File No. 70-9793
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POS AMC
Amendment No. 10
(Post-Effective Amendment No. 7)
to
FORM U-l
APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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FIRSTENERGY CORP.
FIRSTENERGY SERVICE COMPANY
OHIO EDISON COMPANY
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
THE TOLEDO EDISON COMPANY
PENNSYLVANIA POWER COMPANY
JERSEY CENTRAL POWER & LIGHT COMPANY
PENNSYLVANIA ELECTRIC COMPANY
METROPOLITAN EDISON COMPANY
76 South Main Street
Akron, Ohio 44308
(Names of companies filing this statement and address of principal
executive office)
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FirstEnergy Corp.
(Name of top registered holding company parent of applicant)
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Leila L. Vespoli, Douglas E. Davidson,
Senior Vice President and General Esq.
Counsel Thelen Reid & Priest LLP
FirstEnergy Corp. 40 West 57th Street
76 South Main Street New York, New York 10019
Akron, Ohio 44308
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(Names and addresses of agents for service)
FirstEnergy Corp., FirstEnergy Service Company, Ohio Edison Company, The
Cleveland Electric Illuminsting Company, The Toledo Edison Company and
Pennsylvania Power Company, Jersey Central Power & Light Company, Metropolitan
Edison Company, Pennsylvania Electric Company (collectively "Applicants") hereby
amend in its entirety Amendment No. 9 (Post-Effective Amendment No. 6) to Form
U-1 filed by FirstEnergy Corp., FirstEnergy Service Company and GPU Service,
Inc. ("GPU Service") in docket No. 70-9793 on May 29, 2003 as follows:
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTIONS.
A. Background. By Order dated October 29, 2001 in this proceeding
(Holding Co. Act Release No. 27459) (the "Merger Order"), as supplemented by
orders dated November 8, 2001 (Holding Company Act Release No. 27483) and
December 23, 2002 (Holding Company Act Release No. 27628), the Commission
authorized the merger between FirstEnergy Corp. ("FirstEnergy"), an Ohio
corporation, and GPU, Inc. ("GPU"), a Pennsylvania corporation. The merger
became effective on November 7, 2001, with FirstEnergy as the surviving entity,
and FirstEnergy registered under the Act as a holding company on the same day.
As a result of the merger, FirstEnergy directly or indirectly owns all of the
outstanding common stock of ten electric utility subsidiaries, Ohio Edison
Company ("Ohio Edison"), The Cleveland Electric Illuminating Company ("Cleveland
Electric"), The Toledo Edison Company ("Toledo Edison"), American Transmission
Systems, Incorporated, Jersey Central Power & Light Company ("JCP&L"),
Pennsylvania Electric Company ("Penelec"), Metropolitan Edison Company
("Met-Ed"), Pennsylvania Power Company ("Penn Power"), York Haven Power Company,
and The Waverly Electric Power & Light Company, which together provide service
to approximately 4,300,000 retail and wholesale electric customers in a 37,200
square-mile area in Ohio, New Jersey, New York and Pennsylvania; and one gas
utility subsidiary, Northeast Ohio Natural Gas Corp. ("Northeast"), which
provides gas distribution and transportation service to approximately 5,000
customers in central and northeast Ohio. FirstEnergy's electric and gas utility
subsidiaries are referred to herein collectively as the "Utility Subsidiaries."
FirstEnergy also directly owns all of the issued and outstanding common
stock of FirstEnergy Service Company ("ServeCo"), an Ohio corporation, which was
organized in 2001 in order to become a new service company subsidiary of
FirstEnergy. On June 1, 2003, GPU Service, Inc. ("GPU Service"), a Pennsylvania
corporation, which was formerly a direct service company subsidiary of GPU, and
was, until then, a direct subsidiary of FirstEnergy, was merged into ServeCo.
FirstEnergy also directly or indirectly holds investments in numerous
non-utility subsidiaries that are engaged in a variety of energy-related,
exempt, or otherwise functionally related non-utility businesses (collectively,
the "Non-Utility Subsidiaries"), including FirstEnergy Generation Corp.
("GenCo") and FirstEnergy Nuclear Operating Company ("FENOC"). Reference is made
to Appendix A to the Merger Order for a description of these Non-Utility
Subsidiaries. The Utility and Non-Utility Subsidiaries of FirstEnergy are
collectively referred to herein as the "Subsidiaries."
Under the Merger Order, the Commission granted FirstEnergy a temporary
exemption under its rules in order to enable FirstEnergy to continue to provide
1
to the pre-merger Subsidiaries of FirstEnergy certain common corporate
services,1 until such time as all of the service functions performed by
FirstEnergy and GPU Service have been consolidated in ServeCo.2 The Merger Order
specified that ServeCo would begin at least minimal operations within 90 days
following closing of the merger, and that all service functions of FirstEnergy
and GPU Service would be transferred to ServeCo not later than February 1, 2003.
Employees of FirstEnergy were transferred to ServeCo by January 1, 2002 and
FirstEnergy no longer has any employees and no longer provides any services.
Through May 31, 2003, GPU Service continued to use the allocation methods and
policies and procedures GPU Service ("GPU Methods") used prior to the Merger. By
Supplemental Order dated January 31, 2003 (Holding Company Act Release No.
27647), the Commission authorized an extension of time until June 1, 2003 for
full compliance of ServeCo's activities in order to coincide with FirstEnergy's
implementation of the SAP Enterprise IT Solution project.3 On June 1, 2003, GPU
Service was merged into ServeCo. By Supplemental Order dated June 2, 2003
(Holding Company Act Release No. 27682) (the "June 2 Order"), the Commission
granted an additional one month extension to June 30, 2003, authorizing the
FirstEnergy System to continue its service company activities. Since June 1,
2003, ServeCo has been functioning as the FirstEnergy System service company in
accordance with the arrangements described herein.
