(14) FAIR VALUE DISCLOSURES

Financial Instruments Measured at Fair Value on a Recurring Basis

PHI applies FASB guidance on fair value measurement and disclosures (ASC 820) that established a framework for measuring fair value and expanded disclosures about fair value measurements. As defined in the guidance, 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 (exit price). PHI utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. Accordingly, PHI utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3).

The following tables set forth, by level within the fair value hierarchy, PHI's financial assets and liabilities (excluding Conectiv Energy assets and liabilities held for sale) that were accounted for at fair value on a recurring basis as of March 31, 2012 and December 31, 2011. As required by the guidance, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. PHI's assessment of the significance of a particular input to the fair value measurement requires the exercise of judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.


	Fair Value Measurements at March 31, 2012
Description	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1) (a)		Significant Other Observable Inputs (Level 2) (a)		Significant Unobservable Inputs (Level 3)
	*(millions of dollars)*
ASSETS
Derivative instruments (b)
Electricity (c)	$	3	$	—	$	3	$	—
Cash equivalents
Treasury fund		70		70		—		—
Executive deferred compensation plan assets
Money market funds		16		16		—		—
Life insurance contracts		61		—		43		18

	$	150	$	86	$	46	$	18

LIABILITIES
Derivative instruments (b)
Electricity (c)	$	31	$	—	$	31	$	—
Natural gas (d)		56		42		—		14
Executive deferred compensation plan liabilities
Life insurance contracts		28		—		28		—

	$	115	$	42	$	59	$	14

(a)	There were no transfers of instruments between level 1 and level 2 valuation categories.

(b)	The fair value of derivative assets and liabilities reflect netting by counterparty before the impact of collateral.

(c)	Represents wholesale electricity futures and swaps that are used mainly as part of Pepco Energy Services' retail energy supply business.

(d)

Level 1 instruments represent wholesale gas futures and swaps that are used mainly as part of Pepco Energy Services' retail energy supply business and level 3 instruments represent natural gas options purchased by DPL as part of a natural gas hedging program approved by the DPSC, as well as Pepco Energy Services physical basis contracts.


	Fair Value Measurements at December 31, 2011
Description	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1) (a)		Significant Other Observable Inputs (Level 2) (a)		Significant Unobservable Inputs (Level 3)
	*(millions of dollars)*
ASSETS
Cash equivalents
Treasury fund	$	114	$	114	$	—	$	—
Executive deferred compensation plan assets
Money market funds		18		18		—		—
Life insurance contracts		60		—		43		17

	$	192	$	132	$	43	$	17

LIABILITIES
Derivative instruments (b)
Electricity (c)	$	32	$	—	$	32	$	—
Natural gas (d)		67		50		—		17
Capacity		1		—		1		—
Executive deferred compensation plan liabilities
Life insurance contracts		28		—		28		—

	$	128	$	50	$	61	$	17

(a)	There were no transfers of instruments between level 1 and level 2 valuation categories.

(b)	The fair value of derivative liabilities reflect netting by counterparty before the impact of collateral.

(c)	Represents wholesale electricity futures and swaps that are used mainly as part of Pepco Energy Service's retail energy supply business.

(d)	Level 1 instruments represent wholesale gas futures and swaps that are used mainly as part of Pepco Energy Services' retail energy supply business and level 3 instruments represent natural gas options purchased by DPL as part of a natural gas hedging program approved by the DPSC.

PHI classifies its fair value balances in the fair value hierarchy based on the observability of the inputs used in the fair value calculation as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis, such as the New York Mercantile Exchange (NYMEX).

Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using broker quotes in liquid markets and other observable data. Level 2 also includes those financial instruments that are valued using methodologies that have been corroborated by observable market data through correlation or by other means. Significant assumptions are observable in the marketplace throughout the full term of the instrument and can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

PHI's level 2 derivative instruments primarily consist of electricity derivatives at March 31, 2012. Level 2 power swaps are provided by a pricing service that uses liquid trading hub prices or liquid hub prices plus a congestion adder to estimate the fair value at zonal locations within trading hubs.

