SOUTHERN CALIFORNIA EDISON Co - Annual Report: 2008 (Form 10-K)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

 

Commission File Number 1-2313

SOUTHERN CALIFORNIA EDISON COMPANY

(Exact name of registrant as specified in its charter)

 

 

 

(626) 302-1212

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o No  þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “accelerated filer,” “large accelerated filer,” and “smaller reporting company” in Rule 12b-12 of the Exchange Act. (Check One):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

As of February 22, 2009, there were 434,888,104 shares of Common Stock outstanding, all of which are held by the registrant’s parent holding company. The aggregate market value of registrant’s voting and non-voting common equity held by non-affiliates was zero. As of February 25, 2009, there were 434,888,104 shares of Common Stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the following documents listed below have been incorporated by reference into the parts of this report so indicated.

 

 

 

TABLE OF CONTENTS

 

 

This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect SCE’s current expectations and projections about future events based on SCE’s knowledge of present facts and circumstances and assumptions about future events and include any statement that does not directly relate to a historical or current fact. Other information distributed by SCE that is incorporated in this report, or that refers to or incorporates this report, may also contain forward-looking statements. In this report and elsewhere, the words “expects,” “believes,” “anticipates,” “estimates,” “projects,” “intends,” “plans,” “probable,” “may,” “will,” “could,” “would,” “should,” and variations of such words and similar expressions, or discussions of strategy or of plans, are intended to identify forward-looking statements. Such statements necessarily involve risks and uncertainties that could cause actual results to differ materially from those anticipated. See “Risk Factors” in Part I, Item 1A of this report and “Introduction” in the MD&A for cautionary statements that accompany those forward-looking statements and identify important factors that could cause results to differ. Readers should carefully review those cautionary statements as they identify important factors that could cause results to differ, or that otherwise could impact SCE or its subsidiaries.

 

Additional information about risks and uncertainties, including more detail about the factors described in this report, is contained throughout this report, in the MD&A that appears in the Annual Report, the relevant portions of which are filed as Exhibit 13 to this report, and which is incorporated by reference into Part II, Item 7 of this report, and in Notes to Consolidated Financial Statements. Readers are urged to read this entire report, including the information incorporated by reference, and carefully consider the risks, uncertainties and other factors that affect SCE’s business. Forward-looking statements speak only as of the date they are made and SCE is not obligated to publicly update or revise forward-looking statements. Readers should review future reports filed by SCE with the SEC.

 

Glossary

 

When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below.

 

 

Glossary (Continued)

 

 

 

Glossary (Continued)

 

 

 

SCE was incorporated in 1909 under the laws of the State of California. SCE is a public utility primarily engaged in the business of supplying electric energy to a 50,000-square-mile area of central, coastal and southern California, excluding the City of Los Angeles and certain other cities. This SCE service territory includes approximately 432 cities and communities and a population of more than 13 million people. In 2008, SCE’s total operating revenue was derived as follows: 42% commercial customers, 38% residential customers, 6% resale sales, 7% industrial customers, 6% public authorities, and 1% agricultural and other customers. During 2008, the sources of electric power that serviced SCE’s customers were approximately 28% owned by SCE and approximately 72% procured from third parties. At December 31, 2008, SCE had consolidated assets of $31.0 billion and total shareholder’s equity of $7.4 billion. SCE had 16,344 full-time employees at year-end 2008.

 

SCE’s retail operations are subject to regulation by the CPUC. The CPUC has the authority to regulate, among other things, retail rates, issuance of securities, and accounting practices. SCE’s wholesale operations are subject to regulation by the FERC. The FERC has the authority to regulate wholesale rates as well as other matters, including unbundled transmission service pricing, accounting practices, and licensing of hydroelectric projects.

 

Additional information about the regulation of SCE by the CPUC and the FERC, and about SCE’s competitive environment, appears in the MD&A under the heading “SCE: Regulatory Matters” and in this section under the sub heading “— Competition of SCE.”

 

SCE is subject to the jurisdiction of the NRC with respect to its nuclear power plants. United States NRC regulations govern the granting of licenses for the construction and operation of nuclear power plants and subject those power plants to continuing review and regulation. The California Coastal Commission issued a coastal permit for the construction of the San Onofre Units 2 and 3 in 1974. SCE has a coastal permit from the California Coastal Commission to construct a temporary dry cask spent fuel storage installation for San Onofre Units 2 and 3. The California Coastal Commission also has continuing jurisdiction over coastal permits issued for the decommissioning of San Onofre Unit 1, including for the construction of a temporary dry cask spent fuel storage installation for spent fuel from that unit.

 

The construction, planning, and siting of SCE’s power plants within California are subject to the jurisdiction of the California Energy Commission (for plants 50 MW or greater) and the CPUC. SCE is subject to the rules and regulations of the CARB, and local air pollution control districts with respect to the emission of pollutants into the atmosphere; the regulatory requirements of the California State Water Resources Control Board and regional boards with respect to the discharge of pollutants into waters of the state; and the requirements of the California Department of Toxic Substances Control with respect to handling and disposal of hazardous materials and wastes. SCE is also subject to regulation by the US EPA, which administers certain federal statutes relating to environmental matters. Other federal, state, and local laws and regulations relating to environmental protection, land use, and water rights also affect SCE.

 

The construction, planning and siting of SCE’s transmission lines and substation facilities require the approval of many governmental agencies and compliance with various laws, depending upon the attributes of each particular project. These agencies include utility regulatory commissions such as the CPUC and other state regulatory agencies depending on the project location; the ISO, and other environmental, land management and resource agencies such as the Bureau of Land Management, the U.S. Fish and Wildlife Service, the U.S. Forest Service, and the California Department of Fish and Game; Regional Water Quality Control Boards; and the States’ Offices of Historic Preservation. In addition, to the extent that SCE transmission line projects pass through lands owned or controlled by Native American tribes, consent and approval from the affected tribes and the Bureau of Indian Affairs will also be necessary for the project to proceed. The agencies’

approval processes, implemented through their respective regulations and other statutes that impose requirements on the approvals of such projects, may adversely affect and delay the schedule for these projects.