ServeCo's authorized capitalization consists of 850 shares of common
stock with no par value, of which one (1) share is issued and outstanding and
held by FirstEnergy. ServeCo will derive substantially all of its needs for
additional working capital from borrowings under FirstEnergy's non-utility money
pool (as authorized in the Merger Order) and/or additional equity investments by
FirstEnergy pursuant to Rule 45(b)(4) or Rule 52(b), as applicable.
B. Summary of Requested Action. Filed herewith as Exhibit N-7 is the
proposed form of Service Agreement, including cost allocation methods, which
ServeCo proposes to enter into with FirstEnergy and each Subsidiary that
requests services. In addition, FirstEnergy requests authorization, through
August 1, 2006, for a separate Service Agreement in the form filed herewith as
Exhibit N-8 among certain of its Ohio Utility Subsidiaries and Penn Power which
will enable these Utility Subsidiaries to render certain services to each other,
all as further described below. Exhibit N-9 is ServeCo's Policies and Procedures
--------------------
1 These services include: energy supply management of the bulk power and
natural gas supply, fuel procurement, coordination of gas and electric systems,
maintenance, construction and engineering work; customer billing; materials
management; facilities management; human resources; finance; accounting;
internal auditing; information systems; corporate planning and research; public
affairs; legal; environmental matters; and executive services.
2 The Merger Order states that FirstEnergy will file a separate application
with the Commission on or before September 1, 2002 (extended upon request to the
Staff to October 15, 2002) to seek authorization for ServeCo to consolidate
service company functions now performed by FirstEnergy and GPU Service,
including a form of the proposed service agreement, policies and procedures and
cost allocation methods to be used by ServeCo.
3 SAP is an Enterprise Resource Planning(ERP) system that links and coordinates
business processes. It will replace existing systems in Human Resources,
Finance, Supply Chain, Distribution and Fossil/Nuclear areas, and will be used
to manage work, share information, track customer accounts, and meet other
business needs.
2
Manual (the "ServeCo Manual"). By June 1, 2003, all personnel of GPU Service
were transferred to and became employees of either ServeCo., or in the case of
certain GPU Service employees who provide service only to one Utility
Subsidiary, to the appropriate Utility Subsidiary. Upon full implementation of
this reorganization, it is expected that ServeCo will have approximately 3,580
employees in multiple locations organized in thirty departments. Applicants now
seek an order (1) authorizing the consolidation of FirstEnergy's service company
functions in ServeCo, (2) approving ServeCo's policies and procedures, (3)
approving the Service Agreement, the form of which is attached hereto as Exhibit
N-7 and (4) approving, through August 1, 2006, the Utility-to-Utility Service
Agreement, the form of which is attached hereto as Exhibit N-8. Because the New
Jersey Board of Public Utilities ("NJBPU") has not yet approved JCP&L's petition
seeking authority for it to enter into the Service Agreement, Applicants request
that the Commission reserve jurisdiction with respect to JCP&L's participation
thereunder and extend the interim authority granted in the June 2 Order with
respect to JCP&L until the NJBPU approves JCP&L's participation in the Service
Agreement.
C. Services to be rendered by ServeCo. Following the proposed
consolidation of service functions in ServeCo, ServeCo will enter into a Service
Agreement with FirstEnergy, each of the Utility Subsidiaries, and each other
associate company in the FirstEnergy system that requests services from ServeCo.
The Service Agreement will be in the form attached hereto as Exhibit N-7.
ServeCo will provide its associate companies with services in the following
departments, which are described in fuller detail in Exhibit A to the Service
Agreement: administrative services, business development, call center, claims,
communications, controllers, corporate and shareholder services, corporate
affairs and community involvement, credit management, energy delivery and
customer service, economic development, enterprise risk management, FirstEnergy
technologies, technology and support services, governmental affairs, human
resources, industrial relations, information technology, insurance services,
internal audit, investment management, investor relations, legal, performance
planning, rates and regulatory affairs, real estate, supply chain, transmission
& distribution technical services, treasury and workforce development.
Services rendered by ServeCo will be rendered at cost in accordance with
Rules 90 and 91. The costs of services provided by ServeCo will be directly
assigned, distributed or allocated by work order numbers (or equivalent cost
collectors, collectively, "workorders")4 in accordance with the SEC's Uniform
System of Accounts for Mutual Service Companies and Subsidiary Service
Companies. The primary basis for charges to associate companies is the direct
charge method. Other costs that are not directly assigned, including overheads
and other general administrative costs which will include costs of operating
--------------------
4 There are four cost collectors which are equivalent to work orders: "orders",
"cost centers", "networks" and "work breakdown structures" ("WBSs"). Orders
include work orders, sales orders, internal orders and service orders. Each
employee will be assigned to a cost center which will be responsible for
collecting routine costs. WBSs are analogous to work orders and can be used for
projects exceeding certain dollar thresholds or durations, or which involve
investing in capital assets. To ensure proper recordkeeping, each employee will
be required to charge time against a designated order, network, WBS or cost
center number.
3
ServeCo as a separate corporate entity, will be allocated to associate companies
using one or a combination of the methods of allocation that are described in
Exhibit "A" to the Service Agreement.
ServeCo will maintain its accounts, cost-accounting procedures and other
records in accordance with the requirements of the Commission's Uniform System
of Accounts for Mutual Service Companies and Subsidiary Service Companies.
