NOTE 9 - RETAIL RATES AND REGULATORY ACCOUNTING

Retail Rates Our retail rates are approved by the PSB after considering the recommendations of Vermont's consumer advocate, the DPS. Fair regulatory treatment is fundamental to maintaining our financial stability. Rates must be set at levels to recover costs, including a market rate of return to equity and debt holders, in order to attract capital.

Alternative Regulation: On September 30, 2008, the PSB issued an order approving our alternative regulation plan. The plan became effective on November 1, 2008. It was scheduled to expire on December 31, 2011. The plan allows for quarterly PCAM adjustments to reflect changes in power supply and transmission-by-others costs and annual base rate adjustments to reflect changes in operating costs; and an annual ESAM adjustment to reflect changes, within predetermined limits, from the allowed earnings level. Under the plan, the allowed return on equity is adjusted annually to reflect one-half of the change in the average yield on the 10-year Treasury note as measured over the last 20 trading days prior to October 15 of each year. The ESAM provides for the return on equity of the regulated portion of our business to fall between 75 basis points above or below the allowed return on equity before any adjustment is made. If the actual return on equity of the regulated portion of our business exceeds 75 basis points above the allowed return, the excess amount is returned to customers in a future period. If the actual return on equity of our regulated business falls between 75 and 125 basis points below the allowed return on equity, the shortfall is shared equally between shareholders and customers. Any earnings shortfall in excess of 125 basis points below the allowed return on equity is fully recovered from customers. As such, the minimum return for our regulated business is 100 basis points below the allowed return. These adjustments are made at the end of each fiscal year.

The ESAM also provides for an exogenous effects provision. Under this provision,we are allowed to defer the unexpected impact if in excess of $0.6 million, of changes in GAAP, tax laws, FERC or ISO-NE rules and major unplanned operation, maintenance costs, such as those due to major storms and other factors including loss of load not due to variations in heating and cooling temperatures.

By order dated March 3, 2011, the PSB approved amendments to the alternative regulation plan that: 1) extend its duration until December 31, 2013; 2) alter the methodology for implementing the non-power cost cap contained in the plan; 3) reset our allowed ROE to 9.45 percent; and 4) remove provisions no longer applicable to the provision of our services.

Using the methodology specified in our alternative regulation plan, our 2010 return on equity from the regulated portion of our business was 8.95 percent. We filed this calculation with the PSB in April 2011. No ESAM adjustment was required since this return was within 75 basis points of our 2010 allowed return on equity of 9.59 percent. On May 20, 2011 the DPS notified the PSB that they agreed with our conclusion that no 2010 ESAM adjustment was required. On May 26, 2011 the PSB accepted our 2010 ESAM calculation.

The PCAM adjustment for the second quarter of 2011 was an over-collection of $0.8 million and was recorded as a current liability. This over-collection will be returned to customers over the three months ending December 31, 2011. We filed a PCAM report with the PSB identifying this over-collection. The PSB has not yet acted on this filing.

The PCAM adjustment for the first quarter of 2011 was an over-collection of $1 million and was recorded as a current liability. This over-collection will be returned to customers over the three months ending September 30, 2011. We filed a PCAM report with the PSB identifying this over-collection. The DPS recommended the PCAM report be approved as filed and the PSB accepted the DPS recommendation and approved the filing.

CVPS SmartPower(R) On October 27, 2009, the DOE announced that Vermont's electric utilities will receive $69 million in federal stimulus funds to deploy advanced metering, new customer service enhancements and grid automation. As a participant on Vermont's smart grid stimulus application, we expect to receive a grant of over $31 million.

On April 15, 2010, we signed an agreement with the DOE for our portion of the Smart Grid stimulus grant and project and the agreement became effective April 19, 2010. The agreement includes provisions for funding and other requirements. We are eligible to receive reimbursement of 50 percent of our total project costs incurred since August 6, 2009, up to $31 million. From the inception of the project through June 30, 2011, we have incurred $6.7 million of costs, of which $3.4 million were operating expenses and $3.3 million were capital expenditures. We have submitted requests for reimbursement of $3.1 million and have received $2.5 million to date.

Regulatory Accounting Under FASB's guidance for regulated operations, we account for certain transactions in accordance with permitted regulatory treatment whereby regulators may permit incurred costs, typically treated as expenses by unregulated entities, to be deferred and expensed in future periods when recovered through future revenues. In the event that we no longer meet the criteria under accounting for regulated operations and there is not a rate mechanism to recover these costs, we would be required to write off $11.7 million of regulatory assets (total regulatory assets of $38.8 million less pension and postretirement medical costs of $27.1 million), $0.5 million of other deferred charges - regulatory and $4.9 million of other deferred credits - regulatory. This would result in a total charge to operations of $7.3 million on a pre-tax basis as of June 30, 2011. We would be required to record pre-tax pension and postretirement costs of $26.8 million to Accumulated Other Comprehensive Loss and $0.3 million to Retained Earnings as reductions to stockholders' equity. We would also be required to determine any potential impairment to the carrying costs of deregulated plant. Regulatory assets, certain other deferred charges and other deferred credits are shown in the table below (dollars in thousands).

	June 30, 2011		December 31, 2010
Regulatory assets
Pension and postretirement medical costs	$	27,146	$	27,959
Nuclear plant dismantling costs		6,114		6,821
Nuclear refueling outage costs - Millstone Unit #3		162		486
Income taxes		4,601		4,480
Asset retirement obligations and other		765		730
Total Regulatory assets		38,788		40,476
Less: Current portion		2,108		1,924
Total Regulatory assets less current portion	$	36,680	$	38,552

Other deferred charges - regulatory
ESAM deferred costs	$	0	$	4,157
Environmental		452		0
Other		5		181
Total Other deferred charges - regulatory		457		4,338
Less: Current portion		0		2,078
Total Other deferred charges - regulatory less current portion	$	457	$	2,260

Other deferred credits - regulatory
Asset retirement obligation - Millstone Unit #3	$	3,311	$	3,009
Vermont Yankee settlements		37		0
Unrealized gains on power-related derivatives		59		0
CVPS SmartPower(R) grant reimbursements		701		1,180
Other		755		805
Total Other deferred credits - regulatory		4,863		4,994
Less: Current Portion		1,008		1,108
Total Other deferred credits - regulatory less current portion	$	3,855	$	3,886

The regulatory assets included in the table above are being recovered in retail rates and are supported by written rate orders. The recovery period for regulatory assets varies based on the nature of the costs. All regulatory assets are earning a return, except for income taxes, nuclear plant dismantling costs, and pension and postretirement medical costs. Other deferred charges – regulatory are supported by PSB-approved accounting orders or approved cost recovery methodologies, allowing cost deferral until recovery in a future rate proceeding. Most items listed in other deferred credits - regulatory are being amortized for periods ranging from two to three years. Pursuant to PSB-approved rate orders, when a regulatory asset or liability is fully amortized, the corresponding rate revenue shall be booked as a reverse amortization in an opposing regulatory liability or asset account.

Regulatory assets for pension and postretirement medical costs are discussed in Note 12 - Pension and Postretirement Medical Benefits. Regulatory assets for nuclear plant dismantling costs are related to our equity interests in Maine Yankee, Connecticut Yankee and Yankee Atomic which are described in Note 4 - Investments in Affiliates. Power-related derivatives are discussed in more detail in Note 6 - Fair Value.