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Fair Value Measurements
 9 Months Ended
Sep. 30, 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 which was not material as of September 30, 2012 and December 31, 2011.
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).
The following table sets forth assets and liabilities that were accounted for at fair value by level within the fair value hierarchy:
 
September 30, 2012
(in millions)
Level 1
 
Level 2
 
Level 3
 
Netting
and
Collateral1
 
Total
Assets at Fair Value
 
 
 
 
 
 
 
 
 
Money market funds2
$
933

 
$
—

 
$
—

 
$
—

 
$
933

Derivative contracts:
 
 
 
 
 
 
 
 
 
Electricity
—

 
85

 
148

 
(44
)
 
189

Natural gas
1

 
—

 
—

 
(1
)
 
—

Fuel Oil
2

 
—

 
—

 
(2
)
 
—

Tolling
—

 
—

 
4

 
—

 
4

Subtotal of derivative contracts
3

 
85

 
152

 
(47
)
 
193

Long-term disability plan
8

 
—

 
—

 
—

 
8

Nuclear decommissioning trusts:
 
 
 
 
 
 
 
 
 
Stocks3
2,227

 
—

 
—

 
—

 
2,227

Municipal bonds
—

 
654

 
—

 
—

 
654

U.S. government and agency securities
467

 
122

 
—

 
—

 
589

Corporate bonds4
—

 
374

 
—

 
—

 
374

Short-term investments, primarily cash equivalents5
—

 
145

 
—

 
—

 
145

Subtotal of nuclear decommissioning trusts
2,694

 
1,295

 
—

 
—

 
3,989

Total assets6
3,638

 
1,380

 
152

 
(47
)
 
5,123

Liabilities at Fair Value
 
 
 
 
 
 
 
 
 
Derivative contracts:
 
 
 
 
 
 
 
 
 
Electricity
—

 
8

 
17

 
(15
)
 
10

Natural gas
1

 
115

 
6

 
(48
)
 
74

Tolling
—

 
—

 
617

 
—

 
617

Subtotal of derivative contracts
1

 
123

 
640

 
(63
)
 
701

Interest rate contracts
—

 
125

 
—

 
—

 
125

Total liabilities
1

 
248

 
640

 
(63
)
 
826

Net assets (liabilities)
$
3,637

 
$
1,132

 
$
(488
)
 
$
16

 
$
4,297

 
December 31, 2011
(in millions)
Level 1
 
Level 2
 
Level 3
 
Netting
and
Collateral1
 
Total
Assets at Fair Value
 
 
 
 
 
 
 
 
 
Money market funds2
$
1,293

 
$
—

 
$
—

 
$
—

 
$
1,293

Derivative contracts:
 
 
 
 
 
 
 
 
 
Electricity
—

 
65

 
218

 
(58
)
 
225

Natural gas
4

 
5

 
—

 
(7
)
 
2

Fuel oil
4

 
—

 
—

 
(4
)
 
—

Tolling
—

 
—

 
10

 
—

 
10

Subtotal of derivative contracts
8

 
70

 
228

 
(69
)
 
237

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
3,641

 
1,305

 
228

 
(69
)
 
5,105

Liabilities at Fair Value
 
 
 
 
 
 
 
 
 
Derivative contracts:
 
 
 
 
 
 
 
 
 
Electricity
—

 
10

 
77

 
(17
)
 
70

Natural gas
—

 
234

 
23

 
(52
)
 
205

Tolling
—

 
—

 
451

 
—

 
451

Subtotal of derivative contracts
—

 
244

 
551

 
(69
)
 
726

Interest rate contracts
—

 
90

 
—

 
—

 
90

Total liabilities
—

 
334

 
551

 
(69
)
 
816

Net assets (liabilities)
$
3,641

 
$
971

 
$
(323
)
 
$
—

 
$
4,289

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 
Money market funds are included in cash and cash equivalents and restricted cash and cash equivalents on Edison International's consolidated balance sheets.
3 
Approximately 67% and 70% of the equity investments were located in the United States at September 30, 2012 and December 31, 2011, respectively.
4 
At September 30, 2012 and December 31, 2011, corporate bonds were diversified and included collateralized mortgage obligations and other asset backed securities of $42 million and $22 million, respectively.
5 
Excludes net receivables of $8 million and $25 million at September 30, 2012 and December 31, 2011, respectively, of interest and dividend receivables as well as receivables and payables related to pending securities sales and purchases.
6 
Excludes other investments of $70 million and $81 million at September 30, 2012 and December 31, 2011, respectively, primarily related to the cash surrender value of company owned life insurance investments which are used to fund certain executive benefits including deferred compensation. Also excludes other investments of $77 million and $118 million at September 30, 2012 and December 31, 2011, respectively, primarily related to leveraged leases.
The following table sets forth a summary of changes in the fair value of Level 3 net derivative assets and liabilities:
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
(in millions)
2012
 
2011
 
2012
 
2011
 
Fair value of net assets (liabilities) at beginning of period
$
(343
)
 
$
(275
)
 
$
(323
)
 
$
97

 
Total realized/unrealized gains (losses):
 
