Income Taxes

Continuing Operations

For continuing operations, including noncontrolling interests, the statutory U.S. federal income tax rate reconciles to Dominion’s and Virginia Power’s effective income tax rate as follows:



	Dominion				Virginia Power
Nine Months Ended September 30,	2011		2010		2011		2010
U.S. statutory rate	35.0	%	35.0	%	35.0	%	35.0	%
Increases (reductions) resulting from:
State taxes, net of federal benefit	3.6		4.5		3.9		3.9
Legislative changes	—		1.2		—		1.3
Other, net	(1.4	)	(0.4	)	(0.5	)	(1.3	)
Effective tax rate	37.2	%	40.3	%	38.4	%	38.9	%

Dominion's and Virginia Power's effective tax rates in 2010 reflect the reduction of deferred tax assets resulting from the enactment of the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act of 2010 which eliminated the employer's deduction, beginning in 2013, for that portion of its retiree prescription drug coverage cost that is being reimbursed by the Medicare Part D subsidy. In addition, Dominion's effective tax rate in 2010 reflects higher state income taxes due to the sale of its Appalachian E&P operations.

See Note 6 to the Consolidated Financial Statements in Dominion's and Virginia Power's Annual Report on Form 10-K for the year ended December 31, 2010, for a discussion of the Companies' unrecognized tax benefits. During the nine months ended September 30, 2011, Dominion's and Virginia Power's unrecognized tax benefits changed as follows:



	Dominion			Virginia Power
(millions)
Balance at January 1, 2011	$	307		$	117
Increases - prior period positions	24			17
Decreases - prior period positions	(53		)	(33		)
Current period positions	41			23
Balance at September 30, 2011	$	319		$	124

With the expiration of statutes of limitations, completion of audits and possible settlements with tax authorities, it is reasonably possible that unrecognized tax benefits could decrease during the next 12 months by up to $60 million for Dominion and up to $30 million for Virginia Power. In addition, based on Dominion's decision in October 2011 to file tax refund claims involving uncertainty in the reporting of asset dispositions, unrecognized tax benefits increased by $96 million.

Discontinued Operations

Income tax expense in 2010 for Dominion's discontinued operations primarily reflects the impact of goodwill written off in the sale of Peoples that is not deductible for tax purposes and the reversal of deferred taxes for which the benefit was offset by the reversal of income tax-related regulatory assets.