UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10–Q


(Mark One)
x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR
		15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended September 30, 2006

		OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR
		15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from ___________ to _____________


Commission	Registrant, State of Incorporation,	I.R.S. Employer
File Number	Address, and Telephone Number	Identification No.


333-83635	PSE&G Transition Funding LLC	22-3672053
	(A Delaware limited liability company) 80 Park Plaza – T4D P.O. Box 1171 Newark, New Jersey 07101-1171 973 297-2227 http://www.pseg.com

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer o Accelerated filer o Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes o No x

Registrant is a wholly owned subsidiary of Public Service Electric and Gas Company. Registrant meets the conditions set forth in General Instruction H(1) (a) and (b) of Form 10-Q and is filing this Form 10-Q with the reduced disclosure format authorized by General Instruction H.

TABLE OF CONTENTS


		PAGE


FORWARD-LOOKING STATEMENTS		ii

PART I. FINANCIAL INFORMATION

Item 1.	Condensed Financial Statements	1
	Notes to Condensed Financial Statements
	Note 1. Organization and Basis of Presentation	4
	Note 2. The Bonds	5
	Note 3. Significant Agreements and Related Party Transactions	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	7
	Results of Operations	7
	Liquidity and Capital Resources	8

Item 3.	Qualitative and Quantitative Disclosures About Market Risk	8

Item 4.	Controls and Procedures	8

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	9

Item 6.	Exhibits	9

Signature		10

FORWARD-LOOKING STATEMENTS

Except for the historical information contained herein, certain of the matters discussed in this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those anticipated. Such statements are based on management’s beliefs as well as assumptions made by and information currently available to management. When used herein, the words “anticipate”, “intend”, “estimate”, “believe”, “expect”, “plan”, “potential”, variations of such words and similar expressions are intended to identify forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The following review of factors should not be construed as exhaustive.

In addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements, factors that could cause actual results to differ materially from those contemplated in any forward-looking statements include, among others, the following: state and federal legal or regulatory developments; national or regional economic conditions; market demand and prices for energy; customer conservation; distributed generation technology; weather variations affecting customer energy usage; the effect of continued electric industry restructuring; operating performance of Public Service Electric and Gas Company’s facilities and third party suppliers; and the payment patterns of customers including the rate of delinquencies.

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

PSE&G TRANSITION FUNDING LLC
CONDENSED STATEMENTS OF OPERATIONS
(Thousands of Dollars)
(Unaudited)


	For the Quarters Ended September 30,						For the Nine Months Ended September 30,

	2006			2005			2006			2005


OPERATING REVENUES	$	83,511		$	92,838		$	218,564		$	230,390
OPERATING EXPENSES
Amortization of Bondable Transition Property		49,493			56,080			114,590			118,336
Servicing and Administrative Fees		395			366			1,207			1,092

Total Operating Expenses		49,888			56,446			115,797			119,428

OPERATING INCOME		33,623			36,392			102,767			110,962
Interest Income		701			396			1,993			1,009
Interest Expense		(34,149	)		(36,682	)		(104,292	)		(111,700	)

NET INCOME	$	175		$	106		$	468		$	271

See Notes to Condensed Financial Statements.

PSE&G TRANSITION FUNDING LLC
CONDENSED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)


	September 30, 2006		December 31, 2005

ASSETS
Current Assets:
Cash	$	1,139	$	671
Receivable from Member		65,977		58,924
Restricted Cash		10,390		14,061

Total Current Assets		77,506		73,656


Noncurrent Assets:
Restricted Cash		17,448		16,810
Bondable Transition Property		1,794,308		1,908,898
Deferred Issuance Costs		45,022		51,792
Regulatory Assets – Interest Rate Swap		5,478		11,462

Total Noncurrent Assets		1,862,256		1,988,962

TOTAL ASSETS	$	1,939,762	$	2,062,618


LIABILITIES
Current Liabilities:
Current Portion of Long-Term Debt	$	159,852	$	154,773
Current Portion of Derivative Liability		2,610		5,540
Current Portion of Payable to Member		6,907		6,586
Payable to Affiliate		—		1,198
Accrued Interest		5,310		5,585

