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 7.90% in 2014 and 2013. The CPUC also 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)	2014		2013
Current:
Regulatory balancing accounts	$	1,088	$	484
Energy derivatives	159		54
Other	7		—
Total current	1,254		538
Long-term:
Deferred income taxes, net	3,405		2,957
Pensions and other postretirement benefits	1,218		369
Energy derivatives	850		816
Unamortized investments, net	255		332
San Onofre	1,288		1,325
Unamortized loss on reacquired debt	201		222
Regulatory balancing accounts	44		818
Other	351		402
Total long-term	7,612		7,241
Total regulatory assets	$	8,866	$	7,779

SCE's regulatory assets related to energy derivatives are primarily an offset to unrealized losses on derivatives. The regulatory asset changes based on fluctuations in the fair market value of the contracts, which expire in 1 to 45 years.

SCE's regulatory assets related to deferred income taxes represent tax benefits passed through to customers. The CPUC requires SCE to pass 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 50 years.

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 8). This amount is being recovered through rates charged to customers as the plans are funded.

SCE's unamortized investments primarily include nuclear assets related to Palo Verde and legacy meters retired as part of the Edison SmartConnect^® program. Nuclear assets related to Palo Verde are expected to be recovered by 2047 and earned a return of 7.90% in 2014 and 2013. SCE's unamortized investments related to legacy meters are expected to be recovered by 2017 and earned a rate of return of 6.46% in 2014 and 2013.

In accordance with the San Onofre OII Settlement Agreement, SCE is authorized to recover in rates its San Onofre regulatory asset, generally over a ten-year period commencing February 1, 2012. Under the San Onofre OII Settlement Agreement (see Note 11), SCE was allowed to earn a rate of return of 2.62% for the period 2013 – 2014 and is authorized to continue to earn this rate as adjusted during the amortization period thereafter with changes in SCE's authorized return on debt and preferred equity. SCE's regulatory assets related to San Onofre nuclear fuel will earn a return equal to commercial paper rate that the CPUC uses to calculate interest on balancing accounts.

SCE's net regulatory asset related to its unamortized loss on reacquired debt will be recovered over the remaining original amortization period of the reacquired debt over periods ranging from 1 to 35 years.

Regulatory Liabilities

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



	December 31,
(in millions)	2014		2013
Current:
Regulatory balancing accounts	$	380	$	724
Other	21		43
Total current	401		767
Long-term:
Costs of removal	2,826		2,780
Recoveries in excess of ARO liabilities¹	1,956		1,071
Regulatory balancing accounts	1,083		1,132
Other	24		12
Total long-term	5,889		4,995
Total regulatory liabilities	$	6,290	$	5,762

¹ 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 9).

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

SCE's regulatory liability equal to nuclear decommissioning trust assets in excess of the related asset retirement obligations which represent future refunds to customers if such assets are not used to decommission the related nuclear facilities. The increase in this regulatory liability resulted from a revision to the asset retirement obligations of San Onofre and Palo Verde. For further information, see Note 1.

Regulatory Balancing Accounts

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. Over-collections 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. Regulatory balancing 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 accounts do not have the right of offset and are presented gross in the consolidated balance sheets. Under and over collections 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)	2014			2013
Asset (liability)
Energy resource recovery account	$	1,028		$	1,005
Four Corners memorandum account	—			145
New system generation balancing account	35			132
Public purpose programs and energy efficiency programs	(874		)	(1,152		)
Base rate recovery balancing account	(5		)	(247		)
Greenhouse gas auction revenue	(182		)	(385		)
FERC balancing accounts	(32		)	(59		)
Generator settlements	(197		)	7
Other	(104		)	—
Liability	$	(331	)	$	(554	)

In 2014, the CPUC issued a proposed decision on SCE's 2015 ERRA forecast application adopting an annual revenue requirement of $5.59 billion, an increase of approximately $437 million over the 2014 revenue requirement. SCE expects to implement this requirement in rates in the first half of 2015. The ERRA undercollection is expected to decrease with implementation of these revised rates.

SCE had participated in proceedings seeking recovery of refunds from certain sellers of electricity and natural gas during the energy crisis in California in 2000 – 2001. SCE is authorized to refund to customers any refunds actually realized by SCE, net of litigation costs and amounts retained by SCE as a shareholder incentive pursuant to an established sharing arrangement. During 2014, the FERC approved generator settlement agreements which resulted in total refunds to customers of $219 million of which $15 million is subject to a shareholder incentive.