PSEG's CEO Says Power Markets Remain Challenging

Public Service Enterprise Group Inc.'s (PEG) Chief Executive Ralph Izzo said Wednesday that the power markets remain challenging amid low natural-gas prices, customer erosion and increased retail competition.

"Market prices for energy remain lower than the embedded price for energy in the BGS [basic generation service] contract and this dynamic has led to the entry of new retail suppliers into the market," Izzo said during a conference call. Amid these challenges, the company is focusing on reducing costs "without sacrificing reliability," he said.

About two-thirds of the commercial and industrial customers have switched out of basic generation service, but only 1% of residential customers have switched, according to Caroline Dorsa, the company's chief financial officer.

Legacy hedges bolstered the company's third-quarter results, but those contracts are set to expire in 2011 and 2012. Increased competition is resetting the prices of those contracts.

This increased competition has pressured power prices and is compelling switching among commercial and industrial customers. Power migration hit earnings by a penny a share in the third quarter and is expected to be four cents a share in 2010. Each 5% of migration from basic generation service would reduce that segment's earnings by 1.5 cents on an annualized basis based on current prices, according to Dorsa.

Meanwhile, PSEG is in the process of negotiating the sale of two plants in Texas with combined generation capacity of 2,000 megawatts. The company expects to close the sale in the first quarter of 2011.

"We've been saying that we need to get bigger in Texas or get out, and we have not found appropriate opportunities to grow in the market," Izzo said. He said divesting these assets would reduce the size of the New Jersey-based company's generation capacity, "but it will prove returns on the portfolio and keep the focus squarely on the market with the highest body."

PSEG revised its capital spending plans for the next few years. The company expects to spend $4.5 billion in 2010 through 2012, and another $1.6 billion in 2013.

-By Naureen S. Malik, Dow Jones Newswires; 212-416-4210; naureen.malik@dowjones.com

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