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 amount of risk taken is determined by the Commercial Operations, Energy Supply and Finance groups in accordance with our established risk management policies as approved by the Finance Committee of our Board of Directors. Our market risk oversight staff independently monitors our risk policies, procedures and risk levels and provides members of the Commercial Operations Risk Committee (Regulated Risk Committee) and the Energy Supply Risk Committee (Competitive Risk Committee) various daily, weekly and/or monthly reports regarding compliance with policies, limits and procedures. The Regulated Risk Committee consists of AEPSC's Chief Operating Officer, Chief Financial Officer, Executive Vice President of Generation, Senior Vice President of Commercial Operations and Chief Risk Officer. The Competitive Risk Committee consists of AEPSC's Chief Operating Officer, Chief Financial Officer and Chief Risk Officer in addition to AEP Energy Supply's President and Vice President.

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, 2014 and December 31, 2013 are summarized in the following table:

	March 31, 2014				December 31, 2013
	Book Value		Fair Value		Book Value		Fair Value
	(in millions)
Long-term Debt	$	18,087	$	19,738	$	18,377	$	19,672

Fair Value Measurements of Other Temporary Investments

Other Temporary Investments include funds held by trustees primarily for the payment of securitization bonds and Securities Available for Sale, including 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, 2014
					Gross		Gross		Estimated
					Unrealized		Unrealized		Fair
Other Temporary Investments			Cost		Gains		Losses		Value
			(in millions)
Restricted Cash (a)			$	206	$	-	$	-	$	206
Fixed Income Securities:
	Mutual Funds			80		-		-		80
Equity Securities - Mutual Funds				13		11		-		24
Total Other Temporary Investments			$	299	$	11	$	-	$	310

			December 31, 2013
					Gross		Gross		Estimated
					Unrealized		Unrealized		Fair
Other Temporary Investments			Cost		Gains		Losses		Value
			(in millions)
Restricted Cash (a)			$	250	$	-	$	-	$	250
Fixed Income Securities:
	Mutual Funds			80		-		-		80
Equity Securities - Mutual Funds				12		11		-		23
Total Other Temporary Investments			$	342	$	11	$	-	$	353

(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, 2014 and 2013:

	Three Months Ended March 31,
	2014		2013
	(in millions)
Proceeds from Investment Sales	$	-	$	-
Purchases of Investments		1		11
Gross Realized Gains on Investment Sales		-		-
Gross Realized Losses on Investment Sales		-		-

As of March 31, 2014 and December 31, 2013, we had no Other Temporary Investments with an unrealized loss position. As of March 31, 2014, fixed income securities were primarily debt based mutual funds with short and intermediate maturities. Mutual funds may be sold and do not contain maturity dates.

For details of the reasons for changes in Securities Available for Sale included in Accumulated Other Comprehensive Income (Loss) for the three months ended March 31, 2014 and 2013, see Note 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 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, 2014 and December 31, 2013:

		March 31, 2014						December 31, 2013
		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		$	12	$	-	$	-	$	19	$	-	$	-
Fixed Income Securities:
	United States Government		606		31		(4)		609		26		(4)
	Corporate Debt		43		4		(1)		37		2		(1)
	State and Local Government		281		1		-		255		1		-
	Subtotal Fixed Income Securities		930		36		(5)		901		29		(5)
Equity Securities - Domestic			1,020		514		(80)		1,012		506		(82)
Spent Nuclear Fuel and
	Decommissioning Trusts	$	1,962	$	550	$	(85)	$	1,932	$	535	$	(87)

The following table provides the securities activity within the decommissioning and SNF trusts for the three months ended March 31, 2014 and 2013:

	Three Months Ended March 31,
	2014		2013
	(in millions)
Proceeds from Investment Sales	$	148	$	168
Purchases of Investments		164		185
Gross Realized Gains on Investment Sales		8		3
Gross Realized Losses on Investment Sales		1		2

The adjusted cost of fixed income securities was $894 million and $872 million as of March 31, 2014 and December 31, 2013, respectively. The adjusted cost of equity securities was $506 million and $506 million as of March 31, 2014 and December 31, 2013, respectively.

