FAIR VALUE

12 Months Ended

Dec. 31, 2011

FAIR VALUE [Abstract]

FAIR VALUE

NOTE 6 - FAIR VALUE

Effective January 1, 2008, we adopted FASB's guidance for fair value measurements.  The guidance establishes a single, authoritative definition of fair value, prescribes methods for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value and expands disclosures about the use of fair value measurements; however, the guidance does not expand the use of fair value accounting.  The guidance defines fair value 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.”

Valuation Techniques Fair value is not an entity-specific measurement, but a market-based measurement utilizing assumptions market participants would use to price the asset or liability.  The FASB requires three valuation techniques to be used at initial recognition and subsequent measurement of an asset or liability:

Market Approach:  This approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

Income Approach:  This approach uses valuation techniques to convert future amounts (cash flows, earnings) to a single present value amount.

Cost Approach:  This approach is based on the amount currently required to replace the service capacity of an asset (often referred to as the “current replacement cost”).

The valuation technique (or a combination of valuation techniques) utilized to measure fair value is the one that is appropriate given the circumstances and for which sufficient data is available.  Techniques must be consistently applied, but a change in the valuation technique is appropriate if new information is available.

Fair Value Hierarchy FASB guidance establishes a fair value hierarchy to prioritize the inputs used in valuation techniques. The hierarchy is designed to indicate the relative reliability of the fair value measure. The highest priority is given to quoted prices in active markets, and the lowest to unobservable data, such as an entity's internal information. The lower the level of the input of a fair value measurement, the more extensive the disclosure requirements. There are three broad levels:

Level 1:  Quoted prices (unadjusted) are available in active markets for identical assets or liabilities as of the reporting date.  Level 1 includes directly held securities in our non-qualified Millstone Decommissioning Trust Fund.

Level 2:  Pricing inputs are other than quoted prices in active markets included in Level 1, which are directly or indirectly observable as of the reporting date.  This value is based on other observable inputs, including quoted prices for similar assets and liabilities in markets that are not active.  Level 2 includes cash equivalents that consist of money market funds, commercial paper held in restricted cash and securities not directly held in our Millstone Decommissioning Trust Funds such as fixed income securities (Treasury securities, other agency and corporate debt) and equity securities.

Level 3:  Pricing inputs include significant inputs that are generally less observable.  Unobservable inputs may be used to measure the asset or liability where observable inputs are not available.  We develop these inputs based on the best information available, including our own data.  Level 3 instruments include derivatives related to our forward energy purchases and sales, financial transmission rights and a power-related option contract.  There were no changes to our Level 3 fair value measurement methodologies during 2011 and 2010.

Recurring Measures The following table sets forth by level within the fair value hierarchy our financial assets and liabilities that are accounted for at fair value on a recurring basis.  Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the assets and liabilities and their placement within the fair value hierarchy levels (dollars in thousands):

	Fair Value as of December 31, 2011
	Level 1		Level 2		Level 3		Total
Assets:
Millstone decommissioning trust fund
Investments in securities:
Marketable equity securities	$	1,621	$	2,847			$	4,468
Marketable debt securities
Corporate bonds				356				356
U.S. Government issued debt securities (Agency and Treasury)				963				963
State and municipal				88				88
Other				30				30
Total marketable debt securities				1,437				1,437
Cash equivalents and other				45				45
Total investments in securities		1,621		4,329				5,950
Restricted cash - long-term				2,550				2,550
Cash equivalents		434						434
Restricted cash				4,619				4,619
Power-related derivatives - current					$	4		4
Total assets	$	2,055	$	11,498	$	4	$	13,557
Liabilities:
Power-related derivatives - current					$	4,940	$	4,940
Total liabilities	$	0	$	0	$	4,940	$	4,940

	Fair Value as of December 31, 2010
	Level 1		Level 2		Level 3		Total
Assets:
Millstone decommissioning trust fund
Investments in securities:
Marketable equity securities	$	1,587	$	2,776			$	4,363
Marketable debt securities
Corporate bonds				350				350
U.S. Government issued debt securities (Agency and Treasury)				911				911
State and municipal				38				38
Other				36				36
Total marketable debt securities				1,335				1,335
Cash equivalents and other				44				44
Total investments in securities		1,587		4,155				5,742
Restricted cash - long-term				17,581				17,581
Cash equivalents		1,653						1,653
Restricted cash				5,903				5,903
Power-related derivatives - current						28		28
Total assets	$	3,240	$	27,639	$	28	$	30,907

Millstone Decommissioning Trust Our primary valuation technique to measure the fair value of our nuclear decommissioning trust investments is the market approach.  We own a share of the qualified decommissioning fund and cannot validate a publicly quoted price at the qualified fund level.  However, actively traded quoted prices for the underlying securities comprising the fund have been obtained.  Due to these observable inputs, fixed income, equity and cash equivalent securities in the qualified fund are classified as Level 2.  Equity securities are held directly in our non-qualified trust and actively traded quoted prices for these securities have been obtained.  Due to these observable inputs, these equity securities are classified as Level 1.

We recognize transfers in and out of the fair value hierarchy levels at the end of the reporting period.  There were no transfers of equity and debt securities within the fair value hierarchy levels during the period ended December 31, 2011 or December 31, 2010.

Cash Equivalents and Restricted Cash The market approach is used to measure the fair values of money market funds and other short-term investments included in cash equivalents and restricted cash.  We have the ability to transact our money market funds at the net asset value price per share and can withdraw those funds without a penalty.  We are able to obtain quoted prices for these funds; therefore they are classified as Level 2.  We are able to obtain a quoted price for our 90-day commercial paper held in restricted cash; however, the quote was from a less active market.  We have concluded that this investment does not qualify for Level 1 and is reflected as Level 2.  Cash equivalents are included in cash and cash equivalents on the Consolidated Balance Sheets.

Power-related Derivatives We have historically had three types of derivative assets and liabilities: forward energy contracts, FTRs, and a power-related option contract.  At December 31, 2011, our derivatives consisted of forward energy contracts and FTRs.  At December 31, 2010, our derivatives consisted of FTRs only. Our primary valuation technique to measure the fair value of these derivative assets and liabilities is the income approach, which involves determining a present value amount based on estimated future cash flows.  However, when circumstances warrant, we may also use alternative approaches as described below to calculate the fair value for each type of derivative.  Since many of the valuation inputs are not observable in the market, we have classified our derivative assets and liabilities as Level 3.

To calculate the fair value of forward energy contracts, we typically use a mark-to-market valuation model that includes the following inputs: contract energy prices, forward energy prices, contract volumes and delivery dates, risk-free and credit-adjusted interest rates, counterparty credit ratings and our credit rating.

To calculate the fair value of our FTR contracts we use two different approaches.  For FTR contracts entered into with an auction date close to the reporting date, we use the auction clearing prices obtained from ISO-NE, which represents a market approach to determining fair value.  Auction clearing prices are used to value all FTRs at December 31 each year.  For FTR contract valuations performed at interim reporting dates, we use an internally developed valuation model to estimate the fair values for the remaining portions of annual FTRs.  This model includes the following inputs: historic congestion component prices for the applicable locations, historic energy prices, forward energy prices, contract volumes and durations, and the applicable risk-free rate.

To calculate the fair value of our power-related option contract, which expired at December 31, 2010, we used a binomial tree model that included the following inputs: forward energy prices, expected volatility, contract volume, prices and duration, and LIBOR swap rates.

Level 3 Changes There were no transfers into or out of Level 3 during the periods presented. The following table is a reconciliation of changes in the net fair value of power-related derivatives that are classified as Level 3 in the fair value hierarchy at December 31 (dollars in thousands):

	2011			2010			2009
Balance as of beginning of period	$	28		$	254		$	8,820
Gains and losses (realized and unrealized)
Included in earnings		(659	)		3,981			23,113
Included in Regulatory and other assets/liabilities		(4,940	)		(120	)		(8,564	)
Purchases		24			0			0
Net settlements		611			(4,087	)		(23,115	)
Balance at December 31	$	(4,936	)	$	28		$	254

At December 31, 2011 and 2010, there were no realized gains or losses included in earnings attributable to the change in unrealized gains or losses related to derivatives still held at the reporting date.  This is due to our regulatory accounting treatment for all power-related derivatives.

Based on a PSB-approved Accounting Order, we record the change in fair value of power contract derivatives as deferred charges or deferred credits on the Consolidated Balance Sheet, depending on whether the change in fair value is an unrealized loss or gain.  The corresponding offsets are current and long-term assets or liabilities depending on the duration.