a. audit scope and objectives · 2 vantage consulting, inc. competitive service and affiliate...

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Vantage Consulting, Inc.

I. EXECUTIVE SUMMARY

A. AUDIT SCOPE AND OBJECTIVES

The overall objective of the audit is to assist the Board in assessing the extent to which the competitive services offerings of PSE&G and its affiliates are in compliance with the Electric Discount and Energy Competition Act (the Act) and the Board’s Affiliate Relations, Fair Competition and Accounting Standards (the Standards). To accomplish this objective, the audit (1) examined the practices, programs and methodologies employed by PSE&G to comply with the Standards and (2) examined PSE&G’s cost allocation and accounting procedures to determine if any competitive services offerings are being subsidized by the ratepayers.

The basis for the audit project work plan was the Request For Proposal (RFP) prepared by the BPU. This RFP provided direction as to the scope of the project and the specifics of this audit. Our team developed much of its work plan based on the attachments to the RFP, the information provided by PSE&G at the pre-bid conference, and other public information. Specific areas that were addressed include:

• Cross subsidization between utility and non-utility segments. • Separation of utility and non-utility organizations. • Effects on ratepayers of the use of utility assets in the provision of non-safety

related competitive services. • Effects on utility workers. • The effect of utility practices on the market for such services. • Overall compliance with the Act and the Standards. • Reasonableness of lump sum charges or service contract rates. • Time and material charges encountered in the competitive environment. • Determination as to whether other services offered by the utility are competitive.

B. PROJECT TEAM

In order to staff a project of this complexity and with such a short schedule, a team consisting of three firms was assembled to address all of the issues. Vantage Consulting, Inc., NorthStar Consulting Group, Inc. and Mitchell & Titus, LLP (collectively referred to as the Audit Team) collaborated on the project. Exhibit I-1 lists the name, firm, and areas of responsibility for each member of the Audit Team.

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_________________________________________________________________________________

Competitive Service and Affiliate Compliance Audit of PSE&G

Exhibit I-1 Audit Team

Name Firm Areas of

Responsibility Walt Drabinski Vantage Project Manager, Chapters 1, 2, and 4 Michael Allen NorthStar Project Manager, Chapters 1, 3, and 5 Douglas Bennett NorthStar Chapters 3 (Sunburst) and 5 Chuck Buechel Vantage Chapters 2 and 4 Mark Fowler Vantage Chapter 3 (Holdings) Martha King Vantage Chapter 3 (Holdings) Dawn Francis NorthStar Chapters 3 and 5 Darrell Smith NorthStar Chapter 3 (Appliance Service Business) Wesley Garland Mitchell & Titus Chapter 4 (SAP Audit) Chris Brown Mitchell & Titus Chapter 4 (SAP Audit) Bob Wilkinson Vantage Chapter 4 (SAP Audit) Marie Davidson Vantage Chapter 4 (Intercompany Transactions) Cynthia Holste Vantage Chapter 2 (Compensation) Hayley Downey Vantage Administration and Editing

C. SUMMARY OF FINDINGS

CHAPTER II: INFRASTRUCTURE ISSUES

Chapter II of the report addresses the current organization, the placement and organization of Affiliate Compliance, and changes in compensation practices as a result of the reorganization of PSE&G. PSE&G has undergone a major reorganization during the last ten months. It has effectively been broken into three separate companies. PSE&G, the utility where distribution, transmission, customer service, appliance services, and meter reading and billing reside; PSEG Power, a Limited Liability Company where all of the nuclear, fossil, and trading activities and assets reside; and PSEG Service Corporation (Service Company,) where shared services are located. A fourth major subsidiary of Public Service Enterprise Group, PSEG Energy Holdings, was in existence prior to the reorganization of PSE&G.

The transfer of personnel from PSE&G to PSEG Power took place at the end of 1999, while the transfer of assets to PSEG Power took place on August 21, 2000 in order to meet the legal deadline in the restructuring legislation. It should be noted that the final development of this company must wait until a number of legal challenges are exhausted.

The Service Company was formed late in 1999 and employees changed payroll in December 1999. However the final approval of this organization is under consideration by the BPU at this time.

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Our team held numerous discussions with PSE&G management regarding the location and structure of the affiliate compliance group as well as the formality of affiliate compliance procedures. Currently, responsibility for affiliate compliance rests with the Chief Compliance Officer/General Counsel of PSE&G and his staff. The legal department is undergoing a reorganization at this time and it is expected that a partner level attorney will have day to day responsibility for compliance issues after the reorganization. It is not clear at this time what resources will be available on a permanent basis as part of this compliance group. In addition to having concerns about the size and responsibility of the affiliate compliance group, we also have raised concerns in Chapter V about the comprehensiveness of the compliance plan itself.

One specific objective of the audit was to assess changes in the compensation program to determine if it accurately reflects the size of the new utility. After the spin-off of PSEG Power and PSEG Services, the utility is at 70 percent of its former staffing and has a reduction in assets of almost $2.6 billion. Our compensation expert determined that job positions were being accurately reassessed and compensation levels were adjusted appropriately.

CHAPTER III: COMPETITIVE SERVICES

Chapter III includes an assessment of each competitive service offered by the competitive business segments of PSE&G and PSEG. The competitive services include those services deemed competitive services by the Act or the Board and as well as other services that are or may be subject to the Standards. The competitive services addressed include the following:

• Electric generation service offered through PSEG Power. • Testing, equipment overhaul and repair, and maintenance, offered through

SERVCO, an operating division of PSEG Power. • Mechanical contracting and energy services offered through PSEG Energy

Technologies, an operating company within PSEG Holdings. • Appliance repair offered through PSE&G. • Metering and billing, offered through Sunburst Customer Solutions, part of

PSE&G. • A variety of other competitive services offered by PSE&G.

PSEG Power and SERVCO

Power generation, a competitive service as defined in Section 8.b of the Act, is provided through PSEG Power LLC, a subsidiary of Public Service Enterprise Group. PSEG Power was created August 1, 1999, to separate PSE&G’s generation and wholesale power marketing businesses from its transmission and distribution utility businesses. All PSE&G employees involved in power generation were transferred to PSEG Power in December 1999. PSE&G’s power generation assets were transferred to PSEG Power on August 21, 2000.

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In addition to power generation, PSEG Power also provides equipment maintenance and testing services to outside parties through its SERVCO division. These services are offered on a limited but competitive basis and are included in this audit.

The audit verified that PSEG Power’s generation service is a wholesale competitive service and therefore not subject to Sections 3, 4, and 5 of the Standards. It is also not subject to Section 6, which refers only to competitive business segments of PSE&G.

The audit also verified that the competitive services offered through SERVCO were offered only to wholesale customers and therefore exempt from the Standards. However, it was noted that PSE&G’s position that all service provided to commercial or industrial companies was wholesale is not necessarily true. SERVCO needs to excercise care that it continues to provide services only on a wholesale basis or PSEG Power could become subject to Sections 3, 4, and 5 of the Standards.

PSEG Energy Holdings

PSEG Energy Holdings, Inc. (Energy Holdings) is one of four direct wholly-owned subsidiaries of PSEG. Energy Holdings is the parent of PSEG’s energy related businesses not held under PSE&G or PSEG Power. PSEG holdings consists of six wholly owned subsidiaries and 305 indirect subsidiaries. The wholly owned subsidiaries are:

• PSEG Global • PSEG Energy Technologies, Inc. • PSEG Capital • Enterprise Capital Funding Corporation • Enterprise Group Development Corporation • PSEG Resources, Inc.

The audit verified that PSE&G’s Compliance Plan was correct in its claim that PSEG Energy Technologies (PSEG ET) was the only affiliate within Holdings which offered competitive services to retail customers in New Jersey and therefore subject to Sections 3, 4, and 5 of the Standards. Actions have been taken to separate PSEG ET employees from other employees and to separate the marketing function.

PSEG Global has no assets within New Jersey and does not sell on a retail or wholesale business within the state.

Employee transfers between PSEG ET and PSE&G have been in compliance with Standards. The physical separation between PSEG ET and other affiliates at the Edison office complex is inadequate.

PSE&G Appliance Service Business

The Appliance Service Business (ASB) is a competitive business segment of PSE&G that provides competitive services to retail customers of PSE&G as defined in Section 8 of the Act. Appliance repair services are also provided to certain customers outside PSE&G’s territory who were served on a contract basis prior to the date of the Act and the Standards.

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Appliance repair services are provided as an adjunct to safety services performed by PSE&G. The same staff perform required safety functions such as checking for leaks and carbon monoxide as perform appliance repairs. PSE&G has provided home appliance services for as long as it has provided gas utility services.

The audit found that while ASB was in compliance with most sub-sections of the Standards, it was not in compliance with Sections 6.3.e.1 and 6.3.e.7. Field technicians do not inform customers that they may have the work done by another firm unless the customer raises questions about the service or the cost. Customer Service Professionals (CSP) in the call center do not inform callers that there are alternative companies that offer appliance repair services. Both of these actions violate the Standards.

It should be noted that it is virtually impossible to maintain strict compliance with Sections 6.3.e.1 and 6.3.e.7 of the Standards because in some cases the business lead is being passed from a person to the same person. In other cases, clarifying communication with customers may provide adequate compliance.

PSE&G Sunburst Customer Solutions and Other Competitive Services

Sunburst Customer Solutions (Sunburst) is a competitive business segment within PSE&G's Customer Operations organization. Sunburst provides meter reading, billing and payment processing services to municipalities and utilities operating within PSE&G's service territory. PSE&G has offered Sunburst services since July 1995 and has secured new clients as recently as April 1999.

The audit found that PSE&G has not received Board approval for the competitive services offered by Sunburst and for the other competitive services offered by PSE&G as required by Section 6.1.a of the Standards.

The audit also found that Sunburst is not in compliance with Section 6.3.e of the Standards, which prohibits utility employees from solicitation and sharing market analysis, among other restrictions. Sunburst shares PSE&G's booth at the League of Municipalities Convention in Atlantic City and Sunburst offers to provide telemarketing services.

CHAPTER IV: CORPORATE ACCOUNTING AND CROSS SUBSIDIZATION REVIEW

This chapter reviews many Corporate Accounting issues our auditors were required to review as part of this assignment. In particular it addresses the formation and operations of PSEG Services Corporation (“Service Company”). The Services Company is a recently formed direct subsidiary of Public Service Enterprise Group Incorporated (“Enterprise”). The Service Company was formed to provide various corporate support, managerial and administrative support services to PSE&G and the other subsidiaries of Enterprise (“Operating Companies”).

The primary system for meeting the corporate accounting requirements is the recently installed SAP system. The audit concludes that the system performs the accounting and

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cost allocation functions reasonably well but the system is deficient in its ability to provide the managerial reports for monitoring compliance with the Affiliate Standards.

With regard to the review and evaluation of the Service Company, the audit concludes that the Service Company provides corporate support services for PSE&G and other PSEG affiliates that conform to the requirements of the Affiliate Standards. PSEG’s efforts to initiate the Service Company are a reasonable response to meeting the rigors of a more competitive industry which will require PSE&G to control prices while maintaining a high quality level of service.

There were however a number of difficulties in conducting the audit.

• The identification of Service Company components, functions and services provided to PSE&G and affiliates was very difficult.

• Procedures for preparing summaries of inter-company monthly billings for PSE&G to PSEG Power, PSEG Power to PSE&G, PSEG Holdings to PSE&G, and PSE&G to PSEG Holdings are cumbersome and subject to employee error because it requires considerable offline work downloading data to Excel spreadsheets.

• No detailed support is provided to service recipients for monthly charges/invoices to/from PSEG affiliates.

• ASB financial reports to the Board of Directors provide little detail and are not timely filed. Cost and performance benchmarking data for functions, products and services provided by PSEG affiliates, including the Service Company is not available.

• PSE&G has not completed the Action Plans included in the 1999 Internal Audit Report on intercompany transactions and has not completed certain Action Plans identified in the 1998 Internal Audit Report on intercompany transactions.

CHAPTER V: AFFILIATE STANDARDS COMPLIANCE

This chapter provides an overall assessment of PSE&G’s compliance with the Affiliate Relations, Fair Competition and Accounting Standards, and a review of the PSE&G’s Compliance Plan submitted on June 15, 2000. PSE&G’s compliance status with each section and sub-section of the Standards is addressed, as is the overall quality and completeness of the Compliance Plan.

Sections 1 and 2: Scope and Definitions

While these sections of the Standards do not require any specific compliance action by PSE&G, the audit did reveal that PSE&G’s Compliance Plan incorrectly concludes that Section 6 applies only to retail competitive services. Section 1.1.a.ii of the Standards, which

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defines the applicability of Section 6, does not differentiate between wholesale and retail competitive services.

Section 3: Nondiscrimination

The audit found PSE&G to be in compliance with Section 3 except for Sections 3.2 and 3.10. PSE&G’s Customer Inquiry Center provides PSEG ET with after hours telephone answering support. In addition, PSEG ET utilizes PSE&G employees in providing operation and maintenance support in Project Renaissance. PSE&G has not demonstrated that these services were made available to all market participants on a competitive basis. Therefore, these activities are not in compliance with Section 3.2.

PSEG ET’s use of PSE&G’s call center may also violate the restrictions on PSE&G providing business development and customer relations support to PSEG ET contained in Section 3.10.

Section 4: Information Disclosure

The audit found PSE&G to be in compliance with all parts of Section 4 with the exception of Sections 4.2 and 4.7. PSE&G has not demonstrated compliance with Sections 4.2 and 4.7 of the Standards.

Even though PSE&G has policies and procedures in place for handling confidential information, the types of information which would be governed by Section 4.2 have not been identified. Therefore, employees cannot be instructed as to what information is restricted by Section 4.2.

The audit team was unable to verify PSE&G’s compliance with the Section 4.7 because PSE&G could not provide the requested records of all contracts and related bids.

Section 5: Separation

The audit found PSE&G to be in compliance with all parts of Section 5 with the exception of Sections 5.5 and 5.6.e.2. PSE&G is not in compliance with Section 5.5. of the Standards.

Section 5.5 along with the definition of “services that may not be shared” found in Section 2.1 of the Standards prohibits marketing as a shared corporate service. PSEG Services provides marketing as a shared corporate service to both PSE&G and PSEG ET.

The call answering service PSE&G provides to PSEG ET does not comply with Section 5.6.e.2, which prohibits PSE&G from participating with PSEG ET on communications with existing customers.

Section 6: Competitive Products and/or Services Offered by a Utility or Related Competitive Business Segments of a Utility

PSE&G’s Appliance Service Business is in compliance with all parts of Section 6 except Sections 6.3.e.1 and 6.3.e.7. PSE&G is not in compliance with most of Section 6 with regard to the competitive services offered through Sunburst Customer Solutions and other

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competitive service services offered by PSE&G. These issues were described above in the overview of findings for Chapter 3.

Section 7: Regulatory Oversight

While the audit found PSE&G in compliance with Section 7, several deficiencies were noted in the Compliance Plan. The Plan failed to demonstrate compliance in several areas (noted in the sections above), was organized in a confusing manner, and reflected an interpretation of the scope of coverage for Section 6 of the Standards which was significantly too narrow.

Section 8: Dispute Resolution

PSE&G is in compliance with Section 8.1 of the Standards.

Section 9: Violations and Penalties

Section 9 does not require any specific action by PSE&G.

OVERALL CONCLUSIONS

PSE&G is, in general, making an effort to meet the requirements of the Standards. Given that the Standards were made public in March 2000, progress has been substantial.

PSE&G has interpreted the Standards and used definitions in a manner to minimize the areas where the Standards apply to the Company. As one might expect, given a certain lack of definition in the rules, PSE&G has interpreted them in a self-serving manner.

.

While no material errors or major mis-allocations were discovered in our accounting audit, there are serious problems with the SAP system implemented recently. Recommendations for change are contained in this audit report.

The audit identified a number of areas where PSE&G is not in compliance with the Standards. These are identified and recommendations for compliance are contained in this audit report.

Other key findings:

• The separation of utility and non-utility organizations complies with the Standards.

• The audit did not reveal any adverse affects on ratepayers from the use of utility assets in the provision of non-safety related competitive services.

• The provision of competitive services does not adversely affect utility workers. • PSE&G’s practices in providing competitive services do not adversely affect the

market for such services.

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D. AUDIT APPROACH

BACKGROUND

The Audit Team conducted its investigation during the period of July 2000 through October 2000, with on-site field work and interviews completed by September 2000.

A total of 13 consultants from the Audit Team, plus a Project Administrator, were involved in the investigation and contributed to the final report. In addition, the BPU Staff was involved in the investigation. At least one BPU staff member attended the majority of the interviews and the BPU Staff helped facilitate communications between the Audit Team and PSE&G.

AUDIT PROCESS

Prior to beginning field work, PSE&G management, the BPU Staff, and Vantage project managers met to refine the scope of the audit and to clarify procedures for submitting interview and information requests. Field work commenced with initial interviews of key personnel who detailed the SAP system and internal audit activities relative to cost allocations and competitive services.

After the preliminary interviews, the Team modified the preliminary work plan it submitted in its proposal to accurately reflect the requirements of the project. The Team revised its work plan and developed it into an Audit Plan that provided details to the Team’s consultants and accountants on work steps, interviews, information, and analysis. The Audit Team submitted its revised Audit Plan to the BPU with its first status report.

The on-site field work phase lasted approximately six weeks. Throughout this phase, the Audit Team conducted a total of 43 interviews and field visits, and submitted 207 information requests. The Team also visited locations of affiliates, call centers and other facilities. Our accountants spent almost 40 person-days working with the SAP system on terminals that were provided. The field visits, SAP auditing, interviews, and information request responses formed the basis of the factual information provided in this report.

The Audit Team conducted interviews with a broad range of personnel including:

• Accounting managers and technical staff • Officers from all major affiliates • The Compliance Officer • Field and operations personnel • Managers from the appliance service business • The President of PSE&G

After all interviews and verifications were complete, the Team developed Draft Report Chapters and submitted the drafts to the BPU Staff for review and comment. After reviewing and commenting on the drafts, the BPU Staff forwarded the draft report to PSE&G on October 2, 2000 for its comments. The Team and the BPU Staff reviewed PSE&G’s comments and discussed them in a telephone meeting. The Team incorporated

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PSE&G’s comments into its final draft, where issues of accuracy arose, and forwarded the final draft to the BPU Staff for approval. Upon approval, the Team published its Final Report.

The report is organized in the following manner in order to provide a logical presentation of the information and detail:

• Chapter I – Executive Summary, provides a brief synopsis of the report, as well as a listing of each recommendation made, its relative priority, and potential for quantifiable cost savings, where appropriate.

• Chapter II – Background and Organizational Issues, provides an introduction into the organization of PSEG and its subsidiaries as well as discussions about compliance infrastructure, SAP, and compensation programs.

• Chapter III – Competitive Services, sets forth a detailed analysis of each of the major areas of service provided. This includes PSEG Power, Appliance Services Business, Global and Energy Technologies, and Sunburst.

• Chapter IV – Corporate Accounting Issues, provides the bulk of the accounting and financial audit. The analysis of SAP and cross-subsidization issues are reviewed. The proposed Service Company organization are also reviewed.

• Chapter V – Compliance With the Standards, addresses the individual standards and determines whether PSE&G is in compliance.

• Chapter VI – Appendix.

E. SUMMARY OF RECOMMENDATIONS

The following summary of recommendations provides key information on actions that the Team believes PSE&G should undertake. The recommendation table is laid out as follows. Column one provides the recommendation number with an R indicating a recommendation. The roman numeral refers to the chapter of the report, and the number is the sequential number of the recommendation in the report. The second column provides the recommendation description, taken directly from the report, and the reference to the specific finding(s) that supports the recommendation.

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_________________________________________________________________________________


Exhibit I-2 Summary of Recommendations

Rec. Number

Recommendation Description

II-R1 Develop a compliance team within the current legal department or elsewhere that is capable of addressing upcoming issues and further develop the compliance plan into a robust, useful document. (Refer to Finding II-F1.)

III-R2 Clarify the Compliance Plan to address the process by which SERVCO will restrict its outside activities to wholesale customers. (Refer to Finding III-F6.)

III-R3 Increase security and employee awareness at the Edison complex to prevent information transfer among employees. (Refer to Finding III-F12.)

III-R4 Develop and implement training that specifically addresses the real situations likely to be encountered by those affiliates providing competitive retail services. (Refer to Finding III-F13.)

III-R5 Training materials should be revised to remove ambiguity regarding solicitation. (Refer to Finding III-F20.)

III-R6 Customer inquiry center employees should inform customers during the initial call that if the work needed is not safety-related then other contractors may be available to perform the needed work. (Refer to Finding III-F20.)

III-R7 PSE&G should seek clarification of Section 6.3.e.1 of the Standards from the Board. (Refer to Finding III-F20.)

III-R8 PSE&G should obtain Board approval for the competitive services offered by Sunburst and the other competitive services offered by PSE&G. (Refer to Finding III-F26.)

IV-R9 Sunburst marketing activities should be separated from those of PSE&G. (Refer to Finding III-F27.)

IV-R10 Reconcile all internal Service Company documents, lists and accounting systems and procedures manuals to reflect and conform to the same groupings and definitions of Service Company functions and services currently provided to affiliates. . (IV-F29)

IV-R11 Develop appropriate report writers within SAP, with proper controls to produce accurate, timely detailed support for all monthly inter-company billings. (IV-F36.)

IV-R12 Develop appropriate report writers within SAP, with proper controls to

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produce accurate, timely detailed support for all monthly inter-company billings. (IV-F36 and F37.)

IV-R13 Develop a system of monthly invoices from all PSEG affiliates to ASB with sufficient detail for ASB and PSEG management to review the propriety of all inter-company charges on a monthly basis. (IV-F39.)

IV-R14 Develop accurate and appropriate benchmark data for the 2001 planning process, based on FY 2000 actual results. (IV-F40

IV-R15 Implement the Action Plans included in the internal audit report referenced in Finding IV-F1 above. (IV-F43 & F44)

IV-R16 The Accounting Services Department should review each of the audit exceptions presented and make the necessary adjustments to ensure that cross-subsidization does not occur. (IV-F45)

IV-R17 Choose one of the methods, i.e., planned costs or actual costs and apply it to all Cost Centers’ charges and allocations. (IV-F46.)

IV-R18 Develop a comprehensive plan for addressing all of the problems with SAP. Refer to Finding IV-F48

V-R19 Improve the Affiliate Standards training materials to support instruction, application, and job duties for all PSE&G and PSEG employees affected by the Standards. Identify potential areas of violation, correct areas that are potentially incorrect, misleading or oversimplified. (Refer to Finding V-F64.)

V-R20 PSE&G should either discontinue providing services to PSEG ET or provide them under the conditions specified in Section 3.2 of the Standards. (Refer to Finding V-F65 & F66.)

V-R21 Identify the types of information covered by Section 4.2 and inform those employees with access to this information about the Section 4.2 and its requirements. (Refer to Finding V-F7787

V-R22 PSEG Services should discontinue Marketing as a shared corporate service offered to both PSE&G and PSEG ET. (Refer to Finding V-F90.)

V-R23 PSE&G should clarify the Board’s intent with regard to shared corporate officers to determine if it is in compliance with Standard 5.7.b. (Refer to Finding V-F102.)

V-R24 Develop supporting procedures for the Compliance Plan which (1) provide the information necessary to fully demonstrate compliance and (2) can be used as a guide by employees who have questions regarding compliance with the Standards. (Refer to Finding V-F102.)

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F. GLOSSARY OF TERMS

SAP Systems, Applications, and Products ASB Appliance Service Business CSP Customer Service Professional GSIMS Gas Service Information System BGS Basic Generation Service ERP Enterprise Resource Planning IPP Independent Power Production APSO Appliance Parts and Service Order WBS Work Breakdown Structure ASD Accounting Services Department RCBSs Related Competitive Business Segments VRU Voice Remote Unit EHEP Experimental Hourly Energy Pricing Service

Docket No. EA00040235 14

V ant age Consulting, Inc . Mitchell & Titus LLP

NORTHSTAR CONSULTING GROUP




II. BACKGROUND AND ORGANIZATIONAL ISSUES

A. ORGANIZATIONAL STRUCTURE

PREVIOUS ORGANIZATION

Public Service Enterprise Group (PSEG) has undergone a significant restructuring as a result of the energy deregulation in New Jersey. Prior to deregulation, PSEG was a holding company with two major entities. PSE&G, the utility, and PSEG Holdings, a company that managed the broad range of national and international investments. This organization changed dramatically as a result of the restructuring legislation and decisions.

CURRENT ORGANIZATION

The organization under PSEG can now be viewed as four distinct companies:

• Public Service Electric & Gas – customer service, appliance repair, meter reading and billing. This is the pipes and wires part of the utility. It consists of distribution, transmission, customer service, meter reading, and appliance services.

• PSE&G Service Corporation – This new company now provides a broad range of services to all of the PSEG affiliates, including PSE&G.

• PSEG- Power, LLC – The assets associated with all fossil, nuclear, and energy trading were transferred to this new company on August 21, 2000.

• PSEG Energy Holdings – Most of the 300 plus subsidiaries that PSEG owns throughout the world reside in PSEG Global. This includes PSEG Energy Technology, a retail competitive services company that has been identified as the only subsidiary listed as “affected” or required to comply with Sections 3-5 of the Affiliate Rules.

ORGANIZATION CHARTS

A number of organization charts are provided to better portray the current organizations.

• Exhibit II-1 depicts the PSE&G organization before it was broken into three sections.

• Exhibit II-2 depicts the PSEG as it is now organized. • Exhibit II-3 depicts the PSEG Energy Technology as it is now organized. • Exhibit II-4 depicts the PSEG Energy Holdings as it is now organized. • Exhibit II-5 depicts the PSEG Service Corporation, i.e. the newest corporate entity,

a petition for the approval of which is pending before the BPU.

Docket No. EX99030182 16

Vantage Consulting, Inc. MITCHELL & TITUS NORTHSTAR





Exhibit II-1 PSE&G Prior to Reorganization

PSE&GCOB & CEO

PSE&GCOO & President

SVP Finance&

CFO

Chief NuclearOfficer

& Pres. NBU

VPDistribution

VP Elec. Trans.

VP HR

VP IT.

VPAppliance.

VP Fossil Gen

VPDel. Oper.

VPCust. Serv.

VPEnergy Res.

VPExter. Aff.

VP Corp. Rate.

VP Law

Sr. VPGen Cnsl.

VPEnvir &

H&S

CorpSecretary





Exhibit II-2 Public Service Enterprise Group Organization

PSEG Power, LLC

Public Service EnterpriseGroup Incorporated

Public Service Electric & Gas PSEG Holdings PSEG Service Corporation





Exhibit II-3 PSEG Energy Technology Organization

PSEG Energy

Technologies IncChairman of the

board

SVP Energy ManagementServices

Regional VPPenn/Delaware

Regional VPNorthern NJ/NY

Regional VPNew England

PSEG EnergyTechnologies IncPresident & CEO

VP EnergySolutions

VP RetailSystems

VP &GeneralCounsel

VP Financeand Strategic

Analysis





Exhibit II-4 PSEG Holdings Organization

Enterprise CapitalFunding Corp.

PSEG Global, Inc.President

Enterprise GroupDevelopmentCorporation

President

PSEG EnergyTechnologies, Inc.President & CEO

PSEG Resources, Inc.President

PSEG VP & CEO

President & COO

PSEG ServiceCorporation COB,President, & CEO





Exhibit II-5 PSEG Services Corporation

PSEG Services Corporation

COB, President & CEO

Executive Vice President -Finance

Senior Vice President– Finance and Chief

Financial Officer

VP – InformationTechnology

VP andTreasurer

VP – CorporatePlanning

VP andController

VP – EnterpriseCorporate

Development

Senior Vice President andGeneral Counsel

CorporateSecretary

VP – HumanResources

VP –Environment,

Health & Safety

VP - Law




AFFILIATE COMPLIANCE ORGANIZATION AND INFRASTRUCTURE

II-F1 The organization and infrastructure for affiliate compliance is currently inadequate.

The audit team feels strongly that it will be essential for PSE&G to develop a viable compliance infrastructure in order to maintain its compliance and to remain vigilant to potential violations. The audit team believes this to be true because affiliate issues will likely become more important rather than less. There are several reasons that provide the basis for this belief. First, in approximately two years, the contract for Basic Generation Service (BGS) will expire and must be reconsidered. Changes in how PSE&G provides power to its customers will likely raise some sensitive issues related to affiliate standards since third party suppliers will become more active participants. Second, PSE&G will be filing a request to change rates by the end of 2002. One would expect the dollars associated with affiliated interests to be one of the contentious issues. Finally, as these affiliated interest issues receive more attention in public forums PSE&G will certainly want to avoid any potential penalties and the resulting negative public relations that would follow.

A viable compliance infrastructure would consist of a high level commitment of resources to affiliate compliance. This means creating one or more full-time positions devoted solely to providing assurance that PSE&G remains in compliance with the affiliate standards. Further, it means developing a compliance plan that not only meets the BPU requirements but demonstrates a corporate commitment to maintain compliance and to further demonstrate how this compliance will be met. The plan should state clearly and concisely the purpose of the plan and it should be well organized in a manner consistent with the Affiliate Standards. The plan should clearly demonstrate how PSE&G will comply and the procedures that have been established to ensure compliance. This would provide valuable assistance to the BPU in its efforts to determine compliance. It could also serve as a reference for employees who find they need clarification on the standards and how they apply to their job responsibilities. Finally, PSE&G needs to create a corporate culture that reinforces its commitment to comply with the Affiliate Standards.

PSE&G has recently begun a process that the audit team believes will enhance the company’s affiliate compliance efforts. The Legal Department has indicated that by the end of the year it expects to reorganize and create a full-time partner level position to deal only with affiliate compliance matters. Depending on how this reorganization evolves, the company will determine whether additional resources will need to be committed. PSE&G can also further develop the infrastructure to reinforce affiliate compliance by providing employee training that meets the specific needs and concerns of employee groups. PSE&G can also create a program of regular communication to employees on affiliate compliance matters. This communication could be through an electronic or paper medium or both. PSE&G could also heighten the employees’ awareness to affiliate compliance related issues by revising the Standards of Integrity to explicitly address affiliate compliance standards and by modifying the Certification of Compliance that each employee signs to include specific reference to the Affiliate Standards.




II-R1 Develop a compliance team within the current legal department or elsewhere that is capable of addressing upcoming issues and further develop the compliance plan into a robust, useful document. (Refer to Finding II-F1.)

The proposed organization is not yet fully defined. We would expect to see adequate resources in this group to address daily issues as well as long term issues of training and monitoring.

Additional discussion on inadequacies of the current compliance plan are provided in Chapter 5. The primary problem with the current plan is that it does not always provide any detail as to how compliance will be achieved. Rather it simply says the company will comply.

B. SYSTEM, APPLICATION, & PRODUCTS (SAP) ENTERPRISE SYSTEM

A description of SAP is provided early in this report in order that readers will have a basic understanding prior to reading the body of the report.

SAP stands for Systems, Applications, and Products in Data Processing. SAP R/3 is the name of an advanced software product produced by a German company called SAP AG. SAP AG was founded in 1972 by five former IBM employees. Today SAP is the 4th largest software maker and its R/3 system is installed at more than 20,000 sites worldwide.

Many North American energy services companies have implemented SAP including: GPU, Reliant Energy (Houston Industries), Connectiv (DelmarvaPower/Atlantic Energy), Oklahoma Gas and Electric, Wisconsin Electric Power, Virginia Power, Trans Alta, Ontario Hydro, Westcoast Energy, and more.

SAP is what is called an Enterprise Resource Planning (ERP) system, also referred to as a "backbone" system. It is embedded with standard business practices and provides most of the basic back-office business functions: accounting, HR, procurement and materials management, etc. It is a world class system for processing transactional information, such as new hire, change of address, vendor payments, and material receipts.

SAP was first implemented at PSEG in January 1998 for the Fossil Generation organization. In January 1999, SAP replaced over 130 separate "legacy" systems (including the human resources system, general ledger, and materials management systems).

It is a "real time" system (meaning once the information is entered and saved, it is available to all). It is made up of modules that are "integrated," meaning information in one module is automatically used by other modules, eg. receipt of an inventoried (or "valued") material is not only listed in the materials management (MM) module as a part in the storeroom, it is listed in accounting (the Fl module) in the inventory balance.




C. COMPENSATION PROGRAM CHANGES

One requirement of the audit was to assess the compensation program to determine if it properly addressed changes that have taken place in organization and responsibilities. To address this, our auditors conducted a review of the compensation program in place. In particular, we determined the following:

• Type of programs in place for compensating management employees at the utility and other affiliates.

• Compensation/contract status of PSE&G’s unions. • Impact on compensation of key officers due to the reorganization and

restructuring of the utility.

II-F2 The overall program for officer compensation at PSE&G is reasonable, and is based on sound practices and philosophy.

The compensation function of PSE&G is performed by 19 employees under the direction of the Director of Performance & Rewards within the Human Resources Department of PSEG Services. This group is responsible for compiling market data and making recommendations for base pay, annual merit budgets and annual incentives for the non-union employees below the officer level of PSEG, with the exception of PSEG Holdings employees. The cost for this work is charged back to each affiliate and PSE&G based on the allocation methodology outlined in the service agreement.1 The compensation program for non-union employees includes base pay and annual incentives that reflect the corporate financial performance and individual performance measures2.

Additionally, there are between 100 – 200 key employees who are eligible for stock options at the discretion of the Board3. These options are a part of an employee retention strategy for employees in critical areas of the company.

Compensation for the 17 officers, defined as Vice President, Sr. Vice President, and President of the Public Service Enterprise Group is determined through an evaluation of the positions, market comparisons, and financial performance. The Vice President of HR works with Hewitt Associates in forming recommendations that are presented to the Chairman of the Board and the Organizational Committee of the Board of Directors for approval4. The compensation package consists of base pay, annual incentives, and long-term incentives in the form of Non-Qualified Stock Options, which can be issued in tandem with Performance Units or Dividend Equivalents5 for a rolling three-year cycle.

The process to determine base salaries includes an annual review of each officer’s responsibilities, and changes to the scope are incorporated into the market comparisons. Edison Electric Institute (EEI) compensation data is the primary source of competitive market data, with PSEG positions compared to those companies with revenues of $6 Billion and above. This data is augmented by additional market information from6:

• Dow Jones 15 Utilities • Tower Perrin, Energy Services Industry, 1999 Executive Compensation Data Base




• Hewitt Associates, 1999 Cash compensation by Industry, and Energy/Utility • American Gas Association, 1998 Executive Compensation Survey • Executive Compensation Services (Watson Wyatt,) 1999-2000 top Management

Regression analysis Report • William M. Mercer, Inc., 1999 Finance, Accounting, & Legal Compensation

Survey • Hewitt Associates, Total Compensation Base • Foushee Group Inc. 1998 Compensation Survey • Hewitt Associates, Independent Power Human Resources Association –

Compensation Special Analysis – 1999

The reorganization of PSEG should shift the scope of the comparisons, with the executives for PSE&G being compared to utilities with revenues significantly less than the $7 – 8 Billion that PSEG as a whole generates. The scope of responsibilities has changed significantly, with the President of PSE&G responsible for the transmission and distribution of energy, and excludes the nuclear business unit, fossil generation, energy trading, and law7 or other centralized support. While these are offset to some degree by the increase in responsibility for rate cases and other challenges that result from the industry changes, the expectation would be that the executives would be matched with external data that defines the changed responsibilities and lower revenue base, and the total compensation package targeted to that market8. In fact, that’s the case, with the base salary for the new president of PSE&G being approximately 20% lower than that of the retired president of the intact Enterprise to reflect the changes in responsibility. Annual incentive targets and long-term incentive targets mirror the lower base pay, with a total compensation package valued at significantly less than the current president’s predecessor9.

II-F3 Annual incentives are designed to reflect performance against specified employer goals, individual performance goals and corporate goals for the plan year.

Employer Goals, a group of one to three “quantifiable, measurable business goals”10, include customer service levels and safety performance. The plan is written in such a way that a fatality within the company eliminates the annual bonus for everyone. Corporate Goals are tied to Total Shareholder Return; if no dividend is paid to shareholders, no incentives are paid to employees.

Achievement against these goals for executive compensation is measured within 60 days of the end of each plan year. Target percents vary between 35% - 50% of base pay, depending upon the level of the position11. Seventy percent (70%) of the total target incentive amount is tied to the achievement of the Employer Goals. Thirty percent (30%) of the total target incentive is based on the achievement of Individual Performance Goals, the one to three goals specific to the individual. The employee’s ultimate incentive award is based upon the achievement against these objectives, weighted by the extent to which the Corporate Goals were attained. The maximum incentive award that can be earned is 1.5 times the participant’s total target incentive amount12.




Long-term incentives of Non-Qualified Stock Options are awarded based on Total Shareholder Returns for a rolling 3-year period. The percent of variability in the program has increased over the past few years, while merit increases have remained less than 4% per year13. The structure of the program emphasizes customers, employees and shareholders in the variable portions, emphasizing the link between performance and pay. The merit increases to base pay stresses the individual accountability for performance in addition to the group achievements




III. COMPETITIVE SERVICES

This chapter provides an assessment of each of the major competitive services offered by the competitive business segments of PSE&G and PSEG. The competitive services described in this chapter include those services deemed competitive services by the Act or the Board and those services that are subject to the Standards. The competitive services addressed include the following:

• Electric generation service offered through PSEG Power. • Testing, equipment overhaul and repair, and maintenance, offered through

SERVCO, an operating division of PSEG Power. • Mechanical contracting and energy services offered through PSEG Energy

Technologies, an operating company within PSEG Holdings. • Appliance repair offered through PSE&G. • Metering and billing, offered through Sunburst Customer Solutions, part of

PSE&G. • A variety of other competitive services offered by PSE&G.

The assessment includes a brief description of the business unit offering the service(s), a description of the competitive service, the extent to which it complies with the Standards, and any cross-subsidization issues that were identified in the audit.

The chapter is organized around the business segments offering competitive services:

• PSEG Power: power generation and SERVCO • PSEG Energy Technologies (PSEG-ET): mechanical contracting and energy

services • PSE&G: appliance repair • PSE&G: Sunburst and other services

A. PSEG POWER LLC: POWER GENERATION AND SERVCO

Power generation, a competitive service as defined in Section 8.b of the Act, is provided through PSEG Power LLC, a subsidiary of Public Service Enterprise Group. PSEG Power was created August 1, 1999, in accordance with BPU Docket Nos. EO97070461, EO97070462 and EO97070463 to separate PSE&G’s generation and wholesale power marketing businesses from its transmission and distribution utility businesses. All PSE&G employees involved in power generation were transferred to PSEG Power in December 1999. PSE&G’s power generation assets were transferred to PSEG Power on August 21, 2000.

In addition to power generation, PSEG Power also provides equipment maintenance and testing services to outside parties through its SERVCO division. These services are offered on a limited but competitive basis and are included in this audit.




OVERVIEW OF PSEG POWER AND SERVCO

PSEG Power has four major operating divisions:14

• Fossil--Operates fossil generating stations. • Nuclear--Operates Hope Creek and Salem generating stations. • Energy Resources & Trade--Trades electric power generated by PSEG and other

suppliers, purchases power to fulfill needs of the BGS (basic generation service) agreement, and purchases gas for PSE&G.

• SERVCO--Operates testing laboratory, central maintenance shop, and travelling maintenance crews; also provides these services to outside customers.

Power generation is the primary competitive service offered by PSEG Power. At present, almost all of the power generated by PSEG Power is used to meet the requirements of the BGS agreement. PSEG Power sells excess power and capacity to power wholesalers under the terms of Wholesale Power Service Agreements filed with FERC.15 PSEG Power does not sell power to retail customers.

PSEG Power interfaces with PSE&G in a number of areas, including the following:

• PSEG Power manages PSE&G’s gas supply, including selling any excess supply. However, PSEG Power is not in the retail gas sales business.

• PSEG Power purchases gas under tariff from PSE&G for use in the generating stations.

• Under the terms of the BGS, PSEG Power provides all the electric energy required by PSE&G for its customers.

• PSEG Power currently receives centralized support services (human resources, legal, purchasing, information resources, etc.) from PSEG Services corporation (PSEG Services).

• PSE&G provides maintenance services for transformers and relay equipment at PSEG Power’s generating stations.

PSEG Power also provides testing equipment maintenance services to outside parties through its SERVCO division. SERVCO’s primary mission is to provide equipment maintenance, repair, and testing and diagnostic services to PSEG Power’s generation facilities. SERVCO also offers these services to outside parties when internal needs do not fully utilize existing capacity. Outside services are provided both directly to the ultimate customer or on a sub-contract basis to other companies providing maintenance and repair services. During 2000, SERVCO’s outside customers included companies in the following industries: telecommunications, electric distribution, environmental compliance, steel manufacturing, equipment repair, materials and equipment testing, and independent power production.

SERVCO’s competitive services account for a small percentage of SERVCO’s activities. On average, only about two percent of SERVCO’s labor budget is devoted to supplying outside services.16 During the first six months of 2000, SERVCO completed 43 jobs for outside customers, receiving revenues of $647,764.17




COMPLIANCE WITH THE STANDARDS

In its Compliance Plan, PSE&G contends that PSEG Power (including SERVCO) is not covered by the Standards because it only sells to wholesale customers.18 Therefore, the initial objective of the audit was to validate this claim by reviewing the types of customers served by PSEG Power and SERVCO. If the audit upheld PSE&G’s claim, no further auditing of PSEG Power’s compliance with the Standards would be necessary other than to assess the possibility of cross-subsidization. If the audit found that PSEG Power did provide services to retail customers in New Jersey, the audit plan called for a detailed review of PSEG Power’s compliance with each Standard.

III-F4 The competitive generation services offered by PSEG Power are made only to wholesale customers and therefore are not subject to Sections 3, 4, and 5 of the Standards.

Although PSEG Power is a competitive business segment of PSEG’s Holding Company, the power generation service offered by PSEG Power is not subject to Sections 3, 4, and 5 of the Standards. Section 1.1.a.i of the Standards states that Sections 3, 4, and 5 of the Standards apply only to transactions between a public utility and a related competitive business segment of the holding company “…offering competitive services to retail customers in New Jersey.” The audit verified that PSEG Power sells energy, capacity and ancillary services only to wholesale customers under terms and conditions specified by FERC.19

PSE&G has received authorization from FERC to sell wholesale electric power and capacity pursuant to PSE&G’s Market-Based Power Sales Tariff on file with the Commission. For each wholesale customer, PSE&G and the customer execute a wholesale power service agreement and an agreement for general terms and conditions of service for capacity and/or energy at market based rates. These arrangements include the definition of a wholesale customer, which specifically excludes “ultimate (retail) consumers of electric service.” The service agreement is filed with the Commission and a Notice of the filing and a notice of acceptance are published by the Commission.20

PSEG Power is also not subject to Section 6 of the Standards, which applies only to public utilities and their related competitive business segments. PSEG Power is a competitive business segment of Public Service Enterprise Group (the holding company), not the utility.

III-F5 PSE&G may be obligated to a number of aspects of Sections 3 and 4 of the Standards at such time as basic generation services are competitively bid and include PSEG Power.

The Standards as they affect utility information and the open competitive selection of basic generation services would prohibit preferential treatment, access to information, and disclosure of information to PSEG Power after September 1, 2002. The audit team bases this assessment on the following.

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. It also provides specific guidelines and parameters for the Board to follow with respect to restructuring related issues.

Issues and resolutions from BPU Unbundling Docket No. E0970461 and Restructuring Docket No. E097070463 addressed the resolution of Basic Generation Service (BGS) Obligation – Pursuant to Sections 9(a) and 9(b)(3) of the Act (the Stipulation). Based upon the Final Decision and Order for BPU Dockets E0970461, E0970462, and E0970463, dated April 21, 1999, PSE&G has a three-year obligation to provide BGS to those retail customers who choose to remain with the utility for at least the three-year period beginning August 1, 1999 and will support the bidding out of the BGS after this date. In the fourth year, the BGS will be provided for the first time by a third party as a result of the bid.

As noted in the Order, PSEG Power would not provide retail electric generation service and would not be in direct competition with electric power suppliers in the State. The parties also agreed that a PSEG Enterprise Group non-regulated affiliate (PSEG Power) would be authorized to bid for BGS.

The Order also determined that structural separation of generation-related assets into a separate corporate entity (creating the affiliate PSEG Power) was necessary and the transfer value for the generation facilities including related materials, supplies, liabilities, and fuel would be transferred at the full value of the assets. The Order notes on page 112:

Pursuant to the provisions of subsections 7(f), 7(i), 7(j) and 8(b) of the Act, N.J.S.A. 48:3-65(f) (i) and (j) and N.J.S.A. 48:3-65(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.

