ATLANTIC CITY ELECTRIC CO (Form: 10-K, Received: 03/02/2009 16:20:31)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

Commission File Number	Name of Registrant, State of Incorporation, Address of Principal Executive Offices, and Telephone Number	I.R.S. Employer Identification Number
001-31403	PEPCO HOLDINGS, INC. (Pepco Holdings or PHI), a Delaware corporation 701 Ninth Street, N.W. Washington, D.C. 20068 Telephone: (202)872-2000	52-2297449
001-01072	POTOMAC ELECTRIC POWER COMPANY (Pepco), a District of Columbia and Virginia corporation 701 Ninth Street, N.W. Washington, D.C. 20068 Telephone: (202)872-2000	53-0127880
001-01405	DELMARVA POWER & LIGHT COMPANY (DPL), a Delaware and Virginia corporation 800 King Street, P.O. Box 231 Wilmington, Delaware 19899 Telephone: (202)872-2000	51-0084283
001-03559	ATLANTIC CITY ELECTRIC COMPANY (ACE), a New Jersey corporation 800 King Street, P.O. Box 231 Wilmington, Delaware 19899 Telephone: (202)872-2000	21-0398280

Continued

Securities registered pursuant to Section 12(b) of the Act:

Registrant		Title of Each Class		Name of Each Exchange on Which Registered
Pepco Holdings		Common Stock, $.01 par value		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

Registrant		Title of Each Class
Pepco		Common Stock, $.01 par value
DPL		Common Stock, $2.25 par value
ACE		Common Stock, $3.00 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Pepco Holdings

Yes

Pepco

Yes

DPL

Yes

ACE

Yes

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Pepco Holdings

Yes

Pepco

Yes

DPL

Yes

ACE

Yes

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.

Pepco Holdings

Yes

Pepco

Yes

DPL

Yes

ACE

Yes

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K (applicable to Pepco Holdings only). X

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and larger accelerated filer” in Rule 12b-2 of the Exchange Act.

	Large Accelerated Filer	Accelerated Filer	Non-Accelerated Filer
Pepco Holdings	X
Pepco			X
DPL			X
ACE			X

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Pepco Holdings

Yes

Pepco

Yes

DPL

Yes

ACE

Yes

Pepco, DPL, and ACE meet the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and are therefore filing this Form 10-K with the reduced disclosure format specified in General Instruction I(2) of Form 10-K.

Registrant	Aggregate Market Value of Voting and Non-Voting Common Equity Held by Non-Affiliates of the Registrant at June 30, 2008	Number of Shares of Common Stock of the Registrant Outstanding at February 2, 2009
Pepco Holdings	$5.2 billion	219,115,048 ($.01 par value)
Pepco	None (a)	100 ($.01 par value)
DPL	None (b)	1,000 ($2.25 par value)
ACE	None (b)	8,546,017 ($3.00 par value)

(a)	All voting and non-voting common equity is owned by Pepco Holdings.

(b)	All voting and non-voting common equity is owned by Conectiv, a wholly owned subsidiary of Pepco Holdings.

THIS COMBINED FORM 10-K IS SEPARATELY FILED BY PEPCO HOLDINGS, PEPCO, DPL AND ACE. INFORMATION CONTAINED HEREIN RELATING TO ANY INDIVIDUAL REGISTRANT IS FILED BY SUCH REGISTRANT ON ITS OWN BEHALF. EACH REGISTRANT MAKES NO REPRESENTATION AS TO INFORMATION RELATING TO THE OTHER REGISTRANTS.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Pepco Holdings, Inc. definitive proxy statement for the 2009 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission on or about March 26, 2009 are incorporated by reference into Part III of this report.

TABLE OF CONTENTS
			Page
	-	Glossary of Terms	i
PART I
Item 1.	-	Business	1
Item 1A.	-	Risk Factors	21
Item 1B.	-	Unresolved Staff Comments	31
Item 2.	-	Properties	32
Item 3.	-	Legal Proceedings	33
Item 4.	-	Submission of Matters to a Vote of Security Holders	34
PART II
Item 5.	-	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	35
Item 6.	-	Selected Financial Data	38
Item 7.	-	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
Item 7A.	-	Quantitative and Qualitative Disclosures About Market Risk	140
Item 8.	-	Financial Statements and Supplementary Data	145
Item 9.	-	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	361
Item 9A.	-	Controls and Procedures	361
Item 9A(T).	-	Controls and Procedures	361
Item 9B.	-	Other Information	363
PART III
Item 10.	-	Directors, Executive Officers and Corporate Governance	364
Item 11.	-	Executive Compensation	366
Item 12.	-	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	367
Item 13.	-	Certain Relationships and Related Transactions, and Director Independence	368
Item 14.	-	Principal Accounting Fees and Services	368
PART IV
Item 15.	-	Exhibits, Financial Statement Schedules	369
Financial Statements		Included in Part II, Item 8	369
Schedule I -		Condensed Financial Information of Parent Company	370
Schedule II -		Valuation and Qualifying Accounts	373
Exhibit 12 -		Statements Re: Computation of Ratios	389
Exhibit 21 -		Subsidiaries of the Registrant	393
Exhibit 23 -		Consents of Independent Registered Public Accounting Firm	395
Exhibits 31.1 - 31.8		Rule 13a-14a/15d-14(a) Certifications	399
Exhibits 32.1 - 32.4		Section 1350 Certifications	407
Signatures			411

GLOSSARY OF TERMS

Term	Definition
2007 Maryland Rate Orders	The MPSC orders approving new electric service distribution base rates for Pepco and DPL in Maryland, each effective June 16, 2007.
A&N	A&N Electric Cooperative, purchaser of DPL’s retail electric distribution assets in Virginia
ABO	Accumulated benefit obligation
ACE	Atlantic City Electric Company
ACE Funding	Atlantic City Electric Transition Funding LLC
ADITC	Accumulated deferred investment tax credits
AFUDC	Allowance for Funds Used During Construction
AMI	Advanced Metering Infrastructure
Ancillary services	Generally, electricity generation reserves and reliability services
APIC	Additional paid-in capital
APIC pool	A computation that establishes the beginning balance of the APIC
Appeals Office	The Appeals Office of the IRS
Bankruptcy Funds	$13 million from the Bankruptcy Settlement to accomplish the remediation of the Metal Bank/Cottman Avenue site
Bankruptcy Settlement	The bankruptcy settlement among the parties concerning the environmental proceedings at the Metal Bank/Cottman Avenue site
BGS	Basic Generation Service (the supply of electricity by ACE to retail customers in New Jersey who have not elected to purchase electricity from a competitive supplier)
BGS-FP	BGS-Fixed Price service
BGS-CIEP	BGS-Commercial and Industrial Energy Price service
Bondable Transition Property	Right to collect a non-bypassable transition bond charge from ACE customers pursuant to bondable stranded costs rate orders issued by the NJBPU
BSA	Bill Stabilization Adjustment
CAA	Federal Clean Air Act
CAIR	EPA’s Clean Air Interstate rule
CAMR	EPA’s Clean Air Mercury rule
CERCLA	Comprehensive Environmental Response, Compensation, and Liability Act of 1980
Citgo	Citgo Asphalt Refining Company
CO 2	Carbon dioxide
Conectiv	A wholly owned subsidiary of PHI which is a holding company under PUHCA 2005 and the parent of DPL and ACE
Conectiv Energy	Conectiv Energy Holding Company and its subsidiaries
Conectiv Group	Conectiv and certain of its subsidiaries that were involved in a like-kind exchange transaction under examination by the IRS
Cooling Degree Days	Daily difference in degrees by which the mean (high and low divided by 2) dry bulb temperature is above a base of 65 degrees Fahrenheit
CRMC	PHI’s Corporate Risk Management Committee
CWA	Federal Clean Water Act
D. C. Circuit	United States Court of Appeals for the District of Columbia Circuit
DC OPC	District of Columbia Office of People’s Counsel
DCPSC	District of Columbia Public Service Commission

Term	Definition
Default Electricity Supply	The supply of electricity by PHI’s electric utility subsidiaries at regulated rates to retail customers who do not elect to purchase electricity from a competitive supplier, and which, depending on the jurisdiction and period, is also known as SOS or BGS service
Default Supply Revenue	Revenue received for Default Electricity Supply
Delaware District Court	United States District Court for the District of Delaware
Delta Project	Conectiv Energy’s 545 megawatt natural gas and oil-fired combined-cycle electricity generation plant located in Peach Bottom Township, Pennsylvania
DNREC	Delaware Department of Natural Resources and Environmental Control
DPL	Delmarva Power & Light Company
DPSC	Delaware Public Service Commission
DRP	PHI’s Shareholder Dividend Reinvestment Plan
DSM	Demand Side Management
EDIT	Excess Deferred Income Taxes
EITF	Emerging Issues Task Force
EPA	United States Environmental Protection Agency
EPS	Earnings per share
ERISA	Employee Retirement Income Security Act of 1974
Exchange Act	Securities Exchange Act of 1934, as amended
FAS	Financial Accounting Standards
FASB	Financial Accounting Standards Board
FERC	Federal Energy Regulatory Commission
FHACA	Flood Hazard Area Control Act
FIFO	First in first out
FIN	FASB Interpretation Number
FPA	Federal Power Act
FSP	FASB Staff Position
FSP AUG AIR-1	FSP American Institute of Certified Public Accountants Industry Audit Guide, Audits of Airlines — “Accounting for Planned Major Maintenance Activities”
FWPA	Freshwater Wetlands Protection Act
GAAP	Accounting principles generally accepted in the United States of America
GCR	Gas Cost Recovery
GWh	Gigawatt hour
Heating Degree Days	Daily difference in degrees by which the mean (high and low divided by 2) dry bulb temperature is below a base of 65 degrees Fahrenheit.
HEDD	High electric demand day
HPS	Hourly Priced Service DPL is obligated to provide to its largest customers
IRC	Internal Revenue Code
IRS	Internal Revenue Service
ISO	Independent system operator
ISONE	Independent System Operator - New England
ITC	Investment Tax Credit
LTIP	Pepco Holdings’ Long-Term Incentive Plan
MAPP	Mid-Atlantic Power Pathway
Maryland OPC	Maryland Office of People’s Counsel
Mcf	One thousand cubic feet
Medicare Act	Medicare Prescription Drug, Improvement and Modernization Act of 2003
Mirant	Mirant Corporation
MPSC	Maryland Public Service Commission
NERC	North American Electric Reliability Corporation

iii

Term	Definition
NFA	No Further Action letter issued by the NJDEP
NJBPU	New Jersey Board of Public Utilities
NJDEP	New Jersey Department of Environmental Protection
NJPDES	New Jersey Pollutant Discharge Elimination System
Normalization provisions	Sections of the IRC and related regulations that dictate how excess deferred income taxes resulting from the corporate income tax rate reduction enacted by the Tax Reform Act of 1986 and accumulated deferred investment tax credits should be treated for ratemaking purposes
NOx	Nitrogen oxide
NPDES	National Pollutant Discharge Elimination System
NUGs	Non-utility generators
NYDEC	New York Department of Environmental Conservation
ODEC	Old Dominion Electric Cooperative, purchaser of DPL’s wholesale transmission business in Virginia
Panda	Panda-Brandywine, L.P.
Panda PPA	PPA between Pepco and Panda
PARS	Performance Accelerated Restricted Stock
PBO	Projected benefit obligation
PCI	Potomac Capital Investment Corporation and its subsidiaries
Pepco	Potomac Electric Power Company
Pepco Energy Services	Pepco Energy Services, Inc. and its subsidiaries
Pepco Holdings or PHI	Pepco Holdings, Inc.
PHI Parties	The PHI Retirement Plan, PHI and Conectiv, parties to cash balance plan litigation brought by three management employees of PHI Service Company
PHI Retirement Plan	PHI’s noncontributory retirement plan
PJM	PJM Interconnection, LLC
Power Delivery	PHI’s Power Delivery Business
PPA	Power Purchase Agreement
PRP	Potentially responsible party
PUHCA 2005	Public Utility Holding Company Act of 2005, which became effective February 8, 2006
RAR	IRS revenue agent’s report
RARM	Reasonable Allowance for Retail Margin
RC Cape May	RC Cape May Holdings, LLC, an affiliate of Rockland Capital Energy Investments, LLC, and the purchaser of the B.L. England generating facility
RECs	Renewable energy credits
Recoverable stranded costs	The portion of stranded costs that is recoverable from ratepayers as approved by regulatory authorities
Regulated T&D Electric Revenue	Revenue from the transmission and the delivery of electricity to PHI’s customers within its service territories at regulated rates
Revenue Decoupling Adjustment	A negative adjustment equal to the amount by which revenue from such distribution sales exceeds the revenue that Pepco and DPL are entitled to earn based on the approved distribution charge per customer
RGGI	Regional Greenhouse Gas Initiative
ROE	Return on equity
RPM	Reliability Pricing Model
SEC	Securities and Exchange Commission
Sempra	Sempra Energy Trading LLP
SFAS	Statement of Financial Accounting Standards
SILO	Sale-in/lease-out
SNCR	Selective Non-Catalytic Reduction

Term	Definition
SO 2	Sulfur dioxide
SOS	Standard Offer Service (the supply of electricity by Pepco in the District of Columbia, by Pepco and DPL in Maryland and by DPL in Delaware on and after May 1, 2006, to retail customers who have not elected to purchase electricity from a competitive supplier)
Spark spread	The market price for electricity less the product of the cost of fuel times the unit heat rate. It is used to estimate the relative profitability of a generation unit.
SPCC	Spill Prevention, Control, and Countermeasure plan required by EPA
Spot	Commodities market in which goods are sold for cash and delivered immediately
Standard Offer Service revenue or SOS revenue	Revenue Pepco and DPL, respectively, receive for the procurement of energy for its SOS customers
Starpower	Starpower Communications, LLC
Stranded costs	Costs incurred by a utility in connection with providing service which would be unrecoverable in a competitive or restructured market. Such costs may include costs for generation assets, purchased power costs, and regulatory assets and liabilities, such as accumulated deferred income taxes.
T&D	Transmission and distribution
Tolling agreement	A physical or financial contract where one party delivers fuel to a specific generating station in exchange for the power output
Transition Bond Charge	Revenue ACE receives, and pays to ACE Funding, to fund the principal and interest payments on Transition Bonds and related taxes, expenses and fees
Transition Bonds	Transition bonds issued by ACE Funding
Treasury lock	A hedging transaction that allows a company to “lock-in” a specific interest rate corresponding to the rate of a designated Treasury bond for a determined period of time
VaR	Value at Risk
VIE	Variable interest entity
VRDBs	Variable Rate Demand Bonds

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Item 1. BUSINESS

OVERVIEW

Pepco Holdings, Inc. (PHI or Pepco Holdings), a Delaware corporation incorporated in 2001, is a diversified energy company that, through its operating subsidiaries, is engaged primarily in two businesses:

The distribution, transmission and default supply of electricity and the delivery and supply of natural gas (Power Delivery), conducted through the following regulated public utility companies:

o	Potomac Electric Power Company (Pepco), which was incorporated in Washington, D.C. in 1896 and became a domestic Virginia corporation in 1949,

o	Delmarva Power & Light Company (DPL), which was incorporated in Delaware in 1909 and became a domestic Virginia corporation in 1979, and

o	Atlantic City Electric Company (ACE), which was incorporated in New Jersey in 1924.

Competitive energy generation, marketing and supply (Competitive Energy) conducted through subsidiaries of Conectiv Energy Holding Company (collectively Conectiv Energy) and Pepco Energy Services, Inc. and its subsidiaries (collectively Pepco Energy Services).

The following chart shows, in simplified form, the corporate structure of PHI and its principal subsidiaries.

Conectiv is solely a holding company with no business operations. The activities of Potomac Capital Investment Corporation (PCI) are described below under the heading “Other Business Operations.”

PHI Service Company, a subsidiary service company of PHI, provides a variety of support services, including legal, accounting, treasury, tax, purchasing and information technology services to PHI and its operating subsidiaries. These services are provided pursuant to a service agreement among PHI, PHI Service Company, and the participating operating subsidiaries. The expenses of PHI Service Company are charged to PHI and the participating operating subsidiaries in accordance with costing methodologies set forth in the service agreement.

Pepco Holdings’ management has identified its operating segments at December 31, 2008 as Power Delivery, Conectiv Energy, Pepco Energy Services, and Other Non-Regulated.For financial information relating to PHI’s segments, see Note (5), “Segment Information” to the consolidated financial statements of PHI set forth in Part II, Item 8. Each of Pepco, DPL and ACE has one operating segment.

Investor Information

Each of PHI, Pepco, DPL and ACE files reports under the Securities Exchange Act of 1934, as amended. The Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports, of each of the companies are made available free of charge on PHI’s internet Web site as soon as reasonably practicable after such documents are electronically filed with or furnished to the Securities and Exchange Commission (SEC). These reports may be found at http://www . pepcoholdings.com/investors .

Description of Business

The following is a description of each of PHI’s two principal business operations.

Power Delivery

The largest component of PHI’s business is Power Delivery, which consists of the transmission, distribution and default supply of electricity and the delivery and supply of natural gas. In 2008, 2007 and 2006, respectively, PHI’s Power Delivery operations produced 51%, 56%, and 61% of PHI’s consolidated operating revenues (including revenue from intercompany transactions) and 72%, 66%, and 67% of PHI’s consolidated operating income (including income from intercompany transactions).

Each of Pepco, DPL and ACE is a regulated public utility in the jurisdictions that comprise its service territory. Each company owns and operates a network of wires, substations and other equipment that is classified either as transmission or distribution facilities. Transmission facilities are high-voltage systems that carry wholesale electricity into, or across, the utility’s service territory. Distribution facilities are low-voltage systems that carry electricity to end-use customers in the utility’s service territory.

Delivery of Electricity, Natural Gas and Default Electricity Supply

The Power Delivery business is conducted by PHI’s three utility subsidiaries: Pepco, DPL and ACE. Each company is responsible for the delivery of electricity and, in the case of DPL, also natural gas in its service territory, for which it is paid tariff rates established by the applicable local public service commission. Each company also supplies electricity at regulated rates to retail customers in its service territory who do not elect to purchase electricity from a competitive energy supplier. The regulatory term for this supply service varies by jurisdiction as follows:

Delaware

Standard Offer Service (SOS)

District of Columbia

SOS

Maryland

SOS

New Jersey

Basic Generation Service (BGS)

Effective January 2, 2008, DPL sold its retail electric distribution assets and its wholesale electric transmission assets in Virginia. This sale terminated DPL’s obligations as a supplier of electricity to retail customers in its Virginia service territory who do not elect to purchase electricity from a competitive supplier.

In this Form 10-K, the supply service obligations of the respective utility subsidiaries are referred to generally as Default Electricity Supply.

In the aggregate, the Power Delivery business delivers electricity to more than 1.8 million customers in the mid-Atlantic region and distributes natural gas to approximately 122,000 customers in Delaware.

Transmission of Electricity and Relationship with PJM

The transmission facilities owned by Pepco, DPL and ACE are interconnected with the transmission facilities of contiguous utilities and are part of an interstate power transmission grid over which electricity is transmitted throughout the mid-Atlantic portion of the United States and parts of the Midwest. The Federal Energy Regulatory Commission (FERC) has designated a number of regional transmission organizations to coordinate the operation and planning of portions of the interstate transmission grid. Pepco, DPL and ACE are members of the PJM Regional Transmission Organization (PJM RTO). In 1997, FERC approved PJM Interconnection, LLC (PJM) as the provider of transmission service in the PJM RTO region, which currently consists of all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia. As the independent grid operator, PJM coordinates the electric power market and the movement of electricity within the PJM RTO region. Any entity that wishes to have electricity delivered at any point in the PJM RTO region must obtain transmission services from PJM, at rates approved by FERC. In accordance with FERC-approved rules, Pepco, DPL, ACE and the other transmission-owning utilities in the region make their transmission facilities available to the PJM RTO and PJM directs and controls the operation of these transmission facilities. Transmission rates are proposed by the transmission owner and

approved by FERC. PJM provides billing and settlement services, collects transmission service revenue from transmission service customers and distributes the revenue to the transmission owners. PJM also directs the regional transmission planning process within the PJM RTO region. The PJM Board of Managers reviews and approves each PJM regional transmission expansion plan.

Distribution of Electricity and Deregulation

Historically, electric utilities, including Pepco, DPL and ACE, were vertically integrated businesses that generated all or a substantial portion of the electric power supply that they delivered to customers in their service territories over their own distribution facilities. Customers were charged a bundled rate approved by the applicable regulatory authority that covered both the supply and delivery components of the retail electric service. However, legislative and regulatory actions in each of the service territories in which Pepco, DPL and ACE operate have resulted in the “unbundling” of the supply and delivery components of retail electric service and in the opening of the supply component to competition from non-regulated providers. Accordingly, while Pepco, DPL and ACE continue to be responsible for the distribution of electricity in their respective service territories, as the result of deregulation, customers in those service territories now are permitted to choose their electricity supplier from among a number of non-regulated, competitive suppliers. Customers who do not choose a competitive supplier receive Default Electricity Supply on terms that vary depending on the service territory, as described more fully below.

In connection with the deregulation of electric power supply, Pepco, DPL and ACE have divested all of their respective generation assets, by either selling them to third parties or transferring them to the non-regulated affiliates of PHI that comprise PHI’s Competitive Energy businesses. Accordingly, Pepco, DPL and ACE are no longer engaged in generation operations.

Seasonality

Power Delivery’s operating results historically have been seasonal, generally producing higher revenue and income in the warmest and coldest periods of the year. In Maryland, however, the decoupling of distribution revenue for a given reporting period from the amount of power delivered during the period, as the result of the adoption in 2007 by the Maryland Public Service Commission (MPSC) of a bill stabilization adjustment mechanism for retail customers, has had the effect of eliminating changes in customer usage due to weather conditions or other reasons as a factor having an impact on revenue and income.

Regulation

The retail operations of PHI’s utility subsidiaries, including the rates they are permitted to charge customers for the delivery and transmission of electricity and, in the case of DPL, also the distribution and transportation of natural gas, are subject to regulation by governmental agencies in the jurisdictions in which they provide utility service as follows:

o	Pepco’s electricity delivery operations are regulated in Maryland by the MPSC and in Washington, D.C. by the District of Columbia Public Service Commission (DCPSC).

o	DPL’s electricity delivery operations are regulated in Maryland by the MPSC and in Delaware by the Delaware Public Service Commission (DPSC) and, until the sale of

its Virginia assets on January 2, 2008, were regulated in Virginia by the Virginia State Corporation Commission.

o	DPL’s natural gas distribution and intrastate transportation operations in Delaware are regulated by the DPSC.

o	ACE’s electricity delivery operations are regulated by the New Jersey Board of Public Utilities (NJBPU).

o	The transmission and wholesale sale of electricity by each of PHI’s utility subsidiaries are regulated by FERC.

o	The interstate transportation and wholesale sale of natural gas by DPL is regulated by FERC.

Pepco

Pepco is engaged in the transmission, distribution and default supply of electricity in Washington, D.C. and major portions of Prince George’s County and Montgomery County in suburban Maryland. Pepco’s service territory covers approximately 640 square miles and has a population of approximately 2.1 million. As of December 31, 2008, Pepco delivered electricity to 767,000 customers (of which 247,000 were located in the District of Columbia and 520,000 were located in Maryland), as compared to 760,000 customers as of December 31, 2007 (of which 241,800 were located in the District of Columbia and 518,200 were located in Maryland).

In 2008, Pepco delivered a total of 26,863,000 megawatt hours of electricity, of which 29% was delivered to residential customers, 51% to commercial customers, and 20% to United States and District of Columbia government customers. In 2007, Pepco delivered a total of 27,451,000 megawatt hours of electricity, of which 30% was delivered to residential customers, 50% to commercial customers, and 20% to United States and District of Columbia government customers.

Pepco has been providing market-based SOS in Maryland since July 2004. Pursuant to an order issued by the MPSC in November 2006, Pepco will continue to be obligated to provide SOS to residential and small commercial customers indefinitely, until further action of the Maryland General Assembly, and to medium-sized commercial customers through May 2010. Pepco purchases the power supply required to satisfy its SOS obligation from wholesale suppliers under contracts entered into pursuant to competitive bid procedures approved and supervised by the MPSC. Pepco also has an on-going obligation to provide SOS service, known as Hourly Priced Service (HPS), for the largest customers. Power to supply the SOS HPS customers is acquired in next-day and other short-term PJM RTO markets. Pepco is entitled to recover from its SOS customers the cost of the SOS supply plus an average margin of $.001651 per kilowatt-hour. Because margins vary by customer class, the actual average margin over any given time period depends on the number of Maryland SOS customers from each customer class and the load taken by such customers over the time period. Pepco is paid tariff delivery rates for the delivery of electricity over its transmission and distribution facilities to all electricity customers in its Maryland service territory regardless of whether the customer receives SOS or purchases electricity from another energy supplier.

Pepco has been providing market-based SOS in the District of Columbia since February 2005. Pursuant to orders issued by the DCPSC, Pepco will continue to be obligated to provide SOS to residential and small and large commercial customers indefinitely, pending investigation by the DCPSC of other alternatives, including the selection of another party to administer the SOS franchise. Pepco purchases the power supply required to satisfy its SOS obligation from wholesale suppliers under contracts entered into pursuant to a competitive bid procedure approved by the DCPSC. Pepco is entitled to recover from its SOS customers the costs associated with the acquisition of the SOS supply, plus administrative charges that are intended to allow Pepco to recover the administrative costs incurred to provide the SOS. These administrative charges include an average margin for Pepco of $.002151 per kilowatt-hour. Because margins vary by customer class, the actual average margin over any given time period depends on the number of District of Columbia SOS customers from each customer class and the load taken by such customers over the time period. Pepco is paid tariff delivery rates for the delivery of electricity over its transmission and distribution facilities to all electricity customers in its District of Columbia service territory regardless of whether the customer receives SOS or purchases electricity from another energy supplier.

For the year ended December 31, 2008, 50% of Pepco’s Maryland distribution sales (measured by megawatt hours) were to SOS customers, as compared to 51% in 2007, and 33% of its District of Columbia distribution sales were to SOS customers in 2008, as compared to 35% in 2007.

DPL

DPL is engaged in the transmission, distribution and default supply of electricity in Delaware and portions of Maryland. In northern Delaware, DPL also supplies and distributes natural gas to retail customers and provides transportation-only services to retail customers that purchase natural gas from other suppliers.

Transmission and Distribution of Electricity

In Delaware, electricity service is provided in the counties of Kent, New Castle, and Sussex and in Maryland in the counties of Caroline, Cecil, Dorchester, Harford, Kent, Queen Anne’s, Somerset, Talbot, Wicomico and Worchester. Prior to January 2, 2008, DPL also provided transmission and distribution of electricity in Accomack and Northampton counties in Virginia. As discussed below, under the heading “Sale of Virginia Retail Electric Distribution and Wholesale Transmission Assets,” DPL, on January 2, 2008, completed the sale of substantially all of its Virginia retail electric distribution and wholesale electric transmission assets.

DPL’s electricity distribution service territory covers approximately 5,000 square miles and has a population of approximately 1.3 million. As of December 31, 2008, DPL delivered electricity to 498,000 customers (of which 299,000 were located in Delaware and 199,000 were located in Maryland), as compared to 519,000 electricity customers as of December 31, 2007 (of which 298,000 were located in Delaware, 198,000 were located in Maryland, and 23,000 were located in Virginia).

In 2008, DPL delivered a total of 13,015,000 megawatt hours of electricity to its customers, of which 39% was delivered to residential customers, 41% to commercial customers

and 20% to industrial customers. In 2007, DPL delivered a total of 13,680,000 megawatt hours of electricity, of which 39% was delivered to residential customers, 40% to commercial customers and 21% to industrial customers.

DPL has been providing market-based SOS in Delaware since May 2006. Pursuant to orders issued by the DPSC, DPL will continue to be obligated to provide fixed-price SOS to residential, small commercial and industrial customers through May 2012 and to medium, large and general service commercial customers through May 2010. DPL purchases the power supply required to satisfy its fixed-price SOS obligation from wholesale suppliers under contracts entered into pursuant to competitive bid procedures approved by the DPSC. DPL also has an obligation to provide SOS service, known as HPS for the largest customers. Power to supply the HPS customers is acquired on next-day and other short-term PJM RTO markets. DPL’s rates for supplying fixed-price SOS and HPS reflect the associated capacity, energy, transmission, and ancillary services costs and a Reasonable Allowance for Retail Margin (RARM). Components of the RARM include a fixed annual margin of approximately $3 million, plus estimated incremental expenses, a cash working capital allowance, and recovery with a return over five years of the capitalized costs of the billing system used for billing HPS customers. DPL is paid tariff delivery rates for the delivery of electricity over its transmission and distribution facilities to all electricity customers in its Delaware service territory regardless of whether the customer receives SOS or purchases electricity from another energy supplier.

In Delaware, DPL distribution sales to SOS customers represented 55% of total distribution sales (measured by megawatt hours) for the year ended December 31, 2008, as compared to 54% in 2007.

DPL has been providing market-based SOS in Maryland since June 2004. Pursuant to an order issued by the MPSC in November 2006, DPL will continue to be obligated to provide SOS to residential and small commercial customers indefinitely until further action of the Maryland General Assembly, and to medium-sized commercial customers through May 2010. DPL purchases the power supply required to satisfy its SOS obligation from wholesale suppliers under contracts entered into pursuant to competitive bid procedures approved and supervised by the MPSC. DPL also has an on-going obligation to provide SOS service, known as HPS, for the largest customers. Power to supply the SOS HPS customers is acquired in next-day and other short-term PJM RTO markets. DPL purchases the power supply required to satisfy its SOS obligation from wholesale suppliers under contracts entered into pursuant to competitive bid procedures approved and supervised by the MPSC. DPL is entitled to recover from its SOS customers the costs of the SOS supply plus an average margin of $.001630 per kilowatt-hour. Because margins vary by customer class, the actual average margin over any given time period depends on the number of Maryland SOS customers from each customer class and the load taken by such customers over the time period. DPL is paid tariff delivery rates for the delivery of electricity over its transmission and distribution facilities to all electricity customers in its Maryland service territory regardless of whether the customer receives SOS or purchases electricity from another energy supplier.

In Maryland, DPL distribution sales to SOS customers represented 65% of total distribution sales (measured by megawatt hours) for the year ended December 31, 2008, as compared to 67% in 2007.

DPL provided Default Service in Virginia from March 2004 until the sale of its Virginia retail electric distribution and wholesale transmission assets on January 2, 2008. DPL was paid tariff delivery rates for the delivery of electricity over its transmission and distribution facilities to all electricity customers in its Virginia service territory regardless of whether the customer received Default Service or purchased electricity from another energy supplier.

In Virginia, DPL distribution sales to Default Service customers represented 94% of total distribution sales (measured by megawatt hours) for the year ended December 31, 2007.

Sale of Virginia Retail Electric Distribution and Wholesale Transmission Assets

In January 2008, DPL completed (i) the sale of its retail electric distribution assets on the Eastern Shore of Virginia to A&N Electric Cooperative and (ii) the sale of its wholesale electric transmission assets located on the Eastern Shore of Virginia to Old Dominion Electric Cooperative.

Natural Gas Distribution

DPL provides regulated natural gas supply and distribution service to customers in a service territory consisting of a major portion of New Castle County in Delaware. This service territory covers approximately 275 square miles and has a population of approximately 500,000. Large volume commercial, institutional, or industrial natural gas customers may purchase natural gas either from DPL or from other suppliers. DPL uses its natural gas distribution facilities to transport natural gas for customers that choose to purchase natural gas from other suppliers. Intrastate transportation customers pay DPL distribution service rates approved by the DPSC. DPL purchases natural gas supplies for resale to its retail service customers from marketers and producers through a combination of long-term agreements and next-day delivery arrangements. For the twelve months ended December 31, 2008, DPL supplied 65% of the natural gas that it delivered, compared to 67% in 2007.

DPL distributed natural gas to 122,000 customers as of December 31, 2008 and 2007. In 2008, DPL distributed 20,300,000 Mcf (thousand cubic feet) of natural gas to customers in its Delaware service territory, of which 38% were sales to residential customers, 24% to commercial customers, 3% to industrial customers, and 35% to customers receiving a transportation-only service. In 2007, DPL delivered 20,700,000 Mcf of natural gas, of which 38% were sales to residential customers, 25% were sales to commercial customers, 4% were to industrial customers, and 33% were sales to customers receiving a transportation-only service.

ACE

ACE is primarily engaged in the transmission, distribution and default supply of electricity in a service territory consisting of Gloucester, Camden, Burlington, Ocean, Atlantic, Cape May, Cumberland and Salem counties in southern New Jersey. ACE’s service territory covers approximately 2,700 square miles and has a population of approximately 1.1 million. As of December 31, 2008, ACE delivered electricity to 547,000 customers in its service territory, as compared to 544,000 customers as of December 31, 2007. In 2008, ACE delivered a total of 10,089,000 megawatt hours of electricity to its customers, of which 44% was delivered to residential customers, 44% to commercial customers and 12% to industrial customers. In 2007, ACE delivered a total of 10,187,000 megawatt hours of electricity to its customers, of which

44% was delivered to residential customers, 44% to commercial customers, and 12% to industrial customers.

Electric customers in New Jersey who do not choose another supplier receive BGS from their electric distribution company. New Jersey’s electric distribution companies, including ACE, jointly procure the supply to meet their BGS obligations from competitive suppliers selected through auctions authorized by the NJBPU for New Jersey’s total BGS requirements. The winning bidders in the auction are required to supply a specified portion of the BGS customer load with full requirements service, consisting of power supply and transmission service.

ACE provides two types of BGS:

BGS-Fixed Price (BGS-FP), which is supplied to smaller commercial and residential customers at seasonally-adjusted fixed prices. BGS-FP rates change annually on June 1 and are based on the average BGS price obtained at auction in the current year and the two prior years. ACE’s BGS-FP load is approximately 2,198 megawatts, which represents approximately 99% of ACE’s total BGS load. Approximately one-third of this total load is auctioned off each year for a three-year term.

BGS-Commercial and Industrial Energy Price (BGS-CIEP), which is supplied to larger customers at hourly PJM RTO real-time market prices for a term of 12 months. ACE’s BGS-CIEP load is approximately 33 megawatts, which represents approximately 1% of ACE’s BGS load. This total load is auctioned off each year for a one-year term.

ACE is paid tariff rates established by the NJBPU that compensate it for the cost of obtaining the BGS supply. ACE does not make any profit or incur any loss on the supply component of the BGS it provides to customers.

ACE is paid tariff delivery rates for the delivery of electricity over its transmission and distribution facilities to all electricity customers in its New Jersey service territory regardless of whether the customer receives BGS or purchases electricity from another energy supplier.

ACE distribution sales to BGS customers represented 78% of total distribution sales (measured by megawatt hours) for the year ended December 31, 2008, as compared to 80% in 2007.

In February 2007, ACE completed the sale of its B.L. England generating facility, which is reflected as discontinued operations on ACE’s consolidated statements of earnings for the years ended December 31, 2007 and 2006. ACE’s sale of its interests in the Keystone and Conemaugh generating facilities in September 2006 is also reflected as discontinued operations on the consolidated statement of earnings for the year ended December 31, 2006 of ACE.

ACE has several contracts with non-utility generators (NUGs) under which ACE purchased 3.8 million megawatt hours of power in 2008. ACE sells the electricity purchased under the contracts with NUGs into the wholesale market administered by PJM.

In 2001, ACE established Atlantic City Electric Transition Funding LLC (ACE Funding) solely for the purpose of securitizing authorized portions of ACE’s recoverable stranded costs through the issuance and sale of bonds (Transition Bonds). The proceeds of the sale of each series of Transition Bonds have been transferred to ACE in exchange for the transfer by ACE to ACE Funding of the right to collect a non-bypassable transition bond charge from ACE customers pursuant to bondable stranded costs rate orders issued by the NJBPU in an amount sufficient to fund the principal and interest payments on the Transition Bonds and related taxes, expenses and fees (Bondable Transition Property). The assets of ACE Funding, including the Bondable Transition Property, and the Transition Bond charges collected from ACE’s customers, are not available to creditors of ACE. The holders of Transition Bonds have recourse only to the assets of ACE Funding.

Competitive Energy

The Competitive Energy businesses provide competitive generation, marketing and supply of electricity and natural gas, and related energy management services primarily in the mid-Atlantic region. These operations are conducted through subsidiaries of Conectiv Energy and Pepco Energy Services. For the years ended December 31, 2008, 2007 and 2006, PHI’s Competitive Energy operations produced 53%, 48%, and 43%, respectively, of PHI’s consolidated operating revenues and 36%, 26%, and 20%, respectively, of PHI’s consolidated operating income.

Conectiv Energy

Conectiv Energy divides its activities into two operational categories: (i) Merchant Generation & Load Service and (ii) Energy Marketing.

Merchant Generation & Load Service

Conectiv Energy provides wholesale electric power, capacity and ancillary services in the wholesale markets and also supplies electricity to other wholesale market participants under long- and short-term bilateral contracts. Conectiv Energy supplies electric power to Pepco, DPL and ACE to satisfy a portion of their Default Electricity Supply load, as well as the default electricity supply load shares of other utilities within the PJM RTO and Independent System Operator - New England wholesale markets. Conectiv Energy obtains the electricity required to meet its Merchant Generation & Load Service power supply obligations from its own generation plants, tolling agreements, bilateral contract purchases from other wholesale market participants and purchases in the wholesale market. Conectiv Energy’s primary fuel source for its generation plants is natural gas. Conectiv Energy manages its natural gas supply using a portfolio of long-term, firm storage and transportation contracts, and a variety of derivative instruments.

Conectiv Energy’s generation capacity is concentrated in mid-merit plants, which due to their operating flexibility and multi-fuel capability can quickly change their output level on an economic basis. Like “peak-load” plants, mid-merit plants generally operate during times when demand for electricity rises and prices are higher. However, mid-merit plants usually operate more frequently and for longer periods of time than peak-load plants because of better heat rates. As of December 31, 2008, Conectiv Energy owned and operated mid-merit plants with a combined 2,778 megawatts of capacity, peak-load plants with a combined 639 megawatts of capacity and base-load generating plants with a combined 340 megawatts of capacity. See

Item 2 “Properties” of this Form 10-K. In addition to the generation plants it owns, Conectiv Energy controls another 500 megawatts of capacity through tolling agreements.

Conectiv Energy is constructing a 545 megawatt natural gas and oil-fired combined-cycle electricity generation plant located in Peach Bottom Township, Pennsylvania known as the Delta Project. The plant will be owned and operated as part of Conectiv Energy and is expected to go into commercial operation in 2011. Conectiv Energy has entered into a six-year tolling agreement with an unaffiliated energy company under which Conectiv Energy will sell the energy, capacity and most of the ancillary services from the plant for the period June 2011 through May 2017 to the other party. Under the terms of the tolling agreement, Conectiv Energy will be responsible for the operation and maintenance of the plant, subject to the other party’s control over the dispatch of the plant’s output. The other party will be responsible for the purchase and scheduling of the fuel to operate the plant and all required emissions allowances.

Energy Marketing

Conectiv Energy also sells natural gas and fuel oil to very large end-users and to wholesale market participants under bilateral agreements. Conectiv Energy obtains the natural gas and fuel oil required to meet its supply obligations through market purchases for next day delivery and under long- and short-term bilateral contracts with other market participants. In addition, Conectiv Energy operates a short-term power desk, which generates margin by identifying and capturing price differences between power pools and locational and timing differences within a power pool. Conectiv Energy also engages in power origination activities, which primarily represent the fixed margin component of structured power transactions such as default supply service . Conectiv Energy refers to these operations collectively as Energy Marketing.

Pepco Energy Services

Pepco Energy Services provides retail energy supply and energy services primarily to commercial, industrial, and government customers. Pepco Energy Services sells electricity, including electricity from renewable resources, to customers located primarily in the mid-Atlantic and northeastern regions of the U.S., Texas and the Chicago, Illinois areas. As of December 31, 2008, Pepco Energy Services’ estimated retail electricity backlog was approximately 33 million megawatts for delivery through 2014, an increase of approximately 1 million megawatts over December 31, 2007. Pepco Energy Services also sells natural gas to customers located primarily in the mid-Atlantic region.

Pepco Energy Services also provides energy savings performance contracting services principally to federal, state and local government customers, owns and operates two district energy systems and designs, constructs, and operates combined heat and power and central energy plants.

Pepco Energy Services owns three landfill gas-fired electricity plants that have a total generating capacity rating of 10 megawatts and the output of these plants is sold into the wholesale market administered by PJM and a solar photovoltaic plant that has a generating capacity rating of 2 megawatts and the output of this plant is sold to its host facility.

Pepco Energy Services provides high voltage construction and maintenance services to customers throughout the United States and low voltage electric construction and maintenance services and streetlight construction and asset management services to utilities, municipalities and other customers in the Washington, D.C. area.

Pepco Energy Services owns and operates two oil-fired power plants. The power plants are located in Washington, D.C. and have a generating capacity rating of approximately 790 megawatts. See Item 2 “Properties” of this Form 10-K. Pepco Energy Services sells the output of these plants into the wholesale market administered by PJM. In February 2007, Pepco Energy Services provided notice to PJM of its intention to deactivate these plants. In May 2007, Pepco Energy Services deactivated one combustion turbine at its Buzzard Point facility with a generating capacity of approximately 16 megawatts. Pepco Energy Services currently plans to deactivate the balance of both plants by May 2012. PJM has informed Pepco Energy Services that these facilities are not expected to be needed for reliability after that time, but that its evaluation is dependent on the completion of transmission and distribution upgrades. Pepco Energy Services’ timing for deactivation of these units, in whole or in part, may be accelerated or delayed based on the operating condition of the units, economic conditions, and reliability considerations. Deactivation will not have a material impact on PHI’s financial condition, results of operations or cash flows.

Derivatives and Risk Management

PHI’s Competitive Energy businesses use derivative instruments primarily to reduce their financial exposure to changes in the value of their assets and obligations due to commodity price fluctuations. The derivative instruments used by the Competitive Energy businesses include forward contracts, futures, swaps, and exchange-traded and over-the-counter options. In addition, the Competitive Energy businesses also manage commodity risk with contracts that are not classified as derivatives. The two primary risk management objectives are (1) to manage the spread between the cost of fuel used to operate electric generation plants and the revenue received from the sale of the power produced by those plants, and (2) to manage the spread between retail sales commitments and the cost of supply used to service those commitments to ensure stable cash flows, and lock in favorable prices and margins when they become available.

Conectiv Energy’s goal is to manage the risk associated with the expected power output of its generation facilities and their fuel requirements. The risk management goals are approved by PHI’s Corporate Risk Management Committee and may change from time to time based on market conditions. The actual level of coverage may vary depending on the extent to which Conectiv Energy is successful in implementing its risk management strategies. For additional discussion of Conectiv Energy’s risk management Activities, see Item 7A “Quantitative and Qualitative Disclosures About Market Risk” set forth in Part II of this Form 10-K.

PJM Capacity Markets

A source of revenue for the Competitive Energy businesses is the sale of capacity by Conectiv Energy and Pepco Energy Services associated with their respective generating facilities. The wholesale market for capacity in PJM is administered by PJM which is responsible for ensuring that within the transmission control area there is sufficient generating capability available to meet the load requirements plus a reserve margin. In accordance with PJM requirements, retail sellers of electricity in the PJM market are required to maintain

capacity from generating facilities within the control area or generating facilities outside the control area, which have firm transmission rights into the control area that correspond to their load service obligations. This capacity can be obtained through the ownership of generation facilities, entry into bilateral contracts or the purchase of capacity credits in the auctions administered by PJM. All of the generating facilities owned by the Competitive Energy businesses are located in the transmission control area administered by PJM. The capacity of a generating unit is determined based on the demonstrated generating capacity of the unit and its forced outage rate.

Beginning on June 1, 2007, PJM replaced its former capacity market rules with a forward capacity auction procedure known as the Reliability Pricing Model (RPM), which provides for differentiation in capacity prices between “locational deliverability areas.” One of the primary objectives of RPM is to encourage the development of new generation sources, particularly in constrained areas.

Under RPM, PJM has held five auctions, each covering capacity to be supplied over consecutive 12-month periods, with the most recent auction covering the 12-month period beginning June 1, 2011. Auctions of capacity for each subsequent 12-month delivery period will be held 36 months ahead of the scheduled delivery year. The next auction, for the period June 2012 through May 2013, will take place in May 2009. The Competitive Energy businesses are exposed to certain deficiency charges payable to PJM if their generation units fail to meet certain reliability levels. Some deficiency charges may be reduced by purchasing capacity from PJM or third parties.

In addition to participating in the PJM auctions, the Competitive Energy businesses participate in the forward capacity market as both sellers and buyers in accordance with PHI’s risk management policy, and accordingly, prices realized in the PJM capacity auctions may not be indicative of gross margin that PHI earns in respect to its capacity purchases and sales during a given period.

Competition

The unregulated energy generation, supply and marketing businesses located primarily in the mid-Atlantic region are characterized by intense competition at both the wholesale and retail levels. At the wholesale level, Conectiv Energy and Pepco Energy Services compete with numerous non-utility generators, independent power producers, wholesale power marketers and brokers, and traditional utilities that continue to operate generation assets. In the retail energy supply market and in providing energy management services, Pepco Energy Services competes with numerous competitive energy marketers and other service providers. Competition in both the wholesale and retail markets for energy and energy management services is based primarily on price and, to a lesser extent, the range and quality of services offered to customers.

Seasonality

The power generation, supply and marketing businesses are seasonal and weather patterns can have a material impact on operating performance. Demand for electricity generally is higher in the summer months associated with cooling and demand for electricity and natural gas generally is higher in the winter months associated with heating, as compared to other times of the year. Historically, the competitive energy operations of Conectiv Energy and Pepco

Energy Services have generated less revenue when temperatures are milder than normal in the winter and cooler than normal in the summer. Milder weather can also negatively impact income from these operations. The energy management services of Pepco Energy Services generally are not seasonal.

Other Business Operations

Through its subsidiary PCI, PHI maintains a portfolio of cross-border energy sale-leaseback transactions, with a book value at December 31, 2008 of approximately $1.3 billion. For additional information concerning these cross-border lease transactions, see Note (16), “Commitments and Contingencies” to the consolidated financial statements of PHI set forth in Item 8 “Financial Statements and Supplementary Data” of the Form 10-K. This activity constitutes a separate operating segment for financial reporting purposes, which is designated “Other Non-Regulated.”

EMPLOYEES

At December 31, 2008, PHI had 5,474 employees, including 1,343 employed by Pepco, 898 employed by DPL, 523 employed by ACE and 1,893 employed by PHI Service Company. The remaining were employed by PHI’s Competitive Energy and other non-regulated businesses. Approximately 2,896 employees (including 1,047 employed by Pepco, 727 employed by DPL, 378 employed by ACE, 341 employed by PHI Service Company, and 403 employed by the Competitive Energy businesses) are covered by collective bargaining agreements with various locals of the International Brotherhood of Electrical Workers.

ENVIRONMENTAL MATTERS

PHI’s subsidiaries’ currently projected capital expenditures plan for the replacement of existing or installation of new environmental control facilities that are necessary for compliance with environmental laws, rules or agency orders are expected to be approximately $37 million in 2009 and $32 million in 2010. These expenditures include $18 million and $11 million, respectively, to comply with multi-pollutant regulations adopted by the Delaware Department of Natural Resources and Environmental Control (DNREC), as more fully discussed below. The actual costs of environmental compliance may be materially different from this capital expenditures plan depending on the outcome of the matters addressed below or as a result of the imposition of additional environmental requirements or new or different interpretations of existing environmental laws, rules and agency orders.

Air Quality Regulation

The generating facilities and operations of PHI’s subsidiaries are subject to federal, state and local laws and regulations, including the Federal Clean Air Act (CAA), which limit emissions of air pollutants, require permits for operation of facilities and impose recordkeeping and reporting requirements.

Sulfur Dioxide, Nitrogen Oxide, Mercury and Nickel Emissions

The acid rain provisions of the CAA regulate total sulfur dioxide (SO 2 ) emissions from affected generating units and allocate “allowances” to each affected unit that permit the unit to emit a specified amount of SO 2 . The generating facilities of PHI’s subsidiaries that require SO 2 allowances use allocated allowances or allowances acquired, as necessary, in the open market to satisfy the applicable regulatory requirements. Also under current regulations implementing CAA standards, each of the states in which PHI subsidiaries own and operate generating units regulate nitrogen oxide (NOx) emissions from generating units and allocate NOx allowances. Most of the generating units operated by PHI subsidiaries are subject to NOx emission limits. These units use allocated allowances or allowances acquired, as necessary, in the open market to maintain compliance with the regulatory requirements during the calendar year and during the ozone season (May 1 to September 30).

In 2005, the United States Environmental Protection Agency (EPA) issued its Clean Air Interstate Rule (CAIR), which imposes further reductions of SO 2 and NOx emissions from electric generating units in 28 eastern states and the District of Columbia, including each of the states in which PHI subsidiaries own and operate generating units. CAIR uses an allowance system to cap state-wide emissions of SO 2 and NOx in two stages beginning in 2009 for NOx and in 2010 for SO 2 . States may implement CAIR by adopting EPA’s trading program or through regulations that at a minimum achieve the level of reductions that would be achieved through implementation of EPA’s program. Each state covered by CAIR may determine independently which emission sources to control and which control measures to adopt. CAIR includes model rules for multi-state cap and trade programs for power plants that states may choose to adopt to meet the required emissions reductions. Generating units are permitted to satisfy the CAIR requirements through the use of allocated allowances or allowances acquired in the open market, through the installation of pollution control devices or through fuel modifications.

In July 2008, the United States Court of Appeals for the District of Columbia Circuit (the D.C. Circuit) vacated CAIR and remanded the rule to the EPA for further rulemaking to address the flaws it found with the rule, including EPA’s (1) failure to ensure that CAIR emission reductions from upwind states would assist downwind states in meeting air quality standards, (2) method for allocating SO 2 and NOx emission caps among the states and (3) efforts to terminate or limit acid rain SO 2 allowances. In December 2008, the D.C. Circuit held that CAIR nevertheless would remain in effect pending such rulemaking.

The states in which PHI subsidiaries own and operate generating units have either adopted regulations to implement CAIR or will require compliance with the federal CAIR program. In either case, the regulatory programs will require, beginning in 2009, the surrender of one NOx annual allowance for each ton of NOx emitted during the year and one NOx ozone season allowance for each ton of NOx emitted during the ozone season; and between 2010 and

2014, the surrender of one SO 2 annual allowance for each 0.5 ton of SO 2 emitted during the year and beginning in 2015, one SO 2 allowance for each 0.35 ton of SO 2 emitted during the year. To implement CAIR, the New Jersey Department of Environmental Protection (NJDEP) adopted a new NOx trading program to replace its prior NOx trading program. This new trading program allocates NOx annual and NOx ozone season allowances to Conectiv Energy’s Carll’s Corner, Cedar, Cumberland, Deepwater, Middle, Mickleton, and Sherman generating units, and will operate in a manner similar to NJDEP’s prior NOx trading program. Conectiv Energy’s Edge Moor, Christiana and Hay Road generating units in Delaware will be subject to federal CAIR for NOx and SO 2 . Pennsylvania promulgated CAIR regulations in 2008 that are applicable to Conectiv Energy’s Bethlehem generating units and the generating units being constructed in Peach Bottom Township, Pennsylvania. Virginia is implementing CAIR by participating in EPA’s cap and trade program making Conectiv Energy’s Tasley peaking unit subject to federal CAIR for NOx and SO 2 . Conectiv Energy’s Crisfield generating units in Maryland, Bayview units in Virginia, Edge Moor 10, Delaware City 10 and West 10 units in Delaware, and Missouri Avenue generating units in New Jersey produce fewer megawatts than CAIR’s applicability threshold and therefore are not subject to CAIR.

Pepco Energy Services’ Benning Road generating units located in the District of Columbia are subject to CAIR requirements. Pepco Energy Services’ Buzzard Point generating units and its landfill gas generating units produce fewer megawatts than CAIR’s applicability threshold and therefore are not subject to CAIR.

Conectiv Energy and Pepco Energy Services units use NOx annual, NOx ozone season and SO 2 allowances allocated or acquired, as necessary, in the open market to comply with CAIR. Although implementation of CAIR will increase costs for Conectiv Energy and Pepco Energy Services units, PHI currently does not anticipate that CAIR will have a significant impact on the financial results of its business.

In August 2008, NJDEP proposed amendments to its air pollution control regulations applicable to generating units in New Jersey to implement a multi-pollutant strategy to reduce fine particulate matter, SO 2 and NOx emissions from coal-fired boilers serving electric generating units and NOx emissions from high electric demand day (HEDD) units, which are units capable of generating 15 or more megawatts and which are operated less than or equal to an average of 50 percent of the time during the ozone season. The units that will be subject to NJDEP’s multi-pollutant regulations when promulgated also are subject to CAIR requirements, and accordingly, must hold sufficient NOx and SO2 allowances to cover their NOx and SO 2 emissions. The proposed multi-pollutant regulations may require the installation of pollution control equipment at the Deepwater generating station in order to comply with the more stringent maximum allowable emission rates. For the period 2009 through 2014, the proposed HEDD regulations do not impose specific emission limits at any specific source, but require reductions from HEDD units that Conectiv Energy chooses to operate in accordance with a protocol submitted to NJDEP. Beginning in May 2015, the proposed regulations establish specific maximum allowable emissions rates for HEDD units. NJDEP’s regulations are expected to become final in May 2009. Conectiv Energy is evaluating its options for complying with the proposed regulations.

In 2005, EPA finalized its Clean Air Mercury Rule (CAMR), which established mercury emissions standards for new or modified sources and capped state-wide emissions of mercury beginning in 2010. The regulations, which permitted states to implement CAMR by adopting

EPA’s market-based cap-and trade allowance program for coal-fired utility boilers or through regulations that at a minimum achieve the reductions that would be achieved through EPA’s program, were vacated by the United States Court of Appeals for the District of Columbia Circuit in February 2008.

In December 2004, NJDEP published final rules regulating mercury emissions from power plants and industrial facilities in New Jersey that impose standards, effective December 15, 2007, that are significantly stricter than EPA’s now vacated federal CAMR for coal-fired plants. Conectiv Energy has confirmed, based upon the monitoring of mercury emissions at the Deepwater generating facility, that its only coal-fired generating plant in New Jersey is in compliance with the mercury emissions limit without the need for the installation of additional pollution control equipment.

In November 2006, DNREC adopted multi-pollutant regulations to require large coal-fired and residual oil-fired electric generating units to develop control strategies to address air quality in Delaware. These control strategies are intended to assure attainment of ambient air quality standards for ozone and fine particulate matter, address local scale fine particulate emission problems, reduce mercury emissions, satisfy the now vacated federal CAMR rule, improve visibility and help satisfy Delaware’s regional haze obligations. For Conectiv Energy’s Edge Moor coal-fired units, these regulations establish stringent short-term limits for emissions of NOx, SO 2 and mercury, and for Edge Moor’s residual oil-fired generating unit, impose more stringent sulfur in fuel oil limits and establish stringent short-term limits for NOx emissions. The regulations also cap annual mass emissions of NOx and SO 2 from Edge Moor’s coal-fired and residual oil-fired units, and mercury from Edge Moor’s coal-fired units. In December 2006, Conectiv Energy filed a complaint with the Delaware Superior Court seeking review of the adoption of the new regulations. In December 2008, Conectiv Energy reached a settlement with DNREC. Under the terms of the settlement agreement, Conectiv Energy will comply with the NOx, SO 2 and mercury emission reduction requirements by the regulatory compliance dates, except that it will comply with the Phase II mercury emission limit by January 1, 2012, which is one year earlier than the regulatory compliance date. In addition, DNREC has agreed to increase the annual SO 2 mass emission limit as it relates to the Edge Moor residual oil-fired generating unit. Conectiv Energy is installing new pollution control equipment and/or enhancing existing equipment to comply with the multi-pollutant regulations. Conectiv Energy currently estimates that it will cost up to $81 million over a period of six years to install the control equipment necessary to comply with the regulations. These estimated costs do not include increased costs associated with operating control equipment.

Conectiv Energy is installing water injection pollution control equipment on its five stationary combustion turbines in Delaware (Christiana 11 and 14, Edge Moor 10, Delaware City 10 and West 10) to comply with new ozone season NOx emission limits. Conectiv Energy estimates that the cost of compliance will be approximately $3 million.

In a March 2005 rulemaking, EPA removed coal- and oil-fired units from the list of source categories requiring Maximum Achievable Control Technology for hazardous air pollutants such as mercury and nickel under CAA Section 112, thus, for the time being, eliminating the possibility that control devices would be required under this section of the CAA to reduce nickel emissions from the oil-fired unit at Conectiv Energy’s Edge Moor generating facility. In the decision issued on February 8, 2008, the U.S. Court of Appeals for the District of

Columbia Circuit determined that the delisting of coal- and oil-fired units from regulation under CAA Section 112 was unlawful.

Carbon Dioxide Emissions

Delaware, Maryland and New Jersey (along with Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont and New York) are signatories to the Regional Greenhouse Gas Initiative (RGGI), a cooperative effort by ten Northeast and mid-Atlantic states to first stabilize and then beginning in 2015 incrementally reduce carbon dioxide (CO 2 ) emissions with the goal of achieving an overall 10% reduction from baseline by 2018. Under RGGI, each of the participating states has adopted legislation or regulations to implement a regional CO 2 budget and an allowance trading program to regulate emissions from fossil fuel-fired electric generating units rated at 25 megawatts or greater. Under the program each covered fossil fuel-fired electric generating unit is required, commencing January 1, 2009, to hold allocated CO 2 allowances, or and allowances acquired in the open market equivalent to its CO 2 emissions during specified compliance periods. Beginning in 2009, all covered CO 2 sources must have an approved plan to monitor tons of CO 2 emitted. The Maryland and New Jersey CO 2 allowance trading programs each provides for auction of substantially all of the allowances allocated to the state by RGGI. Delaware’s program, in 2009, will auction 60% of allowances and allocate 40% of allowances to existing CO 2 sources. For each year after 2009, Delaware will increase the percentage of allowances for auction by 8%, such that 100% of allowances will be auctioned in 2014. The first compliance period is the three-year period from 2009 to 2011. The period may be extended to four years if a safety-valve mechanism is triggered by meeting certain market price targets. In early 2012, each source will be required to surrender one CO 2 allowance for each ton of CO 2 emitted during the period. Conectiv Energy participated in the September and December 2008 RGGI auctions and anticipates participating in subsequent RGGI auctions as necessary.

In February 2007, the New Jersey Governor signed an Executive Order that requires New Jersey to stabilize its statewide greenhouse gas emissions at 1990 levels by 2020, and to reduce statewide greenhouse gas emissions to 80% below 2006 levels by 2050. The Executive Order requires NJDEP to coordinate with NJBPU, New Jersey’s Department of Transportation, New Jersey’s Department of Community Affairs and other interested parties to evaluate policies and measures that will enable New Jersey to achieve the statewide greenhouse gas emissions reduction levels set forth in the Executive Order. In July 2007, New Jersey enacted legislation requiring NJDEP to promulgate regulations by July 1, 2009 that establish a statewide greenhouse gas emissions monitoring and reporting program covering all sources within the state to evaluate progress toward the 2020 and 2050 greenhouse gas limits. These programs are in addition to New Jersey’s participation in RGGI for electric generating units.

Water Quality Regulation

Provisions of the federal Water Pollution Control Act, also known as the Clean Water Act (CWA), establish the basic legal structure for regulating the discharge of pollutants from point sources to surface waters of the United States. Among other things, the CWA requires that any person wishing to discharge pollutants from a point source (generally a confined, discrete conveyance such as a pipe) obtain a National Pollutant Discharge Elimination System (NPDES) permit issued by EPA or by a state agency under a federally authorized state program. Each of

the steam generating facilities operated by PHI’s subsidiaries has a NPDES permit authorizing pollutant discharges, which is subject to periodic renewal.

In July 2004, EPA issued final regulations under Section 316(b) of the CWA that are intended to minimize potential adverse environmental impacts from power plant cooling water intake structures on aquatic resources by establishing performance-based standards for the operation of these structures at large existing electric generating plants, including Conectiv Energy’s Deepwater and Edge Moor generating facilities. These regulations may require changes to cooling water intake structures as part of the NPDES permit renewal process. In January 2007, the U.S. Court of Appeals for the Second Circuit issued a decision in Riverkeeper, Inc. v. United States Environmental Protection Agency (commonly known as the Riverkeeper II decision), that remanded to EPA for additional rulemaking substantial portions of these regulations for large existing electric generating plants. In April 2008, the U.S. Supreme Court agreed to review the Riverkeeper II decision. Briefing and oral argument before the Court have been completed, but no decision has been rendered. Regardless of the outcome of the pending judicial proceedings, additional EPA rulemaking is expected, and the capital expenditures, if any, that may be needed as a consequence of such new regulations will not be known until the rulemaking process is concluded and each affected facility completes additional studies and addresses related permit requirements.

EPA has delegated authority to administer the NPDES program to a number of state agencies including DNREC. The NPDES permit for Conectiv Energy’s Edge Moor generating facility expired on October 30, 2003, but has been administratively extended until DNREC issues a renewal permit. Conectiv Energy submitted a renewal application to the DNREC in April 2003. Studies required under the existing permit to determine the impact on aquatic organisms of the plant’s cooling water intake structures were completed in 2002. Site-specific alternative technologies and operational measures have been evaluated and discussed with DNREC. DNREC, however, has not announced how it intends to address Section 316(b) requirements in the renewal NPDES permit in light of Riverkeeper II and the remand of substantial portions of the federal regulations.

Under the New Jersey Water Pollution Control Act, NJDEP implements regulations, administers the New Jersey Pollutant Discharge Elimination System (NJPDES) program with EPA oversight, and issues and enforces NJPDES permits. In June 2007, Conectiv Energy filed a timely application for renewal of the NJPDES permit for the Deepwater generating facility, which administratively extended the existing permit. The existing NJPDES permit for Deepwater requires that Conectiv Energy perform several studies to determine whether or not Deepwater’s cooling water intake structures satisfy applicable requirements for protection of the environment. While those study requirements were consistent with requirements under EPA’s regulations implementing CWA Section 316(b), the result of the Riverkeeper II decision and any subsequent EPA rulemaking may require reevaluation of the design and operational measures that Conectiv Energy anticipated using for future compliance with Section 316(b) at Deepwater. In view of the uncertainty associated with Riverkeeper II , NJDEP, at Conectiv Energy’s request, has agreed to stay a cooling water intake structure design upgrade requirement in Deepwater’s existing NJPDES permit. NJDEP is preparing a renewal permit for Deepwater, which will be published as a draft NJPDES renewal permit together with a request for public comments.

Pepco and a subsidiary of Pepco Energy Services discharge water from a steam generating plant and service center located in the District of Columbia under a NPDES permit

issued by EPA in November 2000. Pepco filed a petition with EPA’s Environmental Appeals Board seeking review and reconsideration of certain provisions of EPA’s permit determination. In May 2001, Pepco and EPA reached a settlement on Pepco’s petition, under which EPA withdrew certain contested provisions and agreed to issue a revised draft permit for public comment. A timely renewal application was filed in May 2005 and the companies are operating under the November 2000 permit, excluding the withdrawn conditions, in accordance with the settlement agreement. In June 2008, EPA issued a draft permit. Pepco filed comments on the draft permit in January 2009. In February 2009, EPA issued the final draft permit and initiated a 30-day public comment period, closing on March 16, 2009. The capital expenditures, if any, that may be needed as a consequence of new permit conditions, will not be known until the permit process is concluded.

In November 2007, NJDEP adopted amendments to the agency’s regulations under the Flood Hazard Area Control Act (FHACA) to minimize damage to life and property from flooding caused by development in flood plains. The amended regulations, which took effect November 5, 2007, impose a new regulatory program to mitigate flooding and related environmental impacts from a broad range of construction and development activities, including electric utility transmission and distribution construction that was previously unregulated under the FHACA and that is otherwise regulated under a number of other state and federal programs. ACE filed an appeal of these regulations with the Appellate Division of the Superior Court of New Jersey on November 3, 2008. PHI cannot predict at this time the costs of complying with the FHACA regulations due, among other things, to the potential for additional rulemaking as a result of the appeal, as well as the possibility that NJDEP will issue exemptions from the new regulations.

On October 6, 2008, NJDEP adopted amendments to the agency’s regulations under the Freshwater Wetlands Protection Act (FWPA). PHI believes that the amended FWPA regulations unnecessarily restrict, among other things, various types of electric transmission and distribution system maintenance and construction activity and PHI is evaluating whether to appeal the FWPA regulations to the Appellate Division of the Superior Court of New Jersey. PHI cannot predict at this time the costs of complying with the amendments to the FWPA regulations due to the potential for additional rulemaking if an appeal is filed, as well as the possibility that NJDEP may issue exemptions from certain aspects of the new regulations.

In 2002, EPA amended its oil pollution prevention regulations to require facilities that, because of their location, could reasonably be expected to discharge oil in quantities that may be harmful to the environment, to implement and amend Spill Prevention, Control, and Countermeasure (SPCC) Plans. PHI facilities subject to the regulations must now comply with these regulatory requirements by July 1, 2009. In December 2008, EPA published a final rule to clarify its regulations and streamline certain requirements. In a February 3, 2009 Federal Register notice, EPA delayed until April 4, 2009 the effective date of the December 2008 final rule and indicated that it is reviewing the dates by which facilities must prepare or amend SPCC Plans and implement those plans. PHI continues to analyze its facilities to identify equipment and sites for which physical modifications may be necessary to reduce the risk of a release of oil and comply with EPA’s SPCC regulations. As provided in EPA’s regulations, SPCC Plans for PHI facilities for which the installation of structures or equipment is not practicable include an oil spill contingency plan and a written commitment of manpower, equipment and materials to respond to a discharge of oil. PHI anticipates that compliance with the EPA regulations will require physical modification of certain facilities through the construction of containment

structures or replacement of oil-filled equipment with non-oil-filled equipment at a total anticipated cost to ACE, DPL and Pepco of approximately $50 million.

Hazardous Substance Regulation

The Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) authorizes EPA, and comparable state laws authorize state environmental authorities, to issue orders and bring enforcement actions to compel responsible parties to investigate and take remedial actions at any site that is determined to present an actual or potential threat to human health or the environment because of an actual or threatened release of one or more hazardous substances. Parties that generated or transported hazardous substances to such sites, as well as the owners and operators of such sites, may be deemed liable under CERCLA or comparable state laws. Pepco, DPL and ACE each has been named by EPA or a state environmental agency as a potentially responsible party in pending proceedings involving certain contaminated sites. See (i) Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources and Liquidity – Capital Requirements – Environmental Remediation Obligations,” and (ii) Note (16), “Commitments and Contingencies – Legal Proceedings – Environmental Litigation” to the consolidated financial statements of PHI set forth in Part II, Item 8 of this Form 10-K.

Item 1A. RISK FACTORS

The businesses of PHI, Pepco, DPL and ACE are subject to numerous risks and uncertainties, including the events or conditions identified below. The occurrence of one or more of these events or conditions could have an adverse effect on the business of any one or more of the companies, including, depending on the circumstances, its financial condition, results of operations and cash flows. Unless otherwise noted, each risk factor set forth below applies to each of PHI, Pepco, DPL and ACE.

PHI and its subsidiaries are subject to substantial governmental regulation, and unfavorable regulatory treatment could have a negative effect.

The regulated utilities that compose PHI’s Power Delivery businesses are subject to regulation by various federal, state and local regulatory agencies that significantly affects their operations. Each of Pepco, DPL and ACE is regulated by state regulatory agencies in its service territories, with respect to, among other things, the rates it can charge retail customers for the supply and distribution of electricity (and additionally for DPL the supply and distribution of natural gas). In addition, the rates that the companies can charge for electricity transmission are regulated by FERC, and DPL’s natural gas transportation is regulated by FERC. The companies cannot change supply, distribution, or transmission rates without approval by the applicable regulatory authority. While the approved distribution and transmission rates are intended to permit the companies to recover their costs of service and earn a reasonable rate of return, the profitability of the companies is affected by the rates they are able to charge. In addition, if the costs incurred by any of the companies in operating its transmission and distribution facilities exceed the allowed amounts for costs included in the approved rates, the financial results of that company, and correspondingly, PHI, will be adversely affected.

PHI’s subsidiaries also are required to have numerous permits, approvals and certificates from governmental agencies that regulate their businesses. PHI believes that each of its

subsidiaries has, and each of Pepco, DPL and ACE believes it has, obtained or sought renewal of the material permits, approvals and certificates necessary for its existing operations and that its business is conducted in accordance with applicable laws; however, none of the companies is able to predict the impact of future regulatory activities of any of these agencies on its business. Changes in or reinterpretations of existing laws or regulations, or the imposition of new laws or regulations, may require any one or more of PHI’s subsidiaries to incur additional expenses or significant capital expenditures or to change the way it conducts its operations.

Pepco may be required to make additional divestiture proceeds gain-sharing payments to customers in the District of Columbia and Maryland. (PHI and Pepco only)

Pepco currently is involved in regulatory proceedings in Maryland and the District of Columbia related to the sharing of the net proceeds from the sale of its generation-related assets. The principal issue in the proceedings is whether Pepco should be required to share with customers the excess deferred income taxes and accumulated deferred investment tax credits associated with the sold assets and, if so, whether such sharing would violate the normalization provisions of the Internal Revenue Code and its implementing regulations. Depending on the outcome of the proceedings, Pepco could be required to make additional gain-sharing payments to customers and payments to the Internal Revenue Service (IRS) in the amount of the associated accumulated deferred investment tax credits, and Pepco might be unable to use accelerated depreciation on District of Columbia and Maryland allocated or assigned property. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Regulatory and Other Matters — Divestiture Cases” for additional information.

The operating results of the Power Delivery business and the Competitive Energy businesses fluctuate on a seasonal basis and can be adversely affected by changes in weather.

The Power Delivery business historically has been seasonal and weather patterns have had a material impact on its operating performance. Demand for electricity is generally higher in the summer months associated with cooling and demand for electricity and natural gas is generally higher in the winter months associated with heating as compared to other times of the year. Accordingly, each of PHI, Pepco, DPL and ACE historically has generated less revenue and income when temperatures are warmer than normal in the winter and cooler than normal in the summer. In Maryland, the adoption in 2007 of a bill stabilization adjustment mechanism for retail customers of Pepco and DPL, which decouples distribution revenue for a given reporting period from the amount of power delivered during the period, has had the effect of eliminating changes in the use of electricity by such retail customers due to weather conditions or for other reasons as a factor having an impact on reported revenue and income.

Historically, the competitive energy operations of Conectiv Energy and Pepco Energy Services also have produced less revenue when weather conditions are milder than normal, which can negatively impact PHI’s income from these operations. The energy management services business of Pepco Energy Services is not seasonal.

Facilities may not operate as planned or may require significant maintenance expenditures, which could decrease revenues or increase expenses.

Operation of the Pepco, DPL and ACE transmission and distribution facilities and the Competitive Energy businesses’ generation facilities involves many risks, including the breakdown or failure of equipment, accidents, labor disputes and performance below expected levels. Older facilities and equipment, even if maintained in accordance with sound engineering practices, may require significant capital expenditures for additions or upgrades to keep them operating at peak efficiency, to comply with changing environmental requirements, or to provide reliable operations. Natural disasters and weather-related incidents, including tornadoes, hurricanes and snow and ice storms, also can disrupt generation, transmission and distribution delivery systems. Operation of generation, transmission and distribution facilities below expected capacity levels can reduce revenues and result in the incurrence of additional expenses that may not be recoverable from customers or through insurance, including deficiency charges imposed by PJM on generation facilities at a rate of up to two times the capacity payment that the generation facility receives. Furthermore, the generation and transmission facilities of the PHI companies that are defined as elements of the Bulk Electric System, which is defined by the North American Electric Reliability Corporation (NERC) as transmission facilities operating at a voltage of 100 kilovolts and above, are subject to mandatory compliance with the reliability standards established by the NERC and the Reliability First Regional Entity, which is the NERC-designated regional entity with jurisdiction in the PJM region. Failure to comply with the standards may result in substantial monetary penalties and reflect poorly on the public image of PHI.

The transmission facilities of the Power Delivery business are interconnected with the facilities of other transmission facility owners whose actions could have a negative impact on operations.

The electricity transmission facilities of Pepco, DPL and ACE are directly interconnected with the transmission facilities of contiguous utilities and, as such, are part of an interstate power transmission grid. FERC has designated a number of regional transmission organizations to coordinate the operation of portions of the interstate transmission grid. Pepco, DPL and ACE are members of the PJM RTO. In 1997, FERC approved PJM as the provider of transmission service in the PJM RTO region, which currently consists of all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia. Pepco, DPL and ACE operate their transmission facilities under the direction and control of PJM. PJM RTO and the other regional transmission organizations have established sophisticated systems that are designed to ensure the reliability of the operation of transmission facilities and prevent the operations of one utility from having an adverse impact on the operations of the other utilities. However, the systems put in place by PJM RTO and the other regional transmission organizations may not always be adequate to prevent problems at other utilities from causing service interruptions in the transmission facilities of Pepco, DPL or ACE. If any of Pepco, DPL or ACE were to suffer such a service interruption, it could have a negative impact on it and on PHI.

The cost of compliance with environmental laws, including laws relating to emissions of greenhouse gases, is significant and new environmental laws may increase expenses.

The operations of PHI’s subsidiaries, including Pepco, DPL and ACE, are subject to extensive federal, state and local environmental laws, rules and regulations relating to air quality, water quality, spill prevention, waste management, natural resources, site remediation, and health and safety. These laws and regulations can require significant capital and other expenditures to, among other things, meet emissions and effluent standards, conduct site remediation and perform environmental monitoring. If a company fails to comply with applicable environmental laws and regulations, even if caused by factors beyond its control, such failure could result in the assessment of civil or criminal penalties and liabilities and the need to expend significant sums to come into compliance.

In addition, PHI’s subsidiaries are required to obtain and comply with a variety of environmental permits, licenses, inspections and other approvals. If there is a delay in obtaining any required environmental regulatory approval, or if there is a failure to obtain, maintain or comply with any such approval, operations at affected facilities could be halted or subjected to additional costs.

There is growing concern at the federal and state levels about CO 2 and other greenhouse gas emissions. As a result, it is possible that, in addition to RGGI, state and federal regulations will be developed that will impose more stringent limitations on emissions than are currently in effect. Any of these factors could result in increased capital expenditures and/or operating costs for one or more generating plants operated by PHI’s Conectiv Energy and Pepco Energy Services businesses. Until specific regulations are promulgated, the impact that any new environmental regulations, voluntary compliance guidelines, enforcement initiatives or legislation may have on the results of operations, financial position or liquidity of PHI and its subsidiaries is not determinable. PHI, Pepco, DPL and ACE each continues to monitor federal and state activity related to environmental matters in order to analyze their potential operational and cost implications.

New environmental laws and regulations, or new interpretations of existing laws and regulations, could impose more stringent limitations on the operations of PHI’s subsidiaries or require them to incur significant additional costs. Current compliance strategies may not successfully address the relevant standards and interpretations of the future.

Failure to retain and attract key skilled professional and technical employees could have an adverse effect on operations.

The ability of each of PHI and its subsidiaries, including Pepco, DPL and ACE, to implement its business strategy is dependent on its ability to recruit, retain and motivate employees. Competition for skilled employees in some areas is high and the inability to retain and attract these employees could adversely affect the company’s business, operations and financial condition.

PHI’s Competitive Energy businesses are highly competitive . (PHI only)

The unregulated energy generation, supply and marketing businesses primarily in the mid-Atlantic region are characterized by intense competition at both the wholesale and retail levels. PHI’s Competitive Energy businesses compete with numerous non-utility generators,

independent power producers, wholesale and retail energy marketers, and traditional utilities. This competition generally has the effect of reducing margins and requires a continual focus on controlling costs.

PHI’s Competitive Energy businesses rely on some generation, transmission, storage, and distribution assets that they do not own or control to deliver wholesale and retail electricity and natural gas and to obtain fuel for their generation facilities. (PHI only)

PHI’s Competitive Energy businesses depend on electric generation and transmission facilities, natural gas pipelines, and natural gas storage facilities owned and operated by others. The operation of their generation facilities also depends on coal, natural gas or diesel fuel supplied by others. If electric generation or transmission, natural gas pipelines, or natural gas storage are disrupted or capacity is inadequate or unavailable, the Competitive Energy businesses’ ability to buy and receive and/or sell and deliver wholesale and retail power and natural gas, and therefore to fulfill their contractual obligations, could be adversely affected. Similarly, if the fuel supply to one or more of their generation plants is disrupted and storage or other alternative sources of supply are not available, the Competitive Energy businesses’ ability to operate their generating facilities could be adversely affected.

Changes in technology may adversely affect the Power Delivery business and the Competitive Energy businesses.

Research and development activities are ongoing to improve alternative technologies to produce electricity, including fuel cells, wind energy, micro turbines and photovoltaic (solar) cells. It is possible that advances in these or other alternative technologies will reduce the costs of electricity production from these technologies, thereby making the generating facilities of the Competitive Energy businesses less competitive. In addition, increased conservation efforts and advances in technology could reduce demand for electricity supply and distribution, which could adversely affect the Power Delivery businesses of Pepco, DPL and ACE and the Competitive Energy businesses. Changes in technology also could alter the channels through which retail electricity is distributed to customers which could adversely affect the Power Delivery businesses of Pepco, DPL and ACE.

PHI’s risk management procedures may not prevent losses in the operation of its Competitive Energy businesses. (PHI only)

The operations of PHI’s Competitive Energy businesses are conducted in accordance with sophisticated risk management systems that are designed to quantify risk. However, actual results sometimes deviate from modeled expectations. In particular, risks in PHI’s energy commodity activities are measured and monitored utilizing value-at-risk models to determine the effects of potential one-day favorable or unfavorable price movements. These estimates are based on historical price volatility and assume a normal distribution of price changes and a 95% probability of occurrence. Consequently, if prices significantly deviate from historical prices, PHI’s risk management systems, including assumptions supporting risk limits, may not protect PHI from significant losses. In addition, adverse changes in energy prices may result in economic losses in PHI’s earnings and cash flows and reductions in the value of assets on its balance sheet under applicable accounting rules.

The commodity hedging procedures used by the Competitive Energy businesses may not protect them from significant losses caused by volatile commodity prices. (PHI only)

To lower the financial exposure related to commodity price fluctuations, PHI’s Competitive Energy businesses routinely enter into contracts to hedge the value of their assets and operations. As part of this strategy, PHI’s Competitive Energy businesses utilize fixed-price, forward, physical purchase and sales contracts, tolling agreements, futures, financial swaps and option contracts traded in the over-the-counter markets or on exchanges. Each of these various hedge instruments can present a unique set of risks in its application to PHI’s energy assets. PHI must apply judgment in determining the application and effectiveness of each hedge instrument. Changes in accounting rules, or revised interpretations to existing rules, may cause hedges to be deemed ineffective as an accounting matter. This could have material earnings implications for the period or periods in question. Conectiv Energy’s objective is to hedge a portion of the expected power output of its generation facilities and the costs of fuel used to operate those facilities so it is not completely exposed to energy price movements. Hedge targets are approved by PHI’s Corporate Risk Management Committee and may change from time to time based on market conditions. Conectiv Energy generally establishes hedge targets annually for the next three succeeding 12-month periods. Within a given 12-month horizon, the actual hedged positioning in any month may be outside of the targeted range, even if the average for a 12-month period falls within the stated range. Management exercises judgment in determining which months present the most significant risk, or opportunity, and hedge levels are adjusted accordingly. Since energy markets can move significantly in a short period of time, hedge levels may also be adjusted to reflect revised assumptions. Such factors may include, but are not limited to, changes in projected plant output, revisions to fuel requirements, transmission constraints, prices of alternate fuels, and improving or deteriorating supply and demand conditions. In addition, short-term occurrences, such as abnormal weather, operational events, or intra-month commodity price volatility may also cause the actual level of hedging coverage to vary from the established hedge targets. These events can cause fluctuations in PHI’s earnings from period to period. Due to the high heat rate of the Pepco Energy Services generating facilities, Pepco Energy Services generally does not enter into wholesale contracts to lock in the forward value of its plants. To the extent that PHI’s Competitive Energy businesses have unhedged positions or their hedging procedures do not work as planned, fluctuating commodity prices could result in significant losses. Conversely, by engaging in hedging activities, PHI may not realize gains that otherwise could result from fluctuating commodity prices.

The operations of the Competitive Energy businesses can give rise to significant collateral requirements. The inability to fund those requirements may prevent the businesses from hedging associated price risks or may require curtailment of their operations. (PHI only)

A substantial portion of Pepco Energy Services’ business is the sale of electricity and natural gas to retail customers. In conducting this business Pepco Energy Services typically enters into electricity and natural gas sale contracts under which it is committed to supply the electricity or natural gas requirements of its retail customers over a specified period at agreed upon prices. To acquire this energy, Pepco Energy Services enters into wholesale purchase contracts for electricity and natural gas. These contracts typically impose collateral requirements on each party designed to protect the other party against the risk of nonperformance between the date the contract is entered into and the date the energy is paid for. The collateral required to be posted can be of varying forms, including cash, letters of credit and guarantees. When energy market prices decrease relative to the supplier contract prices, Pepco Energy Service’s collateral

obligations increase. In addition, Conectiv Energy and Pepco Energy Services each enter into contracts to buy and sell electricity, various fuels, and related products, including derivative instruments, to reduce its financial exposure to changes in the value of its assets and obligations due to energy price fluctuations. These contracts usually require the posting of collateral. Under various contracts entered into by both businesses, the required collateral is provided in the form of an investment grade guaranty issued by PHI. Under these contracts, a reduction in PHI’s credit rating can also trigger a requirement to post additional collateral. To satisfy these obligations when required, PHI and its non-utility subsidiaries rely primarily on cash balances, access to the capital markets and existing credit facilities.

Particularly in periods of energy market price volatility, the collateral obligations associated with the Competitive Energy businesses can be substantial. These collateral demands negatively affect PHI’s liquidity by requiring PHI to draw on its capacity under its credit facilities and other financing sources. The inability of PHI to maintain the necessary liquidity also could have an adverse effect on PHI’s results of operations and financial condition by requiring the Competitive Energy businesses to forego new business opportunities, by requiring the businesses to curtail their hedging activity, thereby increasing their exposure to energy market price changes or by rendering them unable to meet their collateral obligations to counterparties.

PHI and its subsidiaries have significant exposure to counterparty risk. (PHI only)

Both Conectiv Energy and Pepco Energy Services enter into transactions with numerous counterparties. These include both commercial transactions for the purchase and sale of electricity and natural gas and derivative and other transactions to manage the risk of commodity price fluctuations. Under these arrangements, the Competitive Energy businesses are exposed to the risk that the counterparty may fail to perform its obligation to make or take delivery under the contract, fail to make a required payment or fail to return collateral posted by the Competitive Energy businesses when no longer required. Under many of these contracts, Conectiv Energy and Pepco Energy Services are entitled to receive collateral or other types of performance assurance from the counterparty, which may be in the form of cash, letters of credit or parent guarantees, to protect against performance and credit risk. Even where collateral is provided, capital market disruptions can prevent the counterparty from meeting its collateral obligations or could degrade the value of letters of credit and guarantees as a result of the lowered rating or insolvency of the issuer or guarantor. In the event of a bankruptcy of a counterparty, bankruptcy law, in some circumstances, could require Conectiv Energy and Pepco Energy Services to surrender collateral held or payments received. In addition, Conectiv Energy and Pepco Energy Services are participants in the wholesale electric markets administered by various independent system operators (ISOs), and in particular PJM. If an ISO incurs losses due to counterparty nonperformance, those losses are allocated to and borne by other market participants in the ISO. Such defaults could adversely affect PHI’s results of operations, liquidity or financial condition. These risks are increased during periods of significant commodity price fluctuations, tightened credit and ratings downgrades.

Business operations could be adversely affected by terrorism.

The threat of, or actual acts of, terrorism may affect the operations of PHI or any of its subsidiaries in unpredictable ways and may cause changes in the insurance markets, force an increase in security measures and cause disruptions of fuel supplies and markets. If any of its

infrastructure facilities, such as its electric generation, fuel storage, transmission or distribution facilities, were to be a direct target, or an indirect casualty, of an act of terrorism, the operations of PHI, Pepco, DPL or ACE could be adversely affected. Corresponding instability in the financial markets as a result of terrorism also could adversely affect the ability to raise needed capital.

Insurance coverage may not be sufficient to cover all casualty losses that the companies might incur.

PHI and its subsidiaries, including Pepco, DPL and ACE, currently have insurance coverage for their facilities and operations in amounts and with deductibles that they consider appropriate. However, there is no assurance that such insurance coverage will be available in the future on commercially reasonable terms. In addition, some risks, such as weather related casualties, may not be insurable. In the case of loss or damage to property, plant or equipment, there is no assurance that the insurance proceeds, if any, received will be sufficient to cover the entire cost of replacement or repair.

Revenues, profits and cash flows may be adversely affected by economic conditions.

Periods of slowed economic activity generally result in decreased demand for power, particularly by industrial and large commercial customers. As a consequence, recessions or other downturns in the economy may result in decreased revenues and cash flows for the Power Delivery businesses of Pepco, DPL and ACE and the Competitive Energy businesses.

The IRS challenge to cross-border energy sale and lease-back transactions entered into by a PHI subsidiary could result in loss of prior and future tax benefits. (PHI only)

PCI maintains a portfolio of eight cross-border energy lease investments, which as of December 31, 2008, had an equity value of approximately $1.3 billion and from which PHI currently derives approximately $56 million per year in tax benefits in the form of interest and depreciation deductions in excess of rental income. In 2005, the Treasury Department and IRS issued a notice identifying sale-leaseback transactions with certain attributes entered into with tax-indifferent parties as tax avoidance transactions, and the IRS announced its intention to disallow the associated tax benefits claimed by the investors in these transactions. PHI’s cross-border energy lease investments, each of which is with a tax-indifferent party, have been under examination by the IRS as part of the normal PHI federal income tax audits. In connection with the audit of PHI’s 2001 and 2002 income tax returns, the IRS disallowed the depreciation and interest deductions in excess of rental income claimed by PHI with respect to six of its cross-border energy lease investments. In addition, the IRS has sought to recharacterize the leases as loan transactions as to which PHI would be subject to original issue discount income.

PHI believes that its tax position with regard to its cross-border energy lease investments is appropriate based on applicable statutes, regulations and case law and is protesting the IRS adjustments and the unresolved audit issues have been forwarded to the Appeals Office of the IRS. In the event that PHI were not to prevail and were to suffer a total disallowance of the tax benefits and incur imputed original issue discount income due to the recharacterization of the leases as loans, as of December 31, 2008, PHI would have been obligated to pay approximately $520 million in additional federal and state taxes and $83 million of interest. In addition, the IRS could require PHI to pay a penalty of up to 20% on the amount of additional taxes due. PHI

anticipates, however that any additional taxes that it would be required to pay as a result of the disallowance of prior deductions or a recharacterization of leases as loans would be recoverable in the form of lower taxes over the remaining term of the investments.

For further discussion of this matter see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Regulatory and Other Matters — Federal Tax Treatment of Cross-Border Leases” of this Form 10-K.

PHI and its subsidiaries are dependent on their ability to successfully access capital markets. An inability to access capital may adversely affect their businesses.

PHI, Pepco, DPL and ACE all rely on access to both short-term money markets and long-term capital markets as sources of liquidity and to satisfy their capital requirements that are not met by cash flow from their operations. Capital market disruptions, or a downgrade in their respective credit ratings, could increase the cost of borrowing or could prevent the companies from accessing one or more financial markets. Factors that could affect the ability of PHI and its subsidiaries to access one or more financial markets could include, but are not limited to:

· recession or an economic slowdown;

· the bankruptcy of one or more energy companies or financial institutions;

· significant changes in energy prices;

· a terrorist attack or threatened attacks; or

· a significant transmission failure.

In accordance with the requirements of the Sarbanes-Oxley Act of 2002 and the SEC rules thereunder, PHI’s management is responsible for establishing and maintaining internal control over financial reporting and is required to assess annually the effectiveness of these controls. The inability to certify the effectiveness of these controls due to the identification of one or more material weaknesses in these controls also could increase financing costs or could adversely affect the ability to access one or more financial markets.

The funding of future defined benefit pension plan and post-retirement benefit plan obligations is based on assumptions regarding the valuation of future benefit obligations and the performance of plan assets. If market performance decreases plan assets or changes in assumptions regarding the valuation of benefit obligations increase our liabilities, PHI, Pepco, DPL or ACE may be required to make significant unplanned cash contributions to fund these plans.

PHI holds assets in trust to meet its obligations under the PHI Retirement Plan (a defined benefit pension plan) and its postretirement benefit plan. The amounts that PHI is required to contribute (including the amounts for which Pepco, DPL and ACE are responsible) to fund the trusts are determined based on assumptions made as to the valuation of future benefit obligations, and the investment performance of the plan assets. Accordingly, the performance of the capital markets will affect the value of plan assets. A decline in the market value of plan

assets may increase the plan funding requirements to meet the future benefit obligations. In addition, changes in interest rates affect the valuation of the liabilities of the plans. As interest rates decrease, the liabilities increase, potentially requiring additional funding. Demographic changes, such as a change in the expected timing of retirements or changes in life expectancy assumptions, also may increase the funding requirements of the plans. A need for significant additional funding of the plans could have a material adverse effect on the cash flow of PHI, Pepco, DPL and ACE. Future increases in pension plan and other post-retirement plan costs, to the extent they are not recoverable in the base rates of PHI’s utility subsidiaries, could have a material adverse effect on results of operations and financial condition of PHI, Pepco, DPL and ACE.

PHI’s cash flow, ability to pay dividends and ability to satisfy debt obligations depend on the performance of its operating subsidiaries. PHI’s unsecured obligations are effectively subordinated to the liabilities and the outstanding preferred stock of its subsidiaries. (PHI only)

PHI is a holding company that conducts its operations entirely through its subsidiaries, and all of PHI’s consolidated operating assets are held by its subsidiaries. Accordingly, PHI’s cash flow, its ability to satisfy its obligations to creditors and its ability to pay dividends on its common stock are dependent upon the earnings of the subsidiaries and the distribution of such earnings to PHI in the form of dividends. The subsidiaries are separate legal entities and have no obligation to pay any amounts due on any debt or equity securities issued by PHI or to make any funds available for such payment. Because the claims of the creditors of PHI’s subsidiaries and the preferred stockholders of ACE are superior to PHI’s entitlement to dividends, the unsecured debt and obligations of PHI are effectively subordinated to all existing and future liabilities of its subsidiaries and to the rights of the holders of ACE’s preferred stock to receive dividend payments.

Energy companies are subject to adverse publicity which makes them vulnerable to negative regulatory and litigation outcomes.

The energy sector has been among the sectors of the economy that have been the subject of highly publicized allegations of misconduct in recent years. In addition, many utility companies have been publicly criticized for their performance during natural disasters and weather related incidents. Adverse publicity of this nature may render legislatures, regulatory authorities, and other government officials less likely to view energy companies such as PHI and its subsidiaries in a favorable light, and may cause PHI and its subsidiaries to be susceptible to adverse outcomes with respect to decisions by such bodies.

Provisions of the Delaware General Corporation Law may discourage an acquisition of PHI. (PHI only)

As a Delaware corporation, PHI is subject to the business combination law set forth in Section 203 of the Delaware General Corporation Law, which could have the effect of delaying, discouraging or preventing an acquisition of PHI.

Because Pepco is a wholly owned subsidiary of PHI, and each of DPL and ACE is an indirect wholly owned subsidiary of PHI, PHI can exercise substantial control over their dividend policies and businesses and operations. (Pepco, DPL and ACE only)

All of the members of each of Pepco’s, DPL’s and ACE’s board of directors, as well as many of Pepco’s, DPL’s and ACE’s executive officers, are officers of PHI or an affiliate of PHI. Among other decisions, each of Pepco’s, DPL’s and ACE’s board is responsible for decisions regarding payment of dividends, financing and capital raising activities, and acquisition and disposition of assets. Within the limitations of applicable law, and subject to the financial covenants under each company’s respective outstanding debt instruments, each of Pepco’s, DPL’s and ACE’s board of directors will base its decisions concerning the amount and timing of dividends, and other business decisions, on the company’s respective earnings, cash flow and capital structure, but may also take into account the business plans and financial requirements of PHI and its other subsidiaries.

Item 1B. UNRESOLVED STAFF COMMENTS

Pepco Holdings

None.

Pepco

None.

DPL

None.

ACE

None.

Item 2. PROPERTIES

Generation Facilities

The following table identifies the electric generating facilities owned by PHI’s subsidiaries at December 31, 2008.

Electric Generating Facilities			Location	Owner	Generating Capacity (kilowatts)
Coal-Fired Units
	Edge Moor Units 3 and 4		Wilmington, DE	Conectiv Energy a	260,000
	Deepwater Unit 6		Pennsville, NJ	Conectiv Energy a	80,000
					340,000
Oil Fired Units
	Benning Road		Washington, DC	Pepco Energy Services b	550,000
	Edge Moor Unit 5		Wilmington, DE	Conectiv Energy a	450,000
					1,000,000
Combustion Turbines/Combined Cycle Units
	Hay Road Units 1-4		Wilmington, DE	Conectiv Energy a	555,300
	Hay Road Units 5-8		Wilmington, DE	Conectiv Energy a	565,000
	Bethlehem Units 1-8		Bethlehem, PA	Conectiv Energy a	1,130,000
	Buzzard Point		Washington, DC	Pepco Energy Services b	240,000
	Cumberland		Millville, NJ	Conectiv Energy a	84,000
	Sherman Avenue		Vineland, NJ	Conectiv Energy a	81,000
	Middle		Rio Grande, NJ	Conectiv Energy a	77,000
	Carll’s Corner		Upper Deerfield Twp., NJ	Conectiv Energy a	73,000
	Cedar		Cedar Run, NJ	Conectiv Energy a	68,000
	Missouri Avenue		Atlantic City, NJ	Conectiv Energy a	60,000
	Mickleton		Mickleton, NJ	Conectiv Energy a	59,000
	Christiana		Wilmington, DE	Conectiv Energy a	45,000
	Edge Moor Unit 10		Wilmington, DE	Conectiv Energy a	13,000
	West		Marshallton, DE	Conectiv Energy a	15,000
	Delaware City		Delaware City, DE	Conectiv Energy a	16,000
	Tasley		Tasley, VA	Conectiv Energy a	26,000
					3,107,300
Landfill Gas-Fired Units
	Fauquier Landfill Project		Fauquier County, VA	Pepco Energy Services b	2,000
	Eastern Landfill Project		Baltimore County, MD	Pepco Energy Services d	3,000
	Bethlehem Landfill Project		Northampton, PA	Pepco Energy Services c	5,000
					10,000
Solar Photovoltaic
		Atlantic City Convention Center	Atlantic City, NJ	Pepco Energy Services e	2,000

Other Natural Gas Fired Units
		Deepwater Unit 1	Pennsville, NJ	Conectiv Energy a	78,000

Diesel Units
	Crisfield		Crisfield, MD	Conectiv Energy a	10,000
	Bayview		Bayview, VA	Conectiv Energy a	12,000
					22,000
Total Electric Generating Capacity					4,559,300

a	All holdings of Conectiv Energy are owned by its various subsidiaries.

b	These facilities are owned by a subsidiary of Pepco Energy Services.

c	This facility is owned by Bethlehem Renewable Energy LLC, of which Pepco Energy Services holds a 80% membership interest.

d	This facility is owned by Eastern Landfill Gas, LLC, of which Pepco Energy Services holds a 75% membership interest.

e	This facility is owned by Pepco Energy Services, Inc.

The preceding table sets forth the net summer electric generating capacity of the electric generating plants owned by Pepco Holdings’ subsidiaries. Although the generating capacity of these facilities may be higher during the winter months, the plants operated by PHI’s subsidiaries are used to meet summer peak loads that are generally higher than winter peak loads. Accordingly, the summer generating capacity more accurately reflects the operational capability of the plants.

Transmission and Distribution Systems

On a combined basis, the electric transmission and distribution systems owned by Pepco, DPL and ACE at December 31, 2008, taking into account the sale by DPL of its Virginia retail electric distribution and wholesale electric transmission assets in January 2008, consisted of approximately 3,200 transmission circuit miles of overhead lines, 300 transmission circuit miles of underground cables, 18,200 distribution circuit miles of overhead lines, and 15,500 distribution circuit miles of underground cables, primarily in their respective service territories. DPL and ACE own and operate distribution system control centers in New Castle, Delaware and Mays Landing, New Jersey, respectively. Pepco also operates a distribution system control center in Maryland. The computer equipment and systems contained in Pepco’s control center are financed through a sale and leaseback transaction.

DPL has a liquefied natural gas plant located in Wilmington, Delaware, with a storage capacity of approximately 3 million gallons and an emergency sendout capability of 48,210 Mcf per day. DPL owns eight natural gas city gate stations at various locations in New Castle County, Delaware. These stations have a total sendout capacity of 255,500 Mcf per day. DPL also owns approximately 111 pipeline miles of natural gas transmission mains, 1,802 pipeline miles of natural gas distribution mains, and 1,301 natural gas pipeline miles of service lines. The natural gas transmission mains include approximately 7 miles of pipeline, 10% of which is owned and used by DPL for natural gas operations, and 90% of which is owned and used by Conectiv Energy for delivery of natural gas to electric generation facilities.

Substantially all of the transmission and distribution property, plant and equipment owned by each of Pepco, DPL and ACE is subject to the liens of the respective mortgages under which the companies issue First Mortgage Bonds. See Note (11), “Debt” to the consolidated financial statements of PHI set forth in Item 8 of this Form 10-K.

Item 3. LEGAL PROCEEDINGS

Pepco Holdings

Other than litigation incidental to PHI and its subsidiaries’ business, PHI is not a party to, and PHI and its subsidiaries’ property is not subject to, any material pending legal proceedings except as described in Note (16), “Commitments and Contingencies—Legal Proceedings” to the consolidated financial statements of PHI set forth in Item 8 of this Form 10-K.

Pepco

Other than litigation incidental to its business, Pepco is not a party to, and its property is not subject to, any material pending legal proceedings except as described in Note (13), “Commitments and Contingencies—Legal Proceedings” to the financial statements of Pepco set forth in Item 8 of this Form 10-K.

DPL

Other than litigation incidental to its business, DPL is not a party to, and its property is not subject to, any material pending legal proceedings except as described in Note (14), “Commitments and Contingencies—Legal Proceedings” to the financial statements of DPL set forth in Item 8 of this Form 10-K.

ACE

Other than litigation incidental to its business, ACE is not a party to, and its property is not subject to, any material pending legal proceedings except as described in Note (14), “Commitments and Contingencies—Legal Proceedings” to the financial statements of ACE set forth in Item 8 of this Form 10-K.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Pepco Holdings

None.

INFORMATION FOR THIS ITEM IS NOT REQUIRED FOR PEPCO, DPL, AND ACE AS THEY MEET THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I(1)(a) AND (b) OF FORM 10-K AND THEREFORE ARE FILING THIS FORM WITH THE REDUCED FILING FORMAT.

Part II

Item 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The New York Stock Exchange is the principal market on which Pepco Holdings common stock is traded. The following table presents the dividends declared per share on the Pepco Holdings common stock and the high and low sales prices for the common stock based on composite trading as reported by the New York Stock Exchange during each quarter in the last two fiscal years.

Period	Dividends			Price Range
	Per Share			High		Low
2008 :
First Quarter	$	.27	$	29.640	$	23.800
Second Quarter		.27		27.385		24.010
Third Quarter		.27		26.160		21.610
Fourth Quarter		.27		23.930		15.270
	$	1.08
2007 :
First Quarter	$	.26	$	29.280	$	24.890
Second Quarter		.26		30.710		26.890
Third Quarter		.26		29.280		24.200
Fourth Quarter		.26		30.100		25.730
	$	1.04

See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources and Liquidity — Capital Requirements — Dividends” of this Form 10-K for information regarding restrictions on the ability of PHI and its subsidiaries to pay dividends.

At December 31, 2008, there were approximately 61,347 holders of record of Pepco Holdings common stock.

Dividends

On January 22, 2009, the Board of Directors declared a dividend on common stock of 27 cents per share payable March 31, 2009, to shareholders of record on March 10, 2009.

PHI Subsidiaries

All of the common equity of Pepco, DPL and ACE is owned directly or indirectly by PHI. Pepco, DPL and ACE each customarily pays dividends on its common stock on a quarterly basis based on its earnings, cash flow and capital structure, and after taking into account the business plans and financial requirements of PHI and its other subsidiaries.

Pepco

All of Pepco’s common stock is held by Pepco Holdings. The table below presents the aggregate amount of common stock dividends paid by Pepco to PHI during each quarter in the last two fiscal years.

Period		Aggregate Dividends
2008 :
First Quarter	$	20,000,000
Second Quarter		-
Third Quarter		44,000,000
Fourth Quarter		25,000,000
	$	89,000,000
2007 :
First Quarter	$	15,000,000
Second Quarter		14,000,000
Third Quarter		45,000,000
Fourth Quarter		12,000,000
	$	86,000,000

DPL

All of DPL’s common stock is held by Conectiv. The table below presents the aggregate amount of common stock dividends paid by DPL to Conectiv during each quarter in the last two fiscal years. Dividends received by Conectiv were used to pay down short-term debt owed to PHI.

Period		Aggregate Dividends
2008 :
First Quarter	$	27,000,000
Second Quarter		15,000,000
Third Quarter		-
Fourth Quarter		10,000,000
	$	52,000,000
2007 :
First Quarter	$	8,000,000
Second Quarter		19,000,000
Third Quarter		-
Fourth Quarter		12,000,000
	$	39,000,000

ACE

All of ACE’s common stock is held by Conectiv. The table below presents the aggregate amount of common stock dividends paid by ACE to Conectiv during each quarter in the last two fiscal years. Dividends received by Conectiv were used to pay down short-term debt owed to PHI.

Period		Aggregate Dividends
2008 :
First Quarter	$	-
Second Quarter		31,000,000
Third Quarter		-
Fourth Quarter		15,000,000
	$	46,000,000
2007 :
First Quarter	$	20,000,000
Second Quarter		10,000,000
Third Quarter		20,000,000
Fourth Quarter		-
	$	50,000,000

Recent Sales of Unregistered Equity Securities

Pepco Holdings

None.

Pepco

None.

DPL

None.

ACE

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

Pepco Holdings

None.

Pepco

None.

DPL

None.

ACE

None.

Item 6 SELECTED FINANCIAL DATA

PEPCO HOLDINGS CONSOLIDATED FINANCIAL HIGHLIGHTS

		2008			2007			2006			2005			2004
	(in millions, except per share data)
Consolidated Operating Results
Total Operating Revenue	$	10,700	(a)	$	9,366		$	8,363		$	8,066		$		7,223
Total Operating Expenses		9,932			8,560	(c)		7,670	(e)		7,160	(g)(h)(i)			6,451
Operating Income		768			806			693			906				772
Other Expenses		300			284			283	(f)		286				341
Preferred Stock Dividend Requirements of Subsidiaries		-			-			1			3				3
Income Before Income Tax Expense and Extraordinary Item		468			522			409			617				428
Income Tax Expense		168	(a)(b)		188	(d)		161			255	(j)			167	(k)
Income Before Extraordinary Item		300			334			248			362				261
Extraordinary Item		-			-			-			9				-
Net Income		300			334			248			371				261
Earnings Available for Common Stock		300			334			248			371				261

Common Stock Information
Basic Earnings Per Share of Common Stock Before Extraordinary Item	$	1.47		$	1.72		$	1.30		$	1.91		$		1.48
Basic - Extraordinary Item Per Share of Common Stock		-			-			-			.05				-
Basic Earnings Per Share of Common Stock		1.47			1.72			1.30			1.96				1.48
Diluted Earnings Per Share of Common Stock Before Extraordinary Item		1.47			1.72			1.30			1.91				1.48
Diluted - Extraordinary Item Per Share of Common Stock		-			-			-			.05				-
Diluted Earnings Per Share of Common Stock		1.47			1.72			1.30			1.96				1.48
Cash Dividends Per Share of Common Stock		1.08			1.04			1.04			1.00				1.00
Year-End Stock Price		17.76			29.33			26.01			22.37				21.32
Net Book Value per Common Share		19.14			20.04			18.82			18.88				17.74

Weighted Average Shares Outstanding		204			194			191			189				177

Other Information
Investment in Property, Plant and Equipment	$	12,926		$	12,307		$	11,820		$	11,441		$		11,109
Net Investment in Property, Plant and Equipment		8,314			7,877			7,577			7,369				7,152
Total Assets		16,475			15,111			14,244			14,039				13,375

Capitalization
Short-term Debt	$	465		$	289		$	350		$	156		$		320
Long-term Debt		4,859			4,175			3,769			4,203				4,362
Current Maturities of Long-Term Debt and Project Funding		85			332			858			470				516
Transition Bonds issued by ACE Funding		401			434			464			494				523
Capital Lease Obligations due within one year		6			6			6			5				5
Capital Lease Obligations		99			105			111			117				122
Long-Term Project Funding		19			21			23			26				65
Minority Interest		6			6			24			46				55
Common Shareholders’ Equity		4,190			4,018			3,612			3,584				3,339
Total Capitalization	$	10,130		$	9,386		$	9,217		$	9,101		$		9,307

(a)	Includes a pre-tax charge of $124 million ($86 million after-tax) related to the adjustment to the equity value of cross-border energy lease investments, and included in Income Taxes is a $7 million after-tax charge for the additional interest accrued on the related tax obligation.
(b)	Includes $23 million of after-tax net interest income on uncertain and effectively settled tax positions (primarily associated with the reversal of previously accrued interest payable resulting from the final and tentative settlements, respectively, with the IRS on the like-kind exchange and mixed service cost issues and a claim made with the IRS related to the tax reporting for fuel over- and under-recoveries) and a benefit of $8 million (including a $3 million correction of prior period errors) related to additional analysis of deferred tax balances completed in 2008.
(c)	Includes $33 million ($20 million after-tax) from settlement of Mirant bankruptcy claims.
(d)	Includes $20 million ($18 million net of fees) benefit related to Maryland income tax settlement.
(e)	Includes $19 million of impairment losses ($14 million after-tax) related to certain energy services business assets.
(f)	Includes $12 million gain ($8 million after-tax) on the sale of Conectiv Energy’s equity interest in a joint venture which owns a wood burning cogeneration facility.
(g)	Includes $68 million ($41 million after-tax) gain from sale of non-utility land owned by Pepco at Buzzard Point.
(h)	Includes $71 million ($42 million after-tax) gain (net of customer sharing) from settlement of Mirant bankruptcy claims.
(i)	Includes $13 million ($9 million after-tax) related to PCI’s liquidation of a financial investment that was written off in 2001.
(j)	Includes $11 million in income tax expense related to the mixed service cost issue under IRS Revenue Ruling 2005-53.
(k)	Includes a $20 million charge related to an IRS settlement. Also includes $13 million tax benefit related to issuance of a local jurisdiction’s final consolidated tax return regulations .

Item 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The information required by this item is contained herein, as follows:

Registrants		Page No.
Pepco Holdings		41
Pepco		104
DPL		116
ACE		129

THIS PAGE LEFT INTENTIONALLY BLANK.

PEPCO HOLDINGS

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

PEPCO HOLDINGS, INC.

GENERAL OVERVIEW

In 2008, 2007 and 2006, respectively, PHI’s Power Delivery operations produced 51%, 56%, and 61% of PHI’s consolidated operating revenues (including revenues from intercompany transactions) and 72%, 66%, and 67% of PHI’s consolidated operating income (including income from intercompany transactions).

The Power Delivery business consists primarily of the transmission, distribution and default supply of electricity, which for 2008, 2007, and 2006, was responsible for 94%, 94%, and 95%, respectively, of Power Delivery’s operating revenues. The distribution of natural gas contributed 6%, 6% and 5% of Power Delivery’s operating revenues in 2008, 2007 and 2006, respectively. Power Delivery represents one operating segment for financial reporting purposes.

The Power Delivery business is conducted by PHI’s three utility subsidiaries: Potomac Electric Power Company (Pepco), Delmarva Power & Light Company (DPL) and Atlantic City Electric Company (ACE). Each of these companies is a regulated public utility in the jurisdictions that comprise its service territory. Each company is responsible for the delivery of electricity and, in the case of DPL, natural gas in its service territory, for which it is paid tariff rates established by the applicable local public service commission. Each company also supplies electricity at regulated rates to retail customers in its service territory who do not elect to purchase electricity from a competitive energy supplier. The regulatory term for this supply service varies by jurisdiction as follows:

Delaware

Standard Offer Service (SOS)

District of Columbia

SOS

Maryland

SOS

New Jersey

Basic Generation Service (BGS)

Effective January 2, 2008, DPL sold its retail electric distribution assets and its wholesale electric transmission assets in Virginia. Prior to that date, DPL supplied electricity at regulated rates to retail customers in its service territory who did not elect to purchase electricity from a competitive energy supplier, which is referred to in Virginia as Default Service.

In this Form 10-K, the supply service obligations of the respective utility subsidiaries are referred to generally as Default Electricity Supply.

Pepco, DPL and ACE are also responsible for the transmission of wholesale electricity into and across their service territories. The rates each company is permitted to charge for the wholesale transmission of electricity are regulated by the Federal Energy Regulatory Commission (FERC). Transmission rates are updated annually based on a FERC-approved formula methodology.

PEPCO HOLDINGS

The profitability of the Power Delivery business depends on its ability to recover costs and earn a reasonable return on its capital investments through the rates it is permitted to charge. The Power Delivery operating results historically have been seasonal, generally producing higher revenue and income in the warmest and coldest periods of the year. Operating results also can be affected by economic conditions, energy prices and the impact of energy efficiency measures on customer usage of electricity.

In connection with its approval of new electric service distribution base rates for Pepco and DPL in Maryland, effective in June 2007 (the 2007 Maryland Rate Orders), the Maryland Public Service Commission (MPSC) approved a bill stabilization adjustment mechanism (BSA) for retail customers. For customers to which the BSA applies, Pepco and DPL recognize distribution revenue based on an approved distribution charge per customer. From a revenue recognition standpoint, the BSA thus decouples the distribution revenue recognized in a reporting period from the amount of power delivered during the period. This change in the reporting of distribution revenue has the effect of eliminating changes in retail customer usage (whether due to weather conditions, energy prices, energy efficiency programs or other reasons) as a factor having an impact on reported revenue. As a consequence, the only factors that will cause distribution revenue from retail customers in Maryland to fluctuate from period to period are changes in the number of customers and changes in the approved distribution charge per customer.

The Competitive Energy businesses provide competitive generation, marketing and supply of electricity and gas, and related energy management services primarily in the mid-Atlantic region. These operations are conducted through:

·	Subsidiaries of Conectiv Energy Holding Company (collectively, Conectiv Energy), which engage primarily in the generation and wholesale supply and marketing of electricity and gas within the PJM Interconnection, LLC (PJM) and Independent System Operator - New England (ISONE) wholesale markets

·	Pepco Energy Services, Inc. and its subsidiaries (collectively, Pepco Energy Services), which provides retail energy supply and energy services primarily to commercial, industrial, and governmental customers.

Each of Conectiv Energy and Pepco Energy Services is a separate operating segment for financial reporting purposes. For the years ended December 31, 2008, 2007 and 2006, the operating revenues of the Competitive Energy businesses (including revenue from intercompany transactions) were equal to 53%, 48%, and 43%, respectively, of PHI’s consolidated operating revenues, and the operating income of the Competitive Energy businesses (including operating income from intercompany transactions) was 36%, 26%, and 20% of PHI’s consolidated operating income for the years ended December 31, 2008, 2007 and 2006, respectively. For the years ended December 31, 2008, 2007 and 2006, amounts equal to 7%, 10%, and 13% respectively, of the operating revenues of the Competitive Energy businesses were attributable to electric energy and capacity, and natural gas sold to the Power Delivery segment.

Conectiv Energy’s primary objective is to maximize the value of its generation fleet by leveraging its operational and fuel flexibilities. Pepco Energy Services’ primary objective is to capture retail energy supply and service opportunities predominantly in the mid-Atlantic region.

PEPCO HOLDINGS

The financial results of the Competitive Energy business can be significantly affected by wholesale and retail energy prices, the cost of fuel and gas to operate the Conectiv Energy plants, and the cost of purchased energy necessary to meet its power and gas supply obligations.

The Competitive Energy businesses, like the Power Delivery business, are seasonal, and therefore weather patterns can have a material impact on operating results.

Through its subsidiary Potomac Capital Investment Corporation (PCI), PHI maintains a portfolio of cross-border energy sale-leaseback transactions with a book value at December 31, 2008 of approximately $1.3 billion. This activity constitutes a fourth operating segment, which is designated as “Other Non-Regulated,” for financial reporting purposes. For a discussion of PHI’s cross-border leasing transactions, see “Regulatory and Other Matters — PHI’s Cross-Border Energy Lease Investments” in this Management’s Discussion and Analysis.

IMPACT OF THE CURRENT CAPITAL AND CREDIT MARKET DISRUPTIONS

The recent disruptions in the capital and credit markets, combined with the volatility of energy prices, have had an impact on several aspects of PHI’s businesses. While these conditions have required PHI and its subsidiaries to make certain adjustments in their financial management activities, PHI believes that it and its subsidiaries currently have sufficient liquidity to fund their operations and meet their financial obligations. These market conditions, should they continue, could have a negative effect on PHI’s financial condition, results of operations and cash flows.

Liquidity Requirements

PHI and its subsidiaries depend on access to the capital and credit markets to meet their liquidity and capital requirements. To meet their liquidity requirements, PHI’s utility subsidiaries and its Competitive Energy businesses historically have relied on the issuance of commercial paper and short-term notes and on bank lines of credit to supplement internally generated cash from operations. PHI’s primary credit source is its $1.5 billion syndicated credit facility, which can be used by PHI and its utility subsidiaries to borrow funds, obtain letters of credit and support the issuance of commercial paper. This facility is in effect until May 2012 and consists of commitments from 17 lenders, no one of which is responsible for more than 8.5% of the total $1.5 billion commitment. The terms and conditions of the facility are more fully described below under the heading “Capital Resources and Liquidity ¾ Credit Facilities.”

Due to the capital and credit market disruptions, the market for commercial paper in the latter part of 2008 was severely restricted for most companies. As a result, PHI and its subsidiaries have not been able to issue commercial paper on a day-to-day basis either in amounts or with maturities that they have typically required for cash management purposes. To address the challenges posed by the current capital and credit market environment and to ensure that PHI and its subsidiaries will continue to have sufficient access to cash to meet their liquidity needs, PHI and its subsidiaries have undertaken a number of actions, including the following:

·	PHI has conducted a review to identify cash and liquidity conservation measures, including opportunities to reduce collateral obligations and to defer capital expenditures due to lower than anticipated growth. Several measures to reduce

PEPCO HOLDINGS

collateral obligations and expenditures have been taken. Additional measures could be undertaken if conditions warrant.

·	PHI issued an additional 16.1 million shares of the Company’s common stock at a price per share of $16.50 in November 2008, for net proceeds of $255 million.

·	PHI added a 364-day $400 million credit facility in November 2008.

·	In November 2008, ACE issued $250 million of First Mortgage Bonds, 7.75% Series due November 15, 2018.

·	In November 2008, DPL issued $250 million of First Mortgage Bonds, 6.40% Series due December 1, 2013.

·	In December 2008, Pepco issued $250 million of First Mortgage Bonds, 7.90% Series due December 15, 2038.

At December 31, 2008, the amount of cash, plus borrowing capacity under the syndicated credit facility and PHI’s new 364-day credit facility, available to meet the liquidity needs of PHI on a consolidated basis totaled $1.5 billion, of which $843 million consisted of the combined cash and borrowing capacity of PHI’s utility subsidiaries. During the months of January and February 2009, the average daily amount of the combined cash and borrowing capacity of PHI on a consolidated basis was $1.4 billion, and of its utility subsidiaries was $831 million. This decrease in liquidity of PHI on a consolidated basis was primarily due to increased collateral requirements of the Competitive Energy businesses. During the months of January and February 2009, the combined cash and borrowing capacity of PHI’s utility subsidiaries ranged from a low of $673 million to a high of $1 billion.

Collateral Requirements of the Competitive Energy Businesses

In conducting its retail energy sales business, Pepco Energy Services typically enters into electricity and natural gas sales contracts under which it is committed to supply the electricity or natural gas requirements of its retail customers over a specified period at agreed upon prices. Generally, Pepco Energy Services acquires the energy to serve this load by entering into wholesale purchase contracts. To protect the respective parties against the risk of nonperformance by the other party, these wholesale purchase contracts typically impose collateral requirements that are tied to changes in the price of the contract commodity. In periods of energy market price volatility, these collateral obligations can fluctuate materially on a day-to-day basis.

Pepco Energy Services’ practice of offsetting its retail energy sale obligations with corresponding wholesale purchases of energy has the effect of substantially reducing the exposure of its margins to energy price fluctuations. In addition, the non-performance risks associated with its retail energy sales are relatively low due to the inclusion of governmental entities among its customers and the purchase of insurance on a significant portion of its commercial and other accounts receivable. However, because its retail energy sales contracts typically do not have collateral obligations, during periods of declining energy prices Pepco Energy Services is exposed to the asymmetrical risk of having to post collateral under its

PEPCO HOLDINGS

wholesale purchase contracts without receiving a corresponding amount of collateral from its retail customers. In the second half of 2008, the decrease in energy prices has caused a significant increase in the collateral obligations of Pepco Energy Services.

In addition, Conectiv Energy and Pepco Energy Services in the ordinary course of business enter into various contracts to buy and sell electricity, fuels and related products, including derivative instruments, designed to reduce their financial exposure to changes in the value of their assets and obligations due to energy price fluctuations. These contracts also typically have collateral requirements.

Depending on the contract terms, the collateral required to be posted by Pepco Energy Services and Conectiv Energy can be of varying forms, including cash and letters of credit. As of December 31, 2008, the Competitive Energy businesses had posted net cash collateral of $331 million and letters of credit of $558 million.

At December 31, 2008, the amount of cash, plus borrowing capacity under the syndicated credit facility and PHI’s new 364-day credit facility, available to meet the liquidity needs of the Competitive Energy businesses on a consolidated basis totaled $684 million. During the months of January and February 2009, the combined cash and borrowing capacity available to PHI’s Competitive Energy businesses ranged from a low of $378 million to a high of $757 million.

Ongoing Monitoring of Financial and Market Conditions

PHI monitors its liquidity position on a daily basis and routinely conducts stress testing to assess the impact of changes in commodity prices on its collateral requirements. Stress testing conducted over the months of January and February 2009, based on contractual rights and obligations in effect at the time, indicated that a 1% change in forward prices corresponding to the periods under the various contractual arrangements with respect to which collateral was required would have caused an estimated change of approximately $6 million in Conectiv Energy’s net collateral requirements and a change of approximately $17 million in Pepco Energy Services’ net collateral requirements. PHI’s net collateral obligations decrease when forward prices increase and increase when forward prices decrease.

PHI also closely monitors its credit ratings and outlooks and those of its rated subsidiaries, and computes the hypothetical effect that changes in credit ratings would have on collateral requirements and the cost of capital. Based on contractual provisions in effect at December 31, 2008, a one-level downgrade in the unsecured debt credit ratings of PHI and each of its rated subsidiaries, which would decrease ratings to below “investment grade,” would increase the collateral obligations of PHI and its subsidiaries by up to $462 million.

Counterparty Credit Risk

PHI is exposed to the risk that the counterparties to contracts may fail to meet their contractual payment obligations or may fail to deliver purchased commodities or services at the contracted price. PHI attempts to minimize these risks through, among other things, formal credit policies, regular assessments of counterparty creditworthiness, and the establishment of a credit limit for each counterparty.

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Pension and Postretirement Benefit Plans

PHI and its subsidiaries sponsor pension and postretirement benefit plans for their employees. While the plans have not experienced any significant impact in terms of liquidity or counterparty exposure due to the disruption of the capital and credit markets, the stock market declines have caused a decrease in the market value of benefit plan assets over the twelve months ended December 31, 2008. The negative return did not have an impact on PHI’s results of operations for 2008; however, this reduction in benefit plan assets will result in increased pension and postretirement benefit costs in future years.

PHI currently estimates that its net periodic pension benefit cost will be approximately $85 million in 2009, as compared to $24 million in 2008 . The utility subsidiaries are generally responsible for approximately 80% to 85% of the total PHI net periodic pension benefit cost. Approximately 30% of net periodic pension benefit cost is capitalized.

PHI expects to make a discretionary tax deductible contribution to the pension plan in 2009 of approximately $300 million. The utility subsidiaries will be responsible for funding their share of the contribution of approximately $170 million for Pepco, $10 million for DPL and $60 million for ACE. PHI Service Company is responsible to fund the remaining share of the contribution. PHI will monitor the markets and evaluate any additional discretionary funding needs later in the year. See Note (10), “Pensions and Other Postretirement Benefits,” to the consolidated financial statements of PHI set forth in Item 8 of this Form 10-K.

BUSINESS STRATEGY

PHI’s business strategy is to remain a mid-Atlantic regional diversified energy delivery utility and competitive energy services company focused on value creation and operational excellence. The components of this strategy include:

Achieving earnings growth in the Power Delivery business by focusing on transmission and distribution infrastructure investments and constructive regulatory outcomes, while maintaining a high level of operational excellence.

Supplementing PHI’s utility earnings through competitive energy businesses that focus on serving the competitive wholesale and retail markets primarily within the PJM Regional Transmission Organization (PJM RTO) market.

Pursuing technologies and practices that promote energy efficiency, energy conservation and the reduction of greenhouse gas emissions.

To further this business strategy, PHI may from time to time examine a variety of transactions involving its existing businesses, including the entry into joint ventures or the disposition of one or more businesses, as well as possible acquisitions. PHI also may reassess or refine the components of its business strategy as it deems necessary or appropriate in response to a wide variety of factors, including the requirements of its businesses, competitive conditions and regulatory requirements.

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Strategic Analysis of Pepco Energy Services’ Retail Energy Supply Business

Over the past several months, PHI has been conducting a strategic analysis of the retail energy supply business of Pepco Energy Services. This review has included, among other things, the evaluation of potential alternative supply arrangements to reduce collateral requirements or a possible restructuring, sale or wind down of the business. As discussed above under the heading, “Impact of Current Capital and Credit Market Disruption -- Collateral Requirements of the Competitive Energy Businesses,” as energy prices have declined in the second half of 2008, the collateral that Pepco Energy Services has been required to post to secure its obligations under its wholesale energy purchase contracts has increased substantially. Among the factors being considered is the return PHI earns by investing capital in the retail energy supply business as compared to alternative investments. PHI expects the retail energy supply business to remain profitable based on its existing contract backlog and the margins that have been locked in with corresponding wholesale energy purchase contracts. The increased cost of capital associated with its collateral obligations has been factored into its retail pricing and, as a consequence, PES is experiencing reduced retail customer retention levels and reduced levels of new retail customer acquisitions.

EARNINGS OVERVIEW

Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007

PHI’s net income for the year ended December 31, 2008 was $300 million, or $1.47 per share, compared to $334 million, or $1.72 per share, for the year ended December 31, 2007.

Net income for the year ended December 31, 2008, included the charges set forth below in the Other Non-Regulated operating segment, which are presented net of federal and state income taxes and are in millions of dollars:

	Adjustment to the equity value of cross-border energy lease investments to reflect the impact of a change in assumptions regarding the estimated timing of the tax benefits	$	(86 )
	Additional interest accrued under Financial Accounting Standards Board Interpretation No. 48 (FIN 48) related to the estimated federal and state income tax obligations from the change in assumptions regarding the estimated timing of the tax benefits on cross-border energy lease investments	$	(7)

Net income for the year ended December 31, 2007, included the credits set forth below in the Power Delivery operating segment, which are presented net of federal and state income taxes and are in millions of dollars.

	Mirant Corporation (Mirant) bankruptcy damage claims settlement	$	20
	Maryland income tax settlement, net of fees	$	18

Excluding the items listed above, net income would have been $393 million, or $1.93 per share, in 2008 and $296 million, or $1.53 per share, in 2007.

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PHI’s net income for the years ended December 31, 2008 and 2007, by operating segment, is set forth in the table below (in millions of dollars):

		2008		2007		Change
Power Delivery	$	250	$	232	$	18
Conectiv Energy		122		73		49
Pepco Energy Services		39		38		1
Other Non-Regulated		(59)		46		(105)
Corp. & Other		(52)		(55)		3
Total PHI Net Income	$	300	$	334	$	(34)

Discussion of Operating Segment Net Income Variances:

Power Delivery’s $18 million increase in earnings is primarily due to the following:

·	$38 million increase due to the impact of the distribution base rate orders ($23 million related to Maryland, which became effective in June 2007 for Pepco and DPL, and $15 million related to the District of Columbia, which became effective in February 2008 for Pepco).

·	$23 million increase due to favorable income tax adjustments primarily related to FIN 48 interest impact.

·	$15 million increase due to FERC network transmission service rate changes in June 2007 and 2008.

·	$20 million decrease due to the Mirant bankruptcy damage claims settlement in 2007.

·	$18 million decrease due to the Maryland tax settlement, net of fees in 2007.

·	$16 million decrease primarily due to lower sales (primarily decreased customer usage, including an unfavorable impact of weather compared to 2007).

·	$5 million decrease due to higher operating and maintenance costs (primarily higher employee-related costs and bad-debt expense).

Conectiv Energy’s $49 million increase in earnings is primarily due to the following:

·	$43 million increase in Merchant Generation & Load Service primarily due to:

(i)

an increase of $22 million primarily due to short-term sales of firm natural gas and natural gas transportation and storage rights, the dual-fuel capability of the combined cycle mid-merit units (fuel switching), cross-commodity hedging (use of natural gas to hedge power positions), and the opportunities created by the mid-merit combined cycle units’ operating flexibility (option value) in conjunction with short-term power and fuel price volatility,

(ii)

an increase of $28 million due to higher PJM capacity prices net of capacity hedges,

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(iii)

an increase of $11 million due to the application of fair value accounting treatment and associated settlements with respect to excess coal hedges accounted for at fair value,

	(iv)	a decrease of $9 million due to a lower of cost or market adjustment to the value of oil inventory held at the power plants at year-end 2008, and
	(v)	a decrease of $9 million due to lower sales of emissions allowances.

$9 million increase in Energy Marketing primarily due to increased short-term power desk margins, and new default electricity supply contracts.

$5 million increase due to favorable income tax adjustments primarily due to the reversal of FIN 48 interest accruals.

$10 million decrease primarily due to higher plant maintenance.

Pepco Energy Services’ $1 million increase in earnings is primarily due to the following:

$6 million increase resulting from higher volumes due to growth in the retail gas supply business.

$2 million increase in the retail electricity business due to more favorable congestion costs; partially offset by higher cost of electricity and other electricity supply costs.

$2 million increase resulting from favorable income tax adjustments related to deferred income taxes.

$9 million decrease for the generation plants primarily due to Reliability Pricing Model (RPM) related charges.

Other Non-Regulated’s $105 million decrease in earnings is primarily due to the following:

$86 million after-tax charge resulting from a $124 million adjustment to the equity value of PHI’s cross-border energy lease investments.

$7 million after-tax charge for interest accrued under FIN 48 related to estimated federal and state income tax obligations for the period from January 1, 2001 through June 30, 2008 resulting from the change in assumptions regarding the estimated timing of the tax benefits of PHI’s cross-border energy lease investments.

$9 million decrease primarily due to favorable valuation adjustments to certain other PCI portfolio investments in 2007; partially offset by lower interest expense.

Corporate and Other’s $3 million increase in earnings is primarily due to lower interest expense and corporate governance costs.

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CONSOLIDATED RESULTS OF OPERATIONS

The following results of operations discussion compares the year ended December 31, 2008, to the year ended December 31, 2007. All amounts in the tables (except sales and customers) are in millions.

Operating Revenue

A detail of the components of PHI’s consolidated operating revenue is as follows:


	2008		2007		Change
Power Delivery	$	5,487	$	5,244	$	243
Conectiv Energy		3,047		2,206		841
Pepco Energy Services		2,648		2,309		339
Other Non-Regulated		(60)		76		(136)
Corp. & Other		(422)		(469)		47
Total Operating Revenue	$	10,700	$	9,366	$	1,334

Power Delivery

The following table categorizes Power Delivery’s operating revenue by type of revenue.


	2008		2007		Change
Regulated T&D Electric Revenue	$	1,690	$	1,592	$	98
Default Supply Revenue		3,413		3,295		118
Other Electric Revenue		66		66		-
Total Electric Operating Revenue		5,169		4,953		216

Regulated Gas Revenue		204		211		(7)
Other Gas Revenue		114		80		34
Total Gas Operating Revenue		318		291		27

Total Power Delivery Operating Revenue	$	5,487	$	5,244	$	243

Regulated Transmission and Distribution (T&D) Electric Revenue includes revenue from the delivery of electricity, including the delivery of Default Electricity Supply, by PHI’s utility subsidiaries to customers within their service territories at regulated rates. Regulated T&D Electric Revenue also includes transmission service revenue that PHI’s utility subsidiaries receive as transmission owners from PJM.

Default Supply Revenue is the revenue received for Default Electricity Supply. The costs related to Default Electricity Supply are included in Fuel and Purchased Energy and Other Services Cost of Sales. Default Supply Revenue also includes revenue from transition bond charges and other restructuring related revenues.

Other Electric Revenue includes work and services performed on behalf of customers, including other utilities, which is not subject to price regulation. Work and services includes

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mutual assistance to other utilities, highway relocation, rentals of pole attachments, late payment fees, and collection fees.

Regulated Gas Revenue consists of revenues from on-system natural gas sales and the transportation of natural gas for customers by DPL within its service territories at regulated rates.

Other Gas Revenue consists of DPL’s off-system natural gas sales and the sale of excess system capacity.

In response to an order issued by the New Jersey Board of Public Utilities (NJBPU) regarding changes to ACE’s retail transmission rates, ACE has established deferred accounting treatment for the difference between the rates that ACE is authorized to charge its customers for the transmission of Default Electricity Supply and the cost that ACE incurs. Under the deferral arrangement, any over or under recovery is deferred as part of Deferred Electric Service Costs pending an adjustment of retail rates in a future proceeding. As a consequence of the order, effective January 1, 2008, ACE’s retail transmission revenue is being recorded as Default Supply Revenue, rather than as Regulated T&D Electric Revenue, thereby conforming to the practice of PHI’s other utility subsidiaries, which previously established deferred accounting treatment for any over or under recovery of retail transmission rates relative to the cost incurred. ACE’s retail transmission revenue for the period prior to January 1, 2008 has been reclassified to Default Supply Revenue in order to conform to the current period presentation.

Electric Operating Revenue

Regulated T&D Electric Revenue
	2008		2007		Change

Residential	$	580	$	579	$	1
Commercial		746		720		26
Industrial		29		26		3
Other		335		267		68
Total Regulated T&D Electric Revenue	$	1,690	$	1,592	$	98

Other Regulated T&D Electric Revenue consists primarily of (i) transmission service revenue, (ii) revenue from the resale of energy and capacity under power purchase agreements between Pepco and unaffiliated third parties in the PJM RTO market, and (iii) either (a) a positive adjustment equal to the amount by which revenue from Maryland retail distribution sales falls short of the revenue that Pepco and DPL are entitled to earn based on the distribution charge per customer approved in the 2007 Maryland Rate Orders or (b) a negative adjustment equal to the amount by which revenue from such distribution sales exceeds the revenue that Pepco and DPL are entitled to earn based on the approved distribution charge per customer (a Revenue Decoupling Adjustment).

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Regulated T&D Electric Sales (Gigawatt hours (GWh))
	2008		2007		Change

Residential		17,186		17,946		(760)
Commercial		28,739		29,137		(398)
Industrial		3,781		3,974		(193)
Other		261		261		-
Total Regulated T&D Electric Sales		49,967		51,318		(1,351)

Regulated T&D Electric Customers (in thousands)
	2008		2007		Change

Residential		1,612		1,622		(10)
Commercial		196		197		(1)
Industrial		2		2		-
Other		2		2		-
Total Regulated T&D Electric Customers		1,812		1,823		(11)

Due to the sale of DPL’s Virginia retail electric distribution assets in January 2008, the numbers of Regulated T&D Electric Customers listed above include a decrease of approximately 19,000 residential customers and 3,000 commercial customers.

The Pepco, DPL and ACE service territories are located within a corridor extending from Washington, D.C. to southern New Jersey. These service territories are economically diverse and include key industries that contribute to the regional economic base.

Commercial activity in the region includes banking and other professional services, government, insurance, real estate, shopping malls, casinos, stand alone construction, and tourism.

Industrial activity in the region includes automotive, chemical, glass, pharmaceutical, steel manufacturing, food processing, and oil refining.

Regulated T&D Electric Revenue increased by $98 million primarily due to:

An increase of $28 million due to a distribution rate change under the 2007 Maryland Rate Orders that became effective in June 2007, including a positive $19 million Revenue Decoupling Adjustment.

An increase of $24 million due to a distribution rate change in the District of Columbia that became effective in February 2008.

An increase of $24 million due to a distribution rate change as part of a higher New Jersey Societal Benefit Charge that became effective in June 2008 (substantially offset in Deferred Electric Service Costs).

An increase of $24 million in transmission service revenue primarily due to transmission rate changes in June 2008 and 2007.

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An increase of $24 million in Other Regulated T&D Electric Revenue from the resale of energy and capacity purchased under the power purchase agreement between Panda-Brandywine, L.P. (Panda) and Pepco (the Panda PPA) (offset in Fuel and Purchased Energy and Other Services Cost of Sales.

An increase of $4 million due to customer growth of 1% in 2008 (excluding customers associated with the sale of DPL’s Virginia retail electric distribution and wholesale transmission assets in January 2008).

The aggregate amount of these increases was partially offset by:

A decrease of $20 million due to lower weather-related sales (a 2% decrease in Heating Degree Days and a 10% decrease in Cooling Degree Days).

A decrease of $12 million due to the sale of DPL’s Virginia retail electric distribution and wholesale transmission assets in January 2008.

Default Electricity Supply

Default Supply Revenue
	2008		2007		Change

Residential	$	1,882	$	1,843	$	39
Commercial		1,125		1,073		52
Industrial		75		94		(19)
Other		331		285		46
Total Default Supply Revenue	$	3,413	$	3,295	$	118

Other Default Supply Revenue consists primarily of revenue from the resale of energy and capacity purchased under non-utility generating contracts (NUGs) in the PJM RTO market.

Default Electricity Supply Sales (GWh)
	2008		2007		Change

Residential		16,621		17,469		(848)
Commercial		9,564		9,910		(346)
Industrial		640		914		(274)
Other		101		131		(30)
Total Default Electricity Supply Sales		26,926		28,424		(1,498)

Default Electricity Supply Customers (in thousands)
	2008		2007		Change

Residential		1,572		1,585		(13)
Commercial		166		166		-
Industrial		1		1		-
Other		2		2		-
Total Default Electricity Supply Customers		1,741		1,754		(13)

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Due to the sale of DPL’s Virginia retail electric distribution assets in January 2008, the number of Default Electricity Supply Customers listed above includes a decrease of approximately 19,000 residential customers and 3,000 commercial customers.

Default Supply Revenue, which is substantially offset in Fuel and Purchased Energy and Other Services Cost of Sales and Deferred Electric Service Costs, increased by $118 million primarily due to:

An increase of $202 million in market-based Default Electricity Supply rates.

An increase of $48 million in wholesale energy revenues due to the sale in PJM RTO at higher market prices of electricity purchased from NUGs.

The aggregate amount of these increases was partially offset by:

A decrease of $55 million due to lower weather-related sales (a 2% decrease in Heating Degree Days and a 10% decrease in Cooling Degree Days).

A decrease of $33 million primarily due to existing commercial and industrial customers electing to purchase electricity from competitive suppliers.

A decrease of $32 million due to the sale of DPL’s Virginia retail electric distribution and wholesale transmission assets in January 2008.

A decrease of $12 million due to differences in consumption among the various customer rate classes.

Gas Operating Revenue

Regulated Gas Revenue
	2008		2007		Change

Residential	$	121	$	124	$	(3)
Commercial		69		73		(4)
Industrial		6		8		(2)
Transportation and Other		8		6		2
Total Regulated Gas Revenue	$	204	$	211	$	(7)

Regulated Gas Sales (billion cubic feet)
	2008		2007		Change

Residential		7		8		(1)
Commercial		5		5		-
Industrial		1		1		-
Transportation and Other		7		7		-
Total Regulated Gas Sales		20		21		(1)

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Regulated Gas Customers (in thousands)
	2008		2007		Change

Residential		113		112		1
Commercial		9		10		(1)
Industrial		-		-		-
Transportation and Other		-		-		-
Total Regulated Gas Customers		122		122		-

DPL’s natural gas service territory is located in New Castle County, Delaware. Several key industries contribute to the economic base as well as to growth.

Commercial activity in the region includes banking and other professional services, government, insurance, real estate, shopping malls, stand alone construction and tourism.

Industrial activity in the region includes automotive, chemical and pharmaceutical.

Regulated Gas Revenue decreased by $7 million primarily due to:

A decrease of $4 million due to differences in consumption among the various customer rate classes.

A decrease of $3 million due to lower weather-related sales (a 3% decrease in Heating Degree Days).

A decrease of $2 million primarily due to Gas Cost Rate changes effective April 2007, November 2007 and November 2008.

The aggregate amount of these decreases was partially offset by:

An increase of $2 million due to a distribution base rate change effective April 2007.

Other Gas Revenue

Other Gas Revenue, which is substantially offset in Fuel and Purchased Energy and Other Services Cost of Sales, increased by $34 million primarily due to revenue from higher off-system sales, the result of an increase in market prices. Off-system sales are made possible due to available pipeline capacity that results from low demand for natural gas from regulated customers.

Conectiv Energy

The impact of Operating Revenue changes and Fuel and Purchased Energy and Other Services Cost of Sales changes with respect to the Conectiv Energy component of the Competitive Energy business are encompassed within the discussion that follows.

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Operating Revenues of the Conectiv Energy segment are derived primarily from the sale of electricity. The primary components of its costs of sales are fuel and purchased power. Because fuel and electricity prices tend to move in tandem, price changes in these commodities from period to period can have a significant impact on Operating Revenue and Costs of Sales without signifying any change in the performance of the Conectiv Energy segment. Conectiv Energy also uses a number of and various types of derivative contracts to lock in sales margins, and to economically hedge its power and fuel purchases and sales. Gains and losses on derivative contracts are netted in revenue and Cost of Sales as appropriate under the applicable accounting rules. For these reasons, PHI from a managerial standpoint focuses on gross margin as a measure of performance.

