Note 11. Fair Value Measurements

PSEG, Power and PSE&G adopted accounting standard "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in GAAP and International Financial Reporting Standards (IFRS)" effective January 1, 2012. This standard defines fair value, establishes a framework for measuring fair value and expands disclosures about 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 March 31, 2012, these consist primarily of electric swaps whose basis is deemed significant to the fair value measurement, and long-term gas supply contracts.

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 March 31, 2012 and December 31, 2011, 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 March 31, 2012
Description	Total			Cash Collateral Netting (E)			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)	$	271		$	(88	)	$	0	$	280		$	79
Interest Rate Swaps (B)	$	62		$	0		$	0	$	62		$	0
NDT Funds: (C)
Equity Securities	$	772		$	0		$	772	$	0		$	0
Debt Securities-Govt Obligations	$	323		$	0		$	0	$	323		$	0
Debt Securities-Other	$	305		$	0		$	0	$	305		$	0
Other Securities	$	48		$	0		$	0	$	48		$	0
Rabbi Trusts: (C)
Equity Securities-Mutual Funds	$	22		$	0		$	22	$	0		$	0
Debt Securities-Govt Obligations	$	110		$	0		$	0	$	110		$	0
Debt Securities-Other	$	41		$	0		$	0	$	41		$	0
Other Securities	$	53		$	0		$	0	$	53		$	0
Liabilities:
Derivative Contracts:
Energy-Related Contracts (A)	$	(172	)	$	40		$	0	$	(194	)	$	(18	)
Interest Rate Swaps (B)	$	(2	)	$	0		$	0	$	(2	)	$	0
Non-Recourse Debt (D)	$	(50	)	$	0		$	0	$	0		$	(50	)
Power
Assets:
Derivative Contracts:
Energy-Related Contracts (A)	$	237		$	(88	)	$	0	$	280		$	45
NDT Funds: (C)
Equity Securities	$	772		$	0		$	772	$	0		$	0
Debt Securities-Govt Obligations	$	323		$	0		$	0	$	323		$	0
Debt Securities-Other	$	305		$	0		$	0	$	305		$	0
Other Securities	$	48		$	0		$	0	$	48		$	0
Rabbi Trusts: (C)
Equity Securities-Mutual Funds	$	4		$	0		$	4	$	0		$	0
Debt Securities-Govt Obligations	$	22		$	0		$	0	$	22		$	0
Debt Securities-Other	$	8		$	0		$	0	$	8		$	0
Other Securities	$	10		$	0		$	0	$	10		$	0
Liabilities:
Derivative Contracts:
Energy-Related Contracts (A)	$	(170	)	$	40		$	0	$	(194	)	$	(16	)
PSE&G
Assets:
Derivative Contracts:
Energy-Related Contracts (A)	$	34		$	0		$	0	$	0		$	34
Rabbi Trusts: (C)
Equity Securities-Mutual Funds	$	7		$	0		$	7		0		$	0
Debt Securities-Govt Obligations	$	36		$	0		$	0	$	36		$	0
Debt Securities-Other	$	14		$	0		$	0	$	14		$	0
Other Securities	$	18		$	0		$	0	$	18		$	0
Liabilities:
Derivative Contracts:
Energy-Related Contracts (A)	$	(2	)	$	0		$	0	$	0		$	(2	)


	Recurring Fair Value Measurements as of December 31, 2011
Description	Total			Cash Collateral Netting (E)			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 Funds: (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 Trusts-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 (D)	$	(50	)	$	0		$	0	$	0		$	(50	)
Power
Assets:
Derivative Contracts:
Energy-Related Contracts (A)	$	194		$	(100	)	$	0	$	257		$	37
NDT Funds: (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 Trusts-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 Trusts-Mutual Funds (C)	$	57		$	0		$	6	$	51		$	0
Liabilities:
Derivative Contracts:
Energy-Related Contracts (A)	$	(7	)	$	0		$	0	$	0		$	(7	)

(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. Fair values of other energy contracts may be based on broker quotes that we cannot corroborate with actual market transaction data.

(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)

The fair value measurements table excludes cash of $1 million which is part of the NDT Fund. The NDT Fund maintains investments in various equity and fixed income securities classified as "available for sale." The Rabbi Trust maintains investments in an S&P 500 index fund and various fixed income securities classified as "available for sale." These securities are generally valued with prices that are either exchange provided (equity securities) or market transactions for comparable securities and/or broker quotes (fixed income securities). Level 1—Investments in marketable equity securities within the NDT 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). The Rabbi Trust equity index fund is valued based on quoted prices in an active market (Level 1). Level 2—NDT and Rabbi Trust fixed income securities are limited to investment grade corporate bonds and United States Treasury obligations or Federal Agency mortgage-backed securities with a wide range of maturities. Since many fixed income securities do not trade on a daily basis, they are priced using an evaluated pricing methodology that varies by asset class and reflects observable market information such as the most recent exchange price or quoted bid for similar securities. Market-based standard inputs typically include benchmark yields, reported trades, broker/dealer quotes, and issuer spreads (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).

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

(E)	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.