Furthermore, on page 124, item 30, the Order directed the following:

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.




III-F6 The testing, repair, and maintenance services provided by SERVCO are provided on a wholesale basis, given the definition of the term “retail” used by PSE&G in its Compliance Plan.

In its Compliance Plan, PSE&G defines the term “retail” as “…sales made in quantities to ultimate consumers to meet personal needs, rather than for commercial or industrial uses of the articles sold.”21 This definition was taken from a federal court case. Based on this definition, PSE&G considers all SERVCO’s customers as wholesale, thereby exempting SERVCO from Sections 3, 4, 5, and 6 of the Standards. If any of SERVCO’s customers were retail customers, it would jeopardize PSE&G’s claim that PSEG Power is not subject to the Standards.

Since the Standards were finalized, SERVCO has completed 18 projects for outside customers.22 Eight projects were performed on a sub-contract basis to another firm. Seven projects were performed for utilities or independent power producers. The remaining three projects were performed for a refinery, a bakery, and an environmental company. All three were contracted before the adoption of the Standards.

While some of SERVCO’s projects are clearly wholesale (e.g., projects performed on a sub-contract basis for other firms who had primary customer relationship responsibility) projects for customers such as bakeries and refineries are more problematical. It is unclear if the services offered to these customers are for personal or for commercial or industrial use. The commercial or industrial status of a customer does not necessarily mean that all services provided for those customers are wholesale.

III-R2 Clarify the Compliance Plan to address the process by which SERVCO will restrict its outside activities to wholesale customers. (Refer to Finding III-F6.)

The Compliance Plan should include a description of the process by which SERVCO will verify the wholesale/retail status of a customer. Specific types of customers which it considers wholesale should be listed.

III-F7 The review of transactions between PSE&G and PSEG Power and SERVCO revealed no instances of cross-subsidization.

A complete discussion of the cross-subsidization analysis of PSEG Power, PSE&G, and other affiliates can be found in Chapter IV.

B. PSEG ENERGY HOLDINGS INC.

PSEG Energy Holdings, Inc. (Energy Holdings) is one of four direct wholly-owned subsidiaries of PSEG. Energy Holdings is the parent of PSEG’s energy related businesses not held under PSE&G or PSEG Power. PSEG Holdings consists of six wholly owned subsidiaries and 305 indirect subsidiaries. The wholly owned subsidiaries are:

• PSEG Global • PSEG Energy Technologies, Inc.




• PSEG Capital • Enterprise Capital Funding Corporation • Enterprise Group Development Corporation • PSEG Resources, Inc.

As the name implies, PSEG Energy Holdings, Inc. is a holding company and provides no direct services. Energy Holdings does however serve as the recipient and clearing house for dollars flowing from and to other PSEG entities such as the Service Company. This somewhat complicates the transaction analysis in that not all dollars flowing to Holdings need to be allocated to their subsidiaries. This makes an assessment of the value of dollars transferred versus the actual value provided impossible. It should however, be noted that Holdings is not required under affiliate rules to allocate expenses in any particular fashion or at all.

_________________________________________________________________________________


Exhibit III-123 PSEG Energy Holdings Subsidiaries Annual Financial Summary 1999, ($ in millions)

Company Revenues Operating

Expenses Net

Income Total

Assets PSEG Global 141 52 46 1,715 PSEG Resources 180 11 73 2,096 PSEG ET 286 294 (6) 249

Note that Revenues less Operating Expenses does not equal Net income due to other income, interest expenses, income taxes, and minority interests. Source: Form U-3A-2, February 29, 2000

_________________________________________________________________________________

Total revenues for PSEG Energy Holdings for 1999 is $607 million and operating expenses and net income are $369 million and $108 million, respectively. As shown in Exhibit III-1,24 PSEG ET provides the most in revenues to the consolidated total with $286 million as compared to $141 million and $180 million for Global and Resources. Likewise, PSEG ET’s operating expenses of $294 million are considerably higher than the other major Energy Holdings subsidiaries. Global and Resources incurred operating expenses of $52 million and $11 million in 1999. That year ET incurred a loss of $6 million while Global and Resources provided income of $46 million and $73 million to Energy Holdings Consolidated Net Income. Total assets for PSEG Holdings is $4,112 million of which the majority is held at PSEG Resources with $2,096 million, followed closely by PSEG Global with $1,715 million in assets. PSEG ET has far less in assets than its sister companies totaling $249 million at the end of 1999, as shown in Exhibit III-1.25

The audit examined all six subsidiaries. PSEG ET, which provides competitive services to the retail sector26 in New Jersey, received the greatest attention. PSEG Global and PSEG Resources were also examined because of their relative size but it was quickly determined




that they provide no retail competitive services. The other affiliates were reviewed for transaction flows and cross-subsidization issues but were found to be unaffected by affiliate rules governing the provision of competitive retail services.

OVERVIEW OF PSEG ENERGY HOLDINGS SUBSIDIARIES

PSEG Global invests and participates in development and operation of generation and distribution projects. These include co-generation, independent power production (IPP) and electric distribution. The majority of the facilities are qualifying facilities under PURPA.27 Eleven of the projects are “foreign utility companies” (FUCOs) under the Public Utility Holding Company Act (PUHCA) of 1935. Fourteen are designated as “exempt wholesale generators” under the same act. Global has three direct wholly-owned subsidiaries listed below:

• PSEG Global New Jersey Inc. (PSEG NJ) • PSEG Global USA Inc. (PSEG Global USA) • PSEG India Company

PSEG Global also has 225 indirect subsidiaries including limited and general partnership interests. PSEG Global has minimal contact with other PSEG affiliates other than for the provision of centralized support services.

PSEG Resources provides financing for energy infrastructure projects in developed countries. The PSEG Resource portfolio includes over 60 energy related investments including leveraged leases, leveraged buyout funds, limited partnerships and marketable securities. In addition to the energy investments, PSEG Resource’s portfolio includes a number of asset types in various industries. PSEG Resources has 13 direct and 10 indirect wholly-owned subsidiaries.28 The distinction between assets held by PSEG Resources and other PSEG Holding’s companies is that PSEG Resources assumes a passive role in their investments as opposed to the operational role assumed by PSEG Global.

PSEG ET provides a variety of energy related services to commercial and industrial customers throughout the Northeastern and Middle Atlantic regions of the United States. PSEG has 12 direct and 8 indirect wholly-owned subsidiaries. The direct subsidiaries and their primary services are as follows:

• The Dowling Group, Inc.: The Dowling group has one direct and two indirect subsidiaries which provide mechanical, construction and building services. The Dowling Group subsidiaries offer services in New Jersey and Pennsylvania.

• Public Service Conservation Resource Corporation (PSCRC): PSCRC finances, markets and develops energy conservation projects. Most of these projects are within the PSEG service territory.

• Arden Engineering Constructors, Inc. (Arden): Arden provides mechanical, construction and building services within Rhode Island.

• East Coast Mechanical, Inc. (East Coast): East Coast provides mechanical, construction and building services in Virginia.




• The Frank A. McBride Company (McBride): McBride has five direct wholly-owned subsidiaries which provide mechanical and electrical services, and sheet metal fabrication and installation services in New Jersey.

• Liber Rich & Sons: Provides mechanical contracting services in New Jersey. • Rich Fire Protection Company, Inc.: Provides fire protection and mechanical

contracting services in New Jersey. • Keith H. Struble Air Conditioning (Struble): Struble provides mechanical

contracting services in New Jersey. • Thomas H. Barham, Co. (Barham): Barham provides mechanical contracting

services in New Jersey. • Central Plumbing and Heating Company, Inc. (Central): Central provides fire

protection and mechanical services in Pennsylvania. • Tougher Industries, Inc. (Tougher): Tougher provides mechanical contracting

services and fabricates and installs sheet metal in New York. • McBride Energy Services Company, LLC (MESCO): MESCO is an energy

services business in New Jersey. PSEG ET and its 10 subsidiary operations that provide competitive services to the retail market in New Jersey are the only affiliates identified by PSE&G as “Affected Affiliates” for purposes of the Compliance Plan. These 10 affiliates are:

• Liber Rich & Sons, Inc. • Rich Fire Protection Company, Inc. • Thomas H. Barham • Keith H. Stuble Air Conditioning, Inc. • The Frank A. McBride Company • Independent Electrical Construction Company • Independent Sheet Metal Co., Inc. • Fluidic’s of New Jersey, Inc. • Urban Comm-Data, Inc. • McBride Energy Services Company

The affected affiliates, as well as all PSEG ET affiliates, perform building services or directly related services. These include electrical contracting, HVAC, security systems and other construction services. These are primarily provided to commercial and industrial customers. PSEG ET previously provided a commodity gas service but this practice has been discontinued as of June 30, 2000. 29

The following table summarizes the available PSEG ET subsidiary financials for those operations in NJ.




_________________________________________________________________________________


Exhibit III-230 PSEG ET Subsidiaries Annual Financial Summary 1999, ($ in millions)

Company31 Revenues Operating

Expenses Net Income Total Assets

PSCRC 24 12 8 90 Arden 35 34 1 18 Liber Rich & Sons 9 9 (1) 4 Rich Fire 3 4 (1) 2 Struble 4 5 0 3 Frank A. McBride Company 47 47 0 36 East Coast 0 1 0 1 Note that revenues minus operating expenses does not equal net income due to interest expenses, and income taxes. Other income has been excluded. “0” in above exhibit represent dollars less than half a million. Source: Form U-3A-2, February 29, 2000

_________________________________________________________________________________

Of total revenues reported by PSEG ET, the Frank A. McBride Company and Arden contributed $47 million and $35 million respectively. Expenses for Frank A. McBride Company are $47 million resulting in a 1999 net income of less then half a million dollars. Expenses for Arden are $34 million with a resulting net income of $1 million.


In its Compliance Plan, PSE&G contends that only PSEG ET and certain of its subsidiaries are covered by the Standards because they are the only competitive business segments selling to retail customers in New Jersey32. The initial objective of the audit was to validate this claim by reviewing the services and types of customers served by the other subsidiaries of PSEG Holdings. For PSEG ET and any other competitive business segment found to be subject to the Standards, the audit focused on several key issues, including:

• Maintenance of separate books and records • Offering of preferential treatment to customers or tying of products • Transfer of employees • Information disclosure • Transactions with PSE&G limited to those allowed by the Standards • Physical separation • Cross subsidization

III-F8 ET maintains its own Board of Directors.

Standard 5.7.2 prohibits a utility board member or officer from serving on the board of a competitive business segment. ET has its own Board of Directors comprised of three members from within the PSEG Corporation. The ET Directors are the President of ET, PSEG EVP Finance and President and COO of PSEG Energy Holdings Inc.33 All companies




acquired by ET maintain their Board of Directors as well. Investment decisions are made by the ET Board for ET and communicated to PSEG.34

III-F9 Neither PSEG Global nor PSEG Resources offer any competitive services subject to the Standards.

No affected affiliates or affiliates involved in retail competition exist within the PSEG Global or the PSEG Resources organization. As noted, these affiliates were given an initial review due to their size and visibility but found to have no affiliate standards’ concerns beyond transaction flows and cross-subsidization. PSEG Resources has no operations within New Jersey and none of the operations owned or financed by Resources are directly managed. PSEG Resources provides no competitive services nor do they provide any services for retail customers.35 This conclusion was reached by a review of operations owned and through interviews with PSEG Resources personnel.

PSEG Global also has no operating assets within New Jersey and does not sell at this time on a wholesale or retail basis. This conclusion was reached after interviews with senior PSEG Global executives and a review of the operations of Global.

III-F10 PSEG ET and its 10 subsidiaries identified in PSE&G’s Compliance Plan are the only competitive business segments within PSEG Holdings that offer competitive services to retail customers in New Jersey.

While there are numerous companies, subsidiaries, partnerships and other corporate entities that reside in PSEG Holdings, only PSEG ET has been identified as a retail competitive business within PSE&G’s franchise area.

III-F11 Employee transfers between PSEG ET and PSE&G have been in compliance with the Standards.

Standard 5.7 governs the transfer and joint use of employees between PSE&G and related competitive business segments of PSEG involved in merchant functions or electric and gas related activities.

During the period January 1, 2000, through July 10, 2000, one employee transferred from PSE&G (Delivery, Appliance Service) to PSEG ET(Energy Management Solutions).36 Nine employees transferred from PSEG ET to PSE&G over this same period.37 The majority of this employee movement out of PSEG ET is attributable to the cessation of commodity services within PSEG ET.38

There is no prohibition against employees moving from the utility to a competitive business segment. However, Standard 5.7.c does require that any employee doing so must not transfer back to the utility for a period less than one year except under special circumstances. As such, the transfer is within the rules at the time of the audit.




III-F12 The physical separation between PSEG ET and other affiliates at the Edison office complex is inadequate.

Standard 5.3 prohibits the sharing of office space between PSE&G and PSEG ET. The majority of PSEG ET headquarters personnel are located at an office complex in Edison which also houses personnel from PSE&G and other affiliates. Within the complex, PSEG ET’s office facilities were located on a separate floor from PSE&G office facilities. However, there are no security controls in place to prevent employees from obtaining access to the office space of an affiliate. There are no postings prohibiting affiliate employees entry to the PSEG ET area nor is there any security check preventing employee movement among floors.

While the Standards do not specifically define what is meant by “not share office space”, it is reasonable to assume that without some sort of security measures PSE&G cannot guarantee that its employees will not be sharing space with PSEG ET employees.

III-R3 Increase security and employee awareness at the Edison complex to prevent information transfer among employees. (Refer to Finding III-F12.)

Much of the concern over information transfer can be addressed through more diligent and directed training and education focused on the importance of separation and the need to prohibit the exchange of information among regulated and non-regulated affiliates providing retail services in New Jersey. However, along with the training and education there needs to be security directives which specifically govern the movement of utility employees to ET work areas and vice versa.

III-F13 Training specific to those affiliates that provide competitive retail services does not exist.

A number of the affiliates within Holdings and their subsidiaries have little if any affiliate transaction concerns. Yet the training for these affiliates is the same as that being provided to PSEG ET personnel who provide competitive retail services with the resulting opportunity for affiliate standards violations.

III-R4 Develop and implement training that specifically addresses the real situations likely to be encountered by those affiliates providing competitive retail services. (Refer to Finding III-F13.)

Training should be developed that addresses the likely situations that may be encountered by employees during the course of their normal business day. PSEG ET employees in particular should be made more aware of the standards, the reasons for compliance and the potential penalties associated with non-compliance.

III-F14 The volume of transactions between PSE&G and PSEG ET are relatively small.

Transactions between Energy Holdings and PSE&G are governed by two devices:39

• Service Level Understandings (SLUs) and




• Contracts for individual services

SLUs are agreements by which the entity receiving service, called the customer, and the entity providing the service, called the provider, agree to the terms by which services will be provided. There are numerous SLUs between Energy Holdings entities and PSEG Services Corporation. The agreements, which were reviewed for content, are summarized in a listing shown in Exhibit III-3, Service Level Understandings.40

_________________________________________________________________________________


Exhibit III-3 Service Level Understanding Listing

Provider Customer

Accounting Services Holdings Corporate Payroll Energy Holdings CAAARS Energy Holdings Corporate Accounting Energy Holdings Corporate Tax Energy Holdings V/P Controller Energy Holdings ASD Energy Holdings Business Integration Support Center Energy Holdings Environmental Health and Safety PSEG-Global External Affairs PSEG-Global External Affairs PSEG Resources Human Resources PSEG Global Human Resources Energy Holdings Internal Audit PSEG Global General Counsel Corporate Secretary Libraries & Information Resources Corporate Security Claims

PSEG Energy Holdings and Public Service Enterprise Group

Emerging Tech and Transfer PSEG Global Long Range Resource Planning PSEG Global Treasury Services Department PSEG Global Treasury Services Department PSEG Energy Holdings

Source: IR-279 _________________________________________________________________________________

The second method used to control services that flow between PSEG affiliates are contracts. Contracts are negotiated for services that do not fall under the already agreed upon SLUs. While SLUs are accounted for using the main PSEG accounting system, SAP, transactions governed by contracts are accounted for in the intercompany receivable and payable accounts, bypassing the SAP system. 41

Review of the contracts between Energy Holdings and PSE&G showed contracts regarding:42




• Replacement of existing air compressor and gauges on the dry pipe valve • A preventative maintenance contract for an air conditioning and heating unit • The retrofit construction at the New Freedom Switch Station • HVAC equipment acquisition and installation • HVAC acquisition and delivery, excluding installation • O&M services to Bell Atlantic - NJ (now Verizon) for its fiber optic network (i.e.,

PSE&G labor)

As of the time of the audit, Energy Holdings and subsidiaries do not purchase any significant support services from organizations outside PSEG.

Billings for SLU services are performed once a month through the SAP system. The intercompany accounts are affected for the SLU activity. Services initiated by SLU and that are tracked through the SAP system, are summarized in Exhibit III-4. 43 These services are those that are provided to PSEG ET from the PSE&G service providers and represent a significant amount of the activity between PSE&G and Energy Holdings.

_________________________________________________________________________________


Exhibit III-4 Transactions From PSE&G to Energy Holdings

January-00 February-00 March-00 April-00 May-00 June-00 Total

Affiliation Fee 144,000 144,000 144,000 144,000 144,000 144,000 864,000 Rent Facility 50,000 50,000 50,000 50,000 50,000 50,000 300,000 Other 21,954 44,283 39,974 11,003 23,136 22,293 162,643 Total 215,954 238,283 233,974 205,003 217,136 216,293 1,326,643

Percent of Other to Total Charges 10% 19% 17% 5% 11% 10% 12%

_________________________________________________________________________________

As shown in Exhibit III-445, the majority of the monthly transaction amount from PSE&G to PSEG ET is the payment of the Affiliation Fee. The next most significant amount is the Rent Facility charge. The remaining amount, Other, varies between 5 percent and 19 percent of total monthly charges for the six months ended June 30, 2000, with an average of 12 percent.46 Total monthly dollars is about $200,000 that flows from Energy Holdings to PSE&G.




_________________________________________________________________________________


Exhibit III-5 Financial Transaction Summary PSE&G and ET

ET Affiliate January-00 February-00 March-00 April-00 May-00 June-00 Total

Fludics 12,737 12,737

McBride 587 587

Independent Sheet Metal 5,452 485,249 706,750 200,295 237,653 1,635,399

McBride/Struble 881 8,346 9,752 349 19,328

Total 587 6,333 485,249 715,096 222,784 238,002 1,668,051

_________________________________________________________________________________

Exhibit III-547 shows that the level of contract activity is similar to the dollar volume in the SAP system. We reviewed the contract activity (see contract review description above) and noted that the invoices supporting the figures in Exhibit III-548 represented transactions described in those contracts.

Fully Allocated Costs were tested overall and in detail for PSE&G, as described in Chapter IV. This complements the audit work performed on PSEG ET where specific charges were reviewed and their amount, description, and supporting documentation noted for reasonableness. To summarize the work performed, the SAP system was tested for its ability to systematically allocate charges based on pre-determined cost allocators that were reviewed and approved for specific jobs or tasks. It was noted that all costs are allocated out of PSEG Services and that the cost allocators were reasonable. (See Finding regarding Fully Allocated Cost in Chapter IV.)

C. PSE&G: APPLIANCE REPAIR

The Appliance Service Business (ASB) is a competitive business segment of PSE&G that provides competitive services to retail customers of PSE&G as defined in Section 8 of the Act. Appliance repair services are also provided to certain customers outside PSE&G’s territory who were served on a contract basis prior to the date of the Act and the Standards. Appliance repair services are provided as an adjunct to safety services performed by PSE&G. The same staff perform required safety functions such as checking for leaks and carbon monoxide as perform appliance repairs. PSE&G has provided home appliance services for as long as it has provided gas utility services.

OVERVIEW OF THE APPLIANCE SERVICE BUSINESS

ASB is organized into four geographic zones: Northern, Central, Mid Central and Southern. Each zone has three districts and about 200 technicians. Most field technicians begin their day’s work from their homes. They do not report to a PSE&G facility. They receive their work assignments and record their activities via a mobile data terminal in their service truck




that communicates wirelessly with the dispatch center. Inventory replacements are sent via United Parcel Service directly to the field technician’s home, further increasing the proportion of their normal day that field technicians have available to respond to customer requests.

The activities of ASB field technicians are either utility-directed or customer-requested. Examples of utility-directed services include meter changes, safety and permit checks of facilities where the public congregates whether the facility is owned publicly or privately. All utility-directed services are non-competitive and are considered part of the regulated activities of PSE&G. Internally these activities are referred to as “tariffed”. This terminology can be confusing because the ASB Pricing Schedule approved by the BPU for competitive work is also a form of tariff.49

Customer-requested services may be categorized as safety-related or customer-paid repairs. Safety-related services that include only diagnostic testing and minor adjustments are charged to the utility as “tariffed” work. The customer-paid repairs are subdivided into contract customers who pay a set monthly amount and do not pay for covered repairs and Appliance Parts and Service Order (APSO) customers who pay for each repair based on time-and-materials as set forth in the BPU-approved ASB Pricing Schedule.50

There is a group of field technicians who work on “white goods” (e.g. a dishwasher) for which there are not normally safety issues. In the past, this group was managed as a single unit for the entire state. Recently these employees have been re-assigned to ASB’s four geographic zones. It is too early to tell how their assignments may change as a result of this organizational change.51

Customer-requested services begin when the customer calls the customer service center. At the call center, the Customer Service Professional (CSP) records a description of the problem and codes it so that the proper zone and district ASB office dispatcher is notified through the Gas Service Information Management System (GSIMS). The priority of the call is determined according to specified rules based on the customer’s description of the problem. The dispatcher assigns each service request to a field technician. The most urgent priority is safety-related calls. For example, a call stating that the customer smells gas is assigned the highest priority. In 99.7 percent of the cases, the technician arrives at the premises within one hour.52 Other calls are assigned a lower priority as described in Exhibit III-6.53 If a high priority call is received and there are no technicians available, the dispatcher will page a technician who is engaged in a non-safety-related repair and tell him to leave that job and go to the safety-related call location.




_________________________________________________________________________________


Exhibit III-6 Call Type and Priority

Type of Call Example Priority/

Response Time Gas Leaks/Emergencies Gas leaks, Carbon Monoxide

that wont shut off Within 1 hour*

Urgent Carbon Monoxide when appliances are operating

Either 2 or 4 hours

Commercial Inoperative appliances needed for business

4 hours

No heat/AC Time dependent Upon ARVL**

No hot water Time dependent Upon ARVL

Other Same Day Orders with special circumstances: Injury/ damage, BPU complaint, shut off error

Same day (within 23.59 hours)

Other Appliance repairs Future dated work Active and inactive orders As required Inspections/permits Future dated work

Source: IR-259 * Times are from receipt of initial call to “Make Safe”. ** ARVL refers to the longest anticipated wait time for service based on workload.

_________________________________________________________________________________

Field technicians record their time electronically by entering into the mobile data terminal in their truck the start and stop time for each activity with the corresponding activity code. Most days begin with travel to the first job. Once at the job site, the technician diagnoses the problem. Travel and diagnosis time are considered utility-related so the customer is not charged.

• If the problem is safety related, the technician repairs the unit. When the work is completed, the technician enters the end time and codes that describe the nature of the problem and the correction. (As determined in BPU Docket Nos. GR91101574J and ER91111698J.)

• If the problem is not safety related and the customer is on a contract, the technician records his start time with a customer repair code, repairs the appliance and then records the time of completion. (As determined in BPU Docket Nos. GR91101574J and ER91111698J.)

• If the problem is not safety related and the customer is not covered by a contract, the technician provides an estimate of the cost using the ASB Pricing Schedule. The fixed price quoted for the repair includes all labor and parts. If the customer authorizes the repair, the technician records his start time with a customer repair code, completes the repair and records the time of completion.




The mobile data terminal sends the information on each job to GSIMS. If the customer is under APSO, the system later adds the repair cost to the customer’s bill. Downtime for technicians is coded to a specific activity code.


According to Section 1.1.a of the Standards, ASB, a competitive business segment of PSE&G serving retail customers in New Jersey, must comply with Section 6 of the Standards. Sections 3, 4, and 5 do not apply because ASB is within PSE&G and is not a competitive business segment of PSEG, the holding company. Sections 1, 2, 7, 8, and 9 apply to all competitive business segments covered by the Standards.

Section 6 of the Standards sets forth standards of conduct applicable to utilities and their competitive business segments. Our audit focused on each aspect of Standard 6, including

• Eligible products and services • Standards for approval • Conditions for offering competitive products and services • Accounting standards, books and records, and reporting • Treatment of revenues • Changes in price and service offerings

III-F15 The competitive products and services offered by ASB are allowed under the terms of Standard 6.1.b.4.

The competitive appliance repair services offered by PSE&G were being offered to customers prior to January 1, 1993.

III-F16 Employees of ASB track and report their time in accordance with section 6.3.a.

All employees of ASB are involved in the provision of competitive as well as non-competitive services. Therefore, the employees must track and report their time by each activity performed. ASB field technicians record their start and stop time with an activity code for each different activity they perform including travel and downtime.54 These times are electronically transmitted to the GSIMS computer that calculates time duration and posts these times daily after approval of the report by the technician’s supervisor.

Employees who are not involved directly in providing appliance services report their time to indirect codes. Indirect time of employees in ASB is accumulated as zone indirect or ASB support and then allocated to the categories of service: APSO, Contract and Tariff (Revenue requirement).




III-F17 The record keeping and accounting used by ASB complies with Section 6.3.b of the Standards.

Section 2 of the Standards defines fully allocated costs as “…an allocation of the direct, indirect and other economic costs of all equipment, vehicles, labor, related fringe benefits and overheads, real estate, furniture, fixtures and other personalty [sic] and administration utilized, and other assets utilized and costs incurred, directly or indirectly in providing competitive services.”

The hourly rate used to compute minimum floor rates for ASB’s competitive, customer-charged services is determined using the ASB allocation spreadsheet.55 This spreadsheet includes all costs incurred by ASB and all costs allocated to ASB by other business segments.56 No costs are allocated from ASB to any other business segment. Therefore, the spreadsheet represents the “fully allocated” cost of the ASB business. It was not possible to make an independent confirmation of whether the worksheet contained all costs allocated to ASB and whether these costs represented all that should have been allocated to ASB due to PSE&G’s inability to provide requested SAP reports.57

Capital costs are included in the ASB spreadsheet in two ways. First, depreciation for capital assets assigned to ASB is included. However, no return on these assets is included. Second, real facilities are charged to ASB, as to all segments of PSE&G, as an allocation of total corporate facility charges based on space occupied.

III-F18 PSE&G is in compliance with Section 6.3.c. Provision of competitive appliance repair services do not adversely impact its ability to provide safe, adequate, and proper electric and gas public utility service

ASB has procedures in place to ensure its competitive products and/or services activities do not adversely impact its ability to provide safe, adequate and proper electric and gas public utility service. Interviews indicate that safety-related calls are always given highest priority including stopping customer repair work to perform utility safety related work.58 Emergency calls receive the highest priority at the customer call centers. The order of priority for the different types of customer calls is shown in Exhibit III-1 above.

III-F19 ASB’s offering of competitive products and services in a non-discriminatory manner to all customers complies with Section 6.3.d of the Standards.

The audit team observed a number of customer calls to the Customer Inquiry Center, reviewed other recorded calls and found no instances of violation of Standard 6.3.d. In addition, Slide 14 of the training package entitled Affiliate Standards: Interpreting the Rules June 200059 informs PSE&G employees that they must not discriminate in providing its competitive services.

III-F20 PSE&G call center employees provide business leads to ASB, which does not comply with Section 6.3.e.1 of the Standards.

ASB provides training to its employees regarding prohibitions in the Standards against solicitation and providing business leads. The ASB Service Instruction Manual60 supports




the Standard when it informs ASB employees that the “…associate must inform the customer that [competitive services] are also available from contractors other than PSE&G.” The manual further cautions “…associates shall not recommend specific contractors. The associate (i.e. ASB employee in contact with a customer) should refer the customer to the Yellow Pages of the telephone directory.”

However, the manual is ambiguous about the prohibition on solicitation when it states “Associates should be certain that our customers’ repair needs cannot be provided by the Appliance Service Business before referring them to an outside contractor.” This ambiguity is continued when the manual informs employees that “Associates may volunteer information about competitive services provided by ASB…”

When calls for appliance repair are received at the customer inquiry center, they are coded and passed on to ASB’s GSIMS computer system. If the repair is not safety- or reliability-related, then the call center can be passing business leads to ASB in violation of Section 6.3.e.1 of the Standards. In many cases, the referral does not become a lead until a technician visits the customer and determines that there is no safety- or reliability-related concern. If the technician does not inform the customer that there are other firms that could perform the repair as advised in the ASB training manual, then the technician is again an employee performing a non-competitive function passing a lead on to an employee, himself, to perform a competitive service in violation of Section 6.3.e.1. At this time, field technicians do not inform customers that they may have the work done by another firm unless the customer raises questions about the service or the cost.61

Customer Service Professionals (CSP) in the call center do not inform callers that there are alternative companies that offer appliance repair services. The training provided to call center employees informs them that the Appliance Service Business is subject to the “Fair Competition Standards”. It also states that call center employees “…shall not: Solicit competitive service business on behalf of the utility.”62

It is virtually impossible to maintain strict compliance with this section of the Standard because in some cases, the business lead is being passed from a person to the same person. In other cases, clarifying communication with customers may provide adequate compliance.

III-R5 Training materials should be revised to remove ambiguity regarding solicitation. (Refer to Finding III-F20.)

The training materials should state unambiguously that employees are prohibited against soliciting and providing business leads. ASB employees must inform the customer that the competitive services are also available from contractors other than PSE&G.

III-R6 Customer inquiry center employees should inform customers during the initial call that if the work needed is not safety-related then other contractors may be available to perform the needed work. (Refer to Finding III-F20.)

If the customer inquiry center employee receives a call for a repair that is not safety- or reliability-related, then the customer must be informed at that time that the service could be provided by contractors other than PSE&G.




III-R7 PSE&G should seek clarification of Section 6.3.e.1 of the Standards from the Board. (Refer to Finding III-F20.)

Due to the unusual but long-standing relationship between PSE&G and ASB, it is virtually impossible to maintain strict compliance with Section 6.3.e.1. The Act and the Standards are intended to allow PSE&G to offer competitive appliance services in association with its normal utility-related appliance and safety work. PSE&G should seek clarification from the BPU whether strict compliance is required given the legacy of the relationship between PSE&G and ASB.

III-F21 PSE&G is in compliance with Section 6.3.e.2 of the Standards. PSE&G does not share marketing reports or other non-public marketing information with employees of ASB.

The audit found no instances of violation of this standard. ASB provides training to its employees regarding prohibitions in the Standards against disclosure of proprietary and non-publicly available reports. In the training materials Affiliate Standards: Interpreting the Rules June 2000,63 slide 9 informs PSE&G employees that they “…cannot share with … any other affected affiliate, customer specific data without written customer consent.” This admonition is repeated on Slide 15.

III-F22 PSE&G is in compliance with Sections 6.3.e.3-6 of the Standards.

The team found no instances of violation of these standards. ASB provides training to its employees regarding prohibitions in the Standards against providing preferential treatment in the training materials. Affiliate Standards: Interpreting the Rules June 2000 Slide 15 informs PSE&G employees that they are prohibited to “Represent or provide preferential treatment as a consequence of a customer obtaining competitive services.”

No instances of such discriminatory processing were discovered. No instances of such discriminatory tying of competitive and non-competitive products and services were observed.

III-F23 PSE&G is not in compliance with Section 6.3.e.7 of the Standards.

As noted in the discussion above regarding Section 6.3.e.1, the CSPs in the Customer Inquiry Center direct or assign calls from current utility customers to ASB in a manner that is not available to other competitors.

III-F24 PSE&G maintains separate sub-ledgers for ASB and is in compliance with Section 6.4 of the Standards.

PSE&G is required by the Standards to provide separate cost data. A summary of this information is provided in Exhibit III-7.




III-F25 PSE&G treats the revenues received for competitive services offered by ASB in accordance with Section 6.5.

ASB collects direct costs as the fully loaded labor charge for time spent on premise and the costs of parts installed. Indirect costs are those that are not uniquely related to a specific activity performed by ASB for a customer. For example, downtime expenses or capital expenses such as a service truck. Indirect costs also are those allocated to ASB from other business segments (e.g. human resources). Indirect costs are allocated to specific services based on allocation formulas. The floor rate for labor is established by assigning both direct and indirect costs to ASB labor hours used to perform competitive and non competitive work.





Exhibit III-7 Summary of ASB Information Required by Section 6.4.a (12 months ending June 30, 2000)

Compliance Plan Item Description

Automatic water heater replacement

Appliance Service Part

Orders

Residential and Small Commercial

Replacement Parts Service Contracts Data Source

Section 6(4)(a)(1) Total Customers 2,213 130,172 499,870 CIS/DSS(a)(2) Total Revenues Received By The Utility 1,091,043 12,885,939 38,070,724 SAP

(a)(3) Dedicated AssetsNOT

APPLICABLENOT

APPLICABLE NOT APPLICABLE

(a)(4) Carrying Costs on Dedicated AssetsNOT

APPLICABLENOT


(a)(5) Portion of Shared Assets Allocated To Competitive Services** 57,634 1,048,639 2,775,433 CAARS(a)(6) Dedicated Expenses Incurred in the Start-Up, Promotion, and Provision of Service 912,766 6,868,892 11,606,743 SAP(a)(7) Fully Allocated Shared Expenses 39,475 8,880,494 23,644,962 SAP(a)(8) Total Margins - Total Revenues Less Total Expenses 138,802 -2,863,448 2,819,019 SAP(a)(9) Net Revenues - Total Revenues less Dedicated Expenses 178,277 6,017,047 26,463,980 SAP

(a)(10) Any Such Items as the Board May DetermineNOT

APPLICABLENOT


**Allocation based on premise visits

PSE&G - Affiliate Standards Compliance PlanSummary of Competitive Product / Service Accounting Standards, Books, and Records (Sect. 6(4)(a1) through (a10))

Appliance Service BusinessFor One Year Ending 06/30/00




D. PSEG:SUNBURST CUSTOMER SOLUTIONS AND OTHER COMPETITIVE SERVICES

Sunburst Customer Solutions (Sunburst) is a competitive business segment within PSE&G's Customer Operations organization. Sunburst provides meter reading, billing and payment processing services to municipalities and utilities operating within PSE&G's service territory.

PSE&G directly markets Sunburst services claiming it can team up with PSE&G's “bundled” customer service package, taking advantage of nearly 100 years of expertise in optimizing meter reading, billing and payment processing systems. More specifically, Sunburst’s current marketing materials provide the following explanation of the services and advantages offered by Sunburst:64

• Enhance the municipality's level of customer service • Provide 24-hour inbound and outbound telephone services • Provide telemarketing • Perform information processing • Reduce operating costs • Minimize costly capital expenditures

OVERVIEW OF SUNBURST AND OTHER SERVICES

PSE&G has offered Sunburst services since July 1995 and has secured new clients as recently as April 1999.65 Sunburst-related work activities performed by PSE&G personnel are collected and charged to SAP Standing Orders for client billing. The activities represented by SAP Standing Orders for the 2000 calendar year include the following:66

• Read meters and support • Process payments - mail • Process payments -walk in • Provide post-sale services • Deploy and deliver IT services • Develop, deliver and maintain Sunburst billing • Develop, deliver and maintain customer billing • Generate and qualify sale leads • Monitor customer expectations • Develop new products and services

Water Meter Reading

PSE&G personnel performing normal gas and electric meter reading duties for PSE&G customers also perform Sunburst business field activities. As an extension of PSE&G's activities, Sunburst offers clients access to:

• Use of advanced hand-held microprocessors




• Electronic loading of information such as date read and time • Special meter conditions such as damaged meters or meter tampering • Field condition information that helps answer customer inquiries

Billing

Sunburst utilizes PSE&G’s billing, information, and customer call center resources to offer clients:

• Utility billing • Information provided on-line to customer service representatives • Customer inquiry services (call answering) • Call handling

Payment Processing

PSE&G's payment processing functions support Sunburst activities by providing:

• Central payment processing service • Handling incoming mail • Posting payments to accounts (same day as receipt) • Real-time data updates (to the client's CIS) • Bank deposits (same day as receipt)

Collection Services

Sunburst offers to manage client's overdue accounts, customizing the effort to their individual needs. For example, Sunburst offers to contact the client's customers in writing or by telephone to set up payment terms or resolve their related matters.

Sunburst’s clients are shown in Exhibit III-7 below. Sunburst revenues for the first two quarters of 2000 were $250,073.67 Approximately 90 percent ($224,767) of these revenues were for meter reading services.




_________________________________________________________________________________


Exhibit III-8 List of Sunburst Clients and Services Provided

Customer Meter

Reading Billing Walk-in

Payment Central

Payment Start Date

East Brunswick X 01/96 UWR - Jersey City X X 07/96 Highland Park X 02/96 UWR - Hoboken X 07/95 Franklin Township – Franklin Park, Franklin Twp., Somerset, Kingston, East Millstone, Middlebush, Griggstown

X 12/96

PVWC - Clifton, Lodi, Paterson, West Paterson, Prospect Park, Passaic

X 01/97

Pequannock & Pompton Plains X 04/97 Burlington Township X 06/97 Elmwood Park X X X 08/97 Glen Ridge X X X 12/97 Florence & Roebling X 04/99 Source: IR-286

_________________________________________________________________________________


III-F26 PSE&G has not received Board approval for the competitive services offered by Sunburst and for the other competitive services offered by PSE&G as required by Section 6.1.a of the Standards.

Sunburst is a competitive business segment of PSE&G. Section 6.1.a requires that all competitive services offered by a competitive business segment of PSE&G require review and approval from the Board unless offered prior to January 1, 1993. While PSE&G has submitted information to the BPU regarding Sunburst, the Company has not received approval from the Board regarding Sunburst services. PSE&G states:68

By Order dated December 2, 1996 in Docket No. EC96070517 (attached) [no attachments were provided with IR-284], the BPU directed each electric and gas utility to submit a list of all tariffed or non-tariffed “competitive” services then being




provided to customers. For any such services being offered without prior Board approval, each utility was directed to demonstrate that the rates charged for such services are reasonable, non-discriminatory and that there is no cross-subsidization by non-competitive services. The Order went on to state, “Upon review of the information received the Board will consider further appropriate action.” On January 2, 1997, PSE&G filed the second aspect of its response to that Order (attached) [no attachments were provided with IR-284] and covered among other “competitive” services the “Sunburst Customer Solutions” Customer Service offering of water meter reading, billing and payment processing services to municipal water utilities and water companies. Since no previous Board approval had been obtained, the filing provided the information demonstrating that the Board took no action on the Sunburst Customer Solutions offerings which have continued to date.

Section C.48:3-51 of the Electric Discount and Energy Competition Act (the Act) defines competitive service as any service offered by an electric public utility or a gas public utility that the Board determines to be competitive pursuant to Section 8 or Section 10 of the Act or that is not regulated by the Board. Additionally, the Act defines a related competitive business segment of an electric or gas public utility to be any business venture of an electric or gas public utility including, but not limited to, functionally separate business units, joint ventures, and partnerships, that offers to provide or provides competitive services. The Act does not make a distinction between retail and wholesale competitive services in its definition of terms.

In section C.48:3-55 item 7.a, the Act states that an electric public utility or a related competitive business segment of an electric public utility shall not offer any competitive service to retail customers within New Jersey without the prior express written approval of the Board. In item 10.d, the Act addresses gas public utilities similarly.

Section 1.1.a.ii of the Standards states that Section 6 sets forth standards of conduct applicable to electric and gas public utilities and the related competitive business segments of each electric public utility and gas public utility, as well as the transactions, interactions and relations between an electric or gas public utility and a related competitive business segment of an electric or gas public utility. There is no distinction made between retail and wholesale offerings.

PSE&G contends that since Sunburst is not providing services on a retail basis, is not associated with electric generation, and has not been the subject of a BPU notice or hearing defining its services as a competitive offering, Section 6.3.e of the Affiliate Standards is not applicable to marketing or solicitation prohibitions.69

It is important to note the fundamental relationship of compliance with Section 6.1 and the remainder of Section 6. If PSE&G has not obtained approval from the Board for competitive business segments of the utility as called for in Section 6.1.a, it is unreasonable to expect PSE&G to have performed the reporting and financial accounting activities in compliance with other aspects of Section 6.




PSE&G provides additional competitive services that are not explicitly addressed in its Compliance Plan. These include:

• Live-line maintenance training for other utilities. • Mobile backup emergency equipment loans for other utilities. • Gas acquisition for other gas suppliers. • Design, construction, and maintenance of other utilities’ infrastructure. • Substation maintenance for other parties’ substations. • Pole and duct bank occupancy rentals. • Fiber optic installation and attachment lenses. • Consulting and planning services regarding interchange for the PJM. • Payment processing services for third party suppliers. • Leasing of duct, pole, or tower space for third parties.

Presumably, PSE&G believes these services are exempt from the Standards (like Sunburst) since they are offered to utilities and industrial customers which PSE&G believes to be wholesale customers.70 PSE&G has not filed any requests for limited exemption to the Standards and related reporting requirements.71

III-R8 PSE&G should obtain Board approval for the competitive services offered by Sunburst and the other competitive services offered by PSE&G. (Refer to Finding III-F26.)

To ensure that it is in compliance with the Affiliate Standards, PSE&G should seek approval from the BPU to provide the competitive services offered by Sunburst. In lieu of BPU approval, PSE&G should submit a letter clarifying its position with the BPU on this matter.

III-F27 Representation of Sunburst at PSE&G's booth at the League of Municipalities Convention in Atlantic City is not in compliance with Section 6.3.e of the Standards.

Section 6.3.e of the Standards prohibits utility employees from solicitation and sharing market analysis, among other restrictions. Based upon Sunburst marketing materials described above, PSE&G offers to provide telemarketing services.72

Based upon Service Level Understandings, Marketing as a functional unit of PSEG Services Corporation provides a number of resources and services to organizational units of PSE&G such as Appliance Service Business (a retail competitive service) and Customer Operations (PSE&G's Customer Inquiry Center, personnel who are employees of the utility) that, for example, include sales training for Customer Services and Appliance Service personnel, enhancing products and services that complement PSE&G’s core energy distribution business, providing data, information and resources. The expectations of this effort also include developing detailed plans to reacquire profitable market share outside the PSE&G franchise area that will complement the PSEG Retail Strategy.73 This activity constitutes solicitation and sharing market information.




III-R9 Sunburst marketing activities should be separated from those of PSE&G. (Refer to Finding III-F27.)




IV. CORPORATE ACCOUNTING ISSUES

This chapter reviews many Corporate Accounting issues our auditors were required to review as part of this assignment. In particular it addresses the formation and operations of PSEG Services Corporation (“Service Company”). The Services Company is a recently formed direct subsidiary of Public Service Enterprise Group Incorporated (“Enterprise”). The Service Company was formed to provide various corporate support, managerial and administrative support services to PSE&G and the other subsidiaries of Enterprise (“Operating Companies”).

The New Jersey Electric Discount and Energy Competition Act ("Act"), signed into law on February 9, 1999, specifically authorized the sharing of corporate support personnel and assets between utilities and their unregulated affiliates, with the direction that such shared corporate support services could not result in cross-subsidization. The Affiliate Standards issued by the Board of Public Utilities (“BPU”) on March 15, 2000, further clarified its interpretation of “corporate support services” and provided that it would be inappropriate to share certain corporate support services, such as marketing, with affiliates offering competitive services to retail customers in New Jersey. The BPU’s Standards provide that other corporate support services may be shared with all affiliates, provided that there is proper cost allocation and provided that the sharing of these services do not serve as a conduit to circumvent the restrictions contained in the Standards.

A. BACKGROUND

On April 20, 2000 PSE&G filed a petition with BPU to centralize corporate support services into PSEG Services Corporation, a wholly-owned, direct subsidiary of Public Service Enterprise Group Incorporated.74 In this filing PSE&G outlined the benefits of forming the Service Company as follows:

• The centralization of corporate support services among PSE&G and its affiliates will allow the operating units of PSE&G to focus their skills and attention on operational and service matters, while ensuring that the corporate support resources necessary to support those efforts are likewise focused on providing quality support services.

• Centralization utilizes existing employees who have historically provided these corporate support services to the PSEG companies.

• Centralization facilitates enhanced compliance with the Act, Affiliate Standards and other federal and state regulations, by allowing Enterprise to more readily institute and monitor corporate-wide policies and procedures to ensure compliance.

