-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LZctBknCb/mfY8aQVWZCTXq2l6dgxmA5C0+YrkUBivVEFErcL6vZTowRdhfxQDFf CNj71By6uT66zNjpfM8NBg== 0000950152-99-004729.txt : 19990520 0000950152-99-004729.hdr.sgml : 19990520 ACCESSION NUMBER: 0000950152-99-004729 CONFORMED SUBMISSION TYPE: U-1 PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19990519 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRSTENERGY CORP CENTRAL INDEX KEY: 0001031296 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 341843785 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: U-1 SEC ACT: SEC FILE NUMBER: 070-09501 FILM NUMBER: 99630400 BUSINESS ADDRESS: STREET 1: 76 SOUTH MAIN ST CITY: AKRON STATE: OH ZIP: 44308-1890 BUSINESS PHONE: 3303845100 MAIL ADDRESS: STREET 1: 76 SOUTH MAIN ST CITY: AKRON STATE: OH ZIP: 44308-1890 U-1 1 FIRSTENERGY CORPORATION FORM U-1 1 FILE NO. [_____] UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM U-1 APPLICATION/DECLARATION UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 FIRSTENERGY CORP. 76 SOUTH MAIN STREET AKRON, OHIO 44308 (NAME OF COMPANY FILING THIS STATEMENT AND ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) NANCY C. ASHCOM, CORPORATE SECRETARY FIRSTENERGY CORP. 76 SOUTH MAIN STREET AKRON, OHIO 44308 (NAMES AND ADDRESS OF AGENT FOR SERVICE) The Commission is requested to send copies of all notices, orders and communications in connection with this Application/Declaration to: MICHAEL F. CUSICK Winthrop, Stimson, Putnam & Roberts One Battery Park Plaza New York, New York 10004 (212) 858-1000 2 ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION ----------------------------------- INTRODUCTION Pursuant to Sections (9)(a)(2) and 10 of the Public Utility Holding Company Act of 1935 (the "1935 Act" or the "Act"), FirstEnergy Corp., an Ohio corporation ("FirstEnergy" or the "Applicant"), hereby requests that the Securities and Exchange Commission (the "Commission") issue an order (i) approving the direct acquisition by FirstEnergy of all of the issued and outstanding voting securities of American Transmission Systems, Incorporated, a newly formed Ohio corporation ("ATSI"), (ii) approving the indirect acquisition by FirstEnergy of certain debt securities to be issued by ATSI as part of consideration for transfer of certain transmission assets as described in Item 1.B.1 hereof (the "Transmission Assets") owned by each of Ohio Edison Company, an Ohio corporation ("Ohio Edison"), The Cleveland Electric Illuminating Company, an Ohio corporation ("Cleveland Electric"), The Toledo Edison Company, an Ohio corporation ("Toledo Edison") and Pennsylvania Power Company, a Pennsylvania corporation (individually, "Penn Power," and collectively, the "Operating Companies") to ATSI and (iii) granting such other authorizations as may be necessary in connection therewith. FirstEnergy's proposed creation of ATSI and transfer of the Transmission Assets to ATSI is part of its plan to establish an independent regional transmission organization ("RTO"). The proposed formation of the new transmission company is intended to provide the following benefits to FirstEnergy and its Operating Companies' customers: (i) greater corporate and organizational separation of transmission from generation; and (ii) by tying together control, planning, maintenance and financial responsibilities of the Operating Companies' transmission facilities into a single company having an independent, streamlined and cost-efficient operation, (a) creating synergies that result in better service in the region and (b) assuring non-discriminatory access for all transmission users. FirstEnergy's plan to establish an RTO, with the creation of ATSI as a significant step toward this end, will maximize the value of the Transmission Assets to shareholders. FirstEnergy is a public-utility holding company under the 1935 Act. It directly owns all of the issued and outstanding voting securities of Cleveland Electric, Toledo Edison and Ohio Edison and indirectly owns all of the issued and outstanding voting securities of Penn Power. FirstEnergy has claimed an exemption from all provisions of the 1935 Act (except for Section 9(a)(2) thereof) pursuant to Rule 2 thereunder. See FirstEnergy Form U-3A-2, "Statement by Holding Company Claiming Exemption Under Rule U-2 from the Provisions of the Public Utility Holding Company Act of 1935," dated February 26, 1999, attached hereto as Exhibit G-1. Ohio Edison currently owns all of the issued and outstanding voting securities of Penn Power. Ohio Edison, Penn Power, Cleveland Electric and Toledo Edison are all "public-utility companies" as defined in the 1935 Act. Ohio Edison is also a "holding company" as defined in the 1935 Act. Ohio Edison is currently exempt from the registration and other requirements of the 1935 Act, other than from Section 9(a)(2) thereof, pursuant to Section 3(a)(2) thereof. ATSI is incorporated as an Ohio corporation. It currently does not conduct any business or own any utility assets. Upon completion of the transfer of the Transmission Assets from the 3 Operating Companies to it, ATSI will become a "public-utility company" as defined in the 1935 Act. The transactions contemplated hereby will be accomplished through (i) FirstEnergy's acquisition of all of the issued and outstanding voting securities of ATSI in exchange for approximately $300 million, (ii) the sale and transfer by the Operating Companies of their Transmission Assets to ATSI in consideration for the purchase price (the "Purchase Price") which will be the net book value of the Transmission Assets as of November 30, 1998 (approximately $655 million) and (iii) ATSI's financing of the purchase of the Transmission Assets by (A) the use of FirstEnergy's purchase price for all of the issued and outstanding voting securities of ATSI for an amount equal to 45% of the Purchase Price and (B) ATSI's issuance of promissory notes (which may be secured by a lien on the assets transferred) to the Operating Companies in an aggregate amount equal to 55% of the Purchase Price. The interest rate on the promissory notes will be based on the embedded cost of debt of the Operating Companies on a consolidated basis as of November 30, 1998 (which was approximately 7.75%). A. DESCRIPTION OF PARTIES TO THE TRANSACTION 1. GENERAL DESCRIPTION. (a) FIRSTENERGY. FirstEnergy was organized under the laws of the State of Ohio in 1996. The principal executive offices of FirstEnergy are located in Akron, Ohio. FirstEnergy is a holding company within the meaning of Section 2(a)(7) of the 1935 Act. FirstEnergy's principal business is the holding of all of the issued and outstanding voting securities of the following 12 direct active subsidiaries: Ohio Edison; Cleveland Electric; Toledo Edison; FirstEnergy Properties, Inc.; FirstEnergy Ventures Corp.; FirstEnergy Trading Services, Inc.; FirstEnergy Securities Transfer Company; FirstEnergy Facilities Services Group, Inc.; MARBEL Energy Corporation; JR Operating Company; FirstEnergy Services Corp.; and FirstEnergy Nuclear Operating Company; and all of the issued and outstanding voting securities of the following four direct inactive subsidiaries: Centerior Service Company; FirstEnergy Holdings, LLC; FE Acquisition Corp.; and ATSI. Unless otherwise noted, all these subsidiaries are incorporated in the State of Ohio and have their principal offices in Akron, Ohio. (b) ATSI. ATSI is incorporated as an Ohio corporation on October 8, 1998. It currently does not conduct any business or own any utility assets. Upon consummation of the transactions contemplated hereby, ATSI will become a "public-utility company" as defined in the 1935 Act. (c) OHIO EDISON. Ohio Edison was organized under the laws of the State of Ohio in 1930 and is both a public utility and a public utility holding company which is exempt from regulation by the Commission under the 1935 Act (except for Section 9(a)(2) thereof) because it is predominantly a public-utility company whose operations as such do not extend beyond the State of Ohio and contiguous states. See Ohio Edison Company, Holding Co. Act Release No. 21019 (April 26, 1979). Ohio Edison owns all of the issued and outstanding voting securities of Penn Power. Ohio Edison also owns directly 16.5% of the issued and outstanding voting securities of Ohio Valley Electric Corporation, an Ohio corporation ("OVEC") (which, in turn, owns all of the issued and outstanding voting securities of Indiana-Kentucky Electric 2 4 Corporation ("IKEC")). OVEC is a public utility company organized under the laws of Ohio in 1952. On the same date, IKEC was organized under the laws of Indiana. The two companies were formed by 15 independent investor-owned public utilities (including Ohio Edison, Penn Power and Toledo Edison), furnishing electric service in the Ohio River Valley for the purpose of providing the large electric power requirements projected for the major uranium enrichment complex near Portsmouth, Ohio, then being built by the Atomic Energy Commission, the predecessor to the Nuclear Regulatory Commission ("NRC"). In addition to Penn Power, Ohio Edison has seven other wholly-owned subsidiaries organized, unless otherwise noted, under the laws of the State of Ohio: (i) OES Capital, Incorporated; (ii) OES Fuel, Incorporated; (iii) OES Finance, Incorporated; (iv) Ohio Edison Financing Trust, organized under the laws of the State of Delaware; (v) Ohio Edison Financing Trust II, organized under the laws of the State of Delaware; (vi) OES Nuclear, Incorporated; and (vii) OES Ventures, Incorporated. These subsidiaries manage and finance nuclear fuel for Ohio Edison and Penn Power, finance certain electric accounts receivable, provide structures for investment in energy-related projects and the raising of capital by Ohio Edison, finance and manage business opportunities not directly related to the provision of electric service, or provide other energy-related products and services. OES Ventures, Incorporated has a 49% beneficial interest in the PNBV Capital Trust, a business trust organized under the laws of the State of Delaware to facilitate the acquisition of lease obligation bonds relating to Ohio Edison's sale and leaseback of individual interests in Beaver Valley Nuclear Power Station Unit No. 2 and Perry Nuclear Power Plant Unit No. 1 and the resultant reduction in effective cost to Ohio Edison under those leases. Finally, Ohio Edison has a 49% interest in OES Engineering Incorporated, a corporation that provides engineering services at cost as a subcontractor on construction projects undertaken by Ohio Edison for third parties. Other than Penn Power, these subsidiaries do not, individually or in the aggregate, have a material effect on the consolidated financial statements of Ohio Edison. (d) PENN POWER. Penn Power was organized under the laws of the Commonwealth of Pennsylvania in 1930 and owns property and does business as an electric public utility in that state. Penn Power is also authorized to do business and owns property in the State of Ohio. Penn Power has one wholly-owned subsidiary, Penn Power Energy, Inc. (e) CLEVELAND ELECTRIC. Cleveland Electric was organized under the laws of the State of Ohio in 1892 and is a public utility company engaged primarily in the generation, transmission, distribution and sale of electric energy to an area of approximately 1,700 square miles in northeastern Ohio, including the City of Cleveland. It has one subsidiary, Centerior Funding Corporation, which is a Delaware corporation organized in 1996 that finances accounts receivable. It also owns 10% of The Toledo Edison Capital Corporation ("TECC"), which is a Delaware corporation organized in 1997 that makes equity investments in Delaware business trusts that hold lessor debt instruments issued in connection with Cleveland Electric's and Toledo Edison's sale and leaseback of interests in the Bruce Mansfield Plant. (f) TOLEDO EDISON. Toledo Edison was organized under the laws of the State of Ohio in 1901 and is a public utility company engaged primarily in the generation, transmission, distribution and sale of electric energy to an area of approximately 2,500 square miles in 3 5 northwestern Ohio, including the City of Toledo. It owns 90% of TECC. Toledo Edison owns directly 4% of the issued and outstanding voting securities of OVEC. (g) FIRSTENERGY PROPERTIES, INC. FirstEnergy Properties, Inc. was organized in 1929 and primarily manages non-residential real estate. It has one subsidiary, BSG Properties, Inc., organized in 1996 that pursues real estate development. (h) FIRSTENERGY VENTURES CORP. FirstEnergy Ventures Corp. was organized in 1971. Its principal business involves the ownership of stock investments in certain non-utility ventures. It has seven subsidiaries organized under the laws of the State of Ohio: (i) Centerior Power Enterprises, Inc. which, together with CPICOR Management LLC (a non-affiliate), is responsible for implementing a Department of Energy ("DOE") clean coal project; (ii) Centerior Energy Services, Inc., which provides various energy consulting services under the registered trade name "The E. Group"; (iii) Fertile-Earth Inc., which composts certain wastes and wood products into salable mulch and soil amendments; (iv) FirstEnergy Telecom Corp., which provides telecommunications services; (v) Centerior Communications Holdings, Inc., which holds equity investments for certain telecommunications ventures; (vi) Bay Shore Power Company, which proposes to provide steam to a Toledo Edison generating unit and a nonaffiliated refinery; and (vii) FirstEnergy Fuel Marketing Company which provides products and services to electricity generators and industrial fuel users. FirstEnergy Ventures is also part owner of seven Ohio limited liability companies: Eastroc, LLC, Eastroc Technologies, LLC and Engineered Processes, LTD, which own or apply technologies for the production of gypsum products; Carbon Plus, LLC, which converts nonhazardous waste by-products into new products; Warrenton River Terminal, LTD, which owns facilities for the transloading of bulk materials on the Ohio River; Soils Technology, LLC, which recycles discarded materials to manufacture nutrient-rich soils; and Ohio National Energy, LTD, which is involved in the East Burger Merchant Repowering Project. (i) FIRSTENERGY TRADING SERVICES, INC. FirstEnergy Trading Services, Inc. is an Ohio corporation organized in 1995 that is a power marketer in the wholesale power markets. (j) FIRSTENERGY SECURITIES TRANSFER COMPANY. FirstEnergy Securities Transfer Company is an Ohio corporation organized in 1997 to act as transfer agent and registrar for the securities of FirstEnergy and its direct and indirect subsidiaries. (k) FIRSTENERGY FACILITIES SERVICES GROUP, INC. FirstEnergy Facilities Services Group is the parent company of the eight direct subsidiaries engaged in heating, ventilating, air conditioning and energy management. These subsidiaries consist of the following: (i) Ancoma, Inc. of Rochester New York (New York corporation); (ii) Colonial Mechanical Corporation of Richmond, Virginia, which has a subsidiary Webb Technologies, Inc. of Norfolk, Virginia (both Virginia corporations); (iii) Dunbar Mechanical Inc. of Toledo, Ohio (Ohio corporation); (iv) Edwards Electrical & Mechanical, Inc. of Indianapolis, Indiana (Indiana corporation); (v) Elliott-Lewis Corporation of Philadelphia, Pennsylvania (Pennsylvania corporation); (vi) L.H. Cranston & Sons, Inc. of Timonium, Maryland (Maryland corporation); (vii) Roth Bros., Inc. of Youngstown, Ohio (Ohio corporation) and its subsidiary The Hattenbach Company of Cleveland, Ohio (Ohio corporation); and (viii) R.P.C. Mechanical, Inc. of Cincinnati, Ohio 4 6 (Ohio corporation) and its subsidiary Spectrum Controls Systems of Cincinnati, Ohio (Ohio corporation). (l) MARBEL ENERGY CORPORATION. MARBEL Energy Corporation ("MARBEL") is a fully integrated natural gas company. MARBEL owns interests in more than 1,800 gas and oil wells and holds interests in more than 200,000 undeveloped acres in eastern and central Ohio. MARBEL's subsidiaries include MB Operating Company, Inc., a natural gas exploration and production company, which has as subsidiaries, J. R. Nominee Corp., J. R. Nominee Corp. II and Natural Gas Brokerage Corporation (all Ohio corporations) and Northeast Ohio Operating Companies, Inc., which has as subsidiaries Gas Transport, Inc., NEO Construction Company and Ohio Intrastate Gas Transmission Company (all Ohio corporations). (m) JR OPERATING COMPANY. JR Operating Company engages in the acquisition and development of oil and gas properties. (n) FIRSTENERGY SERVICES CORP. A national sales group was established within FirstEnergy Services Corp. to pursue sales in the unregulated electric utility market. FirstEnergy Services Corp. qualified to do business in Pennsylvania in 1998 and the national sales group began selling in the Pennsylvania market following the restructuring which opened the generation business to increased competition. (o) FIRSTENERGY NUCLEAR OPERATING COMPANY. FirstEnergy Nuclear Operating Company operates the Davis-Besse Nuclear Power Station and the Perry Nuclear Power Plant under the supervision and direction of the owners of those facilities. 2. DESCRIPTION OF UTILITY OPERATIONS. (a) FIRSTENERGY AND ATSI. Currently, neither of FirstEnergy and ATSI directly owns any utility properties or performs any utility operations. (b) OHIO EDISON AND PENN POWER. Ohio Edison furnishes electric service to communities in a 7,500 square mile area of central and northeastern Ohio. Ohio Edison also provides transmission services and electric energy for resale to certain municipalities in its service area and transmission services to certain rural cooperatives. Ohio Edison has ownership interests in certain generating facilities located in the Commonwealth of Pennsylvania. Ohio Edison also engages in the sale, purchase and interchange of electric energy with other electric companies. During the twelve months ended December 31, 1998, the principal source of Ohio Edison's operating revenues was derived from the sale of electricity. Penn Power furnishes electric service to communities in a 1,500 square mile area of western Pennsylvania. Penn Power also provides transmission services and electric energy for resale to certain municipalities in Pennsylvania. During the twelve months ended December 31, 1998, the principal source of Penn Power's operating revenues was derived from the sale of electricity. Ohio Edison and Penn Power own or lease all or a portion of 39 electric generating units, consisting of 18 coal fired units, three nuclear units, seven oil fired units, one gas/oil fired unit and 10 diesel generators (located at three sites), which have total net generating capacity of 5,757 5 7 megawatts ("MW"). All of the electric properties owned by Ohio Edison and Penn Power are located within the State of Ohio and the Commonwealth of Pennsylvania. Eleven of the 18 coal fired units are 100% owned by Ohio Edison, and all such units are located in Ohio. Four of the 18 coal fired units are held in a combined Ohio Edison-Penn Power ownership along with other parties and the remaining three coal fired units are 100% owned by Penn Power. The three nuclear units consist of (i) Beaver Valley Nuclear Power Station Unit 1 ("Beaver Valley Unit 1"), located in Pennsylvania and representing a 425 MW share from a combined Ohio Edison-Penn Power ownership of 52.50%, (ii) Beaver Valley Nuclear Power Station Unit 2 ("Beaver Valley Unit 2"), also located in Pennsylvania and representing a 343 MW share from an Ohio Edison ownership and leasehold interest of 41.88%, and (iii) Perry Nuclear Power Plant Unit 1 ("Perry Unit 1"), located in Ohio and representing a 421 MW share from a combined Ohio Edison-Penn Power ownership and leasehold interest of 35.24%. One of the seven oil fired units is located in Ohio and 100% owned by Ohio Edison. The remaining six oil fired units are also located in Ohio but are held in a combined Ohio Edison-Penn Power ownership. The oil/natural gas unit is located in Ohio and is 100% owned by Ohio Edison. Two of the three diesel generator sites are located in Ohio and the remaining diesel generator site is located in Pennsylvania. All three diesel generator sites are held in a combined Ohio Edison-Penn Power ownership. Ohio Edison and Penn Power have transmission facilities of 5,647 circuit line miles covering an area of approximately 9,000 square miles. These facilities have 629 circuit miles of 345 kilovolt ("kV") lines, 2,239 circuit miles of 138 kV lines, 1,894 circuit miles of 69 kV lines, 180 circuit miles of 34.5 kV lines and 581 circuit miles of 23 kV lines. Additionally, the electric distribution systems of Ohio Edison and Penn Power have include overhead pole line and underground conduit carrying primary, secondary and street lighting circuits. Ohio Edison and Penn Power own, individually or together with one or more of the other Central Area Power Coordination Group ("CAPCO") companies (Cleveland Electric, Toledo Edison and Duquesne Light Company ("Duquesne")) as tenants in common, 448 substations with a total installed transformer capacity of 24,849,513 kV-amperes, of which 70 are transmission substations, including nine located at generating plants. Ohio Edison and Penn Power have three 345kV and four 138kV interconnections. Ohio Edison and Cleveland Electric have five 345 kV and four 138 kV interconnections, and Ohio Edison and Toledo Edison have one 345 kV and one 138 kV interconnection. Ohio Edison has one 345 kV interconnection with Allegheny Energy Inc., seven 345 kV interconnections with American Electric Power Company, Inc. ("AEP") and five 345 kV interconnections with Duquesne. Ohio Edison has the following 138 kV interconnections with neighboring utility systems: one with Allegheny Energy, eight with AEP and three with Dayton Power and Light Company ("Dayton"). Ohio Edison and Penn Power also have the following 69 kV interconnections with other utility systems: one with Dayton, one with AEP, one with Allegheny Energy, and one with Duquesne. Ohio Edison does not own or have any financial interest in any natural gas pipeline company. However, at Ohio Edison's Edgewater plant, OES Fuel owns a four mile gas pipeline that connects the Edgewater plant to the Columbia Gas Transmission system. 6 8 (c) OVEC AND IKEC. OVEC owns the Kyger Creek Plant at Cheshire, Ohio, which is a coal-fired facility with a capacity of 1,075 MW. IKEC owns the Clifty Creek Plant at Madison, Indiana, which is a coal-fired facility with a capacity of 1,290 MW. These plants are connected by a 780-mile 345 kV transmission network and are interconnected with the major transmission systems of OVEC's sponsor companies, although OVEC's transmission facilities do not interconnect directly with the Ohio Edison-Penn Power or Toledo Edison systems. (d) CLEVELAND ELECTRIC. Cleveland Electric is engaged primarily in the generation, transmission, distribution and sale of electric energy to an area of approximately 1,700 square miles in northeastern Ohio, including the City of Cleveland. Cleveland Electric also has ownership interests in certain generating facilities located in the Commonwealth of Pennsylvania. Cleveland Electric also engages in the sale, purchase and interchange of electric energy with other electric companies. During the twelve months ended December 31, 1998, the principal source of Cleveland Electric's operating revenues was derived from the sale of electricity. Cleveland Electric's generating properties consist of all or a portion of: (i)15 units at four fossil fuel plants including the Avon Lake Plant, located in Avon Lake, Ohio, the Lake Shore Plant, located in Cleveland, Ohio, the Eastlake Plant, located in Eastlake, Ohio, and the Ashtabula Plant, located in Ashtabula, Ohio; (ii) a 452 MW share of Davis-Besse Nuclear Power Station located in Oak Harbor, Ohio; and a (iii) 351 MW share of a pumped storage hydroelectric plant ("Seneca Plant") located in Warren, Pennsylvania. These six Cleveland Electric-owned plants have a net demonstrated capability of 2,997 MW. At the present time Cleveland Electric is in the process of acquiring its co-owner's share of the Seneca Plant (87 MW). Cleveland Electric and Toledo Edison as co-lessees, have an ownership share of 6.5% (51 MW), 45.9% (358 MW) and 44.38% (355 MW) of Units 1, 2 and 3, respectively, of the coal-fired Bruce Mansfield Plant located in Shippingport, Pennsylvania. Cleveland Electric also has a 31.11% ownership share (371 MW) of Perry Unit 1 located in Perry, Ohio, and a 24.47% share (201 MW) of Beaver Valley Unit 2 located in Shippingport, Pennsylvania, and leases, as co-lessee with Toledo Edison, another 18.26% (150 MW) of Beaver Valley Unit 2. Cleveland Electric owns the transmission facilities located in the area it serves in northeastern Ohio for transmitting electric energy to all of its customers, except for one 5.5 mile 138 kV transmission line that Cleveland Electric leases from the City of Cleveland. The portions of the transmission lines located in Pennsylvania to the Seneca Plant, Bruce Mansfield Plant and the Beaver Valley Power Station are not owned by Cleveland Electric. Cleveland Electric has a transmission interconnection with Pennsylvania Electric Company, which provides for transmission of electric energy from the Seneca Plant. Cleveland Electric also has interconnections with Ohio Edison that provide for the transmission of electric energy from the Bruce Mansfield Plant and the Beaver Valley Nuclear Power Station, and also interconnects with AEP. 7 9 Cleveland Electric's transmission facilities consist of transmission lines and transmission substations operating at voltages up to 345,000 volts. Cleveland Electric owns the distribution facilities located in the area it serves in northeastern Ohio for distributing electric energy to all of its customers. These distribution facilities consist primarily of distribution lines and distribution substations and related service facilities and are used to serve electric energy to customers pursuant to franchises granted by the State of Ohio and, in some instances, by municipalities. (e) TOLEDO EDISON. Toledo Edison is engaged primarily in the generation, transmission, distribution and sale of electric energy to an area of approximately 2,500 square miles in northwestern Ohio, including the City of Toledo. Toledo Edison also has ownership interests in certain generating facilities located in the Commonwealth of Pennsylvania. Toledo Edison also engages in the sale, purchase and interchange of electric energy with other electric companies. During the twelve months ended December 31, 1998, the principal source of Toledo Edison's operating revenues was derived from the sale of electricity. Toledo Edison's generating properties consist of : (i) one wholly-owned fossil fuel electric generating station, Bay Shore, located in Lucas County, Ohio; (ii) a 428 MW share of Davis-Besse Nuclear Power Station located in Oak Harbor, Ohio; and (iii) five internal combustion turbine generator units with an aggregate capability of 77 MW located in northwestern Ohio. These Toledo Edison-owned plants have a net demonstrated capability of 1,136 MW. Toledo Edison and Cleveland Electric as co-lessees, have an ownership share of 6.5% (51 MW), 45.9% (358 MW) and 44.38% (355 MW) of Units 1, 2 and 3, respectively, of the coal-fired Bruce Mansfield Plant located in Shippingport, Pennsylvania. Toledo Edison also has a 19.91% ownership share (238 MW) of Perry Unit 1. Toledo Edison has a tenant-in-common interest and leasehold interest (with Cleveland Electric as co-lessee with respect to 150 MW) in 19.91% (163 MW) in Beaver Valley Unit 2. Toledo Edison is presently selling 150 MW of its Beaver Valley Unit 2 leased capacity entitlement to Cleveland Electric. Toledo Edison's transmission facilities consist of transmission lines and transmission substations operating at voltages up to 345,000 volts. Toledo Edison owns the transmission facilities located in the area it serves in northwestern Ohio for transmitting electric energy to all of its customers. The portions of the transmission lines located in Pennsylvania to the Bruce Mansfield Plant and the Beaver Valley Power Station are not owned by Toledo Edison. Toledo Edison has interconnections with Ohio Edison that provide for the transmission of electric energy from the Bruce Mansfield Plant and the Beaver Valley Nuclear Power Station. Toledo Edison also has transmission interconnections with Consumers Energy Company, The Detroit Edison Company and AEP. Toledo Edison owns the distribution facilities located in the area it serves in northwestern Ohio for distributing electric energy to all of its customers. These distribution facilities consist 8 10 primarily of distribution lines and distribution substations and related service facilities and are used to serve electric energy to its customers. (f) TRANSACTION WITH DUQUESNE. The CAPCO companies (the Operating Companies and Duquesne) jointly own nine generating units and independently own related CAPCO transmission facilities. As part of a separate transaction from the transactions contemplated herein, the Operating Companies have negotiated a transaction pursuant to which they will exchange ownership interest of these and other generating units with Duquesne so that the joint ownership of generating units with Duquesne is eliminated. Duquesne would also sell seven CAPCO transmission facilities to ATSI. There can be no assurance that required regulatory approvals will be received. (g) UTILITY REGULATION. Ohio Edison, Cleveland Electric and Toledo Edison are subject to broad regulation as to rates and other matters by the Public Utilities Commission of Ohio (the "PUCO"). Under Ohio law, municipalities may regulate rates, subject to appeal to the PUCO if not acceptable to the utility. Penn Power is subject to broad regulation as to rates and other matters by the Pennsylvania Public Utility Commission (the "PPUC"). Ohio Edison, Cleveland Electric, Toledo Edison and Penn Power are also subject to the jurisdiction of the Federal Energy Regulatory Commission (the "FERC") under the Federal Power Act with respect to wholesale electric rates and other matters. Construction and operation of nuclear generating units are subject to the regulatory jurisdiction of the NRC, including the issuance by it of construction permits and operating licenses. ATSI will be subject to the jurisdiction of the FERC with respect to its rates and other matters. B. DESCRIPTION OF THE PROPOSED TRANSACTION 1. DESCRIPTION OF THE TRANSMISSION ASSETS. The Transmission Assets to be transferred from the Operating Companies to ATSI are identified in detail in Appendix D to the Operating Agreement between ATSI and the Operating Companies. The Appendix also describes the generation and distribution facilities retained by the Operating Companies. The Operating Agreement appears in full in Exhibit B-2 to this Application/Declaration. Essentially, ATSI will acquire from the Operating Companies and will operate transmission facilities currently operating at voltages of generally 345 kV and 138 kV (the "Bulk Transmission System"), and 69 kV facilities (the "Area Transmission System," and together with the Bulk Transmission System, the "Transmission System"). The Transmission Assets to be transferred shall include: (1) transmission lines (including towers, poles, and conductors) and transmission stations; (2) transformers providing transformation within the Bulk Transmission System and between the Bulk Transmission System and Area Transmission System; (3) the System Control Center facility and equipment in Wadsworth, Ohio not including the associated land and land rights; 9 11 (4) lines providing connections to generation facilities; (5) radial taps from the Transmission System that are 69kV and above (up to, but not including, the facilities that establish the final circuit connection to distribution facilities or retail customers); (6) substations that provide primarily a transmission function; (7) voltage control devices and power flow control devices directly connected to the Transmission System; (8) mobile capacitor banks 69kV or higher; and (9) equipment spares for transmission facilities. The Transmission Assets include all the facilities currently recorded on the books of the Operating Companies as "transmission" facilities as well as the CAPCO transmission lines discussed in Item 1.A.2(f) above, with the exception of certain 36 kV, 34.5kV, 33kV and 23 kV facilities ("Subtransmission Facilities") and do not include "distribution facilities" used to provide retail service. Distribution facilities include all facilities with voltages below 69 kV, including both Subtransmission Facilities and the final circuit connection to substations providing transformation or connection to any retail customer regardless of voltage level. The Operating Companies currently provide transmission service to certain wholesale customers at delivery points less than 69 kV. In order to ensure continuity of service to such customers who decide to take service under the new FERC-approved transmission tariff under which ATSI will offer its transmission service (the "ATSI Tariff"), ATSI and the Operating Companies have entered into an Agency Agreement. A copy of the Agency Agreement is attached as Appendix C to the Operating Agreement, which in turn is included in Exhibit B-1 to this Application/Declaration. Under the Agency Agreement, the Operating Companies and ATSI have expressly provided for use of certain distribution facilities necessary to continue transmission service to wholesale customers served at delivery points whose voltages are less than 69 kV. Transmission service to wholesale customers over these distribution facilities will be offered under the ATSI Tariff, and associated distribution costs will be recovered in the rates on a direct assignment basis as a distribution adder. This procedure is necessary to ensure that existing wholesale customers served at voltages below 69 kV will have access to comparable transmission service under the ATSI Tariff. 