Additional Information Regarding Level 3 Measurements

For valuations that include both observable and unobservable inputs, if the unobservable input is determined to be significant to the overall inputs, the entire valuation is categorized in Level 3. This includes derivatives valued using indicative price quotations for contracts with tenors that extend into periods with no observable pricing. In instances where observable data is unavailable, consideration is given to the assumptions that market participants would use in valuing the asset or liability. This includes assumptions about market risks such as liquidity, volatility and contract duration. Such instruments are categorized in Level 3 because the model inputs generally are not observable. PSEG's Risk Management Committee approves risk management policies and objectives for risk assessment, control and valuation, counterparty credit approval, and the monitoring and reporting of risk exposures. The Risk Management Committee reports to the Audit Committee of the PSEG Board of Directors on the scope of the risk management activities and is responsible for approving all valuation procedures at PSEG. Forward price curves for the power market utilized by PSEG Energy Resources & Trade LLC (ER&T)'s traders to manage the portfolio are maintained and reviewed by PSEG's Enterprise Risk Management market pricing group, and used for financial reporting purposes. PSEG considers credit and nonperformance risk in the valuation of derivative contracts categorized in Levels 2 and 3, including both historical and current market data, in its assessment of credit and nonperformance risk by counterparty. The impacts of credit and nonperformance risk were not material to the financial statements.

Disclosed below is detail surrounding our significant Level 3 valuations, of which the most significant positions are electric swaps for Power and long-term natural gas supply contracts for PSE&G. For Power, in general, electric swaps are valued based on at least two pricing inputs, basis and underlying. To the extent the basis component is based on a single broker quote and is significant to the fair value of the electric swap, it is categorized as Level 3. The remaining balance of Power's Level 3 positions consist primarily of certain long-dated capacity contracts, electric load deals in which load consumption may change hourly and certain long-term natural gas supply contracts. Long-dated capacity contracts are fair valued using auction prices. If the fair value for the unobservable tenor is significant, then the entire capacity contract is categorized as Level 3. Electric load deals are fair valued using certain unobservable inputs, such as historic load variability. For Power and PSE&G, long-term gas supply contracts are valued using both actively traded pricing points as well as unobservable inputs such as gas prices beyond observable periods and longer term basis quotes and accordingly, the fair value measurements are classified in Level 3.

The table below discloses the significant unobservable inputs used in developing the fair value of these Level 3 positions:

Quantitative Information About Level 3 Fair Value Measurements



Commodity	Level 3 Position	Fair Value as of March 31, 2012					Valuation Technique(s)	Significant Unobservable Input	Range
		Assets		(Liabilities)
		Millions
Power
Electricity	Electric Swaps	$	40	$	(15	)	Discounted cash flow	Power Basis	$0 -$10/MWh
Electricity	Electric Load Deals		4		0		Discounted cash flow	Historic Load Variability	-20% – +20%
Other	Various (A)		1		(1	)

Total Power		$	45	$	(16	)

PSE&G
Natural Gas	Long-Term Gas Supply	$	34	$	(2	)	Discounted cash flow	Longer-Term Basis	$0-$2/MMBTU

Total PSE&G		$	34	$	(2	)

PSEG
Non-Recourse Debt		$	0	$	(50	)	Discounted cash flow	Underlying Collateral	See "Fair Value Option" below.

Total PSEG		$	79	$	(68	)

(A)	Includes long-dated electric capacity and long-term gas supply positions which are immaterial.

The significant unobservable inputs listed above would have a direct impact on the fair values of the above Level 3 instruments if they were adjusted. For energy-related contracts in cases where Power and PSE&G are sellers, an increase in either the power basis or the load variability or the longer-term basis amounts would decrease the fair value.

A reconciliation of the beginning and ending balances of Level 3 derivative contracts and securities for the three months ended March 31, 2012 and 2011 follows:

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

for the Three Months Ended March 31, 2012


				Total Gains or (Losses) Realized/Unrealized
Description	Balance as of January 1, 2012			Included in Income (A)		Included in Regulatory Assets/ Liabilities (B)		Purchases, (Sales) (C)		(Issuances) Settlements (D)			Transfers In (Out) (E)		Balance as of March 31, 2012
	Millions
PSEG
Net Derivative Assets	$	21		$	34	$	35	$	0	$	(29	)	$	0	$	61
Non-Recourse Debt	$	(50	)	$	0	$	0	$	0	$	0		$	0	$	(50	)
Power
Net Derivative Assets	$	24		$	34	$	0	$	0	$	(29	)	$	0	$	29
PSE&G
Net Derivative Assets (Liabilities)	$	(3	)	$	0	$	35	$	0	$	0		$	0	$	32

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

for the Three Months Ended March 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 March 31, 2011
	Millions
PSEG
Net Derivative Assets	$	47	$	(31	)	$	(10	)	$	18	$	(22	)	$	0		$	2
NDT Funds	$	8	$	0		$	0		$	0	$	0		$	(8	)	$	0
Net Derivative Assets (Liabilities)	$	42	$	(31	)	$	0		$	18	$	(22	)	$	0		$	7
NDT Funds	$	8	$	0		$	0		$	0	$	0		$	(8	)	$	0
PSE&G
Net Derivative Assets (Liabilities)	$	5	$	0		$	(10	)	$	0	$	0		$	0		$	(5	)

(A)

PSEG's and Power's gains and losses are mainly attributable to changes in net derivative assets and liabilities of which $34 million and $(33) million are included in Operating Income in 2012 and 2011, respectively, and $(1) million is included in OCI and $3 million is included in Income from Discontinued Operations in 2011. Of the $34 million in Operating Income in 2012, $5 million is unrealized. Of the $(33) million in Operating Income in 2011, $(32) million is unrealized.

