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 (money market investments and assets held in rabbi trusts are held by PG&E Corporation and not the Utility). The 2010 presentation has been changed to reflect gross assets and liabilities by level to conform to the current period presentation. Additionally, the Company corrected $125 million that was netted and classified inappropriately between Level 3 price risk management instrument assets and liabilities and other immaterial price risk management instrument changes.


	Fair Value Measurements
	At September 30, 2011										At December 31, 2010
(in millions)	Level 1		Level 2		Level 3		Netting⁽ ¹ ⁾		Total		Level 1		Level 2		Level 3		Netting⁽ ¹ ⁾		Total
Assets:
Money market investments		$ 223		$ -		$ -		$ -		$ 223		$ 138		$ -		$ -		$ -		$ 138

Nuclear decommissioning trusts
U.S. equity securities		786		12		-		-		798		1,029		7		-		-		1,036
Non-U.S. equity securities		311		-		-		-		311		349		-		-		-		349
U.S. government and agency securities		715		150		-		-		865		584		40		-		-		624
Municipal securities		-		65		-		-		65		-		119		-		-		119
Other fixed-income securities		-		94		-		-		94		-		66		-		-		66

Total nuclear decommissioning trusts ⁽ ² ⁾		1,812		321		-		-		2,133		1,962		232		-		-		2,194

Price risk management instruments (Note 7)
Electric		-		-		166		24		190		6		2		119		63		190
Gas		-		-		9		(1)		8		-		-		6		5		11

Total price risk management instruments		-		-		175		23		198		6		2		125		68		201

Rabbi trusts
Fixed-income securities		-		26		-		-		26		-		24		-		-		24
Life insurance contracts		-		67		-		-		67		-		65		-		-		65

Total rabbi trusts		-		93		-		-		93		-		89		-		-		89

Long-term disability trust
U.S. equity securities		4		13		-		-		17		11		24		-		-		35
Non-U.S. equity securities		-		9		-		-		9		-		-		-		-		-
Fixed-income securities		-		132		-		-		132		-		150		-		-		150

Total long-term disability trust		4		154		-		-		158		11		174		-		-		185

Total assets		$ 2,039		$ 568		$ 175		$ 23		$ 2,805		$ 2,117		$ 497		$ 125		$ 68		$ 2,807

Liabilities:
Price risk management instruments (Note 7)
Electric		$ 299		$ 12		$ 448		$ (329)		$ 430		$ 235		$ 73		$ 475		$ (315)		$ 468
Gas		49		3		8		(52)		8		41		1		49		(41)		50

Total liabilities		$ 348		$ 15		$ 456		$ (381)		$ 438		$ 276		$ 74		$ 524		$ (356)		$ 518

⁽¹⁾	Includes the effect of the contractual ability to settle contracts under master netting agreements and margin cash collateral.

⁽²⁾	Excludes $169 million and $185 million at September 30, 2011 and December 31, 2010, respectively, primarily related to deferred taxes on appreciation of investment value.

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

PG&E Corporation invests 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 treasury bills, federal agency securities, certificates of deposit, and commercial paper with a maximum weighted average maturity of 60 days or less. PG&E Corporation's investments in these money market funds are generally valued using unadjusted quotes in an active market for identical assets and are thus classified as Level 1. Money market funds are recorded as cash and cash equivalents in PG&E Corporation's Condensed Consolidated Balance Sheets.

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 and debt securities. 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 in active markets for identical transactions 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 composed primarily of fixed-income securities that include U.S. government and agency securities, municipal securities, and corporate debt securities. U.S. government and agency securities consist primarily of treasury securities that are classified as Level 1 because the fair value is determined by observable market prices in active markets. A market-based valuation 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 rating, coupon rate, and maturity of each security are considered in the valuation, as applicable.

Price risk management instruments include physical and financial derivative contracts, such as forwards, swaps, options, and CRRs that are either exchange-traded or over-the-counter traded. (See Note 7 above.)

