-----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, BIqQt0OGjjOrCK8Ci5P31Ulz5J7Wh79ublyY9rh83y4bjjZizhs4Xjh3fNhCpBaI CBuzv2aiT2GzGo0ngf7f1A== 0001031296-03-000026.txt : 20030131 0001031296-03-000026.hdr.sgml : 20030131 20030131145242 ACCESSION NUMBER: 0001031296-03-000026 CONFORMED SUBMISSION TYPE: POS AMC PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 20030131 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: POS AMC SEC ACT: 1935 Act SEC FILE NUMBER: 070-09793 FILM NUMBER: 03534346 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 POS AMC 1 u1_70-9793.txt POST EFFECTIVE AMENDMENT NO. 4 File No. 70-9793 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 POS AMC Amendment No. 7 (Post-Effective Amendment No. 4) to FORM U-l APPLICATION/DECLARATION UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 ------------------------------------------------------------------ FirstEnergy Corp. FIRSTENERGY SERVICE COMPANY GPU Service, Inc. 76 South Main Street Akron, Ohio 44308 (Names of companies filing this statement and address of principal executive office) ------------------------------------------------------------------- FirstEnergy Corp. (Name of top registered holding company parent of applicant) ------------------------------------------------------------------- Leila L. Vespoli, Douglas E. Davidson, Esq. Senior Vice President and Thelen Reid & Priest LLP General Counsel 40 West 57th Street FirstEnergy Corp. New York, New York 10019 76 South Main Stree Akron, Ohio 44308 ------------------------------------------------------------------ (Names and addresses of agents for service) FirstEnergy Corp., FirstEnergy Service Company and GPU Service, Inc. (collectively "Applicants") hereby amend in its entirety Amendment No. 5 (Post-Effective Amendment No. 2) to Form U-1 filed by Applicants in docket No. 70-9793 on October 15, 2002 as follows: ITEM 1. DESCRIPTION OF PROPOSED TRANSACTIONS. ------------------------------------ A. Background. By Order dated October 29, 2001 in this proceeding ---------- (Holding Co. Act Release No. 27459) (the "Merger Order"), as supplemented by orders dated November 8, 2001 (Holding Company Act Release No. 27483) and December 23, 2002 (Holding Company Act Release No. 27628), the Commission authorized the merger between FirstEnergy Corp. ("FirstEnergy"), an Ohio corporation, and GPU, Inc. ("GPU"), a Pennsylvania corporation. The merger became effective on November 7, 2001, with FirstEnergy as the surviving entity, and FirstEnergy registered under the Act as a holding company on the same day. As a result of the merger, FirstEnergy directly or indirectly owns all of the outstanding common stock of ten electric utility subsidiaries, Ohio Edison Company ("Ohio Edison"), The Cleveland Electric Illuminating Company ("Cleveland Electric"), The Toledo Edison Company ("Toledo Edison"), American Transmission Systems, Incorporated, Jersey Central Power & Light Company ("JCP&L"), Pennsylvania Electric Company ("Penelec"), Metropolitan Edison Company ("Met-Ed"), Pennsylvania Power Company ("Penn Power"), York Haven Power Company, and The Waverly Electric Power & Light Company, which together provide service to approximately 4,300,000 retail and wholesale electric customers in a 37,200 square-mile area in Ohio, New Jersey, New York and Pennsylvania; and one gas utility subsidiary, Northeast Ohio Natural Gas Corp. ("Northeast"), which provides gas distribution and transportation service to approximately 5,000 customers in central and northeast Ohio. FirstEnergy's electric and gas utility subsidiaries are referred to herein collectively as the "Utility Subsidiaries." FirstEnergy also directly owns all of the issued and outstanding common stock of FirstEnergy Service Company ("ServeCo"), an Ohio corporation, which was organized in 2001 in order to become a new service company subsidiary of FirstEnergy, and GPU Service, Inc. ("GPU Service"), a Pennsylvania corporation, which was formerly a direct service company subsidiary of GPU. FirstEnergy also directly or indirectly holds investments in numerous non-utility subsidiaries that are engaged in a variety of energy-related, exempt, or otherwise functionally related non-utility businesses (collectively, the "Non-Utility Subsidiaries"), including FirstEnergy Generation Corp. ("GenCo") and FirstEnergy Nuclear Operating Company ("FENOC"). Reference is made to Appendix A to the Merger Order for a description of these Non-Utility Subsidiaries. The Utility and Non-Utility Subsidiaries of FirstEnergy are collectively referred to herein as the "Subsidiaries." Under the Merger Order, the Commission granted FirstEnergy a temporary exemption under its rules in order to enable FirstEnergy to continue to provide to the pre-merger Subsidiaries of FirstEnergy certain common corporate services,1 until such time as all of the - -------------------- 1 These services include: energy supply management of the bulk power and natural gas supply, fuel procurement, coordination of gas and electric systems, maintenance, construction and engineering work; customer billing; materials management; facilities management; human resources; finance; accounting; internal auditing; information systems; corporate planning and research; public affairs; legal; environmental matters; and executive services. service functions performed by FirstEnergy and GPU Service have been consolidated in ServeCo.2 The Merger Order specified that ServeCo would begin at least minimal operations within 90 days following closing of the merger, and that all service functions of FirstEnergy and GPU Service would be transferred to ServeCo not later than February 1, 20032 The Merger Order states that FirstEnergy will file a separate application with the Commission on or before September 1, 2002 (extended upon request to the Staff to October 15, 2002) to seek authorization for ServeCo to consolidate service company functions now performed by FirstEnergy and GPU Service, including a form of the proposed service agreement, policies and procedures and cost allocation methods to be used by ServeCo.. Employees of FirstEnergy were transferred to ServeCo by January 1, 2002 and FirstEnergy no longer has any employees and no longer provides any services. Since January 1, 2002, GPU Service has continued to use the allocation methods and policies and procedures GPU Service ("GPU Methods") used prior to the Merger. ServeCo's authorized capitalization consists of 850 shares of common stock with no par value, of which one (1) share is issued and outstanding and held by FirstEnergy. ServeCo will derive substantially all of its needs for additional working capital from borrowings under FirstEnergy's non-utility money pool (as authorized in the Merger Order) and/or additional equity investments by FirstEnergy pursuant to Rule 45(b)(4) or Rule 52(b), as applicable. B. Summary of Requested Action. In this Post-Effective Amendment, ---------------------------- FirstEnergy, ServeCo and GPU Service are requesting authorization to consolidate all common corporate services provided during the pre-merger period to associate companies in the FirstEnergy system by FirstEnergy and GPU Service in ServeCo.3 In addition, FirstEnergy asks for a delay of the original February 1, 2003 date for full compliance to June 1, 2003 in order to coincide with FirstEnergy's implementation of the SAP Enterprise IT Solution project.4 Filed herewith as Exhibit N-7 is the proposed form of Service Agreement, including cost allocation methods, which ServeCo proposes to enter into with FirstEnergy and each Subsidiary that requests services. In addition, FirstEnergy requests authorization for a separate Service Agreement in the form filed herewith as Exhibit N-8 among certain of its Ohio Utility Subsidiaries and Penn Power which will enable these Utility Subsidiaries to render certain - -------------------- 2 The Merger Order states that FirstEnergy will file a separate application with the Commission on or before September 1, 2002 (extended upon request to the Staff to October 15, 2002) to seek authorization for ServeCo to consolidate service company functions now performed by FirstEnergy and GPU Service, including a form of the proposed service agreement, policies and procedures and cost allocation methods to be used by ServeCo. 