9. FAIR VALUE MEASUREMENTS

Fair Value Hierarchy and Valuation Techniques

The accounting guidance for “Fair Value Measurements and Disclosures” establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Where observable inputs are available for substantially the full term of the asset or liability, the instrument is categorized in Level 2. When quoted market prices are not available, pricing may be completed using comparable securities, dealer values, operating data and general market conditions to determine fair value. Valuation models utilize various inputs such as commodity, interest rate and, to a lesser degree, volatility and credit that include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, market corroborated inputs (i.e. inputs derived principally from, or correlated to, observable market data) and other observable inputs for the asset or liability. Our market risk oversight staff independently monitors our valuation policies and procedures and provides members of the Commercial Operations Risk Committee (CORC) various daily, weekly and monthly reports, regarding compliance with policies and procedures. The CORC consists of our Chief Operating Officer, Chief Financial Officer, Executive Vice President of Energy Supply, Senior Vice President of Commercial Operations and Chief Risk Officer.

For our commercial activities, exchange traded derivatives, namely futures contracts, are generally fair valued based on unadjusted quoted prices in active markets and are classified as Level 1. Level 2 inputs primarily consist of OTC broker quotes in moderately active or less active markets, as well as exchange traded contracts where there is insufficient market liquidity to warrant inclusion in Level 1. We verify our price curves using these broker quotes and classify these fair values within Level 2 when substantially all of the fair value can be corroborated. We typically obtain multiple broker quotes, which are nonbinding in nature, but are based on recent trades in the marketplace. When multiple broker quotes are obtained, we average the quoted bid and ask prices. In certain circumstances, we may discard a broker quote if it is a clear outlier. We use a historical correlation analysis between the broker quoted location and the illiquid locations. If the points are highly correlated, we include these locations within Level 2 as well. Certain OTC and bilaterally executed derivative instruments are executed in less active markets with a lower availability of pricing information. Illiquid transactions, complex structured transactions, FTRs and counterparty credit risk may require nonmarket based inputs. Some of these inputs may be internally developed or extrapolated and utilized to estimate fair value. When such inputs have a significant impact on the measurement of fair value, the instrument is categorized as Level 3. The main driver of our contracts being classified as Level 3 is the inability to substantiate our energy price curves in the market. A significant portion of our Level 3 instruments have been economically hedged which greatly limits potential earnings volatility.

We utilize our trustee's external pricing service in our estimate of the fair value of the underlying investments held in the nuclear trusts. Our investment managers review and validate the prices utilized by the trustee to determine fair value. We perform our own valuation testing to verify the fair values of the securities. We receive audit reports of our trustee's operating controls and valuation processes. The trustee uses multiple pricing vendors for the assets held in the trusts.

Assets in the nuclear trusts, Cash and Cash Equivalents and Other Temporary Investments are classified using the following methods. Equities are classified as Level 1 holdings if they are actively traded on exchanges. Items classified as Level 1 are investments in money market funds, fixed income and equity mutual funds and domestic equity securities. They are valued based on observable inputs primarily unadjusted quoted prices in active markets for identical assets. Items classified as Level 2 are primarily investments in individual fixed income securities and cash equivalents funds. Fixed income securities do not trade on an exchange and do not have an official closing price but their valuation inputs are based on observable market data. Pricing vendors calculate bond valuations using financial models and matrices. The models use observable inputs including yields on benchmark securities, quotes by securities brokers, rating agency actions, discounts or premiums on securities compared to par prices, changes in yields for U.S. Treasury securities, corporate actions by bond issuers, prepayment schedules and histories, economic events and, for certain securities, adjustments to yields to reflect changes in the rate of inflation. Other securities with model-derived valuation inputs that are observable are also classified as Level 2 investments. Investments with unobservable valuation inputs are classified as Level 3 investments.

Fair Value Measurements of Long-term Debt

The fair values of Long-term Debt are based on quoted market prices, without credit enhancements, for the same or similar issues and the current interest rates offered for instruments with similar maturities classified as Level 2 measurement inputs. These instruments are not marked-to-market. The estimates presented are not necessarily indicative of the amounts that we could realize in a current market exchange.

The book values and fair values of Long-term Debt as of March 31, 2013 and December 31, 2012 are summarized in the following table:

	March 31, 2013				December 31, 2012
	Book Value		Fair Value		Book Value		Fair Value
	(in millions)
Long-term Debt	$	17,573	$	20,448	$	17,757	$	20,907

Fair Value Measurements of Other Temporary Investments

Other Temporary Investments include funds held by trustees primarily for the payment of securitization bonds, marketable securities that we intend to hold for less than one year and investments by our protected cell of EIS.

The following is a summary of Other Temporary Investments:

			March 31, 2013
					Gross		Gross		Estimated
					Unrealized		Unrealized		Fair
Other Temporary Investments			Cost		Gains		Losses		Value
			(in millions)
Restricted Cash (a)			$	167	$	-	$	-	$	167
Fixed Income Securities:
	Mutual Funds			76		-		-		76
Equity Securities - Mutual Funds				10		8		-		18
Total Other Temporary Investments			$	253	$	8	$	-	$	261

			December 31, 2012
					Gross		Gross		Estimated
					Unrealized		Unrealized		Fair
Other Temporary Investments			Cost		Gains		Losses		Value
			(in millions)
Restricted Cash (a)			$	241	$	-	$	-	$	241
Fixed Income Securities:
	Mutual Funds			65		2		-		67
Equity Securities - Mutual Funds				10		6		-		16
Total Other Temporary Investments			$	316	$	8	$	-	$	324

(a)		Primarily represents amounts held for the repayment of debt.

