UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington,
D. C.  20549
 
 FORM
10-Q
 (Mark
One)
 [X]  QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 SECURITIES
EXCHANGE ACT OF 1934
 
 For
the quarterly period ended March 31, 2008
 
 OR
 
 [  ]  TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 SECURITIES
EXCHANGE ACT OF 1934
 
 For
      the transition period from
              
              to
 
 Commission
              Registrant;
      State of Incorporation;
              I.R.S.
      EmployerFile
      Number
              Address; and Telephone
      Number
              Identification
      No.333-21011
              FIRSTENERGY
      CORP.
              34-1843785(An
      Ohio Corporation)76
      South Main StreetAkron,
      OH  44308Telephone (800)736-3402333-145140-01
              FIRSTENERGY
      SOLUTIONS CORP.
              31-1560186(An
      Ohio Corporation)c/o
      FirstEnergy Corp.76
      South Main StreetAkron,
      OH 44308Telephone
      (800)736-34021-2578
              OHIO
      EDISON COMPANY
              34-0437786(An
      Ohio Corporation)c/o
      FirstEnergy Corp.76
      South Main StreetAkron,
      OH  44308Telephone (800)736-34021-2323
              THE
      CLEVELAND ELECTRIC ILLUMINATING COMPANY
              34-0150020(An
      Ohio Corporation)c/o
      FirstEnergy Corp.76
      South Main StreetAkron,
      OH  44308Telephone (800)736-34021-3583
              THE
      TOLEDO EDISON COMPANY
              34-4375005(An
      Ohio Corporation)c/o
      FirstEnergy Corp.76
      South Main StreetAkron,
      OH  44308Telephone (800)736-34021-3141
              JERSEY
      CENTRAL POWER & LIGHT COMPANY
              21-0485010(A
      New Jersey Corporation)c/o
      FirstEnergy Corp.76
      South Main StreetAkron,
      OH  44308Telephone (800)736-34021-446
              METROPOLITAN
      EDISON COMPANY
              23-0870160(A
      Pennsylvania Corporation)c/o
      FirstEnergy Corp.76
      South Main StreetAkron,
      OH  44308Telephone (800)736-34021-3522
              PENNSYLVANIA
      ELECTRIC COMPANY
              25-0718085(A
      Pennsylvania Corporation)c/o
      FirstEnergy Corp.76
      South Main StreetAkron,
      OH  44308Telephone (800)736-3402
  
  Indicate by check
mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
 
 Yes (X)  No (  )
              FirstEnergy
      Corp., Ohio Edison Company and Pennsylvania Electric
    CompanyYes (  )  No (X)
              FirstEnergy
      Solutions Corp., The Cleveland Electric Illuminating Company, The Toledo
      Edison Company, Jersey Central Power & Light Company and Metropolitan
      Edison Company
 
 Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of
"large accelerated filer,” “accelerated filer” and “smaller reporting company"
in Rule 12b-2 of the Exchange Act.
 
 Large
      Accelerated Filer
                (X)
              FirstEnergy
      Corp.Accelerated
      Filer
                (  )
              N/ANon-accelerated
      Filer (Do not check if a smaller reporting company)
                (X)
              FirstEnergy
      Solutions Corp., Ohio Edison Company, The Cleveland Electric Illuminating
      Company, The Toledo Edison Company, Jersey Central Power & Light
      Company, Metropolitan Edison Company and Pennsylvania Electric
      Company
 
 Smaller
      Reporting Company
                (  )
              N/A
 
 Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).
 
 Yes (  )
      No (X)
              FirstEnergy
      Corp., FirstEnergy Solutions Corp., Ohio Edison Company, The Cleveland
      Electric Illuminating Company, The Toledo Edison Company, Jersey Central
      Power & Light Company, Metropolitan Edison Company, and Pennsylvania
      Electric Company
 
 Indicate the number
of shares outstanding of each of the issuer’s classes of common stock, as of the
latest practicable date:
 
 OUTSTANDINGCLASS
              AS
      OF MAY 8, 2008FirstEnergy
      Corp., $0.10 par value
              304,835,407FirstEnergy
      Solutions Corp., no par value
              7Ohio Edison
      Company, no par value
              60The Cleveland
      Electric Illuminating Company, no par value
              67,930,743The Toledo
      Edison Company, $5 par value
              29,402,054Jersey Central
      Power & Light Company, $10 par value
              14,421,637Metropolitan
      Edison Company, no par value
              859,500Pennsylvania
      Electric Company, $20 par value
              4,427,577
 
 FirstEnergy Corp. is
the sole holder of FirstEnergy Solutions Corp., Ohio Edison Company, The
Cleveland Electric Illuminating Company, The Toledo Edison Company, Jersey
Central Power & Light Company, Metropolitan Edison Company and Pennsylvania
Electric Company common stock.
 
 This combined Form
10-Q is separately filed by FirstEnergy Corp., FirstEnergy Solutions Corp., Ohio
Edison Company, The Cleveland Electric Illuminating Company, The Toledo Edison
Company, Jersey Central Power & Light Company, Metropolitan Edison Company
and Pennsylvania Electric Company. Information contained herein relating to any
individual registrant is filed by such registrant on its own behalf. No
registrant makes any representation as to information relating to any other
registrant, except that information relating to any of the FirstEnergy
subsidiary registrants is also attributed to FirstEnergy Corp.
 
 OMISSION OF CERTAIN
INFORMATION
 
 FirstEnergy
Solutions Corp., Ohio Edison Company, The Cleveland Electric Illuminating
Company, The Toledo Edison Company, Jersey Central Power & Light Company,
Metropolitan Edison Company and Pennsylvania Electric Company meet the
conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and are
therefore filing this Form 10-Q with the reduced disclosure format specified in
General Instruction H(2) to Form 10-Q.
  
  Forward-Looking Statements:
This Form 10-Q includes forward-looking statements based on information
currently available to management. Such statements are subject to certain risks
and uncertainties. These statements include declarations regarding management’s
intents, beliefs and current expectations. These statements typically contain,
but are not limited to, the terms “anticipate,” “potential,” “expect,”
“believe,” “estimate” and similar words. Forward-looking statements involve
estimates, assumptions, known and unknown risks, uncertainties and other factors
that may cause actual results, performance or achievements to be materially
different from any future results, performance or achievement expressed or
implied by such forward-looking statements.
 
 Actual results may
differ materially due to:
 ·
              the speed and
      nature of increased competition in the electric utility industry and
      legislative and regulatory changes affecting how generation rates will be
      determined following the expiration of existing rate plans in Ohio and
      Pennsylvania,
 ·
              economic or
      weather conditions affecting future sales and
  margins,
 ·
              changes in
      markets for energy services,
 ·
              changing
      energy and commodity market prices,
 ·
              replacement
      power costs being higher than anticipated or inadequately
      hedged,
 ·
              the continued
      ability of FirstEnergy’s regulated utilities to collect transition and
      other charges or to recover increased transmission
  costs,
 ·
              maintenance
      costs being higher than
anticipated,
 ·
              other
      legislative and regulatory changes, revised environmental requirements,
      including possible GHG emission
regulations,
 ·
              the
      uncertainty of the timing and amounts of the capital expenditures needed
      to, among other things, implement the Air Quality Compliance Plan
      (including that such amounts could be higher than anticipated) or levels
      of emission reductions related to the Consent Decree resolving the New
      Source Review litigation or other potential regulatory
      initiatives,
 ·
              adverse
      regulatory or legal decisions and outcomes (including, but not limited to,
      the revocation of necessary licenses or operating permits and oversight)
      by the NRC (including, but not limited to, the Demand for Information
      issued to FENOC on May 14,
2007),
 ·
              the timing and
      outcome of various proceedings before
the
 -
              PUCO
      (including, but not limited to, the distribution rate cases and the
      generation supply plan filing for the Ohio Companies and the successful
      resolution of the issues remanded to the PUCO by the Ohio Supreme Court
      regarding the RSP and RCP, including the deferral of fuel
      costs)
 -
              and Met-Ed’s
      and Penelec’s transmission service charge filings with the PPUC as well as
      the resolution of the Petitions for Review filed with the Commonwealth
      Court of Pennsylvania with respect to the transition rate plan for Met-Ed
      and Penelec,
 ·
              the continuing
      availability of generating units and their ability to operate at, or near
      full capacity,
 ·
              the changing
      market conditions that could affect the value of assets held in the
      registrants’ nuclear decommissioning trusts, pension trusts and other
      trust funds,
 ·
              the ability to
      comply with applicable state and federal reliability
      standards,
 ·
              the ability to
      accomplish or realize anticipated benefits from strategic goals (including
      employee workforce initiatives),
 ·
              the ability to
      improve electric commodity margins and to experience growth in the
      distribution business,
 ·
              the ability to
      access the public securities and other capital markets and the cost of
      such capital,
 ·
              the risks and
      other factors discussed from time to time in the registrants’ SEC filings,
      and other similar factors.
 
 The foregoing review
of factors should not be construed as exhaustive. New factors emerge from time
to time, and it is not possible to predict all such factors, nor assess the
impact of any such factor on the registrants’ business or the extent to which
any factor, or combination of factors, may cause results to differ materially
from those contained in any forward-looking statements. Also, a security rating
is not a recommendation to buy, sell or hold securities, and it may be subject
to revision or withdrawal at any time and each such rating should be evaluated
independently of any other rating. The registrants expressly disclaim any
current intention to update any forward-looking statements contained herein as a
result of new information, future events or otherwise.
 
 
 
 
 
 
 
  
  TABLE
OF CONTENTS
 
 
 
 PagesGlossary of Terms
              iii-vPart
      I.     Financial InformationItems 1. and 2. - Financial
      Statements and Management’s Discussion and Analysis ofFinancial Condition
      and Results of Operations.FirstEnergy Corp.Management's
      Discussion and Analysis of Financial Condition and
              1-32Results of OperationsReport of
      Independent Registered Public Accounting Firm
              33Consolidated
      Statements of Income
              34Consolidated
      Statements of Comprehensive Income
              35Consolidated
      Balance Sheets
              36Consolidated
      Statements of Cash Flows
              37FirstEnergy Solutions
      Corp.Management's
      Narrative Analysis of Results of Operations
              38-40Report of
      Independent Registered Public Accounting Firm
              41Consolidated
      Statements of Income and Comprehensive Income
              42Consolidated
      Balance Sheets
              43Consolidated
      Statements of Cash Flows
              44Ohio Edison
    CompanyManagement's
      Narrative Analysis of Results of Operations
              45-46Report of
      Independent Registered Public Accounting Firm
              47Consolidated
      Statements of Income and Comprehensive Income
              48Consolidated
      Balance Sheets
              49Consolidated
      Statements of Cash Flows
              50The Cleveland Electric
      Illuminating CompanyManagement's
      Narrative Analysis of Results of Operations
              51-52Report of
      Independent Registered Public Accounting Firm
              53Consolidated
      Statements of Income and Comprehensive Income
              54Consolidated
      Balance Sheets
              55Consolidated
      Statements of Cash Flows
              56The Toledo Edison
      CompanyManagement's
      Narrative Analysis of Results of Operations
              57-58Report of
      Independent Registered Public Accounting Firm
              59Consolidated
      Statements of Income and Comprehensive Income
              60Consolidated
      Balance Sheets
              61Consolidated
      Statements of Cash Flows
              62
  i
  TABLE
OF CONTENTS (Cont'd)
 
 
 
 Jersey Central Power & Light
      Company
              PagesManagement's
      Narrative Analysis of Results of Operations
              63-64Report of
      Independent Registered Public Accounting Firm
              65Consolidated
      Statements of Income and Comprehensive Income
              66Consolidated
      Balance Sheets
              67Consolidated
      Statements of Cash Flows
              68Metropolitan Edison
      CompanyManagement's
      Narrative Analysis of Results of Operations
              69-70Report of
      Independent Registered Public Accounting Firm
              71Consolidated
      Statements of Income and Comprehensive Income
              72Consolidated
      Balance Sheets
              73Consolidated
      Statements of Cash Flows
              74Pennsylvania Electric
      CompanyManagement's
      Narrative Analysis of Results of Operations
              75-76Report of
      Independent Registered Public Accounting Firm
              77Consolidated
      Statements of Income and Comprehensive Income
              78Consolidated
      Balance Sheets
              79Consolidated
      Statements of Cash Flows
              80Combined Management’s Discussion
      and Analysis of Registrant Subsidiaries
              81-94Combined Notes to Consolidated
      Financial Statements
              95-123Item
      3.                      Quantitative
      and Qualitative Disclosures About Market Risk.
              124Item
      4.                      Controls
      and Procedures – FirstEnergy.
              124Item
      4T.                    Controls
      and Procedures – FES, OE, CEI, TE, JCP&L, Met-Ed and
      Penelec.
              124Part
      II.   Other InformationItem
      1.                      Legal
      Proceedings.
              125Item
      1A.                   Risk
      Factors.
              125Item
      2.                      Unregistered
      Sales of Equity Securities and Use of Proceeds.
              125Item
      6.                      Exhibits.
              126
 
 
 
 
  ii
 GLOSSARY
OF TERMS
  The
following abbreviations and acronyms are used in this report to identify
FirstEnergy Corp. and its current and former subsidiaries:
 
 ATSI
              American
      Transmission Systems, Inc., owns and operates transmission
      facilitiesCEI
              The Cleveland
      Electric Illuminating Company, an Ohio electric utility operating
      subsidiaryCompanies
              OE, CEI, TE,
      JCP&L, Met-Ed and PenelecFENOC
              FirstEnergy
      Nuclear Operating Company, operates nuclear generating
      facilitiesFES
              FirstEnergy
      Solutions Corp., provides energy-related products and
    servicesFESC
              FirstEnergy
      Service Company, provides legal, financial and other corporate support
      servicesFGCO
              FirstEnergy
      Generation Corp., owns and operates non-nuclear generating
      facilitiesFirstEnergy
              FirstEnergy
      Corp., a public utility holding companyGPU
              GPU, Inc.,
      former parent of JCP&L, Met-Ed and Penelec, which merged with
      FirstEnergy on
                November 7,
      2001JCP&L
              Jersey Central
      Power & Light Company, a New Jersey electric utility operating
      subsidiaryJCP&L
      Transition
                Funding
              JCP&L
      Transition Funding LLC, a Delaware limited liability company and issuer of
      transition
                bondsJCP&L
      Transition
                Funding
      II
              JCP&L
      Transition Funding II LLC, a Delaware limited liability company and issuer
      of transition
                bondsMet-Ed
              Metropolitan
      Edison Company, a Pennsylvania electric utility operating
      subsidiaryNGC
              FirstEnergy
      Nuclear Generation Corp., owns nuclear generating
    facilitiesOE
              Ohio Edison
      Company, an Ohio electric utility operating subsidiaryOhio
      Companies
              CEI, OE and
      TEPenelec
              Pennsylvania
      Electric Company, a Pennsylvania electric utility operating
      subsidiaryPenn
              Pennsylvania
      Power Company, a Pennsylvania electric utility operating subsidiary of
      OEPennsylvania
      Companies
              Met-Ed,
      Penelec and PennPNBV
              PNBV Capital
      Trust, a special purpose entity created by OE in 1996Shippingport
              Shippingport
      Capital Trust, a special purpose entity created by CEI and TE in
      1997TE
              The Toledo
      Edison Company, an Ohio electric utility operating
    subsidiaryTEBSA
              Termobarranquila
      S.A. Empresa de Servicios PublicosThe following
      abbreviations and acronyms are used to identify frequently used terms in
      this report:AEP
              American
      Electric Power Company, Inc.AOCL
              Accumulated
      Other Comprehensive LossAQC
              Air Quality
      ControlARB
              Accounting
      Research BulletinARO
              Asset
      Retirement ObligationASM
              Ancillary
      Services MarketBGS
              Basic
      Generation ServiceBPJ
              Best
      Professional JudgmentCAA
              Clean Air
      ActCAIR
              Clean Air
      Interstate RuleCAMR
              Clean Air
      Mercury RuleCBP
              Competitive
      Bid ProcessCO2
              Carbon
      DioxideDFI
              Demand for
      InformationDOJ
              United States
      Department of JusticeDRA
              Division of
      Ratepayer AdvocateEIS
              Energy
      Independence StrategyEITF
              Emerging
      Issues Task ForceEMP
              Energy Master
      PlanEPA
              United States
      Environmental Protection AgencyEPACT
              Energy Policy
      Act of 2005ESP
              Electric
      Security PlanFASB
              Financial
      Accounting Standards BoardFERC
              Federal Energy
      Regulatory CommissionFIN
              FASB
      InterpretationFIN
      46R
              FIN 46
      (revised December 2003), "Consolidation of Variable Interest
      Entities"FIN
      47
              FIN 47,
      "Accounting for Conditional Asset Retirement Obligations - an
      interpretation of FASB
                Statement
      No. 143"FIN
      48
              FIN 48,
      “Accounting for Uncertainty in Income Taxes - an interpretation of FASB
      Statement
                No.
      109”FirstCom
              First
      Communications, Inc.
  iii
 GLOSSARY
OF TERMS, Cont’d.
  FMB
              First Mortgage
      BondsFSP
              FASB Staff
      PositionFSP FAS
      157-2
              FSP FAS 157-2,
      “Effective Date of  FASB Statement No. 157”FTR
              Financial
      Transmission RightsGAAP
              Accounting
      Principles Generally Accepted in the United StatesGHG
              Greenhouse
      GasesICE
              Intercontinental
      ExchangeIRS
              Internal
      Revenue ServiceISO
              Independent
      System OperatorkV
              KilovoltKWH
              Kilowatt-hoursLIBOR
              London
      Interbank Offered RateLOC
              Letter of
      CreditMEIUG
              Met-Ed
      Industrial Users GroupMISO
              Midwest
      Independent Transmission System Operator, Inc.Moody’s
              Moody’s
      Investors ServiceMRO
              Market Rate
      OfferMW
              MegawattsNAAQS
              National
      Ambient Air Quality StandardsNERC
              North American
      Electric Reliability CorporationNJBPU
              New Jersey
      Board of Public UtilitiesNOPR
              Notice of
      Proposed RulemakingNOV
              Notice of
      ViolationNOX
              Nitrogen
      OxideNRC
              Nuclear
      Regulatory CommissionNSR
              New Source
      ReviewNUG
              Non-Utility
      GenerationNUGC
              Non-Utility
      Generation ChargeNYMEX
              New York
      Mercantile ExchangeOCA
              Office of
      Consumer AdvocateOTC
              Over the
      CounterOVEC
              Ohio Valley
      Electric CorporationPCRB
              Pollution
      Control Revenue BondPICA
              Penelec
      Industrial Customer AlliancePJM
              PJM
      Interconnection L. L. C.PLR
              Provider of
      Last ResortPPUC
              Pennsylvania
      Public Utility CommissionPRP
              Potentially
      Responsible PartyPSA
              Power Supply
      AgreementPUCO
              Public
      Utilities Commission of OhioPUHCA
              Public Utility
      Holding Company Act of 1935RCP
              Rate Certainty
      PlanRECB
              Regional
      Expansion Criteria and BenefitsRFP
              Request for
      ProposalRPM
              Reliability
      Pricing ModelRSP
              Rate
      Stabilization PlanRTO
              Regional
      Transmission OrganizationS&P
              Standard &
      Poor’s Ratings ServiceSBC
              Societal
      Benefits ChargeSEC
              U.S.
      Securities and Exchange CommissionSECA
              Seams
      Elimination Cost AdjustmentSFAS
              Statement of
      Financial Accounting StandardsSFAS
      109
              SFAS No. 109,
      “Accounting for Income Taxes”SFAS
      123(R)
              SFAS No.
      123(R), "Share-Based Payment"SFAS
      133
              SFAS No. 133,
      “Accounting for Derivative Instruments and Hedging
    Activities”SFAS
      141(R)
              SFAS No
      141(R), “Business Combinations”SFAS
      143
              SFAS No. 143,
      “Accounting for Asset Retirement Obligations”SFAS
      157
              SFAS No. 157,
      “Fair Value Measurements”SFAS
      159
              SFAS No. 159,
      “The Fair Value Option for Financial Assets and Financial Liabilities –
      Including an
                Amendment
      of FASB Statement No. 115”SFAS
      160
              SFAS No. 160,
      “Noncontrolling Interests in Consolidated Financial Statements – an
      Amendment
                of
      ARB No. 51”SFAS
      161
              SFAS No 161,
      “Disclosure about Derivative Instruments and Hedging Activities – an
      Amendment
                of
      FASB Statement No. 133”
  iv
 GLOSSARY
OF TERMS, Cont’d.
  
 SIP
              State
      Implementation Plan(s) Under the Clean Air ActSNCR
              Selective
      Non-Catalytic ReductionSO2
              Sulfur
      DioxideTBC
              Transition
      Bond ChargeTMI-1
              Three Mile
      Island Unit 1TMI-2
              Three Mile
      Island Unit 2TSC
              Transmission
      Service ChargeVIE
              Variable
      Interest Entity
  v
  PART I. FINANCIAL
INFORMATION
 
 ITEMS
1. AND 2. FINANCIAL STATEMENTS AND MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
 
 FIRSTENERGY
CORP.
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
 FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 
 
 EXECUTIVE
SUMMARY
 
 Net income in the
first quarter of 2008 was $276 million, or basic earnings of $0.91 per
share of common stock ($0.90 diluted), compared with net income of
$290 million, or basic and diluted earnings of $0.92 per share in the first
quarter of 2007. The decrease in FirstEnergy’s earnings was driven primarily by
increased operating expenses, partially offset by increased
revenues.
 
 Change
      in Basic Earnings Per Share
                From
      Prior Year First QuarterBasic Earnings
      Per Share – First Quarter 2007
              $
      0.92Gain on
      non-core asset sales – 2008
              0.06Saxton
      decommissioning regulatory asset – 2007
              (0.05)Trust
      securities impairment
              (0.02)Revenues
              0.55Fuel and
      purchased power
              (0.42)Depreciation
      and amortization
              (0.03)Deferral of
      new regulatory assets
              (0.03)Energy
      Delivery O&M expenses
              (0.03)General
      taxes
              (0.02)Corporate-owned
      life insurance
              (0.06)Other
      expenses
              0.01Reduced common
      shares outstanding
              0.03Basic Earnings
      Per Share – First Quarter 2008
              $
      0.91
 
 Regulatory
Matters - Ohio
 
 Legislative
Process
 
 On April 22, 2008,
an amended version of Substitute Senate Bill 221 (Substitute SB221) was passed
by the Ohio House of Representatives and sent back to the Ohio Senate for
concurrence. On April 23, 2008, the Ohio Senate approved the House's
amendments to Substitute SB221 and forwarded the bill to the Governor for
signature, which he signed on May 1, 2008. Amended Substitute SB221
requires all electric distribution utilities to file an RSP, now called an ESP,
with the PUCO. An ESP is required to contain a proposal for the supply and
pricing of retail generation. A utility could also simultaneously file an MRO in
which it would have to demonstrate the following objective market criteria: The
utility or its transmission service affiliate belongs to a FERC-approved RTO
having a market-monitor function and the ability to mitigate market power, and a
published source exists that identifies information for traded electricity and
energy products that are contracted for delivery two years into the future. The
PUCO would test the ESP and its pricing and all other terms and conditions
against the MRO and may only approve the ESP if it is found to be more favorable
to customers. As part of an ESP with a plan period longer than three years, the
PUCO shall prospectively determine every fourth year of the plan whether it is
substantially likely the plan will provide the electric distribution utility a
return on common equity significantly in excess of the return likely to be
earned by publicly traded companies, including utilities, that face comparable
business and financial risk (comparable companies). If so, the PUCO may
terminate the ESP. Annually under an ESP, the PUCO shall determine whether an
electric distribution utility's earned return on common equity is significantly
in excess of returns earned on common equity during the same period by
comparable companies, and if so, shall require the utility to return such excess
to customers by prospective adjustments. Amended Substitute SB221 also includes
provisions dealing with advanced and renewable energy standards and energy
efficiency, including requirements to meet annual benchmarks. FirstEnergy is
currently evaluating this legislation and expects to file an ESP in the second
or third quarter of 2008.
   1
  Distribution Rate Request
 
 On February 25,
2008, evidentiary hearings concluded in the distribution rate requests for the
Ohio Companies. The requests for $332 million in revenue increases were filed on
June 7, 2007. Public hearings were held from March 5, 2008 through March 24,
2008. Main briefs were filed on March 28, 2008, and reply briefs were filed on
April 18, 2008. The PUCO is expected to render its decision during the second or
third quarter of 2008 (see Outlook – Ohio).
 
 Regulatory
Matters - Pennsylvania
 
 Penn’s
Interim Default Service Supply
 
 On March 13, 2008,
the PPUC approved the residential procurement process in Penn’s Joint Petition
for Settlement. This RFP process calls for load-following, full-requirements
contracts for default service procurement for residential customers for the
period covering June 1, 2008 through May 31, 2011. The PPUC had previously
approved the default service procurement processes for commercial and industrial
customers. The default service procurement for small commercial customers was
conducted through multiple RFPs, while the default service procurement for large
commercial and industrial customers will utilize hourly pricing. Bids in the two
RFPs for small commercial load were approved by the PPUC on February 22, 2008,
and March 20, 2008. On March 28, 2008, Penn filed compliance tariffs with the
new default service generation rates based on the approved RFP bids for small
commercial customers which the PPUC then certified on April 4, 2008. On
April 14, 2008, the first RFP for residential customers’ load was held
consisting of tranches for both 12 and 24-month supply. The PPUC approved the
bids on April 16, 2008. The second RFP is scheduled to be held on May 14,
2008, after which time the PPUC is expected to approve the new rates to go into
effect June 1, 2008.
 Met-Ed
and Penelec Transmission Service Charge Filing
 
 On April 14, 2008,
Met-Ed and Penelec filed annual updates to the TSC rider for the period June 1,
2008, through May 31, 2009. The proposed TSCs include a component for
under-recovery of actual transmission costs incurred during the prior period
(Met-Ed - $144 million and Penelec - $4 million) and future transmission
cost projections for June 2008 through May 2009 (Met-Ed - $258 million and
Penelec - $92 million). Met-Ed has proposed a transition approach that would
recover past under-recovered costs plus carrying charges through the new TSC
over thirty-one months and defer a portion of the projected costs
($92 million) plus carrying charges for recovery through future TSCs by
December 31, 2010.
 
 Generation
 
 Generation
Output Record
 
 FirstEnergy set a
new first quarter generation output record of 20.4 million megawatt-hours, a
1.8% increase over the prior record established in the first quarter of 2006.
  Refueling
Outage
 
 On April 14, 2008,
Beaver Valley Unit 2 began its regularly scheduled refueling outage. During the
outage, several improvement projects will take place on the 868-MW unit
including replacing the high pressure turbine and inspecting the reactor vessel
and other plant safety systems. Beaver Valley Unit 2 had operated for 520
consecutive days when it was taken off line for the outage.
 
 Maintenance
Outage
 
 On April 14, 2008,
the Perry Nuclear Power Plant returned to service following completion of a
10-day planned outage for valve work and other maintenance in preparation for
the upcoming summer months.
 
 Financial
Matters
 
 Acquisition
of Additional Equity Interests in Beaver Valley Unit 2
 
 On March 3, 2008,
notice was given to the nine owner trusts that are lessors under sale and
leaseback transactions, originally entered into by TE in 1987, that NGC would
acquire the related 18.26% undivided interest in Beaver Valley Unit 2 through
the exercise of the periodic purchase option provided for in the applicable
facility leases. The purchase price to be paid by NGC for the undivided interest
will be equal to the higher of a specified casualty value under the applicable
facility leases (approximately $239 million in the aggregate for the equity
portion of all nine facility leases) and the fair market sales value of such
undivided interests. Determination of the fair market sales value may become
subject to an appraisal procedure provided for in the lease documentation. An
additional payment of approximately $236 million would be required to prepay in
full the outstanding principal of, and accrued but unpaid interest on, the
lessor notes of the nine owner trusts. Alternatively, this amount would not be
paid as part of the aggregate purchase price if the lessor notes are instead
assumed at the time of the exercise of the option. If NGC determines to prepay
the notes, it is possible that the proceeds from such prepayment may not be
sufficient to pay the principal of, and interest on, the bonds as they become
due. If that is the case, NGC would provide a mechanism to address any such
potential shortfall in a timely manner.
  2
  
 Repurchase
and Remarketing of Auction Rate Bonds
 
 Between February 27,
2008 and April 2, 2008, FirstEnergy’s subsidiaries repurchased all of their
tax-exempt long-term PCRBs originally sold at auction rates ($530 million)
in response to disruptions in the auction rate securities market. In February
2008, FGCO, NGC, Met-Ed and Penelec elected to convert all of their then
outstanding auction rate PCRBs to a weekly rate mode, which required their
mandatory purchase of these PCRBs on the applicable conversion dates. The
companies initially funded the repurchase with short-term debt. On April 22,
2008, Met-Ed ($28.5 million) and Penelec ($45 million) successfully
marketed their converted PCRBs in a variable-rate mode. Subject to market
conditions, FGCO and NGC plan to remarket their converted PCRBs later in 2008,
either in fixed-rate or variable-rate modes.
 Non-Core
Asset Sale
 
 On March 7, 2008,
FirstEnergy sold substantially all of the assets of FirstEnergy Telecom
Services, Inc. to FirstCom for $45 million in cash, with FirstCom also assuming
related liabilities. The sale resulted in an after-tax gain of approximately
$0.06 per share. FirstEnergy is a 15.6% shareholder in FirstCom.
 
 FIRSTENERGY’S
BUSINESS
 
 FirstEnergy is a
diversified energy company headquartered in Akron, Ohio, that operates primarily
through three core business segments (see Results of Operations).
 
 ·
              Energy Delivery Services
      transmits and distributes electricity through FirstEnergy’s eight utility
      operating companies, serving 4.5 million customers within 36,100
      square miles of Ohio, Pennsylvania and New Jersey and purchases power for
      its PLR and default service requirements in Pennsylvania and New Jersey.
      This business segment derives its revenues principally from the delivery
      of electricity within FirstEnergy’s service areas at regulated rates, cost
      recovery of regulatory assets and the sale of electric generation service
      to retail customers who have not selected an alternative supplier (default
      service) in its Pennsylvania and New Jersey franchise areas. The segment’s
      net income reflects the commodity costs of securing electricity from
      FirstEnergy’s competitive energy services segment under partial
      requirements purchased power agreements with FES and from non-affiliated
      power suppliers, including, in each case, associated transmission
      costs.
 