Executive deferred compensation plan assets consist of life insurance policies that are categorized as level 2 assets because they are priced based on the assets underlying the policies, which consist of short-term cash equivalents and fixed income securities that are priced using observable market data and can be liquidated for the value of the underlying assets as of March 31, 2012. The level 2 liability associated with the life insurance policies represents a deferred compensation obligation, the value of which is tracked via underlying insurance sub-accounts. The sub-accounts are designed to mirror existing mutual funds and money market funds that are observable and actively traded.

Level 3 – Pricing inputs include significant inputs that are generally less observable than those from objective sources. Level 3 includes those financial instruments that are valued using models or other valuation methodologies.

Derivative instruments categorized as level 3 include natural gas options used by DPL as part of a natural gas hedging program approved by the DPSC and natural gas physical basis contracts held by Pepco Energy Services. DPL applies a Black-Scholes model to value its options, which contains inputs, such as the forward price curves, contract prices, contract volumes, the risk-free rate and the implied volatility factors, which are based on a range of historical NYMEX option prices. The implied volatility is a factor based on a range between 0.60 and 2.03. DPL maintains valuation policies and procedures and reviews the validity and relevance of the inputs used to estimate the fair value of its options. The natural gas physical basis contracts held by Pepco Energy Services are valued using liquid hub prices plus a congestion adder. The congestion adder is between the range of two cents to forty-three cents, which is an internally derived adder based on historical data and experience. Pepco Energy Services obtains the liquid hub prices from a third party and reviews the valuation methodologies, inputs, and reasonableness of the congestion adder on a quarterly basis.

The table below summarizes the primary unobservable inputs used to determine the fair value of PHI's level 3 instruments and the range of values that could be used for those inputs as of March 31, 2012:

Type of Instrument

Fair Value at
March 31, 2012

Valuation Technique

Unobservable Input

Range

(millions of dollars)

Natural Gas Options

$

12

Option model

Volatility Factor

0.60 – 2.03

Natural Gas Physical Basis Contracts

$

2

Market comparable

Congestion adder

$

0.02 – $0.43

PHI used values within these ranges as part of its fair value estimates, and a significant change in any of the unobservable inputs within these ranges would have an insignificant impact on the reported fair value as of March 31, 2012.

Executive deferred compensation plan assets and liabilities include certain life insurance policies that are valued using the cash surrender value of the policies, net of loans against those policies. The cash surrender values do not represent a quoted price in an active market; therefore, are unobservable and are categorized as level 3. Cash surrender values are provided by third parties and reviewed by PHI for reasonableness.

Reconciliations of the beginning and ending balances of PHI's fair value measurements using significant unobservable inputs (level 3) for the three months ended March 31, 2012 and 2011 are shown below:


	Three Months Ended March 31, 2012
	Natural Gas			Life Insurance Contracts
	*(millions of dollars)*
Beginning balance as of January 1	$	(17	)	$	17
Total gains (losses) (realized and unrealized)
Included in income		—			1
Included in accumulated other comprehensive loss		—			—
Included in regulatory assets		(3	)		—
Purchases		—			—
Issuances		—			—
Settlements		6			—
Transfers in (out) of level 3		—			—

Ending balance as of March 31	$	(14	)	$	18


	Three Months Ended March 31, 2011
	Natural Gas			Life Insurance Contracts
	*(millions of dollars)*
Beginning balance as of January 1	$	(23	)	$	19
Total gains (losses) (realized and unrealized)
Included in income		—			3
Included in accumulated other comprehensive loss		—			—
Included in regulatory assets		(1	)		—
Purchases		—			—
Issuances		—			(1	)
Settlements		5			(4	)
Transfers in (out) of level 3		—			—

Ending balance as of March 31	$	(19	)	$	17

The breakdown of realized and unrealized gains on level 3 instruments included in income as a component of Other income or Other operation and maintenance expense for the periods below were as follows:


	Three Months Ended March 31,
	2012		2011
	*(millions of dollars)*
Total net gains included in income for the period	$	1	$	3