The fair value of fixed income securities held in the nuclear trust funds, summarized by contractual maturities, as of March 31, 2014 was as follows:

	Fair Value of
	Fixed Income
	Securities
	(in millions)
Within 1 year	$	82
1 year – 5 years		386
5 years – 10 years		193
After 10 years		269
Total	$	930

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, 2014 and December 31, 2013. 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, 2014

			Level 1		Level 2		Level 3		Other		Total

Assets:			(in millions)

Cash and Cash Equivalents (a)			$	16	$	1	$	-	$	275	$	292

Other Temporary Investments
Restricted Cash (a)				187		7		-		12		206
Fixed Income Securities:
	Mutual Funds			80		-		-		-		80
Equity Securities - Mutual Funds (b)				24		-		-		-		24
Total Other Temporary Investments				291		7		-		12		310

Risk Management Assets
Risk Management Commodity Contracts (c) (d)				20		586		128		(364)		370
Cash Flow Hedges:
	Commodity Hedges (c)			-		21		2		(10)		13
Fair Value Hedges				-		2		-		2		4
De-designated Risk Management Contracts (e)				-		-		-		4		4
Total Risk Management Assets				20		609		130		(368)		391

Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (f)				3		-		-		9		12
Fixed Income Securities:
	United States Government			-		606		-		-		606
	Corporate Debt			-		43		-		-		43
	State and Local Government			-		281		-		-		281
		Subtotal Fixed Income Securities		-		930		-		-		930
Equity Securities - Domestic (b)				1,020		-		-		-		1,020
Total Spent Nuclear Fuel and Decommissioning Trusts				1,023		930		-		9		1,962

Total Assets			$	1,350	$	1,547	$	130	$	(72)	$	2,955

Liabilities:

Risk Management Liabilities
Risk Management Commodity Contracts (c) (d)			$	30	$	485	$	25	$	(362)	$	178
Cash Flow Hedges:
	Commodity Hedges (c)			-		15		-		(10)		5
	Interest Rate/Foreign Currency Hedges			-		2		-		-		2
Fair Value Hedges				-		10		-		2		12
Total Risk Management Liabilities			$	30	$	512	$	25	$	(370)	$	197

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

			Level 1		Level 2		Level 3		Other		Total

Assets:			(in millions)

Cash and Cash Equivalents (a)			$	16	$	1	$	-	$	101	$	118

Other Temporary Investments
Restricted Cash (a)				231		8		-		11		250
Fixed Income Securities:
	Mutual Funds			80		-		-		-		80
Equity Securities - Mutual Funds (b)				23		-		-		-		23
Total Other Temporary Investments				334		8		-		11		353

Risk Management Assets
Risk Management Commodity Contracts (c) (g)				22		549		142		(273)		440
Cash Flow Hedges:
	Commodity Hedges (c)			-		15		-		(8)		7
Fair Value Hedges				-		1		-		3		4
De-designated Risk Management Contracts (e)				-		-		-		6		6
Total Risk Management Assets				22		565		142		(272)		457

Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (f)				8		-		-		11		19
Fixed Income Securities:
	United States Government			-		609		-		-		609
	Corporate Debt			-		37		-		-		37
	State and Local Government			-		255		-		-		255
		Subtotal Fixed Income Securities		-		901		-		-		901
Equity Securities - Domestic (b)				1,012		-		-		-		1,012
Total Spent Nuclear Fuel and Decommissioning Trusts				1,020		901		-		11		1,932

Total Assets			$	1,392	$	1,475	$	142	$	(149)	$	2,860

Liabilities:

