Item 1. Business

GENERAL

Dominion, headquartered in Richmond, Virginia and incorporated in Virginia in 1983, is one of the nation’s largest producers and transporters of energy. Dominion’s strategy is to be a leading provider of electricity, natural gas and related services to customers primarily in the eastern region of the U.S. Dominion’s portfolio of assets includes approximately 27,50027,615 MW of generation, 6,000generating capacity, 6,100 miles of electric transmission lines, 56,00056,800 miles of electric distribution lines, in Virginia and North Carolina, 12,00011,000 miles of natural gas transmission, gathering and storage pipeline 21,700and 21,800 miles of gas distribution pipeline, exclusive of service lines of two inches in diameter or less, and 1.3 Tcfe of proved natural gas and oil reserves.less. Dominion also owns the nation’s largest underground natural gas storage system, operates approximately 942947 bcf of storage capacity and serves retail energy customers in twelve14 states.

Dominion is focused on expanding its investment in regulated electric generation, transmission and distribution and regulated electric and natural gas transmission and distribution infrastructure within and around its existing footprint. As a result, regulated capital projects will continue to receive priority treatment in its spending plans. Dominion expects this will increase its earnings contribution from regulated operations, while reducing the sensitivity of its earnings to commodity prices.

In 2010, Dominion announced plans to invest more than $10 billion over the next five years to expand and improve its regulated electric and natural gas businesses. A substantial portion of this investment will be essential to meet the anticipated increase in electricity demand in its service territory. Other drivers for the capital investment program include the need to construct infrastructure to handle the expected increase in natural gas production from the Marcellus Shale formation and upgrades to its gas distribution and electric transmission and distribution network. Dominion also announced that it may invest up to an additional $2 billion in its electric generating fleet to meet potential new environmental requirements.

Dominion’s nonregulated operations include merchant generation, energy marketing and price risk management activities and retail energy marketing operations and natural gas and oil exploration and production in the Appalachian basin of the U.S.operations. Dominion’s operations are conducted through various subsidiaries, including Virginia Power.

Virginia Power, headquartered in Richmond, Virginia and incorporated in Virginia in 1909 as a Virginia public service corporation, is a regulated public utility that generates, transmits and distributes electricity for sale in Virginia and northeastern North Carolina. In Virginia, Virginia Power conducts business under the name “Dominion Virginia Power.” In North Carolina, it conducts business under the name “Dominion North Carolina Power” and serves retail customers located in the northeastern region of the state, excluding certain municipalities. In addition, Virginia Power sells electricity at wholesale prices to rural electric cooperatives, municipalities and into wholesale electricity markets. All of Virginia Power’s common stock is owned by Dominion.

The term “Dominion” is used throughout this report and, depending on the context of its use, may represent any of the following: the legal entity, Dominion Resources, Inc., one or more of Dominion Resources, Inc.’s consolidated subsidiaries (other than Virginia Power) or operating segments or the entirety of Dominion Resources, Inc. and its consolidated subsidiaries.

The term “Virginia Power” is used throughout this report and, depending on the context of its use, may represent any of the following: the legal entity, Virginia Electric and Power Company, one or more of its consolidated subsidiaries or operating segments or the entirety of Virginia Power and its consolidated subsidiaries.

Amounts disclosed for Dominion are inclusive of Virginia Power, where applicable.

The historical results of the non-Appalachian E&P operations are included in the Corporate and Other segment. The historical results of the Appalachian E&P operations are included in the Dominion Energy segment.

SALEOF PEOPLES

In February 2010, Dominion completed the sale of Peoples to PNG Companies LLC and netted after-tax proceeds of approximately $542 million. The historical results of these operations are included in the Corporate and Other segment and presented in discontinued operations. See Note 4 to the Consolidated Financial Statements for additional information.

ASSIGNMENTOF MARCELLUS ACREAGE

In 2008, Dominion completed a transaction with Antero to assign drilling rights to approximately 117,000 acres in the Marcellus Shale formation located in West Virginia and Pennsylvania. Dominion received proceeds of approximately $347 million. Under the agreement, Dominion receivesreceived a 7.5% overriding royalty interest on future natural gas production from the assigned acreage. Dominion retained the drilling rights in traditional formations both above and below the Marcellus Shale interval and continues its conventional drilling program on the acreage.

SALEOF E&P PROPERTIES

In 2007, Dominion completedThe overriding royalty interest was transferred to CONSOL as part of the sale of its non-Appalachian natural gas and oilsubstantially all of Dominion’s Appalachian E&P operations and assets for approximately $13.9 billion. See Note 4 to the Consolidated Financial Statement for additional information.

In 2006, Dominion received approximately $393 million of proceeds from sales of certain gas and oil properties, primarily resulting from the sale of certain properties located in Texas and New Mexico.

The historical results of these operations are included in the Corporate and Other segment.2010.

