BEFORE THE
PENNSYLVANIA PUBLIC UTILITY COMMISSION
Joint Application of West Penn Power Company
d/b/a Allegheny Power, Trans-Allegheny Interstate
Line Company and FirstEnergy Corp. for a
Certificate of Public Convenience under Section
1102(a)(3) of the Public Utility Code approving
a change of control of West Penn Power Company
and Trans-Allegheny Interstate Line Company
:
:
:
:
:
:
:
INITIAL DECISION
Before
Wayne L. Weismandel
and
Mary D. Long
Administrative Law Judges
A-2010-2176520
A-2010-2176732
TABLE OF CONTENTS
I.
HISTORY OF THE PROCEEDINGS .................................................................................1
II.
FINDINGS OF FACT........................................................................................................18
III.
DISCUSSION ....................................................................................................................32
A.
The Transaction .....................................................................................................32
1.
2.
Regulatory Approvals Sought ....................................................................34
a.
Change in Control ..........................................................................34
b.
Affiliated Interest Agreements .......................................................34
The Joint Petition for Partial Settlement ....................................................36
B.
Legal Standards ......................................................................................................37
C.
Merits of the Transaction .......................................................................................39
1.
Benefits Identified in the Joint Application ...............................................39
2.
Employment ...............................................................................................41
3.
Application of Merger Savings: Rate Stay-Out ........................................44
4.
Financial Governance and Ring Fencing ...................................................45
5.
Service, Quality and Reliability .................................................................47
6.
Universal Service .......................................................................................50
7.
Act 129, Solar Procurements and Alternative Energy Funding .................51
8.
Smart Meters and Time of Day Usage .......................................................52
9.
Non-Utility Generation Contract Issues.....................................................53
10.
Distribution Rate and Tariffs .....................................................................54
11.
Default Service and Other Retail Enhancements .......................................55
12.
Competition in the Wholesale and Retail Marketplace .............................60
13.
Municipal Aggregation ..............................................................................72
IV.
CONCLUSION ..................................................................................................................74
V.
CONCLUSIONS OF LAW ...............................................................................................76
VI.
ORDER ..............................................................................................................................80
APPENDIX
I.
HISTORY OF THE PROCEEDINGS
On May 14, 2010, West Penn Power Company d/b/a Allegheny Power (West
Penn), Trans-Allegheny Interstate Line Company (TrAILCo) and FirstEnergy Corp.
(FirstEnergy) (collectively, Joint Applicants) filed with the Pennsylvania Public Utility
Commission (Commission) a Joint Application (Joint Application) to obtain approval for a
change of control of West Penn and TrAILCo under Chapters 11 and 28 of the Public Utility
Code (Code), 66 Pa. C.S. §§101 et. seq., to be effected by the merger of Allegheny Energy, Inc.
(Allegheny) with Element Merger Sub., Inc. (Merger Sub), a wholly-owned subsidiary of
FirstEnergy. The Joint Application also requested that the Commission approve, under Chapter
21 of the Code, certain revisions to affiliated interest agreements designed to facilitate the
sharing of services between Allegheny and FirstEnergy. The Joint Application included written
direct testimony marked for identification purposes as Joint Applicants’ Statements Numbers 1,
2, 3, 4 and 5.
By Notice dated May 18, 2010, an Initial Prehearing Conference was scheduled
for June 22, 2010, and the case was assigned to us.
By letter from the Commission’s Secretary dated May 19, 2010, the Joint
Applicants were instructed to publish a notice once in a newspaper of general circulation in the
area involved.
On May 20, 2010, the Joint Applicants filed their Errata to the Joint Application.
On May 24, 2010, Allison C. Kaster, Esquire, and Carrie B. Wright, Esquire, filed
an entry of their appearance on behalf of the Commission’s Office of Trial Staff (OTS).
Also on May 24, 2010, we issued a Prehearing Conference Order that, among
other things, required the filing and serving of Initial Prehearing Conference memoranda not
later than June 15, 2010, and prescribed the minimum contents.
On May 29, 2010, notice of the Joint Application’s filing was published in the
Pennsylvania Bulletin.
On June 1, 2010, the Joint Applicants filed a proof of publication that notice of
the Joint Application’s filing had been published in the Pittsburgh Post-Gazette on May 28,
2010.
On June 2, 2010, the International Brotherhood of Electrical Workers (IBEW)
filed a Petition to Intervene.
By letter from the Commission’s Secretary dated June 3, 2010, all parties to the
case were directed to address the attached 12 questions. (See Appendix A)
On June 9, 2010, the York County Solid Waste and Refuse Authority (YCSWA)
filed its Petition to Intervene and a Motion for Admission Pro Hac Vice for Benjamin L. Willey,
Esquire.
On June 11, 2010, Duquesne Light Company (Duquesne), the Pennsylvania Rural
Electric Association (PREA), and the West Penn Power Sustainable Energy Fund (WPPSEF)
each filed their respective Petition to Intervene.
On June 14, 2010, the Office of Consumer Advocate (OCA) filed its Protest and
Public Statement; the Office of Small Business Advocate (OSBA) filed its Notice of Intervention
and Protest, its Public Statement, and an entry of appearance of Daniel G. Asmus, Esquire;
IBEW filed its Prehearing Memorandum; YCSWA filed its Prehearing Memorandum; The
Pennsylvania State University (PSU) filed both a Protest and a Petition to Intervene; Citizen
Power, Inc. (Citizen Power) filed its Petition to Intervene; ARIPPA filed its Petition to Intervene;
the West Penn Power Industrial Intervenors (WPPII) filed its Petition to Intervene; the Met-Ed
Industrial Users Group (MEIUG) and the Penelec Industrial Customer Alliance (PICA)
(collectively, MEIUG/PICA) filed their Joint Petition to Intervene; the Commonwealth of
2
Pennsylvania, Department of Environmental Protection (DEP) filed its Petition to Intervene;
Direct Energy Services, LLC (Direct Energy) filed its Petition to Intervene and its Prehearing
Memorandum; the Retail Energy Supply Association (RESA) filed its Petition to Intervene and
its Prehearing Memorandum; the Pennsylvania Mountains Healthcare Alliance (PMHA) filed its
Petition to Intervene; the Utility Workers Union of America, AFL-CIO (UWUA) and UWUA
System Local No. 102 (Local 102) (collectively, UWUA Intervenors) filed their Petition to
Intervene and a Motion for Admission Pro Hac Vice for Scott H. Strauss, Esquire, and Katharine
M. Mapes, Esquire; the Clean Air Council (CAC) filed both a Protest and a Petition to Intervene
and its Prehearing Memorandum; Constellation NewEnergy, Inc. (CNE) and Constellation
Energy Commodities Group, Inc. (CCG) (collectively, Constellation) filed their Petition to
Intervene and their Prehearing Memorandum; and Citizens for Pennsylvania’s Future
(PennFuture) filed its Petition to Intervene.
On June 15, 2010, the Joint Applicants, OTS, OCA, OSBA, Duquesne, PREA,
WPPSEF, PSU, Citizen Power, ARIPPA, WPPII, MEIUG/PICA, DEP, PMHA, UWUA
Intervenors, and PennFuture each filed their respective Prehearing Memorandum.
On June 18, 2010, MEIUG/PICA submitted information regarding a possible
witness on their behalf which had not been available when they filed their Prehearing
Memorandum.
On June 21, 2010, OSBA submitted information regarding a possible witness on
its behalf which had not been available when it filed its Prehearing Memorandum.
The Initial Prehearing Conference occurred as scheduled on June 22, 2010.
Representatives on behalf of the Joint Applicants, OTS, OCA, OSBA, IBEW, YCSWA,
Duquesne, PREA, WPPSEF, PSU, Citizen Power, ARIPPA, WPPII, MEIUG/PICA, DEP, Direct
Energy, RESA, PMHA, UWUA Intervenors, CAC, Constellation, and PennFuture participated.
Various procedural matters were agreed to and a litigation schedule was developed. Parties who
had filed both a Petition to Intervene and a Protest were directed to provide written support for
3
their position that they were entitled to do so. A transcript of the proceeding containing 41 pages
was produced.
By Order Granting Petitions To Intervene dated June 23, 2010, we granted the
respective interventions of IBEW, YCSWA, Duquesne, PREA, WPPSEF, PSU, Citizen Power,
ARIPPA, WPPII, MEIUG/PICA, DEP, Direct Energy, RESA, PMHA, UWUA Intervenors,
CAC, Constellation, and PennFuture, all of which were unopposed. Also by Orders dated June
23, 2010, we granted admission Pro Hac Vice to Benjamin L. Willey, Esquire, on behalf of
YCSWA and to Scott H. Strauss, Esquire, and Katharine M. Mapes, Esquire, on behalf of the
UWUA Intervenors.
By Scheduling And Briefing Order dated June 23, 2010, we established a
litigation schedule and a briefing schedule for the case.
On June 23, 2010, CAC withdrew its filed Protest, its Petition to Intervene having
been granted in the Order Granting Petitions To Intervene.
By Hearing Notice dated June 24, 2010, an Initial and further Hearing was
scheduled for October 12, 13, 14, and 15, 2010.
On June 25, 2010, PSU filed its Memorandum In Support Of Protest in response
to the direction given at the Initial Prehearing Conference.
On June 29, 2010, we issued a Protective Order in the form that had been agreed
upon by the parties. We also issued an Order dated June 29, 2010, holding that a party cannot
maintain two roles in the same cause of action and, consequently, dismissing PSU’s Petition to
Intervene (leaving its Protest intact).
By letter dated June 29, 2010, addressed to the Commission’s Chairman, State
Senator Kim Ward requested that a Public Input Hearing be held on the proposed merger in the
39th Senatorial District.
4
By Order Scheduling Public Input Hearing dated July 7, 2010, we scheduled a
Public Input Hearing, in two sessions, in Greensburg, Pennsylvania, on August 3, 2010.
By letter dated July 8, 2010, ARIPPA identified a potential witness on its behalf.
By Public Input Hearing Notice dated July 9, 2010, a Public Input Hearing, with
sessions at 1:00 p.m. and 6:00 p.m., was scheduled in Greensburg, Pennsylvania, on August 3,
2010.
Under cover letter dated July 15, 2010, Joint Applicants served written
supplemental direct testimony marked for identification purposes as Joint Applicants’ Statements
Numbers 1-S and 2-S.
On July 15, 2010, Direct Energy filed and served its Motion To Dismiss
Objections And Compel Response To Its Set I Interrogatories And Request For Document
Production and its Motion To Dismiss Objections And Compel Response To Its Set II
Interrogatories And Request For Document Production.
On July 19, 2010, Joint Applicants filed and served their Answer In Opposition to
Direct Energy’s Motion To Dismiss Objections And Compel Response To Its Set I
Interrogatories And Request For Document Production.
By letter dated July 20, 2010, WPPSEF identified three potential witnesses on its
behalf.
On July 23, 2010, we heard argument, via telephone, on Direct Energy’s Motion
To Dismiss Objections And Compel Response To Its Set I Interrogatories And Request For
Document Production. During the course of the proceeding a number of the disputed
interrogatories were withdrawn by the propounding party and disputes over two of the
5
interrogatories were resolved by the parties involved. A transcript of the proceeding containing
33 pages (numbered 42 through 74) was produced.
By Order On Motion To Dismiss Objections And Compel Answers To
Interrogatories And Production Of Documents dated July 23, 2010, we denied the motion with
respect to Direct Energy’s Set I Interrogatories that had not been withdrawn nor resolved by the
parties involved.
On July 26, 2010, Joint Applicants filed proofs of publication of notice of the
scheduled Public Input Hearing in the Pittsburgh Post-Gazette and the Greensburg TribuneReview on July 19, 2010.
By separate letters dated July 27, 2010, OCA, YCSWA, Duquesne, DEP, PMHA,
and CAC each identified potential witnesses on their respective behalf.
By separate letters dated July 30, 2010, OTS, OSBA, PSU, WPPII,
MEIUG/PICA, Direct Energy, RESA, and PennFuture each identified potential witnesses on
their respective behalf.
On August 3, 2010, a Public Input Hearing, in two sessions, was held in
Greensburg, Pennsylvania. Eleven individuals presented sworn testimony during the session
beginning at 1:00 p.m. and 12 individuals presented sworn testimony during the session
beginning at 6:00 p.m. No exhibits were received into evidence. A transcript of the 1:00 p.m.
session containing 70 pages and a transcript of the 6:00 p.m. session containing 58 pages were
produced.
On August 6, 2010, DEP filed its Motion Requesting Leave To Amend
Prehearing Memorandum To Include An Additional Witness.
6
On August 9, 2010, Joint Applicants filed and served their Answer In Opposition
to Direct Energy’s Motion To Dismiss Objections And Compel Response To Its Set II
Interrogatories And Request For Document Production.
On August 12, 2010, DEP filed and served its Motion To Dismiss Objections and
Compel Answers To Interrogatories Set I.
Under cover letter dated August 12, 2010, we forwarded copies of two letters we
had received regarding testimony received at the Public Input Hearing to all parties to cure any
ex parte communication issues.
On August 16, 2010, Joint Applicants filed their Answer to DEP’s Motion To
Dismiss Objections and Compel Answers To Interrogatories Set I and their Answer to DEP’s
Motion Requesting Leave To Amend Prehearing Memorandum To Include An Additional
Witness.
Also on August 16, 2010, Barry A. Naum, Esquire, entered his appearance on
behalf of PMHA.
Under cover letter dated August 16, 2010, PennFuture served its written direct
testimony.
Under cover letters dated August 17, 2010, OTS, OCA, OSBA, WPPSEF, PSU,
DEP, Direct Energy, RESA, PMHA, CAC, and Constellation each served its respective written
direct testimony.
Under cover letters dated August 17, 2010, YCSWA, PREA, Citizen Power, and
ARIPPA each advised that they would not be serving written direct testimony.
7
On August 17, 2010, Direct Energy filed and served an exhibit that had been
inadvertently omitted from its Motion To Dismiss Objections And Compel Response To Its Set
II Interrogatories And Request For Document Production.
On August 17, 2010, Aron J. Beatty, Esquire, entered his appearance on behalf of
OCA.
On August 17, 2010, Lauren M. Lepkoski, Esquire, entered her appearance on
behalf of OSBA.
On August 17, 2010, Michael D. Fiorentino, Esquire, entered his appearance on
behalf of CAC.
On August 17, 2010, Duquesne filed its Petition For Leave To Withdraw Its
Petition To Intervene.
Under cover letters dated August 19, 2010, both WPPII and MEIUG/PICA each
advised that they would not be serving written direct testimony.
By Order Granting Petition For Leave To Withdraw Intervention dated August
20, 2010, we granted Duquesne’s Petition For Leave To Withdraw Its Petition To Intervene.
By Order On Motion To Dismiss Objections And Compel Answers To
Interrogatories And Production Of Documents dated August 20, 2010, we dismissed in part and
denied in part Direct Energy’s Motion To Dismiss Objections And Compel Response To Its Set
II Interrogatories And Request For Document Production.
By Order Granting Motion To Amend Prehearing Conference [Memorandum] To
Include An Additional Witness dated August 23, 2010, we granted DEP’s Motion Requesting
Leave To Amend Prehearing Memorandum To Include An Additional Witness.
8
On August 25, 2010, Direct Energy filed its Motion To Compel The Production
Of The Hart-Scott-Rodino Discovery Materials That Were Served On Three Other Parties.
On August 25, 2010, OSBA filed its Motion Requesting Leave To Amend
Prehearing Memorandum To Include An Additional Witness.
By Order Granting In Part And Denying In Part Motion To Compel dated August
25, 2010, we granted in part and denied in part DEP’s Motion To Dismiss Objections and
Compel Answers To Interrogatories Set I.
On August 30, 2010, Joint Applicants filed their Motion To Dismiss Objections
And Compel Response To Set I Interrogatories.
On August 31, 2010, Joint Applicants filed their Answer In Opposition To Direct
Energy Services’ Motion To Compel The Production Of The Hart-Scott-Rodino Discovery
Materials That Were Served On Three Other Parties.
By Order Granting Motion To Amend Prehearing Conference [Memorandum] To
Include An Additional Witness dated August 31, 2010, we granted OSBA’s Motion Requesting
Leave To Amend Prehearing Memorandum To Include An Additional Witness.
By Order Granting Motion To Compel Production Of Documents dated
September 7, 2010, we granted Direct Energy’s Motion To Compel The Production Of The HartScott-Rodino Discovery Materials That Were Served On Three Other Parties.
On September 8, 2010, Direct Energy filed its Answer To The Joint Applicants’
Motion To Dismiss Objections And Compel Responses To The Set I Interrogatories By The
Joint Applicants.
9
Under cover letter dated September 9, 2010, Direct Energy corrected a
typographical error on page 5 of its Answer To The Joint Applicants’ Motion To Dismiss
Objections And Compel Responses To The Set I Interrogatories By The Joint Applicants.
On September 10, 2010, Joint Applicants filed their Motion In Limine With
Respect To The Testimony Of Direct Energy Services, LLC.
Under cover letter dated September 10, 2010, OCA served the written direct
testimony marked for identification purposes as OCA Statement No. 1 – Highly Confidential.
By letter dated September 11, 2010, YCSWA advised that it would not be serving
written rebuttal testimony.
Under cover letters dated September 13, 2010, Joint Applicants, OCA, OSBA,
WPPSEF, and RESA each served their respective written rebuttal testimony.
By letters dated September 13, 2010, PREA, PSU, Citizen Power, ARIPPA,
WPPII, MEIUG/PICA, PMHA, CAC, and Constellation each advised that they would not be
serving written rebuttal testimony.
By Order Dismissing Motion To Dismiss Objections And Compel Answers to Set
I Interrogatories As Moot dated September 14, 2010, we dismissed Joint Applicants’ Motion To
Dismiss Objections And Compel Response To Set I Interrogatories as moot.
On September 14, 2010, Direct Energy filed its Motion To Suspend Schedule To
Allow The Commission To Consider The Issues Raised In Joint Applicants’ Motion In Limine.
By Order Establishing Response Time dated September 15, 2010, we ordered that
answers to the Joint Applicants’ Motion In Limine With Respect To The Testimony Of Direct
Energy Services, LLC and to the Direct Energy Motion To Suspend Schedule To Allow The
10
Commission To Consider The Issues Raised In Joint Applicants’ Motion In Limine be served not
later than 4:00 p.m. on September 23, 2010.
Under cover letter dated September 17, 2010, Direct Energy served the written
supplemental direct testimony of Mathew J. Morey.
On September 21, 2010, PennFuture filed its Motion For Leave To Designate A
Witness.
On September 23, 2010, Joint Applicants served their Answer To Direct Energy
Services, LLC’s Motion To Suspend Schedule.
On September 23, 2010, WPPII and MEIUG/PICA served their joint Answer to
both the Joint Applicants’ Motion In Limine With Respect To The Testimony Of Direct Energy
Services, LLC and to the Direct Energy Motion To Suspend Schedule To Allow The
Commission To Consider The Issues Raised In Joint Applicants’ Motion In Limine.
On September 23, 2010, Direct Energy served its Answer to the Joint Applicants’
Motion In Limine With Respect To The Testimony Of Direct Energy Services, LLC.
Under cover letter dated September 24, 2010, Direct Energy corrected a
typographical error on page 8 of its Answer to the Joint Applicants’ Motion In Limine With
Respect To The Testimony Of Direct Energy Services, LLC.
On September 27, 2010, Direct Energy filed its Motion Requesting Leave To
Present An Additional Witness.
By Order Granting Motion To Designate A Substitute Witness dated September
27, 2010, we granted PennFuture’s Motion For Leave To Designate A Witness because of the
death of a previously identified witness on behalf of PennFuture.
11
By Witness Identification And Scheduling Order dated September 27, 2010, we
ordered that the parties submit a final list of witnesses it would present at the Initial and further
Hearing and an agreed upon schedule in which the witnesses would appear.
Under cover letter dated September 28, 2010, Jason E. Oyler, Esquire, entered his
appearance on behalf of DEP.
By Order On Motion In Limine And Motion To Suspend Schedule dated
September 28, 2010, we denied the Joint Applicants’ Motion In Limine With Respect To The
Testimony Of Direct Energy Services, LLC and dismissed as moot Direct Energy’s Motion To
Suspend Schedule To Allow The Commission To Consider The Issues Raised In Joint
Applicants’ Motion In Limine.
Under cover letter dated September 30, 2010, OTS served its written Surrebuttal
testimony.
By Order Denying Motion Requesting Leave To Present An Additional Witness
dated September 30, 2010, we denied Direct Energy’s Motion Requesting Leave To Present An
Additional Witness.
Under cover letters dated October 1, 2010, Joint Applicants, OCA, OSBA,
WPPSEF, PSU, DEP, Direct Energy, RESA, CAC, Constellation, and PennFuture each served
their respective written Surrebuttal testimony.
By letters dated October 1, 2010, YCSWA, PREA, ARIPPA, WPPII,
MEIUG/PICA, and PMHA each advised that they would not be serving written Surrebuttal
testimony.
On October 1, 2010, Joint Applicants filed their Motion To Strike The
Supplemental Direct Testimony Of Direct Energy Services, LLC.
12
By letter dated October 4, 2010, Citizen Power advised that it would not be
serving written Surrebuttal testimony.
On October 4, 2010, Joint Applicants filed their Motion To Strike Testimony Of
The Pennsylvania Department Of Environmental Protection.
By Order On Motion To Strike Supplemental Direct Testimony dated October 4,
2010, we denied the Joint Applicants’ Motion To Strike The Supplemental Direct Testimony Of
Direct Energy Services, LLC and granted leave to the Joint Applicants to serve supplemental
rebuttal testimony.
By letter dated October 5, 2010, YCSWA advised that it would not be serving
written Surrebuttal testimony.
By letters dated October 5, 2010, OCA, WPPSEF, Direct Energy, RESA, and
PennFuture each identified the respective witnesses it would be presenting at the Initial and
further Hearing.
By letters dated October 5, 2010, YCSWA, PREA, and ARIPPA each advised
that it would not be presenting any witnesses at the Initial and further Hearing.
On October 5, 2010, Direct Energy filed its Motion For Leave To Submit
Supplemental Surrebuttal.
On October 6, 2010, DEP filed its Answer to the Joint Applicants’ Motion To
Strike Testimony Of The Pennsylvania Department Of Environmental Protection.
On October 6, 2010, RESA filed its Motion To Permit Access To Joint
Applicants’ Highly Sensitive Material.
13
On October 6, 2010, the Joint Applicants filed a Motion for Admission Pro Hac
Vice for Clifford M. Naeve, Esquire, and Matthew W.S. Estes, Esquire.
On October 6, 2010, PMHA withdrew what had previously been marked for
identification purposes as PMHA Statement No. 1, the written direct testimony of Norman J.
Ziemer.
By letters dated October 6, 2010, Joint Applicants, OTS, OSBA, PSU, DEP,
CAC, and Constellation each identified the respective witnesses it would be presenting at the
Initial and further Hearing.
By letters dated October 6, 2010, Citizen Power, WPPII, and MEIUG/PICA each
advised that it would not be presenting any witnesses at the Initial and further Hearing.
On October 7, 2010, Joint Applicants filed their Motion To Dismiss Objections
And Compel Response To Set III Interrogatories To Direct Energy Services, LLC.
On October 8, 2010, the Joint Applicants filed their Answer to Direct Energy’s
Motion For Leave To Submit Supplemental Surrebuttal and their Answer to RESA’s Motion To
Permit Access To Joint Applicants’ Highly Sensitive Material.
Under cover letter dated October 8, 2010, Direct Energy served a corrected
version of what had previously been marked for identification as Direct Energy Exhibit MJM-2.
On October 12, 2010, PSU withdrew what had previously been marked for
identification purposes as Penn State Statement Nos. 1 and 2, the written testimony of James L.
Crist.
On October 12, 2010, Direct Energy filed its Answer to the Joint Applicants’
Motion To Dismiss Objections And Compel Response To Set III Interrogatories To Direct
Energy Services, LLC.
14
The Initial and further Hearing convened as scheduled at 1:00 p.m. on October 12,
2010. Representatives of the Joint Applicants, OTS, OCA, OSBA, YCSWA, PREA, WPPSEF,
Citizen Power, ARIPPA, WPPII, MEIUG/PICA, DEP, Direct Energy, RESA, PMHA, CAC,
Constellation, and PennFuture all participated at some point during the Initial and further
Hearing. IBEW, PSU, and the UWUA Intervenors did not participate in the Initial and further
Hearing. Outstanding motions that had not been ruled upon were decided at the Initial and
further Hearing. Specifically, the Joint Applicants’ Motion for Admission Pro Hac Vice for
Clifford M. Naeve, Esquire, and Matthew W.S. Estes, Esquire, was granted (Tr. 183); Direct
Energy’s Motion For Leave To Submit Supplemental Surrebuttal was granted (Tr. 183); the Joint
Applicants’ Motion To Strike Testimony Of The Pennsylvania Department Of Environmental
Protection was granted (Tr. 183-190) with DEP being allowed to present an offer of proof on the
record;1 RESA’s Motion To Permit Access To Joint Applicants’ Highly Sensitive Material was
granted (Tr. 190-195); and the Joint Applicants’ Motion To Dismiss Objections And Compel
Response To Set III Interrogatories To Direct Energy Services, LLC was withdrawn (Tr. 733).
A total of 24 witnesses were called; 10 by the Joint Applicants, one by OTS, two by OCA, two
by OSBA, one by WPPSEF, one by DEP, three by Direct Energy, one by RESA, one by CAC,
one by Constellation, and one by PennFuture. Written testimony and accompanying exhibits of
two individuals were admitted into evidence by stipulation of the parties with cross-examination
waived (PennFuture Statement Nos. 1 and 1-S and Joint Applicants’ Statement No. 11-R with
Appendix A. Tr. 298-300, 320-321). In total, the following statements and exhibits were
admitted into evidence on behalf of the respective parties: Joint Applicants’ Statement Nos. 1,
1-S, 2, 2-S, 3, 4, 5, 2-R, 4-R, 5-R, 6-R, 7-R, 8-R, 9-R, 10-R, 11-R, 1-SR, and 8-SR and Joint
Applicants’ Exhibit Nos. WHH-1, TJF-1, TJF-2, TJF-3, TJF-4, AJA-1SR-1, AJA-1SR-2, AJA1SR-3, and FG-1, and Joint Applicants’ Cross-examination Exhibit Nos. 1 through 16; OTS’s
Statement Nos. 1 and 1-SR; OCA’s Statement Nos. 1, 1-R, 1-S, 2, 2-R, and 2-S, and OCA’s
