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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

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, 2003

Commission file number 1-2198

The Detroit Edison Company, a Michigan corporation, meets the conditions set forth in General Instruction I (1) (a) and (b) of Form 10-K and is, therefore, filing this form with the reduced disclosure format.

THE DETROIT EDISON COMPANY

313-235-8000
(Registrant’s telephone number, including area code)

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

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

None

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]    No [  ]

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 registrants’ knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes [  ]   No [X]

All of the registrant’s 134,287,832 outstanding shares of common stock, par value $10 per share, are owned by DTE Energy Company.

DOCUMENTS INCORPORATED BY REFERENCE

None

The Detroit Edison Company

Annual Report on Form 10-K
Year Ended December 31, 2003
Table of Contents

Definitions

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Forward-Looking Statements

Certain information presented herein includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve certain risks and uncertainties that may cause actual future results to differ materially from those contemplated, projected, estimated or budgeted in such forward-looking statements. There are many factors that may impact forward-looking statements including, but not limited to, the following:

•		the effects of weather and other natural phenomena on operations and sales to customers;
•		economic climate and growth in the geographic areas where we do business;
•		environmental issues, including changes in the climate, and regulations;
•		nuclear regulations and risks associated with nuclear operations;
•		implementation of electric Customer Choice programs;
•		implementation of electric utility restructuring in Michigan;
•		employee relations;
•		unplanned outages;
•		access to capital markets and capital market conditions and other financing efforts that can be affected by credit agency ratings;
•		the timing and extent of changes in interest rates;
•		the level of borrowings;
•		changes in the cost of fuel and purchased power;
•		effects of competition;
•		impact of FERC and MPSC proceedings and regulations;
•		changes in federal or state tax laws and their interpretations, including the code, regulations, rulings, court proceedings and audits;
•		ability to recover costs through rate increases;
•		insurance;
•		the cost of protecting assets against or damage due to terrorism; and
•		changes in accounting standards and financial reporting regulations.

New factors emerge from time to time. We cannot predict what factors may arise or how such factors may cause our results to differ materially from those contained in any forward-looking statement. Any forward-looking statement speaks only as of the date on which such statement is made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

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Part I

Items 1. & 2. Business & Properties

GENERAL

Detroit Edison is a Michigan corporation organized in 1903. Detroit Edison is a public utility subject to regulation by the MPSC and FERC and is engaged in the generation, purchase, distribution and sale of electric energy to 2.1 million customers in a 7,600 square mile area in southeastern Michigan.

References in this report to “we,” “us” and “our” are to Detroit Edison.

We currently operate our businesses through two strategic business units (Energy Resources – Power Generation and Energy Distribution – Power Distribution). Based on this structure, we set strategic goals, allocate resources and evaluate performance. A discussion of each business follows.

ENERGY RESOURCES

Power Generation

Description

Power Generation comprises our regulated power generation business and plants within Detroit Edison. These plants are regulated by numerous federal and state governmental agencies, including the MPSC, the NRC and the EPA. Electricity is generated from Detroit Edison’s numerous fossil plants, its hydroelectric pumped storage plant and its nuclear plant, and purchased from electricity generators, suppliers and wholesalers. The electricity we produce and purchase is sold to four major classes of customers: residential, commercial, industrial and wholesale, principally throughout Michigan, the Midwest and Ontario, Canada.

Weather, economic factors and electricity prices affect sales levels to customers. Our peak load and highest total system sales generally occur during the third quarter of the year driven by air conditioning and other cooling-related demands. Power generation sales are made to a diverse base of customers in both type and number; sales levels are not dependent on any small market segment. However, due to residential rate subsidization, less than 1% of the customers constitute approximately 80% of the power generation margin. Business customers who have elected to participate in the electric Customer Choice program are having a significant unfavorable effect on our financial performance.

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Our power is generated from a variety of fuels and is supplemented with market purchases. The table below details our energy supply mix and average cost per unit:

(2) Includes amounts associated with hedging activities.

