Google posted an official announced on this last night saying:
Public Service Search is a service that enables non-profit, university, and government web sites to provide search functionality to their visitors without serving ads. While we've stopped accepting new Public Service Search accounts, if you want to add the functionality of this service to your site, we encourage you to check out the Google Custom Search Engine. Note that if you already have a Public Service Search account, you'll be able to continue offering search results on your site.
They are hoping that new non-profits and organizations will use the Google CSE instead. And only non-profit, university, and government sites can turn off ads from within their custom search engine.
FYI - we have our own Google CSE enabling you to search the search marking forums - and some people really love it. Yes, the ads are on because we are not a non-profit, university, and government site.
Forum discussion at WebmasterWorld.