(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)	Represents $18 million in purchases in 2011.

(D)	Represents $(29) million in settlements in 2012. Includes $(11) million in issuances and $(11) million in settlements in 2011.

(E)

There were no transfers among levels during the three months ended March 31, 2012. During the three months ended March 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. As per PSEG's policy, this transfer was recognized as of the beginning of the quarter.

As of March 31, 2012, PSEG carried $1.8 billion of net assets that are measured at fair value on a recurring basis, of which $11 million of net assets were measured using unobservable inputs and classified as Level 3 within the fair value hierarchy. These Level 3 net assets represent less than 1% of PSEG's total assets.

As of March 31, 2011, PSEG carried $1.7 billion of net assets that are measured at fair value on a recurring basis, of which $2 million were measured using unobservable inputs and classified as Level 3 within the fair value hierarchy. These Level 3 net assets represent less than 1% of PSEG's total assets.

Fair Value Option

As of 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 Payable) associated with these leases at their respective fair values on the effective date of the rejection. Energy Holdings has elected to record the Notes Payable 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 Payable will be included in earnings each period. The $550 million of contractual principal outstanding on the Notes Payable is valued at $50 million as of March 31, 2012 and December 31, 2011. Energy Holdings 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 March 31, 2012 or December 31, 2011. The $50 million fair value of these Notes Payable is included on PSEG's Condensed Consolidated Balance Sheet as of March 31, 2102 and December 31, 2011. The fair values of the Notes Payable include significant internal assumptions based on expected cash flows and the fair values of the underlying collateral. Changes to projected capacity factors, capacity and energy prices, fuel costs and other required cash outflows could significantly impact the fair value of the collateral which would increase or decrease the fair value of the Notes. These Notes Payable are classified as Level 3 in the fair value hierarchy as a result of mainly unobservable inputs.

Fair Value of Debt

The estimated fair values were determined using the market quotations or values of instruments with similar terms, credit ratings, remaining maturities and redemptions as of March 31, 2012 and December 31, 2011.


	March 31, 2012				December 31, 2011
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	Millions
Long-Term Debt:
PSEG (Parent) (A)	$	38	$	60	$	39	$	62
Power-Recourse Debt (B)		2,685		3,092		2,751		3,158
PSE&G (B)		4,271		4,875		4,270		4,905
Transition Funding (PSE&G) (B)		845		954		895		1,016
Transition Funding II (PSE&G) (B)		44		47		44		47
Energy Holdings:
Project Level, Non-Recourse Debt (C)		95		95		95		95

Total Long-term Debt	$	7,978	$	9,123	$	8,094	$	9,283

(A)	Fair value represents net offsets to debt resulting from adjustments from interest rate swaps entered into to hedge certain debt at Power and the unamortized premium resulting from a debt exchange entered into between Power and Energy Holdings.

(B)

The debt fair valuation is based on the present value of each bond's future cash flows. The discount rates used in the present value analysis are based on an estimate of new issue bond yields across the treasury curve. When a bond has embedded options, an interest rate model is used to reflect the impact of interest rate volatility into the analysis. (primarily Level 2 measurements).

(C)

Fair value amounts include $50 million of non-recourse project debt related to Dynegy which is classified as a Level 3 measurement. See "Fair Value Option" above for more details on Dynegy debt. Non-recourse project debt of $45 million is valued as equivalent to the amortized cost and is classified as a Level 3 measurement.

Fair Value Measurements

Note 11. Fair Value Measurements

PSEG, Power and PSE&G adopted accounting standard "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in GAAP and International Financial Reporting Standards (IFRS)" effective January 1, 2012. This standard defines fair value, establishes a framework for measuring fair value and expands disclosures about 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 March 31, 2012, these consist primarily of electric swaps whose basis is deemed significant to the fair value measurement, and long-term gas supply contracts.

