8. 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.

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 non-binding 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. Long-dated and illiquid complex or structured transactions and FTRs can introduce the need for internally developed modeling inputs based upon extrapolations and assumptions of observable market data 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. To a lesser extent, these contracts could be sensitive to volumetric estimates for some structured transactions. However, a significant portion of our Level 3 volumetric contractual positions 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 June 30, 2012 and December 31, 2011 are summarized in the following table:

	June 30, 2012				December 31, 2011
	Book Value		Fair Value		Book Value		Fair Value
	(in millions)
Long-term Debt	$	17,302	$	20,025	$	16,516	$	19,259

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:

			June 30, 2012
					Gross		Gross		Estimated
					Unrealized		Unrealized		Fair
Other Temporary Investments			Cost		Gains		Losses		Value
			(in millions)
Restricted Cash (a)			$	217	$	-	$	-	$	217
Fixed Income Securities:
	Mutual Funds			64		1		-		65
Equity Securities - Mutual Funds				11		4		-		15
Total Other Temporary Investments			$	292	$	5	$	-	$	297

			December 31, 2011
					Gross		Gross		Estimated
					Unrealized		Unrealized		Fair
Other Temporary Investments			Cost		Gains		Losses		Value
			(in millions)
Restricted Cash (a)			$	216	$	-	$	-	$	216
Fixed Income Securities:
	Mutual Funds			64		-		-		64
Equity Securities - Mutual Funds				11		3		-		14
Total Other Temporary Investments			$	291	$	3	$	-	$	294

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

The following table provides the activity for our debt and equity securities within Other Temporary Investments for the three and six months ended June 30, 2012 and 2011:

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
	(in millions)
Proceeds from Investment Sales	$	-	$	51	$	-	$	247
Purchases of Investments		1		5		1		153
Gross Realized Gains on Investment Sales		-		-		-		-
Gross Realized Losses on Investment Sales		-		-		-		-

As of June 30, 2012 and December 31, 2011, we had no Other Temporary Investments with an unrealized loss position. As of June 30, 2012, 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.

The following tables provide details of Other Temporary Investments included in Accumulated Other Comprehensive Income (Loss) on our balance sheet and the reasons for changes for the three and six months ended June 30, 2012. All amounts in the following table are presented net of related income taxes.

Total Accumulated Other Comprehensive Income (Loss) Activity for Other Temporary Investments
Three Months Ended June 30, 2012

		(in millions)
Balance in AOCI as of March 31, 2012		$	4
Changes in Fair Value Recognized in AOCI			(1)
Amount of (Gain) or Loss Reclassified from AOCI to Statement of Income:
	Interest Income		-
Balance in AOCI as of June 30, 2012		$	3

Total Accumulated Other Comprehensive Income (Loss) Activity for Other Temporary Investments
Six Months Ended June 30, 2012

		(in millions)
Balance in AOCI as of December 31, 2011		$	2
Changes in Fair Value Recognized in AOCI			1
Amount of (Gain) or Loss Reclassified from AOCI to Statement of Income:
	Interest Income		-
Balance in AOCI as of June 30, 2012		$	3

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 debt 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 debt investments held in these trusts and generally intends to sell debt 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 June 30, 2012 and December 31, 2011:

		June 30, 2012						December 31, 2011
		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		$	16	$	-	$	-	$	18	$	-	$	-
Fixed Income Securities:
	United States Government		644		104		(1)		544		61		(1)
	Corporate Debt		44		5		(1)		54		5		(2)
	State and Local Government		256		1		(1)		330		-		(2)
	Subtotal Fixed Income Securities		944		110		(3)		928		66		(5)
Equity Securities - Domestic			698		258		(79)		646		215		(80)
Spent Nuclear Fuel and
	Decommissioning Trusts	$	1,658	$	368	$	(82)	$	1,592	$	281	$	(85)

The following table provides the securities activity within the decommissioning and SNF trusts for the three and six months ended June 30, 2012 and 2011:

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
	(in millions)
Proceeds from Investment Sales	$	183	$	177	$	517	$	465
Purchases of Investments		192		186		545		492
Gross Realized Gains on Investment Sales		3		7		5		12
Gross Realized Losses on Investment Sales		1		4		2		9

The adjusted cost of debt securities was $834 million and $862 million as of June 30, 2012 and December 31, 2011, respectively. The adjusted cost of equity securities was $440 million and $431 million as of June 30, 2012 and December 31, 2011, respectively.

