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By LAURIE BROOKS, vice president, risk management, and chief risk officer with the Public Service Enterprise Group, a New Jersey public utility

Generally, these risks are related to the capital intensive financing requirements of our infrastructure, the regulatory environment in which we operate and the nature and volatility of energy commodities.

PSEG Power established a retail medium-term note program enabling us to issue bonds directly to investors through a retail distribution network. The program is beneficial especially during a period when credit concerns and capital constraints significantly limit traditional market access. Importantly, we were able to diversify funding by tapping a new "buy and hold" investor base; and at a meaningful cost savings relative to institutional funding alternatives. Additionally, there is substantial flexibility with respect to term, structure and size of offering in this retail product.

One must also plan for the retirement of these assets and in the case of nuclear plants the ultimate decommissioning of the plants. Since 1988, nuclear plant owners in the U.S. have been required by the Nuclear Regulatory Commission to set aside funds in order to finance the considerable costs of decommissioning--or dismantling--nuclear power plant sites after the reactors have been shut down.

In our case we have opted to set up an investment trust fund to manage these future costs. This essentially becomes a classic asset/liability management problem not unlike a pension fund but with more time to recoup before payments need to be made. Needless to say, the state of the current equity markets has had an impact on the value of these funds, which will have to be managed carefully over the next several years.

Finally, hedging the fuel costs and output of generation plants to reduce earnings volatility requires collateral management. With commodity prices that have been extremely volatile, this has posed some significant challenges to traditional thinking around stress testing and scenario analysis. We measure and plan for margin requirements in the event of a downgrade to our own credit rating. Over the last several years the challenge has been to maintain sufficient collateral in a rising price environment where the probability of a downgrade event has been low.

Our new challenge is to maintain sufficient collateral in a low price environment where even though the amount of collateral required may be lower, the risk of a downgrade is higher since earnings may be lower, collateral funding costs are higher and funds are scarce. The trick in both cases is to maximize the utilization of available lines of credit with existing counterparties, maximize offsetting trades that provide a natural set-off of exposure with quality counterparties and increase netting through the use of clearing brokers.

April 15, 2009

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