Note 17. Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Accounting guidance for fair value measurement emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and establishes a fair value hierarchy that distinguishes between assumptions based on market data obtained from independent sources and those based on an entity's own assumptions. The hierarchy prioritizes the inputs to fair value measurement into three levels:

Level 1—measurements utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that PSEG, Power and PSE&G have the ability to access. These consist primarily of listed equity securities.

Level 2—measurements include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and other observable inputs such as interest rates and yield curves that are observable at commonly quoted intervals. These consist primarily of non-exchange traded derivatives such as forward contracts or options and most fixed income securities.

Level 3—measurements use unobservable inputs for assets or liabilities, based on the best information available and might include an entity's own data and assumptions. In some valuations, the inputs used may fall into different levels of the hierarchy. In these cases, the financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. As of December 31, 2011, these consist primarily of power swaps whose basis is deemed significant to the fair value measurement and certain long-dated capacity positions.

The following tables present information about PSEG's, Power's and PSE&G's respective assets and (liabilities) measured at fair value on a recurring basis as of December 31, 2011 and December 31, 2010, including the fair value measurements and the levels of inputs used in determining those fair values. Amounts shown for PSEG include the amounts shown for Power and PSE&G.


	Recurring Fair Value Measurements as of December 31, 2011

Description	Total			Cash Collateral Netting (F)			Quoted Market Prices of Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	Millions
PSEG
Assets:
Derivative Contracts:
Energy-Related Contracts(A)	$	198		$	(100	)	$	0	$	257		$	41
Interest Rate Swaps(B)	$	64		$	0		$	0	$	64		$	0
NDT Fund:(C)
Equity Securities	$	685		$	0		$	685	$	0		$	0
Debt Securities-Govt Obligations	$	359		$	0		$	0	$	359		$	0
Debt Securities-Other	$	281		$	0		$	0	$	281		$	0
Other Securities	$	24		$	0		$	0	$	24		$	0
Rabbi Trust—Mutual Funds(C)	$	172		$	0		$	19	$	153		$	0
Liabilities:
Derivative Contracts:
Energy-Related Contracts(A)	$	(155	)	$	18		$	0	$	(153	)	$	(20	)
Interest Rate Swaps(B)	$	(2	)	$	0		$	0	$	(2	)	$	0
Non-Recourse Debt(E)	$	(50	)	$	0		$	0	$	0		$	(50	)

Power
Assets:
Derivative Contracts:
Energy-Related Contracts(A)	$	194		$	(100	)	$	0	$	257		$	37
NDT Fund:(C)
Equity Securities	$	685		$	0		$	685	$	0		$	0
Debt Securities-Govt Obligations	$	359		$	0		$	0	$	359		$	0
Debt Securities-Other	$	281		$	0		$	0	$	281		$	0
Other Securities	$	24		$	0		$	0	$	24		$	0
Rabbi Trust—Mutual Funds(C)	$	33		$	0		$	4	$	29		$	0
Liabilities:
Derivative Contracts:
Energy-Related Contracts(A)	$	(148	)	$	18		$	0	$	(153	)	$	(13	)

PSE&G
Assets:
Derivative Contracts:
Energy-Related Contracts(A)	$	4		$	0		$	0	$	0		$	4
Rabbi Trust—Mutual Funds(C)	$	57		$	0		$	6	$	51		$	0
Liabilities:
Derivative Contracts:
Energy-Related Contracts(A)	$	(7	)	$	0		$	0	$	0		$	(7	)


	Recurring Fair Value Measurements as of December 31, 2010
Description	Total			Cash Collateral Netting (F)			Quoted Market Prices of Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
							Millions
PSEG
Assets:
Derivative Contracts:
Energy-Related Contracts(A)	$	222		$	(135	)	$	0	$	228		$	129
Interest Rate Swaps(B)	$	39		$	0		$	0	$	39		$	0
NDT Fund:(C)
Equity Securities	$	735		$	0		$	735	$	0		$	0
Debt Securities-Govt Obligations	$	303		$	0		$	0	$	303		$	0
Debt Securities-Other	$	255		$	0		$	0	$	255		$	0
Other Securities	$	70		$	0		$	0	$	62		$	8
Rabbi Trust—Mutual Funds(C)	$	160		$	0		$	18	$	142		$	0
Other Long-Term Investments(D)	$	2		$	0		$	2	$	0		$	0
Liabilities:
Derivative Contracts:
Energy-Related Contracts(A)	$	(125	)	$	74		$	0	$	(117	)	$	(82	)
Power
Assets:
Derivative Contracts:
Energy-Related Contracts(A)	$	205		$	(135	)	$	0	$	228		$	112
NDT Fund:(C)
Equity Securities	$	735		$	0		$	735	$	0		$	0
Debt Securities-Govt Obligations	$	303		$	0		$	0	$	303		$	0
Debt Securities-Other	$	255		$	0		$	0	$	255		$	0
Other Securities	$	70		$	0		$	0	$	62		$	8
Rabbi Trust—Mutual Funds(C)	$	32		$	0		$	4	$	28		$	0
Liabilities:
Derivative Contracts:
Energy-Related Contracts(A)	$	(113	)	$	74		$	0	$	(117	)	$	(70	)
PSE&G
Assets:
Derivative Contracts:
Energy-Related Contracts(A)	$	17		$	0		$	0	$	0		$	17
Rabbi Trust—Mutual Funds(C)	$	54		$	0		$	6	$	48		$	0
Liabilities:
Derivative Contracts:
Energy-Related Contracts(A)	$	(12	)	$	0		$	0	$	0		$	(12	)

(A)

Level 2—Fair values for energy-related contracts are obtained primarily using a market-based approach. Most derivative contracts (forward purchase or sale contracts and swaps) are valued using the average of the bid/ask midpoints from multiple broker or dealer quotes or auction prices. Prices used in the valuation process are also corroborated independently by management to determine that values are based on actual transaction data or, in the absence of transactions, bid and offers for the day. Examples may include certain exchange and non-exchange traded capacity and electricity contracts and natural gas physical or swap contracts based on market prices, basis adjustments and other premiums where adjustments and premiums are not considered significant to the overall inputs.

