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Audit Of FirstEnergy Ohio Utilities' Corporate Separation Plan Finds "Minor" Violations Related To Products & Services

Audit Consultant Recommends FirstEnergy Products Remove FE Ohio Utilities' Names & Logos From Marketing Materials

Consultant Suggests FE Ohio Utilities "Explore" Allowing Retail Suppliers To Use Utility Billing For Non-commodity Services, As Affiliates May Do

Recommends FE Utilities Better Inform Customers Of Complaint Process, Noting Potential For Complaints About Retail Suppliers

September 13, 2021

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Copyright 2010-21
Reporting by Paul Ring •

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The Public Utilities Commission of Ohio (PUCO) issued an audit report of FirstEnergy’s Ohio electric distribution companies’ compliance with corporate separation laws and related PUCO regulations.

Specifically, the report assesses Cleveland Electric Illuminating Company, Ohio Edison, Toledo Edison and other FirstEnergy affiliates’ procedures related to 44 corporate separation requirements in Ohio Administrative Code (OAC).

The report identifies 23 requirements in which the FirstEnergy companies are compliant, 13 opportunities for improvement, 8 minor violations, and zero major violations. The report describes minor violations as "deviation from compliance requirements not likely to result in a failure of compliance." The audit examined procedures in place from Nov. 1, 2016 through Oct. 31, 2020.

PUCO said that, "Overall, the report found that FirstEnergy needs to build a robust and effective compliance plan that is designed to meet the specific corporate separation requirements in the OAC. The report makes recommendations to improve compliance with respect to structural safeguards, managing customer and supplier information, customer protection, marketing and branding, and accounting and its cost allocation manual."

A media representative from FirstEnergy Corp. provided the following statement concerning the matter:

"While we are currently reviewing the PUCO’s audit report, we appreciate the auditor's feedback and are open to making any necessary improvements in corporate separation compliance."

--- Statement from FirstEnergy Corp.

Of note, the audit report, prepared by a consultant, states, "[Consultant] finds minor non-compliance for a couple of requirements related with products and services," as the consultant summarized these as follows:

• "Financial settlement: FirstEnergy is allowed to offer non-electric goods and services through a Commission-approved tariff. During the 2016- 2020 period, FEP [FirstEnergy Products] generated total revenue of approximately [redacted] with the profit of approximately [redacted]. Profits from FEP are settled to the Ohio Companies below the line, which means profits are not credited in any way to customers. Offering products through regulated channel is a competitive advantage for FirstEnergy affiliates that other providers do not have. Additionally, [redacted] FEP revenue [redacted] during the 2016-2020 period was collected through customers' utility bills. This is a convenience offered by FEP through the regulated companies to regulated customers that FirstEnergy competitors cannot offer."

• "Not enough separation between FEP and FirstEnergy Home: FirstEnergy offers the same products and services as FEP to all Ohio consumers through an unregulated subsidiary known as First Energy Home. It appears First Energy Home also shares the same internal resources as FEP. There is a risk of FirstEnergy Home sharing resources with FEP that are ultimately financed or coming from the Ohio Companies. If the same staff support both regulated (FEP) and unregulated (FirstEnergy Home) services, it is challenging to maintain a 'mental barrier' and keep confidential customer information set aside while providing support to an unregulated affiliate."

• "Soft/Warm transfers: Ohio Company customers can be transferred to the FEP group when they call for customer service-related issues, called 'soft transfers.' During the 2016- 2020 audit period, products sold through soft transfers generated a profit of approximately [redacted]. Once again, FirstEnergy competitors would not have access to this opportunity to gain customers through redirected electric utility customer service calls. The profit from FEP business activities is also not credited back to the Ohio Companies customers because it settles below the line."

The audit consultant said, "We have concerns with a few aspects of the FirstEnergy Home operation regarding corporate separation," and offered the following recommendations:

• "First, we recommend FirstEnergy perform an annual internal audit to ensure that adequate protections are in place to prevent the cross-subsidization of any protected information between FEP, the Ohio Companies, and Suvon d/ b/a FirstEnergy Home."

