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 before income taxes	$	564		$	666		$	1,186		$	1,378
Provision for income tax at federal statutory rate of 35%	197			233			415			482
Increase (decrease) in income tax from:
State tax – net of federal benefit	10			31			30			61
Property-related	(19		)	(18		)	(39		)	(38		)
Other	(12		)	(1		)	(22		)	(9		)
Total income tax expense	$	176		$	245		$	384		$	496
Effective tax rate	31		%	37		%	32		%	36		%

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,	$	373		$	329
Tax positions taken during the current year:
Increases	23			58
Tax positions taken during a prior year:
Increases	154			44
Decreases	(33		)	(34		)
Decreases for settlements during the period	—			—
Balance at December 31,	$	517		$	397

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. This included 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 adjustment and filed a protest with the IRS in the first quarter of 2011.

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.