Total Current Liabilities		174,679		173,682


Long-Term Liabilities:
Long-Term Debt		1,667,210		1,783,974
Derivative Liability		2,868		5,922
Payable to Member		76,418		81,559
Regulatory Liability – Overcollateralization		4,823		4,185

Total Long-Term Liabilities		1,751,319		1,875,640

TOTAL LIABILITIES		1,925,998		2,049,322


MEMBER’S EQUITY
Contributed Capital		12,625		12,625
Retained Earnings		1,139		671

Total Member’s Equity		13,764		13,296

TOTAL LIABILITIES AND MEMBER’S EQUITY	$	1,939,762	$	2,062,618

See Notes to Condensed Financial Statements.

PSE&G TRANSITION FUNDING LLC
CONDENSED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)


	For the Nine Months Ended September 30,

	2006			2005


CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	468		$	271
Adjustments to Reconcile Net Income to Net Cash
Flows from Operating Activities:
Amortization of Bondable Transition Property		114,590			118,336
Amortization of Deferred Issuance Costs		6,770			7,253
Net Changes in Certain Current Assets and Liabilities:
Receivable from Member		(7,053	)		(14,280	)
Payable to Affiliate		(1,198	)		—
Accrued Interest		(275	)		(280	)
Net Increase in Overcollateralization		638			638

Net Cash Provided By Operating Activities		113,940			111,938


CASH FLOWS FROM INVESTING ACTIVITIES
Restricted Cash		3,033			(1,922	)

Net Cash Provided By (Used In) Investing Activities		3,033			(1,922	)


CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of Long-Term Debt		(111,685	)		(105,224	)
Repayment of Payable to Member		(4,820	)		(4,521	)
Cash Dividends Paid		—			(162	)

Net Cash Used In Financing Activities		(116,505	)		(109,907	)

Increase in Cash and Cash Equivalents		468			109
Cash and Cash Equivalents at Beginning of Period		671			435

Cash and Cash Equivalents at End of Period	$	1,139		$	544


Interest Paid	$	97,797		$	104,727

See Notes to Condensed Financial Statements.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Organization and Basis of Presentation

Organization

Unless the context otherwise indicates, all references to “Transition Funding,” “we,” “us” or “our” herein mean PSE&G Transition Funding LLC, a Delaware limited liability company located at 80 Park Plaza, Newark, New Jersey 07102.

We were formed under the laws of the State of Delaware on July 21, 1999 and operate pursuant to a limited liability company agreement with Public Service Electric and Gas Company (PSE&G) as our sole member. PSE&G is an operating electric and gas utility and is a wholly-owned subsidiary of Public Service Enterprise Group Incorporated (PSEG). We were organized for the sole purpose of purchasing and owning bondable transition property (BTP) of PSE&G, issuing transition bonds (Bonds), pledging our interest in BTP and other collateral to a debt/security trustee (Trustee) to collateralize the Bonds, and performing activities that are necessary, suitable or convenient to accomplish these purposes.

BTP represents the irrevocable right of PSE&G, or its successor or assignee, to collect a non-bypassable transition bond charge (TBC) from retail electric customers pursuant to a Final Order in PSE&G’s rate unbundling and restructuring proceedings (Final Order) and a bondable stranded cost rate order (Finance Order), which were issued on August 24, 1999 and September 17, 1999, respectively, by the State of New Jersey Board of Public Utilities (BPU) in accordance with the New Jersey Electric Discount and Energy Competition Act enacted in February 1999. These orders are a matter of public record and are available from the BPU. The Finance Order authorizes the TBC to be sufficient to recover $2.525 billion aggregate principal amount of Bonds, plus an amount sufficient to provide for any credit enhancement, to fund any reserves and to pay interest, redemption premiums, if any, servicing fees and other expenses relating to the Bonds.

