SOUTHERN CALIFORNIA EDISON Co - Annual Report: 2009 (Form 10-K)

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SCHEDULE II TABLE OF CONTENTS

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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 ý    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 ý

        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 ý    No o

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o    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. ý

        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 ý

        As of February 22, 2010, 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.

DOCUMENTS INCORPORATED BY REFERENCE

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

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FORWARD-LOOKING STATEMENTS

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. Some of the risks, uncertainties and other important factors that could cause results to differ, or that otherwise could impact SCE, include, but are not limited to:

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environmental laws and regulations, both at the state and federal levels, or changes in the application of those laws, that could require additional expenditures or otherwise affect the cost and manner of doing business;

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cost of capital and the ability to borrow funds and access to capital markets on reasonable terms;

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the cost and availability of electricity including the ability to procure sufficient resources to meet expected customer needs in the event of significant counterparty defaults under power-purchase agreements;

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changes in the fair value of investments and other assets;

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ability of SCE to recover its costs in a timely manner from its customers through regulated rates;

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decisions and other actions by the CPUC, the FERC and other regulatory authorities and delays in regulatory actions;

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changes in interest rates, rates of inflation, including those rates which may be adjusted by public utility regulators;

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governmental, statutory, regulatory or administrative changes or initiatives affecting the electricity industry, including the market structure rules applicable to each market and price mitigation strategies adopted by Independent System Operators and Regional Transmission Organizations;

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risks associated with operating nuclear and other power generating facilities, including operating risks, nuclear fuel storage issues, failure, availability, efficiency, output, cost of repairs and retrofits, in each case of equipment, and availability and cost of spare parts;

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availability and creditworthiness of counterparties and the resulting effects on liquidity in the power and fuel markets and/or the ability of counterparties to pay amounts owed in excess of collateral provided in support of their obligations;

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cost and availability of labor, equipment and materials;

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the ability to obtain sufficient insurance, including insurance relating to SCE's nuclear facilities and wildfire-related liability, and to recover the costs of such insurance;

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ability to recover uninsured losses in connection with wildfire-related liability;

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effects of legal proceedings, changes in or interpretations of tax laws, rates or policies, and changes in accounting standards;

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potential for penalties or disallowances caused by non-compliance with applicable laws and regulations;

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outcome of disputes with the IRS and other tax authorities regarding tax positions taken by Edison International;

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cost and availability of coal, natural gas, fuel oil, and nuclear fuel, and related transportation to the extent not recovered through regulated rate cost escalation provisions or balancing accounts;

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cost and availability of emission credits or allowances for emission credits;

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transmission congestion in and to each market area and the resulting differences in prices between delivery points;

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ability to provide sufficient collateral in support of hedging activities and power and fuel purchases;

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risk of counterparty default in hedging transactions or power-purchase and fuel contracts;

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weather conditions, natural disasters and other unforeseen events;

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risks inherent in the development of generation projects and transmission and distribution infrastructure replacement and expansion projects, including those related to project site identification, financing, construction, permitting, and governmental approvals; and

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risks that competing transmission systems will be built by merchant transmission providers in SCE's territory.

See "Risk Factors" in Part I, Item 1A of this report for additional information on risks and uncertainties that could cause results to differ from those currently expected 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. 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 U.S. Securities and Exchange Commission.

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GLOSSARY

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

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PART I

ITEM 1. BUSINESS

SCE is an investor-owned public utility primarily engaged in the business of supplying electricity 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 over 400 cities and communities with a collective population of more than 13 million people. In 2009, SCE's total operating revenue was derived as follows: 42% commercial customers, 39% residential customers, 6% industrial customers, 2% resale sales, 6% public authorities, and 5% agricultural and other customers. SCE had 17,348 full-time employees at December 31, 2009.

SCE makes available, free of charge on www.edisoninvestor.com, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statement and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after SCE electronically files such material with, or furnishes it to, the SEC. Such reports are also available on the SEC's internet website, www.sec.gov. The information contained on, or connected to, the Edison investor website is not incorporated by reference into this report.

Financial Information About Geographic Areas

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.

Regulation

CPUC

SCE's retail operations are subject to regulation by the California Public Utilities Commission ("CPUC"). The CPUC has the authority to regulate, among other things, retail rates, energy purchases on behalf of retail customers, rate of return, rates of depreciation, issuance of securities, disposition of utility assets and facilities, oversight of nuclear decommissioning, and aspects of the construction, planning and project site identification of the electricity transmission system.

Resource Adequacy Requirements

The CPUC has established resource adequacy requirements, which require SCE to procure adequate electricity to meet its expected customer needs on both a system-wide and a local basis. SCE would be subject to penalties if it failed to meet the requirements. SCE complied with the resource adequacy requirements in 2009 and expects to comply in 2010.

Procurement of Renewable Resources

California law requires SCE to increase its procurement of energy from 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. Under the

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CPUC's current rules, the maximum penalty for inability to achieve renewable procurement targets is $25 million per year. SCE's ability to meet the RPS target depends largely on the ability of third parties to meet contractual obligations to deliver power to SCE. Flexible compliance rules, such as banking of past surplus and earmarking of future deliveries from executed contracts, are also available. SCE does not believe it will be assessed penalties for 2009 or the prior years and cannot predict whether it will be assessed penalties for future years.

FERC

SCE's wholesale operations (including sales of electricity into the wholesale markets) are subject to regulation by the Federal Energy Regulatory Commission ("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.

Reliability Standards

On July 20, 2006, the FERC certified the North American Electric Reliability Corporation ("NERC") as its Electric Reliability Organization to establish and enforce reliability standards for the bulk power system. Compliance with these standards became mandatory on June 18, 2007. SCE believes it has taken appropriate steps to be compliant with current NERC reliability standards that apply to its operations.

CEC

The construction, planning, and project site identification of SCE's power plants within California are subject to the jurisdiction of the California Energy Commission ("CEC") (for plants 50 MW or greater). The CEC is responsible for forecasting future energy needs. These forecasts are used by the CPUC in determining the adequacy of SCE's electricity procurement plans. California law prohibits the CEC from siting or permitting a new nuclear power plant in California until it finds a federally approved and demonstrated method for the disposal of nuclear waste.

Nuclear Power Plant Regulation

SCE is subject to the jurisdiction of the U.S. Nuclear Regulatory Commission ("NRC") with respect to San Onofre and Palo Verde Nuclear Generating Stations. NRC requirements govern the granting, amendment, and extension of licenses for the construction and operation of nuclear power plants and subject those power plants to continuing oversight, inspection, and performance assessment with respect to plant operation and related activities.

