SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) January 24, 1997
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
(Exact name of registrant as specified in its charter)
State of New Jersey 1-9120 22-2625848
(State or other (Commission (I.R.S. Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
80 Park Plaza, P.O. Box 1171
Newark, New Jersey 07102-1171
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 201-430-7000
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
(Exact name of registrant as specified in its charter)
State of New Jersey 1-973 22-1212800
(State or other (Commission (I.R.S. Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
80 Park Plaza, P.O. Box 570
Newark, New Jersey 07101-0570
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 201-430-7000
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Item 5. Other Events.
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The following information updates certain matters previously reported to the
Securities and Exchange Commission under Item 1 - Business and Item 3 - Legal
Proceedings of Part I and Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") of Part II of the Annual
Reports on Form 10-K for the year ended December 31, 1995; and under Item 2 -
MD&A of Part I and Item 5 - Other Information of Part II of the Quarterly
Reports on Form 10-Q for the quarters ended March 31, 1996, June 30, 1996 and
September 30, 1996 of Public Service Electric and Gas Company ("PSE&G") and of
its parent, Public Service Enterprise Group Incorporated ("Enterprise").
PSE&G - Competition/Rate Matters/Regulation
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New Jersey Energy Master Plan
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On January 16, 1997, the New Jersey Board of Public Utilities (BPU) issued its
Draft Phase II of the New Jersey Energy Master Plan (Draft Plan) addressing
wholesale and retail competition in New Jersey. The Draft Plan proposes the
restructuring of the electric power industry in New Jersey. Beginning in October
1998, 5% of retail electric customer load of all classes (industrial, commercial
and residential) would be given the ability to directly choose their electric
power supplier. All customers would be phased-in, with the percentage increasing
to 20% in April 1999, 35% in October 1999, 50% in April 2000, 75% in October
2000 and 100% in April 2001.
The BPU proposes in the Draft Plan that beginning October 1998, the rates for
bundled electricity services, consisting of power generation, transmission,
distribution and auxiliary customer services, such as metering and billing, be
unbundled. Each electric utility, including PSE&G, would continue to be
responsible for providing distribution service to all customers, with price and
service quality for distribution service regulated by the BPU. Other customer
services would also continue to be offered by the electric utility, for a
monthly fee, including metering, billing and account administration, which would
also be regulated by the BPU.
Transmission service would be provided by an Independent System Operator (ISO),
which would be responsible for maintaining the reliability of the regional power
grid and would be regulated by the Federal Energy Regulatory Commission (FERC).
The utility would continue to pass through the cost of transmission to customers
in its regulated rates. The Draft Plan also calls for further review of metering
and billing in order to make recommendations for the long term related to
introduction of competition into the customer services area. A distribution
utility would be permitted to offer customer-side services, such as equipment
repair and service contracts in a competitive marketplace.
The Draft Plan states that the BPU is committed to assuring that a fully
competitive marketplace exists prior to the ending of its economic regulation of
power supply. At a minimum, utility generating assets and functions must be
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functionally separated and operate at arms length from the transmission,
distribution and customer service functions of the electric utilities. The BPU
reserves final judgment on the issue of requiring divestiture of utility
generating assets until detailed analyses of the potential for market power
abuses by utilities have been performed. In addition, the BPU believes that it
is necessary to have a fully independent and operating ISO prior to the
implementation of customer choice. The BPU proposes that retail competition in
New Jersey be introduced approximately 12 to 18 months after the implementation
of full wholesale competition as provided by FERC Order 888.
The Draft Plan proposes requiring each electric utility to file, no later than
July 15, 1997, complete restructuring plans, stranded cost filings and unbundled
rate filings. Review of the filings would be completed by October 1998.
Consumer protections proposed in the Draft Plan include: maintaining the
electric utility as a universal service or "basic generation service" provider;
continued funding of social programs now provided by electric utilities;
registration of all third party suppliers with the BPU; establishment of
standards of conduct for third party suppliers; and continued funding for energy
efficiency programs.
The Draft Plan proposes that utilities have an opportunity for a limited number
of years to recover through rates stranded costs associated with generating
capacity commitments made prior to the advent of competition. However, while the
BPU proposes that the quantification of eligible stranded costs and a
determination of stranded cost recovery should be undertaken on a case-by-case
basis, the Draft Plan recommends that there not be a guarantee for 100% recovery
of all eligible stranded costs. The Draft Plan states that the opportunity for
full recovery of such eligible costs is contingent upon and may be constrained
by the utility meeting a number of conditions, including achievement of the goal
of delivering a near term rate reduction to customers of 5 to 10%. The Draft
Plan states that the presumptive cutoff point for electric generation stranded
cost recovery would be the last base rate case prior to the Draft Plan, with
such costs incurred after inclusion in such last base rate case to be subject to
a greater burden of proof for recovery, including evidence of a market test to
determine availability of cost-effective alternatives.
