Fair Value

12 Months Ended

Dec. 31, 2011

Fair Value [Abstract]

FAIR VALUE

FAIR VALUE

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in a principal or most advantageous market. Fair value is a market-based measurement that is determined based on inputs, which refer broadly to assumptions that market participants use in pricing assets or liabilities. These inputs can be readily observable, market corroborated or generally unobservable inputs. The Company makes certain assumptions it believes that market participants would use in pricing assets or liabilities, including assumptions about risk, and the risks inherent in the inputs to valuation techniques. Credit risk of the Company and its counterparties is incorporated in the valuation of assets and liabilities through the use of credit reserves, the impact of which was immaterial at December 31, 2011 and December 31, 2010. The Company believes it uses valuation techniques that maximize the use of observable market-based inputs and minimize the use of unobservable inputs.

A fair value hierarchy has been established, that prioritizes the inputs to valuation techniques used to measure fair value in three broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. All assets and liabilities are required to be classified in their entirety based on the lowest level of input that is significant to the fair value measurement in its entirety. Assessing the significance of a particular input may require judgment considering factors specific to the asset or liability, and may affect the valuation of the asset or liability and its placement within the fair value hierarchy. The Company classifies fair value balances based on the fair value hierarchy defined as follows:

• Level 1 — Consists of unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the reporting date.

• Level 2 — Consists of inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.

• Level 3 — Consists of unobservable inputs for assets or liabilities whose fair value is estimated based on internally developed models or methodologies using inputs that are generally less readily observable and supported by little, if any, market activity at the measurement date. Unobservable inputs are developed based on the best available information and subject to cost-benefit constraints.

The following table presents assets measured and recorded at fair value on a recurring basis as of December 31, 2011:

							Net Balance at
(in Millions)	Level 1		Level 2		Level 3		December 31, 2011
Assets:
Nuclear decommissioning trusts	$	577	$	360	$	—	$	937
Other investments	55		54		—		109
Derivative assets — FTRs	—		—		1		1
Total	$	632	$	414	$	1	$	1,047

							Net Balance at
(in Millions)	Level 1		Level 2		Level 3		December 31, 2011
Assets:
Current	$	—	$	—	$	1	$	1
Noncurrent(1)	632		414		—		1,046
Total Assets	$	632	$	414	$	1	$	1,047

The following table presents assets and liabilities measured and recorded at fair value on a recurring basis as of December 31, 2010:

								Net Balance at
(in Millions)	Level 1		Level 2			Level 3		December 31, 2010
Assets:
Nuclear decommissioning trusts	$	599	$	340		$	—	$	939
Other investments	52		55			—		107
Derivative assets — FTRs	—		—			2		2
Total	$	651	$	395		$	2	$	1,048
Liabilities:
Derivative liabilities — Emissions	—		(3		)	—		(3		)
Total	$	—	$	(3	)	$	—	$	(3	)
Net Assets at December 31, 2010	$	651	$	392		$	2	$	1,045

								Net Balance at
(in Millions)	Level 1		Level 2			Level 3		December 31, 2010
Assets:
Current	$	—	$	—		$	2	$	2
Noncurrent(1)	651		395			—		1,046
Total Assets	$	651	$	395		$	2	$	1,048
Liabilities:
Current	$	—	$	(3	)	$	—	$	(3	)
Total Liabilities	$	—	$	(3	)	$	—	$	(3	)
Net Assets at December 31, 2010	$	651	$	392		$	2	$	1,045

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(1) Includes $109 and $107 million of other investments that are included in the Consolidated Statements of Financial Position in Other Investments at December 31, 2011 and December 31, 2010, respectively.

The following table presents the fair value reconciliation of Level 3 assets and liabilities measured at fair value on a recurring basis for the years ended December 31, 2011 and 2010:

	Year Ended December 31
(in Millions)	2011			2010
Net Assets as of January 1	$	2		2
Change in fair value recorded in regulatory assets/liabilities	2			6
Purchases, issuances and settlements:
Settlements	(3		)	(6		)
Net Assets as of December 31	$	1		$	2
The amount of total gains (losses) included in regulatory assets and liabilities attributed to the change in unrealized gains (losses) related to regulatory assets and liabilities held at December 31, 2011 and 2010	$	1		$	2

Transfers in and transfers out of Level 3 represent existing assets or liabilities that were either previously categorized as a higher level and for which the inputs to the model became unobservable or assets and liabilities that were previously classified as Level 3 for which the lowest significant input became observable during the period. Transfers in and transfers out of Level 3 are reflected as if they had occurred at the beginning of the period. No transfers between Levels 1, 2 or 3 occurred in the years ended December 31, 2011 and December 31, 2010.

Nuclear Decommissioning Trusts and Other Investments

The nuclear decommissioning trusts and other investments hold debt and equity securities directly and indirectly through commingled funds and institutional mutual funds. Exchange-traded debt and equity securities held directly are valued using quoted market prices in actively traded markets. The commingled funds and institutional mutual funds which hold exchange-traded equity or debt securities are valued based on the underlying securities, using quoted prices in actively traded markets. Non-exchange-traded fixed income securities are valued based upon quotations available from brokers or pricing services. A primary price source is identified by asset type, class or issue for each security. The trustees monitor prices supplied by pricing services and may use a supplemental price source or change the primary price source of a given security if the trustees determine that another price source is considered to be preferable. The Company has obtained an understanding of how these prices are derived, including the nature and observability of the inputs used in deriving such prices. Additionally, the Company selectively corroborates the fair values of securities by comparison of market-based price sources.