San Onofre is currently addressing a number of regulatory and performance issues. The NRC is requiring SCE to take actions to provide greater assurance of compliance by San Onofre personnel with applicable NRC requirements and procedures. SCE is currently implementing plans to address the identified issues. The NRC has continued to affirm that San Onofre has been operated and is being operated safely; however, the cumulative impact of these regulatory and performance issues is an increase in management focus and other resources applied at San Onofre.

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Information about nuclear decommissioning can be found in "Item 8. SCE Notes to Consolidated Financial Statements—Note 1. Summary of Significant Accounting Policies and Note 6. Commitments and Contingencies." Information about nuclear insurance can be found in "Item 8. SCE Notes to Consolidated Financial Statements—Note 6. Commitments and Contingencies."

Transmission and Substation Facilities Regulation

The construction, planning and project site identification of SCE's transmission lines and substation facilities require the approval of many governmental agencies and compliance with various laws. These agencies include utility regulatory commissions such as the CPUC and other state regulatory agencies depending on the project location; the Independent System Operator ("ISO"), and other environmental, land management and resource agencies such as the Bureau of Land Management, the U.S. Forest Service, and the California Department of Fish and Game; and Regional Water Quality Control Boards. 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.

Relationship with Certain Affiliated Companies

SCE is subject to CPUC affiliate transaction rules and compliance plans governing the relationship between SCE and its affiliates.

Overview of Ratemaking Mechanisms

SCE sells electricity to retail customers at rates authorized by the CPUC. SCE sells transmission service and wholesale power at rates authorized by the FERC.

Base Rates

Base rates authorized by the CPUC and the FERC are intended to provide SCE a reasonable opportunity to recover its costs and earn a return on its net investment in generation, transmission and distribution facilities (or "rate base"). These base rates provide for recovery of operations and maintenance costs, capital-related carrying costs (depreciation, taxes and interest) and a return or profit, on a forecast basis.

CPUC Base Rates

Base rates for SCE's generation and distribution functions are authorized by the CPUC through triennial General Rate Case ("GRC") proceedings. The CPUC sets an annual revenue requirement for the base year which is made up of the carrying cost on capital investment (depreciation, return and taxes), plus the authorized level of operation and maintenance expense. The return is established by multiplying an authorized rate of return, determined in the separate cost of capital proceedings (as discussed below), by the generation and distribution rate base. In the GRC proceedings, the CPUC also approves capital spending on a forecast basis. Adjustments to the revenue requirement for the remaining two years of a typical three-year GRC cycle are requested, based on criteria established in the GRC proceeding, which generally include annual allowances for escalation in operation and

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maintenance costs, forecasted changes in capital-related investments and the timing and number of expected nuclear refueling outages. SCE's most recent GRC decision for the 2009-2011 period was issued in March 2009 and was effective as of January 1, 2009. SCE expects to begin proceedings for the 2012 GRC in the third quarter of 2010. As part of the GRC, the CPUC has authorized a revenue decoupling mechanism, which allows for the difference between the revenue authorized and the actual volume of electricity sales to be collected from or refunded to ratepayers. Accordingly, SCE does not bear the volumetric risk related to electricity sales.

The CPUC regulates SCE's capital structure and authorized rate of return. SCE's current authorized capital structure is 48% common equity, 43% long-term debt and 9% preferred equity. SCE's current authorized cost of capital consists of: cost of long-term debt of 6.22%, authorized cost of preferred equity of 6.01% and authorized return on common equity of 11.5%. In 2008, the CPUC approved a multi-year cost of capital mechanism, which allows for annual adjustments if certain thresholds are reached. SCE's earnings may be impacted when actual financing costs are above or below its authorized costs for long-term debt and preferred equity financings.

FERC Base Rates

Base rates for SCE's transmission functions provide a rate of return and are authorized by the FERC, in periodic proceedings that are similar to the CPUC GRC proceeding. Requested rate changes at the FERC are generally implemented before final approval of the application, with revenue collected prior to a final FERC decision being subject to refund. FERC-approved base rate revenues that vary from forecast are not subject to balancing account mechanisms or otherwise recoverable or refundable and therefore will impact earnings.

Cost-Recovery Rates

Cost-recovery mechanisms allow SCE to recover its costs, but do not allow a return or profit. These mechanisms are used to recover SCE's costs of fuel, purchased-power, demand-side management programs, nuclear decommissioning, public purpose programs, certain operation and maintenance expenses, and depreciation expense related to certain projects. Although the CPUC authorizes balancing account mechanisms for such costs to refund or recover any differences between forecasted and actual costs, under- or over-collections in these balancing accounts do impact cash flows and can build rapidly.

The CPUC also uses a mechanism known as a "balancing account" to eliminate the effect on earnings that differences in revenue resulting from actual and forecast electricity sales may have. Under this mechanism, the difference in revenue between the actual and the forecast electricity sales is recovered from or refunded to ratepayers and therefore does not impact SCE's earnings.

SCE's balancing account for fuel and power procurement-related costs is established under the Energy Resource Recovery Account ("ERRA") Mechanism. SCE files annual forecasts of the costs that it expects to incur during the following year and sets rates using forecasts. The CPUC has established a "trigger" mechanism for the ERRA balancing account that allows for a rate adjustment if the balancing account over-collection or under-collection exceeds 5% of SCE's prior year's generation revenue.

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The majority of costs eligible for recovery through cost-recovery rates are subject to CPUC reasonableness reviews, and thus could negatively impact earnings and cash flows if found to be unreasonable and disallowed.

Energy Efficiency Shareholder Risk/Reward Incentive Mechanism

The CPUC has adopted an Energy Efficiency Risk/Reward Incentive Mechanism, which allows for both financial incentives and economic penalties based on SCE's performance toward meeting goals set for it by the CPUC for energy efficiency. Under this mechanism, SCE has the opportunity to earn an incentive if it achieves 85% or more of its energy efficiency goals for the three year period. Economic penalties would be imposed in the event SCE achieves less than 65% of its goals. The mechanism allows for two annual progress payments, subject to holdback percentages, for progress towards meeting the goals and a third payment for final performance on the goals, which includes the payment of any holdbacks. SCE may retain the first and second progress payments as long as it meets a minimum of 65% of the goals. If SCE does not meet the 65% level, the amount of the progress payments and economic penalties would be deducted from future incentive payments. Both incentives and economic penalties for each three-year period are capped at $200 million.

In January 2009, the CPUC issued a new rulemaking intended to review the framework of the Energy Efficiency Risk/Reward Incentive Mechanism. The CPUC has yet to release a Decision on a new framework.

