AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 1, 1999
REGISTRATION NO. 333-83635
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
AMENDMENT NO. 1 TO FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PSE&G TRANSITION FUNDING LLC
(Issuer of Securities)
(Exact name as specified in registrant's Certificate of Formation)
DELAWARE 22-3672053
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
PSE&G TRANSITION FUNDING LLC
80 PARK PLAZA
SUITE [ ]
NEWARK, NEW JERSEY 07102
(973) 430-7000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
JAMES T. FORAN ROBERT E. BUSCH
VICE PRESIDENT AND GENERAL COUNSEL SENIOR VICE PRESIDENT AND CHIEF
80 PARK PLAZA, T-5B FINANCIAL OFFICER
NEWARK, NEW JERSEY 07102 80 PARK PLAZA, T-8E
(973) 430-6131 NEWARK, NEW JERSEY 07102
(973) 430-7761
(Name, address, including zip code, and telephone number,
including area code, of agents for service)
-----------
Copies to:
CHRISTOPHER J. KELL ERIC D. TASHMAN
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP BROWN & WOOD LLP
919 THIRD AVENUE 555 CALIFORNIA STREET
NEW YORK, NEW YORK 10022 SAN FRANCISCO, CALIFORNIA 94104
(212) 735-2160 (415) 772-1200
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If the only Securities being registered on this form are being
offered pursuant to dividend or interest reinvestment plans, please check
the following box: |_|
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. |X|
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If delivery of the Prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
============================================================================================
TITLE OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED BE REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Transition Bonds $ 1,000,000 ___% $ $278
- --------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON ANY DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON A DATE AS THE SECURITIES AND EXCHANGE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
=============================================================================
[FLAG]
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This
prospectus supplement is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state where the
offer or sale is not permitted.
Subject to Completion. Dated [ ], 1999.
Prospectus Supplement to Prospectus dated [ ], 1999.
$_________ TRANSITION BONDS, SERIES 1999-____
PSE&G TRANSITION FUNDING LLC
Issuer of the Transition Bonds
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
Seller and Servicer
<TABLE>
<CAPTION>
Expected
Underwriting Final Final
Principal Interest Discounts and Net Payment Maturity
Amount: Rate: Price: Commissions: Proceeds: Date: Date:
--------- --------------------- ------------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Class A-1 Transition Bonds
Class A-2 Transition Bonds
Class A-3 Transition Bonds
Class A-4 Transition Bonds
Class A-5 Transition Bonds
Class A-6 Transition Bonds
Class A-7 Transition Bonds
Class A-8 Transition Bonds
</TABLE>
The total price to the public is $_______, the total amount of the
underwriting discount is $______. The total amount of proceeds plus accrued
interest and before deduction of expenses is $______.
Consider carefully the risk factors beginning on page _____ of the
accompanying prospectus before buying the transition bonds.
The transition bonds represent obligations of PSE&G Transition Funding LLC
only, which is the issuer, and are backed only by the assets of the issuer.
Neither PSE&G, its parent, Public Service Enterprise Group Incorporated,
nor any of their respective affiliates, other than the issuer, are liable
for payments on the transition bonds.
There currently is no secondary market for the transition bonds, and there
is no assurance that one will develop. Additional information is contained
in the prospectus. Prospective investors are urged to read both this
prospectus supplement and the prospectus in full. Sales of the transition
bonds may not be consummated unless the purchaser has received both this
prospectus supplement and the prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed on the
adequacy or accuracy of this prospectus supplement or the accompanying
prospectus. Any representation to the contrary is a criminal offense.
LEHMAN BROTHERS
October __, 1999
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
WHERE TO FIND INFORMATION IN THESE DOCUMENTS............................S-4
INTRODUCTION............................................................S-5
The Collateral....................................................S-6
Payment Sources...................................................S-6
THE SERIES 1999-__ TRANSITION BONDS.....................................S-7
Principal Payments................................................S-8
Interest Payments.................................................S-9
Optional Redemption..............................................S-10
CREDIT ENHANCEMENT.....................................................S-10
Periodic Adjustment of the Transition Bond Charge................S-10
Collection Account and Subaccounts...............................S-11
DESCRIPTION OF BONDABLE TRANSITION PROPERTY............................S-13
THE TRANSITION BOND CHARGE.............................................S-14
UNDERWRITING THE SERIES 1999-__ TRANSITION BONDS.......................S-15
The Underwriters' Sales Price for the Transition Bonds...........S-16
No Assurance as to Resale Price or Resale Liquidity
for the Transition Bonds......................................S-16
Various Types of Underwriter Transactions Which May
Affect the Price of the Transition Bonds......................S-16
RATINGS FOR THE SERIES 1999-__ TRANSITION BONDS........................S-17
IMPORTANT NOTICE
ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS............................1
SUMMARY OF TERMS..........................................................2
The Collateral......................................................5
Payment Sources.....................................................5
Priority of Distributions...........................................6
Credit Enhancement and Accounts.....................................7
State Pledge........................................................9
Payments of Interest and Principal.................................11
Optional Redemption................................................11
Payment Dates and Record Dates.....................................11
Material Income Tax Considerations.................................11
ERISA Considerations...............................................11
REPORTS TO HOLDERS OF THE TRANSITION BONDS...............................12
WHERE TO FIND INFORMATION IN THESE DOCUMENTS
This prospectus supplement and the attached prospectus provide
information about the issuer and PSE&G, including terms and conditions that
apply to the transition bonds. The specific terms of this series of
transition bonds, the series 1999-_ transition bonds, are contained in this
prospectus supplement. The terms that apply to all series of transition
bonds appear in the prospectus which follows this prospectus supplement.
You should read both of these documents in full before buying the
transition bonds.
We have included cross-references to captions in these materials
where you can find further related discussions. Cross references may be
contained in the introductory sections which will direct you elsewhere in
this prospectus supplement or the attached prospectus for more detailed
description of a particular topic. You can also find references to key
topics in the Table of Contents on the previous page.
You should rely only on information on the transition bonds provided
in this prospectus supplement and the attached prospectus. We have not
authorized anyone to provide you with different information.
INTRODUCTION
THE ISSUER: PSE&G Transition Funding LLC, a Delaware
limited liability company
ISSUER'S ADDRESS: 80 Park Plaza, Suite [ ], Newark,
New Jersey 07102
ISSUER'S TELEPHONE NUMBER: (973) 430-7000
SELLER OF THE PROPERTY TO Public Service Electric and Gas Company
THE ISSUER: (PSE&G), an operating electric and gas public
utility, incorporated under the laws of the
State of New Jersey in 1924. PSE&G serves
approximately 1.9 million electric customers
and 1.6 million gas customers in New Jersey.
SELLER'S ADDRESS: 80 Park Plaza, Newark, New Jersey 07102
SELLER'S TELEPHONE NUMBER: (973) 430-7000
SERVICER OF THE PROPERTY: PSE&G
TRUSTEE: The Bank of New York
MINIMUM DENOMINATION: $1,000 (except for one bond of each class of a
smaller denomination)
THE COLLATERAL
The transition bonds will be secured by bondable transition property,
a property right created under New Jersey state legislation. In general
terms, the bondable transition property represents the irrevocable right to
recover, through a transition bond charge payable by PSE&G's retail
electric customers of electricity within PSE&G's service territory who
access PSE&G's transmission and distribution system, an amount sufficient
to pay:
o the interest, fees, expenses, costs, charges, credit
enhancement and premiums, if any, associated with the
transition bonds, and
o the principal amount of the transition bonds.
The proceeds of the transition bonds will be used to pay a portion of
PSE&G's stranded costs. Stranded costs are the amount determined by the BPU
by which an electric utility's net electric generation related costs which
traditionally would be recoverable under a regulated environment exceed
those costs recoverable in a competitive electric supply market. The
bondable transition property is described in more detail under "THE SALE
AGREEMENT -- PSE&G'S SALE AND ASSIGNMENT OF BONDABLE TRANSITION PROPERTY"
in the prospectus.
In connection with the issuance of the transition bonds, PSE&G will
sell its bondable transition property to the issuer. PSE&G, as servicer of
the bondable transition property, will collect the transition bond charge
from customers on behalf the issuer. Third party suppliers of electricity
to PSE&G's customers may be allowed to collect the transition bond charge
from customers and pay the billed amounts to PSE&G, as servicer. Since the
amount of transition bond charge collections will depend on the amount of
electricity consumed by customers within PSE&G's service territory, they
may vary substantially from year to year. See "THE SELLER AND SERVICER OF
THE BONDABLE TRANSITION PROPERTY" in the prospectus.
PAYMENT SOURCES
On each payment date, the trustee will pay amounts scheduled to be
paid on transition bonds from amounts available for withdrawal from trust
accounts held by the trustee or paid pursuant to contracts pledged to
secure one or more series of transition bonds, including collections
received from the servicer with respect to the transition bond charge
during the prior three months. All series of transition bonds, including
the series 1999-__ transition bonds, will be payable from the same bondable
transition property. If another series of bonds is issued, the principal
source of repayment for that series will also be the transition bond charge
collected by the servicer. The issuance of other series of transition bonds
is not expected to adversely affect the sufficiency of transition bond
charge collections for payments on the series 1999-__ transition bonds.
This is because the transition bond charge and adjustments thereof are
generally based on the total principal amount of all transition bonds
outstanding. Moreover, any additional series of transition bonds will be
issued only if it will not result in the downgrading or withdrawal of any
rating by a rating agency on any outstanding bonds. See "The Indenture" in
the prospectus.
THE SERIES 1999-__ TRANSITION BONDS
The transition bonds will be issued under and secured pursuant to the
indenture between the issuer and the trustee, as supplemented for each
series of transition bonds.
The series 1999-__ transition bonds will be issued in minimum
denominations of $1,000 and in integral multiples of $1.00 above that
amount, with an exception for one transition bond in each class which may
have a smaller denomination. The series 1999-__ transition bonds will consist
of eight classes, in the initial principal amounts, bearing the interest
rates and having the expected final payment dates and final maturity dates
set forth below:
TABLE 1
Initial Class Expected Final Final
Class Principal Balance Interest Rate Payment Date Maturity Date
----- ----------------- ------------- -------------- -------------
_________ _________
A-1 $ [ %] ( ) ( )
----------- ------ ------- -------
_________ _________
A-2 $ [ %] ( ) ( )
----------- ------ ------- -------
_________ _________
A-3 $ [ %] ( ) ( )
----------- ------ ------- -------
_________ _________
A-4 $ [ %] ( ) ( )
----------- ------ ------- -------
_________ _________
A-5 $ [ %] ( ) ( )
----------- ------ ------- -------
_________ _________
A-6 $ [ %] ( ) ( )
----------- ------ ------- -------
_________ _________
A-7 $ [ %] ( ) ( )
----------- ------ ------- -------
_________ _________
A-8 $ [ %] ( ) ( )
----------- ------ ------- -------
The expected final payment date for each class of the series 1999-__
transition bonds is the date on which there is expected to be no further
outstanding principal balance of that class in accordance with the expected
amortization schedule for that class. The final maturity date for each
class of the series 1999-__ transition bonds is the date on which the
issuer is required to pay any outstanding principal balance of that class.
PRINCIPAL PAYMENTS
On each payment date, the issuer will distribute principal of the
series 1999-__ transition bonds to the series 1999-__ transition bondholders,
in accordance with the expected amortization schedule and to the extent
funds are available, in the following order:
(1) to the holders of the class series 1999-[__] transition bonds,
until the principal balance of that class has been reduced to
zero;
(2) [Add other classes]
The issuer will not, however, pay principal on a payment date of any class
of series 1999-__ transition bonds if making such payment would reduce the
principal balance of a class to an amount lower than that specified in the
expected amortization schedule for that class on that payment date. The
entire unpaid principal amount of each class of series 1999-__ transition
bonds will be due and payable on the final maturity date for the class. If
an event of default under the indenture has occurred and is continuing, the
trustee may declare the unpaid principal amount of all outstanding
transition bonds together with accrued interest to be due and payable. If
there is a shortfall in the amount necessary to make principal payments
that are due and payable, including upon an acceleration following an event
of default, the trustee will distribute principal pro rata to each series
and class of transition bonds based on the outstanding principal amount of
that series or class.
The following table sets forth the principal balance from the
issuance date to the expected final payment date that is scheduled to
remain outstanding for each class of the series 1999-__ transition bonds. The
table reflects the principal balance for each class at each payment date
after principal payments scheduled to be made on that date. In establishing
the Expected Amortization Schedule, it has been assumed, among other
things, that:
1. the series 1999-__ transition bonds are issued on ________;
2. payments on the series 1999-__ transition bonds are made on
each payment date, commencing on ________;
3. the annual servicing fee for the series 1999-__ transition bonds
equals [0.05%] of the initial outstanding principal balance of
the series 1999-__ transition bonds;
4. there are no net earnings on amounts on deposit in the collection
account;
5. operating expenses, including all fees, costs and charges of
the issuer and the trustee, are paid in the amount of $_____ in
the aggregate for all series on each payment date and that
these amounts are payable in arrears; and
6. all transition bond charge collections are received in
accordance with PSE&G's forecasts and deposited in the
collection account.
<TABLE>
<CAPTION>
TABLE 2
EXPECTED AMORTIZATION SCHEDULE
Class Class Class Class Class Class Class Class
Payment A-1 A-2 A-3 A-4 A-5 A-6 A-7 A-8
Dates Balance Balance Balance Balance Balance Balance Balance Balance
<S> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
There can be no assurance that the principal balance of any class of
the series 1999-__ transition bonds will be reduced at the rate indicated in
the foregoing table. The actual rates of reduction in class principal
balances may be slower but, except in the case of optional redemption or
acceleration due to an event of default, not faster than those indicated in
Table 2. The series 1999-__ transition bonds will not be in default if not
paid as specified above in Table 2 unless the final outstanding principal
balance of any class is not paid on the final maturity date of that class.
INTEREST PAYMENTS
Interest on each class of series 1999-__ transition bonds will accrue
from the date of issuance until the first payment date, and thereafter from
payment date to payment date until the transition bonds have been paid in
full, at the interest rate indicated in Table 1. The issuer is required to
pay interest quarterly on March 15, June 15, September 15, and December 15
for each year, beginning March 15, 2000, or, if such day is not a business
day, the following business day. Each such day is referred to as a payment
date.
On each payment date, the issuer will pay interest on each class of
the series 1999-__ transition bonds as follows:
o if there has been a payment default, any unpaid interest
payable but unpaid on any prior payment dates, together with
interest on any such unpaid interest; and
o accrued interest on the principal balance of each class of
series 1999-__ transition bonds as of the close of business on
the preceding payment date, or the date of the original
issuance of the class of series 1999-__ transition bonds, as
applicable, after giving effect to all payments of principal
made on the preceding payment date.
The issuer will pay interest on the series 1999-__ transition bonds prior
to paying principal of the transition bonds. See "THE TRANSITION
BONDS--PAYMENTS OF INTEREST ANd PRINCIPAL ON THE TRANSITION BONDS" in the
prospectus. If there is a shortfall in the amounts necessary to make
interest payments, the trustee will distribute interest pro rata to each
series and class of transition bonds based on the outstanding principal
amount of that series or class and the applicable interest rate. The issuer
will calculate interest on the basis of a 360-day year of twelve 30-day
months. Interest on each class of transition bonds will accrue from its
issuance date at the interest rate set forth above in Table 1.
Interest on the series 1999-__ transition bonds, class ___ will be
calculated as follows:
[To be provided at issuance for any class with a floating interest rate]
OPTIONAL REDEMPTION
The issuer may redeem all of the outstanding series 1999-__
transition bonds, at its option, on any payment date if the outstanding
principal balance of the series 1999-__ transition bonds (after giving
effect to payments scheduled to be made on that payment date) is less than
5% of the initial principal balance of the series 1999-__ transition bonds.
In the case of redemption, the issuer will pay the outstanding principal
amount of the series 1999-__ transition bonds and interest accrued and
unpaid up to the redemption date. The trustee will give notice of the
redemption to transition bondholders not less than five days nor more than
45 days prior to the redemption date. The series 1999-__ transition bonds
will not be redeemed before the expected final payment date in any other
circumstances other than in the case of acceleration due to an event of
default.
CREDIT ENHANCEMENT
Credit enhancement for the series 1999-__ transition bonds is
intended to protect you against losses or delays in scheduled payments on
your transition bonds.
PERIODIC ADJUSTMENT OF THE TRANSITION BOND CHARGE
Credit enhancement for the transition bonds includes mandatory
periodic adjustments by the New Jersey Board of Public Utilities, referred
to as the BPU, to the transition bond charge to be billed to customers,
upon the petition by PSE&G, as servicer. PSE&G, as servicer, will petition
for an adjustment annually through December 1, 2012 and quarterly
commencing on October 15, 2013. The periodic adjustments will be designed
to ensure, among other things, sufficient funds for timely payments of
principal and interest on the transition bonds in accordance with the
expected amortization schedule set forth in Table 2 above. See "THE BPU
FINANCING ORDER AND THE TRANSITION BOND CHARGE - THE BPU'S TRANSITION BOND
CHARGE ADJUSTMENT PROCESS" in the prospectus. The adjustments will be made
if there are excess collections or if the transition bond charge does not
produce sufficient revenues:
(1) to make timely payments on the transition bonds;
(2) to pay transaction fees and expenses; and
(3) to fund any of the subaccounts, including the capital
subaccount and overcollateralization subaccount, to their
required levels.
COLLECTION ACCOUNT AND SUBACCOUNTS
The trustee will establish a collection account to hold the capital
contribution from PSE&G to the issuer and the amounts remitted by the
servicer from time to time. The collection account will contain the funds
securing the transition bonds. The collection account will consist of
subaccounts including the following:
o the general subaccount;
o one or more series subaccounts;
o the capital subaccount;
o the overcollateralization subaccount; and
o the reserve subaccount.
Withdrawals from and deposits to these subaccounts will be made as
described under "THE INDENTURE--THE COLLECTION ACCOUNT FOR THE TRANSITION
BONDS" and "--HOW FUNDS in THE COLLECTION ACCOUNT WILL BE ALLOCATED" in the
prospectus.
The General Subaccount. Transition bond charge collections remitted
by the servicer to the trustee will be deposited into the general
subaccount. On the business day preceding each payment date, the trustee
will allocate amounts in the general subaccount to make the allocations
described under "THE INDENTURE - HOW FUNDS IN THE COLLECTION ACCOUNT WILL
BE ALLOCATED" in the prospectus.
The Series Subaccount. Upon the issuance of each series of transition
bonds, a series subaccount will be established with respect to that series.
On the business day preceding each payment date, the trustee will allocate
from amounts on deposit in the general subaccount to the series subaccount
for each series an amount sufficient to pay, to the extent available:
1. interest payable on that series on that payment date;
2. the principal of that series payable as a result of an
acceleration following the occurrence of an event of default,
the principal of that series payable on the final maturity date
of that series, or the principal payable on a redemption date;
3. principal scheduled to be paid on that series on the next
payment date, excluding amounts provided for in clause 2 above;
On the business day preceding each payment date, allocations will be made
to each series subaccount as described under "THE INDENTURE - HOW FUNDS IN
THE COLLECTION ACCOUNT WILL BE ALLOCATED" in the prospectus. On each
payment date, the trustee will withdraw funds from the series subaccount to
make payments on the related series of transition bonds.
The Capital Subaccount. Upon the issuance of the transition bonds,
PSE&G will deposit $ in the capital subaccount, which represents the
required capital amount for the series. If amounts available in the general
subaccount, the reserve subaccount and the overcollateralization subaccount
are not sufficient on any payment date to make scheduled payments to the
transition bondholders and to pay the expenses, fees and charges specified
in the indenture, the trustee will draw on amounts in the capital
subaccount to make those payments. The required capital amount has been set
at a level sufficient to obtain the ratings on the transition bonds
described below under "RATINGS FOR THE SERIES 1999-__ TRANSITION BONDS."
The Overcollateralization Subaccount. The overcollateralization
amount for the series 1999-__ transition bonds million which represents [ ]%
of the initial outstanding balance of that series. The trustee will deposit
in the overcollateralization subaccount transition bond charge collections
up to an amount which is referred to as the scheduled overcollateralization
level. The scheduled overcollateralization level for each payment date is
set forth below. The overcollateralization levels have been set at amounts
sufficient to obtain the ratings on the series 1999-__ transition bonds which
are described below under "RATINGS FOR THE SERIES 1999-__ TRANSITION BONDS".
The required overcollateralization amount will not be less 0.5% of the
original principal amount of the transition bonds. See also "THE TRANSITION
BONDS--CREDIT ENHANCEMENT FOR THE TRANSITION BONDs" in the prospectus.
TABLE 3
SCHEDULED OVERCOLLATERALIZATION LEVELS
Required Over- Required Over-
Collateralization Collateralization
Payment Date Level Payment Date Level
If amounts available in the general subaccount and the reserve
subaccount are not sufficient on any payment date to make scheduled
payments to the transition bondholders and to pay the expenses, fees and
charges specified in the indenture, the trustee will draw on amounts in the
overcollateralization subaccount to make those payments.
The Reserve Subaccount. The reserve subaccount will be funded with
any transition bond charge collections and earnings on amounts in the
collection account, other than the capital subaccount, in excess of the
amount necessary to pay on any payment date:
1. expenses of the trustee and the servicer and other fees, costs
and charges,
2. scheduled principal of and interest on the transition bonds
payable on that payment date,
3. any amount required to replenish the capital subaccount, and
4. the amounts required to fund the overcollateralization
subaccount to the required level.
The transition bond charge will be adjusted periodically to eliminate any
amounts on deposit in the reserve subaccount.
On any payment date, if amounts available in the general subaccount
are not sufficient to make scheduled payments to the transition
bondholders, the trustee will draw on any amounts in the reserve subaccount
to make those payments.
DESCRIPTION OF BONDABLE TRANSITION PROPERTY
Bondable transition property is a property right created by New
Jersey state legislation. Bondable transition property represents the
irrevocable right of an electric public utility to charge, collect and
receive, and be paid from collections of, transition bond charges, in
amounts sufficient to recover the following, referred to as bondable
stranded costs:
1. the stranded costs of an electric utility approved by the BPU
for recovery through the issuance of transition bonds;
2. the costs of retiring existing debt or equity capital of the
electric utility, including accrued interest and premiums, and
other related fees, costs and charges, approved by the BPU; and
3. the costs incurred to issue, service or refinance the
transition bonds, including accrued interest and acquisition or
redemption premium, and other financing costs and related fees,
costs and charges, including but not limited to credit
enhancements, service charges, overcollateralization, interest
rate caps, swaps or collars, yield maintenance, maturity
guarantees and other hedging agreements or to sell or transfer
the bondable transition property, or to assign, sell or
otherwise transfer bondable transition property, approved by
the BPU.
It also includes the right of an electric public utility to obtain periodic
adjustments of the transition bond charge and all revenues, collections,
payments, money and proceeds with respect to the foregoing.
THE TRANSITION BOND CHARGE
The bondable stranded costs authorized in the BPU financing order are
to be recovered from customers of PSE&G through the transition bond charge.
PSE&G, in its capacity as servicer of the bondable transition property
under the servicing agreement, will bill the transition bond charge to each
customer.
PSE&G Will Assess the Transition Bond Charge on Customers. PSE&G, in
its capacity as servicer of the bondable transition property under the
servicing agreement, will assess the transition bond charge on the bills of
each customer. A customer is a person that is an end user of electricity,
is connected to any part of PSE&G's transmission and distribution system
and is located within PSE&G's service territory. Each customer who accesses
PSE&G's transmission and distribution must pay the transition bond charge,
even if that customer elects to purchase electricity from another supplier.
In certain limited circumstances, customers who self-generate may avoid the
transition bond charge, as described under "THE COMPETITION ACT - PSE&G AND
OTHER UTILITIES MAY SECURITIZE STRANDED COSTS - Customers Cannot Avoid
Paying the Transition Bond Charge". The transition bond charge is assessed
as a uniform per kilowatt-hour charge against all customers of all classes,
the amount of the charge depending on the amount of electricity delivered
to the customer through PSE&G's distribution system. Any third party
supplier of electricity to PSE&G's customers must pay PSE&G the transition
bond charge billed by such third party supplier to PSE&G's customers.
PSE&G Will Calculate the Transition Bond Charge. PSE&G, as servicer,
will calculate the transition bond charge based on the total amount
required to be billed to customers to generate transition bond charge
collections sufficient to ensure timely payment of principal of and
interest on the transition bonds and the other amounts required to be paid
by the issuer. The charge will be reflected in each customer's bill.
Transition bond charge collections will vary from projections because total
electricity consumption revenues are affected by changes in usage, number
of customers, rates of delinquencies and write-offs or other factors. See
Tables 1 through 9 under "THE SELLER AND SERVICER OF THE BONDABLE
TRANSITION PROPERTY" in the prospectus. PSE&G, as servicer, is required to
seek adjustments to the transition bond charge on each calculation date as
described under "THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE" in
the prospectus, in order to adjust for such variations on each calculation
date.
The BPU's Transition Bond Charge Adjustment Process. Transition bond
charge collections are intended to be neither more nor less than the amount
necessary to pay the principal of the transition bonds of each series in
accordance with the expected amortization schedule, to pay interest on each
series, to pay related expenses and to fund or replenish the subaccounts.
There is no limit on the number of transition bond charge adjustments.
Furthermore, the BPU is obliged to continue to approve transition bond
adjustments calculated in accordance with the formula until there are no
transition bonds outstanding and all fees and expenses of the issuer have
been paid. In order to enhance the likelihood of a proper amount of
transition bond charge collections, the servicing agreement requires the
servicer to petition the BPU to approve adjustments to the transition bond
charge annually through December 1, 2012, and quarterly commencing on
October 1, 2013 for so long as the transition bonds are outstanding. The
adjustments will conform the transition bond charge to the schedule of
expected payments of principal of and interest on the transition bonds and
will be in an amount required to ensure receipt of revenues sufficient to
provide for the full recovery of bondable stranded costs. Each periodic
adjustment will become effective on an interim basis 30 days after filing,
and final after 60 days, in each case, absent a determination by the BPU of
manifest error.
There will be a single per kilowatt hour transition bond charge for
all customers of all classes. Initially, PSE&G estimates that the
transition bond charge will be approximately $0.007497 per kilowatt hour
for all customers of all classes, beginning on the issuance date for the
transition bonds. See "THE COMPETITION ACT" and "THE BPU FINANCING ORDER
AND THE TRANSMISSION BOND CHARGE" in the prospectus.
UNDERWRITING THE SERIES 1999-__ TRANSITION BONDS
Subject to the terms and conditions set forth in the underwriting
agreement among the issuer, PSE&G and the underwriters for whom Lehman
Brothers is acting as the representative, the issuer has agreed to sell to
the underwriters, and the underwriters have severally agreed to purchase,
the principal amount of transition bonds set forth opposite each
underwriter's name below:
NAME CLASS TOTAL
Lehman Brothers Inc.
Under the underwriting agreement, the underwriters will take and pay
for all of the transition bonds offered hereby, if any are taken.
THE UNDERWRITERS' SALES PRICE FOR THE TRANSITION BONDS.
Series 1999-__ transition bonds sold by the underwriters to the
public will be initially offered at the initial public offering prices set
forth on the cover of this prospectus supplement. The underwriters propose
initially to offer the transition bonds to dealers at the initial public
offering prices, less a selling concession not to exceed the percentage set
forth below, and the underwriters may allow and dealers may reallow a
discount not to exceed the percentage set forth below.
SELLING REALLOWANCE
CLASS CONCESSION DISCOUNT
Class [ ].................................
[Add other classes].........................
After the initial public offering, the public offering prices,
selling concessions and reallowance discounts may change.
NO ASSURANCE AS TO RESALE PRICE OR RESALE LIQUIDITY FOR THE TRANSITION BONDS.
The series 1999-__ transition bonds are a new issue of securities with
no established trading market. They will not be listed on any securities
exchange. The issuer has been advised by the underwriters that they intend
to make a market in the transition bonds but they are not obligated to do
so and may discontinue market making at any time without notice. No
assurance can be given as to the liquidity of the trading market for the
transition bonds.
VARIOUS TYPES OF UNDERWRITER TRANSACTIONS WHICH MAY AFFECT THE PRICE OF THE
TRANSITION BONDS.
The underwriters may engage in overallotment transactions,
stabilizing transactions, syndicate covering transactions and penalty bids
with respect to the transition bonds in accordance with Regulation M under
the Exchange Act. Overallotment transactions involve syndicate sales in
excess of the offering size, which create a syndicate short position.
Stabilizing transactions are bids to purchase the transition bonds which
are permitted, so long as the stabilizing bids do not exceed a specified
maximum price. Syndicate covering transactions involve purchases of the
transition bonds in the open market after the distribution has been
completed in order to cover syndicate short positions. Penalty bids permit
the underwriters to reclaim a selling concession from a syndicate member
when the transition bonds originally sold by the syndicate member are
purchased in a syndicate covering transaction. These overallotment
transactions, stabilizing transactions, syndicate covering transactions and
penalty bids may cause the prices of the transition bonds to be higher than
they would otherwise be. None of the seller, the issuer or the trustee or
any of the underwriters represent that the underwriters will engage in any
of these transactions or that these transactions, once commenced, will not
be discontinued without notice at any time.
In the ordinary course of business, each underwriter and its
affiliates have engaged and may engage in transactions with the issuer and
its affiliates, including PSE&G. In addition, each underwriter may from
time to time take positions in the transition bonds.
Under the terms of the underwriting agreement, the issuer and PSE&G
have agreed to reimburse the underwriters for some expenses. The issuer and
the seller have agreed to indemnify the underwriters against some
liabilities, including liabilities under the Securities Act.
RATINGS FOR THE SERIES 1999-__ TRANSITION BONDS
It is a condition of any underwriter's obligation to purchase the
series 1999-_ transition bonds that the series 1999-_ transition bonds be
rated "__" by S&P, "__" by Moody's , "__" by Fitch IBCA and "__" by Duff &
Phelps.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
rating agency. No person is obligated to maintain the rating on the
transition bonds, and, accordingly, there can be no assurance that the
ratings assigned to any class of the transition bonds upon initial issuance
will not be revised or withdrawn by a rating agency at any time thereafter.
If a rating of any class of the transition bonds is revised or withdrawn,
the liquidity of that class may be adversely affected. In general, ratings
address credit risk and do not represent any assessment of any particular
rate of principal payments on the transition bonds other than payment in
full of each class of the transition bonds by the applicable final maturity
date.
[FLAG]
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities and it is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.
PROSPECTUS
Subject to Completion. Dated [ ], 1999.
PSE&G TRANSITION FUNDING LLC
Issuer of the Transition Bonds
TRANSITION BONDS
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
Seller and Servicer
Consider carefully the risk factors beginning on page _____
of this prospectus before buying the transition bonds.
The transition bonds represent obligations of PSE&G Transition Funding LLC
only, which is the issuer, and are backed only by the assets of the issuer.
Neither PSE&G, its parent, Public Service Enterprise Group Incorporated,
nor any of their respective affiliates, other than the issuer, are liable
for payments on the transition bonds.
There currently is no secondary market for the transition bonds, and there
is no assurance that one will develop.
This prospectus, together with the applicable prospectus supplement,
constitutes a summary of material terms of the offering of a series of
transition bonds. Prospective investors are urged to read both this
prospectus and the prospectus supplement in full. Sales of the transition
bonds may not be consummated unless the purchaser has received both this
prospectus and the prospectus supplement.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR
DISAPPROVED THESE SECURITIES, NOR HAVE THEY DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
October __, 1999
TABLE OF CONTENTS
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS.............1
SUMMARY OF TERMS............................................................2
The Collateral...........................................................5
Payment Sources..........................................................5
Priority of Distributions................................................6
Credit Enhancement and Accounts..........................................7
State Pledge.............................................................9
Payments of Interest and Principal......................................11
Optional Redemption.....................................................11
Payment Dates and Record Dates..........................................11
Material Income Tax Considerations......................................11
ERISA Considerations.......................................................11
REPORTS TO HOLDERS OF THE TRANSITION BONDS.................................12
RISK FACTORS...............................................................13
The Competition Act May Be Overturned by the Federal
Government Without Full Compensation.................................15
Future State Legislative Action May Invalidate the
Transition Bonds or Their Underlying Assets..........................15
SERVICING RISKS............................................................17
Inability to Terminate Service to Certain Delinquent
Customers in Winter..................................................22
The Risks Associated With Potential Bankruptcy Proceedings..............22
Other Risks Associated With An Investment In The Transition
Bonds................................................................25
FORWARD-LOOKING STATEMENTS.................................................26
PUBLIC SERVICE ELECTRIC AND GAS COMPANY....................................27
THE COMPETITION ACT........................................................29
Recovery of Stranded Costs is Allowed for PSE&G and Other
New Jersey Utilities.................................................29
PSE&G and Other Utilities May Securitize Stranded Costs.................30
PSE&G'S RESTRUCTURING......................................................33
THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE.....................35
The BPU Financing Order.................................................35
The BPU's Transition Bond Charge Adjustment Process.....................37
THE SELLER AND SERVICER OF THE BONDABLE TRANSITION PROPERTY................38
PSE&G ..................................................................38
Public Service Enterprise Group Incorporated............................39
PSE&G's Customer Classes................................................39
Percentage Concentration Within PSE&G's Large Commercial
and Industrial Customers.............................................42
How PSE&G Forecasts the Number of Customers and the Amount
of Electricity Usage.................................................42
Forecast Variances......................................................43
Variance For the Amount of Electricity Consumed (gWh)...................43
Credit Policy; Billing; Collections and Write-Offs;
Termination of Service...............................................43
Loss and Delinquency Experience.........................................45
How PSE&G Will Apply Partial Payments by its Customers..................48
PSE&G's Efforts to Deal With the Year 2000 Computer Issue...............48
PSE&G TRANSITION FUNDING LLC, THE ISSUER...................................50
INFORMATION AVAILABLE TO THE TRANSITION BONDHOLDERS........................53
THE TRANSITION BONDS.......................................................54
General Terms of the Transition Bonds...................................54
Payments of Interest and Principal on the Transition Bonds..............55
Redemption of the Transition Bonds......................................56
Credit Enhancement for the Transition Bonds.............................56
Transition Bonds Will Be Issued in Book-Entry Form......................57
Certificated Transition Bonds...........................................61
WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS FOR THE
TRANSITION BONDS........................................................62
THE SALE AGREEMENT.........................................................63
PSE&G's Sale and Assignment of Bondable Transition Property.............63
PSE&G's Representations and Warranties..................................64
PSE&G's Obligation to Indemnify the Issuer and the Trustee
and to Take Legal Action.............................................69
Successors to PSE&G.....................................................70
THE SERVICING AGREEMENT....................................................70
PSE&G's Servicing Procedures............................................70
The BPU's Transition Bond Charge Adjustment Process.....................73
PSE&G's Transition Bond Charge Collections..............................73
PSE&G's Compensation for Its Role as Servicer and Its
Release of Other Parties.............................................74
PSE&G's Duties as Servicer..............................................74
PSE&G's Representations and Warranties as Servicer......................75
PSE&G, as Servicer, Will Indemnify the Issuer and Other
Related Entities.....................................................76
PSE&G, as Servicer, Will Provide Statements to the Issuer
and to the Trustee...................................................76
PSE&G to Provide Compliance Reports Concerning the
Servicing Agreement..................................................77
Matters Regarding PSE&G as Servicer.....................................77
Events Constituting a Default by PSE&G in Its Role as Servicer..........79
The Trustee's Rights if PSE&G Defaults as Servicer......................79
The Obligations of a Servicer That Succeeds PSE&G.......................80
THE INDENTURE..............................................................80
The Security for the Transition Bonds...................................80
Transition Bonds May Be Issued in Various Series or Classes.............81
The Collection Account for the Transition Bonds.........................83
How Funds in the Collection Account Will Be Allocated...................87
Reports to Holders of the Transition Bonds..............................90
The Issuer and the Trustee May Modify the Indenture.....................91
What Constitutes an Event of Default on the Transition Bonds............94
Covenants of the Issuer.................................................97
Access to the List of Holders of the Transition Bonds...................99
The Issuer Must File an Annual Compliance Statement.....................99
The Trustee Must Provide a Report to All Transition Bondholders.........99
What Will Trigger Satisfaction and Discharge of the Indenture..........100
The Issuer's Legal Defeasance and Covenant Defeasance Options..........100
The Trustee............................................................102
HOW A BANKRUPTCY OF THE SELLER OR
SERVICER MAY AFFECT YOUR INVESTMENT.......................................102
MATERIAL INCOME TAX MATTERS FOR THE TRANSITION BONDS......................106
Income Tax Status of the Transition Bonds..............................106
General................................................................106
Taxation of Non-U.S. Holders...........................................108
Backup Withholding.....................................................110
Material State of New Jersey Tax Matters...............................110
ERISA CONSIDERATIONS......................................................110
Plan Asset Issues For an Investment in the Transition Bonds............111
Prohibited Transaction Exemptions......................................111
Special Considerations Applicable to Insurance Company
General Accounts....................................................113
General Investment Considerations For Prospective Plan
Investors in the Transition Bonds...................................114
PLAN OF DISTRIBUTION FOR THE TRANSITION BONDS.............................114
RATINGS FOR THE TRANSITION BONDS..........................................115
VARIOUS LEGAL MATTERS RELATING TO THE TRANSITION BONDS....................116
IMPORTANT NOTICE
ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS
You should rely only on information related to the transition bonds
provided in this prospectus and in the related prospectus supplement. No
dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in
this prospectus and the prospectus supplement and, if given or made, the
information or representations must not be relied upon as having been
authorized by the issuer, PSE&G, the underwriters or any dealer,
salesperson or other person. This prospectus and the related prospectus
supplement do not constitute an offer to sell, or a solicitation of an
offer to buy any security in any jurisdiction in which it is unlawful to
make any similar offer or solicitation.
We include cross-references to sections where you can find additional
information. Check the Table of Contents to locate these sections.
SUMMARY OF TERMS
This summary contains a brief description of the transition bonds
that applies to all series of transition bonds issued under this
prospectus. Information that relates to a specific series of transition
bonds can be found in the prospectus supplement related to that series. You
will find a detailed description of the terms of the offering of the
transition bonds in "THE TRANSITION BONDS" in this prospectus.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 13 OF THIS PROSPECTUS.
The Issuer: PSE&G Transition Funding LLC, a Delaware
limited liability company, wholly owned by
PSE&G. The issuer was formed solely to purchase
bondable transition property and to issue one
or more series of transition bonds secured by
the bondable transition property.
Issuer's Address: 80 Park Plaza, T-6, Newark, New Jersey 07102
Issuer's Telephone Number: (973) 430-6564
Seller of the Bondable PSE&G, an operating electric and gas utility,
Transition Property to incorporated under the laws of the State of New
the Issuer: Jersey in 1924. As of July 1, 1999, PSE&G
served approximately 1.9 million electric
customers and 1.6 million gas customers,
covering areas in which approximately 5.5
million people reside. Approximately 70% of the
State's population resides in PSE&G's service
territory which encompasses approximately 2,600
square miles, including New Jersey's six
largest cities.
Seller's Address: 80 Park Plaza, Newark, New Jersey 07102
Seller's Telephone Number: (973) 430-7000
Servicer of the Bondable PSE&G, acting as servicer, and any successor
Transition Property: servicer, will service the transition bond
charge pursuant to a servicing agreement with
the issuer.
PSE&G will be entitled to an annual servicing
fee of 0.05% of the initial principal balance
of the transition bonds which will be payable
on a monthly basis from the transition bond
charge collections. If PSE&G is replaced by a
successor servicer, the successor servicer may
be paid an annual fee of up to 1.25% of the
initial principal balance of the transition
bonds.
Trustee: The Bank of New York
The Assets of the Issuer: The issuer will own:
o the bondable transition property
transferred to the issuer (See "THE SALE
AGREEMENT --PSE&G'S SALe AND ASSIGNMENT OF
BONDABLE TRANSITION Property" in this
prospectus);
o trust accounts held by the trustee; and
o other credit enhancement acquired or held
to ensure payment of the transition bonds.
Transaction Overview: New Jersey state law permits electric public
utilities, such as PSE&G, to recover the costs
of generation-related investments and other
obligations that cannot be recouped through
market-based rates in a competitive electricity
generation market. These costs are commonly
known as stranded costs. A public utility may
recover stranded costs through an irrevocable
non-bypassable charge called a transition bond
charge that is assessed on all retail electric
customers. New Jersey law permits special
purpose entities formed by electric public
utilities to issue debt securities secured by
the right to receive revenues arising from the
transition bond charge. This right creates the
bondable transition property. See "THE
TRANSITION BONDS" in the prospectus. The
following sets forth the primary steps of the
transaction underlying the offering of the
transition bonds:
o PSE&G will sell the bondable transition
property to the issuer in exchange for the
net proceeds from the sale of the
transition bonds.
o The issuer, whose primary asset is the
bondable transition property, will sell
the transition bonds to the underwriters
named in the prospectus
supplement.
o PSE&G will act as the servicer of the
bondable transition property and as the
administrator of the issuer.
The transition bonds and the bondable
transition property securing the transition
bonds are not an obligation of PSE&G or any of
its affiliates, other than the issuer. The
transition bonds and the bondable transition
property are also not an obligation of the
State of New Jersey or any governmental agency,
authority or instrumentality of the State.
PARTIES TO THE TRANSACTION
[GRAPHIC OMITTED]
THE COLLATERAL
The transition bonds will be secured by bondable transition property,
a property right created under the Competition Act and the BPU financing
order. The Competition Act is The New Jersey Electric Discount and Energy
Competition Act, enacted in February 1999. The State of New Jersey Board of
Public Utilities, referred to as the BPU, issued to PSE&G on September 17,
1999 an order providing, among other things, for the issuance of transition
bonds. This order is referred to as the BPU financing order. In general
terms, the bondable transition property represents the irrevocable right to
recover, through a non-bypassable transition bond charge payable by all of
PSE&G's retail electric customers within its service territory who access
PSE&G's transmission and distribution system,
o the principal amount of and interest on the transition bonds, and
o the expenses, fees, charges and credit enhancement associated with
the transition bonds.
PSE&G will sell bondable transition property to the issuer. The
bondable transition property is described in more detail under "THE SALE
AGREEMENT --PSE&G'S SALE ANd ASSIGNMENT OF BONDABLE TRANSITION PROPERTY" in
this prospectus. PSE&G, as servicer of the bondable transition property,
will collect the transition bond charge from customers within its service
territory on behalf of the issuer. Third party suppliers of electricity to
PSE&G's customers may be allowed to collect the transition bond charge from
customers within PSE&G's service territory. The third party suppliers will
be required to pay the transition bond charge to the servicer. See "THE
SELLER AND SERVICER OF THE BONDABLE TRANSITION PROPERTY" in this
prospectus.
The net proceeds from the transition bonds will be used to repay to
PSE&G a portion of its stranded costs. Stranded costs are the amount
determined by the BPU by which an electric utility's net electric
generation related costs which traditionally would be recoverable under a
regulated environment exceed those costs recoverable in a competitive
electric generation market.
PAYMENT SOURCES
On each payment date, the trustee will pay amounts due on the
transition bonds from
o transition bond charge collections remitted by the servicer to the
issuer during the prior quarter;
o any third party credit enhancement; and
o amounts available from trust accounts held by the trustee. These
accounts are described in greater detail under "THE INDENTURE--THE
COLLECTION ACCOUNT FOR THE TRANSITIOn BONDS" in this prospectus.
PRIORITY OF DISTRIBUTIONS
The trustee will apply transition bond charge collections remitted by
the servicer together with all investment earnings on the trust accounts,
to the extent funds are available in the collection account, in the
following order of priority:
(a) Except as provided in (b) below, to the payment of the servicing fee,
monthly on the date specified for the payment of the monthly servicing fee.
So long as PSE&G is the servicer, the monthly servicing fee will be a fixed
fee equal to one twelfth of 0.05% of the original principal amount of each
series of transition bonds.
(b) On each payment date specified in the related prospectus supplement,
(1) payment of the trustee's fee, which will be a fixed fee in an
amount specified in the indenture, plus all expenses of the
trustee and indemnities payable to the trustee;
(2) payment of the monthly servicing fee, as described in (a)
above;
(3) payment of the administration fee in an amount specified in the
administration agreement between the issuer and PSE&G and
payment of the fees of the independent managers of the issuer;
(4) payment of current operating expenses of the issuer, (up to an
aggregate of $_______ for such payment date for all series);
(5) payment of the interest then due on the transition bonds and
any previously accrued but unpaid interest;
(6) payment of the principal then due on the transition bonds as
follows:
o any principal due and unpaid on any transition bonds, or,
on the final maturity date of any transition bonds, the
outstanding principal amount of such transition bonds; plus
o the unpaid principal amount of any transition bonds called
for redemption; plus
o the unpaid principal amount of the transition bonds upon an
acceleration following an event of default;
(7) payment of the principal then scheduled to be paid on the
transition bonds;
(8) payment of any amounts payable under any hedge agreement;
(9) payment of any remaining unpaid operating expenses and
indemnity amounts;
(10) replenishment of each capital subaccount, pro rata, up to the
required capital amount;
(11) funding of each overcollateralization subaccount, pro rata, up
to the required levels;
(12) release to the issuer of an amount equal to investment earnings
since the previous payment date on amounts in the capital
subaccount;
(13) allocation of the remainder, if any, to the reserve subaccount.
See also "THE INDENTURE-HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE
ALLOCATED" in this prospectus. A diagram depicting how the transition bond
charge will be allocated may be
found on page 10 of this prospectus.
CREDIT ENHANCEMENT AND ACCOUNTS
Unless otherwise specified in any prospectus supplement, the primary
form of credit enhancement for the transition bonds will be mandatory
periodic adjustments to the transition bond charge. The BPU is required to
make periodic adjustments to the transition bond charge upon petition by
PSE&G, as servicer, or the issuer, to ensure receipt of revenues sufficient
to cover all ongoing transaction costs, including
o expected principal amortization of the transition bonds;
o interest on the transition bonds; and
o other ongoinG transaction costs and expenses as specified in
items (1) through (11) above.
o for each series of transition bonds, amortization of each class
of such series according to the expected amortization schedule;
o for each series of transition bonds, the amount in the
overcollateralization subaccount for such series equaling the
required overcollateralization amount for such series;
o for each series of transition bonds, the capital subaccount for
such series equaling the required capital level for such
series; and
o the reserve subaccount equaling zero, by the earlier of (1) the
payment date immediately preceding the next adjustment and (2)
the expected final payment date.
The servicer will petition the BPU to approve such adjustments to
make up for any shortfall or excess in transition bond charge collections.
In this way, the transition bond charge collections will be designed to
cover the expected amortization schedule of payments of principal of the
transition bonds, interest on the transition bonds and other fees, costs
and expenses. The adjustments must be made annually through January 1, 2013
and quarterly commencing on November 1, 2013. Expressed generally, the most
likely primary causes of a shortfall or excess in transition bond charge
collections include the following situations:
o the actual electric consumption by PSE&G's customers varies
from PSE&G's forecasts;
o the actual rate of collection of billed electric charges varies
from PSE&G's expected rate of collection.
See "RISK FACTORS-SERVICING RISKS" in this prospectus. The transition bond
charge collections will fund the collection account and various subaccounts
as set forth below.
Collection Account - Under the indenture, the trustee will hold a single
collection account, divided into various subaccounts, some of which may be
series specific and some of which may be held for all series of transition
bonds. The primary subaccounts for credit enhancement purposes are:
(1) Capital Subaccount - An amount specified in the prospectus
supplement for each series of transition bonds will be
deposited into such series' capital subaccount on the date of
issuance of that series. Any shortfall in the capital
subaccount for an existing series will be replenished by
adjustments to the transition bond charge.
(2) Overcollateralization Subaccount - The prospectus supplement
for each series of transition bonds will specify a funding
level for such series' overcollateralization subaccount. That
amount will be funded over the term of the transition bonds.
(3) Reserve Subaccount - Any excess amount of transition bond
charge collections and investment earnings, other than earnings
on the capital subaccount, after payments have been made on a
payment date, will be held in the reserve subaccount for all
series of transition bonds.
Each of the capital subaccount and the overcollateralization
subaccount for each series will be available to make payments for such
series on each payment date and other amounts allocable to such series
through item (b)(7) above under "Priority of Distributions" for such
series. The reserve subaccount will be available to make payments for all
series on each payment date and other amounts through item (b)(8) above and
for items (10) and (11) for all series. To the extent that amounts on
deposit in the reserve subaccount are needed for more than one series, but
are insufficient, the amounts on deposit will be allocated to each series,
in proportion to the outstanding principal amount of such series.
Additional forms of credit enhancement, if any, for each series will
be specified in the related prospectus supplement. It is not anticipated
that there will be any additional third party credit enhancement, such as
letters of credit or insurance, for any series. Credit enhancement for the
transition bonds is intended to protect you against losses or delays in
scheduled payments on your transition bonds.
STATE PLEDGE
Under the Competition Act, the State of New Jersey pledges and agrees
with the holders of the transition bonds and with the issuer not to limit,
alter or impair the bondable transition property or the other rights vested
in an electric public utility or an assignee or pledgee of the utility or
any financing entity, such as the issuer, or vested in the holders of any
transition bonds pursuant to the bondable stranded cost rate order until
the transition bonds are fully paid and discharged. In addition, the State
will not in any way limit, alter, impair or reduce the value or amount of
the bondable transition property approved by a bondable stranded cost rate
order except as contemplated by the periodic adjustments to the transition
bond charge.
The State of New Jersey may not be required to adhere to its pledge
if its actions to the contrary were a reasonable exercise of the State of
New Jersey's sovereign powers and of a character appropriate to the public
purpose so as to justify such action. However, there is no existing case
law addressing such exercise of the State of New Jersey's sovereign powers
with respect to transition bonds. Alternatively, the State of New Jersey
may not be required to adhere to its pledge if it paid just compensation to
transition bondholders. There is also no existing case law addressing the
issue of just compensation in the context of transition bonds.
[GRAPHIC OMITTED]
PAYMENTS OF INTEREST AND PRINCIPAL
Interest on each class of transition bonds will accrue at the
interest rate specified in the related prospectus supplement. On each
payment date, the trustee will distribute interest accrued on each class of
transition bonds and the scheduled principal payment for such class, if
any, to the extent funds are available therefor, until the outstanding
principal balance of such class has been reduced to zero.
Failure to pay the entire outstanding amount of the transition bonds
of any class or series by the expected final payment date will not result
in a default with respect to that class or series until the final maturity
date for the class or series. The expected final payment date and the final
maturity date of each series and class of transition bonds are specified in
the related prospectus supplement.
OPTIONAL REDEMPTION
Provisions for optional redemption of the transition bonds, if any,
are specified in the related prospectus supplement.
PAYMENT DATES AND RECORD DATES
The payment dates and record dates for each series of transition
bonds are specified in the related prospectus supplement.
MATERIAL INCOME TAX CONSIDERATIONS
In the opinion of Skadden, Arps, Slate, Meagher & Flom, for federal
income tax purposes, and in the opinion of [ ] for New Jersey state income
tax purposes, the transition bonds will constitute obligations of PSE&G.
The issuer and PSE&G have received a private letter ruling from the
Internal Revenue Service regarding the federal income tax aspects of the
transactions described above. Tax counsel have relied on that ruling in
rendering their opinion that transition bonds will be treated as debt of
PSE&G. If you purchase a transition bond, you agree to treat it as debt of
PSE&G for tax purposes.
ERISA CONSIDERATIONS
Pension plans and other investors subject to ERISA may acquire the
transition bonds subject to specified conditions. The acquisition and
holding of the transition bonds could be treated as an indirect prohibited
transaction under ERISA. Accordingly, by purchasing the transition bonds,
each investor purchasing on behalf of a pension plan will be deemed to
certify that the purchase and subsequent holding of the transition bonds
would be exempt from the prohibited transaction rules of ERISA. For further
information regarding the application of ERISA, see "ERISA CONSIDERATIONS"
in the prospectus.
REPORTS TO HOLDERS OF THE TRANSITION BONDS
With respect to each series of transition bonds, on or prior to each
payment date, the trustee will deliver a statement prepared by the trustee
to each transition bondholder of that series. This statement will include,
to the extent applicable, the following information, as well as any other
information so specified in the related supplemental indenture, as to the
transition bonds of that series with respect to that payment date or the
period since the previous payment date:
1. the amount to be paid to transition bondholders of that series
and class as principal;
2. the amount to be paid to transition bondholders of that series
and class as interest;
3. the projected transition bond balance and the actual transition
bond balance for that series and class as of that payment date;
4. the amount on deposit in the overcollateralization subaccount
and the scheduled overcollateralization level, as of that
payment date;
5. the amount on deposit in the capital subaccount as of that
payment date; and
6. the amount, if any, on deposit in the reserve subaccount as of
that payment date.
RISK FACTORS
You should consider the following risk factors in deciding whether to
purchase transition bonds.
TRANSITION BONDHOLDERS MAY EXPERIENCE PAYMENT DELAYS OR LOSSES AS A RESULT
OF THE LIMITED SOURCES OF PAYMENT FOR THE TRANSITION BONDS AND LIMITED
CREDIT ENHANCEMENT
You may suffer payment delays or losses on your transition bonds if
the assets of the issuer are insufficient to pay the principal amount of
the transition bonds in full. The only source of funds for payments on the
transition bonds will be the assets of the issuer. These assets are limited
to:
o the bondable transition property including the right to collect
the transition bond charge and to adjust the transition bond
charge at least annually;
o the funds on deposit in the trust accounts held by the trustee;
and
o contractual rights under various contracts.
The transition bonds will not be insured or guaranteed by PSE&G,
including in its capacity as servicer, or by its parent, Public Service
Enterprise Group Incorporated, any of its affiliates, the trustee or any
other person or entity. Furthermore, it is not anticipated that the
transition bonds will have the benefit of any liquidity facility or of any
third-party credit enhancement, such as letters of credit or insurance.
Thus, you must rely for payment of the transition bonds solely upon
collections of the transition bond charge, funds on deposit in the trust
accounts held by the trustee and any other credit enhancement described in
the related prospectus supplement. See "PSE&G TRANSITION FUNDING LLC, THE
ISSUER" in this prospectus.
JUDICIAL, LEGISLATIVE OR REGULATORY ACTION THAT MAY ADVERSELY
AFFECT YOUR INVESTMENT
THE LAW WHICH UNDERPINS THE TRANSITION BONDS MAY BE INVALIDATED
The bondable transition property is the creation of the Competition
Act and a financing order issued by the BPU pursuant to the Competition
Act. The Competition Act was adopted in February 1999. PSE&G is the first
utility to issue transition bonds pursuant to the Competition Act. A court
decision or a federal or state law might seek to overturn either the
Competition Act or the BPU financing order. Because the transition bonds
are a creation of statute, any alteration affecting the validity of the
relevant underlying legislative provisions would directly impact the
transition bonds. For example, the provisions which create bondable
transition property as existing property may be invalidated. This would
eliminate the validity of the assets securing the transition bonds. As
another example, the provisions which allow for the transition bond charge
adjustment process may be invalidated. This would prevent the servicer from
ensuring that the issuer has sufficient funds for the scheduled payments on
the transition bonds. Similar legislation in other states has been
challenged but not overturned.
There is uncertainty associated with investing in bonds payable from
an asset which depends for its existence on recently enacted legislation
because of an absence of any judicial or regulatory experience implementing
and interpreting the legislation. Since the enactment of the Competition
Act in February 1999, there has been no lawsuit which has challenged its
validity or the validity of the BPU financing order. A future lawsuit may
yet be filed and may be successful. However, certain of the interested
parties have resolved some of the issues which could arise under the
Competition Act to their satisfaction by entering into a "stipulation"
filed with the BPU. See "PSE&G'S RESTRUCTURING."
If a court were to determine that the relevant provisions of the
Competition Act or the BPU financing order are unlawful, invalid or
unenforceable in whole or in part, it could adversely affect the validity
of the transition bonds, the bondable transition property or the issuer's
ability to make distributions on the transition bonds, and may not trigger
any requirement for PSE&G to indemnify you. In that case, you could suffer
a loss on your investment in the transition bonds.
Electricity generation deregulation laws similar to the Competition
Act have been enacted in other states, including Pennsylvania, California,
Illinois, Massachusetts and Montana. The validity of similar legislation in
other states has been upheld in those states where judicial challenges were
made. While the issuer is not aware of any significant challenges to
similar legislation currently pending in other states, a court might yet
overturn a similar statute in another state in response to a future claim.
Such a decision would not automatically invalidate the Competition Act or
the related BPU financing order, but it might give rise to a challenge to
the Competition Act. Therefore, legal activity in other states may
indirectly affect the value of your investment.
In Pennsylvania, three lawsuits have challenged the validity of state
legislation similar to the Competition Act. Two of these alleged that the
legislation was not validly enacted by the Pennsylvania legislature. A
Pennsylvania court has rejected these claims. The court's decisions in
those cases have not been appealed and the period for filing appeals has
lapsed. The third law suit asserted that the legislative provisions that
allowed for the recovery of transition bond charge violated the Commerce
Clause of the U.S. Constitution. The Pennsylvania courts rejected that
claim, and a petition that the U.S. Supreme Court review the case was
denied.
In California, a consumer advocacy group and others filed a petition
to the California Supreme Court asking that the court suspend the
implementation of the state's Public Utility Commission's decision, which,
among other items, allowed for the recovery of a utility's stranded costs.
The Supreme Court denied this petition. Various consumer groups then filed
a voter initiative which, among other items, would have prohibited the
collection of customer charges to pay for interest and principal for debt
instruments which were backed by the recovery of a utility's stranded
costs. In November of 1998, approximately 73% of the total votes cast were
voted against the proposition. Although consumer groups have recently
issued press releases threatening legal action, no other legal action has
taken place which threaten the recovery of stranded costs in California.
In Massachusetts, a consumer advocacy group filed a voter initiative
which would have repealed the Commonwealth of Massachusetts' electricity
deregulation law. This law includes a provision allowing utilities to
recover stranded costs from consumers. In November of 1998, approximately
65% of the total votes cast were voted to keep the deregulation law. No
other legal action has taken place which threatens the recovery of stranded
costs in Massachusetts.
In Illinois and Montana, there has been no legal activity which
challenged the recovery of stranded costs.
THE COMPETITION ACT MAY BE OVERTURNED BY THE FEDERAL GOVERNMENT WITHOUT FULL
COMPENSATION
At least one bill was introduced in the 105th Congress prohibiting
the recovery of stranded costs, and this prohibition could negate the
existence of bondable transition property. The 105th Congress adjourned
without taking any further action on that bill. As of the date hereof, no
member of Congress had introduced a bill in the 106th Congress that would
affect the existence or value of PSE&G's bondable transition property or
the imposition of the transition bond charge. No prediction can be made as
to whether any future bills, that prohibit the recovery of stranded costs,
or securitized financing for the recovery of these costs, will become law
or, if they become law, what their final form or effect will be. There is
no assurance that the courts would consider this preemption a "taking" from
the transition bondholders. Moreover, even if this preemption of the
Competition Act and/or the BPU financing order by the federal government
were considered a "taking" under the U.S. Constitution for which the
government had to pay the estimated market value of the transferred
bondable transition property at the time of the taking, there is no
assurance that this compensation would be sufficient to pay the full amount
of principal of and interest on the transition bonds or to pay such amounts
on a timely basis.
FUTURE STATE LEGISLATIVE ACTION MAY INVALIDATE THE TRANSITION BONDS OR THEIR
UNDERLYING ASSETS
Unlike California, Massachusetts and some other states, the citizens
of the State of New Jersey do not have the constitutional right to adopt or
revise laws by initiative or referendum. Thus the Competition Act cannot be
amended or repealed by the electorate.
Under the Competition Act, the State of New Jersey has pledged not to
diminish the value of the transition bond property. For a description of
this pledge, see "THE COMPETITION ACT-PSE&G AND OTHER UTILITIES MAY
SECURITIZE STRANDED COSTS" in this prospectus. Despite this pledge, the
legislature of the State of New Jersey may attempt in the future to repeal
or amend the Competition Act in a manner which might limit or alter the
bondable transition property so as to reduce its value.
In the opinion of Skadden, Arps, Slate, Meagher & Flom LLP, counsel
to PSE&G, under the contract clauses of the United States and New Jersey
constitutions, the State of New Jersey could not repeal or amend the
Competition Act or take any other action that substantially impairs the
rights of the transition bondholders, unless this action is a reasonable
exercise of the State of New Jersey's sovereign powers and of a character
appropriate to the public purpose justifying this action. To date, no cases
addressing these issues in the context of transition bonds have been
decided. There have been cases in which courts have applied the contract
clause of the United States Constitution and parallel state constitutional
provisions to strike down legislation, reducing or eliminating taxes or
public charges which supported bonds issued by public instrumentalities, or
otherwise reducing or eliminating the security for the bonds. Based upon
case law, in the opinion of Skadden, Arps, Slate, Meagher & Flom LLP it
would appear unlikely that the State of New Jersey could limit, alter,
impair or reduce the value or amount of the bondable transition property
which would substantially impair the rights of transition bondholders,
unless the action is reasonable and appropriate to further a legitimate
public purpose.
Moreover, in the opinion of Skadden, Arps, Slate, Meagher & Flom LLP,
under the taking clauses of the United States and New Jersey Constitutions,
the State of New Jersey could not repeal or amend the Competition Act (by
way of legislative process) or take any action in contravention of its
pledge and agreement (described above) without paying just compensation to
the transition bondholders, as determined by a court of competent
jurisdiction, if doing so would constitute a permanent appropriation of the
property interest of transition bondholders in the bondable transition
property and deprive the transition bondholders of their reasonable
expectations arising from their investments in the transition bonds. There
is no assurance, however, that, even if a court were to award just
compensation, it would be sufficient to pay the full amount of principal of
and interest on the transition bonds.
There can be no assurance that a repeal of or amendment to the
Competition Act will not be sought or adopted or that any action by the
State of New Jersey may not occur, any of which might constitute a
violation of the State of New Jersey's pledge and agreement with the
transition bondholders. In any event, costly and time-consuming litigation
might ensue. Any litigation might adversely affect the price and liquidity
of the transition bonds and the dates of payments of interest on and
principal thereof and, accordingly, the weighted average lives thereof.
Moreover, given the lack of judicial precedent directly on point, and the
novelty of the security for the transition bondholders, the outcome of any
litigation cannot be predicted with certainty, and accordingly, transition
bondholders could incur a loss of their investment.
PSE&G will not indemnify you for any changes in the law that may
affect the value of your transition bonds.
THE BPU MAY TAKE ACTION WHICH REDUCES THE VALUE OF THE TRANSITION BONDS
Pursuant to the Competition Act, the BPU financing order issued to
PSE&G is irrevocable upon issuance and the BPU may not directly or
indirectly, by any subsequent action, rescind or amend the BPU financing
order or reduce or impair the amount of bondable stranded costs authorized
under the BPU financing order. The BPU nevertheless might attempt to revise
or rescind any of its regulations or orders in ways that ultimately have an
adverse impact upon the bondable transition property or the transition bond
charge. Apart from the terms of the BPU financing order, the BPU retains
the power to adopt, revise or rescind rules or regulations affecting PSE&G
or a successor electric public utility. Any new or amended regulations or
orders by the BPU, for example, could affect the ability of the servicer to
collect the transition bond charge on a full and timely basis. PSE&G has
agreed to take legal or administrative actions, including instituting and
provoking legal actions, as may be reasonably necessary to block or
overturn any attempts to cause a repeal, modification or supplement to the
Competition Act, the BPU financing order or the bondable transition
property. PSE&G has also agreed to resist proceedings of third parties,
which, if successful, would result in a breach of its representations
concerning the bondable transition property, the BPU financing order or the
Competition Act. See "THE SALE AGREEMENT" in this prospectus. However,
there is no assurance that PSE&G would be able to take this action or that
any action PSE&G is able to take would be successful. Future BPU
regulations or orders may affect the rating of the transition bonds, their
price or the rate of transition bond charge collections and, accordingly,
the amortization of transition bonds and their weighted average lives. As a
result, transition bondholders could suffer a loss of their investment.
PSE&G, as servicer, is required to file with the BPU, on behalf of
the issuer, periodic adjustments of the transition bond charge. These
adjustments are intended to provide, among other things, for timely payment
of the transition bonds. The BPU may challenge PSE&G's calculation of its
proposed adjustments which may cause delay or refuse to permit an
adjustment to take effect on the grounds that the adjustment contains a
manifest error. Under the BPU financing order, manifest error means an
arithmetic error evident on the face of the filing. Any such delay in the
implementation of the adjustment could cause a delay in the payments on the
transition bonds.
SERVICING RISKS
INACCURATE FORECASTING OR UNANTICIPATED DELINQUENCIES COULD RESULT IN
INSUFFICIENT FUNDS TO MAKE SCHEDULED PAYMENTS ON THE TRANSITION BONDS.
Because the transition bond charge is assessed based on kilowatt
hours of electricity consumed by customers, a shortfall of payments arising
from the transition bond charge could result if the servicer inaccurately
forecasts electricity consumption or underestimates customer delinquencies
or charge-offs when setting the transition bond charge. A shortfall in
transition bond charge collections could result in shortfalls in payments
of interest on the transition bonds and of principal of the transition
bonds not being paid according to the expected amortization schedule,
lengthening the weighted average life of the transition bonds, or payments
of principal and interest not being made at all.
Inaccurate forecasting of electricity consumption by the servicer
could result from, among other things:
o warmer winters or cooler summers, resulting in less electricity
consumption than forecasted;
o general economic conditions being worse than expected, causing
customers to migrate from PSE&G's service territory or reduce
their electricity consumption;
o the occurrence of a natural disaster, such as a hurricane or
blizzard, unexpectedly disrupting electrical service and
reducing consumption;
o problems with energy generation, transmission or distribution
resulting from a change in the market structure of the electric
industry;
o large customers ceasing business or departing PSE&G's service
territory;
o customers consuming less electricity because of economic or
operational difficulties associated with the year 2000;
o customers consuming less electricity because of increased
conservation efforts; or
o large customers switching to self-generation of electric power
without being required to pay transition bond charges under the
Competition Act. See "THE COMPETITION ACT."
Inaccurate forecasting of delinquencies or charge-offs by the
servicer could result from, among things:
o unexpected deterioration of the economy or the occurrence of a
natural disaster, causing greater charge-offs than expected or
forcing PSE&G's or a successor electric public utility to grant
additional payment relief to more customers;
o unexpected increase in delinquencies due to consumers'
financial hardship associated with the year 2000;
o a change in law that makes it more difficult for PSE&G's or a
successor electric public utility to disconnect nonpaying
customers, or that requires PSE&G's or a successor distribution
company to apply more lenient credit standards in accepting
customers; or
o the introduction into the energy markets of less creditworthy
third party energy suppliers who collect payments arising from
the transition bond charge, but who fail to remit customer
charges in a timely manner. See "--IT MAY BE MORe DIFFICULT TO
COLLECT THE TRANSITION BOND CHARGE FROM THIRD PARTIES THAN FROM
PSE&G'S RETAIL CUSTOMERS."
UNCERTAINTIES ASSOCIATED WITH COLLECTING THE TRANSITION BOND CHARGE AND
UNPREDICTABILITY OF A DEREGULATED ELECTRICITY MARKET
PSE&G had not previously calculated a transition bond charge for
customers, nor made all of the associated calculations and predictions
which are inherent in such calculation, before the calculations required in
connection with the BPU financing order and its initial issuance of
transition bonds. The predictions are based on primarily historical
performance of customer and energy usage and collection of payments for
which PSE&G has records available. These usage and collection records,
however, do not reflect customers' payment patterns or energy usage in a
competitive market as competition is being introduced now in New Jersey for
the first time. These records also do not reflect any experience with
consolidated billing by third party suppliers. Because that kind of billing
is new in New Jersey, there are potentially unforeseen factors in that
billing which may impact on collection of payments. Therefore, the records
which PSE&G has to date may have limited value in calculating the initial
transition bond charge and the proposed transaction bond charge
adjustments. Furthermore, the servicer does not have any experience
administering the transition bond charge on behalf of an independent
issuer. Risks are associated with the servicer's inexperience in
calculating, billing and collecting the transition bond charge and in
managing customer payments on behalf of the issuer.
YOUR INVESTMENT RELIES ON PSE&G CONTINUING TO ACT AS SERVICER OF THE BONDABLE
TRANSITION PROPERTY
PSE&G, as servicer, will be responsible for billing and collecting
the transition bond charge and for filing with the BPU to adjust this
charge. If PSE&G ceased servicing the bondable transition property, it
might be hard to find a successor servicer. Upon a servicer default based
upon the commencement of a case by or against the servicer under the United
States Bankruptcy Code or similar laws, the trustee and the issuer may be
prevented from effecting a transfer of servicing. Upon a servicer default
because of a failure to make required remittances, the issuer or the
trustee would have the right to apply to the BPU for sequestration and
payment of revenues arising from the bondable transition property. However
federal bankruptcy law may prevent the BPU from issuing or enforcing this
order. In either case of a servicer default, payments on the transition
bonds may be suspended. See "RISK FACTORS--THE RISKS ASSOCIATED WITH
POTENTIAL BANKRUPTCY PROCEEDINGS" in this prospectus.
BILLING AND COLLECTION PRACTICES MAY REDUCE THE AMOUNT OF FUNDS AVAILABLE
FOR PAYMENTS ON THE TRANSITION BONDS
The methodology of determining the amount of the transition bond
charge the issuer may impose on each customer is specified in the BPU
financing order. Thus, PSE&G cannot change this methodology. However,
PSE&G, as servicer, may set its own billing and collection arrangements
with each customer. For example, to recover part of an outstanding
electricity bill, PSE&G may agree to extend a customer's payment schedule
or to write off the remaining portion of the bill. Also, PSE&G, or a
successor to PSE&G as servicer, may change billing and collection
practices. Any change to billing and collection practices may have an
adverse or unforeseen impact on the timing and amount of customer payments
and may reduce the amount of transition bond charge collections and thereby
limit the issuer's ability to make scheduled payments on the transition
bonds. See "THE SELLER AND SERVICER OF THE BONDABLE TRANSITION
PROPERTY--HOW PSE&G FORECASTS THE NUMBER OF CUSTOMERS AND THE AMOUNT OF
ELECTRICITY USAGE" in this prospectus. Similarly, the BPU may require
changes to these practices. Any changes in billing and collection
regulation might adversely affect the billing terms and the terms of
remittances by third party suppliers to the servicer or make it more
difficult for the servicer to collect the transition bond charge. These
changes may adversely affect the value of the transition bonds and their
amortization and, accordingly, their weighted average lives. See "THE BPU
FINANCING ORDER AND THE TRANSITION BOND CHARGE" in this prospectus.
IT MAY BE DIFFICULT TO COLLECT THE TRANSITION BOND CHARGE FROM THIRD
PARTIES WHO PROVIDE ELECTRICITY TO PSE&G'S CUSTOMERS
In the future, customers may pay the transition bond charge to third
parties who supply them with electric power. These third parties are
obliged to forward the charge to PSE&G, as servicer. These entities must
pay PSE&G the transition bond charge even if they do not collect the charge
from retail customers. PSE&G will have limited rights to collect the
transition bond charge directly from those customers who receive their
electricity bills from a third party. If many customers within PSE&G's
service territory elect to receive their electricity bills from third
parties, the issuer may have to rely on a relatively small number of
entities for the collection of the bulk of the transition bond charge.
Third parties might use more permissive standards in bill collection and
credit appraisal than PSE&G uses towards its retail customers or might be
less effective in billing and collecting. As a result, those entities may
not be as successful in collecting the transition bond charge as PSE&G
anticipated when setting the transition bond charge. A default by a third
party which collects from a large number of retail customers would have a
greater impact than a default by a single retail customer and therefore
have a greater impact on transition bond charge collections and, in turn,
on the issuer's ability to make timely payments on the transition bonds.
Neither the seller nor the servicer will pay any shortfalls resulting
from the failure of any third party supplier to forward transition bond
charge collections to PSE&G, as servicer. There can be no assurance that
third party suppliers will use the same customer credit standards as the
servicer. It is possible that third party suppliers may have a higher rate
of delinquencies and write-offs than PSE&G. There can be no assurance that
the servicer will be able to mitigate credit risks relating to these third
party suppliers to the same extent to which it mitigates the risks relating
to its customers. The adjustment mechanism, the deposits required from
certain customers as a prerequisite to service and any other credit
enhancement will be available to compensate for a failure by a third party
collector to pay the transition bond charge over to the issuer. However,
the amount of credit enhancement funds may not be sufficient to prevent a
delay in payments on the transition bonds.
PSE&G'S CUSTOMER PAYMENTS MAY DECLINE DUE TO CONFUSION
The transition bond charge is being introduced to customers for the
first time. Any change in customer billing and payment arrangements may
result in customer confusion and the misdirection or delay of payments,
which could have the effect of causing delays in transition bond charge
collections. Any problems arising from new and untested systems or any lack
of experience on the part of the third party suppliers or other third
parties with customer billing and collections could also cause delays in
billing and collecting the transition bond charge. These delays could
result in shortfalls in transition bond charge collections and, therefore,
reduce the ability of the issuer to make timely payments on the transition
bonds.
POTENTIAL DELAYS IN PAYMENTS ON TRANSITION BONDS DUE TO POTENTIAL COMPUTER
PROGRAM PROBLEMS ASSOCIATED WITH THE YEAR 2000
Principal and interest payments on the transition bonds could be
delayed if PSE&G, in its capacity as servicer, the trustee or a third
party, such as DTC, CEDEL or Euroclear, on whom transition bond payments
depend, experiences problems in its computer programs or in the computer
programs relating to the year 2000 of those vendors on whom they rely. Many
existing computer programs use only two digits to identify a year. These
programs could fail or produce erroneous results during the transition from
the year 1999 to the year 2000 and afterwards. PSE&G has evaluated the
impact of preparing its systems for the year 2000. It has identified areas
of potential impact and is implementing conversion efforts. As of June 30,
1999, 99% of PSE&G's critical systems were year 2000 ready, with the
exception of certain nuclear facilities. All critical systems are expected
to be year 2000 ready by the end of November, 1999.
PSE&G, or a third party on whom PSE&G relies for collection of the
transition bond charge, may not have a computer system that is year 2000
compliant by January 1, 2000. If this occurs, PSE&G's ability to service
the bondable transition property may be materially and adversely affected.
If DTC, CEDEL or Euroclear experiences problems with its computer programs,
whether due to its own malfunctioning or that of associated parties, the
issuer's ability to make scheduled payments on the transition bonds may be
adversely affected. The operation of the automated programs of such
clearing-houses is crucial to timely payments on the transition bonds. In
addition, the trustee may not have a computer system that is year 2000
compliant by January 1, 2000. If this occurs, the trustee's ability to make
distributions on the transition bonds may be materially and adversely
affected. See "THE SELLER AND SERVICER OF THE BONDABLE TRANSITION
PROPERTY--PSE&G'S EFFORTS TO DEAL WITH THE YEAR 2000 COMPUTER ISSUE" and
"THE TRANSITION BONDS--TRANSITION BONDS WILL BE ISSUED In BOOK-ENTRY FORM"
in this prospectus.
PSE&G's customers may not all be year 2000 compliant by January 1,
2000. Some customers may experience financial difficulty because of
operational problems, whether stemming from their own systems or those of
their customers and service providers. Such difficulties may lead to
increased delinquencies and even to a reduction of the customer sales
base.
INABILITY TO TERMINATE SERVICE TO CERTAIN DELINQUENT CUSTOMERS IN WINTER
A winter moratorium prevents PSE&G from terminating service to
certain delinquent residential customers without special approval from the
BPU from November 15 of each year until at least March 15 of the following
year. As a result, PSE&G must provide service to such customers during this
period without recouping the transition bond charge from such customers.
This reduces the amount of transition bond charge collections available for
payments on the transition bonds, although the expected associated
reduction in payments would be factored into the transition bond charge
adjustment. See "THE SELLER AND SERVICER OF THE BONDABLE TRANSITION
PROPERTY--CREDIT POLICY; BILLING; COLLECTIONS; TERMINATION OF SERVICE" in
this prospectus.
THE RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY PROCEEDINGS
PSE&G WILL COMMINGLE THE TRANSITION BOND CHARGE WITH OTHER REVENUES WHICH
MAY OBSTRUCT ACCESS TO THE ISSUER'S FUNDS IN CASE OF BANKRUPTCY OF PSE&G
PSE&G will not segregate the transition bond charge from the other
funds it collects from its customers. The transition bond charge will be
segregated only after PSE&G pays them to the trustee. PSE&G will be
permitted to remit collections on a monthly basis only if:
o at any time PSE&G has the requisite credit ratings from the
rating agencies or
o PSE&G provides credit enhancement satisfactory to the rating
agencies to assure remittance by PSE&G to the trustee of the
transition bond charge it collects.
Otherwise, PSE&G will be required to remit collections within two
business days of receipt. Despite these requirements, PSE&G might fail to
pay the full amount of the transition bond charges to the trustee or might
fail to do so on a timely basis. This failure could materially
reduce the value of your investment.
The Competition Act provides that the rights of the issuer to the
bondable transition property are not affected by the commingling of these
funds with PSE&G's other funds. In a bankruptcy of PSE&G, however, a
bankruptcy court might rule that federal bankruptcy law takes precedence
over the Competition Act and does not recognize the right of the issuer to
collections of the transition bond charge that are commingled with other
funds of PSE&G as of the date of bankruptcy. If so, the collections of the
transition bond charge held by PSE&G as of the date of bankruptcy would not
be available to pay amounts owing on the transition bonds. In this case,
the issuer would have a general unsecured claim against PSE&G for those
amounts. This scenario could cause material delays in payment or an
inability of the issuer to gain access to the funds required for scheduled
payments on the transition bonds.
BANKRUPTCY OF PSE&G COULD RESULT IN LOSSES OR DELAYS IN PAYMENTS ON THE
TRANSITION BONDS
The Competition Act and the BPU financing order provide that as a
matter of New Jersey state law
o bondable transition property constitutes presently existing
property of PSE&G for all purposes;
o PSE&G may sell, assign and otherwise transfer that property and
PSE&G or the issuer may pledge or grant a security interest in
the property as collateral for transition bonds; and
o a transfer of the bondable transition property from PSE&G to
the issuer is a sale or other absolute transfer of the bondable
transition property, not a pledge of the bondable transition
property to secure a financing by PSE&G.
See "THE COMPETITION ACT" in this prospectus. These three provisions are
important to maintaining payments on the transition bonds in accordance
with their terms during any bankruptcy of PSE&G. In addition, the
transaction has been structured with the objective of keeping the issuer
separate from PSE&G in the event of a bankruptcy of PSE&G.
A bankruptcy court generally follows state property law on issues
such as those addressed by the three provisions described above. However, a
bankruptcy court has authority not to follow state law if it determines
that the state law is contrary to a paramount federal bankruptcy policy or
interest. If a bankruptcy court in a PSE&G bankruptcy refused to enforce
one or more of the state property law provisions described above for this
reason, the effect of this decision on you as a transition bondholder would
be similar to the treatment you would receive in a PSE&G bankruptcy if the
transition bonds had been issued directly by PSE&G. A decision by the
bankruptcy court that, despite the separateness of PSE&G and the issuer,
the two companies should be consolidated, would have a similar effect on
you as a transition bondholder. That treatment could cause material delays
in payment of, or losses on, your transition bonds and could materially
reduce the value of your investment. For example:
o the trustee could be prevented from exercising any remedies
against PSE&G on your behalf, from recovering funds to repay
the transition bonds or from replacing PSE&G as servicer,
without permission from the bankruptcy court;
o the bankruptcy court could order the trustee to exchange the
bondable transition property for other property, which might be
of lower value;
o tax or other government liens on PSE&G's property that arose
after the transfer of the bondable transition property to the
issuer might nevertheless have priority over the trustee's lien
and might be paid from transition bond charge collections
before payments on the transition bonds;
o the trustee's lien might not be properly perfected in bondable
transition property collections that were commingled with other
funds PSE&G collects from its customers as of the date of
PSE&G's bankruptcy, or might not be properly perfected in all
of the bondable transition property, and the lien could
therefore be set aside in the bankruptcy, with the result that
the transition bonds would represent only general unsecured
claims against PSE&G;
o the bankruptcy court might rule that the transition bond charge
collected by the issuer should be used to pay a portion of the
cost of providing electric service; or
o the bankruptcy court might rule that the remedy provisions of
the bondable transition property sale agreement are
unenforceable, leaving the issuer with a claim of actual
damages against PSE&G, which may be difficult to prove.
A BPU SEQUESTRATION ORDER FOR BONDABLE TRANSITION PROPERTY IN CASE OF
DEFAULT MIGHT NOT BE ENFORCEABLE IN BANKRUPTCY
If PSE&G defaults on its obligations as servicer, the Competition Act
allows the BPU or any court of competent jurisdiction to order the
sequestration and payment of all transition bond charge collections to the
transition bondholders. The Competition Act states that this BPU or court
order would be effective even if made while PSE&G or its successor is in
bankruptcy. However, federal bankruptcy law may prevent the BPU from
issuing or enforcing this order. The indenture requires the trustee to
request an order from the bankruptcy court to permit the BPU to issue and
enforce the order. However, the bankruptcy court may deny the request. In
this scenario, the issuer would lose access to the transition bond charge
collections and thereby lose its source of funds for scheduled payments on
the transition bonds.
OTHER RISKS ASSOCIATED WITH AN INVESTMENT IN THE TRANSITION BONDS
ABSENCE OF SECONDARY MARKET FOR TRANSITION BONDS COULD LIMIT YOUR ABILITY
TO RESELL TRANSITION BONDS
The underwriters for the transition bonds may assist in resales of
the transition bonds but they are not required to do so. A secondary market
for the transition bonds may not develop. If it does develop, it may not
continue or it may not be sufficiently liquid to allow you to resell any of
your transition bonds.
THE ISSUER MAY ISSUE ADDITIONAL SERIES OF TRANSITION BONDS WHOSE HOLDERS
HAVE CONFLICTING INTERESTS
The issuer may issue other series of transition bonds without your
prior review or approval. These series may include terms and provisions
which would be unique to that particular series. A new series of transition
bonds may not be issued if it would result in the credit ratings on any
outstanding series of transition bonds being reduced or withdrawn. See "THE
TRANSITION BONDS" and "THE INDENTURE" in this prospectus. In addition, some
matters may require the vote of the holders of all series and classes of
transition bonds. Your interests in these votes may conflict with the
interests of the transition bondholders of another series or of another
class. Thus, these votes could result in an outcome that is materially
unfavorable to you.
THE RATINGS HAVE A LIMITED FUNCTION AND THEY ARE NO INDICATION OF THE
EXPECTED RATE OF PAYMENT OF PRINCIPAL ON THE TRANSITION BONDS
The transition bonds will be rated by one or more established rating
agencies. The ratings merely analyze the probability that the issuer will
repay the total principal amount of the transition bonds at final maturity
and will make timely interest payments. The ratings do not assess the speed
at which the issuer will repay the principal of the transition bonds. Thus,
the issuer may repay the principal of your transition bonds earlier or
later than you expect, which may materially reduce the value of your
investment. A rating is not a recommendation to buy, sell or hold
transition bonds. The rating may change at any time. A rating agency has
the authority to revise or withdraw its bond rating based solely upon its
own judgment. See "RATINGS FOR THE TRANSITION BONDS" in this prospectus.
PSE&G'S OBLIGATION TO INDEMNIFY THE ISSUER FOR A BREACH OF A REPRESENTATION
OR WARRANTY MAY NOT BE SUFFICIENT TO PROTECT YOUR INVESTMENT
If PSE&G breaches a representation or warranty in the sale agreement,
it is obligated to indemnify the issuer and the trustee for any
liabilities, obligation, claims, actions, suit or payments resulting from
that breach, as well as any reasonable costs and expenses incurred. In
addition, PSE&G is obligated to indemnify the issuer and the trustee for
principal and interest on the transition bonds not paid when scheduled to
be paid in accordance with their terms and the amount of any deposits to
the issuer required to have been made which are not made when so required
as a result of a breach of a representation or warranty. However, the
amount of any indemnification paid by the servicer or the seller may not be
sufficient for you to recover all of your loss on the transition bonds. See
"THE SALE AGREEMENT - PSE&G'S OBLIGATION TO INDEMNIFY THE ISSUER AND THE
TRUSTEE AND TO TAKE LEGAL ACTION" in this prospectus.
FORWARD-LOOKING STATEMENTS
Some statements contained in this prospectus and the related
prospectus supplement concerning expectations, beliefs, plans, objectives,
goals, strategies, future events or performance and underlying assumptions
and other statements which are other than statements of historical facts,
are forward-looking statements within the meaning of the federal securities
laws. Although PSE&G and the issuer believe that the expectations and the
underlying assumptions reflected in these statements are reasonable, there
can be no assurance that these expectations will prove to have been
correct. The forward-looking statements involve a number of risks and
uncertainties and actual results may differ materially from the results
discussed in the forward-looking statements. The following are among the
important factors that could cause actual results to differ materially from
the forward-looking statements:
o state and federal legal or regulatory developments;
o national or regional economic conditions;
o market demand and prices for energy;
o weather variations affecting customer energy usage;
o the effect of continued electric industry restructuring;
o operating performance of PSE&G's facilities;
o the payment patterns of customers including the rate of
delinquencies and the accuracy of the collections curve; and
o system conditions (including actual results in achieving year
2000 compliance by PSE&G, its subsidiaries, affiliates,
customers, vendors and others).
Any forward-looking statements should be considered in light of these
important factors and in conjunction with PSE&G's other documents on file
with the SEC.
New factors that could cause actual results to differ materially from
those described in forward-looking statements emerge from time to time. It
is not possible for PSE&G or the issuer to predict all of these factors, or
the extent to which any factor or combination of factors may cause actual
results to differ from those contained in any forward-looking statement.
Any forward-looking statement speaks only as of the date on which the
statement is made and neither PSE&G nor the issuer undertakes any
obligation to update the information contained in the statement to reflect
subsequent developments or information.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
PSE&G, a wholly-owned subsidiary of Public Service Enterprise Group
Incorporated ("Enterprise"), is an operating electric and gas public
utility incorporated under the laws of the State of New Jersey. Enterprise
is an exempt public utility holding company under the Public Utility
Holding Company Act of 1935. PSE&G supplies electric and gas service in
areas of New Jersey, including its principal cities, where approximately
5.5 million people or about 70% of the State's population reside. This area
covers approximately 2,600 square miles and contains residential areas and
a diversified mix of commerce and industry. While PSE&G believes that it
has all the franchises and consents necessary for its electric and gas
transmission and distribution operations in the territory it serves, such
franchises are not exclusive. As of March 31, 1999, PSE&G's assets
comprised approximately 82% of Enterprise's consolidated assets.
The electric utility industry is undergoing fundamental
restructuring. Through the enactment of the Competition Act, the New Jersey
Legislature endeavours to lower energy costs and to allow New Jersey energy
customers to choose their electric power supplier. The Competition Act
deregulates the electric power generation market in order to promote
efficient energy service to consumers and to diversify the sources of
supply of electricity in the State. Therefore, the traditional retail
monopoly for electric power generation will be eliminated and competition
will be introduced to the electricity generation market. To this end, the
BPU is authorized to order electric utilities to separate their generation
facilities into a separate competitive business segment in order for the
generation of electricity to be subject to competition in a separate
market. Customers' bills will be unbundled into separate line items for
electric distribution, transmission and generation services, among others.
In a competitive electric generation market, the traditional electric
utility rate regulation will be replaced by a combination of modified
regulation and some competition.
In order to maintain the financial integrity of electric utilities in
the transition to competition, the Competition Act provides each electric
utility the opportunity to recover certain stranded costs associated with
generation-related assets through a transition bond charge and other
limited charges. PSE&G will recover the stranded costs related to the newly
introduced competition in electric power generation and other reasonably
incurred costs which are nonrecoverable in competitive markets, to the
extent permitted by the BPU. PSE&G'S fossil and nuclear fueled electric
generation plants which produce electric power and current are referred to
as generation related facilities. The high voltage electric lines and
related step up and step down transformers and substations which transmit
electric power and current at higher voltages and usually over longer
distances than distribution facilities are referred to as transmission
facilities . The lower voltage electric lines, transformers and substations
which interconnect with the high voltage transmission lines and distribute
the power and current to the end-use customers at lower voltage levels
consistent with the customers use are referred to as distribution
facilities." See "THE COMPETITION ACT" in this prospectus.
In compliance with the Competition Act, in the fourth quarter of
1999, PSE&G expects to sell all of its generation-related assets and
transfer all of its electric trading and wholesale electric marketing
business to PSEG Power, a Delaware limited liability company formed in 1999
as a wholly owned direct subsidiary of Enterprise.
Where to Find Information About PSE&G. PSE&G files periodic reports
with the SEC as required by the Exchange Act. Reports filed with the SEC
are available for inspection without charge at the public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at its regional offices located as follows: Chicago
Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; and New York Regional Office, 7 World Trade
Center, 13th Floor, New York, New York 10048. Copies of periodic reports
and exhibits thereto may be obtained at the above locations at prescribed
rates. Information filed with the SEC can also be inspected at the SEC site
on the World Wide Web at http://www.sec.gov PSE&G also provides information
through its website at http://www.pseg.com
How the Issuer Will Use the Proceeds of the Transition Bonds. The
issuer will use the entire net proceeds from the sale of the transition
bonds (estimated at $___) to purchase bondable transition property from
PSE&G as described under "THE SALE AGREEMENT" in this prospectus. As
required by the Competition Act, the BPU financing order issued by the BPU
on September 17, 1999 and the BPU restructuring order issued by the BPU on
August 24, 1999, referred to as the BPU restructuring order, PSE&G will
apply the proceeds from the sale to the retirement of outstanding debt and
equity securities in a manner which will not substantially alter PSE&G's
overall capital structure. PSE&G expects that approximately $650 to $950
million of the net proceeds will be applied to the redemption or purchase
of outstanding first mortgage bonds of PSE&G, although the amount and
timing of debt retirement has not been determined. The balance of the net
proceeds after retirement of debt will be used to reduce a combination of
outstanding common and preferred stock of PSE&G. PSE&G will make the final
decisions with respect to the use of proceeds on the basis of market
conditions and other factors existing at the relevant time.
THE COMPETITION ACT
The New Jersey Electric Discount and Energy Competition Act, referred
to as the Competition Act, signed into law in February 1999, provides,
among other things, for the restructuring of the electric utility industry
in New Jersey. The Competition Act requires the unbundling of electric
services into separate generation, transmission and distribution services
with open retail competition for generation services. While electric
utilities will continue to provide transmission and distribution services,
the Competition Act authorizes third party electric power suppliers
licensed by the BPU, referred to as third party suppliers, to provide
electric generation services to retail customers. Under the Competition
Act, third party suppliers are subject to some limited financial and other
requirements and some customer protection requirements, but are generally
not regulated by the BPU. Electric distribution and transmission services
will remain regulated.
Even with the enactment of the Competition Act, the BPU will continue
to regulate aspects of the electric industry in New Jersey with respect to
electric distribution companies. The BPU will also establish guidelines
governing customer billing and collection and metering and disclosure
requirements applicable to third party suppliers participating in the new
market in New Jersey.
RECOVERY OF STRANDED COSTS IS ALLOWED FOR PSE&G AND OTHER NEW JERSEY UTILITIES
The Competition Act allows utilities an opportunity to recover their
stranded costs. Stranded costs means the amount by which the net cost of
the electric public utility's electric generating assets or electric power
purchase contracts, as determined by the BPU, exceeds the market value of
those assets or contracts in a competitive supply marketplace and the costs
of buydowns or buyouts of power purchase contracts. The Competition Act
also permits the recovery of restructuring related costs which the BPU
approves as appropriate for recovery. As a mechanism to recover these
stranded costs, the Competition Act provides for the imposition and
collection of a transition bond charge on customers' bills. Because the
transition bond charge is a usage based charge based on access to the
utility's transmission and distribution system, the customers will be
assessed regardless of whether the customers purchase electricity from the
utility or a third party supplier.
The BPU restructuring order authorizes PSE&G to recover $2.940
billion of its net of tax stranded costs, of which $2.4 billion may be
recovered through securitization pursuant to the BPU financing order. The
BPU financing order authorizes PSE&G to recover up to $125 million of
additional related costs through securitization. The restructuring order
also authorizes the recovery of $540 million net of tax of generation
related stranded costs which will not be securitized. The stranded costs
which will not be securitized will be recovered through a non-bypassable
market transition charge imposed by PSE&G as of August 1, 1999 on
principally the same customer base from which PSE&G will collect the
transition bond charge. The Competition Act permits PSE&G to seek recovery
of additional stranded costs through either an additional market transition
charge or an additional securitized transition bond charge, authorized by
the BPU. PSE&G does not, however, anticipate applying for recovery of
additional stranded costs at this time. Moreover, the Competition Act
requires the BPU to review periodically any market transition charge used
to recover stranded costs. This is to ensure that the utility imposing the
charge will not collect charges which exceed its actual stranded costs. Any
periodic review of market transition charges will not affect transition
bond charges servicing transition bonds. See "PSE&G'S RESTRUCTURING" in
this prospectus.
PSE&G AND OTHER UTILITIES MAY SECURITIZE STRANDED COSTS
The Recovery of Stranded Costs May be Facilitated by the Issuance of
Transition Bonds. The Competition Act authorizes the BPU to issue "bondable
stranded cost rate orders" approving, among other things, the issuance of
transition bonds to recover bondable stranded costs and related expenses of
an electric public utility. A utility, a finance subsidiary of a utility or
a third-party assignee of a utility may issue transition bonds. Under the
Competition Act, proceeds of transition bonds are required to be used to
reduce the utility's stranded costs through the retirement of its debt or
equity, or both. Transition bonds are secured by and payable from bondable
transition property and may have an expected amortization schedule of up to
15 years. The BPU financing order allows the final legal maturity of the
transition bonds issued by the issuer to extend to 17 years from date of
issuance of the transition bonds.
The Competition Act contains a number of provisions designed to
facilitate the securitization of stranded costs and related expenses.
A Bondable Stranded Cost Rate Order is Irrevocable. Under the
Competition Act, bondable transition property is created by the issuance by
the BPU of a bondable stranded cost rate order, such as the BPU financing
order. The Competition Act provides that each bondable stranded cost rate
order, including the BPU financing order, will become irrevocable upon
issuance and effectiveness of the order. Upon the transfer of the bondable
transition property to an assignee, such as the issuer, and the receipt of
consideration for the sale of the transition bonds, the bondable stranded
cost rate order, the transition bond charge and the bondable transition
property become a vested, presently existing property right, vested ab
initio in the assignee.
Under the Competition Act, neither the BPU nor any other governmental
entity has the authority, directly or indirectly, legally or equitably, to
rescind, alter, repeal, modify or amend a bondable stranded cost rate
order, to revalue, re-evaluate or revise the amount of bondable stranded
costs, to determine that the transition bond charge or the revenues
required to recover bondable stranded costs are unjust or unreasonable, or
in any way to reduce or impair the value of bondable transition property,
nor will the amount of revenues from the transition bond charge be subject
to reduction, impairment, postponement or termination. In addition, under
the Competition Act, the State of New Jersey pledges and agrees with the
holders of the transition bonds, and with any assignee or financing entity,
such as the issuer, not to limit, alter or impair the bondable transition
property or the other rights vested in an electric public utility or any
assignee or pledgee of the utility or any financing entity or vested in the
holders of any transition bonds pursuant to the bondable stranded cost rate
order until the transition bonds are fully paid and discharged. In
addition, the State pledges and agrees in the Competition Act that it will
not in any way limit, alter, impair or reduce the value or amount of the
bondable transition property approved by the bondable stranded cost rate
order except as contemplated by the periodic adjustments to the transition
bond charge authorized by the Competition Act. See "--The Transition Bond
Charge is Adjusted Periodically" below. See also "--JUDICIAL, LEGISLATIVE
Or REGULATORY ACTION THAT MAY ADVERSELY AFFECT YOUR INVESTMENT" in this
prospectus. A bondable stranded cost rate order does not constitute a debt
or liability of the State, nor does it constitute a pledge of the full
faith and credit of the State. The issuance of transition bonds does not,
directly, indirectly or contingently, obligate the State to levy or pledge
any form of taxation or make any appropriation for their payment.
The Transition Bond Charge is Adjusted Periodically. The Competition
Act requires each bondable stranded costs order to provide for mandatory
adjustment of the transition bond charge, at least once a year, upon
petition of the electric public utility or its assignee or financing party.
Such adjustments are formula-based to ensure receipt of revenues sufficient
to provide for the full recovery of bondable stranded costs, including,
without limitation, the timely payment of the principal of, and interest
and acquisition or redemption premium on, the transition bonds in
accordance with the expected amortization schedule. PSE&G agrees in the
servicing agreement to file with the BPU each proposed adjustment
calculated in accordance with the formula.
Customers Cannot Avoid Paying the Transition Bond Charge. The
Competition Act provides that transition bond charge is "non-bypassable"
which means that the charge will be payable by retail consumers of
electricity within the utility's service territory who access a utility's
transmission and distribution system, even if those customers elect to
purchase electricity from a third party supplier. Also, if on-site
generation facilities that are connected to the utility's transmission and
distribution system produce power that is delivered to off-site retail
customers in New Jersey, the transition bond charge will apply to the sale
or delivery of that power. However, if consumers self-generate and are not
connected to the utility's transmission and distribution system, they will
not be obligated to pay the transition bond charge. If power from on-site
facilities is consumed by on-site consumers that are connected to the
utility's transmission and distribution system, the transition bond charge
will also not apply to that power unless the new on-site generation
facilities in the aggregate reduce the utility's energy distribution to
92.5% or below of its 1999 energy distribution. In that case, the
transition bond charge will be imposed on those on-site customers.
The Competition Act Provides a Procedure for Perfecting a Transfer of
Bondable Transition Property and for Perfecting the Transition Bonds' Lien
on Bondable Transition Property. The Competition Act provides procedures
for assuring that the transfer of the bondable transition property from
PSE&G to the issuer will be perfected under New Jersey law and that the
security interest granted by the issuer to the trustee in the bondable
transition property will be perfected under New Jersey law. The Competition
Act provides that a transfer of bondable transition property will be
perfected against any third party when:
o the BPU has issued its bondable stranded cost rate order with
respect to such bondable transaction property,
o the agreement to transfer the property has been executed and
delivered by the electric public utility or its assignee, and
o a financing statement with respect to the transfer has been
filed in accordance with the New Jersey Uniform Commercial
Code.
The Competition Act provides that security interests in the bondable
transition property are perfected by means of a separate filing under the
Uniform Commercial Code of New Jersey. Upon perfection, a security interest
under the Uniform Commercial Code attaches to bondable transition property,
whether or not the revenues or proceeds thereof have accrued. The
Competition Act provides that priority of security interests in bondable
transition property will not be defeated or adversely affected by:
o commingling of revenues received from transition bond charge
collections with other funds of the utility or its assignee or
o the periodic adjustment of the transition bond charge under the
Competition Act.
The Competition Act Characterizes the Transfer of Bondable Transition
Property as a Sale or Other Absolute Transfer. The Competition Act provides
that a transfer by the utility or an assignee of bondable transition
property will be treated as a sale or other absolute transfer of the
transferor's right, title and interest and not as a borrowing secured by
the bondable transition property, if the parties expressly state in
governing documents that a transfer is to be a sale or other absolute
transfer. The characterization of the transfer as a sale is not affected or
impaired by the fact that:
(a) the assignor retains or acquires a pari passu equity
interest in the bondable transition property or the fact that only a
portion of the bondable transition property is transferred;
(b) the assignor retains or acquires a subordinated equity
interest or other credit enhancement provisions or terms commensurate
with market practices;
(c) the electric public utility acts as collector or servicer
of the related transition bond charge;
(d) the assignor retains bare legal title to the bondable
transition property for servicing or supervising services and
collections relating to the bondable transition property; or
(e) the transfer is treated as a financing for Federal, state
or local tax purposes or financial accounting purposes.
See "RISK FACTORS--THE RISKS ASSOCIATED WITH POTENTIAL BANKRUPTCY
PROCEEDINGs" in this prospectus.
PSE&G'S RESTRUCTURING
The Stipulation and Restructuring Order. On March 17, 1999, PSE&G and
a number of other parties filed a stipulation with the BPU, detailing a
proposal for PSE&G's implementation of full customer choice under the
Competition Act. The parties to the stipulation agreed, among other things,
not to oppose a financing order to be issued by the BPU or the sale of
transition bonds to implement securitization in any judicial or regulatory
forum. An alternative joint proposal was submitted by the Division of the
Ratepayer Advocate in opposition to the stipulation. The BPU found the
stipulation, subject to certain modifications, to be a reasonable framework
for resolution of the proceedings and issued its summary order, dated April
21, 1999. Its final restructuring order was issued on August 24, 1999 and
is referred to as the restructuring order.
The restructuring order authorizes PSE&G to recover a total of $2.940
billion of its net of tax stranded costs, comprised from the following
components. The BPU authorized the recovery of PSE&G's bondable stranded
costs in an amount of $2.525 billion through the issuance of $2.525 billion
in transition bonds, backed by the collection of a transition bond charge
designed to recover $2.400 billion net of tax stranded costs plus $125
million in transaction costs and related expenses of the financing. The BPU
also authorized the recovery of $540 million of unsecuritized
generation-related net of tax stranded costs on a present-value basis
though a market transition charge. In addition, the BPU authorized the
recovery of federal and state taxes associated with the collection of the
transition bond charge through a market transition charge.
PSE&G Unbundled its Electric Rates. PSE&G unbundled its retail
electric rates on August 1, 1999. As a result customers' bills were divided
into separate line items for distribution charges, transmission charges,
generation services, the market transition charge, the transition bond
charge and the societal benefits charge. If a customer chooses a third
party supplier for generation services, the customer may receive separate
billings for those services directly from the third party supplier or it
may receive combined billings for all charges, either from PSE&G or from
the third party supplier pursuant to an agreement between PSE&G and the
third party supplier. If the third party supplier bills the combined
charges, it must remit to PSE&G the amount it bills to customers on behalf
of PSE&G. See "THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE - THE
BPU FINANCING ORDER - PSE&G Must Allow Other Entities to Provide Metering
and Billing Services". PSE&G has not as yet entered into any arrangements
with third party suppliers for billings and collections.
PSE&G May Collect a Societal Benefits Charge. Under the Competition
Act an electric public utility is permitted, with BPU approval, to collect
a non-bypassable societal benefits charge from all of its retail customers
to recover
o nuclear plant decommissioning costs,
o demand side management program costs,
o customer education program costs,
o certain environmental remediation costs and
o previously approved social programs cost such as programs to
assist customers unable to pay their utility bills in full and
on time.
The BPU restructuring order provided that PSE&G may impose a societal
benefits charge commencing August 1, 1999.
PSE&G Must Reduce its Electric Rates. Pursuant to the stipulation and
the BPU restructuring order, PSE&G's current rates for generating,
transmitting and distributing electric power to its customers were reduced
on August 1, 1999 by 5% from prior rates which includes a 1% reduction due
to the savings from securitization. The second rate reduction, which will
take place at the time the transition bonds are sold, will provide an
additional reduction of 2%, so that customers receive the full benefit of
the securitization. A further rate reduction of an additional 2% will take
place on August 1, 2001, bringing the total estimated reduction to 9% from
current rates. In the event that the securitization has not occurred by
August 1, 2001, this reduction would be reduced by 2%. The final rate
reduction of 4.9% will take place on August 1, 2002 and will result in an
overall rate reduction from the rates in effect prior toAugust 1, 1999 of
13.9% (10% from the rates as of April 30, 1997), regardless of the amount
of reduction achieved from securitization. PSE&G's rates will not be
subject to any legislative cap after July 31, 2003, although rates will
continue to be subject to BPU approval.
Pursuant to the Competition Act and the BPU restructuring order,
customers may choose to purchase power from alternative third party
suppliers and later return to PSE&G as their supplier of basic generation
service until July 31, 2002. Pursuant to the BPU restructuring order PSE&G
is also authorized to transfer its generation assets to a separate
corporate entity as a "related competitive business segment of a common
public utility holding company". Any third party supplier will be required
to provide the servicer with total monthly kilowatt hour usage information
for each customer in a timely manner for the servicer to fulfill its
obligations.
THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE
THE BPU FINANCING ORDER
PSE&G's Petition and the BPU Financing Order. On June 8, 1999, PSE&G
filed a petition with the BPU requesting the issuance by the BPU of a
bondable stranded cost rate order under the Competition Act to allow PSE&G
to recover up to $2.4 billion of its bondable stranded costs, plus $125
million of associated transaction costs and the cost of retiring equity and
debt securities of PSE&G. These costs are recoverable through the issuance
of up to $2.525 billion of transition bonds and the imposition of a
transition bond charge. In response to the petition the BPU issued its
financing order, on September 17, 1999, referred to as the BPU financing
order.
The BPU Authorized PSE&G to Issue Transition Bonds. Consistent with
the restructuring order, the BPU financing order authorizes the issuance of
transition bonds in an aggregate principal amount not to exceed $2.525
billion, secured by bondable transition property. The transition bonds may
have a final legal maturity not later than 17 years from the date of
issuance.
The final structure, pricing and other terms of the transition bonds
will be subject to approval of the BPU board or its designee. This approval
will be obtained prior to the sale of the transition bonds. The BPU
financing order permits PSE&G to enter into a hedge agreement to protect
PSE&G's customers against interest rate exposure in connection with the
sale of transition bonds.
The BPU Authorized PSE&G to Impose the Transition Bond Charge. Under
the BPU financing order, the BPU authorizes PSE&G to impose, meter, charge,
bill, collect and receive from customers, the transition bond charge in an
amount sufficient to recover the principal amount of transition bonds in
accordance with a scheduled amortization and interest thereon, plus an
amount sufficient to provide for any credit enhancement, to fund any
reserves, and to pay acquisition or redemption premiums, if any, servicing
fees and other expenses relating to the transition bonds.
The BPU also grants PSE&G, as servicer, the authority to make
"non-routine" filings for adjustments. This would permit filings to be made
to accommodate changes in the formula specified in the BPU financing order
for the mandatory periodic adjustments which PSE&G deems appropriate to
remedy a significant and recurring variance between actual and expected
transition bond charge collections. Any such filing is required to be made
at least 90 days prior to the proposed effective date and would be subject
to BPU approval.
The transition bond charge will be a single per kilowatt hour charge
assessed against all customers, regardless of customer class, on a monthly
basis as part of their regular monthly billings. PSE&G will set the initial
per kilowatt hour transition bond charge, based upon the formula approved
in the BPU financing order. The transition bond charge and the charge for
related federal and state taxes associated with the collection of the
transition bond charge are intended to provide an approximately level
combined charge throughout the term of the transition bonds. The transition
bond charge and the related charge for taxes will be reflected in each
customer's bill in a single line item with an explanation in the bill that
the line item includes the transition bond charge.
The transition bond charge for each series of transition bonds will
be assessed on all customer bills and will be pro-rated in the case of the
first bill after issuance of a series of transition bonds to account for
any partial month since the date of issuance. For instance, if a particular
series issuance date is August 15, bills that include current charges for
services provided before August 15 will not be assessed the transition bond
charge for the period prior to August 15, with respect to that series. Upon
each adjustment of the transition bond charge or issuance of additional
series of transition bonds, the adjusted transition bond charge will be
assessed in the same manner.
The initial transition bond charge will be calculated on the basis
of:
o the issuance of $2,525 million of transition bonds,
o the projected total payments required in relation to the
transition bonds during the period commencing on the date of
issuance of the transition bonds and ending December 31, 2000,
and
o the estimated amount of kwh of electricity delivered, billed
and collected during that period.
The periodic adjustments to the transition bond charge are designed
to ensure that transition bond charge collections are not more or less than
the amount necessary to meet all of the required payments in relation to
the transition bonds and related costs and expenses and to maintain the
required balances in the overcollateralization subaccount and the capital
subaccount. In requesting periodic adjustments, the servicer is required to
take into account updated projections of consumption levels and timing of
collections and any amounts held in the reserve subaccount.
PSE&G Must Allow Other Entities to Provide Metering and Billing
Services. Under the Competition Act, the BPU may establish specific
standards for metering, billing and other activities by third party
suppliers participating in the new market in New Jersey. In order to
qualify to serve as a third party supplier, an electric supplier must
maintain at least a "BBB" or the equivalent long term unsecured credit
rating from Moody's Investors Service or Standard & Poor's Ratings
Services, or lodge with the servicer a cash deposit or comparable security
equal to two months' maximum estimated collections of all charges payable
to PSE&G. The BPU financing order allows qualified third party suppliers,
approved by the BPU, to bill and collect the transition bond charge on
behalf of the issuer. In doing so, third-party suppliers must comply with
all applicable BPU billing and collection requirements. Third party
suppliers must also agree to remit the full amount of all charges it bills
to customers for the electric generation, transmission and distribution
services PSE&G or its successor provides, together with the transition bond
charge, regardless of whether such payments are received from the
customers, within 15 days of PSE&G's or its successor's bill for such
charges. If a third party supplier fails to remit charges within a further
7 days, PSE&G, as servicer, or its successor may assume responsibility for
billing or transfer responsibility to another qualified third party
supplier. While a third party supplier collecting the transition bond
charge may request termination of service to delinquent customers, only
PSE&G or a successor electric public utility, may disconnect or reconnect a
customer's distribution service.
The BPU May Designate a Replacement Servicer. The Competition Act
provides that in the event of a default by the electric public utility in
respect of charging, collecting and receiving revenues derived from the
transition bond charge and upon the application of the secured party, such
as the trustee, or an assignee, such as the issuer, the BPU or any court of
competent jurisdiction will by order designate a trustee or other entity to
act in place of the electric public utility to impose, meter, charge, bill,
collect and receive the transition bond charge. The BPU may, in its
discretion establish criteria for the selection of any entity that may
become a servicer of bondable transition property upon the default or other
material adverse change in the financial condition of the electric public
utility. The appointment of a successor servicer must not result in the
downgrade or withdrawal of a rating on any outstanding transition bonds.
THE BPU'S TRANSITION BOND CHARGE ADJUSTMENT PROCESS
The servicing agreement requires the servicer to seek adjustments to
the transition bond charge in order to enhance the likelihood that actual
transition bond charge collections, net of any amounts on deposit in the
reserve subaccount, are neither more nor less than the amount necessary to
amortize the transition bonds of each series in accordance with the related
amortization schedule, to pay interest, to fund the overcollateralization
subaccount to the amount required to be on deposit in the
overcollateralization account, to replenish any shortfalls in the capital
subaccount, and to pay the trustee's fee, the servicing fee and the other
expenses and costs included in bondable stranded costs. These adjustments
are formula based, incorporating actual transition bond charge collections,
as well as updated assumptions by the servicer as to projected future usage
of electricity by customers, expected delinquencies and write-offs and
future expenses relating to bondable transition property and the transition
bonds, and the issuance of any additional series of transition bonds. They
are designed to achieve each of the above goals by the payment date
immediately preceding the next date on which the transition bond charge is
adjusted or the expected final payment date, as applicable, taking into
account any amounts on deposit in the reserve subaccount. If at the time of
issuance of a series, the servicer determines any additional adjustments
are required, the dates for these adjustments will be specified in the
prospectus supplement for the series.
The Schedule for Making Adjustments to the Transition Bond Charge.
The servicer will file an adjustment request to the transition bond charge
with the BPU on December 1 of each year and on any additional date or dates
specified in the prospectus supplement for any series of
transition bonds. Each proposed adjustment will become effective on an
interim basis 30 days after filing, and final after 60 days, in each case,
absent a determination by the BPU of manifest error. Each adjustment will
be effective on an interim basis on January 1 of the following year and
will be effective on a final basis 30 days thereafter. In the case of a
finding of manifest error by the BPU, the proposed adjustment will not
become effective until the error is corrected to the satisfaction of the
BPU. The date on which an adjustment request is filed is referred to as a
calculation date.
The BPU Authorized PSE&G to Sell Bondable Transition Property to the
Issuer. Under the BPU financing order, the BPU authorized PSE&G to assign,
sell, transfer or pledge bondable transition property to the issuer.
THE SELLER AND SERVICER OF THE BONDABLE TRANSITION PROPERTY
PSE&G
PSE&G is an operating electric and gas public utility, incorporated
under the laws of the State of New Jersey in 1924. The equity of PSE&G is
held by Enterprise. PSE&G is engaged principally in the generation,
transmission, distribution and sale of electric energy service and in the
transmission, distribution and sale of gas service in New Jersey. PSE&G
supplies electric and gas service in areas of New Jersey in which
approximately 5.5 million people reside, servicing approximately 70% of the
State's population. PSE&G's electric and gas service area is a corridor of
approximately 2,600 square miles running diagonally across New Jersey from
Bergen County in the northeast to an area below the City of Camden in the
southwest. The greater portion of this area is served with both electricity
and gas, but some parts are served with electricity only and other parts
with gas only. This heavily populated, commercialized and industrialized
territory encompasses most of New Jersey's largest municipalities,
including its six largest cities, Newark, Jersey City, Paterson, Elizabeth,
Trenton and Camden, in addition to approximately 300 suburban and rural
communities. This service territory contains residential areas and a
diversified mix of commerce and industry, including major facilities of
many corporations of national prominence. PSE&G believes that it has all
the franchises and consents necessary for its electric and gas distribution
operations in the territory it serves.
PSE&G reported net income of $604 million on revenue of $5,590
million for the year ended December 31, 1998 as compared with net income of
$528 million on revenue of $5,855 for the year ended December 31, 1997. For
the year ended December 31, 1998 approximately 72% and 28% of revenues were
derived from electricity and gas, respectively, of which 36% was derived
from residential customers, 37% was derived from commercial customers, 16%
was derived from industrial customers and 10% was derived from other
customers.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
Enterprise, a holding company formed in 1985, has two principal,
direct, wholly owned subsidiaries, PSE&G and PSEG Energy Holdings Inc. The
assets of PSE&G comprise approximately 82% of Enterprise's consolidated
assets, and the financial condition and results of operation of PSE&G are
principal factors affecting the financial condition and results of
operations of Enterprise. PSEG Energy Holdings Inc., formerly Enterprise
Diversified Holdings Incorporated, is the parent of Enterprise's
non-utility businesses.
PSE&G'S CUSTOMER CLASSES
PSE&G's customer base is divided into three classes of business:
residential, commercial, and industrial. Several rate classes are included
within each category differentiated by type and level of service.
ELECTRIC REVENUE, NUMBER OF CUSTOMERS AND CONSUMPTION
The following table shows the amount of billed electric revenue per
customer class for the past five and a half years and the percentage of
each customer class of the total billed revenue. The figures for 1999 are
based on the six month period from January to June.
<TABLE>
<CAPTION>
TABLE 1
BILLED REVENUE ($000)
1994 % 1995 % 1996 % 1997 % 1998 % 1999 %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential $1,198,007 32.50% $1,258,773 32.70% $1,255,691 32.80% $1,228,098 32.90% $1,266,508 33.40% $583,916 32.00%
Commercial $1,796,557 48.80% $1,892,093 49.20% $1,904,274 49.70% $1,856,899 49.80% $1,904,794 50.20% $938,509 51.40%
Industrial $689,600 18.70% $696,947 18.10% $670,884 17.50% $643,650 17.30% $625,974 16.50% $302,995 16.60%
Total $3,684,164 100.00% $3,847,814 100.00% $3,830,849 100.00% $3,728,646 100.00% $3,797,277 100.00% $1,825,419 100.00%
</TABLE>
The following table shows the average number of customers in each
customer class for the past five and a half years and the percentage each
customer class bears to the total number of customers. The figures for 1999
are based on the six month period from January to June.
<TABLE>
<CAPTION>
TABLE 2
AVERAGE NUMBER OF CUSTOMERS (Customer Bills)
1994 % 1995 % 1996 % 1997 % 1998 % 1999 %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential 1,666,598 86.50% 1,677,780 86.50% 1,683,208 86.50% 1,686,444 86.40% 1,701,066 86.30% 1,711,159 86.30%
Commercial 250,312 13.00% 252,574 13.00% 253,611 13.00% 257,013 13.20% 260,957 13.20% 262,381 13.20%
Industrial 9,630 0.50% 9,522 0.50% 9,300 0.50% 9,170 0.50% 9,101 0.50% 9,025 0.50%
Total 1,926,540 100.00% 1,939,876 100.00% 1,946,119 100.00% 1,952,627 100.00% 1,971,124 100.00% 1,982,565 100.00%
</TABLE>
The following table shows the total billed electric consumption in
MWh for the past five and a half years for each customer class and the
percentage each customer class bears to the total consumption. The figures
for 1999 are based on the six month period from January to June.
<TABLE>
<CAPTION>
TABLE 3
BILLED ELECTRIC CONSUMPTION (MWh)
1994 % 1995 % 1996 % 1997 % 1998 % 1999 %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential 10,708,914 27.50% 10,755,485 27.80% 10,736,855 28.00% 10,710,735 28.10% 11,091,537 28.40% 5,168,811 27.30%
Commercial 19,007,330 48.80% 18,968,792 49.10% 18,990,242 49.50% 18,923,234 49.70% 19,509,283 50.00% 9,664,448 51.19%
Industrial 9,243,537 23.70% 8,934,958 23.10% 8,625,133 22.50% 8,444,973 22.20% 8,440,088 21.60% 4,096,857 21.60%
Total 38,959,781 100.00% 38,659,236 100.00% 38,352,230 100.00% 38,078,943 100.00% 39,040,908 100.00% 18,930,116 100.00%
</TABLE>
PERCENTAGE CONCENTRATION WITHIN PSE&G'S LARGE COMMERCIAL AND INDUSTRIAL
CUSTOMERS
For the period ended December 1998, the ten largest single site
electric customers represented approximately 5.6% of PSE&G's kWh sales and
the ten largest multi-site electric customers represented approximately
6.9% of PSE&G's kWh sales. In both cases the customers are in the large
commercial and industrial customer class. There are no material
concentrations in the residential class.
HOW PSE&G FORECASTS THE NUMBER OF CUSTOMERS AND THE AMOUNT OF ELECTRICITY
USAGE
Accurate projections of the number of customers, usage and retail
electric revenue are important in setting, maintaining and adjusting the
transition bond charge. The transition bond charge must be sufficient to
recover interest on and principal of the transition bonds, to maintain the
scheduled overcollateralization level, to replenish any withdrawals from
the capital subaccount and to pay the trustee's fee, the servicing fee and
the other expenses and costs included in bondable stranded costs. See "THE
BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE--THE BPU'S TRANSITION
BOND CHARGE ADJUSTMENT PROCESS" AND "RISK FACTORS--SERVICING RISKS" in this
prospectus.
The energy forecast process starts with a set of assumptions,
including economic, demographic, price, marketing, major customers,
demand-side management, private plant/co-generation and technology impact
assumptions.
The residential energy forecast is primarily based on a forecast of
New Jersey household growth. The use per customer forecast is developed
using variables representing growth in the number of air conditioners, New
Jersey income per household, energy efficiency improvements and PSE&G
average electric price.
The commercial energy forecast is developed by reference to total
personal income and non-manufacturing employment for New Jersey, PSE&G's
average electric price, a forecast of floor space and the total number of
buildings for New Jersey.
The specific economic and demographic variables on which the
industrial energy forecast are based include manufacturing employment, the
industrial production index and employee productivity for New Jersey, the
average PSE&G electric and gas price and industrial fuel oil prices.
Natural gas and or fuel oil prices are used as a proxy for competitive
energy prices. The largest industrial customers are forecast individually.
The industrial forecast is further adjusted to account for major known
activities in the industrial market such as maintenance shutdowns,
co-generation and private plant installations and significant changes in
operating characteristics.
The short-term and long-term forecasting models have been reviewed by
the BPU and by BPU hired auditors. All classes of business forecasts assume
normal weather and include the effects of demand side management programs.
FORECAST VARIANCES
The table below compares actual usage in gWh for a particular year to
the related forecast prepared during the previous year. For example, the
annual 1994 variance is based on a forecast prepared in 1993. There can be
no assurance that the future variance between actual and expected
consumption will be similar to the historical experience set forth below.
The figures for 1999 are based on the six month period from January to June.
TABLE 4
VARIANCE FOR THE AMOUNT OF ELECTRICITY CONSUMED (GWH)
1994 1995 1996 1997 1998 1999
FORECAST 37,570 38,201 37,804 38,217 38,716 18,838
ACTUAL 38,211 38,316 38,439 38,627 39,130 18,912
VARIANCE-% 1.7061 0.301 1.6797 1.0728 1.0693 0.39
If actual consumption of electricity is higher than the forecast,
there will most likely be an excess of transition bond charge collections.
Similarly, if actual consumption of electricity is lower than the forecast,
there will most likely be insufficient transition bond charge collections.
CREDIT POLICY; BILLING; COLLECTIONS AND WRITE-OFFS; TERMINATION OF SERVICE
Credit Policy
PSE&G is required under New Jersey law to provide service to all
customers. PSE&G relies on the information provided by the customer and its
customer information system to determine whether PSE&G has previously
served a customer. Certain accounts are secured with deposits or guarantees
as a precautionary measure. The amount of the deposit reflects the
estimated use over a two-month period, which is the average time period
required to take collection action on past-due billings. Since the vast
majority of customers pay their bills within the allotted time, PSE&G does
not require deposits from all new customers.
PSE&G has developed certain criteria for establishing credit. PSE&G
uses a positive identification and credit scoring system to determine
creditworthiness of its new customers. This system has proven to be an
effective method for reducing PSE&G's delinquencies. If a deposit is
required to establish credit, industrial and commercial customers must
deposit cash equal to twice the maximum monthly bills, by a satisfactory
guarantor, or otherwise establishing credit to the satisfaction of PSE&G.
In general, residential customers may establish credit by depositing cash
equal to twice the average monthly bill. Deposits may not be required if
the applicant has previously been a customer of PSE&G and has paid all
bills for service for a period of 12 consecutive months ending immediately
before the applicant ceased PSE&G service, or if the customer provides a
letter of credit from its previous utility showing no delinquencies in the
past 12 months.
Billing Process
PSE&G bills its customers once every 27 to 33 days and distributes
approximately an equal number of bills each business day. For the year
ending 1998, PSE&G mailed out an average of 105,000 bills on each business
day to its customers. For accounts with potential billing error exceptions,
reports are generated for manual review. This review examines accounts that
have abnormally high or low bills, potential meter-reading errors and
possible meter malfunctions.
Collection and Write-Off Policy
PSE&G receives approximately 87% of its total bill payments via U.S.
mail. Approximately 9% of bill payments are received at local offices and
other third party pay offices. PSE&G receives the remainder of payments via
electronic payment and field collection. Bills are due on presentation, and
are considered delinquent 19 days after billing. Customers are notified of
a delinquent account in the following monthly bill. The same delinquency
policy will apply to the transition bond charge. Timing and collection
follow-up is based on customer type.
For residential customers, a past due reminder notice is sent with
the monthly bill if payment of the previous month's bill has not been
received. If payment is not received by the time of the third month's bill,
a shut-off notice is included in that monthly bill. A telephone contact is
attempted ten business days after the shut-off notice is issued. Service is
terminated if payment is not made by the due date of the third bill. Once
service is terminated, the customer may be required to pay an amount up to
the total amount past due and to come to a deferred arrangement on any
balance not paid in order to resume service.
For industrial and commercial customers, a shut-off notice is sent
with the monthly bill if payment of the previous month's bill has not been
received. A telephone contact is attempted ten workdays after the shut-off
notice is issued. Service is terminated if payment is not made by the due
date on the second bill. Once service is terminated, the customer may be
required to pay an amount up to the total amount past due and to come to a
deferred arrangement on any balance not paid in order to resume service.
If service is terminated for a customer of any class, a charge of $20
for gas and $15 for electric is required for service restoration. For both
industrial and commercial customers, a final bill including all unpaid
amounts is issued after service termination. Unpaid final bills are written
off approximately 80 days after the final bill is issued.
PSE&G may change its credit, billing, collections and
termination/restoration of service policies and procedures from time to
time. It is expected that any such changes would be
designed to enhance PSE&G's ability to bill and collect customer charges on
a timely basis. Under the servicing agreement, any changes to customary
billing and practices instituted by PSE&G will apply to collections of the
transition bond charge so long as PSE&G is the servicer.
Termination of Service for Certain Residential Customers in the
Winter. The winter termination program is part of the New Jersey
Administrative Code and prevents discontinuance of electric and gas service
to qualified residential customers from November 15 through March 15. The
BPU has reserved the option of extending the program to the end of March,
if abnormally bad weather is forecasted.
The program provides for the requirement of good-faith payments
according to a 12-month system budget plan. The regulation also provides
for restoration of service for customers eligible to participate in the
program who had service shut off for non-payment prior to November 15, if
up to 25% of the outstanding balance is paid. Residential customers who
qualify for the program and who do not meet the requirement for good-faith
payments, may have service discontinued if PSE&G successfully petitions the
BPU for non-restoration. The program requires that a BPU-approved fact
sheet accompany each discontinuance notice to residential customers during
the program period. The fact sheet is distributed as a bill insert since
discontinuance notices are issued on the customer's bill.
LOSS AND DELINQUENCY EXPERIENCE
The following tables set forth information relating to the total
billed revenues and write-off experience for the past several years. Such
historical information is presented herein because PSE&G's actual
experience with respect to write-offs and delinquencies may affect the
timing of transition bond charge collections. PSE&G does not expect, but
cannot assure, that the delinquency or write-off experience with respect to
transition bond charge collections will differ substantially from the rates
indicated. Write-off and delinquency data is affected by factors such as
the overall economy, weather and changes in collection practices. The net
write-offs and delinquency experience is expected, but can not be assured,
to be similar to PSE&G's previous experience. For example, changes in the
retail electric market, including but not limited to the introduction of
third party suppliers who may be permitted to provide consolidated billing
to PSE&G's customers, could mean that delinquency and write-off ratios will
vary from those presented in the tables below. In each of tables 5 through
9, figures for 1999 are for January 1, 1999-June 30, 1999.
The following table shows total electric and gas billed revenue for
the past five and a half years for each customer class.
<TABLE>
<CAPTION>
TABLE 5
TOTAL ELECTRIC AND GAS BILLED REVENUES
(IN THOUSANDS)
1994 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C> <C>
Residential $2,104,795 $2,098,138 $2,306,281 $2,193,120 $2,102,802 $1,197,993
Commercial $2,342,261 $2,387,105 $2,439,707 $2,358,069 $2,306,227 $1,210,193
Industrial $1,028,396 $ 997,149 $1,013,170 $ 982,258 $ 912,081 $ 444,071
Total $5,475,452 $5,482,392 $5,659,158 $5,533,446 $5,321,111 $2,852,257
</TABLE>
Gross write-offs for electricity and gas have been tracked by class
of business since February 20, 1996. The following table shows gross
write-offs for electricity and gas for the past three and a half years for
each customer class.
TABLE 6
GROSS WRITE-OFFS PER CUSTOMER CLASS
RESIDENTIAL COMMERCIAL INDUSTRIAL
1999 $14,741,869 $4,078,646 $336,200
1998 $31,418,333 $9,216,337 $701,550
1997 $39,858,956 $8,748,398 $558,760
1996 $27,009,186 $6,185,755 $522,273
The following table shows gross write-offs as a percentage of total
electric and gas billed revenue for the past three and a half years for
each customer class.
TABLE 7
GROSS WRITE-OFFS AS A PERCENTAGE OF BILLED REVENUE PER CUSTOMER CLASS
RESIDENTIAL COMMERCIAL INDUSTRIAL
1999 1.23% 0.34% 0.08%
1998 1.49% 0.40% 0.08%
1997 1.82% 0.37% 0.06%
1996 1.22% 0.25% 0.02%
The following table shows total net write-offs and the corresponding
percentage of total billed revenues for the past five and a half years for
all customers for electricity and gas.
TABLE 8
TOTAL NET WRITE-OFF AND NET WRITE-OFFS
AS A PERCENTAGE OF BILLED REVENUE
NET WRITE-OFFS AS A
NET WRITE-OFFS % OF BILLED REVENUE
1999 $16,872,000 0.59%
1998 $37,793,000 0.74%
1997 $50,058,000 0.93%
1996 $35,807,000 0.66%
1995 $35,038,000 0.66%
1994 $37,157,000 0.71%
Net write-offs include amounts recovered by PSE&G from deposits, bankruptcy
proceedings and payments received after an account has been written-off
either to PSE&G or one of its external collection agencies.
The following table sets forth information relating to PSE&G's rate
of delinquencies, as a percent of accounts receivable of all PSE&G
customers for the past five and a half years:
<TABLE>
<CAPTION>
TABLE 9
ELECTRIC AND GAS DELINQUENCIES
1-30 31-60 61-90 91-120 121-150 151-180 OVER 180
DAYS PAST DAYS PAST DAYS PAST DAYS PAST DAYS PAST DAYS PAST DAYS PAST
YEAR DUE DUE DUE DUE DUE DUE DUE
<S> <C> <C> <C> <C> <C> <C> <C>
1999 65% 16% 7% 4% 2% 1% 4%
1998 69% 15% 6% 4% 2% 1% 4%
1997 73% 14% 5% 2% 2% 1% 4%
1996 73% 13% 4% 2% 2% 1% 5%
1995 76% 13% 4% 2% 1% 1% 3%
1994 76% 12% 4% 2% 1% 1% 4%
</TABLE>
While accounts are considered delinquent if they are unpaid 19 days
after billing, customers are not notified of any delinquency in their
account until the next billing. The delinquency data above represents only
active customer accounts as opposed to the write-off data which reflects
only customer accounts where service is no longer being provided. PSE&G has
not traced the rate of delinquencies by customer class.
HOW PSE&G WILL APPLY PARTIAL PAYMENTS BY ITS CUSTOMERS
The BPU financing order requires that PSE&G allocate partial payments
of electricity bills for any period in the following order:
o to sales taxes (which PSE&G collects as trustee for the State
of New Jersey and not for its own account or for that of the
issuer);
o pro rata to the transition bond charge and PSE&G's other
charges and taxes, where any of such charges are in arrears,
based on their proportion to PSE&G's total charges assessed for
that period;
o pro rata to the transition bond charge and PSE&G's other
charges and taxes, where any of such charges are current
charges, based on their proportion to PSE&G's total charges
assessed for that period.
PSE&G's other charges include gas charges which are often billed together
with electric charges. Partial payments will also be allocated among
different series of transition bonds, pro rata, based on their respective
outstanding principal balances.
PSE&G'S EFFORTS TO DEAL WITH THE YEAR 2000 COMPUTER ISSUE
PSE&G is faced with the task of addressing the year 2000 issue. The
year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year and other programming
techniques which limit date calculations or assign special meanings to some
dates. Any of PSE&G's computer systems that have date-sensitive software or
microprocessors may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to measure usage, read meters, process
transactions, send bills or operate electric generation, transmission and
distribution stations. In addition, the year 2000 issue could affect the
ability of customers to receive bills sent by PSE&G or make payments on
these bills.
PSE&G has had a formal project in place since 1997 to address year
2000 issues. Based upon project progress to date, all mission critical
systems are expected to be ready by January 1, 2000. Future progress is
dependent on a wide number of variables, including the continued
availability of trained resources and vendors meeting commitments to PSE&G.
PSE&G has established a three-phase program to achieve year 2000
readiness. The initial phase (inventory) identifies systems having
potential year 2000 issues and sets priorities for assessing and
remediating those systems. The second phase (assessment) determines whether
systems are digital/date sensitive and the extent of date related issues.
The third phase (remediation/testing) repairs programming code, upgrades or
replaces systems and validates that code repairs were implemented as intended.
Inventory is more than 99% complete for all information technology,
infrastructure and process control/monitoring systems. Substantial
assessment work has been completed on the information technology,
infrastructure systems and process control systems. Remediation/testing is
in progress on information technology, process control and infrastructure
systems.
PSE&G completed required year 2000 readiness work for more than 99%
of its critical systems as of June 30, 1999, except for certain systems at
PSE&G's nuclear facilities. The work required for those remaining nuclear
facilities is expected to be completed by the end of November 1999 in order
to coincide with planned refueling outages at those remaining facilities.
By the end of 1999, a majority of PSE&G's non-critical systems are also
expected to be year 2000 ready with the remainder of such non-critical
systems to be ready in 2000.
"Year 2000 compliant" means that computer systems or equipment with
date-sensitive chips will accurately process date and time data. "Year 2000
ready" means that the computer systems or equipment with date-sensitive
chips can be used on January 1, 2000, and beyond, but are not fully year
2000 compliant.
PSE&G is continuing to work with its supplier base to assess the year
2000 readiness status of vendors who provide critical materials and
services, referred to as key vendors. PSE&G has received indications from
more than 95% of its key vendors that they are making or have made
preparations for the year 2000. To date, all key vendors who have responded
indicate that their business operations will be ready. Failure of key
vendors to meet year 2000 requirements could result in material adverse
impacts to PSE&G's operations, financial condition, results of operations
and net cash flows.
Based upon present assessments, Enterprise estimates that through
2000, it will incur approximately $83 million in year 2000 related costs.
Through June 30, 1999, Enterprise spent approximately $47 million on
remediation costs, which included assistance from outside consultants.
These costs are being funded through internally generated funds and are
being expensed as incurred. A portion of these costs is not likely to be
incremental to Enterprise or PSE&G, but rather represents a redeployment of
existing personnel/resources.
The schedule to replace certain systems was accelerated for year 2000
purposes. Analysis of these systems is continuing and costs identified to
date are approximately $5 million, which are not included in the estimates
above. Additionally, PSE&G is continuing its installation of programs from
SAP America, Inc. to replace certain major business systems. SAP America,
Inc. has represented that it is year 2000 compliant, and thus, its
installation will eliminate the need to modify those business systems for
year 2000 compliance. The phased implementation of SAP is scheduled to be
completed before January 1, 2000. The cost of implementing SAP is not
included in the above cost estimates since SAP implementation has not been
accelerated for year 2000 purposes.
PSE&G TRANSITION FUNDING LLC, THE ISSUER
PSE&G Transition Funding LLC, the issuer of the transition bonds, was
formed as a Delaware limited liability company, on July 21, 1999 pursuant
to a limited liability company agreement of PSE&G as sole member of the
issuer. The assets of the issuer are limited to the bondable transition
property which was sold to the issuer, the trust funds held by the trustee,
rights of the issuer under the transaction documents, any third-party
credit enhancement and any money distributed to the issuer from the
collection account in accordance with the indenture and not distributed to
PSE&G. The BPU financing order and the indenture provide that the bondable
transition property, as well as the other collateral described in the BPU
financing order and the indenture, will be pledged by the issuer to the
trustee. Pursuant to the indenture, the transition bond charge collections
remitted to the trustee by the servicer must be used to pay the transition
bonds and other obligations of the issuer specified in the indenture. As of
the date of this prospectus, the issuer has not carried on any business
activities and has no operating history. Audited financial statements of
the issuer attached to this Prospectus are included as part of this
prospectus.
The Issuer's Purpose. The issuer has been created for the sole purpose
of:
1. purchasing and owning the bondable transition property;
2. issuing one or more series of transition bonds, each of which may
be comprised of one or more classes, from time to time;
3. pledging its interest in the bondable transition property and
other collateral to the trustee under the indenture in order to
secure the transition bonds; and
4. performing activities that are necessary, suitable or convenient to
accomplish these purposes.
The Interaction Between PSE&G and the Issuer. On the issue date for
each series, except in the event of a refunding of outstanding transition
bonds, PSE&G will sell bondable transition property to the issuer pursuant
to an agreement between PSE&G, in this capacity, the seller, and the
issuer. PSE&G will service the bondable transition property pursuant to a
servicing agreement with the issuer. PSE&G and any successor in the
capacity of servicer are referred to as the servicer.
The Issuer's Management. The issuer's business will be managed by
five managers, referred to as the managers, appointed from time to time by
PSE&G or, in the event that PSE&G transfers its interest in the issuer, by
the new owner or owners. The issuer will have at all times following the
initial issuance of the transition bonds at least two independent managers
who, among other things, are not and have not been for at least three years
from the date of their appointment:
1. a direct or indirect legal or beneficial owner of the issuer or
PSE&G or any of their respective affiliates,
2. a relative, supplier, employee, officer, director, manager,
contractor or material creditor of the issuer or PSE&G or any of
their respective affiliates, or
3. a person who controls PSE&G or its affiliates. The remaining
managers will be employees or officers of PSE&G.
The managers will devote the time necessary to conduct the affairs of
the issuer. The following are the managers as of the date of this prospectus:
NAME AGE POSITION AT PSE&G
Robert E. Busch [ ] Senior Vice President and Chief Financial
Officer
Mr. Busch is currently serving as the
Senior Vice President and Chief
Financial Officer of PSE&G. Prior to
joining PSE&G in 1998, Mr. Busch was
the National Director of the Hay Group
Utility Consulting Practice and prior
to joining the Hay Group, he held
various positions at Northeast
Utilities.
Robert C. Murray [ ] Executive Vice President - Finance
Mr. Murray is currently Executive Vice
President of PSE&G and Vice President
and Chief Financial Officer of PSEG.
Prior to his current position, Mr.
Murray was Chief Financial Officer of
PSE&G.
R. Edwin Selover [ ] Senior Vice President and General Counsel
Mr. Selover is currently Senior Vice
President and General Counsel of
PSE&G, as well as Vice President and
General Counsel of PSEG. Mr. Selover
has served in these positions since
1988.
None of the managers has been involved in any legal proceedings which
are specified in Item 401(f) of the SEC's Regulation S-K.
The Managers' Compensation and Limitation on Liabilities. The issuer
has not paid any compensation to any manager since the issuer was formed.
The managers other than the independent managers will not be compensated by
the issuer for their services on behalf of the issuer. The independent
managers will be paid quarterly fees from the revenues of the issuer and
will be reimbursed for their reasonable expenses. These expenses include
without limitation the reasonable compensation, expenses and disbursements
of such agents, representatives, experts and counsel as the independent
managers may employ in connection with the exercise and performance of
their rights and duties under the issuer's limited liability company
agreement, the indenture, the sale agreement and the servicing agreement.
The limited liability company agreement provides that the managers will not
be personally liable under any circumstances except for:
1. liabilities arising from their own willful misconduct or gross
negligence,
2. liabilities arising from the failure by any of the managers to
perform obligations expressly undertaken in the issuer's
limited liability company agreement, or
3. taxes, fees or other charges, based on or measured by any fees,
commissions or compensation received by the managers in
connection with the transactions described in this prospectus.
The limited liability company agreement further provides that, to the
fullest extent permitted by law, the issuer shall indemnify the managers
against any liability incurred in connection with their services as
managers for the issuer except in the cases described in clauses 1 through
3 above.
The Issuer is a Separate and Distinct Legal Entity. Under the
issuer's limited liability company agreement, the issuer may not file a
voluntary petition for relief under the Bankruptcy Code without a unanimous
vote of its managers, including the independent managers. PSE&G has agreed
that it will not cause the issuer to file a voluntary petition for relief
under the Bankruptcy Code. The limited liability company agreement requires
the issuer:
o to take all reasonable steps to continue its identity as a separate
legal entity;
o to make it apparent to third persons that it is an entity with assets
and liabilities distinct from those of PSE&G, other affiliates of
PSE&G, the managers or any other person; and
o to make it apparent to third persons that, except for federal and
state tax purposes, it is not a division of PSE&G or any of its
affiliated entities or any other person.
The principal place of business of the issuer is 80 Park Plaza, T-6,
Newark, New Jersey 07102, and its telephone number is (973) 430-6564.
Administration Agreement. PSE&G will provide administrative services
for the issuer pursuant to an administration agreement between the issuer
and PSE&G. The issuer will pay PSE&G a market rate fee for performing these
services.
INFORMATION AVAILABLE TO THE TRANSITION BONDHOLDERS
The issuer has filed with the SEC a registration statement under the
Securities Act, with respect to the transition bonds. This prospectus,
which forms a part of the registration statement, and any prospectus
supplement describe the material terms of some documents filed as exhibits
to the registration statement. However, this prospectus and any prospectus
supplement do not contain all of the information contained in the
registration statement and its exhibits. Any statements contained in this
prospectus or any prospectus supplement concerning the provisions of any
document filed as an exhibit to the registration statement or otherwise
filed with the SEC are not necessarily complete, and in each instance
reference is made to the copy of the document so filed. For further
information, reference is made to the registration statement and the
exhibits thereto, which are available for inspection without charge at the
public reference facilities maintained by the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at its regional offices located as
follows: Chicago Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and New York Regional Office, 7
World Trade Center, 13th Floor, New York, New York 10048. Copies of the
registration statement and exhibits thereto may be obtained at the above
locations at prescribed rates. Information filed with the SEC can also be
inspected at the SEC site on the World Wide Web at http://www.sec.gov. The
issuer will file with the SEC all periodic reports as are required by the
Exchange Act, and the rules, regulations or orders of the SEC thereunder.
The issuer may discontinue filing periodic reports under the Exchange Act
at the beginning of the fiscal year following the issuance of the
transition bonds of any series if there are fewer than 300 holders of the
transition bonds.
All reports and other documents filed by the issuer pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the
date of this prospectus and prior to the termination of the offering of the
transition bonds will be deemed to be incorporated by reference into this
prospectus and to be a part hereof. Any statement contained in this
prospectus, in a prospectus supplement or in a document incorporated or
deemed to be incorporated by reference in this prospectus will be deemed to
be modified or superseded for purposes of this prospectus and any
prospectus supplement to the extent that a statement contained in this
prospectus, in a prospectus supplement or in any separately filed document
which also is or is deemed to be incorporated by reference herein modifies
or supersedes that statement. Any statement so modified or superseded will
not be deemed, except as so modified or superseded, to constitute part of
this prospectus or any prospectus supplement. The issuer will provide
without charge to each person to whom a copy of this prospectus is
delivered, on the written or oral request of this person, a copy of any or
all of the documents incorporated herein by reference, except for the
exhibits which are not specifically incorporated by reference in the
documents. Written requests for these copies should be directed to the
issuer, c/o Brian Smith, Director of Investor Relations, Public Service
Electric and Gas Company, 80 Park Plaza, Newark, New Jersey 07102.
Telephone requests for these copies should be directed to the issuer at
(973) 430-6564.
THE TRANSITION BONDS
The transition bonds will be issued under and secured by the
indenture between the issuer and the trustee substantially in the form
filed as an exhibit to the registration statement of which this prospectus
forms a part. The terms of each series of transition bonds will be provided
in the indenture and the related indenture supplement. The following
summary describes some general terms and provisions of the transition
bonds. The particular terms of the transition bonds of any series offered
by any prospectus supplement will be described in the prospectus
supplement.
GENERAL TERMS OF THE TRANSITION BONDS
The transition bonds may be issued in one or more series, each made
up of one or more classes. The terms of a series may differ from the terms
of another series, and the terms of a class may differ from the terms of
another class of the same series. The terms of each series will be
specified in the related prospectus supplement.
The indenture requires, as a condition to the issuance of each series
of transition bonds, that such issuance will not result in any rating
agency reducing or withdrawing its then current rating of any outstanding
series or class of transition bonds. The notification in writing by each
rating agency to the seller, the servicer, the trustee and the issuer that
any action will not result in a reduction or withdrawal is referred to as
the rating agency condition.
The Issuer's Transition Bonds Will be Maintained in Book-Entry
Format. The related prospectus supplement will set forth the procedure for
the manner of the issuance of the transition bonds of each series.
Generally, each series of transition bonds will initially be represented by
one or more transition bonds registered in the name of Cede & Co., as the
nominee of DTC. The transition bonds will be available for purchase in
initial denominations specified in the related prospectus supplement which
will be not less than $1,000, with an exception for one transition bond in
each class which may have a smaller denomination. Unless and until
definitive transition bonds are issued under the limited circumstances
described in this prospectus, no transition bondholder will be entitled to
receive a physical bond representing a transition bond. All references in
this prospectus to actions by transition bondholders will refer to actions
taken by DTC upon instructions from DTC participants. In addition, all
references in this prospectus to payments, notices, reports and statements
to transition bondholders will refer to payments, notices, reports and
statements to DTC or Cede, as the registered holder of each series of
transition bonds. DTC or Cede will receive these payments, notices, reports
and statements for distribution to the beneficial owners of the transition
bonds in accordance with DTC's procedures with respect thereto. See
"--TRANSITION BONDS WILL BE ISSUED IN BOOK-ENTRY FORM" and "--CERTIFICATED
TRANSITION BONDS" below.
PAYMENTS OF INTEREST AND PRINCIPAL ON THE TRANSITION BONDS
Interest will accrue on the principal balance of transition bonds of
a series or class at the interest rate specified in or determined in the
manner specified in the related prospectus supplement. Interest will be
payable to the transition bondholders of the series or class on each
payment date, commencing on the first payment date specified in the related
prospectus supplement. On any payment date with respect to any series, the
issuer will make principal payments on that series only until the
outstanding principal balance thereof has been reduced to the principal
balance specified for that payment date in the expected amortization
schedule for that series, but only to the extent funds are available for
that series as described in this prospectus. Accordingly, principal of the
series or class of transition bonds may be paid later, but not sooner, than
reflected in the expected amortization schedule therefor, except in a case
of any applicable optional redemption or acceleration. See "RISK
FACTORS--OTHER RISKS ASSOCIATED WITH AN INVESTMENT IN THE TRANSITION BONDS"
and "--SERVICING RISKS" in this prospectus.
The indenture provides that failure to pay the entire outstanding
principal amount of the transition bonds of any series or class by the
expected final payment date will not result in an event of default under
the indenture until after the final maturity date for the series or class,
as applicable.
On each payment date, the amount required to be paid as principal on
the transition bonds, from transition bond charge collections allocable to
such series, the capital subaccount and overcollateralization subaccount
for such series, and the reserve subaccount for all series, will equal:
o the unpaid principal amount of each class of that series due on
the final payment date of that class; plus
o the unpaid principal amount of any transition bonds of each class
of that series called for redemption; plus
o the unpaid principal amount of each class of that series upon an
acceleration following an event of default; plus
o the principal scheduled to be paid on each class of that series
of transition bonds on that payment date.
The entire unpaid principal amount of a series of transition bonds
will be due and payable if:
1. an event of default under the indenture occurs and is continuing
and
2. the trustee or the holders of a majority in principal amount of
the transition bonds of all series then outstanding, voting as
a group, have declared the transition bonds to be immediately
due and payable.
See "THE INDENTURE--WHAT CONSTITUTES AN EVENT OF DEFAULT ON THE TRANSITIOn
BONDS" and "WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS FOR THE
TRANSITION BONDS" in this prospectus.
REDEMPTION OF THE TRANSITION BONDS
Redemption provisions, if any, for any series will be specified in
the related prospectus supplement, including the premiums, if any, payable
upon redemption. Unless the context requires otherwise, all references in
this prospectus to principal of the transition bonds of a series insofar as
it relates to redemption includes any premium that might be payable thereon
if transition bonds of the series are redeemed, as described in the related
prospectus supplement. The redemption price will, in each case, include
accrued interest to the date of redemption. Notice of redemption of any
series of transition bonds will be given by the trustee to each registered
holder of a transition bond by first-class mail, postage prepaid, mailed
not less than five days nor more than 45 days prior to the date of
redemption or in another manner or at another time as may be specified in
the related prospectus supplement. Notice of redemption may be conditioned
upon the deposit of moneys with the trustee before the redemption date and
this notice will be of no effect unless these moneys are so deposited. All
transition bonds called for redemption will cease to bear interest on the
specified redemption date, provided the redemption price is on deposit with
the trustee at that time, and will no longer be considered "outstanding"
under the indenture. The transition bondholders will have no further rights
with respect thereto, except to receive payment of the redemption price
thereof and unpaid interest accrued to the date fixed for redemption from
the trustee.
CREDIT ENHANCEMENT FOR THE TRANSITION BONDS
Credit enhancement with respect to the transition bonds of each
series will be provided principally by adjustments to the transition bond
charge and amounts on deposit in the reserve subaccount for all series and
the overcollateralization subaccount and the capital subaccount for such
series. In addition, for any series of transition bonds or one or more
classes thereof, additional credit enhancement, if any, may be provided.
The amounts and types of credit enhancement, if any, and the provider of
any such credit enhancement with respect to each series of transition bonds
or one or more classes thereof will be described in the related prospectus
supplement. Additional credit enhancement may be in the form of:
o an additional reserve subaccount,
o subordination by one series for the benefit of another,
o additional overcollateralization,
o a financial guaranty insurance policy,
o a letter of credit,
o a credit or liquidity facility,
o a repurchase obligation,
o a third party payment or other support,
o a cash deposit or other credit enhancement, or
o any combination of the foregoing, as may be set forth in the
related prospectus supplement.
If specified in the related prospectus supplement, credit enhancement
for a series of transition bonds may cover one or more other series of
transition bonds.
TRANSITION BONDS WILL BE ISSUED IN BOOK-ENTRY FORM
Unless otherwise specified in the related prospectus supplement, all
classes of transition bonds will initially be represented by one or more
bonds registered in the name of DTC, or another securities depository. The
transition bonds will be available to investors only in the form of
book-entry transition bonds. Transition bondholders may also hold
transition bonds through CEDEL, or the Euroclear in Europe, if they are
participants in one of those systems or indirectly through participants.
The Role of Cede, CEDEL and Euroclear. DTC will hold the global bond
or bonds representing the transition bonds. CEDEL and Euroclear will hold
omnibus positions on behalf of their participants through customers'
securities accounts in CEDEL's and Euroclear's names on the books of their
respective depositories. Citibank, N.A. is depository for CEDEL and Morgan
Guaranty Trust Company of New York is depository for Euroclear. These
depositories will, in turn hold these positions in customers' securities
accounts in the depositories' names on the books of DTC. Citibank, N.A.
will act as depository for CEDEL and Morgan Guaranty Trust Company of New
York will act as depository for Euroclear.
The Function of DTC. DTC is a limited purpose trust company organized
under the laws of the State of New York, and is a member of the Federal
Reserve System. DTC is a "clearing corporation" within the meaning of the
New York Uniform Commercial Code and a "clearing agency" registered
pursuant to Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and to facilitate the clearance and
settlement of securities transactions between participants through
electronic book-entries, thereby eliminating the need for physical movement
of bonds. Direct participants of DTC include securities brokers and
dealers, banks, trust companies, clearing corporations and some other
organizations. DTC is owned by a number of its direct participants and by
the New York Stock Exchange, Inc., the Nasdaq-Amex Market Group and the
National Association of Securities Dealers, Inc. Access to DTC's system is
also available to indirect participants.
The Function of CEDEL. CEDEL is incorporated under the laws of
Luxembourg. CEDEL holds securities for its customers and facilitates the
clearance and settlement of securities transactions by electronic
book-entry transfers between their accounts. CEDEL provides various
services, including safekeeping, administration, clearance and settlement
of internationally traded securities and securities lending and borrowing.
CEDEL also deals with domestic securities markets in over 30 countries
through established depository and custodial relationships. CEDEL has
established an electronic bridge with Morgan Guaranty Trust as the
Operator of the Euroclear system in Brussels to facilitate settlement of
trades between CEDEL and MGT/EOC. CEDEL currently accepts over 110,000
securities issues on its books.
CEDEL customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies, and
clearing corporations and may include any underwriters, agents or dealers
with respect to a series of transition bonds offered hereby. CEDEL's U.S.
customers are limited to securities brokers and dealers and banks.
The Function of Euroclear. Euroclear was created in 1968 to hold
securities for Euroclear participants and to clear and settle transactions
between Euroclear participants through simultaneous electronic book-entry
delivery against payment. By performing these functions, Euroclear
eliminated the need for physical movement of securities and also eliminated
any risk from lack of simultaneous transfers of securities and cash.
Transactions may now be settled in any of 30 currencies, including Euros
and United States dollars. The Euroclear System includes various other
services, including securities lending and borrowing, and arrangements with
domestic markets in several countries generally similar to the arrangements
for cross-market transfers with DTC described below. The Euroclear System
is operated by Euroclear Operator, under contract with the Euroclear
Clearance System S.C., a Belgian cooperative corporation, referred to as
the Cooperative. All operations are conducted by the Euroclear Operator,
and all Euroclear securities clearance accounts and Euroclear cash accounts
are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for Euroclear on behalf of Euroclear
participants. Euroclear participants include central banks, commercial
banks, securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other
firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System. As a
Federal Reserve System Member, it is regulated and examined by the Board of
Governors of the Federal Reserve System and the New York State Banking
Department, as well as the Belgian Banking Commission.
Terms and Conditions of Euroclear. Securities clearance accounts and
cash accounts with the Euroclear Operator are governed by the Terms and
Conditions Governing Use of Euroclear and the related Operating Procedures
of Euroclear and applicable Belgian law which are referred to in this
prospectus as the Terms and Conditions. The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of
securities and cash from Euroclear and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific securities to specific securities
clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of Euroclear participants and has no record of or
relationship with persons holding through Euroclear participants.
The Rules for Transfers Among DTC, CEDEL or Euroclear Participants.
Transfers between participants will occur in accordance with DTC rules.
Transfers between CEDEL customers and Euroclear participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
customers or Euroclear participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European
international clearing system by its depository. Cross-market transactions
will require delivery of instructions to the relevant European
international clearing system by the counterparty in this system in
accordance with its rules and procedures and within its established
deadlines, in European time. The relevant European international clearing
system will, if the transaction meets its settlement requirements, deliver
instructions to its depository to take action to effect final settlement on
its behalf by delivering or receiving transition bonds in DTC, and making
or receiving payments in accordance with normal procedures for same-day
funds settlement applicable to DTC. CEDEL customers and Euroclear
participants may not deliver instructions directly to the depositories.
DTC Will be the Holder of the Issuer's Transition Bonds. Unless and
until definitive transition bonds are issued, it is anticipated that the
only "holder" of transition bonds of any series will be DTC. Transition
bondholders will only be permitted to exercise their rights as transition
bondholders indirectly through participants and DTC. All references herein
to actions by transition bondholders thus refer to actions taken by DTC
upon instructions from its participants. In addition, all references herein
to payments, notices, reports and statements to transition bondholders
refer to payments, notices, reports and statements to DTC, as the
registered holder of the transition bonds, for payments to the beneficial
owners of the transition bonds in accordance with DTC procedures.
Book-Entry Transfers and Transmission of Payments. Except under the
circumstances described below, while any book-entry transition bonds of a
series are outstanding, under DTC's rules, DTC is required to make
book-entry transfers among participants on whose behalf it acts with
respect to the book-entry transition bonds. In addition, DTC is required to
receive and transmit payments of principal of, and interest on, the
book-entry transition bonds. Participants with whom transition bondholders
have accounts with respect to book-entry transition bonds are similarly
required to make book-entry transfers and receive and transmit these
payments on behalf of their respective transition bondholders. Accordingly,
although transition bondholders will not possess physical bonds, DTC's
rules provide a mechanism by which transition bondholders will receive
payments and will be able to transfer their interests.
DTC can only act on behalf of participants, who in turn act on behalf
of indirect participants and some banks. Thus, the ability of holders of
beneficial interests in the transition bonds to pledge transition bonds to
persons or entities that do not participate in the DTC system, or otherwise
take actions in respect of these transition bonds, may be limited due to
the lack of definitive transition bonds.
DTC has advised the trustee that it will take any action permitted to
be taken by a transition bondholder under the indenture only at the
direction of one or more participants to whose account with DTC the
transition bonds are credited.
How Transition Bond Payments Will Be Credited by CEDEL and Euroclear.
Payments with respect to transition bonds held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL customers or Euroclear
participants in accordance with the relevant systems' rules and procedures,
to the extent received by its depository. These payments will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. See "MATERIAL INCOME TAX MATTERS FOR THE TRANSITION BONDS" in
this prospectus. CEDEL or the Euroclear Operator, as the case may be, will
take any other action permitted to be taken by a transition bondholder
under the indenture on behalf of a CEDEL Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to its depository's ability to effect these actions on its behalf
through DTC.
DTC, CEDEL and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of transition bonds among participants of
DTC, CEDEL and Euroclear. However, they are under no obligation to perform
or continue to perform these procedures and these procedures may be
discontinued at any time.
Management of DTC is aware that some systems that are dependent upon
calendar dates, including dates before, on, and after January 1, 2000, may
encounter "year 2000 problems." DTC has informed the industry that it has
developed and is implementing a program so that its systems, as the same
relate to the timely payment of principal, payments, interest payments and
related distributions to security-holders, book-entry deliveries, and
settlement of trades within DTC, continue to function appropriately. This
program includes a technical assessment and a remediation plan, each of
which is complete. Additionally, DTC's plan includes a testing phase, which
is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also
dependent upon other parties, including, but not limited to, issuers and
their agents, as well as DTC's direct participants and indirect
participants, third party vendors from whom DTC licenses software and
hardware, and third party vendors on whom DTC relies for information or the
provision of services, including telecommunication and electrical utility
service providers, among others. DTC has informed the Industry that it is
contacting, and will continue to contact, third party vendors from whom DTC
acquires services to
1. impress upon them the importance of these services being year
2000 compliant; and
2. determine the extent of their efforts for year 2000 remediation
and testing of their services.
In addition, DTC is in the process of developing the contingency plans that
it deems appropriate.
According to DTC, the information in the preceding two paragraphs
with respect to DTC has been provided to the Industry for informational
purposes only and is not intended to serve as a representation, warranty,
or contract modification of any kind.
CERTIFICATED TRANSITION BONDS
The Circumstances That Will Result in the Issuance of Certificated
Transition Bonds. Unless otherwise specified in the related prospectus
supplement, each class of transition bonds will be issued in fully
registered, certificated form to transition bondholders or their nominees,
rather than to DTC, only if:
1. the issuer advises the trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as
depository with respect to this class of transition bonds and
the issuer is unable to locate a qualified successor;
2. the issuer, at its option, elects to terminate the book-entry
system through DTC; or
3. after the occurrence of an event of default under the
indenture, transition bondholders representing at least a
majority of the outstanding principal amount of the transition
bonds of all series advise the trustee through DTC in writing
that the continuation of a book-entry system through DTC, or a
successor thereto, is no longer in the transition bondholders'
best interest.
The Delivery of Certificated Transition Bonds. Upon the occurrence of
any event described in the immediately preceding paragraph, DTC will be
required to notify all affected beneficial owners of transition bonds
through participants of the availability of certificated transition bonds.
Upon surrender by DTC of the certificated bonds representing the applicable
transition bonds and receipt of instructions for re-registration, the
trustee will authenticate and deliver certificated transition bonds.
Thereafter the trustee will recognize the holders of these certificated
transition bonds as transition bondholders under the indenture.
The Payment Mechanism for Certificated Transition Bonds. Payments of
principal of, and interest on, certificated transition bonds will be made
by the trustee, as paying agent, in accordance with the procedures set
forth in the indenture. These payments will be made directly to holders of
certificated transition bonds in whose names the certificated transition
bonds were registered at the close of business on the related record date
specified in each prospectus supplement. These payments will be made by
check mailed to the address of the holder as it appears on the register
maintained by the trustee. The final payment on any transition bond,
however, will be made only upon presentation and surrender of the
transition bond at the office or agency specified in the notice of final
payment to transition bondholders.
The Transfer or Exchange of Certificated Transition Bonds.
Certificated transition bonds will be transferable and exchangeable at the
offices of the transfer agent and registrar, which will initially be the
trustee. No service charge will be imposed for any registration of transfer
or exchange, but the transfer agent and registrar may require payment of a
sum sufficient to cover any tax or other governmental charge imposed in
connection therewith.
WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS
FOR THE TRANSITION BONDS
The rate of principal payments, the amount of each interest payment
and the actual final payment date for each series or class of transition
bonds will be dependent on the rate and timing of receipt of transition
bond charge collections and the availability of credit enhancement.
Accelerated receipts of transition bond charge collections will not,
however, result in payment of principal on the transition bonds earlier
than the related expected final payment dates. This is because receipts in
excess of the amounts necessary to amortize the transition bonds in
accordance with the applicable expected amortization schedule, to pay
interest on the transition bonds, to pay related expenses and to fund or
replenish the capital and overcollateralization subaccounts, will be
allocated to the reserve subaccount. However, delayed receipts of
transition bond charge collections may result in principal payments on the
transition bonds occurring more slowly than as reflected in the expected
amortization schedule or later than the related expected final payment
dates. Redemption of any class or series of transition bonds and
acceleration of the final maturity date after an event of default will
result in payment of principal earlier than the related expected final
payment dates.
The Effect of Transition Bond Charge Collections on the Timing of
Transition Bond Payments. The actual payments on each payment date for each
series or class of transition bonds and the weighted average life thereof
will be affected primarily by the rate and the timing of receipt of
transition bond charge collections. Amounts available in the reserve
subaccount, the overcollateralization subaccount and the capital subaccount
will also affect the weighted average life of the Transaction Bonds. The
aggregate amount of transition bond charge collections and the rate of
principal amortization on the transition bonds will depend, in part, on
actual energy usage by customers and the rate of delinquencies and
write-offs. This is because the transition bond charge will be calculated
based on estimates of usage and collections. The transition bond charge
will be adjusted from time to time based in part on the actual rate of
transition bond charge collections. However, there can be no assurance that
the servicer will be able to forecast accurately actual electricity usage
and the rate of collections or implement adjustments to the transition bond
charge that will cause transition bond charge collections to be received at
any particular rate. See "RISK FACTORS--SERVICING RISKS" AND "THE BPU
FINANCING ORDER AND THE TRANSITION BOND CHARGE--THE BPU'S TRANSITION BOND
CHARGE ADJUSTMENT PROCESS" in this prospectus.
A payment on a date that is later than the expected final payment
date might result in a longer weighted average life. In addition, if
scheduled payments on the transition bonds are received later than the
applicable scheduled payment dates, this might result in a longer weighted
average life of the transition bonds.
THE SALE AGREEMENT
The following summary describes particular material terms and
provisions of the sale agreement pursuant to which the seller is selling
and the issuer is purchasing the bondable transition property. The sale
agreement may be amended by the parties thereto, with the consent of the
trustee, if notice of the amendment is provided by the issuer to each
rating agency and the rating agency condition has been satisfied. The form
of the sale agreement has been filed as an exhibit to the registration
statement.
PSE&G'S SALE AND ASSIGNMENT OF BONDABLE TRANSITION PROPERTY
On the initial transfer date, pursuant to the sale agreement, the
seller will sell and assign to the issuer, without recourse, except as
provided therein, the initial bondable transition property. The bondable
transition property represents the irrevocable right to receive through the
transition bond charge amounts sufficient to recover bondable stranded
costs with respect to the related series of transition bonds. The net
proceeds received from the sale of the transition bonds will be applied to
the purchase of the bondable transition property. In addition, the seller
may from time to time offer to sell additional bondable transition property
to the issuer, subject to the satisfaction of the conditions specified in
the sale agreement and the indenture. Each subsequent sale will be financed
through the issuance of an additional series of transition bonds. If this
offer is accepted by the issuer, the subsequent sale will be effective on a
subsequent transfer date.
In accordance with the Competition Act, upon the issuance of the BPU
financing order, the execution and delivery of the sale agreement and the
related bill of sale and the filing of a financing statement under the New
Jersey Uniform Commercial Code, the transfer of the initial bondable
transition property will be perfected as against all third persons,
including judicial lien creditors. In addition, upon the execution of a
subsequent bill of sale and the filing of a financing statement under the
New Jersey Uniform Commercial Code, a transfer of subsequent bondable
transition property will also be perfected against all third persons,
including judicial lien creditors.
The initial bondable transition property is the bondable transition
property, as identified in the related bill of sale, sold to the issuer on
the initial transfer date pursuant to the sale agreement in connection with
the issuance of the initial series of transition bonds. The subsequent
bondable transition property is the bondable transition property, as
identified in the related bill of sale, sold to the issuer on any
subsequent transfer date pursuant to the sale agreement in connection with
the subsequent issuance of a series of transition bonds.
PSE&G'S REPRESENTATIONS AND WARRANTIES
In the sale agreement, the seller will make representations and
warranties to the issuer as of the initial transfer date and any subsequent
transfer date to the effect, among other things, that:
1. all information provided by the seller to the issuer with
respect to the bondable transition property is correct in all
material respects;
2. the transfers and assignments contemplated by the sale
agreement constitute sales of the initial bondable transition
property or the subsequent bondable transition property, as the
case may be, from the seller to the issuer, and the seller will
have no right, title or interest in the bondable transition
property and the bondable transition property would not be part
of the debtor's estate in the event of the filing of a
bankruptcy petition by or against the seller under any
bankruptcy law;
3. a. the seller is the sole owner of the bondable transition
property being sold to the issuer on the initial transfer
date or subsequent transfer date, as applicable,
b. the bondable transition property has been validly
transferred and sold to the issuer free and clear of all
liens other than liens created by the issuer pursuant to
the indenture, and
c. all filings (including filings with the New Jersey
Secretary of State under the New Jersey Uniform
Commercial Code) necessary in any jurisdiction
(1) for the transfer of the bondable transition
property to the issuer to be perfected against any
third party and
(2) to give the trustee a first priority perfected
security interest in the bondable transition
property
have been made;
4. the BPU financing order has been issued by the BPU in
accordance with the Competition Act, the BPU financing order
and the process by which it was issued comply with all
applicable laws, rules and regulations and the BPU financing
order is in full force and effect;
5. as of the date of issuance of any series of transition bonds,
the transition bonds are entitled to the protections provided
by the Competition Act and, in accordance with the Competition
Act, the BPU financing order and the transition bond charge
have become irrevocable and each issuance advice letter
delivered by the issuer to the BPU pursuant to the BPU
financing order is final and uncontestable;
6. a. under the Competition Act, the State of New Jersey may
not limit, alter or impair the bondable transition
property or other rights vested in the seller, the issuer
or the trustee of the transition bondholders pursuant to
the BPU financing order until the transition bonds are
fully paid and discharged, or in any way limit, alter,
impair or reduce the value or amount of the bondable
transition property; and
b. under the laws of the State of New Jersey and the United
States, the State of New Jersey may not take any action
that substantially impairs the rights of the transition
bondholders unless that action is a reasonable exercise
of the State of New Jersey's sovereign powers and
appropriate to further a legitimate public purpose, and,
under the Takings Clauses of the New Jersey and United
States Constitutions, in the event this action
constitutes a permanent appropriation of the property
interest of transition bondholders in the bondable
transition property and deprives the transition
bondholders of their reasonable expectations arising from
their investments in transition bonds, that action cannot
be taken unless just compensation, as determined by a
court of competent jurisdiction, is provided to
transition bondholders;
7. there is no order by any court providing for the revocation,
alteration, limitation or other impairment of the Competition
Act, the BPU financing order, the bondable transition property
or the transition bond charge or any rights arising under any
of them or that seeks to enjoin the performance of any
obligations under the BPU financing order;
8. no other approval, authorization, consent, order or other
action of, or filing with any court, federal or state
regulatory body, administrative agency or other governmental
instrumentality is required in connection with the creation or
transfer of bondable transition property, except those that
have been obtained or made;
9. except as disclosed by the seller to the issuer, there are no
proceedings or investigations pending or, to the best of the
seller's knowledge, threatened before any court, federal or
state regulatory body, administrative agency or other
governmental instrumentality having jurisdiction over the
issuer or the seller or their respective properties challenging
the Competition Act, the BPU financing order or the
restructuring order (insofar as it relates to the sale of the
bondable transition property);
10. the assumptions used in calculating the transition bond charge
in the issuance advice letter delivered by the issuer to the
BPU pursuant to the BPU financing order are reasonable and made
in good faith;
11. a. bondable transition property constitutes presently existing
property;
b. bondable transition property includes, without limitation;
(1) the irrevocable right of the seller to charge,
collect and receive, and be paid from collections
of, the transition bond charge in the amount
necessary to provide for the full recovery of the
bondable stranded costs described in the BPU
financing order,
(2) all rights of the seller under the BPU financing
order, and
(3) all rights to obtain periodic adjustments of the
transition bond charge; and
c. the BPU financing order, including the right to collect the
transition bond charge, are irrevocable by the BPU.
12. the seller is a corporation duly organized and in good standing
under the laws of the State of New Jersey, with corporate power
and authority to own its properties and conduct its business as
currently owned or conducted;
13. the seller has the corporate power and authority to execute and
deliver the sale agreement and to carry out its terms, the
seller has full corporate power and authority to own the
bondable transition property and sell and assign the initial
bondable transition property, in the case of the initial
transfer date, and the subsequent bondable transition property,
in the case of each subsequent transfer date, as applicable, to
the issuer and the seller has duly authorized this sale and
assignment to the issuer by all necessary corporate action and
the execution, delivery and performance of the sale agreement
have been duly authorized by the seller by all necessary
corporate action;
14. the sale agreement constitutes a legal, valid and binding
obligation of the seller, enforceable against the seller in
accordance with its terms, subject to customary exceptions
relating to bankruptcy and equitable principles;
15. the consummation of the transactions contemplated by the sale
agreement and the fulfillment of the terms thereof do not
conflict with, result in any breach of any of the terms and
provisions of, or constitute (with or without notice or lapse
of time) a default under, the articles of incorporation or
by-laws of the seller, or any indenture, agreement or other
instrument to which the seller is a party or by which it shall
be bound; nor result in the creation or imposition of any lien
upon any of its properties pursuant to the terms of any
applicable indenture, agreement or other instrument; nor
violate any law or any order, rule or regulation applicable to
the seller of any court or of any federal or state regulatory
body, administrative agency or other governmental
instrumentality having jurisdiction over the seller or its
properties;
16. except for the filing of financing statements and continuation
statements under the UCC, no approval, authorization, consent,
order or other action of, or filing with, any court, federal or
state regulatory body, administrative agency or other
governmental instrumentality is required in connection with the
execution and delivery by the seller of the sale agreement, the
performance by the seller of the transactions contemplated by
the sale agreement or the fulfillment by the seller of the
terms of the sale agreement, except those which have previously
been obtained or made;
17. there are no proceedings or investigations pending or, to the
seller's best knowledge, threatened, before any court, federal
or state regulatory body, administrative agency or other
governmental instrumentality having jurisdiction over the
seller or its properties
a. asserting the invalidity of the sale agreement, the
servicing agreement, any bills of sale for bondable
transition property, the issuer's limited liability
company agreement or the certificate of formation filed
with the State of Delaware to establish the issuer, which
are referred to together as the basic documents, or the
transition bonds,
b. seeking to prevent the issuance of transition bonds or
the consummation of the transactions contemplated by the
basic documents or the transition bonds,
c. seeking any determination or ruling that could be
reasonably expected to materially and adversely affect
the performance by the seller of its obligations under,
or the validity or enforceability of, the basic documents
or the transition bonds, or
d. challenging the seller's treatment of the transition
bonds as debt of the seller for federal and state income,
gross receipts or franchise tax purposes;
18. after giving effect to the sale of any bondable transition
property under the sale agreement, the seller:
a. is solvent and expects to remain solvent;
b. is adequately capitalized to conduct its business and
affairs considering its size and the nature of its
business and intended purposes;
c. is not engaged and does not expect to engage in a
business for which its remaining property represents an
unreasonably small portion of its capital; and
d. reasonably believes that it will be able to pay its debts
as they become due; and
e. is able to pay its debts as they mature and does not
intend to incur, or believe that it will incur,
indebtedness that it will not be able to repay at its
maturity; and
19. the seller is duly qualified to do business as a foreign
corporation in good standing, and has obtained all necessary
licenses and approvals, in all jurisdictions in which the
ownership or lease of property or the conduct of its business
require any qualifications, licenses or approvals (except where
the failure to so qualify would not be reasonably likely to
have a material adverse effect on the seller's business,
operations, assets, revenues, properties or prospects).
PSE&G'S OBLIGATION TO INDEMNIFY THE ISSUER AND THE TRUSTEE AND TO TAKE LEGAL
ACTION
Under the sale agreement, the seller is obligated to indemnify the
issuer and the trustee and related parties specified therein, against
1. any and all taxes, other than any taxes imposed on transition
bondholders solely as a result of their ownership of transition
bonds, that may at any time be imposed on or asserted against
any of those persons under existing law as of the date of
issuance of the transition bonds as a result of the sale and
assignment of the bondable transition property by the seller to
the issuer, the acquisition or holding of bondable transition
property by the issuer or the issuance and sale by the issuer
of transition bonds, including any sales, gross receipts,
general corporation, personal property, privilege or license
taxes, but excluding any taxes imposed as a result of a failure
of that person to properly withhold or remit taxes imposed with
respect to payments on any transition bond; and
2. (a) any and all amounts of principal and interest on the
transition bonds not paid when due or when scheduled to be paid
in accordance with their terms and the amount of any deposits
to the issuer required to have been made in accordance with the
terms of the basic documents which are not made when so
required, in each case, as a result of the seller's breach of
its representation, warranties, covenants or agreements
contained in the sale agreement, and
(b) any and all liabilities, obligations, claims, actions,
suits or payments of any kind whatsoever that may be imposed on
or asserted against any such person, other than any
liabilities, obligations or claims for or payments of principal
of or interest on the transition bonds, together with any
reasonable costs and expenses incurred by that person, in each
case as a result of the seller's breach of any of its
representations, warranties or covenants contained in the sale
agreement.
These indemnification obligations will rank pari passu with other general
unsecured obligations of the seller. The indemnities described above will
survive the termination of the sale agreement and include reasonable fees
and expenses of investigation and litigation (including reasonable
attorneys' fees and expenses).
PSE&G's Limited Obligation to Undertake Legal Action. The seller and
the servicer are required to institute any action or proceeding necessary
to compel performance by the BPU or the State of New Jersey of any of their
obligations or duties under the Competition Act or the BPU financing order
with respect to the bondable transition property. The cost of any action
reasonably allocated by the servicer or seller to the serviced bondable
transition property would be payable from transition bond charge
collections as an operating expense payable to the servicer and, in the
case of the seller, as reimbursed by the servicer to the seller. Except for
the foregoing and subject to the seller's further covenant to fully
preserve, maintain and protect the interests of the issuer in the bondable
transition property, the seller will not be under any obligation to appear
in, prosecute or defend any legal action that is not incidental to its
obligations under the sale agreement.
SUCCESSORS TO PSE&G
The sale agreement provides that any person which succeeds to the
major part of the electric public utility business of the seller will be
the successor to the seller. The sale agreement further requires that:
1. immediately after giving effect to any transaction referred to
in this paragraph, no representation or warranty made in the
sale agreement will have been breached and no servicer default,
and no event that, after notice or lapse of time, or both,
would become a servicer default will have occurred and be
continuing;
2. the rating agencies will have received prior written notice of
the transaction; and
3. officers' certificates and opinions of counsel specified in the
sale agreement will have been delivered to the issuer and the
trustee.
THE SERVICING AGREEMENT
The following summary describes the material terms of the servicing
agreement pursuant to which the servicer is undertaking to service bondable
transition property. The form of the servicing agreement has been filed as
an exhibit to the registration statement.
The servicing agreement may be amended by the parties thereto with
the consent of the trustee under the indenture, if the rating agency
condition has been satisfied.
PSE&G'S SERVICING PROCEDURES
General. The servicer, as agent for the issuer, will manage, service,
administer and make collections in respect of the transition bond charge.
The servicer's duties will include:
1. calculating and billing the transition bond charge and
collecting the transition bond charge from customers and third
party suppliers, as applicable;
2. responding to inquiries by customers and third party suppliers,
the BPU, or any federal, local or other state governmental
authority with respect to the transition bond charge;
3. accounting for transition bond charge collections,
investigating and resolving delinquencies, processing and
depositing collections, making periodic remittances and
furnishing periodic reports to the issuer, the trustee and the
rating agencies;
4. selling, as agent for the issuer, defaulted or written-off
accounts in accordance with the servicer's usual and customary
practices for accounts of its own electric service customers;
and
5. taking action in connection with adjustments to the transition
bond charge as described below.
The servicer is required to notify the issuer, the trustee and the rating
agencies in writing of any laws or BPU regulations promulgated after the
execution of the servicing agreement that have a material adverse effect on
the servicer's ability to perform its duties under the servicing agreement.
Collections Curve. The servicer will prepare annually a forecast of
the percentages of amounts billed in a particular calendar month, which is
referred to as a billing month, that are expected to be received during the
billing month and each of the following six months. These forecasts are
referred to as the collections curve.
In the servicing agreement, the servicer agrees to remit actual
transition bond charge collections for each billing month to the trustee
for deposit in the collection account not later than the reconciliation
date, described below, following that billing month. In addition, the
servicer agrees to make periodic payments on account of transition bond
charge collections to the trustee for deposit in the collection account as
follows. For, so long as:
1. PSE&G or any successor to PSE&G's electric public utility business
remains the servicer;
2. no servicer default has occurred and is continuing; and
3. a. PSE&G, or any successor referred to in this paragraph,
maintains a short-term rating of "A-1" or better by S&P,
"P-1" or better by Moody's, "F-1" or better by Fitch; or
b. the rating agency condition has been satisfied, and any
additional conditions or limitations imposed by the rating
agencies are complied with;
the servicer will remit these on account payments to the trustee on a
monthly basis. In that case, on the 15th day of each calendar month, or if
such 15th day is not a business day, the next business day, referred to as
a monthly remittance date, for each of the seven preceding billing months
an amount equal to the amount of transition bond charge collections
estimated to have been received during the preceding calendar month for
those billing months, based on the collections curve then in effect. The
collections curve is used to estimate transition bond charge collections
because the actual amount of those collections in any month cannot be
determined on a current basis and the servicer believes that the
collections curve provides a reasonably accurate estimate of those
collections. The estimated payments are made by the servicer from
collections received from customers. The estimated payments are reconciled
with actual collections on each reconciliation date as described below.
The sum of the amounts paid to the trustee over the seven-month
period following a particular billing month based on the collections curve
for that billing month, is referred to as the collections curve payment for
that billing month.
If the servicer has not satisfied the conditions specified above, the
servicer will remit estimated transition bond charge collections based on
the collections curve to the trustee within two business days. Each day on
which those remittances are made is referred to as a daily remittance date.
Daily remittance dates and monthly remittance dates are referred to
collectively in this prospectus as remittance dates.
On or before each reconciliation date, the servicer will compare the
actual transition bond charge collections to the collections curve payments
previously made to the trustee for each of the 12 billing months beginning
19 months before the month in which such reconciliation date occurs,
through the preceding month that is 7 months prior to the month in which
such reconciliation date occurs. Reconciliation date means the last
Business Day of each November commencing November 2000 through November
2012 and the last Business Day of each month thereafter. If the collections
curve payments previously made for those billing months exceed actual
transition bond charge collections for those billing months, this excess is
referred to as an excess collections curve payment. In that case, the
servicer may either:
1. reduce the amount that the servicer remits to the trustee for
deposit in the collection account on the following remittance
date, and if necessary, succeeding remittance dates, by the
amount of the excess collections curve payment; or
2. require the trustee to pay the servicer from the collection
account the amount of the excess collections curve payment,
which upon payment becomes property of the servicer.
If the estimated transition bond charge collections previously made for
those billing months are less than actual transition bond charge
collections for those billing months, this deficiency is referred to as a
collections curve payment shortfall. In that case, the servicer must pay
the collections curve payment shortfall to the trustee on that
reconciliation date for deposit in the collection account.
A business day is any day other than a Saturday or Sunday or a day on
which banking institutions in Newark, New Jersey or New York, New York are
required or authorized by law or executive order to close.
THE BPU'S TRANSITION BOND CHARGE ADJUSTMENT PROCESS
Among other things, the servicing agreement requires the servicer to
file adjustment requests on each calculation date which will be annually,
on December 1 through December 1, 2012, and quarterly commencing on October
1, 2013. The servicer is permitted under the BPU financing order to file
adjustment requests more often than annually but not more frequently than
quarterly. These adjustment requests are based on actual transition bond
charge collections and updated assumptions by the servicer as to projected
future usage of electricity by customers, expected delinquencies and
write-offs, future payments and expenses relating to bondable transition
property and the transition bonds and any amounts on deposit in the reserve
account. The servicer agrees to calculate these adjustments to result in
the calculations specified in "THE BPU FINANCING ORDER AND THE TRANSITION
BOND CHARGE--THE BPU'S TRANSITION BOND CHARGE ADJUSTMENT PROCESS."
The servicer will file adjustment requests 30 days in advance of the
date on which the servicer requests the adjustment to be effective. In the
absence of a determination by the BPU finding a manifest error, the
adjustment request will become effective on an interim basis thirty days
after filing, and final 60 days after filing. The servicer will be required
under the servicing agreement to file an adjustment request on December 1
of each year until December 1, 2012 and each October 1, January 1, April 1
and July 1 of each year beginning October 1, 2013 for so long as the
Transition Bonds remain outstanding.
PSE&G'S TRANSITION BOND CHARGE COLLECTIONS
The servicer is required to remit all transition bond charge
collections from whatever source, based on the collections curve, to the
trustee for deposit pursuant to the indenture on each remittance date.
Until transition bond charge collections are remitted to the collection
account, the servicer will not segregate them from its general funds.
Remittances of transition bond charge collections will not include interest
thereon prior to the remittance date or late fees from customers, which the
servicer may retain. See "RISK FACTORS--THE RISKs ASSOCIATED WITH POTENTIAL
BANKRUPTCY PROCEEDINGS" in this prospectus.
PSE&G'S COMPENSATION FOR ITS ROLE AS SERVICER AND ITS RELEASE OF OTHER PARTIES
The issuer agrees to pay the servicer a monthly servicing fee, in the
amount specified in the related prospectus supplement. The servicing fee
for each series, together with any portion of the servicing fee that
remains unpaid from prior payment dates, will be paid solely to the extent
funds are available therefor as described under "THE INDENTURE--HOW FUNDS
In THE COLLECTION ACCOUNT WILL BE ALLOCATED" in this prospectus. The
servicing fee will be paid prior to the payment of or provision for any
amounts in respect of interest on and principal of the transition bonds. In
the servicing agreement, the servicer releases the issuer and the trustee
from any and all claims whatsoever relating to bondable transition property
or the servicer's servicing activities with respect thereto.
PSE&G'S DUTIES AS SERVICER
In the servicing agreement, the servicer has agreed, among other
things, that, in servicing bondable transition property:
1. except where the failure to comply with any of the following
would not adversely affect the issuer's or the trustee's
respective interests in bondable transition property;
a. it will manage, service, administer and make collections
in respect of bondable transition property with
reasonable care and in material compliance with
applicable law and regulations, using the same degree of
care and diligence that the servicer exercises with
respect to billing and collection activities that the
servicer conducts for itself and others;
b. it will follow customary standards, policies and procedures;
c. it will use all reasonable efforts, consistent with its
customary servicing procedures, to enforce and maintain
rights in respect of bondable transition property;
d. it will calculate the transition bond charge in
compliance with the Competition Act, the BPU financing
order and any applicable tariffs;
2. it will keep on file, in accordance with customary procedures,
all documents related to bondable transition property and will
maintain accurate and complete accounts pertaining to bondable
transition property; and
3. it will use all reasonable efforts consistent with its
customary servicing procedures to collect all amounts owed in
respect of bondable transition property as they become due.
PSE&G'S REPRESENTATIONS AND WARRANTIES AS SERVICER
In the servicing agreement, the servicer will make representations
and warranties as of the date the seller sells or otherwise transfers
bondable transition property to the issuer to the effect, among other
things, that:
1. the servicer is a corporation duly organized and in good
standing under the laws of the state of its incorporation, with
the corporate power and authority to own its properties and
conduct its business as its properties are currently owned and
its business is presently conducted and to execute, deliver and
carry out the terms of the servicing agreement and has the
power, authority and legal right to service the bondable
transition property;
2. the servicer is duly qualified to do business as a foreign
corporation in good standing in all jurisdictions in which it
is required to do so;
3. the servicer's execution, delivery and performance of the
servicing agreement have been authorized by all necessary
corporate action;
4. the servicing agreement constitutes a binding obligation of the
servicer, enforceable against the servicer in accordance with
its terms, subject to customary exceptions relating to
bankruptcy and equitable principles;
5. the consummation of the transactions contemplated by the
servicing agreement does not conflict with the servicer's
articles of incorporation or by-laws or any material agreement
by which the servicer is bound, nor result in any lien upon the
servicer's properties or violate any law or regulation
applicable to the servicer or its properties;
6. except for filings under the New Jersey Uniform Commercial
Code, no governmental actions or filings are required for the
servicer to execute, deliver and perform its obligations under
the servicing agreement, except those which have been taken or
made; and
7. no proceeding is pending or, to the servicer's best knowledge,
threatened before any court or other governmental
instrumentality having jurisdiction over the servicer or its
properties:
a. except as disclosed by the servicer to the issuer,
seeking any determination or ruling that might materially
and adversely affect the performance by the servicer of
its obligations under, or the enforceability against the
servicer of, the servicing agreement; or
b. relating to the servicer and which might adversely affect
the federal or state income, gross receipts or franchise
tax attributes of the transition bonds.
PSE&G, AS SERVICER, WILL INDEMNIFY THE ISSUER AND OTHER RELATED ENTITIES
Under the servicing agreement, the servicer agrees to indemnify the
issuer, the trustee, for itself and on behalf of the transition
bondholders, and related parties specified in the servicing agreement,
against any liabilities of any kind that may be incurred by or asserted
against any of those persons as a result of:
1. the servicer's willful misfeasance, bad faith or gross
negligence in the performance of its duties under the servicing
agreement or the servicer's reckless disregard of its duties
under the servicing agreement;
2. the servicer's breach of any of its representations or
warranties under the servicing agreement; and
3. litigation and related expenses relating to its obligations as
servicer.
PSE&G, AS SERVICER, WILL PROVIDE STATEMENTS TO THE ISSUER AND TO THE TRUSTEE
For each payment date, the servicer will provide to the issuer and
the trustee a statement indicating, with respect to the bondable transition
property, among other things:
1. the amount to be paid to transition bondholders of that series
and class in respect of principal;
2. the amount to be paid to transition bondholders of that series
and class in respect of interest;
3. the projected transition bond balance and the transition bond
balance for that series and class as of that payment date;
4. the amount on deposit in the overcollateralization subaccount
for such series and the scheduled overcollateralization level
for such series, as of that payment date;
5. the amount on deposit in the capital subaccount for such series
as of that payment date; and
6. the amount, if any, on deposit in the reserve subaccount as of
that payment date.
On the basis of this information, the trustee will furnish to the
transition bondholders on each payment date the report described under "THE
INDENTURE--REPORTS TO HOLDERS OF THE TRANSITION BONDS."
On or before each remittance date, but not more frequently than monthly,
the servicer will furnish to the issuer and the trustee a statement setting
forth the aggregate amount remitted or to be remitted by the servicer to
the trustee for deposit on that remittance date pursuant to the indenture.
In addition, under the servicing agreement the servicer is required
to give written notice to the issuer, the trustee and each rating agency,
promptly after having obtained knowledge thereof, but in no event less than
five business days thereafter, of any event which, with the giving of
notice or the passage of time or both, would become a servicer default
under the servicing agreement.
PSE&G TO PROVIDE COMPLIANCE REPORTS CONCERNING THE SERVICING AGREEMENT
A firm of independent public accountants will furnish to the issuer,
the trustee and the rating agencies, on or before March 31 of each year, a
statement as to compliance by the servicer during the preceding calendar
year, or the relevant portion thereof, with procedures relating to the
servicing of bondable transition property. This report, which is referred
to as the annual accountant's report, will state that the firm has
performed the procedures in connection with the servicer's compliance with
the servicing obligations of the servicing agreement, identifying the
results of these procedures and including any exceptions noted. The
accounting firm providing the report will be independent of the servicer
within the meaning of the Code of Professional Ethics of the American
Institute of Certified Public Accountants. The servicing agreement will
also provide for delivery to the issuer and the trustee, on or before March
31 of each year, a certificate signed by an officer of the servicer. This
certificate will state that the servicer has fulfilled its obligations
under the servicing agreement for the preceding calendar year, or the
relevant portion thereof, or, if there has been a default in the
fulfillment of any relevant obligation, describing each default. The
servicer will give the issuer, each rating agency, and the trustee notice
of any servicer default under the servicing agreement.
MATTERS REGARDING PSE&G AS SERVICER
Pursuant to the servicing agreement, PSE&G may assign its obligations
under the servicing agreement to any successor approved by the BPU provided
the rating agency condition and other conditions specified in the BPU
financing order have been satisfied. Under the BPU financing order, the BPU
will permit a successor servicer to replace PSE&G only if it also
determines that the current credit ratings on the transition bonds will not
be withdrawn or downgraded.
Under the servicing agreement, any person which succeeds to the major
part of the electric distribution business of the servicer and which
assumes the obligations of the servicer, will be the successor of the
servicer under the servicing agreement. The servicing agreement further
requires that:
1. immediately after giving effect to the transaction referred to
in this paragraph, no representation or warranty made by the
servicer in the servicing agreement will have been breached and
no servicer default, and no event which, after notice or lapse
of time, or both, would become a servicer default will have
occurred and be continuing;
2. officers' certificates and opinions of counsel will have been
delivered to the issuer, the trustee, and the rating agencies;
and
3. prior written notice will have been received by the rating
agencies.
Subject to the foregoing provisions, PSE&G may not resign from the
obligations and duties imposed on it as servicer. However, PSE&G may resign
as servicer upon a determination, communicated to the issuer, the trustee
and each rating agency and evidenced by an opinion of counsel, that the
performance of PSE&G's duties under the servicing agreement is no longer
legal. This resignation will not become effective until a successor
servicer has assumed the duties of PSE&G under the servicing agreement.
Until the transition bonds have been paid in full and all related
obligations have been satisfied, PSE&G is obligated by the Competition Act
to provide electricity through its transmission and distribution system to
its customers and, as servicer, will have the right to meter, charge, bill,
collect and receive the transition bond charge from its customers for the
account of the issuer and the trustee. Each of these rights and obligations
may be assigned at the discretion of PSE&G. However, under the Competition
Act, if PSE&G defaults in respect of charging, collecting and receiving
revenues derived from transition bond charge, the trustee or the issuer may
apply to the BPU or any court of competent jurisdiction for an order
designating a trustee or other entity to act in place of PSE&G as the
servicer for the metering, charging, collecting and receiving the
transition bond charge for the account of the issuer and the trustee. Under
the Competition Act, the BPU or the court is required to issue the order.
The BPU may, at its discretion, establish criteria for the selection of any
entity that may become a successor servicer upon default or other adverse
material change in the financial condition of PSE&G.
Except as expressly provided in the servicing agreement, the servicer
will not be liable to the issuer for any action taken or not taken pursuant
to the servicing agreement or for errors in judgment. However, the servicer
will be liable to the extent this liability is imposed by reason of the
servicer's wilful misfeasance, bad faith or gross negligence or by reason
of reckless disregard of duties under the servicing agreement.
EVENTS CONSTITUTING A DEFAULT BY PSE&G IN ITS ROLE AS SERVICER
Servicer defaults will include, among other things:
1. any failure by the servicer to deliver to the trustee, on
behalf of the issuer, any required remittance that continues
unremedied for a period of five business days after written
notice of such failure is received by the servicer from the
issuer or the trustee;
2. any failure by the servicer to perform in any material respect
any other agreement in the servicing agreement or any other
Basic Document to which it is a party, which failure materially
and adversely affects bondable transition property and which
continues unremedied for 60 days after notice of this failure
has been given to the servicer by the issuer or the trustee, or
after discovery of this failure by an officer of the servicer,
as the case may be;
3. any representation or warranty made by the servicer in the
servicing agreement proves to have been incorrect when made,
which has a material adverse effect on any of the transition
bondholders or the issuer and which continues unremedied for 60
days after notice of this failure has been given to the
servicer by the issuer or the trustee or after discovery of
this failure by an officer of the servicer, as the case may be;
or
4. an event of bankruptcy, insolvency, readjustment of debt,
marshalling of assets and liabilities, or similar proceedings
with respect to the servicer or an action by the servicer
indicating its insolvency as specified in the servicing
agreement.
The trustee with the consent of the holders of the majority of the
principal amount of the transition bonds of all series and classes may
waive any default by the servicer, except a default in making any required
remittances to the trustee.
THE TRUSTEE'S RIGHTS IF PSE&G DEFAULTS AS SERVICER
As long as a servicer default remains unremedied, the trustee, with
the consent of the holders of a majority of the transition bonds of all
series, may terminate all the rights and obligations of the servicer under
the servicing agreement. However, the servicer's indemnification obligation
and obligation to continue performing its functions as servicer until a
successor servicer is appointed may not be terminated. Under the servicing
agreement, the trustee, with the consent of the holders of a majority of
the transition bonds of all series, may appoint a successor servicer. The
trustee may make arrangements for compensation to be paid to any successor
servicer. Only a successor servicer that is an electric public utility may
bring an action against a customer for nonpayment of the transition bond
charge, or terminate service for failure to pay the transition bond charge.
Upon a servicer default based upon the commencement of a case by or
against the servicer under the United States Bankruptcy Code or similar
laws, the trustee and the issuer may be prevented from effecting a transfer
of servicing. See "RISK FACTORS--THe RISKS ASSOCIATED WITH POTENTIAL
BANKRUPTCY PROCEEDINGS" in this prospectus. Upon a servicer default because
of a failure to make required remittances, the issuer or the trustee will
have the right to apply to the BPU for sequestration and payment of
revenues arising from the bondable transition property.
THE OBLIGATIONS OF A SERVICER THAT SUCCEEDS PSE&G
In accordance with the BPU financing order and the servicing
agreement, if a third party succeeds to the role of the servicer, the
servicer will cooperate with the issuer, the trustee and the successor
servicer in terminating the servicer's rights and responsibilities under
the servicing agreement. This procedure includes the transfer to the
successor servicer of all related documentation and cash. The servicer will
be liable for all reasonable costs and expenses incurred in transferring
servicing responsibilities. A successor servicer may not resign unless it
is prohibited from serving by law. The predecessor servicer is obligated,
on an ongoing basis, to cooperate with the successor servicer and provide
whatever information is, and take whatever actions are, reasonably
necessary to assist the successor servicer in performing its obligations
under the servicing agreement.
THE INDENTURE
The following summary describes some of the terms of the indenture
pursuant to which transition bonds will be issued. The form of the
indenture, including the form of the supplemental indenture, has been filed
as an exhibit to the registration statement of which this prospectus forms
a part.
THE SECURITY FOR THE TRANSITION BONDS
To secure the payment of principal of and premium, if any, and
interest on, and any other amounts owing in respect of, the transition
bonds pursuant to the indenture, the issuer will grant to the trustee for
the benefit of the transition bondholders a security interest in all of the
issuer's right, title and interest in and to the following collateral:
1. the bondable transition property sold by the seller to the
issuer pursuant to the sale agreement and all proceeds thereof;
2. the sale agreement;
3. all bills of sale delivered by the seller pursuant to the sale
agreement;
4. the servicing agreement;
5. the administration agreement;
6. the collection account, each subaccount therein and all amounts
on deposit therein from time to time, with the exception of
$100,000 to be held in the capital subaccount free of the lien
of the indenture to ensure that the issuer has sufficient
assets to pay its expenses as they come due;
7. any other property of whatever kind owned from time to time by
the issuer, other than:
a. cash or other property released to the issuer from the
capital subaccount in accordance with the indenture,
which other property is not expected to be substantial;
b. any payment received by the issuer pursuant to any hedge
agreement entered into by the issuer; and
c. proceeds from the sale of the transition bonds used to
pay the costs of issuance of the transition bonds and the
purchase price of the bondable transition property
pursuant to the sale agreement;
8. all present and future claims, demands, causes and chooses in
action in respect of
any or all of the foregoing; and
9. all payments on or under and all proceeds of every kind and
nature whatsoever in respect of any or all of the foregoing.
See "--HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATEd" below.
TRANSITION BONDS MAY BE ISSUED IN VARIOUS SERIES OR CLASSES
Transition bonds may be issued under the indenture from time to time
in series, so long as the rating agency condition is satisfied, to finance
the purchase by the issuer of bondable transition property, which is
referred to as a financing issuance. The aggregate principal amount of
transition bonds that may be authenticated and delivered under the
indenture may not exceed $2.525 billion plus the amount of any refunding
issuance. Any series of transition bonds may include one or more classes
which differ, among other things, as to interest rate and amortization of
principal. The terms of all transition bonds of the same series will be
identical, unless a series includes more than one class, in which case the
terms of all transition bonds of the same class will be identical. The
particular terms of the transition bonds of any series and class will be
set forth in the supplemental indenture. The terms of this series and any
classes thereof will not be subject to prior review by, or consent of, the
transition bondholders of any previously issued series. See "RISK
FACTORS--OTHER RISKS ASSOCIATED WITH AN INVESTMENT IN THe TRANSITION
BONDS," "THE TRANSITION BONDS" and "PSE&G'S RESTRUCTURING" in this
prospectus.
The principal source of repayment for all series of transition bonds
will be the transition bond charge collected by the servicer. The issuance
of additional series of transition bonds is not expected to adversely
affect the sufficiency of transition bond charge collections for payments
on any particular series of transition bonds. This is because the
transition bond charge and adjustments thereof are generally based on the
total principal amount of all transition bonds outstanding. Moreover, any
additional series of transition bonds will be issued only if it will not
result in the downgrading or withdrawal of any rating by a rating agency on
any outstanding bonds.
Under the indenture, the trustee will authenticate and deliver an
additional series of transition bonds only upon receipt by the trustee of,
among other things, a certificate of the issuer that no event of default
has occurred and is continuing, an opinion of counsel to the issuer and
evidence of satisfaction of the rating agency condition.
Opinion of Independent Certified Public Accountants Required for Each
Series or Class. In addition, in connection with the issuance of each new
series, the trustee will have to receive a certificate or opinion of a firm
of independent certified public accountants of recognized national
reputation. This certificate will be based on the assumptions used in
calculating the initial transition bond charge with respect to the
transferred bondable transition property or, if applicable, the most recent
revised transition bond charge with respect to the transferred bondable
transition property. The certificate will state to the effect that, after
giving effect to the issuance of the new series and the application of the
proceeds therefrom, the transition bond charge will be sufficient:
1. to pay all expenses, fees and charges of the issuer,
2. to pay interest of each series of transition bonds when due,
3. to pay principal of each series of transition bonds in
accordance with the expected amortization schedule therefor,
and
4. to fund the overcollateralization subaccount for each series to
the scheduled overcollateralization level for each series,
as of each payment date taking into account any amounts on deposit in the
reserve subaccount.
If the issuance is a refunding issuance, the amount of money
necessary to pay premiums, if any, and the outstanding principal balance of
and interest on the transition bonds being refunded will be deposited into
a separate account with the trustee.
THE COLLECTION ACCOUNT FOR THE TRANSITION BONDS
Under the indenture, the issuer will establish the collection
account, with the trustee or at another eligible institution as described
below. Funds received from collections of the transition bond charge will
be deposited into the collection account. The collection account will be
divided into the following subaccounts, which need not be separate bank
accounts:
1. the general subaccount;
2. one or more series subaccounts,
3. overcollateralization subaccount for each series,
4. the capital subaccount for each series,
5. if required by the indenture, one or more defeasance subaccounts,
and
6. the reserve subaccount.
All amounts in the collection account not allocated to any other
subaccount will be allocated to the general subaccount. Unless the context
indicates otherwise, references to the collection account include all of
the subaccounts contained therein. All money deposited from time to time in
the collection account, all deposits therein pursuant to the indenture, and
all investments made in eligible investments will be held by the trustee in
the collection account as part of the collateral, with the exception of
$100,000 in the capital subaccount.
The following institutions are eligible institutions for the
establishment of the collection account:
1. the corporate trust department of the trustee; or
2. a depositary institution organized under the laws of the United
States of America or any state or any domestic branch of a
foreign bank, which:
a. has either:
(1) a long-term unsecured debt rating of "AAA" by S&P
and Fitch and "A1" by Moody's; or
(2) a certificate of deposit rating of "A-1" by S&P and
"P-1" by Moody's, or any other long-term,
short-term or certificate of deposit rating
acceptable to the rating agencies; and
b. whose deposits are insured by the Federal Deposit Insurance
Corporation.
Appropriate Investments for Funds in the Collection Account. All
funds in the collection account shall be invested in any of the following
eligible investments:
1. direct obligations of, and obligations fully and
unconditionally guaranteed as to the timely payment by, the
United States of America;
2. demand deposits, time deposits, certificates of deposit of
depository institutions or trust companies specified in the
indenture;
3. commercial paper having, at the time of investment, a rating in
the highest rating category from each rating agency;
4. demand deposits, time deposits and certificates of deposit
which are fully insured by the Federal Deposit Insurance
Corporation;
5. money market funds which have the highest rating from each
rating agency, including funds for which the trustee or any of
its affiliates is investment manager or advisor,
6. banker's acceptances issued by any depository institution or
trust company referred to in clause 2 above;
7. repurchase obligations with respect to any security that is a
direct obligation of, or fully guaranteed by, the United States
of America or agencies or instrumentalities thereof, entered
into with depository institutions or trust companies in each
case as specified in the indenture;
8. repurchase obligations with respect to any security or whole
loan, as provided and with the ratings specified in the
indenture; or
9. any other investment permitted by each rating agency.
These eligible investments may not:
1. be sold, liquidated or otherwise disposed of at a loss, prior to
the maturity thereof; or
2. mature later than the next payment date, except for any funds
in the collection account in excess of the amount needed to
make all required and scheduled payments and deposits on the
next payment date, which may mature at any time before the
second following payment date.
In the case of a defeasance, the issuer will deposit U.S. Government
Obligations in the defeasance subaccount. U.S. Government Obligations are
direct obligations, or certificates representing an ownership interest in
those obligations, of the United States of America, including any agency or
instrumentality thereof, for the payment of which the full faith and credit
of the United States of America is pledged and which are not callable at
the issuer's option. No money held in the collection account may be
invested, and no investment held in the collection account may be sold,
unless the security interest in the collection account will continue to be
perfected in the investment or the proceeds of the sale.
Remittances to the Collection Account. On each remittance date, as
described under "THE SERVICING AGREEMENT - PSE&G'S SERVICING PROCEDURES -
COLLECTIONS CURVE" above, the servicer will remit the estimated transition
bond charge collections and any indemnity amounts to the trustee under the
indenture for deposit in the collection account. An indemnity amount is any
amount paid by PSE&G, as the seller or the servicer, to the trustee, for
the trustee itself or on behalf of the transition bondholders, in respect
of indemnification obligations pursuant to the sale agreement or the
servicing agreement. See "THE SALE AGREEMENT" and "THE SERVICING AGREEMENT."
Collection Account. Transition bond charge collections will be
deposited into the collection account. On each payment date, the trustee
will allocate amounts in the collection account to the General Subaccount
as described under "HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED"
below.
General Subaccount. Transition bond charge collections will be
deposited into the general subaccount. On each payment date, the trustee
will allocate amounts in the general subaccount among the other subaccounts
as described under "HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED"
below.
Series Subaccount. Upon the issuance of each series of transition
bonds, a series subaccount will be established for that series. On each
payment date, the trustee will allocate from amounts on deposit in the
general subaccount to each series subaccount an amount sufficient to pay:
1. interest payable on each class of that series on that payment
date;
2. the principal of each class of that series payable as a result
of an acceleration following the occurrence of an event of
default, the principal of each class of that series payable on
the final maturity date of that series, or the principal of
each class of that series payable on a redemption date;
3. principal scheduled to be paid on each class of that series on
the next payment date, excluding amounts provided for in clause
2 above;
On each payment date, allocations will be made to each series subaccount as
described under "HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED"
below. On each payment date, the trustee will withdraw funds from the
series subaccount to make payments on the related series of transition bonds.
Capital Subaccount. Upon the issuance of each series of transition
bonds, PSE&G will make a capital contribution to the issuer from PSE&G's
general funds in an amount equal to the required capital amount. The issuer
will pay this amount to the trustee for deposit into the capital subaccount
for such series which will be invested in eligible investments. The trustee
will draw on amounts in the capital subaccount for such series to the
extent that, in allocating funds in accordance with clauses 1 through 7 for
such series in "HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED"
below, amounts on deposit in the general subaccount, the series
subaccounts, the reserve subaccount and the overcollateralization
subaccount for such series are insufficient to make scheduled distributions
and payments of fees and expenses specified in those clauses. If any series
of transition bonds has been retired as of any payment date, the amounts on
deposit in the capital subaccount for such series will be released to the
issuer, free of the lien of the indenture. The issuer is not contractually
obligated to pay over to PSE&G any amounts released to the issuer from the
capital subaccount upon retirement of any series of transition bonds.
Overcollateralization Subaccount. Transition bond charge collections
to the extent available as described in "HOW FUNDS IN THE COLLECTION
ACCOUNT WILL BE ALLOCATED" below will be allocated to the
overcollateralization subaccount for any series on each payment date. Each
prospectus supplement will specify the scheduled overcollateralization
level on each payment date for the related series of transition bonds. The
overcollateralization amount for any series will be funded over the life of
the transition bonds of each series and in aggregate will equal the amount
stated in the related prospectus supplement for that series, which is
referred to as the overcollateralization amount.
Amounts in the overcollateralization subaccount for any series will
be invested in eligible investments. On each payment date, the trustee will
draw on the overcollateralization subaccount for any series to the extent
that, in allocating funds to such series in accordance with clauses 1
through 7 in "HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE Allocated" below,
amounts on deposit in the general subaccount, the series subaccounts and
the reserve subaccount are insufficient to make scheduled distributions and
payments of fees and expenses specified in those clauses. If any series of
transition bonds has been retired as of any payment date, the amounts on
deposit in the overcollateralization subaccount for such series will be
released to the issuer, free of the lien of the indenture. The issuer is
not contractually obligated to pay over to PSE&G any amounts released to
the issuer from the overcollateralization subaccount upon retirement of any
series of transition bonds.
Reserve Subaccount. Transition bond charge collections available on
any payment date that are not necessary to pay clauses 1 to through 12 in
"HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED" below will be
allocated to the reserve subaccount. Amounts in the reserve subaccount will
be invested in eligible investments. On each payment date, the trustee will
draw on the reserve subaccount, if any, to the extent that, in allocating
funds in accordance with clauses 1 through 8; 10 and 11 in "HOW FUNDS IN
THE COLLECTION ACCOUNT WILL BE Allocated" below, amounts on deposit in the
general subaccount and the series subaccounts are insufficient to make
scheduled distributions and payments of fees and expenses specified in
those clauses.
Defeasance Subaccount. In the event funds are remitted to the trustee
in connection with the exercise of the legal defeasance option or the
covenant defeasance option, the issuer will establish a defeasance
subaccount for each series. If this occurs, funds set aside for future
payment of the transition bonds will be deposited into the defeasance
subaccount. All amounts in a defeasance subaccount will be applied by the
trustee to the payment to the holders of the affected transition bonds.
These amounts will include all sums due for principal, premium, if any, and
interest. These amounts will be applied in accordance with the provisions
of the transition bonds and the indenture. See "THE ISSUER'S LEGAL
DEFEASANCE AND COVENANT DEFEASANCE OPTIONS" below.
HOW FUNDS IN THE COLLECTION ACCOUNT WILL BE ALLOCATED
Amounts remitted from the servicer to the trustee, and all investment
earnings on the subaccounts in the collection account, will be deposited
into the general subaccount of the collection account. Amounts on deposit
in the general subaccount will be allocated to each outstanding series, pro
rata, based upon the outstanding principal amount of each series. The
servicer will draw on the general subaccount for payment of the monthly
servicing fee. On each payment date, the trustee will allocate all amounts
in the general subaccount in the following priority:
1. all amounts owed to the trustee will be paid to the trustee;
2. the servicing fee and all unpaid servicing fees from prior
payment dates will be paid to the servicer;
3. the administration fee payable under the administration
agreement between the issuer and PSE&G will be paid to PSE&G
and fees and expenses of and indemnities payable to the
independent managers of the issuer, plus legal fees and
expenses of, and indemnity amounts payable to, the independent
managers;
4. so long as no event of default has occurred and is continuing
or would be caused by this payment, all operating expenses of
the issuer other than those specified in clauses 1, 2 and 3
above, will be paid to the persons entitled thereto, provided
that the amount paid on any payment date pursuant to this
clause may not exceed [$ ] in the aggregate for all series;
5. an amount equal to interest payable on each class of each
series of transition bonds for the payment date will be
allocated to the corresponding series subaccount or will be
paid to the counterparty on any interest rate swap between the
issuer and that counterparty if so specified in the related
prospectus supplement;
6. an amount equal to principal of each class of any series of
transition bonds payable as a result of acceleration triggered
by an event of default, principal of any class of any series of
transition bonds payable on the final maturity date for that
class or series, or the principal payable with respect to a
redemption date will be allocated to the corresponding series
subaccount;
7. an amount equal to principal scheduled to be paid on each class
of each series of transition bonds on the next payment date,
excluding amounts provided for pursuant to clause 6 above, will
be allocated to the corresponding series subaccount;
8. payment of any amounts payable under any hedge agreement will
be paid to any hedge counterparty;
9. all remaining unpaid operating expenses and indemnity amounts
will be paid to the persons entitled thereto;
10. any amount necessary to replenish the capital subaccount for
each series will be allocated to that subaccount;
11. an amount will be allocated to the overcollateralization
subaccount for each series to cause the amount in the
overcollateralization subaccount for each series to equal the
scheduled overcollateralization level for the
overcollateralization subaccount;
12. so long as no event of default has occurred and is continuing,
an amount equal to investment earnings since the preceding
payment date on amounts in each capital subaccount will be
released to the issuer;
13. the balance, if any, will be allocated to the reserve subaccount;
and
14. following repayment of all outstanding series of transition
bonds, the balance, if any, will be released to the issuer free
from the lien of the indenture.
Interest means, for any payment date for any series of transition
bonds, the sum, without duplication, of:
1. an amount equal to the amount of interest accrued at the
applicable interest rates from the prior payment date with
respect to that series;
2. any unpaid interest plus any interest accrued on this unpaid
interest;
3. if the transition bonds have been declared due and payable, all
accrued and unpaid interest thereon; and
4. with respect to a series to be redeemed prior to the next
payment date, the amount of interest that will be payable as
interest on the series on that redemption date.
Principal means, with respect to any payment date and any series of
transition bonds:
1. the amount of principal scheduled to be paid on such payment date;
2. the amount of principal due on the final maturity date of any
series;
3. the amount of principal due as a result of the occurrence and
continuance of an event of default and acceleration of the
transition bonds;
4. the amount of principal, due as a result of a redemption of
transition bonds prior to the next payment date pursuant to the
indenture; and
5. any overdue payments of principal.
If on any payment date funds in the general subaccount are
insufficient to make the allocations contemplated by clauses 1 through 11
above for any series, the trustee will draw from amounts on deposit in the
following subaccounts in the following order up to the amount of the
shortfall for such series:
1. from the reserve subaccount (pro rata to the outstanding
principal balance of each series if the amount in the reserve
subaccount is insufficient to cover the shortfalls for all
outstanding series) for allocations in clauses 1 through 8,
10 and 11,
2. from the overcollateralization subaccount for such series, for
allocations in clauses 1 through 7, and
3. from the capital subaccount for such series, for allocations in
clauses 1 through 7.
If the amount in the reserve subaccount is insufficient to cover the
shortfalls for all outstanding series, the trustee will allocate funds in
the reserve subaccount pro rata, as follows, unless otherwise provided in
the prospectus supplement. Interest payments will be paid in the proportion
that the aggregate outstanding principal amount of such series or class
bears to the total outstanding principal amount of all series and classes.
Payments of principal will be paid in the proportion that the aggregate
principal scheduled to be paid on that payment date for that series or
class bears to the aggregate principal scheduled to be paid on that payment
date for all series and classes.
REPORTS TO HOLDERS OF THE TRANSITION BONDS
With respect to each series of transition bonds, on or prior to each
payment date, the trustee will deliver a statement prepared by the trustee
to each transition bondholder of that series. This statement will include,
to the extent applicable, the following information, as well as any other
information so specified in the related supplemental indenture, as to the
transition bonds of that series with respect to that payment date or the
period since the previous payment date:
1. the amount to be paid to transition bondholders of that series
and class as principal;
2. the amount to be paid to transition bondholders of that series
and class as interest;
3. the projected transition bond balance and the transition bond
balance for that series and class as of that payment date;
4. the amount on deposit in the overcollateralization subaccount
and the scheduled overcollateralization level, as of that
payment date;
5. the amount on deposit in the capital subaccount as of that
payment date; and
6. the amount, if any, on deposit in the reserve subaccount as of
that payment date.
THE ISSUER AND THE TRUSTEE MAY MODIFY THE INDENTURE
Modifications of the Indenture that Do Not Require Consent of
Transition Bondholders. Without the consent of any of the holders of the
outstanding transition bonds but with prior notice to the rating agencies,
the issuer and the trustee may execute a supplemental indenture for any of
the following purposes:
1. to correct or amplify the description of the collateral, or
better to confirm unto the trustee the collateral, or to
subject to the lien of the indenture additional property;
2. to evidence the succession, in compliance with the indenture,
of another person to the issuer, and the assumption by the
successor of the covenants of the issuer in the indenture and
in the transition bonds;
3. to add to the covenants of the issuer, for the benefit of the
holders of the transition bonds, or to surrender any right or
power conferred upon the issuer in the indenture;
4. to assign any property to or with the trustee;
5. to cure any ambiguity, to correct any inconsistent provision of
the indenture or any supplemental indenture or to make any
other provisions with respect to matters arising under the
indenture or in any supplemental indenture; but:
a. this action shall not, as evidenced by an opinion of
counsel, adversely affect in any material respect the
interests of any transition bondholder; and
b. the rating agency condition shall have been satisfied;
6. to provide for a successor trustee and to facilitate the
administration of the trusts under the indenture by more than
one trustee, pursuant to the indenture;
7. to modify the indenture to effect the qualification of the
indenture under the Trust Indenture Act or any similar federal
statute hereafter enacted and to add to the indenture any other
provisions as may be expressly required by the Trust Indenture
Act; or
8. to set forth the terms of any series that has not theretofore
been authorized by a supplemental indenture, provided that the
rating agency condition has been satisfied.
Modifications That Require the Approval of the Transition
Bondholders. The issuer and the trustee also may, with prior notice to the
rating agencies and with the consent of the holders of not less than a
majority of the outstanding amount of the transition bonds of each series
or class to be affected thereby, execute a supplemental indenture to add
any provisions to, or change in any manner or eliminate any of the
provisions of, the indenture or modify in any manner the rights of the
transition bondholders under the indenture. However, this supplemental
indenture may not, without the consent of the holder of each outstanding
transition bond of each series or class affected thereby:
1. change the date of payment of any scheduled payment of
principal of or premium, if any, or interest on any transition
bond, or reduce the principal amount thereof, the interest rate
specified thereon or the redemption price or the premium, if
any, with respect thereto, change the provisions of the
indenture and the applicable supplemental indenture relating to
the application of collections on, or the proceeds of the sale
of, the collateral to payment of principal of or premium, if
any, or interest on the transition bonds, or change the
currency in which any transition bond or any interest thereon
is payable;
2. impair the right to institute suit for the enforcement of the
provisions of the indenture regarding payment;
3. reduce the percentage of the aggregate amount of the
outstanding transition bonds, or of a series or class thereof,
the consent of the holders of which is required for any
supplemental indenture, or the consent of the holders of which
is required for any waiver of compliance with specified
provisions of the indenture or of defaults and their
consequences;
4. reduce the percentage of the outstanding amount of the
transition bonds required to direct the trustee to direct the
issuer to liquidate the collateral;
5. modify the section of the indenture relating to the consent of
transition bondholders with respect to supplemental indentures,
except to increase any percentage specified therein or to
provide that those provisions of the indenture or the basic
documents specified in the indenture cannot be modified or
waived without the consent of each outstanding transition
bondholder affected thereby;
6. modify the indenture to affect the amount of any payment of
interest, principal or premium, if any, payable on any
transition bond on any payment date or change the redemption
dates, expected amortization schedules or series final maturity
dates or class final maturity dates of any transition bonds;
7. decrease the required capital amount with respect to any
series, the overcollateralization amount or the scheduled
overcollateralization level with respect to any payment date;
8. modify the indenture regarding the voting of transition bonds
held by the issuer, the seller, an affiliate of either of them
or any obligor on the transition bonds;
9. decrease the percentage of the aggregate principal amount of
the transition bonds required to amend the sections of the
indenture which specify the applicable percentage of the
aggregate principal amount of the transition bonds necessary to
amend the indenture or other related agreements specified
therein; or
10. permit the creation of any lien ranking prior to or on a parity
with the lien of the indenture with respect to any of the
collateral for the transition bonds or, except as otherwise
contemplated in the indenture, terminate the lien of the
indenture on any property or deprive the holder of any
transition bond of the security of the indenture.
Enforcement of the Sale Agreement and Servicing Agreement. The
indenture will provide that the issuer will take all lawful actions to
enforce its rights under the sale agreement and the servicing agreement.
The indenture will also provide that the issuer will take all lawful
actions to compel or secure the performance and observance by PSE&G and the
servicer of each of their respective obligations to the issuer under the
sale agreement and the servicing agreement. So long as no event of default
occurs and is continuing, the issuer may exercise any and all rights,
remedies, powers and privileges lawfully available to the issuer under or
in connection with the sale agreement and the servicing agreement. However,
if the issuer and PSE&G or the servicer propose to amend, modify, waive,
supplement, terminate or surrender, or agree to any amendment,
modification, supplement, termination, waiver or surrender of, the process
for adjusting the transition bond charge, the issuer must notify the
trustee and the trustee must notify transition bondholders of this
proposal. In addition, the trustee may consent to this proposal only with
the consent of the holders of a majority of the principal amount of the
outstanding transition bonds of each series or class materially and
adversely affected thereby and only if the rating agency condition is
satisfied.
If an event of default occurs and is continuing, the trustee may, and
at the direction of the holders of a majority of the outstanding amount of
the transition bonds of all series shall, exercise all rights, remedies,
powers, privileges and claims of the issuer against the seller or the
servicer under or in connection with the sale agreement and the servicing
agreement, and any right of the issuer to take this action shall be
suspended. In the event of a foreclosure, there is likely to be a limited
market, if any, for the bondable transition property, and, therefore,
foreclosure may not be a realistic or practical remedy.
Modifications to the Sale Agreement and the Servicing Agreement. With
the consent of the trustee, the sale agreement and the servicing agreement
may be amended, so long as the rating agency condition is satisfied, at any
time and from time to time, without the consent of the transition
bondholders. However, this amendment may not adversely affect the interest
of any transition bondholder in any material respect without the consent of
the holders of a majority of the outstanding transition bonds of each
series or class materially and adversely affected thereby.
Notification of the Rating Agencies, the Trustee and the Transition
Bondholders of any Modification. If the issuer, PSE&G or the servicer:
1. proposes to amend, modify, waive, supplement, terminate or
surrender, or agree to any other amendment, modification,
waiver, supplement, termination or surrender of, the terms of
the sale agreement or the servicing agreement; or
2. waive timely performance or observance by PSE&G or the servicer
under the sale agreement or servicing agreement, respectively;
in each case in a way which would materially and adversely affect the
interests of transition bondholders, the issuer must first notify the
rating agencies of the proposed amendment. Upon receiving notification
regarding the rating agency condition, the issuer must thereafter notify
the trustee and the trustee must notify the transition bondholders of the
proposed amendment and whether the rating agency condition has been
satisfied with respect thereto. The trustee will consent to this proposed
amendment, modification, supplement or waiver only with the consent of the
holders of a majority of the outstanding principal amount of the transition
bonds of each series or class materially and adversely affected thereby and
once the rating agency condition has been satisfied.
WHAT CONSTITUTES AN EVENT OF DEFAULT ON THE TRANSITION BONDS
An "Event of Default" is defined in the indenture as:
1. a default for five business days in the payment of any interest
on any transition bond;
2. a default in the payment of the principal of any transition
bond of any series on the final maturity date for that series
or, if applicable, any class on the final maturity date for
that class;
3. a default in the payment of the redemption price for any
transition bond on the redemption date therefor;
4. a default in the observance or performance of any covenant or
agreement of the issuer made in the indenture (other than those
specifically dealt with in 1, 2 or 3 above) and the
continuation of that default for a period of 30 days after the
earlier of the date (a) notice is given to the issuer by the
trustee; (b) notice is given to the issuer and the trustee by
the holders of at least 25% in principal amount of the
transition bonds of any series or class, or (c) the issuer has
knowledge of the default; and
5. specified events of bankruptcy, insolvency, receivership or
liquidation of the issuer.
If an event of default occurs and is continuing, the trustee or holders of
a majority in principal amount of the transition bonds of all series then
outstanding may declare the principal of all series of the transition bonds
to be immediately due and payable. This declaration may, under the
circumstances specified in the indenture, be rescinded by the holders of a
majority in principal amount of all series of the transition bonds then
outstanding.
When the Trustee Can Sell the Collateral. If the transition bonds of
all series have been declared to be due and payable following an event of
default, the trustee may, in its discretion, either:
1. sell the collateral or
2. elect to have the issuer maintain possession of the collateral
and continue to apply distributions on the collateral as if
there had been no declaration of acceleration.
The trustee is prohibited from selling the collateral following an event of
default other than a default in the payment of any principal, a default for
five days or more in the payment of any interest on any transition bond of
any series or a default in the payment of the redemption price for any
transition bond on the redemption date therefor unless:
1. the holders of 100% of the principal amount of all series of
transition bonds consent to this sale; or
2. the proceeds of this sale are sufficient to pay in full the
principal of and premium, if any, and accrued interest on the
outstanding transition bonds; or
3. the trustee determines that funds provided by the collateral
would not be sufficient on an ongoing basis to make all
payments on the transition bonds of all series as these
payments would have become due if the transition bonds had not
been declared due and payable, and the trustee obtains the
consent of the holders of 66 2/3% of the aggregate principal
outstanding amount of the transition bonds of all series.
Right of Transition Bondholders to Direct Proceedings. Subject to the
provisions for indemnification and the limitations contained in the
indenture, the holders of a majority in principal amount of the outstanding
transition bonds of all series will have the right to direct the time,
method and place of conducting any proceeding or any remedy available to
the trustee or exercising any trust or power conferred on the trustee;
provided that, among other things:
1. this direction shall not conflict with any rule of law or with
the indenture;
2. subject to the provisions specified in the indenture, any
direction to the trustee to sell or liquidate the collateral
shall be by the holders of 100% of the principal amount of all
series of transition bonds then outstanding; and
3. the trustee may take any other action deemed proper by the
trustee that is not inconsistent with this direction.
In case an event of default occurs and is continuing, the trustee will be
under no obligation to exercise any of the rights or powers under the
indenture at the direction of any of the holders of transition bonds of any
series if it reasonably believes it will not be adequately indemnified
against the costs, expenses and liabilities which might be incurred by it
in complying with this request. The trustee does not need to take any
action pursuant to the direction of the transition bondholders if it
determines that this action might materially adversely affect the rights of
any transition bondholder not consenting to this action.
Waiver of Default. The holders of a majority in principal amount of
the transition bonds of all series then outstanding may, in those cases
specified in the indenture, waive any default with respect thereto.
However, they may not waive a default in the payment of principal of or
premium, if any, or interest on any of the transition bonds or a default in
respect of a covenant or provision of the indenture that cannot be modified
without the waiver or consent of all of the holders of the outstanding
transition bonds of all affected series and classes.
No transition bondholder will have the right to institute any
proceeding, judicial or otherwise, or to avail itself of the right to
foreclose on the bondable transition property or otherwise enforce the lien
in the bondable transition property, with respect to the indenture, unless:
1. the holder previously has given to the trustee written notice of
a continuing event of default;
2. the holders of not less than 25% in principal amount of the
outstanding transition bonds of all series have made written
request of the trustee to institute the proceeding in its own
name as trustee;
3. the holder or holders have offered the trustee security or
indemnity reasonably satisfactory to the trustee against the
liabilities to be incurred in complying with the request;
4. the trustee for 60 days after its receipt of the notice,
request and offer has failed to institute the proceeding; and
5. no direction inconsistent with this written request has been
given to the trustee during the 60-day period referred to above
by the holders of a majority of the outstanding transition
bonds of all series.
COVENANTS OF THE ISSUER
The issuer will keep in effect its existence as a limited liability
company under Delaware law, provided that the issuer may consolidate with
or merge into another entity or sell substantially all of its assets to
another entity and dissolve if:
1. the entity formed by or surviving the consolidation or merger
or to whom substantially all of its assets are sold is
organized under the laws of the United States or any state
thereof and expressly assumes by a supplemental indenture the
due and punctual payment of the principal of and premium, if
any, and interest on all transition bonds and the performance
of the issuer's obligations under the indenture;
2. the entity expressly assumes all obligations and succeeds to
all rights of the issuer under the sale agreement and the
servicing agreement pursuant to an assignment and assumption
agreement executed and delivered to the trustee;
3. no default or event of default will have occurred and be
continuing immediately after giving effect the merger,
consolidation or sale;
4. the rating agency condition will have been satisfied;
5. the issuer has received an opinion of counsel to the effect
that this consolidation or merger or sale would have no
material adverse tax consequence to the issuer or any
transition bondholder, the consolidation or merger or sale
complies with the indenture and all conditions precedent
therein provided relating to the consolidation or merger or
sale and will result in the trustee maintaining a continuing
valid first priority security interest in the collateral;
6. none of the bondable transition property, the BPU financing
order or the seller's, the servicer's or the issuer's rights
under the Competition Act or the BPU financing order are
impaired thereby; and
7. any action that is necessary to maintain the lien and security
interest created by the indenture will have been taken.
Additional Covenants of the Issuer. The issuer will take any action
necessary or advisable to, among other things, maintain and preserve the
lien and security interest, and priority thereof, of the indenture. The
issuer will not permit the validity of the indenture to be impaired, the
lien to be amended, subordinated or terminated or discharged, or any person
to be released from any covenants or obligations except as expressly
permitted by the indenture. The issuer will also not permit any lien,
charge, claim, security interest, mortgage or other encumbrance, other than
the lien and security interest created by the indenture, to be created on
or extend to or otherwise arise upon or burden the collateral or any part
thereof or any interest therein or the proceeds thereof. Finally, the
issuer will not permit the lien of the indenture not to constitute a
continuing valid first priority security interest in the collateral.
The issuer may not, among other things:
1. except as expressly permitted by the indenture dispose of any
of the collateral unless directed to do so by the trustee in
accordance with the indenture; or
2. claim any credit on, or make any deduction from the principal
or premium, if any, or interest payable in respect of, the
transition bonds, other than amounts properly withheld under
the Code, or assert any claim against any present or former
transition bondholder because of the payment of taxes levied or
assessed upon the issuer.
The issuer may not engage in any business other than purchasing and
owning the bondable transition property, issuing transition bonds from time
to time, pledging its interest in the collateral to the trustee to secure
the transition bonds, and performing activities that are convenient to
accomplish the foregoing.
The Issuer May Not Engage in Any Other Financial Transactions. The
issuer may not issue, incur, assume or guarantee any indebtedness except
for the transition bonds and any obligations under any credit enhancement
or hedge agreement for any series of transition bonds. Also, the issuer may
not guarantee or otherwise become contingently liable in connection with
the obligations, stocks or dividends of, or own, purchase, repurchase or
acquire, or agree contingently to acquire any stock, obligations, assets or
securities of, or any other interest in, or make any capital contribution
to, any other person, other than the eligible investments. The issuer may
not make any loan or advance or credit to any person. The issuer will not
make any expenditure for capital assets or lease any capital asset other
than bondable transition property purchased from the seller pursuant to,
and in accordance with, the sale agreement. The issuer may not make any
payments, distributions or dividends to any member of the issuer in respect
of its membership interest in the issuer, other than any amount released to
the issuer by the trustee in accordance with the indenture and except as
otherwise provided in the indenture.
The servicer will deliver to the trustee the Annual Accountant's
Report, compliance certificates and monthly reports regarding distributions
and other statements required by the servicing agreement. See "THE
SERVICING AGREEMENT" in this prospectus.
ACCESS TO THE LIST OF HOLDERS OF THE TRANSITION BONDS
Any transition bondholder may, by written request to the trustee,
obtain access to the list of all transition bondholders maintained by the
trustee for the purpose of communicating with other transition bondholders
with respect to their rights under the indenture or the transition bonds.
The trustee may elect not to afford a requesting transition bondholder
access to the list of transition bondholders if it agrees to mail the
desired communication or proxy, on behalf and at the expense of the
requesting transition bondholder, to all transition bondholders.
THE ISSUER MUST FILE AN ANNUAL COMPLIANCE STATEMENT
The issuer will be required to file annually with the trustee a
written statement as to the fulfillment of its obligations under the
indenture. In addition, the issuer will furnish to the trustee an opinion
of counsel concerning filings made by the issuer on an annual basis and
before the effectiveness of any amendment to the sale agreement or the
servicing agreement.
THE TRUSTEE MUST PROVIDE A REPORT TO ALL TRANSITION BONDHOLDERS
If required by the Trust Indenture Act, the trustee will be required
to mail each year to all transition bondholders a brief report. This report
must state, among other items:
1. the trustee's eligibility and qualification to continue as the
trustee under the indenture,
2. any amounts advanced by it under the indenture,
3. the amount, interest rate and maturity date of specific
indebtedness owing by the issuer to the trustee in the
trustee's individual capacity,
4. the property and funds physically held by the trustee,
5. any additional issue of a series of transition bonds not
previously reported and
6. any action taken by it that materially affects the transition
bonds of any series and that has not been previously reported.
WHAT WILL TRIGGER SATISFACTION AND DISCHARGE OF THE INDENTURE
The indenture will be discharged with respect to the transition bonds
of any series upon the delivery to the trustee of funds sufficient for the
payment in full of all of the transition bonds of that series with the
trustee. In addition, the issuer must deliver to the trustee the officer's
certificate and opinion of counsel specified in the indenture. The
deposited funds will be segregated and held apart solely for paying the
transition bonds, and the transition bonds will not be entitled to any
amounts on deposit in the collection account other than amounts on deposit
in the defeasance subaccount for the transition bonds.
THE ISSUER'S LEGAL DEFEASANCE AND COVENANT DEFEASANCE OPTIONS
The issuer may, at any time, terminate:
1. all of its obligations under the indenture with respect to the
transition bonds of any series; or
2. its obligations to comply with some of the covenants in the
indenture, including all of the covenants described under
"COVENANTS OF THE ISSUER" above.
The legal defeasance option is the right of the issuer to terminate
at any time its obligations under the indenture with respect to the
transition bonds of any series. The covenant defeasance option is the right
of the issuer at any time to terminate its obligations to comply with the
covenants in the indenture. The issuer may exercise the legal defeasance
option with respect to any series of transition bonds notwithstanding its
prior exercise of the covenant defeasance option with respect to that
series. If the issuer exercises the legal defeasance option with respect to
any series, that series will be entitled to payment only from the funds or
other obligations set aside under the indenture for payment thereof on the
expected final payment date or redemption date therefor as described below.
That series will not be subject to payment through redemption or
acceleration prior to the expected final payment date or redemption date,
as applicable. If the issuer exercises the covenant defeasance option with
respect to any series, the final payment of the transition bonds of that
series may not be accelerated because of an event of default relating to a
default in the observance or performance of any covenant or agreement of
the issuer made in the indenture.
The issuer may exercise the legal defeasance option or the covenant
defeasance option with respect to any series of transition bonds only if:
1. the issuer irrevocably deposits or causes to be deposited in
trust with the trustee cash or U.S. Government Obligations for
the payment of principal of and premium, if any, and interest
on that series to the expected final payment date or redemption
date therefor, as applicable, the deposit to be made in the
defeasance subaccount for that series;
2. the issuer delivers to the trustee a certificate from a
nationally recognized firm of independent accountants
expressing its opinion that the payments of principal and
interest on the U.S. Government Obligations when due and
without reinvestment plus any cash deposited in the defeasance
subaccount will provide cash at times and in sufficient amounts
to pay in respect of the transition bonds of that series:
a. principal in accordance with the expected amortization
schedule therefor, and/or if that series is to be
redeemed, the redemption price on the redemption date
therefor, and
b. interest when due;
3. in the case of the legal defeasance option, 95 days pass after
the deposit is made and during the 95-day period no default
relating to events of bankruptcy, insolvency, receivership or
liquidation of the issuer occurs and is continuing at the end
of the period;
4. no default has occurred and is continuing on the day of this
deposit and after giving effect thereto;
5. in the case of the legal defeasance option, the issuer delivers
to the trustee an opinion of counsel stating that:
a. the issuer has received from, or there has been published
by, the Internal Revenue Service a ruling; or
b. since the date of execution of the indenture, there has
been a change in the applicable federal income tax law; and
in either case confirming that the holders of the transition
bonds of that series will not recognize income, gain or loss
for federal income tax purposes as a result of the exercise of
the legal defeasance option and will be subject to federal
income tax on the same amounts, in the same manner and at the
same times as would have been the case if the legal defeasance
had not occurred;
6. in the case of the covenant defeasance option, the issuer
delivers to the trustee an opinion of counsel to the effect
that the holders of the transition bonds of that series will
not recognize income, gain or loss for federal income tax
purposes as a result of the exercise of the covenant defeasance
option and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have
been the case if the covenant defeasance had not occurred; and
7. the issuer delivers to the trustee a certificate of an
authorized officer of the issuer and an opinion of counsel,
each stating that all conditions precedent to the satisfaction
and discharge of the transition bonds of that series have been
complied with as required by the indenture.
There will be no other conditions to the exercise by the issuer of
its legal defeasance option or its covenant defeasance option.
THE TRUSTEE
The Bank of New York will be the trustee under the indenture. The
trustee may resign at any time upon 30 days notice by so notifying the
issuer. The holders of a majority in principal amount of the transition
bonds of all series then outstanding may remove the trustee by so notifying
the trustee and may appoint a successor trustee. The issuer will remove the
trustee if the trustee ceases to be eligible to continue in this capacity
under the indenture, the trustee becomes insolvent, a receiver or other
public officer takes charge of the trustee or its property or the trustee
becomes incapable of acting. If the trustee resigns or is removed or a
vacancy exists in the office of trustee for any reason, the issuer will be
obligated promptly to appoint a successor trustee eligible under the
indenture. No resignation or removal of the trustee will become effective
until acceptance of the appointment by a successor trustee. The trustee
must at all times satisfy the requirements of the Trust Indenture Act and
the Investment Company Act of 1940 and must be year 2000 compliant. The
Trustee must also have a combined capital and surplus of at least $50
million and a long term debt rating of at least "BBB-" by Standard &
Poor's, at least "Baa3" or better by Moody's and at least "BBB-" by Fitch
IBCA. If the trustee consolidates with, merges or converts into, or
transfers all or substantially all of its corporate trust business or
assets to, another entity, the resulting, surviving or transferee entity
will without any further action be the successor trustee.
HOW A BANKRUPTCY OF THE SELLER OR
SERVICER MAY AFFECT YOUR INVESTMENT
Sale or Financing. PSE&G will represent and warrant in the sale
agreement that the transfer of the bondable transition property in
accordance with that agreement constitutes a valid sale and assignment by
PSE&G to the issuer of the bondable transition property. PSE&G will also
represent and warrant in the sale agreement, and it is a condition of
closing for the sale of bondable transition property, that it will take the
appropriate actions under the Competition Act and the New Jersey Uniform
Commercial Code, including filing a financing statement, to perfect this
sale. The Competition Act provides that a transfer of bondable transition
property by an electric utility to an assignee which the parties have in
the governing documentation expressly stated to be a sale or other absolute
transfer, in a transaction approved in a financing order, shall be treated
as an absolute transfer of all the transferor's right, title and interest,
as in a sale or other absolute transfer, and not as a pledge or other
financing, of the relevant bondable transition property. The Competition
Act also provides that the characterization of a transfer as a sale or
other absolute transfer shall not be affected or impaired in any manner by
treatment of the transfer as a financing for federal or state tax purposes
or financial accounting purposes. PSE&G and the issuer will treat the
transaction as a sale under applicable law, although for financial
reporting and federal and state income and franchise tax purposes the
transition bonds will be treated as a financing and not a sale. See "THE
COMPETITION ACT--PSE&G ANd OTHER UTILITIES MAY SECURITIZE STRANDED COSTS"
in this prospectus.
In the event of a bankruptcy of PSE&G, a party in interest in the
bankruptcy might take the position that the sale of the bondable transition
property to the issuer was a financing transaction and not a "sale or other
absolute transfer." The party in interest might argue that the treatment of
the transaction for financial reporting and tax purposes as a financing and
not a sale lends weight to the position that the transaction should be
treated as a financing and not a sale. However, as noted above, the
Competition Act specifically provides for the treatment of the transaction
as a sale as a matter of state law and that treatment is not affected by
treatment of the transfer as a financing for federal or state tax purposes
or financial accounting purposes. If a court were nonetheless to
characterize the transaction as a financing rather than a sale, the issuer
would be treated as a secured creditor of PSE&G in the bankruptcy
proceedings. Although, as noted below, the issuer would in that case have a
security interest in the bondable transition property, it would not likely
be entitled to access to the transition bond charge collections during the
bankruptcy. As a result repayment on the bonds could be significantly
delayed and a plan of reorganization in the bankruptcy might permanently
modify the amount and timing of payments to the issuer of transition bond
charge collections and therefore the amount and timing of funds available
to the issuer to pay bondholders.
In order to mitigate the impact of the possible recharacterization of
a sale of bondable transition property as a financing transaction, the
Competition Act and the Uniform Commercial Code provide that if a financing
statement is filed and the transfer is thereafter held to constitute a
financing transaction and not a sale or other absolute transfer, this
notice will be deemed to constitute a filing with respect to a security
interest. The sale agreement requires that financing statements under the
Uniform Commercial Code executed by the issuer be filed in the appropriate
offices in New Jersey. The Competition Act further provides that any
relevant filing in respect of transition bonds takes precedence over any
other filings. As a result of these filings, the issuer would be a secured
creditor of PSE&G and entitled to recover against the security, which is
the collateral. None of this, however, mitigates the risk of payment delays
and other adverse effects caused by a seller bankruptcy. Further, if, for
any reason, a bondable transition property notice is not filed under the
Competition Act or the issuer fails to otherwise perfect its interest in
the bondable transition property, and the transfer is thereafter deemed not
to constitute a sale or other absolute transfer, the issuer would be an
unsecured creditor of PSE&G. In that event, the issuer's sole source of
payment for the transition bonds would be whatever it recovered on its
unsecured claim in the PSE&G bankruptcy case, which could differ materially
from the amount and timing of transition bond charge collections that were
intended to fund payments on the transition bonds.
Consolidation of the Issuer and PSE&G. If PSE&G were to become a
debtor in a bankruptcy case, a party in interest in the bankruptcy may
attempt to substantively consolidate the assets and liabilities of the
issuer and PSE&G. PSE&G and the issuer have taken steps to attempt to
minimize this risk (as discussed in "PSE&G TRANSITION FUNDING LLC, THE
ISSUER" in this prospectus). However, no assurance can be given that if
PSE&G or an affiliate of PSE&G other than the issuer were to become a
debtor in a bankruptcy case, a court would not order that the assets and
liabilities of the issuer be consolidated with those of PSE&G or its
affiliate. If the assets and liabilities were ordered consolidated, the
claims of the transition bondholders against the issuer would be treated as
secured claims against the consolidated entities. Payment of those claims
would be subject to substantial delay and to adjustment in timing and
amount under a plan of reorganization in the bankruptcy case.
Claims in Bankruptcy; Challenge to Indemnity Claims. If PSE&G were to
become a debtor in a bankruptcy case, claims including indemnity claims by
the issuer against PSE&G under the sale agreement and the other documents
executed in connection therewith would be unsecured claims and would be
subject to being discharged in the bankruptcy case. In addition, a party in
interest in the bankruptcy may request that the Bankruptcy Court estimate
any contingent claims of the issuer against PSE&G. That party may then take
the position that these claims should be estimated at zero or at a low
amount because the contingency giving rise to these claims is unlikely to
occur. If PSE&G were to become a debtor in a bankruptcy case and the
indemnity provisions of the sale agreement were triggered, a party in
interest in the bankruptcy might challenge the enforceability of the
indemnity provisions. If a court were to hold that the indemnity provisions
were unenforceable, the issuer would be left with a claim for actual
damages against PSE&G based on breach of contract principles. The actual
amount of these damages would be subject to estimation and/or calculation
by the court.
No assurances can be given as to the result of any of the
above-described actions or claims. Furthermore, no assurance can be given
as to what percentage of their claims, if any, unsecured creditors would
receive in any bankruptcy proceeding involving PSE&G.
Status of Bondable Transition Property as Current Property. PSE&G has
represented in the sale agreement, and the Competition Act provides, that
the bondable transition property constitutes an existing property right on
the date that the BPU financing order became effective and that it
thereafter exists continuously for all purposes. Nevertheless, no assurance
can be given that in the event of a bankruptcy of PSE&G a party in interest
in the bankruptcy would not attempt to take the position that the bondable
transition property comes into existence only as customers use electricity.
If a court were to adopt this position, no assurance can be given that a
security interest in favor of the transition bondholders would attach to
transition bond charge in respect of electricity consumed after the
commencement of the bankruptcy case. If it were determined that the
bondable transition property had not been sold to the issuer, and the
security interest in favor of the transition bondholders did not attach to
transition bond charge in respect of electricity consumed after the
commencement of the bankruptcy case, then the issuer would be an unsecured
creditor of PSE&G. If so, there would be delays or reductions in payments
on the transition bonds. Whether or not a court determined that the
bondable transition property had been sold to the issuer, no assurances can
be given that a court would not rule that any transition bond charge
relating to electricity consumed after the commencement of the bankruptcy
cannot be transferred to the issuer or the trustee.
In addition, in the event of a bankruptcy of PSE&G, a party in
interest in the bankruptcy could assert that the issuer should pay a
portion of PSE&G's costs associated with the generation, transmission or
distribution of the electricity, consumption of which gave rise to the
transition bond charge collections used to make payments on the transition
bonds.
Regardless of whether PSE&G is the debtor in a bankruptcy case, if a
court were to accept the argument that the bondable transition property
comes into existence only as customers use electricity, a tax or government
lien or other nonconsensual lien on property of PSE&G arising before the
bondable transition property came into existence could have priority over
the issuer's interest in the bondable transition property. Adjustments to
the transition bond charge may be available to mitigate this exposure,
although there may be delays in implementing these Adjustments.
Enforcement of Rights by Trustee. Upon an event of default under the
indenture, the Competition Act permits the trustee to enforce the security
interest in the bondable transition property in accordance with the terms
of the indenture. In this capacity, the trustee is permitted to request the
BPU to order the sequestration and payment to transition bondholders of all
revenues arising with respect to the bondable transition property. The
Competition Act provides that this order will remain in full force and
effect notwithstanding bankruptcy, reorganization, or other insolvency
proceedings with respect to the utility or its assignee. There can be no
assurance, however, that the BPU would issue this order after a PSE&G
bankruptcy in light of the automatic stay provisions of Section 362 of the
United States Bankruptcy Code or, alternatively, that a bankruptcy court
would lift the automatic stay to permit this action by the BPU. In that
event, the trustee may under the indenture seek an order from the
bankruptcy court lifting the automatic stay with respect to this action by
the BPU, and an order requiring an accounting and segregation of the
revenues arising from the bondable transition property. There can be no
assurance that a court would grant either order.
Bankruptcy of Servicer. The servicer is entitled to commingle
transition bond charge collections with its own funds until each remittance
date. The Competition Act provides that the relative priority of a lien
created under the Competition Act is not defeated or adversely affected by
the commingling of transition bond charge collections arising with respect
to the bondable transition property with funds of the electric utility.
However, in the event of a bankruptcy of the servicer, a party in interest
in the bankruptcy might assert, and a court might rule, that transition
bond charge collections commingled by the servicer with its own funds and
held by the servicer as of the date of bankruptcy were property of the
servicer as of that date and are therefore property of the servicer's
bankruptcy estate, rather than property of the issuer. If the court so
rules, then the court would likely rule that the trustee has only a general
unsecured claim against the servicer for the amount of commingled
transition bond charge collections held as of that date and could not
recover the commingled transition bond charge collections held as of the
date of bankruptcy.
However the court rules on the ownership of the commingled transition
bond charge collections, the automatic stay arising upon the bankruptcy of
the servicer could delay the trustee from receiving the commingled
transition bond charge collections held by the servicer as of the date of
the bankruptcy until the court grants relief from the stay. A court ruling
on any request for relief from the stay could be delayed pending the
court's resolution of whether the commingled transition bond charge
collections are property of the issuer or of the servicer, including
resolution of any tracing of proceeds issues.
The servicing agreement provides that the trustee, as assignee of the
issuer, together with the other persons specified therein, may vote to
appoint a successor servicer that satisfies the rating agency condition.
The servicing agreement also provides that the trustee, together with the
other persons specified therein, may petition the BPU or a court of
competent jurisdiction to appoint a successor servicer that meets this
criterion. However, the automatic stay might delay a successor servicer's
replacement of the servicer. Even if a successor servicer may be appointed
and may replace the servicer, a successor may be difficult to obtain and
may not be capable of performing all of the duties that PSE&G as servicer
was capable of performing.
MATERIAL INCOME TAX MATTERS FOR THE TRANSITION BONDS
INCOME TAX STATUS OF THE TRANSITION BONDS
The issuer and PSE&G have received a private letter ruling from the
Internal Revenue Service, referred to as the IRS, to the effect that the
transition bonds will be classified as debt obligations of PSE&G. Based on
that private letter ruling and the assumptions contained therein, including
a representation by PSE&G that it will not make, or allow there to be made,
any election to the contrary, Skadden, Arps, Slate, Meagher & Flom LLP,
special federal income tax counsel to PSE&G and the issuer, will render its
opinion that the issuer will not be subject to United States federal income
tax as an entity separate from PSE&G.
GENERAL
The following is a summary of the material United States federal
income tax consequences of the purchase, ownership and disposition of the
transition bonds applicable to an initial purchaser of transition bonds
that, for U.S. federal income tax purposes, is a Non-U.S. Holder as defined
below. This summary has been prepared by Skadden, Arps, Slate, Meagher &
Flom LLP, special federal income tax counsel to PSE&G and the issuer, which
is referred to in this prospectus as the special tax counsel. Special tax
counsel is of the opinion that its summary is correct in all material
respects. Special tax counsel will render no other opinions to the issuer
with respect to the transition bonds. This summary does not purport to
furnish information in the level of detail or with the attention to an
investor's specific tax circumstances that would be provided by an
investor's tax adviser. This summary also does not address the consequences
to holders of the transition bonds under state, local or foreign tax laws.
This summary is based upon current provisions of the Code, Treasury
Regulations thereunder, current administrative rulings, judicial decisions
and other applicable authorities in effect as of the date hereof, all of
which are subject to change, possibly with retroactive effect. Legislative,
judicial or administrative changes may occur, perhaps with retroactive
effect, which could affect the accuracy of the statements and conclusions
set forth herein as well as the tax consequences to holders of the
transition bonds.
IT IS RECOMMENDED THAT ALL PROSPECTIVE INVESTORS CONSULT THEIR TAX ADVISERS
REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF THE OWNERSHIP AND
DISPOSITION OF TRANSITION BONDS IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES,
AS WELL AS THE EFFECT OF ANY FOREIGN, STATE, LOCAL OR OTHER LAWS.
As used herein, a U.S. Holder of a transition bond means an investor
that is a U.S. Person and a Non-U.S. Holder of a transition bond means an
investor that is not a U.S. Person. For purposes of this discussion, a U.S.
Person means:
1. an individual, who is a citizen or resident of the United States
for U.S. federal income tax purposes,
2. a corporation, partnership or other entity (treated as a
corporation or a partnership for federal income tax purposes)
created or organized in or under the laws of the United States,
or any state or the District of Columbia, (other than a
partnership that is not treated as a U.S. person under any
applicable Treasury Regulations);
3. an estate, the net income of which is subject to United States
federal income taxation regardless of its source, or
4. a trust, if a court within the United States is able to
exercise primary supervision over the administration of each
trust and one or more United States persons have the authority
to control all substantial decisions of such trust. Certain
trusts in existence on or before August 20, 1996, that were
treated as U.S. Persons under the law in effect on such date
that fail to quality as U.S. Persons under current law, may
elect to continue to be treated as U.S. Persons to the extent
prescribed in the Treasury Regulations.
TAXATION OF NON-U.S. HOLDERS
Payments of interest income received by a Non-U.S. Holder generally
will not be subject to United States federal withholding tax, assuming that
the interest income is not effectively connected with the Non-U.S. Holder's
conduct of a trade or business in the United States and provided that the
Non-U.S. Holder complies with the requirements listed below.
Withholding Taxation on Interest Received before 2001. Payments of
interest income on the transition bonds received by a Non-U.S. Holder that
does not hold its transition bonds in connection with the conduct of a
trade or business in the United States on or prior to December 31, 2000,
will not be subject to United States federal withholding tax, or to backup
withholding and information reporting, provided that:
1. a Non-U.S. Holder does not actually or constructively own 10%
or more of the total combined voting power of all classes of
stock of PSE&G entitled to vote,
2. a Non-U.S. Holder is not a controlled foreign corporation that
is related to PSE&G through stock ownership, and
3. the issuer or the trustee receive:
a. From the Non-U.S. Holder, a properly completed Form W-8,
or substitute Form W-8, signed under penalties of
perjury, which provides its name and address and
certifies that it is a Foreign Person or
b. from a security clearing organization, bank or other
financial institution that holds the transition bonds in
the ordinary course of its trade or business, which is
referred to as a Financial Institution, on behalf of a
Non-U.S. Holder, certification signed under penalties of
perjury, that this Form W-8, or substitute Form W-8 has
been received by it, or by another Financial Institution,
from the Non-U.S. Holder, and a copy of the Form W-8, or
substitute Form W-8, is furnished to the issuer or to the
trustee.
Withholding Taxation on Interest Received After December 31, 2000.
Payments of interest income on the transition bonds received by a Non-U.S.
Holder that does not hold its Transition Bonds in connection with the
conduct of a trade or business in the United States after December 31,
2000, will not be subject to United States federal withholding tax, or to
backup withholding and information reporting, provided that requirements 1
and 2 of the preceding paragraph are satisfied and, in general, PSE&G or
its paying agent must receive:
1. from a Non-U.S. Holder appropriate documentation to treat the
payment as made to a foreign beneficial owner under Treasury
regulations issued under Section 1441 of the Code;
2. a withholding certificate from a person claiming to be a
foreign partnership and the foreign partnership has received
appropriate documentation to treat the payment as made to a
foreign beneficial owner in accordance with these Treasury
regulations;
3. a withholding certificate from a person representing to be a
"qualified intermediary" that has assumed primary withholding
responsibility under these Treasury regulations and the
qualified intermediary has received appropriate documentation
from a foreign beneficial owner in accordance with its
agreement with the IRS; or
4. a statement, under penalties of perjury from an authorized
representative of a Financial Institution, stating that the
Financial Institution has received from the beneficial owner a
withholding certificate described in these Treasury regulations
or that it has received a similar statement from another
Financial Institution acting on behalf of the foreign
beneficial owner.
In general, it will not be necessary for a Non-U.S. Holder to obtain or
furnish a United States taxpayer identification number to PSE&G or its
paying agent in order to claim any of the foregoing exemptions from United
States withholding tax on payments of interest. Interest paid to a Non-U.S.
Holder will be subject to a United States withholding tax of 30% upon the
actual payment of interest income, except as described above and except
where an applicable tax treaty provides for the reduction or elimination of
this withholding tax. A Non-U.S. Holder generally will be taxable in the
same manner as a United States corporation or resident with respect to
interest income if the income is effectively connected with the Non-U.S.
Holder's conduct of a trade or business in the United States. Effectively
connected income received by a Non-U.S. Holder that is a corporation may in
some circumstances be subject to an additional "branch profits tax" at a
30% rate, or if applicable, a lower rate provided by a treaty.
Capital Gains Tax Issues. A Non-U.S. Holder generally will not be
subject to United States federal income or withholding tax on gain realized
on the sale or exchange of transition bonds, unless:
1. the Non-U.S. Holder is an individual who is present in the
United States for 183 days or more during the taxable year and
this gain is from United States sources or
2. the gain is effectively connected with the conduct by the
Non-U.S. Holder of a trade or business in the United States and
other requirements are satisfied.
BACKUP WITHHOLDING
Backup withholding of United States federal income tax at a rate of
31% may apply to payments made in respect of the bonds to registered owners
who are not "exempt recipients" and who fail to provide certain identifying
information (such as the registered owner's taxpayer identification number)
in the required manner. Generally, individuals are not exempt recipients,
whereas corporations and certain other entities generally are exempt
recipients. Payments made in respect of the bonds to a U.S. Holder must be
reported to the IRS, unless the U.S. Holder is an exempt recipient or
establishes an exemption. Compliance with the identification procedures
described in the preceding section would establish an exemption from backup
withholding for those Non-U.S. Holders who are not exempt recipients.
In addition, upon the sale of a bond to (or through) a broker, the
broker must withhold 31% of the entire purchase price, unless either (i)
the broker determines that the seller is a corporation or other exempt
recipient or (ii) the seller provides, in the required manner, certain
identifying information and, in the case of a Non-U.S. Holder, certifies
that such seller is a Non-U.S. Holder (and certain other conditions are
met). Such a sale must also be reported by the broker to the IRS, unless
either (i) the broker determines that the seller is an exempt recipient or
(ii) the seller certifies its Non-U.S. status (and certain other conditions
are met). Certification of the registered owner's Non-U.S. status would be
made normally on an IRS Form W-8 under penalties of perjury, although in
certain cases it may be possible to submit other documentary evidence.
Any amounts withheld under the backup withholding rules from a
payment to a beneficial owner would be allowed as a refund or a credit
against such beneficial owner's United States federal income tax provided
the required information is furnished to the IRS.
MATERIAL STATE OF NEW JERSEY TAX MATTERS
In the opinion of [ ], Special New Jersey tax counsel to PSE&G and
the issuer, interest from transition bonds received by a person who is not
otherwise subject to corporate or personal income tax in the State of New
Jersey will not be subject to these taxes. Neither the State of New Jersey
nor any of its political subdivisions presently impose intangible personal
property taxes and therefore New Jersey residents will not be subject to
these taxes.
ERISA CONSIDERATIONS
ERISA, and Section 4975 of the Code impose restrictions on:
1. employee benefit plans (as defined in Section 3(3) of ERISA) that
are subject to Title I of ERISA;
2. plans (as defined in Section 4975(e)(1) of the Code) that are
subject to Section 4975 of the Code, including individual
retirement accounts or Keogh plans;
3. any entities whose underlying assets include plan assets by
reason of a plan's investment in these entities, each of the
entities described in 1, 2 and 3, being referred to as a Plan;
and
4. persons who have specified relationships to Plans which are
"parties in interest" under ERISA and "disqualified persons"
under the Code which, collectively are referred to as Parties
in Interest.
Moreover, based on the reasoning of the United States Supreme Court in John
Hancock Mut. Life Ins. Co. v. Harris Trust and Sav. Bank, 510 U.S. 86
(1993), an insurance company's general account may be deemed to include
assets of the Plans investing in the general account, such as through the
purchase of an annuity contract. Thus, this insurance company might be
treated as a Party in Interest with respect to a Plan by virtue of this
investment. ERISA also imposes specific duties on persons who are
fiduciaries of Plans subject to ERISA, and ERISA and Section 4975 of the
Code prohibit specified transactions between a Plan and Parties in Interest
with respect to the Plan. Violations of these rules may result in the
imposition of excise taxes and other penalties and liabilities under ERISA
and Section 4975 of the Code.
PLAN ASSET ISSUES FOR AN INVESTMENT IN THE TRANSITION BONDS
The Plan Asset Regulation is a regulation issued by the United States
Department of Labor which states that if a Plan makes an "equity"
investment in a corporation, partnership, trust or other specified
entities, the underlying assets and properties of the entity will be deemed
for purposes of ERISA and Section 4975 of the Code to be assets of the
investing Plan unless those exceptions set forth in the regulation apply.
Although there is little statutory or regulatory guidance on this subject,
and there can be no assurances in this regard, it appears that the
transition bonds should not be treated as an equity interest for purposes
of the Plan Asset Regulation. Accordingly, the assets of the Borrower
should not be treated as the assets of Plans investing in the transition
bonds. Pursuant to the Plan Asset Regulation, an equity interest is any
interest in an entity other than an instrument that is treated as
indebtedness under applicable law and which has no substantial equity
features.
PROHIBITED TRANSACTION EXEMPTIONS
It should be noted, however, that without regard to the treatment of
the transition bonds as equity interests under the Plan Asset Regulation,
PSE&G and/or its affiliates, as a provider of services to Plans, may be
deemed to be Parties in Interest with respect to many Plans. The purchase
and holding of transition bonds by or on behalf of one or more of these
Plans could result in a prohibited transaction within the meaning of
Section 406 or 407 of ERISA or Section 4975 of the Code. However, the
purchase and holding of transition bonds may be subject to one or more
statutory or administrative exemptions from the prohibited transaction
rules of ERISA and Section 4975 of the Code.
Examples of Prohibited Transaction Class Exemptions. Potentially
applicable prohibited transaction class exemptions, which are referred to
as PTCE's, include the following:
1. PTCE 90-1, which exempts specific transactions involving
insurance company pooled separate accounts;
2. PTCE 95-60, which exempts specific transactions involving
insurance company general accounts;
3. PTCE 91-38, which exempts specific transactions involving bank
collective investment funds;
4. PTCE 84-14, which exempts specific transactions effected on
behalf of a Plan by a "qualified professional asset manager" as
that term is defined in ERISA, and which is referred to as a
QPAM; or
5. PTCE 96-23, which exempts specific transactions effected on
behalf of a Plan by specific "in-house" asset managers.
It should be noted, however, that even if the conditions specified in one
or more of these exemptions are met, the scope of relief provided by these
exemptions may not necessarily cover all acts that might be construed as
prohibited transactions.
Conditions That Would Allow the QPAM Exemption to Apply. Plan
fiduciaries intending to rely upon the QPAM exemption should consider the
following. As noted above, although the issuer believes that the transition
bonds should not constitute "equity interests" for purposes of the Plan
Asset Regulation, it is nonetheless possible that any class or series of
transition bonds could be treated as "equity interests" for purposes of the
Plan Asset Regulation, in which case the assets of the issuer would be
treated as the assets of any Plan purchasing that class or series unless
another exception were applicable. In this event, transition bond charge
collections would be deemed, for purposes of the prohibited transaction
rules, to flow indirectly from customers to Plans that own that class or
series of transition bonds. Thus, if one or more customers were Parties in
Interest with respect to a Plan that owned that class or series of
transition bonds, such holding could be deemed to constitute a prohibited
transfer of property between a Plan and any Party in Interest with respect
to the Plan. The QPAM exemption requires, among other things, that at the
time of the proposed transaction, the party in interest, or its affiliate,
does not have the authority to appoint or terminate the QPAM as a manager
of any of the Plan's assets. This means, however, that if a Party in
Interest with respect to a Plan that holds such class or series, is a
customer that has the authority to appoint or terminate the QPAM as a
manager of the Plan's assets (for example, the Plan's sponsor, a director
of the Plan sponsor), the holding of that class or series of transition
bonds by the Plan could be deemed to constitute a prohibited transaction to
which the QPAM exemption does not apply. Accordingly, fiduciaries intending
to rely upon the QPAM exemption should carefully discuss the effectiveness
of the QPAM exemption with their legal advisors before purchasing any class
or series of transition bonds.
PRIOR TO MAKING AN INVESTMENT IN THE TRANSITION BONDS OF ANY SERIES,
A PLAN INVESTOR MUST DETERMINE WHETHER, AND EACH FIDUCIARY CAUSING THE
TRANSITION BONDS TO BE PURCHASED BY, ON BEHALF OF OR USING PLAN ASSETS OF A
PLAN THAT IS SUBJECT TO THE PROHIBITED TRANSACTION RULES OF ERISA OR
SECTION 4975 OF THE CODE, INCLUDING WITHOUT LIMITATION AN INSURANCE COMPANY
GENERAL ACCOUNT, SHALL BE DEEMED TO HAVE REPRESENTED AND WARRANTED THAT, AN
EXEMPTION FROM THE PROHIBITED TRANSACTION RULES APPLIES, SO THAT THE USE OF
PLAN ASSETS OF THE PLAN TO PURCHASE AND HOLD THE TRANSITION BONDS DOES NOT
AND WILL NOT CONSTITUTE OR OTHERWISE RESULT IN A NON-EXEMPT PROHIBITED
TRANSACTION IN VIOLATION OF SECTION 406 OR 407 OF ERISA OR SECTION 4975 OF
THE CODE.
SPECIAL CONSIDERATIONS APPLICABLE TO INSURANCE COMPANY GENERAL ACCOUNTS
It should be noted that the Small Business Job Protection Act of 1996
added new Section 401(c) of ERISA relating to the status of the assets of
insurance company general accounts under ERISA and Section 4975 of the
Code. Pursuant to Section 401(c), the Department of Labor was required to
issue the General Account Regulations with respect to insurance policies
issued on or before December 31, 1998 that are supported by an insurer's
general account. The General Account Regulations are final regulations,
which are required to be issued by the Department of Labor pursuant to
Section 401(c) of ERISA with respect to insurance policies issued on or
before December 31, 1998, that are supported by an insurer's general
account. The General Account Regulations are to provide guidance on which
assets held by the insurer constitute "plan assets" for purposes of the
fiduciary responsibility provisions of ERISA and Section 4975 of the Code.
Section 401(c) also provides that until the date that is 18 months after
the General Account Regulations become final, no liability under the
fiduciary responsibility and prohibited transaction provisions of ERISA and
Section 4975 may result on the basis of a claim that the assets of the
general account of an insurance company constitute the plan assets of any
Plan. This provision does not apply in cases of avoidance of the General
Account Regulations or actions brought by the Secretary of Labor relating
to particular breaches of fiduciary duties that also constitute breaches of
state or federal criminal law. The plan asset status of insurance company
separate accounts is unaffected by new Section 401(c) of ERISA, and
separate account assets continue to be treated as the plan assets of any
Plan invested in a separate account.
Department Of Labor Proposed Regulations. As of the date hereof, the
Department of Labor has issued proposed regulations under Section 401(c).
Final regulations are expected to be issued some time in the near future,
although the timing and nature of the final regulations remain uncertain.
If the General Account Regulations are adopted substantially in the form in
which proposed, the General Account Regulations may not exempt the assets
of insurance company general accounts from treatment as "plan assets" after
December 31, 1998. The proposed regulations should not, however, adversely
affect the applicability of PTCE 95-60 to purchases of transition bonds by
insurance company general accounts.
GENERAL INVESTMENT CONSIDERATIONS FOR PROSPECTIVE PLAN INVESTORS IN THE
TRANSITION BONDS
Prior to making an investment in the transition bonds, prospective
Plan investors should consult with their legal advisors concerning the
impact of ERISA and the Code and the potential consequences of this
investment with respect to their specific circumstances. Moreover, each
Plan fiduciary should take into account, among other considerations,
1. whether the fiduciary has the authority to make the investment;
2. whether the investment constitutes a direct or indirect
transaction with a Party in Interest;
3. the composition of the Plan's portfolio with respect to
diversification by type of asset;
4. the Plan's funding objectives;
5. the tax effects of the investment; and
6. whether under the general fiduciary standards of investment
prudence and diversification an investment in the transition
bonds is appropriate for the Plan, taking into account the
overall investment policy of the Plan and the composition of
the Plan's investment portfolio.
Governmental plans and some church plans are generally not subject to
the fiduciary responsibility provisions of ERISA or the provisions of
Section 4975 of the Code. However, these plans may be subject to
substantially similar rules under state or other federal law, and may also
be subject to the prohibited transaction rules of Section 503 of the Code.
The sale of transition bonds to a Plan shall not be deemed a
representation by PSE&G or the underwriters that this investment meets all
relevant legal requirements with respect to Plans generally or any
particular Plan.
PLAN OF DISTRIBUTION FOR THE TRANSITION BONDS
The transition bonds of each series may be sold to or through the
underwriters by a negotiated firm commitment underwriting and public
reoffering by the underwriters. The transition bonds may also be sold to or
through any other underwriting arrangement as may be specified in the
related prospectus supplement or may be offered or placed either directly
or through agents. The issuer and the trustee intend that transition bonds
will be offered through various methods from time to time. The issuer also
intends that offerings may be made concurrently through more than one of
these methods or that an offering of a particular series of transition
bonds may be made through a combination of these methods.
The distribution of transition bonds may be effected from time to
time in one or more transactions at a fixed price or prices, which may be
changed, or at market prices prevailing at the time of sale, at prices
related to the prevailing market prices or in negotiated transactions or
otherwise at varying prices to be determined at the time of sale.
The transition bonds may be offered through one or more different
methods, including offerings through underwriters. It is not anticipated
that any of the transition bonds will be listed on any securities exchange.
There can be no assurance that a secondary market for any series of
transition bonds will develop or, if one does develop, that it will
continue.
Compensation to Underwriters. In connection with the sale of the
transition bonds, underwriters or agents may receive compensation in the
form of discounts, concessions or commissions. Underwriters may sell
transition bonds to particular dealers at prices less a concession.
Underwriters may allow, and these dealers may reallow, a concession to
other dealers. Underwriters, dealers and agents that participate in the
distribution of the transition bonds of a series may be deemed to be
underwriters. Any discounts or commissions received by the underwriters
from the issuer and any profit on the resale of the transition bonds by
them may be deemed to be underwriting discounts and commissions under the
Securities Act. These underwriters or agents will be identified, and any
compensation received from the issuer will be described, in the related
prospectus supplement.
Other Distribution Issues. Under agreements which may be entered into
by PSE&G, the issuer and the trustee, underwriters and agents who
participate in the distribution of the transition bonds may be entitled to
indemnification by PSE&G and the issuer against liabilities specified
therein, including under the Securities Act. The underwriters may, from
time to time, buy and sell the transition bonds, but there can be no
assurance that an active secondary market will develop and there is no
assurance that this market, if established will continue.
RATINGS FOR THE TRANSITION BONDS
It is a condition of any Underwriter's obligation to purchase the
transition bonds that each series or class be rated investment grade, that
is, in one of the four highest rating categories, by each of S&P, Moody's,
Fitch IBCA and Duff & Phelps.
Limitations of Security Ratings. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to
revision or withdrawal at any time by the assigning rating agency. No
person is obligated to maintain the rating on any transition bonds, and,
accordingly, there can be no assurance that the ratings assigned to any
series or class of transition bonds upon initial issuance will not be
lowered or withdrawn by a rating agency at any time thereafter. If a rating
of any series or class of transition bonds is revised or withdrawn, the
liquidity of this class of transition bonds may be adversely affected. In
general, ratings address credit risk and do not represent any assessment of
any particular rate of principal payments on the transition bonds other
than the payment in full of each series or class of transition bonds by the
applicable Termination Date for such series or class.
VARIOUS LEGAL MATTERS RELATING TO THE TRANSITION BONDS
Some legal matters relating to the issuer and the issuance of the
transition bonds will be passed upon for the issuer by Skadden, Arps,
Slate, Meagher & Flom LLP, New York, New York and for the Underwriters by
Brown & Wood LLP, San Francisco California. Some legal matters relating to
PSE&G will be passed upon for PSE&G by ____________, New Jersey. Some legal
matters relating to the federal tax consequences of the issuance of the
transition bonds will be passed upon for the issuer by Skadden, Arps,
Slate, Meagher & Flom LLP. Some legal matters relating to State of New
Jersey tax consequences of the issuance of the transition bonds will be
passed upon for the issuer by ______________.
INDEX TO FINANCIAL STATEMENTS OF PSE&G TRANSITION FUNDING LLC
Page
Report of Independent Accountants..........................................F-2
Statement of Net Assets Available for Issuer Activities.................F-3
Statement of Changes in Net Assets Available for Issuer Activities......F-4
Notes to Financial Statements..............................................F-5
REPORT OF INDEPENDENT ACCOUNTANTS
To the Owners
of PSE&G Transition Funding LLC
We have audited the accompanying balance sheet of PSE&G Transition Funding
LLC (the "Company") as of July 23, 1999. This balance sheet is the
responsibility of the Company's management. Our responsibility is to
express an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheet. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
balance sheet presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of the Company as of July 23, 1999 in
conformity with generally accepted accounting principles.
Deloitte & Touche
Parsippany, New Jersey
August 27, 1999
PSE&G TRANSITION FUNDING LLC
Balance Sheet
as of July 23, 1999
ASSETS
Receivable from Member $ 1,000
-------
Total Assets $ 1,000
=======
LIABILITIES AND MEMBER'S EQUITY
Member's Equity $ 1,000
-------
Total Liabilities and Member's Equity $ 1,000
See Notes to Financial Statements.
PSE&G TRANSITION FUNDING LLC
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
PSE&G Transition Funding LLC (the Company), a limited liability company
established by Public Service Electric and Gas Company (PSE&G) under the
laws of the State of Delaware, was formed on July 21, 1999 pursuant to a
limited liability company agreement with PSE&G, as sole member of the
Company. PSE&G is an operating electric and gas utility and is a wholly
owned subsidiary of Public Service Enterprise Group Incorporated
(Enterprise). The Company was organized for the sole purpose of purchasing
and owning bondable transition property (BTP), issuing transition bonds
(Bonds, pledging its interest in BTP and other collateral to the trustee to
collateralize the Bonds, and performing activities that are necessary,
suitable or convenient to accomplish these purposes.
BTP represents the irrevocable right of PSE&G, or its successor or
assignee, to collect a non-bypassable transition bond charge (TBC) from
customers pursuant to a bondable stranded cost rate order (BPU financing
order), which is anticipated to be issued in 1999 by the State of New
Jersey Board of Public Utilities (BPU) in accordance with the Electric
Discount and Energy Competition Act enacted in New Jersey in February 1999.
The BPU financing order is expected to authorize the TBC to be sufficient
to recover $2.525 billion aggregate principal amount of Bonds, plus an
amount sufficient to provide for any credit enhancement, to fund any
reserves and to pay interest, redemption premiums, if any, servicing fees
and other expenses relating to the Bonds.
The Company's organizational documents require it to operate in a manner so
that it should not be consolidated in the bankruptcy estate of PSE&G in the
event PSE&G becomes subject to a bankruptcy proceeding. Both PSE&G and the
Company will treat the transfer of BTP to the Company as a sale under
applicable law. The Bonds will be treated as debt obligations of the
Company. For financial reporting and Federal income tax and State of New
Jersey income and franchise tax purposes, the transfer of BTP to the
Company will be treated as a financing arrangement and not as a sale.
Furthermore, the results of operations of the Company will be consolidated
with PSE&G for financial and income tax reporting purposes.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The preparation of financial statements in conformity with Generally
Accepted Accounting Principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amount of
revenues, expenses, assets, and liabilities and disclosure of
contingencies. Actual results could differ from these estimates.
UNAMORTIZED DEBT ISSUANCE COSTS
The costs associated with the anticipated issuance of the Bonds will be
capitalized and amortized over the life of the Bonds utilizing the
effective interest method.
INCOME TAXES
The Company has elected not to be taxed as a corporation for federal income
tax purposes. The Company is treated as a division of PSE&G, and
accordingly, will not be treated as a separate taxable entity.
3. THE BONDS
The purpose of the Company is to issue Bonds pursuant to authority granted
by the BPU in the anticipated BPU financing order. The Company intends to
issue Bonds in series (Series) from time to time, the maturities and
interest rates of which will depend upon market conditions at the time of
issuance. The proceeds will be used to fund the purchase of BTP from PSE&G.
The Bonds will be collateralized by the BTP and other assets of the
Company. Under applicable law, the Bonds will not be an obligation of PSE&G
or secured by the assets of PSE&G. Also under applicable law, the Bonds
will be recourse to the Company and will be collateralized on a pro rata
basis by the BTP and the equity and assets of the Company. The source of
repayment will be the TBC authorized pursuant to the anticipated BPU
financing order, which will be collected from PSE&G customers by PSE&G, as
servicer. TBC collections will be deposited at least monthly by PSE&G with
the Company and used to pay the expenses of the Company, to pay debt
service on the Bonds and to fund any credit enhancement for the Bonds. The
Company will also pledge the capital contributed by PSE&G to secure the
debt service requirements of the Bonds. The debt service requirements will
include an overcollateralization subaccount, a capital subaccount and a
reserve subaccount which will be available to bond holders. Any amounts
collateralizing the Bonds will be returned to the Company upon payment of
the Bonds.
4. SIGNIFICANT AGREEMENTS AND RELATED PARTY TRANSACTIONS
Under the servicing agreement to be entered into by the Company and PSE&G
concurrently with the issuance of the first Series of Bonds, PSE&G, as
servicer, will be required to manage and administer the BTP of the Company
and to collect the TBC on behalf of the Company. The Company will pay an
annual servicing fee to PSE&G which will be determined when the Bonds are
issued. The servicing fee will also be recovered through the TBC.
All debt issuance costs will be paid by PSE&G and reimbursed by the Company
upon issuance of the Bonds.
PART II
ITEM 14. Other Expenses of Issuance and Distribution
The following is an itemized list of the estimated expenses to be
incurred in connection with the offering of the securities being offered
hereunder other than underwriting discounts and commissions.
Registration Fee..................................$ 278
---------------
Printing and Engraving Expenses...................$ *
---------------
Trustee's Fees and Expenses.......................$ *
---------------
Legal Fees and Expenses...........................$ *
---------------
Blue Sky Fees and Expenses........................$ *
---------------
Accountants' Fees and Expenses....................$ *
---------------
Rating Agency Fees................................$ *
---------------
Miscellaneous Fees and Expenses...................$ *
---------------
Total.............................................$ *
---------------
_________________________
* To be provided by amendment.
ITEM 15. Indemnification of Members and Mangers.
Section 18-108 of the Delaware limited liability Company Act provides
that, subject to specified standards and restrictions, if any, as are set
forth in the limited liability company agreement, a limited liability
company shall have the power to indemnify and hold harmless any member or
manager or other person from and against any and all claims and demands
whatsoever.
The limited liability company agreement (the "LLC Agreement") of
PSE&G Transition Funding LLC provides that, to the fullest extent permitted
by law, PSE&G Transition Funding LLC shall indemnify its members and
managers against any liability incurred in connection with any proceeding
in which any member or manager may be involved as a party or otherwise by
reason of the fact that the member or manager is or was serving in its
capacity as a member or manager, unless this liability is based on or
arises in connection with the member's or manager's own willful misconduct
or gross negligence, the failure to perform the obligations set forth in
the LLC Agreement, or taxes, fees or other charges on, based on or measured
by any fees, commissions or compensation received by the managers in
connection with any of the transactions contemplated by the LLC Agreement
and related agreements.
ITEM 16. Exhibits
Exhibit No. Description
1.1 Form of Underwriting Agreement.*
4.1.1 Limited Liability Company Agreement of PSE&G Transition Funding LLC.**
4.2 Certificate of Formation of PSE&G Transition Funding LLC.**
4.3 Form of Indenture.*
4.4 Form of Transition Bonds.*
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, relating to
legality of the Transition Bonds.
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP with Respect to
Material Federal Tax Matters.
8.2 Opinion of [ ] with respect to material State of New Jersey
tax matters*
10.1 Form of Sale Agreement.*
10.2 Form of Servicing Agreement.*
10.3 Petition of PSE&G to the New Jersey Board of Public Utilities, dated
June 8, 1999**
10.4 Financing Order of the BPU issued September 17, 1999.
23.1.1 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in its
opinion filed as Exhibits 5.1 and 8.1).
23.1.2 Consent of [ ] (Included in its opinion filed as Exhibit
8.2).*
23.2 Consent of Deloitte & Touche LLP.*
24.1 Power of Attorney.*
25.1 Statement of Eligibility under the Trust Indenture Act of 1939, as
amended, of The Bank of New York, as Trustee under the Indenture.*
27.1 Financial Data Schedule.*
99.1 Final Restructuring Order of the BPU issued July 24, 1999.
99.2 Internal Revenue Service Private Letter Ruling pertaining to Transition
Bonds.
* To be filed by amendment
** Previously filed
ITEM 17. Undertakings
The undersigned Registrant on behalf of PSE&G Transition Funding LLC
(the "issuer") hereby undertakes as follows:
a. (1) to file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement: (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933, as amended; (ii) to reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) of the Securities Act of 1933, as amended, if, in
the aggregate, the changes in volume and price represent no more than a
twenty percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" Table in the effective registration
statement; and (iii) to include any material information with respect to
the plan of distribution not previously disclosed in the registration
statement or any material change in this information in the registration
statement; provided, however, that (a)(1)(i) and (a)(i)(ii) will not apply
if the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed pursuant to Section
13 or Section 15(d) of the Securities Exchange Act of 1934, as amended,
that are incorporated by reference in this registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, as amended, each relevant post-effective
amendment shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of these securities at
that time shall be deemed to be the initial bona fide offering hereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
b. That, for purposes of determining any liability under the
Securities Act of 1933, as amended, each filing of the Registrant's annual
report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange
Act of 1934, as amended) with respect to the issuer that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of these securities at that time shall be deemed to be the initial
bona fide offering thereof.
c. That insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers
and controlling persons of the registrant pursuant to the provisions
described under Item 15 above, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission this
indemnification is against public policy as expressed in the Act and is,
theretofore, unenforceable. In the event that a claim for indemnification
against these liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer of controlling person of
the registrant in the successful defense of any action, suit or proceeding)
is asserted by the director, officer or controlling person in connection
with the securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether this indemnification by it is against public policy as expressed in
the Securities Act of 1933 and will be governed by the final adjudication
of this issue.
d. That, for purposes of determining any liability under the
Securities Act of 1933, as amended, the information omitted from the form
of prospectus filed as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(i) or (4) or 497(h) under the Securities Act of
1933, as amended, shall be deemed to be part of this registration statement
as of the time it was declared effective.
e. That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
these securities at that time shall be deemed to be the initial bona fide
offering thereof.
f. The undersigned registrant hereby undertakes to file an
application for the purpose of determining the eligibility of the trustee
to act under subsection (a) of Section 310 of the Trust Indenture Act of
1939, as amended, in accordance with the rules and regulations prescribed
by the Commission under Section 305(b)(2) of the Trust Indenture Act of
1939, as amended.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3 and that the
security rating requirement of Form S-3 will be met by the time of sale,
and has duly caused this registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Newark, State
of New Jersey, on October 1, 1999.
PSE&G Transition Funding LLC
By: /s/ Robert C. Murray
--------------------------------------
Name: Robert C. Murray
Title: Manager
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
October 1, 1999 /s/ Robert E. Busch
--------------------------------------------
Date Name: Robert E. Busch
Title: Manager
October 1, 1999 /s/ Robert C. Murray
--------------------------------------------
Date Name: Robert C. Murray
Title: Manager
October 1, 1999 /s/ R. Edwin Selover
--------------------------------------------
Date Name: R. Edwin Selover
Title: Manager
INDEX TO EXHIBITS
Exhibit No. Description
1.1 Form of Underwriting Agreement.*
4.1.1 Limited Liability Company Agreement of PSE&G Transition Funding
LLC.**
4.2 Certificate of Formation of PSE&G Transition Funding LLC.**
4.3 Form of Indenture.*
4.4 Form of Transition Bonds.*
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, relating
to legality of the Transition Bonds.
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP with
respect to material federal tax matters.
8.2 Opinion of [ ] with respect to material State of New Jersey
tax matters*
10.1 Form of Sale Agreement.*
10.2 Form of Servicing Agreement.*
10.3 Petition of PSE&G to the New Jersey Board of Public Utilities,
dated June 8, 1999.**
10.4 Financing Order of the BPU issued September 17, 1999.
23.1.1 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in
its opinion filed as Exhibits 5.1 and 8.1).
23.1.2 Consent of [ ] (included in its opinion filed as Exhibit
8.2).*
23.2 Consent of Deloitte & Touche LLP.*
24.1 Power of Attorney.*
25.1 Statement of Eligibility under the Trust Indenture Act of 1939,
as amended, of The Bank of New York, as Trustee under the
Indenture.*
27.1 Financial Data Schedule.*
99.1 Final Restructuring Order of the BPU issued July 24, 1999.
99.2 Internal Revenue Service Private Letter Ruling pertaining to
Transition Bonds.
* To be filed by amendment
** Previously filed
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
WHERE TO FIND INFORMATION IN THESE DOCUMENTS.................................S-4
INTRODUCTION.................................................................S-5
The Collateral...............................................................S-6
Payment Sources..............................................................S-6
THE SERIES 1999-__ TRANSITION BONDS..........................................S-7
Principal Payments...........................................................S-8
Interest Payments............................................................S-9
Optional Redemption.........................................................S-10
CREDIT ENHANCEMENT..........................................................S-10
Periodic Adjustment of the Transition Bond Charge...........................S-10
Collection Account and Subaccounts..........................................S-11
DESCRIPTION OF BONDABLE TRANSITION PROPERTY.................................S-13
THE TRANSITION BOND CHARGE..................................................S-14
UNDERWRITING THE SERIES 1999-__ TRANSITION BONDS............................S-15
The Underwriters' Sales Price for the Transition Bonds......................S-16
No Assurance as to Resale Price or Resale Liquidity for the
Transition Bonds........................................................S-16
Various Types of Underwriter Transactions Which May Affect the
Price of the Transition Bonds...........................................S-16
RATINGS FOR THE SERIES 1999-__ TRANSITION BONDS.............................S-17
PROSPECTUS
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS................1
SUMMARY OF TERMS...............................................................2
The Collateral.................................................................5
Payment Sources................................................................5
Priority of Distributions......................................................6
Credit Enhancement and Accounts................................................7
State Pledge...................................................................9
Payments of Interest and Principal............................................11
Optional Redemption...........................................................11
Payment Dates and Record Dates................................................11
Material Income Tax Considerations............................................11
ERISA Considerations..........................................................11
REPORTS TO HOLDERS OF THE TRANSITION BONDS....................................12
RISK FACTORS..................................................................13
The Competition Act May Be Overturned by the Federal Government
Without Full Compensation.................................................15
Future State Legislative Action May Invalidate the Transition Bonds or
Their Underlying Assets...................................................15
SERVICING RISKS...............................................................17
Inability to Terminate Service to Certain Delinquent Customers in Winter......22
The Risks Associated With Potential Bankruptcy Proceedings....................22
Other Risks Associated With An Investment In The Transition Bonds.............25
FORWARD-LOOKING STATEMENTS....................................................26
PUBLIC SERVICE ELECTRIC AND GAS COMPANY.......................................27
THE COMPETITION ACT...........................................................29
Recovery of Stranded Costs is Allowed for PSE&G and Other New Jersey
Utilities.................................................................29
PSE&G and Other Utilities May Securitize Stranded Costs.......................30
PSE&G'S RESTRUCTURING.........................................................33
THE BPU FINANCING ORDER AND THE TRANSITION BOND CHARGE........................35
The BPU Financing Order.......................................................35
The BPU's Transition Bond Charge Adjustment Process...........................37
THE SELLER AND SERVICER OF THE BONDABLE TRANSITION PROPERTY...................38
PSE&G ........................................................................38
Public Service Enterprise Group Incorporated..................................39
PSE&G's Customer Classes......................................................39
Percentage Concentration Within PSE&G's Large Commercial and Industrial
Customers...............................................................42
How PSE&G Forecasts the Number of Customers and the Amount of
Electricity Usage.......................................................42
Forecast Variances............................................................43
Variance For the Amount of Electricity Consumed (gWh).........................43
Credit Policy; Billing; Collections and Write-Offs; Termination of Service....43
Loss and Delinquency Experience...............................................45
How PSE&G Will Apply Partial Payments by its Customers........................48
PSE&G's Efforts to Deal With the Year 2000 Computer Issue.....................48
PSE&G TRANSITION FUNDING LLC, THE ISSUER......................................50
INFORMATION AVAILABLE TO THE TRANSITION BONDHOLDERS...........................53
THE TRANSITION BONDS..........................................................54
General Terms of the Transition Bonds.........................................54
Payments of Interest and Principal on the Transition Bonds....................55
Redemption of the Transition Bonds............................................56
Credit Enhancement for the Transition Bonds...................................56
Transition Bonds Will Be Issued in Book-Entry Form............................57
Certificated Transition Bonds.................................................61
WEIGHTED AVERAGE LIFE AND YIELD CONSIDERATIONS
FOR THE TRANSITION BONDS......................................................62
THE SALE AGREEMENT............................................................63
PSE&G's Sale and Assignment of Bondable Transition Property...................63
PSE&G's Representations and Warranties........................................64
PSE&G's Obligation to Indemnify the Issuer and the Trustee and to Take Legal
Action..................................................................69
Successors to PSE&G...........................................................70
THE SERVICING AGREEMENT.......................................................70
PSE&G's Servicing Procedures..................................................70
The BPU's Transition Bond Charge Adjustment Process...........................73
PSE&G's Transition Bond Charge Collections....................................73
PSE&G's Compensation for Its Role as Servicer and Its Release of Other
Parties.................................................................74
PSE&G's Duties as Servicer....................................................74
PSE&G's Representations and Warranties as Servicer............................75
PSE&G, as Servicer, Will Indemnify the Issuer and Other Related Entities......76
PSE&G, as Servicer, Will Provide Statements to the Issuer and to the Trustee..76
PSE&G to Provide Compliance Reports Concerning the Servicing Agreement........77
Matters Regarding PSE&G as Servicer...........................................77
Events Constituting a Default by PSE&G in Its Role as Servicer................79
The Trustee's Rights if PSE&G Defaults as Servicer............................79
The Obligations of a Servicer That Succeeds PSE&G.............................80
THE INDENTURE.................................................................80
The Security for the Transition Bonds.........................................80
Transition Bonds May Be Issued in Various Series or Classes...................81
The Collection Account for the Transition Bonds...............................83
How Funds in the Collection Account Will Be Allocated.........................87
Reports to Holders of the Transition Bonds....................................90
The Issuer and the Trustee May Modify the Indenture...........................91
What Constitutes an Event of Default on the Transition Bonds..................94
Covenants of the Issuer.......................................................97
Access to the List of Holders of the Transition Bonds.........................99
The Issuer Must File an Annual Compliance Statement...........................99
The Trustee Must Provide a Report to All Transition Bondholders...............99
What Will Trigger Satisfaction and Discharge of the Indenture................100
The Issuer's Legal Defeasance and Covenant Defeasance Options................100
The Trustee..................................................................102
HOW A BANKRUPTCY OF THE SELLER OR
SERVICER MAY AFFECT YOUR INVESTMENT..........................................102
MATERIAL INCOME TAX MATTERS FOR THE TRANSITION BONDS.........................106
Income Tax Status of the Transition Bonds....................................106
General......................................................................106
Taxation of Non-U.S. Holders.................................................108
Backup Withholding...........................................................110
Material State of New Jersey Tax Matters.....................................110
ERISA CONSIDERATIONS.........................................................110
Plan Asset Issues For an Investment in the Transition Bonds..................111
Prohibited Transaction Exemptions............................................111
Special Considerations Applicable to Insurance Company General Accounts......113
General Investment Considerations For Prospective Plan Investors
in the Transition Bonds.................................................114
PLAN OF DISTRIBUTION FOR THE TRANSITION BONDS................................114
RATINGS FOR THE TRANSITION BONDS.............................................115
VARIOUS LEGAL MATTERS RELATING TO THE TRANSITION BONDS.......................116
EXHIBIT 5.1
OPINION OF SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP,
RELATING TO THE LEGALITY OF THE TRANSITION BONDS
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
ONE NEWARK CENTER
NEWARK, NEW JERSEY 07102
(973) 639-6800
October 1, 1999
PSE&G Transition Funding LLC
80 Park Plaza
Newark, New Jersey 07102
Re: PSE&G Transition Funding LLC
Ladies and Gentlemen:
We have acted as special counsel to PSE&G Transition Funding LLC, a
Delaware limited liability company (the "Company"), in connection with the
preparation of the Registration Statement, as amended to the date hereof,
filed on Form S-3 (the "Registration Statement") with the Securities and
Exchange Commission (the "Commission") in connection with the registration
under the Securities Act of 1933, as amended, of transition bonds (the
"Transition Bonds") of the Company to be offered from time to time as
described in the form of the prospectus (the "Prospectus") included as part
of the Registration Statement. Capitalized terms used in this letter and
not defined herein have the meanings given to such terms in the Prospectus.
We are familiar with the proceedings taken and proposed to be taken
by the Company in connection with the proposed authorization, issuance and
sale of the Transition Bonds. In this connection, we have examined
originals or copies, certified or otherwise identified to our satisfaction,
of such records of the Company and such agreements, certificates of public
officials, certificates of officers or other representatives of the Company
and others and such other documents, certificates and records as we have
deemed necessary or appropriate as a basis for the opinion set forth
herein.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original
documents of all documents submitted to us as certified, conformed or
photostatic copies and the authenticity of the originals of such latter
documents. In making our examination of documents, we have assumed that the
parties thereto had or will have the power, corporate or other, to enter
into and perform all obligations thereunder and have also assumed the due
authorization by all requisite action, corporate or other, and execution
and delivery by such parties of such documents and the validity and binding
effect thereof on such parties. As to any facts material to the opinions
expressed herein which we have not independently established or verified,
we have relied upon statements and representations of officers and other
representatives of the Company and others.
The opinion expressed below is based on the following assumptions:
(a) the Registration Statement will become effective;
(b) the proposed transactions are consummated as contemplated in the
Registration Statement;
(c prior to the issuance of any Series or Class of Transition
Bonds:
(i) all necessary orders, approvals and authorizations for
the Company's purchase from time to time of Bondable
Transition Property from PSE&G, in exchange for the net
proceeds of Transition Bonds will have been obtained by
the Company;
(ii) the Amended and Restated Limited Liability Company Agreement
of the Company will have been executed and delivered by
an authorized representative of PSE&G as sole member of
the Company;
(ii the Indenture will have been executed and delivered by the
Company's authorized representative and by the trustee
named therein;
(iv) the maturity dates, the bond rates, the redemption
provisions and the other terms of the Transition Bonds
being offered will be fixed in accordance with the terms
of the Indenture;
(v) the Sale Agreement between the Company and PSE&G, as
Seller, will have been executed and delivered;
(vi) the Servicing Agreement between the Company and PSE&G, as
Servicer, will have been executed and delivered; and
(vi) the Underwriting Agreement between PSE&G and the
underwriters of the Transition Bonds (the "Underwriting
Agreement") will have been executed and delivered; and
(d) the Indenture will be qualified in accordance with the provisions
of the Trust Indenture Act of 1939, as amended.
Members of our firm are admitted to practice in the State of New
Jersey, and we do not express any opinion as to the laws of any other
jurisdiction other than the federal laws of the United States.
In rendering the opinion set forth herein, we have assumed that the
execution and delivery by the Company of the Indenture and the Transition
Bonds and the performance by the Company of its obligations thereunder do
not violate, conflict with or constitute a default under (i) any agreement
or instrument to which the Company or its properties is subject, except
that we do not make such assumption with respect to those agreements and
instruments which have been identified to us by the Company as being
material to it; (ii) any law, rule or regulation to which the Issuer is
subject, except that we do not make such assumption with respect to those
laws, rules and regulations of the State of New Jersey and the United
States of America which, in our experience, are normally applicable to
transactions of the type contemplated by the Indenture and the Transition
Bonds ("Applicable Laws"), but without our having made any special
investigation concerning any other laws, rules or regulations; and (iii)
any judicial or regulatory order or decree of any governmental authority,
except that we do not make such assumption with respect to those orders or
decrees which have been identified to us by the Company as being material
to it of any New Jersey or federal executive, legislative, judicial,
administrative or regulatory body established under Applicable Laws.
Based on and subject to the foregoing, we are of the opinion that,
when properly executed and authenticated in accordance with the Indenture
and delivered against payment of the purchase price provided for in the
Underwriting Agreement, and upon satisfaction of all other conditions
contained in the Indenture and the Underwriting Agreement, the Transition
Bonds will constitute valid and binding obligations of the Company, will be
fully paid and non-assessable and will be enforceable against the Company
in accordance with their terms, except to the extent that enforcement
thereof may be limited by (1) bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance or other similar laws now or hereafter in
effect relating to creditor's rights generally and (2) general principles
of equity (regardless of whether enforceability is considered in a
proceeding at law or in equity).
We consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the references to this firm under the heading
"Various Legal Matters Relating to the Transition Bonds" in the Prospectus
included in the Registration Statement. In giving this consent, we do not
thereby admit that we are included in the category of persons whose consent
is required under Section 7 of the Act or the rules and regulations of the
Commission.
Very truly yours,
/s/ Skadden, Arps, Slate,
Meagher & Flom LLP
EXHIBIT 8.1
OPINION OF SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP,
WITH RESPECT TO MATERIAL FEDERAL TAX MATTERS
Exhibit 8.1
October 1, 1999
Public Service Electric and Gas Company
80 Park Plaza
Newark, New Jersey 07102
Re: PSE&G Transition Funding LLC
Ladies and Gentlemen:
In connection with the filing of Registration Statement No.
333-82635 on Form S-3 relating to PSE&G Transition Funding LLC (the
"Issuer"), as amended from time to time, (the "Registration Statement")
with the Securities and Exchange Commission, you have requested our opinion
regarding certain descriptions of tax consequences contained in the form of
prospectus (the "Prospectus") included in the Registration Statement.
We have acted as special federal income tax counsel to the Issuer, in
connection with (a) the sale to the Issuer of PSE&G's Bondable Transition
Property, which is the property right created by New Jersey's Competition
Act representing the irrevocable right of Public Service Electric and Gas
Company ("PSE&G") or its assignee to receive through a Transition Bond
Charge amounts sufficient to recover all of its Bondable Stranded Costs and
(b) the Issuer's issuance of Transition Bonds which are supported by the
Bondable Transition Property and which are offered and sold pursuant to
Registration Statement No. 333-82635 on Form S-3, as amended from time to
time (the "Registration Statement" and such offered Transition Bonds (the
"Offered Bonds").
In connection with our engagement, we have examined and relied upon
the forms of the Certificate of Formation of PSE&G Transition Funding LLC
and the Amended and Restated Limited Liability Company Agreement for PSE&G
Transition Funding LLC included as exhibits to the Registration Statement.
In addition, the opinion expressed below is based on the following
assumptions:
(a) the Registration Statement will become effective;
(b the proposed transactions are consummated as contemplated in the
Registration Statement;
(c) prior to the issuance of any series or class of Transition Bonds:
(i) all necessary orders, approvals and authorizations for the
Issuer's purchase from time to time of Bondable Transition
Property from PSE&G, in exchange for the net proceeds of
Transition Bonds will have been obtained by the Issuer;
(ii) the Amended and Restated Limited Liability Company
Agreement of the Issuer will have been executed and
delivered by an authorized representative of PSE&G as sole
member of the Issuer;
(iii) the Indenture will have been executed and delivered by the
Issuer's authorized representative and The Bank of New
York, as trustee;
(iv) the maturity dates, the bond rates, the redemption
provisions and the other terms of the Transition Bonds
being offered will be fixed in accordance with the terms
of the Indenture;
(v) the Sale Agreement between the Issuer and PSE&G, as
Seller, will have been executed and delivered;
(vi) the Servicing Agreement between the Issuer and PSE&G, as
Servicer, will have been executed and delivered;
(vii) an unrevoked private letter ruling addressed to
PSE&G with respect to the issuance of the Transition Bonds
will have been issued by the Internal Revenue Service (the
"PSE&G Private Letter Ruling"); and
(viii) the Underwriting Agreement among the Issuer and the
underwriters of the Transition Bonds (the "Underwriting
Agreement") will have been executed and delivered;
(d) the Indenture will be qualified in accordance with the provisions
of the Trust Indenture Act of 1939, as amended.
Furthermore, we have, or will have, examined and considered
executed originals or counterparts, or certified or other copies identified
to our satisfaction as being true copies of such certificates, instruments,
documents and other corporate records of each of the Issuer and PSE&G and
matters of fact and law as we deem necessary for the purposes of the
opinion expressed below, and we have assumed (i) that such documents will
in all material respects conform to the descriptions provided therefor in
the Registration Statement, (ii) that such documents will not be amended
and (iii) that the parties to such documents will comply with the terms
thereof. Capitalized terms not otherwise defined herein have the respective
meanings assigned to such terms in the Registration Statement.
In our examination, we have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals,
the conformity to original documents of all documents submitted to us as
certified or photostatic copies and the authenticity of the originals of
such latter documents. As to any facts material to the opinions expressed
herein which were not independently established or verified, we have relied
upon statements, representations, and certifications of officers and other
representatives of the Issuer, PSE&G, the Underwriters and others.
In rendering our opinion, we have also considered and relied upon the
Internal Revenue Code of 1986, as amended, and administrative rulings,
judicial decisions, Treasury regulations, and such other authorities as we
have deemed appropriate, all as in effect as of the date hereof. In
particular we have relied on the PSE&G Private Letter Ruling. The
statutory provisions, regulations and interpretations upon which our
opinion is based are subject to changes, and such changes could apply
retroactively. In addition, there can be no assurance that positions
contrary to those stated in our opinion may not be taken by the Internal
Revenue Service.
We also note that the Prospectus and the Underwriting Agreement do
not relate to a specific transaction. Accordingly, the above-referenced
description of Federal income tax consequences may, under certain
circumstances, require modification in the context of an actual
transaction.
We express no opinions as to the laws of any jurisdiction other than
the federal laws of the United States of America to the extent specifically
referred to herein.
Based upon and subject to the foregoing, we are of the following
opinions:
1. the Issuer will not be subject to United States federal income
tax as an entity separate from PSE&G; and
2. the statements in the Prospectus under the heading "Summary of
Terms - Prospectus" and under the heading "Material Income Tax
Matters for the Transition Bonds" subject to the qualifications
set forth therein, accurately describe the material federal
income tax consequences to holders of the Offered Bonds that are
not U.S. persons (within the meaning of the Code), under existing
law and the assumptions stated therein.
Furthermore, subject to the qualifications and assumptions set forth
therein, we hereby adopt and confirm to you our opinion as set forth under
the heading "Material Income Tax Matters for the Transition Bonds" in the
Prospectus.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to Skadden, Arps, Slate,
Meagher & Flom LLP under the captions "Various Legal Matters Relating to
the Transition Bonds" in the Prospectus and "Material Income Tax Matters
for the Transition Bonds" in the Prospectus.
Very truly yours,
/s/ Skadden, Arps, Slate,
Meagher & Flom LLP
AGENDA DATE: 9/10/99
IN THE MATTER OF THE PETITION OF PUBLIC )
SERVICE ELECTRIC AND GAS COMPANY FOR A )
BONDABLE STRANDED COST RATE ORDER IN )
ACCORDANCE WITH CHAPTER 23 OF THE LAWS )
OF 1999, TO AUTHORIZE THE IMPOSITION OF A )
NONBYPASSABLE TRANSITION BOND CHARGE, )
TO AUTHORIZE THE SALE OF BONDABLE ) BONDABLE STRANDED
TRANSITION PROPERTY, THE ISSUANCE AND ) COSTS RATE ORDER
SALE OF NOT TO EXCEED $2.525 BILLION )
AGGREGATE PRINCIPAL AMOUNT OF TRANSITION )
BONDS BY A FINANCING ENTITY TO RECOVER ) DOCKET NO.: EF99060390
PETITIONER'S BONDABLE STRANDED COSTS, )
AND THE APPLICATION OF TRANSITION BOND )
PROCEEDS TO RETIRE OUTSTANDING UTILITY )
DEBT, EQUITY OR BOTH, AND TO APPROVE THE )
FORMULA FOR THE CALCULATION AND )
ADJUSTMENT OF THE TRANSITION BOND CHARGE )
AND MARKET TRANSITION CHARGE-TAX RE )
LATED THERETO. )
(SERVICE LIST ATTACHED)
BY THE BOARD:
By Petition filed with the Board of Public Utilities ("Board" or
"BPU") on June 8, 1999 ("Petition"), Public Service Electric and Gas
Company ("Petitioner"), for purposes of recovering the stranded costs
deemed eligible for rate recovery by the Board in the Summary Order dated
April 21, 1999, which was more fully detailed in the Final Decision and
Order dated August 24, 1999 ("Restructuring Order"), in Docket Nos.
E097070461, E097070462 and E097070463, together with other bondable
stranded costs described in the Electric Discount and Energy Competition
Act ("Act"), P.L. 1999, c. 23, codified at N.J.S.A. 48:3-49, et seq., and
to allow Petitioner to comply with the rate reduction requirements
determined by the Board to be necessary and appropriate consistent with the
provisions of Sections 4 and 13 of the Act, requests that the Board issue
an irrevocable bondable stranded cost rate order (the "Financing Order") to
authorize: (i) the imposition of a nonbypassable transition bond charge, as
provided in Section 18 of the Act, and the collection of such charge (the
"Transition Bond Charge") by Petitioner or another entity approved by the
Board; (ii) the sale of the Bondable Transition Property (as defined below)
to an approved financing entity; (iii) the issuance and sale of not to
exceed $2.525 billion aggregate principal amount of transition bonds (the
"Transition Bonds") by the financing entity to recover Petitioner's
bondable stranded costs and to apply the proceeds of such bonds to retire
Petitioner's outstanding debt, equity or both; (iv) the formula for the
imposition and adjustment of a nonbypassable market transition charge (the
"MTC-Tax") and the collection of such charge as previously authorized by
the Board in the Restructuring Order to recover Federal Income and State
Corporate Business Taxes associated with the Bondable Transition Property
(as defined below) and the collection of the Transition Bond Charges and
the MTC-Tax (the "MTC-Tax Component") to reconcile future tax rates and
MTC-Tax collections to assure full recovery of the MTC-Tax Component; and
(v) the formula for the calculation and adjustment of the Transition Bond
Charge.
Petitioner has stated that the proceeds of the Transition Bonds (net
of Upfront Transaction Costs (as defined below) will be used by or on
behalf of Petitioner solely for the purposes of reducing the amount of its
otherwise recovery-eligible stranded costs, through the retirement of debt
or equity, or both. Petitioner states that the entire amount of cost
savings achieved as a result of the issuance of the Transition Bonds shall
be passed on to customers in the form of reduced rates for electricity.
1. PROCEDURAL HISTORY
On April 30, 1997, the Board issued an Order adopting and releasing a
document entitled "Restructuring the Electric Power Industry in New Jersey:
Findings and Recommendations" ("Final Report"). The Final Report contained
the findings and recommendations concerning the future structure of the
electric power industry in New Jersey, including the recommendation that in
the future electric consumers be offered a choice of electric power
suppliers in order to effectuate substantial economic benefits by way of
lower electric bills and the provision of more service options to the
State's residents and businesses.
Recognizing that there were a number of substantial procedural steps
necessary to implement the recommended policies and to prepare for the
commencement of retail competition, the Board directed in that Order that
each of the State's four investor owned electric utilities make three
filings: a rate unbundling petition, a stranded cost petition, and a
restructuring plan.
On July 11, 1997, the Board issued an Order Establishing Procedures,
wherein it determined to transmit each utility's rate unbundling and
stranded cost filings to the Office of Administrative Law ("OAL") for
hearings and the issuance of an Initial Decision. The Board also determined
to retain the restructuring plan filings for its own review and, as
necessary, hearings.
On July 15, 1997, Petitioner filed its Proposal in Response to the
Final Report. The unbundling and stranded costs portions of Petitioner's
filing were transmitted to the OAL and assigned to Administrative Law Judge
("ALJ") Louis G. McAfoos t/a (BPU Docket Nos. EO97070461 and EO97070462
respectively). The restructuring portion of the filing was retained by the
Board (BPU Docket No. EO97070463).
Twenty days of evidentiary hearings on the unbundling and stranded
costs proceeding were conducted by ALJ McAfoos at the OAL between February
9, 1998 and March 18, 1998. During that time period, witnesses were
cross-examined on their prefiled direct testimony, as well as on any filed
rebuttal or surrebuttal testimony. At the close of hearings, a briefing
schedule and issues outline were adopted by ALJ McAfoos. After requesting
and receiving extensions of time from the Board, Initial Briefs were filed
on or about April 13, 1998. Reply Briefs were filed on or about April 20,
1998.
After the Petitioner's unbundling and stranded cost hearings and
briefing were completed at the OAL, approximately twenty additional days of
evidentiary hearings were held before Commissioner Carmen J. Armenti
between April 27, 1998 and May 28, 1998. During these dates, the parties
presented testimony and conducted cross-examination on certain identified
restructuring issues affecting all four electric utilities.
Following the close of hearings before Commissioner Armenti, briefs
and reply briefs on the restructuring issues were filed on June 26 and July
17, 1998, respectively.
After requesting and receiving an extension of time from the Board,
ALJ McAfoos issued an Initial Decision and Report on Petitioner's
unbundling and stranded cost filings on August 14, 1998. The parties filed
Exceptions and Replies to Exceptions to the Initial Decision with the Board
on October 2, 1998 and October 30, 1998, respectively.
On February 9, 1999, Governor Whitman signed the Act into law. The
Act authorizes the Board to permit competition in the electric generation
and natural gas supply marketplaces and such other traditional utility
areas as the Board determines. In addition, all four electric utilities
were mandated to implement specific rate reductions over a period of four
years. Among other things, the Act requires that the Board, by Order, shall
provide that by no later than August 1, 1999 each electric public utility
shall provide retail choice of electric power suppliers for its customers,
reduce its aggregate level of rates for each customer class by no less than
five percent, unbundle its rate schedules and establish so-called "shopping
credits" applicable to the bills of retail customers who choose alternative
electric power suppliers.
By Order dated February 16, 1999, the Board established guidelines
and a schedule for the commencement of settlement negotiations among the
parties in the Petitioner's stranded costs and unbundling proceedings. The
Board set a deadline of March 3, 1999 for the submission to the Board of a
negotiated settlement, which deadline was later extended to March 5, 1999.
No comprehensive settlement was reached among all the parties; however, on
March 17, 1999 a proposed stipulation of settlement ("Stipulation") was
filed by Petitioner and eight other parties. A proposed alternative
stipulation of settlement ("Stipulation II") was submitted to the Board on
March 29, 1999 by the Division of the Ratepayer Advocate and five other
parties. The parties were provided the opportunity to submit comments to
the Board on the Stipulation by April 5 and comments on Stipulation II by
April 7, 1999.
At its April 21, 1999 open public agenda meeting, the Board found
that with certain modifications the Stipulation could serve as a reasonable
framework for a fair and reasonable resolution of the matters and issued
its Summary Order dated April 21, 1999 ("Summary Order") memorializing the
Board's decision in BPU Docket Nos. EO97070461, EO97070462 and EO97070463.
In that Summary Order, the Board determined, among other things, that
Petitioner would have an opportunity to recover up to $2.94 billion net of
tax of stranded costs, in part through the securitization of $2.4 billion.
As noted above, Petitioner filed its Petition in this securitization
matter on June 8, 1999. In response, by motion filed July 2, 1999, the New
Jersey Business Users filed a motion to intervene in this matter. On July
9, 1999, Co-Steel Raritan also filed a motion to intervene. On July 22,
1999, Petitioner filed separate responses to both motions. On July 23,
1999, movants filed individual replies to Petitioner's responses. At its
open public agenda meeting on July 26, 1999, the Board denied both motions
(BPU Docket. No. EF99060390).
On August 11, 1999, the Ratepayer Advocate filed a letter dated
August 11, 1999 in which it raised 13 Issues, including an argument that
evidentiary hearings (Issue I set forth in the Ratepayer Advocate's
Memorandum) are required to be held in this Docket. On August 13, 1999,
Petitioner filed its reply thereto. By letter dated August 24, 1999,
Petitioner submitted a proposal to resolve two of the Issues (Issues IX and
X) raised by the Ratepayer Advocate. At its open public agenda meeting on
August 24, 1999, the Board rendered its findings regarding Issues II
through VIII and Issue XIII. The Board also found that hearings were not
required with respect to Issues IX and X and held in abeyance a decision on
Issues XI and XII. The Board has carefully considered the Ratepayer
Advocate's comments as well as the response thereto by Petitioner, in
rendering this Order and Issues IX through XII are addressed herein in
Section 5.
As noted, by Order dated August 24, 1999, the Board issued the
Restructuring Order in the unbundling, stranded cost and restructuring
proceedings (Docket Nos. EO97070461, EO97070462 and EO97070463). In doing
so, the Board memorialized with greater detail the Board's April 21, 1999
decision approving the level of stranded costs and the amount to be
securitized in this financing proceeding. A fuller description of the
procedural history regarding the unbundling, stranded costs and
restructuring proceedings is included in the Restructuring Order.
On August 9, 1999, Petitioner filed with the Board a copy of the
Special Purpose Entity's ("SPE") (defined below) Registration Statement on
Form S-3 relating to the Transition Bonds ("SEC Filing"). On September 2,
1999, Petitioner filed revised Attachment A-1 to its Petition (describing
Ratepayer Savings methodology) as well as its quarterly report on Form 10-Q
with the Securities and Exchange Commission ("SEC") for the quarter ended
June 30, 1999 ("10-Q").
2. TRANSITION BOND TRANSACTION
A. PROPOSED STRUCTURE
A general description of the Transition Bond transaction structure
(the "Transition Bond Transaction") proposed by the Petitioner follows.
This proposed structure is subject to modification, depending upon the
requirements of tax authorities, input from underwriters in connection with
the marketing of the Transition Bonds and negotiations with nationally
recognized statistical rating organizations (the "rating agencies")
selected by Petitioner to assign credit ratings to the Transition Bonds.
Petitioner states that the proposed structure is intended to minimize debt
service costs, maximize ratepayer savings and create a substantially level
charge over the life of the Bonds while obtaining the best possible rating
for the Transition Bonds as asset-backed securities. Petitioner has
requested that the Board authorize the execution of hedging arrangements
(as described in paragraph 2(e) below). The final structure, pricing, terms
and conditions will be determined by Petitioner at the time Transition
Bonds are priced, subject to an approving certification by the designee
(the "Designee") of the Board as provided herein.
In the Restructuring Order, the Board approved the issuance of up to
$2.525 billion of Transition Bonds to permit the recovery by the Petitioner
of $2.4 billion of net of tax bondable stranded costs plus transaction
costs not exceeding $125 million. The Board also determined in the
Restructuring Order that the Federal Income and State Corporate Business
Taxes which are reflected in the grossed-up revenue requirement associated
with the $2.4 billion in net of tax stranded costs being securitized are
legitimate recoverable stranded costs to be recovered through the MTC-Tax
approved in the Restructuring Order.
The Petitioner has requested the authority to recover its bondable
stranded costs as defined in Section 3 of the Act, including (1) the costs,
(including, but not limited to, redemption premiums, unamortized costs of
issuance and interest and preferred dividends accruing on or after the
issuance of the Transition Bonds), estimated at $100 million, of retiring
existing debt or equity, or both, with the proceeds of the Transition Bonds
("Capital Reduction Costs"); (2) the costs, estimated at $25 million,
incurred to issue the Transition Bonds ("Upfront Transaction Costs"); and
(3) principal and interest on the Transition Bonds, together with the costs
of paying, refinancing, administering and servicing, credit enhancing (if
any), overcollateralizing and hedging the Transition Bonds as more fully
described herein ("Ongoing Transition Bond Costs") (such Capital Reduction
Costs, Upfront Transaction Costs and Ongoing Transition Bond Costs all
being hereinafter referred to as "Bondable Stranded Costs"). The Petitioner
has also requested approval of the formula for the calculation and
adjustment of the Transition Bond Charge and MTC-Tax related thereto.
Petitioner has further requested that, pursuant to this Financing
Order, Petitioner be granted authority to recover through the sale of the
Bondable Transition Property up to $2.525 billion of its Bondable Stranded
Costs, including Capital Reduction Costs and Upfront Transaction Costs.
Ongoing Transition Bond Costs will be recovered by the SPE through the
assessment and collection of the Transition Bond Charge, a separate,
nonbypassable charge assessed and collected from all customers of
Petitioner and/or any successor electric public utility operating within
Petitioner's existing service territory, except as provided in Section 28
of the Act.
Petitioner states that the principal asset to be used to secure the
Transition Bonds is the Bondable Transition Property. Petitioner points out
that pursuant to Section 16 of the Act, this Financing Order and the
Transition Bond Charges are irrevocable upon this Financing Order's
becoming effective pursuant to Section 19 of the Act, and this Financing
Order cannot be rescinded, altered, repealed, modified or amended by the
Board or any other governmental entity; nor impaired by the State of New
Jersey, as pledged in Section 17 of the Act.
Petitioner states that it will form a non-utility, bankruptcy-remote
special-purpose entity (the "SPE"), wholly owned by Petitioner, and will
provide the initial capitalization of such SPE. The Petition provides that
Petitioner will sell the Bondable Transition Property directly or through
an assignee (as defined in the Act) to the SPE in a transaction which,
under Section 23 of the Act, will be a legal true sale and absolute
transfer to such SPE, and that the SPE will constitute a financing entity
for purposes of the Act.
To raise the funds to pay the purchase price of the Bondable
Transition Property to Petitioner, the SPE will issue and sell Transition
Bonds, the net proceeds of which bonds will be remitted to Petitioner. The
SPE will issue and sell the Transition Bonds in a negotiated public
offering as asset-backed securities ("ABS"). Petitioner states that all
prior securitizations of utility stranded costs in other jurisdictions have
been structured as ABS and sold on a negotiated basis and the expertise of
an underwriter is critical to the structuring, pricing and marketing of
securities in the ABS market. Petitioner notes that in states such as
Massachusetts where competitive bidding requirements would otherwise be
applicable, bidding of stranded cost securitization transactions has either
been waived or not required to access the ABS market. For these reasons,
Petitioner and Lehman Brothers, its lead underwriter, believe that a
negotiated sale will assure that the Transition Bonds will receive the
highest possible rating and will obtain the lowest possible interest and
transaction costs, ensuring compliance with the requirements of Section
14(b)(4) of the Act which provides that Petitioner's customers pay the
lowest transition bond charges consistent with market conditions at time of
pricing and the terms of this Order.
Petitioner states that all of the assets of the SPE, including,
without limitation, the Bondable Transition Property and the other
collateral of the SPE (the "Other SPE Collateral"), will be pledged as
collateral to secure the Transition Bonds. Petitioner notes that the Other
SPE Collateral may include (without limitation) the rights of the SPE under
the Transition Bond Transaction documents, including a sale agreement by
which the SPE acquires the Bondable Transition Property and receives
certain indemnification from the Petitioner, a servicing agreement by which
Petitioner or any successor in that capacity acts as servicer of the
Bondable Transition Property (the "Servicer"), an administration agreement
by which the SPE will be administered, and various trust accounts of the
SPE.
While the Board is requested to approve Transition Bonds with
scheduled amortizations not exceeding 15 years at issuance in accordance
with Section 14 of the Act, it is also requested to approve stated
maturities of up to two additional years in order to reduce
overcollateralization requirements and enhance the prospects of securing
the highest possible credit rating for the Transition Bonds. Petitioner
states that these objectives should result in lower interest costs and,
thus, savings to ratepayers.
B. RECOVERY OF UPFRONT TRANSACTION COSTS
In order to issue Transition Bonds to achieve net savings for the
benefit of its customers, Petitioner will incur transaction costs. Based on
the currently estimated initial offering of $2.525 billion of Transition
Bonds, Petitioner has estimated that such amount will include Upfront
Transaction Costs of approximately $25 million which may vary, in part,
based on the factors described below. Petitioner states that these Upfront
Transaction Costs will include, among other items, the underwriting spread,
rating agency fees, financial advisory fees, accounting fees, SEC
registration fees, printing and marketing expenses, trustees' fees, legal
fees, the servicing set-up fee and the administrative cost to set up the
SPE. The Petitioner has requested authority to recover the Upfront
Transaction Costs out of the proceeds of the sale of the Transition Bonds
and to include such costs as Bondable Stranded Costs, the right to recover
such amounts to constitute a portion of the Bondable Transition Property.
Petitioner indicates that to the extent payment of any Upfront Transaction
Costs is required prior to the issuance of the Transition Bonds, such costs
will be paid by Petitioner and reimbursed from the proceeds of the
Transition Bonds.
C. RECOVERY OF CAPITAL REDUCTION COSTS
Petitioner has requested recovery of the Bondable Stranded Costs of
retiring Petitioner's debt or equity, or both, including, but not limited
to, accrued interest and accrued preferred dividends, premium and other
fees, costs and charges relating thereto out of the proceeds of the sale of
the Transition Bonds and to include such costs as Bondable Stranded Costs,
the right to recover such amounts to constitute a portion of the Bondable
Transition Property.
D. RECOVERY OF ONGOING TRANSITION BOND COSTS
Petitioner has requested recovery of Ongoing Transition Bond Costs
through the Transition Bond Charge. Petitioner states that the primary
Ongoing Transition Bond Costs are principal and interest on the Transition
Bonds, and that other such costs include principally the servicing fee of
.05% of the initial principal amount of the Transition Bonds (the
"Servicing Fee") paid to Petitioner, as the Servicer (as defined below), or
such higher fee as may be payable to a successor Servicer, and the ongoing
cost of credit enhancement, overcollateralization and hedging arrangements,
if any. Petitioner states that there will also be a small amount of
additional, ongoing costs associated with the Transition Bond Transaction,
such as the administration fee, legal and accounting fees, directors or
managers fees, rating agency fees, trustee fees and other costs of
operating the SPE. Petitioner states that these costs should be included as
Bondable Stranded Costs to be recovered through the Transition Bond Charge
in accordance with Section 14 of the Act, and the right to recover these
costs as Bondable Stranded Costs will be a portion of the Bondable
Transition Property.
E. APPROVAL OF FINAL TERMS AND CONDITIONS: TRANSITION BOND
TRANSACTION
Petitioner states that prior to the pricing of the Transition Bonds,
it will cooperate with and provide such information to the Board's Designee
as is reasonably requested in order that the Designee may make the
certifications required below. To assist the Designee in making his
required certifications, upon the pricing of the Transition Bonds, the
Petitioner will file with the Board's Designee a Pricing Advice Certificate
(see Appendix D to this Financing Order). This document may be based upon
the advice of the Petitioner's lead underwriter and will certify, in
substance, that the structuring and pricing of the Transition Bonds
(including any hedging arrangement priced at the time of pricing of the
Transition Bonds as described below), assures that the Petitioner's
customers pay the lowest Transition Bond Charges consistent with then
current market conditions and the terms of this Financing Order.
Petitioner also states that prior to the approval of pricing of the
Transition Bonds (including any hedging arrangement priced at the time of
the pricing of the Transition Bonds), the Designee will receive a
certificate from Petitioner's lead underwriter substantially to the effect
that, in its judgment, the structuring and pricing of the Transition Bonds
(and any such hedging arrangement) is reasonable in the light of current
market conditions. Upon the filing of the Pricing Advice Certificate (at
the time of the pricing of the Transition Bonds and any such hedging
arrangement), Petitioner requests that the Board's Designee will file with
the Board a certificate (see Appendix A hereto) to the effect that the
structure and pricing of the Transition Bonds (and any such hedging
arrangement) assures that Petitioner's customers pay the lowest Transition
Bond Charges consistent with market conditions and the terms of the
Financing Order, and approving the terms and conditions of the Transition
Bonds (and any such hedging arrangement), including scheduled amortization
up to 15 years and stated maturities of up to two additional years.
Petitioner states that payments on the Transition Bonds will be
semiannual or quarterly, depending upon rating agencies, tax considerations
and market conditions at the time of Transition Bond pricing, and that debt
service on the Transition Bonds will be scheduled upon issuance so that the
sum, for each annual period, of (i) the Periodic Payment Requirements
(defined below) and (ii) the associated MTC-Tax collections will result in
substantially equal Transition Bond Charges.
Petitioner states that one or more classes of the Transition Bonds
may be issued as variable rate instruments which are fixed or capped
through the execution of an interest rate exchange agreement, an interest
rate cap agreement or similar hedging arrangement . If, at the time of
pricing of the Transition Bonds, the Petitioner and its lead underwriter
determine that such a hedging arrangement is expected to result in a lower
interest cost on such classes of bonds or on all classes of an issue taken
as a whole, the hedging arrangement will be described in the Pricing Advice
Certificate (see Appendix D hereof) and is subject to approval by the
Designee in the Designee Certification. Any counterparty to such a hedging
arrangement must have a credit rating consistent with achieving the highest
possible ratings on the Transition Bonds.
Petitioner has also advised the Board's Staff and the Board's
financial advisor that it may be advantageous, under certain market
conditions, to enter into a hedging arrangement in order to attempt to
synthetically fix or cap interest rates on the Transition Bonds in advance
of the actual pricing of the Transition Bonds. Petitioner also stated that
the implementation of a hedging arrangement in advance of the pricing of
the Transition Bonds should only be undertaken if Petitioner determines and
certifies to the Board Designee, that such an arrangement is appropriate to
assure that Petitioner can achieve the required rate reductions through
securitization and to protect ratepayers against future interest rate
increases.
Because there is no market for hedging Transition Bonds directly,
Petitioner has advised Board Staff that any hedging arrangement may not
provide a "perfect" hedge against interest rate volatility. Petitioner has
further advised Board Staff that in order to hedge the risk of changes in
the interest rates prior to the pricing of the Transition Bonds, it is
necessary to make reference to rates and spreads in other markets,
including the United States Treasury Bond market and the interest rate swap
market. Petitioner has further advised that it may itself enter into
hedging arrangements with one or more third party counterparties and enter
into a back-to-back hedging arrangement with the SPE.
Petitioner has also advised that payments from or to one or more of
the third party counterparties with whom Petitioner or the SPE enters into
a hedging arrangement prior to the pricing of the Transition Bonds in order
to fix or cap interest rates shall be treated as follows: If a payment is
received by Petitioner and/or the SPE from the third party counterparties,
Petitioner and/or the SPE would retain such amount (or an estimate of such
amounts if the exact amount is unknown at the time of pricing of the
Transition Bonds), after any current income taxes and the principal amount
of the Transition Bonds will be correspondingly reduced. In the event the
actual payment received from the hedging arrangement at the time of issuing
the Transition Bonds does not equal the amount by which the Transition Bond
issuance was reduced, the difference would be recovered by the Petitioner
and/or SPE or credited to ratepayers as an adjustment to Ongoing
Transaction Costs and reflected in the initial Transition Bond Charge.
If a payment must be made by Petitioner and/or the SPE to the
third-party counterparties, such payment, or any portion thereof, net of
tax, may be included in Transaction Costs and securitized provided the
total amount securitized (i.e., the $2.4 billion of net-of-tax stranded
costs, plus Capital Reduction and Upfront Transaction Costs expressed on a
net of tax basis to the extent they are deductible when incurred (not to
exceed $125 million in the aggregate, pre-tax, or $74 million, net of tax),
plus the payment to the third-party counterparty, net of tax to the extent
the payment is deductible when incurred) does not exceed $2.525 billion..
Alternatively, at the discretion of the Petitioner and/or SPE, the payment
to any counterparty by the SPE may be amortized over the term of the
Transition Bonds and, together with interest determined at the weighted
average yield on the Transition Bonds, included as part of Ongoing
Transaction Costs and remitted to Petitioner or another counterparty.
Petitioner suggests that any periodic payment of Ongoing Transaction
Costs by SPE to Petitioner related to such a hedging arrangement may be
made subordinate to the payments of Transition Bonds.
Petitioner has requested that if a hedging arrangement is entered
into prior to the pricing of the Transition Bonds, the hedging arrangement
will be approved by the Designee by the execution and delivery to the
Petitioner of a Designee Certification which will describe and approve the
structuring and pricing of the hedging arrangement. Upon the delivery to
the Petitioner of such Designee Certification, the terms of any hedging
arrangement, including the terms of the Transition Bonds which are assumed
as part of such hedging arrangement, shall be final and incontestable, and
shall not be subject to further review or approval by the Designee upon the
pricing of the Transition Bonds. The Designee Certification shall be filed
by the Designee with the Board at the same time the Designee files the
Designee Certification approving the pricing of the Transition Bonds. The
Designee shall also approve and certify the terms for the termination of
any hedging arrangement.
Not later than five business days after the issuance and sale of the
Transition Bonds, Petitioner will confirm to the Board, in an "Issuance
Advice Letter" substantially in the form of Appendix B to this Financing
Order, the actual interest rates on the Transition Bonds, the schedule of
payments of principal and interest on the Transition Bonds (the "expected
amortization schedule"), and the initial Transition Bond Charge and
MTC-Tax, which will be calculated using the formula described in Exhibit A
of the Petition. The Issuance Advice Letter will also include a calculation
of present value savings to customers using the methodology employed in
Appendix H hereof, applied to the actual structure and terms of Transition
Bonds. Pursuant to Section 15(a)(2) of the Act, the initial Transition Bond
Charge and MTC-Tax will become effective when the Issuance Advice Letter is
filed, without further action by the Board.
F. TRANSITION BOND CHARGE
Pursuant to Section 15 of the Act, Petitioner states that Transition
Bond Charges will be set periodically by formula at a level intended to
recover the sum of the Ongoing Transition Bond Costs, including, without
limitation: (1) the principal of (in accordance with the expected
amortization schedule approved by the Designee at or before the time of
pricing of the Transition Bonds) and interest on the Transition Bonds
authorized by the Board in this Financing Order; (2) the costs of operating
and administering the SPE; (3) the costs of servicing the Transition Bonds,
including servicing and trustee fees, expenses and indemnities,
substantially as described in the SEC filing; (4) amounts required to fund
or replenish the overcollateralization account in accordance with the
overcollateralization schedule approved by the Board's Designee at pricing
of the Transition Bonds; (5) the reimbursement of any amounts required to
be drawn from the SPE's capital account pursuant to the Bond Indenture,
substantially as described in the SEC filing; and (6) the ongoing expenses
of any other credit enhancement or hedging arrangements (the required
periodic payment of all such amounts, including deficiencies on past due
amounts for any reason, is herein called the "Periodic Payment Requirement"
and the total of such requirements until paid in full, the "Total Payment
Requirements").
In Attachments A3 and A4 to Exhibit A of the Petition, the Petitioner
describes the formula by which it proposes to periodically establish and
adjust the Transition Bond Charge and the MTC-Tax. Petitioner states that
the Transition Bond Charges and the MTC-Tax will be set and adjusted based
on assumptions described in Attachments A3 and A4 to Exhibit A of the
Petition, as those assumptions are adjusted periodically in accordance with
Attachments A3 and A4 to Exhibit A. These assumptions include, but are not
limited to, sales forecasts, customer payment and charge-off patterns,
defaults by third party suppliers (as described herein), the Periodic
Payment Requirement (including without limitation the timely payment of
principal of and interest and acquisition or redemption premium on, the
Transition Bonds) and tax rates. In Attachment A2 to Exhibit A of the
Petition, Petitioner projected the initial Transition Bond Charge and the
MTC-Tax using the formula described in Attachments A3 and A4 to Exhibit A
to the Petition and assuming the Periodic Payment Requirements as shown in
Revised Attachment A1 to Exhibit A of the Petition which is attached hereto
as Appendix I.
Petitioner requests that the Transition Bond Charges shall remain in
effect until the SPE owner of the Bondable Transition Property has received
Transition Bond Charges sufficient to discharge the Total Payment
Requirements.
Petitioner states that each customer's monthly bill will contain a
line item which includes both the Transition Bond Charge and MTC-Tax and
will note in text or contain a footnote that a portion of such combined
charge represents Bondable Transition Property being collected on behalf of
the SPE as owner of Bondable Transition Property.
G. PERIODIC ADJUSTMENTS TO THE TRANSITION BOND CHARGE AND MTC-TAX
The Board is required by Section 15 of the Act to make mandatory
periodic adjustments (the "True-Up Mechanism") to the Transition Bond
Charge upon petition of Petitioner, its assignee or financing entity, to
ensure receipt of revenues sufficient to satisfy the Periodic Payment
Requirement. Under the Act, mandatory periodic adjustments of Transition
Bond Charges must be made at least annually. As described earlier, such
adjustments will be based upon a formula described in Attachments A3 and A4
to Exhibit A of the Petition. Each such adjustment shall be formula-based,
shall be in the amount required to ensure receipt of revenues sufficient to
satisfy the Periodic Payment Requirement, including, without limitation,
the timely payment of principal of, and interest and acquisition or
redemption premium on, the Transition Bonds. As Servicer, Petitioner states
that it will be responsible for filing with the Secretary of the Board
documentation for any necessary periodic adjustments (see Appendix C
hereto). (Petitioner, as Servicer under the Servicing Agreement, described
below, and any successor to Petitioner as servicer are herein referred to
as the "Servicer".)
Petitioner has requested authorization to file for adjustments of the
Transition Bond Charge, as often as quarterly, as determined necessary by
Petitioner for credit rating purposes. Each such periodic adjustment shall
become effective 30 days after filing thereof with the Board absent a
determination by the Board of manifest error (i.e. an arithmetic error
evident on the face of such filing). Under Section 15 of the Act, the
Servicer shall propose such adjustments in a filing with the Secretary of
the Board at least 30 days in advance of the date upon which it is
requested to be effective. The proposed adjustment shall become effective
on an interim basis on such requested effective date, in the absence of a
Board Order to the contrary. Under Section 15 of the Act, in the absence of
a Board order to the contrary, the periodic adjustment shall become final
60 days after the filing. The Petitioner has requested that the Board
confirm that the periodic adjustment will become final absent a finding by
the Board of manifest error as defined above in the application of the
adjustment formula approved herein. The Petitioner asserts that this
standard is consistent with the other provisions of Section 15 which
require that the periodic adjustment be implemented to ensure "timely
payment" of, among other things, principal of and interest and acquisition
or redemption premium on the Transition Bonds. Petitioner further asserts
that in order to achieve the highest possible credit ratings on the
Transition Bonds and, thus, the lowest costs to ratepayers, the periodic
adjustments must be made final based upon this objective standard.
As provided in the Restructuring Order, the MTC-Tax is subject to
periodic review and adjustment. Petitioner proposes that the adjustment is
to be made as often as quarterly to reconcile the income taxes recovered to
the income taxes required to be paid on the taxable net revenue as
calculated in accordance with Exhibit A to the Petition from the Transition
Bond Charges and the MTC-Tax. Petitioner requests that the reconciliation
be made at the same time and substantially in the same manner as the True
Up Mechanism for Transition Bond Charges in order to ensure receipt of
revenues sufficient to assure that the MTC-Tax is not being underrecovered
or overrecovered. Upon petition of Petitioner, the MTC-Tax will be adjusted
based upon assumptions described in Attachments A3 and A4 to Exhibit A to
the Petition, as those assumptions are adjusted from time to time in
accordance with such Attachments A3 and A4. No delay in the mandatory
adjustment or failure to make any such adjustment of the MTC-Tax will in
any way adversely affect the mandatory periodic adjustment of the
Transition Bond Charge described in the preceding paragraph.
The Petitioner has also requested authority for the Servicer to make
"non-routine" filings for adjustments to the formula described in Exhibit A
of the Petition to assure timely payment of the Total Payment Requirements,
including principal and interest on the Transition Bonds. These filings
would be made to accommodate changes to the formula described in
Attachments A3 and A4 to Exhibit A, if deemed appropriate by the Servicer
to protect bondholders to remedy a significant and recurring variance
between actual and expected Transition Bond Charge collections. Any such
filing would be required to be made with the Secretary of the Board at
least 90 days prior to the proposed effective date, and would be subject to
Board approval.
H. REMITTANCE OF TRANSITION BOND CHARGES
Petitioner states that the Servicer will employ a methodology to
remit to the Transition Bond trustee ("Bond Trustee") the Transition Bond
Charge as described in the Petition and in Exhibit C thereto. Petitioner
notes that the Servicer will receive the Transition Bond Charge collections
daily and may, as authorized by Section 15 of the Act, commingle Transition
Bond Charge collections with other customer payments until the remittance
date to the Bond Trustee.
Petitioner states that collections from each customer will be applied
first to sales taxes (which Petitioner will collect as trustee for the
State and not for its own account or that of the SPE, and which are not
"charges" for purposes of the following allocations), then to charges in
arrears, if any, and then to current charges. With respect to each billing
period, partial payments of charges will be allocated to the Transition
Bond Charge, to the MTC-Tax and to the Petitioner's other charges, pro
rata, based on the proportions that the Transition Bond Charges, the
MTC-Tax and the Petitioner's other charges bear to the total charges
collected. Partial payments of Transition Bond Charges will be allocated to
the SPE (as owner of the Bondable Transition Property), pro rata, based on
the proportions that the Transition Bond Charge representing the Bondable
Transition Property and any transition bond charges established pursuant to
other subsequent financing orders bear to the total Transition Bond Charges
collected. Subsequently, the Petitioner advised the Board that it would
file, as part of its required Unbundling Filing of August 1, 2002, data
showing the impact of the timing of customer payments of Transition Bond
Charges to the Petitioner versus payments by the Petitioner as Servicer to
the transition bond trustee. This data shall include a calculation of
customer daily remittances, timing of remittances to the bond trustee and
the short-term interest rate then applicable to determine the amount of
"float" income earned by the Petitioner in its capacity as Servicer. If the
Board determines in its review of this filing, that the Petitioner retained
revenue over and above its servicing fee, it may calculate such retained
revenue, and impute interest thereon, in determining fair and reasonable
rates going forward from the date of its review.
Petitioner says that the Bond Trustee will apply Transition Bond
Charge collections substantially as described in the SEC filing. Thus,
investment income earned on the trust accounts held by the Bond Trustee may
be used to satisfy current Periodic Payment Requirements. Investment income
on the capital account not used currently for these purposes will be
released to the SPE. Any earnings in excess of required balances in such
trust accounts (other than the capital account) will reduce the Transition
Bond Charges through the True-Up Mechanism.
Upon retirement of all outstanding Transition Bonds and payment of
all Ongoing Transition Bond Costs, Petitioner states that any remaining
amounts held by the Bond Trustee will be released to the SPE and that
Petitioner's equity in the SPE may be distributed to Petitioner, Petitioner
also says that it will credit an amount equal to any overcollected
Transition Bond Charges, less any amount of any unpaid MTC-Tax charges and
any amount that was withdrawn and not replenished to the SPE's equity, to
its customers against its distribution charges.
I. CREDIT ENHANCEMENT
The Transition Bond documents will incorporate the True-Up Mechanism
authorized by Section 15 of the Act as described above and
overcollateralization amounts or other means of credit enhancement as
required by the rating agencies or taxing authorities.
The Petitioner explains that the Transition Bond Charge will be set
to collect an overcollateralization amount over time in addition to the
principal (in accordance with the expected amortization schedule) and
interest payable on the Transition Bonds and the other Ongoing Transition
Bond Costs. The Petitioner states that the overcollateralization amount
necessary for the Transition Bonds will be determined just prior to
pricing, after consultation with the rating agencies and tax authorities,
and will be subject to the approval of the Designee at the time of pricing
of the Transition Bonds. As with other components of the Transition Bond
Charge, the overcollateralization component will be incorporated into each
periodic adjustment to the extent necessary using the True-Up Mechanism.
J. FORMATION OF SPE
The SPE will be a wholly-owned, non-utility subsidiary of the
Petitioner and is expected to be a limited liability company, and will be
managed substantially as described in the SEC Filing.
K. BONDABLE TRANSITION PROPERTY
Under Section 3 of the Act, the Petitioner's Bondable Transition
Property (the "Bondable Transition Property") will consist of (a) the
irrevocable right to charge, collect and receive, and be paid from
collections of the Transition Bond Charge the amount necessary to provide
for the full recovery of Total Payment Requirements, (b) all rights of
Petitioner under this Financing Order, including without limitation all
rights to obtain periodic adjustments of the Transition Bond Charge
pursuant to the True-Up Mechanism and (c) all revenues, collections,
payments, money and proceeds arising under, or with respect to, all of the
foregoing.
Pursuant to Sections 16 and 22 of the Act, upon receipt of payment
for the Bondable Transition Property by the Petitioner from the SPE, the
Bondable Transition Property will constitute a vested presently existing
property right and will continuously exist as property for all purposes as
provided in the Act and the Financing Order, whether or not the revenues
and proceeds arising with respect thereto have accrued and notwithstanding
the fact that the value of the property right may depend upon consumers
using electricity or the Servicer performing services; and the validity of
any sale, assignment or other transfer of the Bondable Transition Property
will not be defeated or adversely affected by the commingling by Petitioner
of revenues recovered from amounts charged, collected and received on
account of the Bondable Transition Property with other funds of Petitioner.
L. SALE OF BONDABLE TRANSITION PROPERTY TO SPE
Petitioner requests the Board to approve the sale of the Bondable
Transition Property to an SPE in one or more transactions which, under
Section 23 of the Act, will be a legal true sale and absolute transfer to
the SPE, notwithstanding any other characterization for tax, accounting or
other purposes. The Petitioner explains that the SPE will have all of the
rights originally held by Petitioner with respect to the Bondable
Transition Property, including the right to exercise any and all rights and
remedies to collect any amounts payable by any customer in respect of the
Bondable Transition Property, which includes the right to direct Petitioner
or any successor electric public utility to shut-off electric power to the
extent permitted in accordance with law and any applicable regulations.
The Petitioner notes that the agreement in connection with the sale
and transfer of the Bondable Transition Property to the SPE will include
representations and warranties with respect to, among other things, the
validity of this Financing Order, the Bondable Transition Property and the
title thereto, and provide specific covenants, indemnities and/or
repurchase obligations in connection with such transfer for the benefit of
the holders of Transition Bonds.
m. Issuance of Transition Bonds
The Board is requested to approve the issuance of Transition Bonds by
the SPE. The Petitioner states that the Transition Bonds will, by their
terms, be recourse only to the SPE's credit and assets, and will be secured
by a pledge of all of the rights, title and interest of the SPE in its
Bondable Transition Property and Other SPE Collateral.
N. NONBYPASSABLE TRANSITION BOND CHARGE AND MTC-TAX
The Transition Bond Charge and MTC-Tax are nonbypassable and will be
assessed against and collected from all customers of the Petitioner or any
successor electric public utility, except as provided in Section 28 of the
Act, within the Petitioner's service area as of the date of the Petition
until the Total Payment Requirements are discharged in full. Pursuant to
Section 18 of the Act, the Transition Bond Charge will apply equally to
each customer, regardless of class, based on the amount of electricity
delivered to the customer through the transmission and distribution system
of Petitioner or any successor electric public utility that takes over all
or a portion of the Petitioner's service area, including electricity sold
to customers by any third party supplier, as described below.
O. THIRD PARTY SUPPLIERS
The Petitioner states that billing, collection and remittance of
Transition Bond Charges by a third party supplier ("TPS") may increase the
risk of shortfalls in Transition Bond Charge and MTC-Tax collections by
exposing the cash flow to potential interruption due to the default,
bankruptcy or insolvency of the TPS. It notes that this risk of
interruption will increase risks to investors and ratepayers, potentially
increasing the required credit enhancement or reducing the credit rating
and increasing the rate of interest on Transition Bonds. The Petitioner
concludes that such TPS billing may increase the Transition Bond Charge and
MTC-Tax component resulting from interruption or delay in payment.
In order to mitigate against these risks, satisfy rating agency
concerns and reduce the cost to ratepayers, Petitioner requests that any
TPS should be required to comply with certain billing, collection and
remittance procedures and information access requirements described in the
Petition and comparable to those in effect in other states in which
stranded cost securitizations have been effected. The Petitioner indicates
that these requirements are largely derived from rating agencies' criteria,
as described in Exhibit D of the Petition.
P. SERVICING
Petitioner states that it will enter into a servicing agreement with
the SPE to perform servicing functions on behalf of the SPE with respect to
the Bondable Transition Property, which, servicing engagements, including
servicing compensation, will be substantially as described in the SEC
filing.
Q. MTC-TAX COMPONENT RECOVERIES
Pursuant to the Restructuring Order, Petitioner has been authorized
to recover fully the MTC-Tax Component through the ongoing collection of
the MTC-Tax until full payment of principal and interest of the Transition
Bonds. Pursuant to the Restructuring Order, the MTC-Tax is subject to
mandatory periodic adjustment (at the same time and substantially in the
same manner as the Transition Bond Charges) to reconcile the MTC-Tax
collections with the Federal Income and State Corporate Business taxes
required to be paid on the taxable revenue as calculated in accordance with
Exhibit A to the Petition from the Transition Bond Charge and the MTC-Tax.
The Petitioner will maintain separate accounting for the MTC-Tax
collections and the Bondable Transition Property. As provided in Section
23(a)(4) of the Act, Petitioner's right to recover the MTC-Tax by
Petitioner will in no way affect or impair the legal true sale and absolute
transfer of the Bondable Transition Property to the SPE, or otherwise
affect the legal rights and attributes of the Bondable Transition Property
under the Act.
3. RATEPAYER BENEFITS
Based upon its most recent rate case, Petitioner has a pre-tax rate
of return of 14.23%, which is equivalent to an after-tax rate of return of
8.42%. Based upon the structure, methodology and assumptions as set forth
in the letter of Petitioner to the Board dated September 2, 1999
("September 2, 1999 Letter") and in Appendix H hereof, Petitioner
represents that, as proposed, the Transition Bond Transaction will result
in net present value savings over the term of the Transition Bonds and
greater rate reductions than would be required to recover the recoverable
stranded costs if Transition Bonds were not issued. Petitioner states that
the actual net present value savings and rate reductions resulting from the
Transition Bond Transaction will depend upon the actual amount of
Transition Bonds issued, market conditions at the time of the pricing of
the Transition Bonds (and any hedging arrangement), and the actual amount
of Bondable Stranded Costs. The structure, pricing, terms and conditions of
the Transition Bonds (and any hedging arrangement) will be subject to
approval by the Designee pursuant to the delegation of authority in this
Financing Order. In its Issuance Advice Letter filed with the Board
following the pricing of the Transition Bonds, the Petitioner will present
a calculation of the expected net present value savings and rate reductions
resulting from issuance of the Transition Bonds using the methodology
described in the September 2, 1999 Letter and based upon the findings in
the Restructuring Order and the rate reductions prescribed in the Act.
4. USE OF PROCEEDS
The Petitioner states that the proceeds, net of underwriting
discount, from the sale of Transition Bonds will be remitted to Petitioner
in consideration of Petitioner's sale of Bondable Transition Property. In
accordance with Section 14 of the Act, Petitioner will use such proceeds,
after payment of Upfront Transaction Costs, to reduce its $2.4 billion net
of tax bondable stranded costs through the retirement of debt or equity, or
both (including transactions completed after the date of this Order).
5. RATEPAYER ADVOCATE'S COMMENTS
As noted in the procedural history set forth hereinabove, by letter
memorandum dated August 11, 1999, the Ratepayer Advocate ("Advocate") filed
comments in response to Petitioner's filing in this matter. The Advocate's
primary argument was that evidentiary hearings were required given the
nature of the issues in dispute in this matter. At its public meeting dated
August 24, 1999, memorialized by Board Order dated September 17, 1999, the
Board ruled that it would not be necessary to hold evidentiary hearings
with regard to the issues raised by the Advocate's memorandum except that
it held two issues, issues XI and XII, in abeyance until further review.
The Board also referred to correspondence of Petitioner dated August 24,
1999 setting forth proposals for resolving issues IX and X. The Board
determined that no hearings were necessary with regard to issues IX and X
and indicated it anticipated that the Petitioner's proposals with regard to
these issues would adequately address the Ratepayer Advocate's concerns. We
note that the Ratepayer Advocate has submitted no further correspondence
with regard to Petitioner's proposals on issues IX and X, nor any other
comments with regard to the Restructuring Order.
1. The Advocate argues in issue IX of its memorandum that
Petitioner's proposal does not adequately take account of interest earned
(the "float") by Petitioner on monies held between the time Petitioner
receives customer payments and the time it remits said payments to the SPE,
and that the failure to flow this interest back to customers is contrary to
the Act's mandate calling for the lowest possible Transition Bond Charges
with all savings passed along to customers. The Advocate also argues that
given the lack of certainty as to when Petitioner will file its next rate
case, it is not a solution to wait until Petitioner files a base rate case.
The Advocate concludes that the Board should order that Petitioner flow
back to ratepayers the benefit of the float accruing between the dates
Petitioner collects the Transition Bond Charges and related MTC-Tax and the
date the money collected is remitted to the SPE.
As noted above, by letter dated August 24, 1999, Petitioner filed
with the Board an alternative proposal regarding how it will handle the
above referenced float. This proposal is set forth in Point IX of
Attachment A to Petitioner's August 24, 1999 letter, and
is as follows:
The Company is directed to file, as part of its required
Unbundling Filing of August 1, 2002, data showing the impact of
the timing of customer payments of transition bond charges to
PSE&G versus payments by PSE&G as Servicer to the transition
bond trustee. This data shall include a calculation of customer
daily remittances, timing of remittances to the bond trustee
and the short-term interest rate then applicable to determine
the amount of "float" income earned by PSE&G in its capacity as
Servicer. If the Board determines in its review of this filing,
that PSE&G retained revenue over and above its servicing fee,
it may calculate such retained revenue, and impute interest
thereon, in determining fair and reasonable rates going forward
from the date of its review. [Attachment A to Petitioner's
letter filed August 24, 1999]
After review, the Board FINDS that the foregoing proposal is a
reasonable resolution of issue IX of the Advocate's memorandum. Allowance
for consideration of the impact of the float on rates in the unbundling
filing of August 1, 2002 provides a reasonable means of examining any rate
treatment which may be appropriate because of the float.
2. The Advocate argues in issue X of its memorandum that Petitioner's
proposal to include in transaction costs the recovery of accrued interest
on redeemed debt and accrued dividends on redeemed preferred equity amounts
to a double recovery for Petitioner because ratepayers are already fully
compensating investors through current base rates. The Advocate concludes
that the Board should state in its Order that accrued interest and
dividends are costs that Petitioner has already collected in base rates,
and that these costs should be excluded from transaction costs.
Point X of Attachment A of Petitioner's August 24, 1999 letter filing
contains Petitioner's proposed resolution of issue X, which states as
follows:
As reflected in the Company's Reply of August 13, 1999 to Point
X of the Ratepayer Advocate's Memorandum of August 11, 1999,
accrued interest on bonds and accrued dividends on preferred
securities will be calculated from the time transition bonds
are issued until the time the related bonds/preferred stock is
retired/redeemed. Only this amount of accrued interest and
dividends will be included in the estimated $125 million of
transaction costs to be recovered through the transition bond
issuance. If the Company's transaction costs are below $125
million in the aggregate, the excess will be applied as a
reduction of the Company's SBC deferred balance.
[Attachment A to Petitioner's letter filed August 24, 1999]
After review, the Board finds that the above proposal provides a
reasonable resolution of issue X of the Advocate's Memorandum. As of the
date of the issuance of the Transition Bonds the accrued interest and
preferred dividends will no longer effectively be recovered in base rates.
Therefore, any charge to customers as of and after the issuance of the
Transition Bonds will not constitute a double charge.
3. Issue XI of the Advocate's Memorandum concerns the estimated lag
caused by a delay in the collection of revenues and the associated over
billing to correct for this lag. The Advocate argues that Petitioner's
treatment of this lag is costly to ratepayers because the lag in the first
year is assumed to exist for 15 years and the over billing is therefore
amortized accordingly. In support of this argument, the Advocate argues
that because current revenues are already sufficiently high to cover the
cost of Petitioner's assets and are, therefore, already provided for in
rates, Petitioner's over collection associated with the lag is in fact a
double charge to customers. The Advocate suggests that the solution to the
perceived lag is to eliminate the over billing and include an adjustment
through Petitioner's first year true-up mechanism.
In its Reply to the Advocate's Memorandum, dated August 13, 1999,
Petitioner argues that the bankruptcy remote requirements of securitization
demand that sufficient cash be available from the Transition Bond Charges
to service the debt for the full term of the Transition Bonds. Therefore,
cash flow is important and must be sufficient to cover collection lags and
uncollectables. Petitioner also argues that while it is less apparent in
the years following the first year, collection lags continue for the term
of the bonds. With regard to the Advocate's proposed solution to require
Petitioner to include an adjustment for the recovery of the collection lag
in the true-up mechanism, Petitioner argues that such an approach would put
stress on the AAA rating on the Transition Bonds because the initial charge
would not be established at a level sufficient to service the Transition
Bonds without first utilizing the true-up mechanism. Petitioner also argues
that the Advocate's proposal does not really solve the problem because the
true-up mechanism would increase the customer charge in a similar fashion
to that proposed by Petitioner.
As a preliminary matter, it appears after a review of the arguments
set forth above and an examination of the record regarding the billing lag
issue, that an evidentiary hearing is not necessary for the Board to rule
on this issue. It is clear from the record and from the arguments presented
that there is indeed a billing lag for the term of the Transition Bonds
which must be covered by revenues sufficient to service the Transition
Bonds. See, Section 15(b) of the Act,. The only remaining issue is how best
to account for the lag in customer payments through the Transition Bond
Charges and related charges. Because Petitioner's proposal adequately
accounts for the lag through the Transition Bond Charge calculation shown
in Attachment A-2 to the Petition and through Petitioner's agreement to
credit any overcollected Transition Bond Charges to its customers, with the
added benefit of fully funding the Transition Bonds, the Board FINDS
Petitioner's approach to be reasonable.
4. With regard to issue XII, the Advocate argues that Petitioner has
not provided back-up documentation to support a servicing fee of 0.05% for
collecting the Transition Bond Charges payments from customers and
transmitting same to the SPE. The Advocate also argues that while it may be
true that it would cost considerably more for an outside entity to do the
servicing, the cost to Petitioner is only an incremental service without
the need for a newly created billing and collection procedure. The Advocate
concludes that the servicing fee must be demonstrated and justified and
that the Board should at least cap the servicing fee at no more than 0.05%
for the first year, with a review of the fee a year from the beginning date
of the collection of the Transition Bond Charges.
Petitioner argues in its August 13,1999 Reply that the 0.05%
servicing fee represents Petitioner's best estimate of the costs to bill,
collect, account for and remit to the SPE, along with the cost to make the
various changes to the accounting system and produce various reports for
the trustee, bondholders, rating agencies and the Board.
Petitioner also argues that the servicing fee has been calculated on
an arms length basis to protect the bankruptcy remote nature of the
transaction. Petitioner asserts that the fee is also one of the lowest fees
used by other utilities that are presently servicing securitization
requirements. Finally, Petitioner notes that the servicing will be adjusted
in its next electric base rate proceeding.
After review, the Board FINDS that the proposed servicing fee of
0.05% is as low as any servicing fee charged by any other utility in the
nation in connection with a securitization of comparable size and
complexity and is, therefore, reasonable. Moreover, the Board will review
in Petitioner's next electric base rate proceeding such servicing
compensation to assure that the servicing fee is market-based and provides
a reasonable return.
6. FINDINGS WITH RESPECT TO PETITION
Based on the record of proceedings in this matter and those related
to the Restructuring Order, the Petition and the provisions of the Act and
the Restructuring Order, the Board HEREBY FINDS:
Recovery of Costs
1. As approved by the Board in BPU Docket Nos. EO97070461, EO97070462
and EO97070463 (which approval constitutes the "Restructuring Order"),
Petitioner is authorized to recover up to $2.940 billion net of tax
stranded costs.
2. Petitioner's net of tax stranded costs to be securitized approved
in the Restructuring Order are $2.4 billion plus an additional amount of up
to $125 million for transaction costs are recoverable through the
Transition Bond Charge. In addition, the Restructuring Order permits the
recovery of the Federal Income and State Corporate Business taxes related
to securitization (i.e., the MTC-Tax Component), which are reflected in the
grossed-up revenue requirement number associated with the $2.4 billion in
net of tax stranded costs.
3. The Petitioner's Bondable Stranded Costs include: (1) the Capital
Reduction Costs, (2) the Upfront Transaction Costs and (3) the Ongoing
Transition Bond Costs..
Mitigation
4. In the Restructuring Order the Board found, in accordance with
Section 14(b)(1) of the Act, that Petitioner has taken reasonable measures
to date, and has the appropriate incentives or plans in place to take
reasonable measures, to mitigate the total amount of
its stranded costs.
Necessity of Securitization
5. In the Restructuring Order the Board found, in accordance with
Section 14(b)(2) of the Act, that Petitioner will not be able to achieve
the level of rate reduction deemed by the Board to be necessary and
appropriate pursuant to the provisions of Sections 4 and 13 of the Act
absent the issuance of the Transition Bonds.
Tangible Benefits
6. In accordance with Section 14(b)(3) of the Act, so long as the
weighted average yield on the Transition Bonds is less than 9.0%, the
issuance of such Transition Bonds will provide tangible and quantifiable
benefits to ratepayers, including greater rate reductions than would have
been achieved absent the issuance of Transition Bonds and net present value
savings over the term of the Transition Bonds. Petitioner has advised the
BPU Staff that it will exercise its best efforts to achieve an effective
weighted average yield on the Transition Bonds significantly less than
9.0%.
7. The methodology used, including an after-tax return of 8.42% as
determined in Petitioner's most recent rate case, to calculate expected net
present value savings as described in Appendix H hereof is reasonable.
8. A substantially level per kilowatt-hour charge will permit
Petitioner to achieve appropriate rate reductions and will increase net
present value savings to ratepayers over the life of the Transition Bonds
when compared to a substantially level annual charge. The formula used to
calculate the initial Transition Bond Charge and the periodic adjustments
thereto as described in Exhibit A (Attachments A-2 and A-3) of the Petition
as filed, as well as the modifications to illustrate the application of the
provisions of Section2(e) in the event a hedging arrangement were to be
entered into prior to pricing the Transition Bonds and interest rates
and/or the Transition Bond spread were to subsequently decline, are
reasonable and adherence thereto will provide assurance that Customers will
pay the lowest Transition Bond Charges consistent with market conditions
and the terms of this Financing Order, in compliance with Section 14(b)(4)
of the Act. The standard for the Board to use in making periodic
adjustments of the Transition Bond Charge final is the absence of a
manifest error (i.e., an arithmetic error evident on the face of the
filing) in the application of the Transition Bond Charge adjustment
formula, which standard the Board finds consistent with Section 15 of the
Act and the achievement of the lowest possible interest cost on the
Transition Bonds. The estimate of the initial Transition Bond Charge,
determined in accordance with either Appendix H or Appendix I, attached
hereto, is reasonable. The request of the Servicer to make non-routine
adjustments of the Transition Bond Charge formula as described in paragraph
2(g) of this Financing Order is reasonable.
Structuring and Pricing; Hedging Arrangements
9. The procedures established in this Financing Order relating to the
final approval of the structuring and pricing of the Transition Bonds
(including any hedging arrangements priced at the time of the pricing of
the Transition Bonds) assure that, in accordance with Section 14(b)(4) of
the Act, Petitioner's customers pay the lowest Transition Bond Charges
consistent with market conditions and the terms of this Financing Order. As
authorized herein by the Board and in full satisfaction of the requirements
of Sections 14(b)(4) and 15(a)(3) of the Act, the structuring and pricing
of the Transition Bonds (including any such hedging arrangement) will be
conclusively deemed to satisfy the requirements of Section 14(b)(4), and
the terms and conditions of the Transition Bond financing shall be
conclusively approved if so certified by the Designee upon the pricing of
the Transition Bonds and any such hedging arrangement.
10. The procedures proposed by the Petitioner, as set forth in
Section 2(e) hereof, for the execution of a hedging arrangement prior to
the pricing of the Transition Bonds are reasonable and consistent with the
Act.
11. The formation of the SPE by Petitioner, the capitalization of the
SPE by Petitioner, the sale by Petitioner to the SPE of its Bondable
Transition Property, the providing of overcollateralization as described
herein and as approved in the Designee Certification, and the entering into
a servicing agreement, an administration agreement, a sale agreement, other
agreements and transactions by Petitioner and the SPE substantially as
described in the Petition and the SEC Filing and the hedging arrangements
as described herein and in Appendix E herein are reasonable and necessary.
12. The methodology for the remittance of Transition Bond Charges as
described in Exhibit C of the Petition will satisfy the requirements of
Section 14 of the Act and is a reasonable means of undertaking the
remittance of these charges.
13. The conditions to the resignation or replacement of the
Petitioner as Servicer as described in the Petition are reasonable.
14. The Transition Bond Charge and MTC-Tax billing, collection and
remittance procedures imposed upon any TPS as set forth in the Petition are
reasonable.
15. Capital Reduction Costs, which do not include interest or
preferred dividends accrued prior to the date of the issuance of the
Transition Bonds, and the Upfront Transaction Costs, not to exceed $125
million in the aggregate, are reasonable.
16. The recovery of Ongoing Transition Bond Costs, including recovery
of amounts owed under any hedging arrangement, as previously described
herein is reasonable and consistent with the Act.
17. The scheduled amortization upon issuance for the Transition Bonds
being up to 15 years and the stated maturity of the Transition Bonds being
up to two additional years following the scheduled amortization are
reasonable and permitted under the Act.
18. The issuance of series and classes of Transition Bonds by the SPE
in an aggregate principal amount not to exceed $2.525 billion is reasonable
and consistent with the Act and the Restructuring Order. The Financial
Advisor, has advised the Board that, in its opinion, the negotiated sale of
the Transition Bonds should be expected to provide a lower cost of funds
than a competitive sale. Therefore, the negotiation of the sale of the
Transition Bonds with Lehman Brothers on behalf of a group of underwriters
is reasonable and serves the public interest.
19. The True-Up Mechanism to obtain adjustments to the Transition
Bond Charge and the MTC-Tax described hereinabove and set forth in Appendix
I hereof is reasonable.
Use of Proceeds
20. Petitioner's proposed application of the proceeds of the
Transition Bonds as described in Petitioner's Quarterly Report to the SEC
on Form 10-Q for the Quarter Ended June 30, 1999 is
reasonable and consistent with the Act.
Regulatory Compliance
21. In light of the specific provisions of the Act governing the
Transition Bond Transaction, Petitioner's petition is found to comply with
N.J.A.C. 14:1-5.6 and -5.9, to the extent either might be deemed
applicable.
22. Petitioner's undertaking with respect to amortization of
discount, if any, on the Transition Bonds complies with N.J.A.C. 14:1-5.9A.
Periodic Adjustment of the MTC-Tax
23. The MTC-Tax should be subject to mandatory periodic adjustment at
the same time and in substantially the same manner as adjustments to the
Transition Bond Charges; provided, however, the Petitioner makes reasonable
efforts to utilize any and all deductions to taxable income for which it
may be eligible with respect to the securitization transaction, now or in
the future, whether or not such deductions are contained in the formula
presented by Petitioner in its Petition, so that the MTC-Tax Component does
not result in the over-recovery or under-recovery of taxes to the
Petitioner. The Board further finds that if a final determination is made
related to the amortization of Investment Tax Credits, as described on
Pages 112, 113 and 125 of the Restructuring Order, or if the amounts
received for overcollateralization are prospectively determined by the
Internal Revenue Service ("IRS") to be deductible, such formula shall be
modified by Petitioner to incorporate any such determination.
7. ORDERS
Based on the foregoing, the record of proceedings on the Petition
(including the incorporation of discovery requests and responses thereto,
as requested by Petitioner in its Reply to the Advocate's Memorandum), and
the provisions of the Act and the Restructuring Order, the Board HEREBY
ORDERS:
1. The Petition for this Financing Order pursuant to Section 14 of
the Act is approved subject to the terms and conditions stated herein.
2. In addition to Petitioner's Bondable Stranded Costs approved in
part by the Board in the Restructuring Order, the Board hereby authorizes
recovery of restructuring related costs consisting of: (1) the Capital
Reduction Costs, (2) the Upfront Transaction Costs and (3) the Ongoing
Transition Bond Costs, and hereby approves the formula for the calculation
and adjustment of the Transition Bond Charge and the MTC-Tax Component. in
accordance with the Board's Findings herein.
Bondable Transition Property and Transition Bond Charges
3. The issuance of Transition Bonds by the SPE up to a maximum of
$2.525 billion and the sale by the Petitioner of the Bondable Transition
Property to the SPE are authorized.
4. The Transition Bond Charges will be assessed against all existing
and future electric customers of Petitioner or any successor within the
service area of Petitioner at the date of the Petition, except as provided
in Section 28 of the Act, and will apply equally to each customer of
Petitioner, regardless of class, based on the amount of electricity
delivered to the customer (whether purchased from the Petitioner or a TPS)
through the transmission and distribution system of Petitioner or any
successor electric public utility who may take over all or a portion of the
Petitioner's service area.
5. Transition Bond Charges will be set at a level sufficient to
recover the Total Payment Requirements. The Transition Bond Charge and the
MTC -Tax will remain in effect until the SPE, as owner of the Bondable
Transition Property, has received Transition Bond Charges sufficient to
recover the Total Payment Requirements and the MTC-Tax Component.
6. Pursuant to the Act, there is created and established for the
benefit of Petitioner (or any assignee in accordance herewith) Bondable
Transition Property consisting of the irrevocable right to charge, collect
and receive, and be paid from collections of, the Transition Bond Charges
in the amount necessary to meet the Total Payment Requirements, all rights
of Petitioner to the Bondable Transition Property under this Order with
respect to the Transition Bond Charges including without limitation all
rights to obtain periodic adjustments of the Transition Bond Charges
pursuant to Section 15 of the Act, and all revenues, collections, payments,
money and proceeds arising under, or with respect to, all of the foregoing.
7. Pursuant to Section 16 of the Act, neither the Board nor any other
governmental entity will have the authority, directly or indirectly,
legally or equitably, to rescind, alter, repeal, modify or amend this
Financing Order, to revalue, re-evaluate or revise the amount of Bondable
Stranded Costs, to determine that the Transition Bond Charges or the
revenues required to recover Bondable Stranded Costs are unjust or
unreasonable, or in any way to reduce or impair the value of the Bondable
Transition Property, nor shall the amount of revenues arising with respect
thereto be subject to reduction, impairment, postponement or termination,
provided, however, that nothing in this Financing Order will preclude
adjustments of the Transition Bond Charges or the MTC-Tax in accordance
with the provisions hereof and of Section 15 of the Act.
8. Pursuant to Section 16 of the Act, and notwithstanding any other
provision of law, this Financing Order and the Transition Bond Charges
authorized herein will become irrevocable upon the issuance of this
Financing Order and its becoming effective pursuant to Section 19 of the
Act. This Financing Order, the Transition Bond Charges and the Bondable
Transition Property will constitute a vested, presently existing property
right upon the transfer to an assignee and receipt of consideration for
such Bondable Transition Property.
9. Pursuant to Section 15 of the Act, until the Total Payment
Requirements have been fully satisfied, this Financing Order and the
authority to meter, charge, collect and receive the Transition Bond Charges
and the MTC-Tax will remain in effect and Petitioner shall be obligated to
provide electricity to its customers and will have the right to meter,
charge, collect and receive the Transition Bond Charges, which rights and
obligations may be assignable solely within the discretion of Petitioner.
Sale, Pledge and Assignment Of Transition Property
10. In accordance with the Act and as described in the Petition,
Petitioner is authorized to sell, pledge or assign any or all of its
interest in Bondable Transition Property that arises from this Financing
Order directly, or indirectly through an assignee, to the SPE. The SPE is
authorized to acquire the Bondable Transition Property and is approved and
designated as a "financing entity" (as defined in Section 3 of the Act) for
such purpose, and for the purpose of issuing Transition Bonds and pledging
the Bondable Transition Property to the payment of the Transition Bonds.
11. The SPE will pay the purchase price of the Bondable Transition
Property equal to the net proceeds from the issuance of the Transition
Bonds directly or indirectly to Petitioner, to be applied substantially as
described in the Petitioner's Second Quarter 10-Q dated August 16, 1999 and
as set forth in ordering paragraph 36 of this Financing Order.
12. Upon the sale by Petitioner of the Bondable Transition Property
to the SPE as described in this Financing Order, the SPE will have all of
the rights originally held by Petitioner with respect to the Bondable
Transition Property, including, without limitation, the right to exercise
any and all rights and remedies, including the right to direct the
Petitioner or any successor electric public utility to shut-off electric
power to the extent permitted by law and any applicable regulations, and to
assess and collect any amounts payable by any customer in respect of such
Bondable Transition Property, notwithstanding any objection or direction to
the contrary by the Servicer.
13. Upon the sale by Petitioner of Bondable Transition Property to
the SPE, Petitioner or any successor Servicer will not be entitled to
recover the Transition Bond Charges other than for the benefit of the
holders of Transition Bonds in accordance with Petitioner's duties as
Servicer of such Bondable Transition Property as authorized in this
Financing Order.
Transition Bonds
14. The scheduled amortization upon issuance of the Transition Bonds
will be up to 15 years, and the stated maturity will be up to two
additional years. The Transition Bonds may be issued in series and classes
with different terms. Debt service on the Transition Bonds shall be
scheduled upon issuance so that the sum, for each annual period, of (i) the
Periodic Payment Requirements and (ii) the associated MTC-Tax will result
in a substantially equal per kilowatt-hour (kwh) charge. One or more
classes of Transition Bonds may be issued as variable rate instruments, the
interest on which is fixed or hedged in accordance with the terms of a
hedging arrangement consistent with this Financing Order. In addition,
Petitioner may, at any time after the issuance of this Financing Order,
request that the Designee authorize a hedging arrangement as described in
paragraph 2(e) herein to reduce interest rate risk
15. The amount of Transition Bonds to be issued (not to exceed $2.525
billion) is approved as described herein. The final structure, pricing,
terms and conditions of the Transition Bonds (including any hedging
arrangement described in paragraph 2(e)) will, to the extent consistent
with the provisions of this Financing Order, be determined by Petitioner
and approved by the Board or its Designee pursuant to his delegation of
authority from the Board, pursuant to Sections 14(b)(4) and 15(a)(3) of the
Act, at the time Transition Bonds are priced and/or any such hedging
arrangement is entered into. The Designee may rely conclusively on the
finding of the tangible and quantifiable benefits of securitization in
Section 6 of Paragraph 6 hereof, as required by Section 14(b)(3) of the
Act, upon the advice of the Board's Financial Advisor and upon information
provided to the Designee by Petitioner to support any Designee
Certification. Any Designee Certification shall be substantially in the
Form of Appendix A hereto, shall constitute a part of this Financing Order,
shall constitute a full and complete record of the determinations and
approvals made therein and full satisfaction of the requirements of
Sections 14(b)(4) and 15(a)(3) of the Act, and shall be final and
uncontestable as of its date.
16. The issuance and sale of the Transition Bonds through negotiation
with underwriters is approved.
Recovery of Bondable Stranded Costs
17. In accordance with Section 20 of the Act, Transition Bonds will
be recourse only to the credit and assets of the SPE. Investment income
earned on the trust accounts held by the Bond Trustee may be used to
satisfy current scheduled interest and principal payments on the Transition
Bonds and related expenses and to replenish the SPE's equity and the
scheduled overcollateralization amount. Investment income in the capital
account not used currently for this purpose will be released to the SPE.
Any earnings in excess of amounts required to be held in such trust
accounts (other than the capital account) will reduce the Transition Bond
Charge annually through the True-up Mechanism.
18. The Capital Reduction Costs and Upfront Transaction Costs
(including hedging costs permitted to be securitized as described in
Section 2(e) hereof) up to $125 million in the aggregate are authorized to
be recovered through the issuance of Transition Bonds.
19. The Ongoing Transition Bond Costs, including recovery of amounts
owed under any hedging arrangement which are not securitized, as described
herein are authorized to be recovered through the Transition Bond Charge.
Provided, however, that the amounts owed to the Petitioner by the SPE under
any hedging arrangements shall bear interest at the weighted average yield
on the Transition Bonds and shall amortize on a pro rata basis with the
amount of the Transition Bonds.
Reports
20. The Designee will make his determinations and approvals of the
pricing of the Transition Bonds and/or any hedging arrangement described in
paragraph 2(e) herein, upon receipt from the Petitioner of the Pricing
Advice Certificate(s) substantially in the form of Appendix D hereto.
Within two business days after the pricing of the Transition Bonds, the
Designee shall file with the Secretary of the Board a Designee
Certification(s) substantially in the form of Appendix A hereto. As
provided in ordering paragraph 15 of this Financing Order, any Designee
Certification will be final and uncontestable as of its date and will
represent final approval, pursuant to Sections 14(b)(4) and 15(a)(3) of the
Act, of the structure, pricing, terms and conditions of the Transition
Bonds and/or any such hedging arrangement. No delay or error in such filing
will affect the validity of this Financing Order, the Bondable Transition
Property or the Transition Bonds.
21. Pursuant to Section 15 of the Act, not later than five business
days after issuance and sale of the Transition Bonds, Petitioner will
notify the Secretary of the Board, in an Issuance Advice Letter
substantially in the form of Appendix B hereto, of the initial Transition
Bond Charge and MTC-Tax (which are hereby approved), the expected
amortization schedule approved in the Designee Certification and related
matters. The Issuance Advice Letter will be automatically effective upon
filing with the Secretary of the Board. No delay or error in such filing
will affect the validity of this Financing Order, the Bondable Transition
Property or the Transition Bonds. Upon the filing of the Issuance Advice
Letter, Petitioner will implement the rate reduction determined using the
methodology set forth in Appendix H (Attachment 2), as required by Section
4(i) of the Act.
Servicing of Transition Bonds
22. Petitioner, as Servicer, is authorized to enter into a servicing
agreement, substantially as described in the SEC Filing, with the SPE
pursuant to which Petitioner agrees to continue to operate its distribution
system to provide service to its customers, to impose, charge, collect and
receive Transition Bond Charges with respect to Bondable Transition
Property for the benefit and account of such SPE or its assigns, and to
account for and remit these amounts to or for the account of such SPE or
its assigns in the manner described in Exhibit C of the Petition.
23. Each customer's bill will contain in text or in a footnote that a
portion of the monthly charge represents Bondable Transition Property being
collected on behalf of the SPE as owner of the Bondable Transition
Property.
24. Collections from each customer will be applied first to sales
taxes (which Petitioner will collect as trustee for the State and not for
its own account or that of the SPE, and which are not "charges" for
purposes of the following allocations), then to charges in arrears, if any,
and then to current charges. With respect to each billing period, partial
payments of charges will be deemed to constitute the Transition Bond
Charge, the MTC-Tax and the Petitioner's other charges, pro rata, based on
the proportions that the Transition Bond Charge, the MTC-Tax and the
Petitioner's other charges bear to the total of such charges. Partial
payments of Transition Bond Charges will be allocated to the owners of
Bondable Transition Property, pro rata, based on the proportions that the
Transition Bond Charge representing the Bondable Transition Property and
any transition bond charges established pursuant to other subsequent
financing orders bear to the total transition bond charges.
25. Pursuant to Section 22 of the Act, in the event of a default by a
Servicer under any Servicing Agreement with respect to Transition Bonds,
upon application of the SPE or the Bond Trustee, the Board will designate a
successor Servicer for the Bondable Transition Property, who will promptly
assume billing and collection responsibilities for Transition Bond Charges
and the MTC-Tax. The Board will act on an expedited basis to designate
within 30 days such successor Servicer. Such successor Servicer will assume
all rights and obligations of the initial Servicer.
26. The Board will only permit any successor Servicer to replace
Petitioner as Servicer in any of its servicing functions with respect to
the Transition Bond Charges and the Bondable Transition Property authorized
by this Financing Order upon determining that approving or requiring such
successor Servicer will not cause the then current credit ratings on
Transition Bonds to be withdrawn or downgraded.
27. Any TPS that proposes to collect Transition Bond Charges or the
MTC-Tax must (i) meet the creditworthiness criteria to be established by
the Board, and at a minimum, the criteria set forth and approved below in
this Financing Order; and (ii) comply with the billing, collection and
remittance procedures and information access requirements set forth below.
28. The Board will only authorize a TPS to bill and collect the
Transition Bond Charge or the MTC-Tax for remittance to the Servicer or the
Petitioner respectively, if (i) such TPS agrees to remit the full amount of
all charges it bills to customers for services provided by the Petitioner
or any successor electric public utility, together with Transition Bond
Charges and the MTC-Tax, regardless of whether payments are received from
such customers, within 15 days of Petitioner's or the Servicer's bill for
such charges, (ii) such TPS will provide the Servicer with total monthly
kwh usage information for each customer in a timely manner for the Servicer
to fulfill its obligations, as such information is the basis of such
remittance, and (iii) the Servicer will be entitled, within seven days
after a default by the TPS in remitting any charges payable to the
Petitioner, together with Transition Bond Charges and the MTC-Tax, to
assume responsibility for billing all charges for services provided by
Petitioner or any successor electric public utility, including the
Transition Bond Charges and the MTC-Tax, or to transfer responsibility to a
qualifying third party. In addition, if and so long as such TPS does not
maintain at least a 'BBB' (or the equivalent) long term unsecured credit
rating from Moody's Investors Service or Standard & Poor's Rating Services,
such TPS shall maintain, with the Servicer or as directed by the Servicer,
a cash deposit or comparable security equal to two months' maximum
estimated collections of all charges payable to the Servicer, including the
Transition Bond Charges and the MTC-Tax, as reasonably estimated by
Petitioner (or any such successor electric public utility or by the
Servicer). In the event of a default in the remittance of any such charges
by a TPS, any shortfall in Transition Bond Charge or MTC-Tax collections
will be included in the periodic adjustment of the Transition Bond Charge
and the MTC-Tax as described herein.
29. Customers will continue to be responsible for payment to the
Servicer of the Transition Bond Charge and the MTC-Tax billed by a TPS, to
the extent such customer has not paid Transition Bond Charges or MTC-Tax
billed to it. In the event of a failure of any customer to pay the
Transition Bond Charge or MTC-Tax, the Petitioner is authorized to shut-off
power, or a successor Servicer is authorized to direct the electric public
utility to shut-off power, to such customer in accordance with law.
30. The Servicer will be entitled to an annual servicing fee equal to
.05% of the initial balance of the Transition Bonds (the "Servicing Fee").
The Board approves the Servicing Fee as described herein. The Board also
approves a higher annual Servicing Fee of any successor Servicer of up to
1.25 % of the initial principal balance of the Transition Bonds.
The Transition Bond Charge : Establishment and Adjustment
31. The formula used to calculate the Transition Bond Charge and to
periodically adjust the Transition Bond Charge, as described in Appendix I
hereof, is approved.
32. Pursuant to Section 15 of the Act, the initial Transition Bond
Charge and MTC-Tax will be filed with the Secretary of the Board in the
Issuance Advice Letter and will be effective upon such filing, to be
adjusted up or down, as necessary, by the True-Up Mechanism.
33. In accordance with Section 15 of the Act, the Servicer, on behalf
of Petitioner and the pledgees or transferees of the Bondable Transition
Property, is authorized to file with the Secretary of the Board periodic
formula-based Transition Bond Charge adjustments, at least annually but not
more frequently than quarterly, to the extent necessary to ensure the full
and timely recovery of an amount equal to the Periodic Payment
Requirements. Each such adjustment shall be formula-based, shall be in the
amount required to ensure receipt of revenues sufficient to provide for the
full and timely recovery of Bondable Stranded Costs, including, without
limitation, the timely payment of principal of, and interest and
acquisition or redemption premium on, the Transition Bonds issued to
finance such Bondable Stranded Costs. The periodic adjustments will be
filed in substantially the form attached to this Financing Order as
Appendix C.
34. Each periodic adjustment of the Transition Bond Charges will
become effective 30 days after filing with the Secretary of the Board,
absent a determination by the Board of manifest error (i.e., an arithmetic
error evident on the face of the filing) in the application of the formula
approved herein. Petitioner will propose such adjustments in a filing with
the Secretary of the Board at least 30 days in advance of the date upon
which it is requested to be effective. The proposed adjustment will become
effective on an interim basis on such date and, in the absence of a Board
order to the contrary correcting such manifest error, will become final 60
days after the filing.
35. If necessary to ensure the timely recovery of the Periodic
Payment Requirements and the MTC-Tax, the Board will approve adjustments to
the methodology as proposed by Petitioner in "non-routine" true-up filings
as discussed hereinabove.
Use Of Transition Bond Proceeds
36. Petitioner will use the proceeds of the Transition Bonds, net of
transaction costs and any costs of credit enhancement for the Transition
Bonds paid from the proceeds, to reduce its Bondable Stranded Costs through
the retirement of Petitioner's debt or equity, or both (including
transactions completed after the date of this Order.). Petitioner is
authorized to apply the proceeds to retire debt, equity or both,
substantially as set forth in Petitioner's Second Quarter 10-Q filed with
the SEC, and to pay any accrued interest and accrued preferred dividends
from the date of issuance of the Transition Bonds to the date of
retirement, and to pay any premium, unamortized discounts and other fees,
costs and charges associated with such retirement. No failure to apply the
proceeds in accordance with the Restructuring Order or this Financing Order
shall affect the sale of the Bondable Transition Property or the right to
collect the Transition Bond Charges.
Approval of Servicing Agreement, Administration Agreement, Sale
Agreement, Hedging Arrangement, if any, and Other Agreements or
Transactions
37. Petitioner's entering into a servicing agreement, an
administration agreement, a sale agreement, any hedging arrangement and
other Transition Bond Transaction documents with the SPE consistent with
the terms of this Order and/or substantially as described in the SEC Filing
and such other related transaction documents and other dealings between
Petitioner and the SPE as contemplated therein and herein are authorized.
Accounting for Certain Benefits
38. Pursuant to Section 15 of the Act, any amount of the Transition
Bond Charges held by the Bond Trustee in excess of those amounts necessary
to fully recover the Periodic Payment Requirements will be applied as a
credit to reduce Transition Bond Charges through the True-Up mechanism, as
described in the Petition, except that if more than one issue of Transition
Bonds is sold, all such requirements with respect to such Transition Bonds
will be aggregated for purposes of determining whether or not the total
transition bond charges collected exceed the total of such requirements for
all such Transition Bonds.
39. Upon retirement of all outstanding Transition Bonds and any
related Ongoing Transition Bond Costs, any remaining amounts held by the
Bond Trustee will be released to the SPE. Petitioner's equity in the SPE
may be distributed to Petitioner. Petitioner will credit an amount equal to
any remaining Transition Bond Charges, less any amount of any unpaid
MTC-Tax charges and any amount that was withdrawn and not replenished to
the SPE's equity, to its electric customers against its distribution
charges. Any overcollected MTC-Tax charges shall also be credited to
Petitioner's electric customers against Petitioner's distribution charges.
40. Not more than nine months following issuance of the Transition
Bonds, the Petitioner will file with the Board a reconciliation statement
for Upfront Transaction Costs and Capital Reduction Costs. If the sum of
Upfront Transaction Costs and Capital Reduction Costs exceeds $125 million,
such excess shall be eligible for recovery in a subsequent proceeding. If
the sum of Upfront Transaction Costs (plus any hedging costs associated
with any hedging arrangements entered into prior to the pricing of
Transition Bonds) and Capital Reduction Costs is less than $125 million,
such difference shall be credited against the Petitioner's Societal
Benefits Charge to the benefit of ratepayers. Prior to being expended for
their intended purpose, earnings on proceeds from the Transition Bonds
issued to pay transaction costs (Capital Reduction and Upfront Transaction
Costs (plus any hedging costs associated with any hedging arrangements
entered into prior to the pricing of Transition Bonds)) shall be credited
to the beginning balance of deferred costs associated with Petitioner's
Societal Benefits Charge, and bear interest at the rate applicable to such
balance as set forth in Ordering Paragraph 6 on page 116 of the
Restructuring Order. The failure to file such statement or any delay in
filing the same or making such credits shall not affect the validity of
this Financing Order, the Bondable Transition Property or the Transition
Bonds.
Records
41. Pursuant to Section 21 of the Act, the Petitioner or another
Servicer on its behalf will maintain or cause to be maintained records of
Transition Bond Charges and associated MTC-Tax collections which have been
assessed and collected by Petitioner, as Servicer, under this Financing
Order and the Restructuring Order respectively. Such records, and any
records of a financing entity, will be made available by Petitioner for
inspection and examination within a reasonable time upon demand therefor by
the Board or the related financing entity.
MTC-Tax Adjustments
42. Pursuant to the Restructuring Order and this Order, Petitioner is
authorized to file with the Board proposals for mandatory periodic
adjustments of the MTC-Tax authorized by the Board in the Restructuring
Order. Such adjustments shall be formula-based and shall initially be based
on the formula attached hereto as Appendix I and is hereby approved. Such
adjustments shall be made substantially in the same manner and at the same
time as the True-Up Mechanism for the Transition Bond Charges in order to
insure receipt of revenues sufficient to recover the MTC-Tax Component.
Unless the Petitioner or the Board proposes an adjustment to the formula
used to calculate the MTC-Tax, any proposed adjustment to the MTC-Tax will
become effective 30 days after filing absent manifest error and, in the
absence of a Board Order to the contrary, will become final 60 days after
filing. The initial amount of the MTC-Tax will be filed with the Board as
part of the Issuance Advice Letter and become effective upon such filing in
the same manner and at the same time as the related initial Transition Bond
Charge. The periodic adjustments will be filed in substantially the form
attached to this Financing Order as Appendix C.
43. It is the express intention of the Board that the Petitioner
shall not overrecover or underrecover the MTC-Tax Component. Accordingly,
Petitioner shall adjust the formula used to calculate the MTC-Tax to
reflect changes in federal income tax or State corporate business tax rates
and any other changes to the application or interpretation of such laws,
provided such changes are either "generic" (affect all taxpayers such as a
prospective change in the tax rate) or are securitization-related. The
latter changes would, for example, include the amortization of Investment
Tax Credits, as described on pages 112, 113 and 125 of the Restructuring
Order, or the deductibility of the amounts received for
overcollateralization in the event that such payments are prospectively
determined by the IRS to not constitute taxable income as a result of an
IRS letter or other ruling to that effect.
Any proposed adjustment to the formula by the Petitioner shall be
submitted to the Secretary of the Board no less than 60 days prior to its
proposed effective date and shall become effective on the proposed
effective date absent a Board Order to the contrary; provided, however,
that the existing formula shall remain effective in the interim.
44. As provided in Section 23(a)(4) of the Act, Petitioner's right to
recover the MTC-Tax Component will in no way affect or impair the legal
true sale and absolute transfer of the Bondable Transition Property to the
SPE, or otherwise affect the legal rights and attributes of the Bondable
Transition Property under the Act or under this Financing Order.
Miscellaneous
45. Pursuant to Section 19 of the Act, this Financing Order will be
effective only in accordance with the terms hereof and upon the written
consent of Petitioner to all such terms.
46. In pricing the Transition Bonds, and in determining whether it
may be advantageous to enter into a hedging arrangement prior to the
pricing of the Transition Bonds pursuant to Section 2(e), Petitioner will
apply both the methodology on which Appendix H is based (securitizing
Transaction Costs as approved herein pre-tax and reflecting the related tax
deductions in the initial-year of the MTC-Tax calculation) and that on
which Appendix I is based (securitizing Transaction Costs as approved
herein on a net-of-tax basis and not reflecting the tax-related tax
deductions in the initial year of the MTC-Tax calculation), and base the
pricing and hedging determination on the method that results in the lowest
total Transition Bond and MTC-Tax Charges, calculated as shown in
Attachment A-1 of either Appendix H or I.
47. Pursuant to Section 25 of the Act, the consideration or approval
by the Board of a petition by Petitioner under the Act, including this
Financing Order and the periodic adjustment provided in Section 15 of the
Act, will be wholly separate from, and will not be utilized in the Board's
consideration of, any other ratemaking or other proceeding involving
Petitioner, except as otherwise provided in Sections 39 and 40 hereof and
in the Act.
This Financing Order is issued subject to the following provisions,
failure of compliance with which shall not affect the rights of the holders
of the Transition Bonds:
(1) Petitioner will furnish the Secretary of the Board with copies
of all documents as executed and filed with other regulatory
agencies relating to the Transition Bonds.
(2) Petitioner will quarterly file with this Board a statement
setting forth details with respect to the disbursement of net
proceeds of the Transition Bonds and their use in retiring debt
or equity or both.
(3) This Financing Order will not be construed as a certification
that the Transition Bonds will be secured by tangible or
intangible assets of commensurate value or
investment costs.
(4) The Petitioner is directed to file, as part of its required
Unbundling Filing of August 1, 2002, data showing the impact of
the timing of customer payments of transition bond charges to
Petitioner versus payments by Petitioner, as Servicer, to the
transition bond trustee. This data shall include a calculation
of customer daily remittances, timing of remittances to the
bond trustee and the short-term interest rate then applicable
to determine the amount of "float" income earned by Petitioner
in its capacity as Servicer. If the Board determines in its
review of this filing, that Petitioner retained revenue over
and above its servicing fee, it may calculate such retained
revenue, and impute interest thereon, in determining fair and
reasonable rates going forward from the date of its review.
(5) The Board hereby designates Herbert H. Tate, President, or in
his absence any other Commissioner, as its Designee under this
Financing Order. Such Designee shall act only in accordance
with the Designee Guidelines approved herein and attached
hereto as Appendix E.
DATED: September 17, 1999
BOARD OF PUBLIC UTILITIES
BY:
HERBERT H. TATE
PRESIDENT
CARMEN J. ARMENTI
COMMISSIONER
FREDERICK F. BUTLER
COMMISSIONER
ATTEST:
MARK W. MUSSER
SECRETARY
CONSENT OF PETITIONER
Pursuant to Section 19 of the Act, Petitioner hereby consents to all
of the terms of this Bondable Stranded Costs Rate Order, this 17th day of
September, 1999.
PUBLIC SERVICE ELECTRIC
AND GAS COMPANY
BY:
ALFRED C. KOEPPE
SENIOR VICE PRESIDENT
Appendix A
[BPU LETTERHEAD] CERTIFICATION
(to be filed with the Secretary of the Board within two business days
following pricing of the transition bonds)
BOARD OF PUBLIC UTILITIES (THE "BOARD") OF THE STATE OF NEW JERSEY
SUBJECT: Certification for [Transition Bonds ("Transition Bonds")] [hedging
arrangement ("hedging arrangement")] Pursuant to the Order of the Board
dated September 17, 1999, No. EF99060390 (the "Financing Order")
I, _____________________________(the "Designee"), in accordance with
Sections 14(b) and 15(a)(3) of the Electric Discount and Energy Competition
Act, Chapter 23 of the Laws of 1999 ("Act"), for the purpose of (a)
establishing that the structuring and pricing of the Transition Bonds(1)
assures that the Petitioner's customers pay the lowest Transition Bond
Charges consistent with market conditions and the terms of the Financing
Order and (b) approving at the time of pricing of the Transition Bonds
[hedging arrangement and related terms of the Transition Bonds], the terms
and conditions of the Transition Bonds [hedging arrangement and related
terms of the Transition Bonds], servicing fees, if any, with respect to the
collection of such Transition Bond Charges and the pledging, assignment and
sale of Bondable Transition Property in connection with the initial
Transition Bond Charge, HEREBY CERTIFY as follows:
- ------------
(1) For a certification relating to hedging arrangements substituted for
"establishing that the structure and pricing of the Transition Bonds"
the words "establishing that the terms of the hedging arrangements
which determine the certain pricing and structuring terms of the
Transition Bonds".
1. Any capitalized terms not defined herein shall have the meanings
ascribed thereto in the Financing Order.
2. The following are the terms of the Transition Bonds:
Name of Transition Bonds:_________
SPE:___________
Closing Date: _________
Amount Issued: _________
Interest Rates and Expected Amortization Schedule: See Attachment 1
Distributions to Investors (quarterly or semi-annually): ________
Weighted Average Coupon Rate: ________
Weighted Average Yield:_________
Capital Amount: ________
Overcollateralization Amount:_______
Overcollateralization Schedule: See Attachment 1
New Jersey Statutory Corporate Business Tax Rate: __________
Federal Statutory Corporate Income Tax Rate: __________
[3. Brief Description of Hedging Arrangement:]
4. All such items are within the parameters established in the
Financing Order and in the Designee Guidelines in Appendix E to the
Financing Order. Accordingly, (a) the structuring and pricing of the
[Transition Bonds] [hedging arrangement and related terms of the Transition
Bonds] assures that Petitioner's customers will pay the lowest Transition
Bond Charges consistent with market conditions and the terms of the
Financing Order and (b) the terms and conditions of the [Transition Bonds
and the schedule of payments of principal and interest on the Transition
Bonds and overcollateralization requirements] [the terms and conditions of
the hedging arrangements and related terms of the Transition Bonds] are
approved.
THIS CERTIFICATION, in accordance with Sections 14(b)(4) and 15(a)(3)
of the Act and the Financing Order, is final and uncontestable as of its
date, which is the pricing date of the [Transition Bonds] [the hedging
arrangement].
Dated:
____________________________
Designee
ATTACHMENT 1
EXPECTED AMORTIZATION SCHEDULE
(with coupons, prices, classes, if any, expected amortization
schedule and stated maturities, call features, and scheduled
overcollateralization requirements)
A. General Terms
Stated Call
Class Price Coupon Fixed/Floating Maturity Feature
----- ----- ------ -------------- -------- -------
B. Scheduled Amortization Requirement
Date Class A-1 Class A-2 Class A-N
---- --------- --------- ---------
C. Schedule of Overcollateralization Requirement
Date Required Overcollateralization Level
---- ------------------------------------
Appendix B
ISSUANCE ADVICE LETTER
[PSE&G Letterhead]
[To be filed with the Board of Public Utilities or its successor
not later than five business days following sale and issuance
of the Transition Bonds]
[DATE]
Mark W. Musser, Esq., Secretary
State of New Jersey
Board of Public Utilities
Two Gateway Center
Newark, New Jersey 07102
Re: Docket No. EF99060390
Dear Mr. Musser:
Pursuant to your Honorable Board's order in the above-captioned
Docket ("Financing Order"), Public Service Electric and Gas Company
("Company") hereby transmits for filing this Issuance Advice Letter. Any
capitalized terms not defined herein shall have the meanings ascribed
thereto in the Financing Order.
In the Financing Order, the Board authorized the Company to
file an Issuance Advice Letter when pricing terms for a series of
Transition Bonds have been established. This Issuance Advice Letter filing
applies the methodology approved by the Board in the Financing Order to
establish the initial Transition Bond Charge and initial MTC-Tax. The terms
of issuance are as follows:
1. Transition Bond Name:_________
2. SPE Name:______________
3. Trustee: _________
4. Closing Date: _________
5. Amount Issued: _________
6. Upfront Transaction Costs: _______
7. Interest Rates and Expected Amortization Schedule: See Attachment 1
8. Distributions to Investors (quarterly or semi-annually): ________
9. Annual Servicing Fee as a percent of the initial principal
balance: _____________
10. Overcollateralization amount: _______________
11. Overcollateralization Schedule: See Attachment 1_______
12. Capital amount: ________
13. Brief description of any interest rate exchange agreement or other
hedging arrangement.
Table I below shows the current assumptions for each of the variables
used in the Transition Bond Charge and MTC-Tax calculation.
TABLE I
INPUT VALUES FOR INITIAL TRANSITION BOND CHARGE AND MTC-TAX
Forecasted annual kWh sales (month-by-month, residential,
commercial and industrial)
Residential Commercial Industrial
(__%) (__%) (__%)
Percent of billed amounts collected
in current month:
Percent of billed amounts collected
in second month after billing:
Percent of billed amounts collected
in third month after billing:
Percent of billed amounts collected
in fourth month after billing:
Percent of billed amounts collected
in fifth month after billing:
Percent of billed amounts collected
in sixth month after billing:
Percent of billed amounts expected
to be charged-off:
Forecasted annual Ongoing Transition Bond Costs (including any hedging
costs): ________
Required annual overcollateralization amount: ________
Current Transition Bond outstanding balance: ________
Scheduled Transition Bond outstanding balance as of ___/___/___:_____
New Jersey Statutory Corporate Business Tax Rate: __________
Federal Statutory Corporate Income Tax Rate: __________
Based on the approved formula, the initial Transition Bond Charge is ______
(cent)/kwh and the initial MTC-Tax is ______ (cent)/kwh
Attachment 2 is a spreadsheet calculation which shows expected net present
value savings of $___ million and rate reductions of ___ for this series of
Transition Bonds.
In accordance with the Financing Order, the Transition Bond Charge
and MTC-Tax shall be automatically effective when filed and will continue
to be effective.
Respectfully submitted,
General Corporate Counsel
Attachments
ATTACHMENT 1
EXPECTED AMORTIZATION SCHEDULE
(with coupons, prices, classes, if any, expected amortization
schedule and stated maturities, call features and scheduled
overcollateralization requirements)
A. General Terms
Stated Call
Class Price Coupon Fixed/Floating Maturity Feature
----- ----- ------ -------------- -------- -------
B. Scheduled Amortization Requirement
Date Class A-1 Class A-2 Class A-N
---- --------- --------- ---------
C. Schedule of Overcollateralization Requirement
Date Required Overcollateralization Level
---- ------------------------------------
ATTACHMENT 2
RATEPAYER SAVINGS
Appendix C
TRUE-UP LETTER
[PSE&G Letterhead]
[date]
Mark W. Musser, Esq., Secretary
State of New Jersey
Board of Public Utilities
Two Gateway Center
Newark, New Jersey 07102
Re: Docket No. EF99060390
Dear Mr. Musser:
Pursuant to your Honorable Board's order in the above-captioned
Docket ("Financing Order"), Public Service Electric and Gas Company
("Company") as Servicer of the Transition Bonds or any successor Servicer
and on behalf of the trustee as assignee of the SPE shall apply at least
annually for mandatory periodic adjustment to the Transition Bond Charge
and MTC-Tax charge. Any capitalized terms not defined herein shall have the
meanings ascribed thereto in the Financing Order.
Each such adjustment shall be proposed in a filing ("True-Up Letter")
with the Board at least 30 days in advance of the date upon which it is
requested to be effective (which effective date hereunder is ____________).
The proposed adjustment to the Transition Bond Charge shall become
effective on an interim basis on such date and, in the absence of a Board
order to the contrary finding manifest error in the calculation, shall
become final 60 days after the filing. The proposed adjustment to the
MTC-Tax charge, absent a proposed change in the formula, shall become
effective on an interim basis on such date and, in the absence of a Board
order to the contrary finding manifest error in the calculation, shall
become final 60 days after the filing.
Using the formula approved by the Board in the Financing Order (or in
effect pursuant to the True-Up Letter dated _______), this filing modifies
the variables used in the Transition Bond Charge and MTC-Tax calculation
and provides the resulting modified Transition Bond Charge and MTC-Tax
charge. Table I shows the revised assumptions for each of the variables
used in calculating the Transition Bond Charge and MTC-Tax charge. The
assumptions underlying the current Transition Bond Charge and MTC-Tax
charge were filed by the Company in an Issuance Advice/True-Up Letter dated
________________.
Based on the approved formula, the proposed Transition Bond Charge is
______ (cent)/kWh and the resulting MTC-Tax is ______ (cent)/kwh.
Respectfully submitted,
General Corporate Counsel
Attachment
TABLE I
INPUT VALUES FOR ADJUSTED TRANSITION BOND CHARGE AND MTC-TAX
Forecasted annual kwh sales: (month-by-month, residential,
commercial and industrial)
Residential Commercial Industrial
(__%) (__%) (__%)
Percent of billed amounts collected
in current month:
Percent of billed amounts collected
in second month after billing:
Percent of billed amounts collected
in third month after billing:
Percent of billed amounts collected
in fourth month after billing:
Percent of billed amounts collected
in fifth month after billing:
Percent of billed amounts collected
in sixth month after billing:
Percent of billed amounts charged-off:
1. Under-collection of prior principal amount _______
2. Upcoming collection of current principal amount _______
3. Under-collection of prior interest amount ____
4. Upcoming collection of current interest amount _______
5. Under-collection of prior over-collateralization amount _______
6. Upcoming collection of current over-collateralization amount _______
7. Under-collection of prior tax component amount _______
8. Upcoming collection of current tax component amount _______
9. Deficiency in required capital amount _______
10. Amount in reserve account ________
11. Upcoming period servicing and administration fees (including hedging
costs, if any) _______
12. N.J. Statutory Corporate Business Tax Rate ___________
13. Federal Statutory Corporate Income Tax Rate___________
Appendix D
PRICING ADVICE CERTIFICATE
[PSE&G Letterhead]
[To be filed not later than the date of pricing of the Transition Bonds]
[DATE]
[Mark W. Musser, Esq., Secretary
State of New Jersey
Board of Public Utilities
Two Gateway Center
Newark, New Jersey 07102]
and
[Board Designee]
Re: Docket No. EF99060390
Dear Mr. Musser:
Pursuant to your Honorable Board's order in the above-captioned
Docket ("Financing Order"), Public Service Electric and Gas Company
("Company") hereby transmits for filing this Pricing Advice Certificate.
Any capitalized terms not defined herein shall have the meanings ascribed
thereto in the Financing Order.
In the Financing Order, the Board requires the Company to file a
Pricing Advice Certificate when pricing terms for a series of Transition
Bonds and the pricing of any hedging arrangement in advance of the issuance
of Transition Bonds have been approved by the Com pany. The proposed terms
of pricing and issuance of the [Transition Bonds] [hedging arrange ment]
are as follows:
Name of Transition Bonds:_________
SPE:___________
Closing Date: _________
Amount Issued: _________
Interest Rates and Expected Amortization Schedule: See Attachment 1
Distributions to Investors (quarterly or semi-annually): ________
Weighted Average Coupon Rate: ________
Weighted Average Yield:_________
Capital Amount: ________
Overcollateralization Amount:_______
Overcollateralization Schedule: See Attachment 1
[Brief description of any hedging arrangement:]
The Company hereby certifies that: (i) all proposed terms of pricing
and issuance of the [Transition Bonds] and/or [the hedging arrangement] are
within the parameters established in the Financing Order and the Designee's
Guidelines attached as Appendix E to the Financing Order [and] (ii) the
structuring and pricing of the [Transition Bonds] and/or [the hedging
arrangement] assures that Company's customers will pay the lowest
Transition Bond Charges consistent with market conditions and the terms of
the Financing Order [or (iii) the hedging arrangement (A) assures that the
Company can achieve the required rate reductions through securitization (as
contemplated by the Restructuring Order), (B) assures that net present
value savings will be realized over the life of the Transition Bonds and
(C) reasonably protects ratepayers against interest rate increases which
may occur after the date hereof.]
The Company's certification provided in clause (ii) or (iii) above is
based, in part, upon representations provided to the Company by its Senior
Underwriter for the Transition Bonds, Lehman Brothers Inc.
Respectfully submitted,
General Corporate Counsel
Attachments
Appendix E
Designee Guidelines
Docket No. EF99060390
The Designee is empowered to agree to the terms and conditions of the
Transition Bonds to be issued to recover a portion of the Stranded Costs of
Public Service Electric & Gas Company (the "Company"), and to certify that
the structuring and pricing of the Transition Bonds assure that the
ratepayers will pay the lowest Transition Bond Charges consistent with
market conditions and the terms of the Financing Order; provided, however,
that the Designee cannot approve the terms and conditions or deliver such
certification if the terms and conditions of the structuring and pricing of
the Transition Bonds fall outside the parameters set forth below:
o Bond Size: Not to exceed $2,525,000,000
o Bond Maturity 15 year scheduled amortization, not to exceed 17
year final stated maturity
o Amortization Set to provide substantially equal kilowatt-hour
charges (including the Transition Bond Charge and
MTC-Tax).
o Payment Dates: The first payment of principal shall occur within
11 months of issuance and payments of principal
and interest shall be no less frequent than
semi-annually.
o Capital Account The Company shall capitalize the SPE at no less
and Over than .50% of the initial principal amount of the
Collateralization bonds. The Transition Bond Charge shall include
over-collateralization in amounts sufficient to
build up to no more than 2.00% of the initial
principal amount of the Transition Bonds.
o Redemption The bonds will not have optional redemption
Features features other than a 5% "clean-up" call.
o Underwriting and The syndication and underwriting process is
Syndication standard for the execution of an asset-backed
securitization of this size and credit quality as
stated in the letters of the Company's lead
underwriter, Lehman Brothers, and the Board's
financial advisor, Bear Stearns & Co. Inc., dated
August 30, 1999 and September 2, 1999,
respectively, copies of which were ordered to be
filed in this Docket.
o Floating Rate If the Company proposes to cause the issuer to
Bond Hedging issue floating rate bonds which are swapped to a
Arrangement fixed rate then any such swap shall be competi
tively bid among no less than three (3) qualified
swap counterparties and the issuer shall accept
the lowest responsible bid taking into account the
trading value of the counterparties. A swap
counterparty shall be deemed a qualified swap
counterparty if the rating of the counterparty is
at least AA-/Aa3.
o Hedging The Designee may authorize a Hedging Arrangement
Arrangement if (a) the Company notifies the Designee and the
Board's Financial Advisor that if the Transition
Bonds were to be issued as of the date of such
notification the expected average weighted yield
on the Transition Bonds would produce net present
value savings of approximately $275 million; (b)
the Board's Financial Advisor concurs with such
analysis; and (c) the Company indicates its
intention to initiate a Hedging Arrangement as
soon as practicable thereafter.
Capitalized terms used herein and not otherwise defined shall have the
meanings set for in the Financing Order.
The terms and conditions described therein are hereby approved with such
modifications and amendments as are acceptable to the Designee relying upon
the written advice and recommenda tions of the Board's financial advisor
(collectively, the "Designee Guidelines").
Appendix F
LEHMAN BROTHERS' CERTIFICATION
[Lehman Brothers' Letterhead]
[To be filed not later than the date of pricing of the Transition Bonds]
[DATE]
[Mark W. Musser, Esq., Secretary
State of New Jersey
Board of Public Utilities
Two Gateway Center
Newark, New Jersey 07102]
and
[Board Designee]
Re: Docket No. EF99060390
Dear Mr. Musser:
Pursuant to your Honorable Board's order in the above-captioned
Docket ("Financing Order"), Lehman Brothers hereby transmits for filing
this Certification in support of Public Service Electric and Gas Company's
(the "Company") Pricing Advice Certificate dated [DATE]. Any capitalized
terms not defined herein shall have the meanings ascribed thereto in the
Financing Order.
In the Financing Order, the Board requires the Company's Lead
Underwriter to file a Certification supporting the Company's Pricing Advice
Certificate when pricing terms for a series of Transition Bonds and when
the terms of a hedging arrangement have been approved by the Company. In
its Pricing Advice Certificate, the Company indicated that terms of pricing
and issuance are as follows:
Name of Transition Bonds:_________
SPE:___________
Closing Date: _________
Amount Issued: _________
Interest Rates and Expected Amortization Schedule: See Attachment 1
Distributions to Investors (quarterly or semi-annually): ________
Weighted Average Coupon Rate: ________
Weighted Average Yield:_________
Capital Amount: ________
Overcollateralization Amount:_______
Overcollateralization Schedule: See Attachment 1
[Brief description of any interest rate exchange agreement or other
hedging arrangement:]
Lehman Brothers, as Lead Underwriter, hereby certifies that:
(1) The structuring and pricing of the Transition Bonds, as proposed, is
reasonable in the light of current market conditions.
(2) Assuming the accuracy of the assumptions of the Company contained in
the Financing Order and the formulae contained therein, and of the
mathematical calculations made by the Company thereunder, the
customers of the Company will pay the lowest transition bond charges
consistent with current market conditions and the terms of the
Financing Order.
[or, if the certification is given in connection with the execution of a
hedging arrangement in advance of the pricing of the Transition Bonds
(1) The structuring and pricing of the hedging arrangement is reasonable
in light of current market conditions.
(2) The hedging arrangement reasonably protects ratepayers against
interest rate increases which may occur after the date of its
execution.
[or if the certification is given in connection with the termination of a
hedging arrangement, the pricing of the termination payment is reasonable]
Respectfully submitted,
Attachments
Appendix G
Form of Advisory Letter from Bear Stearns & Co. Inc.
As Financial Advisor
Bear Stearns & Co. Inc. (Bear Stearns) has acted as the financial advisor
to the New Jersey Board of Public Utilities ("BPU") with respect to the
offering and issuance of [Amount and Title of Transition Bond Offering]
(the "Securities") and/or the execution of a hedging arrangement by [Issuer
Designation] (the "Issuer").
Bear Stearns has examined (i) the Unbundling Stranded Costs and
Restructuring Order (the "Restructuring Order") of the BPU signed on
__________ (the "Order Date"); (ii) the Petition of PSE&G for a Financing
Order, dated _______, as supplemented and amended (the "Petition"); (iii)
the Financing Order of the BPU dated _______ (the "Financing Order") (iv)
the form of Prospectus and Prospectus Supplement of the Issuer as filed
with the SEC on [date of final draft reviewed] concerning the Securities
(collectively the "Prospectus"); (v) the final pricing terms (the "Final
Terms") for the Securities provided by Lehman Brothers (the "Senior
Manager") which final pricing terms were agreed upon between the Issuer,
PSE&G and the Senior Manager; (vi) the Underwriting Agreement for the
Securities (the "Underwriting Agreement"), proposed for execution on the
date hereof among PSE&G, the Issuer and the Senior Manager; (vii) the form
of Designee Certificate proposed to be delivered on the date hereof to the
Issuer pursuant to the Financing Order; (viii) the Pricing Advice
Certificate delivered by PSE&G on the date hereof; and (ix) such other
documents, representations and other forms of information as we have deemed
necessary and appropriate in order for us to deliver this Pricing
Certificate. We have found the following:
1. The structuring and pricing of the Securities, (and any hedging
arrangement) as evidenced, inter alia, by the terms thereof contained
in the Prospectus and the Final Terms provided to us by the Senior
Manager are reasonable in light of current market conditions and are
consistent with the terms of the Financing Order.
2. The Final Terms of the Securities including the syndicate rules, the
estimated costs of issuance, the overcollateralization levels and the
servicing fees, appear reasonable and consistent with current market
conditions.
3. The initial Transition Bond Charge proposed by PSE&G in accordance
with the Financing Order should be [adjusted up or down] [left
unchanged] in order to provide the Issuer with amounts not less than
those necessary to fully recover the bondable stranded costs of
PSE&G, in light of the actual interest rates achieved in the
marketing and sale of the Securities and the costs, including
overcollateralization of ___%, associated with the issuance of the
Securities.
4. Assuming the accuracy of the assumptions of PSE&G contained in the
Financing Order and the formulas contained therein, and of the
mathematical calculations made by the Issuer thereunder, the
customers of PSE&G will pay the lowest Transition Bond Charges
consistent with current market conditions and the terms of the
Financing Order.
5. PSE&G has delivered its Pricing Advice Certificate, which conforms to
the Final Terms. Using the methodology contained in the Financing
Order, the issuance of the Securities provides ratepayers with net
present value savings over the term of the Securities.
AGENDA DATE: 4/21/99
[Seal]
STATE OF NEW JERSEY
BOARD OF PUBLIC UTILITIES
TWO GATEWAY CENTER
NEWARK, NJ 07102
ENERGY
IN THE MATTER OF PUBLIC SERVICE ) FINAL DECISION AND ORDER
ELECTRIC AND GAS COMPANY'S RATE ) ------------------------
UNBUNDLING, STRANDED COSTS AND ) BPU DOCKET NOS. EO97070461,
RESTRUCTURING FILINGS ) EO97070462, AND EO97070463
(SERVICE LIST ATTACHED)
BY THE BOARD:
This Decision and Order memorializes and provides the reasoning for
the action taken by the Board of Public Utilities ("Board" or "BPU") in
these matters, by a vote of three Commissioners, at its April 21, 1999
public agenda meeting, which action was summarized in our Summary Order
dated April 21, 1999. The structure of this Decision and Order is set forth
in the following Table of Contents.
TABLE OF CONTENTS
-----------------
Page Number
-----------
I. BACKGROUND AND PROCEDURAL HISTORY . . . . . . . . . . . . . . . . . 2
II. INITIAL DECISION . . . . . . . . . . . . . . . . . . . . . . . . . 11
A. Stranded Costs . . . . . . . . . . . . . . . . . . . . . . . . 11
1. PSE&G's Estimate of Stranded Costs and Proposed
Recovery . . . . . . . . . . . . . . . . . . . . . . . 11
2. Post-1992 Rate Case Capital Additions to Owned
Generation . . . . . . . . . . . . . . . . . . . . . . 11
a. Bergen I Repowering . . . . . . . . . . . . . . . . 12
b. Linden Combustion Turbine Project . . . . . . . . . 12
c. Mercer Rehabilitation Project . . . . . . . . . . . 12
d. Other Fossil Capital Addition Project
Disallowances . . . . . . . . . . . . . . . . . . 13
e. Salem Nuclear Capital Additions . . . . . . . . . . 13
3. Applicable Test/Methodology . . . . . . . . . . . . . . . 13
B. Mitigation Strategies to Meet Rate Reduction Targets . . . . . 16
C. Rate Reduction . . . . . . . . . . . . . . . . . . . . . . . . 17
D. Securitization . . . . . . . . . . . . . . . . . . . . . . . . 18
E. Unbundled Rates . . . . . . . . . . . . . . . . . . . . . . . 18
1. Use of 1995 Cost of Service Study . . . . . . . . . . . . 18
2. Functionalization of Costs . . . . . . . . . . . . . . . 19
F. Segregation of Rates into Functional Components . . . . . . . 19
1. Unbundling/Rebundling . . . . . . . . . . . . . . . . . . 19
2. Market Credit/Capacity Credit . . . . . . . . . . . . . . 20
3. Implicit/Explicit MTC . . . . . . . . . . . . . . . . . . 20
4. Societal Benefits . . . . . . . . . . . . . . . . . . . . 21
5. Securitization Transition Charge . . . . . . . . . . . . 22
6. Competition Transition Charge . . . . . . . . . . . . . . 22
7. Impact of Proposed Unbundled Rates/Revenue
Neutrality . . . . . . . . . . . . . . . . . . . . . . 22
III. EXCEPTIONS AND REPLY EXCEPTIONS . . . . . . . . . . . . . . . . . 22
A. Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . 23
1. PSE&G . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2. Ratepayer Advocate . . . . . . . . . . . . . . . . . . . 23
3. BPU Staff . . . . . . . . . . . . . . . . . . . . . . . . 24
4. Co-Steel Raritan . . . . . . . . . . . . . . . . . . . . 25
5. The Coalition for Fair Competition . . . . . . . . . . . 25
6. County of Passaic . . . . . . . . . . . . . . . . . . . . 25
7. Independent Energy Producers of New Jersey . . . . . . . 25
8. Mid-Atlantic Power Supply Association . . . . . . . . . . 26
9. New Jersey Business Users . . . . . . . . . . . . . . . . 26
10. New Jersey Commercial Users . . . . . . . . . . . . . . 27
11. New Jersey Industrial Consumer Group . . . . . . . . . . 27
12. New Jersey Public Interest Intervenors . . . . . . . . . 27
13. New Jersey Transit Corporation . . . . . . . . . . . . . 28
14. Tosco . . . . . . . . . . . . . . . . . . . . . . . . . 28
B. Reply Exceptions . . . . . . . . . . . . . . . . . . . . . . . 28
1. PSE&G . . . . . . . . . . . . . . . . . . . . . . . . . . 28
2. Ratepayer Advocate . . . . . . . . . . . . . . . . . . . 29
IV. RESTRUCTURING PROCEEDING . . . . . . . . . . . . . . . . . . . . . 29
A. Basic Generation Service . . . . . . . . . . . . . . . . . . . 30
1. Pricing and Contract Terms and Options . . . . . . . . . 30
2. BGS Price/Shopping Credit . . . . . . . . . . . . . . . . 31
B. Horizontal Market Power . . . . . . . . . . . . . . . . . . . 33
C. Incentives For Divestiture . . . . . . . . . . . . . . . . . . 34
D. PSE&G's Energy-Only Proposal . . . . . . . . . . . . . . . . . 36
1. Reliability Obligations Within PJM . . . . . . . . . . . 37
2. Capacity Market . . . . . . . . . . . . . . . . . . . . . 38
V. SETTLEMENT PROPOSALS . . . . . . . . . . . . . . . . . . . . . . . 40
A. Stipulation Filed by PSE&G and Other Parties . . . . . . . . . 40
B. Alterative Stipulation Filed by the RPA and Other
Parties . . . . . . . . . . . . . . . . . . . . . . . . . . 48
VI. COMMENTS ON THE SETTLEMENT PROPOSALS . . . . . . . . . . . . . . . 55
A. Comments on the PSE&G Stipulation . . . . . . . . . . . . . . 55
1. PSE&G . . . . . . . . . . . . . . . . . . . . . . . . . . 55
2. Ratepayer Advocate . . . . . . . . . . . . . . . . . . . 61
3. Mid-Atlantic Power Supply Association . . . . . . . . . . 64
4. New Jersey Public Interest Intervenors . . . . . . . . . 67
5. New Energy Ventures . . . . . . . . . . . . . . . . . . . 67
6. New Jersey Industrial Customer Group . . . . . . . . . . 68
7. The Coalition for Fair Competition . . . . . . . . . . . 69
8. New Jersey Citizen Action . . . . . . . . . . . . . . . . 71
9. New Jersey Business Users . . . . . . . . . . . . . . . . 72
10. Co-Steel Raritan . . . . . . . . . . . . . . . . . . . . 74
11. PP&L Energy Plus . . . . . . . . . . . . . . . . . . . . 75
12. New Jersey Commercial Users . . . . . . . . . . . . . . 76
13. Tosco . . . . . . . . . . . . . . . . . . . . . . . . . 78
14. Independent Energy Producers of New Jersey . . . . . . . 78
15. Enron . . . . . . . . . . . . . . . . . . . . . . . . . 78
16. Rockland Electric Company . . . . . . . . . . . . . . . 79
17. National Energy Marketers Association . . . . . . . . . 79
18. Exelon Energy . . . . . . . . . . . . . . . . . . . . . 80
B. Comments on Stipulation II . . . . . . . . . . . . . . . . . . 81
1. Division of the Ratepayer Advocate . . . . . . . . . . . 81
2. PSE&G . . . . . . . . . . . . . . . . . . . . . . . . . . 82
3. MAPSA . . . . . . . . . . . . . . . . . . . . . . . . . . 87
4. New Jersey Business Users . . . . . . . . . . . . . . . . 88
5. Independent Energy Producers of New Jersey . . . . . . . 89
6. Jersey Central Power & Light Company, d/b/a
GPU Energy . . . . . . . . . . . . . . . . . . . . . . 89
7. Atlantic City Electric . . . . . . . . . . . . . . . . . 90
DISCUSSION AND FINDINGS . . . . . . . . . . . . . . . . . . . . . 90
I. BACKGROUND AND PROCEDURAL HISTORY
The New Jersey Energy Master Plan Phase I Report ("Phase I Report"),
released in March 1995, presented a vision for the State in which energy
markets in New Jersey would be guided by market-based principles and
competition. The Phase I Report recognized that increased competition in
New Jersey's energy markets could potentially help reduce the high energy
prices existing in the State, further the State's economic development
goals, and provide an opportunity to streamline the regulatory review
process. The Phase I Report provided a policy framework for the transition
from energy industry monopolies to competitive markets.
The Phase I Report also made several policy recommendations to be
implemented as short term or interim measures to address immediate
competitive pressures in the State and to prepare for the transition to
competition. These included the adoption of legislation allowing rate
flexibility and permitting alternative regulation to enable New Jersey's
electric utilities to compete to retain certain "at risk" customers and
attract new customers, while stimulating efficiency and innovation. The
Phase I Report further recommended the adoption of significant consumer
protection standards to ensure that captive ratepayers do not subsidize
competitive activities and that all ratepayers benefit from the transition
to more competition. In addition to the recommendations for interim action,
the Phase I Report also explicitly directed the BPU to investigate possible
changes to the structure of the electric power industry in New Jersey as a
longer term means of achieving lower costs of electricity in the State.
In response to the identified need for interim measures, the Rate
Flex and Alternative Regulation Act, N.J.S.A. 48:2-21.24 et seq. (the "Rate
Flex Act"), was enacted in July 1995. In this Act, the Legislature found
that during a transitional phase aimed at achieving the long term goal of
lower electric and natural gas costs to consumers, it might be necessary
for the BPU to implement short-term measures to promote and enhance
economic development and employment in the State, and to permit New Jersey
utilities to compete for customers with competitive alternatives. The Rate
Flex Act specifically allows the State's electric utilities to enter into
off- tariff rate agreements with customers for a period of seven years from
the Act's passage and permits electric or gas utilities to petition the BPU
to be regulated under alternatives to rate base/rate of return regulation.
The Rate Flex Act further declared that it is the policy of the State
to foster the production and delivery of electricity and natural gas in a
manner that lowers costs and rates while improving the quality and choices
of service for all energy consumers; to ensure that New Jersey remains
economically competitive on a regional, national and international basis;
and to enhance the economic vitality of the State by attracting and
retaining business and creating and retaining jobs. The Legislature also
found that competitive market forces can produce the stated goals of
improved quality and choices of energy services at lower costs, while
promoting efficiency, reducing regulatory delay and fostering productivity
and innovation.
Consistent with the Phase I Report, and in keeping with the
Legislature's stated desire that increased competition in energy markets be
explored as a more long-term means to reduce the cost of electricity in New
Jersey for all customers, the BPU, by Order dated June 1, 1995, initiated a
Phase II proceeding under Docket No. EX94120585. This proceeding was
intended to accomplish several goals. By investigating the long term
structure of the electric power industry in the State, it was hoped that an
electric power industry policy could be developed to facilitate the
emergence of a competitive marketplace which would foster the production
and delivery of electricity in such a matter as to lower costs and rates
and improve the quality and choices of service. In those areas where
effective competition developed, ongoing regulation in its present form
might be unnecessary. Additionally, there was the goal of facilitating the
development of competition in those markets where competitive services did
not yet exist, but where increased competition could benefit consumers.
Finally, there was a concern about the need to continue to regulate the
quality and price of energy supplies and services where competition does
not exist and it is determined that consumers are best served by continued
regulation.
Thus, a proceeding was initiated by the Board to investigate the
appropriateness and feasibility of electricity wheeling or electric power
competition at the retail level; the actions necessary to establish a fully
efficient, competitive wholesale marketplace for electric generation;
whether divestiture of electric utility generation assets is necessary; the
need for retail wheeling if an efficient, competitive wholesale electric
power market is achieved; the need for divestiture of electric utility
generation assets or alternatively, the unbundling and corporate separation
of electric services; and the definition and equitable treatment of
stranded investments. Consistent with State policy goals expressed in the
Rate Flex Act, the Board specifically directed that the proceeding
investigate the appropriate manner of continuing existing consumer and
environmental protections in a restructured market; ensuring universal,
non-discriminatory access to service; guaranteeing the provision of a safe
and adequate power supply and system reliability; and achieving the State's
environmental and energy efficiency goals.
The Board sought to obtain guidance and input on the many issues
raised from the widest possible array of interests. The BPU solicited and
received several rounds of written comments as well as written testimony,
conducted public and legislative-type hearings and, through its Staff,
formed and facilitated informal working groups and a negotiating team to
explore issues in more depth and to attempt to develop a consensus, where
possible.
On January 16, 1997, the BPU released its Proposed Findings and
Recommendations in the Phase II Proceeding ("Draft Report"). The Board held
a public hearing to receive oral comments on the recommendations contained
in the Draft Report at the Board's Newark offices on February 4, 1997.
Additional public hearings were held in Blackwood, New Jersey on February
5, 1997 and in Trenton on February 11, 1997. The Board received written
comments from 39 parties and heard testimony from 42 parties relative to
the Draft Report.
On April 30, 1997, after careful consideration of the input received
regarding its Draft Report, the Board issued an Order Adopting and
Releasing Final Report. The Final Report, entitled "Restructuring the
Electric Power Industry in New Jersey: Findings and Recommendations"
("Final Report"), was submitted to the Governor and the Legislature for
their consideration and contained the BPU's findings and recommendations
concerning the future structure of the electric power industry in New
Jersey, including the recommendation to offer electric consumers a choice
of electric power suppliers, beginning in October 1998, to effectuate
substantial economic benefit, in the form of lower electric bills and more
service options to the State's residents and businesses. In the
introductory letter presenting the Final Report to the Legislature,
Governor and residents and business owners of the State, the Board
expressly stated that it looked forward to working with the Legislature and
the public over the coming months to develop legislation necessary to adopt
appropriate consumer protection measures and to implement these policy
findings and recommendations.
Recognizing that there were a number of substantial procedural steps
necessary to implement the recommended policies, and in order to prepare
for the commencement of retail competition, the Board, in its April 30,
1997 Order, directed each of the State's four investor owned electric
utilities, Atlantic Electric Company ("ACE"), Jersey Central Power and
Light Company, d/b/a GPU Energy ("GPU"), Public Service Electric and Gas
Company ("PSE&G" or "Company") and Rockland Electric Company ("RECO") to
make three filings by July 15, 1997. These included a rate unbundling
petition, a stranded cost petition, and a restructuring plan. The Board
also recognized that there were a number of issues which needed to be
addressed generically for all four electric utilities, including standards
for fair competition, affiliate relationship standards, analysis of market
power, and the mechanics for the phase-in of customer choice. The Board
anticipated that these issues would be pulled out of the individual utility
proceedings and reviewed generically.
By Order dated June 25, 1997, the Board directed its Division in
Audits, in cooperation with the Division of Energy, to initiate management
audits on ACE, GPU, PSE&G and RECO in accordance with N.J.S.A. 48:2-16.4,
and to solicit the assistance of qualified consulting firms to perform said
audits under the supervision of Board Staff. Said audits were to include,
but not be limited to, focused reviews of the individual electric
utilities' unbundling, stranded costs and restructuring filings. A Request
for Proposals was issued on June 27, 1997, and after receipt and review of
numerous proposals, Vantage/ICF Consulting ("ICF" or "the Auditors") was
selected by the Board to perform the audit of PSE&G, under BPU Docket No.
EA7060397.
On July 11, 1997, the Board issued an Order Establishing Procedures,
wherein it determined to transmit each utility's rate unbundling and
stranded cost filing to the Office of Administrative Law ("OAL") for
hearings and Initial Decision, and to retain the restructuring plan filings
for its review and, as necessary, hearings, with the intention of issuing a
Final Decision and Order in these matters before the anticipated start date
of competition.
On July 15, 1997, Public Service Electric & Gas Company filed its
Proposal in Response to the Final Report.(1) The Company's proposal was
supported by the prefiled direct testimony of Lawrence R. Codey, Frederick
W. Lark, Robert C. Murray, Gerald W. Schirra, Robert C. Krueger, Dr Colin
J. Loxley, and Paul I. Joskow.
- ------------------
1 Unlike the other three utilities, and contrary to the Board's
directive in its April 30, 1997 Order, PSE&G did not make three separate
filings, but made a single filing containing its unbundling, stranded costs
and restructuring proposals. The filing was assigned three separate BPU
Docket Nos. EO97070461, EO97070462, and EO97070463, for the respective
unbundling, stranded costs and restructuring issues.
The unbundling and stranded costs portions of PSE&G's filing were
transmitted to the OAL, and assigned to Administrative Law Judge ("ALJ")
Louis G. McAfoos t/a. The restructuring portion of the filing was retained
by the Board.
On September 15, 1997, the Board issued an Order on Motions to
Intervene/Participate and for Pro Hoc Vice Admission, wherein it considered
and ruled upon numerous motions for intervention and/or participation and
pro hac vice admission in the restructuring proceedings retained by the
Board. Motions to intervene in the PSE&G unbundling and stranded cost
proceedings were ruled upon by ALJ McAfoos.(2)
- -------------------
2 In addition to PSE&G, Staff and the Division of the Ratepayer
Advocate, the following parties were granted intervenor status by ALJ
McAfoos: Atlantic City Electric Company; Co-Steel Raritan ("Co-Steel");
Coalition For Fair Competition ("CFC"); Cogen Technologies Energy Group
("Cogen"); County of Passaic; Duke Energy Trading and Marketing, L.L.C.
("Duke"); Electric Clearinghouse, Inc. Additionally, participant status,
pursuant to N.J.A.C. 1:1-16.5, was granted to Citizens Against Rate
Escalation ("C.A.R.E."); New Jersey Citizen Action ("NJCA"); Allen
Goldberg; New Jersey Natural Gas Company ("NJNG"); and South Jersey Gas
Company ("SJG"). MidCon/mc2 withdrew from these cases in June 1998.
On September 19, 1997, the Board issued an Order in response to a
letter motion filed by the Division of the Ratepayer Advocate ("RPA"),
wherein, among other things, the Board provided certain clarifications and
guidance as to the scope of the proceedings before the OAL, offered further
guidance on the issues of securitization, the level of rate reductions and
divestiture, and extended, by one month, the date by which Initial
Decisions were to be rendered by the OAL.
By Order dated September 25, 1997, the Board established procedures
for the restructuring proceedings retained by the Board, and identified
issues that would be specifically considered. The Board Order identified
certain issues which it anticipated were likely to be contested, as well as
issues with generic implications which might lend themselves to a
collaborative review. For the generic issues, the Board created three
working groups on customer processes, reliability and competitive issues,
to discuss specific details, narrow issues in contention and attempt to
develop a consensus position, if possible. The working groups were directed
to provide status reports to the Board by January 10, 1998, identifying
areas of consensus, as well as areas where consensus was unlikely. The
Board recognized that where consensus was unlikely, a further procedural
schedule would need to be established.
Additional Orders in the above-captioned dockets were issued by the
Board between October 1997 and March 1999, addressing additional motions by
various parties, including motions for intervention, pro hac vice
admission, schedule modifications, clarification and reconsideration of
earlier rulings, and interlocutory review of certain ALJ rulings.
Additionally, by Order dated January 28, 1998, the Board established a
procedural schedule for review of the following generic restructuring
issues: the potential for exercise of market power by the State's electric
utilities regarding their generation assets; functional separation plans;
divestiture of generation assets; basic generation plans, including the
cost to provide service to low-income and bad-debt customers; mechanics of
the phase-in of retail competition; the customer enrollment process; load
balancing and a settlement system requirements for alternative supplier
deliveries; and Demand Side Management ("DSM") and renewables issues. The
Board noted that PSE&G's proposal to introduce retail choice initially on
an energy-only basis, an issue specific to PSE&G, could also be the subject
of testimony. The Board also noted that there might be a need for hearings
in the proceedings before it on any individual issues left unresolved in
the unbundling and stranded cost proceedings.
ALJ McAfoos issued a Procedural Order Setting Schedule for the
proceedings at the OAL on October 8, 1997, which was modified on November
10, 1997 to allow additional time for parties to submit prefiled testimony.
On or about November 26, 1997, testimony was filed in the unbundling
and stranded cost proceedings by the following witnesses on behalf of the
intervenors: Raymond E. Makul on behalf of the CFC; Jeffrey A. Brown, Harry
J. Kingerski and Theodore F. Kuhn on behalf of Enron; Steven Gabel on
behalf of IEPNJ; Steven Gabel on behalf of MAPSA; David Magnus Boonin and
Nancy I. Day on behalf of NEV; Dr. Alan Rosenberg on behalf of NJBUS and
NJICG; John L. Parodi, Henry Riewerts and James B. Rouse on behalf of
NJBUS; Dr. Dennis W. Goins on behalf of NJCU; William B. Marcus and Edward
A. Smeloff on behalf of NJPII (3); Cheryl Beach on behalf of NJT; Charles
Wolfe on behalf of IBEW Local 94; Peter A. Bradford, Michael D. Dirmeier,
Robert J. Henkes, Dr. Richard A. Rosen, Douglas C. Smith and John K. Stutz
on behalf of the Ratepayer Advocate; and Elliot M. Loyless and Herman L.
Seedorf on behalf of Tosco.(4)
- ----------------------
3 The Natural Resources Defense Council ("NRDC"), a member of the
NJPII coalition, did not join in the submission by NJPII of testimony,
briefs and/or exceptions in the stranded costs, unbundling and
restructuring proceedings.
4 As outlined in the Procedural History attached to the Initial
Decision, a number of motions to strike portions of the various testimonies
were filed by the Company and ruled upon by the ALJ. Some of these rulings
were followed by motions to the Board for interlocutory review, which were
in turn, considered by the Board.
The Company filed rebuttal testimony by: Lawrence R. Codey, Dr. Paul
L. Joskow, Robert C. Krueger, Frederick W. Lark, Dr. Colin J. Loxley,
Robert W. Metcalfe, Robert C. Murray, David R. Powell, Gerald W. Schirra
and Albert N. Stellwag.
ALJ McAfoos conducted a status conference on January 16, 1998 and
issued a hearing schedule for the unbundling and stranded costs proceedings
on January 24, 1998.
On or about January 26, 1998, surrebuttal testimony was filed by the
following witnesses on behalf of the intervenors: Vincent C. Dimiceli and
Scott Norwood on behalf of Co-Steel Raritan; Harry J. Kingerski and
Theodore F. Kuhn on behalf of Enron; Dr. Alan Rosenberg on behalf of NJBUS
and NJICG; Peter A. Bradford, Michael D. Dirmeier, Robert I. Henkes, Dr.
Richard A. Rosen, James A. Rothschild, Douglas C. Smith and John K. Stutz
on behalf of the Ratepayer Advocate; William B. Marcus on behalf of NJPII;
Dr. Dennis A. Goins on behalf of NJCU; Steven Gabel on behalf of MAPSA; and
Raymond E. Makul on behalf of the CFC. Tosco also filed and served revised
prefiled testimony of witnesses Loyless and Seedorf to conform with a
December 23, 1997 ruling by the ALJ concerning the striking of certain
portions of their prefiled testimony.
On January 29, 1998, the Board accepted as received and released to
all parties in the unbundling and stranded cost proceedings, copies of the
Management Audit Report entitled "Audit of Public Service Electric and Gas
Unbundling and Stranded Cost Filings of its Electric Restructuring Docket
No. EX97060397" which was prepared for the Board by Vantage/ICF Consulting.
On March 5, 1998, the Board accepted as received and released to all
parties in the restructuring proceeding, copies of the Management Audit
Report regarding PSE&G's restructuring filing prepared by ICF.
Twenty days of evidentiary hearings were conducted at the OAL between
February 9, 1998 and March 18, 1998 on the unbundling and stranded costs
proceedings. During that time period, witnesses were cross-examined on
their prefiled direct testimony, as well as on any filed rebuttal or
surrebuttal testimony. At the close of hearings, a briefing schedule and
issues outline were adopted by ALJ McAfoos. After requesting and receiving
extensions of time from the Board, Initial Briefs were filed on or about
April 13, 1998. Reply Briefs were filed on or about April 20, 1998.
After the PSE&G unbundling and stranded cost hearings and briefing
were completed at the OAL, approximately twenty additional days of
evidentiary hearings were held before Commissioner Carmen J. Armenti
between April 27, 1998 and May 28, 1998, for testimony and
cross-examination by the parties on certain identified restructuring issues
affecting all four electric utilities which had been retained by the Board.
Direct and/or rebuttal or surrebuttal testimony was filed by Atlantic
Electric Company (Joseph R. Bartalone, Jr., Tsion M. Messick, Thomas S.
Shaw, Jerrold L. Jacobs, Henry K. Levary, Eileen Unger, Ashley C. Brown,
Rodney Frame, Paul L. Joskow); the CFC (Raymond E. Makul); GPU (Dennis
Baldissari, Douglas J. Howe, Charles A. Mascari, William Hogan, Almarin
Phillips); IBEW Local 94 (Charles Wolfe); IEPNJ (Steven Gabel); MAPSA
(Steven Gabel, Dr. Craig Roach); NEV (Barbara Kates Garnick); NJBUS (Henry
Riewerts, John Parodi); NJICG (Fred Mazurski); NJPII (not including the
NRDC) (Nathaniel Greene, Bruce Biewald, Edward Smeloff, Thomas Bourgeois);
NorAm (Keith Sappenfield); PSE&G (Gerald W. Schirra, Frederick W. Lark,
Colin Loxley, Lawrence R. Codey, Alfred E. Kahn, Rodney Frame, Paul
Jaskow); the Ratepayer Advocate (Barbara Alexander, Peter Lanzalotta,
Andrea Crane, Peter A. Bradford, Roger Colton, James D. Cotton, Dr. David
A. Nichols); RECO (Terry L. Dittrich, Frank P. Marino, John C. Dalton, John
Lombardi); and SESCO (Richard Esteves). In addition, representatives of the
four consulting firms (ICF, Stone and Webster, Barrington-Wellsley and
Hagler Bailley) which submitted Management Audit Reports to the Board on
the four electric utilities' restructuring filings also testified and were
cross-examined.
During the hearings, various motions, including motions to strike
certain portions of the prefiled testimony were ruled upon by Commissioner
Armenti, whose rulings are HEREBY AFFIRMED by the entire Board, essentially
for the reasons set forth by Commissioner Armenti in the transcripts.
After the close of hearings before Commissioner Armenti, briefs and
reply briefs on the restructuring issues were filed on June 26 and July 17,
1998, respectively. This Order also incorporates, as they apply to PSE&G,
four of the issues considered in the restructuring proceeding before the
Board: market power, basic generation, divestiture and the proposal of
PSE&G to initially introduce retail choice on an "energy-only" basis.
After requesting and receiving an extension of time from the Board,
ALJ McAfoos issued an Initial Decision and Report on PSE&G's unbundling and
stranded cost filings on August 14, 1998. The parties filed Exceptions and
Replies to Exceptions to the Initial Decision with the Board on October 2
and October 30, 1998, respectively.
On February 9, 1999, Governor Whitman signed into law the Electric
Deregulation and Energy Competition Act ("the Act"), N.J.S.A. 48:3-49 et
seq. The Act authorizes the Board to permit competition in the electric
generation and natural gas supply marketplace and such other traditional
utility areas as the Board determines. In addition, all four electric
utilities were mandated to implement specific rate reductions over the
course of the next four years.(5) Among other things, the Act requires that
the Board, by Order, shall provide that by no later than August 1, 1999,
each electric public utility shall provide retail choice of electric power
suppliers for its customers, reduce its aggregate level of rates for each
customer class by no less than five percent, unbundle its rate schedules
and establish so-called "shopping credits" applicable to the bills of
retail customers who choose alternative electric power suppliers.
- -------------------
5 Although the natural gas market will be opened to competition, as
will the provision of other energy related services, no specific statewide
rate reductions were mandated for the four natural gas utilities.
By letter dated March 8, 1999, MAPSA moved to reopen and supplement
the record in the PSE&G unbundling and stranded cost proceedings to update
the record on stranded costs and to consider the appropriate level of the
shopping credit which the Board is required to establish under the Act. By
Order dated March 25, 1999, the Board denied MAPSA's motion.
By Order dated February 11, 1999, the Board established guidelines
and a schedule for the commencement of settlement negotiations among the
parties in the PSE&G stranded costs, unbundling and restructuring
proceedings. The Board set a deadline of March 3, 1999, for the submission
to the Board of a negotiated settlement, which deadline was later extended
to March 5, 1999. No comprehensive settlement was reached among all the
parties; however, on March 17, 1999, a proposed stipulation of settlement
("Stipulation") was filed by PSE&G, NRDC, NJCU, IBEW Local 94, NJT, Enron,
Tosco and IEPNJ. A proposed alternative stipulation of settlement
("Stipulation II") was submitted to the Board on March 29, 1999, by the
Division of the Ratepayer Advocate, MAPSA, NJBUS, NJICG, NJPII (with the
exception of NRDC), and NEV. Parties were provided the opportunity to
submit comments to the Board on the Stipulation by April 5, 1999 and on
Stipulation II by April 7, 1999.
By Order dated July 13, 1998, the Board ruled on various motions or
objections, including a motion dated April 22, 1998 by the CFC for the
Board to disclose any ex parte communications in accordance with N.J.A.C.
1:1-14.5(a). N.J.A.C. 1:1-14.5(a) is a part of the Uniform Administrative
Procedure Rules, which were adopted by the Office of Administrative Law and
pertain to contested case proceedings. This regulation provides:
Except as specifically permitted by law or this chapter, a
judge may not initiate or consider ex parte any evidence or
communications concerning issues of fact or law in a pending or
impending proceeding. Where ex parte communications are
unavoidable, the judge shall advise all parties of the
communications as soon as possible thereafter.
In response to the CFC's April 1998 motion, the Board ruled that "to
the extent there are communications on issues of fact or law being
adjudicated in the unbundled rates and stranded cost filings, as opposed to
policy and legal issues being considered in the generic, legislative type
proceeding, the Board would be required to comply with N.J.A.C.
1:1-14.5(a). Therefore, the Board does not grant or deny the CFC's motion
itself because the Board is required, in any event, to comply with
applicable law."
By a subsequent motion dated February 22, 1999, the CFC again moved
pursuant to N.J.A.C. 1:1-14.5(a), for disclosure of ex parte
communications. No responses or other filings were made with regard to the
CFC's motion. At its agenda meeting of April 21, 1999, the Board confirmed
that there had not been ex parte communications on issues of fact or law to
be adjudicated by the Board in PSE&G's unbundled rates and stranded cost
proceedings. Accordingly, there are no disclosures to be made pursuant to
N.J.A.C. 1:1-14.5(a) and the Board's ruling on the CFC's prior motion, and
the Board determined to dismiss the CFC's motion as it pertained to the
PSE&G proceedings.
On April 20, 1999, on the eve of the Board's scheduled consideration
of this matter at its April 21, 1999 public agenda meeting, the CFC
requested oral argument with respect to the pending proposed stipulations,
arguing that there has been no opportunity for public dialogue between the
Board and the parties on the issues raised by the the stipulations. PSE&G
opposed the request for oral argument. At our April 21, 1999 public agenda
meeting, we determined to deny the motion for oral argument. We note that
oral argument is discretionary with the Board and we are satisfied that the
CFC and all parties have had extensive opportunities to raise their
concerns through evidentiary hearings, briefing, the stipulation process
and in written comments with respect to the pending stipulations.
II. INITIAL DECISION
On August 14, 1998, ALJ McAfoos filed his Initial Decision with the
Board. The I.D. contains a procedural history and a summary of PSE&G's July
15, 1997 filing, a summary and analysis of the record, and provides the
ALJ's findings with respect to the numerous litigated issues in the rate
unbundling and stranded costs proceedings. Key elements of the Initial
Decision are summarized below.
A. STRANDED COSTS
1. PSE&G'S ESTIMATE OF STRANDED COSTS AND PROPOSED RECOVERY
The Company's filing identifies the following major stranded cost
components and amounts: nuclear generation, $3,119,023,000, and fossil
generation, $787,008,000, for a total of $3,906,031,000. In addition, the
Company has identified $1,589,030,000 of Non-Utility Generation ("NUG")
contracts for stranded cost recovery. At page 9 of the I.D., the ALJ finds
that the Company's broad characterization of nuclear and fossil generation
stranded costs and above market NUG contract costs "are reasonable
categories to be included in the final computation of a stranded costs
number." The ALJ makes no findings with respect to the issue of revenue
loss to on-site generation and a competition transition charge, finding
that the Board has reserved these issues unto itself in a separate docket.
I.D. at 10. Additionally, the ALJ makes no findings regarding the existence
of a regulatory compact with respect to capital expenditure recovery. Id.
2. POST-1992 RATE CASE CAPITAL ADDITIONS TO OWNED GENERATION
The Company's filing requested stranded cost recovery for capital
additions made since its last base rate case was decided in 1992, including
approximately $471 million in nuclear and $962 million in fossil capital
expenditures during the period January 1, 1993 through December 31, 1998.
An issue addressed at length in the record and in the I.D. at pages 10
through 15 is whether the Board's "market test" policies apply to several
major capital addition projects, including the Bergen Phase I repowering,
the Linden Generating Station combustion turbine project, and the Salem I
steam generator replacement.
Relying on a number of past Board decisions, PSE&G argued that it was
not required to perform an up-front economic analysis for these projects
and that it has submitted substantial proofs to validate the prudency of
these additions. The Ratepayer Advocate, Enron and other intervenors argued
that PSE&G failed to meet its burden of proof, as set forth at page 106 of
the Final Report, regarding these capital additions, in that it has not
provided proof that a market test was undertaken to demonstrate the
economics of these expenditures.
As a preliminary matter, the ALJ finds that previous Board Orders
cited by PSE&G were only intended to relieve the Company of the need for an
up-front economic review and prior Board approval before commencing these
capital projects, and do not relieve PSE&G of any duty to present
persuasive testimony that a market test was performed to justify the
economics of these projects and that the economics were validated.
Nonetheless, the ALJ concludes that the Company has submitted substantial
justification for the inclusion for the bulk of its post-1992 capital
additions, as summarized below, and that the Board should recognize their
inclusion for stranded cost calculation purposes. I.D. at 15.
a. Bergen I Repowering
PSE&G requested stranded cost recovery of approximately $126 million
associated with the Bergen I facility repowering, out of a total repowering
cost of approximately $400 million. Based upon his assessment of the record
as set forth on pages 15 to 18 of the I.D., the ALJ concludes that "the
moneys expended by the Company in the Bergen repowering were reasonable,
and that the economic and environmental benefits the Company has
demonstrated on the record were such that not only the prudency of the
project was proven, but sufficient economic data can be found in the record
to justify an ex post facto market test as to the reasonableness of this
expenditure." I.D. at 18. The ALJ concludes, therefore, that the stranded
costs associated with Bergen should be recognized by the Board. Id.
b. Linden Combustion Turbine Project
PSE&G requested stranded cost recovery of approximately $53 million
for the Linden facility. The ALJ concludes that the Company provided
sufficient data to satisfy a market test requirement and that the costs
should be included in the stranded cost
calculation. I.D. at 18.
c. Mercer Rehabilitation Project
PSE&G identified three major projects at the Mercer Generating
Station, totaling approximately $140 million. The ALJ concludes that the
expenditures on the Mercer facility were reasonably incurred and should be
recognized by the Board in its stranded cost calculation. I.D. at 19.
d. Other Fossil Capital Addition Project Disallowances
The Auditors recommended that two fossil projects be disallowed from
inclusion in the stranded cost calculation, namely, $1.977 million
associated with the Burlington auxiliary power system replacement and
$0.222 million associated with the Mercer CEM data acquisition system.
PSE&G argued that these projects were mandated by state or federal
environmental regulations. The ALJ concludes that these expenditures were
reasonable and should be included in the stranded cost calculation. Id.
e. Salem Nuclear Capital Additions
The Company requested recovery of approximately $308 million of Salem
Nuclear Generating Station capital expenditures incurred since the 1992
base rate case, including $73 million for the replacement of a steam
generator at Salem 1. The Ratepayer Advocate and a number of intervenors
objected to the inclusion of these expenses. Based upon an assessment of
the record as set forth at pages 19-21 of the I.D., the ALJ concludes that
a sufficient quantum of evidence exists on the record for the Board to
include $73.19 million associated with the steam generator replacement and
$118.493 million associated with pre-steam generator projects in the
stranded cost calculation. I.D. at 21.
3. APPLICABLE TEST/METHODOLOGY
In its filing, PSE&G made no provision for the divestiture of
existing generating facilities. Several parties recommended divestiture as
the most appropriate gauge of the actual market value of the facilities in
the review of stranded costs. The ALJ notes that the Board had specifically
reserved unto itself the issue of whether it would be appropriate to direct
the electric utilities to divest themselves of their generating facilities
and he therefore does not make any rulings on this question. I.D. at 22.
The ALJ notes that absent divestiture, an administrative
determination must be made to arrive at a quantification of stranded costs.
He further notes that the Company's methodology, which was broadly followed
by all intervenors in their studies, is premised on the theory that market
value can be estimated administratively by utilizing a market price
forecast. The forecasted market energy price and capacity price (otherwise
referred to as the market clearing price or "MCP"), applied to the
forecasted output of particular generating assets, was used to derive a
projected market revenue of each facility on an annual basis. Forecasted
annual cash expenditures including fuel, operation and maintenance ("O&M")
expenses, capital additions, taxes, administrative and general ("A&G")
expenses and other ancillary costs were then subtracted from the projected
annual market revenues. A comparable analysis was performed for each
generating facility, as well as for each power purchase agreement with NUG
generators. The net results were discounted back to present value using a
8.42 percent discount rate, based upon the Company's 1992 cost of capital,
using the Company's capital structure provided in the last base rate case.
This net present value cash flow for each generating facility was
subtracted from the net book value of each generating asset to derive the
stranded cost. Using this methodology, PSE&G identified approximately $3.9
billion, net of tax, generation-related stranded costs.
As summarized in detail in the I.D. at pages 22 through 40, numerous
parties challenged various aspects of the Company's quantifications, and
the Ratepayer Advocate, Enron and the Auditors each performed independent
studies, using a similar methodology, but with varying assumptions and
inputs. The RPA recommended a net of tax generation related stranded cost
level of $1.898 billion. Enron recommended that fossil generation stranded
costs be reduced to $47 million and that nuclear generation stranded costs
be reduced to $2.335 billion, producing a total recommended net of tax
generation related stranded cost of approximately $2.4 billion. The final
estimate provided by the Auditors was $2.852 billion. (Exhibit S-15).
Based on his review of the record, the ALJ recommends that certain
adjustments be made to the Company's quantification of stranded costs. I.D.
at 40-43. With respect to the forecast MCP, the ALJ was not persuaded by
the RPA's and Auditors' calculations and methodologies concerning the cost
and performance of new generating plants, concluding that they
inappropriately failed to credit demonstrated savings associated with
technological improvements. At the same time, he concludes that the
Company's assumptions were overstated. He concludes that the RPA's
quantification of future output from the Bergen and Mercer facilities is
appropriate, notwithstanding that his calculations assume a much
higher-than-average future capacity, since the Company's substantial recent
investment in these facilities makes it reasonable to assume that the
facilities will be in a position to operate more efficiently in the future
than they have over the past five years. I.D. at 40. The ALJ also finds the
RPA's quantification of the cost of fuel and resulting dispatch rates and
its position regarding PJM imports to be persuasive. Id.
With regard to projected capacity prices, the ALJ concludes that the
RPA and the Auditors each overstated escalation factors, resulting in
inappropriately high capacity costs; on the other hand, he concludes that
PSE&G's capacity escalation factor is understated, notwithstanding
technological improvements. He also concludes that the $7.50 capacity price
recommended by Enron is insupportable. Accordingly, he recommends that the
Board calculate capacity prices by escalating at the anticipated general
inflation rate during the forecast period. I.D. at 41. The ALJ concurs with
the RPA's contention that the PJM market is moving from a cost-based to a
market-based rate, and recommends adoption of the RPA's dispatching
modeling proposal. He also concurs with NJPII's adjustment to reflect
nitrogen oxide and sulfur dioxide emission credits. Id.
Regarding future capital additions included in the stranded cost
projection, the ALJ asserts that it reasonable to assume that some level of
ongoing capital additions beyond normal O&M expenses will be needed to
maintain the facilities in safe operational condition; however, he
recommends that PSE&G's estimates, while facially reasonable, should be
subject to ongoing review. Additionally, the ALJ agrees with Staff that the
anticipated replacement of the steam generator at Salem should be removed
from the calculation. He also concurs with Enron's position to reflect cost
values associated with ancillary services. Id.
The ALJ concludes that the Company's capital structure and cost of
capital has changed in the six years since the last base rate case decision
and, while recognizing that this is not a base rate case, finds it
reasonable to adopt, for purposes of calculating stranded costs, the
revised discount rate proposed by the RPA, which includes a 10.25 percent
cost of common equity. I.D. at 42. The ALJ agrees with Staff and the RPA
that certain adjustments should be made regarding the issue of FASB-90. He
also agrees with Staff and the RPA that an adjustment to Salem O&M expenses
proposed by RRA witness Henkes should be recognized. The ALJ rejects the
RPA's proposed adjustment for post-retirement benefits (FAS-106), finding
the Board's accounting treatment of this issue to be dispositive. Id. The
ALJ concurs with Staff and the RPA that an appropriate adjustment should be
made to reflect the timing and actual future expected costs after the
cessation of the Levelized Energy Adjustment Clause ("LEAC") and roll-in
into base rates and that a final LEAC true-up should be conducted, to
safeguard ratepayers and prevent the Company from earning an excessive
return. Id.
Given the numerous adjustments which he recommends be made to the
original PSE&G proposal, the ALJ was unable to quantify a specific stranded
cost amount for the Board's consideration. However, he recommended that the
parties conference on this issue and submit to the Board a stranded cost
figure that incorporates his findings and recommendations. I.D. at 42-43.
The Board notes that the parties did indeed conference on this issue,
but were unable to reach a consensus view on the precise quantification of
the ALJ's decision. By letter dated November 18, 1998, Staff forwarded to
the Board, the ALJ and the parties the results of a quantification of
stranded costs resulting from the I.D. as computed by the Auditors using
the models they sponsored during litigation. Three scenarios were provided
in that analysis, which varied by the treatment of inflation adjustments
which were unspecified in the I.D. The three scenarios ranged from a low,
net of tax stranded cost quantification of $2.485 billion, to a medium
$2.949 billion, to a high of $3.310 billion. These calculations represent
the Auditors' interpretation of the I.D. and do not necessarily represent
the position of Staff or the Auditors in the case.
B. MITIGATION STRATEGIES TO MEET RATE REDUCTION TARGETS
The ALJ notes that the Board made clear in its discussion of the
question of stranded cost recovery in its Final Report that, prior to the
Board entertaining a utility's request for a level of stranded cost
recovery, the utility must make a good faith effort to undertake
appropriate strategies to mitigate the level of stranded costs. I.D. 43-44.
At pages 43 through 54 of the I.D., the ALJ summarizes the Company's case
with respect to mitigation, and discusses in detail the testimony and
positions of the parties as well as the Company's response thereto with
respect to this issue.
The ALJ's findings on this issue are discussed at pages 54 through 59
of the I.D. While noting the Board's prior statements that the instant
cases were not to be construed as base rate cases, the ALJ also cites and
relies upon the Board's determination, in a February 1998 Order, that
testimony addressing the Company's current cost of capital should not be
struck and that a reevaluation of the cost of capital could be viewed as a
legitimate mitigation measure. He concludes that a 10.15 percent cost of
equity, with the capital structure recommended by the RPA, is reasonable
for purposes of calculating funds available for possible mitigation. The
ALJ finds that the analysis provided by Dr. Vander Wiede on behalf of
PSE&G, supporting a return on equity for the Company of 12.3 percent, is
inaccurate and skewed and results in an exceedingly high return on equity.
The ALJ utilizes the study performed by the RPA's expert, but adjusts that
recommendation by 100 basis points to reflect higher risk associated with
the move away from traditional regulation. The ALJ emphasizes however, that
this finding is solely for the purpose of quantifying stranded costs and
should not be used to infer that the Company is earning an excessive rate
of return vis-a-vis its currently existing base rates. I.D. at 54-55.
With regard to the objection raised by the Company to RPA witness
Henkes' analysis of 1996 earned return, specifically concerning Accumulated
Deferred Investment Tax Credits ("ADITC"), the ALJ finds merit in the
Company's objections. He also concludes that Mr. Henkes did not make a
weather normalization adjustment in his analysis. I.D. 55-56.
The ALJ concurs with the RPA's position that due consideration should
be given to the expected $35 million annual cost savings from the
expiration of certain plant abandonment amortizations. The ALJ concurs with
the Staff and RPA argument that the LEAC should be reviewed prior to its
roll-in into rates to ensure that an appropriate going-forward level of
recovery is rolled into base rates, and finds that rolling the current
level of recovery into rates would clearly and inappropriately produce
excessive earnings. I.D. at 56. He also concludes that the RPA position,
joined in by Staff and the CFC, that competitive services revenues be
recognized as an offset to stranded costs, is appropriate and should be
given recognition by the Board. Id.
With regard to NUG contract cost mitigation, the ALJ concludes that
the Company appears to be making a good faith effort to renegotiate these
contracts, and that any recommendations to penalize the Company at this
point for failing to renegotiate contracts with its affiliates is, at best,
premature. He finds that the Company's performance can be reviewed and the
ratepayers sufficiently protected via the annual NUG recovery mechanism.
I.D. at 57. The ALJ finds in favor of the Staff position that any revenue
enhancements that the Company experiences during the transition period
should be used to mitigate stranded costs.
The ALJ disagrees with the elasticity adjustment proposed by Staff,
since the underlying DSM and private plant assumptions are highly
speculative. Moreover, he rejects the Auditors' overall elasticity
adjustment as being misplaced, dated and fatally flawed, since the
underlying study is not based on PSE&G-specific factors. I.D. at 58. The
ALJ also rejects the Auditors' estimate that the Company could realize up
to $850 million of additional mitigation with cost savings in the areas of
capital, operation and maintenance, administrative and general, fuel, etc.,
finding that such savings are overstated and unobtainable. The ALJ notes
that it was demonstrated that the Company is a regional leader in cost
containment and finds that PSE&G has made a reasonable forecast regarding
future cost reductions.
The ALJ also rejects Staff's recommendation to reflect "natural
mitigation" initiatives, finding insufficient record support to demonstrate
that the depreciation of existing generation assets will mitigate stranded
costs. I.D. at 59. He also rejects the Auditors' conclusion that the
Company will experience a reduced cost of capital during the transition
period (other than through securitization), finding it highly speculative.
Id. He also rejects the Staff's contention that sales levels as of 1997
have already reached the projected levels for 2002. Finally, the ALJ finds
some merit in the NJICG and NJBUS recommendation that stranded assets are
no longer used and useful and should earn a reduced rate of return as a
further form of mitigation, but cautions that such adjustment could have
deleterious effect on the Company, suggesting that the Board may wish to
consider such an adjustment in the total context of the rate reduction
award and the final restructuring plan.
C. RATE REDUCTION
In its Final Report, the Board stated as one of its primary goals in
the restructuring of the electric industry, the provision of a near term
reduction in rates "on the order of 5-10%." Final Report at 114. At pages
60 through 64 if the I.D., the ALJ provides a discussion of the various
parties' positions and arguments with respect to the appropriate level of
rate reduction. The Company proposed a rate reduction of 6.7 percent, based
upon its proposed level of securitization, as well as its proposal to
extend distribution depreciation lives and to amortize the excess
distribution depreciation reserve of $568.7 million. The RPA recommended a
15 percent rate reduction, assuming a seven year transition period. NJICG
and NJBUS recommended an immediate 10 percent rate reduction, and another 2
percent reduction by October 1, 1999, producing a total reduction of 12
percent. NJCU recommended a 10 percent rate reduction. The Auditors
recommended a range of reductions from 8 1/2 to 14 percent. The ALJ notes
that Staff did not articulate a specific number, but implicitly adopted a
10.37 percent recommended reduction in its brief, based upon the Auditors'
findings, and offered various recommendations for consideration. The ALJ
concludes that the most appropriate level of rate reduction lies in a range
of from 10 to 12 percent and that this level of rate reduction will not
unduly impair the Company's financial condition. I.D. at 64-65.
D. SECURITIZATION
The Board's Final Report recognized that securitization is one of the
elements that a utility may employ in developing a program to achieve rate
reductions. At pages 65 through 67 of the I.D., the ALJ discusses PSE&G's
proposal to securitize $2.5 billion of its total net of tax stranded costs
with 15 year bonds, as well as the parties' positions related thereto.
PSE&Gs proposal was projected to produce annual savings to customers of
approximately 2.7 percent, based upon an assumed interest rate of 7.5
percent. The ALJ concludes that the Company's proposal is consistent with
the Board's Final Report, and that it will result in reasonable savings
which will be flowed back to ratepayers, and should be adopted. I.D. at 68.
The ALJ declined to consider Staff's objections, which were adopted by the
RPA, to the proposed collection of taxes through the securitized bond
charge, since Staff's alternative proposal, including schedules supporting
Staff's position, was not introduced until the briefing stage of the case.
E. UNBUNDLED RATES
1. USE OF 1995 COST OF SERVICE STUDY
At page 69 through 71 of the I.D., the ALJ discusses the Company's
reliance upon a 1995 cost of service study ("COSS") in support of its rate
unbundling filing, and the objections of numerous parties (Staff took no
position on this issue) to this study as not complying with the Final
Report, as well as certain recommended adjustments thereto. The Board's
Final Report had directed that rates be unbundled based upon "the cost of
service study utilized, consistent with BPU-approved cost allocation
methodologies, in the last base rate case when current base rates were
established." Final Report at 151. PSE&G's last base rate case was based
upon a test year ending June 1992, with a cost of service study based on
calendar year 1990. At page 71 of the I.D., the ALJ concludes that the
Company's actions in filing a 1995 study were inappropriate and deserving
of adverse comment; however, he notes that this is the only evidence
available in the record and that all parties have had an opportunity to
review and criticize it. He therefore concludes that the Board will be
presented with a full factual record upon which to decide whether the
updated 1995 cost of service study will satisfy its requirements, or
whether it would be more appropriate to order the Company to submit a study
based on the 1992 base rate case.
2. FUNCTIONALIZATION OF COSTS
The Board's Final Report provides for the unbundling of existing
rates and for rates based upon the proper functionalization of costs and
expenses to production, transmission, distribution, and customer
components. Final Report at 151. At pages 71 through 78 of the I.D., the
ALJ discusses the Company's proposed functionalization of costs in PSE&Gs
cost of service study, and the parties' positions related thereto. He
concludes that the Company's use of a 1995, as opposed to a 1992, cost of
service study has resulted in substantial shifts in the functionalization
of costs among various classes, and particularly between distribution and
production classes. I.D. at 77. He concludes that the proposed
functionalization is proper, except as follows. He accepts the RPA position
that Gross Receipts and Franchise Taxes ("GR&FT") should be reallocated to
reflect the new tax law, and that the requested reallocation of the GR&FT
in the 1995 period is also justified. He concurs with recommendation of
MAPSA's witness to reallocate $13.7 million in marketing and sales expense
to generation. He concurs with Staff's recommendation to reject the
proposal to use a $19.84 million placeholder for ancillary services. He
also concurs with Staff that the Federal Energy Regulatory Commission
("FERC")-approved tariff rate of $161.5 million for unbundled transmission
is more appropriate than the Company's proposed $173.2 million. He concurs
with Enron's witness that $22.49 million associated with bad debts and
uncollectibles and $2.3 million for regulatory commission expense should be
separated from the distribution function. He further concludes that the
Lower Delaware Valley transmission system costs should be reallocated on a
dual demand and energy basis. I.D. at 78.
F. SEGREGATION OF RATES INTO FUNCTIONAL COMPONENTS
1. UNBUNDLING/REBUNDLING
The ALJ notes that, notwithstanding the Board's directive in the
Final Report, PSE&G did not submit fully unbundled rates in its filing, and
discusses the objections of numerous parties to the PSE&G proposal. I.D. at
79-81. The ALJ also notes that the Auditors discussed certain potential
benefits and shortcomings of the PSE&G proposal and suggested two possible
alternatives to the Company's proposal. I.D. at 81 to 82.
The ALJ finds that the Company's failure to fully unbundle rates is
not in accord with the Board's directives in the Final Report and will have
the effect of stifling future competition and making customer choice
difficult. He further finds that the Auditors' second suggested
alternative, to partially rebundle non-competitive rates and implement an
implicit Market Transition Charge ("MTC") including a rate cap, with
explicit and separate energy and capacity credits, has merit and warrants
the Board's consideration. I.D. at 83.
2. MARKET CREDIT/CAPACITY CREDIT
The ALJ describes the Company's proposal to implement a market energy
credit ("MEC"), by which customers who choose a third party supplier would
receive a credit on their PSE&G bill based on their hourly usage at each
hour's market price of energy, defined as the PJM hourly wholesale spot
market price, as well as PSE&G's proposal to implement a capacity credit in
the future only when a liquid and visible PJM capacity market develops. Id.
The ALJ summarizes the concerns with this proposal raised by the RPA,
Enron, NJBUS, NJICG, MAPSA, and Staff. I.D. at 84-87. These concerns
include arguments by a number of parties that an energy-only credit would
be extremely difficult for suppliers to beat, and arguments that the credit
must include a retail cost adder.
The ALJ concludes that an energy-only MEC is not responsive to the
Board's Final Report and may well have the effect of stifling competition
by making it extremely difficult for alternative suppliers to compete
against the Company. I.D. at 87. He disagrees with the Company's assertion
that third party suppliers can easily dispose of their capacity through
sales to other buyers, and finds unpersuasive the Company's arguments that
it must maintain the capacity obligation to assure generation adequacy and
reliability during the transition. Id. He endorses the proposal sponsored
by Enron that, until a liquid and visible market for capacity exists in the
PJM system, the market capacity credit should be based on the loss-adjusted
market capacity prices that PSE&G used to develop its stranded cost
estimates, and should be included as a component of its MEC. Id. The ALJ
concludes that the Company has already understated the level of credit that
should be reflected in customer bills, and finds merit in the arguments of
those parties that argued for the inclusion of some level of retail adder.
I.D. at 88-89.
3. IMPLICIT/EXPLICIT MTC
The Board directed in its Final Report that a specific market
transition charge, in the form of a separate non-bypassable component of
each customer's electric bill, must be established for each utility. Final
Report at 116. The Company chose not to include a specific market
transition charge in its proposal, but instead proposed to freeze rates for
a seven year transition period. The ALJ summarizes the Company's position
as well as various parties' objections to or positions regarding that
proposal. I.D. at 90-92. The ALJ concludes that the Company's proposal
fails to comport with the specific directive of the Final Report that an
explicit MTC calculation be made and that this be reflected as a separate
unbundled charge. I.D. at 92. He further concludes that the Company's
proposal for an implicit MTC, absent any form of tracking, periodic review
or true-up, creates the real possibility that PSE&G may over-recover
stranded costs. Id. The ALJ finds no specific merit in the PSE&G proposal
that would outweigh the clear dangers associated therewith and, as a
result, concludes that PSE&G should be required to develop an explicit MTC.
I.D. at 92-93.
4. SOCIETAL BENEFITS CHARGE
The Board directed in the Final Report that each utility include in
its rate unbundling filing a societal benefits charge ("SBC"), as a per
unit charge, to separately collect the costs currently embedded in rates
associated with the current provision of "DSM, gas plant remediation,
nuclear decommissioning and societal programs including winter moratorium,
'bad debt' customers, low income assistance and weatherization and existing
late payment and deposit policies." Final Report at 149. At pages 93 and 94
of the I.D., the ALJ discusses the Company's proposal in its filing for the
implementation of an annually-adjusted SBC, which provides for interest on
both under and over-recoveries and which includes the collection of NUG
costs and gross receipts and franchise taxes in addition to other elements
such as demand side management, environmental remediation costs, nuclear
decommissioning, nuclear fuel disposal, uncollectibles and restructuring
costs. The ALJ notes that GR&FT and NUG costs are not provided for in the
Board's definition in the Final Report of a SBC. The ALJ discusses the
parties' opposition to various aspects of the Company's proposal. I.D. at
94-96. The ALJ concludes that the Company's proposal is reasonable, since
the annual adjustment mechanism allows for annual review of the SBC
sub-components and will allow the Board full control over the level and
reasonableness of these charges. I.D. at 96. However, he agrees with the
position expressed by Staff and other parties that NUG costs should be
removed from the MTC and that a separate NUG charge be created instead,
which charge will be reviewable on an annual basis, as will the SBC. This
will permit the timely pass-through to ratepayers of the benefits of any
NUG contract renegotiations. I.D. at 97. He further agrees with the Staff
position that restructuring expenses, when they are readily ascertainable,
should be shared equally between customers and shareholders. He rejects the
claims by certain intervenors that the SBC does not fully allocate costs in
conformity with the Company's cost of service study, and disagrees with the
RPA proposal that the benefits of NUG renegotiation be shared, finding it
premature, given his finding that there be an annual review of NUG costs.
Id. The ALJ concurs with the RPA position that the inclusion of GR&FT in
the SBC is misplaced, since such treatment would have the effect of
shifting costs from the generation to the distribution function. I.D. at
97-98.
5. SECURITIZATION TRANSITION CHARGE
With regard to the Company's securitization transition charge ("STC")
proposal, the ALJ concurs with the RPA that the Board should expressly
order that the securitization funds collected through the STC be used
solely to benefit ratepayers. I.D. at 98. He further concurs with the RPA
and finds that the expenses of the securitization financing should not be
borne solely by ratepayers, but rather should be shared, since both
customers and stockholders will benefit by securitization. Id.
6. COMPETITION TRANSITION CHARGE
The ALJ makes no findings with regard to the Company's proposal to
implement a competition transition charge ("CTC") applicable to on-site
generation. The ALJ notes that the parties' objections related to this
issue were of a generic nature, and that the question is before the Board
as a separate matter. The ALJ leaves this issue to the Board for evaluation
in the confines of that docket after the Legislature has addressed this
issue. I.D. at 99.
7. IMPACT OF PROPOSED UNBUNDLED RATES/REVENUE NEUTRALITY
In the Final Report, the Board directed that rates be unbundled based
on an embedded cost of service analysis which would achieve complete
revenue neutrality on a company-wide basis relative to existing rates, and
inter-class and intra-class revenue neutrality relative to existing bundled
rates. Final Report at 150. The ALJ summarizes PSE&G's proposal with
respect to this issue and the various parties' exceptions thereto. I.D. at
100. The ALJ finds and recom m ends that, assum ing the Board em ploys the
1995 cost of service study, the Company be required to reevaluate its
unbundled rates, via the customer charge, to more appropriately reflect
actual revenue neutrality. Id.
III. EXCEPTIONS AND REPLY EXCEPTIONS
Numerous parties filed extensive Exceptions and Reply Exceptions to
the Initial Decision. These largely reiterated the positions advocated by
the parties during the hearings. Some of the key arguments raised by the
parties in their Exceptions and Reply Exceptions are summarized
hereinbelow.
A. EXCEPTIONS
1. PSE&G
While noting that the ALJ has "substantially agreed" with the Company
as to the recommended level of stranded costs, PSE&G filed 119 pages of
Exceptions, wherein it takes issue with a number of positions adopted by
the ALJ. Among the issues addressed by PSE&G relative to stranded costs are
post-1992 base rate case capital additions to generation (PSE&G Exceptions
at 4-11); applicable test methodology (Id. at 12-54); mitigation strategies
(Id. at 55- 71); rate reductions (Id. at 72-80); securitization (Id. at
81-82); and electric and gas allocators (Id. at 83-84). Specifically, with
respect to post-1992 capital additions, the Company argues that a
retroactive market test is not applicable (Id. at 4), and takes exception
to the ALJ's removal of $85 million budgeted for the Salem Unit 2 Steam
generator replacement. Id. at 9.
With respect to unbundled rates, PSE&G defends its use of the 1995
COSS (Id. at 85-95) and takes exception to a number of the ALJ's
recommendations concerning functionalization of costs (Id. at 96-102);
segregation of rates into functional components (Id. at 103-116); and
revenue neutrality (Id. at 117-118).
2. RATEPAYER ADVOCATE
The RPA similarly filed 120 pages of Exceptions addressing numerous
aspects of the ALJ's recommendations with respect to PSE&G's rate
unbundling and stranded cost filings. With respect to stranded costs, the
RPA argues that PSE&G's claim for automatic, unconditional and full
recovery of stranded costs has no basis in law, economics or logic. (RPA
Exceptions at 12-32). The RPA contends that the ALJ properly found that
PSE&G was required to meet a market test for post-rate case capital
expenditures and asserts that PSE&G has not satisfied that test. Id. at
33-34. Specifically, the RPA takes exception to the ALJ's allowance of
post-rate case capital additions for Bergen 1, Mercer and Salem. Id. at
33-48.
Among the other stranded cost issues addressed by the RPA are: NUG
contract related stranded costs (Id. at 52); quantification of stranded
costs (Id. at 53-87); mitigation (Id. at 87-92); rate reduction (Id. at
92-95); securitization (Id. at 95-99); the market transition credit (Id. at
99-100); and the energy-only credit and shopping credits. (Id. at 100-102).
With respect to rate unbundling, the RPA objects to the Company's use
of the 1995 COSS, arguing that it pervaded and distorted the Company's
entire unbundling case, resulting in massive cost shifting among functions
and a lack of revenue neutrality. Id. at 105. Among the other unbundling
issues addressed by the RPA are cost functionalization issues (Id. at
109-115); the societal benefit's charge (Id. at 115-118); and the
securitization charge (Id. at 118- 119).
3. BPU STAFF
In its Exceptions, Staff notes that the ALJ had chastised Staff for
introducing in its Initial Brief positions and recommendations for the
first time. Staff contends that this is not a new issue in administrative
proceedings but, rather, is an issue which has been repeatedly decided in
Staff's favor in multiple forums. New Jersey Dep't of the Pub. Advocate v.
New Jersey Bd. of Pub. Utils., 189 N.J. Super. 491, 518 (App. Div. 1983);
I/M/O New Jersey Natural Gas Company, BPU Docket No. GR90030335J (July 17,
1990); Coalition for Fair Competition v. New Jersey Bd. of Pub. Utils.,
A-6069-95T1, page 23 (App. Div. 1998). Staff argues that there was no basis
for the ALJ to ignore these precedents and reject certain of Staff's
positions and recommendations as set forth in its brief as being
extra-record. (Staff Exceptions at 4).
Staff takes exception to the inclusion of certain post base rate case
capital additions. Id. at 5-11. Staff argues that PSE&G should be held
responsible for the above market costs of Bergen 1. Id. at 8. With respect
to the Salem steam generator replacement, Staff notes that while it has
opined that the steam generator project could be deemed recoverable under a
specific test if applied by the Board, there clearly is sufficient basis
for the Board to put PSE&G at risk for those expenditures and deny recovery
as stranded costs. Id. at 10. Staff continues to recommend its positions
set forth in its brief with respect to certain exclusions of pre- and post-
steam generator projects. (Staff Initial Brief at 13-14).
Staff takes exception to the recommendation of the ALJ that market
clearing price forecasts of PSE&G be adjusted to determine a single
specific level of stranded costs. Id. at 12- 20. Staff also argues that the
ALJ, in discussing the Company's stranded cost estimates, fails to
distinguish between net-of-tax and revenue requirement amounts. Id. at
21-25. Staff further argues that the ALJ erred in allowing a 100 basis
point risk premium in his calculation of return, if any, allowed as a
component of generation related stranded cost recovery through the MTC.
Id. at 26-31.
Staff argues that the ALJ failed to propose adequate mitigation
strategies. Id. at 32-34. Staff takes the position that the proposed
gross-up for taxes related to securitization is not required nor
appropriate for inclusion in the securitization transition charge. Id. at
35-39. Finally, Staff takes exception to various adjustments and positions
of the ALJ concerning unbundling. Id. at 40-50.
4. CO-STEEL RARITAN
Co-Steel takes service from PSE&G pursuant to a ten-year service
agreement. It argues that its contract precludes the imposition of all
stranded cost related charges regardless of the precise form they may take
once this proceeding has run its course. This includes any stranded costs
related charges that may exist after the current contract expires. Co-Steel
argues that such post-contract stranded cost charges would violate the
terms and intent of its contract and constitute an unconstitutional
contract impairment. (Co-Steel Exceptions at 2). Co-Steel notes that the
ALJ did not address this issue in the I.D. and contends that the I.D.'s
silence on this issue "implicitly" appears to determine that stranded costs
charges would apply to Co-Steel. Co-Steel contends that this is improper
and contrary to "substantial evidence" in the record on this issue. Id.
5. THE COALITION FOR FAIR COMPETITION
The CFC objects to the AU's determination to exclude from evidentiary
consideration testimony filed by its expert witness relating to issues of
fair competition and argues that stranded costs cannot be accurately
quantified unless and until the utilities are required to mitigate fully by
dedicating revenues from competitive assets. The CFC argues that the Board
should remand this docket to the ALJ along with instructions that the
record be re-opened in order to hear and consider testimony submitted by
the CFC and all interested parties concerning the issue of fair
competition. (CFC Exceptions at 1-3).
6. COUNTY OF PASSAIC
The County of Passaic agrees with the ALJ's finding that PSE&G's
failure to fully unbundle rates is not in accord with the Board's Final
Report and will have the effect of stifling future competition and making
consumer choice difficult. (Passaic Exceptions at 2). The County of Passaic
argues that the Board should ensure that all rate classes, and particularly
Street Lighting Service, are unbundled. Id. at 4.
7. INDEPENDENT ENERGY PRODUCERS OF NEW JERSEY
IEPNJ asserts that the I.D. should have more clearly stated that the
NTC should be trued- up annually. (IEPNJ Exceptions at 3). Additionally, it
asserts that for the I.D. should have recommended that the NUG recovery
cost vehicle be made part of the SBC. Id. It also argues that the I.D.
should be clarified with respect to "going forward costs." While IEPNJ
agrees that some ongoing level of capital expenditures will be necessary to
factor into PSE&G's market valuation of its generating assets, it argues
that a "bright line" test is needed to ensure against anti-competitive
subsidization of the utility generation function. Id. at 2-3.
8. MID-ATLANTIC POWER SUPPLY ASSOCIATION
MAPSA endorses the ALJ's finding that there is a need for a retail
adder to provide a reasonable Market Energy Credit. It argues, however,
that the Initial Decision does not reflect in the MEC the full retail cost
of supplying electricity at retail. It argues that costs such as
generation-related customer service costs, generation-related auxiliary
service costs, marketing and advertising costs and generation-related
administrative and general expenses need to be added to the MEC. (MAPSA
Exceptions at 2-5). MAPSA asserts that its witnesses provided reasonable
quantifications of the retail costs that need to be reflected in the MEC
and urges the Board to implement the I.D.'s findings on the need for a
retail adder using its witnesses' retail adder quantifications. Id. at 2.
MAPSA further argues that there should be annual true-ups of the MEC to
allow customers sufficient time to decide whether or not to shop. Finally,
MAPSA argues that the ALJ erred in failing to utilize different rates of
return in functionalizing costs. Transmission and Distribution Services
assertedly are not as risky as generation and, thus, have different
appropriate rates of return. Id. at 8-10.
9. NEW JERSEY BUSINESS USERS
NJBUS argues that PSE&G's post-1992 rate base additions should not be
included in calculating its allowable stranded cost recovery. (NJBUS
Exceptions at 18). NJBUS further argues that the ALJ correctly concluded
that Bergen, Linden and Salem were not grandfathered from the Board's
market test requirement, but that he erred by recommending that these
projects be included in PSE&G's stranded cost allowance. Id. at 20-37.
NJBUS argues that the ALJ erred in not adopting NJBUS' methodology
for calculating PSE&G's stranded costs, and argues that the ALJ's
recommendations are flawed in regard to the methodology for calculating the
price of capacity and other cost estimates. Id. at 41-53.
NJBUS also raises certain concerns with respect to mitigation (Id.
at 54-56) and securitization (Id. at 73-76), and objects to the use of the
1995 cost of service study (Id. at 77). NJBUS argues that there is ample
support in the record for a rate reduction of 20% (Id. at 69-72), and
further argues that there should be an equal, fixed and explicit MTC for
Basic Generation Service ("BGS") customers and customers of other suppliers
(Id. at 84).
10. NEW JERSEY COMMERCIAL USERS
NJCU argues that PSE&G's proposed distribution depreciation change
should not be counted towards the mandated rate reduction. (NJCU Exceptions
at 2). NJCU urges that, within 24 months, the Board initiate a detailed
review of PSE&G's costing and allocation methodologies to determine whether
inter- and intra-class cost shifts are justified under more appropriate
cost of service methodologies. Id. at 2. NJCU further urges the Board to
initiate a proceeding and determine PSE&G's distribution revenue
requirement within 24 months. Id. at 2-3. NJCA also argues that PSE&G
should be required to develop an explicit MTC. Id. at 3.
11. NEW JERSEY INDUSTRIAL CONSUMER GROUP
NJICG argues that the ALJ erred by permitting inclusion of virtually
all post-base rate case additions in PSE&G's stranded cost calculations,
and that PSE&G's submissions concerning these additions fail to meet the
standards for recovery set forth by the Board in the Final Report. (NJICG
Exceptions at 3-11). NJICG raises concerns about PSE&G's proposal not to
divest its generating assets and argues that the Board should permit no
equity return on stranded assets. Id. at 11-14. NJICG also argues that the
Initial Decision erred in recommending adoption of PSE&G's securitization
proposal and that PSE&G's use of an updated cost of service study as the
basis for unbundled rates should be rejected. Id. at 19-26.
12. NEW JERSEY PUBLIC INTEREST INTERVENORS
NJPII argues that it appears that the primary factor that led to the
ALJ's recognition of post test year capital expenditures is the voluminous
nature of the material presented by PSE&G. (NJPII Exceptions at 2). NJPII
asserts that only 10 pages of the 219 page exhibit which addresses PSE&G's
post rate case expenditures at Salem provides any alleged economic
comparison of the replacement of the steam generator with other supply
options. Id. at 2-3. The NJPII also asserts that the ALJ erroneously failed
to address flaws in the evidence as identified by NJPII. Id. at 3-6.
NJPII takes issue with the ALJ's refusal to consider the issue of
divestiture, and raises concerns regarding recovery of going forward costs,
and administrative and general costs. Id. at 11-20. NJPII also reiterates
its position that securitization should not be allowed to extend to
stranded costs associated with NUG contracts. Id. at 22-23.
13. NEW JERSEY TRANSIT CORPORATION
NJT notes that the Initial Decision, in spite of its recognition of
PSE&G's failure to use the appropriate COSS, makes no findings as to the
appropriate remedy. NJT asks that a second phase of the unbundling
proceedings be commenced to update PSE&G's COSS. (NJT Exceptions at 2).
Additionally, NJT argues that the Board should order that PSE&G's proposed
rate decreases be allocated on cost based principles and not on a uniform
percentage basis. Id. at 3.
14. TOSCO
Tosco argues that PSE&G's proposed Departing Load Tariff undermines
Board policy because it would lead to less choice and higher monopoly
rates. (Tosco Exceptions at 6-14). It further argues that the proposed
Departing Load Tariff is not a legitimate stranded cost that any customer
should pay for. Id. at 14-20.
B. REPLY EXCEPTIONS
In light of the vast record in this case, most of the parties either
relied upon earlier submissions in lieu of filing Reply Exceptions or filed
limited Reply Exceptions reiterating key points or responding to specific
assertions made the Company in its Exceptions. Two parties, however, PSE&G
and the RPA, filed extensive Reply Exceptions of 170 and 80 pages
respectively. In general, these Reply Exceptions reiterated PSE&G's and the
RPA's previously articulated positions. PSE&G and the RPA also addressed
and responded to certain positions advocated by Board Staff in its
Exceptions, as well as the arguments raised by various other parties in
their Exceptions. While the Board has reviewed and carefully considered all
the Exceptions and Replies to Exceptions, because of the voluminous record,
we will highlight only a few of the arguments made by PSE&G and the RPA in
their Reply Exceptions.
1. PSE&G
With respect to post-rate case capital additions, PSE&G argues that
Bergen, Linden, Mercer and Salem were all not subject to a market test.
With regard to Salem, PSE&G argues that the intervenors' assertion that the
ALJ has improperly shifted the burden of proof is incorrect and further
argues that the various arguments of other parties for disallowance of the
post-1992 capital additions are without merit. (PSE&G Reply Exceptions at
39-76).
With respect to unbundling, PSE&G again argues that use of the 1995
COSS is practical and correct and provides the Board with a reasonable
basis upon which to proceed to authorize the commencement of competition.
Id. at 144. The Company notes that its last base rate case was resolved by
Stipulation and that there was no explicit Board-approved COSS. PSE&G
argues that reliance upon the 1995 COSS is appropriate based upon the
record that was developed in this case and that reconstruction of a COSS
based upon a 1992 revenue requirement would cause unnecessary controversy,
litigation and delay.
With respect to the argument raised by Co-Steel in its Exceptions,
PSE&G contends that there is no language in the Service Agreement that
absolves Co-Steel from paying any stranded costs either during or after the
term of its Service Agreement. During the term of the agreement, to the
extent it takes power under the HTS Tariff rate, it would be subject to
whatever happens to that rate as a result of restructuring, After the
Service Agreement expires in 2005, Co-Steel would be no different than any
other customer on its distribution system. Id. at 169-170.
2. RATEPAYER ADVOCATE
With respect to post-rate case capital additions, the RPA again
reiterates that PSE&G was required to meet a market test for inclusion of
stranded costs related to post-rate case capital additions and that PSE&G
did not satisfy the market test for the post-rate case capital additions
for which it is requesting stranded cost recovery. (RPA Reply Exceptions at
5-18).
The RPA also argues that the ALJ properly concluded that PSE&G's use
of the 1995 COSS was inappropriate and will not yield revenue neutral
unbundled rates. Id. at 64-72.
IV. RESTRUCTURING PROCEEDING
As noted above, evidentiary hearings were held before Commissioner
Carmen J. Armenti on certain identified restructuring issues from April 27,
1998 through May 28, 1998. This was followed by the submission of Briefs
and Reply Briefs on generic and nongeneric restructuring issues. Key
elements of the briefed positions of various parties with regard to certain
specific, non-generic restructuring issues of relevance to the PSE&G filing
are summarized hereinbelow, by issue.
A. BASIC GENERATION SERVICE
1. PRICING AND CONTRACT TERMS AND OPTIONS
PSE&G did not propose a specific BGS rate, but rather has proposed a
monthly pricing option, whereby the Company will either buy power from the
spot market to supply BGS customers or purchase wholesale power via monthly
contractual obligations. (Exhibit PS-32, pp. 3-4). Under the PSE&G
proposal, the BGS rate would change monthly. PSE&G indicates that under its
proposed pricing option, the customer would not be required to make a long
term commitment for BGS service.
The RPA proposes that all utilities solicit competitive bids for
sufficient capacity and energy to supply BGS for an initial two year
period. The RPA proposes that energy suppliers would put in a bid to the
local distribution company ("LDC") to provide energy and capacity for BGS
for a two-year period. (Exhibit RA-13, p. 49). The RPA indicates that this
could include short-term, as well as portfolio purchases. The RPA asserts
that this will ensure that BGS customers will benefit from a competitive
energy market, and will also result in less price volatility than with a
BGS price that fluctuates over a short time frame. The RPA points out that
under its proposal there would be no need for a true-up, because the risk
of market price fluctuations would be on the successful bidder.
Staff, in its Initial Brief, supports the concept advocated by
several of the utilities in this proceeding by which the utility/basic
generation provider would match supply commitments with customer
commitments. (Staff Initial Restructuring Brief ("IRB") at 70). Proposed
options include a monthly pricing option for customers who do not want a
long term BGS commitment, where supply is purchased from the spot market,
geared to customers to whom price stability is not of greatest concern and
who will most likely choose to participate in customer choice; or an annual
or a six month fixed pricing option for customers not choosing to
participate in customer choice, who are looking for price stability similar
to that experienced prior to restructuring, where supply is purchased by
the utility on either an annual or bi-annual contract. Staff points out
that the aim of any matching concept is to have a portfolio of supply
commitments which matches customer commitments, both in terms of price paid
versus the price received for power by the utility and the duration of the
purchase commitments. Staff further indicates that under the matching
concept there is a limited opportunity for a large under- or overrecovery
of deferred balances to accumulate, thus limiting any distortion of the
prices for basic generation service. Id. Staff maintains that price
distortion has the potential to lead to gaming by market participants, and
can otherwise send incorrect pricing signals to customers. Accordingly, it
is Staff's position that, in order to provide a smooth transition to
competition, the Board should require each electric utility to provide BGS
customers the opportunity to select from either a fixed price option, or a
monthly pricing option for BGS service. Id. at 70-72.
2. BGS PRICE/SHOPPING CREDIT
PSE&G proposed that its BGS rate/shopping credit should be set at the
sum of the PJM market price for energy, plus the cost of line losses,
associated taxes and the avoided incremental administrative and general
cost of power procurement associated with the energy delivered, referred to
by PSE&G as the retail adder. PSE&G estimates this retail adder to be .0014
cents per kilowatt-hour. (Exhibit PS-32, p.14). PSE&G further indicates
that as soon as a liquid and visible market for capacity is established,
the generation component of the BGS rate will include a capacity component
as well. PSE&G asserts that the retail adder should be based on the avoided
incremental administrative and general cost of PSE&G providing power to
customers and not the imputed costs of a hypothetical marketer. PSE&G
indicates that the product of this calculation is the amount that customers
on BGS will pay for the generation component of BGS and will also act as
the amount that customers who choose an alternative supplier will receive a
bill credit. PSE&G asserts that this credit will serve a competitive
benchmark for customers choosing an alternative supplier and should be
equal to the total avoided cost of PSE&G for serving that customer. (PSE&G
IRB at 68).
The RPA proposes that the BGS rate/shopping credit be based on a
competitive bid process for both energy and capacity. (Exhibit RA-15, p.
4). The RPA asserts that the competitive low bid, which should be reviewed
by the Board, would become that utility's standard offer rate for
generation under BGS, and would also need to include a retail margin
encompassing administrative and general costs incurred serving retail
customers, including a cost for marketing. The RPA argues that the
competitive bid process will also provide the Board with a benchmark price
for both energy and capacity, which will provide a starting point for the
determination of the appropriate shopping credit, including a retail margin
composed of marketing and A&G costs associated with generation for
customers who exercise their right to choose an alternative supplier. The
RPA proposes that the shopping credit be set at a level that appropriately
reflects PSE&G's generation and marketing costs to serve retail customers,
and is sufficient to attract alternative energy suppliers.
Enron proposes that the rate for BGS should be the sum of the prices
for the unbundled components of BGS, capped (after any Board mandated rate
reductions) as approved by the Board. In Enron's view, the sum of these
components would also become the shopping credit for those customers who
choose to use an alternative energy supplier. (Exhibit Enron-35, pp.34-
35). Enron defines the shopping credit for generation as the amount
remaining after the individual prices for transmission service,
distribution service, and intangibles (societal benefits, stranded costs,
securitization bond charge, etc.) are deducted from the total rate cap.
Enron asserts that the shopping credit should equal the utility's fully
embedded cost for generation less the market transition charge, which is a
fixed charge. (Enron IRB at 104).
Enron argues that in developing the shopping credit, in order to
ensure that competition develops in New Jersey, the Board should impute a
cost to the wholesale price of energy for BGS that bears a meaningful
relation to the cost of electricity for retail customers. As such, Enron
asserts that the shopping credit would be the benchmark against which
customers would determine whether it is financially beneficial for them to
remain with BGS or consider choosing an alternative supplier.
MAPSA, representing many of the alternative suppliers in this
proceeding, asserts that in order to set the proper generation rate, all
components of retail cost must be reflected in the BGS rate. MAPSA
indicates that the BGS rate will be the retail rate against which all
suppliers will compete. As such, MAPSA asserts that the BGS rate should
include the wholesale price of energy and capacity, as well as marketing
and administrative costs involved in providing competitive retail service,
thus reflecting the full cost of supplying electricity at retail. MAPSA
indicates that these marketing and administrative costs would result in
about a 0.4 to 0.5 cents per kilowatt-hour increase to the BGS rate. (MAPSA
IRB at 28).
New Jersey Citizen Action indicates that to the greatest extent
possible, BGS pricing should be at the same level as the market clearing
price, plus additional costs incurred by the LDC for purchasing electricity
for BGS customers. (NJCA IRB at 13).
Staff, in its Initial Restructuring Brief, takes the position that
the BGS price and/or the shopping credit should be based on market prices,
resulting in BGS customers having access to market based pricing. (Staff
IRB at 72). As such, Staff asserts that a BGS price and/or shopping credit
that is based upon the market will most appropriately reflect the value of
supply and therefore send the most appropriate price signals. Staff further
asserts that a BGS price which reflects current market conditions will
provide the most appropriate benchmark for comparison shopping by BGS
customers considering offers from competing alternative suppliers. Staff
asserts that the BGS price must equal the shopping credit, that is, the
amount being charged for generation services being supplied by the utility
must be the same as the amount deducted (e.g. credited) from the utility
portion of the bill if the customer no longer takes generation service.
Staff also shares the concern express by many of the alternative
suppliers in this proceeding that a market-based BGS price or shopping
credit must reflect the full cost of providing retail generation service
and not simply reflect the wholesale price index. Id. at 75. Staff,
however, points out that an artificial adder or margin should not be
included in the BGS rate simply to stimulate the marketplace, since such
artificial stimuli will only serve to distort the marketplace. Staff,
however, asserts that in order to provide alternative suppliers with a fair
opportunity to compete, appropriate retail-related generation costs must be
included in the BGS price as an adder to the wholesale cost of power. Id.
B. HORIZONTAL MARKET POWER
PSE&G submitted a market power analysis prepared by witnesses Joskow
and Frame in support of the argument that the Company lacks horizontal
market power. (Exhibit PS-46). PSE&G argues that the record in this
proceeding demonstrates overwhelmingly that it does not possess market
power in the generation and power supply markets for the following reasons:
the region's generation market is highly competitive; transmission
constraints where PSE&G can impose market power are infrequent during the
few hours of system constraint, markets in the eastern PJM region are
competitive in every time period; concerns with local "load pockets" and
must-run generation have been exaggerated and, in any event, are fully
addressed through the PJM supporting companies's market based pricing
proposal to the FERC, incorporating a bid cap proposal; and PSE&G's rate
cap proposal precludes it from exercising market power even if it had the
ability to do so. (PSE&G IRB at 97-127).
The RPA, relying upon the testimony of its witness Peter Lanzalotta
and MAPSA witness Craig Roach, asserts that none of the electric utilities
have complied with the Board's directive to supply a comprehensive market
power analysis, since those submitted by the electric utilities are flawed.
(RPA IRB at 112). The RPA asserts that the record in this proceeding
demonstrates a significant potential that, absent corrective action, one or
more of New Jerseys incumbent electric utilities will be able to exercise
horizontal market power within their service territories and in more
localized areas. As such, in order to mitigate the potential for horizontal
market power, the RPA urges the Board to direct each electric utility
within New Jersey to submit a comprehensive market power analysis and
mitigation plan, which should include divestiture, and to establish
information reporting requirements and monitoring procedures. Id. at 121.
Enron asserts that because serious issues exist regarding the
potential exercise of horizontal market power by New Jersey's utilities,
the Board should actively monitor the competitive marketplace as it
develops and take all necessary steps to prevent the exercise of market
power by the utilities both within New Jersey and the PJM control area.
(Enron IRB at 132.)
MAPSA, relying upon the testimony of its witness Craig Roach (Exhibit
MAPSA-2), asserts that objective measurements of market power for firm
power indicate that PSE&G maintains an unacceptable level of market power
and, in an unregulated market, would be able to impose prices higher than
those that a competitive market would provide. MAPSA asserts that the Board
must mitigate PSE&G's horizontal market power, which, it suggests, could be
remedied by at least a partial divestiture of its generation capacity.
(MAPSA IRB at 39).
Staff asserts that on a region-wide basis and, importantly, based
upon the current ownership configurations, there is no conclusive evidence
of imminent market power problems in the PJM power pool. Staff further
indicates that an updated market power assessment must be required as part
of the review of any proposed sale of generating assets by ACE and PSE&G.
As such, Staff recommends that an empirical market power study should be
part of an ongoing regulatory monitoring process of potential or actual
market power abuse, including a look at localized load pockets during
certain hours. This monitoring process must include a cooperative effort of
the Board and the PJM Independent System Operator ("ISO"). Staff asserts
that the Board should obtain regular reports from the PJM ISO on
information being obtained through its Market Monitoring Plan. Staff
further points out that the price cap proposal by PSE&G does not, in and of
itself, mitigate market power concerns. (Staff IRB at 86-92).
C. INCENTIVES FOR DIVESTITURE
PSE&G argues that it must retain its generation assets during a
proposed seven year transitional period in order to offer a rate reduction
and reliability guarantee, and that a forced divestiture of its generation
assets will not advance the achievement of the Board's restructuring goals.
(PSE&G IRB at 139). PSE&G further proposes that at the conclusion of the
transition period, all its generation assets will be transferred at "net
book value" to an affiliate of its parent company, Public Service
Enterprise Group ("PEG"), that will be "functionally independent" of the
utility. (Tr. 3129-3130). PSE&G asserts that the Board has no authority to
order divestiture, particularly in light of the Company's statutory
obligation to serve. PSE&G takes issue with arguments raised be other
parties who have cited examples of fossil generation asset sales above
"book" value as evidence that forced divestiture will reduce the Company's
stranded cost estimate and asserts that those arguments are flawed. PSE&G
argues that the vast majority of its fossil generation assets are valued
above book, and the cited examples of above "book" value sales from other
jurisdictions are irrelevant. Id. at 141.
The RPA argues that the divestiture of generation assets constitutes
the most significant step in advancing the goal of retail competition in
the market for electricity and realizing the attendant consumer benefits
which flow therefrom. (RPA IRB at 138). The RPA points out that divestiture
would provide an objective measure of stranded cost valuation and, in light
of recent above-book value sales of generation facilities, a way to
mitigate stranded costs. The RPA further points out that divestiture would
also effectuate the ultimate form of functional separation, eliminating the
need for extensive regulatory policing and potential for cross-
subsidization, while simultaneously dispersing the ownership of generating
units to alleviate market power concerns. The RPA urges the Board to
require divestiture of generation assets as a precondition to any stranded
cost recovery. Id. at 141.
Enron submits that the Board should reject PSE&G's "divestiture"
proposal to move its generation assets to an affiliate at book value at the
end of the transition period. (Enron IRB at 169). Enron contends that the
proposal to shift PSE&G's generation assets to an affiliated company at an
"accounting value" is fraught with the danger that ratepayers who paid for
the PSE&G system will not receive sufficient value for their very
significant investment and PSE&G could potentially obtain this portfolio of
valuable resources at a fraction of their true value. Id. at 170.
Enron argues that the Board should encourage PSE&G to divest its
generation assets in the near term to avoid the market power, functional
separation and cross~subsidy issues that will otherwise hamper the Board in
its efforts to monitor PSE&G and to likely reduce stranded costs. Enron
suggests that one incentive the Board could offer PSE&G would be to
condition PSE&G's ability to securitize its stranded costs (or a larger
percentage of those costs) upon PSE&G's agreement to divest. Id. at 171.
MAPSA indicates that failure to take steps to require PSE&G to divest
its generation assets will harm ratepayers by forcing them to overpay for
regulated services and depriving them of the fruits of competition. (MAPSA
IRB at 43).
IEPNJ identifies two incentives that the Board can consider relating
to the divestiture of PSE&G's generation assets: the level of
securitization which the Board permits on utility generation assets could
be tied directly to divestiture; and/or, after determining the most
reasonable estimate of stranded costs of utility assets through an
administrative estimate, the Board could allow the utility to retain a
share of any divestiture proceeds above that amount. (IEPNJ IRB at 8).
The New Jersey Public Interest Intervenors argue that to ensure that
the emerging markets develop most efficiently, while providing utilities
with the appropriate level of cost recovery for investments made under
regulation, the Board must implement policies that encourage or require
divestiture of utility owned generation. (NJPII IRB at 2-3).
New Jersey Citizen Action supports divestiture by all of the
incumbent utilities as the fairest and most efficient mechanism for
resolving a magnitude of restructuring issues, principally stranded cost
recovery and market power. NJCA indicates that the Board should establish
minimum requirements as a condition of such recovery. (NJCA IRB at 16).
Staff indicates that any incentives for divestiture should be related
to stranded cost recovery assets, since divestiture removes the substantial
uncertainty associated with administrative estimates. Staff further
indicates that divestiture has the potential to reduce stranded costs below
levels that might otherwise be experienced based upon administrative
estimates, since significant premiums over book value have been experienced
in recent generation divestitures. (Staff IRB at 104).
Absent divestiture, Staff asserts that the Company should have
undertaken significant stranded cost mitigation measures, as a means to
reduce the uncertainty associated with administrative stranded cost
estimates. Staff suggests that it would be reasonable for the Board, in
setting a stranded cost level for non-divesting utility, to impute a
discount to projected stranded costs and/or to give greater weight to the
higher end market value estimates for these foregone cost and risk
mitigation measures. Staff further recommends that the Board should set a
lower cap on the level of securitized bonds which a utility may issue when
it has not established its generation market value via divestiture. Id. at
105-106.
D. PSE&G'S ENERGY-ONLY PROPOSAL
PSE&G in its filing proposes that during the transition period, all
of its customers, except those taking service under specific contracts, be
able to purchase their energy requirements from third party suppliers,
while PSE&G would remain the provider of capacity for its customers. PSE&G
indicates that an approach which would allow customers initially to
purchase both energy and capacity from third-party suppliers is unworkable.
In order to ensure that reliability is not sacrificed, PSE&G proposes to
maintain all capacity obligations in its service territory, and will not
offer a capacity credit to its customers choosing a thirdparty supplier
until a liquid capacity market that provides a visible price for capacity
is established within PJM. (Exhibit PS- 11, pp. 10-11).
The RPA indicates that PSE&G's energy-only credit proposal would
discourage competitors from entering its service territory during crucial,
initial period of retail choice. The RPA points outs that PSE&G's proposal
would require customers who select an alternative supplier to effectively
pay for a large portion of generation costs twice, once to PSE&G through
its remaining bundled rates and once to a new supplier. (Exhibit RA-13, p.
54). The RPA further points out that the energy-only proposal is a concept
that would stifle competition in PSE&G's territory before it begins, and
result in PSE&G having a de facto unregulated monopoly over generation
suppliers. (RPA IRB at 41.).
Enron indicates that the record reveals that the energy-only proposal
is a sham and a pretext for an unprecedented and unjustified attempt to
erect a formidable barrier to competition that would virtually eliminate
the benefits of competition to energy consumers in PSE&G's territory, as
well as shielding PSE&G from financial risk should consumers elect to
switch suppliers. (Enron IRB at 72-96).
PP&L argues that PSE&G's energy-only proposal is an unnecessary major
barrier to competition in New Jersey's retail electric market. PP&L asserts
that the PSE&G energy-only proposal would undercut competition and lead to
a new phase of monopolistic control by PSE&G in its service territory.
(PP&L IRB at 15).
MAPSA also opposes the energy-only proposal and raises substantially
the same arguments against PSE&G's proposal as voiced by the other
marketers. (MAPSA IRB at 22-24).
NJBUS argues that the PSE&G proposal would prohibit anyone but PSE&G
from offering capacity contacts in PSE&G's service territory for at least
two years. NJBUS points out that such a fragmentation of the New Jersey
electric power market would frustrate the BPU's goal of uniform, statewide
rules governing the introduction and implementation of competitive access,
and should be rejected. (NJBUS IRB at 27-32).
1. RELIABILITY OBLIGATIONS WITHIN PJM
PSE&G indicates that during the transition period, it will maintain
the responsibility for reliability and customers' capacity requirements,
thereby assuring electric customers that they will be able to freely shop
for energy without reliability concerns. PSE&G argues that it should
maintain this reliability responsibility because the Reliability Assurance
Agreement ("RAA") being developed for the PJM system is a work in progress,
and undue reliance on the RAA, PJM and the market during the transition
period would, in PSE&G's view, be premature and pose an unacceptable risk.
PSE&G points out that even after the RAA is executed and approved by FERC,
it must still be tested and proven. PSE&G asserts that there is substantial
evidence in the record supporting its reliability concerns that cannot be
minimized. (PSE&G IRB at 34-45).
Enron indicates that the RAA is now and will continue to be the
operative document that creates the approved method for assuring long term
capacity adequacy in the PJM control area. Enron argues that the RAA will
provide the appropriate operative backstop for capacity adequacy, not an
individual utility such as PSE&G that would purport to be the self-anointed
"guardian" of reliability within its service territory. (Enron IRB at 77-83).
PP&L asserts that the rationale for PSE&G's energy-only proposals,
that it must supply capacity to protect system reliability, is fallacious.
PP&L argues that in addressing PSE&G's refusal to give a capacity credit
based on PSE&G's reliability rationale, the Board should consider and give
weight to the proposals of the other LDCs, which are not limited to an
energy- only format. (PP&L IRB at 17-23).
MAPSA asserts that PSE&G's energy-only proposal will harm reliability
in the long term because the proposal creates a significant barrier to
entry into the generation market. MAPSA points out that barrier to entry
arises by inhibiting-potential sellers from selling what most consumers
want to buy, both energy and capacity. MAPSA further argues that the
energy-only limitation, by excluding capacity as a competitive product,
would limit the value of new power plants, resulting in fewer new power
plants from being built, thereby harming long term reliability. (MAPSA IRB
at 23).
NJBUS also asserts that the PSE&G proposal to defer capacity
competition is not justified by its concerns about reliability. NJBUS
points out that, although all New Jersey electric utilities are concerned
about reliability, no other utility supports the prohibition on capacity
competition inherent in PSE&G's proposal. (NJBUS IRB at 27-28).
IEPNJ argues that the structure and foundation of the PJM completely
obviates PSE&G's position that it will maintain the responsibility for
reliability and customers' capacity requirements. IEPNJ points out that PJM
has, and will assure reliability of supply to customers, through
requirements which will be imposed equally on all suppliers, both utility
and non-utility. As such, IEPNJ asserts that PSE&G need not be the monopoly
provider of capacity services. (IEPNJ IRB at 5-6).
Staff concurs with PSE&G's observation that the RAA is as yet
untested, at least with respect to the retail marketplace. However, Staff
notes that the RAA is hardly a radical or new concept, and will serve as a
conservative mechanism for PJM to provide for supply adequacy as the retail
marketplace is opened to competitive markets. Staff maintains that the RAA
mechanism that is and will be in place provides sufficient assurance to
conclude that there is no reliability-driven basis for maintaining PSE&G as
a monopoly supplier of retail capacity service in its service territory.
Staff recommends that the Board should require all load serving entities
("LSEs") serving retail load in PSE&G's territory and throughout the State
to adhere to all RAA and other PJM reliability criteria as a condition of
doing business in the State. Staff also recommends that the Board should
closely monitor the implementation of the RAA as the retail markets open
up, to assure that reliability, in fact, is not compromised.(Staff IRB at
43-56).
2. CAPACITY MARKET
PSE&G indicates that it will not offer a capacity credit to its
customers choosing a third-party supplier, until a liquid capacity market
that provides a visible price for capacity is established within PJM. PSE&G
points out that an actual, not estimated or assumed market capacity price
is required because in the absence of a visible and liquid market for
capacity, an administrative credit is certain to be wrong on a consistent
basis. (PSE&G IRB at 46-55).
The RPA asserts that the rationale for PSE&G refusing to allow its
customers to shop for capacity is that it is waiting for a liquid and
visible capacity market to emerge within PJM. The RPA points out that the
rationale appears to be based on PSE&G's fear that it will not be able to
sell its unneeded capacity once other suppliers begin providing PSE&G
customers with their own capacity. The RPA asserts that this rationale does
not justify PSE&G's energy-only proposal. (RPA IRB at 37).
Enron indicates that notwithstanding PSE&G's suggestion to the
contrary, a viable and visible capacity market presently exists within the
PJM control area. Enron asserts that PSE&G's energy-only proposal would
greatly inhibit the further development of the capacity market by
significantly limiting participation of suppliers within the PSE&G
territory, and argues that it should be rejected. (Enron IRB at 84-91).
PP&L submits that competition has been occurring in Pennsylvania,
with parties buying and selling capacity in the bilateral market to meet
their obligations within PJM. PP&L asserts that, all in all, there is a
vibrant market that is quite liquid and pricing is known to the capacity
market participants. (PP&L IRB at 17-24)
MAPSA indicates that the record in this proceeding is replete with
evidence that there is an active bilateral capacity market, that capacity
is regularly bought and sold and that despite the confidentiality of the
marketplace, utilities, other participants and regulators can and do obtain
information necessary to make pricing decisions. Furthermore, MAPSA asserts
that there is no need to know the price of capacity for everyone, only
PSE&G's price for capacity for its regulated BGS service. MAPSA therefore
points out that there is no basis for PSE&G's contention that open
published rates for capacity are a prerequisite for competition. (MAPSA IRB
at 23-24).
NJBUS also argues that a liquid and visible or transparent wholesale
capacity price is not a prerequisite to competition. While a transparent
price may be useful in the competitive markets, the market itself will
accomplish that goal. NJBUS feels the proposal by PSE&G is solely a market
strategy, having nothing whatsoever to do with the public interest. (NJBUS
IRB at 30-32).
NJCU also argues that PSE&G's arguments on this issue are without
merit. NJCU disagrees with the notion that a liquid and visible capacity
market will exist only when the PJM/ISO post prices and quantities for
capacity products. NJCU points out that capacity products are currently
bought and sold each day in the wholesale market. (NJCU IRB at 9-16).
Staff asserts that the capacity credit can be determined based on
relevant market information. Staff points out that the other LDCs have
proposed in varying ways to procure both energy and capacity for their BGS
rate, which will be transparent to the Board, and should reflect the
competitive market price for capacity. Staff further asserts that these
capacity prices can act as market indices when setting the capacity credit
while the PJM capacity market takes hold and develops. Staff asserts that
this method will, in the short run, give customers the ability to have
sufficient information to comparison shop, while a liquid and visible
capacity market develops. (Staff IRB at 56-63).
V. SETTLEMENT PROPOSALS
As noted above, by Order dated February 11, 1999, the Board, noting
the enactment of the Electric Discount and Energy Competition Act on
February 9, 1999, adopted a preliminary schedule to render decisions in the
pending PSE&G and other three electric public utility restructuring related
proceedings, consistent with the requirements of and the timetables
required by the Act. In so doing, the Board encouraged the parties in each
of the respective proceedings to attempt to negotiate a settlement of the
outstanding issues, in the unbundling, stranded costs and restructuring
proceedings. The Board established a preliminary deadline of March 3, 1999,
for the submission of any negotiated settlement in the PSE&G dockets, in
advance of an anticipated March 31, 1999 date for deciding the PSE&G
matters. The parties commenced settlement discussions and, at the request
of Staff, the deadline for the submission of any negotiated settlement was
subsequently extended.
A. STIPULATION FILED BY PSE&G AND OTHER PARTIES
On March 17, 1999, a Stipulation ("Stipulation") was filed by PSE&G
on behalf of eight parties to the proceedings, including PSE&G, NRDC, NJCU,
IBEW Local 94, New Jersey Transit, Enron, Tosco and IEPNJ ("the stipulating
parties"), representing a proposed resolution by these parties of the
issues in the stranded cost and rate unbundling proceedings and all of the
non-generic restructuring proceeding issues included by the Board in its
February 11, 1999 Order encouraging the settlement process. The key
substantive elements of the Stipulation are summarized hereinbelow.
1. The stipulating parties have agreed that the following rate reductions
should be implemented, consistent with subsection 4(d) of the Act, N.J.S.A.
48:3-52(d):
a) A 5% reduction from current rates, for service rendered on and
after August 1, 1999. This reduction includes a 1% reduction relating
to the savings from securitization.
b) An estimated reduction of an additional 2% from current rates for
service rendered on or after January 1, 2000, subject to the prior
receipt of a Bondable Transition Cost Rate Order establishing a
securitization bond charge and providing for the securitization of
$2.475 billion of generation-related stranded costs, and the recovery
of related taxes, issuance costs and transaction costs. The level of
rate reduction provided to customers will reflect the actual savings
from the issuance of the bonds, less the 1% savings already provided
to customers as of August 1, 1999, and the actual date of the rate
reduction will be the same date as the securitization bond charge is
established. This rate reduction and all subsequent rate reductions
as set forth below are contingent upon the implementation of the
securitization bond charge.
c) A further rate reduction for service rendered on and after August
1, 2001 to bring the total rate reduction to 8.25% from current rates.
d) A final rate reduction for service rendered on and after August 1,
2002 which will result in each customer class receiving a rate
reduction of 10% relative to the rates in effect as of April 30, 1997.
e) All rate reductions will be applied to customers' bills pursuant
to the rate design set forth in Attachment 2 to the Stipulation.
f) The final rate reduction will be sustained until July 31, 2003.
2. There shall be a four year transition period commencing on August 1,
1999 and terminating on July 31, 2003 ("Transition Period").
3. Unbundled rates for each rate class have been developed using the
Company's 1995 cost of service study, using the parameters defined in
Attachment 2 to the Stipulation. Each customer's bill shall indicate the
dollar savings resulting from the rate reductions.
4. An excess depreciation reserve in the amount of $568.7 million is to be
amortized over three years and seven months, beginning on January 1, 2000
and ending on July 31, 2003, under the following schedule: $125 million
each in 2000 and 2001, $135 million in 2002, and $183.7 million in 2003.
5. Consistent with subsection 12 of the Act, N.J.S.A. 48:3-60, PSE&G will
establish a Societal Benefits Charge Clause, which will include costs for
social programs (including a universal service fund), nuclear
decommissioning costs, demand side management costs, manufactured gas plant
remediation costs and consumer education costs.
6. The SBC will be set at the level of costs included in rates as of
February 9, 1999, the effective date of the Act, and will remain constant
at that level through the Transition Period. The difference between actual
costs incurred during the Transition Period, and the level of costs
reflected in the SBC will be subject to deferred accounting. Interest on
any under/overrecovery will be computed at a seven-year single A debt rate.
At the completion of the Transition Period the SBC will be reset and then
reset annually thereafter.
7. DSM generation-related lost revenue created subsequent to August 1, 1999
will no longer be reflected in the calculation of costs eligible for DSM
cost recovery.
8. PSE&G's unbundled rates will include a non-utility generation market
transition charge ("NTC") to recover above-market stranded costs of
existing NUG contracts. The contracts will remain the obligation of PSE&G
during their lives. PSE&G will sell the energy and capacity from these
contracts at wholesale PJM locational marginal prices and at wholesale,
respectively.
9. The initial level of the NTC will be set to recover $183 million of
above-market NUG costs (based upon Exhibit PS-20, Schedule CJL-F3 and more
fully defined in Attachment 2). This level will remain constant for four
years from August 1, 1999. The difference between this collection level and
the actual above-market NUG costs during the Transition Period will be
subject to deferred accounting. Interest at the seven year single A debt
rate will be calculated on over/underrecoveries. After the Transition
Period, the NTC will be reset annually. Board- approved NUG contract buyout
and buydown costs will be reflected in the NTC, consistent with subsection
13(l)(3) of the Act, N.J.S.A. 48:3-61(l)(3).
10. While PSE&G maintains that its generation assets stranded cost
valuation of $3.873 billion is supported by the record, the stipulating
parties, including PSE&G, have agreed that the Company is entitled to
recover $3.30 billion of its generation-related stranded costs resulting
from a market valuation of $0.046 billion and $1.722 billion for nuclear
and fossil generating assets, respectively. The stipulating parties have
agreed to a total reduction of $225 million in unsecuritized stranded costs
including: (1) to reflect the estimated Levelized Energy Adjustment Clause
overrecovery as of July 31, 1999 ($60 million after-tax); and (2) a
reduction of $90 million of Salem stranded costs. The stipulating parties
have agreed that the Company will be provided an opportunity to recover up
to $3.075 billion of generation related stranded costs, through
securitization of $2.475 billion and an opportunity to recover up to $600
million of unsecuritized generation related stranded costs on a net present
value basis.G72
11. With respect to securitization, the stipulating parties have agreed
that: (i) consistent with section 14 of the Act, N.J.S.A. 48:3-62, PSE&G
will utilize the net proceeds of securitization to refinance or retire its
debt and/or equity; (ii) that such refinancing and/or retirement of such
debt may occur as a result of mandatory and/or optional redemption,
repurchase and/or tender, which may be at a premium; and (iii) the Board
should authorize PSE&G to employ such methods as are reasonable and
necessary to achieve the overall intent and purposes of the Act.
a) The stipulating parties have further agreed that the Board should
issue a financing order authorizing PSE&G to issue up to $2.6 billion
of transition bonds, representing $2.475 billion of stranded costs
and an estimated $125 million of transaction costs. The stipulating
parties, other than the NJCU, have agreed that all taxes related to
securitization will be separately stated on the tariff and will be
recovered through Board- approved transition bond charges. The NJCU
has reserved its right to comment on this tax issue.
12. PSE&G has requested (and the stipulating parties do not object) that
the Board issue a number of findings pursuant to section 14 of the Act,
N.J.S.A. 48:3-62, in connection with its review of PSE&G's stranded costs
filing, including that:
a) PSE&G has taken reasonable measures to date on mitigation of
stranded costs (Exhibit PS-14) and the terms of the Stipulation,
including rate reductions, rate freezes, and other mitigation
measures will create appropriate incentives in place to mitigate the
total amount of its stranded costs;
b) PSE&G will not be able to achieve the level of rate reduction
deemed by the Board to be necessary and appropriate pursuant to the
provisions of sections 4 and 13 of the Act, N.J.S.A. 48:3-52 and
absent the issuance of transition bonds; and
c) The issuance of such bonds will provide tangible and quantifiable
benefits to ratepayers, including greater rate reductions than would
have been achieved absent the issuance of such bonds and net present
value savings over the term of the bonds.
13. The stipulating parties have agreed that PSE&G should be provided the
opportunity to recover up to $600 million of its unsecuritized stranded
costs on a net of tax, net present value basis, calculated at a 8.42%
discount rate, over the Transition Period. This recovery is to be
accomplished via a 2 mill per kwh retail adder, an explicit Market
Transition Charge, exclusive of the NTC, and the amount funded by the
excess depreciation reserve amortization. The stipulating parties recognize
that as BGS customers leave PSE&G for third party suppliers, full recovery
of these costs is not assured and represents a risk of undercollection to
PSE&G.
14. At the end of the Transition Period, the recovery of the $600 million
will be reconciled to actual collections based on actual sales, the net
present value of the recovery from the MTC (exclusive of the NTC),
collections from the 2.0 mill per kwh adder for all customers retained on
BGS, the depreciation amortization, and any payments to PSE&G resulting
from BGS bidding in year four of the Transition Period. PSE&G will be at
risk for any shortfall. In the event the Company collects over $600
million, such overrecovery will be used to reduce the SBC at the end of the
Transition Period when the SBC is reset.
15. The Company's shopping credit shall equal its BGS rate, which shall be
inclusive of an allowance for the cost of energy, capacity, transmission,
ancillary services, losses, taxes and retail adder. The shopping credit
levels should be established and fixed for the duration of the transition
period without adjustment or true up of any kind. The stipulating parties
have agreed to the following shopping credits:
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
RS 5.71 5.86 5.86 5.86 5.86
GLP 5.30 5.35 5.39 5.44 5.44
LPL-S 4.84 4.88 4.93 4.97 4.97
LPL-P 4.54 4.58 4.62 4.66 4.66
HTS-SubT 4.30 4.35 4.40 4.44 4.44
HTS-HV 4.12 4.16 4.21 4.25 4.25
OVERALL 4.95 5.03 5.06 5.10 5.10
- ------- ---- ---- ---- ---- ----
Additional shopping-related savings, resulting from customers receiving
electric generation service from a supplier at a price less than the
applicable rate schedule shopping credit, are above and beyond the rate
reductions set forth in paragraph 1 of the Stipulation.
16. The stipulating parties have agreed that the stipulated BGS
rates/shopping credits meet the shopping credit definition in the Act and
resolve the issue of BGS pricing and the shopping credit in a manner that
satisfies the requirements of subsections 9(a) and 9(d) of the Act,
N.J.S.A. 48:3-57(a) and (d).
17. Under the Act, PSE&G has a three year obligation to provide BGS through
July 31, 2002. The stipulating parties support the bidding out of the BGS
to be provided after July 31, 2002. The first year bid will be a
pre-payment method based upon the preestablished shopping credit for year
four. If the bid results in a payment to PSE&G, it will be considered as a
part of the MTC. If the bid requires a payment by PSE&G, such payment will
be subject to deferral and subsequent recovery with interest at a seven
year single A debt rate. PSE&G's unregulated affiliate will be authorized
to bid for such BGS to be provided after July 31, 2002, pursuant to
Board-approved procedures.
18. PSE&G has agreed not to promote its BGS as a competitive alternative.
19. The stipulating parties will not object to the Board approving the
transfer of the Company's electric generation-related assets and their
operation, as identified in Attachment 3 to the Stipulation, and all
associated rights and liabilities, into a separate corporate entity or
entities ("Genco") to be owned by Public Service Enterprise Group Inc. and
not by PSE&G.
20. The stipulating parties have agreed that the final and fixed transfer
value, pursuant to subsections 7(d) and 13(e) of the Act, N.J.S.A.
48:3-55(d) and 61(e), for the generation facilities to be transferred is
$2.368 billion, which is the fair market value of the transferred assets.
In addition, PSE&G will transfer other generation-related assets including
materials, supplies and fuel, at book value. PSE&G will not retain any
liabilities associated with the transferred generation facilities. No land
held for future use (Account 105) will be transferred to Genco. All
generation related expenses and capital expenditures related to generation
will be borne by Genco.
21. The BGS contract between PSE&G and Genco will contain the following
provisions:
a) The transfer to Genco shall be accompanied by Genco and PSE&G
entering into a BGS contract whereby Genco would provide full
requirements service for energy, capacity, losses and ancillary
services needed by PSE&G for BGS and Off-Tariff Rate Agreement
("OTRA") customers.
b) The BGS contract shall provide that the consideration paid by
PSE&G for such full requirements service shall be (i) an amount equal
to the full amount charged for BGS to PSE&G's retail electric
customers (less sales and use tax and transmission); (ii) an amount
equal to PSE&G's retail delivery to OTRA customers, multiplied by the
comparable BGS rate for such customers as set forth in paragraph 15
(less sales and use tax and transmission); and (iii) an additional
charge for price stability services provided by the combustion
turbine assets of Genco, payable based on the installed capacity of
those assets, equal to the full actual amount collected pursuant to
paragraph 13 of the Stipulation, excluding the 2.0 mill per kwh
retail adder. Pursuant to subsection 9(b)(3) of the Act, N.J.S.A.
48:3-57(b)(3), no net revenue from this contract may be used to
reduce the MTC or distribution rates.
c) The BGS contract shall also provide that PSE&G will transfer to
Genco the authority to act as its agent for the purpose of
scheduling, electing and/or using all rights, including Fixed
Transmission Rights, associated with transmission delivery of full
requirements service for PSE&G's customers.
d) The BGS contract shall be filed with the Board.
22. For the term of the BGS contract, PSE&G will continue to supply, on an
as needed basis, dedicated intrastate natural gas transportation services
for Genco's own gas supplies from PSE&G's city gate to the transferred
generating facilities, under current Board-approved rates, terms and
conditions.
23. During the Transition Period, the transferred generating facilities may
only be sold or transferred by Genco to any other party if the other party
agrees to enter into a comparable BGS contract with the same
considerations, including the right to recover the MTC allocated to such
generating facilities. If a sale of the transferred generating facilities
occurs within the Transition Period, any net after-tax gains from such
sales will be shared equally between shareholders and customers, in a
manner to be determined by the Board.
24. The Company requests, and the stipulating parties do not object to,
certain specified findings by the Board with regard to the transfer of the
generating assets in accordance with the designation of such facilities as
Exempt Wholesale Generators ("EWG") under section 32(c) of the Public
Utility Holding Company Act of 1935 ("PUHCA"). In addition, the stipulating
parties agree that Genco, as an EWG, will not offer retail electric
service.
25. PSE&G requests, and the stipulating parties do not object to, the Board
finding that in accordance with section 32(k) of the PUHCA, the Board has
sufficient regulatory authority, resources and access to books and records
of PSE&G and any relevant associate, affiliate or subsidiary company, to
ensure that the BGS contract with: (a) benefit consumers; (b) not violate
any State law; (c) not provide the Genco any unfair competitive advantage
by virtue of its affiliation or association with the Company; and (d) is in
the public interest.
26. PSE&G shall submit, within 60 days of the Board's written approval of
the Stipulation, a tentative schedule for the receipt of necessary
authorization for the transfer from other agencies. Within 60 days of such
approval, PSE&G shall file with the Board copies of any documents
evidencing the transfer and related assumption of liabilities. Upon receipt
of approval from other agencies, PSE&G will provide a filing which reflects
the terms of such approvals and accounting implemented.
27. The stipulating parties have agreed that the Board should order that
all contracts (except NUG contracts) associated with the electric
generating business be transferred to Genco from PSE&G simultaneously with
the transfer of the generating assets, along with all rights and
obligations in connection therewith.
28. The stipulating parties recognize that various federal and state
approvals and third-party consents will be necessary and will result in a
delay between the date that the Board may approve the Stipulation and the
date the generating facilities are actually transferred to Genco. In order
to maintain the intent of the Stipulation during this period of transfer
and to effectuate the purposes of the Act under subsection 9(b)(3),
N.J.S.A. 48-3-57(b)(3), the stipulating parties have agreed that provisions
of section 7 of the Act, N.J.S.A. 48:3-55 which require a payment of a
percentage of net revenues for the sharing of common assets and personnel
is inapplicable.
29. Generating capacity transferred to Genco will be maintained as a
capacity resource within PJM for the Transition Period. During that period,
Genco may sell said capacity outside of the PJM system for periods of less
than one year after it makes a good faith effort to sell the capacity into
the PJM system at market rates.
30. The stipulating parties, other than Enron, have agreed that in addition
to any other affiliate standards of conduct that might apply to PSE&G, the
following shall apply until the expiration of the MTC or until appropriate
and applicable safeguards or code of conduct are adopted by the FERC:
Neither [PSE&G nor any related business segment of Public Service
Enterprise Group selling electric power at retail in New Jersey]
shall receive from Genco an unreasonable preference over a
non-affiliated retail electric supplier ("RES") that is not
comparable to that afforded a non-affiliated RES in the purchase,
sale, use or conveyance of goods and services. This provision shall
not apply to the BGS Wholesale Supply Agreement entered into between
Genco and [PSE&G] and approved by the Board.
30A. Enron contends that the affiliate Standard of Conduct that should
apply is as follows:
Genco shall not offer power or other services to any of its
affiliates which are not made generally available to non-affiliated
companies, nor shall it offer such power or other services to
affiliates at prices more favorable than those generally available in
the competitive marketplace and/or to those offered to non-affiliated
companies. This provision shall not apply to the BGS Wholesale Supply
Agreement entered into between Genco and [PSE&G] and approved by the
Board.
31. PSE&G requests, and the stipulating parties do not object to, a finding
by the Board, pursuant to N.J.S.A. 48:3-7, that the transfer of generating
facilities to Genco is in the public interest, will not jeopardize system
reliability, and will not adversely impact PSE&G's ability to meet its
pension obligations to its employees.
32. The Company requests, and the stipulating parties do not object to, a
finding by the Board that, because of the extensive nature of the record
regarding valuation of the assets being transferred, the requirements of
N.J.A.C. 14:1-5.6 should be waived.
33. Upon the transfer of the nuclear generation assets, neither PSE&G or
its retail customers shall be responsible to decommission its previously
owned nuclear units, subject to Nuclear Regulatory Commission ("NRC")
approval. That responsibility will pass to Genco with the transfer of the
nuclear generation and associated assets described in Attachment 3 to the
Stipulation and the Decommissioning Trust Funds.
34. The stipulating parties have agreed that the proposed Third Party
Supplier Master Service Agreement and associated electric tariff
modifications filed by PSE&G on February 1, 1999 should be approved subject
to: (1) conformance with the balance of the Stipulation; (2) conformance
with the Act; (3) changes resulting from the resolution of restructuring
issues; and (4) changes as a result of the Third Party Supplier Master
Service Agreement resolution. These changes will be included in a
completely new tariff which will be filed with the Board after approval of
the Stipulation and resolution of other restructuring issues.
35. The stipulating parties agree with Staffs recommendation that the Board
work cooperatively with the PJM-ISO to monitor actual market behavior in
connection with the FERC's ordered market monitoring plan.
36. The stipulating parties have agreed to work cooperatively to conclude
the billing and metering proceeding in an expedited fashion, which
proceeding the parties request that the Board conclude by May 1, 2000.
B. ALTERATIVE STIPULATION FILED BY THE RPA AND OTHER PARTIES
By letter dated March 29, 1999, the Ratepayer Advocate submitted an
alternative Stipulation of Settlement to the Board for its consideration on
behalf of a number of parties to the proceedings, including the RPA, MAPSA,
NJBUS, NJICG, NJPII (excluding the NRDC), and NEV. The RPA indicates in its
letter that, while it had sought in good faith to negotiate issues related
to the proceedings with PSE&G over the previous month, an agreement could
not be reached. The RPA urges the Board to reject the Stipulation sponsored
by PSE&G and certain other parties and instead adopt its proposed
alternative Stipulation of Settlement ("Stipulation II") accompanying its
March 29, 1999 letter, which it asserts represents an alternative
compromise to resolve the issues in these cases which will safeguard rate
discounts into the future, provide greater selections and savings in the
electricity market to jump start competition, and give PSE&G a substantial
opportunity to recover the same amount of stranded costs with the same
level of securitization proposed in its own plan.
The key elements of Stipulation II are summarized below:
(a) Stipulation II proposes that PSE&G be ordered to reduce its overall
rates, cumulatively, by the following amounts, pursuant to the following
schedule:
August 1, 1999 5.0% from current rates;
January 1, 2000 7.0% from current rates (assuming a 3%
reduction from securitization; any
additional reductions over 3% would be
passed through to ratepayers);
August 1, 2001 8.25% from current rates; and
August 1, 2002 13.9% from current rates.
Contrary to the PSE&G Stipulation, these rate reductions would not be
contingent on securitization, but reflect guaranteed minimums. Savings from
securitization would be passed on as further rate reductions.
(b) Under PSE&G's proposal, the rate decreases in years one to four would
be reflected in a separate transition rate credit or negative MTC, which
would be eliminated in year five. To avoid the asserted rate shock in year
five attendant to PSE&G's proposed Stipulation, Stipulation II proposes
that the following cost reductions be applied as offsets to the rate
increases:
(1) Approximately 60% of the $569 million excess depreciation reserve
should be applied to offset the rate increases in years five and six;
(2) The value of expired amortizations still in rates ($35 million)
should be applied to offset rate increases;
(3) $90 million of Salem related stranded costs as reflected in the
PSE&G Stipulation should be applied to further offset rate increases;
(4) The $90 million (after tax) overcollection in the LEAC as of July
31, 1999 should be applied to further offset rate increases.
The parties to Stipulation II assert that failure to recognize such cost
reductions would result in PSE&G's rates being overstated by approximately
$900 million (grossed up for taxes), which would allegedly occur under
PSE&G's proposed Stipulation. Stipulation II proposes to use a portion of
PSE&G's rate credits to eliminate rate increases that would otherwise occur
after the 48 month Transition Period. In addition, Stipulation II suggests
that rates should stay at the reduced levels in year seven and thereafter
unless PSE&G proves the need for a higher rates in a rate proceeding.
(c) Stipulation II proposes that the rate decreases be allocated to reflect
the impact of the 1998 Demand Side Adjustment Factor ("DSAF") increase.
Transition bond charges would be grossed up and collected via a per kwh
charge to reflect the manner in which the revenue requirement associated
with generating assets is currently being collected in rates. These
elements are asserted to be consistent with the PSE&G Stipulation and would
ensure that all customers receive the same rate reductions among and
between rate classes.
(d) Stipulation II proposes that distribution rates be reduced by $20
million to reflect the current risk adjusted cost of capital, which reduces
the average distribution rate from 2.08 cents to 2.03 cents per kwh. This
is consistent with PSE&G's proposed Stipulation.
(e) Stipulation II proposes that stranded cost recovery be as follows:
Total Stranded Costs $3.30 billion
Securitized Amount $2.54 billion
(including issuance costs)
Contribution from Retail Adder $54.6 million
Distribution Depreciation
Amortization $170.35 million
Genco Transfer Premium $600 million
Non-Credited Cost Reductions $3 million
Mitigation Opportunities $828 million
TOTAL $4.23 BILLION
While the stated level of stranded costs is identical to the amount in
PSE&G's proposed Stipulation, Stipulation II would require PSE&G to fund
the unsecuritized portion of this amount through recognition of the actual
value of the transfer of the Company's generation assets and other related
assets to an unregulated affiliate as well as through mitigation cost
savings and non- credited cost reductions.
Genco Transfer Value
Stipulation II would reduce PSE&G's MTC to zero. In this manner, it
is asserted that ratepayers will actually receive the $600 million premium
for the assets transferred. By contrast, while PSE&G's proposed Stipulation
appears to acknowledge that the fair market value of the assets transferred
to Genco is $600 million greater than the nominal net book value less
assumed stranded costs, it recognizes this higher value, not by an offset
to stranded costs, but rather, through a string of MTC payments to be made
by ratepayers and from foregone future rate reductions.
Other Sources of Stranded Cost Funding
In addition to the $600 million market value adjustment described
above, Stipulation II identifies the following other sources of recovery
opportunity for nonsecuritized stranded costs:
(1) Distribution depreciation reserve amortization: In contrast to
the PSE&G Stipulation, under which PSE&G would retain the entire
excess depreciation balance (estimated by PSE&G to be $569 million),
to be applied towards its opportunity to recover non- securitized
stranded costs, Stipulation II would permit the Company to retain
approximately 40% of the net present value of the amortization as a
contribution to stranded costs.
(2) Retail adder: Stipulation II recognizes that a contribution to
stranded costs is made by customers who do not shop but rather remain
with the Company for BGS. For such customers, the retail adder in
their shopping credit also remains with PSE&G. Based upon a levelized
retail adder of 7.3 mills per kwh, Stipulation II identifies an
additional contribution of $54.64 million contribution to stranded
costs by non-shoppers.
(3) Non-Credited Cost Reductions: Stipulation II would permit PSE&G
to retain over $40 million in expired amortizations and other cost
reductions, which might otherwise be passed to ratepayers via rate
reductions.
(4) Mitigation opportunities: Stipulation II assumes over $800
million in future cost mitigation opportunities for PSE&G, based upon
the mid-range of mitigation cost savings estimates identified by the
Auditors.
In total, Stipulation II assertedly would provide PSE&G the opportunity to
recover over $2.8 billion for stranded costs, without even considering the
Genco transfer premium or mitigation savings opportunities.
(f) Under Stipulation II, BGS would be bid out on a "prepayment basis" in
year three, to be effective in year four, and would be rebid annually
thereafter.
(g) Stipulation II accepts the proposed generation asset transfer
envisioned in PSE&G's proposed Stipulation, subject to the following
conditions:
(1) The assignment of a $600 million transfer premium or market value
adder to benefit ratepayers;
(2) The establishment of detailed Affiliate Relations rules;
(3) The initiation of a Genco Code of Conduct for PSE&G, including a
requirement that PSE&G or its affiliated supplier would not receive
an unreasonable preference over non-affiliated suppliers. Excess
power generation should be sold to the highest bidder through an
accessible bulletin board type system.
(4) Generating capacity transferred to Genco would be maintained as a
capacity resource within PJM for the first four years; and
(5) Consistent with the Act, the submission of a detailed plan and
proposal for the transfer.
(h) Stipulation II proposes to offer higher customer shopping credits than
PSE&G's proposed Stipulation. Specifically, Stipulation II proposes the
following shopping credits, inclusive of transmission:
1999 4.95 cents per kwh;
2000 5.40 cents per kwh;
2001 5.40 cents per kwh;
2002 5.40 cents per kwh;
2003 5.40 cents per kwh.
The 5.40 cent per kwh system average shopping credit is proposed to be
distributed as follows:
RS 6.28 cents per kwh;
GLP 5.50 cents per kwh;
LPL-S 5.00 cents per kwh;
LPL-P 4.80 cents per kwh;
HTS-SubT 4.50 cents per kwh;
HTS-HV 4.16 cents per kwh.
Stipulation II recommends that the Board establish a special
incentive customer shopping credit for RS and GLP customers located in
Urban Enterprise Zones, and proposes the following additional conditions:
(1) Actual customer shopping credits should be calculated on a rate
class basis as the residual after all other unbundled elements are
calculated so long as the results do not produce credits that are
lower than those proposed hereinabove;
(2) The shopping credits should be allocated between demand and
energy for all schedules with separate demand charges;
(3) If PSE&G's transmission charges increase during the transition
period, shopping credits should be increased accordingly.
The parties to Stipulation II assert that PSE&G's proposed
Stipulation provides shopping credits which are inadequate to allow robust
competition, particularly in the residential market. These parties further
assert that the shopping credits provided in PSE&G's proposed Stipulation
are significantly below the shopping credits established in Pennsylvania in
the PECO, Energy ("PECO") service territory, when those shopping credits
are updated for New Jersey-specific costs and increases in the wholesale
market. While the PECO shopping credits have been described as reflecting a
level that is necessary to make robust competition possible for all
customer classes, the parties to Stipulation II assert that "blindly"
applying the PECO credits to other jurisdictions without updating them for
jurisdictional cost differences and changes in market conditions "makes
little sense." (Stipulation II at 25). Attachment D to Stipulation II
contains an affidavit by John Rohrbach, on behalf of MAPSA, explaining the
market factors to be considered when updating the PECO Shopping Credit for
application in New Jersey. It is asserted that aggregate transmission
costs, congestion costs and tax rate differentials between New Jersey and
Pennsylvania amount to 0.11 cents per kwh on average, and 0.24 cents per
kwh for serving residential customers. (Stipulation II at 26). In addition,
it is asserted that since the PECO case, there have been long term
increases in wholesale forward energy and capacity market costs amounting
to 0.495 cents per kwh on average, and 0.561 cents per kwh for residential
customers, and that these increases will be present "at least for the next
several years." Id.
(k)(6) Stipulation II incorporates the PSE&G Stipulation's proposal with
respect to the Societal Benefits Charge.
- ------------------
6 We have followed enumeration set forth in Stipulation II, which
does not include a provision "(I)" or "(j)".
(1) Stipulation II incorporates the PSE&G Stipulation's proposal with
respect to non-utility generation issue, with the proviso that PSE&G must
seek to maximize value from NUG contracts by selling all portions of the
contract at the market clearing price.
(m) Stipulation II lists several additional terms which should be adopted
at the same time the other issues in these proceedings are decided,
including:
1. Third Party Supplier Agreement and Retail Tariff issues must be
satisfactorily resolved, including the establishment of the Agreement
as a supplier tariff; customers should be permitted to change
suppliers at will without incurring large "switching" fees, and not
be locked in for a minimum of one year as proposed in the PSE&G
Stipulation;
2. Necessary Electronic Date Interchange ("EDI") protocols and
procedures should be established via a collaborative process;
certification of third party suppliers' and PSE&G's EDI systems as
being compliant with EDI protocols and Board standards should be done
by an independent third party, and not PSE&G;
3. PSE&G may continue to serve existing Off-Tariff Rate Agreements
consistent with the provisions of the Act;
4. The Board will begin proceedings as soon as possible to establish
rules for unbundling and competitive provision of metering and
billing at the earliest possible date, but no later than January 1,
2000. In the interim, third party suppliers should be permitted to
bill for their own services.
(n) To facilitate successful municipal aggregation in PSE&G's service
territory, Stipulation II finds the following provisions to be appropriate:
1. Within two weeks of receipt of a customer's request, PSE&G shall
provide the usage data or load profiles for the past twelve months to
the customer making the request, at no charge to the customer;
2. PSE&G shall provide area based aggregate load profiles by
municipal boundaries and rate class upon request by a government
aggregator and shall also provide the government aggregator, free of
charge a list of addresses (excluding names) of all energy customers
who receive services within the boundaries of the town or
municipality; and
3. PSE&G shall maintain and disseminate a Board approved list of
licensed third party suppliers to its customers free of charge twice
a year.
VI. COMMENTS ON THE SETTLEMENT PROPOSALS
Upon receipt of the Stipulation and Stipulation II, the Board
established a comment period to allow interested parties to submit comments
to the Board with respect to both proposals. The parties were advised via
letters from the Board's Secretary that comments with respect to the two
proposed settlements were to be filed by April 5 and April 7, 1999,
respectively. Comments were received from numerous parties, several
participants, as well as several non-parties including: PSE&G, the
Ratepayer Advocate, MAPSA, NJBUS, NJPII (except for NRDC), NEV, NJICG,
NJCA, IEPNJ, Tosco, Enron, NJCU, PP&L Energy Plus ("PP&L"), Co-Steel, CFC,
RECO, National Energy Marketers Association ("NEMA") and Exelon Energy.
Letters generally supporting the PSE&G Stipulation were also received from
the Commerce and Industry Association of New Jersey and the New Jersey
Business and Industry Association. Key elements of the comments are
summarized hereinbelow.
A. COMMENTS ON THE PSE&G STIPULATION
1. PSE&G
PSE&G, a signatory party to the Stipulation, indicates that the
Stipulation contains mutually balancing and interdependent provisions and
reflects compromises reached among all the signatories after consideration
of the record evidence. PSE&G asserts that the Stipulation is reasonable
and in the public interest, is fully supported by the record, is wholly
consistent and in compliance with the Act, and should be adopted by the
Board. PSE&G asserts that, in contrast to other jurisdictions undertaking
electric industry restructuring, where either rate reductions or a shopping
credit were awarded, the Stipulation provides both generous rate reductions
and large shopping credits which are among the largest awarded anywhere in
the nation to date, and which include a retail adder. PSE&G asserts that
any larger rate reductions or shopping credits would be unreasonable and
would jeopardize PSE&G's financial viability, its workers' jobs, and would
impact quality of service. PSE&G indicates that it has agreed in the
Stipulation to forego the opportunity to recover over three quarters of a
billion dollars of stranded costs compared to its original request for $3.9
billion, and to significantly shorten the recovery period from seven to
four years. Moreover, the proposed transfer of generating assets addresses
concerns raised by customers, suppliers and cogenerators during the
proceeding regarding the ability of the utility to favor its own generation
in the retail markets.
PSE&G notes that the Board has long relied on stipulations to assist
it in resolving issues before it and that the Courts have upheld that
reliance, recognizing that the parties themselves are often in the best
position to determine a reasonable outcome in view of their familiarity
with the issues and the evidence. I/M/O Petition of PSE&G, 304 N.J. Super
247, 266-267 (App. Div. 1997) Cert. Den., 152 N.J. 12 (1997). PSE&G asserts
that in the above cited case the Court upheld reliance by the Board on a
stipulation executed by less than all the parties to a case, calling
stipulations "fact-finding tools" and concluding that "so long as the Board
independently examines the existing record and expressly finds that the
stipulated figures yield rates that satisfy the statutory standard, the
Board may adopt the stipulations," Id. at 268, 270.
PSE&G asserts that the rate reductions provided in the Stipulation
are consistent with the requirements of the Act, will produce approximately
$1.5 billion in customer savings over the four year transition period, and
are among the largest restructuring rate reductions reported in cases
throughout the country. PSE&G notes that during the proceeding the Company
proposed a 6.7% rate reduction, the Auditors proposed reductions ranging
from 8.58% to 12.01 %, the NJBUS and NJICG recommended a 10% rate reduction
which would grow to 12% the following year, NJBUS and NJCU recommended a
rate reduction of "at least" 10% and the RPA recommended a reduction of 15%
without the Company's depreciation proposal and a 19% reduction with the
depreciation adjustment. Based upon this record, the ALJ recommended a 10%
to 12% range for the rate reduction. PSE&G argues that the stipulated rate
reductions, reaching 13.9% during the last year of the transition period,
are clearly in line with the record and the majority of recommendations in
the case, and comport with the requirements of the Act.
PSE&G asserts that paragraph 3 of the Stipulation and Attachment 2
therein provide unbundled rates consistent with section 4 of the Act,
N.J.S.A. 48:3-52, including a separate charge for BGS and a shopping
credit, a separate transmission component of BGS based on the current PJM
Open Access Tariff, discrete charges for customer services and
distribution, assurances that there will be no reallocation of costs
between or among customer classes, and a mechanism for showing the impact
of the required rate reductions on the bill. PSE&G contends that the
Stipulation's reliance on the 1995 cost of service study modified to
accommodate updates and recommendations of the parties, is reasonable and
consistent with the Act. PSE&G argues that the 1995 cost of service study
was utilized by the Company from the start of the proceedings and the
parties had ample opportunity to analyze and comment thereupon, and that
the Act does not require use of the cost of service study from the last
base rate case as argued by some parties. The signatory parties to the
Stipulation have agreed to adjust the 1995 cost of service study to
incorporate a $20 million decrease in distribution rates to reflect a more
current cost of capital of 9.5%. Adjustments were also made to reflect
changes in Post-Retirement Benefits other than Pension ("PBOP") accounting
and energy tax law.
The Company asserts that the use of the amortization of the excess
electric depreciation reserve is reasonable and consistent with its
original proposal in this matter, and provides a source of funds to achieve
the mandated rate reductions without jeopardizing the financial health of
the Company. The SBC provided by the proposed Stipulation includes only
those cost categories identified in section 12 of the Act, N.J.S.A.
48:3-60, consistent with the Act's sustained rate reduction requirements,
and is capped at current recovery levels during the transition period, in
contrast to PSE&G's original proposal that the SBC be exempt from the rate
cap. PSE&G argues that the deferred accounting with interest will provide
PSE&G the opportunity for full recovery of these costs, which are not under
the Company's control but are dependent upon regulatory action by the Board
or other State agencies. The NTC charge will permit recovery by PSE&G of
contractually-incurred NUG costs, and will also provide a mechanism to
reflect future buyouts or buydowns of NUG contracts, consistent with the
provisions of section 13 of the Act, N.J.S.A. 48:3-61. Deferred accounting
with interest will assure full recovery of these costs consistent with the
Act and case law in New Jersey.
With regard to stranded cost levels, PSE&G asserts that the record
demonstrates, and the ALJ concluded, that recovery of the majority of the
Company's post-1992 rate case capital additions is justified, and asserts
that the record demonstrates that the standards for such recovery as set
forth in subsection 13(d) of the Act, N.J.S.A. 48:3-61(e), have been met.
With regard to overall calculation methodology, the Company asserts that it
used a modeling technique that was followed by all parties, as recognized
by the ALJ, and that this methodology is fundamentally no different than
the process a prospective buyer of the generating assets would go through.
PSE&G argues that this technique satisfies the requirement in subsection
13(e) of the Act, N.J.S.A. 48:3-61(e), that the full market value of each
asset over its remaining useful life be demonstrated. PSE&G asserts that
this methodology is superior to a comparison to sales of generating assets
by other utilities, as argued by Stipulation II's proponents, because such
a comparative sales approach cannot reflect the vast differences between
plants with respect to numerous factors, including heat rates, future
capital additions, environmental regulations, energy prices, taxes,
transferred or retained liabilities and pre-closing conditions. The record
includes a range of owned generation stranded cost estimates using various
versions of the Company's approach and different assumptions. The Company
filed a quantification of $3.9 billion. The RPA recommended generation
stranded costs of $1.898 billion, but PSE&G asserts the record reflects
that the RPA's actual position at the close of hearings was $2.308 billion.
The Auditors quantified a range from a low of $2.485 billion, to a medium
of $2.949 billion and a high of $3.310 billion, based on the ALJ's I.D. The
stipulated level of eligible generation-related stranded costs of $3.3
billion, therefore, is asserted to be within the range of the parties'
recommendations on the record. Moreover, PSE&G agreed via the Stipulation
to forego recovery of $225 million of this eligible amount, thereby capping
recovery at $3.075 billion.
The Company asserts that there are substantial grounds for Board
approval of the level of securitization in the Stipulation pursuant to
subsection 14(b) of the Act, N.J.S.A. 48:3-62(b), because the record
demonstrates that the Company has taken reasonable mitigation measures,
that it will not be able to achieve the necessary rate reductions absent
securitization, and that the bonds will result in tangible and quantifiable
benefits to ratepayers.(7) PSE&G also points to the Auditors' recommendation
that the Company be allowed to securitize $2.4 billion of generation
stranded costs. PSE&G asserts that in order to fully recover the bonded
stranded costs of $2.475 billion, approximately $1.710 of state and federal
income tax that are triggered by recovery of the bonded stranded costs must
also be recovered, and that inclusion of the taxes in the nonrevocable bond
charge, as provided in the Stipulation, provides assurance of such
collection. PSE&G argues that this position is supported by the definition
of "bondable stranded costs" in section 3 of the Act, N.J.S.A. 48:3-51, as
well by subsection 15(a)(2) of the Act, N.J.S.A. 48:3- 63(a)(2). PSE&G
raises concerns with an alternative suggestion raised by the RPA and others
that the taxes should be separately collected through the MTC, asserting
that it is questionable whether the Act would permit a 15 year MTC to
recover these tax expenses, with the only possible, but in its view still
questionable, vehicle being subsection 13(l)(3) of the Act, N.J.S.A.
48:3-61(l)(3). It further argues that use of the MTC is not needed, since
it would be a simple matter to require a true-up of the bond charge if
statutory tax rate changes occur. Thus, PSE&G maintains that use of an MTC
rather than the bond charge would put PSE&G at risk for these taxes, is
really not needed, and should not be implemented, and that the inclusion of
taxes in the bond transition charges, as provided in the Stipulation,
should be approved.
- -----------------
7 PSE&G's April 15, 1999 comments at page 31 list citations to the
record which, it alleges, support this conclusion.
PSE&G asserts that the shopping credits in the Stipulation, which
equal the BGS price, are consistent with the Act, particularly subsections
9(a),(c), and (e) thereof, N.J.S.A. 48:3-57(a), (c) and (e), and are
supported by the record. The BGS charge is required to be based on the cost
of power purchased at prices consistent with market conditions in the
competitive wholesale market, plus ancillary and administrative costs. The
energy and capacity market price estimates testified to by Company witness
Loxley, adjusted for losses and taxes and differentiated by rate schedule,
time periods and load profiles and consideration of other cost estimate
evidence in the record were used by the parties to the Stipulation as the
basis for the BGS price/shopping credits. To this was added a retail adder
of 2 mills per kwh to recognize related ancillary and administrative costs,
consistent with section 9 of the Act, N.J.S.A. 48:3-57, and transmission
costs equal to the PJM Open Access Tariff. During the proceeding, certain
parties argued for a retail adder ranging up to 5 mills per kwh, while
PSE&G and the Auditors took the position in testimony that no retail adder
was appropriate since it could be viewed as providing windfall gains to
marketers and shopping customers, to the disadvantage of non-shopping
customers. Thus, PSE&G asserts, the 2 mill retail adder is within the range
in the record. The Stipulation's shopping credits are higher than any other
PSE&G is aware of based on reported decisions in other states.
With regard to the Genco transfer, PSE&G asserts that the transfer is
consistent with the record in the restructuring proceeding, where PSE&G
said that its objective was to remain in the generation business, and where
several parties argued for a divestiture of generating assets or a greater
degree of separation from the electric public utility to alleviate market
power concerns. Moreover, the contract for Genco to supply PSE&G full BGS
requirements at a predetermined price puts considerable risk on Genco that
would otherwise have been on the utility. PSE&G asserts that adoption of
the Act, particularly subsections 7(f) and (1), N.J.S.A. 48:3-55(f) and(l)
reinforced the desire for greater separation by limiting electric
utilities' ability to offer competitive services, including electric
generation service, but putting no such restrictions on competitive
business segments of a public utility holding company. It maintains that a
transfer to a related competitive business segment of PSE&G's holding
company is consistent with the Act and meets the interests of not having
competitive generation service adversely impact PSE&G's regulated service
or create the potential for cross-subsidization.
PSE&G further asserts that the transfer is also consistent with
subsection 7(d) of the Act, N.J.S.A. 48:3-55(d), which requires that a
transfer "shall be recorded at full value as determined by the board." The
value of the generating assets was extensively litigated in the proceeding,
and the Stipulation sets the value of the generating assets at $1.768
billion, based upon an agreement in paragraph 10 of the Stipulation that
recovery-eligible stranded costs amount to $3.3 billion which, subtracted
from the net book value of $5.068 billion, equals $1.768 billion. PSE&G
emphasizes as noteworthy the fact that Enron and IEPNJ, representing direct
competitors of Genco in the generation marketplace, have agreed to this
valuation. PSE&G points to a further benefit of the transfer, namely the
advance on the $600 million MTC payment which is to be provided to PSE&G,
which will be used to retire debt and reduce the utility's capitalization.
As well, per paragraph 33 of the Stipulation, responsibility for nuclear
decommissioning will pass to Genco along with transfer of the
decommissioning trust fund, thus addressing one of the major concerns of
the RPA.
PSE&G asserts that the BGS contract envisioned in the Stipulation is
consistent with both subsections 9(b)(2), N.J.S.A. 48:3-57(b)(2), in terms
of its pricing provisions and 9(b)(3), N.J.S.A. 48:3-57(b)(3), in terms of
the alternative cost recovery mechanism tied to maintaining price stability
of the Act. The parties to the Stipulation have requested Board approval of
key terms of the transfer as set forth in the Stipulation, and PSE&G has
committed to a subsequent timely filing with the Board with the accounting
details and other contractual provisions governing the transfer. The
Company recognizes the Board's continued jurisdiction over the transfer
until the Board accepts the executed BGS contract, the separate entities
are established and capitalized, books of accounts are established and the
assets transferred, appropriate monies are paid to PSE&G, and requisite
regulatory approvals are obtained. Moreover, PSE&G asserts that, because
paragraph 20 of the Stipulation provides that auditable accounting
protocols be in place no later than the transfer effective date to assure
that all expenses and capital expenditures related to generation are borne
by Genco, it is appropriate that the parties agreed in paragraph 28 that
net revenue sharing per subsection 7(d) of the Act, N.J.S.A. 48:3-55(d),
need not apply during the period after the Board issues an order approving
the Stipulation but before all regulatory and other approvals are attained
and the actual transfer is effectuated.
PSE&G points to various provisions in the Stipulation as maintaining
reliability of service to BGS customers, including the requirement that any
sale by Genco of the transferred generating assets include a requirement
that the buyer assume the obligations of the BGS contract, continuation of
the Board-approved natural gas supply relationships between PSE&G and the
transferred generating facilities, transfer of related contractual rights
and obligations, and maintenance of the transferred generating capacity as
a capacity resource within PJM during the transition period. As to the
latter, PSE&G notes that there is no such obligation for any other
traditional utility or new load serving entity under the PJM Reliability
Assurance Agreement not to sell capacity outside PJM as it loses load to
competing suppliers, and instead to market any excess capacity first within
PJM.
For Codes of Conduct, PSE&G recommends adoption of the alternative
provided in paragraph 30 of the Stipulation. It objects to Enron's proposed
alternative in paragraph 30A because its scope encompasses all affiliates,
not just those engaged in the retail sale of electricity. PSE&G submits
that the Board should approve the transfer of its generation assets to
Genco pursuant to its authority to approve dispositions of utility property
under N.J.S.A. 48:3-7 and it maintains that the only substantive concern in
this regard, that the utility's pension obligations continue to be
satisfied, is addressed in paragraph 31 of the Stipulation. Moreover, it
asserts that the requirements of N.J.S.A.14:1-5.6(a) will be substantially
satisfied on or before the date of transfer, and that a waiver pursuant to
N.J.A.C. 14:1-5.6(l) of any requirement in N.J.A.C. 14:1- 5.6(b) that the
generation assets be advertised is justified, given the voluminous record
in this matter concerning market value of the transferred assets, the
uniqueness of the property and the unusual nature of the transaction.
Finally, PSE&G recommends approval of paragraph 34 regarding the proposed
Third Party Supplier Master Service Agreement, in order that the proposed
tariff serve as a template to be modified based upon mandates in the Act
and decisions by the Board on related third party supplier agreement issues.
2. RATEPAYER ADVOCATE
The RPA, a signatory to Stipulation II, requests that the Board
reject the Stipulation and instead adopt Stipulation II. The RPA asserts
that the initial 5% rate reduction in the Stipulation violates the Act,
arguing that subsection 4(d)(2) of the Act, N.J.S.A. 48:3-52(d)(2),
requires a 5% reduction from April 30, 1997 rates and that the 5% reduction
in the Stipulation is from current rates, which include a 3.9% increase
effective April 1, 1998. Moreover, it asserts that the Stipulation's
conditioning of the remaining rate reductions upon the implementation of a
securitization transition charge violates the Act, which requires that
mandated rate reductions be achieved whether or not any portion of stranded
costs are securitized. It asserts that, under the Stipulation, at the end
of the four year transition period, all of PSE&G's rate reductions will
completely terminate, which it claims is contrary to the subsections 4(f)
and 4(j) of the Act, N.J.S.A. 48:3-52(f) and (j). Moreover, the RPA asserts
that the proposal to eliminate all rate reductions as of July 31, 2003,
including the estimated 3% from securitization, violates section 14 of the
Act, N.J.S.A. 48:3-62, which requires that the entire amount of savings
from securitization shall be passed on to ratepayers over the full term of
the bonds, in this case for 15 years. By contrast, Stipulation II provides
for sustained rate reductions in years five and six and beyond. The RPA
does not object to a four year transition period instead of seven years as
originally filed by PSE&G, however, it notes that the significance of this
period under the Stipulation is that rates will automatically increase in
year five (beginning August 1, 2003).
The RPA does not object to the use of the 1995 cost of service study
within the context of the Stipulation II, but if Stipulation II is not
accepted in full, the RPA asserts that use of the 1992 cost of service
study is contrary to the Board's Final Report, since the 1995 cost of
service study was never the subject of review in a base rate case. The RPA
also objects to the Stipulation's proposal to add $80.46 million in costs
related to post-retirement benefits other than pensions ("PBOP") to its
unbundled distribution rates, for the following reasons. First, using the
Company's established electric/gas revenue requirement allocations, only
76% of this cost (approximately $60.1 million) should be included in
electric rates; second, PSE&G's actual total revenue requirement is only
$68.3 million, not $80 million, thus the electric revenue requirement
portion would only be $52 million; and third, a portion of the FAS-106 PBOP
revenue requirement is properly functionalized to generation, rather than
100% to distribution as proposed in the Stipulation.
The RPA asserts that the proposed amortization of electric
distribution depreciation reserve fund in paragraph 4 of the Stipulation
should be rejected by the Board because it represents excess money that has
been collected from ratepayers, which would normally be returned via a
reduction in depreciation rates, but that under the Stipulation would be
used to fund statutorily-required rate reductions. Instead, Stipulation II
would use 60% of the excess distribution depreciation reserve to fund
sustained rate reductions beyond year four, and only the remaining 40%
would be used to fund rate reductions in years one to four as an offset to
the MTC as in the PSE&G Stipulation.
Regarding the SBC, the RPA asserts that the Board should require a
more detailed list than that provided in the Stipulation of all items that
may be included in the SBC, and should also provide actual calculations of
the DSM charge and its derivation, including the appropriate level of
generation lost revenues to be removed per the Stipulation. The collection
of interest on the deferred SBC costs, as contemplated in the Stipulation,
is not specifically allowed under the Act, and is contrary to the Board's
existing regulations for LEAC underrecovery. Moreover, if allowed at all,
interest should be based on the short-term debt rate, not the seven year
debt rate, since the transition period is only four years.
The RPA asserts that it is PSE&G's obligation to maximize the price
it gets for NUG power that will flow through the NTC; therefore NUG power
should be sold through PJM or at the market, whether inside or outside PJM,
whichever is greater. Moreover, the Board should order PSE&G to update the
NUG costs to be included in the NTC, and should require PSE&G, at the very
lease, to attempt to mitigate NUG contracts held by its own affiliates, or
demonstrate why it could not mitigate such costs, before it is permitted to
recover above-market NUG contract costs. The RPA also expresses the same
concerns regarding the computation of interest on deferred NTC costs as
articulated above with respect to SBC costs, although noting that, if
adopted in full, Stipulation II would allow interest on under- and
overrecoveries in the NTC.
The RPA asserts that the recovery of $3.075 billion of stranded costs
provided for in the Stipulation is $800 million higher than the stranded
cost estimate of every party to the litigated case except for PSE&G, and
that the Stipulation provides only one mitigation action; the foregone $90
million in Salem costs. While the Stipulation provides a virtual guarantee
of an additional $600 million above the securitized level, Stipulation II
would provide the opportunity to recover such costs through mitigation, a
portion of the retained retail adder, and a portion of the depreciation
reserve amortization. Moreover, the asserted overstated stranded cost level
is, the RPA argues, directly related to an undervaluation of PSE&G's
generating plants. While the Stipulation sets that value at $1.768 billion,
the most reasonable estimate is between $2.4 billion and $2.9 billion.
Accordingly, the RPA asserts that the best estimate of generation-related
stranded costs is between $2.2 billion and $2.7 billion, far below the
Stipulation's $3.075 billion guaranteed recovery level.
The RPA asserts that it is unclear that the Stipulation's provision
of $2.475 billion of securitization does not violate subsection 14(c)(1) of
the Act, N.J.S.A. 48:3-62(c)(1), since the recovery eligible stranded costs
provided in the Stipulation appears to be $3.075 billion, 75% of which
would be only $2.306 billion, or subsections 13(c) and (f) of the Act,
N.J.S.A. 48:3- 61(c) and (f), because the $3.075 billion figure appears not
to recognize mitigation and the transfer values from asset sales or
divestitures. The RPA objects to the Stipulation's proposal that customers
pay 100% of securitization issuance costs, and argues that, as the ALJ
determined, such costs should be shared on a 50%/50% basis by utility
shareholders and customers. It further maintains that issuance costs should
not exceed $62.5 million based on current estimates, not $125 million as
provided in the Stipulation. The RPA also objects to the recovery through
the transition bond charge ("TBC") of taxes associated with securitization,
arguing that such costs should be recovered via the MTC as a separate tax
MTC instead. The RPA also objects to the Stipulation's requested findings
that PSE&G has reasonably mitigated its stranded costs, since it asserts
the Stipulation provides literally no achieved or expected mitigation.
Moreover, the RPA contests the requested finding that PSE&G could not
achieve the mandated rate reductions absent securitization, since it claims
to have proven in the case that PSE&G could reduce rates by 15% from April
1997 levels for a seven year period and maintain its financial integrity,
and the ALJ found that rates could be reduced by 10-12% over a seven year
period without jeopardizing the Company's financial integrity. The RPA
further asserts that the Stipulation provides securitization savings only
during the years 2000 through 2003, rather than over the entire 15 year
life of the bonds as required in subsections 14(a) and (b)(3) of the Act,
N.J.S.A. 48:3-62(a) and (b)(3).
The RPA asserts that the Stipulation's phased distribution
depreciation amortization alone will provide the Company a $458 million net
present value contribution toward stranded costs, guaranteeing recovery of
an "indisputable" 76% of the $600 million of unsecuritized stranded costs
which PSE&G is only supposed to have an "opportunity" to recover. In
addition, assuming 5% incremental load loss to competing suppliers in each
of the years 1999 through 2003, the 2 mill per kwh retail adder retained by
PSE&G will produce an additional $271 million nominal, and $120 million
after-tax net present value contribution towards stranded costs. Thus, the
RPA asserts that these two items alone "guarantee" the recovery of 96% or
more of the $600 million, which PSE&G is only supposed to have an
"opportunity" to recover.
As to BGS and shopping credits, the RPA reasserts that the level of
shopping credits in Stipulation II, as opposed to those provided in the
Stipulation, are necessary to stimulate a robust competitive market, and
reiterates the arguments on this issue which are found at pages 23 through
27 of Stipulation II.
As to the proposed transfer of PSE&G's generation assets to an
unregulated affiliated entity or Genco, the RPA argues that this proposal
was not made in the evidentiary record, it implicates many other issues in
the case, and the Stipulation would effectuate the Genco transfer without
any further filings by PSE&G, or any additional Board review. The RPA
asserts that the Board should either defer resolution of the transfer
pending evidentiary hearings, or in the alternative adopt Stipulation II on
all issues relating to the Genco formation and asset transfer. Moreover,
while the Stipulation appears to recognize that the generating assets are
worth at least $600 million more than the net book value less estimated
stranded costs, it provides for customers to repay the $600 million to
Genco; thus the true transfer value is only $1.8 billion. By contrast, as
set forth in Stipulation II, a reasonable market value of the assets to be
transferred is $2.9 billion based on recent market evidence, which is
considerably higher than the "administratively determined" estimate
reflected in the Stipulation. The RPA asserts that Stipulation II, which
reduces the MTC to zero, recognizes the appropriate transfer value as
$2.368 billion, thus providing ratepayers the additional market value for
the assets transferred.
The Genco transfer in the Stipulation also entails the transfer of
all contracts associated with the electric generating business and other
contractual rights and liabilities; however no transfer valuation for, or
even a listing of, these rights and liabilities is provided. The RPA also
finds objectionable the request in the Stipulation for a waiver of N.J.A.C.
14:1-5.6, since it would allegedly result in a blind approval of an asset
transfer without the provision of complete documentation of what is being
transferred.
The RPA reiterates the recommended Code of Conduct and Affiliate
Relations rules set forth in the Stipulation II. The RPA also requests that
the Board order that Genco maintain transferred capacity as a capacity
resource within PJM for the first four years, and that the Board require
the submission of a plan and proposal for the transfer providing details
including a specific list of transferred assets, contracts and intangibles;
specific accounting entries; and the effect of the transfer on reliability
and existing collective bargaining agreements or workforce levels.
The RPA further asserts that the Board should disregard paragraph 34
of the Stipulation, since the subject tariff modifications are outdated,
addressed in the Act, and/or are the subject of generic restructuring
proceedings and discussions. Nonetheless, the RPA provides specific
comments with respect to specific issues related to the third party
supplier agreement, including the customer enrollment package, customer
usage records, customer authorization and confirmation, minimum contract
terms, switching fees and the billing of customers.
3. MID-ATLANTIC POWER SUPPLY ASSOCIATION
MAPSA, a signatory to Stipulation II, submits that the Stipulation
should be rejected as it fails to properly implement the four principal
goals of the Act; specifically: (1) to provide guaranteed ratepayer
benefits by implementing the required minimum rate discounts; (2) to
provide fair treatment to the utility and its shareholders by giving them
an opportunity to recover quantifiable, fully mitigated stranded costs; (3)
to create a vibrant competitive environment by establishing appropriate
shopping credits; and (4) to assure a level playing field through the
establishment of appropriate rules and requirements. MAPSA argues that the
Stipulation is flawed because it fails to allow for the development of a
competitive market, it does not guarantee fulfillment of the minimum rate
discount requirements of the Act, and it does nothing to address rate shock
in years five and six.
MAPSA contends that while the Stipulation claims to establish a level
of stranded costs of $3.3 billion, and an opportunity to recover only
$3.075 billion through unbundled rates, the real opportunity to recover
stranded costs is more than $1 billion greater than this claim. It
identifies the recovery opportunities as follows: $2.6 billion (including
$125 million for bond issuance costs) via the Securitization Transition
Charge, $120 million via retained a retail adder, $460.5 million via the
distribution depreciation reserve amortization, $90 million via the agreed
upon Salem cost reduction, $90 million via the LEAC overcollection at July
31, 1999, $35 million via expired amortizations, $800 million via
documented mitigation opportunities, and $600 million via the Genco
transfer premium. Moreover, MAPSA asserts that this list does not include a
quantification of additional value from the Genco transfer, including the
value of purchased power and gas supply contracts, good will, fixed
transmission rights, emission reductions and NOX credits, footprint for new
plants or plant expansion, avoidance of new plant siting and building
costs, the value of capacity in PJM, and the value of ancillary services.
Accordingly, MAPSA asserts that the Stipulation provides PSE&G with over
$1.5 billion in excess compensation, which leads to inadequate shopping
credits, an uncertain level of rate reductions, and rate spikes in years
five and six.
MAPSA asserts that PSE&G's approach to calculating the BGS charge or
shopping credit is skewed, by using an out-of-date and understated market
line to calculate energy costs and a dramatically understated retail adder
to reflect retail delivery costs and the ability to offer savings to
customers. The shopping credit or BGS charge is, in MAPSA's view, more
appropriately calculated by using the so-called Pennsylvania "residual"
method. This method begins with the bundled rate after recognizing the
discount, and subtracts from that bundled rate the distribution rate,
transmission rate and societal benefits rate and taxes to derive the
generation rate; from the generation rate is subtracted the stranded cost
charges (STC or MTC); the remainder is the shopping credit. MAPSA adds that
if the level of the shopping credit thus produced is not sufficient to
produce robust competition, then the structure or timing of stranded cost
recovery must be adjusted. Under this method, if an "excess" is created in
the remaining rate level, it will be used to enhance competition, as
opposed to the PSE&G approach under which any excess would flow to increase
the MTC.
MAPSA further submits that savings of at least 5-7% must be offered
by suppliers to entice customers to switch; savings at this level can only
be offered if the shopping credit is sufficient to cover the cost of
procuring and delivering power, the cost of marketing and customer service,
and the need to provide a margin. MAPSA asserts that the PSE&G shopping
credit understates the forward cost of energy by at least 4 mills, and the
retail adder of 2 mills is inadequate for a supplier to cover retail costs
and offer savings.
MAPSA asserts that the Pennsylvania experience demonstrates the
importance of a shopping credit that offers savings to customers. The
shopping credits established for PECO Energy ("PECO") in Pennsylvania have
assertedly produced the most robust competitive market in that state; 1/3
of eligible load has switched to alternative suppliers, including 14% of
residential customers. In neighboring territories in Pennsylvania, where
shopping credits are 6 mills to 18 mills lower (depending on company and
customer class) per kwh, shopping is alleged to be virtually non-existent.
Thus, MAPSA asserts, the PECO shopping credits should be used as the
starting point; but must be updated to account for New Jersey specific
costs and generic energy market cost increases
With respect to the Genco transfer, MAPSA notes that the Stipulation
acknowledges that the value of the generating assets is significantly
higher than the adjusted (net book cost less "stipulated stranded cost")
book value, yet this $600 million premium is to be transferred to PSE&G
without ratepayers receiving any benefit via greater rate reductions or
larger shopping credits. MAPSA maintains that the benefits of the higher
"real market value" of the generating assets should be given back to
ratepayers. If the Board does not credit the $600 million premium to
ratepayers, then it should either disapprove the transfer, require PSE&G to
actually divest its generation, or establish a yearly true-up to capture
future market events if they show that the assets were transferred at an
undervalued amount. Moreover, MAPSA asserts that the Stipulation lacks
details concerning the transfer and appears to overlook or dismiss the need
for various filing requirements and approvals.
MAPSA asserts that while the Stipulation contains some limited
provisions to prevent Genco from exercising anti-competitive behavior, they
are limited and must be expanded upon to address the following issues:
there should be an absolute ban on Genco from making direct retail sales;
the exceptions provided Genco from the requirement that the generating
capacity be maintained in PJM for four years could be exercised in a manner
which raises capacity prices in PJM; and the codes of conduct must provide
a process for allowing competitors to ascertain whether unreasonable
preferences are being provided, including reporting and public posting of
offers by Genco for sales to affiliates.
MAPSA also comments that the Stipulation is unclear on the process of
finalizing PSE&G's Third Party Supplier Master Service Agreement, which as
filed, assertedly contains a number of troubling provisions, nor does it
mention an affiliate code of conduct, which must be adopted and implemented
before competition commences. Finally, MAPSA asserts that elements of the
Stipulation, including elements related to the Genco transfer and the
reasonableness of the shopping credits, are not supported by the record,
and there is a need for additional hearings and testimony in order to avoid
violation of the parties' due process rights.
4. NEW JERSEY PUBLIC INTEREST INTERVENORS
NJPII (with the exception of the NRDC), a signatory to Stipulation
II, urges rejection of the Stipulation and Board approval of the
alternative Stipulation II. It argues that the Stipulation does not
guarantee the mandated rate reductions, rather the reductions are
contingent upon securitization. Moreover, NJPII cautions the Board to take
note of developments in Massachusetts and California as evidence that
setting shopping credits too low can result in an inactive market, and
points to activity in Pennsylvania, specifically the PECO shopping credits,
as evidence of how setting the shopping credits at appropriate levels can
foster competition. According to NJPII, the Stipulation's shopping credits
fail to account for all of the costs to deliver electricity to New Jersey
and the empirical data from a year's worth of activity in the PECO service
territory. NJPII argues that the market values underlying the stranded
costs identified in the Stipulation do not reflect required mitigation
activities and ever-increasing empirical evidence that the market value of
fossil generation is understated. Recent sales of fossil generation have
assertedly resulted in significant premiums over book value and NJPII
maintains that ratepayers should receive this benefit.
5. NEW ENERGY VENTURES
NEV, a signatory to Stipulation II, urges the Board to reject the
Stipulation, and instead to approve Stipulation II. NEV submits that robust
competition has occurred in the PECO service territory where meaningful
shopping credits have been provided, whereas in Massachusetts there has
been little competitive activity because the Standards Offer, which is
similar to the shopping credit, is low relative to market prices. NEV
asserts that the PECO model provides an excellent framework and starting
point for New Jersey. However, since the PECO settlement, there have been
increases in wholesale market prices, and NEV maintains that certain
adjustments should be considered to ensure that New Jersey customers
receive rate discounts of equal magnitude as PECO customers. NEV argues
that the shopping credits in Stipulation II are more equitable for all
customer classes than those in the Stipulation, as evidenced by the broad
range of customers signing Stipulation II and the assurance of the
discounts that will be offered.
NEV also asserts that the Stipulation contains only vague and
insufficient codes of conduct governing PSE&G's relationship with Genco,
and that it also tilts the playing field in favor of the incumbent in terms
of various customer issues, including fees for switching and obtaining
information. NEV urges the Board to develop a forum for resolving these
issues. Finally, NEV urges the Board to address metering and billing
issues, including a prohibition against PSE&G issuing a single bill for
supplier and utility charges, and the promulgation of metering and billing
rules by January 1, 2000.
6. NEW JERSEY INDUSTRIAL CUSTOMER GROUP
NJICG, a signatory to Stipulation II, urges the Board to reject the
Stipulation and to instead adopt Stipulation II. It asserts that the
Stipulation violates the Act by rendering the achievement of the mandated
minimum rate reductions contingent upon securitization, while, in contrast,
Stipulation II has no such "strings" attached. Moreover, NJICG asserts that
the level of securitization in the Stipulation violates the Act because
although the Act limits securitization to 75% of "recovery eligible"
stranded costs, after recognizing mitigation and the transfer values from
asset sales or divestitures, the Stipulation derives the $2.475 billion of
securitized stranded cost by multiplying $3.3 billion times 75% without
recognition of the factors required by the Act. NJICG notes that if the
level of securitization were to be decreased to correct this flaw, PSE&G
would not be denied the opportunity to recover the disallowed portion of
the securitization figure, but could attempt to recoup these amounts via
the MTC.
NJICG argues that the $1.8 billion transfer price for the Genco
transfer dramatically understates the actual market value, indeed it has no
connection to the market value, which it asserts to be more on the order of
$2.9 billion. Moreover, according to NJICG, ratepayers are also
shortchanged because the $600 million transfer premium which is included in
the Stipulation would be paid directly by Genco to PSE&G, whose
shareholders would receive an immediate benefit, and the ratepayers would
repay this $600 million to Genco via the MTC revenue stream. NJICG further
questions the legality of this arrangement, since the Act only authorizes
utilities to recover an MTC based on the "above-market" portion of their
generating assets, and the Act also requires "net proceeds" from the sale
of generating assets to be reflected in a timely adjustment to the MTC.
NJICG maintains that once PSE&G receives the $600 million premium, its
unsecuritized stranded costs must be reduced to zero. Finally, on this
issue, it argues that if, according to PSE&G, Genco is paying "fair market
value for the assets transferred," then, by definition, there are no
stranded "above market" costs for Genco to collect through an MTC, even
assuming the statutory authority to do so.
With regard to shopping credits, NJICG asserts that the PSE&G
shopping credits are unsupported and are too low to spur competition; they
must be set to reflect the real costs of doing business in New Jersey. The
PECO level of shopping credits must be updated to account for changes in
energy markets since the PECO credits were set, as well as to reflect New
Jersey- specific considerations. One or two marketers agreeing to a level
of shopping credits is not sufficient to insure that there will be a
competitive marketplace; rather, there must be a "sufficient number" of
"good alternatives" to basic generation service, such as the four to five
good alternatives required by the FERC to demonstrate a competitive natural
gas pipeline market.
NJICG asserts that the rate design contained in the Stipulation,
which employs a temporary "rate reduction credit" rather than a reduction
to existing rates, will lead to an automatic rate spike after July 31,
2003. Moreover, the use of deferral accounts for the SBC and NUG contract
costs in the Stipulation will likely exacerbate rate spikes after July 31,
2003. NJICG maintains that Stipulation II removes the rate spike problem
for at least two additional years, and more appropriately leads to a
sharing of burdens to recover stranded costs and reduce rates between
shareholders and customers.
7. THE COALITION FOR FAIR COMPETITION
The CFC, which was not a signatory to either Stipulation, asserts
that the Stipulation is not conducive to fair competition or compliant with
the Act because it would allow PSE&G to transfer generating assets to an
unregulated affiliated Genco at book value, and thereby fails to mitigate
PSE&G's stranded costs through the market-based valuation of assets. To
prevent the Genco transfer from acting as a massive subsidy for competitive
activity, the CFC argues that the Board should require proper market based
pricing of the assets, compensation to ratepayers based upon this market
value, and the adoption of stringent standards for fair competition. The
CFC also asserts that the rate reductions provided in the Stipulation
cannot be tied to securitization, and that PSE&G has not demonstrated the
need for securitization to achieve the mandated rate reductions.
The CFC argues that the Board does not have the authority to approve
the proposed Stipulation "as is"; that the Stipulation violates the Act,
and that there is a need for public and evidentiary hearing to develop an
evidentiary record before the Board acts on the Stipulation. The CFC argues
that a contested partial stipulation amounts to a joint petition which must
be fully reviewed by the Board to assure compliance with the law, to
ascertain whether it is supported by the record, and to assure fairness to
all affected parties and interests. The CFC argues that because PSE&G
failed to submit the evidentiary basis and statutory sources for each
position in its proposal, as was done with Stipulation II, the PSE&G
Stipulation must be rejected.
The CFC asserts that the excess depreciation revenue amounts to an
overcollection of $567 million, which should be refunded to ratepayers with
interest and not counted as part of the mandated rate reductions. It
recommends that an Order to Show Cause be issued to commence an
investigation into whether there are additional overcollections. The CFC
also asserts that the provisions of the Stipulation (paragraphs 5-7)
providing full recovery of the four categories of costs in section 12 of
the Act, N.J.S.A. 48:3-60, providing that the SBC level will remain
constant for four years, are not mandated by the Act. It argues that full
recovery of costs was only assured in the Act for DSM costs, and that
funding levels should not be frozen for four years given the requirement in
the Act that the BPU conduct a proceeding to determine the proper level of
DSM funding for the next four years.
The CFC further maintains that absent an actual sale or auction of
assets, stranded costs must be calculated using comparable sales, which
assertedly show that generating assets have netted purchase prices far in
excess of book value. The CFC asserts that PSE&G has not satisfied the
Act's requirement that in support of its securitization request it
demonstrate that it has taken all reasonable steps to mitigate its stranded
costs, including dedication of up to 50% of net revenues from
utility-offered competitive services and 25% of net revenues from holding
company affiliate competitive services as required by subsections 7(b) and
7(l) of the Act, N.J.S.A. 48:3-55(b) and (1), and that it could not achieve
the mandated rate reductions without securitization. The CFC further
asserts that there are distinct statutory standards for setting shopping
credits and for setting BGS prices. Therefore, rather than simply
establishing shopping credits equal to the BGS price, as provided in the
Stipulation, the CFC argues that the BGS and shopping credits should each
be established, after an in-depth analysis, as separate determinations,
with the shopping credits set to create a truly viable and robust
competitive marketplace. The CFC also contends that fixing the level of the
shopping credits for four years, as provided in the Stipulation, is
"folly," and that there should be at least annual resettings to reopen and
reevaluate the level of the shopping credit to assure competition as
required by the Act. Further, the CFC argues that PSE&G has not
demonstrated that the provision of BGS through a bilateral contract with
Genco under the terms of the Stipulation is compliant with section 9(b)(2)
of the Act; N.J.S.A. 48:3-57(b)(2), since there is no need for PSE&G to
supply BGS when there is an abundance of competitive sources from which to
choose.
Regarding the proposed transfer of assets to Genco, the CFC endorses
PSE&G's decision to start divestiture of competitive business assets and
units, but it stresses that there are three keys to a proper transfer:
establishment of transfer value and compensation to be paid to ratepayers;
establishment of standards of fair competition or affiliate codes of
conduct; and a true-up of the MTC. The CFC asserts that the
previously-struck testimony it sponsored in the proceedings with respect to
transfer pricing must now be admitted and given full evidentiary weight,
since the Genco proposal in the Stipulation has "opened the door" to this
testimony. The CFC further argues that subsection 7(d) of the Act, N.J.S.A.
483-55(d), requires the Board to adopt rules and regulations which will
govern the transfer of electric utility assets to a corporate affiliate,
but that no such regulations have been proposed or adopted. Moreover, the
Stipulation reflects a transfer at depreciated book value, which is
asserted to be far below market value of the assets as demonstrated by
recent generation asset sales (which the CFC claims show sales from 2.5 to
5 times book value), and is therefore in violation of section 7 of the Act,
N.J.S.A. 48:3-55, as well as preexisting law. The transfer proposal is also
asserted to be in violation of subsection 13(g) of the Act, N.J.S.A.
48:3-61 (g), since there is no provision for a true-up of stranded costs
after the transfer has been made. The CFC favors the affiliate standards
supported by Enron, as reflected in paragraph 30A, of the Stipulation, but
indicates that, at a minimum, the Genco/PSE&G relationship must be made
expressly subject to the standards the Board adopts pursuant to sections 7
and 8 of the Act, N.J.S.A. 48:3-55 and 56.
With regard to the Stipulation itself, the CFC claims that if fails
to meet the standards set forth in I/M/O Petition of PSE&G, supra. The CFC
alleges that the signatories to the Stipulation are not a diverse group of
parties with opposing interests who negotiated hard at arms length, as
argued by PSE&G, but rather represent a group of parties with close ties to
PSE&G, who were chosen by the Company for closed door negotiations and were
vulnerable to PSE&G pressure and undue influence, and were "induced" to
sign by PSE&G. Finally, the CFC opposes the Stipulation's requested waiver
of certain provisions of section 7 of the Act, N.J.S.A. 48:3-55, (paragraph
28 of the Stipulation), and N.J.A.C. 14:1-5.6 (paragraph 32 of the
Stipulation).
8. NEW JERSEY CITIZEN ACTION
NJCA, which was not a signatory to either the Stipulation or
Stipulation II, simultaneously filed its comments with respect to both the
Stipulation and Stipulation II. NJCA asserts that the Stipulation falls
short of the legislative mandate on rate reductions, because while the Act
requires achievement of the minimum rate reductions as a requirement for
securitization, the Stipulation conditions the rate reductions on the
approval of securitization. It argues that PSE&G has an obligation to
demonstrate that it cannot go beyond the mandated 10% rate reduction
without harming shareholders and employees. It also expresses concern
regarding potential rate spikes in year five under the Stipulation, which
would violate the spirit and the letter of the Act, since it argues the
intent of the Act is to provide lower rates in a sustained fashion and
create a competitive market. While Stipulation II does address the rate
spike in year five, NJCA indicates that it has been unable to independently
verify the impact of the allocations on the Company. Additionally, it
criticizes the proposal in Stipulation II that allows the Company to wait
four years to repay customers for $90 million in Salem related stranded
costs, versus the immediate return under the Stipulation. Further, NJCA
questions the provision in Stipulation II which would permit PSE&G to
retain 40% of the excess depreciation reserve. NJCA questions why rates
cannot be reduced further under either proposal given the high level of
securitization of stranded costs, since it understands stranded costs as
the reason for current high rates. In light of the provisions of the Act
permitting an opportunity for full stranded cost recovery, NJCA does not
oppose the level of stranded cost recovery and securitization embodied in
both the Stipulation and in Stipulation II; however, it expresses concern
regarding the valuation of the generating assets proposed to be transferred
to Genco, and supports the RPA's request for a further review of the
transfer price issue. NJCA also opposes the collection of taxes related to
securitized stranded costs via the transition bond charge as proposed in
the Stipulation, arguing that such costs should be recovered a separate MTC
instead. NJCA further maintains that issuance costs should be borne by
shareholders or, in the alternative, be shared, with the ratepayers' share
collected through an MTC.
As to the issue of shopping credits, NJCA asserts that while a
reasonable shopping credit, similar to levels established in the PECO
settlement, can assist in the competition, it is not a "magic bullet." NJCA
urges the Board to follow the pattern of both stipulations and set a higher
shopping credit for residential customers.
9. NEW JERSEY BUSINESS USERS
NJBUS, a signatory to Stipulation II, urges rejection of the
Stipulation and the adoption in its place of Stipulation II. NJBUS asserts
that the initial 5% rate reduction in the Stipulation violates subsections
4(b) and (d) of the Act, N.J.S.A. 48:3-52(b) and (d), by including in that
initial reduction a "prefunded" 1% of the securitization savings, arguing
that, in effect, the initial rate reduction would only be 4%, not the 5%
required by the Act. Moreover, NJBUS maintains that there is no basis for a
finding that if 1% of the securitization savings is prefunded, there will
be net present value savings over the life of the bonds as required by
subsection 14(b) of the Act, N.J.S.A. 48:3-62(b). Prefunding, NJBUS
alleges, deprives customers of savings equal to 1 % of revenues per year
for at least two years, or $80 million, because the Act requires that the
5% rate reduction must be implemented whether or not there is
securitization, and all securitization savings must be passed through to
customers on a timely basis, per subsection 4(l) of the Act, N.J.S.A.
48:3-52(l). Assuming securitization savings of 3%, NJBUS argues that the
Act requires rates to be reduced by at least 8% (5% minimum initially plus
the 3% securitization savings) as of January 1, 2000. NJBUS also argues
that subsection 4(d)(2) of the Act, N.J.S.A. 48:3- 52(d)(2), requires that
the initial 5% rate reduction be measured against April 30,1997 rates, not
against current rates as assumed in the Stipulation. NJBUS asserts that, at
best, the third year rate reduction would be worth only $10 million to
ratepayers and thus, under the Stipulation's prefunding program, customers
would be deprived of $70 million in rate reductions.
NJBUS maintains that the rate reductions must be applied to each of
the unbundled rate elements, not as a separate rate reduction line item as
provided in the Stipulation; otherwise, there would be an automatic rate
increase of at least 13.9% on August 1, 2003 by eliminating this rate
reduction line item, in violation of the requirements of subsection 40),
N.J.S.A. 48:3-520) of the Act, for sustainable rate reductions. Stipulation
II extends the rate reduction level in year four for another two years, and
retains those rates in year seven and beyond, unless rate increases are
approved by the Board after a full rate case. NJBUS asserts that there are
additional funds available to sustain rate reductions beyond those
explicitly contemplated in Stipulation II, including sharing of Genco
competitive service revenues pursuant to section 7 of the Act, N.J.S.A.
48-.3-55, and application to regulated rates of all net revenues derived
from the bilateral BGS supply contract between Genco and PSE&G, pursuant to
subsection 9(b)(2) of the Act, N.J.S.A. 48:3-57(b)(2). NJBUS contends that
the Stipulation inappropriately attempts to circumvent or otherwise waive
these requirements.
NJBUS objects to the generation asset transfer contemplated in the
Stipulation, asserting that there is a substantial underevaluation of the
assets, and that because the transfer was not presented in PSE&G's original
filing, it does not have record support. Moreover, NJBUS contends that
neither the value of the BGS contract nor the other contractual rights
being transferred has been calculated. The $2.368 billion transfer value is
asserted to be a "sham," since $600 million to be collected by PSE&G via
the MTC, will be repaid to Genco. NJBUS argues that the recovery by Genco
of the $600 million is virtually guaranteed; accordingly, the true asset
transfer value being paid by Genco is only $1.768 billion. NJBUS submits
that, as set forth in the affidavit of Michael B. Dirmeier attached to
Stipulation II, a conservative value for the owned generating assets is
$2.9 billion, which, after tax, translates to a transfer value of $2.4
billion. This estimate is based on reported sales of utility generating
plants over 35,000 megawatts nationwide over the past 18 months. Subsection
13(e) of the Act,. N.J.S.A. 48:3-61 (e), requires that, in quantifying
stranded costs, the full market value of each asset, including value that
would not be realized until after the expiration of the MTC must be
demonstrated. Mr. Dirmeier's approach is asserted by NJBUS to do just this.
NJBUS maintains that subsection 11 (c) of the Act, N.J.S.A. 48:3-59(c),
requires the Board to approve any generating asset sale, based on findings
that the sale reflects the full market value is in the ratepayers' best
interests. NJBUS asserts that because the Stipulation requires ratepayers
to repay $600 million, the actual sale price of $1.7687 billion does not
reflect full market value. Moreover, absent the asset transfer, section
13(g) of the Act, N.J.S.A. 48:3-61(g) would require a periodic review and
true-up of market valuation and adjustment to stranded cost recovery
accordingly, which offers ratepayers protection against stranded costs
being set too high (because market valuation is too low) based upon an
administrative estimate. NJBUS contends that the proposed asset transfer in
the Stipulation eliminates this protection, and therefore must be rejected
unless the transfer occurs at full market value. It maintains that the
Company's initial filing did not support an immediate transfer of assets,
only an asset transfer after the then-proposed transition period, and that
the details of such proposed transfer were vague. NJBUS thus asserts that
the record does not supply an adequate foundation for the transfer of
assets based on a market value of $1.768 billion, as implied by the
Stipulation.
NJBUS also claims that the value of the BGS contract is a valuable
right afforded Genco above and beyond the asset transfer, which value has
not been, but should be, considered. NJBUS further alleges that other
valuable contract rights, including power and fuel contracts, real and
personal contracts and other contractual rights and liabilities are
proposed to be transferred without compensation, and the value has not
been, but should be calculated and considered. NJBUS maintains that one of
the most important items transferred to Genco is the ability to control the
scheduling and use of PSE&G's transmission assets as PSE&G's agent, thereby
enabling Genco to use PSE&G's transmission rights to make unregulated sales
and bypassing PSE&Gs responsibility to release transmission rights to the
market on the electronic bulletin board, and that the generation sites
themselves may also have significant value. NJBUS claims as well, that the
right to collect net revenues from the use of common assets and personnel,
as required in section 7 of the Act, N.J.S.A. 48-3-55, should not be
waived, as proposed in the Stipulation.
NJBUS further asserts that the amount of stranded costs which PSE&G
seeks to securitize in the Stipulation violates the Act, since the
recovery-eligible stranded costs as identified in the Stipulation,
consistent with the use of that term in the Act, is $3.075 billion, and the
$2.475 billion level of securitization exceeds the 75% limit imposed in
subsection 14(c)(1) of the Act, N.J.S.A. 48-3-62(c)(1). NJBUS maintains
that the Stipulation also fails to specify how the proceeds from
securitization will be used to reduce rates, since it does not specifically
identify the proportion of debt and/or equity that will be retired. NJBUS
asserts that the Stipulation's proposal to collect revenue taxes associated
with securitization via the transition bond charge, which is to be
established in an irrevocable bondable costs rate order, should be
rejected; instead, a special tax MTC should be instituted which could be
changed. to address changes in federal tax laws. It also argues that any
overrecoveries of the unsecuritized stranded costs by the end of the
transition period should earn interest, which should be returned to
customers and that the Stipulation makes no such provision.
Additionally, NJBUS asserts that there is no record evidence to
support the Stipulation's shopping credit levels. All evidence in the
record was based on mathematical modeling, not real market evidence; such
evidence now exists and should be used, according to the NJBUS. It
maintains that the Stipulation's shopping credits are too low to promote
competition, pointing to affidavits attached to Stipulation II for support,
including the affidavit of John S. Rohrbach which asserts that the shopping
credits are too low when compared to those set in the PECO territory more
than a year ago, due to increases in energy costs, capacity pricing, a
higher congestion cost, and a higher tax rate in New Jersey as compared to
Pennsylvania.
Finally, NJBUS urges rejection of the proposed tariff revisions in
Attachment 6 to the Stipulation, which it asserts incorporates numerous
provisions which were not available during the OAL proceedings, and which
address many issues which the Board has set for generic resolution via
restructuring working groups.
10. CO-STEEL RARITAN
The primary concern of Co-Steel, which operates a steel "mini-mill"
in Perth Amboy, in this proceeding, has been its ten year service agreement
with PSE&G under the Experimental Hourly Energy Pricing Service ("EHEP")
tariff, and specifically its assertion that its contract precludes the
imposition of stranded cost-related charges either during or after the
contract term, which extends until November 17, 2005. With respect to the
period during the contract term, Co-Steel asserts that the agreement
unquestionably precludes the imposition of stranded cost charges, since the
bargain was struck and investment decisions made based on the precise terms
negotiated, which cannot be altered without the parties' consent. Moreover,
Co-Steel argues that imposition of post-contract stranded cost charges
based upon Co-Steel's consumption during the contract term would equate to
a price increase during the contract term. Given the 10-year term of the
contract and the interruptible nature of Co-Steel's electric service,
Co-Steel maintains that it cannot be deemed to have caused any of PSE&G's
stranded costs. To subject Co-Steel to stranded cost charges would give it
the worst of both possible worlds: barred by contract from enjoying the
benefits of competition, yet subject to stranded cost charges caused by the
arrival of competition. Moreover, it contends that the imposition of
stranded cost charges upon it would violate the constitutional prohibition
against contract impairment.
Co-Steel, which was not a signatory to either the Stipulation or
Stipulation II, raises certain concerns as to how the Stipulation would
affect Co-Steel. It maintains that, on its face, the Stipulation is unclear
as to what surcharges, if any, would apply to Co-Steel under its contract.
Co-Steel contends that it has been advised by PSE&G that under Block 1 of
the contract rate, which is pegged to the HTS tariff rate, Co-Steel would
receive the same rate discounts provided to all other HTS customers, and
that its Block 2 usage would be governed by contract and be unaffected by
the Stipulation. Co-Steel contends that if it is determined that the Act
requires that stranded cost charges be paid by Co-Steel, then the Act's
requirement that all customers should have the ability to shop as of August
1, 1999 should also apply, and Co- Steel should be permitted to seek
alternative suppliers. Imposition of the securitization charge, the NTC and
the MTC at the levels envisioned in the Stipulation would, according to
Co-Steel, increase its annual bill in the aggregate by as much as $7.3
million, thus wiping out all the benefits derived from the contract the
Board approved in 1995. Imposition of stranded cost charges after the
contract expires would assertedly impose $4 million or more annually on Co-
Steel, which would effectively wipe out whatever benefits it would
otherwise derive from seeking an alternative supplier at that time.
Finally, Co-Steel argues that the proposed elimination of the current
interruptible credit in the HTS tariff for customers who switch suppliers
would completely offset the benefits of the HTS shopping credit, thereby
economically preventing such a customer from switching suppliers.
11. PP&L ENERGY PLUS
PP&L, which was not a signatory to either the Stipulation or
Stipulation II, filed comments addressing both stipulations. PP&L indicates
that it has not joined in either settlement proposal, because of
significant issues with both. PP&L also indicates that it currently serves
a large amount of competitive retail load in Pennsylvania, unlike some
other retail suppliers active in these proceedings. It asserts that neither
stipulation adequately balances full and fair recovery of validly incurred
stranded costs with robust shopping credits. PP&L challenges PSE&G's
assertion that the Stipulation provides the largest shopping credits in the
country, indicating that while this may be true on an average basis, the
uneven distribution of shopping credits results in certain classes of
customers having credits well below those provided to PECO customers, and
that this will adversely impact competition for medium-sized commercial and
industrial customers. PP&L asserts that the PECO shopping credit and the
PECO settlement were addressed in the record in this matter, and argues
that while the Stipulation's shopping credits are 2 mills higher than
PECO's for residential and large industrial customers, representing those
customers least likely and most likely to shop, respectively, they are 5.9
mills and 13 mills lower for LPL-S (general service-secondary) and LPL-P
(primary distribution) customers, respectively. While Stipulation II does a
better job of trying to ensure adequate credits for mid-sized customers,
according to PP&L, it still falls short of a balanced, even distribution
when compared to PECO's credits, with shopping credits for residential and
large industrial customers even higher than the Stipulation's, but with
LPL-S and LPL-P credits still 11.8 mills and 3.7 mills lower, respectively,
than the PECO credits.
PP&L agrees with the supporters of Stipulation II that there are
certain cost differences between PECO and PSE&G such as taxes, transmission
costs and congestion costs. However, PP&L does not agree with the wholesale
forward energy and capacity projections set forth in Stipulation II.
Therefore, while generally in favor of higher credits, PP&L proposes
alternative shopping credits which, it asserts, are the minimum necessary
to support robust competition for all customer classes, while balancing the
interests of all concerned. PP&L proposes only modest increases to the
shopping credits proposed in the Stipulation for medium-sized commercial
and industrial customer classes, which, it asserts, only raise the average
system credits by less than 1 mill per kwh over those in the Stipulation.
PP&L also asserts that the manner in which the Stipulation proposes
to show rate reductions on customers' bill is confusing, and has provided
alternative, simpler billing formats. Additionally, while supporting the
generation asset transfer in the Stipulation, it also supports
strengthening the codes of conduct language in paragraph 30. Finally, PP&L
opposes the Third Party Supplier Agreement embodied in the Stipulation, and
favors instead a collaborative approach to these issues as proposed in
Stipulation II.
12. NEW JERSEY COMMERCIAL USERS
NJCU, a signatory to the Stipulation, simultaneously filed its
comments in support of the Stipulation and its response to Stipulation II.
NJGU asserts that the provided rate reductions in the Stipulation are
consistent with NJCU's litigation position that rates be reduced by 13.4%
from current rates, the findings of the AU that PSE&G's rates be reduced by
10-12%, and the Act's requirements that rates be reduced initially by at
least 5% from current rates, and by at least 10% from April 30, 1997 rates
within 36 months. NJCU indicates that it shares the RPA's concerns as
reflected in Stipulation II with respect to a potential rate spike in year
five.
With regard to shopping credits, NJCU takes issue with the RPA's
assertion that the Stipulation II shopping credits "closely approximate"
the PECO shopping credits. NJCU asserts that the substantially higher
Stipulation II residential shopping credits come at the direct and sole
expense of the shopping credits for small businesses, an approach which it
maintains is inconsistent with the PECO credits and which will assertedly
adversely impact the ability of small businesses to realize savings by
shopping. Moreover, NJCU finds the price increases made in the competitive
energy marketplace to be "very troubling" and inconsistent with the goals
of restructuring. NJCU specifically points to the assertions via affidavit
by MAPSA that shopping credits must be increased above the PECO levels to
reflect higher wholesale power costs. NJCU asserts that such developments
are inconsistent with the goals of restructuring as embodied in the Board's
Final Report and in the policy declarations in the Act, specifically that
it is the policy of this State to "place greater reliance on competitive
markets, where such markets to exist, to deliver energy services to
consumers in greater variety and at lower cost than traditional, bundled
public utility service." N.J.S.A. 48:3-50(a)(2). It postulates that the
early results of competition in Pennsylvania which assertedly have resulted
in significant increases despite offsetting reductions, may suggest that
marketers are reaping a disproportionate share of the benefits of
competition.
NJCU notes that the rate unbundling provisions in the Stipulation
reflect and resolve the concerns with respect to the PSE&G filing which
NJCU raised during the litigation phase and with which the ALJ concurred in
the I.D., specifically, to eliminate the significant intra-class cost
impacts in the initial unbundling and instead achieve intraclass
neutrality; to develop an explicit MTC as opposed to an implicit MTC; and
include a market capacity credit in addition to a market energy credit.
These provisions are also consistent with the provisions of the Act,
according to the NJCU. It also notes that the Stipulation reflects an
adjustment to the 1995 cost of service study which reduces the cost of
capital to 9.5 percent to reflect reduced risk associated with the
distribution function, which produces a $20 million reduction.
With regard to stranded costs, NJCU asserts that, with one exception,
the Stipulation is consistent with its litigated position that there either
be a direct sharing of stranded costs or an indirect sharing via
implementation of a minimum 10% base rate reduction. The Stipulation, by
reducing the stranded cost recovery opportunity from $3.9 billion as
requested, to $3.075 billion, produces a 20% reduction in the requested
amount. Moreover, such recovery is not guaranteed, while any overrecovery
will be returned to ratepayers. NJCU did reserve in the Stipulation its
right to challenge the tax treatment on securitization. It does not dispute
that there may be certain tax liabilities associated with securitized
stranded costs; however it concurs with the position expressed in
Stipulation II that actual taxes associated with the transition bonds
should be collected through a separate MTC, subject to true-up, rather than
through the transition bond charge. With regard to the Genco transfer, NJCU
recognizes that reasonable parties can disagree, but believes that the
assigned transfer value is within the range of reasonableness and is
therefore acceptable. NJCU further notes that, through oversight, paragraph
30A of the Stipulation does not reflect its agreement with the affiliate
code of conduct espoused by Enron.
13. TOSCO
Tosco, a signatory party to the Stipulation, asserts that the
Stipulation represents a full and fair resolution of this matter and will
provide for necessary finality and expeditious decision, and that any
re-opening of the record, as suggested in Stipulation II, will virtually
insure delay such that retail choice will not be implemented by August 1,
1999, as required by law. It argues that competitive markets, asset
valuations and restructuring activities are evolving on a continuing basis;
if that were the basis for reopening, the record would never close. It
submits that the record position of PSE&G has been substantially modified
because there is a true cap on all bill elements and accelerated rate
reductions for all customers; there is a shopping credit at the very top
end of a reasonable range; there are reductions in stranded costs of $0.825
billion; and there is true restructuring, with generation going out to bid
on a competitive basis in year four. It also notes that through legislative
resolution, on-site generation is enabled to develop without exit or like
fees.
14. INDEPENDENT ENERGY PRODUCERS OF NEW JERSEY
IEPNJ, a signatory party to the Stipulation, asserts that the
Stipulation succeeds on several fronts, by providing rate reductions of
nearly 14%; providing shopping credits well ahead of those in New England
and in line with those in Pennsylvania; providing a reasoned approach to
the treatment of stranded costs; providing a framework for the development
of a competitive market; and complying with all provisions of the Act. It
notes that PSE&G has abandoned a claim to recover over $570 million of
stranded costs, including significant investment in upgrades and repairs at
the Salem nuclear plants, which significantly contributes to the rate
reductions being offered, and that PSE&G is also at risk for recovery of
the $600 million of unsecuritized stranded costs. It maintains that the
Stipulation provides a road map to a competitive energy market by
transferring generating assets to a separate, competitive arm of the PSE&G
holding company, including the development of accounting protocols and a
code of conduct to govern relationships between PSE&G and Genco, with no
preference to be offered by PSE&G to Genco. In this regard, IEPNJ
recommends adoption of the affiliate code of conduct language proposed by
Enron as reflected in paragraph 30A of the Stipulation.
15. ENRON
Enron, a signatory to the Stipulation, recommends its adoption as
being consistent with the intent of the Act and supported by the record in
these proceedings. Enron also notes that the level of shopping credits is
consistent with the testimony of Enron and other witnesses during the OAL
proceedings who testified in support of shopping credits at levels which
will establish a robust competitive marketplace; that the shopping credits
in the Stipulation are among the highest in the country; and that the
Stipulation is also consistent with the ALJ's recommendation in
establishing a 2 mill per kwh adder. Enron also supports the provision in
paragraph 36 of the Stipulation wherein the parties agree to work
cooperatively to conclude the metering and billing proceeding in an
expedited fashion, no later than May 1, 2000, as compared to the
legislative requirement in section 6 of the Act, N.J.S.A. 48:3-54, that
such proceeding be completed by August 2000. Finally, Enron supports the
affiliate relations standards language set forth in paragraph 30A of the
Stipulation.
16. ROCKLAND ELECTRIC COMPANY
RECO, which was not a signatory to either the Stipulation or
Stipulation II, takes no position either in support of or in opposition to
the Stipulation. RECO emphasizes that the Board's ultimate decision in its
pending restructuring-related proceedings must be based on the merits of a
RECO-specific stipulation or an evaluation of the record evidence submitted
to the ALJ and the Board in those proceedings. The PSE&G decision or
components thereof should not bind RECO nor be evidentiary with respect to
resolution of RECO's proceedings, nor should it be considered a "threshold"
for settlement discussions in RECO's proceedings.
17. NATIONAL ENERGY MARKETERS ASSOCIATION
NEMA, a trade association of wholesale and retail marketers of
electricity, which was granted participant status in the restructuring
proceedings by the Board by Order dated July 30, 1998, was not a signatory
to either the Stipulation or Stipulation II. NEMA asserts that the
Stipulation falls short of the goals in both the Board's Final Report and
in the Act. NEMA is specifically concerned with regard to the valuation and
transfer of generation assets, and the development, cost allocation and
proper valuation of shopping credits for each ratepayer class. NEMA submits
that proper generation asset valuation is critical to a competitively
neutral, price- competitive marketplace, particularly in light of a
transfer to an unregulated affiliated entity. Absent an actual sale, NEMA
is concerned that the valuation placed on the assets based upon an
administrative estimate may be understated, and that such undervaluation
not only increases stranded costs, but unfairly subsidizes a competitive
advantage for the entity receiving the undervalued asset.
NEMA asserts that shopping credits have been used in early stages of
restructuring as a proxy for the complete unbundling of otherwise bundled
utility generation services. If shopping credits are set too low,
competition will not occur, consumers will not be able to experience
savings, and competitive suppliers will not participate in the New Jersey
market nor make long term investments in infrastructure. NEMA contends that
the level of shopping credits in the Stipulation do not properly value the
assets and services to be replaced by competition, and are therefore
inadequate. NEMA submits that shopping credits developed using actual or
projected costs do not reflect the full unbundled cost of generation and
related services; consequently the Stipulation's shopping credits
undervalue the true cost to ratepayers for these services. It also argues
that the shopping credits are also significantly understated relative to
both today's market values as well as any reasonable forecast of future
market values.
NEMA proposes that the Board commit the parties to reconvene
settlement discussions, to address the proper determination of stranded
costs implicit in the transfer of generation assets, the development of
affiliate rules and codes of conduct, and the development of shopping
credits that more accurately reflect the full regulated costs of generation
and related services.
18. EXELON ENERGY
Horizon Energy Company, d/b/a/ Exelon Energy is a marketer/aggregator
that provides electric service to retail electric customers throughout
Pennsylvania and currently provides natural gas service at retail in New
Jersey, and Exelon Management and Consulting is a broker that facilitates
transactions between buyers and sellers of energy. A subsidiary and
division, respectively, of PECO Energy Company, they are referred to
collectively as Exelon. Exelon moved to intervene in the restructuring
proceeding on February 4, 1999 and was granted participant status by the
Board on March 18, 1999. Exelon asserts to have a substantial interest in
the proceeding and submitted comments addressing both stipulations, with
respect to certain issues that assertedly are critical to the creation of a
competitive retail electricity market. Exelon maintains that the shopping
credit is the most critical factor in creating a viable competitive retail
electricity market; if the credits are too low, customers, particularly
residential, will not shop because the low level of savings will not
justify the customer's time and effort evaluating offers and selecting a
supplier. The highest level of residential customer interest in
Pennsylvania is in PECO's service territory, which has the highest
residential shopping credit. It submits that the shopping credit levels in
Stipulation II reflect credit levels that are necessary in New Jersey to
create competition. Exelon also suggests that transmission costs should be
backed out of the shopping credit to avoid confusion, or that PSE&G should
be required to commit to the transmission rates that are incorporated into
the shopping credits. Exelon supports Enron's alternative Code of Conduct
as set forth in paragraph 30A of the Stipulation. With regard to Attachment
6 to the Stipulation, Exelon identifies a number of proposed tariff
revisions which it maintains are either contrary to the Act or not in the
public interest.
B. COMMENTS ON STIPULATION II
Comments on Stipulation II, to the extent not jointly included in
comments previously submitted in response to the Stipulation, were
submitted by the following parties: RPA, PSE&G, MAPSA, NJBUS, IEPNJ, GPU
and ACE. These comments are summarized below.
1. DIVISION OF THE RATEPAYER ADVOCATE
The RPA's comments in support of Stipulation II repeat many of the
key elements and rationale for the proposal which were included in the
original submission and summarized previously, and thus will not be
repeated at length here. In short, the RPA asserts that Stipulation II is
superior to the Stipulation because it does a better job of balancing all
of the interests, as it will allow customers to save additional money
through a vibrant competitive market; achieve sustained rate reductions
beyond year four; and will allow PSE&G to recover and securitize a
"generous" level of stranded costs and to earn a fair return, thus
maintaining the Company's financial integrity. The RPA submits that the
Board must balance the interests of ratepayers in terms of rates and
service with the interests of the utility in maintaining its financial
integrity, and must include in its review the policies embodied in the Act.
The RPA argues that Stipulation II achieves the appropriate balance of
these goals and interests, with appropriate deference to the Act's mandate
for rate discounts and the establishment of a competitive energy
marketplace.
In support of its assertion regarding the impact of Stipulation II on
PSE&G, the RPA points to its testimony in the proceedings which it asserts
demonstrated that PSE&G could reduce its rates by 18.9% from current levels
(15% from April 30, 1997 rates) for the duration of the then-proposed seven
year transition period, not including the savings from securitization, and
to the ALJ's findings that PSE&G could reduce its rates by 10-12% over
seven years and maintain its financial integrity. It asserts that the rate
reductions proposed in Stipulation II are substantially below and of a
shorter duration than both the RPA's initial proposal and the ALJ's
recommendation, that the level of stranded cost recovery and securitization
in Stipulation II are substantially higher than in its litigated case, and
that PSE&G's financial condition has improved since these proceedings began
as supported by an attached affidavit from its witness Rothschild. Mr.
Rothschild asserts, among other things, that Wall Street analysts are
predicting positive earnings potential for PSE&G's parent company, Public
Service Enterprise Group ("PEG"), which would produce, if achieved, a
return on equity of 11.9% to 12.7% for PEG, which is higher than the return
found reasonable by the ALJ in this matter; that there has been a
substantial run-up in PEG's common stock price over the past two years, and
that debt costs have declined by 50 basis points since the period of time
analyzed in the record. All of these factors, it is asserted, lead to the
conclusion that rates could be reduced another 6.75% beyond the rate
reductions in Stipulation II and be absorbed by what would otherwise be
"excess earnings." Therefore, he submits that the Company will be able to
maintain its financial integrity throughout the six years encompassed by
Stipulation II.
The RPA further asserts that Stipulation II's proposed treatment of
the Genco transfer is far more balanced and appropriate than what is
proposed in the Stipulation.
2. PSE&G
PSE&G asserts that Stipulation II should be rejected. It maintains
that Stipulation II is not a "stipulation" at all since it is not the
product of negotiations between adverse parties but rather a joint effort
by parties with similar positions to reiterate their litigation positions.
PSE&G further asserts that Stipulation II is, in effect, a new motion to
reopen the record, which the Board has previously denied. PSE&G argues that
to the extent Stipulation II constitutes a new motion to reopen, it is
barred by the doctrines of Res Judicata and the Law of the Case. PSE&G
further argues that Stipulation II inappropriately relies upon inadmissable
hearsay affidavits containing extra-record materials, the nature of which
the Board has already properly determined it will not consider. PSE&G
further argues that the cases cited by Stipulation II regarding the alleged
need for further evidentiary hearings are wholly inapplicable.
PSE&G asserts that the rate reductions cannot be sustained as
proposed in Stipulation II without securitization. PSE&G submits that
subsections 14(a) and 4(i) of the Act, N.J.S.A. 48:3- 62(a) and N.J.S.A.
48:3-52(i), contemplates that securitization will provide a source for the
funding of rate reductions; however Stipulation II, while suggesting that
the rate reductions not be tied to securitization, offers no reasonable
alternative source of funding. Moreover, PSE&G argues, Stipulation II
ignores the fact that if PSE&G cannot securitize $2.475 billion of stranded
costs, it would be forced to recover that amount via an MTC, which would
require recovery of $620 million per year, plus a return on the unamortized
balance and taxes during the transition period, which would actually
produce a rate increase.
PSE&G notes that the proposed extension of rate reductions to
distribution rates in years five and six and beyond in Stipulation II is
not achievable. PSE&G notes at the outset that the basis for this extension
is primarily provided via the affidavit of a new consultant, Mr. Rohrbach,
who assertedly relies on hearsay information, is unfamiliar with the
relevant testimony and record, and ignores or disregards that record,
producing errors and misassumptions. The four alleged sources of rate
reductions in years five and six and beyond are addressed by PSE&G as
follows: First, Stipulation II claims that $290 million will be available
from the use of 60% of the distribution depreciation reserve of $569
million. This ignores the fact, as reflected in the record, and consistent
with the Stipulation, that all of the depreciation reserve is relied upon
in assisting the funding of stranded costs and achieving the rate
reductions during the Transition Period; accordingly none of the
depreciation reserve will be left to fund rate reductions in years five and
six. Second, Stipulation II proposes to use $35 million of expiring
amortizations to offset rate increases. In fact, these amortizations, which
terminate in 2000, are already included as a source of funding for the rate
reductions in the Stipulation. Moreover, while Stipulation II assumes a
gross-up of the expired amortizations to come to a pre-tax value of $63
million, PSE&G contends that this ignores the record evidence that the
amortization value of $35 million is already a grossed-up amount. Third,
Stipulation II utilizes $90 million of stranded costs related to the Salem
generating plant as reflected in the Stipulation to fund additional rate
reductions in years five and six. While the ALJ concluded that all Salem
capital additions were appropriately included in stranded costs, PSE&G
agreed to a $90 million disallowance, which has already been accounted for
as part of the $225 million reduction in the recovery of stranded costs
from $3.3 billion to $3.075 billion. Fourth, Stipulation II calls for the
use of an alleged $90 million LEAC overrecovery to support future rate
reductions. PSE&G states that this number is an error; the amount of the
overcollection which is relevant is $60 million, not $90 million, and that
this LEAC overrecovery is already accounted for in the Stipulation as part
of the aforementioned $225 million reduction in recovery of eligible
stranded costs.
PSE&G cites additional errors and/or misassumptions in the analysis
underlying Stipulation II's rate reductions in years five and six. First,
Stipulation II states that the reductions it proposes in years five and six
will require rates to be reduced by $900 million over the two year period.
In reality, at the recommended 14.05% rate reduction during years five and
six, set forth in Attachment B, Table 2 of Stipulation II, the real value
of such reductions would be over $1.2 billion according to PSE&G. Second,
Stipulation II provides that certain categories of available sources for
reductions in years five and six should be grossed-up for taxes.
Specifically, the "balance in distribution depreciation adjustment" in
Attachment B, Table 1 is erroneously grossed-up, since it applies to a
number which is already pre-tax. Combined with the aforementioned tax
gross-up error on the expiring amortizations, PSE&G asserts that these two
errors alone result in Table I of Attachment B overstating potential
sources of funds by $144 million. Third, Stipulation II alleges that the
Stipulation understates the savings from securitization because it does not
extend the calculation of the benefits of securitization beyond the
transition period. PSE&G asserts that this is a "regurgitation" of the RPA
witness Dirmeier's testimony in the proceeding which was already addressed
and rebutted via its witnesses, Murray and Krueger. In fact, because
securitized bonds permanently replace higher cost capital, there is a
permanent reduction in revenue requirements accompanying the lower bond
payments, the net effect of which is a long term savings which does not
expire at the end of the transition period. Fourth, Stipulation II assumes
further rate reductions from growth in kwh sales. However, according to
PSE&G, this totally ignores the fact that the Stipulation already accounts
for the sales growth effect during the transition period which reduced the
securitization charge. Fifth, Stipulation II recommends that rates stay at
the same reduced level in year seven and thereafter unless PSE&G proves the
need for an increase in a rate case. PSE&G points out that for a
distribution company with $830 million in revenues, to keep rates reduced
by approximately $600 million per year would require more than a rate case;
it would destroy the Company financially and/or lead to substantial
workforce reductions and threaten service quality.
PSE&G emphasizes the alleged absurdity of Stipulation II by pointing
to the unbundled rates it would produce at the end of the transition
period. The average shopping credit would be 5.4 cents, or 60% of the bill,
as opposed to a distribution rate of 2.03 cents, or 20% of the bill; yet
Stipulation II recommends that additional rate reductions come from the
distribution business rather than through other parts of the rate. This
proposal in Stipulation II would result in the relatively small
distribution company subsidizing marketer profits. PSE&G further points out
that the affidavit of Mr. Rohrbach supporting the Stipulation II rate
reductions, which represents that he participated in the PECO settlement
discussions, expresses concern with a possible increase in PSE&G's 2003
rate from 9.0 to 9.90 cents, while the PECO rate in 2003, which he
participated in establishing, will be 9.96 cents.
PSE&G further asserts that Stipulation II's claim that it provides an
opportunity to recover the same amount of stranded costs as the
Stipulation, is false. In fact, as evidenced by Attachment A to Stipulation
II, the Company will only be given an opportunity to recover $268 million
of unsecuritized stranded costs. Moreover, according to PSE&G, while
Attachment B Table 1 to Stipulation II creates the impression that PSE&G
has $4.3 billion dollars available to cover its stranded costs, other than
the listed items concerning securitization (the value of which is
assertedly overstated) and the distribution depreciation amortization
(listed as available only in the amount of $170.35 million), none of the
listed "opportunities" are in fact available for stranded cost recovery.
First, PSE&G argues that Stipulation II's proposal to disallow one-half of
bond issuance and transaction costs, leading to an effective reduction in
stranded cost recovery of $62.6 million is not supported by the Act or the
evidence. Second, PSE&G takes issue with Stipulation II's retention of a
7.3 mills per kwh retail adder for those customers who do not shop,
totaling a $54.64 million contribution to stranded costs. PSE&G asserts
that the proposed 7.3 mill adder is unsupported in the record, and cannot
be relied upon. Third, Stipulation II relies on the retention by PSE&G of
40% of the net present value of the distribution depreciation amortization,
or $170.35 million, as a contribution towards stranded cost recovery. PSE&G
maintains that the record in the case demonstrates that all of the
depreciation amortization will be needed to fund stranded cost recovery and
the rate reductions, and will not be available to pay for rate reductions
in years five and six. Fourth, Stipulation II identifies the "Genco
Transfer Premium" as an additional stranded cost recovery opportunity. In
fact, PSE&G asserts there is no such premium; the proposal in Stipulation
amounts to nothing more than a $600 million disallowance of stranded costs
based upon a superficial plant value analysis. Fifth, Stipulation II
purports to allow the Company to retain $43 million in "non-credited cost
reductions" which would otherwise be passed through to customers via rate
reductions, for stranded cost recovery. PSE&G asserts that the alleged
savings to be used to fund the proposed rate reductions in years five and
six will not, in reality, be available for such purposes, because they are
already being relied upon to fund the rate reductions during the transition
period or stranded cost recovery.
Finally, PSE&G notes that Stipulation II identifies $828 million of
"mitigation opportunities" as additional "stranded cost recovery
opportunities." PSE&G asserts that these alleged mitigation opportunities,
originally proposed by the Auditors, were unfounded and explicitly rejected
by the ALJ in his I.D. Moreover, PSE&G contends that use of the $828
million is in error for three reasons: 1) it is a pre-tax number; it would
have to be reduced to $330 million to bring it to a net-of-tax basis
consistent with the stranded cost amount; 2) approximately half of this
amount is related to generating facilities and accordingly these mitigation
savings have already been reflected in the reduction of stranded costs from
$3.9 billion to $3.3 billion; and 3) a portion of these savings relate to
transmission rates which are regulated by the FERC. Correcting these
alleged errors reduces the claimed $828 million of mitigation to less than
$250 million, which is far less than the amount of stranded cost recovery
for which PSE&G is at risk, since it has already agreed to cap
unsecuritized stranded costs at $225 million less than the total, and
because the primary source of the opportunity is via the retail adder,
which PSE&G loses as customers switch suppliers. PSE&G claims that
assertion in the Mr. Dirmeier's affidavit attached to Stipulation II, that
the Company is not at risk for the $600 million, is in error since he fails
to account for income taxes associated with the depreciation reserve
amortization and thereby overstates stranded cost recovery by approximately
$100 million (from $458 million to $357 million). In addition, PSE&G claims
that the contribution to stranded cost via the retail adder is overstated
in Mr. Dirmeier's affidavit, since it relies on a very low shopping rate
which is not even consistent with the shopping rate assumed in Mr.
Rohrbach's affidavit attached to Stipulation II. When these errors are
corrected, the actual retention rate from the depreciation amortization and
the retail adder is asserted to be $456 million, or 76% of the $600
million, not the erroneous 96%.
Contrary to the assertions of Stipulation II's proponents, PSE&G
asserts that the generation asset transfer is discussed and supported in
the record. It maintains that there was extensive testimony regarding the
need for separation of generation from the utility, as well as the value of
the assets, and the benefits of removing the risk of nuclear operations
from ratepayers. Moreover, contrary to the suggestions by Stipulation II's
proponents, subsection 7(d) of the Act, N.J.S.A. 3-55(d), specifically
contemplates the transfer of assets from a utility to a related competitive
business segment of the holding company. PSE&G contends that efforts in
affidavits attached to Stipulation II to show the $1.768 billion asset
valuation too low are flawed, because they rely on hearsay information and
a third party report, and because no attempt was made to assess whether any
of the data from recent sales is relevant to the specific PSE&G plants
being transferred. With regard to the proposal in Stipulation II regarding
Codes of Conduct, PSE&G asserts that the proposal assumes market power
which has not been proven or found, would render Genco a State-regulated
generation company limited to electronic bulletin board transactions,
intrudes on FERC-jurisdictional issues, and is inconsistent with the Act.
PSE&G asserts that Board regulation of affiliate transactions should be
limited to ensure that there is no cross-subsidization or improper exchange
of "restricted information."
PSE&G further asserts that, contrary to those in Stipulation II, the
shopping credits proposed in the Stipulation are supported by record
evidence (Exhibit EN-35(R), pp.10-13; RA- 35, pp.3-5), and will encourage
competition, while avoiding burdening customers who remain with PSE&G from
subsidizing those who choose other suppliers, and maximizing rate
reductions. The Stipulation's shopping credits are fixed, not floating as
originally proposed by PSE&G, which marketers testified would be helpful,
and they are market based and include a reasonable retail adder. PSE&G
contends that the record shows that rate reductions cannot be achieved if
the shopping credit is increased unduly. PSE&G further asserts that the
"eleventh hour"attempt to increase shopping credits from the range in the
Stipulation (5.03 to 5.10 cents) to 5.40 cents is based on erroneous and
untimely assumptions and arguments. The assertion that suppliers will be
unable to deliver savings at the Stipulation's "too low" shopping credit
levels is undermined by Stipulation II's own supporting affidavits, which
claim that the PECO shopping credits have led to a vibrant competitive
marketplace. PSE&G points out that the PECO shopping credits are, on
average, virtually identical to those in the Stipulation, that suppliers in
PECO are facing the same PJM region market conditions as will be
experienced in New Jersey, and that the PECO shopping credits have not been
increased to reflect alleged changes in market conditions as is being
proposed here. Yet, according to Stipulation II's own proponents, the PECO
marketplace is successful and PSE&G notes that the record in this
proceeding includes testimony extolling the virtues of the Pennsylvania
shopping credit. Moreover, PSE&G points out that one of MAPSA's members
sponsored public testimony by former Pennsylvania PUC Commissioner Hanger
before the New Jersey Senate Committee considering restructuring
legislation on November 12, 1998, stating that "Given present market
conditions, New Jersey will not create competition for residential and
small commercial customers unless the residential shopping credit is
approximately 5.0 to 5.5 cents per kwh." The residential credit in the
Stipulation, which Stipulation II's proponents claim is too low, is 5.86
cents, and no one has alleged that market conditions today differ from
November 1998. Moreover, the alleged differences in cost between
Pennsylvania and New Jersey which necessitate a higher credit than PECO
amount to only about 1 mill per kwh; yet the Stipulation's average shopping
credit is this much higher than the PECO credit already.
PSE&G contends that the remainder and majority of the proposed
adjustments to increase the Stipulation's shopping credits come from the
unsubstantiated market price increase. PSE&G also asserts that there is no
assurance that increased shopping credits will result in any savings to
customers, as opposed to being retained by marketers as additional profits
or to cover inefficient marketing or administrative costs. PSE&G takes
issue with additional assertions in the affidavits attached to Stipulation
II. While there is an assertion that shopping credits must be increased to
5.40 cents for PSE&G customers to receive the same rate discounts that PECO
customers enjoy, in fact, the Stipulation provides shopping credits nearly
identical to, and in fact slightly higher than, PECO's, while regulated
rates for PECO will be increasing over the next few years, and PSE&G's will
be decreasing. PSE&G also contends that the retail adder proposed in the
Stipulation II is unsubstantiated and could have been presented for
cross-examination in the case, but was not. It also argues that the claim
that the Stipulation's shopping credit is more like the California and
Massachusetts credits than like PECO is simply wrong: the record
established that the California credit is a floating credit with no retail
adder, as initially proposed by PSE&G, and that the Massachusetts credit
was below market wholesale prices. The Stipulation's credits are fixed, not
floating, like PECO's, and are almost identical in magnitude to PECO's.
3. MAPSA
MAPSA's comments repeat the arguments accompanying and in support of
the original filing of Stipulation II, and point to the support of the
"huge majority" of PSE&G customers and government organizations(8) that will
be directly affected by this matter as an indication of Stipulation II's
superiority over the Stipulation. The MAPSA comments also include a
supplemental affidavit by Mr. Rohrbach purporting to explain in further
detail certain financial calculations, the impact of the shopping credit on
PSE&G's cash flow, the rationale for the higher shopping credits proposed
in Stipulation II.
- --------------------
8 On March 30, 1999, the New Jersey State League of Municipalities
sent a letter to the Board expressing its "unqualified support" for
Stipulation II.
The affidavit is argued to demonstrate that the financial impact on
PSE&G associated with the higher shopping credits in Stipulation II would
be "negligible." MAPSA's affidavit asserts that the nominal cost to PSE&G
associated with the higher shopping credit, assuming shopping percentages
ranging from 15%-25% for residentials to 100% for large industrials, is
under $18.6 million per year; however, it is asserted that Genco can sell
50% of the power freed up by customers leaving BGS into the forward market
at higher prices, thereby offsetting the net impact of the shopping credit
by $6 million per year, to $12.6 million annually. MAPSA also asserts that
the higher shopping credits will primarily benefit customers, through the
opportunity for savings because in a competitive retail marketplace,
marketers will not be able to retain a portion of the shopping credit as
enhanced profits, but will have to pass the savings along to customers.
4. NEW JERSEY BUSINESS USERS
NJBUS reiterates the key reasons as to why, in its view, Stipulation
II is preferable to the Stipulation. NJBUS asserts that Stipulation II
provides a fair resolution of all the key areas of these proceedings, while
at the same time agreeing for the purpose of settlement, to resolve many of
the issues in a manner preferred by PSE&G. NJBUS points out that the rate
reductions embodied in Stipulation II are identical to those provided in
the Stipulation, and asserts that if Stipulation II is adopted, it would
waive its objection to the "pre-funding" of 1% of the securitization
implicit in the rate reduction schedule, as well as its objections to the
initial 5% reduction being taken from current rates rather than April 30,
1997 rates. Stipulation II also incorporates the implementation of the rate
reduction per the PSE&G proposal, that is, via a restructuring rate
reduction line item. However, NJBUS cautions that this mechanism will lead
to an automatic rate increase of up to 13.9% after the transition period;
Stipulation II essentially eliminates this rate shock by applying cost
savings to which ratepayers are entitled, and which would otherwise be
realized by shareholders under the Stipulation. Absent a settlement, NJBUS
asserts that subsection 4(f) of the Act, N.J.S.A. 48:3-52(f), would require
that rate reductions come from unbundled rate elements, rather than from
credits applied to customers' bills. NJBUS accepts the restructuring rate
reduction line item as allocating rate reductions in a fair manner to all
customers, provided that increases in years five and six are eliminated.
NJBUS asserts that the Act does not permit securitization at the
$2.475 billion level, but it agrees to waive its objection to this level in
the interests of settlement based on either the mitigated stranded cost
level available for recovery as calculated by PSE&G ($3.075 billion) or by
Stipulation II ($2.475 billion). With regard to PSE&G's proposal to include
$125 million of bond issuance and transaction costs as part of stranded
cost recovery through securitization. NJBUS asserts that it is fairer to
ratepayers that PSE&G be required to share the 50% of the bond transaction
costs, as proposed in Stipulation II. NJBUS also asserts that Stipulation
II is superior to the Stipulation because it properly recognizes the full
market value of the Company's owned generation plants. NJBUS maintains that
the $600 million of unsecuritized stranded costs can be reduced to zero by
properly crediting ratepayers with the $600 million attributable to the
above net book market value of the generating assets. NJBUS notes that
Stipulation II's agreement to allow the immediate transfer of PSE&G's
generating assets, and thereby waive the protection of an ongoing review
and true-up of the amount of stranded costs, is contingent on valuing the
assets at $2.9 billion ($2.4 billion net of taxes), as compared to the
asset transfer value of $1.768 billion implicit in the Stipulation. NJBUS
states that the $2.9 billion asset value is based upon a November 12, 1998
report of Resource Data International, Inc. which sets forth average market
recoveries for 35,000 MW of generation plant sales nationally over the
prior 18 months. It asserts that subsection 11(d) of the Act, N.J.S.A.
48:3-59(d), requires that the full market value of the assets be credited
to offset stranded costs.
Finally, NJBUS reiterates the arguments presented in the Stipulation
II filing and summarized above with respect to the need for the higher
shopping credits in its proposal.
5. INDEPENDENT ENERGY PRODUCERS OF NEW JERSEY
IEPNJ opposes the adoption of Stipulation II, and reaffirms its
support for the Stipulation. In its view, Stipulation II reflects an effort
to "cherry pick" the ideal solution on every issue, and is ultimately
illusory and unobtainable and, indeed, disingenuous in many respects. IEPNJ
maintains that Stipulation II was crafted in a vacuum, without regard to
the record developed in this matter and without an effort to reconcile the
diverse interests of the parties. While Stipulation II incorporates the
elements of the Stipulation concerning recovery of NUG costs in an NTC,
IEPNJ points out that it has no "better choice" than to accept these terms
for NUG cost recovery since they are required by the Act as well as by a
prior Third Circuit Court decision. However, IEPNJ asserts that the RPA
attempts to "tweak" the legislative guarantee of full recovery of NUG
contract costs by arguing that PSE&G should be required to maximize the
market value realized from the resale of purchased NUG power and thus
mitigate stranded costs, and that PSE&G should attempt to mitigate, in
particular, the NUG contracts held by its own affiliates. IEPNJ argues that
such efforts to impose a mandatory mitigation obligation on PSE&G are
inconsistent with the Act and with applicable case law.
6. JERSEY CENTRAL POWER & LIGHT COMPANY, D/B/A GPU ENERGY
GPU, which was not a signatory to either stipulation, addresses
certain procedural aspects of Stipulation II, but does not discuss any of
the specific terms that might be included in any Board Order resolving this
matter. GPU argues that Stipulation II should not be considered a competing
settlement proposal but, rather, should be regarded as simply joint
comments on the Stipulation, or a position paper, rather than a competing
settlement proposal. It submits that there can be no true settlement
reached that does not include the Company, the primary moving party to the
case, particularly when the outcome of the case will primarily and directly
impact the financial condition of PSE&G. It notes that conversely, the
goals of the parties to Stipulation II, whose interests are all more or
less aligned on the same side of the issues, can be achieved essentially
without cost to any of those parties, and accordingly, unlike PSE&G, the
parties to Stipulation II have few practical restrictions in striking a
deal which serves their own interests, without taking into account the
impact on PSE&G. PSE&G argues that, by definition, such a one-sided
"settlement" cannot be viewed as such in the true sense of the word, since
it is devoid of the type of give-and-take compromises that are the essence
of a true settlement, and thus, it should not be accorded the weight of a
true settlement.
7. ATLANTIC CITY ELECTRIC
ACE, which was not a signatory to either stipulation, neither
endorses nor opposes the adoption of the Stipulation, but opposes adoption
of Stipulation II, since the principles underlying Stipulation II could
have adverse consequences for other utilities, including ACE. ACE submits
that the proposals in Stipulation II are not supported by the record, and
that their adoption would violate the parties' due process rights. It
further contends that Stipulation II includes arbitrary shopping credits
set based upon the wishes of large energy marketers and not on the costs of
providing basic generation service. As well in its view, the proposal rests
on improper interpretations of the Act with regard to securitization and
rate reductions. ACE objects to a utility being forced to reduce its
stranded cost recovery in order to fund an arbitrarily-set shopping credit,
as it maintains is the case with the credits embodied in Stipulation II.
DISCUSSION AND FINDINGS
As noted above, since the close of hearings in these proceedings, the
New Jersey State Legislature passed, and on February 9, 1999 Governor
Whitman signed into law, the Electric Discount and Energy Competition Act,
N.J.S.A. 48:3-49 et seq. The Act in numerous areas sets forth explicit
directives with respect to the implementation of electric retail choice
and, during the Transition Period, the Act establishes minimum aggregate
rate reductions for electric public utilities. It also provides specific
guidelines and parameters for the Board to follow with respect to a myriad
of restructuring related issues, but in many areas leaves important
decision-making details to the expertise of the Board consistent with those
guidelines and parameters. The Act requires that each electric public
utility submit rate unbundling, stranded cost and restructuring filings to
the Board, in a form to be determined by the Board, and it explicitly
provides that filings submitted and proceedings conducted prior to the
Act's effective date satisfy such requirements, provided that the Board
shall take such actions as may be necessary, if any, to ensure that the
requirements of the Act are met in all regulatory actions related to the
Act which were commenced prior to its enactment. N.J.S.A. 48:3-98. The
Board HEREBY FINDS that this requirement of the Act has been met and that
the filings submitted and the proceedings conducted prior to the Act's
effective date were thorough and complete and provide an adequate record,
and therefore satisfy the Act's requirements.
As summarized in some detail hereinabove, the Board has, by virtue of
the issuance of its April 30, 1997 Order adopting and releasing the Final
Report and the subsequent Board- directed electric public utility filings
on July 15, 1997 and ensuing hearings at the OAL and before the Board,
caused to be developed an extensive evidentiary record in these
proceedings, and has provided substantial opportunity for public input in
both the development of its policy findings and recommendations as set
forth in its Final Report, and in the subsequent Board- directed rate
unbundling, stranded cost and restructuring filings and related
proceedings. As noted above, twenty days of evidentiary hearings were held
at the OAL on the stranded costs and unbundling issues, and an additional
twenty days of evidentiary hearings were held before Commissioner Armenti
on the restructuring issues.
In reviewing the voluminous record before us, it is clear that many
of the significant aspects of and issues in these proceedings are factually
interrelated, with the outcome of one materially impacting decisions in
other areas. This is particularly the case with respect to the level of
rate reductions, the level of stranded costs, the level of shopping
credits, and the various components of unbundled rates. In transmitting
these matters to the Office of Administrative Law, the Board, in
anticipation of the enactment of legislation in this area, requested that
the Administrative Law Judges in this and the other electric public utility
proceedings develop a broad record on stranded costs and unbundling issues
and, specifically, with respect to the issues of rate reductions, stranded
costs and securitization, issue a range of recommendations. With the
passage of the Act, with its explicit directives and guidelines and
parameters, the Board is now prepared to render decisions with respect to
the subject issues in these proceedings in conformance therewith, based
upon the record developed and comments provided, and in a time frame
necessary to comply with the retail choice time line set forth in the Act.
We acknowledge and appreciate the efforts of ALJ McAfoos in presiding
over the stranded costs and unbundling proceedings and in producing a
detailed and thorough Initial Decision. In light of the enactment of the
new legislation and the subsequent developments in the case as described
hereinabove, we HEREBY MODIFY the Initial Decision as follows:
Subsequent to the close of hearings and the issuance of the Initial
Decision, shortly after the Act was signed into law, and with the
encouragement of the Board, as set forth in our February 11, 1999 Order,
settlement conferences were held among the parties. These discussions
ultimately led to a crystallization of the issues and the proffer of two
alternative settlement proposals which are before us for consideration
along with the Initial Decision and the evidentiary record developed before
ALJ McAfoos and the Board. We are cognizant of the fact that each of the
proposed stipulations before us is non-unanimous. Nonetheless, it is well-
established that the Board may consider and rely upon non-unanimous
stipulations as fact- finding tools so long as the Board independently
examines the existing record and expressly finds that the stipulated rates
yield rates that satisfy the statutory standards. I/M/O Petition of PSE&G,
supra at 270. We continue to believe that, in complex and technical cases
such as this one, "the adversary parties themselves are often in the best
position to work out the framework of a reasonable resolution of the
issues." Id. at 259. We FIND that in the instant matter, all of the parties
in this case were given an opportunity and, indeed were urged by the Board,
by Order dated February 11, 1999, to participate in an attempt to negotiate
a settlement and we FURTHER FIND that all parties were given an
opportunity, via the submission of written comments, to raise their
concerns to the Board with respect to the alternative stipulations which
were proffered to the Board for its consideration. Id. at 270. We HEREBY
REJECT the contention of some of the parties in their comments that there
is a need to reopen the record for additional evidentiary hearings in light
of the passage of the Act and/or the content of the settlement proposals,
essentially for the reasons set forth in our March 25, 1999 Order denying
MAPSA's initial motion to reopen and supplement the record. We FIND that
the evidentiary record before us as summarized hereinabove, is sufficiently
comprehensive and detailed to allow us to fully consider all of the issues
before us.
As stated in our Summary Order in this matter, and as will be
explained below, based on our review of the extensive record in these
proceedings, as well as the two alternative stipulations and the comments
received thereupon, we FIND the PSE&G-sponsored Stipulation to be, overall,
more financially prudent and consistent with the Act's requirements and
consistent with the record. We FURTHER FIND that with the modifications and
clarifications to a number of key elements, as set forth in our Summary
Order and amplified herein, the Stipulation can serve as a reasonable
framework for a fair and reasonable resolution of these matters based upon
and consistent with the record before us. Conversely, as described below,
we FIND Stipulation II, sponsored by the Ratepayer Advocate and other
parties, to be, in many significant areas, not supported by the record,
reliant upon miscalculations and inappropriate assumptions or conclusions,
and not reflective of a balanced consideration of all the issues in these
matters. However, a number of specific and legitimate concerns have been
raised by the commentors, including the proponents of Stipulation II, and
where appropriate and as discussed below, these have been addressed by the
modifications and clarifications to the Stipulation set forth hereinbelow.
First, with regard to the issues of the magnitude of the rate
reductions and the shopping credits, we note the following with respect to
the provisions of the Act. Section 4 of the Act, N.J.S.A. 48:3-52, requires
that as of August 1, 1999, each electric public utility must reduce its
aggregate level of rates, inclusive of all unbundled rate components, by at
least 5%. Section 4 of the Act further provides that the Board may adopt a
schedule for the phase-in of additional rate reductions over the ensuing 36
months, except that, in any event, by no later than August 1, 2002, each
electric public utility shall reduce its aggregate level of rates by at
least 10% relative to the level of bundled rates in effect as of April 30,
1997 (since PSE&G received a 3.9% overall increase in rates subsequent to
April 30, 1997 to recover DSM program costs, this provision, in effect,
requires a 13.9% reduction from current rates by PSE&G by no later than
August 1, 2002), and each electric public utility shall sustain such final
level of rate reduction for at least 12 months, through at least July 31,
2003. These provisions of the Act essentially establish a price cap under
which all unbundled rate elements must fit during the four year period from
August 1, 1999 through July 31, 2003. As such, to the extent one unbundled
rate component is increased, all other things remaining equal, either one
or more other unbundled rate components must be decreased, or the overall
aggregate level of rate reduction must be reduced from what it otherwise
would or could have been. This relationship is particularly relevant given
the requirements and provisions of subsections 4(b) and 4(f) of the Act,
N.J.S.A. 48:3-52(b) and (f), specifically those provisions which require
the Board to establish shopping credits, applicable to the bills of retail
customers who choose to purchase electric generation service from a duly
licensed power supplier, at levels which, among other things, encourage the
development of a competitive retail supply marketplace, while at the same
time providing and sustaining the required aggregate level of rate
reductions. Put simply, under a price cap as mandated by the Act, once the
other unbundled rate components, including provisions for stranded cost
recovery, are established, higher shopping credits would result in lesser
rate reductions, and vice versa, absent a deferral of the recovery of costs
into some future period. In a very real sense then, the Board is required
by the Act to balance the achievement of two crucial, yet potentially
conflicting factors. All other things being equal, a movement too far in
one direction, in favor of larger shopping credits at the expense of lesser
rate reductions, would benefit electric power suppliers and/or shopping
customers, at the expense of customers who do not switch suppliers.
Conversely, a move too far in the other direction in favor of lower
shopping credits to achieve higher rate reductions would benefit
non-shopping customers, while potentially inhibiting the development of a
competitive market by making it less attractive for third party suppliers
to enter the marketplace, thus resulting in diminished opportunities for
customers to switch suppliers.
We FIND that the rate reduction schedule provided in the Stipulation
meets the legislatively-mandated minimum rate reduction levels for August
1, 1999 and August 1, 2002, and, in fact, exceeds the minimum required rate
reductions during the period from January 1, 2000 through July 31, 2002, by
introducing additional phased-in reductions, which additional steps are
permitted, but not mandated by the Act. These enhanced rate reductions, as
set forth more fully below, support the level of bondable stranded costs
found to be reasonable by the Board. Additionally, we FIND that the
Stipulation, specifically the provisions of paragraph 1(b) thereof,
complies with the provisions of subsection 4(l) of the Act, N.J.S.A.
48:3-52(l), which require immediate and full pass-through of securitization
savings to customers. We note, however, that the Stipulation
inappropriately conditions the entire incremental rate reductions in
January 2000, August 2001 and August 2002 on the implementation of the
securitization bond charge. As noted previously, the 13.9% rate reduction
in August 2002, as well as the 5% rate reduction in August 1999, are
required minimum rate reductions, and the imposition of the noted condition
for these two rate reductions is clearly inappropriate. As discussed in
more detail below, we believe, that if securitization is implemented, the
two intermediate rate reductions should, at a minimum, be based on certain
guaranteed levels even if the estimated savings from securitization are not
fully realized. Should greater savings be achievable as a result of
securitization as implemented, these additional savings shall be reflected
in reductions beyond the requisite minimums.
Moreover, in our view, the level of the BGS rates/shopping credits
embodied in the PSE&G Stipulation, while supported in the record and
consistent with the provisions of subsections 4(b) and 4(f) of the Act,
N.J.S.A. 48:3-52 (b) and (f) exceed those contemplated by many of the
parties and indeed the ALJ when the rate reduction recommendations were
made. The PSE&G proposal for a 6.7% rate reduction in its July 15, 1997
filing was accompanied by a proposal to set the BGS price at a level
consistent with the forecasted 1999 PJM spot energy price. The Auditors'
recommended rate reduction range of between 8.5% and 14% was premised on an
audit of the Company proposal, including the PJM energy rate proposal for
BGS and the shopping credit. As discussed above, the rate reduction
proposals sponsored by several parties in the proceeding, including NJBUS,
NJICG and NJCU, fell in the range of 10 to 12 percent.
It is clear that the record reflects a wide range of rate reduction
proposals, and the ALJ himself recommends a range of rate reductions of
between 10 and 12 percent which he finds will not unduly impair the
Company's financial condition. The ultimate rate reduction step in the
PSE&G Stipulation of 13.9% from current rates, which level is mandated by
the Act, exceeds this range of reductions found reasonable by the ALJ. At
the same time, the shopping credit levels in the PSE&G Stipulation are far
in excess of the levels originally proposed by PSE&G. We note that the
proposed 13.9% rate reduction in the Stipulation is to be phased in over
three years. We FIND that a phase-in is reasonable in order to provide
PSE&G an opportunity for recovery of non-securitized stranded costs, as
addressed below, while at the same time establishing the level of shopping
credits provided in the PSE&G Stipulation. Nonetheless, even considering
the phase-in, the average rate reduction for all customers over the entire
four year Transition Period, as provided by the PSE&G Stipulation as
modified herein, still exceeds nine percent, and additional savings are
made possible by the shopping credit and retail adder, which brings the
total available savings to in excess of 10 percent over the entire four
year Transition Period. Considering the higher level of shopping credits,
including the 2 mill per kwh retail adder embodied in the shopping credits
proposed in the Stipulation, we FIND that the rate reductions in the
proposed Stipulation fall within the range supported by the record and
recommended by the ALJ. Moreover, we note and emphasize that, consistent
with the provisions of subsection 4(h) of the Act, N.J.S.A. 48:3-52(h),
these total rate reductions do not include the additional energy tax
savings that customers will realize as a result of the Energy Tax Reform
Act, P.L. U.S. 1997, c.162.
Further, we note that the provisions of subsection 4(j) of the Act,
N.J.S.A. 48:3- 52(j), require that the maximum level of rate reduction (in
the case of PSE&G, 13.9% from current rates) be sustained until at least
July 31, 2003. Accordingly, it is appropriate, and we FIND it to be
reasonable and consistent with the Act, that the Transition Period consist
of the four year period from August 1, 1999, when the rate reductions
begin, through July 31, 2003, at which time the mandated price cap expires
and the Board may reset the aggregate level of rates.
We FIND that the higher levels and more extended period of rate
reductions as proposed in Stipulation II are not supported by the record,
and are indeed reliant on assumptions which are plainly incorrect. The
proposed use of $290 million, representing 60%, of the distribution
depreciation reserve amortization of $569 million as a source of additional
rate reductions is inappropriate, since the $569 million amortization is
already embedded in the Company's petition, and fully utilized and relied
upon in the ALJ's recommended range of rate reductions, as well as to
partially fund the rate reductions and stranded cost recovery during the
Transition Period embedded in the Stipulation. Use of a portion of this
amortization in an attempt to justify further rate reductions in years five
and six would result in an inappropriate "double-count" of this source of
funds. Additionally, and as asserted by PSE&G in its comments, Stipulation
II incorrectly relies upon the gross-up of $35 million of expiring
amortization levels which, in fact, already represent grossed-up figures,
and it also incorrectly relies upon a gross-up of the "balance in the
distribution depreciation adjustment," which is applied to a number which
is already grossed-up, thus representing two additional examples of
"double-counting." We also conclude that use of $90 million in write-offs
associated with the Salem generating plant to fund rate reductions in years
five and six, as proposed in Stipulation II, represents yet another
"double-count," since this write-off is already reflected in a reduction in
the level of stranded cost recovery provided in the Stipulation, as
modified herein. We do, however, concur with several of the comments and
the proposal in Stipulation II and FIND that the actual LEAC overrecovery
balance existing as of August 1, 1999, consists of funds overcollected from
and appropriately returned to the ratepayers of PSE&G, with interest, and
thus should be utilized for the benefit of customers, not the Company.
However, we believe it more appropriate that this be accomplished by
utilizing the overrecovered amount as an offset to the NTC deferred
balance, rather than to justify and establish a specific level of rate
reduction in years five and beyond as proposed by the RPA. By applying the
LEAC overrecovery balance to the starting deferred NTC deferred balance
effective August 1, 1999, these monies will be available, with accrued
interest, to mitigate the impacts of recovery of any other deferred costs
in year five and beyond.
Notwithstanding our finding that Stipulation II "double-counts" the
expiring amortizations by grossing-up an already "grossed-up" number, we do
believe that when for $35 million of amortizations indeed expires it can
allow for additional rate reductions beyond those contemplated in the
Stipulation and beyond those made possible because of the amount of
bondable stranded costs authorized by this Order. Accordingly, we believe
it appropriate that if securitization is implemented, the proposed 8.25%
rate decrease on August 1, 2001 be increased by 0.75% to 9.0%. This figure,
as well as the 7% January 1, 2000 rate decrease, shall be a guaranteed
minimum decrease and shall not be contingent upon the achievement of any
particular minimum level of savings from securitization.
With respect to the levels of shopping credits, it is plainly evident
that the shopping credits embodied in the Stipulation are significantly
higher than those proposed by the Company in its filing, and reflect
consideration of the criticisms leveled at that proposal by the parties to
this proceeding, as summarized hereinabove, some of which were found to
have merit by the ALJ. The proposed shopping credits in the Stipulation
reflect market capacity costs, in addition to market energy costs, and also
include a retail adder as recommended by the ALJ. The market energy and
capacity costs reflected in the shopping credits contained in the
Stipulation are consistent with the market price projections presented in
the testimony of Company witness Loxley. The shopping credits in the
Stipulation also make provision for transmission costs, and the losses and
sales tax which will be incurred by third party suppliers. We note that the
shopping credits are on par with, and indeed on average slightly higher
than those in the PECO service territory in Pennsylvania. These higher
shopping credits are noteworthy because, both during the evidentiary
proceeding and in comments on the Stipulation, various marketers have
pointed to the PECO service territory as having the most robust and active
retail electricity marketplace in the nation, and the PECO service
territory lies in the same regional electricity marketplace as PSE&G.
On the other hand, we find that the shopping credits proposed in
Stipulation II are excessive, unsupported by the record, and based upon
flawed reasoning. First, because of the interrelatedness between the
shopping credits and the rate reductions, as addressed above, and having
established herein the appropriate levels for the other unbundled rate
components, namely the distribution charge, including the Corporate
Business Tax ("CBT") and the Transitional Energy Facility Assessment
("TEFA"), SBC, MTC, and TBC, and having found that Stipulation II's
underlying financial analysis is flawed, the level of shopping credits
proposed in Stipulation II would lead to either lower rate reductions or a
significant deferral of cost recovery, which would lead to higher rates in
the future.
In addition, while acknowledging that the shopping credits in the
Stipulation are higher than those in PECO's territory, the proponents of
Stipulation II assert that, on a "real" basis, the credits in the
Stipulation are lower, citing asserted changes in the PJM electricity
market and differences in costs between New Jersey and Pennsylvania. It is
asserted in supporting affidavits that the credits in the Stipulation would
have to be raised by about 0.6 cents in order to provide a comparable level
of competition to that enjoyed by PECO customers. Based on our review of
the submissions, the Board concludes that almost all of the claimed
differences (approximately 5 of the claimed 6 mill average difference)
relate to asserted increases in market prices since the PECO shopping
credits were established. We FIND the claim that an increase in the
shopping credits to reflect alleged market price increases is necessary in
order to provide savings similar to those afforded in the PECO territory to
be simply untrue; no provision was made in the PECO decision by the
Pennsylvania Public Utility Commission ("PaPUC") to update the shopping
credits to reflect changed market conditions, as is suggested be done here.
To the extent that retail competition is flourishing in PECO's service
territory, it is occurring at the fixed levels of shopping credits
established by the PaPUC in April 1998, despite alleged increases in market
price conditions. Moreover, even assuming arguendo, that the cited market
prices presented via a post-hearing affidavit are accurate, it is important
to note that while the Stipulation's shopping credits are premised on
long-term pricing forecasts which have been the subject of substantial
review in the proceeding, the proponents of Stipulation II would have the
Board premise a decision to set shopping credits for four years based upon
a current price condition; however, such price conditions may change daily,
if not more often. Accordingly, the Board is not persuaded that it
reasonably could or should base its decision on this "snapshot" market
information. Rather, we FIND that it is more appropriate to establish the
shopping credit levels based upon the market price forecasts over the four
year Transition Period which have been presented in this proceeding and
which have been the subject of extensive review in the record.
Finally, we FIND MAPSA' s arguments in support of higher shopping
credits to be internally inconsistent. MAPSA asserts that the BGS charge or
shopping credit should be calculated using the Pennsylvania "residual"
method, which begins with the bundled rate (recognizing the mandated
discount) and then subtracts from that bundled rate the distribution rate,
transmission rate, societal benefits rate and taxes. Such a method bears no
relation to market prices, either current or projected, and might produce a
shopping credit which is reflective of current market conditions only by
happenstance. Moreover, the use of such a residual method during the last
year of the Transition Period, when the rate discount increases to 13.9 %,
would produce shopping credits which are actually lower than the level of
shopping credits established herein.
With regard to the total level of opportunity for recovery of
stranded costs, a key issue with respect to an assessment of the proposal
in the Stipulation is the value assigned to the generating assets as part
of the transfer. Before addressing that issue, however, we address a
related issue which as described herein has been raised in the comments by
MAPSA and the other proponents of Stipulation II, specifically the
assertion that the terms of the PSE&G Stipulation actually provide PSE&G
the opportunity to recover over $1 billion more than the $3.075 billion net
of tax recovery opportunity asserted by PSE&G. As described in our summary
of the comments above, this is claimed to occur because, in addition to the
$2.6 billion (including transaction costs) from securitized bonds, the
Company will assertedly receive $120 million via a retained retail adder
obtained from non-switching customers, $460.5 million via the distribution
reserve amortization, $90 million via the agreed-upon Salem cost reduction,
$90 million via the LEAC overcollection at July 31, 1999, $35 million via
expiring amortizations, $800 million via documented mitigation
opportunities and $600 million via the Genco transfer premium. After
careful review, we FIND this assertion to be flawed for a number of
reasons. Most substantially, the so-called Genco "transfer premium"
represents essentially an advance by Genco to PSE&G in the amount of $600
million (which we modify herein to $540 million for reasons discussed
below), above and beyond the net $1.768 billion agreed upon value of the
assets (which we modify herein to $1.903 billion for reasons discussed
below). This premium will be used to further reduce the capitalization
structure of PSE&G, and is then to be repaid to Genco via the sources of
revenue identified in the PSE&G Stipulation, namely the depreciation
amortization, the retained adder, and the explicit MTC charge. In this
manner Genco, not PSE&G, assumes any risk associated with collection of the
$600 million (modified herein to $540 million) of unsecuritized stranded
costs. However, the overrecovery assertion by MAPSA and others is
incorrect, because it assumes that both the $600 million premium as well as
the sources to repay the premium both count towards the recovery of the
unsecuritized stranded costs. This results in a "double count," and
resulting calculation error of $600 million. Moreover, as will be described
in more detail below, the inclusion of $800 million of mitigation by MAPSA
results in a further "double count," since mitigation has already been
taken into account as part of the reduction in the total net of tax
stranded cost quantification from $3.9 billion as filed by PSE&G as well as
other elements of this decision. Moreover, MAPSA relies upon the Auditor's
Report as the source of the $800 million mitigation opportunity but, as
pointed out by PSE&G, ignores the fact that the $800 million figure
presented by the Auditors was a gross number, from which income taxes of
over $300 million would have to be deducted in order to express the number
net of tax, and therefore directly comparable to the stranded cost number
which is expressed net of tax. Accordingly, we FIND the assertion that
under the terms of the Stipulation PSE&G will overrecover the agreed upon
level of stranded costs by over $1 billion to be based upon a flawed
analysis and plainly incorrect.
As described herein, the Board received voluminous comments with
respect to the asset valuation associated with the proposed transfer of
generation assets to the affiliated Genco, with emphasis on the underlying
support for the transfer itself, and particular emphasis on the value to be
assigned to the non-nuclear generating units. At the outset, we FIND that
the proposed transfer of generating assets from PSE&G to Genco and the
proposed BGS supply arrangement from Genco to PSE&G are amply supported by
the record in this proceeding. The Company's filing proposed that the
Company would remain in the generation business throughout the then-
proposed seven-year transition period, with PSE&G utilizing its generation
assets to backstop capacity and reliability in New Jersey and the PJM grid
during this period, and then transferring its generation assets to an
affiliate of the holding company at the end of the transition period. This
proposal was submitted in the context of PSE&G's assertion that a liquid
and visible capacity market did not yet exist in the PJM control area, and
the resultant proposal by PSE&G that the retail electric market be opened
to competition on an energy-only basis, with PSE&G being responsible for
continuing to provide capacity for all retail customers. It is clear, and
PSE&G has since acknowledged, that a liquid and visible capacity market
has, in fact, been developed by the PJM ISO, and that the PJM now conducts
regular capacity auctions. Accordingly, we FIND that the conditions which
were originally assumed to prevail at the end of the then-proposed seven
year transition period, and which supported the proposal to transfer the
generation assets at that time, are currently in place, and therefore
support the immediate transfer of the assets.
We further FIND that the proposed BGS supply arrangement between
Genco and PSE&G provides known rates and assurances during the transition
period. Rather than having PSE&G and its customers solely and immediately
dependent on the wholesale marketplace for the procurement of BGS energy
and capacity, the Genco arrangement provides a price guarantee and a
capacity backstop, similar to the assurances which PSE&G originally
proposed that it provide during the transition period via the retention of
the generation assets within the utility. Since all the PSE&G generation
facilities, including its nuclear power plants, will be transferred to the
unregulated Genco affiliate, customers will no longer be exposed to
operational risks associated with these facilities. Until BGS is bid out
for year four of the Transition Period, Genco will assume all risks
associated with providing BGS service at the pre-determined BGS prices. We
FIND this reduction of risk and the fixed price to be a substantial benefit
to customers. We are also of the view that the provisions of paragraph 29
of the Stipulation, which require that the transferred generation capacity
be maintained by Genco as a capacity resource within PJM for at least the
duration of the Transition Period is a significant benefit to consumers
during periods of heavy demand. We FIND this restriction to be consistent
with the intent of the originally-filed PSE&G proposal to backstop capacity
and reliability with its owned generation and, subject to our modifications
to paragraph 29 of the Stipulation delineated below, we FURTHER FIND that
it will provide a reasonable and appropriate transition mechanism to help
preserve the reliability of the PJM grid and foster a competitive capacity
market in the region, which, in turn, will inure to the benefit of PSE&G's
customers through lower prices. With regard to paragraph 29 of the
Stipulation, we clarify that the Board will retain jurisdiction over and
will monitor whether Genco is making good faith efforts to sell excess
capacity into the PJM system at market rates.
As pointed out by PSE&G in its comments, the proposed immediate
transfer of PSE&G's generation assets is also responsive to the concerns
voiced by a number of parties during these proceedings that the original
PSE&G proposal for functional separation of generation coupled with
affiliate relations standards might not be sufficient to protect against
cross-subsidies and ensure a level competitive electric generation playing
field. Indeed, several parties in the proceeding advanced the view during
the hearings that structural separation of generation-related assets into a
separate corporate entity was necessary to provide adequate protections.
The transfer proposed in the PSE&G Stipulation achieves those goals for the
foregoing reasons, and we FIND it to be reasonable subject to the terms and
conditions set forth herein.
Moreover, as evidenced by the language in subsection 7(d) of the Act,
N.J.S.A. 48:3- 55(d), a transfer of assets from an electric public utility
to a related competitive business segment of the utility's holding company
was contemplated by the Legislature and is permitted by the Act, subject to
Board approval including a determination by the Board of the "full value"
of the assets. We also note that the proposed transfer is consistent with
the intent of the Act, which in subsections 8(a) and (b), N.J.S.A. 48:3-56
(a) and (b), declares electric generation service to be a competitive
service not subject to rate base/rate-of-return regulation, and which in
subsection 7(f), N.J.S.A. 48:3-55(f), prohibits an electric public utility
or its related competitive business segment from offering competitive
electric generation service, but which in subsection 7(j), N.J.S.A.
48:3-55(j), permits a public utility holding company affiliate to offer
competitive retail electric generation service or wholesale power service.
By the terms of the Stipulation, Genco would not provide retail electric
generation service, and therefore would not be in direct competition with
electric power suppliers in the State, but would be providing wholesale
power services. The corporate structure described in the proposed
Stipulation is consistent with the structure permitted in the Act, and
warrants our approval of paragraph 24 of the Stipulation, which requests a
Board finding that Genco be characterized as an Exempt Wholesale Generator
("EWG"), meaning that it would be a wholesale provider of power not subject
to rate of return regulation under the Board's or FERC's jurisdiction.
With respect to the valuation of the assets being transferred, there
is a direct link between the value assigned these assets with respect to
the transfer, and the magnitude of PSE&G's stranded costs: the higher the
assigned value, the lower the remaining stranded costs. The issue of the
value of PSE&G's generation assets was litigated at length in the stranded
cost proceeding, as described in the Initial Decision and summarized
hereinabove. Extensive testimony with respect to both the proper net book
value of the assets to be utilized for purposes of stranded costs, as well
as the net present value cash flows forecasted to be generated by the
generation facilities over their remaining lives was presented in evidence
at the Office of Administrative Law. The discounted net cash flow analysis
approach, which was utilized by PSE&G in its stranded cost calculation and
utilized as well by other parties' witnesses in the case (albeit with
different assumptions) represents an analysis that would be undertaken by a
potential bidder to determine its offering price in an asset auction
process. The ALJ weighed the arguments and rendered findings with respect
to the various inputs, variables and assumptions underlying a discounted
cash flow analysis, including market energy and capacity price forecasts,
forecasted capital additions and operation and maintenance costs, unit
output and rates of return. We FIND that additional hearings are not
required on this issue because there is sufficient basis in the record for
a determination of the value of PSE&G's generation assets, and we FURTHER
FIND that all parties have had ample opportunity during the proceedings to
advance their arguments and introduce evidence with respect to the value of
these assets.
As summarized above, in the comments on the proposed Stipulation, a
number of parties urged the Board to consider the results of various recent
fossil fuel generation divestitures throughout the country, arguing that
recent data indicates that, when put up for sale and competitive bid,
electric utility fossil fuel generation has fetched prices in excess of
book value. While general trends as to the results of industry-wide asset
sales may be somewhat instructive and while, as discussed below, we have
considered them and taken them into account in our decision, we concur with
the comments received from PSE&G that it is impossible to reasonably
attempt to extrapolate PSE&G's asset values from the results from sales of
other utilities' generating assets. Any number of unique and individual
factors associated with a particular utility's assets may exist which would
justify divergent outcomes or plant values. These factors include plant
vintage and conditions, heat rates, location, state and/or local
environmental regulations or restrictions, environmental liabilities, fuel
restrictions, fuel commodity and transportation costs, labor agreements,
state and/or local tax liabilities and market price conditions. These
factors, as they apply specifically to PSE&G's assets, were included in
this proceeding as part of the stranded cost calculations, as the
discounted net cash flow analyses prepared by PSE&G and several other
parties considered all future costs and revenues associated specifically
with each individual PSE&G generating facility. A proposed analysis to
bring the purported comparable sales into comparability was not offered by
the proponents of Stipulation II, nor is it likely that such an analysis
could be readily performed. We FIND, for the foregoing reasons, that it
would be unreasonable to rely upon these recent sales as the basis for a
determination of the value of PSE&G's generating assets. We FURTHER FIND
that there is ample support in the record for the Board to determine the
market value of PSE&G's generating assets, and that the discounted net cash
flow analyses presented in the stranded cost proceeding are the appropriate
mechanism to be utilized to render such a determination.
As described herein, the Company performed a discounted net cash flow
analysis to quantify the magnitude of its owned generation stranded cost,
which it indicated in its filing amounted to approximately $3.9 billion.
I.D. at 9. The Ratepayer Advocate, Enron and the Auditors each performed
independent studies, using a similar methodology but varying assumptions
and inputs. Numerous parties challenged various aspects of the Company's
quantification. The discounted net cash flow methodology produces, and the
$3.9 billion amount represents, a net-of-tax figure. In other words, this
does not reflect the actual revenue requirement associated with recovery of
generation stranded costs. The net-of-tax figure must be grossed up for
federal and state income taxes to obtain the actual owned generation
stranded cost recovery level.
The ALJ found a number of the proposed adjustments and assumptions of
the parties to be appropriate and adopted same, including a higher future
capacity factor for the Bergen and Mercer generating facilities, the cost
of fuel and resulting dispatch rates, and PJM import levels supported by
the RPA. I.D. at 40. He also found the Company's assumed escalation rate
for capacity prices to be understated, and concluded that such prices
should be escalated at the general inflation rate. I.D. at 41. He further
concurred with NJPII's recommended adjustment to add the value of nitrogen
oxide and sulfur dioxide emission credits to market revenues, as well as
with Staff's proposed adjustment to remove the anticipated Salem steam
generator replacement from the calculation, and with Enron's proposed
adjustment to reflect cost values associated with ancillary services. Id.
The ALJ further concluded that the discount rate should be reduced to
reflect an updated capital structure and cost of capital vis-a-vis the
Company's last base rate case. Id. at 41-42. The ALJ also concurred with
the Staff and RPA- proposed FASB 90 and 106 adjustments with respect to
Salem. Id. at 42.
As described hereinabove, pursuant to the ALJ's recommendation, the
parties met to attempt to provide a quantification of the ALJ's stranded
cost-findings after the Initial Decision was released. While no consensus
was reached among the parties, after the meeting, by letter dated November
18, 1998, the Auditors submitted to the Board a proposed quantification of
the ALJ's stranded cost recommendations, reflecting a range of values based
on three scenarios, from a low end of $2.485 billion, to a mid-range of
$2.949 billion, to a high end of $3.310 billion. We HEREBY ACCEPT as
reasonable, with one minor modification discussed below, the Auditors'
mid-range quantification of the ALJ's decision with respect to PSE&G's
net-of-tax owned generation stranded costs of $2.949 billion and, based on
that quantification, HEREBY ADOPT the ALJ's I.D. with respect to the
magnitude of PSE&G's net-of-tax owned generation stranded costs. We FIND,
however, that the Auditors did not include any value for nitrogen oxide and
sulfur dioxide emission credits, which adjustments the ALJ found
appropriate. We note that NJPII, which recommended this adjustment, did not
provide a quantification of these credits. While it is difficult to
estimate the value of these credits with precision at this time, based on
our judgment, we believe it fair to adjust the net-of-tax stranded cost
amount of $2.949 billion to $2.94 billion to impute a value for these
credits, consistent with the ALJ's findings.
Accordingly, we HEREBY FIND the level of net-of-tax owned generation
stranded cost for PSE&G to be $2.94 billion. This amount, when compared to
the level of net-of-tax stranded costs which PSE&G would be afforded the
opportunity to recover via the proposed Stipulation ($3.075 billion),
results in a reduction to net-of-tax stranded cost recovery of $135
million. This decrease of $135 million in net-of-tax stranded cost
vis-a-vis the level proposed in the Stipulation represents a finding by the
Board that the market value of PSE&G's owned generation assets is $135
million greater than that assumed in the Stipulation. The comments received
in response to the Stipulation, regarding recent industry divestiture
information, would suggest that this increased value, vis-a-vis the
Stipulation, should be assigned to the Company's fossil fuel generating
units, since these types of units, as opposed to nuclear generation
facilities, have obtained sales premiums. We therefore FIND, consistent
with the general industry trends which have been noted in a number of the
comments received, that the transfer value of the Company's fossil
generating assets should be increased by $135 million. Accordingly, we FIND
that the generating assets shall be transferred to Genco at the following
market valuations: $0.046 billion for nuclear; and $1.857 billion for
fossil. Thus, the full value of the generating asset transfer is $1.903
billion, in satisfaction of the requirements of subsection 7(d) of the Act,
N.J.S.A. 48:3-55(d), which we FIND to be the full market value of the
generating assets over their remaining useful life in accordance with the
provisions of subsection 13(e) of the Act, N.J.S.A. 48:3-61(e).
Additionally, for the foregoing reasons, including the use of the
generating assets by Genco to provide BGS at a fixed price over the
Transition Period, the removal of operational risk from ratepayers, the
removal of nuclear plant decommissioning responsibility and attendant
risks, the maintaining of the capacity associated with the transferred
generation as a capacity resource for the duration of the Transition
Period, and the receipt by PSE&G of full market value for the assets, we
FIND that the transfer, subject to the terms set forth herein, is in the
public interest and will not jeopardize system reliability. Moreover, for
the foregoing reasons and because this Order and its implementation will
not impair the financial integrity of PSE&G or its holding company, because
allowance has been made for continued recovery of post-retirement benefits
(except for prospective post-retirement benefits associated with generation
employees which become the responsibility of Genco) in PSE&G's rates, and
because the transfer of assets will result in the generation employees
remaining employees under the holding company, we FIND that the transfer
will not adversely impact PSE&G's ability to meet its pension obligations
to its employees.
We note that, as a result of the transfer of all generating assets to
Genco, Public Service Enterprise Group will likely have non-regulated
assets in excess of 20%. The Board's Decision and Order implementing the
results of the Focused Audit (Docket No. EA92040459) ("Focused Audit
Order") required the Company to notify the Board if the non-regulated
assets exceeded 20% to allow the Board to assess the potential adverse
financial effects of under-performing non-regulated businesses on the
credit-worthiness of PSE&G, and thereby prevent possible impairment of the
utility's ability to render safe, adequate and proper service. Due to
significant changes in the industry and in particular, the changes in the
Company's corporate structure being brought about as a result of this Final
Decision and Order, modifications to the Board's June 17, 1986 Order
Authorizing Transfer of Stock and Approving Merger, Docket No. EM8507774,
("Holding Company Order") and relief from or modifications to the Focused
Audit Order may be warranted. The Company is HEREBY DIRECTED to file a
petition to either maintain the existing regulatory parameters or to
propose modifications thereto, by no later than the end of the first
quarter of 2000. In the interim period, the Board will deem Public Service
Enterprise Group and PSE&G not to be in violation of the non-regulated
asset ratio established by the Board in May 1993. However, the Board will
continue to monitor this issue and reserves the right to make further
rulings in this matter as warranted.
With respect to the transfer of the nuclear generation assets (and
the related transfer of the decommissioning trust funds in accordance with
paragraph 33 of the PSE&G Stipulation), we noted above the benefits
associated with the transfer of not only operational risk but, also,
decommissioning risk and responsibility to Genco, attendant with Genco's
opportunity to earn non-regulated returns associated with the sale of power
and related services from the nuclear units. In order to ensure that the
risk and responsibility of decommissioning is fully transferred to Genco
along with the transfer of the assets and the decommissioning trust funds,
recognizing that funding for decommissioning will remain in the SBC paid by
PSE&G customers, we believe it necessary to place parameters on such
continued funding by ratepayers and we shall do so. We, therefore, DIRECT
that, within ninety (90) days of the date of this Order, PSE&G submit to
the Board for its approval, a specific proposal a limit to its financial
responsibility for funding, and, in turn, for ratepayers' obligation to
fund through the SBC, the cost of decommissioning the nuclear units
transferred to Genco. We ADDITIONALLY DIRECT PSE&G to submit all accounting
entries that will be made upon the transfer of the decommissioning trust
funds to Genco.
With regard to the level of securitization of stranded costs, the ALJ
concluded that PSE&G's proposal in the case to securitize $2.5 billion of
its total net of tax stranded cost with 15 year bonds will result in
reasonable savings to ratepayers which will be flowed back to ratepayers
through a reduction in base rates, (estimated at 2.7% assuming a 7.5%
interest rate), is consistent with the Final Report and should be adopted.
I.D. at 68. We further note that subsection 14(c) of the Act, N.J.S.A.
48:3-62(c), provides that the Board may, in the event that an electric
public utility has not divested itself of a majority of its generation
assets, authorize the issuance of transition bonds for utility generation
plant stranded costs determined to be recoverable pursuant to paragraph (1)
of subsection 13 (a) of the Act, N.J.S.A. 48:3-61(a), in the amount of 75
percent of the total amount of an electric public utility's
recovery-eligible utility generation plant stranded costs. As set forth
herein, the Board has found, pursuant to the provisions of section 13 of
the Act, N.J.S.A. 48:3- that the net-of-tax level of owned generation
stranded cost is $2.94 billion. For purposes of establishing an actual
revenue requirement necessary to provide PSE&G an opportunity to recover
$2.94 billion in stranded costs after-tax, it is necessary and appropriate
to gross-up this amount, to account for the fact that PSE&G will incur an
income tax liability associated with the recovery of net-of-tax stranded
costs, and to afford PSE&G the opportunity to collect appropriate taxes
associated therewith. However, we concur with the concerns raised by Staff
during the litigation of these proceedings, as well as the RPA and others
during the comment period, and HEREBY REJECT as inappropriate and, in our
view, inconsistent with the intent of the Act, the proposal within the
Stipulation, supported by all signatories thereto except the NJCU, that all
taxes related to securitization be recovered through the transition bond
charges. We conclude that the transition bond charge is appropriately
utilized to provide and ensure collection of the principal and interest
payments on the transition bonds. The assured collection of the bond
principal and interest provided via the irrevocable transition bond charge
is necessary in order to obtain the highest possible rating on the bonds,
which, in turn, will result in the lowest possible interest rate on the
bonds and resultant maximized ratepayer savings. We do not believe it
appropriate, nor consistent with the intent of the Act, that the utilities'
tax obligations be collected via the irrevocable transition bond charge. As
indicated previously, however, it is entirely appropriate and necessary
that the net-of-tax stranded cost number be grossed-up for ratemaking
purposes, and that PSE&G be afforded the opportunity to fully recover these
taxes.
Accordingly, the Board HEREBY DIRECTS that a Market Transition Charge
be established, coincident with the establishment of the transition bond
charge, pursuant to section 13 of the Act, specifically for the collection
of securitization-related Federal Income and State Corporate Business Taxes
("MTC-Tax"). The taxes to be collected through the MTC-Tax shall reflect
the grossed-up revenue requirements associated with the net-of-tax amount
of stranded costs, together with the estimated level of transaction costs,
authorized by the Board herein for recovery through securitization. PSE&G
is HEREBY AUTHORIZED to impose the MTC-Tax until the related bondable
stranded costs including principal and interest have been paid in full. The
imposition of the MTC-Tax over the same term as the imposition of the TBC
and, as such, beyond the eight year limitation of the Act, is permitted in
accordance with the provisions of paragraph (3) of subsection 13(l) of the
Act, N.J.S.A. 48:3-61(l)(3), and is, in our view, reasonable and necessary
to realize the estimated level of securitization-related rate savings as
reflected in the record, since the PSE&G proposal in the proceeding which
formed the basis for the securitization savings estimates was to include
the collection of the tax gross-up amount in the TBC itself. The collection
of the tax gross-up amount through a MTC-Tax with a duration shorter than
that of the TBC would have the effect of decreasing the
securitization-related savings. The Board therefore, DIRECTS that the
MTC-Tax be separate and distinct from the MTC established for the
collection of stranded costs associated with power purchase agreements with
non-utility generators over the life of those contracts and the MTC
established for recovery of the unsecuritized utility stranded costs over a
four year time period. The Board HEREBY DIRECTS that the MTC-Tax shall be
subject to periodic review and adjustment, consistent with the provisions
of subsection 13(g) of the Act, N.J.S.A. 48:3-61 (g), to reconcile the
income taxes required to be paid on the taxable net revenue from the TBC
collections (we note that any such adjustment will not include adjustments
for market price, as market value for the assets is fixed as a result of
the transfer). We concur with the concerns expressed in some of the
comments that there should be a provision for adjustments in the event the
tax laws change and, thus, we HEREBY DIRECT that the reconciliation shall
include adjustments for changes in statutory federal and state tax rates.
The reconciliation shall be formula driven to reflect the tax requirements
arising from the issuance of transition bonds, the collection of transition
bond charges and the collection of the MTC-Tax. The Board further FINDS
that the Company is entitled to the opportunity to full and timely recovery
of the associated income taxes for as long as transition bond charges
remain collectible.
With respect to the net of tax amount of stranded cost to be
securitized, we HEREBY AUTHORIZE PSE&G to securitize an amount of up to
$2.4 billion, plus an additional amount of up to $125 million for related
and reasonably and prudently incurred transaction costs. Upon receipt and
review of an application by PSE&G, the Board will consider the issuance of
a bondable stranded costs rate Order ("Financing Order") authorizing the
issuance of transition bonds in these amounts with a scheduled amortization
of 15 years and the imposition of a transition bond charge therefore,
pursuant to section 14 of the Act, N.J.S.A. 48:3-62. The Board HEREBY FINDS
that issuance of transition bonds in these amounts is necessary for PSE&G
to meet the rate reductions determined by the Board herein to be necessary
and appropriate consistent with the provisions of sections 4 and 13 of the
Act, N.J.S.A. 48:3-52 and and to meet the other requirements of the Act,
specifically, the establishment of shopping credits at a level which will
foster a competitive marketplace. Specifically, absent the estimated
savings from securitization, PSE&G would not be able to meet the required
phased-in rate reduction steps of 7% on January 1, 2000 and 9% on August 1,
2001, or, in the alternative, would have to substantially reduce the
shopping credits.
Moreover, we emphasize that, in addition to securitization savings
being necessary for PSE&G to achieve phased-in rate reductions on January
1, 2000 and August 1, 2001 which exceed the minimum required rate
reductions in the Act, our authorization of the issuance of transition
bonds in the amount of $2.4 billion, and PSE&G's receipt of the proceeds
therefrom, provides a significant benefit to the Company. It is, therefore,
entirely appropriate and necessary that the Board condition the
implementation of securitization on the implementation by PSE&G of the
herein directed rate reductions of a minimum 7% on January 1, 2000 and a
minimum 9% on August 1, 2001.
We further note that Attachment 1 to the PSE&G-Stipulation contains a
calculation of the estimated savings related to securitization during the
Transition Period, based upon an assumed transition bond interest rate of
6.5%, reflective of the then-prevailing rate, and an amortization period of
15 years. Based upon the assumptions set forth therein, the issuance of
transition bonds will provide tangible and quantifiable benefits to
ratepayers on the order of 3%. We note that the requested level of
securitization of $2.475 billion in the Stipulation is approximately equal
to, and indeed modestly ($25 million) lower than the original $2.5 billion
proposal found reasonably appropriate by the ALJ. Our determination to
require a $75 million reduction in the level of stranded cost
securitization, from $2.475 billion as proposed in the PSE&G Stipulation to
$2.4 billion, reflects a pro-rata reduction in the level of authorized
operation related securitization consistent with the $135 million reduction
ordered herein to the requested level of total stranded cost recovery (from
$3.075 million to $2.940 billion).
We FURTHER FIND that the total recoverable stranded cost revenue
requirement, based upon a statutory federal and state tax rate of 40.85%
and a net-of-tax recoverable stranded cost amount of $2.94 billion, is
approximately $4.97 billion. Accordingly, we FIND that the authorized level
of stranded cost securitization of $2.4 billion, represents approximately
48% of the total amount of the recovery eligible generation-related
stranded cost rate recovery authorized, and thereby meets the requirements
of subsection 14(c) of the Act, N.J.S.A. 48:3- 62(c). The proceeds received
by PSE&G from the issuance of $2.4 billion of transition bonds shall be
utilized by PSE&G to reduce the capitalization of PSE&G, in a manner which
does not substantially alter the overall capital structure of the utility
adverse to the interests of bondholders or ratepayers. Consistent with
maintaining an appropriate credit rating for the distribution utility, and
in order to increase the ratepayer benefits that result from the use of the
securitization proceeds, we view an increase in the debt component of
PSE&G's (the utility's) capitalization as failing within this requirement.
Having established herein the level of total net-of-tax
generation-related stranded cost at $2.94 billion, and having authorized
the issuance of transition bonds to "refinance" $2.4 billion, PSE&G shall
be afforded the opportunity, consistent with the provisions of section 13
of the Act, N.J.S.A. 48:3- to recover up to $540 million, net-of-tax,
through an MTC, representing the unsecuritized amount of PSE&G's stranded
costs. The actual revenue requirement associated with this $540 million
recovery opportunity, based upon a 40.85% Federal and State income tax
rate, is on the order of $760 million. Consistent with the provisions of
the PSE&G Stipulation (as modified herein), the $540 million is to be
provided up-front by Genco to PSE&G in the form of a transfer premium.
These funds shall be used by PSE&G, much like the proceeds from the
transition bonds, to refinance and/or retire its debt and/or equity. This
will benefit the utility and, ultimately, the customers of PSE&G by further
reducing PSE&G's cost of capital. PSE&G will have the opportunity to
recover up to $540 million, net-of-tax, through any retained retail adder
associated with non-switching or returning customers, the MTC (exclusive of
the NTC and the MTC-Tax) and the amount funded by the excess distribution
reserve amortization; which funds, will be, in turn, transferred to Genco
as received pursuant to the terms of the BGS contract (as modified and
approved herein). At the end of the Transition Period, the recovery of the
$540 million will be reconciled with actual collections as set forth
herein, with PSE&G being at risk for any shortfall and customers receiving
the benefit of any overrecovery via a credit of such excess amount to the
SBC. We FIND this mechanism to be consistent with the provisions of section
13 of the Act, N.J.S.A. 48:3- which require that we afford the utility
the opportunity, but not a guarantee, for recovery of generation-related
stranded costs, and that (with specific reference to subsection 13(g) of
the Act, N.J.S.A. 48:3- 61(g)), we reconcile stranded cost recoveries to
ensure that the utility will not collect in excess of its stranded costs.
The above-described mechanism has the added benefit of transferring the
risk of non-recovery of stranded costs to Genco, the unregulated affiliate,
and not the utility, since PSE&G will receive the $540 million from Genco
up-front in the form of a transfer premium.
With regard to the rate unbundling and rate design proposal in the
PSE&G Stipulation, we note the Act requires at subsection 4(c), N.J.S.A.
48:3-52(c), in addition to the mandated rate reductions for each customer
class as provided in subsection 4(d), N.J.S.A. 48:3-52(d), that rate
unbundling not result in a reallocation of utility cost responsibility
between or among different classes of customers. Taken together, it is our
belief that these sections require that the Board implement unbundled rate
designs which afford, to the extent practicable, each customer within each
customer class the mandated level of rate reductions. Moreover, the Act at
subsection 4(b), N.J.S.A. 48:3-52(b), explicitly requires that each
customer's bill indicate the dollar amount of the savings attributable to
the mandated rate reductions. While we reserve final judgement on the
actual proposed rates to be implemented pending our review of PSE&G's
compliance tariff filing, we FIND that the overall rate design proposed in
the PSE&G Stipulation, and specifically the implementation of the rate
reduction credit, and the dollar savings statement on the bill, is
consistent with the intent of the Act during the Transition Period. The
rate reduction credit, as we envision it, is designed to assure that all
customers receive the required reduction off the sum of the unbundled rate
components. However, we are concerned that, subsequent to the Transition
Period, such rate design could have unintended and unnecessary impacts on
PSE&G's customers, since the termination of the rate reduction credit at
the end of year four would, absent any other adjustment, result in an
increase in rates in year five which would equal the amount of the credit
in effect in year four. Moreover, the elimination of the credit in year
five could result in an unpermitted shift in cost responsibility. Although
it is not known at this time what the BGS rate will be in year five or what
the level of deferred balances for the SBC and NTC will be at that time,
the Board is concerned that a simple removal of the rate reduction credit
in year five without a reassessment of the other unbundled rate elements,
could result in total charges which exceed the total of the otherwise
appropriate unbundled rate elements. We also FIND it necessary and
appropriate for the Board to review the overall level of rate savings as
well as the level of the distribution rate design and the other unbundled
rate components, including the SBC and the NTC, prior to the conclusion of
the Transition Period to determine, among other things, whether any
additional future savings should be passed along to ratepayers
prospectively.
With respect to the level and design of distribution rates, we note
the ALJ's conclusion that the 1995 cost of service study is the only
evidence available in the record with respect to cost of service, and that
the parties had an opportunity to review and criticize it. Moreover, we
acknowledge that the Final Report indicates that each electric utility's
rates are to be unbundled utilizing the cost of service study employed to
set rates in each company's last base rate case. However, we are now vested
with the responsibility of implementing the Act, which was passed and
signed into law subsequent to our issuance of the Final Report and, indeed,
after the close of hearings in these matters. The Act requires that rate
reductions be implemented over a three year period, and sustained for at
least one additional year through July 31, 2003, in effect, resulting in a
price cap on the distribution and other unbundled rate components through
that date. As such, the price cap will be in effect, and PSE&G will be
required to maintain its distribution rate without adjustment, through a
date more than ten years from the conclusion of PSE&G's last base rate
case. In light of this, and the fact that, unlike other unbundled rate
components the distribution rate will not be subject to true-up and
reconciliation, it is our judgment and determination that PSE&G should not
be required to submit a cost of service study from the 1992 base rate case,
but that it instead be permitted to use the 1995 cost of service study
which was entered into the record and which the parties had an opportunity
to review and critique during the hearing process. Use of the 1995 study
provides a greater assurance, in light of the price cap to be imposed
through July 2003, that PSE&G's distribution rates are being established at
a reasonable level based on the record in this case and is supported by the
record. Moreover, the distribution rates set forth in the PSE&G
Stipulation, while reflecting the updated 1995 cost of service study,
incorporate a $20 million decrease in annual distribution revenue
requirements relative to the amount supported by the study, to reflect a
more current overall cost of capital of 9.5%. This provides further
assurance that the average level of distribution rates being set via the
PSE&G Stipulation is reasonable.
With regard to the specific unbundled rate components, we FIND that
the establishment of an SBC which will include costs for social programs,
nuclear decommissioning costs, demand side management costs manufactured
gas plant remediation costs and consumer education costs is consistent with
the provisions of section 12 of the Act, N.J.S.A. 48:3-60. We also note
that the composition of the SBC, as proposed in the PSE&G Stipulation,
remedies the deficiency in the Company's original proposal, which
inappropriately included NUG contract costs and gross receipts and
franchise tax in the SBC. The Act does not permit the inclusion of NUG
contract costs or GR&FT taxes in the SBC. The establishment of the initial
SBC at a level of costs included in rates as of the effective date of the
Act and sustaining such rate for the duration of the four-year Transition
Period is consistent with the provisions and intent of section 12 of the
Act, N.J.S.A. 48:3-60, and is also consistent with the imposition of a
four-year price cap pursuant to section 4 of the Act, N.J.S.A. 48:3-52.
Moreover, it is appropriate and, we believe, consistent with the intent of
the Act, that the Company be provided the opportunity to fully recover
reasonable and prudent expenditures for the types of programs reflected in
the SBC. These programs all provide social and/or environmental benefits,
and are mandated to be performed or funded by utilities pursuant to State
laws, regulations or agency orders. Accordingly, we FIND that deferred
accounting treatment of under and overrecoveries, along with appropriate
carrying costs to reflect the cost (to the utility or, in the case of an
overrecovery, the customer) of financing deferred monies, is necessary and
appropriate in order to provide for full recovery under the legislatively
required price cap mechanism.
Since PSE&G is being afforded herein the opportunity to recover,
beginning August 1, 1999, all of its remaining above-market owned
generation costs through the market transition charge, MTC-Tax and
transition bond charge, it is our determination that continued collection
through the SBC (formerly the DSAF) of generation-related lost revenues
attributable to demand side management programs would result in an
overcollection of generation costs. Accordingly, we FIND that such
generation-related lost revenues arising subsequent to that date shall
cease to be collected after July 31, 1999.
As noted above, the proposed Stipulation appropriately removes the
recovery of above-market NUG contract costs from the SBC, as originally
proposed. Instead, these costs are to be collected via a separate NTC,
which is to be set at an initial level of $183 million annually and
sustained at this level over the Transition Period, with the difference
between NTC recoveries and actual above-market NUG contract costs to be
subject to deferred accounting, including interest on accrued under or over
recoveries. The establishment of a separate charge for the collection of
above-market NUG contract costs, subject to reconciliation, is consistent
with the findings of the ALJ, who concluded that such a mechanism would
permit the timely pass-through to ratepayers of benefits of any NUG
contract renegotiations. We note that with the price cap imposed by the
Act, the NTC will not be actually adjusted during the Transition Period;
however through deferred accounting and interest accrual on cumulative
under or over recoveries, ratepayers will be assured of receiving the full
benefits of any NUG contract renegotiations, as envisioned by the ALJ and
indeed as required by the Act. Section 13 of the Act, N.J.S.A. 48:3-
permits recovery by an electric public utility through a market transition
charge of stranded costs related to long- term NUG contracts, provided that
the utility has demonstrated the full market value of each such contract
and that it has taken all reasonably available measures to mitigate the
contracts' above-market costs, subject to periodic review and adjustment of
the charge to ensure that the utility will not collect charges that exceed
actual stranded costs, and provided that the charge is not set at a level
which prevents the achievement of the mandated rate reductions. Moreover,
the Act permits a NUG-related MTC to be set for a term as long as the
duration of the NUG contracts, and requires that any and all savings
resulting from NUG contract renegotiation, buyout or buydown be passed back
to ratepayers in a timely manner. We FIND that the establishment of the NTC
as proposed in the PSE&G Stipulation and described herein, which NTC we
regard as a separate market transition charge dedicated solely to NUG
contract stranded cost recovery, is consistent with the provisions of
section 13 of the Act, N.J.S.A. 48:3-61. Pursuant to the provisions of
subsections 13(e) and 13(f) of the Act, N.J.S.A. 48:3-61 (e) and (f), PSE&G
will retain the ongoing obligation to demonstrate that it has obtained the
full market value for the NUG contract power, and that it has taken all
reasonably available steps to mitigate above-market NUG contract costs.
Specifically, while we approve herein the proposed sale by PSE&G of NUG
contract energy and capacity at wholesale PJM locational marginal prices
and at wholesale, respectively, PSE&G will be required to sell such power
through alternative means if such means are available at a more beneficial
market price, and PSE&G will be required to continue to make reasonable
attempts to renegotiate, buy out or buy down its NUG contracts.
We also FIND that the proposed bidding out of BGS for year four of
the Transition Period is consistent with the Act. Subsection 9(a) of the
Act, N.J.S.A. 48:3-57, provides that each electric public utility must
provide BGS for at least three years subsequent to August 1, 1999 and
thereafter until the Board finds that such provision is no longer necessary
and in the public interest. Subsection 9(a) further provides that power
procured for BGS shall be purchased at prices consistent with market
conditions, that the BGS charges to customers shall be regulated by the
Board and "based on the reasonable and prudent cost of . . . providing such
service. . .", and that the aggregate rate reductions be sustained
notwithstanding the resultant BGS charges. The proposed Stipulation
provides that PSE&G will provide BGS through July 31, 2002 in conformance
with the Act. The BGS pricing provided by the proposed Stipulation, both
during the first three years of the Transition Period when BGS is provided
by PSE&G as well as during the fourth year when BGS will be provided for
the first time by a third party as a result of the bid, is established and
is based upon the market price projections (plus a retail adder as
discussed herein) for the four year period in the record. In this manner,
BGS pricing for the Transition Period is consistent with market conditions
as required by the Act. We expect that the bidding out of BGS for year four
as provided in the Stipulation will have the added benefit of creating
substantial competition among third party suppliers for the right to
provide this service at the pre-established BGS rate/ shopping credit
price, thereby potentially producing added benefits to customers consistent
with the provisions of paragraph 17 of the proposed Stipulation. This
mechanism is consistent with the intent of the Act to place greater
reliance on competitive markets to deliver energy services at lower costs
(see subsection 2(a)(2) of the Act, N.J.S.A. 48:3-50(a)(2)). At the same
time, however, the mechanism provided to have suppliers bid for the right
to provide BGS during year four at the pre-established price, will assure
that the aggregate rate reductions will be sustained in year four, and
will-provide price stability as part of a reasonable and appropriate
transition mechanism to the reliance on the competitive market for the
provision of BGS. Accordingly, subject to the foregoing and to the terms of
this Order, we FIND that it will no longer be necessary and in the public
interest for PSE&G to provide BGS in year four of the Transition Period or
thereafter if BGS is successfully bid publicly as proposed in the
Stipulation. We HEREBY DIRECT that the Company file, by no later than
August 1, 2001, a specific proposal for public comment and review and
approval by the Board to implement a request for proposals ("RFP") to
supply basic generation service for the period August 1, 2002 through July
31, 2003. Such proposal should include a proposal to assure that any RFP
does not provide any undue competitive advantage to an affiliate of PSE&G,
and that the selection process does not allow for favored treatment of an
affiliate of PSE&G, should such affiliate choose to participate in the
bidding process.
Pursuant to the provisions of subsections 7(f), 7(l), 7(j) and 8(b)
of the Act, N.J.S.A. 48:3-65(f) (l) and (j) and N.J.S.A. 48:3-66(b), taken
together, an electric public utility is not permitted to offer competitive
electric generation service and, pursuant to the definitions provided in
section 3 of the Act, N.J.S.A. 48:3-51, basic generation service is not a
competitive service. Accordingly, we FIND the provisions of paragraph 18 of
the proposed Stipulation to be consistent with both the letter and intent
of the Act. With regard to the relationships and transactions between PSE&G
and Genco, other than those specifically governed by the terms of the BGS
contract provided for herein and as subsequently reviewed and approved by
the Board, rather than adopting either of the standards proposed in the
Stipulation, we deem it most appropriate and efficient to subject PSE&G and
Genco to the same standards as we shall be imposing on other utilities and
their affiliates, and thereby determine that such relationships and
transactions between PSE&G and Genco, shall be governed by the affiliate
relations standards adopted by the Board pursuant to section 8 of the Act,
N.J.S.A. 48:3-56.
Notwithstanding the foregoing, and in light of the establishment of
shopping credit levels which, while overall reflective of market prices may
not adequately reflect the seasonality of market prices and, in order to
deter suppliers from offering services to customers that might cause them
to leave BGS during low cost periods and return to BGS during high cost
periods, thereby "gaming" the system, the Board HEREBY ADOPTS the following
protections. PSE&G shall have the option of imposing a one-year commitment
on any non-residential customer returning to BGS unless such customer
selects a new third party supplier within 30 days of the return to BGS.
Notwithstanding the 30 day "grace period," any non-residential customer
returning to BGS during May of any year shall become subject to the
one-year commitment unless a new third party supplier is selected before
June 1 and any non-residential customer returning to BGS during June, July
or August of any year will immediately become subject to the one-year
commitment without any "grace period" to select a new third party supplier.
We decline to adopt a similar mechanism for residential customers at this
time, because we are mindful that the residential market in general has
been a more difficult market for third party suppliers to penetrate, and we
wish to minimize, where practicable, restrictions which may dissuade
residential customers from switching to a third party supplier. We will
monitor developments, including products and services being offered to
residential customers by third party suppliers, and will revisit the
possible imposition of the one-year commitment provisions on residential
customers if it becomes clear that our decision at this time has led to
gaming by suppliers and/or customers.
The Board notes that the Stipulation does not provide for the
Investment Tax Credit ("ITC") value to be flowed through to ratepayers. The
Board HEREBY DIRECTS the Company to seek a letter ruling from the IRS to
determine whether or not the value of the ITC can legitimately be credited
to customers without violating the tax normalization policies of that
Agency to the detriment of the Company and the customers, and to provide a
copy of that letter ruling once received from the IRS to the Board and the
Ratepayer Advocate. In the event that the IRS issues a letter ruling which
is unfavorable to the proposition that the ITC cannot be passed onto
customers, then this issue will be moot. In the event that the IRS issues a
letter ruling which is favorable to the proposition that the ITC can be
passed onto customers, then the Board in year four of the Transition Period
will consider any action which it may deem appropriate, giving
consideration to the issues resolved in the Stipulation of March 17, 1999,
the Board's modifications to that Stipulation, and other relevant
considerations which the parties might bring to the Board's attention in
that review of the issue during year four of the Transition Period.
Finally, we address the issue raised in the proceeding by Co-Steel,
described hereinabove, with respect to the imposition of stranded cost or
related charges such as the transition bond charge on power consumed by
Co-Steel under its special contract dated November 14, 1994 with PSE&G,
which issue was litigated during the proceeding before ALJ McAfoos but
which was not addressed in the Initial Decision. Block 1 of CoSteel's usage
under the special contract is based on the Company's HTS tariff. The Act
makes clear that the MTC, TBC and SBC are to be non-bypassable charges
(except for eligible on-site generator customers pursuant to section 28 of
the Act, N.J.S.A. 48:3-76)). Customers on the HTS tariff, must therefore be
assessed MTC, TBC and SBC charges. However, pursuant to the requirements of
section 4 of the Act, N.J.S.A. 48:3-52, HTS customers, as well as all other
customers, will experience a 5% aggregate rate reduction effective August
1, 1999, a 7% rate reduction on or about January 1, 2000, a 9% rate
reduction effective August 1, 2001 and a 13.9% rate reduction effective
August 1, 2002. Importantly, all such rate reductions are inclusive of the
imposition of the MTC, TBC and SBC charges. Indeed, a portion of the
aggregate rate reductions which will be received are a direct result of the
securitization approved herein; enjoyment of those price reductions by a
customer without paying towards the transition bonds and related costs
which helped make such reductions possible would be unfair. Accordingly, we
FIND that there is no legal basis in the Act for an exclusion for Co-Steel
from paying the MTC, TBC and SBC charges, and indeed there is no merit for
Co-Steel's arguments whatever, since the cost of its power consumption
under Block 1 of the special contract will be reduced as a result of the
Act and this Order and, moreover, as already acknowledged by PSE&G,
Co-Steel's Block 2 usage will be governed by the special contract and,
therefore, the price thereof will be unaffected by this Order. We therefore
REJECT CoSteel's arguments, including its assertion that it should be
released from its contract and be able to shop for an alternative supplier
immediately, since there has been no material change to the contract for
which PSE&G and Co-Steel bargained. Moreover, Co-Steel will be receiving
power at a net price lower than that originally bargained for as a result
of this Order. Finally, we REJECT the arguments made by Co-Steel that it
should be exempted from the imposition of any stranded cost charges after
the expiration of the special contract. Simply put, any special pricing
arrangements. for which it has bargained expire with the expiration of the
special contract. After the expiration of its contract with PSE&G, Co-Steel
will be subject to and have all of the options afforded under applicable
law, including with regard to utility tariffs, and the ability to shop for
an alternative supplier.
Based on the above, we hereby incorporate as a fair resolution of the
issues in these proceedings, the elements of Paragraphs 1 to 36 of the
Stipulation filed by PSE&G and others, subject to the modifications and
clarifications set forth above, along with the specific modifications and
clarifications set forth below. To the extent the Initial Decision is
inconsistent herewith, it is modified to conform herewith.
Based upon the foregoing, we HEREBY FIND and DIRECT as follows:
1) Electric rate reductions shall be implemented by PSE&G as follows to
comply with the provisions of subsection 4(d) of the Act, N.J.S.A.
48:3-52(d):
a) A 5% aggregate rate reduction from rates in effect as of the
date of the Board's Summary Order in this matter (hereinafter
"current rates") for service rendered on and after August 1,
1999. This reduction includes a 1% reduction relating to the
savings from securitization.
b) A minimum additional rate reduction of 2% of current rates
targeted for service rendered on or after January 1, 2000
subject to the issuance prior to such date of a Bondable
Transition Cost Rate Order establishing a securitization bond
charge and providing for the securitization of $2.4 billion of
generation-related stranded costs and the recovery of up to
$125 million of related and reasonable and prudently-incurred
taxes, costs of issuance, and transaction costs including costs
of refinancing or retirement of debt or equity as provided in
paragraph 11 (together "Bondable Stranded Costs") and the sale
of the securitization bonds. The date of the reduction will be
the same date as the securitization transition charge is
established.
c) A further minimum 2% rate reduction for service rendered on or
after August 1, 2001 to bring the total rate reduction to 9%
from current rates assuming that securitization is implemented
should greater savings be achievable as a result of
securitization as implemented, the additional savings shall be
reflected in reductions beyond the requisite minimums set forth
herein in (b) and
d) A final rate reduction for service rendered on and after August
1, 2002, in an amount that, when considered with the above
reductions, will result in a rate reduction by customer class
of 10% relative to rates in effect as of April 30, 1997.
e) All rate reductions will be applied to each customer's bill to
reflect the above reductions, as set forth on Attachment 2 of
the PSE&G Stipulation page 2 of 19. However, as discussed
herein, we are concerned that the removal of the rate reduction
credit in year five will lead to an undue bill impact, since
removal of the entire rate reduction credit would appear to
result in a total customer bill which exceeds the sum of the
current unbundled rate components, including the distribution
rate, BGS rate (including transmission), STC, NTC, and SBC
which will remain, prior to adjustment, in year five. Moreover,
we are concerned that the particular unbundled rate components,
particularly with respect to distribution charges, as provided
in Attachment 2 of the Stipulation will, after the expiration
of the rate reduction credit, result in a shift in cost
responsibility between and among customer classes. As further
discussed herein, we also find it necessary and appropriate for
the Board to review the overall level of rate savings prior to
the conclusion of the Transition Period. We therefore DIRECT
the Company to file, by no later than August 1, 2002, the
proposed unbundled rates and support therefor which it proposes
be implemented at the expiration of the Transition Period on
August 1, 2003.
f) The rate reduction described in paragraph 1(d) shall be
sustained until July 31, 2003.
2) There shall be a four-year transition period commencing on August 1,
1999 and terminating on July 31, 2003 (Transition Period).
3) The unbundled rates to be effective for each rate class in PSE&G's
Tariff for Electric Service have been developed using the Company's
1995 Cost of Service Study using the parameters defined in Attachment
2 of the PSE&G Stipulation, including the unbundled rates and rate
components. Each customer's bill shall indicate the dollar amount of
the difference between what the customer's total charges would have
been without the reduction and the total charges in that bill
pursuant to subsection 4(b) of the Act, N.J.S.A. 48:3-52(b).
4) An excess electric distribution reserve in the amount of $568.7
million is to be amortized over three years and seven months
beginning on January 1, 2000 and ending July 31, 2003. Amortization
amounts will be $125 million in the year 2000, $125 million in the
year 2001, $135 million in the year 2002, and $183.7 million in the
year 2003.
5) Consistent with section 12 of the Act, N.J.S.A. 48:3-60, PSE&G will
establish a Societal Benefits Charge. The SBC will include costs
related to: 1) Social Programs (including the Universal Service
Fund); 2) Nuclear Plant Decommissioning costs; 3) Demand Side
Management Program costs; 4) Manufactured Gas Plant Remediation
costs; and 5) Consumer Education Costs.
6) The SBC will be set at the level of costs for the above items
included in rates as of February 9, 1999, the effective date of the
Act, and as more explicitly defined in Attachment 2 of the PSE&G
Stipulation. This SBC level will remain constant through the
Transition Period. Actual costs incurred by the Company for each of
the cost components enumerated in paragraph 5 will be subject to
deferred accounting. Interest adjusted on August 1 of each year of
the Transition Period will be accrued on any under or overrecovered
balances. The interest rate will be based on seven year constant
maturity treasuries as shown in the Federal Reserve Statistical
Release on or closest to August 1 of each year plus sixty basis
points. At the completion of the Transition Period, the SBC will be
reset and then reset annually upon Board approval to amortize any
over- or under collected balances.
7) The DSM generation-related lost revenue created subsequent to August
1, 1999 will no longer be reflected in the calculation of costs
eligible for Demand Side Management Program cost recovery and
deferral as described in Attachment 2 of the PSE&G Stipulation.
8) Consistent with section 13 of the Act, N.J.S.A. 48:3- the
Company's unbundled electric tariffs and distribution service rates
will include a NTC to recover the above-market stranded costs of
PSE&G's existing non-utility generation contracts. These contracts
will continue to remain the obligation of PSE&G during the life of
the contracts. The Company will sell the energy and capacity from
these contracts at the PJM Interchange Hourly Locational Marginal
price and at wholesale within the PJM region, respectively.
Notwithstanding the foregoing, the Company has an ongoing obligation
to mitigate the above-market stranded costs recovered through the
NTC, pursuant to subsection 13(f) of the Act, N.J.S.A. 48:3 61(f).
9) The initial level of the NTC will be set based on the above-market
non-utility generation costs for 1999 of $183 million (Exhibit PS-20,
Schedule CJL-F3) and as more explicitly defined in Attachment 2 of
the Stipulation. This NTC level will remain constant for a period of
four years from August 1, 1999. Actual annual payments made by the
Company for NUG costs will be reduced by the value received from the
sale of the energy and capacity associated with those contracts as
described in paragraph 8. For the purpose of calculating the amount
of stranded cost which PSE&G is entitled to recover during the
Transition Period, any increase or decrease in the above-market costs
will be subject to deferred accounting and interest, adjusted on
August 1 of each year of the Transition Period, will be calculated on
any under- or over-recovered balances. The interest rate will be
based on seven year constant maturity treasuries as shown in the
Federal Reserve Statistical Release on or closest to August 1 of each
year plus sixty basis points. After the Transition Period, the NTC
will be reset and then reset annually upon Board approval to amortize
any over- or under-collected balances. Board approved buy-outs and
buy-downs of NUG contracts will be reflected in this clause in a
manner consistent with subsection 13(l)(3) of the Act, N.J.S.A.
48:3-61(l)(3).
10) The Company is entitled to recover $2.94 billion net-of-tax of its
generation-related stranded costs resulting from a market valuation
of $0.046 billion and $1.857 billion for nuclear and fossil
generating assets, respectively. As set forth in paragraphs 11 and
13, the Company will be provided with an opportunity to recover up to
$2.94 billion of net-of-tax generation related stranded costs through
securitization of $2.4 billion and an opportunity to recover up to
$540 million of its unsecuritized net-of-tax generation related
stranded costs on a present value basis, subject to true-up on the
collection of the unsecuritized generation related stranded costs as
provided in paragraph 17 hereinbelow. The accumulated LEAC
overrecovery balance as of July 31, 1999, including accumulated
interest thereon as of that date, shall be applied as a credit to the
starting deferred balance for the NTC.
11) In order to comply with the requirements of section 14 of the Act,
N.J.S.A. 48:3- 62, PSE&G will utilize the net proceeds of
securitization, after payment of all related fees and expenses of
issuance and sale, to refinance or retire its debt and/or equity, in
a manner that will not substantially alter the Company's overall
capital structure to the detriment of bondholders or ratepayers; (ii)
such refinancing and/or retirement of such debt may occur as a result
of, among other things, mandatory and/or optional redemption,
repurchase and/or tender by or on behalf of PSE&G, which optional
redemption, repurchase or tender may be at a premium; and (iii) the
Board HEREBY AUTHORIZES PSE&G to employ such methods as are
reasonable and necessary to achieve the overall intent and purposes
of the Act.
a) Upon application by PSE&G and determination by the Board that
the conditions of the Act are met, the Board will issue a
financing order consistent with the provisions of the Act, to
authorize PSE&G to issue up to $2.525 billion of transition
bonds representing $2.4 billion of net-of-tax
generation-related stranded costs and up to $125 million of
transaction costs including related fees and expenses of
issuance, sale of bonds and to refinance or refund its debt and
equity subject to approval of the Board. The taxes related to
securitization, which reflect the grossed up revenue
requirement number associated with the $2.4 billion in net of
tax stranded costs being securitized, are recoverable stranded
costs, however they should not be collected through the
transition bond charge; rather, such taxes shall be collected
via a separate MTC referred to as an "MTC-Tax." The duration of
this separate MTC shall be 15 years, or otherwise so as to be
identical to the duration of the transition bond charge.
12) a) PSE&G has taken reasonable measures to date on mitigation of
stranded costs (Exhibit PS-14) and the terms of this Order
including rate reductions, rate freezes, and other mitigation
measures will create appropriate incentives in place to
mitigate the total amount of its stranded costs;
b) PSE&G will not be able to achieve the level of rate reduction
deemed by the Board to be necessary and appropriate pursuant to
the provisions of Sections 4 and 13 of the Act, N.J.S.A.
48:3-52 and N.J.S.A. 48:3- absent the issuance of transition
bonds providing for the recovery of its Bondable Stranded Costs
as set forth in paragraph 1 (b); and
c) We note that market interest rates are subject to volatility,
and the actual interest rates on the transition bonds are not
known at this time. Accordingly, it is impossible to reach
final determinations at this time with respect to the actual
level of savings and benefits associated with the issuance of
transition bonds by PSE&G. Indeed, to the extent that the
interest rate on the bonds is not fixed until the time of the
pricing of the terms and conditions of the transition bonds,
such final determinations with respect to savings and benefits
could be problematic even at the date of the issuance by the
Board of a financing Order. In order to be able to address this
issue definitively in the financing Order, recognizing the
inherent volatility of market interest rates, we will determine
in the financing Order an upper bound for the actual interest
rate on the bonds, at or below which would result in a level of
savings and benefits for ratepayers which the Board deems
appropriate in accordance with, the provisions of the Act.
13) Pursuant to paragraph 10, in accordance with section 13 of the Act,
N.J.S.A. 48:3- and on the condition that the Genco transfer is
implemented, and the unsecuritized generation stranded cost level is
not subject to true-up (other than as provided in paragraph 17
hereinbelow), PSE&G shall be provided with the opportunity to recover
up to $540 million of its unsecuritized generation stranded costs on
a net present value (8.42% discount rate) net of tax basis over the
Transition Period. This recovery is to be accomplished via a 2 mill
per kwh retail adder, an explicit Market Transition Charge (MTC),
exclusive of the NTC, as discussed in Attachment 2 to the PSE&G
Stipulation, and the amount funded by the excess distribution
depreciation reserve amortization. As Basic Generation Service (BGS)
customers leave PSE&G for third-party suppliers, full recovery of
these costs is not assured and represents a risk of undercollection
to PSE&G.
14) At the end of the Transition Period, the recovery of the $540 million
will be reconciled to actual collections based on actual sales, the
net present value of recovery from both the MTC, exclusive of the
NTC, and collections from a 2.0 mill per kWh retail adder for
all customers retained on the BGS, and the depreciation amortization.
In the event the Company fails to collect $540 million, it will be at
risk for any such shortfall. In the event the Company collects over
$540 million, it shall use any such overrecovery to reduce the
Company's SBC at the end of the Transition Period when the SBC is
reset and shall in no event be retained by PSE&G or remitted to
Geneco or otherwise utilized to recover unsecuritized
generation-related stranded costs. The discount rate used in these
present value calculations will be based on the same cost of capital
discount rate used to calculate securitization savings on Attachment
1 to the PSE&G Stipulation.
15) The Company's shopping credit shall equal its BGS rate, which shall
be inclusive of an allowance for the cost of energy, capacity,
transmission, ancillary services, losses, taxes and retail adder. The
Company's BGS/shopping credit levels shall be established and fixed
for the duration of the transition period, without adjustment or true
up of any kind, as follows:
AUG-DEC JAN-DEC JAN-DEC JAN-DEC JAN-JUL
1999 2000 2001 2002 2003
RS 5.71 5.86 5.86 5.86 5.86
GLP 5.30 5.35 5.39 5.44 5.44
LPL-S 4.84 4.88 4.93 4.97 4.97
LPL-P 4.54 4.58 4.62 4.66 4.66
HTS-SUBT 4.30 4.35 4.40 4.44 4.44
HTS-HV 4.12 4.16 4.21 4.25 4.25
OVERALL 4.95 5.03 5.06 5.10 5.10
- ---------------------------------------------------------------------
The above rates are rate schedule averages, which will differ by
blocks and time periods of each rate schedule as defined in Attachment
2. Other rate schedules (RHS, RLM, WH, WHS, HS, BPL and PSAL) will be
calculated consistent with the above as presented in Attachment 2 of
the Stipulation. Additional shopping related savings, resulting from
customers receiving electric generation service from a supplier at a
price less than the above shopping credits, are above and beyond the-
rate reductions set forth in paragraph 1.
16) The above-referenced pre-established BGS rates meet the shopping
credit definition in the Act and resolve the issue of BGS pricing and
the shopping credit in a manner that accommodates the parties'
concerns and satisfies the requirements of subsections 9(a) and 9(d)
of the Act, N.J.S.A. 48:3-57(a) and (d).
17) Basic Generation Service Obligation - Pursuant to subsections 9(a)
and 9(b)(3) of the Act, N.J.S.A. 48:3-57(a) and (b)(3), the Company
has a three-year obligation to provide BGS to those retail customers
who choose to remain with the utility during the three-year period
ending July 31, 2002. The BGS to be provided after July 31, 2002
shall be bid out. The first year bid will be a pre-payment method
based upon pre-established shopping credit for year four. If the bid
for generation results in a payment to PSE&G, it shall be credited to
the deferred SBC balance for purposes of establishing the SBC rate in
year five. If the bid for generation requires a payment by PSE&G,
such payment shall be subject to deferral and subsequent recovery at
the Interest Rate. A non-regulated affiliate of Public Service
Enterprise Group, Inc. will be authorized to bid for such BGS to be
provided after July 31, 2002 pursuant to terms that apply to other
suppliers of electricity, subject to procedures to be determined by
the Board.
18) PSE&G shall not promote its BGS as a competitive alternative.
19) Pursuant to the provision of subsection 7(d) of the Act, N.J.S.A.
48:3-55(d), the Board approves the transfer of the Company's electric
generation-related assets and their operation, and all associated
rights and liabilities into a separate corporate entity or entities
(Genco) to be wholly owned by Public Service Enterprise Group, Inc.
and not by Public Service Electric and Gas Company. The specific
generation facilities and assets which shall be transferred are
identified on Attachment 3 to the Stipulation (the "Generation
Facilities"). PSE&G represented that these facilities and assets
constitute all of its electric generation related assets.
20) The final and fixed transfer value pursuant to subsections 7(d) and
13(e) of the Act, N.J.S.A. 48:3-55(d) and 61(e), for the Generation
Facilities is $2.443 billion (Attachment 4 to the Stipulation as
modified pursuant to this Order) which is the fair market value of
the assets transferred considering all revenues derived from the BGS
contract described in paragraph 21 hereof. In addition, PSE&G will
transfer at book value at the time of transfer other generation-
related assets including materials, supplies, and fuel, which book
value we find to be the full value for such generation-related
assets, in accordance with subsection 7(d) of the Act, N.J.S.A.
48:3-55(d). Such transfer prices ensure that PSE&G receives full
value for the Generation Facilities and related assets and that PSE&G
will not retain any liabilities associated with the transferred
Generation Facilities or other generation-related assets and shall
assure that customers' responsibility for stranded costs is
established at the lowest reasonable level. No land held for future
use (Account 105) will be transferred to Genco. All
generation-related expenses will be borne by Genco. The Company shall
have auditable accounting protocols in place no later than the
effective date of the transfer to assure that all expenses and
capital expenditures related to generation will be borne by Genco.
21) The BGS contract between PSE&G and Genco will contain the following
provisions:
To ensure the reliability of service to BGS and to remove the risk of
price volatility to the regulated Company during the transition to a
competitive market and to further ensure that PSE&G can meet its
contractual obligations to provide power under certain Off-Tariff Rate
Agreements (listed in Attachment 5 to the Stipulation), the transfer to the
Genco shall be accompanied by the Genco and PSE&G's entering into a BGS
contract which shall be submitted for approval to the Board, whereby the
Genco would provide full requirements service for energy, capacity, losses
and ancillary services needed by the Company for BGS and for Off-Tariff
Rate Agreements for the period that the Company will be providing BGS under
the Stipulation;
b) In exchange for ensuring the reliability of supply for PSE&G's
BGS, for removing the risk of price volatility from the
regulated Company in providing such service and to further
ensure that PSE&G can meet its contractual obligations in its
Off-Tariff Rate Agreements, the BGS contract shall provide that
the consideration paid by PSE&G for such full requirements
service shall be: (i) an amount computed on a monthly basis
equal to the full amount charged for BGS to PSE&G's retail
electric customers as set forth in paragraph 15 (less any sales
and use tax and transmission); (ii) an amount computed on a
monthly basis equal to PSE&G's retail delivery to Off-Tariff
Rate Agreement customers, multiplied by the comparable BGS rate
for such customers (less sales and use tax and transmission);
and (iii) an additional charge for price stability services
provided by the combustion turbine assets of Genco, payable
based on the installed capacity of those assets. The additional
charge, set forth in (iii) above, will be an amount computed on
a monthly basis equal to the full actual amount collected
pursuant to paragraph 13 excluding the 2 mill per kWh retail
adder. Pursuant to subsection 9(b)(3) of the Act, N.J.S.A.
48:3-57(b)(3), no net revenue from this contract may be used as
a reduction of the MTC or distribution rates.
c) To further ensure the reliability of supply for PSE&G's BGS and
to remove the risk of price volatility from PSE&G, the BGS
contract shall also provide that PSE&G shall transfer to Genco,
solely for the purpose of Genco meeting its obligations under
the BGS contract, including the removal of price volatility,
the authority to act as its agent for the purpose of
scheduling, electing and/or using all rights, including-Fixed
Transmission Rights, associated with transmission delivery of
full requirements service for PSE&G's BGS and Off-Tariff Rate
Agreement customers. Genco will be responsible for costs
related to BGS scheduling activities to the same degree it
would be responsible for those costs for other load serving
entities.
d) The BGS contract shall be filed with the Board for review and
approval to ensure its consistency with the letter and intent
of this Order. The parties shall have the right to comment to
the Board on terms and conditions which are reflected in the
BGS contract but which are not set forth herein.
22) To further ensure the reliability of the BGS after the transfer of
the Generation Facilities, PSE&G shall continue to supply, on an as
needed basis, dedicated intrastate natural gas transportation
services for the Genco's own gas supplies from PSE&G's city gate to
the transferred generating facilities in accordance with the
Stipulation approved in Docket No. ER94070293, OAL Docket No. PUC
732894 on May 5, 1995. Such dedicated intrastate natural gas
transportation services shall continue to be supplied by PSE&G to
Genco for the term of the BGS contract.
23) To ensure that the goals of reliable service and sustained rate
reductions are achieved, the transferred Generation Facilities may
only be sold or otherwise transferred by Genco to any other party
during the Transition Period if the other party agrees to take the
Generation Facilities subject to entering into a comparable BGS
contract with the same consideration including the right to recover
the MTC allocated to such Generation Facilities. Said contract shall
be subject to review and approval by the Board to assure such
comparability and to otherwise ensure that the PSE&G customers
receive at least the same level of benefits as attendant to the BGS
contract between PSE&G and Genco. If a sale of some or any of the
transferred Generating Facilities by Genco occurs within five years
of August 1, 1999, any net after tax gains from such sale will be
shared equally between shareholders and customers in a manner to be
determined by the Board.
24) The Board finds that qualifying the Generation Facilities being
transferred, either separately or jointly, in accordance with section
32(c) of the Public Utility Holding Company Act of 1935 as Exempt
Wholesale Generators will benefit consumers, is in the public
interest, will not provide any unfair competitive advantage by virtue
of the Genco's affiliation or association with the Company subject to
compliance with affiliate relations and fair competition standards to
be adopted by the Board, and does not violate State law. As an EWG,
Genco shall not offer retail electric service.
25) The Board finds that, in accordance with section 32(k) of the Public
Utility Holding Company Act of 1935, it has sufficient regulatory
authority, resources and access to books and records of Public
Service Electric and Gas Company and any relevant associate,
affiliate or subsidiary company, to ensure that the BGS contract will
(a) benefit consumers; (b) not violate any State law; (c) not provide
Genco any unfair competitive advantage by virtue of its affiliation
or association with the Company; and (d) is in the public interest.
26) PSE&G shall submit, within 60 days of the date of issuance of the
Board's Order, a tentative schedule for the receipt of authorization
for the transfer from other agencies for the Generation Facilities
described in Attachment 3 to the Stipulation. PSE&G shall submit to
the Board copies of any filings made to other agencies seeking
authorization of the transfer, in order to assure that no material
changes to the terms and conditions attendant to this Order are being
sought. Within 60 days following approval, PSE&G shall also file with
the Board copies of any documents evidencing such transfer and
assumption of liabilities in connection therewith. Upon the receipt
of approval from other agencies, PSE&G shall provide a filing, which
reflects the terms and the approvals received and accounting
implemented.
27) In order to ensure that PSE&G does not retain any risks or
liabilities associated with the electric generating business after
the Generating Facilities have been transferred, the Board hereby
orders that all contracts (except for the NUG contracts) associated
with the electric generating business, including, but not limited to,
wholesale electric purchase and sales agreements, fuel contracts,
real and personal property interests, and other contractual rights
and liabilities, be transferred from PSE&G to Genco simultaneous with
the transfer of all generating assets, and to substitute the Genco
for PSE&G as the party(s) to any such contracts.
28) The Board recognizes that various federal and state regulatory
approvals, as well as third-party consents, will be necessary to
complete the transfer of assets, rights and obligations contemplated
by this Order and anticipates that such approvals and consents will
result in a delay between the date of this Order approving the
transfer and the date that the Generation Facilities are actually
transferred. The Board finds that PSE&G will receive from Genco the
full market value of the generating assets, and that such receipt
will be reflected as an offset to the MTC charged by PSE&G to recover
unsecuritized stranded costs. Accordingly, and in order to effectuate
the purposes of the Act under subsection 9(b)(3), N.J.S.A.
48:3-57(b)(3), and to ensure that PSE&G is not unduly penalized while
diligently complying with this Order and supplying BGS at rates
approved by the Board, any requirement under section 7 of the Act,
N.J.S.A. 48:3-55, which would require the payment of any percentage
of net revenues for the sharing of common assets and personnel is not
applicable, provided that the transfer is completed within one year
of the date of this Order, unless extended by further Order of the
Board.
29) Generating capacity transferred to Genco shall be maintained as a
capacity resource within the PJM system for the Transition Period.
During that period, Genco will be permitted to sell said capacity
outside of the PJM system for periods of less than one year after it
makes good faith efforts to sell the transferred capacity into the
PJM system at market rates. For purposes of implementing this Order,
the Board will retain jurisdiction over and will monitor whether
Genco is complying with the terms of this Order during the Transition
Period to sell excess capacity into the PJM system at market prices.
30) In addition to any other Affiliate Standard of Conduct that might
apply to PSE&G, the relationship and any transactions between PSE&G
and Genco, except as such relationship is defined in the BGS
contract, as reviewed and approved by the Board, will be governed by
the affiliate relations standards adopted by the Board pursuant to
section 8 of the Act, N.J.S.A. 48:3-56.
31) The transfer of Generation Facilities and related rights and
liabilities contemplated by this Order is in the public interest and
will not jeopardize the reliability of the electric power' system.
Such transfer will not adversely impact the ability of PSE&G to meet
its obligations to its employees with respect to pension benefits, as
contemplated pursuant to N.J.S.A. 48:3-7.
32) The advertising requirements under N.J.A.C. 14:1-5.6 are waived
because of the extensive nature of the record regarding valuation of
the assets being transferred and no further authorizations by the
Board are required to effectuate this transfer provided that all
other regulatory approvals are obtained on a basis consistent with
this Order.
33) Upon the transfer of the nuclear generation assets, neither PSE&G nor
its retail customers shall be responsible to decommission its
previously owned nuclear units, subject to the Nuclear Regulatory
Commission approval. That responsibility will pass to the Genco with
the transfer of the nuclear generation and associated assets
described in Attachment 3 to the Stipulation and the Nuclear
Decommissioning Trust Funds.
34) The Third Party Supplier Agreements are subject to an ongoing generic
working group under the Board's restructuring dockets. We will
determine the contents and substance of the Third Party Agreement and
accompanying tariffs within the context of that generic
proceeding.(9)
- ----------------------
9 The four electric public utilities and a majority of active
third party suppliers in fact reached agreement on a Master Third
Party Supplier Agreement and accompanying tariffs, which was approved
by the Board at its July 26, 1999 public agenda meeting.
35) The Board will work closely and cooperatively with the PJM-ISO to
monitor actual market behavior in connection with the PJM-ISO's
FERC-ordered market monitoring plan.
36) The Board directs the parties to work cooperatively to conclude the
billing and metering proceeding in an expedited fashion, which
proceeding the Board will endeavor to conclude by May 1, 2000, but in
any event shall conclude by August 1, 2000 pursuant to section 6 of
the Act, N.J.S.A. 48:3-54.
37) The Board directs PSE&G to seek a letter ruling from the IRS to
determine whether or not the value of the ITC can legitimately be
credited to customers without violating the tax normalization
policies of that agency to the detriment of the Company and its
customers.
In summary, subject to the conditions embodied herein, the rate
discounts provided by PSE&G relative to current rates during the Transition
Period shall be as follows:
August 1, 1999 5%
January 1, 2000 7% (minimum)
August 1, 2001 9% (minimum)
August 1, 2002 13.9%
The average shopping credits shall be as follows:
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
RS 5.71 5.86 5.86 5.86 5.86
GLP 5.30 5.35 5.39 5.44 5.44
LPL-S 4.84 4.88 4.93 4.97 4.97
LPL-P 4.54 4.58 4.62 4.66 4.66
HTS-subT 4.30 4.35 4.40 4.44 4.44
HTS-HV 4.12 4.16 4.21 4.25 4.25
- -----------------------------------------------------------------------------
OVERALL 4.95 5.03 5.06 5.10 5.10
- -----------------------------------------------------------------------------
The opportunity for recovery of up to $2.94 billion of net of tax
generation stranded costs is afforded via $2.4 billion of securitization
and the opportunity for up to $540 million to be recovered via the MTC, the
retained retail adder and the depreciation reserve amortization and
subsequently remitted to Genco, per the terms of the Stipulation as
modified.
The total opportunity for recovery of net of tax generation stranded
cost is set at $2.94 billion, with the implementation of the Genco
transfer, resulting from an increase in the net transfer value for the
generating assets of $135 million from $1.768 billion to $1.903 billion.
The amount of generation stranded costs which is authorized for
securitization is $2.4 billion. The Company is also authorized to
securitize up to the estimated $125 million of reasonably incurred bond
transaction costs.
The amount of unsecuritized net of tax stranded cost which the
Company is permitted an opportunity to recover is $540 million, with the
implementation of the Genco transfer per the terms of the Stipulation as
modified herein, and subject to the true-up provisions provided in
paragraph 17 of the Stipulation as modified herein.
DATED: BOARD OF PUBLIC UTILITIES
BY:
------------------------------------
HERBERT H. TATE
PRESIDENT
------------------------------------
CARMEN J. ARMENTI
COMMISSIONER
------------------------------------
FREDERICK F. BUTLER
COMMISSIONER
ATTEST:
-------------------------
MARK W. MUSSER
SECRETARY
INTERNAL REVENUE SERVICE DEPARTMENT OF THE TREASURY
Index Number: 61.00-00, 61.03-00 Washington, D.C. 20224
61.43-00, 451.01-00
Patricia A. Rado Person to Contact:
Vice-President & Controller Thomas M. Preston (50-05811)
Public Service Enterprise Group and Telephone Number:
Subsidiaries (202) 622-4443
80 Park Place Refer Reply to:
Newark, N.J. 07101 CC:DOM:Fl&P:2-PLR-110566-99
Date: JUL 23, 1999
Legend
Parent = Public Service Enterprise Group
EIN: 22-2625848
Company = Public Service Electric & Gas Company
EIN: 22-1212800
State A = New Jersey
State B = Delaware
Statute = Electric Discount and Energy Competitor Act
a = 2.4 billion
- -
b = 2.525 billion
- -
c = 0.5
- -
d = 15
- -
e = 17
- -
f = 5
- -
Dear Ms. Rado:
This letter is in reply to your letter dated June 9, 1999, and other
correspondence, asking the Internal Revenue Service to rule on the
transaction described below.
FACTS
Parent is the common parent of an affiliated group of corporations
that includes Company. Parent files a consolidated return for the group.
Company, a calendar year taxpayer that uses the accrual method of
accounting, is an investor-owned electric utility in State A. Company
generates, transmits, and distributes electricity to residential,
commercial, and industrial customers within a designated territory. Company
has the exclusive right to sell electricity at retail within its territory
and is regulated by State A's board of public utilities (BPU) and the
Federal Energy Regulatory Commission.
State A is deregulating its electric industry. As a result, Company's
customers will be allowed to contract directly with alternative suppliers
of electricity, and Company will compete with other parties to sell
electricity.
In a competitive market some of Company's generation facilities will
have values substantially below their book value and some of its contracts
to purchase electricity will be at rates above the market price. To enable
Company to recover the net uneconomic portions of its prudently incurred
costs of generation-related assets and obligations (Transition Costs),
State A enacted Statute and the BPU issued orders allowing Company to
collect nonbypassable charges from consumers of electricity located in
Company's territory. The charges will be based, in part, on the amount of
electricity purchased by the consumer, whether from the Company or from an
alternative supplier.
Under Statute, a portion of Company's Transition Costs may be
recovered by collecting separate, nonbypassable, usage-based charges called
Transition Bond Charges (TBCs) and by issuing securities that will be
secured by Company's right to collect the TBCs. The TBCs will be collected
from consumers of electricity located in Company's territory. To obtain the
authority to collect TBCs and to issue securities, Company must apply for a
financing order from the BPU.
Under a financing order, TBCs to be collected by Company will be
generally based on the actual electricity usage of each affected consumer.
Actual collection of TBCs will vary from expected collections due to a
number of factors including power usage and delinquencies. The Financing
Order will require the adjustment of the TBC charge at least annually.
Under Statute, the right to collect TBCs is separate property right
(Bondable Transition Property).
PROPOSED TRANSACTION
The BPU has issued a Recovery Order authorizing the recovery of
Company's Transition Costs. The Recovery Order specifies that $a of a
Company's Transition Costs are eligible for bond financing.
Company has applied to the BPU for a Financing Order authorizing the
issuance of the Notes in an aggregate principal amount not to exceed $b.
The Financing Order will authorize TBCs in an amount needed to service the
Notes, pay transaction costs, and provide for credit enhancement. The
Financing Order will create Bondable Transition Property in the right to
collect the TBCs and will provide that the Bondable Transition Property may
be assigned to a special purpose entity (SPE).
In the Recovery Order, the BPU has also granted Company the authority
to recover the federal income taxes and state corporate business taxes it
will incur as it bills customers for TBCs. Company's tax liability will be
collected under separate, non-bondable charges (Tax Charges).
Company will form the SPE under State B law as a bankruptcy remote,
limited liability company for the special purpose of effectuating the
Proposed Transaction. The SPE will use the accrual method of accounting.
Company will be the sole member of the SPE. The SPE will not elect to be
treated as an association taxable as a corporation under section
301.7701-3(b)(1) of the Procedure and Administration Regulations. Company
will contribute, as equity to the SPE, cash equal to c percent of the total
issue price of the Notes.
Pursuant to the Financing Order, Company will transfer the Bondable
Transition Property to the SPE. The SPE will issue and sell Notes to
investors not to exceed the aggregate principal amount of $b. The proceeds
from the issuance of the Notes, net of issuance costs, will be transferred
to Company in consideration for the Bondable Transition Property.
The Issuer will initially issue one series of Notes to investors
(Series A-1). Series A-1 will be divided into sequential classes, each with
a different legal maturity date. Company expects that the Notes will have
scheduled maturity dates of no more than d years, and legal maturity dates
of no more than e years. Scheduled maturity is the date on which the final
principal payment is expected to be paid; legal maturity is the date on
which nonpayment is a default.
Interest on Series A-1 will be payable quarterly or semiannually at
rates that are based on yields commensurate with similarly rated debt
obligations of comparable weighted average lives. The Notes are expected to
be sold at or near par value.
Principal payments will be scheduled to be made quarterly or semiannually
and will be applied in sequential order to each class of Series A-1 until
the outstanding principal balance of the class is reduced to zero.
Series A-1 will be subject to an optional "clean-up" call (i.e.,
early payment of all outstanding principal and accrued interest) when the
outstanding principal of the series declines to less than f percent of the
original issue price of the series. Because the classes will be allocated
principal payments in sequential order, the clean-up call for Series A-1
will apply only to the classes with the longest maturities.
Initially, Company will service the consumer accounts that are
subject to the TBCs. As Servicer, Company will, on a monthly basis, bill
and collect TBCs, remit collected TBCs to the SPE, and retain all books and
records regarding the TBCs, subject to the SPE's right of inspection.
Company will retain all investment income earned on the TBCs between the
time they are collected and the time they are remitted to the SPE. Only in
the event that Company fails satisfactorily to perform its servicing
functions will Company be subject to replacement as Servicer. Company's
ability to resign as Servicer will be restricted.
It is possible that third-party suppliers (TPS) may bill and collect
payments (including TBCs) from customers. In that event, the Servicer will
bill the TPS for the full amount of TBCs, based on the amount of
electricity delivered by Company, and other charges owed to the Company in
its individual capacity. TPS may be required to take additional steps
designed to reduce commingling risks, including providing a cash deposits
of two months' estimated collections. Nonetheless, in all events, the
amounts paid will be based on electricity usage.
The TBCs will be set to provide for recovery of the costs associated
with billing and collecting the TBCs as well as for an excess amount
(Overcollateralization Amount) that will eventually reach c percent of the
original principal amount of the Notes. The Overcollateralization Amount
will be collected approximately ratably over the expected term of the
Notes.
The SPE will retain all remitted TBCs in the Collection Account,
which consists of four subaccounts entitled General, Reserve, Capital, and
Overcollateralization. The General Subaccount holds all funds in the
Collection Account not held in any of the other three subaccounts. The
Servicer will remit all TBC payments to the General Subaccount, and the
Trustee will draw on amounts in the General Subaccount to pay expenses of
the SPE, and to make scheduled payments on the Notes and to make other
payments and transfers in accordance with the terms of the Indenture. TBC
collections in excess of amounts necessary to pay interest and principal on
the Notes, related fees and expenses of the SPE, replenish the Capital
Subaccount up to the required capital level, and fund and maintain the
Overcollateralization Subaccount up to its required level, will be
allocated to the Reserve Subaccount.
If the TBCs collected in any period are insufficient to satisfy the
SPE's payment obligations on the Notes, the Trustee may draw on amounts in
the Reserve Subaccount, the Overcollateralization Subaccount, and finally,
the Capital Subaccount to make necessary payments and transfers under the
Indenture. To the extent that amounts in the Capital Subaccount or the
Overcollateralization Subaccount are used to satisfy scheduled principal
and interest payments, future TBCs will be adjusted to replenish those
subaccounts. In addition, any funds in the Reserve Subaccount from prior
payment dates will be used to replenish the Capital Subaccount and the
Overcollateralization Subaccount.
Investment income earned on amounts in the Collection Account also
may be used to satisfy scheduled interest and principal payments on the
Notes and to replenish the SPE's equity and the scheduled
Overcollateralization Amount. Any excess revenues, up to an amount equal to
the investment income on the Capital Subaccount, will be remitted to the
SPE, which may distribute the earnings to Company.
The Notes will provide for the following events of default: (1) a
default in the payment of interest within five days after a payment is due;
(2) a default in the payment of outstanding principal as of the legal
maturity date; (3) a default in Company's obligation to repurchase the
Bondable Transition Property in the event of the breach of certain material
representations concerning the effectiveness of the financing order and
Company's rights in the Bondable Transition Property; (4) certain breaches
of covenants, representations or warranties by the SPE in the Indenture
that go unremedied for 30 days; and (5) certain events of bankruptcy or
insolvency of the SPE.
In the event of a payment default, the Trustee or holders of a
majority in principal amount of all series then outstanding may declare the
principal of all classes of the Notes to be immediately due and payable.
The Notes will be secured by all property of the SPE, including the
Bondable Transition Property, the Servicing Agreement, the Collection
Account, all rights to obtain adjustments to the Bondable Transition
Property, and any swap agreement executed to permit the issuance of
floating rate Notes. Company expects the Notes to receive one of the three
highest credit ratings from one or more nationally recognized credit rating
agencies.
ISSUES
Does the issuance of the Financing Order authorizing the collection
of the TBCs and the issuance of the Recovery Order authorizing the
collection of the Tax
Charges result in gross income to Company?
Does the issuance of the Notes result in gross income to Company?
Are the Notes obligations of Company?
LAW
Section 61 of the Internal Revenue Code generally defines gross
income as "income from whatever source derived", except as otherwise
provided by law. Gross income includes income realized in any form, whether
in money, property, or services. Section 1.61-1(a) of the Income Tax
Regulations. This definition encompasses all "accessions to wealth, clearly
realized, and over which the taxpayers have complete dominion."
Commissioner v. Glenshaw Glass Co. 348 U.S. 426, 431 (1955), 1955-1 C.B.
207.
The right to collect the TBCs and the Tax Charges is of significant
value in producing income for Company. Moreover, State A's action in making
the TBC rights transferable has enhanced that value. Generally, the
granting of a transferable right by the government does not cause the
realization of income. Rev. Rul. 92-16, 1992-1 C.B. 15 (allocation of air
emission rights by the Environmental Protection Agency does not cause a
utility to realize gross income); Rev. Rul. 67-135, 1967-1 C.B. 20 (fair
market value of an oil and gas lease obtained from the government through a
lottery is not includable in income).
The economic substance of a transaction generally governs its federal
tax consequences. Gregory v. Helvering, 293 U.S. 465 (1935), XIV-1 C.B.
193. Affixing a label to an undertaking does not determine its character.
Rev. Rul. 97-3, 1997-1 C.B. 9. An instrument secured by property may be an
obligation of the taxpayer or, alternatively, may be a disposition of the
underlying property by the taxpayer. C. id. (the Small Business
Administration is the primary obligor of certain guaranteed payment rights
that are created under its participating security program).
CONCLUSIONS
Based on the facts as represented, we rule as follows:
(1) The issuance of the Financing Order authorizing the collection of
the TBCs and the issuance of the Recovery Order authorizing the collection
of the Tax Charges will not result in gross income to Company.
(2) The issuance of the Notes will not result in gross income to
Company.
(3) The Notes will be obligations of Company.
Except as specifically ruled on above, no opinion is expressed or
implied regarding the federal tax aspects of the transaction.
This ruling is directed only to Company. Under section 6110(k)(3) of
the Code, this ruling may not be used or cited as precedent.
A copy of this letter should be attached to the federal income tax
return of Company for the taxable years that include the transaction
described in this letter.
Sincerely,
Assistant Chief Counsel
Financial Institutions & Products
By:
____________________________________
Marshall Feiring
Senior Technician Reviewer, Branch 2
cc: DD, Newark District
Attn: Chief, Examination Division
James F. Malloy
Helen S. Yanchisin
Arthur Andersen LLP
1666 K Street, N.W.
Washington, D.C. 20006
