4. REGULATORY MATTERS

On January 8, 2011, Progress Energy and Duke Energy entered into the Merger Agreement. See Note 2 for regulatory information related to the Merger with Duke Energy.

A. PEC RETAIL RATE MATTERS

COST RECOVERY FILINGS

On June 3, 2011, PEC filed with the NCUC for a $104 million increase in the fuel rate charged to its North Carolina ratepayers, driven by rising fuel prices. If approved, the increase will be effective December 1, 2011, and will increase residential electric bills by $2.66 per 1,000 kilowatt-hours (kWh) for fuel cost recovery. On June 3, 2011, PEC also filed for a $25 million increase in the demand-side management (DSM) and energy-efficiency (EE) rate charged to its North Carolina ratepayers, which if approved, will be effective December 1, 2011, and will increase the residential electric bills by $1.16 per 1,000 kWh for DSM and EE cost recovery. On June 3, 2011, PEC also requested a $2 million increase for North Carolina Renewable Energy and Energy Efficiency Portfolio Standard (NC REPS), which if approved, will be effective December 1, 2011, and will increase the residential electric bills by $0.05 per 1,000 kWh. The net impact of the three filings results in an average increase in residential electric bills of 3.8 percent. We cannot predict the outcome of these matters.

On June 29, 2011, the SCPSC approved a $22 million increase in the fuel rate charged to PEC's South Carolina ratepayers, driven by rising fuel prices. The increase was effective July 1, 2011, and increased residential electric bills by $3.45 per 1,000 kWh. The SCPSC also provisionally approved on June 29, 2011 a $4 million increase in the DSM and EE rate. The increase was effective July 1, 2011, and increased residential electric bills by $1.25 per 1,000 kWh. The net impact of the two filings resulted in an average increase in residential electric bills of 4.7 percent. We cannot predict the outcome of this matter.

OTHER MATTERS

Construction of Generating Facilities

In June 2011, a newly-constructed 600-Megawatt (MW) combined cycle natural gas-fueled facility at the Richmond generation facility was placed in service. The NCUC has also granted PEC permission to construct two additional new generating facilities: an approximately 950-MW combined cycle natural gas-fueled facility at its Lee generation facility and an approximately 620-MW natural gas-fueled facility at its Sutton generation facility. The facilities are expected to be placed in service in January 2013 and December 2013, respectively.

Planned Retirements of Generating Facilities

PEC filed a plan with the NCUC and the SCPSC to retire all of its coal-fired generating facilities in North Carolina that do not have scrubbers. These facilities total approximately 1,500 MW at four sites. In March 2011, PEC advised the NCUC and the SCPSC that the coal-fired generating facilities at one of the four sites, the Weatherspoon site, is expected to be retired on October 1, 2011. PEC expects to retire the remaining facilities by the end of 2014.

The net carrying value of the four facilities at June 30, 2011, of $171 million is included in other utility plant, net on the Consolidated Balance Sheets. Consistent with ratemaking treatment, PEC will continue to depreciate each plant using the current depreciation lives and rates on file with the NCUC and the SCPSC until the earlier of the plant's retirement or PEC's completion and filing of a new depreciation study on or before March 31, 2013. The final recovery periods may change in connection with the regulators' determination of the rate recovery of the remaining net carrying value.

B. PEF RETAIL RATE MATTERS

CR3 OUTAGE

In September 2009, PEF's Crystal River Unit No. 3 Nuclear Plant (CR3) began an outage for normal refueling and maintenance as well as an uprate project to increase its generating capability and to replace two steam generators. During preparations to replace the steam generators, workers discovered a delamination (or separation) within the concrete at the periphery of the containment building, which resulted in an extension of the outage. After analysis, PEF determined that the concrete delamination at CR3 was caused by redistribution of stresses in the containment wall that occurred when PEF created an opening to accommodate the replacement of the unit's steam generators. In March 2011, the work to return the plant to service was suspended after monitoring equipment at the repair site identified a new delamination that occurred in a different section of the outer wall after the repair work was completed and during the late stages of retensioning the containment building. CR3 has remained out of service while PEF conducted an engineering analysis and review of the new delamination and evaluated repair options. Subsequent to March 2011, monitoring equipment has detected additional changes in the partially tensioned containment building and additional cracking or delaminations may have occurred or could occur during the repair process.

