EXHIBIT P

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Company: San Diego Gas & Electric Company (U 902 M) 

Proceeding: 2020 Cost of Capital 

Application: A.19-04-017 

Exhibit No.: SDG&E-05-S 

SAN DIEGO GAS & ELECTRIC COMPANY

PREPARED SUPPLEMENTAL TESTIMONY OF 

CONCENTRIC ENERGY ADVISORS 

WILDFIRE RISK PREMIUM 

(AB 1054) 

BEFORE THE PUBLIC UTILITIES COMMISSION 

OF THE STATE OF CALIFORNIA 

AUGUST 1, 2019 

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Company: San Diego Gas & Electric Company (U 902 M) 

Proceeding: 2020 Cost of Capital 

Application: A.19-04-017 

Exhibit No.: SDG&E-05-S Chapter 1 

SAN DIEGO GAS & ELECTRIC COMPANY

PREPARED SUPPLEMENTAL TESTIMONY OF 

JOHN J. REED AND JAMES M. COYNE 

CHAPTER 1 

BEFORE THE PUBLIC UTILITIES COMMISSION 

OF THE STATE OF CALIFORNIA 

AUGUST 1, 2019

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TABLE OF CONTENTS 

 

I. INTRODUCTION .............................................................................................................. 1

II. PURPOSE AND OVERVIEW OF TESTIMONY ............................................................. 1

III. THE IMPACTS OF AB 1054 ON SHAREHOLDER RISK.............................................. 3

IV. ESTIMATES OF THE EQUITY RISK ADJUSTMENT FOR WILDFIRE 

LIABILITY RISK ............................................................................................................... 6

A. The Estimated Loss Approach ................................................................................ 9

B. The Insurance Approach ....................................................................................... 14

C. The CAT Bond Approach ..................................................................................... 18

V. CONCLUSIONS AND RECOMMENDATION ............................................................. 19

EXHIBITS 

Exhibit SDG&E-Concentric-05-S-1 Risk Premium Analyses 

 

 

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1 I. INTRODUCTION 

2 Q. Please state your names, affiliation, and business address. 

3 

4 

5 My name is James M. Coyne, and I am Senior Vice President of Concentric 

6 Energy Advisors, Inc. 

7 Q. On whose behalf are you testifying? 

8 

9 

10 

11 Q. Have you previously provided testimony in this proceeding? 

12 

13 II. PURPOSE AND OVERVIEW OF TESTIMONY 

14 Q. What is the purpose of your Prepared Supplemental Testimony? 

15 

16 

17 

18 

19 

20 

21 

22 

23 

24 

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1 

2 

3 

4 Q. What was your conclusion regarding the required wildfire risk premium for the 

5 Company prior to the passage of AB 1054? 

6 

7 

8 

9 Q. What was the basis for your recommended risk premium in your Prepared Direct 

10 Testimony? 

11 

12 

13 

14 

15 

16 

17 We also had to make certain assumptions regarding the legal and regulatory 

18 framework in California. Our estimated risk premium reflected the state of legal and 

19 regulatory affairs that existed prior to AB 1054. It was our understanding that there were 

20 several potential legislative and regulatory solutions that could reduce the risk of wildfire 

21 liabilities to California’s utilities. We are now able to focus on the specific features of 

22 the enacted legislation. 

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1 Q. What is your revised conclusion regarding the required wildfire risk premium for 

2 the Company after the passage of AB 1054? 

3 

4 

5 

6 

7 

8 

9 Q. How is the remainder of your Prepared Supplemental Testimony organized? 

10 

11  Section III describes our assessment of the change in risks for California utilities 

12 resulting from the enactment of AB 1054; 

13  Section IV contains an update to our analysis of the appropriate risk premium for 

14 the Company’s cost of equity utilizing the same primary approaches as in our 

15 Prepared Direct Testimony; 

16  Section V summarizes our results, conclusions, and recommendation. 

17 

18 III. THE IMPACTS OF AB 1054 ON SHAREHOLDER RISK 

19 Q. Please describe the risk reducing impacts of AB 1054 on utility and shareholder 

20 risk. 

21 

22 

23 

24 

25 

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1 

2 

3 1. Establishing a revised prudence standard for determining whether a utility’s 

costs and expenses arising from a covered wildfire are just and reasonable;1 4 

5 2. Establishing a cap on wildfire related expenses that have been found to be 

6 imprudently incurred equal to 20 percent of the utility’s transmission and 

distribution ratebase;2 7 

8 3. Creating liquidity through the creation of a Wildfire Fund that reimburses 

9 utilities’ settled claims while the utility seeks cost recovery through a CPUC 

process.3 10 

11 Upon first inspection, these are important and significant steps aimed at 

12 moderating the extraordinary risks of California’s wildfire liability for utilities and their 

13 customers. But there are significant risks unique to California and unknowns within the 

14 legislative framework that mean that shareholders continue to bear material risk. 

15 Q. What unique risks remain after the passage of AB 1054? 

16 

17 

18 

19  The legal standard known as inverse condemnation was unchanged by AB 1054, 

20 and utilities remain legally liable when their equipment is a cause of a wildfire 

21 ignition. This doctrine makes utilities strictly liable for liability damages caused 

22 by their own facilities, regardless of whether the utility acted reasonably and 

23 showed no negligence. So even though AB 1054 may cap the utilities’ ultimate 

 

1

 Cal. Pub. Util. Code § 451.1. 

2

 Id. at § 3292(h)(2)(C)(i). 

3

 Id. at § 3292(f)(1). 

