Note 13. Income Taxes

PSEG’s, Power’s and PSE&G’s effective tax rates for the three months and six months ended June 30, 2012 and 2011 were as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
PSEG		40.9%		41.5%		33.7%		41.6%
Power		41.2%		41.1%		40.3%		41.2%
PSE&G		38.4%		41.0%		32.7%		40.7%

For the three months ended June 30, 2012, the decrease in PSE&G’s effective tax rate was due primarily to tax benefits from PSE&G’s increased write-offs of uncollectible accounts.

For the six months ended June 30, 2012, the decrease in PSEG’s and PSE&G’s effective tax rate was due primarily to the settlement with the IRS in regard to leveraged leases (See Note 8. Commitments and Contingent Liabilities) and the federal audits for tax years 1997 through 2006 (see below). The decrease in Power’s effective tax rate was due primarily to a reduction in NDT taxes which was partially offset by a reduction in the IRC section 199 deduction for domestic production activities.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, enacted December 17, 2010, included a provision making qualified property placed into service after September 8, 2010 and before January 1, 2012, eligible for 100% bonus depreciation for tax purposes. In addition, qualified property placed into service in 2012 will be eligible for 50% bonus depreciation for tax purposes. These provisions have generated cash for PSEG through tax benefits related to the accelerated depreciation in 2011 and will for 2012. These tax benefits would have otherwise been received over an estimated average 20 year period.

PSE&G has accrued $11 million of Investment Tax Credits (ITC) associated with alternative energy projects in the first six months of 2012. Prior to 2012, the law provided an option to claim either a grant or the ITC. For years prior to 2012, the ITC had been accounted for as a reduction of the book basis of the related assets as opposed to being recorded in tax expense. As the grant program expired at the end of 2011, ITC for 2012 has been accounted for as an accumulated deferred investment credit on the balance sheet which is amortized as a reduction of tax expense over the life of the related project.

PSEG’s unrecognized tax benefits decreased by approximately $546 million through the first half of 2012, primarily attributable to PSEG. This decrease was primarily due to the settlement with the IRS, in the amount of $387 million, of the leasing issue (See Note 8. Commitments and Contingent Liabilities) and the federal audits for tax years 1997 through 2006 (see below). The remaining unrecognized tax benefit of $159 million represents a decrease of prior period positions. As a result, as of June 30, 2012, there is no material increase or decrease in unrecognized tax benefits that is reasonably possible to occur within the next twelve months. The interest and penalties associated with the decrease in the uncertain tax position was $356 million. The impact on the accumulated deferred income taxes and regulatory asset associated with the unrecognized tax benefit decrease is $228 million. The change in the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $318 million.

On June 26, 2009, September 15, 2008 and December 17, 2007, PSEG made tax deposits with the IRS in the amounts of $140 million, $80 million and $100 million, respectively, to defray potential interest costs associated with disputed tax assessments associated with certain lease investments (see Note 8. Commitments and Contingent Liabilities). On January 31, 2012, PSEG signed a specific matter closing agreement with the IRS regarding this matter. Based on this agreement, these deposits will be applied against tax and interest due pursuant to the closing agreement. Further, on the same date, PSEG signed a Form 870-AD settlement agreement covering all audit issues for tax years 1997 through 2003. On March 26, 2012, PSEG executed a Form 870-AD settlement agreement covering all audit issues for tax years 2004 through 2006. These two agreements conclude ten years of audits for PSEG and the leasing issue for all tax years. The financial statement impacts of these agreements, net of existing financial statement reserves, is a net decrease in tax expense of approximately $70 million for PSEG, including $30 million and $1 million for PSE&G and Power, respectively.

Income Taxes

Note 13. Income Taxes

PSEG’s, Power’s and PSE&G’s effective tax rates for the three months and six months ended June 30, 2012 and 2011 were as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
PSEG		40.9%		41.5%		33.7%		41.6%
Power		41.2%		41.1%		40.3%		41.2%
PSE&G		38.4%		41.0%		32.7%		40.7%

For the three months ended June 30, 2012, the decrease in PSE&G’s effective tax rate was due primarily to tax benefits from PSE&G’s increased write-offs of uncollectible accounts.

For the six months ended June 30, 2012, the decrease in PSEG’s and PSE&G’s effective tax rate was due primarily to the settlement with the IRS in regard to leveraged leases (See Note 8. Commitments and Contingent Liabilities) and the federal audits for tax years 1997 through 2006 (see below). The decrease in Power’s effective tax rate was due primarily to a reduction in NDT taxes which was partially offset by a reduction in the IRC section 199 deduction for domestic production activities.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, enacted December 17, 2010, included a provision making qualified property placed into service after September 8, 2010 and before January 1, 2012, eligible for 100% bonus depreciation for tax purposes. In addition, qualified property placed into service in 2012 will be eligible for 50% bonus depreciation for tax purposes. These provisions have generated cash for PSEG through tax benefits related to the accelerated depreciation in 2011 and will for 2012. These tax benefits would have otherwise been received over an estimated average 20 year period.

PSE&G has accrued $11 million of Investment Tax Credits (ITC) associated with alternative energy projects in the first six months of 2012. Prior to 2012, the law provided an option to claim either a grant or the ITC. For years prior to 2012, the ITC had been accounted for as a reduction of the book basis of the related assets as opposed to being recorded in tax expense. As the grant program expired at the end of 2011, ITC for 2012 has been accounted for as an accumulated deferred investment credit on the balance sheet which is amortized as a reduction of tax expense over the life of the related project.