 

The United States Department of Energy has regulatory authority over certain aspects of SCE’s operations and business relating to energy conservation, power plant fuel use and disposal, electric sales for export, public utility regulatory policy, and natural gas pricing.

 

SCE is subject to CPUC affiliate transaction rules and compliance plans governing the relationship between SCE and its affiliates. See “Business of Edison International — Regulation of Edison International” above for further discussion of these rules.

 

Because SCE is an electric utility company operating within a defined service territory pursuant to authority from the CPUC, SCE faces competition only to the extent that federal and California laws permit other entities to provide electricity and related services to customers within SCE’s service territory. California law currently provides only limited opportunities for customers to choose to purchase power directly from an energy service provider other than SCE. SCE also faces some competition from cities and municipal districts that create municipal utilities or community choice aggregators. In addition, customers may install their own on-site power generation facilities. Competition with SCE is conducted mainly on the basis of price, as customers seek the lowest cost power available. The effect of competition on SCE generally is to reduce the size of SCE’s customer base, thereby creating upward pressure on SCE’s rate structure to cover fixed costs, which in turn may cause more customers to leave SCE in order to obtain lower rates.

 

SCE supplies electricity to its customers through extensive transmission and distribution networks. Its transmission facilities (which exist primarily in California but also in Nevada and Arizona), deliver power from generating sources to the distribution network, consist of approximately 7,200 circuit miles of 33 kilovolt (kV), 55 kV, 66 kV, 115 kV, and 161 kV lines and 3,520 circuit miles of 220 kV lines, 1,240 circuit miles of 500 kV lines, and 889 substations. SCE’s distribution system, which takes power from substations to the customer, includes approximately 71,500 circuit miles of overhead lines, 40,000 circuit miles of underground lines, 1.5 million poles, 719 distribution substations, 715,527 transformers, and 810,519 area and streetlights, all of which are located in California.

 

SCE owns and operates the following generating facilities: (1) an undivided 78.21% interest (1,760 MW) in San Onofre Units 2 and 3, which are large pressurized water nuclear generating units located on the California coastline between Los Angeles and San Diego; (2) 36 hydroelectric plants (1,178.9 MW) located in California’s Sierra Nevada, San Bernardino and San Gabriel mountain ranges, three of which (2.7 MW) are no longer operational and will be decommissioned; (3) a diesel-fueled generating plant (9 MW) located on Santa Catalina island off the southern California coast, (4) a natural gas-fueled two unit power plant (1,050 MW) located in Redlands, California, and (5) four gas-fueled, combustion turbine peaker plants located in the cities of Norwalk, Ontario, Rancho Cucamonga and Stanton, California (combined generating capacity of 186 MW).

 

SCE owns an undivided 56% interest (884.8 MW net) in Mohave, which consists of two coal-fueled generating units that no longer operate located in Clark County, Nevada near the California border. See “SCE: Regulatory Matters — Mohave Generating Station and Related Proceedings” in the MD&A for more information.

 

SCE owns an undivided 15.8% interest (601 MW) in Palo Verde Units 1, 2 and 3, which are large pressurized water nuclear generating units located near Phoenix, Arizona, and an undivided 48% interest (720 MW) in Units 4 and 5 at Four Corners, which is a coal-fueled generating plant located near the City of Farmington, New Mexico. Palo Verde and Four Corners are operated by Arizona Public Service Company, as operating agent for SCE and other co-owners of these generating units.

 

At year-end 2008, the SCE-owned generating capacity (summer effective rating) was divided approximately as follows: 43% nuclear, 22% hydroelectric, 23% natural gas, 13% coal, and less than 1% diesel. The capacity

factors in 2008 for SCE’s nuclear and coal-fired generating units were: 82% for San Onofre; 78% for Four Corners; and 86% for Palo Verde. For SCE’s hydroelectric plants, generating capacity is dependent on the amount of available water. SCE’s hydroelectric plants operated at a 24% capacity factor in 2008. These plants were operationally available for 73% of the year.

 

San Onofre, Four Corners, certain of SCE’s substations, and portions of its transmission, distribution and communication systems are located on lands of the United States or others under (with minor exceptions) licenses, permits, easements or leases, or on public streets or highways pursuant to franchises. Certain of such documents obligate SCE, under specified circumstances and at its expense, to relocate transmission, distribution, and communication facilities located on lands owned or controlled by federal, state, or local governments.

 

Thirty-one of SCE’s 36 hydroelectric plants (some with related reservoirs) are located in whole or in part on United States lands pursuant to 30- to 50-year FERC licenses that expire at various times between 2009 and 2039 (the remaining five plants are located entirely on private property and are not subject to FERC jurisdiction). Such licenses impose numerous restrictions and obligations on SCE, including the right of the United States to acquire projects upon payment of specified compensation. When existing licenses expire, the FERC has the authority to issue new licenses to third parties that have filed competing license applications, but only if their license application is superior to SCE’s and then only upon payment of specified compensation to SCE. New licenses issued to SCE are expected to contain more restrictions and obligations than the expired licenses because laws enacted since the existing licenses were issued require the FERC to give environmental purposes greater consideration in the licensing process. SCE has filed applications for the relicensing of certain hydroelectric projects with an aggregate capacity of approximately 915 MW. Annual licenses have been issued to SCE hydroelectric projects that are undergoing relicensing and whose long-term licenses have expired. Federal Power Act Section 15 requires that the annual licenses be renewed until the long-term licenses are issued or denied.