Exhibit Nos. RSH-1, RSH-2, BA-1, BA-2, BA-3, and OCA’s Cross-examination Exhibit No. 3;
OSBA’s Statement Nos. 1, 2, 3, and 4, and OSBA’s Exhibit Nos. IEc-1 and IEc-2, and OSBA’s
Cross-examination Exhibit No. 2; WPPSEF’s Statement Nos. 1, 1-R, and 1-SR; DEP’s Statement
1
DEP Statement Nos. 1 and 2 were admitted into the record for the sole purpose of the offer of
proof. Tr. at 188-189.
15
Nos. 3 and S-1, and DEP’s Table 1-S, and DEP’s Cross-examination Exhibit Nos. 1, 4, 6, 7, 8,
18, and 19; Direct Energy’s Statement Nos. 1, 1-Supp., 1-SR, 1-SR-Supp., 2, 2-SR, 3, and 3-SR,
Direct Energy’s Exhibit Nos. MJM-1, MJM-2, MJM-3, MJM-4, MJM-5, FL-1, FL-2, FL-3, FL4, and FL-5, and Direct Energy’s Cross-examination Exhibit Nos. 1 through 6, 8, and 9; RESA’s
Statement Nos. 1, 1-R, and 1-SR, and RESA’s Exhibit Nos. RJH-1, RJH-2, RJH-3, and RJH-4,
and RESA’s Cross-examination Exhibit Nos. 1 and 2; CAC’s Statement Nos. 1 and 2-R, and
CAC’s Exhibit No. CAC-1; Constellation’s Statement Nos. 1 and 1-SR; and PennFuture’s
Statement Nos. 1, 1-S, 2, and 2-S, and PennFuture’s Exhibit Nos. PF-MB-1 and PF-CK-1. A
transcript of the proceeding containing 900 pages (numbered 171 through 1070) was produced.
On October 12, 2010, DEP filed its Petition For An Interlocutory Commission
Review And Answer To The Material Question Presented regarding the proposed DEP testimony
that had been barred.
On October 22, 2010, DEP and the Joint Applicants each filed their respective
Brief In Support (DEP) and Brief In Opposition (Joint Applicants) to DEP’s Petition For An
Interlocutory Commission Review And Answer To The Material Question Presented.
On October 25, 2010, the Joint Applicants, OTS, OCA, IBEW, YCSWA, PREA,
WPPSEF, PSU, ARIPPA, WPPII, MEIUG/PICA, DEP, PMHA, the UWUA Intervenors, CAC,
Constellation, and PennFuture (collectively, Joint Petitioners) filed their Joint Petition For Partial
Settlement (Joint Petition). The only parties not joining in the Joint Petition were OSBA, Citizen
Power, Direct Energy, and RESA. The Joint Petition is a comprehensive settlement among the
Joint Petitioners and resolves all issues pertaining to the Joint Application in a manner
satisfactory to each of the Joint Petitioners.
On October 26, 2010, IBEW filed its Statement In Support of the Joint Petition.
On October 28, 2010, OCA, YCSWA, PREA, WPPSEF, ARIPPA, WPPII,
MEIUG/PICA, DEP, PMHA, CAC, and Constellation each filed their respective Statement In
Support of the Joint Petition.
16
On October 29, 2010, the Joint Applicants, OTS and PSU each filed their
respective Statement In Support of the Joint Petition.
By letters dated November 2, 2010, YCSWA, PMHA, and CAC each advised that
they would not be filing a Main Brief, but reserved their respective right to file a Reply Brief.
On November 3, 2010, the Joint Applicants, OCA, OSBA, Citizen Power, Direct
Energy, and RESA each filed a Main Brief. Also on November 3, 2010, the Energy Association
of Pennsylvania (EAP) filed an Amicus Curiae Brief in accordance with the provisions of 52 Pa.
Code §5.502(d).
By letters dated November 3, 2010, OTS, PREA, WPPSEF, PSU, ARIPPA,
WPPII, MEIUG/PICA, and Constellation each advised that they would not be filing a Main
Brief. PREA, WPPSEF, PSU, ARIPPA, and Constellation each reserved their respective right to
file a Reply Brief.
On November 4, 2010, DEP filed its Notice Of Withdrawal of its Petition For An
Interlocutory Commission Review And Answer To The Material Question Presented.
On November 15, 2010, the Joint Applicants, OCA, OSBA, Citizen Power, Direct
Energy, and RESA each filed a Reply Brief.
By letters dated November 15, 2010, YCSWA, PREA, WPPSEF, PSU, ARIPPA,
WPPII, MEIUG/PICA, PMHA, and CAC each advised that they would not be filing a Reply
Brief. Also on November 15, 2010, DEP and PennFuture advised by e-mail that they would not
be filing a Reply Brief.
The record in this case closed at 4:00 p.m. on November 15, 2010.
17
On or about November 22, 2010, Eric Joseph Epstein (Epstein) filed what he
styled a “Letter of Information.” This post-close of the record filing, by a person who is not a
party in the case, is completely improper. See 52 Pa. Code §5.431(b). Consequently, it is not a
part of the official record in this case and we have not considered it in reaching our decision.
On December 2, 2010, the Joint Applicants filed their Motion For Leave To
Respond To The “Letter Of Information” Filed By Eric Joseph Epstein. Inasmuch as the Epstein
filing is not a part of the record and has not been considered in our decision making, this motion
is superfluous. While we understand counsel’s wariness about allowing procedurally improper
material to go unanswered, further needlessly burdening the parties and presiding officers with
responding to Epstein and ruling on the responses would only compound the problem. We will
include an Order paragraph striking the Epstein filing so that there is no question that it is not a
part of the record in this case.
By Commission Secretarial Letter dated December 7, 2010, the Commission
granted permission to DEP to withdraw its Petition For An Interlocutory Commission Review
And Answer To The Material Question Presented.
II.
1.
FINDINGS OF FACT
On May 14, 2010, Joint Applicants filed a Joint Application to obtain the
approval of the Commission under Chapters 11 and 28 of the Code for a change in control of
West Penn and TrAILCo to be effected by the merger of Allegheny with Merger Sub, a whollyowned subsidiary of FirstEnergy.
2.
The Joint Applicants also asked for the Commission’s approval under
Chapter 21 of the Code to revise certain affiliated interest arrangements in order to facilitate
sharing services between the Allegheny and FirstEnergy systems.
18
3.
FirstEnergy,2 Allegheny3 and Merger Sub4 are parties to an Agreement
and Plan of Merger (the Merger Agreement) (Exhibit E to Jt. App. Ex. 1). Under the terms of
the Merger Agreement, Allegheny will merge with Merger Sub and, as the surviving corporation,
Allegheny will become a wholly-owned subsidiary of FirstEnergy. The shareholders of
FirstEnergy and Allegheny approved the Merger.
4.
FirstEnergy will remain the ultimate corporate parent of Met-Ed, Penelec,
Penn Power, (the FirstEnergy Pennsylvania Utilities) and all other FirstEnergy subsidiaries and
will become the ultimate corporate parent of Allegheny and all of the Allegheny subsidiaries,
including West Penn and TrAILCo. Met-Ed, Penelec, Penn Power, West Penn and TrAILCo
will continue to operate as Pennsylvania electric public utilities.
5.
West Penn is a corporation organized and existing under the laws of the
Commonwealth of Pennsylvania and is engaged in the business of supplying and distributing
electricity to approximately 715,000 retail customers in a 10,400 square mile area of western and
central Pennsylvania.
6.
West Penn is a “public utility” and an “electric distribution company”
(EDC) as those terms are defined, respectively, in Sections 102 and 2803 of the Code (66 Pa.
C.S. §§102 and 2803).
2
FirstEnergy owns, directly or indirectly, all of the outstanding common stock of seven electric
utility operating subsidiaries in four states: Metropolitan Edison Company (Met-Ed), Pennsylvania Electric
Company (Penelec), and Pennsylvania Power Company (Penn Power), in Pennsylvania and, in the case of Penelec,
The Waverly Electric Light and Power Company, in New York; Ohio Edison Company, The Cleveland Electric
Illuminating Company and The Toledo Edison Company, in Ohio; and Jersey Central Power & Light Company
(JCP&L), in New Jersey (collectively, the FirstEnergy Utilities). The FirstEnergy Utilities comprise the nation’s
fifth largest investor-owned electric system based on customers served, with 4.5 million customers in Ohio,
Pennsylvania, New Jersey and New York. In addition, FirstEnergy subsidiaries and affiliates are involved in the
generation and transmission of electricity, energy management and other energy-related services. Through its
subsidiaries, FirstEnergy owns electric generation totaling more than 14,000 MW of capacity.
3
Allegheny is a public utility holding company and has three direct public utility subsidiaries that
conduct business as Allegheny Power: West Penn, in Pennsylvania; Monongahela Power Company (Mon Power), in
West Virginia; and The Potomac Edison Company (Potomac Edison), in Maryland, West Virginia, and Virginia
(collectively, the Allegheny Power Utilities). The Allegheny Power Utilities serve 1.6 million customers in four
states. In addition, TrAILCo is an indirect public utility subsidiary of Allegheny.
4
Merger Sub is a wholly-owned subsidiary of FirstEnergy that was formed for the sole purpose of
effecting the Merger. When the Merger is completed, Merger Sub will be subsumed, by operation of law, into
Allegheny and cease to exist as a separate corporate entity.
19
7.
West Penn is subject to regulation by the Commission.
8.
West Penn is headquartered at 800 Cabin Hill Drive, Greensburg,
Pennsylvania 15601.
9.
TrAILCo is a corporation organized and existing under the laws of the
State of Maryland and the Commonwealth of Virginia and is engaged in the business of
transmitting electricity in interstate commerce.
10.
TrAILCo is a “public utility” under Section 102 of the Code (66 Pa. C.S.
11.
TrAILCo is subject to regulation by the Commission.
12.
TrAILCo is headquartered at 800 Cabin Hill Drive, Greensburg,
§102).
Pennsylvania 15601.
13.
FirstEnergy is a corporation organized and existing under the laws of the
14.
FirstEnergy is qualified to do business in Pennsylvania.
15.
FirstEnergy is a diversified energy services holding company.
16.
FirstEnergy is headquartered at 76 South Main Street, Akron, Ohio 44308.
17.
The FirstEnergy Utilities in Pennsylvania are subject to regulation by the
18.
Allegheny is a public utility holding company.
State of Ohio.
Commission.
20
19.
Allegheny is headquartered at 800 Cabin Hill Drive, Greensburg,
Pennsylvania 15601.
20.
TrAILCo is an indirect public utility subsidiary of Allegheny.
21.
On October 25, 2010, the Joint Applicants, OTS, OCA, DEP, IBEW,
UWUA Intervenors, PSU, MEIUG/PICA, WPPII, PREA, PMHA, WPPSEF, YCSWA, ARIPPA,
CAC, PennFuture, and Constellation filed and served the Joint Petition. Statements in Support
of the Joint Petition were filed on or about October 29, 2010, by each of the settling parties.
22.
The OSBA, Citizen Power, RESA and Direct Energy are not parties to the
23.
There are many benefits that should be derived from the increased scale,
Joint Petition.
scope and diversification of the combined company, including improved service, reliability and
operational flexibility, and increased financial stability for West Penn, TrAILCo, Met-Ed,
Penelec, Penn Power, and all other FirstEnergy and Allegheny public utility subsidiaries.
24.
The increased scale and scope is ultimately expected to strengthen the
balance sheet of the combined company, creating a larger, financially stronger parent company
that is better positioned to compete for and attract capital on reasonable terms for its public
utility subsidiaries. In addition, the diversification of the energy delivery and generation
portfolios of the combined company should result in a more stable cash flow.
25.
The all-stock transaction is expected to improve financial metrics of the
combined company.
26.
The combined company is expected to be able to draw upon the
intellectual capital, technical expertise and experience of a deeper and more diverse workforce,
with particular skills in managing distribution companies in competitive energy markets.
21
27.
The Merger is a natural alliance of companies with adjoining service
territories and interconnected transmission systems, which should be beneficial in the integration
and management of the combined company.
28.
The combined company should be better able to invest in and deploy new
processes and technologies, including innovations anticipated as part of the Act 129 Energy
Efficiency and Conservation plans being implemented by West Penn, Met-Ed, Penelec, and Penn
Power.
29.
The Merger will facilitate and build upon the combined companies’ areas
of expertise, allowing the deployment of “best practices” derived from ten electric utilities and
additional, experienced resources when needed to meet emergencies, storm outages or other
similar circumstances.
30.
As part of the Merger integration process, FirstEnergy and Allegheny
intend to conduct a review of their existing procedures and policies to determine “best practices”
and how to implement them. The combined company will work to maintain the current levels of
reliability of West Penn, as measured and determined using West Penn’s current methodology
for measuring reliability, and will conduct a study to determine if opportunities exist to improve
reliability.
31.
The combined company’s commitment to streamlining operations,
reducing overall complexity and reliance upon a regional focus will ensure a continued high
level of management attention on distribution system reliability and overall customer service.
32.
The Merger will generate synergies and result in overall aggregate cost
saving opportunities for the combined company. The synergies that will accrue to the
Pennsylvania utilities over time should, at least in part, offset the increasing cost of providing
regulated retail utility service and, thereby, may reduce the size of future rate increase requests.
22
33.
The settlement embodied in the Joint Petition is supported by a broad and
diverse stakeholder coalition that includes the Commonwealth of Pennsylvania, representatives
of the residential and industrial customer classes, organized labor, and environmental and
sustainable energy groups. The settlement ensures that there will be affirmative benefits in the
immediate future and over time in addition to those described in the Joint Application.
34.
Under the settlement, in addition to the commitments made in the Joint
Application, specific net employment level commitments have been made for employees of
FirstEnergy and its affiliates in Greensburg and Westmoreland County.
35.
The corporate headquarters of Allegheny in Greensburg will become the
regional headquarters of West Penn; the regional headquarters of Met-Ed will remain in
Reading; and the regional headquarters of Penelec will remain in Erie for a period of at least five
years.
36.
Upon consummation of the Merger, West Penn’s residential customers
will receive distribution rate credits of $3.57 million per year for three years. Additional rate
credits will be provided to customers receiving service under existing West Penn Tariff 37.
37.
The FirstEnergy Pennsylvania Utilities will not seek any distribution rate
increases to be effective before October 1, 2012 (except for extraordinary storm expense or
changes by the Federal Energy Regulatory Commission in facilities included in transmission
rates).
38.
A credit of $6.19 million will be provided to commercial customers under
specified rate schedules to address increases in Energy Efficiency & Conservation (EE&C) costs
under West Penn’s revised EE&C Plan.
39.
The Joint Applicants commit to achieving specific levels in the
Commission’s Customer Average Interruption Duration Index (CAIDI) and System Average
23
Interruption Duration Index (SAIDI) for West Penn, as well as West Penn’s average speed of
answering customer calls.
40.
The Joint Applicants commit to continued reliability investments for rural
electric cooperatives and to establish a Joint Utility-Industrial Customer Committee to identify,
discuss and address local power and service quality issues for industrial customers.
41.
The Joint Applicants commit to attaining a 55% penetration level for West
Penn’s Customer Assistance Program over a five-year period (based upon additional spending of
$750,000 per year) as well as an increase in funding for West Penn’s Low-Income Usage
Reduction Program (rising to an additional $1.8 million in the fifth year after the Merger).
42.
FirstEnergy will review methods used by West Penn in raising money for
its Hardship Fund and adopt any “best practices” to achieve additional fundraising success for
the hardship programs of the FirstEnergy Pennsylvania Utilities.
43.
West Penn and the FirstEnergy Pennsylvania Utilities will procure 40% of
their solar requirements under Pennsylvania’s Alternative Energy Portfolio Standards Act
through 2021 using long-term contracts.
44.
FirstEnergy will contribute $1 million to the Pennsylvania Sunshine
Program to support solar energy and $1 million to the Keystone Home Energy Loan Program, as
well as provide additional support to the West Penn Sustainable Energy Fund.
45.
Consistent with programs offered to support competitive retail electric
supply in the service territories of the FirstEnergy Pennsylvania Utilities, West Penn will modify
its proposed purchase of receivables program, appoint a representative to perform retail
ombudsman services, and introduce expanded billing options and access for suppliers to interval
and non-interval consumption information via Electronic Data Interchange (EDI) as well as
submit several additional EDI change requests.
24
46.
FirstEnergy will ensure that utility customers are financially protected in a
variety of ways, including: (i) ensuring that each FirstEnergy Pennsylvania Utility operating
company issues its own debt after obtaining appropriate regulatory authorization; (ii) ensuring
that each FirstEnergy Pennsylvania Utility operating company maintains its own credit rating so
long as it has debt outstanding and credit rating agencies are willing to provide such rating; (iii)
ensuring that no individual FirstEnergy Pennsylvania Utility operating company will assume
debt issued by the holding company without Commission approval; (iv) maintaining separate
financial statements reflecting each FirstEnergy Pennsylvania Utility’s own assets and liabilities;
and v) ensuring that each FirstEnergy Pennsylvania Utility operating company has its own
capital structure, which is a function of its own debt and equity.
47.
West Penn and the FirstEnergy Pennsylvania Utilities will provide
detailed information about default supply procurements to the OCA, OTS and OSBA and also
prepare annual reports through 2015 addressing wholesale market prices and trends in the PJM
markets.
48.
As part of the settlement, each of the FirstEnergy Pennsylvania Utilities
will credit customers to the extent the utility earns a return on equity that exceeds 10.1% (subject
to adjustments for pension normalization) between the consummation of the Merger and October
1, 2012.
49.
Dr. William H. Hieronymus, on behalf of the Joint Applicants, presented
an analysis of the Merger that conformed to FERC’s regulations and merger precedents to
determine whether the merger applicants will have the ability to exercise market power, which is
defined as the ability to increase market prices for a sustained period of time.
50.
Dr. Hieronymus focused his analysis on the PJM market that will exist
after June 1, 2011, when generation and transmission assets in the American Transmission
Systems, Inc. (ATSI)5 footprint (including generation assets not owned by FirstEnergy) are
5
ATSI is a wholly-owned subsidiary of FirstEnergy and owns transmission assets which operate as
part of the Midwest Independent System Operator (MISO). Those transmission assets will be integrated into PJM in
2011.
25
integrated into PJM. He also analyzed alternative geographic markets to give the Commission
further assurance that the transaction will not have an adverse impact on competition.
51.
Dr. Hieronymus found that, even after the transaction, the markets he
analyzed are almost entirely large, unconcentrated markets. On average, the post-transaction
testing index levels (Herfindahl-Hirschman Index) are below the current threshold for defining
an unconcentrated market, and, in only three off-peak seasonal periods do levels slightly exceed
the threshold.
52.
The combined company’s share of electric generation after the transaction
will not allow it to control the market price of energy that retail electric suppliers use to meet
their retail service obligations, and the loss of Allegheny Energy Supply as a competitor will
have only a trivial impact on the market due to its small size.
53.
Met-Ed, Penn Power, Penelec and West Penn are the default service
providers in their respective service territories.
54.
The Merger will not have any adverse impact on either the provision of
default service or the ability of EGSs to serve retail mass market customers.
55.
In default service supply solicitations, many suppliers compete to provide
supply on the basis of lowest price to customers and the timing and definitions of products
procured are established through a Commission proceeding; the combined company will have no
ability to unilaterally alter those decisions.
56.
EGSs that want to serve default service customers must now compete
against other EGSs and the default service approved by the Commission; after the Merger, the
situation is unchanged.
57.
The ownership of low-cost generation resources by a wholesale supplier
does not provide it with an unfair pricing advantage in retail electricity markets, and there is no
26
basis to conclude that the proposed Merger would result in reduced competition in default
service supply auctions.
58.
The Merger would not in any way affect the barriers to entering or exiting
the Pennsylvania retail electricity market and, with the ending of rate caps, there will be a
sufficient number of EGSs active in Pennsylvania to support a workably competitive market in
retail electricity after the Merger.
59.
The record evidence establishes that the Merger will not result in
anticompetitive or discriminatory conduct, including the unlawful exercise of market power,
which will prevent retail electricity customers in this Commonwealth from obtaining the benefits
of a properly functioning and workable competitive retail market.
60.
Direct Energy is a licensed electric generation supplier (EGS) in the
Commonwealth of Pennsylvania.
61.
Direct Energy recommended that the proposed Merger be conditioned on a
fundamental restructuring of Pennsylvania’s default service provider (DSP) model (at least as
applied to the Joint Applicants).
62.
The principal components of the Direct Energy Plan are as follows:
a.
Require the merged entity’s four EDCs to exit the DSP business
and have the Commission appoint one or more alternative DSPs to take over that
role in the Met-Ed, Penelec, Penn Power and West Penn service territories;
b.
Have the new DSP(s) auction off existing residential and small
business (Mass Market) default service customers to EGSs, unless such customers
affirmatively “opt out.” After an initial one-year period, the EGSs, at their
discretion, would be free to charge the assigned customers whatever prices they
wished;
27
c.
Mandate that the only DSP product to be offered the “opt out”
Mass Market customers be a completely unhedged, 100% hourly spot priced
service;
d.
Require the merged entity to unbundle its billing function and
distribution rates through the creation of a separate “BillCo”; and
e.
Require the merged entity to divest an undefined amount of
generation.
63.
Direct Energy’s proposals are allegedly designed to address what its own
witnesses describe as generic flaws in the structure of the competitive retail market in
Pennsylvania arising from the way the Commission has implemented the Electric Competition
Act for all Pennsylvania EDCs, not just West Penn and FirstEnergy’s Pennsylvania Utility
subsidiaries.
64.
The Merger will not change the manner in which retail customers are
served – the FirstEnergy Pennsylvania Utilities will remain the DSPs in their service territories
and West Penn will remain the DSP in its service territory.
65.
Direct Energy did not file a petition to have either Met-Ed, Penelec, Penn
Power, or West Penn relieved of its DSP obligation.
66.
Direct Energy has not alleged that Met-Ed, Penelec, Penn Power or West
Penn lacks the operational and financial fitness to continue to serve as a DSP in its service area,
nor have they claimed that those companies have lost the ability to provide default service under
reasonable rates and conditions.
67.
At the conclusion of DSP proceedings, in which Direct participated, the
Commission found that Met-Ed, Penelec, Penn Power and West Penn were fit to perform the
duties of a DSP and that their respective DSP programs satisfied the requirements of 66 Pa. C.S.
§2807(e) for competitive procurement of generation supplies for default service customers.
28
68.
The DSP programs of Met-Ed and Penelec were approved in November
2009;6 Penn Power’s most recent DSP program was resolved by a Joint Petition for Settlement
filed on July 23, 2010, to which Direct Energy was a signatory;7 and West Penn’s DSP program
was approved by the Commission in a fully litigated 2008 proceeding.8
69.
Direct Energy did not submit evidence suggesting that FirstEnergy or any
of its affiliates had engaged in anticompetitive or discriminatory behavior.
70.
There are many alternative suppliers licensed to serve commercial and
industrial customers in the service territories of West Penn and the FirstEnergy Pennsylvania
Utilities.
71.
Pennsylvania has a number of EGSs that are as large as, or larger than,
FirstEnergy/Allegheny will be post-Merger and that have sufficient scale and experience to
compete.
72.
Billing costs currently are recovered by Met-Ed, Penelec, Penn Power and
West Penn through their base distribution rates. The Direct Energy Plan would unbundle the
billing function and, of necessity, require that rates be established for the new BillCo entity.
73.
Direct Energy did not quantify the costs of implementing its proposal.
74.
Direct Energy’s proposal is likely to increase costs to customers, reduce
customers’ competitive options, generate needless customer confusion, and, generally, harm
efforts to promote retail competition in the Commonwealth.
6
Joint Petition Of Metropolitan Edison Company And Pennsylvania Electric Company For
Approval Of Their Default Service Plans, Docket Nos. P-2009-2093053 and P-2009-2093054 (November 6, 2009).
7
Joint Petition for Settlement submitted July 23, 2010 at Docket No. P-2010-2157862.
8
Petition of the West Penn Power Company d/b/a Allegheny Power for Approval of Its Retail
Electric Default Service Program and Competitive Procurement Plan for Service at the Conclusion of the
Restructuring Transition Period, Docket No. P-00072342, 2008 Pa. PUC LEXIS 30 (July 25, 2008).
29
75.
Direct Energy’s proposal is based on assumptions that are not supported
by record evidence. Specifically, there is no evidence that Direct Energy’s proposal would
produce any discernable benefits to customers.
76.
No other state has adopted the default service model proposed by Direct
77.
The OSBA recommended that the Commission attach various conditions
Energy.
to its approval of the Merger.
78.
Five of the OSBA’s proposed conditions, dealing with Merger
synergies/EE&C Plan costs, financial governance measures, customer service and reliability,
“blending” of distribution rates and “harmonizing” default service procurement methods
following the Merger have been adequately addressed in the settlement embodied in the Joint
Petition.
79.
OSBA’s proposal to impose restrictions on the Joint Applicants – but not
other EGSs – with respect to participating in municipal aggregation relates to matters that are
outside the scope of this proceeding.
80.
Extensive reporting requirements on executive compensation already
apply and require publicly held companies such as FirstEnergy to report detailed information