Docket No. AA00040232 56



• Centralization allows regulators, such as the BPU, to more easily audit the costs allocated to the regulated utility for support services, thus ensuring that PSE&G is not improperly cross-subsidizing the activities of its affiliates.

In the April 20, 2000 filing, PSE&G also outlined various elements of the plans for organizing and implementing the formation of the Service Company including:

• A sample Service Agreement to govern the relationship between the Service Company and each Operating Company receiving services from the Service Company.

• A summary description of how cost will be accumulated and allocated to the Operating Companies.

• Plans for transferring assets and assigning contracts from PSE&G to the Service Company. Capitalization of the Service Company, i.e., plans for the Operating Companies to contribute to a working capital fund held by the Service Company and procedures for charging or crediting the Operating Companies for interest on the excess or deficit in their share of the working capital fund.

• Plans for implementing control mechanisms to ensure there is no improper cross-subsidization or inappropriate flow of information through shared corporate support services.

The following pages include our report on the results of our review of the organization and operations of the Service Company for the six-month period ending June 30, 2000. The report is organized into a discussion of our findings and recommendations in the following areas:

• Service Company organization, components, functions, and services. • Users of Service Company services and related Service Level Understandings. • Service Company cost accounting procedures (SAP), and cost allocation

methodology (Settlement Rules). • Effectiveness of Service Company procedures to prevent cross-subsidization. • Compliance of Service Company operations with the Act and the Affiliate

Standards.

B. SERVICE COMPANY ORGANIZATION AND SERVICES

The organization chart provided in Exhibit IV-1 illustrates a high level look at the organization. Since the Service Company has not yet been formally approved by the NJBPU, the officers in this organization are also currently shown in the PSE&G organization.





Exhibit IV-1 Service Company Organization

PSEG Services Corporation

COB, President & CEO

Executive Vice President -Finance

Senior Vice President– Finance and Chief

Financial Officer

VP – InformationTechnology

VP andTreasurer

VP – CorporatePlanning

VP andController

VP – EnterpriseCorporate

Development

Senior Vice President andGeneral Counsel

CorporateSecretary

VP – HumanResources

VP –Environment,

Health & Safety

VP - Law

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SAP ENTERPRISE RESOURCE PLANNING SYSTEM

In order to understand much of what happens with regard to accounting, cost allocation or managerial reporting at PSEG, one must understand the purpose and function of the SAP system. The following is a description of SAP and its implementation at PSE&G. The following is quoted directly from a manual and is not necessarily the view of the auditors.

SAP stands for Systems, Applications, and Products in Data Processing. SAP R/3 is the name of an advanced software product produced by a German company called SAP AG. SAP AG was founded in 1972 by five former IBM employees. Today SAP is the 4th largest software maker and its R/3 system is installed at more than 20,000 sites worldwide.

Many North American energy services companies have implemented SAP including: GPU, Reliant Energy (Houston Industries), Connectiv (DelmarvaPower/Atlantic Energy), Oklahoma Gas and Electric, Wisconsin Electric Power, Virginia Power, Trans Alta, Ontario Hydro, Westcoast Energy, and more.

SAP is what is called an Enterprise Resource Planning (ERP) system, also referred to as a "backbone" system. It is embedded with standard business practices and provides most of the basic back-office business functions: accounting, HR, procurement and materials management, etc. It is a world class system for processing transactional information, such as new hire, change of address, vendor payments, and material receipts.

SAP was first implemented at PSEG in January 1998 for the Fossil Generation organization. In January 1999, SAP replaced over 130 separate "legacy" systems (including human resources system, general ledger, and materials management systems).

It is a "real time" system (meaning once the information is entered and saved, it is available to all). It is made up of modules that are "integrated," meaning information in one module is automatically used by other modules, eg. receipt of an inventoried (or "valued") material is not only listed in the materials management (MM) module as a part in the storeroom, it is listed in accounting (the Fl module) in the inventory balance.

HOW SAP IS USED AT PSEG

In the mid-1990's it became clear that PSEG's aging legacy computer systems needed to be replaced. PSEG decided to implement an integrated system to reduce the time spent re-entering and verifying data in the many independent systems that had grown over the prior decade.

Prior to SAP, each organization tended to develop or purchase "best of breed" packages that optimized their own functional work. During the 1990's there was an effort to look at work corporately, from a process point of view. It was agreed that for the good of Enterprise, an integrated system would allow efficiencies that could not be obtained by stand-alone software packages. Upon further analysis, it became clear that to obtain the most business benefits, integrated system should focus on improving the work management system for the Lines of Business. This would allow a better understanding of costs, organize work more efficiently and ultimately bring bottom line benefits and greater customer satisfaction.

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The focus of processes (eg. HR, Finance, and Procurement and Materials Management) should be to efficiently and effectively support the LOB's.

SAP was purchased and configured to PSEG's needs. It is used for many things including: payroll, personnel data (position, salary, address, etc.), staffing, training records, cost planning and profit center reporting, recording and managing assets, recording and managing inventory, recording costs associated with doing work (through the use of Orders, Projects, or Work Breakdown Structure (WBS) elements), as well as providing a work management system for work done on Nuclear generation facilities, Fossil generation facilities, Transmission lines, and some Distribution facilities. Distribution will begin using SAP for Fleet Maintenance and gas and electric Inside Plant (which includes gas meter and regulating stations and electric sub and switching stations) in January 2000.

SAP is not used for utility customer information or billing, or for employee benefits. It does not replace the Gas Service Information Management System (GSIMS. GSIMS is a radio frequency dispatch system. There is an interface between GSIMS and SAP that transfers payroll and labor information, and also material and financial information. There is also an interface between SAP and the Integrated Work Management System (IWMS) used by Distribution Electric and Gas Outside Plant.

There is much more functionality in the SAP system that PSE&G can still implement to obtain business benefit, and the company will be looking for opportunities to do so. In fact, the SAP Center of Excellence (COE) was created to see that Enterprise maximizes the full value of SAP. In addition to identifying opportunities to use existing or new functionality, the SAP CoE is responsible for all system configuration and software upgrades.

AP R/3 is an integrated business system designed to help organizations run such business processes as managing inventory, creating requisitions, processing sales orders, paying invoices, and so on. SAP R/3 covers a wide spectrum of business processes.

In the past, computer systems were specified and brought into organizations by each individual department: Human Resources chose its own system, Materials Management chose its system, Accounting shows its system, and so on.

Although each of those systems may have been the best choice for a particular department, keeping them working together was very expensive. Moreover, this kind of complex patchwork system inhibited change in organizations - and we all know what happens to organizations that can’t change quickly.

SAP R/3 provides a single integrated system to handle the needs of all departments in a corporation. This integration is the single biggest advantage to moving to SAP R/3. Also, because SAP R/3 is a client-server-based system, its versatility is further enhanced.

ANALYSIS OF SAP

As competition increases in the deregulated environment, PSEG will continue to expand its products and services. This expansion of products and services increases the allocation of costs across business areas and among entities within the PSEG corporate structure. The

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Act and Affiliate Standards prohibit cross-subsidization among regulated and non-regulated activities, subsidiaries, or affiliated companies.

The SAP Cost Accounting Manual75 is the official PSEG Corporate Guide documenting the cost allocation methodologies and related accounting policies and procedures. The Manual contains guidelines for allocating costs of products and services between PSEG’s regulated and non-regulated entities. The Manual addresses the following topics:

• SAP System Hierarchy and PSEG’s Financial Structure • Activity Type Policy • Vehicle Activity Type Policies • Space Allocation • Affiliate Transfer Pricing Guidelines • Third Party Cost Guidelines • Surcharging • Time Reporting in CATS (Cross Application Time Sheet System)

PSEG recognizes the SAP Cost Accounting Manual is a “work in process”. The Manual will continue to be revised and modified as company philosophies, activities and business units continue to evolve. The discussion which follows presents the findings and recommendations which resulted from our review of the SAP Cost Accounting System and cost allocations as they relate to Service Company operations.

SAP hierarchy & PSEG financial structure

In implementing SAP, PSEG has set up the following hierarchy. Through this financial reporting structure PSEG accounts for all business transactions, performs internal and external reporting and shares information. The Controlling module in SAP represents the cost accounting functionality within SAP and includes cost and revenue element accounting, cost center accounting, order management, product cost accounting, and profit center accounting. The Finance module represents all the financial accounting and regulatory reporting components. The Finance module hierarchy consists of Company, Company Codes and Business areas. Our review of SAP as it has been implemented in the Service Company, focused on the Controlling module.

Controlling Area

The controlling area is an organizational unit identifying the organization’s managerial accounting operations. The controlling area in SAP is PSEG. Consolidated financial statements are available at this level. The controlling area contains the cost center and profit center hierarchies.

Company Codes

Company codes are used to identify separate accounting entities within an organization. A company code identifies a separate accounting entity for PSEG which will have its own balance sheet and profit and loss statement. Exhibit IV-2 presents the PSEG Company Codes used in the SAP accounting system.76

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_________________________________________________________________________________


Exhibit IV-2 Major Company Codes

• Public Service Enterprise Group Inc PS10 • PSEG Energy Holdings PSEH • PSEG Power LLC PO10 • PSEG Fossil LLC FG20 • PSEG Power New York, Inc. FG30 • PSE&G Management & Services EG10 • PSE&G Fossil Generation FG10 • PSE&G Nuclear Generation NG10 • PSE&G Transmission TC10 • PSE&G Delivery DC10 • PSE&G Energy Resources & Trade TR10 • PSEG Services Corporation IS10

_________________________________________________________________________________

Business Areas

The company codes listed above contain several business areas. A business area is a component within a company code representing a separate area of operations or managerial responsibility. A business area is an internal organization. An internal balance sheet and profit and loss statement can be prepared for a business area, however, these statements do not fulfill all requirements for external compliance reporting.

Profit Centers

Profit center accounting enables profit center managers to determine internal profits or losses for specific profit centers or groups of profit centers. A profit center is a segment of a business organization that is responsible for producing profits on its own. Cost centers and other objects are assigned to profit centers. All profit centers are cost centers, however, not all cost centers are profit centers. A separate operating profit and loss statement can be produced for a profit center. Payables, receivables, fixed assets, and inventory balances can also be derived by profit center. This level of reporting is the reason for designating profit centers.

Cost Centers

Cost center accounting is used to determine and report where costs occur. Cost centers are units of the organization where costs are accumulated. Cost centers generally represent a department or a function. Cost centers are used to collect information on costs and provide a means for analyzing costs. Cost centers also represent areas of managerial responsibility

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and can be used to represent one view for management reporting. Every cost center is assigned to a single profit center and a company code.

IV-F28 The SAP Finance Module (FI) processes all the financial transactions of the PSEG Affiliates and produces the financial and regulatory reports for each entity.

Separate corporate entities provide the framework for separation of financial reporting; financial accounting; contracts between entities; identification of “ownership” of assets, employees, products, and services; and placement of responsibility for implementing policies and procedures to prevent cross-subsidization

Separate books and records provide the framework for accumulating costs related to a specific entity’s products, and services; developing fully allocated cost pricing methods and procedures applicable to a particular entity’s products and services; financial and regulatory reporting; and allows more focused audits of a particular entity’s transactions

The Finance Module of SAP (FI Module) provides the financial accounting and regulatory reporting system for all PSEG Affiliates. The Controlling Area within the SAP system is an organizational unit identifying the organization’s managerial accounting operations. PSEG is the Controlling Area in SAP. Separate and consolidated financial statements are available at this level. Company Codes are used to identify separate accounting entities. A company code identifies a separate accounting entity for PSEG , which will have its own balance sheet and profit and loss statement. Major company codes used by PSEG are included in Exhibit IV-2

The Controlling Module of SAP (CO Module) represents the cost accounting function within SAP and includes cost and revenue element accounting, cost center accounting, order management, product cost accounting and profit center accounting for all PSEG Affiliates. The SAP cost accounting system, cost allocation mechanisms, and transfer pricing mechanisms are discussed in detail in Section D of Chapter IV of this report.

COST ALLOCATION AND TRANSFER MECHANISMS

This section discusses how PSEG accumulates, allocates and transfers (charges) direct and indirect costs, and corporate governance costs from internal service providers to operating companies. The definitions and descriptions included here are taken directly from the PSEG Cost Accounting Manual77

Direct Costs

Direct costs are expenses that are directly attributable to delivering a product or service. Examples of direct costs are: Hope Creek property insurance and ASB direct marketing campaign – postage.

Internal service provider employees charge orders with their time via their Activity Type. Orders charged may reside either in the Operating Company requesting the work or in the cost center performing the work. At the end of each month, the costs accumulated on the

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order are settled (charged/billed/allocated) to the Operating Companies using an allocation basis that identifies the Operating Companies benefiting from the services provided.

These costs are billed to the recipient of the product or service in one of the following manners:

• As a direct charge to an order created and owned by the recipient Operating Company.

• As an indirect assessment as in the case with products and services provided by Information Technology and Accounting Services.

• As an internal settlement (allocation). Orders settled (allocated) to the Operating Companies either at 100% to one Operating Company or with a settlement rule (allocation) to various Operating Companies.

Indirect Costs

Indirect costs are expenses that are not directly attributable to delivering products or services, but support the delivery of products and services. Examples of indirect costs are such items as space costs and attendance at staff meetings.

Internal service provider employees charge their time to orders within their cost center using their activity type code. At the end of the month these orders are settled (charged) to the cost center’s assessment center. At month end, the assessment center is allocated to the Operating Companies based on the amount of direct work and corporate governance provided by the internal service provider.

These costs are then transferred (billed) to the recipient of the product or service in one of the following manners:

• As an assessment charge from the internal service provider’s assessment center to the recipient Operating Companies based on the amount of direct work received.

• As an internal settlement (allocation) as in the case of space cost.

Corporate Governance

Corporate governance costs are expenses associated with providing the functions necessary for corporate existence and for supporting the ability of PSEG management to provide governance and meet fiduciary responsibilities. An example of a cost that is considered to be corporate governance is an employee in the Corporate Secretary’s office participating in planning the Annual Shareholder Meeting.

Internal service provider employees charge their time to orders. At the end of the month these orders are settled (charged) to the Corporate Governance Assessment Center residing in the Service Company. At the end of the month the Corporate Governance Assessment Center is allocated and billed to the Operating Companies based on the type of governance work performed.

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Cost Allocations

Cost allocation factors (methods) are used by PSEG to allocate all costs which cannot be directly charged. Exhibit V-3 presents the cost currently being used by PSEG.78 This list is a general list of frequently used allocators. A more detailed and more current list of all allocators used by the Service Company Cost Centers is included in Appendix Section A.

_________________________________________________________________________________


Exhibit IV-3 Summary of Cost Allocation Factors

Allocation Factor Total Holdings Power Utility

Common Equity 100.0% 36.6% 19.1% 44.3%Modified Massachusetts Formula (MMF) 100.0% 8.1% 25.1% 66.8%Utility Modified Massachusetts Formula (UMMF) 100.0% 0.0% 0.0% 100.0%Number of User Ids 100.0% 13.2% 47.4% 39.4%New Jersey Assets 100.0% 0.6% 12.5% 86.8%US Assets 100.0% 1.0% 15.6% 83.4%Average Claim Dollars 100.0% 0.0% 0.6% 99.4%Space Allocation 100.0% 10.2% 23.2% 66.6%Headcount 100.0% 17.2% 28.1% 54.7%Bargining Unit Headcount 100.0% 15.6% 21.1% 63.3%MAST Headcount 100.0% 20.7% 44.2% 35.1%Per Day Vehicle Rental Fee 100.0% 0.0% 44.0% 56.0%Number of Paychecks 100.0% 4.0% 29.0% 67.0%Number of Invoices Processed 100.0% 0.0% 52.1% 47.9%Number of Telephone Etensions and Usage 100.0% 5.4% 22.0% 72.6%Number of Desktops 100.0% 0.0% 19.3% 80.7%Number of Attendees for Training and Development 100.0% 3.9% 31.8% 64.3%

_________________________________________________________________________________

SERVICE COMPANY COMPONENTS/FUNCTIONS

IV-F29 The identification of Service Company components, functions and services provided to PSE&G and affiliates was very difficult.

One of the first objectives of the audit was to clearly quantify the services provided by and to PSE&G, the Service Company, and all other affiliates. Since almost 80% of all transfers are from the Service Company to various affiliates, this was our first objective. In the analysis of Service Company components, functions and services provided to affiliates, the following documents were reviewed:

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• PSE&G Petition to centralize Corporate Support Services, dated April 20, 2000.79 This Petition to centralize corporate support services contains a general overview of functions, services and cost allocation methods. This definition of functions and services is difficult to reconcile to the “Catalogue”, the SAP Cost Accounting Manual definition of Cost Centers, and the Service Company expenditure/billings schedules.

• Catalogue of PSEG Services Corporation products and services to be used in the 2001 planning process.80

• PSEG Cost Accounting Manual, Service Company cost center designations.81 • Schedule of expenditures/billings for the 20 most active standing service orders

for each Service Company Internal Service Provider (ISP)/Cost Center for the six-months ended June 30, 2000.82 The schedules of expenditures/billings for Service Company ISPs includes ISPs/Cost Center expenditures/billings for Cost Centers which are not included in the SAP Cost Accounting Manual. (Profit Center #1927, External Affairs – Corporate Costs & Governance).

Each of these documents presents a different view of Service Company functions and services provided to affiliates. In addition, our accountants interviewed numerous personnel from the Accounting Department and spent almost 40 person days reviewing hard copy documents, and electronically tracing service order charges to source documents.

In its April 20, 2000 Petition to form the Service Company, PSE&G described the functions to be performed by the Service Company and the services to be provided by the Service Company to PSE&G and its affiliates. During the six-months ended June 30, 2000, the definition of Service Company functions and services has been the subject of several revisions. A summary of functions and services provided by the Service Company, based on Internal Service Providers/Cost Centers in place at June 30, 2000, is presented in Appendix Section A.83

These Service Company functions, services provided, and cost allocation methods were identified in our review of the 20 largest standing service orders for each Internal Service Provider in the Service Company. Since these Internal Service Providers/Cost Centers represent the cost pools into which all Service Company costs are accumulated and billed to the PSEG affiliates, they should include all the components, functions and services of the Service Company. This exhibit, while lengthy, provides a broad range of detailed information needed by auditors reviewing cross-subsidization issues. It also assists regulators in addressing the validity of Service Company services provided to affiliates and cost allocation methods and procedures used to allocate the cost of these services.

IV-R10 Reconcile all internal Service Company documents, lists and accounting systems and procedures manuals to reflect and conform to the same groupings and definitions of Service Company functions and services currently provided to affiliates. (IV-F29)

Standard definitions and groupings of Service Company functions and services provided to affiliates should be included, as a minimum, in the following documents:

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• All communications and filings with BPU. • Catalogue of services provided by PSEG Services Corporation (Service

Company). • Training materials for Service Company personnel responsible for providing

services to affiliates, initiating service orders, auditing transactions in the SAP Cost Accounting System, reviewing cost allocations/settlement rules, preparing and negotiating Service Level Understandings (SLUs), accounting for Service Company expenditures/cost accumulation/billings, and reconciling monthly Service Company Billings to affiliates.

• PSEG Cost Accounting Manual. • Service Level Understandings (SLUs).

This level of reconciliation and documentation of Service Company functions and services provided to affiliates will improve PSEG’s, regulators’, and the public’s ability to determine if services provided are permitted according to the Affiliate Standards. The ability of all interested parties to evaluate the propriety of cost allocation bases, methods, and procedures will be enhanced.

IV-F30 The Service Company provides marketing services to PSE&G and its affiliates.

All PSEG marketing functions, services, and personnel have been transferred to the Service Company, with the exception of ET which recently added marketing personnel to their organization. The Service Company provides the following categories of professional marketing services to PSE&G and all other PSEG affiliates:84

• Advertising • Market research • Customer data base management • DSM program management • Product management • Business development • Sales and lead generation • Media relations • Web site support • Sponsorship management • Federal affairs professional services

Transfer of these services to the Service Company, a separate corporate entity removes them from the regulatory definition of “shared services”. However, provision of marketing services to all PSEG entities by the Service Company must be monitored closely to ensure that cross-subsidization does not exist. The potential for cross-subsidization in the provision of marketing services by the Service Company is discussed in the “Cross-subsidization” section of this Chapter. The issue of compliance with the rules is addressed in detail in Chapter V of this report.

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IV-F31 Services provided by the Service Company meet the definition of “Corporate Support Services” as defined in the Affiliate Standards.85

SECTION 2 DEFINITIONS of the Affiliate Relations, Fair Competition and Accounting Standards and Related Reporting Requirements (Affiliate Standards) contains the following definition related to corporate support services:86

• “ ‘Shared services’ means administrative and support services that do not involve merchant functions, including by way of example: payroll, taxes, shareholder services, insurance, financial reporting, financial planning and analysis, corporate accounting, corporate security, human resources (compensation, benefits, employment policies), employee records, regulatory affairs, lobbying, legal, and pension management.”

SECTION 5 SEPARATION, Item 5. Corporate Support includes the following definitions related to corporate support services:

“An electric and/or gas public utility, its public utility holding company and related competitive business segments, or separate business segments of the public utility holding company created solely to perform corporate support services may share joint corporate oversight, governance, support systems and personnel. Any shared support shall be priced, reported and conducted in accordance with Sections 4 and 5, respectfully (of the Affiliate Standards), set forth herein, as well as other applicable Board pricing and reporting requirements.”

“Such joint utilization shall not allow or provide a means for the transfer of confidential customer or market information from the electric and/or gas utility to a related competitive business segment of its public utility holding company in violation of these standards, create the opportunity for preferential treatment or unfair competitive advantage, lead to customer confusion, or create significant opportunities for cross-subsidization of a related competitive business segment of the public utility holding company. In the compliance plan required pursuant to subsections 1 or 2 of Section 7 below, a senior corporate officer from the electric and/or gas public utility and public utility holding company shall verify the adequacy of the specific mechanisms and procedures in place to ensure the electric and/or gas public utility follows the mandates of these standards, and to ensure the electric and/or gas public utility is not utilizing joint corporate support services as a conduit to circumvent these standards.”

Appendix A, Description of Service Company Functions, Services and Cost Allocation Methods includes the following general categories of services:

• Information Technology • Legal • Financial Services • Corporate Support • Human Resources • External Affairs

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• Energy Resources & DSM Services

The April 20, 2000 petition to centralize corporate support services in PSEG Services Corporation (Service Company) included the following general categories of services:

• Accounting Services • Auditing Services • Business Development • Communications • Corporate Secretary • Corporate Services • Environmental, Health, and Safety • Financial Risk Management • General PSEG Management • Governmental Affairs • Human resources Management Services • Information Technology • Legal • Marketing Services • Procurement and Materials Management • Public Information and Media Relations • Strategic Planning • Treasury Services

The descriptions, in Appendix A, of services provided by each Service Company Cost Center indicate that the services outlined in the April 20, 2000 Petition, although grouped differently, are the services being provided and are services allowed by the Act and the Affiliate Standards.

IV-F32 Service Company services received by PSE&G meet the definition of corporate support services allowed by the Act and the Affiliate Standards.

PSE&G received the full range of services offered by the Service Company during the six-months ended June 30, 2000. PSE&G Transmission did not receive any Enterprise Corporate Development services or any DSM Staff Services. The PSE&G Appliance Service Business did not receive any Enterprise Corporate Development services, New Business Development services, or DSM Staff services. With these five exceptions, all other Service Company services were received by all of PSE&G’s operations.

IV-F33 Service Company services received by PSEG Power meet the definition of corporate support services allowed by the Act and the Affiliate Standards.

PSEG Power received most of the full range of services offered by the Service Company during the six-months ended June 30, 2000. PSEG Fossil, LLC; PSEG Nuclear, LLC; and PSEG Energy Resources & Trade, LLC did not receive any New Business Development services or any DSM Staff services. With these exceptions, all other Service Company services were received by all of PSEG Power’s operations.

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IV-F34 Service Company services received by PSEG Holdings meet the definition of corporate support services allowed by the Act and the Affiliate Standards.

PSEG Holdings received most of the full range of services offered by the Service Company during the six-months ended June 30, 2000. PSEG Holdings did not receive any Corporate Planning Staff, New Business Development, or Transmission services Staff,. . With these exceptions, all other Service Company services were received by PSEG Holdings.

IV-F35 The NJBPU filing requesting approval of a service company provides a detailed description of how services would be priced under varying conditions PSEG accounting policy includes these transfer pricing principles and the SAP accounting system provides the ability to implement these policies.

Schedule H of the PSE&G Service Company filing provides the detail of these transfer pricing policies and is summarized here.87 Our accountants reviewed PSEG’s transfer pricing policies and procedures and tested the application of the policies and procedures as part of the audit. Specific results are provided later in this chapter.

All costs of the Service Company, including compensation for use of capital, will be billed at fully allocated cost.

Records will be maintained by the Service Company to accumulate all costs of doing business and to determine the total cost of services provided by the Service Company. These costs will include the wages and salaries of employees, materials and supplies, cost of capital, the fees and other charges of contractors supplying goods and services, and related expenses such as insurance, taxes, pension and other employee benefits.

Costs incurred for service rendered or personnel assigned to the Operating Company by the Service Company, will be Directly charged to the Operating Company. These charges will include all direct and indirect costs associated with providing the service. It is anticipated that the majority of the costs incurred by the Service Company will be directly charged to the Operating Company for whom the cost was incurred.

When a service is rendered for the benefit of more than one Operating Company, the incurred cost will be directly charged to the Operating Companies that have received the benefit of the service.

All other costs which cannot be directly charged, such as shareholders services will be allocated to all Operating Companies taking service from the Service Company. These allocations will be based on predetermined formulae. The predetermined formulae to be used could include one or more generic cost driver(s) such as assets, revenues, and payroll (dollars or number of associates). The formulae will be reviewed periodically and revised as appropriate to fully allocate all costs by each year-end.

All charges for services provided by Service Company personnel will be determined using employee time records and/or the appropriate allocation methodology. Records of related expenses will be maintained and will be subject to periodic review by the Operating

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Companies. Out-of-Pocket expenses which are incurred by the Service Company on behalf of the Operating Companies will be Billed at cost to the respective Operating Company.

C. USERS OF SERVICE COMPANY SERVICES

PSEG Services Corporation (Service Company) is a wholly owned subsidiary of Public Service Enterprise Group Incorporated (PSEG). The Service Company was formed to provide centralized corporate support services to the PSEG operating companies, both regulated and unregulated.

Public Service Electric and Gas Company (PSE&G)

PSE&G, the utility, provides electricity and gas delivery services and certain competitive services, including PSE&G’s Appliance Service Business. PSE&G competitive services also include its equipment testing and repair service (SERVCO), during the first six-months of 2000. SERVCO operations will be transferred to PSEG Power when the PSEG generation assets are transferred from PSE&G to PSEG Power. (Note: this transfer took place on August 21, 2000) PSE&G operations also include the operations of Sunburst, which provides meter reading and billing services to various municipalities. PSE&G takes the position that services provided by Sunburst are “wholesale” services and therefore not covered by the affiliate standards. Further discussion and our recommendation on this topic are provided in Chapter V.

PSEG Power LLC (PSEG Power)

PSEG Power is non-utility generation holding company that owns all of the shares of PSEG Fossil, LLC; PSEG Nuclear, LLC; and PSEG Energy Resources & Trade, LLC. PSEG Power was formed to separate PSE&G’s generation and wholesale marketing businesses from its transmission and distribution utility businesses.

PSEG Energy Holdings, Inc. (PSEG Holdings)

PSEG Holdings is a holding company that owns PSEG Global, PSEG Energy Technologies (PSEG ET) and PSEG Resources. These businesses own, operate, and invest in energy and energy related businesses throughout the world

A summary of the specific corporate entities that receive services from the Service Company: is provided in Exhibit IV-4.88

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_________________________________________________________________________________


Exhibit IV-4 Service Company Clients

Arden Engineering Constructors PSEG Global – Conemaugh Central Heating & Air Conditioning PSEG Global Dallas East Coast Mechanical PSEG Global New Jersey EGDC PSEG Global USA Enterprise Capital Funding PSEG – GWF Fluidics PSEG Hong Kong Frank A. McBride Co. PSEG India Independent Sheet Metal Co., Inc. PSEG International IPE Energia PSEG Kennedy Liber Rich & Sons, Inc. PSEG Mexico, Inc. McBride Energy Service Company LLC PSEF New Hampshire Micro Turbine PSEG Nuclear PSEG America PSEG Power PSEG Americas PSEG Resources Corporation PSEG – America & Europe PSEG – San Nicolas PSEG Bangkok PSEG Stoney Brook PSEG Bay PSCRC PSEG Capital Corp Public Service Conservation Resources PSEG Eagle Point Public Service Electric and Gas Company East North America & Europe Rich Fire Protection, Inc. PSEG Energy Holdings Struble Air Conditioning, Inc. PSEG Energy Resources & Trade Thomas Barham Co. PSEG Energy Technologies Tougher Industries PSEG Fossil Urban Comm Data, Inc. PSEG Global _________________________________________________________________________________

Exhibit IV-5 provides an indication of the scope of services provided by the Service Company to PSE&G and its affiliates. It identifies the affiliates which received services and the Service Company Cost Center which provided the services, during the six-months ended June 30, 2000.89

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_________________________________________________________________________________


Exhibit IV-5 Service Company Services Provided to PSE&G and its Affiliates

PSEG Service Company PSE&G PSE&G PSE&G PSE&G PSEG PSEG PSEG PSEG PSEG PSEGInternal Service Provider Elec Gas Power Power Power Power Cust Eng

Cost Center Dist Dist Trans ASB Fossl Nuc ERT GRT Opps Hld.

VP Info Technology & Staff X X X X X X X X XIT Oper. & Client Ser. Staff X X X X X X X XIT Professional Ser. Staff X X X X X X X XIT Enterprise IT Arch. Staff X X X X X X X X XLegal Corp Security Staff X X X X X X X X X XLegal Claims Staff X X X X X X X XLegal Corp. Secretary Staff X X X X X X X X XLegal Lib & Info Res. Staff X X X X X X X X XLegal Env Hlth & Safe Staff X X X X X X X X XLegal Gen Cnsl Utl Law Stf X X X X X X X X XFin Ser Bus Int Team Staff X X X X X X X X XCorp Sup Res.Recovery Stf X X X X X X XCorp Sup Mat Mgt Sup Stf X X X X X X X XFin Ser Bus Int Sup Ctr Stf X X X X X X X X XFin Ser Treasury Ser Staff X X X X X X X X X XFin Ser Internal Audit Staff X X X X X X X X X XFin Ser Corp Planning Stf X X X X X X X X XFin Ser Acctg Service Staff X X X X X X X XFin Ser Ins/Rl EstateTtaxes X X X X X X X XPSEG Ser Co Ent CorpDev X X X X X X XPSEG Ser Co Ent Rsk Mgt X X X X X X X X XPSEG SC PSEG Marketing X X X X X X X X XPSEG Ser Co New Bus Dev X X XPSEG SC Corparate Mgt X X X X X X X XHR VP Human Res Staff X X X X X X X X X XHR Ind Relations Staff X X X X X X X X X XHR Per & Rewards Staff X X X X X X X X X XHR Medical Staff X X X X X X X X X XHR Q Dev & Org Eff Staff X X X X X X X X X XHR Stg Staffing & Suc Pln X X X X X X X X X XHR Training & Dev Staff X X X X X X X X XCorp Hdqrs Services Staff X X X X X X X X X XCorp Hdqrs Trans Ser Staff X X X X X X X XHR HR Service Center Staff X X X X X X X X X XExt Affairs VP Staff X X X X X X X X XExt Affairs Int Comm Staff X X X X X X X X XExt Affairs Ext & Nuc Staff X X X X X X X X XExt Affairs State Gov Staff X X X X X X X XExt Affairs Corp Cost & Gov X X X X X X X X XExt Affairs Fed Affairs Staff X X X X X X X X XExt Affairs Corp Rate Counsl X X X X X X XExt Affairs Regional Pub Aff X X X X X X X X XExt Affairs Corp Resp Staff X X X X X X X XExt Affairs Area Dev Staff X X X X X X X X XExt Affairs Senior VP Staff X X X X X X X XEnergy Res DSM Mgt Srvcs X X X X X X X XEnergy Res DSM DSM Stf X X

_________________________________________________________________________________

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D. SAP COST ACCOUNTING SYSTEM & COST ALLOCATIONS

AUDIT APPROACH AND WORKPLAN

Service Company Audit

The tight schedule and difficulty in obtaining some information required that our accountants audit transactions in two parts. First the SAP was reviewed as to its effectiveness as a management and accounting tool. Then Service Company transactions with PSE&G were audited using Generally Accepted Auditing Standards as a guide. Finally, an audit of transactions between other affiliates was performed. Our review of the application of the SAP cost accounting system and procedures in the Service Company’s operations, and the application of PSEG cost allocation factors to Service Company costs included the following work:

• Obtained schedules of the top 20 standing service orders for each Service Company cost center. (See Exhibit IV-6 for summary of charges and allocations) The schedules included the cost allocation factor for each standing order, the percent of cost center cost which was “direct charged” and the amounts charged to each recipient of services (for each service order and the cost center total).

• For each cost center selected the three largest standing orders and traced (“drilled down”) June , 2000 charges to source documents.

• For a selected sample of employees obtained time reports for the week of June 25, 2000. Traced the selected June charges on the service orders to the selected employee time sheets.

• Reviewed the application of PSEG allocation factors to each cost center for propriety and reasonableness.

Audit of Affiliates

Our audit of transactions among other affiliates was more limited than for PSEG Service Company transactions. Some of the specific audit activities undertaken for affiliate transactions other than the Service Company transactions included:

• Review of March 2000 billings/charges for PSE&G to PSEG Power, PSEG Power to PSE&G, PSEG Holdings to PSE&G, and PSE&G to PSEG Holdings

• Analysis of March 2000 billings/charges for support. • Review of Cross Application Time Sheet System (CATS) and test of employee

time charges on a sample basis. • Review of ASB monthly reports to the Board of Directors, and detailed review of

$3,435 000 of billings to ASB from the Service Company. • Review of the affiliate order process flow. • Review of benchmarking data for services provided by the Service Company to

PSEG affiliates. • Reviewed asset transfers.

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• Reviewed the calculation and charging of employee fringe benefits and pension costs.

Findings and recommendations which resulted from this review are presented below.

IV-F36 Procedures for preparing summaries of inter-company monthly billings for PSE&G to PSEG Power, PSEG Power to PSE&G, PSEG Holdings to PSE&G, and PSE&G to PSEG Holdings are cumbersome and subject to employee error because it requires considerable offline work downloading data to Excel spreadsheets.

We reviewed the detailed support and the calculations and procedures required to produce a summary of all affiliate billings for the month of March, 2000.90 These schedules required a summary of each entity’s charges for Labor, Materials & Supplies, Outside Services, Pension Cost, Taxes Interest and Other (including indirect and overhead). The process and procedures necessary to produce these schedules are basically manual, using Excel spreadsheets and downloading large volumes of data from various SAP accounts. These procedures have limited control features and consequently may result in significant human error.

IV-R11 Develop appropriate report writers within SAP, with proper controls to produce accurate, timely detailed support for all monthly inter-company billings. (IV-F36.)

IV-F37 No detailed support is provided to service recipients for monthly charges/invoices to/from PSEG affiliates.

We reviewed the monthly billings for inter company charges to and from all affiliates for March 2000 to determine the level of detailed support provided for each monthly bill/charge.

One of the most effective methods of preventing cross-subsidization is the monthly review of inter-company charges by responsible persons at the entity receiving the bill. Without some detailed support for the charge/invoice this review is not possible. The monthly charge is only a number.

PSEG Inter-company billings and payments are posted as debits and credits to inter-company accounts in the SAP general ledger for each Operating Company.

PSEG Services prepares and submits formal invoices for charges to other affiliates, however, these invoices are a total billing for the month with no support attached. PSE&G charges and PSEG Services charges are posted (and cleared/paid) through the inter-company accounts in the general ledger. No invoices or support is submitted to the recipient Company.

Procedures should be developed and implemented for all affiliated charges to provide invoices and sufficient support with the invoices for the service recipient to monitor the propriety of the monthly charges

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IV-R12 Develop appropriate report writers within SAP, with proper controls to produce accurate, timely detailed support for all monthly inter-company billings. (IV-F36 and F37.)

IV-F38 The Cross Application Time Sheet System (CATS) provides the basis for accurate reporting, accumulating, and billing employees time.

Labor charges represent by far the largest element of total inter-company charges among all affiliates. As an example, the total billing91 from PSEG Power to PSE&G for the month of March, 2000 was $43,641887. Of this amount $34,318,352 (78.6%) was labor. Since we did not receive timely data necessary to perform detailed testing of transactions in affiliate charges, other than the Service Company’s charges, we expanded our audit scope with regard to labor charges and the CATS system.

CATS is the system employees use to enter, track, and post their time to SAP cost objects (orders and/or projects). All MAST and Union employees are required to enter their time into CATS via positive time reporting. Positive time reporting means that periodically daily or at least weekly time must be entered into the system for each individual. Exception reports will be prepared for any active employee not entering a weekly time sheet.

Charging orders and/or projects for all significant time spent, whether paid or unpaid is required even if unpaid time (professional/corridor time) was not planned. When exceptions like this occur, a cost center variance representing an over utilization occurs. These types of variances are expected and are explainable. The information from these types of variances are useful in understanding the resources required by each process, activity or service. This information is also valuable when planning for subsequent years. The Accounting Services Department (ASD) is working with the Operating Companies and Internal Service Providers to monitor significant over/under utilization which occur. Rate (transfer price) adjustments will be necessary as over/under allocations of employee time occur.

We selected an employee sample from each Cost Center in the Service Company and traced the charge on the service order to the employees time sheet for the last week in June, 2000. No significant exceptions were noted.

Overall weaknesses in the application of the CATS system are noted in other sections of this report along with recommendation for strengthening controls and procedures.

IV-F39 ASB financial reports to the Board of Directors provide little detail and are not timely filed.92

In response to our request for all competitive services reports to the Board of Directors, we received quarterly reports for each quarter in 1999 and a year end report for 1999 for the Appliance Service Business (ASB). PSEG takes the position that SERVCO operations and Sunburst operations are wholesale businesses, and are not subject to the Affiliate Standards, which cover retail services.

We received no reports for ASB for 2000.

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The 1999 reports received are very high level profit and loss statements. These reports provide no detail as to what makes up the charges included in the statements. Monitoring the propriety of affiliate charges to ASB at the Board level, through a general purpose profit and loss statement is not possible.

We performed a detailed review of $3,435,000 of charges to ASB by the Service Company, for the six-months ended June 30, 2000. Other than the general weaknesses in the SAP Cost Accounting System and in the application of cost allocators, detailed in other sections of this report, no material exceptions were noted.

IV-R13 Develop a system of monthly invoices from all PSEG affiliates to ASB with sufficient detail for ASB and PSEG management to review the propriety of all inter-company charges on a monthly basis. (IV-F39.)

IV-F40 Cost and performance benchmarking data for functions, products and services provided by PSEG affiliates, including the Service Company is not available.93

Many of the cost allocations in the SAP accounting system are based on “planned” expenditures for the year. “Planned” expenditures for 2000 should be based on benchmarks created from actual 1999 and/or other prior years’ data. The Year 2000 is the first year of existence for PSEG Services Corporation. It is also the first year that Service Level Understandings (SLUs) have been used. Therefore, no benchmark data for functions, products and services was prepared. The information available and included in the SLUs for 2000 are the activities, products/services, associated costs, and the Operating Company receiving that product or service.

The lack of accurate benchmarking data will probably result in more adjustments to “true-up” inter-company charges at the end of 2000, than would be necessary if good benchmarking data was available for the 2000 planning process.

IV-R14 Develop accurate and appropriate benchmark data for the 2001 planning process, based on FY 2000 actual results. (IV-F40)

IV-F41 No asset transfers occurred during the six months ended June 30, 2000.

Discussion of PSEG policy and procedures for pricing services, products, or assets is presented in other sections of this report.

IV-F42 Policies and procedures are in place to allocate fringe benefits (vacation, payroll taxes, health insurance, etc.) and pension costs based on payroll.94

Internal orders for fringe benefits are created and settled to Cost Center #1905 – Employment Benefit Resources. Total fringe benefit costs for the six-months ended June 30, 2000 was approximately $35.0 millions.

Internal orders for pension benefits are created and settled to Cost Center #1980- Pension & OPEB. Total pension & OPEB costs for the six-months ended June 30, 2000 was approximately $26.6 millions.

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Cost Centers #1905 and #1980 are distributed to all affiliate service recipients based on the ratio of total labor cost dollars in the recipient cost center to total labor cost dollars in all cost centers.

For example, ASB’s fringe benefits rate is 18.671% of labor cost, and its pension cost rate is 8.746% of labor cost.

Exhibit IV-695, Schedule of Top 20 Service Orders for Each Service Company Cost Center summarizes charges to Affiliates by Cost Center, for the six-months ended June 30, 2000. Total costs/charges for the Service Company for the six-months ended June 30, 2000 was $190,555,000. Total costs/charges included in the top 20 standing service orders, for which we conducted the detailed review outlined above, was $156,834,000. Our detailed review included 82.3% of total Service Company costs/charges for the six-months ended June 30, 2000.

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Exhibit IV-6 Schedule of Top 20 Service Orders for Each Service Company Cost Center

For the Six-Months ended June 30, 2000, ($000) PSEG Service Company PSE&G PSE&G PSE&G PSE&G PSEG PSEG PSEG PSEG PSEG PSEG PSEG CostInternal Service Provider Elec Gas Power Power Power Power Cust Eng Services Center

Cost Center Dist Dist Trans ASB Fossl Nuc ERT GRT Opps Hld. Corp TotalVP Info Technology & Staff 1,073 984 104 237 197 519 72 37 1,007 8,724 12,954IT Oper. & Client Ser. Staff 501 582 55 53 148 197 75 36 41,242 42,889IT Professional Ser. Staff 488 567 54 51 144 192 73 1,905 3,336 6,810IT Enterprise IT Arch. Staff 523 481 51 115 97 252 36 18 71 394 2,038Legal Corp Security Staff 202 131 19 9 39 84 18 5 34 36 577Legal Claims Staff 3,726 2,128 54 119 81 86 1 6,195Legal Corp. Secretary Staff 59 53 15 2 13 14 12 1 153 322Legal Lib & Info Res. Staff 273 245 66 66 90 471 39 18 220 1,488Legal Env Hlth & Safe Staff 233 787 57 16 811 2,134 8 1 8 25 4,080Legal Gen Cnsl Utl Law Stf 743 524 81 25 642 650 164 9 40 2,878Fin Ser Bus Int Team Staff 103 91 7 11 73 97 7 1 390Corp Sup Res.Recovery Stf 935 1,154 759 280 67 3,195Corp Sup Mat Mgt Sup Stf 591 511 10 104 369 228 7 43 1,863Fin Ser Bus Int Sup Ctr Stf 115 76 5 31 34 143 2 1 142 8,423 8,972Fin Ser Treasury Ser Staff 951 822 312 57 233 329 157 6 132 756 3,755Fin Ser Internal Audit Staff 546 419 81 20 158 298 123 69 99 118 1,931Fin Ser Corp Planning Stf 559 933 89 24 472 222 215 1 79 2,594Fin Ser Acctg Service Staff 407 323 94 41 185 215 124 268 3,017 4,674Fin Ser Ins/Rl EstateTtaxes 1,490 780 357 60 1,420 2,546 301 373 7,327PSEG Ser Co Ent CorpDev 147 120 24 6 37 37 36 1 52 460PSEG Ser Co Ent Rsk Mgt 48 48 47 2 160 305PSEG SC PSEG Marketing 426 555 32 923 89 83 64 26 1,376 25 3,599PSEG Ser Co New Bus Dev 264 6 63 333PSEG SC Corparate Mgt 864 702 144 34 218 219 218 1,621 4,020HR VP Human Res Staff 205 162 13 76 66 268 8 4 32 95 67 996HR Ind Relations Staff 235 185 9 115 72 197 7 3 82 7 1 913HR Per & Rewards Staff 346 272 24 182 114 378 47 26 199 212 146 1,946HR Medical Staff 307 248 24 105 94 531 8 2 13 11 260 1,603HR Q Dev & Org Eff Staff 222 179 22 120 88 485 16 8 73 10 106 1,329HR Stg Staffing & Suc Pln 193 155 11 78 82 296 7 3 55 8 133 1,021HR Training & Dev Staff 132 108 16 61 40 28 5 61 3 5 459Corp Hdqrs Tower Space 3,676 805 253 10,903 15,637Corp Hdqrs Trans Servcs 350 69 92 511HR HR Service Center Staff 334 282 24 554 122 112 15 3 145 51 324 1,966Ext Affairs VP Staff 23 15 10 1 51 7 107Ext Affairs Int Comm Staff 269 215 19 58 46 216 11 6 9 849Ext Affairs Ext & Nuc Staff 118 100 29 8 25 130 9 5 70 494Ext Affairs State Gov Staff 71 60 10 3 1 145Ext Affairs Corp Cost & Gov 964 908 213 55 19 519 280 248 110 3,316Ext Affairs Fed Affairs Staff 103 70 27 2 21 130 21 15 389Ext Affairs Corp Rate Counsl 67 65 11 3 7 7 7 167Ext Affairs Regional Pub Aff 74 61 10 3 2 4 154Ext Affairs Corp Resp Staff 69 58 8 3 1 4 1 1 145Ext Affairs Area Dev Staff 171 129 21 3 33 4 4 4 5 374Ext Affairs Senior VP Staff 23 20 3 1 1 48Energy Res DSM Mgt Srvcs 217 73 1 1 1 3 296Energy Res DSM DSM Stf 280 40 320Total Billings 23,668 16,379 2,279 3,435 8,064 12,707 2,248 507 1,052 9,297 77,198 156,834

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IV-F43 Controls in the areas of inter-company billings and the SAP Cost Collection Process are unsatisfactory.