2. OPERATION OF THE TRANSMISSION SYSTEM. ATSI will operate the Transmission System pursuant to the ATSI Tariff and the Operating Agreement. ATSI will have operational control of the Transmission Assets, serve as the control area operator over the Transmission System, offer and arrange for ancillary services, operate the Open Access Same-Time Information System ("OASIS") in conformance with FERC Order No. 889(1), and administer the ATSI Tariff, - ----------------------------- (1) Open Access Same-Time Information System (Formerly Real-Time Information Network) and Standards of Conduct, Order No. 889, Docket No. RM95-9-000, 61 Fed. Reg. 21737 (May 10, 1996), FERC Stats. & Regs. [Reg. Preambles 1991-96] P. 31,035 (1996) (subsequent history omitted). 10 12 including all requests for service under the ATSI Tariff. ATSI will also be responsible for maintenance of the Transmission Assets, and will initially contract with the Operating Companies to perform the maintenance. ATSI will offer all ancillary services required by the FERC in its Order No. 888. Since ATSI owns no generating facilities, it will purchase the necessary ancillary services from third parties. Under the Operating Agreement, the Operating Companies are required to sell ancillary services to ATSI upon request at FERC approved rates. ATSI is free, however, to purchase ancillary services from unaffiliated generators, and will do so consistent with a least cost procurement strategy. ATSI expects to enter into agreements to purchase ancillary services from unaffiliated generators in its control area. ATSI will not, however, engage in the purchase and sale of energy other than to obtain the necessary ancillary services. In short, upon receipt of the necessary regulatory approvals, ATSI will commence providing open access transmission service to those existing open access customers served by the Operating Companies under the existing transmission tariff ("FirstEnergy Open Access Tariff"), and any other eligible customer requesting transmission service from ATSI. In addition, post-transfer, the Operating Companies will become customers of ATSI under the ATSI Tariff. Where the Operating Companies are responsible for providing transmission service under agreements or tariffs predating Order No. 888 ("Grandfathered Transmission Agreements"), ATSI will work to ensure obligations are satisfied, and will make its Transmission System available to provide transmission service under the Grandfathered Transmission Agreements unless otherwise directed by the FERC. 3. FINANCIAL ASPECTS OF THE TRANSACTION. A Bill of Sale will be entered into between FirstEnergy Corp., on behalf of the Operating Companies, and ATSI covering the conveyance of the Transmission Assets. The Transmission Assets transferred to ATSI under the Bill of Sale include FirstEnergy's rights and interests in any contracts under the FirstEnergy Open Access Tariff. A copy of the form of Bill of Sale is included as part of Exhibit B-1 to this Application/Declaration. The transactions contemplated hereby will be accomplished through (i) FirstEnergy's acquisition of all of the issued and outstanding voting securities of ATSI in exchange for approximately $300 million, (ii) the sale and transfer by the Operating Companies of their Transmission Assets to ATSI in consideration for the Purchase Price which will be the net book value of the Transmission Assets as of November 30, 1998 (approximately $655 million) and (iii) ATSI's financing of the purchase of the Transmission Assets by (A) the use of FirstEnergy's purchase price for all of the issued and outstanding voting securities of ATSI for an amount equal to 45% of the Purchase Price and (B) ATSI's issuance of promissory notes (which may be secured by a lien on the assets transferred) to the Operating Companies in an aggregate amount equal to 55% of the Purchase Price. The interest rate on the promissory notes will be based on the embedded cost of debt of the Operating Companies on a consolidated basis as of November 30, 1998 (which was approximately 7.75%). The 45/55 equity-debt ratio is the same as the Operating Companies' consolidated ratio as of November 30, 1998. Release of the Transmission Assets from the liens of the indentures securing mortgage bonds of the Operating Companies will take place at transfer of the Transmission Assets to 11 13 ATSI. Fee land, easements and rights-of-way have been excluded from the asset transfer and will remain the property of the Operating Companies. ATSI will acquire the right to use land through 50-year ground leases with the Operating Companies. C. REASONS FOR AND ANTICIPATED EFFECTS OF THE PROPOSED TRANSACTION 1. CONTEXT OF THE TRANSACTION--CREATION OF A LARGER RTO. The transfer of the Transmission Assets to ATSI will facilitate implementation of the subsequent transfer of these facilities into an RTO. FirstEnergy's formation of ATSI and the transfer of the Transmission Assets to ATSI is not the ultimate goal. Rather, this is a step towards the subsequent transfer of these facilities to an RTO. FirstEnergy's ultimate goal is to divest ownership, operation and control of its transmission facilities from its other assets. Accordingly, if ATSI does not file a Section 203 application under the Federal Power Act to transfer ownership or control of its transmission facilities to an RTO within two years of the date of approval of the joint application with the FERC (a copy of which is attached hereto as Exhibit D-1), ATSI will file a Section 203 application to divest its transmission facilities to an unaffiliated entity. FirstEnergy intends to continue its efforts with other transmission owners in the development of a transmission alliance that would own, operate and aggregate regional transmission assets and could, in turn, operate transmission facilities of other companies (the "Transmission Alliance"). At present, the three utility systems currently committed to participating with FirstEnergy in the Transmission Alliance (AEP, Consumers Energy and Virginia Power) would stretch from Michigan to Virginia and would provide open access transmission service over approximately 43,500 miles of transmission lines serving a population of 23 million. It will strive to better align the interests of transmission customers with the interests of transmission owners and operators. FirstEnergy has not precluded consideration of other regional transmission alternatives. Whatever the regional entity, ATSI's existence as a separate corporate entity and single provider of transmission services will facilitate the process. Moreover, ATSI will have the opportunity to gain some experience in the operation of the transmission system as a stand alone entity - experience that will be valuable to the effectuation of the next step. 2. ANTICIPATED EFFECTS. The proposed formation of the new transmission company is intended to provide the following benefits to FirstEnergy and its Operating Companies' customers: (i) greater corporate and organizational separation of transmission from generation; and (ii) by tying together control, planning, maintenance and financial responsibilities of the Operating Companies' transmission facilities into a single company having an independent, streamlined and cost-efficient operation, (a) creating synergies that result in better service in the region, (b) assuring non-discriminatory access for all transmission users and (c) maximizing the value of the Transmission Assets for shareholders. ATSI will not be engaged in the electric power generation business, and will contract with the Operating Companies and others on the open market to provide ancillary services on a least cost basis. ATSI will not own distribution facilities, and will use distribution facilities only to the extent required to provide transmission services to wholesale customers served at voltages below 69 kV under the ATSI Tariff. Instead, ATSI will focus solely on efficiently and effectively operating and maintaining, and where necessary expanding, its transmission system, and will be well-situated to respond quickly to customer needs. 12 14 D. ADDITIONAL INFORMATION No associate company or affiliate of FirstEnergy or any affiliate of any such associate company has any direct or indirect material interest in the proposed transaction except as stated herein. ITEM 2. FEES, COMMISSIONS AND EXPENSES ------------------------------ The fees, commissions and expenses to be paid or incurred, directly or indirectly, in connection with the transactions contemplated herein, including other related matters, are estimated as follows: Legal fees Winthrop, Stimson, Putnam & Roberts ............................ * Fees relating to appraisal of the Transmission Assets ............... * Miscellaneous ....................................................... * TOTAL ............................................................... * * To be filed by amendment. ITEM 3. APPLICABLE STATUTORY PROVISIONS It is believed that Sections 9(a)(2) and 10 of the Act are applicable to the proposed transactions. To the extent that the proposed transactions are considered by the Commission to require authorization, approval or exemption under any section of the Act or provision of the rules or regulations thereunder other than those specifically referred to herein, request for such authorization, approval or exemption is hereby made. Upon consummation of the transfer of the Transmission Assets from the Operating Companies to ATSI, ATSI will become an "electric utility company" as defined in Section 2(a)(3) of the Act as well as a "public-utility company" as defined in Section 2(a)(5) of the Act. Because FirstEnergy will, as a result of the transactions contemplated herein, be directly acquiring five per centum or more of the outstanding voting securities of ATSI in addition to those of each of the Operating Companies (which are public-utility companies), such acquisition will be subject to Section 9(a)(2) of the Act. Moreover, because FirstEnergy will be indirectly acquiring certain securities (I.E., the promissory notes) of ATSI, such acquisition will also be subject to Section 9(a)(2) of the Act. Thus FirstEnergy believes that the proposed transactions cannot proceed without the Commission's approval pursuant to Section 10 of the Act. The relevant statutory standards to be satisfied are set forth in Sections 10(b), 10(c), and 10(f) of the Act. A. SECTION 10(b) Section 10(b) of the 1935 Act provides that, if the requirements of Section 10(f) are satisfied, the Commission shall approve an acquisition under Section 9(a) unless the Commission finds that: 13 15 (1) such acquisition will tend towards interlocking relations or the concentration of control of public utility companies, of a kind or to an extent detrimental to the public interest or the interest of investors or consumers; (2) in case of the acquisition of securities or utility assets, the consideration, including all fees, commissions, and other remuneration, to whomsoever paid, to be given, directly or indirectly, in connection with such acquisition is not reasonable or does not bear a fair relation to the sums invested in or the earning capacity of the utility assets to be acquired or the utility assets underlying the securities to be acquired; or (3) such acquisition will unduly complicate the capital structure of the holding company system of the applicant or will be detrimental to the public interest of consumers or the proper functioning of such holding company system. 1. SECTION 10(b)(1). The proposed transactions will not tend towards interlocking relations or the concentration of control of public utility companies, of a kind or to an extent detrimental to the public interest or the interest of investors or consumers. Notwithstanding the above, as in the case of virtually every transaction subject to Section 9(a)(2), there may exist among FirstEnergy and its public utility subsidiaries (including ATSI) interlocking directors and officers only of such nature and to such extent as normally exist in public utility holding company systems among affiliated and associated companies. See CIPSCO, Inc., Holding Co. Act. Release No. 25152, 47 S.E.C. Docket 174, 178 (1990). Similarly, the proposed transactions will not tend toward any "concentration of control of public-utility companies" that is detrimental to the public interest, consumers or investors. The proposed transactions will not involve the acquisition of any utility assets that are not already owned, either directly or indirectly, by FirstEnergy and "will therefore have no effect on the concentration of control of public-utility companies." Wisconsin Energy Corp., Holding Co. Act Release No. 24267, 37 SEC Docket 296, 300 (1986). In this Application/Declaration, FirstEnergy seeks only to more definitively separate its generation from its transmission facilities in order to pave the way for complete divestiture of the transmission facilities to an RTO. As proposed herein, the Transmission Assets that are now owned by the Operating Companies will be divested to, and acquired by, ATSI, a corporate subsidiary of FirstEnergy. None of FirstEnergy, the Operating Companies and ATSI proposes to merge with any other entity in the instant Application/Declaration. ATSI does not currently own any generation, distribution or transmission facilities, and will not own or control any generation. Upon completion of the proposed transfer, the Operating Companies will no longer own transmission facilities. 2. SECTION 10(b)(2)--FAIRNESS OF CONSIDERATION AND FEES. (a) FAIRNESS OF CONSIDERATION. Section 10(b)(2) of the 1935 Act requires the Commission to determine whether the consideration in connection with a proposed acquisition of securities is reasonable and whether it bears a fair relation to the investment in and the earning capacity of the utility assets underlying the securities being acquired. The consideration in connection with security acquisitions under the transactions contemplated herein will be as follows: (i) approximately 14 16 $300 million will be paid by FirstEnergy for all of the outstanding voting securities of ATSI and (ii) the Transmission Assets will be transferred to ATSI for the promissory notes and a cash payment equal to the difference between the aggregate principal amount of the promissory notes and the net book value of the Transmission Assets. FirstEnergy believes that the consideration to be paid by it for the voting securities of ATSI is reasonable because the amount of such consideration plus the total amount of debt that ATSI will incur in acquiring the Transmission Assets is equal to the approximate actual value of those assets. FirstEnergy further believes that such consideration bears a fair relation to the investment in and the earning capacity of the Transmission Assets because it is based on the net book value those assets had in the hands of the Operating Companies. The rates set by FERC in connection with those facilities when they were owned by the Operating Companies permitted them to achieve a fair return on those assets. Since ATSI's rates will also be subject to FERC approval, it can be expected that those rates (which should be based on the same book value) will permit ATSI to achieve a fair return on them as well. This being the case, FirstEnergy, being the sole equity owner of ATSI, can expect to earn a fair return on its investment. FirstEnergy believes that the consideration paid by the Operating Companies for the promissory notes is reasonable because the principal amount of the notes, when added to the cash that the Operating Companies will receive for the Transmission Assets, will be equal to the net book value of those assets on the books of the Operating Companies. The consideration paid by the Operating Companies bears a fair relation to the investment in and the earning capacity of the Transmission Assets because the interest rate borne by the promissory notes will be equal to the embedded cost of debt of the Operating Companies on a consolidated basis and this amount is not any greater than the cost of debt (on a consolidated basis) that FERC considered when it approved the transmission rates currently applicable to the Transmission Assets. In any event, the proposed transaction is not in a real sense an acquisition of securities; it is merely a corporate reorganization. (b) REASONABLENESS OF FEES. An estimate of the fees and expenses to be paid in connection with the proposed transactions is set forth in Item 2 hereof. The estimated amounts to be paid are fees required to be paid to governmental bodies, fees for necessary professional services, and other expenses incurred or to be incurred in connection with carrying out the proposed transactions. FirstEnergy believes that such fees and expenses are reasonable and customary for a transaction of this kind, and the standards of Section 10(b)(2) are thus satisfied. 3. SECTION 10(b)(3)--CAPITAL STRUCTURE. Section 10(b)(3) requires the Commission to determine whether the proposed transactions will unduly complicate FirstEnergy's capital structure or will be detrimental to the public interest, the interests of investors or consumers or the proper functioning of FirstEnergy's system. The corporate capital structure of FirstEnergy after the consummation of the proposed transactions will not be unduly complicated. FirstEnergy will directly acquire all of the issued and outstanding voting securities of ATSI, in addition to continuing to own directly or indirectly all of the issued and outstanding voting securities of each of the Operating Companies, and thus there will be no minority equity interest in any of such companies. The Operating Companies will own all of ATSI's debt securities. No change will be effected in the capital structure of Penn Power, which will continue to be a wholly-owned subsidiary of Ohio Edison. In any event, as set forth more fully in Item 3.B.2 and elsewhere in this Application/Declaration, the proposed formation of the new transmission company is expected to 15 17 result in certain benefits to the public and to consumers and investors of the FirstEnergy holding-company system. FirstEnergy's plan to establish an RTO, with the creation of ATSI as a significant step toward that end, will maximize the value of the Transmission Assets to shareholders. B. SECTION 10(C) Section 10(c) of the 1935 Act provides that: Notwithstanding the provisions of subsection (b), the Commission shall not approve: (1) an acquisition of securities or utility assets, or of any other interest, which is unlawful under the provisions of Section 8 or is detrimental to the carrying out of the provisions of Section 11; or (2) the acquisition of securities or utility assets of a public utility or holding company unless the Commission finds that such acquisition will serve the public interest by tending towards the economical and the efficient development of an integrated public utility system . . . . 1. SECTION 10(c)(1). Consistent with the standards set forth in Section 10(c)(1) of the Act, the proposed acquisition of securities will not be unlawful under the provisions of Section 8 of the Act (inasmuch as Section 8 applies only to registered holding companies), or detrimental to the carrying out of the provisions of Section 11 of the 1935 Act, which also applies, by its terms, only to registered holding companies, because FirstEnergy believes that following the consummation of the proposed transactions it will continue to be a public-utility holding company entitled to an exemption under Section 3(a)(1) of the 1935 Act from all of the provisions of the 1935 Act (except for Section 9(a)(2) thereof), including provisions relating to registration. See FirstEnergy Form U-3A-2, "Statement by Holding Company Claiming Exemption Under Rule U-2 from the Provisions of the Public Holding Company Act of 1935," dated February 26, 1999, attached hereto as Exhibit G-1. Section 8 prohibits a registered holding company or any of its subsidiaries from acquiring, owning interests in or operating both a gas utility company and an electric utility company serving substantially the same area if prohibited by state law. Because none of FirstEnergy and any of its subsidiary companies owns or has any financial interest in any gas utility company and because ATSI will not own or have any financial interest in any gas utility company, following the proposed transactions, FirstEnergy will not have acquired, and will not own or operate a gas utility company. Section 11(a) of the Act requires the Commission to examine the corporate structure of registered holding companies to ensure, among others, that unnecessary complexities are eliminated and voting powers are fairly and equitably distributed. The proposed transactions meet the standards of Section 11(a) of the Act. As discussed above with respect to the requirements of Section 10(b)(3) of the Act, FirstEnergy will directly acquire all of the issued and outstanding voting securities of ATSI, in addition to continuing to own directly or indirectly all of the issued and outstanding voting securities of each of the Operating Companies, thus leaving no minority interests outstanding. The Operating Companies will own all of ATSI's debt 16 18 securities. Penn Power will continue to be a wholly-owned subsidiary of Ohio Edison. After the consummation of the proposed transactions, no person will be a holding company with respect to FirstEnergy. 2. SECTION 10(c)(2). As the following discussion will demonstrate, the proposed transactions will serve the public interest by tending towards the economical and efficient development of an integrated public-utility system, as required by Section 10(c)(2) of the Act. (a) EFFICIENCIES AND ECONOMIES. As described more fully in Item 1.C.2 above, the proposed transactions tend towards the following efficiencies and economies: (i) greater corporate and organizational separation of transmission from generation; and (ii) by tying together control, planning, maintenance and financial responsibilities of the Operating Companies' transmission facilities into a single company having an independent, streamlined and cost-efficient operation, synergies will be created that result in better service in the region and non-discriminatory access for all transmission users will be assured. FirstEnergy's plan to establish an RTO, with the creation of ATSI as a significant step toward that end, will maximize the value of the Transmission Assets to shareholders. (b) INTEGRATED PUBLIC UTILITY SYSTEM. As applied to electric utility companies, the term "integrated public utility system" is defined in Section 2(a)(29)(A) of the Act as: a system consisting of one or more units of generating plants and/or transmission lines and/or distributing facilities, whose utility assets, whether owned by one or more electric utility companies, are physically interconnected or capable of physical interconnection and which under normal conditions may be economically operated as a single interconnected and coordinated system confined in its operation to a single area or region, in one or more states, not so large as to impair (considering the state of the art and the area or region affected) the advantages of localized management, efficient operation, and the effectiveness of regulation. The Commission has previously taken notice of developments that have occurred in the gas and electric industries in recent years, and has interpreted the Act and analyzed proposed transactions in light of these changed and changing circumstances. See, e.g., New Century Energies, Inc., Holding Co. Act Release No. 26748 (Aug. 1, 1997) (approving transactions relating to combination of a Colorado gas and electric public-utility company and intrastate exempt holding company and a New Mexico electric public-utility company), citing Hearing on Regulation of Public Utility Holding Companies Before Subcomm, on Telecommunications and Finance and Subcomm. on Energy and Power of the House of Representatives Comm, on Commerce, 104th Cong., 1st Sess. (Aug. 4, 1995) (testimony of Arthur Levitt, Chairman, SEC); "The Regulation of Public-Utility Holding Companies," report of the Division of Investment Management (June 1995) ("1995 Report") at 29-31; and Consolidated Natural Gas Co., Holding Co. Act Release No. 26512 (Apr. 30, 1996). See also Rust v. Sullivan, 500 U.S. 173, 186-87 (1991) ("an agency is not required to" establish rules of conduct to last forever, "but rather must be given ample latitude to "adapt [its] rules and policies to the demands of changing circumstances.") (citations omitted); Shawmut Assn. v. SEC, 146 F.2d 791, 796-97 (1st Cir. 1945) (an agency "is expected to treat experience not as a jailer but as a teacher"). 17 19 On the basis of the statutory definition above, the Commission has established four standards that must be met before the Commission will find that an integrated public-utility system will result from a proposed acquisition of securities: (1) the utility assets of the system are physically interconnected or capable of physical interconnection; (2) the utility assets, under normal conditions, may be economically operated as a single interconnected and coordinated system; (3) the system must be confined in its operations to a single area or region; and (4) the system must not be so large as to impair (considering the state of the art and the area or region affected) the advantages of localized management, efficient operation, and the effectiveness of regulation. Environmental Action, Inc. v. SEC, 895 F.2d 1255, 1263 (9th Cir. 1990), quoting In re Electric Energy, Inc., 38 S.E.C. 658, 668 (1958). The proposed transactions satisfy all four of these requirements. It should be noted that in the 1995 Report, the Division recommended that the Commission "respond realistically to the changes in the utility industry and interpret more flexibly each piece of the integration equation." 1995 Report at 71. CAPABLE OF PHYSICAL INTERCONNECTION. Upon consummation of the proposed transactions, Ohio Edison, Penn Power, Cleveland Electric and Toledo Edison, along with the new transmission company, ATSI, will continue to be "physically interconnected or capable of physical interconnection" within the meaning of Section 2(a)(29)(A). The electric service areas of the Operating Companies are adjacent, with Ohio Edison separating Cleveland Electric and Toledo Edison. The proposed transactions will maintain a continuous, geographically compact system across northern Ohio and western Pennsylvania. Moreover, the service areas served by the Operating Companies are already highly interconnected. Ohio Edison and Penn Power have three 345kV and four 138kV interconnections. Ohio Edison and Cleveland Electric have five 345 kV and four 138 kV interconnections, and Ohio Edison and Toledo Edison have one 345 kV and one 138 kV interconnection. After the transfer of the Transmission Assets to ATSI contemplated by the proposed transactions, the same physical interconnections will be maintained in the FirstEnergy holding company system. In view of the above, the facts presented clearly support a finding that the utility assets of the FirstEnergy system are "physically interconnected or capable of physical interconnection" within the meaning of Section 2(a)(29)(A) of the Act. SINGLE INTERCONNECTED AND COORDINATED SYSTEM. Section 2(a)(29)(A) of the Act requires that the utility assets, under normal circumstances, may be "economically operated as a single interconnected and coordinated system." The Commission has interpreted this language to refer to the physical operation of utility assets as a system in which, among other 18 20 things, the generation and/or flow of current within the system may be centrally controlled and allocated as need or economy directs. See UNITIL Corp., Holding Co. Act Release No. 25524 (Apr. 24, 1992). The electric generation, transmission and distribution system of FirstEnergy are operated in a manner that satisfies the standard of economic and coordinated operations in Section 2(a)(29)(A) of the Act. Moreover, as more fully described in Item 1.C.2 above, the proposed transactions are expected to result in greater coordination and more efficient allocation of provision of transmission services within the region served by the FirstEnergy holding company system. SINGLE AREA OR REGION. The "single integrated system" of FirstEnergy and its subsidiaries are currently confined in its operations to a single area or region, namely, northern and central Ohio and western Pennsylvania. This will not change as a result of the consummation of the proposed transactions, including the introduction of ATSI into the existing system. LOCALIZED MANAGEMENT, EFFICIENT OPERATION AND EFFECTIVE REGULATION. The FirstEnergy's utility system will not be enlarged at all as a result of the proposed transactions; thus, they will not impair the advantages of localized management, efficient operations and the effectiveness of regulation. Moreover, the Commission's past decisions on "localized management" show that the proposed transactions fully preserve the advantages of localized management. In such cases, the Commission has evaluated localized management in terms of: (i) responsiveness to local needs, see American Electric Power Co., Holding Co. Act Release No. 20633 (July 21, 1978)(advantages of localized management evaluated in terms of whether an enlarged system could be "responsive to local needs"); General Public Utilities Corp., 37 S.E.C. 28, 36 (1956)(localized management evaluated in terms of "local problems and matters involving relations with consumers"); (ii) whether management and directors were drawn from local utilities, see Centerior Energy Corp., Holding Co. Act Release No. 24073 (April 29, 1986)(advantages of localized management would not be compromised by the affiliation of two electric utilities under a new holding company because the new holding company's "management [would be] drawn from the present management" of the two utilities); (iii) the preservation of corporate identities, See Northeast Utilities, Holding Co. Act Release No. 25221 (December 21, 1990) (utilities "will be maintained as separate New Hampshire corporations . . . [t]herefore the advantages of localized management will be preserved"); Columbia Gas System, Inc., Holding Co. Act Release No. 24599 (March 15, 1988)(benefits of local management maintained where the utility to be added would be a separate subsidiary); and (iv) the ease of communications, see American Electric Power Co., Holding Co. Act Release No. 20633 (July 21, 1978)(distance of corporate headquarters from local management was a "less important factor in determining what is in the public interest" given the "present-day ease of communications and transportation"). The effectiveness of regulation will not be diminished as a result of the proposed transactions; Ohio Edison, Cleveland Electric and Toledo Edison will remain subject to regulation by the PUCO, and Penn Power will remain subject to regulation by the PPUC. Moreover, the respective interstate activities of Ohio Edison, Penn Power, Cleveland Electric and Toledo Edison will continue to be regulated by the FERC. ATSI will also be subject to regulation of the FERC with respect to rates and other matters. 