We expect an adequate supply of fuel and purchased power to meet our obligation to serve customers. The effect of lost sales due the electric Customer Choice program has reduced our need for purchased power and increased our ability to sell power in the wholesale market. We have short and long-term supply contracts for expected fuel and purchased power requirements as detailed in the following table:

Power Generation’s generating capability is heavily dependent upon coal. The coal is purchased from various sources in different geographic areas under agreements that vary in both pricing and terms. Detroit Edison expects to obtain the majority of its coal requirements through long-term contracts with the balance to be obtained through short-term agreements and spot purchases. Detroit Edison has contracts with three coal suppliers for a total purchase of up to 28 million tons of low-sulfur western coal to be delivered from 2004 through 2008. Detroit Edison also has a contract with a supplier for the purchase of approximately 4 million tons of Appalachian coal to be delivered from 2004 through 2006. These existing long-term coal contracts include provisions for price escalation as well as de-escalation. Given the geographic diversity of supply, Detroit Edison believes it can meet the expected generation requirements. We own and lease a fleet of rail cars and have long-term transportation contracts with companies to provide rail and vessel services for delivery of purchased coal to our generating facilities.

We purchase power from other electricity generators, suppliers and wholesalers. These purchases supplement our generation capability to meet customer demand during peak cycles. For example, when high temperatures occur during the summer we require additional electricity to meet demand. This access to additional power is an efficient and economical way to meet our obligation to customers without increasing capital expenditures to build additional base-load power facilities.

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Regulation

Detroit Edison’s Power Generation business is subject to the regulatory jurisdiction of various agencies, including the MPSC, FERC and NRC. The MPSC issues orders pertaining to rates, recovery of certain costs, including the costs of generating facilities and regulatory assets, conditions of service, accounting and operating-related matters. Detroit Edison’s MPSC-approved rates charged to customers have historically been designed to allow for the recovery of costs, plus an authorized rate of return on our investments. The FERC regulates Detroit Edison with respect to financing authorization and wholesale electric activities. The NRC has regulatory jurisdiction over all phases of the operation, construction, licensing and decommissioning of Detroit Edison’s Fermi 2 nuclear plant.

Since 1996 there have been several important acts, orders, court rulings and legislative actions in the state of Michigan that affect our Power Generation operations. In 1996, the MPSC began an initiative designed to give all of Michigan’s electric customers access to electricity supplied by other generators and marketers. In 1998, the MPSC authorized the electric Customer Choice program that allowed for a limited number of customers to purchase electricity from suppliers other than their local utility. The local utility would continue to transport the electric supply to the customers’ facilities, thereby retaining distribution margins. The electric Customer Choice program was phased in over a three-year period, with all customers having the option to choose their electric supplier by January 2002.

In 2000, the Michigan Legislature enacted legislation that reduced electric rates by 5% and reaffirmed January 2002 as the date for full implementation of the electric Customer Choice program. This legislation also contained provisions freezing rates through 2003 and preventing rate increases for residential customers through 2005 and for small business customers through 2004. The legislation and an MPSC order issued in 2001 established a methodology to enable Detroit Edison to recover stranded costs related to its generation operations that may not otherwise be recoverable due to electric Customer Choice related lost sales and margins. The legislation also provides for the recovery of the costs associated with the implementation of electric Customer Choice program. The MPSC has determined that these costs be treated as regulatory assets. Additionally, the legislation provides for recovery of costs incurred as a result of changes in taxes, laws and other governmental actions including the Clean Air Act.

Due to MPSC orders issued in 1997 and 1998 that altered the regulatory process in Michigan and provided a plan for transition to electric Customer Choice for the generation business of Detroit Edison, effective December 1998, Detroit Edison’s generation business no longer met the criteria of SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation.” Since the June 2000 legislation was enacted into law and with the issuance of subsequent clarifying MPSC orders in 2001 and 2002, rates for retail customers and transition charges for electric Customer Choice customers will be set to recover Detroit Edison’s generation costs. Such costs will be billed and recovered from both retail and choice customers and thus satisfy the criteria of SFAS No. 71. In addition, we have the legislative authority to defer regulatory costs in 2002 and 2003 and to begin recovery of such costs starting in 2004 after the mandated rate freeze expires. The recovery of these costs is dependent on authorization from the MPSC. As a result, we resumed application of SFAS No. 71 for our generation business in the fourth quarter of 2002.

In June 2003, Detroit Edison filed an application with the MPSC for a change in retail electric rates, resumption of the Power Supply Cost Recovery (PSCR) mechanism, and recovery of net stranded costs. Detroit Edison is specifically requesting authority to increase rates by $427 million annually with a three-year phase in as customers’ rate caps expire. In February 2004, the MPSC authorized an interim base rate increase of $248 million annually.