Our initial analysis for this project consisted of a series of meetings and interviews with senior personnel from the Accounting Department and Internal Audit. In these meetings we received detailed description of SAP, how it works and problems that have been encountered. Our accountants then spent almost forty person-days working with SAP and requesting numerous reports from it. Our general conclusions were as follows:

• Accounting and Ledger Posting – We found no problems with the ability of SAP to post costs to the correct accounts once properly identified.

• Cost Allocation Capability – Here we found that SAP performed the function adequately if it was provided with good information. Significant weaknesses exist in the application of SAP cost processes and procedures and these weaknesses and recommendations for improvements are addressed later in the chapter.

• Inter-company invoices and monthly billings – Monthly invoices are not always provided to service recipients and when they are, sufficient support for the billings are not provided. Detailed findings and recommendations regarding monthly invoicing/billing are addressed in a prior section of this chapter.

In this finding we concur with the Service Company’s Internal Audit Services Department audit report entitled “Audit Report Summary – 1999 Inter-Company Transactions Management Advisory Service – SAP Cost Collection Process for Internal Billing”, dated June 6, 2000.96 Major findings from that audit include the following:

With regard to the SAP Cost Collection process:

• The methodology used to collect costs for billing affiliate organizations and management reporting is overly technical, complex and costly to administer. Transaction testing shows data collection inaccuracies.

• The Accounting Services Department (ASD) needs to clearly define: (1) Local management’s (Operating Companies and Services Corporation) accountability and responsibility to review and update product/service pricing, activity pricing, and the accuracy of information in internal orders, and (2) The rollout for an overall understanding of controls and objectives.

• A PSEG Enterprise practice that provides guidance to the Operating Companies and the Service Company on how to record costs and bill affiliates has not been developed. This was evidenced by the development of several product and service pricing methodologies, excessive numbers of cost objects created in SAP, and inconsistencies between FERC and PSEG information.

• System access to create, change and release internal orders is held by individuals who are not fully trained in cost planning and cost management guidelines, including Affiliate Standards requirements, and FERC and management reporting expectations.

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• A process to periodically monitor the symmetry between FERC indicators and PSEG settlement rules to support FERC reporting and rate case filings does not exist.

• The Corporate Process Model requires updating to align with the business needs for information.

With regard to the billing and reconciliation process:

• An effective review and approval process that ensures the accuracy of Operating Companies’ and Service Company costs on affiliate bills before invoicing does not exist.

• Formal reconciliation of inter-company general ledger accounts payable and receivable do not include a comparison to affiliate balances.

The data collection inaccuracies identified during the internal audit review of inter-company transactions included the following97 :

• Duplicate purchase order and labor charges resulting in overbilling to the affiliates of $900,000 in 1999. These were corrected in conjunction with the December true up.

• Labor-hour entries not approved timely resulting in delayed billings to affiliates (approximate value $20,000).

• Internal orders for 1999 IT communication related costs to PSEG Global and PSEG Energy Technologies being underbilled $295,000 monthly for the last four months of 1999. This was corrected during the first quarter 2000.

• Product and service, and activity prices for 1999 were based on budgeted amounts and not adjusted to reflect actual costs (total difference for the entire company of $3 million.)

IV-F44 PSE&G has not completed the Action Plans included in the 1999 Internal Audit Report (released on June 30, 2000) on intercompany transactions and has not completed certain Action Plans identified in the 1998 Internal Audit Report on intercompany transactions.

During the course of field work, the auditors requested that PSE&G provide documentation of specific actions undertaken to address the concerns identified in the 1999 internal audit of intercompany transactions98. The Company stated that approximately 1000 individuals Enterprise-wide are presently permitted to create or change internal orders. A list of approximately 350 individuals who should have the access privileges has been developed, but has not yet been validated. Until the new list of approved users is ratified, an excessive number of individuals will continue to have the ability to create or change internal orders.

The Corporate Planning Department is in the process of developing two reports for use in monitoring affiliate transactions. The two additional reports are as follows: 1)Service Level Understanding (SLU) Reports which will compare planned SLU figures to actual applied costs quarterly and 2)Service Company (Follow-the-Work) FTW Consolidated Analysis Reports which will compare actual direct costs charged to the operating companies vs.

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indirect costs on a planned and actual basis. These reports are to be used in conjunction with the “Flash Reports” which are used by every cost center to compare actual to budget. Until the additional reports are developed, the Company is compromised in its ability to monitor budget to actual charges for affiliate orders on a timely basis.

The complexity of charging methodologies for products and services along with the lack of adequate back-up documentation continues to exist. For 2000, multiple and different SAP cost flow models are in use. In addition, certain transactions are processed outside the SAP system. The Management Accounting Department is “studying and evaluating” the use of one model for all service providers for 2001.

The area of billing and reconciliation process is of particular concern. In its 1999 report, the Internal Audit group notes that formal reconciliations of intercompany general ledger accounts payable and receivable do not include a comparison to affiliate balances, provided for in the December 31, 1998 audit report.

IV-R15 Implement the Action Plans included in the internal audit report referenced in the report. (IV-F43 and F44)

The Action Plans included in the June 6, 2000 Internal Audit Report included both short-term (2000) and long-term (2001-2002) initiatives designed to improve PSEG accounting, cost accumulation, cost allocation and inter-company billing procedures. These action plans included work in the following areas:

• Review all service provider planning and standing orders to insure that the methods and documentation for the cost allocations assigned to various Operating Companies are appropriate.

• Examine the symmetry between the CO module and FERC data. • Update the SAP Cost Accounting Manual and formally communicate cost

accounting policies and procedures to service providers and service recipients. • Develop and communicate cost accounting and billing guidelines and

requirements. Communicate the roles and responsibilities to service providers and service recipients.

• Conduct timely reviews of differences between activity and product/service standard cost vs. actual cost generated by the Service Company.

• Continue to improve the review and approval process for the billing of internal orders, which was implemented in March 2000. Internal order information should be provided to the responsible service recipient and the responsible service provider before being billed.

• Implement a formal monthly reconciliation process between PSEG affiliate inter-company payables and PSEG affiliate inter-company receivables.

• Develop a clear set of policies, practices and accountabilities for all parties regarding the creation of orders, applying settlement rules and pricing policies.

• Continue corporate-wide training of affected individuals regarding order creation, cost accounting concepts and cost planning.

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PSEG is working on several of these recommendations but, few have been completed as of June 30, 2000. All of these initiatives need to be completed as soon as possible. Until they are completed, the effectiveness of the SAP cost accounting system as a deterrent to cross-subsidization will be greatly reduced.

IV-F45 The detailed review of Service Company Cost Center charges and cost allocations identified costs of $11,633,219, which need to be reviewed and/or adjusted.

During our audit of transactions, we identified a number of transfers where we believe improvements could be made. Exceptions noted in the detailed review of Service Company Cost Center charges and cost allocations are summarized in the table below and described in detail following that. Detailed analysis and working papers supporting these conclusions are included with all other project working papers along with a complete set of information requests.

It should be noted that while we recommend improvements to the allocation method, we are not implying that the current methodology is inherently wrong.

_________________________________________________________________________________


Exhibit IV-7 Audit Exceptions by Cost Center

Cost Center Description Amount in Question #1856 Corporate Security Staff $12,283 #1858 Corporate Secretary Staff $240,805 #1868 Mat Mgt Support Org Staff $202,674 $1877 Internal Audit Staff $1,037,678 #1890 PSEG Services Corporation $5,001,245

$675,557 #1900 Industrial Relations staff $230,842 #1904 Performance & Rewards Staff $114,827 #1927 Ext Affairs Corp Cost & Gov. $4,063,231 #1935 Ext Aff Area Development Staff $54,077 Total $11,633,219 _________________________________________________________________________________

Cost Center #1856 – Corporate Security Staff

Service Order #1503194 – $12,283 - Conduct Security Awareness Training – is allocated based on the Modified Massachusetts Formula, it should be allocated based on attendees.

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Cost Center #1858 – Corporate Secretary Staff

Several service orders totaling $240,805 are allocated based on Common Equity. Since generation assets were on the books of PSE&G during the first seven months of 2000 and on the books of PSEG Power during the last five months of 2000, cross-subsidization may occur.

Cost Center #1867 – Resource Recovery Staff

No space allocation charges are included in the charges to this Cost Center.

Cost Center #1868 – Materials Management Support Organization Staff

Almost all the costs of this Cost Center are allocated based on “Anticipated Demand.” This allocation method charges 64.88% of the cost center’s costs to PSE&G. For the six-months ended June 30. 2000, the Cost Center’s total cost was over-allocated (more cost charged to Operating Companies than actual cost) in the amount of $202,674. As of completion of field work on this audit, a definition of the cost allocation method “Anticipated Demand” had not been received.

Cost Center #1877 – Internal Audit Staff

Cost Center #1877’s total cost for the six-months ended June 30, 2000 was $2,056,459. Of this total, $1,037,678, cost of Service Company and Enterprise audits and audit planning, is allocated using the Modified Massachusetts Formula. Cost of these audit services should be direct charged to the Service Company and Enterprise.

Cost Center #1890 – PSEG Services Corporation

Total cost accumulated in this Cost Center for the six-months ended June 30, 2000 is $5,001,245. Almost all these cost are allocated using the Modified Massachusetts Formula. Allocating these cost in the ratio of dollars of services received by each service recipient would more closely tie the cost allocated to the activity which generated the cost.

This Cost Center also includes Service Order #9CICINTSVCS, Affiliate Assessment Order –Interest Expense, in the amount of $675,557 was allocated on 9/30/00.

Cost Center #1900 – Industrial Relations Staff

Service Order #1518148, Attend Training Programs, in the amount of $230,842 is allocated based on the Cost Center’s percent of work performed for each cost recipient during the period January 1, 2000 to March 31, 2000. This cost should be allocated based on training program attendees.

Cost Center #1904 – Performance and Rewards Staff

For the six-months ended June 30. 2000, the Cost Center’s total cost was over-allocated (more cost charged to Operating Companies than actual cost) in the amount of $114,827

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Cost Center #1914 – PSEG Services Corporation, Corporate Headquarters Services Staff

This Cost Center includes costs associated with the Tower Building lease and related maintenance, security, repairs, etc. totaling $15,832,339 for the six-months ended June 30, 2000. These costs are allocated based on square feet occupied. The Schedule of Top 20 standing orders, provided in IR# 190, did not show the same level of detail for Cost Center #1914 as provided for other Cost Centers. Allocations reported for this Cost Center were PSE&G - $3,676,000, PSEG Power - $805,000, PSEG Holdings - $253,000 and PSEG Services Corporation $10,903,000.

Cost Center #1927- External Affairs Corporate Cost & Governance

Total cost, accumulated in this Cost Center for the six-months ended June 30, 2000, is $7,379,859. Service Order #1520229, Consumer Education, in the amount of $4,063,231 has been deferred, i.e., not charged to any service recipient. It would appear in June 30, 2000 financial statements as a Deferred Charge.

Cost Center #1935 – External Affairs Area Development Staff

Service Order #1519457, Provide Administrative Support – Area Development Activities in the amount of $54,077, needs to be adjusted to allocate some of the costs to PSE&G Transmission and PSE&G Appliance Service Business.

IV-R16 The Accounting Services Department should review each of the audit exceptions presented, make the necessary adjustments to ensure that cross-subsidization does not occur, and submit these adjustments to the BPU Division of Audits. (IV-F45

This analysis when completed should be reported to the BPU Audit Staff . Afterwards, adjustments to books and records should be made and reported.

IV-F46 Inconsistencies exist in the application of cost allocation methods based on the ratio of total costs planned for or charged to service recipients.

A very large percentage of the total cost of Service Company operations is personnel cost. PSEG’s philosophy of Activity Based Costing attempts to charge all service cost to the organization which receives the services. Employees charge their time using activity codes. Time charges are loaded for fringe benefits and accumulated in Cost Centers. Cost Center costs are then either direct charged to service recipients (when the service is provided to a specific recipient) or allocated to all recipients of services from that Cost Center. To allocate Cost Center costs, which cannot be identified with a specific recipient, the Cost Center uses various other allocation methods (Modified Massachusetts Formula, Utility Modified Massachusetts Formula, Attendees, Head Count, etc.)

Two methods used throughout Service Company Cost Centers are:

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• Ratio of the service recipient’s Year 2000 planned (budgeted) Direct, Indirect and Corporate Governance costs to total Service Company planned (budgeted) Direct, Indirect and Corporate Governance costs.

Or

• Ratio of the service recipient’s actual cost allocated for Direct, Indirect and Corporate Governance for the three-months ended March 31, 2000 to total Service Company actual Direct, Indirect and Corporate Governance costs for the three-months ended March 31, 2000

These two allocation methods use the same activity factor (ratio of charges to total Service Company costs) but, different data to apply the method (planned and actual).

Basing the formula on actual cost experience should yield the most reasonable cost allocation since it is the most direct. However, the actual to actual ratio will need to be continually adjusted (and charges adjusted) throughout the year and including year-end totals to apply the method accurately.

IV-R17 Choose one of the methods, i.e., planned costs or actual costs and apply it to all Cost Centers’ charges and allocations. (IV-F19.)

One method or the other should be applied consistently throughout all Cost Centers. Also, either method should be adjusted to reflect the actual costs for the year ended December 31, 2000.

IV-F47 PSEG’s accounting and cost allocation policies and procedures are based on activity based costing principles and when fully implemented, should result in more direct charged costs and less allocated cost. To date the percentage of charges allocated has remained about the same.

Exhibit IV-8 presents the percentage of Service Company charges (costs) which are direct charged vs. allocated as in 1999.99

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_________________________________________________________________________________


Exhibit IV-8 Percent of Service Company Charges ($Millions) Direct Charged vs. Allocated

1999 Actual 2000 Plan 6/30/00 YTD Actual

Charge Method Dollars Percent Dollars Percent Dollars Percent

Direct charged $291.0 72.6% $279.0 80.1% $131.0 73.3%

Allocated $110.0 27.4% $69.5 19.9% 47.6 26.7%

Total $401.0 100.0% $348.5 100.0% $178.6 100.0%

_________________________________________________________________________________

The goal for 2000 is to increase the amount of Service Company charges direct charged from 72.6% of total charges to 80.1% of total charges, a 7.5% increase over 1999 actuals. For the six-months ended June 30, 2000, the increase realized was 0.7%. This small increase in direct charges reflects the weakness in the SAP Cost Accounting System outlined in the findings and recommendations presented above.

E. CROSS-SUBSIDIZATION

SECTION 2 DEFINITIONS, 1. Words defined, Affiliate Standards, page 2 defines “Cross-subsidization” as follows:

“ ‘Cross-subsidization’ means the offering of a competitive product and/or service by an electric and/or gas public utility, or the offering of a product and/or service by an affiliate, which relies in whole or in part on the utilization of utility employees, equipment or other assets, and for which full compensation (via cost allocation or direct payment), as determined by the Board, has not been provided for the use of such electric or/gas public utility assets, resulting in the inappropriate transfer of benefits from the utility ratepayers to the competitive product and/or service or affiliate.’ “

SECTION 5 SEPARATION, Items 1 through 8, Affiliate Standards, pages 12 through 18, defines the areas of an electric and/or gas public utility, its PUHC and related competitive business segments of its public utility holding company shall be separate and defines the rules for shared activities where sharing is permitted. Areas where separation is required and/or sharing is permitted only under certain conditions are:

• Corporate Entities • Books and Records • Sharing of Plant, Facilities, Equipment, or Costs • Joint Purchases

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• Corporate Support • Corporate Identification and Advertising • Employees • Transfer of Services

Separation, if it is complete, is a strong deterrent to cross-subsidization. Some of the effects of separation on cross-subsidization; and findings and recommendations regarding cross-subsidization are presented below.

Corporate Entities

Separate corporate entities provides the framework for separation of financial reporting and cost accounting; contracts between product/service providers and product/service recipients; identification of “ownership” of assets, employees, products and services; and placement of responsibility for implementing policies and procedures to prevent cross-subsidization.

Books and Records

Separate books and records provides the framework for accumulating costs related to a specific entity’s products and services; developing fully allocated cost pricing methods and procedures applicable to a particular entity’s products and services; and allows more focused audits of a particular entities transactions.

Sharing of Plant, Facilities, Equipment or Costs

Physical separation of assets and activities into separate corporate entities; separate accounting systems; and/or, physical locations facilitates the monitoring and prevention of cross-subsidization through unauthorized sharing of plant, facilities, equipment or costs.

Joint Purchases

Physical separation of assets and activities into separate corporate entities; separate accounting systems; and/or, physical locations facilitates the monitoring and prevention of cross-subsidization through unauthorized sharing of plant, facilities, equipment or costs.

Corporate Support

Physical separation of assets and activities into separate corporate entities; separate accounting systems; and/or, physical locations facilitates the monitoring and prevention of cross-subsidization through corporate support services provided to PSE&G and its affiliates by PSEG Services Corporation (Service Company).

Corporate Identification and Advertising

Physical separation of assets and activities into separate corporate entities; separate accounting systems; and/or, physical locations facilitates the monitoring and prevention of cross-subsidization through development of logos and advertising materials related to a

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specific entity’s products and services; developing advertising materials and campaigns applicable to a particular entity’s products and services; and monitoring the activities of employees.

Employees

Physical separation of assets and activities into separate corporate entities; separate accounting systems; and/or, physical locations facilitates the monitoring and prevention of cross-subsidization through unauthorized sharing of employees, independent contractors, consultants or others.

Transfer of Services

Physical separation of assets and activities into separate corporate entities; separate accounting systems; and/or, physical locations facilitates the monitoring and prevention of cross-subsidization through unauthorized transfers of services; and improves the ability to monitor transfer prices.

Transfer of Leases or Rental of Utility Assets

Physical separation of assets and activities into separate corporate entities; separate accounting systems; and/or, physical locations facilitates the monitoring and prevention of cross-subsidization through unauthorized transfers of leases or the rental of utility asset; and improves the ability to monitor transfer prices.

IV-F48 PSE&G currently has no process in place to monitor affiliate transactions on a comprehensive basis.

PSE&G engages in a variety of transactions with its affiliates. These transactions must conform to the Affiliate Relations, Fair Competition and Accounting Standards and PSE&G’s Compliance Plan. In order for PSE&G senior management to monitor affiliate transactions on a comprehensive basis, it is necessary for information regarding these transactions to be gathered into a concise, informative report for management’s review.

During the course of field work, the auditors requested that PSE&G provide them a schedule of intercompany transactions for the period January through June 2000, the agreed upon audit period. Because PSE&G currently has no process in place to gather such information into a concise report, it was extremely difficult for the company to prepare this schedule. During the course of our field work, PSE&G was unable to design a method to extract the necessary data from the SAP system. Instead, accounting personnel were forced to prepare separate spreadsheets with data pulled from various reports. Numerous revisions were required. Information regarding transactions among PSE&G entities contained so little detail that it would be difficult for senior management to draw any conclusions from the information absent additional back-up information.

Regardless of the checks and balances that may be in place to monitor individual affiliate invoices by cost center, senior management must have the information it needs to monitor affiliate transactions on an overall basis. At present, the company has no mechanism in

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place to generate such information in the level of detail needed to adequately monitor affiliate transactions.

Exhibits IV-9 to IV-12 present PSE&G’s quantification of intercompany transactions among the utility and its affiliates. These schedules were developed in connection with our audit and did not exist prior to our request.

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Exhibit IV-9 Analysis of Intercompany Billing – PSEG Power to Utility

January through June 2000

Month Compensation Materials & Supplies

Outside Services

Fuel AFUDC Overhead/ Indirect/ Other Charges

Total

January $33,551,913.91 474,194.38 728,042.29 0.00 54,898.71 3,755,308.20 $ 38,564,357.49 February 23,557,195.00 500,714.39 707,877.39 3,207,562.59 51,121.24 7,677,140.60 35,701,611.21 March 34,318,351.94 1,250,281.98 788,954.76 3,030,385.50 60,970.22 4,192,942.36 43,641,886.76 April 15,174,972.28 1,131,816.23 1,532,744.38 3,167,164.00 64,828.53 13,771,137.17 34,842,662.59 May 30,474,156.21 1,264,283.14 2,613,064.10 8,563,055.55 56,048.12 6,500,523.06 49,471,130.18 June 24,069,440.85 545,480.42 996,124.41 21,203,697.40 66,824.32 8,991,166.33 55,872,733.73 161,146,030.19 5,166,770.54 7,366,807.33 39,171,865.04 354,691.14 44,888,217.72 258,094,381.96 Total Amount of Utility billing PSEG Power

73,971,914.37

Net Amount Billed $ 184,122,467.59

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Exhibit IV-10 Analysis of Intercompany Billing – PSEG Services to Utility

January through June 2000

Month Compensation Materials & Supplies

Outside Services

Rents Interest Payment Transfers

Reclass BPU Prepaid

Real Estate Taxes

Consumer Education

Overhead/ Indirect/

Other Charges

Total

January 14,380,422.17 81,747.89 1,456,665.64 405,625.50 4,093,697.57 2,919,816.04 7,508,493.00 $ 30,846,467.81 February 24,541,479.55 96,379.22 5,587,857.72 463,708.69 1,828,043.89 3,668,194.58 5,316,858.94 13,151,048.81 54,653,571.40 March 20,579,899.35 207,227.26 3,017,443.92 422,745.62 1,844,808.00 4,124,883.94 7,858,345.67 38,055,353.76 April 17,205,689.21 3,605,834.67 2,924,287.19 527,247.01 0.00 1,893,370.93 0.00 8,802,102.54 22,085,338.22 57,043,869.77 May 24,916,448.59 455,051.25 5,663,246.49 298,649.58 0.00 1,744,748.78 0.00 2,112,715.00 11,048,205.62 12,235,643.78 58,474,709.09 June 23,091,378.30 257,767.81 4,636,077.22 784,144.18 0.00 376,714.08 0.00 2,112,715.00 0.00 15,847,698.66 47,106,495.25 124,715,317.17 4,704,008.10 23,285,578.18 2,902,120.

58 7,766,549.46 14,727,728.35 5,316,858.94 13,027,532.54 11,048,205.62 78,686,568.14 $ 286,180,467.08

Total Amount of Utility billing PSEG Services 97,621,055.37 Net Amount Billed $ 188,559,411.71

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Exhibit IV-11 Analysis of Intercompany Billing –Utility to PSEG Power

January through June 2000 Month Compensation Materials &

Supplies Outside Services

Taxes Interest Fuel Payment Transfers

Overhead/ Indirect/ Other

Charges

Total

January 1,931,159.89 4,690,334.20 1,365,386.29 0.00 0.00 639,917.12 $ 8,626,797.50 February 1,656,725.63 190,310.45 410,482.75 0.00 564,674.00 327,276.00 629,820.06 3,779,288.89 March 1,956,462.85 2,399,663.37 566,943.91 136,223.16 279,043.00 327,276.00 1,150,936.44 6,816,548.73 April 1,562,824.94 167,439.35 683,542.36 78,069.87 276,828.00 9,405,112.09 327,276.00 1,354,270.51 13,855,363.12 May 1,639,505.16 140,814.06 1,486,850.88 116,334.21 274,590.00 5,455,248.13 327,276.00 570,876.94 10,011,495.38 June 1,609,605.60 126,977.41 933,344.49 145,875.11 272,338.00 24,311,504.82 2,025,600.15 1,457,175.17 30,882,420.75 10,356,284.07 7,715,538.84 5,446,550.68 476,502.35 1,667,473.00 39,171,865.04 3,334,704.15 5,802,996.24 73,971,914.37 Total Amount of PSEG Power billing Utility 258,094,381.96 Net Amount Billed $ 184,122,467.59

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Exhibit IV-12 Analysis of Intercompany Billing –Utility to PSEG Services

January through June 2000 Month Comp. Materials

& Supplies Outside Services

Utility Services

Rent Taxes Payment Transfers

Payroll Billing

Reclass Entries

Real Estate Taxes

Consumer Education

Overhead/ Indirect/

Other Charges

Total

January $7,424,068 $1,428,180 $1,801,788 $609,674 $1,143,127 $454,287 $1,236,584 $1,934,011 $2,180,726 $2,949,416 $21,161,862 February $2,333,706 $2,233,512 $1,667,527 $342,524 $153,313 $205,638 $0 $1,663,671 $0 $2,775,411 $11,375,302 March $2,699,667 $686,401 $427,348 $324,524 $153,313 $215,960 $0 $2,205,695 $3,137,607 $567,817 $10,418,331 April $1,171,176 $3,039,894 $1,445,708 $280,236 $522,745 $228,032 $206,429 $0 $0 $2,112,715 $7,019,583 $16,026,519 May $2,801,116 $257,305 $3,276,866 $0 $358,821 $225,217 $149,313 $0 $0 $2,133,860 $11,048,206 $4,445,041 $24,695,744 June $1,891,822 $200,094 $2,043,298 $521,801 $865,705 $301,235 $239,972 $0 $2,112,715 $0 $5,766,654 $13,943,297

$18,321,555 $7,845,385 $10,662,536 $2,078,761 $3,197,024 $1,630,369 $1,832,298 $5,803,377 $5,318,333 $6,359,290 $11,048,206 $23,523,922 $97,621,055

Total Amount of PSEG Services billing Utility $286,180,467

Net Amount Billed $188,559,412

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Notes re. PSEG Power to Utility

PSEG Power’s employees operate, maintain and administer the generating facilities owned by PSE&G and in general, perform as a contract operator whose costs are reimbursed. The compensation charges represent labor and associated fringe benefits. All materials and supplies such as pumps, piping, mechanical and electrical replacement parts, filters, oils, etc. which are necessary to operate, maintain and repair the facilities are included in the charge from PSEG Power to the utility. Outside mechanical and electrical contractors are brought in as needed when Utility employees are not available or when specialized work needs to be done on the assets owned by PSE&G. The costs for these contractors are included in the charge for outside services. Natural gas is purchased by the utility for production of electricity at the electric generating stations. For one refinery vendor, a swap agreement is in place, whereby the vendor provides PSE&G gas in exchange for electricity. As a result, fuel intercompany billings from PSEG Power to the utility and vice versa net to $0. Services are provided by PSEG Services Company to Power Company and , in turn, allocated to the utility to the extent services pertained to Utility-owned generation assets. As of August 21, 2000, the generation assets were transferred from the utility to Power. Charges for administrative services and direct labor are no longer allocable to the utility as a result of this asset transfer. Finally, the charge for AFUDC represents a correcting entry to properly record the charge on the utility’s books. Correction of the pertinent settlement rule in SAP will be completed in September 2000 and will eliminate this monthly correction billing.

Notes re. PSEG Services to Utility

Charges for compensation and related overhead costs comprise the majority of billings from PSEG Services to the utility. PSEG Services Company provides a variety of administrative services including accounting, legal, human resources, and information technology. Compensation charges to the utility for its share of these support services includes associated fringe benefits. The overhead costs include all indirect charges from PSEG Services Company to the utility including space costs, information technology and other overheads. Also included are the charges for corporate governance from the Services Corporation to the utility. The charge for materials & supplies includes the costs of general office items and miscellaneous software. The charge for outside services includes the costs of providing support services obtained from third parties such as external auditors, information technology consultants, temporary employees and outside counsel. The rent charge represents lease payments for facilities in which customer operations offices are located. PSEG Services pays the rent bills on behalf of the utility and then bills the utility. The interest charges from PSEG Services to the utility include the costs associated with the utility’s share of the investment in company-owned life insurance policies. The payment transfers included in the billings from PSEG Services to the utility are reimbursements by the utility for various charges that PSEG Services paid on its behalf. The $11 million charge for “consumer education” represents an accounting error that was corrected in the same month, thus netting to $0.

The charge of $5.3 million for “reclass BPU prepaid” represents an incorrect charge to the utility. The BPU assessment fees were allocated to the utility by Service; however, the utility

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had already paid these costs. Thus, this billing was in error. An adjustment will be made in September to reimburse the utility for these costs.

Notes re. Utility to PSEG Power

Compensation charges from the utility to PSEG Power consist primarily of fringe benefit costs. These costs are initially recorded on the utility’s books and then allocated to Power based on planned labor dollars. The compensation charges also include costs of Transmission and Distribution employees who work in the switch yards and substations for PSEG Power. Materials charges include a charge for SERVCO’s materials and supplies which were transferred from the utility to PSEG Power . In addition, $2.2 million was incorrectly billed to PSEG Power for salvage proceeds. A correcting entry will be processed in September 2000. The largest component of charges from the utility to PSEG Power consists of fuel costs included in the fuel swap agreement in which one refinery vendor provides PSE&G natural gas in exchange for electricity. Fuel intercompany billings from the utility to PSEG Power and vice versa net to $0. The payment transfers of $3.3 million represent payments for various items that were paid on behalf of PSEG Power by the utility. Finally, overhead charges include facilities charges for use the common assets, including carrying charges and depreciation as well as incentive compensation charges.

Notes re. Utility to PSEG Services

Compensation charges from the utility to PSEG Services consist primarily of fringe benefits. Fringe benefit costs are initially recorded on the utility’s books and then allocated to Services based on its percentage of planned labor dollars. The charges for utility services and rent are allocations for space occupied by Services personnel in utility-owned facilities. The payment transfers are reimbursements by the utility for various items that PSEG Services paid on its behalf. The reclass entries of $5.3 million represent appropriate correcting entries that were processed during the audit period. No additional correcting entries will be needed with respect to charges from the utility to PSEG Services. As mentioned previously, the charge for consumer education of $11 million represents an accounting error that was corrected in the same month, thus netting to $0. Finally, the overhead charges include charges for the use of common assets and accruals for incentive compensation payments.

IV-R18 Develop a comprehensive plan for addressing all of the problems with SAP. Refer to Finding IV-F48

Our auditors, PSEG Internal Audit and the Corporate Accounting Department all have identified major problems with SAP. Long-term reporting on affiliate transactions as well as effective management of the company are dependent on a properly working SAP system. The accounting department should prepare a comprehensive plan for resolving all difficulties with SAP and report on progress to the BPU Audit Staff on a regular basis.

Cost Accounting Manual

The PSEG Cost Accounting Manual should be updated to accurately identify the Cost Centers, Assessment Centers and Products and Services Centers currently in use.

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A Section should be added to the SAP Cost Accounting Manual to provide a complete description for each Cost Center, Assessment Center and Products and Services Center. The description should include the services provided by the Cost Centers; the types of service cost or other charges charged to the Cost Center, Assessment Center or, Products and Services Center; what entity/business unit receives the services and/or charges; and a description of all the cost allocation methods/bases used by the Cost Center, Assessment Center or Products and Services Center.

Service Level Understandings

All Service Company expenses are billed/charged to the Utility or an Affiliate. Since the Service Company is a separate corporation, Service Level Understandings (SLUs) between the Service Company and service recipients should be considered a contract. The form of SLUs should include the characteristics of a contract. SLUs should specifically define services to be provided and how the services will be priced, including specific prices/allocation methods for each service. The SLUs should be signed by a responsible person representing the service recipient and the service provider. This level of information is necessary for effective monitoring of charges by the service recipient. The general overall Service Agreements between PSEG Affiliates do not provide this level of detail.

Invoices and Billing Support

Monthly charges to PSE&G and PSEG Affiliates are settled through affiliate receivable and payable accounts. Formal invoices with detailed support for the charges are not provided to PSE&G and PSEG Affiliates on a monthly basis. Monthly invoices with sufficient detail to allow the service recipient to monitor the level of services received and the price of services should be provided to all service recipients.100

IV-F49 There was approximately $1.7 million in charges by ET (a sub of Holdings) to PSE&G during the audit period and $1.3 million in charges by PSE&G to Holdings.

During the first six months of 2000, there were a number of transactions between PSE&G and Energy Technologies, a subsidiary of PSEG Holdings, and an “affected affiliate.” There were billings by ET for services such as HVAC acquisition, installation and maintenance, provided by the ET subsidiaries to various PSE&G locations. All of these services and products were provided under competitive contracts.101 In addition, there were charges totaling $1,326,643 by PSE&G to Holdings. Most of these charges consisted of monthly affiliation fees of $144,000/month and rent for facilities of $50,000 per month. Note: the affiliation fee was imposed to account for the credit-worthiness PSEG-ET receives as a subsidiary of PSEG.

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_________________________________________________________________________________


Exhibit IV-13 PSE&G and ET Contract Activity - Transaction Summary

Six

ET Affiliate January-00 February-00 March-00 April-00 May-00 June-00 Months

Fludics 12,737 12,737

McBride 587 587

Independent Sheet Metal 5,452 485,249 706,750 200,295 237,653 1,635,399

McBride/Struble 881 8,346 9,752 349 19,328

Total 587 6,333 485,249 715,096 222,784 238,002 1,668,051

_________________________________________________________________________________

IV-F50 No transfers, leases, rentals, licenses or easements of assets were undertaken between the utility and affiliates during the period January through June 2000.

Section 5.9(b) of the Standards requires that transfers, leases, rental, licenses, easements or other encumbrances of utility assets from the electric and/or gas public utility to a related competitive business segment of its public utility holding company shall be recorded at fair market value or book value as determined by the Board. PSE&G’s BPU filing regarding the formation of PSEG Services Corporation requested approval to transfer certain assets and contracts from PSE&G to PSEG Services Corporation. No transfers have been made to date, and none will be made without the Board’s approval. The Company intends to transfer the assets at net book value which is estimated to be $96 million.

In addition, on August 21, 2000, generation assets and generation related assets were transferred from PSE&G to PSEG Power at the value approved by the BPU in Docket Nos. EO97070461, EO97070462, and EO97070463. The total amount of the transfer was $2.786 billion.

IV-F51 During the six-months ended June 30, 2000, PSE&G is being compensated by the Service Company for the use of assets used by the Service Company in its operations.

The Service Company pays PSE&G for the carrying charges associated with the use of PSE&G assets as follows:

• Return on Assets – Net book value of PSE&G assets used by the Service Company at a cost of capital factor of 8.42%.

• Return of Assets – Recovery of depreciation expense for PSE&G assets used by the Service Company.

Based on the present level of PSE&G assets used by the Service Company, the Service Company is reimbursing PSE&G at the rate of $1,546,000 per month. This reimbursement includes $546,000 for return on assets and $1,000,000 for return of assets.

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Beginning January 1, 2000, any new assets purchased for the Service Company are recorded and depreciated on the Service Company’s books. The current reimbursement ($1,546,000 per month) will remain fixed until BPU approves the transfer of PSE&G assets to the Service Company or, an asset is retired from service. As of June 30, 2000 the amount of new assets acquired by the Service Company was $4,100,000.102

IV-F52 To capitalize the Service Company, when it was formed, each PSEG Affiliate was required to make a capital contribution equal to 1/12th of the amount of the Affiliate’s planned (budgeted) Service Company charges for the year 2000. Interest is paid to each Affiliate based on their share of the Working Capital Fund Balances.

In January, 2000, each Operating Company advanced funds to PSEG Service Corporation (Service Company) equal to 1/12th of their expected year 2000 usage of Service Company services. Beginning in January, 2000, the Service Company billed each Operating Company for the actual use of products and services on a monthly basis. Operating Companies pay the Service Company on a net/10 basis. The Service Company may borrow from PSEG Enterprise any shortfall in its daily cash needs or pay down on its loan from PSEG Enterprise with any excess cash. The Service Company pays PSEG Enterprise interest on the outstanding loan balance, based on an interest rate that varies each month and is equal to PSEG Enterprise’ average short-term interest rate for that month. The Service Company allocates these interest charges to the Operating Companies. At June 30, 2000 the Service Company’s loan balance with PSEG Enterprise was $17,385,200.

Monthly interest expense paid by the Service Company to PSEG Enterprise and allocated to the Operating Companies, based on the level of support the Service Company negotiated and planned to provide to the Operating Companies for the year 2000 was:

_________________________________________________________________________________


Exhibit IV-14103 PSEG ET Interest Payments to PSE&G

Month Action Amount January, 2000 Interest Income $81,889 February, 2000 Interest expense $67,670 March, 2000 Interest expense $102,235 April, 2000 Interest expense $177,461 May, 2000 Interest expense $188,550 June, 2000 Interest expense $211,531 Total $657,557

_________________________________________________________________________________

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IV-F53 Weaknesses in the SAP Cost Accounting System outlined in the Findings and Recommendations, presented in prior sections of this report, significantly reduce PSEG’s management’s ability to understand transactions.

When fully implemented, the SAP accounting system will provide the management and operating information necessary to assist management, service providers and service recipients in monitoring and preventing cross-subsidization. Full implementation of Service Company operations, including transfer of the assets used by the Service Company, will effectively separate Corporate Support functions from other PSEG Affiliates. This separation should reduce the presence of cross-subsidization.

F. COMPLIANCE

This Chapter has focused on a review of PSEG’s compliance with the Affiliated Standards through the formation and operations of the Service Company. Areas of compliance reviewed have included:

• Do services provided by the Service Company meet the definition of “Corporate Support Services” as defined in the Affiliate Standards?

• Are accounting, cost accumulation and cost allocation systems and procedures in place to accurately price transfers of products and services among PSE&G and its Affiliates?

• Does sufficient separation of entities, accounting records and systems and procedures exist to prevent cross-subsidization.

• Have transfers of assets, leases and/or leased assets been priced as required by the Affiliate Standards?

The findings presented here are supported by the analysis presented in prior sections of this Chapter.

IV-F54 Services provided by the Service Company meet the definition of “Corporate Support Services” as defined in the Affiliate Standards.

Appendix A, presents the services provided by all cost centers/internal service providers in the Service Company. A review of this document indicates that all the services provided meet the definition of “Corporate Support Services” as defined in the Affiliate Standards.

IV-F55 Formation of the Service Company provides a vehicle to provide effective separation of employees, entities, accounts and accounting systems.

Despite weakness in the SAP Cost Accounting System and recommendations for strengthening these weaknesses which have been presented in prior sections of this Chapter, the Service Company should provide an overall benefit.

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IV-F56 All costs of the Service Company, including compensation for the use of capital, are billed at fully allocated cost.

Although significant weaknesses exist in the systems and procedures for accumulating and allocating Service Company costs, PSEG has adopted fully allocated costing principles. Continued implementation and strengthening of the SAP cost accounting system is needed to ensure PSEG’s cost allocation principles are accurately applied on a consistent basis.

IV-F57 PSEG has filed the required petitions for BPU approval for transfer of assets.

On April 20, 2000, PSEG filed a petition with BPU requesting approval to transfer certain assets and contracts from PSE&G to PSEG Services Corporation (Service Company). No transfers have been made during the six-months ended June 30, 2000, while awaiting approval of this petition. Upon approval of BPU these assets will be transferred at Net Book Value, which represents a reimbursement to PSE&G of unrecovered cost versus revenues. The preliminary estimate of the Net Book Value of these assets at July 31, 2000 is $96,000,000.104

On August 21, 2000, generation assets and generation related assets were transferred from PSE&G to PSEG Power at the value approved by the BPU in docket numbers E097070461, E097070462, and E097070463. The total amount of this transfer is $2.786 billion.

No other asset transfers occurred during the six-months ended June 30, 2000.105




V. AFFILIATE STANDARDS COMPLIANCE

This chapter provides an overall assessment of PSE&G’s compliance with the Affiliate Relations, Fair Competition and Accounting Standards and a review of the PSE&G’s Compliance Plan submitted on June 15, 2000.

SECTIONS 1 AND 2: SCOPE AND DEFINITIONS

SECTION 1.1: SCOPE

Standard

(a) These standards shall apply as follows:

i. Sections 3 through 5 set forth standards of conduct applicable to transactions, between an electric public utility or gas public utility, including a related competitive business segment of an electric or gas public utility, and a related competitive business segment of the electric or gas public utility holding company providing or offering competitive services to retail customers in New Jersey or the public utility holding company itself providing or offering competitive services to retail customers in New Jersey, as defined herein;

ii. Section 6 sets forth standards of conduct applicable to electric and/or gas public utilities and the related competitive business segments of each electric public utility and gas public utility, as well as the transactions, interactions and relations between an electric and/or gas public utility and a related competitive business segment of an electric and/or gas public utility; and

iii. Sections 7 through 9 address regulatory oversight, dispute resolution and violations and penalties applicable to electric and/or gas public utilities regarding affiliate relations, fair competition, accounting standards and related reporting requirements.

The Board reserves the right to promulgate any additional interim standards as may be required to effectuate the intent of the Act.

Compliance Plan

Intro.D.1 Affected Affiliates: Those business segments of PSEG Energy Technologies and certain of its subsidiaries (PSEG-ET) that provide competitive services to retail customers in New Jersey are the only “Affected Affiliates”. Specifically, PSE&G’s Affiliates that have business segments which provide competitive services to retail customers in New Jersey and that fall under Sections 3, 4 and 5 of the Final Standards are:

PSEG Energy Technologies, Inc. Liber Rich & Sons, Inc. Rich Fire Protection Company, Inc. Thomas H. Barham Keith H. Struble Air Conditioning, Inc. The Frank A. McBride Company Independent Electrical Construction Company Independent Sheet Metal Co., Inc. Fluidic’s of New Jersey, Inc.




Urban Comm-Data, Inc. McBride Energy Services Company

Intro.D.2 Competitive Services [Section 6]: The competitive services offered to retail customers in New Jersey by PSE&G include the PSE&G appliance service business, its replacement parts program and service contracts business. The appliance service business provides services, on a retail basis, to customers in the PSE&G service territory under BPU tariffed rates.

While PSE&G does offer other competitive services, including the reading of utility meters, billing and payment processing services in the water industry, these services are considered wholesale competitive services, and not within the Scope as defined in the Final Standards or Sections 7, 8 and 10 of the ACT.

PSE&G also provides maintenance repair, diagnostic and testing services to the utility industry on a competitive basis under a division called SERVCO. SERVCO provides these service on a wholesale competitive basis, and therefore not within the Scope of Section 6 of the Final Standards. SERVCO currently resides within PSE&G, but will be transferred to PSEG Power upon the transfer of the generation assets.

Findings and Conclusions

V-F58 PSE&G’s Compliance Plan interprets Sections 3, 4, and 5 of the Standards to be applicable only to transactions between PSE&G and PSEG Energy Technologies (PSEG ET).

This interpretation of the Standards is consistent with Section 1.1.a.i of the Standards.

Neither the Act nor the Standards provide a definition of the term “retail”. PSE&G has adopted the following definition in its Compliance Plan:

“Retail” means sales made in quantities to ultimate consumers to meet personal needs, rather than for commercial or industrial uses of the articles sold. (emphasis supplied) Witco Chemical Corp., v. United States, 2 Cl.Ct.504, 507 (1983)106

PSE&G maintains that all competitive services provided to another utility or to an industrial or commercial customer are provided on a wholesale basis and therefore are not subject to Sections 3, 4, and 5 of the Standards. PSE&G’s compliance status could change if the Board modifies the Standards to include a definition of the term “retail” which is less restrictive than the definition used by PSE&G in its Compliance Plan.

V-F59 PSE&G has interpreted Section 6 of the Standards to be applicable only to competitive business segments which provide retail services.

