SCE is exposed to commodity price risk which represents the potential impact that can be caused by a change in the market value of a particular commodity. SCE's hedging program reduces ratepayer exposure to variability in market prices related to SCE's power and gas activities. As part of this program, SCE enters into options, swaps, forwards, tolling arrangements and CRRs. These transactions are pre-approved by the California Public Utilities Commission ("CPUC") or executed in compliance with CPUC-approved procurement plans. SCE recovers its related hedging costs through the energy resource recovery account ("ERRA") balancing account, and as a result, exposure to commodity price risk is not expected to impact earnings, but may impact cash flows.

SCE's electricity price exposure arises from electricity purchased from and sold to the California and other wholesale markets as a result of differences between SCE's load requirements and the amount of energy delivered from its generating facilities, power purchase agreements and California Department of Water Resources ("CDWR") contracts allocated to SCE.

SCE's natural gas price exposure arises from natural gas purchased for generation at the Mountainview power plant and peaker plants, QF contracts where pricing is based on a monthly natural gas index and power purchase agreements in which SCE has agreed to provide the natural gas needed for generation, referred to as tolling arrangements.

The following table summarizes the notional volumes of derivatives used for hedging activities:

		Economic Hedges

Commodity	Unit of Measure	June 30, 2011		December 31, 2010

Electricity options, swaps and forwards	GWh		34,471		32,138
Natural gas options, swaps and forwards	Bcf		255		250
CRRs	GWh		147,992		181,291
Tolling arrangements	GWh		105,631		114,599

The following table summarizes the gross and net fair values of commodity derivative instruments at June 30, 2011:

	Derivative Assets									Derivative Liabilities

(in millions)	Short- Term			Long- Term			Subtotal			Short- Term			Long- Term			Subtotal			Net Liability

Non-trading activities
Economic hedges	$	89		$	200		$	289		$	243		$	579		$	822		$	533
Netting and collateral		(11	)		(21	)		(32	)		(12	)		(21	)		(33	)		(1	)

Total	$	78		$	179		$	257		$	231		$	558		$	789		$	532

The following table summarizes the gross and net fair values of commodity derivative instruments at December 31, 2010:

	Derivative Assets						Derivative Liabilities

(in millions)	Short- Term		Long- Term		Subtotal		Short- Term			Long- Term		Subtotal			Net Liability

Non-trading activities
Economic hedges	$	87	$	367	$	454	$	216		$	449	$	665		$	211
Netting and collateral		—		—		—		(4	)		—		(4	)		(4	)

Total	$	87	$	367	$	454	$	212		$	449	$	661		$	207

SCE recognizes realized gains and losses on derivative instruments as purchased-power expense and expects to recover these costs from ratepayers. As a result, realized gains and losses are not reflected in earnings, but may temporarily affect cash flows. Due to expected future recovery from ratepayers, unrealized gains and losses are recorded as regulatory assets and liabilities and therefore are also not reflected in earnings. The results of derivative activities and related regulatory offsets are recorded in cash flows from operating activities in the consolidated statements of cash flows.

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

(in millions)	2011			2010			2011			2010

Realized losses	$	(35	)	$	(38	)	$	(74	)	$	(62	)
Unrealized losses		(227	)		(276	)		(323	)		(857	)

Certain derivative instruments and power procurement contracts under SCE's power and natural gas hedging activities contain collateral requirements. SCE has historically provided collateral in the form of cash and/or letters of credit for the benefit of counterparties. These requirements can vary depending upon the level of unsecured credit extended by counterparties, changes in market prices relative to contractual commitments and other factors.

Certain of these power contracts contain a provision that requires SCE to maintain an investment grade credit rating from each of the major credit rating agencies, referred to as a credit-risk-related contingent feature. If SCE's credit rating were to fall below investment grade, SCE may be required to pay the derivative liability or post additional collateral. The aggregate fair value of all derivative liabilities with these credit-risk-related contingent features was $164 million and $67 million as of June 30, 2011 and December 31, 2010, respectively, for which SCE has posted no collateral and $4 million of collateral to its counterparties for the respective periods. If the credit-risk-related contingent features underlying these agreements were triggered on June 30, 2011, SCE would be required to post $12 million of collateral.

