Petition for the issuance of a Bondable Stranded Costs Rate Order

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Title: Petition for the issuance of a Bondable Stranded Costs Rate Order
Date: 8/15/2005

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Exhibit 10.3

IN THE MATTER OF THE PETITION OF PUBLIC STATE OF NEW JERSEY

SERVICE ELECTRIC AND GAS COMPANY FOR A

BONDABLE STRANDED COST RATE ORDER IN BOARD OF PUBLIC UTILITIES

ACCORDANCE WITH N.J.S.A. 48:3-49 ET SEQ. TO

RECOVER ITS BASIC GENERATION SERVICE

TRANSITION COSTS (INCLUDING FEDERAL, STATE

AND LOCAL TAX LIABILITIES ASSOCIATED WITH DOCKET NO.: E_______________

SUCH RECOVERY) PROVIDING FOR (1) THE

IMPOSITION OF A NON-BYPASSABLE TRANSITION

BOND CHARGE; (2) THE SALE OF THE RIGHT TO

RECEIVE SUCH CHARGE TO A SPECIAL PURPOSE PETITION

FINANCING ENTITY; (3) THE ISSUANCE AND SALE

IN A PUBLIC OFFERING OR PRIVATE PLACEMENT

OF NOT MORE THAN $150 MILLION AGGREGATE

PRINCIPAL AMOUNT OF TRANSITION BONDS IN ONE

OR MORE SERIES WITH A SCHEDULED

AMORTIZATION UPON ISSUANCE OF UP TO FIFTEEN

(15) YEARS; (4) THE USE OF TRANSITION BOND

PROCEEDS TO REFINANCE OR RETIRE OUTSTANDING

DEBT AND/OR EQUITY AND (5) THE FORMULA FOR

THE CALCULATION AND ADJUSTMENT OF THE

TRANSITION BOND CHARGE AND MARKET

TRANSITION BOND CHARGE -TAX RELATED THERETO.

Public Service Electric and Gas Company (the "Petitioner"), a New

Jersey corporation organized under the provisions of Chapter 185 of the

Laws of 1896, as amended and supplemented, with its principal office at

80 Park Plaza, Newark, New Jersey, respectfully shows that:

1. Petitioner is a public utility engaged in the electric and gas

distribution business, subject to the jurisdiction of your Honorable

Board.

2. This Petition for the issuance of a Bondable Stranded Costs Rate Order

("BSCRO" or "Financing Order") is filed pursuant to the Electric

Discount and Energy Competition Act, Chapter 23 of the Laws of 1999,

N.J.S.A. 48:3-49 et seq. (the "EDECA"), as amended by P.L. 2002, Ch. 84

(the "2002 Amendments", and together with the EDECA,

<PAGE>

the "Act"). Capitalized terms used herein and not specifically defined

shall have the meanings as defined in the Act.

3. RECOVERY OF BASIC GENERATION SERVICE TRANSITION COSTS.

Basic Generation Service ("BGS"), as defined in N.J.S.A. 48:3-51,

is a regulated electric generation service provided, pursuant to

N.J.S.A. 48:3-57, to any electric utility customer of an electric

utility that has not chosen an alternative power supplier. BGS

transition costs ("BGS Transition Costs", as defined in N.J.S.A.

48:3-51) is the amount by which payments by an electric public utility

for the procurement of power for BGS and related ancillary and

administrative costs exceed the net revenues from the BGS charge

established by the Board ("Deferred Balance") pursuant to N.J.S.A

48:3-57, during the Transition Period, together with interest on the

Deferred Balance at the Board-approved rate, that is reflected in a

Deferred Balance account approved by the Board in an Order addressing

the electric public utility's rates, stranded costs, and restructuring

filings pursuant to the Act. BGS Transition Costs include, but are not

limited to payments by an electric public utility pursuant to a

competitive procurement process for BGS supply during the Transition

Period, and the costs of any such payments used to procure the BGS

supply. The Transition Period commenced August 1, 1999 and will end July

31, 2003. The BGS Transition Costs that are the subject matter of this

Petition is the Deferred Balance (the "Year Four Deferred Balance")

incurred by Petitioner for the period August 1, 2002 through July 31,

2003 ("Year Four") pursuant to the rate unbundling stranded cost and

restructuring Orders issued by the Board in Docket Nos. E097070461,

E097070462 and E097070463 dated April 21, 1999 (Summary Order) and

August 24, 1999 (Final Order) (collectively, the "Restructuring Order").

