Edison International

NYSE:EIX

Earnings Call Analysis

Edison International Sees Accelerated Load Growth and Strong Earnings

Edison International's second quarter saw core EPS of $1.23, bringing the year-to-date EPS to $2.37. The company reaffirmed its 2024 EPS guidance of $4.75 to $5.05. Load growth is happening faster than anticipated, leading to substantial CapEx opportunities. They expect load growth to increase 2-3% annually up to 2028, with a further rise expected beyond that. SCE's system average rate decreases and higher electricity demand stabilizes costs. Furthermore, Edison International projects a 5-7% EPS CAGR through 2028 and continues to lead California towards carbon neutrality.

Strong Start to 2024

Edison International has demonstrated a strong performance in the first half of 2024, reporting a core Earnings Per Share (EPS) of $1.23 for Q2 and a year-to-date core EPS of $2.37. This robust beginning reaffirmed their 2024 core EPS guidance, projecting a range between $4.75 and $5.05 .

Positive Regulatory Progress

The company has made significant strides in its 2025 General Rate Case (GRC), reaching partial settlements that cover key operational and maintenance requests. This progress builds confidence in achieving future guidance targets and continued growth. Additionally, regulatory decisions have been favorable, including an approval for interim rate recovery and cost of capital mechanism .

Anticipated Load Growth

Edison International is witnessing load growth sooner than expected. Forecasted load growth over the next 10 years has increased by 35%, driven by rising customer demand and policy-driven electrification efforts. This growth mandates earlier and larger-scale investments in grid upgrades, which will support ongoing electrification and accommodate rising electricity consumption .

Rate Stability and Affordability

System average rate (SAR) increases for Southern California Edison (SCE) are projected to align closely with local inflation rates through 2028, ensuring stable costs for customers. This projection assumes full recovery of legacy wildfire costs and incorporates SCE’s rate case requests, reflecting the company’s commitment to affordability .

Wildfire Mitigation and Sustainability

Edison International remains at the forefront of wildfire mitigation and sustainability. The utility has almost completed a significant portion of its planned grid hardening efforts, resulting in an 85% to 90% reduction in wildfire risk. The Company also continues to lead California’s charge towards a carbon-neutral future by achieving 52% carbon-free power delivery .

Financial Outlook and Capital Needs

Financial performance is strong, with second quarter EPS growth primarily driven by higher authorized revenue and a favorable regulatory environment. Edison International plans to deploy substantial capital to meet growth demands, while keeping equity needs low. The Company's balanced approach and efficient financial execution position it well for future capital investments .

Future-Proofing and Technological Investment

The company is preparing significant investments in advanced technologies and infrastructure to meet future demand. This includes the next-generation ERP system to enhance operational efficiency and further grid enhancements to support increased electrification. These investments are expected to align with rate growth and maintain financial stability .

Earnings Call Transcript 2024-Q2

[Operator]

Good afternoon, and welcome to the Edison International Second Quarter 2024 Financial Teleconference. My name is Julie, and I will be your operator today. [Operator Instructions] Today's call is being recorded.

I would now like to turn the call over to Mr. Sam Ramraj, Vice President of Investor Relations. Mr. Ramraj, you may begin your conference.

[Sam Ramraj, executive]

Thank you, Julie, and welcome, everyone. Our speakers today are President and Chief Executive Officer, Pedro Pizarro; and Executive Vice President and Chief Financial Officer, Maria Rigatti. Also on the call are other members of the management team.

Materials supporting today's call are available at www.edisoninvestor.com. These include our Form 10-Q, prepared remarks from Pedro and Maria and the teleconference presentation. Tomorrow, we will distribute our regular business update presentation.

During this call, we'll make forward-looking statements about the outlook for Edison International and its subsidiaries. Actual results could differ materially from current expectations. Important factors that could cause different results are set forth in our SEC filings. Please read this carefully.