3 FirstEnergy may seek approval to form one or more additional service companies in the future including FirstEnergy Nuclear Operating Company and GPU Nuclear, Inc., which provide operating services to the FirstEnergy nuclear generating plants under the direction and supervision of the owners thereof. 4 SAP is an Enterprise Resource Planning (ERP) system that links and coordinates business processes. It will replace existing systems in Human Resources, Finance, Supply Chain, Distribution and Fossil/Nuclear areas, and will be used to manage work, share information, track customer accounts, and meet other business needs. 2 services to each other, all as further described below. Exhibit N-9 is ServeCo's Policies and Procedures Manual. On January 1, 2003, all personnel of GPU Service were transferred to and became employees of ServeCo. Thus, GPU Service no longer has any employees. By January 1, 2004, certain employees who provide service only to one Utility Subsidiary will be transferred from ServeCo to the appropriate Utility Subsidiary. Upon full implementation of this reorganization, it is expected that ServeCo will have approximately 3,580 employees in multiple locations organized in thirty departments. Applicants now seek a supplemental order authorizing ServeCo to operate using the GPU Methods through June 1, 2003. Applicants request that the Commission reserve jurisdiction over the proposed ServeCo allocation methods, policies and procedures and service agreements filed or to be filed on this docket. C. Services to be rendered by ServeCo. Following the proposed --------------------------------------- consolidation of service functions in ServeCo, ServeCo will enter into a Service Agreement with FirstEnergy, each of the Utility Subsidiaries, and each other associate company in the FirstEnergy system that requests services from ServeCo. The Service Agreement will be in the form attached hereto as Exhibit N-7. ServeCo will provide its associate companies with services in the following departments, which are described in fuller detail in Exhibit A to the Service Agreement: administrative services, business development, call center, claims, communications, controllers, corporate and shareholder services, corporate affairs and community involvement, credit management, energy delivery and customer service, economic development, enterprise risk management, FirstEnergy technologies, FirstEnergy telecom, governmental affairs, human resources, industrial relations, information services, insurance services, internal audit, investment management, investor relations, legal, performance planning, rates and regulatory affairs, real estate, supply chain, transmission & distribution technical services, treasury and workforce development. Services rendered by ServeCo will be rendered at cost in accordance with Rules 90 and 91. The costs of services provided by ServeCo will be directly assigned, distributed or allocated by work order numbers (or equivalent cost collectors, collectively, "workorders")5 in accordance with the SEC's Uniform System of Accounts for Mutual Service Companies and Subsidiary Service Companies. The primary basis for charges to associate companies is the direct charge method. Other costs that are not directly assigned, including overheads and other general administrative costs which will include costs of operating ServeCo as a separate corporate entity, will be allocated to associate companies using one or a combination of the methods of allocation that are described in Exhibit "A" to the Service Agreement. - -------------------- 5 There are four cost collectors which are equivalent to work orders: "orders", "cost centers", "networks" and "work breakdown structures" ("WBSs"). Orders include work orders, sales orders, internal orders and service orders. Each employee will be assigned to a cost center which will be responsible for collecting routine costs. WBSs are analogous to work orders and can be used for projects exceeding certain dollar thresholds or durations, or which involve investing in capital assets. To ensure proper recordkeeping, each employee will be required to charge time against a designated order, network, WBS or cost center number. 3 ServeCo will maintain its accounts, cost-accounting procedures and other records in accordance with the requirements of the Commission's Uniform System of Accounts for Mutual Service Companies and Subsidiary Service Companies. ServeCo will file an annual report on Form U-13-60 in accordance with Rule 94. As provided in the Merger Order, and for so long as FirstEnergy remains a "registered holding company" under PUHCA, no change in the organization of ServeCo, the type and character of the companies to be serviced, the methods of allocating costs to associate companies, or in the scope or character of the services to be rendered subject to Section 13 of the Act, or any rule, regulation or order thereunder, shall be made unless and until ServeCo shall first have given the Commission written notice of the proposed change not less than 60 days prior to the proposed effectiveness of any such change. If, upon the receipt of any such notice, the Commission shall notify ServeCo within the 60-day period that a question exists as to whether the proposed change is consistent with the provisions of Section 13 of the Act, or of any rule, regulation or order thereunder, then the proposed change shall not become effective unless and until the ServeCo shall have filed with the Commission an appropriate declaration regarding such proposed change and the Commission shall have permitted such declaration to become effective. 1. Cost Allocation Methodology ServeCo categorizes costs of services provided to affiliates into three primary categories. Directly Assignable costs represents expenses incurred for activities and services exclusively for the benefit of one affiliate, and in many respects, are captured through individual department workorder systems for specific project billing purposes. Directly Attributable costs represent expenses incurred for activities and services that benefit more than one affiliate and which can be assigned using direct measures of costs causation. The majority of costs incurred by ServeCo fall into the above two categories. By the very nature of a service corporation, a portion of ServeCo's expenses will not be directly related to specific current operations or functions of individual Subsidiaries. Nor are these costs amenable to many of the cost accounting procedures, which frequently concentrate upon identification of variable, fixed and semi-fixed costs. Accordingly, it is necessary to develop formulae that recognize the overall contribution of ServeCo to both the current and future operations of the FirstEnergy system. After all direct charges have been made, the remaining costs (Indirect Costs) in each department in ServeCo must be fairly and equitably allocated among FirstEnergy and the Subsidiaries. As a registered public utility holding company, FirstEnergy's primary business is that of owning and operating electric public utilities. As the electric industry moves through restructuring to permit competition in business areas once the sole province of historical monopolies, FirstEnergy has begun to enter competitive energy and energy services businesses to the extent permitted by state and federal restrictions. Codes of conduct govern the relationship between the Utility Subsidiaries and their affiliated competitive businesses, namely, the Non- 4 Utility Subsidiaries. As a public utility holding company, FirstEnergy has invested capital for infrastructure over many years in the Utility Subsidiaries so that they may develop the support services necessary to serve their customers. The costs associated with these