On February 25, 2011, Allegheny Energy was merged into and swallowed up by Ohio-based, investor owned utility, FirstEnergy. As a result, the "Allegheny Power" dba company name West Virginia and Maryland customers had gotten used to ceased to exist. FirstEnergy reverted the operating companies to their historical legal names. Maryland and West Virginia's eastern panhandle became known as "Potomac Edison," which is a name old-timers may remember from the 1980s. It's still the same company. Nothing much has changed, except for the company's top management and profit goals.
Just two short months after the merger, Mark Clark, Chief Financial Officer and Executive Vice President, had this to say about the "benefits" of the merger to the company's shareholders during a May 3, 2011, earnings call with investment analysts:
Just two short months after the merger, Mark Clark, Chief Financial Officer and Executive Vice President, had this to say about the "benefits" of the merger to the company's shareholders during a May 3, 2011, earnings call with investment analysts:
Merger benefits increased significantly from '11 to '12 to '13. As I said, Gary's going to speak more to that, but this is the pretax earnings impact associated with those and you'll see that, that's in excess of $1 billion.
We're also targeting O&M reductions beyond the synergies of between $75 million and $175 million in 2012 and 2013. We expect asset sales in the range of $800 million to $900 million per year, and we expect to reduce debt by $1.5 billion to $2.2 billion over this time period.
Let's translate this out of "1% speak" and make it understandable. The benefits of the merger were expected to provide shareholders with earnings in excess of $1B in the first 3 years after the merger. The company was also looking to reduce its "O&M" between $75M and $175M. O&M is the acronym for operations and maintenance expense. Operations and maintenance expense is the company's cost of operating and maintaining their systems. In the case of a regulated electric company, like Potomac Edison, this means expenses for things like maintaining their distribution lines, operating their customer service center, sending you monthly bills, and reading your electric meter in accordance with their legal obligations as a regulated utility in the state of West Virginia. A regulated utility is permitted to recover its cost of service, plus a reasonable return on its investment, from its customers. A utility's cost of service includes O&M expense.
Now let's take a look at how this amount is recovered from you and why a reduction in the amount spent would be a benefit to shareholders and increase their earned dividend. A utility recovers its fixed costs through its base rate. Fixed costs are the costs that remain the same year after year, such as the company's investment in a power station like Harrison. O&M is a fixed cost. The amount Potomac Edison is collecting from all of you for O&M was set in its last rate base case in 2007. A base rate case also sets the company's rate of return, the amount of interest it is permitted to collect from you on its fixed costs. Potomac Edison's rate of return in West Virginia is 10.5%. A company is not required to file base rate cases on a regular basis. A company will do so when it can financially benefit from doing so. The rate set in 2007 will continue to be collected until the company takes the initiative to file a new base rate case. A new base rate case will trigger a new battle over the current 10.5% return, most likely setting it lower.
The utility is collecting a fixed amount from you to be used to operate and maintain its system. If it doesn't spend all it collects in one month, it can set it aside to spend later. Conversely, some months it must spend more than it collects. It's supposed to roughly equal out eventually, however, there is no true up mechanism that ensures that the company actually spends every penny on actual O&M expenses. If a company ends up with a positive O&M balance at the end of the quarter, it adds that amount to its profit (dividend). Therefore, whatever Potomac Edison can save on operating and maintaining its system is a direct profit.
So, FirstEnergy's first order of business after the merger was to cut O&M to produce more profit from the combined business. During a subsequent earnings call on February 29, 2012, Mark Clark had this to say:
Now let's take a look at how this amount is recovered from you and why a reduction in the amount spent would be a benefit to shareholders and increase their earned dividend. A utility recovers its fixed costs through its base rate. Fixed costs are the costs that remain the same year after year, such as the company's investment in a power station like Harrison. O&M is a fixed cost. The amount Potomac Edison is collecting from all of you for O&M was set in its last rate base case in 2007. A base rate case also sets the company's rate of return, the amount of interest it is permitted to collect from you on its fixed costs. Potomac Edison's rate of return in West Virginia is 10.5%. A company is not required to file base rate cases on a regular basis. A company will do so when it can financially benefit from doing so. The rate set in 2007 will continue to be collected until the company takes the initiative to file a new base rate case. A new base rate case will trigger a new battle over the current 10.5% return, most likely setting it lower.