The fair value of debt securities held in the nuclear trust funds, summarized by contractual maturities, as of June 30, 2012 was as follows:

	Fair Value
	of Debt
	Securities
	(in millions)
Within 1 year	$	40
1 year – 5 years		362
5 years – 10 years		315
After 10 years		227
Total	$	944

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 June 30, 2012 and December 31, 2011. 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
June 30, 2012

			Level 1		Level 2		Level 3		Other		Total

Assets:			(in millions)

Cash and Cash Equivalents (a)			$	20	$	-	$	-	$	277	$	297

Other Temporary Investments
Restricted Cash (a)				186		-		-		31		217
Fixed Income Securities:
	Mutual Funds			65		-		-		-		65
Equity Securities - Mutual Funds (b)				15		-		-		-		15
Total Other Temporary Investments				266		-		-		31		297

Risk Management Assets
Risk Management Commodity Contracts (c) (f)				53		1,509		163		(1,128)		597
Cash Flow Hedges:
	Commodity Hedges (c)			13		38		1		(14)		38
Fair Value Hedges				-		2		-		-		2
De-designated Risk Management Contracts (d)				-		-		-		21		21
Total Risk Management Assets				66		1,549		164		(1,121)		658

Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (e)				-		4		-		12		16
Fixed Income Securities:
	United States Government			-		644		-		-		644
	Corporate Debt			-		44		-		-		44
	State and Local Government			-		256		-		-		256
		Subtotal Fixed Income Securities		-		944		-		-		944
Equity Securities - Domestic (b)				698		-		-		-		698
Total Spent Nuclear Fuel and Decommissioning Trusts				698		948		-		12		1,658

Total Assets			$	1,050	$	2,497	$	164	$	(801)	$	2,910

Liabilities:

Risk Management Liabilities
Risk Management Commodity Contracts (c) (f)			$	47	$	1,419	$	67	$	(1,204)	$	329
Cash Flow Hedges:
	Commodity Hedges (c)			-		74		-		(14)		60
	Interest Rate/Foreign Currency Hedges			-		35		-		-		35
Total Risk Management Liabilities			$	47	$	1,528	$	67	$	(1,218)	$	424

Assets and Liabilities Measured at Fair Value on a Recurring Basis
December 31, 2011

			Level 1		Level 2		Level 3		Other		Total

Assets:			(in millions)

Cash and Cash Equivalents (a)			$	6	$	-	$	-	$	215	$	221

Other Temporary Investments
Restricted Cash (a)				191		-		-		25		216
Fixed Income Securities:
	Mutual Funds			64		-		-		-		64
Equity Securities - Mutual Funds (b)				14		-		-		-		14
Total Other Temporary Investments				269		-		-		25		294

Risk Management Assets
Risk Management Commodity Contracts (c) (g)				47		1,299		147		(945)		548
Cash Flow Hedges:
	Commodity Hedges (c)			15		23		-		(18)		20
De-designated Risk Management Contracts (d)				-		-		-		28		28
Total Risk Management Assets				62		1,322		147		(935)		596

Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (e)				-		5		-		13		18
Fixed Income Securities:
	United States Government			-		544		-		-		544
	Corporate Debt			-		54		-		-		54
	State and Local Government			-		330		-		-		330
		Subtotal Fixed Income Securities		-		928		-		-		928
Equity Securities - Domestic (b)				646		-		-		-		646
Total Spent Nuclear Fuel and Decommissioning Trusts				646		933		-		13		1,592

