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Fair Value of FInancial Instruments
 12 Months Ended
Dec. 31, 2012
Fair Value of Financial Instruments Note [Abstract]  
Fair Value of FInancial Instruments
: FAIR VALUE OF FINANCIAL INSTRUMENTS

PGE determines the fair value of financial instruments, both assets and liabilities recognized and not recognized in the Company’s consolidated balance sheets, for which it is practicable to estimate fair value as of December 31, 2012 and 2011, and then classifies these financial assets and liabilities based on a fair value hierarchy. The fair value hierarchy is used to prioritize the inputs to the valuation techniques used to measure fair value. These three broad levels and application to the Company are discussed below.

Level 1
Quoted prices are available in active markets for identical assets or liabilities as of the reporting date.
 
Level 2
Pricing inputs include those that are directly or indirectly observable in the marketplace as of the reporting date.

Level 3
Pricing inputs include significant inputs which are unobservable for the asset or liability.

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy.

PGE recognizes transfers between levels in the fair value hierarchy as of the end of the reporting period for all of its financial instruments. Changes to market liquidity conditions, the availability of observable inputs, or changes in the economic structure of a security marketplace may require transfer of the securities between levels. There were no significant transfers between levels during each of the years ended December 31, 2012, 2011 and 2010, except those net transfers out of Level 3 to Level 2 presented in this note.

The Company’s financial assets and liabilities whose values were recognized at fair value are as follows by level within the fair value hierarchy (in millions): 
 
As of December 31, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Nuclear decommissioning trust (1):
 
 
 
 
 
 
 
Money market funds
$
—

 
$
15

 
$
—

 
$
15

Debt securities:
 
 
 
 
 
 
 
Domestic government
7

 
8

 
—

 
15

Corporate credit
—

 
8

 
—

 
8

Non-qualified benefit plan trust (2):
 
 
 
 
 
 
 
Money market funds
—

 
2

 
—

 
2

Equity securities:
 
 
 
 
 
 
 
Domestic
2

 
2

 
—

 
4

International
1

 
—

 
—

 
1

Debt securities - domestic government
2

 
—

 
—

 
2

Assets from price risk management activities (1) (3):
 
 
 
 
 
 
 
Electricity
—

 
1

 
—

 
1

Natural gas
—

 
3

 
2

 
5

 
$
12

 
$
39

 
$
2

 
$
53

Liabilities - Liabilities from price risk management
activities (1) (3):
 
 
 
 
 
 
 
Electricity
$
—

 
$
72

 
$
10

 
$
82

Natural gas
—

 
110

 
8

 
118

 
$
—

 
$
182

 
$
18

 
$
200

 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Activities are subject to regulation, with certain gains and losses deferred pursuant to regulatory accounting and included in regulatory assets or regulatory liabilities as appropriate.
(2)
Excludes insurance policies of $23 million, which are recorded at cash surrender value.
(3)
For further information, see Note 5, Price Risk Management.

 
As of December 31, 2011
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Nuclear decommissioning trust (1):
 
 
 
 
 
 
 
Money market funds
$
—

 
$
14

 
$
—

 
$
14

Debt securities:
 
 
 
 
 
 
 
Domestic government
3

 
9

 
—

 
12

Corporate credit
—

 
11

 
—

 
11

Non-qualified benefit plan trust (2):
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
Domestic
7

 
2

 
—

 
9

International
1

 
—

 
—

 
1

Debt securities - domestic government
3

 
—

 
—

 
3

Assets from price risk management activities (1) (3):
 
 
 
 
 
 
 
Electricity
—

 
2

 
—

 
2

Natural gas
—

 
17

 
—

 
17

 
$
14

 
$
55

 
$
—

 
$
69

Liabilities - Liabilities from price risk management
activities (1) (3):
 
 
 
 
 
 
 
Electricity
$
—

 
$
108

 
$
29

 
$
137

Natural gas
—

 
201

 
50

 
251

 
$
—

 
$
309

 
$
79

 
$
388

 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Activities are subject to regulation, with certain gains and losses deferred pursuant to regulatory accounting and included in regulatory assets or regulatory liabilities as appropriate.
(2)
Excludes insurance policies of $23 million, which are recorded at cash surrender value.
(3)
For further information, see Note 5, Price Risk Management.

Trust assets held in the Nuclear decommissioning and Non-qualified benefit plan trusts are recorded at fair value in PGE’s consolidated balance sheets and invested in securities that are exposed to interest rate, credit and market volatility risks. These assets are classified within Level 1, 2 or 3 based on the following factors:

Money market funds—PGE invests in money market funds that seek to maintain a stable net asset value. These funds invest in high-quality, short-term, diversified money market instruments, short-term treasury bills, federal agency securities, certificates of deposits, and commercial paper. Money market funds are classified as Level 2 in the fair value hierarchy as the securities are traded in active markets of similar securities but are not directly valued using quoted market prices.

Debt securities—PGE invests in highly-liquid United States treasury securities to support the investment objectives of the trusts. These domestic government securities are classified as Level 1 in the fair value hierarchy due to the availability of quoted prices for identical assets in an active market as of the reporting date.

Assets classified as Level 2 in the fair value hierarchy include domestic government debt securities, such as municipal debt, and corporate credit securities. Prices are determined by evaluating pricing data such as broker quotes for similar securities and adjusted for observable differences. Significant inputs used in valuation models generally include benchmark yield and issuer spreads. The external credit rating, coupon rate, and maturity of each security are considered in the valuation as applicable.