19 21 C. SECTION 10(f) Section 10(f) provides that The Commission shall not approve any acquisition as to which an application is made under this section unless it appears to the satisfaction of the Commission that such State laws as may apply in respect of such acquisition have been complied with, except where the Commission finds that compliance with such State laws would be detrimental to the carrying out of the provisions of section 11. Ohio Edison, Cleveland Electric and Toledo Edison are currently subject to the jurisdiction of the PUCO. An application with the PUCO (a copy of which is attached hereto as Exhibit D-3) has been filed for approval of the PUCO with respect to the proposed transfer of the relevant Transmission Assets from each of the three Operating Companies to ATSI. Penn Power is currently subject to the jurisdiction of the PPUC. An application with the PPUC (a copy of which is attached hereto as Exhibit D-5) has been filed for approval of the PPUC with respect to the proposed transfer of the relevant Transmission Assets from Penn Power to ATSI and the operation of Penn Power's transmission lines by ATSI. ITEM 4. REGULATORY APPROVALS -------------------- Set forth below is a summary of the regulatory approvals that the applicants have obtained or expect to obtain in connection with the proposed transactions. Except as set forth below, no other state or local regulatory body or agency and no other federal commission or agency has jurisdiction over the transactions proposed herein. A. FEDERAL POWER ACT Under Section 203 of the Federal Power Act, the FERC has jurisdiction over the proposed transactions. The Operating Companies have filed a joint application with the FERC (a copy of which is attached hereto as Exhibit D-1) for authority to consummate the proposed transactions. B. STATE PUBLIC UTILITY REGULATION An application with the PUCO (a copy of which is attached hereto as Exhibit D-3) has been filed for approval of the PUCO with respect to the proposed transfer of the relevant Transmission Assets from each of the three Operating Companies to ATSI. An application with the PPUC (a copy of which is attached hereto as Exhibit D-5) has been filed for approval of the PPUC with respect to the proposed transfer of the relevant Transmission Assets from Penn Power to ATSI and the operation of Penn Power's transmission lines by ATSI. 20 22 C. OTHER FirstEnergy may file other applications for, or request, certain other consents or authorizations by federal, state or municipal agencies in connection with the issuance of securities, system operations and franchises or any other activities subject to regulatory approval. ITEM 5. PROCEDURE --------- The Applicant requests that there be no 30-day waiting period between the issuance of the Commission's order and the date on which it is to become effective. The Applicant submits that a recommended decision by a hearing or other responsible officer of the Commission is not needed with respect to the proposed transaction and that the Division may assist with the preparation of the Commission's decision and/or order in this matter unless such Division opposes the matters covered hereby. ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS --------------------------------- A. EXHIBITS EXHIBIT A-1 Articles of Incorporation of ATSI. A-2 Amended Articles of Incorporation of FirstEnergy (Incorporated by reference to the Form S-4 Registration Statement filed on February 3, 1997, File No. 333-21011, as Exhibit (3)-1). A-3 Amended Articles of Incorporation of Ohio Edison, effective June 21, 1994 (Incorporated by reference to the Form 10-K Annual Report of Ohio Edison for the year ended December 31, 1994, File No. 1-2578, as Exhibit 3-1). A-4 Amended Articles of Incorporation of Cleveland Electric, effective May 28, 1993 (Incorporated by reference to the Form 10-K Annual Report of Cleveland Electric for the year ended December 31, 1993, File No. 1-2323, as Exhibit 3a). A-5 Amended Articles of Incorporation of Toledo Edison, effective October 2, 1992 (Incorporated by reference to the Form 10-K Annual Report of Toledo Edison for the year ended December 31, 1992, File No. 1-3583, as Exhibit 3a). A-6 Agreement of Merger and Consolidation dated April 1, 1929, among Pennsylvania Power Company (Penn), Harmony Electric Company and Peoples Power Company (consummated May 31, 1930), copies of Letters Patent issued thereon, together with the Election Return and Treasurer's Return, relative to decrease of capital stock; Election Return authorizing change of capital stock and increase of indebtedness; Election Return authorizing change of capital stock; Election Return authorizing increase of capital stock; Election Return establishing 4.24% Preferred Stock; Certificate with respect to the establishment of the 4.64% Preferred Stock; Election Returns and Certificates of Actual Sale in connection with the purchase by Penn Power of all the property of Pine-Mercer Electric Company, Industry Borough Electric Company, Ohio Township Electric Company, and Shippingport Borough 21 23 EXHIBITS Electric Company; Certificate of Change of Location of Penn Power's principal office; Certificate of Consent authorizing increase in authorized Common Stock; Certificate of Consent with respect to the removal of limitations on the authorized amount of indebtedness of Penn Power; Election Returns and Certificates of Actual Sale in connection with the purchase by Penn Power of all the property of Borolak Public Service Company, Eastfax Public Service Company, Norango Public Service Company, Sadwick Public Service Company, Sosango Public Service Company, Surrick Public Service Company, Wesango Public Service Company, and Westfax Public Service Company; Certificate of Change of Location of Penn Power's principal office; Amendment to the Charter extending the territory in which Penn Power may operate in the Borough of Shippingport, Beaver County, Pennsylvania; Certificate of Consent authorizing increase in authorized Common Stock; Certificate with respect to the establishment of the 8% Preferred Stock; Certificate accepting Business Corporation Law of Pennsylvania for government and regulation of affairs of Penn Power; Articles of Amendment incorporating certain protective provisions relating to Preferred Stock, increasing amount of authorized Preferred Stock and authorizing future increases in amounts of authorized Preferred Stock without a vote of the holders of Preferred Stock; Articles of Amendment increasing the authorized number of shares of Common Stock; Statement Affecting Class or Series of Shares with respect to the establishment of the 7.64% Preferred Stock; Articles of Amendment increasing the authorized number of shares of Common Stock; Articles of Amendment increasing the number of authorized shares of Preferred Stock; Statement Affecting Class or Series of Shares with respect to the establishment of the 8.48% Preferred Stock; Articles of Amendment authorizing sinking fund requirements for Preferred Stock; Statement Affecting Class or Series of Shares with respect to the establishment of the 11% Preferred Stock; Articles of Amendment increasing the authorized number of shares of Common Stock; Statement Affecting Class or Series of Shares with respect to the establishment of the 9.16% Preferred Stock; Articles of Amendment increasing authorized number of shares of Common Stock; Articles of Amendment increasing authorized number of shares of Preferred Stock; Statement Affecting Class or Series of Shares with respect to the establishment of the 8.24% Preferred Stock; Statement Affecting Class or Series of Shares with respect to the establishment of the 10.50% Preferred Stock; Articles of Amendment increasing authorized number of shares of Common Stock; Articles of Amendment increasing authorized number of shares of Preferred Stock; Statement Affecting Class or Series of Shares with respect to the establishment of the 15.00% Preferred Stock; Statement Affecting Class or Series of Shares with respect to the establishment of the 11.50% Preferred Stock; Articles of Amendment increasing authorized number of shares of Preferred Stock; Statement Affecting Class or Series of Shares with respect to the establishment of the 13.00% Preferred Stock; Statement Affecting Class or Series of Shares with respect to the establishment of the 11.50% Preferred Stock, Series B; Articles of Amendment effective April 2, 1987, adding a standard of care for, and limiting the personal liability of, officers and directors; Articles of Amendment effective April 1, 1992, setting forth corporate purposes of the Company; Statement with Respect to Shares with respect to the establishment of 22 24 EXHIBITS the 7.625% Preferred Stock and Statement with Respect to Shares with respect to the establishment of the 7.75% Preferred Stock. (Physically filed and designated respectively, as follows: in Form A-2, Registration No. 2-3889, as Exhibit A-1; in Form 1-MD for 1938, File No.2-3889, as Exhibit (a)-1; in Form 1-MD for 1945, File No. 2-3889, as Exhibit A; in Form U-1, File No. 70-2310, as Exhibit A-3 (d); in Form 8-K for March 1951, File No. 1-3491, as Exhibit B; in Form 8-K for June 1958, File No. 1-3491B, as Exhibit 1; in Form 10-K for 1959 as Exhibits 1, 2, 3 and 4; in Form 8-K for March 1960, File No. 1-3491B as Exhibit A; in Form U-1, File No. 70-3971, as Exhibit A-2; in Form U-1, File No. 70-4055, as Exhibit A-2; as Exhibits 1 through 8 in Form 8-K for January 1962, File No. 1-3491; as Exhibit A in Form 8-K for August 1963, File No. 1-3491; as Exhibits A and B in Form 8-K for September 1969, File No. 1-3491; as Exhibit B in Form 8-K for April 1971, File No. 1-3491; as Exhibit B in Form 8-K for September 1971, File No. 1-3491; in Form 8-K for September 1972, File No. 1-3491; as Exhibit A in Form 8-K for December 1972, File No. 1-3491; as Exhibit A in Form 8-K for March 1973, File No. 1-3491; as Exhibit A in Form 8-K for December 1973, File No. 1-3491; as Exhibits A and C in Form 8-K for February 1974, File No. 1-3491; as Exhibits A and B in Form 8-K for January 1975, File No. 1-3491; as Exhibit F in Form 8-K for May 1975, File No. 1-3491; as Exhibit A in Form 8-K for April 1976, File No. 1-3491; as Exhibit G in Form 10-Q for quarter ended June 30, 1977, File No. 1-3491; as Exhibit C in Form 10-K for 1977, File No. 1-3491; as Exhibit A in Form 10-K for 1977, File No. 1-3491; as Exhibit D in Form 10-Q for quarter ended June 30, 1980, File No. 1-3491; as Exhibit (4) in Form 10-Q for quarter ended June 30, 1981, File No. 1-3491; as Exhibit 4 in Form 10-Q for quarter ended June 30, 1982, File No. 1-3491; as Exhibit 4 in Form 10-Q for quarter ended September 30, 1982, File No. 1-3491; as Exhibit 4 in Form 10-Q for quarter ended September 30, 1983, File No. 1-3491; as Exhibit 4 in Form 10-Q for quarter ended March 31, 1984, File No. 1-3491; as Exhibit 4 in Form 10-Q for quarter ended June 30, 1984, File No. 1-3491; as Exhibit 4 in Form 10-Q for quarter ended September 30, 1985, File No. 1-3491; as Exhibit 3-2 in Form 10-K for 1987 File No. 1-3491; as Exhibit 3-2 in Form 10-K for 1992 File No. 1-3491; as Exhibit 19-2 in Form 10-K for 1992 File No. 1-3491; and as Exhibit 3-2 in Form 10-K for 1993 File No. 1-3491.) B-1 Form of Operating Agreement between the Operating Companies and ATSI. D-1 Joint Application of Ohio Edison, Penn Power, Cleveland Electric and Toledo Edison to FERC. D-2 Order of FERC. (To be filed by amendment.) D-3 Application to the PUCO. D-4 Order of the PUCO. (To be filed by amendment.) D-5 Application to the PPUC. D-6 Order of the PPUC. (To be filed by amendment.) F-1 Preliminary Opinion of Counsel. (To be filed by amendment.) 23 25 EXHIBITS F-2 Past Tense Opinion of Counsel. (To be filed with certificate of notification.) G-1 First Energy Form U-3A-2, "Statement by Holding Company Claiming Exemption under Rule U-2 from the Provisions of the Public Utility Holding Company Act of 1935," dated February 26, 1999 (Incorporated by reference to such filing, File No. 69-423). G-2 Form 10-K Annual Report of FirstEnergy for the year ended December 31, 1998 (Incorporated by reference to such filing, File No. 333-21011). G-3 Form 10-K Annual Report of Ohio Edison for the year ended December 31, 1998 (Incorporated by reference to such filing, File No. 1-2578). G-4 Form 10-K Annual Report of Penn Power for the year ended December 31, 1998 (Incorporated by reference to such filing, File No. 1-3491). G-5 Form 10-K Annual Report of Cleveland Electric for the year ended December 31, 1998 (Incorporated by reference to such filing, File No. 1-2323). G-6 Form 10-K Annual Report of Toledo Edison for the year ended December 31, 1998 (Incorporated by reference to such filing, File No. 1-3583). H-1 Form of Notice of Application. B. FINANCIAL STATEMENTS EXHIBIT FS-1 FirstEnergy Consolidated Balance Sheet as of December 31, 1998 (see Annual Report of FirstEnergy on Form 10-K for the year ended December 31, 1998 (Exhibit G-2 hereto)). FS-2 FirstEnergy Consolidated Statements of Income for its last three fiscal years (see Annual Report of Ohio Edison on Form 10-K for the year ended December 31, 1998 (Exhibit G-2 hereto)). FS-3 Ohio Edison Consolidated Balance Sheet as of December 31, 1998 (see Annual Report of Ohio Edison on Form 10-K for the year ended December 31, 1998 (Exhibit G-3 hereto)). FS-4 Ohio Edison Consolidated Statements of Income for its last three fiscal years (see Annual Report of Ohio Edison on Form 10-K for the year ended December 31, 1998 (Exhibit G-3 hereto)). FS-5 Penn Power Balance Sheet as of December 31, 1998 (see Annual Report of Penn Power on Form 10-K for the year ended December 31, 1998 (Exhibit G-4 hereto)). FS-6 Penn Power Statements of Income for its last three fiscal years (see Annual Report of Penn Power on Form 10-K for the year ended December 31, 1998 (Exhibit G-4 hereto)). FS-7 Cleveland Electric Consolidated Balance Sheet as of December 31, 1998 (see Annual Report of Cleveland Electric on Form 10-K for the year ended December 31, 24 26 EXHIBITS 1998 (Exhibit G-5 hereto)). FS-8 Cleveland Electric Consolidated Statements of Income for its last three fiscal years (see Annual Report of Cleveland Electric on Form 10-K for the year ended December 31, 1998 (Exhibit G-5 hereto)). FS-9 Toledo Edison Balance Sheet as of December 31, 1998 (see Annual Report of Toledo Edison on Form 10-K for the year ended December 31, 1998 (Exhibit G-6 hereto)). FS-10 Toledo Edison Statements of Income for its last three fiscal years (see Annual Report of Toledo Edison on Form 10-K for the year ended December 31, 1998 (Exhibit G-6 hereto)). Financial Statements of ATSI are not included herein because it has no assets and has not engaged in any business operations. ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS --------------------------------------- The proposed transactions neither involve a "major federal action" nor "significantly affect the quality of the human environment" as those terms are used in Section 102(2)(C) of the National Environmental Policy Act, 42 U.S.C. Sec. 4321 et seq. Consummation of the proposed transactions will not result in changes in the operations of FirstEnergy, Ohio Edison, Toledo Edison or Penn Power that would have any impact on the environment. No federal agency is preparing an environmental impact statement with respect to this matter. SIGNATURE Pursuant to the requirements of the Public Utility Holding Company Act of 1935, the undersigned company has duly caused this Application/Declaration to be signed on its behalf by the undersigned thereunto duly authorized. Date: ___________, 1999 FIRSTENERGY CORP. By: /s/ H. Peter Burg ----------------------------------- H. Peter Burg President and Chief Executive Officer 25 EX-1.A 2 EXHIBIT 1(A) 1 Exhibit A-1 ARTICLES OF INCORPORATION OF AMERICAN TRANSMISSION SYSTEMS, INCORPORATED (AS FILED WITH THE OHIO SECRETARY OF STATE ON OCTOBER 8, 1998) The undersigned, desiring to form a corporation, for profit, under Sections 1701.01 et seq. of the Ohio Revised Code, does hereby state the following: FIRST. The name of the corporation shall be "American Transmission Systems, Incorporated." SECOND. The place in Ohio where its principal office is to be located is Akron, Summit County. THIRD. The purpose for which this corporation is formed is to engage in any lawful act or activity for which a corporation may be formed under Section 1701.01 to 1701.98, inclusive, of the Ohio Revised Code. FOURTH. The number of shares of all classes which the corporation is authorized to have outstanding is eight hundred and fifty (850) shares of common stock having no par value. IN WITNESS WHEREOF, I have subscribed my name, this ___ day of _________, 1998. American Transmission Systems, Incorporated /s/ Mary Hockwalt Bell ---------------------------- Mary Hockwalt Bell Incorporator 2 ORIGINAL APPOINTMENT OF STATUTORY AGENT The undersigned, the sole incorporator of AMERICAN TRANSMISSION SYSTEMS, INCORPORATED, hereby appoints NANCY C. ASHCOM to be statutory agent upon whom any process, notice or demand required or permitted by statute to be served upon the corporation may be served. The complete address of the agent is: 76 SOUTH MAIN STREET, AKRON, OHIO 44308. /s/ Mary Hockwalt Bell -------------------------------- Mary Hockwalt Bell ACCEPTANCE OF APPOINTMENT The undersigned, NANCY C. ASHCOM, named here in as the statutory agent for AMERICAN TRANSMISSION SYSTEMS, INCORPORATED, hereby acknowledges and accepts the appointment of statutory agent for said corporation. /s/ Nancy C. Ashcom -------------------------------- Nancy C. Ashcom EX-1.B 3 EXHIBIT 1(B) 1 Exhibit B-1 OPERATING AGREEMENT ------------------- WHEREAS, FirstEnergy Corp. has formed a wholly-owned subsidiary, American Transmission Systems, Inc. ("ATSI") to own, plan, and operate Transmission Facilities transferred from The Cleveland Electric Illuminating Company, Ohio Edison Company, Pennsylvania Power Company, and The Toledo Edison Company (FirstEnergy Operating Companies) and to become the Control Area Operator for the Transmission System; WHEREAS, the FirstEnergy Operating Companies have delivered a Bill of Sale transferring ownership of their transmission facilities to ATSI; WHEREAS, the FirstEnergy Operating Companies have entered into Ground Leases which provide for non-exclusive use of transmission rights-of-way by ATSI; WHEREAS, the FirstEnergy Operating Companies and ATSI desire to enter into an Agreement providing for the planning, operation, and control of the Transmission System by ATSI; THIS OPERATING AGREEMENT, including all appendices attached hereto (hereinafter "Agreement") is entered into by ATSI and the FirstEnergy Operating Companies, (Individually a "Party" and collectively the "Parties") transferring the ownership, planning, and operation of the FirstEnergy Transmission System to ATSI. ARTICLE ONE DEFINITIONS 1. IN GENERAL ---------- Unless the context otherwise specifies or requires, the following terms used in this Agreement, or in any appendix to this Agreement, shall have the meanings set forth below. Additional terms are defined in other provisions of this Agreement as needed. 1.1 AGENCY AGREEMENT. The agreement appended hereto as Appendix C which allows ATSI 2 to act as agent for the FirstEnergy Operating Companies to the extent necessary to provide transmission service to wholesale customers served at voltages below 69 kV over Distribution Facilities under the Transmission Tariff. 1.2 CONTROL AREA OPERATOR. Means operating an electric power system or combinations of electric power systems to which a common automatic generation control scheme is applied in order to: a. match, at all times, the power output of the generators within the electric power system(s) and capacity and energy purchased from or sold to entities outside or within the electric power system(s), in accordance with transmission service requests with the load within the electric power system(s); b. maintain scheduled interchange with other Control Areas, within the limits of Good Utility Practice; c. maintain the frequency of the electric power system(s) to NERC standards and provide emergency services in cooperation with the FirstEnergy Operating Companies and Good Utility Practice; d. provide sufficient generating capacity to maintain operating reserves in accordance with Good Utility Practice; and e. administer and implement all transmission reservations in accordance to the "Open Access Same Time Information System" (OASIS). Following FERC approval, ATSI will be the Control Area Operator for the FirstEnergy electric power system. 1.3 DISTRIBUTION FACILITIES. All facilities with nominal voltages below 69 kV which are owned or operated by the FirstEnergy Operating Companies. Distribution Facilities include the 36, 34.5, 33 and 23 kv lines and associated facilities defined in Section 3.1.3 of this Agreement. Distribution -2- 3 facilities shall include the final circuit connection into substations, including substation facilities, providing transformation or connection to any wholesale or retail customer, regardless of the nominal voltage level. Distribution Facilities include all metering and related facilities necessary to serve such customers, including customer owned Distribution Facilities operated by the FirstEnergy Operating Companies and such other facilities defined in Appendix D. 1.4 EFFECTIVE DATE. The Effective Date of this Agreement is the date that FERC approves the application of the FirstEnergy Operating Companies for transfer of ownership, operation, and control of Transmission Facilities to ATSI. 1.5 FERC. The Federal Energy Regulatory Commission, or any successor agency. 1.6 FIRSTENERGY OPERATING COMPANIES. Ohio Edison Company, Pennsylvania Power Company, The Cleveland Electric Illuminating Company, and The Toledo Edison Company. 1.7 GENERATION FACILITIES. Generating Facilities are facilities used for the production of electric energy and which are owned and operated by the FirstEnergy Operating Companies. The Generation Facilities are described in more detail in Appendix D. 1.8 GOOD UTILITY PRACTICE. Any of the practices, methods, and acts engaged in or approved by a significant portion of the electric utility industry during the relevant time period, or any of the practices, methods, and acts which, in the exercise of reasonable judgment in light of the facts known at the time the decision was made, could have been expected to accomplish the desired result at reasonable cost consistent with good business practices, reliability, safety, and expedition. Good Utility Practice is not intended to be limited to the optimum practice, method, or act, to the exclusion of all others, but rather to be a range of acceptable practices, methods, or act generally accepted in the region. 1.9 GRANDFATHERED TRANSMISSION AGREEMENTS. Grandfathered Transmission Agreements has the meaning given in Section 2.1.5 of this Agreement. 1.10 REGULATORY AUTHORITY(IES). Regulatory Authority(ies) includes any federal, state, local or -3- 4 other governmental, regulatory or administrative agency having jurisdiction over the subject matter of this Agreement. 1.11 TRANSFER DATE. The first business day following the Effective Date when ownership, operation, and control of Transmission Facilities is transferred to ATSI. 1.12 TRANSMISSION FACILITIES. Transmission facilities of 69 kV nominal rating and above, all transformers where the nominal low-side voltage is 69 kV and above, the System Control Center facility and equipment, and such other facilities described in Appendix D, sold to, and owned by ATSI. The Transmission Facilities also include any other facilities built, purchased, leased, or otherwise acquired by ATSI in furtherance of its obligations under this Agreement, including any new metering necessary between ATSI and either the Distribution Facilities or Generation Facilities. 1.13 TRANSMISSION TARIFF. The Transmission Tariff on file with the FERC under which ATSI will offer open access transmission service, or any successor tariff. 1.14 TRANSMISSION SYSTEM. The Transmission Facilities owned, operated, and controlled by ATSI that are used to provide service under the Transmission Tariff. 1.15 TRANSMISSION CUSTOMER. A Transmission Customer under the Transmission Tariff or any entity that is a party to a transaction under the Transmission Tariff. Transmission Customer includes the FirstEnergy Operating Companies. ARTICLE TWO RIGHTS, POWERS, AND OBLIGATIONS OF ATSI 2. PLANNING AND OPERATIONS. ------------------------ 2.1.1 PLANNING ACTIVITIES. ATSI shall plan the Transmission System in order to provide all Transmission Customers with efficient, reliable, and non-discriminatory transmission service under the Transmission Tariff. Such planning shall conform to applicable reliability requirements of the North -4- 5 American Electric Reliability Council (NERC), applicable regional reliability councils, or any successor organizations, and all applicable requirements of federal or state laws or Regulatory Authorities and any reliability procedures or guidelines adopted by ATSI. Such planning shall seek to minimize costs for both ATSI and Transmission Customers, consistent with Good Utility Practice and the reliability and other requirements set forth in this Agreement, but shall also include consideration of economic Transmission System expansion, whether by construction or acquisition of new Transmission Facilities. ATSI shall plan the Transmission System as provided in Appendix A to this Agreement. 2.1.2 RELIABILITY. ATSI shall have responsibility for the reliability of the Transmission System. 2.1.3 OPERATIONAL CONTROL. ATSI shall operate the Transmission System and the high side (69 kV or higher) devices of the Distribution Facilities as necessary to provide all Transmission Customers with efficient, reliable, and non-discriminatory transmission service under the Transmission Tariff. Such operation shall be exercised in accordance with Good Utility Practice and shall conform to applicable reliability requirements of the NERC, applicable regional reliability councils, or any successor organizations, and all applicable requirements of federal or state laws or Regulatory Authorities. ATSI shall establish reliability guidelines or procedures necessary to implement and comply with applicable reliability requirements. ATSI's operation of the Transmission System shall be in accordance with Appendix B to this Agreement. 2.1.4 PERFORMANCE OF REGULATORY OBLIGATIONS. ATSI shall comply with transmission operation and planning obligations of the FirstEnergy Operating Companies imposed by federal or state laws or Regulatory Authorities, as of the Effective Date of this Agreement, including all transmission related obligations adopted by FERC in OHIO EDISON, ET AL., 81 FERC section 61,110 (1997), and license conditions imposed by the Nuclear Regulatory Commission or its predecessor, which can no longer be performed solely by the FirstEnergy Operating Companies following transfer of ownership and control of their Transmission Facilities to ATSI, until such time as such obligations are changed or revised to relieve -5- 6 the FirstEnergy Operating Companies or ATSI in whole or in part of such obligations. 2.1.5 GRANDFATHERED TRANSMISSION AGREEMENTS. Where the FirstEnergy Operating Companies are responsible for providing transmission service under agreements or tariffs which were executed or effective prior to July 9, 1996 (Grandfathered Transmission Agreements), ATSI and the FirstEnergy Operating Companies will execute a network integration service agreement under the Transmission Tariff to ensure that the FirstEnergy Operating Companies' obligation to provide transmission service under the Grandfathered Transmission Agreements is satisfied. The load served pursuant to the Grandfathered Transmission Agreements will be included in the FirstEnergy Operating Companies' member load ratio calculation under the Transmission Tariff, and the FirstEnergy Operating Companies shall compensate ATSI for this service under the Transmission Tariff. The FirstEnergy Operating Companies will continue to bill customers served under Grandfathered Transmission Agreements in accordance with those agreements. 2.2 NON-DISCRIMINATORY TRANSMISSION SERVICE. 2.2.1 TRANSMISSION. ATSI shall offer transmission service over the entire Transmission System, to all "Eligible Customers", as defined in the Transmission Tariff, including the FirstEnergy Operating Companies, on a non-discriminatory basis, pursuant to the Transmission Tariff and Agency Agreement attached hereto as Appendix C. ATSI shall be the Transmission Provider under the Transmission Tariff. 2.2.2 PRICING. ATSI may propose to the FERC such pricing for transmission service as is necessary to fulfill its obligations under this Agreement and may propose to the FERC such changes in prices, pricing methods, terms, and conditions as are necessary to continue to fulfill such obligations. 2.2.3 STANDARDS OF CONDUCT. ATSI, the FirstEnergy Operating Companies, their affiliates, and their directors, officers, employees, contractors, and agents shall adhere to the ATSI Standards of Conduct as approved by this Commission. -6- 7 2.2.4 OASIS. ATSI shall assume responsibility for the OASIS or successor system(s) currently maintained by FirstEnergy Operating Companies. The OASIS shall conform to the requirements for such systems as specified by the FERC in Order No. 889, FERC Stat. & Regs. Section 31,037 (1996), as amended by rehearing orders. 2.2.5 ANCILLARY SERVICES. ATSI shall offer, as part of the Transmission Tariff, such ancillary services as are required by the FERC to be offered. ATSI shall obtain ancillary services on a least cost basis. ATSI may obtain ancillary services from the FirstEnergy Operating Companies or from such other generators as make these services available to ATSI at their FERC approved rates for these services consistent with ATSI's reliability responsibilities and other obligations under this Agreement. The FirstEnergy Operating Companies will continue to provide ancillary services to support transmission service using the Transmission System when requested by ATSI. 2.2.6 INSPECTION AND AUDITING PROCEDURES. ATSI shall grant each of the FirstEnergy Operating Companies, its directors, officers, employees or agents, external auditors, and Regulatory Authorities having jurisdiction over ATSI, such access to ATSI's books and records as is necessary to verify compliance by ATSI with this Agreement and to audit and verify transactions under this Agreement. Such access shall be at reasonable times and under reasonable conditions. ATSI shall also comply with the reporting requirements of Regulatory Authorities having jurisdiction over ATSI with respect to the business aspects of its business operations, and shall maintain such accounting records and metering data as is necessary to perform its obligations under this Agreement. ARTICLE THREE -7- 8 RIGHTS, POWERS, AND OBLIGATIONS OF THE PARTIES 3. CONSTRUCTION AND OPERATION OF THE PARTIES' FACILITIES ----------------------------------------------------- 3.1.1 OPERATION OF FIRSTENERGY OPERATING COMPANY FACILITIES. The FirstEnergy Operating Companies shall cooperate with ATSI, its directors, officers, employees, or agents, in performing its duty as Control Area Operator in operating high side (69 kV or higher) devices of the Distribution Facilities, redispatching Generation Facilities, providing reactive supply and voltage control from generation sources or other ancillary services, and curtailing load, when reasonably requested by ATSI, in accordance with the Transmission Tariff and Good Utility Practice. The FirstEnergy Operating Companies shall not operate their Generation and Distribution Facilities in a manner which unduly interferes with the provision of transmission service by ATSI. 3.1.2 DISTRIBUTION FACILITIES USED FOR WHOLESALE SERVICES. ATSI will arrange for transmission service over the Distribution Facilities to wholesale customers served at voltages below 69 kV under the Transmission Tariff. ATSI will cooperate with the FirstEnergy Operating Companies to provide service over these Distribution Facilities to these wholesale customers at FERC approved rates as set forth in Appendix C. 3.1.3 OPERATION OF CERTAIN DISTRIBUTION FACILITIES BY ATSI. For a period of no more than three years from the Effective Date, ATSI will operate, as agent for the FirstEnergy Operating Companies, 36, 34.5, 33 and 23 kV Distribution Facilities currently classified as "transmission" under the FERC Uniform System Accounts. The FirstEnergy Operating Companies will remain responsible for maintaining these facilities in accordance with Good Utility Practice. ATSI will be reimbursed by the FirstEnergy Operating Companies for its cost of operating these Distribution Facilities. Except as provided in Section 3.1.2, these 36, 34.5, 33 and 23 kV Distribution Facilities are not available for service under the Transmission Tariff. The FirstEnergy Operating Companies will assume responsibility for the operation of these Distribution Facilities at the earliest possible date that they can do so consistent with -8- 9 Good Utility Practice. ATSI will cooperate with the FirstEnergy Operating Companies to facilitate the transfer of operational control. 3.1.4 MAINTENANCE AND OPERATION SERVICES. ATSI is responsible for maintenance, and operation of the Transmission System and may employ persons and enter into agreements as necessary to perform these services. ATSI may contract with the FirstEnergy Operating Companies to perform these services. For a period of three years from the Effective Date, the FirstEnergy Operating Companies agree to perform the maintenance and operation services identified in a separate services agreement for ATSI in accordance with Good Utility Practice. This services agreement will continue from year to year thereafter unless terminated by either Party by written notice at least one year prior to the expiration of the annual term, or if this Agreement is terminated in accordance with Article IV. The FirstEnergy Operating Companies shall coordinate performance of these services with ATSI as set forth in more detail in Appendix B to this Agreement. 