WPS's effective tax rate for the threequarters ended March 31, 2011, and nine months ended September 30, 2010, was 33.3%34.3% and 36.1%, respectively.  The effective tax rate for the three and nine months ended September 30, 2009, was 35.0% and 35.1%38.8%, respectively.

WPS calculates its provision for income taxes based on an interim effective tax rate that reflects its projected annual effective tax rate before certain discrete items.

The effective tax rate for the three monthsquarter ended September 30, 2010,March 31, 2011, was lower than the federal tax rate of 35%, primarily due to wind production tax credits, partially offset by state income taxes.

The effective tax rate for the nine monthsquarter ended September 30,March 31, 2010, was higher than the federal tax rate of 35%, primarily due to the elimination of the deductibility oftax deduction for employer-paid postretirement prescription drug payments to retirees,charges, to the extent those paymentscharges will be offset by the receipt of thea federal Medicare Part D subsidy, as mandated in the federal Patient Protection and Affordable Care Act and Health Care and Education Reconciliation Act of 2010 (HCR).  As a result of the legislation, WPS expensed $4.5 million of deferred income tax benefits during the first quarter of 2010, which were previously recognized as a reduction into the provision for income

For the three monthsquarter ended September 30, 2010,March 31, 2011, there was nonot a significant change in WPS’s liability for unrecognized tax benefits.  For the nine months ended September 30, 2010, WPS’s liability for unrecognized tax benefits decreased $3.8 million, a result of favorable IRS examination activity.

WPS routinely enters into long-term purchase and sale commitments that have various quantity requirements and durations.  WPS has obligations to distribute and sell electricity and natural gas to theirits customers and expects to recover costs related to these obligations in future customer rates.

The obligations described below were as of September 30, 2010.March 31, 2011.

On November 18,In 2009, the EPA issued a Notice of Violation (NOV)an NOV to WPS alleging violations of the CAA's New Source Review requirements of the Clean Air Act (CAA).  Specifically, the allegations relatepertaining to requirements for certain projects undertaken at the Weston and Pulliam and Westongeneration stations from 1994 to 2009.  WPS has evaluated the NOV and has metcontinues to meet with the EPA on several occasions and exchangedexchange proposals related to a possible resolution.  WPS continues to review the allegations but is currently unable to predict the impact on its condensed consolidated financial statements.

On May 20, 2010, WPS received from the Sierra Club a Notice of Intent (NOI)an NOI to file a civil lawsuit based on allegations and violations of the CAA at the Weston and Pulliam generation stations.Pulliam.  WPS has entered into a Standstill Agreement with the

Sierra Club and has had discussions related to a possible resolution with the Sierra Club in conjunction with the EPA related to possible resolution.EPA.  However, WPS is currently unable to predict the impact on its condensed consolidated financial statements.

On October 10,In 2009, WPS, along with its co-owners, received from the Sierra Club an NOI to file a civil lawsuit based on allegations that major modifications were made at the Columbia generation station without complying with the CAA.  Specifically, theThe allegations suggest that Prevention of Significant Deterioration (PSD) permits that imposed Best Available Control Technology (BACT)BACT limits on emissions from the facility should have been obtained for the Columbia generation station, which is jointly owned by Wisconsin

WP&L, on behalf of itself and the joint owners, sent a Notice of Deficiency to the Sierra Club regarding the NOI.  In response, the Sierra Club filed a Supplemental NOI on December 14, 2009, purporting to correct the deficiencies.  The parties exchanged initial proposals regarding resolution.  On September 9, 2010, the Sierra Club filed suit against WP&LWisconsin Power and Light (WP&L), the operator of the Columbia plant, in the Federal District Court for the Western District of Wisconsin, relatedalleging that WP&L violated the CAA with respect to one project identified in the NOI forits operation of the Columbia plant.generation station and the Nelson E. Dewey generation station.  The parties have entered into a confidentiality agreement and have stayed the proceeding until June 11, 2011, to allow the Sierra Club to participate in settlement negotiations with the EPA, WP&L, and the other co-owners of the Columbia and Edgewater plants, as discussed below.  WPS is reviewing the allegations in the lawsuit but is currently unable to predict the impact on its condensed consolidated financial statements.