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 March 31, 2012 and December 31, 2011, 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 March 31, 2012
Description	Total			Cash Collateral Netting (E)			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)	$	271		$	(88	)	$	0	$	280		$	79
Interest Rate Swaps (B)	$	62		$	0		$	0	$	62		$	0
NDT Funds: (C)
Equity Securities	$	772		$	0		$	772	$	0		$	0
Debt Securities-Govt Obligations	$	323		$	0		$	0	$	323		$	0
Debt Securities-Other	$	305		$	0		$	0	$	305		$	0
Other Securities	$	48		$	0		$	0	$	48		$	0
Rabbi Trusts: (C)
Equity Securities-Mutual Funds	$	22		$	0		$	22	$	0		$	0
Debt Securities-Govt Obligations	$	110		$	0		$	0	$	110		$	0
Debt Securities-Other	$	41		$	0		$	0	$	41		$	0
Other Securities	$	53		$	0		$	0	$	53		$	0
Liabilities:
Derivative Contracts:
Energy-Related Contracts (A)	$	(172	)	$	40		$	0	$	(194	)	$	(18	)
Interest Rate Swaps (B)	$	(2	)	$	0		$	0	$	(2	)	$	0
Non-Recourse Debt (D)	$	(50	)	$	0		$	0	$	0		$	(50	)
Power
Assets:
Derivative Contracts:
Energy-Related Contracts (A)	$	237		$	(88	)	$	0	$	280		$	45
NDT Funds: (C)
Equity Securities	$	772		$	0		$	772	$	0		$	0
Debt Securities-Govt Obligations	$	323		$	0		$	0	$	323		$	0
Debt Securities-Other	$	305		$	0		$	0	$	305		$	0
Other Securities	$	48		$	0		$	0	$	48		$	0
Rabbi Trusts: (C)
Equity Securities-Mutual Funds	$	4		$	0		$	4	$	0		$	0
Debt Securities-Govt Obligations	$	22		$	0		$	0	$	22		$	0
Debt Securities-Other	$	8		$	0		$	0	$	8		$	0
Other Securities	$	10		$	0		$	0	$	10		$	0
Liabilities:
Derivative Contracts:
Energy-Related Contracts (A)	$	(170	)	$	40		$	0	$	(194	)	$	(16	)
PSE&G
Assets:
Derivative Contracts:
Energy-Related Contracts (A)	$	34		$	0		$	0	$	0		$	34
Rabbi Trusts: (C)
Equity Securities-Mutual Funds	$	7		$	0		$	7		0		$	0
Debt Securities-Govt Obligations	$	36		$	0		$	0	$	36		$	0
Debt Securities-Other	$	14		$	0		$	0	$	14		$	0
Other Securities	$	18		$	0		$	0	$	18		$	0
Liabilities:
Derivative Contracts:
Energy-Related Contracts (A)	$	(2	)	$	0		$	0	$	0		$	(2	)


	Recurring Fair Value Measurements as of December 31, 2011
Description	Total			Cash Collateral Netting (E)			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 Funds: (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 Trusts-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 (D)	$	(50	)	$	0		$	0	$	0		$	(50	)
Power
Assets:
Derivative Contracts:
Energy-Related Contracts (A)	$	194		$	(100	)	$	0	$	257		$	37
NDT Funds: (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 Trusts-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 Trusts-Mutual Funds (C)	$	57		$	0		$	6	$	51		$	0
Liabilities:
Derivative Contracts:
Energy-Related Contracts (A)	$	(7	)	$	0		$	0	$	0		$	(7	)

(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. Fair values of other energy contracts may be based on broker quotes that we cannot corroborate with actual market transaction data.

(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)

The fair value measurements table excludes cash of $1 million which is part of the NDT Fund. The NDT Fund maintains investments in various equity and fixed income securities classified as "available for sale." The Rabbi Trust maintains investments in an S&P 500 index fund and various fixed income securities classified as "available for sale." These securities are generally valued with prices that are either exchange provided (equity securities) or market transactions for comparable securities and/or broker quotes (fixed income securities).

Level 1—Investments in marketable equity securities within the NDT 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). The Rabbi Trust equity index fund is valued based on quoted prices in an active market (Level 1).

Level 2—NDT and Rabbi Trust fixed income securities are limited to investment grade corporate bonds and United States Treasury obligations or Federal Agency mortgage-backed securities with a wide range of maturities. Since many fixed income securities do not trade on a daily basis, they are priced using an evaluated pricing methodology that varies by asset class and reflects observable market information such as the most recent exchange price or quoted bid for similar securities. Market-based standard inputs typically include benchmark yields, reported trades, broker/dealer quotes, and issuer spreads (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).

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

(E)	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.

Additional Information Regarding Level 3 Measurements

For valuations that include both observable and unobservable inputs, if the unobservable input is determined to be significant to the overall inputs, the entire valuation is categorized in Level 3. This includes derivatives valued using indicative price quotations for contracts with tenors that extend into periods with no observable pricing. In instances where observable data is unavailable, consideration is given to the assumptions that market participants would use in valuing the asset or liability. This includes assumptions about market risks such as liquidity, volatility and contract duration. Such instruments are categorized in Level 3 because the model inputs generally are not observable. PSEG's Risk Management Committee approves risk management policies and objectives for risk assessment, control and valuation, counterparty credit approval, and the monitoring and reporting of risk exposures. The Risk Management Committee reports to the Audit Committee of the PSEG Board of Directors on the scope of the risk management activities and is responsible for approving all valuation procedures at PSEG. Forward price curves for the power market utilized by PSEG Energy Resources & Trade LLC (ER&T)'s traders to manage the portfolio are maintained and reviewed by PSEG's Enterprise Risk Management market pricing group, and used for financial reporting purposes. PSEG considers credit and nonperformance risk in the valuation of derivative contracts categorized in Levels 2 and 3, including both historical and current market data, in its assessment of credit and nonperformance risk by counterparty. The impacts of credit and nonperformance risk were not material to the financial statements.

Disclosed below is detail surrounding our significant Level 3 valuations, of which the most significant positions are electric swaps for Power and long-term natural gas supply contracts for PSE&G. For Power, in general, electric swaps are valued based on at least two pricing inputs, basis and underlying. To the extent the basis component is based on a single broker quote and is significant to the fair value of the electric swap, it is categorized as Level 3. The remaining balance of Power's Level 3 positions consist primarily of certain long-dated capacity contracts, electric load deals in which load consumption may change hourly and certain long-term natural gas supply contracts. Long-dated capacity contracts are fair valued using auction prices. If the fair value for the unobservable tenor is significant, then the entire capacity contract is categorized as Level 3. Electric load deals are fair valued using certain unobservable inputs, such as historic load variability. For Power and PSE&G, long-term gas supply contracts are valued using both actively traded pricing points as well as unobservable inputs such as gas prices beyond observable periods and longer term basis quotes and accordingly, the fair value measurements are classified in Level 3.