<PAGE>

By Order dated December 11, 2001 in Docket Nos. EO01100654,

EO01100655, EO01100656 and EO001100657, the Board approved an auction

process for BGS supply, including supply for Year Four, and directed

electric public utilities, including Petitioner, to make an auction

process compliance filing ("Compliance Filing") in response thereto. On

December 12, 2001, Petitioner made the Compliance Filing which included,

among other things, a request for approval of Petitioner's accounting

and cost recovery proposal for BGS Transition Costs, including, but not

limited to, a determination (i) that the BGS Deferred Balance will be

determined as the difference between Petitioner's recorded BGS revenue

and total BGS Cost, (ii) interest on the Deferred Balance at a monthly

rate based on the seven (7) year constant maturity treasuries as shown

in the Federal Reserve Statistical Release on or closest to August 1,

2003 plus 60 basis points and (iii) a presumption of prudence with

respect to Petitioner's BGS Transition Costs. At its special public

agenda meeting held on December 14, 2001, the Board approved

Petitioner's Compliance Filing after finding it to be consistent with

its December 11, 2001 Order.

On August 28, 2002, Petitioner filed its electric deferral case

("BGS Deferral Case"), Docket No. ER02080604, with respect to recovery

of its Year Four Deferred Balance pursuant to the Restructuring Orders

and the Board's July 22, 2002 Order Directing Supplemental Testimony

("Testimony Order"). The BGS Deferral Case was transmitted by the Board

to the New Jersey Office of Administrative Law ("OAL"), which case was

later consolidated with Docket No. ER02050303 for separate hearings. The

Board also, pursuant to the Testimony Order, retained an independent

auditor ("Independent Auditor") to perform an audit of Petitioner's Year

Four Deferred Balance. Public hearings in the BGS Deferral Case were

conducted by an OAL, Administrative

<PAGE>

Law Judge ("ALJ"), on December 10, 11 and 16 of 2002, respectively.

Evidentuary Hearings on the BGS Deferral Case were conducted on March 3,

5 and 6, 2003.

On June 6. 2003, the ALJ rendered his written decision ("ALJ

Decision") to the Board, adopting the terms of a settlement among

Petitioner and certain Parties to the BGS Deferral Case, which ALJ

Decision, if adopted, will resolve all matters in the consolidated

dockets, including the BGS Deferral Case. Petitioner is awaiting a final

decision by the Board ("BGS Cost Order" or "Recovery Order"), including

a finding that Petitioner's Year Four BGS Transition Costs, were

reasonably and prudently incurred and that the Year Four Deferred

Balance upon verification by the Independent Auditor is properly

recoverable by Petitioner, with interest, under the Act . As set forth

in the ALJ Decision, Petitioner's Year Four Deferred Balance is

estimated to be approximately $241.5 million pre-tax at July 31, 2003.

Petitioner accordingly seeks authority to securitize its verified Year

Four Deferral Balance.

4. REQUEST FOR BSCRO

The 2002 Amendments, and specifically, N.J.S.A. 48:3-62(c)(3)

authorizes an electric public utility to securitize the full amount of

its reasonably and prudently incurred BGS Transition Costs pursuant to

the provisions of the Act if the recovery of the BGS Transition Costs

through the securitization would provide benefits to ratepayers based

upon the "criteria" consisting of the lowest transition bond charge

consistent with market conditions and the terms of the BSCRO when

certified by the Board's designee.

On September 17, 1999, your Honorable Board issued a BSCRO to

Petitioner in Docket No. EF99060390 (the "Original Financing Order")

authorizing, among other things, the issuance and sale of up to $2.525

billion aggregate principal amount of

<PAGE>

Transition Bonds by a special purpose financing subsidiary of

Petitioner, the sale of Bondable Transition Property and the imposition

of a non-bypassable Transition Bond Charge ("TBC"), the imposition of a

Market Transition Charge-Tax ("MTC-Tax"), a formula for the calculation

and adjustment of the TBC and the MTC-Tax. On January 31, 2001, PSE&G

Transition Funding LLC, a subsidiary of Petitioner, issued and sold

$2.525 billion of its Transition Bonds, Series 2001-1 (the "Original

Transition Bond Transaction"). The terms and conditions approved by your

Honorable Board in the Original Financing Order are substantially the

same to those proposed herein.