Level 3—For energy-related contracts, which include more complex agreements where limited observable inputs or pricing information are available, modeling techniques are employed using assumptions reflective of contractual terms, current market rates, forward price curves, discount rates and risk factors, as applicable. For certain energy-related option contracts where daily settled option prices are not observable, a traditional Black-Scholes valuation methodology is used which incorporates an internally developed volatility curve that is considered a significant unobservable input. Fair values of other energy contracts may be based on broker quotes that we cannot corroborate with actual market transaction data. We considered the creditworthiness of our counterparties in the valuation of our energy-related contracts and the impacts are immaterial.

(B)

Interest rate swaps are valued using quoted prices on commonly quoted intervals, which are interpolated for periods different than the quoted intervals, as inputs to a market valuation model. Market inputs can generally be verified and model selection does not involve significant management judgment.

(C)

Power's NDT Fund maintains investments in various equity and fixed income securities classified as "available for sale." These securities are valued using quoted market prices, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. All fair value measurements for the fund securities are provided by the trustees of these funds. Investments in marketable equity securities within the Fund are primarily investments in common stocks across a broad range of industries and sectors. Most equity securities are priced utilizing the principal market close price or, in some cases, midpoint, bid or ask price (primarily Level 1).

Power's NDT investments in fixed income securities are primarily with investment grade corporate bonds and United States Treasury obligations or Federal Agency mortgage-backed securities with a wide range of maturities. Fixed income securities are priced using an evaluated pricing methodology that reflects observable market information such as the most recent exchange price or quoted bid for similar securities (primarily Level 2). Short-term investments and certain commingled temporary investments are valued using observable market prices or market parameters such as time-to-maturity, coupon rate, quality rating and current yield (primarily Level 2).

The Rabbi Trust mutual funds are mainly invested in a United States bond index fund and a S&P 500 index fund. The equity index fund is valued based on quoted prices in an active market (Level 1) while the bond index fund is valued using recent exchange prices or a quoted bid (Level 2).

(D)	Other long-term investments consist of equity securities and are valued using a market based approach based on quoted market prices.

(E)	For Non-Recourse Debt, see Fair Value Option below.

(F)	Cash collateral netting represents collateral amounts netted against derivative assets and liabilities as permitted under the accounting guidance for Offsetting of Amounts Related to Certain Contracts.

A reconciliation of the beginning and ending balances of Level 3 derivative contracts and securities for the years ended December 31, 2011 and 2010 follows:

Changes in Level 3 Assets and (Liabilities) Measured at Fair Value on a Recurring Basis

for the Year Ended December 31, 2011


			Total Gains or (Losses) Realized/Unrealized
Description	Balance as of January 1, 2011		Included in Income (A)		Included in Regulatory Assets/ Liabilities (B)			Purchases, (Sales) (C)		Issuances (Settlements) (D)			Transfers In (Out) (E)			Balance as of December 31, 2011
	Millions
PSEG
Net Derivative Assets	$	47	$	22	$	(8	)	$	30	$	(37	)	$	(33	)	$	21
NDT Fund	$	8	$	0	$	0		$	0	$	0		$	(8	)	$	0
Non-Recourse Debt	$	0	$	0	$	0		$	0	$	(50	)	$	0		$	(50	)
Power
Net Derivative Assets	$	42	$	22	$	0		$	30	$	(37	)	$	(33	)	$	24
NDT Fund	$	8	$	0	$	0		$	0	$	0		$	(8	)	$	0
PSE&G
Net Derivative Assets	$	5	$	0	$	(8	)	$	0	$	0		$	0		$	(3	)

Changes in Level 3 Assets and (Liabilities) Measured at Fair Value on a Recurring Basis

for the Year Ended December 31, 2010


			Total Gains or (Losses) Realized/Unrealized
Description	Balance as of January 1, 2010		Included in Income (F)			Included in Regulatory Assets/ Liabilities (B)			Purchases, (Sales) and Settlements			Balance as of December 31, 2010
	Millions
PSEG
Net Derivative Assets	$	105	$	(36	)	$	(1	)	$	(21	)	$	47
NDT Fund	$	9	$	0		$	0		$	(1	)	$	8
Rabbi Trust Fund	$	14	$	0		$	0		$	(14	)	$	0
Power
Net Derivative Assets	$	99	$	(36	)	$	0		$	(21	)	$	42
NDT Fund	$	9	$	0		$	0		$	(1	)	$	8
Rabbi Trust Fund	$	3	$	0		$	0		$	(3	)	$	0
PSE&G
Net Derivative Assets	$	6	$	0		$	(1	)	$	0		$	5
Rabbi Trust Fund	$	5	$	0		$	0		$	(5	)	$	0

(A)

PSEG's and Power's gains and losses are mainly attributable to changes in net derivative assets and liabilities of which $17 million is included in Operating Income, $2 million is included in OCI, and $3 million is included in Income from Discontinued Operations. Of the $17 million in Operating Income, $9 million is unrealized and $8 million is realized.

(B)	Mainly includes gains/losses on PSE&G's derivative contracts that are not included in either earnings or OCI, as they are deferred as a Regulatory Asset/Liability and are expected to be recovered from/returned to PSE&G's customers.

(C)	Includes $66 million in purchases and $(36) million in sales.

(D)	Includes $(25) million in issuances and $(12) million in settlements for derivative contracts and includes $(50) million of issuances due to initial recognition of lessor notes resulting from rejection of the Dynegy leveraged leases.

(E)

During the year ended December 31, 2011, $8 million of assets in the NDT Fund were transferred from Level 3 to Level 2, due to more observable pricing for the underlying securities and $33 million of net derivative assets were transferred from Level 3 to Level 2 due to more available observable market data. The transfers were recognized as of the beginning of the first quarter and fourth quarter, respectively, (i.e. the quarters in which the transfers occurred), as per PSEG's policy.

(F)

PSEG's and Power's gains and losses are mainly attributable to changes in net derivative assets and liabilities of which $(61) million is included in Operating Income, $2 million is included in OCI, and $23 million is included in Income from Discontinued Operations. Of the $(61) million in Operating Income, $(51) million is unrealized and $(10) million is realized.