ServeCo will file an annual report on Form U-13-60 in accordance with Rule 94.
As provided in the Merger Order, and for so long as FirstEnergy remains
a "registered holding company" under PUHCA, no change in the organization of
ServeCo, the type and character of the companies to be serviced, the methods of
allocating costs to associate companies, or in the scope or character of the
services to be rendered subject to Section 13 of the Act, or any rule,
regulation or order thereunder, shall be made unless and until ServeCo shall
first have given the Commission written notice of the proposed change not less
than 60 days prior to the proposed effectiveness of any such change. If, upon
the receipt of any such notice, the Commission shall notify ServeCo within the
60-day period that a question exists as to whether the proposed change is
consistent with the provisions of Section 13 of the Act, or of any rule,
regulation or order thereunder, then the proposed change shall not become
effective unless and until the ServeCo shall have filed with the Commission an
appropriate declaration regarding such proposed change and the Commission shall
have permitted such declaration to become effective.
1. Cost Allocation Methodology
ServeCo categorizes costs of services provided to affiliates into three
primary categories. Directly Assignable costs represents expenses incurred for
activities and services exclusively for the benefit of one affiliate, and in
many respects, are captured through individual department workorder systems for
specific project billing purposes. Directly Attributable costs represent
expenses incurred for activities and services that benefit more than one
affiliate and which can be assigned using direct measures of costs causation.
The majority of costs incurred by ServeCo fall into the above two categories.
By the very nature of a service corporation, a portion of ServeCo's
expenses will not be directly related to specific current operations or
functions of individual Subsidiaries. Nor are these costs amenable to many of
the cost accounting procedures, which frequently concentrate upon identification
of variable, fixed and semi-fixed costs. Accordingly, it is necessary to develop
formulae that recognize the overall contribution of ServeCo to both the current
and future operations of the FirstEnergy system. After all direct charges have
been made, the remaining costs (Indirect Costs) in each department in ServeCo
must be fairly and equitably allocated among FirstEnergy and the Subsidiaries.
As a registered public utility holding company, FirstEnergy's primary
business is that of owning and operating electric public utilities. As the
electric industry moves through restructuring to permit competition in business
areas once the sole province of historical monopolies, FirstEnergy has begun to
enter competitive energy and energy services businesses to the extent permitted
by state and federal restrictions. Codes of conduct govern the relationship
4
between the Utility Subsidiaries and their affiliated competitive businesses,
namely, the Non-Utility Subsidiaries. As a public utility holding company,
FirstEnergy has invested capital for infrastructure over many years in the
Utility Subsidiaries so that they may develop the support services necessary to
serve their customers. The costs associated with these infrastructure
investments (e.g., accounting and human resources systems, telephone circuits
and other communications equipment, mainframe CPU, printers and data storage
development tools and client servers and storage not dedicated to the
competitive unit) were originally incurred, and would continue to be incurred,
regardless of whether or not the Non-Utility Subsidiaries were part of
FirstEnergy. These Indirect Costs will be allocated among all of FirstEnergy's
Subsidiaries using a multi-variable formula, which gives weight to more than one
measure of the size of the various Subsidiaries' operations within the
FirstEnergy system, and is particularly relevant under these circumstances. This
formula is not intended to effect, and will not result in, the allocation of
these Indirect Costs exclusively to the Utility Subsidiaries.
In accordance with Rule 90(b), ServeCo will direct charge its associate
companies for all costs of products and services where possible. The costs of
products and services provided by ServeCo that cannot be charged directly to the
Subsidiary or Subsidiaries receiving the product or service will be allocated
among all Subsidiaries (and FirstEnergy, where applicable) by utilizing one of
the methods described below. The key determinants in assigning the allocation
methods were the business operations of the Subsidiary or Subsidiaries receiving
the benefit of the product and service, and the associated cost driver for each
product and service. FirstEnergy has developed eighteen methods of allocation
for charging a share of the Indirect Costs to the Subsidiaries benefiting from
the particular product or service being provided:
a. "Multiple Factor - All" - For the Indirect Costs for products
or services benefiting the entire FirstEnergy system, FirstEnergy and
all Subsidiaries will bear a fair and equitable portion of such costs.
FirstEnergy will bear 5% of these Indirect Allocations. The remaining
Indirect Allocations will be allocated among the Utility Subsidiaries
and the Non-Utility Subsidiaries benefiting from the services provided,
based on FirstEnergy's equity investment in the respective groups. A
subsequent allocation step will then occur. Among the Utility
Subsidiaries, allocations will be based upon the "Multiple Factor -
Utility" method. Among the Non-Utility Subsidiaries, allocations will be
based upon the "Multiple Factor - Non-Utility" method. This allocation
method will be used by the following ServeCo departments: Executive,
Communications, Controllers, Credit Management, Claims, Enterprise Risk
Management, Internal Audit, Investment Management, Investor Relations,
Real Estate, Treasury, Legal and Performance Planning.
b. "Multiple Factor - Utility" - For the Indirect Costs for a
product or service solely benefiting one or more of the Utility
Subsidiaries, each such Utility Subsidiary so benefiting will be charged
a portion of the Indirect Costs based on the sum of the weighted
averages of the following factors:
1. Gross transmission and/or distribution plant
2. Operating and maintenance expense excluding purchase
power and fuel costs
5
3. Transmission and/or distribution revenues, excluding
transactions with affiliates
These three factors have been determined to be the most appropriate for
the Utility Subsidiaries in the FirstEnergy system. Each factor will be weighted
equally so that no one facet of the electric utility operations inordinately
influences the distribution of Indirect Costs. This allocation method will be
used in the following ServeCo departments: Administrative Services, Corporate,
Controllers, Customer Service, Economic Development, Internal Audit,
Transmission and Distribution Technical Services, Workforce Development,
Communications, Corporate Affairs and Community Involvement, FirstEnergy
Technologies, Investor Relations, Rates and Regulatory Affairs, Real Estate and
Legal.
c. "Multiple Factor - Non-Utility" - For the Indirect Costs for
products or services solely benefiting the Non-Utility Subsidiaries,
each Non-Utility Subsidiary so benefiting receiving the product or
service will be charged a proportion of the Indirect Costs based upon
the total assets of each Non-Utility Subsidiary, including the
generating assets under operating leases from the Utility Subsidiaries.
