Regulatory Matters

6 Months Ended

Jun. 30, 2011

Regulatory Matters

3. Regulatory Matters

In accordance with GAAP, regulatory assets and liabilities are recorded in the condensed consolidated balance sheets for our regulated electric transmission and distribution businesses. Regulatory assets are the deferral of costs expected to be recovered in future customer rates and regulatory liabilities represent current recovery of expected future costs or gains probable of being reflected in future rates.

We evaluate our regulatory assets each period and believe recovery of these assets is probable. We have received or requested a return on certain regulatory assets for which we are currently recovering or seeking recovery through rates. We record a return after it has been authorized in an order by a regulator.

Economic Development Contract

On March 4, 2011, DP&L applied for approval from the PUCO of an arrangement entered into with DPL's largest customer. Under the terms of this arrangement, all of the retail electric energy services of this customer will be provided by DP&L through December 31, 2011. Subject to certain terms and conditions, this arrangement may be extended beyond December 31, 2011; however, its total duration is not to exceed 42 months. This arrangement was approved by the PUCO on June 8, 2011 and effective in July 2011. Under Ohio law, the electric discount provided to this customer may be recovered from all customers through an Economic Development Rider.

Regulatory assets and liabilities on the condensed consolidated balance sheets include:

				At	At
	Type of	Amortization		June 30,	December 31,
$ in millions	Recovery (a)	Through		2011	2010
Regulatory Assets:
Deferred recoverable income taxes	B/C	Ongoing	$	29.1	$	29.9
Pension benefits	C	Ongoing		77.8		81.1
Unamortized loss on reacquired debt	C	Ongoing		13.6		14.3
Regional transmission organization costs	D	2014		4.8		5.5
TCRR, transmission, ancillary and other PJM-related costs	F	Ongoing		8.7		11.8
Deferred storm costs - 2008	D			17.4		16.9
Power plant emission fees	C	Ongoing		6.5		6.6
CCEM smart grid and advanced metering infrastructure costs	D			6.6		6.6
CCEM energy efficiency program costs	F	Ongoing		5.7		4.8
Other costs				8.6		11.5
Total regulatory assets			$	178.8	$	189.0
Regulatory Liabilities:
Estimated costs of removal - regulated property			$	110.2	$	107.9
Postretirement benefits				5.7		6.1
Fuel and purchased power recovery costs	C	Ongoing		13.5		10.0
Total regulatory liabilities			$	129.4	$	124.0

(a)

B – Balance has an offsetting liability resulting in no impact on rate base. C – Recovery of incurred costs without a rate of return.

D – Recovery not yet determined, but is probable of occurring in future rate proceedings.

F – Recovery of incurred costs plus rate of return.

Regulatory Assets

Deferred recoverable income taxes represent deferred income tax assets recognized from the normalization of flow through items as a result of amounts previously provided to customers. This is the cumulative flow through benefit given to regulated customers that will be collected from them in future years. Since currently existing temporary differences between the financial statements and the related tax basis of assets will reverse in subsequent periods, these deferred recoverable income taxes will decrease over time.

Pension benefits represent the qualifying FASC Topic 715 "Compensation – Retirement Benefits" costs of our regulated operations that for ratemaking purposes are deferred for future recovery. We recognize an asset for a plan's overfunded status or a liability for a plan's underfunded status, and recognize, as a component of other comprehensive income (OCI), the changes in the funded status of the plan that arise during the year that are not recognized as a component of net periodic benefit cost. This regulatory asset represents the regulated portion that would otherwise be charged as a loss to OCI.

Unamortized loss on reacquired debt represents losses on long-term debt reacquired or redeemed in prior periods. These costs are being amortized over the lives of the original issues in accordance with FERC and PUCO rules.

Regional transmission organization costs represent costs incurred to join an RTO. The recovery of these costs will be requested in a future FERC rate case. In accordance with FERC precedent, we are amortizing these costs over a 10-year period that began in 2004 when we joined the PJM RTO.

TCRR, transmission, ancillary and other PJM-related costs represent the costs related to transmission, ancillary service and other PJM-related charges that have been incurred as a member of PJM. On an annual basis, retail rates are adjusted to true-up costs with recovery in rates.

Deferred storm costs – 2008 relate to costs incurred to repair the damage caused by hurricane force winds in September 2008, as well as other major 2008 storms. On January 14, 2009, the PUCO granted DP&L the authority to defer these costs with a return until such time that DP&L seeks recovery in a future rate proceeding.

Power plant emission fees represent costs paid to the State of Ohio since 2002. An application is pending before the PUCO to amend an approved rate rider that had been in effect to collect fees that were paid and deferred in years prior to 2002. The deferred costs incurred prior to 2002 have been fully recovered. As the previously approved rate rider continues to be in effect, we believe these costs are probable of future rate recovery.

