Tony Alexander - President and Chief Executive Officer
Kit, I think it's important to recognize we haven't had rate cases for quite some time now. And we've been a part of - in recognition of what's been happening in from a customer standpoint in terms of the depressed economic conditions we've tried our best to hold off. As we move more towards regulation in terms of - we also anticipate having more rate applications. For example, some time this year, going into '15 or '16, the Pennsylvania and West Virginia decisions will be made. The New Jersey decision will be made. Those will all set baselines and new baselines for going forward.

So as we transition more towards a rate case model in terms of improving service to customers and getting them reset at new baselines, there will be a lot of things changing. For example, over the last several years and in part because of the major emphasis on reliability that we've had and because of our desire not to have interim rate cases, we have shifted a lot of our capital, particularly our vegetation management to a lot of our expense to capital, I should say, particularly our vegetation management. We are now about closed in many areas. We're not done yet, but we are about closed in many areas. That doesn't get rid of veg management, but it does move it from capital to expense. And that will happen naturally as we're moving towards these rate case applications in the various jurisdictions that we will have.

Kit Konolige - BGC
Just a final question to follow on that. Can you address at all what we should expect the growth rate to be in earnings in the distribution segment? Obviously you've addressed that in transmission.

Tony Alexander - President and Chief Executive Officer
That's going to depend primarily on our effectiveness as we move through the rate case process. And I think at this point, it's a little early to begin to try to address that.

This matter began when Rate Counsel filed a Motion in September, 2011 alleging
that Jersey Central Power & Light (“JCP&L” or “the Company”) was over-earning and
asking the Board of Public Utilities (“Board” or “BPU”) to require the Company to file a
base rate case to protect ratepayers from continued excessive rates. The record that has
been developed since then shows clearly that Rate Counsel’s concerns were well-founded.
While the Company has sought an increase in rates, the record demonstrates that the
Company has been over-earning and that ratepayers are entitled to a rate reduction of
over $200 million. The record also supports a reduction in the Company’s overall rate of
return.
Rate Counsel recognizes that a rate reduction of this magnitude is extraordinary.
Yet the evidence is clear and Your Honor and the Board must fulfill the statutory
obligation to establish rates that are just and reasonable based on the evidence in the
record. Unfortunately for JCP&L’s ratepayers, however, the story does not end there.
While this matter was pending, the State suffered several severe storms that led to
extensive and long outages throughout New Jersey. JCP&L’s territory was hit
particularly hard and customers suffered through outages of extraordinary scope and
duration. In many ways, the pendency of the rate case was fortuitous, as it led to an
opportunity to examine the Company’s reliability spending and practices as well as its
earnings.
What that examination has shown is of great concern. While JCP&L was granted
additional funds in the second phase of its last base rate case in 2005 to address ongoing
reliability concerns, it substantially decreased spending on reliability once the initial work mandated by the BPU was completed. Between 2008-2010 the Company’s reliability spending was reduced and its tree-trimming budget was cut back significantly. During this same period, JCP&L was sending a whopping 170% of its earnings to its sole shareholder and parent corporation, FirstEnergy.
While the money paid by New Jersey’s ratepayers was being sent off to Ohio,
insufficient funds were being invested in JCP&L’s infrastructure in New Jersey. While some of that spending has now been increased as a result of the storms, ratepayers need the protection of their regulators to ensure not only that the Company’s rates are just and reasonable, but that ratepayers’ investment in this Company is spent for their benefit.
Ratepayers are entitled to better reliability and for this reason Rate Counsel seeks relief in
this case that would require more rigorous reliability reporting and standards as well as
consequences if the Company fails to provide that reporting or meet those standards.
The record also demonstrates that while JCP&L steered its extensive earnings to its parent, the credit rating of FirstEnergy has negatively impacted the credit worthiness of JCP&L. It is fundamentally unfair for the ratepayers to pay more than enough to maintain the stability of the utility and then potentially pay more because of the negative impact of JCP&L’s parent on the utility’s cost to borrow money. For this reason Rate Counsel is also asking the Board to order the Company to conduct a study to determine ring-fencing measures to protect JCP&L’s credit worthiness and thus protect New Jersey ratepayers.
As is evident by the way it started, this is not a standard rate case. It is an opportunity for the Board to reinforce its mandate to ensure safe, adequate and proper service for New Jersey’s ratepayers at just and reasonable rates. It is an opportunity to rein in JCP&L’s persistent reliability problems, to ensure appropriate and continued investment in New Jersey’s infrastructure, and the financial health of a local utility.