As of December 31, 2011, PSEG carried $1.6 billion of net assets that are measured at fair value on a recurring basis, of which $29 million of net liabilities were measured using unobservable inputs and classified as Level 3 within the fair value hierarchy. These Level 3 net liabilities represented less than 1% of PSEG's total assets.

As of December 31, 2010, PSEG carried $1.7 billion of net assets that are measured at fair value on a recurring basis, of which $55 million were measured using unobservable inputs and classified as Level 3 within the fair value hierarchy. These Level 3 net assets represented less than 1% of PSEG's total assets and there were no transfers among levels during the year ended December 31, 2010.

Fair Value Option

As of the December 31, 2011, the effective date of the Dynegy lease rejections, the leases of the Roseton and Danskammer generation facilities were effectively terminated and no longer qualified for leveraged lease accounting under the guidance for leases. As the owner of the facilities, Energy Holdings was required to recognize the underlying assets and nonrecourse notes payable (Notes) associated with these leases at their respective fair values on the effective date of the rejection. Energy Holdings has elected to record the Notes at fair value each reporting period under the fair value option in accordance with guidance for Financial Instruments. The fair value option permits the irrevocable fair value election for selected eligible financial assets or liabilities. Any changes in the fair value of the Notes will be included in earnings each period. The $550 million of contractual principal outstanding on the Notes, currently valued at $50 million, became eligible for the fair value option upon their initial recognition on the balance sheet when the leases were rejected. We elected this option to eliminate certain complexities in applying the effective interest method of amortization given the uncertain payment streams between the election date and the expected foreclosure date. There were no other debt instruments of this type eligible for the fair value option as of December 31, 2011. The $50 million fair value of these Notes is included on PSEG's Consolidated Balance Sheet as of December 31, 2011. The fair value of the Notes include significant internal assumptions based on expected cash flows and the fair values of the underlying collateral. These Notes are classified as Level 3 in the fair value hierarchy as a result of mainly unobservable inputs.

The table of fair value of debt is included in Note 14. Schedule of Consolidated Debt.

Non-recurring Fair Value Measurements

2011

•

During the fourth quarter of 2011, DH filed for protection under Chapter 11 of the US Bankruptcy Code. As a result of the settlement agreement that was reached relating to the lease of electric generation facilities to subsidiaries of DH (See Note 8. Financing Receivables), Energy Holdings ceased leveraged lease accounting for the leased assets and recorded those generation facilities at their respective fair values totaling $50 million, which were carried as nonrecurring fair values at December 31, 2011. The fair values of those generation facilities were determined based on a third party appraisal using significant assumptions including expectations of cash flows which are considered mainly unobservable inputs (Level 3).

2010

•

Due to a significant decline in market prices at December 31, 2010 and June 30, 2010, Power assessed the recoverability of its SO₂ emission allowances not expected to be consumed. As a result of this evaluation, Power recorded pre-tax impairment charges of $3 million and $15 million related to its forecasted excess SO₂ allowances during the quarters ended December 31, 2010 and June 30, 2010, respectively, which are included in Energy Costs in PSEG's and Power's Consolidated Statements of Operations.

As of December 31, 2010, the fair value of remaining excess SO₂ emission allowances of $3 million was determined based on a comparison of quoted market prices where available for each vintage year to the carrying value of the related allowances (Level 2 measurement within the fair value hierarchy). Due to the lack of observable prices beyond certain vintage years, significant internal assumptions were used in the valuation of approximately $1 million of those allowances (Level 3 measurement within the fair value hierarchy).

•

During the fourth quarter of 2010, Energy Holdings recorded an after-tax impairment charge of $6 million on its investment in GWF Power. The remaining investment was carried as a nonrecurring fair value measurement as of December 31, 2010. This investment was considered a Level 3 within the fair value hierarchy based on the use of unobservable inputs.

•

During the second quarter of 2010, Energy Holdings executed a new lease, triggering an assessment of the recoverability of existing property located in Michigan. As a result of the evaluation, Energy Holdings recorded a pre-tax impairment of $10 million during the quarter ended June 30, 2010, which is included in Operating Revenues in PSEG's Consolidated Statement of Operations. The fair value of the property was determined using an internal model based on a discounted cash flow analysis (income approach valuation technique) with significant unobservable inputs (Level 3).

Fair Value Measurements

Note 17. Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Accounting guidance for fair value measurement emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and establishes a fair value hierarchy that distinguishes between assumptions based on market data obtained from independent sources and those based on an entity's own assumptions. The hierarchy prioritizes the inputs to fair value measurement into three levels:

Level 1—measurements utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that PSEG, Power and PSE&G have the ability to access. These consist primarily of listed equity securities.

Level 2—measurements include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and other observable inputs such as interest rates and yield curves that are observable at commonly quoted intervals. These consist primarily of non-exchange traded derivatives such as forward contracts or options and most fixed income securities.

Level 3—measurements use unobservable inputs for assets or liabilities, based on the best information available and might include an entity's own data and assumptions. In some valuations, the inputs used may fall into different levels of the hierarchy. In these cases, the financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. As of December 31, 2011, these consist primarily of power swaps whose basis is deemed significant to the fair value measurement and certain long-dated capacity positions.

The following tables present information about PSEG's, Power's and PSE&G's respective assets and (liabilities) measured at fair value on a recurring basis as of December 31, 2011 and December 31, 2010, including the fair value measurements and the levels of inputs used in determining those fair values. Amounts shown for PSEG include the amounts shown for Power and PSE&G.


