REGULATION

NJNG is subject to cost-based regulation, therefore, it is permitted to recover authorized operating expenses and earn a reasonable return on its utility investment based on the BPU's approval, in accordance with accounting guidance applicable to regulated operations. Accordingly, NJNG capitalizes or defers certain costs that are expected to be recovered from its customers as regulatory assets and recognizes certain obligations representing amounts that are probable future expenditures as regulatory liabilities.

Regulatory assets and liabilities included on the Unaudited Condensed Consolidated Balance Sheets are comprised of the following:



(Thousands)	June 30, 2013		September 30, 2012
Regulatory assets-current
Conservation Incentive Program	$	18,954	$	25,681
Underrecovered gas costs	2,059		7,053
Total current	$	21,013	$	32,734
Regulatory assets-noncurrent
Environmental remediation costs
Expended, net of recoveries	$	47,405	$	59,745
Liability for future expenditures	182,000		182,000
Deferred income taxes	11,405		11,405
Derivatives at fair value, net	386		—
Energy Efficiency Program	38,759		26,025
New Jersey Clean Energy Program (NJCEP)	16,953		5,619
Postemployment and other benefit costs	135,303		142,495
Deferred Superstorm Sandy costs	14,916		—
Other	13,105		13,974
Total noncurrent	$	460,232	$	441,263
Regulatory liability-current
Derivatives at fair value, net	$	1,191	$	1,169
Total current	$	1,191	$	1,169
Regulatory liabilities-noncurrent
Cost of removal obligation	$	77,581	$	65,994
Derivatives at fair value, net	—		1,000
Other	848		83
Total noncurrent	$	78,429	$	67,077

NJNG's recovery of costs is facilitated through its base tariff rates, Basic Gas Supply Service (BGSS) and other regulatory tariff riders. As recovery of regulatory assets is subject to BPU approval, if there are any changes in regulatory positions that indicate recovery is not probable, the related cost would be charged to income in the period of such determination.

Recent regulatory filings and/or actions include the following:

BGSS and Conservation Incentive Program (CIP)

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In March 2013, NJNG and South Jersey Gas Company filed a joint petition with the BPU requesting the continuation of the CIP with certain modifications. The discovery phase has commenced and, if no Board Order on that petition is issued as of September 30, 2013, the CIP program will continue for up to one additional year or until such an Order is issued, whichever is earlier. The CIP permits NJNG to recover utility gross margin variations related to customer usage resulting from customer conservation efforts and allows NJNG to mitigate the impact of weather on its gross margin. Such utility gross margin variations are recovered in the year following the end of the CIP usage year, without interest, and are subject to additional conditions, including an earnings test and an evaluation of BGSS related savings.

•

In May 2013, the BPU approved NJNG's fiscal 2013 BGSS/CIP rate on a final basis. In addition, NJNG notified the BPU that it was going to reduce its current BGSS rate resulting in a 5.2 percent decrease to an average residential heat customer's bill, effective June 2013 and submitted its fiscal 2014 BGSS/CIP filing, which proposes a 1 percent reduction to an average residential heat customer's bill related to the CIP factor for fiscal 2014.

Infrastructure Programs


•	In October 2012, the BPU approved NJNG's Safety Acceleration and Facility Enhancement (SAFE) program, allowing a four-year incremental capital investment program of $130 million, exclusive of allowance for funds used during construction (AFUDC) accruals.


•	In November 2012, NJNG submitted a filing requesting a base rate increase of $6.9 million for Accelerated Infrastructure Programs (AIP), related to the initial phase of AIP (AIP I) and the second phase of AIP (AIP II) infrastructure investments installed in NJNG's distribution and transmission systems through October 31, 2012. In May 2013, the BPU approved a $6.5 million base rate increase.

Energy Efficiency Programs (EE)

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In January 2013, the BPU approved a stipulation to extend NJNG's current SAVEGREEN Project^® (SAVEGREEN) through June 30, 2013. In June 2013, the BPU issued an Order approving NJNG's July 2012 request to extend and expand the current SAVEGREEN projects through June 30, 2015, with certain modifications, resulting in a planned investment of more than $85 million and including a weighted average cost of capital of 6.9 percent. In addition, the BPU approved a rate increase of approximately 1.7 percent related to the NJNG EE Tariff Rider to recover prior EE program costs and EE investments related to the SAVEGREEN programs.

Societal Benefits Clause (SBC)

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In November 2012, the BPU approved NJNG's funding obligations for NJCEP for the period from January 1, 2013 to June 30, 2013 of approximately $9.8 million. In June 2013, the BPU approved NJNG's funding obligations for July 1, 2013 to June 30, 2014, of approximately $15.6 million. Accordingly, NJNG recorded the obligation and corresponding regulatory asset on the Unaudited Condensed Consolidated Balance Sheets.

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In March 2013, the BPU approved a February 2012 filing that requested approval of NJNG's Manufactured Gas Plant (MGP) expenditures incurred through June 30, 2011, maintaining the existing overall SBC rate. In July 2013, NJNG filed an SBC petition with the BPU requesting a reduction to the Remediation Adjustment (RA) factor and approval of the related MGP expenditures for the period July 1, 2011 through June 30, 2013, along with an increase to the NJCEP factor.


•	In June 2013, NJNG filed its annual Universal Service Fund (USF) petition with the BPU. The USF filing is a statewide filing and includes a proposed reduction to the current USF per therm rate.

Other Regulatory Initiatives

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In November 2012, NJNG filed a petition with the BPU requesting deferral accounting for uninsured incremental operating and maintenance costs associated with Superstorm Sandy, which was subsequently approved in May 2013. In addition, NJNG requested that the review of and the appropriate recovery period for such deferred expenses be addressed in the Company's next base rate case. As of June 30, 2013, NJNG has recorded a regulatory asset in the amount of $14.9 million related to these costs.

In March 2013, the BPU issued an Order establishing a generic proceeding to review the prudency of costs incurred by New Jersey utility companies in response to major storm events in 2011 and 2012. In July 2013, NJNG filed its detailed report including unreimbursed, uninsured incremental storm restoration costs and capital expenditures related to Superstorm Sandy.