We compute the income tax expense for each quarter based on the estimated annual effective tax rate for the year. The effective tax rate was 40.4% and 39.7% for the quarter and six months ended June 30, 2011, respectively, compared to 30.9% and 32.6% for the same periods of 2010. The higher effective tax rates for the quarter and six months ended June 30, 2011 are primarily due to lower deductions for qualified production activities and higher expense associated with uncertain tax positions and increased state income taxes, resulting from increased business activity in unitary states and changes in the Illinois and Michigan tax laws.

The BGE effective tax rate was 39.2% and 37.0% for the quarter and six months ended June 30, 2011, respectively, compared to 41.4% and 41.6% for the same periods of 2010. The lower effective tax rates for 2011 are primarily due to the partial reversal during the quarter ended March 31, 2011 of the unfavorable tax adjustment recorded in the quarter ended March 31, 2010 to reflect the impact on our regulated electric business of the healthcare reform legislation that eliminated the tax exempt status of prescription drug subsidies received under Medicare Part D. The partial reversal in 2011 resulted from the Maryland PSC's authorization for BGE to create an electric regulatory asset for this tax law change and amortize the balance over a five-year period as provided in its March 2011 comprehensive order in BGE's most recent base rate case.

Income tax expense for both Constellation Energy and BGE for the quarter and six months ended June 30, 2011 reflects a deferred tax benefit for the costs incurred associated with our pending merger with Exelon. The ultimate treatment of these costs for tax purposes will be determined at the time the merger is closed or terminated. We discuss our pending merger with Exelon on page 9.

The following table summarizes the change in unrecognized tax benefits during 2011 and our total unrecognized tax benefits at June 30, 2011:

At June 30, 2011


	(In millions)
Total unrecognized tax benefits, January 1, 2011	$	239.8
Increases in tax positions related to the current year		1.4
Increases in tax positions related to prior years		4.1
Reductions in tax positions related to prior years		(8.7	)

Total unrecognized tax benefits, June 30, 2011¹	$	236.6

If the total amount of unrecognized tax benefits of $236.6 million were ultimately realized, our income tax expense would decrease by approximately $170 million. The $170 million includes state tax refund claims of $55.9 million that have been disallowed by tax authorities and are subject to appeals.

It is reasonably possible that unrecognized tax benefits could decrease within the next year by approximately $66 million primarily as a result of an expected settlement with the IRS regarding BGE's change of accounting method for tax purposes with respect to certain transmission and distribution expenditures. This decrease is not expected to have a material impact on BGE's financial condition or results of operation.

Interest and penalties recorded in our Consolidated Statements of Income as tax expense relating to liabilities for unrecognized tax benefits were as follows:

	Quarter Ended June 30,					Six Months Ended June 30,

	2011		2010			2011		2010

	(In millions)
Interest and penalties recorded as tax expense (benefit)	$	2.7	$	(10.7	)	$	5.5	$	(7.3	)

BGE's portion of interest and penalties was immaterial for both periods presented.

Accrued interest and penalties recognized in our Consolidated Balance Sheets were $22.3 million, of which BGE's portion was $5.0 million, at June 30, 2011, and $16.8 million, of which BGE's portion was $3.8 million, at December 31, 2010.