On December 11,In 2009, WPS, along with its co-owners, received from the Sierra Club a copy of an NOI to file a civil lawsuit against the EPA based ondue to the EPA's failure to take actions against the co-owners and operator of the Edgewater generation station based upon allegations of failure to comply with the CAA.  Specifically, theThe allegations suggest that PSD permits that imposed BACT limits on emissions from the facilitiesfacility should have been obtained for Edgewater.  EdgewaterWP&L is jointly owned by WP&L (Units 3, 4, and 5), Wisconsin Electric (Unit 5), and WPS (Unit 4) and operated by WP&L.  The parties are in the processoperator of analyzing the Sierra Club's actions.Edgewater.  WPS is currently unable to predict the impact on its condensed consolidated financial statements.

On December 21,Also in 2009, WPS, along with its co-owners, received from the Sierra Club an NOI to file a civil lawsuit based on allegations that major modifications were made at the Edgewater generation station without complying with the PSD and Title V Operating Permit requirements of the CAA.  Specifically, theThe allegations suggest that PSD permits that imposed BACT limits on emissions from the facilitiesfacility should have been obtained for Edgewater.  The parties are in the process of analyzing the allegations and have had discussions with the Sierra Club.  

In September 2010, the Sierra Club filed suit against WP&L regarding Edgewater.in the Federal District Court for the Eastern District of Wisconsin, alleging that WP&L violated the CAA with respect to its operation of the Edgewater generation station.  The parties have entered into a confidentiality agreement and have stayed the proceeding until May 25, 2011, to allow the Sierra Club to participate in settlement negotiations with the EPA, WP&L, and the other co-owners of the Columbia and Edgewater plants, as discussed below.  WPS is currently unable to predict the impact on its condensed consolidated financial statements.

On December 14,In 2009, the EPA issued an NOV to WP&L relative to its Nelson E. Dewey Plantgeneration station and to WP&L and the other joint owners of the Columbia and Edgewater generation stations alleging violations of the CAA's New Source Review requirements of the CAA forpertaining to certain projects undertaken at those plants.  WP&L is the operator of these plants and, along with the joint owners, has metexchanged proposals with the EPA and exchanged proposals related to a possible resolution.  WPS is currently unable to predict the impact on its condensed consolidated financial statements.

In response to the EPA's CAA enforcement initiative, several utilities elected to settle with the EPA, while others are in litigation.  The fines, penalties, and penalties (including the costcosts of supplemental environmental projects)projects associated with settlements involving comparably-sized facilities to Weston and Pulliam range between $7 million and $30 million.  The regulatory interpretations upon which the lawsuits or settlements are based may change baseddepending on future court decisions made in the pending litigation.

If it were ultimately determined in the actions identified above that historic projects at WPS'sthe Weston, Pulliam, Columbia, and Weston plantsEdgewater generation stations required either a state or federal CAA permit, WPS may, under the applicable statutes, be required in order to resolve any such claim,  to:

In addition, under the CAA, citizen groups may pursue a claim.

From 2004 to 2009, the Sierra Club filed a petition with the WDNR under Section 285.61 of the Wisconsin Statutes seeking a contested case hearing onvarious petitions related to the construction permit issued for the Weston 4 generation station, all of which was a necessary predicate to plant construction underwere denied.  On June 24, 2010, the pertinent air emission regulations (hereinafter referred to as the "Weston 4 air permit").  In February 2006, the administrative law judgeWisconsin Court of Appeals affirmed the Weston 4 air permit, with changes to the emission limits for sulfur dioxide and nitrogen oxide from the coal-fired boiler and particulate from the cooling tower.  The changes, which were implemented by the WDNR in a revised permit issued on March 28, 2007, set limits that were more stringent than those originally set by the WDNR (hereinafter referred to as the "March  ;28, 2007 permit language").