For additional information regarding our regulatory environment, see Note 4 - Regulatory Matters.

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Properties

Detroit Edison owns generating properties and facilities that are all located in the state of Michigan. Substantially all the net utility properties of Detroit Edison are subject to the lien of its mortgage. Power Generation plants owned and in service as of December 31, 2003 are as follows:

Strategy and Competition

We continue to strive to be the preferred electricity supplier in southeast Michigan. We believe that we can accomplish our goal by working with our customers, communities and regulatory agencies to be a reliable low cost supplier of electricity. To control expenses, we optimize our fuel blends thereby taking maximum advantage of low cost, environmentally friendly low-sulfur western coals. To ensure generation reliability we will continue to make investments in our generating plants that will improve plant availability and improve operating efficiencies. Revenues from year to year will vary due to weather conditions, economic factors, regulatory events and other risk factors as discussed in the “Risk Factors” section that follows.

Effective January 1, 2002, the electric Customer Choice program expanded in Michigan whereby all of the Company’s electric customers can choose to purchase their electricity from alternative suppliers of generation services. Detroit Edison lost 16% of retail sales in 2003 and 6% of such sales in 2002 as a result of customers choosing to purchase power from alternative suppliers under the electric Customer Choice program. If regulatory or legislative changes are not made, we expect to lose between 17% to 20% of retail sales in 2004 as a result of customers choosing to participate in the program. Customers participating in the electric Customer Choice program consist primarily of industrial and large commercial customers. There is a significant price difference in the wholesale and retail markets, which

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only allows for partial offset of the lost revenue from customer choice migration. We will continue to aggressively utilize the wholesale market to sell the generation made available by the electric Customer Choice program.

ENERGY DISTRIBUTION

Power Distribution

Description

The electric distribution services of Detroit Edison comprise our regulated Power Distribution business. This business distributes electricity generated by Energy Resources’ Power Generation business and alternative electric suppliers to Detroit Edison’s 2.1 million customers in southeastern Michigan. This business also shares, with the DTE Energy’s Gas Distribution segment, the customer service function for the electric and gas utilities of DTE Energy. Accordingly, costs associated with this function, including collections, our call center and uncollectable accounts receivable is shared between Power Distribution and DTE Energy’s Gas Distribution segment.

In January 2003, we sold the steam heating business of Detroit Edison to Thermal Ventures II, LP. In February 2003, DTE Energy sold the International Transmission Company (ITC), a FERC regulated transmission company, to an affiliate of Kohlberg, Kravis, Roberts & Co. and Trimaran Capital Partners, LLC. ITC will continue to provide transmission services to the Energy Distribution business at rates that will be recovered from Detroit Edison’s utility customers.

Weather and economic factors affect our sales and revenues. Similar to the Power Generation business, our peak load and highest total system sales generally occur during the third quarter of the year driven by air conditioning and cooling-related demands. Power Distribution’s sales are not dependent upon a limited number of customers. Additionally, customers participating in the electric Customer Choice program do not impact Power Distribution’s operating revenues or the number of customers served. The loss of any one or a few customers is not reasonably likely to have a material adverse effect on Power Distribution.

Regulation

Detroit Edison’s Power Distribution is subject to the jurisdiction of the MPSC and the FERC, which have regulatory authority over rates, conditions of service and other operating-related matters. As previously discussed, Michigan legislation prevents Detroit Edison from increasing rates to residential customers through 2005 and for small business customers through 2004. By order of the FERC, rates charged by ITC will remain at current levels through December 2004.

In June 2003, Detroit Edison filed an application with the MPSC for a change in retail electric rates, resumption of the PSCR mechanism, and recovery of net stranded costs. In February 2004, the MPSC authorized an interim base rate increase of $248 million annually. See Note 4 for further discussion of the Electric Transitional Rate Plan filing.

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In January 2004, the MPSC issued an order adopting rules governing service quality and reliability standards for electric distribution systems. The reliability standards establish performance levels for service restoration, wire-down relief requests, customer call answer time, customer complaint response, meter reading and new service installations. The order also establishes penalties for delays in service restoration during normal conditions, catastrophic storms and repetitive outages. Detroit Edison is required to file an annual report providing information regarding performance against the measures provided and any penalties incurred.

For additional information regarding our regulatory environment, see Note 4 – Regulatory Matters.