Change in unrealized gains relating to assets still held at reporting date	$	1	$	1

Other Financial Instruments

The estimated fair values of PHI's debt instruments that are measured at amortized cost in PHI's consolidated financial statements and the associated level of the estimates within the fair value hierarchy as of March 31, 2012 are shown in the table below. As required by the fair value measurement guidance, debt instruments are classified in their entirety within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. PHI's assessment of the significance of a particular input to the fair value measurement requires the exercise of judgment, which may affect the valuation of fair value debt instruments and their placement within the fair value hierarchy levels.


	Fair Value Measurements at March 31, 2012
Description	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	*(millions of dollars)*
LIABILITIES
Debt instruments
Long-term debt (a)	$	4,569	$	408	$	3,681	$	480
Transition Bonds issued by ACE Funding (b)		370		—		370		—
Long-term project funding		15		—		—		15

	$	4,954	$	408	$	4,051	$	495

(a)	The carrying amount for Long-term debt is $3,868 million as of March 31, 2012.

(b)	The carrying amount for Transition Bonds issued by ACE Funding, including amounts due within one year, is $323 million as of March 31, 2012.

The fair value of Long-term debt categorized as level 1 is based on actual quoted trade prices for the debt in active markets on the measurement date.

The fair value of Long-term debt and Transition Bonds issued by ACE Funding categorized as level 2 is based on a blend of quoted prices for the debt and quoted prices for similar debt in active markets, but not on the measurement date. The blend places more weight on current pricing information when determining the final fair value measurement. The fair value information is provided by brokers and PHI reviews the methodologies and results.

The fair value of Long-term debt categorized as level 3 is based on a discounted cash flow methodology using observable inputs, such as the U.S. Treasury yield, and unobservable inputs, such as credit spreads, because quoted prices for the debt or similar debt in active markets were insufficient. The Long-Term project funding represents debt instruments issued by Pepco Energy Services related to its energy savings contracts. Long-Term project funding is categorized as level 3 because PHI concluded that the amortized cost carrying amounts for these instruments approximates fair value, which does not represent a quoted price in an active market.

The estimated fair values of PHI's debt instruments at December 31, 2011 are shown below:


	December 31, 2011
	Carrying Amount		Fair Value
	*(millions of dollars)*
Long-term debt	$	3,867	$	4,577
Transition Bonds issued by ACE Funding		332		380
Long-term project funding		15		15

The carrying amounts of all other financial instruments in the accompanying consolidated financial statements approximate fair value.

Fair Value Disclosures

(10) FAIR VALUE DISCLOSURES

Financial Instruments Measured at Fair Value on a Recurring Basis

Pepco applies FASB guidance on fair value measurement and disclosures (ASC 820) that established a framework for measuring fair value and expanded disclosures about fair value measurements. As defined in the guidance, 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 (exit price). Pepco utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. Accordingly, Pepco utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3).

The following tables set forth, by level within the fair value hierarchy, Pepco's financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2012 and December 31, 2011. As required by the guidance, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Pepco's assessment of the significance of a particular input to the fair value measurement requires the exercise of judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.


	Fair Value Measurements at March 31, 2012
Description	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1) (a)		Significant Other Observable Inputs (Level 2) (a)		Significant Unobservable Inputs (Level 3)
	*(millions of dollars)*
ASSETS
Executive deferred compensation plan assets
Money market funds	$	13	$	13	$	—	$	—
Life insurance contracts		57		—		39		18

	$	70	$	13	$	39	$	18

LIABILITIES
Executive deferred compensation plan liabilities
Life insurance contracts	$	10	$	—	$	10	$	—

	$	10	$	—	$	10	$	—

(a)	There were no transfers of instruments between level 1 and level 2 valuation categories.