The presentation includes certain outlook assumptions as well as reconciliation of non-GAAP measures to the nearest GAAP measure. During the question-and-answer session, please limit yourself to one question and one follow-up.

I will now turn the call over to Pedro.

[Pedro Pizarro, executive]

Thanks a lot, Sam, and hello, everyone. Edison International's core EPS for second quarter 2024 was $1.23, bringing year-to-date core EPS to $2.37. With this strong start to the first half of the year, we are confident in reaffirming our 2024 core EPS guidance of $4.75 to $5.05.

Based on the progress in SCE's 2025 general rate case, including many partial settlements, we are also confident in getting a strong outcome for customers. The funding authorized in the GRC to continue making investments in a reliable, resilient and ready grid is the linchman for achieving our 2025 EPS guidance and delivering a 5% to 7% EPS CAGR to 2028.

My remarks today include four important insights. First, low growth trends are materializing sooner than expected, reinforcing SCE's substantial CapEx opportunities with potential upside. Second, SCE is now forecasting system average rate increases through 2028 to be closely aligned with inflation rates, ensuring more stable costs for customers. Third, the company's overall operational and financial risk profiles have significantly improved and are only getting better. Fourth, Edison International is leading the charge towards a carbon-neutral California, with sustainability at the core of our strategy.

Leading up with load growth trends. I highlighted last quarter that we are seeing 2% to 3% annual sales growth in the coming years with an inflection point above 3% annual growth beginning in 2028. However, these demand trends are materializing sooner than expected. As you can see on Page 3, our 10-year load growth forecast has increased substantially in just a relatively short time since SCE's 2022 distribution system plan was prepared. We now expect 35% higher 10-year load growth, far exceeding all prior internal and external forecasts.

One significant driver is more customers calling SCE to request load growth projects, including commercial developments, particularly logistics-related buildings, transportation electrification and new residential housing. In parallel, forecasted policy-driven electric vehicle and building electrification demand has increased. We expect new policies will drive higher customer adoption in the near future, and we have incorporated this information so the grid is ready when customers reach out to us.

We see two major implications from growth showing up sooner and at a larger scale than anticipated. Over a 10-year system planning horizon, [ grid ] upgrades will need to be implemented several years ahead of schedule to accommodate the increased load. As SCE highlighted in its GRC request, serving customers with a reliable, resilient and ready grid will require the utility to significantly expand the electric system through substantial investments that will drive continued rate base growth.

As our investment levels grow to support economy-wide electrification, affordability remains top of mind. We have demonstrated cost leadership over the years, resulting in the lowest system average rate among the major California investor-owned utilities. You will notice that SCE's current system average rate of $0.267 per kilowatt hour is actually lower than at the start of the year. On June 1, SCE reduced rates by about 2% and driven by removing historical costs that have been fully recovered in rates. SCE recently filed an application with the CPUC for approval of its 2025 fuel and purchase power costs, which are projected to be lower than in 2024. Based on current projections, this application would reduce the system average rate by another 9%. This offsets most of the increase in rates that will follow the 2025 GRC final decision.

On Page 4, we now project SCE's rate increases through 2028 to be closely aligned with local inflation levels. To put this in context, let me emphasize two important underlying assumptions. This 2.6% projected rate growth incorporates both the requested increases in SCE's GRC and full recovery of SCE's legigacy wildfire costs. As you will recall, SCE has recovered a significant amount of historical costs tracked in regulatory accounts over the last few years. These historical costs rolling out of rates, combined with rising electricity consumption, partially offset the increases I just mentioned. You have all witnessed how the company's overall operational and financial risk profiles have significantly improved in recent years.

On Page 5, we reemphasized the estimated wildfire risk reduction of 85% to 88% compared to pre-2018. As you know, we've been reporting on the $1 billion annual and $3.5 billion over 3 years losses because those tied to AB 1054. They are the threshold for accessing the wildfire insurance fund and SCE's liability cap when we began reporting this metric.