infrastructure investments (e.g., accounting and human resources systems, telephone circuits and other communications equipment, mainframe CPU, printers and data storage development tools and client servers and storage not dedicated to the competitive unit) were originally incurred, and would continue to be incurred, regardless of whether or not the Non-Utility Subsidiaries were part of FirstEnergy. These Indirect Costs will be allocated using a multi-variable formula, which gives weight to more than one measure of the size of the various Subsidiaries' operations within the FirstEnergy system, and is particularly relevant under these circumstances. In accordance with Rule 90(b), ServeCo will direct charge its associate companies for all costs of products and services where possible. The costs of products and services provided by ServeCo that cannot be charged directly to the Subsidiary or Subsidiaries receiving the product or service will be allocated among all Subsidiaries (and FirstEnergy, where applicable) by utilizing one of the methods described below. The key determinants in assigning the allocation methods were the business operations of the Subsidiary or Subsidiaries receiving the benefit of the product and service, and the associated cost driver for each product and service. FirstEnergy has developed sixteen (16) methods of allocation for charging a share of the Indirect Costs to the Subsidiaries benefiting from the particular product or service being provided: a. "Multiple Factor - All" - For the Indirect Costs for products or services benefiting the entire FirstEnergy system, FirstEnergy and all Subsidiaries will bear a fair and equitable portion of such costs. FirstEnergy will bear 5% of these Indirect Allocations. The remaining Indirect Allocations will be allocated among the Utility Subsidiaries and the Non-Utility Subsidiaries based on FirstEnergy's equity investment in the respective groups. A subsequent allocation step will then occur. Among the Utility Subsidiaries, allocations will be based upon the "Multiple Factor - Utility" method. Among the Non-Utility Subsidiaries, allocations will be based upon the "Multiple Factor - Non-Utility" method. b. "Multiple Factor - Utility" - For the Indirect Costs for a product or service solely benefiting one or more of the Utility Subsidiaries, each such Utility Subsidiary will be charged a portion of the Indirect Costs based on the sum of the weighted averages of the following factors: 1. Gross transmission and/or distribution plant 2. Operating and maintenance expense excluding purchase power and fuel costs 3. Transmission and/or distribution revenues, excluding transactions with affiliates These three (3) factors have been determined to be the most appropriate for the Utility Subsidiaries in the FirstEnergy system. Each factor will be weighted equally so that no one facet of the electric utility operations inordinately influences the distribution of Indirect Costs. 5 c. "Multiple Factor - Non-Utility" - For the Indirect Costs for products or services solely benefiting the Non-Utility Subsidiaries, each Non-Utility Subsidiary receiving the product or service will be charged a proportion of the Indirect Costs based upon the total assets of each Non-Utility Subsidiary, including the generating assets under operating leases from the Utility Subsidiaries. d. "Multiple Factor - Utility and Non-Utility" - For the Indirect Costs for a product or service benefiting one or more of the Utility and Non-Utility Subsidiaries, each such Subsidiary is first assigned a distribution ratio that is in proportion to the Indirect Costs based on FirstEnergy's equity investment in such Subsidiaries. Following this distribution, a subsequent allocation step will then occur. Among the Utility Subsidiaries, allocations will be based upon the "Multiple Factor-Utility." Among the Non-Utility Subsidiaries, allocations will be based upon "Multiple Factor - Non-Utility". e. "Direct Charge Ratio" - The ratio of direct charges for a particular product or service to an individual Subsidiary as a percentage of the total direct charges for a particular product or service to all Subsidiaries. Indirect Costs are then allocated to each Subsidiary based on the calculated ratios. f. "Enterprise Distribution - For the Indirect Costs for products and services that benefit the entire FirstEnergy system, FirstEnergy and all Subsidiaries will bear a fair and equitable portion of such costs. FirstEnergy will bear 5% of these Indirect Costs. The remaining Indirect Costs will be allocated among the Utility Subsidiaries and Non-Utility Subsidiaries based on FirstEnergy's equity investment in the respective groups. g. "Number of Customers Ratio" - For costs of products and services driven by the number of Utility customers, the allocation method that will be used will be the number of Utility customers for the respective Utility Subsidiary receiving the product or service divided by the total number of Utility customers. h. "Number of Shopping Customers" - A "shopping customer" is defined as a Utility customer who has selected a competitive electric generation supplier. For costs of products and services driven by the number of shopping customers, the allocation method that will be used will be the number of shopping customers for the respective Utility Subsidiary receiving the product or service divided by the total number of shopping customers. i. "Number of Participating Employees - General" - For costs of products and services driven by all participating employees within the FirstEnergy system, the allocation method that will be used will be the number of participating employees for the respective Subsidiary receiving the product or service divided by the total number of participating employees. 6 j. "Number of Participating Employees - Utility and Non-Utility" - For costs of products and services driven by participating employees who work for the Utility and Non-Utility Subsidiaries, the Subsidiaries receiving the product or service are first assigned a distribution ratio that is in proportion to the Indirect Costs based on FirstEnergy's equity investment in the respective groups. Costs are further allocated by using the number of participating employees for the respective Subsidiary divided by the total number of participating FirstEnergy employees. k. "Square Footage Used Ratio" - Amount of square footage occupied by a Subsidiary receiving the product or service divided by the total amount of square footage occupied by all FirstEnergy system companies applicable to that respective product or service. l. "Gigabytes Used Ratio" - Number of gigabytes utilized by a Subsidiary receiving the product or service divided by the total number of gigabytes used by the FirstEnergy system companies applicable to that respective product or service. m. "Number of Computer Workstations Ratio" - Number of computer workstations utilized by a Subsidiary receiving the product or service divided by the total number of computer workstations in use by the FirstEnergy system companies applicable to that respective product or service. n. "Number of Billing Inserts Ratio" - Number of billing inserts performed for a Subsidiary receiving the product or service divided by the total number of billing inserts performed for the FirstEnergy system companies applicable to that respective product or service. o. "Number of Invoices Ratio" - Number of invoices processed for a Subsidiary receiving the product or service divided by the total number of invoices processed for the FirstEnergy system companies applicable to that respective product or service. p. "Number of Payments Ratio" - Number of monthly payments processed for a Subsidiary divided by the total monthly number of payments processed for the FirstEnergy system companies applicable to that respective product or service. D. Services to be rendered by certain Utility Subsidiaries to each ------------------------------------------------------------------ other. FirstEnergy organizes and conducts its Utility Subsidiary operations on a - ----- regional basis.6 - -------------------- 6 There are nine regions in three states: Western Region - Ohio; Northern Region - - Ohio; Central Region - Ohio; Southern Region - Ohio; Eastern Region- Ohio; Western Region - Pennsylvania; Eastern Region - Pennsylvania; Northern Region - New Jersey; and Central Region - New Jersey. Each region has a "Regional President", as well as a management and support team that reports to the Regional President. For the most part, each region is entirely within a particular Utility Subsidiary's service territory. However, two regions - Western Region - Ohio and Eastern Region - Ohio -- include parts of several Utility Subsidiaries. Western Region - Ohio, includes all of Toledo Edison and 990 square miles of Ohio Edison's service territory in Sandusky, Ohio. The Eastern Region - Ohio covers the eastern 2,517 square miles of Ohio Edison, 661 square miles of Cleveland Electric and all 1,112 square miles of Penn Power. 