The following table provides the activity for our fixed income and equity securities within Other Temporary Investments for the three months ended March 31, 2013 and 2012:

	Three Months Ended March 31,
	2013		2012
	(in millions)
Proceeds from Investment Sales	$	-	$	-
Purchases of Investments		11		-
Gross Realized Gains on Investment Sales		-		-
Gross Realized Losses on Investment Sales		-		-

As of March 31, 2013 and December 31, 2012, we had no Other Temporary Investments with an unrealized loss position. As of March 31, 2013, fixed income securities are primarily debt based mutual funds with short and intermediate maturities. Mutual funds may be sold and do not contain maturity dates.

For details of Other Temporary Investments included in Accumulated Other Comprehensive Income (Loss) on the balance sheet and the reasons for changes for the three months ended March 31, 2013 and 2012, see Note 2.

Fair Value Measurements of Trust Assets for Decommissioning and SNF Disposal

Nuclear decommissioning and spent nuclear fuel trust funds represent funds that regulatory commissions allow us to collect through rates to fund future decommissioning and spent nuclear fuel disposal liabilities. By rules or orders, the IURC, the MPSC and the FERC established investment limitations and general risk management guidelines. In general, limitations include:

Acceptable investments (rated investment grade or above when purchased).
Maximum percentage invested in a specific type of investment.
Prohibition of investment in obligations of AEP or its affiliates.
Withdrawals permitted only for payment of decommissioning costs and trust expenses.

We maintain trust records for each regulatory jurisdiction. These funds are managed by external investment managers who must comply with the guidelines and rules of the applicable regulatory authorities. The trust assets are invested to optimize the net of tax earnings of the trust giving consideration to liquidity, risk, diversification and other prudent investment objectives.

I&M records securities held in trust funds for decommissioning nuclear facilities and for the disposal of SNF at fair value. I&M classifies securities in the trust funds as available-for-sale due to their long-term purpose. Other-than-temporary impairments for investments in both fixed income and equity securities are considered realized losses as a result of securities being managed by an external investment management firm. The external investment management firm makes specific investment decisions regarding the equity and fixed income investments held in these trusts and generally intends to sell fixed income securities in an unrealized loss position as part of a tax optimization strategy. Impairments reduce the cost basis of the securities which will affect any future unrealized gain or realized gain or loss due to the adjusted cost of investment. I&M records unrealized gains and other-than-temporary impairments from securities in the trust funds as adjustments to the regulatory liability account for the nuclear decommissioning trust funds and to regulatory assets or liabilities for the SNF disposal trust funds in accordance with their treatment in rates. Consequently, changes in fair value of trust assets do not affect earnings or AOCI. The trust assets are recorded by jurisdiction and may not be used for another jurisdiction's liabilities. Regulatory approval is required to withdraw decommissioning funds.

The following is a summary of nuclear trust fund investments as of March 31, 2013 and December 31, 2012:

		March 31, 2013						December 31, 2012
		Estimated		Gross		Other-Than-		Estimated		Gross		Other-Than-
		Fair		Unrealized		Temporary		Fair		Unrealized		Temporary
		Value		Gains		Impairments		Value		Gains		Impairments
		(in millions)
Cash and Cash Equivalents		$	14	$	-	$	-	$	17	$	-	$	-
Fixed Income Securities:
	United States Government		642		53		(1)		648		58		(1)
	Corporate Debt		37		5		(1)		35		5		(1)
	State and Local Government		279		-		(2)		270		1		(1)
	Subtotal Fixed Income Securities		958		58		(4)		953		64		(3)
Equity Securities - Domestic			816		360		(81)		736		285		(77)
Spent Nuclear Fuel and
	Decommissioning Trusts	$	1,788	$	418	$	(85)	$	1,706	$	349	$	(80)

The following table provides the securities activity within the decommissioning and SNF trusts for the three months ended March 31, 2013 and 2012:

	Three Months Ended March 31,
	2013		2012
	(in millions)
Proceeds from Investment Sales	$	168	$	334
Purchases of Investments		185		353
Gross Realized Gains on Investment Sales		3		2
Gross Realized Losses on Investment Sales		2		1

The adjusted cost of fixed income securities was $900 million and $889 million as of March 31, 2013 and December 31, 2012, respectively. The adjusted cost of equity securities was $456 million and $451 million as of March 31, 2013 and December 31, 2012, respectively.

The fair value of fixed income securities held in the nuclear trust funds, summarized by contractual maturities, as of March 31, 2013 was as follows:

	Fair Value of
	Fixed Income
	Securities
	(in millions)
Within 1 year	$	95
1 year – 5 years		356
5 years – 10 years		274
After 10 years		233
Total	$	958

Fair Value Measurements of Financial Assets and Liabilities

The following tables set forth, by level within the fair value hierarchy, our financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2013 and December 31, 2012. As required by the accounting guidance for “Fair Value Measurements and Disclosures,” financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. There have not been any significant changes in our valuation techniques.