We are now also showing you the loss level that would result from hitting the liability cap in a single year which is about $4 billion. The risk reduction of this scenario is over 90%. The differentiator for SCE's wildfire risk mitigation and operational risk profile is the substantial physical grid hardening it has completed. A key benefit of physical grid hardening is that it reduces the burden on customers arising from heavy reliance on operational measures like power shutoffs or fast rip settings. In just 5.5 years, SCE has deployed approximately 5,900 miles of covered conductor.

As you see on Page 6, combined with miles underground, SCE has 84% of its planned hardening complete, and that's permanent physical and observable risk mitigation. It is getting even better. By the end of 2025, SCE expects to be approaching 90% of total distribution lines in high fire risk area being hardened.

As you can see on Page 7, SCE is leading the way in physical risk reduction with its total hardened miles and high fire risk area exceeding those of all other California IOUs combined. In addition to all the successful wildfire mitigation work by SCE, and also by peer utilities, the State of California itself has the strongest wildfire risk reduction profile in the nation.

As outlined on Page 8, that is due to notable improvements via legislation, regulation and suppression. California's legislature passed the landmark Assembly Bill 1054 in 2019, which codifies the prudency standard for IOUs, created the $21 billion wildfire insurance fund and establish a utility liability cap. These are now models informing other states as the threat of wildfires have spread nationwide.

On regulation, the CPUC and other agencies have implemented processes for rigorously reviewing and approving wildfire mitigation plans and safety certifications. On suppression, California has consistently shown its commitment to resource allocation. CAL FIRE's budget has doubled since 2017 to '18, along with an 80% increase in staffing. CAL FIRE has the largest civil aerial firefighting fleet in the world and recently contracted for 20 additional helicopters and 4 airplanes.

SCE is also contributing to local fire agency suppression capabilities through the funding of the year-round quick reaction force. This is made up of the world's largest fire suppression helicopters with unique night firefighting capabilities. This partnership with the L.A. County Fire Department, Orange County Fire Authority and Ventura County [ Fio ] department helps suppress fires regardless of how they start, and it helps protect the communities SCE serves. This is the sixth straight year the utility has funded aerial suppression resources as part of its wildfire mitigation efforts.

Turning to sustainability. We continue to lead the way towards a clean energy future. SCE is a leader in California's efforts to reduce greenhouse gas emissions while also focusing on the grid investments needed for a more resilient equitable clean energy economy. I am proud of all that we've done to execute on our long-term net 0 commitment in alignment with California's ambitious policy goals. I encourage you to read our 2023 sustainability report for details about our accomplishments, our goals and our long-term ESG commitments.

Pages 9 and 10 highlight a few of our accomplishments. In 2023, SCE delivered 52% carbon-free power to customers and that's 55% cleaner than the national average. SCE contracted approximately 2,200 megawatts of energy storage, bringing the total at year-end to about 7,200 megawatts and that's currently standing at 8,100 megawatts. This is simply one of the largest portfolios in the nation.

Lastly, the utility met or outperformed nearly all wildfire mitigation targets last year and invested heavily in hardening the grid leading to the 85% to more than 90% risk reduction I discussed earlier.

Let me conclude by saying that Edison International is leading the charge towards a carbon-neutral California. We're committed to ensuring that the clean energy transition remains reliable, resilient, affordable, equitable and accessible to all customers and communities.

With that, Maria will provide her financial report.

[Maria Rigatti, executive]

Thanks, Pedro, and good afternoon. In my comments today, I would like to emphasize four key financial messages.

First, we are pleased with EIX's financial performance for the first half of the year. Combined with the outlook for the second half, Edison is on track to deliver yet another year of solid results for 2024.

Second, SCE's regulatory outcomes this year have been positive and based on the continuing progress on the two key ongoing CPUC proceedings the 2025 GRC and TKM cost recovery, we are confident in getting good outcomes for customers.