Conectiv Energy Gross Margin

Merchant Generation & Load Service consists primarily of electric power, capacity and ancillary services sales from Conectiv Energy’s generating plants; tolling arrangements entered into to sell energy and other products from Conectiv Energy’s generating plants and to purchase energy and other products from generating plants of other companies; hedges of power, capacity, fuel and load; the sale of excess fuel (primarily natural gas); natural gas transportation and storage; emission allowances; electric power, capacity, and ancillary services sales pursuant to competitively bid contracts entered into with affiliated and non-affiliated companies to fulfill their default electricity supply obligations; and fuel switching activities made possible by the multi-fuel capabilities of some of Conectiv Energy’s power plants.

Energy Marketing activities consist primarily of wholesale natural gas and fuel oil marketing, the activities of the short-term power desk, which generates margin by capturing price differences between power pools and locational and timing differences within a power pool, and power origination activities, which primarily represent the fixed margin component of structured power transactions such as default supply service.

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		Year Ended December 31,
		2008		2007		Change
Operating Revenue ($ millions):
Merchant Generation & Load Service	$	1,846	$	1,087	$	759
Energy Marketing		1,201		1,119		82
Total Operating Revenue 1	$	3,047	$	2,206	$	841

Cost of Sales ($ millions):
Merchant Generation & Load Service	$	1,492	$	806	$	686
Energy Marketing		1,148		1,081		67
Total Cost of Sales 2	$	2,640	$	1,887	$	753

Gross Margin ($ millions) :
Merchant Generation & Load Service	$	354	$	281	$	73
Energy Marketing		53		38		15
Total Gross Margin	$	407	$	319	$	88

Generation Fuel and Purchased Power Expenses ($ millions) 3 :
Generation Fuel Expenses 4,5
Natural Gas	$	223	$	268	$	(45)
Coal		57		62		(5)
Oil		46		34		12
Other 6		2		2		-
Total Generation Fuel Expenses	$	328	$	366	$	(38)
Purchased Power Expenses 5	$	992	$	480	$	512

Statistics:		2008		2007		Change
Generation Output (MWh):
Base-Load 7		1,710,916		2,232,499		(521,583)
Mid-Merit (Combined Cycle) 8		2,625,668		3,341,716		(716,048)
Mid-Merit (Other) 9		74,254		190,253		(115,999)
Peaking		78,450		146,486		(68,036)
Tolled Generation		116,776		160,755		(43,979)
Total		4,606,064		6,071,709		(1,465,645)

Load Service Volume (MWh) 10		10,629,905		7,075,743		3,554,162

Average Power Sales Price 11 ($/MWh):
Generation Sales 4	$	109.71	$	82.19	$	27.52
Non-Generation Sales 12	$	92.02	$	70.43	$	21.59
Total	$	96.92	$	74.34	$	22.58

Average on-peak spot power price at PJM East Hub ($/MWh) 13	$	91.73	$	77.85	$	13.88
Average around-the-clock spot power price at PJM East Hub ($/MWh) 13	$	77.15	$	63.92	$	13.23
Average spot natural gas price at market area M3 ($/MMBtu) 14	$	9.83	$	7.76	$	2.07

Weather (degree days at Philadelphia Airport): 15
Heating degree days		4,403		4,560		(157)
Cooling degree days		1,354		1,513		(159)

1	Includes $397 million and $442 million of affiliate transactions for 2008 and 2007, respectively.

2	Includes $6 million and $7 million of affiliate transactions for 2008 and 2007, respectively. Also, excludes depreciation and amortization expense of $37 million and $38 million, respectively.

3	Consists solely of Merchant Generation & Load Service expenses; does not include the cost of fuel not consumed by the power plants and intercompany tolling expenses.

4	Includes tolled generation.

5	Includes associated hedging gains and losses.

6	Includes emissions expenses, fuel additives, and other fuel-related costs.

7	Edge Moor Units 3 and 4 and Deepwater Unit 6.

8	Hay Road and Bethlehem, all units.

9	Edge Moor Unit 5 and Deepwater Unit 1.

10	Consists of all default electricity supply sales; does not include standard product hedge volumes.

11	Calculated from data reported in Conectiv Energy’s Electric Quarterly Report (EQR) filed with the FERC; does not include capacity or ancillary services revenue.

12	Consists of default electricity supply sales, standard product power sales, and spot power sales other than merchant generation as reported in Conectiv Energy’s EQR.

13	Source: PJM website (www.pjm.com).

14	Source: Average delivered natural gas price at Tetco Zone M3 as published in Gas Daily.

15	Source: National Oceanic and Atmospheric Administration National Weather Service data.

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Conectiv Energy’s revenue and cost of sales are higher in 2008 primarily due to increased default electricity supply volumes and higher energy commodity prices. In 2008, Conectiv Energy expanded its default electricity supply business into ISONE.

Conectiv Energy’s margins were favorably impacted by higher energy commodity prices in the first half of 2008, and unfavorably impacted by the decrease in prices and spark spreads during the second half of the year. Volatile commodity prices contributed to significant movements in the value of transactions accounted for at fair value.

Merchant Generation & Load Service gross margin increased approximately $73 million primarily due to:

An increase of approximately $37 million primarily due to short-term sales of firm natural gas, and natural gas transportation and storage rights, the dual-fuel capability of the combined cycle mid-merit units (fuel switching), cross-commodity hedging (use of natural gas to hedge power positions), and the opportunities created by the mid-merit combined cycle units’ operating flexibility (option value) in conjunction with short-term power and fuel price volatility. This combination of strategies positioned Conectiv Energy to realize the upside potential of its overall portfolio during the winter period. The magnitude of gain was due partly to significant fuel price increases in conjunction with less significant increases in power prices.

An increase of approximately $46 million due to higher PJM capacity prices net of capacity hedges.

An increase of approximately $18 million due to the application of fair value accounting treatment and associated settlements with respect to excess coal hedges.

A decrease of approximately $15 million due to a lower of cost or market adjustment to the value of oil inventory held at the power plants at year-end 2008.

A decrease of approximately $15 million due to lower sales of emissions allowances.

Energy Marketing gross margin increased approximately $15 million primarily due to:

An increase of approximately $9 million in short-term power desk margins in 2008.

An increase of approximately $9 million due to additional default electricity supply contracts in 2008.

A decrease of approximately $4 million due to lower wholesale gas margins.

Pepco Energy Services

Pepco Energy Services’ operating revenue increased by $339 million to $2,648 million in 2008 from $2,309 million in 2007 primarily due to:

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An increase of $259 million due to higher volumes of retail electric load served due to customer acquisitions and higher prices in 2008,

An increase of $64 million due to higher natural gas volumes driven by customer acquisitions and higher prices in 2008,

An increase of $26 million due to increased construction activities in 2008;

The aggregate amount of these increases was partially offset by:

A decrease of $11 million due to RPM-related charges that lowered capacity revenues for the generation plants.

Other Non-regulated

Other Non-Regulated operating revenue decreased by $136 million primarily due to:

A non-cash charge of $124 million was recorded during 2008 as a result of revised assumptions regarding the estimated timing of tax benefits from PCI’s cross-border energy lease investments. In accordance with Financial Accounting Standards Board Staff Position 13-2, this charge was recorded as a reduction to lease revenue from these transactions, which is included in Other Non-Regulated revenues.

Operating Expenses

Fuel and Purchased Energy and Other Services Cost of Sales

A detail of PHI’s consolidated Fuel and Purchased Energy and Other Services Cost of Sales is as follows:


	2008		2007		Change
Power Delivery	$	3,578	$	3,360	$	218
Conectiv Energy		2,640		1,887		753
Pepco Energy Services		2,489		2,161		328
Corp. & Other		(418)		(465)		47
Total	$	8,289	$	6,943	$	1,346

Power Delivery

Power Delivery’s Fuel and Purchased Energy and Other Services Cost of Sales, which is primarily associated with Default Electricity Supply sales, increased by $218 million primarily due to:

An increase of $333 million in average energy costs, the result of new Default Electricity Supply contracts.

PEPCO HOLDINGS

An increase of $32 million in gas purchases for off-system sales, the result of higher average gas costs.

An increase of $24 million for energy and capacity purchased under the Panda PPA.

The aggregate amount of these increases was partially offset by:

A decrease of $61 million primarily due to commercial and industrial customers electing to purchase electricity from competitive suppliers.

A decrease of $60 million due to lower weather-related sales.

A decrease of $45 million due to the sale of Virginia retail electric distribution and wholesale transmission assets in January 2008.

Fuel and Purchased Energy expense is substantially offset in Regulated T&D Electric Revenue, Default Supply Revenue, Regulated Gas Revenue and Other Gas Revenue.

Conectiv Energy

The impact of Fuel and Purchased Energy and Other Services Cost of Sales changes with respect to the Conectiv Energy component of the Competitive Energy business are encompassed within the prior discussion under the heading “Conectiv Energy Gross Margin.”

Pepco Energy Services

Pepco Energy Services’ Fuel and Purchased Energy and Other Services Cost of Sales increased $328 million primarily due to:

An increase of $236 million due to higher volumes of electricity purchased at higher prices in 2008 to serve increased retail customer load.

An increase of $65 million due to higher volumes of natural gas purchased at higher prices in 2008 to serve increased retail customer load.

An increase of $15 million due to increased construction activities in 2008.

An increase of $12 million for the generation plants primarily due to capacity costs related to RPM.

PEPCO HOLDINGS

Other Operation and Maintenance

A detail of PHI’s other operation and maintenance expense is as follows:


	2008		2007		Change
Power Delivery	$	702	$	667	$	35
Conectiv Energy		143		127		16
Pepco Energy Services		87		74		13
Other Non-Regulated		2		3		(1)
Corp. & Other		(17)		(13)		(4)
Total	$	917	$	858	$	59

Other Operation and Maintenance expenses of the Power Delivery segment increased by $35 million; however, excluding $3 million resulting from the operation of ACE’s B.L. England electric generating facility prior to its sale in February 2007, Other Operation and Maintenance expenses increased by $38 million. The $38 million increase was primarily due to:

An increase of $17 million in deferred administrative expenses associated with Default Electricity Supply (offset in Default Supply Revenue) due to (i) the inclusion of $10 million of customer late payment fees in the calculation of the deferral and (ii) a higher rate of recovery of bad debt and administrative expenses as a result of an increase in Default Electricity Supply revenue rates. See the discussion below regarding a 2008 correction of errors in recording customer late payment fees, including $6 million related to prior periods.

An increase of $11 million due to higher bad debt expenses associated with distribution and Default Electricity Supply customers, of which approximately $6 million was deferred.

An increase of $9 million in employee-related costs primarily due to the recording of additional stock-based compensation expense as discussed below, including $6 million related to prior periods.

An increase of $3 million in Demand Side Management program costs (offset in Deferred Electric Service Costs).

An increase of $3 million in legal expenses.

The aggregate amount of these increases was partially offset by:

A decrease of $3 million in corrective and preventative maintenance and emergency restoration costs.

A decrease of $4 million in regulatory expenses primarily due to higher expenses in 2007 relating to the District of Columbia distribution rate case.

A decrease of $3 million due to higher construction project write-offs in 2007 related to customer requested work.

PEPCO HOLDINGS

A decrease of $2 million in accounting services related to tax consulting fees.

Other Operation and Maintenance expense for Conectiv Energy increased by $16 million primarily due to increased planned maintenance at its power plants.

Other Operation and Maintenance expense for Pepco Energy Services increased by $13 million due to increased compensation, benefit, outside contractor and regulatory costs related to growth in its businesses.

During 2008, PHI recorded adjustments, on a consolidated basis, to correct errors in Other Operation and Maintenance expenses for prior periods dating back to February 2005 during which (i) customer late payment fees were incorrectly recognized and (ii) stock-based compensation expense related to certain restricted stock awards granted under the Long-Term Incentive Plan was understated. The late payment fees and stock-based compensation adjustments resulted in increases in Other Operation and Maintenance expenses for the year ended December 31, 2008 of $6 million and $9 million, respectively.

Depreciation and Amortization

Depreciation and Amortization expenses increased by $11 million to $377 million in 2008 from $366 million in 2007. The increase was primarily due to:

An increase of $21 million due to higher amortization by ACE of stranded costs as a result of an October 2007 Transition Bond Charge rate increase (offset in Default Supply Revenue)

An increase of $7 million due to utility plant additions.

The aggregate amount of these increases was partially offset by:

A decrease of $15 million due to a change in depreciation rates in accordance with the 2007 Maryland Rate Orders.

Deferred Electric Service Costs

Deferred Electric Service Costs, which relate only to ACE, decreased by $77 million to income of $9 million in 2008 from an expense of $68 million in 2007. The decrease was primarily due to:

A decrease of $46 million due to a lower rate of recovery associated with deferred energy costs.

A decrease of $29 million due to a lower rate of recovery of costs associated with energy and capacity purchased under the NUGs.

A decrease of $17 million due to a lower rate of recovery associated with deferred transmission costs.

PEPCO HOLDINGS

The aggregate amount of these decreases was partially offset by:

An increase of $15 million primarily due to a higher rate of recovery associated with Demand Side Management program costs.

Deferred Electric Service Costs are substantially offset in Regulated T&D Electric Revenue and Other Operation and Maintenance.

Impairment Losses

During 2008, Pepco Holdings recorded pre-tax impairment losses of $2 million ($1 million after-tax) related to a joint-venture investment owned by Conectiv Energy. During 2007, Pepco Holdings recorded pre-tax impairment losses of $2 million ($1 million after-tax) related to certain energy services business assets owned by Pepco Energy Services.

Effect of Settlement of Mirant Bankruptcy Claims

The Effect of Settlement of Mirant Bankruptcy Claims reflects the recovery in 2007 of $33 million in operating expenses and certain other costs as damages in the Mirant bankruptcy settlement. See “Capital Resources and Liquidity — Cash Flow Activity — Proceeds from Settlement of Mirant Bankruptcy Claims” herein.

Other Income (Expenses)

Other Expenses (which are net of Other Income) increased by $16 million to a net expense of $300 million in 2008 from a net expense of $284 million in 2007 due to:

A decrease of $15 million in income from equity investments.

A decrease of $5 million in Contribution in Aid of Construction tax gross-up income.

The aggregate amount of these decreases in income was partially offset by:

A net decrease of $10 million in interest expense.

Income Tax Expense

PHI’s effective tax rates for the years ended December 31, 2008 and 2007 were 35.9% and 36.0%, respectively. While the change in the effective rate between 2008 and 2007 was minimal, the effective rate in each year was impacted by certain non-recurring items. In 2008, PHI recorded certain tax benefits that reduced its overall effective tax rate, primarily representing net interest income accrued on effectively settled and uncertain tax positions (including interest related to the tentative settlements with the IRS on the mixed service cost and like-kind exchange issues discussed below and a claim made with the IRS related to ACE’s tax reporting of fuel over- and under-recoveries), interest income received in 2008 on the Maryland state tax refund referred to below, and deferred tax adjustments related to additional analysis of its deferred tax balances completed in 2008. These benefits were partially offset by limited federal and state tax benefits related to the charge taken on the cross-border energy lease investments in the second

PEPCO HOLDINGS

quarter of 2008. In 2007, PHI recorded the receipt of Pepco’s Maryland state tax refund in the third quarter of 2007 as a reduction in income tax expense.

During the second quarter 2008, PHI reached a tentative settlement with the IRS concerning the treatment by Pepco, DPL and ACE of mixed service construction costs for income tax purposes during the period 2001 to 2004. On the basis of the tentative settlement, PHI updated its estimated liability related to mixed service costs and, as a result, recorded a net reduction in its liability for unrecognized tax benefits of $19 million and recognized after-tax interest income of $7 million in the second quarter of 2008. See Note (16), “Commitments and Contingencies—Regulatory and Other Matters — IRS Mixed Service Cost Issue,” to the consolidated financial statements of PHI set forth in Item 8 of this Form 10-K.

During the fourth quarter of 2008, PHI reached a final settlement with the IRS concerning a transaction between Conectiv and an unaffiliated third party that was treated by Conectiv as a “like-kind exchange” under Internal Revenue Code Section 1031. PHI’s reserve for this issue was more conservative than the actual settlement and resulted in the reversal of a total of $5 million (after-tax) in excess accrued interest related to this matter in the fourth quarter of 2008. See Note (16), “Commitments and Contingencies — Regulatory and Other Matters — IRS Examination of Like-Kind Exchange Transaction” to the consolidated financial statements of PHI set forth in Item 8 of this Form 10-K.

The following results of operations discussion compares the year ended December 31, 2007, to the year ended December 31, 2006. All amounts in the tables (except sales and customers) are in millions.

Operating Revenue

A detail of the components of PHI’s consolidated operating revenue is as follows:


	2007		2006		Change
Power Delivery	$	5,244	$	5,119	$	125
Conectiv Energy		2,206		1,964		242
Pepco Energy Services		2,309		1,669		640
Other Non-Regulated		76		91		(15)
Corp. & Other		(469)		(480)		11
Total Operating Revenue	$	9,366	$	8,363	$	1,003

PEPCO HOLDINGS

Power Delivery

The following table categorizes Power Delivery’s operating revenue by type of revenue.


		2007		2006		Change
Regulated T&D Electric Revenue	$	1,592	$	1,496	$	96
Default Supply Revenue		3,295		3,309		(14)
Other Electric Revenue		66		58		8
Total Electric Operating Revenue		4,953		4,863		90

Regulated Gas Revenue		211		205		6
Other Gas Revenue		80		51		29
Total Gas Operating Revenue		291		256		35

Total Power Delivery Operating Revenue	$	5,244	$	5,119	$	125

Other Electric Revenue includes work and services performed on behalf of customers, including other utilities, which is not subject to price regulation. Work and services includes mutual assistance to other utilities, highway relocation, rentals of pole attachments, late payment fees, and collection fees.

Regulated Gas Revenue consists of revenues for on-system natural gas sales and the transportation of natural gas for customers by DPL within its service territories at regulated rates.

Other Gas Revenue consists of DPL’s off-system natural gas sales and the sale of excess system capacity.

In response to an order issued by the NJBPU regarding changes to ACE’s retail transmission rates, ACE has established deferred accounting treatment for the difference between the rates that ACE is authorized to charge its customers for the transmission of default electricity supply and the cost that ACE incurs. Under the deferral arrangement, any over or under recovery is deferred as part of Deferred Electric Service Costs pending an adjustment of retail rates in a future proceeding. As a consequence of the order, effective January 1, 2008, ACE’s retail transmission revenue is being recorded as Default Supply Revenue, rather than as Regulated T&D Electric Revenue, thereby conforming to the practice of PHI’s other utility subsidiaries, which previously established deferred accounting treatment for any over or under

PEPCO HOLDINGS

recovery of retail transmission rates relative to the cost incurred. In addition, ACE’s retail transmission revenue for the period prior to January 1, 2008 has been reclassified to Default Supply Revenue in order to conform to the current period presentation.

Electric Operating Revenue

Regulated T&D Electric Revenue
	2007		2006		Change

Residential	$	579	$	550	$	29
Commercial		720		689		31
Industrial		26		27		(1)
Other		267		230		37
Total Regulated T&D Electric Revenue	$	1,592	$	1,496	$	96

Regulated T&D Electric Sales (GWh)
	2007	2006	Change

Residential	17,946	17,139	807
Commercial	29,137	28,378	759
Industrial	3,974	4,119	(145)
Other	261	260	1
Total Regulated T&D Electric Sales	51,318	49,896	1,422

Regulated T&D Electric Customers (in thousands)
	2007	2006	Change

Residential	1,622	1,605	17
Commercial	197	196	1
Industrial	2	2	-
Other	2	2	-
Total Regulated T&D Electric Customers	1,823	1,805	18

Regulated T&D Electric Revenue increased by $96 million primarily due to:

An increase of $43 million in sales due to higher weather-related sales (a 17% increase in Cooling Degree Days and a 12% increase in Heating Degree Days).

An increase of $29 million in Other Regulated T&D Electric Revenue from the resale of energy and capacity purchased under the Panda PPA, (offset in Fuel and Purchased Energy and Other Services Cost of Sales).

PEPCO HOLDINGS

An increase of $20 million due to a distribution rate change under the 2007 Maryland Rate Orders that became effective in June 2007, including a positive $5 million Revenue Decoupling Adjustment.

An increase of $12 million due to higher pass-through revenue primarily resulting from tax rate increases in the District of Columbia (primarily offset in Other Taxes).

An increase of $5 million due to customer growth of 1% in 2007.

The aggregate amount of these increases was partially offset by:

A decrease of $10 million due to a change in the Delaware rate structure effective May 1, 2006, which shifted revenue from Regulated T&D Electric Revenue to Default Supply Revenue.

`A decrease of $4 million due to a Delaware base rate reduction effective May 1, 2006.

Default Electricity Supply

Default Supply Revenue
	2007		2006		Change

Residential	$	1,843	$	1,508	$	335
Commercial		1,073		1,363		(290)
Industrial		94		110		(16)
Other		285		328		(43)
Total Default Supply Revenue	$	3,295	$	3,309	$	(14)

Other Default Supply Revenue consists primarily of revenue from the resale of energy and capacity purchased under NUGs in the PJM RTO market.

Default Electricity Supply Sales (GWh)
	2007		2006		Change

Residential		17,469		16,698		771
Commercial		9,910		14,799		(4,889)
Industrial		914		1,379		(465)
Other		131		129		2
Total Default Electricity Supply Sales		28,424		33,005		(4,581)

PEPCO HOLDINGS

Default Electricity Supply Customers (in thousands)
	2007		2006		Change

Residential		1,585		1,575		10
Commercial		166		170		(4)
Industrial		1		1		-
Other		2		2		-
Total Default Electricity Supply Customers		1,754		1,748		6

Default Supply Revenue, which is partially offset in Fuel and Purchased Energy and Other Services Cost of Sales, decreased by $14 million primarily due to:

A decrease of $346 million primarily due to commercial and industrial customers electing to purchase electricity from competitive suppliers.

A decrease of $95 million due to differences in consumption among the various customer rate classes.

A decrease of $46 million in wholesale energy revenue primarily the result of the sales by ACE of its Keystone and Conemaugh interests and the B.L. England generating facilities.

A decrease of $4 million due to a DPL adjustment to reclassify market-priced supply revenue from Regulated T&D Electric Revenue in 2006.

The aggregate amount of these decreases was partially offset by:

An increase of $379 million due to annual increases in market-based Default Electricity Supply rates.

An increase of $87 million due to higher weather-related sales (a 17% increase in Cooling Degree Days and a 12% increase in Heating Degree Days).

An increase of $10 million due to a change in Delaware rate structure effective May 1, 2006 that shifted revenue from Regulated T&D Electric Revenue to Default Supply Revenue.

Other Electric Revenue

Other Electric Revenue increased $8 million to $66 million in 2007 from $58 million in 2006 primarily due to increases in revenue related to pole rentals and late payment fees.

PEPCO HOLDINGS

Gas Operating Revenue

Regulated Gas Revenue
	2007		2006		Change

Residential	$	124	$	116	$	8
Commercial		73		73		-
Industrial		8		10		(2)
Transportation and Other		6		6		-
Total Regulated Gas Revenue	$	211	$	205	$	6

Regulated Gas Sales (billion cubic feet)
	2007		2006		Change

Residential		8		7		1
Commercial		5		5		-
Industrial		1		1		-
Transportation and Other		7		5		2
Total Regulated Gas Sales		21		18		3

Regulated Gas Customers (in thousands)
	2007		2006		Change

Residential		112		112		-
Commercial		10		9		1
Industrial		-		-		-
Transportation and Other		-		-		-
Total Regulated Gas Customers		122		121		1

Regulated Gas Revenue increased by $6 million primarily due to:

An increase of $12 million due to colder weather (a 15% increase in Heating Degree Days).

An increase of $6 million due to base rate increases effective in November 2006 and April 2007.

An increase of $5 million due to differences in consumption among the various customer rate classes.

An increase of $3 million due to customer growth of 1% in 2007.

The aggregate amount of these increases was partially offset by:

PEPCO HOLDINGS

A decrease of $18 million due to Gas Cost Rate decreases effective November 2006, April 2007 and November 2007 resulting from lower natural gas commodity costs (offset in Fuel and Purchased Energy and Other Services Cost of Sales).

Other Gas Revenue

Other Gas Revenue increased by $29 million to $80 million in 2007 from $51 million in 2006 primarily due to higher off-system sales (partially offset in Fuel and Purchased Energy and Other Services Cost of Sales). The gas sold off-system resulted from increased demand from unaffiliated third party electric generators during periods of low customer demand for natural gas.

Conectiv Energy

Conectiv Energy Gross Margin

PEPCO HOLDINGS

		Year Ended December 31,
		2007		2006		Change
Operating Revenue ($ millions):
Merchant Generation & Load Service	$	1,087	$	1,073	$	14
Energy Marketing		1,119		891		228
Total Operating Revenue 1	$	2,206	$	1,964	$	242

Cost of Sales ($ millions):
Merchant Generation & Load Service	$	806	$	861	$	(55)
Energy Marketing		1,081		848		233
Total Cost of Sales 2	$	1,887	$	1,709	$	178

Gross Margin ($ millions) :
Merchant Generation & Load Service	$	281	$	212	$	69
Energy Marketing		38		43		(5)
Total Gross Margin	$	319	$	255	$	64

Generation Fuel and Purchased Power Expenses ($ millions) 3 :
Generation Fuel Expenses 4,5
Natural Gas 6	$	268	$	175	$	93
Coal		62		53		9
Oil		34		27		7
Other 7		2		4		(2)
Total Generation Fuel Expenses	$	366	$	259	$	107
Purchased Power Expenses 5	$	480	$	431	$	49

Statistics:		2007		2006		Change
Generation Output (MWh):
Base-Load 8		2,232,499		1,814,517		417,982
Mid-Merit (Combined Cycle) 9		3,341,716		2,081,873		1,259,843
Mid-Merit (Other) 10		190,253		115,120		75,133
Peaking		146,486		131,930		14,556
Tolled Generation		160,755		94,064		66,691
Total		6,071,709		4,237,504		1,834,205

Load Service Volume (MWh) 11		7,075,743		8,514,719		(1,438,976)

Average Power Sales Price 12 ($/MWh):
Generation Sales 4	$	82.19	$	77.69	$	4.50
Non-Generation Sales 13	$	70.43	$	58.49	$	11.94
Total	$	74.34	$	62.54	$	11.80

Average on-peak spot power price at PJM East Hub ($/MWh) 14	$	77.85	$	65.29	$	12.56
Average around-the-clock spot power price at PJM East Hub ($/MWh) 14	$	63.92	$	53.07	$	10.85
Average spot natural gas price at market area M3 ($/MMBtu) 15	$	7.76	$	7.31	$	0.45

Weather (degree days at Philadelphia Airport): 16
Heating degree days		4,560		4,205		355
Cooling degree days		1,513		1,136		377

1	Includes $442 million and $471 million of affiliate transactions for 2007 and 2006, respectively. The 2006 amount has been reclassified to exclude $193 million of intra-affiliate transactions that were reported gross in 2006 at the segment level.

Includes $7 million and $5 million of affiliate transactions for 2007 and 2006, respectively. The 2006 amount has been reclassified to exclude $193 million of intra-affiliate transactions that were reported gross in 2006 at the segment level. Also, excludes depreciation and amortization expense of $38 million and $36 million, respectively.

3	Consists solely of Merchant Generation & Load Service expenses; does not include the cost of fuel not consumed by the power plants and intercompany tolling expenses.

4	Includes tolled generation.

5	Includes associated hedging gains and losses.

6	Includes adjusted 2006 amount related to change in natural gas hedge allocation methodology.

7	Includes emissions expenses, fuel additives, and other fuel-related costs.

8	Edge Moor Units 3 and 4 and Deepwater Unit 6.

9	Hay Road and Bethlehem, all units.

10	Edge Moor Unit 5 and Deepwater Unit 1. Generation output for these units was negative for the first and fourth quarters of 2006 because of station service consumption.

11	Consists of all default electricity supply sales; does not include standard product hedge volumes.

12	Calculated from data reported in Conectiv Energy’s Electric Quarterly Report (EQR) filed with the FERC; does not include capacity or ancillary services revenue.

13	Consists of default electricity supply sales, standard product power sales, and spot power sales other than merchant generation as reported in Conectiv Energy’s EQR.

14	Source: PJM website (www.pjm.com).

15	Source: Average delivered natural gas price at Tetco Zone M3 as published in Gas Daily.

16	Source: National Oceanic and Atmospheric Administration National Weather Service data .

PEPCO HOLDINGS

Merchant Generation & Load Service gross margin increased $69 million primarily due to:

An increase of approximately $77 million primarily due to 43% higher generation output attributable to more favorable weather and improved availability at the Hay Road and Deepwater generating plants and improved spark spreads.

An increase of approximately $26 million due to higher capacity prices due to the implementation of the PJM Reliability Pricing Model.

A decrease of $33 million due to less favorable natural gas fuel hedges, and the expiration, in 2006, of an agreement with an international investment banking firm to hedge approximately 50% of the commodity price risk of Conectiv Energy’s generation and Default Electricity Supply commitment to DPL.

Energy Marketing gross margin decreased $5 million primarily due to:

A decrease of $5 million due to lower margins in oil marketing.

A decrease of $4 million due to lower margins in natural gas marketing.

An increase of $3 million for adjustments related to an unaffiliated generation operating services agreement that expired in 2006.

Pepco Energy Services

Pepco Energy Services’ operating revenue increased $640 million to $2,309 million in 2007 from $1,669 million in 2006 primarily due to:

An increase of $646 million due to higher volumes of retail electric load served at higher prices in 2007 driven by customer acquisitions.

An increase of $27 million due to higher volumes of wholesale natural gas sales in 2007 that resulted from increased natural gas supply transactions to deliver gas to retail customers.

The aggregate amount of these increases was partially offset by:

A decrease of $32 million due primarily to lower construction activity in 2007 and to the sale of five construction businesses in 2006.

Other Non-Regulated

Other Non-Regulated operating revenue decreased $15 million to $76 million in 2007 from $91 million in 2006. The operating revenue of this segment primarily consists of lease earnings recognized under Statement of Financial Accounting Standards No. 13, “Accounting for Leases.” The revenue decrease is primarily due to:

PEPCO HOLDINGS

A change in state income tax lease assumptions that resulted in increased revenue in 2006 as compared to 2007.

Operating Expenses

Fuel and Purchased Energy and Other Services Cost of Sales

A detail of PHI’s consolidated Fuel and Purchased Energy and Other Services Cost of Sales is as follows:


	2007		2006		Change
Power Delivery	$	3,360	$	3,304	$	56
Conectiv Energy		1,887		1,709		178
Pepco Energy Services		2,161		1,531		630
Corp. & Other		(465)		(478)		13
Total	$	6,943	$	6,066	$	877

Power Delivery

Power Delivery’s Fuel and Purchased Energy and Other Services Cost of Sales, which is primarily associated with Default Electricity Supply sales, increased by $56 million primarily due to:

An increase of $445 million in average energy costs, the result of new Default Electricity Supply contracts.

An increase of $93 million due to higher weather-related sales.

An increase of $29 million for energy and capacity purchased under the Panda PPA.

The aggregate amount of these increases was partially offset by:

A decrease of $472 million primarily due to commercial and industrial customers electing to purchase an increased amount of electricity from competitive suppliers.

A decrease of $36 million in the Default Electricity Supply deferral balance.

Fuel and Purchased Energy expense is primarily offset in Regulated T&D Electric Revenue, Default Supply Revenue, Regulated Gas Revenue or Other Gas Revenue.

PEPCO HOLDINGS

Conectiv Energy

Pepco Energy Services

Pepco Energy Services’ Fuel and Purchased Energy and Other Services Cost of Sales increased $630 million primarily due to:

	·	An increase of $636 million due to higher volumes of purchased electricity at higher prices in 2007 to serve increased retail customer load.

	·	An increase of $40 million due to higher volumes of wholesale natural gas sales in 2007 that resulted from increased natural gas supply transactions to deliver gas to retail customers.

The aggregate amount of these increases was partially offset by:

A decrease of $45 million due primarily to lower construction activity in 2007 and to the sale of five construction businesses in 2006.

Other Operation and Maintenance

A detail of PHI’s other operation and maintenance expense is as follows:


	2007		2006		Change
Power Delivery	$	667	$	640	$	27
Conectiv Energy		127		116		11
Pepco Energy Services		74		68		6
Other Non-Regulated		3		4		(1)
Corp. & Other		(13)		(20)		7
Total	$	858	$	808	$	50

Other Operation and Maintenance expense of the Power Delivery segment increased by $27 million; however, excluding the favorable variance of $34 million primarily resulting from ACE’s sale of the B.L. England electric generating facility in February 2007, Other Operation and Maintenance expenses increased by $61 million. The $61 million increase was primarily due to:

An increase of $16 million in employee-related costs.

An increase of $11 million in preventative maintenance and system operation costs.

An increase of $7 million in customer service operation expenses.

PEPCO HOLDINGS

An increase of $4 million in costs associated with Default Electricity Supply (primarily deferred and recoverable).

An increase of $4 million in regulatory expenses.

An increase of $4 million in accounting service expenses.

An increase of $3 million due to various construction project write-offs related to customer requested work.

An increase of $3 million in Demand Side Management program costs (offset in Deferred Electric Service Costs).

An increase of $3 million due to higher bad debt expenses.

Other Operation and Maintenance expense for Conectiv Energy increased by $11 million primarily due to:

Higher plant maintenance costs due to more scheduled outages in 2007 and higher costs of materials and labor.

Other Operation and Maintenance expense for Pepco Energy Services increased by $6 million due to:

Higher retail electric and gas operating costs to support the growth in the retail business in 2007.

Other Operation and Maintenance expense for Corporate & Other increased by $7 million due to:

An increase in employee-related costs.

Depreciation and Amortization

Depreciation and Amortization expenses decreased by $47 million to $366 million in 2007 from $413 million in 2006. The decrease is primarily due to:

A decrease of $31 million in ACE’s regulatory asset amortization resulting primarily from the 2006 sale of ACE’s interests in Keystone and Conemaugh.

A decrease of $19 million in depreciation due to a change in depreciation rates in accordance with the 2007 Maryland Rate Order.

Other Taxes

Other Taxes increased by $14 million to $357 million in 2007 from $343 million in 2006. The increase was primarily due to:

PEPCO HOLDINGS

An increase in pass-throughs resulting from tax rate increases (partially offset in Regulated T&D Electric Revenue).

Deferred Electric Service Costs

Deferred Electric Service Costs, which relate only to ACE, increased by $46 million to $68 million in 2007 from $22 million in 2006. The increase is primarily due to:

An increase of $38 million due to a higher rate of recovery associated with energy and capacity purchased under the NUGs.

An increase of $12 million due to a higher rate of recovery associated with deferred energy costs.

The aggregate amount of these increases was partially offset by:

A decrease of $3 million due to a lower rate of recovery associated with Demand Side Management program costs.

Deferred Electric Service Costs are substantially offset in Regulated T&D Electric Revenue and Other Operation and Maintenance.

Impairment Losses

During 2007, Pepco Holdings recorded pre-tax impairment losses of $2 million ($1 million after-tax) related to certain energy services business assets owned by Pepco Energy Services. During 2006, Pepco Holdings recorded pre-tax impairment losses of $19 million ($14 million after-tax) related to certain energy services business assets owned by Pepco Energy Services.

Effect of Settlement of Mirant Bankruptcy Claims

The Effect of Settlement of Mirant Bankruptcy Claims reflects the recovery in 2007 of $33 million in operating expenses and certain other costs as damages in the Mirant bankruptcy settlement. See “Capital Resources and Liquidity — Proceeds from Settlement of Mirant Bankruptcy Claims” herein.

Income Tax Expense

PHI’s effective tax rates for the years ended December 31, 2007 and 2006 were 36.0% and 39.3%, respectively. The decrease in the effective tax rate in 2007 was primarily the result of a 2007 Maryland state income tax refund. The refund was due to an increase in the tax basis of certain assets sold in 2000, and as a result, PHI’s 2007 income tax expense was reduced by approximately $20 million, with a corresponding decrease to the effective tax rate of 3.7%.

CAPITAL RESOURCES AND LIQUIDITY

This section discusses Pepco Holdings’ working capital, cash flow activity, capital requirements and other uses and sources of capital.

PEPCO HOLDINGS

Working Capital

At December 31, 2008, Pepco Holdings’ current assets on a consolidated basis totaled $2.6 billion and its current liabilities totaled $2 billion. At December 31, 2007, Pepco Holdings’ current assets on a consolidated basis totaled $2 billion and its current liabilities totaled $2 billion. The increase in working capital from December 31, 2007 to December 31, 2008 is primarily due to an increase in cash as a result of the issuance of long-term debt during the fourth quarter of 2008.

At December 31, 2008, Pepco Holdings’ cash and current cash equivalents totaled $384 million, of which $343 million was invested in money market funds that invest in U.S. Treasury obligations, and the balance was held as cash and uncollected funds. Current restricted cash (cash that is available to be used only for designated purposes) totaled $10 million. At December 31, 2007, Pepco Holdings’ cash and current cash equivalents totaled $55 million and its current restricted cash totaled $15 million. See “Capital Requirements — Contractual Arrangements with Credit Rating Triggers or Margining Rights” herein for additional information.

A detail of PHI’s short-term debt balance and its current maturities of long-term debt and project funding balance follows.

	As of December 31, 2008 (Millions of dollars)
Type	PHI Parent	Pepco	DPL	ACE	ACE Funding	Conectiv Energy	Pepco Energy Services	PCI	Conectiv	PHI Consolidated
Variable Rate Demand Bonds	$ -	$ -	$ 96	$ 1	$ -	$ -	$ 21	$ -	$ -	$ 118
Bonds held under Standby Bond Purchase Agreement	-	-	-	22	-	-	-	-	-	22
Commercial Paper	-	-	-	-	-	-	-	-	-	-
Bank Loans	-	25	150	-	-	-	-	-	-	175
Credit Facility Loans	50	100	-	-	-	-	-	-	-	150
Total Short-Term Debt	$ 50	$ 125	$ 246	$ 23	$ -	$ -	$ 21	$ -	$ -	$ 465

Current Maturities of Long-Term Debt and Project Funding	$ -	$ 50	$ -	$ -	$ 32	$ -	$ 3	$ -	$ -	$ 85

	As of December 31, 2007 (Millions of dollars)
Type	PHI Parent	Pepco	DPL	ACE	ACE Funding	Conectiv Energy	Pepco Energy Services	PCI	Conectiv	PHI Consolidated
Variable Rate Demand Bonds	$ -	$ -	$105	$23	$ -	$ -	$24	$ -	$ -	$152
Commercial Paper	-	84	24	29	-	-	-	-	-	137
Total Short-Term Debt	$ -	$ 84	$129	$52	$ -	$ -	$24	$ -	$ -	$289

Current Maturities of Long-Term Debt and Project Funding	$ -	$128	$ 23	$50	$ 31	$ -	$ 8	$ 92	$ -	$332

PEPCO HOLDINGS

Credit Facilities

PHI, Pepco, DPL and ACE maintain a credit facility to provide for their respective short-term liquidity needs. The aggregate borrowing limit under this primary credit facility is $1.5 billion, all or any portion of which may be used to obtain loans or to issue letters of credit. PHI’s credit limit under the facility is $875 million. The credit limit of each of Pepco, DPL and ACE is the lesser of $500 million and the maximum amount of debt the company is permitted to have outstanding by its regulatory authorities, except that the aggregate amount of credit used by Pepco, DPL and ACE at any given time collectively may not exceed $625 million. The interest rate payable by each company on utilized funds is, at the borrowing company’s election, (i) the greater of the prevailing prime rate and the federal funds effective rate plus 0.5% or (ii) the prevailing Eurodollar rate, plus a margin that varies according to the credit rating of the borrower. The facility also includes a “swingline loan sub-facility” pursuant to which each company may make same day borrowings in an aggregate amount not to exceed $150 million. Any swingline loan must be repaid by the borrower within seven days of receipt thereof. All indebtedness incurred under the facility is unsecured.

The facility commitment expiration date is May 5, 2012, with each company having the right to elect to have 100% of the principal balance of the loans outstanding on the expiration date continued as non-revolving term loans for a period of one year from such expiration date.

The facility is intended to serve primarily as a source of liquidity to support the commercial paper programs of the respective companies. The companies also are permitted to use the facility to borrow funds for general corporate purposes and issue letters of credit. In order for a borrower to use the facility, certain representations and warranties must be true and correct, and the borrower must be in compliance with specified covenants, including (i) the requirement that each borrowing company maintain a ratio of total indebtedness to total capitalization of 65% or less, computed in accordance with the terms of the credit agreement, which calculation excludes from the definition of total indebtedness certain trust preferred securities and deferrable interest subordinated debt (not to exceed 15% of total capitalization), (ii) a restriction on sales or other dispositions of assets, other than certain sales and dispositions, and (iii) a restriction on the incurrence of liens on the assets of a borrower or any of its significant subsidiaries other than permitted liens. The absence of a material adverse change in the borrower’s business, property, and results of operations or financial condition is not a condition to the availability of credit under the facility. The facility does not include any rating triggers.

In November 2008, PHI entered into a second credit facility in the amount of $400 million with a syndicate of nine lenders. Under the facility, PHI may obtain revolving loans and swingline loans over the term of the facility, which expires on November 6, 2009. The facility does not provide for the issuance of letters of credit. All indebtedness incurred under the facility is unsecured. The interest rate payable on funds borrowed under the facility is, at PHI’s election, based on either (a) the prevailing Eurodollar rate or (b) the highest of (i) the prevailing prime rate, (ii) the federal funds effective rate plus 0.5% or (iii) the one-month Eurodollar rate plus 1.0%, plus a margin that varies according to the credit rating of PHI. Under the swingline loan sub-facility, PHI may obtain loans for up to seven days in an aggregate principal amount which does not exceed 10% of the aggregate borrowing limit under the facility. In order to obtain loans under the facility, PHI must be in compliance with the same covenants and conditions that it is required to satisfy for utilization of the primary credit facility. The absence of a material adverse

PEPCO HOLDINGS

change in PHI’s business, property, and results of operations or financial condition is not a condition to the availability of credit under the facility. The facility does not include any ratings triggers.

Typically, PHI and its utility subsidiaries issue commercial paper if required to meet their short-term working capital requirements. Given the recent lack of liquidity in the commercial paper markets, however, the companies have borrowed under the primary credit facility to maintain sufficient cash on hand to meet daily short-term operating needs. As of December 31, 2008, PHI had an outstanding loan of $50 million and Pepco had an outstanding loan of $100 million under the facility. In January 2009, PHI borrowed an additional $150 million under the facility.

Cash and Credit Facilities Available as of December 31, 2008

	Consolidated PHI		PHI Parent		Utility Subsidiaries

Credit Facilities (Total Capacity)	$	1,900	$	1,275	$	625
Borrowings under Credit Facilities		(150)		(50)		(100)
Letters of Credit		(566)		(561)		(5)
Commercial Paper Outstanding		-		-		-
Remaining Credit Facilities Available		1,184		664		520
Cash Invested in Money Market Funds (a)		343		20		323
Total Cash and Credit Facilities Available	$	1,527	$	684	$	843

(a)	Cash and cash equivalents reported on the Balance Sheet total $384 million, which includes the $343 million invested in money market funds and $41 million held in cash and uncollected funds.

During the months of January and February 2009, the total cash and credit facilities available to PHI on a consolidated basis ranged from a low of $1.1 billion to a high of $1.7 billion, and averaged $1.4 billion. The total cash and credit facilities available to the utility subsidiaries collectively ranged from a low of $673 million to a high of $1 billion, and averaged $831 million.

Cash Flow Activity

PHI’s cash flows for 2008, 2007, and 2006 are summarized below.

	Cash Source (Use)
	2008		2007		2006
	(Millions of dollars)
Operating Activities	$	413	$	795	$	203
Investing Activities		(714)		(582)		(230)
Financing Activities		630		(207)		(46)
Net increase (decrease) in cash and cash equivalents	$	329	$	6	$	(73)

PEPCO HOLDINGS

Operating Activities

Cash flows from operating activities are summarized below for 2008, 2007, and 2006.

	Cash Source (Use)
	2008		2007		2006
	(Millions of dollars)
Net Income	$	300	$	334	$	248
Non-cash adjustments to net income		1,073		382		613
Changes in working capital		(960)		79		(658)
Net cash from operating activities	$	413	$	795	$	203

Net cash from operating activities was $382 million lower for the year ended December 31, 2008 compared to the year ended December 31, 2007. In addition to a $34 million decrease in net income, the primary contributor was a $336 million increase in cash collateral requirements associated with Competitive Energy activities. The cash collateral requirements of the Competitive Energy businesses fluctuate significantly based on changes in energy market prices.

As of December 31, 2008 and 2007, the combined net cash collateral positions of the Pepco Energy Services and Conectiv Energy businesses were net cash posted of $331 million and $90 million, respectively. As energy prices have declined in the second half of 2008, the collateral that the Competitive Energy businesses have been required to post has increased substantially.

In addition, the transfer by Pepco of the Panda PPA to Sempra Energy Trading LLC had an impact on 2008 cash flows from operating activities. Non-cash adjustments to net income reflect the change in restricted cash equivalents used to make the payment and changes in working capital include the reduction in the regulatory liability established to help offset future above-market capacity and energy purchase costs.

Net cash from operating activities in 2007 was $592 million higher than in 2006. In addition to an increase in net income, the factors that primarily contributed to the increase were: (i) a decrease of $203 million in taxes paid in 2007, partially attributable to a tax payment of $121 million made in February 2006 in connection with an unresolved tax matter (see Note (16), “Commitments and Contingencies ¾ Regulatory and Other Matters — IRS Mixed Service Cost Issue” to the consolidated financial statements of PHI set forth in Item 8 of this Form 10-K), (ii) a decrease in cash collateral requirements associated with Competitive Energy activities, and (iii) the receipt of the proceeds of the Mirant bankruptcy settlement, of which $399 million was designated as operating cash flows and $15 million was designated as investing cash flows.

PEPCO HOLDINGS

Investing Activities

Cash flows used by investing activities during 2008, 2007, and 2006 are summarized below.

	Cash (Use) Source
	2008		2007		2006
	(Millions of dollars)
Construction expenditures	$	(781)	$	(623)	$	(475)
Cash proceeds from sale of other assets		56		11		182
All other investing cash flows, net		11		30		63
Net cash used by investing activities	$	(714)	$	(582)	$	(230)

Net cash used by investing activities increased $132 million for the year ended December 31, 2008 compared to the year ended December 31, 2007. The increase was due primarily to (i) $158 million increase in capital expenditures, of which $96 million was attributable to Conectiv Energy and $33 million was attributable to Power Delivery, and (ii) the receipt by Pepco in 2007 of the proceeds of the Mirant bankruptcy settlement of which $15 million was designated as a reimbursement of certain investments in property, plant and equipment, offset by (iii) an increase of $45 million in cash proceeds from the sale of assets. The increase in Conectiv Energy capital expenditures was primarily due to the construction of new generation plants. The increase in Power Delivery capital expenditures was primarily attributable to capital costs associated with new customer services, distribution reliability, and transmission. The proceeds from the sale of assets in 2008 consisted primarily of $54 million received from DPL’s sale of its Virginia retail electric distribution assets and wholesale electric transmission assets. Proceeds from the sale of assets in 2007 consisted primarily of $9 million received from the sale by ACE of the B.L. England generating facility.

Net cash used by investing activities in 2007 was $352 million higher than in 2006 primarily due to: (i) a $148 million increase in capital expenditures, $107 million of which relates to Power Delivery, and (ii) a decrease of $171 million in cash proceeds from the sale of property. The increase in Power Delivery capital expenditures is primarily due to major transmission projects and new substations for Pepco and ACE. The proceeds from the sale of other assets in 2006 consisted primarily of $175 million from the sale of ACE’s interest in the Keystone and Conemaugh generating facilities. Proceeds from the sale of other assets in 2007 consisted primarily of $9 million received from the sale of the B.L. England generating facility. Cash flows from investing activities in 2007 also include $15 million of the net settlement proceeds received by Pepco in the Mirant bankruptcy settlement that were specifically designated as a reimbursement of certain investments in property, plant and equipment.

PEPCO HOLDINGS

Financing Activities

Cash flows used by financing activities during 2008, 2007 and 2006 are summarized below.

	Cash (Use) Source
	2008		2007		2006
	(Millions of dollars)
Dividends paid on common and preferred stock	$	(222)	$	(203)	$	(199)
Common stock issued through the Dividend Reinvestment Plan (DRP)		29		28		30
Issuance of common stock		287		200		17
Redemption of preferred stock of subsidiaries		-		(18)		(22)
Issuances of long-term debt		1,150		704		515
Reacquisition of long-term debt		(590)		(855)		(578)
Issuances (repayments) of short-term debt, net		26		(61)		193
Cost of issuances		(30)		(7)		(6)
All other financing cash flows, net		(20)		5		4
Net cash provided by (used by) financing activities	$	630	$	(207)	$	(46)

Net cash provided by financing activities in 2008 was $837 million higher than in 2007. Net cash used by financing activities in 2007 was $161 million higher than in 2006.

Common Stock Dividends

Common stock dividend payments were $222 million in 2008, $203 million in 2007, and $198 million in 2006. The increase in common dividends paid in 2008 was the result of additional shares outstanding (primarily from PHI’s sale of 6.5 million shares of common stock in November 2007) and a quarterly dividend increase from 26 cents per share to 27 cents per share beginning in the first quarter of 2008. The increase in common dividends paid in 2007 was due to the issuance of the additional shares under the DRP.

Changes in Outstanding Common Stock

In November 2008, PHI sold 16.1 million shares of common stock in a registered offering at a price per share of $16.50, resulting in gross proceeds of $265 million. In November 2007, PHI sold 6.5 million shares of common stock in a registered offering at a price per share of $27.00, resulting in gross proceeds of $176 million.

Under the DRP, PHI issued approximately 1.3 million shares of common stock in 2008, approximately 1 million shares of common stock in 2007 and approximately 1.2 million shares of common stock in 2006.

Changes in Outstanding Preferred Stock

Cash flows from the redemption of preferred stock in 2008, 2007 and 2006 are summarized in the chart below.

PEPCO HOLDINGS

Preferred Stock Redemptions		Redemption Price	Shares Redeemed			Aggregate Redemption Costs for years ended December 31,
			2008	2007	2006	2008		2007		2006
						(Millions of dollars)
DPL
Redeemable Serial Preferred Stock
	4.0% Series of 1943, $100 per share par value	$105.00	-	19,809	-	$	-	$	2	$	-
	3.7% Series of 1947, $100 per share par value	$104.00	-	39,866	-		-		4		-
	4.28% Series of 1949, $100 per share par value	$104.00	-	28,460	-		-		3		-
	4.56% Series of 1952, $100 per share par value	$105.00	-	19,571	-		-		2		-
	4.20% Series of 1955, $100 per share par value	$103.00	-	25,404	-		-		2		-
	5.0% Series of 1956, $100 per share par value	$104.00	-	48,588	-		-		5		-
						$	-	$	18	$	-
Pepco
Serial Preferred Stock
	$2.44 Series of 1957	$51.00	-	-	216,846	$	-	$	-	$	11
	$2.46 Series of 1958	$51.00	-	-	99,789		-		-		5
	$2.28 Series of 1965	$51.00	-	-	112,709		-		-		6
						$	-	$	-	$	22

						$	-	$	18	$	22

Changes in Outstanding Long-Term Debt

Cash flows from the issuance and redemption of long-term debt in 2008, 2007 and 2006 are summarized in the charts below.

		2008			2007		2006
Issuances		(Millions of dollars)

PHI
	6.0% unsecured notes due 2019	$	-		$	200	$	-
	6.125% unsecured notes due 2017		-			250		-
	5.9% unsecured notes due 2016		-			-		200
			-			450		200
Pepco
	6.5% senior notes due 2037 (a)		250			-		-
	Auction rate tax-exempt bonds due 2022 (a)		-			-		110
	6.5% senior notes due 2037 (a)		-			250		-
	7.9% first mortgage bonds due 2038		250			-		-
			500			250		110
DPL
	6.4% first mortgage bonds due 2013		250			-		-
	5.22% unsecured notes due 2016		-			-		100
			250	(b)		-		100
ACE
	5.8% senior notes due 2036 (a)		-			-		105
	7.75% first mortgage bonds due 2018		250			-		-
			250			-		105

Pepco Energy Services			-			4		-
		$	1,000	(b)	$	704	$	515
	(a) Secured by an outstanding series of First Mortgage Bonds. See Note (11), “Debt,” to the consolidated financial statements of PHI in Item 8 of this Form 10-K.
	(b) Excludes DPL $150 million 2-year bank loan that was converted to a 364-day bank loan.

PEPCO HOLDINGS

		2008		2007		2006
Redemptions		(Millions of dollars)

PHI
	3.75% unsecured notes due 2006	$	-	$	-	$	300
	5.5% unsecured notes due 2007		-		500		-
			-		500		300
Pepco
	7.64% medium term notes due 2007		-		35		-
	6.25% first mortgage bonds due 2007		-		175		-
	6.5% first mortgage bonds due 2008		78		-		-
	Auction rate, tax-exempt bonds due 2022 (a)		110		-		-
	Auction rate, tax-exempt bonds due 2022-2024		-		-		110
	5.875% first mortgage bonds due 2008		50		-		-
	Variable rate notes due 2006		-		-		50
			238		210		160
DPL
	7.08% medium term notes due 2007		-		12		-
	Auction rate, tax-exempt bonds due 2030-2038 (a)		58		-		-
	Auction rate, tax-exempt bonds due 2030-2031 (a)		36		-		-
	8.125% medium term notes due 2007		-		50		-
	6.95% first mortgage bonds due 2008		-		3		3
	6.95% first mortgage bonds due 2008		4		-		-
	Auction rate, tax-exempt bonds due 2023 (a)		18		-		-
	6.75% medium term notes due 2006		-		-		20
			116		65		23
ACE
	6.18%-6.19% medium term notes		-		-		65
	6.79% medium term notes due 2008		15		-		-
	Auction rate, tax-exempt bonds due 2029 (a)		25		-		-
	Auction rate, tax-exempt bonds due 2029 (a)		30		-		-
	6.77% medium term notes due 2008		1		-		-
	7.52% medium term notes due 2007		-		15		-
	6.73%-6.75% medium term notes due 2008		25		-		-
	7.15% medium term notes due 2007		-		1		-
	6.71%-6.73% medium term notes due 2008		9		-		-
	Securitization bonds due 2006-2008		31		30		29
			136		46		94
PCI
	7.62% medium term notes due 2007		-		34		-
	8.24% medium term note due 2008		92		-		-
			92		34		-
Pepco Energy Services			8		-		1
		$	590	$	855	$	578
	(a) Held by the indicated company pending resale to the public. See “Purchase of Tax-Exempt Auction Rate Bonds” below.

Purchase of Tax-Exempt Auction Rate Bonds

The redemptions in 2008 shown below include the purchase at par by PHI subsidiaries of $276 million in aggregate principal amount of insured tax-exempt auction rate bonds issued by municipal authorities for the benefit of the respective PHI subsidiaries. These purchases were made in response to disruption in the market for municipal auction rate securities that made it

PEPCO HOLDINGS

difficult for the remarketing agent to successfully remarket the bonds. These bond purchases consisted of the following:

The purchase by Pepco of Pollution Control Revenue Refunding Bonds issued by the Maryland Economic Development Corporation of an aggregate principal amount of $110 million.

The purchase by DPL of Exempt Facilities Refunding Revenue Bonds issued by The Delaware Economic Development Authority in the aggregate principal amount of $112 million.

The purchase by ACE of (i) Pollution Control Revenue Refunding Bonds issued by Cape May County in the aggregate principal amount of $32 million and (ii) Pollution Control Revenue Refunding Bonds issued by Salem County in the aggregate principal amount of $23 million.

The obligations of the PHI subsidiaries with respect to these tax-exempt bonds are considered to be extinguished for accounting purposes; however, each of the companies continues to hold the bonds, while monitoring the market and evaluating the options for reselling the bonds to the public at some time in the future.

Changes in Short-Term Debt

Due to the recent capital and credit market disruptions, the market for commercial paper in 2008 has been severely restricted for most companies. As a result, PHI and its subsidiaries have not been able to issue commercial paper on a day-to-day basis either in amounts or with maturities that they have typically required for cash management purposes. Given their restricted access to the commercial paper market and the general uncertainty in the credit markets, PHI and each of its utility subsidiaries borrowed under the primary credit facility to create a cash reserve for future short-term operating needs. As of December 31, 2008, PHI had a loan of $50 million outstanding and Pepco had a loan of $100 million outstanding under this facility. In January 2009, PHI borrowed an additional $150 million under this facility.

In March 2008, DPL obtained a $150 million unsecured bank loan that matures in July 2009. Interest on the loan is calculated at a variable rate. In May 2008, Pepco obtained a $25 million bank loan that matures on April 30, 2009. Interest on the loan is calculated at a variable rate.

The following insured Variable Rate Demand Bonds (VRDBs) repurchased in 2008 by The Bank of New York Mellon, as bond trustee, were tendered to the trustee by the holders in accordance with the terms of the VRDBs for purchase at par:

$17 million of Pollution Control Revenue Refunding Bonds 1997 Series A issued by Salem County for the benefit of ACE, and

$5 million of Pollution Control Revenue Refunding Bonds 1997 Series B issued by Salem County for the benefit of ACE.

PEPCO HOLDINGS

The purchase of these VRDBs was financed by The Bank of New York Mellon under Standby Bond Purchase Agreements for the respective series. If these VRDBs cannot be remarketed by the remarketing agent prior to the first anniversary of the purchase of the VRDBs by the bond trustee, ACE will be obligated to redeem 1/10th of the principal amount of each series of VRDBs held by the bond trustee every six months thereafter. While the VRDBs are held by the bond trustee, ACE is obligated to pay interest on such bonds at a rate equal to the prime rate or LIBOR plus 50 basis points.

In November 2008, DPL repurchased $9 million of Variable Rate Demand Bonds due 2024.

In 2007, PHI redeemed a total of $36 million in short-term debt with cash from operations.

In 2006, Pepco and DPL issued short-term debt of $67 million and $91 million, respectively, in order to cover capital expenditures and tax obligations throughout the year.

Sale of Virginia Retail Electric Distribution and Wholesale Transmission Assets

In January 2008, DPL completed (i) the sale of its retail electric distribution assets on the Eastern Shore of Virginia to A&N Electric Cooperative for a purchase price of approximately $49 million, after closing adjustments, and (ii) the sale of its wholesale electric transmission assets located on the Eastern Shore of Virginia to Old Dominion Electric Cooperative for a purchase price of approximately $5 million, after closing adjustments.

Sales of ACE Generating Facilities

On September 1, 2006, ACE completed the sale of its interest in the Keystone and Conemaugh generating facilities for $175 million (after giving effect to post-closing adjustments). On February 8, 2007, ACE completed the sale of the B.L. England generating facility for a price of $9 million and in February 2008, ACE received an additional $4 million in an arbitration settlement relating to the sale. For a discussion of the accounting treatment of the gains from these sales, see Note (7), “Regulatory Assets and Regulatory Liabilities,” to the consolidated financial statements of PHI set forth in Item 8 of this Form 10-K.

Sale of Interest in Cogeneration Joint Venture

During the first quarter of 2006, Conectiv Energy recognized a $12 million pre-tax gain ($8 million after-tax) on the sale of its equity interest in a joint venture which owns a wood burning cogeneration facility.

Proceeds from Settlement of Mirant Bankruptcy Claims

On September 5, 2008, Pepco transferred the Panda PPA to Sempra Energy Trading LLC (Sempra), along with a payment to Sempra, terminating all further rights, obligations and liabilities of Pepco under the Panda PPA. The use of the damages received from Mirant to offset above-market costs of energy and capacity under the Panda PPA and to make the payment to Sempra reduced the balance of proceeds from the Mirant settlement to approximately $102 million as of December 31, 2008.

PEPCO HOLDINGS

In November 2008, Pepco filed with the District of Columbia Public Service Commission (DCPSC) and the MPSC proposals to share with customers the remaining balance of proceeds from the Mirant settlement in accordance with divestiture sharing formulas previously approved by the respective commissions. Under Pepco’s proposals, District of Columbia and Maryland customers would receive a total of approximately $25 million and $29 million, respectively. On December 12, 2008, the DCPSC issued a Notice of Proposed Rulemaking concerning the sharing of the Mirant divestiture proceeds, including the bankruptcy settlement proceeds. The public comment period for the proposed rules has expired without any comments being submitted. This matter remains pending before the DCPSC.

On February 17, 2009, Pepco, the Maryland Office of People’s Counsel (the Maryland OPC) and the MPSC staff filed a settlement agreement with the MPSC. The settlement, among other things, provides that of the remaining balance of the Mirant settlement, Pepco shall distribute $39 million to its Maryland customers through a one-time billing credit. If the settlement is approved by the MPSC, Pepco currently estimates that it will result in a pre-tax gain in the range of $15 million to $20 million, which will be recorded when the MPSC issues its final order approving the settlement.

Pending the final disposition of these funds, the remaining $102 million in proceeds from the Mirant settlement is being accounted for as restricted cash and as a regulatory liability.

Capital Requirements

Capital Expenditures

Pepco Holdings’ total capital expenditures for the year ended December 31, 2008 totaled $781 million of which $587 million was incurred by Power Delivery, $138 million was incurred by Conectiv Energy, $31 million was incurred by Pepco Energy Services and $25 million was incurred by Corporate and Other. The Power Delivery expenditures were primarily related to capital costs associated with new customer services, distribution reliability, and transmission.

The table below shows the projected capital expenditures for Power Delivery, Conectiv Energy, Pepco Energy Services and Corporate and Other for the five-year period 2009 through 2013.

	For the Year
		2009		2010		2011		2012		2013		Total
	(Millions of Dollars)
Power Delivery
Distribution	$	407	$	401	$	433	$	496	$	532	$	2,269
Distribution - Blueprint for the Future		47		71		5		112		87		322
Transmission		143		183		249		200		204		979
Transmission - MAPP		56		193		363		474		300		1,386
Gas Delivery		20		21		20		21		19		101
Other		41		52		61		57		38		249
Total for Power Delivery Business		714		921		1,131		1,360		1,180		5,306
Conectiv Energy		281		118		39		12		13		463
Pepco Energy Services		11		12		14		15		15		67
Corporate and Other		5		4		4		4		3		20
Total PHI	$	1,011	$	1,055	$	1,188	$	1,391	$	1,211	$	5,856

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Pepco Holdings expects to fund these expenditures through internally generated cash and external financing.

Distribution, Transmission and Gas Delivery

The projected capital expenditures listed in the table for distribution (other than Blueprint for the Future), transmission (other than the Mid-Atlantic Power Pathway (MAPP)) and gas delivery are primarily for facility replacements and upgrades to accommodate customer growth and reliability.

Blueprint for the Future

During 2007 , Pepco, DPL and ACE each announced an initiative that is referred to as the “Blueprint for the Future.” These initiatives combine traditional energy efficiency programs with new technologies and systems to help customers manage their energy use and reduce the total cost of energy. The programs include demand side management (DSM) efforts, such as rebates or other financial incentives for residential customers to replace inefficient appliances and for business customers to use more energy efficient equipment, such as improved lighting and HVAC systems. Under the programs, customers also could receive credits on their bills for allowing the utility company to “cycle,” or intermittently turn off, their central air conditioning or heat pumps when wholesale electricity prices are high. The programs contemplate that business customers would receive financial incentives for using energy efficient equipment, and would be rewarded for reducing use during periods of peak demand. Additionally, plans include the installation of “smart meters” for all customers in the District of Columbia, Maryland, Delaware and New Jersey, providing the utilities with the ability to remotely read the meters and identify the location of a power outage. Pepco, DPL and ACE have made filings with their respective regulatory commissions for approval of certain aspects of these programs. Delaware has approved a recovery mechanism associated with these plans, and work has proceeded to prepare for the installation of an Advanced Metering Infrastructure (AMI) by the last quarter of 2009.

On December 18, 2008, the DCPSC conditionally approved five DSM programs. The cost of these programs will be recovered through a rate surcharge. On December 31, 2008 the MPSC conditionally approved for both Pepco and DPL, four residential and four non-residential DSM/energy efficiency programs. The MPSC will consider an AMI program in a separate proceeding. PHI anticipates that the costs of these programs will be recovered through a previously approved surcharge mechanism.

MAPP Project

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segment from Possum Point substation to the second substation on the Delmarva Peninsula (Indian River substation) is required to be operational by June 1, 2013. PJM is continuing to evaluate the in-service date for the remaining 80-miles of line segment to connect the Indian River substation to the Salem substation. Construction is expected to occur in sections over the next five year period.

Delta Project

In December 2007, Conectiv Energy announced a decision to construct a 545 megawatt natural gas and oil-fired combined-cycle electricity generation plant to be located in Peach Bottom Township, Pennsylvania (Delta Project). The total construction expenditures for the Delta Project are expected to be $470 million, of which $62 million was expended in 2008 and $63 million in 2007 for three combustion turbines. Projected expenditures of $230 million in 2009, $95 million in 2010, and $20 million in 2011 are included in Conectiv Energy’s projected capital expenditures shown in the table above. The plant is expected to become operational during the second quarter of 2011.

Cumberland Project

In 2007, Conectiv Energy began construction of a new 100 megawatt combustion turbine power plant in Millville, New Jersey. The total construction expenditures for this project are expected to be $75 million (of which $41 million and $23 million, respectively, were incurred in 2008 and 2007), with projected expenditures of $10 million in 2009. These future expenditures are included in Conectiv Energy’s projected capital expenditures shown in the table above. The plant is expected to become operational during the second quarter of 2009.

Compliance with Delaware Multipollutant Regulations

As required by the Delaware multipollutant emissions regulations adopted by the Delaware Department of Natural Resources and Environmental Control, PHI, in June 2007, filed a compliance plan for controlling nitrogen oxide (NOx), sulfur dioxide (SO 2 ) and mercury emissions from its Edge Moor power plant. The plan includes installation of a sodium-based sorbent injection system and a Selective Non-Catalytic Reduction (SNCR) system and carbon injection for Edge Moor Units 3 and 4, and use of an SNCR system and lower sulfur oil at Edge Moor Unit 5. Conectiv Energy currently believes that with these modifications, it will be able to meet the requirements of the new regulations at an estimated capital cost of $81 million (of which $47 million was expended through December 2008) with projected expenditures of $18 million in 2009.

Dividends

Pepco Holdings’ annual dividend rate on its common stock is determined by the Board of Directors on a quarterly basis and takes into consideration, among other factors, current and possible future developments that may affect PHI’s income and cash flows. In 2008, PHI’s Board of Directors declared quarterly dividends of 27 cents per share of common stock payable on March 31, 2008, June 30, 2008, September 30, 2008 and December 31, 2008.

On January 22, 2009, the Board of Directors declared a dividend on common stock of 27 cents per share payable March 31, 2009, to shareholders of record on March 10, 2009.

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PHI generates no operating income of its own. Accordingly, its ability to pay dividends to its shareholders depends on dividends received from its subsidiaries. In addition to their future financial performance, the ability of PHI’s direct and indirect subsidiaries to pay dividends is subject to limits imposed by: (i) state corporate and regulatory laws, which impose limitations on the funds that can be used to pay dividends and, in the case of regulatory laws, as applicable, may require the prior approval of the relevant utility regulatory commissions before dividends can be paid, (ii) the prior rights of holders of existing and future preferred stock, mortgage bonds and other long-term debt issued by the subsidiaries, and any other restrictions imposed in connection with the incurrence of liabilities, and (iii) certain provisions of ACE’s certificate of incorporation which provides that, if any preferred stock is outstanding, no dividends may be paid on the ACE common stock if, after payment, ACE’s common stock capital plus surplus would be less than the involuntary liquidation value of the outstanding preferred stock. Pepco and DPL have no shares of preferred stock outstanding. Currently, the restriction in the ACE charter does not limit its ability to pay dividends.

Pension Funding

Pepco Holdings has a noncontributory retirement plan (the PHI Retirement Plan) that covers substantially all employees of Pepco, DPL and ACE and certain employees of other Pepco Holdings subsidiaries.

As of the 2008 valuation, the PHI Retirement Plan satisfied the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (ERISA) without requiring any additional funding. PHI’s funding policy with regard to the PHI Retirement Plan is to maintain a funding level in excess of 100% of its accumulated benefit obligation (ABO) and that is at least equal to the funding target as defined under the Pension Protection Act of 2006. The funding target under the Pension Protection Act is 100% of accrued liabilities phased in over time. The funding target was 92% for 2008 and is 94% of the accrued liability for 2009. In 2008 and 2007, no contributions were made to the PHI Retirement Plan.

In 2008, the ABO for the PHI Retirement Plan decreased to $1.57 billion from $1.59 billion in 2007, due to an increase in the discount rate from 6.25% to 6.50%. The PHI Retirement Plan assets experienced a negative return of 24% in 2008, below the 8.25% level assumed in the valuation. As a result of the combination of these factors, the funding level at year-end 2008 was below both 100% of the ABO and the funding target for January 1, 2009. Although PHI projects there will be no minimum funding requirement for 2009 under the Pension Protection Act, PHI expects to make a discretionary tax-deductible contribution of approximately $300 million to bring its plan assets to at least the funding target level for 2009 under the Pension Protection Act. For additional discussion of PHI’s Pension and Other Postretirement Benefits, see Note (10), “Pension and Other Postretirement Benefits,” to the consolidated financial statements of PHI set forth in Item 8 of this Form 10-K.

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Contractual Obligations and Commercial Commitments

Summary information about Pepco Holdings’ consolidated contractual obligations and commercial commitments at December 31, 2008, is as follows:

	Contractual Maturity
Obligation		Total		Less than 1 Year		1-3 Years		3-5 Years		After 5 Years
		(Millions of dollars)
Variable rate demand bonds	$	118	$	118	$	-	$	-	$	-
Stand-by bond purchase agreement		22		22		-		-		-
Bank loans and credit facility loans		325		325		-		-		-
Commercial paper		-		-		-		-		-
Long-term debt (a)		5,357		82		602		1,345		3,328
Long-term project funding		21		2		4		4		11
Interest payments on debt		4,049		320		609		523		2,597
Capital leases		167		15		30		30		92
Liabilities and accrued interest related to effectively settled and uncertain tax positions		165		37		-		7		121
Operating leases		591		56		119		47		369
Pension and OPEB plan contributions		339		339		-		-		-
Non-derivative fuel and purchase power contracts		9,067		3,211		2,902		729		2,225
Total	$	20,221	$	4,527	$	4,266	$	2,685	$	8,743

(a) Includes transition bonds issued by ACE Funding.

Third Party Guarantees, Indemnifications and Off-Balance Sheet Arrangements

For a discussion of PHI’s third party guarantees, indemnifications, obligations and off-balance sheet arrangements, see Note (16), “Commitments and Contingencies,” to the consolidated financial statements of PHI set forth in Item 8 of this Form 10-K.

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Energy Contract Net Asset/Liability Activity

The following table provides detail on changes in the net asset or liability position of the Competitive Energy businesses (consisting of the activities of the Conectiv Energy and Pepco Energy Services segments) with respect to energy commodity contracts from one period to the next:

Roll-forward of Fair Value Energy Contract Net Assets (Liabilities) For the Year Ended December 31, 2008 (Dollars are pre-tax and in millions)
	Energy Commodity Activities (a)
Total Fair Value Energy Contract Net Assets at December 31, 2007	$	18
Total change in unrealized fair value		83
Less: Reclassification to realized at settlement of contracts		(97)
Effective portion of changes in fair value - recorded in Other Comprehensive Income		(315)
Cash flow hedge ineffectiveness - recorded in earnings		(3)
Total Fair Value Energy Contract Net Liabilities at December 31, 2008	$	(314)


Detail of Fair Value Energy Contract Net Liabilities at December 31, 2008 (see above)	Total
Current Assets (unrealized gains — derivative contracts)	$	126
Noncurrent Assets (other assets)		13
Total Fair Value Energy Contract Assets		139

Current Liabilities (other current liabilities)		(367)
Noncurrent Liabilities (other liabilities)		(86)
Total Fair Value Energy Contract Liabilities		(453)

Total Fair Value Energy Contract Net Liabilities	$	(314)

(a)	Includes all SFAS No. 133 hedge activity and trading activities recorded at fair value through Accumulated Other Comprehensive Income (AOCI) or on the Statements of Earnings, as required.

The $314 million net liability on energy contracts at December 31, 2008 was primarily attributable to losses on power swaps and natural gas futures and swaps designated as hedges of future energy purchases or production under Statement of Financial Accounting Standards (SFAS) No. 133. Prices of electricity and natural gas declined during the second half of 2008, which resulted in unrealized losses on the energy contracts of the Competitive Energy businesses. These businesses recorded unrealized losses of $315 million on energy contracts in Other Comprehensive Income as these energy contracts were effective hedges under SFAS No. 133. When these energy contracts settle, the related realized gains or losses are expected to be largely offset by the realized loss or gain on future energy purchases or production that will be used to settle the sales obligations of the Competitive Energy businesses to their customers.

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PHI uses its best estimates to determine the fair value of the commodity and derivative contracts that its Competitive Energy businesses hold and sell. The fair values in each category presented below reflect forward prices and volatility factors as of December 31, 2008 and are subject to change as a result of changes in these factors:

Maturity and Source of Fair Value of Energy Contract Net Assets (Liabilities) As of December 31, 2008 (Dollars are pre-tax and in millions)
	Fair Value of Contracts at December 31, 2008
	Maturities
Source of Fair Value	2009		2010		2011		2012 and Beyond		Total Fair Value
Energy Commodity Activities, net (a)
Actively Quoted (i.e., exchange-traded) prices	$	(47)	$	(48)	$	(5)	$	(2)	$	(102)
Prices provided by other external sources (b)		(138)		(56)		(11)		(9)		(214)
Modeled (c)		2		2		(4)		2		2
Total	$	(183)	$	(102)	$	(20)	$	(9)	$	(314)

(a)	Includes all SFAS No. 133 hedge activity and trading activities recorded at fair value through AOCI or on the Statements of Earnings, as required.

(b)	Prices provided by other external sources reflect information obtained from over-the-counter brokers, industry services, or multiple-party on-line platforms that is readily observable in the market.

(c)

Modeled values include significant inputs, usually representing more than 10% of the valuation, not readily observable in the market. The modeled valuation above represents the fair valuation of certain long-dated power transactions based on limited observable broker prices extrapolated for periods beyond two years into the future.

Contractual Arrangements with Credit Rating Triggers or Margining Rights

Under certain contractual arrangements entered into by PHI’s subsidiaries in connection with Competitive Energy business and other transactions, the subsidiary may be required to provide cash collateral or letters of credit as security for its contractual obligations if the credit ratings of the subsidiary are downgraded. In the event of a downgrade, the amount required to be posted would depend on the amount of the underlying contractual obligation existing at the time of the downgrade. Based on contractual provisions in effect at December 31, 2008, a one-level downgrade in the unsecured debt credit ratings of PHI and each of its rated subsidiaries, which would decrease PHI’s rating to below “investment grade,” would increase the collateral obligation of PHI and its subsidiaries by up to $462 million. PHI believes that it and its utility subsidiaries currently have sufficient liquidity to fund their operations and meet their financial obligations.

Many of the contractual arrangements entered into by PHI’s subsidiaries in connection with Competitive Energy and Default Electricity Supply activities include margining rights pursuant to which the PHI subsidiary or a counterparty may request collateral if the market value of the contractual obligations reaches levels in excess of the credit thresholds established in the applicable arrangements. Pursuant to these margining rights, the affected PHI subsidiary may

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receive, or be required to post, collateral due to energy price movements. As of December 31, 2008, Pepco Holdings’ subsidiaries engaged in Competitive Energy activities and Default Electricity Supply activities provided net cash collateral in the amount of $365 million in connection with these activities.

Environmental Remediation Obligations

PHI’s accrued liabilities as of December 31, 2008 include approximately $14 million, of which $6 million is expected to be incurred in 2009, for potential environmental cleanup and other costs related to sites at which an operating subsidiary is a potentially responsible party, is alleged to be a third-party contributor, or has made a decision to clean up contamination on its own property. For information regarding projected expenditures for environmental control facilities, see Item 1 “Business — Environmental Matters,” of this Form 10-K. The most significant environmental remediation obligations as of December 31, 2008, were:

$4 million, of which $1 million is expected to be incurred in 2009, payable by DPL in accordance with a 2001 consent agreement reached with the Delaware Department of Natural Resources and Environmental Control, for remediation, site restoration, natural resource damage compensatory projects and other costs associated with environmental contamination that resulted from an oil release at the Indian River power plant, which was sold in June 2001.

$5 million in environmental remediation costs, of which $1 million is expected to be incurred in 2009, payable by Conectiv Energy associated with the Deepwater generating facility.

Less than $1 million for environmental remediation costs related to former manufactured gas plant operations at a Cambridge, Maryland site on DPL-owned property, adjacent property and the adjacent Cambridge Creek, all of which is expected to be incurred in 2009.

$2 million, constituting Pepco’s liability for a remedy at the Metal Bank/Cottman Avenue site.

$2 million, most of which is expected to be incurred in 2009, payable by DPL in connection with the Wilmington Coal Gas South site located in Wilmington, Delaware, to remediate residual material from the historical operation of a manufactured gas plant.

Less than $1 million, of which a small portion is expected to be incurred in 2009, payable by Pepco for long-term monitoring associated with a pipeline oil release that occurred in 2000.

Sources of Capital

Pepco Holdings’ sources to meet its long-term funding needs, such as capital expenditures, dividends, and new investments, and its short-term funding needs, such as working capital and the temporary funding of long-term funding needs, include internally generated funds, securities issuances and bank financing under new or existing facilities. PHI’s ability to

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generate funds from its operations and to access capital and credit markets is subject to risks and uncertainties. Volatile and deteriorating financial market conditions, diminished liquidity and tightening credit may affect efficient access to certain of PHI’s potential funding sources. See Item 1A, “Risk Factors,” of this Form 10-K, for additional discussion of important factors that may impact these sources of capital.

Internally Generated Cash

The primary source of Pepco Holdings’ internally generated funds is the cash flow generated by its regulated utility subsidiaries in the Power Delivery business. Additional sources of funds include cash flow generated from its non-regulated subsidiaries and the sale of non-core assets.

Short-Term Funding Sources

Pepco Holdings and its regulated utility subsidiaries have traditionally used a number of sources to fulfill short-term funding needs, such as commercial paper, short-term notes and bank lines of credit. Proceeds from short-term borrowings are used primarily to meet working capital needs but may also be used to fund temporarily long-term capital requirements.

Pepco Holdings maintains an ongoing commercial paper program of up to $875 million. Pepco and DPL have ongoing commercial paper programs of up to $500 million, and ACE up to $250 million. The commercial paper can be issued with maturities of up to 270 days. Due to the recent capital and credit market disruptions, however, the market for commercial paper has been severely restricted for most companies. As a result, PHI and its subsidiaries have not been able to issue commercial paper on a day-to-day basis either in amounts or with maturities that they have typically required for cash management purposes.

A further description of the existence and availability of the sources of short-term funding, and the impact of the ongoing capital and credit market disruptions, is set forth above under the headings “Impact of the Current Capital and Credit Market Disruptions — Collateral Requirements of the Competitive Energy Businesses” and “Credit Facilities.”

Long-Term Funding Sources

The sources of long-term funding for PHI and its subsidiaries are the issuance of debt and equity securities and borrowing under long-term credit agreements. Proceeds from long-term financings are used primarily to fund long-term capital requirements, such as capital expenditures and new investments, and to repay or refinance existing indebtedness.

Regulatory Restrictions on Financing Activities

The issuance of debt securities by PHI’s principal subsidiaries requires approval of either FERC or one or more state public utility commissions. Neither FERC approval nor state public utility commission approval is required as a condition to the issuance of securities by PHI.

State Financing Authority

Pepco’s long-term financing activities (including the issuance of securities and the incurrence of debt) are subject to authorization by the DCPSC and MPSC. DPL’s long-term financing activities are subject to authorization by MPSC and the Delaware Public Service

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Commission (DPSC). ACE’s long-term and short term (consisting of debt instruments with a maturity of one year or less) financing activities are subject to authorization by the NJBPU. Each utility, through periodic filings with the state public service commission(s) having jurisdiction over its financing activities, typically seeks to maintain standing authority sufficient to cover its projected financing needs over a multi-year period.

FERC Financing Authority

Under the Federal Power Act (FPA), FERC has jurisdiction over the issuance of long-term and short-term securities of public utilities, but only if the issuance is not regulated by the state public utility commission in which the public utility is organized and operating. Under these provisions, FERC has jurisdiction over the issuance of short-term debt by Pepco and DPL. Pepco and DPL have obtained FERC authority for the issuance of short-term debt. Because Conectiv Energy and Pepco Energy Services also qualify as public utilities under the FPA and are not regulated by a state utility commission, FERC also has jurisdiction over the issuance of securities by those companies. Conectiv Energy and Pepco Energy Services have obtained the requisite FERC financing authority in their respective market-based rate orders.

Money Pool

Pepco Holdings operates a system money pool, or an intra-system cash management program under a blanket authorization adopted by FERC. The money pool is a cash management mechanism used by Pepco Holdings to manage the short-term investment and borrowing requirements of its subsidiaries that participate in the money pool. Pepco Holdings may invest in but not borrow from the money pool. Eligible subsidiaries with surplus cash may deposit those funds in the money pool. Deposits in the money pool are guaranteed by Pepco Holdings. Eligible subsidiaries with cash requirements may borrow from the money pool. Borrowings from the money pool are unsecured. Depositors in the money pool receive, and borrowers from the money pool pay, an interest rate based primarily on Pepco Holdings’ short-term borrowing rate. Pepco Holdings deposits funds in the money pool to the extent that the pool has insufficient funds to meet the borrowing needs of its participants, which may require Pepco Holdings to borrow funds for deposit from external sources.

REGULATORY AND OTHER MATTERS

For a discussion of material pending matters such as regulatory and legal proceedings, and other commitments and contingencies, see Note (16), “Commitments and Contingencies,” to the consolidated financial statements of PHI set forth in Item 8 of this Form 10-K.

CRITICAL ACCOUNTING POLICIES

General

Pepco Holdings has identified the following accounting policies, including certain estimates, that as a result of the judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operations involved, could result in material changes in its financial condition or results of operations under different conditions or using different assumptions. Pepco Holdings has discussed the development, selection and disclosure of each of these policies with the Audit Committee of the Board of Directors.

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Goodwill Impairment Evaluation

PHI believes that the estimates involved in its goodwill impairment evaluation process represent “Critical Accounting Estimates” because they are subjective and susceptible to change from period to period as management makes assumptions and judgments and the impact of a change in assumptions could be material to financial results.

Substantially all of PHI’s goodwill was generated by Pepco’s acquisition of Conectiv in 2002 and is allocated to the Power Delivery reporting unit for purposes of assessing impairment under SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142). Management has identified Power Delivery as a single reporting unit based on the aggregation of components. The first step of the goodwill impairment test under SFAS No. 142 compares the fair value of the reporting unit with its carrying amount, including goodwill. Management uses its best judgment to make reasonable projections of future cash flows for Power Delivery when estimating the reporting unit’s fair value. In addition, PHI selects a discount rate for the associated risk with those estimated cash flows. These judgments are inherently uncertain, and actual results could vary from those used in PHI’s estimates. The impact of such variations could significantly alter the results of a goodwill impairment test, which could materially impact the estimated fair value of Power Delivery and potentially the amount of any impairment recorded in the financial statements.

PHI tests its goodwill for impairment annually as of July 1, and whenever an event occurs or circumstances change in the interim that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Factors that may result in an interim impairment test include, but are not limited to: a change in identified reporting units; an adverse change in business conditions; a protracted decline in stock price causing market capitalization to fall below book value; an adverse regulatory action; or impairment of long-lived assets in the reporting unit.

PHI’s July 1, 2008 annual impairment test indicated that its goodwill was not impaired. PHI performed an interim test of goodwill for impairment at December 31, 2008 as its market capitalization was below its book value for a significant part of the fourth quarter of 2008, and it concluded that its goodwill was not impaired. Details about the interim test at year-end and the results are included in Note (6), “Goodwill,” in PHI’s consolidated financial statements in Item 8 of this Form 10-K.

In order to estimate the fair value of the Power Delivery reporting unit, PHI reviews the results from two discounted cash flow models. The models differ in the method used to calculate the terminal value of the reporting unit. One estimate of terminal value is based on a constant, annual cash flow growth rate that is consistent with Power Delivery’s plan, and the other estimate of terminal value is based on a multiple of earnings before interest, taxes, depreciation, and amortization that management believes is consistent with relevant market multiples for comparable utilities. Each model uses a cost of capital appropriate for a regulated utility as the discount rate for the estimated cash flows associated with the reporting unit. Neither valuation model evidenced impairment of goodwill. PHI has consistently used this valuation model to estimate the fair value of Power Delivery since the adoption of SFAS No. 142.

The estimation of fair value is dependent on a number of factors, including but not limited to interest rates, growth assumptions, assumptions about regulatory ratemaking

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proceedings, operating and capital expenditure requirements and other factors, changes in which could materially impact the results of impairment testing. Assumptions and methodologies used in the models were consistent with historical experience. A hypothetical 10 percent decrease in fair value of the Power Delivery reporting unit at December 31, 2008 would not have resulted in the Power Delivery reporting unit failing the first step of the impairment test as defined in SFAS No. 142. Sensitive, interrelated and uncertain variables that could decrease the estimated fair value of the Power Delivery reporting unit include utility sector market performance, sustained adverse business conditions, the results of rate-making proceedings, higher operating and capital expenditure requirements, a significant increase in the cost of capital and other factors.

Long-Lived Assets Impairment Evaluation

Pepco Holdings believes that the estimates involved in its long-lived asset impairment evaluation process represent “Critical Accounting Estimates” because (i) they are highly susceptible to change from period to period because management is required to make assumptions and judgments about undiscounted and discounted future cash flows and fair values, which are inherently uncertain, (ii) actual results could vary from those used in Pepco Holdings’ estimates and the impact of such variations could be material, and (iii) the impact that recognizing an impairment would have on Pepco Holdings’ assets as well as the net loss related to an impairment charge could be material.

SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” requires that certain long-lived assets must be tested for recoverability whenever events or circumstances indicate that the carrying amount may not be recoverable. An impairment loss may only be recognized if the carrying amount of an asset is not recoverable and the carrying amount exceeds its fair value. The asset is deemed not to be recoverable when its carrying amount exceeds the sum of the undiscounted future cash flows expected to result from the use and eventual disposition of the asset. In order to estimate an asset’s future cash flows, Pepco Holdings considers historical cash flows. Pepco Holdings uses its best estimates in making these evaluations and considers various factors, including forward price curves for energy, fuel costs, legislative initiatives, and operating costs. If necessary, the process of determining fair value is done consistent with the process described in assessing the fair value of goodwill discussed above.

Accounting for Derivatives

Pepco Holdings believes that the estimates involved in accounting for its derivative instruments represent “Critical Accounting Estimates” because (i) the fair value of the instruments are highly susceptible to changes in market value and/or interest rate fluctuations, (ii) there are significant uncertainties in modeling techniques used to measure fair value in certain circumstances, (iii) actual results could vary from those used in Pepco Holdings’ estimates and the impact of such variations could be material, and (iv) changes in fair values and market prices could result in material impacts to Pepco Holdings’ assets, liabilities, other comprehensive income (loss), and results of operations. See Note (2), “Significant Accounting Policies ¾ Accounting for Derivatives,” to the consolidated financial statements of PHI set forth in Item 8 of this Form 10-K for information on PHI’s accounting for derivatives.

Pepco Holdings and its subsidiaries use derivative instruments primarily to manage risk associated with commodity prices and interest rates. SFAS No. 133, “Accounting for Derivative

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Instruments and Hedging Activities,” as amended, governs the accounting treatment for derivatives and requires that derivative instruments be measured at fair value. The fair value of derivatives is determined using quoted exchange prices where available. For instruments that are not traded on an exchange, external broker quotes are used to determine fair value. For some custom and complex instruments, internal models are used to interpolate broker quality price information. For certain long-dated instruments, broker or exchange data is extrapolated for future periods where limited market information is available. Models are also used to estimate volumes for certain transactions. The same valuation methods are used to determine the value of non-derivative, commodity exposure for risk management purposes.

Pension and Other Postretirement Benefit Plans

Pepco Holdings believes that the estimates involved in reporting the costs of providing pension and other postretirement benefits represent “Critical Accounting Estimates” because (i) they are based on an actuarial calculation that includes a number of assumptions which are subjective in nature, (ii) they are dependent on numerous factors resulting from actual plan experience and assumptions of future experience, and (iii) changes in assumptions could impact Pepco Holdings’ expected future cash funding requirements for the plans and would have an impact on the projected benefit obligations, and the reported annual net periodic pension and other postretirement benefit cost on the income statement.

Assumptions about the future, including the expected return on plan assets, discount rate applied to benefit obligations, the anticipated rate of increase in health care costs and participant compensation have a significant impact on employee benefit costs. In terms of quantifying the anticipated impact of a change in the critical assumptions while holding all other assumptions constant, Pepco Holdings estimates that a .25% decrease in the discount rate used to value the benefit obligations could result in a $7 million increase in net periodic benefit cost. Additionally, Pepco Holdings estimates that a .25% reduction in the expected return on plan assets could result in a $6 million increase in net periodic benefit cost. A 1.0% increase in the assumed healthcare cost trend rate could result in a $2 million increase net periodic benefit cost. In addition to its impact on cost, a .25% decrease in the discount rate would increase PHI’s projected pension benefit obligation by $60 million and would increase the accumulated postretirement benefit obligation by $18 million at December 31, 2008. Pepco Holdings’ management consults with its actuaries and investment consultants when selecting its plan assumptions, and benchmarks its critical assumptions against other corporate plans.

The impact of changes in assumptions and the difference between actual and expected or estimated results on pension and postretirement obligations is generally recognized over the working lives of the employees who benefit under the plans rather than immediately recognized in the statements of earnings.

For additional discussion, see Note (10), “Pensions and Other Postretirement Benefits,” to the consolidated financial statements of PHI set forth in Item 8 of this Form 10-K.

Regulation of Power Delivery Operations

The requirements of SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation,” apply to the Power Delivery businesses of Pepco, DPL, and ACE. Pepco Holdings believes that the judgment involved in accounting for its regulated activities

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represent “Critical Accounting Estimates” because (i) a significant amount of judgment is required (including but not limited to the interpretation of laws and regulatory commission orders) to assess the probability of the recovery of regulatory assets, (ii) actual results and interpretations could vary from those used in Pepco Holdings’ estimates and the impact of such variations could be material, and (iii) the impact that writing off a regulatory asset would have on Pepco Holdings’ assets and the net loss related to the charge could be material.

Unbilled Revenue

Unbilled revenue represents an estimate of revenue earned from services rendered by Pepco Holdings’ utility operations that have not yet been billed. Pepco Holdings’ utility operations calculate unbilled revenue using an output based methodology. This methodology is based on the supply of electricity or gas distributed to customers. Pepco Holdings believes that the estimates involved in its unbilled revenue process represent “Critical Accounting Estimates” because management is required to make assumptions and judgments about input factors such as customer sales mix and estimated power line losses (estimates of electricity expected to be lost in the process of its transmission and distribution to customers), all of which are inherently uncertain and susceptible to change from period to period, the impact of which could be material.

Accounting for Income Taxes

Pepco Holdings and the majority of its subsidiaries file a consolidated federal income tax return. Pepco Holdings accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” and effective January 1, 2007, adopted FIN 48 “Accounting for Uncertainty in Income Taxes.” FIN 48 clarifies the criteria for recognition of tax benefits in accordance with SFAS No. 109, and prescribes a financial statement recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. Specifically, it clarifies that an entity’s tax benefits must be “more likely than not” of being sustained assuming that position will be examined by taxing authorities with full knowledge of all relevant information prior to recording the related tax benefit in the financial statements. If the position drops below the “more likely than not” standard, the benefit can no longer be recognized.

Assumptions, judgment and the use of estimates are required in determining if the “more likely than not” standard has been met when developing the provision for income taxes. Pepco Holdings’ assumptions, judgments and estimates take into account current tax laws, interpretation of current tax laws and the possible outcomes of current and future investigations conducted by tax authorities. Pepco Holdings has established reserves for income taxes to address potential exposures involving tax positions that could be challenged by tax authorities. Although Pepco Holdings believes that these assumptions, judgments and estimates are reasonable, changes in tax laws or its interpretation of tax laws and the resolutions of the current and any future investigations could significantly impact the amounts provided for income taxes in the consolidated financial statements.

Under SFAS No. 109, deferred income tax assets and liabilities are recorded, representing future effects on income taxes for temporary differences between the bases of assets and liabilities for financial reporting and tax purposes. Pepco Holdings evaluates quarterly the probability of realizing deferred tax assets by reviewing a forecast of future taxable income and

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the availability of tax planning strategies that can be implemented, if necessary, to realize deferred tax assets. Failure to achieve forecasted taxable income or successfully implement tax planning strategies may affect the realization of deferred tax assets.

New Accounting Standards and Pronouncements

For information concerning new accounting standards and pronouncements that have recently been adopted by PHI and its subsidiaries or that one or more of the companies will be required to adopt on or before a specified date in the future, see Note (3), “Newly Adopted Accounting Standards,” and Note (4), “Recently Issued Accounting Standards, Not Yet Adopted,” to the consolidated financial statements of PHI set forth in Item 8 of this Form 10-K.

FORWARD-LOOKING STATEMENTS

Some of the statements contained in this Annual Report on Form 10-K are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. These statements include declarations regarding Pepco Holdings’ intents, beliefs and current expectations. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of such terms or other comparable terminology. Any forward-looking statements are not guarantees of future performance, and actual results could differ materially from those indicated by the forward-looking statements. Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause PHI’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements.

The forward-looking statements contained herein are qualified in their entirety by reference to the following important factors, which are difficult to predict, contain uncertainties, are beyond Pepco Holdings’ control and may cause actual results to differ materially from those contained in forward-looking statements:

Prevailing governmental policies and regulatory actions affecting the energy industry, including allowed rates of return, industry and rate structure, acquisition and disposal of assets and facilities, operation and construction of plant facilities, recovery of purchased power expenses, and present or prospective wholesale and retail competition;

Changes in and compliance with environmental and safety laws and policies;

Weather conditions;

Population growth rates and demographic patterns;

Competition for retail and wholesale customers;

General economic conditions, including potential negative impacts resulting from an economic downturn;

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Growth in demand, sales and capacity to fulfill demand;

Changes in tax rates or policies or in rates of inflation;

Changes in accounting standards or practices;

Changes in project costs;

Unanticipated changes in operating expenses and capital expenditures;

The ability to obtain funding in the capital markets on favorable terms;

Rules and regulations imposed by federal and/or state regulatory commissions, PJM and other regional transmission organizations (New York Independent System Operator, ISONE), the North American Electric Reliability Council and other applicable electric reliability organizations;

Legal and administrative proceedings (whether civil or criminal) and settlements that affect PHI’s business and profitability;

Pace of entry into new markets;

Volatility in market demand and prices for energy, capacity and fuel;

Interest rate fluctuations and credit and capital market conditions; and

Effects of geopolitical events, including the threat of domestic terrorism.

Any forward-looking statements speak only as to the date of this Annual Report and Pepco Holdings undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date on which such statements are made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for Pepco Holdings to predict all of such factors, nor can Pepco Holdings assess the impact of any such factor on Pepco Holding’s business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement.

The foregoing review of factors should not be construed as exhaustive.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

POTOMAC ELECTRIC POWER COMPANY

GENERAL OVERVIEW

Potomac Electric Power Company (Pepco) is engaged in the transmission and distribution of electricity in Washington, D.C. and major portions of Montgomery County and Prince George’s County in suburban Maryland. Pepco provides Default Electricity Supply, which is the supply of electricity at regulated rates to retail customers in its territories who do not elect to purchase electricity from a competitive supplier, in both the District of Columbia and Maryland. Default Electricity Supply is known as Standard Offer Service in both the District of Columbia and Maryland. Pepco’s service territory covers approximately 640 square miles and has a population of approximately 2.1 million. As of December 31, 2008, approximately 57% of delivered electricity sales were to Maryland customers and approximately 43% were to Washington, D.C. customers.

In connection with its approval of new electric service distribution base rates for Pepco in Maryland, effective in June, 2007 (the 2007 Maryland Rate Order), the Maryland Public Service Commission (MPSC) approved a bill stabilization adjustment mechanism (BSA) for retail customers. For customers to which the BSA applies, Pepco recognizes distribution revenue based on an approved distribution charge per customer. From a revenue recognition standpoint, the BSA thus decouples the distribution revenue recognized in a reporting period from the amount of power delivered during the period. This change in the reporting of distribution revenue has the effect of eliminating changes in retail customer usage (whether due to weather conditions, energy prices, energy efficiency programs or other reasons) as a factor having an impact on reported revenue. As a consequence, the only factors that will cause distribution revenue from retail customers in Maryland to fluctuate from period to period are changes in the number of customers and changes in the approved distribution charge per customer.

Pepco is a wholly owned subsidiary of Pepco Holdings, Inc. (PHI or Pepco Holdings). Because PHI is a public utility holding company subject to the Public Utility Holding Company Act of 2005 (PUHCA 2005), the relationship between PHI and Pepco and certain activities of Pepco are subject to the regulatory oversight of Federal Energy Regulatory Commission under PUHCA 2005.

IMPACT OF THE CURRENT CAPITAL AND CREDIT MARKET DISRUPTIONS

The recent disruptions in the capital and credit markets have had an impact on Pepco’s business. While these conditions have required Pepco to make certain adjustments in its financial management activities, Pepco believes that it currently has sufficient liquidity to fund its operations and meet its financial obligations. These market conditions, should they continue, however, could have a negative effect on Pepco’s financial condition, results of operations and cash flows.

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Liquidity Requirements

Pepco depends on access to the capital and credit markets to meet its liquidity and capital requirements. To meet its liquidity requirements, Pepco historically has relied on the issuance of commercial paper and short-term notes and on bank lines of credit to supplement internally generated cash from operations. Pepco’s primary credit source is PHI’s $1.5 billion syndicated credit facility, under which Pepco can borrow funds, obtain letters of credit and support the issuance of commercial paper in an amount up to $500 million (subject to the limitation that the total utilization by Pepco and PHI’s other utility subsidiaries cannot exceed $625 million). This facility is in effect until May 2012 and consists of commitments from 17 lenders, no one of which is responsible for more than 8.5% of the total commitment.

Due to the recent capital and credit market disruptions, the market for commercial paper was severely restricted for most companies. As a result, Pepco has not been able to issue commercial paper on a day-to-day basis either in amounts or with maturities that it typically has required for cash management purposes. Given its restricted access to the commercial paper market and the uncertainty in the credit markets generally, Pepco borrowed $100 million under the credit facility to create a cash reserve for future short-term operating needs at December 31, 2008. After giving effect to outstanding letters of credit and commercial paper, PHI’s utility subsidiaries have an aggregate of $843 million in combined cash and borrowing capacity under the credit facility at December 31, 2008. During the months of January and February 2009, the average daily amount of the combined cash and borrowing capacity of PHI’s utility subsidiaries was $831 million and ranged from a low of $673 million to a high of $1 billion.

To address the challenges posed by the current capital and credit market environment and to ensure that it will continue to have sufficient access to cash to meet its liquidity needs, Pepco has identified a number of cash and liquidity conservation measures, including opportunities to defer capital expenditures due to lower than anticipated growth. Several measures to reduce expenditures have been taken. Additional measures could be undertaken if conditions warrant.

Due to the financial market conditions, which have caused uncertainty of short-term funding, Pepco issued $250 million in long-term debt securities in December, with the proceeds used to refund short-term debt incurred to finance utility construction and operations on a temporary basis and incurred to fund the temporary repurchase of tax-exempt auction rate securities.

Pension and Postretirement Benefit Plans

Pepco participates in pension and postretirement benefit plans sponsored by PHI for its employees. While the plans have not experienced any significant impact in terms of liquidity or counterparty exposure due to the disruption of the capital and credit markets, the recent stock market declines have caused a decrease in the market value of benefit plan assets in 2008. Pepco expects to contribute approximately $170 million to the pension plan in 2009.

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RESULTS OF OPERATIONS

The following results of operations discussion compares the year ended December 31, 2008 to the year ended December 31, 2007. Other than this disclosure, information under this item has been omitted in accordance with General Instruction I(2)(a) to the Form 10-K. All amounts in the tables (except sales and customers) are in millions of dollars.

Operating Revenue

	2008		2007		Change
Regulated T&D Electric Revenue	$	978	$	928	$	50
Default Supply Revenue		1,309		1,241		68
Other Electric Revenue		35		32		3
Total Operating Revenue	$	2,322	$	2,201	$	121

The table above shows the amount of Operating Revenue earned that is subject to price regulation (Regulated Transmission and Distribution (T&D) Electric Revenue and Default Supply Revenue) and that which is not subject to price regulation (Other Electric Revenue).

Regulated T&D Electric Revenue includes revenue from the delivery of electricity, including the delivery of Default Electricity Supply, to Pepco’s customers within its service territory at regulated rates. Regulated T&D Electric Revenue also includes transmission service revenue that Pepco receives as a transmission owner from PJM Interconnection, LLC (PJM).

Default Supply Revenue is the revenue received for Default Electricity Supply. The costs related to Default Electricity Supply are included in Fuel and Purchased Energy.

Regulated T&D Electric

Regulated T&D Electric Revenue	2008		2007		Change

Residential	$	259	$	263	$	(4)
Commercial		544		529		15
Industrial		-		-		-
Other		175		136		39
Total Regulated T&D Electric Revenue	$	978	$	928	$	50

Other Regulated T&D Electric Revenue consists primarily of (i) transmission service revenue, (ii) revenue from the resale of energy and capacity under power purchase agreements between Pepco and unaffiliated third parties in the PJM Regional Transmission Organization (PJM RTO) market, and (iii) either (a) a positive adjustment equal to the amount by which revenue from Maryland retail distribution sales falls short of the revenue that Pepco is entitled to earn based on the distribution charge per customer approved in the 2007 Maryland Rate Order or

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(b) a negative adjustment equal to the amount by which revenue from such distribution sales exceeds the revenue that Pepco is entitled to earn based on the approved distribution charge per customer (a Revenue Decoupling Adjustment).

Regulated T&D Electric Sales (Gigawatt hours(GWh))	2008		2007		Change

Residential		7,730		8,093		(363)
Commercial		18,972		19,197		(225)
Industrial		-		-		-
Other		161		161		-
Total Regulated T&D Electric Sales		26,863		27,451		(588)

Regulated T&D Electric Customers (in thousands)	2008		2007		Change

Residential		693		687		6
Commercial		74		73		1
Industrial		-		-		-
Other		-		-		-
Total Regulated T&D Electric Customers		767		760		7

Regulated T&D Electric Revenue increased by $50 million primarily due to:

An increase of $24 million due to a distribution rate change in the District of Columbia that became effective in February 2008.

An increase of $16 million due to a distribution rate change under the 2007 Maryland Rate Order that became effective in June 2007, including a positive $13 million Revenue Decoupling Adjustment.

The aggregate amount of these increases was partially offset by:

A decrease of $11 million due to lower weather-related sales (a 4% decrease in Heating Degree Days and a 6% decrease in Cooling Degree Days).

A decrease of $6 million due to differences in consumption among the various customer rate classes.

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Default Electricity Supply

Default Supply Revenue	2008		2007		Change

Residential	$	804	$	774	$	30
Commercial		498		459		39
Industrial		-		-		-
Other		7		8		(1)
Total Default Supply Revenue	$	1,309	$	1,241	$	68

Default Electricity Supply Sales (GWh)	2008		2007		Change

Residential		7,310		7,692		(382)
Commercial		4,126		4,384		(258)
Industrial		-		-		-
Other		9		37		(28)
Total Default Electricity Supply Sales		11,445		12,113		(668)

Default Electricity Supply Customers (in thousands)	2008		2007		Change

Residential		660		659		1
Commercial		53		52		1
Industrial		-		-		-
Other		-		-		-
Total Default Electricity Supply Customers		713		711		2

Default Supply Revenue, which is substantially offset in Fuel and Purchased Energy, increased by $68 million primarily due to:

An increase of $126 million in market-based Default Electricity Supply rates.

The increase was partially offset by:

A decrease of $27 million due to lower weather-related sales (a 4% decrease in Heating Degree Days and a 6% decrease in Cooling Degree Days).

A decrease of $22 million primarily due to existing commercial customers electing to purchase electricity from competitive suppliers.

A decrease of $10 million primarily due to differences in consumption among the various customer rate classes.

The following table shows the percentages of Pepco’s total distribution sales by jurisdiction that are derived from customers receiving Default Electricity Supply from Pepco.

	2008	2007
Sales to District of Columbia customers	33%	35%
Sales to Maryland customers	50%	51%

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Operating Expenses

Fuel and Purchased Energy

Fuel and Purchased Energy, which is primarily associated with Default Electricity Supply revenue, increased by $89 million to $1,335 million in 2008 from $1,246 million in 2007. The increase was primarily due to the following:

An increase of $138 million in average energy costs, the result of new Default Electricity Supply contracts.

An increase of $24 million for energy and capacity purchased under the Panda PPA.

The aggregate amount of these increases was partially offset by:

A decrease of $39 million primarily due to commercial customers electing to purchase electricity from competitive suppliers.

A decrease of $29 million due to lower weather-related sales.

Fuel and Purchased Energy expense is substantially offset in Regulated T&D Electric Revenue and Default Supply Revenue.

Other Operation and Maintenance

Other Operation and Maintenance increased by $2 million to $302 million in 2008 from $300 million in 2007. The increase was primarily due to the following:

An increase of $7 million in deferred administrative expenses associated with Default Electricity Supply (offset in Default Supply Revenue) as the result of the inclusion of $5 million of customer late payment fees in the calculation of the deferral. See the discussion below regarding the 2008 correction of an error in recording customer late payment fees, including $3 million related to prior periods.

An increase of $3 million due to higher bad debt expenses associated with distribution and Default Electricity Supply customers, of which approximately $1 million was deferred.

An increase of $3 million in employee-related costs primarily due to the recording of additional stock-based compensation expense as discussed below, including $3 million related to prior periods.

An increase of $1 million in legal expenses.

An increase of $1 million in environmental costs related to spill prevention and waste disposal.

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The aggregate amount of these increases was partially offset by:

A decrease of $5 million in corrective and preventative maintenance costs.

A decrease of $4 million in regulatory expenses primarily related to the District of Columbia distribution rate case in 2007.

A decrease of $3 million due to various construction project write-offs in 2007 related to customer requested work.

A decrease of $3 million in accounting fees related to tax consulting services.

During 2008, Pepco recorded adjustments to correct errors in Other Operation and Maintenance expenses for prior periods dating back to February 2005 during which (i) customer late payment fees were incorrectly recognized and (ii) stock-based compensation expense related to certain restricted stock awards granted under the Long-Term Incentive Plan was understated. These adjustments resulted in a total increase in Other Operation and Maintenance expenses for the year ended December 31, 2008 of $6 million.

Depreciation and Amortization

Depreciation and Amortization expenses decreased by $10 million to $141 million in 2008, from $151 million in 2007. The decrease was primarily due to a change in depreciation rates in accordance with the 2007 Maryland Rate Order.

Effect of Settlement of Mirant Bankruptcy Claims

The Effect of Settlement of Mirant Bankruptcy Claims reflects the recovery in 2007 of $33 million in operating expenses and certain other costs as damages in the Mirant Corporation (Mirant) bankruptcy settlement.

Other Income (Expenses)

Other Expenses (which are net of Other Income) increased by $15 million to a net expense of $76 million in 2008 from a net expense of $61 million in 2007. This increase was primarily due to:

An increase of $12 million in interest expense due to higher outstanding long-term debt during 2008.

A decrease of $2 million in Contribution in Aid of Construction tax gross-up income.

Income Tax Expense

Pepco’s effective tax rates for the years ended December 31, 2008 and 2007 were 35.6% and 33.2%, respectively. While the change in the effective rate between 2008 and 2007 was not significant, the effective rate in each year was impacted by certain non-recurring items. In 2008, Pepco recorded certain tax benefits that reduced its overall effective tax rate, including net interest income accrued on the tentative settlement with the IRS on the mixed service cost issue

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discussed below, interest income accrued on other effectively settled and uncertain tax positions, interest income received in 2008 on the Maryland state tax refund referred to below, and deferred tax adjustments related to additional analysis of its deferred tax balances completed in 2008. In 2007, Pepco recorded the receipt of the Maryland state tax refund in the third quarter of 2007 as a reduction in income tax expense. This benefit was partially offset by certain income tax charges recorded in the third quarter of 2007 related to additional analysis of Pepco’s deferred tax balances.

During the second quarter 2008, Pepco reached a tentative settlement with the Internal Revenue Service (IRS) concerning the treatment of mixed service costs for income tax purposes during the period 2001 to 2004. On the basis of the tentative settlement, Pepco updated its estimated liability related to mixed service costs and, as a result, recorded a net reduction in its liability for unrecognized tax benefits of $16 million and recognized after-tax interest income of $3 million in the second quarter of 2008. See Note (13), “Commitments and Contingencies — Regulatory and Other Matters — IRS Mixed Service Cost Issue,” to the financial statements of Pepco set forth in Item 8 of this Form 10-K.

Capital Requirements

Capital Expenditures

Pepco’s total capital expenditures for the year ended December 31, 2008, totaled $275 million. These expenditures were primarily related to capital costs associated with new customer services, distribution reliability and transmission.

The table below shows Pepco’s projected capital expenditures for the five year period 2009 through 2013:

	For the Year

	2009		2010		2011		2012		2013		Total
	(Millions of Dollars)
Pepco
Distribution	$	206	$	207	$	221	$	267	$	302	$	1,203
Distribution - Blueprint for the Future		11		16		3		72		79		181
Transmission		52		112		157		94		49		464
Transmission - Mid-Atlantic Power Pathway (MAPP)		46		99		182		128		60		515
Other		12		15		25		26		15		93
	$	327	$	449	$	588	$	587	$	505	$	2,456

Pepco expects to fund these expenditures through internally generated cash and from external financing and capital contributions from PHI.

As further discussed in Note (10), “Debt” to the Pepco financial statements set forth in Item 8 of this Form 10-K, PHI, Pepco, Delmarva Power & Light Company (DPL) and Atlantic City Electric Company (ACE) maintain credit facilities to provide for their respective short-term liquidity needs. The aggregate borrowing limit under the facilities is $1.9 billion. The primary facility consists of a $1.5 billion facility which expires in 2012, all or any portion of which may be used to obtain loans or to issue letters of credit. PHI’s credit limit under the facility is $875 million. The credit limit of Pepco is the lesser of $500 million and the maximum amount of debt the company is permitted to have outstanding by its regulatory authorities which is $500 million,

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except that the aggregate amount of credit used by Pepco, DPL and ACE at any given time collectively may not exceed $625 million.

Distribution and Transmission

The projected capital expenditures listed in the table for distribution (other than Blueprint for the Future) and transmission (other than MAPP) are primarily for facility replacements and upgrades to accommodate customer growth and reliability.

Blueprint for the Future

During 2007 , Pepco announced an initiative it refers to as the “Blueprint for the Future.” The initiative combines traditional energy efficiency programs with new technologies and systems to help customers manage their energy use and reduce the total cost of energy. Pepco has made filings with the District of Columbia Public Service Commission (DCPSC) and the MPSC for approval of certain aspects of these programs. On December 18, 2008, the DCPSC conditionally approved five DSM programs. The cost of these programs will be recovered through a rate surcharge. On December 31, 2008, the MPSC conditionally approved for both Pepco and DPL, four residential and four non-residential DSM/energy efficiency programs. The MPSC will consider an Advanced Metering Infrastructure program in a separate proceeding. Pepco anticipates that the costs of these programs will be recovered through a previously approved surcharge mechanism.

MAPP Project

In October 2007, the PJM Board of Managers approved PHI’s proposed MAPP transmission project for construction of a new 230-mile, 500-kilovolt interstate transmission project at a then-estimated cost of $1 billion. This MAPP project will originate at Possum Point substation in northern Virginia, connect into three substations across southern Maryland, cross the Chesapeake Bay, tie into two substations across the Delmarva Peninsula and terminate at Salem substation in southern New Jersey. This MAPP project is part of PJM’s Regional Transmission Expansion Plan required to address the reliability objectives of the PJM RTO system. On December 4, 2008, the PJM Board approved a direct-current technology for segments of the project including the Chesapeake Bay Crossing. With this modification, the cost of the MAPP project currently is estimated at $1.4 billion. PJM has determined that the line segment from Possum Point substation to the second substation on the Delmarva Peninsula (Indian River substation) is required to be operational by June 1, 2013. PJM is continuing to evaluate the in-service date for the remaining 80-miles of line segment to connect the Indian River substation to the Salem substation. Construction is expected to occur in stages over the next five year period.

Proceeds from Settlement of Mirant Bankruptcy Claims

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In November 2008, Pepco filed with the DCPSC and the MPSC proposals to share with customers the remaining balance of proceeds from the Mirant settlement in accordance with divestiture sharing formulas previously approved by the respective commissions. Under Pepco’s proposals, District of Columbia and Maryland customers would receive a total of approximately $25 million and $29 million, respectively. On December 12, 2008, the DCPSC issued a Notice of Proposed Rulemaking concerning the sharing of the Mirant divestiture proceeds, including the bankruptcy settlement proceeds. The public comment period for the proposed rules has expired without any comments being submitted. This matter remains pending before the DCPSC.

Pending the final disposition of these funds, the remaining $102 million in proceeds from the Mirant settlement is being accounted for as restricted cash and as a regulatory liability.

FORWARD-LOOKING STATEMENTS

Some of the statements contained in this Annual Report on Form 10-K are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. These statements include declarations regarding Pepco’s intents, beliefs and current expectations. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of such terms or other comparable terminology. Any forward-looking statements are not guarantees of future performance, and actual results could differ materially from those indicated by the forward-looking statements. Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause Pepco’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements.

The forward-looking statements contained herein are qualified in their entirety by reference to the following important factors, which are difficult to predict, contain uncertainties, are beyond Pepco’s control and may cause actual results to differ materially from those contained in forward-looking statements:

Changes in and compliance with environmental and safety laws and policies;

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Weather conditions;

Population growth rates and demographic patterns;

Competition for retail and wholesale customers;

General economic conditions, including potential negative impacts resulting from an economic downturn;

Growth in demand, sales and capacity to fulfill demand;

Changes in tax rates or policies or in rates of inflation;

Changes in accounting standards or practices;

Changes in project costs;

Unanticipated changes in operating expenses and capital expenditures;

The ability to obtain funding in the capital markets on favorable terms;

Rules and regulations imposed by federal and/or state regulatory commissions, PJM, the North American Electric Reliability Council and other applicable electric reliability organizations;

Legal and administrative proceedings (whether civil or criminal) and settlements that influence Pepco’s business and profitability;

Volatility in market demand and prices for energy, capacity and fuel;

Interest rate fluctuations and credit and capital market conditions; and

Effects of geopolitical events, including the threat of domestic terrorism.

Any forward-looking statements speak only as to the date of this Annual Report and Pepco undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date on which such statements are made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for Pepco to predict all of such factors, nor can Pepco assess the impact of any such factor on Pepco’s business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement.

The foregoing review of factors should not be construed as exhaustive.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

DELMARVA POWER & LIGHT COMPANY

GENERAL OVERVIEW

Delmarva Power & Light Company (DPL) is engaged in the transmission and distribution of electricity in Delaware and portions of Maryland. DPL provides Default Electricity Supply, which is the supply of electricity at regulated rates to retail customers in its territories who do not elect to purchase electricity from a competitive supplier. Default Electricity Supply is also known as Standard Offer Service in Maryland and in Delaware. DPL’s electricity distribution service territory covers approximately 5,000 square miles and has a population of approximately 1.3 million. As of December 31, 2008, approximately 67% of delivered electricity sales were to Delaware customers and approximately 33% were to Maryland customers. In northern Delaware, DPL also supplies and distributes natural gas to retail customers and provides transportation-only services to retail customers that purchase natural gas from other suppliers. DPL’s natural gas distribution service territory covers approximately 275 square miles and has a population of approximately 500,000.

In connection with its approval of new electric service distribution base rates for DPL in Maryland, effective in June, 2007 (the 2007 Maryland Rate Order), the Maryland Public Service Commission (MPSC) approved a bill stabilization adjustment mechanism (BSA) for retail customers. For customers to which the BSA applies, DPL recognizes distribution revenue based on an approved distribution charge per customer. From a revenue recognition standpoint, the BSA thus decouples the distribution revenue recognized in a reporting period from the amount of power delivered during the period. This change in the reporting of distribution revenue has the effect of eliminating changes in retail customer usage (whether due to weather conditions, energy prices, energy efficiency programs or other reasons) as a factor having an impact on reported revenue. As a consequence, the only factors that will cause distribution revenue from retail customers in Maryland to fluctuate from period to period are changes in the number of customers and changes in the approved distribution charge per customer.

DPL is a wholly owned subsidiary of Conectiv, which is wholly owned by Pepco Holdings, Inc. (PHI or Pepco Holdings). Because PHI is a public utility holding company subject to the Public Utility Holding Company Act of 2005 (PUHCA 2005), the relationship between PHI and DPL and certain activities of DPL are subject to the regulatory oversight of Federal Energy Regulatory Commission under PUHCA 2005.

IMPACT OF THE CURRENT CAPITAL AND CREDIT MARKET DISRUPTIONS

The recent disruptions in the capital and credit markets have had an impact on DPL’s business. While these conditions have required DPL to make certain adjustments in its financial

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management activities, DPL believes that it currently has sufficient liquidity to fund its operations and meet its financial obligations. These market conditions, should they continue, however, could have a negative effect on DPL’s financial condition, results of operations and cash flows.

Liquidity Requirements

DPL depends on access to the capital and credit markets to meet its liquidity and capital requirements. To meet its liquidity requirements, DPL historically has relied on the issuance of commercial paper and short-term notes and on bank lines of credit to supplement internally generated cash from operations. DPL’s primary credit source is PHI’s $1.5 billion syndicated credit facility, under which DPL can borrow funds, obtain letters of credit and support the issuance of commercial paper in an amount up to $500 million (subject to the limitation that the total utilization by DPL and PHI’s other utility subsidiaries cannot exceed $625 million). This facility is in effect until May 2012 and consists of commitments from 17 lenders, no one of which is responsible for more than 8.5% of the total commitment.

Due to the recent capital and credit market disruptions, the market for commercial paper was severely restricted for most companies. As a result, DPL has not been able to issue commercial paper on a day-to-day basis either in amounts or with maturities that it typically has required for cash management purposes. After giving effect to outstanding letters of credit and commercial paper, PHI’s utility subsidiaries have an aggregate of $843 million in combined cash and borrowing capacity under the credit facility at December 31, 2008. During the months of January and February 2009, the average daily amount of the combined cash and borrowing capacity of PHI’s utility subsidiaries was $831 million and ranged from a low of $673 million to a high of $1 billion.

To address the challenges posed by the current capital and credit market environment and to ensure that it will continue to have sufficient access to cash to meet its liquidity needs, DPL has identified a number of cash and liquidity conservation measures, including opportunities to defer capital expenditures due to lower than anticipated growth. Several measures to reduce expenditures have been taken. Additional measures could be undertaken if conditions warrant.

Due to the financial market conditions, which have caused uncertainty of short-term funding, DPL issued $250 million in long-term debt securities in November, with the proceeds used to refund short-term debt incurred to finance utility construction and operations on a temporary basis and incurred to fund the temporary repurchase of tax-exempt auction rate securities.

Pension and Postretirement Benefit Plans

DPL participates in several of the pension and postretirement benefit plans sponsored by PHI and its subsidiaries for their employees. While the plans have not experienced any significant impact in terms of liquidity or counterparty exposure due to the disruption of the capital and credit markets, the recent stock market declines have caused a decrease in the market value of benefit plan assets in 2008. DPL expects to contribute approximately $10 million to the pension plan in 2009.

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RESULTS OF OPERATIONS

Electric Operating Revenue

	2008		2007		Change
Regulated T&D Electric Revenue	$	353	$	337	$	16
Default Supply Revenue		846		846		-
Other Electric Revenue		22		22		-
Total Electric Operating Revenue	$	1,221	$	1,205	$	16

The table above shows the amount of Electric Operating Revenue earned that is subject to price regulation (Regulated Transmission and Distribution (T&D) Electric Revenue and Default Supply Revenue) and that which is not subject to price regulation (Other Electric Revenue).

Regulated T&D Electric Revenue includes revenue from the delivery of electricity, including the delivery of Default Electricity Supply, to DPL’s customers within its service territory at regulated rates. Regulated T&D Electric Revenue also includes transmission service revenue that DPL receives as a transmission owner from PJM Interconnection, LLC (PJM).

Default Supply Revenue is the revenue received for Default Electricity Supply. The costs related to Default Electricity Supply are included in Fuel and Purchased Energy.

Other Electric Revenue includes work and services performed on behalf of customers, including other utilities, which is not subject to price regulation. Work and services include mutual assistance to other utilities, highway relocation, rentals of pole attachments, late payment fees, and collection fees.

Regulated T&D Electric

Regulated T&D Electric Revenue	2008		2007		Change

Residential	$	161	$	166	$	(5)
Commercial		91		91		-
Industrial		12		12		-
Other		89		68		21
Total Regulated T&D Electric Revenue	$	353	$	337	$	16

Other Regulated T&D Electric Revenue consists primarily of (i) transmission service revenue, and (ii) either (a) a positive adjustment equal to the amount by which revenue from Maryland retail distribution sales falls short of the revenue that DPL is entitled to earn based on the distribution charge per customer approved in the 2007 Maryland Rate Order or (b) a negative

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adjustment equal to the amount by which revenue from such distribution sales exceeds the revenue that DPL is entitled to earn based on the approved distribution charge per customer (a Revenue Decoupling Adjustment).

Regulated T&D Electric Sales (Gigawatt hours (GWh))	2008		2007		Change

Residential		5,038		5,333		(295)
Commercial		5,275		5,471		(196)
Industrial		2,652		2,825		(173)
Other		50		51		(1)
Total Regulated T&D Electric Sales		13,015		13,680		(665)

Regulated T&D Electric Customers (in thousands)	2008		2007		Change

Residential		438		456		(18)
Commercial		58		61		(3)
Industrial		1		1		-
Other		1		1		-
Total Regulated T&D Electric Customers		498		519		(21)

Regulated T&D Electric Revenue increased by $16 million primarily due to:

An increase of $15 million primarily due to transmission rate changes in June 2008 and 2007.

An increase of $12 million due to a distribution rate change under the 2007 Maryland Rate Order that became effective in June 2007, including a positive $6 million Revenue Decoupling Adjustment.

An increase of $7 million due to differences in consumption among the various customer rate classes.

The aggregate amount of these increases was partially offset by:

A decrease of $12 million due to the sale of Virginia retail electric distribution and wholesale transmission assets in January 2008.

A decrease of $6 million due to lower weather-related sales (a 2% increase in Heating Degree Days and a 23% decrease in Cooling Degree Days).

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Default Electricity Supply

Default Supply Revenue	2008		2007		Change

Residential	$	553	$	556	$	(3)
Commercial		249		239		10
Industrial		35		42		(7)
Other		9		9		-
Total Default Supply Revenue	$	846	$	846	$	-

Default Electricity Supply Sales (GWh)	2008		2007		Change

Residential		4,923		5,257		(334)
Commercial		2,263		2,291		(28)
Industrial		357		551		(194)
Other		43		45		(2)
Total Default Electricity Supply Sales		7,586		8,144		(558)

Default Electricity Supply Customers (in thousands)	2008		2007		Change

Residential		431		447		(16)
Commercial		49		51		(2)
Industrial		-		-		-
Other		1		1		-
Total Default Electricity Supply Customers		481		499		(18)

Due to the sale of DPL’s Virginia retail electric distribution assets in January 2008, the numbers of Default Electricity Supply Customers listed above include a decrease of approximately 19,000 residential customers and 3,000 commercial customers.

Default Supply Revenue, which is substantially offset in Fuel and Purchased Energy, did not change primarily due to:

An increase of $42 million in market-based Default Electricity Supply rates.

An increase of $8 million primarily due to existing commercial customers electing to purchase a decreased amount of electricity from competitive suppliers.

The aggregate amount of these increases was offset by:

A decrease of $32 million due to the sale of Virginia retail electric distribution and wholesale transmission assets in January 2008.

A decrease of $17 million due to lower weather-related sales (a 2% increase in Heating Degree Days and a 23% decrease in Cooling Degree Days).

The following table shows the percentages of DPL’s total sales by jurisdiction that are derived from customers receiving Default Electricity Supply distribution from DPL.

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	2008	2007
Sales to Delaware customers	55%	54%
Sales to Maryland customers	65%	67%
Sales to Virginia customers	-%	94%

Natural Gas Operating Revenue

	2008		2007		Change
Regulated Gas Revenue	$	204	$	211	$	(7)
Other Gas Revenue		114		80		34
Total Natural Gas Operating Revenue	$	318	$	291	$	27

The table above shows the amounts of Natural Gas Operating Revenue from sources that are subject to price regulation (Regulated Gas Revenue) and those that generally are not subject to price regulation (Other Gas Revenue). Regulated Gas Revenue includes the revenue DPL receives from on-system natural gas delivered sales and the transportation of natural gas for customers within its service territory. Other Gas Revenue includes off-system natural gas sales and the sale of excess system capacity.

Regulated Gas Revenue

Regulated Gas Revenue	2008		2007		Change

Residential	$	121	$	124	$	(3)
Commercial		69		73		(4)
Industrial		6		8		(2)
Transportation and Other		8		6		2
Total Regulated Gas Revenue	$	204	$	211	$	(7)

Regulated Gas Sales (billion cubic feet)	2008		2007		Change

Residential		7		8		(1)
Commercial		5		5		-
Industrial		1		1		-
Transportation and Other		7		7		-
Total Regulated Gas Sales		20		21		(1)

Regulated Gas Customers (in thousands)	2008		2007		Change

Residential		113		112		1
Commercial		9		10		(1)
Industrial		-		-		-
Transportation and Other		-		-		-
Total Regulated Gas Customers		122		122		-

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Regulated Gas Revenue decreased by $7 million primarily due to:

A decrease of $4 million due to differences in consumption among the various customer rate classes.

A decrease of $3 million due to lower weather-related sales (a 3% decrease in Heating Degree Days).

A decrease of $2 million primarily due to Gas Cost Rate changes effective April 2007, November 2007 and November 2008.

The aggregate amount of these decreases was partially offset by:

An increase of $2 million due to a distribution base rate change effective in April 2007.

Other Gas Revenue

Other Gas Revenue, which is substantially offset in Gas Purchased expense, increased by $34 million primarily due to revenue from higher off-system sales, the result of an increase in market prices. Off-system sales are made possible due to available pipeline capacity that results from low demand for natural gas from regulated customers.

Operating Expenses

Fuel and Purchased Energy

Fuel and Purchased Energy, which is primarily associated with Default Electricity Supply revenue, decreased by $18 million to $821 million in 2008 from $839 million in 2007. The decrease was primarily due to:

A decrease of $45 million due to the sale of Virginia retail electric distribution and wholesale transmission assets in January 2008.

A decrease of $18 million due to lower weather-related sales.

The aggregate amount of these decreases was partially offset by:

An increase of $33 million in average energy costs, the result of new Default Electricity Supply contracts.

An increase of $11 million due to a higher rate of recovery of electric supply costs resulting in a change in the Default Electric Supply deferral balance.

Fuel and Purchased Energy expense is substantially offset in Default Supply Revenue.

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Gas Purchased

Total Gas Purchased, which is primarily offset in Regulated Gas Revenue and Other Gas Revenue, increased by $25 million to $245 million in 2008 from $220 million in 2007. The increase is primarily due to:

An increase of $32 million in gas purchases for off-system sales, the result of higher average gas costs.

The increase was partially offset by:

A decrease of $10 million due to a lower rate of recovery of natural gas supply costs resulting in a change in the deferred gas fuel balance.

Other Operation and Maintenance

Other Operation and Maintenance increased by $16 million to $222 million in 2008 from $206 million in 2007. The increase was primarily due to the following:

An increase of $10 million in deferred administrative expenses associated with Default Electricity Supply (offset in Default Supply Revenue) due to (i) the inclusion of $5 million of customer late payment fees in the calculation of the deferral and (ii) a higher rate of recovery of bad debt and administrative expenses as a result of an increase in Default Electricity Supply revenue rates. See the discussion below regarding the 2008 correction of an error in recording customer late payment fees, including $3 million related to prior periods.

An increase of $5 million due to higher bad debt expenses associated with distribution and Default Electricity Supply customers, of which approximately $2 million was deferred.

An increase of $2 million in employee-related costs due to the recording of additional stock-based compensation expense as discussed below, including $2 million related to prior periods.

The aggregate amount of these increases was partially offset by:

A decrease of $2 million primarily in emergency restoration costs.

During 2008, DPL recorded adjustments to correct errors in Other Operation and Maintenance expenses for prior periods dating back to May 2006 during which (i) customer late payment fees were incorrectly recognized and (ii) stock-based compensation expense related to certain restricted stock awards granted under the Long-Term Incentive Plan was understated. These adjustments resulted in a total increase in Other Operation and Maintenance expenses for the year ended December 31, 2008 of $5 million.

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Gain on Sale of Assets

Gain on Sale of Assets increased by $3 million to $4 million in 2008 from $1 million in 2007. The increase was primarily due to a $4 million gain on the sale of Virginia retail electric distribution and wholesale transmission assets in January 2008.

Other Income (Expenses)

Other Expenses (which are net of Other Income) decreased by $5 million to a net expense of $35 million in 2008 from a net expense of $40 million in 2007. The decrease was primarily due to a $4 million net decrease in interest expense on short and long-term debt.

Income Tax Expense

DPL’s effective tax rates for the years ended December 31, 2008 and 2007 were 39.8% and 45.1%, respectively. While the change in the effective rate between 2008 and 2007 was not significant, the effective rate in each year was impacted by certain non-recurring items. In 2008, DPL recorded certain tax benefits that reduced its overall effective tax rate, primarily representing net interest income accrued on the tentative settlement with the Internal Revenue Service (IRS) on the mixed service cost issue discussed below. This benefit was largely offset by income tax charges recorded in the fourth quarter of 2008 related to additional analysis of DPL’s deferred tax balances. In 2007, DPL recorded certain income tax charges in the third quarter of 2007 related to additional analysis of DPL’s deferred tax balances.

During the second quarter 2008, DPL reached a tentative settlement with the Internal Revenue Service concerning the treatment of mixed service costs for income tax purposes during the period 2001 to 2004. On the basis of the tentative settlement, DPL updated its estimated liability related to mixed service costs and, as a result, recorded a net reduction in its liability for unrecognized tax benefits of $1 million and recognized after-tax interest income of $2 million in the second quarter of 2008. See Note (14), “Commitments and Contingencies — Regulatory and Other Matters — IRS Mixed Service Cost Issue,” to the financial statements of DPL set forth in Item 8 of this Form 10-K.

Capital Requirements

Capital Expenditures

DPL’s total capital expenditures for the year ended December 31, 2008, totaled $150 million. These expenditures were primarily related to capital costs associated with new customer services, distribution reliability and transmission.

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The table below shows DPL’s projected capital expenditures for the five-year period 2009 through 2013:

	For the Year
		2009		2010		2011		2012		2013		Total
	(Millions of Dollars)
DPL
Distribution	$	104	$	98	$	108	$	120	$	119	$	549
Distribution - Blueprint for the Future		31		47		1		40		-		119
Transmission		65		46		60		72		122		365
Transmission - Mid-Atlantic Power Pathway (MAPP)		10		94		181		345		220		850
Gas Delivery		20		21		20		21		19		101
Other		18		23		18		14		11		84
	$	248	$	329	$	388	$	612	$	491	$	2,068

DPL expects to fund these expenditures through internally generated cash and from external financing and capital contributions from PHI.

As further discussed in Note (11), “Debt,” to the DPL financial statements set forth in Item 8 of this Form 10-K, PHI, Potomac Electric Power Company (Pepco), DPL and Atlantic City Electric Company (ACE) maintain credit facilities to provide for their respective short-term liquidity needs. The aggregate borrowing limit under the facilities is $1.9 billion. The primary facility consists of a $1.5 billion facility which expires in 2012, all or any portion of which may be used to obtain loans or to issue letters of credit. PHI’s credit limit under the facility is $875 million. The credit limit for DPL is the lesser of $500 million and the maximum amount of debt the company is permitted to have outstanding by its regulatory authorities which is $500 million, except that the aggregate amount of credit used by Pepco, DPL and ACE at any given time collectively may not exceed $625 million.

Distribution, Transmission and Gas Delivery

The projected capital expenditures listed in the table for distribution (other than Blueprint for the Future), transmission (other than MAPP) and gas delivery are primarily for facility replacements and upgrades to accommodate customer growth and reliability.

Blueprint for the Future

During 2007, DPL announced an initiative that is referred to as the “Blueprint for the Future.” This initiative combines traditional energy efficiency programs with new technologies and systems to help customers manage their energy use and reduce the total cost of energy, and includes the installation of “smart meters” for all customers in Delaware and Maryland. DPL has made filings with the Delaware Public Service Commission (DPSC) and the MPSC for approval of certain aspects of these programs. Delaware has approved a recovery mechanism associated with these plans, and work has proceeded to prepare to begin installation of an Advanced Metering Infrastructure (AMI) by the last quarter of 2009. On December 31, 2008, the MPSC conditionally approved four residential and four non-residential DSM/energy efficiency programs. The MPSC will consider an AMI program in a separate proceeding. DPL anticipates that the costs of these programs will be recovered through a previously approved surcharge mechanism.

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MAPP Project

In October 2007, the PJM Board of Managers approved PHI’s proposed MAPP transmission project for construction of a new 230-mile, 500-kilovolt interstate transmission project at a then-estimated cost of $1 billion. This MAPP project will originate at Possum Point substation in northern Virginia, connect into three substations across southern Maryland, cross the Chesapeake Bay, tie into two substations across the Delmarva Peninsula and terminate at Salem substation in southern New Jersey. This MAPP project is part of PJM’s Regional Transmission Expansion Plan required to address the reliability objectives of the PJM RTO system. On December 4, 2008, the PJM Board approved a direct-current technology for segments of the project including the Chesapeake Bay Crossing. With this modification, the cost of the MAPP project is currently estimated at $1.4 billion. PJM has determined that the line segment from Possum Point substation to the second substation on the Delmarva Peninsula (Indian River substation) is required to be operational by June 1, 2013. PJM is continuing to evaluate the in-service date for the remaining 80-miles of line segment to connect the Indian River substation to the Salem substation. Construction is expected to occur in sections over the next five year period.

FORWARD-LOOKING STATEMENTS

Some of the statements contained in this Annual Report on Form 10-K are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. These statements include declarations regarding DPL’s intents, beliefs and current expectations. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of such terms or other comparable terminology. Any forward-looking statements are not guarantees of future performance, and actual results could differ materially from those indicated by the forward-looking statements. Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause DPL’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements.

The forward-looking statements contained herein are qualified in their entirety by reference to the following important factors, which are difficult to predict, contain uncertainties, are beyond DPL’s control and may cause actual results to differ materially from those contained in forward-looking statements:

Changes in and compliance with environmental and safety laws and policies;

Weather conditions;

Population growth rates and demographic patterns;

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Competition for retail and wholesale customers;

General economic conditions, including potential negative impacts resulting from an economic downturn;

Growth in demand, sales and capacity to fulfill demand;

	·	Changes in tax rates or policies or in rates of inflation;
	·	Changes in accounting standards or practices;

Changes in project costs;

Unanticipated changes in operating expenses and capital expenditures;

The ability to obtain funding in the capital markets on favorable terms;

Rules and regulations imposed by federal and/or state regulatory commissions, PJM, the North American Electric Reliability Council and other applicable electric reliability organizations

Legal and administrative proceedings (whether civil or criminal) and settlements that influence DPL’s business and profitability;

Volatility in market demand and prices for energy, capacity and fuel;

Interest rate fluctuations and credit and capital market conditions; and

Effects of geopolitical events, including the threat of domestic terrorism.

Any forward-looking statements speak only as to the date of this Annual Report and DPL undertakes no obligation to update any forward looking statements to reflect events or circumstances after the date on which such statements are made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for DPL to predict all of such factors, nor can DPL assess the impact of any such factor on DPL’s business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement.

The foregoing review of factors should not be construed as exhaustive.

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ACE

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ATLANTIC CITY ELECTRIC COMPANY

GENERAL OVERVIEW

Atlantic City Electric Company (ACE) is engaged in the transmission and distribution of electricity in southern New Jersey. ACE provides Default Electricity Supply, which is the supply of electricity at regulated rates to retail customers in its service territory who do not elect to purchase electricity from a competitive supplier. Default Electricity Supply is also known as Basic Generation Service (BGS) in New Jersey. ACE’s service territory covers approximately 2,700 square miles and has a population of approximately 1.1 million.

ACE is a wholly owned subsidiary of Conectiv, which is wholly owned by Pepco Holdings, Inc. (PHI or Pepco Holdings). Because PHI is a public utility holding company subject to the Public Utility Holding Company Act of 2005 (PUHCA 2005), the relationship between PHI and ACE and certain activities of ACE are subject to the regulatory oversight of Federal Energy Regulatory Commission under PUHCA 2005.

DISCONTINUED OPERATIONS

In February 2007, ACE completed the sale of the B.L. England generating facility. B.L. England comprised a significant component of ACE’s generation operations and its sale required discontinued operations presentation under Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets,” on ACE’s Consolidated Statements of Earnings for the years ended December 31, 2007 and 2006. In September 2006, ACE sold its interests in the Keystone and Conemaugh generating facilities, which for the year ended December 31, 2006, is also reflected as discontinued operations.

The following table summarizes information related to the discontinued operations for the years presented (millions of dollars):

		2008		2007		2006
Operating Revenue	$	-	$	10	$	114
Income Before Income Tax Expense	$	-	$	-	$	4
Net Income	$	-	$	-	$	2

IMPACT OF THE CURRENT CAPITAL AND CREDIT MARKET DISRUPTIONS

The recent disruptions in the capital and credit markets have had an impact on ACE’s business. While these conditions have required ACE to make certain adjustments in its financial management activities, ACE believes that it currently has sufficient liquidity to fund its operations and meet its financial obligations. These market conditions, should they continue, however, could have a negative effect on ACE’s financial condition, results of operations and cash flows.