On November 29, 2010, the constructionWDNR provided a draft revised permit.  WPS objected to proposed changes in the mercury limits and startupthe requirements on the boiler as beyond the authority of the Weston 4 facility orWDNR, and provided technical comments.  WPS and the administrative law judge's decision on the Weston 4 air permit.  WPS believes that it has substantial defensesWDNR continue to the Sierra Club's challenges.  Until the Sierra Club's challenges are finally resolved, WPS will not be ablemeet to make a final determination of the probable impact, if any, of compliance with any changes to the Weston 4 air permit on its future costs.resolve these issues.

Since 2008, an NOV was issued to WPS byhas received four NOVs from the WDNR alleging various violations of the air permits for the Weston site, Weston 4, as well as Weston 1 and 2.  The alleged violations include an exceedance of the carbon monoxide and volatile organic compound limits at Weston 4, exceedances of the hourly sulfur dioxide limit in ten three-hour periods during startup/shutdown and during one separate event at Weston 4, and two that address baghouse operation at Weston 1 and 2.  On July 22, 2009, an NOV was issued to WPS by the WDNR alleging violations of the opacity limits during two six-minute periods (one each at Weston 2, and 4) and of the sulfur dioxide average limit during one three-hour period at Weston 4. An NOV was issued to WPS in September 2009 relating to one event involving baghouse operat ion at Weston 1 and 2 that occurred in December 2008.  A fourth NOV was issued on December 14, 2009, for a clerical error involving pages missing from a quarterly report.report for Weston.  Corrective actions have been taken for the events in the fourfive NOVs.  An enforcement conference was held on January 7, 2009, for the December 2008 NOV and on August 26, 2009, for the July 2009 NOV.  Discussions with the WDNR on the severity classification of the events continue.  ManagementWhile management believes it is very likely that the WDNR will refer the NOVs to the state Justice Department for enforcement.  Managementenforcement, management does not believe that these matters will have a material adverse impact on the condensed consolidated financial statements of WPS.

In early November 2006, it came to the attention of WPS that previous ambient air quality computer modeling done by the WDNR for the Weston facility (and other nearby air sources) did not take into account the emissions from the existing Weston 3 facility for purposes of evaluating air quality increment

The renewal of the Title V air permit for the Pulliam generatinggeneration station was issued by the WDNR onin April 30, 2009.  On June 28, 2010, the EPA issued an order granting the Sierra Club’s petition to object to the Title V permit.  The order directsdirecting the WDNR to respond to the comments raised by the Sierra Club in its Petition (filedobjecting to the Title V permit, which was filed in June 25, 2009).2009.  WPS has been working with the WDNR to address the order.

On October 22, 2010, WPS received from the Sierra Club a copy of an NOI to file a civil lawsuit against the EPA based on what the Sierra Club alleges to be the EPA's unreasonable delay in performing its duties related to the grant or denial of the Pulliam Title V permit.  Integrys Energy GroupWPS is reviewing all these allegations but is currently unable to predict the impact on its condensed consolidated financial statements.

The renewal of the Title V air permit for the Columbia generation station, jointly owned by WP&L, MG&E, and WPS and operated by WP&L, was issued by the WDNR on September 2, 2008.  On October 8,In 2009, the EPA issued an order objecting to the Title V air permit.permit renewal issued by the WDNR for the Columbia generation station.  The order responds to a petition filed by the Sierra Club and determined that a project in 2006 to replace the economizer, final superheater, and related components on Unit 1 should have been permitted as a "major modification."  The order directed the WDNR to resolve the EPA's objections within 90 days and "terminate, modify, or revoke and reissue" the Title V permit accordingly.  On September 22, 2010, the WDNR issued a draft permit.  The parties are evaluating all options, including a challenge to the permit.