Third, with SCE having the lowest system average rate among California IOUs, it is best positioned to address load growth and resulting capital needs as customers dependency on and use of electricity growth.

Fourth, EIX's equity needs to fund our substantial capital program over the next several years are among the lowest in the industry.

Let's begin with a brief review of our second quarter results. EIX reported core EPS of $1.23. As you can see from the year-over-year quarterly variance analysis shown on Page 11, core earnings grew by $0.22. This EPS growth was primarily due to higher CPUC revenue authorized in track 4 of the 2021 GRC, higher authorized rate of return and the final decision on SCE's CEMA application. Partially offsetting these drivers was higher interest expense associated with debt for wildfire claims payments, EIX Parent and Other was in line with the same period last year.

On the regulatory front, we are pleased with the outcomes this year. For instance, as I just mentioned, the CPUC recently issued a favorable decision on SCE's CEMA application. Additionally, SCE received approval in July for interim rate recovery in its 2022 WM VM proceeding, enabling the collection of $210 million of the $384 million request in customer rates beginning in October. Also in July, the CPUC approved the Energy division resolution regarding the implementation of the cost of capital mechanism for 2024.

When we look at where bond yields are today, it's clear that the interest rate environment that triggers the mechanism was sustained. Thus, the 10.75% ROE should stay in place also for 2025. These regulatory decisions, of course, the numerous others we have received over the last few years have significantly strengthened our balance sheet and credit metrics. Since 2021, SCE has recovered more than $4 billion with another approximately $2 billion expected through 2025, all of which you can see on Page 12.

I would like to now comment on the two key ongoing regulatory proceedings starting with SCE's 2025 GRC. Page 13 provides an update on the proceeding, which remains on track.

During the second quarter, SCE filed its update testimony and all parties recently filed their opening brief. We are pleased with the tremendous work SCE has done to narrow the focus of the proceeding. SCE has reached partial settlements covering 12 areas of the GRC, representing nearly 20% of the O&M request and about 8% of the capital request.

On the TKM cost recovery application, [ Cal Advocates ] was the only party to submit prepared testimony. They criticize the maturity of SCE's prefire mitigation measures, leading up to the unprecedented 2017 fire season, but did not put forward a specific disallowance proposal. SCE served strong rebuttal testimony on July 11, identifying [ Keith ] laws and [ Cal Advocate's ] testimony and highlighting the interveners heavy and incorrect reliance on hindsight in its review of the record.

As for next steps, the ALJ extended the schedule such that the motion for settlement approval or case management statement is due on August 7, and hearings will be in November or January.

In summary, based on the evidence put forward so far in this proceeding, we reaffirm the strength of our cost recovery request. We look forward to keeping you informed on further developments on this front.

Please turn to Page 14 for an update on the resolution of SCE's legacy wildfires. Having made substantial progress, SCE has now resolved 98% of TKM individual plaintiff claims and 92% of will be individual plaintiff claims. SCE will file its [ loyalty ] cost recovery application in the third quarter.

SCE's capital and rate base forecasts shown on Pages 15 and 16 are consistent with last quarter's disclosures. SCE's 2025 GRC underpins our forecast as the utility continues to make investments necessary to meet the critical objectives of reliability, resiliency and readiness to meet customers' needs today and in the future. In addition to our forecast, SCE continues to target filing stand-alone applications over the next couple of years that will give it opportunities to deploy capital above and beyond the rate case outcome. The next-gen ERP system application is tracking for late this year with the Advanced Metering 2.0 application expected in 2025.

I would also like to mention that in May, [ CISO ] selected SCE in partnership with [ LOTUS ] Infrastructure as the winning bidder for the North [indiscernible] transmission project. At expected completion in 2032, this project will add about $245 million to SCE's FERC rate base. This builds on the more than $2 billion of transmission spending that was directly awarded to SCE as the incumbent utility in CISO's 2022, 2023 transmission plan.

