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Compliance Audit Report On Ohio Corporate Separation Says "FirstEnergy" Name Should Be Dropped From FirstEnergy Solutions Name

Report Says Prior Assignment Of FirstEnergy Solutions Retail Supply Sales Responsibility To FirstEnergy Service Company, "Highly Inappropriate"

May 14, 2018

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Copyright 2010-17
Reporting by Paul Ring •

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A final report from the SAGE Management Consultants, LLC (SAGE) on a Compliance Audit of the FirstEnergy Operating Companies (including the Ohio regulated utilities, or Ohio Companies) with the Corporate Separation Rules of the Public Utilities Commission of Ohio (PUCO) says that a prior assignment of the responsibility of FirstEnergy Solutions (FES) retail supply sales to FirstEnergy Service Company was, "highly inappropriate."

The report also recommends that if FirstEnergy Solutions continues as a retail supplier in Ohio, the name "FirstEnergy" should be removed from the competitive supplier's name

In a statement to, the FirstEnergy Ohio Utilities said, "We are reviewing the report. FirstEnergy follows all corporate separation rules and we expect to have the opportunity to file comments in response to the report’s findings and recommendations."

According to the report, "While FES is the legal entity that records the sales and costs of the CRES [competitive retail electric service] sales in Ohio, the sales and support for the function is provided by the FirstEnergy Service Company [hereafter, Service Company]." The FirstEnergy Service Company provides shared services to the FirstEnergy Corp. holding company and all of its subsidiaries.

"The FES organization itself is focused on competitive wholesale generation sales. The Service Company provides the CRES sales and support functions," the report states

"The marketing and sales support for FES CRES [competitive retail electric service] operations in Ohio is provided by the Service Company Marketing and Branding group which reports to the FirstEnergy President and Chief Executive Officer," the report states

"The Retail Sales and Marketing group [within the Service Company] directly supports FES CRES sales in Ohio. The Communications and Branding group [within the Service Company] and the Marketing and Product Development group [within the Service Company] indirectly support the FES CRES sales in Ohio," the report said

"The Retail Sales and Marketing [within the Service Company] group directly supports FES CRES sales in Ohio and the other states in which FES offers CRES products. The Retail Sales and Marketing group is responsible for FES CRES sales to all Ohio electric customers, not just the customers in the Ohio Companies’ service territories," the report said

The report notes that the Retail Sales and Marketing group formerly reported to the President of FES.

"The reporting relationship was transferred to the Service Company in 2016 when the responsibility for the FirstEnergy Products (FEP) back office was assigned to it. FEP is managed by the Service Company Marketing and Product Development group. It sells products like smart thermostats and light bulbs and services like appliance warrantees and electrician referrals to the Ohio Companies’ customers under a tariff. It does not sell CRES," the report states

The report notes that FEP only sells non-CRES products and services to the Ohio Companies’ regulated customers and some regulated customers in other states. FES Retail sells CRES products to all Ohio customers and customers in other states.

"FEP is the evolution of the legacy Consumer Products effort. It is being ramped up and the Retail Operations unit is charged with the modernization of the back office functions. Retail Operations is growing the staff and implementing new systems and procedures to support FEP. A 2017 Retail Operations project replicated the FES support model for FEP," the report stated

The report states that, "The assignment of FES CRES retail sales and service responsibility to the Service Company and the designation of FES CRES sales and service leaders as Shared Services Employees is highly inappropriate."

"The 2016 transfer of CRES sales responsibilities from FES to the Service Company Senior Vice President of Marketing and Branding was ill advised. The rationale was that the transfer of the FEP back office responsibilities gave the Retail Operations Director both FES unregulated and FEP regulated responsibilities that needed a Shared Services Employee (FERC orange) designation. This, in turn, gave the Vice President of Retail Sales for FES CRES both regulated and unregulated employee direct reports and he was designated a Shared Services Officer (FERC green) and the position was reorganized under the Shared Services Marketing and Branding group. These Shared Services employee designations for FES sales and support positions and assignment of FES CRES sales responsibility to the Service Company are highly inappropriate," the report said

"FES is a legal entity with a clear distinction as a non-regulated competitive enterprise. The Service Company is intended to provide shared and common services to all FirstEnergy subsidiaries such as information technology, accounting, security, and the like. It is not intended to provide unregulated, competitive sales and service," the report said

"The FEP back office operation has Ohio Companies’ regulated customer information which the FES back office is prohibited from having. It is inappropriate for the FEP and FES back office operations to report to the same director. Further, the FES Retail Sales Vice President routinely participates in management meetings with other Service Company executives," the report said

"The placement of the FES CRES Retail Sales organization under the Service Company Marketing and Branding group makes the FES CRES Retail Sales Vice President part of the senior leadership team for a Service Company group that primarily serves the FirstEnergy regulated operating companies. Attendance by the FES CRES retail sales executive at meetings with other Service Company executives focused on regulated utility operations is problematic. It makes separation of regulated and competitive information highly challenging," the report said

"It is understandable that FirstEnergy would want to utilize the FES back office expertise to modernize the FEP back office. However, the management of the modernization of the FEP back office could have been accomplished by transferring the FES back office director to the FEP organization under the Marketing and Product Development group and backfilling the manager position for the well-established FES back office," the report said

"As it is, the Retail Operations group serves two masters, the unregulated FES CRES sales and the regulated (by tariff) FEP sales. However, the Retail Operations group reports directly to the FES Retail Sales function rather than the FEP marketing and sales function. This is an awkward organization structure," the report said

The report recommends transferring all Service Company personnel who support FES CRES sales and customer service in Ohio to FES.