PEF analyzed multiple repair options as well as early decommissioning and believes, based on the information and analyses conducted to date, that repairing the unit is the best option. PEF engaged outside engineering experts to perform the analysis of possible repair options for the second delamination. The consultants analyzed 22 potential repair options and ultimately narrowed those to four. PEF, along with independent experts, reviewed the four options for technical issues, constructability, and licensing feasibility as well as cost.

Based on that initial analysis, PEF selected the best repair option, which would entail systematically removing and replacing concrete in substantial portions of the containment structure walls. The planned option does not include the area where concrete was replaced during the initial repair. The preliminary cost estimate for this repair is between $900 million and $1.3 billion.

PEF is moving forward systematically and will perform additional detailed engineering analyses and designs, which could affect any final repair plan. This process will lead to more certainty for the cost and schedule of the repair. PEF will continue to refine and assess the plan, and the prudence of continuing to pursue it, based on new developments and analyses as the process moves forward. Under this repair plan, PEF estimates that CR3 will return to service in 2014. A number of factors could affect the repair plan, the return-to-service date and costs, including regulatory reviews, final engineering designs, contract negotiations, the ultimate work scope completion, testing, weather, the impact of new information discovered during additional testing and analysis and other developments. On June 27, 2011, PEF filed an updated status report with the NRC and FPSC regarding the CR3 outage. The FPSC held a subsequent status conference regarding the CR3 outage on July 14, 2011, with another status conference scheduled for August 8, 2011.

CR3's current operating license expires in December 2016, and PEF applied for a 20-year renewal of the license in 2008. PEF understands that the NRC has completed the license extension process with the exception of the containment structure repair. Once the repair design has been completed and evaluated, the NRC can proceed with the review of the containment structure. Assuming repair is successful, management is not aware of any reasons why CR3 will not satisfy the requirements for the license extension.

PEF maintains insurance for property damage and incremental costs of replacement power resulting from prolonged accidental outages through Nuclear Electric Insurance Limited (NEIL). NEIL has confirmed that the CR3 initial delamination is a covered accident but has not yet made a determination as to coverage for the second delamination. Following a 12-week deductible period, the NEIL program provided reimbursement for replacement power costs for 52 weeks at $4.5 million per week, through April 9, 2011. An additional 71 weeks of coverage, which runs through August 2012, is provided at $3.6 million per week. Accordingly, the NEIL program provides replacement power coverage of up to $490 million per event. Actual replacement power costs have exceeded the insurance coverage through June 30, 2011. PEF anticipates that future replacement power costs will continue to exceed the insurance coverage. As discussed below, PEF considers replacement power costs not recoverable through insurance to be recoverable through its fuel cost-recovery clause. PEF also maintains insurance coverage through NEIL's accidental property damage program, which provides insurance coverage up to $2.25 billion with a $10 million deductible per claim. PEF is continuing to work with NEIL for recovery of applicable repair costs and associated replacement power costs.

The following table summarizes the CR3 replacement power and repair costs and recovery through June 30, 2011:

(in millions)		Replacement Power Costs		Repair Costs
Spent to date		$	396	$	203
NEIL proceeds received to date			(162)		(103)
Insurance receivable at June 30, 2011			(115)		(54)
	Balance for recovery	$	119	$	46

PEF believes the actions taken and costs incurred in response to the CR3 delamination have been prudent and, accordingly, considers replacement power and capital costs not recoverable through insurance to be recoverable through its fuel cost-recovery clause or base rates. As approved by the FPSC, on January 1, 2011, PEF began collecting, subject to refund, replacement power costs related to CR3 within the fuel clause (See Note 7C in the 2010 Form 10-K). PEF has recorded $277 million of NEIL replacement power cost reimbursements subsequent to the deductible period, which reduced the portion of the deferred fuel regulatory asset related to the extended CR3 outage to $119 million at June 30, 2011. Additional replacement power costs and repair and maintenance costs incurred until CR3 is returned to service could be material. We cannot predict with certainty the future recoverability of these costs. Failure to recover some or all of these costs could have a material adverse effect on our and PEF's financial results. Additionally, we cannot be assured that CR3 can be repaired and brought back to service until full engineering and other analyses are completed.

On October 25, 2010, the FPSC approved PEF's motion to establish a separate spin-off docket to review the prudence and costs related to the outage and replacement fuel and power costs associated with the CR3 extended outage. This docket will allow the FPSC to evaluate PEF's actions concerning the concrete delamination and review PEF's resulting costs associated with the extended outage.

