Fair Value Measurements

12 Months Ended

Dec. 31, 2012

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value Measurements

Recurring Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (referred to as an “exit price”). Fair value of an asset or liability considers assumptions that market participants would use in pricing the asset or liability, including assumptions about nonperformance risk. As of December 31, 2012 and 2011, nonperformance risk was not material for Edison International and SCE.

Assets and liabilities are categorized into a three-level fair value hierarchy based on valuation inputs used to determine fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

SCE

The following table sets forth assets and liabilities of SCE that were accounted for at fair value by level within the fair value hierarchy:

	December 31, 2012
(in millions)	Level 1		Level 2		Level 3			Netting and Collateral1			Total
Assets at Fair Value
Money market funds	$	5	$	—	$	—		$	—		$	5
Derivative contracts:
CRRs	—		—		186			—			186
Electricity	—		—		31			(13		)	18
Natural gas	—		8		—			(2		)	6
Tolling	—		—		4			—			4
Subtotal of derivative contracts	—		8		221			(15		)	214
Long-term disability plan	8		—		—			—			8
Nuclear decommissioning trusts:
Stocks2	2,271		—		—			—			2,271
Municipal bonds	—		644		—			—			644
U.S. government and agency securities	477		126		—			—			603
Corporate bonds3	—		410		—			—			410
Short-term investments, primarily cash equivalents4	121		—		—			—			121
Subtotal of nuclear decommissioning trusts	2,869		1,180		—			—			4,049
Total assets	2,882		1,188		221			(15		)	4,276
Liabilities at Fair Value
Derivative contracts:
Electricity	—		2		5			(2		)	5
Natural gas	—		113		2			(60		)	55
Tolling	—		—		1,005			—			1,005
Subtotal of derivative contracts	—		115		1,012			(62		)	1,065
Total liabilities	—		115		1,012			(62		)	1,065
Net assets (liabilities)	$	2,882	$	1,073	$	(791	)	$	47		$	3,211

	December 31, 2011
(in millions)	Level 1		Level 2		Level 3			Netting and Collateral1			Total
Assets at Fair Value
Money market funds	$	21	$	—	$	—		$	—		$	21
Derivative contracts:
CRRs	—		—		122			—			122
Electricity	—		—		1			—			1
Natural gas	—		5		—			(3		)	2
Tolling	—		—		10			—			10
Subtotal of derivative contracts	—		5		133			(3		)	135
Long-term disability plan	8		—		—			—			8
Nuclear decommissioning trusts:
Stocks2	1,899		—		—			—			1,899
Municipal bonds	—		756		—			—			756
U.S. government and agency securities	433		147		—			—			580
Corporate bonds3	—		317		—			—			317
Short-term investments, primarily cash equivalents4	—		15		—			—			15
Subtotal of nuclear decommissioning trusts	2,332		1,235		—			—			3,567
Total assets	2,361		1,240		133			(3		)	3,731
Liabilities at Fair Value
Derivative contracts:
Electricity	—		5		65			(2		)	68
Natural gas	—		234		23			(53		)	204
Tolling	—		—		799			—			799
Subtotal of derivative contracts	—		239		887			(55		)	1,071
Total liabilities	—		239		887			(55		)	1,071
Net assets (liabilities)	$	2,361	$	1,001	$	(754	)	$	52		$	2,660

¹  Represents the netting of assets and liabilities under master netting agreements and cash collateral across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level.

²  Approximately 66% and 70% of SCE's equity investments were located in the United States at December 31, 2012 and 2011, respectively.

³  At December 31, 2012 and 2011, SCE's corporate bonds were diversified and included collateralized mortgage obligations and other asset backed securities of $56 million and $22 million, respectively.

⁴  Excludes net payables of $1 million at December 31, 2012 ;and net receivables of $25 million at December 31, 2011, of interest and dividend receivables as well as receivables and payables related to SCE's pending securities sales and purchases.

Edison International Parent and Other

Assets measured at fair value consisted of money market funds of $107 million and $114 million at December 31, 2012 and 2011, respectively, classified as Level 1.

SCE Fair Value of Level 3

The following table sets forth a summary of changes in SCE's fair value of Level 3 net derivative assets and liabilities:

	December 31,
(in millions)	2012			2011
Fair value of net assets (liabilities) at beginning of period	$	(754	)	$	6
Total realized/unrealized gains (losses):
Included in regulatory assets and liabilities1	(70		)	(806		)
Purchases	104			47
Settlements	(71		)	(1		)
Transfers into Level 3	—			—
Transfers out of Level 3	—			—
Fair value of net liabilities at end of period	$	(791	)	$	(754	)
Change during the period in unrealized losses related to assets and liabilities held at the end of the period	$	(119	)	$	(789	)

¹  Due to regulatory mechanisms, SCE's realized and unrealized gains and losses are recorded as regulatory assets and liabilities.