Our organizational documents require us to operate in a manner so that we should not be consolidated in the bankruptcy estate of PSE&G in the event PSE&G becomes subject to a bankruptcy proceeding.

As previously disclosed, on December 20, 2004, PSEG entered into an agreement and plan of merger with Exelon Corporation providing for a merger of PSEG with and into Exelon. On September 14, 2006, PSEG received from Exelon a formal notice of termination of the Merger under the provisions of the Merger Agreement.

Basis of Presentation

The Condensed Financial Statements included herein have been prepared pursuant to the rules and regulations of the SEC for Quarterly Reports on Form 10-Q. Certain information and note disclosures normally included in financial statements prepared in accordance with Generally Accepted Accounting Principles in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the disclosures are adequate to make the information presented not misleading. These Condensed Financial Statements and Notes to Condensed Financial Statements (Notes) should be read in conjunction with and update and supplement matters discussed in our 2005 Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2006 and June 30, 2006.

The unaudited financial information furnished herein reflects all adjustments, which are, in the opinion of management, necessary to fairly state the results for the interim periods presented. The year-end Condensed Balance Sheet was derived from the audited financial statements included in our 2005 Annual Report on Form 10-K.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Note 2. The Bonds

On January 31, 2001, we issued $2.525 billion of Bonds in eight classes with maturities ranging from one year to fifteen years. The net proceeds of the issuance were remitted to PSE&G as consideration for the property right in the TBC.

Under applicable law, the Bonds are not an obligation of PSE&G or secured by the assets of PSE&G, but rather the Bonds are only recourse to us and are collateralized on a pro rata basis by the BTP and our equity and assets. TBC collections are deposited at least monthly by PSE&G with the Trustee and are used to pay our expenses, to pay our debt service on the Bonds and to fund any credit enhancement for the Bonds. We have also pledged the capital contributed by PSE&G to secure the debt service requirements of the Bonds. The debt service requirements include an overcollateralization subaccount, a capital subaccount and a reserve subaccount which are available to bond holders. Any amounts collateralizing the Bonds will be returned to PSE&G upon payment of the Bonds.

The significant terms of the Bonds issued by Transition Funding, and the amounts outstanding, as of September 30, 2006 are as follows:


	Initial Principal Balance		Interest Rate			Payments Made On Bonds Through September 30, 2006		Current Portion Outstanding		Noncurrent Portion Outstanding		Final/ Expected Payment Date	Final Maturity Date

Class A-1	$	105,249,914		5.46	%	$	105,249,914	$	—	$	—	6/17/02	—
Class A-2		368,980,380		5.74	%		368,980,380		—		—	3/15/05	—
Class A-3		182,621,909		5.98	%		182,621,909		—		—	6/15/06	—
Class A-4		496,606,425	LIBOR + 0.30%				41,085,464		159,851,845		295,669,116	6/15/09	6/15/11
Class A-5		328,032,965		6.45	%		—		—		328,032,965	3/15/11	3/15/13
Class A-6		453,559,632		6.61	%		—		—		453,559,632	6/15/13	6/15/15
Class A-7		219,688,870		6.75	%		—		—		219,688,870	6/15/14	6/15/16
Class A-8		370,259,905		6.89	%		—		—		370,259,905	12/15/15	12/15/17

Total	$	2,525,000,000				$	697,937,667	$	159,851,845	$	1,667,210,488

We have entered into an interest rate swap on our sole class of floating rate Bonds (Class A-4). The interest rate swap effectively converts the existing floating rate debt into fixed rate borrowings at 6.2875%. The interest rate swap is indexed to the three-month LIBOR rate. The fair value of the interest rate swap was approximately $(5) million as of September 30, 2006 and $(11) million as of December 31, 2005 and was recorded as a derivative liability, with an offsetting amount recorded as a regulatory asset on the Condensed Balance Sheet. The fair value of this swap will vary over time as a result of changes in market conditions. This amount is deferred and is expected to be recovered from PSE&G customers.