SALEOF MERCHANT FACILITIES

In March 2007, Dominion sold three Peaker facilities for net cash proceeds of $254 million. The Peaker facilities included the 625 MW Armstrong facility in Shelocta, Pennsylvania; the 600 MW Troy facility in Luckey, Ohio; and the 313 MW Pleasants facility in St. Mary’s, West Virginia. Following the decision to sell these assets in December 2006, theThe results of these operations were reclassified to discontinued operations and are presented in the Corporate and Other segment.discontinued operations.

SALEOF DRESDEN

In September 2007, Dominion completed the sale of Dresden to AEP Generating Company for $85 million.

SALEOF CERTAIN DCIDCI OPERATIONS

In August 2007, Dominion completed the sale of Gichner, LLC, all of the issued and outstanding shares of the capital stock of Gichner, Inc. (an affiliate of Gichner, LLC) and Dallastown for approximately $30 million.

In March 2008, Dominion reached an agreement to sell its remaining interest in the subordinated notes of a third-party CDO entity held as an investment by DCI and in April 2008 received proceeds of $54 million, including accrued interest. As discussed in Note 25 to the Consolidated Financial Statements, Dominion deconsolidated the CDO entity as of March 31, 2008.

service reliability hasand customer service have improved. The metric used to measure electric service reliability (System Average Interruption Duration Index,SAIDI, excluding major storm events)events, has also steadily improved. The three-year average SAIDI has improved from 139135 minutes at the end of 20042005 to 110114 minutes at the end of 2009.2010. Likewise, ASA has also shown significant improvement. The three-year average ASA has improved from 73 seconds at the end of 2005 to 42 seconds at the end of 2010. Customer service options are also being enhanced and expanded through the use of technology. Customers now have the ability to use the Internet for routine billing and payment transactions, connecting and disconnecting service, reporting outages and obtaining outage updates. At the end of 2009, over 800,000 of Virginia Power’s customers were signed up to manage their account on-line through dom.com, and over 2.9 million transactions were performed on-line in 2009. This reflects a transaction increase of 45% over 2008. As electric distribution continues to evolve,moves forward, safety, operational performanceelectric service reliability and customer service will remain as key focal areas.

The Virginia General Assembly enacted legislation in April 2007 that instituted a modified cost-of-service rate model for the Virginia jurisdiction of Virginia Power’s utility operations, subject to base rate caps in effect through December 31, 2008. In 2009, the Virginia Commission initiated a review of Virginia Power’s base rates. A discussion of Virginia Power’s proposal in the case, including a settlement agreement to which it is a party, is contained inElectric Regulation inVirginia underRegulation.

Revenue provided by Virginia Power’s electric transmission operations is based primarily on rates approved by FERC. The profitability of this business is dependent on its ability, through the rates it is permitted to charge, to recover costs and earn a reasonable return on its capital investments. Variability in earnings results from changes in rates and the timing of property additions, retirements and depreciation.

In April 2008, FERC granted an application by Virginia Power’s electric transmission operations to establish a forward-looking formula rate mechanism that updates transmission rates on an annual basis and approved an ROE of 11.4% on the common equity base of these operations, effective as of January 1, 2008. The FERC ruling did not materially impact the Company’s results of operations; however, the FERC-approved formula method allows Virginia Power to earn a more current return on its growing investment in electric transmission infrastructure. In addition, in August 2008, FERC granted an application by Virginia Power’s electric transmission operations requesting a revision to its cost of service to reflect an additional ROE incentive adder for eleven electric transmission enhancement projects and approved an incentive of 1.5% for four of the projects and an incentive of 1.25% for the other seven. SeeFederalRegulations inRegulation for additional information.

Virginia Power is a member of PJM, an RTO, and its electric transmission facilities are integrated into PJM wholesale electricity markets. Consistent with the increased authority given to NERC by EPACT, Virginia Power’s electric transmission operations are

Brook-to-Loudoun line is expected to cost approximately $255 million and subject to the receipt of all regulatory approvals, is expected to be completed in June 2011.

In October 2008, the Virginia Commission authorized the construction of the Carson-to-Suffolk line. This project is estimated to cost $224 million and is expected to be completed in June 2011. The siting

As part of subsequent annual PJM RTEP processes, PJM authorized additional electric transmission upgrade projects including Hayes-to-Yorktown in December 2008 and Mt. Storm-to-Doubs in December 2010. In June 2010, the Virginia Commission authorized the construction of thesethe Hayes-to-Yorktown line along the proposed eight-mile route utilizing existing easements and property previously acquired for the transmission linesline right-of-way. In accordance with the Virginia Commission’s approval, approximately 4.2 miles of the Hayes-to-Yorktown line will be constructed overhead and approximately 3.8 miles will be installed underground in order to cross under the York River. The Hayes-to-Yorktown line is expected to cost approximately $63 million and, subject to receipt of all regulatory approvals, is expected to be completed by June 2012.

