Regulatory Assets and Liabilities

Included in SCE's regulatory assets and liabilities are regulatory balancing accounts. CPUC authorized balancing account mechanisms require SCE to refund or recover any differences between forecasted and actual costs. The CPUC has authorized balancing accounts for specified costs or programs such as fuel, purchased-power, demand-side management programs, nuclear decommissioning and public purpose programs. Certain of these balancing accounts include a return on rate base of 7.61% and 7.90% in 2018 and 2017, respectively. The CPUC authorizes the use of a balancing account to recover from or refund to customers differences in revenue resulting from actual and forecasted electricity sales.

Amounts included in regulatory assets and liabilities are generally recorded with corresponding offsets to the applicable income statement accounts.

Regulatory Assets

SCE's regulatory assets included on the consolidated balance sheets are:



	December 31,
(in millions)	2018		2017
Current:
Regulatory balancing accounts	$	814	$	484
Power contracts¹	305		203
Other	14		16
Total current	1,133		703
Long-term:
Deferred income taxes, net of liabilities	3,589		3,143
Pensions and other postretirement benefits	271		271
Power contracts¹	700		799
Unamortized investments, net of accumulated amortization²	118		123
San Onofre³	—		72
Unamortized loss on reacquired debt	153		168
Regulatory balancing accounts	360		143
Environmental remediation	134		144
Other	55		51
Total long-term	5,380		4,914
Total regulatory assets	$	6,513	$	5,617


¹	In 2018, SCE amended the termination date of two power purchase agreements. As a result of this amendment, SCE is required to make early termination payments of $100 million in 2019, $77 million in 2020 and $29 million in 2021, which were reflected as a regulatory asset in the consolidated balance sheets as of December 31, 2018.


²	Relates to a regulatory asset that earns a rate of return. See below for further information.

In accordance with the Revised San Onofre Settlement Agreement, SCE wrote down the San Onofre regulatory asset in 2017 and applied $72 million of the U.S. Department of Energy ("DOE") proceeds, previously reflected as a regulatory liability in the DOE litigation memorandum account, against the remaining San Onofre regulatory asset during the third quarter of 2018. See Note 12 for further information.

SCE's regulatory assets related to power contracts primarily represent derivative contracts that were designated as normal purchase and normal sale contracts. The liabilities for these power contracts are amortized over the remaining contract terms, approximately 2 to 5 years. For further information, see Note 1.

SCE's regulatory assets related to deferred income taxes represent tax benefits passed through to customers. The CPUC requires SCE to flow through certain deferred income tax benefits to customers by reducing electricity rates, thereby deferring recovery of such amounts to future periods. Based on current regulatory ratemaking and income tax laws, SCE expects to recover its regulatory assets related to deferred income taxes over the life of the assets that give rise to the accumulated deferred income taxes, approximately from 1 to 60 years. As a result of Tax Reform, SCE re-measured its deferred tax assets and liabilities as of December 31, 2017. For further information, see Note 8.

SCE's regulatory assets related to pensions and other post-retirement plans represent the unfunded net loss and prior service costs of the plans (see "Pension Plans and Postretirement Benefits Other than Pensions" discussion in Note 9). This amount is being recovered through rates charged to customers.

SCE has long-term unamortized investments which include nuclear assets related to Palo Verde and the beyond the meter program. Nuclear assets related to Palo Verde and the beyond the meter program are expected to be recovered by 2047 and 2027, respectively, and both earned returns of 7.61% in 2018 and 7.90% in 2017.

SCE's net regulatory asset related to its unamortized loss on reacquired debt will be recovered over the original amortization period of the reacquired debt over periods ranging from 10 to 35 years or the life of the new issue if the debt is refunded or refinanced.

SCE's regulatory assets related to environmental remediation represents a portion of the costs incurred at certain sites that SCE is allowed to recover through customer rates. See "Environmental Remediation" discussed in Note 12.

Regulatory Liabilities

SCE's regulatory liabilities included on the consolidated balance sheets are:



	December 31,
(in millions)	2018		2017
Current:
Regulatory balancing accounts	$	1,080	$	1,009
Energy derivatives	158		74
Other¹	294		38
Total current	1,532		1,121
Long-term:
Costs of removal	2,769		2,741
Re-measurement of deferred taxes	2,776		2,892
Recoveries in excess of ARO liabilities	1,130		1,575
Regulatory balancing accounts	1,344		1,316
Other postretirement benefits	185		26
Other¹	125		64
Total long-term	8,329		8,614
Total regulatory liabilities	$	9,861	$	9,735

During 2018, SCE recorded CPUC revenue based on the 2017 authorized revenue requirement adjusted for the July 2017 cost of capital decision and Tax Reform pending the outcome of the 2018 GRC. SCE recorded regulatory liabilities primarily associated with these adjustments. The CPUC has authorized the establishment of a GRC memorandum account, which will make the 2018 revenue requirement ultimately adopted by the CPUC effective as of January 1, 2018. For further information, see Note 1.