The table below discloses the significant unobservable inputs used in developing the fair value of these Level 3 positions:

Quantitative Information About Level 3 Fair Value Measurements



Commodity	Level 3 Position	Fair Value as of March 31, 2012					Valuation Technique(s)	Significant Unobservable Input	Range
		Assets		(Liabilities)
		Millions
Power
Electricity	Electric Swaps	$	40	$	(15	)	Discounted cash flow	Power Basis	$0 -$10/MWh
Electricity	Electric Load Deals		4		0		Discounted cash flow	Historic Load Variability	-20% – +20%
Other	Various (A)		1		(1	)

Total Power		$	45	$	(16	)

PSE&G
Natural Gas	Long-Term Gas Supply	$	34	$	(2	)	Discounted cash flow	Longer-Term Basis	$0-$2/MMBTU

Total PSE&G		$	34	$	(2	)

PSEG
Non-Recourse Debt		$	0	$	(50	)	Discounted cash flow	Underlying Collateral	See "Fair Value Option" below.

Total PSEG		$	79	$	(68	)

(A)	Includes long-dated electric capacity and long-term gas supply positions which are immaterial.

The significant unobservable inputs listed above would have a direct impact on the fair values of the above Level 3 instruments if they were adjusted. For energy-related contracts in cases where Power and PSE&G are sellers, an increase in either the power basis or the load variability or the longer-term basis amounts would decrease the fair value.

A reconciliation of the beginning and ending balances of Level 3 derivative contracts and securities for the three months ended March 31, 2012 and 2011 follows:

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

for the Three Months Ended March 31, 2012


				Total Gains or (Losses) Realized/Unrealized
Description	Balance as of January 1, 2012			Included in Income (A)		Included in Regulatory Assets/ Liabilities (B)		Purchases, (Sales) (C)		(Issuances) Settlements (D)			Transfers In (Out) (E)		Balance as of March 31, 2012
	Millions
PSEG
Net Derivative Assets	$	21		$	34	$	35	$	0	$	(29	)	$	0	$	61
Non-Recourse Debt	$	(50	)	$	0	$	0	$	0	$	0		$	0	$	(50	)
Power
Net Derivative Assets	$	24		$	34	$	0	$	0	$	(29	)	$	0	$	29
PSE&G
Net Derivative Assets (Liabilities)	$	(3	)	$	0	$	35	$	0	$	0		$	0	$	32

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

for the Three Months Ended March 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 March 31, 2011
	Millions
PSEG
Net Derivative Assets	$	47	$	(31	)	$	(10	)	$	18	$	(22	)	$	0		$	2
NDT Funds	$	8	$	0		$	0		$	0	$	0		$	(8	)	$	0
Net Derivative Assets (Liabilities)	$	42	$	(31	)	$	0		$	18	$	(22	)	$	0		$	7
NDT Funds	$	8	$	0		$	0		$	0	$	0		$	(8	)	$	0
PSE&G
Net Derivative Assets (Liabilities)	$	5	$	0		$	(10	)	$	0	$	0		$	0		$	(5	)

(A)

PSEG's and Power's gains and losses are mainly attributable to changes in net derivative assets and liabilities of which $34 million and $(33) million are included in Operating Income in 2012 and 2011, respectively, and $(1) million is included in OCI and $3 million is included in Income from Discontinued Operations in 2011. Of the $34 million in Operating Income in 2012, $5 million is unrealized. Of the $(33) million in Operating Income in 2011, $(32) million is unrealized.

(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)	Represents $18 million in purchases in 2011.

(D)	Represents $(29) million in settlements in 2012. Includes $(11) million in issuances and $(11) million in settlements in 2011.

(E)

There were no transfers among levels during the three months ended March 31, 2012. During the three months ended March 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. As per PSEG's policy, this transfer was recognized as of the beginning of the quarter.

As of March 31, 2012, PSEG carried $1.8 billion of net assets that are measured at fair value on a recurring basis, of which $11 million of net assets were measured using unobservable inputs and classified as Level 3 within the fair value hierarchy. These Level 3 net assets represent less than 1% of PSEG's total assets.

As of March 31, 2011, PSEG carried $1.7 billion of net assets that are measured at fair value on a recurring basis, of which $2 million were measured using unobservable inputs and classified as Level 3 within the fair value hierarchy. These Level 3 net assets represent less than 1% of PSEG's total assets.

Fair Value Option

As of 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 Payable) associated with these leases at their respective fair values on the effective date of the rejection. Energy Holdings has elected to record the Notes Payable 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 Payable will be included in earnings each period. The $550 million of contractual principal outstanding on the Notes Payable is valued at $50 million as of March 31, 2012 and December 31, 2011. Energy Holdings 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 March 31, 2012 or December 31, 2011. The $50 million fair value of these Notes Payable is included on PSEG's Condensed Consolidated Balance Sheet as of March 31, 2102 and December 31, 2011. The fair values of the Notes Payable include significant internal assumptions based on expected cash flows and the fair values of the underlying collateral. Changes to projected capacity factors, capacity and energy prices, fuel costs and other required cash outflows could significantly impact the fair value of the collateral which would increase or decrease the fair value of the Notes. These Notes Payable are classified as Level 3 in the fair value hierarchy as a result of mainly unobservable inputs.

