Fair Value Measurements

12 Months Ended

Dec. 31, 2012

Fair Value Measurements

NOTE 11: FAIR VALUE MEASUREMENTS

PG&E Corporation and the Utility measure their cash equivalents, trust assets, and price risk management instruments at fair value.  Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.  A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:

• Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

• Level 2 - Other inputs that are directly or indirectly observable in the marketplace.

• Level 3 - Unobservable inputs which are supported by little or no market activities.

The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

Assets and liabilities measured at fair value on a recurring basis for PG&E Corporation and the Utility are summarized below (assets held in rabbi trusts are held by PG&E Corporation and not the Utility):

	Fair Value Measurements
	At  December 31, 2012
(in millions)	Level 1		Level 2		Level 3		Netting (1)		Total
Assets:
Money market investments	$	209	$	-	$	-	$	-	$	209
Nuclear decommissioning trusts
Money market investments		21		-		-		-		21
U.S. equity securities		940		9		-		-		949
Non-U.S. equity securities		379		-		-		-		379
U.S. government and agency securities		681		139		-		-		820
Municipal securities		-		59		-		-		59
Other fixed-income securities		-		173		-		-		173
Total nuclear decommissioning trusts (2)		2,021		380		-		-		2,401
Price risk management instruments
(Note 10)
Electricity		1		60		80		6		147
Gas		-		5		1		(6)		-
Total price risk management instruments		1		65		81		-		147
Rabbi trusts
Fixed-income securities		-		30		-		-		30
Life insurance contracts		-		72		-		-		72
Total rabbi trusts		-		102		-		-		102
Long-term disability trust
Money market investments		10		-		-		-		10
U.S. equity securities		-		14		-		-		14
Non-U.S. equity securities		-		11		-		-		11
Fixed-income securities		-		136		-		-		136
Total long-term disability trust		10		161		-		-		171
Total assets	$	2,241	$	708	$	81	$	-	$	3,030
Liabilities:
Price risk management instruments
(Note 10)
Electricity	$	155	$	144	$	160	$	(156)	$	303
Gas		8		9		-		(9)		8
Total liabilities	$	163	$	153	$	160	$	(165)	$	311
(1) Includes the effect of the contractual ability to settle contracts under master netting agreements and margin cash collateral. (2) Excludes $240 million at December 31, 2012 primarily related to deferred taxes on appreciation of investment value.

	Fair Value Measurements
	At December 31, 2011
(in millions)	Level 1		Level 2		Level 3		Netting (1)		Total
Assets:
Money market investments	$	206	$	-	$	-	$	-	$	206
Nuclear decommissioning trusts
Money market investments		24		-		-		-		24
U.S. equity securities		841		8		-		-		849
Non-U.S. equity securities		323		-		-		-		323
U.S. government and agency securities		720		156		-		-		876
Municipal securities		-		58		-		-		58
Other fixed-income securities		-		99		-		-		99
Total nuclear decommissioning trusts (2)		1,908		321		-		-		2,229
Price risk management instruments
(Note 10)
Electricity		-		92		69		8		169
Gas		-		6		-		(3)		3
Total price risk management instruments		-		98		69		5		172
Rabbi trusts
Fixed-income securities		-		25		-		-		25
Life insurance contracts		-		67		-		-		67
Total rabbi trusts		-		92		-		-		92
Long-term disability trust
Money market investments		13		-		-		-		13
U.S. equity securities		-		15		-		-		15
Non-U.S. equity securities		-		9		-		-		9
Fixed-income securities		-		145		-		-		145
Total long-term disability trust		13		169		-		-		182
Total assets	$	2,127	$	680	$	69	$	5	$	2,881
Liabilities:
Price risk management instruments
(Note 10)
Electricity	$	411	$	289	$	143	$	(441)	$	402
Gas		31		13		-		(32)		12
Total liabilities	$	442	$	302	$	143	$	(473)	$	414
(1) Includes the effect of the contractual ability to settle contracts under master netting agreements and margin cash collateral. (2) Excludes $188 million at December 31, 2011 primarily related to deferred taxes on appreciation of investment value

.

Valuation Techniques

The following describes the valuation techniques used to measure the fair value of the assets and liabilities shown in the table above:

Money Market Investments

PG&E Corporation and the Utility invest in money market funds that seek to maintain a stable net asset value.  These funds invest in high quality, short-term, diversified money market instruments, such as U.S. Treasury bills, U.S. agency securities, certificates of deposit, and commercial paper with a maximum weighted average maturity of 60 days or less.  PG&E Corporation's and the Utility's investments in these money market funds are valued using unadjusted prices for identical assets in an active market and are thus classified as Level 1.  Money market funds are recorded as cash and cash equivalents in PG&E Corporation's and the Utility's Consolidated Balance Sheets.