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Liquidity Requirements

ACE depends on access to the capital and credit markets to meet its liquidity and capital requirements. To meet its liquidity requirements, ACE historically has relied on the issuance of commercial paper and short-term notes and on bank lines of credit to supplement internally generated cash from operations. ACE’s primary credit source is PHI’s $1.5 billion syndicated credit facility, under which ACE can borrow funds, obtain letters of credit and support the issuance of commercial paper in an amount up to $500 million (subject to the limitation that the total utilization by ACE and PHI’s other utility subsidiaries cannot exceed $625 million). This facility is in effect until May 2012 and consists of commitments from 17 lenders, no one of which is responsible for more than 8.5% of the total commitment.

Due to the recent capital and credit market disruptions, the market for commercial paper was severely restricted for most companies. As a result, ACE has not been able to issue commercial paper on a day-to-day basis either in amounts or with maturities that it typically has required for cash management purposes. After giving effect to outstanding letters of credit and commercial paper, PHI’s utility subsidiaries have an aggregate of $843 million in combined cash and borrowing capacity under the credit facility at December 31, 2008. During the months of January and February 2009, the average daily amount of the combined cash and borrowing capacity of PHI’s utility subsidiaries was $831 million and ranged from a low of $673 million to a high of $1 billion.

To address the challenges posed by the current capital and credit market environment and to ensure that it will continue to have sufficient access to cash to meet its liquidity needs, ACE has identified a number of cash and liquidity conservation measures, including opportunities to defer capital expenditures due to lower than anticipated growth. Several measures to reduce expenditures have been taken. Additional measures could be undertaken if conditions warrant.

Due to the financial market conditions, which have caused uncertainty of short-term funding, ACE issued $250 million in long-term debt securities in November. The proceeds were used to refund short-term debt incurred to finance utility construction and operations on a temporary basis and incurred to fund the temporary repurchase of tax-exempt auction rate securities.

Pension and Postretirement Benefit Plans

ACE participates in pension and postretirement benefit plans sponsored by PHI for employees. While the plans have not experienced any significant impact in terms of liquidity or counterparty exposure due to the disruption of the capital and credit markets, the recent stock market declines have caused a decrease in the market value of benefit plan assets in 2008. ACE expects to contribute approximately $60 million to the pension plan in 2009.

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RESULTS OF OPERATIONS

Operating Revenue

	2008		2007		Change
Regulated T&D Electric Revenue	$	359	$	327	$	32
Default Supply Revenue		1,258		1,199		59
Other Electric Revenue		16		17		(1)
Total Operating Revenue	$	1,633	$	1,543	$	90

Regulated T&D Electric Revenue includes revenue from the delivery of electricity, including the delivery of Default Electricity Supply, to ACE’s customers within its service territory at regulated rates. Regulated T&D Electric Revenue also includes transmission service revenue that ACE receives as a transmission owner from PJM Interconnection, LLC (PJM).

Default Supply Revenue is the revenue received for Default Electricity Supply. The costs related to Default Electricity Supply are included in Fuel and Purchased Energy. Default Supply Revenue also includes revenue from transition bond charges and other restructuring related revenues.

In response to an order issued by the New Jersey Board of Public Utilities regarding changes to ACE’s retail transmission rates, ACE has established deferred accounting treatment for the difference between the rates that ACE is authorized to charge its customers for the transmission of Default Electricity Supply and the cost that ACE incurs based on transmission formula rates approved by the Federal Energy Regulatory Commission (FERC). Under the deferral arrangement, any over or under recovery is deferred as part of Deferred Electric Service Costs pending an adjustment of retail rates in a future proceeding. As a consequence of the order, effective January 1, 2008, ACE’s retail transmission revenue is being recorded as Default Supply Revenue, rather than as Regulated T&D Electric Revenue, thereby conforming to the practice of PHI’s other utility subsidiaries, which previously established deferred accounting treatment for any over or under recovery of retail transmission rates relative to the cost incurred based on FERC-approved transmission formula rates. ACE’s retail transmission revenue for the period prior to January 1, 2008 has been reclassified to Default Supply Revenue in order to conform to the current period presentation.

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Regulated T&D Electric

Regulated T&D Electric Revenue	2008		2007		Change

Residential	$	160	$	150	$	10
Commercial		111		100		11
Industrial		17		14		3
Other		71		63		8
Total Regulated T&D Electric Revenue	$	359	$	327	$	32

Other Regulated T&D Electric Revenue consists primarily of transmission service revenue.

Regulated T&D Electric Sales (Gigawatt hours (GWh))	2008		2007		Change

Residential		4,418		4,520		(102)
Commercial		4,492		4,469		23
Industrial		1,129		1,149		(20)
Other		50		49		1
Total Regulated T&D Electric Sales		10,089		10,187		(98)

Regulated T&D Electric Customers (in thousands)	2008		2007		Change

Residential		481		479		2
Commercial		64		63		1
Industrial		1		1		-
Other		1		1		-
Total Regulated T&D Electric Customers		547		544		3

Regulated T&D Electric Revenue increased by $32 million primarily due to:

An increase of $8 million primarily due to transmission rate changes in June 2008 and 2007.

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Default Electricity Supply

Default Supply Revenue	2008		2007		Change

Residential	$	525	$	513	$	12
Commercial		378		375		3
Industrial		40		52		(12)
Other		315		259		56
Total Default Supply Revenue	$	1,258	$	1,199	$	59

Other Default Supply Revenue consists primarily of revenue from the resale in the PJM RTO market of energy and capacity purchased under contracts with non-utility generators (NUGs).

Default Electricity Supply Sales (GWh)	2008		2007		Change

Residential		4,388		4,520		(132)
Commercial		3,175		3,235		(60)
Industrial		283		363		(80)
Other		49		49		-
Total Default Electricity Supply Sales		7,895		8,167		(272)

Default Electricity Supply Customers (in thousands)	2008		2007		Change

Residential		481		479		2
Commercial		64		63		1
Industrial		1		1		-
Other		1		1		-
Total Default Electricity Supply Customers		547		544		3

Default Supply Revenue, which is substantially offset in Fuel and Purchased Energy and Deferred Electric Service Costs, increased by $59 million primarily due to:

An increase of $57 million in wholesale energy revenues due to the sale at higher market prices of electricity purchased from NUGs.

An increase of $34 million in market-based Default Electricity Supply rates.

The aggregate amount of these increases was partially offset by:

A decrease of $19 million primarily due to existing commercial and industrial customers electing to purchase electricity from competitive suppliers.

A decrease of $10 million due to lower weather-related sales (a 2% decrease in Heating Degree Days and a 3% decrease in Cooling Degree Days).

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For the years ended December 31, 2008 and 2007, the percentage of ACE’s total distribution sales that are derived from customers receiving Default Electricity Supply are 78% and 80%, respectively.

Operating Expenses

Fuel and Purchased Energy

Fuel and Purchased Energy, which is primarily associated with Default Electricity Supply sales, increased by $127 million to $1,178 million in 2008 from $1,051 million in 2007. The increase was primarily due to:

An increase of $162 million in average energy costs, the result of new Default Electricity Supply contracts.

The increase was partially offset by:

A decrease of $21 million primarily due to commercial and industrial customers electing to purchase electricity from competitive suppliers.

A decrease of $14 million due to lower weather-related sales.

Fuel and Purchased Energy is substantially offset in Default Supply Revenue and Deferred Electric Service Costs.

Other Operation and Maintenance

Other Operation and Maintenance increased by $18 million to $183 million in 2008 from $165 million in 2007. The increase was primarily due to the following:

An increase of $4 million in preventative maintenance and system operation costs.

An increase of $3 million due to higher bad debt expenses associated with distribution customers (offset in Deferred Electric Service Costs).

An increase of $3 million in Demand Side Management program costs (offset in Deferred Electric Service Costs).

An increase of $2 million in employee-related costs, primarily due to the recording of additional stock-based compensation expense as discussed below, including $1 million related to prior periods.

An increase of $2 million in costs associated with Default Electricity Supply.

An increase of $1 million in legal expenses.

During 2008, ACE recorded an adjustment to correct errors in Other Operation and Maintenance expenses for certain restricted stock awards granted under the Long-Term Incentive Plan. This adjustment resulted in an increase in Other Operation and Maintenance expenses for the year ended December 31, 2008 of $1 million.

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ACE

Depreciation and Amortization

Depreciation and Amortization expenses increased by $24 million to $104 million in 2008 from $80 million in 2007. This increase was primarily due to higher amortization of stranded costs as a result of an October 2007 Transition Bond Charge rate increase (offset in Default Supply Revenue).

Deferred Electric Service Costs

Deferred Electric Service Costs decreased by $75 million to income of $9 million in 2008 from an expense of $66 million in 2007. The decrease was primarily due to:

A decrease of $46 million due to a lower rate of recovery associated with deferred energy costs.

A decrease of $29 million due to a lower rate of recovery of costs associated with energy and capacity purchased under the NUGs.

A decrease of $17 million due to a lower rate of recovery associated with deferred transmission costs.

The aggregate amount of these decreases was partially offset by:

An increase of $15 million primarily due to a higher rate of recovery associated with Demand Side Management program costs.

Deferred Electric Service Costs are substantially offset in Regulated T&D Electric Revenue and Other Operation and Maintenance.

Income Tax Expense

ACE’s effective tax rates for the years ended December 31, 2008 and 2007 were 31.9% and 40.6%, respectively. The significant year-over-year decline in the effective tax rate reflects certain non-recurring items recorded in 2008. In 2008, ACE recorded certain tax benefits that reduced its overall effective tax rate, primarily representing net interest income accrued on uncertain tax positions (including interest related to the tentative settlement with the IRS on the mixed service cost issue discussed below and a claim made with the IRS related to the tax reporting of fuel over- and under-recoveries). This benefit was partially offset by income tax charges recorded in the fourth quarter of 2008 related to additional analysis of ACE’s deferred tax balances completed in 2008. In 2007, ACE recorded certain income tax credits in the third quarter of 2007 related to additional analysis of ACE’s deferred tax balances.

During the second quarter 2008, ACE reached a tentative settlement with the Internal Revenue Service concerning the treatment of mixed service costs for income tax purposes during the period 2001 to 2004. On the basis of the tentative settlement, ACE updated its estimated liability related to mixed service costs and, as a result, recorded a net reduction in its liability for unrecognized tax benefits of $2 million and recognized after-tax interest income of $2 million in the second quarter of 2008. See Note (14), “Commitments and Contingencies — Regulatory and Other Matters — IRS Mixed Service Cost Issue,” to the consolidated financial statements of ACE set forth in Item 8 of this Form 10-K.

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Capital Requirements

Capital Expenditures

ACE’s total capital expenditures for the year ended December 31, 2008, totaled $162 million. These expenditures were primarily related to capital costs associated with new customer services, distribution reliability and transmission.

The table below shows ACE’s projected capital expenditures for the five-year period 2009 through 2013:

	For the Year
		2009		2010		2011		2012		2013		Total
	(Millions of Dollars)
ACE
Distribution	$	97	$	96	$	104	$	109	$	111	$	517
Distribution - Blueprint for the Future		5		8		1		-		8		22
Transmission		26		25		32		34		33		150
Transmission - Mid-Atlantic Power Pathway (MAPP)		-		-		-		1		20		21
Other		11		14		18		17		12		72
	$	139	$	143	$	155	$	161	$	184	$	782

ACE expects to fund these expenditures through internally generated cash and from external financing and capital contributions from PHI.

As further discussed in Note (10), “Debt,” to the ACE consolidated financial statements set forth in Item 8 of this Form 10-K, PHI, Potomac Electric Power Company (Pepco), Delmarva Power & Light Company (DPL) and ACE maintain credit facilities to provide for their respective short-term liquidity needs. The aggregate borrowing limit under the facilities is $1.9 billion. The primary facility consists of a $1.5 billion facility which expires in 2012, all or any portion of which may be used to obtain loans or to issue letters of credit. PHI’s credit limit under the facility is $875 million. The credit limit for ACE is the lesser of $500 million and the maximum amount of debt the company is permitted to have outstanding by its regulatory authorities which is $250 million, except that the aggregate amount of credit used by Pepco, DPL and ACE at any given time collectively may not exceed $625 million.

Distribution and Transmission

Blueprint for the Future

During 2007, ACE announced an initiative that is referred to as the “Blueprint for the Future.” This initiative combines traditional energy efficiency programs with new technologies and systems to help customers manage their energy use and reduce the total cost of energy, and includes the installation of “smart meters” for all customers in New Jersey. In November 2007, ACE filed its “Blueprint for the Future” proposal with the New Jersey Board of Public Utilities.

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FORWARD-LOOKING STATEMENTS

Some of the statements contained in this Annual Report on Form 10-K are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. These statements include declarations regarding ACE’s intents, beliefs and current expectations. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of such terms or other comparable terminology. Any forward-looking statements are not guarantees of future performance, and actual results could differ materially from those indicated by the forward-looking statements. Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause ACE’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements.

The forward-looking statements contained herein are qualified in their entirety by reference to the following important factors, which are difficult to predict, contain uncertainties, are beyond ACE’s control and may cause actual results to differ materially from those contained in forward-looking statements:

Changes in and compliance with environmental and safety laws and policies;

Weather conditions;

Population growth rates and demographic patterns;

Competition for retail and wholesale customers;

General economic conditions, including potential negative impacts resulting from an economic downturn;

Growth in demand, sales and capacity to fulfill demand;

	·	Changes in tax rates or policies or in rates of inflation;
	·	Changes in accounting standards or practices;

Changes in project costs;

Unanticipated changes in operating expenses and capital expenditures;

The ability to obtain funding in the capital markets on favorable terms;

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ACE

Rules and regulations imposed by federal and/or state regulatory commissions, PJM, the North American Electric Reliability Council and other applicable electric reliability organizations;

Legal and administrative proceedings (whether civil or criminal) and settlements that influence ACE’s business and profitability;

Volatility in market demand and prices for energy, capacity and fuel;

Interest rate fluctuations and credit and capital market conditions; and

Effects of geopolitical events, including the threat of domestic terrorism.

Any forward-looking statements speak only as to the date of this Annual Report and ACE undertakes no obligation to update any forward looking statements to reflect events or circumstances after the date on which such statements are made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for ACE to predict all of such factors, nor can ACE assess the impact of any such factor on ACE’s business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement.

The foregoing review of factors should not be construed as exhaustive.

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Item 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Risk management policies for PHI and its subsidiaries are determined by PHI’s Corporate Risk Management Committee, the members of which are PHI’s Chief Risk Officer, Chief Operating Officer, Chief Financial Officer, General Counsel, Chief Information Officer and other senior executives. The Corporate Risk Management Committee monitors interest rate fluctuation, commodity price fluctuation, and credit risk exposure, and sets risk management policies that establish limits on unhedged risk and determine risk reporting requirements. For information about PHI’s derivative activities, other than the information disclosed herein, refer to Note (2), “Significant Accounting Policies - Accounting For Derivatives” and Note (17), “Use of Derivatives in Energy and Interest Rate Hedging Activities” to the consolidated financial statements of PHI set forth in Item 8 of this Form 10-K.

Pepco Holdings, Inc.

Commodity Price Risk

The Competitive Energy segments actively engage in commodity risk management activities to reduce their financial exposure to changes in the value of their assets and obligations due to commodity price fluctuations. Certain of these risk management activities are conducted using instruments classified as derivatives under Statement of Financial Accounting Standards (SFAS) No. 133. The Competitive Energy segments also manage commodity risk with contracts that are not classified as derivatives. The Competitive Energy segments’ primary risk management objectives are (1) to manage the spread between the cost of fuel used to operate their electric generation plants and the revenue received from the sale of the power produced by those plants by selling forward a portion of their projected plant output and buying forward a portion of their projected fuel supply requirements and (2) to manage the spread between wholesale and retail sales commitments and the cost of supply used to service those commitments in order to ensure stable and known cash flows and fix favorable prices and margins when they become available.

PHI’s risk management policies place oversight at the senior management level through the Corporate Risk Management Committee which has the responsibility for establishing corporate compliance requirements for the Competitive Energy businesses’ energy market participation. PHI collectively refers to these energy market activities, including its commodity risk management activities, as “energy commodity” activities. PHI uses a value-at-risk (VaR) model to assess the market risk of its Competitive Energy segments’ energy commodity activities. PHI also uses other measures to limit and monitor risk in its energy commodity activities, including limits on the nominal size of positions and periodic loss limits. VaR represents the potential fair value loss on energy contracts or portfolios due to changes in market prices for a specified time period and confidence level. PHI estimates VaR using a delta-normal variance / covariance model with a 95 percent, one-tailed confidence level and assuming a one-day holding period. Since VaR is an estimate, it is not necessarily indicative of actual results that may occur.

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Value at Risk Associated with Energy Contracts For the Year Ended December 31, 2008 (Millions of dollars)
	VaR for Competitive Energy Commodity Activity (a)
95% confidence level, one-day holding period, one-tailed
Period end	$	7
Average for the period	$	6
High	$	12
Low	$	3

(a)

This column represents all energy derivative contracts, normal purchase and sales contracts, modeled generation output and fuel requirements and modeled customer load obligations for PHI’s energy commodity activities.

Conectiv Energy economically hedges both the estimated plant output and fuel requirements as the estimated levels of output and fuel needs change. Economic hedge percentages include the estimated electricity output of Conectiv Energy’s generation plants and any associated financial or physical commodity contracts (including derivative contracts that are classified as cash flow hedges under SFAS No. 133, other derivative instruments, wholesale normal purchase and sales contracts, and default electricity supply contracts).

Conectiv Energy maintains a forward 36 month program with targeted ranges for economically hedging its projected plant output combined with its energy purchase commitments. Beginning in 2008, Conectiv Energy changed its disclosure to show the percentage of its entire expected plant output and energy purchase commitments for all hours that are hedged, as opposed to its hedged position with respect to its projected on-peak plant output and on-peak energy commitments, which previously was disclosed. This change was made in recognition of the significant quantity of projected off-peak plant output and purchase commitments and due to the increased volatility of power prices during off-peak hours. Also beginning in 2008, Conectiv Energy is including default electricity supply contracts and associated hedges in Independent System Operator - New England. The hedge percentages for all expected plant output and purchase commitment (based on the current forward electricity price curve) are as follows:

Month	Target Range
1-12	50-100%
13-24	25-75%
25-36	0-50%

The primary purpose of the risk management program is to improve the predictability and stability of margins by selling forward a portion of projected plant output, and buying forward a

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portion of projected fuel supply requirements. Within each period, hedged percentages can vary significantly above or below the average reported percentages.

As of December 31, 2008, the electricity sold forward by Conectiv Energy as a percentage of projected plant output combined with energy purchase commitments was 81%, 75%, and 39% for the 1-12 month, 13-24 month and 25-36 month forward periods, respectively. The amount of forward sales during the 1-12 month period represents 21% of Conectiv Energy’s combined total generating capability and energy purchase commitments. The volumetric percentages for the forward periods can vary and may not represent the amount of expected value hedged.

Not all of the value associated with Conectiv Energy’s generation activities can be hedged such as the portion attributable to ancillary services and fuel switching due to the lack of market products, market liquidity, and other factors. Also the hedging of locational value can be limited.

Pepco Energy Services purchases electric and natural gas futures, swaps, options and forward contracts to hedge price risk in connection with the purchase of physical natural gas and electricity for delivery to customers. Pepco Energy Services accounts for its futures and swap contracts as cash flow hedges of forecasted transactions. Its options contracts and certain commodity contracts that do not qualify as cash flow hedges are marked-to-market through current earnings. Its forward contracts are accounted for using standard accrual accounting since these contracts meet the requirements for normal purchase and sale accounting under SFAS No. 133.

Credit and Nonperformance Risk

Pepco Holdings’ subsidiaries attempt to minimize credit risk exposure to wholesale energy counterparties through, among other things, formal credit policies, regular assessment of counterparty creditworthiness and the establishment of a credit limit for each counterparty, monitoring procedures that include stress testing, the use of standard agreements which allow for the netting of positive and negative exposures associated with a single counterparty and collateral requirements under certain circumstances, and have established reserves for credit losses. As of December 31, 2008, credit exposure to wholesale energy counterparties was weighted 78% with investment grade counterparties, 16% with counterparties without external credit quality ratings, and 5% with non-investment grade counterparties.

This table provides information on the Competitive Energy businesses’ credit exposure, net of collateral, to wholesale counterparties.

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Schedule of Credit Risk Exposure on Competitive Wholesale Energy Contracts December 31, 2008 (Millions of dollars)

Rating (a)	Exposure Before Credit Collateral (b)	Credit Collateral (c)	Net Exposure	Number of Counterparties Greater Than 10% (d)	Net Exposure of Counterparties Greater Than 10%

Investment Grade	$282	$1	$281	2	$157
Non-Investment Grade	19	-	19	-	-
No External Ratings	62	7	55	-	-
Credit reserves			$ 2

(a)

Investment Grade - primarily determined using publicly available credit ratings of the counterparty. If the counterparty has provided a guarantee by a higher-rated entity (e.g., its parent), it is determined based upon the rating of its guarantor. Included in “Investment Grade” are counterparties with a minimum Standard & Poor’s or Moody’s Investor Service rating of BBB- or Baa3, respectively.

(b)

Exposure Before Credit Collateral - includes the marked to market (MTM) energy contract net assets for open/unrealized transactions, the net receivable/payable for realized transactions and net open positions for contracts not subject to MTM. Amounts due from counterparties are offset by liabilities payable to those counterparties to the extent that legally enforceable netting arrangements are in place. Thus, this column presents the net credit exposure to counterparties after reflecting all allowable netting, but before considering collateral held.

(c)

Credit Collateral - the face amount of cash deposits, letters of credit and performance bonds received from counterparties, not adjusted for probability of default, and, if applicable, property interests (including oil and gas reserves).

(d)

Using a percentage of the total exposure.

Interest Rate Risk

Pepco Holdings manages interest rates through the use of fixed and, to a lesser extent, variable rate debt. Pepco Holdings and its subsidiaries variable or floating rate debt is subject to the risk of fluctuating interest rates in the normal course of business. The effect of a hypothetical 10% change in interest rates on the annual interest costs for short-term and variable rate debt was approximately $2 million as of December 31, 2008.

Potomac Electric Power Company

Interest Rate Risk

Pepco’s debt is subject to the risk of fluctuating interest rates in the normal course of business. Pepco manages interest rates through the use of fixed and, to a lesser extent, variable rate debt. The effect of a hypothetical 10% change in interest rates on the annual interest costs for short-term debt and variable rate debt was approximately $1 million as of December 31, 2008.

Delmarva Power & Light Company

Commodity Price Risk

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risk with capacity contracts that do not meet the definition of derivatives. The primary goal of these activities is to reduce the exposure of its regulated retail gas customers to natural gas price spikes. All premiums paid and other transaction costs incurred as part of DPL’s natural gas hedging activity, in addition to all gains and losses on the natural gas hedging activity, are fully recoverable through the gas cost rate clause included in DPL’s gas tariff rates approved by the Delaware Public Service Commission and are deferred under SFAS No. 71 until recovered. At December 31, 2008, DPL had a net deferred derivative payable of $56 million, offset by a $56 million regulatory asset. At December 31, 2007, DPL had a net deferred derivative payable of $13 million, offset by a $13 million regulatory asset.

Interest Rate Risk

DPL’s debt is subject to the risk of fluctuating interest rates in the normal course of business. DPL manages interest rates through the use of fixed and, to a lesser extent, variable rate debt. The effect of a hypothetical 10% change in interest rates on the annual interest costs for short-term debt and variable rate debt was approximately $1 million as of December 31, 2008.

Atlantic City Electric Company

Interest Rate Risk

ACE’s debt is subject to the risk of fluctuating interest rates in the normal course of business. ACE manages interest rates through the use of fixed and, to a lesser extent, variable rate debt. The effect of a hypothetical 10% change in interest rates on the annual interest costs for short-term debt and variable rate debt was less than $1 million as of December 31, 2008.

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Listed below is a table that sets forth, for each registrant, the page number where the information is contained herein.

	Registrants
Item	Pepco Holdings	Pepco *	DPL *	ACE
Management’s Report on Internal Control Over Financial Reporting	146	237	281	322
Report of Independent Registered Public Accounting Firm	147	238	282	323
Consolidated Statements of Earnings	149	239	283	324
Consolidated Statements of Comprehensive Earnings	150	240	N/A	N/A
Consolidated Balance Sheets	151	241	284	325
Consolidated Statements of Cash Flows	153	243	286	327
Consolidated Statements of Shareholders’ Equity	154	244	287	328
Notes to Consolidated Financial Statements	155	245	288	329

* Pepco and DPL have no subsidiaries and therefore their financial statements are not consolidated.

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PEPCO HOLDINGS

Management’s Report on Internal Control over Financial Reporting

The management of Pepco Holdings is responsible for establishing and maintaining adequate internal control over financial reporting. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed its internal control over financial reporting as of December 31, 2008 based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, the management of Pepco Holdings concluded that its internal control over financial reporting was effective as of December 31, 2008.

PricewaterhouseCoopers LLP, the registered public accounting firm that audited the financial statements of Pepco Holdings included in this Annual Report on Form 10-K, has issued its attestation report on Pepco Holdings’ internal control over financial reporting, which is included herein.

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PEPCO HOLDINGS

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of

Pepco Holdings, Inc.

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Pepco Holdings, Inc. and its subsidiaries at December 31, 2008 and December 31, 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedules and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 12 to the consolidated financial statements, the Company changed its manner of accounting and reporting for uncertain tax positions in 2007.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in

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PEPCO HOLDINGS

accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP

Washington, DC

March 2, 2009

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PEPCO HOLDINGS

PEPCO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
For the Year Ended December 31,	2008	2007		2006
(Millions of dollars, except per share data)
Operating Revenue
Power Delivery	$5,487		$5,244	$5,119
Competitive Energy	5,279		4,054	3,161
Other	(66)		68	83
Total Operating Revenue	10,700		9,366	8,363

Operating Expenses
Fuel and purchased energy	7,571		6,336	5,417
Other services cost of sales	718		607	649
Other operation and maintenance	917		858	808
Depreciation and amortization	377		366	413
Other taxes	359		357	343
Deferred electric service costs	(9)		68	22
Impairment losses	2		2	19
Effect of settlement of Mirant bankruptcy claims	-		(33)	-
Gain on sale of assets	(3)		(1)	(1)
Total Operating Expenses	9,932		8,560	7,670

Operating Income	768		806	693

Other Income (Expenses)
Interest and dividend income	19		20	17
Interest expense	(330)		(340)	(339)
(Loss) income from equity investments	(5)		10	3
Other income	19		28	48
Other expenses	(3)		(2)	(12)
Total Other Expenses	(300)		(284)	(283)

Preferred Stock Dividend Requirements of Subsidiaries	-		-	1

Income Before Income Tax Expense	468		522	409

Income Tax Expense	168		188	161


Net Income	$ 300		$ 334	$ 248

Basic and Diluted Share Information
Weighted average shares outstanding	204		194	191
Earnings per share of common stock	$1.47		$ 1.72	$ 1.30

The accompanying Notes are an integral part of these Consolidated Financial Statements.

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PEPCO HOLDINGS

PEPCO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
For the Year Ended December 31,	2008	2007	2006
(Millions of dollars)
Net income	$300	$334	$248

Other comprehensive earnings (losses)

Unrealized gains (losses) on commodity derivatives designated as cash flow hedges:
Unrealized holding (losses) gains arising during period	(317)	-	(144)
Less: reclassification adjustment for gains (losses) included in net earnings	48	(84)	(2)
Net unrealized (losses) gains on commodity derivatives	(365)	84	(142)

Amortization of deferred hedging gains on terminated Treasury Rate Locks	5	9	12
Minimum pension liability adjustment	-	-	(1)
Amortization of gains and losses for prior service cost	(3)	2	-

Other comprehensive (losses) earnings, before income taxes	(363)	95	(131)
Income tax (benefit) expense	(147)	38	(51)

Other comprehensive (losses) earnings, net of income taxes	(216)	57	(80)

Comprehensive earnings	$ 84	$391	$168

The accompanying Notes are an integral part of these Consolidated Financial Statements.

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PEPCO HOLDINGS

PEPCO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS	December 31, 2008	December 31, 2007
(Millions of dollars)

CURRENT ASSETS
Cash and cash equivalents	$ 384	$ 55
Restricted cash equivalents	10	15
Accounts receivable, less allowance for uncollectible accounts of $37 million and $31 million, respectively	1,392	1,278
Inventories	333	288
Derivative assets	98	43
Prepayments of income taxes	294	250
Prepaid expenses and other	115	68
Total Current Assets	2,626	1,997

INVESTMENTS AND OTHER ASSETS
Goodwill	1,411	1,410
Regulatory assets	2,084	1,516
Investment in finance leases held in trust	1,335	1,384
Restricted cash equivalents	108	424
Income taxes receivable	191	196
Assets and accrued interest related to uncertain tax positions	178	35
Other	228	272
Total Investments and Other Assets	5,535	5,237

PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment	12,926	12,307
Accumulated depreciation	(4,612)	(4,430)
Net Property, Plant and Equipment	8,314	7,877
TOTAL ASSETS	$ 16,475	$15,111

The accompanying Notes are an integral part of these Consolidated Financial Statements.

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PEPCO HOLDINGS

PEPCO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS’ EQUITY	December 31, 2008	December 31, 2007
(Millions of dollars, except shares)

CURRENT LIABILITIES
Short-term debt	$ 465	$ 289
Current maturities of long-term debt and project funding	85	332
Accounts payable and accrued liabilities	847	797
Capital lease obligations due within one year	6	6
Taxes accrued	62	134
Interest accrued	71	70
Liabilities and accrued interest related to uncertain tax positions	71	132
Derivative liabilities	144	14
Other	279	263
Total Current Liabilities	2,030	2,037

DEFERRED CREDITS
Regulatory liabilities	892	1,249
Deferred income taxes, net	2,269	2,105
Investment tax credits	40	39
Pension benefit obligation	626	66
Other postretirement benefit obligations	461	385
Income taxes payable	176	165
Liabilities and accrued interest related to uncertain tax positions	163	65
Other	244	241
Total Deferred Credits	4,871	4,315

LONG-TERM LIABILITIES
Long-term debt	4,859	4,175
Transition bonds issued by ACE Funding	401	434
Long-term project funding	19	21
Capital lease obligations	99	105
Total Long-Term Liabilities	5,378	4,735

COMMITMENTS AND CONTINGENCIES (NOTE 16)

MINORITY INTEREST	6	6

SHAREHOLDERS’ EQUITY
Common stock, $.01 par value - authorized 400,000,000 shares, 218,906,220 shares and 200,512,890 shares outstanding, respectively	2	2
Premium on stock and other capital contributions	3,179	2,869
Accumulated other comprehensive loss	(262)	(46)
Retained earnings	1,271	1,193
Total Shareholders’ Equity	4,190	4,018

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$16,475	$15,111

The accompanying Notes are an integral part of these Consolidated Financial Statements.

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PEPCO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31,	2008		2007		2006
(Millions of dollars)
OPERATING ACTIVITIES
Net income	$	300	$	334	$	248
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		377		366		413
Gain on sale of assets		(3)		(1)		(1)
Effect of settlement of Mirant bankruptcy claims		-		(33)		-
Loss (Gain) on sale of other investment		1		-		(13)
Rents received from leveraged leases under income earned		(65)		(73)		(56)
Impairment losses		2		2		21
Noncash charge to reduce equity value of PHI’s cross border energy lease investments		124		-		-
Proceeds from settlement of Mirant bankruptcy claims		-		507		70
Reimbursements to Mirant		-		(108)		-
Changes in restricted cash equivalents related to Mirant settlement		315		(417)		-
Deferred income taxes		329		83		244
Investment tax credit adjustments		(4)		(3)		(5)
Prepaid pension expense		19		13		22
Allowance for equity funds used during construction		(5)		(4)		(4)
Net unrealized gains on commodity derivatives accounted for at fair value		(21)		(2)		(34)
Changes in:
Accounts receivable		(120)		(102)		356
Regulatory assets and liabilities		(325)		4		(32)
Prepaid expenses		(16)		(18)		5
Inventories		(46)		(4)		(8)
Accounts payable and accrued liabilities		77		60		(246)
Interest accrued		1		(10)		(5)
Taxes accrued		(257)		39		(468)
Cash collateral related to derivative activities		(274)		62		(260)
Proceeds from sale of B.L. England emission allowances		-		48		-
Net other operating		4		52		(44)
Net Cash From Operating Activities		413		795		203

INVESTING ACTIVITIES
Net investment in property, plant and equipment		(781)		(623)		(475)
Proceeds from settlement of Mirant bankruptcy claims representing reimbursement for investment in property, plant and equipment		-		15		-
Proceeds from sale of other assets		56		11		182
Purchases of other investments		(1)		(1)		(1)
Proceeds from the sale of other investments		-		1		24
Net investment in receivables		3		2		2
Changes in restricted cash equivalents		5		8		11
Net other investing activities		4		5		27
Net Cash Used By Investing Activities		(714)		(582)		(230)

FINANCING ACTIVITIES
Dividends paid on preferred stock		-		-		(1)
Dividends paid on common stock		(222)		(203)		(198)
Common stock issued to the Dividend Reinvestment Plan		29		28		30
Redemption of preferred stock of subsidiaries		-		(18)		(22)
Issuance of common stock		287		200		17
Issuances of long-term debt		1,150		704		515
Reacquisition of long-term debt		(590)		(855)		(578)
Issuances (repayments) of short-term debt, net		26		(61)		193
Cost of issuances		(30)		(7)		(6)
Net other financing activities		(20)		5		4
Net Cash From (Used By) Financing Activities		630		(207)		(46)
Net Increase (Decrease) In Cash and Cash Equivalents		329		6		(73)
Cash and Cash Equivalents at Beginning of Year		55		49		122
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	384	$	55	$	49

NON-CASH ACTIVITIES
Asset retirement obligations associated with removal costs transferred to regulatory liabilities	$	9	$	10	$	78
Conversion of DPL long-term debt to short-term debt	$	150	$	-	$	-
Recoverable pension/OPEB costs included in regulatory assets	$	610	$	(31)	$	365
Transfer of combustion turbines to construction work in progress	$	-	$	57	$	-

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest (net of capitalized interest of $11 million, $9 million and $4 million, respectively) and paid for income taxes:
Interest	$	316	$	338	$	332
Income taxes	$	99	$	36	$	239

The accompanying Notes are an integral part of these Consolidated Financial Statements

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PEPCO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
	Common Stock
	Shares		Par Value			Premium on Stock	Capital Stock Expense	Accumulated Other Comprehensive (Loss) Earnings		Retained Earnings
(Millions of dollars, except shares)

BALANCE, DECEMBER 31, 2005	189,817,723	$	2	$	2,600		$ (14)	$ (23)	$	1,019

Net Income	-		-			-	-	-		248
Other comprehensive loss	-		-			-	-	(80)		-
Dividends on common stock ($1.04/sh.)	-		-			-	-	-		(198)
Issuance of common stock:	-		-				-	-		-
Original issue shares	882,153		-			17	-	-		-
DRP original shares	1,232,569		-			30	-	-		-
Compensation expense on share-based awards	-		-			13	-	-		-
Treasury stock	-		-			(1)	-	-		-
BALANCE, DECEMBER 31, 2006	191,932,445		2			2,659	(14)	(103)		1,069

Net Income	-		-			-	-	-		334
Other comprehensive income	-		-			-	-	57		-
Dividends on common stock ($1.04/sh.)	-		-			-	-	-		(203)
Reacquisition of subsidiary preferred stock	-		-			(1)	-	-		-
Issuance of common stock:
Original issue shares	7,601,290		-			200	-	-		-
DRP original shares	979,155		-			28	-	-		-
Compensation expense on share-based awards	-		-			(3)	-	-		-
Cumulative effect adjustment related to the implementation of FIN 48	-		-			-	-	-		(7)
BALANCE, DECEMBER 31, 2007	200,512,890		2			2,883	(14)	(46)		1,193

Net Income	-		-			-	-	-		300
Other comprehensive loss	-		-			-	-	(216)		-
Dividends on common stock ($1.08/sh.)	-		-			-	-	-		(222)
Issuance of common stock:
Original issue shares	17,095,081		-			287	(10)	-		-
DRP original shares	1,298,249		-			29	-	-		-
Compensation expense on share-based awards	-		-			4	-	-		-
BALANCE, DECEMBER 31, 2008	218,906,220	$	2			$3,203	$(24)	$(262)	$	1,271

The accompanying Notes are an integral part of these Consolidated Financial Statements

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PEPCO HOLDINGS, INC.

(1) ORGANIZATION

the distribution, transmission and default supply of electricity and the delivery and supply of natural gas (Power Delivery), conducted through the following regulated public utility companies, each of which is a reporting company under the Securities Exchange Act of 1934, as amended:

o	Potomac Electric Power Company (Pepco), which was incorporated in Washington, D.C. in 1896 and became a domestic Virginia corporation in 1949,

o	Delmarva Power & Light Company (DPL), which was incorporated in Delaware in 1909 and became a domestic Virginia corporation in 1979, and

o	Atlantic City Electric Company (ACE), which was incorporated in New Jersey in 1924.

competitive energy generation, marketing and supply (Competitive Energy) conducted through subsidiaries of Conectiv Energy Holding Company (collectively Conectiv Energy) and Pepco Energy Services, Inc. and its subsidiaries (collectively Pepco Energy Services).

The following is a description of each of PHI’s two principal business operations.

Power Delivery

The largest component of PHI’s business is Power Delivery. Each of Pepco, DPL and ACE is a regulated public utility in the jurisdictions that comprise its service territory. Each company owns and operates a network of wires, substations and other equipment that is classified either as transmission or distribution facilities. Transmission facilities are high-voltage systems that carry wholesale electricity into, or across, the utility’s service territory. Distribution facilities are low-voltage systems that carry electricity to end-use customers in the utility’s

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service territory. Together the three companies constitute a single segment for financial reporting purposes.

Each company is responsible for the delivery of electricity and, in the case of DPL, natural gas, in its service territory, for which it is paid tariff rates established by the applicable local public service commissions. Each company also supplies electricity at regulated rates to retail customers in its service territory who do not elect to purchase electricity from a competitive energy supplier. The regulatory term for this supply service varies by jurisdiction as follows:

Delaware

Standard Offer Service (SOS)

District of Columbia

SOS

Maryland

SOS

New Jersey

Basic Generation Service (BGS)

In this Form 10-K, these supply services are referred to generally as Default Electricity Supply.

Competitive Energy

The Competitive Energy business provides competitive generation, marketing and supply of electricity and gas, and related energy management services, primarily in the mid-Atlantic region. PHI’s Competitive Energy operations are conducted through Conectiv Energy and Pepco Energy Services, each of which is treated as a separate operating segment for financial reporting purposes.

Over the past several months, PHI has been conducting a strategic analysis of the retail energy supply business of Pepco Energy Services. This review has included, among other things, the evaluation of potential alternative supply arrangements to reduce collateral requirements or a possible restructuring sale or wind down of the business. Among the factors being considered is the return PHI earns by investing capital in the retail energy supply business as compared to alternative investments. PHI expects the retail energy supply business to remain profitable based on its existing contract backlog and the margins that have been locked in with corresponding wholesale energy purchase contracts. The increased cost of capital associated with its collateral obligations has been factored into its retail pricing and, as a consequence, PES is experiencing reduced retail customer retention levels and reduced levels of new retail customer acquisitions.

Other Business Operations

Through its subsidiary Potomac Capital Investment Corporation (PCI), PHI maintains a portfolio of cross-border energy sale-leaseback transactions, with a book value at December 31, 2008 of approximately $1.3 billion. This activity constitutes a fourth operating segment for

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financial reporting purposes, which is designated as “Other Non-Regulated.” For a discussion of PHI’s cross-border energy lease investments, see Note (2), “Significant Accounting Policies - Changes in Accounting Estimates,” Note (8), “Leasing Activities - Investment in Finance Leases Held in Trust,” Note (12), “Income Taxes,” and Note (16), “Commitments and Contingencies - PHI’s Cross-Border Energy Lease Investments.”

Impact of the Current Capital and Credit Market Disruptions

Liquidity Requirements

PHI has conducted a review to identify cash and liquidity conservation measures, including opportunities to reduce collateral obligations and to defer capital expenditures due to lower than anticipated growth. Several measures to reduce collateral obligations and expenditures have been taken. Additional measures could be undertaken if conditions warrant.

PHI issued an additional 16.1 million shares of the Company’s common stock at a price per share of $16.50 in November 2008, for net proceeds of $255 million.

PHI added a 364-day $400 million credit facility in November 2008.

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In November 2008, ACE issued $250 million of First Mortgage Bonds, 7.75% Series due November 15, 2018.

In November 2008, DPL issued $250 million of First Mortgage Bonds, 6.40% Series due December 1, 2013.

In December 2008, Pepco issued $250 million of First Mortgage Bonds, 7.90% Series due December 15, 2038.

Collateral Requirements of the Competitive Energy Businesses

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value of their assets and obligations due to energy price fluctuations. These contracts also typically have collateral requirements.

At December 31, 2008, the amount of cash, plus borrowing capacity under the syndicated credit facility and PHI’s new 364-day credit facility, available to meet the liquidity needs of the Competitive Energy businesses on a consolidated basis totaled $684 million. During the months of January and February 2009, the combined cash and borrowing capacity available to PHI’s Competitive Energy businesses ranged from a low of $378 million to a high of $757 million.

Counterparty Credit Risk

Pension and Postretirement Benefit Plans

(2) SIGNIFICANT ACCOUNTING POLICIES

Consolidation Policy

The accompanying consolidated financial statements include the accounts of Pepco Holdings and its wholly owned subsidiaries. All material intercompany balances and transactions between subsidiaries have been eliminated. Pepco Holdings uses the equity method to report investments, corporate joint ventures, partnerships, and affiliated companies in which it holds a 20% to 50% voting interest and cannot exercise control over the operations and policies of the investment. Undivided interests in several jointly owned electric plants previously held by

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PHI, and certain transmission and other facilities currently held, are consolidated in proportion to PHI’s percentage interest in the facility.

Consolidation of Variable Interest Entities

In accordance with the provisions of Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 46R entitled “Consolidation of Variable Interest Entities” (FIN 46R), Pepco Holdings consolidates those variable interest entities where Pepco Holdings or a subsidiary has been determined to be primary beneficiary. FIN 46R addresses conditions under which an entity should be consolidated based upon variable interests rather than voting interests. Subsidiaries of Pepco Holdings have power purchase agreements (PPAs) with a number of entities to which FIN 46R applies.

Pepco and ACE PPAs

Pepco Holdings, through its ACE subsidiary, is a party to three PPAs with unaffiliated, non-utility generators (NUGs). Due to a variable element in the pricing structure of the NUGs, Pepco Holdings potentially assumes the variability in the operations of the plants related to the NUGs and, therefore, has a variable interest in the counterparties. In accordance with the provisions of FIN 46R, Pepco Holdings continued, during 2008, to conduct exhaustive efforts to obtain information from these three entities, but was unable to obtain sufficient information to conduct the analysis required under FIN 46R to determine whether these three entities were variable interest entities or if the Pepco Holdings subsidiaries were the primary beneficiary. As a result, Pepco Holdings has applied the scope exemption from the application of FIN 46R for enterprises that have conducted exhaustive efforts to obtain the necessary information, but have not been able to obtain such information.

Net purchase activities with the NUGs for the years ended December 31, 2008, 2007, and 2006, were approximately $349 million, $327 million, and $324 million, respectively, of which approximately $305 million, $292 million, and $288 million, respectively, related to power purchases under the NUGs. Pepco Holdings does not have loss exposure under the NUGs because cost recovery will be achieved from ACE’s customers through regulated rates.

During the third quarter of 2008, Pepco transferred to Sempra Energy Trading LLP (Sempra) an agreement with Panda-Brandywine, L.P. (Panda) under which Pepco was obligated to purchase from Panda 230 megawatts of capacity and energy annually through 2021 (Panda PPA). Net purchase activities under the Panda PPA for the years-ended December 31, 2008, 2007 and 2006 were approximately $59 million, $85 million and $79 million, respectively. See Note (16), “Commitments and Contingencies — Regulatory and Other Matters — Proceeds from Settlement of Mirant Bankruptcy Claims.”

DPL Onshore Wind Transactions

In 2008, DPL entered into three onshore wind PPAs for energy and renewable energy credits (RECs) to help serve a portion of its requirements under the State of Delaware’s Renewable Energy Portfolio Standards Act, which requires that 20 percent of total load needed in Delaware be produced from renewable sources by 2019. The Delaware Public Service Commission (DPSC) has approved all three agreements, and payments under the agreements are expected to start in 2009 at the earliest.

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DPL has exclusive rights to the energy and RECs in amounts up to a total between 120 and 150 megawatts under the PPAs. The lengths of the contracts range between 15 and 20 years. DPL is only obligated to purchase energy and RECs in amounts generated and delivered by the sellers at rates that are primarily fixed. Recent disruptions in the capital and credit markets could result in delays in the start dates for these PPAs. If the PPAs are not initiated by the specified dates, DPL has the right to terminate the PPAs. DPL’s maximum exposure to loss under the PPAs is the extent to which the market prices for energy and RECs fall below the contractual purchase price.

DPL concluded that two of the PPAs were leases in accordance with the guidance in Emerging Issues Task Force (EITF) Issue No. 01-8 , “Determining Whether an Arrangement Contains a Lease” (EITF 01-8), but that DPL did not own the assets under the lease during construction in accordance with EITF Issue No. 97-10, “The Effect of Lessee Involvement in Asset Construction . ” DPL concluded that it is not the primary beneficiary under the third PPA because it will only receive 50 percent of the output from the facility and it will not absorb a majority of the risks or rewards as compared to the debt and equity investors in the facility. DPL concluded that consolidation is not required for any of these PPAs under FIN 46(R).

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. Although Pepco Holdings believes that its estimates and assumptions are reasonable, they are based upon information available to management at the time the estimates are made. Actual results may differ significantly from these estimates.

Significant matters that involve the use of estimates include the assessment of goodwill and long-lived assets for impairment, fair value calculations for certain derivative instruments, the costs of providing pension and other postretirement benefits, evaluation of the probability of recovery of regulatory assets, and the recognition of income tax benefits as it relates to investments in finance leases held in trust associated with PHI’s portfolio of cross-border energy sale-leaseback investments. Additionally, PHI is subject to legal, regulatory, and other proceedings and claims that arise in the ordinary course of its business. PHI records an estimated liability for these proceedings and claims, when the loss is determined to be probable and is reasonably estimable.

Changes in Accounting Estimates

As further discussed in Note (8), “Leasing Activities,” Note (12), “Income Taxes,” and Note (16), “Commitments and Contingencies — PHI’s Cross-Border Energy Lease Investments,” PHI maintains a portfolio of cross-border energy sale-leaseback investments. The book equity value of these cross-border energy lease investments and the pattern of recognizing the related cross-border energy lease income are based on the timing and amount of all cash flows related to the cross-border energy lease investments, including income tax-related cash flows. These investments are more commonly referred to as sale-in/lease-out (SILO)

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transactions. PHI currently derives tax benefits from these investments based on the extent to which rental income is exceeded by depreciation deductions on the purchase price of the assets and interest deductions on the non-recourse debt financing (obtained to fund a substantial portion of the purchase price of the assets). The Internal Revenue Service (IRS) has announced broadly its intention to disallow the tax benefits recognized by all taxpayers on these types of investments, and, more specifically, the IRS has disallowed interest and depreciation deductions claimed by PHI related to its investments on the 2001 and 2002 PHI federal income tax returns currently under audit and has sought to recharacterize the leases as loan transactions as to which PHI would be subject to original issue discount income.

In 2008, several court decisions in favor of the IRS disallowed deductions in cases involving other taxpayers with certain cross-border energy lease investments. Under FIN 48, “Accounting for Uncertainty in Income Taxes,” the financial statement recognition of an uncertain tax position is permitted only if it is more likely than not that the position will be sustained. Further, under FASB Staff Position (FSP) No. 13-2, “Accounting for a Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged-Lease Transaction” (FSP 13-2), a company is required to assess on a periodic basis the likely outcome of tax positions relating to its cross-border energy lease investments and, if there is a change or a projected change in the estimated timing of the tax benefits generated from these investments, a recalculation of the value of its equity investment is required.

While PHI believes that its tax position with regard to its cross-border energy lease investments is appropriate based on applicable statutes, regulations and case law and intends to contest the adjustments proposed by the IRS, after evaluating the court rulings described above, PHI, at June 30, 2008, reassessed the sustainability of its tax position and revised its assumptions regarding the estimated timing of the tax benefits generated from its cross-border energy lease investments. Based on this reassessment, for the quarter ended June 30, 2008, PHI recorded an after-tax charge to net income of $93 million, consisting of the following components:

A non-cash pre-tax charge of $124 million ($86 million after tax) under FSP 13-2 to reduce the equity value of these cross-border energy lease investments. This pre-tax charge was recorded in the Consolidated Statement of Earnings as a reduction in other operating revenue.

A non-cash after-tax charge of $7 million to reflect the anticipated additional interest expense under FIN 48 related to estimated federal and state income tax obligations for the period over which the tax benefits may be disallowed (January 1, 2001 through June 30, 2008). This after-tax charge was recorded in the Consolidated Statement of Earnings as an increase in income tax expense.

The charge pursuant to FSP 13-2 reflected changes to the book equity value of the cross-border energy lease investments and the pattern of recognizing the related cross-border energy lease income. This amount is being recognized as income over the remaining term of the affected leases, which expire between 2017 and 2047. The tax benefits associated with the lease transactions represent timing differences that do not change the aggregate amount of lease net income over the life of the transactions. No additional charges were considered necessary in the third and fourth quarters of 2008.

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During 2007, as a result of depreciation studies presented as part of Pepco’s and DPL’s Maryland rate cases, the Maryland Public Service Commission (MPSC) approved new, lower depreciation rates for Maryland distribution assets owned by Pepco and DPL. This resulted in lower depreciation expense of approximately $19 million in 2007.

Revenue Recognition

Regulated Revenue

The Power Delivery businesses recognize revenue upon delivery of electricity and gas to their customers, including amounts for services rendered but not yet billed (unbilled revenue). Pepco Holdings recorded amounts for unbilled revenue of $195 million and $170 million as of December 31, 2008 and 2007, respectively. These amounts are included in “Accounts receivable.” Pepco Holdings’ utility subsidiaries calculate unbilled revenue using an output based methodology. This methodology is based on the supply of electricity or gas intended for distribution to customers. The unbilled revenue process requires management to make assumptions and judgments about input factors such as customer sales mix, temperature and estimated power line losses (estimates of electricity expected to be lost in the process of its transmission and distribution to customers), all of which are inherently uncertain and susceptible to change from period to period, and if the actual results differ from the projected results, the impact could be material.

Taxes related to the consumption of electricity and gas by the utility customers, such as fuel, energy, or other similar taxes, are components of the tariff rates charged by PHI subsidiaries and, as such, are billed to customers and recorded in “Operating Revenues.” Accruals for these taxes are recorded in “Other taxes.” Excise tax related generally to the consumption of gasoline by PHI and its subsidiaries in the normal course of business is charged to operations, maintenance or construction, and is de minimis.

Competitive Revenue

The Competitive Energy businesses recognize revenue upon delivery of electricity and gas to the customer, including amounts for electricity and gas delivered, but not yet billed. ISO sales and purchases of electric power are netted hourly and classified as operating revenue or operating expenses, as appropriate. Unrealized derivative gains and losses are recognized in current earnings as revenue if the derivative activity does not qualify for hedge accounting or normal sales treatment under Statement of Financial Accounting Standards (SFAS) No. 133. Revenue for Pepco Energy Services’ energy efficiency construction business is recognized using the percentage-of-completion method, which recognizes revenue as work is completed on the contract, and revenues from its operation and maintenance and other products and services contracts are recognized when earned. Revenue from the Other Non-Regulated business lines is principally recognized when services are performed or products are delivered; however, revenues from utility industry services contracts are recognized using the percentage-of-completion method.

Taxes Assessed by a Governmental Authority on Revenue-Producing Transactions

Taxes included in Pepco Holdings’ gross revenues were $311 million, $318 million and $260 million for the years ended December 31, 2008, 2007 and 2006, respectively.

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Accounting for Derivatives

Pepco Holdings and its subsidiaries use derivative instruments primarily to manage risk associated with commodity prices and interest rates. Risk management policies are determined by PHI’s Corporate Risk Management Committee (CRMC). The CRMC monitors interest rate fluctuation, commodity price fluctuation, and credit risk exposure, and sets risk management policies that establish limits on unhedged risk.

PHI accounts for its derivative activities in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. SFAS No. 133 requires derivative instruments to be measured at fair value. Derivatives are recorded on the Consolidated Balance Sheets as other assets or other liabilities unless designated as “normal purchases and sales.”

Mark-to-market gains and losses on derivatives that are not designated as hedges are presented on the Consolidated Statements of Earnings as operating revenue. PHI uses mark-to-market accounting through earnings for derivatives that either do not qualify for hedge accounting or that management does not designate as hedges.

The gain or loss on a derivative that hedges exposure to variable cash flow of a forecasted transaction is initially recorded in Other Comprehensive Income (a separate component of common stockholders’ equity) and is subsequently reclassified into earnings in the same category as the item being hedged when the gain or loss from the forecasted transaction occurs. If a forecasted transaction is no longer probable, the deferred gain or loss in accumulated other comprehensive income is immediately reclassified to earnings. Gains or losses related to any ineffective portion of cash flow hedges are also recognized in earnings immediately as operating revenue or as a Fuel and Purchased Energy expense.

Changes in the fair value of derivatives designated as fair value hedges as well as changes in the fair value of the hedged asset, liability, or firm commitment are recorded in the Consolidated Statements of Earnings as operating revenue.

PHI designates certain commodity forwards as “normal purchase or normal sales” under SFAS No. 133, which are not required to be recorded on a mark-to-market basis of accounting under SFAS No. 133. This type of contract is used in normal operations, settles physically, and follows standard accrual accounting. Unrealized gains and losses on these contracts do not appear on the Consolidated Balance Sheets. Examples of these transactions include purchases of fuel to be consumed in power plants and actual receipts and deliveries of electric power. Normal purchases and sales transactions are presented on a gross basis, with normal sales recorded as operating revenue and normal purchases recorded as fuel and purchased energy expenses.

The fair value of derivatives is determined using quoted exchange prices where available. For instruments that are not traded on an exchange, pricing services and external broker quotes are used to determine fair value. For some custom and complex instruments, internal models are used to interpolate broker quality price information. For certain long-dated instruments, broker or exchange data is extrapolated for future periods where limited market information is available. Models are also used to estimate volumes for certain transactions. See Note (15), “Fair Value

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Disclosures,” for more information about the types of derivatives employed by PHI and the methodologies used to value them.

The impact of derivatives that are marked-to-market through current earnings, the ineffective portion of cash flow hedges, and the portion of fair value hedges that flows to current earnings are presented on a net basis in the Consolidated Statements of Earnings as operating revenue or as a Fuel and Purchased Energy expense. When a hedging gain or loss is realized, it is presented on a net basis in the same line item as the underlying item being hedged. Normal purchase and sale transactions are presented gross on the Consolidated Statements of Earnings as they are realized. Unrealized derivative gains and losses are presented gross on the Consolidated Balance Sheets except where contractual netting agreements are in place with individual counterparties.

Stock-Based Compensation

Pepco Holdings adopted and implemented SFAS No. 123R, on January 1, 2006, using the modified prospective method. Under this method, Pepco Holdings recognizes compensation expense for share-based awards, modifications or cancellations after the effective date, based on the grant-date fair value. Compensation expense is recognized over the requisite service period. In addition, compensation cost recognized includes the cost for all share-based awards granted prior to, but not yet vested as of, January 1, 2006, measured at the grant-date fair value. A deferred tax asset and deferred tax benefit are also recognized concurrently with compensation expense for the tax effect of the deduction of stock options and restricted stock awards, which are deductible only upon exercise and vesting/release from restriction, respectively. No modifications were made to outstanding stock options or restricted stock awards outstanding prior to the adoption of SFAS No.123R and no changes in valuation methodology or assumptions in estimating their fair value have occurred with its adoption. There were no cumulative adjustments recorded in the financial statements as a result of this new pronouncement; the percentage of forfeitures of outstanding stock options issued prior to SFAS No. 123R’s adoption is estimated to be zero.

In November 2005, the FASB issued FSP 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards” (FSP 123R-3). FSP 123R-3 provides an elective alternative transition method that includes a computation that establishes the beginning balance of the additional paid-in capital (APIC pool) related to the tax effects of employee and director stock-based compensation, and a simplified method to determine the subsequent impact on the APIC pool of employee and director stock-based awards that are outstanding upon adoption of SFAS No. 123R. Entities may make a one-time election to apply the transition method discussed in FSP 123R-3. That one-time election may be made within one year of an entity’s adoption of SFAS No. 123R, or the FSP’s effective date (November 11, 2005), whichever is later. Pepco Holdings adopted the alternative transition method at December 31, 2006.

Pepco Holdings estimates the fair value of each stock option award on the date of grant using the Black-Scholes-Merton option pricing model. This model uses assumptions related to expected option term, expected volatility, expected dividend yield, and risk-free interest rate. Pepco Holdings uses historical data to estimate option exercise and employee termination within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is

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derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding.

As of January 1, 2008, there were no outstanding options that were not fully vested. Consequently, no compensation cost related to the vesting of options was recorded in 2008. Cash received from stock options exercised under all share-based payment arrangements for the years ended December 31, 2008, 2007 and 2006, was $3 million, $13 million, and $16 million, respectively. The actual tax benefit realized from these option exercises totaled zero, $1 million, and $1 million, respectively, for the years ended December 31, 2008, 2007 and 2006.

PHI has issued both time-based and performance-based restricted stock awards that vest over a three year period. The compensation expense associated with these awards is based upon estimated fair value at grant date and is recognized over the three-year service period. The time-based awards have been issued beginning with the 2006-2008 period, and vest in full at the end of the three-year period. The performance-based restricted stock awards for the 2005-2007 performance period contained market conditions that determine the number of shares issuable upon vesting. The market conditions were based on PHI’s total shareholder return relative to a peer group of companies and were reflected in the estimated grant date fair value using a Monte Carlo simulation. The assumptions used in this valuation method included risk free interest rates, expected PHI common stock volatility, and expected correlation to estimate the number of shares to be issued upon vesting. The expected volatility and correlation inputs were based on PHI’s and the peer companies’ shareholder returns over a three-year look back period from the valuation date.

Pepco Holdings’ current policy is to issue new shares to satisfy stock option exercises and the vesting of restricted stock awards.

Income Taxes

PHI and the majority of its subsidiaries file a consolidated federal income tax return. Federal income taxes are allocated among PHI and the subsidiaries included in its consolidated group pursuant to a written tax sharing agreement, which was approved by the Securities and Exchange Commission (SEC) in connection with the establishment of PHI as a holding company as part of Pepco’s acquisition of Conectiv on August 1, 2002. Under this tax sharing agreement, PHI’s consolidated federal income tax liability is allocated based upon PHI’s and its subsidiaries’ separate taxable income or loss amounts.

In 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes.” FIN 48 clarifies the criteria for recognition of tax benefits in accordance with SFAS No. 109, “Accounting for Income Taxes,” and prescribes a financial statement recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. Specifically, it clarifies that an entity’s tax benefits must be “more likely than not” of being sustained prior to recording the related tax benefit in the financial statements. If the position drops below the “more likely than not” standard, the benefit can no longer be recognized. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

On May 2, 2007, the FASB issued FSP FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48” (FIN 48-1), which provides guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously

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unrecognized tax benefits. PHI applied the guidance of FIN 48-1 with its adoption of FIN 48 on January 1, 2007.

The consolidated financial statements include current and deferred income taxes. Current income taxes represent the amounts of tax expected to be reported on PHI’s and its subsidiaries’ federal and state income tax returns. Deferred income tax assets and liabilities represent the tax effects of temporary differences between the financial statement and tax basis of existing assets and liabilities and are measured using presently enacted tax rates. See Note (12), “Income Taxes” for a listing of primary deferred tax assets and liabilities. The portion of Pepco’s, DPL’s, and ACE’s deferred tax liability applicable to its utility operations that has not been recovered from utility customers represents income taxes recoverable in the future and is included in “Regulatory assets” on the Consolidated Balance Sheets. See Note (7), “Regulatory Assets and Regulatory Liabilities,” for additional information.

PHI recognizes interest on under/over payments of income taxes, interest on unrecognized tax benefits, and tax-related penalties in income tax expense. Deferred income tax expense generally represents the net change during the reporting period in the net deferred tax liability and deferred recoverable income taxes.

Investment tax credits from utility plants purchased in prior years are reported on the Consolidated Balance Sheets as “Investment tax credits.” These investment tax credits are being amortized to income over the useful lives of the related utility plant.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, cash invested in money market funds, and commercial paper held with original maturities of three months or less.

Restricted Cash Equivalents

The restricted cash equivalents included in Current Assets and the restricted cash equivalents included in Investments and Other Assets represent (i) cash held as collateral that is restricted from use for general corporate purposes and (ii) cash equivalents that are specifically segregated, based on management’s intent to use such cash equivalents. The classification as current or non-current conforms to the classification of the related liabilities.

Accounts Receivable and Allowance for Uncollectible Accounts

Pepco Holdings’ accounts receivable balances primarily consist of customer accounts receivable, other accounts receivable, and accrued unbilled revenue generated by subsidiaries in the Power Delivery and Competitive Energy businesses. Accrued unbilled revenue represents revenue earned in the current period but not billed to the customer until a future date (usually within one month after the receivable is recorded).

PHI maintains an allowance for uncollectible accounts and changes in the allowance are recorded as an adjustment to Other Operation and Maintenance expense in the Consolidated Statements of Earnings. PHI determines the amount of the allowance based on specific identification of material amounts at risk by customer and maintains a general reserve based on its historical collection experience. The adequacy of this allowance is assessed on a quarterly basis by evaluating all known factors, such as the aging of the receivables, historical collection

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experience, the economic and competitive environment, and changes in the creditworthiness of its customers. Although management believes its allowance is adequate, it cannot anticipate with any certainty the changes in the financial condition of its customers. As a result, PHI records adjustments to the allowance for uncollectible accounts in the period the new information is known.

Inventories

Inventory is valued at the lower of cost or market value. Included in inventories are:

- generation, transmission, and distribution materials and supplies;

- natural gas, fuel oil, and coal; and

- emission allowances, renewable energy credits and RGGI allowances.

PHI utilizes the weighted average cost method of accounting for inventory items, other than fuel oil held for resale. Under this method, an average price is determined for the quantity of units acquired at each price level and is applied to the ending quantity to calculate the total ending inventory balance. Materials and supplies inventory are generally charged to inventory when purchased and then expensed or capitalized to plant, as appropriate, when installed.

The cost of natural gas, coal, and fuel oil for power plants, including transportation costs, are included in inventory when purchased and charged to fuel expense when used. The first in first out (FIFO) method is used for fuel oil inventory held for resale in Conectiv Energy’s oil marketing business. The FIFO method is not materially different from the weighted average cost method for PHI due to the high inventory turnover rate in the oil marketing business.

Emission allowances from United States Environmental Protection Agency (EPA) allocations are added to current inventory each year at a zero cost. Purchased emission allowances are recorded at cost. Emission allowances sold or consumed at the power plants are expensed at a weighted-average cost. This cost tends to be relatively low due to the inclusion of the zero-basis allowances. At December 31, 2008 and 2007, the book value of emission allowances was $11 million and $9 million, respectively. Pepco Holdings has established a committee to monitor compliance with emissions regulations and to ensure its power plants have the required number of allowances.

At December 31, 2008, the market value of Conectiv Energy’s oil inventory was lower than cost and accordingly a pre-tax charge of $15 million was recorded. This charge is included in Fuel and Purchased Energy in the Consolidated Statements of Earnings.

Goodwill

Goodwill represents the excess of the purchase price of an acquisition over the fair value of the net assets acquired at the acquisition date. Substantially all of Pepco Holdings’ goodwill was generated by Pepco’s acquisition of Conectiv in 2002 and was allocated to Pepco Holdings’ Power Delivery reporting unit based on the aggregation of its components. Pepco Holdings tests its goodwill for impairment annually as of July 1, and whenever an event occurs or circumstances change in the interim that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Factors that may result in an interim impairment test include, but are not limited to: a change in the identified reporting units; an adverse change in

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business conditions; a protracted decline in stock price causing market capitalization to fall below book value; an adverse regulatory action; or an impairment of long-lived assets in the reporting unit. PHI performed its annual impairment test on July 1, 2008 and an interim impairment test at December 31, 2008, and no impairment was recorded as described in Note (6), “Goodwill.”

Regulatory Assets and Regulatory Liabilities

The Power Delivery operations of Pepco are regulated by the District of Columbia Public Service Commission (DCPSC) and the MPSC.

The Power Delivery operations of DPL are regulated by the DPSC and the MPSC and, until the sale of its Virginia assets on January 2, 2008, were also regulated by the Virginia State Corporation Commission (VSCC). DPL’s interstate transportation and wholesale sale of natural gas are regulated by the Federal Energy Regulatory Commission (FERC).

The Power Delivery operations of ACE are regulated by the New Jersey Board of Public Utilities (NJBPU).

The transmission and wholesale sale of electricity by Pepco, DPL, and ACE are regulated by FERC.

The requirements of SFAS No. 71 apply to the Power Delivery businesses of Pepco, DPL, and ACE. SFAS No. 71 allows regulated entities, in appropriate circumstances, to establish regulatory assets and liabilities and to defer the income statement impact of certain costs that are expected to be recovered in future rates. Management’s assessment of the probability of recovery of regulatory assets requires judgment and interpretation of laws, regulatory commission orders, and other factors. If management subsequently determines, based on changes in facts or circumstances, that a regulatory asset is not probable of recovery, then the regulatory asset will be eliminated through a charge to earnings.

As part of the new electric service distribution base rates for Pepco and DPL approved by the MPSC, effective in June 2007, the MPSC approved for both companies a bill stabilization adjustment mechanism (BSA) for retail customers. See Note (16) “Commitments and Contingencies — Regulatory and Other Matters — Rate Proceedings.” For customers to which the BSA applies, Pepco and DPL recognize distribution revenue based on an approved distribution charge per customer. From a revenue recognition standpoint, the BSA thus decouples the distribution revenue recognized in a reporting period from the amount of power delivered during the period. Pursuant to this mechanism, Pepco and DPL recognize either (a) a positive adjustment equal to the amount by which revenue from Maryland retail distribution sales falls short of the revenue that Pepco and DPL are entitled to earn based on the approved distribution charge per customer, or (b) a negative adjustment equal to the amount by which revenue from such distribution sales exceeds the revenue that Pepco and DPL are entitled to earn based on the approved distribution charge per customer (a Revenue Decoupling Adjustment). A positive Revenue Decoupling Adjustment is recorded as a regulatory asset and a negative Revenue Decoupling Adjustment is recorded as a regulatory liability. The net Revenue Decoupling Adjustment at December 31, 2008 is a regulatory asset and is included in the “Other” line item on the table of regulatory asset balances in Note (7), “Regulatory Assets and Regulatory Liabilities.”

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Leasing Activities

Pepco Holdings’ lease transactions can include plant, office space, equipment, software, vehicles, and power purchase agreements. In accordance with SFAS No. 13, “Accounting for Leases” (SFAS No. 13), these leases are classified as either capital leases, operating leases or leveraged leases. In addition, PHI assesses whether a power purchase agreement contains a lease within the scope of SFAS No. 13 using guidance in EITF Issue No. 01-08, “Determining Whether an Arrangement Contains a Lease.”

Leveraged Leases

Income from investments in leveraged lease transactions, in which PHI is an equity participant, is accounted for using the financing method. In accordance with the financing method, investments in leased property are recorded as a receivable from the lessee to be recovered through the collection of future rentals. Income, including investment tax credits, on leveraged equipment leases is recognized over the life of the lease at a constant rate of return on the positive net investment. Each quarter, PHI reviews the carrying value of each lease, which includes a review of the underlying lease financial assumptions, the timing and collectability of cash flows, and the credit quality (including, if available, credit ratings) of the lessee. Changes to the underlying assumptions, if any, would be accounted for in accordance with SFAS No. 13 and reflected in the carrying value of the lease effective for the quarter within which they occur.

Operating Leases

An operating lease generally results in a level income statement charge over the term of the lease, reflecting the rental payments required by the lease agreement. If rental payments are not made on a straight-line basis, PHI’s policy is to recognize the increases on a straight-line basis over the lease term unless another systematic and rational allocation basis is more representative of the time pattern in which the leased property is physically employed.

Capital Leases

For ratemaking purposes, capital leases are treated as operating leases; therefore, in accordance with SFAS No. 71, the amortization of the leased asset is based on the rental payments recovered from customers. Investments in equipment under capital leases are stated at cost, less accumulated depreciation. Depreciation is recorded on a straight-line basis over the equipment’s estimated useful life.

Arrangements Containing a Lease

PPAs might fall within the criteria of contracts containing a lease if the arrangement conveys the right to use and control property, plant or equipment. If so, PHI is required to determine whether capital or operating lease accounting is appropriate under SFAS No. 13.

Property, Plant and Equipment

Property, plant and equipment are recorded at original cost, including labor, materials, asset retirement costs, and other direct and indirect costs including capitalized interest. The carrying value of property, plant and equipment is evaluated for impairment whenever

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circumstances indicate the carrying value of those assets may not be recoverable under the provisions of SFAS No. 144. Upon retirement, the cost of regulated property, net of salvage, is charged to accumulated depreciation. For non-regulated property, the cost and accumulated depreciation of the property, plant and equipment retired or otherwise disposed of are removed from the related accounts and included in the determination of any gain or loss on disposition.

The annual provision for depreciation on electric and gas property, plant and equipment is computed on a straight-line basis using composite rates by classes of depreciable property. Accumulated depreciation is charged with the cost of depreciable property retired, less salvage and other recoveries. Property, plant and equipment, other than electric and gas facilities, is generally depreciated on a straight-line basis over the useful lives of the assets. The table below provides system-wide composite annual depreciation rates for the years ended December 31, 2008, 2007, and 2006.

	Transmission & Distribution			Generation
	2008	2007	2006	2008	2007	2006
Pepco	2.7%	3.0%	3.5%	-	-	-
DPL	2.8%	2.9%	3.0%	-	-	-
ACE	2.8%	2.9%	2.9%	-	-	.3% (a)
Conectiv Energy	-	-	-	2.0%	2.0%	2.0%
Pepco Energy Services	-	-	-	9.5%	10.1%	9.6%

(a)

Rate reflects the Consolidated Balance Sheet classification of ACE’s generation assets as “assets held for sale” in 2006 and, therefore, de minimis depreciation expense was recorded.

In accordance with FSP American Institute of Certified Public Accountants Industry Audit Guide, Audits of Airlines—”Accounting for Planned Major Maintenance Activities” (FSP AUG AIR-1), costs associated with planned major maintenance activities related to generation facilities are expensed as incurred.

Long-Lived Assets Impairment

Pepco Holdings evaluates long-lived assets to be held and used, such as generating property and equipment and real estate, to determine if they are impaired whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Examples of such events or changes include a significant decrease in the market price of a long-lived asset or a significant adverse change in the manner in which an asset is being used or its physical condition. A long-lived asset to be held and used is written down to fair value if the sum of its expected future undiscounted cash flows is less than its carrying amount.

For long-lived assets held for sale, an impairment loss is recognized to the extent that the assets’ carrying amount exceeds their fair value including costs to sell.

Capitalized Interest and Allowance for Funds Used During Construction

In accordance with the provisions of SFAS No. 71, PHI’s utility subsidiaries can capitalize as Allowance for Funds Used During Construction (AFUDC) the capital costs of financing the construction of plant and equipment. The debt portion of AFUDC is recorded as a

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reduction of “interest expense” and the equity portion of AFUDC is credited to “other income” in the accompanying Consolidated Statements of Earnings.

Pepco Holdings recorded AFUDC for borrowed funds of $5 million, $7 million, and $3 million for the years ended December 31, 2008, 2007 and 2006, respectively.

Pepco Holdings recorded amounts for the equity component of AFUDC of $5 million, $4 million and $4 million for the years ended December 31, 2008, 2007, and 2006, respectively.

Amortization of Debt Issuance and Reacquisition Costs

Pepco Holdings defers and amortizes debt issuance costs and long-term debt premiums and discounts over the lives of the respective debt issues. Costs associated with the redemption of debt for PHI’s subsidiaries are also deferred and amortized over the lives of the new issues.

Pension and Other Postretirement Benefit Plans

Pepco Holdings sponsors a non-contributory defined benefit retirement plan that covers substantially all employees of Pepco, DPL, ACE and certain employees of other Pepco Holdings subsidiaries (the PHI Retirement Plan). Pepco Holdings also provides supplemental retirement benefits to certain eligible executives and key employees through a nonqualified retirement plan and provides certain postretirement health care and life insurance benefits for eligible retired employees.

Pepco Holdings accounts for the PHI Retirement Plan and nonqualified retirement plans in accordance with SFAS No. 87, “Employers’ Accounting for Pensions,” as amended by SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132 (R)” (SFAS No. 158), and its postretirement health care and life insurance benefits for eligible employees in accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” as amended by SFAS No. 158. PHI’s financial statement disclosures are prepared in accordance with SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” as amended by SFAS No. 158.

See Note (10), “Pensions and Other Postretirement Benefits,” for additional information.

Preferred Stock

As of December 31, 2008 and 2007, PHI had 40 million shares of preferred stock authorized for issuance, with a par value of $.01 per share. No shares of preferred stock were outstanding at December 31, 2008 and 2007.

Reclassifications and Adjustments

Certain prior year amounts have been reclassified in order to conform to current year presentation.

During 2008, PHI recorded adjustments to correct errors in Other Operation and Maintenance expenses for prior periods dating back to February 2005 during which (i) customer late payment fees were incorrectly recognized and (ii) stock-based compensation expense related

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to certain restricted stock awards granted under the Long-Term Incentive Plan was understated. These adjustments, which were not considered material either individually or in the aggregate, resulted in increases in Other Operation and Maintenance expenses of $15 million for the year ended December 31, 2008, all of which related to prior periods.

(3) NEWLY ADOPTED ACCOUNTING STANDARDS

Statement of Financial Accounting Standards (SFAS) No. 157, “ Fair Value Measurements ” (SFAS No. 157)

SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. Under SFAS No. 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the most advantageous market using the best available information. The provisions of SFAS No. 157 were effective for financial statements beginning January 1, 2008 for PHI.

In February 2008, the FASB issued FSP 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” (FSP 157-1), that removed fair value measurement for the recognition and measurement of lease transactions from the scope of SFAS No. 157. The effective date of FSP 157-1 was for financial statement periods beginning January 1, 2008 for PHI.

Also in February 2008, the FASB issued FSP 157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2), which deferred the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (that is, at least annually), until financial statement reporting periods beginning January 1, 2009 for PHI.

PHI applied the guidance of FSP 157-1 and FSP 157-2 with its adoption of SFAS No. 157. The adoption of SFAS No. 157 on January 1, 2008 did not result in a transition adjustment to beginning retained earnings and did not have a material impact on PHI’s overall financial condition, results of operations, or cash flows. SFAS No. 157 also required new disclosures regarding the level of pricing observability associated with financial instruments carried at fair value. This additional disclosure is provided in Note (15), “Fair Value Disclosures.” PHI is currently evaluating the impact of FSP 157-2 and does not anticipate that the application of FSP 157-2 to its other non-financial assets and non-financial liabilities will materially affect its overall financial condition, results of operations, or cash flows.

In September 2008, the SEC and FASB issued guidance on fair value measurements, which was clarified in October 2008 by the FASB in FSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active.” This guidance clarifies the application of SFAS No. 157 to assets in an inactive market and illustrates how to determine the fair value of a financial asset in an inactive market. The guidance was effective beginning with the September 30, 2008 reporting period for PHI, and has not had a material impact on PHI’s results.

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SFAS No. 159, “ The Fair Value Option for Financial Assets and Financial Liabilities—including an Amendment of FASB Statement No. 115 ” (SFAS No. 159)

SFAS No. 159 permits entities to elect to measure eligible financial instruments at fair value. SFAS No. 159 applies to other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. On January 1, 2008, PHI elected not to apply the fair value option for its eligible financial assets and liabilities.

FASB Staff Position (FSP) FIN 39-1, “Amendment of FASB Interpretation No. 39” (FSP FIN 39-1)

FSP FIN 39-1 amended certain portions of FIN 39. The FSP replaces the terms “conditional contracts” and “exchange contracts” in FIN 39 with the term “derivative instruments” as defined in SFAS No. 133. The FSP also amends FIN 39 to allow for the offsetting of fair value amounts for the right to reclaim cash collateral or receivables, or the obligation to return cash collateral or payables, arising from the same master netting arrangement as the derivative instruments. FSP FIN 39-1 applied to financial statements beginning January 1, 2008 for PHI.

PHI retrospectively adopted the provisions of FSP FIN 39-1 and elected to offset the net fair value amounts recognized for derivative instruments and fair value amounts recognized for related collateral positions executed with the same counterparty under a master netting arrangement. Additional disclosure of collateral positions that have been offset against net derivative positions is provided in Note (17), “Use of Derivatives in Energy and Interest Rate Hedging Activities.” The effect of retrospective application of FSP FIN 39-1 was not material at December 31, 2007 and, as such, no amounts were reclassified.

Emerging Issues Task Force (EITF) Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (EITF 06-11)

EITF 06-11 provides that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and paid to employees for equity classified non-vested equity shares, non-vested equity share units, and outstanding equity share options should be recognized as an increase to additional paid-in capital (APIC). The amount recognized in APIC for the realized income tax benefit from dividends on those awards should be included in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment awards. If the estimated amount of forfeitures increases or actual forfeitures reduce the amount of tax benefits previously recognized in APIC and if the APIC pool is depleted, then the reduction in tax benefit would be an adjustment to the income statement.

EITF 06-11 applied prospectively to the income tax benefits of dividends on equity-classified employee share-based payment awards that are granted during financial statement reporting periods beginning on January 1, 2008 for PHI. PHI adopted the provisions of EITF 06-11 on January 1, 2008, and it did not have a material impact on PHI’s overall financial condition, results of operations, or cash flows.

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SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS No. 162)

In May 2008, the FASB issued SFAS No. 162, which identifies the sources of accounting principles and the hierarchy for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. Moving the GAAP hierarchy into the accounting literature directs the responsibility for applying the hierarchy to the reporting entity, rather than just to the auditors.

SFAS No. 162 was effective for PHI as of November 15, 2008 and did not result in a change in accounting for PHI. Therefore, the provisions of SFAS No. 162 did not have a material impact on PHI’s overall financial condition, results of operations, cash flows and disclosure.

FSP FAS 133-1 and FIN 45-4, “Disclosure About Credit Derivatives and Certain Guarantees” (FSP FAS 133-1 and FIN 45-4)

In September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, which require enhanced disclosures by entities that provide credit protection through credit derivatives (including embedded credit derivatives) within the scope of SFAS No. 133, and guarantees within the scope of FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.”

For credit derivatives, FSP FAS 133-1 and FIN 45-4 requires disclosure of the nature and fair value of the credit derivative, the approximate term, the reasons for entering the derivative, the events requiring performance, and the current status of the payment/performance risk. It also requires disclosures of the maximum potential amount of future payments without any reduction for possible recoveries under collateral provisions, recourse provisions, or liquidation proceeds. PHI has not provided credit protection to others through the credit derivatives within the scope of SFAS No. 133.

For guarantees, FSP FAS 133-1 and FIN 45-4 requires disclosure on the current status of the payment/performance risk and whether the current status is based on external credit ratings or current internal groupings used to manage risk. If internal groupings are used, then information is required about how the groupings are determined and used for managing risk.

The new disclosures are required starting with financial statement reporting periods ending December 31, 2008 for PHI. Comparative disclosures are only required for periods ending after initial adoption. The new guarantee disclosures did not have a material impact on PHI.

FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities” (FSP FAS 140-4 and FIN 46(R)-8)

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purpose entity affects an entity’s financial position, financial performance, and cash flows. The principal objectives of the disclosure requirements in Interpretation 46(R) are to outline (i) the significant judgments in determining whether an entity should consolidate a variable interest entity (VIE), (ii) the nature of any restrictions on consolidated assets, (iii) the risks associated with the involvement in the VIE, and (iv) how the involvement with the VIE affects an entity’s financial position, financial performance, and cash flows.

FSP FAS 140-4 and FIN 46(R)-8 is effective for PHI’s December 31, 2008 financial statements. This FSP has no material impact to PHI’s overall financial condition, results of operations, or cash flows as it relates to SFAS No. 140. PHI’s FIN 46(R) disclosures are provided in Note (2), “Significant Accounting Policies - Consolidation of Variable Interest Entities.”

(4) RECENTLY ISSUED ACCOUNTING STANDARDS, NOT YET ADOPTED

SFAS No. 141(R), “Business Combinations—a Replacement of FASB Statement No. 141” (SFAS No. 141 (R))

SFAS No. 141(R) replaces FASB Statement No. 141, “Business Combinations,” and retains the fundamental requirements that the acquisition method of accounting be used for all business combinations and for an acquirer to be identified for each business combination. However, SFAS No. 141 (R) expands the definition of a business and amends FASB Statement No. 109, “Accounting for Income Taxes,” to require the acquirer to recognize changes in the amount of its deferred tax benefits that are realizable because of a business combination either in income from continuing operations or directly in contributed capital, depending on the circumstances.

In January 2009, the FASB proposed FSP FAS 141(R)-a “Accounting for Assets and Liabilities Assumed in a Business Combination that Arise from Contingencies” (FSP FAS 141(R)-a), to clarify the accounting on the initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. The FSP FAS 141(R)-a requires that assets acquired and liabilities assumed in a business combination that arise from contingences be measured at fair value in accordance with SFAS No. 157 if the acquisition date can be reasonably determined. If not, then the asset or liability would be measured at the amount in accordance with SFAS 5, “Accounting for Contingencies,” and FIN 14, “Reasonable Estimate of the Amount of Loss.”

SFAS No. 141(R) and the guidance provided in FSP FAS 141(R)-a applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009 for PHI. PHI has evaluated the impact of SFAS No. 141(R) and does not anticipate its adoption will have a material impact on its overall financial condition, results of operations, or cash flows.

SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an Amendment of ARB No. 51” (SFAS No. 160)

SFAS No. 160 establishes new accounting and reporting standards for a non-controlling interest (also called a “minority interest”) in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a minority interest in a subsidiary is an ownership interest in the consolidated entity that should be separately reported in the consolidated financial statements.

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SFAS No. 160 establishes accounting and reporting standards that require (i) the ownership interests and the related consolidated net income in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity, and presented separately on the face of the consolidated statement of income, (ii) the changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for as equity transactions, and (iii) when a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary must be initially measured at fair value.

SFAS No. 160 is effective prospectively for financial statement reporting periods beginning January 1, 2009 for PHI, except for the presentation and disclosure requirements. The presentation and disclosure requirements apply retrospectively for all periods presented. PHI has evaluated the impact of SFAS No. 160 and does not anticipate its adoption will have a material impact on its overall financial condition, results of operations, cash flows or disclosure.

SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an Amendment of FASB Statement No. 133” (SFAS No. 161)

In March 2008, the FASB issued SFAS No. 161, which changes the disclosure requirements for derivative instruments and hedging activities. Entities will be required to provide qualitative disclosures about derivatives objectives and strategies, fair value amounts of gains and losses on derivative instruments which before were optional, disclosure about credit-risk-related contingent features in derivative agreements, and information on the potential effect on an entity’s liquidity from using derivatives.

SFAS No. 161 requires that the gross fair value of derivative instruments and gross gains and losses be quantitatively disclosed in a tabular format to provide a more complete picture of the location in an entity’s financial statements of both the derivative positions existing at period end and the effect of using derivatives during the reporting period. The FASB provides an option for hedged items to be presented in tabular or non-tabular format.

SFAS No. 161 is effective for financial statement reporting periods beginning January 1, 2009 for PHI. SFAS No. 161 encourages but does not require disclosures for earlier periods presented for comparative purposes at initial adoption. PHI is currently evaluating the impact SFAS No. 161 may have on its March 31, 2009 quarterly disclosures.

FSP EITF No. 03-6-1, “Determining whether Instruments Granted in Share-Based Payment Transactions are Participating Securities” (FSP EITF 03-6-1)

In June 2008, the FASB issued FSP EITF 03-6-1, which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (EPS) under the two-class method described in SFAS No. 128, “Earnings per Share.”

FSP EITF 03-6-1 is effective for financial reporting periods beginning January 1, 2009 for PHI. All prior period EPS data presented shall be adjusted retrospectively (including interim financial statements, summaries of earnings, and selected financial data) to conform with the

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provisions of FSP EITF 03-6-1. PHI is currently evaluating the impact FSP EITF 03-6-1 will have on its earnings per share calculations.

EITF Issue No. 08-5, “Issuer’s Accounting for Liabilities Measured at Fair Value with a Third Party Credit Enhancement” (EITF 08-5)

In September 2008, the FASB issued EITF 08-5 to provide guidelines for the determination of the unit of accounting for a liability issued with an inseparable third-party credit enhancement when it is measured or disclosed at fair value on a recurring basis. EITF 08-5 applies to entities that incur liabilities with inseparable third-party credit enhancements or guarantees that are recognized or disclosed at fair value. This would include guaranteed debt obligations, derivatives, and other instruments that are guaranteed by third parties.

The effect of the credit enhancement may not be included in the fair value measurement of the liability, even if the liability is an inseparable third-party credit enhancement. The issuer is required to disclose the existence of the inseparable third-party credit enhancement on the issued liability.

EITF 08-5 is effective on a prospective basis for reporting periods beginning on and after January 1, 2009 for PHI. The effect of initial application must be included in the change in fair value in the period of adoption. PHI is currently evaluating the impact on its accounting and disclosures.

EITF Issue No. 08-6, “Equity Method Investment Accounting Consideration” (EITF 08-6)

In November 2008, the FASB issued EITF 08-6 to address the accounting for equity method investments including: (i) how an equity method investment should initially be measured, (ii) how it should be tested for impairment, and (iii) how an equity method investee’s issuance of shares should be accounted for. The EITF provides that initial carrying value of an equity method investment can be determined using the accumulation model in SFAS 141(R), “Business Combination (revised 2007),” and other-than-temporary impairments should be recognized in accordance with paragraph 19(h) of Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.”

This EITF is effective for PHI beginning January 1, 2009. PHI is currently evaluating the impact on its accounting and disclosures.

FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (FSP FAS 132(R)-1)

In December 2008, the FASB issued FSP FAS 132(R)-1 to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The required disclosures under this FSP would expand current disclosures under SFAS No. 132(R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits—an amendment of FASB Statements No. 87, 88, and 106,” to be in line with SFAS No. 157 required disclosures.

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The disclosures are to provide users an understanding of the investment allocation decisions made, factors used in the investment policies and strategies, plan assets by major investment types, inputs and valuation techniques used to measure fair value of plan assets, significant concentration of risk within the plan, and the effects of fair value measurement using significant unobservable inputs (Level 3 as defined in SFAS No. 157) on changes in plan assets for the period.

The new disclosures are required starting with financial statement reporting periods ending December 31, 2009 for PHI and earlier application is permitted. Comparative disclosures under this provision are not required for earlier periods presented. PHI is currently evaluating the impact on its disclosures.

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(5) SEGMENT INFORMATION

Based on the provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” Pepco Holdings’ management has identified its operating segments at December 31, 2008 as Power Delivery, Conectiv Energy, Pepco Energy Services, and Other Non-Regulated. Segment financial information for the years ended December 31, 2008, 2007, and 2006, is as follows:

	Year Ended December 31, 2008
	(Millions of dollars)
			Competitive Energy Segments
	Power Delivery		Conectiv Energy		Pepco Energy Services	Other Non- Regulated		Corp. & Other (a)	PHI Cons.
Operating Revenue	$ 5,487		$3,047	(b)	$2,648	$ (60)	(d)	$ (422)	$10,700
Operating Expense (c)	4,931	(b)	2,827		2,592	4		(422)	9,932
Operating Income (Loss)	556		220		56	(64)		-	768
Interest Income	14		2		4	4		(5)	19
Interest Expense	195		25		5	19		86	330
Other Income (Expense)	14		(1)		2	(5)		1	11
Preferred Stock Dividends	-		-		-	3		(3)	-
Income Taxes	139		74		18	(28)	(d)	(35)	168
Net Income (Loss)	250		122		39	(59)	(d)	(52)	300
Total Assets	10,266		2,022		798	1,450		1,939	16,475
Construction Expenditures	$ 587		$ 138		$ 31	$ -		$ 25	$ 781

(a)

Includes unallocated Pepco Holdings’ (parent company) capital costs, such as acquisition financing costs, and the depreciation and amortization related to purchase accounting adjustments for the fair value of Conectiv assets and liabilities as of the August 1, 2002 acquisition date. For consolidation purposes, the Total Assets line item in this column includes Pepco Holdings’ goodwill balance which is primarily attributable to Power Delivery. Included in Corp. & Other are intercompany amounts of $(422) million for Operating Revenue, $(417) million for Operating Expense, $(70) million for Interest Income, $(67) million for Interest Expense, and $(3) million for Preferred Stock Dividends.

(b)	Power Delivery purchased electric energy and capacity and natural gas from Conectiv Energy in the amount of $374 million for the year ended December 31, 2008.

(c)	Includes depreciation and amortization of $377 million, consisting of $317 million for Power Delivery, $37 million for Conectiv Energy, $13 million for Pepco Energy Services, $2 million for Other Non-Regulated and $8 million for Corp. & Other.

(d)

Included in Operating Revenue is a pre-tax charge of $124 million ($86 million after-tax) related to the adjustment to the equity value of cross-border energy lease investments, and included in Income Taxes is a $7 million after-tax charge for the additional interest accrued on the related tax obligations.

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	Year Ended December 31, 2007
	(Millions of dollars)
			Competitive Energy Segments
	Power Delivery		Conectiv Energy		Pepco Energy Services		Other Non- Regulated	Corp. & Other (a)		PHI Cons.
Operating Revenue	$5,244		$2,206	(b)	$2,309	(b)	$ 76	$(469)		$9,366
Operating Expense (c)	4,713	(b)(d)	2,057		2,251		5	(466)	(f)	8,560
Operating Income	531		149		58		71	(3)		806
Interest Income	13		5		3		11	(12)		20
Interest Expense	189		33		4		34	80		340
Other Income	19		1		5		10	1		36
Preferred Stock Dividends	-		-		-		3	(3)		-
Income Taxes	142	(e)	49		24		9	(36)		188
Net Income (Loss)	232		73		38		46	(55)		334
Total Assets	9,800		1,785		683		1,533	1,310		15,111
Construction Expenditures	$ 554		$ 42		$ 15		$ -	$ 12		$ 623

(a)

Includes unallocated Pepco Holdings’ (parent company) capital costs, such as acquisition financing costs, and the depreciation and amortization related to purchase accounting adjustments for the fair value of Conectiv assets and liabilities as of the August 1, 2002 acquisition date. For consolidation purposes, the Total Assets line item in this column includes Pepco Holdings’ goodwill balance which is primarily attributable to Power Delivery. Included in Corp. & Other are intercompany amounts of $(469) million for Operating Revenue, $(464) million for Operating Expense, $(93) million for Interest Income, $(90) million for Interest Expense, and $(3) million for Preferred Stock Dividends.

(b)	Power Delivery purchased electric energy and capacity and natural gas from Conectiv Energy and Pepco Energy Services in the amount of $431 million for the year ended December 31, 2007.

(c)	Includes depreciation and amortization of $366 million, consisting of $305 million for Power Delivery, $38 million for Conectiv Energy, $12 million for Pepco Energy Services, $2 million for Other Non-Regulated and $9 million for Corp. & Other.

(d)	Includes $33 million ($20 million, after-tax) from settlement of Mirant bankruptcy claims.

(e)	Includes $20 million benefit ($18 million net of fees) related to Maryland income tax settlement.

(f)	Includes stock-based compensation expense of $4 million, consisting primarily of $3 million for Power Delivery and $1 million for Conectiv Energy.

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	Year Ended December 31, 2006
	(Millions of dollars)
			Competitive Energy Segments
	Power Delivery		Conectiv Energy		Pepco Energy Services		Other Non- Regulated		Corp. & Other (a)		PHI Cons.
Operating Revenue	$5,119		$1,964	(b)	$1,669		$ 91		$(480)		$ 8,363
Operating Expense (c)	4,651	(b)	1,867		1,631	(e)	7		(486)	(g)	7,670
Operating Income	468		97		38		84		6		693
Interest Income	12		8		3		7		(13)		17
Interest Expense	181		36		5		38		79		339
Other Income	19		10	(d)	2		8		-		39
Preferred Stock Dividends	2		-		-		3		(4)		1
Income Taxes	125	(f)	32		17		8	(f)	(21)	(f)	161
Net Income (Loss)	191		47		21		50		(61)		248
Total Assets	8,933		1,842		618		1,596		1,255		14,244
Construction Expenditures	$ 447		$ 12		$ 6		$ -		$ 10		$ 475

(a)

Includes unallocated Pepco Holdings’ (parent company) capital costs, such as acquisition financing costs, and the depreciation and amortization related to purchase accounting adjustments for the fair value of Conectiv assets and liabilities as of the August 1, 2002 acquisition date. For consolidation purposes, the Total Assets line item in this column includes Pepco Holdings’ goodwill balance which is primarily attributable to Power Delivery. Included in Corp. & Other are intercompany amounts of $(481) million for Operating Revenue, $(475) million for Operating Expense, $(90) million for Interest Income, $(88) million for Interest Expense, and $(3) million for Preferred Stock Dividends.

(b)	Power Delivery purchased electric energy and capacity and natural gas from Conectiv Energy in the amount of $461 million for the year ended December 31, 2006.

(c)	Includes depreciation and amortization of $413 million, consisting of $354 million for Power Delivery, $36 million for Conectiv Energy, $12 million for Pepco Energy Services, $2 million for Other Non-Regulated and $9 million for Corp. & Other.

(d)	Includes $12 million gain ($8 million after-tax) on the sale of its equity interest in a joint venture which owns a wood burning cogeneration facility in California.

(e)	Includes $19 million of impairment losses ($14 million after-tax) related to certain energy services business assets.

(f)

In 2006, PHI resolved certain, but not all, tax matters that were raised in Internal Revenue Service audits related to the 2001 and 2002 tax years. Adjustments recorded related to these resolved tax matters resulted in a $6 million increase in net income ($3 million for Power Delivery and $5 million for Other Non-Regulated, partially offset by an unfavorable $2 million impact in Corp. & Other). To the extent that the matters resolved related to tax contingencies from the Conectiv legacy companies that existed at the August 2002 acquisition date, in accordance with accounting rules, an additional adjustment of $9 million ($3 million related to Power Delivery and $6 million related to Other Non-Regulated) was recorded in Corp. & Other to eliminate the tax benefits recorded by Power Delivery and Other Non-Regulated against the goodwill balance that resulted from the acquisition. Also during 2006, the total favorable impact of $3 million was recorded that resulted from changes in estimates related to prior year tax liabilities subject to audit ($4 million for Power Delivery, partially offset by an unfavorable $1 million for Corp. & Other).

(g)	Includes stock-based compensation expense of $5 million, consisting primarily of $4 million for Power Delivery and $1 million for Conectiv Energy.

(6) GOODWILL

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To estimate the fair value of its Power Delivery reporting unit for its goodwill impairment test, PHI reviewed the results from two discounted cash flow models. The models differ in the method used to calculate the terminal value of the reporting unit. One estimate of terminal value is based on a constant, annual cash flow growth rate that is consistent with Power Delivery’s plan, and the other estimate of terminal value is based on a multiple of earnings before interest, taxes, depreciation, and amortization that management believes is consistent with relevant market multiples for comparable utilities. Each model uses a cost of capital appropriate for a regulated utility as the discount rate for the estimated cash flows associated with the reporting unit. Neither valuation model evidenced impairment of goodwill. PHI has consistently used this valuation model to estimate the fair value of Power Delivery since the adoption of SFAS No. 142.

The estimation of fair value is dependent on a number of factors, including but not limited to future growth assumptions, operating and capital expenditure requirements, and capital costs, and changes in these factors could materially impact the results of impairment testing. The estimated cash flows were sourced from the Power Delivery reporting unit’s business forecast, and they incorporate current plans for capital expenditures and regulatory ratemaking cases. Assumptions and methodologies used in the models were consistent with historical experience, including assumptions concerning the recovery of operating costs and capital expenditures. The discount rate employed reflected PHI’s estimated cost of capital. Sensitive, interrelated and uncertain variables that could decrease the estimated fair value of the Power Delivery reporting unit include utility sector market performance, sustained poor economic conditions, the results of rate-making proceedings, higher operating and capital expenditure requirements, a significant increase in the cost of capital and other factors.

PHI reconciled its total market capitalization at year-end with the sum of the fair value of its business segments to further substantiate the estimated fair value of the Power Delivery reporting unit. PHI determined its market capitalization as of December 31, 2008 for purposes of the reconciliation, which was 7 percent below book value. PHI estimated the fair value of its other business segments (Conectiv Energy, Pepco Energy Services, Other Non-Regulated, and Corporate & Other). The sum of the estimated fair values of the segments exceeded the market capitalization of PHI at December 31, 2008. Management believes that the excess fair value is reflective of a reasonable control premium that reconciles PHI’s market capitalization to the estimated fair value of its business segments. The control premium calculated was consistent with control premiums paid in historical acquisitions in the utility industry.

With the current volatile general market conditions and the disruptions in the credit and capital markets, PHI will continue to closely monitor for indicators of goodwill impairment.

A roll forward of PHI’s goodwill balance is set forth below (millions of dollars):

Balance, December 31, 2006	$	1,409
Add: Adjustment due to resolution of pre-merger tax contingencies and correction of pre-merger deferred tax balances		1
Balance, December 31, 2007		1,410
Less:Changes in estimates related to pre-merger tax contingencies and adjustments to deferred tax balance		1
Balance, December 31, 2008	$	1,411

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(7) REGULATORY ASSETS AND REGULATORY LIABILITIES

The components of Pepco Holdings’ regulatory asset balances at December 31, 2008 and 2007 are as follows:

	2008	2007
	(Millions of dollars)
Securitized stranded costs	$ 674	$ 735
Pension and OPEB costs	944	334
Deferred energy supply costs	31	31
Deferred income taxes	153	156
Deferred debt extinguishment costs	72	72
Unrecovered purchased power contract costs	9	10
Deferred other postretirement benefit costs	10	13
Phase in credits	10	39
Other	181	126
Total Regulatory Assets	$2,084	$1,516

The components of Pepco Holdings’ regulatory liability balances at December 31, 2008 and 2007 are as follows:

	2008	2007
	(Millions of dollars)
Deferred income taxes due to customers	$ 57	$ 60
Deferred energy supply costs	257	248
Federal and New Jersey tax benefits, related to securitized stranded costs	28	31
Asset removal costs	341	332
Excess depreciation reserve	74	90
Settlement proceeds — Mirant bankruptcy claims	102	415
Gain from sale of divested assets	26	67
Other	7	6
Total Regulatory Liabilities	$892	$1,249

A description for each category of regulatory assets and regulatory liabilities follows:

Securitized Stranded Costs: Represents stranded costs associated with contract termination payments associated with a contract between ACE and an unaffiliated non-utility generator (NUG) and the discontinuation of the application of SFAS No. 71 for ACE’s electricity generation business. The recovery of these stranded costs has been securitized through the issuance by Atlantic City Electric Transition Funding LLC (ACE Funding) of transition bonds (Transition Bonds). A customer surcharge is collected by ACE to fund principal and interest payments on the Transition Bonds. The stranded costs are amortized over the life of the Transition Bonds, which mature between 2010 and 2023. A return is received on these deferrals with the exception of taxes.

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Pension and OPEB Costs: Represents the funded portion of Pepco Holdings’ defined benefit pension and other postretirement benefit plans that is probable of recovery in rates under SFAS No. 71 by Pepco, DPL and ACE. There is no return on these deferrals.

Deferred Energy Supply Costs: The regulatory asset primarily represents deferred costs associated with a net under-recovery of Default Electricity Supply costs incurred by Pepco and DPL. The regulatory liability primarily represents deferred costs associated with a net over-recovery by ACE connected with the provision of Default Electricity Supply and other restructuring related costs incurred by ACE. A return is generally received on these deferrals other than the Default Electricity Supply deferrals which do not earn a return.

Deferred Income Taxes: Represents a receivable from Power Delivery’s customers for tax benefits applicable to utility operations of Pepco, DPL, and ACE previously flowed through before the companies were ordered to provide deferred income taxes. As the temporary differences between the financial statement and tax basis of assets reverse, the deferred recoverable balances are reversed. There is no return on these deferrals.

Deferred Debt Extinguishment Costs: Represents the costs of debt extinguishment of Pepco, DPL and ACE for which recovery through regulated utility rates is considered probable and, if approved, will be amortized to interest expense during the authorized rate recovery period. A return is received on these deferrals.

Unrecovered Purchased Power Contract Costs: Represents deferred costs related to purchase power contracts entered into by ACE. The amortization period began in July 1994 and will end in May 2014 and earns a return.

Deferred Other Postretirement Benefit Costs: Represents the non-cash portion of other postretirement benefit costs deferred by ACE during 1993 through 1997. This cost is being recovered over a 15-year period that began on January 1, 1998. There is no return on this deferral.

Phase In Credits: Represents phase-in credits for participating Maryland and Delaware residential and small commercial customers to mitigate the immediate impact of significant rate increases due to energy costs in 2006. The deferral period for Delaware was May 1, 2006 to January 1, 2008 with recovery to occur over a 17-month period beginning January 2008. The Delaware deferral will be recovered from participating customers on a straight-line basis. The deferral period for Maryland was June 1, 2006 to June 1, 2007, with the recovery occurring over an 18-month period beginning June 2007 and ending in 2008. There is no return on these deferrals.

Other: Represents miscellaneous regulatory assets that generally are being amortized over 1 to 20 years and generally do not receive a return.

Deferred Income Taxes Due to Customers: Represents the portion of deferred income tax liabilities applicable to utility operations of Pepco, DPL, and ACE that has not been reflected in current customer rates for which future payment to customers is probable. As temporary differences between the financial statement and tax basis of assets reverse, deferred recoverable income taxes are amortized. There is no return on these deferrals.

Federal and New Jersey Tax Benefits, Related to Securitized Stranded Costs: Securitized stranded costs include a portion of stranded costs attributable to the future tax benefit expected to

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be realized when the higher tax basis of generating plants divested by ACE is deducted for New Jersey state income tax purposes as well as the future benefit to be realized through the reversal of federal excess deferred taxes. To account for the possibility that these tax benefits may be given to ACE’s regulated electricity delivery customers through lower rates in the future, ACE established a regulatory liability. The regulatory liability related to federal excess deferred taxes will remain until such time as the Internal Revenue Service issues its final regulations with respect to normalization of these federal excess deferred taxes. There is no return on these deferrals.

Asset Removal Costs: The depreciation rates for Pepco and DPL include a component for removal costs, as approved by the relevant federal and state regulatory commissions. As such, Pepco and DPL have recorded regulatory liabilities for their estimate of the difference between incurred removal costs and the level of removal costs recovered through depreciation rates.

Excess Depreciation Reserve: The excess depreciation reserve was recorded as part of an ACE New Jersey rate case settlement. This excess reserve is the result of a change in depreciable lives and a change in depreciation technique from remaining life to whole life. The excess is being amortized over an 8.25 year period, which began in June 2005. There is no return on these deferrals.

Gain from Sale of Divested Assets : Represents (i) the balance of the net gain realized by ACE from the sale in 2006 of its interests in the Keystone and Conemaugh generating facilities and (ii) the balance of the net proceeds realized by ACE from the sale in 2007 of the B.L. England generating facility and the monetization of associated emission allowance credits. Both gains are being returned to ACE’s ratepayers as a credit on their bills — the Keystone and Conemaugh gain over a 33-month period that began during the October 2006 billing period and the B.L. England and emission allowances proceeds over a 12-month period that began during the June 2008 billing period. There is no return on these deferrals.

Settlement Proceeds - Mirant Bankruptcy Claims: In 2007, Pepco received $414 million of net proceeds from settlement of a Mirant Corporation (Mirant) claim, plus interest earned, which was designated to pay for future above-market capacity and energy purchases under the Panda PPA. In 2008, Pepco transferred the Panda PPA to Sempra Energy Trading LLC (Sempra) in a transaction in which Pepco made a payment to Sempra and all further Pepco rights, obligations and liabilities under the Panda PPA were terminated. The balance at December 31, 2008 reflects the funds remaining after the Sempra payment. Pepco filed rate applications with the DCPSC and the MPSC in the fourth quarter of 2008 to provide for the disposition of the remaining funds. See Note (16), “Commitments and Contingencies — Proceeds from Settlement of Mirant Bankruptcy Claims” for additional information. Currently there is no return on these deferrals.

Other: Includes miscellaneous regulatory liabilities such as the over-recovery of administrative costs associated with Maryland, Delaware and District of Columbia SOS. These regulatory liabilities generally do not receive a return.

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(8) LEASING ACTIVITIES

Investment in Finance Leases Held in Trust

As of December 31, 2008 and December 31, 2007, Pepco Holdings had cross-border energy lease investments of $1.3 billion and $1.4 billion, respectively, consisting of hydroelectric generation and coal-fired electric generation facilities and natural gas distribution networks located outside of the United States.

As further discussed in Note (2), “Significant Accounting Policies — Changes in Accounting Estimates,” and Note (16), “Commitments and Contingencies - PHI’s Cross-Border Energy Lease Investments,” during the second quarter of 2008, PHI reassessed the sustainability of its tax position and revised its assumptions regarding the estimated timing of tax benefits generated from its cross-border energy lease investments. Based on this reassessment, PHI for the quarter ended June 30, 2008, recorded a reduction in its cross-border energy lease investments of $124 million. No further charges were considered necessary in the third and fourth quarters of 2008.

The components of the cross-border energy lease investments at December 31, 2008 (reflecting the effects of recording this charge) and at December 31, 2007 are summarized below:

	December 31, 2008		December 31, 2007
	(Millions of dollars)

Scheduled lease payments, net of non-recourse debt	$	2,281	$	2,281
Less: Unearned and deferred income		(946)		(897)
Investment in finance leases held in trust		1,335		1,384
Less: Deferred income taxes		(679)		(773)
Net investment in finance leases held in trust	$	656	$	611

Income recognized from cross-border energy lease investments was comprised of the following for the years ended December 31, 2008, 2007 and 2006:

	2008		2007			2006
	(Millions of dollars)
Pre-tax earnings from PHI’s cross-border energy lease investments (included in “Other Revenue”)	$	75	$	76	$	88
Non-cash charge to reduce equity value of PHI’s cross-border energy lease investments		(124)		-		-
Pre-tax (loss) earnings from PHI’s cross-border energy lease investments after adjustment		(49)		76		88
Income tax (benefit) expense		(12)		16		26
Net (loss) income from PHI’s cross-border energy lease investments	$	(37)	$	60	$	62

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Scheduled lease payments from the cross-border energy lease investments are net of non-recourse debt. Minimum lease payments receivable from the cross-border energy lease investments for each of the years 2009 through 2013 and thereafter are zero for 2009, $16 million for 2010, zero for 2011, 2012 and 2013, and $1,319 million thereafter.

Lease Commitments

Pepco leases its consolidated control center, which is an integrated energy management center used by Pepco to centrally control the operation of its transmission and distribution systems. This lease is accounted for as a capital lease and was initially recorded at the present value of future lease payments, which totaled $152 million. The lease requires semi-annual payments of $8 million over a 25-year period beginning in December 1994 and provides for transfer of ownership of the system to Pepco for $1 at the end of the lease term. Under SFAS No. 71, the amortization of leased assets is modified so that the total interest on the obligation and amortization of the leased asset is equal to the rental expense allowed for rate-making purposes. This lease has been treated as an operating lease for rate-making purposes.

Capital lease assets recorded within Property, Plant and Equipment at December 31, 2008 and 2007, in millions of dollars, are comprised of the following:

At December 31, 2008	Original Cost	Accumulated Amortization	Net Book Value
Transmission	$76	$24	$52
Distribution	76	23	53
General	3	3	-
Total	$155	$50	$105

At December 31, 2007
Transmission	$ 76	$ 21	$ 55
Distribution	76	20	56
General	3	3	-
Total	$155	$ 44	$111

The approximate annual commitments under all capital leases are $15 million for each year 2009 through 2013, and $92 million thereafter.

Rental expense for operating leases was $69 million, $50 million, and $53 million for the years ended December 31, 2008, 2007, and 2006, respectively.

Total future minimum operating lease payments for Pepco Holdings as of December 31, 2008, are $56 million in 2009, $75 million in 2010, $44 million in 2011, $28 million in 2012, $19 million in 2013 and $369 million after 2013.

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(9) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is comprised of the following:

At December 31, 2008	Original Cost	Accumulated Depreciation	Net Book Value
	(Millions of dollars)
Generation	$ 1,782	$ 647	$1,135
Distribution	6,874	2,501	4,373
Transmission	2,101	739	1,362
Gas	386	110	276
Construction work in progress	584	-	584
Non-operating and other property	1,199	615	584
Total	$12,926	$4,612	$8,314
At December 31, 2007
Generation	$ 1,758	$ 608	$1,150
Distribution	6,494	2,427	4,067
Transmission	1,962	712	1,250
Gas	364	105	259
Construction work in progress	561	-	561
Non-operating and other property	1,168	578	590
Total	$12,307	$4,430	$7,877

The non-operating and other property amounts include balances for general plant, distribution and transmission plant held for future use as well as other property held by non-utility subsidiaries.

Pepco Holdings’ utility subsidiaries use separate depreciation rates for each electric plant account. The rates vary from jurisdiction to jurisdiction.

Asset Sales

In the third quarter of 2006, ACE completed the sale of its interest in the Keystone and Conemaugh generating facilities for approximately $175 million (after giving effect to post-closing adjustments). In the first quarter of 2007, ACE completed the sale of the B.L. England generating facility for a price of $9 million. In February 2008, ACE received an additional $4 million in settlement of an arbitration proceeding concerning the terms of the purchase agreement. See Note (7), “Regulatory Assets and Regulatory Liabilities,” for treatment of gains from these sales.

J ointly Owned Plant

PHI’s Consolidated Balance Sheet includes its proportionate share of assets and liabilities related to jointly owned plant. PHI’s subsidiaries have ownership interests in transmission facilities and other facilities in which various parties also have ownership interests. PHI’s

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proportionate share of operating and maintenance expenses of the jointly owned plant is included in the corresponding expenses in PHI’s Consolidated Statements of Earnings. PHI is responsible for providing its share of financing for the jointly owned facilities. Information with respect to PHI’s share of jointly owned plant as of December 31, 2008 is shown below.

Jointly Owned Plant	Ownership Share	Plant in Service		Accumulated Depreciation
	(Millions of dollars)
Transmission Facilities	Various	$	36		$	24
Other Facilities	Various		5			2
Total		$	41		$	26

Asset Retirement Obligations (AROs)

A reconciliation of the balances of PHI’s AROs is shown in the table below for the years ended December 31, 2008 and 2007 (millions of dollars):


	December 31, 2006		Liabilities Recognized		Liabilities Settled		Accretion		December 31, 2007
Total Liability	$	65	$	-	$	(63)	$	-	$	2

	December 31, 2007		Liabilities Recognized		Liabilities Settled		Accretion		December 31, 2008
Total Liability	$	2	$	-	$	-	$	-	$	2

During the first quarter of 2006, ACE recorded an asset retirement obligation of $60 million for the B.L. England plant demolition and environmental remediation costs; the obligation was to be amortized over a two-year period. In the first quarter of 2007, ACE completed the sale of the B.L. England generating facilities and the asset retirement obligation and asset retirement costs were reversed.

(10) PENSIONS AND OTHER POSTRETIREMENT BENEFITS

Pension Benefits and Other Postretirement Benefits

Pepco Holdings sponsors the PHI Retirement Plan, which covers substantially all employees of Pepco, DPL, ACE and certain employees of other Pepco Holdings’ subsidiaries. Pepco Holdings also provides supplemental retirement benefits to certain eligible executive and key employees through nonqualified retirement plans.

Pepco Holdings provides certain postretirement health care and life insurance benefits for eligible retired employees. Most employees hired on January 1, 2005 or later will not have company subsidized retiree medical coverage; however, they will be able to purchase coverage at full cost through PHI.

Pepco Holdings accounts for the PHI Retirement Plan and nonqualified retirement plans in accordance with SFAS No. 87, “Employers’ Accounting for Pensions,” and its postretirement

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health care and life insurance benefits for eligible employees in accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” In addition, on December 31, 2006, Pepco Holdings implemented SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132 (R)” (SFAS No. 158), which requires that companies recognize a net liability or asset to report the funded status of their defined benefit pension and other postretirement benefit plans on the balance sheet, with an offset to accumulated other comprehensive income in shareholders’ equity or a deferral in a regulatory asset or liability if probable of recovery in rates under SFAS No. 71, “Accounting For the Effects of Certain Types of Regulation.” SFAS No.158 does not change how pension and other postretirement benefits expenses are accounted for and reported in the consolidated statements of earnings. PHI’s financial statement disclosures are prepared in accordance with SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” as revised and amended by SFAS No. 158. Refer to Note (2), “Significant Accounting Policies — Pension and Other Postretirement Benefit Plans,” for additional information.

All amounts in the following tables are in millions of dollars.

At December 31,		Pension Benefits				Other Postretirement Benefits
Change in Benefit Obligation		2008		2007		2008		2007
Benefit obligation at beginning of year	$	1,701	$	1,715	$	620	$	611
Service cost		36		36		7		7
Interest cost		108		102		40		37
Amendments		15		4		-		-
Actuarial (gain) loss		3		(7)		24		3
Benefits paid		(110)		(149)		(38)		(38)
Benefit obligation at end of year	$	1,753	$	1,701	$	653	$	620
Change in Plan Assets
Fair value of plan assets at beginning of year	$	1,631	$	1,633	$	234	$	206
Actual return on plan assets		(403)		139		(56)		12
Company contributions		5		8		52		54
Benefits paid		(110)		(149)		(38)		(38)
Fair value of plan assets at end of year	$	1,123	$	1,631	$	192	$	234

Funded Status at end of year (plan assets less plan obligations)	$	(630)	$	(70)	$	$(461)	$	(386)

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The following table provides the amounts recognized in PHI’s Consolidated Balance Sheets as of December 31, 2008, in compliance with SFAS No. 158:

		Pension Benefits				Other Postretirement Benefits
		2008		2007		2008		2007
Regulatory asset	$	726	$	203	$	218	$	131
Current liabilities		(4)		(4)		-		-
Pension benefit obligation		(626)		(66)		-		-
Other postretirement benefit obligations		-		-		(461)		(385)
Deferred income tax		6		5		-		-
Accumulated other comprehensive income, net of tax		10		8		-		-
Net amount recognized	$	112	$	146	$	(243)	$	(254)

Amounts included in accumulated other comprehensive income (pre-tax) and regulatory assets at December 31, 2008 in compliance with SFAS No. 158 consist of:

		Pension Benefits				Other Postretirement Benefits
		2008		2007		2008		2007
Unrecognized net actuarial loss	$	742	$	215	$	241	$	159
Unamortized prior service cost (credit)		-		-		(26)		(31)
Unamortized transition liability		-		-		3		3
	$	742	$	215	$	218	$	131
Accumulated other comprehensive income ($10 million, and $8 million net of tax)		16		12		-		-
Regulatory assets		726		203		218		131
	$	742	$	215	$	218	$	131

The table below provides the components of net periodic benefit costs recognized for the years ended December 31.


	Pension Benefits			Other Postretirement Benefits
	2008	2007	2006	2008	2007	2006
Service cost	$36	$ 36	$ 41	$ 7	$ 7	$ 8
Interest cost	108	102	97	40	37	35
Expected return on plan assets	(130)	(130)	(130)	(16)	(14)	(11)
Amortization of prior service cost	-	1	1	(4)	(4)	(4)
Amortization of net loss	10	9	17	13	11	14
Recognition of Benefit Contract	-	4	-	-	2	-
Curtailment/Settlement (Gain)/Loss	-	3	-	-	-	-
Net periodic benefit cost	$24	$ 25	$ 26	$40	$39	$ 42

The table below provides the split of the combined pension and other postretirement net periodic benefit costs between subsidiaries:

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	2008		2007		2006
Pepco	$	24	$	22	$	32
DPL		3		4		1
ACE		12		11		14
Other subsidiaries		25		27		21
Total	$	64	$	64	$	68

The following weighted average assumptions were used to determine the benefit obligations at December 31:

	Pension Benefits		Other Postretirement Benefits
	2008	2007	2008	2007
Discount rate	6.50%	6.25%	6.50%	6.25%
Rate of compensation increase	5.00%	4.50%	5.00%	4.50%
Health care cost trend rate assumed for current year	-	-	8.50%	8.00%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)	-	-	5.00%	5.00%
Year that the rate reaches the ultimate trend rate	-	-	2015	2010

Assumed health care cost trend rates may have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects (millions of dollars):

	1-Percentage- Point Increase	1-Percentage- Point Decrease
Increase (decrease) on total service and interest cost	$ 2	$ (2)
Increase (decrease) on postretirement benefit obligation	$36	$(31)

The following weighted average assumptions were used to determine the net periodic benefit cost for the years ended December 31:


	Pension Benefits			Other Postretirement Benefits
	2008	2007	2006	2008	2007	2006

Discount rate	6.25%	6.00%	5.625%	6.25%	6.00%	5.625%
Expected long-term return on plan assets	8.25%	8.25%	8.50%	8.25%	8.25%	8.50%
Rate of compensation increase	5.00%	4.50%	4.50%	5.00%	4.50%	4.50%

The discount rate is developed using a cash flow matched bond portfolio approach to value SFAS No. 87 and SFAS No. 106 liabilities. A hypothetical bond portfolio is created comprised of high quality fixed income securities with cash flows and maturities that mirror the expected benefit payments to be made under the plans.

In selecting an expected rate of return on plan assets, PHI considers actual historical returns, economic forecasts and the judgment of its investment consultants on expected long-term performance for the types of investments held by the plan. The plan assets consist of equity, fixed income investments, real estate and private equity and, when viewed over a long-term horizon, are expected to yield a return on assets of 8.25%.

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In 2008, PHI and its actuaries conducted an experience study, a periodic analysis of plan experience against actuarial assumptions. The study reviewed withdrawal, retirement and salary increase assumptions. As a result of the study, assumed retirement rates were changed and the age-related salary scale assumption was increased from an average over an employee’s career of 4.50% to 5.00%.

In addition, for the 2008 Other Postretirement Benefit Plan valuation, the medical trend rate was changed to 8.5% declining .5% per year to 5% in 2015 and later, from the 2007 valuation assumption for 2008 of 7% declining 1% per year to 5% in 2010 and later.

Plan Assets

The PHI Retirement Plan weighted average asset allocations at December 31, 2008, and 2007, by asset category are as follows:

Asset Category	Plan Assets at December 31,		Target Plan Asset Allocation	Minimum/ Maximum
Asset Category	2008	2007	Target Plan Asset Allocation	Minimum/ Maximum
Equity securities	50%	60%	60%	55% - 65%
Debt securities	41%	33%	30%	30% - 50%
Other	9%	7%	10%	0% - 10%
Total	100%	100%	100%

Pepco Holdings’ other postretirement plan weighted average asset allocations at December 31, 2008, and 2007, by asset category are as follows:

Asset Category	Plan Assets at December 31,		Target Plan Asset Allocation	Minimum/ Maximum
Asset Category	2008	2007	Target Plan Asset Allocation	Minimum/ Maximum
Equity securities	56%	62%	60%	55% - 65%
Debt securities	37%	34%	35%	20% - 50%
Cash	7%	4%	5%	0% - 10%
Total	100%	100%	100%

In developing an asset allocation policy for the PHI Retirement Plan and other postretirement plan, PHI examined projections of asset returns and volatility over a long-term horizon. In connection with this analysis, PHI examined the risk/return tradeoffs of alternative asset classes and asset mixes given long-term historical relationships, as well as prospective capital market returns. PHI also conducted an asset/liability study to match projected asset growth with projected liability growth to determine whether there is sufficient liquidity for projected benefit payments. By incorporating the results of these analyses with an assessment of its risk posture, and taking into account industry practices, PHI developed its asset mix guidelines. Under these guidelines, PHI diversifies assets in order to protect against large investment losses and to reduce the probability of excessive performance volatility while maximizing return at an acceptable risk level. Diversification of assets is implemented by allocating monies to various asset classes and investment styles within asset classes, and by retaining investment management firm(s) with complementary investment philosophies, styles and approaches. Based on the assessment of demographics, actuarial/funding, and business and financial characteristics, PHI believes that its risk posture is slightly below average relative to

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other pension plans. Consequently, Pepco Holdings believes that a slightly below average equity exposure (i.e., a target equity asset allocation of 60%) is appropriate for the PHI Retirement Plan and the other postretirement plan.

On a periodic basis, Pepco Holdings reviews its asset mix and rebalances assets back to the target allocation over a reasonable period of time. During 2008, the volatility in the stock market made it challenging to maintain the target asset allocation. PHI expects to return to its target asset allocation during 2009 through a combination of contributions to the plan and payment of monthly benefits.

No Pepco Holdings common stock is included in pension or postretirement program assets.

Cash Flows

Contributions - PHI Retirement Plan

PHI’s funding policy with regard to the PHI Retirement Plan is to maintain a funding level in excess of 100% of its accumulated benefit obligation (ABO) and that is at least equal to the funding target as defined under the Pension Protection Act of 2006. As of the January 1, 2008 valuation, the PHI Retirement Plan satisfied the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (ERISA) without requiring any additional funding. In 2008 and 2007, no contributions were made to the PHI Retirement Plan.

At December 31, 2008, PHI’s Plan assets were approximately $1.1 billion and the ABO was approximately $1.6 billion. At December 31, 2007, PHI’s Plan assets were approximately $1.6 billion and the ABO was approximately $1.6 billion. Although PHI projects there will be no minimum funding requirement under the Pension Protection Act guidelines in 2009, PHI expects to make discretionary tax-deductible contribution of approximately $300 million to bring its plan assets to at least the funding target level for 2009 under the Pension Protection Act.

Contributions - Other Postretirement Benefits

In 2008 and 2007, Pepco contributed $9 million and $10 million, respectively, DPL contributed $9 million and $8 million, respectively, and ACE contributed $7 million and $7 million, respectively, to the other postretirement benefit plan. In 2008 and 2007, contributions of $14 million and $13 million, respectively, were made by other PHI subsidiaries. Assuming no changes to the other postretirement benefit pension plan assumptions, PHI expects similar amounts to be contributed in 2009.

Expected Benefit Payments

Estimated future benefit payments to participants in PHI’s pension and postretirement welfare benefit plans, which reflect expected future service as appropriate, as of December 31, 2008 are as follows (millions of dollars):

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Years	Pension Benefits	Other Postretirement Benefits

2009	$114	$ 41
2010	115	44
2011	119	47
2012	123	48
2013	121	50
2014 through 2018	632	262

Medicare Prescription Drug Improvement and Modernization Act of 2003

On December 8, 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Medicare Act) became effective. The Medicare Act introduced a prescription drug benefit under Medicare (Medicare Part D), as well as a federal subsidy to sponsors of retiree health care benefits plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. Pepco Holdings sponsors postretirement health care plans that provide prescription drug benefits that PHI plan actuaries have determined are actuarially equivalent to Medicare Part D. At December 31, 2008, the estimated reduction in accumulated postretirement benefit obligation is $30 million. In 2008 and 2007, Pepco Holdings received $2 million in Federal Medicare prescription drug subsidies.

Pepco Holdings Retirement Savings Plan

Pepco Holdings has a defined contribution retirement savings plan. Participation in the plan is voluntary. All participants are 100% vested and have a nonforfeitable interest in their own contributions and in the Pepco Holdings company matching contributions, including any earnings or losses thereon. Pepco Holdings’ matching contributions were $12 million, $11 million, and $11 million for the years ended December 31, 2008, 2007, and 2006, respectively.

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(11) DEBT

LONG-TERM DEBT

The components of long-term debt are shown below.

			At December 31,
Interest Rate	Maturity		2008		2007
			(Millions of dollars)
First Mortgage Bonds
Pepco:
6.50%	2008	$	-	$	78
5.875%	2008		-		50
5.75% (a)	2010		16		16
4.95% (a)(b)	2013		200		200
4.65% (a)(b)	2014		175		175
Variable (a)(b)(e)	2022		-		110
5.375% (a)	2024		38		38
5.75% (a)(b)	2034		100		100
5.40% (a)(b)	2035		175		175
6.50% (a)(b)	2037		500		250
7.90%	2038		250		-

ACE:
6.71% - 6.81%	2008		-		50
7.25% - 7.63%	2010 - 2014		8		8
6.63%	2013		69		69
7.68%	2015 - 2016		17		17
7.75%	2018		250		-
6.80% (a)	2021		39		39
5.60% (a)	2025		4		4
Variable (a)(b)(e)	2029		-		55
5.80% (a)(b)	2034		120		120
5.80% (a)(b)	2036		105		105

DPL:
6.40%	2013		250		-

Amortizing First Mortgage Bonds
DPL:
6.95%	2008		-		4
Total First Mortgage Bonds		$	2,316	$	1,663

Unsecured Tax-Exempt Bonds
DPL:
5.20%	2019	$	31	$	31
3.15% (e) (f)	2023		-		18
5.50% (c)	2025		15		15
4.90% (d)	2026		35		35
5.65% (c)	2028		16		16
Variable (e)	2030 — 2038		-		94
Total Unsecured Tax-Exempt Bonds		$	97	$	209

(a)

Represents a series of First Mortgage Bonds issued by the indicated company as collateral for an outstanding series of senior notes issued by the company or tax-exempt bonds issued for the benefit of the company. The maturity date, optional and mandatory prepayment provisions, if any, interest rate, and interest payment dates on each series of senior notes or the obligations in respect of the tax-exempt bonds are identical to the terms of the corresponding series of collateral First Mortgage Bonds. Payments of principal and interest on a series of senior notes or the company’s obligations in respect of the tax-exempt bonds satisfy the corresponding payment obligations on the related series of collateral First Mortgage Bonds. Because each series of senior notes and tax-exempt bonds and the corresponding series of collateral First Mortgage Bonds securing that series of senior notes or tax-exempt bonds effectively represents a single financial obligation, the senior notes and the tax-exempt bonds are not separately shown on the table.

(b)

Represents a series of First Mortgage Bonds issued by the indicated company as collateral for an outstanding series of senior notes as described in footnote (a) above that will, at such time as there are no First Mortgage Bonds of the issuing company outstanding (other than collateral First Mortgage Bonds securing payment of senior notes), cease to secure the corresponding series of senior notes and will be cancelled.

(c)	The bonds are subject to mandatory tender on July 1, 2010.

(d)	The bonds are subject to mandatory tender on May 1, 2011.

(e)

Represents tax exempt bonds issued by municipal authorities for the benefit of the company that were purchased at par by the company in 2008. The obligations of the company with respect to the bonds are considered to be extinguished for accounting purposes. The company currently intends to hold the bonds until such time as they can be resold to the public.

(f)	The bonds were subject to mandatory tender on August 1, 2008.

NOTE: Schedule is continued on next page.

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			At December 31,
Interest Rate	Maturity		2008		2007
			(Millions of dollars)
Medium-Term Notes (unsecured)
Pepco:
6.25%	2009	$	50	$	50

DPL:
7.56% - 7.58%	2017		14		14
6.81%	2018		4		4
7.61%	2019		12		12
7.72%	2027		10		10
Total Medium-Term Notes (unsecured)		$	90	$	90

Recourse Debt
PCI:
6.59% - 6.69%	2014	$	11	$	11
7.40% (a)	2008		-		92
Total Recourse Debt		$	11	$	103

Notes (secured)
Pepco Energy Services:
7.85%	2017	$	10	$	10

Notes (unsecured)
PHI:
Variable	2010	$	250	$	250
4.00%	2010		200		200
6.45%	2012		750		750
5.90%	2016		200		200
6.125%	2017		250		250
6.00%	2019		200		200
7.45%	2032		250		250

DPL:
5.00%	2014		100		100
5.00%	2015		100		100
5.22%	2016		100		100
Total Notes (unsecured)		$	2,400	$	2,400

Total Long-Term Debt		$	4,924	$	4,475
Net unamortized discount			(15)		(7)
Current maturities of long-term debt			(50)		(293)
Total Net Long-Term Debt		$	4,859	$	4,175

Transition Bonds Issued by ACE Funding
2.89%	2010	$	-	$	13
2.89%	2011		5		15
4.21%	2013		57		66
4.46%	2016		52		52
4.91%	2017		118		118
5.05%	2020		54		54
5.55%	2023		147		147
Total		$	433	$	465
Net unamortized discount			-		-
Current maturities of long-term debt			(32)		(31)
Total Transition Bonds issued by ACE Funding		$	401	$	434

(a)	Debt issued at a fixed rate of 8.24%. The debt was swapped into variable rate debt at the time of issuance.

NOTE: Schedule is continued on next page.

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The outstanding First Mortgage Bonds issued by each of Pepco, DPL and ACE are subject to a lien on substantially all of the issuing company’s property, plant and equipment.

ACE Funding was established in 2001 solely for the purpose of securitizing authorized portions of ACE’s recoverable stranded costs through the issuance and sale of Transition Bonds. The proceeds of the sale of each series of Transition Bonds have been transferred to ACE in exchange for the transfer by ACE to ACE Funding of the right to collect a non-bypassable transition bond charge from ACE customers pursuant to bondable stranded costs rate orders issued by the NJBPU in an amount sufficient to fund the principal and interest payments on the Transition Bonds and related taxes, expenses and fees (Bondable Transition Property). The assets of ACE Funding, including the Bondable Transition Property, and the Transition Bond charges collected from ACE’s customers, are not available to creditors of ACE. The holders of Transition Bonds have recourse only to the assets of ACE Funding.

The aggregate amounts of maturities for long-term debt and Transition Bonds outstanding at December 31, 2008, are $82 million in 2009, $532 million in 2010, $70 million in 2011, $787 million in 2012, $558 million in 2013, and $3,328 million thereafter.

PHI’s long-term debt is subject to certain covenants. PHI and its subsidiaries are in compliance with all requirements.

LONG-TERM PROJECT FUNDING

As of December 31, 2008 and 2007, Pepco Energy Services had outstanding total long-term project funding (including current maturities) of $21 million and $29 million, respectively, related to energy savings contracts performed by Pepco Energy Services. The aggregate amounts of maturities for the project funding debt outstanding at December 31, 2008, are $2 million for each year 2009 through 2013, and $11 million thereafter.

SHORT-TERM DEBT

Pepco Holdings and its regulated utility subsidiaries have traditionally used a number of sources to fulfill short-term funding needs, such as commercial paper, short-term notes, and bank lines of credit. Proceeds from short-term borrowings are used primarily to meet working capital needs, but may also be used to temporarily fund long-term capital requirements. A detail of the components of Pepco Holdings’ short-term debt at December 31, 2008 and 2007 is as follows.

	2008	2007
	(Millions of dollars)
Commercial paper	$ -	$137
Variable rate demand bonds	118	152
Bonds held under Standby Bond Purchase Agreement	22	-
Bank Loans	175	-
Credit Facility Loans	150	-
Total	$465	$289

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Commercial Paper

Pepco Holdings maintains an ongoing commercial paper program of up to $875 million. Pepco, DPL, and ACE have ongoing commercial paper programs of up to $500 million, $500 million, and $250 million, respectively. The commercial paper programs of PHI, Pepco, DPL and ACE are backed by $1.9 billion in credit facilities, which are described under the heading “Credit Facilities” below.

Pepco Holdings, Pepco, DPL and ACE had no commercial paper outstanding at December 31, 2008. The weighted average interest rate for Pepco Holdings, Pepco, DPL and ACE commercial paper issued during 2008 was 3.18%, 3.45%, 3.88% and 3.12% respectively. The weighted average maturity for Pepco Holdings, Pepco, DPL and ACE was three, two, five and four days respectively for all commercial paper issued during 2008.

Variable Rate Demand Bonds

Variable Rate Demand Bonds (VRDB) are subject to repayment on the demand of the holders and for this reason are accounted for as short-term debt in accordance with GAAP. However, bonds submitted for purchase are remarketed by a remarketing agent on a best efforts basis. PHI expects that the bonds submitted for purchase will continue to be remarketed successfully due to the credit worthiness of the issuing company and because the remarketing resets the interest rate to the then-current market rate. The issuing company also may utilize one of the fixed rate/fixed term conversion options of the bonds to establish a maturity which corresponds to the date of final maturity of the bonds. On this basis, PHI views VRDBs as a source of long-term financing. The VRDBs outstanding at December 31, 2008 mature as follows: 2009 to 2010 ($3 million), 2014 to 2017 ($49 million), 2024 ($24 million) and 2028 to 2031 ($64 million). The weighted average interest rate for VRDB was 3.10% during 2008 and 3.79% during 2007. Of the $118 million in VRDB, $72 million are secured by First Mortgage Bonds issued by DPL, the issuer of the VRDB.

Bank Loans

In March 2008, DPL obtained a $150 million unsecured term loan that matures in July 2009. Interest on the loan is calculated at a variable rate.

In May 2008, Pepco obtained a $25 million bank loan that matures on April 30, 2009. Interest on the loan is calculated at a variable rate.

Credit Facilities

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borrower. The facility also includes a “swingline loan sub-facility,” pursuant to which each company may make same day borrowings in an aggregate amount not to exceed $150 million. Any swingline loan must be repaid by the borrower within seven days of receipt thereof. All indebtedness incurred under the facility is unsecured.

The facility is intended to serve primarily as a source of liquidity to support the commercial paper programs of the respective companies. The companies also are permitted to use the facility to borrow funds for general corporate purposes and issue letters of credit. In order for a borrower to use the facility, certain representations and warranties must be true, and the borrower must be in compliance with specified covenants, including (i) the requirement that each borrowing company maintain a ratio of total indebtedness to total capitalization of 65% or less, computed in accordance with the terms of the credit agreement, which calculation excludes from the definition of total indebtedness certain trust preferred securities and deferrable interest subordinated debt (not to exceed 15% of total capitalization), (ii) a restriction on sales or other dispositions of assets, other than certain sales and dispositions, and (iii) a restriction on the incurrence of liens on the assets of a borrower or any of its significant subsidiaries other than permitted liens. The absence of a material adverse change in the borrower’s business, property, and results of operations or financial condition is not a condition to the availability of credit under the facility. The facility does not include any rating triggers.

Typically, PHI and its utility subsidiaries issue commercial paper if required to meet their short-term working capital requirements. Given the recent lack of liquidity in the commercial paper markets, the companies have borrowed under the primary credit facility to maintain sufficient cash on hand to meet daily short-term operating needs. As of December 31, 2008, PHI had an outstanding loan of $50 million and Pepco had an outstanding loan of $100 million under this facility. In January 2009, PHI borrowed an additional $150 million under the facility.

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(12) INCOME TAXES

PHI and the majority of its subsidiaries file a consolidated federal income tax return. Federal income taxes are allocated among PHI and the subsidiaries included in its consolidated group pursuant to a written tax sharing agreement that was approved by the SEC in connection with the establishment of PHI as a holding company as part of Pepco’s acquisition of Conectiv on August 1, 2002. Under this tax sharing agreement, PHI’s consolidated federal income tax liability is allocated based upon PHI’s and its subsidiaries’ separate taxable income or loss.

The provision for consolidated income taxes, reconciliation of consolidated income tax expense, and components of consolidated deferred tax liabilities (assets) are shown below.

Provision for Consolidated Income Taxes

	For the Year Ended December 31,
	2008	2007	2006
	(Millions of dollars)
Current Tax (Benefit) Expense
Federal	$(103)	$103	$ (78)
State and local	(54)	5	-
Total Current Tax (Benefit) Expense	(157)	108	(78)

Deferred Tax Expense (Benefit)
Federal	234	82	203
State and local	95	1	41
Investment tax credits	(4)	(3)	(5)
Total Deferred Tax Expense	325	80	239

Total Consolidated Income Tax Expense	$168	$188	$161

Reconciliation of Consolidated Income Tax Rate

	For the Year Ended December 31,
	2008	2007	2006

Federal statutory rate	35.0%	35.0%	35.0%
Increases (decreases) resulting from
Depreciation	1.3	1.8	2.0
State income taxes, net of federal effect	7.3	4.3	6.2
Tax credits	(.9)	(.5)	(1.1)
Maryland State tax refund and related interest, net of federal effect	(.6)	(3.7)	-
Leveraged leases	(.1)	(1.4)	(2.3)
Change in estimates and interest related to uncertain and effectively settled tax positions	(3.4)	.9	-
Deferred tax adjustments	(1.3)	.8	-
Other, net	(1.4)	(1.2)	(.5)

Consolidated Effective Income Tax Rate	35.9%	36.0%	39.3%

During 2008, Pepco Holdings completed an analysis of its current and deferred income tax accounts and, as a result, recorded an $8 million net credit to income tax expense in 2008, which is primarily included in “Deferred tax adjustments” in the reconciliation provided above.

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In conjunction with the analysis, Pepco Holdings also identified a $1 million adjustment of its current and deferred income tax accounts that related to pre-acquisition tax contingencies associated with the Conectiv acquisition in 2002, which was recorded as an increase in goodwill. Also identified as part of the analysis were new uncertain tax positions under FIN 48 (primarily representing overpayments of income taxes in previously filed tax returns) that resulted in the recording of after-tax net interest income of $4 million, which is included as a reduction of income tax expense.

In addition, during 2008 Pepco Holdings recorded after-tax net interest income of $18 million under FIN 48 primarily related to the reversal of previously accrued interest payable resulting from tentative and final settlements, respectively, on the Mixed Service Cost and like-kind exchange issues with the IRS and a claim made with the IRS related to the tax reporting for fuel over- and under-recoveries. This amount was offset by $7 million in after-tax interest expense related to the change in assumptions regarding the estimated timing of the tax benefits on cross-border energy lease investments.

FIN 48, “Accounting for Uncertainty in Income Taxes”

As disclosed in Note (2), “Significant Accounting Policies,” PHI adopted FIN 48 effective January 1, 2007. Upon adoption, PHI recorded the cumulative effect of the change in accounting principle of $7 million as a decrease in retained earnings. Also upon adoption, PHI had $187 million of unrecognized tax benefits and $24 million of related accrued interest.

