PSEG, Power and PSE&G

This combined MD&A is separately filed by Public Service Enterprise Group Incorporated (PSEG), PSEG Power LLC (Power) and Public Service Electric and Gas Company (PSE&G). Information contained herein relating to any individual company is filed by such company on its own behalf. Power and PSE&G each make representations only as to itself and make no representations whatsoever as to any other company.

The following discussion relates to the markets in which PSEG and its subsidiaries compete, the corporate strategy for the conduct of PSEG's businesses within these markets, significant events that have occurred during 2008 and the future outlook for Power, PSE&G and PSEG Energy Holdings L.L.C. (Energy Holdings), as well as the key factors that will drive the future performance of these businesses. This discussion includes significant changes in or additions to information reported in the 2007 Annual Report on Form 10-K and refers to the Condensed Consolidated Financial Statements (Statements) and the related Notes to Condensed Consolidated Financial Statements (Notes). This information should be read in conjunction with such Statements, Notes and the 2007 Annual Report on Form 10-K.

PSEG's business consists of four reportable segments, which are Power, PSE&G and the two direct subsidiaries of Energy Holdings: PSEG Global L.L.C. (Global) and PSEG Resources L.L.C. (Resources).

Power

Power is an electric generation and wholesale energy marketing and trading company that is focused on generation markets in the Northeast and Mid Atlantic U.S. Through its subsidiaries, Power seeks to produce low-cost energy through efficient operations of its nuclear, coal and gas-fired generation facilities. Power seeks to balance this generation production with its fuel requirements and supply obligations through energy portfolio management. In addition to the electric generation business, Power's revenues also include gas supply sales under the Basic Gas Supply Service (BGSS) contract with PSE&G and to other customers.

PSE&G

PSE&G operates as an electric and gas public utility in New Jersey under cost-based regulation by the New Jersey Board of Public Utilities (BPU) for its distribution operations and under regulation by the Federal Energy Regulatory Commission (FERC) for its electric transmission and wholesale sales operations. Consequently, the earnings of PSE&G are largely determined by the regulation of its rates by those agencies.

Global

Domestically, Global owns two 1,000 MW combined cycle generation facilities in the Electric Reliability Council of Texas (ERCOT) market, and has investments in power producers that own and operate electric generation in California and Hawaii, with smaller investments in New Hampshire and Pennsylvania. Global has reduced its international risk by monetizing most of its international investments. Global is also pursuing the development of renewable energy projects.

Resources

Resources primarily has invested in energy-related leveraged leases. Resources is focused on maintaining its current investment portfolio and does not expect to make any new investments.

Overview of 2008

Financial Results

PSEG, Power and PSE&G

The results for PSEG, PSE&G, Power and Energy Holdings for the quarter and nine
months ended September 30, 2008 and 2007 are presented below:


                                                                Earnings (Losses)
                                                Quarters Ended                  Nine Months Ended
                                                 September 30,                    September 30,
                                             2008            2007             2008             2007
                                                                    (Millions)
Power                                      $   328         $   338         $    843         $     744
PSE&G                                           98             107              287               302
Global                                          67              41              101                62
Resources (A)                                  (11 )            15             (466 )              46
Other (B)                                       (6 )           (11 )            (19 )             (48 )

PSEG Income from Continuing Operations         476             490              746             1,106
Income from Discontinued Operations            180              16              208                 4

PSEG Net Income                            $   656         $   506         $    954         $   1,110




                                                             Earnings (Loss) Per Share (Diluted)
                                                      Quarters Ended                    Nine Months Ended
                                                       September 30,                      September 30,
                                                   2008              2007             2008             2007
PSEG Income from Continuing Operations          $      0.94        $   0.96         $    1.47        $   2.18
Income from Discontinued Operations                    0.35            0.03              0.41            0.01

PSEG Net Income                                 $      1.29        $   0.99         $    1.88        $   2.19

(A) In the second quarter of 2008, Resources recorded after-tax charges of $490 million related to the disallowance of deductions taken in prior years' tax filings associated with certain types of leveraged lease transactions. See Note
5. Commitments and Contingent Liabilities for additional information.