After more than 44 years of operation, portions of the 99-mile Mt. Storm-to-Doubs line and certain associated facilities are subjectapproaching the end of their expected service lives and require replacement with new facilities to maintain reliable service. Virginia Power owns and has been designated by PJM to rebuild the 96 miles of the line in West Virginia and Virginia, and The Potomac Edison Company owns and has been designated by PJM to rebuild the remaining three miles of the line in Maryland. Subject to applicable state and federal permitsregulatory approvals, Virginia Power’s portion of the rebuild project is expected to cost approximately $300 million and approvals.is expected to be completed by June 2015.

In addition, Virginia Power’s electric distribution network includes approximately 56,00056,800 miles of distribution lines, exclusive of service level lines, in Virginia and North Carolina. The grants for most of its electric lines contain right-of-waysrights-of-way that have been obtained from the apparent owner of real estate, but underlying titles have not been examined. Where right-of-waysrights-of-way have not been obtained, they could be acquired from private owners by condemnation, if necessary. Many electric lines are on publicly-owned property, where permission to operate can be revoked.

SOURCESOF ENERGY SUPPLY

DVP Operating Segment—Dominion and Virginia Power

DVP’s supply of electricity to serve Virginia Power customers is produced or procured by Dominion Generation. SeeDominion Generation for additional information.

operating segment of Dominion derives its earnings primarily from the sale of electricity generated by Virginia Power’s utility and Dominion’s merchant generation assets, as well as associated capacity from Dominion’s merchant generation assets.

Variability in earnings provided by Dominion’s merchant fleet relates to changes in market-based prices received for electricity and capacity. Market-based prices for electricity are largely dependent on commodity prices, primarily natural gas, and the demand for electricity, which is primarily dependent upon weather. Capacity prices are dependent upon resource requirements in relation to the supply available (both existing and new) in the forward capacity auctions, which are held approximately three years in advance of the associated delivery year. Dominion manages electric and capacity price volatility of its merchant fleet by hedging a substantial portion of its expected near-term sales with derivative instruments and also entering into long-term power sales agreements, which should help mitigate the adverse impact onagreements. However, earnings from declineshave been adversely impacted due to a sustained decline in commodity prices, such as those experienced during 2008 and 2009.prices. Variability also results from changes in the cost of fuel consumed, labor and benefits and the timing, duration and costs of scheduled and unscheduled outages.

COMPETITION

Dominion Generation Operating Segment—Dominion and Virginia Power

Retail choice was made availableVirginia Power’s generation operations are not subject to Virginia Power’ssignificant competition as only a limited number of its Virginia jurisdictional electric utility customers beginning January 1, 2003; however, no significant competition developed. In April 2007, the Virginia General Assembly passed legislation endinghave retail choice for most of these customers effective January 1, 2009.choice. SeeRegulation—State Regulations—Electric for more information. Currently, North Carolina does not offer retail choice to electric customers.

Dominion Generation Operating Segment—Dominion

Unlike Dominion Generation’s regulated generation fleet, its merchant generation fleet is dependent on its ability to operate in a competitive environment and does not have a predetermined rate structure that allows for a rate of return on its capital investments. Competition for the merchant fleet is impacted by electricity and fuel prices, new market entrants, construction by others of generating assets and transmission capacity, technological advances in power generation, the actions of environmental and other regulatory authorities and other factors. These competitive factors may negatively impact the merchant fleet’s ability to profit from the sale of electricity and related products and services.

Dominion Generation’s merchant generation fleet owns and operates several facilities in the Midwest that operate within functioning RTOs. A significant portion of the output from these facilities is sold under long-term contracts, with expiration dates ranging from December 31, 2012 to August 31, 2017, and is therefore largely unaffected by competition.price competition during the term of these contracts. Following expiration of these contracts, earnings could be adversely impacted if prevailing prices for energy, capacity and ancillary services are lower than the levels currently received under these contracts.

In addition in April 2009, a fifth combustion turbine (Unit 5) with 160 MW of capacity commenced operations.

The Virginia Commission issued a final order in March 2008 (Final Order), approving a certificate to construct and operate the Virginia City Hybrid Energy Center located in Wise County, Virginia, which once operational, will generate about 585 MW. In July 2008, the SELC, on behalf of four environmental groups, filed a Petition for Appeal of the Final Order with the Supreme Court of Virginia. In April 2009, the Virginia Supreme Court affirmed the Virginia Commission’s Final Order. In its Final Order, the Virginia Commission approved an initial return on common equity for the facility of 12.12%, consisting of a base return of 11.12% plus a 100 basis point enhancement that Virginia law provides for new conventional coal generation facili - -

Dominion Generation Operating Segment—Virginia Power

Presented below is a summary of Virginia Power’s actual system output by energy source:

SEASONALITY

Sales of electricity for Dominion Generation typically vary seasonally as a result of the impact of changes in temperature and the availability of alternative sources for heating on demand by residential and commercial customers. Generally, the demand for electricity peaks during the summer and winter months to meet cooling and heating needs. An increase in heating degree-days for Virginia Power’s utility operations does not produce the same increase in revenue as an increase in cooling degree-days, due to seasonal pricing differentials and because alternative heating sources are more readily available.

