The accounting rules for fair value measurements and disclosures define 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 in a principal or most advantageous market. Fair value is a market-based measurement that is determined based on inputs, which refer broadly to assumptions that market participants use in pricing assets or liabilities. These inputs can be readily observable, market corroborated, or generally unobservable firm inputs. The Companies often make certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, and the risks inherent in the inputs to valuation techniques. The Companies use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.

The accounting rules for fair value measurements and disclosures established a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value in three broad levels. The rules require that assets and liabilities be classified in their entirety based on the level of input that is significant to the fair value measurement. Assessing the significance of a particular input may require judgment considering factors specific to the asset or liability, and may affect the valuation of the asset or liability and their placement within the fair value hierarchy. The Companies classify fair value balances based on the fair value hierarchy defined by the accounting rules for fair value measurements and disclosures as follows:

•Level 1 – Consists of assets or liabilities whose value is based on unadjusted quoted prices in active markets at the measurement date. An active market is one in which transactions for assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis. This category includes contracts traded on active exchange markets valued using unadjusted prices quoted directly from the exchange.

•Level 2 – Consists of assets or liabilities valued using industry standard models and based on prices, other than quoted prices within Level 1, that are either directly or indirectly observable as of the measurement date. The industry standard models consider observable assumptions including time value, volatility factors and current market and contractual prices for the underlying commodities, in addition to other economic measures. This category includes contracts traded on active exchanges or in over-the-counter markets priced with industry standard models.

•Level 3 – Consists of assets or liabilities whose fair value is estimated based on internally developed models or methodologies using inputs that are generally less readily observable and supported by little, if any, market activity at the measurement date. Unobservable inputs are developed based on the best available information and subject to cost benefit constraints. This category includes contracts priced using models that are internally developed and contracts placed in illiquid markets. It also includes contracts that expire after the period of time for which quoted prices are available and internal models are used to determine a significant portion of the value.

For information on the measurement of Con Edison's investment in MVP, which was measured at fair value on a non-recurring basis, see Note A. Assets and liabilities measured at fair value on a recurring basis for the years ended December 31, 2020 and 2019 are summarized below.


	2020					2019
(Millions of Dollars)	Level 1	Level 2	Level 3	Netting Adjustment (e)	Total	Level 1	Level 2	Level 3	Netting Adjustment (e)	Total
Con Edison
Derivative assets:
Commodity (a)(b)(c)	$19	$42	$4	$53	$118	$4	$61	$2	$4	$71
Interest rate swaps (a)(b)(c)(f)	—	—	—	—	—	—	1	—	—	1
Other (a)(b)(d)	431	126	—	—	557	353	125	—	—	478
Total assets	$450	$168	$4	$53	$675	$357	$187	$2	$4	$550
Derivative liabilities:
Commodity (a)(b)(c)	$7	$296	$23	$46	$372	$18	$174	$18	$(22)	$188
Interest rate swaps (a)(b)(c)(f)	—	106	—	—	106	—	41	—	—	41
Total liabilities	$7	$402	$23	$46	$478	$18	$215	$18	$(22)	$229
CECONY
Derivative assets:
Commodity (a)(b)(c)	$15	$20	$—	$(16)	$19	$3	$42	$1	$—	$46
Other (a)(b)(d)	411	120	—	—	531	333	119	—	—	452
Total assets	$426	$140	$—	$(16)	$550	$336	$161	$1	$—	$498
Derivative liabilities:
Commodity (a)(b)(c)	$3	$274	$10	$(19)	$268	$15	$147	$7	$(24)	$145

(a)The Companies’ policy is to review the fair value hierarchy and recognize transfers into and transfers out of the levels at the end of each reporting period. Con Edison and CECONY had $1 million of commodity derivative liabilities transferred from level 3 to level 2 during the year ended December 31, 2020 because of availability of observable market data due to the decrease in the terms of certain contracts from beyond three years as of September 30, 2020 to less than three years as of December 31, 2020. Con Edison and CECONY had $24 million and $22 million of commodity derivative liabilities transferred from level 3 to level 2 during the year ended December 31, 2019 because of availability of observable market data due to the decrease in the terms of certain contracts from beyond three years as of December 31, 2017 to less than three years as of December 31, 2019.