Total Assets			$	983	$	2,255	$	147	$	(682)	$	2,703

Liabilities:

Risk Management Liabilities
Risk Management Commodity Contracts (c) (g)			$	43	$	1,209	$	78	$	(1,052)	$	278
Cash Flow Hedges:
	Commodity Hedges (c)			-		43		-		(18)		25
	Interest Rate/Foreign Currency Hedges			-		42		-		-		42
Total Risk Management Liabilities			$	43	$	1,294	$	78	$	(1,070)	$	345

(a) Amounts in ''Other'' column primarily represent cash deposits in bank accounts with financial institutions or with third parties. Level 1 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) 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.

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

(f) The June 30, 2012 maturity of the net fair value of risk management contracts prior to cash collateral, assets/(liabilities), is as follows: Level 1 matures $2 million in 2012, $12 million in periods 2013-2015 and ($8) million in periods 2016-2018; Level 2 matures $12 million in 2012, $52 million in periods 2013-2015, $17 million in periods 2016-2017 and $9 million in periods 2018-2030; Level 3 matures $7 million in 2012, $38 million in periods 2013-2015, $24 million in periods 2016-2017 and $27 million in periods 2018-2030. Risk management commodity contracts are substantially comprised of power contracts.

(g) The December 31, 2011 maturity of the net fair value of risk management contracts prior to cash collateral, assets/(liabilities), is as follows: Level 1 matures $3 million in 2012, $7 million in periods 2013-2015 and ($6) million in periods 2016-2018; Level 2 matures $21 million in 2012, $50 million in periods 2013-2015, $11 million in periods 2016-2017 and $8 million in periods 2018-2030; Level 3 matures ($19) million in 2012, $44 million in periods 2013-2015, $18 million in periods 2016-2017 and $26 million in periods 2018-2030. Risk management commodity contracts are substantially comprised of power contracts.

There were no transfers between Level 1 and Level 2 during the three and six months ended June 30, 2012 and 2011.

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 June 30, 2012		Assets (Liabilities)

		(in millions)
Balance as of March 31, 2012		$	92
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (a) (b)			(11)
Unrealized Gain (Loss) Included in Net Income (or Changes in Net Assets)
	Relating to Assets Still Held at the Reporting Date (a)		4
Realized and Unrealized Gains (Losses) Included in Other Comprehensive Income			-
Purchases, Issuances and Settlements (c)			15
Transfers into Level 3 (d) (f)			(1)
Transfers out of Level 3 (e) (f)			(8)
Changes in Fair Value Allocated to Regulated Jurisdictions (g)			6
Balance as of June 30, 2012		$	97

		Net Risk Management
Three Months Ended June 30, 2011		Assets (Liabilities)

		(in millions)
Balance as of March 31, 2011		$	73
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (a) (b)			(10)
Unrealized Gain (Loss) Included in Net Income (or Changes in Net Assets)
	Relating to Assets Still Held at the Reporting Date (a)		10
Realized and Unrealized Gains (Losses) Included in Other Comprehensive Income			-
Purchases, Issuances and Settlements (c)			14
Transfers into Level 3 (d) (f)			3
Transfers out of Level 3 (e) (f)			(4)
Changes in Fair Value Allocated to Regulated Jurisdictions (g)			(9)
Balance as of June 30, 2011		$	77

		Net Risk Management
Six Months Ended June 30, 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)			(17)
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			-
Purchases, Issuances and Settlements (c)			33
Transfers into Level 3 (d) (f)			14
Transfers out of Level 3 (e) (f)			(20)
Changes in Fair Value Allocated to Regulated Jurisdictions (g)			13
Balance as of June 30, 2012		$	97

		Net Risk Management
Six Months Ended June 30, 2011		Assets (Liabilities)