Fair Value of Debt

The estimated fair values were determined using the market quotations or values of instruments with similar terms, credit ratings, remaining maturities and redemptions as of March 31, 2012 and December 31, 2011.


	March 31, 2012				December 31, 2011
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	Millions
Long-Term Debt:
PSEG (Parent) (A)	$	38	$	60	$	39	$	62
Power-Recourse Debt (B)		2,685		3,092		2,751		3,158
PSE&G (B)		4,271		4,875		4,270		4,905
Transition Funding (PSE&G) (B)		845		954		895		1,016
Transition Funding II (PSE&G) (B)		44		47		44		47
Energy Holdings:
Project Level, Non-Recourse Debt (C)		95		95		95		95

Total Long-term Debt	$	7,978	$	9,123	$	8,094	$	9,283

(A)	Fair value represents net offsets to debt resulting from adjustments from interest rate swaps entered into to hedge certain debt at Power and the unamortized premium resulting from a debt exchange entered into between Power and Energy Holdings.

(B)

The debt fair valuation is based on the present value of each bond's future cash flows. The discount rates used in the present value analysis are based on an estimate of new issue bond yields across the treasury curve. When a bond has embedded options, an interest rate model is used to reflect the impact of interest rate volatility into the analysis. (primarily Level 2 measurements).

(C)

Fair value amounts include $50 million of non-recourse project debt related to Dynegy which is classified as a Level 3 measurement. See "Fair Value Option" above for more details on Dynegy debt. Non-recourse project debt of $45 million is valued as equivalent to the amortized cost and is classified as a Level 3 measurement.

Fair Value Measurements

Note 11. Fair Value Measurements

PSEG, Power and PSE&G adopted accounting standard "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in GAAP and International Financial Reporting Standards (IFRS)" effective January 1, 2012. This standard defines fair value, establishes a framework for measuring fair value and expands disclosures about 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 March 31, 2012, these consist primarily of electric swaps whose basis is deemed significant to the fair value measurement, and long-term gas supply contracts.

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 March 31, 2012 and December 31, 2011, 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 March 31, 2012
Description	Total			Cash Collateral Netting (E)			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)	$	271		$	(88	)	$	0	$	280		$	79
Interest Rate Swaps (B)	$	62		$	0		$	0	$	62		$	0
NDT Funds: (C)
Equity Securities	$	772		$	0		$	772	$	0		$	0
Debt Securities-Govt Obligations	$	323		$	0		$	0	$	323		$	0
Debt Securities-Other	$	305		$	0		$	0	$	305		$	0
Other Securities	$	48		$	0		$	0	$	48		$	0
Rabbi Trusts: (C)
Equity Securities-Mutual Funds	$	22		$	0		$	22	$	0		$	0
Debt Securities-Govt Obligations	$	110		$	0		$	0	$	110		$	0
Debt Securities-Other	$	41		$	0		$	0	$	41		$	0
Other Securities	$	53		$	0		$	0	$	53		$	0
Liabilities:
Derivative Contracts:
Energy-Related Contracts (A)	$	(172	)	$	40		$	0	$	(194	)	$	(18	)
Interest Rate Swaps (B)	$	(2	)	$	0		$	0	$	(2	)	$	0
Non-Recourse Debt (D)	$	(50	)	$	0		$	0	$	0		$	(50	)
Power
Assets:
Derivative Contracts:
Energy-Related Contracts (A)	$	237		$	(88	)	$	0	$	280		$	45
NDT Funds: (C)
Equity Securities	$	772		$	0		$	772	$	0		$	0
Debt Securities-Govt Obligations	$	323		$	0		$	0	$	323		$	0
Debt Securities-Other	$	305		$	0		$	0	$	305		$	0
Other Securities	$	48		$	0		$	0	$	48		$	0
Rabbi Trusts: (C)
Equity Securities-Mutual Funds	$	4		$	0		$	4	$	0		$	0
Debt Securities-Govt Obligations	$	22		$	0		$	0	$	22		$	0
Debt Securities-Other	$	8		$	0		$	0	$	8		$	0
Other Securities	$	10		$	0		$	0	$	10		$	0
Liabilities:
Derivative Contracts:
Energy-Related Contracts (A)	$	(170	)	$	40		$	0	$	(194	)	$	(16	)
PSE&G
Assets:
Derivative Contracts:
Energy-Related Contracts (A)	$	34		$	0		$	0	$	0		$	34
Rabbi Trusts: (C)
Equity Securities-Mutual Funds	$	7		$	0		$	7		0		$	0
Debt Securities-Govt Obligations	$	36		$	0		$	0	$	36		$	0
Debt Securities-Other	$	14		$	0		$	0	$	14		$	0
Other Securities	$	18		$	0		$	0	$	18		$	0
Liabilities:
Derivative Contracts:
Energy-Related Contracts (A)	$	(2	)	$	0		$	0	$	0		$	(2	)


	Recurring Fair Value Measurements as of December 31, 2011
Description	Total			Cash Collateral Netting (E)			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 Funds: (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 Trusts-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 (D)	$	(50	)	$	0		$	0	$	0		$	(50	)
Power
Assets:
Derivative Contracts:
Energy-Related Contracts (A)	$	194		$	(100	)	$	0	$	257		$	37
NDT Funds: (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 Trusts-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 Trusts-Mutual Funds (C)	$	57		$	0		$	6	$	51		$	0
Liabilities:
Derivative Contracts:
Energy-Related Contracts (A)	$	(7	)	$	0		$	0	$	0		$	(7	)

(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. Fair values of other energy contracts may be based on broker quotes that we cannot corroborate with actual market transaction data.