Risk Management Liabilities
Risk Management Commodity Contracts (c) (g)			$	30	$	475	$	22	$	(282)	$	245
Cash Flow Hedges:
	Commodity Hedges (c)			-		11		3		(8)		6
	Interest Rate/Foreign Currency Hedges			-		2		-		-		2
Fair Value Hedges				-		11		-		3		14
Total Risk Management Liabilities			$	30	$	499	$	25	$	(287)	$	267

(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, 2014 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 2014, $(11) million in periods 2015-2017 and $(1) million in periods 2018-2019; Level 2 matures $32 million in 2014, $56 million in periods 2015-2017, $8 million in periods 2018-2019 and $5 million in periods 2020-2030; Level 3 matures $15 million in 2014, $49 million in periods 2015-2017, $16 million in periods 2018-2019 and $23 million in periods 2020-2030. 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. Level 1 amounts primarily represent investments in money market funds.

(g) The December 31, 2013 maturity of the net fair value of risk management contracts prior to cash collateral, assets/(liabilities), is as follows: Level 1 matures $4 million in 2014, $(11) million in periods 2015-2017 and $(1) million in periods 2018-2019; Level 2 matures $25 million in 2014, $37 million in periods 2015-2017, $7 million in periods 2018-2019 and $5 million in periods 2020-2030; Level 3 matures $27 million in 2014, $60 million in periods 2015-2017, $14 million in periods 2018-2019 and $19 million in periods 2020-2030. 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, 2014 and 2013.

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, 2014		Assets (Liabilities)
		(in millions)
Balance as of December 31, 2013		$	117
Realized Gain (Loss) Included in Net Income (or Changes in Net Assets) (a) (b)			84
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			9
Purchases, Issuances and Settlements (c)			(100)
Transfers into Level 3 (d) (e)			(4)
Transfers out of Level 3 (e) (f)			(2)
Changes in Fair Value Allocated to Regulated Jurisdictions (g)			11
Balance as of March 31, 2014		$	105

		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

(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 our Level 3 positions as of March 31, 2014 and December 31, 2013:

Significant Unobservable Inputs
March 31, 2014

	Fair Value				Valuation	Significant	Input/Range
	Assets		Liabilities		Technique	Unobservable Input	Low		High
	(in millions)
Energy Contracts	$	116	$	23	Discounted Cash Flow	Forward Market Price (a)	$	1.45	$	131.46
						Counterparty Credit Risk (b)		315
FTRs		14		2	Discounted Cash Flow	Forward Market Price (a)		(5.05)		9.17
Total	$	130	$	25

Significant Unobservable Inputs
December 31, 2013

	Fair Value				Valuation	Significant	Input/Range
	Assets		Liabilities		Technique	Unobservable Input	Low		High
	(in millions)
Energy Contracts	$	132	$	22	Discounted Cash Flow	Forward Market Price (a)	$	11.42	$	120.72
						Counterparty Credit Risk (b)		316
FTRs		10		3	Discounted Cash Flow	Forward Market Price (a)		(5.10)		10.44
Total	$	142	$	25

(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 amount of risk taken is determined by the Commercial Operations and Finance groups in accordance with established risk management policies as approved by the Finance Committee of AEP's Board of Directors. The AEP System's market risk oversight staff independently monitors risk policies, procedures and risk levels and provides members of the Commercial Operations Risk Committee (Regulated Risk Committee) various daily, weekly and/or monthly reports regarding compliance with policies, limits and procedures. The Regulated Risk Committee consists of AEPSC's Chief Operating Officer, Chief Financial Officer, Executive Vice President of Generation, 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.