 

Substantially all of SCE’s properties are subject to the lien of a trust indenture securing first and refunding mortgage bonds, of which approximately $5.80 billion in principal amount was outstanding on February 27, 2009. Such lien and SCE’s title to its properties generally are also subject to the terms of franchises, licenses, easements, leases, permits, contracts, and other instruments under which properties are held or operated, certain statutes and governmental regulations, liens for taxes and assessments, and certain other liens, prior rights and encumbrances which do not materially affect SCE’s right to use such properties in its business.

 

SCE’s rights in Four Corners, which is located on land of the Navajo Nation under an easement from the United States and a lease from the Navajo Nation, may be subject to possible defects. These defects include possible conflicting grants or encumbrances not ascertainable because of the absence of, or inadequacies in, the applicable recording law and the record systems of the Bureau of Indian Affairs and the Navajo Nation, the possible inability of SCE to resort to legal process to enforce its rights against the Navajo Nation without Congressional consent, the possible impairment or termination under certain circumstances of the easement and lease by the Navajo Nation, Congress, or the Secretary of the Interior, and the possible invalidity of the trust indenture lien against SCE’s interest in the easement, lease, and improvements on Four Corners.

 

Information about operating issues related to Palo Verde appears in the MD&A under the heading “SCE: Other Developments — Palo Verde Nuclear Generating Station Outage and Inspection”. Information about nuclear decommissioning can be found under the heading “SCE: Other Developments” in the MD&A and in Notes 1 and 6 of Notes to Consolidated Financial Statements. Information about nuclear insurance can be found in Note 6 of Notes to Consolidated Financial Statements.

 

California law prohibits the CEC from siting or permitting a nuclear power plant in California until the CEC finds that there exists a federally approved and demonstrated technology or means for the disposal of high-level nuclear waste.

 

SCE obtains the power needed to serve its customers from its generating facilities and from purchases from qualifying facilities, independent power producers, renewable power producers, the California ISO, and other utilities. In addition, power is provided to SCE’s customers through purchases by the CDWR under contracts with third parties. Sources of power to serve SCE’s customers during 2008 were as follows: 44.0% purchased power; 23.5% CDWR; 32.5% SCE-owned generation consisting of 17.6% nuclear, 7.1% gas, 5.2% coal, and 2.6% hydro.

 

Natural Gas Supply

 

SCE requires natural gas to meet contractual obligations for power tolling agreements (power contracts in which SCE has agreed to provide the natural gas needed for generation under those power contracts) and to serve demand for gas at Mountainview and SCE’s four peaker plants. All of the physical gas purchased by SCE in 2008 was purchased after competitive bidding, under North American Energy Standards Board agreements (master gas agreements) that define the terms and conditions of transactions with a particular supplier prior to any financial commitment.

 

In 2007, SCE secured a one-year natural gas storage capacity contract with Southern California Gas Company for the 2007/2008 storage season. Storage capacity was secured to provide operational flexibility and to mitigate potential costs associated with the dispatch of facilities that had tolling agreements with SCE.

 

Nuclear Fuel Supply

 

For San Onofre Units 2 and 3, contractual arrangements are in place covering 100% of the projected nuclear fuel requirements through the years indicated below:

 

 

For Palo Verde, contractual arrangements are in place covering 100% of the projected nuclear fuel requirements through the years indicated below:

 

 

Spent Nuclear Fuel

 

Information about Spent Nuclear Fuel appears in Note 6 of Notes to Consolidated Financial Statements.

 

Coal Supply

 

On January 1, 2005, SCE and the other Four Corners participants entered into a Restated and Amended Four Corners Fuel Agreement with the BHP Navajo Coal Company under which coal will be supplied to Four Corners Units 4 and 5 until July 6, 2016. The Restated and Amended Agreement contains an option to extend for not less than five additional years or more than 15 years.

 

SCE has property and casualty insurance policies, which include excess liability insurance covering liabilities to third parties for bodily injury or property damage resulting from operations. SCE believes that its insurance policies are appropriate in light of its past claims experience. However, no assurance can be given that SCE’s

insurance will be adequate to cover all losses. See “SCE: Other Developments — Wildfire Insurance Issues” in the MD&A for further discussion.

 

Due to warmer weather during the summer months, electric utility revenue during the third quarter of each year is generally significantly higher than other quarters.

 

SCE is subject to environmental regulation by federal, state and local authorities in the jurisdictions in which it operates. This regulation, including in the areas of air and water pollution, waste management, hazardous chemical use, noise abatement, land use, aesthetics, nuclear control and climate change, continues to result in the imposition of numerous restrictions on SCE’s operation of existing facilities, on the timing, cost, location, design, construction, and operation by SCE of new facilities, and on the cost of mitigating the effect of past operations on the environment.

 

SCE believes that it is in substantial compliance with environmental regulatory requirements. However, possible future developments, such as the promulgation of more stringent environmental laws and regulations, future proceedings that may be initiated by environmental and other regulatory authorities, cases in which new theories of liability are recognized, and settlements agreed to by other companies that establish precedent or expectations for the power industry, could affect the costs and the manner in which SCE conducts its businesses and could require substantial additional capital or operational expenditures or the ceasing of operations at certain of their facilities. There is no assurance that SCE’s financial position and results of operations would not be materially adversely affected. SCE is unable to predict the precise extent to which additional laws and regulations may affect their operations and capital expenditure requirements.

 

Typically, environmental laws and regulations require a lengthy and complex process for obtaining licenses, permits and approvals prior to construction, operation or modification of a project. Meeting all the necessary requirements can delay or sometimes prevent the completion of a proposed project as well as require extensive modifications to existing projects, which may involve significant capital or operational expenditures. Furthermore, if SCE fails to comply with applicable environmental laws, it may be subject to injunctive relief, penalties and fines imposed by federal and state regulatory authorities.

 

SCE’s projected environmental capital expenditures and additional information about environmental matters affecting SCE appear in the MD&A under the heading “Other Developments — Environmental Matters” and in Note 6 of Notes to Consolidated Financial Statements under “Environmental Remediation.”