For purposes of recovering its BGS Transition Costs incurred in

Year Four ("Year Four BGS Transition Costs") by Petitioner pursuant to

the Restructuring Order and the BGS Cost Order to be issued in the BGS

Deferral Case, and pursuant to N.J.S.A. 48:3-62(a), N.J.S.A. 48:3-62(c)

and N.J.S.A. 48:3-62(g), Petitioner hereby requests the Board to issue a

BSCRO authorizing Petitioner to securitize (the "BGS Transition Bond

Transaction") its Year Four BGS Transition Costs, including its net of

tax Year Four Deferred Balance incurred with respect to Year Four as

verified by the Independent Auditor ); to impose a transition bond

charge ("BGS Transition Bond Charge" or "BGS TBC") related thereto; and

to sell Petitioner's right to receive the BGS TBC, together with related

rights, to a bankruptcy-remote, special purpose financing entity ("SPE")

to be formed as a subsidiary of Petitioner for such purpose

substantially identical to the SPE authorized in the Original Financing

Order. Petitioner also requests approval of a formula ("Formula") for

the calculation and adjustment of the BGS TBC and the MTC-Tax related

thereto substantially identical to the Formula authorized in the

Original Financing Order which Formula is incorporated herein by

reference thereto. A

<PAGE>

proposed form of Financing Order, substantially in the form of the

Original Financing Order will be separately provided to Board Staff by

Petitioner.

The Financing Order will provide, among other things, (i) for the

imposition of a non-bypassable TBC as provided in N.J.S.A. 48:3-64(a);

(ii) the transfer of the BGS Bondable Transition Property (as defined

herein) related to such TBC to an SPE; (iii) the issuance of transition

bonds ("BGS Transition Bonds") by the SPE up to $150 million aggregate

principal amount to recover such BGS Transition Costs, all as further

described below, and (iv) a determination that the structure and pricing

of the BGS Transition Bonds be conclusively deemed, as provided in

N.J.S.A 48:3-62(g), as assuring the lowest TBC consistent with market

conditions and the terms of such BSCRO. In the same manner as authorized

in the Original Financing Order, Petitioner requests authority to impose

an MTC-Tax to recover its Federal Income and State Corporate Business

Tax associated with the collection of the BGS TBC until the related BGS

Transition Bonds and other BGS Transition Costs have been paid in full,

and to adjust the MTC-Tax in the same manner and at the same time as the

BGS TBC is adjusted as described in this Petition.

The entire amount of the net proceeds of the BGS Transition Bonds

received by Petitioner shall be utilized by Petitioner to refinance or

retire its outstanding debt or equity or both.

5. BGS TRANSITION BOND TRANSACTION

a. Proposed Structure

A general description of the BGS Transition Bond Transaction

structure follows. The proposed structure is subject to modification

depending upon the requirements of tax

<PAGE>

authorities, input from underwriters in connection with the marketing of

the BGS Transition Bonds, and negotiations with nationally recognized

statistical rating organizations (the "Rating Agencies") selected by

Petitioner to assign credit ratings to the BGS Transition Bonds. The

proposed structure is intended to minimize debt service costs and

maximize ratepayer savings by obtaining the best possible rating for the

BGS Transition Bonds as asset-backed securities. In the same manner as

the Original Financing Transaction, the final structure of the

transaction, pricing and terms of the BGS Transition Bonds will be

determined by Petitioner at the time BGS Transition Bonds are priced and

approved by a designee (the "Designee") of the Board as provided in the

Act and as described herein.