Reconciliation of Beginning and Ending Balances of Unrecognized Tax Benefits

		2008		2007

Beginning balance as of January 1,	$	275	$	187
Tax positions related to current year:
Additions		2		37
Reductions		-		(1)
Tax positions related to prior years:
Additions		196		112
Reductions		(209)		(13)
Settlements		(9)		(47)
Ending balance as of December 31,	$	255	$	275

Unrecognized Benefits That If Recognized Would Affect the Effective Tax Rate

Unrecognized tax benefits represent those tax benefits related to tax positions that have been taken or are expected to be taken in tax returns that are not recognized in the financial statements because, in accordance with FIN 48, management has either measured the tax benefit at an amount less than the benefit claimed or expected to be claimed, or has concluded that it is not more likely than not that the tax position will be ultimately sustained.

For the majority of these tax positions, the ultimate deductibility is highly certain, but there is uncertainty about the timing of such deductibility. Unrecognized tax benefits at December 31, 2008, included $18 million that, if recognized, would lower the effective tax rate.

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Interest and Penalties

PHI recognizes interest and penalties relating to its uncertain tax positions as an element of income tax expense. For the years ended December 31, 2008 and 2007, PHI recognized $25 million of interest income before tax ($15 million after-tax) and $4 million of interest expense before tax ($2 million after-tax), respectively, as a component of income tax expense. As of December 31, 2008 and 2007, PHI had $16 million and $31 million, respectively, of accrued interest payable related to effectively settled and uncertain tax positions.

Possible Changes to Unrecognized Tax Benefits

It is reasonably possible that the amount of the unrecognized tax benefit with respect to some of PHI’s uncertain tax positions will significantly increase or decrease within the next 12 months. The possible settlement of the cross-border energy lease investments issue, the final resolution of the Mixed Service Cost issue, or other federal or state audits could impact the balances significantly. At this time, other than the Mixed Service Cost issue, an estimate of the range of reasonably possible outcomes cannot be determined. The unrecognized benefit related to the Mixed Service Cost issue could decrease by $55 million within the next 12 months upon the final resolution of the tentative settlement with the IRS and the obligation becomes certain. See Note (16), “Commitments and Contingencies,” for additional information.

Tax Years Open to Examination

PHI and the majority of its subsidiaries file a consolidated federal income tax return. PHI’s federal income tax liabilities for Pepco legacy companies for all years through 2000, and for Conectiv legacy companies for all years through 1999, have been determined by the IRS, subject to adjustment to the extent of any net operating loss or other loss or credit carrybacks from subsequent years. The open tax years for the significant states where PHI files state income tax returns (District of Columbia, Maryland, Delaware, New Jersey, Pennsylvania and Virginia) are the same as noted above.

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Components of Consolidated Deferred Tax Liabilities (Assets)

	At December 31,
			2008		2007
	(Millions of dollars)
Deferred Tax Liabilities (Assets)
Depreciation and other basis differences related to plant and equipment		$	1,545	$	1,408
Goodwill and fair value adjustments			(104)		(108)
Deferred electric service and electric restructuring liabilities			189		195
Finance and operating leases			677		734
State net operating loss			(43)		(46)
Valuation allowance on state net operating loss			35		36
Pension and other postretirement benefits			141		36
Deferred taxes on amounts to be collected through future rates			42		33
Other			(243)		(207)
Total Deferred Tax Liabilities, Net			2,239		2,081

Deferred tax assets included in Other Current Assets			31		25
Deferred tax liabilities included in Other Current Liabilities			(1)		(1)

Total Consolidated Deferred Tax Liabilities, Net Non-Current		$	2,269	$	2,105

The net deferred tax liability represents the tax effect, at presently enacted tax rates, of temporary differences between the financial statement and tax basis of assets and liabilities. The portion of the net deferred tax liability applicable to PHI’s operations, which has not been reflected in current service rates, represents income taxes recoverable through future rates, net and is recorded as a regulatory asset on the balance sheet.

The Tax Reform Act of 1986 repealed the Investment Tax Credit (ITC) for property placed in service after December 31, 1985, except for certain transition property. ITC previously earned on Pepco’s, DPL’s and ACE’s property continues to be normalized over the remaining service lives of the related assets.

Resolution of Certain Internal Revenue Service Audit Matters

In 2006, PHI resolved certain, but not all, tax matters that were raised in Internal Revenue Service audits related to the 2001 and 2002 tax years. Adjustments recorded related to these resolved tax matters resulted in a $6 million increase in net income ($3 million for Power Delivery and $5 million for Other Non-Regulated, partially offset by an unfavorable $2 million impact in Corp. & Other). To the extent that the matters resolved related to tax contingencies from the Conectiv legacy companies that existed at the August 2002 merger date, in accordance with accounting rules, an additional adjustment of $9 million ($3 million related to Power Delivery and $6 million related to Other Non-Regulated) was recorded in Corp. & Other to eliminate the tax benefits recorded by Power Delivery and Other Non-Regulated against the goodwill balance that resulted from the merger. Also during 2006, the total favorable impact of $3 million was recorded that resulted from changes in estimates related to prior year tax liabilities subject to audit ($4 million for Power Delivery, partially offset by an unfavorable $1 million for Corp. & Other).

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Taxes Other Than Income Taxes

Taxes other than income taxes for each year are shown below. The total amounts below include $347 million, $348 million, and $333 million, for the years ended December 31, 2008, 2007, and 2006, respectively, related to the Power Delivery Business, which are recoverable through rates.

	2008	2007	2006
	(Millions of dollars)
Gross Receipts/Delivery	$146	$146	$149
Property	67	64	63
County Fuel and Energy	90	88	84
Environmental, Use and Other	56	59	47
Total	$359	$357	$343

(13) MINORITY INTEREST

The outstanding preferred stock issued by subsidiaries of PHI as of December 31, 2008 and 2007 consisted of the following series of serial preferred stock issued by ACE. The shares of each of the series are redeemable solely at the option of the issuer.

	Redemption Price	Shares Outstanding			December 31,
	Redemption Price	2008	2007		2008		2007
				(Millions of dollars)

4.0% Series of 1944, $100 per share par value	$105.50	24,268	24,268	$	2	$	2
4.35% Series of 1949, $100 per share par value	$101.00	2,942	2,942		-		-
4.35% Series of 1953, $100 per share par value	$101.00	1,680	1,680		-		-
4.10% Series of 1954, $100 per share par value	$101.00	20,504	20,504		2		2
4.75% Series of 1958, $100 per share par value	$101.00	8,631	8,631		1		1
5.0% Series of 1960, $100 per share par value	$100.00	4,120	4,120		1		1
Total Preferred Stock of Subsidiaries		62,145	62,145	$	6	$	6

(14)	STOCK-BASED COMPENSATION, DIVIDEND RESTRICTIONS, AND CALCULATIONS OF EARNINGS PER SHARE OF COMMON STOCK

Stock-Based Compensation

PHI maintains a Long-Term Incentive Plan (LTIP), the objective of which is to increase shareholder value by providing a long-term incentive to reward officers, key employees, and directors of Pepco Holdings and its subsidiaries and to increase the ownership of Pepco Holdings’ common stock by such individuals. Any officer or key employee of Pepco Holdings or its subsidiaries may be designated by the PHI board of directors as a participant in the LTIP. Under the LTIP, awards to officers and key employees may be in the form of restricted stock, stock options, performance units, stock appreciation rights, and dividend equivalents. At the time of the adoption of the LTIP, 10 million shares of common stock were reserved for issuance under the LTIP over a period of 10 years commencing August 1, 2002.

Total stock-based compensation expense recorded in the Consolidated Statements of Earnings for the years ended December 31, 2008, 2007, and 2006 is $16 million, $4 million, and

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$6 million, respectively. During 2008, PHI recorded a correction to its prior-year stock based compensation expense. See discussion of the correction in Note (2), “Significant Accounting Policies ¾ Reclassification.” For the years ended December 31, 2008, 2007, and 2006, $1 million in tax expense and $2 million and zero, respectively, in tax benefits were recognized in relation to stock-based compensation costs of stock awards. No compensation costs related to restricted stock grants were capitalized for the years ended December 31, 2008, 2007 and 2006.

PHI recognizes compensation expense related to performance restricted stock awards and time-restricted share awards based on the fair value of the awards at date of grant. PHI estimated the fair value of market condition awards for its 2005-2007 performance restricted stock awards using a Monte Carlo simulation model, in a risk-neutral framework, based on the following assumptions:

		Performance Period 2005-2007
	Risk-free interest rate (%)	3.37
	Peer volatilities (%)	15.5 - 60.1
	Peer correlations	0.15 - 0.72
	Fair value of restricted share	$26.92

Prior to the acquisition of Conectiv by Pepco in 2002, each company had a long-term incentive plan under which stock options were granted. At the time of the acquisition, certain Conectiv options were exchanged on a 1 for 1.28205 basis for Pepco Holdings stock options under the LTIP, resulting in the conversion of 590,198 Conectiv stock options into 756,660 Pepco Holdings stock options. At December 31, 2008, 116,404 of these options remained outstanding, all of which are exercisable at exercise prices of either $13.08 or $19.03.

At the same time, all outstanding Pepco options were exchanged on a one-for-one basis for Pepco Holdings stock options granted under the LTIP. At December 31, 2008, 258,500 of these options remained outstanding, all of which are exercisable. The exercise prices of these options are $21.825, $22.4375, $22.57, $22.685, $23.15625, $24.59 and $29.78125.

Stock option activity for the three years ended December 31, 2008, 2007 and 2006 is summarized below. The information presented in the table is for Pepco Holdings, including converted Pepco and Conectiv options.

	2008			2007			2006
	Number of Options		Weighted Average Price	Number of Options		Weighted Average Price	Number of Options		Weighted Average Price
Beginning-of-year balance	532,635	$	22.3443	1,130,724	$	22.5099	1,864,250	$	22.1944
Options exercised	130,231	$	22.3512	591,089	$	22.6139	733,526	$	21.7081
Options lapsed	27,500	$	23.3968	7,000	$	26.3259	-	$	-
End-of-year balance	374,904	$	22.2647	532,635	$	22.3443	1,130,724	$	22.5099
Exercisable at end of year	374,904	$	22.2647	532,635	$	22.3443	1,130,724	$	22.5099

All stock options have an expiration date of ten years from the date of grant.

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The aggregate intrinsic value of stock options outstanding and exercisable at December 31, 2008, 2007, and 2006 was zero, $4 million, and $4 million, respectively.

The total intrinsic value of stock options exercised during the years ended December 31, 2008, 2007, and 2006 was less than $1 million, $3 million, and $2 million, respectively. For the years ended December 31, 2008, 2007, and 2006, less than $1 million, $1 million, and $1 million, respectively, in tax benefits were recognized in relation to stock-based compensation costs of stock options.

As of December 31, 2008, an analysis of options outstanding by exercise prices is as follows:

Range of Exercise Prices	Number Outstanding and Exercisable at December 31, 2008		Weighted Average Exercise Price	Weighted Average Remaining Contractual Life (in Years)

$13.08 to $19.03		116,404	$18.4402	3.45
$21.83 to $29.78		258,500	$23.9869	2.03
$13.08 to $29.78		374,904	$22.2647	2.47

There were no options granted in 2008, 2007, or 2006.

The Performance Restricted Stock Program and the Merger Integration Success Program have been established under the LTIP. Under the Performance Restricted Stock Program, performance criteria are selected and measured over a three-year period. The target number of share award opportunities established in 2008, 2007 and 2006 under Pepco Holdings’ Performance Restricted Stock Program for performance periods 2008-2010, 2007-2009, and 2006-2008 were 187,175, 200,885, and 218,108, respectively. Additionally, beginning in 2006, time-restricted share award opportunities with a requisite service period of three years were established under the LTIP. The target number of share award opportunities for these awards was 93,584 for the 2008-2010 time period, 100,430 for the 2007-2009 time period and 109,057 for the 2006-2008 time period. The fair value per share on award date for the performance restricted stock was $25.36 for the 2008-2010 award, $25.54 for the 2007-2009 award, and $23.28 for the 2006-2008 award. Depending on the extent to which the performance criteria are satisfied, the executives are eligible to earn shares of common stock and dividends accrued thereon over the vesting period, under the Performance Restricted Stock Program ranging from 0% to 200% of the target share award opportunities, inclusive of dividends accrued. There were 454,632 awards earned with respect to the 2005-2007 share award opportunity.

Under the LTIP, non-employee directors are entitled to a grant on May 1 of each year of a nonqualified stock option for 1,000 shares of common stock. However, the Board of Directors has determined that these grants will not be made.

In connection with the acquisition of Conectiv by Pepco, 80,602 shares of Conectiv performance accelerated restricted stock (PARS) were converted to 104,298 shares of Pepco Holdings restricted stock vesting over periods ranging from 5 to 7 years from the original grant date. As of December 31, 2008, 87,507 converted shares had vested, 10,122 were forfeited and 6,669 shares remain unvested. On January 2, 2009, all remaining shares vested at an average market price of $17.635 per share.

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In September 2007, retention awards in the form of 9,015 shares of restricted stock were granted to certain PHI executives, with vesting periods of two or three years. The 2008 activity for non-vested share opportunities with respect to PHI common stock (including Conectiv PARS converted to Pepco Holdings restricted stock) is summarized below.

	Number of Shares	Weighted Average Grant Date Fair Value
Non-vested share opportunities at January 1, 2008	760,982	$	25.185
Granted	280,759		25.360
Additional performance shares granted	247,860		26.948
Vested	(455,219)		26.910
Forfeited	(55,452)		24.282
Non-vested share opportunities at December 31, 2008	778,930		24.539

The total fair value of restricted stock awards vested during the years ended December 31, 2008, 2007, and 2006 was $12 million, $10 million, and $2 million, respectively.

As of December 31, 2008, there was approximately $8 million of unrecognized compensation cost (net of estimated forfeitures) related to non-vested stock granted under the plans. That cost is expected to be recognized over a weighted-average period of approximately two years.

Dividend Restrictions

PHI, on a stand-alone basis, generates no operating income of its own. Accordingly, its ability to pay dividends to its shareholders depends on dividends received from its subsidiaries. In addition to their future financial performance, the ability of PHI’s direct and indirect subsidiaries to pay dividends is subject to limits imposed by: (i) state corporate and regulatory laws, which impose limitations on the funds that can be used to pay dividends and, in the case of regulatory laws, as applicable, may require the prior approval of the relevant utility regulatory commissions before dividends can be paid; (ii) the prior rights of holders of existing and future preferred stock, mortgage bonds and other long-term debt issued by the subsidiaries, and any other restrictions imposed in connection with the incurrence of liabilities; and (iii) certain provisions of ACE’s charter that impose restrictions on payment of common stock dividends for the benefit of preferred stockholders. Pepco and DPL have no shares of preferred stock outstanding. Currently, the restriction in the ACE charter does not limit its ability to pay dividends. Restricted net assets related to PHI’s consolidated subsidiaries amounted to approximately $2.1 billion at December 31, 2008 and $1.8 billion at December 31, 2007. PHI had no restricted retained earnings or restricted net income at December 31, 2008 and 2007.

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For the years ended December 31, 2008, 2007 and 2006, Pepco Holdings recorded dividends from its subsidiaries as follows:


Subsidiary		2008		2007		2006
		(Millions of dollars)
Pepco	$	89	$	86	$	99
DPL		52		39		15
ACE		46		50		109
Conectiv Energy		-		50		-
	$	187	$	225	$	223

Directors’ Deferred Compensation

Under the Pepco Holdings’ Executive and Director Deferred Compensation Plan, Pepco Holdings directors may elect to defer all or part of their retainer or meeting fees that constitute normal compensation. Deferred retainer or meeting fees can be invested in phantom Pepco Holdings shares and receive accruals equal to the dividends paid on the corresponding number of sharers of Pepco Holdings common stock. The phantom share account balances are settled in cash. The amount deferred and invested in phantom Pepco Holdings shares in the years ended December 31, 2008, 2007 and 2006 was de minimis.

Compensation recognized in respect of dividends and increase in fair value in the years ended December 31, 2008, 2007 and 2006 was de minimis. The balance of deferred compensation invested in phantom Pepco Holdings’ shares at December 31, 2008 and 2007 was $1 million and $2 million, respectively.

Calculations of Earnings per Share of Common Stock

The numerator and denominator for basic and diluted earnings per share of common stock calculations are shown below.

	For the Year Ended December 31,
		2008		2007		2006
		(Millions of dollars, except share data)
Income (Numerator) :
Net Income	$	300	$	334	$	248

Shares (Denominator) :
Weighted Average Shares Outstanding for Computation of Basic and Diluted Earnings Per Share of Common Stock (a)		204		194		191

Basic earnings per share of common stock	$	1.47	$	1.72	$	1.30
Diluted earnings per share of common stock	$	1.47	$	1.72	$	1.30

(a)	Approximately 1 million shares at December 31, 2006 related to options to purchase common stock have been excluded from the calculation of diluted EPS as they are considered to be anti-dilutive.

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Shareholder Dividend Reinvestment Plan

PHI maintains a Shareholder Dividend Reinvestment Plan (DRP) through which shareholders may reinvest cash dividends and both existing shareholders and new investors can make purchases of shares of PHI common stock through the investment of not less than $25 each calendar month nor more than $200,000 each calendar year. Shares of common stock purchased through the DRP may be original issue shares or, at the election of PHI, shares purchased in the open market. There were approximately 1 million original issue shares sold under the DRP in 2008, 2007 and 2006.

Pepco Holdings Common Stock Reserved and Unissued

The following table presents Pepco Holdings’ common stock reserved and unissued at December 31, 2008:

Name of Plan		Number of Shares
DRP		1,436,151
Conectiv Incentive Compensation Plan (a)		1,187,157
Potomac Electric Power Company Long-Term Incentive Plan (a)		327,059
Pepco Holdings Long-Term Incentive Plan		8,473,554
Pepco Holdings Non-Management Directors Compensation Plan		488,713
Pepco Holdings Retirement Savings Plan (b)		3,617,173
Total		15,529,807

(a)

No further awards will be made under this plan.

(b)

Effective January 30, 2006, Pepco Holdings established the Retirement Savings Plan which is an amalgam of, and a successor to, (i) the Potomac Electric Power Company Savings Plan for Bargaining Unit Employees, (ii) the Potomac Electric Power Company Retirement Savings Plan for Management Employees (which resulted from the merger, effective January 1, 2005, of the Potomac Electric Power Company Savings Plan for Non-Bargaining Unit, Non-Exempt Employees and the Potomac Electric Power Company Savings Plan for Exempt Employees), (iii) the Conectiv Savings and Investment Plan, and (iv) the Atlantic City Electric 401(k) Savings and Investment Plan - B.

(15)	FAIR VALUES DISCLOSURES

Effective January 1, 2008, PHI adopted SFAS No. 157, as discussed earlier in Note (3), which established a framework for measuring fair value and expanded disclosures about fair value measurements.

As defined in SFAS No. 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). PHI utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. Accordingly, PHI utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. PHI is able to classify fair value balances based on the observability of those inputs. SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The

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hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). The three levels of the fair value hierarchy defined by SFAS No. 157 are as follows:

Level 1 — Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 — Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using broker quotes in liquid markets, and other observable pricing data. Level 2 also includes those financial instruments that are valued using internally developed methodologies that have been corroborated by observable market data through correlation or by other means. Significant assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

Level 3 — Pricing inputs include significant inputs that are generally less observable than those from objective sources. Level 3 includes those financial instruments that are valued using models or other valuation methodologies. Level 3 instruments classified as derivative liabilities are primarily natural gas options. Some non-standard assumptions are used in their forward valuation to adjust for the pricing; otherwise, most of the options follow NYMEX valuation. A few of the options have no significant NYMEX components, and have to be priced using internal volatility assumptions. Some of the options do not expire until December 2011. All of the options are part of the natural gas hedging program approved by the Delaware Public Service Commission.

Level 3 instruments classified as executive deferred compensation plan assets and liabilities are life insurance policies that are valued using the cash surrender value of the policies. Since these values do not represent a quoted price in an active market they are considered Level 3.

The following table sets forth by level within the fair value hierarchy PHI’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2008. As required by SFAS No. 157, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. PHI’s assessment of the significance of a particular input to the fair value measurement requires the exercise of judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

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	Fair Value Measurements at Reporting Date
	(Millions of dollars)
Description	December 31, 2008		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

ASSETS
Derivative instruments	$	139	$	53	$	79	$	7
Cash equivalents		460		460		-		-
Executive deferred compensation plan assets		70		11		41		18
	$	669	$	524	$	120	$	25

LIABILITIES
Derivative instruments	$	509	$	184	$	296	$	29
Executive deferred compensation plan liabilities		31		-		31		-
	$	540	$	184	$	327	$	29

A reconciliation of the beginning and ending balances of PHI’s fair value measurements using significant unobservable inputs (level 3) is shown below:

			Net Derivative Instruments Assets (Liability)				Deferred Compensation Plan Assets
Beginning balance as of January 1, 2008			$	1			$	17
Total gains or (losses) (realized/unrealized)
Included in earnings				(17)				4
Included in other comprehensive income				-				-
Purchases and issuances				-				(3)
Settlements				5				-
Transfers in and/or out of Level 3				(11)				-
Ending balance as of December 31, 2008			$	(22)			$	18


Gains (realized and unrealized) included in earnings for the period above are reported in Operating Revenue, Other Comprehensive Income, Fuel and Purchased Energy Expense and Other Operation and Maintenance Expense as follows:		Other Comprehensive Income		Operating Revenue		Fuel and Purchased Energy Expense		Other Operation and Maintenance Expense

Total (losses) gains included in earnings for the period above	$	-	$	(3)	$	(14)	$	4

Change in unrealized gains (losses) relating to assets still held at reporting date	$	2	$	-	$	(17)	$	4

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The estimated fair values of Pepco Holdings’ non-derivative financial instruments at December 31, 2008 and 2007 are shown below.

		At December 31,
		2008				2007
		(Millions of dollars)
		Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-Term Debt	$	4,909	$	4,736	$	4,468	$	4,451
Transition Bonds issued by ACE Funding	$	433	$	431	$	465	$	462
Long-Term Project Funding	$	21	$	21	$	29	$	29
Redeemable Serial Preferred Stock	$	6	$	4	$	6	$	4

The methods and assumptions described below were used to estimate, at December 31, 2008 and 2007, the fair value of each class of non-derivative financial instruments shown above for which it is practicable to estimate a value.

The fair value of long-term debt issued by PHI and its utility subsidiaries was based on actual trade prices at December 31, 2008 and 2007, or bid prices obtained from brokers, if actual trade prices were not available. Long-term debt includes recourse and non-recourse debt issued by PCI. The fair value of this debt, including amounts due within one year, was determined based on current rates offered to companies with similar credit ratings in the same industry as PHI for debt with similar remaining maturities. The fair values of all other Long-Term Debt and Transition Bonds issued by ACE Funding, including amounts due within one year, were derived based on current market prices, or for issues with no market price available, were based on discounted cash flows using current rates for similar issues with similar credit ratings, terms, and remaining maturities.

The fair value of the Redeemable Serial Preferred Stock, excluding amounts due within one year, was derived based on quoted market prices or discounted cash flows using current rates of preferred stock with similar terms.

The carrying amounts of all other financial instruments in Pepco Holdings’ accompanying financial statements approximate fair value.

(16) COMMITMENTS AND CONTINGENCIES

REGULATORY AND OTHER MATTERS

Proceeds from Settlement of Mirant Bankruptcy Claims

In 2000, Pepco sold substantially all of its electricity generating assets to Mirant. As part of the sale, Pepco and Mirant entered into a “back-to-back” arrangement, whereby Mirant agreed to purchase from Pepco the 230 megawatts of electricity and capacity that Pepco was obligated to purchase annually through 2021 from Panda under the Panda PPA at the purchase price Pepco was obligated to pay to Panda. In 2003, Mirant commenced a voluntary bankruptcy proceeding in which it sought to reject certain obligations that it had undertaken in connection with the asset sale. As part of the settlement of Pepco’s claims against Mirant arising from the bankruptcy, Pepco agreed not to contest the rejection by Mirant of its obligations under the “back-to-back” arrangement in exchange for the payment by Mirant of damages corresponding to the estimated amount by which the purchase price that Pepco was obligated to pay Panda for the energy and

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capacity exceeded the market price. In 2007, Pepco received as damages $414 million in net proceeds from the sale of shares of Mirant common stock issued to it by Mirant.

On September 5, 2008, Pepco transferred the Panda PPA to Sempra Energy Trading LLC (Sempra), along with a payment to Sempra, thereby terminating all further rights, obligations and liabilities of Pepco under the Panda PPA. The use of the damages received from Mirant to offset above-market costs of energy and capacity under the Panda PPA and to make the payment to Sempra reduced the balance of proceeds from the Mirant settlement to approximately $102 million as of December 31, 2008.

Pending the final disposition of these funds, the remaining $102 million in proceeds from the Mirant settlement is being accounted for as restricted cash and as a regulatory liability.

Rate Proceedings

In the most recent electric service distribution base rate cases filed by Pepco in the District of Columbia and Maryland and by DPL in Maryland, and in a natural gas distribution case filed by DPL in Delaware, Pepco and DPL proposed the adoption of a BSA for retail customers. As more fully discussed below, the implementation of a BSA has been approved for both Pepco and DPL electric service in Maryland and remains pending for Pepco in the District of Columbia. A method of revenue decoupling similar to a BSA, referred to as a modified fixed variable rate design (MFVRD), has been adopted for DPL in Delaware, which will be implemented in the context of DPL’s next Delaware base rate case.

Under the BSA, customer delivery rates are subject to adjustment (through a surcharge or credit mechanism), depending on whether actual distribution revenue per customer exceeds or falls short of the approved revenue-per-customer amount. The BSA increases rates if actual distribution revenues fall below the level approved by the applicable commission and decreases rates if actual distribution revenues are above the approved level. The result is that, over time, the utility collects its authorized revenues for distribution deliveries. As a consequence, a BSA “decouples” revenue from unit sales consumption and ties the growth in revenues to the growth in the number of customers. Some advantages of the BSA are that it (i) eliminates revenue

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fluctuations due to weather and changes in customer usage patterns and, therefore, provides for more predictable utility distribution revenues that are better aligned with costs, (ii) provides for more reliable fixed-cost recovery, (iii) tends to stabilize customers’ delivery bills, and (iv) removes any disincentives for the regulated utilities to promote energy efficiency programs for their customers, because it breaks the link between overall sales volumes and delivery revenues. The MVFRD adopted in Delaware relies primarily upon a fixed customer charge (i.e., not tied to the customer’s volumetric consumption) to recover the utility’s fixed costs, plus a reasonable rate of return. Although different from the BSA, DPL believes that the MFRVD can serve as an appropriate revenue decoupling mechanism.

Delaware

On August 29, 2008, DPL submitted its 2008 Gas Cost Rate (GCR) filing to the DPSC, requesting a 14.8% increase in the level of GCR. On September 16, 2008, the DPSC issued an initial order approving the requested increase, which became effective on November 1, 2008, subject to refund pending final DPSC approval after evidentiary hearings.

On January 26, 2009, DPL submitted to the DPSC an interim GCR filing, requesting a 6.6% decrease in the level of GCR. On February 5, 2009, the DPSC issued an initial order approving the requested decrease, to become effective on March 1, 2009, subject to refund pending final DPSC approval after evidentiary hearings.

District of Columbia

In December 2006, Pepco submitted an application to the DCPSC to increase electric distribution base rates, including a proposed BSA. In January 2008, the DCPSC approved, effective February 20, 2008, a revenue requirement increase of approximately $28 million, based on an authorized return on rate base of 7.96%, including a 10% return on equity (ROE). This increase did not include a BSA mechanism. While finding a BSA to be an appropriate ratemaking concept, the DCPSC cited potential statutory problems in its authority to implement the BSA. In February 2008, the DCPSC established a Phase II proceeding to consider these implementation issues. In August 2008, the DCPSC issued an order concluding that it has the necessary statutory authority to implement the BSA proposal and that further evidentiary proceedings are warranted to determine whether the BSA is just and reasonable. On January 2, 2009, the DCPSC issued an order designating the issues and establishing a procedural schedule for the BSA proceeding. Hearings are scheduled for the second quarter of 2009.

In June 2008, the District of Columbia Office of People’s Counsel (the DC OPC), citing alleged errors by the DCPSC, filed with the DCPSC a motion for reconsideration of the January 2008 order granting Pepco’s rate increase, which was denied by the DCPSC. In August 2008, the DC OPC filed with the District of Columbia Court of Appeals a petition for review of the DCPSC order denying its motion for reconsideration. The District of Columbia Court of Appeals granted the petition; briefs have been filed by the parties and oral argument is scheduled for March 2009.

Maryland

In July 2007, the MPSC issued orders in the electric service distribution rate cases filed by DPL and Pepco, each of which included approval of a BSA. The DPL order approved an

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annual increase in distribution rates of approximately $15 million (including a decrease in annual depreciation expense of approximately $1 million). The Pepco order approved an annual increase in distribution rates of approximately $11 million (including a decrease in annual depreciation expense of approximately $31 million). In each case, the approved distribution rate reflects an ROE of 10%. The rate increases were effective as of June 16, 2007, and remained in effect for an initial period until July 19, 2008, pending a Phase II proceeding in which the MPSC considered the results of audits of each company’s cost allocation manual, as filed with the MPSC, to determine whether a further adjustment to the rates was required. On July 18, 2008, the MPSC issued one order covering the Phase II proceedings for both DPL and Pepco, denying any further adjustment to the rates for each company, thus making permanent the rate increases approved in the July 2007 orders. The MPSC also issued an order on August 4, 2008, further explaining its July 18 order.

DPL and Pepco each have filed a general notice of appeal of the MPSC July 2007 and the July 18 and August 4, 2008 orders. The appeals challenge the MPSC’s failure to implement permanent rates in accordance with Maryland law, and seek judicial review of the MPSC’s denial of both companies’ rights to recover an increased share of the PHI Service Company costs and the costs of performing a MPSC-mandated management audit. The case currently is pending before the Circuit Court for Baltimore City, which issued an order consolidating the appeals on January 27, 2009. Under the procedural schedule set by the court, Pepco and DPL will file a consolidated brief on or before March 9, 2009, specifying the basis for their requested relief.

Federal Energy Regulatory Commission

On August 18, 2008, PHI, Pepco, DPL and ACE submitted an application with FERC for incentive rate treatments in connection with PHI’s MAPP project. The application requested that FERC include Construction Work in Progress of each of Pepco, DPL and ACE in its transmission rate base, an ROE adder of 150 basis points (for a total ROE of 12.8%) and the recovery of prudently incurred costs in the event the project is abandoned or terminated for reasons beyond the control of the applicants. On October 31, 2008, FERC issued an order approving the application.

Divestiture Cases

District of Columbia

In June 2000, the DCPSC approved a divestiture settlement under which Pepco is required to share with its District of Columbia customers the net proceeds realized by Pepco from the sale of its generation-related assets. An unresolved issue relating to the application filed with the DCPSC by Pepco to implement the divestiture settlement is whether Pepco should be required to share with customers the excess deferred income taxes (EDIT) and accumulated deferred investment tax credits (ADITC) associated with the sold assets and, if so, whether such sharing would violate the normalization provisions of the Internal Revenue Code (IRC) and its implementing regulations. As of December 31, 2008, the District of Columbia allocated portions of EDIT and ADITC associated with the divested generating assets were approximately $7 million and $6 million, respectively. Other issues in the divestiture proceeding deal with the treatment of internal costs and cost allocations as deductions from the gross proceeds of the divestiture.

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Pepco believes that a sharing of EDIT and ADITC would violate the IRS normalization rules. Under these rules, Pepco could not transfer the EDIT and the ADITC benefit to customers more quickly than on a straight line basis over the book life of the related assets. Since the assets are no longer owned by Pepco, there is no book life over which the EDIT and ADITC can be returned. If Pepco were required to share EDIT and ADITC and, as a result, the normalization rules were violated, Pepco would be unable to use accelerated depreciation on District of Columbia allocated or assigned property. In addition to sharing with customers the generation-related EDIT and ADITC balances, Pepco would have to pay to the IRS an amount equal to Pepco’s District of Columbia jurisdictional generation-related ADITC balance ($6 million as of December 31, 2008), as well as its District of Columbia jurisdictional transmission and distribution-related ADITC balance ($3 million as of December 31, 2008) in each case as those balances exist as of the later of the date a DCPSC order is issued and all rights to appeal have been exhausted or lapsed, or the date the DCPSC order becomes operative.

In March 2008, the IRS approved final regulations, effective March 20, 2008, which allow utilities whose assets cease to be utility property (whether by disposition, deregulation or otherwise) to return to its utility customers the normalization reserve for EDIT and part or all of the normalization reserve for ADITC. This ruling applies to assets divested after December 21, 2005. For utility property divested on or before December 21, 2005, the IRS stated that it would continue to follow the holdings set forth in private letter rulings prohibiting the flow through of EDIT and ADITC associated with the divested assets. Pepco made a filing in April 2008, advising the DCPSC of the adoption of the final regulations and requesting that the DCPSC issue an order consistent with the IRS position. If the DCPSC issues the requested order, no accounting adjustments to the gain recorded in 2000 would be required.

As part of the proposal filed with the DCPSC in November 2008 concerning the sharing of the proceeds of the Mirant settlement, as discussed above under “Proceeds from Settlement of Mirant Bankruptcy Claims,” Pepco again requested that the DCPSC rule on all of the issues related to the divestiture of Pepco’s generating assets that remain outstanding. On December 12, 2008, the DCPSC issued a Notice of Proposed Rulemaking, which gave notice of Pepco’s November 2008 sharing of proceeds filing and requested comments. The public comment period for the proposed rules has expired without any comments being submitted. This matter remains pending before the DCPSC.

Pepco believes that its calculation of the District of Columbia customers’ share of divestiture proceeds is correct. However, depending on the ultimate outcome of this proceeding, Pepco could be required to make additional gain-sharing payments to District of Columbia customers, including the payments described above related to EDIT and ADITC. Such additional payments (which, other than the EDIT and ADITC related payments, cannot be estimated) would be charged to expense in the quarter and year in which a final decision is rendered and could have a material adverse effect on Pepco’s and PHI’s results of operations for those periods. However, neither PHI nor Pepco believes that additional gain-sharing payments, if any, or the ADITC-related payments to the IRS, if required, would have a material adverse impact on its financial position or cash flows.

Maryland

Pepco filed its divestiture proceeds plan application with the MPSC in April 2001. The principal issue in the Maryland case is the same EDIT and ADITC sharing issue that has been

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raised in the District of Columbia case. See the discussion above under “Divestiture Cases — District of Columbia.” As of December 31, 2008, the Maryland allocated portions of EDIT and ADITC associated with the divested generating assets were approximately $9 million and $10 million, respectively. Other issues deal with the treatment of certain costs as deductions from the gross proceeds of the divestiture. In November 2003, the Hearing Examiner in the Maryland proceeding issued a proposed order with respect to the application that concluded that Pepco’s Maryland divestiture settlement agreement provided for a sharing between Pepco and customers of the EDIT and ADITC associated with the sold assets. Pepco believes that such a sharing would violate the normalization rules (as discussed above) and would result in Pepco’s inability to use accelerated depreciation on Maryland allocated or assigned property. If the proposed order is affirmed, Pepco would have to share with its Maryland customers, on an approximately 50/50 basis, the Maryland allocated portion of the generation-related EDIT ($9 million as of December 31, 2008), and the Maryland-allocated portion of generation-related ADITC. Furthermore, Pepco would have to pay to the IRS an amount equal to Pepco’s Maryland jurisdictional generation-related ADITC balance ($10 million as of December 31, 2008), as well as its Maryland retail jurisdictional ADITC transmission and distribution-related balance ($6 million as of December 31, 2008), in each case as those balances exist as of the later of the date a MPSC order is issued and all rights to appeal have been exhausted or lapsed, or the date the MPSC order becomes operative. The Hearing Examiner decided all other issues in favor of Pepco, except for the determination that only one-half of the severance payments that Pepco included in its calculation of corporate reorganization costs should be deducted from the sales proceeds before sharing of the net gain between Pepco and customers.

In December 2003, Pepco appealed the Hearing Examiner’s decision to the MPSC as it relates to the treatment of EDIT and ADITC and corporate reorganization costs. The MPSC has not issued any ruling on the appeal, pending completion of the IRS rulemaking regarding sharing of EDIT and ADITC related to divested assets. Pepco made a filing in April 2008, advising the MPSC of the adoption of the final IRS normalization regulations (described above under “Divestiture Cases — District of Columbia”) and requesting that the MPSC issue a ruling on the appeal consistent with the IRS position. If the MPSC issues the requested ruling, no accounting adjustments to the gain recorded in 2000 would be required. However, depending on the ultimate outcome of this proceeding, Pepco could be required to share with its customers approximately 50 percent of the EDIT and ADITC balances described above in addition to the additional gain-sharing payments relating to the disallowed severance payments. Such additional payments would be charged to expense in the quarter and year in which a final decision is rendered and could have a material adverse effect on Pepco’s and PHI’s results of operations for those periods. However, neither PHI nor Pepco believes that additional gain-sharing payments, if any, or the ADITC-related payments to the IRS, if required, would have a material adverse impact on its financial position or cash flows.

As part of the proposal filed with the MPSC in November 2008 concerning the sharing of the proceeds of the Mirant settlement, as discussed above under “Proceeds from Settlement of Mirant Bankruptcy Claims,” Pepco again requested that the MPSC rule on all of the issues related to the divestiture of Pepco’s generating assets that remain outstanding.

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generating assets and that none of those amounts will be available for sharing with Pepco’s Maryland customers. The matter is pending before the MPSC.

ACE Sale of B.L. England Generating Facility

In February 2007, ACE completed the sale of the B.L. England generating facility to RC Cape May Holdings, LLC (RC Cape May), an affiliate of Rockland Capital Energy Investments, LLC. In July 2007, ACE received a claim for indemnification from RC Cape May under the purchase agreement in the amount of $25 million. RC Cape May contends that one of the assets it purchased, a contract for terminal services (TSA) between ACE and Citgo Asphalt Refining Co. (Citgo), has been declared by Citgo to have been terminated due to a failure by ACE to renew the contract in a timely manner. RC Cape May has commenced an arbitration proceeding against Citgo seeking a determination that the TSA remains in effect and has notified ACE of the proceeding. The claim for indemnification seeks payment from ACE in the event the TSA is held not to be enforceable against Citgo. While ACE believes that it has defenses to the indemnification claim, should the arbitrator rule that the TSA has terminated, the outcome of this matter is uncertain. ACE notified RC Cape May of its intent to participate in the pending arbitration. The arbitration hearings were conducted in November 2008. A decision is expected late in the second quarter of 2009, after the filing of post-hearing memoranda in the first quarter of 2009.

DPL Sale of Virginia Retail Electric Distribution and Wholesale Transmission Assets

In January 2008, DPL completed (i) the sale of its retail electric distribution assets on the Eastern Shore of Virginia to A&N Electric Cooperative (A&N) for a purchase price of approximately $49 million, after closing adjustments, and (ii) the sale of its wholesale electric transmission assets located on the Eastern Shore of Virginia to Old Dominion Electric Cooperative (ODEC) for a purchase price of approximately $5 million, after closing adjustments. Each of A&N and ODEC assumed certain post-closing liabilities and unknown pre-closing liabilities related to the respective assets they purchased (including, in the A&N transaction, most environmental liabilities). A&N delayed final payment of approximately $3 million, which was due on June 2, 2008, due to a dispute in the final true-up amounts. On October 21, 2008, DPL and A&N entered into a Settlement Agreement pursuant to which A&N paid $3 million to DPL, and an additional $1 million was distributed to DPL pursuant to an escrow agreement.

General Litigation

In 1993, Pepco was served with Amended Complaints filed in the state Circuit Courts of Prince George’s County, Baltimore City and Baltimore County, Maryland in separate ongoing, consolidated proceedings known as “In re: Personal Injury Asbestos Case.” Pepco and other corporate entities were brought into these cases on a theory of premises liability. Under this theory, the plaintiffs argued that Pepco was negligent in not providing a safe work environment for employees or its contractors, who allegedly were exposed to asbestos while working on Pepco’s property. Initially, a total of approximately 448 individual plaintiffs added Pepco to their complaints. While the pleadings are not entirely clear, it appears that each plaintiff sought $2 million in compensatory damages and $4 million in punitive damages from each defendant.

Since the initial filings in 1993, additional individual suits have been filed against Pepco, and significant numbers of cases have been dismissed. As a result of two motions to dismiss,

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numerous hearings and meetings and one motion for summary judgment, Pepco has had approximately 400 of these cases successfully dismissed with prejudice, either voluntarily by the plaintiff or by the court. As of December 31, 2008, there are approximately 180 cases still pending against Pepco in the State Courts of Maryland, of which approximately 90 cases were filed after December 19, 2000, and were tendered to Mirant for defense and indemnification pursuant to the terms of the Asset Purchase and Sale Agreement between Pepco and Mirant under which Pepco sold its generation assets to Mirant in 2000.

While the aggregate amount of monetary damages sought in the remaining suits (excluding those tendered to Mirant) is approximately $360 million, PHI and Pepco believe the amounts claimed by the remaining plaintiffs are greatly exaggerated. The amount of total liability, if any, and any related insurance recovery cannot be determined at this time; however, based on information and relevant circumstances known at this time, neither PHI nor Pepco believes these suits will have a material adverse effect on its financial position, results of operations or cash flows. However, if an unfavorable decision were rendered against Pepco, it could have a material adverse effect on Pepco’s and PHI’s financial position, results of operations or cash flows.

Cash Balance Plan Litigation

In 1999, Conectiv established a cash balance retirement plan to replace defined benefit retirement plans then maintained by ACE and DPL. Following the acquisition by Pepco of Conectiv, this plan became the Conectiv Cash Balance Sub-Plan within the PHI Retirement Plan. In September 2005, three management employees of PHI Service Company filed suit in the U.S. District Court for the District of Delaware (the Delaware District Court) against the PHI Retirement Plan, PHI and Conectiv (the PHI Parties), alleging violations of ERISA, on behalf of a class of management employees who did not have enough age and service when the Cash Balance Sub-Plan was implemented in 1999 to assure that their accrued benefits would be calculated pursuant to the terms of the predecessor plans sponsored by ACE and DPL. A fourth plaintiff was added to the case to represent DPL-legacy employees who were not eligible for grandfathered benefits.

The plaintiffs challenged the design of the Cash Balance Sub-Plan and sought a declaratory judgment that the Cash Balance Sub-Plan was invalid and that the accrued benefits of each member of the class should be calculated pursuant to the terms of the predecessor plans. Specifically, the complaint alleged that the use of a variable rate to compute the plaintiffs’ accrued benefit under the Cash Balance Sub-Plan resulted in reductions in the accrued benefits that violated ERISA. The complaint also alleged that the benefit accrual rates and the minimal accrual requirements of the Cash Balance Sub-Plan violated ERISA as did the notice that was given to plan participants upon implementation of the Cash Balance Sub-Plan.

In September 2007, the Delaware District Court issued an order granting summary judgment in favor of the PHI Parties. In October 2007, the plaintiffs filed an appeal of the decision to the U.S. Court of Appeals for the Third Circuit (the Third Circuit). In November 2008, the Third Circuit affirmed the Delaware District Court ruling. On December 16, 2008, the Third Circuit denied a petition for rehearing filed by the plaintiffs. Plaintiffs have until March 23, 2009, to petition the U.S. Supreme Court for review of the Third Circuit decision.

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If the plaintiffs were to prevail in this litigation, the ABO and projected benefit obligation (PBO) calculated in accordance with SFAS No. 87 each would increase by approximately $12 million, assuming no change in benefits for persons who have already retired or whose employment has been terminated and using actuarial valuation data as of the time the suit was filed. The ABO represents the present value that participants have earned as of the date of calculation. This means that only service already worked and compensation already earned and paid is considered. The PBO is similar to the ABO, except that the PBO includes recognition of the effect that estimated future pay increases would have on the pension plan obligation.

Environmental Litigation

PHI, through its subsidiaries, is subject to regulation by various federal, regional, state, and local authorities with respect to the environmental effects of its operations, including air and water quality control, solid and hazardous waste disposal, and limitations on land use. In addition, federal and state statutes authorize governmental agencies to compel responsible parties to clean up certain abandoned or unremediated hazardous waste sites. PHI’s subsidiaries may incur costs to clean up currently or formerly owned facilities or sites found to be contaminated, as well as other facilities or sites that may have been contaminated due to past disposal practices. Although penalties assessed for violations of environmental laws and regulations are not recoverable from customers of the operating utilities, environmental clean-up costs incurred by Pepco, DPL and ACE would be included by each company in its respective cost of service for ratemaking purposes.

Metal Bank/Cottman Avenue Site . In the early 1970s, both Pepco and DPL sold scrap transformers, some of which may have contained some level of PCBs, to a metal reclaimer operating at the Metal Bank/Cottman Avenue site in Philadelphia, Pennsylvania, owned by a nonaffiliated company. In 1987, Pepco and DPL were notified by the EPA that they, along with a number of other utilities and non-utilities, were potentially responsible parties (PRPs) in connection with the PCB contamination at the site.

In 1997, the EPA issued a Record of Decision that set forth a remedial action plan for the site with estimated implementation costs of approximately $17 million. In May 2003, two of the potentially liable owner/operator entities filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. In October 2003, the bankruptcy court confirmed a reorganization plan that incorporates the terms of a settlement among the two debtor owner/operator entities, the United States and a group of utility PRPs including Pepco (the Utility PRPs). Under the bankruptcy settlement, the reorganized entity/site owner will pay a total of approximately $13 million to remediate the site (the Bankruptcy Settlement).

In March 2006, the U.S. District Court for the Eastern District of Pennsylvania approved global consent decrees for the Metal Bank/Cottman Avenue site, entered into on August 23, 2005, involving the Utility PRPs, the U.S. Department of Justice, EPA, The City of Philadelphia and two owner/operators of the site. Under the terms of the settlement, the two owner/operators will make payments totaling approximately $6 million to the U.S. Department of Justice and totaling approximately $4 million to the Utility PRPs. The Utility PRPs will perform the remedy at the site and will be able to draw on the approximately $13 million from the Bankruptcy Settlement to accomplish the remediation (the Bankruptcy Funds). The Utility PRPs will contribute funds to the extent remediation costs exceed the Bankruptcy Funds available. The Utility PRPs also will be liable for EPA costs associated with overseeing the monitoring and

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operation of the site remedy after the remedy construction is certified to be complete and also the cost of performing the “5 year” review of site conditions required by the Comprehensive Environmental Response, Compensation, and Liability Act of 1980. Any Bankruptcy Funds not spent on the remedy may be used to cover the Utility PRPs’ liabilities for future costs. No parties are released from potential liability for damages to natural resources.

As of December 31, 2008, Pepco had accrued approximately $2 million to meet its liability for a remedy at the Metal Bank/Cottman Avenue site. While final costs to Pepco of the settlement have not been determined, Pepco believes that its liability at this site will not have a material adverse effect on its financial position, results of operations or cash flows.

In 1999, DPL entered into a de minimis settlement with the EPA and paid less than a million dollars to resolve its liability for cleanup costs at the Metal Bank/Cottman Avenue site. The de minimis settlement did not resolve DPL’s responsibility for natural resource damages, if any, at the site. DPL believes that any liability for natural resource damages at this site will not have a material adverse effect on its financial position, results of operations or cash flows.

Delilah Road Landfill Site . In 1991, the New Jersey Department of Environmental Protection (NJDEP) identified ACE as a PRP at the Delilah Road Landfill site in Egg Harbor Township, New Jersey. In 1993, ACE, along with two other PRPs, signed an administrative consent order with NJDEP to remediate the site. The soil cap remedy for the site has been implemented and in August 2006, NJDEP issued a No Further Action Letter (NFA) and Covenant Not to Sue for the site. Among other things, the NFA requires the PRPs to monitor the effectiveness of institutional (deed restriction) and engineering (cap) controls at the site every two years. In September 2007, NJDEP approved the PRP group’s petition to conduct semi-annual, rather than quarterly, ground water monitoring for two years and deferred until the end of the two-year period a decision on the PRP group’s request for annual groundwater monitoring thereafter. In August 2007, the PRP group agreed to reimburse the costs of the EPA in the amount of $81,400 in full satisfaction of EPA’s claims for all past and future response costs relating to the site (of which ACE’s share is one-third). Effective April 2008, EPA and the PRP group entered into a settlement agreement which will allow EPA to reopen the settlement in the event of new information or unknown conditions at the site. Based on information currently available, ACE anticipates that its share of additional cost associated with this site for post-remedy operation and maintenance will be approximately $555,000 to $600,000. On November 23, 2008, Lenox, Inc., a member of the PRP group, filed a bankruptcy petition under Chapter 11 of the U.S. Bankruptcy Code. ACE filed a proof of claim in the Lenox bankruptcy case in February 2009. ACE believes that its liability for post-remedy operation and maintenance costs will not have a material adverse effect on its financial position, results of operations or cash flows regardless of the impact of the Lenox bankruptcy.

Frontier Chemical Site . In June 2007, ACE received a letter from the New York Department of Environmental Conservation (NYDEC) identifying ACE as a PRP at the Frontier Chemical Waste Processing Company site in Niagara Falls, N.Y. based on hazardous waste manifests indicating that ACE sent in excess of 7,500 gallons of manifested hazardous waste to the site. ACE has entered into an agreement with the other parties identified as PRPs to form a PRP group and has informed NYDEC that it has entered into good faith negotiations with the PRP group to address ACE’s responsibility at the site. ACE believes that its responsibility at the site will not have a material adverse effect on its financial position, results of operations or cash flows.

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Franklin Slag Pile Superfund Site. On November 26, 2008, ACE received a general notice letter from EPA concerning the Franklin Slag Pile Superfund Site in Philadelphia, Pennsylvania, asserting that ACE is a PRP that may have liability with respect to the site. If liable, ACE would be responsible for reimbursing EPA for clean-up costs incurred and to be incurred by the agency and for the costs of implementing an EPA-mandated remedy. The EPA’s claims are based on ACE’s sale of boiler slag from the B.L. England generating facility to MDC Industries, Inc. (MDC) during the period June 1978 to May 1983 (ACE owned B.L. England at that time and MDC formerly operated the Franklin Slag Pile Site). EPA further claims that the boiler slag ACE sold to MDC contained copper and lead, which are hazardous substances under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), and that the sales transactions may have constituted an arrangement for the disposal or treatment of hazardous substances at the site, which could be a basis for liability under CERCLA. The EPA’s letter also states that to date its expenditures for response measures at the site exceed $6 million. EPA estimates approximately $6 million as the cost for future response measures it recommends. ACE understands that the EPA sent similar general notice letters to three other companies and various individuals.

ACE believes that the B.L. England boiler slag sold to MDC was a valuable material with various industrial applications, and therefore, such sale was not an arrangement for the disposal or treatment of any hazardous substances as would be necessary to constitute a basis for liability under CERCLA. ACE intends to contest any such claims made by the EPA. At this time ACE cannot predict how EPA will proceed or what portion, if any, of the Franklin Slag Pile Site response costs EPA would seek to recover from ACE.

Deepwater Generating Station Revocation Order . In December 2005, NJDEP issued a Title V operating permit (the 2005 Permit) to Deepwater Generating Station (Deepwater) owned by Conectiv Energy. Conectiv Energy appealed several provisions of the 2005 Permit and a revised Title V operating permit issued in 2008 (the 2008 Permit). Administrative litigation concerning the provisions of the operating permit is ongoing. In February 2008, NJDEP issued an Administrative Order of Revocation and Notice of Civil Administrative Penalty Assessment (the First Revocation Order) revoking the Deepwater operating permit. The First Revocation Order is based on the NJDEP’s contention that Deepwater Unit 6/8 operated in violation of its emission limit for hydrogen chloride (HCl) and total suspended particles (TSP) during a December 2007 stack test. The First Revocation Order also assessed a $20,000 penalty for the HCl incident and a $10,000 penalty for the TSP incident. Conectiv Energy has filed an appeal of both the revocation order and the penalty with the Office of Administrative Law. Subsequent stack tests have confirmed that Unit 6/8 complies with its TSP emission limit and Conectiv Energy and NJDEP entered into a settlement agreement that resolves the $10,000 penalty for TSP from the First Order.

In July 2008, NJDEP issued an Administrative Order of Revocation and Notice of Civil Administrative Penalty Assessment (the Second Revocation Order) revoking the Deepwater operating permit. The Second Revocation Order is based on the NJDEP’s contention that Deepwater Unit 6/8 operated in violation of its emission limit for particulate matter less than 10 microns (PM-10) during the December 2007 stack test. The Second Revocation Order also assessed a penalty for the incident in the amount of $10,000. Conectiv Energy has filed an appeal of both the revocation order and the penalty with the Office of Administrative Law. NJDEP has issued a letter stating that elevated PM-10 levels indicated during the July 2008 stack

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test were the result of laboratory error. Subsequent stack testing has shown that Unit 6/8 complies with its PM-10 emission limit.

In September 2008, NJDEP issued an additional and separate Administrative Order of Revocation and Notice of Civil Administrative Penalty Assessment (the Third Revocation Order) requiring Conectiv Energy to operate Deepwater Unit 6/8 in compliance with its HCl limit or in the alternative revoking Unit 6/8’s operating permit effective October 21, 2008. The Third Revocation Order is based on the NJDEP’s contention that Unit 6/8 violated the HCl limit on 106 days between December 5, 2007 and April 24, 2008 stack tests. The Third Revocation Order assessed a penalty in the amount of $5.3 million. Conectiv Energy has appealed both the revocation order and the penalty with the Office of Administrative Law. The effectiveness of the three revocation orders has been stayed by the NJDEP through February 28, 2009. On February 23, 2009, NJDEP extended the stay of the three revocation orders until May 28, 2009.

Conectiv Energy is operating Deepwater 6/8 while firing coal at a reduced load, or at full load with lime injection, to comply with the challenged HCl permit limit at all potential coal chloride contents. Operation with lime injection was authorized by the Environmental Improvement Pilot Test permit issued by NJDEP in September 2008, which facilitates assessment of the feasibility and practicality of hydrated lime injection technology in controlling HCl emissions from Unit 6/8 at full load without significantly impacting boiler operations. Testing indicates that hydrated lime injection technology effectively controls HCl emissions without significantly impacting boiler operations and without affecting Conectiv Energy’s ability to meet emissions limits for other parameters. Conectiv Energy has not yet determined the costs of converting the hydrated lime injection from a temporary pollution control device to a permanent pollution control device.

Conectiv Energy believes that it has strong legal arguments that NJDEP cannot revoke the permit prior to an administrative hearing and believes that the probability of a complete shut-down of the unit is low because the unit appears to be in compliance with the HCl limit. In addition, Conectiv Energy believes that its appeal asserts strong arguments against the assessment of the $5.3 million penalty.

Appeal of Delaware Multi-Pollutant Regulations . In November 2006, Delaware Department of Natural Resources and Environmental Control (DNREC) adopted multi-pollutant regulations to require large coal-fired and residual oil-fired electric generating units to develop control strategies to address air quality in Delaware. In December 2006, Conectiv Energy filed a complaint with the Delaware Superior Court seeking review of the adoption of the new regulations. In December 2008, Conectiv Energy reached a settlement with DNREC. Under the terms of the settlement agreement, Conectiv Energy will comply with the nitrogen oxide, sulfur dioxide (SO 2 ) and mercury emission reduction requirements required by the regulations by the regulatory compliance dates, except that it will comply with the Phase II mercury emission limit by January 1, 2012, which is one year earlier than the regulatory compliance date. In addition, DNREC has agreed to increase the annual SO 2 mass emission limit as it relates to the Edge Moor residual oil-fired generating unit.

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mitigate flooding and related environmental impacts from a broad range of construction and development activities, including electric utility transmission and distribution construction that was previously unregulated under the FHACA and that is otherwise regulated under a number of other state and federal programs. ACE filed an appeal of these regulations with the Appellate Division of the Superior Court of New Jersey on November 3, 2008. See Item I “Business – Environmental Matters– Air Quality Regulation – Sulfur Dioxide, Nitrogen Oxide, Mercury and Nickel Emissions.”

IRS Examination of Like-Kind Exchange Transaction

In 2001, Conectiv and certain of its subsidiaries (the Conectiv Group) were engaged in the implementation of a strategy to divest non-strategic electric generating facilities and replace these facilities with mid-merit electric generating capacity. As part of this strategy, the Conectiv Group exchanged its interests in two older coal-fired plants for the more efficient gas-fired Hay Road II generating facility owned by an unaffiliated third party. For tax purposes, Conectiv treated the transaction as a “like-kind exchange” under IRC Section 1031. As a result, approximately $88 million of taxable gain was deferred for federal income tax purposes.

The transaction was examined by the IRS as part of the normal Conectiv tax audit. In May 2006, the IRS issued a revenue agent’s report (RAR) for the audit of Conectiv’s 2000, 2001 and 2002 income tax returns, in which the IRS disallowed the qualification of the transaction as an exchange under IRC Section 1031. In July 2006, Conectiv filed a protest of this disallowance to the U.S. Office of Appeals of the IRS (Appeals Office).

In October 2008, Conectiv and the IRS agreed on a settlement under which Conectiv will pay approximately $2 million of tax and $1 million of interest (pre-tax) representing tax and interest due for the years settled with the IRS. PHI will recover the payment of this tax through additional tax depreciation deductions over the remaining tax life of the facility. PHI’s reserve on this issue was more conservative than the actual settlement with the IRS. As a result, PHI reversed a total of $5 million (after-tax) in excess accrued interest in the fourth quarter of 2008.

PHI’s Cross-Border Energy Lease Investments

Between 1994 and 2002 , Potomac Capital Investment Corporation (PCI), a subsidiary of PHI, entered into eight cross-border energy lease investments involving public utility assets (primarily consisting of hydroelectric generation and coal-fired electric generation facilities and natural gas distribution networks) located outside of the United States. Each of these investments is structured as a sale and leaseback transaction commonly referred to as a sale-in/lease-out or SILO transaction. Prior to the reassessment discussed below, PHI had historically derived approximately $74 million per year in tax benefits from these eight cross-border energy lease investments (reflecting 100% of the tax benefits) to the extent that rental income under the leases is exceeded by the depreciation deductions on the purchase price of the assets and interest deductions on the non-recourse debt financing (obtained by PCI to fund a substantial portion of the purchase price of the assets). PHI’s annual tax benefits are now approximately $56 million after giving effect to the reassessment. As of December 31, 2008, PHI’s equity investment in its cross-border energy leases was approximately $1.3 billion which included the impact of the reassessment discussed below. During the period from January 1, 2001 to December 31, 2008, PHI has derived approximately $461 million in federal income tax benefits from the depreciation

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and interest deductions in excess of rental income with respect to these cross-border energy lease investments, which includes the effect of the reassessment discussed below.

In 2005, the Treasury Department and IRS issued Notice 2005-13 identifying sale-leaseback transactions with certain attributes entered into with tax-indifferent parties as tax avoidance transactions, and the IRS announced its intention to disallow the associated tax benefits claimed by the investors in these transactions. PHI’s cross-border energy lease investments, each of which is with a tax-indifferent party, have been under examination by the IRS as part of the normal PHI federal income tax audits. In the final RAR issued in June 2006 in connection with the audit of PHI’s 2001 and 2002 income tax returns, the IRS disallowed the depreciation and interest deductions in excess of rental income claimed by PHI with respect to six of its cross-border energy lease investments. In addition, the IRS has sought to recharacterize the leases as loan transactions as to which PHI would be subject to original issue discount income. PHI is protesting the IRS adjustments and the unresolved audit issues have been forwarded to the Appeals Office. PHI is in the early stages of discussions with the Appeals Office. If these discussions are unsuccessful, PHI currently intends to pursue litigation proceedings against the IRS to defend its tax position. While the audits of PHI’s federal income tax returns for subsequent tax years are ongoing or have not yet commenced, PHI anticipates that the IRS will take the same position with respect to each of the subsequent years on all eight of its cross-border energy lease investments.

In the last several years, IRS challenges to certain cross-border lease transactions have been the subject of litigation. This litigation has resulted in several decisions in favor of the IRS, including two decisions in the second quarter of 2008. In one of the cases decided in the second quarter relating to a lease-in/lease-out transaction, a United States Court of Appeals upheld a lower court decision in favor of the IRS to disallow the tax benefits taken by the taxpayer. In the second case, a United States District Court rendered an opinion concerning a SILO transaction in which it upheld the IRS’s disallowance of tax benefits taken by the taxpayer. Under FIN 48, “Accounting for Uncertainty in Income Taxes,” the financial statement recognition of an uncertain tax position is permitted only if it is more likely than not that the position will be sustained. Further, under FSP 13-2, “Accounting for a Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged-lease Transaction,” a company is required to assess on a periodic basis the likely outcome of tax positions relating to its cross-border energy lease investments and, if there is a change or a projected change in the timing of the tax benefits generated by the transactions, the company is required to recalculate the value of its equity investment.

While PHI believes that its tax position with regard to its cross-border energy lease investments is appropriate based on applicable statutes, regulations and case law, after evaluating the court rulings described above, PHI at June 30, 2008 reassessed the sustainability of its tax position and revised its assumptions regarding the estimated timing of the tax benefits from its cross-border energy lease investments. Based on this reassessment, PHI for the quarter ended June 30, 2008, recorded an after-tax charge to net income of $93 million, consisting of the following components:

A non-cash pre-tax charge of $124 million ($86 million after tax) under FSP 13-2 to reduce the equity value of these cross-border energy lease investments. This

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pre-tax charge has been recorded in the Consolidated Statement of Earnings as a reduction in other operating revenue.

A non-cash charge of $7 million after-tax to reflect the anticipated additional interest expense under FIN 48 on the estimated federal and state income tax that would be payable for the period January 1, 2001 through June 30, 2008, based on the revised assumptions regarding the estimated timing of the tax benefits. This after-tax charge has been recorded in the Consolidated Statement of Earnings as an increase in income tax expense.

The charge pursuant to FSP 13-2 reflects changes to the book equity value of the cross-border energy lease investments and the pattern of recognizing the related cross-border energy lease income. This amount will be recognized as income over the remaining term of the affected leases, which expire between 2017 and 2047. The tax benefits associated with the lease transactions represent timing differences that do not change the aggregate amount of the lease net income over the life of the transactions. Consistent with the revised assumptions regarding the estimated timing of the tax benefits, PHI reduced the tax benefits recorded on its 2007 tax return filed in September 2008 and accordingly paid additional federal and state income taxes. Other than these payments made with the 2007 tax return and estimated tax payments made in 2008 associated with the reduced tax benefits, PHI has made no additional cash payments of federal or state income taxes or interest thereon as a result of the reassessment discussed above. Whether PHI makes an additional payment, and the amount and the timing thereof, will depend on a number of factors, including PHI’s litigation strategy, whether a settlement with the IRS can be reached or whether the company decides to deposit funds with the IRS to avoid higher interest costs, until the issue is resolved. PHI is continuing to defend vigorously its tax position with the IRS.

In connection with the recording of the above adjustment, PHI calculated as of June 30, 2008, the additional non-cash charge to earnings that would have been recorded resulting from the disallowance of the entire amount of the tax benefits from the depreciation and interest deductions in excess of rental income and the recharacterization of the transactions as loans over the period from January 1, 2001 through the end of the lease term. PHI would have incurred an additional non-cash charge to earnings at June 30, 2008 of approximately $346 million consisting of:

A non-cash charge of $324 million ($293 million after tax) under FSP 13-2 to further reduce the equity value of these cross-border energy lease investments.

A non-cash charge of $53 million after-tax to reflect the anticipated additional interest expense under FIN 48 on the estimated federal and state income tax for the period from January 1, 2001 through June 30, 2008.

As of December 31, 2008, no changes in the assumptions have occurred that would materially impact these estimates.

In the event of the total disallowance of the tax benefits and the imputing of original issue discount income due to the recharacterization of the leases as loans, PHI would have been obligated to pay, as of December 31, 2008, approximately $520 million in additional federal and

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state taxes and $83 million of interest. In addition, the IRS could require PHI to pay a penalty of up to 20% on the amount of additional taxes due. PHI anticipates that any additional taxes that it would be required to pay as a result of the disallowance of prior deductions or a recharacterization of the leases as loans would be recoverable in the form of lower taxes over the remaining term of the investments.

On August 7, 2008, PHI received a global settlement offer from the IRS with respect to its SILO transactions. PHI is continuing its discussion with the Appeals Office and has not responded to the global settlement offer.

IRS Mixed Service Cost Issue

During 2001, Pepco, DPL, and ACE changed their methods of accounting with respect to capitalizable construction costs for income tax purposes. The change allowed the companies to accelerate the deduction of certain expenses that were previously capitalized and depreciated. Through December 31, 2005, these accelerated deductions generated incremental tax cash flow benefits of approximately $205 million (consisting of $94 million for Pepco, $62 million for DPL, and $49 million for ACE) for the companies, primarily attributable to their 2001 tax returns.

In 2005, the Treasury Department issued proposed regulations that, if adopted in their current form, would require Pepco, DPL, and ACE to change their method of accounting with respect to capitalizable construction costs for income tax purposes for tax periods beginning in 2005. Based on those proposed regulations, PHI in its 2005 federal tax return adopted an alternative method of accounting for capitalizable construction costs that management believed would be acceptable to the IRS.

At the same time as the proposed regulations were released, the IRS issued Revenue Ruling 2005-53, which was intended to limit the ability of certain taxpayers to utilize the method of accounting for income tax purposes they utilized on their tax returns for 2004 and prior years with respect to capitalizable construction costs. In line with this Revenue Ruling, the IRS revenue agent’s report for the 2001 and 2002 tax returns disallowed substantially all of the incremental tax benefits that Pepco, DPL and ACE had claimed on those returns by requiring the companies to capitalize and depreciate certain expenses rather than treat such expenses as current deductions. PHI’s protest of the IRS adjustments is among the unresolved audit matters relating to the 2001 and 2002 audits pending before the U.S. Office of Appeals of the IRS.

In February 2006, PHI paid approximately $121 million of taxes to cover the amount of additional taxes and interest that management estimated to be payable for the years 2001 through 2004 based on the method of tax accounting that PHI, pursuant to the proposed regulations, adopted on its 2005 tax return. In June 2008, PHI received from the IRS an offer of settlement pertaining to each of Pepco, DPL and ACE for the tax years 2001 through 2004. PHI is substantially in agreement with this proposed settlement. Based on the terms of the proposal, PHI expects the final settlement amount to be less than the $121 million previously deposited.

On the basis of the tentative settlement, PHI updated its estimated liability related to mixed service costs and as a result, recorded in the quarter ended June 30, 2008, a net reduction in its liability for unrecognized tax benefits of $19 million and recognized after-tax interest income of $7 million.

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Third Party Guarantees, Indemnifications, and Off-Balance Sheet Arrangements

Pepco Holdings and certain of its subsidiaries have various financial and performance guarantees and indemnification obligations that they have entered into in the normal course of business to facilitate commercial transactions with third parties as discussed below.

As of December 31, 2008, Pepco Holdings and its subsidiaries were parties to a variety of agreements pursuant to which they were guarantors for standby letters of credit, performance residual value, and other commitments and obligations. The commitments and obligations, in millions of dollars, were as follows:

	Guarantor
		PHI		DPL		ACE		Other		Total
		(Millions of Dollars)

Energy marketing obligations of Conectiv Energy (a)	$	168	$	-	$	-	$	-	$	168
Energy procurement obligations of Pepco Energy Services (a)		243		-		-		-		243
Guaranteed lease residual values (b)		-		3		3		1		7
Other (c)		2		-		-		1		3
Total	$	413	$	3	$	3	$	2	$	421

(a)

Pepco Holdings has contractual commitments for performance and related payments of Conectiv Energy and Pepco Energy Services to counterparties under routine energy sales and procurement obligations, including retail customer load obligations of Pepco Energy Services and requirements under BGS contracts entered into by Conectiv Energy with ACE.

(b)

Subsidiaries of Pepco Holdings have guaranteed residual values in excess of fair value of certain equipment and fleet vehicles held through lease agreements. As of December 31, 2008, obligations under the guarantees were approximately $7 million. Assets leased under agreements subject to residual value guarantees are typically for periods ranging from 2 years to 10 years. Historically, payments under the guarantees have not been made by the guarantor as, under normal conditions, the contract runs to full term at which time the residual value is minimal. As such, Pepco Holdings believes the likelihood of payment being required under the guarantee is remote.

(c)

Other guarantees consist of:

Pepco Holdings has guaranteed a subsidiary building lease of $2 million. Pepco Holdings does not expect to fund the full amount of the exposure under the guarantee.

PCI has guaranteed facility rental obligations related to contracts entered into by Starpower Communications LLC, a joint venture in which PCI, prior to December 2004, had a 50% interest. As of December 31, 2008, the guarantees cover the remaining $1 million in rental obligations.

Pepco Holdings and certain of its subsidiaries have entered into various indemnification agreements related to purchase and sale agreements and other types of contractual agreements with vendors and other third parties. These indemnification agreements typically cover environmental, tax, litigation and other matters, as well as breaches of representations, warranties and covenants set forth in these agreements. Typically, claims may be made by third parties under these indemnification agreements over various periods of time depending on the nature of the claim. The maximum potential exposure under these indemnification agreements can range from a specified dollar amount to an unlimited amount depending on the nature of the claim and the particular transaction. The total maximum potential amount of future payments under these indemnification agreements is not estimable due to several factors, including uncertainty as to whether or when claims may be made under these indemnities.

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Dividends

On January 22, 2009, the Board of Directors declared a dividend on common stock of 27 cents per share payable March 31, 2009 to shareholders of record on March 10, 2009.

Contractual Obligations

As of December 31, 2008, Pepco Holdings’ contractual obligations under non-derivative fuel and purchase power contracts were $3,211 million in 2009, $2,902 million in 2010 to 2011, $729 million in 2012 to 2013, and $2,225 million in 2014 and after.

(17) USE OF DERIVATIVES IN ENERGY AND INTEREST RATE HEDGING ACTIVITIES

PHI’s Competitive Energy businesses use derivative instruments primarily to reduce their financial exposure to changes in the value of their assets and obligations due to commodity price fluctuations. The derivative instruments used by the Competitive Energy businesses include forward contracts, futures, swaps, and exchange-traded and over-the-counter options. In addition, the Competitive Energy businesses also manage commodity risk with contracts that are not classified as derivatives. The two primary risk management objectives are (i) to manage the spread between the cost of fuel used to operate electric generation plants and the revenue received from the sale of the power produced by those plants, and (ii) to manage the spread between retail sales commitments and the cost of supply used to service those commitments to ensure stable cash flows, and lock in favorable prices and margins when they become available.

Conectiv Energy purchases futures, swaps, options and forward contracts to hedge price risk in connection with the purchase of physical natural gas, oil and coal to fuel its generation assets and for resale. Conectiv Energy also purchases electricity swaps, options and forward contracts to hedge price risk in connection with the purchase of electricity for delivery to requirements load customers. Conectiv Energy sells electricity swaps, options and forward contracts to hedge price risk in connection with electric output from its generation fleet. Conectiv Energy accounts for most of its futures, swaps and certain forward contracts as cash flow hedges of forecasted transactions. Derivative contracts purchased or sold in excess of probable quantitative limits are marked-to-market through current earnings. All option contracts are marked-to-market through current earnings. Certain natural gas and oil futures and swaps are used as fair value hedges to protect physical fuel inventory. Some forward contracts are accounted for using standard accrual accounting since these contracts meet the requirements for normal purchase and sale accounting under SFAS No. 133.

Pepco Energy Services purchases electric and natural gas futures, swaps, options and forward contracts to hedge price risk in connection with the purchase of physical natural gas and electricity for delivery to customers. Pepco Energy Services accounts for its futures and swap contracts as cash flow hedges of forecasted transactions. Option contracts are marked-to-market through current earnings. Forward contracts are accounted for using standard accrual accounting since these contracts meet the requirements for normal purchase and sale accounting under SFAS No. 133.

PHI and its subsidiaries also use derivative instruments from time to time to mitigate the effects of fluctuating interest rates on debt incurred in connection with the operation of their

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businesses. In June 2002, PHI entered into several treasury lock transactions in anticipation of the issuance of several series of fixed rate debt commencing in July 2002.

Cash Flow Hedges

The table below provides detail on effective cash flow hedges under SFAS No. 133 included in PHI’s Consolidated Balance Sheet as of December 31, 2008. Under SFAS No. 133, cash flow hedges are marked-to-market on the balance sheet with corresponding adjustments to Accumulated Other Comprehensive Income. The data in the table indicates the magnitude of the effective cash flow hedges by hedge type (i.e., energy commodity and interest rate hedges), maximum term, and portion expected to be reclassified to earnings during the next 12 months.

Cash Flow Hedges Included in Accumulated Other Comprehensive Loss As of December 31, 2008 (Millions of dollars)
Contracts	Accumulated Other Comprehensive Income (Loss) After-tax (a)	Portion Expected to be Reclassified to Earnings during the Next 12 Months	Maximum Term
Energy Commodity	$(227)	$(151)	65 months
Interest Rate	(25)	(3)	284 months
Total	$(252)	$(154)

(a)	Accumulated Other Comprehensive Income as of December 31, 2008, includes a $(10) million balance related to minimum pension liability. This balance is not included in this table as it is not a cash flow hedge.

The following table shows the pre-tax gain (loss) recognized in earnings for cash flow hedge ineffectiveness for the years ended December 31, 2008, 2007 and 2006, respectively, and where they were reported in PHI’s Consolidated Statements of Earnings during the periods.

	2008	2007	2006
	(Millions of dollars)
Operating Revenue	$ 3	$ (2)	$ -
Fuel and Purchased Energy Expenses	(6)	-	-
Total	$(3)	$ (2)	$ -

For the years ended December 31, 2008, 2007 and 2006, $1 million, $2 million and zero, respectively, in losses were reclassified from Other Comprehensive Income to earnings because the forecasted hedged transactions were deemed no longer probable.

Fair Value Hedges

In connection with their energy commodity activities, the Competitive Energy businesses designate certain derivatives as fair value hedges. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings.

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The net pre-tax gains (losses) recognized during the twelve months ended December 31, 2008, 2007 and 2006 included in the Consolidated Statements of Earnings for fair value hedges and the associated hedged items are shown in the following table:

	2008	2007	2006
	(Millions of dollars)
(Losses) Gains on Derivative Instruments	$ (5)	$(10)	$-
Gains (Losses) on Hedged Items	$ 5	$ 10	$-

Other Derivative Activity

In connection with their energy commodity activities, the Competitive Energy businesses hold certain derivatives that do not qualify as hedges. Under SFAS No. 133, these derivatives are recorded at fair value through earnings with corresponding adjustments on the balance sheet.

The pre-tax gains (losses) on these derivatives are included in “Competitive Energy Operating Revenues” and are summarized in the following table:

Energy Commodity Activities (a)	2008	2007	2006
	(Millions of dollars)
Realized Gains (Losses)	$ 56	$ 7	$ 26
Unrealized Gains (Losses)	21	2	34
Total	$ 77	$ 9	$ 60

(a)	There were no ineffective fair value hedge gains for the years ended December 31, 2008, 2007 and 2006, respectively.

As indicated in Note (3), PHI offsets the fair value amounts recognized for derivative instruments and fair value amounts recognized for related collateral positions executed with the same counterparty under a master netting arrangement. The amount of cash collateral that was offset against these net derivative positions is as follows:

	December 31, 2008		December 31, 2007
	(Millions of dollars)

Cash collateral pledged to counterparties with the right to reclaim	$	205	$	-
Cash collateral received from counterparties with the obligation to return		53		-

As of December 31, 2008 and 2007, PHI had no cash collateral pledged or received related to derivatives accounted for at fair value that was not eligible for offset under master netting arrangements.

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(18) ACCUMULATED OTHER COMPREHENSIVE LOSS

A detail of the components of Pepco Holdings’ Accumulated Other Comprehensive (Loss) Earnings is as follows. For additional information, see the Consolidated Statements of Comprehensive Earnings.

	Commodity Derivatives	Treasury Lock	Other	Accumulated Other Comprehensive (Loss) Earnings
	(Millions of dollars)

Balance, December 31, 2005	$ 25	$(40)	$ (8)	$ (23)
Current year change	(87)	7	-	(80)
Balance, December 31, 2006	(62)	(33)	(8)	(103)
Current year change	53	4	-	57
Balance, December 31, 2007	(9)	(29)	(8)	(46)
Current year change	(218)	4	(2)	(216)
Balance December 31, 2008	$(227)	$(25)	$(10)	$(262)

A detail of the income tax (benefit) expense allocated to the components of Pepco Holdings’ Other Comprehensive (Loss) Earnings for each year is as follows.

	Commodity Derivatives	Treasury Lock	Other	Accumulated Other Comprehensive (Loss) Earnings
	(Millions of dollars)
December 31, 2006	$ (55)	$ 5	$ (1)(a)	$ (51)
December 31, 2007	$ 32	$ 5	$ 1 (b)	$ 38
December 31, 2008	$(147)	$ 1	$ (1)(b)	$(147)

(a)	Represents the income tax benefit on an adjustment for nonqualified pension plan minimum liability.

(b)	Represents income tax expense on amortization of gains and losses for prior service costs.

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(19) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The quarterly data presented below reflect all adjustments necessary in the opinion of management for a fair presentation of the interim results. Quarterly data normally vary seasonally because of temperature variations, differences between summer and winter rates, and the scheduled downtime and maintenance of electric generating units. The totals of the four quarterly basic and diluted earnings per common share may not equal the basic and diluted earnings per common share for the year due to changes in the number of common shares outstanding during the year.

	2008
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Total
	(Millions, except per share amounts)
Total Operating Revenue	$	2,641		$	2,518	(b)	$	3,060		$	2,481		$	10,700
Total Operating Expenses		2,418			2,404	(c)		2,785	(e)		2,325			9,932
Operating Income		223			114			275			156			768
Other Expenses		(71)			(71)			(76)			(82)			(300)
Income Before Income Tax Expense		152			43			199			74			468
Income Tax Expense		53	(a)		28	(d)		80			7	(f)		168
Net Income		99			15			119			67			300
Basic and Diluted Earnings Per Share of Common Stock	$	.49		$	.07		$	.59		$	.32		$	1.47
Cash Dividends Per Common Share	$	.27		$	.27		$	.27		$	.27		$	1.08

	2007
	First Quarter		Second Quarter			Third Quarter			Fourth Quarter			Total
	(Millions, except per share amounts)
Total Operating Revenue	$	2,179	$	2,084		$	2,770	(h)	$	2,333	(h)	$	9,366
Total Operating Expenses		2,026		1,928	(g)		2,450	(g) (i)		2,156	(g)		8,560
Operating Income		153		156			320			177			806
Other Expenses		(70)		(70)			(72)			(72)			(284)
Income Before Income Tax Expense		83		86			248			105			522
Income Tax Expense		31		29			80	(j)		48			188
Net Income		52		57			168			57			334
Basic and Diluted Earnings Per Share of Common Stock	$	.27	$	.30		$	.87		$	.29		$	1.72
Cash Dividends Per Common Share	$	.26	$	.26		$	.26		$	.26		$	1.04

(a)

Includes $7 million of after-tax net interest income on uncertain tax positions primarily related to casualty losses.

(b)

Includes a $124 million charge ($86 million after-tax) related to the adjustment to the equity value of cross-border energy lease investments under FSP 13-2.

(c)

Includes a $4 million adjustment to correct an understatement of operating expenses for prior periods dating back to February 2005 where late payment fees were incorrectly recognized.

(d)

Includes $7 million of after-tax interest income related to the tentative settlement of the IRS mixed service cost issue and $2 million of after-tax interest income received in 2008 on the Maryland state tax refund offset by a $7 million after-tax charge for interest related to the increased tax obligation associated with the adjustment to the equity value of cross-border energy lease investments.

(e)

Includes a $9 million charge related to an adjustment in the accounting for certain restricted stock awards granted under the Long-Term Incentive Plan (LTIP) and a $4 million adjustment to correct an understatement of operating expenses for prior periods dating back to May 2006 where late payment fees were incorrectly recognized.

(f)

Includes $11 million of after-tax net interest income on uncertain and effectively settled tax positions (primarily associated with the final settlement with the IRS on the like-kind exchange issue, a claim made with the IRS related to the tax reporting for fuel over- and under-recoveries and the reversal of the majority of the interest income recognized on uncertain tax positions related to casualty losses in the first quarter) and a benefit of $8 million (including a $3 million correction of prior period errors) related to additional analysis of deferred tax balances completed in 2008.

(g)

Includes adjustment related to timing of recognition of certain operating expenses which were overstated by $5 million in the fourth quarter and understated by $1 million and $4 million in the second and third quarters, respectively.

(h)

Includes adjustment related to timing of recognition of certain operating revenues which were overstated by $2 million in the third quarter and understated by $2 million in the fourth quarter.

(i)

Includes $33 million benefit ($20 million after-tax) from settlement of Mirant bankruptcy claims.

(j)

Includes $20 million benefit ($18 million net of fees) related to Maryland income tax refund.

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Management’s Report on Internal Control over Financial Reporting

The management of Pepco is responsible for establishing and maintaining adequate internal control over financial reporting. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed its internal control over financial reporting as of December 31, 2008 based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, the management of Pepco concluded that its internal control over financial reporting was effective as of December 31, 2008.

This Annual Report on Form 10-K does not include an attestation report of Pepco’s registered public accounting firm, PricewaterhouseCoopers LLP, regarding internal control over financial reporting. Management’s report was not subject to attestation by PricewaterhouseCoopers LLP pursuant to temporary rules of the Securities and Exchange Commission that permit Pepco to provide only management’s report in this Form 10-K.

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Report of Independent Registered Public Accounting Firm

To the Shareholder and Board of Directors of

Potomac Electric Power Company

In our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Potomac Electric Power Company (a wholly owned subsidiary of Pepco Holdings, Inc.) at December 31, 2008 and December 31, 2007, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 11 to the financial statements, the company changed its manner of accounting and reporting for uncertain tax positions in 2007.

PricewaterhouseCoopers LLP

Washington, DC

March 2, 2009

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POTOMAC ELECTRIC POWER COMPANY STATEMENTS OF EARNINGS
For the Year Ended December 31,		2008		2007		2006
(Millions of dollars)

Operating Revenue	$	2,322	$	2,201	$	2,216
Operating Expenses
Fuel and purchased energy		1,335		1,246		1,300
Other operation and maintenance		302		300		277
Depreciation and amortization		141		151		166
Other taxes		288		290		273
Effect of settlement of Mirant bankruptcy claims		-		(33)		-
Gain on sale of assets		-		(1)		-
Total Operating Expenses		2,066		1,953		2,016
Operating Income		256		248		200
Other Income (Expenses)
Interest and dividend income		9		9		6
Interest expense		(93)		(82)		(75)
Other income		10		12		13
Other expenses		(2)		-		(1)
Total Other Expenses		(76)		(61)		(57)

Income Before Income Tax Expense		180		187		143

Income Tax Expense		64		62		58

Net Income		116		125		85

Dividends on Serial Preferred Stock		-		-		1

Earnings Available for Common Stock	$	116	$	125	$	84

The accompanying Notes are an integral part of these Financial Statements.

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POTOMAC ELECTRIC POWER COMPANY STATEMENTS OF COMPREHENSIVE EARNINGS
For the Year Ended December 31,	2008	2007	2006
(Millions of dollars)

Net income	$116	$125	$85
Minimum pension liability adjustment, before income taxes	-	-	6
Income tax expense	-	-	2
Other comprehensive earnings, net of income taxes	-	-	4
Comprehensive earnings	$116	$125	$89

The accompanying Notes are an integral part of these Financial Statements.

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POTOMAC ELECTRIC POWER COMPANY BALANCE SHEETS
ASSETS	December 31, 2008		December 31, 2007
(Millions of dollars)

CURRENT ASSETS
Cash and cash equivalents		$ 146	$ 19
Restricted cash equivalents		-	1
Accounts receivable, less allowance for uncollectible accounts of $15 million and $13 million, respectively		377	344
Inventories		45	45
Prepayments of income taxes		151	93
Prepaid expenses and other		37	15
Total Current Assets		756	517
INVESTMENTS AND OTHER ASSETS
Regulatory assets		169	179
Prepaid pension expense		142	152
Investment in trust		24	27
Income taxes receivable		166	171
Restricted cash equivalents		102	417
Other		105	75
Total Investments and Other Assets		708	1,021
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment		5,607	5,369
Accumulated depreciation		(2,371)	(2,274)
Net Property, Plant and Equipment		3,236	3,095
TOTAL ASSETS		$4,700	$4,633

The accompanying Notes are an integral part of these Financial Statements.

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POTOMAC ELECTRIC POWER COMPANY BALANCE SHEETS
LIABILITIES AND SHAREHOLDER’S EQUITY	December 31, 2008	December 31, 2007
(Millions of dollars, except shares)

CURRENT LIABILITIES
Short-term debt	$ 125	$ 180
Current maturities of long-term debt	50	128
Accounts payable and accrued liabilities	187	202
Accounts payable to associated companies	70	76
Capital lease obligations due within one year	6	6
Taxes accrued	44	90
Interest accrued	19	17
Liabilities and accrued interest related to uncertain tax positions	38	68
Other	94	88
Total Current Liabilities	633	855
DEFERRED CREDITS
Regulatory liabilities	238	542
Deferred income taxes, net	788	619
Investment tax credits	10	13
Other postretirement benefit obligation	49	58
Income taxes payable	137	129
Other	66	70
Total Deferred Credits	1,288	1,431

LONG-TERM LIABILITIES
Long-term debt	1,445	1,112
Capital lease obligations	99	105
Total Long-Term Liabilities	1,544	1,217

COMMITMENTS AND CONTINGENCIES (NOTE 13)
SHAREHOLDER’S EQUITY
Common stock, $.01 par value, authorized 200,000,000 shares, issued 100 shares	-	-
Premium on stock and other capital contributions	611	533
Retained earnings	624	597
Total Shareholder’s Equity	1,235	1,130

TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY	$4,700	$4,633

The accompanying Notes are an integral part of these Financial Statements.

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POTOMAC ELECTRIC POWER COMPANY STATEMENTS OF CASH FLOWS
For the Year Ended December 31,	2008		2007	2006
(Millions of dollars)
OPERATING ACTIVITIES
Net Income	$ 116		$ 125	$ 85
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization	141		151	166
Gain on sale of assets	-		(1)	-
Effect of settlement of Mirant bankruptcy claims	-		(33)	-
Proceeds from settlement of Mirant bankruptcy claims	-		507	70
Reimbursements to Mirant	-		(108)	-
Changes in restricted cash and cash equivalents related to Mirant settlement	315		(417)	-
Deferred income taxes	185		(3)	38
Investment tax credit adjustments, net	(2)		(2)	(2)
Prepaid pension expense	10		8	12
Other postretirement benefit obligation	(9)		(12)	(1)
Changes in:
Accounts receivable	(33)		(46)	21
Regulatory assets and liabilities, net	(309)		(33)	(19)
Prepaid expenses	(2)		(3)	(1)
Accounts payable and accrued liabilities	(8)		52	(28)
Interest accrued	2		-	(2)
Taxes accrued	(174)		12	(170)
Inventories	-		(3)	(6)
Net other operating	(9)		9	(6)
Net Cash From Operating Activities	223		203	157
INVESTING ACTIVITIES
Investment in property, plant and equipment	(275)		(272)	(205)
Proceeds from settlement of Mirant bankruptcy claims representing reimbursement for investment in property, plant and equipment	-		15	-
Change in restricted cash equivalents	1		(1)	-
Net other investing activities	1		2	29
Net Cash Used By Investing Activities	(273)		(256)	(176)
FINANCING ACTIVITIES
Dividends paid to Parent	(89)		(86)	(99)
Capital contribution from Parent	78		-	-
Dividends paid on preferred stock	-		-	(1)
Issuances of long-term debt	500		250	110
Reacquisition of long-term debt	(238)		(210)	(160)
(Repayments) issuances of short-term debt, net	(55)		113	67
Redemption of preferred stock	-		-	(22)
Net other financing activities	(19)		(7)	5
Net Cash From (Used By) Financing Activities	177		60	(100)

Net Increase (Decrease) in Cash and Cash Equivalents	127		7	(119)
Cash and Cash Equivalents at Beginning of Year	19		12	131
CASH AND CASH EQUIVALENTS AT END OF YEAR	$ 146	$	$ 19	$ 12
NONCASH ACTIVITIES
Asset retirement obligations associated with removal costs transferred to regulatory liabilities	$ 9		$ 5	$ 28
Capital contribution in respect of certain intercompany transactions	$ -		$ 1	$ 24
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest (net of capitalized interest of $2 million, $5 million and $1 million, respectively) and paid for income taxes:
Interest	$ 87		$ 78	$ 73
Income taxes	$ 60		$ 61	$128

The accompanying Notes are an integral part of these Financial Statements.

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POTOMAC ELECTRIC POWER COMPANY STATEMENTS OF SHAREHOLDER’S EQUITY
	Common Stock Shares Par Value		Premium on Stock	Capital Stock Expense	Accumulated Other Comprehensive Earnings (Loss)	Retained Earnings
(Millions of dollars, except shares)
BALANCE, DECEMBER 31, 2005	100	-	$508	$ -	$(4)	$575
Net Income	-	-	-	-	-	85
Other comprehensive loss	-	-	-	-	4	-
Dividends:
Preferred stock	-	-	-	-	-	(1)
Common stock	-	-	-	-	-	(99)
Capital contribution from Parent	-	-	24	-	-	-
BALANCE, DECEMBER 31, 2006	100	-	532	-	-	560
Net Income	-	-	-	-	-	125
Dividends:
Common stock	-	-	-	-	-	(86)
Capital contribution from Parent	-	-	1	-	-	-
Cumulative Effect Adjustment Related to the Implementation of FIN 48	-	-	-	-	-	(2)
BALANCE, DECEMBER 31, 2007	100	-	533	-	-	597
Net Income	-	-	-	-	-	116
Dividends:
Common stock	-	-	-	-	-	(89)
Capital contribution from Parent	-	-	78	-	-	-
BALANCE, DECEMBER 31, 2008	100	$ -	$611	$ -	$ -	$624

The accompanying Notes are an integral part of these Financial Statements.

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NOTES TO FINANCIAL STATEMENTS

POTOMAC ELECTRIC POWER COMPANY

(1) ORGANIZATION

Potomac Electric Power Company (Pepco) is engaged in the transmission and distribution of electricity in Washington, D.C. and major portions of Prince George’s County and Montgomery County in suburban Maryland. Pepco provides Default Electricity Supply, which is the supply of electricity at regulated rates to retail customers in its territories who do not elect to purchase electricity from a competitive supplier, in both the District of Columbia and Maryland. Default Electricity Supply is known as Standard Offer Service (SOS) in both the District of Columbia and Maryland. Pepco is a wholly owned subsidiary of Pepco Holdings, Inc. (Pepco Holdings or PHI).

Liquidity Requirements

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defer capital expenditures due to lower than anticipated growth. Several measures to reduce expenditures have been taken. Additional measures could be undertaken if conditions warrant.

Pension and Postretirement Benefit Plans

(2) SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. Although Pepco believes that its estimates and assumptions are reasonable, they are based upon information available to management at the time the estimates are made. Actual results may differ significantly from these estimates.

Significant matters that involve the use of estimates include the assessment of contingencies, the calculation of future cash flows and fair value amounts for use in asset impairment evaluations, pension and other postretirement benefits assumptions, unbilled revenue calculations, the assessment of the probability of recovery of regulatory assets, and income tax provisions and reserves. Additionally, Pepco is subject to legal, regulatory, and other proceedings and claims that arise in the ordinary course of its business. Pepco records an estimated liability for these proceedings and claims when the loss is determined to be probable and is reasonably estimable.

Change in Accounting Estimates

During 2007, as a result of the depreciation study presented as part of Pepco’s Maryland rate case, the Maryland Public Service Commission (MPSC) approved new lower depreciation rates for Pepco’s Maryland distribution assets. This resulted in lower depreciation expense of approximately $19 million for the last six months of 2007.

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Revenue Recognition

Pepco recognizes revenue upon delivery of electricity to its customers, including amounts for services rendered, but not yet billed (unbilled revenue). Pepco recorded amounts for unbilled revenue of $98 million and $82 million as of December 31, 2008 and 2007, respectively. These amounts are included in “Accounts receivable.” Pepco calculates unbilled revenue using an output based methodology. This methodology is based on the supply of electricity intended for distribution to customers. The unbilled revenue process requires management to make assumptions and judgments about input factors such as customer sales mix, temperature, and estimated power line losses (estimates of electricity expected to be lost in the process of its transmission and distribution to customers), all of which are inherently uncertain and susceptible to change from period to period, and if actual results differ from projected results, the impact could be material.

Taxes related to the consumption of electricity by its customers, such as fuel, energy, or other similar taxes, are components of Pepco’s tariffs and, as such, are billed to customers and recorded in “Operating Revenues.” Accruals for these taxes by Pepco are recorded in “Other taxes.” Excise tax related generally to the consumption of gasoline by Pepco in the normal course of business is charged to operations, maintenance or construction, and is de minimis.

Taxes Assessed by a Governmental Authority on Revenue-Producing Transactions

Taxes included in Pepco’s gross revenues were $241 million, $243 million and $223 million for the years ended December 31, 2008, 2007 and 2006, respectively.

Long-Lived Assets Impairment

Pepco evaluates certain long-lived assets to be held and used (for example, equipment and real estate) to determine if they are impaired whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Examples of such events or changes include a significant decrease in the market price of a long-lived asset or a significant adverse change in the manner an asset is being used or its physical condition. A long-lived asset to be held and used is written down to fair value if the sum of its expected future undiscounted cash flows is less than its carrying amount.

For long-lived assets that can be classified as assets to be disposed of by sale, an impairment loss is recognized to the extent that the assets’ carrying amount exceeds their fair value including costs to sell.

Income Taxes

Pepco, as a direct subsidiary of Pepco Holdings, is included in the consolidated federal income tax return of PHI. Federal income taxes are allocated to Pepco based upon the taxable income or loss amounts, determined on a separate return basis.

In 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies the

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criteria for recognition of tax benefits in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes,” and prescribes a financial statement recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. Specifically, it clarifies that an entity’s tax benefits must be “more likely than not” of being sustained prior to recording the related tax benefit in the financial statements. If the position drops below the “more likely than not” standard, the benefit can no longer be recognized. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

On May 2, 2007, the FASB issued FASB Staff Position (FSP) FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48” (FIN 48-1), which provides guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. Pepco applied the guidance of FIN 48-1 with its adoption of FIN 48 on January 1, 2007.

The financial statements include current and deferred income taxes. Current income taxes represent the amounts of tax expected to be reported on Pepco’s state income tax returns and the amount of federal income tax allocated from Pepco Holdings.

Deferred income tax assets and liabilities represent the tax effects of temporary differences between the financial statement and tax basis of existing assets and liabilities and are measured using presently enacted tax rates. The portion of Pepco’s deferred tax liability applicable to its utility operations that has not been recovered from utility customers represents income taxes recoverable in the future and is included in “regulatory assets” on the Balance Sheets. See Note (6), “Regulatory Assets and Regulatory Liabilities,” for additional information.

Deferred income tax expense generally represents the net change during the reporting period in the net deferred tax liability and deferred recoverable income taxes.

Pepco recognizes interest on under/over payments of income taxes, interest on unrecognized tax benefits, and tax-related penalties in income tax expense.

Investment tax credits from utility plants purchased in prior years are reported on the Balance Sheets as Investment tax credits. These investment tax credits are being amortized to income over the useful lives of the related utility plant.

FIN 46R, “Consolidation of Variable Interest Entities”

Due to a variable element in the pricing structure of Pepco’s purchase power agreement with Panda-Brandywine, L.P. (Panda) entered into in 1991, pursuant to which Pepco was obligated to purchase from Panda 230 megawatts of capacity and energy annually through 2021 (Panda PPA), Pepco potentially assumed the variability in the operations of the plants related to the Panda PPA and therefore had a variable interest in the entity.

During the third quarter of 2008, Pepco transferred the Panda PPA to Sempra Energy Trading LLP. Net purchase activities with the counterparty to the Panda PPA for the years ended December 31, 2008, 2007 and 2006, were approximately $59 million, $85 million and $79 million, respectively. See Note (13), “Commitments and Contingencies — Regulatory and Other Matters — Proceeds from Settlement of Mirant Bankruptcy Claims,” for additional information.

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Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, cash invested in money market funds, and commercial paper held with original maturities of three months or less. Additionally, deposits in PHI’s “money pool,” which Pepco and certain other PHI subsidiaries use to manage short-term cash management requirements, are considered cash equivalents. Deposits in the money pool are guaranteed by PHI. PHI deposits funds in the money pool to the extent that the pool has insufficient funds to meet the needs of its participants, which may require PHI to borrow funds for deposit from external sources.

Restricted Cash Equivalents

Accounts Receivable and Allowance for Uncollectible Accounts

Pepco’s accounts receivable balance primarily consists of customer accounts receivable, other accounts receivable, and accrued unbilled revenue. Accrued unbilled revenue represents revenue earned in the current period but not billed to the customer until a future date (usually within one month after the receivable is recorded).

Pepco maintains an allowance for uncollectible accounts and changes in the allowance are recorded as an adjustment to Other Operation and Maintenance expense in the Statement of Earnings. Pepco determines the amount of the allowance based on specific identification of material amounts at risk by customer and maintains a general reserve based on its’ historical collection experience. The adequacy of this allowance is assessed on a quarterly basis by evaluating all known factors such as the aging of the receivables, historical collection experience, the economic and competitive environment, and changes in the creditworthiness of its customers. Although management believes its allowances is adequate, it cannot anticipate with any certainty the changes in the financial condition of its customers. As a result, Pepco records adjustments to the allowance for uncollectible accounts in the period the new information is known.

Inventories

Included in inventories are generation, transmission, and distribution materials and supplies.

Pepco utilizes the weighted average cost method of accounting for inventory items. Under this method, an average price is determined for the quantity of units acquired at each price level and is applied to the ending quantity to calculate the total ending inventory balance. Materials and supplies inventory are generally charged to inventory when purchased and then expensed or capitalized to plant, as appropriate, when installed.

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Regulatory Assets and Regulatory Liabilities

Pepco is regulated by the MPSC and the District of Columbia Public Service Commission (DCPSC). The transmission and wholesale sale of electricity by Pepco is regulated by the Federal Energy Regulatory Commission (FERC).

Based on the regulatory framework in which it has operated, Pepco has historically applied, and in connection with its transmission and distribution business continues to apply, the provisions of SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation.” SFAS No. 71 allows regulated entities, in appropriate circumstances, to establish regulatory assets and to defer the income statement impact of certain costs that are expected to be recovered in future rates. Management’s assessment of the probability of recovery of regulatory assets requires judgment and interpretation of laws, regulatory commission orders, and other factors. If management subsequently determines, based on changes in facts or circumstances that a regulatory asset is not probable of recovery, the regulatory asset will be eliminated through a charge to earnings.

As part of the new electric service distribution base rates for Pepco approved by the MPSC, effective in June 2007, the MPSC approved a bill stabilization adjustment mechanism (BSA) for retail customers. For customers to which the BSA applies, Pepco recognizes distribution revenue based on an approved distribution charge per customer. From a revenue recognition standpoint, the BSA thus decouples the distribution revenue recognized in a reporting period from the amount of power delivered during the period. Pursuant to this mechanism, Pepco recognizes either (a) a positive adjustment equal to the amount by which revenue from Maryland retail distribution sales falls short of the revenue that Pepco is entitled to earn based on the approved distribution charge per customer, or (b) a negative adjustment equal to the amount by which revenue from such distribution sales exceeds the revenue that Pepco is entitled to earn based on the approved distribution charge per customer (a Revenue Decoupling Adjustment). A positive Revenue Decoupling Adjustment is recorded as a regulatory asset and a negative Revenue Decoupling Adjustment is recorded as a regulatory liability. The net Revenue Decoupling Adjustment at December 31, 2008 is a regulatory asset and is included in the “Other” line item on the table of regulatory asset balances in Note (6), “Regulatory Assets and Regulatory Liabilities.”

Investment in Trust

Represents assets held in a trust for the benefit of participants in the Pepco Owned Life Insurance plan.

Property, Plant and Equipment

Property, plant and equipment are recorded at original cost, including labor, materials, asset retirement costs and other direct and indirect costs including capitalized interest. The carrying value of property, plant and equipment is evaluated for impairment whenever circumstances indicate the carrying value of those assets may not be recoverable under the provisions of SFAS No. 144. Upon retirement, the cost of regulated property, net of salvage, is charged to accumulated depreciation. For additional information regarding the treatment of removal obligations, see the “Asset Retirement Obligations” section included in this Note.

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The annual provision for depreciation on electric property, plant and equipment is computed on the straight-line basis using composite rates by classes of depreciable property. Accumulated depreciation is charged with the cost of depreciable property retired, less salvage and other recoveries. Property, plant and equipment other than electric facilities is generally depreciated on a straight-line basis over the useful lives of the assets. The system-wide composite depreciation rates for 2008, 2007, and 2006 for Pepco’s transmission and distribution system property were approximately 3%, 3%, and 4%, respectively.

Capitalized Interest and Allowance for Funds Used During Construction

In accordance with the provisions of SFAS No. 71, utilities can capitalize as Allowance for Funds Used During Construction (AFUDC) the capital costs of financing the construction of plant and equipment. The debt portion of AFUDC is recorded as a reduction of “interest expense” and the equity portion of AFUDC is credited to “other income” in the accompanying Statements of Earnings.

Pepco recorded AFUDC for borrowed funds of $2 million, $5 million, and $1 million for the years ended December 31, 2008, 2007, and 2006, respectively.

Pepco recorded amounts for the equity component of AFUDC of $3 million for each of the years ended December 31, 2008 and 2007, and $2 million for the year ended December 31, 2006.

Leasing Activities

Pepco’s lease transactions can include office space, equipment, software and vehicles. In accordance with SFAS No. 13, “Accounting for Leases” (SFAS No. 13), these leases are classified as either capital leases or operating leases.

Operating Leases

An operating lease generally results in a level income statement charge over the term of the lease, reflecting the rental payments required by the lease agreement. If rental payments are not made on a straight-line basis, Pepco’s policy is to recognize the increases on a straight-line basis over the lease term unless another systematic and rational allocation basis is more representative of the time pattern in which the leased property is physically employed.

Capital Leases

For ratemaking purposes capital leases are treated as operating leases; therefore, in accordance with SFAS No. 71, the amortization of the leased asset is based on the rental payments recovered from customers. Investments in equipment under capital leases are stated at cost, less accumulated depreciation. Depreciation is recorded on a straight-line basis over the equipment’s estimated useful life.

Amortization of Debt Issuance and Reacquisition Costs

Pepco defers and amortizes debt issuance costs and long-term debt premiums and discounts over the lives of the respective debt issues. Costs associated with the redemption of debt are also deferred and amortized over the lives of the new issues.

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Asset Removal Costs

In accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations,” asset removal costs are recorded as regulatory liabilities. At December 31, 2008 and 2007, $107 million and $98 million, respectively, are reflected as regulatory liabilities in the accompanying Balance Sheets.

Pension and Other Postretirement Benefit Plans

Pepco Holdings sponsors a non-contributory retirement plan that covers substantially all employees of Pepco (the PHI Retirement Plan) and certain employees of other Pepco Holdings subsidiaries. Pepco Holdings also provides supplemental retirement benefits to certain eligible executives and key employees through nonqualified retirement plans and provides certain postretirement health care and life insurance benefits for eligible retired employees.

The PHI Retirement Plan is accounted for in accordance with SFAS No. 87, “Employers’ Accounting for Pensions,” as amended by SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (SFAS No. 158), and its other postretirement benefits in accordance with SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” as amended by SFAS No. 158. Pepco Holdings’ financial statement disclosures were prepared in accordance with SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” as amended by SFAS No. 158.

Pepco participates in benefit plans sponsored by Pepco Holdings and as such, the provisions of SFAS No. 158 do not have an impact on its financial condition and cash flows.

Dividend Restrictions

In addition to its future financial performance, the ability of Pepco to pay dividends is subject to limits imposed by: (i) state corporate and regulatory laws, which impose limitations on the funds that can be used to pay dividends and, in the case of regulatory laws, may require the prior approval of Pepco’s utility regulatory commissions before dividends can be paid and (ii) the prior rights of holders of future preferred stock, if any, and existing and future mortgage bonds and other long-term debt issued by Pepco and any other restrictions imposed in connection with the incurrence of liabilities. Pepco has no shares of preferred stock outstanding. Pepco had approximately $125 million and $75 million of restricted retained earnings at December 31, 2008 and 2007, respectively.

Reclassifications and Adjustments

Certain prior year amounts have been reclassified in order to conform to current year presentation.

During 2008, Pepco recorded adjustments to correct errors in Other Operation and Maintenance expenses for prior periods dating back to February 2005 during which (i) customer late payment fees were incorrectly recognized and (ii) stock-based compensation expense related to certain restricted stock awards granted under the Long-Term Incentive Plan was understated. These adjustments, which were not considered material either individually or in the aggregate,

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resulted in a total increase in Other Operation and Maintenance expenses of $6 million for the year ended December 31, 2008, all of which related to prior periods.

(3) NEWLY ADOPTED ACCOUNTING STANDARDS

Statement of Financial Accounting Standards (SFAS) No. 157, “ Fair Value Measurements ” (SFAS No. 157)

Pepco applied the guidance of FSP No. 157-1 and FSP 157-2 with its adoption of SFAS No. 157. The adoption of SFAS 157 on January 1, 2008 did not result in a transition adjustment to beginning retained earnings and did not have a material impact on Pepco’s overall financial condition, results of operations, or cash flows. SFAS No. 157 also required new disclosures regarding the level of pricing observability associated with financial instruments carried at fair value. This additional disclosure is provided in Note (12), “Fair Value Disclosures.” Pepco is currently evaluating the impact of FSP 157-2 and does not anticipate that the application of FSP 157-2 to its other non-financial assets and non-financial liabilities will materially affect its overall financial condition, results of operations, or cash flows.

In September 2008, the Securities and Exchange Commission and FASB issued guidance on fair value measurements, which was clarifies in October 2008 by the FASB in FSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active.” This guidance clarifies the application of SFAS No. 157 to assets in an inactive market and illustrates how to determine the fair value of a financial asset in an inactive market. The guidance was effective beginning with the September 30, 2008 reporting period for Pepco, and has not had a material impact on Pepco’s results.

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SFAS No. 159, “ The Fair Value Option for Financial Assets and Financial Liabilities—including an Amendment of FASB Statement No. 115 ” (SFAS No. 159)

SFAS No. 159 permits entities to elect to measure eligible financial instruments at fair value. SFAS No. 159 applies to other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. On January 1, 2008, Pepco elected not to apply the fair value option for its eligible financial assets and liabilities.

SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS No. 162)

SFAS No. 162 was effective for Pepco as of November 15, 2008 and did not result in a change in accounting for Pepco. Therefore, the provisions of SFAS No. 162 did not have a material impact on Pepco’s overall financial condition, results of operations, cash flows and disclosure.

FSP FAS 133-1 and FIN 45-4, “Disclosure About Credit Derivatives and Certain Guarantees” (FSP FAS 133-1 and FIN 45-4)

In September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, which requires enhanced disclosures by entities that provide credit protection through credit derivatives (including embedded credit derivatives) within the scope of SFAS No. 133, and guarantees within the scope of FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.”

For credit derivatives, FSP FAS 133-1 and FIN 45-4 requires disclosure of the nature and fair value of the credit derivative, the approximate term, the reasons for entering the derivative, the events requiring performance, and the current status of the payment/performance risk. It also requires disclosures of the maximum potential amount of future payments without any reduction for possible recoveries under collateral provisions, recourse provisions, or liquidation proceeds. Pepco has not provided credit protection to others through the credit derivatives within the scope of SFAS No. 133.

The new disclosures are required starting with financial statement reporting periods ending December 31, 2008 for Pepco. Comparative disclosures are only required for periods ending after initial adoption. The new guarantee disclosures did not have a material impact on Pepco.

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FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities” (FSP FAS 140-4 and FIN 46(R)-8)

In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8 to expand the disclosures under the original pronouncements. The disclosure requirements in SFAS No. 140 for transfers of financial assets are to include disclosure of (i) a transferor’s continuing involvement in transferred financial assets, and (ii) how a transfer of financial assets to a special-purpose entity affects an entity’s financial position, financial performance, and cash flows. The principal objectives of the disclosure requirements in Interpretation 46(R) are to outline (i) significant judgments in determining whether an entity should consolidate a variable interest entity (VIE), (ii) the nature of any restrictions on consolidated assets, (iii) the risks associated with the involvement in the VIE, and (iv) how the involvement with the VIE affects an entity’s financial position, financial performance, and cash flows.

FSP FAS 140-4 and FIN 46(R)-8 is effective for Pepco’s December 31, 2008 financial statements. This FSP has no material impact to Pepco’s overall financial condition, results of operations, or cash flows as it relates to SFAS No. 140. Pepco’s FIN 46(R) disclosures are provided in Note (2), “Significant Accounting Policies - FIN 46R, Consolidation of Variable Interest Entities.”

(4) RECENTLY ISSUED ACCOUNTING STANDARDS, NOT YET ADOPTED

SFAS No. 141(R), “Business Combinations—a Replacement of FASB Statement No. 141” (SFAS No. 141 (R))

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SFAS No. 141(R) and the guidance provided in FSP FAS 141(R)-a applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009 for Pepco. Pepco has evaluated the impact of SFAS No. 141(R) and does not anticipate its adoption will have a material impact on its overall financial condition, results of operations, or cash flows.

SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an Amendment of ARB No. 51” (SFAS No. 160)

SFAS No. 160 is effective prospectively for financial statement reporting periods beginning January 1, 2009 for Pepco, except for the presentation and disclosure requirements. The presentation and disclosure requirements apply retrospectively for all periods presented. Pepco has evaluated the impact of SFAS No. 160 and does not anticipate its adoption will have a material impact on its overall financial condition, results of operations, cash flows or disclosure.

EITF Issue No. 08-6, “Equity Method Investment Accounting Consideration” (EITF 08-6)

In November 2008, the FASB issued EITF 08-6 to address the accounting for equity method investments including: (i) how an equity method investment should initially be measured, (ii) how it should be tested for impairment, and (iii) how an equity method investee’s issuance of shares should be accounted for. The EITF concludes that initial carrying value of an equity method investment can be determined using the accumulation model in SFAS 141(R), “Business Combination (revised 2007),” and other-than-temporary impairments should be recognized in accordance with paragraph 19(h) of Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.”

This EITF is effective for Pepco beginning January 1, 2009. Pepco is currently evaluating the impact on its accounting and disclosures.

FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (FSP FAS 132(R)-1)

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132(R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits—an amendment of FASB Statements No. 87, 88, and 106,” to be in line with SFAS No. 157 required disclosures.

The new disclosures are required starting with financial statement reporting periods ending December 31, 2009 for Pepco and earlier application is permitted. Comparative disclosures under this provision are not required for earlier periods presented. Pepco is currently evaluating the impact on its disclosures.

(5) SEGMENT INFORMATION

In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” Pepco has one segment, its regulated utility business.

(6) REGULATORY ASSETS AND REGULATORY LIABILITIES

The components of Pepco’s regulatory asset balances at December 31, 2008 and 2007 are as follows:

	2008	2007
	(Millions of dollars)
Deferred energy supply costs	$ 12		$ 15
Deferred income taxes	53		61
Deferred debt extinguishment costs	39		40
Other	65		63
Total Regulatory Assets	$169		$179

The components of Pepco’s regulatory liability balances at December 31, 2008 and 2007 are as follows:

	2008	2007
	(Millions of dollars)
Deferred energy supply cost	$ 9	$ 6
Deferred income taxes due to customers	18	21
Asset removal costs	107	98
Settlement proceeds - Mirant bankruptcy claims	102	415
Other	2	2
Total Regulatory Liabilities	$238	$542

A description of the regulatory assets and regulatory liabilities is as follows:

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Deferred Energy Supply Costs: The regulatory asset primarily represents deferred costs associated with a net under-recovery of Default Electricity Supply costs in Maryland. The regulatory liability primarily represents deferred costs associated with a net over-recovery of Default Electricity Supply costs incurred in the District of Columbia. The Default Electricity Supply deferrals do not earn a return.

Deferred Income Taxes: Represents a receivable from our customers for tax benefits Pepco has previously flowed through before the company was ordered to provide deferred income taxes. As the temporary differences between the financial statement and tax basis of assets reverse, the deferred recoverable balances are reversed. There is no return on these deferrals.

Deferred Debt Extinguishment Costs: Represents the costs of debt extinguishment for which recovery through regulated utility rates is considered probable and, if approved, will be amortized to interest expense during the authorized rate recovery period. A return is received on these deferrals.

Other: Represents miscellaneous regulatory assets that generally are being amortized over 1 to 20 years and generally do not receive a return.

Deferred Income Taxes Due to Customers: Represents the portion of deferred income tax liabilities applicable to Pepco’s utility operations that has not been reflected in current customer rates for which future payment to customers is probable. As temporary differences between the financial statement and tax basis of assets reverse, deferred recoverable income taxes are amortized. There is no return on these deferrals.

Asset Removal Costs: Pepco’s depreciation rates include a component for removal costs, as approved by its federal and state regulatory commissions. Pepco has recorded a regulatory liability for their estimate of the difference between incurred removal costs and the level of removal costs recovered through rates.

Settlement proceeds - Mirant Bankruptcy Claims: In 2007, Pepco received $414 million of net proceeds from settlement of a Mirant Corporation (Mirant) claim, plus interest earned, which was designated to pay for future above-market capacity and energy purchases under the Panda PPA. In 2008, Pepco transferred the Panda PPA to Sempra Energy Trading LLC (Sempra) in a transaction in which Pepco made a payment to Sempra and all further Pepco rights, obligations and liabilities under the Panda PPA were terminated. The balance at December 31, 2008 reflects the funds remaining after the Sempra payment. Pepco filed rate applications with the DCPSC and the MPSC in the fourth quarter of 2008 to provide for the disposition of the remaining funds. See Note (13), “Commitments and Contingencies — Proceeds From Settlement of Mirant Bankruptcy Claims” for additional information. Currently there is no return on these deferrals.

Other : Includes miscellaneous regulatory liabilities such as the over-recovery of administrative costs associated with Maryland and District of Columbia SOS. These regulatory liabilities generally do not receive a return.

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(7) LEASING ACTIVITIES

Lease Commitments

Pepco leases its consolidated control center, which is an integrated energy management center used by Pepco to centrally control the operation of its transmission and distribution systems. This lease is accounted for as a capital lease and was initially recorded at the present value of future lease payments, which totaled $152 million. The lease requires semi-annual payments of $8 million over a 25-year period beginning in December 1994 and provides for transfer of ownership of the system to Pepco for $1 at the end of the lease term. Under SFAS No. 71, the amortization of leased assets is modified so that the total interest expense charged on the obligation and amortization expense of the leased asset is equal to the rental expense allowed for rate-making purposes. This lease has been treated as an operating lease for rate-making purposes.

Capital lease assets recorded within Property, Plant and Equipment at December 31, 2008 and 2007 are comprised of the following:

At December 31, 2008	Original Cost	Accumulated Amortization	Net Book Value
	(Millions of dollars)
Transmission	$76	$24	$52
Distribution	76	23	53
Other	3	3	-
Total	$155	$50	$105

At December 31, 2007

Transmission	$ 76	$21	$ 55
Distribution	76	20	56
Other	3	3	-
Total	$155	$44	$111

The approximate annual commitments under capital leases are $15 million for each year 2009 through 2013 and $92 million thereafter.

Rental expense for operating leases was $4 million for each of the years ended December 31, 2008, 2007 and 2006.

Total future minimum operating lease payments for Pepco as of December 31, 2008 are $3 million in 2009, $8 million in 2010, less than $1 million in each of the years 2011 through 2013, and $2 million after 2013.

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(8) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is comprised of the following:

At December 31, 2008	Original Cost	Accumulated Depreciation	Net Book Value
	(Millions of dollars)
Distribution	$ 4,201	$ 1,730	$ 2,471
Transmission	801	344	457
Construction work in progress	162	-	162
Non-operating and other property	443	297	146
Total	$ 5,607	$ 2,371	$ 3,236

At December 31, 2007

Distribution	$3,911	$1,670	$2,241
Transmission	786	328	458
Construction work in progress	236	-	236
Non-operating and other property	436	276	160
Total	$5,369	$2,274	$3,095

The non-operating and other property amounts include balances for general plant, distribution and transmission plant held for future use, intangible plant and non-utility property.

(9) PENSIONS AND OTHER POSTRETIREMENT BENEFITS

Pepco accounts for its participation in the Pepco Holdings benefit plans as participation in a multi-employer plan. For 2008, 2007, and 2006, Pepco was responsible for $24 million, $22 million and $32 million, respectively, of the pension and other postretirement net periodic benefit cost incurred by Pepco Holdings. In 2008 and 2007, Pepco made no contributions to the PHI Retirement Plan, and $9 million and $10 million, respectively to other postretirement benefit plans. At December 31, 2008 and 2007, Pepco’s prepaid pension expense of $142 million and $152 million, and other postretirement benefit obligation of $49 million and $58 million, effectively represent assets and benefit obligations resulting from Pepco’s participation in the Pepco Holdings benefit plan. Pepco expects to contribute approximately $170 million to the pension plan in 2009.

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(10) DEBT

LONG-TERM DEBT

The components of long-term debt are shown below .

			At December 31,
Interest Rate	Maturity		2008		2007
			(Millions of dollars)
First Mortgage Bonds

6.50%	2008	$	-	$		78
5.875%	2008		-			50
5.75% (a)	2010		16			16
4.95% (a)(b)	2013		200			200
4.65% (a)(b)	2014		175			175
Variable (a)(b)(c)	2022		-			110
5.375% (a)	2024		38			38
5.75% (a)(b)	2034		100			100
5.40% (a)(b)	2035		175			175
6.50% (a)(b)	2037		500			250
7.90%	2038		250			-

Total First Mortgage Bonds			1,454			1,192

Medium-Term Notes
6.25%	2009		50			50

Total long-term debt			1,504			1,242
Net unamortized discount			(9)			(2)
Current maturities of long-term debt			(50)			(128)
Total net long-term debt		$	1,445	$		1,112

(a)

Represents a series of First Mortgage Bonds issued by Pepco as collateral for an outstanding series of senior notes issued by the company or tax-exempt bonds issued by or for the benefit of Pepco. The maturity date, optional and mandatory prepayment provisions, if any, interest rate, and interest payment dates on each series of senior notes or the obligations in respect of the tax-exempt bonds are identical to the terms of the corresponding series of collateral First Mortgage Bonds. Payments of principal and interest on a series of senior notes or the company’s obligations in respect of the tax-exempt bonds satisfy the corresponding payment obligations on the related series of collateral First Mortgage Bonds. Because each series of senior notes and tax-exempt bonds and the corresponding series of collateral First Mortgage Bonds securing that series of senior notes or tax-exempt bonds effectively represents a single financial obligation, the senior notes and the tax-exempt bonds are not separately shown on the table.

(b)

Represents a series of First Mortgage Bonds issued by Pepco as collateral for an outstanding series of senior notes as described in footnote (a) above that will, at such time as there are no First Mortgage Bonds of Pepco outstanding (other than collateral First Mortgage Bonds securing payment of senior notes), cease to secure the corresponding series of senior notes and will be cancelled.

(c)	The insured auction rate tax exempt bonds were repurchased by Pepco at par due to the disruption in the credit markets. The bonds are considered extinguished for accounting purposes however Pepco intends to remarket or reissue the bonds to the public in 2009.

The outstanding First Mortgage Bonds are subject to a lien on substantially all of Pepco’s property, plant and equipment.

The aggregate principal amount of long-term debt outstanding at December 31, 2008, that will mature in each of 2009 through 2013 and thereafter is as follows: $50 million in 2009, $16 million in 2010, zero in 2011 and 2012, $200 million in 2013, and $1,238 million thereafter.

Pepco’s long-term debt is subject to certain covenants. Pepco is in compliance with all requirements.

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SHORT-TERM DEBT

Pepco, a regulated utility, has traditionally used a number of sources to fulfill short-term funding needs, such as commercial paper, short-term notes, and bank lines of credit. Proceeds from short-term borrowings are used primarily to meet working capital needs, but may also be used to temporarily fund long-term capital requirements. A detail of the components of Pepco’s short-term debt at December 31, 2008 and 2007 is as follows.

	2008	2007
	(Millions of dollars)
Commercial paper	$ -	$ 84
Intercompany borrowings	-	96
Bank Loan	25	-
Credit Facility Loans	100	-
Total	$125	$180

Commercial Paper

Pepco maintains an ongoing commercial paper program of up to $500 million. The commercial paper notes can be issued with maturities up to 270 days from the date of issue. The commercial paper program is backed by a $500 million credit facility, described below under the heading “Credit Facility,” shared with PHI’s other utility subsidiaries, Delmarva Power & Light Company (DPL) and Atlantic City Electric Company (ACE).

Pepco had no commercial paper outstanding at December 31, 2008 and $84 million of commercial paper outstanding at December 31, 2007. The weighted average interest rate for commercial paper issued during 2008 was 3.45% and 5.27% in 2007. The weighted average maturity for commercial paper issued during 2008 was two days and during 2007 was four days.

Bank Loan

In May 2008, Pepco obtained a $25 million bank loan that matures on April 30, 2009. Interest on the loan is calculated at a variable rate.

Credit Facility

PHI, Pepco, DPL and ACE maintain a credit facility to provide for their respective short-term liquidity needs. The aggregate borrowing limit under this primary credit facility is $1.5 billion, all or any portion of which may be used to obtain loans or to issue letters of credit. PHI’s credit limit under the facility is $875 million. The credit limit of each of Pepco, DPL and ACE is the lesser of $500 million and the maximum amount of debt the company is permitted to have outstanding by its regulatory authorities, except that the aggregate amount of credit used by Pepco, DPL and ACE at any given time collectively may not exceed $625 million. The interest rate payable by each company on utilized funds is, at the borrowing company’s election, (i) the greater of the prevailing prime rate and the federal funds effective rate plus 0.5% or (ii) the prevailing Eurodollar rate, plus a margin that varies according to the credit rating of the borrower. The facility also includes a “swingline loan sub-facility,” pursuant to which each company may make same day borrowings in an aggregate amount not to exceed $150 million.

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Any swingline loan must be repaid by the borrower within seven days of receipt thereof. All indebtedness incurred under the facility is unsecured.

The facility is intended to serve primarily as a source of liquidity to support the commercial paper programs of the respective companies. The companies also are permitted to use the facility to borrow funds for general corporate purposes and issue letters of credit. In order for a borrower to use the facility, certain representations and warranties must be true, and the borrower must be in compliance with specified covenants, including (i) the requirement that each borrowing company maintain a ratio of total indebtedness to total capitalization of 65% or less, computed in accordance with the terms of the credit agreement, which calculation excludes from the definition of total indebtedness certain trust preferred securities and deferrable interest subordinated debt (not to exceed 15% of total capitalization), (ii) a restriction on sales or other dispositions of assets, other than certain sales and dispositions, and (iii) a restriction on the incurrence of liens on the assets of a borrower or any of its significant subsidiaries other than permitted liens. The absence of a material adverse change in the borrower’s business, property, and results of operations or financial condition is not a condition to the availability of credit under the facility. The facility does not include any rating triggers.

As a result of severe liquidity constraints in the credit, commercial paper and capital markets during 2008, Pepco borrowed under the $1.5 billion credit facility. Typically, Pepco issues commercial paper if required to meet its short-term working capital requirements. Given the lack of liquidity in the commercial paper markets, Pepco borrowed under the credit facility to maintain sufficient cash on hand to meet daily short-term operating needs. At December 31, 2008, Pepco had borrowed $100 million. The LIBOR-based loan matures in April 2009.

(11) INCOME TAXES

Pepco, as a direct subsidiary of PHI, is included in the consolidated federal income tax return of PHI. Federal income taxes are allocated to Pepco pursuant to a written tax sharing agreement that was approved by the Securities and Exchange Commission in connection with the establishment of PHI as a holding company as part of Pepco’s acquisition of Conectiv on August 1, 2002. Under this tax sharing agreement, PHI’s consolidated federal income tax liability is allocated based upon PHI’s and its subsidiaries’ separate taxable income or loss.

The provision for income taxes, reconciliation of income tax expense, and components of deferred income tax liabilities (assets) are shown below.

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Provision for Income Taxes


	For the Year Ended December 31,
		2008		2007		2006
	(Millions of dollars)
Current Tax (Benefit) Expense
Federal	$	(94)	$	81	$	13
State and local		(25)		(14)		9

Total Current Tax (Benefit) Expense		(119)		67		22

Deferred Tax Expense (Benefit)
Federal		147		(4)		36
State and local		38		1		2
Investment tax credits		(2)		(2)		(2)

Total Deferred Tax Expense (Benefit)		183		(5)		36

Total Income Tax Expense	$	64	$	62	$	58

Reconciliation of Income Tax Rate

	For the Year Ended December 31,
	2008	2007	2006

Federal statutory rate	35.0%	35.0%	35.0%
Increases (decreases) resulting from
Depreciation	2.9	2.8	4.1
Asset removal costs	(2.0)	(1.1)	(2.2)
State income taxes, net of federal effect	5.8	5.2	4.8
Software amortization	1.3	1.8	2.1
Tax credits	(1.1)	(1.0)	(1.5)
Change in estimates and interest related to uncertain and effectively settled tax positions	(3.1)	.2	(1.0)
Maryland State tax refund and related interest, net of federal effect	(1.4)	(10.4)	-
Deferred tax adjustments	(1.2)	1.9	-
Other, net	(.6)	(1.2)	(.7)

Effective Income Tax Rate	35.6%	33.2%	40.6%

During 2008, Pepco completed an analysis of its current and deferred income tax accounts and, as a result, recorded a $3 million net credit to income tax expense in 2008, which is primarily included in “Deferred tax adjustments” in the reconciliation provided above. In addition, during 2008 Pepco recorded after-tax net interest income of $5 million under FIN 48 primarily related to the reversal of previously accrued interest payable resulting from a favorable tentative settlement of the Mixed Service Cost issue with the IRS and after-tax interest income of $2 million for interest received in 2008 on the Maryland state tax refund.

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FIN 48, “Accounting for Uncertainty in Income Taxes”

As disclosed in Note (2), “Significant Accounting Policies,” Pepco adopted FIN 48 effective January 1, 2007. Upon adoption, Pepco recorded the cumulative effect of the change in accounting principle of $2 million as a decrease in retained earnings. Also upon adoption, Pepco had $95 million of unrecognized tax benefits and $7 million of related accrued interest.

Reconciliation of Beginning and Ending Balances of Unrecognized Tax Benefits

		2008		2007

Beginning balance as of January 1,	$	60	$	95
Tax positions related to current year:
Additions		1		2
Tax positions related to prior years:
Additions		38		4
Reductions		(37)		(8)
Settlements		-		(33)
Ending balance as of December 31,	$	62	$	60

Unrecognized Benefits That If Recognized Would Affect the Effective Tax Rate

Unrecognized tax benefits represent those tax benefits related to tax positions that have been taken or are expected to be taken in tax returns that are not recognized in the financial statements because, in accordance with FIN 48, management has either measured the tax benefit at an amount less than the benefit claimed, or expected to be claimed, or has concluded that it is not more likely than not that the tax position will be ultimately sustained.

For the majority of these tax positions, the ultimate deductibility is highly certain, but there is uncertainty about the timing of such deductibility. At December 31, 2008, Pepco had no unrecognized tax benefits that, if recognized, would lower the effective tax rate.

Interest and Penalties

Pepco recognizes interest and penalties relating to its uncertain tax positions as an element of income tax expense. For the years ended December 31, 2008 and 2007, Pepco recognized $8 million of interest income before tax ($5 million after-tax) and $1 million of interest income before tax (less than $1 million after-tax), respectively, as a component of income tax expense. As of December 31, 2008 and 2007, Pepco had $4 million and $9 million, respectively, of accrued interest payable related to effectively settled and uncertain tax positions.

Possible Changes to Unrecognized Tax Benefits

It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain of Pepco’s unrecognized tax positions will significantly increase or decrease within the next 12 months. The final settlement of the Mixed Service Cost issue or other federal or state audits could impact the balances significantly. At this time, other than the Mixed Service Cost issue, an estimate of the range of reasonably possible outcomes cannot be determined. The unrecognized benefit related to the Mixed Service Cost issue could decrease by $20 million

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within the next 12 months upon final resolution of the tentative settlement with the IRS and the obligation becomes certain. See Note (13), “Commitments and Contingencies,” herein for additional information.

Tax Years Open to Examination

Pepco, as a direct subsidiary of PHI, is included on PHI’s consolidated federal income tax return. Pepco’s federal income tax liabilities for all years through 2000 have been determined, subject to adjustment to the extent of any net operating loss or other loss or credit carrybacks from subsequent years. The open tax years for the significant states where Pepco files state income tax returns (District of Columbia and Maryland) are the same as noted above.

Components of Deferred Income Tax Liabilities (Assets)

		At December 31,
	2008		2007
	(Millions of dollars)
Deferred Tax Liabilities (Assets)
Depreciation and other basis differences related to plant and equipment	$	682	$	616
Pension and other postretirement benefits		99		26
Deferred taxes on amounts to be collected through future rates		19		12
Other		(21)		(38)
Total Deferred Tax Liabilities, Net		779		616
Deferred tax assets included in Other Current Assets		8		3
Deferred tax assets included in Other Current Liabilities		1		-
Total Deferred Tax Liabilities, Net - Non-Current	$	788	$	619

The net deferred tax liability represents the tax effect, at presently enacted tax rates, of temporary differences between the financial statement and tax basis of assets and liabilities. The portion of the net deferred tax liability applicable to Pepco’s operations, which has not been reflected in current service rates, represents income taxes recoverable through future rates, net and is recorded as a regulatory asset on the balance sheet. No valuation allowance for deferred tax assets was required or recorded at December 31, 2008 and 2007.

The Tax Reform Act of 1986 repealed the Investment Tax Credit (ITC) for property placed in service after December 31, 1985, except for certain transition property. ITC previously earned on Pepco’s property continues to be normalized over the remaining service lives of the related assets.

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Taxes Other Than Income Taxes

Taxes other than income taxes for each year are shown below. These amounts relate to the Power Delivery business and are recoverable through rates.

	2008	2007	2006
	(Millions of dollars)
Gross Receipts/Delivery	$106	$108	$109
Property	38	36	35
County Fuel and Energy	90	88	84
Environmental, Use and Other	54	58	45
Total	$288	$290	$273

(12) FAIR VALUE DISCLOSURES

Effective January 1, 2008, Pepco adopted SFAS No. 157, as discussed earlier in Note (3), which established a framework for measuring fair value and expands disclosures about fair value measurements.

As defined in SFAS No. 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Pepco utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. Accordingly, Pepco utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Pepco is able to classify fair value balances based on the observability of those inputs. SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). The three levels of the fair value hierarchy defined by SFAS No. 157 are as follows:

Level 3 — Pricing inputs include significant inputs that are generally less observable than those from objective sources. Level 3 includes those financial investments that are valued using

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models or other valuation methodologies. Level 3 instruments classified as executive deferred compensation plan assets are life insurance policies that are valued using the cash surrender value of the policies. Since these values do not represent a quoted price in an active market they are considered Level 3.

The following table sets forth by level within the fair value hierarchy Pepco’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2008. As required by SFAS No. 157, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Pepco’s assessment of the significance of a particular input to the fair value measurement requires the exercise of judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

	Fair Value Measurements at Reporting Date
	(Millions of dollars)
Description	December 31, 2008		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

ASSETS
Cash equivalents	$	236	$	236	$	-	$	-
Executive deferred compensation plan assets		59		7		35		17
	$	295	$	243	$	35	$	17

LIABILITIES
Executive deferred compensation plan liabilities	$	13	$	-	$	13	$	-
	$	13	$	-	$	13	$	-

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A reconciliation of the beginning and ending balances of Pepco’s fair value measurements using significant unobservable inputs (level 3) is shown below (in millions of dollars):

	Deferred Compensation Plan Assets
Beginning balance as of January 1, 2008	$	16
Total gains or (losses) (realized/unrealized)
Included in earnings		4
Included in other comprehensive income		-
Purchases and issuances		(3)
Settlements		-
Transfers in and/or out of Level 3		-
Ending balance as of December 31, 2008	$	17


Gains or (losses) (realized and unrealized) included in earnings for the period above are reported in Other Operation and Maintenance Expense as follows:		Other Operation and Maintenance Expense

Total gains included in earnings for the period above	$	4

Change in unrealized gains relating to assets still held at reporting date	$	4

The estimated fair values of Pepco’s non-financial instruments at December 31, 2008 and 2007 are shown below.

		At December 31,
		2008			2007
		(Millions of dollars)
	Carrying Amount		Fair Value	Carrying Amount		Fair Value
Long-Term Debt		$1,495	$1,474		$1,240	$1,183

The fair values of the Long-Term Debt, which include First Mortgage Bonds and Medium-Term Notes, including amounts due within one year, were based on the current market prices, or for issues with no market price available, were based on discounted cash flows using current rates for similar issues with similar terms and remaining maturities.

(13) COMMITMENTS AND CONTINGENCIES

REGULATORY AND OTHER MATTERS

Proceeds from Settlement of Mirant Bankruptcy Claims

In 2000, Pepco sold substantially all of its electricity generating assets to Mirant. As part of the sale, Pepco and Mirant entered into a “back-to-back” arrangement, whereby Mirant agreed

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to purchase from Pepco the 230 megawatts of electricity and capacity that Pepco was obligated to purchase annually through 2021 from Panda under the Panda PPA at the purchase price Pepco was obligated to pay to Panda. In 2003, Mirant commenced a voluntary bankruptcy proceeding in which it sought to reject certain obligations that it had undertaken in connection with the asset sale. As part of the settlement of Pepco’s claims against Mirant arising from the bankruptcy, Pepco agreed not to contest the rejection by Mirant of its obligations under the “back-to-back” arrangement in exchange for the payment by Mirant of damages corresponding to the estimated amount by which the purchase price that Pepco was obligated to pay Panda for the energy and capacity exceeded the market price. In 2007, Pepco received as damages $414 million in net proceeds from the sale of shares of Mirant common stock issued to it by Mirant.

Pending the final disposition of these funds, the remaining $102 million in proceeds from the Mirant settlement is being accounted for as restricted cash and as a regulatory liability.

Rate Proceedings

In the most recent electric service distribution base rate cases filed by Pepco in the District of Columbia and Maryland, Pepco proposed the adoption of a BSA for retail customers. As more fully discussed below, the implementation of a BSA has been approved for electric service in Maryland and remains pending in the District of Columbia. Under the BSA, customer delivery rates are subject to adjustment (through a surcharge or credit mechanism), depending on whether actual distribution revenue per customer exceeds or falls short of the approved revenue-per-customer amount. The BSA increases rates if actual distribution revenues fall below the level approved by the applicable commission and decreases rates if actual distribution revenues are above the approved level. The result is that, over time, Pepco collects its authorized revenues

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for distribution deliveries. As a consequence, a BSA “decouples” revenue from unit sales consumption and ties the growth in revenues to the growth in the number of customers. Some advantages of the BSA are that it (i) eliminates revenue fluctuations due to weather and changes in customer usage patterns and, therefore, provides for more predictable utility distribution revenues that are better aligned with costs, (ii) provides for more reliable fixed-cost recovery, (iii) tends to stabilize customers’ delivery bills, and (iv) removes any disincentives for Pepco to promote energy efficiency programs for its customers, because it breaks the link between overall sales volumes and delivery revenues.

District of Columbia

Maryland

In July 2007, the MPSC issued an order in Pepco’s electric service distribution rate case, which included approval of a BSA. The order approved an annual increase in distribution rates of approximately $11 million (including a decrease in annual depreciation expense of approximately $31 million). The approved distribution rate reflects an ROE of 10%. The rate increases were effective as of June 16, 2007, and remained in effect for an initial period until July 19, 2008, pending a Phase II proceeding in which the MPSC considered the results of an audit of Pepco’s cost allocation manual, as filed with the MPSC, to determine whether a further adjustment to the rates was required. On July 18, 2008, the MPSC issued an order covering the Phase II proceedings, denying any further adjustment to Pepco’s rates, thus making permanent the rate increases approved in the July 2007 order. The MPSC also issued an order on August 4, 2008, further explaining its July 18 order.

Pepco has filed a general notice of appeal of the MPSC July 2007 and the July 18 and August 4, 2008 orders. The appeal challenges the MPSC’s failure to implement permanent rates in accordance with Maryland law, and seek judicial review of the MPSC’s denial of Pepco’s

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rights to recover an increased share of the PHI Service Company costs and the costs of performing a MPSC-mandated management audit. The case currently is pending before the Circuit Court for Baltimore City. Under the procedural schedule set by the court, Pepco will file a consolidated brief on or before March 9, 2009, specifying the basis for its requested relief.

Federal Energy Regulatory Commission

On August 18, 2008, Pepco submitted an application with the Federal Energy Regulatory Commission (FERC) for incentive rate treatments in connection with PHI’s 230-mile, 500-kilovolt Mid-Atlantic Power Pathway Project (the MAPP Project). The application requested that FERC include Pepco’s Construction Work in Progress in its transmission rate base, an ROE adder of 150 basis points (for a total ROE of 12.8%) and the recovery of prudently incurred costs in the event the project is abandoned or terminated for reasons beyond Pepco’s control. On October 31, 2008, FERC issued an order approving the application.

Divestiture Cases

District of Columbia

In June 2000, the DCPSC approved a divestiture settlement under which Pepco is required to share with its District of Columbia customers the net proceeds realized by Pepco from the sale of its generation-related assets. An unresolved issue relating to the application filed with the DCPSC by Pepco to implement the divestiture settlement is whether Pepco should be required to share with customers the excess deferred income taxes (EDIT) and accumulated deferred investment tax credits (ADITC) associated with the sold assets and, if so, whether such sharing would violate the normalization provisions of the Internal Revenue Code and its implementing regulations. As of December 31, 2008, the District of Columbia allocated portions of EDIT and ADITC associated with the divested generating assets were approximately $7 million and $6 million, respectively. Other issues in the divestiture proceeding deal with the treatment of internal costs and cost allocations as deductions from the gross proceeds of the divestiture.