regarding executive compensation in annual proxy statements, which are publicly accessible.
Additionally, the Dodd-Frank Wall Street Reform and Consumer Protection Act imposes a “say
on pay” requirement on public companies that requires an advisory shareholder vote on
compensation for executive officers of the reporting companies.
81.
Met-Ed, Penelec, and Penn Power are currently implementing a variety of
the retail market enhancements RESA proposes in this proceeding.
30
82.
The settlement extends many of these enhancements to West Penn’s
service territory, including: (1) revisions to West Penn’s proposed purchase of receivables (POR)
program for residential and small commercial customers; (2) mailings to customers regarding
competitive offers and promotion of shopping opportunities; (3) updated lists of shopping and
non-shopping customers for suppliers, with regular updates; (4) provision of interval and noninterval customer data via electronic data interchange (EDI) and other EDI transactions; (5)
appointment of a West Penn representative to perform retail ombudsman services; (6) provision
of flexible billing options for EGSs within West Penn’s service territory, including both EDC
rate-ready and bill-ready options and programming of new rate ready billing codes; and (7)
provision of budget billing for customers for an EGS’s supply charges if the EGS is utilizing
EDC consolidated billing.
83.
RESA did not quantify the costs of its proposed customer referral
84.
Imposing a supplier referral function on EDC call centers will compromise
program.
the primary function of those call centers.
85.
An expansion of POR programs is not necessary to support retail choice
for large commercial and industrial customers, who are already mostly shopping.
86.
A high-level director need not be assigned to manage day-to-day supplier
questions, as RESA proposes, in light of the immediate access of the supervisors of supplier
support services at the FirstEnergy Pennsylvania Utilities and West Penn to other management
personnel.
87.
RESA proposes, as a condition of Merger approval, that FirstEnergy be
required to retain an “independent cost allocation expert” to audit the relationship between
FirstEnergy’s regulated utilities and its unregulated businesses (as well as the relationship
between West Penn and Allegheny’s unregulated businesses) for the previous three years and for
the year following the Merger and provide reports to the Commission.
31
88.
RESA did not undertake a cost allocation analysis in support of its audit
89.
Many of the costs incurred for services to unregulated subsidiaries are
proposal.
directly billed to those subsidiaries and not allocated among regulated subsidiaries and
unregulated subsidiaries. FirstEnergy directly bills its subsidiaries for costs and performs cost
allocations consistent with the requirements of the Commission and the Federal Energy
Regulatory Commission.
90.
The FirstEnergy Pennsylvania Utilities and West Penn are regularly
audited by the Commission’s Bureau of Audits and the Commission has broad statutory powers
to conduct audits, request information, and supervise affiliate relations (including disallowance
of unreasonable expenses charged to regulated utilities by their affiliates).
III.
A.
DISCUSSION
The Transaction
FirstEnergy,9 Allegheny10 and Merger Sub11 are parties to an Agreement and Plan
of Merger (the “Merger Agreement”).12 Under the terms of the Merger Agreement, Allegheny
9
FirstEnergy owns, directly or indirectly, all of the outstanding common stock of seven electric
utility operating subsidiaries in four states: Metropolitan Edison Company (“Met-Ed”), Pennsylvania Electric
Company (“Penelec”), and Pennsylvania Power Company (“Penn Power”), in Pennsylvania and, in the case of
Penelec, The Waverly Electric Light and Power Company, in New York; Ohio Edison Company, The Cleveland
Electric Illuminating Company and The Toledo Edison Company, in Ohio; and Jersey Central Power & Light
Company (“JCP&L”), in New Jersey (collectively, the “FirstEnergy Utilities”). The FirstEnergy Utilities comprise
the nation’s fifth largest investor-owned electric system based on customers served, with 4.5 million customers in
Ohio, Pennsylvania, New Jersey and New York. In addition, FirstEnergy subsidiaries and affiliates are involved in
the generation and transmission of electricity, energy management and other energy-related services. Through its
subsidiaries, FirstEnergy owns electric generation totaling more than 14,000 MW of capacity. See Jt. App. Ex. 1,
pp. 2-3.
10
Allegheny is a public utility holding company and has three direct public utility subsidiaries that
conduct business as Allegheny Power: West Penn, in Pennsylvania; Monongahela Power Company (“Mon Power”),
in West Virginia; and The Potomac Edison Company (“Potomac Edison”), in Maryland, West Virginia, and Virginia
(collectively, the “Allegheny Power Utilities”). The Allegheny Power Utilities serve 1.6 million customers in four
states. In addition, TrAILCo is an indirect public utility subsidiary of Allegheny. See Jt. App. Ex. 1, pp. 2-3.
32
will merge with Merger Sub and, as the surviving corporation, Allegheny will become a whollyowned subsidiary of FirstEnergy. When the Merger is completed, each Allegheny shareholder
will be entitled to receive 0.667 shares of FirstEnergy common stock for each share of Allegheny
common stock that he or she holds. Each issued and outstanding share of FirstEnergy common
stock will remain outstanding following the Merger, and each FirstEnergy shareholder will hold
the same number of shares of FirstEnergy common stock that the shareholder held immediately
prior to the Merger. Following the Merger, the existing shareholders of FirstEnergy will own
approximately 73% and the former shareholders of Allegheny will own approximately 27% of
the combined company.
FirstEnergy will remain the ultimate corporate parent of Met-Ed, Penelec and
Penn Power (the “FirstEnergy Pennsylvania Utilities”) and all other FirstEnergy subsidiaries and
will become the ultimate corporate parent of Allegheny and all of the Allegheny subsidiaries,
including West Penn and TrAILCo.13 The Joint Applicants may elect to adopt an alternative
corporate structure under which the Allegheny Power Utilities would be first tier subsidiaries of
FirstEnergy. To avoid the time and expense of a second “change-in-control” filing to recognize
what would simply amount to an internal reorganization (and no change in ultimate control), the
Joint Applicants have requested that the Commission approve this alternative corporate structure
as well.14
The combined company’s corporate headquarters will be in Akron, Ohio. The
corporate headquarters of Allegheny Energy, located in Greensburg, Pennsylvania, will become
the regional headquarters of West Penn. Immediately following the Merger, FirstEnergy will
increase its Board of Directors from eleven to thirteen members and will fill the two new
positions by appointing two members of the Allegheny Board of Directors to the FirstEnergy
Board of Directors. Mr. Anthony J. Alexander, the current Chief Executive Officer and
11
Merger Sub is a wholly-owned subsidiary of FirstEnergy that was formed for the sole purpose of
effecting the Merger. When the Merger is completed, Merger Sub will be subsumed, by operation of law, into
Allegheny and cease to exist as a separate corporate entity.
12
Exhibit E to Jt. App. Ex. 1.
13
Exhibit F-1 to Jt. App. Ex. 1.
14
Jt. App. Ex. 1, pp. 4-5.
33
President of FirstEnergy, will serve as Chief Executive Officer and President of FirstEnergy
following the Merger. Mr. Paul J. Evanson, the current Chief Executive Officer of Allegheny,
will become the Executive Vice Chairman of FirstEnergy and will report to Mr. Alexander.
After the Merger, Met-Ed, Penelec, Penn Power, West Penn and TrAILCo will
continue to operate as Pennsylvania electric public utilities and will remain subject to the
continuing jurisdiction of the Commission without any reduction of the Commission’s existing
oversight or any diminishment in the Commission’s authority over these public utilities. Thus,
the Merger will not adversely affect the day-to-day operations of these utilities. Indeed, as set
forth in more detail below, the Merger will enhance the capabilities of these utilities to fulfill
their obligations to provide safe, adequate and reliable service to their retail customers in
Pennsylvania.
1.
Regulatory Approvals Sought
a.
Change In Control
The Joint Applicants request that the Commission issue certificates of public
convenience evidencing its approval, under Section 1102(a) of the Code, as interpreted by the
Commission’s Statement of Policy at 52 Pa. Code §69.901, for a change in control of West Penn
and TrAILCo. Additionally, pursuant to Section 2811(e) of the Code, the Joint Applicants
request that the Commission find, as part of its approval granted under Section 1102, that the
Merger will not result in anti-competitive or discriminatory conduct, including the unlawful
exercise of market power, which will prevent retail electricity customers in the Commonwealth
from obtaining the benefits of a properly functioning and workable competitive retail electricity
market.
b.
Affiliated Interest Agreements
The Joint Applicants also request that the Commission approve, under Chapter 21
of the Code, certain modifications in affiliated interest agreements to become effective upon
consummation of the Merger. The proposed modifications add the Allegheny operating
companies to existing affiliated interest agreements to which Met-Ed, Penelec and Penn Power
are parties.
34
Allegheny and FirstEnergy have service company subsidiaries that provide a
range of accounting, financial, legal and other services to their respective operating companies.
At Allegheny, all employees are employed by Allegheny Energy Service Company (AESC) and
are assigned to provide services to Allegheny and its affiliates, including the Allegheny Power
Utilities. At FirstEnergy, certain employees are employed by the FirstEnergy Utilities while
other employees who provide administrative and technical support services are employed by
FirstEnergy Service Company (FESC).15
Met-Ed, Penelec and Penn Power are parties to a Service Agreement with FESC
that was approved by the Commission’s Order entered February 4, 2003, at Docket No.
G-00020987. In addition, the three FirstEnergy Pennsylvania Utilities are parties to a pending
Mutual Assistance Agreement, which allows them to share services among themselves and with
other FirstEnergy Utilities. The FirstEnergy Pennsylvania Utilities are also parties to an
Intercompany Income Tax Allocation Agreement, which established the terms under which the
utilities participate in FirstEnergy’s filing of a consolidated federal income tax return.16
The merging companies have established transition teams to determine how
AESC’s employees, the Allegheny Power Utilities and other Allegheny entities will be
integrated into the FirstEnergy organizational model. Although this process is still ongoing, the
Joint Applicants believe that substantial benefits can be derived by enabling FESC and the
FirstEnergy Utilities to provide services to West Penn and TrAILCo and for West Penn and
TrAILCo to share services with the FirstEnergy Utilities. The Joint Applicants, therefore,
request that the Commission approve the following modifications to the FirstEnergy Service
Agreement, Mutual Assistance Agreement, and Intercompany Income Tax Allocation
Agreement to become effective upon the close of the Merger:
(a)
The addition of certain Allegheny operating companies,
including West Penn and TrAILCo, each as a “Client
Company”, to the FirstEnergy Service Agreement. See Ex.
G-1 to Jt. App. Ex. 1;
15
Jt. App. Ex. 1, p. 9.
16
Jt. App. Ex. 1, p. 9.
35
(b)
The addition of certain Allegheny operating companies,
including West Penn and TrAILCo as parties to the Mutual
Assistance Agreement. See Ex. G-2 to Jt. App. Ex. 1; and
(c)
The addition of certain Allegheny operating companies,
including West Penn and TrAILCo as parties to the
Intercompany Income Tax Allocation Agreement. See Ex.
G-3 to Jt. App. Ex. 1.
The proposed modifications, which have not been opposed, will give the
combined company the operational flexibility to share best practices and to make the most
productive use of all available resources as soon as possible after the Merger. If any additional
changes to the scope, manner, terms or conditions of the existing affiliated interest agreements
are necessary or desired in the future, further Commission approvals will be sought under
Section 2102 of the Code.17
2.
The Joint Petition For Partial Settlement
On October 25, 2010, the Joint Applicants filed with the Commission and served
on the ALJs and all active parties a Joint Petition for Partial Settlement (Joint Petition) executed
by all of the active parties except the OSBA, Citizen Power, RESA and Direct Energy.18 The
Joint Petition resolves all issues among the Joint Petitioners. The Joint Petitioners are in full
agreement that the Merger, as described in the Joint Application and as supplemented by the
Joint Petition, will provide substantial affirmative public benefits, which are summarized in
Paragraph 58 thereof. Additionally, the Joint Petitioners agree that consummating the Merger on
the terms set forth in the Joint Application as supplemented by the Joint Petition is in the public
interest, as explained in Paragraph 59 thereof, and express their full support for the Joint Petition,
as evidenced by the Statements in Support each filed on or before October 29, 2010. The terms
of the Joint Petition include commitments regarding employment levels, rate stay-out provisions,
rate credits, and enhancements in a variety of areas including customer service and reliability,
17
66 Pa. C.S. §2102.
The signatories to the Joint Petition are hereinafter referred to as the “Joint Petitioners” or
“Settling Parties.”
18
36
universal service, alternative and sustainable energy, financial governance, and retail
competition, as discussed below.
B.
Legal Standards
The Agreement and Plan of Merger (Merger Agreement) requires the approval of
the Commission as evidenced by its issuance of a certificate of public convenience.19 Before the
Commission may issue a certificate of public convenience it must find that the granting of such
certificate is necessary or proper for the service, accommodation, convenience, or safety of the
public.20 Even where the Commission finds sufficient public benefit to find that the granting of a
certificate of public convenience is necessary or proper for the service, accommodation,
convenience, or safety of the public without imposing any conditions, the Commission
nevertheless has discretion to impose conditions which it deems to be just and reasonable.21
However, the Commission has refrained from exercising the power to impose conditions when
the proposed merger provides affirmative public benefits unless the record indicates service
deficiencies or infrastructure deterioration to the point of impairing the technical, managerial, or
financial fitness of the merging companies.22
In an acquisition context, when the Commission considers the public interest it is
contemplated that the benefits and detriments of the acquisition will be measured as they impact
on all affected parties and not merely on one particular group or geographic subdivision.23
Competitive impact is a substantial component of a rational net public benefits
evaluation in a merger context.24 The Commission will not approve a merger if the merger or
19
66 Pa. C.S. §1102(a)(3).
20
66 Pa. C.S. §1103(a).
21
66 Pa. C.S. §1103(a).
22
Joint Application of SBC Communications, Inc. and AT&T Corp. Together with its Certificated
Pennsylvania Subsidiaries for Approval of Merger, Docket Numbers A-311163F0006, A-310213F0008,
A-310258F0005, Opinion and Order adopted and entered October 6, 2005.
23
Middletown Twp. v. Pa. Public Utility Comm’n, 482 A.2d 674 (Pa. Cmwlth. 1984).
24
Popowsky v. Pa. Public Utility Comm’n, 937 A.2d 1040 (Pa. 2007).
37
acquisition “is likely to result in anticompetitive or discriminatory conduct, including unlawful
exercise of market power, which will prevent retail electricity customers in this Commonwealth
from obtaining the benefits of a properly functioning and workable competitive retail electricity
market.”25
The burden of proof in this proceeding is upon the Joint Applicants.26 As the
parties bearing the burden of proof, the Joint Applicants must prove by a preponderance of the
evidence that the Commission’s issuance of a certificate of public convenience approving the
Merger Agreement as modified by the Joint Petition is in the public interest because it will
affirmatively promote the service, accommodation, convenience, or safety of the public in some
substantial way.27 However, the Commission is not required to secure legally binding
commitments or to quantify benefits where this may be impractical, burdensome, or impossible
in determining if the proposed merger will affirmatively promote the service, accommodation,
convenience, or safety of the public in some substantial way.28 Instead, the Commission
“applies a preponderance of the evidence standard to make factually-based determinations
(including predictive ones informed by expert judgment) concerning certification matters.” 29
Finally, the Commission’s standards for reviewing a non-unanimous settlement,
as proposed here, are the same as those for deciding a fully contested case. Accordingly,
substantial evidence consistent with the statutory requirements must support the proposed
settlement.30
25
66 Pa. C.S. §2811(e).
26
66 Pa. C.S. §332(a).
27
City Of York v. Pa. Public Utility Comm’n, 449 Pa. 136, 295 A.2d 825 (1972).
28
Popowsky v. Pa. Public Utility Comm’n, 594 Pa. 583, 937 A.2d 1040 (2007).
29
Id. at 611, 937 A.2d at 1057.
30
Popowsky v. Pa. PUC, 805 A.2d 637 (Pa. Cmwlth. 2002), petition for allowance of appeal denied,
820 A.2d 163 (Pa. 2003); ARIPPA v. Pa. PUC, 792 A.2d 636 (Pa. Cmwlth. 2001), petition for allowance of appeal
denied, 820 A.2d 163 (Pa. 2003).
38
As we explain more fully below, we find that the Joint Applicants have
sufficiently demonstrated that the proposed merger, as modified by the settlement petition
provides sufficient benefits to a sufficient spectrum of stakeholders to be in the public interest.
Moreover, while the Joint Applicants will clearly be an aggressive player in retail energy
markets, the Joint Applicants are not likely to engage in anticompetitive or discriminatory
conduct which will prevent retail customers from obtaining the benefits of a properly functioning
retail market.
C.
Merits of the Transaction
1.
Benefits Identified in the Joint Application
The Joint Applicants, as part of the original application in support of the Merger
Agreement and in the direct testimony of FirstEnergy’s President and Chief Executive Officer,
Mr. Anthony J. Alexander, enumerated benefits derived from the proposed merger as follows:
Increased Scale and Scope; Diversification. There are many
benefits that should be derived from the increased scale, scope and
diversification of the combined company . . ., including improved
service, reliability and operational flexibility, and increased
financial stability for West Penn, TrAILCo, Met-Ed, Penelec, Penn
Power, and all other FirstEnergy and Allegheny public utility
subsidiaries. . . .
Increased Financial Strength and Flexibility. The increased
scale and scope is ultimately expected to strengthen the balance
sheet of the combined company, creating a larger, financially
stronger parent company that is better positioned to compete for
and attract capital on reasonable terms for its public utility
subsidiaries. In addition, the diversification of the energy delivery
and generation portfolios of the combined company should result
in a more stable cash flow. The all-stock transaction is expected to
improve financial metrics of the combined company. . . .
Enhanced Expertise in Competitive Energy Markets, Energy
Technologies, and Regional Issues. The combined company is
expected to be able to draw upon the intellectual capital, technical
expertise and experience of a deeper and more diverse workforce,
with particular skills in managing distribution companies in
competitive energy markets. The Merger is a natural alliance of
39
companies with adjoining service territories and interconnected
transmission systems, which should be beneficial in the integration
and management of the combined company. The combined
company should also be better able to invest in and deploy new
processes and technologies, including innovations anticipated as
part of the Act 129 Energy Efficiency and Conservation plans
being implemented by West Penn, Met-Ed, Penelec, and Penn
Power. . . .
Enhanced Customer Service and Reliability. FirstEnergy and
Allegheny share a strong commitment to enhancing customer
service and reliability. The Merger will facilitate and build upon
the combined companies’ areas of expertise, allowing the
deployment of “best practices” derived from ten electric utilities
and additional, experienced resources when needed to meet
emergencies, storm outages or other similar circumstances. As
part of the Merger integration process, FirstEnergy and Allegheny
intend to conduct a review of their existing procedures and policies
to determine “best practices” and how to implement them. The
combined company will work to maintain the current levels of
reliability of West Penn, as measured and determined using West
Penn’s current methodology for measuring reliability, and will
conduct a study to determine if opportunities exist to improve
reliability. The combined company’s commitment to streamlining
operations, reducing overall complexity and reliance upon a
regional focus will ensure a continued high level of management
attention on distribution system reliability and overall customer
service . . . .
Synergies, Efficiencies and Cost Savings. The Joint Applicants
are confident that the Merger will generate synergies and result in
overall aggregate cost saving opportunities for the combined
company. The synergies that will accrue to the Pennsylvania
utilities over time should, at least in part, offset the increasing cost
of providing regulated retail utility service and, thereby, may
reduce the size of future rate increase requests . . . 31
Mr. Alexander also explained that the Merger will provide expanded
opportunities for career advancement and professional growth for Allegheny employees who
remain with the Company. He also detailed the specific commitments by FirstEnergy to
maintain West Penn’s regional headquarters in Greensburg, Pennsylvania, as well as its
31
Jt. App. St. 1 at 8-12.
40
commitments to employees after the Merger regarding employment levels and existing employee
collective bargaining agreements and benefits.32 Furthermore, he testified that FirstEnergy had
agreed that, for a period of three years, it will maintain at least Allegheny’s current levels of
charitable support in local communities. Thereafter, FirstEnergy will continue to support local
charities at levels consistent with its commitments to other communities it serves. In addition,
FirstEnergy will expand its network of Power System Institutes (PSIs) by adding a new PSI
program within West Penn’s service territory to help students earn an associate’s degree in
applied science or in technical studies with a focus on electric utility technology.33
The settlement adds to these benefits. The Settling Parties include representatives
of consumers, industrial customers, non-utility generators, environmental and sustainable groups,
an electricity supplier, the Department of Environmental Protection, and labor organizations.
Further, although the OSBA is not a signatory to the petition for settlement, it represented in its
reply brief that many of the conditions of the agreement resolved some of the concerns it had to
the merger proposal.34
2.
Employment
The corporate headquarters of Allegheny Energy is located in Greensburg,
Pennsylvania. There are approximately 910 employees currently assigned to the Greensburg
area, with 65 of those employees scheduled to be relocated to West Virginia in the near future (a
move that has nothing to do with this merger).35 The Joint Applicants had made no
commitments in their filings as to the continued employment of the remaining 845 employees of
32
Jt. App. St. 1 at 13-15.
33
Jt. App. St. 1 at 15-16.
34
The OSBA did not join the settlement in large part due to its position that FirstEnergy’s municipal
aggregation plans created a substantial threat to retail competition and was not outweighed by the benefits offered in
the settlement. That issue is discussed below.
35
Tr. at 303-304.
.
41
Allegheny Energy located in the Greensburg, Westmoreland County area.36 Two public input
hearings were scheduled in Greensburg.
At the public input hearings in Greensburg, State Senator Kim Ward testified as to
her concerns over possible job losses in the Greensburg area.37 Senator Ward testified as to the
high rate of unemployment in Westmoreland County, and how the potential loss of jobs in
Greensburg due to the merger would be “devastating.”38 Senator Ward urged the Commission to
adopt some type of work force protection if the merger was approved.39
Amanda Gordon, an OTS witness, described the effect of the possible loss of jobs
at the Greensburg, Pennsylvania headquarters of Allegheny Energy as a result of the merger. 40
Ms. Gordon testified that the Joint Applicants’ on-the-record commitments to jobs were
insufficient.41 Ms. Gordon recommended that Joint Applicants agree to a 5-year jobs
commitment for the Greensburg area.42 Accordingly, as part of the Joint Petition, the Joint
Applicants agreed to more specific commitments to regional employment in addition to those
made in their original filings.43 The corporate headquarters of Allegheny Energy in Greensburg,
Pennsylvania will become West Penn’s regional headquarters. In addition, the Joint Applicants
commit that the net employment levels in Greensburg, Pennsylvania and Westmoreland County
for FirstEnergy employees and its affiliates will be as follows for the five years following
consummation of the merger:
36
Tr. at 290, 294-297.
37
Tr. at 58-63.
38
Tr. at 60.
39
Tr. at 60.
40
OTS St. 1 at 2-5.
41
OTS St. 1 at 5.
42
Id.
43
Jt. App. St. 1 at 14.
42
1.
During the 12-month period following consummation of the merger, an
average number of no less than 800 employees.
2.
During the subsequent 12-month period, an average number of no less
than 675 employees.
3.
During the subsequent 12-month period, an average number of no less
than 650 employees.
4.
During the subsequent 24-month period, an average number of no less
than 600 employees.
The average number of employees is comprised of the number of employees with
primary reporting locations in Greensburg, Pennsylvania and any new jobs that are created in or
moved to Westmoreland County, less any employees who leave due to voluntary attrition. The
Joint Applicants further commit that career transition services will be provided for employees in
Greensburg, Pennsylvania whose jobs are impacted by the merger. Such services include
assistance and training for writing resumes, interview skills and job search services. In addition,
the current regional headquarters of Met-Ed and Penelec are guaranteed to remain in
Pennsylvania for at least the next 5 years.44
Union workers are also protected. UWUA Intervenors support approval of the
Merger Agreement as modified by the Joint Petition as in the public interest for the reasons
stated therein, as well as for the following reasons:
44