Assets and Liabilities Measured at Fair Value on a Recurring Basis
March 31, 2013

			Level 1		Level 2		Level 3		Other		Total

Assets:			(in millions)

Cash and Cash Equivalents (a)			$	6	$	1	$	-	$	172	$	179

Other Temporary Investments
Restricted Cash (a)				151		6		-		10		167
Fixed Income Securities:
	Mutual Funds			76		-		-		-		76
Equity Securities - Mutual Funds (b)				18		-		-		-		18
Total Other Temporary Investments				245		6		-		10		261

Risk Management Assets
Risk Management Commodity Contracts (c) (d)				43		810		117		(507)		463
Cash Flow Hedges:
	Commodity Hedges (c)			4		40		1		(21)		24
Fair Value Hedges				-		2		-		3		5
De-designated Risk Management Contracts (e)				-		-		-		11		11
Total Risk Management Assets				47		852		118		(514)		503

Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (f)				5		-		-		9		14
Fixed Income Securities:
	United States Government			-		642		-		-		642
	Corporate Debt			-		37		-		-		37
	State and Local Government			-		279		-		-		279
		Subtotal Fixed Income Securities		-		958		-		-		958
Equity Securities - Domestic (b)				816		-		-		-		816
Total Spent Nuclear Fuel and Decommissioning Trusts				821		958		-		9		1,788

Total Assets			$	1,119	$	1,817	$	118	$	(323)	$	2,731

Liabilities:

Risk Management Liabilities
Risk Management Commodity Contracts (c) (d)			$	44	$	700	$	42	$	(518)	$	268
Cash Flow Hedges:
	Commodity Hedges (c)			1		24		-		(21)		4
	Interest Rate/Foreign Currency Hedges			-		2		-		-		2
Fair Value Hedges				-		2		-		3		5
Total Risk Management Liabilities			$	45	$	728	$	42	$	(536)	$	279

Assets and Liabilities Measured at Fair Value on a Recurring Basis
December 31, 2012

			Level 1		Level 2		Level 3		Other		Total

Assets:			(in millions)

Cash and Cash Equivalents (a)			$	6	$	1	$	-	$	272	$	279

Other Temporary Investments
Restricted Cash (a)				227		5		-		9		241
Fixed Income Securities:
	Mutual Funds			67		-		-		-		67
Equity Securities - Mutual Funds (b)				16		-		-		-		16
Total Other Temporary Investments				310		5		-		9		324

Risk Management Assets
Risk Management Commodity Contracts (c) (g)				47		938		131		(599)		517
Cash Flow Hedges:
	Commodity Hedges (c)			8		28		-		(12)		24
Fair Value Hedges				-		2		-		2		4
De-designated Risk Management Contracts (e)				-		-		-		14		14
Total Risk Management Assets				55		968		131		(595)		559

Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (f)				7		-		-		10		17
Fixed Income Securities:
	United States Government			-		648		-		-		648
	Corporate Debt			-		35		-		-		35
	State and Local Government			-		270		-		-		270
		Subtotal Fixed Income Securities		-		953		-		-		953
Equity Securities - Domestic (b)				736		-		-		-		736
Total Spent Nuclear Fuel and Decommissioning Trusts				743		953		-		10		1,706

Total Assets			$	1,114	$	1,927	$	131	$	(304)	$	2,868

Liabilities:

Risk Management Liabilities
Risk Management Commodity Contracts (c) (g)			$	45	$	838	$	45	$	(636)	$	292
Cash Flow Hedges:
	Commodity Hedges (c)			-		48		-		(12)		36
	Interest Rate/Foreign Currency Hedges			-		37		-		-		37
Fair Value Hedges				-		2		-		2		4
Total Risk Management Liabilities			$	45	$	925	$	45	$	(646)	$	369

(a) Amounts in ''Other'' column primarily represent cash deposits in bank accounts with financial institutions or with third parties. Level 1 and Level 2 amounts primarily represent investments in money market funds.

(b) Amounts represent publicly traded equity securities and equity-based mutual funds.

(c) Amounts in ''Other'' column primarily represent counterparty netting of risk management and hedging contracts and associated cash collateral under the accounting guidance for ''Derivatives and Hedging.''

(d) The March 31, 2013 maturity of the net fair value of risk management contracts prior to cash collateral, assets/(liabilities), is as follows: Level 1 matures $6 million in 2013, ($4) million in periods 2014-2016 and ($3) million in periods 2017-2018; Level 2 matures $17 million in 2013, $73 million in periods 2014-2016, $14 million in periods 2017-2018 and $6 million in periods 2019-2030; Level 3 matures $6 million in 2013, $27 million in periods 2014-2016, $18 million in periods 2017-2018 and $24 million in periods 2019-2030. Risk management commodity contracts are substantially comprised of power contracts.

(e) Represents contracts that were originally MTM but were subsequently elected as normal under the accounting guidance for ''Derivatives and Hedging.'' At the time of the normal election, the MTM value was frozen and no longer fair valued. This MTM value will be amortized into revenues over the remaining life of the contracts.

(f) Amounts in ''Other'' column primarily represent accrued interest receivables from financial institutions.

(g) The December 31, 2012 maturity of the net fair value of risk management contracts prior to cash collateral, assets/(liabilities), is as follows: Level 1 matures $9 million in 2013, ($3) million in periods 2014-2016 and ($4) million in periods 2017-2018; Level 2 matures $16 million in 2013, $61 million in periods 2014-2016, $16 million in periods 2017-2018 and $7 million in periods 2019-2030; Level 3 matures $18 million in 2013, $31 million in periods 2014-2016, $13 million in periods 2017-2018 and $24 million in periods 2019-2030. Risk management commodity contracts are substantially comprised of power contracts.

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2013 and 2012.