The Petitioner requests in this current Petition the authority to

recover related BGS Transition Costs, including (1) the net amount of

its tax Year Four Deferred Balance, as verified by the Independent

Auditor; (2) the costs (currently estimated at $2.7 million) incurred to

issue Transition Bonds (the "Upfront Transaction Costs"); (3) principal

and interest on the Transition Bonds, together with the costs of paying,

refinancing, administering and servicing, credit enhancing,

overcollateralizing, the Transition Bonds ("Ongoing Transition Bond

Costs"); and (4) taxes related to securitization, which reflect the

grossed up revenue requirement associated with the net of tax stranded

costs being securitized (the "Tax Component"), as more fully described

herein. Pursuant to the proposed Financing Order, and as authorized in

the Original Financing Order, Petitioner requests authority to recover

from the proceeds of the BGS Transition Bonds, up to $150 million of its

BGS Transition Costs, including its Upfront Transaction Costs. The

remaining BGS Transition Costs, being the Ongoing Transition

<PAGE>

Bond Costs, will be recovered through the assessment and collection of

the BGS Transition Bond Charge. In the same manner as authorized in the

Original Financing Order the BGS Transition Bond Charge will be a

separate, non-bypassable charge assessed and collected from all

customers of Petitioner and/or any successor distribution company within

Petitioner's existing service territory as of the date of this Petition,

except as provided in N.J.S.A 48:3-77.

The principal asset to be used to support Transition Bonds is the

BGS Bondable Transition Property , a property right created under the

Act, which includes the irrevocable right to charge and collect

Transition Bond Charges and to obtain periodic adjustments of such

Transition Bond Charges, and all revenues, collections, payments, money

and proceeds thereof. Pursuant to N.J.S.A. 48:3-65 the Financing Order

and the Transition Bond Charges are irrevocable upon the Financing Order

becoming effective under the Act, and the Financing Order cannot be

rescinded, altered, repealed, modified or amended by the Board or any

other governmental entity, nor can it be impaired by the State of New

Jersey, as provided in N.J.S.A. 48:3-66.

In the same manner as provided in the Original Financing Order to

implement the BGS Transition Bond Transaction, Petitioner will form a

new non-utility, special-purpose bankruptcy-remote entity ("SPE") to be

wholly-owned by Petitioner, and will provide the capitalization for such

SPE. Petitioner will sell the Bondable Transition Property to the SPE in

the BGS Transition Bond Transaction which, in accordance with the Act,

will be a legal true sale and absolute transfer to the SPE. The SPE will

constitute a financing entity for purposes of the Act. Board approval of

the SPE and the BGS Transition Bond

<PAGE>

Transaction will constitute a finding that the SPE's activities will not

violate any affiliate relation standards currently in effect or that the

Board may adopt in the future.

In the same manner as provided in the Original Financing Order to

raise the funds to pay to Petitioner the purchase price of the BGS

Bondable Transition Property, the SPE will issue and sell BGS Transition

Bonds. The SPE will issue the BGS Transition Bonds in the form of

asset-backed securities ("ABS") and sell the securities in a negotiated,

fully underwritten public or private offering. All prior securitizations

of utility stranded costs or BGS Transition Costs in New Jersey,

including the Original Transition Bond Transaction approved by your

Honorable Board in the Original Financing Order, have been or are

proposed to be structured as ABS and sold on a negotiated basis. To the

extent that it may be more cost-effective to structure the BGS

Transition Bond Transaction as a private offering under Rule 144A of the

Securities and Exchange Commission, Petitioner will do so. The expertise

of an underwriter is critical to the structuring, pricing and marketing

of securities in the ABS market. For such purpose, Petitioner has

engaged Citigroup Global Markets, Inc. As in the Original Transition

Bond Transaction, Petitioner continues to believe that a negotiated sale

will assure that the Transition Bonds will receive the highest possible

rating and will obtain the lowest possible interest and transaction

costs, ensuring compliance with the requirements of the Act that

Petitioner's customers pay the lowest transition bond charges consistent

with market conditions at time of pricing.

In the same manner as provided in the Original Financing Order,

all of the assets of the SPE, including, without limitation, the BGS

Bondable Transition Property and the other collateral of the SPE (the

"Other SPE Collateral"), will be pledged as collateral to

<PAGE>

secure the BGS Transition Bonds. The Other SPE Collateral will include,

without limitation: (1) the rights of the SPE under the BGS Transition

Bond Transaction documents, including the purchase agreement by which

each SPE acquires the Bondable Transition Property; (2) a servicing

agreement by which Petitioner or any successor Servicer acts as servicer

of the Bondable Transition Property; (3) an administration agreement by

which the SPE will be administered; (4) various trust accounts of the

SPE into which the proceeds of BGS TBC, together with the pledged funds

of the SPE, will be deposited; (5) any investment earnings on amounts

held by the Bond Trustee; and (6) the equity capital of the SPE.