Trust Assets

The assets held by the nuclear decommissioning trusts, the rabbi trusts related to the non-qualified deferred compensation plans, and the long-term disability trust are composed primarily of equity securities, debt securities, and life insurance policies.  In general, investments held in the trusts are exposed to various risks, such as interest rate, credit, and market volatility risks.

Equity securities primarily include investments in common stock, which are valued based on unadjusted prices for identical securities in active markets and are classified as Level 1.  Equity securities also include commingled funds composed of equity securities traded publicly on exchanges across multiple industry sectors in the U.S. and other regions of the world, which are classified as Level 2.  Price quotes for the assets held by these funds are readily observable and available.

Debt securities are primarily composed of U.S. government and agency securities, municipal securities, and other fixed-income securities, including corporate debt securities.  U.S. government and agency securities primarily consist of U.S. Treasury securities that are classified as Level 1 because the fair value is determined by observable market prices in active markets.  A market approach is generally used to estimate the fair value of debt securities classified as Level 2.  Under a market approach, fair values are determined based on evaluated pricing data, such as broker quotes, for similar securities adjusted for observable differences.  Significant inputs used in the valuation model generally include benchmark yield curves and issuer spreads.  The external credit ratings, coupon rate, and maturity of each security are considered in the valuation model, as applicable.

Price Risk Management Instruments

Price risk management instruments include physical and financial derivative contracts, such as power purchase agreements, forwards, swaps, options, and CRRs that are traded either on an exchange or over-the-counter.  (See Note 10 above.)

Power purchase agreements, forwards, and swaps are valued using a discounted cash flow model.  Exchange-traded forwards and swaps that are valued using observable market forward prices for the underlying commodity are classified as Level 1.  Over-the-counter forwards and swaps that are identical to exchange-traded forwards and swaps or are valued using forward prices from broker quotes that are corroborated with market data are classified as Level 2.  Long-dated power purchase agreements that are valued using significant unobservable data are classified as Level 3.  These Level 3 contracts are valued using either estimated basis adjustments from liquid trading points or techniques, including extrapolation from observable prices, when a contract term extends beyond a period for which market data is available.

Exchange-traded options are valued using observable market data and market-corroborated data and are classified as Level 2.  Over-the-counter options are classified as Level 3 and are valued using a standard option pricing model, which includes forward prices for the underlying commodity, time value at a risk-free rate, and volatility.  For periods where market data is not available, the Utility extrapolates observable data using internal models.

The Utility holds CRRs to hedge the financial risk of CAISO-imposed congestion charges in the day-ahead market.  CRRs are valued based on prices observed in the CAISO auction, which are discounted at the risk-free rate.  Limited market data is available in the CAISO auction and between auction dates; therefore, the Utility uses models to forecast CRR prices for those periods not covered in the auctions.  CRRs are classified as Level 3.

Transfers between Levels

PG&E Corporation and the Utility recognize any transfers between levels in the fair value hierarchy as of the end of the reporting period. For the year ended December 31, 2012, there were no significant transfer between levels.

At December 31, 2011, the valuation of price risk management over-the-counter forwards and swaps and exchange-traded options incorporated market observable and market corroborated inputs, where certain previously-considered unobservable inputs became observable.  Therefore, the Utility transferred these instruments out of Level 3 and into Level 2.  There were no significant transfers between Levels 1 and 2 in the year ended December 31, 2011.

Level 3 Measurements and Sensitivity Analysis

The Utility's Market and Credit Risk Management department is responsible for determining the fair value of the Utility's price risk management derivatives.  Market and Credit Risk Management reports to the Chief Risk Officer of the Utility.  Market and Credit Risk Management utilizes models to derive pricing inputs for the valuation of the Utility's Level 3 instruments.  These models use pricing inputs from brokers and historical data.  The Market and Credit Risk Management department and the Controller's organization collaborate to determine the appropriate fair value methodologies and classification for each derivative.  Inputs used and fair value of Level 3 instruments are reviewed period-over-period and compared with market conditions to determine reasonableness.  Valuation models and techniques are reviewed periodically.