While JCP&L enjoys cost savings by deferring projects, a substantial amount of revenue are being collected from ratepayers that has not been invested in JCP&L’s infrastructure. At that same time JCP&L was giving its parent FirstEnergy a generous dividend. Over 70 percent of JCP&L’s profits during 2009 to 2011 were paid out in dividends to its parent  FirstEnergy instead of reinvesting its profits in its New Jersey electric distribution utility. The Company claims that “necessary” right of way vegetation management was deferred due to an off right of way vegetation management program called the Corridor Widening  Initiative. However, in light of the millions of dollars sent to Ohio in dividends, it appears that the Company collected sufficient ratepayer funds to maintain its vegetation management spending and still complete the Corridor Widening Initiative.

First, a merger acquisition premium should not be considered to be part of the cost of providing utility delivery service, since this is a cost that shareholders should be required to bear. The Company did not cite a single instance of another utility commission or electric utility rate case where inclusion of goodwill in capital structure was sanctioned. Goodwill does not represent actual utility assets or investor-supplied funds, which Mr. Kahal found adversely affects the quality of JCP&L’s balance sheet and the Company’s credit agency ratings.  Mr. Kahal concluded that this goodwill is “an accounting adjustment to the Company’s balance sheet that occurred in conjunction with the GPU/FirstEnergy  merger approximately a decade ago.”

The Company’s manipulation of its cash working capital requirement for federal
income taxes is especially bothersome when one considers the fact that JCP&L is a
member of the FirstEnergy consolidated tax group and, therefore, is making these
quarterly tax payments, not to the IRS, but to its parent corporation, FirstEnergy. And, in
fact, in 2011, parent corporation FirstEnergy paid no income taxes to the IRS.
JCP&L is therefore not only charging ratepayers for income taxes that were never
paid to the IRS, it also seeks to charge ratepayers for a phantom cash working capital
requirement on those phantom taxes. This is unfair and should not be allowed. Properly
measuring the expense lead days associated with the payment of federal income taxes
reduces JCP&L’s claimed CWC requirement by approximately $10.5 million.

FirstEnergy’s incentive compensation programs are heavily weighted toward the achievement of certain financial objectives, with no payout being made unless certain financial goals are met. Incentive plans that are based largely on earnings criteria are not sufficiently related to the provision of safe and reliable utility service to justify passing this cost onto ratepayers. If incentive   compensation programs are tied to increased corporate and shareholder earnings, then the corporate shareholders, not ratepayers, should pay for them. To do otherwise violates all sense of fairness to the ratepayers of the regulated entity. Accordingly, Rate Counsel recommends that JCP&L’s proposed incentive compensation expenses of $8.4 million be disallowed for rate making purposes in this case.

As these miscellaneous expenses are not  related to the provision of safe, adequate
and reliable service, they are not appropriate for inclusion in rates set for utility service.
Certainly the Company has not demonstrated how funding of retiree clubs and parties will have a positive impact on the provision of electric service. Moreover, it is long standing Board policy in this state that institution and goodwill advertising shall be paid by shareholders, not ratepayers.
The Company has failed to demonstrate that these various expenses provide any “measurable benefit to its ratepayers” and therefore “the mandate of Title 48 for just and
reasonable rates precludes the captive ratepayer from subsidizing those costs.”
Accordingly, Your Honor and the Board should reject the Company’s proposal to include
the above listed $79,258 in miscellaneous expenses in claimed operating expenses.