In its Compliance Plan107 PSE&G has interpreted Section 6 of the Standards to apply only to transactions between PSE&G (the regulated utility) and its Appliance Service Business (ASB), a competitive business segment of PSE&G. PSE&G does not interpret Section 6 of the Standards to be applicable to other competitive services offered by PSE&G such as meter reading, billing and payment processing services, transmission and substation maintenance,




and payment processing services. PSE&G considers these services to be wholesale competitive services. Section 1.1.a.ii of the Standards, which defines the applicability of Section 6, does not differentiate between wholesale and retail competitive services.

SECTION 1.2: LIMITED EXEMPTION

Standard

(a) A New Jersey electric and/or gas public utility, which is also a multi-state electric and/or gas public utility and subject to the jurisdiction of other state or federal regulatory commissions, may file an application, requesting a limited exemption from these standards or part(s) thereof, for transactions between the electric or/gas public utility and its affiliate(s) solely in its role of serving its jurisdictional areas wholly outside of New Jersey.

The applicant has the burden of proof to establish the appropriateness of the requested exemption.

Compliance Plan

This Section is not addressed in the Compliance Plan.


V-F60 Section 1.2 does not require any compliance action by PSE&G.

PSE&G indicates in the PSEG 1999 Annual Report that its service territory is in the State of New Jersey.108 PSE&G has indicated that it has not applied for any limited exemptions to the Standards.109

SECTION 2.1: WORDS DEFINED

Standard

The following words and terms shall have the following meanings unless the context clearly indicates otherwise.

“Act” means the “Electric Discount and Energy Competition Act” (P.L. 1999, c. 23), N.J.S.A. 48:3-49 et seq.

“Affiliate” means a “related competitive business segment of an electric public utility or a related competitive business segment of a gas public utility” or a “related competitive business segment of a public utility holding company” as defined herein and in the Act.

“Affiliated” means related to an electric or gas public utility as an affiliate thereof

"Board" means the New Jersey Board of Public Utilities or any successor agency.

"Category" means a group of products and/or services that use the same type of electric and/or gas public utility assets or capacity. For example, "leases of land under utility transmission lines" or "use of a utility repair shop for third party equipment repair" would each constitute a separate product and/or service category.

"Competitive service" means any services, goods, or products offered by an electric public utility or a gas public utility that the Board has already determined or that the Board shall in the future determine to be competitive pursuant to section 8 or section 10 of the Act or that is not regulated by the Board.




“Cross-subsidization” means the offering of a competitive product and/or service by an electric and/or gas public utility, or the offering of a product and/or service by an affiliate, which relies in whole or in part on the utilization of utility employees, equipment or other assets, and for which full compensation (via cost allocation or direct payment), as determined by the Board, has not been provided for the use of such electric or/gas public utility assets, resulting in the inappropriate transfer of benefits from the utility ratepayers to the competitive product and/or service or affiliate.

"Customer" means any person that is an end user and is connected to any part of the transmission and distribution system within an electric public utility's service territory or a gas public utility's service territory within this State.

"Customer Information" means information data regarding a utility customer which the electric and/or gas public utility learned, acquired or developed while in the business of providing electric and/or gas public utility services.

"Demand side management" means the management of customer demand for energy service through the implementation of cost-effective energy efficiency technologies, including, but not limited to, installed conservation, load management and energy efficiency measures on and in the residential, commercial, industrial, institutional and governmental premises and facilities in this State.

“Dth” means decatherms or ten therms.

“EBB” means an electric and/or gas public utility’s electronic bulletin board.

"Electric public utility" means a public utility, as that term is defined in N.J.S.A.48:2-13, that transmits and distributes electricity to end users within this State.

"Electric related service" means a service that is directly related to the consumption of electricity by an end user, including, but not limited to, the installation of demand side management measures at the end user's premises, the maintenance, repair or replacement of appliances, lighting, motors or other energy-consuming devices at the end user's premises, and the provision of energy consumption measurement and billing services.

"Existing products and/or services” means those products and/or services which an electric and/or gas public utility was offering prior to January 1, 1993, that have been approved by the Board prior to February 9, 1999, or an electric and/or gas public utility is offering on the effective date of the adoption of these standards.

“Fully allocated cost” means an allocation of the direct, indirect and other economic costs of all equipment, vehicles, labor, related fringe benefits and overheads, real estate, furniture, fixtures and other personalty and administration utilized, and other assets utilized and costs incurred, directly or indirectly in providing competitive services.

“Functional separation” means the formation of a separate business unit by an electric or gas public utility for purposes of offering competitive services permitted by NJSA48:3-55(f) or N.J.S.A. 48:3-58(b) of the Act, which separate business unit shall be a related competitive business segment of an electric public utility or gas public utility as defined herein and in the Act.

"FERC" means the Federal Energy Regulatory Commission or any successor agency.

"Gas public utility" means a public utility, as that term is defined in NJSA 48:2-13, that distributes gas to end users within this State.

"Gas related service" means a service that is directly related to the consumption of gas by an end user, including, but not limited to, the installation of demand side management measures at the end user's premises, the maintenance, repair or replacement of appliances or other energy-consuming devices at the end user's premises, and the provision of energy consumption measurement and billing services.




“Individual proprietary information” means a customer’s name, address, telephone number, energy usage and payment history and such other information as the Board, by Order, may determine.

“Joint purchases” means purchases made by a parent or holding company or affiliate thereof for use by one or more affiliates, the fully allocated costs of which are allocated to be paid proportionally by the affiliates, based upon utilization.

“Joint purchases allowed” means purchases not associated with merchant functions, examples of which would be joint purchases of office supplies and telephone services.

“Joint purchases not allowed” means purchases associated with merchant functions, examples of which would be gas and electric purchasing for resale, purchasing of gas transportation and storage capacity, purchasing of electric transmission, systems operations, and marketing.

“kW” means kilowatts or 1000 watts.

“kWh” means kilowatt-hours or 1000 watt-hours.

“Long term” means a transaction in excess of thirty-one (31) days.

“Merchant functions” means the marketing and/or the provision of electric generation service and/or gas supply service to wholesale or retail customers, as opposed to the marketing and/or provision of transmission and distribution services, by an electric and/or gas public utility.

"Person" means an individual, partnership, corporation, association, trust, limited liability company, governmental entity or other legal entity.

“Products” means goods as defined in the Uniform Commercial Code, NJSA, all other real, personal and intellectual property of whatever being or nature.

"Public utility holding company” or “PUHC" means: (1) any company that, directly or indirectly, owns, controls, or holds with power to vote, ten percent or more of the outstanding voting securities of an electric public utility or a gas public utility or of a company which is a public utility holding company by virtue of this definition, unless the Securities and Exchange Commission, or its successor, by order declares such company not to be a public utility holding company under the Public Utility Holding Company Act of 1935, 15 U.S.C. s.79 et seq., or its successor; or (2) any person that the Securities and Exchange Commission, or its successor, determines, after notice and opportunity for hearing, directly or indirectly, to exercise, either alone or pursuant to an arrangement or understanding with one or more other persons, such a controlling influence over the management or policies of an electric public utility or a gas public utility or public utility holding company as to make it necessary or appropriate in the public interest or for the protection of investors or consumers that such person be subject to the obligations, duties, and liabilities imposed in the Public Utility Holding Company Act of 1935 or its successor.

“Public posting” means a posting on an electric and/or gas public utility’s EBB, website or other industry recognized and publicly accessible electronic or print medium.

“Ratepayer Advocate” or “RA” means the Division of Ratepayer Advocate or any successor agency.

“Regulatory asset” means an asset recorded on the books of an electric public utility or gas public utility pursuant to the Statement of Financial Accounting Standards, No. 71, entitled “Accounting for the Effects of Certain Types of Regulation," or any successor standard and as deemed recoverable by the Board.

"Related competitive business segment of an electric public utility or gas public utility" means any business venture of an electric public utility or gas public utility including, but not limited to, functionally separate business units, joint ventures, and partnerships, that offers to provide or provides competitive services.

"Related competitive business segment of a public utility holding company" means any business venture of a public utility holding company, including, but not limited to, functionally separate business




units, joint ventures, and partnerships and subsidiaries, that offers to provide or provides competitive services, but does not include any related competitive business segments of an electric public utility or gas public utility.

“Services that may not be shared” means those services which involve merchant functions, including, by way of example: hedging and financial derivatives and arbitrage services, gas and/or electric purchasing for resale, purchasing of gas transportation and storage capacity, purchasing of electric transmission, system operations, and marketing.

“Shared services” means administrative and support services that do not involve merchant functions, including by way of example: payroll, taxes, shareholder services, insurance, financial reporting, financial planning and analysis, corporate accounting, corporate security, human resources (compensation, benefits, employment policies), employee records, regulatory affairs, lobbying, legal, and pension management.

“Short term” means a transaction of thirty-one (31) days or less.

“Slamming” means the unauthorized change of a consumer’s electric power supplier or gas supplier.

“Structural separation” means the formation of a related competitive business segment of a public utility holding company.

“Therm” means 100,000 BTUs. "Transmission and distribution system" means any facility or equipment that is used for the transmission, distribution and/or delivery of electricity or natural gas to the end-use customers including, but not limited to, the land, structures, meters, lines, pipes, switches and all other appurtenances thereof and thereto, owned or controlled by the electric and/or gas public utility, or LDC, respectively within this State.

Compliance Plan

See Section 1.1 of this Chapter.


V-F61 PSE&G’s Compliance Plan is consistent with the definitions contained in Section 2.1 of the Standards.




SECTION 3: NONDISCRIMINATION

Section 3 of the Standards prohibits PSE&G from showing preferential treatment in utility service by (1) representing that as a result of the affiliation with the utility its related competitive business segments (RCBSs) or customers of its RCBSs will receive any different treatment by the utility than the treatment the utility provides to other, unaffiliated companies or their customers; or (2) providing its RCBSs, or customers of its RCBSs any preference over non-affiliated suppliers or their customers in the provision of services provided by the utility.

The audit team reviewed whether PSE&G has limited transactions between itself and its RCBSs to tariffed products and services, or the sale or purchase of goods, property, products and service made generally available by the utility or RCBS to all market participants through an open, competitive bid process. More specifically, we examined whether PSE&G:

• Provides leads to its RCBSs. • Solicits business on behalf of its RCBSs. • Acquires information on behalf of or to provide to its RCBSs. • Shares market analysis reports. • Requests authorization from its customers to pass on customer information

exclusively to its RCBSs. • Gives any appearance that the utility speaks on behalf of its RCBSs. • Gives any appearance that the RCBSs speak on behalf of the utility. • Provides discretion in the applications of tariffs in the same manner to all RCBSs

and other market participants and their customers. • Requests for similar services are processed in the same manner and within the

same time for RCBSs and all other market participants and their customers. • Ties the provision of any services or the availability of discounts of rates, rebates,

or waivers of terms and conditions of any services provided by the utility, to the taking of any goods or services from its RCBSs.

• Assigns customers to any of its RCBSs. • Provides training in Affiliate Standards that is thorough, accurate, and

comprehensive.

SECTION 3.1: PREFERENTIAL TREATMENT REGARDING SERVICES PROVIDED BY AN ELECTRIC AND/OR GAS PUBLIC UTILITY

Standard

(a) An electric and/or gas public utility shall not unreasonably discriminate against any competitor in favor of its affiliate(s) or related competitive business segment:

1. An electric or gas public utility shall not represent that, as a result of the relationship with the electric and/or gas public utility or for any other reason, a related competitive business segment of its public utility holding company, or customers of a related competitive business segment of its public utility holding company will receive any different treatment by the electric and/or gas public utility than the treatment the electric and/or gas public utility provides to other, unaffiliated companies or their customers; and




An electric or gas public utility shall not provide a related competitive business segment of its public utility holding company, or customers of a related competitive business segment of its public utility holding company, any preference (including but not limited to terms and conditions, pricing, or timing) over non-affiliated suppliers or their customers in the provision of products and/or services offered by the electric and/or gas public utility.

Compliance Plan

Ch. 5.B.1 In response to the Draft Standards issued by the Board in March of 1999, PSE&G developed a training program designed to educate employees regarding the scope and intent of the Draft Standards. The first in a series of formal training courses, Choice 101: Introduction to Customer Choice and Electric Deregulation (Choice 101) was presented to PSE&G employees in the spring through fall of 1999. During that training employees were informed that all customers shall be treated in a non-discriminatory manner, regardless of whether or not they purchase their energy from PSE&G. The training materials were specific in pointing out, “A PSE&G associate cannot…suggest that service will be smoother if the customer chooses PSEG Energy Technologies.” Choice 101 was designed to make employees fully aware of their responsibilities in the deregulated environment as well as restrictions on their behavior. It pointed out that PSE&G may not offer preferential treatment to its affiliate, PSEG–ET. Employees were told that they cannot direct or advise customers to choose PSEG-ET, provide competitive information to PSEG-ET or even volunteer information that PSEG-ET is PSE&G’s non-regulated affiliate.

On November 19, 1999, PSEG issued interim guidelines, which instructed employees not to “…give PSEG-ET or PSEG-ET’s customers preference in the request, receipt or termination of utility services.” Additional training on the Final Standards will commence in June 2000 and will be in the format of a video presentation featuring senior corporate officers with a facilitated discussion. Participants will be required to sign a document stating that they understand and will comply with the Final Standards. Training will be targeted to all Affected Affiliates, PSE&G and PSEG Services in order to avoid circumvention of the Final Standards. [Section 3.1(a)]


V-F62 PSE&G is in compliance with Section 3.1 of the Standards.

PSE&G does not provide preferential treatment to its affiliates or customers of its affiliates in the provision of utility products or services. PSE&G’s Compliance Plan notes the prohibition on representing that customers of affiliates will receive different treatment, as well as the prohibition on providing preferential treatment described in 3.1.

The audit team monitored incoming customer service calls at the Customer Inquiry Center. Customer Choice calls were not observed. This is not unexpected since less than 2 percent of total customer calls annually are customer choice related.110 The audit team then reviewed several hours of previously taped customer calls.111 There was one customer choice call concerning a billing issue. This customer was handled in a courteous and professional manner.

The audit team reviewed the processing time of customer requests to change supplier.112 During the period from August 1999 through July of 2000, PSE&G processed over 83,000




requests to change supplier. The types of requests and the average processing times are shown below in Exhibit V–1. When comparing the processing time between switching suppliers from PSE&G to a third party supplier (TPS) or to PSEG ET, there is no demonstrated preference given to PSEG ET.

_________________________________________________________________________________ Competitive Service and Affiliate Compliance Audit of PSE&G

Exhibit V-1 Average Processing Time for Customer Requests to Change Supplier

Change

From Change

To Number of Requests

Processing Days (Avg.)

PSE&G TPS 70,069 32 PSE&G PSEG ET 472 35

TPS TPS 2079 34 PSEG-ET TPS 52 29

TPS PSE&G 11,442 32 Source: IR-164, IR-218

_________________________________________________________________________________

The audit team interviewed the manager of customer service planning. This area of PSE&G is responsible for coordination of customer needs within PSE&G. In the normal investigation and processing of service requests (which could include a larger service feed, a new service feed, intermittent outages, etc.) service planning personnel have no knowledge of who the customer selected as a generation supplier.113 Further investigation also indicated that service planning personnel have limited access to the Customer Information System and as such would not be a in position to determine this information. This arrangement does not provide service planning personnel an opportunity to discriminate in the provision of services.

The audit team reviewed the processing time for customer data requests. There are two types of customer data requests: those requested through the Customer Choice Enrollment package and those requested by the customer for a TPS or Energy Consultant. Customer data requests processed through the Customer Choice Enrollment package114 are sent directly to the customer, in order that the customer may shop with any or all of the suppliers on the Supplier List.115 The process usually takes two business days to complete. There is little opportunity to offer preferential treatment in this process due to the following:

• A third-party data processing service handles the requests at a remote location to PSE&G. The normal processing time is one to two business days.

• The data goes directly to the customer not to an affiliate or a TPS. • The customer has not specified any interest in one TPS over another.




Customer data requests sent to anyone other than the customer requires the accurate completion of the Customer Usage Information Authorization Form116 or a formal letter on customer letterhead authorizing release of information. PSE&G maintains accurate records of all requests processed. The processing time for PSEG-ET versus non-affiliated TPSs is shown below in Exhibit V-2 for one year beginning in August of 1999.

_________________________________________________________________________________ Competitive Service and Affiliate Compliance Audit of PSE&G

Exhibit V-2 Average Processing Time (Days) for

Customer Information Requests

Month PSEG ET Non-Affiliated TSPs

Aug 99 4.9 5.5 Sep 99 5.4 5.2 Oct 99 4.5 5.3 Nov 99 2.0 1.7 Dec 99 1.0 1.0 Jan 00 2.2 1.6 Feb 00 1.5 2.1 Mar 00 1.2 1.8 Apr 00 No Requests 1.3 May 00 2.0 2.8 Jun 00 1.1 1.5 Jul 00 No Requests 1.0

Annual Average 4.2 4.0 Total Requests 7374 35411

Source: IR-143, IR-159 _________________________________________________________________________________

The processing time for PSEG ET and non-affiliated TPSs is approximately the same. Therefore, it can be inferred that there is no preferential treatment given customers of affiliates in the processing of requests for customer information.117

The audit team interviewed the manager of Major Accounts and was assured that the assignment of account representatives was impartial to energy supplier is based on the following criteria:

• The level of distribution service voltage. All 26kV customers (high-voltage, high-load) receive an account representative.

• Large builders and developers. New commercial development has had significant service level issues.




• Load of greater than 2 MW.

The audit team reviewed the top 100 customers by consumption and their respective account representatives and energy suppliers. PSE&G did not discriminate in assigning account representatives.118

The audit team reviewed the Customer Choice enrollment package. Based on the materials provided it can be inferred that PSE&G does not intend to offer preferential treatment to any customers regardless of energy provider. PSE&G stated in the cover letter, “Whatever your decision, PSE&G will continue to deliver electric service at the high-level of reliability you have come to expect”.119

V-F63 PSE&G has provided its customer contact employees with effective training on the implications of the new industry structure resulting from the Act.

As indicated in the Compliance Plan, PSE&G has established an employee training program for customer contact employees.120 The program has six sessions. The first five sessions are called Choice and focus on providing information on the “Customer Choice” program adopted by the Board that allows end-use customers to select their providers of electric energy and natural gas. The first five sessions include the following:

• Choice 101 – Implementing Choice • Choice 202 – Customer Choice Process • Choice 404 – Setting the Stage for More Changes • Choice 505 – Third Party Supplier Billing • Choice 2000 – Unbundled Gas

During the spring of 1999, PSE&G began the training program with the customer contact employees. The training utilized the following technique to conduct the sessions:

• Situation Identification – Background information on industry changes such as unbundling of bills, customer choice, etc., that requires a change in work procedure.

• Changes in work processes – Detailed information on what specific work processes are involved, a conveyance of technical information and the establishment of new processes.

• Codes of conduct - Specific rules governing behavior backed by examples of the proper and improper ways of handling situations. The codes of conduct usually addressed a facet of the Standards that was applicable to the affected work process, including preferential treatment, tying and information handling.

This training provided a consistent, well-presented, methodology for instructing employees on the new industry structure. The codes of conduct, in relation to the Standards, were complete and accurate in the context of the work processes being performed. All customer contact employees have received this training. This training was not intended to serve as Affiliate Standards training.




V-F64 PSE&G’s training program for affiliate relations is not as effective as it could be.

Affiliate Standards training was developed in June of 2000. The training begins with a video, “Winning by the Rules” followed by a series of slides covering the affiliate standards. This training addresses the Standards as a list of prohibitions. While the training is clear on some specific actions to avoid, it is not fully effective for the following reasons:

• The training material is not presented in a logical order. The slides jump from Scope Issues, to Separation Issues, to Business Development Issues and then back to Separation Issues.

• The training material is oversimplified into a series of elements that are often incorrect and misleading. For instance, slide three, “Scope of the Affiliate Standards” has four bullets (paraphrased): - Standards limited to affected affiliates - This means PSEG ET - Does not apply to PSEG Power - Service Company cannot be used as a conduit to circumvent the Standards This information is correct for Sections 3, 4, and 5 of the Standards only. This slide could be construed to imply that other subsidiaries such as PSEG Power could be used as a conduit to circumvent the Standards

• There are no direct references to the Standards, the reason for them and the relevance to individual job responsibilities. The major concepts of the Standards (nondiscrimination, information confidentiality, etc.) are not clearly articulated. It is quite possible that employees could repeat the training material verbatim and not realize in performing their day-to-day job responsibilities that they are violating the Standards.

• This training is intended for direct customer contact employees only. So while customer contact employees are trained the remainder of PSE&G’s employees are not. This potentially represents a future compliance issue for PSE&G if employees are not trained in the Standards and are subsequently found to be engaging in prohibited activities.

As stated in the Compliance Plan and subsequently verified by the audit team, employees were trained that all customers will be treated in a non-discriminatory manner regardless of whether or not they get power from PSE&G.

V-R19 Improve the Affiliate Standards training materials to support instruction, application, and job duties for all PSE&G and PSEG employees affected by the Standards. Identify potential areas of violation, correct areas that are potentially incorrect, misleading or oversimplified. (Refer to Finding V-F64)

A team of personnel from the Compliance Group, Training, and other operating departments should work together in developing a comprehensive program.




SECTION 3.2: TRANSACTIONS

Standard

(a) Transactions between an electric and/or gas public utility and a related competitive business segment of its public utility holding company shall be prohibited, except for the following:

(i) tariffed products and services;

(ii) the sale or purchase of goods, property, products or services made generally available by the electric and/or gas public utility, by the PUHC or a related competitive business segment of its public utility holding company to all market participants through an open, competitive bidding process; or

as provided for in subsection 5.4 {Joint purchases}, in subsection 5.5 {Corporate support} or subsection 6.1 {Competitive Utility Products and/or Services} below, provided the transactions specified in Section 6 {Competitive Utility Products and/or Services} comply with all other applicable rules.

Compliance Plan

Ch. 3.B PSE&G is in compliance with the rules regarding transactions between PSE&G and its Affected Affiliates. PSE&G and its Affected Affiliates have entered into several agreements for construction services, prior to the existence of the Affiliate Standards. [Section 3.2]

Ch. 3.B While PSE&G performs a gas procurement function for PSEG-ET, it plans to terminate this activity on July 1, 2000. The ‘delivery service’ that PSE&G has provided to PSEG-ET since late 1994 is an operating procedure rather than a formal contractual arrangement. It involves the coordination of certain scheduling and tracking activities and is a nominating convenience. Rather than arranging gas deliveries by many of PSEG-ET suppliers to several locations, it has proven to be more efficient to have PSEG-ET schedule its supplies to be delivered to PSE&G, and then to have PSE&G schedule deliveries (with the same total volume) to the other locations. The volumes associated with this activity have been relatively minor (typically less than 10 MDTh per day). PSEG-ET has maintained all delivery and balancing responsibilities at the inlet to the facilities of all the gas distribution companies behind which it serves its retail customers, including PSE&G. The delivery service will cease effective July 1, 2000.

This phase-out is due to the fact that existing contracts are dependent upon this support. To require early termination and/or compliance would result in any undue hardship to those customers which was clearly not anticipated by the Board.


V-F65 PSE&G is not in compliance with Section 3.2 of the Standards.

PSE&G’s Customer Inquiry Center provides PSEG ET with after hours telephone answering support.121 PSEG ET utilizes PSE&G employees in providing operation and maintenance support in Project Renaissance.122 PSE&G has not demonstrated that these services were made available to all market participants on a competitive basis.




It should be noted that the services PSE&G provides to PSEG ET were begun prior to the finalization of the Standards. However, the Standards require that PSE&G now provide such services to all market participants through and open competitive bidding process.

V-F66 PSE&G’s Compliance Plan does not adequately address how it will ensure that all products and services which PSE&G makes available to its affected affiliates will be offered on competitive business to all market participants.

PSE&G’s Compliance Plan addresses tariffed products and services and shared corporate services but does not address the concept of the sale or purchase of affiliate products and services through an open, competitive bidding process or their availability to all market participants. An explanation of how service agreements or contracts between PSE&G and its affiliates were obtained through an open, competitive bidding process was requested.123 PSE&G responded with a copy of the Service Agreement and Addendum between PSE&G and PSEG and its Subsidiaries, which would include all affiliate entities regardless of their affected/unaffected status. The response did not demonstrate that the products and services made available between competitive business segments and the utility are obtained through an open, competitive bidding process.

V-R20 PSE&G should either discontinue providing services to PSEG ET or provide them under the conditions specified in Section 3.2 of the Standards. (Refer to Finding V-F65 & F66.)

SECTION 3.3: PROVISION OF SUPPLY, CAPACITY, SERVICES OR INFORMATION

Standard

(a) An electric and/or gas public utility shall provide access to utility information, services, and unused capacity or supply on a non-discriminatory basis to all market participants, including affiliated and non-affiliated companies, except as provided for in subsection 5.4 {Joint purchases}, subsection 5.5 {Corporate support} and subsection 6.1 {Competitive Utility Products and/or Services} below, provided the transactions specified in Section 6 {Competitive Utility Products and/or Services} below comply with all other applicable rules.

If an electric and/or gas public utility provides supply, capacity, services, or information to a related competitive business segment of its public utility holding company, it shall make the offering available, via a public posting, on a non-discriminatory basis to non-affiliated market participants, which include competitors serving the same market as the related competitive business segment of the electric and/or gas public utility's holding company.

Compliance Plan

Ch. 3.B PSE&G does not provide access to utility information or services, nor sell unused capacity or supply, or surplus energy, kWh and/or Dth, and/or capacity, kW or therms on a short-term or long-term basis to its Affected Affiliates. [Sections 3.3 and 3.4]

Ch. 5.B.2 PSE&G’s employee training program indicates that no utility information, services, unused capacity or supply, other than those expressly permitted by the Final Standards may be offered or provided exclusively to Affected Affiliates. PSE&G information, services and unused capacity addressed in this rule includes all activities of PSE&G,




except as provided for in Section 5.4 (Joint Purchases), Section 5.5 (Corporate Support), and Subsection 6.1 (Competitive Products and/or Services). Section 3.3 covers both customer information and operating information. As noted in Section 3.3, PSE&G is not precluded from offering to its affiliates, on an exclusive basis, services permitted by Section 5.4 and Section 5.5; however, PSE&G acknowledges that it may not offer or provide other capacity or functions to its Affected Affiliates on an exclusive basis. [Section 3.3 (a)]

Ch. 5.B.3 When PSE&G provides supply, capacity, services or information to an Affected Affiliate, it will make this information or services available to similarly situated market participants on an equal and non-discriminatory basis. PSE&G considers notice given to the market in which an Affected Affiliate operates as satisfying the requirements of this rule. PSE&G does not interpret this rule to require that offerings be made individually to its Affected Affiliates’ competitors. Notifications and information are posted on PSE&G’s internet web site for each respective transaction. PSE&G procedures specify the form and content of the information to be posted on its web site. [Section 3.3(a)1]

Ch. 5.B.8 PSE&G maintains as confidential all individual proprietary customer information. PSE&G has strict rules protecting customer information and has developed specific procedures related to customer choice for responding to requests for such information. Requests for customer information are processed by PSE&G in accordance with the customer choice enrollment process, which requires that the customer sign an authorization form prior to PSE&G providing any individual proprietary information to a electric generation and/or gas service supplier. PSE&G requires the supplier to have this form in hand before any such information is sent. PSE&G has emphasized to its employees that this procedure must be followed regardless of whether the third-party supplier (TPS) is an affiliate of PSE&G.

PSE&G will release individual proprietary customer information only to the TPS that a customer specifies. A customer’s written affirmative agreement to release its information to a specific TPS will not be interpreted as the customer’s authorization to release information given to any other entity. Information released to its Affected Affiliates pursuant to a signed customer authorization is not subject to the requirements of Section 3.3; i.e., customer information cannot be made available to non-affiliated market participants on the same terms because PSE&G does not have the customer’s permission to release the information to anyone other than the specific supplier identified. [Section 4.1]

Ch. 5.B.9 PSE&G has policies and procedures controlling the handling of proprietary and confidential information acquired as a result of operating its distribution system. PSE&G reserves the right not to share non-publicly available information with any third parties, whether affiliated or not. Also, consistent with Section 3.3, PSE&G does not require that non-publicly available information that is not received as a result of operating its distribution system and shared with an Affected Affiliate be individually offered to non-affiliated entities. Further, Section 4.2 permits PSE&G to exchange proprietary corporate information with its Affected Affiliates on an exclusive basis provided the exchange is necessary in order to conduct the corporate support permitted by Section 5.5. This information is used only in conjunction with the permitted corporate support services.

Non-public restricted (customer and information received as a result of operating the distribution system) information that is not required for the provision of corporate support services, such as information about PSE&G’s natural gas or electricity related goods or services, will only be shared with an Affected Affiliate if it is contemporaneously made available to non-affiliated entities on the same terms and made available for public inspection. If PSE&G provides non-customer specific, non-public information to its




affiliates, it may charge the affiliate for such information in accordance with the pricing rules contained in Section 5.8. If PSE&G charges its Affected Affiliates for such information, in order to adhere to the same terms and conditions clause noted in this rule, PSE&G will not permit the release of such information to any non-affiliated entity until that entity has made payments and met any other conditions required of the Affected Affiliates that received the same information. [Section 4.2]



The Compliance Plan and IR-141 indicate that PSE&G provides procurement and delivery services of natural gas to PSEG ET. This service was scheduled to end July 31, 2000. PSE&G terminated this service on June 30, 2000 when PSEG ET exited the commodity business.124

PSE&G has indicated in Chapter 3 of its Compliance Plan that they currently do not sell unused capacity or supply or surplus energy to its affected affiliates. PSE&G further indicated in Chapter 5 of its Compliance Plan that when it does provide supply or capacity to its affected affiliates that it will do so to all market participants on a non-discriminatory basis.

PSE&G provides current meter-read information to a customers’ TPS. This is necessary in order that the TPS can calculate the customers’ generation charges. PSE&G has established a procedure whereby all TPSs are electronically sent the meter-reads within 24 hours. The TPS then has 48 hours to electronically send to PSE&G the customer charges for those customers who have elected that PSE&G prepare a consolidated bill. PSE&G prepares a daily exception report to identify TPSs that have not replied and then notifies the TPSs that their information has not been received. PSE&G provides this service to all market participants on an equal and non-discriminatory basis.125

As stated in the Compliance Plan and subsequently verified by the audit team, employees were trained that PSEG ET is not allowed access to non-public information about customer accounts or the distribution system. Employees were also trained in the process for handling customer data requests. This process is described in Section 3.1 of this chapter.

PSE&G Internal Audit has performed audits of FERC 889 compliance in October 1999 and in 2000. These audits along with the Affiliate Standards audit indicate overall compliance with Section 3.3.126 This assessment is based on the following:

The FERC amended 18 CFR to add Part 37 containing rules establishing and governing an Open Access Same-time Information System (OASIS) (formerly real-time information networks) issued April 24, 1996 and prescribing standards of conduct. Under this final rule, each public utility or its agent that owns, controls, or operates facilities used for the transmission of electric energy in interstate commerce was required to create or participate in an OASIS that would provide open access transmission customers and potential customers with information, provided by electronic means, about available transmission capacity, prices, and other information that will enable them to obtain open access non-discriminatory transmission service. This final rule requires (1) each public utility subject to the rule to implement standards of conduct to functionally separate transmission and




wholesale power merchant functions and (2) create an OASIS system that provides information in a non-discriminatory manner. The FERC also developed the requirements and formats for a fully functional OASIS.

Part 37.4 standards of conduct cover employee conduct, transfers and prohibitions on the disclosure of information or use of transfers as a means to circumvent the standards of conduct.

Part 37.6 has eight paragraphs that govern the use of information consistent with Affiliate Standards Section 3 and Section 4:

• Lists the objectives of an OASIS system. • Lists what must be posted for public transmission capability i.e. available

transmission capability and total transmission capability as well as how and when this information is to be updated.

• Sets out the requirements for posting transmission service products, including resold capacity as well as their prices.

• Provides the same for offerings of ancillary services. • Sets out the requirements for posting transmission service requests and

responses including service denials and curtailments of interruption of transmission.

• Provides requirements for posting transmission service schedules. • Deals with posting other transmission-related communications. • Sets out the requirements for auditing information.

In its June 1998 Order, the BPU evaluated whether source and sink information should be posted on the OASIS system, or kept confidential and explained that source and sink information for point-to-point transmission service describes the location of the generators and the ultimate load in an electric systems sense, and does not necessarily identify sellers and buyers by name. This information may routinely include only the identities of the respective control areas (e.g., in the case of point-to-point transmission across a transmission provider’s system, the point of receipt is identified as a control area and the point of delivery is similarly identified). Or, it may include the identities of the respective bus bars of the particular generators and loads (e.g. out of or into a provider’s transmission system).

SECTION 3.4: SURPLUS ENERGY AND/OR CAPACITY

Standard

(a) An electric and/or gas public utility selling or making an offer to sell surplus energy, kWh and/or Dth, respectively, and/or capacity, kW or therms, respectively, on a short term basis to its PUHC or a related competitive business segment of its public utility holding company, shall make the offering available on a non-discriminatory basis to non-affiliated electric or gas marketers, via a public posting.

An electric and/or gas public utility making an offer to sell surplus energy, kWh and/or Dth, respectively, and/or capacity, kW or therms, respectively, on a long term basis to the PUHC or a related competitive business segment of its public utility holding company, shall make the offering




available on a non-discriminatory basis to non-affiliated electric or gas marketers, via a public posting

Compliance Plan

Ch. 3.B PSE&G does not provide access to utility information or services, nor sell unused capacity or supply, or surplus energy, kWh and/or Dth, and/or capacity, kW or therms on a short-term or long-term basis to its Affected Affiliates. [Sections 3.3 and 3.4]

While PSE&G performs a gas procurement function for PSEG-ET, it plans to terminate this activity on July 1, 2000. The ‘delivery service’ that PSE&G has provided to PSEG-ET since late 1994 is an operating procedure rather than a formal contractual arrangement. It involves the coordination of certain scheduling and tracking activities and is a nominating convenience. Rather than arranging gas deliveries by many of PSEG-ET suppliers to several locations, it has proven to be more efficient to have PSEG-ET schedule its supplies to be delivered to PSE&G, and then to have PSE&G schedule deliveries (with the same total volume) to the other locations. The volumes associated with this activity have been relatively minor (typically less than 10 MDTh per day). PSEG-ET has maintained all delivery and balancing responsibilities at the inlet to the facilities of all the gas distribution companies behind which it serves its retail customers, including PSE&G. The delivery service will cease effective July 1, 2000.

This phase-out is due to the fact that existing contracts are dependent upon this support. To require early termination and/or compliance would result in any undue hardship to those customers which was clearly not anticipated by the Board.



Section 3.4 addresses the offer or sale of surplus energy, kWh, Dth, capacity, kW, or therms to a related competitive business segment. The Standard requires that the offering be made available on a non-discriminatory basis to non-affiliated entities via public posting. Based upon Section 1.1.a.i of the Standards only PSEG ET would be affected by this Standard and PSE&G’s other affiliate entities are unaffected. PSE&G’s Compliance Plan states that PSE&G does not provide access to utility information or services, nor sell unused capacity or supply, or surplus energy, kWh and/or Dth, and/or capacity, kW or therms on a short-term or long-term basis to its Affected Affiliates. However, when PSE&G does provide supply, capacity, services or information to an Affected Affiliate, it will make this information or services available to similarly situated market participants on an equal and non-discriminatory basis.

SECTION 3.5: OFFERING OF DISCOUNTS AND DISCRETIONARY WAIVERS

Standard

(a) Except when made generally available by an electric and/or gas public utility through an open, competitive bidding process, an electric and/or gas public utility shall not offer a discount or waive all or any part of any other charge or fee to a related competitive business segment of its public utility holding company, PUHC, or offer a discount or waiver for a transaction in which a related competitive business segment of its public utility holding company is involved unless the electric




and/or gas public utility shall make such discount or waiver available on a non-discriminatory basis to other market participants.

1. An electric and/or gas public utility shall not give its PUHC or a related competitive business segment of its public utility holding company involved in energy supply or marketing a preference with respect to tariff provisions that provide for discretionary waivers of fees, penalties, etc., unless offered to all others on a non-discriminatory basis.

An electric and/or gas public utility shall document the cost differential underlying the discount to its PUHC or a related competitive business segment of its public utility holding company in the Affiliate Discount Report described in subsection 3.11(a) below.

Compliance Plan

Ch. 3.B PSE&G does not offer discounts, discretionary waivers and/or tariff modifications to its Affected Affiliates. [Section 3.5, Section 3.6 and Section 3.11]


V-F69 PSE&G is in compliance with Section 3.5 of the Affiliate Standards. PSE&G does not offer discretionary waivers or discounts to affiliates.

PSE&G has noted in its compliance plan that PSE&G does not offer discounts or discretionary waivers to its affected affiliates. PSE&G’s response to IR-124 states that PSE&G does not offer discounts, discretionary waivers and/or tariff modifications to its affiliates.

Interviews with PSE&G Major Accounts Management indicates that they have not assigned any customers to discretionary tariffs since customer choice was initiated. Discretionary tariffs are negotiated customer specific contracts for electric service. These contracts are few in number and BPU approved.

SECTION 3.6: INTERPRETATION OF TARIFF PROVISIONS

Standard

(a) An electric and/or gas public utility shall apply tariff provision(s) on a non-discriminatory basis to its PUHC or related competitive business segments of its public utility holding company and to other market participants and their respective customers if the tariff provision allows for discretion in its application.

An electric and/or gas public utility shall strictly enforce a tariff provision if the tariff provision does not allow discretion in its application.

Compliance Plan






V-F70 PSE&G is in compliance with Section 3.6 of the Standards. PSE&G uniformly applies BPU approved tariffs in the manner specified in the BPU tariffs.

PSE&G has noted in its compliance plan that PSE&G does not offer tariff modifications to its affected affiliates. Interviews with PSE&G staff indicate that with the exception of customers on discretionary tariffs discussed in Section 3.5, all customers are on a BPU approved tariff.

PSE&G has also stated that “PSE&G does not offer discounts, discretionary waivers and/or tariff modifications to its affiliates”.127

SECTION 3.7: PROCESSING REQUESTS FOR ELECTRIC AND/OR GAS PUBLIC UTILITY SERVICES

Standard

An electric and/or gas public utility shall process all requests for similar services provided by the electric and/or gas public utility on a non-discriminatory basis for its PUHC or a related competitive business segment of its public utility holding company and for all other market participants and their respective customers.

Compliance Plan

Ch. 5.B.4 PSE&G understands that Section 3.7 is intended so PSE&G does not provide preferential treatment to its Affected Affiliates, when processing requests for similar services provided by a gas and/or electric public utility. PSE&G’s Customer Choice enrollment process assures that all requests for service, from its Affected Affiliates or from non-affiliated energy suppliers, are provided on a non-discriminatory basis. [Section 3.7]


V-F71 PSE&G is in compliance with Section 3.7 of the Standards. PSE&G processes requests for utility services in a non-discriminatory, non-preferential manner.

Employees have been trained to treat all customers in a non-discriminatory manner regardless of whether or not they get power from PSE&G. The audit team monitored incoming customer service calls at the Customer Inquiry Center. Customers requesting new or shut-off service were scheduled on the day of their choosing.

The audit team reviewed the process for assigning dedicated customer account representatives to large commercial/industrial services. This process is described in Section 3.1 of this chapter.

The audit team reviewed the processing times for customer requests for usage information and for switching suppliers. The results of these analyses are discussed in Section 3.1 of this chapter.

The audit team reviewed the prioritization system for incoming telephone calls to the Customer Inquiry System. Calls are prioritized based on a level of urgency. The highest




and first priority is given to telephone calls reporting a gas leak or other hazardous condition. The audit team tested the voice activation system and found no account number was necessary to enter the system and that there was no waiting time to speak to a Customer Service Professional (CSP) about an urgent condition. The second priority is to report an outage. This option on the telephone system is routed to a VRU (Voice Remote Unit). Upon entering an account number, information concerning an area outage is played for the customer. If it is an isolated outage or the customer does not know the account number, the call is routed to a customer service professional to take the information. The lowest priority calls are for general utility business, including Customer Choice, and the Appliance Service Business. Customer Choice calls are on the same queue as service requests, and billing issues. Customer Choice information calls are given equal priority with traditional utility service calls. The establishment of a prioritized queue establishes a process whereby service is provided on a first-come first-serve basis.128

SECTION 3.8: TYING OF PRODUCTS AND/OR SERVICES PROVIDED BY AN ELECTRIC AND/OR GAS PUBLIC UTILITY

Standard

An electric and/or gas public utility shall not condition or otherwise tie the provision of any products and/or services provided by the electric and/or gas public utility, nor the availability of discounts of rates or other charges or fees, rebates, or waivers of terms and conditions of any products and/or services provided by the electric and/or gas public utility to the taking of any products and/or services from its PUHC or a related competitive business segment of its public utility holding company.

Compliance Plan

Ch. 5.B.5 PSE&G’s training materials make it clear to employees that the utility’s products and services are not to be tied to the products and services of any of its Affected Affiliates. More specifically, PSE&G has instructed its employees that no conditions may be implied or imposed upon PSE&G’s customers that require doing business with an Affected Affiliate in order to receive any products, services or special prices offered or provided by PSE&G.

PSE&G utility employees who have customer contact responsibilities receive periodic reminders that they are not to say or imply that the taking of any utility service or product is contingent upon the taking of any service or product from an Affected Affiliate. [Section 3.8]


V-F72 PSE&G is in compliance with Section 3.8 of the Standards. PSE&G does not condition the provision of utility services to taking of products and services from an affiliate.

While PSE&G’s Compliance Plan has indicated training as the primary vehicle to obtain compliance on this issue, PSE&G’s training sessions do not specifically address the prohibition on the tying of services.




PSE&G has an approved BPU tariff for Experimental Hourly Energy Pricing Service (EHEP). In exchange for the customer curtailing load during periods of constrained supply and delivery, the customers receive a credit on their bills. Application of this tariff requires that PSE&G be the sole source provider to the customer. In essence, although the tariff is BPU approved, the prerequisites of the tariff represent a tying arrangement and are in conflict with the Standards.129

The audit team monitored incoming customer service calls at the Customer Inquiry Center. While no actual customer choice calls were received, there were a significant number of appliance service business calls. It can be inferred that CSPs are not tying services based on the following observations:

• CSPs did not solicit customers to purchase an ASB service plan. • CSPs did not pressure customers into keeping ASB service plans that they were

canceling. • CSPs did not pressure current ASB customers to increase the number of ASB

service plans. • CSPs treated all customers professionally and courteously regardless of the

services they were purchasing from PSE&G. • CSPs did not link the purchase of an ASB service plan with receiving service.

The audit team reviewed the Customer Choice enrollment package. Based on the materials provided it can be inferred that PSE&G does not tie services. PSE&G stated in the cover letter, “Whatever your decision, PSE&G will continue to deliver electric service at the high-level of reliability you have come to expect”.130

The audit team request copies of PSE&G’s responses to customer RFPs/RFQs for energy services in order to observe any indication that of PSE&G tying services of large commercial/ industrial customers. PSE&G responded that they provide default Basic Generation Service and prohibited from offering non-tariff services to its customers. PSE&G further stated that it has not received nor responded to any RFPs/RFQs for energy services by customers.131

SECTION 3.9: ASSIGNMENT OF CUSTOMERS

Standard

An electric and/or gas public utility shall not assign customers to which it currently provides products and/or services to any related competitive business segments of its public utility holding company, whether by default, direct assignment, option or by any other means, unless that means is equally available to all competitors on a non-discriminatory basis.

Compliance Plan

Ch. 5.B.6 PSE&G does not assign retail customers to any service provider. PSE&G’s training materials instruct employees not to assign customers to Affected Affiliates. PSE&G does not assign customers to any Affected Affiliates unless the means of assignment are equally available to all competitors. [Section 3.9]





V-F73 PSE&G is in Compliance with Section 3.9 of the Standards. PSE&G does not assign customers to its affiliates.