 ·
              Competitive Energy
      Services supplies the electric power needs of end-use customers
      through retail and wholesale arrangements, including associated company
      power sales to meet all or a portion of the PLR and default service
      requirements of FirstEnergy’s Ohio and Pennsylvania utility subsidiaries
      and competitive retail sales to customers primarily in Ohio, Pennsylvania,
      Maryland and Michigan. This business segment owns or leases and operates
      19 generating facilities with a net demonstrated capacity of approximately
      13,664 MW and also purchases electricity to meet sales obligations. The
      segment's net income is primarily derived from affiliated company power
      sales and non-affiliated electric generation sales revenues less the
      related costs of electricity generation, including purchased power and net
      transmission and ancillary costs charged by PJM and MISO to deliver energy
      to the segment’s customers.
 
 ·
              Ohio Transitional Generation
      Services supplies the electric power needs of non-shopping
      customers under the default service requirements of the Ohio Companies.
      The segment's net income is primarily derived from electric generation
      sales revenues less the cost of power purchased from the competitive
      energy services segment through a full-requirements PSA arrangement with
      FES, including net transmission and ancillary costs charged by MISO to
      deliver energy to retail
customers.
  3
  
 RESULTS
OF OPERATIONS
 
 The financial
results discussed below include revenues and expenses from transactions among
FirstEnergy's business segments. A reconciliation of segment financial results
is provided in Note 13 to the consolidated financial statements. Net income
by major business segment was as follows:
 
 Three
      Months EndedMarch
      31,
              
              Increase2008
              
              2007
              
              (Decrease)Net
      Income
              (In
      millions, except per share data)By
      Business SegmentEnergy
      delivery services
              
              $
              179
              
              
              $
              218
              
              
              $
              (39
              )Competitive
      energy services
              
              
              87
              
              
              
              98
              
              
              
              (11
              )Ohio
      transitional generation services
              
              
              23
              
              
              
              24
              
              
              
              (1
              )Other and
      reconciling adjustments*
              
              
              (13
              )
              
              
              (50
              )
              
              
              37Total
              
              $
              276
              
              
              $
              290
              
              
              $
              (14
              )Basic
      Earnings Per Share
              
              $
              0.91
              
              
              $
              0.92
              
              
              $
              (0.01
              )Diluted
      Earnings Per Share
              
              $
              0.90
              
              
              $
              0.92
              
              
              $
              (0.02
              )
 
 *
Consists primarily of interest expense related to holding company debt,
corporate support services revenues and expenses, telecommunications services
and elimination of intersegment transactions.
 
 Summary of Results of Operations –
First Quarter 2008 Compared with First Quarter 2007
 
 Financial results
for FirstEnergy's major business segments in the first three months of 2008 and
2007 were as follows:
 
 OhioEnergy
                
                
                Competitive
                
                
                Transitional
                
                
                Other
      andDelivery
                
                
                Energy
                
                
                Generation
                
                
                Reconciling
                
                
                FirstEnergyFirst
      Quarter 2008 Financial Results
                
                Services
                
                
                Services
                
                
                Services
                
                
                Adjustments
                
                
                Consolidated(In
      millions)Revenues:ExternalElectric
                
                $
                2,050
                
                
                $
                289
                
                
                $
                691
                
                
                $
                -
                
                
                $
                3,030Other
                
                
                162
                
                
                
                40
                
                
                
                16
                
                
                
                29
                
                
                
                247Internal
                
                
                -
                
                
                
                776
                
                
                
                -
                
                
                
                (776
                )
                
                
                -Total
      Revenues
                
                
                2,212
                
                
                
                1,105
                
                
                
                707
                
                
                
                (747
                )
                
                
                3,277Expenses:Fuel and
      purchased power
                
                
                983
                
                
                
                533
                
                
                
                588
                
                
                
                (776
                )
                
                
                1,328Other
      operating expenses
                
                
                445
                
                
                
                309
                
                
                
                77
                
                
                
                (31
                )
                
                
                800Provision for
      depreciation
                
                
                106
                
                
                
                53
                
                
                
                -
                
                
                
                5
                
                
                
                164Amortization
      of regulatory assets
                
                
                249
                
                
                
                -
                
                
                
                9
                
                
                
                -
                
                
                
                258Deferral of
      new regulatory assets
                
                
                (100
                )
                
                
                -
                
                
                
                (5
                )
                
                
                -
                
                
                
                (105
                )General
      taxes
                
                
                173
                
                
                
                32
                
                
                
                1
                
                
                
                9
                
                
                
                215Total
      Expenses
                
                
                1,856
                
                
                
                927
                
                
                
                670
                
                
                
                (793
                )
                
                
                2,660Operating
      Income
                
                
                356
                
                
                
                178
                
                
                
                37
                
                
                
                46
                
                
                
                617Other Income
      (Expense):Investment
      income
                
                
                45
                
                
                
                (6
                )
                
                
                1
                
                
                
                (23
                )
                
                
                17Interest
      expense
                
                
                (103
                )
                
                
                (34
                )
                
                
                -
                
                
                
                (42
                )
                
                
                (179
                )Capitalized
      interest
                
                
                -
                
                
                
                7
                
                
                
                -
                
                
                
                1
                
                
                
                8Total Other
      Income (Expense)
                
                
                (58
                )
                
                
                (33
                )
                
                
                1
                
                
                
                (64
                )
                
                
                (154
                )Income Before
      Income Taxes
                
                
                298
                
                
                
                145
                
                
                
                38
                
                
                
                (18
                )
                
                
                463Income
      taxes
                
                
                119
                
                
                
                58
                
                
                
                15
                
                
                
                (5
                )
                
                
                187Net
      Income
                
                $
                179
                
                
                $
                87
                
                
                $
                23
                
                
                $
                (13
                )
                
                $
                276
   4
   OhioEnergy
                
                
                Competitive
                
                
                Transitional
                
                
                Other
      andDelivery
                
                
                Energy
                
                
                Generation
                
                
                Reconciling
                
                
                FirstEnergyFirst
      Quarter 2007 Financial Results
                
                Services
                
                
                Services
                
                
                Services
                
                
                Adjustments
                
                
                Consolidated(In
      millions)Revenues:ExternalElectric
                
                $
                1,875
                
                
                $
                276
                
                
                $
                613
                
                
                $
                -
                
                
                $
                2,764Other
                
                
                165
                
                
                
                45
                
                
                
                6
                
                
                
                (7
                )
                
                
                209Internal
                
                
                -
                
                
                
                714
                
                
                
                -
                
                
                
                (714
                )
                
                
                -Total
      Revenues
                
                
                2,040
                
                
                
                1,035
                
                
                
                619
                
                
                
                (721
                )
                
                
                2,973Expenses:Fuel and
      purchased power
                
                
                844
                
                
                
                447
                
                
                
                544
                
                
                
                (714
                )
                
                
                1,121Other
      operating expenses
                
                
                408
                
                
                
                300
                
                
                
                49
                
                
                
                (8
                )
                
                
                749Provision for
      depreciation
                
                
                98
                
                
                
                51
                
                
                
                -
                
                
                
                7
                
                
                
                156Amortization
      of regulatory assets
                
                
                246
                
                
                
                -
                
                
                
                5
                
                
                
                -
                
                
                
                251Deferral of
      new regulatory assets
                
                
                (124
                )
                
                
                -
                
                
                
                (20
                )
                
                
                -
                
                
                
                (144
                )General
      taxes
                
                
                165
                
                
                
                28
                
                
                
                2
                
                
                
                8
                
                
                
                203Total
      Expenses
                
                
                1,637
                
                
                
                826
                
                
                
                580
                
                
                
                (707
                )
                
                
                2,336Operating
      Income
                
                
                403
                
                
                
                209
                
                
                
                39
                
                
                
                (14
                )
                
                
                637Other Income
      (Expense):Investment
      income
                
                
                70
                
                
                
                3
                
                
                
                1
                
                
                
                (41
                )
                
                
                33Interest
      expense
                
                
                (109
                )
                
                
                (52
                )
                
                
                (1
                )
                
                
                (23
                )
                
                
                (185
                )Capitalized
      interest
                
                
                2
                
                
                
                3
                
                
                
                -
                
                
                
                -
                
                
                
                5Total Other
      income (Expense)
                
                
                (37
                )
                
                
                (46
                )
                
                
                -
                
                
                
                (64
                )
                
                
                (147
                )Income Before
      Income Taxes
                
                
                366
                
                
                
                163
                
                
                
                39
                
                
                
                (78
                )
                
                
                490Income
      taxes
                
                
                148
                
                
                
                65
                
                
                
                15
                
                
                
                (28
                )
                
                
                200Net
      Income
                
                $
                218
                
                
                $
                98
                
                
                $
                24
                
                
                $
                (50
                )
                
                $
                290Changes
      Between First Quarter 2008 andFirst
      Quarter 2007 Financial ResultsIncrease
      (Decrease)Revenues:ExternalElectric
                
                $
                175
                
                
                $
                13
                
                
                $
                78
                
                
                $
                -
                
                
                $
                266Other
                
                
                (3
                )
                
                
                (5
                )
                
                
                10
                
                
                
                36
                
                
                
                38Internal
                
                
                -
                
                
                
                62
                
                
                
                -
                
                
                
                (62
                )
                
                
                -Total
      Revenues
                
                
                172
                
                
                
                70
                
                
                
                88
                
                
                
                (26
                )
                
                
                304Expenses:Fuel and
      purchased power
                
                
                139
                
                
                
                86
                
                
                
                44
                
                
                
                (62
                )
                
                
                207Other
      operating expenses
                
                
                37
                
                
                
                9
                
                
                
                28
                
                
                
                (23
                )
                
                
                51Provision for
      depreciation
                
                
                8
                
                
                
                2
                
                
                
                -
                
                
                
                (2
                )
                
                
                8Amortization
      of regulatory assets
                
                
                3
                
                
                
                -
                
                
                
                4
                
                
                
                -
                
                
                
                7Deferral of
      new regulatory assets
                
                
                24
                
                
                
                -
                
                
                
                15
                
                
                
                -
                
                
                
                39General
      taxes
                
                
                8
                
                
                
                4
                
                
                
                (1
                )
                
                
                1
                
                
                
                12Total
      Expenses
                
                
                219
                
                
                
                101
                
                
                
                90
                
                
                
                (86
                )
                
                
                324Operating
      Income
                
                
                (47
                )
                
                
                (31
                )
                
                
                (2
                )
                
                
                60
                
                
                
                (20
                )Other Income
      (Expense):Investment
      income
                
                
                (25
                )
                
                
                (9
                )
                
                
                -
                
                
                
                18
                
                
                
                (16
                )Interest
      expense
                
                
                6
                
                
                
                18
                
                
                
                1
                
                
                
                (19
                )
                
                
                6Capitalized
      interest
                
                
                (2
                )
                
                
                4
                
                
                
                -
                
                
                
                1
                
                
                
                3Total Other
      Income (Expense)
                
                
                (21
                )
                
                
                13
                
                
                
                1
                
                
                
                -
                
                
                
                (7
                )Income Before
      Income Taxes
                
                
                (68
                )
                
                
                (18
                )
                
                
                (1
                )
                
                
                60
                
                
                
                (27
                )Income
      taxes
                
                
                (29
                )
                
                
                (7
                )
                
                
                -
                
                
                
                23
                
                
                
                (13
                )Net
      Income
                
                $
                (39
                )
                
                $
                (11
                )
                
                $
                (1
                )
                
                $
                37
                
                
                $
                (14
                )
   5
 
 Energy Delivery Services – First
Quarter 2008 Compared with First Quarter 2007
 
 Net income decreased
$39 million to $179 million in the first three months of 2008 compared
to $218 million in the first three months of 2007, primarily due to higher
operating expenses partially offset by increased revenues.
 
 Revenues –
 
 The
increase in total revenues resulted from the following sources:
 
 Three
      Months EndedMarch
      31,
              
              IncreaseRevenues
      by Type of Service
              
              2008
              
              2007
              
              (Decrease)(In
      millions)Distribution
      services
              
              $
              955
              
              $
              944
              
              $
              11Generation
      sales:Retail
              
              
              790
              
              
              720
              
              
              70Wholesale
              
              
              219
              
              
              132
              
              
              87Total
      generation sales
              
              
              1,009
              
              
              852
              
              
              157Transmission
              
              
              197
              
              
              183
              
              
              14Other
              
              
              51
              
              
              61
              
              
              (10
              )Total
      Revenues
              
              $
              2,212
              
              $
              2,040
              
              $
              172
 
 The
change in distribution deliveries by customer class is summarized in the
following table:
 
 Electric
      Distribution KWH DeliveriesResidential
              
              
              2.4
              %Commercial
              
              
              1.9
              %Industrial
              
              
              (1.0
              )%Total
      Distribution KWH Deliveries
              
              
              1.2
              %
 
 The increase in
electric distribution deliveries to customers was primarily due to increased
weather-related usage in the Ohio Companies’ and Penn’s service territories
during the first three months of 2008 compared to the same period of 2007
(heating degree days increased 2.4%). The higher revenues from increased
distribution deliveries were partially offset by the residual effects of the
distribution rate decreases for Met-Ed and Penelec as a result of a
January 11, 2007 PPUC rate decision (see Outlook – State Regulatory Matters
– Pennsylvania).
 
 The following table
summarizes the price and volume factors contributing to the $157 million
increase in generation revenues in the first quarter of 2008 compared to the
first quarter of 2007:
 
 Sources
      of Change in Generation Revenues
              
              Increase
                  (Decrease)(In
      millions)Retail:Effect
      of 0.7% decrease in sales volumes
              
              $
              (5
              )Change
      in prices
              
              
              7570Wholesale:Effect
      of 8.9% increase in sales volumes
              
              
              12Change
      in prices
              
              
              7587Net Increase
      in Generation Revenues
              
              $
              157
 
 The decrease in
retail generation sales volumes was primarily due to an increase in customer
shopping in Penn’s and JCP&L’s service territories in the first three months
of 2008. The increase in retail generation prices during the first three months
of 2008 reflected increased generation rates for JCP&L resulting from the
New Jersey BGS auction process and an increase in NUGC rates authorized by the
NJBPU. Wholesale generation sales increased principally as a result of Met-Ed
and Penelec selling additional available power into the PJM market. The increase
in prices reflected higher spot market prices for PJM market
participants.
 
 Transmission
revenues increased $14 million primarily due to higher transmission rates
for Met-Ed and Penelec resulting from the January 2007 PPUC authorization of
transmission cost recovery. Met-Ed and Penelec defer the difference between
revenues from their transmission rider and transmission costs incurred with no
material effect on current period earnings (see Outlook – State Regulatory
Matters – Pennsylvania).
 
 6
 
 
 Expenses –
 
 The
increases in revenues discussed above were offset by a $219 million
increase in expenses due to the following:
 
 ·
              Purchased
      power costs were $139million higher in the
      first three months of 2008 due to higher unit costs and a decrease in the
      amount of NUG costs deferred. The increased unit costs reflected the
      effect of higher JCP&L costs resulting from the BGS auction process.
      JCP&L is permitted to defer for future collection from customers the
      amounts by which its costs of supplying BGS to non-shopping customers and
      costs incurred under NUG agreements exceed amounts collected through BGS
      and NUGC rates and market sales of NUG energy and capacity. The following
      table summarizes the sources of changes in purchased power
      costs:
 
 Source
      of Change in Purchased Power
              
              Increase
                (Decrease)(In
      millions)Purchases from
      non-affiliates:Change due to increased unit
      costs
              
              $
              84Change due to decreased
      volumes
              
              
              (18
              )66Purchases from
      FES:Change due to decreased unit
      costs
              
              
              (4
              )Change due to increased
      volumes
              
              
              1713Decrease in
      NUG costs deferred
              
              
              60Net Increase
      in Purchased Power Costs
              
              $
              139
 
 
 ·
              Other
      operating expenses increased $37million due primarily
      to the effects of:
 
 -
              An increase of
      $15million in
      MISO and PJM transmission expenses, resulting primarily from higher
      congestion costs (see transmission revenues discussion
    above).
 
 -
              An increase in
      operation and maintenance expenses of $11million for storm
      restoration work during the first quarter of
  2008.
 
 -
              An increase in
      labor expenses of $9million primarily due
      to an increase in the number of employees in the first quarter of 2008
      compared to 2007 as a result of the segment’s workforce
      initiatives.
 
 ·
              An increase of
      $3 million in amortization of regulatory assets compared to 2007 due
      primarily to recovery of deferred BGS costs through higher NUGC rates for
      JCP&L.
 
 ·
              The deferral
      of new regulatory assets during the first three months of 2008 was
      $24 million lower primarily due to the absence of the deferral in
      2007 of decommissioning costs related to the Saxton nuclear research
      facility.
 
 ·
              Depreciation
      expense increased $8million due to
      property additions since the first quarter of
  2007.
 
 ·
              General taxes
      increased $8 million due to higher property taxes and gross receipts
      taxes.
 
 
 Other Expense –
 
 Other expense
increased $21million
in 2008 compared to the first three months of 2007 primarily due to lower
investment income of $25million resulting from the
repayment of notes receivable from affiliates since the first quarter of 2007,
partially offset by lower interest expense (net of capitalized interest) of
$4million.
 
 Competitive Energy Services – First
Quarter 2008 Compared with First Quarter 2007
 
 Net income for this
segment was $87million in the first three
months of 2008 compared to $98million in the same period
in 2007. The $11 million reduction in net income reflects a decrease in
gross generation margin and higher operating costs which were partially offset
by lower interest expense.
 
 
 7
 
 Revenues –
 
 Total revenues
increased $70million
in the first three months of 2008 compared to the same period in 2007. This
increase primarily resulted from higher unit prices on affiliated generation
sales to the Ohio Companies and increased non-affiliated wholesale sales, which
were partially offset by lower retail sales.
 
 The
increase in reported segment revenues resulted from the following
sources:
 
 Three
      Months EndedMarch
      31,
              
              IncreaseRevenues
      by Type of Service
              
              2008
              
              2007
              
              (Decrease)(In
      millions)Non-Affiliated
      Generation Sales:Retail
              
              $
              160
              
              $
              174
              
              $
              (14
              )Wholesale
              
              
              129
              
              
              103
              
              
              26Total
      Non-Affiliated Generation Sales
              
              
              289
              
              
              277
              
              
              12Affiliated
      Generation Sales
              
              
              776
              
              
              714
              
              
              62Transmission
              
              
              33
              
              
              23
              
              
              10Other
              
              
              7
              
              
              21
              
              
              (14
              )Total
      Revenues
              
              $
              1,105
              
              $
              1,035
              
              $
              70
 
 
 The lower retail
revenues resulted from decreased sales in the PJM market, partially offset by
increased sales in the MISO market. The decrease in PJM retail sales is
primarily the result of lower contract renewals for commercial and industrial
customers. The increase in MISO retail sales is primarily the result of
capturing more shopping customers in Penn’s service territory, partially offset
by lower customer usage. Higher non-affiliated wholesale revenues resulted from
the effect of increased generation available for the non-affiliated wholesale
market.
 
 The increased
affiliated company generation revenues were due to increased sales volumes and
higher unit prices for the Ohio Companies, partially offset by lower unit prices
for the Pennsylvania Companies. The increase in PSA sales to the Ohio Companies
was due to their higher retail generation sales requirements. The higher unit
prices reflected increases in the Ohio Companies’ retail generation rates. The
higher sales to the Pennsylvania Companies were due to increased Met-Ed and
Penelec generation sales requirements. These increases were partially offset by
lower sales to Penn due to a 45% increase in customer shopping in the first
quarter of 2008 compared to the first quarter of 2007.
 
 The following tables
summarize the price and volume factors contributing to changes in revenues from
generation sales:
 
 Source
      of Change in Non-AffiliatedGeneration
      Revenues
              
              Increase
      (Decrease)(In
      millions)Retail:Effect of 9.0% decrease in sales
      volumes
              
              $
              (16
              )Change in prices
              
              
              2(14
              )Wholesale:Effect of 3.5% increase in sales
      volumes
              
              
              4Change in prices
              
              
              2226Net Increase
      in Non-Affiliated Generation Revenues
              
              $
              12
 
 
 Source
      of Change in Affiliated Generation Revenues
              
              Increase
      (Decrease)(In
      millions)Ohio
      Companies:Effect of 1.2% increase in sales
      volumes
              
              $
              6Change in prices
              
              
              4450Pennsylvania
      Companies:Effect of 9.0% increase in sales
      volumes
              
              
              16Change in prices
              
              
              (4
              )12Net Increase
      in Affiliated Generation Revenues
              
              $
              62
 
 
 8
 
 Transmission
revenues increased $10 million due to increased retail load in the MISO
market and higher transmission rates ($12 million), partially offset by
reduced financial transmission rights auction revenue ($2 million). Other
revenue decreased $14 million primarily due to lower interest income from
short-term investments.
 
 Expenses -
 
 Total expenses
increased $101 million in the first three months of 2008 due to the
following factors:
 
 ·
              Fossil fuel
      costs increased $68 million due to increased generation volumes
      ($37 million) and higher unit prices ($31 million). The
      increased unit prices primarily reflect higher coal transportation costs
      ($24 million) and increased emission allowance costs
      ($5 million) in the first quarter of
2008.
 
 ·
              Purchased
      power costs increased $20 million due primarily to higher market
      rates, partially offset by reduced volume requirements due to increased
      generation from internal resources.
 
 ·
              Nuclear
      operating costs increased $23 million due to this year’s Davis-Besse
      refueling outage and the preparatory work associated with the Beaver
      Valley Unit 2 refueling outage scheduled for the second quarter of
      2008.
 
 ·
              Other expense
      increased $15 million due primarily to the assignment of CEI’s and
      TE’s leasehold interests in the Bruce Mansfield Plant to FGCO in the
      fourth quarter of 2007 ($7 million) and reduced earnings on life
      insurance investments during the first quarter of 2008
      ($6 million).
 
 ·
              Higher
      depreciation expenses of $2 million were due to property additions
      since the first quarter of 2007.
 
 ·
              Higher general
      taxes of $4 million resulted from increased gross receipts taxes and
      property taxes.
 
 Partially offsetting
the higher costs were:
 
 ·
              Fossil
      operating costs were $23 million lower due to fewer outages in 2008
      compared to 2007 and increased gains on emission allowance
      sales.
 
 ·
              Transmission
      expense declined $7 million due to reduced PJM congestion charges and
      a change in MISO revenue sufficiency guarantee
  settlements.
 
 Other Expense –
 
 Total other expense
in the first three months of 2008 was $13million lower than the
first quarter of 2007, primarily due to a decline in interest expense (net of
capitalized interest) of $22 million due to the repayment of notes payable
to affiliates since the first quarter of 2007 and a $2 million increase in
earnings from nuclear decommissioning trust investments, partially offset by an
$11 million increase in trust securities impairments.
 
 Ohio Transitional Generation Services –
First Quarter 2008 Compared with First Quarter 2007
 
 Net income for this
segment decreased to $23million in the first three
months of 2008 from $24 million in the same period of 2007. Higher
operating expenses, primarily for purchased power, were almost entirely offset
by higher generation revenues.
 
 Revenues –
 
 The
increase in reported segment revenues resulted from the following
sources:
 
 Three
      Months EndedMarch
      31,Revenues
      by Type of Service
              
              2008
              
              2007
              
              Increase(In
      millions)Generation
      sales:Retail
              
              $
              606
              
              $
              546
              
              $
              60Wholesale
              
              
              3
              
              
              2
              
              
              1Total
      generation sales
              
              
              609
              
              
              548
              
              
              61Transmission
              
              
              93
              
              
              71
              
              
              22Other
              
              
              5
              
              
              -
              
              
              5Total
      Revenues
              
              $
              707
              
              $
              619
              
              $
              88
 
 
 9
 
 
 The following table
summarizes the price and volume factors contributing to the increase in sales
revenues from retail customers:
 
 Source
      of Change in Retail Generation Revenues
              
              Increase(In
      millions)Effect of 1.3% increase in sales
      volumes
              
              $
              7Change in prices
              
              
              53Total
      Increase in Retail Generation Revenues
              
              $
              60
 
 The increase in
generation sales was primarily due to higher weather-related usage in the first
three months of 2008 compared to the same period of 2007 and reduced customer
shopping. Heating degree days in OE’s, CEI’s and TE’s service territories
increased by 2.8%, 1.7% and 3.3%, respectively. Average prices increased
primarily due to an increase in the Ohio Companies’ fuel cost recovery rider
that became effective in January 2008. The percentage of generation services
provided by alternative suppliers to total sales delivered by the Ohio Companies
in their service areas decreased by 1.8percentage points from the
same period in 2007.
 
 Increased
transmission revenue resulted from higher sales volumes ($7 million) and a
PUCO-approved transmission tariff increase ($15 million) that became
effective July 1, 2007.
 
 Expenses -
 
 Purchased power
costs were $44million
higher due primarily to higher unit costs for power purchased from FES. The
factors contributing to the higher costs are summarized in the following
table:
 
 Source
      of Change in Purchased Power
              
              Increase
                (Decrease)(In
      millions)Purchases from
      non-affiliates:Change due to increased unit
      costs
              
              $
              (5
              )Change due to decreased
      volumes
              
              
              (1
              )(6
              )Purchases from
      FES:Change due to increased unit
      costs
              
              
              44Change due to increased
      volumes
              
              
              650Net Increase
      in Purchased Power Costs
              
              $
              44
 
 
 The increase in
purchase volumes from FES was due to the higher retail generation sales
requirements described above. The higher unit costs reflect the increases in the
Ohio Companies’ retail generation rates, as provided for under the PSA with
FES.
 
 Other operating
expenses increased $28 million due in part to MISO transmission-related
expenses ($12 million). The difference between transmission revenues
accrued and transmission expenses incurred is deferred, resulting in no material
impact to current period earnings. The remainder of the increase resulted from
lower associated company cost reimbursements related to the Ohio Companies’
generation leasehold interests.
 
 Other – First Quarter 2008 Compared
with First Quarter 2007
 
 FirstEnergy’s
financial results from other operating segments and reconciling items, including
interest expense on holding company debt and corporate support services revenues
and expenses, resulted in a $37 million increase in FirstEnergy’s net
income in the first three months of 2008 compared to the same period in 2007.
The increase resulted from the sale of telecommunication assets
($19 million, net of taxes), reduced short-term disability costs
($8 million) and reduced interest expense ($11 million) associated
with FirstEnergy’s revolving credit facility.
 
 CAPITAL
RESOURCES AND LIQUIDITY
 
 FirstEnergy’s
business is capital intensive, requiring significant resources to fund operating
expenses, construction expenditures, scheduled debt maturities and interest and
dividend payments. In 2008 and in subsequent years, FirstEnergy expects to
satisfy these requirements with a combination of cash from operations and funds
from the capital markets. FirstEnergy also expects that borrowing capacity under
credit facilities will continue to be available to manage working capital
requirements during those periods.
 
 10
 
 
 As of March 31,
2008, FirstEnergy’s net deficit in working capital (current assets less current
liabilities) was principally due to the initial short-term funding of the
repurchase of certain auction rate bonds described below and the classification
of certain variable interest rate PCRBs as currently payable long-term debt. The
PCRBs currently permit individual debt holders to put the respective debt back
to the issuer for purchase prior to maturity.
 
 Changes in Cash Position
 
 FirstEnergy's
primary source of cash required for continuing operations as a holding company
is cash from the operations of its subsidiaries. FirstEnergy and certain of its
subsidiaries also have access to $2.75 billion of short-term financing
under a revolving credit facility which expires in 2012. Under the terms of the
facility, FirstEnergy is permitted to have up to $1.5 billion in
outstanding borrowings at any time, subject to the facility cap of $2.75 billion
of aggregate outstanding borrowings by it and its subsidiaries that are also
parties to such facility. In the first three months of 2008, FirstEnergy
received $88 million of cash dividends from its subsidiaries and paid
$168 million in cash dividends to common shareholders. With the exception
of Met-Ed, which is currently in an accumulated deficit position, there are no
material restrictions on the payment of cash dividends by the subsidiaries of
FirstEnergy.
 
 As of March 31,
2008, FirstEnergy had $70 million of cash and cash equivalents compared
with $129 million as of December 31, 2007. The major sources of
changes in these balances are summarized below.
 
 Cash Flows From Operating
Activities
 
 FirstEnergy's
consolidated net cash from operating activities is provided primarily by its
energy delivery services and competitive energy services businesses (see Results
of Operations above). Net cash provided from operating activities was $356million in the first
three months of 2008 compared to $57 million used for operating activities
in the first three months of 2007, as summarized in the following
table:
 
 Three
      Months EndedMarch
      31,Operating
      Cash Flows
              
              2008
              
              2007(In
      millions)Net
      income
              
              $
              276
              
              $
              290Non-cash
      charges
              
              
              203
              
              
              125Pension trust
      contribution
              
              
              -
              
              
              (300
              )Working
      capital and other
              
              
              (123
              )
              
              (172
              )$
              356
              
              $
              (57
              )
 
 
 Net cash provided
from operating activities increased by $413million in the first
three months of 2008 compared to the first three months of 2007 primarily due to
the absence of a $300 million pension trust contribution in 2007, a
$78 million increase in non-cash charges and a $49 million increase
from working capital and other changes, partially offset by a $14million decrease in net
income (see Results of Operations above). The increase in non-cash charges is
primarily due to lower deferrals of new regulatory assets and deferred purchased
power costs. The deferral of new regulatory assets decreased primarily as a
result of the absence of the deferral of decommissioning costs related to the
Saxton nuclear research facility in the first quarter of 2007. Deferred
purchased power costs decreased as a result of lower deferred NUG costs. The
changes in working capital and other primarily resulted from a $149 million
change in the collection of receivables and an $85 million change in the
settlement of accounts payable, partially offset by increased tax payments
compared to the first three months of 2007.
 
 Cash Flows From Financing
Activities
 
 In the first three
months of 2008, cash provided from financing activities was $227 million
compared to $346 million in the first three months of 2007. The decrease
was primarily due to lower short-term borrowings and debt issuances in the first
quarter of 2008, partially offset by redemption of common stock in the first
quarter of 2007. The following table summarizes security issuances and
redemptions.
 
 11
 
 
 
 Three
      Months EndedMarch
      31,Securities
      Issued or Redeemed
              
              2008
              
              2007(In
      millions)New
      issuesUnsecured
      notes
              
              $
              -
              
              $
              250RedemptionsPollution
      control notes(1)
              
              $
              362
              
              $
              -Senior secured
      notes
              
              
              6
              
              
              13Common
      stock
              
              
              -
              
              
              891$
              368
              
              $
              904Short-term
      borrowings, net
              
              $
              746
              
              $
              1,139(1)Includes the
      repurchase of certain auction rate PCRBs described below,
                whichwere
      extinguished from FirstEnergy’s consolidated balance sheet.
 