The utility is collecting a fixed amount from you to be used to operate and maintain its system. If it doesn't spend all it collects in one month, it can set it aside to spend later. Conversely, some months it must spend more than it collects. It's supposed to roughly equal out eventually, however, there is no true up mechanism that ensures that the company actually spends every penny on actual O&M expenses. If a company ends up with a positive O&M balance at the end of the quarter, it adds that amount to its profit (dividend). Therefore, whatever Potomac Edison can save on operating and maintaining its system is a direct profit.
So, FirstEnergy's first order of business after the merger was to cut O&M to produce more profit from the combined business. During a subsequent earnings call on February 29, 2012, Mark Clark had this to say:
...we continue to look for opportunities to reduce O&M. I just want to give you one, very quick example, of what we're doing on the O&M side.
We closed the transaction February 28 of last year. There are roughly 75 major applications that have to get integrated between the 2 companies. For some of the operating savings to occur, those systems have to be integrated. I'm pleased to say that our IT folks are basically going to integrate all of those applications in record time, and they'll make their cut-over shortly. They've had 5 test runs, so you'll see that some of the synergy has been accelerated and some of the synergies too, become, as we integrate our systems. And we're quite pleased with where we are. We'll continue to look for incremental costs. It's kind of our nature. But we're not going to do anything simply for a short-term benefit that puts the company at a longer-term risk. That's just not something we are going to do. Everything we are doing is to place FirstEnergy in the best possible forward position.
Right, Mark. Don't do anything crazy like reorganize and cut your meter reading positions because something like that could have unforeseen consequences that squander Potomac Edison's community goodwill and put the company at a longer-term risk. After all, an unhappy customer base could do something unexpected, like turn out in record numbers to oppose a proposed generation transfer that was planned as part of the company's strategy to "...expect asset sales in the range of $800 million to $900 million per year, and we expect to reduce debt by $1.5 billion to $2.2 billion over this time period." Remember, you must always place FirstEnergy in the best possible forward position!
Fast forward another year. The company's penny-pinching has reduced/reorganized its meter reading staff to less than half of its former level. The company is still collecting the same amount of O&M, but now they're spending half the amount! The extra gets added to the dividend to show the shareholders a profit. Shareholders are the only ones who truly matter. Its not about responsibly providing a needed service in a monopoly construct. Because the company has reduced its staff by more than half, meters are only getting read less than half as often as they should. This means that the company is relying on more estimates to calculate monthly bills. Perhaps the company thinks that it can train its customers to read their own meters and call it in to the company, allowing for more accuracy while also maintaining the meter reading staff cuts. But that's not what happens... oh, no. Some customers simply refuse to do the job they are paying the company to do, and the inaccurate usage estimates continue to pile up. You all know what happens when you add too many inaccurate numbers to an equation -- the answer becomes hopelessly skewed. And that's exactly what has happened to customers' bills. Depending on the number of actual v. estimated readings currently in the queue of averaged billings, bills can swing wildly from month to month, resulting in some customers receiving outrageous bills for thousands of dollars that they simply cannot pay. Potomac Edison's customer service staff simply doesn't care. Pay up or be cut off. And then the service shut-offs begin...
And the community took action.
The WV PSC opened an investigation into the company's business practices on June 7. The West Virginia legislature announced its own parallel, independent investigation of the company on June 13.