While the Board is requested to approve BGS Transition Bonds with

scheduled amortization upon issuance not exceeding 15 years in

accordance with N.J.S.A.48: 3-62(d)(3), and with a final legal maturity

of up to 17 years in order to minimize overcollateralization

requirements and to enhance the prospects of securing the highest

possible credit rating for the BGS Transition Bonds, Petitioner expects

that the actual amortization schedule upon issuance and final legal

maturity of the BGS Transition Bonds will not exceed that of the

Transition Bonds issued pursuant to the Original Financing Order in the

Original Transition Bond Transaction. These objectives should result in

lower interest costs and thus benefit to ratepayers.

In the same manner as provided in the Original Financing Order,

Petitioner requests that the duration of the MTC-Tax be identical to the

duration of the Transition Bond Charge. The following schematic

illustrates the proposed transaction:

<PAGE>

<TABLE>

PARTIES TO TRANSACTION Sale of BGS Transition

Bonds for cash, pursuant to

----------------- ----------------------------- Underwriting Agreement

| | | SPE | -----------------

| PSE&G |<---------------------------->| PSE&G Securitization |<--------------------------->| |

| | Bondable Transition Property | Sole Member, PSE&G |-----------| |----------| |

----------------- for net proceeds of | | | | -----------------

Transition Bonds ----------------------------- | | ^

| | | | |

| |------------------------------------- | Bondable Transition | | -----------------

----------------- | Property and Other SPE | | | |

Administration Fee, pursuant to | | | -----------------

----------------- Administration Agreement | -----------------

| | | | |

| ADMINISTRATOR |---------------------------------------- | BOND |

| PSE&G | | TRUSTEE |

| | | |

----------------- -----------------

</TABLE>

<PAGE>

b. Recovery of Upfront BGS Transaction Costs

In the same manner as the Original Financing Transaction, in order

to issue BGS Transition Bonds and to produce benefit for its customers,

Petitioner will incur Upfront Transaction Costs related to the issuance

of BGS Transition Bonds. Based on the current estimated initial offering

of $150 million of Transition Bonds, Petitioner currently estimates that

such amount will include Upfront Transaction Costs of approximately $2.5

million which may vary, in part, based on the factors described below.

Upfront Transaction Costs of issuing BGS Transition Bonds will include,

among other items, the underwriting spread, rating agency fees,

accounting fees, any Securities and Exchange Commission registration

fees printing and marketing expenses, trustees' fees, legal fees, the

servicing set-up fee and the administrative cost of forming the SPE.

In the same manner as provided in the Original Financing

Transaction, the Petitioner requests authority to recover the Upfront

Transaction Costs from the proceeds of the sale of the BGS Transition

Bonds and to include such costs as BGS Transition Costs, the right to

recover such amounts to constitute a portion of the Bondable Transition

Property. To the extent prior payment is required, such costs will be

paid by Petitioner and reimbursed from the proceeds of the BGS

Transition Bonds.

c. Ongoing BGS Transition Bond Costs

Petitioner requests recovery of the Ongoing Transition Bond Costs

through the BGS TBC. The primary Ongoing Transition Bond Costs are the

principal and interest on the BGS Transition Bonds. Other Ongoing

Transition

<PAGE>

Bond Costs include principally the servicing fee (the "Servicing Fee")

paid to Petitioner, as the Servicer (as defined below) and the ongoing

cost of credit enhancement and overcollateralization.

In the same manner as provided in the Original Financing Order, it

is anticipated that there will be a small amount of additional Ongoing

Transition Bond Costs associated with the BGS Transition Bond

Transaction, such as an administration fee, legal and accounting fees,

directors or managers' fees, rating agency fees, trustee fees and other

costs of operating the SPE. These Costs are BGS Transition Costs and

will be recovered through the BGS TBC in accordance with the Act, and

the right to recover these costs as BGS Transition Costs will be

included as a portion of the BGS Bondable Transition Property.

d. Approval of Final Terms and Conditions: BGS Transition Bond

Transaction

In the same manner as provided in the Original Financing Order,

upon the pricing of the BGS Transition Bonds, the Board's Designee under

the Act will file with the Board a certificate to the effect that the

structure and pricing of the BGS Transition Bonds assures that

Petitioner's customers pay the lowest BGS TBC consistent with market

conditions and the terms of the Financing Order, and approving the terms

and conditions of the BGS Transition Bonds, including scheduled

amortization up to 15 years and final legal maturities of up to 17

years, as required to obtain the highest possible credit ratings.