The following tables set forth a reconciliation of changes in the fair value of net trading derivatives and other investments classified as Level 3 in the fair value hierarchy:

		Net Risk Management
Three Months Ended March 31, 2013		Assets (Liabilities)
		(in millions)
Balance as of December 31, 2012		$	86
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (a) (b)			(4)
Unrealized Gain (Loss) Included in Net Income (or Changes in Net Assets)
	Relating to Assets Still Held at the Reporting Date (a)		(5)
Realized and Unrealized Gains (Losses) Included in Other Comprehensive Income			1
Purchases, Issuances and Settlements (c)			(6)
Transfers into Level 3 (d) (e)			6
Transfers out of Level 3 (e) (f)			-
Changes in Fair Value Allocated to Regulated Jurisdictions (g)			(2)
Balance as of March 31, 2013		$	76

		Net Risk Management
Three Months Ended March 31, 2012		Assets (Liabilities)
		(in millions)
Balance as of December 31, 2011		$	69
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (a) (b)			(12)
Unrealized Gain (Loss) Included in Net Income (or Changes in Net Assets)
	Relating to Assets Still Held at the Reporting Date (a)		3
Realized and Unrealized Gains (Losses) Included in Other Comprehensive Income			1
Purchases, Issuances and Settlements (c)			16
Transfers into Level 3 (d) (e)			17
Transfers out of Level 3 (e) (f)			(12)
Changes in Fair Value Allocated to Regulated Jurisdictions (g)			10
Balance as of March 31, 2012		$	92

(a) Included in revenues on the condensed statements of income.

(b) Represents the change in fair value between the beginning of the reporting period and the settlement of the risk management commodity contract.

(c) Represents the settlement of risk management commodity contracts for the reporting period.

(d) Represents existing assets or liabilities that were previously categorized as Level 2.

(e) Transfers are recognized based on their value at the beginning of the reporting period that the transfer occurred.

(f) Represents existing assets or liabilities that were previously categorized as Level 3.

(g) Relates to the net gains (losses) of those contracts that are not reflected on the condensed statements of income. These net gains (losses) are recorded as regulatory liabilities/assets.

The following table quantifies the significant unobservable inputs used in developing the fair value of our Level 3 positions as of March 31, 2013:

	Fair Value				Valuation	Significant	Input/Range
	Assets		Liabilities		Technique	Unobservable Input	Low		High
	(in millions)
Energy Contracts	$	114	$	37	Discounted Cash Flow	Forward Market Price (a)	$	11.59	$	133.27
						Counterparty Credit Risk (b)		354
FTRs		4		5	Discounted Cash Flow	Forward Market Price (a)		(13.65)		9.67
Total	$	118	$	42

(a) Represents market prices in dollars per MWh.

(b) Represents average price of credit default swaps used to calculate counterparty credit risk, reported in basis points.

Fair Value Measurements

9. FAIR VALUE MEASUREMENTS

Fair Value Hierarchy and Valuation Techniques

The accounting guidance for “Fair Value Measurements and Disclosures” establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Where observable inputs are available for substantially the full term of the asset or liability, the instrument is categorized in Level 2. When quoted market prices are not available, pricing may be completed using comparable securities, dealer values, operating data and general market conditions to determine fair value. Valuation models utilize various inputs such as commodity, interest rate and, to a lesser degree, volatility and credit that include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, market corroborated inputs (i.e. inputs derived principally from, or correlated to, observable market data) and other observable inputs for the asset or liability. The AEP System's market risk oversight staff independently monitors its valuation policies and procedures and provides members of the Commercial Operations Risk Committee (CORC) various daily, weekly and monthly reports, regarding compliance with policies and procedures. The CORC consists of AEPSC's Chief Operating Officer, Chief Financial Officer, Executive Vice President of Energy Supply, Senior Vice President of Commercial Operations and Chief Risk Officer.

For commercial activities, exchange traded derivatives, namely futures contracts, are generally fair valued based on unadjusted quoted prices in active markets and are classified as Level 1. Level 2 inputs primarily consist of OTC broker quotes in moderately active or less active markets, as well as exchange traded contracts where there is insufficient market liquidity to warrant inclusion in Level 1. Management verifies price curves using these broker quotes and classifies these fair values within Level 2 when substantially all of the fair value can be corroborated. Management typically obtains multiple broker quotes, which are nonbinding in nature, but are based on recent trades in the marketplace. When multiple broker quotes are obtained, the quoted bid and ask prices are averaged. In certain circumstances, a broker quote may be discarded if it is a clear outlier. Management uses a historical correlation analysis between the broker quoted location and the illiquid locations. If the points are highly correlated, these locations are included within Level 2 as well. Certain OTC and bilaterally executed derivative instruments are executed in less active markets with a lower availability of pricing information. Illiquid transactions, complex structured transactions, FTRs and counterparty credit risk may require nonmarket based inputs. Some of these inputs may be internally developed or extrapolated and utilized to estimate fair value. When such inputs have a significant impact on the measurement of fair value, the instrument is categorized as Level 3. The main driver of the contracts being classified as Level 3 is the inability to substantiate energy price curves in the market. A significant portion of the Level 3 instruments have been economically hedged which greatly limits potential earnings volatility.

Fair Value Measurements of Long-term Debt

The fair values of Long-term Debt are based on quoted market prices, without credit enhancements, for the same or similar issues and the current interest rates offered for instruments with similar maturities classified as Level 2 measurement inputs. These instruments are not marked-to-market. The estimates presented are not necessarily indicative of the amounts that could be realized in a current market exchange.