CCEM smart grid and AMI costs represent costs incurred as a result of studying and developing distribution system upgrades and implementation of AMI. On October 19, 2010, DP&L elected to withdraw its case pertaining to the Smart Grid and AMI programs. The PUCO accepted the withdrawal in an order issued on January 5, 2011. The PUCO also indicated that it expects DP&L to continue to monitor other utilities' Smart Grid and AMI programs and to explore the potential benefits of investing in Smart Grid and AMI programs and that DP&L will, when appropriate, file new Smart Grid and/or AMI business cases in the future. We plan to file to recover these deferred costs in a future regulatory rate proceeding. Based on past PUCO precedent, we believe these costs are probable of future recovery in rates.

CCEM energy efficiency program costs represent costs incurred to develop and implement various new customer programs addressing energy efficiency. These costs are being recovered through an energy efficiency rider that began July 1, 2009 and is subject to a two-year true-up for any over/under recovery of costs.

Other costs primarily include consumer education advertising costs regarding electric deregulation, settlement system costs, electric choice system, RPM capacity, other PJM and rate case costs and alternative energy costs that are or will be recovered over various periods.

Regulatory Liabilities

Estimated costs of removal – regulated property reflects an estimate of amounts collected in customer rates for costs that are expected to be incurred in the future to remove existing transmission and distribution property from service when the property is retired.

Postretirement benefits represent the qualifying FASC Topic 715 "Compensation – Retirement Benefits" gains related to our regulated operations that, for ratemaking purposes, are probable of being reflected in future rates. We recognize an asset for a plan's overfunded status or a liability for a plan's underfunded status, and recognize, as a component of OCI, the changes in the funded status of the plan that arise during the year that are not recognized as a component of net periodic benefit cost. This regulatory liability represents the regulated portion that would otherwise be reflected as a gain to OCI.

Fuel and purchased power recovery costs represent prudently incurred fuel, purchased power, derivative, emission and other related costs which will be recovered from or returned to customers in the future through the operation of the fuel and purchased power recovery rider. The fuel and purchased power recovery rider fluctuates based on actual costs and recoveries and is modified at the start of each seasonal quarter. DP&L implemented the fuel and purchased power recovery rider on January 1, 2010. DP&L recently underwent an audit of its fuel and purchased power recovery rider and, as a result, there is some uncertainty as to the costs that will be approved for recovery. Independent third parties conducted the fuel audit in accordance with PUCO standards. The audit was completed in the second quarter of 2011 and a hearing has been set by the PUCO for August 30, 2011. Once the PUCO audit approval process is complete, DP&L may record a favorable or unfavorable adjustment to earnings. Based on past PUCO precedent, we believe these deferred fuel and purchased power costs are probable of future recovery or repayment in the case of over recovery.

DP&L [Member]

Regulatory Matters

3. Regulatory Matters

In accordance with GAAP, regulatory assets and liabilities are recorded in the condensed consolidated balance sheets for our regulated electric transmission and distribution businesses. Regulatory assets are the deferral of costs expected to be recovered in future customer rates and regulatory liabilities represent current recovery of expected future costs or gains probable of being reflected in future rates.

We evaluate our regulatory assets each period and believe recovery of these assets is probable. We have received or requested a return on certain regulatory assets for which we are currently recovering or seeking recovery through rates. We record a return after it has been authorized in an order by a regulator.

Economic Development Contract

On March 4, 2011, DP&L applied for approval from the PUCO of an arrangement entered into with DPL's largest customer. Under the terms of this arrangement, all of the retail electric energy services of this customer will be provided by DP&L through December 31, 2011. Subject to certain terms and conditions, this arrangement may be extended beyond December 31, 2011; however, its total duration is not to exceed 42 months. This arrangement was approved by the PUCO on June 8, 2011 and effective in July 2011. Under Ohio law, the electric discount provided to this customer may be recovered from all customers through an Economic Development Rider.

Regulatory assets and liabilities on the condensed consolidated balance sheets include:

				At	At
	Type of	Amortization		June 30,	December 31,
$ in millions	Recovery (a)	Through		2011	2010
Regulatory Assets:
Deferred recoverable income taxes	B/C	Ongoing	$	29.1	$	29.9
Pension benefits	C	Ongoing		77.8		81.1
Unamortized loss on reacquired debt	C	Ongoing		13.6		14.3
Regional transmission organization costs	D	2014		4.8		5.5
TCRR, transmission, ancillary and other PJM-related costs	F	Ongoing		8.7		11.8
Deferred storm costs - 2008	D			17.4		16.9
Power plant emission fees	C	Ongoing		6.5		6.6
CCEM smart grid and advanced metering infrastructure costs	D			6.6		6.6
CCEM energy efficiency program costs	F	Ongoing		5.7		4.8
Other costs				8.6		11.5
Total regulatory assets			$	178.8	$	189.0
Regulatory Liabilities:
Estimated costs of removal - regulated property			$	110.2	$	107.9
Postretirement benefits				5.7		6.1
Fuel and purchased power recovery costs	C	Ongoing		13.5		10.0
Total regulatory liabilities			$	129.4	$	124.0

(a) B Balance has an offsetting liability resulting in no impact on rate base. C Recovery of incurred costs without a rate of return.