	Fair Value Measurements at December 31, 2011
Description	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1) (a)		Significant Other Observable Inputs (Level 2) (a)		Significant Unobservable Inputs (Level 3)
	*(millions of dollars)*
ASSETS
Executive deferred compensation plan assets
Money market funds	$	12	$	12	$	—	$	—
Life insurance contracts		57		—		40		17

	$	69	$	12	$	40	$	17

LIABILITIES
Executive deferred compensation plan liabilities
Life insurance contracts	$	10	$	—	$	10	$	—

	$	10	$	—	$	10	$	—

(a)	There were no transfers of instruments between level 1 and level 2 valuation categories.

Pepco classifies its fair value balances in the fair value hierarchy based on the observability of the inputs used in the fair value calculation as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using broker quotes in liquid markets and other observable data. Level 2 also includes those financial instruments that are valued using methodologies that have been corroborated by observable market data through correlation or by other means. Significant assumptions are observable in the marketplace throughout the full term of the instrument and can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

Executive deferred compensation plan assets consist of life insurance policies that are categorized as level 2 assets because they are priced based on the assets underlying the policies, which consist of short-term cash equivalents and fixed income securities that are priced using observable market data and can be liquidated for the value of the underlying assets as of March 31, 2012. The level 2 liability associated with the life insurance policies represents a deferred compensation obligation, the value of which is tracked via underlying insurance sub-accounts. The sub-accounts are designed to mirror existing mutual funds and money market funds that are observable and actively traded.

Level 3 – Pricing inputs include significant inputs that are generally less observable than those from objective sources. Level 3 includes those financial instruments that are valued using models or other valuation methodologies.

Executive deferred compensation plan assets and liabilities include certain life insurance policies that are valued using the cash surrender value of the policies, net of loans against those policies. The cash surrender values do not represent a quoted price in an active market; therefore, are unobservable and are categorized as level 3. Cash surrender values are provided by third parties and reviewed by Pepco for reasonableness.

Reconciliations of the beginning and ending balances of Pepco's fair value measurements using significant unobservable inputs (level 3) for the three months ended March 31, 2012 and 2011 are shown below:


	Life Insurance Contracts
	Three Months Ended March 31,
	2012		2011
	*(millions of dollars)*
Beginning balance as of January 1	$	17	$	18
Total gains (losses) (realized and unrealized)
Included in income		1		3
Included in accumulated other comprehensive loss		—		—
Purchases		—		—
Issuances		—		(1	)
Settlements		—		(4	)
Transfers in (out) of level 3		—		—

Ending balance as of March 31	$	18	$	16

The breakdown of realized and unrealized gains on level 3 instruments included in income as a component of Other operation and maintenance expense for the periods below were as follows:


	Three Months Ended March 31,
	2012		2011
	*(millions of dollars)*
Total gains included in income for the period	$	1	$	3

Change in unrealized gains relating to assets still held at reporting date	$	1	$	1

Other Financial Instruments

The estimated fair values of Pepco's debt instruments that are measured at amortized cost in Pepco's financial statements and the associated level of the estimates within the fair value hierarchy as of March 31, 2012 are shown in the table below. As required by the fair value measurement guidance, debt instruments are classified in their entirety within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. Pepco's assessment of the significance of a particular input to the fair value measurement requires the exercise of judgment, which may affect the valuation of fair value debt instruments and their placement within the fair value hierarchy levels.


	Fair Value Measurements at March 31, 2012
Description	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	*(millions of dollars)*
LIABILITIES
Debt instruments
Long-term debt (a)	$	1,927	$	408	$	1,519	$	—

	$	1,927	$	408	$	1,519	$	—

(a)	The carrying amount for Long-term debt is $1,540 million as of March 31, 2012.

The fair value of Long-term debt categorized as level 1 is based on actual quoted trade prices for the debt in active markets on the measurement date.

The fair value of Long-term debt categorized as level 2 is based on a blend of quoted prices for the debt and quoted prices for similar debt in active markets, but not on the measurement date. The blend places more weight on current pricing information when determining the final fair value measurement. The fair value information is provided by brokers and Pepco reviews the methodologies and results.