• "Second, Suvon is spread throughout FirstEnergy's corporate structure under FirstEnergy Service Company. There is no entity on the Corporate Organizational Chart that indicates FirstEnergy Advisors or FirstEnergy Home, nor is it obvious based on anyone's title who works for either organization. We recommend that Suvon, including FirstEnergy Advisors and FirstEnergy Home, be separated into their own organization within FirstEnergy, and not be considered part of FESC."

• "Third, recognizing that utility customers are providing FEP with a market for their products and services, and that the profits generated by that group are not shared with customers, we recommend a profit-sharing mechanism be adopted. This profit-sharing should include profits from both FEP and any soft transfers of Ohio Companies' customers. Currently, Ohio Companies' customers receive no benefit from having their operating company associated with FEP."

• "Fourth, another of FirstEnergy Products' competitive advantages is that it can offer a payment option for their services as part of the customer's utility bill. This is clearly a desirable option, as evidenced by [redacted] of the revenue in the 2016-2020 period being collected in this manner. FEP's competitors do not have access to this option. A profit-sharing mechanism should be set up to allow for Ohio regulated customers to benefit from allowing unregulated affiliates access to its regulated customer billing system. FirstEnergy might also explore allowing other providers access to the regulated customer billing system to provide equitable treatment with their affiliates."

• Regarding marketing and branding, the consultant recommends that, "FEP remove Ohio Companies' names and logos from their marketing materials and activities. Using the Ohio Companies' names to sell non-electric goods and services is capitalizing on the reputation of the Ohio Companies."

With respect to compliance with the code of conduct and marketing and branding, the audit consultant said, "We do not find FirstEnergy non-compliant with the requirements related to marketing and branding."

"We find that FESC [FirstEnergy Service Company] employees disclose their affiliation when they are marketing to Ohio Company customers in the form of a disclosure at the bottom of marketing materials," the consultant said

"However, there is a key opportunity for improvement for FirstEnergy in how it markets their products and services. The FEP group adds 'services' to the Ohio Companies name to market non-electric products and services. Adding 'Services' may not provide enough information for customers to distinguish that the entity offering products and services is different than their distribution company. A customer could reasonably assume that FirstEnergy Products was also their utility. This provides competitive advantage that independent competitors do not have," the consultant said

The audit consultant also said that, "We found a minor non-compliance," with certain cost allocation manual (CAM) requirements. "OAC 4901:1-37 Section 08(C) states that the CAM is intended to ensure there is no cross-subsidization between affiliates, but there is a lack of monitoring and controls in place regarding the CAM. The CAM itself is not sufficiently preventing cross-subsidization. Additionally, FirstEnergy does not have job summaries of independent contractors as per OAC 4901:1-37 Section 08(D)(S), has not maintained a log as required by OAC 4901:1-37 Section 08(D)(7); similarly, as enumerated in OAC 4901:1-37 Section 08(1), FirstEnergy did not have designated staff person(s) to take over the responsibilities of the corporate compliance officer when this position was vacant during the November 2020- April2021 period," the consultant said

The consultant also recommended that, for managing customer and supplier information, "we recommend FirstEnergy place a greater emphasis on the availability of a list of alternative retail suppliers to any customer upon request."

"Since these requests most likely come through the customer service function, it is likely that customers are receiving the supplier lists. However, to ensure customers can access this information from any interaction with FirstEnergy, utility staff should be made more aware of this requirement and establish a process to supply the appropriate list," the consultant said

The consultant further recommended that, "For customer protection, we suggest monitoring and reporting customer complaints in more detail. First Energy stated that Companies only track customer complaints received from the Commission. Some customers may not even be aware of the Commission, and certainly would not be submitting a complaint to them. Customers are much more likely to complain to their utility regarding third party supplier practices. Tracking should occur at this stage to assess potential common issues on which the Company could make plan changes."

Case 17-974-EL-UNC

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