3.1.5 CONSTRUCTION. A. ATSI is responsible for the design and construction of new Transmission Facilities where necessary or desirable to provide transmission service over the Transmission System, or in response to requests for transmission service under the Transmission Tariff. ATSI will acquire all land, licenses, or rights-of-way, necessary for such construction. ATSI may contract with the FirstEnergy Operating Companies for design, construction and related real estate services. For a period of three years from the Effective Date, the FirstEnergy Operating Companies agree to construct all new Transmission Facilities for ATSI as provided in a separate construction agreement. The construction agreement will continue from year to year thereafter unless terminated by either Party by written notice at least one year prior to expiration of the annual term, or if this Agreement is terminated in accordance with Article IV. B. The FirstEnergy Operating Companies shall use due diligence to plan and construct Distribution Facilities necessary to provide adequate and reliable transmission service to -9- 10 wholesale customers served at voltages below 69 kV, or in response to requests for service under the Transmission Tariff. C. All facilities constructed pursuant to this Agreement shall be subject to such siting, permitting, and environmental requirements as may be imposed by state, local, and federal laws and regulations, and subject to the approval of Regulatory Authorities . Construction of new facilities shall be performed in accordance with Good Utility Practice, industry standards, and any Regulatory Authorities. All new Transmission Facilities shall be owned by ATSI and all new Distribution Facilities shall be owned by the FirstEnergy Operating Companies. 3.1.6 ACQUISITION. If ATSI constructs, leases, or otherwise acquires ownership or control of Transmission Facilities after the Transfer Date, such facilities shall become part of the Transmission System. 3.1.7 PROVIDING INFORMATION. ATSI shall provide such information to the FirstEnergy Operating Companies as is necessary for them to perform their obligations under this Agreement or any Grandfathered Transmission Agreement, or to comply with requirements of Regulatory Authorities. All such information shall be submitted in accordance with Order No. 889. Information identified as confidential shall be treated as confidential to the extent permitted by law. 3.1.8 FACILITIES ACCESS. ATSI shall allow the FirstEnergy Operating Companies, their directors, officers, employees, or agents such access to its Transmission Facilities as is necessary for the FirstEnergy Operating Companies to perform their obligations under this Agreement or to comply with the requirements of Regulatory Authorities. Such access shall be at reasonable times and under reasonable conditions. 3.2 ADDITIONAL OBLIGATIONS OF THE FIRSTENERGY OPERATING COMPANIES. 3.2.1 PROVIDING INFORMATION. The FirstEnergy Operating Companies shall provide such information to ATSI as is necessary for it to perform its obligations under this Agreement, the -10- 11 Transmission Tariff, and any service agreements thereunder, or to comply with the requirements of Regulatory Authorities. All such information shall be submitted in accordance with Order No. 889. Information identified as confidential shall be treated as confidential to the extent permitted by law. 3.2.2 FACILITIES ACCESS. The FirstEnergy Operating Companies shall allow ATSI, its directors, officers, employees, or agents, such access to their Distribution Facilities and Generation Facilities as is necessary for ATSI to perform its obligations under this Agreement, the Transmission Tariff, and any service agreements thereunder, or to comply with the requirements of Regulatory Authorities. Such access shall be at reasonable times and under reasonable conditions. 3.3.3 INSPECTION AND AUDITING PROCEDURES. The FirstEnergy Operating Companies shall grant the FERC, ATSI, its directors, officers, employees, and agents, and each state regulatory authority having jurisdiction over the FirstEnergy Operating Companies, such access to books and records as is necessary for ATSI to perform its obligations under this Agreement, the Transmission Tariff, and any service agreements thereunder, to comply with the requirements of Regulatory Authorities, and to audit and verify transactions under this Agreement. Such access shall be at reasonable times and under reasonable conditions. The FirstEnergy Operating Companies shall comply with the reporting requirements of Regulatory Authorities having jurisdiction over the FirstEnergy Operating Companies with respect to the business aspects of their operations, and shall maintain such accounting records and metering data as is necessary to perform its obligations under this Agreement. ARTICLE FOUR TERM AND TERMINATION 4.1 The term of this Agreement shall commence on the Effective Date and the Agreement will remain in effect for an initial period of three years unless terminated earlier by the mutual consent of the Parties, or in accordance with Section 4.2 below. After the initial three year term, this Agreement shall thereafter remain in effect from year to year unless terminated by either Party upon at least one year's -11- 12 written notice prior to the annual renewal date. 4.2 In entering into this Agreement the Parties contemplate that ATSI will join a regional transmission organization (RTO) during the initial three-year term of the Agreement. In preparing for the implementation of a transfer of ownership, control or operation of the Transmission System through ATSI's participation in a RTO (or otherwise through the divestiture of ownership of ATSI by FirstEnergy Corp.), the Parties may desire to leave in place all or part of this Agreement for an interim period following the date of transfer or divestiture to permit permanent arrangements to be negotiated and made effective among the Parties and the RTO or new owner(s). Accordingly, upon consent of the Parties (which will not be unreasonably withheld), this Agreement may remain in place for an interim period following the date of transfer or divestiture of the Transmission System; provided, however, that if the transfer of ownership, control or operation of the Transmission System takes place through ATSI's participation in a RTO, ATSI must secure the consent of the RTO to permit any continued effectiveness of this Agreement past the date of transfer. 4.3 The Parties' obligation to make any payments owing or due under this Agreement or to complete the construction of specific facilities agreed to prior to termination of this Agreement, shall survive the termination of this Agreement. ARTICLE FIVE REGULATORY APPROVALS 5. REGULATORY AUTHORITIES. This Agreement is subject to acceptance or approval by the FERC and may be subject to the actions of Regulatory Authorities to which ATSI and the FirstEnergy Operating Companies may be subject and which may affect the ability of ATSI or the FirstEnergy Operating Companies to participate in this Agreement. -12- 13 5.1.1 In the event one or more of the Regulatory Authorities rejects, disapproves or refuses in whole or in part to accept this Agreement, then this Agreement shall cease to be effective. 5.1.2 In the event one or more of the Regulatory Authorities by order imposes conditions on approval or acceptance of the Agreement which adversely affect either Party, the affected Party may, no later than thirty (30) days after the date of such order, withdraw from this Agreement. 5.2 RENEGOTIATION. If any provision of this Agreement, or the application thereof to any person, entity, or circumstance, is held by a Regulatory Authority or court of competent jurisdiction to be invalid, void, or unenforceable, then the Parties shall endeavor in good faith to negotiate such amendment or amendments to this Agreement as will restore the relative benefits and obligations of the Parties under this Agreement immediately prior to such holding. If such negotiations are unsuccessful, then the Parties may withdraw from this Agreement. ARTICLE SIX MISCELLANEOUS PROVISIONS 6.1 DESCRIPTIVE HEADINGS. The descriptive headings of Articles, Sections, Paragraphs, Subparagraphs, and other provisions of this Agreement have been inserted for convenience of reference only and shall not define, modify, restrict, construe, or otherwise affect the construction or interpretation of any of the provisions of this Agreement. 6.2 GOVERNING LAW. This Agreement shall be interpreted, construed, and governed by the laws of the State of Ohio, except to the extent preempted by the laws of the United States of America. 6.3 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument, binding upon the FirstEnergy Operating Companies and ATSI. -13- 14 6.4 NO IMPLIED WAIVERS. The failure of a Party to insist upon or enforce strict performance of any of the specific provisions of this Agreement at any time shall not be construed as a waiver or relinquishment to any extent of such Party's right to assert or rely upon any such provisions, rights, or remedies in that or any other instance, or as a waiver to any extent of any specific provision of this Agreement; rather the same shall be and remain in full force and effect. 6.5 FURTHER ASSURANCES. Each Party agrees that it shall hereafter execute and deliver such further instruments, provide all information, and take or forbear such further acts and things as may be reasonably required or useful to carry out the intent and purpose of this Agreement and as are not inconsistent with the provisions of this Agreement. 6.6 DELIVERY OF NOTICES. Except as otherwise expressly provided herein, notices required under this Agreement shall be in writing and shall be sent to the FirstEnergy Operating Companies or ATSI by U.S. mail, overnight courier, hand delivery, telefacsimile, or other reliable electronic means. Any notice required under this Agreement shall be deemed to have been given either upon delivery, if by U.S. mail, overnight courier, or hand delivery, or upon confirmation, if given by telefacsimile or other reliable electronic means. 6.7 ENTIRE AGREEMENT. This Agreement, including the appendices attached hereto, the Transmission Tariff, Service Agreements thereunder, the Agency Agreement, the Bill of Sale, Ground Lease, and other agreements referenced herein constitute the entire agreement among the Parties with respect to the subject matter of this Agreement, and no previous or contemporary oral or written representations, agreements, or understandings made by any director, officer, agent, or employee of the FirstEnergy Operating Companies or ATSI shall be binding on the other unless contained in this Agreement, including the appendices attached hereto, the Transmission Tariff, Service Agreements thereunder, the Agency Agreement, the Bill of Sale, Ground Lease, or other agreements referenced herein. No amendment, modification or change in this Agreement shall be valid and enforceable unless reduced -14- 15 in writing and executed by the Parties. 6.8 GOOD FAITH EFFORTS. Each Party agrees that it shall in good faith take all reasonable actions necessary to fulfill its obligations under this Agreement. Where the consent, agreement, or approval of any Party must be obtained hereunder, such consent, agreement, or approval shall not be unreasonably withheld, conditioned, or delayed. Where any Party is required or permitted to act, or omit to act, based on its opinion or judgment, such opinion or judgment shall not be unreasonably exercised. To the extent that the jurisdiction of any Regulatory Authorities applies to any part of this Agreement or the transactions or actions covered by this Agreement, each Party shall cooperate to secure any necessary or desirable approval or acceptance of such Regulatory Authorities of such part of this Agreement or such transactions or actions. 6.9 THIRD-PARTY AGREEMENTS. This Agreement, including the appendices to this Agreement, the Transmission Tariff, the Service Agreements thereunder, the Agency Agreement, Bill of Sale, and the Ground Leases, and other agreements referenced herein, shall not be construed, interpreted or applied in such a manner as to cause the FirstEnergy Operating Companies to be in material breach, anticipatory or otherwise, of any agreement between the FirstEnergy Operating Companies and one or more third parties who are not Parties to this Agreement for the joint ownership, operation, or maintenance of any electrical facilities covered by this Agreement, the Transmission Tariff, or the Agency Agreement. A FirstEnergy Operating Company which has such a third-party joint agreement shall discuss with ATSI any material conflict between such third-party joint agreement and this Agreement, the Transmission Tariff, or the Agency Agreement raised by a third party to such joint agreement, and shall act in good faith to resolve such conflict in accordance with Good Utility Practice. IN WITNESS WHEREOF, the Parties have caused their duly authorized representatives -15- 16 to execute and attest this Agreement, on their respective behalf, as of this ____ day of ____________, 199__. - ----------------------------------- -------------------------------- Signature Signature - ----------------------------------- -------------------------------- Title of Signatory Title of Signatory ATSI TRANSMISSION SYSTEMS, INC. THE FIRSTENERGY OPERATING COMPANIES: OHIO EDISON COMPANY PENNSYLVANIA POWER COMPANY THE CLEVELAND ELECTRIC ILLUMINATING CO. THE TOLEDO EDISON COMPANY
-16- 17 APPENDIX A ---------- SYSTEM PLANNING 1. OVERVIEW. --------- This Appendix A describes the process to be used by ATSI in planning the Transmission System. Nothing in this Appendix is intended to restrict or expand existing federal or state laws. ATSI has overall responsibility for planning the Transmission System to provide all Transmission Customers with efficient, reliable, and non-discriminatory transmission service, and has exclusive responsibility for planning the ATSI Transmission Facilities. ATSI will cooperate with all Transmission Customers to ensure that costs to both ATSI and Transmission Customers are minimized in the planning process. ATSI will also coordinate the planning of Transmission Customer owned facilities which affect operation of the Transmission System, or are necessary to provide service to wholesale customers, and shall review and comment on any plans developed by the Transmission Customer for these facilities. With respect to Distribution Facilities, ATSI shall have only that planning authority necessary to carry out its responsibilities under this Agreement and the Transmission Tariff. When performing System Impact and Facilities Studies as defined in the Transmission Tariff, ATSI shall treat Transmission Customer owned facilities on a comparable basis with ATSI's own facilities. ATSI shall make all determinations of Available Transmission Capability (ATC) over the Transmission System, including determinations involving the impact on Transmission Customer owned facilities of providing ATC. 2. THE PLANNING PROCESS -------------------- A. NEW LOAD 1. FirstEnergy Operating Companies will be the point of contact for retail customers planning to increase existing load or to connect new load to either the Transmission System or to Distribution Facilities. The FirstEnergy Operating Companies shall inform ATSI of any new load proposed to connect directly to the Transmission System. 18 2. The FirstEnergy Operating Companies shall coordinate load and facility additions with ATSI for the planning of new Transmission Facilities. The FirstEnergy Operating Companies will be required to obtain the approval of ATSI before proceeding with any modifications or additions to the Transmission System. ATSI will be obligated to act on the proposals submitted by FirstEnergy Operating Companies in an expeditious manner, consistent with its obligation to serve the FirstEnergy Operating Companies' network loads under the Transmission Tariff. 3. Transmission Customers may contact ATSI directly with regard to initiating any transmission planning activities to accommodate increased loads or power transfers. ATSI will act on the proposals submitted by Transmission Customers in an expeditious manner, consistent with its obligation to serve the Transmission Customers' network loads under the Transmission Tariff. B. NEW GENERATION 1. ATSI is responsible for connection of new generation synchronized to the Transmission System. The connection will be established through a joint process with the generator. ATSI will develop "Facility Connection Requirements" which will set out the minimum technical, design, reliability, protection and operational criteria which must be complied with by generators wishing to connect and synchronize generation to the Transmission System. This will include, but not be limited to the must run and black start requirements of the generator. ATSI will enter into the necessary agreements to permit the connection. 2. DISTRIBUTED GENERATION. The FirstEnergy Operating Companies are responsible for arrangements with retail customers who install generation which is connected to the Transmission System. The FirstEnergy Operating Companies will cooperate with the retail customers to develop procedures for the operation of such generation. C. PLANNING RESPONSIBILITIES OF ATSI 19 -3- (1) ATSI will have ultimate decision-making responsibility for transmission planning, including the approval or rejection of any proposed modification or addition that significantly affects the capability of the Transmission System. (2) ATSI will have ultimate responsibility for planning the Transmission System to: (a) meet reliability standards (as defined by NERC, applicable regional reliability councils and any successor or other industry or reliability organizations) in a manner consistent with Good Utility Practice; (b) meet transmission requirements associated with the distributed load growth of the FirstEnergy Operating Companies and ATSI's Transmission Customers; (c) increase transfer capability on the Transmission System in response to congestion price signals, to relieve interregional constraints, and in response to requests for service; and (d) minimize costs to ATSI and its Transmission Customers. (3) ATSI will develop the "Planning Criteria" for the Transmission System and will cooperate with the FirstEnergy Operating Companies and connected generators to determine the must run status of their units. (4) ATSI will conduct power flow and stability studies for the Transmission System, and will participate in joint studies with other control areas or reliability councils as necessary to ensure compliance with NERC and applicable regional planning criteria, including, but not limited to the following. (a) ATSI will maintain transmission modeling information. (b) ATSI will maintain specific transmission line and equipment information to develop a database for determining the thermal ratings of circuits and transformers. This will include information such as transmission line plan and 20 -4- profile and transformer test data. (c) ATSI will be responsible for maintaining data necessary for a system short circuit database, relay setting database, and other information necessary for performing dynamic system studies and assessing system performance. (d) ATSI will be responsible for performing short circuit adequacy studies and providing verification of compliance or a schedule for planned facility replacements to achieve compliance. (e) The FirstEnergy Operating Companies will cooperate with ATSI in the preparation of geographic transmission maps, system one lines, design drawings, and substation schematic one lines of the Transmission Facilities for use by ATSI and submittal to various reliability and regulatory organizations. The materials so developed will be owned by ATSI. (5) Proposed Distribution Facilities or Transmission Customer owned facilities which will be configured in a manner that establish a parallel path with the Transmission System will require coordination of planning and operation with ATSI. Transmission Customers seeking to establish a parallel path with the Transmission System will provide the necessary data for review and resolution of potential operating problems. D. PLANNING RESPONSIBILITIES OF FIRSTENERGY OPERATING COMPANIES (1) The FirstEnergy Operating Companies will: (a) Annually submit to ATSI a load forecast for all delivery points from the Transmission System. This includes transmission (retail) connected substations, FirstEnergy Operating Companies' distribution substations, and any delivery point to wholesale customers served under grandfathered transmission agreements. 21 -5- (b) Submit on an annual basis, forecasts of the monthly peak demands for each delivery point for the next 10 years, together with corresponding projected power factors. (c) Annually submit to ATSI planned facility (new delivery point) connections to the Transmission System for the next 10 years. (2) All such information shall be used for planning purposes only and shall be kept confidential by ATSI to the extent permitted by law. (3) The FirstEnergy Operating Companies are responsible for maintaining modeling data used by ATSI for dynamic stability and planning studies. The FirstEnergy Operating Companies will also maintain a schedule of planned generation maintenance outages, for a minimum of 5 years ahead, and submit this schedule together with forecasts of generator availability to ATSI biannually. Periodic unit tests will be required to verify reactive capability. (4) Changes to Generation Facilities' equipment and operation, such as GSU tap settings, which could impact the available reactive capability of a generating unit, must be submitted to ATSI for approval. ATSI will specify generating unit voltage schedules when required for must run operation. 3. DISTRIBUTION PLANNING Except as provided above, the planning of all Transmission Customer owned transmission and distribution facilities shall be done by the Transmission Customer. Furthermore, the Transmission Customer, in carrying out their planning responsibilities to meet the reliability needs of all loads connected to the Transmission System may, as appropriate, develop and propose plans involving modifications or expansions to any Transmission Facilities which are part of the Transmission System. All such plans proposed by the Transmission Customers will be reviewed by ATSI, and may be incorporated into 22 -6- Transmission System plan developed by ATSI if appropriate. ATSI will assist Transmission Customers, to the extent consistent with this Agreement and the Transmission Tariff, in satisfying the planning requirements of Regulatory Authorities. 23 APPENDIX B ---------- SYSTEM OPERATIONS 1. OPERATIONAL RESPONSIBILITIES. ----------------------------- A. ATSI'S RESPONSIBILITIES. ATSI shall be responsible for the following operational functions: 1. ATSI shall operate the Transmission System, the 36, 34.5, 33 and 23 kV Distribution Facilities, and will control the high side (69 kV or higher) devices of the Distribution Facilities necessary to the reliable operation of the Transmission System, and will be the Control Area Operator for the FirstEnergy System. 2. ATSI shall review and approve, as appropriate, requests for transmission service, will schedule transmission transactions, and shall determine available transmission capability (hereinafter "ATC") under the Transmission Tariff. 3. ATSI shall provide service over the Transmission System pursuant to the Transmission Tariff. 4. ATSI shall be responsible for the security of the Transmission System. 5. ATSI shall offer ancillary services required to support transmission service under the Transmission Tariff. 6. ATSI shall establish, in cooperation with Transmission Customers, the schedule for maintenance of all Transmission Facilities making up the Transmission System and shall coordinate with the FirstEnergy Operating Companies and other generation owners, as appropriate, the scheduling of maintenance on generation facilities connected to the Transmission System. 7. ATSI shall be responsible for operations of the OASIS system in accordance with the Transmission Tariff. 8. ATSI shall monitor and coordinate voltage levels that are the responsibility of control areas to maintain. 24 9. ATSI will operate and maintain the reliability of the Transmission System in accordance with Good Utility Practice and applicable NERC, ECAR, and Regulatory Authorities. For purposes of this paragraph, Good Utility Practice means a standard of reliability which meets or succeeds the average CAIDI, SAIDI, SAIFI, or other commonly used reliability indices maintained in the industry, of FirstEnergy Transmission Facilities for the three years prior to the Transfer Date. B. THE FIRSTENERGY OPERATING COMPANIES' RESPONSIBILITIES. As described more fully below, the FirstEnergy Operating Companies shall have the following responsibilities: 1. The FirstEnergy Operating Companies shall own, operate and maintain the Distribution and Generation Facilities in accordance with Good Utility Practice. Except as provided below, operation of the Distribution Facilities by ATSI shall be limited to the high side (69 kV or higher) devices of the Distribution Facilities where necessary to ensure reliable operation of the Transmission System. 2. The FirstEnergy Operating Companies shall cooperate with ATSI to provide transmission service to wholesale customers served at voltages below 69 kV through their Distribution Facilities at the direction of ATSI pursuant to the terms of the Transmission Tariff. 3. The FirstEnergy Operating Companies shall comply with the instructions of ATSI in its role as Control Area Operator. 4. The FirstEnergy Operating Companies shall maintain Transmission Facilities included in the Transmission System under maintenance schedules approved by ATSI unless other arrangements are made in accordance with Section 3.I.B of the Agreement. The FirstEnergy Operating Companies shall coordinate maintenance on their Generation Facilities significantly affecting the capability or reliability of the Transmission System with ATSI. Maintenance of Transmission Facilities shall be performed in accordance with Good Utility Practice. For purposes of this paragraph, and for a period of three years from the Effective Date of this Agreement, "Good Utility Practice" shall include maintenance -2- 25 practices which meet or exceed the FirstEnergy's maintenance practices for Transmission Facilities in the three years prior to this Agreement. 5. The FirstEnergy Operating Companies shall offer to redispatch their Generation Facilities units in accordance with the Transmission Tariff, when feasible, subject to receiving appropriate compensation. The FirstEnergy Operating Companies shall submit and coordinate Generation Facility outage schedules with ATSI when such outages affect transmission capability or transmission reliability. 6. The FirstEnergy Operating Companies shall provide advance written notice, if possible, to ATSI before taking Distribution Facilities out of service if the outage will affect operation of the Transmission System. II. CONTROL OVER TRANSMISSION FACILITIES. ------------------------------------- A. ATSI CONTROL. 1. ATSI shall have operational control over the Transmission Facilities that make up the Transmission System. ATSI shall also have operational control over the 36, 34.5, 33 and 23 kV Distribution Facilities for a period of no more than three years from the Effective Date of this Agreement. ATSI will transfer operational control of these Distribution Facilities to the FirstEnergy Operating Companies at the earliest possible date that it can do so consistent with Good Utility Practice. ATSI will cooperate with the FirstEnergy Operating Companies to facilitate the transfer of operational control of these Distribution Facilities. 2. ATSI shall periodically review whether the Transmission Facilities under its operational control constitute all of the facilities necessary to provide reliable transmission service contemplated under the Agreement and the Transmission Tariff. 3. ATSI shall, in consultation with the FirstEnergy Operating Companies, develop, and then revise from time-to-time as appropriate, operating procedures for its exercise of operational -3- 26 control over the Transmission System, the 36, 34.5, 33, and 23 kV Distribution Facilities, the high side (69 kV or higher) devices of the Distribution Facilities, and those Distribution Facilities used to serve wholesale customers at voltages below 69 kV (hereinafter "Operating Procedures"). The Operating Procedures shall be provided to the FirstEnergy Operating Companies and, except to the extent determined necessary for emergency or security reasons, such procedures shall be made available to the public. ATSI shall comply with its Operating Procedures in exercising its operational control over the facilities described above. 4. ATSI shall operate the Transmission System in such a way as to preserve the rights of parties to Third Party or Grandfathered Transmission Agreements. 5. ATSI shall be responsible for coordinating system operation with the applicable regional reliability councils and may join such councils as appropriate. 6. ATSI shall comply with any transmission operating obligations imposed by federal or state law or Regulatory Authorities which can no longer be performed solely by the FirstEnergy Operating Companies following transfer of ownership and operational control of its Transmission Facilities to ATSI, until such obligations are revised or changed. 7. ATSI shall take no action that would impair the safety and reliability of nuclear facilities, and shall take actions consistent with nuclear license conditions or requirements of the Nuclear Regulatory Commission ("NRC") imposed on the FirstEnergy Operating Companies. B. FIRSTENERGY OPERATING COMPANIES' RESPONSIBILITIES. -------------------------------------------------- 1. The FirstEnergy Operating Companies shall own, operate, and maintain their Distribution Facilities in accordance with Good Utility Practice, and comply with the reasonable requests of ATSI with respect to such operation and maintenance issued in compliance with the Operating Procedures. 2. The FirstEnergy Operating Companies will operate their Distribution Facilities in -4- 27 such a way as to preserve the rights of parties to Third Party or Grandfathered Transmission Agreements. C. RETAINED RIGHTS OF THE FIRSTENERGY OPERATING COMPANIES. The FirstEnergy Operating Companies shall retain all rights of ownership in Distribution Facilities. Nothing in this Appendix B shall be deemed to restrict or prohibit access to the Transmission Facilities by the FirstEnergy Operating Companies, or those acting under their authority, in furtherance of this Agreement when such access does not affect the provision of transmission services. ATSI shall be notified promptly by the FirstEnergy Operating Companies should an event occur which results in unplanned outages of a transmission line or transformer. III. DETERMINATION OF AVAILABLE TRANSMISSION CAPABILITY AND TRANSMISSION ------------------------------------------------------------------- SCHEDULING. ----------- A. AVAILABLE TRANSMISSION CAPABILITY. ATSI shall determine the ATC consistent with the terms of the Transmission Tariff and this Agreement. 1. ATSI shall review all data received from other control areas, independent transmission system operators, regional reliability councils, or other entities that impact ATC calculations. 2. ATSI shall share data with other control areas, independent transmission system operators, regional reliability councils, or other entities with whom data must be exchanged, as requested, in order to determine ATC. 3. ATSI shall determine the capacity, rating, control settings, and contingencies for all Transmission Facilities used to calculate ATC. B. TRANSMISSION SERVICE REQUESTS. ATSI shall receive and process all transmission service requests in accordance with the Transmission Tariff. 1. ATSI shall be responsible for conducting all System Impact Studies associated with a request for transmission service. The required analysis shall be coordinated between ATSI and the FirstEnergy Operating Companies as follows: -5- 28 a. ATSI shall provide sufficient information to representatives of the FirstEnergy Operating Companies to allow them to model load consequences of the requested service on Distribution Facilities. b. ATSI shall coordinate with FirstEnergy Operating Companies representatives when processing requests for service through Distribution Facilities. c. ATSI shall consult and with the FirstEnergy Operating Companies with respect to the installation of equipment which affects Distribution Facilities. 2. Upon completion of any required System Impact Studies, ATSI shall be responsible for making the final determination as to the amount of firm and non-firm transmission capacity that is available under the Transmission Tariff, and for resolving requests for transmission service in accordance with the terms of the Transmission Tariff. 3. When there is not adequate transmission capability to satisfy a transmission request, ATSI shall relieve or facilitate the relief of the transmission constraint consistent with the terms of the Transmission Tariff. 4. ATSI shall be responsible for documenting all transmission service requests under the Transmission Tariff, the disposition of such requests, and any supporting data required to support the decision with respect to such requests. C. SCHEDULING TRANSMISSION SERVICE TRANSACTIONS. ATSI shall schedule all transmission service transactions involving the Transmission Tariff, as follows: 1. ATSI shall schedule and curtail transmission service and schedule the allocation of losses and ancillary services in accordance with the Transmission Tariff. 