California's Energy Future & Wildfire Risk - Edison International CEO Pedro Pizarro

You looked at my dissertation. Okay, this is scary, and you're going to get me nerding out.

Well, Nat, thanks so much for having me on. Really appreciate that, and very timely to ask about our story because it started 140 years ago as of July 4th. One of the original constituent companies lit up the town of Visalia for the 4th of July, and the history went on with a number of acquisitions. One of those companies was Pacific Light and Power. I highlight that one because that's an interesting one. It had a couple of key folks. One was Henry Huntington. If you've spent time in Southern California, you might have been to the Huntington Library.

So he was behind the Pacific Light and Power Company, as was John Eastwood, who was this amazing hydraulic engineer. And they developed the Big Creek hydroelectric project. Our team likes to call that the hardest working water in the world, and that's still operating. The system has something like a thousand megawatts, and so that really laid the foundation for Southern California growing. And as the area has grown, so have we. So I like going to Big Creek now and then, and it feels like you're staring at the DNA of the company.

So it's towards the northern part of our territory in the Sierras. Open invitation if you want to go visit. It's beautiful. But I think for me it's also reflective of who the company is today. It was an engineering marvel at the time. The high-voltage transmission lines that connected it down to Southern California were developed in part with support, with help or collaboration with Caltech. So I got my PhD. My wife is a research professor there. So a little personal connection there too. And the challenge in building that project — this is before helicopters could drop stuff in. This is before you could, you know, have roads going up there. So a lot of equipment taken up by mules and some makeshift roads, and not just the engineering marvel of using the water multiple times as it comes down from the Sierras, but the physical achievement of doing that work under tough conditions. It's really testament to, again, the DNA of the company. So today, you fast forward, and I'm really proud that our team is on the leading edge of applying a number of technologies to our space. I'm sure we can get into talking about how we're using AI and how we're helping to, you know, digitalize the grid. It's important to do hard things, and hard things are what advance you. And I'm proud that that's been the history of the company back then and today.

You looked at my dissertation. Okay, this is scary, and you're going to get me nerding out.

You know, absolutely, and those stories are actually somewhat intertwined, right? And a little bit before my time — I joined the company in '99. I first started poking my head around as a McKinsey consultant, I think around '93, '94. But a couple of things came together. One, you had the shocks of the energy crisis in the 70s, the reliance on oil. It was interesting. We were having a strategic offsite with our executive team, and our head of strategy pulled out some newspaper clippings, and these clippings were all about high prices and rates and concerns, consumer concerns. And she asked, 'Is that from today? Is that from sometime in the past?' You know, a little quiz from the 70s, I think. And so as California looked at turning to alternative resources, the company saw an opportunity to then build a new business around, you know, those alternatives. And that, to make a long story short, spawned Edison Mission Energy. You know, Edison Mission Energy grew from California roots to really be a global company and had assets throughout the United States, had coal, natural gas, and then they developed a large wind business. At one point, they were the seventh-largest wind developer in the country. Had international assets throughout Europe and Asia. And as we then hit the California energy crisis at the end of the 90s and into the 2000s, in order to manage the finances for the company and under that stress, I think a tough decision was made to sell the international assets at the time. And so Edison Mission Energy became a US independent power producer, but, you know, under the Edison International umbrella. Fast forward some more, and I actually ended up being the last head of Edison Mission Energy while still under Edison ownership. It was a really neat business, but because it had coal plants and because those coal plants had been subject to new environmental requirements — this is in the 2000s — that created a financial stress. And so by the time that I went to Edison Mission Energy to run that, Edison International had told Wall Street that it was a stressed business and there was a possibility of needing a restructuring and potentially even a bankruptcy, just because of the financial stress. I went to EM January 1st of 2011. We worked hard on seeing how we could help the finances improve and operations. Working hard, great team there, did lots of really good operations improvement. But in the meantime, shale gas came into the equation. Natural gas prices plunged by 25% through the year, I think, into '11 and part of '12. EM was a merchant generator, so it was depending on market prices, and given that stress, filed for bankruptcy protection at the end of 2012 and emerged with a sale to NRG in the spring of 2014. So that was a — you know, spent a little while on that, but it was an interesting story because it showed that there was a lot of innovation in developing that business. It was responsive to actually California policy, which then grew into a much broader than California play. And then factors changed, life happened, there was stress, and we ended up having what I think of as a successful bankruptcy because, you know, we went through an orderly process, had a sale, and some of those assets still operate today. But it did mean, though, that that ended Edison International's presence in the merchant generation space. So where we are today, Southern California Edison is, you know, the main operating business. It is essentially a wires business. We have a little bit of generation in Southern California Edison, you know, the hydro assets that we talked about, one natural gas-fired CCGT, five peakers. But by and large, it's really a wires-focused business, and it's an electric-only business. And I think that, again, also aligns well with California policy.