D Recovery not yet determined, but is probable of occurring in future rate proceedings.

F Recovery of incurred costs plus rate of return.

Regulatory Assets

Deferred recoverable income taxes represent deferred income tax assets recognized from the normalization of flow through items as a result of amounts previously provided to customers. This is the cumulative flow through benefit given to regulated customers that will be collected from them in future years. Since currently existing temporary differences between the financial statements and the related tax basis of assets will reverse in subsequent periods, these deferred recoverable income taxes will decrease over time.

Pension benefits represent the qualifying FASC Topic 715 "Compensation Retirement Benefits" costs of our regulated operations that for ratemaking purposes are deferred for future recovery. We recognize an asset for a plan's overfunded status or a liability for a plan's underfunded status, and recognize, as a component of other comprehensive income (OCI), the changes in the funded status of the plan that arise during the year that are not recognized as a component of net periodic benefit cost. This regulatory asset represents the regulated portion that would otherwise be charged as a loss to OCI.

Unamortized loss on reacquired debt represents losses on long-term debt reacquired or redeemed in prior periods. These costs are being amortized over the lives of the original issues in accordance with FERC and PUCO rules.

Regional transmission organization costs represent costs incurred to join an RTO. The recovery of these costs will be requested in a future FERC rate case. In accordance with FERC precedent, we are amortizing these costs over a 10-year period that began in 2004 when we joined the PJM RTO.

TCRR, transmission, ancillary and other PJM-related costs represent the costs related to transmission, ancillary service and other PJM-related charges that have been incurred as a member of PJM. On an annual basis, retail rates are adjusted to true-up costs with recovery in rates.

Deferred storm costs 2008 relate to costs incurred to repair the damage caused by hurricane force winds in September 2008, as well as other major 2008 storms. On January 14, 2009, the PUCO granted DP&L the authority to defer these costs with a return until such time that DP&L seeks recovery in a future rate proceeding.

Power plant emission fees represent costs paid to the State of Ohio since 2002. An application is pending before the PUCO to amend an approved rate rider that had been in effect to collect fees that were paid and deferred in years prior to 2002. The deferred costs incurred prior to 2002 have been fully recovered. As the previously approved rate rider continues to be in effect, we believe these costs are probable of future rate recovery.

CCEM smart grid and AMI costs represent costs incurred as a result of studying and developing distribution system upgrades and implementation of AMI. On October 19, 2010, DP&L elected to withdraw its case pertaining to the Smart Grid and AMI programs. The PUCO accepted the withdrawal in an order issued on January 5, 2011. The PUCO also indicated that it expects DP&L to continue to monitor other utilities' Smart Grid and AMI programs and to explore the potential benefits of investing in Smart Grid and AMI programs and that DP&L will, when appropriate, file new Smart Grid and/or AMI business cases in the future. We plan to file to recover these deferred costs in a future regulatory rate proceeding. Based on past PUCO precedent, we believe these costs are probable of future recovery in rates.

CCEM energy efficiency program costs represent costs incurred to develop and implement various new customer programs addressing energy efficiency. These costs are being recovered through an energy efficiency rider that began July 1, 2009 and is subject to a two-year true-up for any over/under recovery of costs.

Other costs primarily include consumer education advertising costs regarding electric deregulation, settlement system costs, electric choice system, RPM capacity, other PJM and rate case costs and alternative energy costs that are or will be recovered over various periods.

Regulatory Liabilities

Estimated costs of removal regulated property reflects an estimate of amounts collected in customer rates for costs that are expected to be incurred in the future to remove existing transmission and distribution property from service when the property is retired.

Postretirement benefits represent the qualifying FASC Topic 715 "Compensation Retirement Benefits" gains related to our regulated operations that, for ratemaking purposes, are probable of being reflected in future rates. We recognize an asset for a plan's overfunded status or a liability for a plan's underfunded status, and recognize, as a component of OCI, the changes in the funded status of the plan that arise during the year that are not recognized as a component of net periodic benefit cost. This regulatory liability represents the regulated portion that would otherwise be reflected as a gain to OCI.

Fuel and purchased power recovery costs represent prudently incurred fuel, purchased power, derivative, emission and other related costs which will be recovered from or returned to customers in the future through the operation of the fuel and purchased power recovery rider. The fuel and purchased power recovery rider fluctuates based on actual costs and recoveries and is modified at the start of each seasonal quarter. DP&L implemented the fuel and purchased power recovery rider on January 1, 2010. DP&L recently underwent an audit of its fuel and purchased power recovery rider and, as a result, there is some uncertainty as to the costs that will be approved for recovery. Independent third parties conducted the fuel audit in accordance with PUCO standards. The audit was completed in the second quarter of 2011 and a hearing has been set by the PUCO for August 30, 2011. Once the PUCO audit approval process is complete, DP&L may record a favorable or unfavorable adjustment to earnings. Based on past PUCO precedent, we believe these deferred fuel and purchased power costs are probable of future recovery or repayment in the case of over recovery.