Income Taxes

Our effective tax rate was (69.5)% and 4.8% for the three and nine months ended September 30, 2012 as compared with 4.1% and 13.7% for the three and nine months ended September 30, 2011. The following table summarizes the significant differences from the federal statutory rate (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
(Loss) Income Before Income Taxes	$	(12,360	)	$	15,530		$	41,698		$	67,737

Income tax calculated at 35% federal statutory rate	4,326			(5,435		)	(14,594		)	(23,707		)

Permanent or flow through adjustments:
Prior year permanent return to accrual adjustments	1,857			—			1,857			(2,571		)
Flow-through repairs deductions	1,808			3,243			9,547			8,745
Flow-through of state bonus depreciation deduction	276			1,170			2,159			4,452
Recognition of state net operating loss benefit/valuation allowance release	51			—			51			2,402
State income tax and other, net	270			387			(1,009		)	1,382
	$	4,262		$	4,800		$	12,605		$	14,410

Income tax benefit (expense)	$	8,588		$	(635	)	$	(1,989	)	$	(9,297	)

Our effective tax rate differs from the federal statutory tax rate of 35% primarily due to the regulatory impact of flowing through the federal and state tax benefit of repairs deductions and state tax benefit of bonus depreciation deductions. The regulatory accounting treatment of these deductions requires immediate income recognition for temporary tax differences of this type, which is referred to as the flow-through method. When the flow-through method of accounting for temporary differences is reflected in regulated revenues, we record deferred income taxes and establish related regulatory assets and liabilities.

Uncertain Tax Positions

We have unrecognized tax benefits of approximately $135.5 million as of September 30, 2012, including approximately $80.2 million that, if recognized, would impact our effective tax rate. We do not anticipate that total unrecognized tax benefits will significantly change due to the settlement of audits or the expiration of statutes of limitation within the next twelve months.

The Internal Revenue Service (IRS) issued guidance during the third quarter of 2011 providing a safe harbor method for determining the tax treatment of repair costs related to electric transmission and distribution property. We are evaluating whether or not we want to elect the safe harbor method, which may result in a change in related repairs deductions and unrecognized tax benefits.

Our policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. During the nine months ended September 30, 2012, we have not recognized expense for interest or penalties, and do not have any amounts accrued at September 30, 2012 and December 31, 2011, respectively, for the payment of interest and penalties.

Our federal tax returns from 2000 forward remain subject to examination by the IRS.