CDWR-Related Rates

As a result of the California energy crisis, in 2001 the California Department of Water Resources ("CDWR") entered into contracts to purchase power for sale at cost directly to SCE's retail customers and issued bonds to finance those power purchases. The CDWR's total statewide power charge and bond charge revenue requirements are allocated by the CPUC among the customers of the Investor-Owned Utilities. SCE bills and collects from its customers the costs of power purchased and sold by the CDWR, CDWR bond-related charges and direct access exit fees. The CDWR-related charges and a portion of direct access exit fees that are remitted directly to the CDWR are not recognized as electric utility revenue by SCE and therefore have no impact on SCE's earnings; however, they do impact customer rates.

Competition

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. While California law provides only limited opportunities for customers to choose to purchase power directly from an energy service provider other than SCE, a California law was adopted in 2009 that permits a limited, phased-in expansion of customer choice (direct access) for nonresidential customers. 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.

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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 number of customers purchasing power from SCE, but those customers typically continue to utilize and pay for SCE's transmission and distribution services.

In the area of transmission infrastructure, SCE may experience increased competition from merchant transmission providers.

Purchased Power and Fuel Supply

SCE obtains the power needed to serve its customers from its generating facilities and from purchases from qualifying facilities ("QFs"), independent power producers, renewable power producers, the CAISO, 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 2009 were approximately: 44% purchased power; 23% CDWR; and 33% SCE-owned generation.

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 peaker plants, which are supplemental plants that only operate when demand for power is high. All of the physical gas purchased by SCE in 2009 was purchased through competitive bidding.

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 "Item 8. SCE Notes to Consolidated Financial Statements—Note 6. Commitments and Contingencies."

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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.

CAISO Wholesale Energy Market

In California and other states, wholesale energy markets exist through which competing electricity generators offer their electricity output to electricity retailers. Each state's wholesale electricity market is generally operated by its state ISO or a regional RTO. California's wholesale electricity market is operated by the CAISO. In 2006, the California Independent System Operator ("CAISO") began its Market Redesign and Technology Upgrade ("MRTU") program to redesign and upgrade the wholesale energy market across its controlled grid. The MRTU market design allows the CAISO to schedule power in hourly increments with hourly prices through a real-time and day-ahead market that combines energy, ancillary services, unit commitment and congestion management. These MRTU features became effective in March 2009 and SCE began participating in the day-ahead and real-time markets for the sale of its generation and purchases of its load requirements.

The MRTU structure uses a nodal locational pricing model, which sets wholesale electricity prices at 3,000 different system points (nodes) that reflect local generation and delivery costs, as opposed to the previous system of three broad zonal prices. Generally, SCE schedules its electricity generation assets to serve its load but when it has excess generation or the market price of power is more economic than its own generation, SCE may sell power from utility-owned generation assets and existing power procurement contracts on, or buy generation and/or ancillary services to meet its load requirements from, the IFM. SCE will offer to buy its generation at nodes near the source of the generation, but will take delivery at nodes throughout SCE's service territory. Congestion may occur when available energy cannot be delivered to all loads due to transmission constraints capacity, which results in transmission congestion charges and differences in prices at various nodes. The CAISO also offers congestion revenue rights or CRRs, a commodity that entitles the holder to receive (or pay) the value of transmission congestion between specific nodes, acting as an economic hedge against transmission congestion charges.

Properties

SCE supplies electricity to its customers through extensive transmission and distribution networks. Its transmission facilities, which are located primarily in California but also in Nevada and Arizona, deliver power from generating sources to the distribution network and consist of 33 kV, 55 kV, 66 kV, 115 kV, and 161 kV lines; 220 kV and 500 kV lines; and 893 substations. SCE's distribution system, which takes power from substations to customers, includes over 70,000 circuit miles of overhead lines, 43,500 circuit miles of underground lines, 1.46 million poles, over 720 distribution substations, approximately 715,600 transformers, and 813,000 area lights and streetlights, all of which are located in California.

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SCE owns the following generating facilities (and operates all of these facilities except Palo Verde and Four Corners, which are operated by Arizona Public Service Company ("APS")):

San Onofre, Four Corners, certain of SCE's substations, and portions of its transmission, distribution and communication systems are located on lands owned by the United States or others under licenses, permits, easements or leases, or on public streets or highways pursuant to franchises. Certain of the documents evidencing such rights obligate SCE, under specified circumstances and at its expense, to relocate such 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 U.S.-owned lands pursuant to 30- to 50-year FERC licenses that expire at various times between 2010 and 2040. 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

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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 objectives greater consideration in the licensing process.

Substantially all of SCE's properties are subject to the lien of a trust indenture securing first and refunding mortgage bonds, of which approximately $6.40 billion in principal amount was outstanding on February 26, 2010.

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 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.

Insurance

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.

Severe wildfires in California have given rise to large damage claims against California utilities. Additionally, California law includes a doctrine of inverse condemnation that imposes strict liability (including liability for a claimant's attorneys' fees) for fire damage caused to private property by a utility's electric facilities that serve the public. These damage claims and the related doctrine may affect SCE's liability insurance levels and cost. On September 1, 2009, SCE renewed its insurance coverage, which included coverage for wildfire liabilities up to a reduced limit of $500 million (with an increased self-insured retention of $10 million per wildfire occurrence). Various coverage limitations within the policies that make up the insurance coverage could result in substantially higher self-insured costs in the event of multiple wildfire occurrences during the policy period (September 1, 2009 to August 31, 2010). SCE may experience further coverage reductions and/or increased insurance costs in future years. No assurance can be given that future losses will not exceed the limits of SCE's insurance coverage.

Seasonality

For a discussion of seasonality of SCE's revenues, see "Electric Utility Results of Operations—Supplemental Operating Revenue Information" in the MD&A.

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Environmental Matters

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's projected environmental capital expenditures and additional information about environmental matters affecting SCE appear in the MD&A under the heading "Liquidity and Capital Resources—Capital Investment Plan" and in "Item 8. SCE Notes to Consolidated Financial Statements—Note 6. Commitments and Contingencies—Environmental Remediation."

Climate Change

There have been a number of efforts at both the federal and state legislative and regulatory levels to adopt or enact regulations to reduce green house gas emissions. Any climate change regulation or other legal obligation that would require substantial reductions in emissions of greenhouse gases or that would impose additional costs or charges for the emission of greenhouse gases could significantly increase the cost of generating electricity from fossil fuels, especially coal, as well as the cost of purchased power, which could adversely affect SCE's business.

