Income Taxes

9 Months Ended

Sep. 30, 2011

Income Taxes [Abstract]

Income Taxes

Income Taxes

During the three and nine months ended September 30, 2010, the effective tax rate was 37% and 36%, respectively.  During the three and nine months ended September 30, 2011, the effective tax rate was 32% and 33%, respectively. The most significant item affecting the comparability of the effective tax rate for both the three and nine months ended September 30, 2010 and 2011 is a change in tax reserve.  CenterPoint Houston recorded an $11 million and $9 million decrease in accrued interest for tax reserves related to the potential normalization violation during the three months and nine months ended September 30, 2011, respectively.

As a result of the enactment in March 2010 of the Patient Protection and Affordable Care Act and the related Health Care and Education Reconciliation Act of 2010, a portion of retiree health care costs that are reimbursed by Medicare Part D subsidies will no longer be tax deductible effective for tax years beginning after December 31, 2012.  Based upon the actuarially determined net present value of lost future retiree health care deductions related to the subsidies, CenterPoint Houston reduced its deferred tax asset related to future retiree health care deductions by approximately $7 million in March 2010.  The entire reduction in the deferred tax asset was recorded as an adjustment to regulatory assets because CenterPoint Houston believes it will be recovered through the regulatory process. Additionally, the regulatory assets were adjusted in March 2010 by approximately $4 million related to the recovery of CenterPoint Houston's income taxes.

The following table summarizes CenterPoint Houston's unrecognized tax benefits at December 31, 2010 and September 30, 2011:

	December 31, 2010		September 30, 2011
	(in millions)
Unrecognized tax benefits	$	232	$	44
Portion of unrecognized tax benefits that, if recognized, would reduce the effective income tax rate		14		16
Interest accrued on unrecognized tax benefits		17		4

The decrease of $188 million in unrecognized tax benefits from December 31, 2010 is primarily related to the remeasurement of unrecognized tax benefits for the potential normalization violation.  As a result of the Settlement, discussed in Note 4(a), CenterPoint Houston has determined that the potential normalization violation has been prevented and consequently, recorded a reduction to the unrecognized tax benefits by $268 million during the three months ended September 30, 2011, of which $203 million was related to the balance as of December 31, 2010 with the remaining $65 million related to the six months ended June 30, 2011. The unrecognized tax benefit for the normalization issue was a temporary difference and, therefore, the decrease in the balance thereto resulted in an increase to the deferred tax liability of $257 million and a decrease in income tax expense of $11 million for the release of accrued interest expense.

It is reasonably possible that the total amount of unrecognized tax benefits could decrease by $30 million over the next 12 months depending on the result of CenterPoint Energy's administrative appeal relating to the Internal Revenue Service's (IRS) disallowance of CenterPoint Houston's casualty loss deduction associated with the damage caused by Hurricane Ike.  Additionally, the casualty loss deduction is a temporary difference and, therefore, any increase or decrease in the balance of unrecognized tax benefits related thereto would not affect the effective tax rate.

In January 2011, the IRS commenced its examination of CenterPoint Energy's 2008 and 2009 consolidated federal income tax returns, of which CenterPoint Houston is a member.