Turning to EPS guidance. Page 17 shows our 2024 core EPS guidance and modeling considerations. We are pleased with our start to the year, and with SEMA approved and no other CPUC decisions built into our 2024 guidance, we are confident in achieving the range of $4.75 to $5.05. Also, I'm pleased to share that we've completed EIX financing plan with the issuance of $500 million of debt at the end of June and having achieved our planned $100 million of equity via internal programs earlier in the year.

I would now like to reemphasize that for the 2025 through 2028 period, we have equity needs of only $400 million in total, even though we plan to deploy substantial amounts of capital. As you can see on the right side of Page 18, SCE's strong cash flow generation and the incremental debt to finance accretive growth address nearly all of our cash needs. We credit this to our strong financial discipline, efficient financing execution and the significant memo account recovery I just mentioned.

Let me conclude by saying that California's clean energy future depends on substantial investment in the grid as the economy depends even more on electricity. Affordability and equity will be key components to driving greater adoption of transportation and building electrification. With SCE having the lowest system average rate among California IOUs it is very well positioned to make substantial capital investments as customers' dependency on and use of electricity grows.

That concludes my remarks, and I'll pass it back to Sam.

[Sam Ramraj, executive]

Julie, please open the call for questions. As a reminder, we request you to limit yourself to one question and one follow-up so everyone in line has the opportunity to ask a question.

[Operator]

[Operator Instructions] Our first question comes from Michael Lonegan with Evercore ISI.

[Michael Lonegan, analyst]

Obviously, you reached the partial settlement in the GRC representing 19% of O&M and 8% of the capital request. Certainly a positive development, but still a good amount, not settled on. Just wondering how you're thinking about the key debates remaining and what gives you confidence in a constructive final decision?

[Pedro Pizarro, executive]

Michael, good to hear you. And let me just start. To me, I think the headline continues to be that in this rate case, when you look at the ingoing intervener positions -- now when you sum it all up, they still landed with rate base growth in line with our range. So that, I think, is a very constructive place to be at the beginning of the case and where we are with the case now. We will continue to work through issues. We -- as you said, we have some partial settlements I think the SE team has done a very nice job putting forth the case on why we need the investments that we requested for a reliable, resilient and ready grid, and we'll just continue to work our way through the process.

Maria or Steve Powell, anything you would add?

[Maria Rigatti, executive]

I'd like to say the proceeding is still on track from a time perspective. We have been able to settle these areas that are noted in the materials. That means that we can focus on a narrow and narrow set of issues.

But again, Pedro's point at the end of the day, the proposal that the interveners put into the proceeding at this point, still tied to the -- and are consistent with the lower end of our range. So I think we have a lot of opportunity here to do something that's beneficial to customers.

[Michael Lonegan, analyst]

Great. And then secondly for me, you talked about load growth materializing faster than expected. Just wondering if you're expecting incremental investment in the planning period through 2028? Potentially how much could we expect? And when -- and how would you think about financing that incremental spending?

[Maria Rigatti, executive]

So Michael, I think our team is -- I think you noticed, we were in the planning phase for a plan that's going to be submitted shortly. The team will need to look and continue to evaluate the precise plans that our customers are bringing forward to us, and that will allow us to then lay out the investments will come back into the capital plan and then come back into rate base.

To the extent that we see these things materializing within the GRC cycle, we do have the ability to reprioritize capital. We've mentioned that before, and we have built flexibility into the rate case. And then beyond that, we'll look at other mechanisms that allow us to file separate applications, and there are a number of avenues that we could pursue.

But Steve, you've been working with the team on the plan. So you want to jump in?

[Steven Powell, executive]

Sure. So in terms of the load growth, we've certainly seen an acceleration of customer demand. And so we're still evaluating the taking -- [indiscernible] weighting those requests based on the completeness of them and figuring out how much additional infrastructure will be needed to support them. We're constantly readjusting our plans based on various factors. And so the increase in customer demand has been important.