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1 liability, this is a unique risk in California, and credit rating agencies continue to 

recognize this doctrine as a credit constraint;4 2 

3  There is no precedent for the CPUC operating under the revised prudence 

4 standard articulated in AB 1054. The impact on the CPUC’s determination of 

5 prudence is uncharted water with significant impact on shareholders. The risk 

6 reducing effect of the adoption of the “industry norm” for prudence depends on 

7 how the CPUC implements the standard for utilities operating under the Wildfire 

8 Fund. For example, if the CPUC were to adopt a view that it only takes minimal 

9 evidence to overcome the presumption of prudence and shift the burden of proof, 

10 then the risk reducing effect is minimal. The only relevant precedent of a CPUC 

11 prudence review is the Commission’s 100 percent imprudence finding in 

12 SDG&E’s Wildfire Expense Memorandum Account (“WEMA”) application, 

13 further increasing uncertainty. Credit rating agencies recognize the uncertainty 

14 regarding how the CPUC will implement the revised prudency standards as 

another credit constraint.5 15 

16  There are ongoing concerns about the Wildfire Fund’s durability. The Fund will 

17 be created by a combination of State and utility funding totaling $21 billion, 

18 assuming all three currently eligible utilities participate (Pacific Gas and Electric 

19 Company, Southern California Edison Company, and SDG&E). Governor 

20 Newsom’s Strike Force retained an energy advisory firm, Filsinger Energy 

21 Partners, (“Filsinger”) to measure the probability of exhausting the Wildfire Fund. 

22 Filsinger prepared a Wildfire Fund Durability Analysis (“Filsinger Report”), that 

23 estimated various probabilities for the Fund’s exhaustion, ranging from 0.1 to 

24 21.9 percent by the year 2035, depending on the likelihood of the CPUC finding 

25 the utility to be imprudent, which ranged from 25 to 75 percent. This assumed a 

26 median wildfire loss of $7 billion per year based upon the experience of the last 

five years.6 27 But this median loss figure is far too low if the experience of the last 

two years continues, where the median yearly loss was much higher.7 28 Actual 

29 losses and the life of the Fund will depend on the CPUC’s prudence findings 

30 (which determine whether the Fund is reimbursed), and the actual losses of all 

 

4

 See, e.g., Fitch Ratings, Fitch Affirms San Diego Gas & Electric’s IDR at ‘BBB+; Outlook Revised to 

Stable, dated July 17, 2019 (“Fitch July 17 Report”) at 1. 

5

 See id.; see also S&P Global Ratings, San Diego Gas & Electric Co. Ratings Affirmed, Outlook Revised 

to Stable from Negative, dated July 30, 2019, at 2 (“S&P July 30 Report”). 

6

 Filsinger Energy Partners, California Wildfire Fund Durability Analysis, dated June 26, 2019, at 2-3 

(Filsinger June 26, 2019 Report”) (assuming a 20 percent cap, as ultimately adopted); see also Moody’s 

Investor Services, Rating Action: Moody’s affirms San Diego Gas & Electric’s ratings; changes 

outlook to positive from negative, dated July 29, 2019 at 1 (“Moody’s July 29 Report”) (referencing 

Filsinger analysis). 

7

 See Prepared Supplemental Testimony of Don Widjaja (Aug. 2019) (Ex. SDG&E-03-S (Widjaja)), at 

6. 

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1 three utilities. It is possible that one or two utilities could draw down the Fund, 

leaving no resources for the other(s).8 2 If the Fund is exhausted, the risk reducing 

3 benefits of the imprudence liability cap and liquidity supported by the Fund are 

4 negated. 

5  Insurance coverage is an important risk management tool for each utility. Under 

6 AB 1054, a utility’s insurance coverage is subject to a recommendation of 

7 “reasonable insurance coverage” by the Fund Administrator. If the Administrator 

8 should recommend a lower insurance level, and if adopted by the CPUC, the 

9 utility’s shareholders would be subject to greater risk. 

10  The imprudence liability cap, which is approximately $825 million for SDG&E, 

11 is also subject to be lifted by the Wildfire Fund Administrator (“Administrator”) if 

12 the Administrator concludes that the utility has acted in a manner that constitutes 

“conscious or willful disregard of the rights and safety of others.”9 13 

14 Lastly, it must be recognized that the magnitude of wildfire risk is unique to 

15 California. Post AB 1054, the state’s utilities will still bear more risk than their industry 

16 peers. As a result, the combination of risk-reducing elements of the legislation and these 

17 remaining uncertainties following implementation cannot be measured within a standard 

18 industry peer group and must be measured incrementally. 

19 IV. ESTIMATES OF THE EQUITY RISK ADJUSTMENT FOR WILDFIRE 

20 LIABILITY RISK 

21 Q. Please describe how you have updated your approach to estimating the risk 

22 premium adjustment for wildfire liability risk. 

23 

24 

25 

26 

 

8

 See Fitch July 17 Report (identifying “contagion risks associated with comingling of funds”). 

9

 Cal. Pub. Util. Code § 3292(h)(3)(A). 

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1 

2 

3 

4 

5 

6 Q. How do the potential liability outcomes affect shareholders’ exposure to liabilities? 

7 

8 

9 

10 

11 

12 

 

10 See Prepared Direct Testimony of Concentric, Chapter 1 (Apr. 2019) (Ex. SDG&E-05 (Concentric) Ch. 

1) at 35. 

Liability	

Outcome

Has	the	

Wildfire	Fund	

been	

exhausted?

Has	the	

utility	been	

found	to	have	

acted	

prudently?

Wildfire	Liability	

Above	Insurance	

Incurred

Prudent

Fund	Solvent 100%	Recovery

Fund	Insolvent 100% Recovery

Imprudent

Fund	Solvent

Actual	Liabilities	

Capped	at	$825	

million

Fund Insolvent Actual	Liabilities

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1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

 

11 Id. 

12 Id. 

13 See Prepared Supplemental Testimony of Bruce Folkmann (Aug. 2019) (Ex. SDG&E-01-S 

(Folkmann)) at 4. 

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1 

2 

3 

4 Q. Please describe how your approach to estimating the risk of potential loss associated 

5 with wildfires has changed since the filing of your Prepared Direct Testimony. 