PSE&G’s Compliance Plan notes the prohibition on assigning customers as described in Section 3.9 of the Standards.132 As stated in the Compliance Plan and subsequently verified by the audit team, PSE&G provides customer contact employees training that expressly addresses assignment. Customer Service Professionals are instructed that customers must affirmatively select their generation supplier if they want to participate in Customer Choice.133 PSE&G has stated that they have not assigned any customers to an affiliate during 1999 or 2000.134

The audit team reviewed customer requests to switch suppliers from PSE&G to a TPS. PSEG ET earned less than one-percent of the market share that enrolled in the Customer Choice program.135

SECTION 3.10: BUSINESS DEVELOPMENT AND CUSTOMER RELATIONS

Standard

(a) Except as otherwise provided by these standards, an electric and/or gas public utility shall not provide any assistance, aid or services to its PUHC or related competitive business segment of the PUHC if related to customer enrollment, marketing or business development unless offered to all competitors on a non-discriminatory basis. By way of example but not limited to, an electric or gas public utility shall not:

1. provide leads to its PUHC or a related competitive business segment of its public utility holding company;

2. solicit business on behalf of its PUHC or a related competitive business segment of its public utility holding company;

3. acquire information on behalf of or to provide to its PUHC or a related competitive business segment of its public utility holding company;

4. share market analysis reports or any other type(s) of proprietary or non-publicly available reports, including but not limited to market, forecast, planning or strategic reports, with its PUHC or a related competitive business segment of its public utility holding company;

5. share customer usage or end use equipment information obtained during the course of providing electric and/or gas public utility services, including but not limited to the administration of demand-side management programs, with its PUHC or a related competitive business segment of its public utility holding company;

6. request authorization from its customers to pass on customer information exclusively to its PUHC or a related competitive business segment of its public utility holding company;

7. represent or imply that the electric and/or gas public utility speaks on behalf of its PUHC or a related competitive business segment of its public utility holding company or that the customer will receive preferential treatment as a consequence of conducting business with the related competitive business segment of its public utility holding company; or

8. represent or imply that its PUHC or a related competitive business segment of its public utility holding company speaks on behalf of the electric and/or gas public utility.




Provided it is in compliance with these standards, and subject to the provisions of subsection 4.5(b), an electric and/or gas public utility may offer or provide customers advice or assistance with regard to a related competitive business segment of its public utility holding company and/or other product and/or service providers upon the unsolicited request of the customer, so long as such advice or assistance is provided with regard to other competitors on a non-discriminatory basis.

Compliance Plan

Ch. 5.B.7 PSE&G’s training materials emphasize that customer leads are not to be provided to its Affected Affiliates, that business may not be solicited on behalf of its Affected Affiliates, that no customer information may be acquired or requested on behalf of its Affected Affiliates, and that no market analysis reports prepared using PSE&G restricted information or other proprietary information is to be shared with its Affected Affiliates. PSE&G prohibits the release of individual proprietary customer information without the customer’s written consent. Customer information includes the customer usage or end use equipment information.

PSE&G employees are trained not to suggest in any way that a customer will receive preferential treatment by doing business with its Affected Affiliates. Employees are also instructed not to give the appearance that its Affected Affiliates speak on behalf of PSE&G. Finally, PSE&G employees are instructed not to offer or provide customers with advice with regard to its Affected Affiliates or other product and/or service providers unless it provides such advice on a non-discriminatory basis to competitors. [Section 3.10]


V-F74 Depending on the nature of the calls taken for PSEG ET, PSE&G could be in violation of Section 3.10.a.

As discussed in Section 3.2 of this chapter, PSE&G’s Customer Inquiry Center provides call answering services to PSEG ET after normal business hours.136 These calls could include calls related to customer enrollment that are prohibited by Section 3.10.a. The number of calls involved is relatively small, and the audit team did not audit specific after hours calls to determine if any of the calls involved requests for PSEG ET services.

PSE&G’s Compliance Plan notes that business may not be solicited on behalf of its Affected Affiliates, that no customer information may be acquired or requested on behalf of its Affected Affiliates, and that no market analysis reports prepared using PSE&G restricted information or other proprietary information is to be shared with its Affected Affiliates. PSE&G prohibits the release of individual proprietary customer information without the customer’s written consent.

As stated in the Compliance Plan and subsequently verified by the audit team, PSE&G provides customer contact employees training that specifically instructs employees not to:

• Provide competitive information to PSEG Energy Technologies. • Direct or advise customers to PSEG Energy Technologies. • Volunteer information that PSEG Energy Technologies is PSE&G’s non–

regulated affiliate. • Release customer information without written permission from the customer.




• Provide leads to PSEG ET. • Solicit business on behalf of PSEG ET. • Request information on behalf of PSEG ET. • Trade upon, promote or advertise it relationship with PSEG ET.

Customer contact employees are permitted to discuss general information with customers concerning “Choice”. They may offer to send the customer an enrollment package and suggest further research at the PSE&G and NJBPU web sites. Yes or No answers may be supplied to customers requesting information concerning whether a particular supplier is licensed, but no further information may be supplied.137

Section 3.2 of this Chapter contains recommendations related to the services offered by PSE&G to PSEG ET.

SECTION 3.11: AFFILIATE DISCOUNT REPORTS

STANDARD

(a) If a discount, rebate, or other waiver of any charge, penalty, or fee associated with products and/or services provided by an electric and/or gas public utility is offered to its PUHC or a related competitive business segment of its public utility holding company, the electric and/or gas public utility shall provide the following information within 24 hours of the time of the transaction, via a public posting:

- the name of the its PUHC or related competitive business segment of its public utility holding company involved in the transaction;

- the rate charged; - the maximum rate; the time period for which the discount, rebate, or waiver applies; - the quantities involved in the transaction; - the delivery points involved in the transaction; - any conditions or requirements applicable to the discount, rebate or waiver, and a

documentation of the cost differential underlying the discount as required in subsection 4 of Section 3 above; and

- procedures by which a non-affiliated entity may request a comparable offer.

(b) An electric and/or gas public utility that provides its PUHC or a related competitive business segment of its public utility holding company a discounted rate, rebate, or other waiver of a charge, penalty or fee associated with services offered by the electric and/or gas public utility shall maintain, in compliance with N.J.A.C. 14:5-5.2 or longer if required by another government agency, for each billing period, the following information:

1. the name of its PUHC or a related competitive business segment of its public utility holding company being offered products and/or services provided by the electric and/or gas public utility in the transaction;

2. the related competitive business segment’s role in the transaction, i.e., shipper, marketer, supplier, seller, etc.;

3. the duration of the discount or waiver;

4. the maximum rate;

5. the rate or fee actually charged during the billing period; and

6. the quantity of products and/or services scheduled at the discounted rate during the billing period for each delivery point.




7. facts demonstrating that the discounted rate, rebate, or other waiver of a charge, penalty or fee was offered to non-affiliated entities on a non-discriminatory basis.

All records maintained pursuant to these standards shall also conform to FERC rules where applicable.

Compliance Plan




PSE&G does not offer discounts, discretionary waivers and/or tariff modifications to its affected affiliates.138 Section 1.1.a.i limits the application of this Standard to retail competitive services in New Jersey. The Compliance Plan does not address offering discounts or waivers to unaffected affiliates. DR 141 requested a description of the process by which PSE&G provides access to utility information services and unused capacity and supply for all similarly situated market participants. PSE&G’s response stated, in essence, that PSE&G did not provide utility information, offer discounts, discretionary waivers and/or tariff modifications to PSEG ET.




SECTION 4: INFORMATION DISCLOSURE

Section 4 of the Standards specifies the procedures and requirements that PSE&G must follow in disclosing several categories of information including:

• Customer information • Non-customer specific, non-public information about PSE&G • Service providers • Suppliers • Affiliate-related advice or assistance

In addition, PSE&G must maintain and make available records relating to affiliate transactions and contracts in accordance with N.J.A.C. 14:5-5.2 or longer if another government agency so requires.

In examining PSE&G’s compliance with Section 4, the auditing team used the following evaluative criteria:

• The utility provides customer information to its RCBSs and non-affiliate entities on an equal basis and only with written customer consent.

• The utility makes non-customer specific non-public information available on a non-discriminatory basis to non-affiliated companies when it makes such information available to an RCBS.

• The utility controls information disclosure in such a way as to be fair to all entities and maintains records of all transactions with its RCBSs.

• Non-customer specific non-public information is made available to RCBSs and all other service providers at the same time and under the same terms and conditions.

• Utility compiles all requests to review such information within 3 days.

• Information on service providers is given to customers only at their request, and includes information on all service providers, including RCBSs, or alternatively, a response will consist of references to generally available listings of service providers.

• The utility does not supply non-public supplier information to its RCBSs or non-affiliated entities without written permission from the supplier.

• The utility does not actively solicit the release of such information exclusively to its own RCBS in an effort to keep such information from other unaffiliated entities.

• The utility answers customer requests for information about any RCBS service provider by providing an authorized list of all providers of gas-related, electricity-related, or other utility-related goods and services operating in its service territory, including its RCBSs, or in a manner otherwise permitted by Section IV.3.




• The utility honors third-party requests to be included on such list.

• All tariffed and nontariffed transactions with RCBSs are logged and recorded in PSE&G’s General Accounts.

• The utility maintains timely, accurate records of all transactions between the utility and its RCBSs.

• The utility maintains a record of all contracts and related bids for the provision of work, products or services to and from the utility to its RCBSs for no less than required by N.J.A.C. 14:5-5.2 or longer if another government agency so requires.

SECTION 4.1: CUSTOMER INFORMATION

Standard

An electric and/or gas public utility may provide individual proprietary information to its PUHC or a related competitive business segments of its public utility holding company, and only with prior affirmative customer written consent or as otherwise authorized by the Board and only if it is provided to unaffiliated entities on a non-discriminatory basis.

Compliance Plan

Ch. 5.B.8 PSE&G maintains as confidential all individual proprietary customer information. PSE&G has strict rules protecting customer information and has developed specific procedures related to customer choice for responding to requests for such information. Requests for customer information are processed by PSE&G in accordance with the customer choice enrollment process, which requires that the customer sign an authorization form prior to PSE&G providing any individual proprietary information to a electric generation and/or gas service supplier. PSE&G requires the supplier to have this form in hand before any such information is sent. PSE&G has emphasized to its employees that this procedure must be followed regardless of whether the third-party supplier (TPS) is an affiliate of PSE&G.

PSE&G will release individual proprietary customer information only to the TPS that a customer specifies. A customer’s written affirmative agreement to release its information to a specific TPS will not be interpreted as the customer’s authorization to release information given to any other entity. Information released to its Affected Affiliates pursuant to a signed customer authorization is not subject to the requirements of Section 3.3; i.e., customer information cannot be made available to non-affiliated market participants on the same terms because PSE&G does not have the customer’s permission to release the information to anyone other than the specific supplier identified. [Section 4.1]



PSE&G maintains the confidentiality of customer information and will not release customer information without explicit written customer consent. PSE&G’s Compliance Plan notes




PSE&G’s policy on the confidentiality of customer information and the prohibition against releasing customer information without a properly executed customer information release form.

PSE&G has established in its Customer Choice enrollment program a process whereby customers interested in soliciting proposals from TPSs are sent their usage information directly. This eliminates the need for authorizing release or validating consent forms on a large-scale basis.

PSE&G has a Customer Information Release form that is used to release customer information to a third party. The form must be accurately completed and signed by the authorized signature associated with the account number.139

Various employees have access to the Customer Information System. Although access is granted on an as needed basis to perform specific job functions, access to customer account information is on a one-at-a-time basis. Only a select handful of individuals have authority to perform data queries on the Customer Information System. This safeguard eliminates the creation of lists of customers sorted by strategic criteria that could be sold or given to affiliated or non-affiliated market participants.

SECTION 4.2: NON-CUSTOMER SPECIFIC NON-PUBLIC INFORMATION

Standard

(a) An electric and/or gas public utility shall make available non-customer specific non-public information acquired as a result of operating the public utility’s distribution system, including information about an electric and/or gas public utility's natural gas or electricity purchases, sales, or operations or about an electric and/or gas public utility's gas-related goods or services, electricity-related goods or services, to a related competitive business segment of its public utility holding company only if the electric and/or gas public utility makes such information available, via a public posting, to all other service providers on a nondiscriminatory basis, and keeps the information open to public inspection.

1. An electric or gas public utility is permitted to exchange proprietary information on an exclusive basis with its PUHC or a related competitive business segments of its public utility holding company, provided it is necessary to exchange this information in the provision of the corporate support services permitted by subsection 5.5 below.

The PUHC’s or related competitive business segment’s use of such proprietary information is limited to its use in conjunction with the permitted corporate support services, and is not permitted for any other use.

Compliance Plan

Ch. 5.B.9 PSE&G has policies and procedures controlling the handling of proprietary and confidential information acquired as a result of operating its distribution system. PSE&G reserves the right not to share non-publicly available information with any third parties, whether affiliated or not. Also, consistent with Section 3.3, PSE&G does not require that non-publicly available information that is not received as a result of operating its distribution system and shared with an Affected Affiliate be individually offered to non-affiliated entities. Further, Section 4.2 permits PSE&G to exchange proprietary corporate




information with its Affected Affiliates on an exclusive basis provided the exchange is necessary in order to conduct the corporate support permitted by Section 5.5. This information is used only in conjunction with the permitted corporate support services.

Non-public restricted (customer and information received as a result of operating the distribution system) information that is not required for the provision of corporate support services, such as information about PSE&G’s natural gas or electricity related goods or services, will only be shared with an Affected Affiliate if it is contemporaneously made available to non-affiliated entities on the same terms and made available for public inspection. If PSE&G provides non-customer specific, non-public information to its affiliates, it may charge the affiliate for such information in accordance with the pricing rules contained in Section 5.8. If PSE&G charges its Affected Affiliates for such information, in order to adhere to the same terms and conditions clause noted in this rule, PSE&G will not permit the release of such information to any non-affiliated entity until that entity has made payments and met any other conditions required of the Affected Affiliates that received the same information. [Section 4.2]


V-F77 PSE&G has not demonstrated compliance with Section 4.2 of the Affiliate Standards.

Section 4.2 deals with non-customer specific non-public information shared between PSE&G and a related competitive business segment of its PUHC. Section 1.1.a.i limits the application of this Standard to retail competitive services in New Jersey. The Standard also recognizes the use of proprietary information in conjunction with permitted corporate services. As such, PSE&G recognizes only PSEG ET as an affected affiliate subject to this Standard. In its response to a request for a description of the process by which PSE&G provides access to utility information services and unused capacity and supply for all similarly situated market participants, PSE&G simply stated that PSE&G did not provide utility information, offer discounts, discretionary waivers and/or tariff modifications to PSEG ET.140

Even though PSE&G has policies and procedures in place for handling confidential information, the types of information which would be governed by Section 4.2 have not been identified. Therefore, employees cannot be instructed as to what information is restricted by Section 4.2.

V-R21 Identify the types of information covered by Section 4.2 and inform those employees with access to this information about the Section 4.2 and its requirements. (Refer to Finding V-F77.)

SECTION 4.3: SUPPLIER LISTS

Standard

When an electric and/or gas public utility makes available a list of electric generation and/or gas service suppliers (suppliers), said list shall only contain those suppliers who are duly licensed by the Board and comply with the electric and/or gas public utility’s Board-approved tariff to operate on its distribution system. Said list shall be maintained in alphabetical order, and not highlight or otherwise promote any particular supplier.




Compliance Plan

Ch. 5.B.10 PSE&G understands that deregulation and the emergence of a large number of electric and/or gas service suppliers (suppliers) has prompted many customers to contact their utility company to inquire about suppliers and procure lists of companies with whom they might eventually do business. PSE&G maintains a neutral position with regard to suppliers by adequately distancing itself from any and all suppliers, including its Affected Affiliates.

When PSE&G provides or makes available to its customers any list of suppliers:

- The list contains only those suppliers who are duly licensed by the Board and who comply with the Board’s approved tariff to operate on PSE&G’s distribution system. PSE&G may refer customers to the BPU’s website.

- The list is maintained in alphabetical order and does not highlight or otherwise promote any particular supplier.

- PSE&G’s Customer Choice enrollment process includes only Board authorized suppliers, and does not highlight or promote any particular supplier. [Section 4.3]



PSE&G includes a list of suppliers in its Customer Choice enrollment package. This package must be requested by the customer and can be ordered on-line or through the call center. An interview with the PSE&G Customer Choice Implementation Manager indicated that the supplier list is downloaded on the 22nd of every month from the BPU web site and added to the Customer Choice materials. The audit team reviewed the supplier lists dated 6/23/00 and 7/21/2000 and found the following:141

• The supplier list is included in the Customer Choice enrollment materials. • The list dated 7/21/00 largely matches the list found on the BPU’s web site on

8/15/00. Although the lists are not identical, the differences are minor and can be attributed to the BPU having edited the list since 7/21/00, where addresses and names were updated and new suppliers added.

• It can be inferred that if the suppliers are found on the BPU web site that they are duly licensed by the Board.

• The list is maintained in alphabetical order. • The list does not highlight or otherwise promote any particular supplier.

SECTION 4.4: NON-PUBLIC SUPPLIER INFORMATION

Standard

(a) An electric and/or gas public utility may provide non-public information and data which have been received from unaffiliated suppliers to its PUHC or a related competitive business segment of its public utility holding company or other non-affiliated entities only if the electric and/or gas public utility first obtains written affirmative authorization to do so from said unaffiliated supplier.




An electric and/or gas public utility shall not solicit the release of such information exclusively to its PUHC or a related competitive business segment of its public utility holding company in an effort to keep such information from other unaffiliated entities.

Compliance Plan

Ch. 5.B.11 PSE&G interprets this rule as governing the sharing of information from unaffiliated third-party providers of energy or energy services. PSE&G will not request permission of such suppliers to disclose information exclusively to its Affected Affiliates. If a supplier requests that its information be released, or inquires about information release to affiliate or non-affiliates, PSE&G will refer the supplier to Section 4.4 of the Final Standards. Any written authorization that a supplier provides for release of information pursuant to this rule will be maintained by PSE&G. [Section 4.4]



The audit did not identify any instance where non-public information or data was received from unaffiliated suppliers and provided to a PSE&G affected affiliate.

A description of the process by which PSE&G provides access to utility information services and unused capacity and supply for all similarly situated market participants was requested.142 PSE&G’s response stated, in essence, that PSE&G did not provide utility information, offer discounts, discretionary waivers and/or tariff modifications to PSEG ET.

A description of any non-public information or data received from unaffiliated suppliers and provided to PSE&G affiliates was requested. The response stated that with respect to Energy Suppliers, non-public information or data received from unaffiliated suppliers has not been provided to PSE&G affiliates.143

SECTION 4.5: PRODUCT AND/OR SERVICE PROVIDER INFORMATION

Standard

(a) Except upon request by a customer or as authorized in subsection 3 of this subsection or otherwise by the Board, an electric and/or gas public utility shall not provide its customers with any list of product and/or service providers, which highlights or otherwise identifies its PUHC or a related competitive business segment of its public utility holding company, regardless of whether such list also includes the names of unaffiliated entities.

(b) If a customer requests information about any affiliated product and/or service provider, the electric and/or gas public utility may acknowledge that such affiliated product and/or service provider exists, but shall provide no additional information unless it provides a list of all providers of gas-related, electricity-related, or other utility-related products and/or services in business in its service territory, including the related competitive business segment of its public utility holding company.

Any such list shall include all suppliers licensed by the Board.




Where maintaining such list would be unduly burdensome due to the number of service providers, the electric and/or gas public utility shall not provide a list and may direct the customer to a generally available listing of service providers, e.g., the Board, the telephone directory or Internet.

Compliance Plan

Ch. 5.B.12 PSE&G has informed its employees, through its training program and via the interim guidelines, that if a customer requests information about any electric and/or gas supplier, PSE&G shall provide a list of all electric generation and/or gas service suppliers (suppliers) in alphabetical order with the name and telephone number of each. Such list shall represent the approved Board list. If a customer requests information about an Affected Affiliate, PSE&G will provide the entire approved Board list of suppliers.

PSE&G does not believe that this rule precludes providing customers with information about the competitive market in New Jersey. PSE&G does not interpret this rule as preventing PSE&G from referring customers who request information about suppliers to the Board’s website or to the page on that website that includes the Board’s list of currently licensed suppliers. PSE&G also does not interpret Section 4.5 of the Final Standards as prohibiting a printing of the Board’s list directly from that web site for provision to customers at their request. In no case will PSE&G emphasize the inclusion of its Affected Affiliates within the list. [Section 4.5]



As stated in the Compliance Plan and verified by the audit team through interviews and data review, customer contact employees were trained not to comment either negatively or positively on a particular TPS nor to direct or advise customers regarding which TPS to choose, but rather to supply a list of all approved TPS’s and their phone numbers to customers.

The audit team reviewed the content and the distribution process of the supplier lists. The findings and conclusions are addressed in Section 4.3: Supplier Lists.

SECTION 4.6: RECORD-KEEPING

Standard

(a) An electric and/or gas public utility shall maintain complete and accurate records, documenting all tariffed and non-tariffed transactions with its PUHC and a related competitive business segments of its public utility holding company, including but not limited to, all waivers of tariff or contract provisions.

(b) An electric and/or gas public utility shall maintain such records in compliance with the time frame required by N.J.A.C. 14:5-5.2 or longer if another government agency so requires.

The electric and/or gas public utility shall make such records available for Board and/or RA review upon 72 hours' notice, or at a time mutually agreeable to the electric and/or gas public utility and the Board and/or RA.




Compliance Plan

Ch. 9.B.1 PSE&G maintains complete and accurate records, documenting all tariff and non-tariff transactions within SAP. [Section 4.6(a)]

PSE&G maintains that it is in compliance with the record retention policies established by the Board under N.J.A.C. 14:5-5.2. [Section 4.7]

Records documenting all tariff and non-tariff transactions shall be made available at a time mutually agreeable to PSE&G and the Board and/or RA. [Section 4.6(c)]


V-F81 PSE&G has not demonstrated that it is in compliance with Section 4.6 of the standards.

In Chapter 4 Section D, several concerns regarding the SAP system were discussed. While SAP maintains detailed information on specific transactions, the ability to compile and access this information in a meaningful and timely manner has not been demonstrated. Until the SAP system is fully implemented and procedures to improve control and enhance the effective utilization of the system are established, PSE&G’s compliance with Section 4.6 of the Standards cannot be assessed. Accordingly, at this time the audit team must conclude that compliance has not been established with regard to this Standard.

SECTION 4.7: MAINTENANCE OF AFFILIATE CONTRACTS AND RELATED BIDS

Standard

An electric and/or gas public utility shall maintain a record of all contracts and related bids for the provision of work, products and/or services to and from the electric and/or gas public utility to and from the PUHC or related competitive business segments of its public utility holding company in compliance with N.J.A.C. 14:5-5.2 or longer if another government agency so requires.

Compliance Plan

Ch. 9.B.1 PSE&G maintains that it is in compliance with the record retention policies established by the Board under N.J.A.C. 14:5-5.2. [Section 4.7]


V-F82 PSE&G has not demonstrated that it is in compliance with Section 4.7 of the Standards.

The audit team was unable to verify PSE&G’s compliance with the Standard because PSE&G not provide the requested records of all contracts and related bids.

A brief explanation of the type of business performed by the affiliate and a brief explanation of the nature of services provided by PSE&G and the affiliate was requested for each affiliate that provides or receives services to or from PSE&G. In its response, PSE&G




describes 11 categories of services provided to and from PSE&G and PSEG Power by PSEG ET.144 However, the service agreements and contracts provided in response to IR-109 did not include all of the agreements for the provision of work activities described in IR-110-S1.

Records of all contracts and related bids for the provision of work products or services to and from the Company to its affiliates were requested. PSE&G’s response provided the following:145

• Service Agreement by and between PSE&G and Enterprise Diversified Holding, Inc. dated May 1, 1994

• Addendum to Service Agreement, dated December 28, 1999 • Agreement by and between PSE&G and Energis Resources, Inc. dated May 7,

1997 • Agreement by and between PSE&G and PSEG ET.

The bid and contract record for any work performed by any PSEG ET subsidiary for PSE&G or for PSEG Power was requested. PSE&G provided one agreement between Independent Sheet Metal Company (a PSEG ET subsidiary) and 18 proposals by Independent Sheet Metal, one purchase order with related proposal from Independent Sheet Metal, and one purchase order between PSE&G and Fluidics (another PSEG ET subsidiary).146

A description of the approach employed by the Company related to the maintenance of contemporaneous records documenting all transactions with its affiliates was requested. PSE&G’s response suggested that PSEG has a comprehensive and sound records management program managed by the professional records management staff within Libraries and Information Resources and that special or periodic reports of transactions with associated companies are maintained for six years in compliance with NARUC 65c(1) and CFR 125.3 regulatory requirements.147 Nevertheless, despite numerous information requests by the audit team, records of affiliate contracts and all of the activities between PSE&G and its affiliates do not appear to be maintained and available for audit review.




SECTION 5: SEPARATION

Section 5 of the standards requires that the utility and its RCBSs operate and keep records as separate corporate entities. There are nine components of Section 5 that address different aspects of separation. Section 5 requires that a utility and its RCBSs (1) be separate corporate entities; (2) keep separate books and records, (3) not share facilities, except for the provision of shared corporate services, (4) avoid joint purchases related to the utility merchant function, (5) not use the corporate support function as conduit to evade the Standards; (6) not promote or advertise an affiliate’s affiliation with the utility, (7) not jointly employ the same employees, and (8) transfer allowable goods and services at fair market value or fully loaded cost.

In assessing PSE&G’s compliance with Section 5, the audit team considered a number of criteria:

• The utility and its RCBSs are organizationally and functionally separate. • There are no overlapping managerial positions other than for approved shared

services. • The utility’s interpretation of what constitutes a separate corporate entity is

consistent with the Standards. • Separate books and records are kept for the utility and its affiliates. • Books are kept in accordance with USOA and GAAP standards. • Physical separation of the utility and any affiliated companies engaged in the

provisioning of a product that uses gas or electricity or the provisioning of services that relate to the use of gas or electricity.

• Affiliate companies do not have computer access to information systems beyond what is appropriate for joint corporate functions.

• The processes used to allocate costs for shared facilities and services provide accurate and timely information.

• Items jointly purchased are allowed by the Standards. • Costs of joint purchases are allocated appropriately. • Disclaimers are used appropriately. • No RCBSs has traded upon, promoted or advertised its affiliation with the

utility. • Transfers of employees between the utility and its RCBSs do not come at the

expense of the utility business. - Officer approval of both companies involved in the transfer is obtained

before the transfer occurs. - Utility employees are free to accept or reject employment with RCBSs and no

involuntary transfers take place. - If a utility employee elects to accept a position with an RCBS, he or she

resigns from the utility. • The utility has no joint employees with its RCBSs except where exempted. • The transfer-pricing methodology ensures that transactions between the utility

and its RCBSs do not harm the utility or its customers.




SECTION 5.1: CORPORATE ENTITIES

Standard

An electric and/or gas public utility, its PUHC and related competitive business segments of its public utility holding company shall be separate corporate entities.

Compliance Plan

Ch. 2.C.1 PSE&G and its Affected Affiliates are separate corporate entities. [Section 5.1]


V-F83 PSE&G is in compliance with Section 5.1 of the Affiliate Standards.

To determine the separateness of PSE&G and each of its significant affiliates, including all affected affiliates, we reviewed the Articles of Incorporation of each entity noting that the name of the company stated on the Article of Incorporation agreed to PSEG company records. We also noted that the date was reasonable, and that an official signature was in place. This review was made of the affiliates with the most significant dollar activity or balances on its Income Statement or Balance Sheet for the year ended 1999. Although this does not encompass the test period, it was determined that the end of the year balances on the Balance Sheet at December 31, 1999, and the activity on the Income Statement for the year of 1999 would still indicate the affiliates with the most significant balances and level of activities for the test period, January 1, 2000 through June 30, 2000. The affiliates whose Articles of Incorporation were reviewed are shown in Exhibit V-3.




_________________________________________________________________________________ PSE&G Competitive Services Offerings Audit

Exhibit V-3 Affiliate Articles of Incorporation Reviewed

Public Service Enterprise Group

PSEG Americas Ltd.

Public Service Electric and Gas PSEG Texgen Holdings Inc. PSEG Power LLC PSEG Global Funding II LLC Energy Holdings PSEG Americas Ltd. PSEG Services Corporation PSEG Americas Inc PSEG Energy Technologies PSEG International Inc. PSCRC PSEG New Hampshire Fluidics PSEG Hawaiian Investment Arden PSEG Asia Inc. Liber Rich & Sons CEMAS Rich Fire PSEG GWF Struble PSEG USA Frank A. McBride Company PSEG Global East Coast PSEG NJ PSEG Brazil Investment RCMC PSEG Americas Operating Company PSRC, Inc PSEG Brazil Ltda. PSEG Resources PSEG Cayman Americas Company

_________________________________________________________________________________

SECTION 5.2: BOOKS AND RECORDS

Standard

(a) An electric and/or gas public utility and related competitive business segments of its public utility holding company shall keep separate books and records.

(b) Electric and/or gas public utilities’ books and records shall be kept in accordance with applicable Uniform System of Accounts (USOA).

The books and records of its PUHC or a related competitive business segment of an electric and/or gas public utility’s holding company engaged in transactions, interactions and relations with the electric or gas public utility shall be open for examination by the Board

Compliance Plan

Ch. 9.B.2 PSE&G and PSEG-ET use a common accounting information system called SAP. Within SAP, they have separate company codes, which allow for timely generation of financial statements. SAP was implemented in January 1999. [Section 5.2(a)]

Ch. 9.B.3 Separate books and records are also maintained in SAP for the competitive business segments of PSE&G. This separation occurs through the use of profit centers, cost centers and a mechanism known as an order group. Profit centers and costs centers are used to track revenue and expenses related to PSE&G or the competitive business segment. Order groups categorize orders into distinct classes (i.e. Tariff and Non-Tariff)




that enable charges to those orders to be identified with specific initiatives. [Section 5.2(a)]

Ch. 9.B.4 The books and records of PSE&G and the competitive business segments of PSE&G are kept in accordance with applicable Uniform System of Accounts. The accounting of PSE&G is subject, in certain respects, to the requirements of the BPU and the FERC. As a result, PSE&G maintains its accounts for its regulated operations in accordance with their prescribed Uniform Systems of Accounts, which are the same. The application of Generally Accepted Accounting Principles (GAAP) by PSE&G differs in certain respects from applications by non-regulated businesses. [Section 5.2(b)]

Ch. 9.B.5 The books and records of PSE&G and the competitive business segments of PSE&G are open for examination by the BPU. PSE&G provides monthly financial statements to the Board, and will continue this practice. [Section 5.2(c)]


V-F84 PSE&G is in compliance with Section 5.2 of the Affiliate Standards. PSEG, PSE&G, and its related competitive business segments keep separate books and records.

To determine that separate books and records were kept for PSEG, PSE&G, and their affiliates, the audit team reviewed the financial statements of each of the PSEG companies listed in Exhibit V-3.148 We reviewed audited financial statements, if they were available, and internally generated financial statements if audited financial statements were not available. The companies that had audited financial statements were:

• PSEG • PSE&G • Energy Holdings • PSEG Energy Technology • PSEG Global

Through the interview process, our consultants confirmed that separate books and records exist for each of the PSEG affiliates.149 PSEG, PSE&G, and its competitive business segments books and records are kept in accordance with the Uniform System of Accounts.

Our review of the PSEG financial statements and books and records confirmed that they are kept in accordance with the USOA. We also noted that the books and records are kept in accordance with GAAP.150 We confirmed both of these facts through the interview process.151

The books and records of PSEG, PSE&G and its competitive business segments are open for examination by the BPU.

Through discussion with PSEG employees and BPU staff, our consultants confirmed that the books and records are open for examination by the BPU.




SECTION 5.3: SHARING OF PLANT, FACILITIES, EQUIPMENT OR COSTS

Standard

(a) An electric and/or gas public utility shall not share office space, office equipment, services, and systems with a related competitive business segment of its public utility holding company, except to the extent appropriate to perform shared corporate support functions permitted under this subsection of Section 5 or as follows.

1. An electric and/or gas public utility may access the computer or information systems of a competitive related business segment of its PUHC or allow a related competitive business segment of its PUHC to access its computer or information systems, for purposes of the sharing of computer hardware and software systems and may share office space, office equipment, services and systems, provided adequate system protections are in place to prevent the accessing of information or data between the utility and its affiliate(s) which would be in violation of these standards.

i. Prevention of unauthorized access to computer and information systems must be specifically addressed as part of an electric and/or gas public utility’s compliance plan submitted pursuant to subsection 1.(b) of Section 7.

(b) Paragraph (a) of this subsection does not preclude an electric and/or gas public utility from offering a joint product and/or service, provided such joint product and/or service is authorized by the Board and is available to all non-affiliated product and/or service providers on the same terms and conditions, e.g., joint billing services.

Compliance Plan

Ch. 2.C.2 PSE&G does share office space, office equipment, services and systems with its Affected Affiliates and provides appropriate security features. [Section 5.3]

Ch. 8.B PSE&G has a comprehensive set of security controls that adequately prevent unauthorized access to its computer hardware and information systems. PSE&G maintains strict physical and electronic security measures. For computer and information systems that support non-shared utility functions, employee access codes serve as the first line of defense against unauthorized access to PSE&G’s overall Information Technology (IT) infrastructure. Individual user profiles then determine what systems within the global network an employee will be able to use.

Individual business units within PSE&G have established additional security measures to protect unauthorized access to applications within their responsibility. For systems that support shared services or corporate support functions, PSE&G’s IT data center maintains security software, processes and controls to ensure that only authorized employees of the PSEG Services have access to these systems and databases.

PSE&G has also provided extensive training to its employees regarding the need to protect proprietary and confidential operating and customer information, and restrictions on the release of such information to unauthorized individuals. [Section 5.3]





V-F85 PSE&G is in compliance with Section 5.3 of the Affiliate Standards.

The audit team visited the facilities occupied by PSEG ET (the only affiliate subject to this Standard) and verified that PSE&G does not share office space with PSEG ET. In addition, PSE&G and PSEG ET use separate computer systems.

SECTION 5.4: JOINT PURCHASES

Standard

(a) An electric and/or gas public utility and its PUHC or related competitive business segments of its public utility holding company may make joint purchases of products and/or services, but not those associated with merchant functions.

(b) The electric and/or gas public utility must insure that all such joint purchases are priced, reported, and conducted in a manner that permits clear identification of the electric and/or gas public utility‘s portion and its PUHC or the related competitive business segment’s portions of such purchases, and that direct costs of the joint purchase(s) as well as the indirect purchasing costs are apportioned between the electric and/or gas public utility and the related competitive business segment of the public utility holding company in direct proportion to the relative amounts of the purchased product(s) and/or service(s) received and/or utilized, respectively, and in accordance with these standards and other applicable Board allocation and reporting rules.

Compliance Plan

Ch. 3.B All joint purchases are priced, reported, and conducted in a manner that permits clear identification of PSE&G’s portion of such purchases. All direct costs of the joint purchases, as well as indirect purchasing costs, are properly apportioned to the relative amounts of the purchased products and/or services received and/or utilized. [Section 5.4 (a) and (b)].


V-F86 PSE&G is in compliance with Section 5.4 Standards.

PSE&G’s records clearly identity the portion of joint purchases attributable to PSE&G and each competitive business segment.

PSE&G provided a list of all joint purchase arrangements between PSE&G and its affiliates during 1999 and 2000 to date.152 The affiliate entities include PSEG-Power, PSEG Services Corporation, Delivery (PSE&G) and Energy Technology. PSE&G also provided purchasing agreements for the joint purchases selected for analysis. Purchasing detail by vendor demonstrated the appropriate proportion of charges to each entity.153




SECTION 5.5: CORPORATE SUPPORT

Standard

(a) An electric and/or gas public utility, its public utility holding company and related competitive business segments, or separate business segments of the public utility holding company created solely to perform corporate support services may share joint corporate oversight, governance, support systems and personnel. Any shared support shall be priced, reported and conducted in accordance with Sections 4 and 5, respectively, set forth herein, as well as other applicable Board pricing and reporting requirements.

(b) Such joint utilization shall not allow or provide a means for the transfer of confidential customer or market information from the electric and/or gas public utility to a related competitive business segment of its public utility holding company in violation of these standards, create the opportunity for preferential treatment or unfair competitive advantage, lead to customer confusion, or create significant opportunities for cross-subsidization of a related competitive business segment of the public utility holding company. In the compliance plan required pursuant to subsections 1 or 2 of Section 7 below, a senior corporate officer from the electric and/or gas public utility and public utility holding company shall verify the adequacy of the specific mechanisms and procedures in place to ensure the electric and/or gas public utility follows the mandates of these standards, and to ensure the electric and/or gas public utility is not utilizing joint corporate support services as a conduit to circumvent these standards.

Compliance Plan

Ch. 2.C.3 The services that PSE&G shares with its Affected Affiliates are corporate support services including joint corporate oversight, governance, corporate accounting and human resources. (See Chapter 8-Information Systems for a detailed discussion of the PSEG computer and information systems controls.) [Section 5.5(a)]

Ch. 2.C.4 Corporate support services do not provide a means for the transfer of confidential (customer/market) information from PSE&G to Affected Affiliates, create the opportunity for preferential treatment or unfair competitive advantages, lead to customer confusion or create significant opportunities for the cross-subsidization of Affected Affiliates. [Section 5.5(b)]

Ch. 2.C.5 PSE&G’s Chief Compliance Officer is responsible for verifying the adequacy of the specific mechanisms and procedures in place to assure that PSE&G follows the mandates of the Final Standards and to assure that PSE&G is not utilizing corporate support services as a conduit to circumvent the Final Standards. [Section 5.5(b)]

Ch. 3.B PSEG Service’s provision of shared services conforms to the requirements of the Final Standards regarding separate business segments of the public utility holding company created to perform corporate support services. Shared support is priced, reported and conducted in accordance with applicable standards, as well as other applicable Board pricing and reporting requirements. Corporate support services and joint utilization of support systems and personnel will not be used as a means for the transfer of confidential customer or market information from PSE&G to any Affected Affiliates, create the opportunity for preferential treatment or unfair competitive advantage, lead to customer confusion, or create significant opportunities for cross-subsidization of any Affected Affiliates. PSE&G has adequate mechanisms and procedures in place in order for PSE&G to follow the mandates of the Final Standards, and to assure that PSE&G is not utilizing shared services as a conduit to circumvent the Final Standards. [Section 5.5]





V-F87 PSE&G is not in compliance with Section 5.5. of the Standards.

Section 5.5 along with the definition of “services that may not be shared” found in Section 2.1 of the Standards prohibits marketing as a shared corporate service. PSEG Services provides marketing as a shared corporate service in violation of Section 5.5.

PSEG Services was created to provide shared corporate oversight, governance, support systems and personnel.154 As such, PSEG Services has developed a Service Agreement with PSE&G to provide accounting, auditing, business development, communications, corporate secretary, corporate, environmental, financial risk management, general PSEG management, governmental affairs, human resources management, information technology, legal, marketing, procurement and materials management, public information and media relations, strategic planning, and treasury services. These services and business relationships with PSE&G operations are more fully addressed in Chapter IV of this report.

The Marketing Department of PSEG Services provides training and business development services directly to PSEG ET while at the same time providing marketing services for PSE&G.155

PSE&G’s Compliance Plan notes that business may not be solicited on behalf of its Affected Affiliates, that no customer information may be acquired or requested on behalf of its Affected Affiliates, and that no market analysis reports prepared using PSE&G restricted information or other proprietary information is to be shared with its Affected Affiliates. PSE&G prohibits the release of individual proprietary customer information without the customer’s written consent.

V-R22 PSEG Services should discontinue Marketing as a shared corporate service offered to both PSE&G and PSEG ET. (Refer to Finding V-F87.)

A reorganization of the marketing department was announced in early April 2000.156 Assuming the reorganization occurs as announced PSE&G may be in compliance by the time the report is final.

SECTION 5.6: CORPORATE IDENTIFICATION AND ADVERTISING

Standard

(a) A related competitive business segment of a public utility holding company shall not trade upon, promote, or advertise its relationship with the electric and/or gas public utility, nor use the electric and/or gas public utility’s name and/or logo in any circulated material, including but not limited to, hard copy, correspondence, business cards, faxes, electronic mail, electronic or hardcopy advertising or marketing materials, unless it discloses clearly and conspicuously or in audible language that:

1. the PUHC or related competitive business segment of the public utility holding company "is not the same company as [LDC’s NAME HERE], the electric and/or gas public utility";




2. the PUHC or related competitive business segment of the public utility holding company is not regulated by the Board; and

3. "You do not have to buy [RELATED COMPETITIVE BUSINESS SEGMENT’S NAME HERE] products in order to continue to receive quality regulated services from the electric and/or gas public utility."

(b) The requirement of the name and/or logo disclaimer set forth in (a) above is limited to the use of the name and/or logo in New Jersey.

(c) An electric and/or gas public utility, through action or words, shall not represent that, as a result of its PUHC or a related competitive business segment of the public utility holding company’s relationship with the electric and/or gas public utility, its affiliate(s) will receive any different treatment than other product and/or service providers.

(d) An electric and/or gas public utility shall not offer or provide to its PUHC or a related competitive business segment of its public utility holding company advertising space in the electric and/or gas public utility’s billing envelope(s) or any other form of electric and/or gas public utility’s written communication to its customers unless it provides access to all other unaffiliated service providers on the same terms and conditions.

(e) An electric and/or gas public utility shall not participate in joint advertising or joint marketing activities with its PUHC or related competitive business segments of its public utility holding company which activities include, but are not limited to, joint sales calls, through joint call centers or otherwise, or joint proposals (including responses to requests for proposals) to existing or potential customers.

1. The prohibition in subsection (e) above not withstanding, at a customer's unsolicited request, an electric and/or gas public utility may participate, on a nondiscriminatory basis, in non-sales meetings with its PUHC or a related competitive business segment of its public utility holding company or any other market participant to discuss technical or operational subjects regarding the electric and/or gas public utility's provision of distribution service to the customer;

2. Except as otherwise provided for by these standards, an electric and/or gas public utility shall not participate in any joint business activity(ies) with its PUHC or a related competitive business segment of its public utility holding company which includes, but is not limited to, advertising, sales, marketing, communications and correspondence with any existing or potential customer;

3. An electric and/or gas public utility shall not participate jointly with its PUHC or a related competitive business segment of the PUHC in trade shows, conferences, or other information or marketing events held in New Jersey; and

4. An electric and/or gas public utility shall not subsidize costs, fees, or payments with its PUHC or related competitive business segments of its public utility holding company associated with research and development activities or investment in advanced technology research.

Compliance Plan

Ch. 6.B. The pseg.com website discloses that “PSEG Energy Technologies is not the same company as Public Service Electric and Gas Company (PSE&G), the electric and gas public utility. PSEG Energy Technologies is not regulated by the Board of Public Utilities. You do not have to buy PSEG Energy Technologies products in order to continue to




receive quality regulated services from the electric and gas public utility.”

1. In order to comply with the Final Standards, PSE&G has adopted the following Guiding Principles and has distributed such Guiding Principles to their Affected Affiliates and PSEG Services:

DISCLOSURE PRINCIPLES

The New Jersey Affiliate Standards issued on March 15, 2000, require the use of a disclosure statement by any affiliate of PSE&G which provides competitive services to retail customers in the State of New Jersey, to the extent such Affected Affiliate uses either PSE&G’s name or PSEG’s name or logo in any circulated material, including but not limited to, hard copy, correspondence, business cards, faxes, electronic mail or hardcopy advertising or marketing materials.

The following Guiding Principles are intended to ensure compliance with the Affiliate Standards by providing for a consistent application of the disclosure statement. To the extent these guidelines do not appear to be applicable to a particular graphic standards question, you should seek guidance from PSEG’s law department.

Disclosure Statement: “_______(name of affiliate) is not the same company as Public Service Electric and Gas Company (“PSE&G”), the New Jersey based electric and gas public utility. _______ (name of affiliate) is not regulated by the New Jersey Board of Public Utilities. You do not have to buy _______(name of affiliate)’s products in order to continue to receive quality regulated services from PSE&G.” (Please note that the italicized language is optional).

Application: The disclosure statement shall be used on all material circulated in New Jersey by an affected affiliate (an affiliate offering competitive services to retail customers in New Jersey) for which customers or potential customers of the affected affiliate are the intended or reasonably foreseeable recipients.

Circulated Printed Brochures/Materials: Insert disclosure at either the bottom left or bottom center of the inside front cover of multi-page materials and at either the bottom left of bottom center of the front page of materials consisting of only one sheet. Any built-in response cards should also contain the disclosure.

Business Cards: The disclosure should be placed on the back of the business card. Emails: Disclosure should be used at the bottom of the first page. Letterhead: Disclosure statement should be used at the bottom of the first page. Faxes: Disclosure should be used at the bottom of the first page. Radio: An audible disclosure should be used at the end of the radio announcement. Website: Disclosure should be used at the bottom left or bottom center of the first page of

the home page and any other page of an affected affiliate’s web page that can be accessed without going through the home page that references PSEG or PSE&G.