We incurred approximately $230 million in issuance costs in connection with the securitization transaction, including $201 million of costs of a hedging arrangement as permitted by the Finance Order. Of this amount, $125 million was included with the BTP, with the balance in deferred issuance costs. Costs in excess of the $125 million of transaction costs provided for in the Finance Order were paid by PSE&G and are being recovered on a subordinated basis by us through the TBC and remitted to PSE&G with interest at a rate of 6.48%.

Note 3. Significant Agreements and Related Party Transactions

Under the servicing agreement entered into by PSE&G and us, concurrently with the issuance of the first Series of Bonds, PSE&G, as servicer, is required to manage and administer our BTP and to collect the TBC on our behalf. Under the Finance Order, PSE&G withholds from the TBC collections an annual servicing fee equal to 0.05% of the initial balance of Bonds issued. In addition we pay miscellaneous operating expenses to PSE&G up to $100 thousand per quarter, administration fees up to $31 thousand per quarter and trustee fees up to $4 thousand per quarter. Servicing and administrative fees paid to PSE&G for each of the quarters ended September 30, 2006 and 2005 were

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

approximately $395 thousand and $366 thousand, respectively. Servicing and administrative fees paid to PSE&G for each of the nine months ended September 30, 2006 and 2005 were approximately $1,207 thousand and $1,092 thousand, respectively.

As of September 30, 2006 and December 31, 2005, we had a receivable from our sole member, PSE&G, of approximately $66 million and $59 million, respectively, relating to TBC billings. As of September 30, 2006 and December 31, 2005, our payable to PSE&G was approximately $83 million and $88 million, respectively, which primarily relates to the costs in excess of the $125 million of transaction costs provided for in the Finance Order that were paid by PSE&G and billed to us. Interest Expense relating to this payable to PSE&G for each of the quarters ended September 30, 2006 and 2005 was approximately $1 million. Interest Expense relating to this payable to PSE&G for each of the nine months ended September 30, 2006 and 2005 was approximately $4 million. As of December 31, 2005, we had a payable of approximately $1.2 million for funds deposited with us on behalf of our affiliate, PSE&G Transition Funding II LLC, which was paid during the first quarter of 2006.

In addition to the payments above, interest earned on funds in the Capital Subaccount is periodically dividended to PSE&G. During the nine months ended September 30, 2005, we paid dividends to PSE&G of approximately $162 thousand.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Following are the significant changes in or additions to information reported in our 2005 Annual Report on Form 10–K affecting the financial condition and the results of our operations. This discussion refers to our Condensed Financial Statements (Statements) and related Notes to Condensed Financial Statements (Notes) and should be read in conjunction with such Statements and Notes. The following analysis of the financial condition and our results of operations is in an abbreviated format pursuant to General Instruction H of Form 10-Q.

On January 31, 2001, we issued $2.525 billion of transition bonds in eight classes with maturities ranging from one year to fifteen years. The net proceeds of the issuance were utilized to acquire Public Service Electric and Gas Company’s (PSE&G) property right in the BGS transition bond charge (TBC). We use collections of the TBC to make scheduled principal and interest payments on the transition bonds and to cover any additional administrative costs.

RESULTS OF OPERATIONS

Operating Revenues

TBC revenues decreased $9 million or 10% and $12 million or 5% for the quarter and nine months ended September 30, 2006, respectively, as compared to the same periods in 2005, primarily due to KWh sales which declined 6% for the quarter and 2% for the nine months ended, decreasing revenues by approximately $7 million in each period. In addition there was a decline in the TBC rate as a result of the annual true-up approved by the State of New Jersey Board of Public Utilities (BPU), the TBC (exclusive of sales and use tax) decreased to 0.6586 cents per Kilowatt-hour (kWh) as compared to 0.6723 cents per kWh charged in 2005. The rate change accounted for a reduction of $2 million and $5 million for the quarter and nine months ended, respectively. Any increases or decreases in the TBC rate is designed to maintain the Capital Subaccount and the Overcollateralization account at appropriate levels and have adequate funds to meet our scheduled repayments of the deferred issuance costs to PSE&G, as servicer of the Bonds.

