UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

Commission
File Number

Name of Registrant, State of Incorporation, Address of Principal Executive Offices,
and Telephone Number

I.R.S. Employer Identification Number

001-31403

PEPCO HOLDINGS, INC.
(Pepco Holdings or PHI), a
  Delaware corporation
701 Ninth Street, N.W.
Washington, D.C. 20068
Telephone: (202)872-2000

52-2297449

001-01072

POTOMAC ELECTRIC POWER COMPANY
(Pepco), a District of
  Columbia and Virginia
  corporation
701 Ninth Street, N.W.
Washington, D.C. 20068
Telephone: (202)872-2000

53-0127880

001-01405

DELMARVA POWER & LIGHT COMPANY
(DPL), a Delaware and
  Virginia corporation
800 King Street, P.O. Box 231
Wilmington, Delaware 19899
Telephone: (202)872-2000

51-0084283

001-03559

ATLANTIC CITY ELECTRIC COMPANY
(ACE), a New Jersey
  corporation
800 King Street, P.O. Box 231
Wilmington, Delaware 19899
Telephone: (202)872-2000

21-0398280

______________________________________________________________________________

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

Registrant

Title of Each Class

Name of Each Exchange
on Which Registered  

Pepco Holdings

Common Stock, $.01 par value

New York Stock Exchange

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

Registrant

Title of Each Class

Pepco

Serial Preferred Stock,
  $50 par value

     Indicate by check mark whether each of the registrants (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. 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 registrant's knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K (applicable to Pepco Holdings and Pepco only).    .

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

Pepco Holdings

Yes    X       No       

Pepco

Yes            No    X  

DPL

Yes            No    X  

ACE

Yes            No    X  

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

Registrant

Aggregate Market Value of Voting and Non-Voting Common Equity Held by Non-Affiliates of the Registrant at June 30, 2004

Number of Shares of Common Stock of the Registrant Outstanding at March 1, 2005

Pepco Holdings

$3.2 billion

188,348,974
($.01 par value)

Pepco

None (a)

100
($.01 par value)

DPL

None (b)

1,000
($2.25 par value)

ACE

None (b)

8,546,017
($3 par value)

(a)

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

(b)

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

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

DOCUMENTS INCORPORATED BY REFERENCE

________________________________________________________________________________

TABLE OF CONTENTS

Page

-

Glossary of Terms

i

PART I

  Item 1.

-

Business

1

  Item 2.

-

Properties

19

  Item 3.

-

Legal Proceedings

20

  Item 4.

-

Submission of Matters to a Vote of
   Security Holders

25

PART II

  Item 5.

-

Market for Registrant's Common Equity, Related
   Stockholder Matters and Issuer Purchases of
   Equity Securities

26

  Item 6.

-

Selected Financial Data

29

  Item 7.

-

Management's Discussion and Analysis of
   Financial Condition and Results of Operations

32

  Item 7A.

-

Quantitative and Qualitative Disclosures
   About Market Risk

147

  Item 8.

-

Financial Statements and Supplementary Data

152

  Item 9.

-

Changes in and Disagreements With Accountants
   on Accounting and Financial Disclosure

360

  Item 9A.

-

Controls and Procedures

360

  Item 9B.

-

Other Information

362

PART III

  Item 10.

-

Directors and Executive Officers of the Registrant

364

  Item 11.

-

Executive Compensation

368

  Item 12.

-

Security Ownership of Certain Beneficial Owners
   and Management

375

  Item 13.

-

Certain Relationships and Related Transactions

377

  Item 14.

-

Principal Accounting Fees and Services

377

PART IV

  Item 15.

-

Exhibits, Financial Statement Schedules

378

   Financial Statements

Included in Part II, Item 8

378

   Schedule I   -

Condensed Financial Information of Parent Company

379

   Schedule II  -

Valuation and Qualifying Accounts

382

   Exhibit 11   -

Statements Re. Computation of Earnings
   Per Common Share

400

   Exhibit 12   -

Statements Re. Computation of Ratios

401

   Exhibit 21   -

Subsidiaries of the Registrant

405

   Exhibit 23   -

Consents of Independent Registered Public
  Accounting Firm

407

Exhibits 31.1 - 31.8

Rule 13a-14a/15d-14(a) Certifications

411

Exhibits 32.1 - 32.4

Section 1350 Certifications

419

  Signatures

423

___________________________________________________________________________________

           GLOSSARY OF TERMS

Term

Definition

ABO

Accumulated benefit obligation

Accounting hedges

Derivatives designated as cash flow and fair value hedges

ACE

Atlantic City Electric Company

ACE Funding

Atlantic City Electric Transition Funding LLC

Act

Prescription Drug, Improvement and Modernization Act of 2003

ADITC

Accumulated deferred investment tax credits

AFUDC

Allowance for Funds Used During Construction

Agreement and Plan
  of Merger

Agreement and Plan of Merger, dated as of February 9, 2001, among PHI, Pepco and Conectiv

Ancillary services

Generally, electricity generation reserves and reliability services

APB

Accounting Principles Board Opinion

APB No. 18

Accounting Principles Board Opinion No. 18, entitled "The Equity Method of Accounting for Investments in Common Stock"

APBO

Accumulated Post-retirement Benefit Obligation

APCA

Air Pollution Control Act

Asset Purchase and
  Sale Agreement

Asset Purchase and Sale Agreement, dated as of June 7, 2000 and subsequently amended, between Pepco and Mirant (formerly Southern Energy, Inc.) relating to the sale of Pepco's generation assets

Bankruptcy Court

Bankruptcy Court for the Northern District of Texas

BGS

Basic generation service in New Jersey (the supply of energy to customers who have not chosen a competitive supplier)

BPU Financing Orders

Bondable stranded costs rate orders issued by the NJBPU

BTP

Bondable Transition Property

CAA

Federal Clean Air Act

CBI

Conectiv Bethlehem, LLC

CERCLA

Comprehensive Environmental Response, Compensation, and Liability Act of 1980

CESI

Conectiv Energy Supply, Inc.

Circuit Court

U.S. Court of Appeals for the Fifth Circuit

CO₂

Carbon Dioxide

Competitive Energy
  Business

Consists of the business operations of Conectiv Energy and Pepco Energy Services

Conectiv

A wholly owned subsidiary of PHI which is a PUHCA holding company and the parent of DPL and ACE

Conectiv Energy

Conectiv Energy Holding Company and its subsidiaries

Conectiv Power
  Delivery

The tradename under which DPL and ACE conduct their power delivery operations

COPCO

Conowingo Power Company

Creditors Committee

The Official Committee of Unsecured Creditors of Mirant Corporation

CRMC

PHI's Corporate Risk Management Committee

CTs

Combustion turbines

CWA

Federal Clean Water Act

DCPSC

District of Columbia Public Service Commission

Debentures

Junior Subordinated Debentures

Delivery revenue

Revenue Pepco receives for delivering energy to its customers

DER

Discrete Emission Reduction Credits

District Court

U.S. District Court for the Northern District of Texas

i
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Term

Definition

DNREC

Delaware Department of Natural Resources and Environmental Control

DPL

Delmarva Power & Light Company

DPSC

Delaware Public Service Commission

DRP

PHI's Shareholder Dividend Reinvestment Plan

DSR

Default Supply Revenue

EDECA

New Jersey Electric Discount and Energy Competition Act

EDIT

Excess Deferred Income Taxes

EITF

Emerging Issues Task Force

EPA

U.S. Environmental Protection Agency

ERISA

Employment Retirement Income Security Act of 1974

Exchange Act

Securities Exchange Act of 1934, as amended

FASB

Financial Accounting Standards Board

FERC

Federal Energy Regulatory Commission

FIN 45

FASB Interpretation No. 45, entitled "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others"

FIN 46

FASB Interpretation No. 46, entitled "Consolidation of Variable Interest Entities"

Financing Order

Financing Order of the SEC under PUHCA dated July 31, 2002 with respect to PHI and its subsidiaries

FirstEnergy

FirstEnergy Corp., formerly Ohio Edison

FirstEnergy PPA

PPAs between Pepco and FirstEnergy Corp. and Allegheny Energy, Inc.

GCR

Gas Cost Recovery

GPC

Generation Procurement Credit

Internal Control over
  Financial Reporting

A process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

IRC

Internal Revenue Code

IRS

Internal Revenue Service

ITC

Investment Tax Credit

LEAC Liability

ACE's $59.3 million deferred energy cost liability existing as of July 31, 1999 related to ACE's Levelized Energy Adjustment Clause and ACE's Demand Side Management Programs

LOB

Line of business

LTIP

Pepco Holdings' Long-Term Incentive Plan

MACT

Maximum Achievable Control Technology

Mcf

One thousand cubic feet

ii
_________________________________________________________________________________

Term

Definition

MDE

Maryland Department of the Environment

MISO

Midwest Independent System Operator

Mirant

Mirant Corporation and certain of its subsidiaries

Mirant Parties

Mirant Corporation and its affiliate Mirant Americas Energy Marketing, LP

Mirant Pre-Petition
  Obligations

Unpaid obligations of Mirant to Pepco existing at the time of filing of Mirant's bankruptcy petition consisting primarily of payments due Pepco in respect of the PPA-Related Obligations

Moody's

Moody's Investor Service

MPSC

Maryland Public Service Commission

MTC

Market Transition Charge

NERC

North American Electric Reliability Council

NJBPU

New Jersey Board of Public Utilities

NJDEP

New Jersey Department of Environmental Protection

NJPDES

New Jersey Pollutant Discharge Elimination System

Normalization
  provisions

Sections of the Internal Revenue Code and related regulations that dictate how excess deferred income taxes resulting from the corporate income tax rate reduction enacted by the Tax Reform Act of 1986 and accumulated deferred investment tax credits should be treated for ratemaking purposes

NOx

Nitrogen oxide

NPDES

National Pollutant Discharge Elimination System

NSR

New Source Review

NUG

Non-Utility Generation

OCI

Other Comprehensive Income

O&M

Operating and maintenance expenses

Panda

Panda-Brandywine, L.P.

Panda PPA

PPA between Pepco and Panda

PARS

Performance Accelerated Restricted Stock

PBO

Projected benefit obligations

PCI

Potomac Capital Investment Corporation and its subsidiaries

PEI

Pepco Enterprises, Inc.

