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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11: FAIR VALUE MEASUREMENTS (Continued)
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 December 31, 2012
(in millions)
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
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