We cannot predict the outcome of these matters.

COST OF REMOVAL RESERVE

The base rate settlement agreement in effect through the last billing cycle of 2012 provides PEF the discretion to reduce amortization expense (cost of removal component) by up to $150 million in 2010, up to $250 million in 2011, and up to any remaining balance in the cost of removal reserve in 2012 until the earlier of (a) PEF's applicable cost of removal reserve reaches zero, or (b) the expiration of the settlement agreement at the end of 2012. In the event PEF reduces amortization expense by less than the annual amounts for 2010 or 2011, PEF may carry forward (i.e., increase the annual cap by) any unused cost of removal reserve amounts in subsequent years during the term of the agreement. Pursuant to the settlement agreement, PEF carried an unused balance of $90 million forward from 2010, which is available to reduce future amortization expense. For the three and six months ended June 30, 2011, PEF recognized a $54 million and $134 million reduction in amortization expense, respectively. Under the base rate settlement agreement, PEF had eligible cost of removal reserves of $338 million remaining as of June 30, 2011. The balance of the cost of removal reserve is impacted by accruals in accordance with PEF's latest depreciation study, removal costs expended and reductions in amortization expense as permitted by the settlement agreement.

NUCLEAR COST RECOVERY

Levy Nuclear

Major construction activities on PEF's proposed Levy Units No. 1 and No. 2 Nuclear Plants (Levy) have been postponed until after the NRC issues the combined license (COL) for the plants, which is expected in 2013 if the current licensing schedule remains on track. Along with the FPSC's annual prudence reviews, we will continue to evaluate the project on an ongoing basis based on certain criteria, including, but not limited to cost; potential carbon regulation; fossil fuel prices; the benefits of fuel diversification; public, regulatory and political support; adequate financial cost-recovery mechanisms; appropriate levels of joint owner participation; customer rate impacts; project feasibility; DSM and EE programs; and availability and terms of capital financing. Taking into account these criteria, we consider Levy to be PEF's preferred baseload generation option.

CR3 Uprate

In 2007, the FPSC issued an order approving PEF's Determination of Need petition related to a multi-stage uprate of CR3 that will increase CR3's gross output by approximately 180 MW during its next refueling outage. PEF implemented the first-stage design modifications in 2008. The third and final stage of the uprate required a license amendment to be filed with the NRC, which was filed by PEF in June 2011.

Cost Recovery

On May 2, 2011, PEF filed its annual nuclear cost-recovery filing with the FPSC for a $6 million decrease in the amount charged to PEF's ratepayers. The nuclear cost-recovery filing includes recovery of pre-construction and carrying costs and Capacity Cost-Recovery Clause (CCRC) recoverable O&M expense incurred or anticipated to be incurred during 2012, recovery of $115 million of prior years deferrals in 2012, as well as the estimated actual true-up of 2011 costs associated with the Levy and CR3 uprate projects. This results in an estimated decrease in the nuclear cost-recovery charge of $0.33 per 1,000 kWh for residential customers, which if approved, would begin with the first January 2012 billing cycle. On July 1, 2011, PEF filed a motion with the FPSC to defer until 2012 the approval of the long-term feasibility analysis of completing the CR3 uprate, and the determination of reasonableness on, and recovery of, 2011 and 2012 estimated costs. If approved, this would reduce the recovery under the nuclear cost recovery clause related to the CR3 uprate project by $17 million, and result in a further estimated decrease of $0.55 per 1,000 kWh for residential customers in 2012. The FPSC has scheduled hearings to address these matters in August 2011, with a decision expected in October 2011. We cannot predict the outcome of this matter.

DEMAND-SIDE MANAGEMENT

On July 26, 2011, the FPSC set PEF's DSM compliance goals to remain at their current level until the next goal setting docket is initiated.

Regulatory Matters Disclosure [Line Items]

Regulatory Matters

B. PEF RETAIL RATE MATTERS

CR3 OUTAGE

In September 2009, PEF's Crystal River Unit No. 3 Nuclear Plant (CR3) began an outage for normal refueling and maintenance as well as an uprate project to increase its generating capability and to replace two steam generators. During preparations to replace the steam generators, workers discovered a delamination (or separation) within the concrete at the periphery of the containment building, which resulted in an extension of the outage. After analysis, PEF determined that the concrete delamination at CR3 was caused by redistribution of stresses in the containment wall that occurred when PEF created an opening to accommodate the replacement of the unit's steam generators. In March 2011, the work to return the plant to service was suspended after monitoring equipment at the repair site identified a new delamination that occurred in a different section of the outer wall after the repair work was completed and during the late stages of retensioning the containment building. CR3 has remained out of service while PEF conducted an engineering analysis and review of the new delamination and evaluated repair options. Subsequent to March 2011, monitoring equipment has detected additional changes in the partially tensioned containment building and additional cracking or delaminations may have occurred or could occur during the repair process.

