INCOME TAXES

Income tax expense (benefit) consists of the following (in millions):



	Years Ended December 31,
	2012		2011		2010
Current:
Federal	$	16	$	2	$	(20	)
State and local	1		—		—
	17		2		(20		)
Deferred:
Federal	30		43		61
State and local	17		13		12
	47		56		73
Income tax expense	$	64	$	58	$	53

The significant differences between the U.S. federal statutory rate and PGE’s effective tax rate for financial reporting purposes are as follows:



	Years Ended December 31,
	2012		2011		2010
Federal statutory tax rate	35.0	%	35.0	%	35.0	%
Federal tax credits	(11.8	)	(12.7	)	(10.4	)
State and local taxes, net of federal tax benefit	3.5		2.6		4.4
Adjustment to deferred taxes for change in blended composite state tax rate	2.6		—		—
Flow through depreciation and cost basis differences	2.4		2.1		0.1
Other	(0.6	)	1.3		1.2
Effective tax rate	31.1	%	28.3	%	30.3	%

Deferred income tax assets and liabilities consist of the following (in millions):



	As of December 31,
	2012			2011
Deferred income tax assets:
Employee benefits	$	162		$	135
Price risk management	77			145
Tax credits, net of valuation allowance	55			56
Regulatory liabilities	20			22
Tax loss carryforwards	—			1
Total deferred income tax assets	314			359
Deferred income tax liabilities:
Depreciation and amortization	623			572
Regulatory assets	224			274
Other	4			9
Total deferred income tax liabilities	851			855
Deferred income tax liability, net	$	(537	)	$	(496	)
Classification of net deferred income taxes:
Current deferred income tax asset ⁽¹⁾	$	51		$	33
Noncurrent deferred income tax liability	(588		)	(529		)
	$	(537	)	$	(496	)


(1)	Included in Other current assets in the consolidated balance sheets.

PGE has federal and state tax credit carryforwards of $41 million and $14 million, respectively, which will expire at various dates from 2014 through 2031.

PGE believes that it is more likely than not that its deferred income tax assets as of December 31, 2012 and 2011 will be realized; accordingly, no valuation allowance has been recorded. During the year ended December 31, 2011, the valuation allowance decreased $2 million as a result of the expiration of unused state credits.

As of December 31, 2012 and 2011, PGE had no unrecognized tax benefits. As of December 31, 2010, the amount of the Company’s unrecognized tax benefit was $2 million, including interest, resulting from a gross increase in a position taken in a prior period. During the year ended December 31, 2010, the Company recognized $1 million in interest and no penalties. During 2011, the unrecognized tax benefit of $2 million was recognized as a result of filing for a federal tax accounting method change.

PGE files income tax returns in the U.S. federal jurisdiction, the states of Oregon and Montana, and certain local jurisdictions. The Internal Revenue Service (IRS) is in the process of finalizing an examination of PGE’s income tax returns for 2006, 2009, and 2010, for which no material findings have been identified. The Company is not currently under examination by state or local tax authorities.