This allocation method will be used in the following ServeCo
departments: Communications, Investment Management and Legal.
d. "Multiple Factor - Utility and Non-Utility" - For the
Indirect Costs for a product or service benefiting one or more of the
Utility and Non-Utility Subsidiaries, each such Subsidiary so benefiting
is first assigned a distribution ratio that is in proportion to the
Indirect Costs based on FirstEnergy's equity investment in such
Subsidiaries. Following this distribution, a subsequent allocation step
will then occur. Among the Utility Subsidiaries, allocations will be
based upon the "Multiple Factor-Utility." Among the Non-Utility
Subsidiaries, allocations will be based upon "Multiple Factor -
Non-Utility". This allocation method will be used in the following
ServeCo departments: Administrative Services, Call Center, FirstEnergy
Technologies, Technology & Support Services, Information Technology,
Rates and Regulatory Affairs, Supply Chain, Controllers, Credit
Management, Insurance Services, Treasury and Legal.
e. "Direct Charge Ratio" - The ratio of direct charges for a
particular product or service to an individual Subsidiary as a
percentage of the total direct charges for a particular product or
service to all Subsidiaries benefiting from such services. Indirect
Costs are then allocated to each Subsidiary based on the calculated
ratios. This allocation method will be used by Information Technology
Department of ServeCo.
f. "Number of Customers Ratio" - For costs of products and
services driven by the number of Utility customers, the allocation
method that will be used will be the number of Utility customers for the
respective Utility Subsidiary receiving the product or service divided
by the total number of Utility customers. This allocation method will be
used by the Customer Service Department of ServeCo.
6
g. "Number of Shopping Customers Ratio" - A "shopping customer"
is defined as a Utility customer who has selected a competitive electric
generation supplier. For costs of products and services driven by the
number of shopping customers, the allocation method that will be used
will be the number of shopping customers for the respective Utility
Subsidiary receiving the product or service divided by the total number
of shopping customers. This allocation method will be used by the
Customer Service Department of ServeCo.
h. "Number of Participating Employees - General" - For costs of
products and services driven by all participating employees within the
FirstEnergy system, the allocation method that will be used will be the
number of participating employees for the respective Subsidiary
receiving the product or service divided by the total number of
participating employees. This allocation method will be used in the
following ServeCo departments: Workforce Development, Corporate Affairs
and Community Involvement, Human Resources and Industrial Relations.
i. "Number of Participating Employees - Utility and Non-Utility"
- For costs of products and services driven by participating employees
who work for the Utility and Non-Utility Subsidiaries, the Subsidiaries
receiving the product or service are first assigned a distribution ratio
that is in proportion to the Indirect Costs based on FirstEnergy's
equity investment in the respective groups. Costs are further allocated
by using the number of participating employees for the respective
Subsidiary divided by the total number of participating FirstEnergy
employees. This allocation method will be used in the following ServeCo
departments: Communications, Human Resources, Investment Management and
Legal.
j. "Gigabytes Used Ratio" - Number of gigabytes utilized by a
Subsidiary receiving the product or service divided by the total number
of gigabytes used by the FirstEnergy system companies applicable to that
respective product or service. This allocation method will be used by
the Information Technology Department of ServeCo.
k. "Number of Computer Workstations Ratio" - Number of computer
workstations utilized by a Subsidiary receiving the product or service
divided by the total number of computer workstations in use by the
FirstEnergy system companies applicable to that respective product or
service. This allocation method will be used by the Information
Technology Department of ServeCo.
l. "Number of Billing Inserts Ratio" - Number of billing inserts
performed for a Subsidiary receiving the product or service divided by
the total number of billing inserts performed for the FirstEnergy system
companies applicable to that respective product or service. This
allocation method will be used by the Information Technology Department
of ServeCo.
m. "Number of Invoices Ratio" - Number of invoices processed for
a Subsidiary receiving the product or service divided by the total
number of invoices processed for the FirstEnergy system companies
applicable to that respective product or service. This allocation method
7
is not currently in use but will be used by the Controller's Department
of ServeCo once some historical information is available within
FirstEnergy's automated system.
n. "Number of Payments Ratio" - Number of monthly payments
processed for a Subsidiary divided by the total monthly number of
payments processed for the FirstEnergy system companies applicable to
that respective product or service. This allocation method will be used
by the Customer Service Department of ServeCo.
o. "Daily Print Volume" - Average daily print volume performed
for a Subsidiary receiving the service divided by the total average
daily print volume performed for the entire FirstEnergy system. This
allocation method will be used by the Information Technology Department
of ServeCo.
p. "Number of Intel Servers" - Number of Intel servers utilized
by a Subsidiary receiving the product or service divided by the total
number of Intel servers utilized by the FirstEnergy system. This
allocation method will be used by the Information Technology Department
of ServeCo.
q. "Application Development Ratio" - Number of application
development hours budgeted for a Subsidiary receiving the service
divided by the total number of budgeted application development hours
for the year. This allocation method will be used by the Information
Technology Department of ServeCo.
r. "Server Support Composite" - The average ratio of unix
gigabytes, SAP gigabytes and Intel number of servers for a Subsidiary
receiving the service. This allocation method will be used by the
Information Technology Department of ServeCo.