Federal Legislative/Regulatory Developments

In June 2009, the U.S. House of Representatives passed the American Clean Energy and Security Act. The bill, which was endorsed by SCE's parent company, Edison International, would establish a cap-and-trade system for greenhouse gas emissions commencing in 2012. Under the cap-and-trade system, a cap to reduce aggregate greenhouse gas emissions from all covered entities would be established and decline over time. Emitters of greenhouse gases would be required to have allowances for their greenhouse gas emissions during a relevant measurement period. The bill would provide for stated portions of required allowances to be allocated free of charge in declining amounts over time. Emitters of greenhouse gases would have to purchase the remainder of their required allowances in the open market, although a portion may be provided by so-called offset credits (for alternative greenhouse gas emission reduction efforts). Similar legislation was introduced in the U.S. Senate in September 2009. SCE cannot predict whether legislation imposing limits on greenhouse gas emissions in the U.S. will be passed in 2010 and the timing, content and potential effects on SCE of any legislation that may be enacted remain uncertain.

Even if Congress does not pass legislation mandating greenhouse gas emissions reductions, regulatory developments under the Clean Air Act ("CAA") may also result in greenhouse gas emissions requirements that could affect SCE. In April 2007, the U.S. Supreme Court held, in Massachusetts, et al v. Environmental Protection Agency, that greenhouse gases are "air

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pollutants" under the CAA and that that the US EPA has a duty to determine whether greenhouse gas emissions from new motor vehicles contribute to climate change or offer a reasoned explanation for its failure to make such a determination. In response to this decision, in December 2009, the US EPA issued a finding that certain greenhouse gases, including carbon dioxide, endanger the public health and welfare, which enables the US EPA to establish greenhouse gas emissions limits for new light-duty vehicles. It is expected that the US EPA will issue the final light-duty vehicle emissions limits in March 2010.

The December 2009 endangerment finding will trigger future regulation of stationary sources of greenhouse gases, such as power plants, which the US EPA plans to phase in beginning in 2011. In addition, when the regulation of greenhouse gases from light-duty vehicles is finalized, greenhouse gas emissions will become subject to review under the CAA's Prevention of Significant Deterioration ("PSD") (construction or modification of major sources) permit program. Sources subject to a PSD review for greenhouse gases would be required to use best available control technology ("BACT") to control greenhouse gas emissions. Because carbon dioxide is emitted in greater quantities than other CAA-regulated pollutants, regulating it under the PSD Program would cover a large number of sources. To avoid the regulatory and enforcement consequences of such an outcome, in November 2009 the US EPA proposed a regulation, known as the "greenhouse gas tailoring rule." The greenhouse gas tailoring rule would redefine the PSD program to increase the threshold emission limit of carbon dioxide equivalents in a year from 250 tons to 25,000 metric tons. Whether or not this regulation is finalized, it is likely that SCE's fossil-fueled generating facilities would be major sources for purposes of the PSD programs. However, because the current PSD proposal affects only new or modified sources, it is not expected to have an immediate effect on SCE's existing generating plants. If SCE is required to install pollution controls in the future or otherwise modify its operations in order to reduce carbon dioxide emissions, the impact will depend on the nature and timing of the controls to be applied, both of which remain uncertain. SCE does not believe that currently there are commercially and technically feasible, full scale methods to control greenhouse gas emissions from its existing fossil-fueled generating facilities.

State Legislative/Regulatory Developments

California has enacted two laws regarding greenhouse gas emissions. The first law, the California Global Warming Solutions Act of 2006 (also referred to as AB 32), establishes a comprehensive program to reduce greenhouse gas emissions. AB 32 requires the California Air Resources Board ("CARB") to develop regulations, potentially including market-based compliance mechanisms, to reduce California's greenhouse gas emissions to 1990 levels by 2020. The CARB's mandatory program will commence in 2012 and will implement incremental reductions aimed at reducing greenhouse gas emissions to 1990 levels by 2020. The CARB has released preliminary draft regulations establishing a California cap-and-trade program, which include revisions to the CARB's mandatory greenhouse gas emissions reporting regulation and are expected to be finalized by the CARB in October 2010.

The second law, SB 1368, required the CPUC and the California Energy Commission ("CEC") to adopt greenhouse gas emission performance standards that restrict the ability of investor owned and publicly owned utilities, respectively to enter into long-term arrangements

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for the purchase of electricity. These standards must equal the performance of a combined-cycle gas turbine generator. The standards that have been adopted prohibit California load-serving entities, including SCE, from entering into long-term financial commitments with generators that emit more than 1,100 pounds of CO₂ per MWh, which includes most coal-fired plants. SB 1368 also affects the ability of utilities to make long-term capital investments in generators that do not meet the emission performance standards. SB 1368 may prohibit SCE from making emission control expenditures at Four Corners.

California law also requires SCE to increase its procurement of electricity generated from 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 such resources by no later than December 31, 2010 or such later date as flexible compliance requirements permit. In addition, in September 2009, Governor Schwarzenegger issued an executive order directing the CARB to adopt a regulation consistent with 33% of retail sellers' annual electricity sales being obtained from renewable energy sources by 2020. The executive order provides that the regulation may accelerate or expand the timeframe for compliance as well as increase the targeted percentage of annual electricity sales to be obtained from renewable resources, based on a thorough assessment of relevant factors.

Regional Initiatives

There are a number of regional initiatives relating to greenhouse gas 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 legislation would preempt regional or state initiatives, since these initiatives are in varying stages of development and implementation, although such preemption could simplify compliance by reducing regulatory duplication. If state and/or regional initiatives remain in effect after federal legislation is enacted, generators could be required to satisfy them in addition to federal standards.

Arizona, California, Montana, New Mexico, Oregon, Utah, Washington, and the Canadian provinces of British Columbia, Manitoba, Ontario and Quebec launched the Western Climate Initiative to develop strategies to reduce greenhouse gas emissions in the region to 15% below 2005 levels by 2020. In September 2008, the partners released recommendations for the regional cap-and-trade program to help achieve that reduction goal. In February 2010, Arizona gave notice that it would not take part in the Western Climate Initiative's cap-and-trade program.

Litigation Developments

In 2009, three courts issued decisions in cases involving the question of whether emissions of greenhouse gases from power plants and other large sources could constitute a public nuisance, making the sources potentially liable for damages or other remedies.

