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Derivative Instruments and Hedging Activities | 9 Months Ended
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Sep. 30, 2011
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Instruments and Hedging Activities | Derivative Instruments and Hedging Activities Commodity Price Risk 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. Notional Volumes of Derivative Instruments The following table summarizes the notional volumes of derivatives used for hedging activities:
|  |  | Economic Hedges
Commodity | Unit of Measure |  | September 30, 2011 |  | December 31, 2010
Electricity options, swaps and forwards | GWh |  | 30,143 |  |  | 32,138 |
Natural gas options, swaps and forwards | Bcf |  | 266 |  |  | 250 |
CRRs | GWh |  | 146,628 |  |  | 181,291 |
Tolling arrangements | GWh |  | 104,822 |  |  | 114,599 |
Fair Value of Derivative Instruments The following table summarizes the gross and net fair values of commodity derivative instruments at September 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 | $ | 82 |  |  | $ | 145 |  |  | $ | 227 |  |  | $ | 305 |  |  | $ | 577 |  |  | $ | 882 |  |  | $ | 655 |
Netting and collateral | (14 | ) |  | (13 | ) |  | (27 | ) |  | (18 | ) |  | (23 | ) |  | (41 | ) |  | (14 | )
Total | $ | 68 |  |  | $ | 132 |  |  | $ | 200 |  |  | $ | 287 |  |  | $ | 554 |  |  | $ | 841 |  |  | $ | 641 |
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 |
Income Statement Impact of Derivative Instruments SCE recognizes realized gains and losses on derivative instruments as purchased-power expense and expects that such gains or losses will be part of the purchased power costs recovered 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. The following table summarizes the components of economic hedging activity:
| Three months ended September 30, |  | Nine months ended September 30,
(in millions) | 2011 |  | 2010 |  | 2011 |  | 2010
Realized losses | $ | (58 | ) |  | $ | (53 | ) |  | $ | (132 | ) |  | $ | (116 | )
Unrealized losses | (110 | ) |  | (165 | ) |  | (433 | ) |  | (1,022 | )
Contingent Features/Credit Related Exposure 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 $162 million and $67 million as of September 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 September 30, 2011, SCE would be required to post $23 million of collateral. Counterparty Default Risk Exposure 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. Margin and Collateral Deposits Margin and collateral deposits include cash deposited with 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. SCE nets counterparty receivables and payables where balances exist under master netting agreements. SCE 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 counterparties:
(in millions) | September 30, 2011 |  | December 31, 2010
Collateral provided to counterparties: |  |  |
Offset against derivative liabilities | $ | 14 |  |  | $ | 4 |
Reflected in other current assets | 9 |  |  | 5 |

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- Definition The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. 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