Energy Assistance Programs

Energy assistance programs funded by the federal government and the State of Michigan, remain critical to Detroit Edison’s ability to control its uncollectable accounts receivable and collections expenses.

Detroit Edison’s uncollectable accounts receivable expense is directly affected by the level of government funded assistance its qualifying customers receive. We are working with the State of Michigan and others to increase the share of funding allocated to our customers to be representative of the number of low-income individuals in our service territory.

Properties

Detroit Edison owns and operates 663 distribution substations with a capacity of approximately 31,079,000 kilovolt-amperes (kVA) and approximately 407,000 line transformers with a capacity of approximately 24,542,000 kVA. Substantially all of the net utility properties of Detroit Edison are subject to the lien of its mortgage. Circuit miles of distribution lines owned and in service as of December 31, 2003 are as follows:

There are numerous interconnections that allow the interchange of electricity between Detroit Edison and electricity providers external to its service area. These interconnections are owned and operated by ITC and connect to neighboring energy companies.

Strategy and Competition

Our strategy focuses on improving the quality of customer service and lowering operating costs by improving operating efficiencies as well as targeting capital investments in areas that have the greatest

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impact on reliability improvements with the goal of managing distribution rates charged to utility customers.

The decision to sell ITC is consistent with our strategic view that maximization of shareholder value and high levels of customer service are best achieved with assets that we own, operate and over which we exercise significant control. As Detroit Edison’s rates are designed to recover transmission costs, billings to Detroit Edison from ITC will be recovered from Detroit Edison’s utility customers. Rates charged by ITC to Detroit Edison will, by FERC order, remain at current levels through December 2004. Thereafter, rates would be subject to normal FERC regulation and market forces.

Competition in the regulated electrical distribution business is provided primarily by on-site generation by industrial customers and distributed generation applications by industrial and commercial customers. We do not expect significant competition for distribution to any group of customers in the near term.

ENVIRONMENTAL MATTERS

We are subject to extensive environmental regulation. Additional costs may result as the effects of various chemicals on the environment are studied and governmental regulations are developed and implemented. We expect to continue recovering environmental costs related to utility operations through rates charged to our customers. Greater details on environmental issues are provided in the following Notes to the Consolidated Financial Statements:

We are subject to applicable permit requirements, and to potentially increasing stringent federal, state and local standards covering among other things, particulate and gaseous stack emission limitations, the discharge of waste into lakes and streams and the handling and disposal of waste material.

The U.S. Environmental Protection Agency (EPA) issued ozone transport regulations and, in December 2003, proposed additional emission regulations relating to ozone, fine particulate and mercury air pollution. The new rules have led to additional controls on fossil-fueled power plants to reduce nitrogen oxides, sulfur dioxide, carbon dioxide and particulate emissions. To comply with these new controls, Detroit Edison has spent approximately $560 million through December 2003 and estimates that it will spend approximately $40 million in 2004 and incur up to an additional $1.2 billion of future capital expenditures over the next five to eight years to satisfy both the existing and proposed new control requirements. The EPA initiated enforcement actions against several major electric utilities citing violations of new source provisions of the Clean Air Act. Detroit Edison received and responded to information requests from the EPA on this subject. In October 2003, the EPA promulgated revised regulations to clarify new source review provisions going forward. Several states and environmental organizations have challenged these regulations and in December 2003 the Court stayed the implementation of the regulations until the U.S. Court of Appeals D.C. Circuit renders an opinion in the case. We cannot predict the future impact of this issue upon Detroit Edison.

We are required to demonstrate that the cooling water intake structures at all of its facilities minimize adverse environmental impact. We filed such demonstrations and in the event of a final adverse decision, may be required to install additional control technologies to further minimize the impact.

Various state and federal laws regulate Detroit Edison’s handling, storage and disposal of its waste materials. The EPA and the Michigan Department of Environmental Quality (MDEQ) have aggressive programs to manage the clean up of contaminated property. We have extensive land holdings and, from time to time, must investigate claims of improperly disposed contaminants. We anticipate that we will be periodically included in these types of environmental proceedings.

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RISK FACTORS

There are various risks associated with the operations of Detroit Edison. To provide a framework to understand our operating environment, we are providing a brief explanation of the more significant risks associated with our businesses. Although we have tried to identify and discuss key risk factors, others could emerge in the future. Each of the following risks could affect our performance.

Electric Customer Choice – Without regulatory and legislative changes, the negative impact of the electric Customer Choice program will continue to impact our financial performance.