"FES CRES Retail Sales Vice President and his sales organization should be transferred back to FES. The Retail Operations organization can be split into its FEP and FES components and the FEP component transferred to the FEP group under Marketing and Product Development and the FES portion transferred back to FES with the CRES sales function," the report said

"The FEP and FES components of Retail Operations are already segregated. Each has dedicated employees (other than the Director) in segregated offices using different systems and contractors. It will be straightforward to separate the components and transfer them to the appropriate organizational units," the report said

The report also said that FirstEnergy Corp. should, "relocate the FEP Retail Operations units away from the FES competitive organizational units. Right now, there are only signs separating FEP Retail Operations from FES competitive unit work areas. For practical reasons, FEP Retail Operations cannot be physically separated with separate badge access in its current open office location without high expense. FES competitive work units are currently adjacent to the FEP Retail Operations. The Affiliate Restrictions signs and a separate printer are not adequate physical separation between regulated and unregulated operations."

The report said that, "FirstEnergy Solutions’ successful competitive retail electric services in the Ohio Companies’ territories may be related to its FirstEnergy name."

The report states, "The three Ohio Companies are prominently branded as 'A FirstEnergy Company,' as in 'Ohio Edison, A FirstEnergy Company.' FirstEnergy works hard on its stand-alone branding in Ohio as well. For example, the Cleveland Browns stadium is a 'FirstEnergy Stadium.'"

The report states, "The Ohio Companies Corporate Separation Plan Code of Conduct ... says: 'The Companies, upon request from a customer, will provide a complete list of all competitive retail electric service providers operating on the system, but may not endorse any competitive retail electric service providers, indicate that an electric services company is an affiliate unless specifically and independently asked by a customer or other third party, or indicate that any competitive retail electric service provider will receive preference because of an affiliate relationship.'"

"By virtue of the name, FirstEnergy Solutions, it is impossible for the FirstEnergy Ohio Companies representatives to not, 'indicate that an electric services company is an affiliate ...' as they share the name, 'FirstEnergy.' Further, Case No. 13-3151-EL-COL requires the Ohio Companies to place the FirstEnergy Solutions logo prominently on the bills to FES CRES Ohio customers."

"A separate FirstEnergy program, FirstEnergy Products, offers tariffed products, such as smart light bulbs and thermostats, and services, such as appliance warrantees and electricians, to the Ohio Companies’ customers. Executives in this program tout the importance of using the FirstEnergy name with FirstEnergy Products, saying FirstEnergy is a 'trusted supplier' and the 'FirstEnergy brand is prominent," the report says

"When potential CRES customers are presented with a list of potential CRES providers, even if it is from the PUCO website, the name FirstEnergy Solutions connotes that it is part of FirstEnergy, just as Ohio Edison, CEI, and Toledo Edison are part of FirstEnergy. It is natural that some would infer that FirstEnergy Solutions is the same as their 'trusted utility supplier'” and give greater consideration to FES in making their CRES supplier decisions," the report says

Among the report's recommendations is, "Remove FirstEnergy from the name of FirstEnergy Solutions to eliminate affiliate bias."

"Using 'FirstEnergy' in the Ohio Companies’ CRES affiliate’s name, 'FirstEnergy Solutions,' implies an endorsement by the FirstEnergy Ohio Companies. Should FES continue to be a CRES provider in Ohio, it should have a different name that does not include 'FirstEnergy' or any other name that implies a connection to the Ohio Companies," the report said

The report also says, "The link to the FES website from the FirstEnergy website provides an unfair advantage."

"The FirstEnergy website represents the Ohio Companies as well as other FirstEnergy entities. The link from the FirstEnergy website to the separate FES website could be interpreted as an endorsement of FES CRES services by the Ohio Companies. Since the FES website is separate from the FirstEnergy website, the link could be severed easily. Likewise, the link from the FES website to the FirstEnergy website could be severed," the report says

"The links between the FirstEnergy website and the FES website should be severed to remove the chance of miscommunicating that the Ohio Companies somehow endorse the FES CRES offerings in Ohio," the report said

The report noted that FirstEnergy relies on Federal Energy Regulatory Commission rule compliance for the Ohio Companies’ corporate separation requirement compliance, and that there is no separate Ohio Corporate Separation Rule compliance program.

However, the report said that the FERC rule compliance program does not cover all of the Ohio Corporate Separation Plan Code of Conduct articles.

"Going forward, FirstEnergy should add an addendum to the FERC Compliance Programs to cover these Ohio Corporate Separation Rules compliance elements," the report said

The report noted that FirstEnergy has announced its intention to exit "commodity exposed" businesses which will reduce the risk of the Ohio Companies’ corporate affiliations, if implemented.

"The FirstEnergy exit of the competitive generation business and the competitive retail electric services business in Ohio will reduce the risk to Ohio ratepayers from affiliate relationships and transactions with the Ohio Companies’ affiliates," the report said

The report found that the Ohio Companies’ purchases of electricity commodity and services from affiliates have been well-controlled by the regulatory processes in place.

The report said that there have been no hotline calls relevant to FES CRES in the Ohio Companies’ territories in recent years.

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