Public Service Enterprise Group (PSEG) CEO James Ferland said Wednesday the stand-alone energy company may consider further separating its unregulated and regulated operations at some point because of the adverse regulatory restrictions that led to the failure of its merger with Exelon.

“We can’t really leave [regulators] in a position where they can essentially veto things that are strategically good for the company,” Ferland said in response to an analyst’s question during a conference call.

The analyst pointed out that if the company had placed its merchant power operations under a holding company structure, then state regulators would not have had the jurisdiction to impose the conditions that ended up killing the merger (see NGI, Sept. 18).

Regulators recently have become more aggressive in demanding rate concessions from energy companies because of rising energy costs. Citing “insurmountable hurdles” at the New Jersey Board of Public Utilities, Exelon and PSEG gave formal notice of termination of the merger agreement two weeks ago, nearly two years after the deal was first announced. The merger application was pending at the NJBPU for more than 19 months.

“This really calls for [a strategic review by] not only us but other companies who have not only merchant businesses but regulated [utility] businesses and would like to keep them together and have been able to in the past,” said Ferland. “To the extent that, not just here in New Jersey but anywhere, the regulatory process is going to make it difficult to maintain that kind of a strategy by artificially holding rates particularly low at the regulated portion of the business with the hopes that the unregulated portion could provide adequate shareholder support, then one would have to reexamine that model.

“That is obviously something that we will give serious thought. It is also not the kind of thing that you jump to five minutes after you have a regulatory decision like this,” he said. “We need to think about it. We need to talk with government officials in the state about this.

“Clearly the company’s strategic direction can’t be dictated by regulators for a regulated business that represents 25-30% of a company’s ongoing earnings.”

PSEG’s unregulated business, PSEG Power, owns and operates power plants with about 14,600 MW of generating capacity. The company’s assets include the Salem and Hope Creek nuclear power plants in New Jersey and part of the Peach Bottom nuclear plant in Pennsylvania. The company’s unregulated businesses also include its global energy operations and PSEG Resources, which invests in energy-related financial transactions. Public Service Electric & Gas (PSE&G), the company’s regulated utility, serves 2.1 million electric customers and 1.7 million gas customers in New Jersey.

Despite the merger’s failure, Ferland said PSEG as a stand-alone company has a strong outlook because of higher energy prices, rate relief at PSE&G and the strength of its nuclear business, which is in part due to a continuing operating agreement with Exelon. The company is expecting its earnings to grow by more than 30% from 2005 levels to $4.60-5.00/share in 2007.

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