Pepco believes that a sharing of EDIT and ADITC would violate the Internal Revenue Service (IRS) normalization rules. Under these rules, Pepco could not transfer the EDIT and the ADITC benefit to customers more quickly than on a straight line basis over the book life of the related assets. Since the assets are no longer owned by Pepco, there is no book life over which the EDIT and ADITC can be returned. If Pepco were required to share EDIT and ADITC and, as a result, the normalization rules were violated, Pepco would be unable to use accelerated depreciation on District of Columbia allocated or assigned property. In addition to sharing with customers the generation-related EDIT and ADITC balances, Pepco would have to pay to the IRS an amount equal to Pepco’s District of Columbia jurisdictional generation-related ADITC balance ($6 million as of December 31, 2008), as well as its District of Columbia jurisdictional transmission and distribution-related ADITC balance ($3 million as of December 31, 2008) in each case as those balances exist as of the later of the date a DCPSC order is issued and all rights to appeal have been exhausted or lapsed, or the date the DCPSC order becomes operative.

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the normalization reserve for ADITC. This ruling applies to assets divested after December 21, 2005. For utility property divested on or before December 21, 2005, the IRS stated that it would continue to follow the holdings set forth in private letter rulings prohibiting the flow through of EDIT and ADITC associated with the divested assets. Pepco made a filing in April 2008, advising the DCPSC of the adoption of the final regulations and requesting that the DCPSC issue an order consistent with the IRS position. If the DCPSC issues the requested order, no accounting adjustments to the gain recorded in 2000 would be required.

Maryland

Pepco filed its divestiture proceeds plan application with the MPSC in April 2001. The principal issue in the Maryland case is the same EDIT and ADITC sharing issue that has been raised in the District of Columbia case. See the discussion above under “Divestiture Cases — District of Columbia.” As of December 31, 2008, the Maryland allocated portions of EDIT and ADITC associated with the divested generating assets were approximately $9 million and $10 million, respectively. Other issues deal with the treatment of certain costs as deductions from the gross proceeds of the divestiture. In November 2003, the Hearing Examiner in the Maryland proceeding issued a proposed order with respect to the application that concluded that Pepco’s Maryland divestiture settlement agreement provided for a sharing between Pepco and customers of the EDIT and ADITC associated with the sold assets. Pepco believes that such a sharing would violate the normalization rules (as discussed above) and would result in Pepco’s inability to use accelerated depreciation on Maryland allocated or assigned property. If the proposed order is affirmed, Pepco would have to share with its Maryland customers, on an approximately 50/50 basis, the Maryland allocated portion of the generation-related EDIT ($9 million as of December 31, 2008), and the Maryland-allocated portion of generation-related ADITC. Furthermore, Pepco would have to pay to the IRS an amount equal to Pepco’s Maryland jurisdictional generation-related ADITC balance ($10 million as of December 31, 2008), as well as its Maryland retail jurisdictional ADITC transmission and distribution-related balance ($6 million as of December 31, 2008), in each case as those balances exist as of the later

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of the date a MPSC order is issued and all rights to appeal have been exhausted or lapsed, or the date the MPSC order becomes operative. The Hearing Examiner decided all other issues in favor of Pepco, except for the determination that only one-half of the severance payments that Pepco included in its calculation of corporate reorganization costs should be deducted from the sales proceeds before sharing of the net gain between Pepco and customers.

On February 17, 2009, Pepco, the Maryland OPC and the MPSC staff filed a settlement agreement with the MPSC. The settlement agreement, among other things, provides that Pepco will be allowed to retain the EDIT and ADITC reserves associated with Pepco’s divested generating assets and that none of those amounts will be available for sharing with Pepco’s Maryland customers. The matter is pending before the MPSC.

General Litigation

Since the initial filings in 1993, additional individual suits have been filed against Pepco, and significant numbers of cases have been dismissed. As a result of two motions to dismiss, numerous hearings and meetings and one motion for summary judgment, Pepco has had

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approximately 400 of these cases successfully dismissed with prejudice, either voluntarily by the plaintiff or by the court. As of December 31, 2008, there are approximately 180 cases still pending against Pepco in the State Courts of Maryland, of which approximately 90 cases were filed after December 19, 2000, and were tendered to Mirant for defense and indemnification pursuant to the terms of the Asset Purchase and Sale Agreement between Pepco and Mirant under which Pepco sold its generation assets to Mirant in 2000.

While the aggregate amount of monetary damages sought in the remaining suits (excluding those tendered to Mirant) is approximately $360 million, Pepco believes the amounts claimed by the remaining plaintiffs are greatly exaggerated. The amount of total liability, if any, and any related insurance recovery cannot be determined at this time; however, based on information and relevant circumstances known at this time, Pepco does not believe these suits will have a material adverse effect on its financial position, results of operations or cash flows. However, if an unfavorable decision were rendered against Pepco, it could have a material adverse effect on Pepco’s financial position, results of operations or cash flows.

Environmental Litigation

Pepco is subject to regulation by various federal, regional, state, and local authorities with respect to the environmental effects of its operations, including air and water quality control, solid and hazardous waste disposal, and limitations on land use. In addition, federal and state statutes authorize governmental agencies to compel responsible parties to clean up certain abandoned or unremediated hazardous waste sites. Pepco may incur costs to clean up currently or formerly owned facilities or sites found to be contaminated, as well as other facilities or sites that may have been contaminated due to past disposal practices. Although penalties assessed for violations of environmental laws and regulations are not recoverable from Pepco’s customers, environmental clean-up costs incurred by Pepco would be included in its cost of service for ratemaking purposes.

Metal Bank/Cottman Avenue Site . In the early 1970s, Pepco sold scrap transformers, some of which may have contained some level of PCBs, to a metal reclaimer operating at the Metal Bank/Cottman Avenue site in Philadelphia, Pennsylvania, owned by a nonaffiliated company. In 1987, Pepco was notified by the United States Environmental Protection Agency (EPA) that it, along with a number of other utilities and non-utilities, was a potentially responsible party (PRP) in connection with the PCB contamination at the site.

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will make payments totaling approximately $6 million to the U.S. Department of Justice and totaling approximately $4 million to the Utility PRPs. The Utility PRPs will perform the remedy at the site and will be able to draw on the approximately $13 million from the Bankruptcy Settlement to accomplish the remediation (the Bankruptcy Funds). The Utility PRPs will contribute funds to the extent remediation costs exceed the Bankruptcy Funds available. The Utility PRPs also will be liable for EPA costs associated with overseeing the monitoring and operation of the site remedy after the remedy construction is certified to be complete and also the cost of performing the “5 year” review of site conditions required by the Comprehensive Environmental Response, Compensation, and Liability Act of 1980. Any Bankruptcy Funds not spent on the remedy may be used to cover the Utility PRPs’ liabilities for future costs. No parties are released from potential liability for damages to natural resources.

IRS Mixed Service Cost Issue

During 2001, Pepco changed its method of accounting with respect to capitalizable construction costs for income tax purposes. The change allowed Pepco to accelerate the deduction of certain expenses that were previously capitalized and depreciated. Through December 31, 2005, these accelerated deductions generated incremental tax cash flow benefits of approximately $94 million for Pepco, primarily attributable to Pepco’s 2001 tax returns.

In 2005, the Treasury Department issued proposed regulations that, if adopted in their current form, would require Pepco to change its method of accounting with respect to capitalizable construction costs for income tax purposes for tax periods beginning in 2005. Based on those proposed regulations, PHI in its 2005 federal tax return adopted an alternative method of accounting for capitalizable construction costs that management believed would be acceptable to the IRS.

At the same time as the proposed regulations were released, the IRS issued Revenue Ruling 2005-53, which was intended to limit the ability of certain taxpayers to utilize the method of accounting for income tax purposes they utilized on their tax returns for 2004 and prior years with respect to capitalizable construction costs. In line with this Revenue Ruling, the IRS revenue agent’s report for the 2001 and 2002 tax returns disallowed substantially all of the incremental tax benefits that Pepco had claimed on those returns by requiring it to capitalize and depreciate certain expenses rather than treat such expenses as current deductions. PHI’s protest of the IRS adjustments is among the unresolved audit matters relating to the 2001 and 2002 audits pending before the U.S. Office of Appeals of the IRS.

In February 2006, PHI paid approximately $121 million of taxes to cover the amount of additional taxes and interest that management estimated to be payable for the years 2001 through 2004 based on the method of tax accounting that PHI, pursuant to the proposed regulations, adopted on its 2005 tax return. In June 2008, PHI received from the IRS an offer of settlement pertaining to Pepco for the tax years 2001 through 2004. Pepco is substantially in agreement with this proposed settlement. Based on the terms of the proposal, Pepco expects the final settlement amount to be less than the $121 million previously deposited.

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On the basis of the tentative settlement, Pepco updated its estimated liability related to mixed service costs and as a result, recorded in the quarter ended June 30, 2008, a net reduction in its liability for unrecognized tax benefits of $16 million and recognized after-tax interest income of $3 million.

Contractual Obligations

As of December 31, 2008, Pepco’s contractual obligations under non-derivative fuel and power purchase contracts were $1,202 million in 2009, $975 million in 2010 to 2011, $25 million in 2012 to 2013, and zero in 2014 and thereafter.

(14) RELATED PARTY TRANSACTIONS

PHI Service Company provides various administrative and professional services to PHI and its regulated and unregulated subsidiaries including Pepco. The cost of these services is allocated in accordance with cost allocation methodologies set forth in the service agreement using a variety of factors, including the subsidiaries’ share of employees, operating expenses, assets, and other cost causal methods. These intercompany transactions are eliminated by PHI in consolidation and no profit results from these transactions at PHI. PHI Service Company costs directly charged or allocated to Pepco for the years ended December 31, 2008, 2007 and 2006 were approximately $145 million, $129 million, and $114 million, respectively.

Certain subsidiaries of Pepco Energy Services perform utility maintenance services, including services that are treated as capital costs, for Pepco. Amounts charged to Pepco by these companies for the years ended December 31, 2008, 2007 and 2006 were approximately $11 million, $26 million and $15 million, respectively.

In addition to the transactions described above, Pepco’s financial statements include the following related party transactions in its Statements of Earnings:

	For the Year Ended December 31,
	2008	2007	2006
Income (Expense)	(Millions of dollars)
Intercompany power purchases - Conectiv Energy Supply (a)	$(23)	$(63)	$(36)
Intercompany lease transactions (b)	-	-	$ (2)

(a)

Included in fuel and purchased energy expense.

(b)

Included in other operation and maintenance expense.

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As of December 31, 2008 and 2007, Pepco had the following balances on its Balance Sheets due (to)/from related parties:

	2008	2007
Asset (Liability)	(Millions of dollars)
Payable to Related Party (current)
PHI Service Company	$(17)	$(17)
Conectiv Energy Supply	-	(6)
Pepco Energy Services (a)	(53)	(53)
The items listed above are included in the “Accounts payable to associated companies” balance on the Balance Sheet of $70 million and $76 million at December 31, 2008 and 2007, respectively.
Money Pool Balance with Pepco Holdings (included in short-term debt )	-	$(96)

(a)

Pepco bills customers on behalf of Pepco Energy Services where customers have selected Pepco Energy Services as their alternative supplier or where Pepco Energy Services has performed work for certain government agencies under a General Services Administration area-wide agreement.

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(15) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

	2008
		First Quarter		Second Quarter			Third Quarter			Fourth Quarter			Total
	(Millions of dollars)
Total Operating Revenue	$	525	$	539		$	728		$	530		$	2,322
Total Operating Expenses		482		475	(a)		627	(c)		482			2,066
Operating Income		43		64			101			48			256
Other Expenses		(18)		(19)			(21)			(18)			(76)
Income Before Income Tax Expense		25		45			80			30			180
Income Tax Expense		10		14	(b)		34			6	(d)		64
Net Income		15		31			46			24			116
Dividends on Preferred Stock		-		-			-			-			-
Earnings Available for Common Stock	$	15	$	31		$	46		$	24		$	116

	2007
		First Quarter		Second Quarter		Third Quarter			Fourth Quarter		Total
	(Millions of dollars)
Total Operating Revenue	$	507	$	495	$	693		$	506	$	2,201
Total Operating Expenses		477		450		562	(e)		464		1,953
Operating Income		30		45		131			42		248
Other Expenses		(15)		(14)		(17)			(15)		(61)
Income Before Income Tax Expense		15		31		114			27		187
Income Tax Expense		6		13		30	(f)		13		62
Net Income		9		18		84			14		125
Dividends on Preferred Stock		-		-		-			-		-
Earnings Available for Common Stock	$	9	$	18	$	84		$	14	$	125

(a)

Includes a $4 million adjustment to correct an understatement of operating expenses for prior periods dating back to February 2005 where late payment fees were incorrectly recognized.

(b)

Includes $3 million of after-tax interest income related to the tentative settlement of the IRS mixed service cost issue and $2 million of after-tax interest income received in 2008 on the Maryland state tax refund.

(c)

Includes a $3 million charge related to an adjustment in the accounting for certain restricted stock awards granted under the Long-Term Incentive Plan (LTIP).

(d)

Includes $2 million of after-tax net interest income on uncertain and effectively settled tax positions and a benefit of $3 million (including a $2 million correction of prior period errors) related to additional analysis of deferred tax balances completed in 2008.

(e)

Includes $33 million benefit ($20 million after-tax) from settlement of Mirant bankruptcy claims.

(f)

Includes $20 million benefit ($18 million net of fees) related to Maryland income tax refund and a charge of $3 million related to additional analysis of deferred tax balances completed in 2007.

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Management’s Report on Internal Control over Financial Reporting

The management of DPL is responsible for establishing and maintaining adequate internal control over financial reporting. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed its internal control over financial reporting as of December 31, 2008 based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, the management of DPL concluded that its internal control over financial reporting was effective as of December 31, 2008.

This Annual Report on Form 10-K does not include an attestation report of DPL’s registered public accounting firm, PricewaterhouseCoopers LLP, regarding internal control over financial reporting. Management’s report was not subject to attestation by PricewaterhouseCoopers LLP pursuant to temporary rules of the Securities and Exchange Commission that permit DPL to provide only management’s report in this Form 10-K.

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Report of Independent Registered Public Accounting Firm

To the Shareholder and Board of Directors of

Delmarva Power & Light Company

In our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Delmarva Power & Light Company (a wholly owned subsidiary of Pepco Holdings, Inc.) at December 31, 2008 and December 31, 2007, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 12 to the financial statements, the Company changed its manner of accounting and reporting for uncertain tax positions in 2007.

PricewaterhouseCoopers LLP

Washington, DC

March 2, 2009

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DELMARVA POWER & LIGHT COMPANY STATEMENTS OF EARNINGS

For the Year Ended December 31,	2008	2007	2006
(Millions of dollars)
Operating Revenue
Electric	$1,221	$1,205	$1,168
Natural Gas	318	291	255
Total Operating Revenue	1,539	1,496	1,423
Operating Expenses
Fuel and purchased energy	821	839	817
Gas purchased	245	220	198
Other operation and maintenance	222	206	185
Depreciation and amortization	72	74	76
Other taxes	35	36	37
Gain on sale of assets	(4)	(1)	(2)
Total Operating Expenses	1,391	1,374	1,311
Operating Income	148	122	112
Other Income (Expenses)
Interest and dividend income	2	1	1
Interest expense	(40)	(43)	(41)
Other income	3	2	7
Other expenses	-	-	(4)
Total Other Expenses	(35)	(40)	(37)

Income Before Income Tax Expense	113	82	75

Income Tax Expense	45	37	32

Net Income	68	45	43

Dividends on Redeemable Serial Preferred Stock	-	-	1

Earnings Available for Common Stock	$ 68	$ 45	$ 42

The accompanying Notes are an integral part of these Financial Statements.

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DELMARVA POWER & LIGHT COMPANY BALANCE SHEETS
ASSETS	December 31, 2008	December 31, 2007
(Millions of dollars)

CURRENT ASSETS
Cash and cash equivalents	$ 138	$ 11
Restricted cash equivalents	-	4
Accounts receivable, less allowance for uncollectible accounts of $10 million and $8 million, respectively	202	195
Inventories	52	45
Prepayments of income taxes	34	56
Prepaid expenses and other	28	16
Total Current Assets	454	327
INVESTMENTS AND OTHER ASSETS
Goodwill	8	8
Regulatory assets	242	225
Prepaid pension expense	184	178
Other	35	35
Total Investments and Other Assets	469	446
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment	2,656	2,616
Accumulated depreciation	(827)	(829)
Net Property, Plant and Equipment	1,829	1,787
TOTAL ASSETS	$2,752	$2,560

The accompanying Notes are an integral part of these Financial Statements.

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DELMARVA POWER & LIGHT COMPANY BALANCE SHEETS
LIABILITIES AND SHAREHOLDER’S EQUITY	December 31, 2008	December 31, 2007
(Millions of dollars, except shares)

CURRENT LIABILITIES
Short-term debt	$ 246	$ 286
Current maturities of long-term debt	-	23
Accounts payable and accrued liabilities	108	105
Accounts payable due to associated companies	34	54
Taxes accrued	7	8
Interest accrued	6	6
Liabilities and accrued interest related to uncertain tax positions	23	34
Other	69	60
Total Current Liabilities	493	576
DEFERRED CREDITS
Regulatory liabilities	277	276
Deferred income taxes, net	446	410
Investment tax credits	8	9
Above-market purchased energy contracts and other electric restructuring liabilities	19	21
Other	71	65
Total Deferred Credits	821	781

LONG-TERM LIABILITIES
Long-term debt	686	529

COMMITMENTS AND CONTINGENCIES (NOTE 14)

SHAREHOLDER’S EQUITY
Common stock, $2.25 par value, authorized 1,000,000 shares - issued 1,000 shares	-	-
Premium on stock and other capital contributions	304	242
Retained earnings	448	432
Total Shareholder’s Equity	752	674

TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY	$2,752	$2,560

The accompanying Notes are an integral part of these Financial Statements.

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DELMARVA POWER & LIGHT COMPANY STATEMENTS OF CASH FLOWS
For the Year Ended December 31,	2008	2007		2006
(Millions of dollars)

OPERATING ACTIVITIES
Net income	$ 68		$ 45	$ 43
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization	72		74	76
Gain on sale of assets	(4)		(1)	(2)
Deferred income taxes	33		27	39
Investment tax credit adjustments, net	(1)		(1)	(1)
Prepaid pension expense	(6)		(6)	(7)
Changes in:
Accounts receivable	(44)		(1)	(10)
Regulatory assets and liabilities	27		(18)	(31)
Inventories	(7)		(5)	2
Accounts payable and accrued liabilities	(19)		62	10
Taxes accrued	12		(10)	(75)
Prepaid expenses	(7)		7	3
Net other operating	(1)		(4)	(5)
Net Cash From Operating Activities	123		169	42

INVESTING ACTIVITIES
Investment in property, plant and equipment	(150)		(133)	(134)
Proceeds from sale of assets	54		-	3
Changes in restricted cash equivalents	4		(4)	-
Net other investing activities	(1)		2	(2)
Net Cash Used By Investing Activities	(93)		(135)	(133)

FINANCING ACTIVITIES
Dividends paid to Parent	(52)		(39)	(15)
Dividends paid on preferred stock	-		-	(1)
Redemption of preferred stock	-		(18)	-
Capital contribution from Parent	62		-	-
Issuances of long-term debt	400		-	100
Reacquisitions of long-term debt	(116)		(65)	(23)
(Repayments) issuances of short-term debt, net	(190)		90	30
Net other financing activities	(7)		1	1
Net Cash From (Used By) Financing Activities	97		(31)	92

Net Increase In Cash and Cash Equivalents	127		3	1
Cash and Cash Equivalents at Beginning of Year	11		8	7

CASH AND CASH EQUIVALENTS AT END OF YEAR	$138		$ 11	$ 8

NONCASH ACTIVITIES
Asset retirement obligations associated with removal costs transferred to regulatory liabilities	$ -		$ 5	$ 50
Capital (distribution) contribution in respect of certain intercompany transactions	$ -		$ (1)	$ 8
Conversion of long-term debt to short-term debt	$150		$ -	$ -

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest (net of capitalized interest of $1 million, $1 million, and $1 million, respectively), and paid for income taxes:
Interest	$ 37		$ 42	$ 39
Income taxes	$ 1		$ 20	$ 33

The accompanying Notes are an integral part of these Financial Statements.

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DELMARVA POWER & LIGHT COMPANY STATEMENTS OF SHAREHOLDER’S EQUITY
	Common Stock		Premium on Stock	Capital Stock Expense	Retained Earnings
	Shares	Par Value	Premium on Stock	Capital Stock Expense	Retained Earnings
(Millions of dollars, except shares)

BALANCE, DECEMBER 31, 2005	1,000	$-	$245	$(10)	$400
Net Income	-	-	-	-	43
Dividends:
Preferred stock	-	-	-	-	(1)
Common stock	-	-	-	-	(15)
Capital contribution from Parent	-	-	8	-	-

BALANCE, DECEMBER 31, 2006	1,000	-	253	(10)	427
Net Income	-	-	-	-	45
Preferred stock redemption	-	-	-	-	(1)
Dividends:
Common stock	-	-	-	-	(39)
Capital distribution from Parent	-	-	(1)	-	-

BALANCE, DECEMBER 31, 2007	1,000	-	252	(10)	432
Net Income	-	-	-	-	68
Dividends:
Common stock	-	-	-	-	(52)
Capital contribution from Parent	-	-	62	-	-

BALANCE, DECEMBER 31, 2008	1,000	$-	$314	$(10)	$448

The accompanying Notes are an integral part of these Financial Statements.

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NOTES TO FINANCIAL STATEMENTS

DELMARVA POWER & LIGHT COMPANY

(1) ORGANIZATION

Delmarva Power & Light Company (DPL) is engaged in the transmission and distribution of electricity in Delaware and portions of Maryland and Virginia (until the sale of its Virginia assets on January 2, 2008), and provides gas distribution service in northern Delaware. Additionally, DPL supplies electricity at regulated rates to retail customers in its territories who do not elect to purchase electricity from a competitive supplier. The regulatory term for this service varies by jurisdiction as follows:

Delaware

Standard Offer Service (SOS)

Maryland

SOS

Virginia

Default Service (prior to January 2, 2008)

In this Form 10-K, DPL also refers to these supply services generally as Default Electricity Supply. DPL is a wholly owned subsidiary of Conectiv, which is wholly owned by Pepco Holdings, Inc. (Pepco Holdings or PHI).

In January 2008, DPL completed the sale of its retail electric distribution assets and the sale of its wholesale electric transmission assets, both located on the Eastern Shore of Virginia. For a discussion of the sales of the Virginia assets, see Note (14), “Commitment and Contingencies — Regulatory and Other Matters — Sale of Virginia Retail Electric Distribution and Wholesale Transmission Assets.”

Impact of the Current Capital and Credit Market Disruptions

The recent disruptions in the capital and credit markets have had an impact on DPL’s business. While these conditions have required DPL to make certain adjustments in its financial management activities, DPL believes that it currently has sufficient liquidity to fund its operations and meet its financial obligations. These market conditions, should they continue, however, could have a negative effect on DPL’s financial condition, results of operations and cash flows.

Liquidity Requirements

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To address the challenges posed by the current capital and credit market environment and to ensure that it will continue to have sufficient access to cash to meet its liquidity needs, DPL has identified a number of cash and liquidity conservation measures, including opportunities to defer capital expenditures due to lower than anticipated growth. Several measures to reduce expenditures have been taken. Additional measures could be undertaken if conditions warrant.

Pension and Postretirement Benefit Plans

(2) SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. Although DPL believes that its estimates and assumptions are reasonable, they are based upon information available to management at the time the estimates are made. Actual results may differ significantly from these estimates.

Significant matters that involve the use of estimates include the assessment of contingencies, the calculation of future cash flows and fair value amounts for use in asset impairment evaluations, fair value calculations (based on estimated market pricing) associated with derivative instruments, pension and other postretirement benefits assumptions, unbilled revenue calculations, the assessment of the probability of recovery of regulatory assets, and

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income tax provisions and reserves. Additionally, DPL is subject to legal, regulatory, and other proceedings and claims that arise in the ordinary course of its business. DPL records an estimated liability for these proceedings and claims when the loss is determined to be probable and is reasonably estimable.

Change in Accounting Estimates

During 2007, as a result of the depreciation study presented as part of DPL’s Maryland rate case, the Maryland Public Service Commission (MPSC) approved new lower depreciation rates for DPL’s Maryland distribution assets.

Revenue Recognition

DPL recognizes revenues upon delivery of electricity and gas to its customers, including amounts for services rendered, but not yet billed (unbilled revenue). DPL recorded amounts for unbilled revenue of $52 million and $50 million as of December 31, 2008 and 2007, respectively. These amounts are included in “Accounts receivable.” DPL calculates unbilled revenue using an output based methodology. This methodology is based on the supply of electricity or gas intended for distribution to customers. The unbilled revenue process requires management to make assumptions and judgments about input factors such as customer sales mix, temperature, and estimated power line losses (estimates of electricity expected to be lost in the process of its transmission and distribution to customers), all of which are inherently uncertain and susceptible to change from period to period, and if the actual results differ from the projected results, the impact could be material. Revenues from non-regulated electricity and gas sales are included in Electric revenues and Natural Gas revenues, respectively.

Taxes related to the consumption of electricity and gas by its customers, such as fuel, energy, or other similar taxes, are components of DPL’s tariffs and, as such, are billed to customers and recorded in Operating Revenues. Accruals for these taxes by DPL are recorded in Other taxes. Excise tax related generally to the consumption of gasoline by DPL in the normal course of business is charged to operations, maintenance or construction, and is de minimis.

Taxes Assessed by a Governmental Authority on Revenue-Producing Transactions

Taxes included in DPL’s gross revenues were $15 million, $13 million and $14 million for the years ended December 31, 2008, 2007 and 2006, respectively.

Accounting for Derivatives

DPL uses derivative instruments (forward contracts, futures, swaps, and exchange-traded and over-the-counter options) primarily to reduce gas commodity price volatility while limiting its customers’ exposure to increases in the market price of gas. DPL also manages commodity risk with physical natural gas and capacity contracts that are not classified as derivatives. The primary goal of these activities is to reduce the exposure of its regulated retail gas customers to natural gas price fluctuations. All premiums paid and other transaction costs incurred as part of DPL’s natural gas hedging activity, in addition to all gains and losses related to hedging activities, are fully recoverable through the fuel adjustment clause approved by the Delaware Public Service Commission (DPSC), and are deferred under Statement of Financial Accounting Standards (SFAS) No. 71 until recovered. At December 31, 2008, there was a net deferred

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derivative payable of $56 million, offset by a $56 million regulatory asset. At December 31, 2007, there was a net deferred derivative payable of $13 million, offset by a $13 million regulatory asset.

Long-Lived Asset Impairment Evaluation

DPL evaluates certain long-lived assets to be held and used (for example, equipment and real estate) to determine if they are impaired whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Examples of such events or changes include a significant decrease in the market price of a long-lived asset or a significant adverse change in the manner an asset is being used or its physical condition. A long-lived asset to be held and used is written down to fair value if the sum of its expected future undiscounted cash flows is less than its carrying amount.

Income Taxes

DPL, as an indirect subsidiary of Pepco Holdings, is included in the consolidated federal income tax return of PHI. Federal income taxes are allocated to DPL based upon the taxable income or loss amounts, determined on a separate return basis.

In 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies the criteria for recognition of tax benefits in accordance with Statement of SFAS No. 109, “Accounting for Income Taxes,” and prescribes a financial statement recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. Specifically, it clarifies that an entity’s tax benefits must be “more likely than not” of being sustained prior to recording the related tax benefit in the financial statements. If the position drops below the “more likely than not” standard, the benefit can no longer be recognized. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

On May 2, 2007, the FASB issued FASB Staff Position (FSP) FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48” (FIN 48-1), which provides guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. DPL applied the guidance of FIN 48-1 with its adoption of FIN 48 on January 1, 2007.

The financial statements include current and deferred income taxes. Current income taxes represent the amounts of tax expected to be reported on DPL’s state income tax returns and the amount of federal income tax allocated from Pepco Holdings.

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taxes recoverable in the future and is included in “regulatory assets” on the Balance Sheets. See Note (7), “Regulatory Assets and Regulatory Liabilities,” for additional discussion.

Deferred income tax expense generally represents the net change during the reporting period in the net deferred tax liability and deferred recoverable income taxes.

DPL recognizes interest on under/over payments of income taxes, interest on unrecognized tax benefits, and tax-related penalties in income tax expense.

Investment tax credits from utility plant purchased in prior years are reported on the Balance Sheets as Investment tax credits. These investment tax credits are being amortized to income over the useful lives of the related utility plant.

Consolidation of Variable Interest Entities

In accordance with the provisions of FIN 46R entitled “Consolidation of Variable Interest Entities,” DPL consolidates those variable interest entities where DPL has been determined to be primary beneficiary. FIN 46R addresses conditions under which an entity should be consolidated based upon variable interests rather than voting interests.

DPL Onshore Wind Transactions

In 2008, DPL entered into three onshore wind power purchase arrangements (PPAs) for energy and renewable energy credits (RECs) to help serve a portion of its requirements under the State of Delaware’s Renewable Energy Portfolio Standards Act, which requires that 20 percent of total load needed in Delaware be produced from renewable sources by 2019. The DPSC has approved all three agreements, and payments under the agreements are expected to start in 2009 at the earliest.

DPL concluded that two of the PPAs were leases in accordance with the guidance in Emerging Issues Task Force (EITF) Issue No. 01-8, “Determining Whether an Arrangement Contains a Lease” (EITF 01-8), but that DPL did not own the assets under the lease during construction in accordance with EITF Issue No. 97-10, “The Effect of Lessee Involvement in Asset Construction.” DPL concluded that it is not the primary beneficiary under the third PPA because it will only receive 50 percent of the output from the facility and it will not absorb a majority of the risks or rewards as compared to the debt and equity investors in the facility. DPL concluded that consolidation is not required for any of these PPAs under FIN 46(R).

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Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, cash invested in money market funds, and commercial paper held with original maturities of three months or less. Additionally, deposits in PHI’s “money pool,” which DPL and certain other PHI subsidiaries use to manage short-term cash management requirements, are considered cash equivalents. Deposits in the money pool are guaranteed by PHI. PHI deposits funds in the money pool to the extent that the pool has insufficient funds to meet the needs of its participants, which may require PHI to borrow funds for deposit from external sources.

Restricted Cash Equivalents

Restricted cash equivalents represents cash either held as collateral or pledged as collateral, and is restricted from use for general corporate purposes.

Accounts Receivable and Allowance for Uncollectible Accounts

DPL’s accounts receivable balance primarily consists of customer accounts receivable, other accounts receivable, and accrued unbilled revenue. Accrued unbilled revenue represents revenue earned in the current period but not billed to the customer until a future date (usually within one month after the receivable is recorded).

DPL maintains an allowance for uncollectible accounts. DPL determines the amount of the allowance based on specific identification of material amounts at risk by customer and maintains a general reserve based on its’ historical collection experience. The adequacy of this allowance is assessed on a quarterly basis by evaluating all known factors such as the aging of the receivables, historical collection experience, the economic and competitive environment, and changes in the creditworthiness of its customers. Although management believes its allowance is adequate, it cannot anticipate with any certainty the changes in the financial condition of its customers. As a result, DPL records adjustments to the allowance for uncollectible accounts in the period the new information is known.

Inventories

Included in inventories are:

- generation, transmission, and distribution materials and supplies; and

- natural gas.

DPL utilizes the weighted average cost method of accounting for inventory items. Under this method, an average price is determined for the quantity of units acquired at each price level and is applied to the ending quantity to calculate the total ending inventory balance. Materials and supplies inventory are generally charged to inventory when purchased and then expensed or capitalized to plant, as appropriate, when installed.

The cost of natural gas, including transportation costs, is included in inventory when purchased and charged to fuel expense when used.

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Goodwill

Goodwill represents the excess of the purchase price of an acquisition over the fair value of the net assets acquired at the acquisition date. All of DPL’s goodwill was generated by DPL’s acquisition of Conowingo Power Company in 1995. DPL tests its goodwill for impairment annually as of July 1, and whenever an event occurs or circumstances change in the interim that would more likely than not reduce the fair value of DPL below its carrying amount. Factors that may result in an interim impairment test include, but are not limited to: a change in identified reporting units; an adverse change in business conditions; a protracted decline in PHI’s stock price causing its market capitalization to fall below its book value; an adverse regulatory action; or an impairment of long-lived assets. DPL performed its annual impairment test on July 1, 2008, and an interim impairment test at December 31, 2008, and no impairment was recorded as described in Note (6), “Goodwill.”

Regulatory Assets and Regulatory Liabilities

Certain aspects of DPL’s utility businesses are subject to regulation by the DPSC and the MPSC, and, until the sale of its Virginia assets on January 2, 2008, were regulated by the Virginia State Corporation Commission (VSCC). The transmission and wholesale sale of electricity by DPL is regulated by the Federal Energy Regulatory Commission (FERC). DPL’s interstate transportation and wholesale sale of natural gas are regulated by FERC.

Based on the regulatory framework in which it has operated, DPL has historically applied, and in connection with its transmission and distribution business continues to apply, the provisions of SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation.” SFAS No. 71 allows regulated entities, in appropriate circumstances, to establish regulatory assets and to defer the income statement impact of certain costs that are expected to be recovered in future rates. Management’s assessment of the probability of recovery of regulatory assets requires judgment and interpretation of laws, regulatory commission orders, and other factors. If management subsequently determines, based on changes in facts or circumstances, that a regulatory asset is not probable of recovery, then the regulatory asset will be eliminated through a charge to earnings.

As part of the new electric service distribution base rates for DPL approved by the MPSC, effective in June 2007, the MPSC approved a bill stabilization adjustment mechanism (BSA) for retail customers. For customers to which the BSA applies, DPL recognizes distribution revenue based on an approved distribution charge per customer. From a revenue recognition standpoint, the BSA thus decouples the distribution revenue recognized in a reporting period from the amount of power delivered during the period. Pursuant to this mechanism, DPL recognizes either (a) a positive adjustment equal to the amount by which revenue from Maryland retail distribution sales falls short of the revenue that DPL is entitled to earn based on the approved distribution charge per customer, or (b) a negative adjustment equal to the amount by which revenue from such distribution sales exceeds the revenue that DPL is entitled to earn based on the approved distribution charge per customer (a Revenue Decoupling Adjustment). A positive Revenue Decoupling Adjustment is recorded as a regulatory asset and a negative Revenue Decoupling Adjustment is recorded as a regulatory liability. The net Revenue Decoupling Adjustment at December 31, 2008 is a regulatory asset and is included in the “Other” line item on the table of regulatory asset balances in Note (7), “Regulatory Assets and Regulatory Liabilities.”

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Property, Plant and Equipment

Property, plant and equipment are recorded at original cost, including labor, materials, asset retirement costs and other direct and indirect costs including capitalized interest. The carrying value of property, plant and equipment is evaluated for impairment whenever circumstances indicate the carrying value of those assets may not be recoverable under the provisions of SFAS No. 144. Upon retirement, the cost of regulated property, net of salvage, is charged to accumulated depreciation. For additional information regarding the treatment of retirement obligations, see the “Asset Retirement Obligations” section included in this Note.

The annual provision for depreciation on electric and gas property, plant and equipment is computed on the straight-line basis using composite rates by classes of depreciable property. Accumulated depreciation is charged with the cost of depreciable property retired, less salvage and other recoveries. Property, plant and equipment other than electric and gas facilities is generally depreciated on a straight-line basis over the useful lives of the assets. The system-wide composite depreciation rate for each of 2008, 2007 and 2006 for DPL’s transmission and distribution system property was approximately 3%.

Capitalized Interest and Allowance for Funds Used During Construction

DPL recorded AFUDC for borrowed funds of $1 million for each of the years ended December 31, 2008, 2007, and 2006.

DPL recorded amounts for the equity component of AFUDC of $1 million, zero and $1 million for the years ended December 31, 2008, 2007 and 2006, respectively.

Leasing Activities

DPL’s lease transactions can include plant, office space, equipment, software and vehicles. In accordance with SFAS No. 13, “Accounting for Leases” (SFAS No. 13), these leases are classified as operating leases.

Operating Leases

An operating lease generally results in a level income statement charge over the term of the lease, reflecting the rental payments required by the lease agreement. If rental payments are not made on a straight-line basis, DPL’s policy is to recognize the increases on a straight-line basis over the lease term unless another systematic and rational allocation basis is more representative of the time pattern in which the leased property is physically employed.

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Amortization of Debt Issuance and Reacquisition Costs

DPL defers and amortizes debt issuance costs and long-term debt premiums and discounts over the lives of the respective debt issues. Costs associated with the redemption of debt are also deferred and amortized over the lives of the new issues.

Asset Removal Costs

In accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations,” asset removal costs are recorded as regulatory liabilities. At December 31, 2008 and 2007, $234 million is reflected as a regulatory liability in the accompanying Balance Sheets.

Pension and Other Postretirement Benefit Plans

Pepco Holdings sponsors a non-contributory retirement plan that covers substantially all employees of DPL (the PHI Retirement Plan) and certain employees of other Pepco Holdings subsidiaries. Pepco Holdings also provides supplemental retirement benefits to certain eligible executives and key employees through nonqualified retirement plans and provides certain postretirement health care and life insurance benefits for eligible retired employees.

DPL participates in benefit plans sponsored by Pepco Holdings and as such, the provisions of SFAS No. 158 do not have an impact on its financial condition and cash flows.

Dividend Restrictions

In addition to its future financial performance, the ability of DPL to pay dividends is subject to limits imposed by: (i) state corporate and regulatory laws, which impose limitations on the funds that can be used to pay dividends and, in the case of regulatory laws, may require the prior approval of DPL’s utility regulatory commissions before dividends can be paid and (ii) the prior rights of holders of existing and future preferred stock, mortgage bonds and other long-term debt issued by DPL and any other restrictions imposed in connection with the incurrence of liabilities. DPL has no shares of preferred stock outstanding. DPL had approximately $95 million and $118 million of restricted retained earnings at December 31, 2008 and 2007, respectively.

Reclassifications and Adjustments

Certain prior year amounts have been reclassified in order to conform to current year presentation.

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During 2008, DPL recorded adjustments to correct errors in Other Operation and Maintenance expenses for prior periods dating back to May 2006 during which (i) customer late payment fees were incorrectly recognized and (ii) stock-based compensation expense related to certain restricted stock awards granted under the Long-Term Incentive Plan was understated. These adjustments, which were not considered material either individually or in the aggregate, resulted in a total increase in Other Operation and Maintenance expenses of $5 million for the year ended December 31, 2008, all of which related to prior periods.

(3) NEWLY ADOPTED ACCOUNTING STANDARDS

Statement of Financial Accounting Standards (SFAS) No. 157, “ Fair Value Measurements ” (SFAS No. 157)

DPL applied the guidance of FSP 157-1 and FSP 157-2 with its adoption of SFAS No. 157. The adoption of SFAS No. 157 on January 1, 2008 did not result in a transition adjustment to beginning retained earnings and did not have a material impact on DPL’s overall financial condition, results of operations, or cash flows. SFAS No. 157 also required new disclosures regarding the level of pricing observability associated with financial instruments carried at fair value. This additional disclosure is provided in Note (13), “Fair Value Disclosures.” DPL is currently evaluating the impact of FSP 157-2 and does not anticipate that the application of FSP 157-2 to its other non-financial assets and non-financial liabilities will materially affect its overall financial condition, results of operations, or cash flows.

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This guidance clarifies the application of SFAS No. 157 to assets in an inactive market and illustrates how to determine the fair value of a financial asset in an inactive market. The guidance was effective beginning with the September 30, 2008 reporting period for DPL, and has not had a material impact on DPL’s results.

SFAS No. 159, “ The Fair Value Option for Financial Assets and Financial Liabilities—including an Amendment of FASB Statement No. 115 ” (SFAS No. 159)

SFAS No. 159 permits entities to elect to measure eligible financial instruments at fair value. SFAS No. 159 applies to other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. On January 1, 2008, DPL elected not to apply the fair value option for its eligible financial assets and liabilities.

FASB Staff Position (FSP) FIN 39-1, “Amendment of FASB Interpretation No. 39” (FSP FIN 39-1)

FSP FIN 39-1 amended certain portions of FIN 39. The FSP replaces the terms “conditional contracts” and “exchange contracts” in FIN 39 with the term “derivative instruments” as defined in SFAS Statement No. 133 “Accounting for Derivative Instrument and Hedging Activities” (SFAS No. 133). The FSP also amends FIN 39 to allow for the offsetting of fair value amounts for the right to reclaim cash collateral or receivables, or the obligation to return cash collateral or payables, arising from the same master netting arrangement as the derivative instruments. FSP FIN 39-1 applied to financial statements beginning January 1, 2008 for DPL.

DPL retrospectively adopted the provisions of FSP FIN 39-1 and elected to offset the net fair value amounts recognized for derivative instruments and fair value amounts recognized for related collateral positions executed with the same counterparty under a master netting arrangement. The effect of retrospective application of FSP FIN 39-1 was not material at December 31, 2007 and, as such, no amounts were reclassified.

SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS No. 162)

SFAS No. 162 was effective for DPL as of November 15, 2008 and did not result in a change in accounting for DPL. Therefore, the provisions of SFAS No. 162 did not have a material impact on DPL’s overall financial condition, results of operations, cash flows and disclosure.

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FSP FAS 133-1 and FIN 45-4, “Disclosure About Credit Derivatives and Certain Guarantees” (FSP FAS 133-1 and FIN 45-4)

For credit derivatives, FSP FAS 133-1 and FIN 45-4 requires disclosure of the nature and fair value of the credit derivative, the approximate term, the reasons for entering the derivative, the events requiring performance, and the current status of the payment/performance risk. It also requires disclosures of the maximum potential amount of future payments without any reduction for possible recoveries under collateral provisions, recourse provisions, or liquidation proceeds. DPL has not provided credit protection to others through the credit derivatives within the scope of SFAS No. 133.

The new disclosures are required starting with financial statement reporting periods ending December 31, 2008 for DPL. Comparative disclosures are only required for periods ending after initial adoption. The new guarantee disclosures did not have a material impact on DPL.

FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities” (FSP FAS 140-4 and FIN 46(R)-8)

FSP FAS 140-4 and FIN 46(R)-8 is effective for DPL’s December 31, 2008 financial statements. This FSP has no material impact to DPL’s overall financial condition, results of operations, or cash flows as it relates to SFAS No. 140. DPL’s FIN 46(R) disclosures are provided in Note (2), “Significant Accounting Policies - Consolidation of Variable Interest Entities.”

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(4) RECENTLY ISSUED ACCOUNTING STANDARDS, NOT YET ADOPTED

SFAS No. 141(R), “Business Combinations—a Replacement of FASB Statement No. 141” (SFAS No. 141 (R))

SFAS No. 141(R) and the guidance provided in FSP FAS 141(R)-a applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009 for DPL. DPL has evaluated the impact of SFAS No. 141(R) and does not anticipate its adoption will have a material impact on its overall financial condition, results of operations, or cash flows.

SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an Amendment of ARB No. 51” (SFAS No. 160)

SFAS No. 160 is effective prospectively for financial statement reporting periods beginning January 1, 2009 for DPL, except for the presentation and disclosure requirements. The presentation and disclosure requirements apply retrospectively for all periods presented.

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DPL has evaluated the impact of SFAS No. 160 and does not anticipate its adoption will have a material impact on its overall financial condition, results of operations, cash flows or disclosure.

SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an Amendment of FASB Statement No. 133” (SFAS No. 161)

SFAS No. 161 is effective for financial statement reporting periods beginning January 1, 2009 for DPL. SFAS No. 161 encourages but does not require disclosures for earlier periods presented for comparative purposes at initial adoption. DPL is currently evaluating the impact SFAS No. 161 may have on its March 31, 2009 quarterly disclosures.

EITF Issue No. 08-5, “Issuer’s Accounting for Liabilities Measured at Fair Value with a Third Party Credit Enhancement” (EITF 08-5)

EITF 08-5 is effective on a prospective basis in reporting periods on and after January 1, 2009 for DPL. The effect of initial application shall be included in the change in fair value in the period of adoption. DPL is currently evaluating the impact on its accounting and disclosures.

EITF Issue No. 08-6, “Equity Method Investment Accounting Consideration” (EITF 08-6)

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issuance of shares should be accounted for. The EITF concludes that initial carrying value of an equity method investment can be determined using the accumulation model in SFAS 141(R), “Business Combination (revised 2007),” and other-than-temporary impairments should be recognized in accordance with paragraph 19(h) of Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.”

This EITF is effective for DPL beginning January 1, 2009. DPL is currently evaluating the impact on its accounting and disclosures.

FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (FSP FAS 132(R)-1)

The new disclosures are required starting with financial statement reporting periods ending December 31, 2009 for DPL and earlier application is permitted. Comparative disclosures under this provision are not required for earlier periods presented. DPL is currently evaluating the impact on its disclosures.

(5) SEGMENT INFORMATION

In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” DPL has one segment, its regulated utility business.

(6) GOODWILL

DPL’s July 1, 2008 annual impairment test indicated that its goodwill was not impaired. DPL performed an interim impairment test at December 31, 2008, as the market capitalization of PHI for a significant period in the fourth quarter of 2008 was lower than its book value. The December 31, 2008 impairment test indicated that the goodwill balance was not impaired under either of the discounted cash flow models.

To estimate the fair value of DPL’s business, DPL reviewed the results from two discounted cash flow models. The models differ in the method used to calculate the terminal value of the reporting unit. One estimate of terminal value is based on a constant, annual cash flow growth rate that is consistent with DPL’s plan, and the other estimate of terminal value is

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based on a multiple of earnings before interest, taxes, depreciation, and amortization that management believes is consistent with relevant market multiples for comparable utilities. Each model uses a cost of capital appropriate for a regulated utility as the discount rate for the estimated cash flows associated with the reporting unit. Neither valuation model evidenced impairment of goodwill. PHI has consistently used this valuation model to estimate the fair value of DPL’s business since the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142).

The estimation of fair value is dependent on a number of factors, including but not limited to future growth assumptions, operating and capital expenditure requirements, and capital costs, and changes in these factors could materially impact the results of impairment testing. The estimated cash flows were sourced from DPL’s forecast, and they incorporate current plans for capital expenditures and regulatory ratemaking cases. Assumptions and methodologies used in the models were consistent with historical experience, including assumptions concerning the recovery of operating costs and capital expenditures. The discount rate employed reflected DPL’s estimated cost of capital. Sensitive, interrelated and uncertain variables that could decrease the estimated fair value of DPL’s business include utility sector market performance, sustained poor economic conditions, the results of rate-making proceedings, higher operating and capital expenditure requirements, a significant increase in the cost of capital and other factors.

With the current volatile general market conditions and the disruptions in the credit and capital markets, DPL will continue to closely monitor whether there is goodwill impairment.

(7) REGULATORY ASSETS AND REGULATORY LIABILITIES

The components of DPL’s regulatory asset balances at December 31, 2008 and 2007 are as follows:

	2008	2007
	(Millions of dollars)
Deferred energy supply costs	$ 19	$ 16
Deferred income taxes	74	73
Deferred debt extinguishment costs	19	18
Phase in credits	10	38
COPCO acquisition adjustment	38	40
Other	82	40
Total Regulatory Assets	$242	$225

The components of DPL’s regulatory liability balances at December 31, 2008 and 2007 are as follows:

	2008	2007
(Millions of dollars)
Deferred energy supply costs	$ 1	$ 1
Deferred income taxes due to customers	39	39
Asset removal costs	234	234
Other	3	2
Total Regulatory Liabilities	$277	$276

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A description for each category of regulatory assets and regulatory liabilities follows:

Deferred Energy Supply Costs: The regulatory asset primarily represents deferred costs associated with a net under-recovery of Default Electricity Supply costs incurred in Maryland and deferred fuel costs for DPL’s gas business. The gas deferred fuel costs are recovered over a twelve month period and include a return component. The regulatory liability primarily represents deferred costs associated with a net over-recovery of Default Electricity Supply costs incurred in Delaware. The Default Electricity Supply deferrals do not earn a return.

Deferred Income Taxes: Represents a receivable from our customers for tax benefits DPL has previously flowed through before the company was ordered to provide deferred income taxes. As the temporary differences between the financial statement and tax basis of assets reverse, the deferred recoverable balances are reversed. There is no return on these deferrals.

COPCO Acquisition Adjustment: On July 19, 2007, the Maryland PSC issued an order which provided for the recovery of a portion of DPL’s goodwill. As a result of this order, $41 million in DPL goodwill has been transferred to a regulatory asset. It will earn a 12.95% return and will be amortized from August 2007 through August 2018.

Other: Includes losses associated with DPL’s natural gas hedging activity which earns a return and under-recovery of administration costs associated with Maryland and Delaware SOS that do not receive a return.

Deferred Income Taxes Due to Customers: Represents the portion of deferred income tax liabilities applicable to DPL’s utility operations that has not been reflected in current customer rates, for which future payment to customers is probable. As temporary differences between the financial statement and tax basis of assets reverse, deferred recoverable income taxes are amortized. There is no return on these deferrals.

Asset Removal Costs: DPL’s depreciation rates include a component for removal costs, as approved by its federal and state regulatory commissions. DPL has recorded a regulatory liability for their estimate of the difference between incurred removal costs and the level of removal costs recovered through rates.

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Other: Includes over-recovery of procurement and administration costs associated with Maryland and Delaware SOS. There is no return on these deferrals.

(8) LEASING ACTIVITIES

DPL leases an 11.9% interest in the Merrill Creek Reservoir. The lease is an operating lease and payments over the remaining lease term, which ends in 2032, are $107 million in the aggregate. DPL also has long-term leases for certain other facilities and equipment. Total future minimum operating lease payments for DPL, including the Merrill Creek Reservoir lease, as of December 31, 2008 are $9 million in 2009, $17 million in 2010, $5 million in 2011, $5 million in 2012, $5 million in 2013, and $99 million after 2013.

Rental expense for operating leases, including the Merrill Creek Reservoir lease, was $9 million, $10 million and $11 million for the years ended December 31, 2008, 2007 and 2006, respectively.

(9) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is comprised of the following:

At December 31, 2008	Original Cost	Accumulated Depreciation	Net Book Value
	(Millions of dollars)
Distribution	$1,358	$393	$ 965
Transmission	641	205	436
Gas	386	110	276
Construction work in progress	71	-	71
Non-operating and other property	200	119	81
Total	$2,656	$827	$1,829
At December 31, 2007
Distribution	$1,341	$397	$ 944
Transmission	632	205	427
Gas	364	105	259
Construction work in progress	77	-	77
Non-operating and other property	202	122	80
Total	$2,616	$829	$1,787

The balances of all property, plant and equipment, which are primarily electric transmission and distribution property, are stated at original cost. Utility plant is generally subject to a first mortgage lien.

Asset Sales

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(10) PENSIONS AND OTHER POSTRETIREMENT BENEFITS

DPL accounts for its participation in the Pepco Holdings benefit plans as participation in a multi-employer plan. For 2008, 2007, and 2006, DPL was responsible for $3 million, $4 million and $1 million, respectively, of the pension and other postretirement net periodic benefit cost incurred by Pepco Holdings. In 2008 and 2007, DPL made no contributions to the PHI Retirement Plan, and $9 million and $8 million, respectively to other postretirement benefit plans. At December 31, 2008 and 2007, DPL’s prepaid pension expense of $184 million and $178 million, and other postretirement benefit obligation of $4 million and $5 million, included in Other Deferred Credits, effectively represent assets and benefit obligations resulting from DPL’s participation in the Pepco Holdings benefit plan. DPL expects to contribute approximately $10 million to the pension plan in 2009.

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(11) DEBT

LONG-TERM DEBT

Long-term debt outstanding as of December 31, 2008 and 2007 is presented below:

Type of Debt	Interest Rates	Maturity	2008	2007
			(Millions of dollars)
First Mortgage Bonds	6.40%	2013	$250	$ -

Amortizing First Mortgage Bonds	6.95%	2008	-	4

Unsecured Tax-Exempt Bonds:
	5.20%	2019	31	31
	3.15%	2023 (c)	-	18
	5.50%	2025 (a)	15	15
	4.90%	2026 (b)	35	35
	5.65%	2028 (a)	16	16
	Variable	2030-2038 (d)	-	94
			97	209
Medium-Term Notes (unsecured):
	7.56%-7.58%	2017	14	14
	6.81%	2018	4	4
	7.61%	2019	12	12
	7.72%	2027	10	10
			40	40

Notes (unsecured):
	5.00%	2014	100	100
	5.00%	2015	100	100
	5.22%	2016	100	100
			300	300

Total long-term debt			687	553
Unamortized premium and discount, net			(1)	(1)
Current maturities of long-term debt			-	(23)
Total net long-term debt			$686	$529

(a)

The bonds are subject to mandatory tender on July 1, 2010.

(b)

The bonds are subject to mandatory tender on May 1, 2011.

(c)

The bonds were subject to mandatory tender on August 1, 2008.

(d)

The insured auction rate tax-exempt bonds were repurchased by DPL at par due to the disruption in the credit markets. The bonds are considered extinguished for accounting purposes; however, DPL intends to remarket or reissue the bonds to the public in 2009.

The outstanding First Mortgage Bonds issued by DPL are subject to a lien on substantially all of DPL’s property, plant and equipment.

Maturities of long-term debt and sinking fund requirements during the next five years are as follows: zero in 2009, $31 million in 2010, $35 million in 2011, zero in 2012, $250 million in 2013, and $371 million thereafter.

DPL’s long-term debt is subject to certain covenants. DPL is in compliance with all requirements.

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DPL

SHORT-TERM DEBT

DPL, a regulated utility, has traditionally used a number of sources to fulfill short-term funding needs, such as commercial paper, short-term notes, and bank lines of credit. Proceeds from short-term borrowings are used primarily to meet working capital needs, but may also be used to temporarily fund long-term capital requirements. A detail of the components of DPL’s short-term debt at December 31, 2008 and 2007 is as follows.

	2008	2007
	(Millions of dollars)
Commercial paper	$ -	$ 24
Intercompany borrowings	-	157
Variable rate demand bonds	96	105
Bank Loan	150	-
Total	$246	$286

Commercial Paper

DPL maintains an ongoing commercial paper program of up to $500 million. The commercial paper notes can be issued with maturities up to 270 days from the date of issue. The commercial paper program is backed by a $500 million credit facility, described below under the heading “Credit Facility,” shared with PHI’s other utility subsidiaries, Potomac Electric Power Company (Pepco) and Atlantic City Electric Company (ACE).

DPL had no commercial paper outstanding at December 31, 2008 and $24 million of commercial paper outstanding at December 31, 2007. The weighted average interest rates for commercial paper issued during 2008 and 2007 were 3.88% and 5.35%, respectively. The weighted average maturity for commercial paper issued during 2008 and 2007 was five days and four days, respectively.

Variable Rate Demand Bonds

Variable Rate Demand Bonds (“VRDB”) are subject to repayment on the demand of the holders and for this reason are accounted for as short-term debt in accordance with GAAP. However, bonds submitted for purchase are remarketed by a remarketing agent on a best efforts basis. DPL expects the bonds submitted for purchase will continue to be remarketed successfully due to the credit worthiness of the company and because the remarketing agent resets the interest rate to the then-current market rate. The company also may utilize one of the fixed rate/fixed term conversion options of the bonds to establish a maturity which corresponds to the date of final maturity of the bonds. On this basis, DPL views VRDB as a source of long-term financing. During 2008, $9 million of VRDB’s were tendered to the company. If market conditions are favorable, DPL intends to remarket these bonds during 2009. The VRDB outstanding in 2008 mature as follows: 2017 ($26 million), 2024 ($24 million), 2028 ($16 million), and 2029 ($30 million). The weighted average interest rate for VRDB was 3.24% during 2008 and 3.87% during 2007. Of the $96 million in VRDB’s, $72 million of DPL’s obligations are secured by first mortgage bonds, which provide collateral to the investors in the event of a default by DPL.

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DPL

Bank Loan

In March 2008, DPL obtained a $150 million unsecured term loan that matures in July 2009. Interest on the loan is calculated at a variable rate.

Credit Facility

PHI, Pepco, DPL and ACE maintain a credit facility to provide for their respective short-term liquidity needs. The aggregate borrowing limit under this primary credit facility is $1.5 billion, all or any portion of which may be used to obtain loans or to issue letters of credit. PHI’s credit limit under the facility is $875 million. The credit limit of each of Pepco, DPL and ACE is the lesser of $500 million and the maximum amount of debt the company is permitted to have outstanding by its regulatory authorities, except that the aggregate amount of credit used by Pepco, DPL and ACE at any given time collectively may not exceed $625 million. The interest rate payable by each company on utilized funds is, at the borrowing company’s election, (i) the greater of the prevailing prime rate and the federal funds effective rate plus 0.5% or (ii) the prevailing Eurodollar rate, plus a margin that varies according to the credit rating of the borrower. The facility also includes a “swingline loan sub-facility,” pursuant to which each company may make same day borrowings in an aggregate amount not to exceed $150 million. Any swingline loan must be repaid by the borrower within seven days of receipt thereof. All indebtedness incurred under the facility is unsecured.

The facility is intended to serve primarily as a source of liquidity to support the commercial paper programs of the respective companies. The companies also are permitted to use the facility to borrow funds for general corporate purposes and issue letters of credit. In order for a borrower to use the facility, certain representations and warranties must be true, and the borrower must be in compliance with specified covenants, including (i) the requirement that each borrowing company maintain a ratio of total indebtedness to total capitalization of 65% or less, computed in accordance with the terms of the credit agreement, which calculation excludes from the definition of total indebtedness certain trust preferred securities and deferrable interest subordinated debt (not to exceed 15% of total capitalization), (ii) a restriction on sales or other dispositions of assets, other than certain sales and dispositions, and (iii) a restriction on the incurrence of liens on the assets of a borrower or any of its significant subsidiaries other than permitted liens. The absence of a material adverse change in the borrower’s business, property, and results of operations or financial condition is not a condition to the availability of credit under the facility. The facility does not include any rating triggers.

As a result of severe liquidity constraints in the credit, commercial paper and capital markets during October 2008, DPL borrowed under the $1.5 billion credit facility. Typically, DPL issues commercial paper if required to meet its short-term working capital requirements. Given the lack of liquidity in the commercial paper markets, DPL borrowed under the credit facility to maintain sufficient cash on hand to meet daily short-term operating needs. In October 2008, DPL borrowed $150 million. At December 31, 2008, DPL did not have any borrowings under the facility.

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DPL

(12) INCOME TAXES

DPL, as an indirect subsidiary of PHI, is included in the consolidated federal income tax return of PHI. Federal income taxes are allocated to DPL pursuant to a written tax sharing agreement that was approved by the Securities and Exchange Commission in connection with the establishment of PHI as a holding company as part of Pepco’s acquisition of Conectiv on August 1, 2002. Under this tax sharing agreement, PHI’s consolidated federal income tax liability is allocated based upon PHI’s and its subsidiaries’ separate taxable income or loss.

The provision for income taxes, reconciliation of income tax expense, and components of deferred income tax liabilities (assets) are shown below.

Provision for Income Taxes

	For the Year Ended December 31,
	2008	2007	2006
	(Millions of dollars)
Current Tax Expense (Benefit)
Federal	$11	$12	$(4)
State and local	2	(1)	(2)
Total Current Tax Expense (Benefit)	13	11	(6)
Deferred Tax Expense (Benefit)
Federal	25	21	30
State and local	8	6	9
Investment tax credit amortization	(1)	(1)	(1)
Total Deferred Tax Expense	32	26	38
Total Income Tax Expense	$45	$37	$32

Reconciliation of Income Tax Rate

	For the Year Ended December 31,
	2008	2007	2006

Federal statutory rate	35.0%	35.0%	35.0%
Increases (decreases) resulting from
Depreciation	1.0	2.9	2.4
State income taxes, net of federal effect	5.8	5.2	6.4
Tax credits	(.7)	(1.0)	(1.2)
Change in estimates and interest related to uncertain and effectively settled tax positions	(2.6)	(1.2)	1.3
Deferred tax adjustments	2.0	3.9	-
Other, net	(.7)	.3	(1.2)

Effective Income Tax Rate	39.8%	45.1%	42.7%

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DPL

During 2008, DPL completed an analysis of its current and deferred income tax accounts and, as a result, recorded a $2 million charge to income tax expense in 2008, which is primarily included in “Deferred tax adjustments” in the reconciliation provided above. In addition, during 2008 DPL recorded after-tax net interest income of $3 million under FIN 48 primarily related to the reversal of previously accrued interest payable resulting from a favorable tentative settlement of the mixed service cost issue with the IRS.

FIN 48, “Accounting for Uncertainty in Income Taxes”

As disclosed in Note (2), “Significant Accounting Policies,” DPL adopted FIN 48 effective January 1, 2007. Upon adoption, DPL recorded the cumulative effect of the change in accounting principle of $100 thousand as an increase in retained earnings. Also upon adoption, DPL had $43 million of unrecognized tax benefits and $10 million of related accrued interest.

Reconciliation of Beginning and Ending Balances of Unrecognized Tax Benefits

		2008		2007

Beginning balance as of January 1,	$	41	$	43
Tax positions related to current year:
Additions		-		1
Tax positions related to prior years:
Additions		35		7
Reductions		(22)		-
Settlements		-		(10)
Ending balance as of December 31,	$	54	$	41

Unrecognized Benefits That If Recognized Would Affect the Effective Tax Rate

Unrecognized tax benefits represent those tax benefits related to tax positions that have been taken or are expected to be taken in tax returns that are not recognized in the financial statements because, in accordance with FIN 48, management has either measured the tax benefit at an amount less than the benefit claimed, or expected to be claimed, or has concluded that it is not more likely than not that the tax position will be ultimately sustained.

For the majority of these tax positions, the ultimate deductibility is highly certain, but there is uncertainty about the timing of such deductibility. At December 31, 2008, DPL had no unrecognized tax benefits that, if recognized, would lower the effective tax rate.

Interest and Penalties

DPL recognizes interest and penalties relating to its uncertain tax positions as an element of income tax expense. For the years ended December 31, 2008 and 2007, DPL recognized $5 million of interest income before tax ($3 million after-tax) and $2 million of interest expense before tax ($1 million after-tax), respectively, as a component of tax expense. As of December 31, 2008 and 2007, DPL had $3 million and $6 million, respectively, of accrued interest payable related to effectively settled and uncertain tax positions.

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DPL

Possible Changes to Unrecognized Tax Benefits

It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain of DPL’s unrecognized tax positions will significantly increase or decrease within the next 12 months. The final settlement of the Mixed Service Cost issue or other federal or state audits could impact the balances significantly. At this time, other than the Mixed Service Cost issue, an estimate of the range of reasonably possible outcomes cannot be determined. The unrecognized benefit related to the Mixed Service Cost issue could decrease by $22 million within the next 12 months upon final resolution of the tentative settlement with the IRS and the obligation becomes certain. See Note (14), “Commitments and Contingencies,” for additional information.

Tax Years Open to Examination

DPL, as in indirect subsidiary of PHI, is included on PHI’s consolidated federal tax return. DPL’s federal income tax liabilities for all years through 1999 have been determined, subject to adjustment to the extent of any net operating loss or other loss or credit carrybacks from subsequent years. The open tax years for the significant states where DPL files state income tax returns (Maryland, Delaware, and Virginia) are the same as noted above.

Components of Deferred Income Tax Liabilities (Assets)

	As of December 31 ,
	2008	2007
	(Millions of dollars)
Deferred Tax Liabilities (Assets)
Depreciation and other basis differences related to plant and equipment	$339	$315
Deferred taxes on amounts to be collected through future rates	14	13
Pension and other postretirement benefits	72	62
Other	15	16
Total Deferred Tax Liabilities, net	440	406
Deferred tax assets included in Other Current Assets	8	6
Deferred tax liabilities included in Other Current Liabilities	(2)	(2)
Total Deferred Tax Liabilities, net - non-current	$446	$410

The net deferred tax liability represents the tax effect, at presently enacted tax rates, of temporary differences between the financial statement and tax basis of assets and liabilities. The portion of the net deferred tax liability applicable to DPL’s operations, which has not been reflected in current service rates, represents income taxes recoverable through future rates, net and is recorded as a regulatory asset on the balance sheet. No valuation allowance for deferred tax assets was required or recorded at December 31, 2008 and 2007.

The Tax Reform Act of 1986 repealed the Investment Tax Credit (ITC) for property placed in service after December 31, 1985, except for certain transition property. ITC previously earned on DPL’s property continues to be normalized over the remaining service lives of the related assets.

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DPL

Taxes Other Than Income Taxes

Taxes other than income taxes for each year are shown below. These amounts relate to the Power Delivery business and are recoverable through rates.

	2008	2007	2006
	(Millions of dollars)
Gross Receipts/Delivery	$17	$17	$19
Property	18	18	17
Environmental, Use and Other	-	1	1
Total	$35	$36	$37

(13) FAIR VALUE DISCLOSURES

Effective January 1, 2008, DPL adopted SFAS No. 157, as discussed earlier in Note (3), which established a framework for measuring fair value and expands disclosures about fair value measurements.

As defined in SFAS No. 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). DPL utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. Accordingly, DPL utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. DPL is able to classify fair value balances based on the observability of those inputs. SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). The three levels of the fair value hierarchy defined by SFAS No. 157 are as follows:

Level 3 — Pricing inputs include significant inputs that are generally less observable than those from objective sources. Level 3 includes those financial investments that are valued using models or other valuation methodologies. DPL’s Level 3 instruments are natural gas options.

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DPL

Some non-standard assumptions are used in their forward valuation to adjust for the pricing; otherwise, most of the options follow NYMEX valuation. A few of the options have no significant NYMEX components, and have to be priced using internal volatility assumptions. Some of the options do not expire until December 2011. All of the options are part of the natural gas hedging program approved by the Delaware Public Service Commission.

Level 3 instruments classified as executive deferred compensation plan assets are life insurance policies that are valued using the cash surrender value of the policies. Since these values do not represent a quoted price in an active market they are considered Level 3.

The following table sets forth by level within the fair value hierarchy DPL’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2008. As required by SFAS No. 157, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. DPL’s assessment of the significance of a particular input to the fair value measurement requires the exercise of judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

	Fair Value Measurements at Reporting Date
	(Millions of dollars)
Description	December 31, 2008		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

ASSETS
Cash equivalents	$	129	$	129	$	-	$	-
Executive deferred compensation plan assets		4		3		-		1
	$	133	$	132	$	-	$	1

LIABILITIES
Derivative instruments	$	56	$	29	$	3	$	24
Executive deferred compensation plan liabilities		1		-		1		-
	$	57	$	29	$	4	$	24

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DPL

A reconciliation of the beginning and ending balances of DPL’s fair value measurements using significant unobservable inputs (level 3) is shown below (in millions of dollars):

	Net Derivative Instruments Assets (Liability)		Deferred Compensation Plan Assets
Beginning balance as of January 1, 2008	$	(11)	$	1
Total gains or (losses) (realized/unrealized)
Included in earnings		(14)		-
Included in other comprehensive income		-		-
Purchases and issuances		-		-
Settlements		1		-
Transfers in and/or out of Level 3		-		-
Ending balance as of December 31, 2008	$	(24)	$	1


Gains (realized and unrealized) included in earnings for the period above are reported in Fuel and Purchased Energy Expense and Other Operation and Maintenance Expense as follows:		Fuel and Purchased Energy Expense		Other Operation and Maintenance Expense

Total losses included in earnings for the period above	$	(14)	$	-

Change in unrealized losses relating to assets still held at reporting date	$	(17)	$	-

The estimated fair values of DPL’s non-derivative financial instruments at December 31, 2008 and 2007 are shown below.

	2008		2007
	Carrying Amount	Fair Value	Carrying Amount	Fair Value
	(Millions of dollars)
Long-term debt	$686	$682	$552	$544

The fair values of the Long-term debt, which includes First Mortgage Bonds, Amortizing First Mortgage Bonds, Unsecured Tax-Exempt Bonds, Medium-Term Notes, and Unsecured Notes, including amounts due within one year, were derived based on current market prices, or for issues with no market price available, were based on discounted cash flows using current rates for similar issues with similar terms and remaining maturities.

(14) COMMITMENTS AND CONTINGENCIES

Rate Proceedings

In the most recent electric service distribution base rate cases filed by DPL in Maryland, and in a natural gas distribution case filed by DPL in Delaware, DPL proposed the adoption of a BSA for retail customers. As more fully discussed below, the implementation of a BSA has been approved for electric service in Maryland. A method of revenue decoupling similar to a BSA,

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DPL

referred to as a modified fixed variable rate design (MFVRD), has been adopted in Delaware, which will be implemented in the context of DPL’s next Delaware base rate case. Under the BSA, customer delivery rates are subject to adjustment (through a surcharge or credit mechanism), depending on whether actual distribution revenue per customer exceeds or falls short of the approved revenue-per-customer amount. The BSA increases rates if actual distribution revenues fall below the level approved by the applicable commission and decreases rates if actual distribution revenues are above the approved level. The result is that, over time, DPL collects its authorized revenues for distribution deliveries. As a consequence, a BSA “decouples” revenue from unit sales consumption and ties the growth in revenues to the growth in the number of customers. Some advantages of the BSA are that it (i) eliminates revenue fluctuations due to weather and changes in customer usage patterns and, therefore, provides for more predictable utility distribution revenues that are better aligned with costs, (ii) provides for more reliable fixed-cost recovery, (iii) tends to stabilize customers’ delivery bills, and (iv) removes any disincentives for DPL to promote energy efficiency programs for its customers, because it breaks the link between overall sales volumes and delivery revenues. The MVFRD adopted in Delaware relies primarily upon a fixed customer charge (i.e., not tied to the customer’s volumetric consumption) to recover the utility’s fixed costs, plus a reasonable rate of return. Although different from the BSA, DPL believes that the MFRVD can serve as an appropriate revenue decoupling mechanism.

Delaware

Maryland

In July 2007, the MPSC issued an order in DPL’s electric service distribution rate case, which included approval of a BSA. The order approved an annual increase in distribution rates of approximately $15 million (including a decrease in annual depreciation expense of approximately $1 million). The approved distribution rate reflects a return on equity (ROE) of 10%. The rate increases were effective as of June 16, 2007, and remained in effect for an initial period until July 19, 2008, pending a Phase II proceeding in which the MPSC considered the results of an audit of DPL’s cost allocation manual, as filed with the MPSC, to determine whether a further adjustment to the rates was required. On July 18, 2008, the MPSC issued an order covering the Phase II proceedings, denying any further adjustment to DPL’s rates, thus making permanent the rate increases approved in the July 2007 order. The MPSC also issued an order on August 4, 2008, further explaining its July 18 order.

DPL has filed a general notice of appeal of the MPSC July 2007 and the July 18 and August 4, 2008 orders. The appeal challenges the MPSC’s failure to implement permanent rates in accordance with Maryland law, and seek judicial review of the MPSC’s denial of DPL’s rights

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DPL

to recover an increased share of the PHI Service Company costs and the costs of performing a MPSC-mandated management audit. The case currently is pending before the Circuit Court for Baltimore City. Under the procedural schedule set by the court, DPL will file a consolidated brief on or before March 9, 2009, specifying the basis for its requested relief.

Federal Energy Regulatory Commission

On August 18, 2008, DPL submitted an application with FERC for incentive rate treatments in connection with PHI’s 230-mile, 500-kilovolt Mid-Atlantic Power Pathway transmission project. The application requested that FERC include DPL’s Construction Work in Progress in its transmission rate base, an ROE adder of 150 basis points (for a total ROE of 12.8%) and the recovery of prudently incurred costs in the event the project is abandoned or terminated for reasons beyond DPL’s control. On October 31, 2008, FERC issued an order approving the application.

Sale of Virginia Retail Electric Distribution and Wholesale Transmission Assets

Environmental Litigation

DPL is subject to regulation by various federal, regional, state, and local authorities with respect to the environmental effects of its operations, including air and water quality control, solid and hazardous waste disposal, and limitations on land use. In addition, federal and state statutes authorize governmental agencies to compel responsible parties to clean up certain abandoned or unremediated hazardous waste sites. DPL may incur costs to clean up currently or formerly owned facilities or sites found to be contaminated, as well as other facilities or sites that may have been contaminated due to past disposal practices. Although penalties assessed for violations of environmental laws and regulations are not recoverable from DPL’s customers, environmental clean-up costs incurred by DPL would be included in its cost of service for ratemaking purposes.

Metal Bank/Cottman Avenue Site . In the early 1970s, DPL sold scrap transformers, some of which may have contained some level of PCBs, to a metal reclaimer operating at the Metal Bank/Cottman Avenue site in Philadelphia, Pennsylvania, owned by a nonaffiliated company. In 1987, DPL was notified by the United States Environmental Protection Agency (EPA) that it, along with a number of other utilities and non-utilities, was a potentially responsible party in connection with the PCB contamination at the site. In 1999, DPL entered into a de minimis settlement with EPA and paid less than a million dollars to resolve its liability

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DPL

for cleanup costs at the Metal Bank/Cottman Avenue site. The de minimis settlement did not resolve DPL’s responsibility for natural resource damages, if any, at the site. DPL believes that any liability for natural resource damages at this site will not have a material adverse effect on its financial position, results of operations or cash flows.

IRS Mixed Service Cost Issue

During 2001, DPL changed its method of accounting with respect to capitalizable construction costs for income tax purposes. The change allowed DPL to accelerate the deduction of certain expenses that were previously capitalized and depreciated. Through December 31, 2005, these accelerated deductions generated incremental tax cash flow benefits of approximately $62 million for DPL, primarily attributable to DPL’s 2001 tax returns.

In 2005, the Treasury Department issued proposed regulations that, if adopted in their current form, would require DPL to change its method of accounting with respect to capitalizable construction costs for income tax purposes for tax periods beginning in 2005. Based on those proposed regulations, PHI in its 2005 federal tax return adopted an alternative method of accounting for capitalizable construction costs that management believed would be acceptable to the IRS.

At the same time as the proposed regulations were released, the IRS issued Revenue Ruling 2005-53, which was intended to limit the ability of certain taxpayers to utilize the method of accounting for income tax purposes they utilized on their tax returns for 2004 and prior years with respect to capitalizable construction costs. In line with this Revenue Ruling, the IRS revenue agent’s report for the 2001 and 2002 tax returns disallowed substantially all of the incremental tax benefits that DPL had claimed on those returns by requiring it to capitalize and depreciate certain expenses rather than treat such expenses as current deductions. PHI’s protest of the IRS adjustments is among the unresolved audit matters relating to the 2001 and 2002 audits pending before the U.S. Office of Appeals of the Internal Revenue Service (IRS).

In February 2006, PHI paid approximately $121 million of taxes to cover the amount of additional taxes and interest that management estimated to be payable for the years 2001 through 2004 based on the method of tax accounting that PHI, pursuant to the proposed regulations, adopted on its 2005 tax return. In June 2008, PHI received from the IRS an offer of settlement pertaining to DPL for the tax years 2001 through 2004. DPL is substantially in agreement with this proposed settlement. Based on the terms of the proposal, DPL expects the final settlement amount to be less than the $121 million previously deposited.

On the basis of the tentative settlement, DPL updated its estimated liability related to mixed service costs and, as a result, recorded in the quarter ended June 30, 2008, a net reduction in its liability for unrecognized tax benefits of $1 million and recognized after-tax interest income of $2 million.

Contractual Obligations

As of December 31, 2008, DPL’s contractual obligations under non-derivative fuel and power purchase contracts were $482 million in 2009, $412 million in 2010 to 2011, $47 million in 2012 to 2013, and $136 million in 2014 and thereafter.

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DPL

(15) RELATED PARTY TRANSACTIONS

PHI Service Company provides various administrative and professional services to PHI and its regulated and unregulated subsidiaries including DPL. The cost of these services is allocated in accordance with cost allocation methodologies set forth in the service agreement using a variety of factors, including the subsidiaries’ share of employees, operating expenses, assets, and other cost causal methods. These intercompany transactions are eliminated by PHI in consolidation and no profit results from these transactions at PHI. PHI Service Company costs directly charged or allocated to DPL for the years ended December 31, 2008, 2007 and 2006 were $111 million, $108 million, and $101 million, respectively.

In addition to the PHI Service Company charges described above, DPL’s financial statements include the following related party transactions in its Statements of Earnings:

	For the Year Ended December 31,
	2008	2007	2006
(Expense) Income	(Millions of dollars)
Full Requirements Contract with Conectiv Energy Supply for power, capacity and ancillary services to service Provider of Last Resort Load (a)	$ -	$ -	$(122)
SOS with Conectiv Energy Supply (a)	(180)	(263)	(214)
SOS with Pepco Energy Services (a)	-	(6)	-
Intercompany lease transactions (b)	7	8	9
Transcompany pipeline gas sales with Conectiv Energy Supply (c)	1	3	3
Transcompany pipeline gas purchases with Conectiv Energy Supply (d)	$ (3)	$ (2)	$ (3)

(a) Included in fuel and purchased energy expense.

(b) Included in electric revenue.

(d) Included in gas purchased expense.

As of December 31, 2008 and 2007, DPL had the following balances on its balance sheets due (to)/from related parties:

	2008	2007
Asset (Liability)	(Millions of dollars)
Payable to Related Party (current)
PHI Service Company	$(15)	$ (25)
Conectiv Energy Supply	(14)	(23)
Pepco Energy Services	(6)	(7)
The items listed above are included in the “Accounts payable to associated companies” balance on the Balance Sheet of $34 million and $54 million at December 31, 2008 and 2007, respectively.
Money Pool Balance with Pepco Holdings (included in short-term debt)	-	$(157)
Money Pool Interest Accrued (included in interest accrued)	-	$ (1)

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DPL

(16) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

	2008
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Total
	(Millions of dollars)
Total Operating Revenue	$	411		$	372		$	401			$355		$1,539
Total Operating Expenses		364			341			376	(c)		310		1,391
Operating Income		47			31			25			45		148
Other Expenses		(8)			(7)			(8)			(12)		(35)
Income Before Income Tax Expense		39			24			17			33		113
Income Tax Expense		13	(a)		8	(b)		6			18	(d)	45
Net Income		26			16			11			15		68
Dividends on Preferred Stock		-			-			-			-		-
Earnings Available for Common Stock	$	26		$	16		$	11			$ 15		$ 68

	2007
	First Quarter		Second Quarter		Third Quarter			Fourth Quarter			Total
	(Millions of dollars)
Total Operating Revenue	$	422	$	330	$	399			$345		$1,496
Total Operating Expenses		385		310		367			312		1,374
Operating Income		37		20		32			33		122
Other Expenses		(10)		(9)		(10)			(11)		(40)
Income Before Income Tax Expense		27		11		22			22		82
Income Tax Expense		11		2		11	(e)		13	(e)	37
Net Income		16		9		11			9		45
Dividends on Preferred Stock		-		-		-			-		-
Earnings Available for Common Stock	$	16	$	9	$	11			$ 9		$ 45

(a)	Includes $3 million of after-tax net interest income on uncertain tax positions primarily related to casualty losses.

(b)	Includes $2 million of after-tax interest income related to the tentative settlement of the IRS mixed service cost issue.

(c)

Includes a $2 million charge related to an adjustment in the accounting for certain restricted stock awards granted under the Long-Term Incentive Plan (LTIP) and a $4 million adjustment to correct an understatement of operating expenses for prior periods dating back to May 2006 where late payment fees were incorrectly recognized.

(d)

Includes $3 million of after-tax net interest expense on uncertain and effectively settled tax positions (primarily associated with the reversal of the majority of the interest income recognized on uncertain tax positions related to casualty losses in the first quarter) and a charge of $2 million to correct prior period errors related to additional analysis of deferred tax balances completed in 2008.

(e)	Includes a charge of $1 million in the third quarter and $2 million in the fourth quarter related to additional analysis of deferred tax balances completed in 2007.

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Management’s Report on Internal Control over Financial Reporting

The management of ACE is responsible for establishing and maintaining adequate internal control over financial reporting. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed its internal control over financial reporting as of December 31, 2008 based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, the management of ACE concluded that its internal control over financial reporting was effective as of December 31, 2008.

This Annual Report on Form 10-K does not include an attestation report of ACE’s registered public accounting firm, PricewaterhouseCoopers LLP, regarding internal control over financial reporting. Management’s report was not subject to attestation by PricewaterhouseCoopers LLP pursuant to temporary rules of the Securities and Exchange Commission that permit ACE to provide only management’s report in this Form 10-K.

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Report of Independent Registered Public Accounting Firm

To the Shareholder and Board of Directors of

Atlantic City Electric Company

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Atlantic City Electric Company (a wholly owned subsidiary of Pepco Holdings, Inc.) and its subsidiaries at December 31, 2008 and December 31, 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 11 to the consolidated financial statements, the Company changed its manner of accounting and reporting for uncertain tax positions in 2007.

PricewaterhouseCoopers LLP

Washington, DC

March 2, 2009

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ATLANTIC CITY ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF EARNINGS
For the Year Ended December 31,	2008	2007	2006
( Millions of dollars)
Operating Revenue	$1,633	$1,543	$1,373

Operating Expenses
Fuel and purchased energy	1,178	1,051	924
Other operation and maintenance	183	165	148
Depreciation and amortization	104	80	111
Other taxes	24	22	23
Deferred electric service costs	(9)	66	15
Total Operating Expenses	1,480	1,384	1,221

Operating Income	153	159	152

Other Income (Expenses)
Interest and dividend income	1	1	2
Interest expense	(62)	(64)	(64)
Other income	3	5	5
Other expenses	(1)	-	(2)
Total Other Expenses	(59)	(58)	(59)

Income Before Income Tax Expense	94	101	93

Income Tax Expense	30	41	33

Income from Continuing Operations	64	60	60

Discontinued Operations (Note 16)
Income from operations (net of tax of zero, zero, and $2 million, respectively)	-	-	2

Net Income	64	60	62

Dividends on Redeemable Serial Preferred Stock	-	-	-

Earnings Available for Common Stock	$ 64	$ 60	$ 62

The accompanying Notes are an integral part of these Consolidated Financial Statements.

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ATLANTIC CITY ELECTRIC COMPANY CONSOLIDATED BALANCE SHEETS
ASSETS	December 31, 2008	December 31, 2007
(Millions of dollars)
CURRENT ASSETS
Cash and cash equivalents	$ 65	$ 7
Restricted cash equivalents	10	10
Accounts receivable, less allowance for uncollectible accounts of $6 million and $5 million, respectively	195	198
Inventories	15	14
Prepayments of income taxes	47	47
Prepaid expenses and other	16	17
Total Current Assets	348	293
INVESTMENTS AND OTHER ASSETS
Regulatory assets	766	818
Restricted funds held by trustee	5	7
Receivables and accrued interest related to uncertain tax positions	113	5
Prepaid pension expense	6	8
Other	26	32
Total Investments and Other Assets	916	870


PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment	2,216	2,078
Accumulated depreciation	(666)	(634)
Net Property, Plant and Equipment	1,550	1,444

TOTAL ASSETS	$2,814	$2,607

The accompanying Notes are an integral part of these Consolidated Financial Statements.

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ATLANTIC CITY ELECTRIC COMPANY CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER’S EQUITY	December 31, 2008	December 31, 2007
(Millions of dollars, except shares)
CURRENT LIABILITIES
Short-term debt	$ 23	$ 52
Current maturities of long-term debt	32	81
Accounts payable and accrued liabilities	122	129
Accounts payable to associated companies	28	18
Taxes accrued	7	30
Interest accrued	14	13
Liabilities and accrued interest related to uncertain tax positions	6	27
Other	35	37
Total Current Liabilities	267	387
DEFERRED CREDITS
Regulatory liabilities	377	431
Deferred income taxes, net	549	386
Investment tax credits	10	11
Other postretirement benefit obligation	41	38
Liabilities and accrued interest related to uncertain tax positions	3	6
Other	14	15
Total Deferred Credits	994	887

LONG-TERM LIABILITIES
Long-term debt	610	416
Transition Bonds issued by ACE Funding	401	434
Total Long-Term Liabilities	1,011	850

COMMITMENTS AND CONTINGENCIES (NOTE 14 )

REDEEMABLE SERIAL PREFERRED STOCK	6	6

SHAREHOLDER’S EQUITY
Common stock, $3.00 par value, authorized 25,000,000 shares, 8,546,017 shares outstanding	26	26
Premium on stock and other capital contributions	344	309
Retained earnings	166	142
Total Shareholder’s Equity	536	477

TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY	$2,814	$2,607

The accompanying Notes are an integral part of these Consolidated Financial Statements.

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ATLANTIC CITY ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31,	2008	2007	2006
(Millions of dollars)

OPERATING ACTIVITIES
Net income	$ 64	$ 60	$ 62
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization	104	80	111
Investment tax credit adjustments	(1)	1	(1)
Deferred income taxes	166	(31)	4
Pension expense	2	3	5
Other postretirement benefit obligations	3	1	3
Changes in:
Accounts receivable	3	(35)	42
Regulatory assets and liabilities	(43)	55	18
Inventories	(1)	(1)	10
Prepaid expenses	1	(1)	2
Accounts payable and accrued liabilities	10	-	(106)
Interest accrued	1	-	1
Taxes accrued	(159)	24	(120)
Proceeds from sale of B.L. England emission allowances	-	48	-
Net other operating	3	(8)	(10)
Net Cash From Operating Activities	153	196	21

INVESTING ACTIVITIES
Investment in property, plant and equipment	(162)	(149)	(108)
Proceeds from sale of assets	1	9	177
Change in restricted cash equivalents	(1)	(1)	2
Net other investing activities	1	10	-
Net Cash (Used By) From Investing Activities	(161)	(131)	71

FINANCING ACTIVITIES
Dividends paid to Parent	(46)	(50)	(109)
Capital contribution from Parent	35	-	-
Issuances of long-term debt	250	-	105
Reacquisitions of long-term debt	(136)	(46)	(94)
(Repayments) issuances of short-term debt, net	(29)	28	1
Costs of issuances and refinancing	(2)	-	(1)
Net other financing activities	(6)	5	3
Net Cash From (Used By) Financing Activities	66	(63)	(95)

Net Increase (Decrease) In Cash and Cash Equivalents	58	2	(3)
Cash and Cash Equivalents at Beginning of Year	7	5	8

CASH AND CASH EQUIVALENTS AT END OF YEAR	$ 65	$ 7	$ 5

NON-CASH ACTIVITIES
Capital contribution in respect of certain intercompany transactions	$ -	$ 3	$ 13

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest (net of capitalized interest of $2 million, $2 million, and $1 million, respectively) and paid for income taxes:
Interest	$ 58	$ 62	$ 60
Income taxes	$ 21	$ 38	$129

The accompanying Notes are an integral part of these Consolidated Financial Statements.

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ATLANTIC CITY ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY
				Premium on Stock	Capital Stock Expense	Retained Earnings
	Common Stock
	Shares	Par Value
(Millions of dollars, except shares)

BALANCE, DECEMBER 31, 2005	8,546,017		$26	$294	$(1)	$179

Net Income	-		-	-	-	62
Dividends:
Common stock	-		-	-	-	(109)
Capital contribution from Parent	-		-	13	-	-
BALANCE, DECEMBER 31, 2006	8,546,017		26	307	(1)	132

Net Income	-		-	-	-	60
Dividends:
Common stock	-		-	-	-	(50)
Capital contribution from Parent	-		-	3	-	-
BALANCE, DECEMBER 31, 2007	8,546,017		26	310	(1)	142

Net Income	-		-	-	-	64
Dividends:
Common stock	-		-	-	-	(46)
Transfer of deferred income tax liabilities to Parent	-		-	-	-	6
Capital contribution from Parent	-		-	35	-	-
BALANCE, DECEMBER 31, 2008	8,546,017		$26	$345	$(1)	$166

The accompanying Notes are an integral part of these Consolidated Financial Statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ATLANTIC CITY ELECTRIC COMPANY

(1) ORGANIZATION

Atlantic City Electric Company (ACE) is engaged in the transmission and distribution of electricity in southern New Jersey. In addition, ACE provides Default Electricity Supply, which is the supply of electricity at regulated rates to retail customers in its service territory who do not elect to purchase electricity from a competitive supplier. Default Electricity Supply is also known as Basic Generation Service (BGS). ACE is a wholly owned subsidiary of Conectiv, which is wholly owned by Pepco Holdings, Inc. (Pepco Holdings or PHI).

In addition to its electricity transmission and distribution operations, during 2006 ACE owned a 2.47% undivided interest in the Keystone electric generating facility, a 3.83% undivided interest in the Conemaugh electric generating facility (with a combined generating capacity of 108 megawatts), and also owned the B.L. England electric generating facility (with a generating capacity of 447 megawatts). On September 1, 2006, ACE sold its interests in the Keystone and Conemaugh generating facilities and on February 8, 2007, ACE completed the sale of the B.L. England generating facility.

Impact of the Current Capital and Credit Market Disruptions

Liquidity Requirements

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capacity of PHI’s utility subsidiaries was $831 million and ranged from a low of $673 million to a high of $1 billion.

To address the challenges posed by the current capital and credit market environment and to ensure that it will continue to have sufficient access to cash to meet its liquidity needs, ACE has identified a number of cash and liquidity conservation measures, including opportunities to defer capital expenditures due to lower than anticipated growth. Several measures to reduce expenditures have been taken. Additional measures could be undertaken if conditions warrant.

Pension and Postretirement Benefit Plans

(2) SIGNIFICANT ACCOUNTING POLICIES

Consolidation Policy

The accompanying consolidated financial statements include the accounts of ACE and its wholly owned subsidiaries. All intercompany balances and transactions between subsidiaries have been eliminated. ACE uses the equity method to report investments, corporate joint ventures, partnerships, and affiliated companies where it holds a 20% to 50% voting interest and cannot exercise control over the operations and policies of the investee. Individual interests in several jointly owned electric plants previously held by ACE, and certain transmission and other facilities currently held are consolidated in proportion to ACE’s percentage interest in the facility.

In accordance with the provisions of Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 46R, entitled “Consolidation of Variable Interest Entities” (FIN 46R), ACE consolidates those variable interest entities where ACE has been determined to be primary beneficiary. FIN 46R addresses conditions when an entity should be consolidated based upon variable interests rather than voting interests. For additional information, see the FIN 46R discussion later in this Note.

Use of Estimates

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financial statements and accompanying notes. Although ACE believes that its estimates and assumptions are reasonable, they are based upon information available to management at the time the estimates are made. Actual results may differ significantly from these estimates.

Significant matters that involve the use of estimates include the assessment of contingencies, the calculation of future cash flows and fair value amounts for use in asset impairment evaluations, pension and other postretirement benefits assumptions, unbilled revenue calculations, the assessment of the probability of recovery of regulatory assets, and income tax provisions and reserves. Additionally, ACE is subject to legal, regulatory, and other proceedings and claims that arise in the ordinary course of its business. ACE records an estimated liability for these proceedings and claims when the loss is determined to be probable and is reasonably estimable.

Revenue Recognition

ACE recognizes revenue upon delivery of electricity to its customers, including amounts for electricity delivered but not yet billed (unbilled revenue). ACE recorded amounts for unbilled revenue of $45 million and $38 million as of December 31, 2008 and December 31, 2007, respectively. These amounts are included in “Accounts receivable.” ACE calculates unbilled revenue using an output based methodology. This methodology is based on the supply of electricity intended for distribution to customers. The unbilled revenue process requires management to make assumptions and judgments about input factors such as customer sales mix, temperature, and estimated power line losses (estimates of electricity expected to be lost in the process of its transmission and distribution to customers), all of which are inherently uncertain and susceptible to change from period to period, and if the actual results differ from the projected results, the impact could be material.

Taxes related to the delivery of electricity to its customers are a component of ACE’s tariffs and, as such, are billed to customers and recorded in “Operating Revenues.” Accruals for these taxes by ACE are recorded in “Other taxes.” Excise tax related generally to the consumption of gasoline by ACE in the normal course of business is charged to operations, maintenance or construction, and is de minimis.

Taxes Assessed by a Governmental Authority on Revenue-Producing Transactions

Taxes included in ACE’s gross revenues were $22 million, $23 million and $22 million for the years ended December 31, 2008, 2007 and 2006, respectively.

Long-Lived Asset Impairment Evaluation

ACE evaluates certain long-lived assets to be held and used (for example, generating property and equipment and real estate) to determine if they are impaired whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Examples of such events or changes include a significant decrease in the market price of a long-lived asset or a significant adverse change in the manner an asset is being used or its physical condition. A long-lived asset to be held and used is written down to fair value if the sum of its expected future undiscounted cash flows is less than its carrying amount.

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Income Taxes

ACE, as an indirect subsidiary of PHI, is included in the consolidated federal income tax return of Pepco Holdings. Federal income taxes are allocated to ACE based upon the taxable income or loss amounts, determined on a separate return basis.

In 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies the criteria for recognition of tax benefits in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes,” and prescribes a financial statement recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. Specifically, it clarifies that an entity’s tax benefits must be “more likely than not” of being sustained prior to recording the related tax benefit in the financial statements. If the position drops below the “more likely than not” standard, the benefit can no longer be recognized. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

On May 2, 2007, the FASB issued FASB Staff Position (FSP) FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48” (FIN 48-1), which provides guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. ACE applied the guidance of FIN 48-1 with its adoption of FIN 48 on January 1, 2007.

The consolidated financial statements include current and deferred income taxes. Current income taxes represent the amounts of tax expected to be reported on ACE’s state income tax returns and the amount of federal income tax allocated from PHI.

Deferred income tax assets and liabilities represent the tax effects of temporary differences between the financial statement and tax basis of existing assets and liabilities, and are measured using presently enacted tax rates. The portion of ACE’s deferred tax liability applicable to its utility operations that has not been recovered from utility customers represents income taxes recoverable in the future and is included in “regulatory assets” on the Consolidated Balance Sheets. See Note (6), “Regulatory Assets and Regulatory Liabilities,” for additional discussion.

Deferred income tax expense generally represents the net change during the reporting period in the net deferred tax liability and deferred recoverable income taxes.

ACE recognizes interest on under/over payments of income taxes, interest on unrecognized tax benefits, and tax-related penalties in income tax expense.

Investment tax credits from utility plant purchased in prior years are reported on the Consolidated Balance Sheets as Investment tax credits. These investment tax credits are being amortized to income over the useful lives of the related utility plant.

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Discontinued Operations

Discontinued operations are identified and accounted for in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” For information regarding ACE’s discontinued operations refer to Note (16), “Discontinued Operations” herein.

FIN 46R, “Consolidation of Variable Interest Entities”

ACE has power purchase agreements (PPAs) with a number of entities, including three contracts between unaffiliated non-utility generators (NUGs) and ACE. Due to a variable element in the pricing structure of the NUGs, ACE potentially assumes the variability in the operations of the plants related to these PPAs and, therefore, has a variable interest in the entities. In accordance with the provisions of FIN 46R (revised December 2003), entitled “Consolidation of Variable Interest Entities,” and FSP FIN 46(R)-6, “Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R),” ACE continued, during the fourth quarter of 2008, to conduct exhaustive efforts to obtain information from these entities, but was unable to obtain sufficient information to conduct the analysis required under FIN 46R to determine whether these three entities were variable interest entities or if ACE was the primary beneficiary. As a result, ACE has applied the scope exemption from the application of FIN 46R for enterprises that have conducted exhaustive efforts to obtain the necessary information, but have not been able to obtain such information.

Net purchase activities with the NUGs for the years ended December 31, 2008, 2007 and 2006, were approximately $349 million, $327 million and $324 million, respectively, of which approximately $305 million, $292 million and $288 million, respectively, related to power purchases under the NUGs. ACE does not have exposure to loss under the NUGs because cost recovery will be achieved from its customers through regulated rates.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, cash invested in money market funds, and commercial paper held with original maturities of three months or less. Additionally, deposits in PHI’s “money pool,” which ACE and certain other PHI subsidiaries use to manage short-term cash management requirements, are considered cash equivalents. Deposits in the money pool are guaranteed by PHI. PHI deposits funds in the money pool to the extent that the pool has insufficient funds to meet the needs of its participants, which may require PHI to borrow funds for deposit from external sources.

Restricted Cash Equivalents

Restricted cash equivalents represents cash either held as collateral or pledged as collateral, and is restricted from use for general corporate purposes.

Accounts Receivable and Allowance for Uncollectible Accounts

ACE’s accounts receivable balance primarily consists of customer accounts receivable, other accounts receivable, and accrued unbilled revenue. Accrued unbilled revenue represents revenue earned in the current period but not billed to the customer until a future date (usually within one month after the receivable is recorded).

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ACE maintains an allowance for uncollectible accounts and changes in the allowance are recorded as an adjustment to Other Operation and Maintenance expense in the Consolidated Statements of Earnings. ACE determines the amount of allowance based on specific identification of material amounts at risk by customer and maintains a general reserve based on its historical collection experience. The adequacy of this allowance is assessed on a quarterly basis by evaluating all known factors such as the aging of the receivables, historical collection experience, the economic and competitive environment, and changes in the creditworthiness of its customers. Although management believes its allowances is adequate, it cannot anticipate with any certainty the changes in the financial condition of its customers. As a result, ACE records adjustments to the allowance for uncollectible accounts in the period the new information is known.

Inventories

Included in inventories are generation, transmission, and distribution materials and supplies. ACE utilizes the weighted average cost method of accounting for inventory items. Under this method, an average price is determined for the quantity of units acquired at each price level and is applied to the ending quantity to calculate the total ending inventory balance. Materials and supplies inventory are generally charged to inventory when purchased and then expensed or capitalized to plant, as appropriate, when installed.

Regulatory Assets and Regulatory Liabilities

Certain aspects of ACE’s utility businesses are subject to regulation by the New Jersey Board of Public Utilities (NJBPU). The transmission and wholesale sale of electricity by ACE is regulated by the Federal Energy Regulatory Commission (FERC).

Based on the regulatory framework in which it has operated, ACE has historically applied, and in connection with its transmission and distribution business continues to apply, the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, “Accounting for the Effects of Certain Types of Regulation.” SFAS No. 71 allows regulated entities, in appropriate circumstances, to establish regulatory assets and to defer the income statement impact of certain costs that are expected to be recovered in future rates. Management’s assessment of the probability of recovery of regulatory assets requires judgment and interpretation of laws, regulatory commission orders, and other factors. If management subsequently determines, based on changes in facts or circumstances, that a regulatory asset is not probable of recovery, then the regulatory asset will be eliminated through a charge to earnings.

Property, Plant and Equipment

Property, plant and equipment are recorded at original cost, including labor, materials, asset retirement costs and other direct and indirect costs, including capitalized interest. The carrying value of property, plant and equipment is evaluated for impairment whenever circumstances indicate the carrying value of those assets may not be recoverable under the provisions of SFAS No. 144. Upon retirement, the cost of regulated property, net of salvage, is charged to accumulated depreciation.

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and other recoveries. Property, plant and equipment other than electric facilities is generally depreciated on a straight-line basis over the useful lives of the assets. The system-wide composite depreciation rate for each of 2008, 2007 and 2006 for ACE’s transmission and distribution system property was 3%.

Capitalized Interest and Allowance for Funds Used During Construction

ACE recorded AFUDC for borrowed funds of $2 million, $2 million and $1 million for the years ended December 31, 2008, 2007 and 2006, respectively.

ACE recorded amounts for the equity component of AFUDC of $1 million for each of the years ended December 31, 2008, 2007 and 2006.

Leasing Activities

ACE’s lease transactions can include plant, office space, equipment, software and vehicles. In accordance with SFAS No. 13, “Accounting for Leases” (SFAS No. 13), these leases are classified as operating leases.

Operating Leases

An operating lease generally results in a level income statement charge over the term of the lease, reflecting the rental payments required by the lease agreement. If rental payments are not made on a straight-line basis, ACE’s policy is to recognize the increases on a straight-line basis over the lease term unless another systematic and rational allocation basis is more representative of the time pattern in which the leased property is physically employed.

Amortization of Debt Issuance and Reacquisition Costs

ACE defers and amortizes debt issuance costs and long-term debt premiums and discounts over the lives of the respective debt issues. Costs associated with the redemption of debt are also deferred and amortized over the lives of the new issues.

Pension and Other Postretirement Benefit Plans

Pepco Holdings sponsors a non-contributory retirement plan that covers substantially all employees of ACE (the PHI Retirement Plan) and certain employees of other Pepco Holdings subsidiaries. Pepco Holdings also provides supplemental retirement benefits to certain eligible executives and key employees through nonqualified retirement plans and provides certain postretirement health care and life insurance benefits for eligible retired employees.

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No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” as amended by SFAS No. 158. Pepco Holdings’ financial statement disclosures were prepared in accordance with SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” as amended by SFAS No. 158.

ACE participates in benefit plans sponsored by Pepco Holdings and as such, the provisions of SFAS No. 158 do not have an impact on its financial condition and cash flows.

Dividend Restrictions

In addition to its future financial performance, the ability of ACE to pay dividends is subject to limits imposed by: (i) state corporate and regulatory laws, which impose limitations on the funds that can be used to pay dividends and, in the case of regulatory laws, may require the prior approval of ACE’s utility regulatory commission before dividends can be paid; (ii) the prior rights of holders of existing and future preferred stock, mortgage bonds and other long-term debt issued by ACE and any other restrictions imposed in connection with the incurrence of liabilities; and (iii) certain provisions of the charter of ACE, which impose restrictions on payment of common stock dividends for the benefit of preferred stockholders. Currently, the restriction in the ACE charter does not limit its ability to pay dividends. ACE had approximately $89 million and $88 million of restricted retained earnings at December 31, 2008 and 2007, respectively.

Reclassifications and Adjustments

Certain prior year amounts have been reclassified in order to conform to current year presentation.

During 2008, ACE recorded an adjustment to correct errors in Other Operation and Maintenance expenses for certain restricted stock awards granted under the Long-Term Incentive Plan. This adjustment, which was not considered material, resulted in an increase in Other Operation and Maintenance expenses of $1 million for the year ended December 31, 2008, all of which related to prior periods.

(3) NEWLY ADOPTED ACCOUNTING STANDARDS

Statement of Financial Accounting Standards (SFAS) No. 157, “ Fair Value Measurements ” (SFAS No. 157)

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157-1), that removed fair value measurement for the recognition and measurement of lease transactions from the scope of SFAS No. 157. The effective date of FSP 157-1 was for financial statement periods beginning January 1, 2008 for ACE.

ACE applied the guidance of FSP 157-1 and FSP 157-2 with its adoption of SFAS No. 157. The adoption of SFAS No. 157 on January 1, 2008 did not result in a transition adjustment to beginning retained earnings and did not have a material impact on ACE’s overall financial condition, results of operations, or cash flows. SFAS No. 157 also required new disclosures regarding the level of pricing observability associated with financial instruments carried at fair value. This additional disclosure is provided in Note (13), “Fair Value Disclosures.” ACE is currently evaluating the impact of FSP 157-2 and does not anticipate that the application of FSP 157-2 to its other non-financial assets and non-financial liabilities will materially affect its overall financial condition, results of operations, or cash flows.

In September 2008, the Securities and Exchange Commission and FASB issued guidance on fair value measurements, which was clarifies in October 2008 by the FASB in FSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active.” This guidance clarifies the application of SFAS No. 157 to assets in an inactive market and illustrates how to determine the fair value of a financial asset in an inactive market. The guidance was effective beginning with the September 30, 2008 reporting period for ACE, and has not had a material impact on ACE’s results.

SFAS No. 159, “ The Fair Value Option for Financial Assets and Financial Liabilities—including an Amendment of FASB Statement No. 115 ” (SFAS No. 159)

SFAS No. 159 permits entities to elect to measure eligible financial instruments at fair value. SFAS No. 159 applies to other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. On January 1, 2008, ACE elected not to apply the fair value option for its eligible financial assets and liabilities.

SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS No. 162)

SFAS No. 162 was effective for ACE as of November 15, 2008 and did not result in a change in accounting for ACE. Therefore, the provisions of SFAS No. 162 did not have a material impact on ACE’s overall financial condition, results of operations, cash flows and disclosure.

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FSP FAS 133-1 and FIN 45-4, “Disclosure About Credit Derivatives and Certain Guarantees” (FSP FAS 133-1 and FIN 45-4)

For credit derivatives, FSP FAS 133-1 and FIN 45-4 requires disclosure of the nature and fair value of the credit derivative, the approximate term, the reasons for entering the derivative, the events requiring performance, and the current status of the payment/performance risk. It also requires disclosures of the maximum potential amount of future payments without any reduction for possible recoveries under collateral provisions, recourse provisions, or liquidation proceeds. ACE has not provided credit protection to others through the credit derivatives within the scope of SFAS No. 133.

The new disclosures are required starting with financial statement reporting periods ending December 31, 2008 for ACE. Comparative disclosures are only required for periods ending after initial adoption. The new guarantee disclosures did not have a material impact on ACE.

FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities” (FSP FAS 140-4 and FIN 46(R)-8)

FSP FAS 140-4 and FIN 46(R)-8 is effective for ACE’s December 31, 2008 financial statements. This FSP has no material impact to ACE’s overall financial condition, results of operations, or cash flows as it relates to SFAS No. 140. ACE’s FIN 46(R) disclosures are provided in Note (2), “Significant Accounting Policies - FIN 46R, Consolidation of Variable Interest Entities.”

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(4) RECENTLY ISSUED ACCOUNTING STANDARDS, NOT YET ADOPTED

SFAS No. 141(R), “Business Combinations—a Replacement of FASB Statement No. 141” (SFAS No. 141 (R))

SFAS No. 141(R) and the guidance provided in FSP FAS 141(R)-a applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009 for ACE. ACE has evaluated the impact of SFAS No. 141(R) and does not anticipate its adoption will have a material impact on its overall financial condition, results of operations, or cash flows.

SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an Amendment of ARB No. 51” (SFAS No. 160)

SFAS No. 160 is effective prospectively for financial statement reporting periods beginning January 1, 2009 for ACE, except for the presentation and disclosure requirements. The presentation and disclosure requirements apply retrospectively for all periods presented.

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ACE has evaluated the impact of SFAS No. 160 and does not anticipate its adoption will have a material impact on its overall financial condition, results of operations, cash flows or disclosure.

EITF Issue No. 08-6, “Equity Method Investment Accounting Consideration” (EITF 08-6)

In November 2008, the FASB issued EITF 08-6 to address the accounting for equity method investments including: (i) how an equity method investment should initially be measured, (ii) how it should be tested for impairment, and (iii) how an equity method investee’s issuance of shares should be accounted for. The EITF concludes that initial carrying value of an equity method investment can be determined using the accumulation model in SFAS 141(R), “Business Combination (revised 2007),” and other-than-temporary impairments should be recognized in accordance with paragraph 19(h) of Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.”

This EITF is effective for ACE beginning January 1, 2009. ACE is currently evaluating the impact on its accounting and disclosures.

FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (FSP FAS 132(R)-1)

The disclosures are to provide users an understanding of the investment allocation decisions made, factors used in the investment policies and strategies, plan assets by major investment types, inputs and valuation techniques used to measure fair value of plan assets, significant concentration of risk within the plan, and the effects of fair value measurement using significant unobservable inputs (Level 3 as defined by SFAS No. 157) on changes in plan assets for the period.

The new disclosures are required starting with financial statement reporting periods ending December 31, 2009 for ACE and earlier application is permitted. Comparative disclosures under this provision are not required for earlier periods presented. ACE is currently evaluating the impact on its disclosures.

(5) SEGMENT INFORMATION

In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” ACE has one segment, its regulated utility business.

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(6) REGULATORY ASSETS AND REGULATORY LIABILITIES

The components of ACE’s regulatory asset balances at December 31, 2008 and 2007 are as follows:

	2008	2007
	(Millions of dollars)
Securitized stranded costs	$674	$735
Deferred income taxes	26	22
Deferred debt extinguishment costs	14	14
Deferred other postretirement benefit costs	10	13
Unrecovered purchased power contract costs	9	10
Other	33	24
Total Regulatory Assets per Balance Sheet	$766	$818

The components of ACE’s regulatory liability balances at December 31, 2008 and 2007 are as follows:

	2008	2007
	(Millions of dollars)
Excess depreciation reserve	$ 74	$ 90
Deferred energy supply costs	247	241
Federal and New Jersey tax benefits, related to securitized stranded costs	28	31
Gain from sale of divested assets	26	67
Other	2	2
Total Regulatory Liabilities per Balance Sheet	$377	$431

A description for each category of regulatory assets and regulatory liabilities follows:

Securitized Stranded Costs: Represents stranded costs associated with a non-utility generator contract termination payment and the discontinuance of the application of SFAS No. 71 for ACE’s electricity generation business. The recovery of these stranded costs has been securitized through the issuance by Atlantic City Electric Transition Funding LLC (ACE Funding) of transition bonds (Transition Bonds). A customer surcharge is collected by ACE to fund principal and interest payments on the Transition Bonds. The stranded costs are amortized over the life of the Transition Bonds, which mature between 2010 and 2023. A return is received on these deferrals with the exception of taxes.

Deferred Income Taxes: Represents a receivable from our customers for tax benefits ACE has previously flowed through before the company was ordered to provide deferred income taxes. As the temporary differences between the financial statement and tax basis of assets reverse, the deferred recoverable balances are reversed. There is no return on these deferrals.

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Unrecovered Purchased Power Contract Costs: Represents deferred costs related to purchase power contracts at ACE, which are being recovered from July 1994 through May 2014 and which earn a return.

Other: Represents miscellaneous regulatory assets that generally are being amortized over 1 to 20 years and generally do not receive a return.

Excess Depreciation Reserve: The excess depreciation reserve was recorded as part of an ACE New Jersey rate case settlement. This excess reserve is the result of a change in estimated depreciable lives and a change in depreciation technique from remaining life to whole life. The excess is being amortized over an 8.25 year period, which began in June 2005. There is no return on these deferrals.

Deferred Energy Supply Costs: The regulatory liability primarily represents deferred costs associated with a net over-recovery by ACE connected with the provision of Default Electricity Supply costs and other restructuring related costs incurred by ACE. A return is generally received on these deferrals.

Federal and New Jersey Tax Benefits, Related to Securitized Stranded Costs: Securitized stranded costs include a portion of stranded costs attributable to the future tax benefit expected to be realized when the higher tax basis of the generating plants is deducted for New Jersey state income tax purposes as well as the future benefit to be realized through the reversal of federal excess deferred taxes. To account for the possibility that these tax benefits may be given to ACE’s regulated electricity delivery customers through lower rates in the future, ACE established a regulatory liability. The regulatory liability related to federal excess deferred taxes will remain on ACE’s Consolidated Balance Sheets until such time as the Internal Revenue Service issues its final regulations with respect to normalization of these federal excess deferred taxes. There is no return on these deferrals.

(7) LEASING ACTIVITIES

ACE leases certain types of property and equipment for use in its operations. Rental expense for operating leases was $9 million, $10 million and $12 million for the years ended December 31, 2008, 2007 and 2006, respectively.

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Total future minimum operating lease payments for ACE as of December 31, 2008 are $4 million in 2009, $9 million in 2010, $1 million in 2011, $1 million in 2012, $1 million in 2013, and $21 million after 2013.

(8) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is comprised of the following:

At December 31, 2008	Original Cost	Accumulated Depreciation	Net Bo ok Value
	(Millions of dollars)

Generation	$ 10	$ 9	$ 1
Distribution	1,316	379	937
Transmission	658	190	468
Construction work in progress	71	-	71
Non-operating and other property	161	88	73
Total	$ 2,216	$ 666	$ 1,550

At December 31, 2007

Generation	$ 10	$ 9	$ 1
Distribution	1,243	361	882
Transmission	544	180	364
Construction work in progress	122	-	122
Non-operating and other property	159	84	75
Total	$2,078	$634	$1,444

Jointly Owned Plant

ACE’s Consolidated Balance Sheet includes its proportionate share of assets and liabilities related to jointly owned plant. ACE has ownership interests in transmission facilities, and other facilities in which various parties have ownership interests. ACE’s proportionate share of operating and maintenance expenses of the jointly owned plant is included in the corresponding expenses in ACE’s Consolidated Statements of Earnings. ACE is responsible for providing its share of financing for the jointly owned facilities. Information with respect to ACE’s share of jointly owned plant as of December 31, 2008 is shown below.

Jointly Owned Plant	Ownership Share	Plant in Service	Accumulated Depreciation
		(Millions of dollars)
Transmission Facilities	Various	$25	$17
Other Facilities	Various	1	-
Total		$26	$17

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Asset Sales

As discussed in Note (16), “Discontinued Operations,” in the third quarter of 2006, ACE completed the sale of its interests in the Keystone and Conemaugh generating facilities for approximately $175 million (after giving effect to post-closing adjustments). In the first quarter of 2007, ACE completed the sale of the B.L. England generating facility for a price of $9 million. In February 2008, ACE received an additional $4 million in settlement of an arbitration proceeding concerning the terms of the purchase agreement. See Note (6), “Regulatory Assets and Regulatory Liabilities,” for treatment of gains from these sales.

(9) PENSIONS AND OTHER POSTRETIREMENT BENEFITS

ACE accounts for its participation in the Pepco Holdings benefit plans as participation in a multi-employer plan. For 2008, 2007, and 2006, ACE was responsible for $12 million, $11 million and $14 million, respectively, of the pension and other postretirement net periodic benefit cost incurred by Pepco Holdings. In 2008 and 2007, ACE made no contributions to the PHI Retirement Plan, and $7 million and $7 million, respectively to other postretirement benefit plans. At December 31, 2008 and 2007, ACE’s prepaid pension expense of $6 million and $8 million, and other postretirement benefit obligation of $41 million and $38 million, effectively represent assets and benefit obligations resulting from ACE’s participation in the Pepco Holdings benefit plan. ACE expects to contribute approximately $60 million to the pension plan in 2009.

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(10) DEBT

LONG-TERM DEBT

Long-term debt outstanding as of December 31, 2008 and 2007 is presented below.

Type of Debt	Interest Rates	Maturity	2008		2007
			(Millions of dollars)
First Mortgage Bonds:
	6.71%-6.81%	2008	$ -	$ 50
	7.25%-7.63%	2010-2014	8	8
	6.63%	2013	69	69
	7.68%	2015-2016	17	17
	7.75%	2018	250	-
	6.80% (a)	2021	39	39
	5.60% (a)	2025	4	4
	Variable (a)(b)(c)	2029	-	55
	5.80% (a)(b)	2034	120	120
	5.80% (a)(b)	2036	105	105

Total long-term debt			612	467
Net unamortized discount			(2)	(1)
Current maturities of long-term debt			-	(50)
Total net long-term debt			$610	$416

Transition Bonds Issued by ACE Funding:
	2.89%	2010	$ -	$ 13
	2.89%	2011	5	15
	4.21%	2013	57	66
	4.46%	2016	52	52
	4.91%	2017	118	118
	5.05%	2020	54	54
	5.55%	2023	147	147
			433	465
Net unamortized discount			-	-
Current maturities of long-term debt			(32)	(31)
Total net long-term Transition Bonds issued by ACE Funding			$401	$434

(a)

Represents a series of First Mortgage Bonds issued by ACE as collateral for an outstanding series of senior notes issued by the company or tax-exempt bonds issued by or for the benefit of ACE. The maturity date, optional and mandatory prepayment provisions, if any, interest rate, and interest payment dates on each series of senior notes or the obligations in respect of the tax-exempt bonds are identical to the terms of the corresponding series of collateral First Mortgage Bonds. Payments of principal and interest on a series of senior notes or the company’s obligation in respect of the tax-exempt bonds satisfy the corresponding payment obligations on the related series of collateral First Mortgage Bonds. Because each series of senior notes and tax-exempt bonds and the corresponding series of collateral First Mortgage Bonds securing that series of senior notes or tax-exempt bonds effectively represents a single financial obligation, the senior notes and the tax-exempt bonds are not separately shown on the table.

(b)

Represents a series of First Mortgage Bonds issued by ACE as collateral for an outstanding series of senior notes as described in footnote (a) above that will, at such time as there are no First Mortgage Bonds of ACE outstanding (other than collateral First Mortgage Bonds securing payment of senior notes), cease to secure the corresponding series of senior notes and will be cancelled.

(c)	The insured auction rate tax-exempt bonds were repurchased by ACE at par due to the disruption in the credit markets. The bonds are considered extinguished for accounting purposes; however, ACE intends to remarket or reissue the bonds to the public in 2009.

The outstanding First Mortgage Bonds issued by ACE are subject to a lien on substantially all of ACE’s property, plant and equipment.

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ACE Funding was established in 2001 solely for the purpose of securitizing authorized portions of ACE’s recoverable stranded costs through the issuance and sale of Transition Bonds. The proceeds of the sale of each series of Transition Bonds have been transferred to ACE in exchange for the transfer by ACE to ACE Funding of the right to collect a non-bypassable transition bond charge from ACE customers pursuant to bondable stranded costs rate orders issued by the NJBPU in an amount sufficient to fund the principal and interest payments on the Transition Bonds and related taxes, expenses and fees (Bondable Transition Property). The assets of ACE Funding, including the Bondable Transition Property, and the Transition Bond charges collected from ACE’s customers are not available to creditors of ACE. The Transition Bonds are obligations of ACE Funding and are non-recourse to ACE.

The aggregate principal amount of long-term debt including Transition Bonds outstanding at December 31, 2008, that will mature in each of 2009 through 2013 and thereafter is as follows: $32 million in 2009, $35 million in 2010, $35 million in 2011, $37 million in 2012, $108 million in 2013, and $798 million thereafter.

ACE’s long-term debt is subject to certain covenants. ACE is in compliance with all requirements.

SHORT-TERM DEBT

ACE has traditionally used a number of sources to fulfill short-term funding needs, such as commercial paper, short-term notes, and bank lines of credit. Proceeds from short-term borrowings are used primarily to meet working capital needs, but may also be used to temporarily fund long-term capital requirements. A detail of the components of ACE’s short-term debt at December 31, 2008 and 2007 is as follows.

	2008	2007
	(Millions of dollars)
Commercial paper	$ -	$ 29
Variable rate demand bonds	1	23
Bonds held under Standby Bond Purchase Agreement	22	-
Total	$ 23	$ 52

Commercial Paper

ACE maintains an ongoing commercial paper program of up to $250 million. The commercial paper notes can be issued with maturities up to 270 days from the date of issue. The commercial paper program is backed by a $500 million credit facility, described below under the heading “Credit Facility,” shared with PHI’s other utility subsidiaries, Potomac Electric Power Company (Pepco) and Delmarva Power & Light Company (DPL).

ACE had no commercial paper outstanding at December 31, 2008 and $29 million of commercial paper outstanding at December 31, 2007. The weighted average interest rates for commercial paper issued during 2008 and 2007 were 3.12 % and 5.45%, respectively. The weighted average maturity for commercial paper issued during 2008 and 2007 was four days and three days, respectively.

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Variable Rate Demand Bonds

Variable Rate Demand Bonds (VRDB) are subject to repayment on the demand of the holders and for this reason are accounted for as short-term debt in accordance with GAAP. However, bonds submitted for purchase are remarketed by a remarketing agent on a best efforts basis. ACE expects the bonds submitted for purchase will continue to be remarketed successfully due to the credit worthiness of the company and because the remarketing resets the interest rate to the then-current market rate. The company also may utilize one of the fixed rate/fixed term conversion options of the bonds to establish a maturity which corresponds to the date of final maturity of the bonds. On this basis, ACE views VRDB as a source of long-term financing. During 2008, in accordance with their terms, $22 million of VRDB were tendered to the bond trustee under a Standby Bond Purchase Agreement (SBPA) that was created at the time of issuance to provide liquidity for the bondholders. If market conditions are favorable, ACE intends to remarket these bonds during 2009. The VRDB outstanding in 2008 mature as follows: 2014 ($18 million) and 2017 ($5 million). The weighted average interest rate for VRDB was 3.29 % and 3.59% during 2008 and 2007, respectively.

Credit Facility

PHI, Pepco, DPL and ACE maintain a credit facility to provide for their respective short-term liquidity needs. The aggregate borrowing limit under this primary credit facility is $1.5 billion, all or any portion of which may be used to obtain loans or to issue letters of credit. PHI’s credit limit under the facility is $875 million. The credit limit of each of Pepco, DPL and ACE is the lesser of $500 million and the maximum amount of debt the company is permitted to have outstanding by its regulatory authorities, except that the aggregate amount of credit used by Pepco, DPL and ACE at any given time collectively may not exceed $625 million. The interest rate payable by each company on utilized funds is, at the borrowing company’s election, (i) the greater of the prevailing prime rate and the federal funds effective rate plus 0.5% or (ii) the prevailing Eurodollar rate, plus a margin that varies according to the credit rating of the borrower. The facility also includes a “swingline loan sub-facility,” pursuant to which each company may make same day borrowings in an aggregate amount not to exceed $150 million. Any swingline loan must be repaid by the borrower within seven days of receipt thereof. All indebtedness incurred under the facility is unsecured.

The facility is intended to serve primarily as a source of liquidity to support the commercial paper programs of the respective companies. The companies also are permitted to use the facility to borrow funds for general corporate purposes and issue letters of credit. In order for a borrower to use the facility, certain representations and warranties must be true, and the borrower must be in compliance with specified covenants, including (i) the requirement that each borrowing company maintain a ratio of total indebtedness to total capitalization of 65% or less, computed in accordance with the terms of the credit agreement, which calculation excludes from the definition of total indebtedness certain trust preferred securities and deferrable interest subordinated debt (not to exceed 15% of total capitalization), (ii) a restriction on sales or other dispositions of assets, other than certain sales and dispositions, and (iii) a restriction on the incurrence of liens on the assets of a borrower or any of its significant subsidiaries other than

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permitted liens. The absence of a material adverse change in the borrower’s business, property, and results of operations or financial condition is not a condition to the availability of credit under the facility. The facility does not include any rating triggers.

As a result of severe liquidity constraints in the credit, commercial paper and capital markets during September 2008, ACE borrowed $135 million under the $1.5 billion credit facility. Typically, ACE issues commercial paper if required to meet its short-term working capital requirements. Given the lack of liquidity in the commercial paper markets, ACE borrowed under the credit facility to maintain sufficient cash on hand to meet daily short-term operating needs. At December 31, 2008, ACE had no borrowings under the facility.

(11) INCOME TAXES

ACE, as an indirect subsidiary of PHI, is included in the consolidated federal income tax return of PHI. Federal income taxes are allocated to ACE pursuant to a written tax sharing agreement that was approved by the Securities and Exchange Commission in connection with the establishment of PHI as a holding company as part of Pepco’s acquisition of Conectiv on August 1, 2002. Under this tax sharing agreement, PHI’s consolidated federal income tax liability is allocated based upon PHI’s and its subsidiaries’ separate taxable income or loss.

The provision for consolidated income taxes, reconciliation of consolidated income tax expense, and components of consolidated deferred income tax liabilities (assets) are shown below.

Provision for Consolidated Income Taxes

	For the Year Ended December 31,
	2008	2007	2006
	(Millions of dollars)
Operations
Current Tax (Benefit) Expense
Federal	$ (98)	$57	$21
State and local	(37)	15	11
Total Current Tax (Benefit) Expense	(135)	72	32
Deferred Tax Expense (Benefit)
Federal	121	(27)	3
State and local	45	(4)	(1)
Investment tax credit amortization	(1)	-	(1)
Total Deferred Tax Expense (Benefit)	165	(31)	1
Total Income Tax Expense from Operations	30	41	33

Discontinued Operations
Deferred Tax Expense
Federal	-	-	1
State	-	-	1
Total Deferred Tax on Discontinued Operations	-	-	2
Total Consolidated Income Tax Expense	$ 30	$41	$35

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Reconciliation of Consolidated Income Tax Rate

	For the Year Ended December 31,
	2008	2007	2006

Federal statutory rate	35.0%	35.0%	35.0%
Increases (decreases) resulting from
State income taxes, net of federal effect	6.1	6.4	7.3
Tax credits	(1.1)	.1	(1.5)
Change in estimates and interest related to uncertain and effectively settled tax positions	(14.1)	1.0	(3.8)
Deferred tax adjustments	7.4	(.5)	-
Other, net	(1.4)	(1.4)	(1.5)

Consolidated Effective Income Tax Rate	31.9%	40.6%	35.5%

During 2008, ACE completed an analysis of its current and deferred income tax accounts and, as a result, recorded a $7 million charge to income tax expense in 2008, which is included in “Deferred tax adjustments” in the reconciliation provided above. Also identified as part of the analysis were new uncertain tax positions for ACE under FIN 48 (primarily representing overpayments of income taxes in previously filed tax returns) that resulted in the recording of after-tax net interest income of $4 million, which is included as a reduction of income tax expense.

In addition, during 2008 ACE recorded additional after-tax net interest income of $10 million under FIN 48 primarily related to the reversal of previously accrued interest payable resulting from a favorable tentative settlement of the Mixed Service Cost issue with the IRS and a claim made with the IRS related to the tax reporting of fuel over- and under-recoveries.

FIN 48, “Accounting for Uncertainty in Income Taxes”

As disclosed in Note (2), “Significant Accounting Policies,” ACE adopted FIN 48 effective January 1, 2007. Upon adoption, ACE recorded an immaterial adjustment to retained earnings representing the cumulative effect of the change in accounting principle. Also upon adoption, ACE had $28 million of unrecognized tax benefits and $3 million of related accrued interest.

Reconciliation of Beginning and Ending Balances of Unrecognized Tax Benefits

		2008		2007

Beginning balance as of January 1,	$	152	$	28
Tax positions related to current year:
Additions		1		34
Tax positions related to prior years:
Additions		40		94
Reductions		(144)		(4)
Settlements		-		-
Ending balance as of December 31,	$	49	$	152

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Unrecognized Benefits That If Recognized Would Affect the Effective Tax Rate

Unrecognized tax benefits represent those tax benefits related to tax positions that have been taken or are expected to be taken in tax returns that are not recognized in the financial statements because, in accordance with FIN 48, management has either measured the tax benefit at an amount less than the benefit claimed, or expected to be claimed, or has concluded that it is not more likely than not that the tax position will be ultimately sustained.

For the majority of these tax positions, the ultimate deductibility is highly certain, but there is uncertainty about the timing of such deductibility. Unrecognized tax benefits at December 31, 2008, included $2 million that, if recognized, would lower the effective tax rate.

Interest and Penalties

ACE recognizes interest and penalties relating to its uncertain tax positions as an element of income tax expense. For the years ended December 31, 2008 and 2007, ACE recognized $24 million of interest income before tax ($14 million after-tax) and $2 million of interest income before tax ($1 million after-tax), respectively, as a component of income tax expense. As of December 31, 2008 and 2007, ACE had $13 million of accrued interest receivable and $1 million of accrued interest payable, respectively, related to effectively settled and uncertain tax positions.

Possible Changes to Unrecognized Tax Benefits

It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain of ACE’s unrecognized tax positions will significantly increase or decrease within the next 12 months. The final settlement of the Mixed Service Cost issue or other federal or state audits could impact the balances significantly. At this time, other than the Mixed Service Cost issue, an estimate of the range of reasonably possible outcomes cannot be determined. The unrecognized benefit related to the Mixed Service Cost issue could decrease by $13 million within the next 12 months upon final resolution of the tentative settlement with the IRS and the obligation becomes certain. See Note (14), “Commitments and Contingencies,” herein for additional information.

Tax Years Open to Examination

ACE, as an indirect subsidiary of PHI, is included on PHI’s consolidated federal tax return. ACE’s federal income tax liabilities for all years through 1999 have been determined, subject to adjustment to the extent of any net operating loss or other loss or credit carrybacks from subsequent years. The open tax years for the significant states where PHI files state income tax returns (New Jersey and Pennsylvania) are the same as noted above.

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Components of Consolidated Deferred Income Tax Liabilities (Assets)

	As of December 31 ,
	2008	2007
	(Millions of dollars)
Deferred Tax Liabilities (Assets)
Depreciation and other basis differences related to plant and equipment	$255	$212
Deferred taxes on amounts to be collected through future rates	10	8
Payment for termination of purchased power contracts with NUGs	68	73
Electric restructuring liabilities	198	195
Fuel and purchased energy	4	(96)
Other	(1)	(18)
Total Deferred Tax Liabilities, net	534	374
Deferred tax asset included in Other Current Assets	15	12
Total Consolidated Deferred Tax Liabilities, net - non-current	$549	$386

The net deferred tax liability represents the tax effect, at presently enacted tax rates, of temporary differences between the financial statement and tax basis of assets and liabilities. The portion of the net deferred tax liability applicable to ACE’s operations, which has not been reflected in current service rates, represents income taxes recoverable through future rates, net and is recorded as a regulatory asset on the balance sheet. No valuation allowance for deferred tax assets was required or recorded at December 31, 2008 and 2007.

The Tax Reform Act of 1986 repealed the Investment Tax Credit (ITC) for property placed in service after December 31, 1985, except for certain transition property. ITC previously earned on ACE’s property continues to be normalized over the remaining service lives of the related assets.

Taxes Other Than Income Taxes

Taxes other than income taxes for each year are shown below. These amounts relate to the Power Delivery business and are recoverable through rates.

	2008	2007	2006
	(Millions of dollars)
Gross Receipts/Delivery	$21	$20	$21
Property	2	3	2
Environmental, Use and Other	1	(1)	-
Total	$24	$22	$23

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(12) PREFERRED STOCK

The preferred stock amounts outstanding as of December 31, 2008 and 2007 are as follows:

	Redemption Price	Shares Outstanding			December 31,
	Redemption Price	2008	2007		2008		2007
				(Millions of dollars)

4.0% Series of 1944, $100 per share par value	$105.50	24,268	24,268	$	2	$	2
4.35% Series of 1949, $100 per share par value	$101.00	2,942	2,942		-		-
4.35% Series of 1953, $100 per share par value	$101.00	1,680	1,680		-		-
4.10% Series of 1954, $100 per share par value	$101.00	20,504	20,504		2		2
4.75% Series of 1958, $100 per share par value	$101.00	8,631	8,631		1		1
5.0% Series of 1960, $100 per share par value	$100.00	4,120	4,120		1		1
Total Preferred Stock of Subsidiaries		62,145	62,145	$	6	$	6

Under the terms of the Company’s Articles of Incorporation, ACE has authority to issue up to 799,979 shares of its $100 par value Cumulative Preferred Stock. In addition, ACE has authority to issue up to 2 million shares of No Par Preferred Stock and 3 million shares of Preference Stock without par value.

(13) FAIR VALUE DISCLOSURES

Effective January 1, 2008, ACE adopted SFAS No. 157, as discussed earlier in Note (3), which established a framework for measuring fair value and expands disclosures about fair value measurements.

As defined in SFAS No. 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). ACE utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. Accordingly, ACE utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. ACE is able to classify fair value balances based on the observability of those inputs. SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). The three levels of the fair value hierarchy defined by SFAS No. 157 are as follows:

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marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

The following table sets forth by level within the fair value hierarchy ACE’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2008. As required by SFAS No. 157, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. ACE’s assessment of the significance of a particular input to the fair value measurement requires the exercise of judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

	Fair Value Measurements at Reporting Date
	(Millions of dollars)
Description	December 31, 2008		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

ASSETS
Cash equivalents	$	76	$	76	$	-	$	-
Executive deferred compensation plan assets		1		1		-		-
	$	77	$	77	$	-	$	-

LIABILITIES
Executive deferred compensation plan liabilities	$	1	$	-	$	1	$	-
	$	1	$	-	$	1	$	-

The estimated fair values of ACE’s financial instruments at December 31, 2008 and 2007 are shown below.

	2008		2007
	Carrying Amount	Fair Value	Carrying Amount	Fair Value
	(Millions of dollars)
Long-term debt	$610	$638	$466	$464
Redeemable Serial Preferred Stock	$ 6	$4	$ 6	$ 4
Transition Bonds issued by ACE Funding	$433	$431	$465	$462

The methods and assumptions below were used to estimate, at December 31, 2008 and 2007, the fair value of each class of financial instruments shown above for which it is practicable to estimate a value.

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The fair values of the Long-term Debt, which includes First Mortgage Bonds, Medium-Term Notes, and Transition Bonds issued by ACE Funding, including amounts due within one year, were derived based on current market prices, or for issues with no market price available, were based on discounted cash flows using current rates for similar issues with similar terms and remaining maturities.

The fair value of the Redeemable Serial Preferred Stock, excluding amounts due within one year, were derived based on quoted market prices or discounted cash flows using current rates of preferred stock with similar terms.

(14) COMMITMENTS AND CONTINGENCIES

Rate Proceedings

On August 18, 2008, ACE submitted an application with FERC for incentive rate treatments in connection with PHI’s 230-mile, 500-kilovolt Mid-Atlantic Power Pathway transmission project. The application requested that FERC include ACE’s Construction Work in Progress in its transmission rate base, an ROE adder of 150 basis points (for a total ROE of 12.8%) and the recovery of prudently incurred costs in the event the project is abandoned or terminated for reasons beyond ACE’s control. On October 31, 2008, FERC issued an order approving the application.

Sale of B.L. England Generating Facility

Environmental Litigation

ACE is subject to regulation by various federal, regional, state, and local authorities with respect to the environmental effects of its operations, including air and water quality control, solid and hazardous waste disposal, and limitations on land use. In addition, federal and state statutes authorize governmental agencies to compel responsible parties to clean up certain abandoned or unremediated hazardous waste sites. ACE may incur costs to clean up currently or formerly owned facilities or sites found to be contaminated, as well as other facilities or sites that may have been contaminated due to past disposal practices. Although penalties assessed for violations of environmental laws and regulations are not recoverable from ACE’s customers,

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environmental clean-up costs incurred by ACE would be included in its cost of service for ratemaking purposes.

Delilah Road Landfill Site . In 1991, the New Jersey Department of Environmental Protection (NJDEP) identified ACE as a potentially responsible party (PRP) at the Delilah Road Landfill site in Egg Harbor Township, New Jersey. In 1993, ACE, along with two other PRPs, signed an administrative consent order with NJDEP to remediate the site. The soil cap remedy for the site has been implemented and in August 2006, NJDEP issued a No Further Action Letter (NFA) and Covenant Not to Sue for the site. Among other things, the NFA requires the PRPs to monitor the effectiveness of institutional (deed restriction) and engineering (cap) controls at the site every two years. In September 2007, NJDEP approved the PRP group’s petition to conduct semi-annual, rather than quarterly, ground water monitoring for two years and deferred until the end of the two-year period a decision on the PRP group’s request for annual groundwater monitoring thereafter. In August 2007, the PRP group agreed to reimburse the costs of the United States Environmental Protection Agency (EPA) in the amount of $81,400 in full satisfaction of EPA’s claims for all past and future response costs relating to the site (of which ACE’s share is one-third). Effective April 2008, EPA and the PRP group entered into a settlement agreement which will allow EPA to reopen the settlement in the event of new information or unknown conditions at the site. Based on information currently available, ACE anticipates that its share of additional cost associated with this site for post-remedy operation and maintenance will be approximately $555,000 to $600,000. On November 23, 2008, Lenox, Inc., a member of the PRP group, filed a bankruptcy petition under Chapter 11 of the U.S. Bankruptcy Code. ACE filed a proof of claim in the Lenox bankruptcy case in February 2009. ACE believes that its liability for post-remedy operation and maintenance costs will not have a material adverse effect on its financial position, results of operations or cash flows regardless of the impact of the Lenox bankruptcy.

355

ACE

CERCLA. The EPA’s letter also states that to date its expenditures for response measures at the site exceed $6 million. EPA estimates approximately $6 million as the cost for future response measures it recommends. ACE understands that the EPA sent similar general notice letters to three other companies and various individuals.

Appeal of New Jersey Flood Hazard Regulations. In November 2007, NJDEP adopted amendments to the agency’s regulations under the Flood Hazard Area Control Act (FHACA) to minimize damage to life and property from flooding caused by development in flood plains. The amended regulations, which took effect November 5, 2007, impose a new regulatory program to mitigate flooding and related environmental impacts from a broad range of construction and development activities, including electric utility transmission and distribution construction that was previously unregulated under the FHACA and that is otherwise regulated under a number of other state and federal programs. ACE filed an appeal of these regulations with the Appellate Division of the Superior Court of New Jersey on November 3, 2008. See Item I “Business – Environmental Matters– Air Quality Regulation – Sulfur Dioxide, Nitrogen Oxide, Mercury and Nickel Emissions.”

IRS Mixed Service Cost Issue

During 2001, ACE changed its method of accounting with respect to capitalizable construction costs for income tax purposes. The change allowed ACE to accelerate the deduction of certain expenses that were previously capitalized and depreciated. Through December 31, 2005, these accelerated deductions generated incremental tax cash flow benefits of approximately $49 million for ACE, primarily attributable to ACE’s 2001 tax returns.

In 2005, the Treasury Department issued proposed regulations that, if adopted in their current form, would require ACE to change its method of accounting with respect to capitalizable construction costs for income tax purposes for tax periods beginning in 2005. Based on those proposed regulations, PHI in its 2005 federal tax return adopted an alternative method of accounting for capitalizable construction costs that management believed would be acceptable to the Internal Revenue Service (IRS).

At the same time as the proposed regulations were released, the IRS issued Revenue Ruling 2005-53, which was intended to limit the ability of certain taxpayers to utilize the method of accounting for income tax purposes they utilized on their tax returns for 2004 and prior years with respect to capitalizable construction costs. In line with this Revenue Ruling, the IRS revenue agent’s report for the 2001 and 2002 tax returns disallowed substantially all of the incremental tax benefits that ACE had claimed on those returns by requiring it to capitalize and depreciate certain expenses rather than treat such expenses as current deductions. PHI’s protest of the IRS adjustments is among the unresolved audit matters relating to the 2001 and 2002 audits pending before the Appeals Office of the IRS.

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ACE

In February 2006, PHI paid approximately $121 million of taxes to cover the amount of additional taxes and interest that management estimated to be payable for the years 2001 through 2004 based on the method of tax accounting that PHI, pursuant to the proposed regulations, adopted on its 2005 tax return. In June 2008, PHI received from the IRS an offer of settlement pertaining to ACE for the tax years 2001 through 2004. ACE is substantially in agreement with this proposed settlement. Based on the terms of the proposal, ACE expects the final settlement amount to be less than the $121 million previously deposited.

On the basis of the tentative settlement, ACE updated its estimated liability related to mixed service costs and, as a result, recorded in the quarter ended June 30, 2008, a net reduction in its liability for unrecognized tax benefits of $2 million and recognized after-tax interest income of $2 million.

Contractual Obligations

As of December 31, 2008, ACE’s contractual obligations under non-derivative fuel and power purchase contracts were $275 million in 2009, $ 500 million in 2010 to 2011, $461 million in 2012 to 2013, and $2,196 million in 2014 and thereafter.

(15) RELATED PARTY TRANSACTIONS

PHI Service Company provides various administrative and professional services to PHI and its regulated and unregulated subsidiaries including ACE. The cost of these services is allocated in accordance with cost allocation methodologies set forth in the service agreement using a variety of factors, including the subsidiaries’ share of employees, operating expenses, assets, and other cost causal methods. These intercompany transactions are eliminated by PHI in consolidation and no profit results from these transactions at PHI. PHI Service Company costs directly charged or allocated to ACE for the years ended December 31, 2008, 2007 and 2006 were $88 million, $81 million and $79 million, respectively.

