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.

Edison International categorizes financial assets and liabilities into a fair value hierarchy based on valuation inputs used to derive 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:

		As of June 30, 2011

(in millions)		Level 1		Level 2		Level 3			Netting and Collateral¹			Total

Assets at Fair Value
Money market funds²		$	743	$	—	$	—		$	—		$	743

Derivative contracts:
	Electricity		—		44		231			(33	)		242
	Natural gas		—		65		11			—			76
	Fuel oil		6		—		—			(6	)		—
	Tolling		—		—		41			—			41
	Coal		—		1		—			(1	)		—

Subtotal of commodity contracts			6		110		283			(40	)		359

Long-term disability plan			9		—		—			—			9

Nuclear decommissioning trusts:
	Stocks³		2,062		—		—			—			2,062
	Municipal bonds		—		812		—			—			812
	U.S. government and agency securities		309		118		—			—			427
	Corporate bonds⁴		—		310		—			—			310
	Short-term investments, primarily cash equivalents⁵		4		31		—			—			35

Subtotal of nuclear decommissioning trusts			2,375		1,271		—			—			3,646

Total assets⁶			3,133		1,381		283			(40	)		4,757

Liabilities at Fair Value
Derivative contracts:
	Electricity		—		9		71			(9	)		71
	Natural gas		—		239		6			(1	)		244
	Tolling		—		—		481			—			481

Subtotal of commodity contracts			—		248		558			(10	)		796
Interest rate contracts			—		22		—			—			22

Total liabilities			—		270		558			(10	)		818

Net assets (liabilities)		$	3,133	$	1,111	$	(275	)	$	(30	)	$	3,939

		As of December 31, 2010

(in millions)		Level 1		Level 2		Level 3		Netting and Collateral¹			Total

Assets at Fair Value
Money market funds²		$	1,100	$	—	$	—	$	—		$	1,100

Derivative contracts:
	Electricity		—		70		363		(61	)		372
	Natural gas		1		69		11		(1	)		80
	Fuel oil		8		—		—		(8	)		—
	Tolling		—		—		118		—			118

Subtotal of commodity contracts			9		139		492		(70	)		570

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			3,363		1,379		492		(70	)		5,164

Liabilities at Fair Value
Derivative contracts:
	Electricity		—		13		40		(21	)		32
	Natural gas		—		286		11		(4	)		293
	Tolling		—		—		344		—			344
	Coal		—		1		—		(1	)		—

Subtotal of commodity contracts			—		300		395		(26	)		669
Interest rate contracts			—		16		—		—			16

Total liabilities			—		316		395		(26	)		685

Net assets (liabilities)		$	3,363	$	1,063	$	97	$	(44	)	$	4,479

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 on Edison International's consolidated balance sheets.
³: Approximately 68% and 67% of the equity investments were located in the United States at June 30, 2011 and December 31, 2010, respectively.
⁴: Corporate bonds are diversified, and included $27 million at both June 30, 2011 and December 31, 2010, respectively, for collateralized mortgage obligations and other asset backed securities.
⁵: Excludes net receivables of $11 million and net liabilities of $5 million at June 30, 2011 and December 31, 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 June 30, 2011 and December 31, 2010, respectively, 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:

		Three months ended June 30,						Six months ended June 30,

(in millions)		2011			2010			2011			2010

Fair value, net asset (liabilities) at beginning of period		$	(44	)	$	(397	)	$	97		$	62
Total realized/unrealized gains (losses):
	Included in earnings¹		18			(18	)		18			27
	Included in regulatory assets and liabilities²		(247	)		(294	)		(382	)		(781	)
	Included in accumulated other comprehensive income		(4	)		(2	)		(3	)		4
Purchases			22			26			28			32
Settlements			(20	)		(24	)		(31	)		(52	)
Transfers in or out of Level 3			—			6			(2	)		5

Fair value, net liability at end of period		$	(275	)	$	(703	)	$	(275	)	$	(703	)

Change during the period in unrealized losses related to assets and liabilities held at the end of the period³		$	(226	)	$	(287	)	$	(368	)	$	(717	)

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: Amounts reported in "Competitive power generation" revenue on Edison International's consolidated statements of income were $14 million and $(2) million for the three months ended June 30, 2011 and 2010, respectively, and were $8 million and $32 million for the six months ended June 30, 2011 and 2010, respectively. The remainder of the unrealized losses relate to SCE. See 2 above.

Edison International 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.

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.

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.

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), 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 Edison International 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, Edison International continues to assess valuation methodologies used to determine fair value.

For derivative contracts that trade infrequently (illiquid financial transmission rights and 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.

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. EMG reviews credit ratings of counterparties (and related default rates based on such credit ratings) and prices of credit default swaps. The market price (or premium) for credit default swaps represents the price that a counterparty would pay to transfer the risk of default, typically bankruptcy, to another party. A credit default swap is not directly comparable to the credit risks of derivative contracts, but provides market information of the related risk of nonperformance. The nonperformance risk adjustment represented an insignificant amount at both June 30, 2011 and December 31, 2010.

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