It's been a fair amount of electrification load, but we're also seeing growth in residential, particular from new home starts, which have accelerated the last couple of years beyond expectations. There's a fair amount of commercial industrial loads. So it's a pretty diverse set of load growth that we've seen, and we will continue to make adjustments. And certainly with whether it's GRC or alternative funding approaches will be on the table.

We continue to provide ideas into what's called the high DER proceeding at the Public Utilities Commission, where they're still evaluating different ways that we can look for investment opportunities in the middle of the GRC cycle. So that's our approach right now.

[Operator]

Our next question comes from Shar Pourreza with Guggenheim Partners.

[Shahriar Pourreza, analyst]

Just a couple of quick ones here. Just on the legacy wildfire cost application, obviously, the constructive signs and see settlements potential opportunities. And kind of moving procedural schedule to accommodate that. Can you just elaborate on any issues that remain debated that would go into hearing potentially? Would you settle for anything less than 100%? And under what incentives would you do that?

[Pedro Pizarro, executive]

Shar, this one, as you can imagine, it's a life proceeding, and we really can't comment on potential settlements beyond just saying that we're certainly open to that and always willing to engage with parties and we think the team did a strong job and showing a prudency. But I don't think we're in a place where we can comment on specific elements of the case at this point. Apologies for that.

[Maria Rigatti, executive]

And Shar just procedurally, August 7 is when either settlement would be filed or we would file a case management statement. And in the case management statement, the issues that are still to be addressed during hearings and/or any other stipulations would then be part of that statement. And then the hearings then would be scheduled for that November or January time frame. So that's the process that we'll be going to that going through that you can monitor.

[Shahriar Pourreza, analyst]

Okay. Perfect. We'll look for that. And then just -- and obviously, you noted a small buyback program basically focused on share-based comp. How are you thinking about maybe capital allocation in light of the legacy wildfire claims recovery if that recovery potentially overequitize you relative to your credit targets -- your metrics?

[Maria Rigatti, executive]

Sure. Well, I mean, obviously, we have debt that's outstanding at SCE that went to fund the claims payment. As we get recovery or, as you know, our proposal has been that we would securitize that. So we would be able to [indiscernible] the debt that's already been issued, we can reallocate that debt to rate base financing, if you will, to sort of make sure that we stay within our capital structure.

The recovery does improve our credit metrics. Every $1 billion is 40 to 50 basis points of improved credit metrics. But I think as we go through that process, then we can start to look at as refinancings of equity content securities come up at the holding company, where we can replace those, which are, of course, because they have equity content, a little higher cost with regular way debt, we'll take all of that into consideration as we look at the recovery and from the wildfire claims.

I will say we will continue to have a 15% to 17% FFO to debt framework for the company.

[Operator]

Our next question comes from Nick Campanella with Barclays.

[Nicholas Campanella, analyst]

I wanted to ask on notable start on full year '24. Just given we're kind of halfway through the year, are you kind of trending towards the higher end of your range? Do you just still have confidence in the midpoint at this point? What puts you higher?

[Maria Rigatti, executive]

Nick, it's Maria. We're very confident in our guidance. We've reaffirmed it. I think you know that over the course of the year, different quarters have different events that happen within them, but we are very confident in our guidance, and we think we're right on track.

[Nicholas Campanella, analyst]

Okay. And then just, I guess, a follow-up on Shar's question just -- you're talking about the load demand equation that could lead to accelerated CapEx. Just as the plan stands today, can you remind us if you were -- is there like a level that you could fund additional capital without additional equity?

[Maria Rigatti, executive]

Nick, I think that really depends when the capital comes in and when we have to make the investments. As I said, we have that 15% to 17% FFO to debt financing framework that we work towards. And where we are in that range will dictate whether we can continue to use our existing financing plan or if we need to do anything beyond that.