So there are over 5 million customer accounts, and there are over or around 15 million residents. So it's roughly 40% of California, and the geographic diversity is just fascinating, right? Because everything from the beaches to, you know, the very arid parts past Palm Springs, essentially desert, to snowy mountains for the hydro system. So we have it all, Nat.

I'll start high level. I love the state. I've spent more time here in my life than anywhere else. I came here to get my graduate degree. I actually chased to California — my wife and I had met in college back east, and we got our graduate degrees together, and then we stayed. Raised our kids here, and I love the diversity of the state in every sense — geographic, population. There's a lot to be said for California. It also has challenges. It's an expensive place. Maybe you get what you pay for. We certainly enjoy living here. On the energy side, we've alluded to this already, but it really does tend to be at the forefront of policy. And sometimes that's leading edge, sometimes it might feel a little bit bleeding edge. But it also recognizes its responsibility as one of the world's largest economies to find a way to do new things and set an example. And I appreciate that for the state. So how that translates into Southern California Edison, you know, we are part of this economy. We recognize that probably, you know, electric utilities might be what, a few percent, maybe 5% of GDP, but the other 95% is relying on us. And so there's this sense of mission and responsibility and alignment with state policy. Yet at the same time, we view part of our role as being candid, outspoken, analytical, and kind of down the middle of the fairway in terms of points of view. And, you know, we might get into this later, but, you know, over the course of my decade as CEO, we've published something like seven or eight white papers that have all been centered around the topic of how does California meet its net-zero ambitions, but in a real way, right? What's the most economic way to get there? This is not about dogma. So, for example, the role of natural gas — some of our environmentalist friends, who I think are very well-intentioned, maybe have been less pleased with us in the past when we've affirmed the fact that even though we're not a natural gas company, we're electric-only, right? But we recognize that natural gas will have a role in the state's economy for quite some time, even as we shift more and more use away from that to clean firm generation that's carbon-free. But that can't happen instantaneously. And we've been outspoken about that, about making sure we're doing the math, base it on the math, do the right thing, and have Southern California Edison both support the state's policy but help shape it and be outspoken when maybe it hasn't been thought out fully. I'm sure we'll talk about wildfire at some point, but that's been one of the examples where, you know, we've really tried to bring some analytical rigor to a tough, complex problem.

Yeah. And you already scared me by looking up my dissertation title. So look, my story is pretty simple. It is a little weird. It was a little different. I always liked science. I grew up in a lower-middle-class family in Puerto Rico. Great parents. Moved to Florida when I was in high school. I knew I liked science, and I thought that for me that would be becoming an MD. So I was premed in my mind all the way through the first part of college. Got a scholarship to go to Harvard. And so ended up going there and started out thinking premed. And as I went along, I realized that — well, two things. One, I really liked the more quantitative side of science, or maybe alternatively I was a little bit lazy, and that biology stuff required a lot of memorization, and, you know, physical chemistry, you could learn a few equations and then derive the rest. So I ended up being more on the chemical physics side, lots of quantum mechanics focus. Decided to go to grad school thinking that someday I'd be an academic. Stayed on in Boston at MIT for my PhD. I mentioned my Californian wife — she was a year behind me at Harvard. And so when she was graduating, she wanted to come back and be an earthquake scientist, you know, do her PhD work at Caltech, been accepted there. So I transferred and chased her across the country. And it sounds cringy, but we've been married now 37 years, so that worked out. And completed my PhD, got a fellowship to go be a postdoc back at MIT. But I thought that I would look around before I committed, just to see what was out there, and ended up getting an offer from McKinsey. And this was early in their days when they were recruiting from non-MBA programs. I think at that point they were growing at a 14% annual growth rate. They were hiring a full third of the Harvard Business School class, and they thought that it would be good to look at other fields for talent. And so I went there, not after a lot of hemming and hawing. And I thought I'd maybe check it out for a couple of years, and ended up doing about five and a half years at the firm. Edison was a client, so I got to know them. And when the travel was getting to me and we had just had our first daughter, I accepted an offer to come work at Edison. Again, thinking I'd be here for a couple of years. And once I figured out what I wanted to do when I grew up, those two years in my mind turned into — I'm now approaching 27 years with the company. I was attracted to Edison by a sense of mission, which back then was safe, reliable, affordable power. You know, I remember thinking about, you know, when you see the lights as you're landing in the area and how much of that was Edison, and, well, you know, wouldn't it be neat to be a part of that? What I found as my years went on here is that that mission expanded beyond safe, reliable, affordable to clean as a big part of that. And that's why you've seen a big theme certainly during my tenure around the focus on how our business is a key enabler of the clean energy transition and, frankly, doing something about climate change. And, you know, it's something that is happening, and we've been sadly on the leading edge of feeling those impacts, you know, through wildfires and other impacts. So that's maybe the medium-sized version of the story: premed, then scientist, then consultant, then thought I'd be here two years, and it's been a while. And I've been CEO at the corporate level for — it'll be 10 years, October 1st of this year, of '26.