		(in millions)
Balance as of December 31, 2010		$	85
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (a) (b)			(9)
Unrealized Gain (Loss) Included in Net Income (or Changes in Net Assets)
	Relating to Assets Still Held at the Reporting Date (a)		7
Realized and Unrealized Gains (Losses) Included in Other Comprehensive Income			-
Purchases, Issuances and Settlements (c)			6
Transfers into Level 3 (d) (f)			4
Transfers out of Level 3 (e) (f)			(12)
Changes in Fair Value Allocated to Regulated Jurisdictions (g)			(4)
Balance as of June 30, 2011		$	77

(a) Included in revenues on our 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) Represents existing assets or liabilities that were previously categorized as Level 3.

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

(g) Relates to the net gains (losses) of those contracts that are not reflected on our 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 June 30, 2012:

	Fair Value				Valuation	Significant	Forward Price Range
	Assets		Liabilities		Technique	Unobservable Input (a)	Low		High
	(in millions)
Energy Contracts	$	152	$	60	Discounted Cash Flow	Forward Market Price	$	10.76	$	174.18
FTRs		12		7	Discounted Cash Flow	Forward Market Price		(10.77)		10.78
Total	$	164	$	67

(a) Represents market prices beyond defined terms for Levels 1 and 2.

Fair Value Measurements

7. 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.

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 non-binding 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. Long-dated and illiquid complex or structured transactions and FTRs can introduce the need for internally developed modeling inputs based upon extrapolations and assumptions of observable market data 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. To a lesser extent, these contracts could be sensitive to volumetric estimates for some structured transactions. However, a significant portion of the Level 3 volumetric contractual positions 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 June 30, 2012 and December 31, 2011 are summarized in the following table:

	June 30, 2012				December 31, 2011
Company	Book Value		Fair Value		Book Value		Fair Value

	(in thousands)
APCo	$	3,677,116	$	4,380,840	$	3,726,251	$	4,431,912
I&M		2,131,501		2,402,581		2,057,675		2,339,344
OPCo		3,860,044		4,453,479		4,054,148		4,665,739
PSO		949,897		1,138,292		947,364		1,123,306
SWEPCo		2,047,676		2,315,719		1,728,637		2,019,094

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 June 30, 2012 and December 31, 2011. 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.

Assets and Liabilities Measured at Fair Value on a Recurring Basis
June 30, 2012
APCo
		Level 1		Level 2		Level 3		Other		Total

Assets:		(in thousands)

Risk Management Assets
Risk Management Commodity Contracts (a) (f)		$	5,566	$	331,309	$	27,645	$	(279,843)	$	84,677
Cash Flow Hedges:
	Commodity Hedges (a)		-		1,186		29		(252)		963
De-designated Risk Management Contracts (b)			-		-		-		877		877
Total Risk Management Assets		$	5,566	$	332,495	$	27,674	$	(279,218)	$	86,517

Liabilities:

Risk Management Liabilities
Risk Management Commodity Contracts (a) (f)		$	2,784	$	321,155	$	14,810	$	(296,846)	$	41,903
Cash Flow Hedges:
	Commodity Hedges (a)		-		4,023		-		(252)		3,771
Total Risk Management Liabilities		$	2,784	$	325,178	$	14,810	$	(297,098)	$	45,674

Assets and Liabilities Measured at Fair Value on a Recurring Basis
December 31, 2011
APCo
		Level 1		Level 2		Level 3		Other		Total

Assets:		(in thousands)

Risk Management Assets
Risk Management Commodity Contracts (a) (f)		$	4,680	$	302,128	$	25,423	$	(255,324)	$	76,907
Cash Flow Hedges:
	Commodity Hedges (a)		-		1,095		-		(664)		431
De-designated Risk Management Contracts (b)			-		-		-		1,533		1,533
Total Risk Management Assets		$	4,680	$	303,223	$	25,423	$	(254,455)	$	78,871

Liabilities:

Risk Management Liabilities
Risk Management Commodity Contracts (a) (f)		$	2,535	$	291,194	$	23,379	$	(279,997)	$	37,111
Cash Flow Hedges:
	Commodity Hedges (a)		-		3,009		73		(664)		2,418
Total Risk Management Liabilities		$	2,535	$	294,203	$	23,452	$	(280,661)	$	39,529

(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) 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.