7 These regions operate and are managed as separate business units. The regional structure focuses on moving accountability and decision making closer to customers with an emphasis on decentralized operations and providing cost effective, high-quality service to customers. Because of this decentralized, regional approach, certain regional support services (such as Human Resources, Workforce Development and Business Services) will be accounted for in the appropriate Utility Subsidiary. In the case of Western Region - Ohio and Eastern Region - Ohio, the employees who must provide service to more than one legal entity will continue to charge their time in a fair and equitable manner to all Utility Subsidiaries within that region, rather than be accounted for in the ServeCo.7 In addition, from time to time, one Utility Subsidiary may request other services from another Utility Subsidiary. These services will be provided at cost in accordance with Rules 90 and 91 and billed to the receiving Utility Subsidiary(ies), at cost as set forth in accordance with a Utility-to-Utility Service Agreement, the form of which is filed herewith as Exhibit N-8.8 This will allow the regional management to operate regions as separate units, and provide the most effective service possible to the customers of the Utility Subsidiaries. ITEM 2. FEES, COMMISSIONS AND EXPENSES. ------------------------------ FirstEnergy estimates that the additional fees, commissions and expenses incurred or to be incurred in connection with the proposed transaction will not exceed $25,000. ITEM 3. APPLICABLE STATUTORY PROVISIONS. ------------------------------- Section 13(b) of the Act and Rule 88 thereunder are applicable to the proposed transaction. FirstEnergy believes that ServeCo has been organized so as to comply with Section 13(b) of the Act and the Commission's rules and regulations thereunder. In this regard, Rule 88 provides that "[a] finding by the Commission that a subsidiary company of a registered holding - -------------------- 7 Of the approximately 5,500 employees in nine Regions, less than 200 employees provide the "regional" support services discussed herein. 8 The Commission has previously authorized utility companies in a holding company system to render service to each other. See e.g., Ameren Corporation, ------- ------------------- Holding Co. Act Release No. 26809 (Dec.30, 1997); CP&L Energy, Holding Co. Act ----------- Release No. 27284 (Nov.27, 2000). 8 company . . . is so organized and conducted, or to be conducted, as to meet the requirements of Section 13(b) of the Act with respect to reasonable assurance of efficient and economical performance of services or construction or sale of goods for the benefit of associate companies, at cost fairly and equitably allocated among them (or as permitted by Rule 90), will be made only pursuant to a declaration filed with the Commission on Form U-13-1, as specified" in the instructions for that form, by such company or the persons proposing to organize it. Notwithstanding the foregoing language, the Commission has on several recent occasions made findings under Section 13(b) based on information set forth in an Application/Declaration on Form U-1, without requiring the formal filing of a Form U-13-1. See SCANA Corp., Holding Co. Act Release No. 27133 (Feb. 9, 2000); -------------- New Century Energies, Holding Co. Act Release No. 26748 (Aug. 1, 1997); CINergy - -------------------- ------- Corp., Holding Co. Act Release No. 26146 (Oct. 21, 1994); UNITIL Corp., Holding - ---- ----------- Co. Act Release No. 25524 (April 24, 1992). In this Post-Effective Amendment, FirstEnergy has submitted substantially the same information for ServeCo as would have been submitted in a Form U-13-1. Accordingly, it is submitted that it is appropriate to find that ServeCo is so organized and its business will be so conducted as to meet the requirements of Section 13(b), and that the filing of a Form U-13-1 is unnecessary, or, alternatively, that this Post-Effective Amendment should be deemed to constitute a filing on Form U-13-1 for purposes of Rule 88. The proposed transaction is also subject to the requirements of Rule 54. Rule 54 provides that in determining whether to approve an application by a registered holding company which does not relate to any exempt wholesale generator ("EWG") or "foreign utility company" ("FUCO"), the Commission shall not consider the effect of the capitalization or earnings of any subsidiary which is an EWG or a FUCO upon the registered holding company if paragraphs (a), (b) and (c) of Rule 53 are satisfied. FirstEnergy currently meets all of the conditions of Rule 53(a), except for clause (1). In the Merger Order, the Commission, among other things, authorized FirstEnergy to invest in EWGs and FUCOs so that FirstEnergy's "aggregate investment," as defined in Rule 53(a)(1), in EWGs and FUCOs does not exceed $5 billion, which $5 billion amount is greater than the amount which would be permitted by clause (1) of Rule 53(a) which, based on FirstEnergy's consolidated retained earning of $1.85 billion as of September 30, 2002, would be $926 million. The Merger Order also specifies that this $5 billion amount may include amounts invested in EWGs and FUCOs by FirstEnergy and GPU at the time of the Merger Order ("Current Investments") and amounts relating to possible transfers to EWGs of certain generating facilities owned by certain of FirstEnergy's operating utilities ("GenCo Investments"). FirstEnergy has made the commitment that through June 30, 2003, its aggregate investment in EWGs and FUCOs other than the Current Investments and GenCo Investments ("Other Investments") will not exceed $1.5 billion. The Commission has reserved jurisdiction over investments that exceed such amount. 9 As of September 30, 2002, and on the same basis as set forth in the Merger Order, FirstEnergy's aggregate investment in EWGs and FUCOs was approximately $1.27 billion,9 an amount significantly below the $5 billion amount authorized in the Merger Order. Additionally, as of September 30, 2002, consolidated retained earnings were $1.85 billion. By way of comparison, FirstEnergy's consolidated retained earnings as of December 31, 2001 were $1.52 billion. In any event, even taking into account the capitalization of and earnings from EWGs and FUCOs in which FirstEnergy currently has an interest, there would be no basis for the Commission to withhold approval of the transactions proposed herein. With respect to capitalization, since the date of the Merger Order, there has been no material adverse impact on FirstEnergy's consolidated capitalization resulting from FirstEnergy's investments in EWGs and FUCOs. As of September 30, 2002, FirstEnergy's consolidated capitalization consisted of 34.8% common equity, 1.7% cumulative preferred stock, 1.8% subsidiary - obligated mandatorily redeemable preferred securities, 56.1% long-term debt and 5.6% notes payable. As of December 31, 2001, those ratios were as follows: 30.3% common equity, 3.1% cumulative preferred