NUCLEAR DECOMMISSIONING

Dominion Generation Operating Segment—Dominion and Virginia Power

Virginia Power has a total of four licensed, operating nuclear reactors at its Surry and North Anna power stations in Virginia.

Decommissioning involves the decontamination and removal of radioactive contaminants from a nuclear power station once operations have ceased, in accordance with standards established by the NRC. Amounts collected from ratepayers and placed into trusts have been invested to fund the expected future costs of decommissioning the Surry and North Anna units.

Virginia Power believes that the decommissioning funds and their expected earnings for the Surry and North Anna units will be sufficient to cover expected decommissioning costs, particularly when combined with future ratepayer collections and contributions to these decommissioning trusts, if such future collections and contributions are required. This reflects the long-term investment horizon, since the units will not be decommissioned for decades, and a positive long-term outlook for trust fund investment returns. Virginia Power will continue to monitor these trusts to ensure they meet the NRC’s minimum financial assurance requirement, which may include the use of parent company guarantees, surety bonding or other financial guarantees recognized by the NRC.

The total estimated cost to decommission Virginia Power’s four nuclear units is $2.2 billion in 20092010 dollars and is primarily based upon site-specific studies completed in 2009. The current cost estimates assume decommissioning activities will begin shortly after cessation of operations, which will occur when the operating licenses expire. Virginia Power expects to decommission the Surry and North Anna units during the period 2032 to 2067.

The estimated decommissioning costs and license expiration dates for the nuclear units owned by Dominion and Virginia Power are shown in the following table.

results that range from reimbursed relocation to revocation of permission to operate.

Craigs interconnect with TGP in New York. DTI filed a certificate application with FERC in November 2010. If the Ellisburg-to-Craigs Project is approved, construction is expected to begin in March 2012, with a planned in-service date of November 2012.

In January 2011, Dominion announced that DTI is developing a natural gas processing and fractionation facility near New Martinsville, West Virginia. Dominion reached an agreement with PPG Industries, Inc. to purchase 56 acres at the Natrium site where DTI plans to process natural gas and NGLs.

SOURCESOF ENERGY SUPPLY

Dominion Energy’s natural gas supply is obtained from various sources including purchases from major and independent producers in the Mid-Continent and Gulf Coast regions, local producers in the Appalachian area and gas marketers. Dominion’s large underground natural gas storage network and the location of its pipeline system are a significant link between the country’s major interstate gas pipelines, including the Rockies Express East pipeline, and large markets in the Northeast and mid-Atlantic regions. Dominion’s pipelines are part of an interconnected gas transmission system, which provides access to supplies nationwide for local distribution companies, marketers, power generators and industrial and commercial customers.

Dominion’s underground storage facilities play an important part in balancing gas supply with consumer demand and are essential to serving the Northeast, mid-Atlantic and Midwest regions. In addition, storage capacity is an important element in the effective management of both gas supply and pipeline transmission capacity. Dominion Energy’s natural gas supply is obtained from various sources including Dominion’s own production, less royalties, purchases from major and independent producers in the Mid-Continent and Gulf Coast regions, local producers in the Appalachian area and gas marketers.

SEASONALITY

Dominion Energy’s natural gas distribution business earnings vary seasonally, as a result of the impact of changes in temperature on demand by residential and commercial customers for gas to meet heating needs. Historically, the majority of these earnings have been generated during the heating season, which is generally from November to March, however implementation of the Straight Fixed Variablestraight fixed variable rate design at Dominion East Ohio has reduced the earnings impact of weather-related fluctuations. Demand for services at Dominion’s pipelinespipeline and storage business can also be weather sensitive. Dominion Energy’s Appalachian E&P business can be impacted by seasonal changes in the demand for natural gas and oil. Commodity prices including prices for Dominion’s unhedged natural gas and oil production, can be impacted by seasonal weather changes, the effects of weather on operations and the economy. Dominion’s producer services business is affected by seasonal changes in the prices of

use of the power grid, which is expected to result in energy savings and lower environmental emissions.

Additionally, the conservation and load management plan includes the following DSM programs, is detailed below.which were approved by the Virginia Commission in March 2010:

Dominion

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Residential Lighting Program—an instant, in-store discount on the purchase of qualifying compact fluorescent lights;

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Home Energy Improvement—energy audits and improvements for homes of low-income customers;

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Smart Cooling Rewards—incentives for residential customers who voluntarily enroll to allow Virginia Power to cycle their air conditioners and heat pumps during periods of peak demand;

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Commercial HVAC Upgrade Program—incentives for commercial customers to improve the energy efficiency of their heating and/or cooling units; and

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Commercial Lighting Program—incentives for commercial customers to install energy-efficient lighting.