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

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

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

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

There were no transfers between Level 1 and Level 2 during the three and six months ended June 30, 2012 and 2011.

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 June 30, 2012		APCo		I&M		OPCo		PSO		SWEPCo

		(in thousands)
Balance as of March 31, 2012		$	7,981	$	5,614	$	11,767	$	-	$	-
Realized Gain (Loss) Included in Net Income
	(or Changes in Net Assets) (a) (b)		(3,210)		(2,258)		(4,734)		-		-
Unrealized Gain (Loss) Included in Net
	Income (or Changes in Net Assets) Relating
	to Assets Still Held at the Reporting Date (a)		-		-		1,711		-		-
Realized and Unrealized Gains (Losses)
	Included in Other Comprehensive Income		(11)		(8)		(16)		-		-
Purchases, Issuances and Settlements (c)			4,988		3,508		7,355		-		-
Transfers into Level 3 (d) (f)			1,301		915		1,919		-		-
Transfers out of Level 3 (e) (f)			(557)		(392)		(821)		-		-
Changes in Fair Value Allocated to Regulated
	Jurisdictions (g)		2,372		1,670		1,788		-		-
Balance as of June 30, 2012		$	12,864	$	9,049	$	18,969	$	-	$	-

Three Months Ended June 30, 2011		APCo		I&M		OPCo		PSO		SWEPCo

		(in thousands)
Balance as of March 31, 2011		$	5,472	$	3,209	$	6,893	$	-	$	-
Realized Gain (Loss) Included in Net Income
	(or Changes in Net Assets) (a) (b)		(3,219)		(1,910)		(4,096)		-		-
Unrealized Gain (Loss) Included in Net
	Income (or Changes in Net Assets) Relating
	to Assets Still Held at the Reporting Date (a)		-		-		1,149		-		-
Realized and Unrealized Gains (Losses)
	Included in Other Comprehensive Income		(50)		(30)		(64)		-		-
Purchases, Issuances and Settlements (c)			4,814		2,856		6,126		-		-
Transfers into Level 3 (d) (f)			1,125		661		1,417		-		-
Transfers out of Level 3 (e) (f)			(213)		(125)		(269)		-		-
Changes in Fair Value Allocated to Regulated
	Jurisdictions (g)		(2,608)		(1,511)		(4,397)		-		-
Balance as of June 30, 2011		$	5,321	$	3,150	$	6,759	$	-	$	-

Six Months Ended June 30, 2012		APCo		I&M		OPCo		PSO		SWEPCo

		(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)		(5,313)		(3,590)		(7,533)		-		-
Unrealized Gain (Loss) Included in Net
	Income (or Changes in Net Assets) Relating
	to Assets Still Held at the Reporting Date (a)		-		-		7,035		-		-
Realized and Unrealized Gains (Losses)
	Included in Other Comprehensive Income		52		34		71		-		-
Purchases, Issuances and Settlements (c)			11,499		7,811		16,397		-		-
Transfers into Level 3 (d) (f)			3,562		2,341		4,934		-		-
Transfers out of Level 3 (e) (f)			(4,676)		(3,028)		(6,388)		-		-
Changes in Fair Value Allocated to Regulated
	Jurisdictions (g)		5,769		4,218		1,787		-		-
Balance as of June 30, 2012		$	12,864	$	9,049	$	18,969	$	-	$	-