In addition to the PHI Service Company charges described above, ACE’s financial statements include the following related party transactions in its Consolidated Statements of Earnings:

	For the Year Ended December 31,
	2008	2007		2006
(Expense) Income	(Millions of dollars)
Purchased power from Conectiv Energy Supply (a)	$(171)		$(99)	$(89)
Meter reading services provided by Millennium Account Services LLC (b)	(4)		(4)	(4)

(a)

Included in fuel and purchased energy expense.

(b)

Included in other operation and maintenance expense.

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ACE

As of December 31, 2008 and 2007, ACE had the following balances due (to)/from related parties:

	2008	2007
Asset (Liability)	(Millions of dollars)
Payable to Related Party (current)
PHI Service Company	$(11)	$(10)
Conectiv Energy Supply	(16)	(8)
The items listed above are included in the “Accounts payable to associated companies” balance on the Consolidated Balance Sheet of $28 million and $18 million at December 31, 2008 and 2007, respectively.

(16) DISCONTINUED OPERATIONS

As discussed in Note (14), “Commitments and Contingencies,” herein, in February 2007, ACE completed the sale of the B.L. England generating facility. B.L. England comprised a significant component of ACE’s generation operations and its sale required discontinued operations presentation under SFAS No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets,” on ACE’s Consolidated Statements of Earnings for the years ended December 31, 2007 and 2006. In September 2006, ACE sold its interests in the Keystone and Conemaugh generating facilities, which for the year ended December 31, 2006 is also reflected as discontinued operations.

The following table summarizes information related to the discontinued operations presentation (millions of dollars):

	2008	2007	2006
Operating Revenue	$ -	$10	$114
Income Before Income Tax Expense	$ -	$ -	$ 4
Net Income	$ -	$ -	$ 2

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ACE

(17) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The quarterly data presented below reflect all adjustments necessary in the opinion of management for a fair presentation of the interim results. Quarterly data normally vary seasonally because of temperature variations, differences between summer and winter rates, and the scheduled downtime and maintenance of electric generating units. Therefore, comparisons by quarter within a year are not meaningful.

	2008
	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Total
	(Millions of dollars)
Total Operating Revenue	$361		$387		$540		$345		$1,633
Total Operating Expenses	346		330		494	(c)	310		1,480
Operating Income	15		57		46		35		153
Other Expenses	(13)		(14)		(13)		(19)		(59)
Income Before Income Tax Expense	2		43		33		16		94
Income Tax Expense	(3)	(a)	16	(b)	13		4	(d)	30
Income From Continuing Operations	5		27		20		12		64
Discontinued Operations, net of tax	-		-		-		-		-
Net Income	5		27		20		12		64
Dividends on Preferred Stock	-		-		-		-		-
Earnings Available for Common Stock	$ 5		$ 27		$ 20		$ 12		$ 64

	2007
	First Quarter	Second Quarter		Third Quarter		Fourth Quarter		Total
	(Millions of dollars)
Total Operating Revenue	$338	$339		$505		$361		$1,543
Total Operating Expenses	312	292	(e)	449	(e)	331	(e)	1,384
Operating Income	26	47		56		30		159
Other Expenses	(14)	(15)		(15)		(14)		(58)
Income Before Income Tax Expense	12	32		41		16		101
Income Tax Expense	4	13		15		9		41
Income From Continuing Operations	8	19		26		7		60
Discontinued Operations, net of tax	-	-		-		-		-
Net Income	8	19		26		7		60
Dividends on Preferred Stock	-	-		-		-		-
Earnings Available for Common Stock	$ 8	$ 19		$ 26		$ 7		$ 60

(a)	Includes $4 million of after-tax net interest income on uncertain tax positions primarily related to casualty losses.

(b)	Includes $2 million of after-tax interest income related to the tentative settlement of the IRS mixed service cost issue.

(c)	Includes a $1 million charge related to an adjustment in the accounting for certain restricted stock awards granted under the Long-Term Incentive Plan (LTIP).

(d)

Includes $8 million of after-tax net interest income on uncertain and effectively settled tax positions (primarily associated with a claim made with the IRS related to the tax reporting for fuel over- and under-recoveries, certain newly identified overpayments of income taxes in previously filed tax returns and the reversal of the majority of the interest income recognized on uncertain tax positions related to casualty losses in the first quarter) and a charge of $7 million to correct prior period errors related to additional analysis of deferred tax balances completed in 2008.

(e)	Includes adjustment related to timing of recognition of certain operating expenses which were overstated by $5 million in the fourth quarter and understated by $1 million and $4 million in the second and third quarters, respectively.

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THIS PAGE LEFT INTENTIONALLY BLANK.

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Item 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None for all registrants.

Item 9A.

CONTROLS AND PROCEDURES

Pepco Holdings, Inc.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision, and with the participation of management, including the chief executive officer and the chief financial officer, Pepco Holdings has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of December 31, 2008, and, based upon this evaluation, the chief executive officer and the chief financial officer of Pepco Holdings have concluded that these controls and procedures are effective to provide reasonable assurance that material information relating to Pepco Holdings and its subsidiaries that is required to be disclosed in reports filed with, or submitted to, the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934, as amended (the Exchange Act) (i) is recorded, processed, summarized and reported within the time periods specified by the SEC rules and forms and (ii) is accumulated and communicated to management, including its chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control over Financial Reporting

See “Management’s Report on Internal Control over Financial Reporting” in Item 8 of this Form 10-K.

Attestation Report of the Registered Public Accounting Firm

See “Report of Independent Registered Public Accounting Firm” in Item 8 of this Form 10-K.

Changes in Internal Control over Financial Reporting

During the quarter ended December 31, 2008, there was no change in Pepco Holdings’ internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, Pepco Holdings’ internal controls over financial reporting.

Item 9A(T) . CONTROLS AND PROCEDURES

Potomac Electric Power Company

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision, and with the participation of management, including the chief executive officer and the chief financial officer, Pepco has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of December 31, 2008, and, based upon this evaluation, the chief executive officer and the chief financial officer of Pepco have concluded that these controls and procedures are effective to provide reasonable assurance

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that material information relating to Pepco that is required to be disclosed in reports filed with, or submitted to, the SEC under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified by the SEC rules and forms and (ii) is accumulated and communicated to management, including its chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control over Financial Reporting

See “Management’s Report on Internal Control over Financial Reporting” in Item 8 of this Form 10-K.

Changes in Internal Control over Financial Reporting

During the quarter ended December 31, 2008, there was no change in Pepco’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, Pepco’s internal controls over financial reporting.

Delmarva Power & Light Company

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision, and with the participation of management, including the chief executive officer and the chief financial officer, DPL has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of December 31, 2008, and, based upon this evaluation, the chief executive officer and the chief financial officer of DPL have concluded that these controls and procedures are effective to provide reasonable assurance that material information relating to DPL that is required to be disclosed in reports filed with, or submitted to, the SEC under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified by the SEC rules and forms and (ii) is accumulated and communicated to management, including its chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control over Financial Reporting

See “Management’s Report on Internal Control over Financial Reporting” in Item 8 of this Form 10-K.

Changes in Internal Control over Financial Reporting

During the quarter ended December 31, 2008, there was no change in DPL’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, DPL’s internal controls over financial reporting.

Atlantic City Electric Company

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Under the supervision, and with the participation of management, including the chief executive officer and the chief financial officer, ACE has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of December 31, 2008, and,

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based upon this evaluation, the chief executive officer and the chief financial officer of ACE have concluded that these controls and procedures are effective to provide reasonable assurance that material information relating to ACE and its subsidiaries that is required to be disclosed in reports filed with, or submitted to, the SEC under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified by the SEC rules and forms and (ii) is accumulated and communicated to management, including its chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control over Financial Reporting

See “Management’s Report on Internal Control over Financial Reporting” in Item 8 of this Form 10-K.

Changes in Internal Control over Financial Reporting

During the quarter ended December 31, 2008, there was no change in ACE’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, ACE’s internal controls over financial reporting.

Item 9B. OTHER INFORMATION

Pepco Holdings, Inc.

None.

Potomac Electric Power Company

None.

Delmarva Power & Light Company

None

Atlantic City Electric Company

None

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Part III

Item 10 . DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Pepco Holdings, Inc.

The following information appearing in PHI’s definitive proxy statement for the 2009 Annual Meeting, which is expected to be filed with the SEC on or about March 26, 2009, is incorporated herein by reference:

The information appearing under the heading “Nominees for Election as Directors.”

The information appearing under the heading “Security Ownership of Certain Beneficial Owners and Management — Section 16(a) Beneficial Ownership Reporting Compliance.”

The information appearing under the heading “Where do I find the Company’s Corporate Business Policies, Corporate Governance Guidelines and Committee Charters?” concerning PHI’s Corporate Business Policies.

The information appearing under the heading “Board Committees — Audit Committee,” regarding the membership and function of the Audit Committee and the financial expertise of its members.

Executive Officers of PHI

The names of the executive officers of PHI and their ages and the positions they held as of March 1, 2009, are set forth in the following table. Their business experience during the past five years is set forth in the footnotes to the table.

PEPCO HOLDINGS
Name	Age	Office and Length of Service
Dennis R. Wraase	64	Chairman of the Board 5/04 - Present (1)
William T. Torgerson	64	Vice Chairman - 6/03 - Present and Chief Legal Officer 3/08 - Present (2)
Joseph M. Rigby	52	President - 3/08 - Present and Chief Executive Officer 3/09 - Present (3)
David M. Velazquez	49	Executive Vice President 3/09 - Present (4)
Paul H. Barry	51	Senior Vice President and Chief Financial Officer 9/07 - Present (5)

364

Kirk J. Emge	59	Senior Vice President and General Counsel 3/08 - Present (6)
Anthony J. Kamerick	61	Senior Vice President and Chief Regulatory Officer 3/09 - Present (7)
Beverly L. Perry	61	Senior Vice President 10/02 - Present
Ronald K. Clark	53	Vice President and Controller 8/05 - Present (8)
Gary J. Morsches	49	President and Chief Executive Officer, Conectiv Energy Holding Company 3/09 - Present (9)
John U. Huffman	49	President - 6/06 - Present and Chief Executive Officer, Pepco Energy Services, Inc. - 3/09 - Present (10)

(1)

Mr. Wraase was Chief Executive Officer of PHI from May 2004 until February 28, 2009, President of PHI from August 2002 until March 2008 and Chief Operating Officer of PHI from August 2002 until June 2003. Mr. Wraase was Chairman of Pepco from May 2004 until February 28, 2009 and was Chief Executive Officer from August 2002 until October 2005. From May 2004 to February 28, 2009, he was also Chairman of DPL and ACE.

(2)	Mr. Torgerson was General Counsel of PHI from August 2002 until March 2008.

(3)

Mr. Rigby was Chief Operating Officer of PHI from September 2007 until February 28, 2009 and Executive Vice President of PHI from September 2007 until March 2008, Senior Vice President of PHI from August 2002 until September 2007 and Chief Financial Officer of PHI from May 2004 until September 2007. Mr. Rigby was President of ACE from July 2001 until May 2004 and Chief Executive Officer of ACE from August 2002 until May 2004. He served as President of DPL from August 2002 until May 2004. Mr. Rigby was President and Chief Executive Officer of ACE, DPL and Pepco from September 1, 2007 to February 28, 2009. Mr. Rigby has been Chairman of Pepco, DPL and ACE since March 1, 2009.

(4)

Mr. Velazquez served as President of Conectiv Energy Holding Company, an affiliate of PHI, from June 2006 to February 28, 2009, Chief Executive Officer of Conectiv Energy Holding Company from January 2007 to February 28, 2009 and Chief Operating Officer of Conectiv Energy Holding Company from June 2006 to December 2006. He served as a Vice President of PHI from February 2005 to June 2006 and as Chief Risk Officer of PHI from August 2005 to June 2006. From July 2001 to February 2005, he served as a Vice President of Conectiv Energy Supply, Inc., an affiliate of PHI.

365

(5)

Mr. Barry was Senior Vice President and Chief Development Officer of Duke Energy Corporation from September 2006 to August 2007. From November 2005 to September 2006, he was Group Executive and President of Duke Energy Americas, a division of Duke Energy Corporation. From June 2002 to November 2005, he was a Vice President of Duke Energy Corporation. Duke Energy is an energy company not affiliated with PHI.

(6)	Mr. Emge was Vice President, Legal Services from August 2002 until March 2008. Mr. Emge has served as General Counsel of ACE, DPL and Pepco since August 2002 and as Senior Vice President of Pepco and DPL since March 1, 2009.

(7)	Mr. Kamerick was Vice President and Treasurer of PHI from August 2002 until February 28, 2009.

(8)

Mr. Clark has been employed by PHI since June 2005 and has also served as Vice President and Controller of Pepco and DPL and Controller of ACE since August 2005. From July 2004 until June 2005, he was Vice President, Financial Reporting and Policy for MCI, Inc., a telecommunications company not affiliated with PHI.

(9)

Mr. Morsches was Executive Vice President of Conectiv Energy Supply, Inc. from January 2009 until February 28, 2009. Mr. Morsches was a Principal of the Boston Consulting Group, a management consulting firm, which is not affiliated with PHI, from June 2005 until January 2009 and was a self-employed consultant from January 2003 until June 2005.

(10)	Since June 2003, Mr. Huffman has been employed by Pepco Energy Services in the following capacities: (a) Chief Operating Officer from April 2006 to February 28, 2009, (b) Senior Vice President, February 2005 to March 2006 and (c) Vice President from June 2003 to February 2005.

The PHI executive officers are elected annually and serve until their respective successors have been elected and qualified or their earlier resignation or removal.

Item 11 . EXECUTIVE COMPENSATION

Pepco Holdings, Inc.

The information appearing under the heading “2008 Director Compensation.”

The information appearing under the heading “Compensation Discussion and Analysis.”

366

The information appearing under the heading “Executive Compensation.”

The information appearing under the heading “Compensation/Human Resources Committee Report.”

Item 12 . SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Pepco Holdings, Inc.

The information appearing under the heading “Security Ownership of Certain Beneficial Owners and Management” in PHI’s definitive proxy statement for the 2009 Annual Meeting, which is expected to be filed with the SEC on or about March 26, 2009, is incorporated herein by reference.

The following table provides information as of December 31, 2008, with respect to the shares of PHI’s common stock that may be issued under PHI’s existing equity compensation plans.

Equity Compensation Plans Information
Plan Category	Number of Securities to be Issued Upon Exercise of Outstanding Options	Weighted-Average Exercise Price of Outstanding Options	Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Outstanding Options)

Equity Compensation Plans Approved by Shareholders (a)	(b)	(b)	8,473,554

Equity Compensation Plans Not Approved by Shareholders	-	-	488,713 (c)

Total	-	-	8,962,267

(a)	Consists solely of the Pepco Holdings, Inc. Long-Term Incentive Plan.

(b)

In connection with the acquisition by Pepco of Conectiv (i) outstanding options granted under the Potomac Electric Power Company Long-Term Incentive Plan were converted into options to purchase shares of PHI common stock and (ii) options granted under the Conectiv Incentive Compensation Plan were converted into options to purchase shares of PHI common stock. As of December 31, 2008, options to purchase an aggregate of 374,904 shares of PHI common stock, having a weighted average exercise price of $22.2647, were outstanding.

(c)

Consists of shares of PHI common stock available for future issuance under the PHI Non-Management Directors Compensation Plan. Under this plan, each director who is not an employee of PHI or any of its subsidiaries (“non-management director”) is entitled to elect to receive his or her annual retainer, retainer for service as a committee chairman, if any, and meeting fees in: (i) cash, (ii) shares of PHI’s common stock, (iii) a credit to an account for the director established under PHI’s Executive and Director Deferred Compensation Plan or (iv) any combination thereof. The plan expires on December 31, 2014 unless terminated earlier by the Board of Directors.

367

Item 13 . CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Pepco Holdings, Inc.

The information appearing under the heading “Board Review of Transactions With Related Parties” in PHI’s definitive proxy statement for the 2009 Annual Meeting, which is expected to be filed with the SEC on or about March 26, 2009, is incorporated herein by reference.

INFORMATION FOR THIS ITEM IS NOT REQUIRED FOR PEPCO, DPL AND ACE AS THEY MEET THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I(1)(a) AND (b) OF FORM 10-K AND THEREFORE ARE FILING THIS FORM WITH THE REDUCED FILING FORMAT.

Item 14 . PRINCIPAL ACCOUNTANT FEES AND SERVICES

Pepco Holdings, Inc., Pepco, DPL and ACE

Audit Fees

The aggregate fees billed by PricewaterhouseCoopers LLP for professional services rendered for the audit of the annual financial statements of Pepco Holdings and its subsidiary reporting companies for the 2008 and 2007 fiscal years, reviews of the financial statements included in the 2008 and 2007 Forms 10-Q of Pepco Holdings and its subsidiary reporting companies, reviews of public filings, comfort letters and other attest services were $7,780,994 and $6,143,733, respectively. The amount for 2007 includes $69,325 for the 2007 audit that was billed after the 2007 amount was disclosed in Pepco Holding’s proxy statement for the 2008 Annual Meeting.

Audit-Related Fees

No fees were billed by PricewaterhouseCoopers LLP for audit-related services for the 2008 or 2007 fiscal years.

Tax Fees

The aggregate fees billed by PricewaterhouseCoopers LLP for tax services rendered for the 2008 and 2007 fiscal years were $284,678 and $126,810 respectively. These services consisted of tax compliance, tax advice and tax planning.

All Other Fees

The aggregate fees billed by PricewaterhouseCoopers LLP for all other services other than those covered under “Audit Fees,” “Audit-Related Fees” and “Tax Fees” for the 2008 and

368

2007 fiscal years were $4,500 and $41,740, respectively, which represented the costs of training and technical materials provided by PricewaterhouseCoopers LLP.

All of the services described in “Audit Fees,” “Audit-Related Fees,” “Tax Fees” and “All Other Fees” were approved in advance by the Audit Committee, in accordance with the Audit Committee Policy on the Approval of Services Provided by the Independent Auditor which is attached as Annex A to Pepco Holdings’ definitive proxy statement for the 2009 Annual Meeting of Shareholders to be filed with the SEC on or about March 26, 2009, and is incorporated herein by reference.

Part IV

Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Documents List

1. FINANCIAL STATEMENTS

The financial statements filed as part of this report consist of the financial statements of each registrant set forth in Item 8, “Financial Statements and Supplementary Data” of this Form 10-K.

2. FINANCIAL STATEMENT SCHEDULES

The financial statement schedules specified by Regulation S-X, other than those listed below, are omitted because either they are not applicable or the required information is presented in the financial statements included in Item 8, “Financial Statements and Supplementary Data” of this Form 10-K.

	Registrants
Item	Pepco Holdings	Pepco	DPL	ACE
Schedule I, Condensed Financial Information of Parent Company	370	N/A	N/A	N/A
Schedule II, Valuation and Qualifying Accounts	373	373	374	374

369

Schedule I, Condensed Financial Information of Parent Company is submitted below.

PEPCO HOLDINGS, INC. (Parent Company)
STATEMENTS OF EARNINGS
	For the Year Ended December 31,
	2008	2007	2006
	(Millions of dollars, except share data)

OPERATING REVENUE	$ -	$ -	$ -
OPERATING EXPENSES
Other operation and maintenance	5	3	3
Total operating expenses	5	3	3
OPERATING LOSS	(5)	(3)	(3)
OTHER INCOME (EXPENSES)
Interest and dividend income	2	1	-
Interest expense	(90)	(91)	(83)
Income from equity investments	356	390	299
Total other income	268	300	216

INCOME BEFORE INCOME TAXES	263	297	213
INCOME TAX BENEFIT	(37)	(37)	(35)
NET INCOME	$ 300	$ 334	$ 248
EARNINGS PER SHARE
Basic and diluted earnings per share of common stock	$1.47	$ 1.72	$ 1.30

The accompanying Notes are an integral part of these financial statements.

370

PEPCO HOLDINGS, INC. (Parent Company)
BALANCE SHEETS
	As of December 31,
	2008	2007
	(Millions of dollars, except share data)
ASSETS
Current Assets
Cash and cash equivalents	$ 556	$ 387
Prepayment of income taxes	61	51
Accounts receivable and other	16	8
	633	446

Investments and Other Assets
Goodwill	1,137	1,136
Notes receivable from subsidiary companies	628	707
Investment in consolidated companies	4,016	3,894
Other	32	25
	5,813	5,762
Total Assets	$6,446	$6,208

CAPITALIZATION AND LIABILITIES

Current Liabilities
Short-term debt	$ 50	$ -
Accounts payable	3	3
Interest and taxes accrued	91	90
	144	93

Deferred Credits
Liabilities and accrued interest related to uncertain tax positions	15	-
Long-Term Debt	2,097	2,097

Commitments and Contingencies

Capitalization
Common stock, $.01 par value; authorized 400,000,000 shares; issued 218,906,220 and 200,512,890 shares, respectively	2	2
Premium on stock and other capital contributions	3,179	2,869
Accumulated other comprehensive loss	(262)	(46)
Retained earnings	1,271	1,193
Total common stockholders’ equity	4,190	4,018
Total Capitalization and Liabilities	$6,446	$6,208

The accompanying Notes are an integral part of these financial statements.

371

PEPCO HOLDINGS, INC. (Parent Company)
STATEMENTS OF CASH FLOWS

	For the Year Ended December 31,
	2008	2007	2006
	(Millions of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$300	$ 334	$ 248
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions from related parties less than earnings	(170)	(215)	(201)
Deferred income taxes, net	2	2	35
Net change in:
Prepaid and other	(10)	-	6
Accounts payable	16	10	-
Interest and taxes	(5)	(5)	(34)
Other, net	(2)	2	14
Net Cash From Operating Activities	131	128	68

CASH FLOWS FROM INVESTING ACTIVITIES
Net investment in property, plant and equipment	-	-	-
Net Cash Used By Investing Activities	-	-	-

CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid on common stock	(222)	(203)	(198)
Common stock issued to the Dividend Reinvestment Plan	29	28	30
Issuance of common stock	287	200	17
Issuance of long-term debt	-	450	200
Capital distribution to subsidiaries	(175)	-	-
Reacquisition of long-term debt	-	(500)	(300)
Decrease in notes receivable from associated companies	79	227	203
Issuances (repayments) of short-term debt, net	50	(36)	36
Costs of issuances and refinancings	(10)	(3)	(2)
Other financing activities	-	-	(1)
Net Cash From (Used By) Financing Activities	38	163	(15)
Net change in cash and cash equivalents	169	291	53
Beginning of year cash and cash equivalents	387	96	43
End of year cash and cash equivalents	$556	$387	$ 96

The accompanying Notes are an integral part of these financial statements.

NOTES TO FINANCIAL INFORMATION

These condensed financial statements represent the financial information for Pepco Holdings, Inc. (Parent Company).

For information concerning PHI’s long-term debt obligations, see Note (11), “Debt” to the consolidated financial statements of Pepco Holdings included in Item 8 of this Form 10-K.

For information concerning PHI’s material contingencies and guarantees, see Note (16), “Commitments and Contingencies” to the consolidated financial statements of Pepco Holdings included in Item 8 of this Form 10-K.

The Parent Company’s majority owned subsidiaries are recorded using the equity method of accounting.

372

Schedule II (Valuation and Qualifying Accounts) for each registrant is submitted below:

Pepco Holdings, Inc.
Col. A	Col. B	Col. C		Col. D	Col. E
		Additions
Description	Balance at Beginning of Period	Charged to Costs and Expenses	Charged to Other Accounts (a)	Deductions(b)	Balance at End of Period
	(Millions of dollars)
Year Ended December 31, 2008 Allowance for uncollectible accounts - customer and other accounts receivable	$31	$44	$6	$(44)	$37
Year Ended December 31, 2007 Allowance for uncollectible accounts - customer and other accounts receivable	$36	$34	$1	$(40)	$31
Year Ended December 31, 2006 Allowance for uncollectible accounts - customer and other accounts receivable	$41	$20	$1	$(26)	$36

(a) Collection of accounts previously written off.

(b) Uncollectible accounts written off.

Potomac Electric Power Company
Col. A	Col. B	Col. C		Col. D	Col. E
		Additions
Description	Balance at Beginning of Period	Charged to Costs and Expenses	Charged to Other Accounts (a)	Deductions(b)	Balance at End of Period
	(Millions of dollars)
Year Ended December 31, 2008 Allowance for uncollectible accounts - customer and other accounts receivable	$13	$18	$1	$(17)	$15
Year Ended December 31, 2007 Allowance for uncollectible accounts - customer and other accounts receivable	$17	$15	$1	$(20)	$13
Year Ended December 31, 2006 Allowance for uncollectible accounts - customer and other accounts receivable	$14	$11	$1	$(9)	$17

(a) Collection of accounts previously written off.

(b) Uncollectible accounts written off.

373

Delmarva Power & Light Company
Col. A	Col. B	Col. C		Col. D	Col. E
		Additions
Description	Balance at Beginning of Period	Charged to Costs and Expenses	Charged to Other Accounts (a)	Deductions(b)	Balance at End of Period
	(Millions of dollars)
Year Ended December 31, 2008 Allowance for uncollectible accounts - customer and other accounts receivable	$8	$17	$3	$(18)	$10
Year Ended December 31, 2007 Allowance for uncollectible accounts - customer and other accounts receivable	$ 8	$12	$-	$(12)	$ 8
Year Ended December 31, 2006 Allowance for uncollectible accounts - customer and other accounts receivable	$ 9	$ 4	$-	$ (5)	$ 8

(a) Collection of accounts previously written off.

(b) Uncollectible accounts written off.

Atlantic City Electric Company
Col. A	Col. B	Col. C		Col. D	Col. E
		Additions
Description	Balance at Beginning of Period	Charged to Costs and Expenses	Charged to Other Accounts (a)	Deductions(b)	Balance at End of Period
	(Millions of dollars)
Year Ended December 31, 2008 Allowance for uncollectible accounts - customer and other accounts receivable	$5	$8	$2	$(9)	$6
Year Ended December 31, 2007 Allowance for uncollectible accounts - customer and other accounts receivable	$6	$5	$-	$(6)	$5
Year Ended December 31, 2006 Allowance for uncollectible accounts - customer and other accounts receivable	$5	$5	$-	$(4)	$6

(a) Collection of accounts previously written off.

(b) Uncollectible accounts written off.

374

3. EXHIBITS

The documents listed below are being filed herewith or have previously been filed and are incorporated herein by reference from the documents indicated and made a part hereof.

Exhibit No.	Registrant(s)	Description of Exhibit	Reference
3.1	PHI	Restated Certificate of Incorporation (filed in Delaware 6/2/2005)	Exh. 3.1 to PHI’s Form 10-K, 3/13/06.
3.2	Pepco	Restated Articles of Incorporation and Articles of Restatement (as filed in the District of Columbia)	Exh. 3.1 to Pepco’s Form 10-Q, 5/5/06.
3.3	DPL	Articles of Restatement of Certificate and Articles of Incorporation (filed in Delaware and Virginia 02/22/07)	Exh. 3.3 to DPL’s Form 10-K, 3/1/07.
3.4	ACE	Restated Certificate of Incorporation (filed in New Jersey 8/09/02)	Exh. B.8.1 to PHI’s Amendment No. 1 to Form U5B, 2/13/03.
3.5	PHI	Bylaws	Exh. 3 to PHI’s Form 8-K, 5/3/07.
3.6	Pepco	By-Laws	Exh. 3.1 to Pepco’s Form 10-Q, 5/5/06.
3.7	DPL	Bylaws	Exh. 3.2.1 to DPL’s Form 10-Q 5/9/05.
3.8	ACE	Bylaws	Exh. 3.2.2 to ACE’s Form 10-Q 5/9/05.
4.1	PHI Pepco	Mortgage and Deed of Trust dated July 1, 1936, of Pepco to The Bank of New York Mellon as successor trustee, securing First Mortgage Bonds of Pepco, and Supplemental Indenture dated July 1, 1936	Exh. B-4 to First Amendment, 6/19/36, to Pepco’s Registration Statement No. 2-2232.
		Supplemental Indentures, to the aforesaid Mortgage and Deed of Trust, dated - December 10, 1939	Exh. B to Pepco’s Form 8-K, 1/3/40.
		July 15, 1942	Exh. B-1 to Amendment No. 2, 8/24/42, and B-3 to Post-Effective Amendment, 8/31/42, to Pepco’s Registration Statement No. 2-5032.

375

		October 15, 1947	Exh. A to Pepco’s Form 8-K, 12/8/47.
		December 31, 1948	Exh. A-2 to Pepco’s Form 10-K, 4/13/49.
		December 31, 1949	Exh. (a)-1 to Pepco’s Form 8-K, 2/8/50.
		February 15, 1951	Exh. (a) to Pepco’s Form 8-K, 3/9/51.
		February 16, 1953	Exh. (a)-1 to Pepco’s Form 8-K, 3/5/53.
		March 15, 1954 and March 15, 1955	Exh. 4-B to Pepco’s Registration Statement No. 2-11627, 5/2/55.
		March 15, 1956	Exh. C to Pepco’s Form 10-K, 4/4/56.
		April 1, 1957	Exh. 4-B to Pepco’s Registration Statement No. 2-13884, 2/5/58.
		May 1, 1958	Exh. 2-B to Pepco’s Registration Statement No. 2-14518, 11/10/58.
		May 1, 1959	Exh. 4-B to Amendment No. 1, 5/13/59, to Pepco’s Registration Statement No. 2-15027.
		May 2, 1960	Exh. 2-B to Pepco’s Registration Statement No. 2-17286, 11/9/60.
		April 3, 1961	Exh. A-1 to Pepco’s Form 10-K, 4/24/61.
		May 1, 1962	Exh. 2-B to Pepco’s Registration Statement No. 2-21037, 1/25/63.
		May 1, 1963	Exh. 4-B to Pepco’s Registration Statement No. 2-21961, 12/19/63.
		April 23, 1964	Exh. 2-B to Pepco’s Registration Statement No. 2-22344, 4/24/64.

376

		May 3, 1965	Exh. 2-B to Pepco’s Registration Statement No. 2-24655, 3/16/66.
		June 1, 1966	Exh. 1 to Pepco’s Form 10-K, 4/11/67.
		April 28, 1967	Exh. 2-B to Post-Effective Amendment No. 1 to Pepco’s Registration Statement No. 2-26356, 5/3/67.
		July 3, 1967	Exh. 2-B to Pepco’s Registration Statement No. 2-28080, 1/25/68.
		May 1, 1968	Exh. 2-B to Pepco’s Registration Statement No. 2-31896, 2/28/69.
		June 16, 1969	Exh. 2-B to Pepco’s Registration Statement No. 2-36094, 1/27/70.
		May 15, 1970	Exh. 2-B to Pepco’s Registration Statement No. 2-38038, 7/27/70.
		September 1, 1971	Exh. 2-C to Pepco’s Registration Statement No. 2-45591, 9/1/72.
		June 17, 1981	Exh. 2 to Amendment No. 1 to Pepco’s Form 8-A, 6/18/81.
		November 1, 1985	Exh. 2B to Pepco’s Form 8-A, 11/1/85.
		September 16, 1987	Exh. 4-B to Pepco’s Registration Statement No. 33-18229, 10/30/87.
		May 1, 1989	Exh. 4-C to Pepco’s Registration Statement No. 33-29382, 6/16/89.
		May 21, 1991	Exh. 4 to Pepco’s Form 10-K, 3/27/92.
		May 7, 1992	Exh. 4 to Pepco’s Form 10-K, 3/26/93.

377

		September 1, 1992	Exh. 4 to Pepco’s Form 10-K, 3/26/93.
		November 1, 1992	Exh. 4 to Pepco’s Form 10-K, 3/26/93.
		July 1, 1993	Exh. 4.4 to Pepco’s Registration Statement No. 33-49973, 8/11/93.
		February 10, 1994	Exh. 4 to Pepco’s Form 10-K, 3/25/94.
		February 11, 1994	Exh. 4 to Pepco’s Form 10-K, 3/25/94.
		March 10, 1995	Exh. 4.3 to Pepco’s Registration Statement No. 33-61379, 7/28/95.
		October 2, 1997	Exh. 4 to Pepco’s Form 10-K, 3/26/98.
		November 17, 2003	Exhibit 4.1 to Pepco’s Form 10-K, 3/11/04.
		March 16, 2004	Exh. 4.3 to Pepco’s Form 8-K, 3/23/04.
		May 24, 2005	Exh. 4.2 to Pepco’s Form 8-K, 5/26/05.
		April 1, 2006	Exh. 4.1 to Pepco’s Form 8-K, 4/17/06.
		November 13, 2007	Exh. 4.2 to Pepco’s Form 8-K, 11/15/07.
		March 24, 2008	Exh. 4.1 to Pepco’s Form 8-K, 3/28/08.
		December 3, 2008	Exh. 4.2 to Pepco’s Form 8-K, 12/8/08.
4.2	PHI Pepco	Indenture, dated as of July 28, 1989, between Pepco and The Bank of New York Mellon, Trustee, with respect to Pepco’s Medium-Term Note Program	Exh. 4 to Pepco’s Form 8-K, 6/21/90.
4.3	PHI Pepco	Senior Note Indenture dated November 17, 2003 between Pepco and The Bank of New York Mellon	Exh. 4.2 to Pepco’s Form 8-K, 11/21/03.
		Supplemental Indenture, to the aforesaid Senior Note Indenture, dated March 3, 2008	Filed herewith.

378

4.4	PHI DPL	Mortgage and Deed of Trust of Delaware Power & Light Company to The Bank of New York Mellon (ultimate successor to the New York Trust Company), as trustee, dated as of October 1, 1943 and copies of the First through Sixty-Eighth Supplemental Indentures thereto	Exh. 4-A to DPL’s Registration Statement No. 33-1763, 11/27/85.
		Sixty-Ninth Supplemental Indenture	Exh. 4-B to DPL’s Registration Statement No. 33-39756, 4/03/91.
		Seventieth through Seventy-Fourth Supplemental Indentures	Exhs. 4-B to DPL’s Registration Statement No. 33-24955, 10/13/88.
		Seventy-Fifth through Seventy-Seventh Supplemental Indentures	Exhs. 4-D, 4-E & 4-F to DPL’s Registration Statement No. 33-39756, 4/03/91.
		Seventy-Eighth and Seventy-Ninth Supplemental Indentures	Exhs. 4-E & 4-F to DPL’s Registration Statement No. 33-46892, 4/1/92.
		Eightieth Supplemental Indenture	Exh. 4 to DPL’s Registration Statement No. 33-49750, 7/17/92.
		Eighty-First Supplemental Indenture	Exh. 4-G to DPL’s Registration Statement No. 33-57652, 1/29/93.
		Eighty-Second Supplemental Indenture	Exh. 4-H to DPL’s Registration Statement No. 33-63582, 5/28/93.
		Eighty-Third Supplemental Indenture	Exh. 99 to DPL’s Registration Statement No. 33-50453, 10/1/93.
		Eighty-Fourth through Eighty-Eighth Supplemental Indentures	Exhs. 4-J, 4-K, 4-L, 4-M & 4-N to DPL’s Registration Statement No. 33-53855, 1/30/95.
		Eighty-Ninth and Ninetieth Supplemental Indentures	Exhs. 4-K & 4-L to DPL’s Registration Statement No. 333-00505, 1/29/96.

379

		Ninety-Fifth Supplemental Indenture	Exh. 4-K to DPL’s Post Effective Amendment No. 1 to Registration Statement No. 333-145691-02, 11/18/08
4.5	PHI DPL	Indenture between DPL and The Bank of New York Mellon Trust Company, N.A. (ultimate successor to Manufacturers Hanover Trust Company), as trustee, dated as of November 1, 1988	Exh. No. 4-G to DPL’s Registration Statement No. 33-46892, 4/1/92.
4.6	PHI ACE	Mortgage and Deed of Trust, dated January 15, 1937, between Atlantic City Electric Company and The Bank of New York Mellon (formerly Irving Trust Company), as trustee	Exh. 2(a) to ACE’s Registration Statement No. 2-66280, 12/21/79.
		Supplemental Indentures, to the aforesaid Mortgage and Deed of Trust, dated as of -
		June 1, 1949	Exh. 2(b) to ACE’s Registration Statement No. 2-66280, 12/21/79.
		July 1, 1950	Exh. 2(b) to ACE’s Registration Statement No. 2-66280, 12/21/79.
		November 1, 1950	Exh. 2(b) to ACE’s Registration Statement No. 2-66280, 12/21/79.
		March 1, 1952	Exh. 2(b) to ACE’s Registration Statement No. 2-66280, 12/21/79.
		January 1, 1953	Exh. 2(b) to ACE’s Registration Statement No. 2-66280, 12/21/79.
		March 1, 1954	Exh. 2(b) to ACE’s Registration Statement No. 2-66280, 12/21/79.
		March 1, 1955	Exh. 2(b) to ACE’s Registration Statement No. 2-66280, 12/21/79.

380

		January 1, 1957	Exh. 2(b) to ACE’s Registration Statement No. 2-66280, 12/21/79.
		April 1, 1958	Exh. 2(b) to ACE’s Registration Statement No. 2-66280, 12/21/79.
		April 1, 1959	Exh. 2(b) to ACE’s Registration Statement No. 2-66280, 12/21/79.
		March 1, 1961	Exh. 2(b) to ACE’s Registration Statement No. 2-66280, 12/21/79.
		July 1, 1962	Exh. 2(b) to ACE’s Registration Statement No. 2-66280, 12/21/79.
		March 1, 1963	Exh. 2(b) to ACE’s Registration Statement No. 2-66280, 12/21/79.
		February 1, 1966	Exh. 2(b) to ACE’s Registration Statement No. 2-66280, 12/21/79.
		April 1, 1970	Exh. 2(b) to ACE’s Registration Statement No. 2-66280, 12/21/79.
		September 1, 1970	Exh. 2(b) to ACE’s Registration Statement No. 2-66280, 12/21/79.
		May 1, 1971	Exh. 2(b) to ACE’s Registration Statement No. 2-66280, 12/21/79.
		April 1, 1972	Exh. 2(b) to ACE’s Registration Statement No. 2-66280, 12/21/79.
		June 1, 1973	Exh. 2(b) to ACE’s Registration Statement No. 2-66280, 12/21/79.
		January 1, 1975	Exh. 2(b) to ACE’s Registration Statement No. 2-66280, 12/21/79.

381

		May 1, 1975	Exh. 2(b) to ACE’s Registration Statement No. 2-66280, 12/21/79.
		December 1, 1976	Exh. 2(b) to ACE’s Registration Statement No. 2-66280, 12/21/79.
		January 1, 1980	Exh. 4(e) to ACE’s Form 10-K, 3/25/81.
		May 1, 1981	Exh. 4(a) to ACE’s Form 10-Q, 8/10/81.
		November 1, 1983	Exh. 4(d) to ACE’s Form 10-K, 3/30/84.
		April 15, 1984	Exh. 4(a) to ACE’s Form 10-Q, 5/14/84.
		July 15, 1984	Exh. 4(a) to ACE’s Form 10-Q, 8/13/84.
		October 1, 1985	Exh. 4 to ACE’s Form 10-Q, 11/12/85.
		May 1, 1986	Exh. 4 to ACE’s Form 10-Q, 5/12/86.
		July 15, 1987	Exh. 4(d) to ACE’s Form 10-K, 3/28/88.
		October 1, 1989	Exh. 4(a) to ACE’s Form 10-Q for quarter ended 9/30/89.
		March 1, 1991	Exh. 4(d)(1) to ACE’s Form 10-K, 3/28/91.
		May 1, 1992	Exh. 4(b) to ACE’s Registration Statement 33-49279, 1/6/93.
		January 1, 1993	Exh. 4.05(hh) to ACE’s Registration Statement 333-108861, 9/17/03
		August 1, 1993	Exh. 4(a) to ACE’s Form 10-Q, 11/12/93.
		September 1, 1993	Exh. 4(b) to ACE’s Form 10-Q, 11/12/93.
		November 1, 1993	Exh. 4(c)(1) to ACE’s Form 10-K, 3/29/94.

382

		June 1, 1994	Exh. 4(a) to ACE’s Form 10-Q, 8/14/94.
		October 1, 1994	Exh. 4(a) to ACE’s Form 10-Q, 11/14/94.
		November 1, 1994	Exh. 4(c)(1) to ACE’s Form 10-K, 3/21/95.
		March 1, 1997	Exh. 4(b) to ACE’s Form 8-K, 3/24/97.
		April 1, 2004	Exh. 4.3 to ACE’s Form 8-K, 4/6/04.
		August 10, 2004	Exh. 4 to PHI’s Form 10-Q, 11/8/04.
		March 8, 2006	Exh. 4 to ACE’s Form 8-K, 3/17/06.
		November 6, 2008	Exh. 4.2 to ACE’s Form 8-K, 11/10/08.
4.7	PHI ACE	Indenture dated as of March 1, 1997 between Atlantic City Electric Company and The Bank of New York Mellon, as trustee	Exh. 4(e) to ACE’s Form 8-K, 3/24/97.
4.8	PHI ACE	Senior Note Indenture, dated as of April 1, 2004, with The Bank of New York Mellon, as trustee	Exh. 4.2 to ACE’s Form 8-K, 4/6/04.
4.9	PHI ACE	Indenture dated as of December 19, 2002 between Atlantic City Electric Transition Funding LLC (ACE Funding) and The Bank of New York Mellon, as trustee	Exh. 4.1 to ACE Funding’s Form 8-K, 12/23/02.
4.10	PHI ACE	2002-1 Series Supplement dated as of December 19, 2002 between ACE Funding and The Bank of New York Mellon, as trustee	Exh. 4.2 to ACE Funding’s Form 8-K, 12/23/02.
4.11	PHI ACE	2003-1 Series Supplement dated as of December 23, 2003 between ACE Funding and The Bank of New York Mellon, as trustee	Exh. 4.2 to ACE Funding’s Form 8-K, 12/23/03.
4.12	PHI	Indenture between PHI and The Bank of New York Mellon, as trustee dated September 6, 2002	Exh. 4.03 to PHI’s Registration Statement No. 333-100478, 10/10/02.

383

10.1	PHI	Employment Agreement of Dennis R. Wraase dated July 26, 2007*	Exh. 10.3 to PHI’s Form 10-Q, 8/6/07.
10.2	PHI	Employment Agreement of William T. Torgerson dated August 1, 2002*	Exh. 10.3 to PHI’s Form 10-Q, 8/9/02.
10.3	PHI	Employment Agreement of Paul H. Barry dated August 7, 2007*	Exh. 10 to PHI’s Form 8-K, 8/13/07.
10.4	PHI	Employment Agreement of Joseph M. Rigby dated August 1, 2008*	Exh. 10.1 to PHI’s Form 8-K, 7/30/08.
10.5	PHI	Pepco Holdings, Inc. Long-Term Incentive Plan*	Filed herewith.
10.6	PHI	Pepco Holdings, Inc. Executive and Director Deferred Compensation Plan*	Filed herewith.
10.7	PHI Pepco	Potomac Electric Power Company Director and Executive Deferred Compensation Plan*	Exh. 10.22 to PHI’s Form 10-K, 3/28/03.
10.8	PHI Pepco	Potomac Electric Power Company Long-Term Incentive Plan*	Exh. 4 to Pepco’s Form S-8, 6/12/98.
10.9	PHI	Conectiv Incentive Compensation Plan*	Exh. 99(e) to Conectiv’s Registration Statement No. 333-18843, 12/26/96.
10.10	PHI	Conectiv Supplemental Executive Retirement Plan*	Filed herewith.
10.11	ACE	Bondable Transition Property Sale Agreement between ACE Funding and ACE dated as of December 19, 2002	Exh. 10.1 to ACE Funding’s Form 8-K, 12/23/02.
10.12	ACE	Bondable Transition Property Servicing Agreement between ACE Funding and ACE dated as of December 19, 2002	Exh. 10.2 to ACE Funding’s Form 8-K, 12/23/02.
10.13	PHI	Conectiv Deferred Compensation Plan*	Exh. 10.1 to PHI’s Form 10-Q, 8/6/04.
10.14	PHI	Form of Employee Nonqualified Stock Option Agreement*	Exh. 10.2 to PHI’s Form 10-Q, 11/8/04.
10.15	PHI	Form of Director Nonqualified Stock Option Agreement*	Exh. 10.3 to PHI’s Form 10-Q, 11/8/04.
10.16	PHI	Form of Election Regarding Payment of Director Retainer/Fees*	Exh. 10.4 to PHI’s Form 10-Q, 11/8/04.
10.17	PHI	Form of Executive and Director Deferred Compensation Plan Executive Deferral Agreement*	Exh. 10.5 to PHI’s Form 10-Q, 11/8/04.

384

10.18	PHI	Form of Executive Incentive Compensation Plan Participation Agreement*	Exh. 10.6 to PHI’s Form 10-Q, 11/8/04.
10.19	PHI	Form of Restricted Stock Agreement*	Exh. 10.7 to PHI’s Form 10-Q, 11/8/04.
10.20	PHI	Form of Election with Respect to Stock Tax Withholding*	Exh. 10.8 to PHI’s Form 10-Q, 11/8/04.
10.21	PHI	Non-Management Directors Compensation Plan*	Filed herewith.
10.22	PHI	Annual Executive Incentive Compensation Plan dated as of February 9, 2009*	Filed herewith.
10.23	PHI	Non-Management Director Compensation Arrangements*	Exh. 10-24 to PHI’s Form 10-K, 2/29/08.
10.24	PHI	Form of Election regarding Non-Management Directors Compensation Plan*	Exh. 10.57 to PHI’s Form 10-K, 3/16/05.
10.25	PHI Pepco	Change-in-Control Severance Plan for Certain Executive Employees*	Filed herewith.
10.26	PHI Pepco	PHI Named Executive Officer 2007 Compensation Determinations*	Exh. 10.32 to PHI’s Form 10-K, 2/29/08.
10.27	PHI Pepco DPL ACE	Amended and Restated Credit Agreement, dated as of May 2, 2007, between PHI, Pepco, DPL and ACE, the lenders party thereto, Wachovia Bank, National Association, as administrative agent and swingline lender, Citicorp USA, Inc., as syndication agent, The Royal Bank of Scotland, plc, The Bank of Nova Scotia and JPMorgan Chase Bank, N.A., as documentation agents, and Wachovia Capital Markets, LLC and Citigroup Global Markets Inc., as joint lead arrangers and joint book runners	Exh. 10 to PHI’s Form 10-Q, 5/7/07.
10.28	PHI	Pepco Holdings, Inc. Combined Executive Retirement Plan*	Filed herewith.
10.29	PHI	PHI Named Executive Officer 2008 Compensation Determinations*	Exh. 10.33 to PHI’s Form 10-K, 2/29/08.
10.30	PHI	PHI Named Executive Officer 2009 Compensation Determinations*	Filed herewith.

385

10.31	DPL	Transmission Purchase and Sale Agreement By and Between Delmarva Power & Light Company and Old Dominion Electric Cooperative dated as of June 13, 2007	Exh. 10.1 to DPL’s Form 10-Q, 8/6/07.
10.32	DPL	Purchase And Sale Agreement By and Between Delmarva Power & Light Company and A&N Electric Cooperative dated as of June 13, 2007	Exh. 10.2 to DPL’s Form 10-Q, 8/6/07.
10.33	DPL PHI	Loan Agreement, dated as of March 20, 2008, between DPL and The Bank of Nova Scotia	Exh. 10.1 to DPL’s Form 8-K, 3/24/08.
10.34	Pepco PHI	Loan Agreement, dated as of May 1, 2008, between Pepco and Wachovia Bank, National Association	Exh. 10.1 to Pepco’s Form 8-K, 5/6/08.
10.35	PHI	Amendment to Employment Agreement of Dennis R. Wraase effective August 1, 2008*	Exh. 10.2 to PHI’s Form 8-K, 7/30/08.
10.36	PHI	Amendment to Employment Agreement of William T. Torgerson effective August 1, 2008*	Filed herewith.
10.37	PHI	Credit Agreement, dated November 7, 2008, by and among Bank of America, N.A., Banc of America Securities, KeyBank National Association, JPMorgan Chase Bank, N.A., SunTrust Bank, The Bank of Nova Scotia, Morgan Stanley Bank, Credit Suisse, Cayman Islands Branch and Wachovia Bank, National Association	Filed herewith.
11	PHI	Statements Re: Computation of Earnings Per Common Share	**
12.1	PHI	Statements Re: Computation of Ratios	Filed herewith.
12.2	Pepco	Statements Re: Computation of Ratios	Filed herewith.
12.3	DPL	Statements Re: Computation of Ratios	Filed herewith.
12.4	ACE	Statements Re: Computation of Ratios	Filed herewith.
21	PHI	Subsidiaries of the Registrant	Filed herewith.
23.1	PHI	Consent of Independent Registered Public Accounting Firm	Filed herewith.
23.2	Pepco	Consent of Independent Registered Public Accounting Firm	Filed herewith.

386

23.3	DPL	Consent of Independent Registered Public Accounting Firm	Filed herewith.
23.4	ACE	Consent of Independent Registered Public Accounting Firm	Filed herewith.
31.1	PHI	Rule 13a-14(a)/15d-14(a) Certificate of Chief Executive Officer	Filed herewith.
31.2	PHI	Rule 13a-14(a)/15d-14(a) Certificate of Chief Financial Officer	Filed herewith.
31.3	Pepco	Rule 13a-14(a)/15d-14(a) Certificate of Chief Executive Officer	Filed herewith.
31.4	Pepco	Rule 13a-14(a)/15d-14(a) Certificate of Chief Financial Officer	Filed herewith.
31.5	DPL	Rule 13a-14(a)/15d-14(a) Certificate of Chief Executive Officer	Filed herewith.
31.6	DPL	Rule 13a-14(a)/15d-14(a) Certificate of Chief Financial Officer	Filed herewith.
31.7	ACE	Rule 13a-14(a)/15d-14(a) Certificate of Chief Executive Officer	Filed herewith.
31.8	ACE	Rule 13a-14(a)/15d-14(a) Certificate of Chief Financial Officer	Filed herewith.

* Management contract or compensatory plan or arrangement.

** The information required by this Exhibit is set forth in Note (14) of the Financial Statements of Pepco Holdings included in Item 8 “Financial Statements and Supplementary Data” of this Form 10-K.

Regulation S-K Item 10(d) requires registrants to identify the physical location, by SEC file number reference, of all documents incorporated by reference that are not included in a registration statement and have been on file with the SEC for more than five years. The SEC file number references for Pepco Holdings, Inc., those of its subsidiaries that are registrants, Conectiv and ACE Funding are provided below:

Pepco Holdings, Inc. in file number 001-31403

Potomac Electric Power Company in file number 001-1072

Conectiv in file number 001-13895

Delmarva Power & Light Company in file number 001-1405

Atlantic City Electric Company in file number 001-3559

Atlantic City Electric Transition Funding LLC in file number 333-59558

Certain instruments defining the rights of the holders of long-term debt of PHI, Pepco, DPL and ACE (including medium-term notes, unsecured notes, senior notes and tax-exempt

387

financing instruments) have not been filed as exhibits in accordance with Regulation S-K Item 601(b)(4)(iii) because such instruments do not authorize securities in an amount which exceeds 10% of the total assets of the applicable registrant and its subsidiaries on a consolidated basis. Each of PHI, Pepco, DPL or ACE agrees to furnish to the SEC upon request a copy of any such instruments omitted by it.

INDEX TO FURNISHED EXHIBITS

The documents listed below are being furnished herewith:

Exhibit No.	Registrant(s)	Description of Exhibit
32.1	PHI	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350
32.2	Pepco	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350
32.3	DPL	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350
32.4	ACE	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350

(b) Exhibits

388

Exhibit 12.1 Statements Re. Computation of Ratios

PEPCO HOLDINGS, INC.

	For the Year Ended December 31,
	2008	2007	2006	2005	2004
	(Millions of dollars)
Income before extraordinary item (a)	$305	$324	$245	$369	$257

Income tax expense (b)	168	188	161	255	167

Fixed charges:
Interest on long-term debt, amortization of discount, premium and expense	341	348	343	341	376
Other interest	24	25	19	20	21
Preferred dividend requirements of subsidiaries	-	-	1	3	3
Total fixed charges	365	373	363	364	400

Nonutility capitalized interest	(6)	(2)	(1)	(1)	-

Income before extraordinary item, income tax expense, fixed charges and capitalized interest	$832	$883	$768	$987	$824

Total fixed charges, shown above	365	373	363	364	400
Increase preferred stock dividend requirements of subsidiaries to a pre-tax amount	-	-	1	2	2

Fixed charges for ratio computation	$365	$373	$364	$366	$402

Ratio of earnings to fixed charges and preferred dividends	2.28	2.36	2.11	2.70	2.05

(a)

Excludes income/losses on equity investments.

(b)

Concurrent with the adoption of FIN 48 in 2007, amount includes interest on uncertain tax positions.

389

Exhibit 12.2 Statements Re. Computation of Ratios

POTOMAC ELECTRIC POWER COMPANY

	For the Year Ended December 31,
	2008	2007	2006	2005	2004
	(Millions of dollars)
Net income	$116	$125	$ 85	$165	$ 97

Income tax expense (a)	64	62	58	128	56

Fixed charges:
Interest on long-term debt, amortization of discount, premium and expense	95	86	77	83	83
Other interest	11	12	13	14	14
Preferred dividend requirements of a subsidiary trust	-	-	-	-	-
Total fixed charges	106	98	90	97	97

Income before income tax expense and fixed charges	$286	$285	$233	$390	$250

Ratio of earnings to fixed charges	2.70	2.91	2.59	4.04	2.57

Total fixed charges, shown above	106	98	90	97	97

Preferred dividend requirements, adjusted to a pre-tax amount	-	-	2	2	2

Total fixed charges and preferred dividends	$106	$ 98	$ 92	$ 99	$ 99

Ratio of earnings to fixed charges and preferred dividends	2.70	2.91	2.54	3.94	2.53

(a)

Concurrent with the adoption of FIN 48 in 2007, amount includes interest on uncertain tax positions.

390

Exhibit 12.3 Statements Re. Computation of Ratios

DELMARVA POWER & LIGHT COMPANY

	For the Year Ended December 31,
	2008	2007	2006	2005	2004
	(Millions of dollars)
Net income	$68	$ 45	$ 43	$75	$ 63

Income tax expense (a)	45	37	32	58	48

Fixed charges:
Interest on long-term debt, amortization of discount, premium and expense	41	44	41	35	33
Other interest	2	2	3	3	2
Preferred dividend requirements of a subsidiary trust	-	-	-	-	-
Total fixed charges	43	46	44	38	35

Income before income tax expense and fixed charges	$156	$128	$119	$171	$146

Ratio of earnings to fixed charges	3.63	2.78	2.70	4.48	4.16

Total fixed charges, shown above	43	46	44	38	35

Preferred dividend requirements, adjusted to a pre-tax amount	-	-	1	2	2

Total fixed charges and preferred dividends	$43	$ 46	$ 45	$ 40	$ 37

Ratio of earnings to fixed charges and preferred dividends	3.63	2.78	2.62	4.28	3.96

(a)

Concurrent with the adoption of FIN 48 in 2007, amount includes interest on uncertain tax positions.

391

Exhibit 12.4 Statements Re. Computation of Ratios

ATLANTIC CITY ELECTRIC COMPANY

	For the Year Ended December 31,
	2008	2007	2006	2005	2004
	(Millions of dollars)
Income from continuing operations	$64	$ 60	$ 60	$ 51	$ 59

Income tax expense (a)	30	41	33	41	41

Fixed charges:
Interest on long-term debt, amortization of discount, premium and expense	64	66	65	60	62
Other interest	3	3	3	4	3
Preferred dividend requirements of subsidiary trusts	-	-	-	-	-
Total fixed charges	67	69	68	64	65

Income before extraordinary item, income tax expense and fixed charges	$161	$170	$161	$156	$165

Ratio of earnings to fixed charges	2.40	2.46	2.37	2.45	2.52

Total fixed charges, shown above	67	69	68	64	65

Preferred dividend requirements adjusted to a pre-tax amount	-	1	1	1	1

Total fixed charges and preferred dividends	$67	$ 70	$ 69	$ 65	$ 66

Ratio of earnings to fixed charges and preferred dividends	2.40	2.44	2.35	2.43	2.50

(a)

Concurrent with the adoption of FIN 48 in 2007, amount includes interest on uncertain tax positions.

392

Exhibit 21 Subsidiaries of the Registrants

Name of Company	Jurisdiction of Incorporation or Organization
Pepco Holdings, Inc.	DE
Potomac Electric Power Company	D.C. & VA
Gridco International LLC (Dissolved 10/8/2008)	DE
POM Holdings, Inc.	DE
Microcell Corporation	NC
Pepco Energy Services, Inc.	DE
Pepco Building Services Inc.	DE
W.A. Chester, L.L.C.	DE
W.A. Chester Corporation	DE
Chester Transmission Construction Canada, Inc.	Canada
Severn Construction Services, LLC	DE
Chesapeake HVAC, Inc. (f/k/a Unitemp, Inc.)	DE
Conectiv Thermal Systems, Inc.	DE
ATS Operating Services, Inc.	DE
Atlantic Jersey Thermal Systems, Inc.	DE
Thermal Energy Limited Partnership I	DE
Eastern Landfill Gas, LLC	DE
Blue Ridge Renewable Energy, LLC	DE
Distributed Generation Partners, LLC	DE
Rolling Hills Landfill Gas, LLC	DE
Potomac Power Resources, LLC	DE
Fauquier Landfill Gas, L.L.C.	DE
Pepco Energy Services - Suez Thermal, LLC (f/k/a Trigen-Pepco Energy Services, LLC)	DC
Pepco Government Services LLC	DE
Pepco Enterprises, Inc.	DE
Electro Ecology, Inc.	NY
Pepco Energy Cogeneration LLC	DE
Bethlehem Renewable Energy, LLC	DE
Potomac Capital Investment Corporation	DE
PCI Netherlands Corporation	NV
PCI Queensland LLC (f/k/a PCI Queensland Corporation)	NV
AMP Funding, LLC	DE
RAMP Investments, LLC	DE
PCI Air Management Partners, LLC	DE
PCI Ever, Inc.	DE
Friendly Skies, Inc.	Virgin Islands
PCI Air Management Corporation	NV
American Energy Corporation	DE
PCI-BT Investing, LLC	DE
Linpro Harmans Land LTD Partnership	MD
Potomac Nevada Corporation	NV
Potomac Delaware Leasing Corporation	DE
Potomac Equipment Leasing Corporation	NV
Potomac Leasing Associates, LP	DE

393

Potomac Nevada Leasing Corporation	NV
PCI Engine Trading, Ltd.	Bermuda
Potomac Capital Joint Leasing Corporation	DE
PCI Nevada Investments	DE
PCI Holdings, Inc.	DE
Aircraft International Management Company	DE
PCI-DB Ventures	DE
Potomac Nevada Investment, Inc.	NV
PCI Energy Corporation	DE
PHI Service Company	DE
Conectiv	DE
Delmarva Power & Light Company	DE & VA
Atlantic City Electric Company	NJ
Atlantic City Electric Transition Funding LLC	DE
Conectiv Properties and Investments, Inc.	DE
DCTC-Burney, Inc.	DE
Conectiv Solutions LLC	DE
ATE Investment, Inc.	DE
King Street Assurance Ltd. (Dissolved 1/22/08)	Bermuda
Enertech Capital Partners, LP	DE
Enertech Capital Partners II, LP	DE
Black Light Power, Inc.	DE
Millennium Account Services, LLC	DE
Conectiv Services, Inc.	DE
Atlantic Generation, Inc.	NJ
Vineland Limited, Inc.	DE
Vineland Cogeneration Limited Partnership	DE
Vineland General, Inc.	DE
Pedrick Gen., Inc.	NJ
Project Finance Fund III, LP	DE
Conectiv Communications, Inc.	DE
Atlantic Southern Properties, Inc.	NJ
Conectiv Energy Holding Company	DE
ACE REIT, Inc.	DE
Conectiv Atlantic Generation, LLC	DE
Conectiv Bethlehem LLC	DE
Conectiv Delmarva Generation, LLC	DE
Conectiv Pennsylvania Generation, LLC	DE
Conectiv Energy Supply, Inc.	DE
Conectiv North East, LLC	DE
Energy Systems North East, LLC	DE
Delta, LLC	DE
Conectiv Mid Merit, LLC	DE
Delaware Operating Services Company	DE
PHI Operating Services Company	DE
Tech Leaders II, LP	DE

394

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-145691 and 333-129429) and the Registration Statements on Form S-8 (Nos. 333-96675, 333-121823 and 333-131371) of Pepco Holdings, Inc. of our report dated March 2, 2009 for Pepco Holdings, Inc. relating to the financial statements, financial statement schedules and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

PricewaterhouseCoopers LLP

Washington, DC

March 2, 2009

395

Exhibit 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 333-145691-03) of Potomac Electric Power Company of our report dated March 2, 2009 relating to the financial statements and financial statement schedule of Potomac Electric Power Company, which appears in this Form 10-K.

PricewaterhouseCoopers LLP

Washington, DC

March 2, 2009

396

Exhibit 23.3

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-145691-02) of Delmarva Power & Light Company of our report dated March 2, 2009 relating to the financial statements and financial statement schedule of Delmarva Power & Light Company, which appears in this Form 10-K.

PricewaterhouseCoopers LLP

Washington, DC

March 2, 2009

397

Exhibit 23.4

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statement on Form S-3 (No. 333-145691-01) of Atlantic City Electric Company of our report dated March 2, 2009 relating to the financial statements and financial statement schedule of Atlantic City Electric Company, which appears in this Form 10-K.

PricewaterhouseCoopers LLP

Washington, DC

March 2, 2009

398

Exhibit 31.1

CERTIFICATION

I, Joseph M. Rigby, certify that:

1.	I have reviewed this report on Form 10-K of Pepco Holdings, Inc.

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchanges Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 2, 2009	/s/ JOSEPH M. RIGBY
	Joseph M. Rigby President and Chief Executive Officer

399

Exhibit 31.2

CERTIFICATION

I, Paul H. Barry, certify that:

1.	I have reviewed this report on Form 10-K of Pepco Holdings, Inc.

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 2, 2009	/s/ PAUL H. BARRY
	Paul H. Barry Senior Vice President and Chief Financial Officer

400

Exhibit 31.3

CERTIFICATION

I, David M. Velazquez, certify that:

1.	I have reviewed this report on Form 10-K of Potomac Electric Power Company.

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 2, 2009	/s/ DAVID M. VELAZQUEZ
	David M. Velazquez President and Chief Executive Officer

401

Exhibit 31.4

CERTIFICATION

I, Paul H. Barry, certify that:

1.	I have reviewed this report on Form 10-K of Potomac Electric Power Company.

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 2, 2009	/s/ PAUL H. BARRY
	Paul H. Barry Senior Vice President and Chief Financial Officer

402

Exhibit 31.5

CERTIFICATION

I, David M. Velazquez, certify that:

1.	I have reviewed this report on Form 10-K of Delmarva Power & Light Company.

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 2, 2009	/s/ DAVID M. VELAZQUEZ
	David M. Velazquez President and Chief Executive Officer

403

Exhibit 31.6

CERTIFICATION

I, Paul H. Barry, certify that:

1.	I have reviewed this report on Form 10-K of Delmarva Power & Light Company.

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 2, 2009	/s/ PAUL H. BARRY
	Paul H. Barry Senior Vice President and Chief Financial Officer

404

Exhibit 31.7

CERTIFICATION

I, David M. Velazquez, certify that:

1.	I have reviewed this report on Form 10-K of Atlantic City Electric Company.

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 2, 2009	/s/ DAVID M. VELAZQUEZ
	David M. Velazquez President and Chief Executive Officer

405

Exhibit 31.8

CERTIFICATION

I, Paul H. Barry, certify that:

1.	I have reviewed this report on Form 10-K of Atlantic City Electric Company.

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 2, 2009	/s/ PAUL H. BARRY
	Paul H. Barry Chief Financial Officer

406

Exhibit 32.1

Certificate of Chief Executive Officer and Chief Financial Officer

Pepco Holdings, Inc.

(pursuant to 18 U.S.C. Section 1350)

I, Joseph M. Rigby, and I, Paul H. Barry, certify that, to the best of my knowledge, (i) the Report on Form 10-K of Pepco Holdings, Inc. for the year ended December 31, 2008, filed with the Securities and Exchange Commission on the date hereof fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (ii) the information contained therein fairly presents, in all material respects, the financial condition and results of operations of Pepco Holdings, Inc.

March 2, 2009	/s/ JOSEPH M. RIGBY
	Joseph M. Rigby President and Chief Executive Officer

March 2, 2009	/s/ PAUL H. BARRY
	Paul H. Barry Senior Vice President and Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to Pepco Holdings, Inc. and will be retained by Pepco Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

407

Exhibit 32.2

Certificate of Chief Executive Officer and Chief Financial Officer

Potomac Electric Power Company

(pursuant to 18 U.S.C. Section 1350)

I, David M. Velazquez, and I, Paul H. Barry, certify that, to the best of my knowledge, (i) the Report on Form 10-K of Potomac Electric Power Company for the year ended December 31, 2008, filed with the Securities and Exchange Commission on the date hereof fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (ii) the information contained therein fairly presents, in all material respects, the financial condition and results of operations of Potomac Electric Power Company.

March 2, 2009	/s/ DAVID M. VELAZQUEZ
	David M. Velazquez President and Chief Executive Officer

March 2, 2009	/s/ PAUL H. BARRY
	Paul H. Barry Senior Vice President and Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to Potomac Electric Power Company and will be retained by Potomac Electric Power Company and furnished to the Securities and Exchange Commission or its staff upon request.

408

Exhibit 32.3

Certificate of Chief Executive Officer and Chief Financial Officer

Delmarva Power & Light Company

(pursuant to 18 U.S.C. Section 1350)

I, David M. Velazquez, and I, Paul H. Barry, certify that, to the best of my knowledge, (i) the Report on Form 10-K of Delmarva Power & Light Company for the year ended December 31, 2008, filed with the Securities and Exchange Commission on the date hereof fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (ii) the information contained therein fairly presents, in all material respects, the financial condition and results of operations of Delmarva Power & Light Company.

March 2, 2009	/s/ DAVID M. VELAZQUEZ
	David M. Velazquez President and Chief Executive Officer

March 2, 2009	/s/ PAUL H. BARRY
	Paul H. Barry Senior Vice President and Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to Delmarva Power & Light Company and will be retained by Delmarva Power & Light Company and furnished to the Securities and Exchange Commission or its staff upon request.

409

Exhibit 32.4

Certificate of Chief Executive Officer and Chief Financial Officer

Atlantic City Electric Company

(pursuant to 18 U.S.C. Section 1350)

I, David M. Velazquez, and I, Paul H. Barry, certify that, to the best of my knowledge, (i) the Report on Form 10-K of Atlantic City Electric Company for the year ended December 31, 2008, filed with the Securities and Exchange Commission on the date hereof fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (ii) the information contained therein fairly presents, in all material respects, the financial condition and results of operations of Atlantic City Electric Company.

March 2, 2009	/s/ DAVID M. VELAZQUEZ
	David M. Velazquez President and Chief Executive Officer

March 2, 2009	/s/ PAUL H. BARRY
	Paul H. Barry Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to Atlantic City Electric Company and will be retained by Atlantic City Electric Company and furnished to the Securities and Exchange Commission or its staff upon request.

410

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, each of the registrants has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	PEPCO HOLDINGS, INC. (Registrant)

March 2, 2009	By	/s/ JOSEPH M. RIGBY
		Joseph M. Rigby President and Chief Executive Officer

	POTOMAC ELECTRIC POWER COMPANY (Pepco) (Registrant)

March 2, 2009	By	/s/ DAVID M. VELAZQUEZ
		David M. Velazquez, President and Chief Executive Officer

	DELMARVA POWER & LIGHT COMPANY (DPL) (Registrant)

March 2, 2009	By	/s/ DAVID M. VELAZQUEZ
		David M. Velazquez, President and Chief Executive Officer

	ATLANTIC CITY ELECTRIC COMPANY (ACE) (Registrant)

March 2, 2009	By	/s/ DAVID M. VELAZQUEZ
		David M. Velazquez, President and Chief Executive Officer

411

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the above named registrants and in the capacities and on the dates indicated:

/s/ JOSEPH M. RIGBY	President and Chief Executive Officer of Pepco Holdings, Director of Pepco, DPL and ACE (Principal Executive Officer of Pepco Holdings)	March 2, 2009
Joseph M. Rigby
/s/ DAVID M. VELAZQUEZ	President and Chief Executive Officer of Pepco, DPL and ACE, Director of Pepco and DPL (Principal Executive Officer of Pepco, DPL and ACE)	March 2, 2009
David M. Velazquez
/s/ PAUL H. BARRY	Senior Vice President and Chief Financial Officer of Pepco Holdings, Pepco, and DPL, Chief Financial Officer of ACE and Director of Pepco (Principal Financial Officer of Pepco Holdings, Pepco, DPL and ACE)	March 2, 2009
Paul H. Barry
/s/ RONALD K. CLARK	Vice President and Controller of Pepco Holdings, Pepco and DPL and Controller of ACE (Principal Accounting Officer of Pepco Holdings, Pepco, DPL and ACE)	March 2, 2009
Ronald K. Clark

412

Signature	Title	Date
/s/ J. B. DUNN	Director, Pepco Holdings	March 2, 2009
Jack B. Dunn, IV

/s/ T. C. GOLDEN	Director, Pepco Holdings	March 2, 2009
Terence C. Golden

/s/ FRANK O. HEINTZ	Director, Pepco Holdings	March 2, 2009
Frank O. Heintz

/s/ BARBARA J. KRUMSIEK	Director, Pepco Holdings	March 2, 2009
Barbara J. Krumsiek

/s/ GEORGE F. MacCORMACK	Director, Pepco Holdings	March 2, 2009
George F. MacCormack

/s/ RICHARD B. McGLYNN	Director, Pepco Holdings	March 2, 2009
Richard B. McGlynn

/s/ LAWRENCE C. NUSSDORF	Director, Pepco Holdings	March 2, 2009
Lawrence C. Nussdorf

/s/ FRANK ROSS	Director, Pepco Holdings	March 2, 2009
Frank K. Ross

/s/ PAULINE A. SCHNEIDER	Director, Pepco Holdings	March 2, 2009
Pauline A. Schneider

/s/ LESTER P. SILVERMAN	Director, Pepco Holdings	March 2, 2009
Lester P. Silverman

/s/ WILLIAM T. TORGERSON	Director, Pepco Holdings	March 2, 2009
William T. Torgerson

/s/ D. R. WRAASE	Director, Pepco Holdings	March 2, 2009
Dennis R. Wraase

/s/ KIRK J. EMGE	Director, Pepco and DPL	March 2, 2009
Kirk J. Emge

/s/ WILLIAM GAUSMAN	Director, Pepco	March 2, 2009
William M. Gausman

/s/ MICHAEL J. SULLIVAN	Director, Pepco	March 2, 2009
Michael J. Sullivan

/s/ STANLEY A. WISNIEWSKI	Director, Pepco	March 2, 2009
Stanley A. Wisniewski

413

INDEX TO EXHIBITS FILED HEREWITH
Exhibit No.	Registrant(s)	Description of Exhibit
4.3	PHI, Pepco	Supplemental Indenture, to the aforesaid Senior Note Indenture, dated March 3, 2008
10.5	PHI	Pepco Holdings, Inc. Long-Term Incentive Plan*
10.6	PHI	Pepco Holdings, Inc. Executive and Director Deferred Compensation Plan*
10.10	PHI	Conectiv Supplemental Executive Retirement Plan*
10.21	PHI	Non-Management Directors Compensation Plan*
10.22	PHI	Annual Executive Incentive Compensation Plan dated as of February 9, 2009*
10.25	PHI, Pepco	Change-In-Control Severance Plan For Certain Executive Employees*
10.28	PHI	Pepco Holdings, Inc. Combined Executive Retirement Plan*
10.30	PHI	PHI Named Executive Officer 2009 Compensation Determinations*
10.36	PHI	Amendment to Employment Agreement of William T. Torgerson effective August 1, 2008
10.37	PHI	Credit Agreement, dated November 7, 2008, by and among Bank of America, N.A., Banc of America Securities, Key Bank National Association, JP Morgan Chase Bank, N.A., Sun Trust Bank, The Bank of Nova Scotia, Morgan Stanley Bank, Credit Suisse, Cayman Islands Branch and Wachovia Bank, National Association
12.1	PHI	Statements Re: Computation of Ratios
12.2	Pepco	Statements Re: Computation of Ratios
12.3	DPL	Statements Re: Computation of Ratios
12.4	ACE	Statements Re: Computation of Ratios
21	PHI	Subsidiaries of the Registrant
23.1	PHI	Consent of Independent Registered Public Accounting Firm
23.2	Pepco	Consent of Independent Registered Public Accounting Firm
23.3	DPL	Consent of Independent Registered Public Accounting Firm
23.4	ACE	Consent of Independent Registered Public Accounting Firm
31.1	PHI	Rule 13a-14(a)/15d-14(a) Certificate of Chief Executive Officer
31.2	PHI	Rule 13a-14(a)/15d-14(a) Certificate of Chief Financial Officer
31.3	Pepco	Rule 13a-14(a)/15d-14(a) Certificate of Chief Executive Officer
31.4	Pepco	Rule 13a-14(a)/15d-14(a) Certificate of Chief Financial Officer
31.5	DPL	Rule 13a-14(a)/15d-14(a) Certificate of Chief Executive Officer
31.6	DPL	Rule 13a-14(a)/15d-14(a) Certificate of Chief Financial Officer
31.7	ACE	Rule 13a-14(a)/15d-14(a) Certificate of Chief Executive Officer
31.8	ACE	Rule 13a-14(a)/15d-14(a) Certificate of Chief Financial Officer

414

INDEX TO EXHIBITS FURNISHED HEREWITH
Exhibit No.	Registrant(s)	Description of Exhibit
32.1	PHI	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350
32.2	Pepco	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350
32.3	DPL	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350
32.4	ACE	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350

SUPPLEMENTAL INDENTURE

THIS SUPPLEMENTAL INDENTURE , dated as of March 31, 2008, between POTOMAC ELECTRIC POWER COMPANY , a corporation duly organized and existing under the laws of the District of Columbia and the Commonwealth of Virginia, having its principal office at 701 Ninth Street, N.W., Washington D.C. 20068 (herein called the “ Company ”), and THE BANK OF NEW YORK , a New York banking corporation, having its principal corporate trust office at 101 Barclay Street, New York, New York 10286, as trustee (herein called the “ Trustee ”). Except as otherwise defined or unless the context otherwise requires, capitalized terms used in this Supplemental Indenture and defined in the Indenture (as hereinafter defined) shall have the meanings specified in the Indenture.

RECITALS OF THE COMPANY

WHEREAS, the Company and the Trustee are parties to that certain Indenture, dated as of November 17, 2003 (the “ Indenture ”), providing for the issuance from time to time of its Securities in an unlimited aggregate principal amount to be issued in one or more series as contemplated therein.

WHEREAS, the Company and the Trustee desire to amend Section 1302(c) of the Indenture to permit any series of Securities to be secured by more than one series of First Mortgage Bonds, pursuant to the terms and subject to the conditions set forth herein.

WHEREAS, pursuant to Section 1201(d) and (k) of the Indenture, the Company and the Trustee are permitted, without the consent of any Holders, to enter into an indenture supplemental to the Indenture to change any provision of the Indenture, provided such change does not adversely affect the interest of the Holders of Securities of any series or Tranche in any material respect.

WHEREAS, the Company has determined that the amendment to Section 1302(c) of the Indenture, as provided for in this Supplemental Indenture, does not adversely affect the interest of the Holders of Securities of any series or Tranche in any material respect.

WHEREAS, the execution and delivery of this Supplemental Indenture has been duly authorized and all acts conditions necessary to make this Supplemental Indenture a valid agreement of the Company have been performed.

NOW, THEREFORE, THIS INDENTURE WITNESSETH:

For and in consideration of the premises and other good and valuable consideration, the receipt whereof is hereby acknowledged, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities or any series thereof, as follows:

ARTICLE ONE

AMENDMENT

Section 1.1. Section 1302(c) of the Indenture is hereby amended and restated in its entirety as follows:

(c) Any series of First Mortgage Bonds may secure the payment of the principal, premium, if any, and interest on only one corresponding series of Securities. Any series of Securities may be secured by one or more series of First Mortgage Bonds, provided that, in the circumstance where more than one series of First Mortgage Bonds secures the payment of the principal, premium, if any, and interest on a series of Securities, (i) the aggregate principal amount of First Mortgage Bonds of such series of First Mortgage Bonds securing such series of Securities collectively shall equal or exceed the outstanding aggregate principal amount of such series of Securities and (ii) the terms of each series of First Mortgage Bonds securing such series of Securities shall satisfy the conditions of Section 1302(a)(ii) through (vi). Each Security of a series shall specify each of the one or more series of First Mortgage Bonds that secures the Securities of such series.

ARTICLE TWO

MISCELLANEOUS PROVISIONS

Section 2.1. Except as specifically amended and supplemented by this Supplemental Indenture, the Indenture shall remain in full force and effect and is hereby ratified and confirmed, and the Indenture and this Supplemental Indenture shall together constitute one and the same instrument.

Section 2.2. This Supplemental Indenture shall be governed by and construed in accordance with the laws of the State of New York, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Supplemental Indenture to the substantive law of another jurisdiction.

Section 2.3. All covenants and agreements in this Supplemental Indenture by the Company and Trustee shall bind their respective successors and assigns, whether so expressed or not.

Section 2.4. The Trustee accepts the amendment of the Indenture as hereby effected but only upon the terms and conditions set forth in the Indenture, as amended and supplemented by this Supplemental Indenture.

Section 2.5. This Supplemental Indenture may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.

Section 2.6. The Trustee accepts the amendment of the Indenture effected by this Supplemental Indenture and agrees to execute the trust created by the Indenture as hereby amended, but only upon the terms and conditions set forth in the Indenture, including the terms and provisions defining and limiting the liabilities and responsibilities of the Trustee, which terms and provisions shall in like manner define and limit its liabilities and responsibilities in the performance of the trust created by the Indenture as hereby amended. Without limiting the generality of the foregoing, the Trustee shall not be responsible in any manner whatsoever for or with respect to any of the recitals contained herein, all of which recitals are made solely by the Company, or for or with respect to (i) the validity or sufficiency of this Supplemental Indenture or any of the terms or provisions hereof, (ii) the due authorization hereof by the Company by corporate action or otherwise, or (iii) the due execution hereof by the Company, and the Trustee makes no representation with respect to any such matters.

[ Signature page follows ]

IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed, all as of the day and year first above written.

	POTOMAC ELECTRIC POWER COMPANY

	By:	/s/ A. J. KAMERICK
	Name:	Anthony J. Kamerick
	Title:	Vice President and Treasurer


	THE BANK OF NEW YORK, as Trustee

	By:	/s/ CHERYL L. CLARKE
	Name:	Cheryl L. Clarke
	Title:	Vice President

PEPCO HOLDINGS, INC. LONG-TERM INCENTIVE PLAN

1. Objective. The objective of this Plan is to increase shareholder value by providing a long-term incentive to reward officers and key employees of the Company and its Subsidiaries and directors of the Company, who are mainly responsible for the continued growth, development, and financial success of the Company and its Subsidiaries, for the profitable performance of the Company and its Subsidiaries. The Plan is also designed to permit the Company and its Subsidiaries to retain talented and motivated officers, key employees, and Directors and to increase their ownership of Company common stock.

2. Definitions. All singular terms defined in this Plan will include the plural and VICE VERSA. As used herein, the following terms will have the meaning specified below:

“Award” means, individually or collectively, Restricted Stock and Restricted Stock Units, Options, Performance Units, Stock Appreciation Rights, Dividend Equivalents, or Unrestricted Stock granted under this Plan.

“Base Salary” means the annual base rate of regular compensation of a Participant immediately before a Change in Control, or if greater, the highest annual such rate at any time during the 12-month period immediately preceding the Change in Control.

“Board” means the Board of Directors of the Company.

“Book Value” means the book value of a share of Stock determined in accordance with the Company’s regular accounting practices as of the last business day of the month immediately preceding the month in which a Stock Appreciation Right is exercised or granted as provided in Section 11.

“Change in Control” means a “change in control” as defined in the Pepco Holdings, Inc. Change-In-Control Severance Plan for Certain Executive Employees.

“Code” means the Internal Revenue Code of 1986, as amended. Reference in the Plan to any section of the Code will be deemed to include any amendments or successor provisions to such section and any regulations promulgated thereunder.

“Committee” means either (i) the committee of the Board that has been assigned by the Board to administer the Plan and which shall consist solely of two or more directors, each of whom is (A) a “non-employee director” (as such term is defined in Rule 16b-3(b)(3) promulgated pursuant to Section 16 of the Exchange Act), or which otherwise shall meet any disinterested administration or other requirements of rules promulgated under Section 16 of the Exchange Act, and (B) an “outside director” (as such term is defined by Treas. Reg. (S)1.162-27(e)(3)), or which otherwise shall meet the administration or other requirements of regulations promulgated under Section 162(m) of the Code, in each case as in effect at the applicable time or on the Board in its entirety if it elects at any time, or from time to time, to assume responsibility for and perform any or all of the functions of the Committee as set forth in the Plan, except that the Board shall not perform any of the functions of the Committee as provided for in Section 7 of the Plan.

“Company” means Pepco Holdings, Inc., a Delaware corporation, or its successor, including any “New Company” as provided in Section 161.

“Date of Grant” means the date on which the granting of an Award is authorized by the Committee or such later date as may be specified by the Committee in such authorization.

“Director” means a member of the Board/

“Disability” means the determination that a Participant is “disabled” under the disability plan of the Company or any of its Subsidiaries in which the Participant participates and, in the case of any Award that is subject to Section 409A of the Code and paid out upon Disability, the Participant is “disabled” under Section 409A of the Code.

“Dividend Equivalent” means an award granted under Section 12.

“Early Retirement” means retirement prior to the Normal Retirement Date.

“Earned Performance Award” means an actual award of a specified number of Performance Units (or shares of Restricted Stock or Restricted Stock Units, as the context requires) that the Committee has determined have been earned and are payable for, in the case of Restricted Stock, earned and with respect to which restrictions will lapse) for a particular Performance Period.

“Effective Date” has the meaning set forth in Section 3A.

“Eligible Employee” means any person employed by the Company or a Subsidiary on a regularly scheduled basis who satisfies all of the requirements of Section 5.

“Exchange Act* means the Securities Exchange Act of 1934, as amended.

“Exercise Period” means the period or periods during which a Stock Appreciation Right is exercisable as described in Section 11.

“Fair Market Value” means the average of the highest and lowest price at which the Stock was sold the regular way on the New York Stock Exchange Composite Transactions on a specified date.

“Good Reason means, without the express written consent of the Participant, the occurrence after a Change in Control of any of the following circumstances, provided that the Participant provides written notification of such circumstances to the Company (or, if applicable, Subsidiary) no later than ninety (90) days from the original occurrence of such circumstances and the Company (or Subsidiary) fails to fully correct such circumstances within thirty (30) days of receipt of such notification:

(i)

the assignment to the Participant of any duties inconsistent in any materially adverse respect with his or her position, authority, duties or responsibilities from those in effect immediately prior to the Change in Control;

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(ii)

a material reduction in the Participant’s base compensation, as such term is used in Treas. Reg. §1.409A(n)(2), as in effect immediately before the Change-in-Control;

(iii)

a material diminution in the authority, duties, or responsibilities of the supervisor to whom the Participant is required to report;

(iv)

a material diminution in the budget over which the Participant retains authority;

(v)

the Company’s (of, if applicable, Subsidiary’s) requiring the Participant to be based in any office or location more than 50 miles from that location at which he or she performed his or her services immediately prior to the occurrence of a Change in Control, except for travel reasonably required in the performance of the Participant’s responsibilities or

(vi)

any other action or inaction that constitutes a material breach by the Company (or Subsidiary) of the agreement under which the Participant provides services to the Company (or Subsidiary). “Incentive Stock Option” means an incentive stock option within the meaning of Section 422 of the Code.

“Normal Retirement Date” is the earliest date as described in the Pension Plan when a Participant is entitled to an unreduced retirement benefit under such plan.

“Option” or “Stock Option” means either a nonqualified stock option or an Incentive Stock Option granted under Section 9.

“Option Period” or “Option Periods” means the period or periods during which an Option is exercisable as described in Section 9.

“Participant” means an employee of the Company or a Subsidiary or a Director who has been granted an Award under this Plan.

“Pension Plan” means the principal defined benefit pension plan of the Company or one of its Subsidiaries in which the Participant participates.

“Performance-Based” means that in determining the amount of a Restricted Stock Award or Restricted Stock Unit Award payout, the Committee will take into account the performance of the Participant, the Company, one or more Subsidiaries, or any combination thereof.

“Performance Period” means a period of time, established by the Committee at the time an Award is granted, during which corporate and/or individual performance is measured.

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“Performance Unit” means a unit of measurement equivalent to such amount or measure as defined by the Committee which may include, but is not limited to, dollars, market value shares, or book value shares.

“Permitted Transferee” means (i) a spouse, child, step-child, grandchild or step-grandchild of the Participant (an “Immediate Family Member”), (ii) a trust the beneficiaries of which do not include any person other than the Participant and immediate family Members, (iii) a partnership (either general or limited) the partners of which do not include any person other than the Participant and Immediate Family Members (or corporations the shareholders of which do not include persons other than the Participant and Immediate Family Members), (iv) a corporation the shareholders of which do not include persons other than the Participant and Immediate Family Members, or (v) any other person or entity designated by the Committee as a Permitted Transferee.

“Plan” means the Pepco Holdings, Inc. Long-Term Incentive Plan, as set forth herein.

“Restricted Stock” means one or more shares of Stock granted under Section 8 that are subject to forfeiture it service-based or performance-based criteria established by the Committee are not achieved .

“Restricted Stock Unit” means a contractual right granted under Section 8 to receive an amount (payable in cash or Stock, as determined by the Committee) having a value that corresponds to the Fair Market Value of a share of Stock if service-based or performance-based criteria established by the Committee are achieved.

“Retirement” means retirement on or after the Normal Retirement Date (as determined in accordance with the provisions of the Pension Plan applicable to the Participant).

“Service-Based” means that in determining the amount of a Restricted Stock Award or Restricted Stock Unit payout, the Committee will take into account only the period of time that the Participant performed services for the Company or its Subsidiaries since the Date of Grant.

“Stock” means the common stock of the Company.

“Stock Appreciation Right” means an Award granted under Section 11.

“Subsidiary(ies)” means any corporation or other form of organization of which 20% or more of its outstanding voting sock or voting power is beneficially owned, directly or indirectly, by the Company.

“Target Performance Award” means a targeted award of a specified number of Performance Units (or shares of Restricted Stock or Restricted Stock Units, as the context requires) which may be earned and payable (or, in the case of Restricted Stock, earned and with respect to which restrictions will lapse) based upon the performance objectives for a particular Performance Period, all as determined by the Committee. The Target Performance Award will be a factor in the Committees ultimate determination of the Earned Performance Award.

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“Termination” means resignation or discharge as a Director or resignation or discharge from employment with the Company or any of its Subsidiaries, except in the event of death, Disability, Retirement or Early Retirement.

“Unrestricted Stock” means an Award granted under Section 13.

3. Effective Date, Duration and Stockholder Approval.

A. Effective Date and Stockholder Approval. The Plan was originally effective on August 1, 20002 (herein referred to as the Effective Date). This restatement of the Plan is effective January 1, 2005.

B. Period for Grants of Awards. Awards may be made as provided herein for a period of ten years after the Effective Date.

C. Termination. The Plan will continue in effect until all matters relating to the payment of outstanding Awards and administration of the Plan have been settled.

4. Plan Administration.

A. Except as set forth in paragraph B of this Section 4 or as otherwise specifically provided herein, the Committee is the Plan administrator and has sole authority to determine all questions of interpretation and application of the Plan, the terms and conditions pursuant to which Awards are granted, exercised or forfeited under the Plan provisions, and, in general, to make all determinations advisable for the administration of the Plan to achieve its stated objective. Such determinations shall be final and not subject to further appeal.

B. Notwithstanding the provisions of paragraph A, the Board shall have the sole authority and discretion to modify the annual Option grant to Directors under Section 9A.

5. Eligibility. Each officer or key employee of the Company and its Subsidiaries (including offers or employees who are members of the Board, but excluding Directors who are not officers or employees of the Company or any Subsidiary) may be designated by the Committee as a Participant, from time to time, with respect to one or more Awards. In addition, Directors who are not officers or employees of the Company or any Subsidiary may be granted Options under Section 9 of the Plan. No officer or employee of the Company or its Subsidiaries shall have any right to be granted an Award under this Plan.

6. Grant of Awards And Limitation of Number of Shares Awarded. The Committee may, from time to time, grant Awards to one or more Eligible Employees and may grant awards in the form of non-qualified Stock Options to Directors who are not officers or employees of the Company or any Subsidiary, provided that (i) subject to any adjustment pursuant to Section 16H, the aggregate number of shares of Stock subject to Awards under this Plan may not exceed 10,000,000 shares; (ii) to the extent that an Award lapses or the rights of the Participant to whom it was granted terminate (except with respect to an Option that lapses due to the exercise of a related Stock Appreciation Right), the corresponding shares of Stock subject to such Award shall again be available for the grant of an Award under the Plan; and (iii) shares delivered by the

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Company under the Plan may be authorized and unissued Stock, Stock held in the treasury of the Company, or Stock purchased on the open market (including private purchases).

7. Section 162(M) Compliance

A. Performance-Based Awards; Covered Executives. Notwithstanding any provisions herein to the contrary, with respect to any Award that is contingent upon the attainment of performance objectives, including, without limitation, Performance-Based Restricted Stock, Performance-Based Restricted Stock Units and Performance Units and is intended to comply with the requirements of Section 162(m) of the Code (for purposes of this Section 7, “Performance-Based Awards”), granted to an executive of the Company who, in the opinion of the Board or the Committee, for a given Performance Period is or is likely to be a “covered employee” within the meaning of Section 162(m) of the Code (for purposes of this Section 7, a “Covered Executive”), the Committee shall establish performance objectives (for purposes of this Section 7, “Performance Goals”) with respect to such Awards no later than the earlier of (i) 90 days after commencement of the Performance Period relating to the Performance-Based Award or (ii) the date on which 25% of the Performance Period relating to the Performance-Based Award will have elapsed.

B. Performance Criteria. Performance Goals, in the sole discretion of the Committee, may be based on one or more business criteria that relate to the individual, groups of individuals, a product or service line, business unit division or Subsidiary of the Company or the Company as a whole, individually or in any combination (each of which business criteria may be relative to a specified goal, to historical performance of the Company or a product or service line, business unit, division or Subsidiary thereof, or to the performance of any other corporation or group of corporations or a product or service line, business unit, division or Subsidiary thereof). Performance Goals will be based on one or more of the following criteria: (i) gross, operating or not earnings before or after income taxes; (ii) earnings per share; (iii) book value per share; (iv) cash flow per share; (v) return on equity, (vi) return on investment; (vii) return on assets, employed assets or net assets; (viii) total stockholder return (expressed on a dollar or percentage basis); (ix) return on cash flow; (x) internal rate of return; (xi) cash flow return on investment; (xii) improvements in capital structure; (xiii) residual income; (xiv) gross income, profitability or net income; (xv) price of any Company security; (xvi) sales to customers (expressed on a dollar or percentage basis); (xvii) retention of customers (expressed on a dollar or percentage basis); (xviii) increase in the Company’s or a Subsidiary’s customer satisfaction ratings (based on a survey conducted by an independent third party); (xix) economic value added (defined to mean net operating profit minus the cost of capital); (xx) market value added (defined to mean the difference between the market value of debt and equity; and economic book value); (xxi) market share; (xxii) level of expenses; (xxiii) combined ratio; (xxiv) payback period on investment and (xxv) net present value of investment.

C. Certification; Maximum Award and Committee Discretion. The Committee shall certify the satisfaction of the foregoing Performance Goals prior to the payment of a Performance-Based Award. No Performance-Based Award with respect to any Covered Executive shall exceed $3,000,000 (either in cash or in Fair Market Value of Stock as determined on the Date of Grant, as appropriate to a given type of Award) for any three-year period. The Committee, in its sole discretion, may reduce (but not increase) the amount of any

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Performance-Based Award determined to be payable to a Covered Executive. No Covered Executive may receive more than 5,000,000 in the aggregate of Options, Stock Appreciation Rights, shares of Performance-Based Restricted Stock, and Performance-Based Restricted Stock Units for the ten-year period during which Awards may be made pursuant to Section 3B hereof.

D. Deferral of Payment. Regardless of whether provided for in or in conjunction with the grant of the Award, the Committee, in its sole discretion, may defer payment of a Participant’s benefit under this Plan if and to the extent that the sum of the Participant's Plan benefit, plus all other compensation paid or payable to the Participant for the fiscal year in which the Plan benefit would otherwise be paid exceeds the maximum amount of compensation that the Company may deduct under Section 162(m) of the Code with respect to the Participant for the year. If deferred by the Committee, such Award benefit shall be paid in the first fiscal year of the Company in which the sum of the Participant’s Plan benefit and all other compensation paid or payable to the Participant does not exceed the maximum amount of compensation deductible by the Company under Section 162(m), provided, however, that if the Award is subject to Section 409A of the Code, payment will be deferred under this Section 7D, unless the Committee provides otherwise in the Award agreement.

8. Restricted Stock and Restricted Stock Unit Awards.

A. Grants of Restricted Stock and Restricted Stock Units. One or more shares of Restricted Stock or Restricted Stock Units may be granted to any Eligible Employee. The Restricted Stock or Restricted Stock Units will be issued to the Participant on the Date of Grant without the payment of consideration by the Participant and shall be in the form of either Service-Based Awards or Performance-Based Awards as described in Paragraph B.

Restricted Stock will be issued in the name of the Participant and will bear a restrictive legend prohibiting sale, transfer, pledge, or hypothecation of the Restricted Stock until the expiration of the restriction period. Upon issuance to the Participant of the Restricted Stock, the Participant will have the right to vote the shares of Restricted Stock, and unless otherwise provided in the Award agreement, to receive the cash dividends distributable with respect to such shares. If the Committee directs that dividends shall not be paid currently and instead shall be accumulated, the payment of such dividends to the Participant shall be made at such times, and in such form and manner, as satisfies the requirements of Section 409A of the Code.

A Restricted Stock Unit is a contractual right and no Stock is issued to the Participant on the Date of Grant. A Restricted Stock Unit shall not entitle the holder to receive dividends or to exercise any rights of a holder of Stock (although the Committee, in its discretion, may award Dividend Equivalents to the holder under Section 12).

The Committee may also impose such other restrictions and conditions on the Restricted Stock and Restricted Stock Units as it deems appropriate.

B. Service-Based Award.

i. Restriction Period. At the time a Service-Based award of Restricted Stock or Restricted Stock Units is granted, the Committee will establish a restriction period applicable to such Award which will be not less than one year and not more than ten

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years. Each award of Restricted Stock or Restricted Stock Units may have a different restriction period, at the discretion of the Committee.

ii. Forfeiture or Payout of Award. In the event a participant ceases employment during a restriction period, a Restricted Stock Award or Restricted Stock Unit Award is subject to forfeiture or payout (i.e., removal of restrictions) as follows: (a) Termination--the Restricted Stock Award or Restricted Stock Unit Award is completely forfeited; (b) Retirement, Disability or death--payout of the Restricted Stock Award or Restricted Stock Unit Award is prorated for service during the period; or (c) Early Retirement--if at the Participant’s request, the payout or forfeiture of to Restricted Stock Award or Restricted Stock Unit Award is determined at the discretion of the Committee, or if at the Company's request, payout of the Restricted Stock Award or Restricted Stock Unit Award is prorated for service during the period; provided, however, that the Committee may modify, in the case of clause (b) and (c), the above if it determines in its sole discretion that special circumstances warrant such modification.

Any shares of Restricted Stock that are forfeited will be transferred by the Participant to the Company.

Upon completion of the restriction period applicable to a Restricted Stock Award, all restrictions will expire and a new certificate or certificates representing the number of Shares as to which the restriction has expired will be issued to the Participant without the restrictive legend described in Section 8A.

C. Performance-Based Award,

i. Restriction Period. At the time a Performance-Based award of Restricted Stock or Restricted Stock Units is granted, the Committee will establish a restriction period applicable to such Award that will be not less than one year and not more than ten years. Each award of Restricted Stock or Restricted Stock Units may have a different restriction period, at the discretion of the Committee. The Committee will also establish a Performance Period.

ii. Performance Objectives. The Committee will determine, no later than 90 days after the beginning of each Performance Period, the performance objectives for each Participant’s Target Performance Award and the number of shares of Restricted Stock or Restricted Stock Units for each Target Performance Award that will be issued on the Date of Grant. Performance objectives may vary from Participant to Participant and will be based upon such performance criteria or combination of factors as the Committee deems appropriate, which may include, but not be limited to, the performance of the Participant, the Company, one or more Subsidiaries, or any combination thereof. Performance Periods may overlap and Participants may participate simultaneously with respect to, Performance-Based Restricted Stock Awards and Restricted Stock Unit Awards for which different Performance Periods are prescribed.

If, during the course of a Performance Period, significant events occur as determined in the sole discretion of the Committee, which the Committee expects to have a substantial effect on a performance objective during such period, the Committee may revise such objective, provided, however, that with respect to an Award subject to Section 7, no adjustment

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will be made that would prevent the Award from satisfying the requirements of Section 162(m) of the Code.

iii. Forfeiture or Payout of Award. As soon as practicable after the end of each Performance Period, the Committee will determine whether the performance objectives and other material terms of the Award were satisfied. The Committee's determination of all such matters will be final and conclusive.

As soon as practicable after the later of (i) the date the Committee makes the above determination or (ii) the completion of the restriction period, the Committee will determine the Earned Performance Award for each Participant. Such determination may result in forfeiture of all or some shares of Restricted Stock or Restricted Stock Units (if Target Performance Award performance objectives were not attained), or an increase in the amount of the award (if Target Performance Award performance objectives were exceeded), and will be based upon such factors as the Committee determines in its sole discretion, but including the Target Performance Award performance objectives.

In the event a Participant ceases employment during a restriction period, the Restricted Stock Award or Restricted Stock Unit Award is subject to forfeiture or payout (i.e., removal of restrictions) as follows: (a) Termination--the Restricted Stock Award or Restricted Stock Unit Award is completely forfeited; (b) Retirement, Disability or death--payout of the Restricted Stock Award or Restricted Stock Unit Award is prorated taking into account factors including, but not limited to, service during the period and the performance of the Participant during the portion of the Performance Period before employment ceased; or (c) Early Retirement--if at the Participant's request, the payout or forfeiture of the Restricted Stock Award or Restricted Stock Unit Award is determined at the discretion of the Committee, or if at the Company's request, payout of the Restricted Stock Award or Restricted Stock Unit Award is prorated taking into account factors including, but not limited to, service during the period and the performance of the Participant during the portion of the Performance Period before employment ceased; provided, however, that, in the case of (b) and (c), the Committee may modify the above if it determines in its sole discretion that special circumstances warrant such modification.

Any shares of Restricted Stock that are forfeited shall be transferred by the Participant to the Company.

With respect to shares of Restricted Stock which are earned, a new certificate or certificates will be issued to the Participant without the restrictive legend described in Section 8A. A certificate or certificates will also be issued for additional Stock, if any, awarded to the Participant because Target Performance Award performance objectives were exceeded.

With respect to Restricted Stock Units which are earned, a payment will be made to the Participant in cash, Stock or a combination thereof, as determined by the Committee in its sole discretion. Unless the Committee provides otherwise in an Award agreement, such payment shall be made in full to the Participant no later than the 15th day of the third month after the end of the first calendar year in which the Restricted Stock Unit is no longer

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subject to a “substantial risk of forfeiture” within the meaning of Section 409A of the Code. If the Committee provides in an Award agreement that a Restricted Stock Unit is intended to be subject to Section 409A of the Code, the Award agreement will include terms that are designed to satisfy the requirements of Section 409A.

D. Waiver of Section 83(B) Election. Unless otherwise directed by the Committee, as a condition of receiving an Award of Restricted Stock, a Participant must waive in writing the right to make an election under Section 83(b) of the Code to report the value of the Restricted Stock as income on the Date of Grant.

9. Stock Options.

A. Grants of Options. One or more Options may be granted to any Eligible Employee or Director, without the payment of consideration by the Participant. In addition, unless prospectively modified by the Board, each year each director who is not an officer or employee of the Company or any Subsidiary will receive on or about May 1, commencing after the Effective Date, a non-qualified Stock Option to purchase 1,000 shares of Stock.

B. Stock Option Agreement. Each Option granted under the Plan will be evidenced by a “Stock Option Agreement” between the Company and the Participant containing provisions determined by the Committee, including, without limitation, provisions to qualify Incentive Stock Options as such under Section 422 of the Code if directed by the Committee at the Date of Grant; provided, however, that each Stock Option Agreement with respect to an Incentive Stock Option must include the following terms and conditions: (i) that the Options are exercisable, either in total or in part, with a partial exercise not affecting the exercisability of the balance of the Option; (ii) every share of Stock purchased through the exercise of an Option will be paid for in full at the time of the exercise; (iii) each Option will cease to be exercisable, as to any share of Stock, at the earliest of (a) the Participant’s purchase of the Stock to which the Option relates, (b) the Participant’s exercise of a related Stock Appreciation Right or (c) the lapse of the Option; (iv) Options will not be transferable by to Participant except by Will or the laws of descent and distribution and will be exercisable during the Participant's lifetime only by the Participant or by the Participant's guardian or legal representative; and (v) notwithstanding any other provision, in the event of a public tender for all or any portion of the Stock or in the event that any proposal to merge or consolidate the Company with another company is submitted to the stockholders of the Company for a vote, the Committee, in its sole discretion, may declare any previously granted Option to be immediately exercisable. A Participant to whom an Incentive Stock Option is granted must be an employee of the Company or of a corporation in which the Company owns, directly or indirectly, stock possessing 50% or more of the voting interest within the meaning of Section 424(f) of the Code.

C. Option Price. The Option price per share of Stock will be set by the Committee at the time of the grant, but will be not less than 100% of the Fair Market Value at the Date of Grant.

D. Form of Payment. At the time of the exercise of the Option, the Option price will be payable in cash or, if permitted by the Committee, in other shares of Stock or in a combination of cash and other shares of Stock in a form and manner as required by the

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Committee in its sole discretion; provided that any shares of Stock used in full or partial payment of the Option price shall have been held by the Participant for a period of at least six months. When Stock is used in full or partial payment of the Option price, it will be valued at the Fair Market Value on the date the Option is exercised.

E. Other Terms and Conditions. The Option will become exercisable in such manner and within such Option Period or Periods, not to exceed ten years from its Date of Grant, as set forth in the Stock Option Agreement upon payment in full of the Option Price. Except as otherwise provided in this Plan or in the Stock Option Agreement, any Option may be exercised in whole or in part at any time.

F. Lapse of Option. An Option will lapse upon the earlier of: (i) ten years from the Date of Grant, or (ii) at the expiration of the Option Period. If the Participant ceases employment or ceases to be a Director within the Option Period and prior to the lapse of the Option, the Option will lapse as follows: (a) Termination--the Option will lapse on the effective date of the Termination; or (b) Retirement, Early Retirement, or Disability--the Option will lapse at the expiration of the Option Period; provided, however, that the Committee may modify the consequences of this clause (b) if it determines in its sole discretion that special circumstances warrant such modification. If the Participant dies within the Option Period and prior to the lapse of the Option, the Option will lapse at the expiration of the Option Period, unless it is exercised before such time by the Participants legal representative(s) or by the person(s) entitled to do so under the Participant’s Will or, if the Participant fails to make testamentary disposition of the Option or dies intestate, by the person(s) entitled to receive the Option under the applicable laws of descent and distribution, provided, however, that the Committee may modify the above if it determines in its full discretion that special circumstances warrant such modification.

G. Individual Limitation. In the case of an Incentive Stock Option, the aggregate Fair Market Value of the Stock for which Incentive Stock Options (whether under this Plan or another arrangement) in any calendar year are first exercisable will not exceed $100,000 with respect to such calendar year (or such other individual limit as may be in effect under the Code on the Date of Grant) plus any unused portion of such limit as the Code may permit to be carried over.

10. Performance Units.

A. Performance Units. One or more Performance Units may be earned by an Eligible Employee based on the achievement of preestablished performance objectives during a Performance Period.

B. Performance Period and Performance Objectives. The Committee will determine a Performance Period and will determine, no later than 90 days after the beginning of each Performance Period, the performance objectives for each Participant’s Target Performance Award and the number of Performance Units subject to each Target Performance Award. Performance objectives may vary from Participant to Participant and will be based upon such performance criteria or combination of factors as the Committee deems appropriate, which may include, but not be limited to, the performance of the Participant, the Company, one or more subsidiaries, or any combination thereof. Performance Periods may overlap and Participants

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may participate simultaneously with respect to Performance Units for which different Performance Periods are prescribed.

If during the course of a Performance Period significant events occur as determined in the sole discretion of the Committee that the Committee expects to have a substantial effect on a performance objective during such period, the Committee may revise such objective, provided, however, that with respect to an Award subject to Section 7, no adjustment will be made that would prevent the Award from satisfying the requirements of Section 162(m) of the Code.

C. Forfeiture or Payout of Award. As soon as practicable after the end of each Perforce Period, the Committee will determine whether the performance objectives and other material terms of the Award were satisfied. The Committee’s determination of all such matters will be final and conclusive.

As soon as practicable after the date the Committee makes the above determination, the Committee will determine the Earned Performance Award for each Participant. Such determination may result in an increase or decrease in the number of Performance Units payable based upon such Participant’s Target Performance Award, and will be based upon such factors as the Committee determines in its sole discretion, but including the Target Performance Award performance objectives.

In the event a Participant ceases employment during a Performance Period, the Performance Unit Award is subject to forfeiture or payout as follows: (a) Termination--the Performance Unit Award is completely forfeited; (b) Retirement, Disability or death--payout of the Performance Unit Award is prorated taking into account factors including, but not limited to, service and the performance of the Participant during the portion of the Performance Period before employment ceased; or (c) Early Retirement--if at the Participant’s request, the payout or forfeiture of the Performance Unit Award is determined at the discretion of the Committee, or if at the Company's request, payout of the Performance Unit Award is prorated taking into account factors including, but not limited to, service and the performance of the Participant during the portion of the Performance Period before employment ceased; provided, however, that the Committee may modify the above if it determines in its sole discretion that special circumstances warrant such modification.

D. Form and Timing of Payment. Each Performance Unit is payable in cash or shares of Stock or in a combination of cash and Stock, as determined by the Committee in its sole discretion. Such payment will be made, except if otherwise specified in the Award agreement, no later than the 15th day of the third month after the end of the first calendar year in which the Performance Unit is no longer subject to a “substantial risk of forfeiture” within the meaning of Section 409A of the Code. If the Committee provides in an Award agreement that a Performance Unit is intended to be subject to Section 409A of the Code, the Award agreement will include terms that are designed to satisfy the requirements of Section 409A.

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11. Stock Appreciation Rights.

A. Grants of Stock Appreciation Rights. Stock Appreciation Rights may be granted under the Plan in conjunction with an Option either at the Date of Grant or by amendment or may be separately granted. Stock Appreciation Rights will be subject to such terms and conditions not inconsistent with the Plan as the Committee may impose.

B. Right to Exercise; Exercise Period. A Stock Appreciation Right issued pursuant to an Option will be exercisable to the extent the Option is exercisable; both such Stock Appreciation Right and the Option to which it relates will not be exercisable during the six months following their respective Dates of Grant except in the event of the Participant's Disability or death. A Stock Appreciation Right issued independent of an Option will be exercisable pursuant to such terms and conditions established in the grant. Notwithstanding such terms and conditions, in the event of a public tender for all or any portion of the Stock or in the event that any proposal to merge or consolidate the Company with another company is submitted to the stockholders of the Company for a vote, the Committee, in its sole discretion, may declare any previously granted Stock Appreciation Right immediately exercisable.

C. Failure to Exercise. If on the last day of the Option Period, in the case of a Stock Appreciation Right granted pursuant to an Option, or the specified Exercise Period, in the case of a Stock Appreciation Right issued independent of an Option, the Participant has not exercised a Stock Appreciation Right, then such Stock Appreciation Right will be deemed to have been exercised by the Participant on the last day of the Option Period or Exercise Period.

D. Payment . An exercisable Stock Appreciation Right granted pursuant to an Option will entitle the Participant to surrender unexercised the Option or any portion thereof to which the Stock Appreciation Right is attached, and to receive in exchange for the Stock Appreciation Right payment (in cash or Stock or a combination thereof as described below) equal to the excess of the Fair Market Value of one share of Stock on the trading day preceding the date of exercise over the Option price, times the number of shares called for by the Stock Appreciation Right (or portion thereof) which is so surrendered. Upon exercise of a Stock Appreciation Right not granted pursuant to an Option, the Participant will receive for each Stock Appreciation Right payment (in cash or Stock or a combination thereof as described below) equal to the excess of the Fair Market Value of one share of Stock on the trading day preceding the date on which the Stock Appreciation Right is exercised over the Fair Market Value of one share of Stock on the Date of Grant of the Stock Appreciation Right, times the number of shares called for by the Stock Appreciation Right.

The Committee may direct the payment in settlement of the Stock Appreciation Right to be in cash or Stock or a combination thereof. Alternatively, the Committee may permit the Participant to elect to receive cash in full or partial settlement of the Stock Appreciation Right. The value of the Stock to be received upon exercise of a Stock Appreciation Right shall be the Fair Market Value of the Stock on the trading day preceding the date on which the Stock Appreciation Right is exercised. To the extent that a Stock Appreciation Right issued pursuant to an Option is exercised, such Option shall be deemed to have been cancelled.

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E. Nontransferable. A Stock Appreciation Right will not be transferable by the Participant except by Will or the laws of descent and distribution and will be exercisable during the Participant’s lifetime only by the Participant or by the Participant's guardian or legal representative.

F. Lapse of a Stock Appreciation Right. A Stock Appreciation Right will lapse upon the earlier of: (i) ten years from the Date of Grant; or (ii) at the expiration of the Exercise Period. If the Participant ceases employment within the Exercise Period and prior to the lapse of the Stock Appreciation Right, the Stock Appreciation Right will lapse as follows: (a) Termination--the Stock Appreciation Right will lapse on the effective date of the Termination; or (b) Retirement, Early Retirement, or Disability--the Stock Appreciation Right will lapse at the expiration of the Exercise Period; provided, however, that the Committee may modify the consequences of this clause (b) if it determines in its sole discretion that special circumstances warrant such modification. If the Participant dies within the Exercise Period and prior to the lapse of the Stock Appreciation Right, the Stock Appreciation Right will lapse at the expiration of the Exercise Period, unless it is exercised before such time by the Participant’s legal representative(s) or by the person(s) entitled to do so under the Participant's Will or, if the Participant fails to make testamentary disposition of the Stock Appreciation Right or dies intestate, by the person(s) entitled to receive the Stock Appreciation Right under the applicable laws of descent and distribution, provided, however, that the Committee may modify the above if it determines in its sole discretion that special circumstances warrant such modification.

12. Dividend Equivalents.

A. Grants of Dividend Equivalents. Dividend Equivalents may be granted under the Plan in conjunction with an Option or a separately awarded Stock Appreciation Right, at the Date of Grant or by amendment, without consideration, by the Participant. Dividend Equivalents may also be granted under the Plan in conjunction with Restricted Stock Awards, Restricted Stock Unit Awards or Performance Units, at any time during the Performance Period, without consideration by the Participant. Dividend Equivalents may be granted under a Performance-Based Restricted Stock Award in conjunction with additional shares of Stock issued if Target Performance Award performance objectives are exceeded. In each such case, the granting of Dividend Equivalents in conjunction with an Award that is intended to satisfy the requirements of Section 162(m) of the Code shall be subject to such limitations or requirements as are necessary to prevent the Award from failing to satisfy such requirements.

B. Payment. Each Dividend Equivalent will entitle the Participant to receive an amount equal to the dividend actually paid with respect to a share of Stock on each dividend payment date from the Date of Grant to the date the Dividend Equivalent lapses as set forth in Section 12D. The Committee, in its sole discretion, may direct the payment of such amount at such times and in such form and manner as determined by the Committee.

C. Nontransferable. A Dividend Equivalent will not be transferable by the Participant.

D. Lapse of a Dividend Equivalent. Each Dividend Equivalent will lapse on the earlier of (i) the date of the lapse of the related Option or Stock Appreciation Right; (ii) the

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date of the exercise of the related Option or Stock Appreciation Right; (iii) the end of the Performance Period (or, if earlier, the date the Participant ceases employment) of the related Performance Units, Performance Based Restricted Stock Award or Performance-Based Restricted Stock Unit Award; or (iv) the lapse date established by the Committee on the Date of Grant of the Dividend Equivalent.

13. Unrestricted Stock

One or more shares of Unrestricted Stock may be granted to an Eligible Employee. Shares of Unrestricted Stock so issued shall not be subject to any restriction on sale or other transfer by the Participant other than any restrictions that may be required by law.

14. Accelerated Award Payout/Exercise.

A. Change in Control. Notwithstanding anything in this Plan document to the contrary, a Participant is entitled to an accelerated payout or accelerated Option Period or Exercise Period (as set forth in Section 14B) with respect to any previously granted Award if the Participant is terminated as an employee or Director or terminates for Good Reason within 12 months following a Change in Control.

B. Amount of Award Subject to Accelerated Payout/Option Period/Exercise Period. The amount of a Participant’s previously granted Award that will be paid or exercisable upon the happening of a change in control will be determined as follows:

Restricted Stock Awards. The Participant will be entitled to an accelerated Award payout, and the amount of the payout will be based on the number of shares of Restricted Stock that were issued on the Date of Grant, prorated based on the number of months of the restriction period that have elapsed as of the payout date. Also, with respect to Performance-Based Restricted Stock Awards, in determining the amount of the payout, target award level achievement will be assumed.

Stock Option Awards and Stock Appreciation Rights. Any previously granted Stock Option Awards or Stock Appreciation Rights will be immediately exercisable.

Performance Units. The Participant will be entitled to an accelerated Award payout, and the amount of the payout will be based on the number of Performance Units subject to the Target Performance Award as established on the Date of Grant, prorated based on the number of months of the Performance Period that have elapsed as of the payout date, and assuming that target award level was achieved.

C. Timing of Accelerated Payout/Option Period/Exercise Period. The accelerated payout set forth in Section 14B will be made within 30 days after the date of the Participant’s termination, except as provided below. The accelerated Option Period/Exercise Period set forth in Section 13B will begin on the date of the Participant’s termination. If the original Award provided for a payout in Stock, any accelerated payout set forth in Section 14B will be made in Stock. With respect to any compensation that is subject to Section 409A of the Code, the accelerated payout set forth in Section 14B will not be paid until the Participant separates from service, within the meaning of Section 409A, and, in the case of Participant who

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is a “specified employee” (as determined under Section 409A(a)(2)(B) of the Code), any payment that would otherwise be made under Section 14B within six months after the Participant’s separation from employment will be paid in the seventh month following the Participant's separation.

15. Amendment of Plan. The Board may at any time and from time to time alter, amend, suspend, or terminate the Plan, in whole or in part, as it shall determine in its sole discretion; provided that no such action shall, without the consent of the Participant to whom any Award was previously granted, adversely affect the rights of such Participant concerning such Award, except to the extent that such termination, suspension, or amendment of the Plan or the Award (i) is required by law (including as required to comply with Section 409A of the Code) or (ii) is deemed by the Board necessary in order to comply with the requirements of Section 162(m) of the Code or Rule 16b-3 under the Exchange Act.

16. Miscellaneous Provisions,

A. Nontransferability. No benefit provided under this Plan shall be subject to alienation or assignment by a Participant (or by any person entitled to such benefit pursuant to the terms of this Plan), nor shall it be subject to attachment or other legal process except:

(i) to the extent specifically mandated and directed by applicable state or federal statute,

(ii) as requested by the Participant (or by any person entitled to such benefit pursuant to the terms of this Plan), and approved by the Committee, to satisfy income tax withholding, and

(iii) if requested by the Participant, and approved by the Committee, a Participant may transfer a Stock Option (other than an Incentive Stock Option) for no consideration to a Permitted Transferee, subject to such terms and condition as the Committee may impose.

B. No Employment Right. Participation in this Plan shall not constitute a contract of employment between the Company or any Subsidiary and any person and shall not be deemed to be consideration for, or a condition of, continued employment of any person.

C. Tax Withholding. The Company or a Subsidiary may withhold any applicable federal, state or local taxes at such time and upon such terms and conditions as required by law or determined by the Company or a Subsidiary. Subject to compliance with any requirements of applicable law, the Committee may permit or require a Participant to have any portion of any withholding or other taxes payable in respect to a distribution of Stock satisfied through the payment of cash by the Participant to the Company or a Subsidiary, the retention by the Company or a Subsidiary of shares of Stock, or delivery of previously owned shares of the Participant’s Stock having a Fair Market Value equal to the withholding amount. Any fractional share of Common Stock required to satisfy such withholding obligations shall be disregarded and the amount due shall be paid in cash by the Participant.

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D. Fractional Shares. Any fractional shares concerning Awards shall be eliminated at the time of payment or payout by rounding down for fractions of less than one-half and rounding up for fractions of equal to or more than one-half. No cash settlements shall be made with respect to fractional shares eliminated by rounding.

E. Government and Other Regulations. The obligation of the Company to make payment of Awards in Stock or otherwise shall be subject to all applicable laws, rules, and regulations, and to such approvals by any government agencies as may be required. The Company shall be under no obligation to register under the Securities Act of 1933, as amended (“Act”), any of the shares of Stock issued, delivered or paid in settlement under the Plan. If Stock awarded under the Plan is issued under circumstances that are designed to exempt the transaction from registration under the Act, the Company may restrict the transfer of the Stock in such manner as it deems advisable to ensure such exempt status.

F. Indemnification. Each person who is or at any time serves as a member of the Board or the Committee (and each person to whom the Board or the Committee has delegated any of its authority or power under this Plan) shall be indemnified and hold harmless by the Company against and from (i) any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by such person in connection with or resulting from any claim, action, suit, or proceeding to which such person may be a party or in which such person may be involved by reason of any action or failure to act under the Plan; and (ii) any and all amounts paid by such person in satisfaction of judgment in any such action, suit, or proceeding relating to the Plan. Each person covered by this indemnification shall give the Company an opportunity, at its own expense, to handle and defend the same before such person undertakes to handle and defend it on such person's own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Certificate of incorporation or Bylaws of the Company or any of its Subsidiaries, as a matter of law, or otherwise, or any power that the Company may have to indemnify such person or hold such person harmless.

G. Reliance on Reports. Each member of the Board or the Committee (and each person to whom the Board or the Committee has delegated any of its authority or power under this Plan) shall be fully justified in relying or acting in good faith upon any report made by the independent public accountants of the Company and its Subsidiaries and upon any other information furnished in connection with the Plan. In no event shall any person who is or shall have been a member of the Board or the Committee (or their delegates) be liable for any determination made or other action taken or any omission to act in reliance upon any such report or information or for any action taken, including the furnishing of information, or failure to act, if in good faith.

H. Changes in Capital Structure. In the event of any change in the outstanding shares of Stock by reason of any stock dividend or split, recapitalization, combination or exchange of shares or other similar changes in the Stock, then appropriate adjustments shall be made in the shares of Stock theretofore awarded to the Participants and in the aggregate number of shares of Stock which may be awarded pursuant to the Plan. Such adjustments shall be conclusive and binding for all purposes. Additional shares of Stock issued

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to a Participant as the result of any such change shall bear the same restrictions as the shares of Stock to which they relate.

I. Company Successors. In the event the Company becomes a party to a merger, consolidation, sale of substantially all of its assets or any other corporate reorganization in which the Company will not be the surviving corporation or in which the holders of the Stock will receive securities of another corporation (in any such case, the “New Company”), then the New Company shall assume the rights and obligations of the Company under this Plan.

J. Governing Law. All matters relating to the Plan or to Awards granted hereunder shall be governed by the laws of the State of Delaware, without regard to the principles of conflict of laws.

K. Relationship to Other Benefits. Any Awards under this Plan are not considered compensation for purposes of determining benefits under any pension, profit sharing, or other retirement or welfare plan, or for any other general employee benefit program.

L. Expenses. The expenses of administering the Plan shall be borne by the Company and its Subsidiaries.

M. Titles and Headings. The titles and headings of the sections in the Plan are for convenience of reference only, and in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control.

N. Deferred Payment. The Committee, in its discretion, may permit a Participant to deter the payment of an Award that would otherwise be made under this Plan, provided, however, that no deferral election will be offered if such deferral election or the offer of such deferral election would cause an Award that is otherwise exempt from Section 409A of the Code to become subject to Section 409A. Any election to defer payment of an Award shall be made under the Pepco Holdings, Inc. Executive and Director Deferred Compensation Plan, or any successor plan.

0. No Guarantee of Favorable TV Treatment. Although the Committee intends to administer the Plan so that Awards will be exempt from, or will comply with, the requirements of Section 409A of the Code, the Company does not warrant that any Award under the Plan will qualify for favorable tax treatment under Code Section 409A or any other provision of federal, state, local, or foreign law. The Company shall not be liable to any Participant for any tax the Participant might owe as a result of the grant, holding, vesting, exercise, or payment of any Award under the Plan.

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IN WITNESS THEREOF, the Company has caused this Plan to be signed this 3 rd day of November, 2008 which version reflects all modifications made to the Plan through such date of execution.

ATTEST		Pepco Holdings, Inc.

By:	/s/ ELLEN S. ROGERS	/s/ D. R. WRAASE
	Corporate Secretary	Chief Executive Officer

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PEPCO HOLDINGS, INC.

REVISED AND RESTATED

EXECUTIVE AND DIRECTOR DEFERRED COMPENSATION PLAN

I.	INTRODUCTION

Potomac Electric Power Company (“Pepco”) established the Potomac Electric Power Company Executive Deferred Compensation Plan (the “Pepco plan”), effective November 18, 1982, to enable certain executives to supplement their retirement income by deferring the receipt of compensation for services performed while the plan was in effect. The Pepco plan was amended from time to time thereafter, including an amendment to make Directors eligible to participate in the plan. On March 13, 2002, further amendments were authorized to the Pepco plan to recognize the intent to consummate a transaction (the “Merger”) by which Pepco and Conectiv, Inc. (“Conectiv”) will become wholly owned subsidiaries of Pepco Holdings, Inc. (the “Company” or “Pepco Holdings”) and, for the near term future, to maintain for the benefit of the executives of Pepco Holdings and its subsidiaries, the level of benefits provided to such executives prior to the Merger. Such amendments include authorization to name Pepco Holdings as the sponsor of the plan; to change the name of the Pepco plan to reflect the change in plan sponsorship to amend the definition of “executive” eligible to participate in the plan; to add an in-service withdrawal feature to the plan; and to provide an investment option which credits a participant’s account with increases or decreases in value attributable to phantom units of Pepco Holdings Common Stock, together with any dividends or stock reinvestment rights associated with the designated units. The plan was thereafter amended to comply with Section 409A of the Internal Revenue Code and regulations issued thereunder. The Plan is restated herein and is

known as the Pepco Holdings, Inc. Executive and Director Deferred Compensation Plan. (the “Plan”).

II.	DEFINITIONS

2.01 “Account” means the bookkeeping account maintained by the Company (i) for each participating Executive and (ii) for each participating Director, which is credited with the Executive’s or the Director’s Deferred Compensation, as the case may be, and with additional amounts in the nature of interest and which is debited to reflect benefit distributions. Effective as of January 1, 2005, each Account shall be divided into two (2) subaccounts. The first subaccount shall reflect the vested balance of such Account as of December 31, 2004, adjusted to reflect (i) subsequent earnings or losses attributable to the hypothetical investment options in which such subaccount is deemed invested and (ii) any distributions made from such subaccount. The second subaccount shall reflect (i) all contributions made to the account on and after January 1, 2005, (ii) any amounts which had been credited to the account prior to January 1, 2005 but which first became vested on or after January 1, 2005, (iii) all earnings or losses attributable to the hypothetical investment options in which such subaccount is deemed vested, and (iv) any distributions made from such subaccount.

2.02 “Agreement” means the Participation Agreement executed by the Company and an Executive or a Director, as the case may be, which designates the amount of the Executive’s or the Director’s Deferred Compensation, the time and manner of benefit distributions, and the Executive’s or the Director’s Beneficiary.

2.03 “Beneficiary” means any person designated by a participating Executive or a participating Director to receive benefits under the Plan in the event of the Executive’s or the Director’s death prior to the completion of all benefit payments under the Plan. An Executive’s

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or a Director’s Agreement, as the case may be, may designate more than one Beneficiary or may designate primary and contingent Beneficiaries.

2.04 “Board of Directors” means the Board of Directors of Pepco Holdings, Inc.

2.05 “Deferred Compensation” means any remuneration which would otherwise be currently payable to the Executive or the Director, but which the Executive or the Director irrevocably agrees to receive on a deferred basis in accordance with the terms of the Plan.

2.06 “Director” means a member of the Board of Directors.

2.07 “Executive” means such employee of any Pepco Holdings subsidiary as designated by the Chief Executive Officer of Pepco Holdings (the Chief Executive Officer to be designated by the Board).

2.08 “Human Resources Committee” shall mean that Committee comprised of members of the Board of Directors, which governs the development of personnel policies for the Company.

2.09 “Internal Revenue Code” shall mean the Internal Revenue Code of 1986, as amended.

2.10 “Normal Compensation” with respect to an Executive means the amount of salary that would be payable to an Executive for the twelve (12) month period commencing on the first day of any Plan Year if the Executive were not participating hereunder. “Normal Compensation” with respect to a Director means the amount of retainer/fees that would be payable to a Director for the twelve (12) month period commencing on the first day of any Plan Year if the Director were not participating hereunder.

2.11 “Plan Year” means the twelve-month period commencing on July 1 of each calendar year and ending on June 30 of the following calendar year. Notwithstanding the above,

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the time period between July 1, 2005 and December 31, 2005 shall be treated as a separate Plan Year and effective as of January 1, 2006, the Plan Year shall constitute the calendar year.

2.12 “Retirement” with respect to an Executive means the date following an Executive’s Separation from Service on which the payment of benefits to the Executive commences under the principal tax-qualified defined benefit pension plan of Pepco Holdings or one of its subsidiaries in which the Executive participates (the “Applicable Defined Benefit Pension Plan”) by reason of the Executive having attained normal or early retirement age under that plan. In the event that an Executive is not entitled to receive benefits under that plan following Separation from Service, “Retirement” means Separation from Service and attainment of age sixty-five (65) . “Retirement” with respect to a Director means Separation from Service and attainment of age sixty-five (65).

2.13 “Separation from Service” means an Executive’s termination of employment with the Company and any of its subsidiaries or a Director’s cessation of participation on the Board of Directors. An Executive who terminates regular employment or a Director who discontinues participation on the Board of Directors and who thereafter performs consulting services for the Company on a part-time basis will nonetheless be deemed to have had a Separation from Service at the date of termination of regular employment or the date of discontinuance of participation on the Board of Directors, as the case may be.

2.14 “Unforeseen Financial Emergency” means a severe financial hardship to the Executive or Director resulting from an illness or accident of the Executive or Director, the Executive or Director’s spouse, or a dependent (as defined in Section 152(a) of the Internal Revenue Code) of the Executive or Director, loss of the Executive or Director’s property due to

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casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Executive or Director.

III.	PARTICIPATION

3.01 An Executive or a Director may execute an Agreement and become a participant in the Plan prior to the first day of any Plan Year. Except as set forth in Section 5.02, an Executive’s or a Director’s Agreement for a Plan Year may not be amended or revoked once that Plan Year has commenced, provided that a participating Executive or a participating Director may at any time change his Beneficiary designation by providing written notice of such change to the Company. Notwithstanding the above, any election to participate in the Plan in respect of the short Plan Year beginning July 1, 2005 and ending December 31, 2005 must be made prior to March 15, 2005.

3.02 An Executive’s or a Director’s Agreement shall relate to (i) compensation for services performed during the Plan Year to which it relates, (ii) benefit entitlements otherwise payable in connection with prior deferrals pursuant to Section 5.01 of the Potomac Electric Power Company Director and Executive Deferred Compensation Plan, (iii) other remuneration approved by the Board of Directors as eligible to be deferred under the Plan, provided that such Agreement shall be entered into prior to payment of such compensation to the Executive or the Director, as the case may be, or (iv)other remuneration approved by the Board of Directors as eligible to be credited under the Plan by way of a transfer of a deferred compensation entitlement to this Plan from any other nonqualified deferred compensation program maintained by the Company. Notwithstanding the above, any Agreement entered into on or after January 1, 2005 shall be structured so as to comply with the timing of election rules contained in Section

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409A(a)(4) of the Internal Revenue Code, as interpreted by the Internal Revenue Service through any proposed or final Regulation or other guidance.

IV .	DEFERRAL OF COMPENSATION - EXECUTIVE AND DIRECTOR RULES

4.01 The deferral of compensation for an Executive shall be made in accordance with the following provisions.

A. Each Plan Year, the Executive may elect any or all of the following five options for deferring compensation, to the extent applicable:

Option 1 – The Executive may elect to defer an amount of Normal Compensation. The Agreement may specify that the Executive’s salary will be reduced by the amount of the Deferred Compensation on a ratable basis throughout the Plan Year or that the Executive’s salary will be reduced by a specified amount or amounts in a specified month or months of the Plan Year.

Option 2.

A. -

The Executive may elect to defer the difference between (i) the lesser of (a) the dollar limitation then in effect pursuant to Section 402(g)(1)(B) of the Internal Revenue Code and (b) six percent (6%) of his compensation, as defined in the principal tax-qualified defined contribution savings plan of Pepco Holdings or one of its subsidiaries in which the Executive participates (the “Applicable Savings Plan”), and (ii) the amount of pre-tax contributions he is permitted to make under the Applicable Savings Plan. Under this Option 2A., the Executive’s salary will be reduced by the amount of Deferred Compensation at the same time and in the same amounts as if such reduction

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was governed by the election then in effect for the Executive under the Applicable Savings Plan.

B. -

Under this Option 2B., the Executive may also elect to defer up to the difference between (i) six percent (6%) of his compensation and (ii) the dollar limitation then in effect pursuant to Section 402(g)(1)(B) of the Internal Revenue Code. For the 2005 Plan Year, any election made by a Participant which involves Option 2 will be construed and applied by reference to these two subelection formats.

Option 3 - The Executive may elect to defer such other compensation which would otherwise be paid to the Executive during the Plan Year provided such compensation has been approved by the Board of Directors in its sole discretion as eligible to be deferred under the Plan.

Option 4 - Subject to the prior approval of the Board of Directors, which approval may be granted or withheld in the sole discretion of the Board of the Directors, the Executive may elect to have the Executive’s Account under this Plan credited with a deferred compensation entitlement attributable to any other nonqualified deferred compensation program maintained by the Company, provided that such transfer will be accompanied by a corresponding elimination of the Company’s obligation under such other deferred compensation arrangement and provided further that no such transfer will be permitted with respect to any deferred compensation entitlement which would otherwise become payable to the Executive under the terms of such other nonqualified deferred compensation program within the same calendar year as the year of the proposed

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transfer. Each Executive who elects Deferred Compensation with respect to a Plan Year shall specify in his Agreement for such Plan Year the Option or Options which shall apply for such Plan Year.

B. The Company will credit the Deferred Compensation to the Account of each participating Executive as of the day such amount would have been paid to the Executive if the Executive’s Agreement had not been in effect. The Executive may elect to have the Company credit, on a monthly basis all Deferred Compensation into the Executive’s Account with an amount in the nature of interest at either (i) the prime rate quoted by the Chase Manhattan Bank, N.A. (the “Prime Rate”), as of the last day of the month; (ii) a rate equal to the rate of return with respect to any one or a combination of the investment funds selected by the Human Resources Committee (an “Investment Fund Rate”), or (iii) a combination of the Prime Rate and an Investment Fund Rate. The Prime Rate or the appropriate Investment Fund Rate(s) shall be credited to the Executive’s Account as of the last day of each calendar month based on the daily balances in the Account which are to be adjusted with respect to the Prime Rate or each designated Investment Fund, as the case may be. The crediting of such interest on a monthly basis shall continue until such balance in the Executive’s Account has been reduced to zero by reason of benefit payments under the Plan.

The Executive may also elect to have the investment return applicable to all or part of any Deferred Compensation credited to the Executive’s Account determined by reference to phantom shares of Pepco Holdings Common Stock (“Common Stock”). In order to initially determine the number of shares of Common Stock which will serve as the basis for adjusting the value of an Executive’s account, the full amount of Deferred Compensation to be credited with an investment return based upon phantom shares shall be divided by the average of the high and

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low sales prices of the Common Stock on the New York Stock Exchange, Inc. on the second business day prior to the date upon which the Executive’s Account is to be credited with such Deferred Compensation. The resulting number will represent the number of phantom shares to be credited to such Executive’s Account. For purposes of determining the value of the Executive’s Account which is attributable to phantom shares, each phantom share shall be deemed to have a value of one share of Common Stock and any time a dividend payment is made with respect to a share of Common Stock, an equivalent amount shall be added to the account of the Executive with respect to each phantom share then credited to the Account. All such dividend equivalent amounts added to the Executive’s Account shall be expressed in the form of phantom shares or fractions thereof.

C. If the Executive elects Option 2A., the Company shall credit the Executive’s Account with a Matching Company Credit equal in value to the percentage of Deferred Compensation elected by the Executive under Option 2A. which would have been matched by the Company if the Executive had contributed such Deferred Compensation to the Applicable Savings Plan. The Matching Company Credit shall be made to the Executive’s Account at the same time as the corresponding Deferred Compensation is credited to the Executive’s Account pursuant to Option 2A. provided that the aggregate match credited to the Executive’s Account due to Deferred Compensation elected by the Executive under Option 2A. plus the match credited to the Executive under the Applicable Savings Plan shall not exceed the dollar limitation then in effect pursuant to Section 402(g)(1)(B) of the Internal Revenue Code.

In addition, if the Executive elects Option 2B., the Company shall credit the Executive’s Account with a Matching Company Credit equal in value to the percentage of

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Deferred Compensation elected by the Executive under Option 2B., based upon the matching rate then being applied in the Applicable Savings Plan.

D. The Company shall furnish each participating Executive with an annual report showing the balance in the Executive’s Account as of June 30 of each year. Effective as of December 31, 2005, the annual report will be prepared as of the December 31 st of each calendar year.

4.02 The deferral of Normal Compensation for a Director shall be made in accordance with the following provisions:

A. Each Plan Year or until the Director provides written notification of cancellation of a previous election, each Director may elect to defer an amount of retainer/fees constituting such Director’s Normal Compensation. The Agreement may specify that the Director’s retainer/fees will be reduced by the elected amount of the Deferred Compensation on a ratable basis throughout the Plan Year or that the Director’s retainer/fees will be reduced by a specified amount or amounts in a specified month or months of the Plan Year. In addition, subject to the prior approval of the Board of Directors. which approval may be granted or withheld in the sole discretion of the Board of Directors, a Director may elect to have the Director’s Account under this Plan credited with a deferred compensation entitlement attributable to any other nonqualified deferred compensation program maintained by the Company, provided that such transfer will be accompanied by a corresponding elimination of the Company’s obligation under such other deferred compensation arrangement and provided further that no such transfer will be permitted with respect to an deferred compensation entitlement which would otherwise become payable to the Director under the terms of such other

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nonqualified deferred compensation program within the same calendar year as the year of the proposed transfer.

B. The Company will credit the Deferred Compensation to the Account of each participating Director as of the day such amount would have been paid to the Director if the Director’s Agreement had not been in effect. All retainer fees and other Director fees which would have been paid to the Director in the form of shares of Company Stock had no deferral election been made will be credited to the Director’s Account in the form of phantom stock. In addition, a Director may elect to have any Deferred Compensation which would otherwise have been paid to the Director in the form of cash had no deferral election been made also expressed in the form of phantom stock by so advising the Human Resources Committee as part of the Director’s Agreement. The full amount of Deferred Compensation to be credited in the form of phantom shares shall be divided by the average of the high and low sale prices of the Common Stock on the New York Stock Exchange. Inc. on the second business day prior to the date upon which the Director’s Account is to be credited with such Deferred Compensation. The resulting number will represent the number of phantom shares to be credited to such Director’s Account. For purposes of determining the value of the Director’s Account which is attributable to phantom shares, each phantom share shall be deemed to have a value of one share of Common Stock and any time a dividend payment is made with respect to a share of Common Stock, an equivalent amount shall be added to the account of the Director with respect to each phantom share then credited to the Account. All such dividend equivalent amounts added to the Director’s Account shall be expressed in the form of phantom shares or fractions thereof.

With respect to any Deferred Compensation credited to the Account of a Director which is not credited in the form of phantom shares, the Company will, in addition, credit the

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Director’s Account on a monthly basis with an amount in the nature of interest at a rate equal to the rate of return with respect to any one or a combination of the investment funds selected by the Human Resources Committee (an investment Fund Rate”). The appropriate rate or rates of interest shall be credited to the Director’s Account as of the last day of each calendar month based on the daily balances in the Account attributable to each designated investment fund, and the crediting of such interest on a monthly basis shall continue until such balance in the Director’s Account has been reduced to zero by reason of benefit payments under the Plan.

C. The Company shall furnish each participating Director with an annual report showing the balance in the Director’s Account as of June 30 of each year. Effective as of December 31, 2005, the annual report will be prepared as of the December 31 st of each calendar year.

D. The Company may establish and may amend, from time to time, a procedure pursuant to which a Director may prospectively modify the manner in which his Account is credited with an investment return, as between the alternatives of phantom shares and such other investments as may be provided for by the Plan from time to time.