Weather – Weather significantly affects our operations. Deviations from normal hot and cold weather conditions affect our earnings and cash flow. Mild temperatures can result in decreased utilization of our assets, lowering income and cash flow. Damage due to ice storms, tornadoes, or high winds can damage our infrastructure and require us to perform emergency repairs and incur material unplanned expenses.

Competition – Deregulation and restructuring in the electric industry, could result in increased competition and unrecovered costs that could affect the financial condition, results of operations or cash flows of our business.

Rate regulation – We operate in a regulated industry. Our electric rates are set by the MPSC and the FERC and cannot be increased without their authorization. We may be impacted by new regulations or interpretations by the MPSC, FERC or other regulatory bodies. New legislation, regulations or interpretations could change how our business operates, impact our ability to recover costs through rate increases or require us to incur additional expenses. There is no assurance that our currently pending electric rate increases will be granted.

Credit ratings - Increased scrutiny of the energy industry and regulatory changes, as well as changes in our economic performance could result in credit agencies reexamining our credit rating. Several of the credit agencies have placed a “negative outlook” on our ratings due primarily to the uncertainty regarding our electric rate case. A downgrade in our rating could restrict or discontinue our ability to access capital markets at attractive rates and increase our borrowing costs.

Regional and national economic conditions – Our businesses follow the economic cycles of the customers we serve. Should national or regional economic conditions decline, reduced volumes of electricity we supply will result in decreased earnings and cash flow. Economic conditions in our service territory also impact our collections of accounts receivable.

Environmental laws and liability – We are subject to numerous environmental regulations. These regulations govern air emissions, water quality, wastewater discharge, and disposal of solid and hazardous waste. Compliance with these regulations can significantly increase capital spending, operating expenses and plant down times. These laws and regulations require us to seek a variety of environmental licenses, permits, inspections, and other regulatory approvals. We may also incur liabilities because of our emission of gases that may cause changes in the climate. The regulatory environment is subject to significant change and, therefore, we cannot predict future issues.

Additionally, we may become a responsible party for environmental clean up at sites identified by a regulatory body. We cannot predict with certainty the amount and timing of future expenditures related to environmental matters because of the difficulty of estimating clean up costs. There is also uncertainty in quantifying liabilities under environmental laws that impose joint and several liability on all potentially responsible parties.

Operation of nuclear facilities – Ownership of an operating nuclear generating plant subjects us to significant additional risks. These risks among others, include, but are not limited to, plant security,

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environmental regulation and remediation, and operational factors than can significantly impact the performance and cost of operating a nuclear facility.

Supply and price of raw materials – We are dependent on coal for much of our electrical generating capacity. Price fluctuation and supply disruptions could have a negative impact on our ability to profitably generate electricity. We have hedging policies in place to mitigate negative fluctuations in commodity supply prices.

Labor relations – Unions represent a majority of our employees. A union choosing to strike as a negotiating tactic would have an impact on our business. We have begun negotiations with unions for contracts expiring in 2004 and cannot predict the outcome. An unfavorable outcome, such as a strike, could adversely impact the business.

Unplanned outages –Unforeseen maintenance may be required to safely produce electricity or comply with environmental regulations. This occurrence could result in spot market purchases of electricity at costs that exceed our generation costs.

Access to capital markets and other financing efforts and interest rates – Our ability to access capital markets is important to operate our businesses. Heightened concerns about the energy industry, the level of borrowing by other energy companies and the market as a whole could limit our access to capital markets. Changes in interest rates could increase our borrowing costs.

Property tax reform – We are one of the largest payers of property taxes in the state of Michigan. Should the legislature change how schools are financed, we could face increased property taxes on our Michigan facilities.

Insurance – While we have a comprehensive insurance program in place to provide coverage for various types of risks, catastrophic damage as a result of acts of God, terrorism, war or a combination of significant unforeseen events could impact our operations and economic losses might not be covered in full by insurance.

Terrorism – Damage to downstream infrastructure or our own assets by terrorist groups would impact our operations.

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EMPLOYEES

We had 8,008 employees at December 31, 2003, of which 4,062 were represented by unions. Of the represented employees, 3,594 are under a contract that expires in June 2004. The contract of the remaining represented employees expires in 2005. We have begun negotiations on the labor contract that expires in June 2004 and cannot predict the outcome.