2. ATSI shall, in consultation with the FirstEnergy Operating Companies, develop and from time-to-time, amend when necessary, scheduling protocols ("Scheduling Protocols"). For the FirstEnergy Operating Companies' nuclear generating facilities, ATSI shall enter into written agreements, -6- 29 which define Scheduling Protocols, limitations, and restrictions necessary to ensure the availability of off site power to such facilities. The Scheduling Protocols shall not conflict with the provisions of the Transmission Tariff or requirements of Regulatory Authorities. All scheduling shall be performed in accordance with the Scheduling Protocols. 3. ATSI shall operate its control area for local generation control and economic dispatch purposes. In so doing, ATSI shall comply with the scheduling instructions issued pursuant to the Scheduling Protocols. 4. In performing its scheduling functions, ATSI shall ensure that the Transmission System is operated in compliance with applicable NERC, regional reliability council or successor organizations, and all other applicable operating reliability criteria. 5. ATSI shall inform representatives of the FirstEnergy Operating Companies of the approved schedules under the Transmission Tariff, and of any subsequent changes made thereto. 6. ATSI shall perform all inadvertent flow accounting for its control area and shall coordinate the performance of such accounting with other control areas. IV. ADMINISTRATION OF TRANSMISSION TARIFF. -------------------------------------- A. ATSI RESPONSIBILITIES. 1. ATSI shall be solely responsible for administering the Transmission Tariff. 2. ATSI shall negotiate as appropriate to develop reciprocal service, equitable tariff application, compensation principles, and any related arrangements. 3. ATSI shall cooperate with the FirstEnergy Operating Companies to ensure that the rates to wholesale customers charged for use of the FirstEnergy Operating Companies Distribution Facilities under the Transmission Tariff adequately compensate the FirstEnergy Operating Companies. ATSI shall, at the FirstEnergy Operating Companies' direction, file an application with FERC under -7- 30 Section 205 of the Federal Power Act to establish or adjust the rates charged for use of FirstEnergy Operating Companies's Distribution Facilities in providing service under the Transmission Tariff. B. FIRSTENERGY OPERATING COMPANIES' RESPONSIBILITIES. The FirstEnergy Operating Companies shall provide transmission service for wholesale customers served at voltages below 69 kV through their Distribution Facilities as directed by ATSI to the extent necessary to provide service under the Transmission Tariff. The FirstEnergy Operating Companies shall provide the necessary information to support any filing made by ATSI at the FERC relating to the Distribution Facilities. V. SECURITY OF THE TRANSMISSION SYSTEM. ------------------------------------ A. GENERAL. 1. The security and reliability of the Transmission System shall be the responsibility of ATSI. 2. ATSI shall be responsible for operating its control area in a secure and reliable manner. 3. ATSI is hereby designated and shall be the Control Area Operator for the Transmission System. In this role, ATSI shall exercise security monitoring and emergency response functions, as described in more detail below. B. SECURITY MONITORING. 1. ATSI shall periodically perform load-flow and stability studies of the Transmission System to identify and address security problems. 2. ATSI shall monitor its control area for system security. It shall be responsible for identifying and addressing local security problems. . 3. The FirstEnergy Operating Companies shall continuously provide ATSI with all data required to assess the security of the Transmission System consistent with NERC (or successor -8- 31 organizations) requirements, and consistent with regional requirements and the ATSI Standards of Conduct. 4. ATSI shall exchange necessary security information with other control areas, independent transmission system operators and regional reliability councils consistent with NERC (or successor organizations) requirements, with regional requirements and the ATSI Standards of Conduct. 5. ATSI shall monitor real-time data to determine whether any control areas are experiencing generation capacity deficiencies. If a generation capacity deficiency event threatens the security of the system, ATSI shall take appropriate action, including if necessary, ordering the shedding of firm load in accordance with operating agreements under the Transmission Tariff. Implementation of specific load shedding measures is the responsibility of the Transmission Customer. C. EMERGENCY RESPONSE. 1. ATSI shall work with Transmission Customers, appropriate state agencies, NERC, regional reliability councils, and other security coordinators to develop regional security plans and emergency operating procedures. 2. ATSI shall, in coordination with Transmission Customers, appropriate state agencies, NERC, regional reliability councils, security coordinators, or other system operators, develop, and from time-to-time update, procedures for responding to emergencies (hereinafter the "Emergency Procedures"). a. The Emergency Procedures shall include procedures for responding to specified critical contingencies. b. ATSI shall continuously analyze issues that may require the initiation of emergency response actions. Such analysis may be made at ATSI's initiative, or at the request of Transmission Customers, NERC, regional reliability councils, security coordinators, or other system operators. The Emergency Procedures shall be amended to include any changes or additions resulting -9- 32 from such analysis. c. The Emergency Procedures shall make provision for system restoration including priority restoration of off-site power to nuclear generating facilities. 3. ATSI shall direct the response to any emergency in the Transmission System pursuant to the Emergency Procedures. The Transmission Customers shall carry out the required emergency actions as directed by ATSI. ATSI will alert Transmission Customers to the possibility of load shedding and will provide as much advance notice as possible of the need to shed firm load. VI. ANCILLARY SERVICES. ------------------- A. ATSI shall offer to provide all Ancillary Services as defined and required under the Transmission Tariff. B. ATSI may acquire the ancillary services required to be offered by the Transmission Tariff from the FirstEnergy Operating Companies or third parties, consistent with a least cost procurement strategy. C. ATSI will determine and obtain any black start service necessary to maintain the reliability of the Transmission System. D. The FirstEnergy Operating Companies, shall provide ancillary services to ATSI upon request. The charges for such ancillary services shall be in accordance with FERC approved rate schedules for the FirstEnergy Operating Companies. VII. TRANSMISSION AND GENERATION MAINTENANCE. ---------------------------------------- A. PLANNED TRANSMISSION MAINTENANCE. ATSI is responsible for reviewing, establishing, and updating schedules for all planned maintenance of Transmission Facilities in the Transmission System. 1. ATSI shall establish its planned transmission maintenance schedules for a -10- 33 minimum of a rolling one year period. The planned maintenance schedules shall be updated monthly. 2. ATSI shall determine if, and the extent to which, such planned transmission maintenance affect transmission service, ATC, ancillary services, the security of the Transmission System, and any other relevant effects. This determination shall include appropriate analytical detail. 3. As part of its review process, ATSI shall identify planned transmission maintenance schedules that limit ATC and shall identify opportunities and associated costs for rescheduling planned maintenance to enhance ATC. 4. ATSI will coordinate planned outages of Transmission Facilities with the Transmission Customers . Transmission Customers will inform ATSI of all customer owned equipment outages that could impact loading on the Transmission System. 5. In developing its transmission maintenance schedule, ATSI will comply with all applicable reliability standards, including, but not limited to, the current maintenance practices of the FirstEnergy Operating Companies, will meet the FirstEnergy Operating Companies' requirements for access to ATSI Transmission Facilities, and will endeavor to minimize congestion. B. UNPLANNED AND EMERGENCY TRANSMISSION MAINTENANCE. ATSI shall coordinate unplanned transmission maintenance with Transmission Customers to assure that reliability of the Transmission System is maintained. For emergency conditions which are likely to result in significant disruption of service or damage to the Generation, Transmission, and Distribution Facilities, or are likely to endanger life, property or the environment, the FirstEnergy Operating Companies (to the extent responsible for performing said maintenance) shall notify ATSI of such emergency maintenance. Prior approval by ATSI for such emergency transmission maintenance is not required. C. GENERATION MAINTENANCE. The FirstEnergy Operating Companies shall coordinate the maintenance of Generating Facilities with ATSI to the extent such generation maintenance affects the transmission capability or transmission reliability of the Transmission System as follows: -11- 34 1. The FirstEnergy Operating Companies' shall submit their planned generating unit maintenance schedules to ATSI annually for a two year period, updated for changes. A five year ahead schedule shall be submitted bi-annually. 2. ATSI shall analyze planned generating unit maintenance schedules to determine the effect on Transmission Customers, ATC, ancillary services, the security of the Transmission System, identification of must run units, and any other relevant effects. ATSI shall inform the FirstEnergy Operating Companies if its generation maintenance schedule is expected to have an impact on the security of the Transmission System. 3. As part of its review process, ATSI shall identify generating unit maintenance schedules that limit ATC and shall recommend opportunities for rescheduling planned maintenance to enhance ATC. If the FirstEnergy Operating Companies reschedule maintenance at ATSI's request, the FirstEnergy Operating Companies shall be compensated for additional costs associated with rescheduling such planned maintenance pursuant to procedures adopted by ATSI, and applied on a non-discriminatory basis to all similarly situated generation owners. 4. For all generators connected to the Transmission System, ATSI will enter into connection, and if necessary, must run agreements, which define coordinated operations and such other operating requirements as are necessary to ensure the safe and reliable of such generators with the Transmission System. D. UNPLANNED GENERATION MAINTENANCE The FirstEnergy Operating Companies shall notify ATSI promptly in the event of an unplanned outage of the Generation Facilities. This includes partial forced outages of Generation Facilities. The FirstEnergy Operating Companies will coordinate unplanned generation maintenance with ATSI to ensure that reliability of the Transmission System is maintained. For emergency conditions which are likely to result in significant disruption of service or damage to the Generation, Transmission, and -12- 35 Distribution Facilities, or are likely to endanger life, property or the environment, the FirstEnergy Operating Companies shall notify ATSI of the emergency generation maintenance. Prior approval by ATSI for emergency generation maintenance is not required. -13- 36 APPENDIX C AGENCY AGREEMENT Through this Agreement ("Agency Agreement"), the FirstEnergy Operating Companies authorize ATSI to offer and provide transmission service over certain facilities as detailed below. RECITALS A. Upon FERC approval pursuant to Section 203 of the Federal Power Act, 16 U.S. C. section 824b and the transfer of ownership and operational control of Transmission Facilities in accordance with the Agreement, ATSI will own the Transmission Facilities identified in Appendix D. ATSI will provide open access transmission service across those facilities in accordance with a Transmission Tariff filed with FERC. B. The FirstEnergy Operating Companies will retain ownership of Distribution Facilities that may be used in part to provide transmission service to wholesale customers served at voltages below 69 kV under ATSI's Transmission Tariff. C. In order for ATSI to offer service to these customers , it is necessary that the FirstEnergy Operating Companies provide the authority to ATSI to provide the transmission and other services necessary to effectuate the Transmission Tariff. D. The FirstEnergy Operating Companies are entering into this Agency Agreement to authorize ATSI to act as their agent in the performance of its tariff administration duties with regard to Distribution Facilities used to provide service to wholesale customers served at voltages below 69 kV; to commit, where necessary, Distribution Facilities used to provide service to wholesale customers served at voltages below 69 kV as required for the performance of service agreements under the Transmission Tariff; to make rate filings with the FERC under Section 205 of the Federal Power Act; to bill and collect FERC approved rates on behalf of the FirstEnergy Operating Companies; and for other purposes as specified herein and in the Agreement. 37 TERMS OF AGREEMENT 1. INCORPORATION OF TRANSMISSION TARIFF. 1.1 INCORPORATION OF TRANSMISSION TARIFF INTO AGREEMENT The Transmission Tariff, including each and every constituent part, is incorporated into this Agency Agreement as though set forth herein in its entirety. In the event of any conflict between any provision of this Agency Agreement and the Transmission Tariff, the Transmission Tariff shall control. 2. APPOINTMENT OF ATSI AS AGENT The FirstEnergy Operating Companies appoint ATSI as its agent to enter into service agreements in conformity with the Transmission Tariff on its behalf for transmission service to wholesale customers using Distribution Facilities to connect to the Transmission System. It is agreed that all such service agreements will bind the FirstEnergy Operating Companies to perform to the requirements and specifications of the Transmission Tariff and service agreements where appropriate. The FirstEnergy Operating Companies will cooperate with ATSI in developing the rate charged for use of their Distribution Facilities (Distribution Adder), and will provide the necessary support for any filing under Section 205 of the FPA made by ATSI to establish a rate for transmission service using Distribution Facilities. 3. PERFORMANCE BY THE FIRSTENERGY OPERATING COMPANIES The FirstEnergy Operating Companies agree to provide all services necessary or appropriate for performance under the Transmission Tariff, and service agreements thereunder, for wholesale transmission service using Distribution and Transmission Facilities. Upon ATSI's request, the FirstEnergy Operating Companies further agree to provide ATSI with all information necessary to permit ATSI to perform its tariff administration functions under the Transmission Tariff. -2- 38 4. PAYMENT TO THE FIRSTENERGY OPERATING COMPANIES. ----------------------------------------------- ATSI will be responsible for billing and collection of all rates charged under the Transmission Tariff, including any Distribution Adder developed pursuant to this Agreement. ATSI shall distribute revenues collected from the Distribution Adder to the FirstEnergy Operating Companies. 5. EFFECTIVENESS, DURATION OF AGENCY AGREEMENT, AND WITHDRAWAL RIGHTS. ------------------------------------------------------------------- The Agency Agreement is effective on the Effective Date as defined in the Agreement. The Agency Agreement will terminate upon mutual agreement of ATSI and the FirstEnergy Operating Companies. 6. INTEGRATION AND AMENDMENT. -------------------------- This is an integrated agreement which contains all terms and conditions of agreement between the parties concerning the subject matter. Any prior or oral agreements concerning the subject matter not stated herein are superseded by this Agency Agreement. This Agency Agreement may be amended only by a writing executed by both Parties. 7. AUTHORITY. ---------- The Parties represent that the person executing this agreement on their behalf is authorized to execute this agreement and bind the Parties to its terms, and that such authorization has been made in compliance with all applicable laws, articles of incorporation, bylaws, and resolutions and in a manner that the authorization is binding upon the FirstEnergy Operating Companies and ATSI. FIRSTENERGY OPERATING COMPANIES OHIO EDISON COMPANY PENNSYLVANIA POWER COMPANY -3- 39 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY THE TOLEDO EDISON COMPANY - ----------------------------------------- Signature Title: ---------------------------------- Date: ---------------------------------- ATSI TRANSMISSION SYSTEMS, INC. - ----------------------------------------- Signature Title: ---------------------------------- Date: ---------------------------------- -4- 40 APPENDIX D PRINCIPLES GUIDING THE DIVISION OF ASSETS BETWEEN THE FIRSTENERGY OPERATING COMPANIES AND AMERICAN TRANSMISSION SYSTEMS, INC. 1. American Transmission Systems, Inc. (ATSI), as a wholly owned subsidiary of FirstEnergy Corp., will purchase, own, and operate the FirstEnergy Operating Companies' Transmission Facilities currently operating at nominal voltages of generally 345 kV and 138 kV ("bulk transmission") and 69 kV facilities ("area transmission"). These facilities include Transmission lines (i.e., towers, poles, conductors) and Transmission substations. 2. Transmission substations provide transformation between portions of the bulk transmission system (e.g., 345-138 kV transformers) and between the bulk and area transmission systems (e.g., 138-69 kV transformers). ATSI will own all Transmission substations and transformers. Substations with common use/miscellaneous facilities providing both a Transmission (ATSI) function and a Distribution (FirstEnergy) function will be Transmission Facilities (i.e., primary transmission function) owned by ATSI if they meet one of the following conditions: (i) a substation bus with more than two 69 kV or higher network sources; (exception being customer substations with revenue metering on each supply) (ii) a substation bus with one or more 69 kV or higher line network sources and a connection (through transformation) to a higher voltage system; (iii) a direct interconnection to another transmission system. All other substations will be Distribution Facilities owned by the FirstEnergy Operating Companies. The primary purpose of the designation as a Transmission (ATSI) versus a Distribution (FirstEnergy) substation is to allocate the cost of the common use facilities (e.g, control buildings). Both ATSI and the FirstEnergy Operating Companies may own major equipment within each Transmission substation. 3. All voltage control devices (e.g., fixed and switched capacitors, reactors, synchronous condensers, static VAR controllers) and power flow control devices directly connected to the Transmission System will be owned by ATSI. Transmission voltage control devices (rated 69 kV and higher) and located in FirstEnergy Operating Companies' Distribution substations will be owned by ATSI, although the remainder of the Distribution substation will be owned by FirstEnergy Operating Companies. 4. ATSI will own Transmission lines providing connections to Generation Facilities. ATSI will also 41 -2- own the Step Up (plant) Substations at Generation Facilities. The FirstEnergy Operating Companies will own the Generator Step Up Transformers, terminating facilities providing the connection for the Generation Facilities to the Step Up Substations, including terminating connections which provide alternative power supply to the Generation Facility, and all generation plant and auxiliary facilities. 5. ATSI will own the radial taps from the Transmission System that are 69 kV and above, excluding the facilities establishing the final circuit connection to substations providing transformation or other connection to Distribution Facilities or retail customers. For example, in the case of a radial 138 kV supply to a 138-12.47 kV substation, the radial line section up to the point of the final circuit connection to the 138-12.47 kV substation will be owned by ATSI. The FirstEnergy Operating Companies will own the final circuit connection to the Distribution substation. The final circuit connections described above are Distribution Facilities. 6. For looped transmission system supply configurations, ATSI ownership will also exclude the final connection to Distribution substations providing transformation or other connection to assets not owned by ATSI. For example, in the case of a loop supply to a 138-12.47 kV substation, the final circuit connections providing the loop supply to the 138-12.47 kV substation will be owned by the FirstEnergy Operating Companies. The final circuit connections will be Distribution Facilities owned by the FirstEnergy Operating Companies. 7. The FirstEnergy Operating Companies currently owns three mobile substations/transformers where there is a choice of two low side windings/taps: two with a choiceof 69 kV or 23 kV, and one with a choice of 69 kV or 34.5 kV. One of these mobile tranformers will be transferred to ATSI . 8. All mobile capacitor banks 69 kV or higher are Transmission Facilities and will be owned by ATSI. 9. ATSI will own the System Control Center facility and equipment in Wadsworth, Ohio, not including the associated land and land rights. The FirstEnergy Operating Companies will pay ATSI for use of the System Control Center. ATSI will pay Cleveland Electric Illuminating Company (CEI) for the use of the System Operation Center (SOC) in Brecksville, Ohio until such time that use for transmission-related functions is no longer needed. The FirstEnergy Operating Companies (CEI) will retain ownership of the SOC. 10. The FirstEnergy Operating Companies will continue to own all land, easements, franchises, and other rights which they have or have upon, under or over which Transmission Facilities are located on the Transfer Date. The land, easements, franchises, and other rights associated with these Transmission Facilities will be leased by ATSI from the FirstEnergy Operating Companies pursuant to a Ground Lease. 11. All equipment spares for Transmission Facilities will be owned by ATSI. All spare parts and equipment spares for Distribution Facilities will be owned by the FirstEnergy Operating Companies. EX-1.D 4 EXHIBIT 1(D) 1 Exhibit D-1 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION FirstEnergy Operating Companies: ) The Cleveland Electric Illuminating Company ) Ohio Edison Company ) Pennsylvania Power Company ) The Toledo Edison Company ) Docket No. EC99-_____-000 Transferors ) American Transmission Systems, Inc., ) Transferee ) APPLICATION OF THE FIRSTENERGY OPERATING COMPANIES FOR AUTHORIZATION TO TRANSFER TRANSMISSION ASSETS TO AMERICAN TRANSMISSION SYSTEMS, INC. The FirstEnergy Operating Companies request authorization under Section 203 of the Federal Power Act (FPA), 16 U.S.C. section 824b and Part 33 of the Federal Energy Regulatory Commission's regulations, 18 C.F.R. Part 33, to transfer ownership and operational control of their jurisdictional transmission facilities to American Transmission Systems, Inc. ("ATSI").(1) The FirstEnergy Operating Companies owning transmission assets are Ohio Edison Company ("Ohio Edison"), The Cleveland Electric Illuminating Company ("CEI"), The Toledo Edison Company ("Toledo Edison"), and Pennsylvania Power Company ("Pennsylvania Power"). The Commission approved the merger of these companies in 1997. Ohio Edison Co., et al., 81 FERC section 61,110 (1997) ("Merger Order"). On November 10, 1998, the Commission issued an order denying various requests for rehearing of the Merger Order and directing the FirstEnergy Operating Companies to report "the status of its participation in the Midwest ISO or another - -------------- 1 In a companion application to be filed shortly, ATSI also seeks approval under FPA section 205, 16 U.S.C. section 824d, of an open access transmission tariff and amended Joint Dispatch Agreement. 2 appropriate regional transmission organization (RTO) and to report other efforts to satisfy our concerns." 85 FERC section 61,203, at 61,845. On December 10, 1998, the FirstEnergy Operating Companies complied with the Commission's directive, and informed the Commission that a necessary intermediate and facilitating interim step to the formation of a RTO would be the transfer of control of the FirstEnergy Operating Companies' transmission assets to an affiliated transmission company. The instant application seeks authorization for the transfer of transmission facilities to ATSI in preparation for the subsequent transfer of such assets and operations to a RTO. ATSI's acquisition and operation of the transmission facilities of the FirstEnergy Operating Companies at this stage will result in a more definitive separation of transmission and generation assets and operations, exceeding the Commission's functional separation requirements, and will permit a more efficient and effective implementation of the subsequent transfer of transmission facilities to the RTO. FirstEnergy's goal is to position its transmission assets for divestiture to a RTO, or to create a vehicle for the addition of transmission assets divested by third parties into it. Accordingly, FirstEnergy commits to the Commission that if ATSI has not filed a Section 203 application to transfer ownership or control of its transmission facilities to a RTO within two years of the date of approval of this application, that ATSI will file a Section 203 application to divest its transmission facilities to an unaffiliated entity. - -------------------------------------------------------------------------------- 2 3 I. THE APPLICANTS The FirstEnergy Operating Companies are Ohio Edison, Pennsylvania Power, CEI, and Toledo Edison. All but Pennsylvania Power are Ohio corporations and wholly-owned subsidiaries of FirstEnergy Corp. Pennsylvania Power is a wholly-owned subsidiary of Ohio Edison and is a Pennsylvania corporation. FirstEnergy Corp. is an exempt holding company under the Public Utility Holding Company Act of 1935. FirstEnergy Corp. is headquartered in Akron, Ohio. Together the FirstEnergy Operating Companies provide retail electric service to more than 2.2 million customers in a 13,200 square-mile area stretching from central and northern Ohio into western Pennsylvania; wholesale electric capacity, energy, and transmission services to 37 municipal electric systems in Ohio and five boroughs in Pennsylvania; and transmission service to 11 rural electric cooperatives (RECs). FirstEnergy has transmission interconnections with six different public utilities. Each interconnection is at or above 138 kV with the exception of four 69 kV interconnections which are normally operated in an open configuration. The FirstEnergy Operating Companies currently own and operate 1,153 miles of 345 kV, 3,667 miles of 138 kV, and 2,279 miles of 69 kV transmission facilities as part of a single control area. The applicants propose that essentially all of these facilities be transferred to ATSI. The original cost of the facilities transferred to ATSI is in excess of one billion dollars. ATSI will 3 4 own and operate these facilities, and become the control area operator for the FirstEnergy System. Each of the four FirstEnergy Operating Companies is a member of the East Central Area Reliability Coordination Agreement (ECAR) region. Additionally, all four companies, along with Duquesne Light Company (Duquesne Light), are members of the Central Area Power Coordinating Group (CAPCO) and jointly own nine generating units and independently own related CAPCO transmission facilities. As part of a separate transaction, the FirstEnergy Operating Companies expect to exchange ownership shares of these and other generating units with Duquesne Light so that joint ownership of generating units with Duquesne Light is eliminated. Duquesne Light will also sell several CAPCO transmission lines and related facilities to ATSI. This latter purchase will be the subject of a separate Section 203 application with the Commission. In anticipation of this transaction, the Duquesne Light transmission facilities are included in the transmission facilities proposed to be owned by ATSI and for which Commission approval for transfer is sought in this application. See Schedule A to the Bill of Sale included as Exhibit H to the application. ATSI, an Ohio corporation, is a wholly-owned subsidiary of FirstEnergy Corp. ATSI does not currently own or operate any facilities subject to the Commission's jurisdiction. However, upon the grant of Commission authorization of the transfer proposed here, ATSI will own and operate all transmission facilities of the FirstEnergy Operating Companies subject to the jurisdiction of the Commission and will provide transmission services pursuant to the terms and conditions set forth in its own Open Access Transmission Tariff (ATSI Tariff). The 4 5 determination of whether existing facilities currently serve a transmission function, and thus should be transferred to ATSI, is based on application of the Commission's seven factor test, and is explained in the supporting testimony of Carl J. Bridenbaugh.(2) ATSI's Tariff will be filed separately under Section 205 of the Federal Power Act in a companion docket, along with an amended version of FirstEnergy's Joint Dispatch Agreement. II. SUMMARY OF TRANSFER A. DESCRIPTION OF FACILITIES The transmission facilities to be transferred from the FirstEnergy Operating Companies to ATSI are described in Appendix D to the Operating Agreement between ATSI and the FirstEnergy Operating Companies. The Appendix also describes the generation and distribution facilities retained by the FirstEnergy Operating Companies. The Operating Agreement appears in full in Exhibit H to this application.(3) Essentially, ATSI will acquire from the FirstEnergy - ------------------ (2) See Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, Order No. 888, Docket No. RM95-8-000, et al., 61 Fed. Reg. 21540 (May 10, 1996), FERC Stats. & Regs. [Reg. Preambles 1991-96] section 31,036, pp. 31,780-81 (1996) (establishing a 7-factor test to guide the transmission/distribution analysis) (subsequent history omitted). (3) The Operating Agreement, which sets forth the rights and obligations of ATSI and the FirstEnergy Operating Companies, contains the following appendices: (A) System Planning, (B) System Operations, (C) Agency Agreement, and (D) Principles Governing Division of Assets. 5 6 Operating Companies and will operate transmission facilities currently operating at voltages of generally 345 kV and 138 kV (the "bulk transmission system"), and 69 kV facilities (the "area transmission system"). The transmission facilities proposed to be transferred include: (1) transmission lines (including towers, poles, and conductors) and transmission sub stations; (2) transformers providing transformation within the bulk transmission system and between the bulk and area transmission systems; (3) the System Control Center facility in Wadsworth, Ohio; (4) lines providing connections to generation sources and step-up (plant) substations; (5) radial taps from the transmission system up to, but not including, the facilities that establish the final connection to distribution facilities or retail customers; (6) substations that provide primarily a transmission function; and (7) voltage control devices and power flow control devices directly connected to the transmission system. - -------------------------------------------------------------------------------- 6 7 The transmission facilities include all the facilities currently recorded on the books of the FirstEnergy Operating Companies as "transmission" facilities as well as the CAPCO transmission facilities discussed above, with the exception of certain 36, 34.5, 33, and 23 kV facilities. Because of the historical evolution of the FirstEnergy System, there are certain geographic areas where 36, 34.5, 33, and 23 kV facilities have served a transmission function. The applicants have reevaluated this classification in light of the Commission's seven factor test, current transmission planning for the FirstEnergy System, and future participation in a RTO, and concluded that these facilities should be classified as distribution. However, these facilities will be operated by ATSI for a transition period not to exceed three years, after which these facilities will be operated by the FirstEnergy Operating Companies. Likewise, the facilities transferred to ATSI do not include distribution facilities used to provide retail service. Distribution facilities include all facilities with voltages below 69 kV, including the final circuit connection to substations providing transformation or connection to any retail customer regardless of voltage level. The FirstEnergy Operating Companies currently provide transmission service to certain wholesale customers at delivery points of less than 69 kV. In order to ensure continuity of service to such wholesale customers who decide to take service under the ATSI Tariff, ATSI and the FirstEnergy Operating Companies have entered into an Agency Agreement.