METROPOLITAN EDISON COMPANY - Pennsylvania Public Utility ...

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Exhibit IX-3FE-PA CompaniesTotal Year-End Inventory Levels2006 – 2009Company 12/31/06 12/31/07 12/31/08 12/31/09Total Reduction2006-2009Met-Ed $12,503,178 $12,101,591 $10,799,975 $10,663,890 $1,839,288 14.7%Penelec $18,837,038 $15,705,265 $14,108,181 $13,428,474 $5,408,564 28.7%Penn Power $1,046,199 $722,763 $753,469 $916,281 $129,918 12.4%Total PA $32,386,415 $28,529,619 $25,661,625 $25,008,645 $7,377,770 22.8%Source: February 2010 Implementation PlanFirstEnergy indicated that inventory which is not considered as working inventoryis either transmission-related inventory or substation-related inventory. As of December31, 2009, the FE-PA Companies had approximately $9 million of transmission relatedand substation related inventory ($25,008,645-$16,013,855=$8,994,790). The turnoverlevel for this inventory has been less than 1.0 turns. Inventory turnover for totalinventory has been approximately 1.1 turns. Based on its efforts and experience gainedduring the years 2006 to 2009, FirstEnergy believes that it would be very difficult toachieve an inventory turnover rate of 3.0 for its working inventory because slow movingspare parts are included along with the active inventory items.FirstEnergy estimates that 58% of the FE-PA Companies’ working inventory, orapproximately $9.3 million, is slow moving (spare parts) inventory. The remainder of theworking inventory is actively managed inventory. FirstEnergy estimates that $2.0 - $2.5million of the $9.3 million in slow moving inventory represents excess usable parts onhand. FirstEnergy plans to reduce excess usable parts on hand by not replenishing theexcess portion of the inventory once it is used. This is a reasonable approach becausedisposing of such inventory now would expose the FE-PA Companies to the risk ofhaving to purchase spare parts when needed in the future at higher prices and possiblyextending outages. When work projects (i.e., capital improvements, etc.) slow down, asoccurred during the recent economic downturn, inventory levels can be lowered, but theCompany then risks stock outs if normal activity levels swiftly return. Also, a majorevent (e.g., a heat wave or an ice storm) could put the Company at risk of not havingthe necessary parts on hand, meaning a normal four hour restoration could take days tocomplete.FirstEnergy is comfortable with the inventory reductions achieved, but feels thatany further decrease would put the FE-PA Companies at risk of an inventory stock out(i.e., the inability to meet a demand due to lack of inventory). FirstEnergy indicated thatthe total materials and supplies inventory was approximately 1% of rate base for theFE-PA Companies as of December 31, 2009. Since the excess usable parts on handrepresent approximately 10% of total inventory, the Audit Staff estimates that theseparts represent only about 0.1% of rate base, or an immaterial amount.The FE-PA Companies annually review inventory levels for potentially obsoletematerials. A report on excess stock is generated by Supply Chain in order to search for- 56 -
old excess inventory. Spare inventory items are retained, but if an item is slow movingand the Company is not sure why it is still in inventory, then it becomes a candidate forbeing designated as obsolete. The write-offs resulting from the annual reviewsconducted during 2006 through 2009 are shown in Exhibit IX-4.CombinedFE-PA CompaniesSource: February 2010 Implementation PlanExhibit IX-4FE-PA CompaniesObsolete Inventory Write-offs2006 – 20092006 2007 2008 2009Total2006-2009$66,775 $151,170 $71,907 $21,763 $311,615FirstEnergy did not establish an incentive goal based on maintaining improvedinventory turnover rates as suggested by BWG. Instead, the Company bases itsincentive goal on inventory levels. The FE-PA Companies’ inventory goals, for 2007through 2010 are shown in Exhibit IX-5.Exhibit IX-5FE-PA CompaniesInventory Level Incentive Goals ($Millions)2007 – 2010Company 2007 2008 2009 2010Met-Ed $11.4 $10.9 $10.7 $10.7Penelec $17.0 $14.5 $14.2 $14.2Penn Power* $14.6 $13.8 $12.8 $38.8* Penn Power inventory was included in the inventory level incentive goals for Ohio Edison-Penn Power in 2007 – 2009, and in the overall inventory level incentive goal for theWestern Distribution Center (Ohio Edison-Penn Power, Cleveland Electric Illuminating, andToledo Edison) for 2010.Source: Data Request No. SS-9In regards to storerooms where the annual issues are less than the year-endinventory balance (i.e., inventory turnover is less than 1.0), the General Manager,Energy Delivery Warehousing & Logistics indicated that these line shop storeroomsprobably include substation inventory. For example, the Indiana Storeroom had anending inventory balance of $317,095 at December 31, 2009, while annual issues werejust $246,922. FirstEnergy indicated that the working inventory at this location might beonly $50,000 to $70,000. FirstEnergy indicated that it aggressively targeted a reductionin line shop storeroom inventory to increase the inventory turnover rate.Inventory should be managed to achieve an acceptable inventory turnover ratewhile minimizing the risk of stock outs that would adversely affect service levels.Considering that transformers are included in the working inventory for the FE-PA- 57 -
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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 and 60: Routine periodic updating of the em
Page 61: Follow-up Finding and Conclusion No
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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