 

The principal environmental laws and regulations affecting SCE’s business are identified below.

 

Climate Change

 

Federal Legislative Initiatives

 

To date, the U.S. has pursued a voluntary GHG emissions reduction program to meet its obligations as a signatory to the UN Framework Convention on Climate Change. As a result of increased attention to climate change in the U.S., however, numerous bills have been introduced in the U.S. Congress that would reduce and/or tax GHG emissions in the U.S. Enactment of climate change legislation within the next several years now seems likely.

 

Regional Initiatives

 

A number of regional initiatives have been undertaken or are in process related to GHG emissions. Implementing regulations for such regional initiatives are likely to vary from state to state and may be more stringent and costly than federal legislative proposals currently being debated in Congress. It cannot yet be determined whether or to what extent any federal legislative system would seek to preempt regional or state initiatives, although such preemption would greatly simplify compliance and eliminate regulatory duplication.

See “Other Developments — Environmental Matters — Climate Change — Regional Initiatives” in the MD&A for further discussion.

 

State-Specific Legislation

 

In September 2006, California enacted two laws regarding GHG emissions. The first, known as AB 32 or the California Global Warming Solutions Act of 2006, establishes a comprehensive program to achieve reductions of GHG emissions. AB 32 requires the CARB to develop regulations which may include market-based compliance mechanisms targeted to reduce California’s GHG emissions to 1990 levels by 2020. The CARB’s mandatory program will take effect commencing in 2012 and will implement incremental reductions so that GHG emissions will be reduced to 1990 levels by 2020. See “Other Developments — Environmental Matters — State-Specific Legislation in the MD&A for further discussion.

 

California law also currently requires SCE to increase its procurement of renewable resources by at least 1% of its annual retail electricity sales per year so that 20% of its annual electricity sales are procured from renewable resources by no later than December 31, 2010. For additional discussion of renewable procurement standards, see “Regulatory Matters — Procurement of Renewable Resources” in the MD&A. Additionally, the AB 32 scoping plan suggests a 33% by 2025 renewables portfolio standard be adopted. See “Other Developments — Environmental Matters — Climate Change — State Specific Legislation” in the MD&A for further discussion.

 

In addition, the CPUC is addressing climate change-related issues in other regulatory proceedings. In 2007, the CPUC expanded the scope of its GHG rulemaking to include GHG emissions associated with the transmission, storage, and distribution of natural gas in California. This proceeding could affect SCE as a natural gas customer.

 

SCE will continue to monitor federal, regional, and state developments relating to climate change to determine their impact on its operations. Programs to reduce GHG emissions could significantly increase the cost of generating electricity from fossil fuels, especially coal, as well as the cost of purchased-power. Any such cost increases should generally be borne by customers.

 

Litigation Developments

 

Climate change regulation may also be affected by litigation in federal and state courts, as well as actions by licensing authorities.

 

Information regarding these developments appears in the MD&A under the heading “Other Developments — Environmental Matters — Climate Change — Litigation Developments.”

 

Emissions Data Reporting

 

SCE is a member of the California Climate Action Registry (CCAR), a non-profit, voluntary membership organization established by state law to allow members to report and certify their greenhouse gas emissions. SCE has been reporting annually to the CCAR since 2002. SCE’s 2007, independently certified GHG emissions, as reported to the CCAR were approximately 6.8 million metric tons from SCE-owned generation. SCE’s reported emissions are pro-rated to its ownership interests in the emitting facilities.

 

Edison International, SCE’s parent holding company, became a founding reporter to The Climate Registry, formed in May 2008. The Climate Registry is a multi-national organization, which allows organizations to voluntarily inventory, verify, and publicly report their GHG emissions. As part of Edison International’s reporting, SCE will be filing verified emissions information for 2008 in June 2009 with The Climate Registry.

 

Responses to Energy Demands and Future GHG Emission Constraints

 

Irrespective of the outcome of federal legislative deliberations, SCE believes that substantial limitations on GHG emissions are inevitable, through increased costs, mandatory emission limits or other mechanisms, and that demand for energy from renewable sources will also continue to increase. As a result, SCE is utilizing its

experience in developing and managing a variety of energy generation systems to create a generation profile, using sources such as wind, solar, geothermal, biomass and small hydro plants, that will be adaptable to a variety of regulatory and energy use environments. SCE leads the nation in renewable power delivery. Its renewables portfolio of owned and procured sources currently consists of: 1,136 MW from wind, 921 MW from geothermal, 356 MW from solar, 178 MW from biomass, and 200 MW from small hydro.

 

SCE has developed and promoted several energy efficiency and demand response initiatives in the residential market, including an ongoing meter replacement program to help reduce peak energy demand; a rebate program to encourage customers to invest in more efficient appliances; subsidies for purchases of energy efficient lighting products; appliance recycling programs; widely publicized tips to our customers for saving energy; and a voluntary demand response program which offers customers financial incentives to reduce their electricity use. SCE is also replacing its electro-mechanical grid control systems with computerized devices that allow more effective grid management.

 

In April 2008, the CPUC authorized SCE to spend approximately $47 million on studying and evaluating the feasibility of an integrated gasification combined cycle plant with carbon capture and sequestration, referred to as Clean Hydrogen Power Generation (CHPG). SCE may be able to recover the amounts spent in rates subject to a requirement to make reasonable efforts to obtain co-funding from other entities. The CPUC has not authorized SCE to build or operate a CHPG plant, as technical feasibility and commercial reasonableness have not yet been proven.

 

Corporate Governance Processes

 

SCE’s Board of Directors regularly receives reports regarding environmental issues that affect SCE, including climate change issues. In addition, SCE participates in Edison International’s Environmental Policy Council, which has primary responsibility regarding environmental issues. The membership of the Council includes senior executives of SCE and reports directly to Edison International’s Chief Executive Officer.