We will, of course, as Steve pointed out earlier, we could reprioritize the spending within our GRC. We have some flexibility there, and we've actually noted that in our GRC where we could go beyond that and look at some other mechanisms to also get cost recovery on a timely basis as well.

[Operator]

Our next question comes from David Arcaro with Morgan Stanley.

[David Arcaro, analyst]

Maybe a quick clarification on load growth. I was just wondering, is that already faster than what you were thinking last quarter? You mentioned the 2% to 3% [ loan ] growth in the near term through 2028 and then accelerating above 3% beyond that. Are you now thinking that it's kind of higher within that range or even faster than you were just previously thinking?

[Pedro Pizarro, executive]

I think at this point, we're still seeing it 2% to 3% in the near term, but the point we're making is that as we look at a 10-year forecast, we're certainly seeing that accelerating and we're watching it closely in the interim. But it was really -- it was fascinating to see that in just 2 years, that 10-year forecast jumped up by 35%. And as Steve was saying, as the team is getting -- SCA is getting customer requests, putting all those together, not all of those come through in the end. So that's why Steve mentioned that the probability weight them and track them, so we'll continue to provide updates if that changes meaningfully.

But I think looking at the near term, it continues to move along at 2% to 3%, but the long-term is really showing that increase, and we'll see what happens in between.

Anything you would say differently, Steve?

[Steven Powell, executive]

I would just add that -- so I'd say, first, particularly the new customer demand, that specific project certainly gives a lot more certainty to the need for the investments in the front end and during the GRC cycle. I would want to note that the 2% to 3% we're talking about that you heard last time, that's about the total energy, the kilowatt hour growth. This demand is the specific local capacity needs of customers. And so this is really driving the infrastructure, the distribution level sort of upgrades as opposed to the total energy consumption that's happening.

Now those can head in the same direction. And so I think this does bolster the view around the 2% to 3%. But at this point, we don't see it driving it well out of that range in the near term.

[David Arcaro, analyst]

Okay. Got it. That's good to hear. And then let's see, Pedro, I was curious your perspective on -- I thought it was interesting just recently, the CPC rolled out a planned procurement for some kind of next-generation technologies within California, some long-duration energy storage offshore wind, geothermal.

So I guess I was just wondering, do you have any early thinking on whether utilities like yourself would be involved in any of those projects or procurement and just how that could maybe reshape the California generation landscape over time?

[Pedro Pizarro, executive]

Yes. And David, I'll start with maybe a big picture comment and Steve may have more to add here as well. Kind of at the highest level, if you go back toward count to 2045 white paper, we see this need for California to be adding significant amounts of large-scale renewables and other clean resources. And so at one level, what the CPUC is doing in this proposal, is to start filling in the blanks and terms of some of the new year and midterm procurement.

The team is still going to the details of that, right? And some of the things we want to look at are relative timing, what's the likelihood of the technology, developing and frankly, that development being feasible within the time frames that the PUC has laid out. So more to come on that as our team evaluates what the PUC put out. But directionally, we certainly see the need to develop a whole host of resources in order to meet the demand that's coming. Steve?

[Steven Powell, executive]

I'd say we agree with PUC on the need for some of these -- the next-generation technologies, whether it's enhanced geothermal, offshore wind. They still need to be derisked and they still may prove they can be built on a timely and affordable basis. Appreciate that the state of the PUC is directing that procurement begin so we can get that process going. And they've asked the Department of Water Resources or they're in the process of that proposal having DWR go and do that procurement. So we want to make sure that procurement is done really effectively because ultimately, this hits customer bills. And we've got to -- we've got to manage the customer bills while also advancing the technologies.

So that's our focus of making sure it gets done efficiently and effectively. And there's a lot of investment like these that are going to need to happen across the state.

[Operator]

Our next question comes from Ryan Levine with Citi.

