This combined MD&A is separately filed by PSEG, Power and 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.

PSEG's business consists of three reportable segments, which are:

• Power, our wholesale energy supply company that integrates its generating asset operations with its wholesale energy, fuel supply, energy trading and marketing and risk management activities primarily in the Northeast and Mid Atlantic U.S.,

• PSE&G, which provides transmission and distribution of electricity and gas in New Jersey, and

• Energy Holdings, which owns our other generation assets and holds other energy-related investments.

Our business discussion in Part I Item 1 Business of our 2008 Annual Report on Form 10-K provides a review of the regions and markets where we operate and compete, as well as our strategy for conducting our businesses within these markets. The following supplements that discussion and the discussion included in the Overview of 2008 and Future Outlook provided in Item 7 in our Form 10-K by describing significant events and business developments that have occurred during 2009 and any changes to the key factors that we expect will drive our future performance. The following discussion 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 2008 Annual Report on Form 10-K.

OVERVIEW OF 2009 AND FUTURE OUTLOOK

During 2009, our business has been impacted by many factors, including lower gas prices, milder weather, the economic slowdown and increased pension costs.

The milder weather and the economic slowdown have caused an overall reduction in customer demands for electricity and gas in the markets where we operate. As a result, our generation volumes for the first nine months in 2009 were approximately 10% lower than in the same period of 2008. This reduced volume was experienced mainly at our coal facilities as lower gas prices have made gas-fired generation more economic.

In addition to the overall reduction in customer demands during the first nine months of 2009, we have experienced a higher number of customers choosing to contract with independent electric suppliers rather than remain under the BGS contracts. This migration away from BGS could be sustained or increase if energy prices continue to be lower than the energy price component of the BGS contracts. Migration has and could continue to result in reduced margins as volumes that were previously sold to satisfy obligations under the BGS contracts are replaced with spot market sales at lower prices.

Our distribution operations were also impacted by both the economy and weather conditions in 2009. Our electric delivery volumes for the first nine months of 2009 declined by 4% due to reduced cooling loads in the summer of 2009, reflecting a temperature humidity index that was 22% cooler than the summer of 2008. However, we experienced a 4% increase in our gas delivery volumes for the first nine months of 2009 as compared to the same period in 2008. Winter weather in 2009, as measured by heating degree days, was 10% higher resulting in higher gas space heating demand and sales.

Excluding the impact of weather, residential electric and gas volumes were down 0.9% and 0.7% respectively. These declines were in line with our expectations for the impact of the economy on sales to this sector. Residential sales contribute approximately 45% of our electric margin and 75% of our gas margin. In the Commercial and Industrial segments, margins from electric customers are not based on total energy consumption as measured by kilowatt-hours, but are based on fixed, monthly demand charges that are set by the highest electric demand for an hour period during the previous 12-month period or, in the

Current economic conditions have also caused deterioration in certain customer payment patterns resulting in a higher portion of our accounts receivable balances remaining outstanding for more than 180 days. This represents 15% of our total customer accounts receivable as of September 2009 as compared to 8% last year. We are increasing our activities on the oldest and largest accounts to expedite these collections. PSE&G believes it has sufficient liquidity to manage these delays in customer payments.

There have also been significant regulatory and legislative developments during the year which may affect our operations in the future as new rules and regulations are adopted.

• In March 2009, the Federal Energy Regulatory Commission (FERC) issued an order regarding PJM Interconnection LLC's (PJM) RPM. The effect of this order includes an increase in the cost of new entry to more accurately reflect construction and equipment costs. This should incent both new build and continued operation of existing facilities. For additional information, see Part II, Item 1. Legal Proceedings.

• In April 2009, the U.S. Supreme Court concluded that the U.S. Environmental Protection Agency (EPA) permissibly relied upon cost-benefit analysis in setting the national performance standards and in providing for cost-benefit variances from those standards as part of the Phase II Section 316(b) regulations of the Federal Water Pollution Control Act. This is important to us because it allows the EPA to continue to use the site-specific cost-benefit test in determining best technology available for minimizing adverse environmental impact. For additional information, see Note 6. Commitments and Contingent Liabilities.

• In April 2009, the EPA released a proposed finding under the Clean Air Act concluding that CO2 is one type of six specific greenhouse gases which causes or contributes to the climate change problem and constitutes air pollution which endangers both public health and welfare. If applied to fossil fuel generation facilities, additional regulation of CO2 emissions could affect our operations, our ability to renew permits and licenses and could result in additional material compliance costs.