 

Information regarding further current developments on climate change and GHG regulation appears in the MD&A under the heading “Other Developments — Environmental Matters — Climate Change.”

 

Air Quality Regulation

 

The Federal CAA, state clean air acts and federal and state regulations implementing such statutes apply to plants owned by SCE as well as to plants from which SCE may purchase power, and have their largest impact on the operation of coal-fired plants. These federal regulations require states to adopt implementation plans, known as SIPs, that are equal to or more stringent than the federal requirements, detailing how they will attain the standards that are mandated by the relevant law or regulation. See “Other Developments — Environmental Matters — Air Quality Regulation” in the MD&A for further discussion.

 

Hazardous Substances and Hazardous Waste Laws

 

Under various federal, state and local environmental laws and regulations, a current or previous owner or operator of any facility, including an electric generating facility, may be required to investigate and remediate releases or threatened releases of hazardous or toxic substances or petroleum products located at that facility, and may be held liable to a governmental entity or to third parties for property damage, personal injury, natural resource damages, and investigation and remediation costs incurred by these parties in connection with these releases or threatened releases. Many of these laws, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, commonly referred to as CERCLA, as amended by the Superfund Amendments and Reauthorization Act of 1986 and the Resource Conservation and Recovery Act, impose liability without regard to whether the owner knew of or caused the presence of the hazardous substances, and courts have interpreted liability under these laws to be strict and joint and several.

 

In connection with the ownership and operation of their facilities, SCE may be liable for costs associated with hazardous waste compliance and remediation required by laws and regulations. Through an incentive mechanism, the CPUC allows SCE to recover in retail rates paid by its customers some of the environmental

remediation costs at certain sites. Additional information about these laws and regulations appears in Note 6 of Notes to Consolidated Financial Statements.

 

Water Quality Regulation

 

Regulations under the federal Clean Water Act require permits for the discharge of pollutants into United States waters and permits for the discharge of storm water flows from certain facilities. The Clean Water Act also regulates the thermal component (heat) of effluent discharges and the location, design, and construction of cooling water intake structures at generating facilities. California has a US EPA approved program to issue individual or group (general) permits for the regulation of Clean Water Act discharges. California also regulates certain discharges not regulated by the US EPA.

 

Clean Water Act — Cooling Water Standards and Regulations

 

On July 9, 2004, the US EPA published the final Phase II rule implementing Section 316(b) of the Clean Water Act establishing standards for cooling water intake structures at existing large power plants. The purpose of the regulation was to reduce substantially the number of aquatic organisms that are pinned against cooling water intake structures (impingement) or drawn into cooling water systems (entrainment). Depending on the findings of demonstration studies contemplated by the rule to demonstrate the costs and benefits of compliance, cooling towers and/or other mechanical means of reducing impingement and entrainment of aquatic organisms could have been required.

 

On January 27, 2007, the Second Circuit rejected the US EPA rule and remanded it to the US EPA. Among the key provisions remanded by the court were the use of cost benefit and restoration to achieve compliance with the rule. On July 9, 2007, the US EPA suspended the requirements for cooling water intake structures, pending further rulemaking. On December 2, 2008, the U.S. Supreme Court heard oral arguments on this case. A decision is expected in the first half of 2009. The US EPA has delayed rulemaking pending the decision of the Supreme Court.

 

The California State Water Resources Control Board is developing a draft state policy on ocean-based, once-through cooling. Further information regarding the cooling water intake structure standards appears in the MD&A under the heading “Other Developments — Environmental Matters — Water Quality Regulation — Clean Water Act — Prohibition on the Use of Ocean–Based Once–Through Cooling.”

 

Electric and Magnetic Fields

 

Electric and magnetic fields naturally result from the generation, transmission, distribution and use of electricity. Since the 1970s, concerns have been raised about the potential health effects of EMF. After 30 years of research, a health hazard has not been established to exist. Potentially important public health questions remain about whether there is a link between EMF exposures in homes or work and some diseases, and because of these questions, some health authorities have identified EMF exposures as a possible human carcinogen. To date, none of the regulatory agencies with jurisdiction over Edison International’s subsidiaries have claimed there is a proven link between exposure to EMF and human health effects.

 

All of SCE’s revenue for the last three fiscal years is attributed to SCE’s country of domicile, the United States. All of SCE’s assets are located in the United States.

 

SCE’s financial viability depends upon its ability to recover its costs in a timely manner from its customers through regulated rates.

 

SCE is a regulated entity subject to CPUC jurisdiction in almost all aspects of its business, including the rates, terms and conditions of its services, procurement of electricity for its customers, issuance of securities, dispositions of utility assets and facilities and aspects of the siting and operations of its electricity distribution

systems. SCE’s ongoing financial viability depends on its ability to recover from its customers in a timely manner its costs, including the costs of electricity purchased for its customers, in its CPUC-approved rates and its ability to pass through to its customers in rates its FERC-authorized revenue requirements. SCE’s financial viability also depends on its ability to recover in rates an adequate return on capital, including long-term debt and equity. If SCE is unable to recover any material amount of its costs in rates in a timely manner or recover an adequate return on capital, its financial condition and results of operations would be materially adversely affected.

 

SCE’s energy procurement activities are subject to regulatory and market risks that could adversely affect its financial condition, liquidity, and earnings.

 

SCE obtains energy, capacity, and ancillary services needed to serve its customers from its own generating plants and contracts with energy producers and sellers. California law and CPUC decisions allow SCE to recover in customer rates reasonable procurement costs incurred in compliance with an approved procurement plan. Nonetheless, SCE’s cash flows remain subject to volatility resulting from its procurement activities. In addition, SCE is subject to the risks of unfavorable or untimely CPUC decisions about the compliance of procurement activities with its procurement plan and the reasonableness of certain procurement-related costs.