stock, 2.2% subsidiary-obligated manditorily redeemable preferred securities, 60.9% long term debt and 3.5% notes payable. Additionally, the proposed transactions will not have any material impact on FirstEnergy's capitalization. Further, since the date of the Merger Order, and, after taking into account the effects of the Merger, there has been no material change in FirstEnergy's level of earnings from EWGs and FUCOs. FirstEnergy's operating subsidiaries are financially sound companies as indicated by their investment grade ratings from the nationally recognized rating agencies for their senior unsecured debt. The following chart includes a breakdown of the senior, unsecured credit ratings for FirstEnergy's operating utility subsidiaries. Subsidiary Standard & Poors10 Moody's11 Fitch12 Ohio Edison BBB- Baa2 --- Cleveland Electric BBB- Baa3 --- Toledo Edison BBB- Baa3 BB Penn Power BBB- Baa2 --- JCP&L BBB --- --- Met-Ed BBB --- --- Penelec BBB A2 BBB+ FirstEnergy satisfies all of the other conditions of paragraphs (a) and (b) of Rule 53. With respect to Rule 53(a)(2), FirstEnergy maintains books and records in conformity with, and otherwise adheres to, the requirements thereof. With respect to Rule 53(a)(3), no more than - -------------------- 9 This $1.27 billion amount represents Current Investments only. As of September 30, 2002, FirstEnergy had no Genco Investments. 10 Standard & Poor's Rating Services 11 Moody's Investors Service, Inc. 12 Fitch, Inc. 10 2% of the employees of FirstEnergy's domestic public utility companies render services, at any one time, directly or indirectly, to EWGs or FUCOs in which FirstEnergy directly or indirectly holds an interest. With respect to Rule 53(a)(4), FirstEnergy will continue to provide a copy of each application and certificate relating to EWGs and FUCOs and relevant portions of its Form U5S to each regulator referred to therein, and will otherwise comply with the requirements thereof concerning the furnishing of information. With respect to Rule 53(b), none of the circumstances enumerated in subparagraphs (1), (2) and (3) thereunder have occurred. FirstEnergy states that the transactions contemplated herein will have no impact on its consolidated capitalization. ITEM 4. REGULATORY APPROVALS. -------------------- The New Jersey Board of Public Utilities ("NJBPU") and the Pennsylvania Pubic Utility Commission ("PPUC") have jurisdiction under their respective state affiliate interests statutes over the proposed Service Agreement, as it relates to the Utility Subsidiaries that are subject to regulation by those commissions. No other State commission, and no Federal commission, other than this Commission has jurisdiction over the proposed transaction. ITEM 5. PROCEDURE. --------- FirstEnergy requests that the Commission issue a supplemental order approving the proposed extension not later than February 1, 2003 and that the Commission issue a further supplemental order approving all other matters as to which jurisdiction will be reserved at the earliest practicable date so that FirstEnergy can implement the new service company structure on or before June 1, 2003. It is further requested that: (i) there not be a recommended decision by an Administrative Law Judge or other responsible officer of the Commission, (ii) the Division of Investment Management be permitted to assist in the preparation of the Commission's decision and (iii) there be no waiting period between the issuance of the Commission's order and the date on which it is to become effective. ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS. --------------------------------- (a) Exhibits: D-12 - Application of JCP&L to NJBPU for Approval of Service Agreement. D-13 - NJBPU Order -- to be filed by amendment. 11 D-14 - Application of Penn Power, Penelec and Met-Ed to PPUC for Approval of Service Agreement -- to be filed by amendment. D-15 - PPUC Order -- to be filed by amendment. N-7 - Form of Service Agreement (including Allocation Methods) -- previously filed. N-8 - Utility-to-Utility Service Agreement -- to be filed by Amendment. N-9 - Policies and Procedures Manual -- to be filed by amendment (in paper copy only) (b) Financial Statements: Omitted as not relevant to the proposed transaction. ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS. --------------------------------------- (a) The proposed transaction does not involve a major Federal action significantly affecting the quality of the human environment. (b) No federal agency has prepared or is preparing an environmental impact statement with respect to the proposed transaction. 12 SIGNATURES ---------- Pursuant to the requirements of the Public Utility Holding Company Act of 1935, as amended, the undersigned companies have duly caused this statement to be signed on their behalves by the undersigned thereunto duly authorized. FirstEnergy Corp. FIRSTENERGY SERVICE COMPANY GPU SERVICE, INC. By:________________________________ Harvey L. Wagner Vice President and Controller Date: January 31, 2003 13 EX-99 3 exhitit-d12.txt EXHIBIT D-12 Exhibit D-12 State of New Jersey Board of Public Utilities - ------------------------------------------ In the Matter of the Verified Petition of | Docket No. ____________ Jersey Central Power & Light Company | for Approval of a Service Agreement | VERIFIED PETITION with FirstEnergy Service Company | ----------------- - ------------------------------------------ TO THE HONORABLE BOARD OF PUBLIC UTILITIES: The Petitioner, Jersey Central Power & Light Company ("JCP&L" or the "Company"), a public utility of the State of New Jersey subject to the jurisdiction of the Board of Public Utilities (the "Board"), and maintaining offices at 300 Madison Avenue, Morristown, New Jersey 07962, respectfully shows: 1. JCP&L is engaged as a New Jersey public utility in the production, generation, purchase, transmission, distribution and sale of electric energy and related utility services to more than 1,000,000 residential, commercial and industrial customers located within 13 counties and 236 municipalities of the State of New Jersey. 2. All correspondence and other communications regarding this proceeding should be transmitted as follows: Marc B. Lasky, Esq. Elizabeth A. Quirk, Esq. Thelen Reid & Priest LLP 65 Madison Avenue Morristown, New Jersey 07960 - and - Michael J. Filippone Jersey Central Power & Light Company 300 Madison Avenue Morristown, New Jersey 07962-1911 - and - Mary H. Bell, Esq. FirstEnergy Corp. 76 South Main Street Akron, Ohio 44308 3. By Order dated October 9, 2001 (Docket No. EM00110870) (the "Board Merger Order"), the Board approved the merger of FirstEnergy Corp. ("FirstEnergy") and GPU, Inc. ("GPU"), the then-corporate parent of JCP&L, which at the time owned all of the outstanding common stock of JCP&L. The FirstEnergy/GPU merger became effective on November 7, 2001 and, as a result, FirstEnergy now directly owns all of the outstanding common stock of JCP&L. FirstEnergy also owns, either directly or indirectly, all of the outstanding common stock of the following other utilities: Ohio Edison Company ("Ohio Edison"), The Cleveland Electric Illuminating Company ("CEI"), The Toledo Edison Company ("Toledo Edison"), American Transmission Systems, Incorporated ("ATSI"), Pennsylvania Electric Company ("Penelec"), Metropolitan Edison Company ("Met-Ed"), Pennsylvania Power Company ("Penn Power"), York Haven Power Company ("York Haven") and The Waverly Electric Power & Light Company ("Waverly"), and the Northeast Ohio Natural Gas Corp. ("NONGC"). FirstEnergy also directly or indirectly owns various non-utility subsidiaries, including GPU Service, Inc. ("GPUS"), and FirstEnergy Service Company ("ServeCo"). ServeCo, an Ohio corporation, is a wholly-owned subsidiary of FirstEnergy formed in 2001 as a new service company subsidiary of FirstEnergy. 