In October 2009, a California federal district court dismissed the complaint that had been filed by a native Alaskan village and the Kivalina Tribe in February 2008 against 24 defendants, including Edison International, who directly or indirectly engaged in the electric

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generating, oil and gas, or coal mining lines of business. Plaintiffs had alleged greenhouse gas emissions from the defendants' business activities contributed to global warming impacts that are melting the Arctic sea ice that protects the village from winter storms and that the village would soon need to be abandoned or relocated at a cost of between $95 million and $400 million. The court dismissed the plaintiffs' federal nuisance claims stating that they were inappropriate for judicial resolution because they required policy choices that were reserved to the legislative or executive branches of the government (the "political question doctrine"). The court also held that the plaintiffs did not have standing under federal law to bring the case, in part because of the lack of connection between the defendants' conduct and the harm that plaintiffs alleged was occurring. The court also dismissed plaintiffs' state law nuisance claims, but without prejudice to those claims being re-filed in state court. The plaintiffs have appealed the dismissal order to the Ninth Circuit Court of Appeals.

In contrast to the district court decision in Kivalina, the U.S. Court of Appeals for the Second Circuit, in September 2009, and the U.S. Court of Appeals for the Fifth Circuit, in October 2009, reversed and remanded lower court decisions that had dismissed complaints (filed in New York and Mississippi, respectively), against electric utilities and others, for injunctive relief and/or damages allegedly arising as a result of greenhouse gas emissions. These courts held that plaintiffs had standing and that their claims (sounding in various common law theories, including public nuisance in the New York case and public nuisance, private nuisance, trespass and negligence in the Mississippi case) were not barred by the political question doctrine. Neither Edison International nor its subsidiaries was named as a defendant in the New York case. At the time the action was dismissed by the court in Mississippi, the plaintiffs were seeking to amend their complaint to include Edison International and several affiliates of Edison International, including SCE, as defendants.

Each of these differing rulings remains subject to appeal, rehearing, or potential review by the U.S. Supreme Court, and thus the ultimate impact of these cases remains uncertain. In addition, SCE cannot predict whether the appellate decisions will result in the filing of new actions with similar claims or whether Congress, in considering climate legislation, will address directly the availability of courts for these sorts of claims.

Emissions Data Reporting

SCE's independently certified greenhouse gas emission data for 2007, as reported to the California Climate Action Registry, showed that SCE emitted 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. Beginning with 2008 data, SCE will be reporting to TCR (as described below) and to the CARB. SCE will begin reporting 2010 data to the US EPA in 2011. SCE reported 2008 greenhouse gas emission data to the CARB in June 2009. The CARB reporting is done in three parts: greenhouse gas emissions from SCE-owned generation, sulfur hexafluoride (SF₆) emissions from SCE-owned or -operated equipment, and transaction reporting of MWhs purchased and resource types (from which the CARB calculates total greenhouse gas emissions). The CARB has not yet published its calculations on SCE's 2008 data.

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Edison International, SCE's parent holding company, became a founding reporter to TCR, formed in May 2008. The Climate Registry "(TCR") is a multi-national organization, which allows organizations to voluntarily inventory, verify, and publicly report their greenhouse gas emissions. As part of Edison International's reporting, SCE filed initial emissions data for 2008 in September 2009 with TCR. This information did not cover all of SCE-owned generation, as allowed under the TCR transitional reporter rules that apply for the first two years that an entity reports its emissions with TCR. Verified emissions data for Edison International, including data for SCE, are expected to be released publicly by TCR at the end of the second quarter of 2010.

In September 2009, the US EPA issued its Final Mandatory Greenhouse Gas Reporting Rule, which requires all energy sources within specified categories, including electric generation facilities, to begin monitoring GHG emissions in January 2010, and to submit annual reports to the US EPA by March 31 of each year, with the first report due on March 31, 2011.

Responses to Energy Demands and Future Greenhouse Gas Emission Constraints

Irrespective of the outcome of current federal or state legislative deliberations, SCE believes that regulation of greenhouse gas emissions is likely to develop, 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 creating a generation profile, from wind, solar, geothermal, biomass and small hydro plants, that will be adaptable to a variety of regulatory and energy use environments. Its renewables portfolio of owned and procured sources currently consists of: 1,583 MW from wind, 956 MW from geothermal, 360 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 customers for saving energy; and a voluntary demand response 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.

Corporate Governance Processes

SCE's Board of Directors regularly receives reports regarding environmental issues that affect SCE, including climate change issues.

Air Quality

The CAA establishes a comprehensive program to protect and improve the nation's air quality by regulating certain air emissions from mobile and stationary sources. The states implement and administer many of these programs and may impose additional or more stringent requirements under the CAA scheme. 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, but have their largest impact on the operation

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of coal-fired plants. The federal environmental regulations require states to adopt implementation plans for certain pollutants, known as SIPs, which are equal to or more stringent than the federal requirements. These plans detail how the state will attain the standards that are mandated by the relevant law or regulation.

The CAA requires the US EPA to review the available scientific data for six criteria pollutants and establish a concentration level in the ambient air for those substances that is adequate to protect public health and welfare. These concentration levels are known as national ambient air quality standards, or NAAQS. The six criteria pollutants are carbon monoxide, lead, nitrogen dioxide, ozone, particulate matter, and sulfur dioxide.

Each state identifies the areas within its boundaries that meet the NAAQS (attainment areas) and those that do not (non-attainment areas), and must develop a SIP both to bring non-attainment areas into compliance with the NAAQS and to maintain good air quality in attainment areas. All SIPs are submitted to the US EPA for approval. If a state fails to develop adequate plans, the US EPA will develop and implement a plan. The attainment status of areas can change, and states may be required to develop new SIPs that address these changes. Many of SCE's facilities are located in counties that have not attained NAAQS for ozone and fine particulate matter. NO_x emissions from power plants impact ambient air ozone levels and SO₂ emissions from power plants impact ambient air fine particulate matter levels.

Nitrogen Oxide and Sulfur Dioxide

Proposed NAAQS for Sulfur Dioxide

In November 2009, the US EPA proposed a new 1-hour NAAQS for SO₂. The new standard is proposed to be between 50 and 100 parts per billion. The US EPA is required by a consent decree to take final action by June 2, 2010. The proposed rule would require states to submit SIPs in 2014, with compliance by 2017.

Mercury – Clean Air Mercury Rule

Until new federal standards are developed to replace the CAMR, SCE will not be able to determine whether it will be necessary to undertake mercury emission control measures beyond those required by state regulations. The CAMR was established by the US EPA as an attempt to reduce mercury emissions from existing coal-fired power plants using a cap-and-trade program. SCE's coal-fired electric generating facility (SCE currently has a 48% ownership interest in Units 4 and 5 of Four Corners) emit mercury and other regulated emissions. As a result of the decision by the U.S. Court of Appeals for the D.C. Circuit in February 2007 that rejected both the CAMR and the related decision by the US EPA to remove oil- and coal-fired plants from the list of sources to be regulated under Section 112 of the CAA, until CAMR is replaced by a new mercury rule, mercury regulation will come from state regulatory bodies.