The fair value of Long-term debt categorized as level 3 is based on a discounted cash flow methodology using observable inputs, such as the U.S. Treasury yield, and unobservable inputs, such as credit spreads, because quoted prices for the debt or similar debt in active markets were insufficient.

The estimated fair values of Pepco's debt instruments at December 31, 2011 are shown below:


	December 31, 2011
	Carrying Amount		Fair Value
	(*millions of dollars*)
Long-term debt	$	1,540	$	1,943

The carrying amount of all other financial instruments in the accompanying financial statements approximate fair value.

Fair Value Disclosures

(12) FAIR VALUE DISCLOSURES

Financial Instruments Measured at Fair Value on a Recurring Basis

DPL applies FASB guidance on fair value measurement and disclosures (ASC 820) that established a framework for measuring fair value and expanded disclosures about fair value measurements. As defined in the guidance, 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 (exit price). DPL utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. Accordingly, DPL utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3).

The following tables set forth, by level within the fair value hierarchy, DPL's financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2012 and December 31, 2011. As required by the guidance, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. DPL's assessment of the significance of a particular input to the fair value measurement requires the exercise of judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.


	Fair Value Measurements at March 31, 2012
Description	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1) (a)		Significant Other Observable Inputs (Level 2) (a)		Significant Unobservable Inputs (Level 3)
	*(millions of dollars)*
ASSETS
Executive deferred compensation plan assets
Money market funds	$	2	$	2	$	—	$	—
Life insurance contracts		1		—		—		1

	$	3	$	2	$	—	$	1

LIABILITIES
Derivative instruments (b)
Natural gas (c)	$	14	$	2	$	—	$	12

	$	14	$	2	$	—	$	12

(a)	There were no transfers of instruments between level 1 and level 2 valuation categories.

(b)	The fair value of derivative liabilities reflect netting by counterparty before the impact of collateral.

(c)	Represents natural gas options purchased by DPL as part of a natural gas hedging program approved by the DPSC.


	Fair Value Measurements at December 31, 2011
Description	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1) (a)		Significant Other Observable Inputs (Level 2) (a)		Significant Unobservable Inputs (Level 3)
	*(millions of dollars)*
ASSETS
Executive deferred compensation plan assets
Money market funds	$	2	$	2	$	—	$	—
Life insurance contracts		1		—		—		1

	$	3	$	2	$	—	$	1

LIABILITIES
Derivative instruments (b)
Natural gas (c)	$	17	$	2	$	—	$	15

	$	17	$	2	$	—	$	15

(a)	There were no transfers of instruments between level 1 and level 2 valuation categories.

(b)	The fair value of derivative liabilities reflect netting by counterparty before the impact of collateral.

(c)	Represents natural gas options purchased by DPL as part of a natural gas hedging program approved by the DPSC.

DPL classifies its fair value balances in the fair value hierarchy based on the observability of the inputs used in the fair value calculation as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis, such as the New York Mercantile Exchange (NYMEX).

Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using broker quotes in liquid markets and other observable data. Level 2 also includes those financial instruments that are valued using methodologies that have been corroborated by observable market data through correlation or by other means. Significant assumptions are observable in the marketplace throughout the full term of the instrument and can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

Level 3 – Pricing inputs include significant inputs that are generally less observable than those from objective sources. Level 3 includes those financial instruments that are valued using models or other valuation methodologies.

Derivative instruments categorized as level 3 include natural gas options used by DPL as part of a natural gas hedging program approved by the DPSC. DPL applies a Black-Scholes model to value its options, which contains inputs, such as the forward price curves, contract prices, contract volumes, the risk-free rate and the implied volatility factors, which are based on a range of historical NYMEX option prices. The implied volatility is a factor based on a range between 0.60 and 2.03. DPL maintains valuation policies and procedures and reviews the validity and relevance of the inputs used to estimate the fair value of its options.