Virginia Power are workinghas also proposed a redesigned distributed generation program which was not approved in its original form by the Virginia Commission in 2010. Virginia Power plans to improve their own energy efficiency, bothseek Virginia Commission approval of the redesigned distributed generation program and several other DSM programs in using less fuel2011.

In September 2010, Virginia Power filed with the North Carolina Commission an application for approval and cost recovery of the DSM programs listed above, as well as the redesigned distributed generation program. In February 2011, the North Carolina Commission approved the five DSM programs listed above. The North Carolina Commission will make a decision regarding the appropriate rate making treatment for the programs in a separate proceeding. Virginia Power expects to producelaunch the same amountfive DSM programs within its North Carolina service territory in the second quarter of energy and2011, subject to use less energy in their operations. Recent upratescost recovery approval by the North Carolina Commission. Virginia Power’s request for approval of their facilities have resulted in significant increases inthe redesigned distributed generation capacity and lower emissions to meetprogram remains pending before the needs of their customers.North Carolina Commission.

Renewable Generation

Renewable energy is also an important component of a diverse and reliable energy mix. Both Virginia and North Carolina have

related to our operations. Additional information related to our environmental compliance obligations can be foundfuture. SeeGlobal Climate Change underRegulation—Environmental Regulations in Note 23 to the Consolidated Financial Statements.

Energy Efficiency and Peak Shaving Programsthis item for more information.

In July 2009, Virginia Power filed withis taking measures to ensure that its electrical infrastructure can support the Virginia Commission an application for approval and cost recovery of eleven DSM programs.expected demand from electric vehicles, which have significantly lower carbon intensity than conventional vehicles. Virginia Power planshas partnered with Ford Motor Company to use DSM, along with its traditional and renewable supply-side resources, to meet its projected load growth overhelp prepare Virginia for the next 15 years. The DSMoperation of electric vehicles, in a collaboration that involves consumer outreach, educational programs provide the first steps toward achieving Virginia’s goal of reducing, by 2022, the electric energy consumption of Virginia Power’s retail customers by ten percent of what was consumed in 2006. Virginia Power expects to launch the DSM programs in early 2010, subject to approval by the Virginia Commission and the North Carolina Commission, as applicable.

A key componentexchange of the plan is the demonstration of “smart grid” technologies that are designed to enhance Virginia Power’s electric distribution system by allowing energy to be delivered more efficiently. Dependent upon the outcome of demonstration and certain regulatory proceedings, Virginia Power may make a significant investment in replacing existing meters with Advanced Metering Infrastructure. The technology is expected to lead to improvements in service reliability and the ability of customers to monitor and control their energy use. Additionally, programs in the DSM plan include:information on vehicle charging requirements.

REGULATION

Dominion and Virginia Power are subject to regulation by the Virginia Commission, North Carolina Commission, SEC, FERC, EPA, DOE, NRC, Army Corps of Engineers and other federal, state and local authorities.

State Regulations

ELECTRIC

Virginia Power’s electric utility retail service is subject to regulation by the Virginia Commission and the North Carolina Commission.

Virginia Power holds certificates of public convenience and necessity which authorize it to maintain and operate its electric facilities now in operation and to sell electricity to customers. However, Virginia Power may not construct or incur financial commitments for construction of any substantial generating facilities or large capacity transmission lines without the prior approval of various state and federal government agencies. In addition, the Virginia Commission and the North Carolina

more than 50 basis points above the Company had proposed to collect in Rider T wouldauthorized level, such earnings will be more appropriately recovered through base rates, and those costs have been incorporated into the Company’s revised base rate filing that was submitted in July 2009. Rider T became effective on September 1, 2009, and increased a typical 1,000 kWh Virginia jurisdictional residential customer’s bill by approximately $1.11 per month.shared with customers.

Virginia Power also haspreviously filed with the Virginia Commission an application for approval and cost recovery of eleven DSM programs, including one peak-shaving program and ten energy efficiency programs. Virginia Power plans to use DSM, along with its traditional and renewable supply-side resources, to meet its projected load growth over the next 15 years. The DSM programs provide the first steps toward achieving Virginia’s goal of reducing, by 2022, the electric energy consumption of the Company’sVirginia Power’s retail customers by ten percent of what was consumed in 2006. In FebruaryMarch 2010, the Virginia Commission concludedapproved the recovery of approximately $28 million for five of the DSM programs through initiation of Riders C1 and C2, effective May 1, 2010. With respect to the other six DSM programs for which approval was sought, the Virginia Commission made a finding that they were not in the public interest at that time, but allowed Virginia Power the opportunity for further evaluation of similar programs. In July 2010, Virginia Power submitted its annual update filing for Riders C1 and C2 with respect to the five approved DSM programs. The proposed revenue requirements for Riders C1 and C2 were approximately $6 million and $18 million, respectively, which together represent a decrease of approximately $5 million compared to the Riders C1 and C2 revenue requirements included in customer rates currently in effect. In February 2011, an evidentiary hearing to consider the DSM programs and the related recovery. The Company has requested approval of two rate adjustment clauses for the associated cost recovery to be effective April 1, 2010. Specifically, the two rate adjustment clauses for recovery from Virginia jurisdictional customers represent an annual net increase in costs of approximately $48 million for the period April 1, 2010 to March 31, 2011. If approvedwas held by the Virginia Commission the rate adjustment clauses will be expected, on a combined basis, to increase a typical 1,000 kWh residential bill by approximately $0.91 per month. The Regulation Act gives the Virginia Commission until the end of March 2010 to act on Virginia Power’s application.update of Riders C1 and C2. The Virginia Commission is required to issue its order by March 30, 2011. Virginia Power plans to seek Virginia Commission approval for several DSM programs in 2011. SeeEnvironmental Strategy for a description of Virginia Power’s DSM programs.