The book values and fair values of Long-term Debt for the Registrant Subsidiaries as of March 31, 2013 and December 31, 2012 are summarized in the following table:

	March 31, 2013				December 31, 2012
Company	Book Value		Fair Value		Book Value		Fair Value
	(in thousands)
APCo	$	3,702,599	$	4,507,266	$	3,702,442	$	4,555,143
I&M		2,282,580		2,584,356		2,057,666		2,372,017
OPCo		3,560,628		4,170,595		3,860,440		4,560,337
PSO		949,856		1,154,618		949,871		1,175,759
SWEPCo		2,044,692		2,386,875		2,046,228		2,400,509

Fair Value Measurements of Financial Assets and Liabilities

The following tables set forth, by level within the fair value hierarchy, the Registrant Subsidiaries' financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2013 and December 31, 2012. As required by the accounting guidance for “Fair Value Measurements and Disclosures,” financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Management's assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. There have not been any significant changes in management's valuation techniques.

APCo
Assets and Liabilities Measured at Fair Value on a Recurring Basis
March 31, 2013

		Level 1		Level 2		Level 3		Other		Total

Assets:		(in thousands)

Risk Management Assets
Risk Management Commodity Contracts (a) (b)		$	3,184	$	108,817	$	13,220	$	(79,065)	$	46,156
Cash Flow Hedges:
	Commodity Hedges (a)		-		1,306		-		(319)		987
Total Risk Management Assets		$	3,184	$	110,123	$	13,220	$	(79,384)	$	47,143

Liabilities:

Risk Management Liabilities
Risk Management Commodity Contracts (a) (b)		$	1,541	$	100,473	$	4,464	$	(82,116)	$	24,362
Cash Flow Hedges:
	Commodity Hedges (a)		-		769		-		(319)		450
Total Risk Management Liabilities		$	1,541	$	101,242	$	4,464	$	(82,435)	$	24,812

APCo
Assets and Liabilities Measured at Fair Value on a Recurring Basis
December 31, 2012

		Level 1		Level 2		Level 3		Other		Total

Assets:		(in thousands)

Risk Management Assets
Risk Management Commodity Contracts (a) (b)		$	4,161	$	166,916	$	17,058	$	(123,117)	$	65,018
Cash Flow Hedges:
	Commodity Hedges (a)		-		498		-		(196)		302
Total Risk Management Assets		$	4,161	$	167,414	$	17,058	$	(123,313)	$	65,320

Liabilities:

Risk Management Liabilities
Risk Management Commodity Contracts (a) (b)		$	1,959	$	158,665	$	6,079	$	(132,884)	$	33,819
Cash Flow Hedges:
	Commodity Hedges (a)		-		1,551		-		(196)		1,355
Total Risk Management Liabilities		$	1,959	$	160,216	$	6,079	$	(133,080)	$	35,174

(a) Amounts in “Other” column primarily represent counterparty netting of risk management and hedging contracts and associated cash collateral under the accounting guidance for “Derivatives and Hedging.”

(b) Substantially comprised of power contracts for APCo, I&M and OPCo and coal contracts for PSO and SWEPCo.

(c) Amounts in “Other” column primarily represent accrued interest receivables from financial institutions. Level 2 amounts primarily represent investments in money market funds.

(d) Amounts represent publicly traded equity securities and equity-based mutual funds.

(e) Amounts in “Other” column primarily represent cash deposits with third parties. Level 1 and Level 2 amounts primarily represent investments in money market funds.

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2013 and 2012.

The following tables set forth a reconciliation of changes in the fair value of net trading derivatives classified as Level 3 in the fair value hierarchy:

Three Months Ended March 31, 2013		APCo		I&M		OPCo
		(in thousands)
Balance as of December 31, 2012		$	10,979	$	7,541	$	15,429
Realized Gain (Loss) Included in Net Income
	(or Changes in Net Assets) (a) (b)		(1,456)		(1,005)		(2,055)
Unrealized Gain (Loss) Included in Net
	Income (or Changes in Net Assets) Relating
	to Assets Still Held at the Reporting Date (a)		-		-		(1,988)
Realized and Unrealized Gains (Losses)
	Included in Other Comprehensive Income		-		-		-
Purchases, Issuances and Settlements (c)			257		179		366
Transfers into Level 3 (d) (e)			632		434		888
Transfers out of Level 3 (e) (f)			(533)		(366)		(749)
Changes in Fair Value Allocated to Regulated
	Jurisdictions (g)		(1,123)		(732)		490
Balance as of March 31, 2013		$	8,756	$	6,051	$	12,381

Three Months Ended March 31, 2012		APCo		I&M		OPCo
		(in thousands)
Balance as of December 31, 2011		$	1,971	$	1,263	$	2,666
Realized Gain (Loss) Included in Net Income
	(or Changes in Net Assets) (a) (b)		(3,580)		(2,411)		(5,056)
Unrealized Gain (Loss) Included in Net
	Income (or Changes in Net Assets) Relating
	to Assets Still Held at the Reporting Date (a)		-		-		6,509
Realized and Unrealized Gains (Losses)
	Included in Other Comprehensive Income		49		31		66
Purchases, Issuances and Settlements (c)			5,948		4,043		8,477
Transfers into Level 3 (d) (e)			2,508		1,764		3,699
Transfers out of Level 3 (e) (f)			(4,001)		(2,814)		(5,900)
Changes in Fair Value Allocated to Regulated
	Jurisdictions (g)		5,086		3,738		1,306
Balance as of March 31, 2012		$	7,981	$	5,614	$	11,767

(a) Included in revenues on the condensed statements of income.