2 4. As a result of the FirstEnergy/GPU merger, FirstEnergy became a registered holding company under the Public Utility Holding Company Act of 1935 ("PUHCA"). By Order dated October 29, 2001 (HCAR No. 27459 (the "SEC Merger Order")), as supplemented by a supplemental order dated November 8, 2001, the Securities and Exchange Commission ("SEC"), among other things, authorized the merger of FirstEnergy and GPU, and directed FirstEnergy to file an application with the SEC, on or before September 1, 2002, seeking authorization for ServeCo to provide all common corporate services to FirstEnergy and all of its utility and non-utility subsidiaries. Subsequently, the SEC Staff granted FirstEnergy's request for an extension of time to file its application until October 15, 2002. On October 15, 2002, FirstEnergy filed its application with the SEC, which is attached hereto as Exhibit A ("SEC Application"). In the SEC Merger Order, the SEC indicated that the application should include the proposed form of service agreement, policies and procedures and cost allocation methods and should provide for ServeCo to be fully functioning by February 1, 2003.1 Additionally, the Board Merger Order approved a Stipulation of Settlement that provides, among other things, that JCP&L must file a petition with the Board for approval of a service agreement between JCP&L and ServeCo and related cost allocations pursuant to N.J.S.A. 48:3-7.1, at the same time that the SEC Application is -------- filed. Pursuant to N.J.S.A. 48:3-7.1, JCP&L hereby requests that the Board -------- approve the service agreement between JCP&L and ServeCo, the form of which is attached to the SEC Application as Exhibit N-7 (the "Service Agreement"), to be applicable for ratemaking purposes. - -------------------- 1 FirstEnergy, in its SEC Application, has proposed to delay this implementation date to April 1, 2003, in order to coincide with FirstEnergy's implementation of an SAP Enterprise IT Solution project, which is an Enterprise Resource Planning system that links and coordinates business processes. This system will replace existing systems in Human Resources, Finance, Supply Chain, Distribution and Fossil/Nuclear areas, and will be used to manage work, share information, track customer accounts, and meet other business needs. 3 N.J.S.A. 48:3-7.1 governs, among other things, certain contracts between -------- public utilities and their affiliates if expenditures for services rendered under the contract exceed $25,000. The Board may disapprove such contract only if it determines that (a) the contract violates New Jersey or federal law; (b) prices or compensation fixed in the contract exceed the "fair" price or "fair" compensation, respectively; or (c) the contract is contrary to the public interest. None of these grounds for disapproval applies here. The Service Agreement will comply with all New Jersey and federal laws. Services will be provided "at cost," as defined by the SEC under PUHCA, to ensure fairness in pricing and compensation. Finally, the Service Agreement is not contrary to the public interest. Indeed, the establishment of ServeCo and its execution of Service Agreements with its affiliates, including JCP&L, has been mandated by PUHCA and the SEC. Additionally, many recent Board proceedings provide precedent for the approvals requested herein.2 5. Currently, GPUS, the pre-merger GPU service company, continues to provide services to JCP&L, Penelec and Met-Ed, and the former GPU non-utility affiliates. Until December 31, 2001, FirstEnergy provided services to the pre-merger FirstEnergy utility and non-utility affiliates. Since that time, ServeCo has provided such services. Additionally, in accordance with the SEC Merger Order, both GPUS and ServeCo continue to provide certain services to the former GPU subsidiaries, including JCP&L. Pursuant to that arrangement, any charges made by FirstEnergy or ServeCo in connection with those services were directly - -------------------- 2 See I/M/O JCP&L for Approval of a Service Agreement with GPU Nuclear Corp., ----------------------------------------------------------------------- BPU Docket No. EM950100390 (Decision and Order, 3/15/96); I/M/O Middlesex Water --------------------- Company, BPU Docket No. WE95050240 (Order of Approval, 11/22/95); I/M/O United - ------- ------------ Water Vernon Hills, BPU Docket No. WE95040155 (Order of Approval, 8/21/95); - ------------------- I/M/O JCP&L for Approval of an Operating Agreement with GPU Generation Corp., - ------------------------------------------------------------------------------- BPU Docket No. EE94030079 (Decision and Order, December 28, 1994; Clarifying Order, February 8, 1995). 4 assigned or allocated to JCP&L and the other former GPU subsidiaries in accordance with the applicable existing GPUS service agreement. 6. By way of background, GPUS was organized in 1971 as a mutual service company under applicable PUHCA rules to provide certain services to GPU, Inc. and its subsidiary companies, including JCP&L. From 1971 through December 31, 1998, GPUS provided services to JCP&L pursuant to a service agreement approved by the Board3 and authorized under PUHCA. In 1999, the scope of the services provided by GPUS was significantly expanded to accommodate newly installed SAP Enterprise software. GPU installed the new software to meet a number of needs, including the implementation of retail choice in the electric utility industry in New Jersey, the organizational restructuring of the management and operations of JCP&L, Met-Ed and Penelec into a "process-based" structure, and resolution of Y2K issues and concerns. The changes brought about by the new SAP system necessitated a new service agreement between JCP&L and GPUS (the "1999 Service Agreement"), which expanded upon the existing service arrangements. In 1998, JCP&L filed a petition with the Board seeking approval of the 1999 Service Agreement (Docket No. EE98050267). Although the record in that proceeding was substantially completed, and included the submission to the Board of a stipulation of settlement between JCP&L and the Division of the Ratepayer Advocate, no order in that docket has been issued. The implementation of the 1999 Service Agreement was undertaken based upon JCP&L's representation to the Board that the expanded service arrangements could be modified or unwound if necessary to accommodate any specific - -------------------- 3 The Board's initial Order approving that service agreement was dated May 31, 1971 (Docket No. 713-200). An amendment to the service agreement was subsequently approved by the Board, by Order dated November 5, 1982 (Docket No. 827-626). 5 requirement of the Board in its ensuing Order, which, at the time, was expected to be forthcoming relatively promptly. The 1999 Service Agreement provided that, in addition to the traditional services that GPUS had historically provided to the GPU utilities, GPUS would also provide all of the operations services to the GPU utilities, including JCP&L (except for those involving system dispatch). GPUS created an Operations Division and JCP&L, as well as Met-Ed and Penelec, transferred all of their non-dispatch employees (bargaining and non-bargaining) to GPUS. Generally, employees did not physically move, but simply worked for, and were paid by, GPUS rather than the individual utilities. Additionally, as part of the reorganization, the materials and supplies inventories of JCP&L, Met-Ed and Penelec were sold and transferred to GPUS. 7. After the ServeCo organization and structure is approved by the SEC, the Board and any other relevant regulatory agencies, ServeCo will enter into the Service Agreement with JCP&L.4 Pursuant to the Service Agreement, ServeCo will provide various corporate, managerial and administrative support services in the following areas, which are described more fully in Exhibit A to the Service Agreement (which is included as Exhibit N-7 to the SEC Application): administrative services, business development, call center, claims, communications, controllers, corporate and shareholders services, corporate affairs and community involvement, credit management, energy delivery and customer service, economic development, enterprise risk management, FirstEnergy technologies, FirstEnergy telecom, governmental affairs, human resources, industrial relations, information services, insurance services, internal audit, investment management, investor relations, legal, performance planning, - -------------------- 4 ServeCo will also enter into agreements with FirstEnergy and FirstEnergy's other utility and non-utility subsidiaries. It is expected that ServeCo will provide services only to FirstEnergy and its affiliates and not to any unaffiliated entity. 