The table below summarizes the primary unobservable input used to determine the fair value of DPL's level 3 instruments and the range of values that could be used for the input as of March 31, 2012:

Type of Instrument

Fair Value at
March 31, 2012

Valuation Technique

Unobservable Input

Range

(millions of dollars)

Natural Gas Options

$

12

Option model

Volatility Factor

0.60 – 2.03

DPL used values within this range as part of its fair value estimates, and a significant change in the unobservable input within this range would have an insignificant impact on the reported fair value as of March 31, 2012.

Executive deferred compensation plan assets and liabilities include certain life insurance policies that are valued using the cash surrender value of the policies, net of loans against those policies. The cash surrender values do not represent a quoted price in an active market; therefore, are unobservable and are categorized as level 3. Cash surrender values are provided by third parties and reviewed by DPL for reasonableness.

Reconciliations of the beginning and ending balances of DPL's fair value measurements using significant unobservable inputs (level 3) for the three months ended March 31, 2012 and 2011 are shown below:


	Three Months Ended March 31, 2012
	Natural Gas			Life Insurance Contracts
	*(millions of dollars)*
Beginning balance as of January 1	$	(15	)	$	1
Total gains (losses) (realized and unrealized):
Included in income		—			—
Included in accumulated other comprehensive loss		—			—
Included in regulatory assets		(3	)		—
Purchases		—			—
Issuances		—			—
Settlements		6			—
Transfers in (out) of level 3		—			—

Ending balance as of March 31	$	(12	)	$	1


	Three Months Ended March 31, 2011
	Natural Gas			Life Insurance Contracts
	*(millions of dollars)*
Beginning balance as of January 1	$	(23	)	$	1
Total gains (losses) (realized and unrealized):
Included in income		—			—
Included in accumulated other comprehensive loss		—			—
Included in regulatory assets		(1	)		—
Purchases		—			—
Issuances		—			—
Settlements		5			—
Transfers in (out) of level 3		—			—

Ending balance as of March 31	$	(19	)	$	1

Other Financial Instruments

The estimated fair values of DPL's debt instruments that are measured at amortized cost in DPL's financial statements and the associated level of the estimates within the fair value hierarchy as of March 31, 2012 are shown in the table below. As required by the fair value measurement guidance, debt instruments are classified in their entirety within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. DPL's assessment of the significance of a particular input to the fair value measurement requires the exercise of judgment, which may affect the valuation of fair value debt instruments and their placement within the fair value hierarchy levels.


	Fair Value Measurements at March 31, 2012
Description	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	*(millions of dollars)*
LIABILITIES
Debt instruments
Long-term debt (a)	$	833	$	—	$	720	$	113

	$	833	$	—	$	720	$	113

(a)	The carrying amount for Long-term debt is $765 million as of March 31, 2012.

The fair value of Long-term debt categorized as level 1 is based on actual quoted trade prices for the debt in active markets on the measurement date.

The fair value of Long-term debt categorized as level 2 is based on a blend of quoted prices for the debt and quoted prices for similar debt in active markets, but not on the measurement date. The blend places more weight on current pricing information when determining the final fair value measurement. The fair value information is provided by brokers and DPL reviews the methodologies and results.

The fair value of Long-term debt categorized as level 3 is based on a discounted cash flow methodology using observable inputs, such as the U.S. Treasury yield, and unobservable inputs, such as credit spreads, because quoted prices for the debt or similar debt in active markets were insufficient.

The estimated fair values of DPL's debt instruments at December 31, 2011 are shown below:


	December 31, 2011
	Carrying Amount		Fair Value
	(*millions of dollars*)
Long-term debt	$	765	$	834

The carrying amounts of all other financial instruments in the accompanying financial statements approximate fair value.

Fair Value Disclosures

(10) FAIR VALUE DISCLOSURES

Financial Instruments Measured at Fair Value on a Recurring Basis

ACE applies FASB guidance on fair value measurement and disclosures (ASC 820) that established a framework for measuring fair value and expanded disclosures about fair value measurements. As defined in the guidance, 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 (exit price). ACE utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. Accordingly, ACE utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3).

The following tables set forth, by level within the fair value hierarchy, ACE's financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2012 and December 31, 2011. As required by the guidance, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. ACE's assessment of the significance of a particular input to the fair value measurement requires the exercise of judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.