 

Many of SCE’s power purchase contracts are tied to market prices for natural gas. Some of its contracts also are subject to volatility in market prices for electricity. SCE seeks to hedge its market price exposure to the extent authorized by the CPUC. SCE may not be able to hedge its risk for commodities on favorable terms or fully recover the costs of hedges in rates, which could adversely affect SCE’s liquidity and results of operation.

 

In its power purchase contracts and other procurement arrangements, SCE is exposed to risks from changes in the credit quality of its counterparties, many of whom may be adversely affected by the current conditions in the financial markets. If a counterparty were to default on its obligations, SCE could be exposed to potentially volatile spot markets for buying replacement power or selling excess power.

 

SCE relies on access to the capital markets. If SCE were unable to access capital markets or the cost of capital were to substantially increase, its liquidity and operations could be adversely affected.

 

SCE’s ability to make scheduled payments of principal and interest, refinance debt, and fund its operations and planned capital expenditure projects depends on its cash flow and access to the capital markets. SCE’s ability to arrange financing and the costs of such capital are dependent on numerous factors, including its levels of indebtedness, maintenance of acceptable credit ratings, its financial performance, liquidity and cash flow, and other market conditions. Market conditions which could adversely affect SCE’s financing costs and availability include:

 

 

SCE may not be successful in obtaining additional capital for these or other reasons. The failure to obtain additional capital from time to time may have a material adverse effect on SCE’s liquidity and operations.

 

SCE is subject to numerous environmental laws and regulations with respect to operation of its facilities. New Laws and regulations could adversely affect SCE.

 

SCE is subject to extensive environmental regulations and permitting requirements that involve significant and increasing costs. SCE devotes significant resources to environmental monitoring, pollution control equipment and emission allowances to comply with existing and anticipated environmental regulatory requirements.

However, the current trend is toward more stringent standards, stricter regulation, and more expansive application of environmental regulations. The U.S. Congress is deliberating over competing proposals to regulate GHG emissions. In addition, the attorneys general of several states, including California, certain environmental advocacy groups, and numerous state regulatory agencies in the United States have been focusing considerable attention on GHG emissions from coal-fired power plants and their potential role in climate change. The adoption of laws and regulations to implement GHG controls could adversely affect operations, particularly of the coal-fired plants. The continued operation of SCE facilities, particularly the coal-fired facilities, may require substantial capital expenditures for environmental controls. In addition, future environmental laws and regulations, and future enforcement proceedings that may be taken by environmental authorities, could affect the costs and the manner in which SCE conducts business. Furthermore, changing environmental regulations could make some units uneconomical to maintain or operate. If the affected subsidiaries cannot comply with all applicable regulations, they could be required to retire or suspend operations at such facilities, or to restrict or modify the operations of these facilities, and their business, results of operations and financial condition could be adversely affected.

 

SCE is subject to extensive regulation and the risk of adverse regulatory decisions and changes in applicable regulations or legislation.

 

SCE operates in a highly regulated environment. SCE’s business is subject to extensive federal, state and local energy, environmental and other laws and regulations. The CPUC regulates SCE’s retail operations, and the FERC regulates SCE’s wholesale operations. The NRC regulates SCE’s nuclear power plants. The construction, planning, and siting of SCE’s power plants and transmission lines in California are also subject to the jurisdiction of the California Energy Commission (for plants 50 MW or greater), and the CPUC. The construction, planning and siting of transmission lines that are outside of California are subject to the regulation of the relevant state agency. Additional regulatory authorities with jurisdiction over some of SCE’s operations and construction projects include the California Air Resources Board, the California State Water Resources Control Board, the California Department of Toxic Substances Control, the California Coastal Commission, the US EPA, the Bureau of Land Management, the U.S. Fish and Wildlife Services, the U.S. Forest Service, Regional Water Quality Boards, the Bureau of Indian Affairs, the United States Department of Energy, the NRC, and various local regulatory districts.

 

SCE must periodically apply for licenses and permits from these various regulatory authorities and abide by their respective orders. Should SCE be unsuccessful in obtaining necessary licenses or permits or should these regulatory authorities initiate any investigations or enforcement actions or impose penalties or disallowances on SCE, SCE’s business could be adversely affected. Existing regulations may be revised or reinterpreted and new laws and regulations may be adopted or become applicable to SCE or SCE’s facilities in a manner that may have a detrimental effect on SCE’s business or result in significant additional costs because of SCE’s need to comply with those requirements.

 

There are inherent risks associated with operating nuclear power generating facilities.

 

Spent fuel storage capacity could be insufficient to permit long-term operation of SCE’s nuclear plants.

 

SCE operates and is majority owner of San Onofre and is part owner of Palo Verde. The United States Department of Energy has defaulted on its obligation to begin accepting spent nuclear fuel from commercial nuclear industry participants by January 31, 1998. If SCE or the operator of Palo Verde were unable to arrange and maintain sufficient capacity for interim spent-fuel storage now or in the future, it could hinder operation of the plants and impair the value of SCE’s ownership interests until storage could be obtained, each of which may have a material adverse effect on SCE.

 

Existing insurance and ratemaking arrangements may not protect SCE fully against losses from a nuclear incident.

 

Federal law limits public liability claims from a nuclear incident to the amount of available financial protection which is currently approximately $12.5 billion. SCE and other owners of the San Onofre and Palo

Verde nuclear generating stations have purchased the maximum private primary insurance available of $300 million per site. If the public liability limit above is insufficient, federal law contemplates that additional funds may be appropriated by Congress. This could include an additional assessment on all licensed reactor operators as a measure for raising further revenue. If this were to occur, a tension could exist between the federal government’s attempt to impose revenue-raising measures upon SCE and the CPUC’s willingness to allow SCE to pass this liability along to its customers, resulting in undercollection of SCE’s costs. There can be no assurance of SCE’s ability to recover uninsured costs in the event federal appropriations are insufficient.