Yeah, and there's a lot there. Let me start here. When the state first considered and enacted its initial renewable portfolio standard — it's a 10% RPS requirement — I was really concerned. And I was a younger executive at the company. Within a couple of years after that, I think it was, I ended up being the guy signing those contracts because I was the vice president of power procurement. And so there's still contracts that are operating that have my signature somewhere. And I was concerned about customer cost. I appreciated the state's policy leadership, right, and vision for moving towards renewables. I supported the move, but I was concerned about the cost implications. And that's been a theme all along. What I underestimated at the time was the power — and that's a double-edged sword — but the power of policy actions like that in stimulating a market and bringing the cost curve down as volumes increase. And so the first contracts that I signed — I mean, we keep pricing terms confidential, but these are really out in, you know, a long time ago. There were contracts that were probably at that time, nominal back then, 13, 14, 15 cents a kilowatt-hour for solar, central-station solar. Today, you read lots of public announcements with solar at three or four cents a kilowatt-hour, sometimes four cents with storage attached, right? So there definitely was a volume effect of helping R&D and manufacturing progress down the cost curve, right? Get more efficient and bring cost down for everybody from that. Now, you can take that to a fault. I think before we started video recording here, we were chit-chatting a little bit. I think you mentioned Spain. I remember visiting Spain around 2010 or so, and at that point they still had their feed-in tariff program, which at the time, in nominal dollars then, if I remember correctly, was something like 35 cents a kilowatt-hour. And it ended up being way too much, and Spain pulled the plug on that program at some point, and there was a lot of appeal. So there's a balancing act there for policymakers around, particularly in a place like California: how do you stimulate markets, how do you lead, how do you make some investments that might be a little expensive at first but with a promise of return, but how do you not overdo it? And so when the program started that provided a very strong incentive to deploy a brand-new and at that point quite expensive technology, it was a subsidy choice that the state made. The state makes lots of subsidy choices. If you look at the Edison bill today, something like 3% of the bill is for public-purpose programs beyond net energy metering, things like low-income subsidies, you know, for folks who have a hard time paying their bill. Again, those are choices, but the rest of the customers pay for that. Now, here's what happened. Net energy metering worked because it helped bring more volume. And in fact — and my numbers are a little dated now — but as we sit here, I believe that the price for solar panels when the program started compared to the cost now is something like a factor of seven difference. So it's a lot cheaper in real terms to install solar in your home today than it was back then. The program worked, but up until a couple of years ago, the program had not been reformed. And you had these really large subsidies. And so I think today, the latest number I saw — again, this might be a little dated by a year or so — but I believe something like it's around eight and a half billion dollars annually that are being transferred from non-solar to solar customers in California through net energy metering. And you're right, a large portion of that is going towards more affluent customers, you know, or has been historically. And so the program needed reform. The Public Utilities Commission did introduce some reforms. You know, a couple of years ago, there was a lot of concern expressed by some members of the solar community. But my view is California does not have an infinite checkbook. Our customers don't have an infinite checkbook. It is appropriate to have subsidies for emerging technologies. Once a technology has emerged, let's move those subsidy dollars to new technologies that need to emerge and let's give them the help. Today, I would rather see a subsidy dollar going towards heat pumps, right? Because we know that from our analysis of what it'll take to get California to net zero, we not only need the clean energy resources, but we need to electrify a lot of the economy. By 2045, we need to see over 90% of vehicles be electric and over 90% of buildings have their water heated and their air cooled and heated through electric heat pumps rather than, you know, natural gas heaters. So, and the heat pump market is still at an emerging state. So I'd rather take subsidy dollars and apply them there, as an example, than with a technology that's much mature and, in fact, you know, fairly economic today.

