Staff has reviewed the initial briefs filed in this matter and finds it has very little to
respond to. Actually, the initial brief of the Companies and the most recently filed
monthly statistical report confirms many of Staffs fears. The Companies are still
providing a lot of excuses without many answers. They continue to point the finger at the Derecho and Super Storm Sandy, when the truth of the matter is those two storms did not cause this problem, but simply exposed the problems within the Companies that were
destined to arise and will do so again if  changes aren’t made.* Further, a review of the February monthly statistical report shows an increase in consecutive reads due to weather related causes, just as Staff suspected. That will continue to be a problem as long as there is weather. Also, as Staff suspected, the Companies cannot or are not willing to seek a modification to its billing system to allow manual changes to a customer’s account when it is shown the estimation routine is inaccurate for that customer. These are just a few examples of many where Staff fears have been confirmed.

Also, Staff finds it odd that the Companies dedicate such a large portion of its
brief arguing why the Commission should not impose the “penalty” provision for missed
meter reads when they claim this problem has been solved. If the problem has indeed
been solved and given the concessions Staff made for reasonable circumstances to avoid the penalty, these penalties should seldom come into play if at all. Again, it is important
to remember the Companies are required to read every meter bi-monthly, absent exigent
circumstances, not just the ones that are convenient at the time. Further, the Commission has approved similar service based performance credits in the past, specifically in the settlement in the Verizon quality of service case, Case No. 08-0761-T-GI. This circumstance is almost unprecedented in West Virginia and calls for bold action. This penalty provision is just that action, a stick in order to incentivize the Companies to make better decisions in the future to the benefit of their customers instead of to the benefit of the Companies.

*In their Initial Brief, the Companies state they have had no problems in Pennsylvania as evidence that the Derecho and Super Storm Sandy were the root causes of these problems. Staff has learned that on February 4, 2014, a complaint was filed by the Utility Workers Union of America against Penelec on behalf of its workers and individual customers for failure to properly staff the meter reading section and for failure to obtain meter  readings, leading to three, four, five consecutive estimated readings.

The focus of this assessment is to evaluate the BE protocols’ performance where bi-monthly
meter reading is the standard.

"If they can get you asking the wrong questions, they don't have to worry about the answers." - Thomas Pynchon

When the values are designated as actual, then BSE assumes that they are actual meter reads and treats when according to the
protocols employees in levelization.

As the number of consecutive estimates increases, the BE performance deteriorates.

...ascertain if using the Prior Period should not be considered for the Base Period if the Prior Period was estimated, and especially if there are indications that there was a large but unwarranted reconciliation.

In the case of scenario 10b (Figure 7-13), which imposed two months of 33%
underestimation followed by a large reconciliation, the performance was not quite as good. The R-value distribution became less compacted around R = 1.0, and the
percentage extreme R-value increased to 8%, four time that of scenario 1b. This might
result because underestimation of usage results in systematically poorer performance of the BE in situations where the estimated month’s usage and the reconciliation amount is large. More testing is called for to verify this result before changes are made to the BE
protocols to mitigate this apparent bias.

Missed scheduled meter reads resulted in a modest increase in the extent of
overestimation measured by the mean R-value, but more importantly more individual
customer R-values are in the extreme tails.

EPRl was asked to perform objective statistical testing of our estimation processes. While we (FirstEnergy) agree with EPRl that the  estimation algorithm performs well for most customers we also believe that performance can be improved.
As such we recognize the need to mitigate any unintended impact to customers in the interim and will as proposed in the settlement:
Bill message customers who received a bill varying by more than 25% from previous year following multiple estimates to remind of
payment options (February 2014);
Exception customers whose current estimate vary by more than 25% from their previous year’s bill for manual review (May 2014).

The two major storms were the largest impact cause of the disruption to obtaining scheduled meter reads. That conclusion is supported by  the experience of sister company, West Penn Power, which experienced all the same  integration issues (system integration,  renumbering, meter reading restructuring) as the Companies experienced, but did not  experience the same level of damage and  widespread outages from these two super  storms. Consequently, West Penn has not had the level of customer complaint and billing  issues that the Companies and their customers experienced.

UWUA brings this complaint in its capacity as the representative of meter readers and other Penelec employees who are being directed by Penelec to continually and willfully violate the Commission's meter reading regulations and the provisions of Penelec's own tariff.

UWUA states on information and belief that Penelec routinely estimates bills for thousands of residential customers three, four, or even five consecutive months when there are no exigent circumstances and no problems with utility personnel gaining access to the customer's meter.

UWUA states on information and belief that Penelec fails to read meters as required because it has failed to fill vacant meter-reading positions and has otherwise failed to properly staff its meter reading function. That is, Penelec has made a business decision to save the expense of hiring additional meter readers and instead issue numerous consecutive estimated bills to residential customers in violation of the Commission's regulations.

Lynn Pugh opened her AEP bill this month to see just how much the cold January had set her back, but she found something in her bill that she normally doesn’t see.

“I’ve never seen the consumer rate relief charge,” said AEP customer Lynn Pugh.

Starting in December of 2013, AEP began adding the consumer rate relief charge to customer bills. According to the company, the new charge is a way to help them account for the spike in the price of coal in 2008-2009.

“It’s actually a reflection of a settlement we had with the PSC to recover the cost of coal,” said AEP spokesman Phillip Moye.

Normally AEP pays around $50 per ton for coal, but in ’08 and ’09 they were paying over $100 per ton because of a coal shortage.

The Public Service Commission signed off on the charge and has allowed AEP to keep it on your bill for the next 15 years. Pugh was shocked to learn that the charge would be on her bill for the next 15 years.

Moye said the AEP opted to go with the additional charge rather than increasing the rate on the price of power.

“The impact on the rate would have been tremendous,” Moye said. “30 to 40 percent increase, and that obviously is more than what customers can bare.”   [bear!!  although maybe customers will tear off their clothes and run naked through the legislature in protest?]

Pugh said she understands why she is paying the additional charge, but doesn’t think it should be on there for the next 15 years.

“I can’t imagine that they paid that much extra for coal that every AEP customer is going to have to pay this.”

The charge is based on how much your bill costs. Pugh’s charge was almost 11 dollars.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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