In March 2009, Virginia Power filedconnection with the Virginia Commission its first annual update to the rate adjustment clause for theBear Garden and Virginia City Hybrid Energy Center requestingprojects, in June 2010, Virginia Power filed annual updates for Riders R and S, respectively, with the Virginia Commission. Initially, Virginia Power proposed an approximately $86 million revenue requirement for Rider R for the April 1, 2011 to March 31, 2012 rate year. Due to the application of accelerated tax depreciation provisions in the Small Business Jobs Act of 2010, passed in September 2010, Virginia Power revised the requested revenue requirement for Rider R in November 2010 from $86 million to $78 million. The adjusted $78 million revenue requirement represents an increase of approximately $99$14 million over the revenue requirement associated with the Rider R customer rates currently in effect. The proposed Rider S revenue requirement, effective April 1, 2011, for financing costs to be recovered through rates in 2010. As part of this filing Virginia Power requested that the 13.5% ROE proposed in itsrate year ending March 31, 2009 base rate filing be applied to2012 is approximately $200 million, which represents an increase of $46 million over the revenue requirement associated with the Rider S pluscustomer rates currently in effect. The ROE included in both rider filings is 12.3%, which is consistent with the terms of the Virginia Settlement Approval Order. In July 2010, the Virginia Commission issued orders with respect to Riders R and S, which adopted a placeholder ROE of 11.3% (not including the 100 basis point enhancementstatutory enhancement) for construction of a new coal-fired generation facility, for a requested totaluse until the ROE of 14.5%. An evidentiary hearing was held before a hearing examiner in August 2009, at which Virginia Power presented a proposed Stipulation and Recommendation that, among other things, would reduce the increaseis determined in the revenue requirementcontext of Virginia Power’s upcoming biennial review. Evidentiary hearings were held by approximately $8 millionthe Virginia Commission on Riders R and S in December and November 2010, respectively.

While, upon entering service, Virginia Power’s new Virginia City Hybrid Energy Center, which is currently under construction in Southwestsouthwest Virginia, will be a new source of GHG emissions, Virginia Power has taken steps to minimize the impact on the environment. The new plant is expected to use at least ten percent10% biomass for fuel and wasis designed to be carbon-capture compatible, meaning that technology to capture CO₂ can be added to the station when it becomes commercially available. Also, Virginia Power has announced plans to convert its coal units at Bremo power station to natural gas, contingent upon the Virginia City Hybrid Energy Center entering service and receipt of necessary approvals. It is currently estimated that the Virginia City Hybrid Energy Center will have the potential to emit about 4.8 million metric tonnes of direct CO₂ emissions in a year assuming a 100% capacity factor and 100% coal-fired operation. Actual emissions will depend on the capacity factor of the facility and the extent to which biomass is burned. SeeDominion Generation—Properties for more information on the projects above, as well as other projects under current development.

Since 2000, the Companies have tracked the emissions of their electric generation fleet. Their electric generation fleet employs a mix of fuel and renewable energy sources. Comparing annual year 2000 to annual year 2008,2009, Dominion and Virginia Power’s electric generating fleet (based on ownership percentage) reduced their average CO₂ emissions rate per MWh of energy

the price of energy commodities. In addition, severe weather, including hurricanes and winter storms, can be destructive, causing outages and property damage that require incurring additional expenses. Additionally, droughts can result in reduced water levels that could adversely affect operations at some of the Companies’ power stations. Furthermore, the Companies’ operations could be adversely affected and their physical plant placed at greater risk of damage should changes in global climate produce, among other possible conditions, unusual variations in temperature and weather patterns, resulting in more intense, frequent and extreme weather events, abnormal levels of precipitation and, for operations located on or near coastlines, a change in sea level.

Dominion and Virginia Power are subject to complex governmental regulation that could adversely affect their results of operations. Dominion’s and Virginia Power’s operations are subject to extensive federal, state and local regulation and require numerous permits, approvals and certificates from various governmental agencies. They must also comply with environmental legislation and associated regulations. Management believes that the necessary approvals have been obtained for existing operations and that their business is conducted in accordance with applicable laws. However, new laws or regulations, the revision or reinterpretation of existing laws or regulations, or penalties imposed for non-compliance with existing laws or regulations may require result in substantial expense.