	Fair Value Measurements at March 31, 2012
Description	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1) (a)		Significant Other Observable Inputs (Level 2) (a)		Significant Unobservable Inputs (Level 3)
	*(millions of dollars)*
ASSETS
Cash equivalents
Treasury fund	$	70	$	70	$	—	$	—

	$	70	$	70	$	—	$	—

LIABILITIES
Executive deferred compensation plan liabilities
Life insurance contracts	$	1	$	—	$	1	$	—

	$	1	$	—	$	1	$	—

(a)	There were no transfers of instruments between level 1 and level 2 valuation categories.


	Fair Value Measurements at December 31, 2011
Description	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1) (a)		Significant Other Observable Inputs (Level 2) (a)		Significant Unobservable Inputs (Level 3)
	*(millions of dollars)*
ASSETS
Cash equivalents
Treasury fund	$	114	$	114	$	—	$	—

	$	114	$	114	$	—	$	—

LIABILITIES
Executive deferred compensation plan liabilities
Life insurance contracts	$	1	$	—	$	1	$	—

	$	1	$	—	$	1	$	—

(a)	There were no transfers of instruments between level 1 and level 2 valuation categories.

ACE classifies its fair value balances in the fair value hierarchy based on the observability of the inputs used in the fair value calculation as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using broker quotes in liquid markets and other observable data. Level 2 also includes those financial instruments that are valued using methodologies that have been corroborated by observable market data through correlation or by other means. Significant assumptions are observable in the marketplace throughout the full term of the instrument and can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

The level 2 liability associated with the life insurance policies represents a deferred compensation obligation, the value of which is tracked via underlying insurance sub-accounts. The sub-accounts are designed to mirror existing mutual funds and money market funds that are observable and actively traded.

Level 3 – Pricing inputs include significant inputs that are generally less observable than those from objective sources. Level 3 includes those financial instruments that are valued using models or other valuation methodologies.

Other Financial Instruments

The estimated fair values of ACE's debt instruments that are measured at amortized cost in ACE's consolidated financial statements and the associated level of the estimates within the fair value hierarchy as of March 31, 2012 are shown in the table below. As required by the fair value measurement guidance, debt instruments are classified in their entirety within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. ACE's assessment of the significance of a particular input to the fair value measurement requires the exercise of judgment, which may affect the valuation of fair value debt instruments and their placement within the fair value hierarchy levels.


	Fair Value Measurements at March 31, 2012
Description	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	*(millions of dollars)*
LIABILITIES
Debt instruments
Long-term debt (a)	$	989	$	—	$	865	$	124
Transition Bonds issued by ACE Funding (b)		370		—		370		—

	$	1,359	$	—	$	1,235	$	124

(a)	The carrying amount for Long-term debt is $833 million as of March 31, 2012.

(b)	The carrying amount for Transition Bonds issued by ACE Funding, including amounts due within one year, is $323 million as of March 31, 2012.

The fair value of Long-term debt categorized as level 1 is based on actual quoted trade prices for the debt in active markets on the measurement date.

The fair value of Long-term debt and Transition Bonds issued by ACE Funding categorized as level 2 is based on a blend of quoted prices for the debt and quoted prices for similar debt in active markets, but not on the measurement date. The blend places more weight on current pricing information when determining the final fair value measurement. The fair value information is provided by brokers and ACE reviews the methodologies and results.

The fair value of Long-term debt categorized as level 3 was based on a discounted cash flow methodology using observable inputs, such as the U.S. Treasury yield, and unobservable inputs, such as credit spreads, because quoted prices for the debt or similar debt in active markets were insufficient.

The estimated fair values of ACE's debt instruments at December 31, 2011 are shown below:


	December 31, 2011
	Carrying Amount		Fair Value
	*(millions of dollars)*
Long-term debt	$	832	$	1,003
Transition Bonds issued by ACE Funding		332		380

The carrying amounts of all other financial instruments in the accompanying consolidated financial statements approximate fair value.