Income Taxes

Effective Tax Rate

The table below provides a reconciliation of income tax expense computed at the federal statutory income tax rate to the income tax provision.



	Three months ended September 30,						Nine months ended September 30,
(in millions)	2012			2011			2012			2011
Income from continuing operations before income taxes	$	477		$	658		$	781		$	1,218
Provision for income tax at federal statutory rate of 35%	167			230			273			426
Increase (decrease) in income tax from:
State tax – net of federal benefit	60			28			56			40
Production and housing credits	(12		)	(12		)	(48		)	(48		)
Property-related	(20		)	(18		)	(39		)	(38		)
Other	(14		)	4			(25		)	(10		)
Total income tax expense from continuing operations	$	181		$	232		$	217		$	370
Effective tax rate	38		%	35		%	28		%	30		%

The CPUC requires flow-through ratemaking treatment for the current tax benefit arising from certain property-related and other temporary differences which reverse over time. The accounting treatment for these temporary differences results in recording regulatory assets and liabilities for amounts that would otherwise be recorded to deferred income tax expense.

Accounting for Uncertainty in Income Taxes

The following table provides a reconciliation of unrecognized tax benefits:



(in millions)	2012			2011
Balance at January 1,	$	631		$	565
Tax positions taken during the current year:
Increases	22			53
Tax positions taken during a prior year:
Increases	207			60
Decreases	(29		)	(37		)
Decreases for settlements during the period	—			—
Balance at September 30,	$	831		$	641

As of September 30, 2012 and December 30, 2011, respectively, if recognized, $578 million and $532 million of the unrecognized tax benefits would impact the effective tax rate.

Tax Dispute

Edison International's federal income tax returns and its California combined franchise tax returns are currently open for years subsequent to 2002. In addition, specific California refund claims made by Edison International for years 1991 through 2002 are currently under review by the Franchise Tax Board. The IRS examination phase of tax years 2003 through 2006 was completed in the fourth quarter of 2010, which included proposed adjustments for the following two items:


•	A proposed adjustment increasing the taxable gain on the 2004 sale of EME's international assets, which if sustained, would result in a federal tax payment of approximately $198 million, including interest and penalties through September 30, 2012 (the IRS has asserted a 40% penalty for understatement of tax liability related to this matter).


•	A proposed adjustment to disallow a component of SCE's repair allowance deduction, which if sustained, would result in a federal tax payment of approximately $95 million, including interest through September 30, 2012.

Edison International disagrees with the proposed adjustments and filed a protest with the IRS in the first quarter of 2011. The appeals process to date has not resulted in a change in the proposed adjustment by the IRS on the taxable gain on the 2004 sale of EME's international assets. If a deficiency notice is issued on this item, it would require payment of the tax, interest and any penalties within 90 days of its issuance or a filing of a petition in United States Tax Court.

Tax Election at Homer City

On March 15, 2012, Homer City made an election to be treated as a partnership for federal and state income tax purposes. As a result of this election, Homer City is treated for tax purposes as distributing its assets and liabilities to its partners, both of which are wholly owned subsidiaries of EME, and triggering tax deductions of approximately $1.0 billion. Such tax deductions were included in Edison International's 2011 consolidated tax returns.

Loss and Credit Carryforwards

Including the tax deduction generated from the Homer City election, Edison International has recorded tax benefits for federal and state net operating loss carryforwards and federal tax credit carryforwards of approximately $1.6 billion as of September 30, 2012.

Repair Deductions

In 2009, Edison International made a voluntary election to change its tax accounting method for certain repair costs incurred on SCE's transmission, distribution and generation assets. In August 2011, the IRS issued guidance on repair deductions and changes in accounting method related to transmission and distribution assets. Based on this guidance, SCE included a second change in tax accounting method on repair costs in its 2011 tax return. Guidance for generation assets is pending. Regulatory treatment for the incremental deductions taken after the voluntary election to change SCE's tax accounting method for certain repair costs is part of SCE's 2012 GRC. Due to the pending regulatory decision, SCE has not recognized an earnings benefit or regulatory asset related to this method change and incremental deductions taken in 2009, 2010 and 2011. In October 2012, the CPUC assigned administrative law judge issued a proposed GRC decision, which if adopted, would result in an earnings benefit of approximately $230 million attributable to flow through treatment of 2009 – 2011 vintage year activity. SCE would also record an earnings benefit related to 2012 vintage year activity consistent with the rate making treatment.