The Draft Plan further states that utilities are obligated to take all
reasonably available measures to mitigate stranded costs caused by the
introduction of retail competition and that independent power producer contracts
must be eligible for stranded cost recovery. The Draft Plan further notes that
New Jersey is studying the "securitization" of stranded costs as a means of
financing these costs at interest rates lower than the utility cost of capital,
thereby helping to mitigate the rate impact of stranded cost recovery.
A specific market charge would be a separate component of a customer's electric
bill, to provide a mechanism to allow utilities the opportunity to recover
stranded costs for a limited number of years, ranging from 4 to 8. Recovery of
securitization may occur over a different period of time.
The Draft Plan suggests the need for federal action in a number of areas as an
integral part of electric restructuring. Of particular concern is the transport
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of nitrogen oxides and other pollutants to New Jersey from power plants located
in the Midwest and Southeast. The Draft Plan states that New Jersey will develop
a contingency action plan if federal action fails to mitigate adverse
environmental impacts caused by electric restructuring.
Enterprise and PSE&G are currently analyzing the Draft Plan to determine its
impact on them if adopted as drafted. The deadline for submission of written
comments is February 14, 1997 and the BPU has stated that it anticipates issuing
a policy pronouncement and order later that month. Enterprise and PSE&G can not
predict what action will ultimately be taken by the BPU.
PSE&G - Nuclear Operations
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Salem
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As previously reported, Salem Nuclear Generating Station Units 1 and 2 were
taken out of service by PSE&G in the second quarter of 1995. During these
outages, PSE&G has made significant changes and improvements related to the
people, processes and equipment at Salem to improve the long-term reliability of
the units. During the course of these outages, PSE&G has also been required to
address certain generic issues applicable to nuclear power plants, which have
also affected the length of the outages. Restart of the units is subject to
completion of the restart plans for the units to the satisfaction of PSE&G and
the Nuclear Regulatory Commission (NRC).
Salem Unit 2 is in the final stage of preparation for restart. The reactor has
been refueled and reassembled and the reactor coolant pumps have been tested and
placed in service. Over 90% of the total work activities have been completed and
approximately 75% of the plant systems have been restored. The unit is currently
scheduled to enter Mode 4 in early February which will allow additional testing
to be performed in preparation for startup.
Recently, a Generic Letter from the NRC (used to notify the nuclear industry of
issues affecting plants generally) identified an issue that will impact the
Salem Unit 2 startup schedule. Generic Letter (96-06) requested all nuclear
utilities, including PSE&G, to review systems for potential waterhammer events
(hydrodynamic stress caused by steam formation in a piping system) and the
impact that these events could have on the system's safety function. PSE&G has
determined that in order to address the concerns of the Generic Letter,
modifications are necessary to the containment fan coil units of Salem Units 1
and 2, which provide containment air cooling. As a result of installation of
these modifications and the time required for NRC acceptance of PSE&G's proposed
resolution of the Generic Letter issues, the start up of Salem Unit 2 will be
delayed, which results in an expected return to service in the second quarter of
1997.
Salem Unit 1 is expected to return to service in the summer of 1997, after
replacement of the unit's four steam generators, which was required in order to
correct a generic problem with certain pressurized water reactors. Removal of
the old steam generators has been completed and installation of the new steam
generators is underway. Salem Unit 1 will also require modifications similar to
Salem Unit 2 to respond to the NRC Generic Letter, but such modifications are
not expected to delay the unit's return to service.
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As mentioned, restart of both Salem units is subject to NRC approval, which
cannot be assured. On January 14, 1997, Senator Joseph Biden of Delaware wrote
to the NRC to request that the full Commission vote on the decision to restart
Salem, rather than permit the NRC staff to authorize the restart under
applicable NRC rules. The NRC has not yet responded to Senator Biden's request.
Hope Creek and Peach Bottom
---------------------------
PSE&G does not anticipate that modifications to Hope Creek Nuclear Generating
Station will be necessary as a result of the Generic Letter. PSE&G has been
advised by Peco Energy Company that modifications to Peach Bottom Atomic Power
Station Units 2 and 3 will not be necessary as a result of the Generic Letter.
On December 24, 1996, the NRC issued its latest periodic Systematic Appraisal of
Licensee Performance (SALP) report for Hope Creek for the period between April
23, 1995 to November 9, 1996. The NRC noted that overall performance improved
during the SALP period, after a significant decline in performance that occurred
early in the period. Further, the NRC noted that PSE&G's actions to address the
areas of concern, once identified, were comprehensive and generally effective.
Three areas, Operations, Maintenance and Engineering, were each rated Category
2, as they had been in the previous SALP rating. Improvements were noted in
these areas with most of the improvement in operations and maintenance occurring
later in the period. The fourth area, Plant Support, was also rated Category 2,
a decline from the previous SALP rating due to problems principally with
security, radiation protection and emergency preparedness implementation.
Weaknesses in communication contributed to performance issues across the
organization.