(B) Other activities include non-segment amounts of PSEG (as parent company) and its subsidiaries and intercompany eliminations. Specific amounts include interest on certain financing transactions and certain administrative and general expenses at PSEG and Energy Holdings (as parent companies).

The quarter-over-quarter decrease in PSEG's Income from Continuing Operations principally reflected decreases at Power and PSE&G. Power's Operating Revenues increased due to higher sales prices on re-contracted BGS contracts and in PJM, exceeding the increase in its generation costs that primarily resulted from increased prices for natural gas purchases. However, these favorable results were more than offset by higher losses recognized in 2008 on certain securities in the Nuclear Decommissioning Trust (NDT) Funds and higher Operation and Maintenance Costs related to outages at certain facilities of PSEG Fossil LLC (Fossil) and PSEG Nuclear LLC (Nuclear). PSE&G's decrease was principally due to lower sales and higher depreciation. The quarter-over-quarter increase in PSEG's Net Income was primarily due to the gain of $187 million recognized in 2008 on the sale of the SAESA Group, which was included in Income from Discontinued Operations.

The nine month over nine month decrease in PSEG's Income from Continuing Operations reflected a significant decrease at Resources, largely due to after-tax charges of $490 million recorded in June 2008 associated with deductions taken for tax purposes on certain types of leveraged lease transactions that are being challenged by the IRS. See Note 5. Commitments and Contingent Liabilities for additional information. Earnings were also slightly lower at PSE&G due to lower sales and higher depreciation. These decreases were somewhat offset by improved earnings at Power and to a lesser degree at Global. Power's Operating Revenues increased due to higher prices and higher sales volumes, partially offset by higher generation costs as well as higher losses in the NDT Fund and Operation and Maintenance Costs. Global's earnings increased primarily due to improved operations and higher mark to market (MTM) gains at its Texas generation facilities.

PSEG, Power and PSE&G

First Quarter

PSEG's Board of Directors approved a two-for-one stock split of PSEG's outstanding shares of common stock.

The BPU approved the results of New Jersey's annual BGS-Fixed Price (FP) and BGS-Commercial and Industrial Energy Price auctions and PSE&G successfully secured contracts to provide the anticipated electricity requirements for its customers. As a result of the February 2008 auction, new BGS-FP rates increased the average residential customer's bill by approximately 12% effective June 2008.

FERC approved the classification of new 69 kV facilities as transmission rather than distribution which PSE&G expects to result in improvements in reliability and more expeditious rate treatment for these facilities.

The U.S. Department of Treasury issued final regulations regarding Investment Tax Credit (ITC) normalization, referring to deferred tax balances that were to be refunded to utility customers but were terminated upon New Jersey's electric industry deregulation in 1999. The ruling confirmed that none of the generation-related ITC could be passed to utility customers without violating the normalization rules.

Second Quarter

The U.S. Supreme Court granted the request of industry petitioners, including Power, to review the question of whether Section 316(b) of the Federal Water Pollution Control Act allows the U.S. Environmental Protection Agency (EPA) to compare costs with benefits in determining the "best technology available" for minimizing adverse environmental impact at cooling water intake structures. This matter could have a material impact on Power's ability to renew Clean Water Act permits at a number of its larger plants without making significant equipment upgrades involving material expenditures.

The BPU approved a settlement agreement allowing PSE&G to invest approximately $105 million in a solar energy pilot program designed to spur investment in solar power in New Jersey and meet energy goals under the EMP. PSE&G will provide loans to customers in its electric service territory for the installation of solar photovoltaic systems on the customers' premises. The program is open to commercial, industrial and residential customers. As of September 30, 2008, PSE&G has received applications for approximately 34% of the 30 MW program.