(4) Under this Agency Agreement, the FirstEnergy Operating Companies and ATSI provide for the use of certain distribution facilities necessary to continue transmission - ----------------- (4) A copy of the Agency Agreement is attached as Appendix C to the Operating Agreement, which in turn is included in Exhibit H to this application. 7 8 service to wholesale customers served at delivery points whose voltages are less than 69 kV. As explained further in ATSI's companion tariff filing, transmission service to wholesale customers over these distribution facilities will be made available under the ATSI Tariff, and associated distribution costs will be recovered in the rates on a direct assignment basis as a distribution adder. This procedure is necessary to ensure that existing wholesale customers served under grandfathered transmission arrangements at voltages below 69 kV will have access to comparable transmission service under the ATSI Tariff. B. ATSI'S OPERATION OF THE TRANSMISSION SYSTEM - -------------------------------------------------------------------------------- 8 9 ATSI will operate the Transmission System pursuant to the ATSI Tariff and the Operating Agreement. ATSI will have operational control of the transmission and 36, 34.5, 33 and 23 kV distribution facilities, serve as the control area operator over the Transmission System, procure, offer and arrange for ancillary services, operate the Open Access Same-Time Information System ("OASIS") in conformance with Order No. 889,(5) and administer the ATSI Tariff, including all requests for service under the ATSI Tariff. ATSI will also be responsible for maintenance of the transmission facilities, and will initially contract with the FirstEnergy Operating Companies to perform the maintenance. ATSI will also assume responsibility for ensuring compliance with FirstEnergy's transmission-related merger commitments, including transmission system planning. In its recent merger proceeding, FirstEnergy agreed to: (1) Amend the Ohio Edison-Centerior interface commitment to include granting a priority equal to native load for a Municipal System's scheduling of transmission service; (2) Operate the internal interface so as not to preclude third-party suppliers from serving both current and future operational needs of the Municipal Systems; (3) Allow Municipal Systems and any other interested parties to join with Applicants in planning the expansion of Transmission facilities; (4) Not charge other jurisdictional customers the redispatch costs that Municipal Systems would have borne but for Applicants' commitment not to seek such costs from them; (5) Expand the capacity of the internal interface in accordance with FirstEnergy's open access tariff if sufficient capacity is not available post-merger on the internal interface to accommodate service requests; - ---------------- (5) Open Access Same-Time Information System (Formerly Real-Time Information Network) and Standards of Conduct, Order No. 889, Docket No. RM95-9-000, 61 Fed. Reg. 21737 (May 10, 1996), FERC Stats. & Regs. [Reg. Preambles 1991-96] section 31,035 (1996) (subsequent history omitted). 9 10 (6) [R]evise the contingencies, priority and price cap commitment to state that, when an internal condition on FirstEnergy's system prevents a Municipal System from taking delivery of electric energy from a third-party supplier, the Municipal System will pay FirstEnergy and the third-party supplier no more, in total, than it would have paid the third-party supplier if the third-party supplier had delivered its electric energy to the Municipal System; and (7) [F]ulfill the commitments reflected in their agreements with the City of Cleveland and AMP-Ohio. See Rehearing Order, 85 FERC Section 61,203, at 61,844 (1998) (footnotes omitted). All of the transmission related merger commitments approved by the Commission for FirstEnergy will be assumed by ATSI. Non-transmission related merger commitments will remain the responsibility of the FirstEnergy Operating Companies. ATSI will offer all ancillary services required by the Commission in Order No. 888. Since ATSI owns no generating facilities, it will purchase the necessary ancillary services from third parties. Under the Operating Agreement, the FirstEnergy Operating Companies are required to offer to sell generation based ancillary services to ATSI, upon request, at Commission approved rates. ATSI will be free, however, to purchase ancillary services from unaffiliated generators, and will do so on a non preferential basis, consistent with a least cost procurement strategy. ATSI expects to enter into agreements to purchase ancillary services from unaffiliated generators in its control area. For example, upon consummation of the asset exchange with Duquesne Light discussed previously, and Duquesne Light's subsequent generation auction, ATSI will contract with the new owners for must run operations and ancillary services from the generators located in ATSI's control area and connected to its transmission system. Likewise, FirstEnergy has signed an agreement with Automated Power Exchange, Inc. (APX) to establish a 10 11 power exchange based on FirstEnergy System. ATSI expects to participate in the exchange to obtain ancillary services. ATSI will not, however, engage in the purchase and sale of energy other than to obtain necessary ancillary services required by its customers. In short, upon receipt of the necessary regulatory approvals, ATSI will commence providing open access transmission service to those existing open access customers served by the FirstEnergy Operating Companies under the existing FirstEnergy Open Access Tariff, and any other eligible customer requesting transmission service from ATSI. The FirstEnergy Operating Companies will become transmission customers of ATSI under ATSI's Tariff. As described more fully in the companion tariff filing, where the FirstEnergy Operating Companies are responsible for providing transmission service under agreements or tariffs predating Order No. 888 ("grandfathered transmission agreements"), ATSI will make the ATSI transmission system available to the FirstEnergy Operating Companies, pursuant to Network Integration Service and Operating Agreements under the ATSI Tariff, in order to provide transmission service under the grandfathered transmission agreements. C. FINANCIAL ASPECTS OF THE TRANSACTION A Bill of Sale will be entered into between the FirstEnergy Operating Companies and ATSI covering the conveyance of the transmission facilities. Schedule A to that document lists the facilities transferred. The "transmission assets" transferred to ATSI under the Bill of Sale include FirstEnergy's rights and interests in any contracts under the FirstEnergy Open Access Tariff. A copy of the form of Bill of Sale is included as part of Exhibit H to this application. The transmission facilities will be sold by the FirstEnergy Operating Companies to ATSI at net 11 12 book value of approximately $647 million as of November 30, 1998. November 30, 1998 represents the end of the first year of operating experience following the FirstEnergy merger, and is the test year in the separate Section 205 filing for ATSI. ATSI will finance the purchase of transmission facilities as follows: 45% of the purchase price will be provided through a cash infusion from ATSI's parent company, FirstEnergy Corp.; and the balance of the purchase price will be financed through promissory notes payable to each of the FirstEnergy Operating Companies for the transmission facilities sold. The interest rate on the promissory notes will be based on the embedded cost of debt of the FirstEnergy Operating Companies on a consolidated basis as of November 30, 1998, or about 7.75%. The twelve months ending November 30, 1998 is the same period used to develop the transmission rates for the ATSI Tariff. The 45/55 equity-debt ratio is equal to FirstEnergy Operating Companies' consolidated ratio as of November 30, 1998, but will not include preferred stock. The accounting entries for the FirstEnergy Operating Companies will be a debit to cash, notes receivable, and accumulated depreciation, and a credit to utility plant for the transmission facilities transferred. Deferred tax balances will remain on the books of the FirstEnergy Operating Companies, consistent with "Guidance on Accounting for Deferred Income Taxes on Intercompany Property Transfers" issued by the Chief Accountant of the Commission in Docket No. AI 98-2-000 on June 15, 1998. The tax basis of the assets to ATSI will be the transfer price -- net book value -- of the facilities. ATSI will file to establish depreciation rates in the Section 205 filing for the transmission facilities. Release of the transmission facilities from the respective first mortgage indentures of the FirstEnergy Operating Companies will take place 12 13 when the transmission facilities are transferred to ATSI. Fee land, easements, and rights-of-way have been excluded from the asset transfer and will remain the property of the FirstEnergy Operating Companies. ATSI will acquire the right to use land through 50-year ground leases (renewable for up to ten, 50-year terms) with the FirstEnergy Operating Companies. A copy of the Form of Ground Lease is included as part of Exhibit H to this application. D. STANDARDS OF CONDUCT In Order No. 888, the Commission stated that "[f]unctional unbundling will work only if a strong code of conduct (including a requirement to separate employees involved in transmission functions from those involved in wholesale power merchant functions) is in place."(6) To that end, the transmission facilities of the FirstEnergy Operating Companies will be owned and operated by a separate corporate entity, ATSI. ATSI will have its own open access tariff. Not only will ATSI's Tariff incorporate the Standards of Conduct set forth in the Commission's regulations,(7) but, in accordance with Section 37.4(c), the FirstEnergy Operating Companies and ATSI have also developed procedures for implementation of the Standards of Conduct. These procedures, which are set forth in the ATSI Standards of Conduct include the following statement of policy: It is the policy of ATSI to operate the Transmission System in a fair and nondiscriminatory manner and to implement such rules and regulations in the governance of the corporation as necessary to prevent control of the decision- - ------------------ (6) Order No. 888, FERC Stats. & Regs. [Reg. Preambles 1991-96] at 31,655. (7) See 18 C.F.R. Part 37, and BALTIMORE GAS & ELECTRIC CO., ET AL., 82 FERC section 61,073 (1998), and AMEREN SERVICES CO., ET AL., 85 FERC section 61,068 (1998) finding FirstEnergy's Standards of Conduct filings acceptable. 13 14 making process by the merchant function of the FirstEnergy Operating companies or its affiliates or any User of the Transmission System. It is the policy of ATSI to own, operate and plan the Transmission System without adverse distinction or preference to the FirstEnergy Operating Companies or Users of the Transmission System, and that investments in new transmission facilities will be made by ATSI without discrimination. Appendix 3, Standards of Conduct at 2-3. Specifically, each employee directly responsible for either the FirstEnergy Operating Companies' wholesale merchant operations or ATSI's transmission operations will be required to sign a Standards of Conduct Acknowledgment and Compliance Statement, and abide by its terms. Managers of departments not directly responsible for these functions will be given a copy of the Standards of Conduct and will similarly be required to sign a Standards of Conduct Acknowledgment and Compliance Statement and abide by its terms. These managers will also be required to review the Standards of Conduct with all of their employees. To further ensure separation of function, the wholesale merchant division of the FirstEnergy Operating Companies has been relocated to a separate headquarters several miles from the System Control Center of ATSI. The FirstEnergy Operating Companies have established procedures that prevent access to the System Control Center by any employee responsible for wholesale merchant functions for the purpose of obtaining information on transmission capacity, price, curtailments, ancillary services, scheduled maintenance and line outages. Firewalls have been established within the Energy Management System ("EMS") to ensure that transmission information from the EMS cannot be accessed by wholesale merchant employees. Implementation of these measures is further 14 15 evidence of ATSI's commitment to further the Commission's objective to separate transmission from wholesale merchant functions in order to ensure non-discriminatory access to its transmission system. Approval of the ATSI Standards of Conduct will be sought in the companion Section 205 filing. A copy of the ATSI Standards of Conduct is included herein as Appendix 3. 15 16 E. SUPPORTING TESTIMONY Volume II of this filing contains testimony in support of the Section 203 filing. Stanley F. Szwed will be the vice president in charge of ATSI. His testimony provides an overview of ATSI's operations and organization. He describes the status of FirstEnergy's efforts to form a RTO. Leonard S. Hyman of Salomon, Smith Barney describes the desirable structure for a RTO, and its conditions for success, including its ability to attract capital on reasonable terms. Bruce J. Busse describes how ATSI will operate the Transmission System and obtain the services necessary to operate the FirstEnergy control area. Carl J. Bridenbaugh describes the rationale for separation of assets between ATSI and the FirstEnergy Operating Companies, including the rationale for separation of transmission and distribution facilities. Harvey L. Wagner will describe the accounting treatment for the sale of assets to ATSI, and provides the pro forma financial statements for ATSI. Although this application raises no market power issues, Walt W. Suratt of National Economic Research Associates provides an affidavit in which he concludes that the sale of assets to ATSI will not affect market power. III. THE PROPOSED TRANSACTION IS IN THE PUBLIC INTEREST Section 203(a) of the FPA, which establishes the Commission's jurisdiction over identified corporate transactions involving public utility jurisdictional facilities and public utility securities, reads in pertinent part: 16 17 (a) No public utility shall sell, lease, or otherwise dispose of . . . its facilities subject to the jurisdiction of the Commission . . . or by any means whatsoever, directly or indirectly, merge or consolidate such facilities or any part hereof with those of any other person, or purchase, acquire, or take any security of any other public utility, without first having secured an order of the Commission authorizing it to do so . . . After notice and opportunity for hearing, if the Commission finds that the proposed disposition, consolidation, acquisition, or control will be consistent with the public interest it shall approve the same.(8) Among the facilities FirstEnergy will transfer to ATSI are jurisdictional facilities of a value in excess of $50,000. The Commission is obligated to approve proposed transactions under Section 203 if it is "consistent with the public interest." While a positive public interest benefit need not be shown, a showing of "compatibility with the public interest is required."(9) In support of this application for approval under Section 203, FirstEnergy provides information which demonstrates that the proposed transfer to ATSI is consistent with the public interest. A. TRANSFER OF ASSETS TO A SEPARATE SUBSIDIARY ADVANCES FERC POLICIES REQUIRING THE SEPARATION OF GENERATION AND TRANSMISSION FUNCTIONS - -------------------------- (8) 16 U.S.C. section 825b(a). (9) PACIFIC POWER & LIGHT CO. V. FPC, 111 F.2d 1014 (9th Cir. 1940). 17 18 In Order No. 888, the Commission determined that functional unbundling of wholesale generation and transmission services is necessary to implement non-discriminatory open access transmission. In doing so, the Commission stopped short of requiring corporate unbundling, which could include the establishment of a separate corporate affiliate to manage a utility's transmission assets. The Commission concluded". . . that functional unbundling of wholesale services is necessary to implement non-discriminatory open access transmission and that corporate unbundling should not now be required."(10) The Commission determined that three requirements are necessary to ensure that public utilities provide non-discriminatory service: (1) a public utility must take transmission services (including ancillary services) for all of its new wholesale sales and purchases of energy under the same tariff of general applicability as do others; (2) a public utility must state separate rates for wholesale generation, transmission, and ancillary services; and (3) a public utility must rely on the same electronic information network that its transmission customers rely on to obtain information about its transmission system when buying or selling power. While recognizing that these requirements would give public utilities an incentive to file fair and efficient rates, terms, and conditions, since they will be subject to those same rates, terms, and conditions, the Commission further concluded that functional unbundling will work - ------------------ (10) Order No. 888, at 31,654. 18 19 only if a strong code of conduct (including a requirement to separate employees involved in transmission functions from those involved in wholesale power merchant functions) is in place.(11) - ----------------------- (11) Order No. 888, at 31,698. 19 20 With this objective in mind, the Commission encouraged utilities to explore whether corporate unbundling or other restructuring mechanisms may be appropriate in particular circumstances and indicated that it would "accommodate other mechanisms that public utilities may submit, including voluntary corporate restructurings (e.g., . . . separate corporate divisions, divestiture), to ensure that open access transmission service occurs on a non-discriminatory basis."(12) While the Commission did not affirmatively require actual corporate separation of generation from transmission, FirstEnergy proposes in this application to do exactly that, thereby doing substantially more than that which is required by Order No. 888 and its progeny. This significant step goes beyond compliance with Order No. 888, and represents significant progress toward the applicant's ultimate goal of transferring transmission ownership to an independent RTO. ATSI's acquisition and operation of the transmission assets of the FirstEnergy Operating Companies will exceed the functional unbundling requirements of Order No. 888, and bring with it greater corporate and organizational separation of transmission from generation. ATSI will be responsible for providing all open access transmission and ancillary services under the ATSI Tariff, and existing open access service agreements under the old FirstEnergy Tariff will be assigned to ATSI. The FirstEnergy Operating Companies will remain responsible for obtaining transmission service associated with grandfathered transmission arrangements. After the transfer of assets, the FirstEnergy Operating Companies will become a network transmission customer of - ----------------------- (12) Order No. 888, at 31,698. 20 21 ATSI and will be required to secure transmission service from ATSI in the same manner as unaffiliated network transmission customers. The current organizational separation between the employees of the FirstEnergy Operating Companies' wholesale merchant function and transmission function will be significantly strengthened beyond the requirements of Order Nos. 888 and 889 because transmission personnel will become employees of a separate company, ATSI. Responsibility for power generation and transmission will be assigned to separate corporate officers of FirstEnergy. ATSI will have its own board of directors and ATSI will operate as a separate value center within FirstEnergy. The result of all these measures will be greater separation of FirstEnergy's wholesale generation business from ATSI's transmission business. ATSI will not be engaged in the electric power generation business, and will contract with the FirstEnergy Operating Companies and others on the open market to provide ancillary services on a least cost basis. ATSI will not own distribution facilities, and will arrange for use of distribution facilities only to the extent required to provide transmission services to wholesale customers served at voltages below 69 kV under the ATSI Tariff. ATSI will focus solely on efficiently and effectively operating and maintaining, and where necessary expanding, its transmission system, and will be well-situated to respond quickly to customer needs. The restructuring of the FirstEnergy system that is proposed here goes well beyond the Commission's requirements for comparability and functional unbundling. By transferring all of their transmission facilities to a separate corporation and by agreeing to take transmission and ancillary services under that corporation's open access tariff for the delivery of all power sold by 21 22 the FirstEnergy Operating Companies to their wholesale and retail customers, the FirstEnergy Operating Companies are going beyond what the Commission required of public utilities in Order No. 888. 22 23 B. THE TRANSACTION MEETS THE REQUIREMENTS OF THE COMMISSION'S MERGER POLICY STATEMENT. The Commission Merger Policy Statement (Order No. 592)(13) sets forth the revised criteria and considerations for evaluating applications under Section 203. Specifically, the Commission examines three factors in analyzing whether a proposed transaction is consistent with the public interest: the effect on competition, the effect on rates, and the effect on regulation. Consideration of these three factors, to the extent those factors guide the Commission's consideration of an intracompany divestiture proposal, further demonstrates that the transaction is consistent with the public interest. 1. THE TRANSACTION IS PRO-COMPETITIVE. - --------------------- (13) Order No. 592, at 30,115. 23 24 The applicants have not submitted a competitive screen analysis because of the nature of the transaction proposed in this application.(14) FirstEnergy seeks only to more definitively separate its generation from its transmission facilities in order to pave the way for complete divestiture of the transmission facilities. As proposed in this application, the transmission facilities that are now owned by the FirstEnergy Operating Companies will be sold to ATSI, a corporate subsidiary of FirstEnergy Corp. Neither FirstEnergy Corp., FirstEnergy Operating Companies, nor ATSI proposes to merge with any other entity in the instant application. ATSI does not currently own any generation, distribution or transmission facilities, and will not own or control any generation. This transmission-only transaction does not involve any concentration of utility or other generation capacity and is designed to lead to even more substantial separation of transmission from other assets. Upon completion of the proposed transfer, the FirstEnergy Operating Companies will no longer own transmission facilities. Thus, FirstEnergy Operating Companies and ATSI will not both be providing open access transmission service in the same geographic market. While legal ownership will change, actual operation of the transmission system will not change in ways that could potentially increase market power. Moreover, the proposed transfer of transmission facilities affects only the ownership and control of FirstEnergy's transmission facilities; it will not alter generation facility ownership or - ------------------------ (14) In Order No. 592, the Commission determined that it is not necessary for merger applicants to perform a competitive market screen analysis or file the data needed for the screen analysis in cases where the merging firms do not have facilities or sell relevant products in common geographic markets. As the Commission explained, "[i]n these cases, the proposed merger will not have an adverse competitive impact (i.e., there can be no increase in the applicants' market power unless they are selling relevant products in the same geographic markets so there is no need for a detailed data analysis." Order No. 592, at 30,113. 24 25 control. In this regard, the proposed transfer of transmission facilities will have no effect upon the concentration of generation market power. In addition, as explained in the affidavit of Walter W. Surratt submitted with this application, ATSI cannot act in ways that confer greater market power than FirstEnergy currently possesses, and in no event will ATSI own or control generation. FirstEnergy's market power can only remain as is or be diminished by the transfer. Furthermore, because the proposed transaction positions FirstEnergy's transmission facilities for divestiture to a RTO, it will facilitate greater competition in the wholesale power markets. 25 26 2. THE TRANSACTION WILL HAVE NO DIRECT EFFECT ON JURISDICTIONAL RATES. This transaction will have no impact on the wholesale power rates charged by the FirstEnergy Operating Companies. Likewise, approval of this transaction is expected to have no direct impact on the rates charged to transmission customers. Because of the exclusion of generator step-up transformers and final circuit connections from the definition of transmission facilities under the ATSI Tariff, and the classification of facilities below 69 kV as distribution facilities, some transmission customers may receive a modest rate reduction from their existing rates. Second, certain terms and conditions contained in the ATSI Tariff, as explained in more detail in the Section 205 filing, are believed to be superior to those in the pro forma tariff. Third, the rates charged for generation based ancillary services by the FirstEnergy Operating Companies will remain unchanged. Since ATSI's proposed rates for generation based ancillary services will simply be a pass-through of its purchased power costs, and since it is free to purchase ancillary services from other suppliers where technically feasible and services are cheaper, rates for these ancillary services will remain the same or decline. Transmission customers will benefit from ATSI's "transmission only" business focus from both a tariff administration and system planning standpoint. Many of the FirstEnergy Operating Companies' transmission dependent customers -- AMP-Ohio, Cleveland Public Power, Painesville, and the Pennsylvania Boroughs -- take service under pre-Order No. 888, grandfathered transmission arrangements. As part of the commitments made by FirstEnergy and approved by this Commission in the FirstEnergy Merger Order, these customers have the right to remain under their existing arrangements, or at their option, to switch 26 27 to service under the FirstEnergy Open Access Tariff. ATSI will honor this merger commitment upon transfer of the assets and acceptance of the ATSI Tariff. Customers who choose to obtain transmission services under their grandfathered transmission arrangements are free to do so, and will be included as part of the Network Load of the FirstEnergy Operating Companies. Their third party suppliers will be designated as Network Resources under the FirstEnergy Operating Companies' Network Integration Service Agreement with ATSI. These customers will continue to pay the same rates, and have the same rights and obligations as provided in their grandfathered transmission arrangements prior to approval of this application. The effect on rates to transmission dependent customers who switch to the ATSI Tariff for network service is almost entirely dependent on the individual circumstances of the customer. Because existing arrangements provide for a variety of rates for service at voltages below 69 kV, and charges for transmission service over distribution facilities are typically averaged rather than directly assigned, the rate impact will vary from customer to customer. However, because of the voltage differentiated feature of the network tariff and the direct assignment of distribution costs, rates under the ATSI Tariff will more closely match the cost of providing service to particular customers. Customers currently taking point-to-point service under the FirstEnergy Open Access Tariff do so at bulk transmission rates. There will be a change in the proposed rates for this service when compared to the rate levels reflected in FirstEnergy's pending open access settlement rates. The cost of service underlying FirstEnergy's pending settlement rates, which are based on a 1995 test year, are substantially below the current cost of providing service over 27 28 these transmission facilities. Accordingly, the FirstEnergy Operating Companies will be filing a Section 205 application seeking an upward adjustment in its rates for Point-to-Point and Network Integration Transmission Service under the existing FirstEnergy Open Access Tariff. Except for Scheduling, System Control and Dispatch Service, charges for ancillary services will be unaffected. The settlement rate levels for generation-based ancillary services will remain in place. The FirstEnergy Section 205 application filing is intended to proceed independently of the filings submitted by ATSI. The ATSI Section 205 application, however, is based with minor changes on the same cost of service analysis and test period, and of course, the same transmission facilities as that upon which FirstEnergy Section 205 application is based. However, FirstEnergy agrees to cap ATSI's initial transmission rates at the transmission rate levels approved for the FirstEnergy Operating Companies in their separate Section 205 filing. Once again, the increase in transmission rates over the pending settlement rates sought by FirstEnergy in the Section 205 applications is attributable to increases in cost of providing service over FirstEnergy's transmission facilities, and not the corporate divestiture of these facilities associated with the creation of ATSI. To be candid, FirstEnergy would have proceeded with a Section 205 application under its existing open access tariff even if ATSI had not been created, and the transfer of assets had not been proposed. Of course, transmission customers will be free to protest the proposed transmission rates in either (or more likely both) the FirstEnergy and ATSI Section 205 filings, and any challenges to the development of the new rates can be fully aired and resolved in those dockets. 3. THERE IS NO ADVERSE EFFECT ON REGULATION. 28 29 In Order No. 592, the Commission addressed two aspects of the effect on regulation. First, in situations involving the creation of registered public utility holding companies, the Commission required section 203 applicants to choose between two options,: (1) commit to abide by the Commission's policies with respect to intra-system transactions within any newly-formed holding company structure; or (2) go to hearing on the issue of the effect of the proposed registered holding company structure on effective regulation by this Commission.(15) The Commission stated that, with respect to the effect of a merger on state regulatory authority, where a State has authority to act on a merger, the Commission ordinarily will not set this issue for a trial-type hearing. However, if the State lacked this authority and raised concerns about the effect on regulation, the Commission may set the issue for hearing. In this case, FirstEnergy remains an exempt holding company and Commission jurisdiction is unaffected. Nevertheless, pending SEC verification of its status, FirstEnergy agrees to abide by the Commission's policy on intra-system transactions. Further, state commissions will have full authority to regulate the FirstEnergy Operating Companies, and to regulate retail markets and distribution facilities, after the transaction. This Commission will retain full authority to regulate transmission service. Applications for approval of this transaction will be submitted to the Ohio and Pennsylvania commissions. Transmission service to retail customers will be unaffected by this application and retail rates will be unaffected. Under the Operating Agreement with the FirstEnergy Operating Companies, ATSI has agreed to plan, operate, and maintain the - ---------------------- (15) 61 Fed. Reg. at 68,604. 