The Companies responding to this General Investigation proceeding have provided a lot of excuses to the Commission as to why so many customers received multiple consecutive poorly estimated bills that led to dramatically high “true up” bills.
Originally, the Companies tried to convince the Commission and the public the problems
were mainly caused by the timing and size of the Derecho and Super Storm Sandy.
When the problems continued, the Companies started providing further excuses, but did
not take responsibility for their role in creating many of the problems themselves and compounded the problem further by making unreasonable demands for payments from the impacted customers. In Staffs opinion, they still have not taken that responsibility.
The Derecho and Super Storm Sandy undeniably played a significant role in the problems underlying this case. However, all along the way, the Companies made poor decision after poor decision with little to no thought as to how it might impact their customers.
These poor decisions lead to multiple and continued violations of their tariffs. Staff takes
these violations very seriously and believes it is time the Companies own up to their mistakes and provide the Commission with concrete evidence these types of problems
will not reoccur. Further, the Companies should be required to either correct the ongoing problems with their estimation routine or switch from bi-monthly to monthly meter reading.

Hurricane Sandy struck the service territories with large amounts of heavy, salt-laden, snow that tore down trees and power lines...

It is easy, and some may say unfair, to play Monday morning quarterback with the decisions of the Companies. Staff does not believe it is unfair to do so in this circumstance. A poor decision here or there is just that, a decision that did not work out.
What we have here is something completely different, poor decision on top of poor
decision on top of devastating storms on top of more poor decisions with no management
thought of potential impacts to customers. This is a pattern of behavior. It appears FirstEnergy had a plan for integration and was determined to follow through with that
plan no matter the result. Little consideration was given to the customers, “merger
synergy savings” had to be captured. Indeed the Companies suspected as early as
September of 2012 there may be problems, but did nothing to attempt to resolve them
until April 2013. At that point, the problems had become so widespread the Companies
had no choice but to try and address them. However, shockingly, the Companies
continue to act as though they were simply a victim of circumstance. Generally, Staff believes the Commission should send a strong message to the Companies that this type of behavior will not be tolerated, that the Commission believes the Companies did indeed violate their tariff in multiple ways and that continued violations will be looked upon
very unfavorably.

Bad historical usage data begets bad data and, thus, CAD believes the only way to correct the problem caused by the Companies’ failure to conduct bi-monthly reads of residential meters is to obtain one year’s worth of reliable data from actual monthly meter reads. It is the goal of the CAD that this matter be resolved in the best possible manner for customers of MP and PE, who have undeniably suffered - and, in some instances, continue to suffer - the ill effects of the Companies’ meter reading and billing practices.

Throughout the course of this proceeding, the Companies have attempted to place the
majority of the blame for their billing and meter reading problems on the Derecho that occurred in June 2012 and Superstorm Sandy, which occurred in October 2012. However, while the storms may have exacerbated the Companies’ existing problem, it is inaccurate to contend that the storms caused the billing problems so many customers have faced. In actuality, the evidence shows that the merger of Allegheny Power into FirstEnergy in 2011 and subsequent transition issues in the wake of the merger, including understaffing, transitioning from the Allegheny billing system to the FirstEnergy billing system, and the questionable timing of the meter route “renumbering” project, created this problem.

Q. Okay. All right. And you mentioned EPRI and the EPRI study, and I know that you --- while we’re on the subject, on page 11 of your testimony, your Direct testimony, you’d made a change at line eight. You state that the EPRI study is now expected to be completed by January 6th, 2014; correct?
A. Correct.
Q. Do you know why it’s been pushed back from December 31st?
A. I received an e-mail this morning from them requesting a little bit more time, because they’ve been meeting with the teams that actually were on site, and after they’ve had a couple of their meetings, they just feel like they’re going to need a little more time.
Q. Now, do you participate in these meetings? A. I have been.
Q. I’m sorry, you have been?
A. Yes.
Q. Okay.
A. Now, I have not been making every single one of them, but ---.
Q. I mean, they’re weekly meetings?
A. That’s right. Recently they had me come daily.
Q. Okay. When did this --- when did the EPRI review begin? I mean, it’s been several months now in the making; correct?
A. Yeah, I believe we signed the statement of work with them in July.
Q. And what are you --- what specifically are you --- are the Companies having EPRI look at? I mean, what is the purpose?
A. What we’re doing is we’re trying to simulate the estimation routine with having lots of good data, and then going through and creating all those scenarios of every other estimate --- every other month estimate, two months in a row estimate, three months in a row estimate, and letting the routine take that data and determining --- I guess we’re trying to figure out where are those checkpoints that we might need. Are we not applying something appropriately that we should be? So we’re more or less --- we’re calling it forensics. That’s basically what they’re doing for us, trying to help us determine, you know, with the data available where we see some issues or breakdown and how can we improve our routine.
Q. And is EPRI going to tell you how it should be improved, assuming it finds breakdowns?
A. Yes.
Q. Okay. Now, is the Company’s plan to implement whatever correction EPRI recommends?
A. I think it’s a little early for me to say that, because I don’t know all of the expense associated with what they would ask us to implement or recommend we implement.
Q. Okay. So there’s a chance that EPRI may say you need to do these 20 things, for example, and the Company says we don’t have the money or the resources to do any of those; we’re just going to disregard your recommendation? That’s a possibility; correct? A. Anything’s possible.