FERC approved incentive rate treatment for PSE&G's Susquehanna-Roseland transmission line project, which will enable PSE&G to earn an adequate return on investment, full recovery of construction costs and the authority to transfer certain incentives to affiliates that are members of Regional Transmission Organizations (RTOs).

A complaint was filed with FERC with respect to PJM's Reliability Pricing Model (RPM) on the grounds that the capacity prices set in the first three RPM auctions were not just and reasonable. In September 2008, the FERC issued an order dismissing this complaint. If upheld on rehearing and on appeal, this order eliminates the potential for the payment of refunds with respect to transitional auction payments made to generators in PJM, including Power.

PSE&G submitted a request to the BPU for an increase in annual BGSS revenues of $376 million to be effective October 1, 2008, representing approximately a 20% increase on a typical residential gas customer's bill. This request was revised to $267 million on August 27, 2008 and approved by the BPU on October 3, 2008.

Power completed turbine replacement projects at Hope Creek and Salem Unit 2, increasing its nuclear generating capacity at those facilities.

• Hope Creek-Phase I increased the nominal capacity of the unit by 10 MW in 2005. Phase II added approximately 150 MW of nominal capacity in the second quarter of 2008.

• Salem Unit 2-Phase I increased Power's share of the nominal capacity by 14 MW in 2003. Phase II was completed and put in operation in the second quarter of 2008, concurrent with steam generator replacement and increased Power's share of the nominal capacity by approximately 23 MW.

In June 2008, as a result of the recent court decisions regarding certain types of leveraged lease transactions, PSEG evaluated its unrecognized tax benefits under FIN 48, "Accounting for Uncertainty in

Third Quarter

In July 2008, PSE&G filed a petition with FERC to implement a cost-of-service formula rate for its existing and future transmission investment. On September 30, 2008, the FERC approved PSE&G's request for formula transmission rates, effective October 1, 2008. Under this formula, PSE&G will put rates into effect in January of each year based upon its internal forecast of annual expenses and capital expenditures, and rates will be trued up to reflect actual annual expenses/capital expenditures in the following year. The order provides for an ROE of 11.68% on existing and new transmission investment.

The Clean Air Interstate Rule (CAIR), enacted by the EPA in 2005, would have required 28 eastern states to reduce nitrogen oxide (NOx) and sulfur dioxide (SO2) in the 2009, 2010 and 2015 timeframe. In July 2008, CAIR was vacated by the United States Court of Appeals for the District of Columbia Circuit. Subsequent to that ruling, market prices for SO2 allowances have declined significantly, and a decline in electricity prices in certain states has occurred. In September 2008, the EPA, certain industry groups and certain environmental groups filed a petition for rehearing with the Court. By order dated October 21, 2008 the Court requested additional briefings from various aligned petitioners, by November 5, 2008, directing them to address:

• whether any party is seeking the repeal of CAIR, and

• whether the Court should stay its mandate to vacate CAIR until EPA promulgates a revised rule.

Any significant decrease in electricity prices could adversely affect Power's revenues. PSEG and Power cannot predict the ultimate resolution of CAIR, nor the ultimate effect on their results of operations. Power foresees no change in its existing construction response to controlling NOx and SO2.

The Board of Directors of PSEG authorized the repurchase of up to $750 million of PSEG Common Stock to be executed over 18 months beginning August 1, 2008. PSEG is not obligated to acquire any specific number of shares and may suspend or terminate its share repurchases at any time. The amount and timing of any stock repurchases would be based on various factors such as management's assessment of PSEG's capital structure and liquidity, the market price of PSEG's common stock and the opportunity to grow the business if investments are available. As of September 30, 2008, approximately two million common shares were repurchased at a cost of $92 million. See Liquidity and Capital Resources for more information.

Global closed on the sale of its investment in the SAESA Group for a total purchase price of $1.3 billion, including the assumption of $413 million of the consolidated debt of the group. The sale resulted in an after-tax gain of $187 million. Net cash proceeds, after Chilean and U.S. taxes of $275 million, were $600 million.