29 30 transmission system in accordance with NERC, industry, and applicable regulatory requirements in order to ensure that reliability of service is maintained. It will also grant access to its books and records to state commissions as necessary to ensure regulatory compliance. ATSI will become a public utility upon completion of this transaction, and its proposed rate schedules will be reviewed by the Commission under Section 205 of the FPA, and ATSI will otherwise be subject to regulation by this Commission under the Federal Power Act. Likewise, there will be no lapse in the Commission's jurisdictional reach over FirstEnergy Operating Companies' transactions and facilities. Further, due to its status as a public utility, any future merger, consolidation, or disposition of ATSI transmission facilities will be subject to prior Commission authorization under Section 203. This means that any future disposition of any jurisdictional asset or service by ATSI, and any sale of ATSI, will be subject to Commission jurisdiction. 4. APPROVAL OF ATSI WILL FACILITATE THE CREATION OF A LARGER, INDEPENDENT RTO The transfer of transmission assets to ATSI will facilitate the subsequent transfer of these facilities to a RTO. To be clear, FirstEnergy's formation of ATSI and the transfer of transmission facilities to ATSI sought here is not the ultimate goal. Rather, this is a step towards the subsequent transfer of these facilities to a RTO. FirstEnergy's ultimate goal is to divest ownership, operation and control of its transmission assets from its other assets. FirstEnergy has advised the Commission of its efforts with other transmission owners in the development of the 30 31 Transmission Alliance.(16) The Transmission Alliance would own, operate, and aggregate regional transmission facilities and could, in turn, operate transmission facilities of other companies. At present, the four interconnected utility systems currently committed to participating in the Transmission Alliance(17) would stretch from Michigan to Virginia and would provide open access transmission service over approximately 43,500 miles of transmission lines across a region with a population of 23 million. The Transmission Alliance will strive to better align the interests of transmission customers with the interests of transmission owners and operators. Still, FirstEnergy has not precluded consideration of other regional transmission alternatives. Whatever the regional entity, ATSI's existence as a separate corporate entity and single provider of transmission services will facilitate its participation in the RTO. Moreover, ATSI will have the opportunity to gain some experience in the operation of the transmission system as a stand alone entity -- experience that will be valuable to the effectuation of the next step. The formation of a RTO not based on an existing power pool can be a difficult and time consuming undertaking. FirstEnergy expects to file a Section 203 application to transfer ownership or operation of ATSI transmission facilities to a RTO in the near future. However, FirstEnergy recognizes that its efforts to gain the necessary consensus to support a new RTO filing at the Commission may not be successful. Accordingly, FirstEnergy commits to the Commission that if ATSI has not filed a Section 203 application to transfer ownership or control of its transmission facilities within two years from the date of Commission's approval of this - -------------------------- (16) FirstEnergy's Response to Requests for Information, filed December 10, 1998 in Docket No. EC97-5-002. 31 32 application, ATSI will file a Section 203 application either seeking divestiture of ATSI's transmission facilities, or to transfer ownership or control of ATSI's transmission facilities to a RTO. However, the applicants do not seek here Commission authorization for the RTO under development. To do so would be premature. FirstEnergy is identifying its next step purely to place the application in the proper context as the Commission undertakes its review under Section 203. The applicants seek here only Commission authorization for the transfer of transmission facilities from the FirstEnergy Operating Companies to ATSI. This includes authorization for the transfer of the Duquesne Light transmission facilities to ATSI. IV. ADDITIONAL INFORMATION REQUIRED UNDER PART 33 OF THE COMMISSION'S REGULATIONS Much of the information required by Section 33.2 of the Commission's regulations, 18 C.F.R. Section 33.2, is provided in the body of the application and in the supporting attachments. This includes the information required by Sections 33.2 (d), (e), (f), and (j). Those items not provided elsewhere are provided below: SECTION 33.2(a) THE EXACT NAMES AND ADDRESSES OF THE PRINCIPAL BUSINESS OFFICES OF APPLICANTS. - -------------------------------------------------------------------------------- (17) American Electric Power, Consumers Energy, First Energy Corp. and Virginia Electric Power Company. 32 33 1. Ohio Edison Company is an Ohio corporation having its principal place of business at Akron, Ohio. 2. The Cleveland Electric Illuminating Company is an Ohio corporation having its principal place of business at Akron, Ohio. 3. The Toledo Edison Company is an Ohio corporation having its principal place of business at Akron, Ohio. 4. Pennsylvania Power Company is a Pennsylvania corporation having its principal place of business at Akron, Ohio. 5. American Transmission Systems, Inc. is an Ohio corporation having its principal place of business at Akron, Ohio. SECTION 33.2(B) NAMES AND ADDRESSES OF THE PERSONS AUTHORIZED TO RECEIVE NOTICES AND COMMUNICATIONS IN RESPECT TO APPLICATION. 1. For the FirstEnergy Operating Companies: Arthur Garfield Vice President FirstEnergy Corp. 76 South Main Street Akron, OH 44308 Phone: (330) 384-5660 Fax: (330) 384-4988 E-Mail: garfield@firstenergycorp.com 2. For American Transmission Systems, Inc.: Stanley Szwed Vice President, Transmission FirstEnergy Corp. 76 South Main Street Akron, OH 44308 Phone: (330) 384-2454 33 34 Fax: (330) 384-3788 E-Mail: sfszwed@firstenergycorp.com 3. Applicants further request that a copy of all notices and communications be addressed to the following persons: Robin M. Nuschler, Esq. Akin, Gump, Strauss, Hauer & Feld, L.L.P. 1333 New Hampshire Avenue, N.W. Suite 400 Washington D.C. 20036 Phone: (202) 887-4412 Fax: (202) 887-4288 E-Mail: rnuschler@akingump.com 34 35 Michael R. Beiting Associate General Counsel FirstEnergy Corp. 76 South Main Street Akron, OH 44308 Phone: (330) 384-5795 Fax: (330) 384-3875 E-Mail: beitingm@firstenergycorp.com SECTION 33.2(c) DESIGNATION OF THE TERRITORIES SERVED. 1. FirstEnergy Operating Companies ------------------------------- The electric service territory, by county and state of each of the FirstEnergy Operating Companies is as follows:
* The Cleveland Electric Illuminating Company (Ohio) -------------------------------------------------- Ashtabula Lorain Cuyahoga Medina Geauga Trumbull Lake * Ohio Edison Company (Ohio) -------------------------- Ashland Madison Ashtabula Mahoning Carroll Marion Champaign Medina Clark Morrow Columbiana Ottawa Crawford Portage Cuyahoga Richland Delaware Sandusky Erie Seneca Fayette Stark Franklin Summit Geauga Trumbull
35 36 Greene Tuscarawas Holmes Union Huron Wayne Knox Wyandot Lorain
* Pennsylvania Power Company (Pennsylvania) ----------------------------------------- Allegheny Crawford Beaver Lawrence Butler Mercer * The Toledo Edison Company (Ohio) -------------------------------- Defiance Putnam Fulton Sandusky Henry Seneca Lucas Williams Ottawa Wood
2. American Transmission Systems, Inc. ----------------------------------- ATSI has no electric service territory. ATSI was formed for the purpose of acquiring transmission facilities of the FirstEnergy Operating Companies and will, upon completion of that transaction, provide open access transmission service under the ATSI Tariff. It will assume responsibility for providing transmission service for all existing agreements under the FirstEnergy Open Access Tariff. It will also act as the control area operator for the transmission system. SECTION 33.2(g) A STATEMENT (IN THE FORM PRESCRIBED BY THE COMMISSION'S UNIFORM SYSTEM OF ACCOUNTS FOR PUBLIC UTILITIES AND LICENSEES) OF THE COST OF THE FACILITIES INVOLVED IN THE TRANSACTION. See Exhibit C. 36 37 SECTION 33.2(h) A STATEMENT AS TO THE EFFECT OF THE PROPOSED TRANSACTION UPON ANY CONTRACT FOR THE PURCHASE, SALE, OR INTERCHANGE OF ELECTRIC ENERGY. The proposed transaction is expected to have no direct impact on any contract for the purchase, sale, or interchange of electric energy. As stated previously, transmission customers served under existing, grandfathered transmission arrangements will have the right to continue receiving transmission service under these arrangements from the FirstEnergy Operating Companies. The FirstEnergy Operating Companies will take network integration service from ATSI under its proposed Tariff. Service agreements under FirstEnergy's Open Access Tariff will be assigned to ATSI. An index of customers served under the FirstEnergy Open Access Tariff is attached as Appendix 1. SECTION 33.2(i) A STATEMENT AS TO WHETHER OR NOT ANY APPLICATION WITH RESPECT TO THE TRANSACTION OR ANY PART THEREOF IS REQUIRED TO BE FILED WITH ANY OTHER FEDERAL OR STATE REGULATORY BODY. In addition to the FPA section 203 authorization requested herein and the FPA section 205 authorization to be requested in the companion tariff filing, other regulatory approvals and notifications will be required before ATSI can assume ownership and control of the Transmission Facilities, e.g., approvals from the Public Utilities Commission of Ohio ("PUCO"), the Pennsylvania Public Utility Commission ("Pennsylvania PUC"), the Ohio Power Siting Board, and the United States Securities and Exchange Commission, and notification to the Nuclear Regulatory Commission. Copies of the applications requesting such authorization are 37 38 included in Exhibit G (Related Applications), which will be supplemented as filings are made. SECTION 33.2(k) A BRIEF STATEMENT OF FRANCHISES HELD, SHOWING DATE OF EXPIRATION IF NOT PERPETUAL. See attached Appendix 2. SECTION 33.2(l) A FORM OF NOTICE SUITABLE FOR PUBLICATION IN THE FEDERAL REGISTER, WHICH WILL BRIEFLY SUMMARIZE THE FACTS CONTAINED IN THE APPLICATION IN SUCH A WAY AS TO ACQUAINT THE PUBLIC WITH ITS SCOPE AND PURPOSE. The required form of notice is appended hereto as Appendix 4. V. LIST OF EXHIBITS REQUIRED BY PART 33 OF THE COMMISSION'S REGULATIONS 18 C.F.R. Section 33.3 EXHIBIT A Copies Of Resolutions Of Directors Authorizing The Transactions. EXHIBIT B Statement Of The Measure Of Control or Ownership. EXHIBIT C Balance Sheets. EXHIBIT D Statement Of Contingent Liabilities. EXHIBIT E Income Statement. EXHIBIT F Analysis Of Retained Earnings. EXHIBIT G Related Applications. EXHIBIT H Contracts Relating to Transfer of Facilities-Bill of Sale, Ground Lease, and Operating Agreement. EXHIBIT I Map and Diagrams of the Transferred Facilities. 38 39 The Applicants request a waiver of the requirements of 18 CFR section 33.3, Exhibit I, for the 69 kV facilities which are the subject of this transaction. Because of the size of the FirstEnergy System, and the number of 69 kV facilities, it is not possible to show these facilities on a single map. Exhibit I as submitted is a detailed representation of only 138 kV and above transmission facilities. Separate engineering diagrams submitted in electronic format contain a detailed representation of the FirstEnergy transmission facilities which are the subject of this Application and are also attached to Exhibit I. A listing of all the facilities proposed to be transferred, including 69 kV facilities, is found at Schedule A to the Bill of Sale included in Exhibit H. While no additional waivers are believed necessary, the applicants request waiver of any regulations necessary to permit the authorization sought herein. VI. CONCLUSION The FirstEnergy Operating Companies respectfully request that the Commission expeditiously authorize the transfer to ATSI of the facilities proposed herein under the terms and conditions set forth in this application. Respectfully submitted, Robin M. Nuschler 39 40 March 19, 1999 40 EX-3.D 5 EXHIBIT 3(D) 1 Exhibit D-3 BEFORE THE PUBLIC UTILITIES COMMISSION OF OHIO In the Matter of the Application of ) the FirstEnergy Operating companies ) Case No. 98-1633-EL-UNC For Approval of the Transfer of their ) Transmission Assets to ATSI ) APPLICATION OHIO EDISON COMPANY, THE CLEVELAND ELECTRIC ILLUMINATING COMPANY, and THE TOLEDO EDISON COMPANY, each being public utility subsidiaries of FirstEnergy Corp. (collectively, the Ohio FirstEnergy Operating Companies(1)), file this Application for approval of the transfer of certain transmission assets to American Transmission Systems, Inc. ("ATSI") pursuant to Section 4905.46 (B) of the Ohio Revised Code. The transfer to ATSI is a transaction in which all of the FirstEnergy Operating Companies will transfer certain of their electric transmission assets and operation of those assets to ATSI. The transaction is intended to be an intermediate and facilitating step in the subsequent transfer of the assets, and their operation, to a regional transmission organization ("RTO"). ATSI's acquisition and operation of these FirstEnergy Operating Company assets at this time will result in a more definitive separation of transmission, generation and distribution assets and operations and will permit a more efficient and rapid transition to participation in a RTO. - ---------------- (1) As used here, reference to the FIRSTENERGY OPERATING COMPANIES includes Ohio Edison Company, The Cleveland Electric Illuminating Company, and The Toledo Edison Company as well as Pennsylvania Power Company, a wholly-owned subsidiary of Ohio Edison Company. Reference to the OHIO FIRSTENERGY OPERATING COMPANIES includes only The Cleveland Electric Illuminating Company, Ohio Edison Company, and The Toledo Edison Company. 1 2 I. BACKGROUND The parent of the FirstEnergy Operating Companies is FirstEnergy Corp., located in Akron, Ohio. The FirstEnergy Operating Companies: - provide electric service to 2.2 million customers; - serve a 13,200 square mile area from central and northern Ohio to western Pennsylvania; - provide wholesale electric services to 37 municipal electric systems in Ohio and five in Pennsylvania; - provide transmission service to 11 rural electric cooperatives in Ohio; - interconnect with six other public utilities at or above 138 kV;(2) - own and operate 1,153 miles of 345 kV, 3,667 miles of 138 kV, and 2,279 miles of 69 kV facilities; - operate as a single electric control area; and - participate as members of the East Central Area Reliability Coordination Agreement (ECAR) region. Ohio Edison Company, The Cleveland Electric Illuminating Company, and The Toledo Edison Company are public utilities under the jurisdiction of the Public Utilities Commission of Ohio. Collectively they serve approximately 2,020,000 customers in northern and central Ohio. Their transmission facilities include 1095 miles of 345 kV, 3,495 miles of 138 kV, and 1,871 miles of 69 kV facilities. These facilities are to be transferred to ATSI. ATSI, an Ohio corporation, is a wholly-owned subsidiary of FirstEnergy Corp. ATSI is not and will not be a public utility under Title 49 of the Revised - ---------------------- (2) Four interconnections exist at 69 kV but are normally operated in an open configuration. 2 3 Code.(3) ATSI does not currently own or operate any facilities subject to this Commission's jurisdiction or that of the Federal Energy Regulatory Commission ("FERC"). Upon obtaining necessary approvals from this Commission and other regulatory bodies having jurisdiction, ATSI will own and operate transmission facilities subject to FERC jurisdiction and will provide transmission services under the terms and conditions set forth in its own Open Access Transmission Tariff ("ATSI Tariff"). To effect the proposed transfer, FirstEnergy needs approval of this Commission as well as approvals of various other regulatory agencies. In particular, as to approvals from FERC, an application for authorization to transfer transmission assets to ATSI under Section 203 of the Federal Power Act (16 U.S.C. Section 824b) and Part 33 of FERC's regulations (18 C.F.R. Part 33) was filed with FERC on March 19, 1999. On April 26, 1999, FirstEnergy filed an application to modify the FirstEnergy Open Access Transmission Tariff to increase its rates for transmission service and to change the classification of below 138 kV transmission facilities to correspond to that used in the ATSI applications. In addition, on April 28, 1999, ATSI filed an application with FERC for acceptance of the ATSI Tariff under Section 205 of the Federal Power Act (16 U.S.C. Section 824d).4 Copies of these filings have been provided to this Commission as required by FERC regulations and we incorporate by reference these filings together with their accompanying exhibits as part of the instant Application. - --------------------- (3) Many of ATSI's facilities will, however, fall within the purview of the Ohio Power Siting Board pursuant to Revised Code Section 4906.04. ATSI will be a public utility as defined in and subject to Chapter 5727 of the Revised Code (Taxation). ATSI will also be a public utility as defined by the Federal Power Act. (4) These filings will be, respectively, referred to herein as the "Section 203 filing", the "FE Operating Companies Section 205 filing", and the "ATSI Section 205 filing". 3 4 The effect of the transaction will be transparent to Ohio retail customers and its execution will have no adverse impact on reliability of service to them. In fact, the transaction should serve to enhance service and reliability as it will facilitate the transfer of those assets to a RTO, capturing the attendent benefits of such an expedient. The Operating Agreement between ATSI and the FirstEnergy Operating Companies assures that ATSI will provide reliable transmission service to the Operating Companies consistent with Good Utility Practice and applicable standards. See Section 203 filing, Exhibit H (Operating Agreement, Appendices A & B (System Operations)). Moreover, it remains the legal obligation of the Ohio FirstEnergy Operating Companies to continue to provide reliable electric service to their Ohio customers. Those companies, as Ohio public utilities, remain subject to this Commission's jurisdiction and the Commission retains its statutory authority to assure this result. Additionally, the execution of this transaction will not affect rates to Ohio retail customers. Pursuant to comprehensive "rate plan" orders of this Commission(5), retail rates for OE, CEI, and TE have been capped through 2005. The existence of the rate cap established by these Commission orders prevents any increases to customers as a result of the transfer of transmission assets, including the additional transmission facilities acquired from Duquesne Light. II. DESCRIPTION OF FACILITIES TO BE TRANSFERRED The assets to be transferred from the FirstEnergy Operating Companies to ATSI are identified in detail in the Section 203 filing, Exhibit H (Bill of Sale, Schedule A). Essentially, ATSI will acquire from the FirstEnergy Operating Companies and will operate transmission facilities currently operating at voltages - ----------------------- (5) Case No. 95-830-EL-UNC, Opinion and Order, October 18, 1995; Case Nos. 96-1211-EL-UNC & 96-1322-EL-MER, Opinion and Order, January 30, 1997. 4 5 of generally 345 kV and 138 kV (the "bulk transmission system"), and 69 kV facilities (the "area transmission system"). The facilities(6) to be transferred ("Transferred Facilities") include: (1) transmission lines (including towers, poles, and conductors), transmission substations and transmission transformers; (2) the System Control Center facility in Wadsworth; (3) transmission lines providing connections to generation facilities; (4) radial taps from the transmission system, excluding the facilities that establish the final circuit connection to distribution facilities or retail customers; (5) voltage control devices and power flow control devices directly connected to the transmission system; and (6) equipment spares for transmission facilities. The Transferred Facilities include most of the facilities currently recorded on the books of the FirstEnergy Operating Companies as "transmission" facilities, and do not include "distribution" facilities that may be used to provide wholesale transmission service. ATSI may use such distribution facilities when necessary, however, to provide wholesale transmission services under the ATSI tariff to wholesale customers who take service at voltages below 69kV. The FirstEnergy Operating Companies and ATSI have expressly provided for such use and have entered into an Agency Agreement under the ATSI Tariff that commits such distribution facilities for use by ATSI in providing wholesale transmission service under the ATSI tariff. Transmission over these distribution facilities will be offered under the ATSI Tariff and associated costs will be included in the rates for wholesale transmission service as a distribution adder. - -------------------------------- (6) The facilities include both fixed and mobile facilities. As to the former, the FirstEnergy Operating Companies will lease the land rights associated with these transmission assets to ATSI through Ground Leases. 5 6 The result is "one-stop" shopping over all facilities necessary to provide transmission service to eligible wholesale customers. As used in this filing, and those made at FERC, distribution facilities generally include all facilities with voltages below 69 kV, including the final circuit connection to substations providing transformation or connection to any retail customer regardless of voltage level. The FirstEnergy Operating Companies used the FERC's seven factor test from Order No. 888 in classifying transmission and distribution facilities for purposes of determining the facilities to be transferred to ATSI as well as setting the transmission rates proposed in the ATSI and FirstEnergy Operating Companies Section 205 filing. The criteria and analysis utilized in making this distinction are explained in detail in the supporting materials to the FERC Section 203 filing. See Section 203 Filing, Prepared Direct Testimony of Carl J. Bridenbaugh, pages 8 through 14. As explained by Mr. Bridenbaugh, certain low voltage facilities - 36, 34.5, 33 and 23 kV - currently classified as transmission under the Uniform System of Accounts do not serve a transmission function and have been reclassified as distribution facilities. These facilities will not be transferred to ATSI. The new classification of facilities between transmission and distribution will have no impact on the rates charged for bundled retail service. The facilities will be transferred to ATSI at the FirstEnergy Operating Companies' net book value(7) as follows: - ---------------------------- (7) These net book values are as of November 30, 1998. The final transaction will be based upon the latest available book value prior to the transfer. 6 7
-------------- ------------------------ -------------------------- ---------------------- Original Cost Accumulated Depreciation Net Purchase (millions) (millions) (millions) -------------- ------------------------ -------------------------- ---------------------- PP $105 $44 $61 OE $590 $258 $332 CEI $323 $144 $179 TE $143 $68 $75 TOTAL $1161 $514 $647 -------------- ------------------------ -------------------------- ----------------------
In addition, ATSI will purchase certain transmission facilities of Duquesne Light Company ("DLC"). FirstEnergy executed a series of agreements with DLC to exchange certain generating capacity as a result of DLC's restructuring order from the Pennsylvania Public Utility Commission. As part of those agreements, FirstEnergy committed to purchase transmission facilities owned by DLC that are associated with the generating capacity to be received by FirstEnergy. The purchase of the transmission facilities from DLC is expected to take place after the transfer of FirstEnergy transmission assets to ATSI. Therefore, ATSI is expected to be the purchaser of the DLC transmission facilities. The net book value of the DLC transmission facilities as of November 30, 1998 was approximately $15 million.(8) The total net purchase price for the FirstEnergy and DLC facilities by ATSI would have been $662 million as of November 30, 1998. The purchase price will be satisfied by ATSI through a combination of debt and equity. Based on the November 30, 1998 net book values, FirstEnergy Corp. will provide $298 million of equity in ATSI and the other $364 million will be in the form of debt to the FirstEnergy Operating Companies. The notes payable - ----------------------------- (8) The FERC Section 203 filing estimated the cost of the DLC transmission facilities to be $32 million. DLC is retaining a portion of the transmission facilities which were assumed to be part of this transaction in the Section 203 filing. 7 8 to the FirstEnergy Operating Companies by ATSI would be as follows (in millions): PP $ 34 OE $ 187 CEI $ 101 TE $ 42 Total $ 364 FirstEnergy's consolidated capital structure was used to determine the capital structure of ATSI, approximately 45% equity ($298 million) and 55% debt ($364 million). The transmission assets being sold will be released from the respective operating companies' mortgages. This may be accomplished by using property which has not been used for other purposes under the particular mortgage, using previously retired bonds available for that purpose, depositing the note received from the transferee of the assets (provided it is secured by a lien on the assets transferred) with the trustee and/or depositing cash with the trustee. All of these options are available, subject to some limitations as to particular companies. III. OPERATION OF FACILITIES ATSI will operate the Transferred Facilities pursuant to its Tariff and an Operating Agreement (Section 203 Filing, Exhibit H (Operating Agreement)) that is subject to FERC jurisdiction. ATSI will have operational control of the facilities (utilizing employees of appropriate training and experience who were formerly with the operating companies); serve as the control area operator over the transmission system; offer and arrange for ancillary services; operate the system's Open Access Same-Time Information System ("OASIS") in conformance with FERC Order No. 889; and administer its Tariff, including all 8 9 requests for service under the Tariff. ATSI will also be responsible for maintenance of the transmission facilities, and will initially contract with the FirstEnergy Operating Companies to perform such maintenance. ATSI will also assume responsibility for ensuring compliance with FirstEnergy's transmission-related merger commitments, including transmission system planning. In short, upon receipt of the necessary regulatory approvals, ATSI will commence providing open access transmission service to those customers previously served by the FirstEnergy Operating Companies, and any other eligible customer requesting transmission service from ATSI. In addition, post-transfer, the FirstEnergy Operating Companies will become transmission customers of ATSI under ATSI's Tariff. The FirstEnergy Operating Companies will take network service from ATSI on behalf of all bundled retail load and grandfathered (non-open access) wholesale customers. Again, this will not affect the retail rates charged by the individual operating companies. IV. REGULATORY APPROVALS In addition to this Commission's approval, and the FERC approvals discussed above, various other federal and state regulatory approvals are required to effect the transaction. The Public Utility Holding Company Act (Section 9a(2)) requires that the transfer be approved by the Securities and Exchange Commission because FirstEnergy will be acquiring a security (stock) in an affiliated public utility (ATSI). Additionally, FirstEnergy is required to provide the Nuclear Regulatory Commission with a copy of any application seeking to transfer to an affiliated company any facilities for the production, transmission, or distribution of electric energy with a value exceeding 10% of net utility plant. Accordingly, FirstEnergy has served a copy of its ss.203 filing upon the NRC. Finally, approval of the transaction will be sought from the Pennsylvania Public 9 10 Utility Commission consistent with several provisions of the Pennsylvania statutes. Insofar as this Commission's jurisdiction is concerned, the FirstEnergy Operating Companies have endeavored to anticipate and describe the relevant statutory Commission approval and authorization necessary to allow this transaction to occur. The complex nature of the transaction and the possible overlap of state and federal agency jurisdiction make it possible that Commission action is necessary on an aspect of the transaction that is not expressly set out in this Application. Therefore, the FirstEnergy Operating Companies request that the Commission grant any such other approval it deems necessary to allow them to consummate the sale of their transmission assets. V. CONCLUSION For the foregoing reasons, the Ohio FirstEnergy Operating Companies request that the Commission approve the transfer of the identified transmission assets to ATSI. Respectfully submitted, ------------------------------------------- Leila L. Vespoli, Trial Attorney Arthur E. Korkosz FirstEnergy Corp. 76 South Main Street Akron, OH 44308 Phone: 330/761-4207 Fax: 330/384-3875 Attorneys for: Ohio Edison Company The Cleveland Electric Illuminating Company The Toledo Edison Company 10 11 CERTIFICATE OF SERVICE ---------------------- I hereby certify that a copy of Application was served upon all parties of record by regular U.S. Mail, postage prepaid, this 12th day of May, 1999. -------------------------------- Arthur E. Korkosz Attorney PARTIES OF RECORD ----------------- Jeffrey L. Small Barry Cohen Chester, Willcox & Saxbe Ohio Consumers' Counsel 17 South High Street 77 South High Street Suite 900 15th Floor Columbus, OH 43215 Columbus, OH 43215 David A. Kopech Kimberly J. Wile Rinehart, Howarth, Rishel & Kopech McNees, Wallace & Nurick 395 East Broad Street 21 East State Street Suite 330 Suite 1700 Columbus, OH 43215 Columbus, OH 43215-4228 Duane W. Luckey Assistant Attorney General 180 East Broad Street 7th Floor Columbus, OH 43266-0573 11 EX-5.D 6 EXHIBIT 5(D) 1 Exhibit D-5 BEFORE THE PENNSYLVANIA PUBLIC UTILITY COMMISSION Application of Pennsylvania Power Company ) Under sections 1102(a)(3), 2102, and 2811(e) for (1)) A Certificate of Public Convenience Authorizing ) the Transfer of Certain Transmission Assets )Docket No. A-00110450 F00__ to American Transmission Systems, Inc., ) and (2) Approval of Certain Affiliated Interest ) Agreements Necessary to Effect the Transfer ) APPLICATION ----------- Pennsylvania Power Company ("Penn Power" or "Company") files this Application for a Certificate of Public Convenience authorizing the Transfer of Certain Transmission Assets to American Transmission Systems, Inc. ("ATSI") and for Approval of Certain Affiliated Interest Agreements Necessary to Effect the Transfer under section 1102(a)(3) and Section 2102 of the Public Utility Code ("Code") (66 Pa. C.S.A. section 1102(a)(3) and Section 2102) ("Application"). This Application is also filed under section 2811(e) of the Electricity Generation Customer Choice and Competition Act ("Competition Act") (66 Pa. C.S.A. section 2811(e)), relating to the divestiture of utility assets. The transfer to ATSI is part of a transaction in which all of the FirstEnergy Operating Companies(1) will transfer certain of their electric transmission assets and their operation to ATSI. The transaction is intended to be an intermediate and facilitating step in the subsequent transfer of the assets to a regional transmission organization ("RTO") or to create a vehicle for the addition of transmission assets divested by third parties to it. ATSI's acquisition and operation of these FirstEnergy Operating Company assets at this time will result in a more definitive separation of transmission, generation, and distribution assets and operations and will permit a more efficient and rapid transition to participation in an RTO. - ------------------ (1) Pennsylvania Power Company, Ohio Edison Company, The Cleveland Electric Illuminating Company, and The Toledo Edison Company. 2 -2- I. BACKGROUND ------------- Penn Power is a public utility whose rates and terms of service are regulated by the Pennsylvania Public Utility Commission ("Commission"). It serves approximately 140,000 customers in a six county area of western Pennsylvania and owns and operates 58 miles of 345 kV, 172 miles of 138 kV, and 408 miles of 69 kV transmission lines. These facilities are to be transferred by Penn Power to ATSI. The parent of the FirstEnergy Operating Companies is FirstEnergy Corp., located in Akron, Ohio. The FirstEnergy Operating Companies: - provide electric service to 2.2 million customers; - serve a 13,200 square mile area from central and northern Ohio to western Pennsylvania; - provide wholesale electric services to 37 municipal electric systems in Ohio and five in Pennsylvania; - provide transmission service to 11 rural electric cooperatives in Ohio; - interconnect with six other public utilities at or above 138 kV;(2) - own and operate 1,153 miles of 345 kV lines, 3,667 miles of 138 kV lines, and 2279 miles of 69 kV lines; - operate as a single electric control area; and - participate as members of the East Central Area Reliability Coordination Agreement (ECAR) region. - ---------------------------- rmally operated in an open configuration. ATSI, an Ohio corporation, is a wholly owned subsidiary of FirstEnergy Corp. ATSI does not currently own or operate any facilities subject to Commission jurisdiction or that of the Federal Energy 3 -3- Regulatory Commission ("FERC"). Upon obtaining necessary approvals from this Commission and other regulatory bodies having jurisdiction, ATSI will own and operate transmission facilities subject to FERC jurisdiction and will provide transmission services under the terms and conditions set forth in its own Open Access Transmission Tariff ("Tariff"). ATSI will become the control area operator for the FirstEnergy System. FirstEnergy, in order to effect the proposed transfer, needs the approval of various other regulatory agencies. An Application for Authorization to Transfer Transmission Assets to ATSI under Section 203 of the Federal Power Act (16 U.S.C. Section 824b) and Part 33 of FERC's regulations (18 C.F.R. Part 33) was filed with FERC on March 19, 1999. In addition, ATSI filed an application with FERC on April 28, 1999 for acceptance of the Tariff under Section 205 of the Federal Power Act (16 U.S.C. Section 824d). Copies of these filings have been served on the Commission as required by FERC regulations. In addition, approval of the transaction is being sought from the Ohio Public Utilities Commission and the Securities Exchange Commission ("SEC"). Finally, the Nuclear Regulatory Commission (NRC) has been notified of the transfer. II. DESCRIPTION OF FACILITIES TO BE TRANSFERRED ------------------------------------------- The transmission assets to be transferred from Penn Power to ATSI are identified in detail in Schedule A of the Bill of Sale from Penn Power to ATSI, Attachment A, hereto. The determination of whether existing facilities serve a transmission function, and thus should be transferred to ATSI is based upon FERC's seven-factor test as explained in the testimony accompanying ATSI's Section 203 filing. Essentially, ATSI will acquire from the FirstEnergy Operating Companies transmission facilities currently operating at voltages of 345 kV and 138 kV (the "bulk transmission system") and of 69 kV (the "area transmission system"). ATSI will provide transmission services pursuant to the terms and conditions set forth in its own Open Access Transmission Tariff. The facilities (including fixed and mobile types) to be 4 -4- transferred ("Transferred Facilities") shall include (1) transmission lines (including towers, poles, and conductors) and transmission transformers and substations;(3) (2) the System Control Center facility in Wadsworth, Ohio; (3) transmission lines providing connections to generation facilities; (4) radial taps from the transmission system (excluding the facilities that establish the final circuit connection to distribution facilities or retail customers); (4) voltage control devices and power flow control devices directly connected to the transmission system; and (6) equipment spares for transmission facilities. The Transferred Facilities comprise all of the facilities currently recorded on the books of Penn Power as "transmission" facilities with the exception of 23 kV facilities which currently are classified as distribution facilities.(4) The Transferred Facilities do not include facilities providing retail service or "distribution" facilities that may be used to provide wholesale transmission service. However, ATSI may use such distribution facilities in order to provide service under its Tariff to existing wholesale customers. The FirstEnergy Operating Companies and ATSI have entered into an Agency Agreement (Appendix C to Attachment B, hereto) under the Open Access Transmission Tariff that commits such distribution facilities for use by ATSI in providing wholesale transmission service under the ATSI Tariff. The facilities will be transferred to ATSI at Penn Power's and the other FirstEnergy - ------------------------ (3) The FirstEnergy Operating Companies will lease the land rights associated with these transmission assets to ATSI through Ground Leases. Approval of Penn Power's Ground Lease is discussed in Section VI of this Application. (4) Distribution facilities are those operating at voltages below 69 kV, including the final circuit connection to substations providing transformation or connection to any retail customer regardless of voltage level. 5 -5- Operating Companies' net book value as of the date of the transfer. The net book values as of November 30, 1998, the test year in ATSI's Section 205 filing, are:
Original Cost Accumulated Depreciation Net Purchase ------------- ------------------------ ------------ (millions) (millions) (millions) PP $105 $44 $61 OE $590 $258 $332 CEI $323 $144 $179 TE $143 $68 $75 ----- ---- ---- TOTAL $1161 $514 $647
- -------------------------------------------------------------------------------- In addition, ATSI is expected to purchase certain transmission facilities of Duquesne Light Company ("Duquesne"). FirstEnergy has signed definitive agreements with Duquesne to exchange certain generating capacity as a result of Duquesne's restructuring order at Docket No. R-00974104. As part of those agreements, FirstEnergy committed to purchase transmission facilities owned by Duquesne that are associated with the generating capacity to be received by FirstEnergy. The purchase of the transmission facilities from Duquesne is expected to take place after the transfer of FirstEnergy transmission assets to ATSI. Therefore, ATSI is expected to be the purchaser of the Duquesne transmission facilities. The net book value of the subject Duquesne transmission facilities as of November 30, 1998 was approximately $15 million. The total net purchase price for the FirstEnergy ($647 million) and Duquesne ($15 million) facilities by ATSI will be $662 million. The purchase price will be satisfied by ATSI through the issuance of a combination of debt and equity. Based on the November 30, 1998 net book values, FirstEnergy Corp. will provide $298 million of equity in ATSI and the other $364 million will be in the form of debt to the FirstEnergy Operating Companies. The notes payable to the FirstEnergy Operating Companies by ATSI will be approximately as follows (in millions): 6 -6- PP $ 34 OE $187 CEI $101 TE $ 42 ---- Total $364 The actual amounts will be based upon the net book value of the transferred assets as of the date of closing. The accounting entries to be made to record the Penn Power asset sale are: Debit Cash $ 27 Debit Notes Receivable $ 34 Debit Accumulated Depreciation $ 44 Credit Utility Plant $105 Similar entries in appropriate amounts will be made for the other FirstEnergy Operating Companies. III. OPERATION OF FACILITIES ---------------------------- ATSI will operate the Transferred Facilities pursuant to its Tariff and an Operating Agreement (Attachment B, hereto) that is subject to FERC jurisdiction. ATSI will have operational control of the transmission and, for the first 3 years, 23 kV facilities of Penn Power; serve as the control area operator over the transmission system; procure, offer and arrange for ancillary services; operate the Open Access Same-Time Information System ("OASIS") in conformance with FERC Order No. 889; and administer its Tariff, including all requests for service under the Tariff. ATSI's operational staff will consist primarily of former employees of FirstEnergy or its operating companies who have appropriate training and experience. ATSI also will be responsible for maintenance of the transmission facilities, and will initially contract with the FirstEnergy Operating Companies to perform the maintenance (See Attachment B). In short, upon receipt of the necessary regulatory approvals, ATSI will commence providing open access transmission service to those existing open access customers served by the FirstEnergy Operating Companies, and any other eligible customer requesting transmission service from 7 -7- ATSI. In addition, post-transfer, the FirstEnergy Operating Companies will become transmission customers of ATSI under its Tariff. IV. COMPETITIVE ISSUES ---------------------- Under Section 2811(e) of the Competition Act, the Commission must review whether the disposition of utility assets is likely to result in anticompetitive or discriminatory conduct or the unlawful exercise of market power which would prevent Pennsylvania retail customers from obtaining the benefits of the Competition Act. As explained below, the proposed transfer will have no anticompetitive effect and, in fact, may enhance customers' ability to secure the benefits of retail competition. As noted previously, FirstEnergy seeks only to more definitively separate its generation from its transmission facilities in order to pave the way for complete divestiture of its transmission assets. ASTI does not currently own any generation, distribution or transmission facilities, and will not own or control any generation. Upon completion of the proposed transfer, the FirstEnergy Operating Companies will no longer own transmission facilities. As such, the proposed transfer is competitively benign in that it has no effect on the concentration of generation or transmission assets or market power. Indeed, FirstEnergy's market power only can remain as is or be diminished by the transfer. Furthermore, because the proposed transaction positions FirstEnergy's transmission facilities for divestiture to an RTO, it will facilitate greater competition in the wholesale power market. In short, the formation of ATSI creates greater separation between the distribution, transmission and generation portions of FirstEnergy and thereby reduces the likelihood of anticompetitive or discriminatory behavior. V. STANDARDS OF CONDUCT ----------------------- In its Order No. 888, FERC stated that "[f]unctional unbundling will work only if a strong code of conduct (including a requirement to separate employees involved in transmission functions from 8 -8- those involved in wholesale power merchant functions) is in place."(5) To that end, not only does ATSI's Tariff incorporate the Standards of Conduct set forth in FERC's regulations,(6) but, in accordance with section 37.4(c) of FERC's regulations,(7) the FirstEnergy Operating Companies and ATSI have also developed procedures for implementation of the Standards of Conduct. These procedures include the following statement of policy: It is the policy of ATSI to operate the Transmission System in a fair and nondiscriminatory manner and to implement such rules and regulations in the governance of the corporation as necessary to prevent control of the decision-making process by the merchant function of the FirstEnergy Operating companies or its affiliates or any User of the Transmission System. It is the policy of ATSI to own, operate and plan the Transmission System without adverse distinction or preference to the FirstEnergy Operating Companies or Users of the Transmission System, and that investments in new transmission facilities will be made by ATSI without discrimination. Specifically, each employee directly responsible for either the FirstEnergy Operating Companies' wholesale merchant operations or ATSI's transmission operations will be required to sign a Standards of Conduct Acknowledgment and Compliance Statement and to abide by its terms. Managers of departments not directly responsible for these functions will be given a copy of the Standards of Conduct and will similarly be required to sign a Standards of Conduct Acknowledgment and Compliance Statement and to abide by its terms. These managers will also be required to review the Standards of Conduct with all of their employees. Furthermore, the wholesale merchant division of the FirstEnergy Operating Companies will be headquartered several miles from ATSI's System Control Center. The FirstEnergy Operating Companies have established procedures that prevent access by any employee responsible for wholesale merchant functions to the System Control Center for the purpose of obtaining information on transmission capacity, price, curtailments, ancillary services, scheduled - ----------------------------- (5) Order No. 888, FERC Stats. & Regs. [Reg. Preambles 1991-96] at 31,655. (6) See 18 C.F.R. Part 37. (7) Id. Section 37.4(c). 9 -9- maintenance and line outages. Firewalls have been established within the Energy Management System ("EMS") to ensure that transmission information from the EMS can not be accessed by wholesale merchant employees. Implementation of these measures is further evidence of ATSI's commitment to provide non-discriminatory access to the transmission system. Approval of the ATSI standards of conduct has been sought from FERC as part of its Section 205 filing. VI. AFFILIATED INTEREST AGREEMENTS ------------------------------ In order to effectuate this transaction, Penn Power requests approval of several affiliated interest agreements under Section 2102 of the Public Utility Code. Commission approval of these agreements is sought to the extent that Section 2107, (66 Pa. C.S.A. Section 2107) relating to approvals by Federal regulatory agencies, does not apply to all or portions of the Agreements. These agreements are: 1. Bill of Sale 2. Ground Lease 3. Promissory Note 4. Operating Agreement The Bill of Sale is designed to convey title to the transmission assets purchased by ATSI from Penn Power and the other FirstEnergy Operating Companies. The Bill of Sale includes an itemization (Schedule A, thereto) of facilities to be transferred and standard representations and warranties. The assets transferred to ATSI under the Bill of Sale include FirstEnergy's rights and interests in any contracts under the FirstEnergy Open Access Tariff. A form of the Bill of Sale is attached hereto as Attachment A. The Ground Lease allows ATSI to use land and rights of way owned by Penn Power and the other FirstEnergy Operating Companies for a term of fifty years. Penn Power will retain ownership of the land with ATSI making annual Base Rent payments to Penn Power of $1,303,674. The Base Rent was 10 -10- calculated using an implicit 11.5% return on equity. The Base Rent payments are net to Penn Power throughout the term, i.e., net of taxes, costs, expenses, liabilities, charges or other deductions except as specifically provided in the lease. A form of Ground Lease is attached hereto as Attachment C. As set forth in Section II, above, ATSI will execute a Promissory Note to Penn Power in an approximate amount of $34 million. The note is payable over 30 years in accordance with the specified payment scheduled attached to the Promissory Note. Interest on the Promissory Note is set at the approximate composite embedded cost of long-term debt for the FirstEnergy Operating Companies of 7.75%. A form of Promissory Note is attached hereto as Attachment D. Lastly, Penn Power will be entering into an Operating Agreement for the planning, operation, and control of the transmission system. This agreement has been filed with FERC and is an integral component of the Section 203 filing for which FERC approval is sought. To the extent Commission approval is necessary, Penn Power requests that the Operating Agreement, attached hereto as Attachment B, be approved. VII. ADDITIONAL COMMISSION APPROVALS ------------------------------- Penn Power has attempted to describe all of the relevant Commission approvals and authorizations necessary to allow this transaction to occur. The complex nature of the transaction and the possible overlap of Pennsylvania and federal agency jurisdiction make it possible that Commission action is necessary on an aspect of the transaction that is not specifically requested in this Application. Therefore, Penn Power requests that the Commission grant any other approvals it deems necessary to allow Penn Power to consummate the sale of its transmission assets. VIII. THE PROPOSED TRANSACTION IS IN THE PUBLIC INTEREST -------------------------------------------------- ATSI's acquisition and operation of the transmission facilities is in the public interest. -11- 11 First, ATSI's acquisition and operation of the transmission assets of the FirstEnergy Operating Companies will exceed the "functional" unbundling requirements of Order No. 888, and bring with it greater corporate and organizational separation of transmission from generation. ATSI will be responsible for providing all open access transmission and ancillary services under the proposed ATSI Tariff, and existing open access service agreements under the old FirstEnergy Tariff will be assigned to ATSI. The FirstEnergy Operating Companies will remain responsible for outstanding transmission obligations associated with grandfathered, pre-open access contracts. After the transfer of assets, the FirstEnergy Operating Companies will become network transmission customers of ATSI and will be required to secure transmission service from ATSI in the same manner as unaffiliated transmission customers. The requirement for the FirstEnergy Operating Companies to take service under the open access tariff does not arise as a result of the transfer. Rather, the companies were required to enter into network service agreements under FirstEnergy's own open access tariff under FERC precedent and policy. This arrangement will not, in and of itself, have any impact on transmission rates. The current organizational separation between the employees of the FirstEnergy Operating Companies' wholesale merchant divisions and transmission divisions will be significantly strengthened beyond the requirements of Order Nos. 888 and 889, because transmission personnel will become employees of a separate company, ATSI. Responsibility for power generation and transmission will be assigned to separate corporate officers of FirstEnergy. ATSI will have its own board of directors and will operate as a separate value center within FirstEnergy. The result of all these measures will be the further separation of FirstEnergy's wholesale generation and transmission services. ATSI will not be engaged in the electric power generation business, and will contract with the FirstEnergy Operating Companies and others on the open market to provide ancillary services on a least cost basis. ATSI will not own distribution facilities, and will arrange for the use of facilities only to the extent required to provide transmission services to wholesale customers served at voltages below 69 kV 12 -12- under the ATSI tariff. ATSI will focus solely on efficiently and effectively operating and maintaining, and where necessary expanding, its transmission system, and will be well situated to respond quickly to customer needs. Regulation of the parties after the proposed transaction will not be adversely affected. FirstEnergy will remain an exempt holding company subject to FERC and SEC jurisdiction. This Commission and the Public Utilities Commission of Ohio will continue to regulate retail markets and distribution facilities after the transaction. FERC will retain its full authority to regulate transmission service. Transmission service to retail customers will be unaffected by the proposed transaction. Under the Operating Agreement with the FirstEnergy Operating Companies, ATSI is obligated to plan, operate, and maintain the transmission system in accordance with NERC, industry, and applicable regulatory requirements in order to ensure that reliability of service is maintained. Penn Power will continue to be subject to statutory and regulatory requirements as to the adequacy, safety and reliability of its facilities and operations and will retain its obligations to provide reliable electric service to its customers. This Commission will have access to ATSI's books and records to the extent necessary to ensure regulatory compliance. ATSI will become a FERC jurisdictional public utility subject to regulation under the Federal Power Act and its rate schedules will be subject to review and acceptance by FERC under Section 205 of the Federal Power Act. There will be no lapse in the jurisdictional reach over the FirstEnergy Operating Companies' transactions and facilities. Moreover, any future merger, consolidation, or disposition of ATSI transmission facilities will be subject to prior FERC authorization under Section 203 of the Federal Power Act. The transfer will also facilitate FirstEnergy's efforts to transfer these facilities to an RTO. To be clear, FirstEnergy's formation of ATSI and the transfer of transmission assets to ATSI sought here is not the ultimate goal. Rather, this is a step towards the subsequent transfer of these facilities to an RTO. 13 -13- FirstEnergy's ultimate goal is to divest ownership, operation and control of its transmission assets from its other assets. FirstEnergy has advised the Commission of its efforts with other transmission owners in the development of the Transmission Alliance. The Transmission Alliance would own, operate, and aggregate regional transmission facilities and could in turn operate transmission facilities of other companies. At present, the four utility systems currently committed to participating in the Transmission Alliance(8) would stretch from Michigan to Virginia and would provide open access transmission service over 43,100 miles of transmission facilities across a region with a population of 23,000,000. The Transmission Alliance is committed to better align the interests of transmission customers with the interests of transmission owners and operators. At the same time, FirstEnergy has not precluded consideration of other regional transmission alternatives. Whatever the regional entity, ATSI's existence as a separate corporate entity and single provider of transmission services will facilitate its participation in an RTO. Moreover, ATSI will have the opportunity to gain some experience in the operation of the transmission system as a stand-alone entity -- experience that will be valuable to the effectuation of the next step. The formation of an RTO not based on an existing power pool can be a difficult and time-consuming undertaking. FirstEnergy expects to file a Section 203 application to transfer ownership or operation of ATSI transmission facilities to an RTO in the near future. However, FirstEnergy recognizes that its efforts to gain the necessary consensus to support a new RTO filing at FERC may not be successful. Accordingly, FirstEnergy has committed to FERC that if ATSI has not filed a Section 203 application to transfer ownership or control of its transmission facilities within two years from the date of FERC's approval of the current Section 203 application before that agency, ATSI will file a second Section 203 application seeking either divestiture of its transmission facilities or the transfer of ownership or control of its transmission facilities to an RTO. FirstEnergy seeks to make it clear that it has no intention to delay the formation of, or participation in, an RTO. Its actions in the Transmission Alliance - -------------------------------- (8) ATSI, American Electric Power, Consumers Energy, and Virginia Electric Power Company 14 -14- will demonstrate this. In offering the two-year divestiture commitment in the FERC proceeding, FirstEnergy seeks only to reinforce its intent to effectuate a separation of transmission from the integrated utility structure. FirstEnergy does not desire delay, and is pursuing a course of action that is hoped and intended to place itself in a FERC-approved RTO well before the close of the two-year period. IX. CONCLUSION ---------- For the foregoing reasons, Penn Power requests that the Commission (a) issue a Certificate of Public Convenience authorizing the proposed transfer of assets, (b) approve the affiliated interest agreements attached hereto, and (c) grant such other approvals as it deems necessary to effectuate this transaction. In doing so, the Commission should find: 1. That the sale of the identified transmission assets by Penn Power to ATSI is in the public interest; 2. That the agreements necessary to effect the sale are reasonable and consistent with the public interest; and 3. That the transaction is not likely to result in anticompetitive or discriminatory conduct or the unlawful exercise of market power. The proposed transaction is a reasonable initial step in the formation of a truly vibrant regional transmission entity. Such an entity is necessary to create the long-term benefits envisioned by the 15 -15- enactment of Competition Act and should be approved. Respectfully submitted, ---------------------------------- Stephen L. Feld Senior Attorney FirstEnergy Corp. 76 South Main Street Akron, OH 44308 Phone: 330/761-4207 Fax: 330/384-3875 May 11, 1999 EX-1.H 7 EXHIBIT 1(H) 1 Exhibit H-1 SECURITIES AND EXCHANGE COMMISSION (Release No. 35- ) Filings under the Public Utility Holding Company Act of 1935 ("Act") May , 1999 Notice is hereby given that the following filing(s) has/have been made with the Commission pursuant to provisions of the Act and rules promulgated thereunder. All interested persons are referred to the application(s) and/or declaration(s) for complete statements of the proposed transaction(s) summarized below. The application(s) and/or declaration(s) and any amendments thereto is/are available for public inspection through the Commission's Office of Public Reference. Interested persons wishing to comment or request a hearing on the application(s) and/or declaration(s) should submit their views in writing by , 1999 to the Secretary, Securities and Exchange Commission, Washington, D.C. 20549, and serve a copy on the relevant applicant(s) and/or declarant(s) at the address(es) as specified below. Proof of service (by affidavit or, in case of an attorney at law, by certificate) should be filed with the request. Any request for hearing shall identify specifically the issues of fact or law that are disputed. A person who so requests will be notified of any hearing, if ordered, and will receive a copy of any notice or order issued in the matter. After said date, the application(s) and/or declaration(s), as filed or as amended, may be granted and/or permitted to become effective. * * * * * * FIRSTENERGY CORP. (70- ) FirstEnergy Corp., 76 South Main Street, Akron, Ohio 44308, an Ohio corporation ("FirstEnergy"), has filed an application/declaration under Sections (9)(a)(2) and 10 of the Act to (i) directly acquire all of the issued and outstanding voting securities of American Transmission Systems, Incorporated, a newly formed Ohio corporation ("ATSI") and (ii) indirectly acquire certain debt securities to be issued by ATSI as part of consideration for transfer of certain transmission assets (the "Transmission Assets") owned by each of Ohio Edison Company ("Ohio Edison"), The Cleveland Electric Illuminating Company ("Cleveland Electric"), The Toledo Edison Company ("Toledo Edison") and Pennsylvania Power Company (individually, "Penn Power," and collectively, the "Operating Companies") to ATSI. 2 FirstEnergy states that the proposed creation of ATSI and transfer of the Transmission Assets to ATSI is part of its plan to establish an independent regional transmission organization. FirstEnergy further states that the proposed formation of the new transmission company is intended to provide the following benefits to it and its Operating Companies' customers: (i) greater corporate and organizational separation of transmission from generation; and (ii) by tying together control, planning, maintenance and financial responsibilities of the Operating Companies' transmission facilities into a single company having an independent, streamlined and cost-efficient operation, (A) creating synergies that result in better service in the region and (B) assuring non-discriminatory access for all transmission users. FirstEnergy states that its plan to establish an independent RTO, with the creation of ATSI, as a significant step toward this end, will maximize the value of the Transmission Assets to shareholders. FirstEnergy was organized under the laws of the State of Ohio in 1996 and is a holding company within the meaning of Section 2(a)(7) of the Act. FirstEnergy's principal business is the holding of all of the issued and outstanding voting securities of the following 12 direct active subsidiaries: Ohio Edison; Cleveland Electric; Toledo Edison; FirstEnergy Properties, Inc.; FirstEnergy Ventures Corp.; FirstEnergy Trading Services, Inc.; FirstEnergy Securities Transfer Company; FirstEnergy Facilities Services Group, Inc.; MARBEL Energy Corporation; JR Operating Company; FirstEnergy Services Corp.; and FirstEnergy Nuclear Operating Company; and all of the issued and outstanding voting securities of the following four direct inactive subsidiaries: Centerior Service Company; FirstEnergy Holdings, LLC; FE Acquisition Corp.; and ATSI. FirstEnergy has claimed an exemption from all provisions of the Act (except for Section 9(a)(2) thereof) pursuant to Rule 2 thereunder. ATSI is incorporated as an Ohio corporation and currently does not conduct any business or own any utility assets. Upon consummation of the proposed transaction, ATSI will become a "public-utility company" as defined in the Act. Ohio Edison was organized under the laws of the State of Ohio in 1930 and is both a public utility and a public utility holding company which is exempt from regulation by the Commission under the Act (except for Section 9(a)(2) thereof) because it is predominantly a public-utility company whose operations as such do not extend beyond the State of Ohio and contiguous states. Ohio Edison owns all of the issued and outstanding voting securities of Penn Power. Ohio Edison also owns directly 16.5% of the issued and outstanding voting securities of Ohio Valley Electric Corporation, an Ohio corporation ("OVEC"). In addition to Penn Power, Ohio Edison has seven other wholly-owned subsidiaries organized, unless otherwise noted, under the laws of the State of Ohio: (i) OES Capital, Incorporated; (ii) OES Fuel, Incorporated; (iii) OES Finance, Incorporated; (iv) Ohio Edison Financing Trust, organized under the laws of the State of Delaware; (v) Ohio Edison Financing Trust II, organized under the laws of the State of Delaware; (vi) OES Nuclear, Incorporated; and (vii) OES Ventures, Incorporated. Finally, Ohio Edison has a 49% interest in OES Engineering Incorporated. Penn Power was organized under the laws of the Commonwealth of Pennsylvania in 1930 and owns property and does business as an electric public utility in that state. Penn Power is also authorized to do business and owns property in the State of Ohio. Penn Power has one wholly-owned subsidiary, Penn Power Energy, Inc. 2 3 Cleveland Electric was organized under the laws of the State of Ohio in 1892 and is a public utility company engaged primarily in the generation, transmission, distribution and sale of electric energy to an area of approximately 1,700 square miles in northeastern Ohio, including the City of Cleveland. It has one subsidiary, Centerior Funding Corporation. It also owns 10% of The Toledo Edison Capital Corporation ("TECC") Toledo Edison was organized under the laws of the State of Ohio in 1901 and is a public utility company engaged primarily in the generation, transmission, distribution and sale of electric energy to an area of approximately 2,500 square miles in northwestern Ohio, including the City of Toledo. It owns 90% of TECC. Toledo Edison owns directly 4% of the issued and outstanding voting securities of OVEC. FirstEnergy states that the proposed transaction will be accomplished through (i) FirstEnergy's acquisition of all of the issued and outstanding voting securities of ATSI in exchange for certain cash consideration, (ii) the sale and transfer by the Operating Companies of their Transmission Assets to ATSI in consideration for the purchase price (the "Purchase Price") which will be the net book value of the Transmission Assets as of November 30, 1998 and (iii) ATSI's financing of the purchase of the Transmission Assets by (A) the use of FirstEnergy's purchase price for all of the issued and outstanding voting securities of ATSI for an amount equal to 45% of the Purchase Price and (B) ATSI's issuance of promissory notes (which may be secured by a lien on the asset transferred) to the Operating Companies in an aggregate amount equal to 55% of the Purchase Price. The interest rate on the promissory notes will be based on the embedded cost of debt of the Operating Companies on a consolidated basis as of November 30, 1998. FirstEnergy states that, after the consummation of the proposed transaction, FirstEnergy will directly own all of the issued and outstanding voting securities of ATSI, in addition to continuing to own directly or indirectly all of the issued and outstanding voting securities of each of the Operating Companies, and thus there will be no minority equity interest in any such companies. The Operating Companies will own all of ATSI's debt securities. No change will be effected in the capital structure of Penn Power, which will continue to be wholly-owned subsidiary of Ohio Edison. 3 -----END PRIVACY-ENHANCED MESSAGE-----