(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)

The fair value measurements table excludes cash of $1 million which is part of the NDT Fund. The NDT Fund maintains investments in various equity and fixed income securities classified as "available for sale." The Rabbi Trust maintains investments in an S&P 500 index fund and various fixed income securities classified as "available for sale." These securities are generally valued with prices that are either exchange provided (equity securities) or market transactions for comparable securities and/or broker quotes (fixed income securities).

Level 1—Investments in marketable equity securities within the NDT 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). The Rabbi Trust equity index fund is valued based on quoted prices in an active market (Level 1).

Level 2—NDT and Rabbi Trust fixed income securities are limited to investment grade corporate bonds and United States Treasury obligations or Federal Agency mortgage-backed securities with a wide range of maturities. Since many fixed income securities do not trade on a daily basis, they are priced using an evaluated pricing methodology that varies by asset class and reflects observable market information such as the most recent exchange price or quoted bid for similar securities. Market-based standard inputs typically include benchmark yields, reported trades, broker/dealer quotes, and issuer spreads (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).

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

(E)	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.

Additional Information Regarding Level 3 Measurements

For valuations that include both observable and unobservable inputs, if the unobservable input is determined to be significant to the overall inputs, the entire valuation is categorized in Level 3. This includes derivatives valued using indicative price quotations for contracts with tenors that extend into periods with no observable pricing. In instances where observable data is unavailable, consideration is given to the assumptions that market participants would use in valuing the asset or liability. This includes assumptions about market risks such as liquidity, volatility and contract duration. Such instruments are categorized in Level 3 because the model inputs generally are not observable. PSEG's Risk Management Committee approves risk management policies and objectives for risk assessment, control and valuation, counterparty credit approval, and the monitoring and reporting of risk exposures. The Risk Management Committee reports to the Audit Committee of the PSEG Board of Directors on the scope of the risk management activities and is responsible for approving all valuation procedures at PSEG. Forward price curves for the power market utilized by PSEG Energy Resources & Trade LLC (ER&T)'s traders to manage the portfolio are maintained and reviewed by PSEG's Enterprise Risk Management market pricing group, and used for financial reporting purposes. PSEG considers credit and nonperformance risk in the valuation of derivative contracts categorized in Levels 2 and 3, including both historical and current market data, in its assessment of credit and nonperformance risk by counterparty. The impacts of credit and nonperformance risk were not material to the financial statements.

Disclosed below is detail surrounding our significant Level 3 valuations, of which the most significant positions are electric swaps for Power and long-term natural gas supply contracts for PSE&G. For Power, in general, electric swaps are valued based on at least two pricing inputs, basis and underlying. To the extent the basis component is based on a single broker quote and is significant to the fair value of the electric swap, it is categorized as Level 3. The remaining balance of Power's Level 3 positions consist primarily of certain long-dated capacity contracts, electric load deals in which load consumption may change hourly and certain long-term natural gas supply contracts. Long-dated capacity contracts are fair valued using auction prices. If the fair value for the unobservable tenor is significant, then the entire capacity contract is categorized as Level 3. Electric load deals are fair valued using certain unobservable inputs, such as historic load variability. For Power and PSE&G, long-term gas supply contracts are valued using both actively traded pricing points as well as unobservable inputs such as gas prices beyond observable periods and longer term basis quotes and accordingly, the fair value measurements are classified in Level 3.

The table below discloses the significant unobservable inputs used in developing the fair value of these Level 3 positions:

Quantitative Information About Level 3 Fair Value Measurements



Commodity	Level 3 Position	Fair Value as of March 31, 2012					Valuation Technique(s)	Significant Unobservable Input	Range
		Assets		(Liabilities)
		Millions
Power
Electricity	Electric Swaps	$	40	$	(15	)	Discounted cash flow	Power Basis	$0 -$10/MWh
Electricity	Electric Load Deals		4		0		Discounted cash flow	Historic Load Variability	-20% – +20%
Other	Various (A)		1		(1	)

Total Power		$	45	$	(16	)

PSE&G
Natural Gas	Long-Term Gas Supply	$	34	$	(2	)	Discounted cash flow	Longer-Term Basis	$0-$2/MMBTU

Total PSE&G		$	34	$	(2	)

PSEG
Non-Recourse Debt		$	0	$	(50	)	Discounted cash flow	Underlying Collateral	See "Fair Value Option" below.

Total PSEG		$	79	$	(68	)

(A)	Includes long-dated electric capacity and long-term gas supply positions which are immaterial.

The significant unobservable inputs listed above would have a direct impact on the fair values of the above Level 3 instruments if they were adjusted. For energy-related contracts in cases where Power and PSE&G are sellers, an increase in either the power basis or the load variability or the longer-term basis amounts would decrease the fair value.