 FirstEnergy had
approximately $1.6 billion of short-term indebtedness as of March 31,
2008 compared to approximately $903 million as of December 31, 2007.
Available bank borrowing capability as of March 31, 2008 included the
following:
 
 Borrowing
      Capability (In
      millions)Short-term
      credit facilities(1)
              
              $
              2,870Accounts
      receivable financing facilities
              
              
              550Utilized
              
              
              (1,646
              )LOCs
              
              
              (60
              )Net available
      capability
              
              $
              1,714(1)
      Includes the  $2.75 billion revolving credit facility described
      below, a $100 million revolving credit facility that expires in
      December 2009 and a $20 million uncommitted line of
  credit.
 
 As of March 31,
2008, the Ohio Companies and Penn had the aggregate capability to issue
approximately $3.4 billion of additional FMB on the basis of property
additions and retired bonds under the terms of their respective mortgage
indentures. The issuance of FMB by OE, CEI and TE is also subject to provisions
of their senior note indentures generally limiting the incurrence of additional
secured debt, subject to certain exceptions that would permit, among other
things, the issuance of secured debt (including FMB) (i) supporting pollution
control notes or similar obligations, or (ii) as an extension, renewal or
replacement of previously outstanding secured debt. In addition, these
provisions would permit OE, CEI and TE to incur additional secured debt not
otherwise permitted by a specified exception of up to $573 million,
$449 million and $121 million, respectively, as of March 31,
2008.
 
 The applicable
earnings coverage tests in the respective charters of OE, TE, Penn and JCP&L
are currently inoperative. In the event that any of them issues preferred stock
in the future, the applicable earnings coverage test will govern the amount of
preferred stock that may be issued. CEI, Met-Ed and Penelec do not have similar
restrictions and could issue up to the number of preferred shares authorized
under their respective charters.
 
 As of March 31,
2008, FirstEnergy had approximately $1.0 billion of remaining unused
capacity under an existing shelf registration statement filed with the SEC in
2003 to support future securities issuances. The shelf registration expires in
December 2008 and provides the flexibility to issue and sell various types of
securities, including common stock, debt securities, and share purchase
contracts and related share purchase units. As of March 31, 2008, OE had
approximately $400 million of remaining unused capacity under a shelf
registration for unsecured debt securities filed with the SEC in 2006 that
expires in April 2009.
 
 FirstEnergy and
certain of its subsidiaries are party to a $2.75 billion five-year
revolving credit facility (included in the borrowing capability table above).
FirstEnergy has the capability to request an increase in the total commitments
available under this facility up to a maximum of $3.25 billion. Commitments
under the facility are available until August 24, 2012, unless the lenders
agree, at the request of the borrowers, to an unlimited number of additional
one-year extensions. Generally, borrowings under the facility must be repaid
within 364 days. Available amounts for each borrower are subject to a specified
sub-limit, as well as applicable regulatory and other limitations.
 
 12
 
 
 The following table
summarizes the borrowing sub-limits for each borrower under the facility, as
well as the limitations on short-term indebtedness applicable to each borrower
under current regulatory approvals and applicable statutory and/or charter
limitations:
 
 Revolving
              
              Regulatory
      andCredit
      Facility
              
              Other
      Short-TermBorrower
              
              Sub-Limit
              
              Debt
      Limitations(1)(In
      millions)FirstEnergy
              
              $
              2,750
              
              $
              -
              (2)OE
              
              
              500
              
              
              500Penn
              
              
              50
              
              
              39
              (3)CEI
              
              
              250
              (4)
              
              500TE
              
              
              250
              (4)
              
              500JCP&L
              
              
              425
              
              
              428
              (3)Met-Ed
              
              
              250
              
              
              300
              (3)Penelec
              
              
              250
              
              
              300
              (3)FES
              
              
              1,000
              
              
              -
              (2)ATSI
              
              
              -
              (5)
              
              50(1)As
      of March 31, 2008.
                (2)No
      regulatory approvals, statutory or charter limitations
      applicable.
                (3)Excluding
      amounts which may be borrowed under the regulated companies’ money
      pool.
                (4)Borrowing
      sub-limits for CEI and TE may be increased to up to $500 million by
      delivering notice to the administrative agent that such borrower has
      senior unsecured debt ratings of at least BBB by S&P and Baa2 by
      Moody’s.
                (5)The
      borrowing sub-limit for ATSI may be increased up to $100 million by
      delivering notice to the administrative agent that either (i) ATSI has
      senior unsecured debt ratings of at least BBB- by S&P and Baa3 by
      Moody’s or (ii) FirstEnergy has guaranteed ATSI’s obligations of such
      borrower under the facility.
 
 The revolving credit
facility, combined with an aggregate $550 million (unused as of
March 31, 2008) of accounts receivable financing facilities for OE, CEI,
TE, Met-Ed, Penelec and Penn, are intended to provide liquidity to meet working
capital requirements and for other general corporate purposes for FirstEnergy
and its subsidiaries.
 
 Under the revolving
credit facility, borrowers may request the issuance of LOCs expiring up to one
year from the date of issuance. The stated amount of outstanding LOCs will count
against total commitments available under the facility and against the
applicable borrower’s borrowing sub-limit.
 
 The revolving credit
facility contains financial covenants requiring each borrower to maintain a
consolidated debt to total capitalization ratio of no more than 65%, measured at
the end of each fiscal quarter. As of March 31, 2008, FirstEnergy’s and its
subsidiaries' debt to total capitalization ratios (as defined under the
revolving credit facility) were as follows:
 
 BorrowerFirstEnergy
              
              58
              %OE
              
              43
              %Penn
              
              25
              %CEI
              
              57
              %TE
              
              42
              %JCP&L
              
              30
              %Met-Ed
              
              47
              %Penelec
              
              49
              %FES
              
              61
              %
 
 The revolving credit
facility does not contain provisions that either restrict the ability to borrow
or accelerate repayment of outstanding advances as a result of any change in
credit ratings. Pricing is defined in “pricing grids”, whereby the cost of funds
borrowed under the facility is related to the credit ratings of the company
borrowing the funds.
 
 13
 
 FirstEnergy's
regulated companies also have the ability to borrow from each other and the
holding company to meet their short-term working capital requirements. A similar
but separate arrangement exists among FirstEnergy's unregulated companies. FESC
administers these two money pools and tracks surplus funds of FirstEnergy and
the respective regulated and unregulated subsidiaries, as well as proceeds
available from bank borrowings. Companies receiving a loan under the money pool
agreements must repay the principal amount of the loan, together with accrued
interest, within 364 days of borrowing the funds. The rate of interest is the
same for each company receiving a loan from their respective pool and is based
on the average cost of funds available through the pool. The average interest
rate for borrowings in the first three months of 2008 was 3.62% for the
regulated companies’ money pool and 3.55% for the unregulated companies’ money
pool.
 
 FirstEnergy’s access
to capital markets and costs of financing are influenced by the ratings of its
securities. The following table displays FirstEnergy’s, FES’ and the Companies’
securities ratings as of March 31, 2008. S&P’s outlook of FirstEnergy
and its subsidiaries remains negative and Moody’s outlook for FirstEnergy and
its subsidiaries remains stable.
 
 Issuer
              
              Securities
              
              S&P
              
              Moody’sFirstEnergy
              
              Senior
      unsecured
              
              BBB-
              
              Baa3FES
              
              Senior
      unsecured
              
              BBB
              
              Baa2OE
              
              Senior
      unsecured
              
              BBB-
              
              Baa2CEI
              
              Senior
      secured
              
              BBB+
              
              Baa2Senior
      unsecured
              
              BBB-
              
              Baa3TE
              
              Senior
      unsecured
              
              BBB-
              
              Baa3Penn
              
              Senior
      secured
              
              A-
              
              Baa1JCP&L
              
              Senior
      unsecured
              
              BBB
              
              Baa2Met-Ed
              
              Senior
      unsecured
              
              BBB
              
              Baa2Penelec
              
              Senior
      unsecured
              
              BBB
              
              Baa2
 
 Between February 27,
2008 and April 2, 2008, FirstEnergy’s subsidiaries repurchased all of their
tax-exempt long-term PCRBs originally sold at auction rates ($530 million)
in response to disruptions in the auction rate securities market. In February
2008, FGCO, NGC, Met-Ed and Penelec elected to convert all of their then
outstanding auction rate PCRBs to a weekly rate mode, which required their
mandatory purchase of these PCRBs on the applicable conversion dates. The
companies initially funded the repurchase with short-term debt. On April 22,
2008, Met-Ed ($28.5 million) and Penelec ($45 million) successfully
marketed their converted PCRBs in a variable-rate mode. Subject to market
conditions, FGCO and NGC plan to remarket their converted PCRBs later in 2008,
either in fixed-rate or variable-rate modes.
 Cash Flows From Investing
Activities
 
 Net cash flows used
in investing activities resulted principally from property additions. Energy
delivery services property additions primarily include expenditures related to
transmission and distribution facilities. Capital spending by the competitive
energy services segment are principally generation-related. The following table
summarizes investing activities for the three months ended March 31, 2008 and
2007 by business segment:
 
 Summary
      of Cash Flows
              
              PropertyProvided
      from (Used for) Investing Activities
              
              Additions
              
              Investments
              
              Other
              
              TotalSources
      (Uses)
              
              (In
      millions)Three
      Months Ended March 31, 2008Energy
      delivery services
              
              $
              (255
              )
              $
              33
              
              $
              2
              
              $
              (220
              )Competitive
      energy services
              
              
              (462
              )
              
              (3
              )
              
              (19
              )
              
              (484
              )Other
              
              
              (12
              )
              
              68
              
              
              -
              
              
              56Inter-Segment
      reconciling items
              
              
              18
              
              
              (12
              )
              
              -
              
              
              6Total
              
              $
              (711
              )
              $
              86
              
              $
              (17
              )
              $
              (642
              )Three
      Months Ended March 31, 2007Energy
      delivery services
              
              $
              (155
              )
              $
              44
              
              $
              10
              
              $
              (101
              )Competitive
      energy services
              
              
              (124
              )
              
              (9
              )
              
              (4
              )
              
              (137
              )Other
              
              
              (1
              )
              
              (16
              )
              
              (4
              )
              
              (21
              )Inter-Segment
      reconciling items
              
              
              (16
              )
              
              (15
              )
              
              -
              
              
              (31
              )Total
              
              $
              (296
              )
              $
              4
              
              $
              2
              
              $
              (290
              )
 
 14
 
 
 Net cash used for
investing activities in the first quarter of 2008 increased by $352 million
compared to the first quarter of 2007. The increase was principally due to a
$415 million increase in property additions, which reflects AQC system
expenditures and the acquisition of a partially completed natural gas fired
generating plant in Fremont, Ohio. Partially offsetting the increase in property
additions were cash proceeds from the sale of telecommunication
assets.
 
 During the remaining
three quarters of 2008, capital requirements for property additions and capital
leases are expected to be approximately $1.4 billion. FirstEnergy and the
Companies have additional requirements of approximately $328 million for
maturing long-term debt during the remainder of 2008. These cash requirements
are expected to be satisfied from a combination of internal cash, short-term
credit arrangements and funds raised in the capital markets.
 
 FirstEnergy's
capital spending for the period 2008-2012 is expected to be approximately
$7.6 billion (excluding nuclear fuel), of which approximately
$2.0 billion applies to 2008. Investments for additional nuclear fuel
during the 2008-2012 period are estimated to be approximately $1.4 billion,
of which about $150 million applies to 2008. During the same period,
FirstEnergy's nuclear fuel investments are expected to be reduced by
approximately $949 million and $111 million, respectively, as the
nuclear fuel is consumed.
 
 GUARANTEES
AND OTHER ASSURANCES
 
 As part of normal
business activities, FirstEnergy enters into various agreements on behalf of its
subsidiaries to provide financial or performance assurances to third parties.
These agreements include contract guarantees, surety bonds and LOCs. Some of the
guaranteed contracts contain collateral provisions that are contingent upon
FirstEnergy’s credit ratings.
 
 As of March 31,
2008, FirstEnergy’s maximum exposure to potential future payments under
outstanding guarantees and other assurances approximated $4.4 billion, as
summarized below:
 
 MaximumGuarantees
      and Other Assurances
              
              Exposure(In
      millions)FirstEnergy
      Guarantees of SubsidiariesEnergy and
      Energy-Related Contracts (1)
              
              $
              441LOC (long-term
      debt) – interest coverage (2)
              
              
              6Other (3)
              
              
              503950Subsidiaries’
      GuaranteesEnergy and
      Energy-Related Contracts
              
              
              86LOC (long-term
      debt) – interest coverage (2)
              
              
              6Other (4)
              
              
              2,6412,733Surety
      Bonds
              
              
              66LOC (long-term
      debt) – interest coverage (2)
              
              
              5LOC (non-debt)
      (5)(6)
              
              
              679750Total
      Guarantees and Other Assurances
              
              $
              4,433
 
 (1)
              Issued for
      open-ended terms, with a 10-day termination right by
      FirstEnergy.
 (2)
              Reflects the
      interest coverage portion of LOCs issued in support of floating-rate
                pollution
      control revenue bonds with various maturities. The principal amount of
                floating-rate
      pollution control revenue bonds of $1.6 billion is reflected in debt
      on
                FirstEnergy’s
      consolidated balance sheets.
 (3)
              Includes
      guarantees of $300 million for OVEC obligations and $80 million
      for nuclear
                decommissioning
      funding assurances.
 (4)
              Includes FES’
      guarantee of FGCO’s obligations under the sale and leaseback of Bruce
                Mansfield Unit
      1.
 (5)
              Includes
      $60 million issued for various terms pursuant to LOC capacity
      available under
                FirstEnergy’s
      revolving credit facility.
 (6)
              Includes
      approximately $194 million pledged in connection with the sale and
      leaseback
                of Beaver
      Valley Unit 2 by CEI and TE, $291 million pledged in connection with
      the sale a
                nd leaseback
      of Beaver Valley Unit 2 by OE and $134 million pledged in connection
      with
                the sale and
      leaseback of Perry Unit 1 by OE.
 
 15
 
 
 FirstEnergy
guarantees energy and energy-related payments of its subsidiaries involved in
energy commodity activities principally to facilitate normal physical
transactions involving electricity, gas, emission allowances and coal.
FirstEnergy also provides guarantees to various providers of credit support for
the financing or refinancing by subsidiaries of costs related to the acquisition
of property, plant and equipment. These agreements legally obligate FirstEnergy
to fulfill the obligations of those subsidiaries directly involved in energy and
energy-related transactions or financings where the law might otherwise limit
the counterparties' claims. If demands of a counterparty were to exceed the
ability of a subsidiary to satisfy existing obligations, FirstEnergy’s guarantee
enables the counterparty's legal claim to be satisfied by other FirstEnergy
assets. The likelihood is remote that such parental guarantees will increase
amounts otherwise paid by FirstEnergy to meet its obligations incurred in
connection with ongoing energy and energy-related activities.
 
 While these types of
guarantees are normally parental commitments for the future payment of
subsidiary obligations, subsequent to the occurrence of a credit rating
downgrade or “material adverse event”, the immediate posting of cash collateral
or provision of an LOC may be required of the subsidiary. As of March 31,
2008, FirstEnergy’s maximum exposure under these collateral provisions was
$440 million.
 
 Most of
FirstEnergy’s surety bonds are backed by various indemnities common within the
insurance industry. Surety bonds and related guarantees provide additional
assurance to outside parties that contractual and statutory obligations will be
met in a number of areas including construction contracts, environmental
commitments and various retail transactions.
 
 FirstEnergy has
guaranteed the obligations of the operators of the TEBSA project up to a maximum
of $2million
(subject to escalation) under the project's operations and maintenance
agreement. In connection with the sale of TEBSA in January 2004, the purchaser
indemnified FirstEnergy against any loss under this guarantee. FirstEnergy has
also provided an LOC ($19 million as of March 31, 2008), which is
renewable and declines yearly based upon the senior outstanding debt of
TEBSA.
 
 OFF-BALANCE
SHEET ARRANGEMENTS
 
 FES and the Ohio
Companies have obligations that are not included on FirstEnergy’s Consolidated
Balance Sheets related to sale and leaseback arrangements involving Perry
Unit 1, Beaver Valley Unit 2 and the Bruce Mansfield Plant, which are
satisfied through operating lease payments. As of March 31, 2008, the
present value of these sale and leaseback operating lease commitments, net of
trust investments, totaled $2.4 billion.
 
 FirstEnergy has
equity ownership interests in certain businesses that are accounted for using
the equity method of accounting for investments. There are no undisclosed
material contingencies related to these investments. Certain guarantees that
FirstEnergy does not expect to have a material current or future effect on its
financial condition, liquidity or results of operations are disclosed under
“Guarantees and Other Assurances” above.
 
 MARKET
RISK INFORMATION
 
 FirstEnergy uses
various market risk sensitive instruments, including derivative contracts,
primarily to manage the risk of price and interest rate fluctuations.
FirstEnergy's Risk Policy Committee, comprised of members of senior management,
provides general oversight for risk management activities throughout the
company.
 
 Commodity Price Risk
 
 FirstEnergy is
exposed to financial and market risks resulting from the fluctuation of interest
rates and commodity prices -- electricity, energy transmission, natural gas,
coal, nuclear fuel and emission allowances. To manage the volatility relating to
these exposures, FirstEnergy uses a variety of non-derivative and derivative
instruments, including forward contracts, options, futures contracts and swaps.
The derivatives are used principally for hedging purposes. Derivatives that fall
within the scope of SFAS 133 must be recorded at their fair value and
marked to market. The majority of FirstEnergy’s derivative hedging contracts
qualify for the normal purchase and normal sale exception under SFAS 133
and are therefore excluded from the tables below. Contracts that are not exempt
from such treatment include certain power purchase agreements with NUG entities
that were structured pursuant to the Public Utility Regulatory Policies Act of
1978. These non-trading contracts are adjusted to fair value at the end of each
quarter, with a corresponding regulatory asset recognized for above-market
costs. The change in the fair value of commodity derivative contracts related to
energy production during the first quarter of 2008 is summarized in the
following table:
 
 16
 
 
 Increase
      (Decrease) in the Fair Valueof Commodity Derivative
      Contracts
              
              Non-Hedge
              
              Hedge
              
              Total(In
      millions)Change
      in the Fair Value ofCommodity
      Derivative Contracts:Outstanding
      net liability as of January 1, 2008
              
              $
              (713
              )
              $
              (26
              )
              $
              (739
              )Additions/change
      in value of existing contracts
              
              
              -
              
              
              (11
              )
              
              (11
              )Settled
      contracts
              
              
              58
              
              
              17
              
              
              75Outstanding
      net liability as of March 31, 2008 (1)
              
              $
              (655
              )
              $
              (20
              )
              $
              (675
              )Non-commodity
      Net Liabilities as of March 31, 2008:Interest rate
      swaps (2)
              
              
              -
              
              
              (3
              )
              
              (3
              )Net
      Liabilities - Derivative Contracts
                as
      of March 31, 2008
              
              $
              (655
              )
              $
              (23
              )
              $
              (678
              )Impact
      of Changes in Commodity Derivative Contracts(3)Income
      Statement effects (pre-tax)
              
              $
              -
              
              $
              -
              
              $
              -Balance Sheet
      effects:Other
      comprehensive income (pre-tax)
              
              $
              -
              
              $
              6
              
              $
              6Regulatory
      assets (net)
              
              $
              (58
              )
              $
              -
              
              $
              (58
              )
 
 (1)
              Includes
      $655 million in non-hedge commodity derivative contracts (primarily
      with NUGs), which are offset by a regulatory
  asset.
 (2)
              Interest rate
      swaps are treated as cash flow or fair value hedges (see Interest Rate
      Swap Agreements below).
 (3)
              Represents the
      change in value of existing contracts, settled contracts and changes in
      techniques/assumptions.
 
 Derivatives
      are included on the Consolidated Balance Sheet as of March 31, 2008
      as follows:
 
 Balance
      Sheet Classification
              
              Non-Hedge
              
              Hedge
              
              Total(In
      millions)Current-Other
      assets
              
              $
              -
              
              $
              62
              
              $
              62Other
      liabilities
              
              
              -
              
              
              (77
              )
              
              (77
              )Non-Current-Other deferred
      charges
              
              
              28
              
              
              12
              
              
              40Other
      non-current liabilities
              
              
              (683
              )
              
              (20
              )
              
              (703
              )Net
      liabilities
              
              $
              (655
              )
              $
              (23
              )
              $
              (678
              )
 
 
 The valuation of
derivative contracts is based on observable market information to the extent
that such information is available. In cases where such information is not
available, FirstEnergy relies on model-based information. The model provides
estimates of future regional prices for electricity and an estimate of related
price volatility. FirstEnergy uses these results to develop estimates of fair
value for financial reporting purposes and for internal management decision
making (see Note 4). Sources of information for the valuation of commodity
derivative contracts as of March 31, 2008 are summarized by year in the
following table:
 
 Source
      of Information-
      Fair Value by Contract Year
              
              2008(1)
              
              2009
              
              2010
              
              2011
              
              2012
              
              Thereafter
              
              Total(In
      millions)Prices
      actively quoted(2)
              
              $
              3
              
              $
              1
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              4Other external
      sources(3)
              
              
              (164
              )
              
              (192
              )
              
              (149
              )
              
              (92
              )
              
              -
              
              
              -
              
              
              (597
              )Prices based
      on models
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (30
              )
              
              (52
              )
              
              (82
              )Total(4)
              
              $
              (161
              )
              $
              (191
              )
              $
              (149
              )
              $
              (92
              )
              $
              (30
              )
              $
              (52
              )
              $
              (675
              )
 
 (1)     For
the last three quarters of 2008.
 (2)     Represents
exchange traded NYMEX futures and options.
 (3)     Primarily
represents contracts based on broker and ICE quotes.
 (4)
              Includes
      $655 million in non-hedge commodity derivative contracts (primarily
      with NUGs), which are offset by a regulatory
  asset.
 
 FirstEnergy performs
sensitivity analyses to estimate its exposure to the market risk of its
commodity positions. A hypothetical 10% adverse shift (an increase or decrease
depending on the derivative position) in quoted market prices in the near term
on its derivative instruments would not have had a material effect on its
consolidated financial position (assets, liabilities and equity) or cash flows
as of March 31, 2008. Based on derivative contracts held as of
March 31, 2008, an adverse 10% change in commodity prices would decrease
net income by approximately $3 million during the next 12
months.
 
 17
 
 
 Interest Rate Swap Agreements - Fair
Value Hedges
 
 FirstEnergy utilizes
fixed-for-floating interest rate swap agreements as part of its ongoing effort
to manage the interest rate risk associated with its debt portfolio. These
derivatives are treated as fair value hedges of fixed-rate, long-term debt
issues – protecting against the risk of changes in the fair value of fixed-rate
debt instruments due to lower interest rates. Swap maturities, call options,
fixed interest rates and interest payment dates match those of the underlying
obligations. As of March 31, 2008, the debt underlying the $250million outstanding
notional amount of interest rate swaps had a weighted average fixed interest
rate of 4.87%, which the swaps have converted to a current weighted average
variable rate of 3.49%.
 
 March
      31, 2008
              
              December
      31, 2007Notional
              
              Maturity
              
              Fair
              
              Notional
              
              Maturity
              
              FairInterest
      Rate Swaps
              
              Amount
              
              Date
              
              Value
              
              Amount
              
              Date
              
              Value(In
      millions)Fair value
      hedges
              
              $
              100
              
              
              2008
              
              $
              1
              
              $
              100
              
              
              2008
              
              $
              -150
              
              
              2015
              
              
              4
              
              
              150
              
              
              2015
              
              
              (3
              )$
              250
              
              
              
              
              $
              5
              
              $
              250
              
              
              
              
              $
              (3
              )
 
 
 Forward Starting Swap Agreements -
Cash Flow Hedges
 
 FirstEnergy utilizes
forward starting swap agreements (forward swaps) in order to hedge a portion of
the consolidated interest rate risk associated with anticipated future issuances
of fixed-rate, long-term debt securities for one or more of its consolidated
subsidiaries in 2008 and 2009, and anticipated variable-rate, short-term debt.
These derivatives are treated as cash flow hedges, protecting against the risk
of changes in future interest payments resulting from changes in benchmark U.S.
Treasury and LIBOR rates between the date of hedge inception and the date of the
debt issuance. During the first three months of 2008, FirstEnergy entered into
forward swaps with an aggregate notional value of $500 million and terminated
forward swaps with an aggregate notional value of $300million. FirstEnergy
paid $18 million in cash related to the terminations, $1 million of
which was deemed ineffective and recognized in current period earnings. The
remaining effective portion ($17 million) will be recognized over the terms
of the associated future debt. As of March 31, 2008, FirstEnergy had
outstanding forward swaps with an aggregate notional amount of $600 million
and an aggregate fair value of $(8) million.
 
 March
      31, 2008
              
              December
      31, 2007Notional
              
              Maturity
              
              Fair
              
              Notional
              
              Maturity
              
              FairForward
      Starting Swaps
              
              Amount
              
              Date
              
              Value
              
              Amount
              
              Date
              
              Value(In
      millions)Cash flow
      hedges
              
              $
              100
              
              
              2009
              
              $
              (2
              )
              $
              -
              
              
              2009
              
              $
              -100
              
              
              2010
              
              
              (1
              )
              
              -
              
              
              2010
              
              
              -25
              
              
              2015
              
              
              (2
              )
              
              25
              
              
              2015
              
              
              (1
              )325
              
              
              2018
              
              
              -
              
              
              325
              
              
              2018
              
              
              (1
              )50
              
              
              2020
              
              
              (3
              )
              
              50
              
              
              2020
              
              
              (1
              )$
              600
              
              
              
              
              $
              (8
              )
              $
              400
              
              
              
              
              $
              (3
              )
 
 Equity Price Risk
 
 Included in nuclear
decommissioning trusts are marketable equity securities carried at their fair
value (market value) of approximately $1.2 billion and $1.4 billion,
as of March 31, 2008 and December 31, 2007, respectively. A
hypothetical 10% decrease in prices quoted by stock exchanges would result in a
$120million reduction
in fair value as of March 31, 2008.
 
 CREDIT
RISK
 
 Credit risk is the
risk of an obligor's failure to meet the terms of any investment contract, loan
agreement or otherwise perform as agreed. Credit risk arises from all activities
in which success depends on issuer, borrower or counterparty performance,
whether reflected on or off the balance sheet. FirstEnergy engages in
transactions for the purchase and sale of commodities including gas,
electricity, coal and emission allowances. These transactions are often with
major energy companies within the industry.
 
 FirstEnergy
maintains credit policies with respect to its counterparties to manage overall
credit risk. This includes performing independent risk evaluations, actively
monitoring portfolio trends and using collateral and contract provisions to
mitigate exposure. As part of its credit program, FirstEnergy aggressively
manages the quality of its portfolio of energy contracts, evidenced by a current
weighted average risk rating for energy contract counterparties of BBB+
(S&P). As of March 31, 2008, the largest credit concentration was with
one party, currently rated investment grade that represented 11% of
FirstEnergy’s total approved credit risk. Within FirstEnergy’s unregulated
energy subsidiaries, 99% of credit exposures, net of collateral and reserve,
were with investment grade counterparties as of March 31, 2008.
 
 18
 
 
 OUTLOOK
 
 State Regulatory Matters
 
 In Ohio, New Jersey
and Pennsylvania, laws applicable to electric industry restructuring contain
similar provisions that are reflected in the Companies' respective state
regulatory plans. These provisions include:
 
 ·
              restructuring
      the electric generation business and allowing the Companies' customers to
      select a competitive electric generation supplier other than the
      Companies;·
              establishing
      or defining the PLR obligations to customers in the Companies' service
      areas;·
              providing the
      Companies with the opportunity to recover potentially stranded investment
      (or transition costs) not otherwise recoverable in a competitive
      generation market;·
              itemizing
      (unbundling) the price of electricity into its component elements –
      including generation, transmission, distribution and stranded costs
      recovery charges;·
              continuing
      regulation of the Companies' transmission and distribution systems;
      and·
              requiring
      corporate separation of regulated and unregulated business
      activities.
 
 The Companies and
ATSI recognize, as regulatory assets, costs which the FERC, the PUCO, the PPUC
and the NJBPU have authorized for recovery from customers in future periods or
for which authorization is probable. Without the probability of such
authorization, costs currently recorded as regulatory assets would have been
charged to income as incurred. Regulatory assets that do not earn a current
return totaled approximately $137 million as of March 31, 2008
(JCP&L - $78 million and Met-Ed - $59 million). Regulatory assets
not earning a current return (primarily for certain regulatory transition costs
and employee postretirement benefits) are expected to be recovered by 2014 for
JCP&L and by 2020 for Met-Ed. The following table discloses regulatory
assets by company:
 
 March
      31,
              
              December
      31,
              
              IncreaseRegulatory
      Assets*
              
              2008
              
              2007
              
              (Decrease)(In
      millions)OE
              
              $
              710
              
              $
              737
              
              $
              (27
              )CEI
              
              
              854
              
              
              871
              
              
              (17
              )TE
              
              
              188
              
              
              204
              
              
              (16
              )JCP&L
              
              
              1,476
              
              
              1,596
              
              
              (120
              )Met-Ed
              
              
              530
              
              
              495
              
              
              35ATSI
              
              
              39
              
              
              42
              
              
              (3
              )Total
              
              $
              3,797
              
              $
              3,945
              
              $
              (148
              )
 
 *
              Penelec had
      net regulatory liabilities of approximately $67 million and
      $74 million as of March 31, 2008 and December 31, 2007,
      respectively. These net regulatory liabilities are included in Other
      Non-current Liabilities on the Consolidated Balance
  Sheets.
 
