METROPOLITAN EDISON COMPANY - Pennsylvania Public Utility ...

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IX. SUPPORT SERVICESBackground - 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), released by the Pennsylvania Public UtilityCommission (PUC or Commission) on March 1, 2007 at D-05MGT002, D-05MGT003and D-05MGT004, contained six recommendations in the Support Services chapter.BWG rated this functional area as needing minor improvement. In this chapter, threeprior recommendations and prior situations are reviewed and three follow-up findingsand one recommendation are presented.Prior Recommendation – Improve inventory turnover rates and eliminate excessinventory.Prior Situation – BWG found that inventory levels for each of the FE-PA Companieshad increased each year from 2003 through 2005, and recommended that the FE-PACompanies implement practices to reduce their materials and supplies inventories.Year-end inventory levels for the three FE-PA Companies combined had increased from$24.4 million in 2003 to $30.2 million in 2005. Inventory turnover levels in 2005 forMet-Ed, Penelec, and Penn Power were 1.81, 1.47, and 1.45, respectively, which werebelow the levels of the better performing Pennsylvania utilities. BWG believed thatFirstEnergy could increase its inventory turnover rates to 3.0, reduce inventory balancesby $5.2 million, and reduce annual inventory carrying costs by $522,000. BWG alsonoted that inventory turnover was not a FirstEnergy Supply Chain incentive objectiveand recommended that a Supply Chain incentive objective based on maintainingimproved inventory turnover rates (including inventory turnover rates for materials andsupplies inventory) be developed.As of December 31, 2005, Met-Ed, Penelec, and Penn Power had inventory withno issues since the implementation of the SAP, AG (SAP) system in 2003 of 34.7%,28.4%, and 18.8%, respectively. Parts with no issues or receipts since theimplementation of SAP in 2003 totaled $6.5 million (i.e., $3.3 million for Met-Ed, $3.2million for Penelec, and $8,670 for Penn Power). These amounts represented slowmoving or inactive inventory requiring periodic review to determine if the inventory wasobsolete (i.e., non-emergency stock) and should be sold for scrap. BWG suggestedthat the FE-PA Companies review the materials for which there have been no receiptsor issues since the implementation of SAP in 2003 and dispose of obsolete andnon-emergency stock. FirstEnergy estimated that the total value of both its obsoleteand non-emergency stock was approximately $300,000. The disposal of both obsoleteand non-emergency stock would have resulted in associated annual carrying costsavings of approximately $30,000.- 54 -
Follow-up Finding and Conclusion No. IX-1 – The FE-PA Companies haveimproved inventory turnover rates and reduced total inventory levels.FirstEnergy has attempted to increase inventory turnover levels to 3.0 for items itconsiders as part of working inventory (i.e., general distribution materials and supplies,distribution transformers, network and underground equipment, and meter equipment)and has achieved some improvement. The actual working inventory turnover levelsexperienced by the FE-PA Companies for 2006 through 2009 are shown in Exhibit IX-1.Met-Ed and Penelec have achieved sizeable improvements in their inventory turnoverrates, while Penn Power’s turns have remained about the same which are above theimproved levels of Met-Ed and Penelec. The FE-PA Companies achieved the improvedturnover rates by reducing their year-end working inventory levels and total year-endinventories during the period 2006 through 2009 as shown in Exhibits IX-2 and IX-3. Inpart, these inventory reductions were accomplished by FirstEnergy annually reviewinginventory for potentially obsolete items.Exhibit IX-1FE-PA CompaniesWorking Inventory Turnover Levels2006 – 2009Company 2006 2007 2008 2009Met-Ed 1.7 2.7 2.2 2.4Penelec 1.2 1.5 1.9 2.2Penn Power 2.7 3.5 4.0 2.7Total PA 1.5 2.1 2.1 2.3Source: February 2010 Implementation PlanExhibit IX-2FE-PA CompaniesYear-End Working Inventory Levels2006 – 2009Company 12/31/06 12/31/07 12/31/08 12/31/09Total Reduction2006-2009Met-Ed $9,786,304 $7,784,863 $6,694,977 $6,492,086 $3,294,218 33.7%Penelec $12,588,901 $10,790,178 $9,277,407 $8,615,291 $3,973,610 31.6%Penn Power $964,242 $721,283 $735,117 $906,478 $57,764 6.0%Total PA $23,339,447 $19,296,324 $16,707,501 $16,013,855 $7,325,592 31.4%Source: February 2010 Implementation Plan- 55 -
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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 32 and 33: IV. CORPORATE GOVERNANCEBackground
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: Routine periodic updating of the em
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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