You know, I'm glad you've raised that. Let me start with this fact point. In order for California to get to net zero, you know, because of the amount of electrification that will be needed to do that, we see statewide load nearly doubling by 2045. Right? To get there, you need a massive amount of investment in generation, whether it's bulk power or distributed. To do some simple math, in our analysis, we've assumed that we'll go from today, where we have about 15% of our residents' rooftops have solar on them. We think that'll go to something like 50% by 2045.

Depends on the state, but it's high.

Yeah, it is. You know, it's higher than California, but we're headed there. And so we think we'll get to, you know, around 50%. Be great to see more, but you have limits in terms of what roofs have enough insulation, can take it, you know, it's economical, etc. Rough numbers, that 50% will contribute something like 30 gigawatts worth of capacity. Let's say we got it wrong and you could actually go to 100%. That would add 60 gigawatts of capacity. But we see the state needing a lot more than that developed, you know, by 2045. If I recall the number right — I don't have it in front of me — but I want to say it was over 120 gigawatts of capacity that needs to be developed. And so it's a bit of all of the above, right? We need to find every clean resource we can get and put it to work, including distributed resources, in order to use those then across the economy. You want them interconnected, right? Because there was some analysis that EPRI did — it's been a few years now, I want to say maybe seven or eight years ago, Electric Power Research Institute — that was taking a look at what it would take for an average Southern California home to be fully off-grid using solar panels and batteries. And you think of California as a fairly sunny place, but we do have rain now and then. We have cloud cover, especially on the coast. And so the study concluded that to have reliable power service on a standalone basis, you would need batteries for something like, I think, at least three days' worth of power use in order to be reliably disconnected. The value of the grid is that it's the original sharing economy before Uber, before Airbnb, right? You're connecting supply and demand, and you're doing it across a wire system. And so that home doesn't have to have three days' worth of batteries. It might have a day's worth of batteries, right? But it can rely on the grid, and it can put power into the grid assisted by a fairly low-cost component, which is the wire system. So when you talk about it being an inflationary system — what I think you mean, tell me if I misread you — was there is constant investment needed. It is a negative cash-flow business, right? You're having to deploy capital, you know, for that. But there's a governor function on that, which is that ultimately the Public Utilities Commission has to agree, determine, approve that the capital we're investing is efficient capital. We face the risk of disallowance if we go invest capital without their approval and they disagree with, you know, where we put that in. So there's a governor on that. We don't have carte blanche here. And it's appropriate. We're a regulated entity, and it's appropriate that the regulator be regulating and be making sure that there's public convenience and necessity in making these investments. One other thing I'd add, and really going beyond California, is that we're also now looking at this through the context of a period in the history of the electric grid where we've gone back to load growth that we haven't seen in decades. Right? So if you and I had been talking four years ago, I would have told you, based on our analysis, that we still saw an increase in load by 2045 in order to get to net zero. But that increase was going to be something like 60%. And we still expected our load to stay fairly flat through 2030, I think it was, because we continued seeing what we had been seeing for the past decade plus. We're seeing customer additions, load growth getting offset by energy efficiency, which is really valuable, and by distributed generation. Well, in fact, if you fast-forward to now, this has all happened much more quickly, and so we're now seeing 1 to 3% annual growth. We expect 30 to 40% load growth by 2035, and as I said, nearly doubling by 2045. And that story is actually accentuated across the rest of the country. The components are different for us. It's really being driven by electrification. We're seeing some data center growth. We have a lot of data center presence already, but we're not seeing the big training centers showing up here. It is an expensive place, right, for my colleagues in other states. There's two other components. It's data centers, but it's also the reshoring of manufacturing. So those three things — data centers, manufacturing, and electrification — are driving a big change here. And so that requires capital investment. But the last point I'll make, and take a breath here, is particularly when you think about data centers and you think about all the controversy around them and who pays, etc. Our view, based on our analysis, is that done correctly, right, with the right regulatory structure, we want to see those data centers and other large loads show up in our territory because guess what? That's more steady use that goes into the denominator, amortizes the cost you have in the numerator, and that can actually help lower rate pressure.