Assets in the nuclear trusts, Restricted Cash for Securitized Funding 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, 2014 and December 31, 2013 are summarized in the following table:

	March 31, 2014				December 31, 2013
Company	Book Value		Fair Value		Book Value		Fair Value
	(in thousands)
APCo	$	4,194,516	$	4,730,819	$	4,194,357	$	4,587,079
I&M		2,012,844		2,203,640		2,039,016		2,174,891
OPCo		2,510,285		2,869,364		2,735,175		3,007,191
PSO		1,049,793		1,200,741		999,810		1,111,149
SWEPCo		2,041,796		2,277,262		2,043,332		2,214,730

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, 2014 and December 31, 2013. 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, 2014

		Level 1		Level 2		Level 3		Other		Total

Assets:		(in thousands)

Restricted Cash for Securitized Funding (a)		$	13,536	$	-	$	-	$	36	$	13,572

Risk Management Assets
Risk Management Commodity Contracts (b) (c)			393		37,854		10,508		(18,979)		29,776
Cash Flow Hedges:
	Commodity Hedges (b)		-		224		-		(15)		209
Total Risk Management Assets			393		38,078		10,508		(18,994)		29,985

Total Assets:		$	13,929	$	38,078	$	10,508	$	(18,958)	$	43,557

Liabilities:

Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)		$	306	$	29,386	$	3,107	$	(20,309)	$	12,490
Cash Flow Hedges:
	Commodity Hedges (b)		-		90		-		(15)		75
Total Risk Management Liabilities		$	306	$	29,476	$	3,107	$	(20,324)	$	12,565

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

		Level 1		Level 2		Level 3		Other		Total

Assets:		(in thousands)

Restricted Cash for Securitized Funding (a)		$	2,714	$	-	$	-	$	36	$	2,750

Risk Management Assets
Risk Management Commodity Contracts (b) (c)			827		54,448		12,097		(29,616)		37,756
Cash Flow Hedges:
	Commodity Hedges (b)		-		389		-		(26)		363
Total Risk Management Assets			827		54,837		12,097		(29,642)		38,119

Total Assets		$	3,541	$	54,837	$	12,097	$	(29,606)	$	40,869

Liabilities:

Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)		$	700	$	49,220	$	1,535	$	(32,609)	$	18,846
Cash Flow Hedges:
	Commodity Hedges (b)		-		313		-		(26)		287
Total Risk Management Liabilities		$	700	$	49,533	$	1,535	$	(32,635)	$	19,133

(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 investment in money market funds.

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

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

(d) Amounts in “Other” column primarily represent accrued interest receivables from financial institutions. Level 1 amounts primarily represent investments in money market funds.

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

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2014 and 2013.

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, 2014		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Balance as of December 31, 2013		$	10,562	$	7,164	$	2,920	$	-	$	-
Realized Gain (Loss) Included in Net Income
	(or Changes in Net Assets) (a) (b)		29,162		18,219		30,963		-		-
Unrealized Gain (Loss) Included in Net
	Income (or Changes in Net Assets) Relating
	to Assets Still Held at the Reporting Date (a)		-		-		-		-		-
Realized and Unrealized Gains (Losses)
	Included in Other Comprehensive Income		-		-		-		-		-
Purchases, Issuances and Settlements (c)			(31,781)		(19,995)		(34,036)		-		-
Transfers into Level 3 (d) (e)			(3,825)		(2,594)		-		-		-
Transfers out of Level 3 (e) (f)			(6)		(4)		-		-		-
Changes in Fair Value Allocated to Regulated
	Jurisdictions (g)		3,289		2,052		4,065		349		442
Balance as of March 31, 2014		$	7,401	$	4,842	$	3,912	$	349	$	442

Three Months Ended March 31, 2013		APCo		I&M		OPCo		PSO		SWEPCo
		(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	$	-	$	-

(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, 2014 and December 31, 2013:

Significant Unobservable Inputs
March 31, 2014
APCo
	Fair Value				Valuation	Significant	Forward Price Range
	Assets		Liabilities		Technique	Unobservable Input (a)	Low		High
	(in thousands)
Energy Contracts	$	6,454	$	2,822	Discounted Cash Flow	Forward Market Price	$	13.34	$	59.60
FTRs		4,054		285	Discounted Cash Flow	Forward Market Price		(5.05)		9.17
Total	$	10,508	$	3,107

