Income Taxes

6 Months Ended

Jun. 30, 2011

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, 2011 and 2010 were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
PSEG		41.5	%		35.8	%		41.6	%		40.2	%
Power		41.1	%		39.0	%		41.2	%		40.7	%
PSE&G		41.0	%		150.0	%		40.7	%		37.0	%

For the three months ended June 30, 2011, PSEG's effective tax rate changed due primarily to the flow through of tax benefits in 2010 at PSE&G related to uncollectible accounts and plant-related adjustments. PSE&G's effective tax rate calculation was impacted by the charge recorded in June 2010 for the Market Transition Charge (MTC) settlement, which resulted in a small pre-tax loss for the three months ended June 30, 2010. There was no material change in the effective tax rate for Power.

For the six months ended June 30, 2011, there were no material changes in the effective tax rate for PSEG and Power. PSE&G's effective tax rate was lower in 2010, primarily due to tax benefits from uncollectible accounts and plant-related adjustments.

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 include various health care-related provisions which will go into effect over the next several years. One of the provisions eliminates the tax deductibility of retiree health care costs, to the extent of federal subsidies received by plan sponsors that provide retiree prescription drug benefits equivalent to Medicare Part D coverage. As a result, in the first quarter of 2010, PSEG recorded noncash after tax charges of $9 million for income tax expense to establish the related deferred tax liabilities, primarily related to Power. There was no immediate impact on PSE&G's income tax expense or effective tax rate since the related amount of $78 million was deferred as a Regulatory Asset to be collected and amortized over future periods.

Two other tax provisions were enacted during 2010 that will have a significant impact on PSEG's cash position. The Small Business Jobs Act of 2010, enacted in September 2010, extended the tax deduction for 50% bonus depreciation through 2010 for qualified property. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, enacted in December 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 will generate cash for PSEG through tax benefits related to the accelerated depreciation most of which is anticipated to be realized in 2011. These tax benefits would have otherwise been received over an estimated average 20 year period.

PSE&G has accrued $28 million of Investment Tax Credits (ITC) associated with alternative energy projects in the first six months of 2011. Because the law provides an option to claim either a grant or the ITC, the ITC has been accounted for as a reduction of the book basis of the related assets as opposed to being recorded in tax expense.

PSEG's unrecognized tax benefits increased by approximately $44 million in the first six months of 2011, attributable to PSE&G. This increase is due to a prior period position raised by the IRS during its examination of the tax years 2004 to 2006 and a new position attributable to refund claims being filed for tax years 2004 to 2009 related to casualty loss deductions. The balance of unrecognized tax benefits that are reasonably likely to increase or decrease within the next 12 months reported at December 31, 2010, will change by $19 million related to the prior period position discussed above.

PSEG made tax deposits with the IRS to defray interest costs associated with disputed tax assessments associated with certain lease investments. The deposits are fully refundable and are recorded as a reduction to Current Accrued Taxes on PSEG's Condensed Consolidated Balance Sheets, but are not reflected in the unrecognized tax benefits.

As a result of a change in accounting method for the capitalization of indirect costs, PSEG reduced the net amount of its uncertain tax positions (including interest) by $95 million, approximately $42 million of which related to PSE&G. It is reasonably possible that PSE&G's claim related to this matter will be settled with the IRS in the next 12 months, resulting in an increase in the uncertain tax positions.

It is reasonably possible that unrecognized tax benefits associated with the leasing tax issue discussed in Note 8. Commitments and Contingent Liabilities, will change significantly. This change could be triggered by a settlement with the IRS or developments in other litigated cases. Based upon these developments, unrecognized tax benefits could increase by as much as $192 million or decrease by as much as $303 million. It is not possible to predict the magnitude, timing or direction of any such change.

Power [Member]

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, 2011 and 2010 were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
PSEG		41.5	%		35.8	%		41.6	%		40.2	%
Power		41.1	%		39.0	%		41.2	%		40.7	%
PSE&G		41.0	%		150.0	%		40.7	%		37.0	%

For the three months ended June 30, 2011, PSEG's effective tax rate changed due primarily to the flow through of tax benefits in 2010 at PSE&G related to uncollectible accounts and plant-related adjustments. PSE&G's effective tax rate calculation was impacted by the charge recorded in June 2010 for the Market Transition Charge (MTC) settlement, which resulted in a small pre-tax loss for the three months ended June 30, 2010. There was no material change in the effective tax rate for Power.

For the six months ended June 30, 2011, there were no material changes in the effective tax rate for PSEG and Power. PSE&G's effective tax rate was lower in 2010, primarily due to tax benefits from uncollectible accounts and plant-related adjustments.

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 include various health care-related provisions which will go into effect over the next several years. One of the provisions eliminates the tax deductibility of retiree health care costs, to the extent of federal subsidies received by plan sponsors that provide retiree prescription drug benefits equivalent to Medicare Part D coverage. As a result, in the first quarter of 2010, PSEG recorded noncash after tax charges of $9 million for income tax expense to establish the related deferred tax liabilities, primarily related to Power. There was no immediate impact on PSE&G's income tax expense or effective tax rate since the related amount of $78 million was deferred as a Regulatory Asset to be collected and amortized over future periods.

Two other tax provisions were enacted during 2010 that will have a significant impact on PSEG's cash position. The Small Business Jobs Act of 2010, enacted in September 2010, extended the tax deduction for 50% bonus depreciation through 2010 for qualified property. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, enacted in December 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 will generate cash for PSEG through tax benefits related to the accelerated depreciation most of which is anticipated to be realized in 2011. These tax benefits would have otherwise been received over an estimated average 20 year period.