Dominion and Virginia Power to incur additional expenses.

Virginia Power could be subject to penalties as a result of mandatory reliability standards. As a result of EPACT, owners and operators of generation facilities and bulk powerelectric transmission systems, including Dominion and Virginia Power, are subject to mandatory reliability standards enacted by NERC and enforced by FERC. Compliance with the mandatory reliability standards may subject the Companies to higher operating costs and may result in increased capital expenditures. If either Dominion or Virginia Power is found not to be in compliance with the mandatory reliability standards it could be subject to remediation costs, as well as sanctions, including substantial monetary penalties.

Dominion’s and Virginia Power’s costs of compliance with environmental laws are significant, and the costsignificant. The costs of compliance with future environmentalenvironmental laws, including laws and regulations designed to addressglobal climate change, air quality, coal combustion by-products, cooling water and other matters could adversely affect their cash flow and profitability.make certain of the Companies’ generation facilities uneconomical to maintain or operate.Dominion’s and Virginia Power’s operations are subject to extensive federal, state and local environmental statutes, rules and regulations relating to air quality, water quality, waste management, natural resources, and health and safety. Compliance with these legal requirements requires the Companies to commit significant capital toward permitting, emission fees, environ - -

and associated regulations, and the selected compliance alternatives. As a result, Dominion and Virginia Powerthe Companies cannot estimate the effect of any such legislation on their results of operations, financial condition or their customers. However, such expenditures, if excessive, could make the Companies’ generation facilities uneconomical to operate, result in the impairment of assets, or otherwise adversely affect Dominion’s or Virginia Power’s results of operations, financial performance or liquidity.

The base rates and rider rates of Virginia Power are subject to regulatory review. As a result of the Regulation Act, in 2009 the Virginia Commission commenced its review of the base rates of Virginia Power under a modified cost-of-service model. Such rates will be set based on analyses ofThat review culminated in a final order in March 2010, in which the Commission ordered that Virginia Power’s costs and capital structure, as reviewed and approved in regulatory proceedings. Under the Regulation Act,base rates be frozen at their pre-September 1, 2009 levels until December 1, 2013. In 2011, however, the Virginia Commission may,will commence biennial reviews of the rates and terms and conditions of Virginia Power and, in a proceeding initiated in 2009, reduce rates orthat first biennial review, may order a credit to customers if Virginia Power is deemed to be earningfor a portion of earnings more than 50 basis points above an ROE level to be established by the Virginia Commission in that proceeding. After the initial rate case, the Virginia Commission will review the base rates of Virginia Power biennially and may order a credit to customers if it is deemed to have earned an ROE more than 50 basis points above an ROE level established by the Virginia Commission and may reduce rates if Virginia Power is found to have had earnings in excess of the established ROE level during two consecutive biennial review periods.authorized ROE.

The rates of Virginia Power’s electric transmission operations and Dominion’s gas transmission and distribution operations are subject to regulatory review. Revenue provided by Virginia Power’s electric transmission operations and Dominion’s gas transmission and distribution operations is based primarily on rates approved by FERC.federal and state regulatory agencies. The profitability of these businesses is dependent on their ability, through the rates that they are permitted to charge, to recover costs and earn a reasonable rate of return on their capital investment.

Virginia Power’s wholesale charges for electric transmission service are adjusted on an annual basis through operation of a FERC-approved formula rate mechanism. Through this mechanism, Virginia Power’s wholesale electric transmission cost of service is estimated and thereafter trued-upadjusted as appropriate to reflect actual costs allocated to Virginia Power by PJM. These wholesale rates are subject to FERC review and prospective adjustment in the event that customers and/or interested state commissions file a complaint with FERC and are able to demonstrate that Virginia

tricity markets regulated by FERC. The wholesale markets allow these merchant generation stations to take advantage of market price opportunities, but also exposesexpose them to market risk. Properly functioning competitive wholesale markets in PJM, MISO and ISO-NE depend upon FERC’s continuation of clearly identified market rules. From time to time FERC may investigate and authorize PJM, MISO and ISO-NE to make changes in market design. FERC also periodically reviews Dominion’s authority to sell at market-based rates. Material changes by FERC to the design of the wholesale markets or Dominion’s authority to sell power at market-based rates could adversely impact the future results of its merchant power business.

