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96
PART II
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Global equity securities primarily include investments in
common stock that are valued based on quoted prices in
active markets and are classified as Level 1. Equity securities
also include commingled funds that are composed of equity
securities traded publicly on exchanges across multiple
industry sectors in the U.S. and other regions of the world.
Investments in these funds are classified as Level 2 because
price quotes 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 using evaluated pricing data such as broker quotes,
for similar securities adjusted for observable dierences.
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.
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. Exchange-traded options are valued using
observable market data and market-corroborated data
and 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. Market and credit risk
management utilizes models to derive pricing inputs for
the valuation of the Utility’s Level 3 instruments using
pricing inputs from brokers and historical data.
The Utility holds CRRs to hedge the financial risk of
CAISO-imposed congestion charges in the day-ahead
market. Limited market data is available in the CAISO
auction and between auction dates; therefore, the Utility
utilizes historical prices to forecast forward prices. CRRs
are classified as Level 3.
Level 3 Measurements and Sensitivity Analysis
The Utility’s market and credit risk management function,
which reports to the Chief Risk and Audit Ocer of the Utility,
is responsible for determining the fair value of the Utility’s
price risk management derivatives. The Utility’s finance and
risk management functions collaborate to determine the
appropriate fair value methodologies and classification for
each derivative. Inputs used and the fair value of Level 3
instruments are reviewed period-over-period and compared
with market conditions to determine reasonableness.
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 9 above.)
(inmillions)
FairValueat
AtDecember
ValuationTechnique
Unobservable
Input
FairValueMeasurement Assets Liabilities Range
()
Congestionrevenuerights    Marketapproach CRRauctionprices ()-
Powerpurchaseagreements -  Discountedcashflow Forwardprices -
() Representspricepermegawatt-hour
(inmillions)
FairValueat
AtDecember
ValuationTechnique
Unobservable
Input
FairValueMeasurement Assets Liabilities Range
()
Congestionrevenuerights   Marketapproach CRRauctionprices ()-
Powerpurchaseagreements -  Discountedcashflow Forwardprices -
() Representspricepermegawatt-hour