PSE&G - Rate Matters
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Settlement of Certain Regulatory Issues
---------------------------------------
By order dated December 31, 1996 (Order), the BPU approved a settlement among
PSE&G, the staff of the BPU and the New Jersey Division of Ratepayer Advocate
addressing (i) the cost impact of the current shutdown of Salem Units 1 and 2,
including the used and usefulness of the units through December 31, 1998; (ii)
the recovery of certain replacement power costs associated with the 1994 Salem
Unit 1 outage; and (iii) the recovery of capacity costs associated with PSE&G's
power purchases from cogeneration producers through December 31, 1998. Under the
Order, PSE&G has begun to provide electric customers with bill credits which
will total $83.9 million in January and February 1997 and PSE&G will forego
recovery of $12 million associated with energy costs that have previously been
deferred. The resulting earnings loss of $62.3 million or 26 cents per share of
Enterprise common stock was previously recorded ($59.0 million or 25 cents per
share in the third quarter of 1996 and $3.3 million or 1 cent per share in
1995).
Under the terms of the Order, Salem Units 1 and 2 will continue in base rates
without being subject to further refund and PSE&G will assume all nuclear and
fossil generating fuel and performance risks, including replacement power costs
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associated with the Salem, Hope Creek and Peach Bottom nuclear stations from
January 1, 1997 through December 31, 1998. The BPU's nuclear performance
standard will not apply to PSE&G from January 1, 1996 through December 31, 1998.
In addition, the energy component of PSE&G's levelized energy adjustment clause
(LEAC) will be fixed at its existing level with no increase to customers until
at least January 1999. Any underrecovered or overrecovered LEAC balance existing
on December 31, 1998 would not be considered in any LEAC review subsequent to
that date. Any potential net overrecovery at that date will be applied to reduce
any potential stranded costs. Any underrecovered balance will be charged to
income in the period identified. As a result of the Order, PSE&G will have all
the risks associated with operating electric generating facilities and
purchasing fuel without the opportunity for profit.
Legal Proceedings
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Settlement of Certain Legal Proceedings with Atlantic City Electric Company
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PSE&G and Atlantic City Electric Company (ACE), a 7.41% owner of Salem Units 1
and 2, have entered into an agreement (Agreement) to dismiss the previously
reported lawsuit brought by ACE alleging mismanagement in the operation of Salem
by PSE&G.
Under the terms of the Agreement, ACE's exposure for 1997 operation and
maintenance (O&M) costs for Salem will be limited to a fixed charge of $10
million, plus certain performance-based additional amounts, up to a maximum of
$21.8 million, depending upon the capacity factors for the Salem Units 1 and 2
for 1997. Based upon 1997 budgeted O&M costs, the cost of the settlement to
PSE&G will depend upon actual performance of the Salem Units. Budgeted O&M costs
for Salem for 1997 are $293.9 million of which ACE's 7.41% share approximates
$21.8 million. Under the terms of the Agreement, for ACE to be responsible to
pay the maximum amount, Unit 1 would have to return to service on July 1, 1997,
Unit 2 would have had to return to service on January 1, 1997 and each unit
would have to operate at an 80% capacity factor from such respective dates for
the remainder of 1997.
During the past 10 years, the average annual capacity factor of the Salem units
has been 68.1% for Unit 1 and 61.1% for Unit 2. In the last year of operation
prior to the current Salem shutdown (1994) the operating capacity factor was
59.3% for Unit 1 and 57.8% for Unit 2.
In the event that the actual 1997 Salem O&M expenses exceed the budgeted amount
of $293.9 million, ACE will not be responsible for its 7.41% share of any such
excess O&M costs unless (i) the excess O&M is directly attributable to
requirements imposed by the NRC or other governmental agencies having
jurisdiction over Salem, (ii) notice from the NRC or such agency is received by
PSE&G after the effective date of the Agreement (12/31/96) and (iii) the notice
is generically applicable to all similar nuclear plants. Certain other
extraordinary events giving rise to additional O&M expenses have also been
excluded from the Agreement.
The Agreement applies only to calendar year 1997 and does not apply to any
damages which may be alleged by ACE to continue beyond or be incurred after
December 31, 1997; and does not apply to ACE's rights under the Salem Owners
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Agreement to review and approve capital projects during 1997; which, in each
instance, will continue to be governed by the terms and conditions of the
Salem Owners Agreement and the rights and obligations of ACE and PSE&G at law or
in equity.
The settlement is subject to receipt of a Court Order, which has been applied
for, confirming that dismissal of the ACE litigation will not prejudice either
party in certain other litigation involving the Salem station.
SIGNATURE
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned hereunto duly authorized.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
(Registrant)
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
(Registrant)
By R. EDWIN SELOVER
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R. Edwin Selover
Vice President and General Counsel
Public Service Enterprise Group Incorporated
Senior Vice President and General Counsel
Public Service Electric and Gas Company
Date: January 24, 1997