	Recurring Fair Value Measurements as of December 31, 2011

Description	Total			Cash Collateral Netting (F)			Quoted Market Prices of Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	Millions
PSEG
Assets:
Derivative Contracts:
Energy-Related Contracts(A)	$	198		$	(100	)	$	0	$	257		$	41
Interest Rate Swaps(B)	$	64		$	0		$	0	$	64		$	0
NDT Fund:(C)
Equity Securities	$	685		$	0		$	685	$	0		$	0
Debt Securities-Govt Obligations	$	359		$	0		$	0	$	359		$	0
Debt Securities-Other	$	281		$	0		$	0	$	281		$	0
Other Securities	$	24		$	0		$	0	$	24		$	0
Rabbi Trust—Mutual Funds(C)	$	172		$	0		$	19	$	153		$	0
Liabilities:
Derivative Contracts:
Energy-Related Contracts(A)	$	(155	)	$	18		$	0	$	(153	)	$	(20	)
Interest Rate Swaps(B)	$	(2	)	$	0		$	0	$	(2	)	$	0
Non-Recourse Debt(E)	$	(50	)	$	0		$	0	$	0		$	(50	)

Power
Assets:
Derivative Contracts:
Energy-Related Contracts(A)	$	194		$	(100	)	$	0	$	257		$	37
NDT Fund:(C)
Equity Securities	$	685		$	0		$	685	$	0		$	0
Debt Securities-Govt Obligations	$	359		$	0		$	0	$	359		$	0
Debt Securities-Other	$	281		$	0		$	0	$	281		$	0
Other Securities	$	24		$	0		$	0	$	24		$	0
Rabbi Trust—Mutual Funds(C)	$	33		$	0		$	4	$	29		$	0
Liabilities:
Derivative Contracts:
Energy-Related Contracts(A)	$	(148	)	$	18		$	0	$	(153	)	$	(13	)

PSE&G
Assets:
Derivative Contracts:
Energy-Related Contracts(A)	$	4		$	0		$	0	$	0		$	4
Rabbi Trust—Mutual Funds(C)	$	57		$	0		$	6	$	51		$	0
Liabilities:
Derivative Contracts:
Energy-Related Contracts(A)	$	(7	)	$	0		$	0	$	0		$	(7	)


	Recurring Fair Value Measurements as of December 31, 2010
Description	Total			Cash Collateral Netting (F)			Quoted Market Prices of Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
							Millions
PSEG
Assets:
Derivative Contracts:
Energy-Related Contracts(A)	$	222		$	(135	)	$	0	$	228		$	129
Interest Rate Swaps(B)	$	39		$	0		$	0	$	39		$	0
NDT Fund:(C)
Equity Securities	$	735		$	0		$	735	$	0		$	0
Debt Securities-Govt Obligations	$	303		$	0		$	0	$	303		$	0
Debt Securities-Other	$	255		$	0		$	0	$	255		$	0
Other Securities	$	70		$	0		$	0	$	62		$	8
Rabbi Trust—Mutual Funds(C)	$	160		$	0		$	18	$	142		$	0
Other Long-Term Investments(D)	$	2		$	0		$	2	$	0		$	0
Liabilities:
Derivative Contracts:
Energy-Related Contracts(A)	$	(125	)	$	74		$	0	$	(117	)	$	(82	)
Power
Assets:
Derivative Contracts:
Energy-Related Contracts(A)	$	205		$	(135	)	$	0	$	228		$	112
NDT Fund:(C)
Equity Securities	$	735		$	0		$	735	$	0		$	0
Debt Securities-Govt Obligations	$	303		$	0		$	0	$	303		$	0
Debt Securities-Other	$	255		$	0		$	0	$	255		$	0
Other Securities	$	70		$	0		$	0	$	62		$	8
Rabbi Trust—Mutual Funds(C)	$	32		$	0		$	4	$	28		$	0
Liabilities:
Derivative Contracts:
Energy-Related Contracts(A)	$	(113	)	$	74		$	0	$	(117	)	$	(70	)
PSE&G
Assets:
Derivative Contracts:
Energy-Related Contracts(A)	$	17		$	0		$	0	$	0		$	17
Rabbi Trust—Mutual Funds(C)	$	54		$	0		$	6	$	48		$	0
Liabilities:
Derivative Contracts:
Energy-Related Contracts(A)	$	(12	)	$	0		$	0	$	0		$	(12	)

(A)

Level 2—Fair values for energy-related contracts are obtained primarily using a market-based approach. Most derivative contracts (forward purchase or sale contracts and swaps) are valued using the average of the bid/ask midpoints from multiple broker or dealer quotes or auction prices. Prices used in the valuation process are also corroborated independently by management to determine that values are based on actual transaction data or, in the absence of transactions, bid and offers for the day. Examples may include certain exchange and non-exchange traded capacity and electricity contracts and natural gas physical or swap contracts based on market prices, basis adjustments and other premiums where adjustments and premiums are not considered significant to the overall inputs.

Level 3—For energy-related contracts, which include more complex agreements where limited observable inputs or pricing information are available, modeling techniques are employed using assumptions reflective of contractual terms, current market rates, forward price curves, discount rates and risk factors, as applicable. For certain energy-related option contracts where daily settled option prices are not observable, a traditional Black-Scholes valuation methodology is used which incorporates an internally developed volatility curve that is considered a significant unobservable input. Fair values of other energy contracts may be based on broker quotes that we cannot corroborate with actual market transaction data. We considered the creditworthiness of our counterparties in the valuation of our energy-related contracts and the impacts are immaterial.

(B)

Interest rate swaps are valued using quoted prices on commonly quoted intervals, which are interpolated for periods different than the quoted intervals, as inputs to a market valuation model. Market inputs can generally be verified and model selection does not involve significant management judgment.

(C)

Power's NDT Fund maintains investments in various equity and fixed income securities classified as "available for sale." These securities are valued using quoted market prices, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. All fair value measurements for the fund securities are provided by the trustees of these funds. Investments in marketable equity securities within the Fund are primarily investments in common stocks across a broad range of industries and sectors. Most equity securities are priced utilizing the principal market close price or, in some cases, midpoint, bid or ask price (primarily Level 1).

Power's NDT investments in fixed income securities are primarily with investment grade corporate bonds and United States Treasury obligations or Federal Agency mortgage-backed securities with a wide range of maturities. Fixed income securities are priced using an evaluated pricing methodology that reflects observable market information such as the most recent exchange price or quoted bid for similar securities (primarily Level 2). Short-term investments and certain commingled temporary investments are valued using observable market prices or market parameters such as time-to-maturity, coupon rate, quality rating and current yield (primarily Level 2).

The Rabbi Trust mutual funds are mainly invested in a United States bond index fund and a S&P 500 index fund. The equity index fund is valued based on quoted prices in an active market (Level 1) while the bond index fund is valued using recent exchange prices or a quoted bid (Level 2).

(D)	Other long-term investments consist of equity securities and are valued using a market based approach based on quoted market prices.

(E)	For Non-Recourse Debt, see Fair Value Option below.