UWUA System Local 102 recently completed negotiations with
Allegheny Energy on a contract extension that was ratified by our
members and will run through April 2013. That contract covers all
of the UWUA System Local 102-represented employees who work
at the Allegheny Energy operating companies. There is language
in the contract extension providing that if the proposed merger is
approved, FirstEnergy will assume the obligations of the new
contract.

Given economic conditions, related pressures on working families,
and the challenges facing utility companies, we believe that it is
particularly important – for both employees and customers – that
Joint Petition at ¶ 15.
43
we continue to have a productive working relationship with the
company that owns Allegheny Power. UWUA Intervenors believe
that the merged company will be receptive to such a relationship.
3.
Application of Merger Savings: Rate Stay-Out
OCA witness Richard Hahn testified as to the lack of substantial affirmative
benefits for Pennsylvania ratepayers as a result of the merger.45 Specifically, Mr. Hahn testified
that Joint Applicants were not proposing to affirmatively share any of the estimated merger
savings with ratepayers. Rather, the estimated $52 million in savings expected to be generated in
Pennsylvania would serve to potentially reduce the size of future rate increases.46 Mr. Hahn
testified that ratepayers may never actually realize the benefit of these savings under the Joint
Applicants’ proposal.47
In order to address these concerns, the Joint Applicants have agreed to certain
specific applications of merger savings for the direct benefit of ratepayers. Specifically, the
settlement provisions provide that there will be no base rate increase for Met-Ed, Penelec and
Penn Power customers prior to October 1, 2012. In addition to the rate case stay-out for these
utilities, if at any time during this period either Met-Ed, Penelec or Penn Power earn in excess of
a 10.1% return on equity, those excess amounts will be returned to the customers of those
utilities as a bill credit.48 This use of merger savings will ensure rate stability for the customers
of these utilities and also ensures that any excess earnings will be returned to customers.
As to West Penn’s customers, in the three years following consummation of the
merger residential customers will receive distribution rate credits equaling approximately $11
million, and Tariff 37 customers (PSU) will receive credits of $45,000 over three years.49
45
OCA St. 1 at 16-21, Public Version.
46
OCA St. 1 at 16, 20, Public Version.
47
OCA St. 1 at 16, Public Version.
48
Joint Petition at ¶ 16.
49
Joint Petition at ¶ 17.
44
Consistent with Mr. Hahn’s recommendations, these affirmative merger savings provide some
immediate benefits to West Penn customers without any uncertainties as to what may or may not
happen in future base rate cases. West Penn’s commercial customers will receive a credit of
approximately $6 million to offset potential increases in Energy Efficiency and Conservation
costs.50 In addition, acquisition and certain transaction costs will be excluded from recovery in
rates for all of the post-merger FirstEnergy electric distribution companies, Met-Ed, Penelec,
Penn Power and West Penn Power.51 These credits will be provided to customers as merger
savings will be provided to all such customers, regardless of whether they take Default Service
or receive service from a competitive electric generation supplier (EGS).52 The OCA, OTS,
PSU, Constellation and PHMA specifically support these provisions which, in their view,
provide substantial affirmative benefits and are in the public interest. The OSBA also supports
these provisions as adequately addressing their concerns on this issue.53
4.
Financial Governance and Ring Fencing
OCA witness Hahn testified as to the need for specific ring-fencing provisions in
order to protect and insulate the regulated utilities from the new parent company and also the
unregulated affiliates of the utilities.54 Mr. Hahn explained that such measures are necessary in
order to protect Pennsylvania ratepayers from any adverse and unintended consequences of the
merger.55 Joint Applicants had made no firm commitments in their originally-filed materials to
put these ring fencing measures in place as part of the proposed merger.
The Joint Petition addressed many of these concerns. In particular, the Joint
Petition provides that the Joint Applicants will: (1) to the extent there are money pools maintain
50
Joint Petition at ¶ 18.
51
Joint Petition at ¶ 19.
52
See Joint Petition at ¶ 17; Constellation St. 1 at 11-15 (arguing that the Merger should not have
adverse effects on competitive markets in the Commonwealth).
53
54
55
OSBA Reply Brief at 14.
OCA St. 1 at 26-27, Public Version.
Id.
45
separate money pools for its regulated and unregulated operations; (2) ensure that each
Pennsylvania operating company issues its own debt after obtaining regulatory approval; (3)
ensure that each FirstEnergy Pennsylvania utility maintains its own credit rating as long as it has
debt outstanding and credit rating agencies are willing to provide such rating; (4) ensure that no
FirstEnergy utility will assume debt issued by the holding company without Commission
approval; (5) maintain separate financial statements that reflect each utility’s own assets and
liabilities; and, (6) ensure that each utility has its own capital structure that is comprised of its
own debt and equity.56 By implementing these corporate protections, the Joint Petition contains
provisions that will protect customers from the risks associated with unregulated affiliates and
cross-subsidization.
The Joint Petition also provides that no FirstEnergy Pennsylvania utility operating
company will do the following unless expressly authorized by the Commission: (1) transfer,
merge, sell, lease or dispose of utility property that has a net book value greater than $10 million
and is included in rate base and recovered through rates; or (2) issue debt secured by utility
assets for purposes other than as approved by the Commission. Moreover, the Joint Petition
further requires that, for a period of five years, if any post merger FirstEnergy Pennsylvania
utility’s equity-to-cap ratio falls below 40%, that company will provide the commission with a
12-month plan to bring its equity-to-cap ratio to 40%. If the ratio remains below 40% after the
12-month period, the company will not pay a dividend to its parent until the ratio is 40% or
greater. By providing for Commission approval in advance of certain transfers of funds,
interested parties can monitor any changes and such protections provide accounting and pricing
protocols that allow the Commission to perform its regulatory oversight functions.57
The OCA, OTS, PSU and PHMA specifically support these provisions which, in
their view, provide substantial affirmative benefits and are in the public interest. Further, the
56
Joint Petition at ¶ 35.
57
Joint Petition at ¶ 36.
46
OSBA does not propose any additional ring-fencing conditions because these provisions
generally satisfy its concerns related to the financial governance of the merged companies. 58
5.
Service, Quality and Reliability
OCA witness Alexander and OTS witness Amanda Gordon testified as to their
concerns over the lack of any commitments by the Joint Applicants to improve customer service
and electric reliability metrics in the West Penn service territory.59 Ms. Alexander specifically
testified that in seeking to generate merger savings, the new owners of West Penn may not invest
the necessary capital for improvements to the reliability of the system and also to improve
customer service metrics.60 Ms. Alexander provided documentation in her Direct Testimony as
to the current state of West Penn’s reliability and customer service indices, which are currently
both less than stellar.61
The Joint Petition includes a provision that FirstEnergy will improve West Penn’s
Customer Average Interruption Duration Index (CAIDI), which is the average duration of
sustained interruptions for those customers who experience interruptions during the analysis
period, by 5% over the next seven years with a target of 172 minutes.62 The Joint Petition also
requires that FirstEnergy improve West Penn’s System Average Interruption Duration Index
(SAIDI), which is the average duration of sustained customer interruptions per customer
occurring during the analysis period, by 5% over the next seven years with a target of 198
minutes.63 In addition, Commission regulations require EDCs to report the percentage of calls
answered within 30 seconds with the representative ready to render assistance and process the
call. As shown in OTS direct testimony, in 2008, 81% of FirstEnergy’s calls were answered
58
OSBA Reply Brief at 15.
59
OCA St. 2 at 11-31; OTS St. 1 at 4-15; OTS St. 1-SR at 4-5.
60
OCA St. 2 at 12.
61
OCA St. 2 at 21-22.
62
Joint Petition at ¶ 49.a.
63
Joint Petition at ¶ 49.b.
47
within 30 seconds while only 58% of West Penn’s calls were answered in 30 seconds.64 The
Joint Petition requires a 30 second answer rate of 70% for West Penn within five years of
approval of the merger.65 In total, these metrics represent specific reliability improvements that
FirstEnergy and West Penn will work to achieve. These agreed upon performance levels are
clearly an improvement over West Penn’s current performance and are important to ensure that
the utility is accessible to its customers.
Furthermore, for the years 2011 through 2017 West Penn will provide an annual
report to the Commission analyzing its progress in achieving the CAIDI and SAIDI thresholds
set forth above.66 Within 60 days of filing the annual report, OTS, OCA and OSBA can convene
a meeting to discuss the performance levels and steps for future compliance.67 Mutually agreed
upon steps can be implemented. If the parties fail to reach an agreement, a party can seek
Commission review of the contested point. These settlement terms ensure that the parties and
Commission have ongoing review over West Penn’s progress and will have the opportunity to
recommend measures to ensure ongoing compliance with the agreed upon standards. These
provisions will ensure that customers of West Penn will see measurable improvements in
reliability and customer service as a result of the merger.68
In addition, while FirstEnergy has agreed to review existing practices and
procedures to determine “best practices” and ways to implement them, it has also agreed to
conduct a study to determine if there are additional areas where West Penn’s reliability and
service quality can be improved.69 The study will be submitted to the Commission’s Bureau of
Conservation, Economics and Energy Planning and to the parties upon request. These measures
will assist FirstEnergy in improving West Penn’s overall performance.
64
OTS St. 1 at 7.
65
Joint Petition at ¶ 49.c.
66
Joint Petition at ¶ 49.d.
67
Joint Petition at ¶ 49.e.
68
Joint Petition at ¶ 49.
69
Joint Petition at ¶ 50.
48
For the specific benefit of industrial ratepayers, the Joint Petition establishes a
joint technical committee to identify, discuss and address local power and service quality issues
impacting industrial customers served by West Penn and, specifically, service issues that can be
addressed through technical, operational or equipment changes that can be made on equipment
used directly in furnishing service to the impacted customer or on the customer's side of the
interface.
The Joint Petition also addresses concerns of rural electric reliability raised
primarily by PREA.70 The Joint Petition extends what is known as the Joint Planning Process
(JPP) from Docket Nos. R-00974008 and R-00974009, as amended by subsequent proceedings,
for five (5) years with an investment level of $4 million for 2013 through 2018 projects unless
Interruption Duration Index (IDI) and Interruption Frequency Index (IFI) standards of at least
85% are achieved for all PREA delivery points, in which case the annual investment level will be
reduced to $3 million. In addition, 50% of the amounts per year are to be spent on tree trimming,
breaker and battery maintenance on circuits serving the PREA delivery points, all of which will
improve service reliability.
The Joint Petition permits PREA to elect to have the annual funding investment
be used for other than the 25% worst performing delivery points, thereby permitting PREA to
participate in the service investment process and improve the cooperation of both the regulated
electric utilities and rural electric cooperatives for the benefit of the customers of each. Further,
the Joint Petition also allows PREA to participate in the redesign of the auto dialer system for
specific delivery points served by either FirstEnergy or Allegheny. FirstEnergy has commited to
the repair or replacement of failed meters or components within 90 days, barring extenuating
circumstances. This further assures that there will be no diminution of service following the
PREA’s member cooperatives receive retail electric service from FirstEnergy at 18 locations in the
Commonwealth. PREA and its member cooperatives also receive electric generation supply through 205 delivery
points located throughout Pennsylvania. Of the total 205 delivery points, only 2 are not served through facilities
owned and operated by either Pennsylvania Electric Company (“Penelec”)/Metropolitan Edison Company
(“MetEd”) or West Penn: 166 are with Penelec; 19 are with MetEd and 18 are with West Penn. 70 Each of the 13
Pennsylvania member cooperatives has at least one delivery point served from either Penelec/MetEd or West Penn
facilities. Most have several or numerous delivery points served by Joint Applicants or subsidiaries. PREA relies
on these delivery points for delivery of generation to meet the electric service needs of its more than 200,000
Pennsylvania consumer-members and approximately 600,000 Pennsylvania residents.
70
49
Merger. The Joint Petition modifies the standards for delivery points with five or fewer
customers and modifies the calculation of outage time in cases where backfeeding by PREA
member cooperatives can restore service to consumers. This should shorten the duration of
outages for the benefit of all customers. The Joint Petition clarifies Allegheny's post-merger
obligations and binds Allegheny to perform the requirements of the JPP on Allegheny's former
system after the Merger is consummated. The Joint Petition makes certain that unless
specifically modified in the settlement the JPP terms and conditions will remain in force and
requires the parties to restate the operative terms, conditions and agreements into one document
within one year. The Joint Petition thus assures that there will be no misunderstandings with
respect to the JPP.
In sum, the terms of the Joint Petition terms and conditions will contribute to
service reliability related to individual consumer, industrial, small business71 and rural customers
and are therefore in the public interest.
6.
Universal Service
OCA witness Barbara Alexander testified as to her concerns regarding the Joint
Applicants’ lack of any commitments to improve the universal service programs offered by West
Penn.72 Specifically, Ms. Alexander recommended improving the efficiency, penetration and
funding for West Penn’s Customer Assistance Program (CAP).73 Ms. Alexander also
recommended that FirstEnergy should build on the success of West Penn in its fundraising
activities for the Hardship Fund, and commit to incorporate those successes in similar programs
for the other FirstEnergy EDCs. Ms. Alexander also testified that the current Low Income Usage
Reduction Program (LIURP) spending for West Penn was far below that of the other FirstEnergy
Pennsylvania EDCs.
71
OSBA Reply Brief at 16.
72
OCA St. 2 at 31-35.
73
OCA St. 2 at 35.
50
The Joint Petition provides enhanced funding and commitments for West Penn’s
CAP program. The Joint Applicants have committed to increasing the penetration rates for West
Penn’s CAP program in order to reach the current penetration levels of the other FirstEnergy
EDCs. This 5-year commitment with expenditures of up to $750,000 per year will not be
recovered from ratepayers in any future rate proceedings.74 Joint Applicants have committed to
using best practices obtained from the West Penn fundraising activities in order to benefit the
Hardship Funds for the remaining FirstEnergy EDCs.75 In addition, over the next five years
FirstEnergy will provide additional funding for West Penn’s LIURP of $4 million.76 As with the
CAP commitment, these significant expenditures will not be recoverable from ratepayers in
future rate proceedings. These provisions provide substantial affirmative benefits and are in the
public interest.
7.
Act 129, Solar Procurements and Alternative Energy Funding
In paragraphs 25 through 29, the Settling Parties have agreed to programs and
substantial financial commitments to the continued growth of solar power in the Commonwealth,
the continued growth of all forms of renewable energy, and the growth of funding to assist
consumers with implementing energy efficiency measures. Included are a total of $2 million in
funding for the Keystone HELP Program and the PA Sunshine Program, and continued funding
for the West Penn Power Sustainable Energy Fund, which promotes the growth and retention of
renewable energy businesses in the West Penn service territory. These programs promote
environmental quality as well as economic development and jobs in the Commonwealth. They
also have the additional benefit of avoiding significant pollution through development of
renewable energy sources and reduced demand for electricity through energy efficiency
programs.
Additionally, the Joint Applicants have also agreed to procure 40% of West
Penn's solar requirements for the period 2011 through 2021 using long-term contracts and
74
Joint Petition at ¶ 20.
75
Joint Petition at ¶ 21.
76
Joint Petition at ¶ 22.
51
contract with credit-worthy industrial customers to purchase Solar Photovoltaic Alternative
Energy Credits (SPAECs) from those customers producing SPAECs within the Commonwealth
of Pennsylvania.
Other provisions of the Joint Petition help the electric distribution companies
meet the requirements of Act 129, allow for financing of alternative renewable energy projects
and should result in lower costs to ratepayers as long-term contracts should provide cheaper
renewable energy credits over time than spot market purchases. The commitments should result
in substantial increases in long-term contracting, especially in the West Penn service territory.
Finally, the development of solar power generation projects should have a positive impact on the
economy of and employment in the Commonwealth.
8.
Smart Meters and Time of Day Usage
Paragraphs 23 and 24 of the Joint Petition address deployment of smart meters in
the electric distribution companies’ territory:
As part of the implementation and deployment plans for the Smart
Meter Implementation Plan (“SMIP”), in addition to any other
deployment schedule Met-Ed, Penelec, Penn Power and West Penn
(the “post-merger FirstEnergy EDCs”) may submit, the
implementation and deployment plan shall include a cost/benefit
analysis for deployment of smart meters to at least 90% of the
EDCs’ customers no later than December 31, 2018.
Consistent with Act 129 of 2008, the post-merger FirstEnergy
EDCs will have voluntary time of use rates available to residential
customers who have smart meters installed, and voluntary real time
rates available for any commercial or industrial customers that
have smart meters installed so long as the EDCs remain the default
service suppliers.77
A customer cannot receive any benefits of smart meter technology unless the
meters are actually installed. These benefits include significant control over electricity costs
77
Joint Petition at ¶¶ 23-24.
52
through time of use and real-time pricing, as well as demand response. The Joint Petition gives a
firm target for substantially complete deployment in all four electric distribution companies’
territories by the end of 2018. This is a substantial acceleration over the current approved plan
for the FirstEnergy companies and is in line with the recent settlement filed in the West Penn
smart meter proceeding (October 20, 2010; Docket No. M-2009-2123951).
9.
Non-Utility Generation Contract Issues
ARIPPA78 is a trade association comprising operating non-utility generation
(NUG) power plants across Pennsylvania, most of which use waste coal as a source of fuel.
Most of ARIPPA’s members have long-term, Commission-approved power contracts with MetEd and Penelec, and have invested over $2 billion in Pennsylvania over the last two decades in
the development of non-utility generation power plants under authority and in furtherance of
state and federal legislative goals. ARIPPA’s members are providers of substantial amounts of
energy and capacity to current FirstEnergy subsidiaries pursuant to these long-term,
Commission-approved contracts that further state and federal statutory goals and objectives
intended to foster independent and alternative power production.
The YCSWA sought to protect its interests with MetEd under an existing
PURPA-based Power Purchase Agreement, which interests include certain commitments and
obligations under the 1998 MetEd Restructuring Settlement at Docket Nos. R-00974008 and
R-00974009.
Both ARIPPA and YCSWA intervened to ensure that neither the proposals by the
Joint Applicants nor any other party negatively impacted their interests in their continued sales of
energy and capacity to the Companies, their receipt of payment for the same in compliance with
federal and state law regarding NUG contracts, and future compliance with NUG stranded cost
recovery. As a result of the settlement achieved in the Joint Petition, ARIPPA and YCSWA’s
interests have been addressed. Section L of the Joint Petition, Paragraph 56 provides as follows:
78
ARIPPA was previously known as the Anthracite Region Independent Power Producers
Association.
53
L.
Non-Utility Generation Contract Issues
56.
Nothing in the Merger proceeding or this agreement alters, nor will
Joint Applicants or their affiliates enter into any other agreement in the merger
proceeding without the participation of ARIPPA and the YCSWA that would
alter, either (1) any existing Non Utility Generation (“NUG”) contracts that were
entered into by Met-Ed, Penelec, or West Penn and subsequently approved by the
Commission or (2) any term or condition of the 1998 Met-Ed/Penelec
Restructuring Settlement at Docket Nos. R-00974008 and R-00974009 et al. and
the West Penn Power 1998 Restructuring Settlement at Docket No. R-00973981
that addresses those NUGs or their contracts.
Thus, ARIPPA and YCSWA are satisfied that with the Commission’s approval of the Joint
Petition as presented, the interests of its members will not be negatively impacted. This is a
markedly different and welcome result for ARIPPA compared to the outcome of the prior
FirstEnergy merger proceeding with GPU, Inc., and one which saves ARIPPA’s members and
other parties substantial resources if the result had been different and further litigation, including
appeals to Commonwealth Court, had been required.
10.
Distribution Rate and Tariffs
In the Joint Petition, the Joint Appicants agreed that any consolidation of the
distribution rates of the post-merger FirstEnergy EDCs may occur only after the issuance by the
Commission of a certificate of public convenience permitting the merger/consolidation of any of
those corporations into a single EDC.79 Further, West Penn will maintain the availability section
and the distribution rate design of Schedules 44 and 46 of the currently existing West Penn retail
tariff and any conjunctive billing agreement in effect for distribution rates on the effective date
of this agreement for five (5) years from the date of the Merger's consummation.80 The OSBA,
through the testimony of Dr. Wilson proposed a condition “requiring that any consolidation of
the distribution rates of the four EDCs [Met-Ed, Penelec, Penn Power, and West Penn] occur
only after the issuance of a certificate of public convenience under Section 1102 to merge the
79
Joint Petition at ¶ 30.
80
Joint Petition at ¶ 31.
54
individual EDCs into a single EDC.”81 The Joint Petition includes Dr. Wilson’s proposed
condition, which satisfies the OSBA’s concerns.82 PSU, WPPII, and PHMA also explicitly
support these provisions and posit that this constitutes a requisite benefit under the City of York
and is in the public interest.
11.
Default Service and Other Retail Enhancements
The Joint Applicants have agreed not to oppose in subsequent Default Service plan
proceedings any proposal to provide to large commercial and industrial customers only an
hourly-priced Default Service structure.83 Specifically, the Joint Applicants also agreed to
harmonize their Price-to-Compare (PTC) structures as a part of their Default Service plan filings
for the period beginning June 1, 2013.84
The Joint Petition also includes a provision by which the Joint Applicants agree to
hold EGS training sessions to address (a) the conditions under which customers may be
“dropped” from EGS service, (b) the process by which EGSs can obtain specific settlement load
information reported to PJM Interconnection, L.L.C. (PJM), and (c) the process for after-the-fact
adjustments with PJM.85
While the Joint Petition includes only the PTC and EGS training session
provisions as future retail market enhancements affecting all of the Joint Applicants’ territories,
the Joint Petition represents a reasonable settlement to encourage further retail market
development in the Allegheny-West Penn service territory, in particular, through the Joint
Applicants’ commitment to (a) file a purchase-of-receivables plan, (b) engage in certain
81
See Joint Applicants’ Main Brief at 70 and OSBA St. 1 at 34-35.
82
See Joint Applicants’ Main Brief at 70 and Joint Petition at ¶30.
See Joint Petition at ¶ 34; see Constellation St. 1 at 18 (lines 15-19) (explaining that the “prudent
mix” for Default Service for large commercial and industrial customers may include only an hourly-priced service).
83
84
See Joint Petition at ¶ 38; see Constellation St. 1 at 21 (lines 20-22) (recommending that the Joint
Applicants commit to a process to develop a uniform structure for their PTC).
85
See Joint Petition at ¶ 46; see Constellation St. 1 at 19-22 (arguing that the Merger should not
stand in the way of the ability to encourage additional retail market enhancements at the earliest opportunity).
55
customer education programs, (c) offer a variety of customer billing options, and (d) provide
necessary retail supplier access to important customer information and other data.86
The Joint Applicants have further agreed as a condition of the Joint Petition to
forego harmonization of default service procurements for West Penn and the FirstEnergy
operating companies through May 31, 2013; thereby preserving the current default service plans
and procurements already approved by the Commission and currently in place for default service
customers. In addition, the Joint Petition preserves the right of the parties to propose
modifications to the design of each of the operating companies' provision of default service for
the period beginning on June 1, 2013.87 The OSBA also supports this agreement.88
RESA contends that the concessions made in the Joint Petition are meager and
inadequate in view of what it perceives to be unfair advantages enjoyed by FirstEnergy Solutions
Corporation (FES) due to its relationship with the affiliated distribution companies and FES’s
aggressive marketing strategy in the service territories of the affiliated EDCs. We find that the
recommendations of RESA resulting from these concerns are unnecessary or are more
appropriately addressed in the context of default service plan proceedings.
For example, RESA recommends that a comprehensive customer education
program be implemented as a condition of the merger, in order to address “competitive market
concerns.” Given the extensive consumer education campaign ongoing by the Commission and
the EDCs,89 this recommendation is unnecessary and unlikely to provide sufficient incremental
See Joint Petition at ¶¶ 39-45 and 47-48; see Constellation St. 1 at 21 (line 1) – 22 (line 22)
(arguing that the Joint Applicants should be required to, among other things and at a minimum, (a) adopt POR
programs, (b) improve EGS access to data and information, (c) provide flexible billing options, (d) improve
customer awareness and education, (e) appoint a sufficiently independent ombudsman for each of the Joint
Applicants’ utilities, (f) adopt uniform PTCs, and (g) publish such uniform PTCs at least two months but preferably
five months ahead of power flow); see also Constellation St. 1-SR at 3 (line 19) – 8 (line 3) (highlighting the need
to, at a minimum, have the Joint Applicants adopt the “best practices” of retail market structures from each
individual utility within the joint, post-Merger territory).
86
87
Joint Petition at ¶¶ 32-33.
88
OSBA Reply Brief at 12.
89
See Policies to Mitigate Potential Electricity Price Increases, Docket No. M-00061957 (Order
entered May 17, 2007).
56
benefit to ratepayers if the costs of the additional recommended program are recovered in rates.
Ratepayers are already paying for approved education programs to coincide with the end of rate
caps in the service territories of those affected utilities.90 It is unclear from the RESA proposal
where the funding for its suggested education programs should come from, or even how much
additional spending would be needed to implement its program,91 but it would seem
unreasonable to ask ratepayers to pay for additional educational spending at this time.
The RESA proposal also presents additional concerns with the level of
involvement for the EDC in educating customers on specifics of EGS offers. Requiring the
EDCs to become surrogate salespersons for the EGSs is both cumbersome and problematic on a
practical basis.92 Moreover, the proposed Joint Petition in this matter already provides a
substantial list of retail market enhancements; eleven separate paragraphs encompassing five
pages of the Joint Petition document, which at many places addresses the same areas of concern
that RESA raises in its proposed education program.93 The RESA education program lacks any
estimated costs for its implementation, lacks any direction as to the bearer of those costs, is
impractical as it recommends that EDC personnel market EGS products, and is unnecessary
based on the fact that the Joint Petition effectively addresses many of the same concerns that
RESA now raises. Accordingly, the RESA education program is rejected.
RESA also proposes that a “properly structured Purchase of Receivables program”
be implemented as a condition of merger approval in this proceeding. However, the Joint