(b) Represents the change in fair value between the beginning of the reporting period and the settlement of the risk management commodity contract.

(c) Represents the settlement of risk management commodity contracts for the reporting period.

(d) Represents existing assets or liabilities that were previously categorized as Level 2.

(e) Transfers are recognized based on their value at the beginning of the reporting period that the transfer occurred.

(f) Represents existing assets or liabilities that were previously categorized as Level 3.

(g) Relates to the net gains (losses) of those contracts that are not reflected on the condensed statements of income. These net gains (losses) are recorded as regulatory liabilities/assets.

The following tables quantify the significant unobservable inputs used in developing the fair value of Level 3 positions as of March 31, 2013:

APCo
	Fair Value				Valuation	Significant	Forward Price Range
	Assets		Liabilities		Technique	Unobservable Input (a)	Low		High
	(in thousands)
Energy Contracts	$	12,347	$	3,082	Discounted Cash Flow	Forward Market Price	$	11.59	$	75.95
FTRs		873		1,382	Discounted Cash Flow	Forward Market Price		(4.47)		9.67
Total	$	13,220	$	4,464

(a) Represents market prices in dollars per MWh.

Fair Value Measurements

9. FAIR VALUE MEASUREMENTS

Fair Value Hierarchy and Valuation Techniques

The accounting guidance for “Fair Value Measurements and Disclosures” establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Where observable inputs are available for substantially the full term of the asset or liability, the instrument is categorized in Level 2. When quoted market prices are not available, pricing may be completed using comparable securities, dealer values, operating data and general market conditions to determine fair value. Valuation models utilize various inputs such as commodity, interest rate and, to a lesser degree, volatility and credit that include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, market corroborated inputs (i.e. inputs derived principally from, or correlated to, observable market data) and other observable inputs for the asset or liability. The AEP System's market risk oversight staff independently monitors its valuation policies and procedures and provides members of the Commercial Operations Risk Committee (CORC) various daily, weekly and monthly reports, regarding compliance with policies and procedures. The CORC consists of AEPSC's Chief Operating Officer, Chief Financial Officer, Executive Vice President of Energy Supply, Senior Vice President of Commercial Operations and Chief Risk Officer.

For commercial activities, exchange traded derivatives, namely futures contracts, are generally fair valued based on unadjusted quoted prices in active markets and are classified as Level 1. Level 2 inputs primarily consist of OTC broker quotes in moderately active or less active markets, as well as exchange traded contracts where there is insufficient market liquidity to warrant inclusion in Level 1. Management verifies price curves using these broker quotes and classifies these fair values within Level 2 when substantially all of the fair value can be corroborated. Management typically obtains multiple broker quotes, which are nonbinding in nature, but are based on recent trades in the marketplace. When multiple broker quotes are obtained, the quoted bid and ask prices are averaged. In certain circumstances, a broker quote may be discarded if it is a clear outlier. Management uses a historical correlation analysis between the broker quoted location and the illiquid locations. If the points are highly correlated, these locations are included within Level 2 as well. Certain OTC and bilaterally executed derivative instruments are executed in less active markets with a lower availability of pricing information. Illiquid transactions, complex structured transactions, FTRs and counterparty credit risk may require nonmarket based inputs. Some of these inputs may be internally developed or extrapolated and utilized to estimate fair value. When such inputs have a significant impact on the measurement of fair value, the instrument is categorized as Level 3. The main driver of the contracts being classified as Level 3 is the inability to substantiate energy price curves in the market. A significant portion of the Level 3 instruments have been economically hedged which greatly limits potential earnings volatility.

AEP utilizes its trustee's external pricing service in its estimate of the fair value of the underlying investments held in the nuclear trusts. AEP's investment managers review and validate the prices utilized by the trustee to determine fair value. AEP's management performs its own valuation testing to verify the fair values of the securities. AEP receives audit reports of the trustee's operating controls and valuation processes. The trustee uses multiple pricing vendors for the assets held in the trusts.

Assets in the nuclear trusts, Other Cash Deposits and Cash and Cash Equivalents are classified using the following methods. Equities are classified as Level 1 holdings if they are actively traded on exchanges. Items classified as Level 1 are investments in money market funds, fixed income and equity mutual funds and domestic equity securities. They are valued based on observable inputs primarily unadjusted quoted prices in active markets for identical assets. Items classified as Level 2 are primarily investments in individual fixed income securities and cash equivalents funds. Fixed income securities do not trade on an exchange and do not have an official closing price but their valuation inputs are based on observable market data. Pricing vendors calculate bond valuations using financial models and matrices. The models use observable inputs including yields on benchmark securities, quotes by securities brokers, rating agency actions, discounts or premiums on securities compared to par prices, changes in yields for U.S. Treasury securities, corporate actions by bond issuers, prepayment schedules and histories, economic events and, for certain securities, adjustments to yields to reflect changes in the rate of inflation. Other securities with model-derived valuation inputs that are observable are also classified as Level 2 investments. Investments with unobservable valuation inputs are classified as Level 3 investments.

Fair Value Measurements of Long-term Debt

The fair values of Long-term Debt are based on quoted market prices, without credit enhancements, for the same or similar issues and the current interest rates offered for instruments with similar maturities classified as Level 2 measurement inputs. These instruments are not marked-to-market. The estimates presented are not necessarily indicative of the amounts that could be realized in a current market exchange.