(F)	Cash collateral netting represents collateral amounts netted against derivative assets and liabilities as permitted under the accounting guidance for Offsetting of Amounts Related to Certain Contracts.

A reconciliation of the beginning and ending balances of Level 3 derivative contracts and securities for the years ended December 31, 2011 and 2010 follows:

Changes in Level 3 Assets and (Liabilities) Measured at Fair Value on a Recurring Basis

for the Year Ended December 31, 2011


			Total Gains or (Losses) Realized/Unrealized
Description	Balance as of January 1, 2011		Included in Income (A)		Included in Regulatory Assets/ Liabilities (B)			Purchases, (Sales) (C)		Issuances (Settlements) (D)			Transfers In (Out) (E)			Balance as of December 31, 2011
	Millions
PSEG
Net Derivative Assets	$	47	$	22	$	(8	)	$	30	$	(37	)	$	(33	)	$	21
NDT Fund	$	8	$	0	$	0		$	0	$	0		$	(8	)	$	0
Non-Recourse Debt	$	0	$	0	$	0		$	0	$	(50	)	$	0		$	(50	)
Power
Net Derivative Assets	$	42	$	22	$	0		$	30	$	(37	)	$	(33	)	$	24
NDT Fund	$	8	$	0	$	0		$	0	$	0		$	(8	)	$	0
PSE&G
Net Derivative Assets	$	5	$	0	$	(8	)	$	0	$	0		$	0		$	(3	)

Changes in Level 3 Assets and (Liabilities) Measured at Fair Value on a Recurring Basis

for the Year Ended December 31, 2010


			Total Gains or (Losses) Realized/Unrealized
Description	Balance as of January 1, 2010		Included in Income (F)			Included in Regulatory Assets/ Liabilities (B)			Purchases, (Sales) and Settlements			Balance as of December 31, 2010
	Millions
PSEG
Net Derivative Assets	$	105	$	(36	)	$	(1	)	$	(21	)	$	47
NDT Fund	$	9	$	0		$	0		$	(1	)	$	8
Rabbi Trust Fund	$	14	$	0		$	0		$	(14	)	$	0
Power
Net Derivative Assets	$	99	$	(36	)	$	0		$	(21	)	$	42
NDT Fund	$	9	$	0		$	0		$	(1	)	$	8
Rabbi Trust Fund	$	3	$	0		$	0		$	(3	)	$	0
PSE&G
Net Derivative Assets	$	6	$	0		$	(1	)	$	0		$	5
Rabbi Trust Fund	$	5	$	0		$	0		$	(5	)	$	0

(A)

PSEG's and Power's gains and losses are mainly attributable to changes in net derivative assets and liabilities of which $17 million is included in Operating Income, $2 million is included in OCI, and $3 million is included in Income from Discontinued Operations. Of the $17 million in Operating Income, $9 million is unrealized and $8 million is realized.

(B)	Mainly includes gains/losses on PSE&G's derivative contracts that are not included in either earnings or OCI, as they are deferred as a Regulatory Asset/Liability and are expected to be recovered from/returned to PSE&G's customers.

(C)	Includes $66 million in purchases and $(36) million in sales.

(D)	Includes $(25) million in issuances and $(12) million in settlements for derivative contracts and includes $(50) million of issuances due to initial recognition of lessor notes resulting from rejection of the Dynegy leveraged leases.

(E)

During the year ended December 31, 2011, $8 million of assets in the NDT Fund were transferred from Level 3 to Level 2, due to more observable pricing for the underlying securities and $33 million of net derivative assets were transferred from Level 3 to Level 2 due to more available observable market data. The transfers were recognized as of the beginning of the first quarter and fourth quarter, respectively, (i.e. the quarters in which the transfers occurred), as per PSEG's policy.

(F)

PSEG's and Power's gains and losses are mainly attributable to changes in net derivative assets and liabilities of which $(61) million is included in Operating Income, $2 million is included in OCI, and $23 million is included in Income from Discontinued Operations. Of the $(61) million in Operating Income, $(51) million is unrealized and $(10) million is realized.

As of December 31, 2011, PSEG carried $1.6 billion of net assets that are measured at fair value on a recurring basis, of which $29 million of net liabilities were measured using unobservable inputs and classified as Level 3 within the fair value hierarchy. These Level 3 net liabilities represented less than 1% of PSEG's total assets.

As of December 31, 2010, PSEG carried $1.7 billion of net assets that are measured at fair value on a recurring basis, of which $55 million were measured using unobservable inputs and classified as Level 3 within the fair value hierarchy. These Level 3 net assets represented less than 1% of PSEG's total assets and there were no transfers among levels during the year ended December 31, 2010.

Fair Value Option

As of the December 31, 2011, the effective date of the Dynegy lease rejections, the leases of the Roseton and Danskammer generation facilities were effectively terminated and no longer qualified for leveraged lease accounting under the guidance for leases. As the owner of the facilities, Energy Holdings was required to recognize the underlying assets and nonrecourse notes payable (Notes) associated with these leases at their respective fair values on the effective date of the rejection. Energy Holdings has elected to record the Notes at fair value each reporting period under the fair value option in accordance with guidance for Financial Instruments. The fair value option permits the irrevocable fair value election for selected eligible financial assets or liabilities. Any changes in the fair value of the Notes will be included in earnings each period. The $550 million of contractual principal outstanding on the Notes, currently valued at $50 million, became eligible for the fair value option upon their initial recognition on the balance sheet when the leases were rejected. We elected this option to eliminate certain complexities in applying the effective interest method of amortization given the uncertain payment streams between the election date and the expected foreclosure date. There were no other debt instruments of this type eligible for the fair value option as of December 31, 2011. The $50 million fair value of these Notes is included on PSEG's Consolidated Balance Sheet as of December 31, 2011. The fair value of the Notes include significant internal assumptions based on expected cash flows and the fair values of the underlying collateral. These Notes are classified as Level 3 in the fair value hierarchy as a result of mainly unobservable inputs.

The table of fair value of debt is included in Note 14. Schedule of Consolidated Debt.