 Regulatory assets by
source are as follows:
 
 March
      31,
              
              December
      31,
              
              IncreaseRegulatory
      Assets By Source
              
              2008
              
              2007
              
              (Decrease)(In
      millions)Regulatory
      transition costs
              
              $
              2,156
              
              $
              2,363
              
              $
              (207
              )Customer
      shopping incentives
              
              
              495
              
              
              516
              
              
              (21
              )Customer
      receivables for future income taxes
              
              
              290
              
              
              295
              
              
              (5
              )Loss on
      reacquired debt
              
              
              56
              
              
              57
              
              
              (1
              )Employee
      postretirement benefits
              
              
              37
              
              
              39
              
              
              (2
              )Nuclear
      decommissioning, decontaminationand spent fuel
      disposal costs
              
              
              (95
              )
              
              (115
              )
              
              20Asset removal
      costs
              
              
              (195
              )
              
              (183
              )
              
              (12
              )MISO/PJM
      transmission costs
              
              
              368
              
              
              340
              
              
              28Fuel costs -
      RCP
              
              
              227
              
              
              220
              
              
              7Distribution
      costs - RCP
              
              
              361
              
              
              321
              
              
              40Other
              
              
              97
              
              
              92
              
              
              5Total
              
              $
              3,797
              
              $
              3,945
              
              $
              (148
              )
 
 
 19
 
 Reliability Initiatives
 
 In late 2003 and
early 2004, a series of letters, reports and recommendations were issued from
various entities, including governmental, industry and ad hoc reliability
entities (PUCO, FERC, NERC and the U.S. – Canada Power System Outage Task Force)
regarding enhancements to regional reliability. The proposed enhancements were
divided into two groups:  enhancements that were to be completed in
2004; and enhancements that were to be completed after 2004.  In 2004,
FirstEnergy completed all of the enhancements that were recommended for
completion in 2004. FirstEnergy is also proceeding with the implementation of
the recommendations that were to be completed subsequent to 2004 and will
continue to periodically assess the FERC-ordered Reliability Study
recommendations for forecasted 2009 system conditions, recognizing revised load
forecasts and other changing system conditions which may impact the
recommendations. Thus far, implementation of the recommendations has not
required, nor is expected to require, substantial investment in new or material
upgrades to existing equipment. The FERC or other applicable government agencies
and reliability coordinators may, however, take a different view as to
recommended enhancements or may recommend additional enhancements in the future
that could require additional material expenditures.
 
 As a result of
outages experienced in JCP&L’s service area in 2002 and 2003, the NJBPU
performed a review of JCP&L’s service reliability. On June 9, 2004, the
NJBPU approved a stipulation that addresses a third-party consultant’s
recommendations on appropriate courses of action necessary to ensure system-wide
reliability. The stipulation incorporates the consultant’s focused audit of, and
recommendations regarding, JCP&L’s Planning and Operations and Maintenance
programs and practices. On June 1, 2005, the consultant completed his work and
issued his final report to the NJBPU. On July 14, 2006, JCP&L filed a
comprehensive response to the consultant’s report with the NJBPU. JCP&L will
complete the remaining substantive work described in the stipulation in
2008.  JCP&L continues to file compliance reports with the NJBPU
reflecting JCP&L’s activities associated with implementing the
stipulation.
 
 In 2005, Congress
amended the Federal Power Act to provide for federally-enforceable mandatory
reliability standards. The mandatory reliability standards apply to the bulk
power system and impose certain operating, record-keeping and reporting
requirements on the Companies and ATSI. The NERC is charged with establishing
and enforcing these reliability standards, although it has delegated day-to-day
implementation and enforcement of its responsibilities to eight regional
entities, including the ReliabilityFirst
Corporation.  All of FirstEnergy’s facilities are located within the
ReliabilityFirst
region. FirstEnergy actively participates in the NERC and ReliabilityFirst stakeholder processes,
and otherwise monitors and manages its companies in response to the ongoing
development, implementation and enforcement of the reliability
standards.
 
 FirstEnergy believes
that it is in compliance with all currently-effective and enforceable
reliability standards.  Nevertheless, it is clear that NERC,
ReliabilityFirst and
the FERC will continue to refine existing reliability standards as well as to
develop and adopt new reliability standards. The financial impact of complying
with new or amended standards cannot be determined at this time. However, the
2005 amendments to the Federal Power Act provide that all prudent costs incurred
to comply with the new reliability standards be recovered in rates. Still, any
future inability on FirstEnergy’s part to comply with the reliability standards
for its bulk power system could have a material adverse effect on its financial
condition, results of operations and cash flows.
 
 In April 2007,
ReliabilityFirst
performed a routine compliance audit of FirstEnergy’s bulk-power system within
the Midwest ISO region and found it to be in full compliance with all audited
reliability standards.  Similarly, ReliabilityFirst has scheduled a
compliance audit of FirstEnergy’s bulk-power system within the PJM region in
2008. FirstEnergy currently does not expect any material adverse financial
impact as a result of these audits.
 
 Ohio
 
 On January 4,
2006, the PUCO issued an order authorizing the Ohio Companies to recover certain
increased fuel costs through a fuel rider and to defer certain other increased
fuel costs to be incurred from January 1, 2006 through December 31,
2008, including interest on the deferred balances. The order also provided for
recovery of the deferred costs over a twenty-five-year period through
distribution rates. On August 29, 2007, the Supreme Court of Ohio concluded that
the PUCO violated a provision of the Ohio Revised Code by permitting the Ohio
Companies “to collect deferred increased fuel costs through future distribution
rate cases, or to alternatively use excess fuel-cost recovery to reduce deferred
distribution-related expenses” and remanded the matter to the PUCO for further
consideration. On September 10, 2007, the Ohio Companies filed an
application with the PUCO that requested the implementation of two
generation-related fuel cost riders to collect the increased fuel costs that
were previously authorized to be deferred. On January 9, 2008, the PUCO approved
the Ohio Companies’ proposed fuel cost rider to recover increased fuel costs to
be incurred in 2008 commencing January 1, 2008 through December 31, 2008, which
is expected to be approximately $189 million. In addition, the PUCO ordered
the Ohio Companies to file a separate application for an alternate recovery
mechanism to collect the 2006 and 2007 deferred fuel costs. On February 8,
2008, the Ohio Companies filed an application proposing to recover
$226 million of deferred fuel costs and carrying charges for 2006 and 2007
pursuant to a separate fuel rider, with alternative options for the recovery
period ranging from five to twenty-five years. This second application is
currently pending before the PUCO and a hearing has been set for July 15,
2008.
 
 20
 
 
 The Ohio Companies
filed an application and rate request for an increase in electric distribution
rates with the PUCO on June 7, 2007. The requested increase is expected to
be more than offset by the elimination or reduction of transition charges at the
time the rates go into effect and would result in lowering the overall
non-generation portion of the average electric bill for most Ohio
customers.  The distribution rate increases reflect capital
expenditures since the Ohio Companies’ last distribution rate proceedings,
increases in operation and maintenance expenses and recovery of regulatory
assets that were authorized in prior cases. On August 6, 2007, the Ohio
Companies updated their filing supporting a distribution rate increase of
$332 million. On December 4, 2007, the PUCO Staff issued its Staff Reports
containing the results of their investigation into the distribution rate
request. In its reports, the PUCO Staff recommended a distribution rate increase
in the range of $161 million to $180 million, with $108 million to $127
million for distribution revenue increases and $53 million for recovery of
costs deferred under prior cases. This amount excludes the recovery of deferred
fuel costs, whose recovery is now being sought in a separate proceeding before
the PUCO, discussed above. On January 3, 2008, the Ohio Companies and
intervening parties filed objections to the Staff Reports and on January 10,
2008, the Ohio Companies filed supplemental testimony. Evidentiary hearings
began on January 29, 2008 and continued through February 25, 2008. During
the evidentiary hearings, the PUCO Staff submitted testimony decreasing their
recommended revenue increase to a range of $114 million to
$132 million. Additionally, in testimony submitted on February 11,
2008, the PUCO Staff adopted a position regarding interest deferred for
RCP-related deferrals, line extension deferrals and transition tax deferrals
that, if upheld by the PUCO, would result in the write-off of approximately
$45 million of interest costs deferred through March 31, 2008 ($0.09
per share of common stock). The PUCO is expected to render its decision during
the second or third quarter of 2008. The new rates would become effective
January 1, 2009 for OE and TE, and approximately May 2009 for
CEI.
 
 On July 10, 2007,
the Ohio Companies filed an application with the PUCO requesting approval of a
comprehensive supply plan for providing retail generation service to customers
who do not purchase electricity from an alternative supplier, beginning
January 1, 2009. The proposed competitive bidding process would average the
results of multiple bidding sessions conducted at different times during the
year. The final price per KWH would reflect an average of the prices resulting
from all bids. In their filing, the Ohio Companies offered two alternatives for
structuring the bids, either by customer class or a “slice-of-system” approach.
A slice-of-system approach would require the successful bidder to be responsible
for supplying a fixed percentage of the utility’s total load notwithstanding the
customer’s classification. The proposal provides the PUCO with an option to
phase in generation price increases for residential tariff groups who would
experience a change in their average total price of 15 percent or more. The PUCO
held a technical conference on August 16, 2007 regarding the filing.
Initial and reply comments on the proposal were filed by various parties in
September and October 2007, respectively. The proposal is currently pending
before the PUCO.
 
 On April 22,
2008, an amended version of Substitute SB221 was passed by the Ohio House of
Representatives and sent back to the Ohio Senate for concurrence. On
April 23, 2008, the Ohio Senate approved the House's amendments to
Substitute SB221 and forwarded the bill to the Governor for signature, which he
signed on May 1, 2008. Amended Substitute SB221 requires all electric
distribution utilities to file an RSP, now called an ESP, with the PUCO. An
ESP is required to contain a proposal for the supply and pricing of retail
generation and may include proposals, without limitation, related to one or more
of the following:
 
 ·
              automatic
      recovery of prudently incurred fuel, purchased power, emission allowance
      costs and federally mandated energy
taxes;
 
 ·
              construction
      work in progress for costs of constructing an electric generating facility
      or environmental expenditure for any electric generating
      facility;
 
 ·
              costs of an
      electric generating facility;
 
 ·
              terms related
      to customer shopping, bypassability, standby, back-up and default
      service;
 
 ·
              accounting for
      deferrals related to stabilizing retail electric
  service;
 
 ·
              automatic
      increases or decreases in standard service offer
  price;
 
 ·
              phase-in and
      securitization;
 
 ·
              transmission
      service and related costs;
 
 ·
              distribution
      service and related costs; and
 
 ·
              economic
      development and energy efficiency.
 
 21
 
 
 A utility could also
simultaneously file an MRO in which it would have to demonstrate the following
objective market criteria: The utility or its transmission service affiliate
belongs to a FERC-approved RTO having a market-monitor function and the ability
to mitigate market power, and a published source exists that identifies
information for traded electricity and energy products that are contracted for
delivery two years into the future. The PUCO would test the ESP and its pricing
and all other terms and conditions against the MRO and may only approve the ESP
if it is found to be more favorable to customers. As part of an ESP with a plan
period longer than three years, the PUCO shall prospectively determine every
fourth year of the plan whether it is substantially likely the plan will provide
the electric distribution utility a return on common equity significantly in
excess of the return likely to be earned by publicly traded companies, including
utilities, that face comparable business and financial risk (comparable
companies). If so, the PUCO may terminate the ESP. Annually under an ESP, the
PUCO shall determine whether an electric distribution utility's earned return on
common equity is significantly in excess of returns earned on common equity
during the same period by comparable companies, and if so, shall require the
utility to return such excess to customers by prospective adjustments. Amended
Substitute SB221 also includes provisions dealing with advanced and renewable
energy standards that contemplate 25% of electrical usage from these sources by
2025. Energy efficiency measures in the bill require energy savings in excess of
22% by 2025. Requirements are in place to meet annual benchmarks for renewable
energy resources and energy efficiency, subject to review by the PUCO.
FirstEnergy is currently evaluating this legislation and expects to file an ESP
in the second or third quarter of 2008.
 Pennsylvania
 
 Met-Ed and Penelec
purchase a portion of their PLR and default service requirements from FES
through a fixed-price partial requirements wholesale power sales agreement. The
agreement allows Met-Ed and Penelec to sell the output of NUG energy to the
market and requires FES to provide energy at fixed prices to replace any NUG
energy sold to the extent needed for Met-Ed and Penelec to satisfy their PLR and
default service obligations. The fixed price under the agreement is expected to
remain below wholesale market prices during the term of the agreement. If Met-Ed
and Penelec were to replace the entire FES supply at current market power prices
without corresponding regulatory authorization to increase their generation
prices to customers, each company would likely incur a significant increase in
operating expenses and experience a material deterioration in credit quality
metrics. Under such a scenario, each company's credit profile would no longer be
expected to support an investment grade rating for their fixed income
securities. Based on the PPUC’s January 11, 2007 order described below, if
FES ultimately determines to terminate, reduce, or significantly modify the
agreement prior to the expiration of Met-Ed’s and Penelec’s generation rate caps
in 2010, timely regulatory relief is not likely to be granted by the
PPUC.
 
 Met-Ed and Penelec
made a comprehensive transition rate filing with the PPUC on April 10, 2006
to address a number of transmission, distribution and supply issues. If Met-Ed's
and Penelec's preferred approach involving accounting deferrals had been
approved, annual revenues would have increased by $216 million and
$157 million, respectively. That filing included, among other things, a
request to charge customers for an increasing amount of market-priced power
procured through a CBP as the amount of supply provided under the then existing
FES agreement was to be phased out. Met-Ed and Penelec also requested approval
of a January 12, 2005 petition for the deferral of transmission-related
costs incurred during 2006. In this rate filing, Met-Ed and Penelec requested
recovery of annual transmission and related costs incurred on or after
January 1, 2007, plus the amortized portion of 2006 costs over a ten-year
period, along with applicable carrying charges, through an adjustable rider.
Changes in the recovery of NUG expenses and the recovery of Met-Ed's non-NUG
stranded costs were also included in the filing. On May 4, 2006, the PPUC
consolidated the remand of the FirstEnergy and GPU merger proceeding, related to
the quantification and allocation of merger savings, with the comprehensive
transition rate filing case.
 
 The PPUC entered its
opinion and order in the comprehensive rate filing proceeding on
January 11, 2007. The order approved the recovery of transmission costs,
including the transmission-related deferral for January 1, 2006 through
January 10, 2007, and determined that no merger savings from prior years
should be considered in determining customers’ rates. The request for increases
in generation supply rates was denied as were the requested changes to NUG
expense recovery and Met-Ed’s non-NUG stranded costs. The order decreased
Met-Ed’s and Penelec’s distribution rates by $80 million and
$19 million, respectively. These decreases were offset by the increases
allowed for the recovery of transmission costs. Met-Ed’s and Penelec’s request
for recovery of Saxton decommissioning costs was granted and, in January 2007,
Met-Ed and Penelec recognized income of $15 million and $12 million,
respectively, to establish regulatory assets for those previously expensed
decommissioning costs. Overall rates increased by 5.0% for Met-Ed
($59 million) and 4.5% for Penelec ($50 million).
 
 On March 30, 2007,
MEIUG and PICA filed a Petition for Review with the Commonwealth Court of
Pennsylvania asking the court to review the PPUC’s determination on transmission
(including congestion) and the transmission deferral. Met-Ed and Penelec filed a
Petition for Review on April 13, 2007 on the issues of consolidated tax savings
and the requested generation rate increase. The OCA filed its Petition for
Review on April 13, 2007, on the issues of transmission (including
congestion) and recovery of universal service costs from only the residential
rate class. From June through October 2007, initial responsive and reply briefs
were filed by various parties. Oral arguments are scheduled to take place in
September 2008. If Met-Ed and Penelec do not prevail on the issue of congestion,
it could have a material adverse effect on the results of operations of Met-Ed,
Penelec and FirstEnergy.
 
 22
 
 On April 14, 2008,
Met-Ed and Penelec filed annual updates to the TSC rider for the period
June 1, 2008, through May 31, 2009. The proposed TSCs include a
component for under-recovery of actual transmission costs incurred during the
prior period (Met-Ed - $144 million and Penelec - $4 million) and future
transmission cost projections for June 2008 through May 2009 (Met-Ed - $258
million and Penelec - $92 million). Met-Ed has proposed a transition
approach that would recover past under-recovered costs plus carrying charges
through the new TSC over thirty-one months and defer a portion of the projected
costs ($92 million) plus carrying charges for recovery through future TSCs
by December 31, 2010.
 
 On March 13, 2008,
the PPUC approved the residential procurement process in Penn’s Joint
Petition for Settlement. This RFP process calls for load-following,
full-requirements contracts for default service procurement for residential
customers for the period covering June 1, 2008 through May 31, 2011. The PPUC
had previously approved the default service procurement processes for
commercial and industrial customers. The default service procurement for small
commercial customers was conducted through multiple RFPs, while the default
service procurement for large commercial and industrial customers will utilize
hourly pricing. Bids in the two RFPs for small commercial load were approved by
the PPUC on February 22, 2008, and March 20, 2008. On March 28, 2008, Penn filed
compliance tariffs with the new default service generation rates based on the
approved RFP bids for small commercial customers which the PPUC then certified
on April 4, 2008. On April 14, 2008, the first RFP for residential customers’
load was held consisting of tranches for both 12 and 24-month supply. The PPUC
approved the bids on April 16, 2008. The second RFP is scheduled to be held on
May 14, 2008, after which time the PPUC is expected to approve the new rates to
go into effect June 1, 2008.
 
 On February 1, 2007,
the Governor of Pennsylvania proposed an EIS. The EIS includes four pieces of
proposed legislation that, according to the Governor, is designed to reduce
energy costs, promote energy independence and stimulate the economy. Elements of
the EIS include the installation of smart meters, funding for solar panels on
residences and small businesses, conservation and demand reduction programs to
meet energy growth, a requirement that electric distribution companies acquire
power that results in the “lowest reasonable rate on a long-term basis,” the
utilization of micro-grids and a three year phase-in of rate increases. On
July 17, 2007, the Governor signed into law two pieces of energy
legislation. The first amended the Alternative Energy Portfolio Standards Act of
2004 to, among other things, increase the percentage of solar energy that must
be supplied at the conclusion of an electric distribution company’s transition
period. The second law allows electric distribution companies, at their sole
discretion, to enter into long term contracts with large customers and to build
or acquire interests in electric generation facilities specifically to supply
long-term contracts with such customers. A special legislative session on energy
was convened in mid-September 2007 to consider other aspects of the EIS. The
Pennsylvania House and Senate on March 11, 2008 and December 12, 2007,
respectively, passed different versions of bills to fund the Governor’s EIS
proposal. Neither chamber has formally considered the other’s bill. On
February 12, 2008, the Pennsylvania House passed House Bill 2200 which
provides for energy efficiency and demand management programs and targets as
well as the installation of smart meters within ten years. Other legislation has
been introduced to address generation procurement, expiration of rate caps,
conservation and renewable energy. The final form of this pending legislation is
uncertain. Consequently, FirstEnergy is unable to predict what impact, if any,
such legislation may have on its operations.
 
 New Jersey
 
 JCP&L is
permitted to defer for future collection from customers the amounts by which its
costs of supplying BGS to non-shopping customers and costs incurred under NUG
agreements exceed amounts collected through BGS and NUGC rates and market sales
of NUG energy and capacity. As of March 31, 2008, the accumulated deferred cost
balance totaled approximately $264 million.
 
 In accordance with
an April 28, 2004 NJBPU order, JCP&L filed testimony on June 7,
2004 supporting continuation of the current level and duration of the funding of
TMI-2 decommissioning costs by New Jersey customers without a reduction,
termination or capping of the funding. On September 30, 2004, JCP&L
filed an updated TMI-2 decommissioning study. This study resulted in an updated
total decommissioning cost estimate of $729 million (in 2003 dollars)
compared to the estimated $528 million (in 2003 dollars) from the prior 1995
decommissioning study. The DRA filed comments on February 28, 2005
requesting that decommissioning funding be suspended. On March 18, 2005,
JCP&L filed a response to those comments. JCP&L responded to additional
NJBPU staff discovery requests in May and November 2007 and also submitted
comments in the proceeding in November 2007. A schedule for further NJBPU
proceedings has not yet been set.
 
 On August 1, 2005,
the NJBPU established a proceeding to determine whether additional ratepayer
protections are required at the state level in light of the repeal of the PUHCA
pursuant to the EPACT. The NJBPU approved regulations effective October 2,
2006 that prevent a holding company that owns a gas or electric public utility
from investing more than 25% of the combined assets of its utility and
utility-related subsidiaries into businesses unrelated to the utility industry.
These regulations are not expected to materially impact FirstEnergy or
JCP&L. Also, in the same proceeding, the NJBPU Staff issued an additional
draft proposal on March 31, 2006 addressing various issues including access
to books and records, ring-fencing, cross subsidization, corporate governance
and related matters. With the approval of the NJBPU Staff, the affected
utilities jointly submitted an alternative proposal on June 1, 2006. The
NJBPU Staff circulated revised drafts of the proposal to interested stakeholders
in November 2006 and again in February 2007. On February 1, 2008, the NJBPU
accepted proposed rules for publication in the New Jersey Register on
March 17, 2008. A public hearing on these proposed rules was held on
April 23, 2008 with comments from interested parties due on May 16,
2008.
 
 23
 
 New Jersey statutes
require that the state periodically undertake a planning process, known as the
EMP, to address energy related issues including energy security, economic
growth, and environmental impact. The EMP is to be developed with involvement of
the Governor’s Office and the Governor’s Office of Economic Growth, and is to be
prepared by a Master Plan Committee, which is chaired by the NJBPU President and
includes representatives of several State departments. In October 2006, the
current EMP process was initiated through the creation of a number of working
groups to obtain input from a broad range of interested stakeholders including
utilities, environmental groups, customer groups, and major customers. In
addition, public stakeholder meetings were held in the fall of 2006 and in early
2007.
 
 On April 17, 2008, a
draft EMP was released for public comment. The draft EMP establishes four major
goals:
 
 ·
              maximize
      energy efficiency to achieve a 20% reduction in energy consumption by
      2020;
 
 ·
              reduce peak
      demand for electricity by 5,700 MW by 2020 (amounting to about a 22%
      reduction in projected demand);
 
 ·
              meet 22.5% of
      the state’s electricity needs with renewable energy by 2020;
      and
 
 ·
              develop low
      carbon emitting, efficient power plants and close the gap between the
      supply and demand for electricity.
 
 Following the public
comment period which is expected to extend into July 2008, a final EMP will be
issued to be followed by appropriate legislation and regulation as necessary. At
this time, FirstEnergy cannot predict the outcome of this process nor determine
the impact, if any, such legislation or regulation may have on its operations or
those of JCP&L.
 
 On February 13,
2007, the NJBPU Staff informally issued a draft proposal relating to changes to
the regulations addressing electric distribution service reliability and quality
standards. Meetings between the NJBPU Staff and interested stakeholders to
discuss the proposal were held and additional, revised informal proposals were
subsequently circulated by the Staff. On September 4, 2007, proposed
regulations were published in the New Jersey Register, which proposal will be
subsequently considered by the NJBPU following comments that were submitted in
September and October 2007. Final regulations (effective upon publication) were
published in the New Jersey Register March 17, 2008. Upon preliminary review of
the new regulations, FirstEnergy does not expect a material impact on its
operations or those of JCP&L.
 
 FERC Matters
 
 Transmission Service between MISO and
PJM
 
 On November 18,
2004, the FERC issued an order eliminating the through and out rate for
transmission service between the MISO and PJM regions. The FERC’s intent was to
eliminate so-called “pancaking” of transmission charges between the MISO and PJM
regions. The FERC also ordered the MISO, PJM and the transmission owners within
MISO and PJM to submit compliance filings containing a rate mechanism to recover
lost transmission revenues created by elimination of this charge (referred to as
the Seams Elimination Cost Adjustment or “SECA”) during a 16-month transition
period. The FERC issued orders in 2005 setting the SECA for hearing. The
presiding judge issued an initial decision on August 10, 2006, rejecting
the compliance filings made by MISO, PJM, and the transmission owners, and
directing new compliance filings. This decision is subject to review and
approval by the FERC. Briefs addressing the initial decision were filed on
September 11, 2006 and October 20, 2006. A final order could be issued by
the FERC in the second quarter of 2008.
  PJM
Transmission Rate Design
 
 On January 31, 2005,
certain PJM transmission owners made filings with the FERC pursuant to a
settlement agreement previously approved by the FERC. JCP&L, Met-Ed and
Penelec were parties to that proceeding and joined in two of the filings. In the
first filing, the settling transmission owners submitted a filing justifying
continuation of their existing rate design within the PJM RTO. Hearings were
held and numerous parties appeared and litigated various issues concerning PJM
rate design; notably AEP, which proposed to create a "postage stamp", or average
rate for all high voltage transmission facilities across PJM and a zonal
transmission rate for facilities below 345 kV. This proposal would have the
effect of shifting recovery of the costs of high voltage transmission lines to
other transmission zones, including those where JCP&L, Met-Ed, and Penelec
serve load. On April 19, 2007, the FERC issued an order finding that the PJM
transmission owners’ existing “license plate” or zonal rate design was just and
reasonable and ordered that the current license plate rates for existing
transmission facilities be retained. On the issue of rates for new transmission
facilities, the FERC directed that costs for new transmission facilities that
are rated at 500 kV or higher are to be collected from all transmission zones
throughout the PJM footprint by means of a postage-stamp rate. Costs for new
transmission facilities that are rated at less than 500 kV, however, are to be
allocated on a “beneficiary pays” basis. The FERC found that PJM’s current
beneficiary-pays cost allocation methodology is not sufficiently detailed and,
in a related order that also was issued on April 19, 2007, directed that
hearings be held for the purpose of establishing a just and reasonable cost
allocation methodology for inclusion in PJM’s tariff.
 
 24
 
 
 On May 18, 2007,
certain parties filed for rehearing of the FERC’s April 19, 2007 order. On
January 31, 2008, the requests for rehearing were denied. The FERC’s orders on
PJM rate design will prevent the allocation of a portion of the revenue
requirement of existing transmission facilities of other utilities to JCP&L,
Met-Ed and Penelec. In addition, the FERC’s decision to allocate the cost of new
500 kV and above transmission facilities on a PJM-wide basis will reduce future
transmission revenue recovery from the JCP&L, Met-Ed and Penelec zones. A
partial settlement agreement addressing the “beneficiary pays” methodology for
below 500 kV facilities, but excluding the issue of allocating new facilities
costs to merchant transmission entities, was filed on September 14, 2007. The
agreement was supported by the FERC’s Trial Staff, and was certified by the
Presiding Judge. The FERC’s action on the settlement agreement is pending. The
remaining merchant transmission cost allocation issues will proceed to hearing
in May 2008. On February 13, 2008, AEP appealed the FERC’s orders to the
federal Court of Appeals for the D.C. Circuit. The Illinois Commerce Commission,
the PUCO and Dayton Power & Light have also appealed these orders to the
Seventh Circuit Court of Appeals. The appeals of these parties and others have
been consolidated for argument in the Seventh Circuit.
 
 Post
Transition Period Rate Design
 
 The FERC had
directed MISO, PJM, and the respective transmission owners to make filings on or
before August 1, 2007 to reevaluate transmission rate design within MISO, and
between MISO and PJM. On August 1, 2007, filings were made by MISO, PJM, and the
vast majority of transmission owners, including FirstEnergy affiliates, which
proposed to retain the existing transmission rate design. These filings were
approved by the FERC on January 31, 2008. As a result of the FERC’s approval,
the rates charged to FirstEnergy’s load-serving affiliates for transmission
service over existing transmission facilities in MISO and PJM are unchanged. In
a related filing, MISO and MISO transmission owners requested that the current
MISO pricing for new transmission facilities that spreads 20% of the cost of new
345 kV and higher transmission facilities across the entire MISO footprint
(known as the RECB methodology) be retained.
 
 On September 17,
2007, AEP filed a complaint under Sections 206 and 306 of the Federal Power Act
seeking to have the entire transmission rate design and cost allocation methods
used by MISO and PJM declared unjust, unreasonable, and unduly discriminatory,
and to have the FERC fix a uniform regional transmission rate design and cost
allocation method for the entire MISO and PJM “Super Region” that recovers the
average cost of new and existing transmission facilities operated at voltages of
345 kV and above from all transmission customers. Lower voltage facilities would
continue to be recovered in the local utility transmission rate zone through a
license plate rate. AEP requested a refund effective October 1, 2007, or
alternatively, February 1, 2008. On January 31, 2008, the FERC issued an order
denying the complaint. A rehearing request by AEP is pending before the
FERC.
  Distribution of MISO Network Service
Revenues
 
 Effective February
1, 2008, the MISO Transmission Owners Agreement provides for a change in the
method of distributing transmission revenues among the transmission owners. MISO
and a majority of the MISO transmission owners filed on December 3, 2007 to
change the MISO tariff to clarify, for purposes of distributing network
transmission revenue to the transmission owners, that all network transmission
service revenues, whether collected by MISO or directly by the transmission
owner, are included in the revenue distribution calculation.  This
clarification was necessary because some network transmission service revenues
are collected and retained by transmission owners in states where retail choice
does not exist, and their “unbundled” retail load is currently exempt from MISO
network service charges. The tariff changes filed with the FERC ensure that
revenues collected by transmission owners from bundled load are taken into
account in the revenue distribution calculation, and that transmission owners
with bundled load do not collect more than their revenue requirements. Absent
the changes, transmission owners, and ultimately their customers, with unbundled
load or in retail choice states, such as ATSI, would subsidize transmission
owners with bundled load, who would collect their revenue requirement from
bundled load, plus share in revenues collected by MISO from unbundled customers.
This would result in a large revenue shortfall for ATSI, which would eventually
be passed on to customers in the form of higher transmission rates as calculated
pursuant to ATSI’s Attachment O formula under the MISO tariff.
 
 Numerous parties
filed in support of the tariff changes, including the public service commissions
of Michigan, Ohio and Wisconsin. Ameren filed a protest on December 26,
2007, arguing that the December 3, 2007 filing violates the MISO
Transmission Owners’ Agreement as well as an agreement among Ameren (Union
Electric), MISO, and the Missouri Public Service Commission, which provides that
Union Electric’s bundled load cannot be charged by MISO for network service. On
February 2, 2008, the FERC issued an order conditionally accepting the
tariff amendment subject to a minor compliance filing, which was made on March
3, 2008. This order ensures that ATSI will continue to receive transmission
revenues from MISO equivalent to its transmission revenue requirement. A
rehearing request by Ameren is pending before the FERC.
 
 On February 1, 2008,
MISO filed a request to continue using the existing revenue distribution
methodology on an interim basis pending amendment of the MISO Transmission
Owners’ Agreement. This request was accepted by the FERC on March 13, 2008. On
that same day, MISO and the MISO transmission owners made a filing to amend the
Transmission Owners’ Agreement to effectively continue the distribution of
transmission revenues that was in effect prior to February 1, 2008. This matter
is currently pending before the FERC.
 
 25
 
 
 MISO Ancillary Services Market and
Balancing Area Consolidation
 
 MISO made a filing
on September 14, 2007 to establish an ASM for regulation, spinning and
supplemental reserves, to consolidate the existing 24 balancing areas within the
MISO footprint, and to establish MISO as the NERC registered balancing authority
for the region. This filing would permit load serving entities to purchase their
operating reserve requirements in a competitive market. FirstEnergy supports the
proposal to establish markets for Ancillary Services and consolidate existing
balancing areas. On February 25, 2008, the FERC issued an order approving the
ASM subject to certain compliance filings. MISO has since notified the FERC that
the start of its ASM is delayed until September of 2008.
 