Petition already provides for a properly structured purchase of receivables (POR) program
consistent with that implemented by other utilities. RESA nevertheless proposes that an all in/all
out provision not be included in the POR program.
However, we fail to see that the POR proposed in the Joint Petition is inadequate.
The creation of a POR program for West Penn is a reasonable part of the resolution of this matter
90
OCA St. 2-R at 25-26.
91
RESA witness Hudson admitted during cross-examination that the cost of the customer referral
program recommended by RESA was an unknown. Tr. at 630.
92
93
OCA St. 2-R at 26-27.
Joint Petition at ¶¶ 38-48.
57
and could provide certain enhancements to the competitive atmosphere in the West Penn service
territory.94 The Joint Petition provides for a comprehensive POR program that is consistent with
the programs in place for Met-Ed and Penelec.95 The Joint Petition provides that within three
months following the integration of West Penn and FirstEnergy’s billing systems, a
comprehensive POR program will be instituted in the West Penn service territory.96 The POR
provisions contained within the Joint Petition are reasonable, and reflective of other POR
programs that have been instituted and approved by the Commission. In addition, Paragraphs 46
through 48 of the Joint Petition offer additional training opportunities for EGSs and additional
value-added services for EGSs that do not currently exist.97 Accordingly, the settlement
provisions have thoroughly addressed the POR issue in this proceeding and RESA’s additional
POR terms should be rejected.
RESA proposes that certain changes be made to the future default service plans of
all FirstEnergy EDCs as a condition of approval for this merger. Specifically, RESA
recommends changes to C & I customers’ kWh thresholds for hourly service, more spot market
and short-term contract procurements and load caps for default service suppliers.
OCA witness Richard Hahn addressed the RESA proposal for the use of more
spot purchases and short-term contracts and how such a proposal is inconsistent with Act 129, as
follows:
RESA’s suggestion to shorten the length of default service
contracts and increase the reliance on spot market purchases is not
consistent with the requirement that default service be provided
using a prudent, least cost mix of spot purchases, short term
contracts and long term contracts. The RESA proposal would
eliminate long term contracts from the mix. Additionally, RESA
has provided no evidence that such a purchasing strategy will
provide the least cost service to customers over time. 98
94
OCA St. 2-R at 27.
95
Joint Petition at ¶ 45.
96
Joint Petition at ¶ 45.
97
Joint Petition at ¶¶ 46-48.
98
OCA St. 1-R at 8.
58
As Mr. Hahn testified, the RESA proposal is contrary to the Act 129 requirements that default
service customers be provided service at the lowest cost over time by using a prudent mix of
spot, short and long-term contracts. We find this testimony persuasive and reject RESA’s
proposal in this proceeding.
OCA witness Hahn also testified on the RESA proposal to implement load caps,
is inappropriate and unlikely to benefit ratepayers:
The determination of whether there should be load caps, and if so,
the appropriate cap, can be very fact and condition specific.
Circumstances exist where a load cap, either improperly set or
existing at all, can drive up the price of power. Under the load cap,
the EDC may not be allowed to meet all of its requirements with
the lowest bid if the load cap is reached. By requiring the EDC to
also buy power at the next (higher) price, and perhaps even the
next (higher) price after that, the overall blended rate charged to
customers can increase. Questions regarding the need for, or
reasonableness of a load cap should not be made outside of the
specific context of the expected procurements. Again, I would
note that the RESA proposal has not been shown to be a benefit to
customers and may actually introduce harm to customers.99
Thus, if implemented within the context of this merger proceeding load caps as proposed by
RESA could be harmful to ratepayers.
RESA recommends that certain changes be made to all of the FirstEnergy EDCs’
operational rules as a condition for approval of this merger.100 However, many of the proposals
it lists are adequately addressed by the Joint Petition.101 As RESA acknowledges, the Joint
Petition provides the opportunity for EGSs to sit down with FirstEnergy’s operational personnel
to discuss many of the issues that RESA proposes to have incorporated as conditions.102
99
OCA St. 1-R at 8-9.
100
RESA Main Brief at 31-36.
101
See Joint Petition at ¶¶ 38-48.
102
RESA Main Brief at 33.
59
12.
Competition in the Wholesale and Retail Marketplace
Under the legal standard applicable to the Commission’s review of market power
issues associated with electric utility mergers, the Commission is required to determine whether
the merger:
is likely to result in anticompetitive or discriminatory conduct,
including the unlawful exercise of market power, which will
prevent retail electricity customers in this Commonwealth from
obtaining the benefits of a properly functioning and workable
competitive retail electricity market.103
While the Commission’s market power focus is on whether a proposed merger
will disrupt competitive retail markets, the Commission has recognized that the competitiveness
of retail markets is directly related to the competitiveness of wholesale electric markets. 104
Consequently, the Commission also considers wholesale market power issues as an important
component of its approach to evaluating the effects of a merger on competitive retail markets.
This is done by utilizing the analysis applied by FERC to evaluate the effect of the proposed
merger on wholesale markets.105
The Joint Applicants contend that the proposed merger will not adversely affect
either wholesale or retail electricity markets, based largely upon the testimony of Dr. William H.
Hieronymus. Dr. Hieronymus presented what is known as an “Appendix A” analysis of the
impact of the merger prepared in accordance with FERC’s regulations and merger precedents. 106
103
66 Pa. C.S. §2811(e)(1).
104
See, e.g., Re PECO Energy Co., 101 Pa. P.U.C. 99 (2006), 2006 WL 559274 at *65-66; see also,
Re Natural Gas Supply Mkt., 100 Pa. P.U.C. 386, 2005 WL 2916370 at *19.
105
See Re: DQE, Inc., 186 PUR4th 39 at 62-65 (1998); Joint Application of PECO Energy Co. And
Pub. Serv. Elec. & Gas Co. for Approval of the Merger of Pub. Serv. Enter. Group, Inc. with and into Exelon Corp.,
248 PUR4th 1 at 54 (2005) (“this Commission’s market power methodology adopt[s] the FERC approach”). See
also ARIPPA v. Pennsylvania Public Utility Comm’n, 792 A.2d 636, 657-58 (Pa. Commonwealth 2002) (upholding
the Commission’s reliance on the fact that FERC had reviewed the merger and found that it would not have any
anticompetitive effects).
106
See 18 C.F.R. §33.3.
60
This analysis applies the “delivered price test,” based on the type of analysis that is described in
the Department of Justice’s (DOJs) Merger Guidelines that are used to evaluate mergers under
the Hart-Scott-Rodino Act.107 This test is intended to determine whether merger applicants will
have the ability to exercise market power, which is defined as the ability to increase market
prices for a sustained period of time. 108
The delivered price test requires a determination of how much generation capacity
can be delivered into a particular market during various seasons (summer, winter, shoulder) and
under various load conditions (off-peak, peak, super peak) at the prevailing market price, plus
five percent. It then uses market shares and the Herfindahl-Hirschman Index (HHI) to evaluate
how concentrated the market is before the merger and after the merger. If the increase in market
concentration caused by the merger exceeds certain levels, FERC will conclude that there is a
“screen failure” that requires a more detailed look at that market.
Under FERC’s Appendix A analysis, the significance of this increase depends on
the total HHI in a market subsequent to the merger. If the post-merger HHI is below 1,000, then
the post-merger market is deemed to be unconcentrated and FERC does not find a problem
regardless of the total increase in HHI caused by the merger.109 If the post-merger HHI is
between 1,000 and 1,800, then the market is deemed to be moderately concentrated. If the
merger-related HHI increase in a moderately concentrated market is above 100, then the screen
is considered to be violated and further examination is required – while an increase below 100
reflects an immaterial change in market concentration.110 If the post-merger HHI is above 1,800,
then the market is deemed to be highly concentrated and the threshold for a screen failure drops
to an increase of 50.111
107
Jt. App. St. 4, Ex. WHH-1, Ex. J-1 at 27-29.
108
Id. at 23.
109
Jt. App. St. 4, Ex. WHH-1, Ex. J-1 at 27.
110
Id.
111
Id. at 27-28.
61
Under FERC’s regulations, a screen failure (i.e., an HHI increase of above 100 for
a moderately concentrated market or an HHI increase of above 50 for a highly concentrated
market) does not necessarily mean that there is a competitive problem. Rather, a screen violation
indicates a need for a more detailed consideration of whether there may be a competitive
problem. Mergers that present no screen violations routinely are approved without a hearing.112
Because the HHI screen is a conservative test, it is entirely possible for a merger to produce
several screen failures and still not present any competitive problems.113
In accordance with FERC’s regulations, Dr. Hieronymus performed an
Appendix A analysis showing the impacts on wholesale energy markets of the Merger of the
Joint Applicants. Because all of the merged company's generation assets will be located in PJM
after FirstEnergy integrates its Midwest ISO assets into PJM, Dr. Hieronymus focused his
analysis on the PJM market that will exist after June 1, 2011, when generation and transmission
assets in the American Transmission Systems, Inc. (ATSI)114 footprint (including generation
assets not owned by FirstEnergy) are integrated into PJM, which he calls his "Base Case."
Dr. Hieronymus also analyzed alternative geographic markets to give the PUC further assurance
that the transaction will not have an adverse impact on competition. This included an analysis
of: (1) PJM before ATSI is integrated into PJM; (2) the MISO before ATSI is integrated into
PJM; (3) PJM East; (4) a combined PJM-MISO market; and (5) a "Midwest Market" consisting
of the western portion of PJM and portions of the MISO market.115
As explained in more detail in Exhibit J, Dr. Hieronymus found that, even after
the transaction, the markets he analyzes (both his base case and the alternative markets) are
112
Id. at 28.
113
See Revised Filing Requirements Under Part 33 of the Commission's Regulations, FERC Stats. &
Regs. ¶ 31,111 at 31,882 (2000) (" Concentration statistics … are not the end of the analysis. We note that in many
cases, the Commission has moved quickly beyond market concentration statistics in evaluating the competitive
effects of proposed mergers."). (emphasis added)
114
ATSI is a wholly-owned subsidiary of FirstEnergy and owns transmission assets which operate as
part of the Midwest Independent System Operator (“MISO”). Those transmission assets will be integrated into PJM
in 2011.
115
Jt. App. St. 4, Ex. WHH-1, Ex. J-1 at 4.
62
almost entirely large, unconcentrated markets with post-transaction HHIs below 1000.116 On
average, the post-transaction HHIs are below the current threshold for defining an
unconcentrated market, and in only three off-peak seasonal periods do the HHI levels slightly
exceed 1000.
Dr. Hieronymus emphasized that the minor screen failures that he found in his
analysis here do not raise any competitive concerns for several reasons.117 They occur only
during off-peak periods where the generating units setting the market price are large baseload
nuclear and coal units. Dr. Hieronymus explained that these baseload coal and nuclear units are
particularly unsuited to being withheld from the market, which is how a generation owner would
go about attempting to raise market prices.118 As a result, minor screen failures in off-peak
periods do not indicate any material increase in the Joint Applicants' ability to exercise market
power. This is a conclusion that FERC has reached on several occasions.119
Moreover, the loss of one supplier, Allegheny Energy Supply Company, LLC
(AE Supply), will not adversely affect the retail electricity market in any substantial way.
Dr. Hieronymus testified that AE Supply is a relatively small retail supplier that serves only
industrial and commercial customers in Pennsylvania and Maryland. In the Pennsylvania service
area it serves customers in the territories of Duquesne Light Company, West Penn Power
Company and Pennsylvania Electric Company. AE Supply’s share of the market is very
small.120 In contrast FirstEnergy Solutions, a subsidiary of FirstEnergy, is a larger and growing
market participant, but still far from dominant. Most of its sales are in areas where AE Supply
has no customers. In areas where AE Supply and FES each serve competitive retail customers
there are many alternative suppliers. Specifically, there are 21 other suppliers in Allegheny’s
116
Jt. App. St. 4, Ex. WHH-1, Ex. J-1 at 46-47.
117
Jt. App. St. 4 at 15.
118
Jt. App. St. 4, Ex. WHH-1, Ex. J-1 at 46-47. See also Tr. at 641.
119
See US Gen. New England, Inc., 109 FERC ¶ 61,361 at P 23 (2004); Ohio Edison Co., 94 FERC
¶ 61,291 at 62,044 (2001); Commonwealth Edison Co., 91 FERC ¶ 61,036 at 61,134 (2000).
120
Jt. App. St. 4 at 13.
63
West Penn service area in Pennsylvania, 26 in FirstEnergy’s Penelec service area in
Pennsylvania and 31 in Duquesne’s Pennsylvania service area. Accordingly, Dr. Hieronymus
concluded that the proposed merger will not have an adverse affect on retail markets due to the
loss of one small supplier.121
The settlement agreement also addresses market power concerns. The Settling
Parties agreed to address these concerns in Paragraphs 53, 54 and 55. These provisions will
allow the Commission, the OTS, OSBA and the OCA to receive timely and accurate information
as to the state of the markets in the post-merger service territories and will enable corrective
actions to be taken if the need arises. The OCA, OTS and OSBA support these provisions
because they provide important protections and are in the public interest.
Direct Energy and others opposed the Joint Applicants’ conclusion that the
merger will not have an adverse effect on retail competition.122 Direct Energy argues first, that
the burden on the Joint Applicants is to demonstrate more than that the merger will have no
adverse impact. According to Direct Energy, the Joint Applicants must demonstrate that the
merger will produce a substantial benefit to competition. Direct Energy further contends that the
best way to produce an affirmative benefit to competition is to divest the Joint Applicants of their
role as default service providers and put in place complicated auction procedures whereby
customers would be auctioned off to alternate suppliers for default service. We reject both of
these claims.
Direct Energy relies on the Pennsylvania Supreme Court’s 2007 Popowsky123
decision for its position that the Joint Applicants must demonstrate that the merger will produce
121
Jt. App. St. 4 at 13-14; Jt. App. St. 4-R at 36-38.
122
Citizen Power makes essentially the same arguments as Direct Energy. That is, Citizen Power
contends that the evidence of competitive harm resulting from the merger outweighs any public benefits offered by
the application and the settlement agreement. As we explain in discussing Direct Energy’s arguments, we reject the
arguments raised by Citizen Power as well. We also note that Citizen Power did not put any of its own evidence
into the record, and while it is critical of the market analysis proffered by the Joint Applicants, it does not offer any
alternative analysis in rebuttal.
123
Popowsky, 937 A.2d 1040 (Pa. 2007).
64
“net affirmative and substantial competitive benefits.” However, neither the decision nor the
language of Section 2811(e) supports this view.
In discussing the net benefits test, the Popowsky Court provided the following:
In line with the DOJ and FCC assessments, competitive impact is a
substantial component of a rational net public benefits evaluation
in the merger context. That the ultimate determination may be that
the impact is modest, minimal, or non-existent does not negate the
necessity of undertaking the examination in the first instance or
remove the factor from the weighing and balancing process.
Significantly, in terms of the net public benefits arising out of
corporate consolidation, anticompetitive effects may offset or
negate advantages and result in a denial of regulatory approval.
Indeed, it is for this very reason that large merger transactions are
so highly regulated. Thus, in the present case, it is clear that the
Commission's satisfaction that competition will not be impaired
was a legitimate and significant factor in the overall certification
inquiry.124
The holding in Popowsky stands for the proposition that competitive impacts must be viewed as
an integral part of the weighing of benefits against detriments. The Commission has engaged in
an evaluation of positives and negatives, a weighing of benefits against detriments, or some
version of a net benefits test in every merger that has come before it. The Popowsky court’s
focus on the relevance of competitive impacts is not the revelation in the law that Direct Energy
suggests, nor does it provide any support for the legal interpretation that Direct Energy proposes
here.
Indeed, the relevant statutory provisions support the view that the relevant inquiry
is whether the merger will have an adverse impact upon retail markets. Section 2811(e)(1),125
124
Id., 937 A.2d at 1056-1057 (Pa. 2007) (internal citations omitted).
125
66 Pa. C.S. §2811(e)(1), provides:
“In the exercise of authority the commission otherwise may have to approve the mergers
or consolidations by electric utilities or electricity suppliers, or the acquisition or
disposition of assets or securities of other public utilities or electricity suppliers, the
commission shall consider whether the proposed merger, consolidation, acquisition or
disposition is likely to result in anticompetitive or discriminatory conduct, including the
unlawful exercise of market power, which will prevent retail electricity customers in this
Commonwealth from obtaining the benefits of a properly functioning and workable
competitive retail electricity market.”
65
requires the Commission to consider whether the merger or consolidation “is likely to result in”
anticompetitive conduct which would prevent customers from obtaining the benefit of a properly
functioning retail market. Subsection (e)(2)126 requires the Commission to preserve the
competitive nature of the markets after it concludes that the merger will result in anticompetitive
or discriminatory conduct. Section 2811 clearly does not require merger applicants to improve
competitive markets or affirmatively demonstrate benefits to competitors.
Direct Energy also takes the position that the retail market in Pennsylvania is so
seriously flawed that the Commission must divest the Joint Applicants’ of their role as default
service providers:
As proposed by Direct Energy, the Commission would
order: (i) a process to select an alternative default service provider,
not affiliated with the Joint Applicants that will provide default
service to customers choosing not to participate in a retail customer
auction in which residential and small commercial customers
would be assigned to participating EGSs in return for the receipt of
an acquisition payment; and (ii) FE to create a separate, affiliated
billing company and transfer all billing and customer care
functions to this subsidiary, with the instruction that, as one of its
duties, it provide EGS-specific billing to those participating in the
retail auction.
Direct Energy has proposed additional remedies that should
be implemented prior to the consummation of the merger. These
remedies include: (B) the divestiture of a portion of FE’s
generation fleet, determined by the Commission as necessary to
eliminate FE’s wholesale market power; . . . C) an enhanced code
of conduct that addresses the relationship between the EDC and
FE’s EGS affiliate, FES, and prohibits FE from marketing in its
affiliated EDC service territories under the FE name; (D)
126
66 Pa. C.S. §2811(e)(2), provides:
“Upon request for approval, the commission shall provide notice and an opportunity for
open, public evidentiary hearings. If the commission finds, after hearing, that a proposed
merger, consolidation, acquisition or disposition is likely to result in anticompetitive or
discriminatory conduct, including the unlawful exercise of market power, which will
prevent retail electricity customers in this Commonwealth from obtaining the benefits of
a properly functioning and workable competitive retail electricity market, the commission
shall not approve such proposed merger, consolidation, acquisition or disposition, except
upon such terms and conditions as it finds necessary to preserve the benefits of a properly
functioning and workable competitive retail electricity market.”
66
continuous monitoring of cross-subsidies; and (E) the imposition
safeguards to protect consumers from potential abuses and to
ensure post-merger compliance.127
To support its view that the merger will cause serious competitive issues, Direct Energy argues
that the default service system in Pennsylvania is fatally flawed in that it unfairly favors default
service provided by an electric distribution company as evidenced by low levels of shopping by
consumers. Direct Energy further relies upon FES’s aggressive marketing plan as proof of
discriminatory conduct.
First, Direct Energy has not put forth any convincing evidence which rebuts the
analysis of Dr. Hieronymus. Direct Energy argues that the removal of AE Supply as a
competitor is a detriment to the market based on speculation that but for the acquisition by
FirstEnergy, it would have become a more significant competitor in the market, but little else.
Nor does Direct Energy (or any other party) convince us that screen failures identified by
Dr. Hieronymus cause any competitive concerns. The failures that he identified occur in very
narrow circumstances and we credit his testimony that those circumstances are unlikely to
provide any real incentive for the Joint Applicants to engage in discriminatory conduct in the
market.
Second, while it is clear that FES intends to be an aggressive marketer of retail
electricity products, such intent does not translate into discriminatory conduct. Direct Energy,
RESA and OSBA rely heavily on FirstEnergy’s desire to pursue municipal aggregation as
evidence of threatened unlawful market power. As we discuss more fully below, the legality
and policy implications of municipal aggregation is far from settled in Pennsylvania, therefore
any concerns relative to FirstEnergy’s intent are both speculative and not related to whether the
merger should be permitted or not. Moreover, we cannot say FirstEnergy’s marketing strategies
are per se anticompetitive. There is no question that these factors create challenges to rival
suppliers, but these challenges do not necessarily rise to the level of discrimination or unlawful
market power.
127
Direct Energy Main Brief at 39-40 (there is no (A) in the original).
67
Next, Direct Energy’s argument that the default service regime in Pennsylvania is
fundamentally flawed has no real nexus to the merger of the Joint Applicants. Direct Energy’s
allegations exist completely independent of the merger, and would remain unchanged even if this
merger was abandoned tomorrow. According to Mathew J. Morey, not only is the current
default service model discriminatory, but the market structure for this service in Pennsylvania is
“anticompetitive.” 128 Mr. Morey testified that the current default service model will not result
in a “workably competitive market.”129 In Mr. Morey’s view, even 30% of retail customers
being served by an EGS is not good enough, “[t]here needs to be a majority of customers
exposed to the competitive market.”130 Further, Direct Energy’s retail operations in
Pennsylvania have to provide suitable profits, and such profits are not obtainable without large
numbers of customers that are easily obtained, or obtained with minimal cost.131 Under crossexamination, Mr. Morey explained that attempting to woo customers away one at a time is far
more expensive than gaining large numbers of customers all at once, such as through an auction
process.132 Mr. Morey admitted, however, that other EGSs apparently can and do procure
customers one at a time.133
These assertions relate to the current state of the market in Pennsylvania. Thus,
Direct Energy’s real issue in this matter is the basic structure of the default service market in
Pennsylvania. This is an issue that is more appropriately addressed by the General Assembly,
not by the Commission in a merger proceeding. Indeed, Direct Energy is not arguing that the
Commission should not grant the certificate of public convenience to the Joint Applicants. Nor
does Direct Energy make any substantial argument that the post-merger FirstEnergy EDCs are
unfit to provide default service due to any infirmity in their “financial fitness to serve retail
128
Direct Energy St. 1 at 12.
129
Direct Energy St. 1-SR at 33.
130
Id.
131
Direct Energy St. 1-SR at 39-40.
132
Tr. at 814.
133
Tr. at 813-814.
68
customers, and [their] ability to provide default service under reasonable rates and conditions.”134
Rather, Direct Energy wants to use the merger proceedings as a vehicle to put in place an
unprecedented departure from default service which would apply only to the FirstEnergy
distribution companies, but offers no analysis of the implication of treating these EDCs
differently from the other EDCs within the Commonwealth which presumably operate in the
same fatally flawed competitive market. Clearly, these proceedings are not the appropriate
venue for Direct Energy’s proposal for a radical departure from the current default service
regime.
Finally, Direct Energy’s proposal, which appears to rely solely on power
purchased at spot market prices appears to run afoul of Act 129, which requires that default
service include a “prudent mix” of not only spot market pricing but also short-term and longterm prices.135 The amendments to Section 2807 brought about by Act 129 do not include
language of discretion, but rather contain language of mandate. Of relevance here, default
134
52 Pa. Code § 54.183(c).
135
Section 2807 of the Public Utility Code, in relevant part as follows:
(3.1) Following the expiration of an electric distribution company's
obligation to provide electric generation supply service to retail customers at
capped rates, if a customer contracts for electric generation supply service and
the chosen electric generation supplier does not provide the service or if a
customer does not choose an alternative electric generation supplier, the default
service provider shall provide electric generation supply service to that customer
pursuant to a commission-approved competitive procurement plan. The electric
power acquired shall be procured through competitive procurement processes
and shall include one or more of the following:
(i) Auctions.
(ii) Requests for proposal.
(iii) Bilateral agreements entered into at the sole discretion of the
default service provider which shall be at prices which are:
(A) no greater than the cost of obtaining generation under comparable
terms in the wholesale market, as determined by the commission at the
time of execution of the contract; or
(B) consistent with a commission-approved competition procurement
process. Any agreement between affiliated parties shall be subject to
review and approval of the commission under Chapter 21 (relating to
relations with affiliated interests). In no case shall the cost of obtaining
generation from any affiliated interest be greater than the cost of
obtaining generation under comparable terms in the wholesale market
at the time of execution of the contract.
69
service power is to be procured through “a prudent mix of” spot, short and long-term contracts in
order to ensure “the least cost to customers over time.” 136 The Preamble to Act 129 additionally
provides:
The General Assembly recognizes the following public policy
findings and declares that the following objectives of the
Commonwealth are served by this act:
(I) The health, safety and prosperity of all citizens of this
Commonwealth are inherently dependent upon the availability of
adequate, reliable, affordable, efficient and environmentally
sustainable electric service at the least cost, taking into account any
benefits of price stability over time and the impact on the
environment. 137
(3.2) The electric power procured pursuant to paragraph (3.1) shall include a
prudent mix of the following:
(i) Spot market purchases.
(ii) Short-term contracts.
(iii) Long-term purchase contracts, entered into as a result of an
auction, request for proposal or bilateral contract that is free of undue
influence, duress or favoritism, of more than four and not more than 20
years. The default service provider shall have sole discretion to
determine the source and fuel type. Long-term purchase contracts
under this subparagraph may not constitute more than 25% of the
default service provider's projected default service load unless the
commission, after a hearing, determines for good cause that a greater
portion of load is necessary to achieve least cost procurement. This
subparagraph shall not apply to contracts executed under paragraph (5).
(3.3) The commission may determine that a contract is required to be extended
for a longer term of up to 20 years, if the extension is necessary to ensure
adequate and reliable service at least cost to customers over time.
(3.4) The prudent mix of contracts entered into pursuant to paragraphs (3.2) and
(3.3) shall be designed to ensure:
(i) Adequate and reliable service.
(ii) The least cost to customers over time.
(iii) Compliance with the requirements of paragraph (3.1).
66 Pa. C.S. §2807(e) (emphasis added)
136
Id.
137
Preamble to Act 129, 2008 Pa. Laws 129.
70
It is important to recognize that Act 129 repealed the prior “prevailing market price” language as
to default service and instituted the “least cost over time” standard.138 In addition, as the
Preamble sets forth, “price stability” is listed as a beneficial attribute of electric service under the
Act. These provisions provide important protections for consumers,139 including

