Income Taxes

3 Months Ended

Mar. 31, 2012

Income Taxes

(11) INCOME TAXES

A reconciliation of PHI's consolidated effective income tax rate from continuing operations is as follows:

	Three Months Ended March 31,
	2012					2011
	(millions of dollars)
Income tax at Federal statutory rate	$	29		35.0	%	$	33		35.0	%
Increases (decreases) resulting from:
State income taxes, net of Federal effect		4		4.9			5		5.0
Asset removal costs		(3	)	(3.7	)		(1	)	(0.7	)
Cross-border energy lease investments		(1	)	(1.2	)		(1	)	(1.2	)
Change in estimates and interest related to uncertain and effectively settled tax positions		(13	)	(15.9	)		1		1.2
Investment tax credits		(1	)	(1.2	)		(1	)	(1.2	)
Permanent differences related to deferred compensation		(1	)	(1.2	)		(2	)	(2.2	)
Other, net		—		0.4			—		(0.5	)
Consolidated income tax expense related to continuing operations	$	14		17.1	%	$	34		35.4	%

PHI's consolidated effective tax rates for the three months ended March 31, 2012 and 2011 were 17.1% and 35.4%, respectively. The decrease in the effective tax rate primarily resulted from changes in estimates and interest related to uncertain and effectively settled tax positions in the first quarter of 2012, primarily due to the effective settlement with the Internal Revenue Service (IRS) with respect to the methodology used historically to calculate deductible mixed service costs and the expiration of the statute of limitations associated with an uncertain tax position in Pepco. The effective rate was further decreased as a result of the increase in asset removal costs in Pepco in 2012 primarily related to a higher level of asset retirements.

Potomac Electric Power Co [Member]

Income Taxes

(9) INCOME TAXES

A reconciliation of Pepco's effective income tax rate is as follows:

	Three Months Ended March 31,
	2012					2011
	(millions of dollars)
Income tax at Federal statutory rate	$	7		35.0	%	$	9		35.0	%
Increases (decreases) resulting from:
State income taxes, net of Federal effect		1		6.3			1		4.4
Change in estimates and interest related to uncertain and effectively settled tax positions		(10	)	(50.5	)		—		—
Permanent differences related to deferred compensation		—		(1.0	)		(1	)	(4.4	)
Asset removal costs		(3	)	(15.8	)		(1	)	(4.0	)
Amortization of software costs		—		2.1			—		(0.4	)
Deferred tax basis adjustments		—		(2.1	)		—		—
Other, net		—		(0.3	)		(1	)	(2.6	)
Income tax expense	$	(5	)	(26.3	)%	$	7		28.0	%

Pepco's effective tax rates for the three months ended March 31, 2012 and 2011 were (26.3)% and 28.0%, respectively. The decrease in the effective tax rate primarily resulted from changes in estimates and interest related to uncertain and effectively settled tax positions in the first quarter of 2012, primarily due to the effective settlement with the Internal Revenue Service with respect to the methodology used historically to calculate deductible mixed service costs and the expiration of the statute of limitations associated with an uncertain tax position. The effective rate was further decreased as a result of the increase in asset removal costs in 2012 primarily related to a higher level of asset retirements.

Delmarva Power & Light Co/De [Member]

Income Taxes

(10) INCOME TAXES

A reconciliation of DPL's effective income tax rate is as follows:

	Three Months Ended March 31,
	2012				2011
	(millions of dollars)
Income tax at Federal statutory rate	$	12	35.0	%	$	14	35.0	%
Increases (decreases) resulting from:
State income taxes, net of Federal effect		2	5.7	%		2	6.0
Other, net		—	(0.7	)		1	1.5
Income tax expense	$	14	40.0	%	$	17	42.5	%

DPL's effective tax rates for the three months ended March 31, 2012 and 2011 were 40.0% and 42.5%, respectively. The decrease in the effective tax rate primarily resulted from changes in estimates and interest related to uncertain and effectively settled tax positions in the first quarter of 2011.

Atlantic City Electric Co [Member]

Income Taxes

(9) INCOME TAXES

ACE's consolidated effective tax rates for the three months ended March 31, 2012 and 2011 were (100)% and 45.5%, respectively. The decrease in the effective tax rate primarily resulted from changes in estimates and interest related to uncertain and effectively settled tax positions in the first quarter of 2012, primarily due to the effective settlement with the Internal Revenue Service with respect to the methodology used historically to calculate deductible mixed service costs.