V.	PAYMENT OF BENEFITS

5.01 Except as otherwise provided in this Article V. the payment of benefits to a participating Executive shall commence as of the date specified by the Executive in the Executive’s Agreement under one of the following options: (i) on the date of commencement of benefits under the Applicable Defined Benefit Pension Plan in which the Executive participates; (ii) on January 31 of the calendar year following the year of the Executive’s Retirement: (iii) on the first day of the month following the Executive’s Separation from Service; (iv) on January 31 of calendar year following Separation from Service; (v) on January 31 of the calendar year

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following the later of the year of the Executive’s Separation from Service or attainment of an age specified in the Agreement; or (vi) on January 31 of the calendar year specified in the Agreement, which may not be earlier than the second calendar year following the calendar year which includes the first day of the Plan Year for which the Agreement is made. Except as otherwise provided in this Article V, the payment of benefits to a participating Director shall commence as of the date specified by the Director in the Director’s Agreement under one of the following options: (i) on the first day of the month following the Director’s Separation from Service; (ii) on January’ 31 of the calendar year following the year of the Director’s Separation from Service; (iii) on January 31 of the calendar year following the later of the year of the Director’s Separation from Service or attainment of an age specified in the Agreement; or (iv) on January 31 of the calendar year specified in the Agreement, which may not be earlier than the second calendar year following the calendar year which includes the first day of the Plan Year for which the Agreement is made. Notwithstanding the above, if an individual who then qualifies as a “specified employee”, as defined in Section 409A(a)(2)(B)(i) of the Internal Revenue Code, incurs a Separation from Service for any reason other than death and becomes entitled to a distribution from this Plan, as a result of such Separation from Service, no distribution otherwise payable to such specified employee during the first six (6) months after the date of such Separation from Service, shall be paid to such specified employee until the date which is one day after the date which is six (6) months after the date of such Separation from Service (or, if earlier, the date of death of the specified employee). No amount of a participating Executive’s benefits which are subject to the provisions of Section 409A of the Internal Revenue Code shall be payable in accordance with Option (1) above which refers to the date of commencement of benefits under the Applicable Defined Benefit Pension Plan. Instead, such

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amounts subject to the provisions of Section 409A of the Internal Revenue Code shall instead be paid pursuant to such other Option as may have been elected by the participating Executive and, in the absence of the election of another such Option, shall be paid as of the first day of the month following the Executive’s Separation from Service.

5.02 As specified in the Executive’s or the Director’s Agreement, as the case may be, benefits shall be paid (i) in a lump sum amount equal to the Executive’s or the Director’s Account balance as of the benefit commencement date, or (ii) in a series of approximately equal monthly or annual installments, as computed by the Company, over a period of between two (2) and fifteen ( 15 ) years with the final payment equaling the then remaining balance in the Executive’s or the Director’s Account. If annual installments are elected by the Executive or the Director, such annual installments shall be payable on the benefit commencement date and each succeeding January 31 during the payment period. Notwithstanding a specification of installment payments in an Executive’s or Director’s Agreement, as the case may be, if the balance in the Executive’s or the Director’s Account as of the benefit commencement date is less than one thousand dollars ($1,000.00), the Company shall instead make a lump sum payment of that amount on that date. The time for payment of benefits to an Executive or a Director may be modified by the Executive or Director by the filing of a written election prior to the beginning of the calendar year in which benefits would otherwise become payable under the existing Agreement. Notwithstanding the above, any delay in the time and any change in the form of a distribution from this Plan of an amount which is subject to Section 409A (i) may not take effect until at least 12 months after the date the election is made, (ii) must involve a further deferral of not less than five (5) years from the date such payment would otherwise be made (except for a payment made due to the death, disability or Unforeseen Financial Emergency of the electing

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Executive or Director, as the case may be, and (iii) must be made, in the case of payments otherwise scheduled to be made at a specified time or pursuant to a fixed schedule, at least 12 months prior to the date such payments were originally scheduled to be made.

5.03 An Executive may apply to the Human Resources Committee for early distribution of all or any part of his Account which is not subject to Section 409A. Any such early distribution shall be made in a single lump sum, provided that ten percent (10%) of the amount withdrawn in such early distribution shall be forfeited prior to payment of the remainder to the Executive. An Executive may not elect an early distribution hereunder if he has received an early distribution or a distribution under Section 5.05 within the previous twelve (12) months. In the event an Executive’s early distribution is submitted within sixty (60) days after a Change in Control (as may be defined in an agreement between the Executive and the Company or in a plan in which the Executive participates) or an elimination of an investment alternative under the Plan that the Human Resources Committee determines is a substantial detriment to the Executive, the forfeiture penalty shall be reduced to five percent (5%).

5.04 In the event that a participating Executive or a participating Director dies before the benefit commencement date, the Company shall make benefit payments to the Executive’s or the Director’s Beneficiary or Beneficiaries in an aggregate amount equal to twice the balance credited to the Account of the participating Executive or participating Director, as the case may be, immediately prior to such individual’s death. An amount equal to Account balance will be paid on the first of the month following the Executive’s or the Director’s death and the remaining amount of the death benefit will commence as of January 31 of the calendar year following the Executive’s or the Director’s death in accordance with the method of payment under Section 5.02 specified in the Executive’s or the Director’s Agreement. In the event that a participating

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Executive or a participating Director dies after the benefit commencement date, any remaining benefit payments shall be paid to the Executive’s or the Director’s Beneficiary or Beneficiaries. In the event that no Beneficiary survives the Executive or the Director, an amount equal to the remaining balance in the Executive’s or Director’s Account (or two times the Account balance if death occurs prior to the benefit commencement date) shall be paid to the estate of the Executive or the Director, as the case may be, in a lump sum within thirty (30) days following the date on which the Company is notified of the Beneficiary’s death.

5.05 Notwithstanding the foregoing, the Company may at any time make a lump sum payment to an Executive or Director (or surviving Beneficiary) equal to part or all of the balance in the Executive’s or Director’s Account, as the case may be, upon a showing of a financial emergency caused by circumstances beyond the control of the Executive or Director (or surviving Beneficiary) which would result in serious financial hardship if such payment were not made. The determination whether such emergency exists shall be made in the sole discretion of the Board of Directors of the Company, the amount of the payment shall be limited to the amount necessary to meet the financial emergency, and any remaining balance in the Executive’s or Director’s Account shall be paid at the time and in the manner otherwise set forth in the Executive’s or Director’s Agreement, as the case may be.

5.06 In the event that a participating Executive or Director ceases to be an employee or Director of the Company and becomes a proprietor, officer, partner, employee, or otherwise becomes affiliated with any business or entity that is in competition with the Company, or becomes employed by any governmental agency’ having jurisdiction over the affairs of the Company, the Company reserves the right in the sole discretion of its Board of Directors to make an immediate lump sum payment to the Executive or the Director in an amount equal to the

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balance in the Executive’s or the Director’s Account at that time, to the extent that such payment is permitted under Section 409A of the Code.

5.07 If an Executive or a Director has entered into two (2) or more Agreements with respect to different Plan Years which specify different benefit commencement dates under Section 5.01 or different methods of payment under Section 5.02, the Company will separately account for the Deferred Compensation attributable to each such Agreement and distribute the amounts covered by each Agreement in accordance with the terms thereof.

VI.	RIGHTS OF PARTICIPATING OFFICERS AND BENEFICIARIES

6.01 Nothing contained in this Plan or any Agreement and no action taken hereunder shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and any Executive, any Director, any Beneficiary or any other person; provided the Company has established a grantor trust (Trust No. 3 originally executed on November 28, 2001) to hold assets to secure the Company’s obligations to participants under the Plan if the establishment of such a trust does not result in the Plan being “funded” for purposes of the Internal Revenue Code. Except to the extent provided through a grantor trust established under the provisions of the preceding sentence, any compensation deferred under the Plan shall continue for all purposes to be a part of the general funds of the Company and to the extent that any person acquires a right to receive payments from the Company under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Company.

6.02 The right of any Executive, Director, Beneficiary, or other person to receive benefits under the Plan may not be assigned, transferred, pledged or encumbered except by will or the laws of descent and distribution, nor shall it be subject to attachment or other legal process of whatever nature.

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6.03 If the Company finds that an person to whom any payment is payable under the Plan is unable to care for his or her affairs because of illness or accident, or is a minor, any payment due (unless a prior claim therefor shall have been made by a duly appointed guardian, committee or other legal representative) may be paid to the spouse, a parent, or a brother or sister, or to any person deemed by the Company to have incurred expense for the person who is otherwise entitled to payment.

VII.	MISCELLANEOUS

7.01 This Plan may be amended, suspended or terminated at any time by the Company provided, however, that no amendment, suspension or termination shall have the effect of impairing the rights of (i) participating Executives or their Beneficiaries or (ii) participating Directors or their Beneficiaries with respect to amounts credited to their Accounts before the date of the amendments, suspension or termination.

7.02 To the extent required by law, the Company’ shall withhold federal or state income or payroll taxes from benefit payments hereunder and shall furnish the recipient and the applicable governmental agency or agencies with such reports, statements, or information as may be legally required in connection with such benefit payments.

7.03 This Plan and all Agreements hereunder shall be construed in accordance with and governed by the laws of the District of Columbia.

IN WITNESS WHEREOF, the Company has caused this version of the Plan to be signed on October 31, 2008 which version reflects all modifications made to the Plan through such date of execution.

ATTEST		Pepco Holdings, Inc.

By:	/s/ ELLEN S. ROGERS	/s/ D. R. WRAASE
	Secretary	Chief Executive Officer

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CONECTIV

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

Revised as of

October 2008

CONECTIV

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

PREAMBLE

The principal objective of this Supplemental Executive Retirement Plan is to ensure the payment of competitive level of Retirement income in order to attract, retain and motivate selected executives. The Plan is designed to provide a benefit which, when added to other Retirement income of the executive, will meet the objective described above. Eligibility for participation in the plan shall be limited to executives who are classified as directors or above, who are participants in the Conectiv Deferred Income Plan, and other managers or executive are selected by the Chief Executive Officer and approved by the Personnel and Compensation Committee of the Board of Directors. In order to be eligible for benefits under this Plan on account of Service prior to employment by an Employer, an executive must be (or have been) recruited into the position (or for the position) as determined by the Committee. This Plan is a successor to the Delmarva Power & Light Company Supplemental Executive Retirement Plan, the Atlantic City Electric Company Supplemental Executive Retirement Plan, Supplemental Executive Retirement Plan - II, and Excess Benefit Retirement Income Program. This Plan is effective January 1, 1999, and is effective as to each Participant on the date he or she is designated as such hereunder.

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SECTION I

DEFINITIONS

1.1 “Actuarial Equivalent” or “Actuarial Equivalence” shall mean the method and amount by which a single life annuity benefit is converted to any other form of benefit, or by which a single sum benefit is converted to any form of annuity benefit, and shall be determined by using the appropriate factors and methods as set forth in the Basic Plan as of the date of determination.

1.2 “Affiliate” means any corporation, partnership or other organization which, during any period of employment of a Participant, was at least 50% controlled by the Company or an affiliate of the Company.

1.3 “Basic Plan” means the Conectiv Retirement Plan as set forth in the Base Plan and the Cash Balance Sub-Plan.

1.4 “Basic Plan Benefit” means the amount of benefit payable from the Basic Plan to a Participant (a) in the form of an unreduced straight life annuity, where the Participant’s benefit from this Plan is payable in the form of an annuity; or (b) in the form of a single lump sum, where the. Participant’s benefit from this Plan is payable in the form of a lump sum.

1.5 “Beneficiary” means the person or persons designated as the Participant’s beneficiary for purposes of the Basic Plan or, for a Participant who is not a participant in the Basic Plan, the person or persons designated as the Participant’s beneficiary for purposes of this Plan on a form provided for such purpose and filed with the Agent designated in Section VII.

1.6 “Change in Control” shall mean the first to occur, after the effective date, of any of the following:

(a) If any Person is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Securities Exchange Act), directly or indirectly, of securities of Conectiv (not including in the securities beneficially owned by such Person any securities acquired directly from Conectiv or its subsidiaries) representing 25% or more of either the then-outstanding shares of common stock of Conectiv or the combined voting power of Conectiv’s then outstanding securities; or

(b) If during any period of 24 consecutive months during the existence of the Plan commencing on or after the effective date, the individuals who, at the beginning of such period, constitute the Board (the “Incumbent Directors”) cease for reason other than death to constitute at least a majority thereof; provided that a director who was not a director at the beginning of such 24-month period shall be deemed to have satisfied requirement (and be an Incumbent Director) if such director was elected by, or on the recommendation of or with the approval of, at least two-third of the directors who then qualified as Incumbent Directors either

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actually (because they were directors at the beginning of such 24-month period) or by prior operation of this Section 1.6; or

(c) The consummation of a merger or consolidation of Conectiv with any other corporation other than (i) a merger or consolidation which would result in the voting securities of Conectiv outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the voting securities of Conectiv or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or(ii) a merger or consolidation effected to implement a recapitalization of Conectiv (or similar transaction) in which no Person is or becomes the beneficial owner, as defined in Section 1.6(a), directly or indirectly, of securities of Conectiv (not including in the securities beneficially owned by such Person any securities acquired directly from Conectiv or its subsidiaries) representing 40% or more of either the then-outstanding shares of common stock of Conectiv or the combined voting power of Conectiv’s then- outstanding securities; or

(d) The stockholders of Conectiv approve a plan of complete liquidation or dissolution of Conectiv, or there is consummated an agreement for the sale or disposition by Conectiv of all or substantially all of Conectiv’s assets, other than a sale or disposition by Conectiv of all or substantially all of Conectiv’s assets to an entity, at least 60% of the combined voting power of the voting securities of which are owned by Persons in substantially the same proportion as their ownership of Conectiv immediately prior to such sale.

Upon the occurrence of a Change in Control as provided above, no subsequent event or condition shall constitute a Change in Control for purposes of the Plan, with the result that there can be no more than one Change in Control hereunder.

For purposes of this Section, the term “Person” shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include: (i) Conectiv or any of its subsidiaries; (ii) a trustee or other fiduciary holding securities under an employee benefit plan of Conectiv or any of subsidiaries; (iii) an underwriter temporarily holding securities pursuant to an offering of such securities; (iv) a corporation owned directly or indirectly by the stockholders of Conectiv substantially the same proportions as their ownership of stock of Conectiv; or (v) with respect to any particular Participant, such Participant or any “group” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act) which includes such Participant).

1.7 “Committee” means the Personnel and Compensation Committee of the Board of Directors of the Company, which has been given authority by the Board of Directors to administer this Plan.

1.8 “Code” means the Internal Revenue Code of 1986, as amended.

1.9 “Company” means Conectiv and any successor thereto.

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1.10 “Compensation” means any amount paid to a Participant as salary or bonus, including pre-tax contributions and elective contributions that are not includible in gross income under sections 125, 402(a)(8) or 402(h) of the Code, and all amounts deferred pursuant to the Conectiv Deferred Income Plan in the year deferred (up to 50% of Compensation as calculated prior to such deferral), but excluding (a) contributions the Company makes to any other benefit plan; (b) any amounts paid in the form of fringe benefits (cash or non-cash), expenses, or welfare benefits, even though such amounts may be taxable for federal income tax purposes; (c ) any amounts paid from the Conectiv Deferred Income Plan; and (d) any amounts paid or deferred in connection with stock grants, stock options, or payments based on stock performance such as stock appreciation rights or phantom stock awards.

1.11 “Disabled” means a mental or physical condition which qualifies a Participant for benefits under the Employer’s long-term disability plan.

1.12 “Effective Date” means January 1, 1999.

1.13 “Employee” means any individual employed by an Employer, provided, however, that to qualify as an Employee for purposes of the Plan, the individual must be a member of a group of “key management or other highly compensated employees” within the meaning of Sections 201, 301 and 401 of ERISA; and provided further than an individual shall not be eligible to become or remain a Participant if (a) he or she is not on an employee payroll of an Employer; (b) he or she has entered into a written agreement with an Employer which provides that he or she shall not participate in the Plan; or (c) he or she is in a group of employees that is excluded from the Plan pursuant to a declaration by the Employer with respect to the Employer’s adoption of the Plan or any amendment thereto.

1.14 “Employer” means the Company or an Affiliate that has adopted this Plan for its Employees.

1.15 “ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

1.16 “Other Retirement Income” means, as determined by the Committee in its discretion, retirement income payable from any other retirement plan whether or not such plan was maintained by, or contributed to, by the Company.

1.17 “Participant” means an Employee of an Employer who is (a) employed at a level of director or above, (b) a participant in the Conectiv Deferred Income Plan who defers income pursuant thereto, or (c) recommended by the Chief Executive Officer and designated as a Participant by the Committee. An Employee shall become a Participant in the Plan as of the later of (a) the Effective Date of this Plan, (b) the date he or she becomes an Employee, or (c) in the case of a person who becomes an Employee pursuant to a resolution of the Committee, the date his or her designation is individually approved by, and is specifically named in the resolution of, the Committee for inclusion in the Plan.

1.18 “Plan” means the Conectiv Supplemental Executive Retirement Plan.

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1.19 “Prior Plan” means the Delmarva Power & Light Company Supplemental Executive Retirement Plan, the Atlantic City Electric Company Supplemental Executive Retirement Plan, the Atlantic City Electric Company Supplement Executive Retirement Plan II, and the Atlantic City Electric Company Excess Benefit Retirement Income Program. Each such Prior Plan is hereby terminated with respect to any person employed by the Company or an Affiliate on or after the Effective Date, and any such person shall receive supplemental retirement benefits only under this Plan or under the Supplemental Executive Retirement Plan sponsored by Delmarva Capital Investments, Inc.

1.20 “Retirement” means the termination of a Participant’s employment with an Employer on one of the Retirement dates specified in Paragraph 2.2.

1.21 “SERP Payable Cash Balance” means the lump sum benefit payable from the Plan as defined in Section III, Sub-section 3.1, and may include an Initial SERP Payable Cash Balance credited pursuant to Section 1.22.

1.22 “Service” means a Participant’s credited years of Service as defined in the Basic Plan, plus any other years of service credited to such Participant prior to age 65 pursuant to an employment agreement with an Employer or pursuant to a resolution of the Committee. For a Participant who is not a participant in the Basic Plan, “Service” shall mean the actual years and months of employment of such participant by an Employer, plus any additional years and months of Service credited to such Participant prior to age 65 pursuant to an employment agreement with an Employer or pursuant to a resolution of the Committee. Effective with the Effective Date, the Committee may grant such Participant an Initial SERP Payable Cash Balance in lieu of such prior Service, and grants of prior Service made prior to the Effective Date may be converted to an Initial SERP Payable Cash Balance.

1.23 “Surviving Spouse” means the spouse of a Participant who is legally married to the Participant at the time of the Participant’s Retirement, or death if still employed by an Employer or an Affiliate.

1.24 “Termination” means the termination of the Participant’s employment with an Employer or an Affiliate, and shall occur at the commencement of any severance pay unless otherwise specified in a written agreement relating to such severance pay.

SECTION II

ELIGIBILITY FOR BENEFITS

2..1 A Participant will be eligible for benefits under the Plan if

(a) the Participant’s Basic Plan Benefit is reduced by reason of the limitation on the maximum benefit payable under §415, or successor provisions, of the Code, or

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(b) the Participant’s Basic Plan Benefit is reduced by reason of the limitation on compensation under §401(a)(17), or successor provisions, of the Internal Revenue Code of 1986, as amended; or

(d) the Participant has received a grant of Service prior to employment with an Employer or an Initial SERP Payable Cash Balance pursuant to the terms of Section 1.22.

2..2 Each Participant is eligible to retire and receive a benefit under this Plan beginning on one of the following dates:

(a) “Normal Retirement Date,” which is the first of the month coincident with or next following the Participant’s sixty-fifth (65 th ) birthday after attaining five (5) years of Service with an Employer (not including pre-employment service granted pursuant to Section 1.22.

(b) “Early Retirement Date,” which is the date the Participant elects to retire after attaining age fifty-five (55) with fifteen (15) years of service or attaining age sixty (60) with twenty (20) years of service.

(c) “Deferred Retirement Date,” which is the date the Participant elects to retire after his or her normal retirement date if he or she does not meet the policy-making executive standard causing his or her mandatory retirement at age sixty- five (65) or is requested by the Board of Directors to work beyond his or her 65 th birthday.

(d) “Disability Retirement Date,” which is the date the Participant elects to retire by reason of Disability after completion of fifteen (15) years of Service. In order to retire on a Disability Retirement Date, in accordance with Section VI, the Participant must provide the Committee satisfactory evidence of Disability.

2..3 A Participant who has a SERP Payable Cash Balance and who Terminates employment before an applicable Retirement Date may receive a lump sum or annuity benefit pursuant to Section III if and only if the benefit is vested pursuant to Section IV, provided that a lump sum payable hereunder shall be paid no earlier than twelve months after such Termination if the Participant is restricted by the terms of Section 2.4.

2.4 If any Participant entitled to benefit under this Plan on account of a grant of service prior to employment with an Employer or an Initial SERP Payable Cash Balance pursuant to Section 1.22 is discharged for cause, or enters into competition with the Company or an Affiliate, or interferes with the relations between the Company or an Affiliate and any customer, or engages in any activity that would result in any decrease or loss in sales by the Company or an Affiliate, the rights of such Participant to a benefit under this Plan based on such Service, including the rights of a Surviving Spouse to a benefit, will be forfeited, unless the Committee determines that such activity is not detrimental to the best interests of the Company or its Affiliates. However, if the individual ceases such activity and notifies the Committee of this action, then the Participant’s

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right to receive a benefit, and any right of a Surviving Spouse to a benefit, may be restored if the Committee in its sole discretion determines that the prior activity has not caused serious injury to the Company or its Affiliates and that the restoration of the benefit would be in the best interest of the Company and its Affiliates. All determinations by the Committee with respect to forfeiture and restoration of benefits shall be final and conclusive.

SECTION III

AMOUNT AND FORM OF RETIREMENT BENEFIT

3.1 Cash Balance Benefit. As of any determination date, the Participant shall be credited with a SERP Payable Cash Balance equal to the Payable Cash Balance that would have been payable under the Basic Plan as if the following assumptions were correct, reduced by the Participant’s Payable Cash Balance actually payable under the Basic Plan as of such determination date:

(a) as if the provisions of the Bask Plan were administered without regard to the benefit limitations set forth in the Basic Plan as a result of section 415 of the Code;

(b) as if the provisions of the Basic Plan were administered without regard to the compensation limitations set forth in the Basic Plan as a result of section 401(a)(17) of the Code;

(c) as if all Compensation were taken into account under the Basic Plan for the year such amounts were earned by such Participant (and not in the year such amounts are actually paid);

(d) as if such Participant’s Payable Cash Balance under the Basic Plan as of his employment commencement date were equal to the Initial SERF Payable Cash Balance; and

(e) as if such Participant had been employed by the Employer during the period for which prior service has been credited for purposes of this Plan pursuant to Section 1.22 (this sub-section (e) shall not be applicable to a Participant whose prior service has been converted to an Initial SERP Payable Cash Balance pursuant to Section 1.22).

In the event the Employer adopts or maintains any other qualified or non-qualified retirement plan that is deemed by the Committee in its sole discretion to constitute Other Retirement Income, the SERP Payable Cash Balance shall be reduced by the Actuarial Equivalent lump sum value of such Other Retirement Income.

3.2 Minimum Benefit.

(a) A Participant who was a participant in a Prior Plan as of December 31, 1998 shall be entitled to a minimum benefit equal to the annual retirement benefit payable at his actual Retirement or Termination Date as calculated under the Prior Plan as of December 31, 1998, reduced by the Basic Plan Benefit as of the Participant ‘s actual

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Retirement or Termination Date, and further reduced by any Other Retirement Income to which the Participant has a vested right as the actual Retirement or Termination Date. Notwithstanding the foregoing, no minimum benefit under this Section 3.2 shall be paid to a Participant if the Participant had received a distribution from a Prior Plan on account of the same Service.

(b) If a Participant described in Section 3.2(a) also satisfies the requirements to be a Grandfathered Participant under the Basic Plan (whether or not such Participant is a participant in the Basic Plan), he or she shall be entitled to a minimum benefit under this Plan equal to the annual retirement benefit payable at his actual Retirement or Termination Date calculated-in accordance with the Grandfathered Participant provisions of the Basic Plan, applying the presumptions set forth in Section 3.1, reduced by the Basic Plan Benefit, and further reduced by any Other Retirement Income to which the Participant has a vested right or which the Participant previously received.

3.3 The benefit payable at any Retirement Date or upon Termination of employment shall be paid to the Participant (or on his behalf, to his Beneficiaries) in the form of a lump-sum equal to the greater of (i) the SERP Payable Cash Balance, or (ii) the Actuarial Equivalent of the minimum or grandfathered benefit as defined in Section 3.2.

(a) any benefit that has an Actuarial Equivalent Value of $50,000 or less (such amount to be increased by vote of the Committee to be applicable to any calendar year or the remainder of any calendar year after the date of such vote) and shall be paid in the form of a lump sum;

(b) if the Participant has elected a lump sum distribution from the Basic Plan and has not submitted an election pursuant to sub-paragraph (c) below, the Participant’s benefit shall be paid in the form of a 50% joint and survivor annuity (with the Participant’s spouse as joint annuitant) unless the Participant elects a different annuity form prior to his Retirement Date or Termination Date; and

(c) if the Participant has made a separate election at least one year prior to the calendar year containing his Retirement Date, the Participant may receive a different form of benefit as set forth in such separate election.

(d) The benefit payable in the form of a lump sum shall be the greater of (1) the SERP Payable Cash Balance, or (ii) the Actuarial Equivalent of the minimum or grandfathered benefit as defined in Section 3.2. The benefit payable in the form of an annuity shall be the greater of (i) the SERP Payable Cash Balance converted to an annuity pursuant to the provisions the Basic Plan, or (ii) the minimum or grandfathered benefit as defined in Section 3.2, subject to any adjustments or actuarial reductions as set forth in the Basic Plan for benefits payable prior to Normal Retirement Date or in any form other than a single life annuity.

3.4 The Committee may make appropriate adjustments to the benefits payable under the Plan to reflect the timing and form of payments of any Other Retirement Income.

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SECTION IV

VESTING OF RETIREMENT BENEFITS

4.1 Participants benefits will vest upon Retirement or in accordance with Section VIII, Subsection 8.71. No benefits are payable under the Plan if a Participant’s employment is Terminated voluntarily or involuntarily for any reason prior to completion of five (5) years of Service with an Employer (excluding any prior Service credited pursuant to Section 1.22), except as specifically voted by the Committee in its sole discretion.

SECTION V

DEATH BENEFIT PAYABLE

5.1 If a Participant should die after completion of five (5) years of Service and before Retirement, the Surviving Spouse will receive a benefit in the form of an annuity equal to 50% of the amount of Participant’s benefit determined in accordance with Section III as if the Participant had retired and commenced receiving a benefit on the first of the month following the date of his or her death. This survivor annuity will not be reduced on account of the age of the Participant or of the Surviving Spouse. Notwithstanding the foregoing, in no event shall the Surviving Spouse benefit be less than the Actuarial Equivalent of the SERP Payable Cash Balance.

5.2 A Surviving Spouse’s benefits will be payable in a lump-sum which is the Actuarial Equivalent of the benefit described in Section 5.1.

5.3 In the event the Participant dies without a Surviving Spouse after completing five (5) years of Service, the SERP Payable Cash Balance shall be paid to his or her Beneficiary, in a single lump sum.

SECTION VI

DISABILITY BENEFITS PAYABLE

6.1 A Participant shall be entitled to retire on his or her Disability Retirement Date.

6.2 The annual disability benefit will be equal the Retirement benefit that would be payable under Section III of this Plan, based on years of Service to his or her Retirement Date and based on Earnings determined as of the last day of active employment with the Employer before commencement of Disability.

6.3 The disability benefit determined in accordance with Paragraph 6.2 will be offset by any disability benefit payable under the Basic Plan, any long-term disability benefits payable by the Employer or by any insurance policy provided by or through the Employer, and any Other Retirement Income.

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6.4 Disability benefits will be payable monthly and will commence on the Participant’s Disability Retirement Date. The last payment will be as of the first of the month during which the disabled Participant dies.

6.5 In the event a disabled Participant dies before attaining Normal Retirement Age, death benefits will be payable pursuant to Section V. In the event a disabled Participant attains Normal Retirement Age while disabled, the Participant’s benefit shall be converted to a Normal Retirement benefit pursuant to Section III and paid in accordance with the provisions thereof.

6.6 The Committee may require, no more frequently than once in any calendar year, that a disabled Participant submit medical evidence of Disability satisfactory to the Committee. The Committee will have sole discretion to discontinue a disability benefit based on it consideration of such evidence or lack thereof.

SECTION VII

ADMINISTRATION OF PLAN

7.1 The Committee, as plan administrator, shall have full power and authority to interpret the Plan, to prescribe, amend, and rescind any rules, form, procedures, and regulations as it deems necessary or appropriate for the proper administration of the Plan, and to make any other determinations and to take any other such actions as it deems necessary or advisable in carrying out its duties under the Plan. All action taken by the Committee arising out of, or in connection with, the administration of the Plan or any rules adopted thereunder, shall, in each case, lie within its sole discretion, and shall be final, conclusive and binding upon the Employer, all Employees, and all Beneficiaries of Employees and all persons and entities having an interest therein. The Committee may, however, delegate to any person or entity of its powers or duties under the Plan. To the extent of such delegation, the delegate shall become invested with the same discretionary authority as the Committee. Any decisions, actions or interpretations to be made under the Plan by the Committee, an Employer, or a delegate of any of them shall be made in their respective sole discretion, not as a fiduciary, and need not be uniformly applied to similarly situated individuals.

7.2 The Company shall indemnify and hold harmless the Committee and any delegate of the Committee’s functions from any and all claims, losses, damages. expenses (including counsel fees) and liability (including any amounts paid in settlement any claim or any other matter with the consent of the Board) arising from any act or omission of such member, except when the same is due to gross negligence or willful misconduct.

7.3 Claims Procedure.

(a) The Committee shall designate a person or executive to whom claims for benefits shall be submitted. If the person claiming a benefit is such designated Agent or a relative or survivor of such Agent, the Chief Executive Officer of the Company shall serve

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as the Agent with respect to such claim. If the person claiming a benefit is the current or former Chief Executive Officer, the chairperson of the Committee shall serve as the Agent with respect to such claim.

(b) Claim. A person who believes that be is being denied a benefit to which he is entitled under the Plan (hereinafter referred to as a “Claimant”) may file a written request for such benefit with the Agent, setting forth the claim.

(c) Claim Decision. Upon receipt of a claim, the Agent may (but shall not be required to consult with the Committee, and shall advise the Claimant within (90) days of receipt of the claim whether the claim is denied. If special circumstances require more than ninety (90) days for processing, the Claimant will be notified in writing within ninety (90) days of filing the claim that the Agent requires up to an additional ninety (90) days to reply. The notice will explain what special circumstances make an extension necessary and indicate the date a final decision is expected to be made.

If the Claimant does not receive a written denial notice or notice of an extension within ninety (90) days, the Claimant may consider the claim denied and may then request a review of denial of the claim, as described below.

If the claim is denied in whole or in part, the Claimant shall be provided a written opinion, using language calculated to be understood by the Claimant, setting forth:

(i) The specific reason or reasons for such denial;

(ii) The specific reference to pertinent provisions of this Plan on which such denial is based;

(iii) A description of any additional material or information necessary for the Claimant to perfect his claim and an explanation why such material or such information is necessary;

(iv) Appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review; and

(v) The time limits for requesting a review under subsection (c) and for review under subsection (d) hereof.

(d) Request for Review. Within sixty (60) days after the receipt by the Claimant of the written opinion described above, the Claimant may request in writing that the Committee review the initial determination. The Claimant or his duly authorized representative may, but need not, review the pertinent documents and submit issues and comments in writing for consideration by the Committee. If the Claimant does not request a review of the initial determination within such sixty (60) day period, the Claimant shall be barred and estopped from challenging the determination.

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(e) Review of Decision. Within sixty (60) days after the Committee’s receipt of a request for review, it will review the initial determination. After considering all materials presented by the Claimant, the Committee will render a written opinion, written in a manner calculated to be understood by the Claimant, setting forth the specific reasons for the decision and containing specific references to the pertinent provisions of this Agreement on which the decision is based. If special circumstances require that the sixty (60) day time period be extended, the Committee will so notify the Claimant and will render the decision as soon as possible, but no later than one hundred twenty (120) days after receipt of the request for review.

7.4 Each Participant may receive a copy of this Plan on request, and the Committee will make available for inspection by any Participant a copy of the rules and regulations used by the Committee in administering the Plan.

SECTION VIII

MISCELLANEOUS

8..1 Amendment and Termination of Plan. The Committee may, in its sole discretion, terminate, suspend or amend this Plan at any time or from time to time, in whole or in part. However, no amendment or suspension of the Plan will affect a retired Participant’s right or the right of a Surviving Spouse to continue to receive a benefit in accordance with this Plan as in effect on thee date such Participant commenced to receive a benefit under this Plan.

8.2 Limitation of Participant’s Right. Nothing in this Plan shall be construed as conferring upon any Participant any right to continue in the employment of the Employer, nor shall it interfere with the rights of the Employer or any Affiliate to terminate the employment of any Participant and/or to take any personnel action affecting any Participant without regard to the effect which such action may have upon such Participant as a recipient or prospective recipient of benefits under the Plan. Any amounts payable hereunder shall not be deemed salary or other compensation to a Participant for the purposes of computing benefits to which the Participant may be entitled under any other arrangement established by the employer for the benefit of its employees. Nothing contained in the Plan shall be construed to prevent the company or any Affiliate from taking any action which is deemed by it to be appropriate or in its best interest. No Participant, Beneficiary, or other person shall have any claim against the company or any Affiliate as a result of such action.

8.3 Individually Negotiated Benefits. Any agreement entered into by the Employer and an employee who is from a select group of management or highly compensated employees which provides individually negotiated benefits to such employee which are not otherwise described in the Plan shall be deemed to be incorporated by reference hereunder.

8.4 Taxes. The Company may make such provisions and take such action as it may deem appropriate for the withholding of any taxes which the Company is required by any law or regulation of any governmental authority, whether Federal, state or local, to withhold in connection with any benefits under the Plan, including, but not limited to, the withholding of

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appropriate sums from any amount otherwise payable to the Participant (or his Beneficiary). Each Participant, however, shall be responsible for the payment of all individual tax liabilities relating to any such benefits.

8.5 Unfounded Status of Plan. The Plan is intended to constitute an “unfunded” plan of deferred compensation for Participants. Benefits payable hereunder shall be payable out of the general assets of the Company, and no segregation of any assets whatsoever for such benefits shall be made. Notwithstanding any segregation of assets or transfer to a grantor trust, with respect to any payments not yet made to a Participant, nothing contained herein shall give any such Participant any rights to assets that are greater than those of a general creditor of the Company.

8.6 Obligation to Company. If a Participant becomes entitled to a distribution of benefits under the Plan, and if at such time the Participant has outstanding any debt, obligation, or other liability representing an amount owing to the company or any Employer or Affiliate, then the Company, Employer, or Affiliate may offset such amount owned to it against the amount of benefits otherwise distributable. Such determination shall be made by the Committee. To the maximum extent permitted by law, no benefit under this Plan otherwise shall be assignable or subject in any manner to alienation, sale, transfer, claims of creditors, pledge, attachment or encumbrances of any kind, other than a qualified domestic relations order that is otherwise enforceable against the Plan and not preempted by ERISA.

8.7 Change in Control. In the event of a Change in Control and a termination of employment or service for any reason, each affected Participant’s benefit shall be distributed immediately to the Participant in one lump-sum payment.

8.8 Governing Law. This plan is established under and will be construed according to ERISA and, where not preempted, the laws of the State of Delaware.

8.9 Headings, Gender, Singular and Plural. Headings are inserted in this Plan for convenience of reference only and are to be ignored in the construction of the provisions of the Plan. The masculine gender, where appearing in the Plan, will be deemed to include the feminine gender, and the singular may include the plural, unless the context clearly indicates the contrary.

8.10 Section 409A Compliance. Notwithstanding the above, if an individual who then qualifies as a ‘specified employee’, as defined in Section 409A(a)(2A)(B)(i) of the Internal Revenue Code, incurs a separation from service for any reason other than death and becomes entitled to a distribution from this Plan then, to the extent required by Section 409A(a)(2)(B), no distribution otherwise payable to such specified employee during the first six (6) months after the date of such separation from service shall be paid to such specified employee until the date which is one day after the date which is six (6) months after the date of such separation from service (or, if earlier, the date of death of the specified employee).

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IN WITNESS WHEREOF , the Company has caused this Plan to be signed on this 3 rd day of November, 2008 which version reflects all modifications made to the Plan through such date of execution.

		PEPCO HOLDINGS, INC.

		By:	/s/ D. R. WRAASE
			Chairman of the Board and Chief Executive Officer

ATTEST

By:	/s/ ELLEN S. ROGERS
	Secretary

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PEPCO HOLDINGS, INC.

NON-MANAGEMENT DIRECTORS COMPENSATION PLAN

1. Purpose of the Plan.

The Pepco Holdings, Inc. Non-Management Directors Compensation Plan (the “Plan”) has been established by Pepco Holdings, Inc. (the “Company”) to compensate directors who are not employees of the Company or any of its subsidiaries for their service as members of the Board of Directors of the Company and to enable such directors to strengthen their common interest with the shareholders of the Company by providing them with the opportunity to increase their equity interest in the Company either through the acquisition of Company common stock or through the acquisition of common stock equivalents.

2. Definitions.

(a) “Board” means the Board of Directors of the Company.

(b) “Common Stock” means the common stock, par value $.01 per share, of the Company.

(d) "Fair Market Value" means the closing price of the Common Stock as reported by the New York Stock Exchange on the day of determination or, if the day of determination is not a trading day or there are no trades on the day of determination, the last trading day preceding the day of determination.

(e) “Governance Committee” means the Corporate Governance/Nominating Committee of the Board.

(f) “Non-Management Director” means a member of the Board who is not an employee of the Company or any of its subsidiaries.

3. Shares of Common Stock Subject to the Plan.

(a) Subject to the provisions of paragraph (b) below, the aggregate number of shares of Common Stock that may be issued under the Plan shall not exceed 500,000 shares. Such shares may, as determined by the Company, be authorized but unissued shares, treasury shares or shares purchased on the open market.

(b) In the event of any stock split, stock dividend, recapitalization, merger, consolidation, reorganization, combination, or exchange of shares or other similar event affecting the Common Stock, the number of shares of Common Stock reserved for issuance under the Plan shall be proportionately adjusted to the extent required to prevent dilution or enlargement of shares issuable under the Plan by reason of such transaction.

4. Administration of the Plan.

The Plan shall be administered by the Governance Committee, which, except as otherwise expressly provided herein, shall have the sole and complete authority to interpret the Plan and to make all other determinations necessary for the Plan’s administration. All action taken by the Governance Committee in the interpretation and administration of the Plan shall be final and binding on all concerned. The Governance Committee may designate officers and employees of the Company to assist the Governance Committee in the administration of the Plan by executing documents on behalf of the Company relating to the administration of the Plan and by performing such ministerial duties in connection with the administration of the Plan as are assigned to them by the Governance Committee.

5. Annual Retainer and Meeting Fees.

Each Non-Management Director shall receive as compensation for his or her services as a director an annual retainer and a per-meeting fee, in each case in an amount and payable at such time as the Board shall determine. Each Non-Management Director who serves as the chairman of a committee of the Board may receive as a fee for such services an additional annual retainer in an amount and payable at such time as the Board shall determine. The Board, at its discretion, may elect to pay prorated compensation to any Non-Management Director for services as a director or committee chairman for any portion of a year.

6. Form of Payment.

(a) Each Non-Management Director who is entitled to receive a retainer or fee under the Plan may elect, in respect of all or any portion of the payment as specified by the Non-Management Director, to receive, in lieu of a payment in cash, either (i) a number of whole shares of Common Stock determined by dividing (A) the amount of the retainer or fee that the Non-Management Director elects to receive in the form of Common Stock by (B) the Fair Market Value of the Common Stock as of the date on which the retainer or fee otherwise would be paid in cash (with cash issued for any fraction of a share) or (ii) a credit of an amount equal to the amount otherwise payable in cash to the Non-Management Director’s account under the Deferred Compensation Plan (a “ DCP Deferral Election”).

(b) In order to be effective, a DCP Deferral Election must be made prior to the year in which the retainer or fee is to be paid, and after the beginning of the year in which the retainer or fee is to be paid such election shall be irrevocable, except that if a individual first becomes a Non-Management Director during a year, a DCP Deferral Election must be made within 30 calendar days after the date the individual first becomes a Non-Employee Director and such election shall apply only to payments made in respect of service after the election is made. Elections to receive shares of Common Stock in lieu of cash may be made at any time prior to the date on which the cash payment otherwise is to be made. Notwithstanding the above, no modification may be made to a DCP Deferral Election, even prior to the beginning of the year in which the retainer or fee is to be paid, except in strict compliance with Section 409A(a)(4) of the Internal Revenue Code.

(c) The shares of Common Stock issued under the Plan shall not be subject to forfeiture and shall be free of any and all restrictions on transfer, except for any restrictions that may be required by law. Any such restrictions on transfer may be reflected in appropriate legends on the certificates for the shares.

7. Limitations on the Issuance of Shares.

No shares of Common Stock shall be issued under the Plan and no certificates representing shares of Common Stock shall be delivered:

(a) if any requisite approval or consent of any governmental authority having jurisdiction over the issuance of the shares shall not have been secured or if the issuance of shares of Common Stock would violate any federal, state or local law, regulation or order that may be applicable;

(b) at any time that the Common Stock is listed on a stock exchange, if the shares of Common Stock pursuant to the award shall not have been effectively listed on such exchange, unless the Company determines that such listing is not required; or

(c) at any time that the Company determines that the satisfaction of withholding tax or other withholding liabilities is necessary or desirable, unless such withholding shall have been effected.

8. No Registration.

The Company shall have no obligation to register any of the shares of Common Stock issuable under this Plan under the Securities Act of 1933, as amended, or under any state securities laws, but may in its discretion elect to do so if it determines that such registration is necessary or appropriate.

9. Taxes.

Each Non-Management Director (or the Non-Management Director’s beneficiary) shall be responsible for all applicable taxes on payments made to the Non-Management Director under the Plan (or beneficiary) regardless of the form of such payments. The Company may make appropriate arrangements to collect from any Non-Management Director (or the Non-Management Director’s beneficiary) the taxes, if any, that the Company may be required to be withheld by any government or government agency prior to payment under the Plan.

10. No Right to Continued Service

Neither the eligibility to participate in the Plan nor the receipt of any payment under the Plan shall confer upon any Non-Management Director the right to continue to serve as a director of the Company if validly removed or the right to be nominated for reelection as director.

11. No Prohibition on Other Compensation

Neither the existence of this Plan nor any provision of this Plan shall preclude the Company from authorizing or approving other plans or forms of compensation for directors of the Company.

12. Expenses

All reasonable expenses of administering the Plan shall be paid by the Company.

13. Amendment and Termination

The Board may amend, suspend, or terminate the Plan at any time; provided that no amendment shall be made without shareholder approval if shareholder approval is required by law, regulation, or securities exchange listing requirement.

14. Governing Law

The Plan shall be construed, administered, and regulated in accordance with the laws of the State of Delaware (excluding the choice of law provisions thereof) and any applicable requirements of federal law.

15. Effectiveness and Expiration of the Plan

The Plan shall become effective January 1, 2005, and, unless terminated earlier by the Board, shall expire on December 31, 2014, after which no further payments may be made under the Plan.

IN WITNESS WHEREOF, the Company has caused this Plan to be signed on this 3 rd day of November, 2008 which version reflects all modifications made to the Plan through such date of execution.

		PEPCO HOLDINGS, INC.

		By:	/s/ D. R. WRAASE
			Chairman of the Board and Chief Executive Officer

ATTEST

By:	/s/ ELLEN S. ROGERS
	Secretary

Pepco Holdings, Inc.

Annual Executive Incentive Compensation Plan

Plan Document

Pepco Holdings, Inc. ("PHI"; the "Company"), pursuant to authority granted by its Board of Directors, hereby establishes and adopts the PHI Executive Incentive Compensation Plan (the "Plan").

1. Purpose of the Plan . The PHI Annual Executive Incentive Compensation Plan is a cash-based incentive program designed to accomplish the following objectives:

Link annual corporate and business priorities and group performance goals.

Reinforce a high performance culture tying rewards to measurable accountabilities and achievement.

Recognize and reward individual performance and differentiate award levels based on absolute and relative contributions.

Provide a variable award opportunity as part of total compensation that enables the Company to attract, retain and motivate key executives.

2. Definitions. The following terms where used in this Plan, shall have the meanings set forth below:

"Award" shall mean an incentive payment made in accordance with the terms of this Plan.

"Board of Directors" or "Board" shall mean the Board of Directors of the Company.

"Business Unit" shall mean a discrete segment of the Company which has a separate incentive plan approved by the Committee.

"Chairman" shall mean Chairman of the Board of Directors of the Company.

"Compensation/Human Resources Committee" or "Committee" shall mean the Compensation/Human Resources Committee of the Board of Directors of the Company.

"Maximum Award Opportunity" shall mean an amount established annually for each Participant in the Plan which represents the maximum incentive payment which may be given under the Plan to that Participant for performance during the Plan Year.

"Participant" shall mean an executive selected to participate in the Plan.

"Performance Goals" shall mean goals which are established for the purpose of assisting the Chairman and the Committee in determining the amount, if any, of Awards to be made for performance during a Plan year and may include:

Annual performance objectives for the Company as a whole ("Corporate Performance Goals");

Business unit performance objectives for the business units of the Company ("Business Unit Performance Goals"); and

Individual performance goals for individual executives participating in the Plan ("Individual Performance Goals").

"Plan Year" shall mean a calendar year during which the Plan is in effect.

"Target Award Level" shall mean an amount established annually for each Participant in the Plan which represents the incentive opportunity which may be available to that Participant if all established Corporate, Business Unit and Individual Performance Goals are met, expressed as a percentage of base earnings, including deferred compensation (other than deferred Awards under the Plan).

3. Plan Administration

The Plan shall be administered in accordance with the terms of this Plan Document by the Compensation/Human Resources Committee upon the recommendations of the Chairman. All decisions of the Committee shall be binding and conclusive on the Participants in the Plan, and upon any party claiming an interest in the Plan through or on behalf of a Participant or former Participant, or on any other basis. Notwithstanding any other provision of the Plan, the Committee shall have the discretion to adjust or eliminate awards within any Participant's Maximum Award Opportunity. A Participant's participation in the Plan shall not be deemed to create a contractual relationship or any other form of obligation between the Participant and the Company, and shall not establish entitlement to any Award.

The Human Resources/Compensation Committee, upon recommendation of the Chairman, shall have the authority to do all such things as are appropriate to ensure the proper administration of this Plan according to its terms, including but not limited to:

(i) Approval of the Participants in the Plan;

(ii) Approval of Corporate Performance Goals;

(iii) Approval of Business Unit Performance Goals;

(iv)

Approval of (a) Target Award Levels, (b) Maximum Award Opportunities, and (c) allocation of the proportion of Awards to be based on Corporate, Business Unit and Individual Goals;

(v)

Determination of the Award, if any, that may be made to each Participant, such determination to be reported to the Board at its next regularly scheduled meeting after the determination is made; and

(vi)	Establishment of any policies, rules or regulations necessary for the proper administration of the Plan.

(vii)

Establishment of any future service requirements which must be met as a condition to the full vesting of an Award.

4. Participation . Participants in the Plan for a Plan Year shall be key executives of the Company, selected by the Chairman and approved by the Compensation/Human Resources Committee. The decision as to selection of participants shall normally be made for a Plan Year prior to the beginning of that Plan Year. The Committee may, however, upon the recommendation of the Chairman, add additional participants during the Plan Year.

If a Participant in the Plan retires, dies or becomes disabled prior to the determination of Awards for a Plan Year, the Participant, or his or her beneficiary, may be given an Award for that Plan Year. If the retirement, death or disability took place during the Plan Year, any such Award shall be made on a pro-rata basis. If a Participant's employment is terminated for any other reason during a Plan Year, no Award shall be made to or on behalf of that Participant for that Plan Year.

At no time shall any person have a right (i) to be selected as a Participant for any Plan Year, (ii) if so selected, to be entitled to any Award, or (iii) having been selected as

a Participant for one Plan Year, to be selected as a Participant for any subsequent Plan Year.

5. Performance Goals .

Corporate Performance Goals . The Compensation/Human Resources Committee, upon the recommendation of the Chairman, shall establish in advance of each Plan Year Corporate Performance Goals designed to accomplish the purpose set forth in Section 1 of the Plan. The Committee, upon the recommendation of the Chairman, shall have the authority to amend Corporate Performance Goals at any time when, in the Committee's judgment, unforeseen circumstances exist which require modification in order to ensure that the purpose of the Plan is properly served.

Business Unit Performance Goals . The Chairman, upon the recommendation of the senior officer of each of the business units of the Company shall establish in advance of each Plan Year Business Unit Performance Goals designed to accomplish the business plan of the business unit for the Plan Year. The Chairman, upon the recommendation of the senior officer of the business unit, shall have the authority to amend Business Unit Performance Goals at any time when, in the Chairman's judgment, unforeseen circumstances exist which require modification in order to ensure that the purpose of the Plan is properly served.

C.	Individual Performance Goals . Individual Performance Goals for Participants in the Plan shall be established in advance for each Plan Year. These Goals will be developed mutually by the Participant and the Senior Officer to whom the Participant reports, and will be reviewed and approved by the Chairman. Individual Performance Goals shall be designed to encourage the accomplishment of such management objectives as are deemed appropriate in light of the purpose of the Plan. The Chairman and any other officer involved in setting Individual Performance Goals, shall ensure that they meet the following general criteria:

	(1)	Business Unit and Individual Performance Goals shall not be established which conflict with the Corporate Performance Goals.

	(2)	Business Unit and Individual Performance Goals shall be considered so that the Goals of one Business Unit and/or Participant do not conflict inappropriately with the Goals of another Business Unit and/or Participant.

Future Service Requirements . The Chairman may condition any Participant’s right to receive all or any portion of an Award by establishing a future service requirement pursuant to which the Participant’s right to receive a designated portion of an Award will be forfeited if the Participant terminates employment for any reason other than death or disability after the Plan Year to which the Award relates and prior to the end of the designated service period.

6. Target Award Levels and Maximum Award Opportunities . The Compensation/Human Resources Committee shall establish in advance for each Plan Year the Target Awards Levels and Maximum Award Opportunities applicable to Participants in the Plan. Target Award Levels shall be expressed as a percentage of base salary including deferred compensation (other than deferred Awards under this Plan) earned during the Plan Year and may vary among individual Participants or among classes of Participants. Target Award Levels may also be allocated as between Corporate Performance Goals, Business Unit Performance Goals and Individual Performance Goals, by Participant or by classes of Participants. Maximum Award Opportunities shall be expressed as a percentage of Target Award Level and may vary among individual Participants or among classes of Participants.

7. Determination of Awards . The Compensation/Human Resources Committee shall determine the Awards, if any, to be made for each Plan Year as soon after the end of the Plan Year and is practicable, considering the purpose of the Plan, the Performance Goals and Target Award Levels previously established for that Plan Year, the actual performance of the Company and of each Business Unit and Participant during the Plan Year, and any other factor or circumstance the Committee, in its sole discretion determines to take into consideration.

8. Payment of Awards . Awards determined for each Plan Year shall be paid as soon as is practicable after both (i) such determination has been made and (ii) if applicable, any applicable future service requirement has been satisfied. In all events, such Award shall be paid prior to the expiration of two and one-half months following (i) the close of the Plan Year to which such Awards relate or (ii) if later, the close of the Plan Year during which any applicable future service requirement was satisfied. Payment will be made in a lump cash sum, except, if a Participant is otherwise eligible to participate in any executive deferred compensation plan of the Company, the Participant may elect to defer payment of any Award in whole or in part under the terms of that plan. Such election must have been exercised prior to the beginning of the Plan Year for which the Award is made unless the Participant first became a Participant after the beginning of the Plan Year.

9. Other Plans . Amounts received by Participants under this Plan shall not be considered compensation for the purpose of any other benefit plan maintained by the Company, unless the terms of such other benefit plan so provide.

10. Nothing contained in this Plan, and no action taken hereunder, shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and any executive, any beneficiary or any other person. To the extent that any person acquires a right to receive payments from the Company under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Company.

11. The right of any Participant, beneficiary, or other person to receive benefits under the Plan may not be assigned, transferred, pledged or encumbered except by will or by the laws of descent and distribution, nor shall it be subject to attachment or other legal process of whatever nature.

12. If the Company finds that any person to whom any payment is payable under this Plan is unable to care for his or her affairs because of illness or accident, or is a minor, any payment due (unless a prior claim therefore shall have been made by a fully appointed guardian, committee or other legal representative) may be paid to the spouse, a parent, or a brother or sister, or to any person deemed by the Company to have incurred expenses for the person who is otherwise entitled to payment, in such manner and proportions as the Company may determine. Any such payment will serve to discharge any liability of the Company under this Plan to make payment to the person who is otherwise entitled to payment.

13. To the extent required by law, the Company shall withhold federal or state income or payroll taxes from benefit payments hereunder and shall furnish the recipient and the applicable governmental agency or agencies with such reports, statements or information as may be legally required in connection therewith.

14. This Plan shall be construed in accordance with and governed by the laws of the District of Columbia.

IN WITNESS WHEREOF, the Company has caused this restated version of the Plan to be signed on this 9 th day of February, 2009.

		PEPCO HOLDINGS, INC.

		By:	/s/ D. R. WRAASE
			Chairman of the Board and Chief Executive Officer


By:	/s/ ELLEN S. ROGERS
	Secretary

PEPCO HOLDINGS, INC.

CHANGE-IN-CONTROL SEVERANCE PLAN

FOR CERTAIN EXECUTIVE EMPLOYEES

Section 1. INTRODUCTION

The Plan is intended to provide severance benefits to certain selected executive employees of the Employer in the event that their employment is terminated under certain circumstances following a Change in Control. The Plan shall be effective as of the Effective Date.

Section 2. DEFINITIONS

Except as may otherwise be specified or as the context may otherwise require, the following terms shall have the respective meanings set forth below whenever used herein:

a. “Base Salary” shall mean the annual base rate of regular compensation of a Participant immediately before a Change in Control, or if greater, the highest annual such rate at any time during the 12-month period immediately preceding the Change in Control.

b. “Benefit Factor” shall mean the multiple (either 3.0, 2.0 or 1.5) which has been assigned to each Participant pursuant to the recommendations of the Chairman and the approval of the Committee for purposes of determining the Participant’s benefit under Section 4.1(b).

c. “Board” shall mean the Board of Directors of the Company.

d. “Cause” shall mean (i) the willful and continued failure by a Participant substantially to perform his or her duties with the Employer (other than any such failure resulting from incapacity due to physical or mental illness of the Participant, or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason), (ii) the willful engaging by a Participant in conduct which is demonstrably and materially injurious to the Employer, monetarily or otherwise or (iii) conviction of a felony (or the entering into a plea of guilty or nolo contendere ) in a matter which relates to Employer’s business, which was conducted on the Employer’s premises or which was conducted while conducting the Employer’s business. For purposes hereof, no act, or failure to act, on a Participant’s part, shall be deemed “willful” unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that any act or omission was in the best interest of the Employer.

e. “Chairman” shall mean Chairman of the Board.

f. “Change in Control” shall mean the first to occur, after the Effective Date, of any of the following:

(i) if any Person is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Securities Exchange Act), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Subsidiaries) representing 35% or more of the combined voting power of the Company’s then outstanding securities;

(ii) if during any period of 12 consecutive months during the existence of the Plan commencing on or after the Effective Date, the individuals who, at the beginning of such period, constitute the Board (the “Incumbent Directors”) cease for any reason other than death to constitute at least a majority thereof; provided that a director who was not a director at the beginning of such 12-month period shall be deemed to have satisfied such 12-month requirement (and be an Incumbent Director) if such director was elected by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually (because they were directors at the beginning of such 12-month period) or by prior operation of this clause (ii);

(iii) the consummation of a merger or consolidation of the Company with any other corporation other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the beneficial owner, as defined in clause (i), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Subsidiaries) representing 50% or more of either the then outstanding shares of Stock of the Company or the combined voting power of the Company’s then outstanding securities; or

(iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company, or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets, other than a sale or disposition by the Company of all or substantially all of the Company’s assets to an entity, at least 50% of the combined voting power of the voting securities of which are owned by Persons in substantially the same proportion as their ownership of the Company immediately prior to such sale.

Upon the occurrence of a Change in Control as provided above, no subsequent event or condition shall constitute a Change in Control for purposes of the Plan. with the result that there can be no more than one Change in Control hereunder.

g. “Code” shall mean the Internal Revenue Code of 1986, as amended.

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h. “Committee” shall mean the Compensation/Human Resources Committee of the Board.

i. “Company” shall mean, subject to Section 8.1(a), Pepco Holdings, Inc., a Delaware corporation.

j. “Covered Termination” shall mean, with respect to a Participant, if, within the one-year period immediately following a Change in Control, the Participant (i) is terminated by the Employer without Cause (other than on account of death or Disability), or (ii) terminates his or her employment with the Employer for Good Reason. A Participant shall not be deemed to have terminated for purposes of the Plan merely because he or she ceases to be employed by the Employer and becomes employed by a new employer involved in the Change in Control provided that such new employer shall be bound by the Plan as if it were the Employer hereunder with respect to such Participant. It is expressly understood that no Covered Termination shall be deemed to have occurred merely because, upon the occurrence of a Change in Control, the Participant ceases to be employed by the Employer and does not become employed by a successor to the Employer after the Change in Control if the successor makes an offer to employ the Participant on terms and conditions which, if imposed by the Employer, would not give the Participant a basis on which to terminate employment for Good Reason.

k. “Date of Termination” shall mean the date on which a Covered Termination occurs.

l. “Disability” shall mean the occurrence after a Change in Control of the incapacity of a Participant due to physical or mental illness, whereby such Participant shall have been absent from the full-time performance of his or her duties with the Employer for six consecutive months.

m. “Effective Date” shall mean the date signed herein.

n. “Employer” shall mean the Company and each Subsidiary designated by the Board to adopt the Plan (and which so adopts the Plan), or, where the context so requires, the Company and such Subsidiaries collectively. The adoption of the Plan by a Subsidiary may be revoked only with the consent of the Board, any such revocation to be subject to Section 7; provided that a Subsidiary which ceases to be, directly or indirectly, through one or more intermediaries, controlling, controlled by or under common control with the Company prior to a Change in Control (other than in connection with and as an integral part of a series of transactions resulting in a Change in Control) shall, automatically and without any further action, cease to be (or be a part of) the Employer for purposes hereof (and the provisions of Section 7.3 shall not apply in such a case).

o. “Good Reason” shall mean, without the express written consent of the Participant, the occurrence after a Change in Control of any of the following circumstances, provided that the Participant provides written notification of such circumstances to the Employer no later than ninety (90) days from the original

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occurrence of such circumstances and the Employer fails to fully correct such circumstances within thirty (30) days of receipt of such notification:

(i) the assignment to the Participant of any duties inconsistent in any materially adverse respect with his or her position, authority, duties or responsibilities from those in effect immediately prior to the Change in Control;

(ii) a material reduction in the Participant’s base compensation, as such term is used in Treas. Reg. §1.409A(n)(2), as in effect immediately before the Change-in-Control;

(iii) a material diminution in the authority, duties, or responsibilities of the supervisor to whom the Participant is required to report;

(iv) a material diminution in the budget over which the Participant retains authority;

(v) the Company’s (or, if applicable, Subsidiary’s) requiring the Participant to be based in any office or location more than 50 miles from that location at which he or she performed his or her services immediately prior to the occurrence of a Change in Control, except for travel reasonably required in the performance of the Participant’s responsibilities or

(vi) the failure of the Employer to obtain a reasonable agreement from any successor to assume and agree to perform the Plan, as contemplated in Section 8.1(a) or any other action or inaction that constitutes a material breach by the Company of the agreement under which the Participant provides services to the Company.

p. “Notice of Termination” shall mean a notice given by the Employer or Participant, as applicable, which shall indicate the specific termination provision in the Plan relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Participant’s employment under the provisions so indicated.

q. “Participant” shall have the meaning ascribed thereto by Section 3.

r. “Person” shall have the meaning ascribed thereto by Section 3(a)(9) of the Securities Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof (except that such term shall not include (i) the Company or any of its Subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportion as their ownership of stock of the Company, or (v) with respect to any particular Participant, such Participant or any “group” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act) which includes such Participant).

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s. “Plan” shall mean this Pepco Holdings, Inc. Change-in-Control Severance Plan for Certain Executive Employees, as it may from time to time be amended in accordance with Section 7.

t. “Potential Change in Control” shall mean the occurrence, before a Change in Control, of any of the following:

(i) if the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control;

(ii) if the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control;

(iii) if any Person becomes the “beneficial owner” (as defined in Rule 13d-3 under the Securities Exchange Act), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Persons any securities acquired directly from the Company or its Subsidiaries) representing 15% or more of either the then outstanding shares of Stock of the Company or the combined voting power of the Company’s then outstanding securities; or

(iv) if the Board adopts a resolution to the effect that, for purposes of the Plan, a Potential Change in Control has occurred.

u. “Securities Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

v. “Service Factor” shall mean the number of months of additional service credit (18, 24 or 36) which as been assigned to each Participant pursuant to the recommendations of the Chairman and the approval of the Committee for purposes of determining the Participant’s benefit under Sections 4.1(c) and (i).

w. “Stock” shall mean the common stock, $.01 par value, of the Company.

x. “Subsidiary” shall mean any entity, directly or indirectly, through one or more intermediaries, controlled by the Company, and which has duly adopted the Plan.

y. “Target Annual Bonus” shall mean a Participant’s annual bonus for the Employer’s fiscal year in which the Date of Termination occurs, which bonus would be paid or payable if the Participant and the Employer were to satisfy all conditions to the Participant’s receiving the annual bonus at target (although not necessarily the maximum annual bonus); provided that such amount shall be annualized for any fiscal year consisting of less than 12 full months; and provided, further, that if at the time of a Change in Control it is substantially certain that a bonus at a level beyond target will be paid or payable for the fiscal year, then the bonus which is substantially certain to be paid or payable, rather than the target bonus, shall be used for these purposes.

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Section 3. PARTICIPATION

The employees of the Employer who shall be “Participants” for purposes hereof shall be, subject to Section 7, those employees of the Employer as shall be proposed by the Chairman for coverage hereby and approved by the Committee. Such proposal and approval process shall also include the determination of the Benefit Factor and Service Factor attributable to each Participant. The initial Participants and their respective Benefit Factors and Service Factors shall be as listed on Exhibit A hereto (which is hereby incorporated herein by reference) as in effect as of the Effective Date. The Company shall cause such Exhibit A to be amended to reflect the Participants participating in the Plan from time to time and their respective Benefit Factors and Service Factors.

Section 4. BENEFITS

4.1. If a Covered Termination occurs with respect to a Participant, then such Participant shall be entitled hereunder to the following:

(a) the product of (i) the Participant’s Target Annual Bonus for the year in which the Date of Termination occurs (or, if higher, as in effect at the time of the Change in Control) and (ii) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365;

(b) an amount equal to the product of (i) the Participant’s Benefit Factor for the year in which the Date of Termination occurs (or, if higher, as in effect at the time of the Change in Control), multiplied by (ii) the sum of (A) the Participant’s annual Base Salary for the year in which the Date of Termination occurs (or, if higher, as in effect at the time of the Change in Control) and (B) the Participant’s Target Annual Bonus for the year in which the Date of Termination occurs (or, if higher, as in effect at the time of the Change in Control);

(c) for a period of time after such termination equal to the Participant’s Service Factor for the year in which the Date of Termination occurs (or, if higher, as in effect at the time of the Change in Control), the Employer shall arrange to make available to such Participant medical, dental, group life and disability benefits that are at least at a level (and cost to the Participant) that is substantially similar in the aggregate to the level of such benefits which was available to such Participant immediately prior to the Change in Control; provided that (i) the Employer shall be required to provide group life and disability benefits only to the extent it is able to do so on reasonable terms and at a reasonable cost, (ii) the Employer shall not be required to provide benefits under this Section 4.1 (c) upon and after the Change in Control which are in excess of those provided to a significant number of employees of similar status who are employed by the Employer from time to time upon and after the Change in Control, (iii) no type of benefit otherwise to be made available to a Participant pursuant to this Section 4.1(c) shall be required to be made available to the extent that such type of benefit is made available to the Participant by any subsequent employer of such Participant and (iv) in the case of any payments or reimbursements to be made to such Participant, all such payments and

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reimbursements must be paid to such Participant prior to the last day of the third calendar year following the calendar year in which the Date of Termination occurs; and (v)to the extent necessary to avoid having any medical or dental benefits provided under this Paragraph treated as subject to the requirements of Section 409A of the Code, any medical or dental coverage relating to a period of time beyond the period of time during which the Participant would be entitled (or would, but for this Plan, be entitled) to continuation coverage under a group health plan of the Company under Section 4980B of the Code (COBRA) if the Participant elected such coverage and paid the applicable premiums, shall be provided through an insurance policy rather than a self-funded program

(d) in addition to the benefits to which a Participant is entitled under the Company’s tax-qualified defined benefit retirement plan in which the Participant participates (the “Retirement Plan”) and, if applicable, defined benefit supplemental executive retirement plan (the “SERP”), including any successor plans thereto, the Employer shall pay to each Participant in cash at the time and in the manner provided in Section 4.2:

(i) the present value of the retirement benefits (or, if available, the lump-sum retirement benefits) which would have accrued under the terms of the Retirement Plan and the SERP (without regard to any amendment to the Retirement Plan or the SERP made subsequent to a Change in Control and prior to the Date of Termination, which amendment adversely affects in any manner the computation of retirement benefits thereunder), determined as if such Participant was the number of months older than his or her actual age at the Date of Termination and had accumulated (after the Date of Termination) the number of additional months of service credit - both as established by such Participant’s Service Factor for the year in which the Date of Termination occurs (or, if higher, as in effect at the time of the Change in Control). Such number of additional months of service credit shall be applied for vesting, benefit accrual and eligibility purposes thereunder at his or her highest annual rate of compensation during the 12 months immediately preceding the Date of Termination (or, if higher, as in effect at the time of the Change in Control) and as if any benefit indexing factors continued at the rate applicable at the Date of Termination, minus

(ii) the present value of the vested retirement benefits (or, if available, the lump-sum retirement benefits) which had then accrued pursuant to the provisions of the Retirement Plan and the SERP; provided, however, that any payment otherwise provided for under this Section 4. 1. (d) shall be reduced by the present value of any retirement (including early retirement) incentives offered for a limited time to, and accepted by, the Participant (whether or not under a tax-qualified plan).

4.2. (a) The payments provided for in Section 4.1 shall (except as otherwise expressly provided therein or as provided in Section 4.2(b), or Section 4.2(c) or as otherwise expressly provided hereunder) be made as soon as practicable, but in no event later than 30 days, following the Date of Termination.

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(b) Notwithstanding any other provision of the Plan to the contrary, no payment or benefit otherwise provided for under or by virtue of the foregoing provisions of the Plan shall be paid or otherwise made available unless and until the Employer shall have first received from the applicable Participant (no later than 60 days after the Employer has provided to the Participant estimates relating to the payments to be made under the Plan) (i) a valid, binding and irrevocable general release and non-disparagement agreement, in form and substance acceptable to the Employer in its discretion; (ii) and a valid, binding and irrevocable covenant against competition and solicitation, in form and substance acceptable to the Employer, provided that the Employer shall be permitted to defer any payment or benefit otherwise provided for in the Plan to the 15 th day after its receipt of such release, covenant and time at which they have become valid, binding and irrevocable. The Employer may require that any such release contain an agreement of the Participant to notify the Employer of any benefit made available by a subsequent employer as contemplated by clause (iii) of the proviso to Section 4.1(c).

(c) Notwithstanding the above, if an individual who then qualifies as a “specified employee” as defined in Section 409A(a)(2)(B)(i) of the Code becomes entitled to a distribution from this Plan, as a result of a Covered Termination or otherwise becomes entitled to a payment under Section 6 of this Plan, then, to the extent and only to the extent required under Section 409A(a)(2)(B) of the Code, no distribution otherwise payable to such specified employee during the first six months after the date of such Covered Termination shall be paid to such specified employee until the date which is one day after the date which is six (6) months after the date of such Covered Termination (or, if earlier, the date of death of the specified employee).

4.3. Notwithstanding any other provision of the Plan to the contrary, to the extent permitted by the Worker Adjustment and Retraining Notification Act (“WARN’), any benefit payable hereunder to a Participant as a consequence of the Participant’s Covered Termination shall be reduced by any amounts required to be paid under Section 2104 of WARN to such Participant in connection with such Covered Termination.

Section 5. ADMINISTRATION

The Plan shall be administered by the Committee appointed by the Board, consisting of one or more individuals employed by the Employer or otherwise serving as a Director of the Company prior to the Change in Control. The acts of a majority of the members present at any meeting of the Committee at which a quorum is present, or acts approved in writing by a majority of the entire Committee, shall be the acts of the Committee for purposes of the Plan. If and to the extent applicable, no member of the Committee may act as to matters under the Plan specifically relating to such member. If any member of the Committee is to be replaced or otherwise ceases to be a member thereof upon or after a Change in Control, then the Chief Executive Officer of the Company (or, if he or she fails to act, the President, the Chief Operating Officer and the Chief Financial Officer, in that order) immediately prior to the Change in Control, and no other person, shall be permitted to designate a successor member. If at any time there is no Committee, the Chief Executive Officer shall have the rights and responsibilities of the Committee hereunder. The Committee shall have the full authority to employ and

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rely on such legal counsel, actuaries and accountants (which may also be those of the Employer), and other agents, designees and delegatees, as it may deem advisable to assist in the administration of the Plan. The Employer hereby indemnifies each member of the Committee for any liability or expense relating to the administration of the Plan, to the maximum extent permitted by law.

Section 6. PARACHUTE TAX PROVISIONS

6.1. If all, or any portion, of the payments and benefits provided under the Plan, if any, either alone or together with other payments and benefits which a Participant receives or is entitled to receive from the Company or its affiliates, would constitute an excess “parachute payment” within the meaning of Section 280G of the Code (whether or not under an existing plan, arrangement or other agreement) (each such parachute payment, a “Parachute Payment”), and would result in the imposition on the Participant of an excise tax under Section 4999 of the Code, then, in addition to any other benefits to which the Participant is entitled under the Plan or otherwise, the Participant shall be paid an amount in cash equal to the sum of the excise taxes payable by the Participant by reason of receiving Parachute Payments plus the amount necessary to place the Participant in the same after-tax position (taking into account any and all applicable federal, state and local excise, income or other taxes at the highest possible applicable rates on such Parachute Payments (including, without limitation, any payments under this Section 6.1) as if no excise taxes had been imposed with respect to Parachute Payments (the “Parachute Gross-up”). Any Parachute Gross-up otherwise required by this Section 6.1 shall not be made later than the time of the corresponding payment or benefit hereunder giving rise to the underlying Section 4999 excise tax, even if the payment of the excise tax is not required under the Code until a later time. Any Parachute Gross-up otherwise required under this Section 6.1 shall be made whether or not there is a Change in Control, whether or not payments or benefits are payable under the Plan, whether or not the payments or benefits giving rise to the Parachute Gross-up are made in respect of a Change in Control and whether or not the Participant’s employment with the Employer shall have been terminated.

6.2. Except as may otherwise be agreed to by the Company and the Participant, the amount or amounts (if any) payable under this Section 6 shall be as conclusively determined by the Company’s independent auditors, or other independent advisor (who served in such capacity immediately prior to the Change in Control), whose determination or determinations shall be final and binding on all parties. The Participant shall agree to utilize such determination or determinations, as applicable, in filing all of the Participant’s tax returns with respect to the excise tax imposed by Section 4999 of the Code. If such independent auditors refuse to make the required determinations, then such determinations shall be made by a comparable independent accounting firm of national reputation reasonably selected by the Company. Notwithstanding any other provision of the Plan to the contrary, as a condition to receiving any Parachute Gross-up payment, the Participant shall agree, in form and substance acceptable to the Company, to be bound by and comply with the provisions of this Section 6.2.

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Section 7. AMENDMENT AND TERMINATION

7.1. Subject to Section 7.2, the Board shall have the right in its discretion at any time to amend the Plan in any respect or to terminate the Plan prior to a Change in Control; provided that Exhibit A hereto may be amended from time to time as provided in Section 7.3 (b) below.

7.2. Notwithstanding any other provision of the Plan to the contrary:

(a) The Plan (including, without limitation, this Section 7.2) as applied to any particular Participant may not be amended or terminated at any time on or after the occurrence of a Change in Control in any manner adverse to the interests of such Participant, without the express written consent of such Participant.

(b) The Plan (including, without limitation, this Section 7.2) as applied to any particular Participant may not be amended or terminated at any time on or after the occurrence of a Potential Change in Control in any manner adverse to the interests of such Participant, without the prior written consent of such Participant, until such time as the transaction or transactions contemplated in connection with the Potential Change in Control, and all related negotiations, are abandoned in their entirety as determined in good-faith and reflected in writing (before a Change in Control) by the Board.

(c) If material negotiations involving the Board or the Chief Executive Officer of the Company have commenced regarding a transaction which, if consummated, would constitute a Change in Control, and the Plan is amended or terminated while such negotiations are continuing and actively being pursued by the Board or the Chief Executive Officer, then such amendment or termination of the Plan (including, without limitation, this Section 7.2), to the extent adverse to the interests of any particular Participant, shall be null and void as applied to such Participant with respect to the Change in Control (if any) which ultimately results directly from such negotiations, unless the written consent of such Participant to the amendment or termination is or has been obtained; it being expressly understood that this Section 7.2(c) shall not apply with respect to any negotiations which at any time prior to a Change in Control have ceased as determined in good faith and reflected in writing (prior to a Change in Control) by the Board or Chief Executive Officer (or which otherwise have ceased at a time prior to a Change in Control).

7.3. (a) If a Subsidiary, with the consent of the Board, purports to revoke its adoption of the Plan in accordance with the other terms of the Plan, such revocation shall be considered to constitute a Plan amendment for purposes of Section 7.2, and, therefore, any such purported revocation shall be subject to the restrictions of Section 7.2.

(b) If after an individual has become a Participant, any attempt is made in accordance with the other terms of the Plan not to include such individual as one of the Participants hereunder, then such exclusion shall be considered to constitute an amendment to the Plan for purposes of Section 7.2, and, therefore, any such purported exclusion shall be subject to the restrictions of Section 7.2.

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Section 8. MISCELLANEOUS

8.1. (a) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform under the terms of the Plan in the same manner and to the same extent that the Company and its affiliates would be required to perform it if no such succession had taken place (provided that such a requirement to perform which arises by operation of law shall be deemed to satisfy the requirements for such an express assumption and agreement), and in such event the Company (as constituted prior to such succession) shall have no further obligation under or with respect to the Plan. Failure of the Company to obtain such assumption and agreement with respect to any particular Participant prior to the effectiveness of any such succession shall be a breach of the terms of the Plan with respect to such Participant and shall entitle each such Participant to compensation from the Employer (as constituted prior to such succession) in the same amount and on the same terms as the Participant would be entitled to hereunder were the Participant’s employment terminated for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in the Plan, “Company” shall mean the Company as hereinbefore defined and any successor to its business or assets as aforesaid which assumes and agrees (or is otherwise required) to perform the Plan. Nothing in this Section 8. 1 (a) shall be deemed to cause any event or condition which would otherwise constitute a Change in Control not to constitute a Change in Control.

(b) Notwithstanding Section 8.1 (a), the Company shall remain liable to those Participants who have a Covered Termination upon a Change in Control because (i) they are not offered continuing employment by a successor to the Employer or (ii) the Participant declines such an offer and the Participant’s resulting termination of employment otherwise constitutes a Covered Termination hereunder.

(c) To the maximum extent permitted by law, the right of any Participant or other person to any amount under the Plan may not be subject to voluntary or involuntary anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment or garnishment by creditors of the Participant or such other person.

(d) The terms of the Plan shall inure to the benefit of and be enforceable by the personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees of each Participant. If a Participant shall die while an amount would still be payable to the Participant hereunder if they had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of the Plan to the Participant’s devisee, legatee or other designee or, if there is no such designee, their estate.

8.2. Except as expressly provided in Section 4.1, Participants shall not be required to mitigate damages or the amount of any payment provided for under the Plan by seeking other employment or otherwise, nor will any payments or benefits hereunder be subject to offset in the event a Participant does mitigate.

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8.3. The Employer shall pay all legal fees and expenses incurred in a legal proceeding by a Participant in seeking to obtain or enforce any right or benefit provided by the Plan. Such payments are to be made within five days after a Participant’s request for payment accompanied with such evidence of fees and expenses incurred as the Employer reasonably may require; provided that if the Participant institutes a proceeding and the judge or other decision-maker presiding over the proceeding affirmatively finds that such Participant has failed to prevail substantially, he or she shall pay his or her own costs and expenses (and, if applicable, return any amounts theretofore paid on his or her behalf under this Section 8.3)

8.4. (a) A Participant may file a claim for benefits under the Plan by written communication to the Committee or its designee. A claim is not considered filed until such communication is actually received by the Committee or such designee. Within 90 days ( or, if special circumstances require an extension of time for processing, 180 days, in which case notice of such special circumstances shall be provided within the initial 90-day period) after the filing of the claim, the Committee shall:

(i) approve the claim and take appropriate steps for satisfaction of the claim; or

(ii) if the claim is wholly or partially denied, advise the claimant of such denial by furnishing to him or her a written notice of such denial setting forth (A) the specific reason or reasons for the denial; (B) specific reference to pertinent provisions of the Plan on which the denial is based and, if the denial is based in whole or in part on any rule of construction or interpretation adopted by the Committee, a reference to such rule, a copy of which shall be provided to the claimant; (C) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of the reasons why such material or information is necessary; and (D) a reference to this Section 8.4.

(b) The claimant may request a review of any denial of his or her claim by

written application to the Committee within 60 days after receipt of the notice of denial of such claim. Within 60 days (or, if special circumstances require an extension of time for processing, 120 days, in which case notice of such special circumstances shall be provided within the initial 60-day period) after receipt of written application for review, the Committee shall provide the claimant with its decision in writing, including, if the claimant’s claim is not approved, specific reasons for the decision and specific references to the Plan’s provisions on which the decision is based.

8.5. All notices under the Plan shall be in writing, and if to the Company or the Committee, shall be delivered to the General Counsel of the Company, or mailed to the Company’s principal office, addressed to the attention of the General Counsel of the Company; and if to a Participant (or the estate or beneficiary thereof), shall be delivered personally or mailed to the Participant at the address appearing in the records of the Company.

8.6. Unless otherwise determined by the Employer in an applicable plan or arrangement, no amounts payable hereunder upon a Covered Termination shall be

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deemed salary or compensation for the purpose of computing benefits under any employee benefit plan or other arrangement of the Employer for the benefit of its employees unless the Employer shall determine otherwise.

8.7. With respect to each Participant, the Plan is the exclusive arrangement applicable to payments and benefits in connection with a change in control of the Company (whether or not a Change in Control), and supersedes any prior arrangements involving the Company or its predecessors or affiliates (including, without limitation, Conectiv and Pepco) relating to changes in control (whether or not Changes

in Control). Participation in the Plan shall not limit any right of a Participant to receive any payments or benefits under an employee benefit or executive compensation plan of the Employer, initially adopted as of or after the Effective Date, or otherwise listed on Exhibit B hereto, which are expressly contingent thereunder upon the occurrence of a change in control (including, but not limited to, the acceleration of any rights or benefits thereunder); provided that in no event shall any Participant be entitled to any payment or benefit under the Plan which duplicates a payment or benefit received or receivable by the Participant under any severance or similar plan or policy of the Employer.

8.8. Any payments hereunder shall be made out of the general assets of the Employer. Each Participant shall have the status of general unsecured creditors of the Employer, and the Plan constitutes a mere promise by the Employer to make payments under the Plan in the future as and to the extent provided herein.

8.9. Nothing in the Plan shall confer on any individual any right to continue in the employ of the Employer or interfere in any way (other than by virtue of requiring payments or benefits as may expressly be provided herein) with the right of the Employer to terminate the individual’s employment at any time.

8.10. The Employer shall be entitled to withhold from any payments or deemed payments any amount of tax withholding required by law.

8.11. The invalidity or unenforceability of any provision of the Plan shall not affect the validity or enforceability of any other provision of the Plan which shall remain in full force and effect.

8.12. The use of captions in the Plan is for convenience. The captions are not intended to and do not provide substantive rights.

8.13 The Plan shall be construed, administered and enforced according to the laws of the State of Delaware, without regard to principles of conflicts of law, except to the extent preempted by federal law.

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IN WITNESS WHEREOF , the Company has caused this Plan to be signed effective this 3 rd day of November 2008 which version reflects all modifications made to the Plan through such date of execution.

ATTEST		PEPCO HOLDINGS, INC.

By:	/s/ ELLEN S. ROGERS	By:	/s/ D. R. WRAASE
	Corporate Secretary		Chief Executive Officer

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PEPCO HOLDINGS, INC.

COMBINED EXECUTIVE RETIREMENT PLAN

The Pepco Holdings, Inc. Combined Executive Retirement Plan is intended to serve as an amended and restated nonqualified executive retirement plan which represents in one plan document, a combination and merger of three previously separate nonqualified executive retirement plans, specifically, the Pepco Holdings, Inc. Supplemental Executive Retirement Plan, the Pepco Holdings, Inc. Supplemental Benefit Plan and the Pepco Holdings, Inc. Executive Performance Supplemental Retirement Plan (hereinafter sometimes collectively referred to as the “Prior Plans”).

The separate benefit structure previously created under the former Pepco Holdings, Inc. Supplemental Executive Retirement Plan is referred to herein as the “Supplemental Executive Retirement Benefit Structure.” The separate benefit structure previously created under the former Pepco Holdings, Inc. Supplemental Benefit Plan is referred to herein as the “Supplemental Benefit Structure.” The separate benefit structure previously created under the former Pepco Holdings, Inc. Executive Performance Supplemental Retirement Plan is referred to herein as the “Executive Performance Supplemental Retirement Benefit Structure.”

The creation of this Plan as a mechanism to merge and centralize the administration of the Prior Plans and the benefit structures thereunder is not intended to constitute a material modification (as utilized in the context of Section 409A of the Internal Revenue Code of 1984, as amended) to any of the Prior Plans and this Plan shall be interpreted and administered in a manner which is consistent with such intent.

I. Definitions

1.1 Applicable Executive Incentive Compensation Plan ¾ The principal annual incentive compensation plan in which the Participant participates.

1.2 Applicable Form of Benefit ¾ The type of life annuity which will be provided to a Participant receiving benefits under this Plan. In the case of a Participant who is not married on the date benefits under this Plan commence, the Plan benefit shall be paid in the form of a single life annuity in which payments will be made to the Participant throughout the Participant’s lifetime and will terminate upon the Participant’s death. In the case of a Participant who is married on the date benefits under this Plan commence, the Plan benefit shall be paid in an actuarially equivalent amount but in the form of a joint and survivor annuity in which payments will be made to the Participant throughout the Participant’s lifetime. Upon the Participant’s death, should the Participant be survived by the spouse to whom the Participant was married on the date benefits under this Plan commenced, such surviving spouse shall be entitled to receive a reduced benefit throughout the surviving spouse’s lifetime equivalent to 50% of the benefit amount payable to the Participant during the Participant’s lifetime. No alternative benefit options are provided under this Plan.

1.3 Applicable Defined Benefit Pension Plan ¾ The principal defined benefit pension plan of Pepco Holdings or one of its subsidiaries in which the Participant participates. In the case of Participants who participate in the General Retirement Plan, such term shall also include participation in the Exempt Surviving Spouse Welfare Plan.

1.4 Committee ¾ The Compensation/Human Resources Committee of the Board of Directors of the Company.

1.5 Company ¾ Pepco Holdings, Inc. or its successor.

1.6 Eligible Executive ¾ An executive who is described in Section 2.1 of this Plan.

1.7 Exempt Surviving Spouse Welfare Plan ¾ The welfare plan by the same name which was sponsored by Pepco prior to the Merger.

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1.8 General Retirement Plan ¾ The defined benefit pension plan by the same name which was sponsored by Pepco prior to the Merger.

1.9 Participant ¾ In the case of the Supplemental Executive Retirement Benefit Structure and the Executive Performance Supplemental Retirement Benefit Structure, an Eligible Executive who has satisfied the conditions described in Section 2.1 and to whom the provisions of Section 2.2 are not applicable. In the case of the Supplemental Benefit Structure, an employee who has been so designated as described in Section 2.1.

1.10 Participation Agreement ¾ The separate agreement with a designated Participant which sets forth the constructive years of Benefit Service which will be credited to the Participant for purposes of determining benefits under the Supplemental Executive Retirement Benefit Structure.

1.11 Plan ¾ The Pepco Holdings, Inc. Combined Executive Retirement Plan.

Any term which is not defined in this section or any other section of the Plan will have the same meaning as that term has under the Applicable Defined Benefit Pension Plan.

II.

Eligibility and Participation

2.1 Any employee of any Pepco Holdings subsidiary as designated by the Chief Executive Officer of the Company (the Chief Executive Officer to be designated by the Board) shall be eligible to participate in this Plan; however, no employee shall be eligible to participate in the Executive Performance Supplemental Retirement Benefit Structure of this Plan if the compensation used to determine benefits for such employee under the Applicable Defined Benefit Pension Plan in which the employee participates includes remuneration in excess of such employee’s basic rate of compensation.

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2.2 An employee shall cease to be a Participant in this Plan and shall not be entitled to any benefits under the Executive Performance Supplemental Retirement Benefit Structure or the Supplemental Executive Retirement Benefit Structure if the employment of such employee is terminated for any reason, other than death, before the later of (i) the date the employee attains age 59, or (ii) the date the employee first attains either his Early Retirement Date or his Normal Retirement Date under the Applicable Defined Benefit Pension Plan.

2.3 In order to receive benefits under the Executive Performance Supplemental Retirement Benefit Structure of the Plan, a Participant (i) must not have incurred a forfeiture of benefits under Section 2.2 and (ii) must have been an Eligible Executive within the twelve (12) months immediately preceding his actual retirement under the Applicable Defined Benefit Pension Plan, and either (a) have held such position for at least a five year period, or (b) have attained age 65.

III.

Retirement Benefits

3.1(a) Supplemental Executive Retirement Benefit Structure . This Section 3.1(a) defines the amount of retirement income which will be paid to a Participant (who terminated employment on or after attaining age 59 for any reason other than death) under the Supplemental Retirement Benefit Structure to supplement other pension benefits. The amount of retirement benefits payable from this Plan under the Supplemental Retirement Benefit Structure in the Applicable Form of Benefit shall be the difference, if any, between (i) the amount of the benefits to which such Participant would be entitled under the provisions of the Applicable Defined Benefit Pension Plan, the provisions of the Executive Performance Supplemental Benefit Structure and the provisions of the Supplemental Benefit Structure (expressed in the Applicable Form of Benefit) had the number of such Participant’s years of service used to calculate the

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benefits under such Plan and such Benefit Structures been increased by the additional years of constructive service set forth in such Participant’s Participation Agreement, and (ii) the amount of benefits, if any, to which such Participant is otherwise entitled under the Applicable Defined Benefit Pension Plan, the Executive Performance Supplemental Benefit Structure and the Supplemental Benefit Structure. Notwithstanding the above, in no event will a Participant be granted constructive years of service hereunder which would cause the combination of his actual years of service credited under the Applicable Defined Benefit Pension Plan and his constructive years of service granted hereunder to exceed the lesser of (i) forty (40), or (ii) the number by which the Participant’s then current age exceeds twenty-five (25). To the extent that a cost of living adjustment is made to the benefits payable under the Applicable Defined Benefit Pension Plan, a comparable and proportionate adjustment will be made to the benefits payable hereunder.

3.1(b) Executive Performance Supplemental Retirement Benefit Structure. This Section 3.1(b) defines the amount of retirement income which will be paid to a Participant under the Executive Performance Supplemental Retirement Benefit Structure of this Plan to supplement other pension benefits. The amount of retirement benefits payable under the Performance Supplemental Retirement Benefit Structure of this Plan in the Applicable Form of Benefit shall be the difference, if any, between (i) the aggregate amount of the benefits to which such Participant would be entitled under the provisions of the Applicable Defined Benefit Pension Plan, the provisions of the Supplemental Executive Retirement Benefit Structure and the provisions of the Supplemental Benefit Structure (expressed in the Applicable Form of Benefit) (a) had the amount of compensation used under the Applicable Defined Benefit Pension Plan to calculate benefits (expressed on an annual basis) been increased by the average of the three highest Awards made to such Participant (or such number of Awards actually made to such

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Participant if less than three) under the Applicable Executive Incentive Compensation Plan (without regard to any deferral of receipt of an Award elected by such Participant) within the five consecutive years immediately preceding the Participant’s retirement under the Applicable Defined Benefit Pension Plan, and (b)(1) had the amount of the benefits under such Plan and such Benefit Structures not been otherwise reduced due to the limitations imposed by Section 415 of the Internal Revenue Code, (2) had any dollar limitation under the Internal Revenue Code on the amount of compensation that may be considered in determining benefits under such Plan and such Benefit Structures not been imposed, and (3) had the deferred compensation earned by such Participant which was excluded from the Participant’s compensation base used in determining retirement benefits under such Plan and such Benefit Structures been included in such compensation base, and (ii) the amount of benefits, if any, to which such Participant is otherwise entitled under the Applicable Defined Benefit Pension Plan, the Supplemental Executive Retirement Benefit Structure and the Supplemental Benefit Structure. To the extent that a cost of living adjustment is made to benefits payable under the Applicable Defined Benefit Pension Plan, a comparable and proportional adjustment will be made to the benefits payable herein.

3.1(c) Supplemental Benefit Structure . This Section 3.1(c) defines the amount of retirement income which will be paid to a Participant under the Supplemental Benefit Structure to supplement other pension benefits. The amount of retirement benefits payable under the Supplemental Benefit Structure of this Plan in the Applicable Form of Benefit shall be the difference, if any, between (i) the amount of the benefits to which such Participant would be entitled under the provisions of the Applicable Defined Benefit Pension Plan and the Conectiv Supplemental Executive Retirement Plan, if applicable (expressed in the Applicable Form of

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Benefit) (1) had the amount of the benefits under such plan not been otherwise reduced due to the limitations imposed by Section 415 of the Internal Revenue Code, (2) had any dollar limitation under the Internal Revenue Code on the amount of compensation that may be considered in determining benefits under such plan not been imposed, and (3) had the deferred compensation earned by such Participant which was excluded from the Participant’s compensation base used in determining retirement benefits under such plan been included in such compensation base, and (ii) the amount of benefits, if any, to which such Participant is otherwise entitled under the Applicable Defined Benefit Pension Plan. To the extent that a cost of living adjustment is made to the benefits payable under the Applicable Defined Benefit Pension Plan, a comparable and proportionate adjustment will be made to the benefits payable hereunder.

A Participant’s rights to a benefit under the Supplemental Benefit Structure shall vest when the Participant otherwise would be vested under the terms and conditions of the Applicable Defined Benefit Pension Plan.

A Participant whose employment with the Company is terminated prior to the attainment of a vested retirement benefit under the Applicable Defined Benefit Pension Plan shall not be entitled to receive a benefit from the Supplemental Benefit Structure of this Plan.

For bookkeeping purposes only, the Company will establish and maintain a Supplemental Benefit Account for each Participant which reflects the Participant’s currently accrued benefit under the Supplemental Benefit Structure, expressed in the form of straight life annuity.

The Company shall furnish each Participant with an annual statement, as of December 31 of each year, showing the benefit under the Supplemental Benefit Structure which the Participant is eligible to receive.

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3.2 “The monthly benefit provided to a Participant under Section 3.1(a), Section 3.1(b) and Section 3.1(c) shall commence as of the first day of the month following the Participant’s separation from service, as defined in Section 409A of the Internal Revenue Code, subject to the provisions of the second paragraph of this Section 3.2.

Notwithstanding the above, if an individual who then qualifies as a “specified employee,” as defined in Section 409A(a)(2A)(B)(i) of the Internal Revenue Code, incurs a separation from service for any reason other than death and becomes entitled to a distribution from this Plan (including a distribution payable pursuant to Section 3.7 as a result of such separation from service) then, to the extent required by Section 409A(a)(2)(B), no distribution otherwise payable to such specified employee during the first six (6) months after the date of such separation from service, shall be paid to such specified employee until the date which is one day after the date which is six (6) months after the date of such separation from service (or, if earlier, the date of death of the specified employee).”

3.3 Death Benefits ¾ This Section 3.3 defines the amount of death benefits, if any, which will be paid to the surviving spouse of a Participant who dies while employed by the Company.

(a) In order to receive death benefits under the Supplemental Executive Retirement Benefit Structure and the Executive Performance Supplemental Retirement Benefit Structure, a surviving spouse must have been legally married to the Participant for at least one (1) year prior to the Participant’s death and the sum of the Participant’s actual years of service used to calculate the benefits under the Applicable Defined Benefit Pension Plan and constructive years of service granted under the Supplemental Executive Retirement Benefit Structure must equal at least ten (10) years.

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(b) The amount of death benefits payable under the Supplemental Executive Retirement Benefit Structure of this Plan shall be the difference, if any, between (i) (a) the amount of the death benefits to which such surviving spouse would have been entitled under the provisions of the Applicable Defined Benefit Pension Plan, the provisions of the Executive Performance Supplemental Retirement Benefit Structure and the Supplemental Benefit Structure (expressed as a single life annuity) had the number of years of service used to calculate the benefits under the Applicable Defined Benefit Pension Plan been increased by the additional constructive years of service set forth in such Participant’s Participation Agreement, and (b) the amount of the benefits to which such surviving spouse would otherwise be entitled under such plans.

(c) The amount of death benefits payable under the Executive Performance Supplemental Retirement Benefit Structure shall be the difference, if any, between (i) the amount for the death benefits to which such surviving spouse would have been entitled under the provisions of the Applicable Defined Benefit Pension Plan, the Supplemental Executive Retirement Benefit Structure and the Supplemental Benefit Structure (expressed as a single life annuity) (a) had the amount of the Participant’s compensation used under the Applicable Defined Benefit Pension Plan to calculate benefits (expressed on an annual basis) under such Plan and such Benefit Structures been increased by the average of the three highest Awards made to such Participant (or such number of Awards actually made to such Participant if less than three) under the Executive Incentive Compensation Plan (without regard to any deferral of receipt of an Award elected by such Participant) within the five consecutive years immediately preceding the Participant’s retirement under the Applicable Defined Benefit Pension Plan or death, as the case may be and (b)(1) had the amount of the benefits under such Plan and such Benefit Structures

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not been otherwise reduced due to the limitations imposed by Section 415 of the Internal Revenue Code, (2) had any dollar limitation under the Internal Revenue Code on the amount of compensation that may be considered in determining benefits under such Plan and such Benefit Structures not been imposed, and (3) had the deferred compensation earned by the Participant which was excluded from the Participant’s compensation base used in determining retirement benefits under such Plan and such Benefit Structures been included in such compensation base, and (ii) the amount of the benefits, if any, to which the surviving spouse would otherwise be entitled under the Applicable Defined Benefit Pension Plan, the Supplemental Executive Retirement Benefit Structure and the Supplemental Benefit Structure.

(d) Death benefits payable under the Supplemental Benefit Structure will be payable to the surviving spouse, in accordance with Section 1.2, commencing as of the first day of the month following the month in which the Participant dies.

3.4 The monthly death benefit provided to a surviving spouse under Sections 3.3(b) and (c) shall commence as of the first day of the month following the month in which the Participant dies.”

3.5 Loss of Benefits

(a) Notwithstanding any other section of this Plan, if a Participant is discharged by the Company because of misfeasance, malfeasance, dishonesty, fraud, misappropriation of funds, or commission of a felony, or if the Committee determines that the Participant has made a material misrepresentation regarding the amount or nature of any pension, retirement or deferred compensation benefits resulting from Participant’s prior employment, such Participant’s rights to any benefit under this Plan shall be forfeited.

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(b) If during his employment with the Company or after the Participant has ceased to be employed by the Company, and after providing him an opportunity to be heard, following 30 days written notice, sent by registered mail, return receipt requested, the Committee finds that such Participant has used or is using trade secrets or other confidential, secret or proprietary information gained while in the employ of the Company in a manner which is, or is likely to be detrimental to the best interests of the Company, the Committee shall notify such Participant of such findings and stop all current and future distributions of his interest hereunder. If within one year of the date or such notice, it is determined by the Committee upon proof submitted by such Participant that he has ceased to so use such information and the Company’s loss from such Participant’s past and future improper use of such information is likely to be insubstantial in proportion to the future loss of his benefit hereunder, the Committee may reinstate him; and, if payment of his retirement income has stopped, it shall be resumed. If he is not reinstated within one year of such notice, the Committee shall cancel his interest hereunder.

3.6 Facility of Payment ¾ If the Committee shall find that any person to whom a benefit is payable is unable to care for his affairs because of illness or accident, any payment due hereunder (unless a prior claim therefor shall have been made by a duly appointed guardian, committee, or other legal representative) may be paid to the spouse, a child, children, a parent, or a brother or sister, or to any person deemed by the Company to have incurred expense for such person otherwise entitled to payment. Any such payment shall be a complete discharge of all liability under the Plan therefor.

3.7 Payment of Benefits Upon Change in Control

(a) Notwithstanding any other provisions of the Plan except Section 3.5, if a Participant terminates employment before the later of (i) the date the employee attains age 59, or

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(ii) the date the employee first attains either his Early Retirement Date or his Normal Retirement Date under the Applicable Defined Benefit Pension for any reason other than death following the occurrence of an event described in subsection (b) of this Section 3.7, the entitlements of such Participant under the Supplemental Executive Retirement Benefit Structure and the Executive Performance Supplemental Retirement Benefit Structure of the Plan shall be paid to him in a lump sum within thirty (30) days of the date of his termination of employment. The amount of such lump sum payment shall be computed in two steps. Under the first step, a calculation will be made of the monthly annuity payments to which such Participant would otherwise have been entitled under the provisions of Section 3.1(a) and Section 3.1(b) of the Plan based upon (a) the service performed by the Participant through the date of such termination of employment, plus (b) the additional years of constructive service set forth in such Participant’s Participation Agreement (hereinafter collectively referred to as “Aggregate Service”) under the assumptions that (i) the Participant was scheduled to commence receipt of benefits under this Plan as of the earliest date on which the Participant could receive benefits under the Applicable Defined Benefit Pension Plan that were not subject to the early retirement reduction factor described in Section 3.02(a) of such plan determined as if such Participant’s years of Vesting Service under the Applicable Defined Benefit Pension Plan equaled his Aggregate Service and (ii) this Plan did not contain any minimum age requirement as to eligibility for receipt of benefits. Under the second step, such monthly annuity payments will be discounted to their present value as of the date of the Participant’s termination of employment using the Pension Benefit Guaranty Corporation’s immediate payment interest rate in effect on the date of the Participant’s termination of employment plus one-half of one percent (1/2%).

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(b) The provisions of subsection (a) of this Section 3.7 shall apply in the event that (i) any “person” (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 35% or more of the combined voting power of the Company’s then outstanding securities; or (ii) during any period of twelve (12) consecutive months (not including any period prior to the adoption of this Plan), individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i) or (iii) of this subsection (b)) whose election by the Board of Directors of the Company or nomination for election by the Company’s stockholders was approved by a vote of at least a majority of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, the stockholders of the Company approve a plan of complete liquidation of the

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Company, or the stockholders of the Company approve an agreement for the sale or disposition by the Company of all or substantially all the Company’s assets. It is acknowledged that an event described in the subsection (b) of this Section 3.7 did occur as of August 1, 2002 in respect of individuals then employed by Potomac Electric Power Company and individuals then employed by Conectiv, Inc. as a result of a merger transaction involving such two entities and that the provisions of Section 3.7(a) currently apply to such individuals.

IV.

Administration of the Plan

4.1 Administration ¾ The Compensation/Human Resources Committee of the Board of Directors shall administer the Plan.

(a) The Committee shall have the sole, exclusive authority to interpret and construe the provisions of this Plan, to decide any disputes which may arise with regard to the rights of employees under the terms of this Plan, to give instructions and directions necessary hereunder and, in general, to direct the administration of the Plan. All fees, salaries, and other costs incurred in connection therewith shall be paid by the Company.

(b) The Committee shall keep or cause to be kept, records containing all relevant data pertaining to Participants and their rights under this Plan, and is charged with the primary duty of seeing that each Participant receives the benefits to which he may be entitled under this Plan.

4.2 Accounts and Reports ¾ The Company and its officers, employees and directors or designees and the Committee shall be entitled to rely upon all tables, valuations, certificates and reports furnished by any actuary selected by the Committee; upon all certificates and reports made by any accountant selected by the Committee; and upon all opinions given by any legal counsel selected by the Committee; and the Company and its officers and directors or designees

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and the Committee shall be fully protected in respect of any action taken or suffered by them in good faith in reliance upon any tables, valuations, certificates, reports, opinions, or other advice furnished by any such actuary, accountant, or counsel; and all action so taken or suffered shall be conclusive upon each of them and upon all Participants of the Plan.

4.3 Expenses of Administration ¾ All expenses shall be paid by the Company.

4.4 Liability ¾ The Company, the Board of Directors, the Committee, officers and employees shall incur no liability for any action taken in good faith in connection with the administration of this Plan. The Company may provide all appropriate and necessary insurance to render the aforesaid harmless from any and all liability incurred in their duties.

Funding

5.1 Company Contributions ¾ No assets of the Company shall be set aside or earmarked or placed in trust or escrow for the benefit of any Participant to fund the Company’s obligations which may exist under the Plan; provided, however, that the Company may establish a grantor trust to hold assets to secure the Company’s obligations to the Participants under this Plan if the establishment of such a trust does not result in the Plan being ‘funded’ for purposes of the Internal Revenue Code of 1986, as amended. The Company has established a grantor trust (Trust 2 originally executed on May 1, 1995) to hold assets to secure the Company’s obligations to the Participants under the Supplemental Benefit Structure and the Executive Performance Supplemental Retirement Benefit Structure of this Plan in such a manner that the establishment of such a trust does not result in the Plan being “funded” for purposes of the Internal Revenue Code of 1986, as amended. Such trust initially received a transfer of a Ten Thousand Dollars ($10,000). However, such trust provides that the full present value of the benefits payable under such Benefit Structures shall subsequently be contributed to the trust in the event the Company

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fails to pay such benefits due hereunder in a timely manner. Except to the extent provided through a grantor trust established under the provisions of the preceding sentences, all payments under this Plan shall be made out of the Company’s general revenue and a Participant’s right to payments shall be solely that of an unsecured general creditor of the Company.

5.2 Employee Contributions ¾ No Participant shall be required or permitted to make any contribution to the Plan.

VI.

Miscellaneous

6.1 Limitation of Responsibility ¾ Neither the establishment of the Plan, any modifications thereof, nor the payment of any benefits shall be construed as giving to any Participant or other person any legal or equitable right against the Company, (the Board of Directors, the Committee, or any officer or employee) except as herein provided; and in no event shall the other terms of employment of any employee be modified or in any way affected thereby.

6.2 Restrictions on Alienation and Assignment ¾ Except as any of the following provisions may be contrary to the law of any state having jurisdiction in the premises, no Participant, or beneficiary shall have the right to assign transfer, hypothecate, encumber, commute or anticipate his interest in any payments under this Plan, and such payments shall not in any way be subject to any legal process to levy upon or attach the same for payment of any claim against any Participant, or beneficiary.

6.3 Failure to Claim Amounts Payable under the Plan ¾ In the event that any amount shall become payable hereunder to any person or, upon his death, to his surviving spouse and if after written notice from the Committee mailed to such person’s last known address as shown in the Company’s records, such person or his personal representative shall not have presented

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himself to the Committee within six months after mailing of such notice, the Committee may, but it is not required to, determine that such person’s interest in the Plan has terminated, which determination shall be conclusive upon all persons provided, however, in lieu of the foregoing, the Committee may in its sole discretion apply to a court of competent jurisdiction for direction as to the distribution of such amount.

6.4 Right of the Company to Dismiss or Demote Employees ¾ Neither the action of the Company in establishing this Plan nor any action taken by it under any provisions of this Plan shall be construed as giving to any employee of the Company the right to be retained in any specific position or in its employ in general or any right to any retirement income or benefit or to any payment whatsoever, except to the extent of the benefits which may be provided for by the express provisions of this Plan. The Company expressly reserves the right at any time, to dismiss, demote or reduce the compensation of any employee without incurring any liability for any claim against itself for any payment whatsoever.

6.5 Amendment and Termination ¾ Nothing in this Plan shall be deemed to limit the Company’s right, by resolution of the Board of Directors of the Company, to amend, modify or terminate the Plan at any time and for any reason except that no such amendment, modification or termination shall serve to decrease the benefits set forth in a Participant’s Participation Agreement, other than by operation of Section 3.5 or by operation of an involuntary termination of employment under the rights reserved to the Company in Section 6.4.

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6.6 Laws to Govern ¾ The provisions of this Plan shall be construed, administered, and enforced according to the laws of the District of Columbia.

IN WITNESS WHEREOF , the Company has caused this Plan to be signed effective this 3 rd day of November 2008.

ATTEST		PEPCO HOLDINGS, INC.

By:	/s/ ELLEN S. ROGERS	By:	/s/ D. R. WRAASE
	Corporate Secretary		Chief Executive Officer

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Exhibit 10.30

NAMED EXECUTIVE OFFICER COMPENSATION DETERMINATIONS

2009 Named Executive Officer Compensation Determinations

The following is a description of certain compensation decisions made on January 22, 2009, and, in the case of Anthony J. Kamerick, on February 26, 2009, in connection with his promotion to Senior Vice President and Chief Regulatory Officer, by the Pepco Holdings, Inc. (“PHI”) Board of Directors or the Compensation/Human Resources Committee (the “Committee”) thereof with respect to the compensation payable to the PHI executive officers identified below, each of whom is an executive officer listed in the Summary Compensation Table included in PHI’s proxy statement for its 2008 Annual Meeting (a “Named Executive Officer”). As to each executive officer listed below, the decisions consisted of (i) the establishment of base salary for 2009, (ii) the establishment of the executive’s 2009 annual bonus opportunity and (iii) the establishment of the executive’s award opportunities for the period 2009-2011 pursuant to the Performance Stock Program and Restricted Stock Program under the Pepco Holdings, Inc. Long-Term Incentive Plan (the “LTIP”).

					2009 Long-Term Incentive Plan Awards (2)
Name	Title		2009 Base Salary	Target 2009 Annual Bonus Opportunity as a Percentage of Base Salary (1)	Performance Stock Program Award Opportunity (# of shares) (3)		Restricted Stock Program Award (# of shares) (4)
Dennis R. Wraase	Chairman	$	1,076,000	0%	Target Maximum	0 0	0
Joseph M. Rigby	President and Chief Executive Officer	$	820,000	100%	Target Maximum	58,554 117,108	29,277
Paul H. Barry	Senior Vice President and Chief Financial Officer	$	518,000	60%	Target Maximum	19,582 39,164	9,791
William T. Torgerson	Vice Chairman and Chief Legal Officer	$	558,000	60%	Target Maximum	21,094 42,188	10,547
Anthony J. Kamerick	Senior Vice President and Chief Regulatory Officer	$	320,000	50%	Target Maximum	7,998 15,996	3,999

(1)

An executive can earn from 0 to 180% of this percentage of his base salary as a cash bonus depending on the extent to which the preestablished performance goals are achieved. See “Executive Incentive Compensation Plan” below for 2009 performance goals.

(2)

The market value of the PHI common stock, $.01 par value (“Common Stock”) (determined based on the average of the high and low Common Stock price as traded on the New York Stock Exchange on December 31, 2008), representing the executive’s combined (i) target award opportunity under the Performance Stock Program and (ii) share award under the Restricted Stock Program is equal to the following percentage of the executive’s 2009 base salary: 200% for Mr. Rigby; 100% for Messrs. Barry and Torgerson; and 70% for Mr. Kamerick.

(3)

See “Long-Term Incentive Plan Awards -- Performance Stock Program” below for a description of the Performance Stock Program.

(4)

See “Long-Term Incentive Plan Awards -- Restricted Stock Program” below for a description of the restricted stock awards.

Executive Incentive Compensation Plan

Each of the executive officers listed in the table above is a participant in the PHI Executive Incentive Compensation Plan. On January 22, 2009, the Committee established as the performance goals to be used for the determination of 2009 cash bonus awards for each of the executive officers (1) earnings relative to the corporate plan, (2) cash flow, (3) electric system reliability, (4) customer satisfaction, (5) diversity and (6) safety.

Long-Term Incentive Plan Awards

On January 22, 2009 and, in the case of Messrs. Rigby and Kamerick, on February 26, 2009, in connection with their promotions, the Committee established award opportunities pursuant to the Performance Stock Program and made awards of restricted stock under the Restricted Stock Program under the LTIP. Participants in the LTIP are key executives of PHI and its subsidiaries selected by the Chairman of the Board of PHI and approved by the Committee, including each of the executive officers listed in the table above.

Performance Stock Program

The award opportunities established under the Performance Stock Program, which account for two-thirds of each participant’s aggregate 2009 Long-Term Incentive Plan award opportunity, relate to performance over a three-year period beginning in 2009 and ending in 2011. Depending on the extent to which the preestablished performance criteria are satisfied, the participant can earn from 0 to 200% of the target award in the form of shares of Common Stock. The performance criteria consist of an earnings-per-share goal, which will account for 75% of the potential award, and cash flow per share goal, which will account for 25% of the potential award. If during the course of the three-year performance period, a significant event occurs, as determined in the discretion of the Compensation/Human Resources Committee, which the Committee expects to have a substantial effect on total shareholder performance during the period, the Committee may revise such measures. The target award opportunity and maximum award opportunity (representing 200% of the target award opportunity) of each listed executive officer are shown in the table above.

Restricted Stock Program

Under the Restricted Stock Program, each listed executive officer has received a grant of shares of restricted stock, which accounts for one-third of the executive’s aggregate 2009 Long-Term Incentive Plan award opportunity. The shares of restricted stock are subject to forfeiture if the employment of the executive terminates before January 22, 2012, except that in the event of death, disability or retirement, the award is prorated to the date of termination. During the vesting period, the executive has all rights of ownership with respect to the shares, including the right to vote the shares and the right to receive dividends on the shares, which dividends the executive will be entitled to retain whether or not the shares vest.

2008 AMENDMENT

EMPLOYMENT AGREEMENT

This Amendment (the "Amendment") to the EMPLOYMENT AGREEMENT (the "Agreement") made as of August 1, 2002 between PEPCO HOLDINGS, INC. (the "Company") and WILLIAM T. TORGERSON (the "Executive ") is adopted by the parties hereto to be effective as of August 1, 2008.

WHEREAS, the Parties wish to modify and supplement the terms of the Employee's employment with the Company for compliance with Section 409A of the Internal Revenue Code of 1986, as amended (the "Code"), as hereinafter provided;

WHEREAS, while the Agreement must be operated in compliance with Code Section 409A, pursuant to guidance issued by the Internal Revenue Service amendments to comply with the provisions Code Section 409A to bring the applicable document into compliance with Code Section 409A must be made no later than December 31, 2008, to be effective no later than January 1, 2009:

Accordingly, the Parties agree as follows:

Section 5(b)(i) is amended in is entirety to read as follows:

"(i) Any outstanding service based restricted stock that would become vested (that is, transferable and nonforfeitable) if the Executive remained an employee through the Term of this Agreement will become vested as of the date of the Executive's termination of employment. In addition, with respect to any outstanding performance based restricted stock and any restricted stock the Company has agreed to award the Executive at the end of a performance period subject to the Company's achievement of performance goals, if the date as of which the restricted stock is to become vested falls within the Term of this Agreement, the stock will become vested, at the end of the performance period if and to the extent that the performance goals are met."

Section 5(b)(iv) is deleted in its entirety.

Section 5(d)(iv) shall be added to the Agreement to read as follows:

"(iv) Any Gross-up Payment shall be made not later than the end of the Executive's taxable year next following the taxable year in which the Executive remits the excise tax under Code Section 4999 and any taxes related thereto."

Section 15 shall be added to the Agreement to read as follows:

(a) Notwithstanding any provision herein or in any other agreement with the Company to the contrary, if the Executive qualifies as a "specified employee", as defined in Code Section 409A(2)(B)(i) at the time of the Executive's separation from service

for any reason other than death, any benefits otherwise provided or payable which are subject to Code Section 409A(a)(2)(B) shall be subject to a six month deferral in payment and will not be otherwise payable, or provided to the Executive, until the earlier of the date of the Employee's death or six months after the date of such separation from service. Any amounts that are deferred in respect of this six month restriction shall be paid to Executive as soon as practicable after the end of the six- month period (or date of death if earlier), but in no event later than 5 business days after the end of such six month period, at which time any remaining payments and benefits will continue to be paid and provided for in the normal form described in herein.

(b) Notwithstanding any provision herein, any payment or benefit under this Agreement which is considered a reimbursement under Code Section 409A must be made no later than the last day of the Executive's taxable year following the Executive's taxable year in which the expense subject to the reimbursement was incurred."

This Amendment shall be effective August 1, 2008.

IN WITNESS WHEREOF, the Parties hereto, intending to be legally bound hereby, have executed this Agreement.

EXECUTIVE
/s/ William T. Torgerson
PEPCO HOLDINGS, INC.
By:	/s/ D. R. Wraase
	Name:	Dennis R. Wraase
	Title:	Chairman & CEO

$390,000,000 CREDIT AGREEMENT

BY AND AMONG

PEPCO HOLDINGS, INC.

as Borrower

and

THE LENDERS PARTY HERETO

and

BANK OF AMERICA, N.A.

as Administrative Agent and Swingline Lender

BANC OF AMERICA SECURITIES LLC,

as Sole Lead Arranger and Sole Book Runner

KEYBANK NATIONAL ASSOCIATION

JPMORGAN CHASE BANK, N.A.

SUNTRUST BANK

THE BANK OF NOVA SCOTIA

MORGAN STANLEY BANK

CREDIT SUISSE, CAYMAN ISLANDS BRANCH

WACHOVIA BANK, NATIONAL ASSOCIATION

as Co-Documentation Agents

Dated as of November 7, 2008

TABLE OF CONTENTS
		Page
ARTICLE I DEFINITIONS		1
1.1	Definitions	1
1.2	Interpretation	12
1.3	Accounting	12
ARTICLE II THE LOANS		13
2.1	Commitments	13
2.2	Increase in Commitments	15
2.3	Required Payments; Termination	15
2.4	[Intentionally Omitted.]	15
2.5	Ratable Loans	15
2.6	Types of Advances	15
2.7	Commitment Fee; Reductions in Aggregate Commitment	16
2.8	Minimum Amount of Each Advance	16
2.9	Prepayments	16
2.10	Method of Selecting Types and Interest Periods for New Advances	16
2.11	Conversion and Continuation of Outstanding Advances	17
2.12	Changes in Interest Rate, etc.	18
2.13	Rates Applicable After Default	18
2.14	Method of Payment	18
2.15	Noteless Agreement; Evidence of Indebtedness	18
2.16	Telephonic Notices	19
2.17	Interest Payment Dates; Interest and Fee Basis	19
2.18	Notification of Advances, Interest Rates, Prepayments and Commitment Reductions	19
2.19	Lending Installations	20
2.20	Non-Receipt of Funds by the Agent	20
ARTICLE III YIELD PROTECTION; TAXES		20
3.1	Yield Protection	20
3.2	Changes in Capital Adequacy Regulations	21
3.3	Availability of Types of Advances	21
3.4	Funding Indemnification	21
3.5	Taxes	22
3.6	Mitigation of Circumstances; Lender Statements; Survival of Indemnity	23
3.7	Replacement of Lender	24
ARTICLE IV CONDITIONS PRECEDENT		24
4.1	Conditions Precedent to Closing and Borrowing	24
4.2	Each Credit Extension	25
ARTICLE V REPRESENTATIONS AND WARRANTIES		25
5.1	Existence and Standing	25
5.2	Authorization and Validity	25
5.3	No Conflict; Government Consent	26
5.4	Financial Statements	26
5.5	No Material Adverse Change	26
5.6	Taxes	26
5.7	Litigation and Contingent Obligations	26
5.8	Significant Subsidiaries	26
5.9	ERISA	27
5.10	Accuracy of Information	27

5.11	Regulation U	27
5.12	Material Agreements	27
5.13	Compliance With Laws	27
5.14	Plan Assets; Prohibited Transactions	27
5.15	Environmental Matters	27
5.16	Investment Company Act	27
5.17	Insurance	28
5.18	No Default	28
5.19	Ownership of Properties	28
5.20	OFAC	28
ARTICLE VI COVENANTS		28
6.1	Financial Reporting	28
6.2	Use of Proceeds	30
6.3	Notice of Default	30
6.4	Conduct of Business	30
6.5	Taxes	30
6.6	Insurance	30
6.7	Compliance with Laws	30
6.8	Maintenance of Properties	31
6.9	Inspection	31
6.10	Merger	31
6.11	Sales of Assets	31
6.12	Liens	32
6.13	Leverage Ratio	34
ARTICLE VII DEFAULTS		34
7.1	Representation or Warranty	34
7.2	Nonpayment	34
7.3	Certain Covenant Breaches	34
7.4	Other Breaches	34
7.5	Cross Default	34
7.6	Voluntary Bankruptcy, etc.	35
7.7	Involuntary Bankruptcy, etc.	35
7.8	Seizure of Property, etc.	35
7.9	Judgments	35
7.10	ERISA	35
7.11	Unenforceability of Loan Documents	36
7.12	Change in Control	36
ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES		36
8.1	Acceleration	36
8.2	Amendments	36
8.3	Preservation of Rights	37
ARTICLE IX GENERAL PROVISIONS		37
9.1	Survival of Representations	37
9.2	Governmental Regulation	37
9.3	Headings	37
9.4	Entire Agreement	37
9.5	Several Obligations; Benefits of this Agreement	37
9.6	Expenses; Indemnification	37
9.7	Numbers of Documents	38
9.8	Disclosure	38
9.9	Severability of Provisions	38

9.10	Nonliability of Lenders	38
9.11	Limited Disclosure	39
9.12	Nonreliance	39
9.13	USA PATRIOT ACT NOTIFICATION	39
9.14	Interest Rate Limitation	39
ARTICLE X THE AGENT		40
10.1	Appointment; Nature of Relationship	40
10.2	Powers	40
10.3	General Immunity	40
10.4	No Responsibility for Loans Recitals etc.	41
10.5	Action on Instructions of Lenders	41
10.6	Employment of Agents and Counsel	41
10.7	Reliance on Documents; Counsel	41
10.8	Agent’s Reimbursement and Indemnification	41
10.9	Notice of Default	42
10.10	Rights as a Lender	42
10.11	Lender Credit Decision	42
10.12	Successor Agent	42
10.13	Agent’s Fee	43
10.14	Delegation to Affiliates	43
10.15	Other Agents	43
ARTICLE XI SETOFF; RATABLE PAYMENTS		43
11.1	Setoff	43
11.2	Ratable Payments	44
ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS		44
12.1	Successors and Assigns	44
12.2	Participations	45
12.3	Assignments	45
12.4	Dissemination of Information	46
12.5	Grant of Funding Option to SPC	46
12.6	Tax Treatment	47
ARTICLE XIII NOTICES		47
12.1	Notices	47
ARTICLE XIV COUNTERPARTS		48
ARTICLE XV CHOICE OF LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL		48
15.1	CHOICE OF LAW	48
15.2	CONSENT TO JURISDICTION	49
15.3	WAIVER OF JURY TRIAL;SERVICE OF PROCESS	49

EXHIBITS

EXHIBIT A	COMPLIANCE CERTIFICATE
EXHIBIT B	ASSIGNMENT AGREEMENT
EXHIBIT C	NOTE
EXHIBIT D	FORM OF INCREASE NOTICE

SCHEDULES

SCHEDULE 1	PRICING SCHEDULE
SCHEDULE 2	COMMITMENTS AND PRO RATA SHARES
SCHEDULE 3	SIGNIFICANT SUBSIDIARIES
SCHEDULE 4	LIENS

iii

CREDIT AGREEMENT

This CREDIT AGREEMENT, dated as of November 7, 2008, is by and among Pepco Holdings, Inc. (the “Borrower”), the Lenders (defined herein) and Bank of America N.A., as administrative agent.

RECITALS

WHEREAS, Borrower has requested and the Lenders have agreed to make available to Borrower, on an unsecured basis, a revolving credit facility in the initial principal amount of $390,000,000, upon the terms and conditions set forth herein, for the purpose of supporting commercial paper obligations and other general corporate purposes of Borrower.

NOW THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows:

ARTICLE I

DEFINITIONS

1.1 Definitions . As used in this Agreement:

“ ACE ” means Atlantic City Electric Company.

“ Administrative Questionnaire ” means an administrative questionnaire, substantially in the form supplied by the Agent, completed by a Lender and furnished to the Agent in connection with this Agreement.

“ Advance ” means a borrowing hereunder (i) made by the Lenders on the same Borrowing Date or (ii) converted or continued by the Lenders on the same date of conversion or continuation, consisting, in either case, of the aggregate amount of the several Revolving Loans of the same Type and, in the case of Eurodollar Loans, for the same Interest Period. “ Advance ” shall include the borrowing of Swingline Loans.

“ Affected Lender ” is defined in Section 3.7 .

“ Affiliate ” of any Person means any other Person directly or indirectly controlling, controlled by or under common control with such Person. A Person shall be deemed to control another Person if the controlling Person owns 10% or more of any class of voting securities (or other ownership interests) of the controlled Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of stock, by contract or otherwise. For purposes of Section 5.20 , no person shall be an “Affiliate” of Borrower solely by reason of owning less than a majority of any class of voting securities of Borrower.

“ Agent ” means Bank of America in its capacity as contractual representative of the Lenders pursuant to Article X , and not in its individual capacity as a Lender, and any successor Agent appointed pursuant to Article X .

“ Aggregate Commitment ” means the aggregate of the Commitments of all the Lenders, (a) as increased from time to time pursuant to Section 2.2 or (b) as reduced from time to time pursuant to the terms hereof.

“ Agreement ” means this Credit Agreement as amended, restated, supplemented or otherwise modified from time to time.

“ Agreement Accounting Principles ” means generally accepted accounting principles as in effect from time to time, applied, with respect to Borrower, in a manner consistent with that used in preparing Borrower’s financial statements referred to in Section 5.4 .

“ Alternate Base Rate ” means, for any day, a rate of interest per annum equal to (a) the highest of (i) the Prime Rate for such day, (ii) the sum of the Federal Funds Effective Rate for such day plus 0.5% and (iii) one month Eurodollar Base Rate plus 1.0% plus (b) the Applicable Margin.

“ Applicable Governmental Authorities ” means, with respect to Borrower, the SEC or any other federal or state governmental authority that has the power to regulate the amount, terms or conditions of short-term debt of Borrower.

“ Applicable Margin ” means, with respect to Eurodollar Advances or Floating Rate Advances, as applicable, to Borrower at any time, the percentage rate per annum which is applicable at such time with respect to Eurodollar Advances or Floating Rate Advances, as applicable, to Borrower in accordance with the provisions of the Pricing Schedule .

“ Arranger ” means Banc of America Securities LLC and its successors, in its capacity as sole lead arranger and book runner.

“ Assignment Agreement ” means an agreement substantially in the form of Exhibit B .

“ Authorized Officer ” means any of the President, any Senior Vice President, any Vice President, the Chief Financial Officer, the Treasurer or any Assistant Treasurer of Borrower, acting singly. Any document delivered hereunder that is signed by an Authorized Officer shall be conclusively presumed to have been authorized by all necessary corporate and/or other action on the part of the Borrower and such Authorized Officer shall be conclusively presumed to have acted on behalf of the Borrower.

“ Bank of America ” means Bank of America, N.A., a national banking association, and its successors.

“ Borrower ” is defined in the preamble.

“ Borrowing Date ” means a date on which an Advance is made hereunder.

“ Borrowing Notice ” is defined in Section 2.10 .

“ Business Day ” means (i) with respect to any borrowing, payment or rate selection of Eurodollar Advances, a day (other than a Saturday or Sunday) on which banks generally are open in New York, New York for the conduct of substantially all of their commercial lending activities, interbank wire transfers can be made on the Fedwire system and dealings in United States dollars are carried on in the London interbank market and (ii) for all other purposes, a day (other than a Saturday or Sunday) on which banks generally are open in New York, New York for the conduct of substantially all of their commercial lending activities and interbank wire transfers can be made on the Fedwire system.

“ Capitalized Lease ” of a Person means any lease of Property by such Person as lessee which would be capitalized on a balance sheet of such Person prepared in accordance with Agreement Accounting Principles.

“ Capitalized Lease Obligations ” of a Person means the amount of the obligations of such Person under Capitalized Leases which would be shown as a liability on a balance sheet of such Person prepared in accordance with Agreement Accounting Principles.

“ Change in Control ” means an event or series of events by which (a) any Person, or two or more Persons acting in concert, acquire beneficial ownership (within the meaning of Rule 13d-3 of the SEC under the Securities Exchange Act of 1934) of 30% or more (by number of votes) of the outstanding shares of Voting Stock of Borrower; or (b) individuals who on the Closing Date were directors of Borrower (the “ Approved Directors ”) shall cease for any reason to constitute a majority of the board of directors of Borrower; provided that any individual becoming a member of such board of directors subsequent to such date whose election or nomination for election by Borrower’s shareholders was approved by a majority of the Approved Directors shall be deemed to be an Approved Director, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened solicitation of proxies or consents for the election or removal of one or more directors by any Person, or two or more Persons acting in concert, other than a solicitation for the election of one or more directors by or on behalf of the board of directors.

“ Closing Date ” means the date hereof.

“ Code ” means the Internal Revenue Code of 1986.

“ Commitment ” means, for each Lender, the obligation of such Lender to make Revolving Loans and to participate in Swingline Loans, in an aggregate amount not exceeding the amount set forth on Schedule 2 or as set forth in any Assignment Agreement relating to any assignment that has become effective pursuant to Section 12.3(ii) , as such amount may be modified from time to time pursuant to the terms hereof.

“ Commitment Fee Rate ” means, at any time, the “ Commitment Fee Rate ” applicable at such time in accordance with the provisions of the Pricing Schedule .

“ Contingent Obligation ” of a Person means any agreement, undertaking or arrangement by which such Person assumes, guarantees, endorses, contingently agrees to purchase or provide funds for the payment of, or otherwise becomes or is contingently liable upon, the obligation or liability of any other Person, or agrees to maintain the net worth or working capital or other financial condition of any other Person, or otherwise assures any creditor of such other Person against loss, including any comfort letter, operating agreement, take or pay contract, application for a letter of credit or the obligations of any such Person as general partner of a partnership with respect to the liabilities of such partnership; provided that Contingent Obligations shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Contingent Obligation shall be deemed equal to the stated or determinable amount of the primary obligation of such other Person or, if such amount is not stated or is indeterminable, the maximum reasonably anticipated liability of such Person in respect thereof.

“ Controlled Group ” means all members of a controlled group of corporations or other business entities and all trades or businesses (whether or not incorporated) under common control which, together with Borrower or any of its Subsidiaries, are treated as a single employer under Section 414 of the Code.

“ Conversion/Continuation Notice ” is defined in Section 2.11 .

“ Credit Extension ” means the making of an Advance.

“ Default ” means an event described in Article VII .

“ Defaulting Lender ” means any Lender that (a) has failed to fund any portion of the Loans or participations in Swingline Loans required to be funded by it hereunder within one Business Day of the date required to be funded by it hereunder, (b) has otherwise failed to pay over to the Agent or any other Lender any other amount required to be paid by it hereunder within one Business Day of the date when due, unless the subject of a good faith dispute, or (c) has been deemed insolvent or become the subject of a bankruptcy or insolvency proceeding.

“ DPL ” means Delmarva Power & Light Company.

“ Environmental Laws ” means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and other governmental restrictions relating to (i) the protection of the environment, (ii) the effect of the environment on human health, (iii) emissions, discharges or releases of pollutants, contaminants, hazardous substances or wastes into surface water, ground water or land, or (iv) the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, hazardous substances or wastes or the clean-up or other remediation thereof.

“ ERISA ” means the Employee Retirement Income Security Act of 1974.

“ Eurodollar Advance ” means an Advance which, except as otherwise provided in Section 2.13 , bears interest at the applicable Eurodollar Rate or, if such Advance is a Swingline Loan, the Eurodollar Market Index Rate.

“ Eurodollar Base Rate ” means, with respect to a Eurodollar Advance for the relevant Interest Period, the applicable British Bankers’ Association Interest Settlement Rate for deposits in U.S. dollars appearing on Reuters Screen FRBD as of 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, and having a maturity equal to such Interest Period, provided that (i) if Reuters Screen FRBD is not available to the Agent for any reason, the applicable Eurodollar Base Rate for the relevant Interest Period shall instead be the applicable British Bankers’ Association Interest Settlement Rate for deposits in U.S. dollars as reported by any other generally recognized financial information service as of 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, and having a maturity equal to such Interest Period, and (ii) if no such British Bankers’ Association Interest Settlement Rate is available to the Agent, the applicable Eurodollar Base Rate for the relevant Interest Period shall instead be the rate determined by the Agent to be the rate at which Bank of America or one of its Affiliate banks offers to place deposits in U.S. dollars with first-class banks in the London interbank market at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, in the approximate amount of Bank of America’s relevant Eurodollar Loan and having a maturity equal to such Interest Period.

“ Eurodollar Loan ” means a Loan which, except as otherwise provided in Section 2.13 , bears interest at the applicable Eurodollar Rate or, if such Loan is a Swingline Loan, the Eurodollar Market Index Rate.

“ Eurodollar Market Index Rate ” means, with respect to a Swingline Loan, for any day, the sum of (i) the quotient of (a) the Eurodollar Base Rate on such day for an Interest Period of one (1) month, divided by (b) one minus the Reserve Requirement (expressed as a decimal) applicable to such Interest Period, plus (ii) the Applicable Margin.

“ Eurodollar Rate ” means, with respect to a Eurodollar Advance (other than a Swingline Loan) for the relevant Interest Period, the sum of (i) the quotient of (a) the Eurodollar Base Rate applicable to such Interest Period, divided by (b) one minus the Reserve Requirement (expressed as a decimal) applicable to such Interest Period, plus (ii) the Applicable Margin.

“ Excluded Taxes ” means, in the case of each Lender or applicable Lending Installation, the Swingline Lender and the Agent, taxes imposed on its overall net income, and franchise taxes imposed on it, by (i) the jurisdiction under the laws of which such Lender, the Swingline Lender or the Agent is incorporated or organized or (ii) the jurisdiction in which such Lender’s, the Swingline Lender’s or the Agent’s principal executive office or such Lender’s applicable Lending Installation is located.

“ Facility Termination Date ” means November 6, 2009, or any earlier date on which the Aggregate Commitment is reduced to zero or the obligations of the Lenders to make Credit Extensions to Borrower is terminated pursuant to Section 8.1 .

“ Federal Funds Effective Rate ” means, for any day, an interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published for such day (or, if such day is not a Business Day, for the immediately preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 11:00 a.m. on such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by the Agent in its sole discretion.

“ FERC ” means the Federal Energy Regulatory Commission.

“ Floating Rate Advance ” means an Advance which, except as otherwise provided in Section 2.13 , bears interest at the Alternate Base Rate.

“ Floating Rate Loan ” means a Loan which, except as otherwise provided in Section 2.13 , bears interest at the Alternate Base Rate.

“ FRB ” means the Board of Governors of the Federal Reserve System and any successor thereto.

“ Granting Lender ” is defined in Section 12.5 .

“ Hybrid Securities ” means any trust preferred securities, or deferrable interest subordinated debt with a maturity of at least 20 years, which provides for the optional or mandatory deferral of interest or distributions, issued by Borrower, or any business trusts, limited liability companies, limited partnerships or similar entities (i) substantially all of the common equity, general partner or similar interest of which are owned (either directly or indirectly through one or more wholly owned Subsidiaries) at all times by Borrower or any of its Subsidiaries, (ii) that have been formed for the purpose of issuing hybrid securities or deferrable interest subordinated debt, and (iii) substantially all the assets of which consist of (A) subordinated debt of Borrower or a Subsidiary of Borrower, and (B) payments made from time to time on the subordinated debt.

“ Impacted Lender ” means any Lender as to which (a) Agent has a good faith belief that the Lender has defaulted in fulfilling its obligations under one or more other syndicated credit facilities or (b) an entity that controls the Lender has been deemed insolvent or become subject to a bankruptcy or other similar proceeding.

“ Increase Notice ” is defined in Section 2.2 .

“ Indebtedness ” of a Person means, without duplication, such Person’s (i) obligations for borrowed money, (ii) obligations representing the deferred purchase price of Property or services (other than accounts payable arising in the ordinary course of such Person’s business payable on terms customary in the trade), (iii) obligations, whether or not assumed, secured by Liens or payable out of the proceeds or production from Property now or hereafter owned or acquired by such Person, (iv) obligations which are evidenced by notes, bonds, debentures, acceptances or similar instruments, (v) obligations of such Person to purchase accounts, securities or other Property arising out of or in connection with the sale of the same or substantially similar accounts, securities or Property, (vi) Capitalized Lease Obligations, (vii) net liabilities under interest rate swap, exchange or cap agreements, obligations or other liabilities with respect to accounts or notes, (viii) obligations under any Synthetic Lease which, if such Synthetic Lease were accounted for as a Capitalized Lease, would appear on a balance sheet of such Person, (ix) unpaid reimbursement obligations in respect of letters of credit issued for the account of such Person and (x) Contingent Obligations in respect of Indebtedness of the types described above.

“ Intangible Transition Property ” means assets described as “ bondable transition property ” in the New Jersey Transition Bond Statute.

“ Interest Period ” means, with respect to a Eurodollar Advance (other than a Swingline Loan), a period of one, two, three or six months commencing on a Business Day selected by Borrower for an Advance pursuant to this Agreement; provided, that with respect to any period during the period commencing September 1, 2009 and ending on the Facility Termination Date, Borrower may select a period of one or two weeks, if available, commencing on a Business Day selected by Borrower for an Advance pursuant to this Agreement. Such Interest Period shall end on the day which corresponds numerically to such date one, two, three or six months thereafter, provided that if there is no such numerically corresponding day in such next, second, third or sixth succeeding month, such Interest Period shall end on the last Business Day of such next, second, third or sixth succeeding month. If an Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall end on the next succeeding Business Day, provided that if said next succeeding Business Day falls in a new calendar month, such Interest Period shall end on the immediately preceding Business Day. Borrower may not select an Interest Period which ends after the scheduled Facility Termination Date.

“ Lenders ” means each of the Persons identified as a “Lender” on the signature pages hereto and their successors and assigns and, as the context requires, the Swingline Lender.

“ Lending Installation ” means, with respect to a Lender, the office, branch, subsidiary or affiliate of such Lender specified as such in its Administrative Questionnaire or otherwise selected by such Lender pursuant to Section 2.19 .

“ Lien ” means any lien (statutory or other), mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including the interest of a vendor or lessor under any conditional sale, Capitalized Lease or other title retention agreement, but excluding the interest of a lessor under any operating lease).

“ Loans ” means the collective reference to the Revolving Loans and the Swingline Loans.

“ Loan Documents ” means this Agreement and the Notes.

“ Material Adverse Effect ” means, with respect to Borrower, a material adverse effect on (i) the business, Property, financial condition or results of operations of Borrower and its Subsidiaries taken as a whole, (ii) the ability of Borrower to perform its obligations under the Loan Documents or (iii) the validity or enforceability of any of the Loan Documents or the rights or remedies of the Agent, the Swingline Lender or the Lenders against Borrower thereunder; provided that in no event shall any Permitted PEPCO Asset Sale, Permitted ACE Asset Sale, Permitted PHI Asset Sale, or Permitted DPL Asset Sale, individually or in the aggregate, be deemed to cause or result in a Material Adverse Effect.

“ Material Indebtedness ” is defined in Section 7.5 .

“ Maturity Date ” means, the Facility Termination Date or such earlier date on which the Obligations of Borrower become due and payable pursuant to Section 8.1 .

“ Moody’s ” means Moody’s Investors Service, Inc.

“ Multiemployer Plan ” means a Plan maintained pursuant to a collective bargaining agreement or any other arrangement to which Borrower or any other member of the Controlled Group is a party to which more than one employer is obligated to make contributions.

“ Net Worth ” means, at any time, the sum, without duplication, at such time of (a) Borrower’s stockholders’ equity plus (b) all Preferred Stock of Borrower (excluding any Preferred Stock which is mandatorily redeemable on or prior to the scheduled Facility Termination Date).

“ New Jersey Transition Bond Statute ” means the New Jersey Electric Discount and Energy Corporation Act as in effect on the date hereof.

“ Nonrecourse Indebtedness ” means, with respect to Borrower, Indebtedness of Borrower or any Subsidiary of Borrower (excluding Nonrecourse Transition Bond Debt) secured by a Lien on the Property of Borrower or such Subsidiary, as the case may be, the sole recourse for the payment of which is such Property and where neither Borrower nor any of its Subsidiaries is liable for any deficiency after the application of the proceeds of such Property.

“ Nonrecourse Transition Bond Debt ” means obligations evidenced by Transition Bonds rated investment grade or better by S&P or Moody’s, representing a securitization of Intangible Transition Property as to which obligations Borrower or any Subsidiary of a Borrower (other than a Special Purpose Subsidiary) has no direct or indirect liability (whether as primary obligor, guarantor, surety, provider of collateral security, through a put option, asset repurchase agreement, capital maintenance agreement or debt subordination agreement, or through any other right or arrangement of any nature providing direct or indirect assurance of payment or performance of any such obligation in whole or in part), except for liability to repurchase Intangible Transition Property conveyed to the securitization vehicle, on terms and conditions customary in receivables securitizations, in the event such Intangible Transition Property violates representations and warranties of scope customary in receivables securitizations.

“ Non-U.S. Lender ” is defined in Section 3.5(iv) .

“ Note ” means any promissory note substantially in the form of Exhibit C issued at the request of a Lender or the Swingline Lender pursuant to Section 2.15 .

“ Obligations ” means all unpaid principal of the Loans, all accrued and unpaid interest on such Loans, all accrued and unpaid fees payable by Borrower and all expenses, reimbursements, indemnities

and other obligations payable by Borrower to the Agent, the Swingline Lender, any other Lender or any other Indemnified Party arising under any Loan Document.

“ OFAC ” means the U.S. Department of the Treasury’s Office of Foreign Assets Control.

“ Other Taxes ” is defined in Section 3.5(ii) .

“ Outstanding Credit Extensions ” means, with respect to Borrower, the sum of the aggregate principal amount of all outstanding Loans to Borrower.

“ Participants ” is defined in Section 12.2(i) .