Frederick County Commissioner Billy Shreve is asking Potomac Edison to donate some land for a park; specifically, the 150-acre Browning Farm, where the utility was planning to build a substation for the Potomac Appalachian Transmission Highline.

He called it a win-win for First Energy and county citizens.

FirstEnergy is trying to reach new labor agreements with two of its Utility Workers Union of America bargaining units.

They include Local 102, which represents several hundred workers in FirstEnergy’s Potomac Edison territory in Maryland and West Virginia and its West Penn Power territory in Pennsylvania.

The members of Local 102 are working as linemen, substation workers, meter readers and technicians.

Robert Whalen, system president of Local 102, said Thursday that so far, FirstEnergy hasn’t threatened to lock out his Potomac Edison and West Penn members. Local 102 began contract talks with FirstEnergy in March 2013.

About 125 of Local 102’s members work at PE service centers in Williamsport; Frederick, Mount Airy and Thurmont, Md.; Martinsburg and Berkeley Springs, W.Va.; and Waynesboro and McConnellsburg, Pa.

Whalen said many of the company’s offers are unacceptable.

“Every benefit — health care, long-term disability, dental plan, vision plan, 401(k) — that’s in our contract now, they (FirstEnergy) want to make them completely at the discretion of FirstEnergy to modify, terminate or amend,” Whalen said.

Company spokesmen disputed such arguments, and said FirstEnergy’s offers have been fair.

The company is “cautiously optimistic we can come together on something,” spokesman Todd Meyers said about negotiations with Local 102. “I think we have a good offer.”

But as to the lockout in Pennsylvania, FirstEnergy spokesman Scott Surgeoner said the company isn’t backing down.

“We think our last best offer is very, very fair, and we are committed to seeing this lockout through,” Surgeoner said.

FirstEnergy and other utilities began to slide in May after Federal Reserve Chairman Ben Bernanke suggested that the central bank could begin go to pull back on its stimulus measures.

FirstEnergy, which serves 6 million customers across the Midwest and the Mid-Atlantic, also got hit after the company posted a nearly 50% drop in earnings for the third quarter due to cooler than usual summer temperatures cutting the need for air conditioning. Shares have recently been trading at their lowest levels in a decade.

Mr. Akins said he wants to avoid the bruising battles that delayed or doomed big projects in the past, like the 275-mile Potomac-Appalachian Transmission Highline project from West Virginia to Maryland. AEP and partner FirstEnergy Corp. dropped development plans for the complex project in 2011.

"Sometimes, we were just dreaming" that the companies could get enormous power lines built across multiple states, Mr. Akins said. He said AEP now is focusing on shorter projects blessed by federal regulators that eliminate grid bottlenecks. "It's where you want to put your money," he said.

This includes traditional tactics, such as upgrading power poles and trimming trees near power lines. But it also encompasses newer approaches, such as microgrids and energy storage, which allow operators to quickly reconfigure the system when portions of the grid go down. Implicit to such plans is the need to ensure uninterrupted power to critical sites such as oil and gas refineries, water-treatment plants, and telecommunication networks, as well as gasoline stations, hospitals, and pharmacies.

Some of the nation’s leaders seem receptive to such approaches.