On July 14, 2010, WPS, along with its co-owners, received from the Sierra Club a copy of an NOI to file a civil lawsuit against the EPA based on what the Sierra Club alleges to be the EPA's unreasonable delay in performing its duties related to the granting or denial of the Title V permit.  Specifically, they allegeThe Sierra Club alleges that the EPA has failed to take actions against the WDNR for its failure to take action regarding the Title V permit as ordered by the EPA.

On September 22, 2010, the WDNR issued a draft construction permit and a draft revised Title V permit.  The co-owners submitted comments on these draft permits.  In correspondence dated November 24, 2010, the EPA notified the WDNR that the EPA does not believe the WDNR's proposal is responsive to the order and requested a response from the WDNR.  On January 24, 2011, the WDNR issued a letter stating that upon review of the submitted public comments, the WDNR has determined not to issue the draft construction permit and draft revised Title V permit that were proposed to respond to the EPA’s order.  The Sierra Club filed a declaratory action on February 26, 2011, alleging that the WDNR had lost jurisdiction to the EPA based upon the WDNR's actions.  On March 8, 2011, the parties were granted a 90-day stay in the proceedings to seek an alternate resolution.  WPS is reviewing all these allegations butcurrently monitoring this situation with WP&L.  While WPS believes the previously issued air permit is still valid, WPS is currently unable to predict the outcome of this matter and the impact on its condensed consolidated financial statements.

The State of Wisconsin's mercury rule, Chapter NR 446, requires a 40% reduction from the 2002 through 2004 baseline mercury emissions in Phase I, beginning January 1, 2010, through the end of 2014.  In Phase II, which begins in 2015, electric generating units above 150 megawatts will be required to reduce mercury emissions by 90%.  Reductions can be phased in and the 90% target can be delayed until 2021 if additional sulfur dioxide and nitrogen oxide reductions are implemented.  By 2015, electric generating units above 25 megawatts but less than 150 megawatts must reduce their mercury emissions to a level defined by the BACT rule.  As of September 30, 2010,March 31, 2011, WPS estimates capital costs of approximately $20$19 million, for Phase I and Phase II, which includes estimates for both wh ollywholly owned and jointly owned plants, to achieve the required Phase I and Phase II reductions.  The capital costs are expected to be recovered in future rate cases.  Because of the vacatur of the federal mercury control and monitoring rule in February 2008,In March 2011, the EPA is reviewing options for a new rulemaking to address hazardous air pollutants, including mercury, and is expected to issueissued a draft rule that will regulate emissions of mercury and other hazardous air pollutants.  A final rule is expected in November 2011.

The EPA issued the Clean Air Interstate Rule (CAIR) in 2005.  CAIR was originally intended2005 in order to reduce sulfur dioxide and nitrogen oxide emissions from utility boilers located in 29 states, including Wisconsin Michigan, Pennsylvania, and New York.Michigan.  Subsequently, the United States Court of Appeals (Court of Appeals) issued a decision vacating CAIR, which the EPA appealed, and in 2008, the Court of Appeals reinstated CAIR.  The first phaseCourt of Appeals directed the EPA to address the deficiencies noted in its ruling to vacate CAIR, required aboutand the EPA issued a 50% reduction beginning in 2009draft CAIR replacement rule for nitrogen oxide and beginning in 2010 for sulfur dioxide.  The second phase required about a 65% reduction in emissions of both pollutants by 2015.comment on July 6, 2010.  The State of Wisconsin's rule to implement CAIR, which incorporates the cap and trade approach, has beenwas forwarded to the EPA for final review.

On July 11, 2008, the U.S. Court of Appeals issued a decision vacating CAIR, the EPA appealed, and in December 2008, the Court of Appeals reversed the CAIR vacatur and CAIR was reinstated.  The Court of Appeals directed the EPA to address the deficiencies noted in its July 11, 2008 ruling, and the EPA issued a draft CAIR replacement rule for comment on July 6, 2010.  As a result of the Court of Appeals' decision, CAIR is in place for 2010.2011.  WPS has not acquired any nitrogen oxide allowances for vintage years2011 and beyond 2010 other than those allocated by the EPA and does not expect any material impact as a result of the vacatur and subsequent reinstatement of CAIR.  WPS will continue to evaluate the impacts of any subsequent rulemaking.