As part of SCE's procurement activities, SCE contracts with a number of utilities, energy companies, financial institutions, and other companies, collectively referred to as counterparties. If a counterparty were to default on its contractual obligations, SCE could be exposed to potentially volatile spot markets for buying replacement power or selling excess power. In addition, SCE would be exposed to the risk of non-payment of accounts receivable, primarily related to sales of excess energy and realized gains on derivative instruments. All of the contracts that SCE has entered into with counterparties are either entered into under SCE's short-term or long-term procurement plan which has been approved by the CPUC, or the contracts are approved by the CPUC before becoming effective. As a result of regulatory recovery mechanisms, losses from non-performance are not expected to affect earnings, but may temporarily affect cash flows.

To manage credit risk, SCE looks at the risk of a potential default by counterparties. Credit risk is measured by the loss that would be incurred if counterparties failed to perform pursuant to the terms of their contractual obligations. To mitigate credit risk from counterparties, master netting agreements are used whenever possible and counterparties may be required to pledge collateral when deemed necessary.

EMG uses derivative instruments to reduce its exposure to market risks that arise from price fluctuations of electricity, capacity, fuel, emission allowances, and transmission rights. Additionally, EMG's financial results can be affected by fluctuations in interest rates. The derivative financial instruments vary in duration, ranging from a few days to several years, depending upon the instrument. To the extent that EMG does not use derivative instruments to hedge these market risks, the unhedged portions will be subject to the risks and benefits of spot market price movements.

Risk management positions may be designated as cash flow hedges or economic hedges, which are derivatives that are not designated as cash flow hedges. Economic hedges are accounted for at fair value on EMG's consolidated balance sheets with offsetting changes recorded on the consolidated statements of operations. For derivative instruments that qualify for hedge accounting treatment, the fair value is recognized, to the extent effective, on EMG's consolidated balance sheets with offsetting changes in fair value recognized in accumulated other comprehensive loss until the related forecasted transaction occurs. The results of derivative activities are recorded in cash flows from operating activities on the consolidated statements of cash flows.

Derivative instruments that are utilized for trading purposes are measured at fair value and included on the consolidated balance sheets as derivative assets or liabilities. Changes in fair value are recognized in operating revenues on the consolidated statements of operations.

Where EMG's derivative instruments are subject to a master netting agreement and the criteria of authoritative guidance are met, EMG presents its derivative assets and liabilities on a net basis on its consolidated balance sheets.

The following table summarizes the notional volumes of derivatives used for hedging and trading activities:

June 30, 2011

				Hedging Activities
Commodity	Instrument	Classification	Unit of Measure	Cash Flow Hedges			Economic Hedges			Trading Activities

Electricity	Forwards/Futures	Sales	GWh		18,901	¹		17,660	³		39,629
Electricity	Forwards/Futures	Purchases	GWh		203	¹		17,750	³		42,863
Electricity	Capacity	Sales	MW-Day (in thousands)		171	²		—			17	²
Electricity	Capacity	Purchases	MW-Day (in thousands)		17	²		—			247	²
Electricity	Congestion	Sales	GWh		—			124	⁴		14,314	⁴
Electricity	Congestion	Purchases	GWh		—			5,459	⁴		287,221	⁴
Natural gas	Forwards/Futures	Sales	bcf		—			1.5			354.1
Natural gas	Forwards/Futures	Purchases	bcf		—			1.5			351.8
Fuel oil	Forwards/Futures	Sales	barrels		—			—			45,000
Fuel oil	Forwards/Futures	Purchases	barrels		—			240,000			70,000
Coal	Forwards/Futures	Sales	tons		—			—			2,564,250
Coal	Forwards/Futures	Purchases	tons		—			—			2,564,250

(in millions)

Instrument	Purpose	Type of Hedge	Notional Amount		Expiration Date

Amortizing interest rate swap	Convert floating rate (6-month LIBOR) debt to fixed rate (3.175%) debt	Cash flow	$	84	June 2016
Amortizing interest rate swap	Convert floating rate (6-month LIBOR) debt to fixed rate (3.415%) debt	Cash flow		110	December 2020
Amortizing interest rate swap	Convert floating rate (3-month LIBOR) debt to fixed rate (4.29%) debt	Cash flow		120	December 2025
Amortizing interest rate swap	Convert floating rate (3-month LIBOR) debt to fixed rate (3.46%) debt	Cash flow		67	March 2026

December 31, 2010

				Hedging Activities
Commodity	Instrument	Classification	Unit of Measure	Cash Flow Hedges			Economic Hedges			Trading Activities

Electricity	Forwards/Futures	Sales	GWh		16,799	¹		22,456	³		34,630
Electricity	Forwards/Futures	Purchases	GWh		408	¹		22,931	³		37,669
Electricity	Capacity	Sales	MW-Day (in thousands)		190	²		—			136	²
Electricity	Capacity	Purchases	MW-Day (in thousands)		8	²		—			419	²
Electricity	Congestion	Sales	GWh		—			136	⁴		12,020	⁴
Electricity	Congestion	Purchases	GWh		—			1,143	⁴		187,689	⁴
Natural gas	Forwards/Futures	Sales	bcf		—			—			30.6
Natural gas	Forwards/Futures	Purchases	bcf		—			—			34.3
Fuel oil	Forwards/Futures	Sales	barrels		—			250,000			10,000
Fuel oil	Forwards/Futures	Purchases	barrels		—			490,000			10,000
Coal	Forwards/Futures	Sales	tons		—			—			2,630,500
Coal	Forwards/Futures	Purchases	tons		—			—			2,645,500

(in millions)

Instrument	Purpose	Type of Hedge	Notional Amount		Expiration Date

Amortizing interest rate swap	Convert floating rate (6-month LIBOR) debt to fixed rate (3.175%) debt	Cash flow	$	138	June 2016
Amortizing forward starting interest rate swap	Convert floating rate (3-month LIBOR) debt to fixed rate (4.29%) debt	Cash flow		122	December 2025
Amortizing forward starting interest rate swap	Convert floating rate (3-month LIBOR) debt to fixed rate (3.46%) debt	Cash flow		68	March 2026

¹: EMG's hedge products include forward and futures contracts that qualify for hedge accounting. This category excludes power contracts for the coal plants which meet the normal purchases and sales exception and are accounted for on the accrual method.
²: EMG's hedge transactions for capacity result from bilateral trades. Capacity sold in the PJM Reliability Pricing Model (RPM) auction is not accounted for as a derivative.
³: EMG also entered into transactions that adjust financial and physical positions, or day-ahead and real-time positions to reduce costs or increase gross margin. These positions largely offset each other. The net sales positions of these categories are primarily related to hedge transactions that are not designated as cash flow hedges.
⁴: Congestion contracts include financial transmission rights, transmission congestion contracts or congestion revenue rights. These positions are similar to a swap, where the buyer is entitled to receive a stream of revenues (or charges) based on the hourly day-ahead price differences between two locations.