TV: Disclosure should be either audible or in printed language at the end of the spot. Trade Shows in New Jersey: The requirement to utilize the disclosure applies to all printed

materials distributed at trade shows in New Jersey. With regard to trade shows booths, the disclosure should be displayed in 52 point type either directly on the booth display or on an easel located at the booth.

Other: The disclosure should be included on all communication to procure goods and services from suppliers, to recruit employees and other types of communications to New Jersey audiences that are addressed above.

Font Size: In the context of printed materials, the disclosure should be the same font and type size used for the predominant body text in the material but no smaller than six point in size. The disclaimer may be displayed in italicized type of the same size if it serves to set the




disclaimer clearly apart from body text. The disclosure should not be displayed upside down, sideways or in a different language than the printed material or in any other way which would have the effect of minimizing its appearance.

Authorized Use of the Name/logo by Third Parties: If an affected affiliate authorizes the use of its name or logo for an advertising or promotional purpose by a third party in the State of New Jersey, use of the name or logo will be conditioned on the use of the disclosure statement. The affected affiliate will take prompt action upon discovery of unauthorized or inappropriate use of the name or logo for advertising or promotional purposes by a third party, to stop the unauthorized or inappropriate use. Unauthorized use by a third party will not be considered a violation of the Affiliate Standards.

Press Releases: Press releases issued by or on behalf of Affected Affiliates to the media in New Jersey, or where New Jersey customers are the primary audience for a press release, will include the following or similar instructions to the media:

Please do not use the name “Public Service Electric and Gas Company” or “PSE&G” when referring to (name of affected affiliate). (Name of affected affiliate) is not the same company as Public Service Electric and Gas Company and is not regulated by the New Jersey Board of Public Utilities and customers of PSE&G do not have to purchase products from (affected affiliate’s name) to continue to receive quality regulated services from PSE&G.”

Media Interviews and Inquiries: Representatives of the affected affiliates interviewed by the press within New Jersey, or where the resulting article is likely to appear in New Jersey, will remind the media representative, who are or may be unfamiliar with the relationship between Public Service Electric and Gas Company and its Affected Affiliates, prior to the interview or inquiry either orally or in writing that the Affected Affiliate is separate from PSE&G, the regulated utility, and caution them to use the full name of the affiliate and not to refer to the Affected Affiliate as PSE&G or Public Service Electric and Gas Company. The rules are interpreted as not requiring the Affected Affiliate representative to recite the disclaimer during the interview.

Signage: The Affiliate Standards are interpreted to allow normal signage on the outside of buildings and sites owned or utilized by the Affected Affiliates in New Jersey without the use of the disclosure statement.

There is no need to use the disclosure in the following applications:

The disclosure does not need to be included on trucks, promotional non-printed materials such as t-shirts and golf balls, communications with regulators, government entities, or security holders or other members of the investment community or internal communications that are not released to parties outside of the PSEG companies. Oral communications, unless recorded and distributed for broadcast, do not need to include disclosure statements.

2. The disclosure does not need to be included on institutional or “brand” advertising which communicate generally to the reader but does not communicate regarding any specific product or service and call the reader to engage in a transaction based on the advertisement.

2. PSE&G currently uses its billing envelope space exclusively for utility purposes. In the event PSE&G decides to offer billing envelope space or advertising space in other written communications to its Affected Affiliates, PSE&G will make such space available to non-affiliated entities on the same terms and conditions. PSE&G has not identified any other form of written




communications in which it might offer advertising space to its Affected Affiliates. If such written communications are identified in the future, and if advertising space is offered to its Affected Affiliates, advertising space will also be offered to entities other than its Affected Affiliates on the same terms and conditions. This situation is only applicable when advertising space is made available to its Affected Affiliates. PSE&G is not prohibited from offering advertising space in other written communications, on a selective basis, to entities other than its Affected Affiliates. [Section 5.6(d)]

3. PSE&G does not participate in joint advertising or joint marketing or other joint business activities with its Affected Affiliates. This includes joint sales calls, the use of joint call centers for advertising, joint proposals or other communications with existing or potential customers. [Section 5.6(e) and 5.6(e)2]

4. PSE&G permits its employees to participate with its Affected Affiliates or another third party, at a customer’s request and on a non-discriminatory basis, in a meeting that the customer has indicated not to be sales meetings. If a PSE&G employee attends such a meeting and sales matters are discussed, the role of the PSE&G employee will be limited to technical or operational discussions regarding PSE&G’s provision of service to the customer. PSE&G employees will make sure at or before the beginning of the meeting that customers and other participants are aware of the restrictions on their participation in discussions in other than technical or operational matters. Moreover, should marketing issues be raised by a customer or another party at any such meeting, PSE&G employees are instructed to reiterate the restrictions on their participation in discussions of these issues and will excuse themselves from the meeting if discussions of sales or marketing issues persist. [Section 5.6(e)1]

5. Separately purchased advertisements and communications by PSE&G and its Affected Affiliates in a publication or facility where advertisements and communications are also solicited and accepted from non-affiliated parties and competitors are permitted. For example, advertising may be purchased separately by PSE&G and its Affected Affiliates in the same magazine or newspaper provided that PSE&G and its Affected Affiliates are not the only parties who have advertisements in the publication. Similarly, separate PSE&G and its Affected Affiliates sponsorship of the same community or charity event or industry conference is interpreted as being in compliance, as long as other non-affiliated sponsors are also represented. [Section 5.6(e)]

6. PSE&G does not subsidize costs, fees, payments or investments with its Affected Affiliates for research and development (R&D) or advanced technology research activities. [Section 5.6(e)4]


V-F88 PSE&G is in compliance with Sections 5.6.a through 5.6.d of the Standards.

PSE&G has not participated in joint advertising or joint marketing with PSEG ET.157 As a matter of policy, PSE&G does not provide advertising space to its affiliates in its billing envelopes or other written communication material.158

PSEG ET’s marketing material was created and circulated prior to finalizing the Affiliate Standards. These materials do not include a disclaimer or explanation of the affiliate’s relationship to PSE&G.159




V-F89 PSE&G is not in compliance with Section 5.6.e.2 of the Standards.

The call answering service PSE&G provides to PSEG ET, discussed in Section 3.2 of this Chapter, does not comply with Section 5.6.e.2, which prohibits PSE&G from participating with PSEG ET on communications with existing customers. Our recommendations regarding this matter are contained in Section 3.2 of this Chapter.

PSE&G does not subsidize costs, fees or payments with PSEG ET associated with research and development activities as described in Section 5.6.e.4.

SECTION 5.7: EMPLOYEES

Standard

(a) Except as permitted in subsection 5 of Section 5 {Corporate support} above, an electric and/or gas public utility and its PUHC or related competitive business segments of its public utility holding company which are engaged in offering merchant functions and/or electric related services or gas related services shall not employ the same employees or otherwise retain, with or without compensation, as employees, independent contractors, consultants, or otherwise.

1. Other than shared administration and overheads, employees of the competitive services business unit of the public utility holding company shall not also be involved in the provision of non-competitive utility and safety services, and the competitive services are provided utilizing separate assets than those utilized to provide non-competitive utility and safety services

(b) An electric and/or gas public utility and the PUHC or related competitive business segments of its public utility holding company shall not have the same persons serving on the Board of Directors as corporate officers, except for the following circumstances.

1. In instances when these standards are applicable to public utility holding companies, any board member or corporate officer may serve on the holding company and with either the electric and/or gas public utility or a related competitive business segment of the public utility holding company, but not both the electric and/or gas public utility and a related competitive business segment of the public utility holding company.

2. Where the electric and/or gas public utility is a multi-state utility, is not a member of a holding company structure, and assumes the corporate governance functions for the related competitive business segments, the prohibition against any board member or corporate officer of the electric and/or gas public utility also serving as a board member or corporate officer of a related competitive business segment shall only apply to related competitive business segments operating within New Jersey.

i. In the case of shared directors and officers, a corporate officer from the electric and/or gas public utility and holding company shall verify, subject to Board approval, in the electric and/or gas public utility's compliance plan required pursuant to subsections 1 and 2 of Section 7 below, the adequacy of the specific mechanisms and procedures in place to ensure that the electric and/or gas public utility is not utilizing shared officers and directors in violation of the Act or these standards.




(c) All employee transfers between an electric and/or gas public utility and its PUHC or related competitive business segments of its public utility holding company providing or offering competitive services to retail customers in New Jersey which are engaged in offering merchant functions and/or electric related services or gas related services shall be consistent with the following provisions:

1. The electric and/or gas public utility shall make a public posting of all employee transfers within 3 working days.

2. An electric and/or gas public utility shall track and report annually to the Board all employee transfers between the electric and/or gas public utility and such related competitive business segments of its public utility holding company.

3. Once an employee of an electric and/or gas public utility is transferred to such related competitive business segment of its public utility holding company, said employee may not return to the electric and/or gas public utility for a period of one year, unless the related competitive business segment of the public utility holding company to which the employee is transferred goes out of business or is acquired by a non-affiliated company during the one-year period.

4. In the event that an employee is returned to the electric and/or gas public utility, such employee cannot be transferred for employment by a related competitive business segment of the public utility holding company which is engaged in offering merchant functions and/or electric-related services or gas-related services for a period of one year.

(d) Employees transferring from an electric and/or gas public utility to a related competitive business segment of the public utility holding company are expressly prohibited from using any information gained from the electric and/or gas public utility to the benefit of the related competitive business segment of the public utility holding company or to the detriment of other unaffiliated product and/or service providers.

i. Any electric and/or gas public utility employee hired by a related competitive business segment of the public utility holding company shall not remove or otherwise provide information to said affiliate which said related competitive business segment of the public utility holding company would otherwise be precluded from having pursuant to these standards.

ii. An electric and/or gas public utility shall not make temporary or intermittent assignments, or rotations to related competitive business segments of its public utility holding company.

Compliance Plan

Ch. 2.C.6 No board member or officer from a non-corporate support function serves both PSE&G and PSEG-ET. PSE&G believes the sharing of corporate officers and board members, for those services allowed to be shared under the Final Standards, are not restricted within the Final Standards. As of now, a Corporate Secretary and an Assistant Secretary are shared by PSE&G and PSEG-ET. There is also one shared corporate support officer of PSE&G who is a board member of PSEG-ET. [Section 5.7(b)]

Ch. 2. C.7 PSE&G’s Chief Compliance Officer is responsible for verifying the adequacy of the specific mechanisms and procedures in place to assure that PSE&G is not using shared officers and directors in violation of the Electric Discount and Energy Competition Act or the Final Standards. [Section 5.7(b) 2.i]




Ch. 7.B.1 Except as permitted in Section 5.5 of the Final Standards (Corporate Support), PSE&G does not jointly employ the same employees, contractors or consultants as its Affected Affiliates. [Section 5.7(a)]

Ch. 7.B.2 PSEG’s Human Resources Department (Human Resources), located in PSEG Services, processes the movement of employees from its Affected Affiliates to PSE&G, and its Affected Affiliates’ Human Resources group processes employee movements from PSE&G to its Affected Affiliates. Both of these Human Resources groups assure that once an employee from PSE&G is moved to its Affected Affiliate, the employee will not return to PSE&G for a period of one year, unless its Affected Affiliate goes out of business or is acquired by a non-affiliated company during the one-year period. In the event an employee who has moved from PSE&G to its Affected Affiliate returns to PSE&G, Human Resources will assure that the employee is not moved back to its Affected Affiliate for a period of one year.

Human Resources tracks employee movement between PSE&G and its Affected Affiliates and will report on that movement in an annual report to the Board, on behalf of PSE&G. Human Resources will also post the information on the PSE&G website within three days of each movement between PSE&G and its Affected Affiliates. [Section 5.7(c)]

Ch. 7.B.3 Human Resources will conduct exit interviews with employees moving from PSE&G to its Affected Affiliates. Exit interviews include the employee who is being moved and his/her manager. In preparation for the exit interview, the manager reviews any material that the employee wishes to take to an Affected Affiliates. Materials that may not be taken to an Affected Affiliate are retained by the manager. At the end of the exit interview, the employee is required to sign a statement acknowledging awareness of, and intended compliance with, the prohibition against taking or using certain kinds of information gained from PSE&G to benefit its Affected Affiliates. Human Resources is responsible for conducting and appropriately documenting the exit interviews. Moving employees are provided a copy of all pertinent forms and a copy of applicable Final Standards.

All employees being moved from PSE&G to an Affected Affiliate are advised of the applicable restrictions on their returning to PSE&G, as well as restrictions on subsequent movement to Affected Affiliates. All moving employees are required to acknowledge that they understand the prohibitions:

using information gained from PSE&G in a discriminatory or exclusive fashion, to the benefit of the Affected Affiliate or to the detriment of other unaffiliated product and/or service providers.

removing or otherwise providing information to the Affected Affiliate that the Affected Affiliate would otherwise be precluded from having.

PSE&G does not temporarily or intermittently assign its employees to its Affected Affiliates or rotate employees between PSE&G and its Affected Affiliates. [Section 5.7(d)]


V-F90 PSE&G is in compliance with Section 5.6, with one possible exception.

PSE&G does not have any employees that are jointly employed by PSE&G and its affiliates.160




The Boards of the four major PSEG subsidiaries do not share any Members. PSEG has four direct wholly-owned subsidiaries and 331 indirect subsidiaries. The board membership of each of these subsidiaries was not reviewed in detail but the boards of the principal subsidiaries were reviewed. As specified in PSE&G’s Compliance Plan, the Chief Compliance Officer is responsible for verifying that PSE&G is not sharing directors of boards in violation of the Standards.

James Ferland is Chief Executive Officer of both PSE&G and PSEG Power, a competitive business segment of PSEG. The Standards are inconsistent on this matter. Section 1.1.a.i indicates Standard 5 only applies to the competitive business segment of a holding company offering competitive services to retail customers in New Jersey. However, Section 5.7 does not make this distinction, and appears to be intended to prevent shared officers between a utility and a competitive business segment of a holding company.

PSE&G’s Compliance Plan indicates that employee transfers will be publicly posted and annually reported. With respect to Section 5.7.c.3, there has been only one PSE&G employee transferred to PSEG ET during 2000 to date.161 This person cannot return to PSE&G until 2/21/2001. There are no PSE&G employees on temporary or intermittent assignment or rotation to PSEG-ET.162

V-R23 PSE&G should request that the Board clarify its intent with regard to shared corporate officers to determine if it is in compliance with Standard 5.7.b. (Refer to Finding V-F90

SECTION 5.8: TRANSFER OF SERVICES

Standard

(a) All transfers of services not prohibited by these standards shall be subject to the following provisions:

1. Transfers from the electric and/or gas public utility to a related competitive segment of its public utility holding company of services produced, purchased or developed for sale on the open market by the electric and/or gas public utility will be priced at no less than the fair market value.

2. Transfers from a related competitive business segment of the public utility holding company to the electric and/or gas public utility of services produced, purchased or developed for sale on the open market by the related competitive business segment of the public utility holding company shall be priced at no more than fair market value.

3. Prices for services regulated by a state or federal agency shall be deemed to be the fair market value.

4. Services produced, purchased or developed for sale on the open market by the electric and/or gas public utility shall be provided to related competitive business segments of its public utility holding company and unaffiliated company(ies) on a nondiscriminatory basis, except as otherwise required or permitted by these standards or applicable law.




5. Transfers of services not produced, purchased or developed for sale on the open market by the electric and/or gas public utility from the electric and/or gas public utility to related competitive business segments of its public utility holding company shall be priced at fully allocated cost.

6. Transfers of services not produced, purchased or developed for sale on the open market by a related competitive business segment of the public utility holding company from that related competitive business segment of the public utility holding company to the electric and/or gas public utility shall be priced at the lower of fully allocated cost or fair market value.

Compliance Plan

Ch. 9.B.1 Transfers for services from PSE&G to an Affected Affiliate of services produced, purchased or developed for sale on the open market will be priced at no less than the fair market value. [Section 5.8(a) 1]

Ch. 9.B.2 Services that an Affected Affiliate transfers to the utility that are produced, purchased or developed for sale on the open market are priced at no more than the fair market value. PSE&G and its Affected Affiliates have entered into several agreements for construction services, prior to the existence of the Affiliate Standards. [Section 5.8(a)2].

Ch. 9.B.3 Prices for services regulated by a state or federal agency shall be deemed to be the fair market value. [Section 5.8(a)3]

Ch. 9.B.4. Services produced, purchased or developed for sale on the open market by PSE&G shall be provided to an Affected Affiliate and unaffiliated companies on a nondiscriminatory basis, except as otherwise permitted by these Standards or applicable law. [Section 5.8(a)4]

Ch. 9.B.5 Any products/services that PSE&G provides to any Affected Affiliate that are not produced, purchased or developed for sale on the open market will be priced at fully allocated cost. PSE&G and its Affected Affiliates have entered into several agreements for construction services, prior to the existence of the Affiliate Standards. [Section 5.8(a)5]

Ch. 9.B.6 The fully allocated costing methodology categorizes total costs into three categories: direct, indirect and corporate governance. An example of a direct cost is the time of an individual dedicated to delivering a particular service. Examples of indirect costs include building space and training. Corporate governance costs are those expenses associated with providing the functions necessary for corporate existence, such as strategy and leadership. Indirect and corporate governance costs are charged to lines of business or products/service accounts using an appropriate allocator. Corporate governance allocators include: percentage of common equity, percent of U.S. assets, and the Modified Massachusetts Formula (whereby costs are allocated on the basis of assets, revenue and labor dollars). There are numerous indirect allocators, including a weighted average of total governance and direct charges of all other internal service providers. [Section 5.8(a)5]

Ch. 9.B.7 Services that an Affected Affiliate transfers to PSE&G that are not produced, purchased or developed for sale on the open market are priced at the lower of fully allocated cost or fair market value. [Section 5.8(a)6]






Chapter IV discusses the pricing of transfers between affiliates in more detail. However, the audit team did not find any instances where any transfers occurred that were not consistent with the requirements of Section 5.8 of the Standards. Analysis of this is included in Chapter IV.

SECTION 5.9: TRANSFER, LEASE OR RENTAL OF UTILITY ASSETS

Standard

(a) All transfers, leases, rentals, licenses, easements or other encumbrances of utility assets to a PUHC or related competitive business segments of a PUHC not prohibited by these standards shall be subject to the following pricing provisions, consistent with all other applicable Board rules:

(b)

1. Transfers, leases, rental, licenses, easements or other encumbrances of utility assets from the electric and/or gas public utility to a related competitive business segment of its public utility holding company shall be recorded at fair market value or book value as determined by the Board.

2. Transfers, leases, rental, licenses, easements or other encumbrances of assets from a related competitive business segment of the public utility holding company to the electric and/or gas public utility shall be recorded at the lesser of book value or fair market value.

Compliance Plan

Ch. 9.B.1 Transfer of assets, leases, licenses, etc. from PSE&G to an Affected Affiliate will be recorded at fair market value or book value as determined by the Board. [Section 5.9(b) 1]

Ch. 9.B.2 Transfer of assets, leases, and licenses from an Affected Affiliate to PSE&G will be recorded at the lesser of book value or fair market value. [Section 5.9(b) 2]



As described in Chapter IV, PSE&G currently has before the Board its application to create Service Company. The formation of Service Company would involve the transfer of assets and contracts from PSE&G to Service Company with an estimated net book value of $96 million. This transfer would not occur until Board approval is given. However, the proposed transfer while outside the audit period is consistent with Section 5.9 of the Standards. In addition Chapter 4 describes the August 21, 2000 transfer of generation and generation-related assets from PSE&G to PSEG Power. This transfer was approved by the Board and was valued at $2.6 billion. No other asset transfers occurred during the six-month audit period ended June 30, 2000.




SECTION 6: COMPETITIVE PRODUCTS AND/OR SERVICES OFFERED BY A UTILITY OR RELATED COMPETITIVE

BUSINESS SEGMENTS OF A UTILITY

SECTION 6.1: ELIGIBLE COMPETITIVE PRODUCTS AND/OR SERVICES

Standard

(a) Except as provided for in the Act or these standards, an electric and/or gas public utility or a related competitive business segment of an electric and/or gas public utility shall not offer competitive products and/or services without the prior review and approval by the Board of a proposed tariff, except where pre-empted by federal law.

1.A public utility holding company may offer any competitive service, including, but not limited to, electric generation service, telecommunications service, and cable service, to retail customers of an electric public utility that is owned by the holding company, but only through a related business segment of the holding company that is not an electric public utility or a related business segment of the electric public utility. Competitive services shall be offered in compliance with all Board rules and regulations for carriers of theses services.

2.A public utility holding company may offer a competitive service to retail customers of a gas public utility that is owned by the holding company, but only through a related business segment of the holding company that is not a related business segment of the gas public utility; provided however, that in the event that a gas public utility is not part of a holding company legal structure, competitive services may be offered by a related competitive business of that gas public utility as long as that related competitive business segment is structurally separated from the gas public utility, and provided that interactions between the gas public utility and the related competitive business segment are in compliance with these standards.

(b) An electric and/or gas public utility or its related competitive business segment may only offer to provide the following competitive products and/or services:

1. Metering, billing or administrative services that are deemed competitive by the Board pursuant to NJSA 48:3-56.

2. Products and/or services related to customer and public safety and reliability of non-competitive utility services as determined by the Board;

3. Competitive products and/or services that have been offered by any electric and/or gas public utility in the State prior to January 1, 1993 or that have been approved by the Board prior to February 9, 1999, to be offered by any electric and/or gas public utility in the State;

4. Products and/or services that are substantially similar, as determined by the Board, to competitive services that have been offered by any electric and/or gas public utility in the State prior to January 1, 1993 or that have been approved by the Board prior to February 9, 1999 to be offered by any electric and/or gas public utility in the State and, in the case of electric public utilities, for which a request for approval by the public utility seeking to offer such service had been filed with the Board on or before July 1, 1998.; or

5. Competitive services to non-residential customers using existing public utility employees.

(c) For a competitive product and/or service that has been offered by an electric and/or gas public utility prior to January 1, 1993 or that has been approved by the Board prior to February 9, 1999, the electric and/or gas public utility may continue offering such product or service, subject to the provisions of these standards and applicable law and shall not be required to seek further




approval to offer said product and/or service, provided, however that if the electric and/or gas public utility does not have a tariff for the service on file with the Board, the electric and/or gas public utility shall file with the Board within 60 days of the date of final adoption of these standards a tariff setting forth the pricing terms, and other terms and conditions of the product and/or service.

(d) For any new competitive product and/or service which an electric and/or gas public utility or its related competitive business segment intends to offer, consistent with these standards, the electric and/or gas public utility must file a proposed public tariff to the Board for its review and approval for the new product and/or service, along with the information in the attachment (Appendix A).

Copies of the petition for approval, including proposed tariff and other required information, shall be certified and shall be accompanied by a certificate of service demonstrating that the petition was served on the Division of the Ratepayer Advocate simultaneous to its submission to the Board.

All tariffs for competitive services filed with the Board shall be in the public records unless the rates contained therein are determined to be proprietary, in which case said tariffs shall be filed under seal and made available under the terms of an appropriate protective agreement as provided by Board Order. The public utility shall have the burden of proof by affidavit and motions to demonstrate the need for proprietary treatment. The rates shall become public upon Board approval.

Compliance Plan

Ch. 4.B.1 All PSE&G retail competitive services as defined in the ACT and subject to the Final Standards have been the subject of prior Board approval and a Competitive Service Tariff filing, initially made by PSE&G on April 23, 1999. [Section 6.1, 6.2 and 6.6]

Ch. 4.B.2 Any new retail competitive product and/or service that PSE&G will propose to offer will be pursuant to a proposed tariff filed with the Board for its review and approval, with all necessary information to meet the Final Standards. Section 6.1(d), 6.2 and 6.6]


V-F93 The competitive appliance repair services offered by PSE&G are in compliance with Section 6.1 of the Standards.

See Chapter III.C for a complete discussion of the findings and recommendations related to Section 6.1 and appliance repair.

V-F94 PSE&G is not in compliance with Section 6.1 of the Standards with regard to the competitive services offered through Sunburst Customer Solutions and other competitive service services offered by PSE&G.

See Chapter III.D for a complete discussion of the findings and recommendations related to Section 6.1 and Sunburst.




SECTION 6.2: STANDARDS FOR APPROVAL

Standard

(a) The Board may approve a proposed new competitive product and/or service filing if the electric and/or gas public utility has demonstrated and the Board determines that:

1. the proposed product and/or service is competitive, consistent with the standards for competitive products and/or services set forth in the Act and as determined by the Board;

2. the provision of the proposed product and/or service by the electric and/or gas public utility will not adversely impact the electric and/or gas public utility’s ability to offer its non-competitive services to customers in a safe, adequate and proper manner, and that in all instances where resources are jointly deployed by the electric and/or gas public utility to provide competitive and non-competitive services and resource constraints arise, the provision of safety-and reliability-related and non-competitive services receives the higher priority;

3. the competitive product and/or service will be offered in a non-discriminatory manner to all customers; and

4. the price which the electric and/or gas public utility or its related competitive business segment will charge for the competitive product and/or service will equal or exceed the fully allocated cost to the electric and/or gas public utility or its related competitive business segment to provide the competitive product and/or service, and will not otherwise result in cross-subsidization.

Notwithstanding any other provisions of these Standards, the Board may determine that any service shall remain regulated for purposes of public safety and welfare. Notwithstanding the other provisions of these standards, an electric and/or gas public utility shall continue to offer safety-related services, as determined by the Board, free of charge to its customers or as otherwise determined by the Board.

Compliance Plan



Any proposed new competitive product or service to be offered by PSE&G will be priced to equal or exceed the fully allocated cost to PSE&G and will not result in cross-subsidization. [Section 6.2(a)4]



PSE&G has not proposed any competitive services for Board approval since the Standards were finalized.




As noted in Chapter III.D, it is recommended that Board approval be sought for competitive products and services offered through Sunburst and other competitive services offered by PSE&G.

SECTION 6.3: CONDITIONS FOR OFFERING COMPETITIVE PRODUCTS AND/OR SERVICES

Standards

(a) All electric and/or gas public utility employees who are directly involved in the provision of non-competitive services as well as competitive services, or who are involved in the provision of more than one competitive service, must maintain complete and accurate time logs to track and record the amount of time spent in the performance of each service. For those employees who travel to remote or customer locations in the provision of competitive services, time logs shall account for and allocate as time to the competitive service all time spent traveling to and from each competitive service job, as well as the time spent performing related diagnostics, repair and/or installation, and allocated share of downtime.

(b) Each electric and/or gas public utility is responsible for and has an ongoing obligation to track, monitor and update, as necessary, its fully allocated cost of providing each competitive product and/or service offering by itself or its related competitive business segment, and to ensure that the price it or its related competitive business segment charges for each such competitive product and/or service at all times equals or exceeds the fully allocated cost of providing such competitive products and/or services and to file the notification required by Subsection 6 below.

(c) Each electric and/or gas public utility is responsible for and has an ongoing obligation to ensure that its and/or its related competitive business segment’s offering of competitive products and/or services does not adversely impact its ability to provide safe, adequate and proper electric and/or gas public utility service.

(d) Each electric and/or gas public utility is responsible for and has an ongoing obligation to ensure that it or its related competitive business segment’s competitive products and/or services are offered in a non-discriminatory manner to all customers.

(e) An electric and/or gas public utility employee engaged in providing non-competitive, regulated services shall not violate these rules regarding cost allocation and fair competition and shall not:

1. solicit competitive services business on behalf of the public utility or its related competitive business segment, or provide business leads to the public utility’s or its related competitive business segment’s employees engaged in the offering of competitive services;

2. share market analysis reports or other type(s) of proprietary or non-publicly available reports, including but not limited to market, forecast, planning or strategic reports, with the public utility’s employees involved in the offering of competitive products and/or services, or with employees of a related competitive business segment of the public utility, unless such information is made available on a non-discriminatory basis to all other service providers and the information is kept open to public inspection, or as otherwise authorized by the Board;

3 represent or imply that a customer will receive preferential treatment as a consequence of obtaining competitive products and/or services from the public utility or its related competitive business segment as opposed to a non-affiliated service provider;

4. provide a customer preferential treatment as a consequence of obtaining competitive products and/or services from the public utility or its related competitive business segment as opposed to a non-affiliated service provider;




5. process any request for non-competitive services offered by the electric and/or gas public utility on a preferential or discriminatory basis for a customer taking competitive products and/or services from the public utility or its related competitive business segment, as opposed to taking such products and/or services from a non-affiliated provider;

6. condition or otherwise tie the provision of any non-competitive services provided by the public utility, nor the availability of discounts of rates or other charges or fees, rebates, or waivers of terms and conditions of any non-competitive products and/or services provided by the public utility to the taking of any competitive products and/or services from the public utility or its related competitive business segment;

7. assign customers to which the public utility currently provides products and/or services to its related competitive business segment, whether by default, direct assignment, option or by any other means, unless that means is equally available to all competitors.

Compliance Plan

Ch. 4.B.3 PSE&G requires comprehensive time reporting by its employees who are involved in providing both competitive and non-competitive services, or who are involved in providing more than one competitive service. PSE&G’s time reporting procedures have been designed to account for all hours worked. Activity codes used to record hours worked clearly identify and capture hours worked on competitive services separate from those worked on non-competitive services. Activity codes also provide the means to collect hours spent performing related diagnostics, repair and/or installation, as well as idle time or “downtime.” Further, activity codes differentiate one competitive service from another and document time spent traveling to and from each competitive and non-competitive service job.

Cross Application Time Sheets (CATS) are used to enter, track, and post hours worked to Systems Applications and Processes’ (SAP) cost objects (orders and/or projects). Except for certain officers, all Management, Administrative, Supervisory and Technical (MAST) and Union associates are required to enter hours worked into CATS via positive time reporting. The frequency of time entry, daily or weekly, is subject to the discretion of local management based on the need for financial information on a real-time basis and the time required to complete and approve time reports. The hours worked on orders and/or work elements are recorded to the appropriate cost objects whether those hours are paid or unpaid, planned or unplanned (i.e. Professional/Corridor Time). Professional/Corridor time represents unpaid hours worked on a specific assignment which extends beyond the normal scheduled day.

Hours worked beyond the scheduled day, in the normal course of completing daily responsibilities, are not covered by this description and should not be recorded. Examples of hours worked that should not be recorded include time to review and respond to e-mails, voice mails, or to complete other work necessary to maintain and complete recurring responsibilities. [Section 6.3(a)]

Ch. 4.B.4 PSE&G currently tracks, monitors and reports its cost of providing each retail competitive product and/or service offering as demonstrated by the quarterly reports it files with the Board. [Sections 6.3(b)]

Ch. 4.B.5 The consistent provision of safe, adequate and proper electric and gas service to its retail customers is PSE&G’s top priority. Neither its provision of retail competitive services nor the provision of retail competitive services by PSEG’s competitive business segments diminishes service or impairs PSE&G’s ability to provide safe, adequate and proper electric and gas service to its customers. [Section 6.3(c)]




Ch. 4.B.6 PSE&G will offer and provide its retail competitive services in a non-discriminatory manner to all customers. Moreover, PSE&G’s compliance procedures provide that employees who are involved in providing non-competitive, regulated services adhere to the Standards and do not:

Solicit competitive services business on behalf of PSE&G. Provide leads to employees of PSE&G who are involved in offering competitive services. Share market analysis reports or other types of proprietary or non-publicly available

reports with employees of PSE&G who are involved in offering competitive services. Provide or offer customers any preferential treatment, as a consequence of taking

competitive products and/or services from PSE&G. Process requests for PSE&G’s non-competitive services on a preferential or

discriminatory basis in return for a customer taking competitive products and/or services from PSE&G.

Condition, assign or otherwise tie the provision of any of PSE&G’s non-competitive services, nor the availability of discounts, rebates or other special terms to the taking of competitive products and/or services from PSE&G. All PSE&G employees who are involved in the provision of retail competitive services will be undergoing training on individual compliance with each of the requirements set forth in the Final Standards. [Section 6.3 (d) and 6.3 (e)]


V-F96 PSE&G’s Appliance Service Business (ASB) is in compliance with all parts of Section 6.3 except Sections 6.3.e.1 and 6.3.e.7.

See Chapter III.C for complete discussion of the findings and recommendations related to Section 6.3 and ASB.

Section 6.3.e items 1-7 prohibit utility employees from solicitation and sharing market analysis, among other restrictions. Based upon Service Level Understandings, Marketing as a functional unit of PSEG Services Corporation provides a number of resources and services to organizational units of PSE&G such as ASB (a retail competitive service) and Customer Operations (employees of the utility) that, for example, include sales training for Customer Services and Appliance Service personnel, enhancing products and services that complement PSE&G’s core energy distribution business, providing data, information and resources. The expectations of this effort also include developing detailed plans to reacquire profitable market share outside the PSE&G franchise area that will complement the PSEG Retail Strategy.163 This activity would, at the least, constitute solicitation and sharing market information.

SECTION 6.4: ACCOUNTING STANDARDS, BOOKS AND RECORDS AND PERIODIC REPORTING

Standard

(a) Each electric and/or public utility and/or its related competitive business segment shall maintain, within its general ledger, separate subledgers for each competitive service and/or product offered. The subledgers shall contain assets, revenue and expense accounts as necessary to record all transactions of each competitive product and/or service offered. Each electric and/or gas public utility and/or its related competitive business segment shall also track the following:




1. total customers; 2. total revenues received by the utility; 3. dedicated assets; 4. carrying costs on dedicated assets; 5. portion of shared assets allocated to the competitive service(s); 6. dedicated expenses incurred in the start-up, promotion, and provision of service; 7. fully allocated shared expenses; 8. total margins, defined as the difference between the total revenues received and the total

expenses; 9. net revenues, defined as the difference between total revenues and dedicated expenses; 10. any such other item as the Board may determine.

(b) Each electric and/or gas public utility shall file with the Board, by no later than forty-five (45) days following the close of each calendar year, an annual financial report and, no later than six (6) months thereafter each year, a semi-annual financial report, providing information on the financial performance of each competitive product and/or service offering made by the public utility and/or its related competitive business segment, utilizing the information compiled pursuant to subsection 4(a) above.

(c) Each electric and/or gas public utility is responsible in the preparation of its annual and semi-annual reports to be filed in accordance with subsection 4(b) above, to reflect the most current cost information available to report the financial performance of it and/or its related competitive business segment’s competitive product and/or service offerings.

(d) All transfers, leases or rental of utility assets from an electric and/or gas public utility to a related competitive business segment of the public utility, for purpose of the asset becoming a dedicated asset of the related competitive business segment of the public utility, shall be recorded at the greater of book cost or fair market value and shall be subject to approval by the Board.

Compliance Plan

Ch. 4.B.7 PSE&G has designed an accounting system that will meet each of the accounting standards and requirements for the maintaining of books and records. PSE&G is in the process of preparing its first semi-annual financial report to the Board on each of its retail competitive services. These reports will provide information on the financial performance of each retail competitive product and/or service offering made by PSE&G with the Board that reflect the most current information available. [Section 6.4]


V-F97 PSE&G is in compliance with Section 6.4 of the Standards with regard to ASB.

See Chapter III.C for complete discussion of the findings related to Section 6.4 and ASB.

As a result of not having obtained Board approval for competitive products and services offered through Sunburst and other competitive services (discussed in Section 6.1 above), PSE&G has not demonstrated compliance with Section 6.4 of the Standards for these competitive services.164




SECTION 6.5: TREATMENT OF REVENUES

Standard

(a) The revenues received by an electric and/or gas public utility or its related competitive business segment(s) for the provision of a competitive product and/or service shall be treated in the following manner:

1. The level of gross revenues representing the fully allocated cost of providing the service shall be recorded in the respective competitive service revenue account and treated above-the-line for ratemaking purposes and credited to ratepayers in a manner to be determined by the Board.

2. For electric public utilities and related competitive business segments of electric public utilities except as set forth in (3) below, pursuant to subsection b. of Section 7 of the Act, fifty (50) % of the total margins shall be recorded in respective competitive service revenue accounts and treated above-the-line for ratemaking purposes and credited to ratepayers via a credit to the market transition charge, or distribution service charge in a manner to be determined by the Board.

3. For a related competitive business segment of an electric public utility, 25% of the total margins shall be recorded in respective competitive service revenue accounts and treated above-the-line for ratemaking purposes and credited to ratepayers of the electric public utility via a credit to the market transition charge, or distribution service charge in a manner to be determined by the Board.

4. For gas public utilities the total margins shall be treated above-the-line for ratemaking purposes and credited to ratepayers in a manner to be determined by the Board.

(b) Revenues received by an electric and/or gas public utility as the result of a transfer of services or a transfer, lease or rental of assets to an affiliate shall be recorded in respective competitive service revenue account and credited to ratepayers in a manner to be determined by the Board.

Compliance Plan

Ch. 4.B.8 PSE&G will treat all revenues received for the provision of retail competitive products and/or services in separate revenue and cost accounts in accordance with the Final Standards. [Section 6.5]


V-F98 PSE&G is in compliance with Section 6.5 of the Affiliate Standards with regard to ASB.

See Chapter III.C for complete discussion of the findings related to Section 6.5 and ASB.

As a result of not having obtained Board approval for competitive products and services offered through Sunburst and other competitive services (discussed in Section 6.1 above), PSE&G has not demonstrated compliance with Section 6.5 of the Standards for these competitive services.




SECTION 6.6: CHANGE(S) IN PRICE OR TERMS AND CONDITIONS

Standards

(a) Each electric and/or gas public utility is required to file a public tariff with the Board for each competitive product and/or service it or its related competitive business segment offers in the State, setting forth the pricing terms and other terms and conditions associated with these competitive products and/or services.

(b) Subsequent to the filing of an initial tariff for an existing competitive product and/or service offering pursuant to subsection 1(c) above, or subsequent to the initial approval by the Board for the offering of a new competitive product and/or service by an electric or gas public utility or its related competitive business segment pursuant to subsections 1(d) and 2 above respectively, an electric and/or gas public utility or its related competitive business segment may make modifications to the pricing terms or other terms and conditions of a competitive product and/or service offering without further approval of the Board, provided that the electric and/or gas public utility must notify the Board of the proposed change at least 30 days prior to its intended implementation, such notification to include:

1. a proposed revised tariff with changes in pricing and/or other terms and conditions clearly identified;

2. an affidavit from an officer of the electric and/or gas public utility, including justification, that the proposed changes do not render the product and/or service offering in non-compliance with the standards for approval set forth in subsection 2 above.

Compliance Plan




V-F99 PSE&G is in compliance with Section 6.6 of the Standards relative to the products and services offered through ASB.

The audit team verified that PSE&G had approved tariffs for all competitive products and services offered by ASB.

As a result of not having obtained Board approval for competitive products and services offered through Sunburst and other competitive services (discussed in Section 6.1 above), PSE&G has not demonstrated compliance with Section 6.6 of the Standards for these competitive services.




SECTION 6.7: CHANGE(S) IN COMPETITIVE AND/OR SERVICE OFFERING

Standard

(a) Any change by an electric and/or gas public utility or its related competitive business segment of a previously Board-approved competitive product and/or service offering, which change shall include, but is not limited to, an expansion of the product and/or service offering outside of the electric and/or gas public utility’s franchise area, shall require the review and prior approval of the Board.

(b) An electric and/or gas public utility proposing a substantive change in offering by itself or its related competitive business segment must submit to the Board, at least 60 days prior to the intended effective date of the change in offering, information sufficient to demonstrate that the change in offering will not adversely impact the ability of said electric or/gas public utility to provide safe, adequate and proper electric and/or gas public utility service.

Compliance Plan

Ch. 4.B.9 Any changes to the price, terms and conditions, or offerings of retail competitive services by PSE&G, including an expansion outside of the franchise area, will be in accordance with the requirements set forth in the Final Standards. [Section 6.7]



PSE&G has not changed any of its Board-approved competitive products and services since the adoption of the Standards.

SECTION 6.8: VIOLATIONS

Standard

(a) In the event that the Board determines that an electric and/or gas public utility or its connected competitive business segment has offered a competitive product and/or service without the prior approval of the Board pursuant to subsections 6.1, 6.2 or 6.7 above, or without the prior notification to the Board pursuant to subsection 6.6 above, such electric and/or gas public utility or its related competitive business segment shall immediately be required to cease and desist such unauthorized product and/or service offerings for a period of at least 90 days as determined by the Board and, subject to further hearings of the Board, may be subject to further penalties as determined by the Board pursuant to subsection 1.(b) of Section 9 below.

(b) In the event that the Board determines as a result of the audit performed pursuant to Section 8 of the Act, subsection 3 of Section 7 of these standards or by other means, after providing the electric and/or gas public utility an opportunity to be heard, pursuant to Section 8(f)3 of the Act, that an electric and/or gas public utility or its related competitive business segment has violated any provision(s) of this section of these standards, the Board may take one or more of the following actions:

1. order a reimbursement, including interest, to competitive product and/or service offering customers of any overcharges resulting from the violation;




2. order a reimbursement to electric or/gas public utility ratepayers, including interest, of any cross-subsidy(ies) found to have been provided to the competitive product and/or service offerings;

3. impose a penalty of up to $10,000 for each such violation;

4. For a first violation:

i. order a violating electric and/or gas public utility to cease some or all competitive product and/or service offerings and form a related competitive business segment of the public utility to perform the competitive product and/or service offerings; or

ii. order a violating related competitive business segment of an electric or/gas public utility to cease some or all competitive product and/or service offerings and permit further competitive offerings only through a related competitive business segment of the public utility holding company; and

5. For a second and subsequent violations:

i. order a violating related competitive business segment of the previously-violating public utility to cease some or all competitive product and/or service offerings and permit further competitive offerings only through a related competitive business segment of the public utility holding company.

Compliance Plan

PSE&G’s Compliance Plan does not specifically address Section 6.8 of the Standards.


Section 6.8 does not require any specific action by PSE&G.




SECTION 7: REGULATORY OVERSIGHT

Section 7 requires PSE&G to demonstrate that it complies with the Standards by filing a formal compliance plan applicable to transactions with all affiliates within three months of adoption of the Final Standards, annually thereafter if there have been changes, and upon the creation of a new affiliate covered by these Standards. Bi-annual audits are required to independently verify compliance with the Standards, and affiliate officers and employees must be made available for testimony as necessary or required by the Board.

The audit team reviewed whether PSE&G filed its Compliance Plans and other related documentation required by the Board in accordance the Standards. The following evaluative criteria were used in performing the compliance audit:

• Compliance plans filed with the Board are thorough, accurate, and timely. • PSE&G immediately notified the Board of the creation of an affected affiliate. • PSE&G has conducted an independent third-party audit at the discretion of the

Board.

SECTION 7.1: COMPLIANCE PLANS

Standard

(a) No later than three months from the final adoption of these standards, each electric and/or gas public utility shall file its compliance plan with the Board and provide a copy of said plan to the RA.

(b) Said compliance plan shall demonstrate that there are adequate procedures in place to ensure compliance with these standards.

1. Said compliance plan shall contain an accurate list of all affiliates of an electric and/or gas public utility, including the business name and address, name and business telephone number of at least one officer of each affiliate and a brief description of the business of each affiliate.

The information required by subsection 1(b)1. above shall be updated within five (5) business days of any change(s) thereto as well as make a public posting thereof.

(c) Absent Board action to the contrary, the electric and/or gas public utility's compliance plan shall be in effect between its filing and the Board’s decision.

(d) Annually thereafter or upon changes thereto, the electric and/or gas public utility shall file a revised compliance plan with the Board and the RA.

Compliance Plan

Ch. 1.B.1 PSE&G has submitted this Compliance Plan within three (3) months from the adoption of the Final Standards, dated March 15, 2000 and it was prepared in compliance with such Final Standards. [Section 7.1(a)]

Ch. 1.B.2 On February 29, 2000, PSEG filed with the Securities and Exchange Commission (SEC) Form U-3A-2. Form U-3A-2 is a public document and discloses the name, state of




organization, location and nature of business, and every subsidiary thereof, in which PSEG holds a direct or indirect interest. The February 29, 2000 Form U-3A-2 is available on the PSEG website at pseg.com and can be located under the heading – SEC Filings. Exhibit 2 provides a list of PSEG’s direct subsidiaries, including the business name and address, name and business telephone number of one officer for each subsidiary.

