Income Taxes

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
Six Months Ended June 30,	2013		2012		2013		2012
U.S. statutory rate	35.0	%	35.0	%	35.0	%	35.0	%
Increases (reductions) resulting from:
State taxes, net of federal benefit	1.9		4.1		2.6		3.9
Investment and production tax credits	(1.5	)	(0.5	)	—		—
Valuation allowances	—		(1.8	)	—		—
AFUDC - equity	(0.8	)	(0.7	)	(1.4	)	(1.1	)
Other, net	(0.5	)	(1.1	)	0.2		0.1
Effective tax rate	34.1	%	35.0	%	36.4	%	37.9	%

Dominion's and Virginia Power's 2013 state income tax expense reflects changes in the amount of income apportioned among states.

Dominion's effective tax rate in 2012 reflects a $22 million reduction of valuation allowance related to state operating loss carryforwards attributable to Fairless. After considering the results of Fairless' operations in recent years and a forecast of future operating results reflecting Dominion's planned purchase of the facility, Dominion concluded that it was more likely than not that the tax benefit of the operating losses would be realized. Significant assumptions included future commodity prices, in particular, those for electric energy produced by Fairless and those for natural gas, as compared to other fuels used for the generation of electricity, which would significantly influence the extent to which Fairless is dispatched by PJM.

See Note 5 to the Consolidated Financial Statements in Dominion's and Virginia Power's Annual Report on Form 10-K for the year ended December 31, 2012, for a discussion of the Companies' unrecognized tax benefits. During the six months ended June 30, 2013, Dominion's and Virginia Power's unrecognized tax benefits changed as follows:



	Dominion		Virginia Power
(millions)
Balance at January 1, 2013	$293		$57
Increases - prior period positions	2		2
Decreases - prior period positions	(42	)	(14	)
Current period positions	15		5
Settlements	(2	)	(2	)
Expiration of statutes of limitations	(4	)	—
Balance at June 30, 2013	$262		$48

During the twelve-month period ending June 30, 2014, it is reasonably possible that settlements with and payments to tax authorities and the expiration of statutes of limitations could reduce unrecognized tax benefits for Dominion and Virginia Power by up to $65 million and $35 million, respectively. Otherwise, Dominion and Virginia Power cannot estimate the range of reasonably possible changes to unrecognized tax benefits that may occur.