The obligation of EDCs to acquire DS supplies at
“prevailing market prices” is eliminated.

Power supply must be acquired through competitive
processes.

Power supply shall include a prudent mix of spot market,
short-term, and long-term (i.e., up to 20 years) bilateral
contracts designed to ensure reliable service at least cost
over time.

Long-term contracts may constitute up to 25% of the DS
obligation.
Further, the default service provider is to recover all reasonable costs under a Commissionapproved default service procurement plan except in the case of (1) non-compliance with a
Commission-approved plan, or (2) fraud, collusion, or market manipulation.
The default service model in Pennsylvania is hardly an “anachronism,” but was
enacted by the General Assembly in late 2008 and has been implemented by the Commission in
a series of cases decided in 2009 and 2010. The General Assembly and the Commission have
put specific requirements in place to afford protections to customers in Pennsylvania who do not
shop for an alternative generation supplier or whose alternative generation supplier fails to
deliver energy. The default service model proposed by Direct Energy, through the use of a
newly-created default service provider, and the auctioning off of customers to EGSs does not
even attempt to comply with the mandates set out by Act 129.
Direct Energy contends that the Commission has the authority to use its discretion
to depart from the mandates of Act 129. We find this argument unconvincing. As we explain in
great detail above, Direct Energy has not provided any compelling reason, such as the highly
138
66 Pa. C.S. §2807(e).
139
OCA St. 2-R at 8-9; see also Jt. App. St. 9-R at 26-27.
71
unique circumstances presented in Pike County, to depart from the “prudent mix” regime of Act
129. More importantly, Direct Energy provided no convincing evidence that its proposal was in
the best interests of consumers.
13.
Municipal Aggregation
The OSBA argues that, although the Joint Petition offers some benefits to
customers, including the small commercial customers that it represents, FirstEnergy’s municipal
aggregation ambitions outweigh these benefits inasmuch as municipal aggregation is detrimental
to default service rates, and as an “opt-out” program does not benefit consumers. Accordingly,
the OSBA recommends that the merger only be approved if the Commission forbids FirstEnergy
and its affiliates from engaging in municipal aggregation until 2013, and requires that the
generating assets of the Joint Applicants be administratively located in separate subsidiaries
which cannot coordinate regarding whether to bid in a particular default service procurement.
We do not believe that either of these proposals is appropriate at this time.
Generally speaking, municipal aggregation allows a municipality to buy
electricity for its residential and small commercial and industrial (Small C&I) customers from a
single electric generation supplier (EGS). In theory, a municipality could provide aggregation
for its residents and businesses on either an “opt-in” or an “opt-out” basis. However, Mr. Fein
(in unrebutted testimony) asserted that FirstEnergy and its affiliates support the adoption of
“Municipal Opt-Out Aggregation,” which would automatically enroll residential and Small C&I
customers with a single EGS unless the customers affirmatively opt-out of such service.140
FirstEnergy CEO Mr. Anthony Alexander testified in this proceeding that
FirstEnergy’s retail marketing strategy (in Pennsylvania and in other states, including Ohio) is to
target the following three retail sales channels: direct sales; municipal aggregation; and sales
140
Constellation St. 1 at 13.
72
into the Provider of Last Resort (POLR) Auctions.141 Mr. Alexander testified that FirstEnergy is
already an active “retail” provider in Pennsylvania.142 Specifically, FES currently participates in
two out of the three targeted sales channels in Pennsylvania under its retail marketing strategy,
i.e., direct sales and sales into the POLR Auctions.143 Mr. Alexander acknowledged that
FirstEnergy’s retail marketing in Pennsylvania currently is limited because of the shortage of
generation, but he predicted that acquiring Allegheny Energy’s generation assets will help
FirstEnergy overcome that limitation. The OSBA seems to suggest that this testimony relating to
FirstEnergy’s general marketing strategy and aspiration to “participate more fully in retail market
opportunities in Pennsylvania . . .”144 relates strictly to FirstEnergy’s intent to pursue municipal
aggregation and creates an unfair advantage.
Clearly, the concept of municipal aggregation is nascent in Pennsylvania and
subject to considerable debate before both the Commission and in the General Assembly.
Indeed, in the aftermath of the announcement of FirstEnergy’s municipal aggregation agreement
with Meadville,145 on October 28, 2010, RESA sought to initiate such a generic proceeding by
filing its Petition of the Retail Energy Supply Association for Investigation and Issuance of
Declaratory Order Regarding the Propriety of the Implementation of Municipal Electric
Aggregation Programs Absent Statutory Authority, at Docket No. P-2010-2207062. On October
29, 2010, Dominion Retail, Inc., joined in the effort to initiate a generic proceeding by filing its
Petition of Dominion Retail, Inc. for Order Declaring that Opt-out Municipal Aggregation
Programs are Illegal for Home Rule and Other Municipalities in the Absence of Legislation
Authorizing Such Programs, at Docket No. P-2010-2207953. FirstEnergy joined the effort to
initiate a generic proceeding on November 9, 2010, when its affiliate, FirstEnergy Solutions
141
Tr. at 261-262. Mr. Alexander’s reference to “direct sales” is to the customer-by-customer
solicitations commonly employed by EGSs. His reference to “sales into the Provider of Last Resort auctions” is to
bidding in the Request for Proposal or auction process used by an EDC to acquire electricity for default service
customers. Bidding in default service procurements does not constitute “retail competition,” as the Commission
appears to define “retail competition.”
142
Tr. at 262.
143
Direct Energy Cross-Examination Ex. 3.
144
Tr. at 262.
145
E.g. Direct Energy Cross-Examination Ex. 5.
73
Corporation, filed its Petition of FirstEnergy Solutions Corp. for Approval to Participate in OptOut Municipal Energy Aggregation Programs of the Optional Third Class Charter City of
Meadville, the Home Rule Borough of Edinboro, the Home Rule City of Warren and the Home
Rule City of Farrell, at Docket No. P-2010-2209253. By Secretarial Letter issued on November
10, 2010, the Commission consolidated the three aforementioned petitions and set a deadline for
interested parties to file answers. The Commission directs each EDC not to switch any customer
to an EGS pursuant to an “opt-out” municipal aggregation contract and each EGS not to switch
any customer from default service (or the customer’s existing EGS) pursuant to an “opt-out”
municipal aggregation contract until these legal issues are addressed and resolved by the
Commission.
Thus, the future of municipal aggregation in the Commonwealth, and whether
FirstEnergy will be able to achieve its retail aspirations are far from assured. While we believe
that the OSBA raises legitimate concerns which should be thoroughly investigated by the
Commission and the General Assembly, any threat posed by municipal aggregation is too
speculative and not sufficiently related to the proposed merger. The unique circumstances of
these merger proceedings are not an appropriate vehicle from which to launch broader policy
goals that may have an effect on the electricity markets across the Commonwealth, and not just
in the territories of the Joint Applicants. While the acquisition of Allegheny Energy’s generating
assets by FirstEnergy may provide it with some competitive advantage, the OSBA has not
presented any evidence related to the other aspects of FirstEnergy’s retail marketing goals which
would permit the conclusion that the advantage is necessarily unfair or rises to the level of being
anticompetitive. In short, it is inappropriate to place restrictions upon the Joint Applicants based
on speculation and intent, and we decline to do so.
IV.
CONCLUSION
The Commission encourages parties in contested on-the-record proceedings to
settle cases.146 Settlements eliminate the time, effort and expense of litigating a matter to its
ultimate conclusion, which may entail review of the Commission’s decision by the appellate
146
See, 52 Pa. Code §5.231.
74
courts of Pennsylvania. Such savings benefit not only the individual parties, but also the
Commission and all ratepayers of a utility, who otherwise may have to bear the financial burden
such litigation necessarily entails.
By definition, a “settlement” reflects a compromise of the parties’ positions,
which arguably fosters and promotes the public interest. When parties in a proceeding reach a
settlement, the principal issue for Commission consideration is whether the agreement reached
suits the public interest.147 In their supporting statements and briefs, the Settling Parties
conclude, after extensive discovery, exchanging and reviewing written testimony and numerous
exhibits, and conducting lengthy settlement discussions, that this settlement resolves those
contested issues of interest to them in this case. The Joint Petitioners declare this Joint Petition is
in the public interest and it should be approved for the reasons expressed in the foregoing
sections of this decision.
It is true, as Direct Energy, RESA and others point out, that not every
consequence of the proposed merger is necessarily positive or a benefit. Nor do the
modifications addressed by the petition for settlement address every concern raised by either the
Settling Parties or the non-settling parties. However, neither the Code nor applicable legal
precedent requires each and every interest of each and every party to be accommodated in a
settlement. In Middletown Township v. Pa. P.U.C.,148 the Commonwealth Court stated that
“when the ‘public interest’ is considered, it is contemplated that the benefits and detriments of
the acquisition be measured as they impact on all affected parties, and not merely on one
particular group or geographic subdivision as might have occurred in this case.” Accordingly,
we conclude that in its totality, the benefits of the proposed merger, as modified by the
settlement agreement, outweigh the negative impacts and we will approve the requested
certificate of public convenience.149
147
Pa. P.U.C. v. CS Water and Sewer Associates, 74 Pa. P.U.C. 767, 771 (1991).
148
482 A.2d 674 (Pa. Cmwlth. 1984).
Popowsky v. Pennsylvania Public Utility Comm’n, 937 A.2d 1040 (Pa. 2007); City of York v.
Pa. PUC, 295 A.2d 825 (Pa. 1972).
149
75
V.
1.
CONCLUSIONS OF LAW
The Commission has jurisdiction over the parties to, and the subject matter
of, this proceeding.
2.
Pursuant to 66 Pa. C.S. §332(a), the burden of proof in this proceeding is
upon the Joint Applicants.
3.
Pursuant to 66 Pa. C.S. §1102(a)(3), the Joint Application requires the
approval of the Commission as evidenced by its issuance of a certificate of public convenience.
4.
Pursuant to 66 Pa. C.S. §1103(a), before the Commission may issue a
certificate of public convenience it must find that the granting of such certificate is necessary or
proper for the service, accommodation, convenience, or safety of the public.
5.
Pursuant to 66 Pa. C.S. §2811(e), before the Commission may issue a
certificate of public convenience in this case it must find that the granting of such certificate is
not likely to result in anticompetitive or discriminatory conduct, including the unlawful exercise
of market power, which will prevent retail electricity customers in this Commonwealth from
obtaining the benefits of a properly functioning and workable competitive retail electricity
market.
6.
The Joint Petition filed on October 25, 2010, by the Joint Applicants,
OTS, OCA, IBEW, YCSWA, PREA, WPPSEF, PSU, ARIPPA, WPPII, MEIUG/PICA, DEP,
PMHA, the UWUA Intervenors, CAC, Constellation, and PennFuture supplements the terms and
conditions of the Joint Application filed by the Joint Applicants on May 14, 2010.
7.
As the parties bearing the burden of proof, the Joint Applicants must prove
by a preponderance of the evidence that the Commission’s issuance of a certificate of public
convenience approving the Joint Application is in the public interest because it will affirmatively
76
promote the service, accommodation, convenience, or safety of the public in some substantial
way.
8.
As the parties bearing the burden of proof, the Joint Applicants must prove
by a preponderance of the evidence that the Commission’s issuance of a certificate of public
convenience approving the Joint Application is not likely to result in anticompetitive or
discriminatory conduct, including the unlawful exercise of market power, which will prevent
retail electricity customers in this Commonwealth from obtaining the benefits of a properly
functioning and workable competitive retail electricity market.
9.
Proof by a preponderance of the evidence means that the party or parties
with the burden of proof presents evidence more convincing, by even the smallest amount, than
that presented by the party or parties in opposition.
10.
Any finding of fact necessary to support the Commission’s adjudication
must be based upon substantial evidence.
11.
Substantial evidence has been defined as such relevant evidence as a
reasonable mind might accept as adequate to support a conclusion. More is required than a mere
trace of evidence or a suspicion of the existence of a fact sought to be established.
12.
In a merger context, the Commission is not required to secure legally
binding commitments or to quantify benefits where this may be impractical, burdensome, or
impossible in determining if the proposed merger will affirmatively promote the service,
accommodation, convenience, or safety of the public in some substantial way.
13.
Pursuant to 66 Pa. C.S. §1103(a), even where the Commission finds
sufficient public benefit to find that the granting of a certificate of public convenience is
necessary or proper for the service, accommodation, convenience, or safety of the public without
imposing any conditions, the Commission nevertheless has discretion to impose conditions
which it deems to be just and reasonable.
77
14.
In an acquisition context, when the Commission considers the public
interest it is contemplated that the benefits and detriments of the acquisition will be measured as
they impact on all affected parties and not merely on one particular group or geographic
subdivision.
15.
In a merger context, competitive impact is a substantial component of a
rational net public benefits evaluation.
16.
A customer who does not affirmatively choose service from an EGS
receives default service.
17.
The Direct Energy Proposal is inconsistent with the mandates of Act 129
as to the procurement of electric generation for default service customers.
18.
The Direct Energy Proposal is inconsistent with the Code at Section
2807(d)(1) that requires a customer’s affirmative consent in order to switch that customer’s
electric provider.
19.
The Direct Energy Proposal to create a BillCo is inconsistent with the
Code at Section 2804(5).
20.
Direct Energy, in making its proposal in this case, has not complied with
the procedural and substantive requirements imposed by the Commission’s default service
regulations at 52 Pa. Code §54.183. Direct Energy did not file a Petition, as the regulations
require.
21.
Direct Energy did not address, or present evidence that would support, the
findings 52 Pa. Code §54.183(c) requires before the Commission can reassign the default service
obligation.
78
22.
Direct Energy’s hourly pricing proposal for default service customers
violates Section 2807(e)(3.1), (3.2), (3.4) and (3.7) of the Code because it fails to consider the
“least cost to customers over time,” “price stability” and a “prudent mix” of “long-term, shortterm and spot market” sources.
23.
The Joint Applicants have established by a preponderance of substantial
evidence that the Merger, implemented in accordance with the terms and conditions of the Joint
Application as supplemented by the Joint Petition, satisfies the requirements of Section 1102(a)
of the Code.
24.
The Joint Applicants have established by a preponderance of substantial
evidence that the Merger, implemented in accordance with the terms and conditions of the Joint
Application as supplemented by the Joint Petition, satisfies the requirements of Section 2811(e)
of the Code.
25.
The Joint Applicants have established by a preponderance of substantial
evidence that the proposed revisions to the FirstEnergy Service Agreement, the Mutual
Assistance Agreement and the Intercompany Tax Allocation Agreement should be approved
under Section 2102 of the Code.
26.
Approval of the Joint Application as supplemented by the Joint Petition
will affirmatively promote the service, accommodation, convenience, or safety of the public in a
substantial way.
79
VI.
ORDER
THEREFORE,
IT IS ORDERED:
1.
That the “Letter of Information” filed by Eric Joseph Epstein in the above-
captioned case on or about November 22, 2010, is stricken.
2.
That all of the terms and conditions of the Joint Petition For Partial
Settlement filed October 25, 2010, in the above-captioned case by West Penn Power Company
d/b/a Allegheny Power, Trans-Allegheny Interstate Line Company, FirstEnergy Corp., the
Pennsylvania Public Utility Commission’s Office of Trial Staff, the Office of Consumer
Advocate, the International Brotherhood of Electrical Workers, the York County Solid Waste
and Refuse Authority, the Pennsylvania Rural Electric Association, the West Penn Power
Sustainable Energy Fund, The Pennsylvania State University, ARIPPA, the West Penn Power
Industrial Intervenors, the Met-Ed Industrial Users Group, the Penelec Industrial Customer
Alliance, the Department of Environmental Protection, the Pennsylvania Mountains Healthcare
Alliance, the Utility Workers Union of America, AFL-CIO and UWUA System Local No. 102,
the Clean Air Council, Constellation NewEnergy, Inc. and Constellation Energy Commodities
Group, Inc., and Citizens for Pennsylvania’s Future are adopted and incorporated herein as
though set forth in full.
3.
That the Joint Application to obtain approval for a change of control of
West Penn Power Company d/b/a Allegheny Power and Trans-Allegheny Interstate Line
Company under Chapters 11 and 28 of the Public Utility Code, 66 Pa. C.S. §§101 et. seq., to be
effected by the merger of Allegheny Energy, Inc. with Element Merger Sub., Inc., a whollyowned subsidiary of FirstEnergy Corp., filed May 14, 2010, in the above-captioned case, as
supplemented by the Joint Petition For Partial Settlement filed October 25, 2010, in the above80
captioned case by West Penn Power Company d/b/a Allegheny Power, Trans-Allegheny
Interstate Line Company, FirstEnergy Corp., the Pennsylvania Public Utility Commission’s
Office of Trial Staff, the Office of Consumer Advocate, the International Brotherhood of
Electrical Workers, the York County Solid Waste and Refuse Authority, the Pennsylvania Rural
Electric Association, the West Penn Power Sustainable Energy Fund, The Pennsylvania State
University, ARIPPA, the West Penn Power Industrial Intervenors, the Met-Ed Industrial Users
Group, the Penelec Industrial Customer Alliance, the Department of Environmental Protection,
the Pennsylvania Mountains Healthcare Alliance, the Utility Workers Union of America, AFLCIO and UWUA System Local No. 102, the Clean Air Council, Constellation NewEnergy, Inc.
and Constellation Energy Commodities Group, Inc., and Citizens for Pennsylvania’s Future, is
approved.
4.
That the proposed revisions to the FirstEnergy Service Agreement, the
Mutual Assistance Agreement, and the Intercompany Tax Allocation Agreement set forth in the
Joint Application to obtain approval for a change of control of West Penn Power Company d/b/a
Allegheny Power and Trans-Allegheny Interstate Line Company under Chapters 11 and 28 of the
Public Utility Code, 66 Pa. C.S. §§101 et. seq., to be effected by the merger of Allegheny
Energy, Inc. with Element Merger Sub., Inc., a wholly-owned subsidiary of FirstEnergy Corp.,
filed May 14, 2010, in the above-captioned case, as supplemented by the Joint Petition For
Partial Settlement filed October 25, 2010, in the above-captioned case by West Penn Power
Company d/b/a Allegheny Power, Trans-Allegheny Interstate Line Company, FirstEnergy Corp.,
the Pennsylvania Public Utility Commission’s Office of Trial Staff, the Office of Consumer
Advocate, the International Brotherhood of Electrical Workers, the York County Solid Waste
and Refuse Authority, the Pennsylvania Rural Electric Association, the West Penn Power
Sustainable Energy Fund, The Pennsylvania State University, ARIPPA, the West Penn Power
Industrial Intervenors, the Met-Ed Industrial Users Group, the Penelec Industrial Customer
Alliance, the Department of Environmental Protection, the Pennsylvania Mountains Healthcare
Alliance, the Utility Workers Union of America, AFL-CIO and UWUA System Local No. 102,
the Clean Air Council, Constellation NewEnergy, Inc. and Constellation Energy Commodities
Group, Inc., and Citizens for Pennsylvania’s Future, are approved.
81
5.
That the alternative post-Merger corporate structures depicted on Exhibits
F-1 and F-2 to the Joint Application to obtain approval for a change of control of West Penn
Power Company d/b/a Allegheny Power and Trans-Allegheny Interstate Line Company under
Chapters 11 and 28 of the Public Utility Code, 66 Pa. C.S. §§101 et. seq., to be effected by the
merger of Allegheny Energy, Inc. with Element Merger Sub., Inc., a wholly-owned subsidiary of
FirstEnergy Corp., filed May 14, 2010, in the above-captioned case, as supplemented by the
Joint Petition For Partial Settlement filed October 25, 2010, in the above-captioned case by West
Penn Power Company d/b/a Allegheny Power, Trans-Allegheny Interstate Line Company,
FirstEnergy Corp., the Pennsylvania Public Utility Commission’s Office of Trial Staff, the
Office of Consumer Advocate, the International Brotherhood of Electrical Workers, the York
County Solid Waste and Refuse Authority, the Pennsylvania Rural Electric Association, the
West Penn Power Sustainable Energy Fund, The Pennsylvania State University, ARIPPA, the
West Penn Power Industrial Intervenors, the Met-Ed Industrial Users Group, the Penelec
Industrial Customer Alliance, the Department of Environmental Protection, the Pennsylvania
Mountains Healthcare Alliance, the Utility Workers Union of America, AFL-CIO and UWUA
System Local No. 102, the Clean Air Council, Constellation NewEnergy, Inc. and Constellation
Energy Commodities Group, Inc., and Citizens for Pennsylvania’s Future, are hereby approved.
6.
That all required certificates of public convenience be issued evidencing
the Pennsylvania Public Utility Commission’s approval of the Joint Application to obtain
approval for a change of control of West Penn Power Company d/b/a Allegheny Power and
Trans-Allegheny Interstate Line Company under Chapters 11 and 28 of the Public Utility Code,
66 Pa. C.S. §§101 et. seq., to be effected by the merger of Allegheny Energy, Inc. with Element
Merger Sub., Inc., a wholly-owned subsidiary of FirstEnergy Corp., filed May 14, 2010, in the
above-captioned case, as supplemented by the Joint Petition For Partial Settlement filed October
25, 2010, in the above-captioned case by West Penn Power Company d/b/a Allegheny Power,
Trans-Allegheny Interstate Line Company, FirstEnergy Corp., the Pennsylvania Public Utility
Commission’s Office of Trial Staff, the Office of Consumer Advocate, the International
Brotherhood of Electrical Workers, the York County Solid Waste and Refuse Authority, the
Pennsylvania Rural Electric Association, the West Penn Power Sustainable Energy Fund, The
Pennsylvania State University, ARIPPA, the West Penn Power Industrial Intervenors, the Met82
Ed Industrial Users Group, the Penelec Industrial Customer Alliance, the Department of
Environmental Protection, the Pennsylvania Mountains Healthcare Alliance, the Utility Workers
Union of America, AFL-CIO and UWUA System Local No. 102, the Clean Air Council,
Constellation NewEnergy, Inc. and Constellation Energy Commodities Group, Inc., and Citizens
for Pennsylvania’s Future.
7.
That any Protest filed in the above-captioned case that is not satisfied nor
withdrawn pursuant to the terms of the Joint Petition For Partial Settlement filed October 25,
2010, in the above-captioned case by West Penn Power Company d/b/a Allegheny Power, TransAllegheny Interstate Line Company, FirstEnergy Corp., the Pennsylvania Public Utility
Commission’s Office of Trial Staff, the Office of Consumer Advocate, the International
Brotherhood of Electrical Workers, the York County Solid Waste and Refuse Authority, the
Pennsylvania Rural Electric Association, the West Penn Power Sustainable Energy Fund, The
Pennsylvania State University, ARIPPA, the West Penn Power Industrial Intervenors, the MetEd Industrial Users Group, the Penelec Industrial Customer Alliance, the Department of
Environmental Protection, the Pennsylvania Mountains Healthcare Alliance, the Utility Workers
Union of America, AFL-CIO and UWUA System Local No. 102, the Clean Air Council,
Constellation NewEnergy, Inc. and Constellation Energy Commodities Group, Inc., and Citizens
for Pennsylvania’s Future is hereby denied.
8.
That West Penn Power Company d/b/a Allegheny Power, Trans-
Allegheny Interstate Line Company, and FirstEnergy Corp. shall file with the Pennsylvania
Public Utility Commission written notice of the consummation of the merger approved herein
within 30 days after such consummation occurs.
83
9.
That the record at Docket Numbers A-2010-2176520 and A-2010-
2176732 be marked closed.
Date: December 14, 2010
Wayne L. Weismandel
Administrative Law Judge
Mary D. Long
Administrative Law Judge
84
APPENDIX
Answers to Items to Be Investigated as Directed by Secretarial Letter dated June 3, 2010
1.
How will the merger impact employment levels in Pennsylvania, particularly, but
not limited to, those employees not covered by collective bargaining agreements? What
will the impact be on Allegheny Energy’s corporate headquarters in Greensburg, PA, as
well as the operating companies’ offices?
Joint Applicants
As part of the Joint Application, FirstEnergy committed to have no net reductions due to
involuntary attrition, for a period of two years after consummation of the Merger, as a result of
the Merger integration process, in either the employment levels of the FirstEnergy Utilities or in
the employment levels of employees of Allegheny Energy Service Company who are assigned to
positions in the Allegheny Power Utilities comparable to their counterparts who are employed by
the FirstEnergy Utilities. It also committed to keep the regional headquarters of West Penn in
Greensburg. See Jt. App. St. 1-S at 5 (citing Jt. App. St. 1 at 6, 13-15; Jt. App. St. 3 at 6-7).
In addition, under the Joint Petition for Partial Settlement (Joint Petition or Settlement), specific
net employment level commitments have been made for employees of FirstEnergy and its
affiliates in Greensburg and Westmoreland County. See Joint Petition ¶ 14. Career transition
services will be provided for those Greensburg employees whose jobs are negatively impacted
by the Merger. Id. Further, the corporate headquarters of Allegheny Energy in Greensburg will
become the regional headquarters of West Penn and the regional headquarters of Met-Ed and
Penelec will remain in Reading and Erie, respectively, for a period of at least five years. Id. ¶¶
14-15.
OCA
The OCA and other parties to this Settlement engaged in numerous and lengthy discussions with
Joint Applicants about the preservation of Pennsylvania jobs. The Settling Parties agreed to
address these concerns in ¶ 14 of the Settlement. Where Joint Applicants’ on-the-record
commitments to preserving Pennsylvania jobs were somewhat vague, the commitments made in
the Settlement are clear and unambiguous. These Settlement provisions provide certain
guaranteed minimum employment levels for the Greensburg area and Westmoreland County
over the next five years, and provide that the Regional Headquarters of West Penn will be
located in Greensburg. In addition, the current regional headquarters of Met-Ed and Penelec are
guaranteed to remain in Pennsylvania for at least the next five years. Settlement at ¶¶ 14, 15; See
also OCA Statement in Support at 4-6. Further, the Joint Applicants made certain commitments
to union jobs, separate and apart from the commitments made in ¶ 14 above, in that FirstEnergy
has committed that it will not reduce its line and substation workers for a period of two years
following consummation of the merger. Jt. App. St. 1 (Alexander) at 14.
A.1
OSBA
The Joint Applicants have committed to specific employment levels, as outlined in the
Settlement at ¶ 14.
OTS
The Joint Petition at ¶ 14 provides that the average number of employees in the 12-month period
following consummation of the merger that have a primary reporting location in Greensburg,
Pennsylvania will be no less than 800. The average number of employees in the following 12month period that have a primary reporting location in Greensburg, Pennsylvania will be no less
than 675. In the subsequent 12-month period, the average number of employees that have a
primary reporting location in Greensburg, Pennsylvania will be no less than 650. In the
subsequent 24-month period, the average number of employees that have a primary reporting
location in Greensburg, Pennsylvania will be no less than 600. For the purposes of calculating
the average number of employees, the number of employees for each year will be the average of
the number of employees with primary reporting locations in Greensburg, Pennsylvania and any
new jobs that are created in or moved to Westmoreland County for each month of the period
being evaluated less any employees who leave due to voluntary attrition.
The corporate headquarters of Allegheny Energy in Greensburg, Pennsylvania will become the
regional headquarters of West Penn. See Jt. App. St. 1 at 6, 13-15; Joint Petition at ¶ 14. The
current locations of FirstEnergy’s regional headquarters for its other Pennsylvania utilities will
not be altered. See Joint Petition at ¶ 15.
ARIPPA
The Joint Applicants have committed to specific employment levels, as outlined in the
Settlement at ¶ 14.
Citizens for Penn. Future
The merger will maintain employment levels in Pennsylvania generally and in Greensburg
specifically for at least the next five years, in accordance with ¶¶ 14-15 of the Joint Petition.
Citizen Power
Based upon ¶ 14 of the Joint Petition, there could be significant job losses associated with the
merger. The number of employees that the Joint Applicants will guarantee at the Greensburg
location gradually is reduced over the first five years after the merger. After five years, there is
no guarantee that there will be any jobs left in Greensburg. See pages 14-15 of Main Brief.
A.2
Clean Air Council
Employment levels and corporate headquarters are addressed in Section II.A., pages 7-9, of the
Joint Petition. Clean Air Council believes that the Settlement provides significant protections for
employees of the merged company, in particular those employees not covered by collective
bargaining agreements. Paragraphs 14-15 of the Settlement outline the commitments made by
the Joint Applicants to maintain electric company distribution headquarters in the
Commonwealth and employment levels in Westmoreland County over the next five years.
Constellation
Constellation did not address Issue 1 in its testimony.
DEP
The Settlement provides significant protections for employees of the merged company, in
particular those employees not covered by collective bargaining agreements. Paragraphs 14-15
of the Settlement outline the commitments made by the Joint Applicants to maintain electric
company distribution headquarters in the Commonwealth and employment levels in
Westmoreland County over the next five years.
Direct Energy
Direct Energy proposed to unbundle the retail billing function to mitigate some of the negative
employment impacts of the proposed merger. Direct Energy St. 1; Direct Energy St. 3.
IBEW
Did not submit a response.
MEIUG/PICA
MEIUG/PICA hereby adopt the representations offered by the Joint Applicants with respect to
the twelve questions posed by the PUC, as set forth in the Commission's June 3, 2010,
Secretarial Letter.
PMHA
PMHA submits that it generally concurs with and adopts the representations made by the Merger
Applicants with respect to these issues and believes that the Joint Petition effectively addresses
each of these issues to the benefit of the public.
PREA
PREA took no specific position on this issue in litigation. However, employment levels and
corporate headquarters are addressed in Section II.A., pages 7-9, of the Settlement.
A.3
PSU
Reference ¶¶ 14 and 15 of the Joint Petition addressing this issue.
RESA
This question is primarilydirected to the Applicants. RESA has not formed a position as to the
impact of the proposed merger on employment levels in Pennsylvania. To the extent there is a
concern as to the potential of the merger to adversely impact employment levels in Pennsylvania,
RESA’s proposed competitive market enhancements can serve as a mechanism for potentially
mitigating this impact. The development of a robust competitive retail market will attract
investment in Pennsylvania by EGSs, brokers, consultants, third party service providers, and
other entities active in the competitive industry. Already the competitive landscape in
Pennsylvania has attracted significant investment with several competitive providers establishing
offices in the Commonwealth. Therefore, the adoption of the retail market enhancements
discussed above will serve to promote growth in a new industry that will help mitigate any
potential adverse impacts on employment levels resulting from the merger.
UWUA
With respect to the questions set forth in the June 3, 2010, letter from the Commission Secretary,
we note that Secretary Question Nos. 1 and 2, which concern employment and service reliability
issues, are addressed in Settlement ¶¶ 49-51, 58 (4th bullet point) and 59 (3rd bullet point). It is
our understanding that in implementing these provisions, the merged company will assess
staffing levels and implement changes as needed. We have not addressed -- and are therefore
unable to take a position with respect to -- the remaining questions in the Secretary’s letter.
WPPII
WPPII hereby adopts the representations offered by the Joint Applicants with respect to the
twelve questions posed by the PUC, as set forth in the Commission's June 3, 2010, Secretarial
Letter.
WPPSEF
The WPPSEF took no specific position on this issue in litigation. However, employment levels
and corporate headquarters are addressed in Section II.A., pages 7-9, of the Settlement.
YCSWA
The YCSWA takes no position on this question. The Settlement deals with this question, in part,
at ¶¶ 14-15, pages 7-9.
See also discussion of “Employment,” Section III.C.2. of Initial Decision.
A.4
2.
How will the merger affect the customer service and system reliability of West Penn
Power and the FirstEnergy Pennsylvania utilities? How will the merger affect West Penn
Power and the FirstEnergy Pennsylvania utilities ability to respond to outages and other
emergencies?
Joint Applicants
FirstEnergy and Allegheny share a strong commitment to enhancing customer service and
reliability. In the Joint Application, a commitment was made by FirstEnergy and Allegheny to
conduct a review of their existing procedures and policies as part of the Merger integration
process to determine “best practices” in these areas and how to implement them. See Jt. App. St.
1-S at 6; Jt. App. St. 3 at 9-13. Under the Settlement, the Joint Applicants commit to achieving
specific levels in the Commission’s Customer Average Interruption Duration Index (CAIDI) and
System Average Interruption Duration Index (SAIDI) for West Penn, as well as West Penn’s
average speed of answering customer calls. In addition, the Joint Applicants commit to
continued reliability investments for rural electric cooperatives and to establish a Joint UtilityIndustrial Customer Committee to identify, discuss and address local power and service quality
issues for industrial customers. See Joint Petition at ¶¶ 49-52.
OCA
The Settling Parties agreed to address these concerns in ¶¶ 49 and 50 of the Settlement. These
provisions will ensure that customers of West Penn will see measurable improvements in
reliability and customer service as a result of the merger. Settlement at ¶ 49. FirstEnergy has
also agreed to conduct further studies on improving reliability and customer service and to make
copies of those studies available to the participants in this proceeding. Settlement at ¶ 50. As
such, the OCA submits that these provisions provide substantial affirmative benefits and are in
the public interest. In addition, other Settlement provisions also relate to the same areas of
concern that Ms. Alexander testified to.
In ¶ 51, the Settling Parties have agreed to form a joint technical committee to study and seek to
resolve local reliability issues faced by industrial customers. In ¶ 52, FirstEnergy has committed
to an additional $4 million per year for a five-year period to continue the study and resolution of
rural electric reliability issues. Both of these initiatives, as they deal with electric reliability,
could add to and enhance the reliability commitments that were the focus of the OCA’s concerns.
As such, these additional measures provide further assurances of the public receiving substantial
affirmative benefits from this merger. Settlement at ¶¶ 49, 50, 51 and 52; See also OCA
Statement in Support at 9-10.
OSBA
Service quality and reliability issues have been addressed in the Settlement at ¶¶ 49-52.
A.5
OTS
In the Application, FirstEnergy and Allegheny committed to conducting a review of existing
procedures and policies to determine best practices and how to implement them. See Jt. App. St.
1 at 10-11; Jt. App. St. 3 at 9-13. In addition, the Joint Petition details specific service quality
and reliability standards that must be implemented at West Penn. See Joint Petition at ¶¶ 49-52.
See also discussion of “Service, Quality and Reliability,” Section III.C.5. of Initial Decision.
ARIPPA
ARIPPA took no specific position on this issue in litigation. However, employment levels and
corporate headquarters are addressed in Section II.A., pages 7-9, of the Joint Petition.
Citizens for Penns. Future
Customer service and reliability issues are addressed by ¶¶ 46-49 of the Joint Petition.
Citizen Power
Based upon ¶ 49 of the Joint Petition, it appears that the Joint Applicants have committed to
meeting certain customer service and system reliability benchmarks. At this point Citizen Power
cannot predict the success of those commitments.
Clean Air Council
Clean Air Council did not adopt a specific position on this issue in litigation and offers no
response except to note that customer service and system reliability are addressed in Section II.J.,
pages 21-27, of the Joint Petition.
Constellation
Constellation did not address Issue 2 in its testimony.
DEP
In addition to the jobs retained for “line” positions after the merger, ¶¶ 49-52 of the Settlement
address service quality and reliability issues. The Department believes that these provisions
should lead to overall improvements in the reliability of the Joint Applicants’ electric service in
the Commonwealth.
Direct Energy
Direct Energy did not address Question 2 in its testimony.
A.6
IBEW
Did not submit a response.
MEIUG/PICA
MEIUG/PICA hereby adopt the representations offered by the Joint Applicants with respect to
the twelve questions posed by the PUC, as set forth in the Commission's June 3, 2010,
Secretarial Letter.
PMHA
PMHA submits that the Joint Petition, if approved, would establish a number of conditions that
will enhance reliability and customer service in the Merger Applicants' various service
territories, and indeed should result in the affirmative benefit of increased reliability for most
customers, and West Penn ratepayers in particular. Specifically, the Joint Petition contains
commitments by the Merger Applicants to achieve tangible performance benchmarks in the West
Penn territory to increase reliability and responsiveness. To the extent that concerns remain with
respect to the FirstEnergy operating companies' reliability of service to its largest customers,
including some PMHA members, the Joint Petition further provides an avenue for these
customers to pursue remediation of such reliability shortfalls.
PREA
PREA took no specific position on this issue in litigation. However, customer service and
system reliability issues are addressed in Section II.J., pages 21-27 of the Settlement and Rural
Electric Reliability Issues in particular are addressed in Section II.J.52. of the Settlement and in
Section II of PREA's Statement in Support.
PSU
Reference ¶¶ 49, 50, 51, and 52 of the Joint Petition addressing this issue.
RESA
Absent the specific mitigation measures discussed above, the proposed merger has the significant
potential to adversely impact customer service for the FirstEnergy and Allegheny Power service
territories. In Pennsylvania, EDCs provide essential services related to the proper functioning of
the competitive retail market. EDCs control all customer meter data that EGSs require in order
to price, enroll and service customers. EDCs control Electronic Data Exchange transactions that
ultimately impact the customer enrollment process. EDCs provide essential billing services for
competitive suppliers, such as consolidated billing. These services are effectively customer
service functions provided by the EDC to enable ratepayers to exercise their legislatively
mandated right to receive electric generation service from a competitive supplier. As discussed
above, numerous operational improvements are needed to ensure a properly functioning
A.7
competitive market. Thus, the proposed merger must include commitments regarding these
operational improvements in order to prevent adverse impacts on customer service standards.
UWUA
See answer to Question 1.
WPPII
See answer to Question 1.
WPPSEF
The WPPSEF took no specific position on this issue in litigation. However, customer service
and system reliability issues are addressed in Section II.J., pages 21-27 of the Settlement.
YCSWA
The YCSWA takes no position on this question. The Settlement deals with this question, in part,
at ¶¶ 46-51, pages 21-24.
3.
Review the impact of the initially proposed corporate structure of the merger versus
the alternately proposed corporate structure. Which corporate structure will better
protect the public interest?
Joint Applicants
The public interest will be equally protected under either corporate structure. The Commission’s
jurisdiction and oversight with respect to West Penn and the FirstEnergy Pennsylvania utilities
remains the same under either corporate structure. The Joint Applicants anticipate that, in the
future, the alternative structure will be desirable for consistency with FirstEnergy’s existing
internal corporate arrangements and procedures once the companies are combined. See Jt. App.
St. 1-S at 2-3.
OCA
The Settling Parties agreed to address these concerns in ¶¶ 35 and 36. These provisions are
substantially consistent with the recommendations of OCA witness Hahn as to necessary ringfencing protections. Settlement at ¶ 35. The agreed upon provisions also include continued
reporting requirements to the Commission in the event that any of the FirstEnergy EDCs
capitalization metrics become of concern. Settlement at ¶ 36. The OCA submits that these
provisions provide key protections for the regulated operations and are in the public interest.
Settlement at ¶¶ 35, 36; See also OCA Statement in Support at 8.
A.8
OSBA
The generating assets of Allegheny Energy should be administratively located in a subsidiary
which operates independently of the generating assets of FES and is prohibited from
coordinating with FES regarding whether or not to bid in a particular default service procurement
and regarding what price to bid.
OTS
OTS concurs with the answer submitted by Joint Applicants. See Jt. App. St. 1-S at 2-3.
ARIPPA
ARIPPA took no specific position on this issue in litigation and has no response.
Citizens for Penns. Future
PennFuture takes no position on this issue.
Citizen Power
Citizen Power takes no position with respect to this issue.
Clean Air Council
Clean Air Council did not adopt a specific position on this issue in litigation and offers no
response.
Constellation
Constellation did not address Issue 3 in its testimony.
DEP
The Department is not taking a position on this issue.
Direct Energy
Direct Energy did not address Question 3 in its testimony.
IBEW
Did not submit a response.
A.9
MEIUG/PICA
MEIUG/PICA hereby adopt the representations offered by the Joint Applicants with respect to
the twelve questions posed by the PUC, as set forth in the Commission's June 3, 2010,
Secretarial Letter.
PMHA
See answer to Question 1.
PREA
PREA took no specific position on this issue in litigation and is not in a position to submit a
response here.
PSU
PSU takes no position on this question.
RESA
This question is primarily directed to the Applicants and RESA has not formed an opinion on
these issues.
UWUA
See answer to Question 1.
WPPII
See answer to Question 1.
WPPSEF
The WPPSEF took no specific position on this issue in litigation and is not in a position to
submit a response here.
YCSWA
The YCSWA takes no position on this question.
A.10
4.
What, if any, ring-fencing mechanisms are presently in place, or proposed as part of
this transaction, to protect West Penn Power, Met-Ed, Penn Power, and Penelec from the
business and financial risk of the parent and other non-regulated affiliates? Are any
changes or additions necessary to better protect the public interest and make the regulated
electric distribution subsidiaries bankruptcy remote?
Joint Applicants
Under the Settlement, FirstEnergy has committed to a robust suite of financial governance
measures (consistent with its current practice) to maintain appropriate separation between its
regulated operations and its unregulated operations. Joint Petition at ¶¶ 35-36. For example, for
a period of five years, if any post-merger FirstEnergy EDC's equity-to-total capitalization ratio
falls below 40% from a financial covenant standpoint, then that company will provide the
Commission with a 12-month plan for bringing its equity-to-total capitalization ratio to at least
40%; if after that period the equity-to-total capitalization ratio remains below 40%, then such
company shall not pay a dividend to its parent until the equity-to-total capitalization ratio is 40%
or greater. Joint Petition at ¶ 36. These financial governance measures are discussed in Sections
V.A. and VI.B. of Joint Applicant’s Brief.
OCA
The Settling Parties agreed to address these concerns in ¶¶ 35 and 36. These provisions are
substantially consistent with the recommendations of OCA witness Hahn as to necessary ringfencing protections. Settlement at ¶ 35. The agreed upon provisions also include continued
reporting requirements to the Commission in the event that any of the FirstEnergy EDCs
capitalization metrics become of concern. Settlement at ¶ 36. The OCA submits that these
provisions provide key protections for the regulated operations and are in the public interest.
Settlement at ¶¶ 35, 36; See also OCA Statement in Support at 8.
OSBA
Ring-fencing has been addressed in the Settlement at ¶35.
OTS
FirstEnergy currently has the following ring-fencing measures in place, which will be extended
to West Penn (Joint Petition at ¶ 35):