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Ozone and Particulates

National Ambient Air Quality Standards

In September 2006, the US EPA issued a final rule that would significantly reduce the 24-hour fine particulate standard (from 65 ug/m3 to 35 ug/m3), but in February 2009, the U.S. Court of Appeals for the D.C. Circuit remanded the annual fine particulate matter standard to the US EPA for further review.

Regional Haze

The regional haze rules under the CAA are designed to prevent impairment of visibility in certain federally designated areas. The goal of the rules is to restore visibility in mandatory federal Class I areas, such as national parks and wilderness areas, to natural background conditions by 2064. Sources such as power plants that are reasonably anticipated to contribute to visibility impairment in Class I areas may be required to install BART or implement other control strategies to meet regional haze control requirements. The US EPA issued a final rulemaking on regional haze in 2005 requiring emission controls that constitute BART for industrial facilities that emit air pollutants which reduce visibility by causing or contributing to regional haze. These amendments required states to develop implementation plans to comply with BART by December 2007, to identify the facilities that will have to reduce SO_2, NO_x and particulate matter emissions, and then to set BART emissions limits for those facilities. Failure to do so results in a federal implementation plan.

In relation to Four Corners, the US EPA requested that APS perform a regional haze BART analysis for Four Corners. The US EPA responded to APS' analysis, which proposed the installation of certain combustion control equipment, by issuing an advanced notice of proposed rulemaking that implied that post-combustion controls in the form of selective catalytic reduction (SCR) pollution control equipment would be BART for Four Corners. A final EPA determination on this matter is expected in late 2010. Until the final determination is issued, SCE cannot predict what pollution control equipment will be required at Four Corners and thus cannot accurately estimate the expenditures that would be necessary for such equipment. In any case, due to the investment constraints of SB 1368, the California law on greenhouse gas emission performance standards discussed above in "—Climate Change—State Legislative/Regulatory Developments," SCE does not expect to be able to participate in any investment in SCR post-combustion controls or combustion controls at Four Corners. SCE thus does not expect to enter into any long-term ownership arrangements for its share of Four Corners Units 4 and 5 after the 2016 expiration of the current participant agreements due to the investment constraints of SB 1368.

New Source Review Requirements ("NSR")

The NSR regulations impose certain requirements on facilities, such as electric generating stations, if modifications are made to air emissions sources at the facility. Since 1999, the US EPA has pursued a coordinated compliance and enforcement strategy to address CAA compliance issues at the nation's coal-fired power plants. The strategy has included both the filing of suits against a number of power plant owners, and the issuance of administrative notices of violation ("NOVs") to a number of power plant owners alleging NSR violations.

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In April 2009, APS, as operating agent of Four Corners, received a US EPA request pursuant to Section 114 of the CAA for information about Four Corners. The US EPA requested information about Four Corners and its operations, including information about Four Corners capital projects from 1990 to the present. APS has responded to the US EPA request. SCE understands that in other cases the US EPA has utilized similar Section 114 letters for examining whether power plants have triggered NSR requirements under the CAA and are therefore potentially subject to more stringent air pollution control requirements. No NSR enforcement-related proceedings have been initiated by the US EPA with respect to Four Corners. SCE cannot predict the outcome of this inquiry.

Water Quality

Clean Water Act

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 temperature 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.

In January 2007, the U.S. Court of Appeals for the Second Circuit rejected the US EPA rule on cooling water intake structures and remanded it to the US EPA. Among the key provisions remanded by the court were the use of cost-benefit analysis for determining the best technology available and the use of restoration to achieve compliance with the rule. On July 2007, the US EPA suspended the requirements for cooling water intake structures, pending further rulemaking. In April 2009, the U.S. Supreme Court reversed the Second Circuit and held that the US EPA may consider, but is not required to use, cost-benefit analysis in formulating regulations under Clean Water Act Section 316(b). The Court did not review the Second Circuit's rejection of the use of restoration as compliance with Section 316(b), which means the Second Circuit decision on this issue remains valid.

The US EPA is currently rewriting its rule, and it is unknown whether the revised regulations will use cost-benefit analysis. Because there are no defined compliance targets absent a new rule, SCE is reviewing a wide range of possible control technologies. Although the new rule could have a material impact on SCE, until the final compliance criteria have been published, SCE can not reasonably determine the financial impact.

Prohibition on the Use of Ocean-Based Once-Through Cooling

In June 2009 the California State Water Resources Control Board issued a draft "Statewide Water Quality Control Policy on the Use of Coastal and Estuarine Waters for Power Plant Cooling." The Policy would establish closed-cycle wet cooling as the best technology available for retrofitting existing "once through" cooled plants such as SCE's San Onofre, which use ocean water for cooling purposes. If the draft policy is adopted, it may significantly impact both operations at San Onofre and SCE's ability to procure timely generating capacity from fossil-fuel plants that use ocean water in once-through cooling systems. It may also impact

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system reliability and the cost of electricity to the extent other coastal power plants in California are forced to shut down or limit operations. The Policy has the potential to adversely affect California's nineteen once-through cooled power plants, which provide over 21,000 MW of combined in-state generation capacity, including over 9,100 MW of capacity interconnected within SCE's service territory.

Hazardous Substances and Hazardous Waste

Under various federal, state and local environmental laws and regulations, a current or previous owner or operator of any 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 for property damage, personal injury, natural resource damages, and investigation and remediation costs incurred by governmental entities and third parties in connection with these releases or threatened releases. Many of these laws, including the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, ("CERCLA"), 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 its 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 "Item 8. SCE Notes to Consolidated Financial Statements—Note 6 .Commitments and Contingencies."

Coal Combustion Wastes

US EPA regulations currently classify coal combustion wastes as solid wastes that are exempt from hazardous waste requirements. The exemption applies to fly ash, bottom ash, slag, and flue gas emission control wastes generated from the combustion of coal or other fossil fuels. The US EPA has studied coal combustion wastes extensively and in 2000 concluded that fossil fuel combustion wastes do not warrant regulation as a hazardous waste. The current classification of coal combustion wastes as exempt from hazardous waste requirements enables beneficial uses of coal combustion wastes, such as for cement production and fill materials.

The US EPA is expected to publish proposed regulations relating to coal combustion waste in 2010. Additional regulation of the storage, disposal and beneficial reuse of coal combustion waste could affect the management of such wastes and could require SCE to incur additional capital and operating costs with no assurance that the additional costs could be recovered. Additionally, SCE may be prohibited from making such expenditures under SB 1368, the California law on greenhouse gas emission performance standards (see "—Climate Change—State Legislative/Regulatory Developments" above for a description of SB 1368).