War, acts and threats of terrorism, natural disaster and other significant events could adversely affect Dominion’s and Virginia Power’soperations.We cannot predict the impact that any future terrorist attacks may have on the energy industry in general, or on our business in particular. Any retaliatory military strikes or sustained military campaign may affect our operations in unpredictable ways, such as changes in insurance markets and disruptions of fuel supplies and markets. In addition, infrastructure facilities, such as electric generation, electric and gas transmission and distribution facilities could be affected by terrorist activities and catastrophic events thatdirect targets of, or indirect casualties of, an act of terror. Furthermore, the physical or cyber security compromise of our facilities, could adversely affect our ability to manage these facilities effectively. Instability in financial markets as a result of terrorism, war, natural disasters, pandemic, credit crises, recession or other factors could result from terrorism. In the event that their generating facilities or other infrastructure assets are subject to potential terrorist activities, such activities could significantly impair their operations and result in a decrease in revenues and additional costs to repair and insure their assets, which could have a material adverse effect on their business. The effects of potential terrorist activities could also include the risk of a significant decline in the U.S. economy, and the decreased availability and increased cost of insurance coverage, any of which could negatively impact the Companies’ results of operations and financial condition.

Dominion and Virginia Power have incurred increased capital and operating expenses and may incur further costs for enhanced security in response to such risks.

There are risks associated with the operation of nuclear facilities. Dominion and Virginia Power operate nuclear facilities that are subject to risks, including their ability to dispose of spent nuclear fuel, the disposal of which is subject to complex federal and state regulatory constraints. These risks also include the cost of and ability to maintain adequate reserves for decommissioning, costs of replacement power, costs of plant maintenance and exposure to potential liabilities arising out of the operation of these facilities. Decommissioning trusts and external insurance coverage are maintained to mitigate the financial exposure to these risks. However, it is possible that decommissioning costs could exceed the amount in the trusts or that costs arising from claims could exceed the amount of any insurance coverage.

The use of derivative instruments could result in financial losses and liquidity constraints. Dominion and Virginia Power use derivative instruments, including futures, swaps, forwards, options and FTRs, to manage commodity and financial market risks. In addition, Dominion purchases and sells commodity-based contracts primarily in the natural gas market for trading purposes. The Companies could recognize financial losses on these contracts, including as a result of volatility in the market values of the underlying commodities or if a counterparty fails to perform

not meet expectations. Additionally, regulators may disallow recovery of some of the costs of a project if they are deemed not to be prudently incurred. Further, Dominion and Virginia Power may not be able to timely and effectively integrate the projects into their operations and such integration may result in unforeseen operating difficulties or unanticipated costs. Any of these or other factors could adversely affect their ability to realize the anticipated benefits from the plant construction and expansion projects.

Exposure to counterparty performance may adversely affect the Companies’ financial results of operations.Dominion and Virginia Power are exposed to credit risks of their counterparties and the risk that one or more counterparties may fail or delay the performance of their contractual obligations, including but not limited to payment for services. Such defaults by customers, suppliers or other third parties may adversely affect the Companies’ financial results.

Energy conservation could negatively impact Dominion’s and Virginia Power’s financial results. Certain regulatory and legislative bodies have introduced or are considering requirements and/or incentives to reduce energy consumption by a fixed date. Additionally, technological advances driven by federal laws mandating new levels of energy efficiency in end-use electric devices, including lighting and electric heat pumps, could lead to declines in per capita energy consumption. To the extent conservation resulted in reduced energy demand or significantly slowed the growth in demand, the value of the Companies’ business activities could be adversely impacted.

An inability to access financial markets could adversely affect the execution of Dominion’s and Virginia Power’s business plans.Dominion and Virginia Power rely on access to short-term money markets and longer-term capital markets and banks as significant sources of funding and liquidity for capital expenditures, normal working capital and collateral requirements related to hedges of future sales and purchases of energy-related commodities primarily associated with Dominion’s merchant generation and gas and oil production. Management believes thatcommodities. Deterioration in the Companies will maintain sufficient access to theseCompanies’ creditworthiness, as evaluated by credit rating agencies or otherwise, or market reputation, or general financial markets based upon their current credit ratings and market reputation. However, certain disruptions outside of Dominion’s and Virginia Power’s control maycould increase their cost of borrowing or restrict their ability to access one or more financial markets. SuchFurther market disruptions could includestem from delays in the current economic recovery, the bankruptcy of an unrelated company, general market disruption due to general credit market or political events, changes to their credit ratings or the failure of financial institutions on which theythe Companies rely. RestrictionsIncreased costs and restrictions on the Companies’ ability to access financial markets may be severe enough to affect their ability to execute their business plans as scheduled.

Market performance and other changes may decrease the value of decommissioning trust funds and benefit plan assets or increase Dominion’s liabilities, which then could require significant additional funding. The performance of the capital markets affects the value of the assets that are held in trusts to satisfy future obligations to decommission Dominion’s nuclear plants and under its pension and other postretirement benefit plans. Dominion has significant obligations in these areas and holds significant assets in these trusts. These assets are subject to market fluctuation and will yield uncertain returns, which may fall below expected return rates. A

Substantially all of Virginia Power’s property is subject to the lien of the Indenture of Mortgage securing its First and Refunding Mortgage Bonds. There were no bonds outstanding as of December 31, 2009;2010; however, by leaving the indenture open,