 Duquesne’s
Request to Withdraw from PJM
 
 On November 8, 2007,
Duquesne Light Company (Duquesne) filed a request with the FERC to exit PJM and
to join the MISO. In its filing, Duquesne asked the FERC to be relieved of
certain capacity payment obligations to PJM for capacity auctions conducted
prior to its departure from PJM, but covering service for planning periods
through May 31, 2011. Duquesne asserted that its primary reason for exiting PJM
is to avoid paying future obligations created by PJM’s forward capacity market.
FirstEnergy believes that Duquesne’s filing did not identify or address numerous
legal, financial or operational issues that are implicated or affected directly
by Duquesne’s proposal. Consequently, FirstEnergy submitted responsive filings
that, while conceding Duquesne’s rights to exit PJM, contested various aspects
of Duquesne’s proposal. FirstEnergy particularly focused on Duquesne’s proposal
that it be allowed to exit PJM without payment of its share of existing capacity
market commitments. FirstEnergy also objected to Duquesne’s failure to address
the firm transmission service requirements that would be necessary for
FirstEnergy to continue to use the Beaver Valley Plant to meet existing
commitments in the PJM capacity markets and to serve native load. Other market
participants also submitted filings contesting Duquesne’s plans.
 
 On January 17, 2008,
the FERC conditionally approved Duquesne’s request to exit PJM. Among other
conditions, the FERC obligated Duquesne to pay the PJM capacity obligations
through May 31, 2011. The FERC’s order took notice of the numerous transmission
and other issues raised by FirstEnergy and other parties to the proceeding, but
did not provide any responsive rulings or other guidance. Rather, the FERC
ordered Duquesne to make a compliance filing in forty-five days detailing how
Duquesne will satisfy its obligations under the PJM Transmission Owners’
Agreement. The FERC likewise directed the MISO to submit detailed plans to
integrate Duquesne into the MISO. Finally, the FERC directed MISO and PJM to
work together to resolve the substantive and procedural issues implicated by
Duquesne’s transition into the MISO. These issues remain unresolved. If Duquesne
satisfies all of the obligations set by the FERC, its planned transition date is
October 9, 2008.
 
 On March 18, 2008,
the PJM Power Providers Group filed a request for emergency clarification
regarding whether Duquesne-zone generators (including the Beaver Valley Plant)
could participate in PJM’s May 2008 auction for the 2011-2012 RPM delivery year.
FirstEnergy and the other Duquesne-zone generators filed responsive pleadings.
On April 18, 2008, the FERC issued its Order on Motion for Emergency
Clarification, wherein the FERC ruled that although the status of the
Duquesne-zone generators will change to “External Resource” upon Duquesne’s exit
from PJM, these generators can contract with PJM for the transmission
reservations necessary to participate in the May 2008 auction. FirstEnergy has
complied with FERC’s order by obtaining executed transmission service agreements
for firm point-to-point transmission service for the 2011-2012 delivery year
and, as such, FirstEnergy satisfies the criteria to bid the Beaver Valley Plant
into the May 2008 RPM auction. Notwithstanding these events, on April 30, 2008
and May 1, 2008, certain members of the PJM Power Providers Group filed further
pleadings on these issues. On May 2, 2008, FirstEnergy filed a responsive
pleading. FirstEnergy is participating in the May 2008 RPM auction for
the 2011-2012 RPM delivery year.
 
 MISO
Resource Adequacy Proposal
 
 MISO made a filing
on December 28, 2007 that would create an enforceable planning reserve
requirement in the MISO tariff for load serving entities such as the Ohio
Companies, Penn Power, and FES. This requirement is proposed to become effective
for the planning year beginning June 1, 2009. The filing would permit MISO to
establish the reserve margin requirement for load serving entities based upon a
one day loss of load in ten years standard, unless the state utility regulatory
agency establishes a different planning reserve for load serving entities in its
state. FirstEnergy generally supports the proposal as it promotes a mechanism
that will result in long-term commitments from both load-serving entities and
resources, including both generation and demand side resources that are
necessary for reliable resource adequacy and planning in the MISO footprint.
Comments on the filing were filed on January 28, 2008. The FERC approved MISO’s
Resource Adequacy proposal on March 26, 2008. Rehearing requests are pending on
the FERC’s March 26Order.
A compliance filing establishing the enforcement mechanism for the reserve
margin requirement is due on or before June 25, 2008.
 
 26
 
 
 Organized
Wholesale Power Markets
 
 On February 21,
2008, the FERC issued a NOPR through which it proposes to adopt new rules that
it states will “improve operations in organized electric markets, boost
competition and bring additional benefits to consumers.” The proposed rule
addresses demand response and market pricing during reserve shortages, long-term
power contracting, market-monitoring policies, and responsiveness of RTOs and
ISOs to stakeholders and customers. FirstEnergy does not believe that the
proposed rule will have a significant impact on its operations. Comments on the
NOPR were filed on April 18, 2008.
 
 Environmental
Matters
 
 Various federal,
state and local authorities regulate FirstEnergy with regard to air and water
quality and other environmental matters. The effects of compliance on
FirstEnergy with regard to environmental matters could have a material adverse
effect on FirstEnergy's earnings and competitive position to the extent that it
competes with companies that are not subject to such regulations and, therefore,
do not bear the risk of costs associated with compliance, or failure to comply,
with such regulations. FirstEnergy estimates capital expenditures for
environmental compliance of approximately $1.4 billion for the period
2008-2012.
 
 FirstEnergy accrues
environmental liabilities only when it concludes that it is probable that it has
an obligation for such costs and can reasonably estimate the amount of such
costs. Unasserted claims are reflected in FirstEnergy’s determination of
environmental liabilities and are accrued in the period that they become both
probable and reasonably estimable.
 
 Clean Air Act Compliance
 
 FirstEnergy is
required to meet federally-approved SO2 emissions
regulations. Violations of such regulations can result in the shutdown of the
generating unit involved and/or civil or criminal penalties of up to $32,500 for
each day the unit is in violation. The EPA has an interim enforcement policy for
SO2
regulations in Ohio that allows for compliance based on a 30-day averaging
period. FirstEnergy believes it is currently in compliance with this policy, but
cannot predict what action the EPA may take in the future with respect to the
interim enforcement policy.
 
 The EPA Region 5
issued a Finding of Violation and NOV to the Bay Shore Power Plant dated June
15, 2006, alleging violations to various sections of the CAA. FirstEnergy has
disputed those alleged violations based on its CAA permit, the Ohio SIP and
other information provided to the EPA at an August 2006 meeting with the EPA.
The EPA has several enforcement options (administrative compliance order,
administrative penalty order, and/or judicial, civil or criminal action) and has
indicated that such option may depend on the time needed to achieve and
demonstrate compliance with the rules alleged to have been violated. On
June 5, 2007, the EPA requested another meeting to discuss “an appropriate
compliance program” and a disagreement regarding the opacity limit applicable to
the common stack for Bay Shore Units 2, 3 and 4.
 
 FirstEnergy complies
with SO2 reduction
requirements under the Clean Air Act Amendments of 1990 by burning lower-sulfur
fuel, generating more electricity from lower-emitting plants, and/or using
emission allowances. NOX reductions
required by the 1990 Amendments are being achieved through combustion controls
and the generation of more electricity at lower-emitting plants. In September
1998, the EPA finalized regulations requiring additional NOX reductions
at FirstEnergy's facilities. The EPA's NOX Transport
Rule imposes uniform reductions of NOX emissions
(an approximate 85% reduction in utility plant NOX emissions
from projected 2007 emissions) across a region of nineteen states (including
Michigan, New Jersey, Ohio and Pennsylvania) and the District of Columbia based
on a conclusion that such NOX emissions
are contributing significantly to ozone levels in the eastern United States.
FirstEnergy believes its facilities are also complying with the NOX budgets
established under SIPs through combustion controls and post-combustion controls,
including Selective Catalytic Reduction and SNCR systems, and/or using emission
allowances.
 
 On May 22, 2007,
FirstEnergy and FGCO received a notice letter, required 60 days prior to the
filing of a citizen suit under the federal CAA, alleging violations of air
pollution laws at the Bruce Mansfield Plant, including opacity limitations.
Prior to the receipt of this notice, the Plant was subject to a Consent Order
and Agreement with the Pennsylvania Department of Environmental Protection
concerning opacity emissions under which efforts to achieve compliance with the
applicable laws will continue. On October 18, 2007, PennFuture filed a
complaint, joined by three of its members, in the United States District Court
for the Western District of Pennsylvania. On January 11, 2008, FirstEnergy filed
a motion to dismiss claims alleging a public nuisance. On April 24, 2008, the
Court denied the motion to dismiss, but also ruled that monetary damages could
not be recovered under the public nuisance claim.
 
 27
 
 On December 18,
2007, the state of New Jersey filed a CAA citizen suit alleging NSR violations
at the Portland Generation Station against Reliant (the current owner and
operator), Sithe Energy (the purchaser of the Portland Station from Met-Ed in
1999), GPU, Inc. and Met-Ed.  Specifically, New Jersey alleges that
"modifications" at Portland Units 1 and 2 occurred between 1980 and 1995 without
preconstruction NSR or permitting under the CAA's prevention of significant
deterioration program, and seeks injunctive relief, penalties, attorney fees and
mitigation of the harm caused by excess emissions. On March 14, 2008, Met-Ed
filed a motion to dismiss the citizen suit claims against it and a stipulation
in which the parties agreed that GPU, Inc. should be dismissed from this case.
On March 26, 2008, GPU, Inc. was dismissed by the Court. Although it remains
liable for civil or criminal penalties and fines that may be assessed relating
to events prior to the sale of the Portland Station in 1999, Met-Ed is
indemnified by Sithe Energy against any other liability arising under the CAA
whether it arises out of pre-1999 or post-1999 events.
 
 National Ambient Air Quality
Standards
 
 In March 2005,
the EPA finalized the CAIR covering a total of 28 states (including Michigan,
New Jersey, Ohio and Pennsylvania) and the District of Columbia based on
proposed findings that air emissions from 28 eastern states and the District of
Columbia significantly contribute to non-attainment of the NAAQS for fine
particles and/or the "8-hour" ozone NAAQS in other states. CAIR requires
reductions of NOX and
SO2
emissions in two phases (Phase I in 2009 for NOX, 2010 for
SO2
and Phase II in 2015 for both NOX and
SO2).
FirstEnergy's Michigan, Ohio and Pennsylvania fossil generation facilities will
be subject to caps on SO2 and
NOX
emissions, whereas its New Jersey fossil generation facility will be subject to
only a cap on NOX emissions.
According to the EPA, SO2 emissions
will be reduced by 45% (from 2003 levels) by 2010 across the states covered by
the rule, with reductions reaching 73% (from 2003 levels) by 2015, capping
SO2
emissions in affected states to just 2.5 million tons annually. NOX emissions
will be reduced by 53% (from 2003 levels) by 2009 across the states covered by
the rule, with reductions reaching 61% (from 2003 levels) by 2015, achieving a
regional NOX cap of 1.3
million tons annually. CAIR has been challenged in the United States Court of
Appeals for the District of Columbia. The future cost of compliance with these
regulations may be substantial and may depend on the outcome of this litigation
and how CAIR is ultimately implemented.
 
 Mercury Emissions
 
 In December 2000,
the EPA announced it would proceed with the development of regulations regarding
hazardous air pollutants from electric power plants, identifying mercury as the
hazardous air pollutant of greatest concern. In March 2005, the EPA finalized
the CAMR, which provides a cap-and-trade program to reduce mercury emissions
from coal-fired power plants in two phases; initially, capping national mercury
emissions at 38 tons by 2010 (as a "co-benefit" from implementation of
SO2
and NOX emission
caps under the EPA's CAIR program) and 15 tons per year by 2018. Several states
and environmental groups appealed the CAMR to the United States Court of Appeals
for the District of Columbia. On February 8, 2008, the court vacated the
CAMR, ruling that the EPA failed to take the necessary steps to “de-list”
coal-fired power plants from its hazardous air pollutant program and, therefore,
could not promulgate a cap and trade program.  The EPA must now seek
further judicial review of that ruling or take regulatory action to promulgate
new mercury emission standards for coal-fired power plants. FGCO’s future cost
of compliance with mercury regulations may be substantial and will depend on the
action taken by the EPA and on how they are ultimately implemented.
 
 Pennsylvania has
submitted a new mercury rule for EPA approval that does not provide a
cap-and-trade approach as in the CAMR, but rather follows a command-and-control
approach imposing emission limits on individual sources. It is anticipated that
compliance with these regulations, if approved by the EPA and implemented, would
not require the addition of mercury controls at the Bruce Mansfield Plant,
FirstEnergy’s only Pennsylvania coal-fired power plant, until 2015, if at
all.
 
 W. H. Sammis Plant
 
 In 1999 and 2000,
the EPA issued an NOV and the DOJ filed a civil complaint against OE and Penn
based on operation and maintenance of the W.H. Sammis Plant (Sammis NSR
Litigation) and filed similar complaints involving 44 other U.S. power plants.
This case, along with seven other similar cases, are referred to as the NSR
cases.
 
 On March 18, 2005,
OE and Penn announced that they had reached a settlement with the EPA, the DOJ
and three states (Connecticut, New Jersey and New York) that resolved all issues
related to the Sammis NSR litigation. This settlement agreement, which is in the
form of a consent decree, was approved by the court on July 11, 2005, and
requires reductions of NOX and
SO2
emissions at the Sammis, Burger, Eastlake and Mansfield coal-fired plants
through the installation of pollution control devices and provides for
stipulated penalties for failure to install and operate such pollution controls
in accordance with that agreement. Consequently, if FirstEnergy fails to install
such pollution control devices, for any reason, including, but not limited to,
the failure of any third-party contractor to timely meet its delivery
obligations for such devices, FirstEnergy could be exposed to penalties under
the Sammis NSR Litigation consent decree. Capital expenditures necessary to
complete requirements of the Sammis NSR Litigation consent decree are currently
estimated to be $1.3 billion for 2008-2012 ($650 million of which is
expected to be spent during 2008, with the largest portion of the remaining
$650 million expected to be spent in 2009). This amount is included in the
estimated capital expenditures for environmental compliance referenced
above.
 
 28
 
 On April 2,
2007, the United States Supreme Court ruled that changes in annual emissions (in
tons/year) rather than changes in hourly emissions rate (in kilograms/hour) must
be used to determine whether an emissions increase triggers NSR. Subsequently,
on May 8, 2007, the EPA proposed to revise the NSR regulations to utilize
changes in the hourly emission rate (in kilograms/hour) to determine whether an
emissions increase triggers NSR.   The EPA has not yet issued a
final regulation. FGCO’s future cost of compliance with those regulations may be
substantial and will depend on how they are ultimately implemented.
 
 Climate Change
 
 In December 1997,
delegates to the United Nations' climate summit in Japan adopted an agreement,
the Kyoto Protocol, to address global warming by reducing the amount of man-made
GHG emitted by developed countries by 2012. The United States signed the Kyoto
Protocol in 1998 but it failed to receive the two-thirds vote required for
ratification by the United States Senate. However, the Bush administration has
committed the United States to a voluntary climate change strategy to reduce
domestic GHG intensity – the ratio of emissions to economic output – by 18%
through 2012. Also, in an April 16, 2008 speech, President Bush set a
policy goal of stopping the growth of GHG emissions by 2025, as the next step
beyond the 2012 strategy. In addition, the EPACT established a Committee on
Climate Change Technology to coordinate federal climate change activities and
promote the development and deployment of GHG reducing
technologies.
 
 There are a number
of initiatives to reduce GHG emissions under consideration at the federal, state
and international level.  At the international level, efforts to reach
a new global agreement to reduce GHG emissions post-2012 have begun with the
Bali Roadmap, which outlines a two-year process designed to lead to an agreement
in 2009. At the federal level, members of Congress have introduced several bills
seeking to reduce emissions of GHG in the United States, and the Senate
Environmental and Public Works Committees have passed one such bill. State
activities, primarily the northeastern states participating in the Regional
Greenhouse Gas Initiative and western states led by California, have coordinated
efforts to develop regional strategies to control emissions of certain
GHGs.
 
 On April 2, 2007,
the United States Supreme Court found that the EPA has the authority to regulate
CO2
emissions from automobiles as “air pollutants” under the CAA. Although this
decision did not address CO2 emissions
from electric generating plants, the EPA has similar authority under the CAA to
regulate “air pollutants” from those and other facilities.
 
 FirstEnergy cannot
currently estimate the financial impact of climate change policies, although
potential legislative or regulatory programs restricting CO2 emissions
could require significant capital and other expenditures. The CO2 emissions
per KWH of electricity generated by FirstEnergy is lower than many regional
competitors due to its diversified generation sources, which include low or
non-CO2 emitting
gas-fired and nuclear generators.
 
 Clean Water Act
 
 Various water
quality regulations, the majority of which are the result of the federal Clean
Water Act and its amendments, apply to FirstEnergy's plants. In addition, Ohio,
New Jersey and Pennsylvania have water quality standards applicable to
FirstEnergy's operations. As provided in the Clean Water Act, authority to grant
federal National Pollutant Discharge Elimination System water discharge permits
can be assumed by a state. Ohio, New Jersey and Pennsylvania have assumed such
authority.
 
 On September 7,
2004, the EPA established new performance standards under Section 316(b) of the
Clean Water Act for reducing impacts on fish and shellfish from cooling water
intake structures at certain existing large electric generating plants. The
regulations call for reductions in impingement mortality (when aquatic organisms
are pinned against screens or other parts of a cooling water intake system) and
entrainment (which occurs when aquatic life is drawn into a facility's cooling
water system). On January 26, 2007, the United States Court of Appeals for the
Second Circuit remanded portions of the rulemaking dealing with impingement
mortality and entrainment back to the EPA for further rulemaking and eliminated
the restoration option from the EPA’s regulations. On July 9, 2007, the EPA
suspended this rule, noting that until further rulemaking occurs, permitting
authorities should continue the existing practice of applying their best
professional judgment (BPJ) to minimize impacts on fish and shellfish from
cooling water intake structures. On April 14, 2008, the Supreme Court of
the United States granted a petition for a writ of certiorari to review certain
aspects of the Second Circuit’s decision. FirstEnergy is studying various
control options and their costs and effectiveness. Depending on the results of
such studies, the outcome of the Supreme Court’s review of the Second Circuit’s
decision, the EPA’s further rulemaking and any action taken by the states
exercising BPJ, the future cost of compliance with these standards may require
material capital expenditures.
 
 29
 
 
 Regulation of Hazardous
Waste
 
 As a result of the
Resource Conservation and Recovery Act of 1976, as amended, and the Toxic
Substances Control Act of 1976, federal and state hazardous waste regulations
have been promulgated. Certain fossil-fuel combustion waste products, such as
coal ash, were exempted from hazardous waste disposal requirements pending the
EPA's evaluation of the need for future regulation. The EPA subsequently
determined that regulation of coal ash as a hazardous waste is unnecessary. In
April 2000, the EPA announced that it will develop national standards regulating
disposal of coal ash under its authority to regulate non-hazardous
waste.
 
 Under NRC
regulations, FirstEnergy must ensure that adequate funds will be available to
decommission its nuclear facilities.  As of March 31, 2008,
FirstEnergy had approximately $2.0 billion invested in external trusts to
be used for the decommissioning and environmental remediation of Davis-Besse,
Beaver Valley, Perry and TMI-2. As part of the application to the NRC to
transfer the ownership of Davis-Besse, Beaver Valley and Perry to NGC in 2005,
FirstEnergy agreed to contribute another $80 million to these trusts by 2010.
Consistent with NRC guidance, utilizing a “real” rate of return on these funds
of approximately 2% over inflation, these trusts are expected to exceed the
minimum decommissioning funding requirements set by the NRC. Conservatively,
these estimates do not include any rate of return that the trusts may earn over
the 20-year plant useful life extensions that FirstEnergy (and Exelon for TMI-1
as it relates to the timing of the decommissioning of TMI-2) seeks for these
facilities.
 
 The Companies have
been named as PRPs at waste disposal sites, which may require cleanup under the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980.
Allegations of disposal of hazardous substances at historical sites and the
liability involved are often unsubstantiated and subject to dispute; however,
federal law provides that all PRPs for a particular site may be liable on a
joint and several basis. Therefore, environmental liabilities that are
considered probable have been recognized on the Consolidated Balance Sheet as of
March 31, 2008, based on estimates of the total costs of cleanup, the Companies'
proportionate responsibility for such costs and the financial ability of other
unaffiliated entities to pay. Total liabilities of approximately
$92 million (JCP&L - $65 million, TE - $1 million, CEI -
$1 million and FirstEnergy Corp. - $25 million) have been accrued
through March 31, 2008. Included in the total for JCP&L are accrued
liabilities of approximately $56 million for environmental remediation of
former manufactured gas plants in New Jersey; which are being recovered by
JCP&L through a non-bypassable SBC.
 
 Other Legal Proceedings
 
 Power Outages and Related
Litigation
 
 In July 1999, the
Mid-Atlantic States experienced a severe heat wave, which resulted in power
outages throughout the service territories of many electric utilities, including
JCP&L's territory. In an investigation into the causes of the outages and
the reliability of the transmission and distribution systems of all four of New
Jersey’s electric utilities, the NJBPU concluded that there was not a prima
facie case demonstrating that, overall, JCP&L provided unsafe, inadequate or
improper service to its customers. Two class action lawsuits (subsequently
consolidated into a single proceeding) were filed in New Jersey Superior Court
in July 1999 against JCP&L, GPU and other GPU companies, seeking
compensatory and punitive damages arising from the July 1999 service
interruptions in the JCP&L territory.
 
 In August 2002, the
trial court granted partial summary judgment to JCP&L and dismissed the
plaintiffs' claims for consumer fraud, common law fraud, negligent
misrepresentation, and strict product liability. In November 2003, the trial
court granted JCP&L's motion to decertify the class and denied plaintiffs'
motion to permit into evidence their class-wide damage model indicating damages
in excess of $50 million. These class decertification and damage rulings were
appealed to the Appellate Division. The Appellate Division issued a decision in
July 2004, affirming the decertification of the originally certified class, but
remanding for certification of a class limited to those customers directly
impacted by the outages of JCP&L transformers in Red Bank, NJ, based on a
common incident involving the failure of the bushings of two large transformers
in the Red Bank substation resulting in planned and unplanned outages in the
area during a 2-3 day period. In 2005, JCP&L renewed its motion to decertify
the class based on a very limited number of class members who incurred damages
and also filed a motion for summary judgment on the remaining plaintiffs’ claims
for negligence, breach of contract and punitive damages. In July 2006, the New
Jersey Superior Court dismissed the punitive damage claim and again decertified
the class based on the fact that a vast majority of the class members did not
suffer damages and those that did would be more appropriately addressed in
individual actions. Plaintiffs appealed this ruling to the New Jersey Appellate
Division which, in March 2007, reversed the decertification of the Red Bank
class and remanded this matter back to the Trial Court to allow plaintiffs
sufficient time to establish a damage model or individual proof of damages.
JCP&L filed a petition for allowance of an appeal of the Appellate Division
ruling to the New Jersey Supreme Court which was denied in May
2007.  Proceedings are continuing in the Superior Court and a case
management conference with the presiding Judge is scheduled for June 13,
2008.  FirstEnergy is defending this class action but is unable to
predict the outcome of this matter.  No liability has been accrued as
of March 31, 2008.
 
 30
 
 
 Nuclear Plant Matters
 
 On May 14, 2007, the
Office of Enforcement of the NRC issued a DFI to FENOC, following FENOC’s reply
to an April 2, 2007 NRC request for information, about two reports prepared by
expert witnesses for an insurance arbitration (the insurance claim was
subsequently withdrawn by FirstEnergy in December 2007) related to Davis-Besse.
The NRC indicated that this information was needed for the NRC “to determine
whether an Order or other action should be taken pursuant to 10 CFR 2.202, to
provide reasonable assurance that FENOC will continue to operate its licensed
facilities in accordance with the terms of its licenses and the Commission’s
regulations.” FENOC was directed to submit the information to the NRC within 30
days. On June 13, 2007, FENOC filed a response to the NRC’s DFI reaffirming that
it accepts full responsibility for the mistakes and omissions leading up to the
damage to the reactor vessel head and that it remains committed to operating
Davis-Besse and FirstEnergy’s other nuclear plants safely and responsibly. FENOC
submitted a supplemental response clarifying certain aspects of the DFI response
to the NRC on July 16, 2007. On August 15, 2007, the NRC issued a
confirmatory order imposing these commitments. FENOC must inform the NRC’s
Office of Enforcement after it completes the key commitments embodied in the
NRC’s order. FENOC’s compliance with these commitments is subject to future NRC
review.
 
 Other Legal Matters
 
 There are various
lawsuits, claims (including claims for asbestos exposure) and proceedings
related to FirstEnergy's normal business operations pending against FirstEnergy
and its subsidiaries. The other potentially material items not otherwise
discussed above are described below.
 
 On August 22, 2005,
a class action complaint was filed against OE in Jefferson County, Ohio Common
Pleas Court, seeking compensatory and punitive damages to be determined at trial
based on claims of negligence and eight other tort counts alleging damages from
W.H. Sammis Plant air emissions. The two named plaintiffs are also seeking
injunctive relief to eliminate harmful emissions and repair property damage and
the institution of a medical monitoring program for class members. On
April 5, 2007, the Court rejected the plaintiffs’ request to certify this
case as a class action and, accordingly, did not appoint the plaintiffs as class
representatives or their counsel as class counsel. On July 30, 2007,
plaintiffs’ counsel voluntarily withdrew their request for reconsideration of
the April 5, 2007 Court order denying class certification and the Court
heard oral argument on the plaintiffs’ motion to amend their complaint which OE
opposed. On August 2, 2007, the Court denied the plaintiffs’ motion to
amend their complaint. The plaintiffs have appealed the Court’s denial of the
motion for certification as a class action and motion to amend their
complaint.
 
 JCP&L's
bargaining unit employees filed a grievance challenging JCP&L's 2002
call-out procedure that required bargaining unit employees to respond to
emergency power outages. On May 20, 2004, an arbitration panel concluded
that the call-out procedure violated the parties' collective bargaining
agreement. At the conclusion of the June 1, 2005 hearing, the arbitration
panel decided not to hear testimony on damages and closed the proceedings. On
September 9, 2005, the arbitration panel issued an opinion to award
approximately $16 million to the bargaining unit employees. On February 6,
2006, a federal district court granted a union motion to dismiss, as premature,
a JCP&L appeal of the award filed on October 18, 2005. A final order
identifying the individual damage amounts was issued on October 31, 2007.
The award appeal process was initiated. The union filed a motion with the
federal court to confirm the award and JCP&L filed its answer and
counterclaim to vacate the award on December 31, 2007. The court held a
scheduling conference in April 2008 where it set a briefing schedule with all
briefs to be concluded by July 2008. JCP&L recognized a liability for the
potential $16 million award in 2005.
 
 The union employees
at the Bruce Mansfield Plant have been working without a labor contract since
February 15, 2008. The parties are continuing to bargain with the
assistance of a federal mediator. FirstEnergy has a strike mitigation plan ready
in the event of a strike.
 
 FirstEnergy accrues
legal liabilities only when it concludes that it is probable that it has an
obligation for such costs and can reasonably estimate the amount of such costs.
If it were ultimately determined that FirstEnergy or its subsidiaries have legal
liability or are otherwise made subject to liability based on the above matters,
it could have a material adverse effect on FirstEnergy's or its subsidiaries'
financial condition, results of operations and cash flows.
 
 31
 
 
 NEW
ACCOUNTING STANDARDS AND INTERPRETATIONS
 
 SFAS 141(R) – “Business
Combinations”
 
 In December 2007,
the FASB issued SFAS 141(R), which requires the acquiring entity in a business
combination to recognize all the assets acquired and liabilities assumed in the
transaction; establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed; and requires the
acquirer to disclose to investors and other users all of the information they
need to evaluate and understand the nature and financial effect of the business
combination. SFAS 141(R) attempts to reduce the complexity of existing GAAP
related to business combinations. The Standard includes both core principles and
pertinent application guidance, eliminating the need for numerous EITF issues
and other interpretative guidance. SFAS 141(R) will affect business combinations
entered into by FirstEnergy that close after January 1, 2009. In addition,
the Standard also affects the accounting for changes in tax valuation allowances
made after January 1, 2009, that were established as part of a business
combination prior to the implementation of this Standard. FirstEnergy is
currently evaluating the impact of adopting this Standard on its financial
statements.
 
 SFAS 160 - “Noncontrolling Interests in
Consolidated Financial Statements – an Amendment of ARB No. 51”
 
 In December 2007,
the FASB issued SFAS 160 that establishes accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. This Statement is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. Early adoption is prohibited. The Statement is not expected
to have a material impact on FirstEnergy’s financial statements.
 
 SFAS
      161 - “Disclosures about Derivative Instruments and Hedging Activities –
      an Amendment of FASB Statement No.
133”
 
 In March 2008, the
FASB issued SFAS 161, which enhances the current disclosure framework for
derivative instruments and hedging activities. The Statement requires that
objectives for using derivative instruments be disclosed in terms of underlying
risk and accounting designation. This disclosure better conveys the purpose of
derivative use in terms of the risks that the entity is intending to manage. The
FASB believes disclosing the fair values of derivative instruments and their
gains and losses in a tabular format is designed to provide a more complete
picture of the location in an entity’s financial statements of both the
derivative positions existing at period end and the effect of using derivatives
during the reporting period. Disclosing information about credit-risk-related
contingent features is designed to provide information on the potential effect
on an entity’s liquidity from using derivatives. Finally, this Statement
requires cross-referencing within the footnotes, which is intended to help users
of financial statements locate important information about derivative
instruments. FirstEnergy is currently evaluating the impact of adopting this
Standard on its financial statements.
 
 
 32
 
 
 
 Report
of Independent Registered Public Accounting Firm
 
 
 
 
 
 
 
 
 To the Stockholders
and Board of
 Directors of
FirstEnergy Corp.:
 
 We have reviewed the
accompanying consolidated balance sheet of FirstEnergy Corp. and its
subsidiaries as of March 31, 2008 and the related consolidated statements of
income, comprehensive income and cash flows for each of the three-month periods
ended March 31, 2008 and 2007. These interim financial statements are the
responsibility of the Company’s management.
 
 We conducted our
review in accordance with the standards of the Public Company Accounting
Oversight Board (United States).  A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting
matters.  It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.  Accordingly, we
do not express such an opinion.
 