Item 3. Legal Proceedings

We are involved in certain legal, regulatory, administrative and environmental proceedings before various courts, arbitration panels and governmental agencies concerning matters arising in the ordinary course of business. These proceedings include certain contract disputes, environmental reviews and investigations, audits, inquiries from various regulators, and pending judicial matters. We cannot predict the final disposition of such proceedings. We regularly review legal matters and record provisions for claims that are considered probable of loss. The resolution of pending proceedings is not expected to have a material effect on our operations or financial statements in the period they are resolved. For additional discussion on legal matters, see the following Notes to the Consolidated Financial Statements:

Item 4. Submission of Matters to a Vote of Security Holders

Omitted per general instruction I (2) (c) of Form 10-K for wholly owned subsidiaries (reduced disclosure format).

Part II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

All of the 134,287,832 issued and outstanding shares of common stock of Detroit Edison, par value $10 per share, are owned by DTE Energy, and constitute 100% of the voting securities of Detroit Edison. Therefore, no market exists for our common stock.

We paid cash dividends of $295 million in 2003 and in 2002 and $306 million in 2001.

Item 6. Selected Financial Data

Omitted per general instruction I (2) (a) of Form 10-K for wholly owned subsidiaries (reduced disclosure format).

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Item 7. Management’s Narrative Analysis of Results of Operations

The Results of Operations discussion for Detroit Edison is presented in accordance with General Instruction I (2) (a) of Form 10-K for wholly owned subsidiaries (reduced disclosure format).

We had net income of $246 million for 2003 compared to net income of $356 million for 2002. The comparability of earnings was impacted by the adoption of a new accounting rule in the 2003 first quarter. As required by generally accepted accounting principles, on January 1, 2003, we adopted a new accounting rule for asset retirement obligations as discussed in Note 2. The cumulative effect of adopting this new accounting rule was to reduce 2003 earnings by $6 million. Results were also affected by a $14 million net of tax loss on the sale of our steam heating business in January 2003.

Detroit Edison’s net income decreased $123 million in 2002 from 2001. The earnings comparability is affected by $186 million ($121 million net of tax) of merger and restructuring charges incurred as a result of the merger between Detroit Edison’s parent company, DTE Energy Company (DTE Energy), and MCN Energy Group Inc. (MCN Energy) in 2001.

Detroit Edison has the following two reportable segments.

ENERGY RESOURCES

Power Generation

The power generation plants of Detroit Edison comprise our regulated power generation business. Detroit Edison’s numerous fossil plants, its hydroelectric pumped storage plant and its nuclear plant generate electricity. The generated electricity, supplemented with purchased power, is sold principally throughout Michigan and the Midwest to residential, commercial, industrial and wholesale customers.

Factors impacting income: Power Generation earnings decreased $10 million in 2003 and increased $106 million in 2002, compared to the prior year. As subsequently discussed, these results primarily reflect changes in gross margins, increased operation and maintenance expenses and the recording of higher regulatory deferrals, which lowered depreciation and amortization expenses.

Merger and restructuring charges associated with the 2001 MCN Energy acquisition also impacted the comparability of results. These charges represent costs associated with systems integration, relocation, legal, accounting and consulting services, as well as costs associated with a work force reduction plan. The plan included

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early retirement incentives and voluntary separation agreements for employees in overlapping corporate support areas.

Gross margins in 2003 declined $135 million due primarily to decreased cooling demand resulting from mild summer weather, lost margins from customers choosing to purchase power from alternative suppliers under the electric Customer Choice program and lost margins from the August 2003 blackout. Weather in 2003 was 38% milder than 2002 resulting in lost margins of $114 million. Detroit Edison lost 16% of retail sales in 2003 and 6% of such sales in 2002 as a result of customers choosing to purchase power from alternative suppliers under the electric Customer Choice program. We estimate that we lost $120 million of margins in 2003 under the electric Customer Choice program, an increase of $70 million over 2002. Lost Choice margins that we believe are recoverable under Michigan legislation are recorded as regulatory assets and therefore reduced depreciation and amortization expense as subsequently discussed. Gross margins benefited from a $.64 per MWh (4%) decline in fuel and purchased power costs reflecting the use of a more favorable power supply mix. The favorable mix is due to lower purchases, which is driven by lost sales under the electric Customer Choice program.