6 

7 

8 

9 

10 

11 

12 

 

14 See Ex. SDG&E-01-S (Folkmann) at 3 (citing Cal. Pub. Util. Code § 451.1(c)). 

15 See Ex. SDG&E-05 (Concentric) Ch. 1 at 36. 

1,500 1,500 1,500 1,500

401 401 401 401

825

1,780

955

1,780 1,780

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Imprudent and

Solvent Fund

Imprudent and

Insolvent Fund

Prudent and

Solvent Fund

Prudent and

Insolvent Fund,

CPUC Recovery

Wildfire Liabilities ($ Millions)

Fund / Rate

Recovery

Shareholder

Liability

FERC

Recovery

Insurance

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1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

 

16 See Filsinger June 26 Report; see also Moody’s Investor Service, Rating Action: Moody’s affirms San 

Diego Gas & Electric Company’s ratings; outlook remains negative,” dated July 12, 2019, at 1 

(“Moody’s July 12 Report”) at 1 (discussing Filsinger study). 

17 See Sempra Energy and SDG&E SEC Form 8-K, filed July 19 (“July 19 Form 8-K”), available at: 

http://investor.sempra.com/static-files/c182aeaf-00b8-48cb-9d48-675852d50c33. 

18 Cal. Pub. Util. Code § 3292(h)(3)(A). 

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1 

2 

3 

4 

5 

6 

7 

8 

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10 

11 

12 

13 

14 

15 

16 

17 

 

19 Filsinger June 26 Report at 5. 

20 See Ex. SDG&E-03-S (Widjaja) at 6. 

21 Id. 

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1 Q. What are the losses an investor can expect given the probability of wildfire liabilities 

2 after AB 1054? 

3 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

 

22 Ex. SDG&E-05 (Concentric) Ch. 1 at 33-37. 

23 Id. at 36. 

24 Id.

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1 The risk associated with the portion above the liability cap represents the liability 

2 if the CPUC finds the Company imprudent and the Wildfire Fund is insolvent. In this 

3 case, the liability cap no longer applies, and SDG&E shareholders must bear the entire 

4 net liability after insurance and FERC recovery. In this modeled scenario, assuming the 

5 same average liability of $3.68 billion, that total liability is $1.78 billion, with an average 

6 of $1.1 billion for liabilities above the cap. After applying a 25 percent probability of 

7 fund insolvency and a 50 percent to 70 percent probability of an imprudence finding to 

8 the remaining average liability above the cap, $1.1 billion, the expected pre-tax liability 

9 for events above the cap (i.e., in situations where the Wildfire Fund is no longer 

10 available) is approximately $137 million to $192 million. 

11 If these liabilities were borne by shareholders, there would be a tax effect 

12 reducing the total loss borne by shareholders by 27.6 percent. This assumes that the tax 

13 shield created by the wildfire losses could be fully utilized on a timely basis and results in 

14 an after-tax exposure for the combined (below the cap and above the cap portions) 

15 expected liabilities of $347 million to $485 million. SDG&E’s wildfire risk model 

16 results in an approximately 1-in-20-year event, or a 5.33 percent annual probability, in 

any given year of a $1.5 billion or greater financial loss.25 17 Applying expected liability to 

18 an annual probability of 5.33 percent (i.e., approximately 1-20-years probability) 

19 indicates an estimated annual loss of $18.48 million to $25.87 million. 

 

25 Id. at 35. 

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1 Q. How can shareholders be compensated for bearing this incremental risk above the 

2 average utility risk profile? 

3 

4 

5 

6 

7 

8 

9 

10 Q. Please describe the Company’s insurance coverage, and the costs associated with 

11 limiting financial exposure to wildfire liabilities and how that has changed as a 

12 result of AB 1054. 

13 

14 

15 

16 

17 

18 

19 

20 

 

26 Although AB 1054 provides that a participating utility must possess $1 billion in insurance or what the 

Administrator recommends, Cal. Pub. Util. Code § 3280(f), for purposes of our testimony we assume 

that SDG&E will continue carrying $1.5 billion in insurance. 

27 Ex. SDG&E-05 (Concentric) Ch. 1 at 40-41. 

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1 

2 

3 Q. How does the potential shareholder risk mitigation provided in AB 1054 inform 

4 your estimate of the Insurance Approach provided in your Prepared Direct 

5 Testimony? 

6 

7 

8 

9 

10 With the revised prudence standard, we assume that there is a higher probability 

11 that liabilities incurred will be found to be eligible for cost recovery. Based on the 

12 Filsinger Report, there is an expectation that an average of 70 percent of liabilities will be 

13 determined to be imprudent over the first three years of the Wildfire Fund. As such, this 

14 reduces the probability of shareholders bearing the risk of liabilities above the 

15 Company’s insurance coverage from 100 percent to 70 percent. As discussed earlier, we 

16 have also examined an alternative scenario in which 50 percent of the liabilities are 

17 judged to be prudent. Also discussed earlier, for an imprudence finding, shareholders 

18 would be limited to $825 million in liabilities, and the Wildfire Fund would reimburse 

19 liabilities in excess of that cap as long as the Wildfire Fund has not been exhausted. As 

20 noted by Fitch Ratings: 

 

28 Id. at 35, 39. 

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1 Funds available to SDG&E will be affected by the frequency and 

2 severity of wildfires in other IOUs’ service territories as well as their 

3 safety conduct, which is less favorable, in Fitch’s view. If the fund 

4 is depleted, the limit of each utility’s liability does not apply. 

5 SDG&E's much smaller and less-wooded service territory, 60% of 

6 underground distribution system, a track record of robust fire 

7 prevention and mitigation programs have contributed to the lack of 

large wildfires in its service territory in the last decade.29 8 

9 Given that access to the fund is not exclusive to SDG&E, and that other utilities 

10 could access the fund and in effect exhaust the fund before SDG&E accesses the Wildfire 

Fund, the risk profile of the fund’s viability extends beyond SDG&E’s risk profile.30 11 

12 Q. How do these assumptions affect your estimate of the risk premium under the 

13 Insurance Approach? 

14 

15 

16 

17 

18 

19 

20 

21 

22 

 

29 See Fitch July 17 Report at 3. 

30 See S&P July 30 Report at 2 (“Accordingly, AB 1054 directly associates SDG&E’s credit quality to 

the operations of its California electric utility peers. Meaning even if SDG&E continues to maintain 

its operational excellence, its longer-term benefit of the credit-supportive liquidity cap is ultimately 

dependent on the operations of California’s other investor-owned electric utilities that are also 

contributing to the [wildfire] fund”). 