• In June 2009, the U.S. House of Representatives passed a bill that promotes renewable energy and requires a reduction in the emission of greenhouse gases from the majority of emission sources, including the generation sector. The bill sets forth major initiatives which include: 1) establishing a national renewable energy standard and 2) creating a market mechanism for the sale and purchase of greenhouse gas emission allowances (cap-and-trade program). If enacted in its current form, the bill could reduce or eliminate existing regional inconsistencies in greenhouse gas regulations. The Senate is expected to consider these issues as well as transmission planning, siting and cost allocation issues in the fourth quarter, but ultimate enactment into law of a bill with comparable provisions and rules is not certain.

• In August 2009, the EPA announced that it is reconsidering whether coal ash, a by-product of generation at our coal facilities, should be re-regulated. The EPA indicated that it intends to propose a rule by the end of 2009. We currently have a program at Hudson, Mercer and Bridgeport to beneficially use the coal ash in other uses as currently allowed by Federal and state regulations. Proposed regulations which more stringently regulate coal ash, including the potential regulation of coal ash as hazardous waste, could materially increase costs for our coal facilities.

• In September 2009, the EPA announced that it would be proposing rules which would subject many power generating units, including ours, to Clean Air Act permitting for greenhouse gases (GHG), including CO2. The proposed rule would require installation of the best available control technologies whenever an applicable modification is made. Current limits for the implementation of such technologies are much lower for pollutants regulated under the Clean Air Act. The EPA

• During the year various legislative proposals have been made with the intention of enacting stricter regulation over derivatives in light of the financial market issues experienced last year, largely caused by derivative trading in connection with mortgage loans. The U.S. House of Representatives is working on a bill, which is expected to be finalized by the end of December. The Senate is expected to work on its own bills in the first quarter of 2010. It is difficult to predict what the final legislation will contain. If the final legislation required all trading to be done over an exchange, we would expect to see our collateral requirements increase substantially to support our activities. If the definition of the types of trades and traders included in the current House drafts remain, then it is unlikely that our collateral requirements will change.

Our future success will depend on our ability to respond to the challenges and opportunities presented by these various regulatory and legislative initiatives.

Looking forward, continued lower market prices and reduced demands would result in lower margins for our generation output. To help offset these reduced margins, we will explore prudent growth opportunities and we have and will continue to look for ways to reduce costs while maintaining our safety, reliability and environmental standards. We will do this focusing on operational excellence, improving our financial strength and making disciplined investments.

Operational Excellence

While total generation volumes were down about 10% in 2009, our generating assets continued to perform well. Our lower cost nuclear generation output was 4% higher for the first nine months of 2009 than in the comparable period in 2008.

In addition, our hedging strategy has resulted in higher average realized electric prices which helped to mitigate the effect of our reduced generation resulting from recent mild weather and recessionary conditions. The increase in realized prices for the first nine months of 2009 as compared to the same period in 2008 was due to comparably higher-priced contracts entered into in prior years that replaced older, lower-priced contracts, such as the 2005 and 2006 Basic Generation Service (BGS) auction contracts which expired in May 2008 and May 2009.

We continue to receive fair pricing for our capacity. Prices set earlier in 2009 under the most recent Reliability Pricing Model (RPM) auction for the 2012-2013 period were higher than those set for 2011-2012 period and once again varied based on the constraints in each of the PJM zones, as compared to the uniform zonal pricing set for the periods from June 2010 to May 2012.

On October 1, 2009, ownership of the Texas facilities was transferred to Power (See Note 17. Subsequent Events for additional information). Since Power has been responsible for the operation of the Texas facilities under a management agreement since January 2008, there are no anticipated operational or commercial impacts resulting from this transaction.

Energy Holdings' remaining portfolio consists primarily of its lease investments at Resources and smaller equity method investments at Global, including GWF Energy which we intend to sell pending the necessary approvals. See Note 3. Discontinued Operations and Dispositions for additional information. As a result, Energy Holdings is focused on:

• continuing to reduce our cash tax exposure related to certain leveraged leases by pursuing opportunities to terminate international leases with lessees that are willing to meet certain economic thresholds (See Note 6. Commitments and Contingent Liabilities for additional information),

• earning adequate returns on its remaining investments, and

• exploring opportunities for investment in renewable energy products, including solar investments, such as those discussed below, our offshore wind project and compressed air energy storage technology.

Financial Strength

Our businesses continued to generate strong cash from operations in 2009. In addition, Power established a program for the issuance of up to $500 million of unsecured medium-term notes (MTNs) to retail investors and has issued $209 million under this program. We used these funds, cash from operations, and cash on hand to:

• contribute $364 million into our pension plans in 2009,

• pay our maturing debt obligations in 2009 (See Note 7. Changes in Capitalization),

• make an additional $140 million deposit with the IRS to defray potential interest costs associated with the disputed tax liability for the leveraged lease investments,

• redeem $280 million of non-recourse debt at our Texas plants, and

• repurchase $10 million of Energy Holdings' remaining Senior Notes.