Edison International and SCE recognize the fair value for transfers in and transfers out of each level at the end of each reporting period. There were no transfers between Levels 1 and 2 during 2012 and 2011.

Valuation Techniques Used to Determine Fair Value

Level 1

The fair value of Edison International and SCE's Level 1 assets and liabilities is determined using unadjusted quoted prices in active markets that are available at the measurement date for identical assets and liabilities. This level includes exchange-traded equity securities and derivatives, U.S. treasury securities and money market funds.

Level 2

Edison International and SCE's Level 2 assets and liabilities include fixed income securities and over-the-counter derivatives. The fair value of fixed income securities is determined using a market approach by obtaining quoted prices for similar assets and liabilities in active markets and inputs that are observable, either directly or indirectly, for substantially the full term of the instrument. For further discussion on fixed income securities, see "—Nuclear Decommissioning Trusts" below.

The fair value of SCE's over-the-counter derivative contracts is determined using an income approach. SCE uses standard pricing models to determine the net present value of estimated future cash flows. Inputs to the pricing models include forward published or posted clearing prices from exchanges (New York Mercantile Exchange and Intercontinental Exchange) for similar instruments and discount rates. A primary price source that best represents trade activity for each market is used to develop observable forward market prices in determining the fair value of these positions. Broker quotes, prices from exchanges or comparison to executed trades are used to validate and corroborate the primary price source. These price quotations reflect mid-market prices (average of bid and ask) and are obtained from sources believed to provide the most liquid market for the commodity.

Level 3

The fair value of SCE's Level 3 assets and liabilities is determined using the income approach through various models and techniques that require significant unobservable inputs. Edison International does not have any Level 3 assets and liabilities. This level includes over-the-counter options, tolling arrangements and derivative contracts that trade infrequently such as congestion revenue rights ("CRRs") and long-term power agreements.

Assumptions are made in order to value derivative contracts in which observable inputs are not available. Changes in fair value are based on changes to forward market prices, including extrapolation of short-term observable inputs into forecasted prices for illiquid forward periods. In circumstances where fair value cannot be verified with observable market transactions,

it is possible that a different valuation model could produce a materially different estimate of fair value. Modeling methodologies, inputs and techniques are reviewed and assessed as markets continue to develop and more pricing information becomes available and the fair value is adjusted when it is concluded that a change in inputs or techniques would result in a new valuation that better reflects the fair value of those derivative contracts.

Level 3 Valuation Process

The process of determining fair value is the responsibility of SCE's risk management department, which report to SCE's chief financial officer. This department obtains observable and unobservable inputs through broker quotes, exchanges and internal valuation techniques that use both standard and proprietary models to determine fair value. Each reporting period, the risk and finance departments collaborate to determine the appropriate fair value methodologies and classifications for each derivative. Inputs are validated for reasonableness by comparison against prior prices, other broker quotes and volatility fluctuation thresholds. Inputs used and valuations are reviewed period-over-period and compared with market conditions to determine reasonableness.

The following table sets forth SCE's valuation techniques and significant unobservable inputs used to determine fair value for Level 3 assets and liabilities at December 31, 2012:

	Fair Value (in millions)							Significant	Range
	Assets			Liabilities			Valuation Technique(s)	Unobservable Input	(Weighted Average)
Electricity:
Options	$	40		$	12		Option model	Volatility of gas prices	25% - 36% (33%)
								Volatility of power prices	29% - 64% (42%)
								Power prices	$41.70 - $59.20 ($47.00)
Forwards	2			4			Discounted cash flow	Power prices	$23.10 - $44.90 ($31.10)
CRRs	186			—			Market simulation model	Load forecast	7,597 MW - 26,612 MW
								Power prices	$(13.90) - $226.75
								Gas prices	$2.95 - $7.78
Gas options	—			2			Option model	Volatility of gas prices	28% - 36% (34%)
Tolling	4			1,005			Option model	Volatility of gas prices	17% - 36% (22%)
								Volatility of power prices	26% - 64% (29%)
								Power prices	$35.00 - $84.10 ($55.40)
Netting	(11		)	(11		)
Total derivative contracts	$	221		$	1,012

Level 3 Fair Value Sensitivity

Gas Options, Electricity Options, and Tolling Arrangements

The fair values of SCE's option contracts and tolling arrangements contain intrinsic value and time value. Intrinsic value is the difference between the market price and strike price of the underlying commodity. Time value is made up of several components, including volatility, time to expiration, and interest rates. The fair value of option contracts changes as the underlying commodity price moves away or towards the strike price. The option model for tolling arrangements reflects plant specific information such as operating and start-up costs.