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1 

2 

3 

4 

5 

6 

7 

8 

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11 

12 

13 

14 

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17 

18 

 

31 See Exhibit SDG&E-Concentric-05-S-1, pgs. 4-5. 

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1 

2 Q. Will the investors who hold SDG&E’s CAT Bonds expect a reduction in the risk 

3 profile of the CAT bonds as a result of AB 1054? 

4 

5 

6 

7 

8 

9 

10 

11 

12 

13 

14 

15 Q. Can SDG&E’s CAT bond yields be used to determine a wildfire risk premium? 

16 

17 

18 

19 

20 

21 

 

32 Ex. SDG&E-05 (Concentric) Ch. 1 at 41-42. 

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1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 V. CONCLUSIONS AND RECOMMENDATION 

12 Q. Please summarize your approach to estimating the wildfire risk premium analyses. 

13 

14 

15 

16 

17 

18 As in our Prepared Direct Testimony, we place most weight on the Estimated Loss 

19 Approach, the Insurance Approach, and the CAT Bond Approach, which offer the most 

20 specifically identifiable and quantifiable risk premium values. Taken together, we believe 

21 these analyses provide the Commission with an appropriate range of the required risk 

 

33 The CAT Bond Approach has been updated to reflect market data for two recent transactions occurring 

May 16, 2019 and June 14, 2019. 

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1 premium. The Credit Rating assessment provided by Mr. Todd Shipman reinforces these 

2 results, although restoration of a debt credit rating does not necessarily satisfy the risk 

3 exposure of equity shareholders. 

4 In order to estimate the risk adjustment, we have taken a probabilistic approach 

5 capturing the principal uncertainties and risks remaining after the implementation of the 

6 legislation. The risks to shareholders have been reduced by AB 1054, but not eliminated. 

7 Our analysis focuses on two remaining risks: a wildfire with a finding of imprudence by 

8 the CPUC; and the potential insolvency of the Wildfire Fund. 

9 Q. What is your recommended ROE adjustment to the Commission? 

10 

11 

12 

13 

14 

15 

16 

17 

18 

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1 Figure 3: Summary of Results

2 

3 Q. Does this complete your Prepared Supplemental Testimony? 

4 

Approach Description ROE Adjustment

Estimated Loss Approach 1.87%

Insurance Approach 3.68%

CAT Bond Approach 3.87%

Mean 3.14%

Median 3.68%

Midpoint of Mean and Median 3.41%

Approach Description ROE Adjustment

Estimated Loss Approach 0.50%

Insurance Approach 1.33%

CAT Bond Approach 1.53%

Mean 1.12%

Median 1.33%

Midpoint of Mean and Median 1.23%

Approach Description ROE Adjustment

Estimated Loss Approach 0.71%

Insurance Approach 1.86%

CAT Bond Approach 2.14%

Mean 1.57%

Median 1.86%

Midpoint of Mean and Median 1.72%

ROE Adjustment

Midpoint of Mean and Median - 0.5 Imprudence 1.23%

Midpoint of Mean and Median - 0.7 Imprudence 1.72%

Midpoint of Scenarios 1.48%

Range of Results - Direct Filing

Supplemental Range of Results - 0.5 Imprudence

Supplemental Range of Results - 0.7 Imprudence

Summary Results

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Exhibit SDG&E-Concentric-05-S-1 

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SDG&E-Concentric-05-S-1

A.19-04-017

Notes Assumptions

[1] SDG&E Average Wildfire Financial Impact Above Insurance ($millions) $3,681

[2] SDG&E Current Wildfire Insurance ($millions) ($1,500)

[3] SDG&E Transmission Labor Allocator in 2019 18.4%

[4] CA Effective Tax Rate 27.6%

[5] SDG&E Requested Equity Ratio in 2019 Rate Case 56.0%

[6] SDG&E 2019 CPUC Rate Base ($millions) $6,537.08

[7] SDG&E CPUC Equity Rate Base ($millions) $3,660.76

[8] SDG&E Liability Cap in Event of Imprudence Finding $825.00

[9] Rate-On-Line (ROL) For Wildfire Insurance Renewals 11.56%

[10a] P(imprudence) 1 70.00%

[10b] P(imprudence) 2 50.00%

[11] P(fund insolvent) 25%

Notes

[1] Company-provided data

[2] Company-provided data

[3] Company-provided data

[4] Company-provided data

[5] Company-provided data

[6] Company-provided data

[7] Equals [5] x [6]

[8] Company-provided data

[9] Company-provided data

[10] Concentric Assumption

[11] Concentric Assumption

Analytical Assumptions

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SDG&E-Concentric-05-S-1

A.19-04-017

Notes

[1] p(imprudent) 70%

[2] p(insolvent) 25%

Category $ (millions)

[3] SDG&E's Average Financial Impact in Excess of Insurance ($millions) 3,681 $ 

[4] SDG&E Wildfire Insurance (1,500) $ 

[5] Wildfire Costs in Excess of Insurance 2,181 $ 

[6] Less Amount - FERC Recovery $ (401)

[7] Wildfire Costs in Excess of FERC Recovery $ 1,780

[8] SDG&E Average Liability Below the Cap 684 $ 

[9] SDG&E Average Liability Above the Cap 1,095 $ 

[10] SDG&E Expected Liability if Found Imprudent, Below the Cap 479 $ 

[11] SDG&E Expected Liability if Found Imprudent, Above the Cap, Fund Insolvent 192 $ 

[12] SDG&E Total Liability Pre-Tax $ 671

[13] SDG&E Liability After-Tax 485 $ 

[14] Probability of Fire Above $1.5B 5.33%

[13] [15]

Description

Net Estimated Fire 

Liabilities ($millions)

Annual Estimated 

Loss ($millions)

SDG&E Liability After-Tax $ 25.87 485 $ 

[16] 2019 Projected SDG&E Rate Base 6,537.08 $ 

[17] Equity Ratio 56.0%

[18] Equity Base $ 3,660.76

[13] [19]