Six Months Ended June 30, 2011		APCo		I&M		OPCo		PSO		SWEPCo

		(in thousands)
Balance as of December 31, 2010		$	5,131	$	3,108	$	6,583	$	1	$	2
Realized Gain (Loss) Included in Net Income
	(or Changes in Net Assets) (a) (b)		(2,489)		(1,473)		(3,158)		-		-
Unrealized Gain (Loss) Included in Net
	Income (or Changes in Net Assets) Relating
	to Assets Still Held at the Reporting Date (a)		-		-		4,949		-		-
Realized and Unrealized Gains (Losses)
	Included in Other Comprehensive Income		(50)		(30)		(64)		-		-
Purchases, Issuances and Settlements (c)			3,881		2,311		4,955		-		-
Transfers into Level 3 (d) (f)			1,221		718		1,539		-		-
Transfers out of Level 3 (e) (f)			(2,853)		(1,713)		(3,648)		-		-
Changes in Fair Value Allocated to Regulated
	Jurisdictions (g)		480		229		(4,397)		(1)		(2)
Balance as of June 30, 2011		$	5,321	$	3,150	$	6,759	$	-	$	-

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

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

(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 assets/liabilities.

The following tables quantify the significant unobservable inputs used in developing the fair value of Level 3 positions as of June 30, 2012:

APCo	Fair Value				Valuation	Significant	Forward Price Range
	Assets		Liabilities		Technique	Unobservable Input (a)	Low		High
	(in thousands)
Energy Contracts	$	24,551	$	12,881	Discounted Cash Flow	Forward Market Price	$	10.76	$	161.12
FTRs		3,123		1,929	Discounted Cash Flow	Forward Market Price		(4.02)		10.78
Total	$	27,674	$	14,810

(a) Represents market prices beyond defined terms for Levels 1 and 2.

Fair Value Measurements

7. 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.

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 non-binding 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. Long-dated and illiquid complex or structured transactions and FTRs can introduce the need for internally developed modeling inputs based upon extrapolations and assumptions of observable market data 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. To a lesser extent, these contracts could be sensitive to volumetric estimates for some structured transactions. However, a significant portion of the Level 3 volumetric contractual positions 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 June 30, 2012 and December 31, 2011 are summarized in the following table:

	June 30, 2012				December 31, 2011
Company	Book Value		Fair Value		Book Value		Fair Value

	(in thousands)
APCo	$	3,677,116	$	4,380,840	$	3,726,251	$	4,431,912
I&M		2,131,501		2,402,581		2,057,675		2,339,344
OPCo		3,860,044		4,453,479		4,054,148		4,665,739
PSO		949,897		1,138,292		947,364		1,123,306
SWEPCo		2,047,676		2,315,719		1,728,637		2,019,094

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 debt 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 debt investments held in these trusts and generally intends to sell debt 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 June 30, 2012 and December 31, 2011:

		June 30, 2012						December 31, 2011
		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		$	15,826	$	-	$	-	$	18,229	$	-	$	-
Fixed Income Securities:
	United States Government		643,542		104,394		(640)		543,506		60,946		(547)
	Corporate Debt		44,354		5,113		(1,463)		53,979		4,932		(1,536)
	State and Local Government		256,373		698		(1,182)		329,986		(430)		(2,236)
	Subtotal Fixed Income Securities		944,269		110,205		(3,285)		927,471		65,448		(4,319)
Equity Securities - Domestic			697,407		257,975		(78,841)		646,032		214,748		(79,536)
Spent Nuclear Fuel and
	Decommissioning Trusts	$	1,657,502	$	368,180	$	(82,126)	$	1,591,732	$	280,196	$	(83,855)

The following table provides the securities activity within the decommissioning and SNF trusts for the three and six months ended June 30, 2012 and 2011:

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
	(in thousands)
Proceeds from Investment Sales	$	182,179	$	176,927	$	516,579	$	464,688
Purchases of Investments		192,104		186,217		544,981		492,162
Gross Realized Gains on Investment Sales		3,380		7,392		4,932		12,405
Gross Realized Losses on Investment Sales		803		4,043		2,219		9,290

The adjusted cost of debt securities was $834 million and $862 million as of June 30, 2012 and December 31, 2011, respectively. The adjusted cost of equity securities was $440 million and $431 million as of June 30, 2012 and December 31, 2011, respectively.