Operating Expenses

Amortization of Bondable Transition Property (BTP)

As a regulated entity, our amortization expense fluctuates with changes in revenue and interest expense. Amortization of BTP decreased approximately $7 million or 12% and $4 million or 3% for the quarter and nine months ended September 30, 2006, respectively, as compared to the same period in 2005, due to decreases in Interest Expense offset by decreases in Operating Revenues. We defer any over or under collection of expense to match against future revenues.

Servicing and Administrative Fees

PSE&G withholds from the TBC collections an annual servicing fee equal to 0.05% of the initial balance of the Bonds issued and charges an additional fee for various administrative costs. Servicing and Administrative Fees increased approximately $29 thousand or 8% and $115 thousand or 11% for the quarter and nine months ended September 30, 2006, respectively, as compared to the same periods in 2005, due to increases in administrative expenses billed to us by the Servicer, PSE&G.

Interest Income

Interest Income increased approximately $305 thousand and $984 thousand for the quarter and nine months ended September 30, 2006, respectively, as compared to the same period in 2005 primarily due to higher interest rates in 2006. The average return on investments increased to approximately 5.0% for the nine months ended September 30, 2006 compared to approximately 3.0% for the nine months ended September 30, 2005.

Interest Expense

Interest expense decreased approximately $3 million or 7% and $7 million or 7% for the quarter and nine months ended September 30, 2006, respectively, as compared to the same period in 2005 due primarily to a reduction in the total amount of debt outstanding.

LIQUIDITY AND CAPITAL RESOURCES

The principal amount of the Bonds, interest, fees and funding of the Overcollateralization account are being recovered through the TBC payable by retail customers of electricity within PSE&G’s service territory who receive electric delivery service from PSE&G. As part of PSE&G’s responsibility as servicer under the Servicing Agreement, PSE&G remits the TBC collections to the Trustee to make scheduled payments on the Bonds.

During 2006, payments of bond principal, interest, intercompany payables and all related expenses were made by the Trustee on March 15, 2006, June 15, 2006 and September 15, 2006, totaling approximately $72 million, $69 million and $75 million, respectively, including funding of the Capital Subaccount and the Overcollateralization account to required levels.

ITEM 3. QUALITATIVE AND QUANTITATIVE
DISCLOSURES ABOUT MARKET RISK

There were no material changes from the disclosures in the Annual Report on Form 10-K for the year ended December 31, 2005 or the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2006 and June 30, 2006.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We have established and maintain disclosure controls and procedures which are designed to provide reasonable assurance that material information is made known to the Chief Executive Officer and Chief Financial Officer by others within the entity. We have established a disclosure committee which is made up of several key management employees and which reports directly to the Chief Financial Officer and Chief Executive Officer. The committee monitors and evaluates the effectiveness of the disclosure controls and procedures as of September 30, 2006 and, based on this evaluation, has concluded that the disclosure controls and procedures were effective in providing reasonable assurance during the period covered in this quarterly report.

Internal Controls

There have been no changes in our internal controls over financial reporting for the quarter ended September 30, 2006, that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 6. EXHIBITS

A listing of exhibits being filed with this document is as follows:


Exhibit Number		Document

31		Certification by Robert E. Busch, Chief Executive Officer and Chief Financial Officer of PSE&G Transition Funding LLC Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934

32		Certification by Robert E. Busch, Chief Executive Officer and Chief Financial Officer of PSE&G Transition Funding LLC Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	PSE&G TRANSITION FUNDING LLC
	(Registrant)

	By:	/s/ Patricia A. Rado

		Patricia A. Rado
		Controller
		(Principal Accounting Officer)

Date: November 13, 2006

PSE&G TRANSITION FUNDING LLC 10-Q