Forwards and swaps that are valued using observable market prices for the underlying commodity or an identical instrument are classified as Level 1 or Level 2. Forwards and swaps that are valued using unobservable data are considered Level 3. These 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.

All commodity-related options are classified as Level 3 and are valued using a standard option pricing model with various assumptions, including forward prices for the underlying commodity, time value at a risk free rate, and volatility. For periods in which market data is not available, the Utility extrapolates these assumptions using internal models.

The Utility holds CRRs to hedge financial risk of CAISO-imposed congestion charges in the day-ahead markets. CRRs are valued based on prices observed in the auction which are extrapolated and discounted at the risk free rate. Limited market data is available between auction dates; therefore, CRRs are classified as Level 3.

PG&E Corporation and the Utility recognize any transfers between levels in the fair value hierarchy as of the end of the reporting period. There were no significant transfers between levels for the nine months ended September 30, 2011.

The following tables present reconciliations for price risk management instruments measured and recorded at fair value on a recurring basis for PG&E Corporation and the Utility, using significant unobservable inputs (Level 3), for the three months ended September 30, 2011 and 2010, respectively:


(in millions)	Price Risk Management Instruments

	2011		2010
Liability balance as of July 1		$ (280)		$ (470)

Realized and unrealized gains (losses):
Included in cost of electricity or cost of natural gas ⁽¹⁾		4		(14)
Included in regulatory assets and liabilities		(89)		(223)
Purchases, issuances, sales, and settlements:
Purchases		53		49
Settlements		31		60


Liability balance as of September 30		$ (281)		$ (598)

⁽¹⁾	Balancing account revenue is recorded for these amounts, therefore, there is no impact to net income.

The following tables present the reconciliation for Level 3 price risk management instruments for the nine months ended September 30, 2011 and 2010, respectively:


(in millions)	Price Risk Management Instruments

	2011		2010
Liability balance as of January 1		$ (399)		$ (250)

Realized and unrealized gains (losses):
Included in cost of electricity or cost of natural gas ⁽¹⁾		20		(76)
Included in regulatory assets and liabilities		(190)		(558)
Purchases, issuances, sales, and settlements:
Purchases		153		141
Settlements		135		145


Liability balance as of September 30		$ (281)		$ (598)

⁽¹⁾	Balancing account revenue is recorded for these amounts, therefore, there is no impact to net income.

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

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):

The Utility classifies its investments held in the nuclear decommissioning trust as "available-for-sale." As the day-to-day investing activities of the trusts are managed by external investment managers, the Utility is unable to assert that it has the intent and ability to hold investments to maturity. Therefore, all unrealized losses are considered other-than-temporary impairments. Gains or losses on the nuclear decommissioning trust investments are refundable or recoverable, respectively, from customers. Therefore, trust earnings are deferred and included in the regulatory liability for recoveries in excess of ARO. There is no impact on the Utility's earnings or accumulated other comprehensive income. (See Note 3 above for further discussion.)

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


(in millions)	Amortized Cost		Total Unrealized Gains		Total Unrealized Losses		Total Fair Value ⁽¹⁾
As of September 30, 2011
Equity securities
U.S.		$ 377		$ 432		$ (11)		$ 798
Non-U.S.		201		119		(9)		311
Debt securities
U.S. government and agency securities		764		101		-		865
Municipal securities		63		2		-		65
Other fixed-income securities		91		3		-		94

Total		$ 1,496		$ 657		$ (20)		$ 2,133

As of December 31, 2010
Equity securities
U.S.		$ 509		$ 529		$ (2)		$ 1,036
Non-U.S.		180		170		(1)		349
Debt securities
U.S. government and agency securities		571		55		(2)		624
Municipal securities		119		1		(1)		119
Other fixed-income securities		65		1		-		66

Total		$ 1,444		$ 756		$ (6)		$ 2,194


⁽¹⁾ Excludes $169 million and $185 million at September 30, 2011 and December 31, 2010, respectively, primarily related to deferred taxes on appreciation of investment value.

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

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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