The Board of Directors has also approved an increase in the quarterly dividends from $0.3225 per share to $0.3325 per share of Common Stock for the first three quarters of 2009 resulting in an indicated annual dividend of $1.33 per share. This increase is consistent with maintaining our target payout ratio of 40% to 50% of Operating Earnings.

Disciplined Investment

We expect to continue to invest in areas that complement our existing businesses and provide attractive risk-adjusted returns. These areas include responding to climate change and continuing to improve environmental performance, upgrading critical energy infrastructure and providing new energy supplies in markets with growing demand. During 2009:

• We were assigned construction and operating responsibility for an additional 500 kV transmission project in New Jersey. The project would run from Branchburg to Hudson. In October 2009, we filed a petition with FERC seeking incentive rate treatment for this project. We have requested that the incentives be effective January 1, 2010.

• We are continuing to pursue obtaining all necessary regulatory approvals for the $750 million Susquehanna-Roseland transmission project. We are awaiting numerous regulatory approvals for this project, including a decision from the BPU which we expect in early 2010. We cannot predict the outcome of the regulatory approvals that are currently pending.

• We requested approval from the BPU for a new solar loan program, called "Solar Loan
II." Under Solar Loan II, we would help finance the installation of an additional 40 MW of solar-powered generating systems in our electric service territory. Any remaining financing capacity from our current solar loan program would be rolled into this new program.

• The BPU approved our Solar 4 All Program. Under this program, we anticipate investing approximately $515 million to develop 80 MW of utility-owned solar photovoltaic systems over a four-year horizon.

• The BPU approved our Capital Economic Stimulus Program. Under this program, we anticipate accelerating $694 million of capital infrastructure investments through our distribution business for electric and gas programs in New Jersey over a 24-month period. The program seeks to support employment in New Jersey, while enhancing the distribution business infrastructure. This program provides for a charge for contemporaneous recovery of a return on the program expenditures plus depreciation of the assets which will be adjusted each January.

• The BPU approved our Energy Efficiency Economic Stimulus Program. Under this program, we anticipate investing approximately $166 million in energy efficiency expenditures through PSE&G for electric and gas programs in New Jersey over an 18-month period. The program seeks to help New Jersey meet its Energy Master Plan goal of reducing energy consumption by 20% by 2020 and to support employment in New Jersey. This program provides for a charge for contemporaneous recovery of a return on the program expenditures.

• We have approved the expenditure of $192 million for a steam path retrofit and related upgrades at Peach Bottom. Approximately $18 million has been spent as of September 2009. These upgrades are expected to result in an increase of our share of capacity by 32 MW (14 MW at Unit 3 in 2011 and 18 MW at Unit 2 in 2012). We also anticipate expenditures in pursuit of additional output through an extended power uprate at Peach Bottom. The uprate is expected to be in service in 2015 for Unit 2 and 2016 for Unit 3. Our share of the increased capacity is expected to be 133 MW with an anticipated cost of approximately $400 million.

• We plan to construct 178 MW of gas-fired peaking capacity at our Kearny site. This capacity was bid and cleared the PJM RPM base residual capacity auction for the 2012-2013 period. We expect to begin construction in the third quarter of 2011. The project is expected to be in-service by June 2012. We estimate the cost of these generating units to be $160 million to $200 million, with approximately $8 million spent as of September 2009.

• We developed a solar project in New Jersey and have acquired two additional solar projects at Energy Holdings to be developed in Florida and Ohio, which together have a total capacity of approximately 29 MW. Completion of these projects is expected by the end of 2010 with a total investment of approximately $100 million.

There is no guarantee that these or future initiatives will be achieved since many issues need to be favorably resolved, such as system conditions, regulatory approvals and funding of construction or development costs.

We receive immediate recovery of our transmission investments and costs through our FERC-approved formula transmission rate. The formula rate mechanism provides for an annual setting of our transmission rates as well as an annual true up to ensure timely recovery of the actual costs of providing transmission service and PSE&G's approved return on equity. In accordance with our formula rate protocols, in October 2009, we filed our 2010 Annual Formula Rate Update with FERC. The update provides for approximately $23 million in increased revenues as part of our 2010 transmission rates.

In May 2009, we filed a Petition with the BPU for an increase in electric and gas distribution base rates. The amounts requested were $134 million and $97 million for electric and gas respectively. An update to the Petition was filed September 25, 2009 requesting $147 million and $106 million for electric and gas respectively. The matter is pending with a decision expected in the first half of 2010.

We anticipate that any current spending under the Capital Economic Stimulus Program will be included in our rate base with the expected decision in our Base Rate Case and that we will continue to receive contemporaneous recovery of future expenditures under this program with the return on equity adjusted to reflect the rate allowed in the Base Rate Case. The recovery mechanisms approved by the BPU for our Solar 4 All, Solar Loan, Energy Efficiency and Demand Response programs are scheduled to be reset on January 1st of each year, with the return on equity to be adjusted to reflect the rate allowed in the Base Rate Case at the time of the BPU Order.