Payments on the BGS Transition Bonds will be semi-annual or quarterly,

depending upon input from rating agencies, tax considerations and market

conditions at the time of the

<PAGE>

pricing of BGS Transition Bonds. Debt service on the BGS Transition

Bonds will be scheduled upon issuance so that the sum, for each annual

period, of the Period Payment Requirement (as defined below) and the

associated MTC-Tax collections will be substantially equal. So long as

the structure, pricing, terms and conditions meet such parameters,

Petitioner will be authorized under the Financing Order to undertake the

BGS Transition Bond Transaction.

In the same manner as provided in the Original Financing Order, if

the structure, pricing, terms and conditions meet the requirements

discussed above, the Company will be authorized under the Financing

Order to undertake the BGS Transition Bond Transaction. Prior to the

pricing of the BGS Transition Bonds, the Designee may obtain from the

Board's financial advisors recent secondary market trading levels of

existing utility stranded cost securitization bonds, to the extent such

is available through public sources. To the extent such information is

available, it is anticipated that such information may, in part, be

considered in connection with the pricing of the Transition Bonds. The

Designee may also conduct conference calls and meetings with the Board's

financial advisors to discuss the background of the ABS market, current

market conditions, investor perception of recent utility stranded cost

securitization bond issues, pricing levels of ABS and recent secondary

market trading levels, to the extent available. Finally, the Designee

may elect to be present at pricing, either in person or by telephone.

In the same manner as provided in the Original Financing Order,

not later than five business days after the issuance and sale of the BGS

Transition Bonds,

<PAGE>

Petitioner will be required to confirm to the Board, in an ("Issuance

Advice Letter"), the actual interest rates on the BGS Transition Bonds,

the expected principal amortization schedule (the "Expected Amortization

Schedule") and the initial BGS Transition Bond Charge and MTC-Tax, which

will be calculated in accordance with the Formula. The Issuance Advice

Letter will also include a calculation of the benefit to Petitioner's

Customers from the issuance of the BGS Transition Bonds as provided in

N.J.S.A. 48:3-62 (c) (3) using the methodology employed in Exhibit A

attached hereto applied to the actual structure and terms of the

Transition Bonds. The initial BGS Transition Bond Charge and MTC-Tax

shall become effective immediately when the Issuance Advice Letter is

filed, without further action by the Board.

e. BGS Transition Bond Charge

In the same manner as provided in the Original Financing Order,

when the BGS Transition Bond Transaction is completed upon the issuance

of the BGS Transition Bonds, Petitioner will impose the BGS TBC upon its

ratepayers. While the new BGS TBC will be separate Bondable Transition

Property and for purposes of Petitioner's tariff, separate and distinct

from the Transition Bond Charge ("Original TBC")that the Board

authorized in the Original Financing Order and that has been imposed

upon ratepayers as a result of the Original Transition Bond Transaction,

the Original TBC and the BGS TBC will be combined for customer billing

and administration, provided that such amounts are separately recorded

on the books of Petitioner pending payment to the Trustee.

<PAGE>

In the same manner as provided in the Original Financing Order,

BGS TBC will be set by the Formula, from time to time, at a level

intended to recover the sum of the Ongoing Transition Bond Costs,

including, without limitation: (i) the principal of (in accordance with

the Expected Amortization Schedule approved by the Designee at the time

of pricing of the BGS Transition Bonds), and interest on, BGS Transition

Bonds authorized by the Board in the Financing Order; (ii) the costs of

operating and administering the SPE; (iii) the costs of servicing the

BGS Transition Bonds, including servicing and trustee fees, expenses and

indemnities; (iv) amounts required to fund or replenish the

overcollateralization account in accordance with overcollateralization

schedule approved at pricing of the BGS Transition Bonds, including the

reimbursement of any amounts drawn from the capital account, and (v) the

ongoing expenses of any other credit enhancement ag