6 rates and regulatory affairs, real estate, supply chain, transmission & distribution technical services, treasury and workforce development. ServeCo will not be performing the "operations" services for JCP&L or any other subsidiary. Instead, those functions, and the related employees, will be shifted back to the utilities.5 8. ServeCo will be a mutual service company in accordance with Rules 87, 88 and 93 under PUHCA. As such, it will keep its accounts, cost-accounting procedures, books and other records consistent with the SEC's Uniform System of Accounts for Mutual Service Companies and Subsidiary Service Companies (or as otherwise authorized by the SEC). Rule 90 under PUHCA generally requires that the pricing of transactions between companies within a registered holding company system shall be limited to "no more than cost" as determined by Rule 91 under PUHCA. Rule 91 under PUHCA, in pertinent part, defines the phrase "at no more than cost" to mean the "price (taking into account all charges) [that] does not exceed a fair and equitable allocation of expenses (including the price paid for goods) plus reasonable compensation for necessary capital . . .". Rule 91 further requires direct charges to be made where costs can be identified without excessive effort or expense. Other elements of cost are to be fairly and equitably allocated. Consistent with these SEC rules, ServeCo will establish systems, methodologies and formulas for charging, billing and allocating costs to the FirstEnergy system companies that it serves. With respect to allocations of costs that are not direct billed, - -------------------- 5 FirstEnergy organizes and conducts its utility subsidiary operations on a regional basis. These regions operate and are managed as separate business units. The regional structure focuses on moving accountability and decision making closer to customers, with an emphasis on decentralized operations and providing cost-effective, high-quality service to customers. JCP&L's New Jersey service territory is comprised of two regions -- "Northern" and "Central". 7 ServeCo will use allocation formulas which will be approved by the SEC and will be filed annually with the SEC as part of ServeCo's annual report on Form U-13-60. Under the Service Agreement, ServeCo will directly assign (or attribute) and charge its associate companies for all costs of products or services where possible. It is expected that the majority of costs incurred by or on behalf of JCP&L that are payable to ServeCo, will be directly assigned (or attributed) and charged to JCP&L. The costs associated with those services which cannot readily be direct billed ("Indirect Costs") will be allocated (among appropriate affiliates, including FirstEnergy) according to the specific formulas enumerated in Exhibit A to the Service Agreement (which is included as Exhibit N-7 to the SEC Application). The allocation formulas recognize the overall contribution of ServeCo to both the current and future operations of the FirstEnergy system and will provide for the costs associated with a fair and equitable share of JCP&L's interest in the activities giving rise to such charges to be allocated to JCP&L. Records will be maintained by each core business or support unit of ServeCo to accumulate all costs of doing business and to determine the costs of providing services. These costs include wages and salaries of employees and related expenses such as insurance, taxes, pensions and other employee welfare expenses.6 Certain costs will not be direct billed either because the services giving rise to those costs are provided to or on behalf of more than one recipient company, or because the costs themselves are not easily susceptible to precise - -------------------- 6 The costs of services provided by ServeCo will be directly assigned, distributed or allocated by work order numbers or equivalent cost collectors (collectively, "work orders"). There are four cost collectors that are equivalent to work orders: "orders", "cost centers," "networks", and "work breakdown structures" ("WBSs"). Orders include work orders, sales orders, internal orders and service orders. Each employee will be assigned to a cost center which will be responsible for collecting routine costs. WBSs are analogous to work orders and can be used for projects exceeding certain dollar thresholds or durations, or which involve investing in capital assets. To ensure proper recordkeeping, each employee will be required to charge time against a designated order, WBS, network, or cost center number. 8 identification with a particular or specific transaction. In such cases, FirstEnergy has developed sixteen methods of allocation for charging a share of such Indirect Costs to FirstEnergy and its utility or non-utility subsidiaries that benefit from the particular product or service being provided. These allocation formulas are set forth in detail in Exhibit A to the Service Agreement, which is included as Exhibit N-7 to the SEC Application attached hereto. As provided in the SEC Merger Order, and for so long as FirstEnergy remains a "registered holding company" under PUHCA, no change in the organization of ServeCo, the type and character of the companies to be serviced, the methods of allocating Indirect Costs to associate companies, or in the scope or character of the services to be rendered subject to Section 13 of PUHCA, or any rule, regulation or order thereunder, may be made unless and until ServeCo has first given the SEC written notice of the proposed change not less than 60 days prior to the proposed effectiveness of any such change. If, upon the receipt of any such notice, the SEC notifies ServeCo within the 60-day period that a question exists as to whether the proposed change is consistent with the provisions of Section 13 of PUHCA, or of any rule, regulation or order thereunder, then the proposed change shall not become effective unless and until ServeCo has filed with the SEC an appropriate declaration regarding such proposed change and the SEC has permitted such declaration to become effective. JCP&L is mindful of the Board's Affiliate Relations, Competition and Accounting Standards and Related Reporting Requirements ("Affiliate Standards"). ServeCo will not be used to circumvent the Affiliate Standards. 9. A number of mechanisms exist to assure that JCP&L (as well as the other FirstEnergy utility subsidiaries) has the means to judge the need for, and extent of, services to be provided by ServeCo, and to monitor the quality and value of the services being provided. These 9 mechanisms include the budget process, written policies and procedures, including service level standar ds, work order procedures to track and document the initiation of services, billing and review procedures to ensure the accuracy of ServeCo billings, review and approval of work orders and billings by personnel who are separate from the billing function, and internal audit examinations. (a) Operating and construction budgets are prepared separately for each FirstEnergy utility subsidiary (including JCP&L). JCP&L budgets will be annually reviewed and approved by the JCP&L Board of Directors. For each utility subsidiary, the budgets are prepared by the region or regions comprising that utility. For instance, JCP&L has two regions, each of which will prepare its own operating and construction budget and provide it to the corporate budget organization. Operating and construction budgets will contain planned, anticipated or projected charges by ServeCo, as well. Once