Description

Net Estimated Fire 

Liabilities ($millions) ROE Adjustment

Expected Annual Shareholder Loss 485 $ 0.71%

Notes

[1] See assumptions

[2] See assumptions 

[3] See assumptions 

[4] See assumptions 

[5] Equals sum of [3] and [4]

[6] Equals [5] x FERC labor allocator [18.4%] (see assumptions)

[7] Equals sum of [5] and [6]

[8] $684 million is the modeled average liability less than or equal to SDG&E's shareholder liability cap [$825 million]. (Company-provided data)

[9] Equals [7] less [8]

[10] Equals [8] * [1]

[11] Equals [9] * [1] * [2]

[12] Equals sum of [10] and [11]

[13] Equals [12] x (1- Effective Tax Rate [27.6%])

[14] Expected probability of a $3.68B fire based on company modeling (Company-provided data)

[15] Equals [13] * [14]

[16] See assumptions

[17] See assumptions

[18] Equals [17] x [16]

[19] Equals [13] / [18] * [14]

2019 Test Year Rate Base ($ millions)

ROE Adjustment

Earnings Approach 

Estimated Fire Above Insurance Coverage

Annualized Estimated Loss

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SDG&E-Concentric-05-S-1

A.19-04-017

Notes

[1] p(imprudent) 50%

[2] p(insolvent) 25%

Category $ (millions)

[3] SDG&E's Average Financial Impact in Excess of Insurance ($millions) 3,681 $ 

[4] SDG&E Wildfire Insurance (1,500) $ 

[5] Wildfire Costs in Excess of Insurance 2,181 $ 

[6] Less Amount - FERC Recovery $ (401)

[7] Wildfire Costs in Excess of FERC Recovery $ 1,780

[8] SDG&E Average Liability Below the Cap 684 $ 

[9] SDG&E Average Liability Above the Cap 1,095 $ 

[10] SDG&E Expected Liability if Found Imprudent, Below the Cap 342 $ 

[11] SDG&E Expected Liability if Found Imprudent, Above the Cap, Fund Insolvent 137 $ 

[12] SDG&E Total Liability Pre-Tax $ 479

[13] SDG&E Liability After-Tax 347 $ 

[14] Probability of Fire Above $1.5B 5.33%

[13] [15]

Description

Net Estimated Fire 

Liabilities ($millions)

Annual Estimated 

Loss ($millions)

SDG&E Liability After-Tax $ 18.48 347 $ 

[16] 2019 Projected SDG&E Rate Base 6,537.08 $ 

[17] Equity Ratio 56.0%

[18] Equity Base $ 3,660.76

[13] [19]

Description

Net Estimated Fire 

Liabilities ($millions) ROE Adjustment

Expected Annual Shareholder Loss 347 $ 0.50%

Notes

[1] See assumptions

[2] See assumptions 

[3] See assumptions 

[4] See assumptions 

[5] Equals sum of [3] and [4]

[6] Equals [5] x FERC labor allocator [18.4%] (see assumptions)

[7] Equals sum of [5] and [6]

[8] $684 million is the modeled average liability less than or equal to SDG&E's shareholder liability cap [$825 million]. (Company-provided data)

[9] Equals [7] less [8]

[10] Equals [8] * [1]

[11] Equals [9] * [1] * [2]

[12] Equals sum of [10] and [11]

[13] Equals [12] x (1- Effective Tax Rate [27.6%])

[14] Expected probability of a $3.68B fire based on company modeling (Company-provided data)

[15] Equals [13] * [14]

[16] See assumptions

[17] See assumptions

[18] Equals [17] x [16]

[19] Equals [13] / [18] * [14]

2019 Test Year Rate Base ($ millions)

ROE Adjustment

Earnings Approach 

Estimated Fire Above Insurance Coverage

Annualized Estimated Loss

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SDG&E-Concentric-05-S-1

A.19-04-017

[1] 2019 Rate-On-Line (ROL) For Wildfire Insurance Renewals 11.56%

[2] p(imprudent) 70%

[3] p(insolvent) 25%

[10]

Description

Amount of 

Insurance ($ 

millions)

Estimated 

Annual Premium 

$ millions)

[4] Wildfire Costs in Excess of Insurance 2,181 $ 

[5] Capped Portion $ 825

[6] Uncapped Portion $ 1,356

[7] SDG&E Expected Liability if Found Imprudent, Below the Cap 578 $ 

[8] SDG&E Expected Liability if Found Imprudent, Above the Cap, Fund Insolvent 237 $ 

[9] Cost of Incremental Wildfire Insurance 815 $ 94 $ 

[11] [12]

Description

Amount of 

Insurance ($ 

millions)

Estimated 

Annual Premium 

(Net of Tax)

Cost of After-tax Incremental Wildfire Insurance 590 $ 68.19 $ 

[13] SDG&E CPUC Equity Rate Base ($millions) 3,661 $ 

[11] [14]

Description

Amount of 

Insurance ($ 

millions) ROE Adjustment

Cost of Incremental Wildfire Insurance 590 $ 1.86%

Notes

[1] Company-provided data

[2] See assumptions

[3] See Assumptions

[4] $2.18 billion represents the amount SDG&E would have to pay to fully cover uninsured portion of $3.68 billion in liabilities.

[5] $825 million is the shareholder liability cap if SDG&E is found imprudent. 