 Based on our review,
we are not aware of any material modifications that should be made to the
accompanying consolidated interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
 
 We previously
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet as of December
31, 2007, and the related consolidated statements of income, capitalization,
common stockholders’ equity, and cash flows for the year then ended (not
presented herein), and in our report (which contained references to the
Company’s change in its method of accounting for uncertain tax positions as of
January 1, 2007, defined benefit pension and other postretirement plans as of
December 31, 2006 and conditional asset retirement obligations as of December
31, 2005, as discussed in Note 9, Note 3, Note 2(G) and Note 12 to the
consolidated financial statements) dated February 28, 2008, we expressed an
unqualified opinion on those consolidated financial statements.  In
our opinion, the information set forth in the accompanying consolidated balance
sheet information as of December 31, 2007, is fairly stated in all material
respects in relation to the consolidated balance sheet from which it has been
derived.
 PricewaterhouseCoopers
      LLP
                Cleveland,
      Ohio
                May 7,
      2008
 
 
 
 
 
 
 
 
 
 33
 
 
 FIRSTENERGY
      CORP.CONSOLIDATED
      STATEMENTS OF INCOME(Unaudited)Three
      Months EndedMarch
      31,2008
                
                
                2007(In
      millions except,per
      share amounts)REVENUES:Electric
      utilities
                
                $
                2,913
                
                
                $
                2,659Unregulated
      businesses
                
                
                364
                
                
                
                314Total
      revenues*
                
                
                3,277
                
                
                
                2,973EXPENSES:Fuel and
      purchased power
                
                
                1,328
                
                
                
                1,121Other
      operating expenses
                
                
                800
                
                
                
                749Provision
      for depreciation
                
                
                164
                
                
                
                156Amortization
      of regulatory assets
                
                
                258
                
                
                
                251Deferral
      of new regulatory assets
                
                
                (105
                )
                
                
                (144
                )General
      taxes
                
                
                215
                
                
                
                203Total
      expenses
                
                
                2,660
                
                
                
                2,336OPERATING
      INCOME
                
                
                617
                
                
                
                637OTHER
      INCOME (EXPENSE):Investment
      income
                
                
                17
                
                
                
                33Interest
      expense
                
                
                (179
                )
                
                
                (185
                )Capitalized
      interest
                
                
                8
                
                
                
                5Total
      other expense
                
                
                (154
                )
                
                
                (147
                )INCOME  BEFORE
      INCOME TAXES
                
                
                463
                
                
                
                490INCOME
      TAXES
                
                
                187
                
                
                
                200NET
      INCOME
                
                $
                276
                
                
                $
                290BASIC
      EARNINGS PER SHARE OF COMMON STOCK
                
                $
                0.91
                
                
                $
                0.92WEIGHTED
      AVERAGE NUMBER OF BASIC SHARES OUTSTANDING
                
                
                304
                
                
                
                314DILUTED
      EARNINGS PER SHARE OF COMMON STOCK
                
                $
                0.90
                
                
                $
                0.92WEIGHTED
      AVERAGE NUMBER OF DILUTED SHARES OUTSTANDING
                
                
                307
                
                
                
                316DIVIDENDS
      DECLARED PER SHARE OF COMMON STOCK
                
                $
                0.55
                
                
                $
                0.50* Includes
      $114 million and $108 million of excise tax collections in the first
      quarter of 2008 and 2007, respectively.The
      accompanying Notes to Consolidated Financial Statements as they relate to
      FirstEnergy Corp. are an integralpart of these
      statements.
 
 34
  FIRSTENERGY
      CORP.CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOME(Unaudited)Three
      Months EndedMarch
      31,2008
                  
                  
                  2007(In
      millions)NET
      INCOME
                  
                  $
                  276
                  
                  
                  $
                  290OTHER
      COMPREHENSIVE INCOME (LOSS):Pension and
      other postretirement benefits
                  
                  
                  (20
                  )
                  
                  
                  (11
                  )Unrealized
      gain (loss) on derivative hedges
                  
                  
                  (13
                  )
                  
                  
                  21Change in
      unrealized gain on available-for-sale securities
                  
                  
                  (58
                  )
                  
                  
                  17Other
      comprehensive income (loss)
                  
                  
                  (91
                  )
                  
                  
                  27Income tax
      expense (benefit) related to other comprehensive income
                  
                  
                  (33
                  )
                  
                  
                  9Other
      comprehensive income (loss), net of tax
                  
                  
                  (58
                  )
                  
                  
                  18COMPREHENSIVE
      INCOME
                  
                  $
                  218
                  
                  
                  $
                  308The
      accompanying Notes to Consolidated Financial Statements as they relate to
      FirstEnergy Corp. are an integralpart of these
      statements.
  35
   FIRSTENERGY
      CORP.CONSOLIDATED
      BALANCE SHEETS(Unaudited)March
      31,
                  
                  
                  December
      31,2008
                  
                  
                  2007(In
      millions)ASSETSCURRENT
      ASSETS:Cash and cash
      equivalents
                  
                  $
                  70
                  
                  
                  $
                  129Receivables-Customers
      (less accumulated provisions of $34 million and$36 million,
      respectively, for uncollectible accounts)
                  
                  
                  1,264
                  
                  
                  
                  1,256Other (less
      accumulated provisions of $24 million and$22 million,
      respectively, for uncollectible accounts)
                  
                  
                  159
                  
                  
                  
                  165Materials and
      supplies, at average cost
                  
                  
                  570
                  
                  
                  
                  521Prepayments
      and other
                  
                  
                  307
                  
                  
                  
                  1592,370
                  
                  
                  
                  2,230PROPERTY,
      PLANT AND EQUIPMENT:In
      service
                  
                  
                  24,894
                  
                  
                  
                  24,619Less -
      Accumulated provision for depreciation
                  
                  
                  10,454
                  
                  
                  
                  10,34814,440
                  
                  
                  
                  14,271Construction
      work in progress
                  
                  
                  1,465
                  
                  
                  
                  1,11215,905
                  
                  
                  
                  15,383INVESTMENTS:Nuclear plant
      decommissioning trusts
                  
                  
                  2,025
                  
                  
                  
                  2,127Investments in
      lease obligation bonds
                  
                  
                  679
                  
                  
                  
                  717Other
                  
                  
                  714
                  
                  
                  
                  7543,418
                  
                  
                  
                  3,598DEFERRED
      CHARGES AND OTHER ASSETS:Goodwill
                  
                  
                  5,606
                  
                  
                  
                  5,607Regulatory
      assets
                  
                  
                  3,797
                  
                  
                  
                  3,945Pension
      assets
                  
                  
                  723
                  
                  
                  
                  700Other
                  
                  
                  596
                  
                  
                  
                  60510,722
                  
                  
                  
                  10,857$
                  32,415
                  
                  
                  $
                  32,068LIABILITIES
      AND CAPITALIZATIONCURRENT
      LIABILITIES:Currently
      payable long-term debt
                  
                  $
                  2,183
                  
                  
                  $
                  2,014Short-term
      borrowings
                  
                  
                  1,649
                  
                  
                  
                  903Accounts
      payable
                  
                  
                  754
                  
                  
                  
                  777Accrued
      taxes
                  
                  
                  416
                  
                  
                  
                  408Other
                  
                  
                  1,167
                  
                  
                  
                  1,0466,169
                  
                  
                  
                  5,148CAPITALIZATION:Common
      stockholders’ equity-Common stock,
      $.10 par value, authorized 375,000,000 shares-304,835,407
      shares outstanding.
                  
                  
                  31
                  
                  
                  
                  31Other
      paid-in capital
                  
                  
                  5,472
                  
                  
                  
                  5,509Accumulated
      other comprehensive loss
                  
                  
                  (108
                  )
                  
                  
                  (50
                  )Retained earnings
                  
                  
                  3,596
                  
                  
                  
                  3,487Total common
      stockholders' equity
                  
                  
                  8,991
                  
                  
                  
                  8,977Long-term debt
      and other long-term obligations
                  
                  
                  8,332
                  
                  
                  
                  8,86917,323
                  
                  
                  
                  17,846NONCURRENT
      LIABILITIES:Accumulated
      deferred income taxes
                  
                  
                  2,717
                  
                  
                  
                  2,671Asset
      retirement obligations
                  
                  
                  1,287
                  
                  
                  
                  1,267Deferred gain
      on sale and leaseback transaction
                  
                  
                  1,052
                  
                  
                  
                  1,060Power purchase
      contract loss liability
                  
                  
                  682
                  
                  
                  
                  750Retirement
      benefits
                  
                  
                  911
                  
                  
                  
                  894Lease market
      valuation liability
                  
                  
                  643
                  
                  
                  
                  663Other
                  
                  
                  1,631
                  
                  
                  
                  1,7698,923
                  
                  
                  
                  9,074COMMITMENTS,
      GUARANTEES AND CONTINGENCIES (Note 10)$
                  32,415
                  
                  
                  $
                  32,068The
      accompanying Notes to Consolidated Financial Statements as they relate to
      FirstEnergy Corp. are an integral part of thesebalance
      sheets.
  36
   FIRSTENERGY
      CORP.CONSOLIDATED
      STATEMENTS OF CASH FLOWS(Unaudited)Three
      Months EndedMarch
      31,2008
                  
                  
                  2007(In
      millions)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                  
                  $
                  276
                  
                  
                  $
                  290Adjustments to
      reconcile net income to net cash from operating
activities-Provision for
      depreciation
                  
                  
                  164
                  
                  
                  
                  156Amortization
      of regulatory assets
                  
                  
                  258
                  
                  
                  
                  251Deferral of
      new regulatory assets
                  
                  
                  (105
                  )
                  
                  
                  (144
                  )Nuclear fuel
      and lease amortization
                  
                  
                  26
                  
                  
                  
                  26Deferred
      purchased power and other costs
                  
                  
                  (59
                  )
                  
                  
                  (116
                  )Deferred
      income taxes and investment tax credits, net
                  
                  
                  89
                  
                  
                  
                  53Investment
      impairment
                  
                  
                  16
                  
                  
                  
                  5Deferred rents
      and lease market valuation liability
                  
                  
                  4
                  
                  
                  
                  (25
                  )Accrued
      compensation and retirement benefits
                  
                  
                  (142
                  )
                  
                  
                  (65
                  )Commodity
      derivative transactions, net
                  
                  
                  8
                  
                  
                  
                  1Gain on asset
      sales
                  
                  
                  (37
                  )
                  
                  
                  -Cash
      collateral received
                  
                  
                  8
                  
                  
                  
                  6Pension trust
      contribution
                  
                  
                  -
                  
                  
                  
                  (300
                  )Decrease
      (increase) in operating assets-Receivables
                  
                  
                  (6
                  )
                  
                  
                  (155
                  )Materials and
      supplies
                  
                  
                  (17
                  )
                  
                  
                  15Prepayments
      and other current assets
                  
                  
                  (115
                  )
                  
                  
                  (74
                  )Increase
      (decrease) in operating liabilities-Accounts
      payable
                  
                  
                  (23
                  )
                  
                  
                  (108
                  )Accrued
      taxes
                  
                  
                  (5
                  )
                  
                  
                  73Accrued
      interest
                  
                  
                  91
                  
                  
                  
                  86Electric
      service prepayment programs
                  
                  
                  (19
                  )
                  
                  
                  (17
                  )Other
                  
                  
                  (56
                  )
                  
                  
                  (15
                  )Net cash
      provided from (used for) operating activities
                  
                  
                  356
                  
                  
                  
                  (57
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:New
      Financing-Long-term
      debt
                  
                  
                  -
                  
                  
                  
                  250Short-term
      borrowings, net
                  
                  
                  746
                  
                  
                  
                  1,139Redemptions
      and Repayments-Common
      stock
                  
                  
                  -
                  
                  
                  
                  (891
                  )Long-term
      debt
                  
                  
                  (368
                  )
                  
                  
                  (13
                  )Net controlled
      disbursement activity
                  
                  
                  6
                  
                  
                  
                  12Stock-based
      compensation tax benefit
                  
                  
                  11
                  
                  
                  
                  8Common stock
      dividend payments
                  
                  
                  (168
                  )
                  
                  
                  (159
                  )Net cash
      provided from financing activities
                  
                  
                  227
                  
                  
                  
                  346CASH
      FLOWS FROM INVESTING ACTIVITIES:Property
      additions
                  
                  
                  (711
                  )
                  
                  
                  (296
                  )Proceeds from
      asset sales
                  
                  
                  50
                  
                  
                  
                  -Sales of
      investment securities held in trusts
                  
                  
                  361
                  
                  
                  
                  273Purchases of
      investment securities held in trusts
                  
                  
                  (384
                  )
                  
                  
                  (294
                  )Cash
      investments
                  
                  
                  58
                  
                  
                  
                  25Other
                  
                  
                  (16
                  )
                  
                  
                  2Net cash used
      for investing activities
                  
                  
                  (642
                  )
                  
                  
                  (290
                  )Net decrease
      in cash and cash equivalents
                  
                  
                  (59
                  )
                  
                  
                  (1
                  )Cash and cash
      equivalents at beginning of period
                  
                  
                  129
                  
                  
                  
                  90Cash and cash
      equivalents at end of period
                  
                  $
                  70
                  
                  
                  $
                  89The
      accompanying Notes to Consolidated Financial Statements as they relate to
      FirstEnergy Corp. are an integral part of these
statements.
  37
 FIRSTENERGY
SOLUTIONS CORP.
 
 MANAGEMENT’S
      NARRATIVE
 ANALYSIS
      OF RESULTS OF OPERATIONS
 
 
 FES is a wholly
owned subsidiary of FirstEnergy. FES provides energy-related products and
services primarily in Ohio, Pennsylvania, Michigan and Maryland, and through its
subsidiaries, FGCO and NGC, owns or leases and operates FirstEnergy’s fossil and
hydroelectric generation facilities and owns FirstEnergy’s nuclear generation
facilities, respectively. FENOC, a wholly owned subsidiary of FirstEnergy,
operates and maintains the nuclear generating facilities.
 
 FES’ revenues are
primarily from the sale of electricity (provided from FES’ generating facilities
and through purchased power arrangements) to affiliated utility companies to
meet all or a portion of their PLR requirements. These affiliated power sales
include a full-requirements PSA with OE, CEI and TE to supply each of their PLR
obligations through 2008, at prices that take into consideration their
respective PUCO-authorized billing rates. FES also has a partial requirements
wholesale power sales agreement with its affiliates, Met-Ed and Penelec, to
supply a portion of each of their respective PLR obligations at fixed prices
through 2010. The fixed prices under the partial requirements agreement are
expected to remain below wholesale market prices during the term of the
agreement. FES also supplies the majority of the PLR requirements of Penn at
market-based rates as a result of a competitive solicitation conducted by Penn.
FES’ existing contractual obligations to Penn expire on May 31, 2008, but
could continue if FES successfully bids in future competitive solicitations.
FES’ revenues also include competitive retail and wholesale sales to
non-affiliated customers in Ohio, Pennsylvania, Maryland and
Michigan.
 
 Results of
Operations
 
 In the first three
months of 2008, net income decreased to $90million from $103million in the same
period in 2007. The decrease in net income was primarily due to higher fuel and
other operating expenses, partially offset by lower purchased power costs and
higher revenues.
 
 Revenues
 
 Revenues increased
by $81million in the
first three months of 2008 compared to the same period in 2007 due to increases
in revenues from non-affiliated and affiliated wholesale sales, partially offset
by lower retail generation sales. Retail generation sales revenues decreased as
a result of decreased sales in the PJM market partially offset by increased
sales in the MISO market. Lower sales in the PJM market were primarily due to
lower contract renewals for commercial and industrial customers. Greater sales
in the MISO market were primarily due to FES’ capturing more shopping customers
in Penn’s service territory, partially offset by lower customer usage.
Non-affiliated wholesale revenues increased as a result of more generation
available for wholesale sales to non-affiliates.
 
 The increase in
affiliated company wholesale sales was due to greater sales to the Ohio and
Pennsylvania Companies to meet their higher retail generation sales
requirements. Higher unit prices resulted from the provision of the
full-requirements PSA under which PSA rates reflect the increase in the Ohio
Companies’ retail generation rates. The higher sales to the Pennsylvania
Companies were due to increased Met-Ed and Penelec generation sales
requirements. These increases were partially offset by lower sales to Penn due
to a 45% increase in customer shopping in the first quarter of 2008 compared to
the first quarter of 2007.
 
 Transmission revenue
increased $10 million due to increased retail load in the MISO market and
higher transmission prices ($12 million), partially offset by reduced FTR
auction revenues ($2 million).
 
 Changes in revenues
in the first three months of 2008 from the same period of 2007 are summarized
below:
 
 Three  Months
      EndedMarch
      31,
              
              IncreaseRevenues
      by Type of Service
              
              2008
              
              2007
              
              (Decrease)(In
      millions)Non-Affiliated
      Generation Sales:Retail
              
              $
              160
              
              $
              174
              
              $
              (14
              )Wholesale
              
              
              129
              
              
              103
              
              
              26Total
      Non-Affiliated Generation Sales
              
              
              289
              
              
              277
              
              
              12Affiliated
      Generation Sales
              
              
              776
              
              
              714
              
              
              62Transmission
              
              
              33
              
              
              23
              
              
              10Other
              
              
              1
              
              
              4
              
              
              (3
              )Total
      Revenues
              
              $
              1,099
              
              $
              1,018
              
              $
              81
 
 
 38
 
 
 The following tables
summarize the price and volume factors contributing to changes in revenues from
non-affiliated and affiliated generation sales in the first three months of 2008
compared to the same period last year:
 
 IncreaseSource
      of Change in Non-Affiliated Generation Revenues
              
              (Decrease)(In
      millions)Retail:Effect of 9.0% decrease in sales
      volumes
              
              $
              (16
              )Change in prices
              
              
              2(14
              )Wholesale:Effect of 3.5% increase in sales
      volumes
              
              
              4Change in prices
              
              
              2226Net Increase
      in Non-Affiliated Generation Revenues
              
              $
              12
 
 IncreaseSource
      of Change in Affiliated Generation Revenues
              
              (Decrease)(In
      millions)Ohio
      Companies:Effect of 1.2% increase in sales
      volumes
              
              $
              6Change in prices
              
              
              4450Pennsylvania
      Companies:Effect of 9.0% increase in sales
      volumes
              
              
              16Change in prices
              
              
              (4
              )12Net Increase
      in Affiliated Generation Revenues
              
              $
              62
 
 Expenses
 
 Total expenses
increased by $94 million in the first three months of 2008 compared with
the same period of 2007. The following table summarizes the factors contributing
to the changes in fuel and purchased power costs in the first three months of
2008 from the same period last year:
 
 Source
      of Change in Fuel and Purchased Power
              
              Increase
                  (Decrease)(In
      millions)Nuclear
      Fuel:Change due to increased unit
      costs
              
              $
              1Change due to volume
      consumed
              
              
              (3
              )(2
              )Fossil
      Fuel:Change due to increased unit
      costs
              
              
              19Change due to volume
      consumed
              
              
              7190Non-affiliated
      Purchased Power:Change due to increased unit
      costs
              
              
              55Change due to volume
      purchased
              
              
              (34
              )21Affiliated
      Purchased Power:Change due to decreased unit
      costs
              
              
              (16
              )Change due to volume
      purchased
              
              
              (35
              )(51
              )Net Increase
      in Fuel and Purchased Power Costs
              
              $
              58
 
 Fossil fuel costs
increased $90million in the first
three months of 2008 primarily as a result of increased coal consumption
reflecting higher generation as a result of fewer outages in 2008 compared to
2007. Higher unit prices were due to increased coal transportation and emission
allowance costs in the first quarter of 2008. The higher fossil fuel costs were
partially offset by lower nuclear fuel costs of $2 million. Lower nuclear
fuel costs reflect decreased nuclear generation primarily as a result of the
refueling outage at Davis-Besse in the first quarter of 2008.
 
 39
 
 
 Purchased power
costs decreased as a result of lower purchases from affiliates, partially offset
by increased non-affiliated purchased power costs. Purchases from affiliated
companies decreased as a result of the assignment of CEI’s and TE’s leasehold
interests in the Mansfield Plant to FGCO in October 2007. Purchased power costs
from non-affiliates increased primarily as a result of higher market rates
partially offset by reduced volume requirements due to increased available
fossil generation.
 
 Other operating
expenses increased by $33million in the first
three months of 2008 from the same period of 2007 primarily due to lease
expenses relating to the assignment of CEI’s and TE’s leasehold interests in the
Mansfield Plant to FGCO and the sale and leaseback of Mansfield Unit 1 that were
completed subsequent to the first quarter in 2007. Higher nuclear operating
costs were due to the refueling outage at Davis-Besse and preparatory work
associated with the Beaver Valley Unit 2 refueling outage that is scheduled for
the second quarter of 2008.
 
 Depreciation expense
increased by $2 million in the first three months of 2008 primarily due to
fossil and nuclear property additions since the first quarter of
2007.
 
 General taxes
increased by $1 million in the first three months of 2008 compared to the
same period of 2007 as a result of higher gross receipts taxes and property
taxes.
 
 Other Expense
 
 Other expense
increased by $4million in the first
three months of 2008 from the same period of 2007 primarily as a result of an
increase in trust securities impairments and reduced loans to the unregulated
money pool, partially offset by lower interest expense. Lower interest expense
reflected the repayment of notes issued to associated companies in connection
with the transfers of generation assets in 2005, partially offset by the
issuance of lower-cost pollution control debt subsequent to March 31,
2007.
 
 Legal
Proceedings
 
 See the “Regulatory
Matters,” “Environmental Matters” and “Other Legal Proceedings” sections within
the Combined Management’s Discussion and Analysis of Registrant Subsidiaries for
discussion of legal proceedings applicable to FES.
 
 New Accounting Standards and
Interpretations
 
 See
the “New Accounting Standards and Interpretations” section within the Combined
Management’s Discussion and Analysis of Registrant Subsidiaries for discussion
of new accounting standards and interpretations applicable to FES.
 
 
 40
 
 
 
 Report
of Independent Registered Public Accounting Firm
 
 
 
 
 
 
 
 
 To the Stockholder
and Board of
 Directors of
FirstEnergy Solutions Corp.:
 
 We have reviewed the
accompanying consolidated balance sheet of FirstEnergy Solutions Corp. and its
subsidiaries as of March 31, 2008 and the related consolidated statements of
income, comprehensive income and cash flows for each of the three-month periods
ended March 31, 2008 and 2007. These interim financial statements are the
responsibility of the Company’s management.
 
 We conducted our
review in accordance with the standards of the Public Company Accounting
Oversight Board (United States).  A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting
matters.  It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.  Accordingly, we
do not express such an opinion.
 
 Based on our review,
we are not aware of any material modifications that should be made to the
accompanying consolidated interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
 
 We previously
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet as of December
31, 2007, and the related consolidated statements of income, capitalization,
common stockholders’ equity, and cash flows for the year then ended (not
presented herein), and in our report (which contained references to the
Company’s change in its method of accounting for uncertain tax positions as of
January 1, 2007, defined benefit pension and other postretirement plans as of
December 31, 2006 and conditional asset retirement obligations as of December
31, 2005, as discussed in Note 8, Note 4, Note 2(G) and Note 11 to the
consolidated financial statements) dated February 28, 2008, we expressed an
unqualified opinion on those consolidated financial statements.  In
our opinion, the information set forth in the accompanying consolidated balance
sheet information as of December 31, 2007, is fairly stated in all material
respects in relation to the consolidated balance sheet from which it has been
derived.
 PricewaterhouseCoopers
      LLP
                Cleveland,
      Ohio
                May 7,
      2008
 
 
 
  
 41
 
  FIRSTENERGY
      SOLUTIONS CORP.CONSOLIDATED
      STATEMENTS OF INCOME AND COMPREHENSIVE INCOME(Unaudited)Three
      Months EndedMarch
      31,2008
                
                
                2007(In
      thousands)REVENUES:Electric sales
      to affiliates
                
                $
                776,307
                
                
                $
                713,674Electric sales
      to non-affiliates
                
                
                301,266
                
                
                
                287,629Other
                
                
                21,543
                
                
                
                16,990Total
      revenues
                
                
                1,099,116
                
                
                
                1,018,293EXPENSES:Fuel
                
                
                321,689
                
                
                
                233,535Purchased
      power from non-affiliates
                
                
                206,724
                
                
                
                186,203Purchased
      power from affiliates
                
                
                25,485
                
                
                
                76,483Other
      operating expenses
                
                
                296,546
                
                
                
                263,596Provision for
      depreciation
                
                
                49,742
                
                
                
                48,010General
      taxes
                
                
                23,197
                
                
                
                21,718Total
      expenses
                
                
                923,383
                
                
                
                829,545OPERATING
      INCOME
                
                
                175,733
                
                
                
                188,748OTHER
      INCOME (EXPENSE):Miscellaneous
      income (expense)
                
                
                (2,904
                )
                
                
                19,732Interest
      expense to affiliates
                
                
                (7,210
                )
                
                
                (29,446
                )Interest
      expense - other
                
                
                (24,535
                )
                
                
                (17,358
                )Capitalized
      interest
                
                
                6,663
                
                
                
                3,209Total other
      expense
                
                
                (27,986
                )
                
                
                (23,863
                )INCOME
      BEFORE INCOME TAXES
                
                
                147,747
                
                
                
                164,885INCOME
      TAXES
                
                
                57,763
                
                
                
                62,381NET
      INCOME
                
                
                89,984
                
                
                
                102,504OTHER
      COMPREHENSIVE INCOME (LOSS):Pension and
      other postretirement benefits
                
                
                (1,820
                )
                
                
                (1,360
                )Unrealized
      gain on derivative hedges
                
                
                5,718
                
                
                
                17,758Change in
      unrealized gain on available-for-sale securities
                
                
                (51,852
                )
                
                
                17,450Other
      comprehensive income (loss)
                
                
                (47,954
                )
                
                
                33,848Income tax
      expense (benefit) related to other comprehensive income
                
                
                (17,403
                )
                
                
                12,333Other
      comprehensive income (loss), net of tax
                
                
                (30,551
                )
                
                
                21,515TOTAL
      COMPREHENSIVE INCOME
                
                $
                59,433
                
                
                $
                124,019The
      accompanying Notes to Consolidated Financial Statements as they relate to
      FirstEnergy Solutions Corp. are anintegral part
      of these statements.
  42
 FIRSTENERGY
      SOLUTIONS CORP.CONSOLIDATED
      BALANCE SHEETS(Unaudited)March
      31,
                
                
                December
      31,2008
                
                
                2007(In
      thousands)ASSETSCURRENT
      ASSETS:Cash and cash
      equivalents
                
                $
                2
                
                
                $
                2Receivables-Customers
      (less accumulated provisions of $6,988,000 and$8,072,000,
      respectively, for uncollectible accounts)
                
                
                125,116
                
                
                
                133,846Associated
      companies
                
                
                317,740
                
                
                
                376,499Other (less
      accumulated provisions of $2,500,000 and $9,000,respectively,
      for uncollectible accounts)
                
                
                2,224
                
                
                
                3,823Notes
      receivable from associated companies
                
                
                737,387
                
                
                
                92,784Materials and
      supplies, at average cost
                
                
                474,625
                
                
                
                427,015Prepayments
      and other
                
                
                135,734
                
                
                
                92,3401,792,828
                
                
                
                1,126,309PROPERTY,
      PLANT AND EQUIPMENT:In
      service
                
                
                8,703,760
                
                
                
                8,294,768Less -
      Accumulated provision for depreciation
                
                
                4,032,545
                
                
                
                3,892,0134,671,215
                
                
                
                4,402,755Construction
      work in progress
                
                
                1,058,080
                
                
                
                761,7015,729,295
                
                
                
                5,164,456OTHER
      PROPERTY AND INVESTMENTS:Nuclear plant
      decommissioning trusts
                
                
                1,263,338
                
                
                
                1,332,913Long-term
      notes receivable from associated companies
                
                
                62,900
                
                
                
                62,900Other
                
                
                24,388
                
                
                
                40,0041,350,626
                
                
                
                1,435,817DEFERRED
      CHARGES AND OTHER ASSETS:Accumulated
      deferred income tax benefits
                
                
                256,983
                
                
                
                276,923Lease
      assignment receivable from associated companies
                
                
                67,256
                
                
                
                215,258Goodwill
                
                
                24,248
                
                
                
                24,248Property
      taxes
                
                
                47,774
                
                
                
                47,774Pension
      assets
                
                
                16,070
                
                
                
                16,723Unamortized
      sale and leaseback costs
                
                
                85,695
                
                
                
                70,803Other
                
                
                34,819
                
                
                
                43,953532,845
                
                
                
                695,682$
                9,405,594
                
                
                $
                8,422,264LIABILITIES
      AND CAPITALIZATIONCURRENT
      LIABILITIES:Currently
      payable long-term debt
                
                $
                1,608,456
                
                
                $
                1,441,196Short-term
      borrowings-Associated
      companies
                
                
                1,145,959
                
                
                
                264,064Other
                
                
                700,000
                
                
                
                300,000Accounts
      payable-Associated
      companies
                
                
                405,668
                
                
                
                445,264Other
                
                
                185,704
                
                
                
                177,121Accrued
      taxes
                
                
                142,834
                
                
                
                171,451Other
                
                
                248,106
                
                
                
                237,8064,436,727
                
                
                
                3,036,902CAPITALIZATION:Common
      stockholder's equity -Common stock,
      without par value, authorized 750 shares-7 shares
      outstanding
                
                
                1,161,473
                
                
                
                1,164,922Accumulated
      other comprehensive income
                
                
                110,103
                
                
                
                140,654Retained
      earnings
                
                
                1,188,639
                
                
                
                1,108,655Total common
      stockholder's equity
                
                
                2,460,215
                
                
                
                2,414,231Long-term debt
      and other long-term obligations
                
                
                77,956
                
                
                
                533,7122,538,171
                
                
                
                2,947,943NONCURRENT
      LIABILITIES:Deferred gain
      on sale and leaseback transaction
                
                
                1,051,871
                
                
                
                1,060,119Accumulated
      deferred investment tax credits
                
                
                59,969
                
                
                
                61,116Asset
      retirement obligations
                
                
                823,686
                
                
                
                810,114Retirement
      benefits
                
                
                65,348
                
                
                
                63,136Property
      taxes
                
                
                48,095
                
                
                
                48,095Lease market
      valuation liability
                
                
                341,881
                
                
                
                353,210Other
                
                
                39,846
                
                
                
                41,6292,430,696
                
                
                
                2,437,419COMMITMENTS
      AND CONTINGENCIES (Note 10)$
                9,405,594
                
                
                $
                8,422,264The
      accompanying Notes to Consolidated Financial Statements as they related to
      FirstEnergy Solutions Corp. are anintegral part
      of these balance sheets.
  43
 FIRSTENERGY
      SOLUTIONS CORP.CONSOLIDATED
      STATEMENTS OF CASH FLOWS(Unaudited)Three
      Months EndedMarch
      31,2008
                
                
                2007(In
      thousands)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                89,984
                
                
                $
                102,504Adjustments to
      reconcile net income to net cash from operating
activities-Provision for
      depreciation
                
                
                49,742
                
                
                
                48,010Nuclear fuel
      and lease amortization
                
                
                25,426
                
                
                
                26,437Deferred rents
      and lease market valuation liability
                
                
                (34,887
                )
                
                
                -Deferred
      income taxes and investment tax credits, net
                
                
                30,781
                
                
                
                21,210Investment
      impairment
                
                
                14,943
                
                
                
                4,169Accrued
      compensation and retirement benefits
                
                
                (11,042
                )
                
                
                (8,297
                )Commodity
      derivative transactions, net
                
                
                8,086
                
                
                
                537Gain on asset
      sales
                
                
                (4,964
                )
                
                
                -Cash
      collateral, net
                
                
                1,601
                
                
                
                1,384Pension trust
      contribution
                
                
                -
                
                
                
                (64,020
                )Decrease
      (increase) in operating assets:Receivables
                
                
                69,533
                
                
                
                (62,940
                )Materials and
      supplies
                
                
                (12,948
                )
                
                
                10,580Prepayments
      and other current assets
                
                
                (12,260
                )
                
                
                (1,440
                )Increase
      (decrease) in operating liabilities:Accounts
      payable
                
                
                (17,149
                )
                
                
                213,484Accrued
      taxes
                
                
                (28,652
                )
                
                
                (2,913
                )Accrued
      interest
                
                
                (728
                )
                
                
                2,930Other
                
                
                (7,514
                )
                
                
                6,694Net cash
      provided from operating activities
                
                
                159,952
                
                
                
                298,329CASH
      FLOWS FROM FINANCING ACTIVITIES:New
      Financing-Equity
      contribution from parent
                
                
                -
                
                
                
                700,000Short-term
      borrowings, net
                
                
                1,281,896
                
                
                
                197,731Redemptions
      and Repayments-Long-term
      debt
                
                
                (288,603
                )
                
                
                (745,444
                )Common stock
      dividend payments
                
                
                (10,000
                )
                
                
                -Net cash
      provided from financing activities
                
                
                983,293
                
                
                
                152,287CASH
      FLOWS FROM INVESTING ACTIVITIES:Property
      additions
                
                
                (476,529
                )
                
                
                (117,506
                )Proceeds from
      asset sales
                
                
                5,088
                
                
                
                -Sales of
      investment securities held in trusts
                
                
                173,123
                
                
                
                178,632Purchases of
      investment securities held in trusts
                
                
                (181,079
                )
                
                
                (188,076
                )Loans to
      associated companies, net
                
                
                (644,604
                )
                
                
                (319,898
                )Other
                
                
                (19,244
                )
                
                
                (3,768
                )Net cash used
      for investing activities
                
                
                (1,143,245
                )
                
                
                (450,616
                )Net change in
      cash and cash equivalents
                
                
                -
                
                
                
                -Cash and cash
      equivalents at beginning of period
                
                
                2
                
                
                
                2Cash and cash
      equivalents at end of period
                
                $
                2
                
                
                $
                2The
      accompanying Notes to Consolidated Financial Statements as they relate to
      FirstEnergy Solutions Corp. are an integral part ofthese
      statements.
 