 

SCE’s financial condition and results of operations could be materially adversely affected if it is unable to successfully manage the risks inherent in operating and improving its facilities.

 

SCE owns and operates extensive electricity facilities that are interconnected to the United States western electricity grid. SCE is also undertaking large-scale new infrastructure construction. The construction of infrastructure involves numerous risks, including risks related to permitting, governmental approvals, and construction delays. The operation of SCE’s facilities and the facilities of third parties on which it relies involves numerous risks, including:

 

 

The occurrence of any of these events could result in lower revenues or increased expenses and liabilities, or both, which may not be fully recovered through insurance, rates or other means in a timely manner or at all.

 

SCE’s insurance coverage may not be sufficient under all circumstances and SCE may not be able to obtain sufficient insurance.

 

SCE’s insurance may not be sufficient or effective under all circumstances and against all hazards or liabilities to which it may be subject. A loss for which SCE is not fully insured could materially and adversely affect SCE’s financial condition and results of operations. Further, due to rising insurance costs and changes in the insurance markets, insurance coverage may not continue to be available at all or at rates or on terms similar to those presently available to SCE.

 

None.

 

The principal properties of SCE are described above in Part I under the heading “Properties.”

 

Catalina South Coast Air Quality Management District Potential Environmental Proceeding

 

During the first half of 2006, the South Coast Air Quality Management District (SCAQMD) issued three NOVs alleging that Unit 15, SCE’s primary diesel generation unit on Catalina Island, had exceeded the NOx emission limit dictated by its air permit. Prior to the NOVs, SCE had filed an application with the SCAQMD seeking a permit revision that would allow a three-hour averaging of the NOx limit during normal (non-startup) operations and clarification regarding a startup exemption. In July 2006, the SCAQMD denied SCE’s application to revise the Unit 15 air permit, and informed SCE that several conditions would have to be satisfied prior to re-application. SCE is currently in the process of developing and supplying the information and analyses required by those conditions.

 

On October 2, 2006 and July 19, 2007, SCE received two additional NOVs pertaining to two other Catalina Island diesel generation units, Unit 7 and Unit 10, alleging that these units have exceeded their annual NOx limit in 2004 (Unit 10), 2005 (Unit 7), and 2006 (Unit 10). Going forward, SCE expects that the new Continuous Emissions Monitoring System, installed in late 2006, which monitors the emissions from these units, along with the employment of best practices, will enable these units to meet their annual NOx limits in 2007.

 

In July 2008, SCE received an additional NOV for emitting NOx in excess of SCE’s Regional Clean Air Incentives Market (RECLAIM) credits. Under the RECLAIM program, a RECLAIM-regulated facility must have sufficient RECLAIM Trading Credits to equal the amount of NOx that the facility emits. The NOV alleges that SCE did not have sufficient RECLAIM Trading Credits in the first and second quarters of 2007 to match the actual NOx emissions at Catalina’s generating units.

 

Settlement negotiations with the SCAQMD regarding the penalties are ongoing and the SCAQMD has not yet proposed any specific fines to be imposed on SCE.

 

Navajo Nation Litigation

 

Information about the SCE Navajo Nation litigation appears in the MD&A under the heading “SCE: Other Developments — Navajo Nation Litigation.”

 

No matters were submitted to a vote of shareholders of SCE during the fourth quarter of 2008.

Pursuant to Form 10-K’s General Instruction (General Instruction) G(3), the following information is included as an additional item in Part I:

 

 

None of SCE’s executive officers is related to each other by blood or marriage. As set forth in Article IV of SCE’s Bylaws, the elected officers of SCE are chosen annually by and serve at the pleasure of SCE’s Board of Directors and hold their respective offices until their resignation, removal, other disqualification from service, or until their respective successors are elected. All of the above officers have been actively engaged in the business of SCE, Edison International and/or the nonutility company affiliates of SCE for more than five years, except for Mr. House, and have served in their present positions for the periods stated below. Additionally, those officers who have had other or additional principal positions in the past five years had the following business experience during that period:

 

 

Certain information responding to Item 5 with respect to frequency and amount of cash dividends is included in the Annual Report, under Quarterly Financial Data on page 109 and is incorporated herein by this reference. As a result of the formation of a holding company described above in Item 1, all of the issued and outstanding common stock of SCE is owned by Edison International and there is no market for such stock.

 

Item 201(d) of Regulation S-K, “Securities Authorized For Issuance Under Equity Compensation Plans,” is not applicable because SCE has no compensation plans under which equity securities of SCE are authorized for issuance.

 

Information responding to Item 6 is included in the Annual Report under “Selected Financial Data: 2004 — 2008” on page 110, and is incorporated herein by reference.

 

Information responding to Item 7 is included in the Annual Report and contained in Exhibit 13 hereto and is incorporated herein by this reference.

 

Information responding to Item 7A is included in the MD&A under the headings “Market Risk Exposures” on pages 33 through 37.

 

Certain information responding to Item 8 is set forth after Item 15 in Part III. Other information responding to Item 8 is included in the Annual Report on pages 55 through 59 and is incorporated herein by this reference.

 

None.

 

Disclosure Controls and Procedures

 

SCE’s management, under the supervision and with the participation of the company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of SCE’s disclosure controls and procedures (as that term is defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period, SCE’s disclosure and procedures are effective.

 

Management’s Report on Internal Control Over Financial Reporting

 

SCE’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as that term is defined in Rule 13a-15(f) under the Exchange Act) for SCE. Under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, SCE’s management conducted an evaluation of the effectiveness of SCE’s internal control over financial reporting based on the framework set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on its evaluation under the COSO framework, SCE’s management concluded that SCE’s internal control over financial reporting was effective as of December 31, 2008.