[Ryan Levine, analyst]

As you're preparing to file the next-gen ERP application next quarter, would you be able to frame broadly the magnitude of the investment opportunity?

And given the acceleration of the longer-term low forecast that you highlighted in your prepared remarks, does that have any implication for the attractiveness of the next-gen ERP system?

[Maria Rigatti, executive]

Yes. So when we file the application, we are going to lay out, of course, the cost of the system, but also really importantly, we're going to lay out the benefits, because that is really going to be a big component. The next-gen system will be, of course, related to the financial reporting aspects of the business but also has a lot to do with work management and becoming more efficient in that regard. So there'll be a lot of benefits that we can talk through when we file our application.

In terms of whether or not it competes with load growth, we need to build out the infrastructure to meet the demand that we're seeing from our customers, but we also need to run an efficient [indiscernible] operation and do the financial statements appropriately as you can appreciate. So I don't think they're in competition with each other.

Also, I think it's really related to the point that Pedro made earlier in his prepared remarks about where we see the system average rate over the next several years. And when you get a chance to look at the materials, you'll be able to see that those rate increases are consistent with inflation, and we have built in our entire GRC request, the NextGen application, the AMI application and 100% cost recovery on the 1,718 wildfire claims.

So with all of that, we're still consistent with local inflation in terms of our SAR forecast.

[Ryan Levine, analyst]

Okay. And then one follow-up. In terms of the low growth forecast, the impact of EV growth, is there anything you're looking for from federal policy that could impact growth in your service territory that's embedded in your guidance that you highlighted today?

[Pedro Pizarro, executive]

Well, one way that I think about it, Ryan, is that we have -- we really are being driven open intended in California by the state's requirements and targets for EVs or having net 0 vehicles by 2035, et cetera. So that really, in some sense, sets the demand picture because that's the binding constraint.

Where the federal government comes in us in a couple of ways. One is certainly the incentives that are being provided by the Inflation Reduction Act are really helpful in lowering the ultimate cost of the transition to consumers. And so certainly, both as Edison and [indiscernible] the industry as EEI, are very focused on preserving those IRA benefits regardless of what administration we have next in Washington. And that's a message that we've been carrying already really forcefully.

And I think fortunately, you -- although you might hear some comments from some camps about potential reversal of the IRA, think in general, you're hearing -- understanding that those benefits are really flowing across all states, both more red states and more blue states. In fact, probably the majority of benefits are flowing to red states right now. And so, I think there's a sense that they're having an impact on the economy.

So we're hopeful that our customers will continue to benefit from those incentives, but at the same time, we see a commitment in California to the transition is unwavering regardless of federal support.

The other federal touch point here, of course, is the clean air provisions in California's waiver. And so that's the other element to watch in all of this. But again, I don't see California shifting its focus away from encouraging the adoption of electric vehicles.

Does that help with the question?

[Ryan Levine, analyst]

Yes, it's helpful.

[Operator]

Our next question comes from Anthony Crowdell with Mizuho.

[Anthony Crowdell, analyst]

I just have a quick one, and I -- you may not want to answer it. It's kind of in the line of the one Shar was asking earlier. Just -- how should we interpret on the TKM recovery? How do we interpret just only Cal Advocates filed testimony? Do we look at it is similar to like a GRC when the rest of the parties may not sign on to -- sometimes they don't sound into a settlement they don't object. I'm just wondering what's the best way to interpret that?

[Pedro Pizarro, executive]

Yes. I think you started to answer with the last part of your question there. There are lots of opportunities for parties to voice their views in these proceedings. It is a little different from a rate from a general rate case. And so not reading a lot into this initial step or certainly the opportunity for other parties to express interest as we move along.

[Operator]

And that was our last question. I will turn the call back to Mr. Sam Ramraj.

[Sam Ramraj, executive]

Thank you for joining us. This concludes the conference call. Have a good rest of the day. You may now disconnect.