In August 2008, Global entered into an agreement to sell its 85% ownership interest in Bioenergie, which consists of generation facilities in Italy. The sale is pending. Bioenergie's operating results for the quarter and nine months ended September 30, 2008 include a pre-tax impairment charge of $33 million and related tax benefits of $22 million which are included in Discontinued Operations.

The Emergency Economic Stabilization Act of 2008, which was passed in October 2008, provides for:

• an eight year extension of the tax credits for solar and other renewable energy sources

• removal of the $2,000 limit on residential solar credits

• utility eligibility for the 30% solar credit

• 10 year accelerated tax depreciation of smart metering and smart grids

PSEG, Power and PSE&G believe that the Emergency Economic Stabilization Act of 2008 will ease their ability to reach New Jersey's aggressive Energy Master Plan goals and spur additional development of

PSE&G, PSEG Energy Resources & Trade LLC (ER&T), Power Connecticut, Fossil and Nuclear submitted market-based rate (MBR) filings to FERC in which they asserted that they either lack market power or, that market power is being effectively mitigated in various markets. On September 2, 2008, PSE&G, ER&T, Power Connecticut, Fossil and Nuclear filed a revised MBR analysis based on recent FERC orders. On October 16, 2008, the FERC accepted the updated market power analysis of PSE&G, ER&T and Power Connecticut, concluding that they had satisfied the standards for MBR authority. The FERC also granted MBR authorization to Fossil and Nuclear.

The final New Jersey Energy Master Plan (EMP) rule was issued in October 2008. The final plan identifies a number of actions to improve energy efficiency, increase the use of renewable resources, ensure a reliable supply of energy and stimulate investment in clean energy technologies.

For additional information, see Item 5. Other Information and Note 5. Commitments and Contingent Liabilities.

Future Outlook

PSEG, Power and PSE&G

PSEG's future success will depend on the ability of Power, PSE&G and Energy Holdings to achieve their respective objectives and earnings expectations, as well as the successful completion of various construction projects and their respective growth initiatives, discussed below.

There is no guarantee that such initiatives will be achieved since many issues need to be considered, such as system reliability concerns, regulatory approvals and construction or development costs.

In general, PSEG believes it has growth opportunities in the following three key areas:

• responding to climate change and continuing to improve environmental performance through investments in energy efficiency, renewables and clean central station power;

• upgrading critical energy infrastructure; and

• providing new energy supplies.

There are challenges for 2009 resulting from the turmoil in the capital and credit markets and volatility in the commodity markets which could place downward pressure on earnings resulting from:

• increasing pension expense due to significantly lower pension asset values;

• increasing cost of borrowing due to tightening capital and credit markets and higher risk premiums sought by investors and lenders; and

• increasing coal costs resulting from a potential renegotiation with a key supplier.

Power

As a merchant generator, Power's primary profit is derived from selling under contract or on the spot market a range of diverse products such as energy, capacity, emissions credits, and a series of energy-related products used to optimize the operation of the energy grid. A key factor for success is Power's ability to operate its nuclear and fossil stations at sufficient capacity factors to limit the need to purchase higher-priced electricity to satisfy its obligations. Historically, Power's nuclear and coal-fired facilities have produced over 50% and 25% of Power's production, respectively. Power seeks to sell a portion of this anticipated low-cost nuclear and coal-fired generation over a multi-year forward horizon, normally over a period of two to four years. With the vast majority of its power sourced from these lower-cost units, rising electric prices have yielded higher margins for Power. Recent market prices for electricity, fuels and other commodities related to Power's business have been increasingly volatile, dramatically increasing during the second quarter of 2008, and falling sharply in the third quarter. The prices of various commodities that affect Power's business, including natural gas, coal and electricity, have also changed relative to one another during this volatile period, which also can impact Power's business results positively or negatively, especially if sustained over the long term (beyond the two to four year contracted period).