Equity securities—Equity mutual fund and common stock securities are primarily classified as Level 1 in the fair value hierarchy due to the availability of quoted prices for identical assets in an active market as of the reporting date. Principal markets for equity prices include published exchanges such as NASDAQ and the New York Stock Exchange (NYSE). Certain mutual fund assets included in commingled trusts or separately managed accounts are classified as Level 2 in the fair value hierarchy as pricing inputs are directly or indirectly observable in the marketplace.

Assets and liabilities from price risk management activities are recorded at fair value in PGE’s consolidated balance sheets and consist of derivative instruments entered into by the Company to manage its exposure to commodity price risk and foreign currency exchange rate risk, and reduce volatility in net power costs for the Company’s retail customers. For additional information regarding these assets and liabilities, see Note 5, Price Risk Management.

For those assets and liabilities from price risk management activities classified as Level 2, fair value is derived using present value formulas that utilize inputs such as quoted forward prices for commodities and interest rates. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category include over-the-counter forwards, commodity futures and swaps.

Assets and liabilities from price risk management activities classified as Level 3 consist of instruments for which fair value is derived using one or more significant inputs that are not observable for the entire term of the instrument. These instruments consist of longer term over-the-counter swap derivatives. Commodity option contracts whose fair value is derived using standardized valuation techniques, such as Black-Scholes, are also classified as Level 3. Inputs into the valuation of commodity option contracts include forward commodity prices, forward interest rates, and historic volatility and correlation factors.

The Company values its Level 3 assets and liabilities from price risk management activities using a discounted cash flow valuation technique in which quoted forward prices for the respective commodity are significant unobservable inputs. Quantitative information regarding the significant, unobservable inputs used in the measurement of Level 3 assets and liabilities from price risk management activities as of December 31, 2012 is presented below:

 
 
 
Range and Weighted Average
Price per Unit
 
Fair Value
 
Low
 
High
 
Weighted Average
 
Unit
Assets from price risk management activities:
(in millions)
 
 
 
 
 
 
 
 
Natural gas financial swaps
$
2

 
$
3.74

 
$
5.21

 
$
4.36

 
Dth
Liabilities from price risk management activities:
 
 
 
 
 
 
 
 
 
Electricity financial swaps and commodity futures
10

 
7.12

 
51.72

 
41.14

 
MWh
Natural gas financial swaps
8

 
3.67

 
5.21

 
4.20
 
Dth
 
 
 
 
 
 
 
 
 
 

Long-term forward prices for commodity derivatives employ the mid-point of the market’s bid-ask spread and are derived using observed transactions in active markets, as well as historical experience as a participant in those markets.

The Company’s Risk Management department, which reports to the Chief Financial Officer, prepares valuations for all derivative transactions. This process includes management of the mark-to-market process, which ultimately determines the fair value measurement for assets and liabilities from price risk management activities. On a daily basis, mark-to-market valuations for derivatives are calculated using the Company’s system of record. Inputs used in performing daily mark-to-market calculations are uploaded into the system of record after review for reasonableness against expectations and subsequent to validation against broker quotes and market data from a regulated exchange. In addition, the overall change in mark-to-market is evaluated based on pricing input expectations. Any discrepancies identified during this process may result in adjustment of an input.

PGE’s Level 3 assets and liabilities from price risk management activities are sensitive to market price changes in the respective underlying commodities. The significance of the impact is dependent upon the magnitude of the price change and the Company’s position as either the buyer or seller of the contract. As the buyer of a commodity financial swap, an increase in the underlying commodity price would result in a favorable change to the fair value measurement. Conversely, a decrease in the underlying commodity price would result in an unfavorable change to the fair value measurement. As the seller of a commodity financial swap, the fair value measurements are sensitive to price changes in a manner opposite to the buy side relationship discussed above.

Changes in the fair value of net liabilities from price risk management activities (net of assets from price risk management activities) classified as Level 3 in the fair value hierarchy were as follows (in millions):

 
Years Ended December 31,
 
2012
 
2011
Net liabilities from price risk management activities as of beginning of year
$
79

 
$
120

Net realized and unrealized losses
15

(1) 
86

Purchases
(1
)
 
3

Issuances
(1
)
 
—

Settlements
—

 
(1
)
Net transfers out of Level 3 to Level 2
(76
)
 
(129
)
Net liabilities from price risk management activities as of end of year
$
16

 
$
79

Level 3 net unrealized losses that have been fully offset by the effect of regulatory accounting
$
14

 
$
88

 
 
 
 
 
 
 
 
 
(1)
Includes $1 million of realized losses, net.

The comparable information contained in the preceding table was as follows for the year ended December 31, 2010 (in millions): 
Net liabilities from price risk management activities as of beginning of year
$
154

Net realized and unrealized losses (1)
65

Purchases, issuances, and settlements, net
27

Net transfers out of Level 3 to Level 2
(126
)
Net liabilities from price risk management activities as of end of year
$
120

Level 3 net unrealized losses that have been fully offset by the effect of regulatory accounting
$
95

 
 
 
 
 
 
 
(1)
Contains nominal amounts of realized losses, net.

Transfers into Level 3 occur when significant inputs used to value the Company’s derivative instruments become less observable, such as a delivery location becoming significantly less liquid. Transfers out of Level 3 occur when the significant inputs become more observable, such as the time between the valuation date and the delivery term of a transaction becomes shorter.

Long-term debt is recorded at amortized cost in PGE’s consolidated balance sheets. The fair value of long-term debt is classified as a Level 2 fair value measurement and is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to PGE for debt of similar remaining maturities. As of December 31, 2012, the estimated aggregate fair value of PGE’s long-term debt was $1,949 million, compared to its $1,636 million carrying amount. As of December 31, 2011, the estimated aggregate fair value of PGE’s long-term debt was $2,091 million, compared to its $1,735 million carrying amount.

For fair value information concerning the Company’s pension plan assets, see Note 10, Employee Benefits.