SCE's regulatory liabilities related to energy derivatives are primarily an offset to unrealized gains on derivatives.

SCE's regulatory liabilities related to costs of removal represent differences between asset removal costs recorded and amounts collected in rates for those costs.

As a result of Tax Reform, SCE's deferred tax assets and liabilities were re-measured at December 31, 2017 resulting in an increase in regulatory liabilities which is subject to change based on the outcome of the regulatory process. The regulatory liabilities are generally expected to be refunded to customers over the lives of the assets and liabilities that gave rise to the deferred taxes. For further information, see Note 8.

SCE's regulatory liabilities related to recoveries in excess of ARO liabilities represents the cumulative differences between ARO expenses and amounts collected in rates primarily for the decommissioning of the SCE's nuclear generation facilities. Decommissioning costs recovered through rates are primarily placed in nuclear decommissioning trusts. This regulatory liability also represents the deferral of realized and unrealized gains and losses on the nuclear decommissioning trust investments. See Note 10 for further discussion.

Net Regulatory Balancing Accounts

Balancing accounts track amounts that the CPUC or FERC have authorized for recovery. Balancing account over and under collections represent differences between cash collected in current rates for specified forecasted costs and such costs that are actually incurred. Undercollections are recorded as regulatory balancing account assets. Overcollections are recorded as regulatory balancing account liabilities. With some exceptions, SCE seeks to adjust rates on an annual basis or at other designated times to recover or refund the balances recorded in its balancing accounts. Memorandum accounts are authorized to track costs for potential future recovery.

Regulatory balancing and memorandum accounts that SCE does not expect to collect or refund in the next 12 months are reflected in the long-term section of the consolidated balance sheets. Regulatory balancing and memorandum accounts that do not have the right of offset are presented gross in the consolidated balance sheets. Under and over collections in balancing accounts and amounts recorded in memorandum accounts typically accrue interest based on a three-month commercial paper rate published by the Federal Reserve.

The following table summarizes the significant components of regulatory balancing accounts included in the above tables of regulatory assets and liabilities:



	December 31,
(in millions)	2018			2017
Asset (liability)
Energy resource recovery account¹	$	815		$	464
New system generation balancing account	(74		)	(197		)
Public purpose programs and energy efficiency programs	(1,200		)	(1,145		)
Base revenue requirement balancing account²	(628		)	(200		)
Tax accounting memorandum account and pole loading balancing account²	28			(259		)
DOE litigation memorandum account	(69		)	(156		)
Greenhouse gas auction revenue and low carbon fuel standard revenue	(81		)	(46		)
FERC balancing accounts	(180		)	(205		)
Catastrophic event memorandum account	144			102
Wildfire expense memorandum account³	128			—
Other	(133		)	(56		)
Liability	$	(1,250	)	$	(1,698	)

Energy resource recovery account ("ERRA") balancing account is subject to a trigger mechanism that allows SCE to request an expeditious rate change if the ERRA balancing account overcollection or undercollection either exceeds 5% of SCE's prior year generation rate revenue or exceeds 4% of SCE's prior year generation rate revenue and SCE does not expect the overcollection or undercollection to fall below 4% within 120 days. For 2019, the 4% and 5% trigger amounts are approximately $213 million and $266 million, respectively. SCE anticipates to recover the ERRA undercollection from customer in rates beginning in April 2019. For further information of ERRA trigger mechanism, see "Business—SCE—Overview of Ratemaking Process."


²	During 2018, $263 million of 2017 incremental tax benefits were reclassified from the tax accounting memorandum account to the base revenue requirement balancing account (to be refunded to customers in 2019).


³	During 2018, the CPUC established a wildfire expense memorandum account ("WEMA") to track wildfire-related costs including insurance premiums in excess of amounts that ultimately will be approved in the 2018 GRC decision. See Note 12 for further information.

In February 2019, the CPUC approved recovery of $107 million of premiums related to a 12-month $300 million wildfire liability insurance policy purchased in December 2017. As a result of this decision, SCE expects to recover these costs in 2019. For further information, see Note 12.