“ Payment Date ” means the last Business Day of each March, June, September and December.

“ PBGC ” means the Pension Benefit Guaranty Corporation, or any successor thereto.

“ PCI ” means Potomac Capital Investment Corporation.

“ PEPCO ” means Potomac Electric Power Company.

“ Permitted ACE Asset Sale ” means the sale of the capital stock or assets of any Subsidiary of ACE other than a Significant Subsidiary of ACE, provided that the fair market value of all such sales shall not exceed $10,000,000 in the aggregate during the term of this Agreement.

“ Permitted ACE Liens ” means the Lien of the Mortgage and Deed of Trust dated January 15, 1937 between ACE and The Bank of New York Mellon.

“ Permitted DPL Asset Sale ” means the sale of the capital stock or assets of any Subsidiary of DPL other than a Significant Subsidiary of DPL, provided that the fair market value of all such sales shall not exceed $10,000,000 in the aggregate during the term of this Agreement.

“ Permitted DPL Liens ” means the Lien of the Mortgage and Deed of Trust dated October 1, 1943 between DPL and Bank of New York Mellon Trust Company (formerly known as The Chase Manhattan Bank), as trustee.

“ Permitted PEPCO Liens ” means (a) the Lien of the Mortgage and Deed of Trust dated July 1, 1936 from PEPCO to The Bank of New York Mellon; and (b) the Lien created by the $152,000,000 sale/leaseback on November 30, 1994 of PEPCO’s control center.

“ Permitted PEPCO Asset Sale ” means the sale of the capital stock or assets of any Subsidiary of PEPCO other than a Significant Subsidiary of PEPCO, provided that the fair market value of all such sales shall not exceed $10,000,000 in the aggregate during the term of this Agreement.

“ Permitted PHI Asset Sale ” means the sale of (a) the centralized steam and chilled water production facility located on an approximately three-quarter acre site on the northeastern corner of the intersection of Atlantic and Ohio Avenues in Atlantic City, New Jersey and related distribution facilities; (b) ownership interests in cross-border leveraged leases and related assets owned by PCI and its Subsidiaries in an aggregate amount not exceeding a book value of $200,000,000; and (c) any Permitted ACE Asset Sale, Permitted DPL Asset Sale or Permitted PEPCO Asset Sale.

“ Permitted PHI Liens ” means (a) Liens on assets of Conectiv Energy Supply, Inc. or any other Subsidiary of Borrower (other than ACE, DPL or PEPCO or any Subsidiary thereof) which is engaged primarily in the energy trading business (a “ Trading Subsidiary ”) to secure obligations arising under energy trading agreements entered into in the ordinary course of business consistent with the past practice of DPL prior to September of 1999 and Liens on cash collateral to secure guaranties by Borrower of the obligations of any Trading Subsidiary under such energy trading agreements, provided that the aggregate amount of all such cash collateral granted by Borrower shall not at any time exceed $100,000,000; (b) Liens on the interests of (i) Conectiv Services, Inc., or any other Subsidiary of Borrower (other than ACE, DPL or PEPCO or any Subsidiary thereof) which may hereafter own the stock of CTS (the “ CTS Parent ”), in the capital stock of Conectiv Thermal Systems, Inc. (“ CTS ”), (ii) CTS in Atlantic Jersey Thermal Systems, Inc. (“ AJTS ”), Thermal Energy Limited Partnership I (“ TELP I ”) and ATS Operating Services, Inc. and (iii) AJTS in TELP I, in each case securing Indebtedness of CTS for which neither Borrower nor any of its Subsidiaries (other than CTS and its Subsidiaries and, solely with respect to the pledge of its interest in the capital stock of CTS, the CTS Parent) has any liability (contingent or otherwise); (c) Liens granted by a bankruptcy remote Subsidiary (the “ SPV ”) of Borrower to facilitate a structured financing in an amount not exceeding $200,000,000; (d) Liens on the stock or assets of one or more Subsidiaries of Borrower, other than ACE, DPL or PEPCO, in favor of the SPV; and (e) Liens on the assets of Conectiv Pennsylvania Generation, LLC (“ CPG ”) and/or on the capital stock of CPG, or its successor, to finance the development and construction of a mid-merit electric generating facility in the State of Pennsylvania (the “ CPG Project ”), provided that (i) the aggregate principal amount of the Indebtedness secured by such Liens shall not exceed $400,000,000 and (ii) such Liens (other than Liens granted by CPG and its Subsidiaries) shall only be granted on assets related to the CPG Project.

“ Person ” means any natural person, corporation, firm, joint venture, partnership, limited liability company, association, enterprise, trust or other entity or organization, or any government or political subdivision or any agency, department or instrumentality thereof.

“ Plan ” means an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code as to which Borrower or any other member of the Controlled Group may have any liability.

“ Preferred Stock ” means, with respect to any Person, equity interests issued by such Person that are entitled to a preference or priority over any other equity interests issued by such Person upon any distribution of such Person’s property and assets, whether by dividend or upon liquidation.

“ Pricing Schedule ” means Schedule 1 hereto.

“ Prime Rate ” means a rate per annum equal to the prime rate of interest publicly announced by Bank of America, from time to time, changing when and as such prime rate changes. The Prime Rate is an index or base rate and shall not necessarily be the lowest or best rate charged to its customers or other banks.

“ Property ” of a Person means any and all property, whether real, personal, tangible, intangible, or mixed, of such Person, or other assets owned, leased or operated by such Person.

“ Pro Rata Share ” means, with respect to any Lender, the percentage which such Lender’s Commitment constitutes of the Aggregate Commitment (and/or, to the extent the Commitments have terminated, the percentage which such Lender’s Revolving Loans and participation in Swingline Loans constitutes of the aggregate principal amount of all Loans). The initial Pro Rata Share of each Lender is set forth on Schedule 2 , or in the Assignment Agreement pursuant to which such Lender becomes a party hereto, as applicable.

“ Public Reports ” means Borrower’s (i) annual report on Form 10-K for the year ended December 31, 2007, (ii) quarterly report on Form 10-Q for the quarter ended September 30, 2008, (iii) current report filed on Form 8-K on November 3, 2008 and (iv) current report filed on Form 8-K on November 6, 2008.

“ Purchasers ” is defined in Section 12.3(i) .

“ Register ” is defined in Section 12.3(iii) .

“ Reportable Event ” means a reportable event, as defined in Section 4043 of ERISA, with respect to a Plan, excluding, however, such events as to which the PBGC has by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event, provided that a failure to meet the minimum funding standard of Section 412 of the Code and of Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any such waiver of the notice requirement in accordance with either Section 4043(a) of ERISA or Section 412(d) of the Code.

“ Requested Commitment Increase ” is defined in Section 2.2 .

“ Required Lenders ” means Lenders in the aggregate having more than 50% of the Aggregate Commitment or, if the Aggregate Commitment has been terminated, Lenders in the aggregate holding more than 50% of the aggregate unpaid principal amount of the Outstanding Credit Extensions to the Borrower.

“ Reserve Requirement ” means, with respect to an Interest Period, the maximum aggregate reserve requirement (including all basic, supplemental, marginal and other reserves) which is imposed under Regulation D of the FRB on Eurocurrency liabilities.

“ Revolving Loan ” means, with respect to a Lender, any revolving loan made by such Lender pursuant to Article II (or any conversion or continuation thereof), but excluding any Swingline Loan.

“ S&P ” means Standard and Poor’s Ratings Services, a division of The McGraw Hill Companies, Inc.

“ SEC ” means the Securities and Exchange Commission.

“ Securitization Transaction ” means any sale, assignment or other transfer by Borrower or a Subsidiary thereof of accounts receivable or other payment obligations owing to Borrower or such Subsidiary or any interest in any of the foregoing, together in each case with any collections and other proceeds thereof, any collection or deposit accounts related thereto, and any collateral, guaranties or other property or claims in favor of Borrower or such Subsidiary supporting or securing payment by the obligor thereon of, or otherwise related to, any such receivables.

“ Significant Subsidiary ” means, with respect to Borrower, a “ significant subsidiary ” (as defined in Regulation S-X of the SEC as in effect on the date of this Agreement) of such Borrower; provided that each of PEPCO, DPL and ACE shall at all times be a Significant Subsidiary of Borrower.

“ Single Employer Plan ” means a Plan maintained by Borrower or any member of the Controlled Group for employees of Borrower or any member of the Controlled Group.

“ SPC ” is defined in Section 12.5 .

“ SPV ” is defined in the definition of Permitted PHI Liens.

“ Special Purpose Subsidiary ” means a direct or indirect wholly owned corporate Subsidiary of ACE, substantially all of the assets of which are Intangible Transition Property and proceeds thereof, formed solely for the purpose of holding such assets and issuing Transition Bonds and, which complies with the requirements customarily imposed on bankruptcy-remote corporations in receivables securitizations.

“ Subsidiary ” of a Person means (i) any corporation more than 50% of the outstanding securities having ordinary voting power of which shall at the time be owned or controlled, directly or indirectly, by such Person or by one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries, or (ii) any partnership, limited liability company, association, business trust, joint venture or similar business organization more than 50% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled.

“ Substantial Portion ” means, at any time with respect to the Property of any Person, Property which represents more than 10% of the consolidated assets of such Person and its Subsidiaries as shown in the consolidated financial statements of such Person and its Subsidiaries as at the last day of the preceding fiscal year of such Person.

“ Swingline Lender ” means Bank of America in its capacity as swingline lender hereunder.

“ Swingline Loan ” means any swingline loan made by the Swingline Lender to Borrower pursuant to Section 2.1(b) .

“ Swingline Sublimit ” means an amount equal to 10% of the Aggregate Commitment. The Swingline Sublimit is part of, and not in addition to, the Aggregate Commitment.

“ Synthetic Lease ” means (a) a so-called synthetic, off-balance sheet or tax retention lease or (b) any other agreement pursuant to which a Person obtains the use or possession of property and which creates obligations that do not appear on the balance sheet of such Person but which, upon the insolvency or bankruptcy of such Person, would be characterized as indebtedness of such Person (without regard to accounting treatment).

“ Taxes ” means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and any and all liabilities with respect to the foregoing which arise from or relate to any payment made hereunder or under any Note, but excluding Excluded Taxes and Other Taxes.

“ Total Capitalization ” means, at any time, the sum of the Total Indebtedness of Borrower plus the Net Worth of Borrower, each calculated at such time.

“ Total Indebtedness ” means, at any time, all Indebtedness of Borrower and its Subsidiaries at such time determined on a consolidated basis in accordance with Agreement Accounting Principles, excluding , to the extent otherwise included in Indebtedness of Borrower or any of its Subsidiaries, (a) any Nonrecourse Transition Bond Debt; (b) to the extent it constitutes Nonrecourse Indebtedness, any Indebtedness secured by liens described in clause (e) of the definition of Permitted PHI Liens; (c) any other Nonrecourse Indebtedness of Borrower and its Subsidiaries (excluding ACE, DPL and PEPCO and their Subsidiaries) to the extent that the aggregate amount of such Nonrecourse Indebtedness does not exceed $200,000,000; and (d) all Indebtedness of PCI and, without duplication, of Borrower the proceeds of which were used to make loans or advances to PCI, in an aggregate amount not exceeding the lesser of

(i) the fair market value of the equity collateral accounts in PCI’s energy leveraged lease portfolio or (ii) $700,000,000.

“ Transferee ” is defined in Section 12.4 .

“ Transition Bonds ” means bonds described as “ transition bonds ” in the New Jersey Transition Bond Statute.

“ Type ” means, with respect to any Advance, its nature as a Floating Rate Advance or a Eurodollar Advance.

“ Unmatured Default ” means an event which but for the lapse of time or the giving of notice, or both, would constitute a Default.

“ Voting Stock ” means, with respect to any Person, voting stock of any class or kind ordinarily having the power to vote for the election of directors, managers or other voting members of the governing body of such Person.

1.2 Interpretation .

(a) The meanings of defined terms are equally applicable to the singular and plural forms of such terms.

(b) Article , Section , Schedule and Exhibit references are to this Agreement unless otherwise specified.

(d) In the computation of periods of time from a specified date to a later specified date, the word “ from ” means “ from and including ”; the words “ to ” and “ until ” each mean “ to but excluding ”, and the word “ through ” means “ to and including .”

(e) Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement) and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the terms of this Agreement; and (ii) references to any statute or regulation are to be construed as including all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting such statute or regulation.

(f) Unless otherwise expressly provided herein, references herein shall be references to Eastern time (daylight or standard as applicable).

1.3 Accounting .

(a) Except as provided to the contrary herein, all accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with Agreement Accounting Principles, except that any calculation or determination which is to be made on a consolidated basis shall be made for Borrower and all of its Subsidiaries, including those Subsidiaries of Borrower, if any, which are unconsolidated on Borrower’s audited financial statements.

(b) If at any time any change in Agreement Accounting Principles would affect the computation of any financial ratio or requirement set forth herein with respect to Borrower and either Borrower or the Required Lenders shall so request, the Agent, the Lenders and Borrower shall negotiate in good faith to amend such ratio or requirement to preserve the original intent thereof in light of such change in Agreement Accounting Principles (subject to the approval of the Required Lenders); provided that, until so amended, (i) such ratio or requirement shall continue to be computed in accordance with Agreement Accounting Principles as in effect prior to such change and (ii) Borrower shall provide to the Agent and the Lenders financial statements and other documents required under this Agreement setting forth a reconciliation between calculations of such ratio or requirement made before and after giving effect to such change in Agreement Accounting Principles.

ARTICLE II

THE LOANS

2.1 Commitments .

(a) Revolving Loans . Each Lender severally agrees, on the terms and conditions set forth in this Agreement, to make Revolving Loans to Borrower and to participate in Swingline Loans made to Borrower, in amounts not to exceed in the aggregate at any one time outstanding the amount of such Lender’s Commitment; provided that , after giving effect to any Credit Extension hereunder, (i) the aggregate principal amount of all Revolving Loans by such Lender to Borrower plus such Lender’s Pro Rata Share of the aggregate principal amount of all Swingline Loans to Borrower shall not exceed such Lender’s Commitment and (ii) the Outstanding Credit Extensions to Borrower shall not at any time exceed the Aggregate Commitment. Within the foregoing limits, Borrower may from time to time borrow, prepay pursuant to Section 2.9 and reborrow hereunder prior to the Facility Termination Date.

(b) Swingline Loans .

(i) Subject to the terms and conditions set forth in this Agreement, the Swingline Lender may, in its discretion and in reliance upon the agreements of the other Lenders set forth in this Section 2.01(b) make Swingline Loans to Borrower from time to time from the Closing Date through, but not including, the Facility Termination Date; provided , that (i) the aggregate principal amount of all outstanding Swingline Loans (after giving effect to any amount requested), shall not exceed the Swingline Sublimit and (ii) the aggregate principal amount of all Revolving Loans by such Lender to Borrower plus such Lender’s Pro Rata Share of the aggregate principal amount of all Swingline Loans to Borrower shall not exceed such Lender’s Commitment; provided , further , that , subject to Section 2.1(b)(ii) , Borrower shall not use the proceeds of any Swingline Loan to refinance any outstanding Swingline Loan. To request a Swingline Loan, Borrower shall notify the Agent in accordance with Section 2.10 hereof. Borrower shall be entitled to borrow, repay and reborrow Swingline Loans in accordance with the terms and subject to the conditions of this Agreement.

(ii) The Swingline Lender may, at any time and from time to time, give written notice to the Agent (a “ Swingline Borrowing Notice ”), on behalf of Borrower (and Borrower hereby irrevocably authorizes and directs the Swingline Lender to act on its behalf), requesting that the Lenders (including the Swingline Lender) make Revolving Loans to Borrower in an amount equal to the unpaid principal amount of any Swingline Loan. The Swingline Borrowing Notice shall include the information with respect to each Revolving Loan set forth in Section 2.10 . The Swingline Lender shall provide a copy of any such notice to Borrower. Each Lender shall make a Revolving Loan in same day funds in an amount equal to its respective Pro Rata Share of Revolving Loans as required to repay the Swingline Loan outstanding to the Swingline

Lender promptly upon receipt of a Swingline Borrowing Notice but in no event later than 1:00 p.m. on the next succeeding Business Day after such Swingline Borrowing Notice is received. On the date of such Revolving Loan, the Swingline Loan (including the Swingline Lender’s Pro Rata Share thereof, in its capacity as a Lender) shall be deemed to be repaid with the proceeds thereof and shall thereafter be reflected as a Revolving Loan on the books and records of the Agent. No Lender’s obligation to fund its respective Pro Rata Share of a Swingline Loan shall be affected by any other Lender’s failure to fund its Pro Rata Share of any Swingline Loan, nor shall any Lender’s Pro Rata Share be increased as a result of any such failure of any other Lender to fund its Pro Rata Share of any Swingline Loan.

(iii) If not repaid earlier, Borrower shall pay to the Swingline Lender the amount of each Swingline Loan within seven days of receipt of such Swingline Loan. If any portion of any such amount paid to the Swingline Lender shall be recovered by or on behalf of Borrower from the Swingline Lender in bankruptcy or otherwise, the loss of the amount so recovered shall be ratably shared among all the Lenders in accordance with their respective Pro Rata Share (unless the amounts so recovered by or on behalf of Borrower pertain to a Swingline Loan extended after the occurrence and during the continuance of a Default of which the Agent has received notice in the manner required pursuant to Section 10.9 and which such Event of Default has not been waived pursuant to the terms hereof). If any payment received by the Swingline Lender under any of the circumstances described in Section 11.3 (including pursuant to any settlement entered into by the Swingline Lender in its discretion), each Lender shall pay to the Swingline Lender its Pro Rata Share thereof on demand of the Agent, plus interest thereon from the date of such demand to the date such amount is returned, at a rate per annum equal to the Federal Funds Effective Rate. The Agent will make such demand upon the request of the Swingline Lender. The obligations of the Lenders under this clause shall survive the payment in full of the Obligations and the termination of this Agreement.

(iv) Each Lender acknowledges and agrees that its obligation to repay Swingline Loans in accordance with the terms of this Section is absolute and unconditional and shall not be affected by any circumstance whatsoever, including, without limitation, non-satisfaction of the conditions set forth in Article IV . Further, each Lender agrees and acknowledges that if prior to the repayment of any outstanding Swingline Loans pursuant to this Section, one of the events described in Section 7.6 or 7.7 shall have occurred, or if a Revolving Loan may not be (as determined in the reasonable discretion of the Agent), or is not, made in accordance with the foregoing provisions, each Lender will, on the date the applicable Revolving Loan would have been made, purchase an undivided participating interest in such Swingline Loan in an amount equal to its Pro Rata Share of the aggregate amount of such Swingline Loan. Each Lender will immediately transfer to the Swingline Lender, in immediately available funds, the amount of its participation and upon receipt thereof the Swingline Lender will deliver to such Lender a certificate evidencing such participation dated the date of receipt of such funds and for such amount, such certificate to be conclusive absent manifest error. Whenever, at any time after the Swingline Lender has received from any Lender such Lender’s participating interest in a Swingline Loan, the Swingline Lender receives any payment on account thereof, the Swingline Lender will distribute to such Lender (including pursuant to a participation made by the Swingline Lender) its participating interest in such amount (appropriately adjusted, in the case of interest payments, to reflect the period of time during which such Lender’s participating interest was outstanding and funded).

(v) The Swingline Lender shall be responsible for invoicing the Borrower for interest on the Swingline Loans. Until each Lender funds its Revolving Loans or participations pursuant

to this Section 2.1(b) to refinance such Lender’s Pro Rata Share of any Swingline Loan, interest in respect of such Pro Rata Share shall be solely for the account of the Swingline Lender.

(vi) The Borrower shall make all payments of principal and interest in respect of the Swingline Loans directly to the Swingline Lender.

2.2 Increase in Commitments .

(a) At any time prior to the Facility Termination Date, Borrower shall have the ability, in consultation with the Agent and through written notice to the Agent, substantially in the form of Exhibit D (the “ Increase Notice ”), to request increases in the Aggregate Commitment (each, a “ Requested Commitment Increase ”); provided that (i) no Lender shall have any obligation to participate in any Requested Commitment Increase, (ii) the aggregate principal amount of all such increases shall not exceed $10,000,000, (iii) each such Requested Commitment Increase shall be in a minimum principal amount of $10,000,000 or, if less, the maximum remaining amount permitted pursuant to clause (ii) above, and (iv) no Default or Unmatured Default shall have occurred and be continuing or would result from the proposed Requested Commitment Increase.

(b) The Agent shall promptly give notice of such Requested Commitment Increase to the Lenders. Each Lender shall notify the Agent within ten (10) Business Days (or such longer period of time which may be agreed upon by the Agent and Borrower and communicated to the Lenders) from the date of delivery of such notice to the Lenders whether or not it offers to increase its Commitment and, if so, by what amount. Any Lender not responding within such time period shall be deemed to have declined to offer to increase its Commitment. The Agent shall notify Borrower of the Lenders’ responses to each request made hereunder. Borrower shall have the right in its sole discretion to accept or reject in whole or in part any offered Commitment increase or at its own expense to solicit a Commitment from any third party financial institution reasonably acceptable to the Agent. Any such financial institution (if not already a Lender hereunder) shall become a party to this Agreement, as a Lender pursuant to a joinder agreement in form and substance reasonably satisfactory to the Agent and Borrower.

(c) Upon the completion of each Requested Commitment Increase, (i) entries in the accounts maintained pursuant to Section 2.15 will be revised to reflect the revised Commitments and Pro Rata Shares of each of the Lenders (including each new Lender becoming a party to this Agreement pursuant to clause (b) above) and (ii) the outstanding Revolving Loans will be reallocated on the effective date of such increase among the Lenders in accordance with their revised Pro Rata Shares and the Lenders (including each new Lender becoming a party to this Agreement pursuant to clause (b) above) agree to make all payments and adjustments necessary to effect such reallocation and Borrower shall pay any and all costs required in connection with such reallocation as if such reallocation were a prepayment.

2.3 Required Payments; Termination . All outstanding Advances to Borrower and all other unpaid Obligations of such Borrower shall be paid in full by Borrower on the Maturity Date.

2.4 Intentionally Omitted .

2.5 Ratable Loans . Each Advance (other than Swingline Loans) hereunder shall be made by the Lenders ratably in accordance with their Pro Rata Shares.

2.6 Types of Advances . The Advances (other than Swingline Loans) to Borrower may be Floating Rate Advances or Eurodollar Advances, or a combination thereof, as selected by Borrower in accordance with Sections 2.10 and 2.11 .

2.7 Commitment Fee; Reductions in Aggregate Commitment .

(a) Borrower agrees to pay to the Agent for the account of the Lenders according to their Pro Rata Shares a commitment fee at a per annum rate equal to the Commitment Fee Rate on the average daily unused portion of the Aggregate Commitment. Commitment fees payable by Borrower shall accrue from the Closing Date to the Facility Termination Date (or, if later, to the date all of Borrower’s Obligations have been paid in full) and shall be payable on each Payment Date and on the Facility Termination Date (and, if applicable, thereafter on demand). For purposes of clarification, Swingline Loans shall not be considered outstanding for purposes of determining the unused portion of the Aggregate Commitment in calculating commitment fees.

(b) Borrower may permanently reduce the Aggregate Commitment ratably among the Lenders in accordance with their Pro Rata Shares, and in integral multiples of $10,000,000, upon at least five Business Days’ written notice to the Agent, which notice shall specify the amount of any such reduction, provided that the Aggregate Commitment may not be reduced below the amount of the Outstanding Credit Extensions on the date of such notice. All fees in respect of the Aggregate Commitment accrued until the effective date of any termination of the Aggregate Commitment shall be paid on the effective date of such termination.

2.8 Minimum Amount of Each Advance . Each Advance shall be in the amount of $5,000,000 or a higher integral multiple of $1,000,000 (or, in the case of a Swingline Loan, in the amount of $500,000 or a higher integral multiple of $100,000); provided that any Floating Rate Advance may be in the amount of the unused Aggregate Commitment.

2.9 Prepayments .

(a) Mandatory . If at any time Borrower’s Outstanding Credit Extensions exceed the Aggregate Commitment, Borrower shall immediately prepay Loans in an amount (rounded upward, if necessary, to an integral multiple of $1,000,000) sufficient to eliminate such excess. If at any time the aggregate principal amount of all outstanding Swingline Loans exceeds the Swingline Sublimit (including, without limitation, after giving effect to any reduction of the Aggregate Commitment pursuant to Section 2.7), Borrower shall immediately prepay Swingline Loans in an amount sufficient to eliminate such excess.

(b) Voluntary . Borrower may from time to time prepay, without penalty or premium, all outstanding Floating Rate Advances to such Borrower, or any portion of the outstanding Floating Rate Advances to such Borrower in the amount of $5,000,000 or a higher integral multiple of $1,000,000, upon one Business Day’s prior notice to the Agent. Borrower may from time to time prepay, without penalty or premium, all outstanding Swingline Loans, or any portion of the outstanding Swingline Loans in the amount of $500,000 or a higher integral multiple of $100,000, on any Business Day if notice is given to the Agent by 1:00 p.m. on such Business Day. Borrower may from time to time prepay, all outstanding Eurodollar Advances (other than Swingline Loans), or any portion of the outstanding Eurodollar Advances in the amount of $5,000,000 or a higher integral multiple of $1,000,000, upon three Business Days’ prior notice to the Agent. Any prepayment of Eurodollar Advances shall be without premium or penalty but shall be subject to the payment of any funding indemnification amounts covered by Section 3.4 .

2.10 Method of Selecting Types and Interest Periods for New Advances . Borrower shall select the Type of Advance and, in the case of each Eurodollar Advance (other than a Swingline Loan), the Interest Period applicable thereto from time to time. All Swingline Loans shall bear interest at the Eurodollar Market Index Rate. Borrower shall give the Agent irrevocable notice (a “ Borrowing Notice ”)

not later than 11:00 a.m. on the Borrowing Date of each Floating Rate Advance and each Swingline Loan and three Business Days before the Borrowing Date for each Eurodollar Advance (other than a Swingline Loan), specifying:

(i) the Borrowing Date, which shall be a Business Day, of such Advance,

(ii) the aggregate amount of such Advance,

(iii) the Type of Advance selected, and

(iv) in the case of each Eurodollar Advance (other than a Swingline Loan), the Interest Period applicable thereto.

Not later than 1:00 p.m. on each Borrowing Date for each Revolving Loan, each Lender shall make available its Revolving Loan or Revolving Loans in funds immediately available to the Agent at its address specified pursuant to Article XIII . The Agent will promptly make the funds so received from the Lenders available to Borrower at the Agent’s aforesaid address. Not later than 1:00 p.m. on each Borrowing Date for each Swingline Loan, the Swingline Lender shall make available its Swingline Loan in funds immediately available to Borrower at the Agent’s aforesaid address. If the Borrower fails to specify a Type of Advance in a Borrowing Notice, then the applicable Advance shall be made as a Floating Rate Advance. If the Borrower requests a Eurodollar Advance but fails to specify an Interest Period, it will be deemed to have specified an Interest Period of one month.

2.11 Conversion and Continuation of Outstanding Advances . Floating Rate Advances shall continue as Floating Rate Advances unless and until such Floating Rate Advances are converted into Eurodollar Advances pursuant to this Section 2.11 or are repaid in accordance with Section 2.9 . Each Eurodollar Advance (other than Swingline Loans) shall continue as a Eurodollar Advance until the end of the then applicable Interest Period therefor, at which time such Eurodollar Advance shall be automatically converted into a Floating Rate Advance unless (x) such Eurodollar Advance is or was repaid in accordance with Section 2.9 or (y) Borrower shall have given the Agent a Conversion/Continuation Notice requesting that, at the end of such Interest Period, such Eurodollar Advance continue as a Eurodollar Advance for a subsequent Interest Period. Subject to the terms of Section 2.8 Borrower may elect from time to time to convert all or any part of a Floating Rate Advance into a Eurodollar Advance. Borrower shall give the Agent irrevocable notice (a “ Conversion/Continuation Notice ”) of each conversion of a Floating Rate Advance into a Eurodollar Advance or continuation of a Eurodollar Advance not later than 11:00 a.m. at least three Business Days prior to the date of the requested conversion or continuation, specifying:

(i) the requested date, which shall be a Business Day, of such conversion or continuation,

(ii) the aggregate amount and Type of the Advance which is to be converted or continued, and

(iii) the amount of such Advance which is to be converted into or continued as a Eurodollar Advance and the duration of the Interest Period applicable thereto.

After giving effect to all Advances, all conversions and all continuations, there shall be no more than 8 Interest Periods in effect with respect to all Loans.

2.12 Changes in Interest Rate, etc. Each Floating Rate Advance shall bear interest on the outstanding principal amount thereof, for each day from the date such Advance is made or is converted from a Eurodollar Advance into a Floating Rate Advance pursuant to Section 2.11 to the date it is paid or is converted into a Eurodollar Advance pursuant to Section 2.11 , at a rate per annum equal to the Alternate Base Rate for such day. Changes in the rate of interest on that portion of any Advance maintained as a Floating Rate Advance will take effect simultaneously with each change in the Alternate Base Rate. Each Eurodollar Advance (other than Swingline Loans) shall bear interest on the outstanding principal amount thereof from the first day of each Interest Period applicable thereto to the last day of such Interest Period at the Eurodollar Rate applicable to such Eurodollar Advance based upon Borrower’s selections under Sections 2.10 and 2.11 and otherwise in accordance with the terms hereof. Each Swingline Loan shall bear interest on the outstanding principal amount thereof at the Eurodollar Market Index Rate and otherwise in accordance with the terms hereof.

2.13 Rates Applicable After Default . Notwithstanding anything to the contrary contained in Section 2.10 or 2.11 , during the continuance of a Default or Unmatured Default, (a) the Required Lenders may, at their option, by notice to Borrower (which notice may be revoked at the option of the Required Lenders notwithstanding any provision of Section 8.2 requiring unanimous consent of the Lenders to changes in interest rates), declare that no Advance may be made as, converted into or continued as a Eurodollar Advance and (b) the Swingline Lender may, at its option, declare that no Swingline Loans shall be made to Borrower. During the continuance of a Default, the Required Lenders may, at their option, by notice to Borrower (which notice may be revoked at the option of the Required Lenders notwithstanding any provision of Section 8.2 requiring unanimous consent of the Lenders to changes in interest rates), declare that (i) each Eurodollar Advance shall bear interest for the remainder of the applicable Interest Period at the rate otherwise applicable to such Interest Period plus 2% per annum and (ii) each Floating Rate Advance and each Swingline Loan shall bear interest at a rate per annum equal to the Alternate Base Rate in effect from time to time plus 2% per annum, provided that during the continuance of a Default under Section 7.6 or 7.7 , the interest rates set forth in clauses (i) and ( ii ) above shall be applicable to all Outstanding Credit Extensions to Borrower without any election or action on the part of the Agent or any Lender.

2.14 Method of Payment . Except as otherwise expressly provided herein, all payments of the Obligations hereunder shall be made, without setoff, deduction, or counterclaim, in immediately available funds to the Agent at the Agent’s address specified pursuant to Article XIII , or at any other office of the Agent specified in writing by the Agent to Borrower, by 1:00 p.m. on the date when due and shall be applied ratably by the Agent among the Lenders. Each payment delivered to the Agent for the account of any Lender shall be delivered promptly by the Agent to such Lender in the same type of funds that the Agent received at its address specified pursuant to Article XIII or at any Lending Installation specified in a notice received by the Agent from such Lender.

2.15 Noteless Agreement; Evidence of Indebtedness .

(a) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of Borrower to such Lender resulting from each Loan made by such Lender to Borrower from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder.

(b) The Agent shall also maintain accounts in which it will record (i) the amount of each Loan to Borrower made hereunder, the Type thereof and the Interest Period with respect thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from Borrower to each Lender hereunder, and (iii) the amount of any sum received by the Agent hereunder from Borrower and each Lender’s share thereof.

(c) The entries maintained in the accounts maintained pursuant to clauses (a) and ( b ) above shall be prima facie evidence of the existence and amounts of the Obligations therein recorded; provided that the failure of the Agent or any Lender to maintain such accounts or any error therein shall not in any manner affect the obligation of Borrower to repay the Obligations in accordance with their terms.

(d) Any Lender may request that its Loans to Borrower be evidenced by a Note. In such event, Borrower shall prepare, execute and deliver to such Lender a Note payable to the order of such Lender. Thereafter, the Loans evidenced by such Note and interest thereon shall at all times (including after any assignment pursuant to Section 12.3 ) be represented by one or more Notes payable to the order of the payee named therein or any assignee pursuant to Section 12.3 , except to the extent that any such Lender or assignee subsequently returns any such Note for cancellation and requests that such Loans once again be evidenced as described in clauses (a) and ( b ) above.

2.16 Telephonic Notices . Borrower hereby authorizes the Lenders and the Agent to extend, convert or continue Advances, to effect selections of Types of Advances and to transfer funds based on telephonic notices made by any person the Agent or any Lender in good faith believes to be acting on behalf of Borrower, it being understood that the foregoing authorization is specifically intended to allow Borrowing Notices and Conversion/Continuation Notices to be given telephonically. Borrower agrees that upon the request of the Agent or any Lender, Borrower will deliver promptly to the Agent a written confirmation signed by an Authorized Officer of Borrower, of each telephonic notice given by Borrower pursuant to the preceding sentence. If the written confirmation differs in any material respect from the action taken by the Agent and the Lenders, the records of the Agent and the Lenders shall govern absent manifest error.

2.17 Interest Payment Dates; Interest and Fee Basis . Interest accrued on each Floating Rate Advance and each Swingline Loan shall be payable on each Payment Date, on any date on which such Floating Rate Advance is prepaid, whether due to acceleration or otherwise, and at maturity. Interest accrued on that portion of the outstanding principal amount of any Floating Rate Advance converted into a Eurodollar Advance (other than Swingline Loans) on a day other than a Payment Date shall be payable on the date of conversion. Interest accrued on each Eurodollar Advance shall be payable on the last day of its applicable Interest Period (and, in the case of a six-month Interest Period, on the day which is three months after the first day of such Interest Period), on any date on which such Eurodollar Advance is prepaid, whether by acceleration or otherwise, and at maturity. Interest on Floating Rate Advances which are bearing interest at the Prime Rate shall be calculated for actual days elapsed on the basis of a 365-day year or, when appropriate, 366-day year. All other interest and all fees shall be calculated for actual days elapsed on the basis of a 360-day year. Interest shall be payable for the day an Advance is made but not for the day of any payment on the amount paid if payment is received prior to 1:00 p.m. at the place of payment. If any payment of principal of or interest on an Advance shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and, in the case of a principal payment, such extension of time shall be included in computing interest in connection with such payment. Each determination by the Agent of an interest rate or fee hereunder shall be conclusive and binding for all purposes, absent manifest error.

2.18 Notification of Advances, Interest Rates, Prepayments and Commitment Reductions . Promptly after receipt thereof, the Agent will notify each Lender of the contents of each notice of reduction in the Aggregate Commitment, Swingline Borrowing Notice, Borrowing Notice, Conversion/Continuation Notice, notice of repayment and Increase Notice received by the Agent hereunder. The Agent will notify each Lender of the interest rate applicable to each Eurodollar Advance promptly upon determination of such interest rate and will give each Lender prompt notice of each change in the Alternate Base Rate.

2.19 Lending Installations . Each Lender may book its Loans at any Lending Installation selected by such Lender and may change its Lending Installation from time to time. All terms of this Agreement shall apply to any such Lending Installation and the Loans and any Notes issued hereunder shall be deemed held by each Lender for the benefit of any such Lending Installation. Each Lender may, by written notice to the Agent and Borrower in accordance with Article XIII , designate replacement or additional Lending Installations through which Loans will be made by it and for whose account Loan payments are to be made.

2.20 Non-Receipt of Funds by the Agent . Unless Borrower or a Lender, as the case may be, notifies the Agent prior to the date on which it is scheduled to make payment to the Agent of (i) in the case of a Lender, the proceeds of a Loan or (ii) in the case of Borrower, a payment of principal, interest or fees to the Agent for the account of the Lenders, that it does not intend to make such payment, the Agent may assume that such payment has been made. The Agent may, but shall not be obligated to, make the amount of such payment available to the intended recipient in reliance upon such assumption. If a Lender or Borrower, as the case may be, has not in fact made such payment to the Agent, the applicable Lender and the Borrower severally agree to, on demand by the Agent, pay to the Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to (x) in the case of payment by a Lender, the Federal Funds Effective Rate for such day for the first three days and, thereafter, the interest rate applicable to the relevant Loan or (y) in the case of payment by Borrower, the interest rate applicable to the relevant Obligation.

ARTICLE III

YIELD PROTECTION; TAXES

3.1 Yield Protection . If, on or after the date of this Agreement, the adoption of any law or any governmental or quasi-governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or any change in the interpretation or administration thereof by any governmental or quasi-governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Swingline Lender, any other Lender or any applicable Lending Installation with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency:

(i) subjects the Swingline Lender, any other Lender or any applicable Lending Installation to any Taxes, or changes the basis of taxation of payments (other than with respect to Excluded Taxes) to the Swingline Lender or any Lender in respect of its Eurodollar Loans, or

(ii) imposes or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, the Swingline Lender, any other Lender or any applicable Lending Installation (other than reserves and assessments taken into account in determining the interest rate applicable to Eurodollar Advances), or

(iii) imposes any other condition the result of which is to increase the cost to the Swingline Lender, any other Lender or any applicable Lending Installation of making, funding or maintaining its Eurodollar Loans or reduces any amount receivable by the Swingline Lender, any other Lender or any applicable Lending Installation in connection with its Eurodollar Loans, or requires the Swingline Lender, any other Lender or any applicable Lending Installation to make any payment calculated by reference to the amount of Eurodollar Loans held or interest received

by it, in each case by an amount deemed material by such Lender, and the result of any of the foregoing is to increase the cost to the Swingline Lender, such other Lender or such applicable Lending Installation of making or maintaining its Eurodollar Loans or Commitment or to reduce the return received by the Swingline Lender, such other Lender or such applicable Lending Installation in connection with its Eurodollar Loans or Commitment, then, within 15 days of demand by the Swingline Lender or such other Lender, Borrower shall pay the Swingline Lender or such other Lender such additional amount or amounts as will compensate the Swingline Lender or such Lender for such increased cost or reduction in amount received.

3.2 Changes in Capital Adequacy Regulations . If the Swingline Lender or another Lender determines the amount of capital required or expected to be maintained by the Swingline Lender or such Lender, any Lending Installation of such Lender or any corporation controlling, the Swingline Lender or such Lender is increased as a result of a Change, then, within 15 days of demand by the Swingline Lender or such Lender, Borrower shall pay the Swingline Lender or such other Lender the amount necessary to compensate for any shortfall in the rate of return on the portion of such increased capital which, the Swingline Lender or such other Lender determines is attributable to this Agreement, Loans outstanding hereunder (or participations therein) or its Commitment to make Loans (after taking into account such Lender’s policies as to capital adequacy). “ Change ” means (i) any change after the date of this Agreement in the Risk Based Capital Guidelines (as defined below) or (ii) any adoption of or change in any other law, governmental or quasi-governmental rule, regulation, policy, guideline, interpretation, or directive (whether or not having the force of law) after the date of this Agreement which affects the amount of capital required or expected to be maintained by the Swingline Lender, any other Lender or any Lending Installation or any corporation controlling any Lender. “ Risk Based Capital Guidelines ” means (i) the risk based capital guidelines in effect in the United States on the date of this Agreement, including transition rules, and (ii) the corresponding capital regulations promulgated by regulatory authorities outside the United States implementing the July 1988 report of the Basle Committee on Banking Regulation and Supervisory Practices Entitled “ International Convergence of Capital Measurements and Capital Standards ,” including transition rules, and any amendments to such regulations adopted prior to the date of this Agreement.

3.3 Availability of Types of Advances . If any Lender or the Swingline Lender notifies the Agent that maintenance of its Eurodollar Loans at a suitable Lending Installation would violate any applicable law, rule, regulation, or directive, whether or not having the force of law, or if any governmental authority has imposed material restrictions on the authority of such Lender or Swingline Lender to purchase or sell, or take deposits of, U.S. Dollars in the London interbank market, or if the Required Lenders determine that (i) deposits of a type and maturity appropriate to match fund Eurodollar Advances are not available, (ii) the interest rate applicable to Eurodollar Advances does not accurately reflect the cost of making or maintaining Eurodollar Advances or (iii) adequate reasonable means do not exist for determining the Eurodollar Rate for any requested Interest Period with respect to a proposed Eurodollar Advance, then the Agent shall suspend the availability of Eurodollar Advances and require any affected Eurodollar Advances to be repaid or converted to Floating Rate Advances, subject to the payment of any funding indemnification amounts required by Section 3.4 .

3.4 Funding Indemnification . If any payment of a Eurodollar Advance (other than a Swingline Loan) occurs on a day which is not the last day of an Interest Period therefor, whether because of acceleration, prepayment or otherwise, or a Eurodollar Advance (other than a Swingline Loan) is not made on the date specified by Borrower for any reason other than default by the Lenders, Borrower shall indemnify each Lender for any loss or cost incurred by it resulting therefrom, including any loss or cost in liquidating or employing deposits acquired to fund or maintain such Eurodollar Advance.

3.5 Taxes .

(i) All payments by Borrower to or for the account of the Swingline Lender, any other Lender or the Agent hereunder or under any Note shall be made free and clear of and without deduction for any and all Taxes. If Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to the Swingline Lender, any other Lender or the Agent, (a) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 3.5 ), the Swingline Lender, such Lender or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (b) Borrower shall make such deductions, (c) Borrower shall pay the full amount deducted to the relevant authority in accordance with applicable law and (d) Borrower shall furnish to the Agent the original copy of a receipt evidencing payment thereof within 30 days after such payment is made.

(ii) In addition, Borrower hereby agrees to pay any present or future stamp or documentary taxes and any other excise or property taxes, charges or similar levies which arise from any payment made by it hereunder or under any Note or from its execution or delivery of, or otherwise attributable to Borrower in connection with, this Agreement or any Note (“ Other Taxes ”).

(iii) Borrower hereby agrees to indemnify the Swingline Lender, each other Lender and the Agent for the full amount of Taxes or Other Taxes (including any Taxes or Other Taxes imposed on amounts payable under this Section 3.5 ) paid by the Swingline Lender, such Lender or the Agent and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. Payments due under this indemnification shall be made within 30 days of the date the Swingline Lender, such Lender or the Agent makes demand therefor pursuant to Section 3.6 .

(iv) Each Lender that is not incorporated under the laws of the United States of America or a state thereof (each a “ Non-U.S. Lender ”) agrees that it will, not less than ten Business Days after the date of this Agreement, (i) deliver to Borrower and the Agent two duly completed copies of United States Internal Revenue Service Form W-8BEN or W-8ECI certifying in either case that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, and (ii) deliver to Borrower and the Agent a United States Internal Revenue Form W-8BEN or W-9, as the case may be, and certify that it is entitled to an exemption from United States backup withholding tax. Each Non-U.S. Lender further undertakes to deliver to Borrower and the Agent (x) renewals or additional copies of such form (or any successor form) on or before the date that such form expires or becomes obsolete, and (y) after the occurrence of any event requiring a change in the most recent forms so delivered by it, such additional forms or amendments thereto as may be reasonably requested by Borrower or the Agent. All forms or amendments described in the preceding sentence shall certify that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, unless an event (including any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form or amendment with respect to it and such Lender advises Borrower and the Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax.

(v) For any period during which a Non-U.S. Lender has failed to provide Borrower with an appropriate form pursuant to clause (iv) above (unless such failure is due to a change in treaty, law or regulation, or any change in the interpretation or administration thereof by any governmental authority, occurring subsequent to the date on which a form originally was required to be provided), Borrower shall not be required to increase any amount payable to such Non-U.S. Lender pursuant to Section 3.5(i)(a) or to otherwise indemnify such Lender under this Section 3.5 with respect to Taxes imposed by the United

States; provided that, should a Non-U.S. Lender which is otherwise exempt from or subject to a reduced rate of withholding tax become subject to Taxes because of its failure to deliver a form required under clause (iv) above, Borrower shall take such steps as such Non-U.S. Lender shall reasonably request to assist such Non-U.S. Lender to recover such Taxes.

(vi) Any Lender that is entitled to an exemption from or reduction of withholding tax with respect to payments under this Agreement or any Note pursuant to the law of any relevant jurisdiction or any treaty shall deliver to Borrower (with a copy to the Agent), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate.

(vii) If the U.S. Internal Revenue Service or any other governmental authority of the United States or any other country or any political subdivision thereof asserts a claim that the Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered or properly completed, because such Lender failed to notify the Agent of a change in circumstances which rendered its exemption from withholding ineffective, or for any other reason), such Lender shall indemnify the Agent fully for all amounts paid, directly or indirectly, by the Agent as tax, withholding therefor, or otherwise, including penalties and interest, and including taxes imposed by any jurisdiction on amounts payable to the Agent under this subsection, together with all costs and expenses related thereto (including attorneys fees and time charges of attorneys for the Agent, which attorneys may be employees of the Agent). The obligations of the Lenders under this Section 3.5(vii) shall survive the payment of the Obligations and termination of this Agreement.

3.6 Mitigation of Circumstances; Lender Statements; Survival of Indemnity . Each Lender (including the Swingline Lender) shall promptly notify Borrower and the Agent of any event of which it has knowledge which will result in, and will use reasonable commercial efforts available to it (and not, in such Lender’s good faith judgment, otherwise disadvantageous to such Lender) to mitigate or avoid, (i) any obligation of Borrower to pay any amount pursuant to Section 3.1 , 3.2 or 3.5 and (ii) the unavailability of Eurodollar Advances under Section 3.3 (and, if any Lender (including the Swingline Lender) has given notice of any such event described above and thereafter such event ceases to exist, such Lender shall promptly so notify Borrower and the Agent). Without limiting the foregoing, each Lender (including the Swingline Lender) shall, to the extent reasonably possible, designate an alternate Lending Installation with respect to its Eurodollar Loans to reduce any liability of Borrower to such Lender under Sections 3.1 , 3.2 and 3.5 or to avoid the unavailability of Eurodollar Advances under Section 3.3 , so long as such designation is not, in the judgment of such Lender, disadvantageous to such Lender. Any Lender (including the Swingline Lender) claiming compensation under Section 3.1 , 3.2 , 3.4 , or 3.5 shall deliver a written statement to Borrower (with a copy to the Agent) as to the amount due under the applicable Section, which statement shall set forth in reasonable detail the calculations upon which such Lender determined such amount and shall be final, conclusive and binding on Borrower in the absence of manifest error. Determination of amounts payable under any such Section in connection with a Eurodollar Loan shall be calculated as though each Lender (including the Swingline Lender) funded its Eurodollar Loan through the purchase of a deposit of the type and maturity corresponding to the deposit used as a reference in determining the Eurodollar Rate or Eurodollar Market Index Rate applicable to such Loan, whether in fact that is the case or not. Unless otherwise provided herein, the amount specified in the written statement of any Lender (including the Swingline Lender) shall be payable on demand after receipt by Borrower of such written statement. Notwithstanding any other provision of this Article III , if any Lender (including the Swingline Lender) fails to notify Borrower of any event or circumstance which will entitle such Lender to compensation from Borrower pursuant to Section 3.1 , 3.2 or 3.5 within 60 days after such Lender obtains knowledge of such event or circumstance, then Borrower will not be responsible for any such compensation arising prior to the 60th day before Borrower receives notice from

such Lender of such event or circumstance. The obligations of Borrower under Sections 3.1 , 3.2 , 3.4 and 3.5 shall survive payment of the Obligations and termination of this Agreement.

3.7 Replacement of Lender . If any Lender makes a demand for compensation under Section 3.1 , 3.2 or 3.5 or a notice of the type described in Section 3.3 (any such Lender, an “ Affected Lender ”), then Borrower may replace such Affected Lender as a party to this Agreement with one or more other Lenders and/or Purchasers which are willing to accept an assignment from such Lender, and upon notice from Borrower such Affected Lender shall assign, without recourse or warranty, its Commitment, its Loans and all of its other rights and obligations hereunder to such other Lenders and/or Purchasers for a purchase price equal to the sum of the principal amount of the Loans so assigned, all accrued and unpaid interest thereon, such Affected Lender’s ratable share of all accrued and unpaid fees, any amount payable pursuant to Section 3.4 as a result of such Affected Lender receiving payment of any Eurodollar Loan prior to the end of an Interest Period therefor (assuming for such purpose that receipt of payment pursuant to such assignment constitutes payment of each outstanding Eurodollar Loan) and all other obligations owed to such Affected Lender hereunder.

ARTICLE IV

CONDITIONS PRECEDENT

4.1 Conditions Precedent to Closing and Initial Advance . The effectiveness of this Agreement is subject to the conditions precedent that the Agent has received (a) evidence, reasonably satisfactory to the Agent, that all fees and (to the extent billed) expenses which are payable on or before the date hereof to the Arranger, the Agent or any Lender hereunder or in connection herewith have been (or concurrently with the execution of this Agreement by the parties will be) paid in full; and (b) each of the following documents (with sufficient copies for each Lender):

(i) A copy of each of the certificate of incorporation, together with all amendments thereto, and the bylaws of Borrower, certified by the Secretary or Assistant Secretary of Borrower.

(ii) An incumbency certificate from Borrower, executed by the Secretary or Assistant Secretary of Borrower, which shall identify by name and title and bear the signatures of the officers of Borrower authorized to sign this Agreement, any Notes and any Borrowing Notice, upon which certificate the Agent shall be entitled to rely until informed of any change in writing by Borrower.

(iii) A copy of a certificate of good standing of Borrower, certified by the appropriate governmental officer in the jurisdiction of incorporation of Borrower.

(iv) A copy, certified by the Secretary or Assistant Secretary of Borrower, of resolutions of Borrower’s Board of Directors authorizing the execution, delivery and performance of the Loan Documents.

(v) A certificate, signed by an Authorized Officer of Borrower, stating that on the Closing Date, no Default or Unmatured Default has occurred and is continuing with respect to Borrower.

(vi) Any Notes requested by a Lender pursuant to Section 2.15 payable to the order of such requesting Lender.

(vii) Copies of all governmental approvals, if any, necessary for Borrower to enter into the Loan Documents and to obtain Credit Extensions hereunder.

(viii) Such other documents as any Lender or its counsel may reasonably request, including, without limitation, opinions of legal counsel to the Borrower, addressed to the Agent and each Lender, dated as of the Closing Date, in form and substance reasonably satisfactory to the Agent.

4.2 Each Credit Extension . Neither the Lenders nor the Swingline Lender shall be required to make any Credit Extension to Borrower unless on the date of such Credit Extension:

(i) No Default or Unmatured Default exists or will result from such Credit Extension.

(ii) The representations and warranties of Borrower contained in Article V , (with the exception of the representations and warranties contained in Sections 5.5 , 5.7 . and 5.15 which shall only be made as of the Closing Date), are true and correct in all material respects as of the date of such Credit Extension except to the extent any such representation or warranty is stated to relate solely to an earlier date, in which case such representation or warranty shall have been true and correct in all material respects on and as of such earlier date.

(iii) After giving effect to such Credit Extension, Borrower’s Outstanding Credit Extensions will not exceed Borrower’s borrowing authority as allowed by Applicable Governmental Authorities.

(iv) All legal matters incident to the making of such Credit Extension shall be reasonably satisfactory to the Lenders and their counsel.

Each request for a Credit Extension by Borrower shall constitute a representation and warranty by Borrower that the conditions contained in Sections 4.2(i) , ( ii ) and ( iii ) have been satisfied. Any Lender may require a duly completed compliance certificate in substantially the form of Exhibit A from Borrower as a condition to the making of a Credit Extension.

ARTICLE V

REPRESENTATIONS AND WARRANTIES

Borrower represents and warrants to the Lenders that:

5.1 Existence and Standing . Borrower is a corporation, and each of its Subsidiaries is a corporation, partnership or limited liability company, duly and properly incorporated or organized, as the case may be, validly existing and (to the extent such concept applies to such entity) in good standing under the laws of its jurisdiction (or, if applicable, jurisdictions) of incorporation or organization and has all requisite authority to conduct its business in each jurisdiction in which its business is conducted, except where failure to do so could not reasonably be expected to have a Material Adverse Effect.

5.2 Authorization and Validity . Borrower has the power and authority and legal right to execute and deliver Loan Documents and to perform its obligations thereunder. The execution and delivery by Borrower of the Loan Documents and the performance of its obligations thereunder have been duly authorized by proper corporate proceedings, the Loan Documents constitute legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their terms, except as

enforceability may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors’ rights generally.

5.3 No Conflict; Government Consent . Neither the execution and delivery by such Borrower of the Loan Documents, nor the consummation of the transactions therein contemplated, nor compliance with the provisions thereof, will violate (i) any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on Borrower or any of its Subsidiaries or (ii) Borrower’s or any of its Subsidiary’s articles or certificate of incorporation, partnership agreement, certificate of partnership, articles or certificate of organization, bylaws, or operating or other management agreement, as the case may be, or (iii) the provisions of any indenture, instrument or agreement to which Borrower or any of its Significant Subsidiaries is a party or is subject, or by which it, or its Property, is bound, or conflict with or constitute a default thereunder, or result in, or require, the creation or imposition of any Lien in, of or on any Property of Borrower or any of its Significant Subsidiaries pursuant to the terms of any such indenture, instrument or agreement. No order, consent, adjudication, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, or other action in respect of any governmental or public body or authority (including the FERC), or any subdivision thereof (any of the foregoing, an “ Approval ”), is required to be obtained by Borrower or any of its Subsidiaries in connection with the execution and delivery by Borrower of the Loan Documents, the borrowings by Borrower under this Agreement, the payment and performance by Borrower of its Obligations or the legality, validity, binding effect or enforceability against Borrower of any Loan Document, except for such Approvals which have been issued or obtained by Borrower and which are in full force and effect.

5.4 Financial Statements . The financial statements included in Borrower’s Public Reports were prepared in accordance with Agreement Accounting Principles and fairly present the consolidated financial condition and operations of Borrower and its Subsidiaries at the dates thereof and the consolidated results of their operations for the periods then ended.

5.5 No Material Adverse Change . Since December 31, 2007, there has been no change from that reflected in the Public Reports in the business, Property, financial condition or results of operations of Borrower and its Subsidiaries taken as a whole which could reasonably be expected to have a Material Adverse Effect.

5.6 Taxes . Borrower and its Subsidiaries have filed all United States federal tax returns and all other material tax returns which are required to be filed and have paid all taxes due pursuant to said returns or pursuant to any assessment received by Borrower or any of its Subsidiaries, except (a) such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided in accordance with Agreement Accounting Principles and (b) taxes and governmental charges (in addition to those referred to in clause (a) ) in an aggregate amount not exceeding $1,000,000. The charges, accruals and reserves on the books of Borrower and its Subsidiaries in respect of any taxes or other governmental charges are adequate.

5.7 Litigation and Contingent Obligations . Except as disclosed in the Public Reports, there is no litigation, arbitration, governmental investigation, proceeding or inquiry pending or, to the knowledge of Borrower, threatened against or affecting Borrower or any of its Subsidiaries which could reasonably be expected to have a Material Adverse Effect or which seeks to prevent, enjoin or delay the making of any Loans. Other than any liability incident to any litigation, arbitration or proceeding which could not reasonably be expected to have a Material Adverse Effect, Borrower has no material contingent obligations not provided for or disclosed in the Public Reports.

5.8 Significant Subsidiaries . Schedule 3 contains an accurate list of all Significant Subsidiaries of Borrower as of the Closing Date setting forth their respective jurisdictions of organization

and the percentage of their respective capital stock or other ownership interests owned by Borrower or other Subsidiaries of Borrower. All of the issued and outstanding shares of capital stock or other ownership interests of such Significant Subsidiaries have been (to the extent such concepts are relevant with respect to such ownership interests) duly authorized and issued and are fully paid and nonassessable.

5.9 ERISA . Each Plan complies in all material respects with all applicable requirements of law and regulations, no Reportable Event has occurred with respect to any Plan, neither Borrower nor any other member of the Controlled Group has withdrawn from any Plan or initiated steps to do so, and no steps have been taken to reorganize or terminate any Plan.

5.10 Accuracy of Information . No written information, exhibit or report furnished by Borrower or any of its Subsidiaries to the Agent or to any Lender in connection with the negotiation of, or compliance with the Loan Documents contained any material misstatement of fact or omitted to state a material fact or any fact necessary to make the statements contained therein not misleading.

5.11 Regulation U . Neither Borrower nor any of its Subsidiaries is engaged principally or as one of its primary activities in the business of extending credit for the purpose of purchasing or carrying any "margin stock" (as defined in Regulation U of the FRB).

5.12 Material Agreements . Neither Borrower nor any Subsidiary thereof is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement to which it is a party, which default could reasonably be expected to have a Material Adverse Effect.

5.13 Compliance With Laws . Borrower and its Subsidiaries have complied with all applicable statutes, rules, regulations, orders and restrictions of any domestic or foreign government or any instrumentality or agency thereof having jurisdiction over the conduct of their respective businesses or the ownership of their respective Property except for any failure to comply with any of the foregoing which could not reasonably be expected to have a Material Adverse Effect.

5.14 Plan Assets; Prohibited Transactions . Borrower is not an entity deemed to hold “plan assets” within the meaning of 29 C.F.R. § 2510.3-101 of an employee benefit plan (as defined in Section 3(3) of ERISA) which is subject to Title I of ERISA or any plan (within the meaning of Section 4975 of the Code).

5.15 Environmental Matters . In the ordinary course of its business, the officers of Borrower consider the effect of Environmental Laws on the business of Borrower and its Subsidiaries, in the course of which they identify and evaluate potential risks and liabilities accruing to Borrower and its Subsidiaries due to Environmental Laws. On the basis of this consideration, Borrower has concluded that Environmental Laws are not reasonably expected to have a Material Adverse Effect. Except as disclosed in the Public Reports, neither Borrower nor any Subsidiary thereof has received any notice to the effect that its operations are not in material compliance with any of the requirements of applicable Environmental Laws or are the subject of any federal or state investigation evaluating whether any remedial action is needed to respond to a release of any toxic or hazardous waste or substance into the environment, which noncompliance or remedial action could reasonably be expected to have a Material Adverse Effect.

5.16 Investment Company Act . Neither Borrower nor any Subsidiary thereof is an “investment company” or a company “controlled” by an “investment company”, within the meaning of the Investment Company Act of 1940.

5.17 Insurance . Borrower and its Significant Subsidiaries maintain insurance with financially sound and reputable insurance companies on all their Property of a character usually insured by entities in the same or similar businesses similarly situated against loss or damage of the kinds and in the amounts, customarily insured against by such entities, and maintain such other insurance as is usually carried by such entities.

5.18 No Default . No Default or Unmatured Default exists.

5.19 Ownership of Properties . As of the Closing Date, Borrower and its Subsidiaries have valid title, free of all Liens other than those permitted by Section 6.12 , to all the Property reflected as owned by Borrower and its Subsidiaries in the financial statements of Borrower referred to in Section 5.4 , other than Property used, sold, transferred or otherwise disposed of since such date (a) in the ordinary course of business or (b) which are not material to the business of Borrower and its Subsidiaries taken as a whole.

5.20 OFAC . None of Borrower, any Subsidiary of Borrower or any Affiliate of Borrower: (i) is a person named on the list of Specially Designated Nationals or Blocked Persons maintained by the U.S. Department of the Treasury’s Office of Foreign Assets Control available at http://www.treas.gov/offices/enforcement/ofac/sdn/index.html, or as otherwise published from time to time; or (ii) is (A) an agency of the government of a country, (B) an organization controlled by a country, or (C) a person resident in a country that is subject to a sanctions program identified on the list maintained by OFAC and available at http://www.treas.gov/offices/enforcement/ofac/sanctions/index.html, or as otherwise published from time to time, as such program may be applicable to such agency, organization or person; or (iii) derives more than 10% of its assets or operating income from investments in or transactions with any such country, agency, organization or person; and (iv) none of the proceeds from the Loans will be used to finance any operations, investments or activities in, or make any payments to, any such country, agency, organization, or person.

ARTICLE VI

COVENANTS

During the term of this Agreement, unless the Required Lenders shall otherwise consent in writing:

6.1 Financial Reporting . Borrower will maintain, for itself and each of its Subsidiaries, a system of accounting established and administered in accordance with Agreement Accounting Principles, and furnish to the Agent (in such number of copies as the Agent may reasonably request):

(i) Within 100 days after the close of its fiscal year, an audit report, which shall be without a “ going concern ” or similar qualification or exception and without any qualification as to the scope of the audit, issued by independent certified public accountants of recognized national standing and reasonably acceptable to the Agent, prepared in accordance with Agreement Accounting Principles on a consolidated and consolidating basis (consolidating statements need not be certified by such accountants) for itself and its Subsidiaries, including balance sheets as of the end of such period, related profit and loss and reconciliation of surplus statements, and a statement of cash flows, accompanied by (a) any management letter prepared by said accountants, and (b) a certificate of said accountants that, in the course of their examination necessary for their certification of the foregoing, they have obtained no knowledge of any Default or Unmatured Default with respect to Borrower, or if, in the opinion of such accountants, any such Default or Unmatured Default shall exist, stating the nature and status thereof; provided that if Borrower is then a “registrant” w-ithin the meaning of Rule 1-01 of Regulation S-X of the SEC

and required to file a report on Form 10-K with the SEC, a copy of Borrower’s annual report on Form 10-K (excluding the exhibits thereto, unless such exhibits are requested under clause (viii) of this Section) or any successor form and a manually executed copy of the accompanying report of Borrower’s independent public accountant, as filed with the SEC, shall satisfy the requirements of this clause (i) ;

(ii) Within 60 days after the close of the first three quarterly periods of each of Borrower’s fiscal years commencing during the term of this Agreement, for itself and its Subsidiaries, either (i) consolidated and consolidating unaudited balance sheets as at the close of each such period and consolidated and consolidating profit and loss and reconciliation of surplus statements and a statement of cash flows for the period from the beginning of such fiscal year to the end of such quarter, all certified by its chief financial officer or (ii) if Borrower is then a “registrant” within the meaning of Rule 1-01 of Regulation S-X of the SEC and required to file a report on Form 10-Q with the SEC, a copy of Borrower’s report on Form 10-Q for such quarterly period, excluding the exhibits thereto, unless such exhibits are requested under clause (viii) of this Section.

(iii) Together with the financial statements (or reports) required under Sections 6.1(i) and ( ii ), a compliance certificate in substantially the form of Exhibit A signed by an Authorized Officer of Borrower showing the calculations necessary to determine Borrower’s compliance with Section 6.13 of this Agreement and stating that, to the knowledge of such officer, no Default or Unmatured Default with respect to Borrower exists, or if any such Default or Unmatured Default exists, stating the nature and status thereof.

(iv) As soon as possible and in any event within 30 days after receipt by Borrower, a copy of (a) any notice or claim to the effect that Borrower or any of its Subsidiaries is or may be liable to any Person as a result of the release by Borrower, any of its Subsidiaries, or any other Person of any toxic or hazardous waste or substance into the environment, and (b) any notice alleging any violation of any federal, state or local environmental, health or safety law or regulation by Borrower or any of its Subsidiaries, which, in either case, could be reasonably expected to have a Material Adverse Effect.

(v) Promptly upon Borrower’s furnishing thereof to its shareholders generally, copies of all financial statements, reports and proxy statements so furnished.

(vi) Promptly upon the filing thereof, copies of all registration statements and annual, quarterly, monthly or other regular reports which Borrower or any of its Subsidiaries files with the SEC.

(vii) As soon as Borrower obtains knowledge of an actual Change in Control or publicly disclosed prospective Change in Control, written notice of same, including the anticipated or actual date of and all other publicly disclosed material terms and conditions surrounding such proposed or actual Change in Control.

(viii) Such other information (including nonfinancial information) as the Agent or any Lender may from time to time reasonably request.

Documents required to be delivered pursuant to clause (i) , ( ii ), ( v ) or ( vi ) above may be delivered electronically and, if so delivered, shall be deemed to have been delivered on the date (i) on which Borrower posts such documents, or provides a link thereto, on a website on the internet at a website address previously specified to the Agent and the Lenders; or (ii) on which such documents are posted on

Borrower’s behalf on IntraLinks or another relevant website, if any, to which each of the Agent and each Lender has access; provided that (i) upon request of the Agent or any Lender, Borrower shall deliver paper copies of such documents to the Agent or such Lender (until a written request to cease delivering paper copies is given by the Agent or such Lender) and (ii) Borrower shall notify (which may be by facsimile or electronic mail) the Agent and each Lender of the posting of any documents. The Agent shall have no obligation to request the delivery of, or to maintain copies of, the documents referred to above or to monitor compliance by Borrower with any such request for delivery, and each Lender shall be solely responsible for requesting delivery to it or maintaining its copies of such documents.

6.2 Use of Proceeds . Borrower will use the proceeds of the Advances to it for general corporate purposes. Borrower will not, nor will it permit any Subsidiary to, use any of the proceeds of the Advances to purchase or carry any “margin stock” (as defined in Regulation U of the FRB).

6.3 Notice of Default /Rating Change . Borrower will give prompt notice in writing to the Lenders of the occurrence of (i) any Default or Unmatured Default (it being understood and agreed that Borrower shall not be required to make separate disclosure under this Section 6.3 of occurrences or developments which have previously been disclosed to the Lenders in any financial statement or other information delivered to the Lenders pursuant to Section 6.1 ) or (ii) any change in a Rating (as defined on Schedule 1 ).

6.4 Conduct of Business . Borrower will, and will cause each of its Significant Subsidiaries (or, in the case of clause (ii) below, each of its Subsidiaries) to, (i) carry on and conduct its business in substantially the same manner and in substantially the same fields of enterprise as it is presently conducted and (ii) do all things necessary to remain duly incorporated or organized, validly existing and (to the extent such concept applies to such entity) in good standing as a domestic corporation, partnership or limited liability company in its jurisdiction of incorporation or organization, as the case may be, and maintain all requisite authority to conduct its business in each jurisdiction in which its business is conducted, except to the extent, in the case of all matters covered by this clause (ii) other than the existence of Borrower, that failure to do so would not reasonably be expected to have a Material Adverse Effect.

6.5 Taxes . Borrower will, and will cause each of its Subsidiaries to, timely file complete and correct United States federal and applicable foreign, state and local tax returns required by law and pay when due all taxes, assessments and governmental charges and levies upon it or its income, profits or Property, except (a) those that are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been set aside in accordance with Agreement Accounting Principles and (b) taxes, governmental charges and levies (in addition to those referred to in clause (a) ) in an aggregate amount not exceeding $1,000,000.

6.6 Insurance . Borrower will, and will cause each of its Significant Subsidiaries to, maintain with financially sound and reputable insurance companies insurance on all of its Property in such amounts and covering such risks as is consistent with sound business practice, and Borrower will furnish to any Lender such information as such Lender may reasonably request as to the insurance carried by Borrower and its Significant Subsidiaries.

6.7 Compliance with Laws . Borrower will, and will cause each of its Subsidiaries to, comply with all laws, rules, regulations, orders, writs, judgments, injunctions, decrees or awards to which it may be subject, including all Environmental Laws, where failure to do so could reasonably be expected to have a Material Adverse Effect.

6.8 Maintenance of Properties . Borrower will, and will cause each of its Subsidiaries to, do all things necessary to (a) maintain, preserve, protect and keep its Property in good repair, working order and condition, and make all necessary and proper repairs, renewals and replacements so that its business carried on in connection therewith may be properly conducted at all times, where failure to do so could reasonably be expected to have a Material Adverse Effect; and (b) keep proper books and records in which full and correct entries shall be made of all material financial transactions of Borrower and its Subsidiaries.

6.9 Inspection . Borrower will, and will cause each of its Significant Subsidiaries to, permit the Agent and the Lenders upon reasonable notice and at such reasonable times and intervals as the Agent or any Lender may designate by their respective representatives and agents, to inspect any of the Property, books and financial records of Borrower and each such Significant Subsidiary, to examine and make copies of the books of accounts and other financial records of Borrower and each such Significant Subsidiary, and to discuss the affairs, finances and accounts of Borrower and each such Significant Subsidiary with, and to be advised as to the same by, their respective officers.

6.10 Merger . Borrower will not, nor will it permit any of its Significant Subsidiaries to, merge or consolidate with or into any other Person, except that, so long as both immediately prior to and after giving effect to such merger or consolidation, no Default or Unmatured Default shall have occurred and be continuing, (i) any Significant Subsidiary of Borrower may merge with Borrower or a wholly-owned Subsidiary of Borrower and (ii) Borrower may merge or consolidate with any other Person so long as Borrower is the surviving entity.

6.11 Sales of Assets . Borrower will not, nor will it permit any of its Subsidiaries to, lease, sell or otherwise dispose of any of its assets (other than in the ordinary course of business), or sell or assign with or without recourse any accounts receivable, except:

(i) Any Subsidiary of Borrower may sell, transfer or assign any of its assets to Borrower or another Subsidiary of Borrower.

(ii) The sale, assignment or other transfer of accounts receivable or other rights to payment pursuant to any Securitization Transaction.

(iii) Any Permitted PHI Asset Sale so long as, at the time thereof and immediately after giving effect thereto, no Default or Unmatured Default exists.

(iv) Any Permitted ACE Asset Sale so long as, at the time thereof and immediately after giving effect thereto, no Default or Unmatured Default exists.

(v) Any Permitted DPL Asset Sale so long as, at the time thereof and immediately after giving effect thereto, no Default or Unmatured Default exists.

(vi) Any Permitted PEPCO Asset Sale so long as, at the time thereof and immediately after giving effect thereto, no Default or Unmatured Default exists.

(vii) So long as no Default or Unmatured Default exists or would result therefrom, the sale of Intangible Transition Property to a Special Purpose Subsidiary in connection with such Special Purpose Subsidiary’s issuance of Nonrecourse Transition Bond Debt.

(viii) Borrower and its Subsidiaries may sell or otherwise dispose of assets so long as the aggregate book value of all assets sold or otherwise disposed of in any fiscal year of Borrower

(other than assets sold or otherwise disposed of in the ordinary course of business or pursuant to clauses (i) through ( vii ) above) does not exceed a Substantial Portion of the Property of Borrower.

6.12 Liens . Borrower will not, nor will it permit any of its Significant Subsidiaries to, create, incur, or suffer to exist any Lien in, of or on the Property of Borrower or any such Significant Subsidiary, except:

(i) Liens for taxes, assessments or governmental charges or levies on its Property if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings and for which adequate reserves in accordance with Agreement Accounting Principles shall have been set aside on its books.

(ii) Liens imposed by law, such as carriers’, warehousemen’s and mechanics’ liens and other similar liens arising in the ordinary course of business which secure payment of obligations not more than 90 days past due or which are being contested in good faith by appropriate proceedings and for which adequate reserves shall have been set aside on its books.

(iii) Liens arising out of pledges or deposits under worker’s compensation laws, unemployment insurance, old age pensions, or other social security or retirement benefits, or similar legislation.

(iv) Utility easements, building restrictions, zoning laws or ordinances and such other encumbrances or charges against real property as are of a nature generally existing with respect to properties of a similar character and which do not in any material way affect the marketability of the same or interfere with the use thereof in the business of Borrower and its Significant Subsidiaries.

(v) Liens existing on the date hereof and described in Schedule 4 (including Liens on after-acquired property arising under agreements described in Schedule 4 as such agreements are in effect on the date hereof).

(vi) Judgment Liens which secure payment of legal obligations that would not constitute a Default with respect to Borrower under Article VII .

(vii) Liens on Property acquired by Borrower or a Significant Subsidiary after the date hereof, existing on such Property at the time of acquisition thereof (and not created in anticipation thereof), provided that in any such case no such Lien shall extend to or cover any other Property of Borrower or such Significant Subsidiary, as the case may be.

(viii) Deposits and/or similar arrangements to secure the performance of bids, fuel procurement contracts or other trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business by Borrower or any of its Significant Subsidiaries.

(ix) Liens on assets of Borrower and its Significant Subsidiaries arising out of obligations or duties to any municipality or public authority with respect to any franchise, grant, license, permit or certificate.

(x) Rights reserved to or vested in any municipality or public authority to control or regulate any property or asset of Borrower or any of its Significant Subsidiaries or to use such

property or asset in a manner which does not materially impair the use of such property or asset for the purposes for which it is held by Borrower or such Significant Subsidiary.

(xi) Irregularities in or deficiencies of title to any Property which do not materially affect the use of such property by Borrower or any of its Significant Subsidiaries in the normal course of its business.

(xii) Liens securing Indebtedness of Borrower and its Subsidiaries incurred to finance the acquisition of fixed or capital assets, provided that (i) such Liens shall be created substantially simultaneously with the acquisition of such fixed or capital assets, (ii) such Liens do not at any time encumber any property other than the property financed by such Indebtedness, (iii) the principal amount of Indebtedness secured thereby is not increased and (iv) the principal amount of Indebtedness secured by any such Lien shall at no time exceed 100% of the original purchase price of such property at the time it was acquired.

(xiii) Any Lien on any property or asset of any corporation or other entity existing at the time such corporation or entity is acquired, merged or consolidated or amalgamated with or into Borrower or any Significant Subsidiary thereof and not created in contemplation of such event.

(xiv) Liens arising out of the refinancing, extension, renewal or refunding of any Indebtedness secured by any Lien permitted by Section 6.12 (v) , ( vii ), ( xii ) or ( xiii ), provided that such Indebtedness is not increased and is not secured by any additional assets.

(xv) Rights of lessees arising under leases entered into by Borrower or any of its Significant Subsidiaries as lessor, in the ordinary course of business.

(xvi) Permitted PEPCO Liens.

(xvii) Permitted DPL Liens.

(xviii) Permitted ACE Liens.

(xix) Permitted PHI Liens.

(xx) Purchase money mortgages or other purchase money liens or conditional sale, lease-purchase or other title retention agreements upon or in respect of property acquired or leased for use in the ordinary course of its business by Borrower or any of its Significant Subsidiaries.

(xxi) Liens granted by a Special Purpose Subsidiary to secure Nonrecourse Transition Bond Debt of such Special Purpose Subsidiary.

(xxii) Liens, in addition to those permitted by clauses (i) through ( xxi ), granted by Borrower and its Subsidiaries (other than ACE, DPL or PEPCO and their Subsidiaries) to secure Nonrecourse Indebtedness incurred after the date hereof, provided that the aggregate amount of all Indebtedness secured by such Liens shall not at any time exceed $200,000,000.

(xxiii) Liens, if any, in favor of the Swingline Lender to cash collateralize or otherwise secure the obligations of a Defaulting Lender or an Impacted Lender to fund risk participations hereunder.

(xxiv) Other Liens, in addition to those permitted by clauses (i) through ( xxiii ), securing Indebtedness or arising in connection with Securitization Transactions, provided that the sum (without duplication) of all such Indebtedness, plus the aggregate investment or claim held at any time by all purchasers, assignees or other transferees of (or of interests in) receivables and other rights to payment in all Securitization Transactions (excluding any Nonrecourse Transition Bond Debt), shall not at any time exceed $700,000,000 for Borrower and its Significant Subsidiaries.

6.13 Leverage Ratio . Borrower will not permit the ratio, determined as of the end of each of its fiscal quarters, of (i) the Total Indebtedness of Borrower to (ii) the Total Capitalization of Borrower to be greater than 0.65 to 1.0. For purposes of this Section, the aggregate outstanding Indebtedness evidenced by Hybrid Securities up to an aggregate amount of 15% of Total Capitalization as of the date of determination, shall be excluded from Total Indebtedness, but the entire aggregate outstanding Indebtedness evidenced by such Hybrid Securities shall be included in the calculation of Total Capitalization.

ARTICLE VII

DEFAULTS

The occurrence of any one or more of the following events shall constitute a Default with respect to Borrower:

7.1 Representation or Warranty . Any representation or warranty made, or deemed made pursuant to Section 4.2 by Borrower to the Swingline Lender, the Lenders or the Agent under or in connection with this Agreement or any certificate or information delivered in connection with this Agreement or any other Loan Document shall be materially false on the date as of which made.

7.2 Nonpayment . Nonpayment of the principal of any Loan when due or nonpayment of any interest on any Loan, or of any commitment fee, or other obligation payable by Borrower under any of the Loan Documents, within five days after the same becomes due.

7.3 Certain Covenant Breaches . The breach by Borrower of any of the terms or provisions of Section 6.2 , 6.4 (as to the existence of Borrower), 6.10 , 6.11 , 6.12 or 6.13 .

7.4 Other Breaches . The breach by Borrower (other than a breach which constitutes a Default under another Section of this Article VII ) of any of the terms or provisions of this Agreement which is not remedied within 15 days (or, in the case of Section 6.9 , five Business Days) after the chief executive officer, the chief financial officer, the President, the Treasurer or any Assistant Treasurer of Borrower obtains actual knowledge of such breach.

7.5 Cross Default . Failure of Borrower or any of its Significant Subsidiaries to pay when due any Indebtedness aggregating in excess of $50,000,000 (“ Material Indebtedness ”); or the default by Borrower or any of its Significant Subsidiaries in the performance (beyond the applicable grace period with respect thereto, if any) of any term, provision or condition contained in any agreement under which any such Material Indebtedness was created or is governed, or any other event shall occur or condition exist, the effect of which default or event is to cause, or to permit the holder or holders of such Material Indebtedness to cause, such Material Indebtedness to become due prior to its stated maturity; or any Material Indebtedness of Borrower or any of its Significant Subsidiaries shall be declared to be due and payable or required to be prepaid or repurchased (other than by a regularly scheduled payment) prior to the stated maturity thereof; or Borrower or any of its Significant Subsidiaries shall not pay, or admit in writing its inability to pay, its debts generally as they become due.

7.6 Voluntary Bankruptcy, etc. Borrower or any of its Significant Subsidiaries shall (i) have an order for relief entered with respect to it under the federal bankruptcy laws as now or hereafter in effect, (ii) make an assignment for the benefit of creditors, (iii) apply for, seek, consent to, or acquiesce in, the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for it or a Substantial Portion of its Property, (iv) institute any proceeding seeking an order for relief under the federal bankruptcy laws as now or hereafter in effect or seeking to adjudicate it a bankrupt or insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors or fail to file an answer or other pleading denying the material allegations of any such proceeding filed against it, (v) take any corporate, partnership or limited liability company action to authorize or effect any of the foregoing actions set forth in this Section 7.6 or (vi) fail to contest in good faith any appointment or proceeding described in Section 7.7 .

7.7 Involuntary Bankruptcy, etc. Without the application, approval or consent of Borrower or any of its Significant Subsidiaries, as applicable, a receiver, trustee, examiner, liquidator or similar official shall be appointed for Borrower or any of its Significant Subsidiaries or a Substantial Portion of its Property, or a proceeding described in Section 7.6(iv) shall be instituted against Borrower or any of its Significant Subsidiaries and such appointment continues undischarged or such proceeding continues undismissed or unstayed for a period of 30 consecutive days.

7.8 Seizure of Property, etc. Any court, government or governmental agency shall condemn, seize or otherwise appropriate, or take custody or control of, all or any portion of the Property of Borrower and its Significant Subsidiaries which, when taken together with all other Property of Borrower and its Significant Subsidiaries so condemned, seized, appropriated, or taken custody or control of, constitutes a Substantial Portion of its Property.

7.9 Judgments . Borrower or any of its Significant Subsidiaries shall fail within 60 days to pay, bond or otherwise discharge one or more (i) judgments or orders for the payment of money in excess of $50,000,000 (or the equivalent thereof in currencies other than U.S. Dollars) in the aggregate or (ii) nonmonetary judgments or orders which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect, and, in any such case, there is a period of five consecutive days during which a stay of enforcement of such judgment(s) or order(s) is not in effect (by reason of pending appeal or otherwise).

7.10 ERISA . (i) Any Person shall engage in any “prohibited transaction” (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any “accumulated funding deficiency” (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan or any Lien in favor of the PBGC or a Plan shall arise on the assets of Borrower or any other member of the Controlled Group, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or commencement of proceedings or appointment of a trustee is, in the reasonable opinion of the Required Lenders, likely to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any other member of the Plan shall terminate for purposes of Title IV of ERISA, (v) Borrower or any other member of the Controlled Group shall, or in the reasonable opinion of the Required Lenders is likely to, incur any liability in connection with a withdrawal from, or the insolvency or reorganization of, a Multiemployer Plan or (vi) any other event or condition shall occur or exist with respect to a Plan; and in each case referred to in clauses (i) through (vi) above, such event or condition, together with all other such events or conditions, if any, could reasonably be expected to have a Material Adverse Effect.

7.11 Unenforceability of Loan Documents . Any Loan Document shall cease to be in full force and effect (other than, in the case of a Note, as contemplated hereby), any action shall be taken by or on behalf of Borrower to discontinue or to assert the invalidity or unenforceability of any of its obligations under any Loan Document, or Borrower or any Person acting on behalf of Borrower shall deny that Borrower has any further liability under any Loan Document or shall give notice to such effect.

7.12 Change in Control . Any Change in Control shall occur, or PHI shall fail to own, directly or indirectly, 100% of the Voting Stock of each of ACE, DPL and PEPCO.

ARTICLE I

ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES

8.1 Acceleration . If any Default described in Section 7.6 or 7.7 occurs, the obligations of the Lenders (including the Swingline Lender) to make Credit Extensions to Borrower hereunder shall automatically terminate and the Obligations of Borrower shall immediately become due and payable without any election or action on the part of the Agent or any Lender. If any other Default occurs, the Required Lenders (or the Agent with the consent of the Required Lenders) may (i) terminate or suspend the obligations of the Lenders (including the Swingline Lender) to make Credit Extensions to Borrower hereunder, or declare the Obligations of Borrower to be due and payable, or both, whereupon such obligations of the Lenders (including the Swingline Lender) shall terminate and/or the Obligations of Borrower shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which Borrower hereby expressly waives and/or (ii) exercise all rights and remedies available to the Agent and the Lenders under the Loan Documents.

If, within 30 days after termination of the obligations of the Lenders to make Credit Extensions to Borrower hereunder or acceleration of the maturity of the Obligations as a result of any Default (other than any Default as described in Section 7.6 or 7.7 ) and before any judgment or decree for the payment of the Obligations due shall have been obtained or entered, the Required Lenders (in their sole discretion) shall so direct, the Agent shall, by notice to Borrower, rescind and annul such termination and/or acceleration.

8.2 Amendments . Subject to the provisions of this Article VIII , the Required Lenders (or the Agent with the consent in writing of the Required Lenders) and Borrower may enter into agreements supplemental hereto for the purpose of adding or modifying any provisions to this Agreement changing in any manner the rights of the Lenders or Borrower hereunder or waiving any Default or Unmatured Default hereunder; provided that no such supplemental agreement shall, without the consent of all of the Lenders:

(i) Extend the final maturity of any Loan or the Facility Termination Date or forgive all or any portion of the principal amount of any Loans or reduce the rate or extend the time of payment of interest thereon or on any commitment fees.

(ii) Reduce the percentage specified in the definition of Required Lenders.

(iii) Other than as provided in Section 2.2 , increase the amount of the Commitment of any Lender hereunder or permit Borrower to assign its rights under this Agreement.

(iv) Amend this Section 8.2 .

No amendment of any provision of this Agreement relating to the Agent shall be effective without the written consent of the Agent. No amendment of this Agreement relating to the Swingline Lender shall be

effective without the written consent of the Swingline Lender. The Agent may waive payment of the fee required under Section 12.3(ii) without obtaining the consent of any other party to this Agreement.

8.3 Preservation of Rights . No delay or omission of the Agent, the Swingline Lender or the other Lenders to exercise any right under the Loan Documents shall impair such right or be construed to be a waiver of any Default or Unmatured Default or an acquiescence therein, and the making of a Credit Extension notwithstanding the existence of a Default or Unmatured Default or the inability of Borrower to satisfy the conditions precedent to such Credit Extension shall not constitute any waiver or acquiescence. Any single or partial exercise of any such right shall not preclude other or further exercise thereof or the exercise of any other right, and no waiver, amendment or other variation of the terms, conditions or provisions of any Loan Document whatsoever shall be valid unless in writing signed by the parties required pursuant to Section 8.2 and then only to the extent in such writing specifically set forth. All remedies contained in the Loan Documents or by law afforded shall be cumulative and all shall be available to the Agent, the Swingline Lender and the other Lenders until the Obligations have been paid in full.

ARTICLE IX

GENERAL PROVISIONS

9.1 Survival of Representations . All representations and warranties of Borrower contained in this Agreement shall survive the making of the Credit Extensions herein contemplated.

9.2 Governmental Regulation . Anything contained in this Agreement to the contrary notwithstanding, no Lender shall be obligated to extend credit to Borrower in violation of any limitation or prohibition provided by any applicable statute or regulation.

9.3 Headings . Section headings in the Loan Documents are for convenience of reference only, and shall not govern the interpretation of any of the provisions of the Loan Documents.

9.4 Entire Agreement . The Loan Documents embody the entire agreement and understanding among Borrower, the Agent and the Lenders and supersede all prior agreements and understandings among Borrower, the Agent and the Lenders relating to the subject matter thereof.

9.5 Several Obligations; Benefits of this Agreement . The respective obligations of the Lenders hereunder are several and not joint and no Lender shall be the partner or agent of any other (except to the extent to which the Agent is authorized to act as such). The failure of any Lender to perform any of its obligations hereunder shall not relieve any other Lender from any of its obligations hereunder. This Agreement shall not be construed so as to confer any right or benefit upon any Person other than the parties to this Agreement and their respective successors and assigns, provided that the parties hereto expressly agree that the Arranger shall enjoy the benefits of the provisions of Sections 9.6 , 9.10 and 10.11 to the extent specifically set forth therein and shall have the right to enforce such provisions on its own behalf and in its own name to the same extent as if it were a party to this Agreement.

9.6 Expenses; Indemnification .

(i) Borrower shall reimburse the Agent and the Arranger for all reasonable costs, internal charges and out of pocket expenses including reasonable expenses of and fees for attorneys for the Agent and the Arranger who are employees of the Agent or the Arranger and of a single outside counsel for all of the Agent and the Arranger paid or incurred by the Agent or the Arranger in connection with the preparation, negotiation, execution, delivery, syndication, review, amendment, modification and

administration of the Loan Documents. Borrower agrees to reimburse the Agent, the Arranger and the Lenders for (A) all reasonable costs, internal charges and out of pocket expenses (including reasonable attorneys’ fees and time charges of attorneys for the Agent, the Arranger and the Lenders, which attorneys may be employees of the Agent, the Arranger or a Lender) paid or incurred by the Agent, the Arranger or any Lender in connection with the collection and enforcement of the Obligations of Borrower under the Loan Documents (including in any “work-out” or restructuring of the Obligations resulting from the occurrence of a Default) and (B) any civil penalty or fine assessed by OFAC against, and all reasonable costs and expenses (including reasonable counsel fees and disbursements) incurred in connection with defense thereof, by the Agent or any Lender as a result of conduct by Borrower that violates a sanction enforced by OFAC.

(ii) Borrower agrees to indemnify the Agent, the Arranger, each Lender, their respective affiliates, and each of the directors, officers and employees of the foregoing Persons (each such Person an “ Indemnified Party ” and collectively, the “ Indemnified Parties ”) against all losses, claims, damages, penalties, judgments, liabilities and reasonable expenses (including all reasonable expenses of litigation or preparation therefor whether or not any Indemnified Party is a party thereto) which any of them may pay or incur arising out of or relating to this Agreement, the other Loan Documents, the transactions contemplated hereby, or the direct or indirect application or proposed application of the proceeds of any Credit Extension hereunder, except to the extent that they are determined in a final non-appealable judgment by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the Indemnified Party seeking indemnification. The obligations of Borrower under this Section 9.6 shall survive the termination of this Agreement.

9.7 Numbers of Documents . All statements, notices, closing documents and requests hereunder shall be furnished to the Agent with sufficient counterparts so that the Agent may furnish one to each of the Lenders.

9.8 Disclosure . Borrower and the Lenders hereby (i) acknowledge and agree that Bank of America and/or its Affiliates from time to time may hold investments in, make other loans to or have other relationships with Borrower and their Affiliates and (ii) waive any liability of Bank of America or any of its Affiliates to Borrower or any Lender, respectively, arising out of or resulting from such investments, loans or relationships other than liabilities arising out of the gross negligence or willful misconduct of Bank of America or its Affiliates.

9.9 Severability of Provisions . Any provision in any Loan Document that is held to be inoperative, unenforceable, or invalid in any jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable, or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability, or validity of that provision in any other jurisdiction, and to this end the provisions of all Loan Documents are declared to be severable.

9.10 Nonliability of Lenders . The relationship between Borrower on the one hand and the Lenders and the Agent on the other hand shall be solely that of borrower and lender. None of the Agent, the Arranger or any Lender shall have any fiduciary responsibility to Borrower. None of the Agent, the Arranger or any Lender undertakes any responsibility to Borrower to review or inform Borrower of any matter in connection with any phase of Borrower’s business or operations. Borrower agrees that none of the Agent, the Arranger or any Lender shall have liability to Borrower (whether sounding in tort, contract or otherwise) for losses suffered by Borrower in connection with, arising out of, or in any way related to, the transactions contemplated and the relationship established by the Loan Documents, or any act, omission or event occurring in connection therewith, unless it is determined in a final non-appealable judgment by a court of competent jurisdiction that such losses resulted from the gross negligence or willful misconduct of the party from which recovery is sought. None of the Agent, the Arranger or any

Lender shall have any liability with respect to, and Borrower hereby waives, releases and agrees not to sue for, any special, indirect or consequential damages suffered by Borrower in connection with, arising out of, or in any way related to the Loan Documents or the transactions contemplated thereby.

9.11 Limited Disclosure .

(i) None of the Agent, the Swingline Lender nor any other Lender shall disclose to any Person any Specified Information (as defined below) except to its, and its Affiliates’, officers, employees, agents, accountants, legal counsel, advisors and other representatives who have a need to know such Specified Information in connection with this Agreement or the transactions contemplated hereby. “ Specified Information ” means information that Borrower has furnished or in the future furnishes to the Agent, the Swingline Lender or any other Lender in confidence, but does not include any such information that (a) is published in a source or otherwise becomes generally available to the public (other than through the actions of the Agent, the Swingline Lender, any other Lender or any of their Affiliates, officers, employees, agents, accountants, legal counsel, advisors and other representatives in violation of this Agreement) or that is or becomes available to the Agent, the Swingline Lender or such other Lender from a source other than Borrower, (b) without duplication with clause (b) above, is otherwise a matter of general public knowledge, (c) that is required to be disclosed by law, regulation or judicial order (including pursuant to the Code), (d) that is requested by any regulatory body with jurisdiction over the Agent, the Swingline Lender or any other Lender, (e) that is disclosed to legal counsel, accountants and other professional advisors to the Agent, the Swingline Lender or such other Lender, in connection with the exercise of any right or remedy hereunder or under any Note or any suit or other litigation or proceeding relating to this Agreement or any Note or to a rating agency if required by such agency in connection with a rating relating to Credit Extensions hereunder, (f) that is disclosed to assignees or participants or potential assignees or participants who agree to be bound by the provisions of this Section 9.11 or (g) that is disclosed to any actual or prospective counterparty (or its advisors) to any swap or derivative transaction relating to Borrower and its obligations who agrees to be bound by the provisions of this Section 9.11 .

(ii) The provisions of this Section 9.11 supersede any confidentiality obligations of any Lender, the Swingline Lender or the Agent relating to this Agreement or the transactions contemplated hereby under any agreement between Borrower and any such party.

9.12 Nonreliance . Each Lender hereby represents that it is not relying on or looking to any margin stock (as defined in Regulation U of the FRB) for the repayment of the Credit Extensions provided for herein.

9.13 USA PATRIOT ACT NOTIFICATION . The following notification is provided to Borrower pursuant to Section 326 of the USA Patriot Act of 2001, 31 U.S.C. Section 5318:

IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT. To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify and record information that identifies each person or entity that opens an account, including any deposit account, treasury management account, loan, other extension of credit or other financial services product. What this means for Borrower: When a borrower opens an account, if such borrower is an individual, the Agent and the Lenders will ask for such borrower’s name, residential address, tax identification number, date of birth and other information that will allow the Agent and the Lenders to identify such borrower, and, if a borrower is not an individual, the Agent and the Lenders will ask for such borrower’s name, tax identification number, business address and other information that will allow the Agent and the Lenders to identify such borrower. The Agent and the Lenders may also ask, if a borrower is an individual, to see such borrower’s driver’s license or other

identifying documents, and, if the borrower is not an individual, to see the borrower’s legal organizational documents or other identifying documents.

9.14 Interest Rate Limitation .

Notwithstanding anything to the contrary contained in any Loan Document, the interest paid or agreed to be paid under the Loan Documents shall not exceed the maximum rate of non-usurious interest permitted by applicable law (the “ Maximum Rate ”). If the Agent or any Lender shall receive interest in an amount that exceeds the Maximum Rate, the excess interest shall be applied to the principal of the Loans or, if it exceeds such unpaid principal, refunded to the Borrower. In determining whether the interest contracted for, charged, or received by the Agent or a Lender exceeds the Maximum Rate, such Person may, to the extent permitted by applicable law, (a) characterize any payment that is not principal as an expense, fee, or premium rather than interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the contemplated term of the Obligations hereunder.

ARTICLE X

THE AGENT

10.1 Appointment; Nature of Relationship . Bank of America is hereby appointed by each of the Lenders as its contractual representative (herein referred to as the “ Agent ”) hereunder and under each other Loan Document, and each of the Lenders irrevocably authorizes the Agent to act as the contractual representative of such Lender with the rights and duties expressly set forth herein and in the other Loan Documents. The Agent agrees to act as such contractual representative upon the express conditions contained in this Article X . Notwithstanding the use of the defined term “ Agent ,” it is expressly understood and agreed that the Agent shall not have any fiduciary responsibilities to any Lender by reason of this Agreement or any other Loan Document and that the Agent is merely acting as the contractual representative of the Lenders with only those duties as are expressly set forth in this Agreement and the other Loan Documents. In its capacity as the Lenders’ contractual representative, the Agent (i) does not hereby assume any fiduciary duties to any of the Lenders, (ii) is a “representative” of the Lenders within the meaning of Section 9-105 of the Uniform Commercial Code and (iii) is acting as an independent contractor, the rights and duties of which are limited to those expressly set forth in this Agreement and the other Loan Documents. Each of the Lenders hereby agrees to assert no claim against the Agent on any agency theory or any other theory of liability for breach of fiduciary duty, all of which claims each Lender hereby waives.

10.2 Powers . The Agent shall have and may exercise such powers under the Loan Documents as are specifically delegated to the Agent by the terms of each thereof, together with such powers as are reasonably incidental thereto. The Agent shall have no implied duties to the Lenders, or any obligation to the Lenders to take any action hereunder or under any other Loan Document except any action specifically provided by the Loan Documents to be taken by the Agent. Except as expressly set forth herein and in the other Loan Documents, the Agent shall not be liable for the failure to disclose any information relating to the Borrower or its Affiliates that is communicated to or obtained by the Person serving as the Agent or any of its Affiliates in any capacity.

10.3 General Immunity . Neither the Agent nor any of its directors, officers, agents or employees shall be liable to Borrower or any Lender for any action taken or omitted to be taken by it or them hereunder or under any other Loan Document or in connection herewith or therewith except to the extent such action or inaction is determined in a final non-appealable judgment by a court of competent jurisdiction to have arisen from the gross negligence or willful misconduct of such Person.

10.4 No Responsibility for Loans Recitals etc. Neither the Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into, or verify (a) any statement, warranty or representation made in connection with any Loan Document or any borrowing hereunder; (b) the performance or observance of any of the covenants or agreements of any obligor under any Loan Document, including any agreement by an obligor to furnish information directly to each Lender; (c) the satisfaction of any condition specified in Article IV , except to confirm receipt of items expressly required to be delivered solely to the Agent; (d) the existence or possible existence of any Default or Unmatured Default; (e) the validity, enforceability, effectiveness, sufficiency or genuineness of any Loan Document or any other instrument or writing furnished in connection therewith; or (f) the contents of any certificate, report or other document delivered hereunder or under any other Loan Document. The Agent shall have no duty to disclose to the Lenders information that is not required to be furnished by Borrower to the Agent at such time, but is voluntarily furnished by Borrower to the Agent (either in its capacity as Agent or in its individual capacity).

10.5 Action on Instructions of Lenders . The Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and under any other Loan Document in accordance with written instructions signed by the Required Lenders (or, when expressly required hereunder, all of the Lenders), and such instructions and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders. The Lenders hereby acknowledge that the Agent shall be under no duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement or any other Loan Document unless it shall be requested in writing to do so by the Required Lenders. The Agent shall be fully justified in failing or refusing to take any action hereunder and under any other Loan Document unless it shall first be indemnified to its satisfaction by the Lenders pro rata against any and all liability, cost and expense that it may incur by reason of taking or continuing to take any such action.

10.6 Employment of Agents and Counsel . The Agent may execute any of its duties as Agent hereunder and under any other Loan Document by or through employees, agents and attorneys in fact and shall not be answerable to the Lenders, except as to money or securities received by it or its authorized agents, for the default or misconduct of any such agents or attorneys in fact selected by it with reasonable care. The Agent shall be entitled to advice of counsel concerning the contractual arrangement between the Agent and the Lenders and all matters pertaining to the Agent’s duties hereunder and under any other Loan Document.

10.7 Reliance on Documents; Counsel . The Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any Note, notice, consent, certificate, affidavit, letter, telegram, statement, paper or document (including any electronic message, Internet or intranet website posting or other distribution) believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and, in respect to legal matters, upon the opinion of counsel selected by the Agent, which counsel may be employees of the Agent.

10.8 Agent’s Reimbursement and Indemnification . The Lenders agree to reimburse and indemnify the Agent ratably in proportion to their respective Commitments (or, if the Commitments have been terminated, in proportion to their Commitments immediately prior to such termination) (i) for any amounts not reimbursed by Borrower for which the Agent is entitled to reimbursement by Borrower under the Loan Documents, (ii) for any other expenses incurred by the Agent on behalf of the Lenders, in connection with the preparation, execution, delivery, administration and enforcement of the Loan Documents (including for any expenses incurred by the Agent in connection with any dispute between the Agent and any Lender or between two or more of the Lenders) and (iii) for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of the Loan Documents or any document delivered in connection therewith or the

transactions contemplated thereby (including for any such amounts incurred by or asserted against the Agent in connection with any dispute between the Agent and any Lender or between two or more of the Lenders), or the enforcement of any of the terms of the Loan Documents or of any such other documents, provided that (i) no Lender shall be liable for any of the foregoing to the extent any of the foregoing is found in a final non-appealable judgment by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the Agent and (ii) any indemnification required pursuant to Section 3.5(vii) shall, notwithstanding the provisions of this Section 10.8 , be paid by the relevant Lender in accordance with the provisions thereof. The obligations of the Lenders under this Section 10.8 shall survive payment of the Obligations and termination of this Agreement.

10.9 Notice of Default . The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Unmatured Default hereunder (except for failure of Borrower to pay any amount required to be paid to the Agent hereunder for the account of the Lenders) unless the Agent has received written notice from a Lender or Borrower referring to this Agreement, describing such Default or Unmatured Default and stating that such notice is a “ notice of default ”. In the event that the Agent receives such a notice, the Agent shall give prompt notice thereof to all Lenders.

10.10 Rights as a Lender . In the event the Agent is a Lender, the Agent shall have the same rights and powers hereunder and under any other Loan Document with respect to its Commitment, its Loans and its participation in the Swingline Loans as any Lender and may exercise the same as though it were not the Agent, and the term “ Lender ” or “ Lenders ” shall, at any time when the Agent is a Lender, unless the context otherwise indicates, include the Agent in its individual capacity. The Agent and its Affiliates may accept deposits from, lend money to, and generally engage in any kind of trust, debt, equity or other transaction, in addition to those contemplated by this Agreement or any other Loan Document, with Borrower or any of its Subsidiaries in which Borrower or such Subsidiary is not restricted hereby from engaging with any other Person. The Agent in its individual capacity is not obligated to remain a Lender.

10.11 Lender Credit Decision . Each Lender acknowledges that it has, independently and without reliance upon the Agent, the Arranger, any other Lender or any of their respective Affiliates, partners, directors, officers, employees, agents, trustees and advisors and based on the financial statements prepared by Borrower and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and the other Loan Documents. Each Lender also acknowledges that it will, independently and without reliance upon the Agent, the Arranger, any other Lender or any of their respective Affiliates, partners, directors, officers, employees, agents, trustees and advisors and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Loan Documents.

10.12 Successor Agent . The Agent may resign at any time by giving written notice thereof to the Lenders and Borrower, such resignation to be effective upon the appointment of a successor Agent or, if no successor Agent has been appointed, forty-five days after the retiring Agent gives notice of its intention to resign. The Agent may be removed at any time with or without cause by written notice received by the Agent from the Required Lenders, such removal to be effective on the date specified by the Required Lenders. Upon any such resignation or removal, the Required Lenders shall have the right (with, so long as no Default or Unmatured Default exists, the consent of Borrower, which shall not be unreasonably withheld or delayed) to appoint, on behalf of Borrower and the Lenders, a successor Agent. If no successor Agent shall have been so appointed by the Required Lenders within thirty days after the resigning Agent’s giving notice of its intention to resign, then the resigning Agent may appoint, on behalf of Borrower and the Lenders, a successor Agent. Notwithstanding the previous sentence, the Agent may at any time without the consent of any Lender but with the consent of Borrower, not to be unreasonably

withheld or delayed, appoint any of its Affiliates which is a commercial bank as a successor Agent hereunder. If the Agent has resigned or been removed and no successor Agent has been appointed, the Lenders may perform all the duties of the Agent hereunder and Borrower shall make all payments in respect of their respective Obligations to the applicable Lender and for all other purposes shall deal directly with the Lenders. No successor Agent shall be deemed to be appointed hereunder until such successor Agent has accepted the appointment. Any such successor Agent shall be a commercial bank with an office in the United States having capital and retained earnings of at least $100,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the resigning or removed Agent. Upon the effectiveness of the resignation or removal of the Agent, the resigning or removed Agent shall be discharged from its duties and obligations hereunder and under the Loan Documents. After the effectiveness of the resignation or removal of an Agent, the provisions of this Article X shall continue in effect for the benefit of such Agent in respect of any actions taken or omitted to be taken by it while it was acting as the Agent hereunder and under the other Loan Documents. In the event that there is a successor to the Agent (by merger or resignation or removal), or the Agent assigns its duties and obligations to an Affiliate pursuant to this Section 10.12 , then the term “ Prime Rate ” as used in this Agreement shall mean the prime rate, base rate or other analogous rate of the new Agent. Notwithstanding the foregoing provisions of this Section 10.12 , the Agent may not be removed by the Required Lenders unless the Agent (in its individual capacity) is concurrently removed from its duties and responsibilities as the Swingline Lender. Any resignation by Bank of America as Agent pursuant to this Section shall also constitute its resignation as Swingline Lender.

10.13 Agent’s Fee . Borrower agrees to pay to each of the Agent and the Arranger, for the Agent’s or the Arranger’s own account, the fees agreed to by Borrower and the Agent or the Arranger, as applicable.

10.14 Delegation to Affiliates . Borrower and the Lenders agree that the Agent may delegate any of its duties under this Agreement to any of its Affiliates. Any such Affiliate (and such Affiliate’s directors, officers, agents and employees) which performs duties in connection with this Agreement shall be entitled to the same benefits of the indemnification, waiver and other protective provisions to which the Agent is entitled under Articles IX and X .

10.15 Other Agents . None of the Lenders identified on the cover page or signature pages of this Agreement or otherwise herein as being the “ Syndication Agent ” or a “ Documentation Agent ” (collectively, the “ Other Agents ”) shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Lenders. Each Lender acknowledges that it has not relied, and will not rely, on any of the Other Agents in deciding to enter into this Agreement or in taking or refraining from taking any action hereunder or pursuant hereto.

ARTICLE II

SETOFF; RATABLE PAYMENTS

11.1 Setoff . In addition to, and without limitation of, any rights of the Lenders and the Swingline Lender under applicable law, if Borrower becomes insolvent, however evidenced, or any Default occurs, any and all deposits (including all account balances, whether provisional or final and whether or not collected or available) and any other Indebtedness at any time held or owing by any Lender or the Swingline Lender or any Affiliate of any Lender or the Swingline Lender to or for the credit or account of Borrower may be offset and applied toward the payment of the Obligations of Borrower owing to such Lender or the Swingline Lender, whether or not the Obligations, or any part thereof, shall then be due and irrespective of whether or not such Lender shall have made any demand under this Agreement or any other Loan Document.

11.2 Ratable Payments . If any Lender, whether by setoff or otherwise, has payment made to it upon the Outstanding Credit Extensions owed to it by Borrower (other than (i) payments received pursuant to Section 3.1 , 3.2 , 3.4 or 3.5 , (ii) payments made to the Swingline Lender in respect of Swingline Loans so long as the Lenders have not funded their participations therein and (iii) any amounts received by the Swingline Lender to secure the obligations of a Defaulting Lender or an Impacted Lender to fund risk participations hereunder) in a greater proportion than that received by any other Lender, such Lender agrees, promptly upon demand, to purchase a portion of the Outstanding Credit Extensions owed by Borrower to the other Lenders so that after such purchase each Lender will hold its ratable proportion of all of Borrower’s Outstanding Credit Extensions. If any Lender, whether in connection with setoff or amounts which might be subject to setoff or otherwise, receives collateral or other protection for the Outstanding Credit Extensions owed to it by Borrower or such amounts which may be subject to setoff, such Lender agrees, promptly upon demand, to take such action necessary such that all Lenders share in the benefits of such collateral ratably in proportion to the Outstanding Credit Extensions owed to each of them by Borrower. In case any such payment is disturbed by legal process, or otherwise, appropriate further adjustments shall be made.

11.3 Payments Set Aside . To the extent that any payment by or on behalf of the Borrower is made to the Agent or any Lender, or the Agent or any Lender exercises its right of setoff, and such payment or the proceeds of such setoff or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Agent or such Lender in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any proceeding under any debtor relief law or otherwise, then (a) to the extent of such recovery, the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such setoff had not occurred, and (b) each Lender severally agrees to pay to the Agent upon demand its applicable share (without duplication) of any amount so recovered from or repaid by the Agent, plus interest thereon from the date of such demand to the date such payment is made at a rate per annum equal to the Federal Funds Effective Rate from time to time in effect. The obligations of the Lenders under clause (b) of the preceding sentence shall survive the payment in full of the Obligations and the termination of this Agreement.

ARTICLE XII

BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS

12.1 Successors and Assigns . The terms and provisions of the Loan Documents shall be binding upon and inure to the benefit of Borrower and the Lenders and their respective successors and assigns, except that (i) Borrower shall not have the right to assign its rights or obligations under the Loan Documents and (ii) any assignment by any Lender must be made in compliance with Section 12.3 . The parties to this Agreement acknowledge that clause (ii) of the preceding sentence relates only to absolute assignments and does not prohibit assignments creating security interests, including any pledge or assignment by any Lender of all or any portion of its rights under this Agreement and any Note to a Federal Reserve Bank; provided that no such pledge or assignment creating a security interest shall release the transferor Lender from its obligations hereunder unless and until the parties thereto have complied with the provisions of Section 12.3 . The Agent may treat the Person which made any Loan or which holds any Note as the owner thereof for all purposes hereof unless and until such Person complies with Section 12.3 ; provided that the Agent may in its discretion (but shall not be required to) follow instructions from the Person which made any Loan or which holds any Note to direct payments relating to such Loan or Note to another Person. Any assignee of the rights to any Loan or any Note agrees by acceptance of such assignment to be bound by all the terms and provisions of the Loan Documents. Any request, authority or consent of any Person, who at the time of making such request or giving such authority or consent is the owner of the rights to any Loan (whether or not a Note has been issued in

evidence thereof), shall be conclusive and binding on any subsequent holder or assignee of the rights to such Loan.

12.2 Participations .

(i) Permitted Participants; Effect . Upon giving notice to but without obtaining the consent of Borrower, any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time sell to one or more Persons (other than a natural person or the Borrower or any of the Borrower’s Affiliates or Subsidiaries) (“ Participants ”) participating interests in any Obligations owing to such Lender, any Note held by such Lender, any Commitment of such Lender or any other interest of such Lender under the Loan Documents. In the event of any such sale by a Lender of participating interests to a Participant, such Lender’s obligations under the Loan Documents shall remain unchanged, such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, such Lender shall remain the owner of the Obligations owing to such Lender and the holder of any Note issued to it for all purposes under the Loan Documents, all amounts payable by Borrower under this Agreement shall be determined as if such Lender had not sold such participating interests, and Borrower, the Swingline Lender and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under the Loan Documents.

(ii) Voting Rights . Each Lender shall retain the sole right to approve, without the consent of any Participant, any amendment, modification or waiver of any provision of the Loan Documents other than any amendment, modification or waiver which extends the Facility Termination Date or the final maturity of any Loan in which such Participant has an interest or forgives all or any portion of the principal amount thereof, or reduces the rate or extends the time of payment of interest thereon or on any commitment fees.

(iii) Benefit of Setoff . Borrower agrees that each Participant shall be deemed to have the right of setoff provided in Section 11.1 in respect of its participating interest in amounts owing under the Loan Documents to the same extent as if the amount of its participating interest were owing directly to it as a Lender under the Loan Documents, provided that each Lender shall retain the right of setoff provided in Section 11.1 with respect to the amount of participating interests sold to each Participant. The Lenders agree to share with each Participant, and each Participant, by exercising the right of setoff provided in Section 11.1 , agrees to share with each Lender, any amount received pursuant to the exercise of its right of setoff, such amounts to be shared in accordance with Section 11.2 as if each Participant were a Lender.

12.3 Assignments .

(i) Permitted Assignments . Any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time assign to one or more Persons (other than a natural person or the Borrower or any of the Borrower’s Affiliates or Subsidiaries) (“ Purchasers ”) all or any part of its rights and obligations under the Loan Documents. Such assignment shall be substantially in the form of Exhibit B or in such other form as may be agreed to by the parties thereto. The consent of Borrower, the Swingline Lender and the Agent shall be required prior to an assignment becoming effective with respect to a Purchaser which is not a Lender or an Affiliate thereof; provided that if a Default exists, the consent of Borrower shall not be required. Any such consent shall not be unreasonably withheld or delayed. Each such assignment with respect to a Purchaser which is not a Lender or an Affiliate thereof shall (unless each of Borrower and the Agent otherwise consent) be in an amount not less than the lesser of (i) $5,000,000 or (ii) the remaining amount of the assigning Lender’s Commitment (calculated as at the date of such

assignment) or outstanding Loans and participations in Swingline Loans (to the extent such Commitment has been terminated). Each assignment shall be of a constant, and not a varying, percentage of all of the assigning Lender’s interests in the Obligations of, and Commitment to, Borrower.

(ii) Effect; Effective Date . Upon (i) delivery to the Agent of an Assignment Agreement, together with any consents required by Section 12.3(i) , and (ii) payment of a $3,500 fee to the Agent for processing such assignment (unless such fee is waived by the Agent), and subject to acceptance and recording of such Assignment Agreement pursuant to Section 12.3(iii) , such Assignment Agreement shall become effective on the effective date specified in such Assignment Agreement. On and after the effective date of such Assignment Agreement, such Purchaser shall for all purposes be a Lender party to this Agreement and any other Loan Document executed by or on behalf of the Lenders and shall have all the rights and obligations of a Lender under the Loan Documents, to the same extent as if it were an original party hereto, and no further consent or action by Borrower, the Lenders or the Agent shall be required to release the transferor Lender with respect to the percentage of the Aggregate Commitment and Obligations assigned to such Purchaser. Any Person that is at any time a Lender and that thereafter ceases to be a Lender pursuant to the terms of this Section 12.3(ii) shall continue to be entitled to the benefit of those provisions of this Agreement that, pursuant to the terms hereof, survive the termination hereof. Upon the consummation of any assignment to a Purchaser pursuant to this Section 12.3(ii) , the transferor Lender, the Agent and Borrower shall, if the transferor Lender or the Purchaser desires that its Loans be evidenced by Notes, make appropriate arrangements so that new Notes or, as appropriate, replacement Notes are issued to such transferor Lender and new Notes or, as appropriate, replacement Notes, are issued to such Purchaser.

(iii). Register . The Agent, acting solely for this purpose as an agent of the Borrower, shall maintain at its United States office a copy of each Assignment Agreement delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitments of, and principal amounts of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the “ Register ”). The entries in the Register shall be conclusive, and Borrower, the Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by Borrower and any Lender, at any reasonable time and from time to time upon reasonable prior notice.

12.4 Dissemination of Information . Borrower authorizes each Lender to disclose to any Participant or Purchaser or any other Person acquiring an interest in the Loan Documents by operation of law (each a “ Transferee ”) and any prospective Transferee any and all information in such Lender’s possession concerning the creditworthiness of Borrower and its Subsidiaries, including any information contained in any Public Reports; provided that each Transferee and prospective Transferee agrees to be bound by Section 9.11 of this Agreement.

12.5 Grant of Funding Option to SPC . Notwithstanding anything to the contrary contained herein, any Lender (a “ Granting Lender ”) may grant to a special purpose funding vehicle (an “ SPC ”), identified as such in writing from time to time by the Granting Lender to the Agent and Borrower, the option to provide to Borrower all or any part of any Loan that such Granting Lender would otherwise be obligated to make pursuant to this Agreement; provided that (i) nothing herein shall constitute a commitment by any SPC to make any Loan and (ii) if an SPC elects not to exercise such option or otherwise fails to provide all or any part of such Loan, the Granting Lender shall be obligated to make such Loan pursuant to the terms hereof. The making of a Loan by an SPC hereunder shall utilize the

Commitment of the Granting Lender to the same extent, and as if, such Loan were made by such Granting Lender. Each party hereto agrees that no SPC shall be liable for any indemnity or similar payment obligation under this Agreement (all liability for which shall remain with the Granting Lender). In furtherance of the foregoing, each party hereto agrees (which agreement shall survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding commercial paper or other senior indebtedness of any SPC, it will not institute against, or join any other Person in instituting against, such SPC any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding under the laws of the United States or any State thereof. In addition, notwithstanding anything to the contrary contained in this Section 12.5 , any SPC may (a) with notice to, but without the prior written consent of, Borrower and the Agent and without paying any processing fee therefor, assign all or a portion of its interests in any Loan to the Granting Lender or to any financial institution (consented to by Borrower and the Agent) providing liquidity and/or credit support to or for the account of such SPC to support the funding or maintenance of Loans and (b) disclose on a confidential basis any non-public information relating to its Loans to any rating agency, commercial paper dealer or provider of any surety, guarantee or credit or liquidity enhancement to such SPC.

12.6 Tax Treatment . If any interest in any Loan Document is transferred to any Transferee which is organized under the laws of any jurisdiction other than the United States or any State thereof, the transferor Lender shall cause such Transferee, concurrently with the effectiveness of such transfer, to comply with the provisions of Section 3.5(iv) .

ARTICLE XIII

NOTICES

13.1 Notices . (a) Except as otherwise permitted by Section 2.16 , all notices, requests and other communications to any party hereunder shall be in writing (including facsimile transmission or electronic mail or posting on a website) and shall, subject to the last paragraph of Section 6.1 , be given to such party at (i) in the case of Borrower or the Agent, its address, facsimile number or electronic mail address set forth below or such other address, facsimile number or electronic mail address as it may hereafter specify for such purpose by notice to the other parties hereto; and (ii) in the case of any Lender, at the address, facsimile number or electronic mail address set forth on Schedule 2 or such other address, facsimile number or electronic mail address as such Lender may hereafter specify for such purpose by notice to Borrower and the Agent. Subject to the last paragraph of Section 6.1 , each such notice, request or other communication shall be effective (i) if given by facsimile transmission, when transmitted to the facsimile number specified pursuant to this Section and confirmation of receipt is received, (ii) if given by mail, three Business Days after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid, or (iii) if given by any other means, when delivered (or, in the case of electronic mail, received) at the address specified pursuant to this Section; provided that notices to the Agent under Article II shall not be effective until received.

(b) Notices to any party shall be sent to it at the following addresses, or any other address as to which all the other parties are notified in writing.

	If to Borower:	Pepco Holdings, Inc.
		701 Ninth Street NW
		Fifth Floor
		Washington, DC 20068
		Attention: Anthony J. Kamerick
		Telephone: (202) 872-2056
		Fax: (202) 872-3015
		E-mail: tjkamerick@pepco.com

	If to Agent:	For Borrowings/Requests for Credit Extensions and Repayments:


		David A. Cochran , Credit Services Representative Bank of America, N.A. One Independence Center 101 N. Tryon Street Mail Code: NC1-001-04-39 Charlotte, NC 28255-0001 Telephone: (980) 386-8201 Facsimile: (704) 719-5440 Electronic Mail: david.a.cochran@bankofamerica.com

		Wire Instructions: Bank of America, New York, N.Y. ABA # 026009593 Account # 1366212250600 Attn: Corporate Credit Services Reference: Pepco Holdings Inc.

		For Financial Reporting Requirements, Bank Group Communications:

		Roberto O. Salazar , Agency Management Officer Bank of America, N.A. 231 South LaSalle Street Mail Code: IL1-231-10-41 Chicago, IL 60604 Telephone: (312) 828-3185 Facsimile: (877) 207-2382 Electronic Mail: roberto.o.salazar@bankofamerica.com

ARTICLE XIV

COUNTERPARTS

This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Agreement by signing any such counterpart. This Agreement shall be effective when it shall have been executed by the Agent and when the Agent shall have received counterparts that, when taken together, bear the signatures of each of the other parties hereto. Delivery of an executed counterpart of a signature page of this Agreement by telecopy or other electronic imaging means shall be effective as delivery of a manually executed counterpart of this Agreement.

ARTICLE XV

CHOICE OF LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL

15.1 CHOICE OF LAW . THE LOAN DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (INCLUDING SECTIONS 5.1401 AND 5.1402 OF THE GENERAL OBLIGATIONS LAW, BUT OTHERWISE WITHOUT REGARD TO THE

CONFLICT OF LAWS PROVISIONS THEREOF) OF THE STATE OF NEW YORK, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.

15.2 CONSENT TO JURISDICTION . BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR NEW YORK STATE COURT SITTING IN NEW YORK, NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENT, AND BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY BORROWER AGAINST THE AGENT OR ANY LENDER OR ANY AFFILIATE OF THE AGENT OR ANY LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN NEW YORK, NEW YORK.

15.3 WAIVER OF JURY TRIAL ; SERVICE OF PROCESS .

(i) BORROWER, THE AGENT AND THE LENDERS HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE RELATIONSHIP ESTABLISHED THEREUNDER.

(ii) BORROWER, THE AGENT AND THE LENDERS IRREVOCABLY CONSENT TO SERVICE OF PROCESS IN THE MANNER PROVIDED FOR NOTICES IN SECTION 13.1 ; PROVIDED THAT SUCH SERVICE OF PROCESS SHALL NOT BE EFFECTIVE UNTIL ACTUALLY RECEIVED. NOTHING IN THIS AGREEMENT WILL AFFECT THE RIGHT OF ANY PARTY HERETO TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW.

[Signatures Follow]

IN WITNESS WHEREOF, Borrower, the Lenders and the Agent have executed this Agreement as of the date first above written.

	PEPCO HOLDINGS, INC.

	By:	/s/ A. J. KAMERICK
	Name:	Anthony J. Kamerick
	Title:	Vice President and Treasurer

	BANK OF AMERICA, N.A., as Agent

	By:	/s/ ROBERTO O. SALAZAR
	Name:	Roberto O. Salazar
	Title:	Assistant Vice President

	BANK OF AMERICA, N.A., as a Lender

	By:	/s/ ERIC H. WILLIAMS
	Name:	Eric H. Williams
	Title:	Vice President

	JPMORGAN CHASE BANK, N.A., as a Lender

	By:	/s/ H. D. DAVIS
	Name:	Helen D. Davis
	Title:	Vice President

	KEYBANK NATIONAL ASSOCIATION, as a Lender

	By:	/s/ SHERRIE I. MANSON
	Name:	Sherrie I. Manson
	Title:	Senior Vice President

	SUNTRUST BANK, as a Lender

	By:	/s/ ANDREW JOHNSON
	Name:	Andrew Johnson
	Title:	Director

	THE BANK OF NOVA SCOTIA, as a Lender

	By:	/s/ THANE RATTEW
	Name:	Thane Rattew
	Title:	Managing Director

	CREDIT SUISSE, Cayman Islands Branch, as a Lender

	By:	/s/ M. FAYBUSOVICH
	Name:	Mikhail Faybusovich
	Title:	Vice President

	By:	/s/ S. MALIK
	Name:	Shaheen Malik
	Title:	Associate

	WACHOVIA BANK, NATIONAL ASSOCIATION, as a Lender

	By:	/s/ SHANNAN TOWNSEND
	Name:	Shannan Townsend
	Title:	Director

	MORGAN STANLEY BANK, as a Lender

	By:	/s/ DANIEL TWENGE
	Name:	Daniel Twenge
	Title:	Authorized Signatory

SCHEDULE 1

PRICING SCHEDULE

	Level I Status	Level II status	Level III Status
Applicable Margin	2.50%	3.00%	3.50%
Commitment Fee Rate	0.50%	0.625%	0.75%

For the purposes of this Schedule, the following terms have the following meanings, subject to the other provisions of this Schedule:

“ Level I Status ” exists with respect to Borrower on any date if, on such date, Borrower’s Moody’s Rating is Baa2 or better, Borrower’s S&P Rating is BBB or better or such Borrower’s Fitch Rating is BBB or better.

“ Level II Status ” exists with respect to Borrower on any date if, on such date, (i) Borrower has not qualified for Level I Status and (ii) Borrower’s Moody’s Rating is Baa3 or better, Borrower’s S&P Rating is BBB- or better or Borrower’s Fitch Rating is BBB- or better.

“ Level III Status ” exists with respect to Borrower on any date if, on such date, Borrower has not qualified for Level I Status or Level II Status.

“ Fitch Rating ” means, at any time, the ratings issued by Fitch Ratings and then in effect with respect to Borrower’s unsecured long-term debt securities without third-party credit enhancement.

“ Moody’s Rating ” means, at any time, the rating issued by Moody’s and then in effect with respect to Borrower’s senior unsecured long term debt securities without third party credit enhancement.

“ Rating ” means the Fitch Rating, the Moody’s Rating or the S&P Rating.

“ Rating Agency ” shall mean Fitch, Moody’s or S&P.

“ S&P Rating ” means, at any time, the rating issued by S&P and then in effect with respect to Borrower’s senior unsecured long term debt securities without third party credit enhancement.

“ Status ” means Level I Status, Level II Status or Level III Status.

For purposes of this Schedule, the Moody’s Rating, the S&P Rating and the Fitch Rating in effect for Borrower on any date are that in effect at the close of business on such date.

The Applicable Margin and the Commitment Fee Rate shall be determined in accordance with the above based on Borrower’s Status as determined from its then current Moody’s Rating, S&P Rating and Fitch Rating. If Borrower is split-rated and all three (3) ratings fall in different Levels, the Applicable Margin and the Commitment Fee Rate shall be based upon the Level indicated by the middle rating. If Borrower is split-rated and two (2) of the ratings fall in the same Level, (the “ Majority Level ”) and the third rating is in a different Level, the Applicable Margin and the Commitment Fee Rate shall be based upon the Majority Level.

Any change in the Applicable Margin by reason of a change in the Moody’s Rating, the S & P Rating or the Fitch Rating shall become effective on the date of announcement or publication by the respective Rating Agency of a change in such Rating or, in the absence of such announcement or publication, on the effective date of such changed Rating.

Sch-1

SCHEDULE 2

COMMITMENTS AND PRO RATA SHARES

Lender	Amount of Commitment	Pro Rata Share
Bank of America, N.A.	$50,000,000	12.820512821%
JPMorgan Chase Bank, N.A.	$49,000,000	12.564102564%
KeyBank National Association	$49,000,000	12.564102564%
SunTrust Bank	$49,000,000	12.564102564%
The Bank of Nova Scotia	$49,000,000	12.564102564%
Morgan Stanley Bank	$48,000,000	12.307692308%
Credit Suisse, Cayman Islands Branch	$48,000,000	12.307692308%
Wachovia Bank, National Association	$48,000,000	12.307692308%
TOTAL:	$390,000,000	100%

Sch-2

SCHEDULE 3

SIGNIFICANT SUBSIDIARIES

Name of Company Controlled	Owned By	Percent Ownership
Potomac Electric Power Company (a D.C. and Virginia corporation)	Pepco Holdings, Inc	100%
Conectiv (a Delaware corporation)	Pepco Holdings, Inc.	100%
Delmarva Power & Light Company (a Delaware and Virginia corporation)	Conectiv	100%
Atlantic City Electric Company (a New Jersey corporation)	Conectiv	100%
Conectiv Energy Holding Company (a Delaware corporation)	Conectiv	100%
Conectiv Delmarva Generation, Inc (a Delaware corporation)	Conectiv Energy Holding Company	100%
Potomac Capital Investment Corp (a Delaware corporation)	Pepco Holdings, Inc	100%
Conectiv Energy Supply, Inc. (a Delaware corporation)	Conectiv Energy Holding Company	100%

Sch-3

SCHEDULE 4

LIENS

Incurred By	Owed To	Property Encumbered	Maturity	Amount of Indebtedness
Potomac Electric Power Co.	GE Bankers Leasing	Vehicles, Office Equip., Computers	Master Agreement	$9,454,017 *
PHI Service Company	GE Bankers Leasing	Office Equip., Computers	Master Agreement	$14,021,973 *
Atlantic City Electric Co.	GE Bankers Leasing	Vehicles, Office Equip., Computers	Master Agreement	$9,843,869 *
Delmarva Power & Light Co.	GE Bankers Leasing	Vehicles, Office Equip., Computers	Master Agreement	$15,028,581 *
Potomac Electric Power Co. (Pepco Energy Services)	Hannon Armstrong Pepco Funding Corp.	Contract Payments Receivable	Master Agreement	$1,783,222 *
Potomac Electric Power Co. (Pepco Energy Services)	Citizen Leasing Corp.	Contract Payments Receivable	Master Agreement	$7,707,156 *
Potomac Electric Power Co. (Pepco Energy Services)	National City Commercial Capital	Contract Payments Receivable	Master Agreement	$11,837,389 *




*The amount of this lien fluctuates with the amount of accounts receivable created by this program. The amount listed is as of September 30, 2008. The Hannon Armstrong balance receives sale treatment accounting and is not reflected on the balance sheet.

Sch-4

EXHIBIT A

COMPLIANCE CERTIFICATE

To:	The Agent and the Lenders under the Credit Agreement referred to below

This Compliance Certificate is furnished pursuant to that certain Credit Agreement dated as of November 7, 2008 (as amended, restated or otherwise modified from time to time, the “ Credit Agreement ”) among Pepco Holdings, Inc. (“ Borrower ”), the Lenders from time to time party thereto and Bank of America, N.A., as Agent. Unless otherwise defined herein, capitalized terms used in this Compliance Certificate have the respective meanings ascribed thereto in the Credit Agreement.

THE UNDERSIGNED HEREBY CERTIFIES THAT:

1. I am the duly elected __________________of Borrower.

2. I have reviewed the terms of the Credit Agreement and I have made, or have caused to be made under my supervision, a detailed review of the transactions and conditions of Borrower and its Subsidiaries during the accounting period covered by the attached financial statements.

3. The examinations described in paragraph 2 did not disclose, and I have no knowledge of, the existence of any condition or event which constitutes a Default or Unmatured Default with respect to Borrower during or at the end of the accounting period covered by the attached financial statements or as of the date of this Compliance Certificate, except as set forth below:

[Describe any exceptions by listing, in detail, the nature of the condition or event, the period during which it has existed and the action taken or proposed to be taken with respect to each such condition or event.]

4. Schedule 1 attached hereto sets forth true and accurate computations of certain covenant ratios in the Credit Agreement which are applicable to Borrower.

The foregoing certifications, together with the computations set forth in Schedule 1 hereto and the financial statements delivered with this Compliance Certificate in support hereof, are made and delivered this ___ day of ________, 200_.

Ex-A1

SCHEDULE 1 TO COMPLIANCE CERTIFICATE

Compliance as of _________ with

provisions of Section 6.13 of

the Credit Agreement

[INSERT FORMULA FOR CALCULATION]

Ex-A2

EXHIBIT B

ASSIGNMENT AGREEMENT

This Assignment Agreement (this “ Assignment Agreement ”) is dated as of the Effective Date set forth below and is entered into by and between [Insert name of Assignor] (the “ Assignor ”) and [Insert name of Assignee] (the “ Assignee ”). Capitalized terms used but not defined herein have the meanings provided in the Credit Agreement identified below, receipt of a copy of which is hereby acknowledged by the Assignee. The Standard Terms and Conditions set forth in Annex 1 attached hereto are hereby agreed to and incorporated herein by reference and made a part of this Assignment Agreement as if set forth herein in full.

For an agreed consideration, the Assignor hereby irrevocably sells and assigns to the Assignee, and the Assignee hereby irrevocably purchases and assumes from the Assignor, subject to and in accordance with the Standard Terms and Conditions and the Credit Agreement, as of the Effective Date inserted by the Agent as contemplated below (i) all of the Assignor’s rights and obligations as a Lender under the Credit Agreement and any other documents or instruments delivered pursuant thereto to the extent related to the amount and percentage interest identified below of all of such outstanding rights and obligations of the Assignor under the respective facilities identified below (including, without limitation, the Swingline Loans included in such facilities) and (ii) to the extent permitted to be assigned under applicable law, all claims, suits, causes of action and any other right of the Assignor (in its capacity as a Lender) against any Person, whether known or unknown, arising under or in connection with the Credit Agreement, any other documents or instruments delivered pursuant thereto or the loan transactions governed thereby or in any way based on or related to any of the foregoing, including, but not limited to, contract claims, tort claims, malpractice claims, statutory claims and all other claims at law or in equity related to the rights and obligations sold and assigned pursuant to clause (i) above (the rights and obligations sold and assigned pursuant to clauses (i) and (ii) above being referred to herein collectively as, the “ Assigned Interest ”). Such sale and assignment is without recourse to the Assignor and, except as expressly provided in this Assignment Agreement, without representation or warranty by the Assignor.

1.	Assignor:

2.	Assignee:		[and is an
		Affiliate of [identify Lender]]

3.	Borrower:	Pepco Holdings, Inc., a Delaware corporation

4.	Agent:	Bank of America, N.A., as the administrative agent under the Credit Agreement

5.	Credit Agreement:	Credit Agreement dated as of November 7, 2008 (as amended, modified, supplemented or extended from time to time, the “ Credit Agreement ”) among the Borrower, the Lenders from time to time party thereto and Bank of America, N.A., as Agent and Swingline Lender.

Ex-B1

6. Assigned Interest:

Aggregate Amount of Commitment/Loans for all Lenders	Amount of Commitment/Loans Assigned 1	Pro Rata Share of Commitment/Loans 2

7.	Trade Date:

8.	Effective Date:

The terms set forth in this Assignment Agreement are hereby agreed to:

ASSIGNOR :	[NAME OF ASSIGNOR]

	By:
	Name:
	Title:


ASSIGNEE :	[NAME OF ASSIGNEE]

	By:
	Name:
	Title:

1 Amount to be adjusted by the counterparties to take into account any payments or prepayments made between the Trade Date and the Effective Date.

2 Set forth, to at least 9 decimals, as a percentage of the Commitment/Loans of all Lenders thereunder.

Ex-B2

[Consented to and] 3 Accepted :

BANK OF AMERICA, N.A., as Agent

By:
Name:
Title:


[Consented to] 4:

PEPCO HOLDINGS, INC., a Delaware corporation

By:
Name:
Title:


[Consented to] 5 :

BANK OF AMERICA, N.A., as Swingline Lender

By:
Name:
Title:

1 Amount to be adjusted by the counterparties to take into account any payments or prepayments made between the Trade Date and the Effective Date.

2 Set forth, to at least 9 decimals, as a percentage of the Commitment/Loans of all Lenders thereunder.

3 To be added only if the consent of the Agent is required by the terms of the Credit Agreement.

4 To be added only if the consent of the Borrower is required by the terms of the Credit Agreement.

5 To be added only if the consent of the Borrower is required by the terms of the Credit Agreement.

Ex-B3

Annex 1 to Assignment Agreement

STANDARD TERMS AND CONDITIONS

1. Representations and Warranties .

1.1. Assignor . The Assignor (a) represents and warrants that (i) it is the legal and beneficial owner of the Assigned Interest, (ii) the Assigned Interest is free and clear of any lien, encumbrance or other adverse claim and (iii) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment Agreement and to consummate the transactions contemplated hereby; and (b) assumes no responsibility with respect to (i) any statements, warranties or representations made in or in connection with the Credit Agreement or any other Loan Document, (ii) the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Documents or any collateral thereunder, (iii) the financial condition of the Borrower, any of its Subsidiaries or Affiliates or any other Person obligated in respect of any Loan Document or (iv) the performance or observance by the Borrower, any of its Subsidiaries or Affiliates or any other Person of any of their respective obligations under any Loan Document.

1.2. Assignee . The Assignee (a) represents and warrants that (i) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment Agreement and to consummate the transactions contemplated hereby and to become a Lender under the Credit Agreement, (ii) it meets the requirements to be an assignee under Section 12.3(i) of the Credit Agreement (subject to such consents, if any, as may be required under Section 12.3(i) of the Credit Agreement), (iii) from and after the Effective Date, it shall be bound by the provisions of the Credit Agreement as a Lender thereunder and, to the extent of the Assigned Interest, shall have the obligations of a Lender thereunder, (iv) it is sophisticated with respect to decisions to acquire assets of the type represented by the Assigned Interest and either it, or the Person exercising discretion in making its decision to acquire the Assigned Interest, is experienced in acquiring assets of such type, (v) it has received a copy of the Credit Agreement, and has received or has been accorded the opportunity to receive copies of the most recent financial statements delivered pursuant to Section 6.1 thereof, as applicable, and such other documents and information as it deems appropriate to make its own credit analysis and decision to enter into this Assignment Agreement and to purchase the Assigned Interest, (vi) it has, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Assignment Agreement and to purchase the Assigned Interest, (vii) if applicable, attached hereto are the forms prescribed by the Internal Revenue Service of the United States certifying that the Assignee is entitled to receive payments under the Loan Documents without deduction or withholding of any United States federal income taxes and (viii) none of the funds, monies, assets or other consideration being used to make the purchase and assumption hereunder are “plan assets” as defined under ERISA and that its rights, benefits and interests in and under the Loan Documents will not be “plan assets” under ERISA; and (b) agrees that (i) it will, independently and without reliance on the Agent, the Assignor or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents, and (ii) it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender. The Assignee hereby appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Loan Documents as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto.

2. Payments . From and after the Effective Date, the Agent shall make all payments in respect of the Assigned Interest (including payments of principal, interest, fees and other amounts) to the Assignor for amounts which have accrued to but excluding the Effective Date and to the Assignee for amounts which have accrued from and after the Effective Date.

Ex-B4

3. General Provisions . This Assignment Agreement shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. This Assignment Agreement may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Assignment Agreement by signing any such counterpart. Delivery of an executed counterpart of a signature page of this Assignment Agreement by telecopy or other electronic imaging means shall be effective as delivery of a manually executed counterpart of this Assignment Agreement. This Assignment Agreement shall be construed in accordance with the internal laws (including Sections 5.1401 and 5.1402 of the General Obligations Law, but otherwise without regard to the conflict of laws provisions thereof) of the State of New York, but giving effect to all federal laws applicable to national banks.

Ex-B5

EXHIBIT C

NOTE

[Date]

Pepco Holdings, Inc. (the “ Borrower ”) promises to pay to ________________ (the “ Lender ”) the aggregate unpaid principal amount of all Loans made by the Lender to the Borrower pursuant to the Credit Agreement (as defined below), at the office of the Agent, together with interest on the unpaid principal amount hereof at the rates and on the dates set forth in the Credit Agreement. The Borrower shall pay the principal of and accrued and unpaid interest on the Loans in full on the Facility Termination Date.

The Lender shall, and is hereby authorized to, record on the schedule attached hereto, or to otherwise record in accordance with its usual practice, the date and amount of each Loan and the date and amount of each principal payment hereunder.

This Note is one of the Notes issued pursuant to, and is entitled to the benefits of, that certain Credit Agreement dated as of November 7, 2008 (as amended or otherwise modified from time to time, the “ Credit Agreement ”), among the Borrower, the lenders party thereto, including the Lender, and Bank of America, N.A., as Agent, to which Credit Agreement reference is hereby made for a statement of the terms and conditions governing this Note, including the terms and conditions under which this Note may be prepaid or its maturity date accelerated. Capitalized terms used herein and not otherwise defined herein are used with the meanings attributed to them in the Credit Agreement.

All payments hereunder shall be made in lawful money of the United States of America and in immediately available funds.

THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (INCLUDING SECTIONS 5.1401 AND 5.1402 OF THE GENERAL OBLIGATIONS LAW, BUT OTHERWISE WITHOUT REGARD TO THE CONFLICT OF LAWS PROVISIONS THEREOF) OF THE STATE OF NEW YORK, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.

	PEPCO HOLDINGS, INC.


	By:
	Name:
	Title:

Ex-C1

SCHEDULE OF LOANS AND PAYMENTS OF PRINCIPAL

NOTE OF PEPCO HOLDINGS, INC.

DATED ____________________

Date	Principal Amount of Loan	Maturity of Interest Period	Principal Amount Paid	Unpaid Balance

Ex-C2

EXHIBIT D

INCREASE NOTICE

________ __, 20__

To:	The Agent and the Lenders under the Credit Agreement referred to below

This Increase Notice is furnished pursuant to Section 2.2(a) of that certain Credit Agreement dated as of November 7, 2008 (as amended, restated or otherwise modified from time to time, the “ Credit Agreement ”) among Pepco Holdings, Inc., the Lenders from time to time party thereto and Bank of America, N.A., as Agent. Unless otherwise defined herein, capitalized terms used in this Increase Notice have the respective meanings ascribed thereto in the Credit Agreement.

1. The Borrower hereby requests a Requested Commitment Increase in the aggregate principal amount of $__________. (Complete with an amount in accordance with Section 2.2(a) of the Credit Agreement.)

2. The aggregate principal amount of all commitment increases as of the date hereof (including the Requested Commitment Increase requested hereby) does not exceed the maximum amount permitted pursuant to the terms of the Credit Agreement.

3. No Default or Unmatured Default has occurred or is continuing or would result from the proposed Requested Commitment Increase.

	PEPCO HOLDINGS, INC.


	By:
	Name:
	Title:

EX-D1