REGULATORY MATTERS

2010 Electric Rate Case Filing

On October 20, 2011, the MPSC issued an order in Detroit Edison's October 29, 2010 rate case filing. The MPSC approved an annual revenue increase of $175 million. Included in the approved increase in revenues was a return on equity of 10.5% on an expected permanent capital structure of 49.2% equity and 50.8% debt.

Detroit Edison self-implemented a rate increase of $107 million on April 28, 2011. The MPSC stated the net revenue collected due to self-implementation be credited to the 2011 Choice Incentive Mechanism (CIM) regulatory asset. Self-implementation revenue of approximately $31 million was credited to the CIM Regulatory Asset as of September 30, 2011. The MPSC required that within ninety days, Detroit Edison file a report regarding the amount of revenue collected through application of its self-implemented rate increase and a proposed reconciliation with the final rates and rate design approved in the order. In addition, a 2011 CIM reconciliation is expected to be filed in early 2012.

Other key aspects of the MPSC order include the following:

•

adopt a new Revenue Decoupling Mechanism (RDM) effective April 1, 2012, that will compare actual revenue (excluding the impacts of weather) by rate class with the base established in this rate case. The RDM has an annual collar of 1.5% in the first year and 3% in the second and subsequent years. The RDM established in the previous rate case, which considered the impact of weather, will be terminated effective October 31, 2011. Therefore, there will be no RDM in place from October 31, 2011 through April 1, 2012;


•	recognition of the expiration of a wholesale contract. Since the expiration of the wholesale contract is not until December 31, 2011, the MPSC is requiring Detroit Edison to calculate a customer credit for each kWh sold under the wholesale contract from October 29, 2011 through December 31, 2011, with the credit to be applied in its next PSCR reconciliation;


•	the Restoration Reconciliation Mechanism, Line Clearance Recovery Mechanism, Uncollectible Expense Tracking Mechanism and CIM are terminated as of the date of the order;


•	due to uncertainty resulting from the Michigan Court of Appeals overturning collection of the Low Income Energy Efficiency Fund (LIEEF), the MPSC required the continued collection of LIEEF amounts in base rates and placement into escrow pending further orders by the MPSC;


•	approval of Detroit Edison's proposal to reduce the Nuclear Decommissioning Surcharge by approximately $20 million annually; and


•	implementation of lower depreciation rates previously approved in a June 2011 MPSC order.

Detroit Edison Uncollectible Expense True-Up Mechanism (UETM)

In March 2011, Detroit Edison filed an application with the MPSC for approval of its UETM for 2010 requesting authority to refund approximately $7 million consisting of costs related to 2010 uncollectible expense. In August 2011, the MPSC approved a settlement agreement for the 2010 UETM authorizing a refund of approximately $7 million to be applied as credits to customer bills beginning September 1, 2011.

Detroit Edison Restoration Expense Tracker Mechanism (RETM) and Line Clearance Tracker (LCT) Reconciliation

In March 2011, Detroit Edison filed an application with the MPSC for approval of the reconciliation of its 2010 RETM and LCT. The Company's 2010 restoration expenses were higher than the amount provided in rates. Accordingly, Detroit Edison requested recovery of $19.5 million. In October 2011, the MPSC approved a settlement agreement reconciling the RETM and approving the LCT report. The MPSC authorized surcharges to recover $19.5 million over a three-month period beginning November 1, 2011.

Detroit Edison Revenue Decoupling Mechanism (RDM)

In May 2011, Detroit Edison filed an application with the MPSC for approval of its RDM reconciliation for the period February 2010 through January 2011 requesting authority to refund approximately $56 million, plus interest. This is the initial reconciliation filing under the pilot RDM. In addition to the refund liability for the initial reconciliation filing, Detroit Edison has accrued an RDM refund for the February 2011 through September 2011 period of approximately $71 million, plus interest. There are various interpretations and alternative calculation methodologies relating to the RDM refund calculation that could ultimately be adopted by the MPSC that could result in significant adjustments in excess of the amounts accrued as of September 30, 2011. An MPSC order on the initial filing is expected in the first half of 2012.

Power Supply Cost Recovery (PSCR) Proceedings

The PSCR process is designed to allow Detroit Edison to recover all of its power supply costs if incurred under reasonable and prudent policies and practices. Detroit Edison's power supply costs include fuel costs, purchased and net interchange power costs, nitrogen oxide and sulfur dioxide emission allowances costs, urea costs, transmission costs and MISO costs. The MPSC reviews these costs, policies and practices for prudence in annual plan and reconciliation filings. The following table summarizes Detroit Edison's PSCR reconciliation filing currently pending with the MPSC:

2010 PSCR Year - The net under-recovery of $52.6 million includes an over-recovery of $15.6 million for the 2009 PSCR year. In addition, the 2010 PSCR reconciliation includes an under-recovery of $7.1 million for the reconciliation of the 2007-2008 Pension Equalization Mechanism, and an over-refund of $3.8 million for the 2011 refund of the self-implemented rate increase related to the 2009 electric rate case filing.

2011 Plan Year - In September 2010, Detroit Edison filed its 2011 PSCR plan case seeking approval of a levelized PSCR factor of 2.98 mills/kWh below the amount included in base rates for all PSCR customers. The filing supports a total power supply expense forecast of $1.2 billion. The plan also includes approximately $36 million for the recovery of its projected 2010 PSCR under-recovery.

2012 Plan Year - In September 2011, Detroit Edison filed its 2012 PSCR plan case seeking approval of a levelized PSCR factor of 4.18 mills/kWh above the amount included in base rates for all PSCR customers. The filing supports a total power supply expense forecast of $1.4 billion. The plan also includes approximately $158 million for the recovery of its projected 2011 PSCR under-recovery.

Energy Optimization (EO) Plans

In September 2011, Detroit Edison filed a biennial EO Plan with the MPSC as required. Detroit Edison's EO Plan application proposed the recovery of EO expenditures for the period 2012-2015 of $294 million and further requested approval of surcharges to recover these costs.

Low Income Energy Efficiency Fund

The Customer Choice and Electricity Reliability Act of 2000, authorized the creation of the LIEEF administered by the MPSC. The purpose of the fund is to provide shut-off and other protection for low income customers and to promote energy efficiency by all customer classes. Detroit Edison collects funding for the LIEEF as part of its base rates and remits the funds to the State of Michigan monthly. In July 2011, the Michigan Court of Appeals issued a decision reversing the portion of MichCon's June 2010 MPSC rate order that permitted MichCon to recover funding for the LIEEF in base rates. In response to the Court of Appeals decision, Detroit Edison has ceased remitting payments for LIEEF funding to the State of Michigan. In October 2011, the MPSC issued an order directing Detroit Edison to continue collecting funds for LIEEF in rates and to escrow the collected funds pending further order by the MPSC. As a result of these actions, Detroit Edison no longer records Operation and Maintenance expense for the payments to the LIEEF fund, but records an offset to Revenues for the amounts that are being escrowed.

Other

The Company is unable to predict the outcome of the unresolved regulatory matters discussed herein. Resolution of these matters is dependent upon future MPSC orders and appeals, which may materially impact the financial position, results of operations and cash flows of the Company.

Date Filed

Net Under-Recovery,
Including Interest

PSCR Cost of
Power Sold

March 2011

$52.6 million

$1.2 billion