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ITEM 1A. RISK FACTORS

Regulatory Risks

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 and FERC 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, through the rates it charges its customers, as approved by the CPUC, 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 through the rates it is allowed to charge an adequate return on capital, including long-term debt and equity. If SCE is unable to recover material amounts of its costs in rates in a timely manner or recover an adequate return on capital, its financial condition and results of operations could be materially adversely affected.

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

SCE obtains energy, capacity, renewable attributes, and ancillary services needed to serve its customers from its own generating plants, as well as through contracts with energy producers and sellers. California law and CPUC decisions allow SCE to recover through the rates it is allowed to charge its customers 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 SCE's 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 through the rates it is allowed to charge its customers, 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 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 and this could have a material adverse effect on SCE's liquidity and financial condition if such costs cannot be recovered in a timely manner.

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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 Nuclear Regulatory Commission regulates SCE's nuclear power plants. The construction, planning, and project site identification 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 project site identification of transmission lines that are outside of California are subject to the regulation of the relevant state agency.

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.

Environmental Risks

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 considering several competing proposals to regulate greenhouse gas emissions. The U.S. Environmental Protection Agency has issued a finding that certain GHGs endanger the public health and welfare and are air pollutants that are subject to the Clean Air Act. 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 greenhouse gas emissions from coal-fired power plants and their potential role in climate change. The adoption of laws and regulations to implement greenhouse act 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,

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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.

Operating Risks

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, which involves 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:

•

operating limitations that may be imposed by environmental or other regulatory requirements;

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imposition of operational performance standards by agencies with regulatory oversight of SCE's facilities;

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environmental and personal injury liabilities caused by the operation of SCE's facilities;

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interruptions in fuel supply;

•

blackouts;

•

employee work force factors, including strikes, work stoppages or labor disputes;

•

weather, storms, earthquakes, fires, floods or other natural disasters;

•

acts of terrorism; and

•

explosions, accidents, mechanical breakdowns and other events that affect demand, result in power outages, reduce generating output or cause damage to SCE's assets or operations or those of third parties on which it relies.

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.

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 Nuclear Generating Station and is part owner of Palo Verde Nuclear Generating Station. The U.S. 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 the 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.

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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 $12.6 billion. SCE and other owners of the San Onofre and Palo Verde Nuclear Generating Stations have purchased the maximum private primary insurance available of $375 million per site. If this public liability limit 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, 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 under-collection 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 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.

Financing Risks

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

SCE's ability to fund operations and planned capital expenditure projects, as well as its ability to refinance debt and make scheduled payments of principal and interest, including to Edison International, 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 SCE's 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:

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current state and liquidity of financial markets;

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market prices for electricity or gas;

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changes in interest rates and rates of inflation;

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terrorist attacks or the threat of terrorist attacks on SCE's facilities or unrelated energy companies; and

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the overall health of the utility industry.

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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.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

The principal properties of SCE are described above in Part I, Item 1. Business under the heading "Properties."

ITEM 3. LEGAL PROCEEDINGS

Catalina South Coast Air Quality Management District Potential Environmental Proceeding

During the period 2006-2008, the South Coast Air Quality Management District (SCAQMD) issued five NOVs alleging violations of the NO_x emission limits and related Regional Clean Air Incentives Market (RECLAIM) trading credit (to offset NO_x emissions) requirements by certain of SCE's diesel generation units on Catalina Island. A settlement agreement, which resolves all of the NOVs, was fully executed in April 2009 and requires SCE to install new equipment by December 31, 2011 or pay a $3 million fine if the equipment is not installed by that date.

Navajo Nation Litigation

Information about the Navajo Nation litigation appears in the "Item 8. SCE Notes to Consolidated Financial Statements—Note 6. Commitments and Contingencies."

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

EXECUTIVE OFFICERS OF THE REGISTRANT

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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 and/or Edison International for more than five years, except for Mr. Ridenoure, 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:

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PART II

ITEM 4. RESERVED

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Certain information responding to Item 5 with respect to frequency and amount of cash dividends is included in "Item 8. SCE Notes to Consolidated Financial Statements Note 17. Quarterly Financial Data." 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.

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ITEM 6.    SELECTED FINANCIAL DATA

Selected Financial Data: 2005 – 2009

The selected financial data was derived from SCE's audited financial statements and is qualified in its entirety by the more detailed information and financial statements, including notes to these financial statements, included in this annual report.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

MANAGEMENT OVERVIEW

Introduction

This overview is presented in three sections:

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Highlights of operating results;

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SCE's capital investment plan to maintain reliability and expand the capability of its distribution and transmission infrastructure, support initiatives in California to increase renewable energy, construct and replace generating assets and deploy advanced metering capability; and

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Environmental developments, including regulatory and legal developments related to greenhouse gases and once-through cooling.

Highlights of Operating Results

SCE's earnings are prepared in accordance with generally accepted accounting principles used in the United States. Management uses core earnings for financial planning and for analysis of performance. Core earnings are also used when communicating with analysts and investors regarding our earnings results to facilitate comparisons of SCE's performance from period to period. Core earnings is a non-GAAP financial measure and may not be comparable to those of other companies. Core earnings are defined as earnings attributable to SCE less income or loss from significant discrete items that management does not consider representative of ongoing earnings, such as: settlement of prior year tax liabilities and non-recurring regulatory or legal proceedings.

SCE's 2009 core earnings increased from 2008 primarily due to higher operating income associated with the CPUC and FERC 2009 general rate case decisions, partially offset by higher income taxes. In addition, core earnings were favorably impacted from lower than planned financings during the year, primarily from cash received for tax-related timing differences and other benefits.

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During 2009, SCE received general rate case decisions from the CPUC and FERC, as follows:

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The CPUC issued a decision in SCE's 2009 GRC, authorizing a $4.83 billion revenue requirement for 2009, an increase of $512 million from SCE's 2008 revenue requirement, effective January 1, 2009. The CPUC also authorized a methodology that would result in an approximate revenue requirement of $5.04 billion in 2010 and $5.25 billion in 2011.

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The FERC approved a settlement to the 2009 rate case effective March 1, 2009. The settlement provides for a transmission revenue requirement of $448 million, an increase of $136 million over the previously authorized amount.

Changes in non-core items include the following:

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An after-tax earnings benefit of $306 million in 2009 resulted from the Global Settlement with the Internal Revenue Service, including a $5 million tax benefit recorded in the fourth quarter from a revised estimate of federal interest related to the settlement. The Global Settlement resolved all outstanding federal tax disputes and affirmative claims for tax years 1986 through 2002.

