METROPOLITAN EDISON COMPANY - Pennsylvania Public Utility ...

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IV. CORPORATE GOVERNANCEBackground - The Stratified Management and Operations Audit of Metropolitan EdisonCompany (Met-Ed), Pennsylvania Electric Company (Penelec), and PennsylvaniaPower Company (Penn Power) (collectively referred to as the FirstEnergy PennsylvaniaCompanies or FE-PA Companies) conducted by the consulting firmBarrington-Wellesley Group, Inc. (BWG or Consultant), released by the PennsylvaniaPublic Utility Commission (PUC or Commission) on March 1, 2007, at D-05MGT002,D-05MGT003 and D-05MGT004, contained three recommendations in the CorporateGovernance chapter. BWG rated this functional area as needing moderateimprovement. In this chapter, one prior recommendation and prior situation arereviewed and one follow-up finding and one recommendation are presented.Prior Recommendation – Have the Director of Internal Audit report administratively toa senior officer of FirstEnergy other than the Chief Financial Officer (CFO).Prior Situation – BWG found that the Director of Internal Audit’s functional reportingrelationship with the Audit Committee of the Board of Directors was appropriate;however, his administrative reporting relationship with the CFO was not desirable.While it was true that the CFO was likely to have a better understanding of the InternalAudit function than another senior officer, the prime objective of the Internal Auditfunction is to audit activities that report directly or indirectly to the CFO. FirstEnergy hada sufficient number of senior executives other than the CFO who could have performedthis administrative responsibility and eliminated the potential conflict of interest or theperception of the conflict that existed. The Consultant found it surprising that althoughthe Audit Committee and the external audit firm were both aware of the issue they didnot take steps to eliminate the conflict of interest.Follow-up Finding and Conclusion No. IV-1 – FirstEnergy has not modified thereporting structure for the Internal Audit Department.FirstEnergy rejected BWG’s recommendation that the Director of Internal Auditreport administratively to the CEO or a direct report of the CEO other than the CFO.FirstEnergy stated that it is common in other companies to have the Director of InternalAudit report administratively to the CFO and substantively to the Board’s AuditCommittee. It also indicated that it has sufficient internal controls to ensure that theInternal Audit function maintains appropriate independence and feels that adequatechecks and balances exist.Currently, the Director of Internal Audit reports administratively to the ChiefFinancial Officer (CFO) and functionally to the Audit Committee of the Board ofDirectors (Audit Committee). This reporting relationship is specified in the Charter ofthe Audit Committee (Charter). One of the purposes of the Audit Committee is to assistthe Board of Directors’ oversight of the performance of the Company’s internal auditfunction. The Charter has very specific details in regards to the responsibilities of theAudit Committee in relation to the internal audit function. The Charter requires the Audit- 26 -
Committee to periodically assess the reporting relationship of the Director of InternalAudit. The Director of Internal Audit discusses this reporting relationship annually(every May) with the Audit Committee.However, the Audit Staff is concerned that the current reporting relationshipcreates a potential risk of undue influence, or at least the appearance thereof, over theobjectivity of the Internal Audit function with respect to accounting and financialreporting matters and the scope or timing of the work efforts. Ideally, the Director ofInternal Audit should report solely to the Audit Committee for operational matters and toan executive other than the CFO for administrative matters and in particular forperformance evaluations.Staff’s Follow-up Recommendation – Modify the Internal Audit Departmentreporting structure so that it no longer administratively reports to the FirstEnergyCFO.- 27 -
Page 5: METROPOLITAN EDISON COMPANYPENNSYLV
Page 8 and 9: • Support Services• Human Resou
Page 10 and 11: • Developed and implemented forma
Page 12 and 13: FIRSTENERGY PENNSYLVANIA COMPANIESM
Page 24 and 25: III. AFFILIATE INTERESTSBackground
Page 26 and 27: In addition, subsidiary or related
Page 28 and 29: BWG recommended that a detailed, wr
Page 30 and 31: management. Other potential uses of
Page 34 and 35: V. FINANCIAL MANAGEMENTBackground -
Page 36 and 37: the internal audit was to determine
Page 38 and 39: Committee citing the internal contr
Page 40 and 41: VI. ELECTRIC RELIABILITYBackground
Page 42: Exhibit VI-1Metropolitan Edison Com
Page 45 and 46: provide additional details to the C
Page 47 and 48: Exhibit VI-6FirstEnergy Pennsylvani
Page 49 and 50: All three FE-PA Companies have had
Page 51 and 52: FirstEnergy is following the right
Page 53 and 54: Company, and The Toledo Edison Comp
Page 55 and 56: technicians. These strategies are u
Page 57 and 58: VIII. EMERGENCY PREPAREDNESSBackgro
Page 59 and 60: Routine periodic updating of the em
Page 61 and 62: Follow-up Finding and Conclusion No
Page 63 and 64: old excess inventory. Spare invento
Page 65 and 66: controls were automated. Moreover,
Page 67 and 68: Exhibit IX-6FE-PA CompaniesPercenta
Page 69 and 70: FE-PA Companies were unable to iden
Page 71 and 72: Staff’s Follow-up Recommendation
Page 73 and 74: Exhibit X-6Metropolitan Edison Comp
Page 75 and 76: Prior Recommendation - Develop a co
Page 77 and 78: Therefore, BWG suggested that First
Page 79 and 80: XI. CUSTOMER SERVICEBackground - Th
Page 81 and 82: Exhibit XI-2FE-PA CompaniesPercenta
Page 83 and 84:
Exhibit XI-5FE-PA Companies Compare
Page 85 and 86:
Exhibit XI-7FE-PA Companies Compare
Page 87 and 88:
Follow-up Finding and Conclusion No
Page 89 and 90:
uilding, in an effort to protect re
Page 91 and 92:
Companies would submit a supplement
Page 93 and 94:
3. The "four-fifths" rule (underuti
Page 95 and 96:
Met-Ed has female underutilization
Page 97 and 98:
Exhibit XII-4Page 1 of 2FirstEnergy
Page 99 and 100:
The number of years that FirstEnerg
Page 101 and 102:
FE-PA Companies do track purchases
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