[6] Equals [4] less [3]

[7] Equals [5] * [2]

[8] Equals [6] * [2] * [3]

[9] Equals sum of [7] and [8]

[10] Equals ROL x [9]

[11] Equals [9] x (1-Effective Tax Rate [27.6%])

[12] Equals ROL * [11] 

[13] See assumptions

[14] Equals [12] / [13]

Insurance Approach

Annualized Estimated Insurance Premium

Annualized Estimated Insurance Premium (Net of Tax)

ROE Adjustment Based on Estimated Insurance Premium (Net of Tax)

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SDG&E-Concentric-05-S-1

A.19-04-017

[1] 2019 Rate-On-Line (ROL) For Wildfire Insurance Renewals 11.56%

[2] p(imprudent) 50%

[3] p(insolvent) 25%

[1] [2]

Description

Amount of 

Insurance ($ 

millions)

Estimated Annual 

Premium $ 

millions)

[4] Wildfire Costs in Excess of Insurance 2,181 $ 

[5] Capped Portion $ 825

[6] Uncapped Portion $ 1,356

[7] SDG&E Expected Liability if Found Imprudent, Below the Cap 413 $ 

[8] SDG&E Expected Liability if Found Imprudent, Above the Cap, Fund Insolvent 169 $ 

[9] Cost of Incremental Wildfire Insurance 582 $ 67.30 $ 

[11] [12]

Description

Amount of 

Insurance ($ 

millions)

Estimated Annual 

Premium (Net of 

Tax)

Cost of Incremental Wildfire Insurance 421 $ 48.71 $ 

[13] SDG&E CPUC Equity Rate Base ($millions) 3,661 $ 

[11] [14]

Description

Amount of 

Insurance ($ 

millions) ROE Adjustment

Cost of Incremental Wildfire Insurance 421 $ 1.33%

Notes

[1] Company-provided data

[2] See assumptions

[3] See Assumptions

[4] $2.18 billion represents the amount SDG&E would have to pay to fully cover uninsured portion of $3.68 billion in liabilities.

[5] $825 million is the shareholder liability cap if SDG&E is found imprudent. 

[6] Equals [4] less [3]

[7] Equals [5] * [2]

[8] Equals [6] * [2] * [3]

[9] Equals sum of [7] and [8]

[10] Equals ROL x [9]

[11] Equals [9] x (1-Effective Tax Rate [27.6%])

[12] Equals ROL * [11] 

[13] See assumptions

[14] Equals [12] / [13]

Annualized Estimated Insurance Premium

Insurance Approach

Annualized Estimated Insurance Premium (Net of Tax)

ROE Adjustment Based on Estimated Insurance Premium (Net of Tax)

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SDG&E-Concentric-05-S-1

A.19-04-017

Dates 3Y Treasury Bond Yield SDG&E CAT Bond Yield

SDG&E CAT over 3Y 

Treasury 

CAT Over 3Y Treasury 

(Net of Tax)

[1] [2] [3] [4]

10/12/2018 2.93% 6.44% 3.51% 2.54%

12/10/2018 2.73% 7.55% 4.82% 3.49%

12/19/2018 2.61% 7.60% 4.99% 3.61%

3/5/2019 2.52% 7.42% 4.90% 3.55%

4/2/2019 2.26% 7.63% 5.37% 3.89%

4/3/2019 2.29% 7.61% 5.32% 3.85%

5/1/2019 2.28% 7.90% 5.62% 4.07%

5/16/2019 2.15% 7.87% 5.72% 4.14%

6/14/2019 1.79% 7.75% 5.96% 4.31%

Last 2 Average 5.84% 4.22%

Notes

[1] Source: Bloomberg 

[2] Source: Bloomberg SD RE Ltd (Series 2018-1). 6.44% is 400 basis points over LIBOR as of 10/12/18 [2.44%].

[3] Equals [2] - [1] 

[4] Equals [3]*(1-Effective Tax Rate [27.6%]

CAT Bond Approach

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

10/12/2018 12/1/2018 1/20/2019 3/11/2019 4/30/2019 6/19/2019

Spread

CAT Over 3Y Treasury (Net of Tax)

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SDG&E-Concentric-05-S-1

A.19-04-017

Approach Description ROE Adjustment

Estimated Loss Approach 1.87%

Insurance Approach 3.68%

CAT Bond Approach 3.87%

Mean 3.14%

Median 3.68%

Midpoint of Mean and Median 3.41%

Approach Description ROE Adjustment

Estimated Loss Approach 0.50%

Insurance Approach 1.33%

CAT Bond Approach 1.53%

Mean 1.12%

Median 1.33%

Midpoint of Mean and Median 1.23%

Approach Description ROE Adjustment

Estimated Loss Approach 0.71%

Insurance Approach 1.86%

CAT Bond Approach 2.14%

Mean 1.57%

Median 1.86%

Midpoint of Mean and Median 1.72%

ROE Adjustment

Midpoint of Mean and Median - 0.5 Imprudence 1.23%

Midpoint of Mean and Median - 0.7 Imprudence 1.72%

Midpoint of Scenarios 1.48%

Notes

[1] The CAT bond ROE adjustment results are reduced proportionally to the change in Insurance Approaches.

Supplemental Range of Results - 0.5 Imprudence

Range of Results - Direct Filing

Supplemental Range of Results - 0.7 Imprudence

Summary Results

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Company: San Diego Gas & Electric Company (U 902 M) 

Proceeding: 2020 Cost of Capital 

Application: A.19-04-017 

Exhibit: SDG&E-05-S Chapter 2 

SAN DIEGO GAS & ELECTRIC COMPANY 

PREPARED SUPPLEMENTAL TESTIMONY OF 

TODD A. SHIPMAN, CFA 

CHAPTER 2 

BEFORE THE PUBLIC UTILITIES COMMISSION 

OF THE STATE OF CALIFORNIA 

 

AUGUST 1, 2019 

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TABLE OF CONTENTS 

I. INTRODUCTION ...............................................................................................................1

II. SUMMARY .........................................................................................................................1

III. THE IMPACT OF WILDFIRE LEGISLATION ON CREDIT QUALITY AND 

RATINGS ............................................................................................................................3

IV. CONCLUSIONS..................................................................................................................7

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1

1 I. INTRODUCTION 

2 Please state your name, affiliation, and business address. 

3 A. My name is Todd A. Shipman. I am an Executive Advisor with Concentric Energy 

4 Advisors, Inc. (“Concentric”). 

5 On whose behalf are you testifying? 

6 A. I am submitting this prepared supplemental testimony on behalf of San Diego Gas & 

7 Electric Company (“SDG&E” or the “Company”), a subsidiary of Sempra Energy, Inc. 

8 (“Sempra”), a publicly-traded holding company. 