The following table summarizes the fair value of derivative instruments reflected on EMG's consolidated balance sheets:

June 30, 2011

		Derivative Assets									Derivative Liabilities
		Derivative Assets									Derivative Liabilities									Net Assets (Liabilities)
(in millions)		Short-term			Long-term			Subtotal			Short-term			Long-term			Subtotal			Net Assets (Liabilities)

Non-trading activities
	Cash flow hedges	$	27		$	2		$	29		$	14		$	34		$	48		$	(19	)
	Economic hedges		60			4			64			51			1			52			12
Trading activities			141			88			229			98			20			118			111

			228			94			322			163			55			218			104
Netting and collateral received¹			(189	)		(31	)		(220	)		(157	)		(32	)		(189	)		(31	)

Total		$	39		$	63		$	102		$	6		$	23		$	29		$	73

December 31, 2010


Non-trading activities
	Cash flow hedges	$	54		$	2		$	56		$	10		$	25		$	35		$	21
	Economic hedges		77			2			79			71			—			71			8
Trading activities			184			103			287			148			29			177			110

			315			107			422			229			54			283			139
Netting and collateral received¹			(269	)		(37	)		(306	)		(223	)		(35	)		(258	)		(48	)

Total		$	46		$	70		$	116		$	6		$	19		$	25		$	91

The following table provides the cash flow hedge activity as part of accumulated other comprehensive loss:

	Cash Flow Hedge Activity¹ Six Months Ended June 30,

	Cash Flow Hedge Activity¹ Six Months Ended June 30,						Income Statement Location
(in millions)	2011			2010			Income Statement Location

Beginning of period derivative gains	$	27		$	175
Effective portion of changes in fair value		(13	)		30
Reclassification to net income		(29	)		(122	)	Competitive power generation revenue

End of period derivative gains (losses)	$	(15	)	$	83

The portion of a cash flow hedge that does not offset the change in the value of the transaction being hedged, which is commonly referred to as the ineffective portion, is immediately recognized in earnings. EMG recorded net gains (losses) of none and $(7) million during the second quarters of 2011 and 2010, respectively, and $2 million and $1 million during the six months ended June 30, 2011 and 2010, respectively, in operating revenues on the consolidated statements of operations representing the amount of cash flow hedge ineffectiveness.

The effect of realized and unrealized gains (losses) from derivative instruments used for economic hedging and trading purposes on the consolidated statements of operations is presented below:

		Three Months Ended June 30,						Six Months Ended June 30,

(in millions)	Income Statement Location	2011			2010			2011		2010

Economic hedges	Competitive power generation revenue	$	20		$	(3	)	$	26	$	(7	)
	Fuel		(2	)		(2	)		4		(1	)
Trading activities	Competitive power generation revenue		41			33			57		80

Certain derivative instruments contain margin and collateral deposit requirements. Since EMG's subsidiaries' credit ratings are below investment grade, EMG's subsidiaries have provided collateral in the form of cash and letters of credit for the benefit of derivative counterparties. The aggregate fair value of all derivative instruments with credit-risk-related contingent features was in an asset position at June 30, 2011 and, accordingly, the contingent features described below do not currently have liquidity exposure. Some hedge contracts include provisions related to a change in control or material adverse effect resulting from amendments or modifications to the related credit facility. Failure by EMG or Midwest Generation to comply with these provisions may result in a termination event under the hedge contracts, enabling the counterparties to terminate and liquidate all outstanding transactions and demand immediate payment of amounts owed to them. Edison Mission Marketing & Trading, Inc. ("EMMT") has hedge contracts that do not require margin, but provide that each party can request additional credit support in the form of adequate assurance of performance in the case of an adverse development affecting the other party. Future increases in power prices could expose EMG's subsidiaries to termination payments or additional collateral postings.

Margin and collateral deposits include cash deposited with counterparties and brokers, and cash received from counterparties and brokers as credit support under energy contracts. The amount of margin and collateral deposits generally varies based on changes in the fair value of the related positions. Edison International nets counterparty receivables and payables where balances exist under master netting agreements. Edison International presents the portion of its margin and collateral deposits netted with its derivative positions on its consolidated balance sheets. The following table summarizes margin and collateral deposits provided to and received from counterparties:

(in millions)		June 30, 2011		December 31, 2010


Collateral provided to counterparties:
	Offset against derivative liabilities	$	4	$	8
	Reflected in margin and collateral deposits		64		65
Collateral received from counterparties:
	Offset against derivative assets		33		52