In view of changes such as these, as well as strong competition, market complexity and constantly changing forward prices, there is no assurance that Power will be able to contract its output at attractive prices. While higher forward prices may have a potentially significant beneficial impact on margins, they could also raise any replacement power costs that Power may incur in the event of unanticipated outages, and could also further increase liquidity requirements as a result of contract obligations. For additional information on liquidity requirements, see Liquidity and Capital Resources.

Power contracts for the future delivery of nuclear fuel and coal to support its contracted sales. Power's estimated fuel needs are subject to change based upon the level of its operations as well as upon market demands for and on the price of coal, both of which have increased recently. Earlier in the year, Power revised the pricing for one of its coal supply agreements for the Mercer station through 2008. A second supplier for about 15% of Mercer's coal requirements declared a force majeure and reduced shipments of coal. A settlement was reached with this supplier pursuant to which shipments were reinstated at the contract volumes with no net increase in price over the terms of the coal supply agreement. An Indonesian supplier of coal for the Bridgeport and Hudson generating units has notified PSEG that it has received a letter from the Indonesian government, as the rights holder for coal resources in Indonesia, requesting that the supplier renegotiate its contracts with PSEG to reflect currently effective market prices based on certain coal indexes. The letter states that in the event that no agreement is reached for the renegotiation of the contracts, the supplier should temporarily discontinue deliveries of coal until agreement is reached. The agreement currently provides for approximately 2.7 million tons for 2009 and 2010 and about half of that annual amount in 2011. Power is currently in negotiations with the supplier. Resolution of this issue cannot be predicted, but any renegotiation of the Indonesian coal contracts would likely result in a material increase in coal costs. Power believes it can continue to manage its fuel sourcing needs in this dynamic market but changes in prices and demand could impact its future operations or financial results.

Power could be impacted by a number of events, including regulatory or legislative actions favoring non-competitive markets, energy efficiency/demand response initiatives and regulatory policies favoring generation that may be subject to less stringent environmental regulation. Further, some of the market- based mechanisms in which Power participates, including BGS auctions and the RPM capacity payments, are at times the subject of review or discussion by some of the participants in the New Jersey and federal regulatory and political arenas, including FERC and the BPU, and the PJM market monitor. Accordingly, Power can provide no assurance that any or all of these mechanisms will continue to exist in their current form. For additional information, see Item 5. Other Information-Regulatory Issues.

In addition, Power must be able to effectively manage its construction projects and continue to economically operate its generation facilities under increasingly stringent environmental requirements, including legislation, regulation and voluntary restrictions that address:

• the control of carbon dioxide (CO2) emissions to reduce the effects of global climate change and greenhouse gas, and the cost of complying with the Regional Greenhouse Gas Initiative (RGGI), including the cost of CO2 emission allowances;

• The first auction related to CO2 allowances for the RGGI region was conducted in September 2008. Future auctions are anticipated on a quarterly basis.

• other emissions such as NOx, SO2 and mercury; and

• the potential need for significant upgrades to existing water intake structures and cooling systems at its larger once-through cooled plants, including Salem, Hudson, Mercer, Sewaren, New Haven and Bridgeport.

Power recently completed two projects to increase the generating capacity of its Hope Creek and Salem Unit 2 facilities and has several other projects included in its forecasted capital expenditures.

Power has two large environmental back-end technology projects underway at its Mercer and Hudson coal plants scheduled to be completed by the end of 2010. Power is focused on completing these projects on schedule and within the established budgets, but faces many risks typically involved in managing large construction projects.

Power has initiated planning activities with respect to the construction of new gas-fired peaking capacity. Power's final decision whether or not to proceed with construction of these units would depend on numerous items, including estimated capital and interconnection costs, available siting and Power's ability to meet environmental permitting requirements. Power is also currently exploring the potential to build new nuclear generation and in addition may also seek growth from acquisition opportunities.

PSE&G

PSE&G's results primarily depend on the treatment of the various rate and other issues by the BPU and FERC, as well as other state and federal regulatory agencies. Therefore, PSE&G's success will depend on its ability to:

. . .