The operations of, and services performed by, ServeCo will be
essentially the same as those undertaken by GPU Service, except that GPU Service
employees who worked for what was known as the "GPU Operations Division" have
been transferred to the various operating utilities and thus those
"operations-related" services will not be performed by ServeCo, but will be
undertaken at the operating utility level. All other services offered by ServeCo
will be the same as those offered by GPU Service.
2. Internal Audit Procedures
The Internal Audit division ("IA") of FirstEnergy has undertaken a
five-phase audit of ServeCo that is expected to take place over the next three
to five years. Phase I, which has been completed, was a proactive review of
ServeCo's processes, approaches, assessment tables and cost allocation
methodologies. At the completion of this phase of the audit, which was prior to
the SAP implementation, IA concluded that the cost allocation methodologies were
consistent with management intent and followed the guidelines set forth in
Exhibit A to the Service Agreement.
8
Phase II, which is expected to be completed by September 4, 2004, is a
detailed review to ensure that the ServeCo employees are implementing processes
and inputting charges correctly to comply with the Act. This phase is scheduled
to begin in late 2003 or early 2004. The multiple factor allocation formula will
be reviewed to determine if the five percent charged to FirstEnergy is a
reasonable amount so that FirstEnergy is allocated a fair and equitable amount
of ServeCo's charges.
Phase III, which is expected to begin by October 1, 2004, will be a
review of the ServeCo allocation methods, a review and validation of ServeCo's
billing methodologies. Additionally, IA will review ServeCo's budget process
including its cost controls, cost accountability, reports, budget variances and
the role of operating company management in the budgeting process. IA will also
review tax allocations in this phase of the audit.
Phase IV, which is expected to begin by January 1, 2005, will consist of
a review of benchmarking data to determine whether pricing of services is at an
appropriate level and whether the quality of services that are provided is
adequate. Finally, Phase V will be a review of the Service Agreement vis-a-vis
the scope of service described therein and the actual services provided.
The following chart illustrates the organization of ServeCo.
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FIRSTENERGY SERVICE COMPANY
ORGANIZATION CHART
----------------------------------------------------------
| BOARD OF DIRECTORS |
|----------------------------------------------------------|
| CEO, FirstEnergy Service Company |
----------------------------------------------------------|
| Senior Vice President & General Counsel |
|-------------------------------------------------------|
| | Legal Services |
| |-------------------------------------------------|
| | Claims |
|-------------------------------------------------------|
| | Corporate, Real Estate and Administrative |
| | Services |
| |-------------------------------------------------|
| Senior Vice President & Chief Financial Officer |
|-------------------------------------------------------|
| | Controller's Dept. (Accounting, Taxes, Budgets |
| | & Financial Analysis) |
| |-------------------------------------------------|
| | Treasury |
| |-------------------------------------------------|
| | Corporate Risk |
| |-------------------------------------------------|
| | | Credit Management |
| | |--------------------------------------------|
| | | Insurance Services |
| | |--------------------------------------------|
| | | Enterprise Risk Management |
| |-------------------------------------------------|
| | Investor Relations |
| |-------------------------------------------------|
| | Internal Audit |
| |-------------------------------------------------|
| | Rates & Regulatory Affairs |
| |-------------------------------------------------|
| | Investment Management |
| |-------------------------------------------------|
| | Performance Planning |
|-------------------------------------------------------|
| Senior Vice President, Technology & Support Services |
|-------------------------------------------------------|
| Senior Vice President, Corporate Affairs and |
| Community Involvement, Human Resources |
| and Communications |
|-------------------------------------------------------|
| | Corporate Affairs and Community Involvement |
| |-------------------------------------------------|
| | Human Resources |
| |-------------------------------------------------|
| | | Industrial Relations |
| |-------------------------------------------------|
| | Communications |
| |-------------------------------------------------|
|-------------------------------------------------------|
| President & COO, FirstEnergy Service Company |
-------------------------------------------------------|
| FirstEnergy Technologies |
|-------------------------------------------------|
| Energy Delivery & Customer Service |
|-------------------------------------------------|
| | Call Center |
| |--------------------------------------------|
| | Customer Service |
| |--------------------------------------------|
| | Economic Development |
| |--------------------------------------------|
| | Workforce Development |
| |--------------------------------------------|
| | Transmission & Distribution Technical Svc |
|-------------------------------------------------|
| Business Development |
|-------------------------------------------------|
| Governmental Affairs |
|-------------------------------------------------|
| Information Technology |
|-------------------------------------------------|
| Supply Chain |
-------------------------------------------------
10
D. Services to be rendered by certain Utility Subsidiaries to each
other.
FirstEnergy organizes and conducts its Utility Subsidiary operations on
a regional basis.5 These regions operate and are managed as separate business
units. The regional structure focuses on moving accountability and decision
making closer to customers with an emphasis on decentralized operations and
providing cost effective, high-quality service to customers.
Because of this decentralized, regional approach, certain regional
support services (such as Human Resources, Workforce Development and Business
Services) will be accounted for in the appropriate Utility Subsidiary. In the
case of Western Region - Ohio and Eastern Region - Ohio, the employees who must
provide service to more than one legal entity will continue to charge their time
in a fair and equitable manner to all Utility Subsidiaries within that region,
rather than be accounted for in the ServeCo.6 At the current time, it is
expected that less than 70 employees will perform the following types of service
pursuant to this arrangement: Human Resources, Dispatching, Forestry, Claims,
Stores Services, Transformer Shop and Facilities, Supervising and Regional
President Staff, Line Services, Substation Services, Engineering Services,
Walk-In Centers, Customer Service, Credit, Meter Reading, Meter Services, Garage
Services, Facilities Services, Regional Administration, VP Administration,
Customer Support, Line Operations and Line Services. In addition, from time to
time, one Utility Subsidiary may request other services from another Utility
Subsidiary. These services will be provided at cost in accordance with Rules 90
and 91 and billed to the receiving Utility Subsidiary(ies), at cost as set forth
in accordance with a Utility-to-Utility Service Agreement, the form of which is
filed herewith as Exhibit N-8.7 It is expected that most of the services
provided pursuant to the Utility-to-Utility Service Agreement will be direct
--------------------
5 There are nine regions in three states: Western Region - Ohio; Northern Region
- Ohio; Central Region - Ohio; Southern Region - Ohio; Eastern Region- Ohio;
Western Region - Pennsylvania; Eastern Region - Pennsylvania; Northern Region -
New Jersey; and Central Region - New Jersey. Each region has a "Regional
President", as well as a management and support team that reports to the
Regional President. For the most part, each region is entirely within a
particular Utility Subsidiary's service territory. However, two regions -
Western Region - Ohio and Eastern Region - Ohio -- include parts of several
Utility Subsidiaries. Western Region - Ohio, includes all of Toledo Edison and
990 square miles of Ohio Edison's service territory in Sandusky, Ohio. The
Eastern Region - Ohio covers the eastern 2,517 square miles of Ohio Edison, 661
square miles of Cleveland Electric and all 1,112 square miles of Penn Power.
6 Of the approximately 5,500 employees in nine Regions, less than 70 employees
provide the "regional" support services discussed herein. Applicants state that
the total amount charged for services pursuant to these arrangements for the
year 2002 was approximately $3.4 million. This amount is estimated based on
average wages including fringes utilizing the hours estimated by each utility
providing the services. A breakdown of these services in provided in Exhibit
N-10 hereto.
7 The Commission has previously authorized utility companies in a holding
company system to render service to each other. See e.g., Ameren Corporation,
--- --- ------ -----------
Holding Co. Act Release No. 26809 (Dec. 30, 1997); CP&L Energy, Holding Co. Act
-----------
Release No. 27284 (Nov.27, 2000).
11
charged. Other costs not directly assigned will be allocated to the utility
subsidiary benefiting from the service, utilizing a combination of the multiple
factor-utility and the number of customers formula specified in the Agreement.
This will allow the regional management to operate regions as separate units,
and provide the most effective service possible to the customers of the Utility
Subsidiaries. ServeCo will include in each U-13-60 that it files with the
Commission information regarding the services provided under the
Utility-to-Utility Service Agreement with respect to what entities have provided
services, what entities have received services and the type of services
provided.
None of the services provided pursuant to the Utility-to-Utility Service
Agreement are services that would typically be provided by mutual service
companies approved by the Commission in accordance with Rule 88 under the Act.
Indeed, Applicants maintain that it would be problematic if a mutual service
company were to provide such services. These services will not encroach upon, or
be duplicative of, the services provided by ServeCo. No decision-making
functions will be offered pursuant to the Utility-to-Utility Service Agreement.
ITEM 2. FEES, COMMISSIONS AND EXPENSES.
FirstEnergy estimates that the additional fees, commissions and expenses
incurred or to be incurred in connection with the proposed transaction will not
exceed $25,000.
ITEM 3. APPLICABLE STATUTORY PROVISIONS.
-------------------------------
Section 13(b) of the Act and Rule 88 thereunder are applicable to the
proposed transaction. FirstEnergy believes that ServeCo has been organized so as
to comply with Section 13(b) of the Act and the Commission's rules and
regulations thereunder. In this regard, Rule 88 provides that "[a] finding by
the Commission that a subsidiary company of a registered holding company . . .
is so organized and conducted, or to be conducted, as to meet the requirements
of Section 13(b) of the Act with respect to reasonable assurance of efficient
and economical performance of services or construction or sale of goods for the
benefit of associate companies, at cost fairly and equitably allocated among
them (or as permitted by Rule 90), will be made only pursuant to a declaration
filed with the Commission on Form U-13-1, as specified" in the instructions for
that form, by such company or the persons proposing to organize it.
Notwithstanding the foregoing language, the Commission has on several recent
occasions made findings under Section 13(b) based on information set forth in an
Application/Declaration on Form U-1, without requiring the formal filing of a
Form U-13-1. See SCANA Corp., Holding Co. Act Release No. 27133 (Feb. 9, 2000);
--------------
New Century Energies, Holding Co. Act Release No. 26748 (Aug. 1, 1997); CINergy
-------------------- -------
Corp., Holding Co. Act Release No. 26146 (Oct. 21, 1994); UNITIL Corp., Holding
---- -----------
Co. Act Release No. 25524 (April 24, 1992). In this Post-Effective Amendment,
FirstEnergy has submitted substantially the same information for ServeCo as
would have been submitted in a Form U-13-1. Accordingly, it is submitted that it
is appropriate to find that ServeCo is so organized and its business will be so
conducted as to meet the requirements of Section 13(b), and that the filing of a
Form U-13-1 is unnecessary, or, alternatively, that this Post-Effective
Amendment should be deemed to constitute a filing on Form U-13-1 for purposes of
Rule 88.
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The proposed transaction is also subject to the requirements of Rule 54.
Rule 54 provides that in determining whether to approve an application by a
registered holding company which does not relate to any exempt wholesale
generator ("EWG") or "foreign utility company" ("FUCO"), the Commission shall
not consider the effect of the capitalization or earnings of any subsidiary
which is an EWG or a FUCO upon the registered holding company if paragraphs (a),
(b) and (c) of Rule 53 are satisfied.
The proposed transactions are also subject to the requirements of Rules
53 and Rule 54. Under Rule 53(a), the Commission shall not make certain
specified findings under Sections 7 and 12 in connection with a proposal by a
holding company to issue securities for the purpose of acquiring the securities
of or other interest in an EWG, or to guarantee the securities of an EWG, if
each of the conditions in paragraphs (a)(1) through (a)(4) thereof are met,
provided that none of the conditions specified in paragraphs (b)(1) through
(b)(3) of Rule 53 exists. Rule 54 provides that the Commission shall not
consider the effect of the capitalization or earnings of subsidiaries of a
registered holding company that are EWGs or FUCOs in determining whether to
approve other transactions if Rule 53(a), (b) and (c) are satisfied.
FirstEnergy currently meets all of the conditions of Rule 53(a), except
for clause (1). In the Merger Order, the Commission, among other things,
authorized FirstEnergy to invest in EWGs and FUCOs so that FirstEnergy's
"aggregate investment," as defined in Rule 53(a)(1), in EWGs and FUCOs does not
exceed $5 billion, which $5 billion amount is greater than the amount which
would be permitted by clause (1) of Rule 53(a) which, based on FirstEnergy's
consolidated retained earning of $1.84 billion as of March 31, 2003, would be
$920 million. The Merger Order also specifies that this $5 billion amount may
include amounts invested in EWGs and FUCOs by FirstEnergy and GPU at the time of
the Merger Order ("Current Investments") and amounts relating to possible
transfers to EWGs of certain generating facilities owned by certain of
FirstEnergy's operating utilities ("GenCo Investments"). FirstEnergy has made
the commitment that through June 30, 2003, its aggregate investment in EWGs and
FUCOs other than the Current Investments and GenCo Investments ("Other
Investments") will not exceed $1.5 billion (the "Modified Rule 53 Test").
As of March 31, 2003, and on the same basis as set forth in the Merger
Order, FirstEnergy's aggregate investment in EWGs and FUCOs was approximately
$1.31 billion,8 an amount significantly below the $5 billion amount authorized
in the Merger Order. Additionally, as of March 31, 2003, consolidated retained
earnings were $1.84 billion. By way of comparison, FirstEnergy's consolidated
retained earnings as of December 31, 2001 were $1.52 billion.
In any event, even taking into account the capitalization of and
earnings from EWGs and FUCOs in which FirstEnergy currently has an interest,
there would be no basis for the Commission to withhold approval of the
transactions proposed herein. With respect to capitalization, since the date of
the Merger Order, there has been no material adverse impact on FirstEnergy's
consolidated capitalization resulting from FirstEnergy's investments in EWGs and
FUCOs. As of December 31, 2002, FirstEnergy's consolidated capitalization
consisted of 33% common equity, 1.7% cumulative preferred stock, 1.9% subsidiary
- obligated mandatorily redeemable preferred securities, 58.3% long-term debt
--------------------
8 This $1.31 billion amount represents Current Investments only. As of March,
31, 2003, FirstEnergy had no Genco Investments.
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and 5.1% notes payable. As of December 31, 2001, those ratios were as follows:
30.3% common equity, 3.1% cumulative preferred stock, 2.2% subsidiary-obligated
mandatorily redeemable preferred securities, 60.9% long term debt and 3.5% notes
payable. Additionally, the proposed transactions will not have any material
impact on FirstEnergy's capitalization. Further, since the date of the Merger
Order, FirstEnergy's investments in EWGs and FUCOs have contributed positively
to its level of earnings, other than for the negative impact on earnings due to
FirstEnergy's writedowns of its investments in Avon Energy Partners Holdings
("Avon") and GPU Empresa Distribuidora Electrica Regional S.A. ("Emdersa").9
Further, since the date of the Merger Order, and, after taking into
account the effects of the Merger, there has been no material change in
FirstEnergy's level of earnings from EWGs and FUCOs.
The Utility Subsidiaries are financially sound companies as indicated by
their investment grade ratings from the nationally recognized rating agencies
for their senior unsecured debt. The following chart includes a breakdown of the
senior, unsecured credit ratings for those Utility Subsidiaries that have
ratings:
--------------------
9 At the time of the Merger Order, FirstEnergy identified certain former GPU
EWG and FUCO investments for divestiture within one year. Among those identified
were Avon, a holding company for Midlands Electricity plc, an electric
distribution business in the United Kingdom and Emdersa and affiliates, an
electric distribution business in Argentina. In May 2002, FirstEnergy sold 79.9%
of its interest in Avon, and in the fourth quarter of 2002, recorded a $50
million charge ($32.5 million net of tax) to reduce the carrying value of its
remaining 20.1% interest. Additionally, FirstEnergy did not reach a definitive
agreement to sell Emdersa as of December 31, 2002, and therefore, the Emdersa
assets could no longer be treated as "assets pending sale" on the FirstEnergy
consolidated balance sheets. On November 1, 2002, FirstEnergy began
consolidating the results of Emdersa's operations in its financial statements.
In the fourth quarter of 2002, FirstEnergy recorded a one-time, after-tax charge
of $88.8 million (comprised of $104.1 million in currency transaction losses
arising principally from U.S. dollar denominated debt, offset by $15.3 million
of operating income). In addition to the currency transaction losses,
FirstEnergy recognized a currency translation adjustment in other comprehensive
income of $91.5 million as of December 31, 2002. These accounting charges, in
the aggregate, resulted in a $212.8 million decrease in FirstEnergy's
consolidated capitalization of $21.55 billion as of December 31, 2002, which
amount includes short-term borrowings.
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Subsidiary Standard & Poors10 Moody's11 Fitch12
Ohio Edison BBB- Baa2 ---
Cleveland Electric BBB- Baa3 ---
Toledo Edison BBB- Baa3 BB
Penn Power BBB- Baa2 ---
JCP&L BBB --- ---
Met-Ed BBB --- ---
Penelec BBB A2 BBB+
FirstEnergy satisfies all of the other conditions of paragraphs (a) and
(b) of Rule 53. With respect to Rule 53(a)(2), FirstEnergy maintains books and
records in conformity with, and otherwise adheres to, the requirements thereof.
With respect to Rule 53(a)(3), no more than 2% of the employees of FirstEnergy's
domestic public utility companies render services, at any one time, directly or
indirectly, to EWGs or FUCOs in which FirstEnergy directly or indirectly holds
an interest. With respect to Rule 53(a)(4), FirstEnergy will continue to provide
a copy of each application and certificate relating to EWGs and FUCOs and
relevant portions of its Form U5S to each regulator referred to therein, and
will otherwise comply with the requirements thereof concerning the furnishing of
information. With respect to Rule 53(b), none of the circumstances enumerated in
subparagraphs (1), (2) and (3) thereunder have occurred.
ITEM 4. REGULATORY APPROVALS.
--------------------
The New Jersey Board of Public Utilities ("NJBPU") and the Pennsylvania
Pubic Utility Commission ("PPUC") have jurisdiction under their respective state
affiliate interests statutes over the proposed Service Agreement, as it relates
to the Utility Subsidiaries that are subject to regulation by those commissions.
On February 4, 2003, the PPUC approved the Service Agreement. The NJBPU has not,
as yet, issued a final determination with respect to the Service Agreement in
accordance with N.J.S.A. 48:3-7.1. JCP&L and ServeCo intend to act in accordance
with the terms of the Service Agreement effective June 1, 2003, subject to any
subsequent decision by the NJBPU with respect to JCP&L's acting thereunder,
which decision could have a retroactive effect. The NJBPU may, after hearing,
disapprove the Service Agreement if it determines that the Service Agreement is
contrary to the public interest, violates New Jersey or federal law or fixes
price or compensation exceeding the fair price or fair compensation for the
property to be furnished, the work to be done or the services to be rendered. If
the NJBPU disapproves the Service Agreement, then Applicants will file with the
Commission any order issued by the NJBPU and seek any necessary approval of the
Commission. The Commission has approved similar state commission arrangements
with respect to service company authorization. Great Plains Energy Inc., HCAR
No. 27662 (Mar. 31, 2003). No other State commission, and no Federal commission,
other than this Commission has jurisdiction over the proposed transaction.
--------------------
10 Standard & Poor's Rating Services
11 Moody's Investors Service, Inc.
12 Fitch, Inc.
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ITEM 5. PROCEDURE.
---------
FirstEnergy requests that the Commission issue a supplemental order
approving the interim operations proposed herein not later than June 1, 2003. It
is further requested that: (i) there not be a recommended decision by an
Administrative Law Judge or other responsible officer of the Commission, (ii)
the Division of Investment Management be permitted to assist in the preparation
of the Commission's decision and (iii) there be no waiting period between the
issuance of the Commission's order and the date on which it is to become
effective.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS.
(a) Exhibits:
D-12 - Application of JCP&L to NJBPU for Approval of
Service Agreement -- previously filed.
D-13 - NJBPU Order -- to be filed by amendment.
D-14 - Application of Penn Power, Penelec and Met-Ed to
PPUC for Approval of Service.
D-15 - PPUC Order.
F-1.2(a) - Opinion of Gary D. Benz, Esq.
N-7 - Revised Form of Service Agreement (including
Allocation Methods).
N-8 - Utility-to-Utility Service Agreement - previously
filed.
N-9 - Policies and Procedures Manual - Paper filing only.
N-10 - Breakdown of Services Provided in 2002 pursuant to
Utility-to-Utility Arrangement
(b) Financial Statements:
Omitted as not relevant to the proposed transaction.
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS.
---------------------------------------
(a) The proposed transaction does not involve a major Federal action
significantly affecting the quality of the human environment.
(b) No federal agency has prepared or is preparing an environmental
impact statement with respect to the proposed transaction.
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SIGNATURES
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, as amended, the undersigned companies have duly caused this statement
to be signed on their behalves by the undersigned thereunto duly authorized.
FIRSTENERGY CORP.
FIRSTENERGY SERVICE COMPANY
OHIO EDISON COMPANY
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
THE TOLEDO EDISON COMPANY
PENNSYLVANIA POWER COMPANY
JERSEY CENTRAL POWER & LIGHT COMPANY
METROPOLITAN EDISON COMPANY
PENNSYLVANIA ELECTRIC COMPANY
By: /s/Harvey L. Wagner
-----------------------------
Harvey L. Wagner
Vice President and Controller
Date: June 30, 2003
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