 
  
 
 44
 
 
 OHIO
EDISON COMPANY
 
 MANAGEMENT’S
      NARRATIVE
 ANALYSIS
      OF RESULTS OF OPERATIONS
 
 
 OE is a wholly owned
electric utility subsidiary of FirstEnergy. OE and its wholly owned subsidiary,
Penn, conduct business in portions of Ohio and Pennsylvania, providing regulated
electric distribution services. They provide generation services to those
customers electing to retain OE and Penn as their power supplier. OE’s power
supply requirements are provided by FES – an affiliated company. Penn
purchases power from FES and third-party suppliers through a competitive RFP
process.
 
 Results of
Operations
 
 In the first three
months of 2008, net income decreased to $44 million from $54 million in the same
period of 2007. The decrease primarily resulted from higher operating costs, a
decrease in the deferral of new regulatory assets and lower investment income,
partially offset by higher electric sales revenues.
 
 Revenues
 
 Revenues increased
by $27 million, or 4.3%, in the first three months of 2008 compared with the
same period in 2007, primarily due to increases in retail generation revenues
($17 million) and distribution throughput revenues ($12 million).
 
 Retail generation
revenues increased primarily due to higher average prices across all customer
classes, partially offset by decreased KWH sales to commercial and industrial
customers. The higher average prices included the 2008 fuel cost recovery rider
that became effective January 16, 2008 (see “Regulatory Matters – Ohio” within
the Combined Management’s Discussion and Analysis of Registrant Subsidiaries).
Weather conditions in the first three months of 2008 compared to the same period
in 2007 contributed to the higher KWH sales to residential customers (heating
degree days increased 2.8% and 0.7% in OE’s and Penn’s service territories,
respectively). Commercial and industrial retail generation KWH sales were lower
due to increased customer shopping in Penn’s service territory in the first
quarter of 2008 compared to the same period last year.
 
 Changes in retail
generation sales and revenues in the first three months of 2008 from the same
period in 2007 are summarized in the following tables:
  Retail
      Generation KWH Sales
                
                Increase
      (Decrease)Residential
                
                
                1.0
                %Commercial
                
                
                (2.5
                )%Industrial
                
                
                (4.1
                )%Net
      Decrease in Generation Sales
                
                
                (1.5
                )%
 
 Retail
      Generation Revenues
              
              Increase(In
      millions)Residential
              
              $
              11Commercial
              
              
              1Industrial
              
              
              5Increase
      in Generation Revenues
              
              $
              17
 
 Revenues from
distribution throughput increased by $12 million in the first three months of
2008 compared to the same period in 2007 due to higher average unit prices for
all customer classes and higher KWH deliveries to residential and commercial
customers. The higher average prices resulted from a transmission rider increase
effective July 1, 2007. The higher KWH deliveries to residential and
commercial customers reflected the favorable weather conditions described
above.
 
 
 
 
 45
 
 Changes in
distribution KWH deliveries and revenues in the first three months of 2008 from
the same period in 2007 are summarized in the following tables.
  
 Distribution
      KWH Deliveries
              
              
              Increase (Decrease)Residential
              
              
              1.7
              %Commercial
              
              
              1.2
              %Industrial
              
              
              (0.8
              )%Net
      Increase in Distribution Deliveries
              
              
              0.7
              %
 
 Distribution
      Revenues
              
              Increase(In
      millions)Residential
              
              $
              6Commercial
              
              
              4Industrial
              
              
              2Increase
      in Distribution Revenues
              
              $
              12
 
 Expenses
 
 Total expenses
increased by $15 million in the first three months of 2008 from the same period
of 2007. The following table presents changes from the prior year by expense
category.
 
 Expenses
      – Changes
              
              Increase
      (Decrease)(In
      millions)Purchased
      power costs
              
              $
              (10
              )Nuclear
      operating costs
              
              
              1Other
      operating costs
              
              
              6Provision for
      depreciation
              
              
              3Amortization
      of regulatory assets
              
              
              3Deferral of
      new regulatory assets
              
              
              11General
      taxes
              
              
              1Net
      Increase in Expenses
              
              $
              15
 
 Lower purchased
power costs in the first three months of 2008 primarily reflected the lower
retail generation KWH sales in Penn’s service territory described above,
partially offset by higher unit prices as provided for under OE’s PSA with FES.
The increase in other operating costs for the first three months of 2008 was
primarily due to higher transmission expenses related to MISO operations. Higher
depreciation expense in the first three months of 2008 reflected capital
additions subsequent to the first quarter of 2007. Higher amortization of
regulatory assets in the first three months of 2008 was primarily due to
increased amortization of MISO transmission deferrals. The decrease in the
deferral of new regulatory assets for the first three months of 2008 was
primarily due to lower MISO costs deferred in excess of transmission revenues
and lower RCP fuel and distribution cost deferrals.
 
 Other Income
 
 Other income
decreased $12 million in the first three months of 2008 as compared with the
same period of 2007 primarily due to reductions in interest income on notes
receivable resulting from principal payments from associated companies since the
first quarter of 2007.
 
 Income Taxes
 
 In the first quarter
of 2007, OE’s income taxes included an immaterial adjustment applicable to prior
periods of $7.2 million related to an inter-company federal tax allocation
arrangement between FirstEnergy and its subsidiaries.
 
 Legal
Proceedings
 
 See the “Regulatory
Matters,” “Environmental Matters” and “Other Legal Proceedings” sections within
the Combined Management’s Discussion and Analysis of Registrant Subsidiaries for
discussion of other legal proceedings applicable to OE.
 
 New Accounting Standards and
Interpretations
 
 See the “New
Accounting Standards and Interpretations” section within the Combined
Management’s Discussion and Analysis of Registrant Subsidiaries for discussion
of new accounting standards and interpretations applicable to OE.
 
 46
 
 
 
 Report
of Independent Registered Public Accounting Firm
 
 
 
 
 
 
 
 
 To the Stockholder
and Board of
 Directors of Ohio
Edison Company:
 
 We have reviewed the
accompanying consolidated balance sheet of Ohio Edison Company and its
subsidiaries as of March 31, 2008 and the related consolidated statements of
income, comprehensive income and cash flows for each of the three-month periods
ended March 31, 2008 and 2007. These interim financial statements are the
responsibility of the Company’s management.
 
 We conducted our
review in accordance with the standards of the Public Company Accounting
Oversight Board (United States).  A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting
matters.  It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.  Accordingly, we
do not express such an opinion.
 
 Based on our review,
we are not aware of any material modifications that should be made to the
accompanying consolidated interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
 
 We previously
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet as of December
31, 2007, and the related consolidated statements of income, capitalization,
common stockholders’ equity, and cash flows for the year then ended (not
presented herein), and in our report (which contained references to the
Company’s change in its method of accounting for uncertain tax positions as of
January 1, 2007, defined benefit pension and other postretirement plans as of
December 31, 2006 and conditional asset retirement obligations as of December
31, 2005, as discussed in Note 8, Note 4, Note 2(G) and Note 11 to the
consolidated financial statements) dated February 28, 2008, we expressed an
unqualified opinion on those consolidated financial statements.  In
our opinion, the information set forth in the accompanying consolidated balance
sheet information as of December 31, 2007, is fairly stated in all material
respects in relation to the consolidated balance sheet from which it has been
derived.
 PricewaterhouseCoopers
      LLP
                Cleveland,
      Ohio
                May 7,
      2008
 
 
 47
  OHIO
      EDISON COMPANYCONSOLIDATED
      STATEMENTS OF INCOME AND COMPREHENSIVE INCOME(Unaudited)Three
      Months EndedMarch
      31,2008
                  
                  
                  2007(In
      thousands)REVENUES:Electric
      sales
                  
                  $
                  622,271
                  
                  
                  $
                  594,344Excise tax
      collections
                  
                  
                  30,378
                  
                  
                  
                  31,254Total
      revenues
                  
                  
                  652,649
                  
                  
                  
                  625,598EXPENSES:Fuel
                  
                  
                  3,170
                  
                  
                  
                  3,015Purchased
      power
                  
                  
                  340,186
                  
                  
                  
                  349,852Nuclear
      operating costs
                  
                  
                  43,021
                  
                  
                  
                  41,514Other
      operating costs
                  
                  
                  94,135
                  
                  
                  
                  88,486Provision for
      depreciation
                  
                  
                  21,493
                  
                  
                  
                  18,848Amortization
      of regulatory assets
                  
                  
                  48,538
                  
                  
                  
                  45,417Deferral of
      new regulatory assets
                  
                  
                  (25,411
                  )
                  
                  
                  (36,649
                  )General
      taxes
                  
                  
                  50,453
                  
                  
                  
                  49,745Total
      expenses
                  
                  
                  575,585
                  
                  
                  
                  560,228OPERATING
      INCOME
                  
                  
                  77,064
                  
                  
                  
                  65,370OTHER
      INCOME (EXPENSE):Investment
      income
                  
                  
                  15,055
                  
                  
                  
                  26,630Miscellaneous
      income (expense)
                  
                  
                  (3,806
                  )
                  
                  
                  373Interest
      expense
                  
                  
                  (17,641
                  )
                  
                  
                  (21,022
                  )Capitalized
      interest
                  
                  
                  110
                  
                  
                  
                  110Total other
      income (expense)
                  
                  
                  (6,282
                  )
                  
                  
                  6,091INCOME
      BEFORE INCOME TAXES
                  
                  
                  70,782
                  
                  
                  
                  71,461INCOME
      TAXES
                  
                  
                  26,873
                  
                  
                  
                  17,426NET
      INCOME
                  
                  
                  43,909
                  
                  
                  
                  54,035OTHER
      COMPREHENSIVE INCOME (LOSS):Pension and
      other postretirement benefits
                  
                  
                  (3,994
                  )
                  
                  
                  (3,423
                  )Change in
      unrealized gain on available-for-sale securities
                  
                  
                  (7,571
                  )
                  
                  
                  (126
                  )Other
      comprehensive loss
                  
                  
                  (11,565
                  )
                  
                  
                  (3,549
                  )Income tax
      benefit related to other comprehensive loss
                  
                  
                  (4,262
                  )
                  
                  
                  (1,503
                  )Other
      comprehensive loss, net of tax
                  
                  
                  (7,303
                  )
                  
                  
                  (2,046
                  )TOTAL
      COMPREHENSIVE INCOME
                  
                  $
                  36,606
                  
                  
                  $
                  51,989The
      accompanying Notes to Consolidated Financial Statements as they relate to
      Ohio Edison Company are an integral partof these
      statements.
  48
 OHIO
      EDISON COMPANYCONSOLIDATED
      BALANCE SHEETS(Unaudited)March
      31,
                
                
                December
      31,2008
                
                
                2007(In
      thousands)ASSETSCURRENT
      ASSETS:Cash and cash
      equivalents
                
                $
                732
                
                
                $
                732Receivables-Customers
      (less accumulated provisions of $7,870,000 and $8,032,000,respectively,
      for uncollectible accounts)
                
                
                266,360
                
                
                
                248,990Associated
      companies
                
                
                179,875
                
                
                
                185,437Other (less
      accumulated provisions of $5,638,000 and $5,639,000,respectively,
      for uncollectible accounts)
                
                
                16,474
                
                
                
                12,395Notes
      receivable from associated companies
                
                
                589,790
                
                
                
                595,859Prepayments
      and other
                
                
                17,785
                
                
                
                10,3411,071,016
                
                
                
                1,053,754UTILITY
      PLANT:In
      service
                
                
                2,804,505
                
                
                
                2,769,880Less -
      Accumulated provision for depreciation
                
                
                1,106,174
                
                
                
                1,090,8621,698,331
                
                
                
                1,679,018Construction
      work in progress
                
                
                60,617
                
                
                
                50,0611,758,948
                
                
                
                1,729,079OTHER
      PROPERTY AND INVESTMENTS:Long-term
      notes receivable from associated companies
                
                
                258,405
                
                
                
                258,870Investment in
      lease obligation bonds
                
                
                253,747
                
                
                
                253,894Nuclear plant
      decommissioning trusts
                
                
                119,948
                
                
                
                127,252Other
                
                
                33,014
                
                
                
                36,037665,114
                
                
                
                676,053DEFERRED
      CHARGES AND OTHER ASSETS:Regulatory
      assets
                
                
                709,969
                
                
                
                737,326Pension
      assets
                
                
                235,933
                
                
                
                228,518Property
      taxes
                
                
                65,520
                
                
                
                65,520Unamortized
      sale and leaseback costs
                
                
                43,882
                
                
                
                45,133Other
                
                
                44,640
                
                
                
                48,0751,099,944
                
                
                
                1,124,572$
                4,595,022
                
                
                $
                4,583,458LIABILITIES
      AND CAPITALIZATIONCURRENT
      LIABILITIES:Currently
      payable long-term debt
                
                $
                334,656
                
                
                $
                333,224Short-term
      borrowings-Associated
      companies
                
                
                50,692
                
                
                
                50,692Other
                
                
                2,609
                
                
                
                2,609Accounts
      payable-Associated
      companies
                
                
                155,654
                
                
                
                174,088Other
                
                
                19,376
                
                
                
                19,881Accrued
      taxes
                
                
                93,390
                
                
                
                89,571Accrued
      interest
                
                
                16,459
                
                
                
                22,378Other
                
                
                99,532
                
                
                
                65,163772,368
                
                
                
                757,606CAPITALIZATION:Common
      stockholder's equity-Common stock,
      without par value, authorized 175,000,000 shares -60 shares
      outstanding
                
                
                1,220,368
                
                
                
                1,220,512Accumulated
      other comprehensive income
                
                
                41,083
                
                
                
                48,386Retained
      earnings
                
                
                351,186
                
                
                
                307,277Total common
      stockholder's equity
                
                
                1,612,637
                
                
                
                1,576,175Long-term debt
      and other long-term obligations
                
                
                839,107
                
                
                
                840,5912,451,744
                
                
                
                2,416,766NONCURRENT
      LIABILITIES:Accumulated
      deferred income taxes
                
                
                783,777
                
                
                
                781,012Accumulated
      deferred investment tax credits
                
                
                15,990
                
                
                
                16,964Asset
      retirement obligations
                
                
                95,009
                
                
                
                93,571Retirement
      benefits
                
                
                176,597
                
                
                
                178,343Deferred
      revenues - electric service programs
                
                
                36,821
                
                
                
                46,849Other
                
                
                262,716
                
                
                
                292,3471,370,910
                
                
                
                1,409,086COMMITMENTS
      AND CONTINGENCIES (Note 10)$
                4,595,022
                
                
                $
                4,583,458The
      accompanying Notes to Consolidated Financial Statements as they relate to
      Ohio Edison Company are an integral partof these
      balance sheets.
 
 49
  OHIO
      EDISON COMPANYCONSOLIDATED
      STATEMENTS OF CASH FLOWS(Unaudited)Three
      Months EndedMarch
      31,2008
                  
                  
                  2007(In
      thousands)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                  
                  $
                  43,909
                  
                  
                  $
                  54,035Adjustments to
      reconcile net income to net cash from operating
      activities-Provision for
      depreciation
                  
                  
                  21,493
                  
                  
                  
                  18,848Amortization
      of regulatory assets
                  
                  
                  48,538
                  
                  
                  
                  45,417Deferral of
      new regulatory assets
                  
                  
                  (25,411
                  )
                  
                  
                  (36,649
                  )Amortization
      of lease costs
                  
                  
                  32,934
                  
                  
                  
                  32,934Deferred
      income taxes and investment tax credits, net
                  
                  
                  6,866
                  
                  
                  
                  (3,992
                  )Accrued
      compensation and retirement benefits
                  
                  
                  (19,482
                  )
                  
                  
                  (16,794
                  )Pension trust
      contribution
                  
                  
                  -
                  
                  
                  
                  (20,261
                  )Increase in
      operating assets-Receivables
                  
                  
                  (27,496
                  )
                  
                  
                  (102,469
                  )Prepayments
      and other current assets
                  
                  
                  (7,451
                  )
                  
                  
                  (6,339
                  )Increase
      (decrease) in operating liabilities-Accounts
      payable
                  
                  
                  (18,939
                  )
                  
                  
                  42,095Accrued
      taxes
                  
                  
                  2,991
                  
                  
                  
                  (46,791
                  )Accrued
      interest
                  
                  
                  (5,919
                  )
                  
                  
                  (6,812
                  )Electric
      service prepayment programs
                  
                  
                  (10,028
                  )
                  
                  
                  (9,053
                  )Other
                  
                  
                  (2,066
                  )
                  
                  
                  (3,283
                  )Net cash
      provided from (used for) operating activities
                  
                  
                  39,939
                  
                  
                  
                  (59,114
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:New
      Financing-Short-term
      borrowings, net
                  
                  
                  -
                  
                  
                  
                  77,473Redemptions
      and Repayments-Common
      stock
                  
                  
                  -
                  
                  
                  
                  (500,000
                  )Long-term
      debt
                  
                  
                  (80
                  )
                  
                  
                  (72
                  )Net cash used
      for financing activities
                  
                  
                  (80
                  )
                  
                  
                  (422,599
                  )CASH
      FLOWS FROM INVESTING ACTIVITIES:Property
      additions
                  
                  
                  (49,011
                  )
                  
                  
                  (29,888
                  )Sales of
      investment securities held in trusts
                  
                  
                  62,344
                  
                  
                  
                  12,951Purchases of
      investment securities held in trusts
                  
                  
                  (63,797
                  )
                  
                  
                  (13,805
                  )Loan
      repayments from associated companies, net
                  
                  
                  6,534
                  
                  
                  
                  511,082Cash
      investments
                  
                  
                  147
                  
                  
                  
                  168Other
                  
                  
                  3,924
                  
                  
                  
                  1,187Net cash
      provided from (used for) investing activities
                  
                  
                  (39,859
                  )
                  
                  
                  481,695Net change in
      cash and cash equivalents
                  
                  
                  -
                  
                  
                  
                  (18
                  )Cash and cash
      equivalents at beginning of period
                  
                  
                  732
                  
                  
                  
                  712Cash and cash
      equivalents at end of period
                  
                  $
                  732
                  
                  
                  $
                  694The
      accompanying Notes to Consolidated Financial Statements as they relate to
      Ohio Edison Company are an integral partof these
      statements.
 
 
 50
  
 
 
 THE
CLEVELAND ELECTRIC ILLUMINATING COMPANY
 
 MANAGEMENT’S
      NARRATIVE
 ANALYSIS
      OF RESULTS OF OPERATIONS
 
 
 CEI is a wholly
owned, electric utility subsidiary of FirstEnergy. CEI conducts business in
northeastern Ohio, providing regulated electric distribution services. CEI also
provides generation services to those customers electing to retain CEI as their
power supplier. CEI’s power supply requirements are primarily provided by FES –
an affiliated company.
 
 Results
of Operations
 
 Net income in the
first three months of 2008 decreased to $58 million from $64 million
in the same period of 2007. The decrease resulted primarily from higher
purchased power costs, increased amortization of regulatory assets and lower
investment income, partially offset by the elimination of fuel costs (due to
assigning leasehold interests in generating assets to FGCO) and decreases in
other operating expenses.
 
 Revenues
 
 Revenues decreased
by $4 million, or 1%, in the first three months of 2008 compared to the
same period of 2007 primarily due to a decrease in wholesale generation revenues
($32 million), partially offset by an increase in retail generation
revenues ($18 million) and distribution revenues
($10 million).
 
 Wholesale generation
revenues decreased due to the assignment of CEI’s leasehold interests in the
Bruce Mansfield Plant to FGCO on October 16, 2007. Prior to the assignment,
CEI sold power from its interests in the plant to FGCO.
 
 Retail generation
revenues increased in the first three months of 2008 due to higher average unit
prices across all customer classes and increased sales volume to residential and
commercial customers compared to the same period of 2007. The higher average
unit prices included the 2008 fuel cost recovery rider that became effective
January 16, 2008 (see “Regulatory Matters – Ohio” within the Combined
Management’s Discussion and Analysis of Registrant Subsidiaries). More
weather-related usage in the first three months of 2008 compared to the same
period of 2007 primarily contributed to the increased sales volume in the
residential and commercial sectors  (heating degree days increased
1.7% from the same period in 2007).
 
 Increases in retail
generation sales and revenues in the first three months of 2008 compared to the
same period in 2007 are summarized in the following tables:
 
 Retail
      Generation KWH Sales
              
              IncreaseResidential
              
              
              3.0
              %Commercial
              
              
              1.8
              %Industrial
              
              
              1.0
              %Increase
      in Retail Generation Sales
              
              
              1.8
              %
 
 
 Retail
      Generation Revenues
              
              Increase(in
      millions)Residential
              
              $
              7Commercial
              
              
              4Industrial
              
              
              7Increase in Generation Revenues
              
              $
              18
 
 Revenues from
distribution throughput increased by $10 million in the first three months
of 2008 compared to the same period of 2007 primarily due higher average unit
prices for all customer classes and higher KWH deliveries to residential and
commercial customers. The higher average unit prices resulted from a
transmission rider increase effective July 1, 2007. The higher KWH
deliveries to residential and commercial customers in the first three months of
2008 reflected the weather impacts described above.
 
 51
 
 
 Changes in
distribution KWH deliveries and revenues in the first three months of 2008
compared to the corresponding period of 2007 are summarized in the following
tables.
 
 Distribution
      KWH Deliveries
              
              IncreaseResidential
              
              
              3.0
              %Commercial
              
              
              1.3
              %Industrial
              
              
              1.0
              %Increase
      in Distribution Deliveries
              
              
              1.7
              %
 
 
 Distribution
      Revenues
              
              Increase(In
      millions)Residential
              
              $
              4Commercial
              
              
              3Industrial
              
              
              3Net
      Increase in Distribution Revenues
              
              $
              10
 
 Expenses
 
 Total expenses
increased by $1 million in the first three months of 2008 compared to the
same period of 2007. The following table presents the change from the prior year
by expense category:
 
 Expenses  -
      Changes
              
              Increase
                (Decrease)(in
      millions)Fuel
      costs
              
              $
              (13
              )Purchased
      power costs
              
              
              13Other
      operating costs
              
              
              (10
              )Amortization
      of regulatory assets
              
              
              5Deferral of
      new regulatory assets
              
              
              5General
      taxes
              
              
              1Net
      Increase in Expenses
              
              $
              1
 
 
 The absence of fuel
costs in the first three months of 2008 was due to the assignment of CEI’s
leasehold interests in the Mansfield Plant to FGCO on October 16, 2007.
Prior to the assignment, CEI incurred fuel expenses related to its leasehold
interest in the plant. Higher purchased power costs primarily reflected higher
unit prices, as provided for under the PSA with FES. Other operating costs were
lower primarily due to the assignment of CEI’s leasehold interests in the
Mansfield plant. Higher amortization of regulatory assets were primarily due to
increased transition cost amortization due to the higher KWH sales discussed
above and increases related to the effective interest methodology. The change in
deferrals of new regulatory assets was primarily due to lower deferred MISO
expenses (more expenses currently recovered through increased transmission
tariffs) and RCP fuel costs (implementation of fuel cost recovery rider). The
change in general taxes is primarily due to higher real and personal property
taxes.
 
 Other Expense
 
 Other expense
increased by $5 million in the first three months of 2008 compared to the
same period of 2007 primarily due to lower investment income, partially offset
by a reduction in interest expense. Lower investment income is primarily the
result of principal repayments since the first quarter of 2007 on notes
receivable from associated companies. The lower interest expense is due to
long-term debt redemptions ($489 million) since the first quarter of 2007,
partially offset by a debt issuance in the first quarter of 2007 ($250
million).
 
 Legal
Proceedings
 
 See the “Regulatory
Matters,” “Environmental Matters” and “Other Legal Proceedings” sections within
the Combined Management’s Discussion and Analysis of Registrant Subsidiaries for
discussion of legal proceedings applicable to CEI.
 
 New Accounting Standards and
Interpretations
 
 See the “New
Accounting Standards and Interpretations” section within the Combined
Management’s Discussion and Analysis of Registrant Subsidiaries for discussion
of new accounting standards and interpretations applicable to CEI.
     52
 .
  
 
 Report
of Independent Registered Public Accounting Firm
 
 
 
 
 
 
 
 
 To the Stockholder
and Board of Directors of
 The Cleveland
Electric Illuminating Company:
 
 We have reviewed the
accompanying consolidated balance sheet of The Cleveland Electric Illuminating
Company and its subsidiaries as of March 31, 2008 and the related consolidated
statements of income, comprehensive income and cash flows for each of the
three-month periods ended March 31, 2008 and 2007. These interim financial
statements are the responsibility of the Company’s management.
 
 We conducted our
review in accordance with the standards of the Public Company Accounting
Oversight Board (United States).  A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting
matters.  It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.  Accordingly, we
do not express such an opinion.
 
 Based on our review,
we are not aware of any material modifications that should be made to the
accompanying consolidated interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
 
 We previously
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet as of December
31, 2007, and the related consolidated statements of income, capitalization,
common stockholders’ equity, and cash flows for the year then ended (not
presented herein), and in our report (which contained references to the
Company’s change in its method of accounting for uncertain tax positions as of
January 1, 2007, defined benefit pension and other postretirement plans as of
December 31, 2006 and conditional asset retirement obligations as of December
31, 2005, as discussed in Note 8, Note 4, Note 2(G) and Note 11 to the
consolidated financial statements) dated February 28, 2008, we expressed an
unqualified opinion on those consolidated financial statements.  In
our opinion, the information set forth in the accompanying consolidated balance
sheet information as of December 31, 2007, is fairly stated in all material
respects in relation to the consolidated balance sheet from which it has been
derived.
 PricewaterhouseCoopers
      LLP
                Cleveland,
      Ohio
                May 7,
      2008
 
 
 53
 
 
 THE
      CLEVELAND ELECTRIC ILLUMINATING COMPANYCONSOLIDATED
      STATEMENTS OF INCOME AND COMPREHENSIVE INCOME(Unaudited)Three
      Months EndedMarch
      31,2008
                
                
                2007(In
      thousands)REVENUES:Electric
      sales
                
                $
                418,708
                
                
                $
                422,805Excise tax
      collections
                
                
                18,600
                
                
                
                18,027Total
      revenues
                
                
                437,308
                
                
                
                440,832EXPENSES:Fuel
                
                
                -
                
                
                
                13,191Purchased
      power
                
                
                193,244
                
                
                
                180,657Other
      operating costs
                
                
                65,118
                
                
                
                74,951Provision for
      depreciation
                
                
                19,076
                
                
                
                18,468Amortization
      of regulatory assets
                
                
                38,256
                
                
                
                33,129Deferral of
      new regulatory assets
                
                
                (29,248
                )
                
                
                (33,957
                )General
      taxes
                
                
                40,083
                
                
                
                38,894Total
      expenses
                
                
                326,529
                
                
                
                325,333OPERATING
      INCOME
                
                
                110,779
                
                
                
                115,499OTHER
      INCOME (EXPENSE):Investment
      income
                
                
                9,188
                
                
                
                17,687Miscellaneous
      income
                
                
                534
                
                
                
                731Interest
      expense
                
                
                (32,520
                )
                
                
                (35,740
                )Capitalized
      interest
                
                
                196
                
                
                
                205Total other
      expense
                
                
                (22,602
                )
                
                
                (17,117
                )INCOME
      BEFORE INCOME TAXES
                
                
                88,177
                
                
                
                98,382INCOME
      TAXES
                
                
                30,326
                
                
                
                34,833NET
      INCOME
                
                
                57,851
                
                
                
                63,549OTHER
      COMPREHENSIVE INCOME (LOSS):Pension and
      other postretirement benefits
                
                
                (213
                )
                
                
                1,202Income tax
      expense related to other comprehensive income
                
                
                281
                
                
                
                355Other
      comprehensive income (loss), net of tax
                
                
                (494
                )
                
                
                847TOTAL
      COMPREHENSIVE INCOME
                
                $
                57,357
                
                
                $
                64,396The
      accompanying Notes to Consolidated Financial Statements as they relate to
      The Cleveland Electric IlluminatingCompany are an
      integral part of these statements.
 