A reconciliation of the beginning and ending balances of Level 3 derivative contracts and securities for the three months ended March 31, 2012 and 2011 follows:

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

for the Three Months Ended March 31, 2012


				Total Gains or (Losses) Realized/Unrealized
Description	Balance as of January 1, 2012			Included in Income (A)		Included in Regulatory Assets/ Liabilities (B)		Purchases, (Sales) (C)		(Issuances) Settlements (D)			Transfers In (Out) (E)		Balance as of March 31, 2012
	Millions
PSEG
Net Derivative Assets	$	21		$	34	$	35	$	0	$	(29	)	$	0	$	61
Non-Recourse Debt	$	(50	)	$	0	$	0	$	0	$	0		$	0	$	(50	)
Power
Net Derivative Assets	$	24		$	34	$	0	$	0	$	(29	)	$	0	$	29
PSE&G
Net Derivative Assets (Liabilities)	$	(3	)	$	0	$	35	$	0	$	0		$	0	$	32

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

for the Three Months Ended March 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 March 31, 2011
	Millions
PSEG
Net Derivative Assets	$	47	$	(31	)	$	(10	)	$	18	$	(22	)	$	0		$	2
NDT Funds	$	8	$	0		$	0		$	0	$	0		$	(8	)	$	0
Net Derivative Assets (Liabilities)	$	42	$	(31	)	$	0		$	18	$	(22	)	$	0		$	7
NDT Funds	$	8	$	0		$	0		$	0	$	0		$	(8	)	$	0
PSE&G
Net Derivative Assets (Liabilities)	$	5	$	0		$	(10	)	$	0	$	0		$	0		$	(5	)

(A)

PSEG's and Power's gains and losses are mainly attributable to changes in net derivative assets and liabilities of which $34 million and $(33) million are included in Operating Income in 2012 and 2011, respectively, and $(1) million is included in OCI and $3 million is included in Income from Discontinued Operations in 2011. Of the $34 million in Operating Income in 2012, $5 million is unrealized. Of the $(33) million in Operating Income in 2011, $(32) million is unrealized.

(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)	Represents $18 million in purchases in 2011.

(D)	Represents $(29) million in settlements in 2012. Includes $(11) million in issuances and $(11) million in settlements in 2011.

(E)

There were no transfers among levels during the three months ended March 31, 2012. During the three months ended March 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. As per PSEG's policy, this transfer was recognized as of the beginning of the quarter.

As of March 31, 2012, PSEG carried $1.8 billion of net assets that are measured at fair value on a recurring basis, of which $11 million of net assets were measured using unobservable inputs and classified as Level 3 within the fair value hierarchy. These Level 3 net assets represent less than 1% of PSEG's total assets.

As of March 31, 2011, PSEG carried $1.7 billion of net assets that are measured at fair value on a recurring basis, of which $2 million were measured using unobservable inputs and classified as Level 3 within the fair value hierarchy. These Level 3 net assets represent less than 1% of PSEG's total assets.

Fair Value Option

As of 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 Payable) associated with these leases at their respective fair values on the effective date of the rejection. Energy Holdings has elected to record the Notes Payable 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 Payable will be included in earnings each period. The $550 million of contractual principal outstanding on the Notes Payable is valued at $50 million as of March 31, 2012 and December 31, 2011. Energy Holdings 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 March 31, 2012 or December 31, 2011. The $50 million fair value of these Notes Payable is included on PSEG's Condensed Consolidated Balance Sheet as of March 31, 2102 and December 31, 2011. The fair values of the Notes Payable include significant internal assumptions based on expected cash flows and the fair values of the underlying collateral. Changes to projected capacity factors, capacity and energy prices, fuel costs and other required cash outflows could significantly impact the fair value of the collateral which would increase or decrease the fair value of the Notes. These Notes Payable are classified as Level 3 in the fair value hierarchy as a result of mainly unobservable inputs.

Fair Value of Debt

The estimated fair values were determined using the market quotations or values of instruments with similar terms, credit ratings, remaining maturities and redemptions as of March 31, 2012 and December 31, 2011.


	March 31, 2012				December 31, 2011
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	Millions
Long-Term Debt:
PSEG (Parent) (A)	$	38	$	60	$	39	$	62
Power-Recourse Debt (B)		2,685		3,092		2,751		3,158
PSE&G (B)		4,271		4,875		4,270		4,905
Transition Funding (PSE&G) (B)		845		954		895		1,016
Transition Funding II (PSE&G) (B)		44		47		44		47
Energy Holdings:
Project Level, Non-Recourse Debt (C)		95		95		95		95

Total Long-term Debt	$	7,978	$	9,123	$	8,094	$	9,283

(A)	Fair value represents net offsets to debt resulting from adjustments from interest rate swaps entered into to hedge certain debt at Power and the unamortized premium resulting from a debt exchange entered into between Power and Energy Holdings.

(B)

The debt fair valuation is based on the present value of each bond's future cash flows. The discount rates used in the present value analysis are based on an estimate of new issue bond yields across the treasury curve. When a bond has embedded options, an interest rate model is used to reflect the impact of interest rate volatility into the analysis. (primarily Level 2 measurements).

(C)

Fair value amounts include $50 million of non-recourse project debt related to Dynegy which is classified as a Level 3 measurement. See "Fair Value Option" above for more details on Dynegy debt. Non-recourse project debt of $45 million is valued as equivalent to the amortized cost and is classified as a Level 3 measurement.