The Affected Affiliates are PSEG’s only Affiliates providing competitive services to retail customers in New Jersey. The Affected Affiliates provide services to customers in the Mid-Atlantic and New England region with these groups of products and services: electricity and gas; consulting, engineering and operations services; and financing solutions. PSE&G shall update this information within five (5) business days for any change(s) and provide a public posting, thereof. [Section 7.1(b)]

Ch. 1.B.3 PSE&G understands that absent BPU action to the contrary, this Compliance Plan shall be in effect between its filing and the Board’s decision in this matter. [Section 7.1(c)]

Ch. 1.B.4 Annually hereafter or upon changes to the PSE&G Compliance Plan, PSE&G will file a revised Compliance Plan with the Board and the RA. [Section 7.1(d)]



PSE&G submitted its Compliance Plan to the Board on June 15, 2000 three months after the adoption of the Final Standards as required in Section 7.1.a.165

V-F102 The Compliance Plan does not demonstrate that there adequate procedures in place to ensure compliance with each of the Standards.

The audit team performed an extensive review of PSE&G’s Compliance Plan, focusing on the four compliance requirements contained in Section 7.1of the Standards:

• Demonstration of adequate procedures to ensure compliance (7.1.b) • The Plan shall contain an accurate list of all affiliates (7.1.b.1) • The list shall be updated within five business days of any changes along with

public posting (7.1.b.1) • Annual revisions or changes to the Compliance Plan must be submitted to the

BPU (7.1.d)

PSE&G organized its Compliance Plan in ten topic areas that do not directly correspond to the nine sections of the Affiliate Standards. They are:

• Introduction • Regulatory Oversight • Corporate Governance • Transactions • Competitive Products and Services • External Interfaces • Corporate Identification and Advertising • Employees




• Information Systems • Record Keeping, Transfer Pricing and Asset Transfer

This organization is confusing, and required PSE&G to include a table which maps the various sections of the Plan to specific sections of the Standards. Rearranging the Standards into different categories does not enhance the Board's ability to assess the Plan and procedures in place to ensure compliance.

The Compliance Plan often provides a statement or declaration that PSE&G does not engage in a specific activity that is in violation of the Standards. A declaration, however, is not a demonstration. Additionally, the Plan makes frequent statements as to PSE&G policy that in many cases simply restate the Standards, are not referenced, or found elsewhere in corporate policies and procedures. For example, the Compliance Plan does not fully demonstrate compliance with the following sections of the Standards:

• Sections 3.2 through 3.6 (Plan Chapter 3.B) • Section 3.11 (Plan Chapter 3.B) • Section 4.7 (Plan Chapter 9.B) • Section 5.4 (Plan Chapter 3.B)

PSE&G has limited the scope of its Compliance Plan in some areas by assuming that Section 6 does not apply to retail competitive services, when this exclusion is specifically for Sections 3, 4, and 5 of the Standards. This assumption and the Plan’s focus on “affected affiliates” limits how PSE&G ensures compliance with the Standards. For example, PSE&G is dependent on training to attain compliance in areas of Nondiscrimination and Confidentiality of Information. This training was provided exclusively to customer contact employees, rather than to a broader group of employees who might encounter affiliate transaction issues.

The Standards require an accurate list of all affiliates (7.1.b.1). PSE&G has only identified the major subsidiaries of its holding company, PSEG, and its affected affiliates in the Compliance Plan. PSE&G further directs readers of the Compliance Plan to PSEG’s filing with the SEC (Form U-3A-2).

The Affiliate Standards require that the list of all affiliates shall be updated within five business days of any changes along with public posting. (7.1.b.1) PSE&G's Compliance Plan has limited its compliance obligation to updating only the list of “affected” affiliates.166

V-R24 Develop supporting procedures for the Compliance Plan which (1) provide the information necessary to fully demonstrate compliance and (2) can be used as a guide by employees who have questions regarding compliance with the Standards. (Refer to Finding V-F102.)




SECTION 7.2: NEW AFFILIATE COMPLIANCE PLANS

Standard

Upon the creation of a new affiliate which is covered by these standards, the electric and/or gas public utility shall immediately notify the Board as well as make a public posting thereof.

Compliance Plan

Ch. 1.B.5 Upon the creation of a new Affected Affiliate covered by the Final Standards, PSE&G will promptly notify the Board and provide a public posting, thereof. [Section 7.2]



PSE&G states that only PSEG ET is an affected affiliate and they will immediately notify the Board upon the creation of a new affected affiliate.

SECTION 7.3: AUDITS

Standard

(a) By no later than December 31, 1999, at the discretion of the Board, the electric and/or gas public utility shall have an audit prepared by an independent auditor, to be selected by the Board, which verifies that the electric and/or gas public utility is in compliance with these standards.

1. The scope of the audit shall be established by the Board.

(b) An audit performed by an independent auditor shall be at the gas and/or electric public utility’s expense.

(c) After December 31, 2000, subsequent audits will be performed at least every 2 years thereafter.

Compliance Plan

Ch. 1.B.6 PSE&G will commence an independent third party audit that verifies its compliance with the Final Standards. Such audit will be performed at the discretion of the Board’s Division of Audits. The costs incurred for the audit will be at the expense of PSE&G. [Section 7.3]



PSE&G has commenced this third party Affiliate Standards Compliance Audit to verify compliance with the Final Standards. This audit has been performed at the discretion of the Board’s Division of Audits and PSE&G has incurred the expense of this audit.




SECTION 8: DISPUTE RESOLUTION

Section 8 of the Standards describes the process for reporting and resolving complaints regarding violation of the Standards. Section 8 also describes the remedies available to the Board for enforcing the Standards. Only a few parts of Section 8 require specific compliance actions by PSE&G, with the remainder of the Section defining the resolution process and available remedies.

In reviewing PSE&G’s compliance with Section 8, the audit team used the following evaluative criteria:

• PSE&G’s Compliance Plan addresses the how to submit a complaint, complaint investigation, reporting, and resolution processes.

• PSE&G has established an employee hotline to report complaints. • PSE&G has properly notified the Board of any complaints and any actions taken

in respect to violations of the Standards.

In conducting its compliance review, the audit team examined the following:

• Data requests covering all formal and informal complaints received by PSE&G during 2000 to date.

• PSE&G’s Compliance Plan.

SECTION 8.1: PROCEDURE

Standard

(a) An electric and/or gas public utility shall establish and file with the Board a dispute resolution procedure, including the establishment of a telephone complaint hotline, to address complaints alleging violations of these standards.

(b) At a minimum, the procedure shall designate a person to conduct an investigation of the complaint and communicate the results of the investigation to the complainant, in writing, within thirty days after the complaint is received, including a description of any action taken.

(c) An electric and/or gas public utility shall report any violation of these standards to the Board, with a copy provided to the RA, within five (5) business days of becoming aware of any such violation(s).

(d) The electric and/or gas public utility shall maintain a log of all resolved and pending complaints. The log shall be subject to review by the Board and RA and shall contain, at minimum, a summary of the complaint, the manner in which the complaint was resolved, or an explanation why the complaint remains pending.

Compliance Plan

Ch. 2.C.8 PSE&G has established Dispute Resolution Procedures to address complaints alleging violations of the Final Standards, see Exhibit 6. [Section 8.1]




EXHIBIT 6

DISPUTE RESOLUTION PROCEDURES

Public Service Electric and Gas Company has established the following in accordance with the Board’s Final Standards to address complaints alleging violations of the Standards:

Telephone Complaint Hotline – Integrity Line (24 hrs./day) 1-800-655-7269

All complaints will be addressed by a member designated by PSE&G’s Compliance Officer to conduct an investigation on alleged complaints and communicate such results to the BPU within 30 days of receipt. Any/all actions addressed during the investigation will be included in a Report to the BPU.

Complaints determined to be in violation of the Final Standards, will be communicated to the BPU and Ratepayer Advocate (RA) within five (5) business days.

The PSE&G Compliance Officer will maintain a log of all resolved and pending complaints received associated with Final Standards. The log and supporting documentation will contain, at a minimum, a summary of the complaint, the manner to resolve the complaint and/or explanation why the complaint remains pending.



PSE&G has filed a dispute resolution procedure with the Board. This procedure is included in Chapter 2 of the Compliance Plan. The dispute resolution plan includes the telephone number of the complaint hotline. The audit team verified that the telephone number is valid, that the number is staffed and that the line is appropriately answered. The dispute resolution procedure also stipulates that PSE&G’s Compliance Officer will designate who shall conduct a complaint investigation.

PSE&G has reported that they have not received any complaints on the hotline nor directly to the Compliance Officer.167 Therefore at this time, no further action by PSE&G is required.




SECTION 9: VIOLATIONS AND PENALTIES

SECTION 9.1: PENALTIES

Standard

(a) If, as a result of an audit conducted pursuant to subsection 7.3 above or by any other means, the Board determines that an electric and/or gas public utility has committed violations of Sections 3,4,5,7 or 8 of these standards which are not substantial violations, the Board is authorized to impose a penalty of up to $10,000 for each such violation upon said electric and/or gas public utility.

(b) If, as a result of an audit conducted pursuant to subsection 7.3 above or by any other means, the Board determines after providing the electric and/or gas public utility notice of a public hearing and an opportunity to be heard, that an electric and/or gas public utility has committed violations of Sections 3, 4, 5, 7 or 8 of these standards which are substantial in nature, the Board is authorized to take some or all of the following actions:

1. Impose a penalty of up to $10,000 for each such violation(s).

2. Order appropriate reimbursement to electric or/gas public utility ratepayers, including interest.

3. For a first violation:

i. order a violating electric or/gas public utility to cease some or all competitive product and/or service offerings and form a related competitive business segment of the public utility to perform the competitive product and/or service offerings; or

ii. order a violating electric or/gas public utility to cease some or all competitive product and/or service offerings through a related competitive business segment of the public utility holding company; and

4. For a second violation:

i. Initiate a hearing to reconsider its approval of the formation of the public utility holding company.

Compliance Plan

Ch. 1.B.7 PSE&G understands that it may be subject to certain penalties if the Board determines that PSE&G has committed violations with respect to the Final Standards. [Section 9.1]


Section 9.1 does not require any specific action by PSE&G.




VI. APPENDIX

_________________________________________________________________________________


Exhibit VI-1 Description Service Company Functions, Services and Cost Allocation Methods

Information Technology – V.P. – IT Staff Cost Center #1841 Assessment Center #7082 IT – Operations & Client Services Staff Cost Center #1848 IT – Professional Services Staff Cost Center #1852 IT – Enterprise IT Architecture Staff Cost Center #1854 Description of Services Provided:

• Desktop Services - Basic Network Access, Support (Locked, unlocked, custom) - Mainframe terminals - Software, Equipment Supply Services (Installation & Configuration) - Accelerated and emergency delivery - Accessories / peripherals, - Basic and performance desktop - High performance workstation - Basic, performance and lightweight laptops

• Departmental Applications - Enterprise Applications Suite - Departmental application support – Mainframe and client server - Special data services - Radio network services - Enhanced network support - Microfiche processing - Customer billing - Postage - Moves, adds and changes - Mobile radio support

• Communications - Corporate extension and use - Voice mail - Other Telco services - Corporate calling card - Cellular telephone

• Consulting Services - Sr. Consultants




- Sr. Technicians • - Reproduction

- Black and White and color copies - Printing services - Typesetting - Corporate Copiers

Allocation Basis:

• Whenever possible, services will be directly charged. ________________________________________________________________________ Legal - Corporate Security Staff Cost Center #1856 Assessment Center #7061 Description of Services Provided:

• Maintain Security Systems • Facilities and Event Security • Preventive and Investigative Services • Information Security Policies • Business Continuity/Crisis Planning • Data Security – Maintain Data Security, Enterprise-wide

Allocation Basis:

• Whenever possible, services will be directly charged. • Other direct charge methods include the following item(s):

- 2000 Modified Massachusetts Formula • Policy, consistency, standards and other governance activities will use the 2000

Modified Massachusetts Formula ________________________________________________________________________ Legal – Claims Staff Cost Center #1857 Assessment Center #7063 Description of Services Provided:

• Claims Handling - Operating Companies (Power, Utility, Energy Holdings, Service Co.)

• Claims Avoidance/Risk Prevention Services including Claims Analysis and Claims Awareness seminars to all Operating Companies (Power, Utility, Energy Holdings, and Service Co.) Note: Injuries and Damages payouts are processed through this cost center.

Allocation Basis:





• Three year historical average of claims paid out

________________________________________________________________________ Legal - Corporate Secretary Staff Cost Center #1858 Assessment Center #7062 Description of Services Provided:

• Plan and Conduct the Annual Meeting • Plan and conduct Board of Directors and Committee meetings of Enterprise

companies. Includes: Board Administration, compensation and membership, and the preparation of Board Written Consents

Allocation Basis:


Anticipated Demand • Policy, consistency, standards and other governance activities will use 2000

Common Equity

________________________________________________________________________ Legal – Libraries/Info Res Staff Cost Center #1859 Assessment Center #7064 Description of Services Provided:

Knowledge Management:

• Research & Information Consulting • Information Central - Intranet • Provide basic reference library services including cataloging new reference

materials, controlling the removal and return of reference materials, ordering/updating reference materials, etc.

Records Management:

• Records retention and storage • Maintain the MANUALS connection database • Formal Guidance & Support in the development of PSEG policies & practices

Allocation Basis:


2000 Modified Massachusetts Formula




• Policy, consistency, standards and other governance activities will use the 2000 Modified Massachusetts Formula

________________________________________________________________________

Legal - Environment Health & Safety Staff Cost Center #1860 Assessment Center #7066 Description of Services Provided:

• Conduct planning and policy development on both a state and federal level • Promote the corporate environmental image • Occupational Health and Safety Programs and Services • Communicate & Educate Enterprise Shareholders on Enterprise Policy

compliance: • Manage permitting and licensing (e.g. water permits, air permits) • Provide regulatory guidance and technical consulting services. • Design, implement, and monitor EH&S compliance programs (audits and

assessments) Environmental Projects and Technical Services:

• Air Quality Programs, Air Operating Permits, Water Studies, Wetlands Studies, Pollution Prevention and Response Plans

• Manage estuary enhancement and revitalization of the marshlands programs • Site remediation and investigations.

Allocation Basis:


Anticipated Demand • Policy, consistency, standards and other governance activities will use 2000 US • Modified Massachusetts Formula

________________________________________________________________________

Legal - General Counsel /Utility Law Staff Cost Center #1862 Assessment Center #7060 Description of Services Provided:

Legal Services • Compliance (e.g. Standards of Integrity) • Advice, counsel and assistance in interpretation of legal statutes and

implementation of regulations. • Financial statements, financing, mergers and acquisitions, new business contracts

and ventures, restructuring & securitization & EMP • Litigation Advice and Representation




• Contract & Real Estate Litigation, Employment Litigation, Personal Injury and property damage

• Environmental/Regulatory Consulting • Manage government relationships at the federal and state level, Manage

regulatory tariffs/licenses and right of ways.

Allocation Basis:


Anticipated Demand • Policy, consistency, standards and other governance activities will use the 2000

Modified Massachusetts Formula ________________________________________________________________________

Financial Services - Business Integration Team Staff Cost Center #1866 Assessment Center #7072 Description of Services Provided:

• Analyze current business processes and identify opportunities for improvement within SAP

• SAP Related: Design new processes Construct the system Perform system, component, and security testing Implement the system

Allocation Basis:

• All services will be directly charged. ________________________________________________________________________ Corporate Support - Resource Recovery Staff Cost Center #1867 Assessment Center #7071 Description of Services Provided:

Waste Management of Hazardous / Non-Hazardous Waste for Operating Companies • Recyclable Waste • Coal Ash Management • Investment Recovery • Material Recovery (De-manufacturing / re-manufacturing) • Records Management – Document Shredding




Allocation Basis:

• Whenever possible, services will be directly charged.

Corporate Support - Materials Mgt. Support Org. Staff Cost Center #1868 Assessment Center #7070 Description of Services Provided:

• Develop Procurement and Materials Strategies • Procure Materials for Service Company, ASB, Customer Ops and E.T. • Contract Management • Materials Handling, Delivery and Storage • Maintain the physical inventory • Maintain Supplier Relationship • Maintain Supplier Diversity Program • Administer the purchasing card program

Allocation Basis:



Modified Massachusetts Formula ________________________________________________________________________ Financial services - Bus Integration Support Ctr Staff (SAP) Cost Center #1869 Assessment Center #7072 Description of Services Provided:

• Ensures the corporation fully leverages all SAP has to offer by maximizing the benefit of completed implementations while working with the lines of business and internal service providers to identify training needs, enhancements or process revisions.

• Makes all major decisions regarding new functionality/upgrades to SAP • Performs all major configurations for all operating companies utilizing SAP • Conducts research and development work • Serves as "advisors" to Operating Companies SAP strategy and influences SAP

regarding future needs • Provide subject matter experts for training of employees on various modules

within SAP.




Allocation Basis:


- HR master records - SAP User Ids

________________________________________________________________________ Financial Services - Treasury Services Staff Cost Center #1876 Assessment Center #7074 Description of Services Provided:

• Stockholder Services • Cash Management • Insurable Risk • Investor Relations • Trustee Relationships • Corporate Finance Services • Corporate Properties • Treasury Consulting Services

Allocation Basis:

• Whenever possible, services will be directly charged • Other direct charge methods include the following item(s):

2000 Utility Modified Massachusetts Formula Headcount

• Policy, consistency, standards and other governance activities will use 2000 Common Equity

Financial Services - Internal Auditing Staff Cost Center #1877 Assessment Center #7076 Description of Services Provided:

• Audits - Operating Companies (Power, Utility, Energy Holdings, Service Co., etc.)

• Business Conduct Compliance (Hotline) • Corporate Governance - Internal Control/Business Ethics Training – General

Control Awareness and Self-Assessment program (CSA) training to Enterprise associates

• Internal Control/Business Ethics Training – Tailored CSA training to meet specific needs of Enterprise Operating Companies and key processes

• Management Advisory Services (MAS) – (Power, Utility, Energy Holdings, Service Co.)

• Special Reviews




• Contract Reviews

Allocation Basis:



________________________________________________________________________ Financial Services - Corporate Planning Staff Cost Center #1878 Assessment Center #7078 Description of Services Provided:

• Formulate Business Strategy • Develop Financial Plan

Allocation Basis:


________________________________________________________________________ Financial Services - Accounting Services Staff Cost Center #1879 Assessment Center #7080 Description of Services Provided:

• Payroll Services • Invoice Processing • Third Party Billing, Cash, and Receivables • Fixed Asset Services • Internal Financial Reporting • External Financial Reporting • Tax Services • Financial Management Services • Accounting Policy Development

Allocation Basis:


- Number of Paychecks - Number of Invoices Processed - Anticipated Demand





________________________________________________________________________

Financial Services - Insurance/Real Estate Taxes Profit Center #1880 Assessment Center #N/A Description of Services Provided:

• Insurance and Real Estate Tax Services Allocation Basis:

• Whenever possible, services will be directly charged. Real Estate Tax Assessment General Property / Casualty Insurance Assessment

________________________________________________________________________ PSEG Services Corporation - Enterprise Corporate Development Staff Cost Center #1882 Assessment Center #7130 Description of Services Provided:

• Corporate Mergers and Acquisitions, joint ventures and divestiture plans for PSEG

• Support business development activities of PSEG subsidiaries

Allocation Basis:



________________________________________________________________________ PSEG Services Corporation - Enterprise Risk Management Staff Cost Center #1884 Assessment Center #7132 Description of Services Provided:

• Monitor risk exposure and reporting to the Risk Management Committee, Audit Committee and the Board of Directors.

• Identify Management Risk • Purchasing Card Financial Risk

Allocation Basis:


Anticipated demand




PSEG Services Corporation - PSEG Marketing Staff Cost Center #1886 Assessment Center #7134 Description of Services Provided:

Advertising and Brand Development • Develop & Implement Branding Projects • Develop & Implement PSEG Special Events Calendar • Residential Services Marketing • Demand Side Marketing • Direct Marketing – Residential • New residential Services

Business Services (C&I) Marketing

• Generate Sales Pipeline Reports • Develop & Implement MicroTurbine Marketing Plan • Client Marketing Communications • Market & Customer Assessment

ENERGY MARKETING

• Develop NJ Marketing Plan

Allocation Basis:



Modified Massachusetts Formula

________________________________________________________________________ PSEG Services Corporation - New Business Development Cost Center #1888 Assessment Center #7136 Description of Services Provided:

• Translate needs for new Products / Customers • Contract Management • Construction Management • Participate with Trade Environment




Allocation Basis:


PSE&G Services Corporation Cost Center #1890

Assessment Center #7138 Description of Services Provided

• Executive Services • Formulate Business Strategy • Develop Long Term Vision • Transform The Organization • Manage Investor Relations • Manage Federal Affairs • Manage FERC and Federal Regulatory Matters

Allocation Basis:

• Whenever possible, services will be directly charged. • Other direct charge methods include the following item(s)

2000 Modified Massachusetts Formula • Policy, consistency, standards and other governance activities will use the 2000


________________________________________________________________________ Human Resources – VP, Human Resources Staff Cost Center #1900 Assessment Center #7084 Description of Services Provided:

• Establish the overall Enterprise priorities as part of HR leadership team • Strategic Consulting Services

- Identify how Human Resources can support Operating Companies, address people-related issues

- Lead Human Resources initiatives within an Operating Company - Diagnose people issues and assess problems from an organizational

perspective that affect an Operating Company - Improve the way Operating Companies lead, manage and develop associates

Future State of Business Services

• Interpret the strategic direction of business in terms of people issues




• Human Resources enhancement Study

Allocation Basis:


Enterprise Headcount

________________________________________________________________________

Human Resources - Industrial Relations Staff Cost Center #1902 Assessment Center #7140 Description of Services Provided:

Union & Management Relations Services

• Management Consulting Services • Industrial Relations Training • Assist operating department management to understand the legal aspects of our

unions and the contract language. • Guide the negotiation and administration of collective bargaining agreements. • Represent Enterprise interests in the handling of grievances, arbitration, NLRB

charges and court cases. • Provide oversight in the areas of grievance/arbitration and identification of

issues. • Participate on joint labor-management problem solving committees. • Provide general consulting in areas such as research, objective/strategy

development, union avoidance and union campaign strategies.

Allocation Basis:


Bargaining Unit Headcount Different Variants of Headcount depending on Service Provided

________________________________________________________________________ Human Resources - Performance and Rewards Staff Cost Center #1904 Assessment Center #7142 Description of Services Provided:

• Compensation Services (Non-Represented Employees) • Benefits Management Services • Performance Management




EMPLOYEE COMMUNICATIONS SERVICES

• Executive compensation & Board of Directors Compensation • Develop Compensation Policies • Evaluate available tools and techniques, provide consulting services to Operating

Companies, develop corporate guidelines and models, work with Quality and Organization Effectiveness, and other Human Resources providers to integrate performance with rewards and other comprehensive systems

• Design strategic compensation plans, including incentive programs, gainsharing, etc

• Design and administer benefit programs • Manage Workers’ Compensation and other disability programs • Manage CHAMP fitness center and work/family programs

Allocation Basis:


Headcount • Policy, consistency, standards and other governance activities will use the 2000


________________________________________________________________________ Human Resources - Employment Benefits Resources Cost Center #1905 Assessment Center #N/A Description of Services Provided:

• Pass-through cost center for Fringe Benefits Allocation Basis:

• All services are directly charged.

________________________________________________________________________ Human Resources – Medical Staff Cost Center #1906

Assessment Center #7144 Description of Services Provided:

Regulated Medical Services

• Conduct job suitability evaluation, including vision, hearing and cardio-pulmonary testing

• Conduct disability evaluations




• Conduct pre-placement, key personnel and return-to-work physical and psychological examinations

• Interpret regulations requiring medical examinations • Conduct drug and alcohol testing and evaluate drug and alcohol problems as

required by law and company policy • Provide any necessary medical consultation with plant personnel regarding

injured/ill associates

Health Promotion Services

• Coordinate health promotion activities • Oversee Employee Assistance Program activities employee disability

evaluations, provide wellness services, oversee operation of CHAMP fitness center, provide health awareness programs, provide limited medical treatment including x-rays, flu shots, etc.

General Medical Services

• Treat associates who are injured at work or have other medical problems

Allocation Basis::

• Whenever possible, services will be directly charged. • Other direct charge methods include the following item(s) Per Exam

________________________________________________________________________

Human Resources - Quality/Organizational Effectiveness Cost Center #1908 Assessment Center #7146 Description of Services Provided:

Employee Communications Services

• Employee Relations Strategy/Policy Development - Align employee relations’ policies and practices with Enterprise goals and

strategies. • Workforce Transformation

- Collect data about the organization to help identify problems and create action plans, team development, conflict/change management, large scale systems change intervention and innovation thinking for business results

Current State of Business Services

• Optimizes an organization’s performance through redesign of its strategy, structure, business processes and operations - Future State of Business Services

• Benchmarking Services




Leadership Skills Development

• Provide leadership development initiatives that are aligned with Enterprise goals and strategies

• Operations & Business Management Development - Deliver professional skills development to build capacity for competitive

advantage (e.g., influence skills, business writing, sales/marketing)

Allocation Basis:

• Whenever possible, services will be directly charged. • Other direct charge methods include the following item(s) • Headcount • Participation Rates for 1999 • Participation Rates for first 6 months of year 2000

________________________________________________________________________ Human Resources - Strategic Staffing & Succession Staff Cost Center #1910 Assessment Center #7148 Description of Services Provided:

Strategic Staffing

Consulting with business leaders to ensure the company has the right talent in the right place at the right cost to meet present and evolving business objectives in a competitive market. This would include identifying and pre-screening candidates, maintain the Resumix database, coordinating the interviewing and hiring process, developing offers for candidates, provide relocation services, schedule pre-requisite skill, psychological and medical testing for candidates

Succession Planning

Consulting with business leaders and identifying and developing talent for critical positions. Supporting the leadership and development initiative. Identifying competency gaps and formulating action plans

Strategic Staffing and Succession Planning

Staffing, succession planning and workforce transformation work performed in support of Nuclear by HR associates at the site

Allocation Basis:





Headcount - 2000 Utility Modified Massachusetts Formula

________________________________________________________________________ Human Resources - Training and Development Staff Cost Center #1912 Assessment Center #N/A Description of Services Provided:

Course Design and Development Services Course Delivery and Support Services

• Technical Training - Deliver technical skills development including contractual, regulatory

enhancement skills training - Energy Supply Training - Cross Functional Skills - Energy Delivery Training - Customer Services Training - Computer Training - Training Assessment Services

• Measurement & Effectiveness - The diagnosis of technical, organizational and performance issues in order to

define effective solutions Allocation Basis:


- Different Variants of Headcount - 1999 Actual Usage of facilities

________________________________________________________________________ Corporate Headquarters Services Staff Cost Center #1914 Assessment Center #N/A Description of Services Provided: Facility Management

• Manage corporate headquarters food service operations, security services, custodial functions, corporate conference rooms and maintaining and operating special mechanical and electrical systems

• Execute general office design and construction and provide space planning and allocation

Allocation Basis::





• Other direct charge methods include the following item(s) Square Feet Occupied

________________________________________________________________________ Corporate Headquarters - Transportation Services Staff Cost Center #1915 Assessment Center #N/A Description of Services Provided:

Transportation Services

• Provide transportation services including helicopter operations, executive chauffeur services, and the management of the Newark Motor Pool and Corporate Van Pool Program

Allocation Basis:


Rental Days

________________________________________________________________________

Human Resources Service Center Staff Cost Center #1916 Assessment Center #7150 Description of Services Provided:

Employee Inquiry Services

• Provide responses to associate inquiries regarding employee benefits, policies, company meetings and events, and payroll direct deposit

HR Admin Services

• Maintain associate, retiree and dependent databases, interfacing with supplier databases, and managing other information. (e.g., AA/EEO reporting)

• Benefits Management Services • Management Administrative Support and Technical (MAST) Compensation

Services - Provide management reporting services in such areas as benefits,

compensation and goal tracking, and compliance reporting to support regulatory and legal requirements and inquiries

Litigation Support - Consulting Services

• Partner with Legal Services to defend the company against EEO/AA litigation and compliance investigations (Includes administration costs not the actual awards paid out.)




Allocation Basis:


Headcount

________________________________________________________________________ External Affairs – VP, External Affairs Staff Cost Center #1920

Assessment Center #7092 Description of Services Provided:

• Manage Public Relations / corporate image for Enterprise • Promote the company’s position on regulatory issues and public policy matters

before the BPU in such a manner that achieves Operating Company and strategic objectives while meeting operational needs.

• Track, monitor and assess priority of issues and activities of people involved with the BPU.

Allocation Basis:


________________________________________________________________________ External Affairs - Internal Communications Staff Cost Center #1922 Assessment Center #7095 Description of Services Provided:

• Develop & produce PSEG Annual Report • Develop & deliver executive communications • Prepare & Distribute PSEG Outlook, Outlook On-line, video information series

and other communications media • Provide communications consulting • Provide speechwriting Design & develop Communications media (creative

services)

Allocation Basis:

• Whenever possible, services will be directly charged. • Policy, consistency, standards and other governance activities use the 2000

Modified 2000 Massachusetts Formula




________________________________________________________________________ External Affairs – External & Nuclear Communications Staff Cost Center #1924 Assessment Center #7096 Description of Services Provided:

• Design, develop and manage PSEG website • Receive and respond to media inquiries • Provide press releases and advisories • Prepare press conferences, events and teleconferences • Provide proactive outreach media • Provide consumer education • Provide executive support for the EOG and Operating Companies • Provide emergency response communications; and all media, education, and

communications regarding Nuclear generation

Allocation Basis:


2000 Utility Modified Massachusetts Formula • Policy, consistency, standards and other governance activities use the 2000


________________________________________________________________________ External Affairs - State Government Affairs Staff Cost Center #1926 Assessment Center #7097 Description of Services Provided:

• Public Policy Analysis • Advocate the company's position on State issues and shape public policy • Track legislative issues • Manage state lobbying efforts • Maintain constituent relationships

Allocation Basis:


2000 Utility Modified Massachusetts Formula




________________________________________________________________________ External Affairs - Corporate Cost & Governance Cost Center #1927 Assessment Center #N/A Description of Services Provided:

• Membership - EEI Business Associations • Membership - AGA Business Associations • Sponsorships • Business Associations – Electric • Business Associations – Gas

Allocation Basis:


Multi-factor formula; Revenue, Customers and Capacity 2000 Modified Massachusetts Formula – Electric only Planned Revenues Full-Time Employees (FTEs) 2000 NJ Assets

• Policy, consistency, standards and other governance activities use the 2000 Modified Massachusetts Formula & 2000 Common Equity

________________________________________________________________________ External Affairs - Federal Affairs Staff Cost Center #1928 Assessment Center #7098 Description of Services Provided:

• Develop Federal policies and positions for the corporation • Represent the company on a Federal level • Develop relations with others who may have influence with Congress and

federal agencies • Provide internal reporting on Federal issues • Manage Federal Political Action Committee

Allocation Basis:


2000 Utility Modified Massachusetts Formula 2000 US Assets





________________________________________________________________________ External Affairs - Corporate Rate Counsel Staff Cost Center #1930 Assessment Center #7086 Description of Services Provided:

• Develop regulatory state policies and strategies for the corporation • Manage internal and external regulatory relations • Perform case filings • Provide internal reporting and support regarding regulatory issues

Allocation Basis:



________________________________________________________________________ External Affairs - Regional Public Affairs Staff Cost Center #1932 Assessment Center #7093 Description of Services Provided:

• Support efforts of private and/or public local, county and state economic development organizations through education and/or consultation with key stakeholders with particular emphasis on Urban Centers. Develop model of urban redevelopment plan and seek to replicate in other centers

• Leverage regional public affairs relationship with local and county government • officials to facilitate and coordinate cross departmental activities • Provide site location assistance to prospective customers • Develop External Communications Strategies • Communicate major issues of Enterprise to the external audience • Maintain a database of key opinion leaders • Provide consumer education • Prepare “Nuclear Outlook” • Assist potential customers in bundled services

Allocation Basis:






________________________________________________________________________ External Affairs - Corporate Responsibility Staff Cost Center #1934 Assessment Center #7094 Description of Services Provided:

• Manage contributions - Enterprise company foundation, matching gift program, and fund raising events and memberships

• Manage employee campaigns and volunteerism efforts such as Power of Giving, and March of Dimes

• Provide assistance and support to the Retired Employees’ Club. • Provide support to PSEG Executives' community and business initiatives.

Includes assisting senior officers to play leadership roles in events and programs throughout the state

• Manage Urban Initiatives’ Community Economic Development Programs in targeted areas throughout the state

Allocation Basis:


2000 Utility Modified Massachusetts Formula 2000 Modified Massachusetts Formula – Electric only 2000 Modified Massachusetts Formula – Gas only

________________________________________________________________________ External Affairs - Area Development Staff Cost Center #1935 Assessment Center #7099 Description of Services Provided:

• Location NJ Services • Economic Development Services • Site Finding Services

Allocation Basis:


2000 Utility Modified Massachusetts Formula 2000 NJ Assets




_______________________________________________________________________ Senior VP Corporate Services & External Affairs Cost Center #1936 Assessment Center #7088 Description of Services Provided:

• Develop Vision and Strategy • Influence and Shape BPU and Other State Agencies

Allocation Basis:


2000 Utility Modified Massachusetts Formula • Policy, consistency, standards and other governance activities will use the 2000


________________________________________________________________________ Energy Recources & DSM - Management Services, Energy Resources & DSM Staff Cost Center #1946 Assessment Center #7090 Description of Services Provided:

• Emerging Technologies • Manage Non-Utility Generation • Perform production cost studies • Conduct long-range resource planning • Develop/Maintain Revenue Forecasts

- Perform load research - Monitor & Analyze Sales

Allocation Basis:





________________________________________________________________________ Energy Resources & DSM - DSM Services Staff Cost Center #1948 Assessment Center #7090 Description of Services Provided:

• Demand Side Management • Standard Offer Programs – all administrative costs are billed to the Energy

Services Companies (ESCO’s) or recovered through DSAF

Allocation Basis:


i




Table of Contents

I. Executive Summary ................................................................................................... 1 A. Audit Scope and Objectives........................................................................... 1 B. Project Team.................................................................................................. 1 C. Summary of Findings..................................................................................... 2 D. Audit Approach .............................................................................................. 9 E. Summary of Recommendations................................................................... 10 F. Glossary of Terms........................................................................................ 13

II. Background and Organizational Issues.................................................................... 15 A. Organizational Structure .............................................................................. 15 B. System, Application, & Products (SAP) Enterprise System ......................... 23 C. Compensation Program Changes................................................................ 24

III. Competitive Services .............................................................................................. 27 A. PSEG Power LLC: Power Generation and SERVCO .................................. 27 B. PSEG Energy Holdings Inc. ......................................................................... 31 C. PSE&G: Appliance Repair ........................................................................... 40 D. PSEG:Sunburst Customer Solutions and Other Competitive Services........ 49

IV. Corporate Accounting Issues.................................................................................. 55 A. Background.................................................................................................. 55 B. Service Company Organization and Services.............................................. 56 C. Users of Service Company Services ........................................................... 70 D. SAP Cost Accounting System & Cost Allocations........................................ 73 E. Cross-subsidization...................................................................................... 86 F. Compliance .................................................................................................. 99

V. Affiliate Standards Compliance.............................................................................. 101 Sections 1 and 2: Scope and Definitions......................................................... 101 Section 3: Nondiscrimination........................................................................... 107 Section 4: Information Disclosure.................................................................... 127 Section 5: Separation ...................................................................................... 136 Section 6: Competitive Products and/or Services Offered by a Utility or

Related Competitive Business Segments of a Utility ................................. 154 Section 7: Regulatory Oversight...................................................................... 165 Section 8: Dispute Resolution ......................................................................... 169 Section 9: Violations and Penalties ................................................................. 171

VI. Appendix............................................................................................................... 173 Description of Services Provided:......................................................... 173

ii




Table of Exhibits

I-1 Audit Team............................................................................................................... 2

I-2 Summary of Recommendations .......................................................................... 11

II-1 PSE&G Prior to Reorganization .......................................................................... 17

II-2 Public Service Enterprise Group Organization ................................................. 18

II-3 PSEG Energy Technology Organization ............................................................ 19

II-4 PSEG Holdings Organization .............................................................................. 20

II-5 PSEG Services Corporation ................................................................................ 21

III-1 PSEG Energy Holdings Subsidiaries Annual Financial Summary 1999......... 32

III-2 PSEG ET Subsidiaries Annual Financial Summary 1999................................. 35

III-3 Service Level Understanding Listing ................................................................ 38

III- 4 Transactions From PSE&G to PSEG ET........................................................... 39

III-5 Financial Transaction Summary PSE&G and ET.............................................. 40

III-6 Call Type and Priority ......................................................................................... 42

III-7 Summary of ASB Information Required by Section 6.4.a (12 months ending June 30, 2000) ..................................................................................... 48

III-8 List of Sunburst Clients and Services Provided .............................................. 51

IV-1 Service Company Organization ......................................................................... 57

IV-2 Major Company Codes ...................................................................................... 61

IV-3 Summary of Cost Allocation Factors ................................................................ 64

IV-4 Service Company Clients ................................................................................... 71

IV-5 Service Company Services Provided to PSE&G and its Affiliates ................. 72

IV-6 Schedule of Top 20 Service Orders for Each Service Company Cost Center ............................................................................................................... 78

iii



IV-7 Audit Exceptions by Cost Center...................................................................... 82

IV-8 Percent of Service Company Charges Direct Charged vs. Allocated ............ 86

IV-9 Analysis of Intercompany Billing – PSEG Power to Utility ............................. 90

IV-10 Analysis of Intercompany Billing – PSEG Services to Utility ....................... 91

IV-11 Analysis of Intercompany Billing – Utility to PSEG Power ........................... 92

IV-12 Analysis of Intercompany Billing – Utility to PSEG Services ....................... 93

IV-13 PSE&G and ET Contract Activity - Transaction Summary............................ 97

IV-14 PSEG ET Interest Payments to PSE&G .......................................................... 98

V-1 Average Processing Time for Customer Requests to Change Supplier ...... 109

V-2 Average Processing Time (Days) for Customer Information Requests........ 110

V-3 Affiliate Articles of Incorporation Reviewed ................................................... 138

VI-1 Description Service Company Functions, Services and Cost Allocation Methods ......................................................................................................... 173

4



5



1 Interview with R. Quinn dated 8/24/00 2 Interview with R. Quinn dated 8/24/00 3 Interview with P. Mellett dated 8/25/00 4 Interview with P. Mellett dated 8/25/00 5 IDR #301 6 IDR #304 7 IDR #305 8 IDR #294 9 IDR #305 10 IDR #301 11 IDR #305 12 IDR #301 13 Interview with R. Quinn dated 8/24/00 14 IR-210 15 IR-209 16 INT-132, Craig Bishop 17 IR-257 18 IR-103, pages 2, 3, 7, and 8 19 IR-209 20 IR-209 21 IR-103, p.3 22 IR-257 23/ U-3A-2 24/ U-3A-2 25/ U-3A-2 26 As recognized by PSEG 28 Form U-3A-2 as filed with the SEC on February 29,2000. 29 Interview 114 Stanley Kosierowski - President Energy Technology 30/ U-3A-2 31 Not all affiliate numbers are available on a disaggregated basis 32 /IR-103 33/ Int.114 34/ Int.114 35 Interview 115 Christopher Kelleher, Sr. VP Investments 36 Document request No. 133 37 Document request No. 133 38 Interview 114 Stanley Kosierowski - President Energy Technology 39/ Discussion with M. Moscufo, 8/30/00 40/ IR 279 41/ Discussion with M. Moscufo, 8/30/00 42/ IR 245 43/ IR 199 44/ IR 199

6



45/ IR 199 46/ IR 199 47/ IR 199 S2 48/ IR 199 S2 49 IR-254 50 IR-254 51 INT-106, Ralph Izzo, S. Chiu 52 INT-133, Art Orticelle, Ralph DiBiase 53 IR-259 54 IR-254 55 IR-260 56 INT-134, Susanne Chiu, Mike Blihar 57 (Need reference to Marie’s DR) 58 IR-259, INT-106, INT-133 59 IR-165 60 IR-261, Section 8, pages 4-5 61 INT-133, A. Orticelle, R. DiBiase 62 IR-165 63 IR-165 64 IR-292 65 IR-286 66 IR-290, IR-293 67 IR-266 68 IR-284 69 IR-291 70 IR-186, S1 71 IR-267 72 IR-291 73 IR-189 74 IR #185, PSE&G Petition to centralize corporate support services, dated April 20, 2000. 75 IR #195, SAP Cost Accounting Manual in its entirety. 76 IR #195, SAP Cost accounting Manual, page 6. 77 IR #195, SAP Cost Accounting Manual in its entirety, pages 83-85. 78 IR #195, SAP Cost Accounting Manual, page 287. 79 IR #185, PSE&G Petition to centralize Corporate Support Services, dated April 20, 2000. 80 IR #226, Catalogue of products and services to be used in 2001 planning process. 81 IR #195, Cost Accounting Manual in its entirety, table of contents provided in response to request

IR #112. 82 IR #190, Schedule of expenditures/billings for the 20 most active standing service orders for each

Service Company Internal Service Provider/Cost center for the six-months ended June 30, 2000. 83 IR #274, Description of Service Company cost centers, services provided and cost allocations. 84 IR #226, Catalogue of products and services to be used in the 2001 planning process. 85 IR #103, Copy of PSE&G Competitive services Compliance Plan. 86 Affiliate Standards, page 5. 87 / PSE&G Filing for a Service Company IR# 185 88 / IR 200 89 IR #190 and IR #190 S1, Schedule of Service Company top 20 standing service orders for each cost

center/internal service provider.

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90 IR #199, Schedule of charges by/between PSE&G, PSEG Services Corporation, PSEG Power, and PSEG Holdings for the period January 1, 2000 through June 30, 2000.

91 IR #199, Schedule of charges by/between PSE&G, PSEG Services Corporation, PSEG Power, and PSEG Holdings for the period January 1, 2000 through June 30, 2000.

92 IR #225. Please provide quarterly reports to the Board, detailing the costs of providing each

competitive service (all reports submitted in 1999 and 2000.) 93 IR #227, Please provide all cost and performance benchmark data for functions, products and

services provided by PSEG by PSEG Service Company available or used for analysis within the last two years.

94 Supplement to IR #190, Audit conference with Maria DaSilva (ASD). 95 IR #190 and IR #190 S!, schedule of top 20 Service Company standing service orders. 96 IR #120, Listing of all audits completed during FY 1999 and completed or planned for FY 2000. 97 / IR #204 98 / IR #280 99 IR #193, Percent of Service Company charges allocated vs. direct billed. 100 IR #199, Schedule of charges by/between PSE&G, PSEG Services Corporation, PSEG Power, and

PSEG Holdings for the period January 1, 2000 through June 30, 2000. 101 /IR #245 and 199 S2 102 IR #299, Description of PSE&G assets used by the Service Company, how compensated, any assets

added, etc. 103 IR #278, Please provide a statement of the Service Company Working Capital Fund balance at June

30, 2000, etc.. 104 IR #281, Description of assets transfers, leases, rentals, licenses and easements planned for the next

year, provide transfer prices and methodology for calculating the price. 105 IR #114, Listing of all property transfers involving PSE&G and any covered Affiliate, including

date, value, and reason for the transaction. 106 IR-181 107 IR-181 108 IR-182 109 IR-267 110 IR-214, IR-216 111 IR-217 112 IR-164, IR-218 113 IR-258 114 IR-223 115 IR-173, IR-223 116 IR-143, IR-159 117 IR-217 118 IR-172 119 IR-223 120 IR-165 121 IR-175 122 IR- 125 123 IR-176 124 IR-268 125 IR-142 126 IR-120

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127 IR-124 128 IR- 212 129 IR-104 130 IR-223 131 IR-174 132 IR-181 133 IR-165 134 IR-145 135 IR-218 136 IR-175 137 IR-144 138 IR-124, 126, and 128 139 IR-159 140 IR-142 141 IR-173, IR-223 142 IR-141 143 IR-171 144 IR-110-S1 145 IR-125 146 IR-245 147 IR-117 148 IR-240, IR-241 149 INT-119 (DaSilva) 150 IR-241, SEC U-3A-2, and misc. detail review 151 IR-119, INT-119 (DaSilva) 152 IR-131 153 IR-297 154 IR-185 155 IR-189, IR-190, Schedule of top 20 Standing Orders for Marketing cost center #1886 156 /IR #138 157 IR-139 158IR-139, IR-140 159 IR-139 160 IR-132 161 IR-133 162 IR-137 163 IR-189 164 IR-186, IR-233, IR-264 165 IR-148, IR-181 166 IR-148, IR-181, Compliance Plan Chapter 1, Section B page 12 167 IR-237

a. audit scope and objectives · 2 vantage consulting, inc. competitive service and affiliate...

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