Gross margins in 2002 improved $106 million due primarily to significantly lower fuel and purchased power costs, partially offset by reduced operating revenues. The reduction in fuel and purchased power costs was driven by a $39.08 per MWh (50%) reduction in average purchased power prices from 2001 levels. The decline in operating revenues is attributable to commercial, industrial and wholesale customers. Commercial and industrial revenues were lower due to a full year’s impact of a 5% legislatively mandated rate reduction for customers that began in April 2001. Additionally, revenues from these retail customers were affected by customers switching to alternative suppliers under the electric Customer Choice program. Revenues from wholesale customers were reduced, reflecting lower power prices. Partially offsetting these revenue reductions was the impact of weather, resulting in a 10% increase in cooling demand during 2002.

(2) Includes amounts associated with hedging activities.

Operation and maintenance expense increased $6 million in 2003 and $51 million in 2002. Operation and maintenance expenses in 2003 were affected by $5 million in costs associated with the August 2003 blackout (Note 4) and a $69 million increase in employee pension and health care benefit costs, due to recent financial market performance, lower discount rates and increased health care trend rates. Partially offsetting these increases were benefits from the DTE Operating System, our company-wide initiative to pursue cost efficiencies as well as enhance operating performance. The DTE Operating System involves the application of tools and operating practices, which have resulted in inventory reductions and improvements in technology systems, among other enhancements. Operation and maintenance expenses in 2003 also benefited from $23 million in sales of emissions credits and lower employee incentive costs.

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Operation and maintenance expenses in 2002 reflect $18 million in higher employee pension and health care benefit costs and $43 million in expenses associated with maintaining our generation fleet. The 2002 increase also includes a $5 million increase in allocations for corporate support services, as well as $11 million to fund the low income and energy efficiency fund. The funding of the low income and energy efficiency program was required under Michigan legislation and is recovered in current sales rates.

Depreciation and amortization expense decreased $107 million in 2003 and $54 million in 2002. The decrease in depreciation and amortization expense is attributable to the income effect of recording regulatory assets totaling $126 million in 2003 and $41 million in 2002 representing the deferral of net stranded and other costs we believe are recoverable under Public Act 141. The decline in 2002 also reflects the extension of the amortization period from seven years to 14 years for certain regulatory assets that were securitized in 2001. See Note 4 – Regulatory Matters. Partially offsetting these declines was increased depreciation associated with generation-related capital expenditures.

Other income and deductions declined $40 million in 2003 and increased $5 million in 2002. The reduction in 2003 is attributable to lower interest expense and increased interest income. Interest expense reflects lower borrowing levels and rates, and interest income includes the accrual of carrying charges on environmental-related regulatory assets.

Outlook – Future operating results are expected to vary as a result of external factors such as regulatory proceedings, new legislation, changes in market prices of power, changes in economic conditions and the levels of customer participation in the electric Customer Choice program.

As previously discussed, we expect to continue losing retail sales and margins in future years under the electric Customer Choice program until the inequities associated with this program are addressed. We will accrue as regulatory assets our unrecovered generation-related fixed costs due to electric Customer Choice that we believe are recoverable under Michigan legislation. We have addressed the issue of stranded costs in our June 2003 electric rate filing and are also pursuing a legislative solution. Additionally, we requested an increase in retail electric rates of $427 million annually to recover higher operating costs and the resumption of the PSCR mechanism. In February 2004, the MPSC authorized an interim base rate increase of $248 million annually. The actual timing and level of recovering stranded and operating costs will ultimately be determined by the MPSC or legislation. We cannot predict the outcome of these matters. See Note 4 – Regulatory Matters.

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ENERGY DISTRIBUTION

Power Distribution

Power Distribution operations include the electric distribution services of Detroit Edison. Power Distribution distributes electricity generated by Energy Resources and alternative electric suppliers to Detroit Edison’s 2.1 million customers.

Factors impacting income: Power Distribution earnings decreased $94 million during 2003 and increased $14 million in 2002, compared to the prior year. As subsequently discussed, these results primarily reflect changes in operating revenues and increased operation and maintenance expenses. Merger and restructuring charges associated with the 2001 MCN Energy acquisition also impacted the comparability of results.

Operating revenues declined $96 million in 2003 primarily due to mild summer weather and the impact of slower economic conditions affecting commercial and industrial sales. Operating revenues increased $87 million in 2002 reflecting higher residential sales attributable to greater cooling demand.