(b)Level 2 assets and liabilities include investments held in the deferred compensation plan and/or non-qualified retirement plans, exchange-traded contracts where there is insufficient market liquidity to warrant inclusion in Level 1, and certain over-the-counter derivative instruments for electricity, refined products and natural gas. Derivative instruments classified as Level 2 are valued using industry standard models that incorporate corroborated observable inputs; such as pricing services or prices from similar instruments that trade in liquid markets, time value and volatility factors.

(c)The accounting rules for fair value measurements and disclosures require consideration of the impact of nonperformance risk (including credit risk) from a market participant perspective in the measurement of the fair value of assets and liabilities. At December 31, 2020 and 2019, the Companies determined that nonperformance risk would have no material impact on their financial position or results of operations.

(e)Amounts represent the impact of legally-enforceable master netting agreements that allow the Companies to net gain and loss positions and cash collateral held or placed with the same counterparties.

The employees in the Companies’ risk management group develop and maintain the Companies’ valuation policies and procedures for, and verify pricing and fair value valuation of, commodity derivatives and interest rate swaps. Under the Companies’ policies and procedures, multiple independent sources of information are obtained for forward price curves used to value commodity derivatives and interest rate swaps. Fair value and changes in fair value of commodity derivatives and interest rate swaps are reported on a monthly basis to the Companies’ risk committees, comprised of officers and employees of the Companies that oversee energy hedging at the Utilities and the Clean Energy Businesses. The risk management group reports to the Companies’ Vice President and Treasurer.

Fair Value of Level 3 at December 31, 2020

(Millions of Dollars)

Valuation Techniques

Unobservable Inputs

Range

Con Edison — Commodity

Electricity

(20)

Discounted Cash Flow

Forward capacity prices (a)

$0.06-$6.26 per kW-month

Transmission Congestion Contracts/Financial Transmission Rights

Discounted Cash Flow

Inter-zonal forward price curves adjusted for historical zonal losses (b)

$(2.65)-$7.69 per MWh

Total Con Edison — Commodity

$(19)

CECONY — Commodity

Electricity

$(11)

Discounted Cash Flow

Forward capacity prices (a)

$0.08-$6.26 per kW-month

Transmission Congestion Contracts

Discounted Cash Flow

Inter-zonal forward price curves adjusted for historical zonal losses (b)

$0.23-$1.13 per MWh

Total CECONY — Commodity

$(10)

The table listed below provides a reconciliation of the beginning and ending net balances for assets and liabilities measured at fair value for the years ended December 31, 2020 and 2019 and classified as Level 3 in the fair value hierarchy:


	Con Edison		CECONY
(Millions of Dollars)	2020	2019	2020	2019
Beginning balance as of January 1,	$(16)	$(13)	$(6)	$(2)
Included in earnings	(10)	(5)	(5)	—
Included in regulatory assets and liabilities	(7)	18	(4)	17
Settlements	15	8	6	1
Transfer out of level 3	(1)	(24)	(1)	(22)
Ending balance as of December 31,	$(19)	$(16)	$(10)	$(6)

For the Utilities, realized gains and losses on Level 3 commodity derivative assets and liabilities are reported as part of purchased power, gas and fuel costs. The Utilities generally recover these costs in accordance with rate provisions approved by the applicable state public utilities regulators. See Note A. Unrealized gains and losses for commodity derivatives are generally deferred on the consolidated balance sheet in accordance with the accounting rules for regulated operations.

For the Clean Energy Businesses, realized and unrealized gains and losses on Level 3 commodity derivative assets and liabilities are reported in non-utility revenues ($3 million gain and $2 million gain) on the consolidated income statement for the years ended December 31, 2020 and 2019, respectively. The change in fair value relating to Level 3 commodity derivative assets and liabilities held at December 31, 2020 and 2019 is included in non-utility revenues ($2 million gain) on the consolidated income statement for the years ended December 31, 2020 and 2019.