Derivative Assets and Liabilities

Derivative assets and liabilities are comprised of physical and financial derivative contracts, including futures, forwards, options and swaps that are both exchange-traded and over-the-counter traded contracts. Various inputs are used to value derivatives depending on the type of contract and availability of market data. Exchange-traded derivative contracts are valued using quoted prices in active markets. The Company considers the following criteria in determining whether a market is considered active: frequency in which pricing information is updated, variability in pricing between sources or over time and the availability of public information. Other derivative contracts are valued based upon a variety of inputs including commodity market prices, broker quotes, interest rates, credit ratings, default rates, market-based seasonality and basis differential factors. The Company monitors the prices that are supplied by brokers and pricing services and may use a supplemental price source or change the primary price source of an index if prices become unavailable or another price source is determined to be more representative of fair value. The Company has obtained an understanding of how these prices are derived. Additionally, the Company selectively corroborates the fair value of its transactions by comparison of market-based price sources. Mathematical valuation models are used for derivatives for which external market data is not readily observable, such as contracts which extend beyond the actively traded reporting period.

Fair Value of Financial Instruments

The fair value of long-term debt is determined by using quoted market prices when available and a discounted cash flow analysis based upon estimated current borrowing rates when quoted market prices are not available. The table below shows the fair value and the carrying value for long-term debt securities. Certain other financial instruments, such as notes payable, customer deposits and notes receivable are not shown as carrying value approximates fair value. See Note 4 for further fair value information on financial and derivative instruments.

	December 31, 2011		December 31, 2010
	Fair Value	Carrying Value	Fair Value	Carrying Value
Long-Term Debt	$5.7 billion	$5.1 billion	$5.3 billion	$5.0 billion

Nuclear Decommissioning Trust Funds

Detroit Edison has a legal obligation to decommission its nuclear power plants following the expiration of their operating licenses. This obligation is reflected as an asset retirement obligation on the Consolidated Statements of Financial Position. Rates approved by the MPSC provide for the recovery of decommissioning costs of Fermi 2 and the disposal of low-level radioactive waste. Detroit Edison is continuing to fund FERC jurisdictional amounts for decommissioning even though explicit provisions are not included in FERC rates. See Note 7.

The following table summarizes the fair value of the nuclear decommissioning trust fund assets:

	December 31		December 31
(in Millions)	2011		2010
Fermi 2	$	915	$	910
Fermi 1	3		3
Low level radioactive waste	19		26
Total	$	937	$	939

At December 31, 2011, investments in the nuclear decommissioning trust funds consisted of approximately 57% in publicly traded equity securities, 41% in fixed debt instruments and 2% in cash equivalents. At December 31, 2010, investments in the nuclear decommissioning trust funds consisted of approximately 61% in publicly traded equity securities, 38% in fixed debt instruments and 1% in cash equivalents. The debt securities at both December 31, 2011 and December 31, 2010 had an average maturity of approximately 7 and 6 years, respectively.

The costs of securities sold are determined on the basis of specific identification. The following table sets forth the gains and losses and proceeds from the sale of securities by the nuclear decommissioning trust funds:

	Year Ended December 31
(in Millions)	2011			2010			2009
Realized gains	$	46		$	192		$	37
Realized losses	$	(38	)	$	(83	)	$	(55	)
Proceeds from sales of securities	$	80		$	377		$	295

Realized gains and losses from the sale of securities for the Fermi 2 and the low level radioactive waste funds are recorded to the Regulatory asset and Nuclear decommissioning liability. The following table sets forth the fair value and unrealized gains for the nuclear decommissioning trust funds:

	Fair		Unrealized
(in Millions)	Value		Gains
As of December 31, 2011
Equity securities	$	533	$	80
Debt securities	385		22
Cash and cash equivalents	19		—
	$	937	$	102
As of December 31, 2010
Equity securities	$	572	$	77
Debt securities	361		11
Cash and cash equivalents	6		—
	$	939	$	88

Securities held in the nuclear decommissioning trust funds are classified as available-for-sale. As Detroit Edison does not have the ability to hold impaired investments for a period of time sufficient to allow for the anticipated recovery of market value, all unrealized losses are considered to be other than temporary impairments.

Unrealized losses incurred by the Fermi 2 trust are recognized as a Regulatory asset. Detroit Edison recognized $67 million and $26 million of unrealized losses as Regulatory assets at December 31, 2011 and 2010, respectively. Since the decommissioning of Fermi 1 is funded by Detroit Edison rather than through a regulatory recovery mechanism, there is no corresponding regulatory asset treatment. Therefore, unrealized losses incurred by the Fermi 1 trust are recognized in earnings immediately. There were no unrealized losses recognized in 2011, 2010 and 2009 for Fermi 1.

Other Available-For-Sale Securities

The following table summarizes the fair value of the Company’s investment in available-for-sale debt and equity securities, excluding nuclear decommissioning trust fund assets:

	December 31, 2011				December 31, 2010
(in Millions)	Fair Value		Carrying value		Fair Value		Carrying Value
Cash equivalents	$	129	$	129	$	125	$	125
Equity securities	4		4		4		4

As of December 31, 2011 and 2010, these securities are comprised primarily of money-market and equity securities. Gains related to trading securities held at December 31, 2011, 2010 and 2009 were $3 million, $7 million and $8 million, respectively.