CRRs and power purchase agreements are valued using historical prices or significant unobservable inputs derived from internally developed models.  Historical prices include CRR auction prices.  Unobservable inputs include forward electricity prices.  Significant increases or decreases in any of those inputs would result in a significantly higher or lower fair value, respectively.  All reasonable costs related to Level 3 instruments are expected to be recoverable through customer rates; therefore, there is no impact to net income resulting from changes in the fair value of these instruments.  (See Note 10 above.)

	Fair Value at
(in millions)	December 31, 2012
Fair Value Measurement	Assets		Liabilities		Valuation Technique	Unobservable Input	Range (1)
Congestion revenue rights	$	80	$	16	Market approach	CRR auction prices	$	(9.04) - 55.15
Power purchase agreements	$	-	$	145	Discounted cash flow	Forward prices	$	8.59 - 62.90
(1)Represents price per megawatt-hour

Level 3 Reconciliation

The following table presents the reconciliation for Level 3 price risk management instruments for the years ended December 31, 2012 and 2011, respectively:

	Price Risk Management Instruments
(in millions)	2012		2011
Liability balance as of January 1	$	(74)	$	(399)
Realized and unrealized gains (losses):
Included in regulatory assets and liabilities or balancing accounts (1)		(5)		122
Transfers out of Level 3		-		203
Liability balance as of December 31	$	(79)	$	(74)
(1)Price risk management activities are recoverable through customer rates, therefore, balancing account revenue is recorded for amounts settled and   purchased and there is no impact to net income. Unrealized gains and losses are deferred in regulatory liabilities and assets.

Financial Instruments

PG&E Corporation and the Utility use the following methods and assumptions in estimating fair value for financial instruments:

• The fair values of cash, restricted cash, net accounts receivable, short-term borrowings, accounts payable, customer deposits, and the Utility's variable rate pollution control bond loan agreements approximate their carrying values at December 31, 2012 and 2011, as they are short-term in nature or have interest rates that reset daily.  

• The fair values of the Utility's fixed-rate senior notes and fixed-rate pollution control bond loan agreements and PG&E Corporation's fixed-rate senior notes were based on quoted market prices at December 31, 2012 and 2011.  The fair value of the ERBs issued by PERF was also based on quoted market prices at December 31, 2011.

The carrying amount and fair value of PG&E Corporation's and the Utility's debt instruments were as follows (the table below excludes financial instruments with carrying values that approximate their fair values):

	At December 31,
	2012				2011
(in millions)	Carrying Amount		Level 2 Fair Value		Carrying Amount		Level 2 Fair Value
Debt (Note 4)
PG&E Corporation	$	349	$	371	$	349	$	380
Utility		11,645		13,946		10,545		12,543
Energy recovery bonds (Note 5)		-		-		423		433

Nuclear Decommissioning Trust Investments

The following table provides a summary of available-for-sale investments held in the Utility's nuclear decommissioning trusts:

				Total		Total
	Amortized			Unrealized		Unrealized		Total Fair
(in millions)	Cost			Gains		Losses		Value (1)
As of December, 2012
Money market investments	$	21	$	-	$	-	$	21
Equity securities
U.S.		331		618		-		949
Non-U.S.		199		181		(1)		379
Debt securities
U.S. government and agency
securities		723		97		-		820
Municipal securities		56		4		(1)		59
Other fixed-income securities		168		5		-		173
Total	$	1,498	$	905	$	(2)	$	2,401
As of December 31, 2011
Money market investments	$	24	$	-	$	-	$	24
Equity securities
U.S.		334		518		(3)		849
Non-U.S.		194		131		(2)		323
Debt securities
U.S. government and agency securities		774		102		-		876
Municipal securities		56		2		-		58
Other fixed-income securities		96		3		-		99
Total	$	1,478	$	756	$	(5)	$	2,229
(1) Excludes $240 million and $188 million at December 31, 2012 and December 31, 2011, respectively, primarily related to deferred taxes on appreciation of investment value.

The fair value of debt securities by contractual maturity is as follows:

(in millions)	As of December 31, 2012
Less than 1 year	$	5
1-5 years		456
5-10 years		218
More than 10 years		373
Total maturities of debt securities	$	1,052

The following table provides a summary of activity for the debt and equity securities:

	2012		2011		2010
(in millions)
Proceeds from sales and maturities of nuclear decommissioning trust
investments	$	1,133	$	1,928	$	1,405
Gross realized gains on sales of securities held as available-for-sale		19		43		42
Gross realized losses on sales of securities held as available-for-sale		(17)		(30)		(11)