RESULTS OF OPERATIONS

The results for PSEG, PSE&G, Power and Energy Holdings for the quarters and nine
months ended September 30, 2009 and 2008 are presented below:


                                                 Three Months                     Nine Months
                                                    Ended                            Ended
                                                September 30,                    September 30,
Earnings (Losses)                            2009           2008             2009             2008
                                                                    Millions
Power                                      $   347        $   328         $     922        $    843
PSE&G                                           88             98               256             287
Energy Holdings                                 34             56                51            (367 )
Other                                           19             (6 )              14             (17 )

PSEG Income from Continuing Operations     $   488        $   476         $   1,243        $    746
Income from Discontinued Operations              -            180                 -             208

Net Income                                 $   488        $   656         $   1,243        $    954




                                                Three Months Ended                 Nine Months Ended
                                                  September 30,                      September 30,
Earnings Per Share (Diluted)                   2009             2008             2009             2008
PSEG Income from Continuing Operations      $     0.96        $   0.94         $    2.45        $   1.47
Income from Discontinued Operations                  -            0.35                 -            0.41

PSEG Net Income                             $     0.96        $   1.29         $    2.45        $   1.88

Our results include the following after-tax impacts of mark-to-market (MTM) activity:

                                       Three Months Ended                Nine Months Ended
Non-Trading Mark-to-Market                September 30,                    September 30,
(MTM) Gains (Losses) After Tax        2009             2008              2009            2008
                                                             Millions
Power                               $       1        $   (20 )        $     (15 )       $   10
Energy Holdings                            16             31                 (7 )           20

Total                               $      17        $    11          $     (22 )       $   30

Both the quarter-over-quarter and nine-month over nine month increases in our Income from Continuing Operations reflect the following large drivers:

• improved earnings at Power due to lower generation costs and higher contract pricing,

• partially offset by lower sales volumes due to milder weather in the second and third quarter and economic conditions.

The nine-month over nine month increases also included:

• the absence of a charge taken in June 2008 related to IRS' disallowance of deductions taken in prior years associated with certain types of leveraged lease transactions, and

• the absence of tax benefits taken in 2008 at PSE&G and Energy Holdings related to an IRS refund claim and other tax items.

Our results of operations are primarily comprised of the results of operations of our operating subsidiaries, Power, PSE&G and Energy Holdings, excluding charges related to intercompany transactions, which are eliminated in consolidation. We also include certain financing costs, and charitable contributions along with general and administrative costs at the parent company. For additional information on intercompany transactions, see Note 15. Related-Party Transactions. For an explanation of the variances, see the discussions for Power, PSE&G and Energy Holdings that follow the table below.

                                 Three Months Ended                      Increase/                       Nine Months Ended                         Increase/
                                   September 30,                        (Decrease)                         September 30,                          (Decrease)
                               2009              2008                  2009 vs 2008                  2009                2008                    2009 vs 2008
                                      Millions                   Millions            %                        Millions                     Millions             %
Operating Revenues          $   3,041         $   3,718         $   (677 )            (18 )       $   9,523          $     10,060        $     (537 )             (5 )
Energy Costs                    1,241             1,899             (658 )            (35 )           4,376                 5,552            (1,176 )            (21 )
Operation and
Maintenance                       622               609               13                2             1,925                 1,856                69                4
Depreciation and
Amortization                      224               214               10                5               634                   597                37                6
Income from Equity
Method Investments                 10                 8                2               25                29                    27                 2                7
Impairment on Equity
Method Investments                  4                 1                3              N/A                12                     1                11              N/A
Other Income and
(Deductions)                       24                52              (28 )            (56 )              87                   129               (42 )            (33 )
Other Than Temporary
Impairments                         -                65              (65 )           (100 )              61                   135               (74 )            (55 )
Interest Expense                  129               149              (20 )            (13 )             407                   448               (41 )             (9 )
Income Tax Expense                337               334                3                1               881                   780               101               13
Income from
Discontinued
Operations, net of tax              -               180             (180 )           (100 )               -                   208              (208 )           (100 )


Power


                                           Three Months                                         Nine Months
                                               Ended                   Increase/                   Ended                   Increase/
                                           September 30,              (Decrease)               September 30,              (Decrease)
                                        2009           2008          2009 vs 2008           2009           2008          2009 vs 2008
                                             Millions                  Millions                  Millions                  Millions
Income from Continuing Operations     $   347        $   328            $  19             $   922        $   843            $  79
Net Income                            $   347        $   328            $  19             $   922        $   843            $  79

. . .