PSEG’s unrecognized tax benefits decreased by approximately $546 million through the first half of 2012, primarily attributable to PSEG. This decrease was primarily due to the settlement with the IRS, in the amount of $387 million, of the leasing issue (See Note 8. Commitments and Contingent Liabilities) and the federal audits for tax years 1997 through 2006 (see below). The remaining unrecognized tax benefit of $159 million represents a decrease of prior period positions. As a result, as of June 30, 2012, there is no material increase or decrease in unrecognized tax benefits that is reasonably possible to occur within the next twelve months. The interest and penalties associated with the decrease in the uncertain tax position was $356 million. The impact on the accumulated deferred income taxes and regulatory asset associated with the unrecognized tax benefit decrease is $228 million. The change in the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $318 million.

On June 26, 2009, September 15, 2008 and December 17, 2007, PSEG made tax deposits with the IRS in the amounts of $140 million, $80 million and $100 million, respectively, to defray potential interest costs associated with disputed tax assessments associated with certain lease investments (see Note 8. Commitments and Contingent Liabilities). On January 31, 2012, PSEG signed a specific matter closing agreement with the IRS regarding this matter. Based on this agreement, these deposits will be applied against tax and interest due pursuant to the closing agreement. Further, on the same date, PSEG signed a Form 870-AD settlement agreement covering all audit issues for tax years 1997 through 2003. On March 26, 2012, PSEG executed a Form 870-AD settlement agreement covering all audit issues for tax years 2004 through 2006. These two agreements conclude ten years of audits for PSEG and the leasing issue for all tax years. The financial statement impacts of these agreements, net of existing financial statement reserves, is a net decrease in tax expense of approximately $70 million for PSEG, including $30 million and $1 million for PSE&G and Power, respectively.

Income Taxes

Note 13. Income Taxes

PSEG’s, Power’s and PSE&G’s effective tax rates for the three months and six months ended June 30, 2012 and 2011 were as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
PSEG		40.9%		41.5%		33.7%		41.6%
Power		41.2%		41.1%		40.3%		41.2%
PSE&G		38.4%		41.0%		32.7%		40.7%

For the three months ended June 30, 2012, the decrease in PSE&G’s effective tax rate was due primarily to tax benefits from PSE&G’s increased write-offs of uncollectible accounts.

For the six months ended June 30, 2012, the decrease in PSEG’s and PSE&G’s effective tax rate was due primarily to the settlement with the IRS in regard to leveraged leases (See Note 8. Commitments and Contingent Liabilities) and the federal audits for tax years 1997 through 2006 (see below). The decrease in Power’s effective tax rate was due primarily to a reduction in NDT taxes which was partially offset by a reduction in the IRC section 199 deduction for domestic production activities.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, enacted December 17, 2010, included a provision making qualified property placed into service after September 8, 2010 and before January 1, 2012, eligible for 100% bonus depreciation for tax purposes. In addition, qualified property placed into service in 2012 will be eligible for 50% bonus depreciation for tax purposes. These provisions have generated cash for PSEG through tax benefits related to the accelerated depreciation in 2011 and will for 2012. These tax benefits would have otherwise been received over an estimated average 20 year period.

PSE&G has accrued $11 million of Investment Tax Credits (ITC) associated with alternative energy projects in the first six months of 2012. Prior to 2012, the law provided an option to claim either a grant or the ITC. For years prior to 2012, the ITC had been accounted for as a reduction of the book basis of the related assets as opposed to being recorded in tax expense. As the grant program expired at the end of 2011, ITC for 2012 has been accounted for as an accumulated deferred investment credit on the balance sheet which is amortized as a reduction of tax expense over the life of the related project.

PSEG’s unrecognized tax benefits decreased by approximately $546 million through the first half of 2012, primarily attributable to PSEG. This decrease was primarily due to the settlement with the IRS, in the amount of $387 million, of the leasing issue (See Note 8. Commitments and Contingent Liabilities) and the federal audits for tax years 1997 through 2006 (see below). The remaining unrecognized tax benefit of $159 million represents a decrease of prior period positions. As a result, as of June 30, 2012, there is no material increase or decrease in unrecognized tax benefits that is reasonably possible to occur within the next twelve months. The interest and penalties associated with the decrease in the uncertain tax position was $356 million. The impact on the accumulated deferred income taxes and regulatory asset associated with the unrecognized tax benefit decrease is $228 million. The change in the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $318 million.

On June 26, 2009, September 15, 2008 and December 17, 2007, PSEG made tax deposits with the IRS in the amounts of $140 million, $80 million and $100 million, respectively, to defray potential interest costs associated with disputed tax assessments associated with certain lease investments (see Note 8. Commitments and Contingent Liabilities). On January 31, 2012, PSEG signed a specific matter closing agreement with the IRS regarding this matter. Based on this agreement, these deposits will be applied against tax and interest due pursuant to the closing agreement. Further, on the same date, PSEG signed a Form 870-AD settlement agreement covering all audit issues for tax years 1997 through 2003. On March 26, 2012, PSEG executed a Form 870-AD settlement agreement covering all audit issues for tax years 2004 through 2006. These two agreements conclude ten years of audits for PSEG and the leasing issue for all tax years. The financial statement impacts of these agreements, net of existing financial statement reserves, is a net decrease in tax expense of approximately $70 million for PSEG, including $30 million and $1 million for PSE&G and Power, respectively.