Pepco

Potomac Electric Power Company

Pepco's pre-merger subsidiaries

PCI and Pepco Energy Services

Pepco Energy Services

Pepco Energy Services, Inc. and its subsidiaries

Pepco Holdings or PHI

Pepco Holdings, Inc.

Pepco TPA Claim

Pepco's $105 million allowed, pre-petition general unsecured claim against each of the Mirant Parties

Pepcom

Pepco Communications, Inc.

PJM

PJM Interconnection, LLC

POLR

Provider of Last Resort (the supply of energy to customers who have not chosen a competitive supplier)

POM

Pepco Holdings' NYSE trading symbol

PPA

Power Purchase Agreement

PPA-Related
  Obligations

Mirant's obligations to purchase from Pepco the capacity and energy that Pepco is obligated to purchase under the FirstEnergy PPA and the Panda PPA

PRP

Potentially Responsible Party

PSD

Prevention of Significant Deterioration

PUHCA

Public Utility Holding Company Act of 1935

RARC

Regulatory Asset Recovery Charge

RCN

RCN Corporation

Recoverable stranded
  costs

The portion of stranded costs that is recoverable from ratepayers as approved by regulatory authorities

iii
_________________________________________________________________________________

Term

Definition

Regulated electric
  revenues

Revenues for delivery (transmission and distribution) service and electricity supply service

Retirement Plan

PHI's noncontributory retirement plan

RI/FS

Remedial Investigation/Feasibility Study

S&P

Standard & Poors

SEC

Securities and Exchange Commission

Settlement Agreement

Amended Settlement Agreement and Release, dated as of October 24, 2003 between Pepco and the Mirant Parties

SFAS

Statement of Financial Accounting Standards

SFAS No. 5

Financial Accounting Standards Board Statement No. 5, entitled "Accounting for Contingencies"

SFAS No. 13

Statement of Financial Accounting Standards No. 13, entitled "Accounting for Leases"

SFAS No. 34

Statement of Financial Accounting Standards No. 34, entitled "Capitalization of Interest Cost"

SFAS No. 71

Statement of Financial Accounting Standards No. 71, entitled "Accounting for the Effects of Certain Types of Regulation"

SFAS No. 87

Statement of Financial Accounting Standards No. 87, entitled "Employers' Accounting for Pensions"

SFAS No. 106

Statement of Financial Accounting Standards No. 106, entitled "Employers' Accounting for Post-retirement Benefits Other Than Pensions"

SFAS No. 115

Statement of Financial Accounting Standards No. 115, entitled "Accounting for Certain Investments in Debt and Equity Securities"

SFAS No. 123

Statement of Financial Accounting Standards No. 123, entitled "Accounting for Stock-Based Compensation"

SFAS No. 131

Statement of Financial Accounting Standards No. 131, entitled "Disclosures About Segments of an Enterprise and Related Information"

SFAS No. 132

Statement of Financial Accounting Standards No. 132, entitled "Employers' Disclosures About Pensions and Other Post-retirement Benefits"

SFAS No. 133

Statement of Financial Accounting Standards No. 133, entitled "Accounting for Derivative Instruments and Hedging Activities"

SFAS No. 141

Statement of Financial Accounting Standards No. 141, entitled "Business Combinations"

SFAS No. 142

Statement of Financial Accounting Standards No. 142, entitled "Goodwill and Other Intangible Assets"

SFAS No. 143

Statement of Financial Accounting Standards No. 143, entitled "Accounting for Asset Retirement Obligations"

SFAS No. 144

Statement of Financial Accounting Standards No. 144, entitled "Accounting for the Impairment or Disposal of Long-Lived Assets"

SFAS No. 150

Statement of Financial Accounting Standards No. 150, entitled "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity"

SMECO

Southern Maryland Electric Cooperative, Inc.

SMECO Agreement

Capacity purchase agreement between Pepco and SMECO

SO₂

Sulfur dioxide

SOS

Standard Offer Service (the supply of energy to customers who have not chosen a competitive supplier)

SPEs

Special Purpose Entities as defined in FIN 46R

Standard Offer Service revenue or SOS revenue

Revenue each of Pepco and DPL, respectively, receives for the procurement of energy by it for its SOS customers

Starpower

Starpower Communications, LLC

iv
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Term

Definition

Stranded costs

Costs incurred by a utility in connection with providing service which would otherwise be unrecoverable in a competitive or restructured market. Such costs may include costs for generation assets, purchased power costs, and regulatory assets and liabilities, such as accumulated deferred income taxes.

TBC

Transition bond charge

TOPrS

Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Which Holds Solely Parent Junior Subordinated Debentures

TPAs

Transition Power Agreements for Maryland and the District of Columbia between Pepco and Mirant

Transition Bonds

Transition bonds issued by ACE Funding

Treasury lock

A hedging transaction that allows a company to "lock-in" a specific interest rate corresponding to the rate of a designated Treasury bond for a determined period of time

VaR

Value at Risk

VEBA

Voluntary Employee Beneficiary Association

VRDB

Variable Rate Demand Bonds

VSCC

Virginia State Corporation Commission

v
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Item 1.    BUSINESS

OVERVIEW

     Pepco Holdings, Inc. (Pepco Holdings or PHI) is a diversified energy company that, through its operating subsidiaries, is engaged in three principal areas of business operations:

·

regulated electricity and natural gas delivery,

·

competitive energy generation, marketing and supply, and

·

other activities consisting primarily of investments in energy-related assets.

     PHI is a public utility holding company registered under the Public Utility Holding Company Act of 1935 (PUHCA) and is subject to the regulatory oversight of the Securities and Exchange Commission (SEC) under PUHCA. As a registered public utility holding company, PHI requires SEC approval to, among other things, issue securities, acquire or dispose of utility assets or securities of utility companies and acquire other businesses. In addition, under PUHCA, transactions among PHI and its subsidiaries generally must be performed at cost and subsidiaries are prohibited from paying dividends out of capital or unearned surplus without SEC approval.

     PHI was incorporated in Delaware on February 9, 2001, for the purpose of effecting the acquisition of Conectiv by Potomac Electric Power Company (Pepco). The acquisition was completed on August 1, 2002, at which time Pepco and Conectiv became wholly owned subsidiaries of PHI. Conectiv was formed in 1998 to be the holding company for Delmarva Power & Light Company (DPL) and Atlantic City Electric Company (ACE) in connection with the combination of DPL and ACE. As a result, DPL and ACE are wholly owned subsidiaries of Conectiv, which also is a registered public utility holding company under PUHCA. The following chart shows, in simplified form, the corporate structure of PHI and its principal subsidiaries.

1
_____________________________________________________________________________

     PHI Service Company, a subsidiary service company of PHI, provides a variety of support services, including legal, accounting, treasury, tax, purchasing and information technology services to PHI and its operating subsidiaries. These services are provided pursuant to a service agreement among PHI, PHI Service Company, and the participating operating subsidiaries which has been filed with, and approved by, the SEC under PUHCA. The expenses of the service company are charged to PHI and the participating operating subsidiaries in accordance with cost allocation methodologies set forth in the service agreement.

     For financial information relating to PHI's segments, see Note (3) Segment Information to the consolidated financial statements of PHI set forth in Item 8 of this Form 10-K. This segment information includes a revision of PHI's segments for 2003 and 2002 to reflect that, as of January 1, 2004, the formerly separate segments of Pepco Power Delivery and Conectiv Power Delivery were combined to form one operating segment. Each of Pepco, DPL and ACE has one operating segment.

Investor Information

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

     The following is a description of each of PHI's areas of operation.

Power Delivery

     The largest component of PHI's business is power delivery, which consists of the transmission and distribution of electricity and the distribution of natural gas. In 2004, 2003 and 2002, respectively, PHI's power delivery operations produced 61%, 55%, and 58% of PHI's consolidated operating revenues and 70%, 82% and 78% of PHI's consolidated operating income.

     PHI's power delivery business is conducted by its subsidiaries Pepco, DPL and ACE, each of which is a regulated public utility in the jurisdictions in which it serves customers. DPL and ACE conduct their power delivery operations under the tradename Conectiv Power Delivery. In the aggregate, PHI's power delivery business delivers electricity to more than 1.8 million customers in the mid-Atlantic region and distributes natural gas to approximately 118,000 customers in Delaware.

2
_____________________________________________________________________________

     Transmission of Electricity and Relationship with PJM

     The transmission facilities owned by Pepco, DPL and ACE are interconnected with the transmission facilities of contiguous utilities and as such are part of an interstate power transmission grid over which electricity is transmitted throughout the mid-Atlantic region and the eastern United States. The Federal Energy Regulatory Commission (FERC) has designated a number of regional transmission operators to coordinate the operation of portions of the interstate transmission grid. Pepco, DPL and ACE are all members of PJM Interconnection, LLC (PJM), the regional transmission operator that coordinates the movement of electricity in all or parts of Delaware, Maryland, New Jersey, Ohio, Pennsylvania, Virginia, West Virginia and the District of Columbia. FERC has designated PJM as the sole provider of transmission service in the PJM territory. Any entity that wishes to deliver electricity at any point in PJM's territory must obtain transmission ser vices from PJM at rates approved by FERC. In accordance with FERC rules, Pepco, DPL, ACE and the other utilities in the region make their transmission facilities available to PJM and PJM directs and controls the operation of these transmission facilities. In return for the use of their transmission facilities, PJM pays the member utilities transmission fees approved by FERC.

     In recent months, the PJM wholesale electricity marketplace has expanded substantially with the addition of companies delivering power in large portions of the Midwest, and their associated generation; additional expansion of PJM into Virginia and North Carolina is planned. This expansion is forecast to lower PJM transaction costs through greater administrative efficiencies of scale, and the addition of low-cost Midwest generation to the marketplace is expected to result in a lower average hourly energy price in the PJM market for next-day deliveries. In connection with this expansion, FERC has ordered the elimination of "through-and-out" transmission rates for energy transactions within the combined regional markets of PJM and the Midwest Independent System Operator (MISO), effective December 1, 2004, and has established transitional surcharges in PJM and MISO for the ensuing 16-month period, which are intended to recoup a portion of the "th rough-and-out" transmission revenue no longer collected by certain transmission owners in the combined region. The data underlying this transition charge and various exclusions from the charge are disputed by a majority of the utilities, including Pepco, DPL and ACE, and many other parties, including subsidiaries of Conectiv Energy Holding Company (collectively, Conectiv Energy) and Pepco Energy Services, Inc. (together with its subsidiaries, Pepco Energy Services); any amounts collected prior to FERC's decision are subject to refund. FERC's eventual decision cannot be predicted.