Non-recurring Fair Value Measurements

2011

•

During the fourth quarter of 2011, DH filed for protection under Chapter 11 of the US Bankruptcy Code. As a result of the settlement agreement that was reached relating to the lease of electric generation facilities to subsidiaries of DH (See Note 8. Financing Receivables), Energy Holdings ceased leveraged lease accounting for the leased assets and recorded those generation facilities at their respective fair values totaling $50 million, which were carried as nonrecurring fair values at December 31, 2011. The fair values of those generation facilities were determined based on a third party appraisal using significant assumptions including expectations of cash flows which are considered mainly unobservable inputs (Level 3).

2010

•

Due to a significant decline in market prices at December 31, 2010 and June 30, 2010, Power assessed the recoverability of its SO₂ emission allowances not expected to be consumed. As a result of this evaluation, Power recorded pre-tax impairment charges of $3 million and $15 million related to its forecasted excess SO₂ allowances during the quarters ended December 31, 2010 and June 30, 2010, respectively, which are included in Energy Costs in PSEG's and Power's Consolidated Statements of Operations.

As of December 31, 2010, the fair value of remaining excess SO₂ emission allowances of $3 million was determined based on a comparison of quoted market prices where available for each vintage year to the carrying value of the related allowances (Level 2 measurement within the fair value hierarchy). Due to the lack of observable prices beyond certain vintage years, significant internal assumptions were used in the valuation of approximately $1 million of those allowances (Level 3 measurement within the fair value hierarchy).

•

During the fourth quarter of 2010, Energy Holdings recorded an after-tax impairment charge of $6 million on its investment in GWF Power. The remaining investment was carried as a nonrecurring fair value measurement as of December 31, 2010. This investment was considered a Level 3 within the fair value hierarchy based on the use of unobservable inputs.

•

During the second quarter of 2010, Energy Holdings executed a new lease, triggering an assessment of the recoverability of existing property located in Michigan. As a result of the evaluation, Energy Holdings recorded a pre-tax impairment of $10 million during the quarter ended June 30, 2010, which is included in Operating Revenues in PSEG's Consolidated Statement of Operations. The fair value of the property was determined using an internal model based on a discounted cash flow analysis (income approach valuation technique) with significant unobservable inputs (Level 3).

Fair Value Measurements

Note 17. Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Accounting guidance for fair value measurement emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and establishes a fair value hierarchy that distinguishes between assumptions based on market data obtained from independent sources and those based on an entity's own assumptions. The hierarchy prioritizes the inputs to fair value measurement into three levels:

Level 1—measurements utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that PSEG, Power and PSE&G have the ability to access. These consist primarily of listed equity securities.

Level 2—measurements include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and other observable inputs such as interest rates and yield curves that are observable at commonly quoted intervals. These consist primarily of non-exchange traded derivatives such as forward contracts or options and most fixed income securities.

Level 3—measurements use unobservable inputs for assets or liabilities, based on the best information available and might include an entity's own data and assumptions. In some valuations, the inputs used may fall into different levels of the hierarchy. In these cases, the financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. As of December 31, 2011, these consist primarily of power swaps whose basis is deemed significant to the fair value measurement and certain long-dated capacity positions.

The following tables present information about PSEG's, Power's and PSE&G's respective assets and (liabilities) measured at fair value on a recurring basis as of December 31, 2011 and December 31, 2010, including the fair value measurements and the levels of inputs used in determining those fair values. Amounts shown for PSEG include the amounts shown for Power and PSE&G.


	Recurring Fair Value Measurements as of December 31, 2011

Description	Total			Cash Collateral Netting (F)			Quoted Market Prices of Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	Millions
PSEG
Assets:
Derivative Contracts:
Energy-Related Contracts(A)	$	198		$	(100	)	$	0	$	257		$	41
Interest Rate Swaps(B)	$	64		$	0		$	0	$	64		$	0
NDT Fund:(C)
Equity Securities	$	685		$	0		$	685	$	0		$	0
Debt Securities-Govt Obligations	$	359		$	0		$	0	$	359		$	0
Debt Securities-Other	$	281		$	0		$	0	$	281		$	0
Other Securities	$	24		$	0		$	0	$	24		$	0
Rabbi Trust—Mutual Funds(C)	$	172		$	0		$	19	$	153		$	0
Liabilities:
Derivative Contracts:
Energy-Related Contracts(A)	$	(155	)	$	18		$	0	$	(153	)	$	(20	)
Interest Rate Swaps(B)	$	(2	)	$	0		$	0	$	(2	)	$	0
Non-Recourse Debt(E)	$	(50	)	$	0		$	0	$	0		$	(50	)

Power
Assets:
Derivative Contracts:
Energy-Related Contracts(A)	$	194		$	(100	)	$	0	$	257		$	37
NDT Fund:(C)
Equity Securities	$	685		$	0		$	685	$	0		$	0
Debt Securities-Govt Obligations	$	359		$	0		$	0	$	359		$	0
Debt Securities-Other	$	281		$	0		$	0	$	281		$	0
Other Securities	$	24		$	0		$	0	$	24		$	0
Rabbi Trust—Mutual Funds(C)	$	33		$	0		$	4	$	29		$	0
Liabilities:
Derivative Contracts:
Energy-Related Contracts(A)	$	(148	)	$	18		$	0	$	(153	)	$	(13	)

PSE&G
Assets:
Derivative Contracts:
Energy-Related Contracts(A)	$	4		$	0		$	0	$	0		$	4
Rabbi Trust—Mutual Funds(C)	$	57		$	0		$	6	$	51		$	0
Liabilities:
Derivative Contracts:
Energy-Related Contracts(A)	$	(7	)	$	0		$	0	$	0		$	(7	)


