REGULATION

As a result of NJNG being subject to cost-based regulation it is permitted to recover authorized operating expenses and earn a reasonable return on their utility investment based on BPU decisions and in accordance with accounting guidance applicable to regulated operations. The impact of the ratemaking process and decisions authorized by the BPU allows NJNG to capitalize or defer certain costs that are expected to be recovered from its customers through rates as regulatory assets and recognizes certain obligations representing probable future events as regulatory liabilities.

Regulatory assets included in the Unaudited Condensed Consolidated Balance Sheets are comprised of the following:



(Thousands)	June 30, 2011		September 30, 2010
Regulatory assets-current
Underrecovered gas costs ⁽¹⁾	$	156	$	36,485
Conservation Incentive Program ⁽¹⁾	9,375		14,960
Other ⁽¹⁾	—		21
Total current	$	9,531	$	51,466
Regulatory assets-noncurrent
Environmental remediation costs (Note 13)
Expended, net of recoveries ⁽²⁾	$	73,495	$	75,707
Liability for future expenditures ⁽³⁾	201,600		201,600
Deferred income and other taxes ⁽¹⁾	15,010		13,860
Derivatives, net (Note 4) ⁽¹⁾	7,682		16,497
Energy Efficiency Program ⁽²⁾	8,685		3,958
New Jersey Clean Energy Program ⁽²⁾	21,448		30,935
Pipeline Integrity Management ⁽⁴⁾	1,148		1,148
Postemployment benefit costs (Note 10) ⁽¹⁾	105,999		106,225
Other ⁽⁵⁾	3,662		4,671
Total noncurrent	$	438,729	$	454,601


(1)	Recoverable, without interest.


(2)	Recoverable, with interest.


(3)	Recovery will be requested when actual expenditures are incurred (see Note 13. Commitments and Contingent Liabilities).


(4)	Recoverable, subject to BPU review and approval in the next base rate case.


(5)	Recoverable, with or without interest depending on the specific program.

Recovery of regulatory assets is subject to BPU approval. If there should be any changes in regulatory positions that indicate recovery is not probable, the related cost would be charged to income in the period of such determination.

Regulatory liabilities included in the Unaudited Condensed Consolidated Balance Sheets are comprised of the following:



(Thousands)	June 30, 2011		September 30, 2010
Regulatory liabilities-noncurrent
Cost of removal obligation ⁽¹⁾	$	57,963	$	57,648
Other ⁽²⁾	90		—
Total noncurrent	$	58,053	$	57,648


(1)	NJNG accrues and collects for cost of removal in rates. This liability represents collections in excess of actual expenditures.


(2)	Refundable, with or without interest depending on the specific program.

Recent regulatory filings and/or actions include the following:

•

In September 2010, the BPU provisionally approved the recovery of $12.1 million related to the Conservation Incentive Program (CIP) effective October 1, 2010, and a decrease to BGSS rates, effective September 16, 2010, both of which were finally approved in April 2011. On June 1, 2011, NJNG filed for a 9.1 percent BGSS price decrease for the average residential heat customer as a result of lower natural gas prices and natural gas purchasing strategies, and a change in the CIP rates. The proposed CIP rates result in an increase to all classes except residential heat, which represents a decrease. Pending BPU approval, the changes will go into effect October 1, 2011.

•

On October 20, 2010, NJNG filed a petition with the BPU for approval of an extension to NJNG's Accelerated Energy Infrastructure Program (AIP II) for capital investments, in the amount of $52.2 million. On January 24, 2011, NJNG amended the amount of this petition to $60.2 million for capital investments to be made through October 31, 2012. NJNG requested approval from the BPU for the recovery of expenditures through base rates, which would include the Company's overall weighted cost of capital of 7.76 percent authorized in its last base rate case. On March 30, 2011, the BPU approved the amended AIP II filing. NJNG will submit filings requesting recovery of AIP II investment costs through base rates, which will include an overall weighted average cost of capital of 7.12 percent that includes a 10.3 percent return on equity.

On June 1, 2011, NJNG filed for an increase in base rate cost recovery of $4.7 million annually, related to AIP I and AIP II infrastructure investments installed in NJNG's distribution and transmission systems, to be effective on October 1, 2011. An additional filing will be submitted in October 2012, requesting rate changes to be effective in January 1, 2013.


•	Effective November 1, 2010, the BPU approved the recovery of the USF program year budget and the recovery of deferred USF administrative costs. On June 30, 2011, NJNG filed for a 0.1 percent decrease in the annual recovery rate to be effective October 1, 2011.

•

NJNG is eligible to receive financial incentives for reducing Basic Gas Supply Service (BGSS) costs through a series of margin-sharing programs that include off-system sales, capacity release, storage incentive and financial risk management (FRM) programs. On April 1, 2011, NJNG filed a petition with the BPU for approval of an extension of these incentive programs. On July 25, 2011, NJNG, the BPU and Rate Counsel executed a Stipulation to extend NJNG's margin-sharing incentive programs for four years through October 31, 2015, under the same terms of its previous agreement with respect to margin-sharing percentages. This agreement also permits the Company to annually propose a process to evaluate and discuss alternative incentive programs, should performance of the existing incentives or market conditions warrant re-evaluation. BPU approval is expected by September 30, 2011.


•	On June 1, 2011, NJNG filed its annual Energy Efficiency (EE) Program filing with the BPU, which was subsequently amended to request that the current recovery rate remain the same. On July 15, 2011, NJNG filed a separate petition to extend its current EE Programs through December 31, 2012.

•

On June 16, 2011, NJNG submitted a filing with the BPU seeking authority to invest up to $15 million to build compressed natural gas vehicle refueling stations in Monmouth, Ocean and Morris counties. If approved, NJNG would begin construction of the stations no later than December 31, 2012. NJNG would submit a cost recovery filing to the BPU in October 2012, requesting a base rate change to be effective early in 2013. Proceeds from the delivery of the associated natural gas, along with any available federal and state incentives, will be credited back to customers to help offset the cost of this investment.