PSE&G has accrued $28 million of Investment Tax Credits (ITC) associated with alternative energy projects in the first six months of 2011. Because the law provides an option to claim either a grant or the ITC, the ITC has been accounted for as a reduction of the book basis of the related assets as opposed to being recorded in tax expense.

PSEG's unrecognized tax benefits increased by approximately $44 million in the first six months of 2011, attributable to PSE&G. This increase is due to a prior period position raised by the IRS during its examination of the tax years 2004 to 2006 and a new position attributable to refund claims being filed for tax years 2004 to 2009 related to casualty loss deductions. The balance of unrecognized tax benefits that are reasonably likely to increase or decrease within the next 12 months reported at December 31, 2010, will change by $19 million related to the prior period position discussed above.

PSEG made tax deposits with the IRS to defray interest costs associated with disputed tax assessments associated with certain lease investments. The deposits are fully refundable and are recorded as a reduction to Current Accrued Taxes on PSEG's Condensed Consolidated Balance Sheets, but are not reflected in the unrecognized tax benefits.

As a result of a change in accounting method for the capitalization of indirect costs, PSEG reduced the net amount of its uncertain tax positions (including interest) by $95 million, approximately $42 million of which related to PSE&G. It is reasonably possible that PSE&G's claim related to this matter will be settled with the IRS in the next 12 months, resulting in an increase in the uncertain tax positions.

It is reasonably possible that unrecognized tax benefits associated with the leasing tax issue discussed in Note 8. Commitments and Contingent Liabilities, will change significantly. This change could be triggered by a settlement with the IRS or developments in other litigated cases. Based upon these developments, unrecognized tax benefits could increase by as much as $192 million or decrease by as much as $303 million. It is not possible to predict the magnitude, timing or direction of any such change.

PSE&G [Member]

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, 2011 and 2010 were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
PSEG		41.5	%		35.8	%		41.6	%		40.2	%
Power		41.1	%		39.0	%		41.2	%		40.7	%
PSE&G		41.0	%		150.0	%		40.7	%		37.0	%

For the three months ended June 30, 2011, PSEG's effective tax rate changed due primarily to the flow through of tax benefits in 2010 at PSE&G related to uncollectible accounts and plant-related adjustments. PSE&G's effective tax rate calculation was impacted by the charge recorded in June 2010 for the Market Transition Charge (MTC) settlement, which resulted in a small pre-tax loss for the three months ended June 30, 2010. There was no material change in the effective tax rate for Power.

For the six months ended June 30, 2011, there were no material changes in the effective tax rate for PSEG and Power. PSE&G's effective tax rate was lower in 2010, primarily due to tax benefits from uncollectible accounts and plant-related adjustments.

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 include various health care-related provisions which will go into effect over the next several years. One of the provisions eliminates the tax deductibility of retiree health care costs, to the extent of federal subsidies received by plan sponsors that provide retiree prescription drug benefits equivalent to Medicare Part D coverage. As a result, in the first quarter of 2010, PSEG recorded noncash after tax charges of $9 million for income tax expense to establish the related deferred tax liabilities, primarily related to Power. There was no immediate impact on PSE&G's income tax expense or effective tax rate since the related amount of $78 million was deferred as a Regulatory Asset to be collected and amortized over future periods.

Two other tax provisions were enacted during 2010 that will have a significant impact on PSEG's cash position. The Small Business Jobs Act of 2010, enacted in September 2010, extended the tax deduction for 50% bonus depreciation through 2010 for qualified property. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, enacted in December 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 will generate cash for PSEG through tax benefits related to the accelerated depreciation most of which is anticipated to be realized in 2011. These tax benefits would have otherwise been received over an estimated average 20 year period.

PSE&G has accrued $28 million of Investment Tax Credits (ITC) associated with alternative energy projects in the first six months of 2011. Because the law provides an option to claim either a grant or the ITC, the ITC has been accounted for as a reduction of the book basis of the related assets as opposed to being recorded in tax expense.

PSEG's unrecognized tax benefits increased by approximately $44 million in the first six months of 2011, attributable to PSE&G. This increase is due to a prior period position raised by the IRS during its examination of the tax years 2004 to 2006 and a new position attributable to refund claims being filed for tax years 2004 to 2009 related to casualty loss deductions. The balance of unrecognized tax benefits that are reasonably likely to increase or decrease within the next 12 months reported at December 31, 2010, will change by $19 million related to the prior period position discussed above.

PSEG made tax deposits with the IRS to defray interest costs associated with disputed tax assessments associated with certain lease investments. The deposits are fully refundable and are recorded as a reduction to Current Accrued Taxes on PSEG's Condensed Consolidated Balance Sheets, but are not reflected in the unrecognized tax benefits.

As a result of a change in accounting method for the capitalization of indirect costs, PSEG reduced the net amount of its uncertain tax positions (including interest) by $95 million, approximately $42 million of which related to PSE&G. It is reasonably possible that PSE&G's claim related to this matter will be settled with the IRS in the next 12 months, resulting in an increase in the uncertain tax positions.

It is reasonably possible that unrecognized tax benefits associated with the leasing tax issue discussed in Note 8. Commitments and Contingent Liabilities, will change significantly. This change could be triggered by a settlement with the IRS or developments in other litigated cases. Based upon these developments, unrecognized tax benefits could increase by as much as $192 million or decrease by as much as $303 million. It is not possible to predict the magnitude, timing or direction of any such change.