	Recurring Fair Value Measurements as of December 31, 2010
Description	Total			Cash Collateral Netting (F)			Quoted Market Prices of Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
							Millions
PSEG
Assets:
Derivative Contracts:
Energy-Related Contracts(A)	$	222		$	(135	)	$	0	$	228		$	129
Interest Rate Swaps(B)	$	39		$	0		$	0	$	39		$	0
NDT Fund:(C)
Equity Securities	$	735		$	0		$	735	$	0		$	0
Debt Securities-Govt Obligations	$	303		$	0		$	0	$	303		$	0
Debt Securities-Other	$	255		$	0		$	0	$	255		$	0
Other Securities	$	70		$	0		$	0	$	62		$	8
Rabbi Trust—Mutual Funds(C)	$	160		$	0		$	18	$	142		$	0
Other Long-Term Investments(D)	$	2		$	0		$	2	$	0		$	0
Liabilities:
Derivative Contracts:
Energy-Related Contracts(A)	$	(125	)	$	74		$	0	$	(117	)	$	(82	)
Power
Assets:
Derivative Contracts:
Energy-Related Contracts(A)	$	205		$	(135	)	$	0	$	228		$	112
NDT Fund:(C)
Equity Securities	$	735		$	0		$	735	$	0		$	0
Debt Securities-Govt Obligations	$	303		$	0		$	0	$	303		$	0
Debt Securities-Other	$	255		$	0		$	0	$	255		$	0
Other Securities	$	70		$	0		$	0	$	62		$	8
Rabbi Trust—Mutual Funds(C)	$	32		$	0		$	4	$	28		$	0
Liabilities:
Derivative Contracts:
Energy-Related Contracts(A)	$	(113	)	$	74		$	0	$	(117	)	$	(70	)
PSE&G
Assets:
Derivative Contracts:
Energy-Related Contracts(A)	$	17		$	0		$	0	$	0		$	17
Rabbi Trust—Mutual Funds(C)	$	54		$	0		$	6	$	48		$	0
Liabilities:
Derivative Contracts:
Energy-Related Contracts(A)	$	(12	)	$	0		$	0	$	0		$	(12	)

(A)

Level 2—Fair values for energy-related contracts are obtained primarily using a market-based approach. Most derivative contracts (forward purchase or sale contracts and swaps) are valued using the average of the bid/ask midpoints from multiple broker or dealer quotes or auction prices. Prices used in the valuation process are also corroborated independently by management to determine that values are based on actual transaction data or, in the absence of transactions, bid and offers for the day. Examples may include certain exchange and non-exchange traded capacity and electricity contracts and natural gas physical or swap contracts based on market prices, basis adjustments and other premiums where adjustments and premiums are not considered significant to the overall inputs.

Level 3—For energy-related contracts, which include more complex agreements where limited observable inputs or pricing information are available, modeling techniques are employed using assumptions reflective of contractual terms, current market rates, forward price curves, discount rates and risk factors, as applicable. For certain energy-related option contracts where daily settled option prices are not observable, a traditional Black-Scholes valuation methodology is used which incorporates an internally developed volatility curve that is considered a significant unobservable input. Fair values of other energy contracts may be based on broker quotes that we cannot corroborate with actual market transaction data. We considered the creditworthiness of our counterparties in the valuation of our energy-related contracts and the impacts are immaterial.

(B)

Interest rate swaps are valued using quoted prices on commonly quoted intervals, which are interpolated for periods different than the quoted intervals, as inputs to a market valuation model. Market inputs can generally be verified and model selection does not involve significant management judgment.

(C)

Power's NDT Fund maintains investments in various equity and fixed income securities classified as "available for sale." These securities are valued using quoted market prices, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. All fair value measurements for the fund securities are provided by the trustees of these funds. Investments in marketable equity securities within the Fund are primarily investments in common stocks across a broad range of industries and sectors. Most equity securities are priced utilizing the principal market close price or, in some cases, midpoint, bid or ask price (primarily Level 1).

Power's NDT investments in fixed income securities are primarily with investment grade corporate bonds and United States Treasury obligations or Federal Agency mortgage-backed securities with a wide range of maturities. Fixed income securities are priced using an evaluated pricing methodology that reflects observable market information such as the most recent exchange price or quoted bid for similar securities (primarily Level 2). Short-term investments and certain commingled temporary investments are valued using observable market prices or market parameters such as time-to-maturity, coupon rate, quality rating and current yield (primarily Level 2).

The Rabbi Trust mutual funds are mainly invested in a United States bond index fund and a S&P 500 index fund. The equity index fund is valued based on quoted prices in an active market (Level 1) while the bond index fund is valued using recent exchange prices or a quoted bid (Level 2).

(D)	Other long-term investments consist of equity securities and are valued using a market based approach based on quoted market prices.

(E)	For Non-Recourse Debt, see Fair Value Option below.

(F)	Cash collateral netting represents collateral amounts netted against derivative assets and liabilities as permitted under the accounting guidance for Offsetting of Amounts Related to Certain Contracts.

A reconciliation of the beginning and ending balances of Level 3 derivative contracts and securities for the years ended December 31, 2011 and 2010 follows:

Changes in Level 3 Assets and (Liabilities) Measured at Fair Value on a Recurring Basis

for the Year Ended December 31, 2011


			Total Gains or (Losses) Realized/Unrealized
Description	Balance as of January 1, 2011		Included in Income (A)		Included in Regulatory Assets/ Liabilities (B)			Purchases, (Sales) (C)		Issuances (Settlements) (D)			Transfers In (Out) (E)			Balance as of December 31, 2011
	Millions
PSEG
Net Derivative Assets	$	47	$	22	$	(8	)	$	30	$	(37	)	$	(33	)	$	21
NDT Fund	$	8	$	0	$	0		$	0	$	0		$	(8	)	$	0
Non-Recourse Debt	$	0	$	0	$	0		$	0	$	(50	)	$	0		$	(50	)
Power
Net Derivative Assets	$	42	$	22	$	0		$	30	$	(37	)	$	(33	)	$	24
NDT Fund	$	8	$	0	$	0		$	0	$	0		$	(8	)	$	0
PSE&G
Net Derivative Assets	$	5	$	0	$	(8	)	$	0	$	0		$	0		$	(3	)

Changes in Level 3 Assets and (Liabilities) Measured at Fair Value on a Recurring Basis

for the Year Ended December 31, 2010


			Total Gains or (Losses) Realized/Unrealized
Description	Balance as of January 1, 2010		Included in Income (F)			Included in Regulatory Assets/ Liabilities (B)			Purchases, (Sales) and Settlements			Balance as of December 31, 2010
	Millions
PSEG
Net Derivative Assets	$	105	$	(36	)	$	(1	)	$	(21	)	$	47
NDT Fund	$	9	$	0		$	0		$	(1	)	$	8
Rabbi Trust Fund	$	14	$	0		$	0		$	(14	)	$	0
Power
Net Derivative Assets	$	99	$	(36	)	$	0		$	(21	)	$	42
NDT Fund	$	9	$	0		$	0		$	(1	)	$	8
Rabbi Trust Fund	$	3	$	0		$	0		$	(3	)	$	0
PSE&G
Net Derivative Assets	$	6	$	0		$	(1	)	$	0		$	5
Rabbi Trust Fund	$	5	$	0		$	0		$	(5	)	$	0

(A)

PSEG's and Power's gains and losses are mainly attributable to changes in net derivative assets and liabilities of which $17 million is included in Operating Income, $2 million is included in OCI, and $3 million is included in Income from Discontinued Operations. Of the $17 million in Operating Income, $9 million is unrealized and $8 million is realized.