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An after-tax non-cash benefit of $46 million was recorded in 2009 from the transfer of the Mountainview power plant to utility rate base pursuant to approvals by the CPUC and FERC.

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An after-tax charge of $49 million in 2008 from a decision by the CPUC disallowing certain amounts and imposing penalties under its performance-based ratemaking program for the period 1997 – 2003.

See "Results of Operations" for discussion of SCE results of operations, including a comparison of 2008 results to 2007.

SCE Capital Program

SCE's capital program is focused primarily in five areas:

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Upgrading and constructing new transmission lines to expand capacity to utilize renewable energy, including the Tehachapi, Devers-Colorado River and Eldorado-Ivanpah projects;

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Maintaining reliability and expanding capability of SCE's transmission and distribution system;

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Developing and installing up to 250 MW of utility-owned solar photovoltaic generating facilities (generally ranging in size from 1 to 2 MW each) on commercial and industrial rooftops and other space in SCE's service territory;

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Replacing steam generators at San Onofre intended to enable operations until at least the end of its initial license period in 2022; and

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Installing "smart" meters in approximately 5.3 million households and small businesses referred to as Edison SmartConnect™.

SCE plans to utilize much of the cash currently generated from its operations and issuance of additional debt and preferred stock for its capital program. SCE's capital expenditures in 2009 totaled $2.9 billion. SCE projects that capital expenditures will be in the range of $3.3 billion

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to $4.0 billion in 2010 and that the 2010 – 2014 total capital investment plan will be in the range of $18 billion to $21.5 billion. The rate of actual capital spending will be affected by permitting, regulatory, market and other factors as discussed further under "Liquidity and Capital Resources—Capital Investment Plan."

Environmental Developments

Greenhouse Gas Regulation Developments

The nature of future environmental regulation and legislation will have a substantial impact on SCE. SCE believes that resolution of current uncertainties about the future, through well-balanced and appropriately flexible regulation and legislation, is needed to support the necessary evolution of the electric industry into using cleaner, more efficient infrastructure and to attract the capital ultimately needed for this effort. Legislative, regulatory, and legal developments related to potential controls over greenhouse gas emissions in the United States are ongoing. Actions to limit or reduce greenhouse gas emissions could significantly increase the cost of generating electricity from fossil fuels as well as the cost of purchased power. In the case of utilities, like SCE, these costs are generally borne by customers.

Recent significant developments include the following:

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Legislation to regulate greenhouse gas emissions continues to be considered by Congress; however, the timing, content, and potential effects on SCE of any greenhouse gas legislation that may be enacted remain uncertain.

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In December 2009, the US EPA issued a final finding that certain greenhouse gases, including carbon dioxide, threaten the public health and welfare. The US EPA has issued a proposed rule, known as the "greenhouse gas tailoring rule," under which all new and major modifications of existing stationary sources emitting 25,000 metric tons of carbon dioxide equivalents annually, including power plants, would be required to include BACT to minimize their greenhouse gas emissions. Since the current proposal affects only new or modified sources, it is not expected to have any immediate effect, if adopted, on SCE's existing fossil-fuel generating stations, but it could affect the cost of new construction or modifications. US EPA could also use its authority in the future to regulate existing sources of greenhouse gas emissions. If controls are required to be installed at SCE's facilities in the future in order to reduce greenhouse gas emissions pursuant to regulations issued by the US EPA or others, the potential impact will depend on the nature of the controls applied, which remains uncertain.

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Three recent court cases addressed the question of whether power plants that emit greenhouse gases constituted public nuisances that could be held liable for damages or other remedies. In one case (in which Edison International, the parent company of SCE, is a named defendant): a California federal district court dismissed the plaintiffs' claims. In the other two, federal courts of appeals permitted the suits to go forward. Each of these differing results remains subject to appeal and thus the ultimate impact of these cases remains uncertain. SCE cannot predict whether these recent decisions will result in the filing of new actions with similar claims or whether Congress, in considering climate legislation, will address directly the availability of courts for these sorts of claims.

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Governor Schwarzenegger issued an executive order to increase California's renewable energy goals from 20% to 33% and has directed the CARB to adopt a regulation consistent with 33% of retail sellers annual electricity sales being obtained from renewable energy sources by 2020. Achieving a 33% renewables portfolio standard in this timeframe is highly ambitious, given the magnitude of the infrastructure build-out required and the slow pace of transmission permitting and approvals. The CARB is also considering a number of direct regulations to reduce greenhouse gases in California, which requirements could go beyond those ultimately imposed by Congress or the US EPA.

Once-Through Cooling

Last year, the California State Water Resources Board released a draft policy, which would establish closed-cycle wet cooling as required technology for retrofitting existing once-through cooled plants like San Onofre and many of the existing gas-fired power plants along the California coast. If the policy is adopted by the Board, it may result in significant capital expenditures at San Onofre and may affect its operations. It may also significantly impact SCE's ability to procure generating capacity from fossil-fuel plants that use ocean water in once-through cooling systems. It may also impact system reliability and the cost of electricity to the extent other coastal power plants in California are forced to shut down or limit operations. The policy has the potential to adversely affect California's nineteen once-through cooled power plants, which provide over 21,000 MW of combined, in-state generation capacity, including over 9,100 MW of capacity interconnected within SCE's service territory.

RESULTS OF OPERATIONS

SCE's results of operations are derived mainly through two sources:

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Utility earning activities, which mainly represent CPUC and FERC-authorized base rates, which allow a reasonable return, and CPUC-authorized incentive mechanisms; and

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Utility cost-recovery activities, which mainly represent CPUC-authorized balancing accounts, which allow recovery of costs incurred or provide mechanisms to track and recover or refund differences in forecasted and actual amounts. Balancing accounts do not allow for a return.

Utility earning activities include base rates that are designed to recover forecasted operation and maintenance costs, certain capital-related carrying costs, interest, taxes and a return, including the return on capital projects recovered through balancing account mechanisms. Differences between authorized and actual results impact earnings. Also, included in utility earning activities are revenues or penalties related to incentive mechanisms, other operating revenue, and regulatory charges or disallowances, if any.

Utility cost-recovery activities include rates which provide for recovery, subject to reasonableness review, of fuel costs, purchased power costs, public purpose related-program costs (including energy efficiency and demand-side management programs), nuclear decommissioning expense, certain operation and maintenance expenses, and depreciation expense related to certain projects. There is no return for cost-recovery expenses.

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Electric Utility Results of Operations

The following table is a summary of SCE's results of operations for the periods indicated. The presentation below separately identifies utility earning activities and utility cost-recovery activities (including Big 4).