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DRAFT OF 1/19/96 10:00 A.M.
PRIVILEGED & CONFIDENTIAL
ATTORNEY WORK PRODUCT
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 January 19, 1996
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
(Exact name of registrant as specified in its charter)
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 07101-1171
(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)
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 of Part I of the Annual Report on Form
10-K for 1994 and Part II of the Reports on Form 10-Q for the
quarters ended March 31, 1995, June 30, 1995 and September 30,
1995 of Public Service Electric and Gas Company (PSE&G) and
its parent, Public Service Enterprise Group Incorporated
(Enterprise).
Rate Matters/Regulation
On January 16, 1996, PSE&G proposed to the New Jersey
Board of Public Utilities (BPU) major changes in utility
regulation that include an immediate $50 million rate
reduction for its electric customers, various types of rate
freezes, assurances that future price increases related to
controllable costs will be lower than the rate of inflation,
and funding of up to an aggregate of $55 million in two
economic development initiatives.
The seven-year "New Jersey Partners in Power" plan (Plan)
calls for an indexed, or price-capped, approach to replace the
existing rate base/rate of return form of regulation for both
its electric and gas operations. It is designed to enable
PSE&G to price energy and energy services competitively and
support New Jersey's economic development goals of attracting
and retaining business and jobs while fostering energy
efficiency and achievement of environmental objectives.
The petition filed with the BPU is designed to fulfill
the objectives of regulatory reform enacted by the legislature
and signed into law by Governor Whitman in July 1995. The
Plan represents a regulatory transition designed to shift the
emphasis and incentives away from a cost-plus form of
regulation to an alternative form that emphasizes and rewards
efficiency, innovation, and service quality.
The Plan, if approved, would give PSE&G the mechanisms
and incentives to compete more effectively on several fronts,
including the ability to develop revenue from non-regulated
products and services, accelerate or modify depreciation
schedules to help mitigate any potential stranded asset issue,
and more aggressively manage the control of costs. In
addition, the Plan would provide the foundation for ongoing
price flexibility without the need for prolonged, adversarial
regulatory proceedings.
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Rate Matters/Regulation (continued)
The Plan allows for a transition to a fully competitive
energy marketplace while substantially shifting the business
and financial risks and opportunities involved in this
transition away from customers to PSE&G and enhancing PSE&G's
ability to make the necessary human, intellectual and
financial investments required to stimulate innovation and
productivity.
Key energy pricing features of the proposed Plan are as
follows:
Upon the BPU's approval of the Plan, PSE&G will reduce
electric rates across the board by $50 million annually
as an upfront guaranteed share of the productivity
improvements that it expects to achieve over the life of
the Plan.
New rates for all PSE&G electric customers reflecting the
reduction would be established through a merger of
existing base tariffs and the Levelized Energy Adjustment
Clause (LEAC) and would be frozen at these levels through
December 31, 1996. In addition, the plan proposes the
elimination of the BPU's existing Nuclear Performance
Standard (NPS). This discontinuance of the LEAC and NPS
would result in substantially shifting the risks and
opportunities involved in managing changes in fuel and
replacement power costs from customers to PSE&G. Gas fuel
costs will continue to be recovered on a dollar for
dollar basis from customers under the existing Levelized
Gas Adjustment Charge (LGAC).
In order to create incentives to lower costs and improve
efficiency and productivity, the Plan would rely on a
comprehensive external price cap index based upon changes
in the Gross Domestic Product Price Index (GDPPI) and a
separate fuel price index mechanism, reduced by a fixed
productivity offset of 0.30% to establish optional annual
price changes each January 1st for electricity. In
addition, the Plan would rely on an index for non-fuel
gas prices calculated on the basis of changes in the
GDPPI, reduced by a fixed productivity offset of 0.35%,
to establish optional annual price changes each January
1st. The price cap mechanisms would become effective on
January 1, 1997 and would assure that any rate increase
related to controllable costs would be below the rate of
inflation, guaranteeing that these costs would decline in
real terms.
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Rate Matters/Regulation (continued)
Under the Plan, PSE&G would establish an initial service
block equal to the first 150 kilowatthours (KWH) of usage
for residential electric customers who would be protected
from price cap index increases through December 31, 2002,
the proposed expiration date of the Plan. Similarly, an
initial service block equal to 40 therms would be set for
residential gas customers and protected from index
increases over the same period of time. In addition,
public street lighting prices would not be subject to
index increases for the life of the Plan.
The Plan includes a productivity gains sharing mechanism. This
mechanism has been designed to provide strong incentives to
maximize efficiency and productivity improvements and ensure
that electric and gas customers receive an increasing share of
productivity gains using returns on equity as a proxy for
these gains. The gains, which would be awarded through bill
credits, would be based on a threshold earnings level defined
as PSE&G's established return on equity of 12% plus a 100
basis points neutral zone above that level. Customers would
receive a 10% share of the gains from the first 50 basis
points above the threshold level. Their share would increase
by an additional 10% for each subsequent increase of 50 basis
points up to a maximum of 50%.
Separate mechanisms also would be established to ensure
continued recovery of costs associated with activities
mandated or approved by state or federal agencies or
otherwise out of PSE&G's control. These costs include
demand side management and conservation programs,
environmental remediation, costs associated with non-
utility electric generators, and nuclear decommissioning
funding. These mechanisms would assure that PSE&G
recovers only actual costs related to these activities.