Due to the reinstatement of CAIR, units affected by the Best Available Retrofit Technology (BART) rule are considered in compliance with BART for sulfur dioxide and nitrogen oxide emissions.  Although particulate emissions also contribute to visibility impairment, the WDNR’sWDNR's modeling has shown the impairment to be so insignificant that additional capital expenditures on controls are not warranted.

For planning purposes, it is still assumed that additional sulfur dioxide and nitrogen oxide controls will be needed on existing units.  The installation of any controls will need to be scheduled as part of WPS's long-term maintenance plan for its existing units.  As such, controls may need to be installed before 2015. On a preliminary basis, and assuming controls are still required, WPS estimates capital costs of $453approximately $437 million, which includes estimates for both wholly owned and WPS’sWPS's share of jointly owned plants, in order to meet an assumed 2015 compliance date.  This estimate is based on costs of current control technology and current information regarding the final state and federal rules.  The capital costs are anticipated to be recovered in future rate cases.

WPS operated facilities in the past at multiple sites for the purpose of manufacturing and storing manufactured gas.  In connection with manufacturing and storing manufactured gas, waste materials were produced that may have resulted in soil and groundwater contamination at these sites.  Under certain laws and regulations relating to the protection of the environment, WPS is required to undertake remedial action with respect to some of these materials.

Management believes that any costs incurred for environmental activities relating to former manufactured gas plant operations that are not recoverable through contributions from other entities or from insurance carriers have been prudently incurred and are, therefore, recoverable through rates for WPS.rates.  Accordingly, management believes that thethese costs incurred in connection with former manufactured gas plant operations will not have a material adverse effect on the condensed consolidated financial statements of WPS.  However, any changes in the approved rate mechanisms for recovery of these costs,

WPS is evaluating both the technical and cost implications that may result from future state, regional, or federal greenhouse gas regulatory programs.  This evaluation indicates it is probable that any regulatory program which caps emissions or imposes a carbon tax will increase costs for WPS and its customers.  The greatest impact is likely to be on fossil fuel-fired generation, with a less significant impact on natural gas storage and distribution operations.  Efforts are underway within the utility industry to find a feasible method for capturing carbon dioxide from pulverized coal-fired units and to develop cleaner ways to burn coal.  The use of alternate fuels is also being explored by the industry, but there are many cost and availability issues.

The EPA will beginbegan regulating greenhouse gas emissions under the Clean Air ActCAA in January 2011, unless there is a successful legal challenge that stays the rule (several lawsuits have been filed).  At that time, the EPA and the states will applyby applying the BACT requirements associated with the new source reviewNew Source Review program to new and modified larger greenhouse gas emitters.  Technology to remove and sequester greenhouse gas emissions is not commercially available at scale,scale; hence, the EPA is considering definingissued guidance that defines BACT in terms of improvements in energy efficiency as opposed to relying on pollution control equipment.  In addition, federal legislation relatedDecember 2010, the EPA announced its intent to develop new source performance standards for greenhouse gas emissions may be enactedfor new and modified, as well as existing, electric utility steam generating units. The EPA plans to propose standards in the future,2011 and effortsfinalize standards in 2012.  Efforts have been initiated to develop state and regional greenhouse gas programs, to create federal legislation to limit c arboncarbon dioxide emissions, and to create national or state renewable portfolio standards.  Currently there is no applicable federal or state legislation pending that specifically addresses greenhouse gas emissions.

A risk exists that such legislation or regulation will increase the cost of energy.producing energy utilizing fossil fuels.  However, WPS believes the capital expenditures being made at its generation units are appropriate under any reasonable mandatory greenhouse gas program and that future expenditures related to control of greenhouse gas emissions or renewable portfolio standards by WPS will be recoverable in rates.  WPS will continue to monitor and manage potential risks and opportunities associated with future greenhouse gas legislative or regulatory actions.

The following table shows outstanding guarantees at WPS: