File No. 70-9793
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POS AMC
Amendment No. 9
(Post-Effective Amendment No. 6)
to
FORM U-l
APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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FirstEnergy Corp.
FIRSTENERGY SERVICE COMPANY
GPU service, inc.
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, Esq.
Senior Vice President and General 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 and GPU Service, Inc.
(collectively "Applicants") hereby amend in its entirety Amendment No. 7
(Post-Effective Amendment No. 4) to Form U-1 filed by Applicants in docket No.
70-9793 on January 31. 2003 as follows:
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTIONS.
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A. Background. By Order dated October 29, 2001 in this proceeding
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(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, and GPU Service, Inc. ("GPU Service"), a Pennsylvania corporation,
which was formerly a direct service company subsidiary of GPU. 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
to the pre-merger Subsidiaries of FirstEnergy certain common corporate
services,1 until such time as all of the service functions performed by
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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.
1
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.
Since January 1, 2002, GPU Service has 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
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
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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 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 Manual (the
"ServeCo Manual"). By June 1, 2003, all personnel of GPU Service will be
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 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 a supplemental order authorizing ServeCo to operate using the allocation
methods described in the ServeCo Manual on an interim basis through June 30,
2003.
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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
C. Services to be rendered by ServeCo. Following the proposed
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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
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
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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
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
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 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.
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
4
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 nineteen 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: Communications, Corporate Affairs and Community
Involvement, Corporate, Controllers, Credit Management, Enterprise Risk
Management, Internal Audit, Investment Management, Investor Relations,
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
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: Customer Service, Economic Development,
Transmission and Distribution Technical Services, Workforce
Development, Communications, Corporate Affairs and Community
Involvement, FirstEnergy Technologies, Rates and Regulatory Affairs 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.
5
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, Real Estate, FirstEnergy
Technologies, Technology & Support Services, Information Technology,
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 in the following ServeCo departments: Call Center
and Customer Service.
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 in the following ServeCo departments: Call Center
and Customer Service.
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 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
6
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. "Square Footage Used Ratio" - Amount of square footage
occupied by a Subsidiary receiving the product or service divided by
the total amount of square footage occupied by all FirstEnergy system
companies applicable to that respective product or service. This
allocation method will be used by the Real Estate Department of
ServeCo.
k. "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.
l. "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.
m. "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.
n. "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 will be used by the Controllers Department of ServeCo.
o. "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.
p. "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.
q. "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.
7
This allocation method will be used by the Information Technology
Department of ServeCo.
r. "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.
s. "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.
The following chart illustrates the organization of ServeCo.
8
FIRSTENERGY SERVICE COMPANY
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ORGANIZATION CHART
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| BOARD OF DIRECTORS |
|----------------------------------------------------------|
| CEO, FirstEnergy Service Company |
----------------------------------------------------------|
| Senior Vice President & General Counsel |
|-------------------------------------------------------|
| | Legal Services |
| |-------------------------------------------------|
| | Claims |
|-------------------------------------------------------|
| 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, Human Resources, |
| Communications, Corporate Affairs and Community |
| Involvement, Corporate, Real Estate, and |
| Administrative Services |
|-------------------------------------------------------|
| | Corporate Affairs & Community Involvement |
| |-------------------------------------------------|
| | Human Resources |
| |-------------------------------------------------|
| | | Industrial Relations |
| |-------------------------------------------------|
| | Communications |
| |-------------------------------------------------|
| | Corporate |
| |-------------------------------------------------|
| | Real Estate |
| |-------------------------------------------------|
| | Administrative Services |
|-------------------------------------------------------|
| 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 |
-------------------------------------------------
9
D. Services to be rendered by certain Utility Subsidiaries to each
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other.
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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
charged. Other costs not directly assigned will be allocated to the utility
subsidiary benefiting from the service, utilizing a combination 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.
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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 200 employees
provide the "regional" support services discussed herein.
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
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Release No. 27284 (Nov.27, 2000).
10
ITEM 2. FEES, COMMISSIONS AND EXPENSES.
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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);
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New Century Energies, Holding Co. Act Release No. 26748 (Aug. 1, 1997); CINergy
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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.
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.
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
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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 Commission has reserved
jurisdiction over investments that exceed such amount.
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 March 31, 2003, FirstEnergy's consolidated capitalization consisted
of 33.7% common equity, 1.65% cumulative preferred stock, 1.9% subsidiary -
obligated mandatorily redeemable preferred securities, 58.78% long-term debt and
3.97% 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, 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.
FirstEnergy's operating 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 FirstEnergy's operating
utility subsidiaries.
Subsidiary Standard & Poors9 Moody's10 Fitch11
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+
--------------------
8 This $1.31 billion amount represents Current Investments only. As of March 30,
2003, FirstEnergy had no Genco Investments.
9 Standard & Poor's Rating Services
10 Moody's Investors Service, Inc.
11 Fitch, Inc.
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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. FirstEnergy states that
the transactions contemplated herein will have no impact on its consolidated
capitalization.
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.
No other State commission, and no Federal commission, other than this Commission
has jurisdiction over the proposed transaction.
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
Agreement -- to be filed by amendment.
D-15 - PPUC Order -- to be filed by amendment.
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N-7 - Revised Form of Service Agreement (including
Allocation Methods).
N-8 - Utility-to-Utility Service Agreement
N-9 - Policies and Procedures Manual - Paper
filing only.
(b) Financial Statements:
Omitted as not relevant to the proposed transaction.
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS.
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(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
GPU SERVICE, INC.
By: ________________________________
Harvey L. Wagner
Vice President and Controller
Date: May 29, 2003