9 Have you previously provided testimony in this proceeding? 

10 A. Yes. I provided prepared direct testimony in April 2019. 

11 II. SUMMARY 

12 Please summarize your prepared direct testimony.

13 A. Credit ratings are an influential and reliable measure of a company’s risk that are used by 

14 investors and other interested parties to assist in assessing risk. Ratings are derived by an 

15 analysis of an issuer’s business risk, a qualitative exercise, and its financial risk, a 

16 quantitative exercise. For utilities, regulatory risk is a major component of the analysis. 

17 The actions of regulators exert significant influence on a utility’s ratings by affecting 

18 both sides of the ratings equation – i.e., business risk and financial risk. The recognition 

19 of growing risks surrounding the severe wildfires that have occurred in California in 

20 recent years and the regulatory response to the developments have resulted in multiple 

21 ratings downgrades. Reversing the credit quality deterioration and restoring ratings to 

22 previous levels would require an improvement in financial risk that implies an equity 

23 return premium for SDG&E within the wildfire risk premium in the range of 1.87 to 6.50 

24 percent range, with an adjustment of 3.4 percent, recommended by witnesses Jim Reed 

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2 

1 and Jim Coyne (Exhibit SDG&E-05, Chapter 1), that was ultimately included in 

SDG&E’s aggregate return on equity (“ROE”) request.1 2 

3 How does the enactment of Assembly Bill (“AB”) 1054 affect the conclusions in your 

4 prepared direct testimony? 

5 A. The enactment of wildfire reform legislation has improved the risk profile of SDG&E, 

6 but it has not restored the regulatory environment and the regulatory compact in the state 

7 to the status quo ante. The legislation leaves California as an outlier among the states. 

8 The state and its utilities will continue to invite closer scrutiny from investors and rating 

9 agencies, and uncertainties surrounding the implementation of the reforms will suppress 

10 the credit quality of SDG&E for the foreseeable future. The conclusions I reached in my 

11 prepared direct testimony continue to hold, except that the lessening of risk in the short to 

12 intermediate term eases the pressure on credit ratings and the magnitude of the equity 

13 return premium necessary to improve financial risk and restore SDG&E’s credit quality. 

14 The equity return premium for SDG&E within the wildfire risk premium is now in the 

15 range of 1.23 to 1.72 percent, with an adjustment of 1.48 percent, as recommended in the 

supplemental testimony by Messrs. Reed and Coyne.2 16 

 1

 Prepared Direct Testimony of Concentric, Chapter 1 (April 2019) (Ex. SDG&E-05 (Concentric) 

Ch. 1) at 6. 

2

 See Prepared Supplemental Testimony of Concentric, Chapter 1 (Aug. 2019) (Ex. SDG&E-05-S 

(Concentric) Ch. 1) at 3. 

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3 

1 III. THE IMPACT OF WILDFIRE LEGISLATION ON CREDIT QUALITY AND 

2 RATINGS 

3 How did wildfire risk affect SDG&E and its credit quality before the wildfire 

4 reform legislation was enacted? 

5 A. As I stated in previous testimony, the risks associated with the legal doctrine of inverse 

6 condemnation combined with the California Public Utilities Commission’s (“CPUC”) 

7 separate prudence review resulted in numerous ratings downgrades of electric utilities in 

8 the state and had the potential to further erode credit quality. The risk attaches to both 

9 sides of the credit analysis equation. But it most directly and urgently affects the 

10 business risk of California electric utilities through the perception that the regulatory 

11 environment in the state has worsened. It threatened the regulatory compact and 

12 increased regulatory risk for those utilities, including SDG&E.

13 The disconnect between the strict liability standard imposed by the courts and the 

14 prudence standard applied by the CPUC, which did not take that strict liability into 

15 account, brought the rising risk to the attention of the rating agencies and led to credit 

16 rating downgrades. The potential for substantial non-recovery of large wildfire costs was 

17 very high with near-term financial and liquidity effects that increase the utility’s financial 

18 risk. The prospect of less than full recovery also negatively affected the utility’s business 

19 risk by highlighting the eroding regulatory environment that forms the foundation of all 

20 utility ratings. For a utility like SDG&E that is exposed to wildfire risk in general but is 

21 not presently experiencing any actual costs from a major wildfire, the primary effect is on 

22 the business risk profile. 

23 That deterioration in its business risk profile resulted in multiple ratings downgrades, as 

24 set forth in my prepared direct testimony and that of Don Widjaja (Exhibit SDG&E-03) 

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4 

1 and Bruce MacNeil (Exhibit SDG&E-06). It has left SDG&E with much lower ratings 

2 than before the wildfire risk began to attract investor and rating agency attention. In the 

3 last year, S&P Global ratings (“S&P”), Moody’s, and Fitch, each reduced SDG&E’s 

credit rating by at least two notches and maintained a negative stance on the ratings.3 4 

5 Did wildfire reform legislation affect SDG&E’s ratings? 

6 A. No. The legislation was not sufficient to restore SDG&E’s credit ratings. The legislation 

7 has prompted no ratings upgrades. The rating agency reactions (see below) indicate to 

8 me that incremental wildfire liability reform is a first step in a process that will take a 

9 long time to prove out before leading to widespread ratings improvement. 

10 How did wildfire reform legislation affect SDG&E and its credit quality? 

11 A. SDG&E’s business risk and regulatory risk are somewhat abated in the near term and 

12 intermediate term from a credit quality perspective. The legislation accomplished two 

13 potentially important reforms that could relieve immediate pressure on SDG&E’s risk 

14 profile. First, the prudence standard for recovering wildfire costs was specified in a way 

15 that, depending on how it is applied, should improve the balance of the utility’s burden of 

16 proof and the interests of ratepayers. Second, the provisions creating a catastrophic 

17 wildfire fund and a cap on shareholder liabilities alleviate liquidity concerns over the near 

18 term and intermediate term for SDG&E. The provisions better support credit quality for 

19 California utilities, in my opinion, but the latter is the feature the rating agencies are more 

20 focused upon. 

 3

 See Prepared Direct Testimony of Don Widjaja (April 2019) (Ex. SDG&E-03 (Widjaja)) at 13-14. 

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5 

1 A negative rating factor that I think will persist for a considerable time is what I call 

2 “ratepayer fatigue,” which was articulated by S&P as a secondary credit risk in a June 

2019 commentary.4 3 If rate increases are necessitated for wildfire cost recovery, it could 

4 crowd out the ability of a utility to fully and timely recover other costs in rates. This 

5 lingering risk, a function of the continuing threat that inverse condemnation’s burden6 shifting poses to California utilities and their ratepayers, could act to limit the ratings 

7 upside for SDG&E and other utilities by suppressing the agencies’ view of regulatory 

8 risk in California. 

9 How did the rating agencies react to the legislation? 

10 A. Initially, Moody’s and S&P affirmed the ratings at the Baa1/BBB+ level and retained 

negative outlooks on the company.5 11 In both cases, the prospect of returning to a stable 

12 stance or moving to a positive stance on the ratings was noted, depending on the 

13 company’s choice to participate in the wildfire fund. Fitch Ratings affirmed at the same 

14 ratings level and changed its outlook to stable right away based on the assumption that 

the company would choose to participate in the wildfire fund.6 15 Moody’s changed to a 

16 positive outlook after the SDG&E opted for the wildfire fund and received its wildfire 

 4

 S&P Global Ratings, Credit FAQ: The Looming California Wildfire Season Prompts an Examination 

of Investor-Owned Utilities’ Risks, dated June 7, 2019 at 3. 

5

 Moody’s Investors Service, Moody’s affirms San Diego Gas & Electric Company’s ratings; outlook 

remains negative, dated July 12, 2019 (“Moody’s July 12 Report”); S&P Global Ratings, Research 

Update: Sempra Energy And Subsidiaries Ratings Affirmed; Outlooks Remain Negative, dated July 

15, 2019 (“S&P July 15 Report”). 

6

 Fitch Ratings, Fitch Affirms San Diego Gas & Electric’s IDR at ‘BBB+’; Outlook Revised to Stable, 

dated July 17, 2019, at 1 (“Fitch July 17 Report”). 

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6 

safety certification.7 1 S&P also changed its outlook, but only to stable, based on the same 

reasoning.8 2 The ratings affirmations and mostly stable outlooks are an indication that the 

3 legislation has removed the pressure on the ratings only through the ratings horizon, 

4 which is in general about three years. Moody’s positive outlook, which implies a one-in5 three chance of an upgrade, is likely a longer-term proposition as well. It appears to be 

6 contingent on sustainable financial performance, no significant wildfires, and credit 

7 supportive outcomes in this cost of capital proceeding and SDG&E’s pending general 

rate case – for example through approving SDG&E’s requested equity ratio.9 8 All of these 

9 will take time to assess. An upgrade would also leave SDG&E multiple notches lower at 

10 all three agencies than where the ratings started before the catastrophic wildfire era. 

11 Do the rating affirmations and your assessment of the effect of wildfire reform 

12 legislation on SDG&E’s credit quality affect the recommendations contained in your 

13 prepared direct testimony? 

14 A. Not in its essentials, but the lower risk profile of SDG&E that is possible in the wake of 

15 the legislation and its future implementation do affect the degree of improvement in 

16 financial risk needed to return ratings to the former level. The wildfire reform legislation 

17 has stemmed the credit quality deterioration caused by the development of wildfire risks 

18 in California. But it has not reversed it. SDG&E’s ratings have now settled at a “new 

 7

 Moody’s Investors Service, Moody’s affirms San Diego Gas & Electric Company’s ratings; changes 

outlook to positive from negative, dated July 29, 2019 at 1 (“Moody’s July 29 Report”). 

8

 S&P Global Ratings, Research Update: San Diego Gas & Electric Co. Ratings Affirmed; Outlook 

Revised to Stable From Negative, dated July 30, 2019 at 1 (“S&P July 30 Report”). 

9

 See Moody’s July 29 Report at 1-2. 

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7 

normal,” so to speak, below the ‘A’ category that both myself10 1 and Dr. Roger Morin 

(Exhibit SDG&E-04)11 2 recommend to be targeted to restore credit quality to a level that 

3 the CPUC has historically found to be desirable to protect ratepayer interests by 

4 supporting the financial integrity of utilities. The rating agencies are still concerned 

5 about the residual risk over the long term from inverse condemnation as applied in 

6 California, uncertainties surrounding the effectiveness of wildfire reform implementation, 

7 and that the operational challenges of heightened wildfire risk could act to impair future 

8 utility credit quality in the state. The credit rating agencies have made clear that AB 

9 1054 alone is not sufficient to restore credit quality to its former level. Therefore, I 

10 reaffirm the recommendations in my prepared direct testimony, as amended by the 

11 prepared supplemental testimony of Reed and Coyne on the risk premium for wildfire 

12 risks. 

13 IV. CONCLUSIONS 

14 Please summarize your key conclusions.

15 A. Strong investment-grade credit ratings should be targeted by the CPUC to support 

16 SDG&E’s ability to provide safe, reliable service at a reasonable cost to the benefit of its 

17 ratepayers. One way to support that goal is to authorize a ROE that corresponds to 

18 SDG&E’s cost of capital that includes a risk premium for heightened wildfire risk as 

19 recommended by Messrs. Reed and Coyne. SDG&E’s aggregate ROE proposal, which is 

 10 Prepared Direct Testimony of Concentric, Chapter 2 (April 2019) (Ex. SDG&E-05 (Concentric) Ch. 

2) at 21-22. 

11

 See Prepared Direct Testimony of Dr. Roger Morin (April 2019) (Ex. SDG&E-04) at 62-64. 

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8 

1 partly based on Messrs. Reed and Coyne’s recommended risk premium, is consistent with 

2 what I estimate would be required to restore SDG&E’s credit rating to a strong 

3 investment grade. 

4 Does this conclude your prepared supplemental testimony?

5 A. Yes. 

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