PEF analyzed multiple repair options as well as early decommissioning and believes, based on the information and analyses conducted to date, that repairing the unit is the best option. PEF engaged outside engineering experts to perform the analysis of possible repair options for the second delamination. The consultants analyzed 22 potential repair options and ultimately narrowed those to four. PEF, along with independent experts, reviewed the four options for technical issues, constructability, and licensing feasibility as well as cost.

Based on that initial analysis, PEF selected the best repair option, which would entail systematically removing and replacing concrete in substantial portions of the containment structure walls. The planned option does not include the area where concrete was replaced during the initial repair. The preliminary cost estimate for this repair is between $900 million and $1.3 billion.

PEF is moving forward systematically and will perform additional detailed engineering analyses and designs, which could affect any final repair plan. This process will lead to more certainty for the cost and schedule of the repair. PEF will continue to refine and assess the plan, and the prudence of continuing to pursue it, based on new developments and analyses as the process moves forward. Under this repair plan, PEF estimates that CR3 will return to service in 2014. A number of factors could affect the repair plan, the return-to-service date and costs, including regulatory reviews, final engineering designs, contract negotiations, the ultimate work scope completion, testing, weather, the impact of new information discovered during additional testing and analysis and other developments. On June 27, 2011, PEF filed an updated status report with the NRC and FPSC regarding the CR3 outage. The FPSC held a subsequent status conference regarding the CR3 outage on July 14, 2011, with another status conference scheduled for August 8, 2011.

CR3's current operating license expires in December 2016, and PEF applied for a 20-year renewal of the license in 2008. PEF understands that the NRC has completed the license extension process with the exception of the containment structure repair. Once the repair design has been completed and evaluated, the NRC can proceed with the review of the containment structure. Assuming repair is successful, management is not aware of any reasons why CR3 will not satisfy the requirements for the license extension.

PEF maintains insurance for property damage and incremental costs of replacement power resulting from prolonged accidental outages through Nuclear Electric Insurance Limited (NEIL). NEIL has confirmed that the CR3 initial delamination is a covered accident but has not yet made a determination as to coverage for the second delamination. Following a 12-week deductible period, the NEIL program provided reimbursement for replacement power costs for 52 weeks at $4.5 million per week, through April 9, 2011. An additional 71 weeks of coverage, which runs through August 2012, is provided at $3.6 million per week. Accordingly, the NEIL program provides replacement power coverage of up to $490 million per event. Actual replacement power costs have exceeded the insurance coverage through June 30, 2011. PEF anticipates that future replacement power costs will continue to exceed the insurance coverage. As discussed below, PEF considers replacement power costs not recoverable through insurance to be recoverable through its fuel cost-recovery clause. PEF also maintains insurance coverage through NEIL's accidental property damage program, which provides insurance coverage up to $2.25 billion with a $10 million deductible per claim. PEF is continuing to work with NEIL for recovery of applicable repair costs and associated replacement power costs.

The following table summarizes the CR3 replacement power and repair costs and recovery through June 30, 2011:

(in millions)		Replacement Power Costs		Repair Costs
Spent to date		$	396	$	203
NEIL proceeds received to date			(162)		(103)
Insurance receivable at June 30, 2011			(115)		(54)
	Balance for recovery	$	119	$	46

PEF believes the actions taken and costs incurred in response to the CR3 delamination have been prudent and, accordingly, considers replacement power and capital costs not recoverable through insurance to be recoverable through its fuel cost-recovery clause or base rates. As approved by the FPSC, on January 1, 2011, PEF began collecting, subject to refund, replacement power costs related to CR3 within the fuel clause (See Note 7C in the 2010 Form 10-K). PEF has recorded $277 million of NEIL replacement power cost reimbursements subsequent to the deductible period, which reduced the portion of the deferred fuel regulatory asset related to the extended CR3 outage to $119 million at June 30, 2011. Additional replacement power costs and repair and maintenance costs incurred until CR3 is returned to service could be material. We cannot predict with certainty the future recoverability of these costs. Failure to recover some or all of these costs could have a material adverse effect on our and PEF's financial results. Additionally, we cannot be assured that CR3 can be repaired and brought back to service until full engineering and other analyses are completed.