Change in Internal Control Over Financial Reporting

 

As discussed above, in 2008, SCE implemented a series of SAP enterprise resource planning (“ERP”) modules, including financial reporting, general ledger, consolidation, property accounting, treasury, supply chain, payroll, human resources and work management. The implementation of these ERP modules and the related workflow capabilities resulted in material changes to SCE’s internal controls over financial reporting (as that term is defined in Rules 13(a)-15(f) or 15(d)-15(f) under the Exchange Act). Therefore, SCE has modified the design and documentation of internal control processes and procedures relating to the new system to replace and supplement existing internal controls over financial reporting, as appropriate. The system changes were undertaken to integrate systems and consolidate information, and were not undertaken in response to any actual or perceived deficiencies in SCE’s internal control over financial reporting.

 

There were no other changes in SCE’s internal control over financial reporting during the quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, SCE’s internal control over financial reporting.

 

SCE has not designed, established, or maintained internal control over financial reporting for four variable interest entities, referred to as “VIEs,” that SCE was required to consolidate under an accounting interpretation issued by the Financial Accounting Standards Board. SCE’s evaluation of internal control over financial reporting does not include these VIEs.

 

This Annual Report on Form 10-K does not include an attestation report of SCE’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by SCE’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit SCE to provide only management’s report in this Annual Report on Form 10-K.

 

None.

 

Information concerning executive officers of SCE is set forth in Part I in accordance with General Instruction G(3), pursuant to Instruction 3 to Item 401(b) of Regulation S-K. Other information responding to Item 10 will appear in SCE’s definitive Proxy Statement to be filed with the SEC in connection with SCE’s Annual Shareholders’ Meeting to be held on April 23, 2009, under the headings “Election of Directors, Nominees for Election,” and “Board Committees and Subcommittees,” and is incorporated herein by this reference.

 

The Edison International Ethics and Compliance Code is applicable to all Directors, officers and employees of Edison International and its majority-owned subsidiaries, including SCE. The Code is available on Edison International’s Internet website at www.edisonethics.com and is available in print without charge upon request from the SCE Corporate Secretary. Any amendments or waivers of Code provisions for SCE’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, will be posted on Edison International’s Internet website at www.edisonethics.com.

 

Information responding to Item 11 will appear in the Proxy Statement under the headings “Compensation Discussion and Analysis,” “Compensation Committees’ Report,” “Compensation Committees’ Interlocks and Insider Participation,” “Summary Compensation Table — Fiscal 2008,” “Grants of Plan-Based Awards in Fiscal 2008,” “Outstanding Equity Awards at Fiscal 2008 Year-End,” “Option Exercises and Stock Vested in Fiscal 2008,” “Pension Benefits,” “Non-qualified Deferred Compensation,” “Potential Payments Upon Termination or Change in Control,” and “Director Compensation,” and is incorporated herein by this reference.

 

Information responding to Item 12 will appear in the Proxy Statement under the headings “Stock Ownership of Directors and Executive Officers” and “Stock Ownership of Certain Shareholders,” and is incorporated herein by this reference.

 

Item 201(d) of Regulation S-K, “Securities Authorized For Issuance Under Equity Compensation Plans,” is not applicable because SCE has no compensation plans under which equity securities of SCE are authorized for issuance.

 

Information responding to Item 13 will appear in the Proxy Statement under the headings “Certain Relationships and Related Transactions,” and “Questions and Answers on Corporate Governance — Q: Is SCE subject to the same stock exchange listing standards regarding corporate governance matters as EIX?, — Q: How do the EIX and SCE Boards determine which Directors are considered independent? and — Q: Which Directors have the EIX and SCE Boards determined are independent?” and is incorporated herein by this reference.

 

Information responding to Item 14 will appear in the Proxy Statement under the heading “Independent Registered Public Accounting Firm Fees,” and is incorporated herein by this reference.

 

The following items contained in the Annual Report are found on pages 55 through 110, and are incorporated herein by this reference to Exhibit 13 to this Annual Report on Form 10-K.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Report of Independent Registered Public Accounting Firm

 

Consolidated Statements of Income — Years Ended December 31, 2008, 2007 and 2006

 

Consolidated Statements of Comprehensive Income — Years Ended December 31, 2008, 2007, and 2006

 

Consolidated Balance Sheets — December 31, 2008 and 2007

 

Consolidated Statements of Cash Flows — Years Ended December 31, 2008, 2007 and 2006

 

Consolidated Statements of Changes in Common Shareholders’ Equity — Years Ended December 31, 2008, 2007 and 2006

 

Notes to Consolidated Financial Statements

 

The following documents may be found in this report at the indicated page numbers:

 

 

Schedules I and III through V, inclusive, are omitted as not required or not applicable.

 

(a)(3) Exhibits

 

See Exhibit Index beginning on page 29 of this report.

 

SCE will furnish a copy of any exhibit listed in the accompanying Exhibit Index upon written request and upon payment to SCE of its reasonable expenses of furnishing such exhibit, which shall be limited to photocopying charges and, if mailed to the requesting party, the cost of first-class postage.

Report of Independent Registered Public Accounting Firm on

Financial Statement Schedule

 

 

To the Board of Directors

of Southern California Edison Company:

 

Our audits of the consolidated financial statements referred to in our report dated March 2, 2009, appearing in the 2008 Annual Report to Shareholders of Southern California Edison Company (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedules listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

 

/s/ PricewaterhouseCoopers LLP

Los Angeles, California

March 2, 2009

Southern California Edison Company

 

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

 

For the Year Ended December 31, 2008

 

 

 

Southern California Edison Company

 

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

 

For the Year Ended December 31, 2007

 

 

 

Southern California Edison Company

 

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

 

For the Year Ended December 31, 2006

 

 

 

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

SOUTHERN CALIFORNIA EDISON COMPANY

 

LINDA G. SULLIVAN

Vice President And Controller

 

Date: March 2, 2009

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

 

 

Date: March 2, 2009