The book values and fair values of Long-term Debt for the Registrant Subsidiaries as of March 31, 2013 and December 31, 2012 are summarized in the following table:

	March 31, 2013				December 31, 2012
Company	Book Value		Fair Value		Book Value		Fair Value
	(in thousands)
APCo	$	3,702,599	$	4,507,266	$	3,702,442	$	4,555,143
I&M		2,282,580		2,584,356		2,057,666		2,372,017
OPCo		3,560,628		4,170,595		3,860,440		4,560,337
PSO		949,856		1,154,618		949,871		1,175,759
SWEPCo		2,044,692		2,386,875		2,046,228		2,400,509

Fair Value Measurements of Trust Assets for Decommissioning and SNF Disposal

Nuclear decommissioning and spent nuclear fuel trust funds represent funds that regulatory commissions allow I&M to collect through rates to fund future decommissioning and spent nuclear fuel disposal liabilities. By rules or orders, the IURC, the MPSC and the FERC established investment limitations and general risk management guidelines. In general, limitations include:

Acceptable investments (rated investment grade or above when purchased).
Maximum percentage invested in a specific type of investment.
Prohibition of investment in obligations of AEP or its affiliates.
Withdrawals permitted only for payment of decommissioning costs and trust expenses.

I&M maintains trust records for each regulatory jurisdiction. These funds are managed by external investment managers who must comply with the guidelines and rules of the applicable regulatory authorities. The trust assets are invested to optimize the net of tax earnings of the trust giving consideration to liquidity, risk, diversification and other prudent investment objectives.

I&M records securities held in trust funds for decommissioning nuclear facilities and for the disposal of SNF at fair value. I&M classifies securities in the trust funds as available-for-sale due to their long-term purpose. Other-than-temporary impairments for investments in both fixed income and equity securities are considered realized losses as a result of securities being managed by an external investment management firm. The external investment management firm makes specific investment decisions regarding the equity and fixed income investments held in these trusts and generally intends to sell fixed income securities in an unrealized loss position as part of a tax optimization strategy. Impairments reduce the cost basis of the securities which will affect any future unrealized gain or realized gain or loss due to the adjusted cost of investment. I&M records unrealized gains and other-than-temporary impairments from securities in these trust funds as adjustments to the regulatory liability account for the nuclear decommissioning trust funds and to regulatory assets or liabilities for the SNF disposal trust funds in accordance with their treatment in rates. Consequently, changes in fair value of trust assets do not affect earnings or AOCI. The trust assets are recorded by jurisdiction and may not be used for another jurisdiction's liabilities. Regulatory approval is required to withdraw decommissioning funds.

The following is a summary of nuclear trust fund investments as of March 31, 2013 and December 31, 2012:

		March 31, 2013						December 31, 2012
		Estimated		Gross		Other-Than-		Estimated		Gross		Other-Than-
		Fair		Unrealized		Temporary		Fair		Unrealized		Temporary
		Value		Gains		Impairments		Value		Gains		Impairments
		(in thousands)
Cash and Cash Equivalents		$	13,320	$	-	$	-	$	16,783	$	-	$	-
Fixed Income Securities:
	United States Government		641,780		53,220		(907)		647,918		58,268		(747)
	Corporate Debt		37,267		4,522		(1,353)		35,399		4,903		(1,352)
	State and Local Government		279,027		(12)		(1,667)		270,090		1,006		(863)
	Subtotal Fixed Income Securities		958,074		57,730		(3,927)		953,407		64,177		(2,962)
Equity Securities - Domestic			816,135		360,386		(80,949)		735,582		284,599		(76,557)
Spent Nuclear Fuel and
	Decommissioning Trusts	$	1,787,529	$	418,116	$	(84,876)	$	1,705,772	$	348,776	$	(79,519)

The following table provides the securities activity within the decommissioning and SNF trusts for the three months ended March 31, 2013 and 2012:

	Three Months Ended March 31,
	2013		2012
	(in thousands)
Proceeds from Investment Sales	$	167,670	$	334,400
Purchases of Investments		184,299		352,877
Gross Realized Gains on Investment Sales		3,323		1,552
Gross Realized Losses on Investment Sales		2,315		1,416

The adjusted cost of fixed income securities was $900 million and $889 million as of March 31, 2013 and December 31, 2012, respectively. The adjusted cost of equity securities was $456 million and $451 million as of March 31, 2013 and December 31, 2012, respectively.

The fair value of fixed income securities held in the nuclear trust funds, summarized by contractual maturities, as of March 31, 2013 was as follows:

	Fair Value of
	Fixed Income
	Securities

	(in thousands)
Within 1 year	$	95,390
1 year – 5 years		355,812
5 years – 10 years		273,653
After 10 years		233,219
Total	$	958,074

Fair Value Measurements of Financial Assets and Liabilities

The following tables set forth, by level within the fair value hierarchy, the Registrant Subsidiaries' financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2013 and December 31, 2012. As required by the accounting guidance for “Fair Value Measurements and Disclosures,” financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Management's assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. There have not been any significant changes in management's valuation techniques.