The Plan would allow for electric and non-fuel gas prices
to be changed to reflect exogenous events beyond the
control of PSE&G and would be subject to modification for
industry restructuring.
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Rate Matters/Regulation (continued)
The Plan calls for an increase of $50 million in annual
depreciation expenses for PSE&G's Hope Creek nuclear
generating station -- $25 million effective January 1,
1997, and an additional $25 million effective January 1,
1998. In addition, the Plan proposes a transfer of
depreciation reserves totaling $253 million from
transmission and distribution to fossil steam electric
generating accounts. The Plan would permit depreciation
to be changed annually following BPU review and approval.
In addition to the pricing features, the Plan guarantees
enhanced quality of customer services through PSE&G's recently
established service guarantee program for electric and gas
customers and specific incentive and penalty mechanisms based
on various service indicators.
The Plan would establish a program of rewards and
penalties in key overall service indicators such as duration
of customer power outages compared to a historic five-year
average.
In addition to these service quality incentives, the Plan
would establish rewards and penalties based on the movement of
PSE&G's average electric residential rate measured against the
national average of residential electric rates. Rewards or
penalties of up to $5 million would be implemented if
comparisons indicate that PSE&G's residential rates decreased
or increased by more than one-half of one percent relative to
the national average.
A major component of the Plan is a proposed economic and
market development and retention assurance program. This would
allow flexible pricing and promote special economic
development activities designed to enhance the economic
vitality of the State of New Jersey. One aspect of the program
would give PSE&G the ability to quickly establish new optional
electric or gas rates or individual customer contracts to
serve new markets and retain or attract individual customers.
Also under the Plan, PSE&G would fund two economic
development initiatives. The first is a private sector
leadership investment of $5 million in the New Jersey Fund for
Community Economic Development. The second new initiative is
establishment of the PSE&G Economic Development Fund in which
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Rate Matters/Regulation (continued)
PSE&G would commit to investing up to $50 million for
financing significant economic development projects within
PSE&G's service territory over the seven years of the Plan.
In addition, the Plan calls for establishment of a State
Emissions Trading Bank (Bank) for economic development and
environmental improvement. PSE&G would donate 1,000 tons of
nitrogen oxide emissions credits to the Bank for use in
economic development. This is intended as a key step to
linking economic development with sound environmental policy
and building on New Jersey's leadership role in seeking a
regional solution to air pollution problems.
Under the Plan, price levels associated with the recovery
of Gross Receipts and Franchise Tax (GRFT) or successor taxes
will be directly adjusted in such a manner as to insure their
full and timely recovery from ratepayers.
PSE&G cannot predict what action, if any, may be taken by
the BPU with respect to the Plan.
PSE&G - Nuclear Operations - Salem and Hope Creek
As previously reported, on October 10, 1995, Enterprise
received a letter from a representative of a purported
shareholder demanding that it commence legal action against
certain of its officers and directors with regard to the
current Salem shutdown. Enterprise has been informed that a
civil complaint to commence a shareholder derivative action
has been filed by such purported shareholder on behalf of
Enterprise shareholders, although legal service of process on
any defendant has not yet been effected. The complaint seeks
to recover damages and other relief for alleged losses
purportedly arising out of PSE&G's operation of Salem and Hope
Creek. Enterprise is presently considering the matter.
Based on current projections and assumptions regarding
operations of PSE&G's five nuclear units, including the
expected return of Hope Creek to service by the end of
February 1996, which is currently undergoing a refueling and
maintenance outage, PSE&G does not expect to incur a penalty
under the NPS applicable to 1996. Any adverse change of such
projected operations would probably result in a penalty under
the NPS.
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Credit Ratings
On January 17, 1996, Moody's Investors Service (Moody's)
announced that it had lowered its securities ratings of
PSE&G's debt and preferred stock as follows: Mortgage Bonds
and Secured Medium-Term Notes (MTNs) to A3 from A2; Debentures
and Preferred Stock to Baa1 from A3; and Commercial Paper to
Prime-2 from Prime-1. PSE&G Fuel Corporation's Commercial
Paper rating was also lowered to Prime-2 from Prime-1.
Moody's, however, confirmed its existing rating of PSEG
Capital's MTNs at Baa2.
The respective ratings presently assigned by Standard and
Poor's Corporation (S&P) and Duff & Phelps (Duff) to PSE&G's
securities are as follows: Mortgage Bonds and MTNs A- and A;
Debenture Bonds BBB+ and A-; Preferred Stock BBB+ and A-; and
Commercial Paper A-2 and Duff1. The ratings presently
assigned by S&P and Duff to PSEG Capital's MTNs are BBB and
BBB+, respectively. The ratings assigned by S&P, Moody's and
Duff to the Commercial Paper of Enterprise's indirect
subsidiary, Enterprise Capital Funding Corporation, which is
supported by a commercial bank letter of credit, are A1+, P1
and Duff1+, respectively.
The current ratings of such securities reflect the respective
views of the rating agency furnishing the same and not
necessarily those of management of Enterprise or PSE&G. An
explanation of the significance of or reasons for such ratings
may be obtained from such agency.
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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 19, 1996