 
 
 
 
 
 
 
Included in earnings1
12

 
(4
)
 
20

 
14

 
Included in regulatory assets and liabilities2
(124
)
3 

162

3 

(140
)
3 
(220
)
3 

Included in accumulated other comprehensive income4
(1
)
 
1

 
1

 
(2
)
 
Purchases
41

 
24

 
111

 
51

 
Settlements
(73
)
 
(8
)
 
(106
)
 
(38
)
 
Transfers into Level 3
—

 
—

 
—

 
—

 
Transfers out of Level 35
—

 
—

 
(51
)
 
(2
)
 
Fair value of net liabilities at end of period
$
(488
)
 
$
(100
)
 
$
(488
)
 
$
(100
)
 
Change during the period in unrealized losses related to assets and liabilities held at the end of the period6
$
(173
)
 
$
(110
)
 
$
(181
)
 
$
(425
)
 
1 
Reported in "Competitive power generation" revenue on Edison International's consolidated statements of income.
2 
Due to regulatory mechanisms, SCE's realized and unrealized gains and losses are recorded as regulatory assets and liabilities.
3 
Includes the elimination of the fair value of derivatives with SCE's consolidated affiliates.
4 
Included in reclassification adjustments in Edison International's consolidated statements of other comprehensive income.
5 
Transfers out of Level 3 into Level 2 occurred due to significant observable inputs becoming available as the transactions near maturity.
6 
Amounts reported in "Competitive power generation" revenue on Edison International's consolidated statements of income was a loss of $7 million for three months ended September 30, 2012, and a gain of $7 million for the nine months ended September 30, 2011. The remainder of the unrealized losses relate to SCE. See 2 above.
The fair value for transfers in and transfers out of each level is determined at the end of each reporting period. There were no transfers between Levels 1 and 2 during the three- and nine-month periods ended September 30, 2012 and 2011.
Valuation Techniques Used to Determine Fair Value
Level 1
The fair value of 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
The fair value of Level 2 assets and liabilities is determined using the income 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. This level includes fixed income securities, over-the-counter derivatives and interest rate swaps. For further discussion on fixed income securities, see "—Nuclear Decommissioning Trusts" below.
Over-the-counter derivative contracts are valued using 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 Level 3 assets and liabilities is determined using the income approach through various models and techniques that require significant unobservable inputs. 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 Edison International's subsidiaries' risk management, departments, which report to their respective chief financial officer. These departments obtain 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 the valuation techniques and significant unobservable inputs used to determine fair value for Level 3 assets and liabilities at September 30, 2012:
 
Fair Value (in millions)
 
Significant
Range
 
Assets
 
Liabilities
Valuation Technique(s)
Unobservable Input
(Weighted Average)
Electricity:
 
 
 
 
 
 
Options
$
23

 
$
26

Option model
Volatility of gas prices
23% - 41% (31%)
 
 
 
 
 
Volatility of power prices
28% - 60% (39%)
 
 
 
 
 
Power prices
$38.10 - $58.80 ($45.30)
Forwards
15

 
20

Discounted cash flow
Power prices
$18.25 - $64.50 ($34.57)
Congestion contracts
100

 
—

Market simulation model
Load forecast
7,597 MW - 26,612 MW
 
 
 
 
 
Power prices
$(13.90) - $226.75
 
 
 
 
 
Gas prices
$2.95 - $7.78
Congestion contracts
62

 
24

Latest auction pricing
Congestion prices
$(5.39) - $11.87 ($0.13)
Gas options
—

 
6

Option model
Volatility of gas prices
24% - 41% (35%)
Tolling
5

 
617

Option model
Volatility of gas prices
17% - 41% (21%)
 
 
 
 
 
Volatility of power prices
26% - 60% (28%)
 
 
 

 
Power prices
$33.20 - $100.80 ($56.10)
Netting
(53
)
 
(53
)
 
 
 
Total derivative contracts
$
152

 
$
640

 
 
 

Level 3 Fair Value Sensitivity
Gas Options, Electricity Options, and Tolling Arrangements
The fair values of 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 Edison International subsidiaries are 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 Edison International subsidiaries are the seller relative to the contract price will decrease (increase) fair value. Inversely as a buyer, an increase (decrease) in long-term forward power prices at illiquid locations relative to the contract price will increase (decrease) fair value.
Congestion Contracts
When valuation is based on a discounted cash flow model and Edison International subsidiaries are the buyer, generally an increase (decrease) in congestion prices in the last auction relative to the contract price will increase (decrease) fair value.
When valuation is based on a market simulation model and Edison International subsidiaries are the buyer, generally increases (decreases) in forecasted load would result in increases (decreases) to fair value. In general, increases (decreases) 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.
Fair Value of Long-Term Debt Recorded at Carrying Value
The carrying value and fair value of long-term debt are:
 
September 30, 2012
 
December 31, 2011
(in millions)
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Long-term debt, including current portion
$
14,273

 
$
14,452

 
$
13,746

 
$
14,264


Fair value of 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 trade receivables and payables, other investments, and short-term debt approximates fair value