(B)	Mainly includes gains/losses on PSE&G's derivative contracts that are not included in either earnings or OCI, as they are deferred as a Regulatory Asset/Liability and are expected to be recovered from/returned to PSE&G's customers.

(C)	Includes $66 million in purchases and $(36) million in sales.

(D)	Includes $(25) million in issuances and $(12) million in settlements for derivative contracts and includes $(50) million of issuances due to initial recognition of lessor notes resulting from rejection of the Dynegy leveraged leases.

(E)

During the year ended December 31, 2011, $8 million of assets in the NDT Fund were transferred from Level 3 to Level 2, due to more observable pricing for the underlying securities and $33 million of net derivative assets were transferred from Level 3 to Level 2 due to more available observable market data. The transfers were recognized as of the beginning of the first quarter and fourth quarter, respectively, (i.e. the quarters in which the transfers occurred), as per PSEG's policy.

(F)

PSEG's and Power's gains and losses are mainly attributable to changes in net derivative assets and liabilities of which $(61) million is included in Operating Income, $2 million is included in OCI, and $23 million is included in Income from Discontinued Operations. Of the $(61) million in Operating Income, $(51) million is unrealized and $(10) million is realized.

As of December 31, 2011, PSEG carried $1.6 billion of net assets that are measured at fair value on a recurring basis, of which $29 million of net liabilities were measured using unobservable inputs and classified as Level 3 within the fair value hierarchy. These Level 3 net liabilities represented less than 1% of PSEG's total assets.

As of December 31, 2010, PSEG carried $1.7 billion of net assets that are measured at fair value on a recurring basis, of which $55 million were measured using unobservable inputs and classified as Level 3 within the fair value hierarchy. These Level 3 net assets represented less than 1% of PSEG's total assets and there were no transfers among levels during the year ended December 31, 2010.

Fair Value Option

As of the December 31, 2011, the effective date of the Dynegy lease rejections, the leases of the Roseton and Danskammer generation facilities were effectively terminated and no longer qualified for leveraged lease accounting under the guidance for leases. As the owner of the facilities, Energy Holdings was required to recognize the underlying assets and nonrecourse notes payable (Notes) associated with these leases at their respective fair values on the effective date of the rejection. Energy Holdings has elected to record the Notes at fair value each reporting period under the fair value option in accordance with guidance for Financial Instruments. The fair value option permits the irrevocable fair value election for selected eligible financial assets or liabilities. Any changes in the fair value of the Notes will be included in earnings each period. The $550 million of contractual principal outstanding on the Notes, currently valued at $50 million, became eligible for the fair value option upon their initial recognition on the balance sheet when the leases were rejected. We elected this option to eliminate certain complexities in applying the effective interest method of amortization given the uncertain payment streams between the election date and the expected foreclosure date. There were no other debt instruments of this type eligible for the fair value option as of December 31, 2011. The $50 million fair value of these Notes is included on PSEG's Consolidated Balance Sheet as of December 31, 2011. The fair value of the Notes include significant internal assumptions based on expected cash flows and the fair values of the underlying collateral. These Notes are classified as Level 3 in the fair value hierarchy as a result of mainly unobservable inputs.

The table of fair value of debt is included in Note 14. Schedule of Consolidated Debt.

Non-recurring Fair Value Measurements

2011

•

During the fourth quarter of 2011, DH filed for protection under Chapter 11 of the US Bankruptcy Code. As a result of the settlement agreement that was reached relating to the lease of electric generation facilities to subsidiaries of DH (See Note 8. Financing Receivables), Energy Holdings ceased leveraged lease accounting for the leased assets and recorded those generation facilities at their respective fair values totaling $50 million, which were carried as nonrecurring fair values at December 31, 2011. The fair values of those generation facilities were determined based on a third party appraisal using significant assumptions including expectations of cash flows which are considered mainly unobservable inputs (Level 3).

2010

•

Due to a significant decline in market prices at December 31, 2010 and June 30, 2010, Power assessed the recoverability of its SO₂ emission allowances not expected to be consumed. As a result of this evaluation, Power recorded pre-tax impairment charges of $3 million and $15 million related to its forecasted excess SO₂ allowances during the quarters ended December 31, 2010 and June 30, 2010, respectively, which are included in Energy Costs in PSEG's and Power's Consolidated Statements of Operations.

As of December 31, 2010, the fair value of remaining excess SO₂ emission allowances of $3 million was determined based on a comparison of quoted market prices where available for each vintage year to the carrying value of the related allowances (Level 2 measurement within the fair value hierarchy). Due to the lack of observable prices beyond certain vintage years, significant internal assumptions were used in the valuation of approximately $1 million of those allowances (Level 3 measurement within the fair value hierarchy).

•

During the fourth quarter of 2010, Energy Holdings recorded an after-tax impairment charge of $6 million on its investment in GWF Power. The remaining investment was carried as a nonrecurring fair value measurement as of December 31, 2010. This investment was considered a Level 3 within the fair value hierarchy based on the use of unobservable inputs.

•

During the second quarter of 2010, Energy Holdings executed a new lease, triggering an assessment of the recoverability of existing property located in Michigan. As a result of the evaluation, Energy Holdings recorded a pre-tax impairment of $10 million during the quarter ended June 30, 2010, which is included in Operating Revenues in PSEG's Consolidated Statement of Operations. The fair value of the property was determined using an internal model based on a discounted cash flow analysis (income approach valuation technique) with significant unobservable inputs (Level 3).