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 above 75 basis points 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 portion of the shortfall between 75 and 125 basis points 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, and collect from customers, 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. In 2011, we deferred $7.5 million of costs related to Tropical Storm Irene and legislative and tax law changes. We filed with the PSB on May 1, 2012 for recovery of these costs commencing on July 1, 2012 as provided by our alternative regulation plan.

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 for 2011 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 2011 return on equity from the regulated portion of our business is approximately 9.08 percent. We filed this calculation with the PSB on May 1, 2012. No additional ESAM adjustment was required since this return was within 75 basis points of our 2011 allowed return on equity of 9.45 percent.

The PCAM adjustment for the first quarter of 2012 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 September 30, 2012. 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 fourth quarter of 2011 was an over-collection of $0.3 million and was recorded as a current liability. This over-collection will be returned to customers over the three months ending June 30, 2012. The DPS recommended the PCAM report be approved as filed and the PSB accepted the DPS recommendation and approved the filing.

The PCAM adjustment for the third quarter of 2011 was an under-collection of $0.3 million and was recorded as a current asset. This under-collection was collected from customers over the three months ending March 31, 2012. The DPS recommended the PCAM report be approved as filed and the PSB accepted the DPS recommendation and approved the filing.

The PCAM adjustment for the first quarter of 2011 was an over-collection of $1 million and for the second quarter of 2011 was an over-collection of $0.8 million. These amounts were recorded as current liabilities and were returned to customers over the three months ending September 30, 2011 for first quarter and ending December 31, 2011 for the second quarter.

On November 1, 2011, we submitted a base rate filing for the rate year commencing January 1, 2012, as required by our alternative regulation plan. The filing proposed an increase in base rates of $15.8 million or a 4.78 percent increase in retail rates, reflecting an allowed ROE of 9.17 percent. Under our alternative regulation plan, the annual change in the non-power costs, as reflected in our base rate filing, is limited to any increase in the U.S. Consumer Price Index for the northeast, less a productivity adjustment that varies based upon the results of a comparison of certain cost metrics of the company with those of a benchmark group of U.S. electric utilities. For the 2012 rate year, the productivity adjustment was 0.95 percent. The non-power costs associated with the implementation of our Asset Management Plan and our CVPS SmartPower® project are excluded from the non-power cost cap. Our 2012 forecasted non-power costs did not exceed the non-power cost cap. On December 28, 2011, we received approval from the PSB and the 4.78 rate increase went into effect January 1, 2012.

Due to the pending merger, on April 13, 2012, we submitted a filing to the PSB requesting modifications to our existing alternative regulation plan. The proposed modifications include termination of our current plan as of September 30, 2012, except for residual ESAM adjustments and the power adjustor allowed under our current plan; termination of the currently effective base rate adjustments as of September 30, 2012; and adjustments to the timing and duration of the ESAM adjustments under the current plan to reflect the early termination of January 1, 2012 base rate change. The filing is expressly conditioned upon approval and closing of the Merger currently pending approval before the PSB. The submission was made as a part of the Memorandum of Understanding reached with Green Mountain Power Corporation and the Vermont Department of Public Service, which is also pending approval in the merger investigation.

CVPS SmartPower® 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.

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 allowed to receive reimbursement of 50 percent of our total eligible project costs incurred since August 6, 2009, up to $31 million. From the inception of the project through March 31, 2012, we have incurred $15.8 million of costs, of which $8.4 million were operating expenses and $7.4 million were capital expenditures. We have submitted requests for reimbursement of $7.4 million and have received $6.8 million to date. We have received $1.8 million in reimbursements in 2012.

In the first quarter of 2012, we have incurred $2.2 million of costs, of which $0.8 million were operating expenses and $1.4 million were capital expenditures.

Pending Merger with Gaz Métro See Note 1 - Business Organization, Pending Merger with Gaz Métro, Regulatory approvals.

Regulatory Accounting Under the 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 $11.3 million of regulatory assets (total regulatory assets of $48.3 million less pension and postretirement medical costs of $37 million), $17.3 million of other deferred charges - regulatory and $4.3 million of other deferred credits - regulatory. This would result in a total charge to operations of $24.3 million on a pre-tax basis as of March 31, 2012. We would be required to record pre-tax pension and postretirement costs of $36.8 million to Accumulated Other Comprehensive Loss and $0.2 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).

	March 31, 2012		December 31, 2011
Regulatory Assets - Long-term Portion:
Pension and postretirement medical costs	$	36,817	$	37,300
Nuclear plant dismantling costs		3,454		3,827
Income taxes		4,702		4,722
Asset retirement obligations (a) (d)		418		426
Other (b) (d)		89		106
Total Regulatory Assets -Long-term Portion		45,480		46,381

Regulatory Assets - Current Portion:
Pension and postretirement medical costs (c) (d)		176		235
Nuclear refueling outage costs - Millstone Unit #3 (c) (d)		644		805
Nuclear plant dismantling costs (c) (d)		1,462		1,433
Environmental costs (c)		339		0
Asset retirement obligations and other (c) (d)		162		132
Total Regulatory Assets - Current Portion		2,783		2,605
Total Regulatory Assets	$	48,263	$	48,986

Other Deferred Charges - Regulatory - Long-term Portion:
ESAM deferred costs (b) (d)	$	1,880	$	3,759
FERC relicensing		609		609
Other (d)		254		255
Total Other Deferred Charges - Regulatory - Long-term Portion		2,743		4,623

Other Deferred Charges - Regulatory - Current Portion:
Unrealized loss on power-related derivatives (c)		8,955		4,940
ESAM deferred costs (c) (d)		5,639		3,759
Other (c) (d)		0		503
Total Other Deferred Charges - Regulatory - Current Portion		14,594		9,202
Total Other Deferred Charges - Regulatory	$	17,337	$	13,825

Other Deferred Credits - Regulatory - Long-term Portion:
Asset retirement obligation - Millstone Unit #3	$	3,430	$	3,060
Other (c) (d)		21		21
Total Other Deferred Credits - Regulatory - Long-term Portion:		3,451		3,081

Other Deferred Credits - Regulatory - Current Portion:
CVPS SmartPower® grant reimbursements (c) (d)		167		222
Other (c) (d)		649		825
Total Other Deferred Credits - Regulatory - Current Portion		816		1,047
Total Other Deferred Credits - Regulatory	$	4,267	$	4,128

(a)	Remaining recovery period is 14 years

(b)	Remaining recovery period is 2 years

(c)	Remaining recovery period is 1 year

(d)	Currently earning a return

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. 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.