Below are volumes associated with the regulated power distribution business:

Operation and maintenance expense increased $75 million in 2003 and $138 million in 2002 reflecting higher costs associated with weather-related power outages, employee benefits, uncollectable accounts receivables, allocations for corporate support services, and customer service initiatives to improve customer satisfaction. Restoration costs associated with three catastrophic storms in 2003 and the August 2003 blackout totaled $76 million. We experienced an April ice storm, resulting in more than 400,000 customers losing power, a July windstorm, affecting over 190,000 customers, a November windstorm, affecting 160,000 customers, and the August blackout, affecting all 2.1 million of our customers. This compares with $49 million in costs in 2002 related to two catastrophic storms,

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as well as heat-related maintenance expenses due to prolonged periods of above normal summer temperatures and the related stress placed on our distribution system.

Employee pension and health care benefit costs increased $26 million in 2003 and $12 million in 2002 due to recent financial market performance, lower discount rates and increased health care trend rates. Uncollectable accounts expense increased $17 million in 2003 and decreased $1 million in 2002 reflecting higher past due amounts attributable to current economic conditions. Additionally, results for 2003 also reflect costs associated with customer service initiatives and a net of tax loss of $14 million on the sale of our non-strategic steam heating business (Note 3). Partially offsetting these increases were benefits from the DTE Operating System, as previously discussed, and lower employee incentive costs.

Taxes other than income decreased $17 million in 2003 and $3 million in 2002. The decline in 2003 is due to lower Michigan Single Business Taxes, reflecting reduced taxable earnings, and lower property taxes.

Outlook – Operating results are expected to vary as a result of external factors such as weather, changes in economic conditions and the severity and frequency of storms. Economic conditions and prior billing issues have resulted in an increase in past due receivables. We believe our allowance for doubtful accounts is based on reasonable estimates. However, failure to make continued progress in collecting our past due receivables would unfavorably affect operating results. As a result, we have organized a focused effort to address the credit and collection issues.

We experienced numerous catastrophic storms over the past few years. The effect of the storms on annual earnings ranged up to $70 million and was partially offset by storm insurance. We were unable to obtain storm insurance at economical rates in 2004 and as a result, we do not anticipate having insurance coverage at levels that would significantly offset unplanned expenses from ice storms, tornadoes, or high winds that damage our distribution infrastructure.

As previously mentioned, Detroit Edison filed a rate case in June 2003 to address future operating costs and other issues. Detroit Edison received an interim order in this rate case in February 2004. See Note 4 – Regulatory Matters.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Commodity Price Risk

Detroit Edison has commodity price risk arising from market price fluctuations in conjunction with the anticipated purchase of electricity to meet its obligations during periods of peak demand. To limit our exposure to commodity price fluctuations, we have entered into a series of electricity forwards and option contracts. See Note 11 – Financial and Other Derivative Instruments for further discussion.

Interest Rate Risk

Detroit Edison estimates that if interest rates were 10% higher or lower, the fair value of long-term debt at December 31, 2003 would decrease $188 million and increase $199 million, respectively.

Credit Risk

We purchase and sell electricity from and to numerous companies operating in the steel, automotive, energy and retail industries. A number of customers have filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. We have negotiated or are currently involved in negotiations with each of the companies, or their successor companies, that have filed for bankruptcy protection. We regularly review contingent matters relating to purchase and sale contracts and record provisions for amounts considered probable of loss. We believe our accrued amounts are adequate for probable losses. The final resolution of these matters is not expected to have a material effect on our financial statements in the period they are resolved.

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Item 8. Financial Statements and Supplementary Data

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INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Shareholder of
The Detroit Edison Company

We have audited the consolidated statement of financial position of The Detroit Edison Company and subsidiaries (the “Company”) as of December 31, 2003 and 2002 and the related consolidated statements of operations, cash flows, and changes in shareholder’s equity and comprehensive income for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements and the financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Detroit Edison Company and subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements of the Company taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, in connection with the required adoption of certain new accounting principles, in 2003 the Company changed its method of accounting for asset retirement obligations, and in 2001 changed its method for accounting for derivative instruments and hedging activities.

/s/ DELOITTE & TOUCHE LLP

Detroit, Michigan
March 1, 2004

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The Detroit Edison Company
Consolidated Statement of Operations

See Notes to Consolidated Financial Statements

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The Detroit Edison Company
Consolidated Statement of Financial Position