Fair Value Measurements

12 Months Ended

Dec. 31, 2011

Fair Value Measurements Disclosure [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 should consider assumptions that market participants would use in pricing the asset or liability, including assumptions about nonperformance risk.

SCE categorizes financial assets and liabilities into a 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).

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

	December 31, 2011
(in millions)	Level 1		Level 2		Level 3			Netting and Collateral			Total
Assets at Fair Value
Money market funds1	$	21	$	—	$	—		$	—		$	21
Derivative contracts2:
Electricity	—		—		1			—			1
Natural gas	—		5		—			(3		)	2
CRRs	—		—		122			—			122
Tolling	—		—		10			—			10
Subtotal of derivative contracts	—		5		133			(3		)	135
Long-term disability plan	8		—		—			—			8
Nuclear decommissioning trusts:
Stocks3	1,899		—		—			—			1,899
Municipal bonds	—		756		—			—			756
U.S. government and agency securities	433		147		—			—			580
Corporate bonds4	—		317		—			—			317
Short-term investments, primarily cash equivalents5	—		15		—			—			15
Subtotal of nuclear decommissioning trusts	2,332		1,235		—			—			3,567
Total assets6	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

	December 31, 2010
(in millions)	Level 1		Level 2		Level 3		Collateral			Total
Assets at Fair Value
Money market funds1	$	243	$	—	$	—	$	—		$	243
Derivative contracts2:
Electricity	—		—		119		—			119
Natural gas	—		69		11		—			80
CRRs	—		—		137		—			137
Tolling	—		—		118		—			118
Subtotal of derivative contracts	—		69		385		—			454
Long-term disability plan	9		—		—		—			9
Nuclear decommissioning trusts:
Stocks3	2,029		—		—		—			2,029
Municipal bonds	—		790		—		—			790
Corporate bonds4	—		346		—		—			346
U.S. government and agency securities	215		73		—		—			288
Short-term investments, primarily cash equivalents5	1		31		—		—			32
Subtotal of nuclear decommissioning trusts	2,245		1,240		—		—			3,485
Total assets6	2,497		1,309		385		—			4,191
Liabilities at Fair Value
Derivative contracts:
Electricity	—		1		24		—			25
Natural gas	—		285		11		(4		)	292
Tolling	—		—		344		—			344
Subtotal of derivative contracts	—		286		379		(4		)	661
Total liabilities	—		286		379		(4		)	661
Net assets	$	2,497	$	1,023	$	6	$	4		$	3,530

¹  Money market funds are included in cash and cash equivalents on SCE's consolidated balance sheets.

²  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.

³  Approximately 70% and 67% of the equity investments were located in the United States at December 31, 2011 and 2010, respectively.

⁴  At December 31, 2011 and 2010, corporate bonds were diversified and included collateralized mortgage obligations and other asset backed securities of $22 million and $27 million, respectively.

⁵  Excludes net receivables of $25 million and net liabilities of $5 million at December 31, 2011 and 2010, respectively, of interest and dividend receivables and receivables related to pending securities sales and payables related to pending securities purchases.

⁶  Excludes $31 million at both December 31, 2011 and 2010, of cash surrender value of life insurance investments for deferred compensation.

The following table sets forth a summary of changes in the fair value of Level 3 assets and liabilities:

	December 31,
(in millions)	2011			2010
Fair value of derivative contracts, net liabilities at beginning of period	$	6		$	(111	)
Total realized/unrealized gains (losses), net:
Included in regulatory assets1	(806		)	58
Purchases	47			38
Settlements	(1		)	5
Transfers into Level 3	—			—
Transfers out of Level 3	—			16
Fair value of derivative contracts, net assets (liabilities) at end of period	$	(754	)	$	6
Change during the period in unrealized gains (losses) related to assets and liabilities held at the end of period	$	(789	)	$	130

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

SCE determines the fair value for transfers in and transfers out of each level at the end of each reporting period. There were no significant transfers between levels during 2011 and 2010.

Valuation Techniques Used to Determine Fair Value

Level 1

Includes financial assets and liabilities where fair value is determined using unadjusted quoted prices in active markets that are available at the measurement date for identical assets and liabilities. Financial assets and liabilities classified as Level 1 include exchange-traded equity securities, exchange traded derivatives, U.S. treasury securities and money market funds.

Level 2

Pricing inputs include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the derivative instrument. Financial assets and liabilities utilizing Level 2 inputs include fixed-income securities and over-the-counter derivatives.

Derivative contracts that are over-the-counter traded are valued using pricing models to determine the net present value of estimated future cash flows and are generally classified as Level 2. 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 source that best represents traded activity for each market is used to develop observable forward market prices in determining the fair value of these positions. Broker quotes or prices from exchanges are used to validate and corroborate the primary 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. Broker quotes are incorporated when corroborated with other information which may include a combination of prices from exchanges, other brokers and comparison to executed trades.

Level 3

Includes financial assets and liabilities where fair value is determined using techniques that require significant unobservable inputs. Over-the-counter options, bilateral contracts, capacity contracts, QF contracts, derivative contracts that trade infrequently (such as congestion revenue rights ("CRRs") in the California market and over-the-counter derivatives at illiquid locations), long-term power agreements, and derivative contracts with counterparties that have significant nonperformance risks are generally valued using pricing models that incorporate unobservable inputs and are classified as Level 3. Assumptions are made in order to value derivative contracts in which observable inputs are not available. In circumstances where SCE cannot verify fair value with observable market transactions, it is possible that a different valuation model could produce a materially different estimate of fair value. As markets continue to develop and more pricing information becomes available, SCE continues to assess valuation methodologies used to determine fair value.

For derivative contracts that trade infrequently (CRRs), changes in fair value are based on models forecasting the value of those contracts. The models' inputs are reviewed and the fair value is adjusted when it is concluded that a change in inputs would result in a new valuation that better reflects the fair value of those derivative contracts. For illiquid long-term power agreements, fair value is based upon the discounting of future electricity and natural gas prices derived from a proprietary model using the risk free discount rate for a similar duration contract, adjusted for credit risk and market liquidity. Changes in fair value are based on changes to forward market prices, including forecasted prices for illiquid forward periods. The fair value of the majority of SCE's derivatives that are classified as Level 3 is determined using uncorroborated non-binding broker quotes and models which may require SCE to extrapolate short-term observable inputs in order to calculate fair value. Broker quotes are obtained from several brokers and compared against each other for reasonableness.

Nonperformance Risk

The fair value of the derivative assets and liabilities are adjusted for nonperformance risk. To assess nonperformance risks, SCE considers the probability of and the estimated loss incurred if a party to the transaction were to default. SCE also considers collateral, netting agreements, guarantees and other forms of credit support when assessing nonperformance. The nonperformance risk adjustment represented an insignificant amount at both December 31, 2011 and 2010.

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. Except for Level 3 investments, 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 long-term debt are:

	December 31,
	2011				2010
(in millions)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-term debt, including current portion	$	8,431	$	10,129	$	7,627	$	8,285

Fair values of long-term debt are 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 fair value of long-term debt is classified as Level 2.

The carrying value of trade receivables, payables and short-term debt approximates fair value.