     Distribution of Electricity and Deregulation

3
_____________________________________________________________________________

permitted to choose their electricity supplier from among a number of non-regulated, competitive suppliers. Customers who do not choose a competitive supplier receive default electricity supply from suppliers on terms that vary depending on the service territory, as described more fully below.

     In connection with the deregulation of electric power supply, Pepco, DPL and ACE have divested substantially all of their generation assets, either by selling them to third parties or transferring them to the non-regulated affiliates of PHI that comprise PHI's competitive energy businesses. Accordingly, Pepco, DPL and ACE are no longer engaged in generation operations, except for the limited generation activities of ACE described below.

     Seasonality

     The power delivery business is seasonal and weather patterns can have a material impact on operating performance. In the region served by PHI, demand for electricity is generally greater in the summer months associated with cooling and demand for electricity and natural gas is generally greater in the winter months associated with heating, as compared to other times of the year. Historically, the power delivery operations of each of PHI's utility subsidiaries have generated less revenues and income when weather conditions are milder in the winter and cooler in the summer.

     Regulation

     The retail operations of PHI's utility subsidiaries, including the rates they are permitted to charge customers for the delivery of electricity and natural gas, are subject to regulation by governmental agencies in the jurisdictions in which they provide utility service. Pepco's electricity delivery operations are regulated in Maryland by the Maryland Public Service Commission (MPSC) and in Washington, D.C. by the District of Columbia Public Service Commission (DCPSC). DPL's electricity delivery operations are regulated in Maryland by the MPSC, in Virginia by the Virginia State Corporation Commission (VSCC) and in Delaware by the Delaware Public Service Commission (DPSC). DPL's natural gas distribution operations in Delaware are regulated by the DPSC. ACE's electricity delivery operations are regulated in New Jersey by the New Jersey Board of Public Utilities (NJBPU). The wholesale and transmission operations for both electricity and natural gas of each of PHI's utility subsidiaries are regulated by FERC.

     Pepco

     Pepco is engaged in the transmission and distribution of electricity in Washington, D.C. and major portions of Prince George's and Montgomery Counties in suburban Maryland. Pepco was incorporated in Washington, D.C. in 1896 and became a domestic Virginia corporation in 1949. Pepco's service territory covers approximately 640 square miles and has a population of approximately 2 million. As of December 31, 2004, Pepco delivered electricity to approximately 737,000 customers, as compared to 726,000 customers as of December 31, 2003. Pepco delivered a total of approximately 26,902,000 megawatt hours of electricity in 2004, compared to approximately 25,994,000 megawatt hours in 2003. In 2004, approximately 30% was delivered to residential customers, 51% to commercial customers, and 19% to United States and District of Columbia government customers.

4
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and to customers in Washington, D.C. through February 7, 2005, for which it was paid established rates set forth in the settlements. Pepco obtained all of the energy and capacity needed to fulfill these fixed-rate default supply obligations in Maryland and Washington, D.C. through January 22, 2005, from an affiliate of Mirant Corporation (Mirant). See Item 7 -- "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Regulatory and Other Matters -- Relationship with Mirant Corporation."

     Under a settlement approved by the MPSC in April 2003 addressing default supply, also known as Standard Offer Service (SOS), in Maryland following the expiration of Pepco's fixed-rate default supply obligations in July 2004, Pepco is required to provide default electricity supply at market rates to residential and small commercial customers through May 2008, to medium-sized commercial customers through May 2006, and to large commercial customers through May 2005. Pepco also has an obligation to provide service at hourly priced market rates to the largest customers through May 2006. In accordance with the settlement, Pepco purchases the power supply required to satisfy its marke t rate default supply obligation from wholesale suppliers under contracts entered into pursuant to a competitive bid procedure approved by the MPSC. Pepco is entitled to recover from its default supply customers the cost of the default supply plus an average margin of approximately $0.002 per kilowatt hour, calculated based on total sales to residential, small, and large commercial Maryland default customers over the twelve months ended December 31, 2003. Because margins vary by customer class, the actual average margin over any given time period depends on the number of Maryland default supply customers from each customer class and the load taken by such customers ove r the time period. Pepco is paid tariff delivery rates for the delivery of electricity over its transmission and distribution facilities to both default supply customers and customers in Maryland who have selected another energy supplier. These delivery rates generally were capped originally through June 2004 as a result of a settlement agreement and the Electric Choice and Competition Act of 1999, and extended through December 31, 2006 pursuant to the MPSC order issued in April 2002 in connection with the merger involving Pepco and Conectiv.

5
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result of the current Pepco distribution rate review case in the District of Columbia (see Item 7 -- "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Regulatory and Other Matters -- Rate Proceedings"), delivery rates in the District of Columbia generally are capped through July 2007, except with respect to residential low-income customers, for whom rates generally are capped through July 2009.

     For the twelve months ended December 31, 2004, Pepco delivered 71% of its load (measured by megawatt hours) to Maryland default supply customers, as compared to 70% in 2003. Pepco delivered 68% of its load to District of Columbia default supply customers in 2004, as compared to 52% in 2003.

     DPL

     DPL is engaged in the transmission and distribution of electricity in Delaware and portions of Maryland and Virginia and provides natural gas distribution service in northern Delaware. In Delaware, service is provided in three counties, Kent, New Castle, and Sussex; in Maryland, service is provided in ten counties, Caroline, Cecil, Dorchester, Harford, Kent, Queen Anne's, Somerset, Talbot, Wicomico, and Worchester; and in Virginia, service is provided to two counties, Accomack and Northampton. DPL was incorporated in Delaware in 1909 and became a domestic Virginia corporation in 1979. DPL's electricity distribution service territory covers approximately 6,000 square miles and has a population of approximately 1.28 million. DPL's natural gas distribution servic e territory covers approximately 275 square miles and has a population of approximately 523,000. As of December 31, 2004, DPL delivered electricity to approximately 501,000 customers and delivered natural gas to approximately 118,000 customers, as compared to 493,000 electricity customers and 117,000 natural gas customers as of December 31, 2003.

     In 2004, DPL delivered a total of approximately 13,902,000 megawatt hours of electricity to its customers, as compared to a total of approximately 14,032,000 megawatt hours in 2003. In 2004, approximately 39% of DPL's retail electricity deliveries were to residential customers, 38% were to commercial customers and 23% were to industrial customers. In 2004, DPL delivered approximately 21,600,000 Mcf (one thousand cubic feet) of natural gas to retail customers in its Delaware service territory, as compared to approximately 22,900,000 Mcf in 2003. In 2004, approxim ately 40% of DPL's retail gas deliveries were sales to residential customers, 26% were to sales commercial customers, 5% were to sales industrial customers, and 29% were sales to customers receiving a transportation-only service.

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conjunction with this service have been deferred for further discussion and will be decided by the DPSC at a later date. A written DPSC order documenting this decision is expected sometime in March or April 2005.

     Under a settlement approved by the MPSC, DPL was required to provide default electricity supply to non-residential customers in Maryland through May 2004 and to residential customers in Maryland through June 2004 for which it was paid established rates set forth in the settlement. DPL obtained all of the energy needed to fulfill its fixed-rate default supply obligations in Maryland under a supply agreement with Conectiv Energy.

     Under a settlement approved by the MPSC in April 2003 addressing default supply in Maryland following the expiration of DPL's fixed-rate default supply obligations in 2004, DPL is required to provide default electricity supply at market rates to residential and small commercial customers through May 2008, to medium-sized commercial customers through May 2006, and to large commercial customers through May 2005. In accordance with the settlement, DPL purchases the power supply required to satisfy its market rate default supply obligations from wholesale suppliers under contracts entered into pursuant to a competitive bid procedure approved and supervised by the MPSC. DPL is entitled to recover from its default supply customers the costs of the default supply plus an average margin of $0.002 per kilowatt hour, calculated based on total sales to residential, small, and large commercial Maryland default customers over the twelve months ended December 31, 2003. Because margins vary by customer class, the actual average margin over any given time period depends on the number of Maryland default supply customers from each customer class and the load taken by such customers over the time period. DPL is paid tariff delivery rates for the delivery of electricity over its transmission and distribution facilities to both default supply customers and customers in Maryland who have selected another energy supplier. These delivery ra tes generally are capped through December 2006.

     Under amendments to the Virginia Electric Utility Restructuring Act implemented in March 2004, DPL is obligated to offer default service to customers in Virginia for an indefinite period until relieved of that obligation by the VSCC. DPL currently obtains all of the energy and capacity needed to fulfill its default service obligations in Virginia under a supply agreement with Conectiv Energy. A prior agreement, also with Conectiv Energy, terminated effective December 31, 2004. The current contract was entered into after conducting a competitive bid procedure and Conectiv Energy was the lowest bidder to provide wholesale power supply for DPL's Virginia default service customers. The new supply agreement commenced January 1, 2005 and expires in May 2006. On October 26, 2004, DPL filed an application with the VSCC for approval to increase the rates that DPL charges its Virginia default service customers to allow it to recover its costs for power under the new supply agreement plus an administrative charge and a margin.

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filing. A settlement resolving all other issues and making the interim rates final was filed on March 4, 2005, contingent only on possible future adjustment depending on the result of a related proceeding at FERC. A hearing is scheduled for March 16, 2005, and the VSCC is expected to approve the settlement.

     DPL is paid tariff delivery rates for the delivery of electricity over its transmission and distribution facilities to both Virginia default service customers and customers in Virginia who have selected another energy supplier. These delivery rates generally are frozen until December 31, 2010, except that DPL can propose two changes in delivery rates - one prior to July 1, 2007 and another between July 1, 2007 and December 31, 2010.

     In Maryland, DPL sales to default supply customers represented 80% of total delivered megawatt hours for the twelve months ended December 31, 2004, as compared to 96% in 2003. In Delaware, DPL sales to default supply customers represented 89% of total delivered megawatt hours for the twelve months ended December 31, 2004, as compared to 87% in 2003, and DPL sales to Virginia default supply customers represented 100% of total delivered megawatt hours in both 2004 and 2003.

     DPL also provides regulated natural gas supply and distribution service to customers in its Delaware natural gas service territory. Large and medium volume commercial and industrial natural gas customers may purchase natural gas either from DPL or from other suppliers. DPL uses its natural gas distribution facilities to transport gas for customers that choose to purchase natural gas from other suppliers. These customers pay DPL distribution service rates approved by the DPSC. DPL purchases natural gas supplies for resale to its sales service< /A> customers from marketers and producers through a combination of long-term agreements and next day delivery arrangements. For the twelve months ended December 31, 2004, DPL supplied 71.8% of the natural gas that it delivered, compared to 71.6% in 2003.

     ACE

     ACE is engaged in the generation, transmission and distribution of electricity in Gloucester, Camden, Burlington, Ocean, Atlantic, Cape May, Cumberland and Salem counties in southern New Jersey. ACE was incorporated in New Jersey in 1924. ACE's service territory covers approximately 2,700 square miles and has a population of approximately 998,000. As of December 31, 2004, ACE delivered electricity to approximately 524,000 customers in its service territory, as compared to approximately 521,000 customers as of December 31, 2003. ACE delivered a total of approximately 9,874,000 megawatt hours of electricity in 2004 compared t o approximately 9,643,000 megawatt hours in 2003. In 2004, approximately 44% was delivered to residential customers, 44% was delivered to commercial customers and 12% was delivered to industrial customers.

the default supply. ACE does not make any profit or incur any loss on the supply component of the default power it provides to customers.

     ACE is paid tariff delivery rates for the delivery of electricity over its transmission and distribution facilities to both default supply customers and customers in its service territory who have selected another energy supplier. ACE currently is involved in a base rate proceeding in which it has requested an increase in its delivery rates. See Item 7 -- "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Regulatory and Other Matters -- Rate Proceedings."

     ACE sales to New Jersey default supply customers represented 76% of total delivered megawatt hours for the twelve months ended December 31, 2004, as compared to 91% in 2003.

     As of December 31, 2004, ACE owned one electric generating facility, the B.L. England generating facility, and interests in two facilities jointly owned with other companies. The combined generating capacity of these facilities is 555 megawatts. See Item 2 -- "Properties." ACE also has contracts with non-utility generators under which ACE purchased 3.9 million megawatt hours of power in 2004. ACE sells the electricity produced by the generating facilities and purchased under the non-utility generator contracts in the wholesale market administered by PJM. During 2004, ACE's generation and wholesale ele ctricity sales operations produced approximately 23.2% of ACE's operating revenue.

     On March 1, 2004, ACE transferred ownership of the 185 megawatt capacity Deepwater generating facility to Conectiv Energy.

     In April 2004, PHI, Conectiv and ACE entered into a preliminary settlement agreement with the New Jersey Department of Environmental Protection (NJDEP) and the Attorney General of New Jersey that provides that, contingent upon the receipt of necessary approvals from applicable regulatory authorities and the receipt of permits to construct certain electric transmission facilities in southern New Jersey, ACE will permanently cease operation of the B.L. England generating facility by December 15, 2007. See Item 7 -- "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Regulatory and Other Matters -- Preliminary Settlement Agreement with the NJDEP."

     In 2002, ACE and the City of Vineland, New Jersey entered into a condemnation settlement agreement which provided for ACE to sell the electric distribution facilities within the city limits, and the approximately 5,400 related customer accounts (to which ACE delivered approximately 103,000 megawatt hours of power in 2003), for $23.9 million. The proceeds were received in installments and the sale was completed in the second quarter of 2004.

     ACE Funding

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which are transferred to ACE in exchange for the related Bondable Transition Property.

Competitive Energy

     PHI's competitive energy business provides non-regulated generation, marketing and supply of electricity and natural gas, and related energy management services, in the mid-Atlantic region. In 2004, 2003 and 2002, respectively, PHI's competitive energy operations produced 50%, 55% and 48% of PHI's consolidated operating revenues. In 2004 and 2002, respectively, PHI's competitive energy operations produced 19% and 12% of PHI's consolidated operating income. In 2003, PHI's competitive energy operations incurred an operating loss equal to 19% of PHI's consolidated operating income. PHI's competitive energy operations are conducted through subsidiarie s of Conectiv Energy and Pepco Energy Services.

     Conectiv Energy

     Conectiv Energy provides wholesale electric power, capacity, and ancillary services in the wholesale markets administered by PJM and also supplies electricity to other wholesale market participants under long-term bilateral contracts. Among its bilateral contracts are the power supply agreements under which Conectiv Energy sells to DPL its default electricity supply for distribution to customers in Delaware and Virginia. Conectiv Energy also sells default supply to customers in ACE's service territory and to other default supply customers in New Jersey. Other than its default supply sales, Conectiv Energy does not currently participate in the retail competitive power sup ply market. Conectiv Energy obtains the electricity required to meet its power supply obligations from its own generating plants, from bilateral contract purchases from other wholesale market participants and from purchases in the wholesale market administered by PJM.

     Conectiv Energy's generation asset strategy focuses on mid-merit plants with operating flexibility and multi-fuel capability that can quickly change their output level on an economic basis. Like "peak-load" plants, mid-merit plants generally operate during times when demand for electricity rises and prices are higher. However, mid-merit plants usually operate for longer periods of time and for more weeks a year than peak-load plants. Conectiv Energy's most recently added mid-merit plant, a combined cycle plant located in Bethlehem, Pennsylvania with a generating capacity of 1,092 megawatts, became fully operational in June 2004. On March 1, 2004, Conectiv Energy received ownership of the 185 megawatt capacity Deepwater generating facility from ACE. As of December 31, 2004, Conectiv Energy owned and operated mid-merit plants with a combined 2,689 megawatts of capacity, peak-load plants with a combined 669 megawatts of capacity and base-load generating plants with a combined 340 megawatts of capacity. See Item 2 -- "Properties." Conectiv Energy also owns three uninstalled combustion turbines with a book value of $57.0 million. Conectiv Energy will determine whether to install these turbines as part of an existing or new generating facility or sell the turbines to a third party based upon market demand and transmission system needs and requirements.

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     Conectiv Energy actively engages in commodity risk management activities to reduce its financial exposure to changes in the value of its assets and obligations due to commodity price fluctuations. Certain of these risk management activities are conducted using instruments classified as derivatives, such as forward contracts, futures, swaps, and exchange-traded and over-the-counter options. Conectiv Energy also manages commodity risk with contracts that are not classified as derivatives. Conectiv Energy has two primary risk management objectives:  to manage the spread between the cost of fuel used to operate its electric generation plants and the revenue received from the sale of the power produced by those plants; and to manage the spread between its POLR, SOS, and BGS load supply contracts in or der to ensure stable and known minimum cash flows and fix favorable prices and margins when they become available. To a lesser extent, Conectiv Energy also engages in market activities in an effort to profit from short-term geographical price differentials in electricity prices among markets.

     Conectiv Energy's goal is to hedge economically 75% of both the expected power output of its generation facilities and the expected costs of fuel used to operate those facilities. The economic hedge goals are approved by PHI's Corporate Risk Management Committee and may change from time to time based on market conditions. However, the actual level of hedging coverage may vary from this goal. In July 2003, Conectiv Energy entered into an agreement with an international investment banking firm consisting of a series of energy contracts designed to more effectively hedge approximately 50% of Conectiv Energy's generation output and approximately 50% of its supply obligations, with t he intention of providing Conectiv Energy with a more predicable earnings stream during the term of the agreement, which expires in May 2006. The agreement consists of two major components: (i) a fixed price energy supply hedge that is used to reduce Conectiv Energy's financial exposure under its current default supply commitment to DPL in Delaware through May 2006 and Virginia through December 2004 and (ii) a generation off-take agreement under which Conectiv Energy receives a fixed monthly payment from the counterparty, and the counterparty receives the profit realized from the sale of approximately 50% of the electricity generated by Conectiv Energy's plants (excluding the Edge Moor facility).

     Pepco Energy Services

     Pepco Energy Services sells retail electricity and natural gas to residential, commercial, industrial and governmental customers in the mid-Atlantic region. Pepco Energy Services also provides integrated energy management services to commercial, industrial and governmental customers, including energy-efficiency contracting, development and construction of "green power" facilities, central plant and other equipment operation and maintenance, fuel management, and home service agreements for residential customers. Subsidiaries of Pepco Energy Services provide high voltage construction and maintenance services to utilities and other customers throughout the United States and low voltage electric and telecommunication construction and maintenance services in the Washington, D.C. area.

     Pepco Energy Services owns peak-load electricity generation plants with approximately 800 megawatts of peak-load capacity, the output of which is sold in the wholesale market administered by PJM. See Item 2 -- "Properties."

using instruments classified as derivatives, such as forward contracts, futures, swaps, and exchange-traded and over-the-counter options. Pepco Energy Services' primary risk management objective is to manage the spread between its retail electric and natural gas sales commitments and the cost of supply used to service those commitments in order to secure favorable margins. Because of the age and design of Pepco Energy Services' power plants, these facilities have a high variable cost of operation and Pepco Energy Services generally does not hedge the output of these plants.

     Competition

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

     Seasonality

     Like the power delivery business, the power generation, supply and marketing businesses are seasonal and weather patterns can have a material impact on operating performance. Demand for electricity generally is greater in the summer months associated with cooling and demand for electricity and natural gas generally is greater in the winter months associated with heating, as compared to other times of the year. Historically, the competitive energy operations of Conectiv Energy and Pepco Energy Services have generated less revenues and income when weather conditions are milder in the winter and cooler in the summer. Energy management services generally are not seasonal.

Other Non-Regulated

     This component of PHI's business is conducted through its subsidiary Potomac Capital Investment Corporation (PCI). PHI's subsidiary Pepco Communications, Inc. (Pepcom) ceased operations in December 2004 following the sale of its principal asset described below.

     PCI

     PCI manages a portfolio of financial investments, which consists primarily of energy leveraged leases. These transactions involve PCI's purchase and leaseback of utility assets located outside of the United States. In 2003 PCI discontinued making new investments, and in 2004 sold its three remaining aircraft. For additional information relating to PCI's energy leveraged leases, see Note (4) to the consolidated financial statements of PHI set forth in Item 8 of this Form 10-K.

     Pepcom

Corporation which owned the other 50% interest in Starpower. Following the completion of the sale, Pepcom has no remaining investments.

EMPLOYEES

     As of December 31, 2004, PHI had 5,592 employees, including 1,606 employed by Pepco, 910 employed by DPL, 647 employed by ACE and 1,686 employed by PHI Service Company. The balance were employed by PHI's competitive energy and other non-regulated businesses.

ENVIRONMENTAL MATTERS

     PHI, through its subsidiaries, is subject to regulation by various federal, regional, state, and local authorities with respect to the environmental effects of its operations, including air and water quality control, solid and hazardous waste disposal, and limitations on land use. In addition, federal and state statutes authorize governmental agencies to compel responsible parties to clean up certain abandoned or unremediated hazardous waste sites. PHI's subsidiaries may incur costs to clean up currently or formerly owned facilities or sites found to be contaminated, as well as other facilities or sites that may have been contaminated due to past disposal practices. PHI currently estimates that capital expenditures for environmental control facilities by its subsidiaries will be $6.6 million in 2005 and $5.7 million in 2006. However, the actual costs of environmental compliance may be materially different from these estimates depending on t he outcome of the matters addressed below or as a result of the imposition of additional environmental requirements or new or different interpretations of existing environmental laws and regulations.

     Air Quality Regulation

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

     Among other things, the CAA regulates total sulfur dioxide (SO₂) emissions from affected generation units and allocates "allowances." The generation facilities of PHI's subsidiaries that require SO₂ allowances use allocated allowances or allowances acquired, as necessary, in the open market to satisfy applicable regulatory requirements. Also under current regulations implementing CAA standards, 22 eastern and mid-western states and the District of Columbia regulate nitrogen oxide (NOx) emissions from generation units and allocate NOx allowances. All of the generation units operated by PHI subsidiaries are subject to NOx emission limits and are required to hold, either through allocations or purchases, NOx allowances as necessary, to achieve compliance from May to September of each year.

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pollution control technology and obtain offsets in some circumstances when those sources undergo a "major modification," as defined in the regulations. During 2002, ACE participated in preliminary discussions with EPA and NJDEP on this matter, without successful resolution.

     On October 27, 2003, EPA published a final rule clarifying the types of activities that qualify as "routine maintenance, repair and replacement" rather than "major modifications" and are therefore excluded from NSR requirements. A number of states, industrial entities and environmental groups have challenged the rule and the U.S. Court of Appeals for the District of Columbia Circuit has stayed the rule's applicability.

     PHI does not believe that any of its subsidiaries have violated NSR requirements, but cannot predict the consequences of the EPA/NJDEP inquiries on B.L. England or Deepwater generating plant operations.

     In an effort to address NJDEP's concerns regarding ACE's compliance with NSR requirements at the B.L. England generating facility, on April 26, 2004, PHI, Conectiv and ACE entered into a preliminary settlement agreement with NJDEP and the Attorney General of New Jersey. The preliminary settlement agreement outlines the basic parameters for a definitive agreement to resolve ACE's alleged NSR liability, if any, at B.L. England and various other environmental issues involving ACE and Conectiv Energy facilities in New Jersey. While the preliminary settlement agreement does not resolve the EPA inquiry, it, among other things, provides that:

·

contingent upon the receipt of necessary approvals from the NJBPU, PJM, North American Electric Reliability Council (NERC)/FERC and other regulatory authorities and the receipt of permits to construct certain transmission facilities in southern New Jersey, ACE will permanently cease operation of the B.L. England generating facility by December 15, 2007. In the event that ACE is unable to shut down the B.L. England facility by December 15, 2007 through no fault of its own (e.g., because of failure to obtain the required regulatory approvals), B.L. England Unit 1 would be required to comply with stringent SO₂, NOx and particulate matter emissions limits set forth in the preliminary settlement agreement by October 1, 2008, and B.L. England Unit 2 would be required to comply with these emissions limits by May 1, 2009. If ACE does not either shut down the B.L. England facility by December 15, 2007 or satisfy the emissions limits applicable in the ev ent shut down is not so completed, ACE would be required to pay significant monetary penalties.

·

to address ACE's appeal of NJDEP actions relating to NJDEP's July 2001 denial of ACE's request to renew a permit variance from sulfur-in-fuel requirements under New Jersey regulations, effective through July 30, 2001, that authorized Unit 1 at B.L. England generating facility to burn bituminous coal containing greater than 1% sulfur, ACE will be permitted to combust coal with a sulfur content of greater than 1% at the B.L. England facility in accordance with the terms of B.L. England's current permit until December 15, 2007 and NJDEP will not impose new, more stringent short-term SO₂ emissions limits on the B.L. England facility during this period.

·

to resolve any possible civil liability (and without admitting liability) for violations of the permit provisions of the New Jersey Air Pollution Control Act (APCA) and the PSD provisions of the CAA relating to modifications that may have been undertaken at the B.L. England facility, ACE paid a $750,000 civil penalty to NJDEP on June 1, 2004,

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to compensate New Jersey for other alleged violations of the APCA and/or the CAA, ACE will undertake environmental projects valued at $2 million, which are beneficial to the state of New Jersey and approved by the NJDEP in a consent order or other final settlement document.

·

ACE will submit all federally required studies and complete construction of facilities necessary to satisfy the EPA's new cooling water intake structure regulations in accordance with a schedule that NJDEP will establish in the New Jersey Pollutant Discharge Elimination System (NJPDES) renewal permit for the B.L. England facility. The schedule will take into account ACE's agreement, provided that all regulatory approvals are obtained, to shut down the B.L. England facility by December 15, 2007.

·

to resolve any possible civil liability (and without admitting liability) for natural resource damages resulting from groundwater contamination at the B.L. England facility, Conectiv Energy's Deepwater generating facility and ACE's operations center near Pleasantville, New Jersey, ACE and Conectiv will pay NJDEP $674,162 or property of equivalent value and will remediate the groundwater contamination at all three sites. If subsequent data indicate that groundwater contamination is more extensive than indicated in NJDEP's preliminary analysis, NJDEP may seek additional compensation for natural resource damages.

     The preliminary settlement agreement also provides that the parties will work toward a consent order or other final settlement document that reflects the terms of the preliminary settlement agreement. ACE, Conectiv and PHI continue to negotiate with the NJDEP the terms of a consent order or other final settlement document.

     On May 4, 2002, ACE and Conectiv Energy entered into an administrative consent order with NJDEP to address the inability of ACE and Conectiv Energy to procure Discrete Emission Reduction (DER) credits to comply fully with New Jersey's NOx Reasonably Available Control Technology requirements, as well as NJDEP's contention that ACE had failed to comply with DER credit use restrictions from 1996 to 2001. The administrative consent order (i) eliminated requirements for ACE and Conectiv Energy to purchase DER credits for certain generation units through May 1, 2005, (ii) provided for installation of new controls on certain Conectiv Energy electric generating units at an estimated cost of $10.7 million, (iii) imposed a $1 million penalty, (iv) required the contribution of $1 million to promote, develop and enhance an urban air shed reforestation project, and (v) imposed operating hour limits at Conectiv Energy's Deepwater generating facility Unit No . 4.

     In December 2003, the EPA proposed regulations under the CAA that would require reductions in emissions of mercury from coal-fired power plants and nickel from oil-fired power plants through implementation of Maximum Achievable Control Technology (MACT) standards. As an alternative, EPA proposed a "cap and trade" program for mercury emissions from coal-fired plants and limitations on nickel emissions from oil-fired plants. In addition, EPA's Clean Air Interstate rule, released on March 10, 2005, imposes additional reductions of SO₂ and NOx emissions from electric generating units in 28 Eastern states and the District of Columbia. These regulations may require installation of pollution control devices and/or fuel modifications for generating units owned by ACE, Conectiv Energy and Pepco Energy Services.

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     On December 6, 2004, NJDEP published final rules regulating mercury emissions from power plants and industrial facilities in New Jersey that impose standards that are significantly stricter than EPA's proposed mercury MACT standard for coal-fired plants. In lieu of meeting these standards for all New Jersey coal-fired units by December 15, 2007, NJDEP's final mercury rules allow an owner or operator to enter into an enforceable agreement to comply with the mercury limits for 50% of a company's total coal-fired capacity by the December 15, 2007 deadline and to comply with the mercury standards, as well as stringent standards regulating emissions of NOx, SO₂ and particulate matter, for the remaining 50% of its units by December 2012. Alternatively, if an owner or operator enters into an enforceable agreement with NJDEP by December 15, 2007 to shut down coal unit(s) by December 15, 2012, then the mercury limitations would not be appli cable to that particular unit. Contingent upon receipt of necessary approvals from the NJBPU, PJM, NERC/FERC and other regulatory authorities and the receipt of permits to construct certain transmission facilities in southern New Jersey, ACE plans to shut down the B.L. England generating facility by December 15, 2007. In this event, no significant capital improvements will be needed at B.L. England to comply with NJDEP's final mercury emission rules or any final EPA mercury rule that is promulgated. Conectiv Energy is investigating what, if any, capital or operational improvements are needed at the Deepwater generating facility in order to comply with NJDEP's final mercury regulations and will analyze the need for capital or operational improvements at the Deepwater generating facility for compliance with EPA's mercury requirements after EPA promulgates a final rule. At this time, Conectiv Energy anticipates tha t activated carbon injection will be needed at Deepwater to meet these regulations at a cost of approximately $300,000.

     On June 29, 2004, New Jersey enacted legislation that imposes a tax on emissions of certain specifically identified toxic substances in New Jersey. In accordance with the legislation, an annual surcharge of $500,000 each will be imposed for ACE's B.L. England facility and for Conectiv Energy's Deepwater facility.

     On September 20, 2004, NJDEP proposed regulations regarding the further control of NOx emissions from combustion sources. These regulations would significantly reduce the NOx limit on B.L. England's diesel generators. These regulations, if adopted as proposed, may require the installation of pollution control devices on these units at a significant capital cost.

     On October 18, 2004, NJDEP proposed regulations that would classify carbon dioxide (CO₂) as an air contaminant and enable NJDEP potentially to regulate CO₂ emissions from power plants and other sources. These regulations, if adopted as proposed, could limit or control emissions of CO₂ from ACE and Conectiv Energy facilities in New Jersey in the future.

     Water Quality Regulation

     Section 402(a) of the federal Water Pollution Control Act, also known as the Clean Water Act (CWA), establishes the basic legal structure for regulating the discharge of pollutants from point sources to surface waters of the United States. Among other things, CWA Section 402(a) requires that any person wishing to discharge pollutants from a point source (generally a confined, discrete conveyance such as a pipe) obtain a National Pollutant Discharge Elimination System (NPDES) permit issued by the EPA or by a state agency under a federally authorized state program. All of the steam generation facilities operated by PHI's subsidiaries have NPDES permits authorizing their pollutant discharges.

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     On July 9, 2004, the EPA issued final regulations under Section 316(b) of the CWA that are intended to minimize potential adverse environmental impacts from power plant cooling water intake structures on aquatic resources by establishing performance-based standards for the operation of these structures at large existing electric generating plants. These regulations may require changes to cooling water intake structures at facilities operated by ACE, Conectiv Energy and Pepco Energy Services. However, the capital expenditures the regulations will require at each facility, if any, will not be known until each facility completes various studies in accordance with a schedule to be established in each permit. Based on these studies, the applicable permitting authority will specify any changes to cooling water intake structures that are required in a facility's NPDES renewal permit.

     The EPA has delegated authority to administer the NPDES program to a number of state agencies including the Delaware Department of Natural Resources and Environmental Control (DNREC). The NPDES permit for Conectiv Energy's Edge Moor Power Plant expired on October 30, 2003, but has been administratively extended through the submission of a renewal application to the DNREC in April 2003. Studies required under the existing permit to determine the impact on aquatic organisms of the plant's cooling water intake structures were completed in 2002. Site-specific alternative technology and operational studies are being conducted to determine the extent of expenditures necessary to modify cooling water intake structures in order to comply with EPA's CWA Section 316(b) performance-based standards. PHI cannot predict the extent of these expenditures until the site-specific studies are completed.

     Under the New Jersey Water Pollution Control Act, NJDEP implements regulations, administers the NJPDES program with EPA oversight, and issues and enforces NJPDES permits. The NJPDES renewal permit for Conectiv Energy's Deepwater generating facility, effective through September 30, 2007, requires several studies to determine whether or not Deepwater's cooling water intake structures are protective of the environment. The studies required by Deepwater's NPDES permit are consistent with requirements under EPA's regulations implementing CWA Section 316(b). NJDEP will consider the results of these studies, as well as other related information submitted in accordance with EPA's CWA Section 316(b) regulations, in connection with the facility's NJPDES permit renewal application, which will be filed in 2007.

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filed a petition with the EPA Environmental Appeals Board seeking review and reconsideration of certain provisions of EPA's permit determination. In May 2001, Pepco and EPA reached a settlement on Pepco's petition, under which EPA withdrew certain contested provisions and agreed to issue a revised draft permit for public comment. The EPA has not issued the revised draft permit and the companies are operating under the November 2000 permit, excluding the withdrawn conditions, in accordance with the settlement agreement.

     Hazardous Substance Regulation

     The Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), authorizes the EPA, and comparable state laws authorize state environmental authorities, to issue orders and bring enforcement actions to compel responsible parties to investigate and take remedial actions at any site that is determined to present an actual or potential threat to human health or the environment because of an actual or threatened release of one or more hazardous substances. Parties that generated or transported hazardous substances to such sites, as well as the owners and operators of such sites, may be deemed liable under CERCLA or comparable state laws. Pepco, DPL and ACE each has been named by the EPA or a state environmental agency as a potentially responsible party (PRP) at certain contaminated sites. See Item 3 -- "Legal Proceedings -- Environmental Litigation." In addition, DPL and ACE have undertaken efforts to remediate curren tly or formerly owned facilities found to be contaminated, including two former manufactured gas plant sites and other owned property. See Item 3 -- "Legal Proceedings -- Environmental Litigation" and Item 7 -- "Management's Discussion and Analysis -- Capital Resources and Liquidity -- Capital Requirements -- Environmental Remediation Obligations."

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Item 2.     PROPERTIES

Generation Facilities

     The following table identifies the electric generation facilities owned by PHI's subsidiaries.

Electric Generating Facilities

Location

Owner

Generating
Capacity 
(kilowatts)

Coal-Fired

Edge Moor

Wilmington, DE

Conectiv Energy¹

260,000 

B L England

Beesley's Pt., NJ

ACE

284,000 

Conemaugh²

New Florence, PA

ACE

65,000 

Keystone³

Shelocta, PA

ACE

42,000 

Deepwater⁴

Pennsville, NJ

Conectiv Energy¹

   80,000 

  731,000 

Oil Fired

Benning Road

Washington, DC

Pepco Energy Services

550,000 

Edge Moor

Wilmington, DE

Conectiv Energy¹

445,000 

B L England

Beesley's Pt., NJ

ACE

155,000 

Deepwater⁴

Pennsville, NJ

Conectiv Energy¹

   86,000 

1,236,000 

Combustion Turbines/Combined Cycle

Hay Road Units 1-4⁵

Wilmington, DE

Conectiv Energy¹

521,000 

Hay Road Units 5-8

Wilmington, DE

Conectiv Energy¹

545,000 

Bethlehem Units 1-8

Bethlehem, PA

Conectiv Energy¹

1,092,000 

Buzzard Point

Washington, DC

Pepco Energy Services

256,000 

Cumberland

Millville, NJ

Conectiv Energy¹

84,000 

Sherman Avenue

Vineland, NJ

Conectiv Energy¹

81,000 

Middle

Rio Grande, NJ

Conectiv Energy¹

77,000 

Carll's Corner

Upper Deerfield Twp., NJ

Conectiv Energy¹

73,000 

Cedar

Cedar Run, NJ

Conectiv Energy¹

68,000 

Missouri Avenue

Atlantic City, NJ

Conectiv Energy¹

60,000 

Mickleton

Mickleton, NJ

Conectiv Energy¹

59,000 

Christiana

Wilmington, DE

Conectiv Energy¹

45,000 

Deepwater⁴

Pennsville, NJ

Conectiv Energy

19,000 

Edge Moor

Wilmington, DE

Conectiv Energy¹

13,000 

Madison Street⁶

Wilmington, DE

Conectiv Energy

11,000 

West

Marshallton, DE

Conectiv Energy¹

15,000 

Delaware City

Delaware City, DE

Conectiv Energy¹

16,000 

Tasley

Tasley, VA

Conectiv Energy¹

   26,000 

3,061,000 

Diesel Units

Crisfield

Crisfield, MD

Conectiv Energy¹

10,000 

Bayview

Bayview, VA

Conectiv Energy¹

12,000 

B L England

Beesley's Pt., NJ

ACE

8,000 

Keystone³

Shelocta, PA

ACE

300 

Conemaugh²

New Florence, PA

ACE

      400 

   30,700 

Total Electric Generating Capacity

5,058,700 

19
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     The above table sets forth the summer electric generating capacity of the electric generating plants owned by Pepco Holdings' subsidiaries. Although, due to thermoelectric factors, the generating capacity of these facilities may be higher during the winter months, the plants operated by PHI's subsidiaries are used to meet summer peak loads that are generally higher than winter peak loads. Accordingly, the summer generating capacity more accurately reflects the operational capability of the plants.

     ACE's generation facilities are subject to the lien of the mortgage under which its First Mortgage Bonds are issued.

Transmission and Distribution Systems

     On a combined basis, the electric transmission and distribution systems owned by Pepco, DPL and ACE at December 31, 2004 consisted of approximately 3,502 transmission circuit miles of overhead lines, 155 transmission circuit miles of underground cables, 22,686 distribution circuit miles of overhead lines, and 18,649 distribution circuit miles of underground cables, primarily in their respective service territories. Pepco also operates a distribution system control center in Maryland. The computer equipment and systems contained in the control center are financed through a sale and leaseback transaction.

     DPL has a liquefied natural gas plant located in Wilmington, Delaware, with a storage capacity of 3,045 million gallons and an emergency sendout capability of 45,000 Mcf per day. DPL owns eight natural gas city gate stations at various locations in New Castle County, Delaware. These stations have a total sendout capacity of 225,000 Mcf per day. DPL also owns approximately 111 pipeline miles of gas transmission mains, 1,728 pipeline miles of gas distribution mains, and 1,268 gas pipeline miles of service lines. The gas transmission mains include 7.2 miles of pipeline of which DPL owns 10% which is used for gas operations and Conectiv Energy owns 90% which is used for delivery of gas to electric generation facilities.

     Substantially all of the transmission and distribution property, plant and equipment owned by each of Pepco, DPL and ACE are subject to the liens of the respective mortgages under which the companies issue First Mortgage Bonds. See Note (7) to the consolidated financial statements of PHI set forth in Item 8 of this Form 10-K.

Item 3.    LEGAL PROCEEDINGS

Pepco Holdings

     The legal proceedings for Pepco Holdings consist solely of those of its subsidiaries, as described below.

GENERAL LITIGATION

Pepco

     Asbestos

20
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brought into these cases on a theory of premises liability. Under this theory, plaintiffs argue that Pepco was negligent in not providing a safe work environment for employees or its contractors, who allegedly were exposed to asbestos while working on Pepco's property. Initially, a total of approximately 448 individual plaintiffs added Pepco to their complaints. While the pleadings are not entirely clear, it appears that each plaintiff sought $2 million in compensatory damages and $4 million in punitive damages from each defendant.

     Since the initial filings in 1993, additional individual suits have been filed against Pepco, and significant numbers of cases have been dismissed. As a result of two motions to dismiss, numerous hearings and meetings and one motion for summary judgment, Pepco has had approximately 400 of these cases successfully dismissed with prejudice, either voluntarily by the plaintiff or by the court. Of the approximately 250 remaining asbestos cases pending against Pepco, approximately 85 cases were filed after December 19, 2000, and have been tendered to Mirant for defense and indemnification pursuant to the terms of the Asset Purchase and Sale Agreement.

     While the aggregate amount of monetary damages sought in the remaining suits (excluding those tendered to Mirant) exceeds $400 million, Pepco believes the amounts claimed by current plaintiffs are greatly exaggerated. The amount of total liability, if any, and any related insurance recovery cannot be determined at this time; however, based on information and relevant circumstances known at this time, Pepco does not believe these suits will have a material adverse effect on its financial condition. However, if an unfavorable decision were rendered against Pepco, it could have a material adverse effect on Pepco's and PHI's results of operations.

DPL and Conectiv Energy

     Enron

     On December 2, 2001, Enron North America Corp. and several of its affiliates (collectively, Enron) filed for protection under the United States Bankruptcy Code. In December 2001, DPL and Conectiv Energy terminated all energy trading transactions under various agreements with Enron. In late January 2003, after several months of discussions between the parties concerning the amount owed by DPL and Conectiv Energy, Enron filed an adversary complaint against Conectiv Energy in the Bankruptcy Court for the Southern District of New York. The complaint sought, among other things, damages in the amount of approximately $11.7 million.

     On June 3, 2004, the Bankruptcy Court approved a settlement among Enron, Conectiv Energy and DPL pursuant to which Conectiv Energy paid Enron an agreed settlement amount that was less than the $11.7 million damages Enron sought and the parties released all claims against each other. Conectiv Energy had previously established a reserve in an amount equal to the agreed settlement payment. Accordingly, the settlement did not have an effect on earnings.

ENVIRONMENTAL LITIGATION

21
_____________________________________________________________________________

hazardous waste sites. PHI's subsidiaries may incur costs to clean up currently or formerly owned facilities or sites found to be contaminated, as well as other facilities or sites that may have been contaminated due to past disposal practices.

Pepco and DPL

     In May 2004, the U.S. Department of Justice (DOJ) invited DPL to enter into pre-filing negotiations in connection with DPL's alleged liability under CERCLA at the Diamond State Salvage site in Wilmington, Delaware. In the context of the negotiations, DOJ informed DPL that DPL is a de minimis party at the site. In February 2005, DPL entered into a de minimis consent decree with the United States which, if approved by the U.S. District Court, would require DPL to pay $144,000 as reimbursement of the government's response costs, resolve DPL's alleged liability, and provide DPL a covenant not to sue from the United States and protection from third-party claims for contribution.

     In July 2004, DPL entered into an Administrative Consent Order with the Maryland Department of the Environment (MDE) to perform a Remedial Investigation/Feasibility Study (RI/FS) to further identify the extent of soil, sediment and ground and surface water contamination related to former manufactured gas plant (MGP) operations at the Cambridge, Maryland site on DPL-owned property and to investigate the extent of MGP contamination on adjacent property. The costs for completing the RI/FS for this site are approximately $300,000, approximately $50,000 of which will be expended in 2005. The costs of cleanup resulting from the RI/FS will not be determinable until the RI/FS is completed and an agreement with respect to cleanup is reached with the MDE. DPL expects to complete the RI/FS in the first quarter of 2005.

     In October 1995, each of Pepco and DPL received notice from EPA that it, along with several hundred other companies, might be a PRP in connection with the Spectron Superfund Site in Elkton, Maryland. The site was operated as a hazardous waste disposal, recycling and processing facility from 1961 to 1988.

     In August 2001, Pepco entered into a consent decree for de minimis parties with EPA to resolve its liability at this site. Under the terms of the consent decree, which was approved by the U.S. District Court for the District of Maryland on March 31, 2003, Pepco made de minimis payments to the United States and a group of PRPs. In return, those parties agreed not to sue Pepco for past and future costs of remediation at the site and the United States will also provide protection against third-party claims for contributions related to response actions at the site. The consent decree does not cover any damages to natural resources. However, Pepco believes that any liability that it might incur due to natural resource damage at this site would not have a material adverse effect on its financial condition or results of operations. In February 2003, the EPA informed DPL that it will have no future liability for contribution to the remediation of the site.

22
_____________________________________________________________________________

     In October 1994, an RI/FS including a number of possible remedies was submitted to the EPA. In December 1997, the EPA issued a Record of Decision that set forth a selected remedial action plan with estimated implementation costs of approximately $17 million. In June 1998, the EPA issued a unilateral administrative order to Pepco and 12 other PRPs to conduct the design and actions called for in its decision. On May 12, 2003, two of the potentially liable owner/operator entities filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. On October 2, 2003, the Bankruptcy Court confirmed a Reorganization Plan that incorporates the terms of a settlement among the debtors, the United States and a group of utility PRPs including Pepco. Under the settlement, the reorganized entity/site owner will pay a total of $13.25 million to remediate the site.

     As of December 31, 2004, Pepco had accrued $1.7 million to meet its liability for a site remedy. At the present time, it is not possible to estimate the total extent of EPA's administrative and oversight costs or the expense associated with a site remedy ultimately implemented. However, Pepco believes that its liability at this site will not have a material adverse effect on its financial condition or results of operations.

     In 1999, DPL entered into a de minimis settlement with EPA and paid approximately $107,000 to resolve its liability for cleanup costs at the site. The de minimis settlement did not resolve DPL's responsibility for natural resource damages, if any, at the site. DPL believes that any liability for natural resource damages at this site will not have a material adverse effect on its financial condition or results of operations.

     On April 7, 2000, approximately 139,000 gallons of oil leaked from a pipeline at a generation station that was owned by Pepco at Chalk Point Generating Station in Aquasco, Maryland. The pipeline was operated by Support Terminals Services Operating Partnership LP (ST Services), an unaffiliated pipeline management company. The oil spread from Swanson Creek to the Patuxent River and several of its tributaries. The area affected covers portions of 17 miles of shoreline along the Patuxent River and approximately 45 acres of marshland adjacent to the Chalk Point property.

     In December 2000, the Department of Transportation, Office of Pipeline Safety, Research and Special Programs Administration (OPS) issued a Notice of Probable Violation, Proposed Civil Penalty and Proposed Compliance Order (NOPV). The NOPV alleged various deficiencies in compliance with regulations related to spill reporting, operations and maintenance of the pipeline and record keeping, none of which relate to the cause of the spill. The NOPV was issued to both Pepco and ST Services and proposed a civil penalty in the amount of $674,000. On June 2, 2004, the OPS issued a Final Order regarding the NOPV in this matter. The Final Order assessed a total fine of $330,250, with $256,250 of that amount assessed jointly against Pepco and ST Services and the remaining $74,000 assessed solely against ST Services. ST Services subsequently filed a Petition for Reconsideration. All penalties were stayed pending the outcome of the Petition for Rec onsideration. On February 9, 2005, OPS issued a Decision on the Petition for Reconsideration that affirmed the Final Order. Pepco's share of the $330,250 penalty assessed pursuant to the Final Order amounts to $128,125.

ACE

23
_____________________________________________________________________________

liability is limited to 0.232 percent of the aggregate remediation liability and thus far ACE has made contributions of approximately $105,000. Based on information currently available, ACE may be required to contribute approximately an additional $100,000. ACE believes that its liability at this site will not have a material adverse effect on its financial condition or results of operations.

     In November 1991, NJDEP identified ACE as a PRP at the Delilah Road Landfill site in Egg Harbor Township, New Jersey. In 1993, ACE, along with other PRPs, signed an administrative consent order with NJDEP to remediate the site. The soil cap remedy for the site has been completed and the NJDEP conditionally approved the report submitted by the parties on the implementation of the remedy in January 2003. In March 2004, NJDEP approved a Ground Water Sampling and Analysis Plan. The results of groundwater monitoring over the first year of this ground water sampling plan will help to determine the extent of post-remedy operation and maintenance costs. In March 2003, EPA demanded from the PRP group reimbursement for EPA's past costs at the site, totaling $168,789. The PRP group objected to the demand for certain costs, but agreed to reimburse EPA approximately $19,000. Based on information currently available, ACE may be required to contribute approximately an additional $626,000. ACE believes that its liability for post-remedy operation and maintenance costs will not have a material adverse effect on its financial condition or results of operations.

     In an effort to address NJDEP's concerns regarding ACE's compliance with New Source Review (NSR) requirements at B.L. England, on April 26, 2004, PHI, Conectiv and ACE entered into a preliminary settlement agreement with NJDEP and the Attorney General of New Jersey. The preliminary settlement agreement outlines the basic parameters for a definitive agreement to resolve ACE's NSR liability at B.L. England and various other environmental issues at ACE and Conectiv Energy facilities in New Jersey. Among other things, the preliminary settlement agreement provides that:

·

contingent upon the receipt of necessary approvals from the NJBPU, PJM, NERC, FERC, and other regulatory authorities and the receipt of permits to construct certain transmission facilities in southern New Jersey ACE will permanently cease operation of the B.L. England generating facility by December 15, 2007. In the event that ACE is unable to shut down the B.L. England facility by December 15, 2007 through no fault of its own (e.g., because of failure to obtain the required regulatory approvals), B.L. England Unit 1 would be required to comply with stringent SO₂, NOx and particulate matter emissions limits set forth in the preliminary settlement agreement by October 1, 2008, and B.L. England Unit 2 would be required to comply with these emissions limits by May 1, 2009. If ACE does not either shut down the B.L. England facility by December 15, 2007 or satisfy the emissions limits applicable in the event shut down is not so completed, ACE would be re quired to pay significant monetary penalties.

·

to address ACE's appeal of NJDEP actions relating to NJDEP's July 2001 denial of ACE's request to renew a permit variance from sulfur-in-fuel requirements under New Jersey regulations, effective through July 30, 2001, that authorized Unit 1 at B.L. England generating facility to burn bituminous coal containing greater than 1% sulfur, ACE will be permitted to combust coal with a sulfur content of greater than 1% at the B.L. England facility in accordance with the terms of B.L. England's current permit until December 15, 2007 and NJDEP will not impose new, more stringent short-term SO₂ emissions limits on the B.L. England facility during this period.

24
_____________________________________________________________________________

·

to resolve any possible civil liability (and without admitting liability) for violations of the permit provisions of the New Jersey APCA and the PSD provisions of the CAA relating to modifications that may have been undertaken at the B.L. England facility, ACE paid a $750,000 civil penalty to NJDEP on June 1, 2004.

·

to compensate New Jersey for other alleged violations of the APCA and/or the CAA, ACE will undertake environmental projects valued at $2 million, which are beneficial to the state of New Jersey and approved by the NJDEP in a consent order or other final settlement document.

·

ACE will submit all federally required studies and complete construction of facilities necessary to satisfy the EPA's new cooling water intake structure regulations in accordance with a schedule that NJDEP will establish in the renewal NJPDES permit for the B.L. England facility. The schedule will take into account ACE's agreement, provided that all regulatory approvals are obtained, to shut down the B.L. England facility by December 15, 2007.

·

to resolve any possible civil liability (and without admitting liability) for natural resource damages resulting from groundwater contamination at the B.L. England facility, Conectiv Energy's Deepwater generating facility and ACE's operations center near Pleasantville, New Jersey, ACE and Conectiv will pay NJDEP $674,162 or property of equivalent value and will remediate the groundwater contamination at all three sites. If subsequent data indicate that groundwater contamination is more extensive than indicated in NJDEP's preliminary analysis, NJDEP may seek additional compensation for natural resource damages.

     The preliminary settlement agreement also provides that the parties will work toward a consent order or other final settlement document that reflects the terms of the preliminary settlement agreement. ACE, Conectiv and PHI continue to negotiate with the NJDEP the terms of a consent order or other final settlement document.

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

Pepco Holdings - None.

Pepco - None.

25
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Part II

Item 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
           MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

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

        Period           

    Dividends
    Per Share   

     Price Range
   High         Low   

2004:

First Quarter

$ .25       

$21.71

$19.08

Second Quarter

.25       

 20.70

 16.94

Third Quarter

.25       

 20.70

 17.90

Fourth Quarter

  .25       

 21.68

 19.88

$1.00       

2003:

First Quarter

$ .25       

$20.56

$16.73

Second Quarter

.25       

 20.51

 16.10

Third Quarter

.25       

 19.65

 16.65

Fourth Quarter

  .25       

 19.84

 17.28

$1.00       

     See Item 7 -- "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Capital Resources and Liquidity" for information regarding restrictions on the ability of PHI and its subsidiaries to pay dividends.

     At December 31, 2004, there were approximately 75,674 holders of record of the Pepco Holdings common stock.

PHI Subsidiaries

26
_____________________________________________________________________________

     Pepco

     All of Pepco's common stock is held by Pepco Holdings. The table below presents the aggregate amount of common stock dividends paid by Pepco to PHI during the periods indicated.

        Period           

Aggregate
Dividends

2004:

First Quarter

$ 11,832,000

Second Quarter

30,329,000

Third Quarter

52,532,000

Fourth Quarter

   7,697,000

$102,390,000

2003:

First Quarter

$ 15,720,000

Second Quarter

31,342,000

Third Quarter

15,000,000

Fourth Quarter

   2,900,000

$ 64,962,000

     DPL

     All of DPL's common stock is held by Conectiv. The table below presents the aggregate amount of common stock dividends paid by DPL to Conectiv during the periods indicated.

        Period           

Aggregate
Dividends

2004:

First Quarter

$22,067,000

Second Quarter

22,393,000

Third Quarter

13,693,000

Fourth Quarter

  9,845,000

$67,998,000

2003:

First Quarter

$18,577,000

Second Quarter

9,116,000

Third Quarter

11,888,000

Fourth Quarter

  9,507,000

$49,088,000

     ACE

     All of ACE's common stock is held by Conectiv. The table below presents the aggregate amount of common stock dividends paid by ACE to Conectiv during the periods indicated.

        Period           

Aggregate
Dividends

2004:

First Quarter

$ 5,647,000

Second Quarter

-

Third Quarter

-

Fourth Quarter

  4,973,000

$10,620,000

2003:

First Quarter

$ 8,224,000

Second Quarter

14,458,000

Third Quarter

18,800,000

Fourth Quarter

          -

$41,482,000

27
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(c)   Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

Pepco Holdings

     None.

Pepco

     The following table summarizes the activity related to repurchases of Pepco's equity securities during the quarter ended December 31, 2004:

PURCHASES OF EQUITY SECURITIES

Period

Total Number of Shares (or Units) Purchased

Average Price Paid per Share (or Unit)

Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs

Maximum Number (or Approximate Dollar Value) that May Yet Be Purchased Under the Plans or Programs

October 1-31, 2004

 84,502¹
shares of
$2.28 Preferred, Series 1965

$47.02  

N/A

N/A

November 1-30, 2004

0

N/A

N/A

N/A

December 1-31, 2004

850,000²
shares of
$3.40 Preferred, Series 1992

$50.00  

N/A

N/A

     Total

934,502 

$49.7305

N/A

N/A

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

28
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Item 6.    SELECTED FINANCIAL DATA

PEPCO HOLDINGS CONSOLIDATED FINANCIAL HIGHLIGHTS

2004

2003

2002 (a)

2001

2000

(In Millions, except Per Share Data)

Consolidated Operating Results

Total Operating Revenue

$

7,221.8 

7,271.3 

4,324.5 

2,371.2 

2,989.3 

(g)

Total Operating Expenses

$

6,446.1 

6,654.9 

(c)

3,778.9 

2,004.8 

(f)

2,094.2 

Operating Income

$

775.7 

616.4 

545.6 

366.4 

895.1 

Other Expenses

$

341.0 

429.0 

(d)

190.4 

105.3 

192.7 

Preferred Stock Dividend
  Requirements of Subsidiaries

$

2.8 

13.9 

20.6 

14.2 

14.7 

Income Before Income Tax Expense

$

431.9 

173.5 

334.6 

246.9 

687.7 

Income Tax Expense

$

173.2 

(b)

65.9 

124.1 

83.5 

341.2 

Income Before Extraordinary Item

$

258.7 

107.6 

210.5 

163.4 

346.5 

Extraordinary Item

$

- 

5.9 

- 

- 

- 

Net Income

$

258.7 

113.5 

(e)

210.5 

163.4 

346.5 

Redemption Premium on
  Preferred Stock

$

0.5 

- 

- - 

- - 

- - 

Earnings Available for
  Common Stock

$

259.2 

113.5 

210.5 

163.4 

346.5 

Common Stock Information

Basic Earnings Per Share of Common
  Stock Before Extraordinary Item

$

1.47 

.63 

1.61 

1.51 

3.02 

Basic - Extraordinary Item Per
  Share of Common Stock

$

- 

.03 

- 

- 

- 

Basic Earnings Per Share
  of Common Stock

$

1.47 

.66 

1.61 

1.51 

3.02 

Diluted Earnings Per Share
  of Common Stock Before
  Extraordinary Item

$

1.47 

.63 

1.61 

1.50 

2.96 

Diluted - Extraordinary Item Per
  Share of Common Stock

$

- 

.03 

- 

- 

- 

Diluted Earnings Per Share
  of Common Stock

$

1.47 

.66 

1.61 

1.50 

2.96 

Basic Common Shares Outstanding
  (Average)

176.8 

170.7 

131.1 

108.5 

114.9 

Diluted Common Shares Outstanding
  (Average)

176.8 

170.7 

131.1 

108.8 

118.3 

Cash Dividends Per Share
  of Common Stock

$

1.00 

1.00 

1.00 

1.165 

1.66 

Year-End Stock Price

$

21.32 

19.54 

19.39 

22.57 

24.71 

Book Value per Common Share

$

17.88 

17.48 

17.62 

17.00 

16.82 

Other Information

Investment in Property, Plant
  and Equipment

$

11,045.2 

10,747.2 

10,625.0 

4,361.9 

4,284.7 

Net Investment in Property, Plant
  and Equipment

$

7,088.0 

6,964.9 

7,043.3 

2,819.0 

2,786.5 

Total Assets

$

13,349.4 

13,371.3 

13,404.1 

5,395.7 

7,209.7 

Capitalization (SEC/PUHCA Method)

Short-term Debt (h)

$

161.3 

360.0 

812.7 

350.2 

211.6 

Long-term Debt (i)

$

5,554.7 

5,678.5 

5,277.5 

1,710.1 

2,674.8 

Project funding (j)

$

70.7 

73.6 

30.4 

22.9 

19.4 

Debentures issued to
  Financing Trust (k)

$

- 

98.0 

- 

- 

- 

Trust Preferred Securities (l)

$

- 

- 

290.0 

125.0 

125.0 

Preferred Stock (m)

$

54.9 

108.2 

110.7 

84.8 

90.3 

Shareholders' Equity

$

3,366.3 

 3,003.3 

2,995.8 

1,823.2 

1,862.5 

   Total Capitalization

$

9,207.9 

 9,321.6 

9,517.1 

4,116.2 

4,983.6 

29
___________________________________________________________________________________

(a)

As a result of the acquisition of Conectiv by Pepco that was completed on August 1, 2002, PHI's 2004 and 2003 amounts include PHI and its subsidiaries' results for the full year. PHI's 2002 amounts include Conectiv and its subsidiaries post-August 1, 2002 results with Pepco and its pre-merger subsidiaries (PCI and Pepco Energy Services) results for all of 2002. The amounts presented for 2001 and 2000 represent only Pepco and its pre-merger subsidiaries results. For additional information, refer to the Management's Discussion and Analysis of Financial Condition and Results of Operations section, herein.

(b)

Includes a $19.7 million charge related to an IRS settlement.

(c)

Includes a charge of $50.1 million ($29.5 million after-tax) related to a CT contract cancellation. Also includes a gain of $68.8 million ($44.7 million after-tax) on the sale of the Edison Place office building.

(d)

Includes an impairment charge of $102.6 million ($66.7 million after-tax) related to Pepcom's investment in Starpower Communications, LLC.

(e)

Includes the unfavorable impact of $44.3 million ($26.6 million after-tax) resulting from trading losses prior to the cessation of proprietary trading.

(f)

Includes $55.5 million ($36.1 million after-tax) impairment charge related to the write-down of aircraft leasing portfolio.

(g)

Includes $423.8 million ($182.0 million after-tax) gain on sale of Pepco's Generation Assets to Mirant.

(h)

Excludes current maturities of long-term debt, capital lease obligations due within one year, and Variable Rate Demand Bonds.

(i)

Includes first mortgage bonds, medium-term notes, other long-term debt, current maturities of long-term debt, and Variable Rate Demand Bonds. Excludes capital lease obligations.

(j)

Represents funding for energy savings contracts performed by Pepco Energy Services and includes current portion of project funds that were provided in exchange for the sale of the customers' accounts receivable.

(k)

Represents debentures issued to Financing Trust and current portion of debentures issued to Financing Trust.

(l)

Company obligated mandatorily redeemable preferred securities of subsidiary trust which holds solely parent junior subordinated debentures.

(m)

Represents Mandatorily Redeemable Serial Preferred Stock, Serial Preferred Stock, and Redeemable Serial Preferred Stock.

30
_____________________________________________________________________________

PEPCO CONSOLIDATED FINANCIAL HIGHLIGHTS

2004

2003

2002 (a)

2001

2000

(In Millions, except Per Share Data)

Consolidated Operating Results

Total Operating Revenue

$

1,805.9 

1,548.0

1,988.0

2,371.2 

2,989.3 

(c)

Total Operating Expenses

$

1,579.7 

1,298.9

1,663.1

2,004.8 

(b)

2,094.2 

Operating Income

$

226.2 

249.1

324.9

366.4 

895.1 

Other Expenses

$

72.9 

70.8

96.3

105.3 

192.7 

Distributions on Preferred
  Securities of Subsidiary Trust

$

- 

4.6

9.2

9.2 

9.2 

Income Before Income Tax Expense

$

153.3 

173.7

219.4

251.9 

693.2 

Income Tax Expense