On October 25, 2010, the FPSC approved PEF's motion to establish a separate spin-off docket to review the prudence and costs related to the outage and replacement fuel and power costs associated with the CR3 extended outage. This docket will allow the FPSC to evaluate PEF's actions concerning the concrete delamination and review PEF's resulting costs associated with the extended outage.

We cannot predict the outcome of these matters.

COST OF REMOVAL RESERVE

The base rate settlement agreement in effect through the last billing cycle of 2012 provides PEF the discretion to reduce amortization expense (cost of removal component) by up to $150 million in 2010, up to $250 million in 2011, and up to any remaining balance in the cost of removal reserve in 2012 until the earlier of (a) PEF's applicable cost of removal reserve reaches zero, or (b) the expiration of the settlement agreement at the end of 2012. In the event PEF reduces amortization expense by less than the annual amounts for 2010 or 2011, PEF may carry forward (i.e., increase the annual cap by) any unused cost of removal reserve amounts in subsequent years during the term of the agreement. Pursuant to the settlement agreement, PEF carried an unused balance of $90 million forward from 2010, which is available to reduce future amortization expense. For the three and six months ended June 30, 2011, PEF recognized a $54 million and $134 million reduction in amortization expense, respectively. Under the base rate settlement agreement, PEF had eligible cost of removal reserves of $338 million remaining as of June 30, 2011. The balance of the cost of removal reserve is impacted by accruals in accordance with PEF's latest depreciation study, removal costs expended and reductions in amortization expense as permitted by the settlement agreement.

NUCLEAR COST RECOVERY

Levy Nuclear

Major construction activities on PEF's proposed Levy Units No. 1 and No. 2 Nuclear Plants (Levy) have been postponed until after the NRC issues the combined license (COL) for the plants, which is expected in 2013 if the current licensing schedule remains on track. Along with the FPSC's annual prudence reviews, we will continue to evaluate the project on an ongoing basis based on certain criteria, including, but not limited to cost; potential carbon regulation; fossil fuel prices; the benefits of fuel diversification; public, regulatory and political support; adequate financial cost-recovery mechanisms; appropriate levels of joint owner participation; customer rate impacts; project feasibility; DSM and EE programs; and availability and terms of capital financing. Taking into account these criteria, we consider Levy to be PEF's preferred baseload generation option.

CR3 Uprate

In 2007, the FPSC issued an order approving PEF's Determination of Need petition related to a multi-stage uprate of CR3 that will increase CR3's gross output by approximately 180 MW during its next refueling outage. PEF implemented the first-stage design modifications in 2008. The third and final stage of the uprate required a license amendment to be filed with the NRC, which was filed by PEF in June 2011.

Cost Recovery

On May 2, 2011, PEF filed its annual nuclear cost-recovery filing with the FPSC for a $6 million decrease in the amount charged to PEF's ratepayers. The nuclear cost-recovery filing includes recovery of pre-construction and carrying costs and Capacity Cost-Recovery Clause (CCRC) recoverable O&M expense incurred or anticipated to be incurred during 2012, recovery of $115 million of prior years deferrals in 2012, as well as the estimated actual true-up of 2011 costs associated with the Levy and CR3 uprate projects. This results in an estimated decrease in the nuclear cost-recovery charge of $0.33 per 1,000 kWh for residential customers, which if approved, would begin with the first January 2012 billing cycle. On July 1, 2011, PEF filed a motion with the FPSC to defer until 2012 the approval of the long-term feasibility analysis of completing the CR3 uprate, and the determination of reasonableness on, and recovery of, 2011 and 2012 estimated costs. If approved, this would reduce the recovery under the nuclear cost recovery clause related to the CR3 uprate project by $17 million, and result in a further estimated decrease of $0.55 per 1,000 kWh for residential customers in 2012. The FPSC has scheduled hearings to address these matters in August 2011, with a decision expected in October 2011. We cannot predict the outcome of this matter.

DEMAND-SIDE MANAGEMENT

On July 26, 2011, the FPSC set PEF's DSM compliance goals to remain at their current level until the next goal setting docket is initiated.