I&M
Assets and Liabilities Measured at Fair Value on a Recurring Basis
March 31, 2013

			Level 1		Level 2		Level 3		Other		Total

Assets:			(in thousands)

Risk Management Assets
Risk Management Commodity Contracts (a) (b)			$	2,200	$	77,123	$	9,136	$	(54,438)	$	34,021
Cash Flow Hedges:
	Commodity Hedges (a)			-		880		-		(220)		660
Total Risk Management Assets				2,200		78,003		9,136		(54,658)		34,681

Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (c)				4,896		-		-		8,424		13,320
Fixed Income Securities:
	United States Government			-		641,780		-		-		641,780
	Corporate Debt			-		37,267		-		-		37,267
	State and Local Government			-		279,027		-		-		279,027
		Subtotal Fixed Income Securities		-		958,074		-		-		958,074
Equity Securities - Domestic (d)				816,135		-		-		-		816,135
Total Spent Nuclear Fuel and Decommissioning Trusts				821,031		958,074		-		8,424		1,787,529

Total Assets			$	823,231	$	1,036,077	$	9,136	$	(46,234)	$	1,822,210

Liabilities:

Risk Management Liabilities
Risk Management Commodity Contracts (a) (b)			$	1,065	$	70,273	$	3,085	$	(56,546)	$	17,877
Cash Flow Hedges:
	Commodity Hedges (a)			-		531		-		(220)		311
Total Risk Management Liabilities			$	1,065	$	70,804	$	3,085	$	(56,766)	$	18,188

I&M
		Assets and Liabilities Measured at Fair Value on a Recurring Basis
		December 31, 2012

			Level 1		Level 2		Level 3		Other		Total

Assets:			(in thousands)

Risk Management Assets
Risk Management Commodity Contracts (a) (b)			$	2,858	$	120,242	$	11,717	$	(84,474)	$	50,343
Cash Flow Hedges:
	Commodity Hedges (a)			-		330		-		(130)		200
Total Risk Management Assets				2,858		120,572		11,717		(84,604)		50,543

Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (c)				6,508		-		-		10,275		16,783
Fixed Income Securities:
	United States Government			-		647,918		-		-		647,918
	Corporate Debt			-		35,399		-		-		35,399
	State and Local Government			-		270,090		-		-		270,090
		Subtotal Fixed Income Securities		-		953,407		-		-		953,407
Equity Securities - Domestic (d)				735,582		-		-		-		735,582
Total Spent Nuclear Fuel and Decommissioning Trusts				742,090		953,407		-		10,275		1,705,772

Total Assets			$	744,948	$	1,073,979	$	11,717	$	(74,329)	$	1,756,315

Liabilities:

Risk Management Liabilities
Risk Management Commodity Contracts (a) (b)			$	1,346	$	110,621	$	4,176	$	(91,183)	$	24,960
Cash Flow Hedges:
	Commodity Hedges (a)			-		1,061		-		(130)		931
	Interest Rate/Foreign Currency Hedges			-		19,524		-		-		19,524
Total Risk Management Liabilities			$	1,346	$	131,206	$	4,176	$	(91,313)	$	45,415

(a) Amounts in “Other” column primarily represent counterparty netting of risk management and hedging contracts and associated cash collateral under the accounting guidance for “Derivatives and Hedging.”

(b) Substantially comprised of power contracts for APCo, I&M and OPCo and coal contracts for PSO and SWEPCo.

(c) Amounts in “Other” column primarily represent accrued interest receivables from financial institutions. Level 2 amounts primarily represent investments in money market funds.

(d) Amounts represent publicly traded equity securities and equity-based mutual funds.

(e) Amounts in “Other” column primarily represent cash deposits with third parties. Level 1 and Level 2 amounts primarily represent investments in money market funds.

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2013 and 2012.

The following tables set forth a reconciliation of changes in the fair value of net trading derivatives classified as Level 3 in the fair value hierarchy:

Three Months Ended March 31, 2013		APCo		I&M		OPCo
		(in thousands)
Balance as of December 31, 2012		$	10,979	$	7,541	$	15,429
Realized Gain (Loss) Included in Net Income
	(or Changes in Net Assets) (a) (b)		(1,456)		(1,005)		(2,055)
Unrealized Gain (Loss) Included in Net
	Income (or Changes in Net Assets) Relating
	to Assets Still Held at the Reporting Date (a)		-		-		(1,988)
Realized and Unrealized Gains (Losses)
	Included in Other Comprehensive Income		-		-		-
Purchases, Issuances and Settlements (c)			257		179		366
Transfers into Level 3 (d) (e)			632		434		888
Transfers out of Level 3 (e) (f)			(533)		(366)		(749)
Changes in Fair Value Allocated to Regulated
	Jurisdictions (g)		(1,123)		(732)		490
Balance as of March 31, 2013		$	8,756	$	6,051	$	12,381

Three Months Ended March 31, 2012		APCo		I&M		OPCo
		(in thousands)
Balance as of December 31, 2011		$	1,971	$	1,263	$	2,666
Realized Gain (Loss) Included in Net Income
	(or Changes in Net Assets) (a) (b)		(3,580)		(2,411)		(5,056)
Unrealized Gain (Loss) Included in Net
	Income (or Changes in Net Assets) Relating
	to Assets Still Held at the Reporting Date (a)		-		-		6,509
Realized and Unrealized Gains (Losses)
	Included in Other Comprehensive Income		49		31		66
Purchases, Issuances and Settlements (c)			5,948		4,043		8,477
Transfers into Level 3 (d) (e)			2,508		1,764		3,699
Transfers out of Level 3 (e) (f)			(4,001)		(2,814)		(5,900)
Changes in Fair Value Allocated to Regulated
	Jurisdictions (g)		5,086		3,738		1,306
Balance as of March 31, 2012		$	7,981	$	5,614	$	11,767