For tolling arrangements and certain gas and power option contracts where SCE is the buyer, increases in volatility of the underlying commodity prices would result in increases to fair value as it represents greater price movement risk. As power and gas prices increase, the fair value of the option contracts and tolling arrangements tends to increase. The valuation of power option contracts and tolling arrangements is also impacted by the correlation between gas and power prices. As the correlation increases, the fair value of power option contracts and tolling arrangements tends to decline.

Forward Power Contracts

Generally, an increase (decrease) in long-term forward power prices at illiquid locations where SCE is the buyer relative to the contract price will increase (decrease) fair value.

CRRs

Where SCE is the buyer, generally increases (decreases) in forecasted load in isolation would result in increases (decreases) to the fair value. In general, an increase (decrease) in electricity and gas prices at illiquid locations tends to result in increases (decreases) to fair value; however, changes in electricity and gas prices in opposite directions may have varying results on fair value.

Nuclear Decommissioning Trusts

SCE's nuclear decommissioning trust investments include equity securities, U.S. treasury securities and other fixed income securities. Equity and treasury securities are classified as Level 1 as fair value is determined by observable market prices in active or highly liquid and transparent markets. The remaining fixed income securities are classified as Level 2. The fair value of these financial instruments is based on evaluated prices that reflect significant observable market information such as reported trades, actual trade information of similar securities, benchmark yields, broker/dealer quotes, issuer spreads, bids, offers and relevant credit information.

SCE's investment policies and CPUC requirements place limitations on the types and investment grade ratings of the securities that may be held by the nuclear decommissioning trust funds. These policies restrict the trust funds from holding alternative investments and limit the trust funds' exposures to investments in highly illiquid markets. Valuation is based on observable market inputs and assumptions used by market participants. With respect to equity and fixed income securities, the trustee obtains prices from third-party pricing services which SCE is able to independently corroborate as described below. A primary price source is identified by the trustee based on asset type, class or issue for each security. The trustee monitors prices supplied by pricing services and may use a supplemental price source or change the primary price source of a given security if the trustee or SCE's investment managers challenge an assigned price and determine that another price source is considered to be preferable. The trustee “scrubs” prices against defined parameters at established times throughout the day. Variances that do not meet the parameters are researched and resolved. Unpriced and stale priced securities, as well as any unusual variations in market price or overall market value are investigated. Price variance reports are reviewed on the basis of predetermined tolerances. Variances identified outside of tolerance are then researched and resolved. Parameters and predetermined tolerance thresholds are established by asset class based on past experience and an understanding of valuation process techniques. Questionable prices are reported to the vendor who provided the price and pricing specialists then follow-up with the vendors. If the prices are validated, the primary price source is used. If not, a secondary source price which has passed the applicable tolerance check is used. The trustee monitors and grades the performance of pricing vendors. SCE reviewed the process/procedures of both the pricing services and the trustee to gain an understanding of the inputs/assumptions and valuation techniques used to price each asset type/class and to reach a conclusion that their pricing controls are satisfactory. This consisted of SCE's review of their written detailed process/procedures and service organization control (SOC 1-formerly SAS 70) reports, as well as follow-up conversations based on our written questions. This assists SCE in determining if the valuations represent exit price fair value and that investments are appropriately classified in the fair value hierarchy. Additionally, SCE corroborates the fair values of securities by comparison to other market-based price sources obtained by SCE's investment managers. Differences outside established thresholds are followed-up with the trustee and resolved. The results of this process have demonstrated that vendor and trustee pricing controls are satisfactory. For each reporting period, SCE reviews the trustee determined fair value hierarchy and overrides the trustee level classification when appropriate. Due to its regulatory treatment, SCE's fair value transactions are recovered in rates. 

Fair Value of Long-Term Debt Recorded at Carrying Value

The carrying value and fair value of Edison International and SCE's long-term debt:

	December 31, 2012				December 31, 2011
(in millions)	Carrying Value		Fair Value		Carrying Value		Fair Value
SCE	$	8,828	$	10,505	$	8,431	$	10,129
Edison International	9,231		10,944		8,834		10,548

Fair value of Edison International and SCE's short-term and long-term debt is classified as Level 2 and is based on evaluated prices that reflect significant observable market information such as reported trades, actual trade information of similar securities, benchmark yields, broker/dealer quotes of new issue prices and relevant credit information.

The carrying value of Edison International and SCE's trade receivables and payables, other investments, and short-term debt approximates fair value.