The fair value of debt securities held in the nuclear trust funds, summarized by contractual maturities, as of June 30, 2012 was as follows:

	Fair Value
	of Debt
	Securities

	(in thousands)
Within 1 year	$	39,580
1 year – 5 years		361,676
5 years – 10 years		315,547
After 10 years		227,466
Total	$	944,269

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 June 30, 2012 and December 31, 2011. 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.

Assets and Liabilities Measured at Fair Value on a Recurring Basis
June 30, 2012
I&M
			Level 1		Level 2		Level 3		Other		Total

Assets:			(in thousands)

Risk Management Assets
Risk Management Commodity Contracts (a) (f)			$	3,915	$	242,091	$	19,445	$	(196,279)	$	69,172
Cash Flow Hedges:
	Commodity Hedges (a)			-		834		21		(178)		677
De-designated Risk Management Contracts (b)				-		-		-		617		617
Total Risk Management Assets				3,915		242,925		19,466		(195,840)		70,466

Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (d)				-		3,984		-		11,842		15,826
Fixed Income Securities:
	United States Government			-		643,542		-		-		643,542
	Corporate Debt			-		44,354		-		-		44,354
	State and Local Government			-		256,373		-		-		256,373
		Subtotal Fixed Income Securities		-		944,269		-		-		944,269
Equity Securities - Domestic (e)				697,407		-		-		-		697,407
Total Spent Nuclear Fuel and Decommissioning Trusts				697,407		948,253		-		11,842		1,657,502

Total Assets			$	701,322	$	1,191,178	$	19,466	$	(183,998)	$	1,727,968

Liabilities:

Risk Management Liabilities
Risk Management Commodity Contracts (a) (f)			$	1,958	$	225,269	$	10,417	$	(208,198)	$	29,446
Cash Flow Hedges:
	Commodity Hedges (a)			-		2,784		-		(178)		2,606
	Interest Rate/Foreign Currency Hedges			-		18,095		-		-		18,095
Total Risk Management Liabilities			$	1,958	$	246,148	$	10,417	$	(208,376)	$	50,147

		Assets and Liabilities Measured at Fair Value on a Recurring Basis
		December 31, 2011
I&M
			Level 1		Level 2		Level 3		Other		Total

Assets:			(in thousands)

Risk Management Assets
Risk Management Commodity Contracts (a) (f)			$	3,001	$	203,175	$	16,305	$	(162,227)	$	60,254
Cash Flow Hedges:
	Commodity Hedges (a)			-		702		-		(425)		277
De-designated Risk Management Contracts (b)				-		-		-		983		983
Total Risk Management Assets				3,001		203,877		16,305		(161,669)		61,514

Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (d)				-		5,431		-		12,798		18,229
Fixed Income Securities:
	United States Government			-		543,506		-		-		543,506
	Corporate Debt			-		53,979		-		-		53,979
	State and Local Government			-		329,986		-		-		329,986
		Subtotal Fixed Income Securities		-		927,471		-		-		927,471
Equity Securities - Domestic (e)				646,032		-		-		-		646,032
Total Spent Nuclear Fuel and Decommissioning Trusts				646,032		932,902		-		12,798		1,591,732

Total Assets			$	649,033	$	1,136,779	$	16,305	$	(148,871)	$	1,653,246

Liabilities:

Risk Management Liabilities
Risk Management Commodity Contracts (a) (f)			$	1,626	$	185,092	$	14,995	$	(178,022)	$	23,691
Cash Flow Hedges:
	Commodity Hedges (a)			-		1,901		47		(425)		1,523
	Interest Rate/Foreign Currency Hedges			-		10,637		-		-		10,637
Total Risk Management Liabilities			$	1,626	$	197,630	$	15,042	$	(178,447)	$	35,851