Separate money pools for utility and unregulated operations that neither
FirstEnergy nor its unregulated subsidiaries can borrow from.
Each operating company of FirstEnergy issues its own debt.
No individual operating company will assume the liability of debts issued by
FirstEnergy.
Each operating company maintains its own financial statements.
Each operating company maintains its own capital structure.
A.11

Regulated and unregulated operations are structures as separate businesses, with
separate management.
In addition to the ring-fencing measures above, the Joint Petition provides for the following
additional protections (Joint Petition at ¶¶ 35-36):



No FirstEnergy Pennsylvania utility operating company will transfer, merge, sell,
lease or dispose of utility property that has a net book value greater than $10
million and is included in rate base and recovered through rates unless expressly
authorized by the Commission.
No FirstEnergy Pennsylvania utility will issue debt secured by utility assets for
purposes other than as approved by the Commission.
For a period of five years, if any post merger FirstEnergy Pennsylvania utility’s
equity-to-cap ratio falls below 40%, that company will provide the Commission
with a 12-month plan to bring its equity-to-cap ratio to 40%. If the ratio remains
below 40% after the 12-month period, the company will not pay a dividend to its
parent until the ratio is 40% or greater.
ARIPPA
ARIPPA took no specific position on this issue in litigation. However, provisions regarding
financial governance are addressed in Section II.H., pages 15-16, of the Joint Petition.
Citizens for Penns. Future
The Joint Applicants’ post-merger capital and financial structures are addressed by ¶¶ 34-36 of
the Joint Petition.
Citizen Power
Based upon ¶ 35 of the Joint Petition, it appears that the Joint Petitioners have instituted several
ring-fencing mechanisms including: 1) maintaining separate money pools for the regulated and
unregulated operations; 2) ensuring that each FirstEnergy Pennsylvania utility operating
company issues its own debt after obtaining appropriate regulatory authorization; 3) ensuring
that each FirstEnergy Pennsylvania utility operating company maintains its own credit rating so
long as it has debt outstanding and credit rating agencies are willing to provide such rating; 4)
ensuring that no individual FirstEnergy Pennsylvania utility operating company will assume debt
issued by the holding company without Commission approval; 5) maintenance of separate
financial statements reflecting each FirstEnergy Pennsylvania utility operating company has its
own capital structure, which is a function of its own debt and equity.
Citizen Power believes that the public interest would be better served by adding a cost allocation
policy that would require “the utility to pay the lesser of cost or market pricing for services they
receive from the holding company or affiliates, and to receive the greater of cost or market
A.12
pricing for services they provide to the holding company or affiliates” as recommended by
Richard S. Hahn in his testimony on behalf of OCA.150
Clean Air Council
Clean Air Council did not adopt a specific position on this issue in litigation and offers no
response except to note that provisions regarding financial governance are addressed in Section
II.H., pages 15-16, of the Joint Petition.
Constellation
Constellation did not address Issue 4 in its testimony.
DEP
Paragraphs 35-37 of the Settlement provide protections for the regulated entities involved with
this merger. The Department did not raise these issues in the proceeding and so does not take a
position on this question. The Department notes that several parties who did raise this issue
vigorously are included in the Joint Petitioners.
Direct Energy
Direct Energy did not address Question 4 in its testimony.
IBEW
Did not submit a response.
MEIUG/PICA
MEIUG/PICA hereby adopt the representations offered by the Joint Applicants with respect to
the twelve questions posed by the PUC, as set forth in the Commission's June 3, 2010,
Secretarial Letter.
PMHA
See answer to Question 1.
PREA
PREA took no specific position on this issue in litigation. However, provisions regarding
financial governance are addressed in Section II.H., pages 15-16, of the Settlement.
150
OCA St. 1 at 25, Public Version.
A.13
PSU
PSU takes no position on this question other than agreeing with ¶¶ 35, 36 and 37 of the Joint
Petition addressing this issue.
RESA
RESA is recommending two mitigation measures that would address concerns related to affiliate
relationships: an enhanced Code of Conduct for Applicants and conditioning the merger on the
results of an independent audit of Applicants’ affiliate relationships and cost allocation practices.
UWUA
See answer to Question 1.
WPPII
See answer to Question 1.
WPPSEF
The WPPSEF took no specific position on this issue in litigation. However, provisions regarding
financial governance are addressed in Section II.H., pages 15-16, of the Settlement.
YCSWA
The YCSWA takes no position on this question. The Settlement deals with this question, in part,
at ¶¶ 35-37, pages 15-16.
See also discussion “Financial Governance and Ringfencing,” Section III.C.4. of Initial
Decision.
5.
How will the merger impact the Act 129 smart meter and energy efficiency
implementation plans of West Penn Power and FirstEnergy’s regulated utilities, Met-Ed,
Penelec and Penn Power?
Joint Applicants
The Merger will have a positive impact because the adjoining service territories will facilitate
integrating and implementing the Act 129 energy efficiency measures and smart meter programs
of each utility:
A.14

The combined company should be better able to invest in and deploy new processes
and technologies, and, in the case of West Penn, potentially avoid over $100 million
in technology infrastructure costs. See Jt. App. St. 1 at 9; Jt. App. St. 3 at 8-9.

Under the Settlement, the smart meter plans for Met-Ed, Penelec, Penn Power and
West Penn will include preparing a cost/benefit analysis for deployment of smart
meters to at least 90% of the EDCs’ customers no later than December 31, 2018. See
Joint Petition at ¶ 23.
Met-Ed, Penelec, Penn Power and West Penn will have voluntary time of use rates available to
residential customers who have smart meters installed, and voluntary real time rates available for
any commercial or industrial customers that have smart meters installed so long as the EDCs
remain the default service suppliers. Id. ¶ 24. The Merger will not create a more leveraged
organization; in fact, debt as a percentage of total capitalization for FirstEnergy will be reduced
and therefore improve for FirstEnergy. See Jt. App. St. 1-S at 6. The Merger and the resulting
stronger balance sheet and cash flow, along with the Settlement financial governance measures
discussed above, are expected to positively affect the credit rating of FirstEnergy over time. See
Jt. App. St. 1-S at 6-7 (citing Jt. App. St. 2 (Pearson) at 3-12).
OCA
The Settlement at ¶ 23 addresses the smart meter implementation plans for all of the FirstEnergy
EDCs, as follows:
As part of the implementation and deployment plans for the Smart
Meter Implementation Plan (SMIP), in addition to any other
deployment schedule Met-Ed, Penelec, Penn Power and West Penn
(the “post-merger FirstEnergy EDCs”) may submit, the
implementation and deployment plan shall include a cost/benefit
analysis for deployment of smart meters to at least 90% of the
EDCs’ customers no later than December 31, 2018.
Settlement at ¶ 23.
OSBA
These issues are addressed in the Settlement at ¶¶ 18 and 23.
OTS
OTS concurs with the answer submitted by Joint Applicants. See Jt. App. St. 1-S at 3-4. In
addition, the Joint Petition addresses smart meter and time of use rates. See Joint Petition at ¶¶
23-24.
A.15
ARIPPA
ARIPPA took no specific position on this issue in litigation. However, smart meters and energy
efficiency are addressed in Section II.D., pages 11-12, of the Joint Petition.
Citizens for Penns. Future
The Joint Applicants’ smart meter implementation plans are addressed by ¶¶ 23 and 24 of the
Joint Petition. The merger should not impact the Joint Applicants’ implementation of their Act
129 plans. The Joint Petition also provides additional energy efficiency benefits, pursuant to its
¶¶ 20-22 and 28, and ¶¶ 25-27 and 29. The public benefits that are produced by long-term
contracts for solar and renewable power and solar and renewable power generally are explained
fully in PennFuture Parties Statement 2 and PennFuture Statement 2-S. The public benefits that
are produced by energy efficiency measures are explained fully in PennFuture Parties Statement
1 and PennFuture Statement 1-2.
Citizen Power
Citizen Power takes no position with respect to this issue.
Clean Air Council
These issues are addressed by ¶¶ 18, 22, 23 and 24 of the Joint Petition. Paragraph 18 obligates
the Joint Applicants to offset the impact of changes to West Penn’s energy efficiency
implementation plan to certain customers who would otherwise incur additional expense.
Paragraph 22 requires significant funding increases in the West Penn LIURP program from
merger savings. Though LIURP is not an Act 129 program, it involves a similar public interest
goal, namely energy efficiency improvements. Paragraphs 23-24 require proposals for
significant deployment of smart meter technology no later than the end of 2018 in all four
merged company EDC territories. This represents a substantial acceleration of the current
approved plan for the FirstEnergy companies and is in accord with the recent settlement in the
West Penn smart meter docket.
Constellation
The Application, as revised by the Partial Settlement, appropriately refrains from affecting the
Joint Applicants’ smart meter and energy efficiency implementation plans, except to the extent
that the Joint Applicants agree to provide additional analysis and certain services to customers
with installed smart meters, as reflected in ¶¶ 23 and 24 of the Partial Settlement.
DEP
Paragraphs 18, 22 (LIURP), 23 and 24 of the Settlement address these issues. Under ¶ 18, the
Joint Applicants will provide funds to offset the impact of changes to West Penn’s energy
efficiency implementation plan to certain customers who would otherwise incur additional
expense. Paragraph 22 requires the Joint Applicants to provide additional funding to the West
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Penn LIURP program. While LIURP is not an Act 129 program, it is directed toward energy
efficiency improvements. Paragraphs 23-24 directly address smart meter deployment in the four
electric distribution companies’ service territories, and require proposals for significant
deployment of smart meter technology no later than the end of 2018. This is a substantial
acceleration over the current approved plan for the FirstEnergy companies and is in line with the
recent settlement filed in the West Penn smart meter proceeding.
Direct Energy
Direct Energy’s proposed divestiture of FirstEnergy's DSP role combined with an auction of
retail customer service accounts would advance the goals of Act 129. Direct Energy St. 1 at 3438; Direct Energy St. 3-SR; Main Brief, Section VI.A.2.
IBEW
Did not submit a response.
MEIUG/PICA
MEIUG/PICA hereby adopt the representations offered by the Joint Applicants with respect to
the twelve questions posed by the PUC, as set forth in the Commission's June 3, 2010,
Secretarial Letter.
PMHA
See answer to Question 1.
PREA
PREA took no specific position on this issue in litigation. However, smart meters and energy
efficiency are addressed in Section II.D., pages 11-12, of the Settlement.
PSU
PSU takes no position on this question other than agreeing with ¶¶ 18, 22, 23 and 24 of the
Joint Petition addressing this issue.
RESA
This question is primarily directed to the Applicants. RESA has not formed an opinion on these
issues.
UWUA
See answer to Question 1.
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WPPII
See answer to Question 1.
WPPSEF
The WPPSEF took no specific position on this issue in litigation. However, smart meters and
energy efficiency are addressed in Section II.D., pages 11-12, of the Settlement.
YCSWA
The YCSWA takes no position on this question. The Settlement deals with this question, in part,
at ¶¶ 23 and 24, pages 11-12 (as to smart meters and Act 129).
See also discussion “Act 129, Solar Procurements and Alternative Energy Funding” and “Smart
Meters and Time of Day Usage,” Section III.C.7. and C.8. of Initial Decision.
6.
How will the merger affect the capital structure of FirstEnergy Corporation? Will
the merger create a more leveraged organization? How will the proposed merger impact
the credit rating of FirstEnergy?
Joint Applicants
The Merger will not create a more leveraged organization; in fact, debt as a percentage of total
capitalization for FirstEnergy will be reduced and therefore improve for FirstEnergy. See Jt.
App. St. 1-S at 6. The Merger and the resulting stronger balance sheet and cash flow, along with
the Settlement financial governance measures discussed above, are expected to positively affect
the credit rating of FirstEnergy over time. See Jt. App. St. 1-S at 6-7 (citing Jt. App. St. 2
(Pearson) at 3-12).
OCA
The Settling Parties agreed to address these concerns in ¶¶ 35 and 36. These provisions are
substantially consistent with the recommendations of OCA witness Hahn as to necessary ringfencing protections. Settlement at ¶ 35. The agreed upon provisions also include continued
reporting requirements to the Commission in the event that any of the FirstEnergy EDCs
capitalization metrics become of concern. Settlement at ¶ 36. The OCA submits that these
provisions provide key protections for the regulated operations and are in the public interest.
Settlement at ¶¶ 35, 36; See also OCA Statement in Support at 8.
OSBA
These issues have been addressed in the Settlement at ¶¶ 35 and 36.
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OTS
OTS concurs with the answer submitted by Joint Applicants. See Jt. App. St. 1-S at 6-7.
ARIPPA
ARIPPA took no specific position on this issue in litigation. However, provisions regarding each
FirstEnergy Pennsylvania utility operating company’s debt and credit provisions and capital
structure are addressed in Section II.H., pages 15-16, of the Joint Petition.
Citizens for Penns. Future
The Joint Applicants’ post-merger capital and financial structures are addressed by ¶¶ 34-36 of
the Joint Petition.
Citizen Power
The announcement of the merger resulted in Standard & Poor’s announcing a downgrade of the
credit rating of FirstEnergy.151 Citizen Power takes no further position on this issue.
Clean Air Council
Clean Air Council did not adopt a specific position on this issue in litigation and offers no
response except to note that provisions regarding each FirstEnergy Pennsylvania EDC’s debt and
credit provisions and capital structure are addressed in Section II.H., pages 15-16, of the Joint
Petition.
Constellation
Constellation did not address Issue 6 in its testimony.
DEP
See response to Question 4.
Direct Energy
Direct Energy did not address Question 6 in its testimony.
IBEW
Did not submit a response.
151
OCA St. 1 at 9, Public Version.
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MEIUG/PICA
MEIUG/PICA hereby adopt the representations offered by the Joint Applicants with respect to
the twelve questions posed by the PUC, as set forth in the Commission's June 3, 2010,
Secretarial Letter.
PMHA
See answer to Question 1.
PREA
PREA took no specific position on this issue in litigation. However, provisions regarding each
FirstEnergy Pennsylvania utility operating company's debt and credit provisions and capital
structure are addressed in Section II.H., pages 15-16 of the Settlement.
PSU
PSU takes no position on this question.
RESA
This question is primarily directed to the Applicants. RESA has not formed an opinion on these
issues.
UWUA
See answer to Question 1.
WPPII
See answer to Question 1.
WPPSEF
The WPPSEF took no specific position on this issue in litigation. However, provisions regarding
each FirstEnergy Pennsylvania utility operating company's debt and credit provisions and capital
structure are addressed in Section II.H., pages 15-16 of the Settlement.
YCSWA
The YCSWA takes no position on this question. The Settlement deals with this question, in part,
at ¶¶ 35-37, pages 15-16.
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7.
Will West Penn Power and the other Allegheny Energy subsidiaries that currently
issue their own debt maintain their own external borrowing authority and separate bond
rating?
Joint Applicants
Yes. FirstEnergy will ensure: (1) that each FirstEnergy Pennsylvania utility operating company
issues its own debt after obtaining appropriate regulatory authorization; (2) that each FirstEnergy
Pennsylvania utility operating company maintains its own credit rating so long as it has debt
outstanding and credit rating agencies are willing to provide such rating; and (3) that no
individual FirstEnergy Pennsylvania utility operating company will assume debt issued by the
holding company without Commission approval. See Joint Petition at ¶ 35. In addition, no
FirstEnergy Pennsylvania utility operating company shall issue debt secured by utility assets for
purposes other those approved by the Commission. Id.
OCA
The Settling Parties agreed to address these concerns in ¶¶ 35 and 36. These provisions are
substantially consistent with the recommendations of OCA witness Hahn as to necessary ringfencing protections. Settlement at ¶ 35. The agreed to provisions also include continued
reporting requirements to the Commission in the event that any of the FirstEnergy EDCs
capitalization metrics become of concern. Settlement at ¶ 36. The OCA submits that these
provisions provide key protections for the regulated operations and are in the public interest.
Settlement at ¶¶ 35, 36; See also OCA Statement in Support at 8.
OSBA
These issues have been addressed through the ring-fencing measures set forth in the Settlement
at ¶35.
OTS
Under the terms of the Joint Petition, each FirstEnergy operating company will maintain its own
borrowing authority and separate bond rating. See Joint Petition at ¶ 35.
ARIPPA
ARIPPA took no specific position on this issue in litigation. However, provisions regarding each
FirstEnergy Pennsylvania utility operating company’s debt and credit provisions are addressed in
Section II.H., pages 15-16, of the Joint Petition.
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Citizens for Penns. Future
The Joint Applicants’ post-merger capital and financial structures are addressed by ¶¶ 34-36 of
the Joint Petition.
Citizen Power
Pursuant to ¶ 35 of the Joint Petition, it appears that West Penn Power and Allegheny Energy
will maintain their own external borrowing authority and separate bond rating.
Clean Air Council
Clean Air Council did not adopt a specific position on this issue in litigation and offers no
response except to note that provisions regarding each FirstEnergy Pennsylvania utility operating
company’s debt and credit provisions are addressed in Section II.H., pages 15-16, of the Joint
Petition.
Constellation
Constellation did not address Issue 7 in its testimony.
DEP
See response to Question 4.
Direct Energy
Direct Energy did not address Question 7 in its testimony.
IBEW
Did not submit a response.
MEIUG/PICA
MEIUG/PICA hereby adopt the representations offered by the Joint Applicants with respect to
the twelve questions posed by the PUC, as set forth in the Commission's June 3, 2010,
Secretarial Letter.
PMHA
See answer to Question 1.
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PREA
PREA took no specific position on this issue in litigation. However, provisions regarding each
FirstEnergy Pennsylvania utility operating company's debt and credit provisions and capital
structure are addressed in Section II.H., pages 15-16 of the Settlement.
PSU
PSU takes no position on this question other than agreeing with ¶¶ 35, 36 and 37 of the Joint
Petition addressing this issue.
RESA
This question is primarily directed to the Applicants. RESA has not formed an opinion on these
issues.
UWUA
See answer to Question 1.
WPPII
See answer to Question 1.
WPPSEF
The WPPSEF took no specific position on this issue in litigation. However, provisions regarding
each FirstEnergy Pennsylvania utility operating company's debt and credit levels, as well as
other financial governance matters including post merger equity ratios, are addressed in Section
II.H., pages 15-16, of the Settlement.
YCSWA
The YCSWA takes no position on this question. The Settlement deals with this question, in part,
at ¶¶ 35-37, pages 15-16.
8.
Will West Penn Power participate in the FirstEnergy Utility money pool? If, yes,
please provide an updated agreement.
Joint Applicants
FirstEnergy intends to request the necessary approvals for both West Penn and TrAILCo to
participate in the existing FirstEnergy utility money pool under its terms and in a manner
consistent with participation by other FirstEnergy Pennsylvania subsidiaries. An updated
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agreement, providing for West Penn’s and TrAILCo’s participation, will be filed shortly after the
Merger is consummated. In the meantime, West Penn and TrAILCo will not participate in the
existing FirstEnergy money pool until the necessary approvals are granted by the Commission.
See Jt. App. St. 2-S at 6. In addition, under the Settlement, FirstEnergy has committed to
maintain separate money pools for regulated and unregulated operations. See Joint Petition at
¶ 35.
OCA
The Settling Parties agreed to address these concerns in ¶¶ 35 and 36. These provisions are
substantially consistent with the recommendations of OCA witness Hahn as to necessary ringfencing protections. Settlement at ¶ 35. The agreed to provisions also include continued
reporting requirements to the Commission in the event that any of the FirstEnergy EDCs
capitalization metrics become of concern. Settlement at ¶ 36. The OCA submits that these
provisions provide key protections for the regulated operations and are in the public interest.
Settlement at ¶¶ 35, 36; See also OCA Statement in Support at 8.
OSBA
This issue has been addressed through the ring-fencing measures set forth in the Settlement at
¶ 35.
OTS
It is FirstEnergy’s intent for West Penn to participate in the utility money pool under terms that
are consistent with FirstEnergy’s other Pennsylvania utilities. FirstEnergy will continue to
maintain separate money pools for utility and unregulated operations that neither FirstEnergy nor
its unregulated subsidiaries can borrow from. See Joint Petition at ¶ 35.
ARIPPA
ARIPPA took no specific position on this issue in litigation. However, separate money pools for
regulated and unregulated operations are addressed in Section II.H., pages 15-16, of the Joint
Petition. An updated agreement will have to be provided by Joint Applicants.
Citizens for Penns. Future
The Joint Applicants’ post-merger capital and financial structures are addressed by ¶¶ 34-36 of
the Joint Petition. PennFuture does not possess an updated agreement governing West Penn
Power’s participation in the FirstEnergy’s utility money pool.
Citizen Power
Pursuant to ¶ 35 of the Joint Petition, it appears that West Penn Power will be allowed to
participate in the merged entity’s regulated money pool.
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Clean Air Council
Clean Air Council did not adopt a specific position on this issue in litigation and offers no
response except to note that separate money pools for regulated and unregulated operations are
addressed in Section II.H., pages 15-16, of the Joint Petition. An updated agreement will have to
be provided by Joint Applicants.
Constellation
Constellation did not address Issue 8 in its testimony.
DEP
See response to Question 4.
Direct Energy
Direct Energy did not address Question 8 in its testimony.
IBEW
Did not submit a response.
MEIUG/PICA
MEIUG/PICA hereby adopt the representations offered by the Joint Applicants with respect to
the twelve questions posed by the PUC, as set forth in the Commission's June 3, 2010,
Secretarial Letter.
PMHA
See answer to Question 1.
PREA
PREA took no specific position on this issue in litigation. However, separate money pools for
regulated and unregulated operations are addressed in Section II.H., pages 15-16, of the
Settlement. An updated agreement will have to be provided by Joint Applicants.
PSU
PSU takes no position on this question other than concurring with the statements contained in
¶¶ 35, 36 and 37 of the Joint Petition addressing this issue.
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RESA
This question is primarily directed to the Applicants. RESA has not formed an opinion on these
issues.
UWUA
See answer to Question 1.
WPPII
See answer to Question 1.
WPPSEF
The WPPSEF took no specific position on this issue in litigation. However, separate money
pools for regulated and unregulated operations are addressed in Section II.H., pages 15-16, of the
Settlement.
YCSWA
The YCSWA takes no position on this question. The Settlement deals with this question, in part,
at ¶¶ 35-37, pages 15-16.
9.
How will the proposed merger savings benefit Pennsylvania ratepayers? Will cost
savings benefit ratepayers or only shareholders?
Joint Applicants
Additionally, over time merger savings should, at least in part, offset the increasing cost of
providing regulated retail utility service. These reductions in cost would accordingly delay or
reduce the size of future rate increase requests and thereby benefit customers. See Jt. App. St.
1-S at 7.
Under the Settlement, commitments were made to provide specific savings to customers:

Met-Ed, Penelec and Penn Power have committed to not increase their
distribution base rates until October 1, 2012, and, during the period of the stayout, if any company’s net distribution investment earns a return on equity that
exceeds 10.1%, then the company will credit its excess earnings over the
following 12 months to the customers of that company. See Jt. Pet. ¶ 16.
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
Certain merger savings will be shared with West Penn residential customers and
the Tariff 37 customer in the form of significant rate credits beginning 60 days
after consummation of the Merger.

A credit of $3.57 million per year for three years will be applied to residential
customers’ distribution rates and a credit of $15,000 per year for three years will
be applied to Tariff 37 customer’s distribution rates. Id. ¶ 17.

West Penn will provide a credit equal to the increase in EE&C costs (deemed to
be $6.19 million) to Rate Schedules 20, 22, 30 Small and 30 Large and Rate
Tariff 37 resulting from West Penn’s revised EE&C Plan. Id. ¶ 18.

West Penn has committed to expanded universal services for its customers and to
increase funding for West Penn’s Low-Income Usage Reduction Program
(LIURP). The commitments for these programs include funding towards a 55%
penetration rate for West Penn’s Customers Assistance Program and significant
additional LIURP expenditures during the five-year period following the Merger.
Id. ¶¶ 20, 22.
OCA
The Settling Parties agreed to address these concerns in ¶¶ 16, 17, 18 and 19. The Settlement
provisions therein provide for no base rate increases for Met-Ed, Penelec and Penn Power
customers prior to October 1, 2012. In addition to the rate case stay-out for these utilities, if at
any time during this period either Met-Ed, Penelec or Penn Power earn in excess of a 10.1%
return on equity, those excess amounts will be returned to the customers of those utilities as a bill
credit. Settlement at ¶ 16. This use of merger savings will ensure rate stability for the customers
of these utilities and also ensures that any excess earnings will be returned to customers.
As to West Penn’s customers, in the three years following consummation of the merger
residential customers will receive distribution rate credits equaling approximately $11 million,
and Tariff 37 customers (the Penn State University) will receive credits of $45,000 over three
years. Settlement at ¶ 17. Consistent with Mr. Hahn’s recommendations, these affirmative
merger savings provide some immediate benefits to West Penn customers without any
uncertainties as to what may or may not happen in future base rate cases. West Penn’s
commercial customers will receive a credit of approximately $6 million to offset potential
increases in Energy Efficiency and Conservation costs. Settlement at ¶ 18. In addition,
acquisition and certain transaction costs will be excluded from recovery in rates for all of the
post-merger FirstEnergy electric distribution companies, Met-Ed, Penelec, Penn Power and West
Penn Power (FirstEnergy EDCs). Settlement at ¶ 19. The OCA submits that these provisions
provide substantial affirmative benefits and are in the public interest. See also OCA Statement in
Support at 6-7. In addition, the Settlement at ¶¶ 20, 22, 27, 28 and 29 provide specific financial
commitments for the benefit of Pennsylvania ratepayers and the public.
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OSBA
The Joint Applicants have provided for some sharing of the projected cost savings. See, e.g.,
Settlement at ¶¶ 16-22, 28, and 29.
OTS
The Joint Applicants did not propose a mechanism for merger savings to directly benefit
ratepayers. Rather, the Joint Applicants stated that merger savings should offset the increasing
cost of providing utility service and would delay or reduce the size of future rate increase
requests (Jt. App. St. No. 1 at 11-12). However, under the Joint Petition, ratepayers will directly
benefit from the merger by providing for a stay-out for Met-Ed, Penelec and Penn Power
customers and providing for approximately $17 million in rate credits for West Penn customers.
See Joint Petition at ¶¶ 16-18.
ARIPPA
ARIPPA took no specific position on this issue in litigation. However, the sharing of merger
savings is addressed throughout several sections of the Joint Petition, most explicitly in Sections
II.A., B., C., D., and E., pages 7-13, of the Joint Petition.
Citizens for Penns. Future
The proposed merger will provide benefits to Pennsylvania ratepayers pursuant to ¶¶ 16-19 of
the Joint Petition.
Citizen Power
Based upon ¶¶ 16-17, it appears that the main benefits to ratepayers is a credit to residential
customers’ distribution rates in West Penn totaling $3.57 million per year for three years and a
stay-out period for Met-Ed, Penelec and Penn Power until October 1, 2012 subject to certain
conditions. Citizen Power believes these benefits are lower than the costs that ratepayers
ultimately will incur because of the impact consolidation will have upon competition.
Clean Air Council
The Joint Petition demonstrates a sharing of merger savings with Pennsylvania ratepayers in
multiple ways, including but not limited to rate reductions, rate case “stay out” provisions,
employment commitments, Universal Service increases, and renewable and alternative energy
funding commitments. At a minimum, merger savings are shared in the following paragraphs of
the Joint Petition: 14-18, 20, 22, 25-29.
Constellation
Constellation did not address Issue 9 in its testimony.
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DEP
The Joint Applicants have made representations in the Merger Application that merger savings
will be passed on to ratepayers in the Commonwealth through lower distribution rate charges
than would otherwise be required absent the merger. In addition, ¶¶ 16 and 17 of the Settlement
contain requirements for the Joint Applicants to freeze distribution rates in the FirstEnergy
distribution companies’ territories through October 2012 and certain credits to West Penn
customers, respectively. In addition, the Settlement pledges certain merger savings to be used
for the benefit of ratepayers, such as the increased LIURP funding provided for in ¶ 22.
Direct Energy
Direct Energy did not address Question 9 in its testimony.
IBEW
Did not submit a response.
MEIUG/PICA
MEIUG/PICA hereby adopt the representations offered by the Joint Applicants with respect to
the twelve questions posed by the PUC, as set forth in the Commission's June 3, 2010,
Secretarial Letter.
PMHA
PMHA is confident that the Joint Petition, if approved, will result in affirmative benefits to the
Merger Applicants' ratepayers. As noted above, the Joint Petition includes: (1) a conditional
distribution base rate increase "stay out" for the FirstEnergy operating companies through
October 1, 2012, and accompanying ratepayer credit for any FirstEnergy operating company net
distribution investment earnings that exceed a 10.1% Return on Equity (RoE) during the "stay
out" period; and (2) direct sharing of merger savings with West Penn's residential and
commercial ratepayers through respective credits equivalent to approximately $17 million in
total. In addition to other benefits that the Settlement provides, these terms will ensure that
ratepayers receive significant, direct benefits from the merger.
PREA
PREA took no specific position on this issue in litigation. However, the sharing of merger
savings is addressed throughout several sections of the Settlement, most explicitly in Sections
II.A., B., C., D., and E., pages 7-13, of the Settlement.
PSU
The settlement provides merger savings or synergy benefits to ratepayers pursuant to ¶¶ 16, 17,
18, and 19 of the Joint Petition. PSU takes no position at this time as to the total amount of
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any other merger or synergy savings and whether such savings will benefit ratepayers or
shareholders.
RESA
This question is primarily directed to the Applicants. RESA has not formed an opinion on these
issues.
UWUA
See answer to Question 1.
WPPII
See answer to Question 1.
WPPSEF
The WPPSEF took no specific position on this issue in litigation. However, the sharing of
merger savings is addressed throughout several sections of the Settlement, most explicitly in
Sections II.A., B., C., D., and E. of the Settlement.
YCSWA
The YCSWA takes no position on this question. The Settlement deals with this question, in part,
at ¶¶ 16-19, pages 9-10.
See also discussion “Application of Merger Savings: Rate Stay-Out,” Section III.C.3. of Initial
Decision.
10.
Are the proposed affiliated interest agreements and cost allocation proposals
reasonable and consistent with the public interest under Section 2102(b) of the Public
Utility Code?
Joint Applicants
Yes. The Joint Applicants are only seeking approval to add certain Allegheny companies to
existing agreements previously approved by or currently pending before the Commission and are
not seeking to make any other changes in the protections in place with respect to affiliated
interests and cost allocation. See Jt. App. St. 1-S at 7; Jt. App. St. 2 at 12-13. Further, as part of
the Settlement, the Joint Petitioners specifically request that the Commission approve the revised
FirstEnergy Service Company Agreement, Mutual Assistance Agreement, and Intercompany
Income Tax Allocation Agreement, to become effective upon close of the merger. See Joint
Petition at ¶ 57.
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OCA
The OCA submits that the affiliated interest agreements filed by Joint Applicants should be
approved subject to the Commission’s statutory authority of continuing review over the
agreements pursuant to Sections 2102(c), 2103 and 2106 of the Public Utility Code.
OSBA
The generating assets of Allegheny Energy should be administratively located in a subsidiary
which operates independently of the generating assets of FES and is prohibited from
coordinating with FES regarding whether or not to bid in a particular default service procurement
and regarding what price to bid.
OTS
OTS concurs with the answer submitted by Joint Applicants. See Jt. App. St. 1-S at 7.
ARIPPA
ARIPPA took no specific position on this issue in litigation. However, affiliate relations are
addressed in Section II.M., page 29, of the Joint Petition.
Citizens for Penns. Future
PennFuture takes no position on this issue.
Citizen Power
Citizen Power believes that the Amended and Restated Mutual Assistance Agreement should be
revised to provide that goods and services provided by a regulated operating company to other
operating companies are provided at the higher of cost (including book value for assets) or
market value as recommended by Richard S. Hahn in his testimony on behalf of OCA.152
Clean Air Council
Clean Air Council did not adopt a specific position on this issue in litigation and offers no
response except to note that affiliate relations are addressed in Section II.M., page 29, of the
Joint Petition.
Constellation
Constellation did not address Issue 10 in its testimony.
152
OCA St. 1 at 40, Public Version.
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DEP
The Department is not taking a position on this issue.
Direct Energy
Direct Energy expressed concerns about cost allocation between the FirstEnergy EDC and its
unregulated EGS affiliate. Direct Energy St. 1 at 16-17; Direct Energy St. 3 at 15-16. Direct
Energy recommends that the Commission should continually investigate the relationships
between FE’s unregulated affiliates and the EDC to ensure cross-subsidies from the regulated
businesses are not funding the FirstEnergy affiliates in a manner that discriminates against
unaffiliated EGSs. Direct Energy St. 3 at 15-16; Main Brief, Section VI.D.
IBEW
Did not submit a response.
MEIUG/PICA
MEIUG/PICA hereby adopt the representations offered by the Joint Applicants with respect to
the twelve questions posed by the PUC, as set forth in the Commission's June 3, 2010,
Secretarial Letter.
PMHA
See answer to Question 1.
PREA
PREA took no specific position on this issue in litigation. However, affiliate relations are
addressed in Section II.M., page 29, of the Settlement.
PSU
PSU takes no position on this question.
RESA
As discussed in testimony RESA is recommending two mitigation measures that would address
concerns related to affiliate relationships: an enhanced Code of Conduct for Applicants and
conditioning the merger on the results of an independent audit of Applicants’ affiliate
relationships and cost allocation practices.
UWUA
See answer to Question 1.
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WPPII
See answer to Question 1.
WPPSEF
The WPPSEF took no specific position on this issue in litigation. However, affiliate relations are
addressed in Section II.M., page 29, of the Joint Petition.
YCSWA
The YCSWA takes no position on this question.
11.
Investigate the impact the proposed merger may have on the potential for
anticompetitive behavior per 66 Pa. C.S. §2811(e)(1). How will the merger affect wholesale
and retail competition for power/electric generation and transmission?
Joint Applicants
The Merger will not negatively affect wholesale or retail competition for electric generation and
transmission. See generally Jt. App. St. 4 and Ex. WHH-1 (testimony of Dr. William
Hieronymus before the Federal Energy Regulatory Commission). While FirstEnergy has already
been very active in supporting and promoting electric competition in Pennsylvania, specific
additional commitments were made in the Settlement to further support competitive wholesale
and retail markets. Retail market enhancements include: a standard Price-to Compare structure
and new customer electric choice materials for each post-merger FirstEnergy EDC; and, for West
Penn, EGS offer mailings, provision of customer information and interval consumption to EGSs,
appointment of a retail choice ombudsman, and a revised purchase of receivables program. See
Joint Petition at ¶¶ 38-48. Regarding wholesale markets, the post-merger FirstEnergy EDCs will
provide to OTS, OSBA and OCA detailed information regarding the processes and results of
procuring Default Service power supplies occurring after June 1, 2013 and for a period of three
years thereafter, subject to the appropriate confidentiality agreements. In addition, the EDCs will
file with the Commission annually from 2011-2015 a report addressing wholesale market prices
and price trends in the PJM markets in which it participates. See Joint Petition at ¶¶ 53-55.
OCA
The Settling Parties agreed to address these concerns in ¶¶ 53, 54 and 55. These provisions will
allow the Commission, the OTS, OSBA and the OCA to receive timely and accurate information
as to the state of the markets in the post-merger service territories and will enable corrective
actions to be taken if the need arises. The OCA submits that these provisions provide important
protections and are in the public interest. See also OCA Statement in Support at 10.
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OSBA
As proposed, and as modified by the Settlement, the anticompetitive effects of the merger will
offset or negate any affirmative benefits arising from the merger.
OTS
OTS concurs with the answer submitted by Joint Applicants. See Jt. App. St. 1-S at 7-8.
ARIPPA
ARIPPA took no specific position on this issue in litigation. However, competitive issues are
addressed in Sections II.I., and K., pages 16-21, and 27-29, of the Joint Petition.
Citizens for Penns. Future
The proposed merger’s impacts on wholesale and retail competition for generation and
transmission are addressed by ¶¶ 37-45 and 50-52 of the Joint Petition.
Citizen Power
Please see Section B of Main Brief.
Clean Air Council
Clean Air Council did not adopt a specific position on this issue in litigation and offers no
response except to note that competitive issues are addressed in Sections II.I., and K., pages 1621, and 27-29, of the Joint Petition.
Constellation
As indicated in Constellation’s Statement in Support, at ¶¶ 38 through 46, the Partial Settlement
includes PTC and EGS training session provisions as future retail market enhancements affecting
all of the Joint Applicants’ territories, encourages further retail market development in the
Allegheny-West Penn service territory, in particular, through the Joint Applicants’ commitment
to (a) file a purchase-of-receivables plan, (b) engage in certain customer education programs, (c)
offer a variety of customer billing options, and (d) provide necessary retail supplier access to
important customer information and other data.
DEP
The Department did not raise this issue in the proceeding. Several competitors of the Joint
Applicants did participate in the proceeding and some are included in the Joint Petitioners.
Paragraphs 38-48 of the Settlement address retail competition issues and appear to provide
access to the Joint Applicants’ distribution customers for retail competition. Paragraphs 53-55 of
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the Settlement also require the Joint Applicants to provide information to the statutory parties
and the Commission concerning these issues through 2015.
Direct Energy
Direct Energy has demonstrated that the merger will not produce any material competitive
benefits. Further, the evidence shows that the post-merger environment is likely to result in anticompetitive and discriminatory conduct on the part of FirstEnergy that will prevent retail
electricity customers from obtaining the benefits of a properly functioning and workably
competitive market. Moreover, the merger would harm post-merger wholesale markets and,
indirectly, the retail generation market in FirstEnergy’s service territory. See Main Brief, Section
V.B.
IBEW
Did not submit a response.
MEIUG/PICA
MEIUG/PICA hereby adopt the representations offered by the Joint Applicants with respect to
the twelve questions posed by the PUC, as set forth in the Commission's June 3, 2010,
Secretarial Letter.
PMHA
See answer to Question 1.
PREA
PREA took no specific position on this issue in litigation. However, affiliate relations are
addressed in Section II.M., page 29, of the Settlement.
PSU
PSU takes no position on this question other than agreeing with ¶¶ 38, 39, 40, 41, 42, 43, 44,
45, 46, 47, 48, 53, 54, and 55 of the Joint Petition addressing this issue.
RESA
As discussed in detail in its main brief, RESA’s position is that the proposed merger creates the
incentive and opportunity for the combined entity to engage in anticompetitive and
discriminatory behavior. The exercise of such power could lead the FirstEnergy affiliated EDCs
to create advantages in favor of the FirstEnergy affiliated EGS in both the ability of the affiliated
EGS to submit bids to provide generation for default service customers and to provide generation
service directly to retail customers. The conditions in the Partial Settlement purporting to
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address these concerns are not significant and will not ameliorate the concerns raised by this
merger.
UWUA
See answer to Question 1.
WPPII
See answer to Question 1.
WPPSEF
The WPPSEF took no specific position on this issue in litigation. However, competitive issues
are addressed in Sections II.I., and K., pages 16-21, and 27-29, of the Settlement.
YCSWA
The YCSWA takes no position on this question. The Settlement deals with this question, in part,
at ¶¶ 53-55, page 28.
See also discussion “Competition in the Wholesale and Retail Marketplace,” Section III.C.12. of
Initial Decision.
12.
How will transmission projects in the western part of the state be affected by the
merger?
Joint Applicants
The Joint Applicants have no plans to alter any existing transmission projects undertaken by
TrAILCo or West Penn, nor do they anticipate any changes to the schedules for such projects.
See Jt. App. St. 1-S at 4.
OCA
OCA witness Hahn addressed this issue, as follows:
The integration of American Transmission System, Inc. (ATSI)
into PJM should not have an adverse impact on transmission
projects in the Western part of Pennsylvania. PJM has established
processes and procedures for the planning and operation of its
transmission system. Moreover, both PJM and MISO must
comply with NERC reliability standards, so the need for new
projects should not be affected by ATSI joining PJM.
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OCA St. 1 at 40, Public Version. The OCA is satisfied that the merger poses no concerns for the
transmission projects in the western part of Pennsylvania.
OSBA
The OSBA defers to the Joint Applicants to answer this question.
OTS
OTS concurs with the answer submitted by Joint Applicants. See Jt. App. St. 1-S at 4.
ARIPPA
ARIPPA took no specific position on this issue in litigation and has no response.
Citizens for Penns. Future
PennFuture takes no position on this issue.
Citizen Power
Citizen Power takes no position with respect to this issue.
Clean Air Council
Clean Air Council did not adopt a specific position on this issue in litigation and offers no
response.
Constellation
Constellation did not address Issue 12 in its testimony.
DEP
The Department is not taking a position on this issue.
Direct Energy
Direct Energy did not address Question 12 in its testimony.
IBEW
Did not submit a response.
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MEIUG/PICA
MEIUG/PICA hereby adopt the representations offered by the Joint Applicants with respect to
the twelve questions posed by the PUC, as set forth in the Commission's June 3, 2010,
Secretarial Letter.
PMHA
See answer to Question 1.
PREA
PREA took no specific position on this issue in litigation and is not in a position to submit a
response here.
PSU
PSU takes no position on this question.
RESA
This question is primarily directed to the Applicants. RESA has not formed an opinion on these
issues at this time, but reserves the right to respond to the positions of the Applicants and others.
UWUA
See answer to Question 1.
WPPII
See answer to Question 1.
WPPSEF
The WPPSEF took no specific position on this issue in litigation and is not in a position to
submit a response here.
YCSWA
The YCSWA takes no position on this question.
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