Significant Unobservable Inputs
December 31, 2013
APCo
	Fair Value				Valuation	Significant	Forward Price Range
	Assets		Liabilities		Technique	Unobservable Input (a)	Low		High
	(in thousands)
Energy Contracts	$	9,359	$	960	Discounted Cash Flow	Forward Market Price	$	13.04	$	80.50
FTRs		2,738		575	Discounted Cash Flow	Forward Market Price		(5.10)		10.44
Total	$	12,097	$	1,535

(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 amount of risk taken is determined by the Commercial Operations and Finance groups in accordance with established risk management policies as approved by the Finance Committee of AEP's Board of Directors. The AEP System's market risk oversight staff independently monitors risk policies, procedures and risk levels and provides members of the Commercial Operations Risk Committee (Regulated Risk Committee) various daily, weekly and/or monthly reports regarding compliance with policies, limits and procedures. The Regulated Risk Committee consists of AEPSC's Chief Operating Officer, Chief Financial Officer, Executive Vice President of Generation, 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, Restricted Cash for Securitized Funding 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, 2014 and December 31, 2013 are summarized in the following table:

	March 31, 2014				December 31, 2013
Company	Book Value		Fair Value		Book Value		Fair Value
	(in thousands)
APCo	$	4,194,516	$	4,730,819	$	4,194,357	$	4,587,079
I&M		2,012,844		2,203,640		2,039,016		2,174,891
OPCo		2,510,285		2,869,364		2,735,175		3,007,191
PSO		1,049,793		1,200,741		999,810		1,111,149
SWEPCo		2,041,796		2,277,262		2,043,332		2,214,730

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, 2014 and December 31, 2013:

		March 31, 2014						December 31, 2013
		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		$	12,439	$	-	$	-	$	18,804	$	-	$	-
Fixed Income Securities:
	United States Government		606,228		31,666		(3,621)		608,875		26,114		(3,824)
	Corporate Debt		42,727		3,223		(1,097)		36,782		2,450		(1,123)
	State and Local Government		280,612		972		(345)		254,638		748		(370)
	Subtotal Fixed Income Securities		929,567		35,861		(5,063)		900,295		29,312		(5,317)
Equity Securities - Domestic			1,020,145		513,803		(79,563)		1,012,511		505,538		(81,677)
Spent Nuclear Fuel and
	Decommissioning Trusts	$	1,962,151	$	549,664	$	(84,626)	$	1,931,610	$	534,850	$	(86,994)

The following table provides the securities activity within the decommissioning and SNF trusts for the three months ended March 31, 2014 and 2013:

	Three Months Ended March 31,
	2014		2013
	(in thousands)
Proceeds from Investment Sales	$	147,700	$	167,670
Purchases of Investments		164,511		184,299
Gross Realized Gains on Investment Sales		8,141		3,323
Gross Realized Losses on Investment Sales		874		2,315

The adjusted cost of fixed income securities was $894 million and $872 million as of March 31, 2014 and December 31, 2013, respectively. The adjusted cost of equity securities was $506 million and $506 million as of March 31, 2014 and December 31, 2013, respectively.

The fair value of fixed income securities held in the nuclear trust funds, summarized by contractual maturities, as of March 31, 2014 was as follows:

	Fair Value of
	Fixed Income
	Securities

	(in thousands)
Within 1 year	$	82,190
1 year – 5 years		386,173
5 years – 10 years		193,018
After 10 years		268,186
Total	$	929,567

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, 2014 and December 31, 2013. 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, 2014

			Level 1		Level 2		Level 3		Other		Total

Assets:			(in thousands)

Risk Management Assets
Risk Management Commodity Contracts (b) (c)			$	267	$	28,746	$	6,945	$	(14,037)	$	21,921
Cash Flow Hedges:
	Commodity Hedges (b)			-		152		-		(10)		142
Total Risk Management Assets				267		28,898		6,945		(14,047)		22,063

Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (d)				3,576		-		-		8,863		12,439
Fixed Income Securities:
	United States Government			-		606,228		-		-		606,228
	Corporate Debt			-		42,727		-		-		42,727
	State and Local Government			-		280,612		-		-		280,612
		Subtotal Fixed Income Securities		-		929,567		-		-		929,567
Equity Securities - Domestic (e)				1,020,145		-		-		-		1,020,145
Total Spent Nuclear Fuel and Decommissioning Trusts				1,023,721		929,567		-		8,863		1,962,151

Total Assets			$	1,023,988	$	958,465	$	6,945	$	(5,184)	$	1,984,214

Liabilities:

Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)			$	208	$	22,089	$	2,104	$	(14,940)	$	9,461
Cash Flow Hedges:
	Commodity Hedges (b)			-		61		-		(10)		51
Total Risk Management Liabilities			$	208	$	22,150	$	2,104	$	(14,950)	$	9,512

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

			Level 1		Level 2		Level 3		Other		Total

Assets:			(in thousands)

Risk Management Assets
Risk Management Commodity Contracts (b) (c)			$	561	$	38,667	$	8,205	$	(20,766)	$	26,667
Cash Flow Hedges:
	Commodity Hedges (b)			-		234		-		(18)		216
Total Risk Management Assets				561		38,901		8,205		(20,784)		26,883

Spent Nuclear Fuel and Decommissioning Trusts
Cash and Cash Equivalents (d)				8,082		-		-		10,722		18,804
Fixed Income Securities:
	United States Government			-		608,875		-		-		608,875
	Corporate Debt			-		36,782		-		-		36,782
	State and Local Government			-		254,638		-		-		254,638
		Subtotal Fixed Income Securities		-		900,295		-		-		900,295
Equity Securities - Domestic (e)				1,012,511		-		-		-		1,012,511
Total Spent Nuclear Fuel and Decommissioning Trusts				1,020,593		900,295		-		10,722		1,931,610

Total Assets			$	1,021,154	$	939,196	$	8,205	$	(10,062)	$	1,958,493

Liabilities:

Risk Management Liabilities
Risk Management Commodity Contracts (b) (c)			$	475	$	35,061	$	1,041	$	(22,796)	$	13,781
Cash Flow Hedges:
	Commodity Hedges (b)			-		212		-		(18)		194
Total Risk Management Liabilities			$	475	$	35,273	$	1,041	$	(22,814)	$	13,975

(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 investment in money market funds.

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

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

(d) Amounts in “Other” column primarily represent accrued interest receivables from financial institutions. Level 1 amounts primarily represent investments in money market funds.

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

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2014 and 2013.

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, 2014		APCo		I&M		OPCo		PSO		SWEPCo
		(in thousands)
Balance as of December 31, 2013		$	10,562	$	7,164	$	2,920	$	-	$	-
Realized Gain (Loss) Included in Net Income
	(or Changes in Net Assets) (a) (b)		29,162		18,219		30,963		-		-
Unrealized Gain (Loss) Included in Net
	Income (or Changes in Net Assets) Relating
	to Assets Still Held at the Reporting Date (a)		-		-		-		-		-
Realized and Unrealized Gains (Losses)
	Included in Other Comprehensive Income		-		-		-		-		-
Purchases, Issuances and Settlements (c)			(31,781)		(19,995)		(34,036)		-		-
Transfers into Level 3 (d) (e)			(3,825)		(2,594)		-		-		-
Transfers out of Level 3 (e) (f)			(6)		(4)		-		-		-
Changes in Fair Value Allocated to Regulated
	Jurisdictions (g)		3,289		2,052		4,065		349		442
Balance as of March 31, 2014		$	7,401	$	4,842	$	3,912	$	349	$	442

Three Months Ended March 31, 2013		APCo		I&M		OPCo		PSO		SWEPCo
		(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	$	-	$	-