All of this stemmed from the cost of a very small staff of meter readers? How much did they save? How much does a meter reader cost? Recently, Potomac Edison placed a help wanted ad on Craig's List for temporary meter readers. Yes, Craig's List! Always my first choice when job hunting...anyhow... I guess they're even too cheap to advertise in more mainstream venues, or perhaps they don't really intend to actually hire anyone. They certainly don't intend to hire anyone to solve the problem long term, after the regulators quit breathing down their neck. The fewer people who see the ad, the fewer applicants Potomac Edison has to blow off. Potomac Edison is offering a starting wage of $12.31 per hour for a meter reader in Frederick, Maryland. That's about $24K per year. Frederick's average per capita income is $36K per year. Compare the meter reader's salary with the recently approved annual compensation of FirstEnergy CEO Tony Alexander of $23M for 2013.
Meter reader: $12.31/hr.
Tony Alexander: $11,454.18/hr.
I think we've found the place where cuts can be made to place FirstEnergy in the best possible forward position. More meter readers, less Tony Alexander.
But will the company turn a corner and put sincere effort into righting its wrongs? Or will it continue to make excuses for its failure, and continue to lie to regulators and the community? What's it going to be, FirstEnergy, truth or consequences?
Fast forward another year. The company's penny-pinching has reduced/reorganized its meter reading staff to less than half of its former level. The company is still collecting the same amount of O&M, but now they're spending half the amount! The extra gets added to the dividend to show the shareholders a profit. Shareholders are the only ones who truly matter. Its not about responsibly providing a needed service in a monopoly construct. Because the company has reduced its staff by more than half, meters are only getting read less than half as often as they should. This means that the company is relying on more estimates to calculate monthly bills. Perhaps the company thinks that it can train its customers to read their own meters and call it in to the company, allowing for more accuracy while also maintaining the meter reading staff cuts. But that's not what happens... oh, no. Some customers simply refuse to do the job they are paying the company to do, and the inaccurate usage estimates continue to pile up. You all know what happens when you add too many inaccurate numbers to an equation -- the answer becomes hopelessly skewed. And that's exactly what has happened to customers' bills. Depending on the number of actual v. estimated readings currently in the queue of averaged billings, bills can swing wildly from month to month, resulting in some customers receiving outrageous bills for thousands of dollars that they simply cannot pay. Potomac Edison's customer service staff simply doesn't care. Pay up or be cut off. And then the service shut-offs begin...
And the community took action.
The WV PSC opened an investigation into the company's business practices on June 7. The West Virginia legislature announced its own parallel, independent investigation of the company on June 13.
All of this stemmed from the cost of a very small staff of meter readers? How much did they save? How much does a meter reader cost? Recently, Potomac Edison placed a help wanted ad on Craig's List for temporary meter readers. Yes, Craig's List! Always my first choice when job hunting...anyhow... I guess they're even too cheap to advertise in more mainstream venues, or perhaps they don't really intend to actually hire anyone. They certainly don't intend to hire anyone to solve the problem long term, after the regulators quit breathing down their neck. The fewer people who see the ad, the fewer applicants Potomac Edison has to blow off. Potomac Edison is offering a starting wage of $12.31 per hour for a meter reader in Frederick, Maryland. That's about $24K per year. Frederick's average per capita income is $36K per year. Compare the meter reader's salary with the recently approved annual compensation of FirstEnergy CEO Tony Alexander of $23M for 2013.
Meter reader: $12.31/hr.
Tony Alexander: $11,454.18/hr.
I think we've found the place where cuts can be made to place FirstEnergy in the best possible forward position. More meter readers, less Tony Alexander.
But will the company turn a corner and put sincere effort into righting its wrongs? Or will it continue to make excuses for its failure, and continue to lie to regulators and the community? What's it going to be, FirstEnergy, truth or consequences?
Image courtesy of meme-master Joe Solomon. Share it on Facebook and show your solidarity with other Potomac Edison/Mon Power/West Penn Power customers who are being victimized by this giant Ohio-based energy conglomerate!
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