the budgets are approved, expenditures will be monitored against these budgets on a monthly basis. JCP&L's financial results will be produced quarterly for internal analysis and are reviewed by its Board of Directors, and then issued to the public and the Board on a quarterly basis. Thus, from the outset, JCP&L will control the level and extent of costs it will incur from ServeCo through the planning JCP&L undertakes and the decisions it makes in connection with its budget for such services, and its regular reviews of performance against budget to determine the reasons for, or to address causes of, variances between the two. (b) The development, implementation and ongoing operations of ServeCo will, to a certain extent, be governed by the FirstEnergy Service Company Policies and Procedure Manual (the "Manual"), which will establish policies and procedures for ServeCo, including those governing time reporting, payroll, cost allocation management, service level standards, and 10 performance management. The Manual is to be filed by amendment to the SEC Application as Exhibit N-9 and will be provided to the Board as Exhibit B to this Verified Petition. The policies and procedures set forth in the Manual will ensure that JCP&L and ServeCo provide sufficient detail with respect to the recording of time, expenses, costs and charges, and the allocation of costs not directly billed, to allow the Board to analyze, evaluate and render a determination as to their reasonableness for ratemaking purposes. (i) The work order procedures also serve as a control mechanism for JCP&L. JCP&L will pay to ServeCo all costs that reasonably can be identified and related to a particular transaction or service performed on its behalf. These costs are documented using work order numbers in accordance with the SEC's Uniform System of Accounts for Mutual Service Companies and Subsidiary Service Companies (or as otherwise authorized by the SEC). Pursuant to controls built into the FirstEnergy accounting system, a transaction requiring a work order will not be processed unless there is a work order number (or equivalent cost collector) provided. All project work orders for JCP&L in excess of $50,000 must be approved by a regional manager. (ii) The billing process is an additional cost control mechanism for JCP&L. The ServeCo billing invoices that will be issued to JCP&L will be generated by the ServeCo Accounting Operations Department on the basis of work order and time documents. The time documents relied upon by the ServeCo Accounting Operations Department will be subject to review and approval by the regional manager responsible for the employees completing such time records. This includes review of the time document charges in relationship to employees' work schedules. The review also will encompass ascertaining that time documents properly indicate the work order number charged. 11 (iii) ServeCo billing invoices will be generated by the ServeCo Accounting Operations Department and issued to each of the FirstEnergy subsidiaries, including JCP&L. Each month, the ServeCo Budget Department will analyze that month's total ServeCo billings versus budget. Each FirstEnergy subsidiary, including JCP&L, will be responsible for monitoring actual billings and comparing them to their budget. If required, detailed ServeCo information (i.e., time sheets, invoices) will be available upon the request of the subsidiary receiving the services. The basis for the allocation of costs will be reviewed annually by JCP&L to ensure that the allocation basis continues to be reasonable and to have a relationship to the business operations receiving the benefit of the services and to the cost drivers for such services. ServeCo will continually monitor these matters to ensure that the allocation methods effectively allocate costs according to benefits received. The ServeCo accounting staff will verify that every multiple party work order has the correct cost allocation method. (iv) Another control that will be performed every month is the reconciliation of ServeCo billings to ServeCo expenses with regard to services rendered for JCP&L. Such reconciliation will ensure that all expenses are billed, and will detect any over- or under-billings. (c) Additionally, the ServeCo internal auditing department will periodically audit ServeCo charges, including an evaluation of the work order process which will be an integral part of the audit. Internal audits of ServeCo charges will be performed on a maximum of a three-year cycle. In general, the main objectives of the internal audit review will be to determine whether internal controls over the distribution billing process are adequate and effective, and to review the current allocation methods and the application of these methods. This would include 12 a review to ensure compliance with SEC, Board and other applicable regulatory requirements, as well as with ServeCo policies and procedures pertaining to billing. The specific audit procedures to be utilized will typically include interviews, observations, tests and other procedures deemed necessary to accomplish the audit objectives. The internal audit department meets at least twice per year with the Audit Committee of the FirstEnergy Board of Directors to review audit plans and findings. Separate individual audit opinions of JCP&L's financial condition and results of operations will continue to be obtained annually from an independent public accounting firm. These audit procedures will ensure that costs associated with the services performed by ServeCo for JCP&L have been properly authorized, allocated and tracked. (d) In addition to the control mechanisms discussed above, there are also other direct and indirect mechanisms that will function as controls over ServeCo charges to JCP&L. For instance, JCP&L's president will serve as a member of the ServeCo Board of Directors. In addition, the JCP&L regional presidents will participate in material decisions made by ServeCo affecting their respective regions. These control mechanisms will provide further protection against cross-subsidization among JCP&L and its affiliates. 10. As discussed above, attached hereto are the following exhibits: Exhibit A -- SEC Application (containing, Exhibit N-7 thereto, the Service Agreement, which contains Exhibit A thereto (Description of Services and Allocation Methodology)) Exhibit B -- Policies and Procedures Manual (to be filed by amendment). 13 WHEREFORE, the Petitioner, Jersey Central Power & Light Company, respectfully requests that the Board: A. approve the Service Agreement and the allocation formulas and methodologies set forth therein to be applicable for ratemaking purposes; B. authorize JCP&L to enter into the Service Agreement with ServeCo; and C. grant such other approvals and provide such other authorization as may be necessary or proper in connection with the foregoing. Respectfully submitted, Dated: October __, 2002 THELEN REID & PRIEST LLP Attorneys for Petitioner, Jersey Central Power & Light Company By: ------------------------------------- Marc B. Lasky 65 Madison Avenue Morristown, New Jersey 07960 (973) 644-3400 14 AFFIDAVIT --------- OF -- VERIFICATION ------------ Michael J. Filippone, being duly sworn upon his oath, deposes and says: 1. I am Director of Rates & Regulatory Affairs - New Jersey for Jersey Central Power & Light Company, and I am duly authorized to make this Affidavit of Verification on its behalf. 2. I have read the contents of the foregoing Verified Petition of Jersey Central Power & Light Company for Approval of a Service Agreement with FirstEnergy Service Company and the Attachments attached thereto, and I hereby verify that the statements of fact and other information contained therein are true and correct to the best of my knowledge, information and belief. -------------------- Michael J. Filippone Sworn to and subscribed before me this ____ day of October, 2002. - ----------------------------- An Attorney-at-Law of the State of New Jersey 15 -----END PRIVACY-ENHANCED MESSAGE-----