 54
 
  THE
      CLEVELAND ELECTRIC ILLUMINATING COMPANYCONSOLIDATED
      BALANCE SHEETS(Unaudited)March
      31,
                  
                  
                  December
      31,2008
                  
                  
                  2007(In
      thousands)ASSETSCURRENT
      ASSETS:Cash and cash
      equivalents
                  
                  $
                  241
                  
                  
                  $
                  232Receivables-Customers
      (less accumulated provisions of $7,224,000 and $7,540,000,
                  
                  
                  266,701
                  
                  
                  
                  251,000respectively,
      for uncollectible accounts)Associated
      companies
                  
                  
                  70,727
                  
                  
                  
                  166,587Other
                  
                  
                  3,643
                  
                  
                  
                  12,184Notes
      receivable from associated companies
                  
                  
                  54,679
                  
                  
                  
                  52,306Prepayments
      and other
                  
                  
                  1,728
                  
                  
                  
                  2,327397,719
                  
                  
                  
                  484,636UTILITY
      PLANT:In
      service
                  
                  
                  2,142,458
                  
                  
                  
                  2,256,956Less -
      Accumulated provision for depreciation
                  
                  
                  827,160
                  
                  
                  
                  872,8011,315,298
                  
                  
                  
                  1,384,155Construction
      work in progress
                  
                  
                  40,834
                  
                  
                  
                  41,1631,356,132
                  
                  
                  
                  1,425,318OTHER
      PROPERTY AND INVESTMENTS:Investment in
      lessor notes
                  
                  
                  425,722
                  
                  
                  
                  463,431Other
                  
                  
                  10,275
                  
                  
                  
                  10,285435,997
                  
                  
                  
                  473,716DEFERRED
      CHARGES AND OTHER ASSETS:Goodwill
                  
                  
                  1,688,521
                  
                  
                  
                  1,688,521Regulatory
      assets
                  
                  
                  853,716
                  
                  
                  
                  870,695Pension
      assets
                  
                  
                  64,497
                  
                  
                  
                  62,471Property
      taxes
                  
                  
                  76,000
                  
                  
                  
                  76,000Other
                  
                  
                  32,735
                  
                  
                  
                  32,9872,715,469
                  
                  
                  
                  2,730,674$
                  4,905,317
                  
                  
                  $
                  5,114,344LIABILITIES
      AND CAPITALIZATIONCURRENT
      LIABILITIES:Currently
      payable long-term debt
                  
                  $
                  207,281
                  
                  
                  $
                  207,266Short-term
      borrowings-Associated
      companies
                  
                  
                  365,816
                  
                  
                  
                  531,943Accounts
      payable-Associated
      companies
                  
                  
                  139,423
                  
                  
                  
                  169,187Other
                  
                  
                  6,169
                  
                  
                  
                  5,295Accrued
      taxes
                  
                  
                  118,102
                  
                  
                  
                  94,991Accrued
      interest
                  
                  
                  37,726
                  
                  
                  
                  13,895Other
                  
                  
                  35,044
                  
                  
                  
                  34,350909,561
                  
                  
                  
                  1,056,927CAPITALIZATION:Common
      stockholder's equityCommon stock,
      without par value, authorized 105,000,000 shares -67,930,743
      shares outstanding
                  
                  
                  873,353
                  
                  
                  
                  873,536Accumulated
      other comprehensive loss
                  
                  
                  (69,623
                  )
                  
                  
                  (69,129
                  )Retained
      earnings
                  
                  
                  743,278
                  
                  
                  
                  685,428Total common
      stockholder's equity
                  
                  
                  1,547,008
                  
                  
                  
                  1,489,835Long-term debt
      and other long-term obligations
                  
                  
                  1,447,980
                  
                  
                  
                  1,459,9392,994,988
                  
                  
                  
                  2,949,774NONCURRENT
      LIABILITIES:Accumulated
      deferred income taxes
                  
                  
                  719,938
                  
                  
                  
                  725,523Accumulated
      deferred investment tax credits
                  
                  
                  18,102
                  
                  
                  
                  18,567Retirement
      benefits
                  
                  
                  94,322
                  
                  
                  
                  93,456Deferred
      revenues - electric service programs
                  
                  
                  21,297
                  
                  
                  
                  27,145Lease
      assignment payable to associated companies
                  
                  
                  38,420
                  
                  
                  
                  131,773Other
                  
                  
                  108,689
                  
                  
                  
                  111,1791,000,768
                  
                  
                  
                  1,107,643COMMITMENTS
      AND CONTINGENCIES (Note 10)$
                  4,905,317
                  
                  
                  $
                  5,114,344The
      accompanying Notes to Consolidated Financial Statements as they relate to
      The Cleveland Electric IlluminatingCompany are an
      integral part of these balance sheets.
  55
 THE
      CLEVELAND ELECTRIC ILLUMINATING COMPANYCONSOLIDATED
      STATEMENTS OF CASH FLOWS(Unaudited)Three
      Months EndedMarch
      31,2008
                  
                  
                  2007(In
      thousands)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                  
                  $
                  57,851
                  
                  
                  $
                  63,549Adjustments to
      reconcile net income to net cash from operating
activities-Provision for
      depreciation
                  
                  
                  19,076
                  
                  
                  
                  18,468Amortization
      of regulatory assets
                  
                  
                  38,256
                  
                  
                  
                  33,129Deferral of
      new regulatory assets
                  
                  
                  (29,248
                  )
                  
                  
                  (33,957
                  )Deferred rents
      and lease market valuation liability
                  
                  
                  -
                  
                  
                  
                  (46,528
                  )Deferred
      income taxes and investment tax credits, net
                  
                  
                  (4,965
                  )
                  
                  
                  (5,453
                  )Accrued
      compensation and retirement benefits
                  
                  
                  (3,507
                  )
                  
                  
                  (890
                  )Pension trust
      contribution
                  
                  
                  -
                  
                  
                  
                  (24,800
                  )Decrease in
      operating assets-Receivables
                  
                  
                  90,280
                  
                  
                  
                  224,011Prepayments
      and other current assets
                  
                  
                  604
                  
                  
                  
                  592Increase
      (decrease) in operating liabilities-Accounts
      payable
                  
                  
                  (28,889
                  )
                  
                  
                  (256,808
                  )Accrued
      taxes
                  
                  
                  23,196
                  
                  
                  
                  13,959Accrued
      interest
                  
                  
                  23,831
                  
                  
                  
                  18,122Electric
      service prepayment programs
                  
                  
                  (5,847
                  )
                  
                  
                  (5,313
                  )Other
                  
                  
                  (63
                  )
                  
                  
                  (167
                  )Net cash
      provided from (used for) operating activities
                  
                  
                  180,575
                  
                  
                  
                  (2,086
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:New
      Financing-Long-term
      debt
                  
                  
                  -
                  
                  
                  
                  247,715Redemptions
      and Repayments-Long-term
      debt
                  
                  
                  (165
                  )
                  
                  
                  (150
                  )Short-term
      borrowings, net
                  
                  
                  (177,960
                  )
                  
                  
                  (130,585
                  )Dividend
      Payments-Common
      stock
                  
                  
                  -
                  
                  
                  
                  (24,000
                  )Net cash
      provided from (used for) financing activities
                  
                  
                  (178,125
                  )
                  
                  
                  92,980CASH
      FLOWS FROM INVESTING ACTIVITIES:Property
      additions
                  
                  
                  (37,203
                  )
                  
                  
                  (36,682
                  )Loans to
      associated companies, net
                  
                  
                  (2,373
                  )
                  
                  
                  (231,907
                  )Collection of
      principal on long-term notes receivable
                  
                  
                  -
                  
                  
                  
                  133,341Redemptions of
      lessor notes
                  
                  
                  37,709
                  
                  
                  
                  35,614Other
                  
                  
                  (574
                  )
                  
                  
                  9,294Net cash used
      for investing activities
                  
                  
                  (2,441
                  )
                  
                  
                  (90,340
                  )Net increase
      in cash and cash equivalents
                  
                  
                  9
                  
                  
                  
                  554Cash and cash
      equivalents at beginning of period
                  
                  
                  232
                  
                  
                  
                  221Cash and cash
      equivalents at end of period
                  
                  $
                  241
                  
                  
                  $
                  775The
      accompanying Notes to Consolidated Financial Statements as they relate to
      The Cleveland Electric IlluminatingCompany are an
      integral part of these statements.
 
  
 56
 
 
 THE
TOLEDO EDISON COMPANY
 
 MANAGEMENT’S
      NARRATIVE
 ANALYSIS
      OF RESULTS OF OPERATIONS
 
 
 TE is a wholly owned
electric utility subsidiary of FirstEnergy. TE conducts business in northwestern
Ohio, providing regulated electric distribution services. TE also provides
generation services to those customers electing to retain TE as their power
supplier. TE’s power supply requirements are provided by FES – an affiliated
company.
 
 Results of
Operations
 
 Net income in the
first three months of 2008 decreased to $17million from $26million in the same
period of 2007. The decrease resulted primarily from lower electric sales
revenues, higher purchased power costs and a decrease in the deferral of new
regulatory assets, partially offset by lower fuel, nuclear and other operating
costs.
 
 Revenues
 
 Revenues decreased
$29million, or
12%, in the first three months of 2008 compared to the same period of 2007
primarily due to lower wholesale generation revenues ($45 million),
partially offset by increased retail generation revenues ($11million) and
distribution revenues ($4million).
 
 The decrease in
wholesale revenues resulted primarily from the termination of TE’s Beaver Valley
Unit 2 sale agreement with CEI at the end of 2007 ($26 million) and lower PSA
sales to FES in the first three months of 2008 ($20 million) due to the
assignment of TE’s leasehold interests in the Bruce Mansfield Plant to FGCO
effective October 16, 2007. In 2008, TE is selling the 158 MW entitlement
from its 18.26% leasehold interest in Beaver Valley Unit 2 to NGC.
 
 Retail generation
revenues increased in the first three months of 2008 due to higher average
prices across all customer classes and increased KWH sales to residential and
commercial customers compared to the same period of 2007. Industrial KWH sales
decreased due in part to a maintenance outage for a large industrial customer
during the first quarter of 2008. The higher average prices included the 2008
fuel cost recovery rider that became effective January 16, 2008 (see
“Regulatory Matters – Ohio” within the Combined Management’s Discussion and
Analysis of Registrant Subsidiaries). The increase in sales volume reflects
increased weather-related usage in the first three months of 2008 (heating
degree days increased 3.3% from the same period of 2007).
 
 Changes in retail
electric generation KWH sales and revenues in the first three months of 2008
from the same period of 2007 are summarized in the following
tables.
 
 IncreaseRetail
      Generation KWH Sales
              
              (Decrease)Residential
              
              
              4.4
              %Commercial
              
              
              5.6
              %Industrial
              
              
              (4.3
              )%Net
      Decrease in Retail Generation Sales
              
              
              (0.1
              )%
 
 Retail
      Generation Revenues
              
              Increase(In
      millions)Residential
              
              $
              4Commercial
              
              
              3Industrial
              
              
              4Increase
      in Retail Generation Revenues
              
              $
              11
 
 Revenues from
distribution throughput increased by $4 million in the first three months
of 2008 compared to the same period in 2007 due to higher average unit prices
for all customer classes and higher KWH deliveries to residential and commercial
customers. The higher average prices resulted from a transmission rider increase
effective July 1, 2007. The higher KWH deliveries to residential and
commercial customers in the first three months of 2008 reflected the weather
impacts described above.
 
 57
 
 
 Changes in
distribution KWH deliveries and revenues in the first three months of 2008 from
the same period of 2007 are summarized in the following tables.
 
 IncreaseDistribution
      KWH Deliveries
              
              (Decrease)Residential
              
              
              3.6
              %Commercial
              
              
              2.3
              %Industrial
              
              
              (4.0
              )%Net
      Decrease in Distribution Deliveries
              
              
              (0.4
              )%
 
 Distribution
      Revenues
              
              Increase
      (Decrease)(In
      millions)Residential
              
              $
              3Commercial
              
              
              2Industrial
              
              
              (1
              )Net
      Increase in Distribution Revenues
              
              $
              4
 
 Expenses
 
 Total expenses
decreased $15 million in the first three months of 2008 from the same
period of 2007. The following table presents changes from the prior year by
expense category.
 
 Expenses
      – Changes
              
              Increase
      (Decrease)(In
      millions)Fuel
      costs
              
              $
              (9
              )Purchased
      power costs
              
              
              5Nuclear
      operating costs
              
              
              (7
              )Other
      operating costs
              
              
              (10
              )Amortization
      of regulatory assets
              
              
              1Deferral of
      new regulatory assets
              
              
              4General
      taxes
              
              
              1Net
      Decrease in Expenses
              
              $
              (15
              )
 
 Lower fuel costs in
the first three months of 2008 compared to the same period of 2007 were due to
the assignment of TE’s leasehold interests in the Mansfield Plant to FGCO in
October 2007. Higher purchased power costs reflected higher unit prices as
provided for under the PSA with FES and a 1.8% increase in KWH purchases.
Nuclear operating expenses decreased primarily due to the reversal
($8 million) of the above-market lease liability associated with TE’s
leasehold interest in Beaver Valley Unit 2 related to the termination of the CEI
sale agreement discussed above. Other operating costs were lower primarily due
to the assignment of TE’s leasehold interests in the Mansfield Plant
($9 million). The change in the deferral of new regulatory assets was
primarily due to lower deferred RCP distribution costs ($3 million) and
fuel costs ($1 million).
 
 Other Expense
 
 Other expense
decreased $2million in the first
three months of 2008 compared to the same period of 2007 primarily due to lower
interest expense, partially offset by lower investment income. The lower
interest expense resulted from the redemption of long-term debt
($85 million principal amount) since the first quarter of 2007. The
decrease in investment income resulted primarily from the principal repayments
since the first quarter of 2007 on notes receivable from associated
companies.
 
 Legal
Proceedings
 
 See the “Regulatory
Matters,” “Environmental Matters” and “Other Legal Proceedings” sections within
the Combined Management’s Discussion and Analysis of Registrant Subsidiaries for
discussion of legal proceedings applicable to TE.
 
 New Accounting Standards and
Interpretations
 
 See the “New
Accounting Standards and Interpretations” section within the Combined
Management’s Discussion and Analysis of Registrant Subsidiaries for discussion
of new accounting standards and interpretations applicable to TE.
 .
   58
 
  
 Report
of Independent Registered Public Accounting Firm
 
 
 
 
 
 
 
 
 To the Stockholder
and Board of
 Directors of The
Toledo Edison Company:
 
 We have reviewed the
accompanying consolidated balance sheet of The Toledo Edison Company and its
subsidiary as of March 31, 2008 and the related consolidated statements of
income, comprehensive income and cash flows for each of the three-month periods
ended March 31, 2008 and 2007. These interim financial statements are the
responsibility of the Company’s management.
 
 We conducted our
review in accordance with the standards of the Public Company Accounting
Oversight Board (United States).  A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting
matters.  It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.  Accordingly, we
do not express such an opinion.
 
 Based on our review,
we are not aware of any material modifications that should be made to the
accompanying consolidated interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
 
 We previously
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet as of December
31, 2007, and the related consolidated statements of income, capitalization,
common stockholders’ equity, and cash flows for the year then ended (not
presented herein), and in our report (which contained references to the
Company’s change in its method of accounting for uncertain tax positions as of
January 1, 2007 and defined benefit pension and other postretirement plans as of
December 31, 2006, as discussed in Note 8 and Note 4 to the consolidated
financial statements) dated February 28, 2008, we expressed an unqualified
opinion on those consolidated financial statements.  In our opinion,
the information set forth in the accompanying consolidated balance sheet
information as of December 31, 2007, is fairly stated in all material respects
in relation to the consolidated balance sheet from which it has been
derived.
 PricewaterhouseCoopers
      LLP
                Cleveland,
      Ohio
                May 7,
      2008
 
 
 59
 
 THE
      TOLEDO EDISON COMPANYCONSOLIDATED
      STATEMENTS OF INCOME AND COMPREHENSIVE INCOME(Unaudited)Three
      Months EndedMarch
      31,2008
                  
                  
                  2007(In
      thousands)REVENUES:Electric
      sales
                  
                  $
                  203,669
                  
                  
                  $
                  233,056Excise tax
      collections
                  
                  
                  8,025
                  
                  
                  
                  7,400Total
      revenues
                  
                  
                  211,694
                  
                  
                  
                  240,456EXPENSES:Fuel
                  
                  
                  1,482
                  
                  
                  
                  10,147Purchased
      power
                  
                  
                  101,298
                  
                  
                  
                  96,169Nuclear
      operating costs
                  
                  
                  10,457
                  
                  
                  
                  17,721Other
      operating costs
                  
                  
                  33,390
                  
                  
                  
                  42,921Provision for
      depreciation
                  
                  
                  9,025
                  
                  
                  
                  9,117Amortization
      of regulatory assets
                  
                  
                  25,025
                  
                  
                  
                  23,876Deferral of
      new regulatory assets
                  
                  
                  (9,494
                  )
                  
                  
                  (13,481
                  )General
      taxes
                  
                  
                  14,377
                  
                  
                  
                  13,734Total
      expenses
                  
                  
                  185,560
                  
                  
                  
                  200,204OPERATING
      INCOME
                  
                  
                  26,134
                  
                  
                  
                  40,252OTHER
      INCOME (EXPENSE):Investment
      income
                  
                  
                  6,481
                  
                  
                  
                  7,225Miscellaneous
      expense
                  
                  
                  (1,514
                  )
                  
                  
                  (3,100
                  )Interest
      expense
                  
                  
                  (6,035
                  )
                  
                  
                  (7,503
                  )Capitalized
      interest
                  
                  
                  37
                  
                  
                  
                  83Total other
      expense
                  
                  
                  (1,031
                  )
                  
                  
                  (3,295
                  )INCOME
      BEFORE INCOME TAXES
                  
                  
                  25,103
                  
                  
                  
                  36,957INCOME
      TAXES
                  
                  
                  8,088
                  
                  
                  
                  11,097NET
      INCOME
                  
                  
                  17,015
                  
                  
                  
                  25,860OTHER
      COMPREHENSIVE INCOME (LOSS):Pension and
      other postretirement benefits
                  
                  
                  (63
                  )
                  
                  
                  573Change in
      unrealized gain on available-for-sale securities
                  
                  
                  1,961
                  
                  
                  
                  379Other
      comprehensive income
                  
                  
                  1,898
                  
                  
                  
                  952Income tax
      expense related to other comprehensive income
                  
                  
                  728
                  
                  
                  
                  334Other
      comprehensive income, net of tax
                  
                  
                  1,170
                  
                  
                  
                  618TOTAL
      COMPREHENSIVE INCOME
                  
                  $
                  18,185
                  
                  
                  $
                  26,478The
      accompanying Notes to Consolidated Financial Statements as they relate to
      The Toledo Edison Companyare an
      integral part of these statements.
  60
 THE
      TOLEDO EDISON COMPANYCONSOLIDATED
      BALANCE SHEETS(Unaudited)March
      31,
                  
                  
                  December
      31,2008
                  
                  
                  2007(In
      thousands)ASSETSCURRENT
      ASSETS:Cash and cash
      equivalents
                  
                  $
                  213
                  
                  
                  $
                  22Receivables-Customers
                  
                  
                  966
                  
                  
                  
                  449Associated
      companies
                  
                  
                  42,232
                  
                  
                  
                  88,796Other (less
      accumulated provisions of $471,000 and $615,000,respectively,
      for uncollectible accounts)
                  
                  
                  4,241
                  
                  
                  
                  3,116Notes
      receivable from associated companies
                  
                  
                  107,664
                  
                  
                  
                  154,380Prepayments
      and other
                  
                  
                  684
                  
                  
                  
                  865156,000
                  
                  
                  
                  247,628UTILITY
      PLANT:In
      service
                  
                  
                  854,457
                  
                  
                  
                  931,263Less -
      Accumulated provision for depreciation
                  
                  
                  397,670
                  
                  
                  
                  420,445456,787
                  
                  
                  
                  510,818Construction
      work in progress
                  
                  
                  28,735
                  
                  
                  
                  19,740485,522
                  
                  
                  
                  530,558OTHER
      PROPERTY AND INVESTMENTS:Investment in
      lessor notes
                  
                  
                  142,657
                  
                  
                  
                  154,646Long-term
      notes receivable from associated companies
                  
                  
                  37,457
                  
                  
                  
                  37,530Nuclear plant
      decommissioning trusts
                  
                  
                  69,491
                  
                  
                  
                  66,759Other
                  
                  
                  1,734
                  
                  
                  
                  1,756251,339
                  
                  
                  
                  260,691DEFERRED
      CHARGES AND OTHER ASSETS:Goodwill
                  
                  
                  500,576
                  
                  
                  
                  500,576Regulatory
      assets
                  
                  
                  187,579
                  
                  
                  
                  203,719Pension
      assets
                  
                  
                  29,420
                  
                  
                  
                  28,601Property
      taxes
                  
                  
                  21,010
                  
                  
                  
                  21,010Other
                  
                  
                  28,959
                  
                  
                  
                  20,496767,544
                  
                  
                  
                  774,402$
                  1,660,405
                  
                  
                  $
                  1,813,279LIABILITIES
      AND CAPITALIZATIONCURRENT
      LIABILITIES:Currently
      payable long-term debt
                  
                  $
                  34
                  
                  
                  $
                  34Accounts
      payable-Associated
      companies
                  
                  
                  56,448
                  
                  
                  
                  245,215Other
                  
                  
                  3,973
                  
                  
                  
                  4,449Notes payable
      to associated companies
                  
                  
                  66,217
                  
                  
                  
                  13,396Accrued
      taxes
                  
                  
                  37,085
                  
                  
                  
                  30,245Lease market
      valuation liability
                  
                  
                  36,900
                  
                  
                  
                  36,900Other
                  
                  
                  51,563
                  
                  
                  
                  22,747252,220
                  
                  
                  
                  352,986CAPITALIZATION:Common
      stockholder's equity-Common stock,
      $5 par value, authorized 60,000,000 shares -29,402,054
      shares outstanding
                  
                  
                  147,010
                  
                  
                  
                  147,010Other paid-in
      capital
                  
                  
                  173,141
                  
                  
                  
                  173,169Accumulated
      other comprehensive loss
                  
                  
                  (9,436
                  )
                  
                  
                  (10,606
                  )Retained
      earnings
                  
                  
                  192,633
                  
                  
                  
                  175,618Total common
      stockholder's equity
                  
                  
                  503,348
                  
                  
                  
                  485,191Long-term debt
      and other long-term obligations
                  
                  
                  303,392
                  
                  
                  
                  303,397806,740
                  
                  
                  
                  788,588NONCURRENT
      LIABILITIES:Accumulated
      deferred income taxes
                  
                  
                  99,732
                  
                  
                  
                  103,463Accumulated
      deferred investment tax credits
                  
                  
                  9,967
                  
                  
                  
                  10,180Lease market
      valuation liability
                  
                  
                  300,775
                  
                  
                  
                  310,000Retirement
      benefits
                  
                  
                  64,422
                  
                  
                  
                  63,215Asset
      retirement obligations
                  
                  
                  28,744
                  
                  
                  
                  28,366Deferred
      revenues - electric service programs
                  
                  
                  9,969
                  
                  
                  
                  12,639Lease
      assignment payable to associated companies
                  
                  
                  28,835
                  
                  
                  
                  83,485Other
                  
                  
                  59,001
                  
                  
                  
                  60,357601,445
                  
                  
                  
                  671,705COMMITMENTS
      AND CONTINGENCIES (Note 10)$
                  1,660,405
                  
                  
                  $
                  1,813,279The
      accompanying Notes to Consolidated Financial Statements as they relate to
      The Toledo Edison Companyare an
      integral part of these balance sheets.
  61
   THE
      TOLEDO EDISON COMPANYCONSOLIDATED
      STATEMENTS OF CASH FLOWS(Unaudited)Three
      Months EndedMarch
      31,2008
                  
                  
                  2007(In
      thousands)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                  
                  $
                  17,015
                  
                  
                  $
                  25,860Adjustments to
      reconcile net income to net cash from operating
activities-Provision for
      depreciation
                  
                  
                  9,025
                  
                  
                  
                  9,117Amortization
      of regulatory assets
                  
                  
                  25,025
                  
                  
                  
                  23,876Deferral of
      new regulatory assets
                  
                  
                  (9,494
                  )
                  
                  
                  (13,481
                  )Deferred rents
      and lease market valuation liability
                  
                  
                  6,099
                  
                  
                  
                  (10,891
                  )Deferred
      income taxes and investment tax credits, net
                  
                  
                  (3,404
                  )
                  
                  
                  (3,639
                  )Accrued
      compensation and retirement benefits
                  
                  
                  (1,813
                  )
                  
                  
                  (756
                  )Pension trust
      contribution
                  
                  
                  -
                  
                  
                  
                  (7,659
                  )Decrease in
      operating assets-Receivables
                  
                  
                  45,738
                  
                  
                  
                  158Prepayments
      and other current assets
                  
                  
                  181
                  
                  
                  
                  312Increase
      (decrease) in operating liabilities-Accounts
      payable
                  
                  
                  (189,243
                  )
                  
                  
                  (17,533
                  )Accrued
      taxes
                  
                  
                  6,840
                  
                  
                  
                  9,379Accrued
      interest
                  
                  
                  4,663
                  
                  
                  
                  3,951Electric
      service prepayment programs
                  
                  
                  (2,670
                  )
                  
                  
                  (2,616
                  )Other
                  
                  
                  991
                  
                  
                  
                  (541
                  )Net cash
      provided from (used for) operating activities
                  
                  
                  (91,047
                  )
                  
                  
                  15,537CASH
      FLOWS FROM FINANCING ACTIVITIES:New
      Financing-Short-term
      borrowings, net
                  
                  
                  52,821
                  
                  
                  
                  -Redemptions
      and Repayments-Long-term
      debt
                  
                  
                  (9
                  )
                  
                  
                  -Short-term
      borrowings, net
                  
                  
                  -
                  
                  
                  
                  (46,518
                  )Net cash
      provided from (used for) financing activities
                  
                  
                  52,812
                  
                  
                  
                  (46,518
                  )CASH
      FLOWS FROM INVESTING ACTIVITIES:Property
      additions
                  
                  
                  (19,435
                  )
                  
                  
                  (6,064
                  )Loans
      repayments from (loans to) associated companies, net
                  
                  
                  46,789
                  
                  
                  
                  (8,583
                  )Collection of
      principal on long-term notes receivable
                  
                  
                  -
                  
                  
                  
                  32,202Redemption of
      lessor notes
                  
                  
                  11,989
                  
                  
                  
                  14,804Sales of
      investment securities held in trusts
                  
                  
                  3,908
                  
                  
                  
                  16,863Purchases of
      investment securities held in trusts
                  
                  
                  (4,715
                  )
                  
                  
                  (17,642
                  )Other
                  
                  
                  (110
                  )
                  
                  
                  (420
                  )Net cash
      provided from investing activities
                  
                  
                  38,426
                  
                  
                  
                  31,160Net increase
      in cash and cash equivalents
                  
                  
                  191
                  
                  
                  
                  179Cash and cash
      equivalents at beginning of period
                  
                  
                  22
                  
                  
                  
                  22Cash and cash
      equivalents at end of period
                  
                  $
                  213
                  
                  
                  $
                  201The
      accompanying Notes to Consolidated Financial Statements as they relate to
      The Toledo Edison Company are anintegral part
      of these statements.
 
 
 62
 
 
 JERSEY
CENTRAL POWER & LIGHT COMPANY
 
 MANAGEMENT’S
NARRATIVE
 ANALYSIS
OF RESULTS OF OPERATIONS
 
 
 JCP&L is a
wholly owned, electric utility subsidiary of FirstEnergy. JCP&L conducts
business in New Jersey, providing regulated electric transmission and
distribution services. JCP&L also provides generation services to those
customers electing to retain JCP&L as their power supplier.
 
 Results of
Operations
 
 Net income for the
first three months of 2008 decreased to $34million from $38million in the same
period in 2007. The decrease was primarily due to higher other operating costs,
partially offset by higher non-generation revenues.
 
 Revenues
 
 In the first three
months of 2008, revenues increased $111million, or 16.5%, as
compared with the same period of 2007. Retail and wholesale generation revenues
increased by $73million and $38million, respectively,
in the first three months of 2008.
 
 Retail generation
revenues from all customer classes increased in the first three months of 2008
compared to the same period of 2007 due to higher unit prices resulting from the
BGS auction effective June 1, 2007, partially offset by a slight decrease
in retail generation KWH sales. Sales volume decreased primarily due to milder
weather in the first three months of 2008 (heating degree days were 6.7% lower
than the first three months of 2007) and an increase in customer shopping in the
commercial and industrial customer sectors by 3.6 percentage points and 3.0
percentage points, respectively.
 
 Wholesale generation
revenues increased $38million in the first
three months of 2008 due to higher market prices, partially offset by a slight
decrease in sales volumes as compared to the first three months of
2007.
 
 Changes in retail
generation KWH sales and revenues by customer class in the first three months of
2008 compared to the same period of 2007 are summarized in the following
tables:
 
 Retail
      Generation KWH Sales
              
              Increase
                (Decrease)Residential
              
              
              0.1
              %Commercial
              
              
              (3.4
              )%Industrial
              
              
              (12.4
              )%Net
      Decrease in Generation Sales
              
              
              (1.9
              )%
 
 Retail
      Generation Revenues
              
              Increase(In
      millions)Residential
              
              $
              43Commercial
              
              
              28Industrial
              
              
              2Increase
      in Generation Revenues
              
              $
              73
 
 Distribution
revenues increased in the first three months of 2008 as compared to the same
period of 2007 due to slight increases in composite unit prices and KWH
deliveries.
 
 Changes in
distribution KWH deliveries in the first three months of 2008 compared to the
same period in 2007 are summarized in the following table:
 
 IncreaseDistribution
      KWH Deliveries
              
              (Decrease)Residential
              
              
              
              0.1
              %Commercial
              
              
              
              1.2
              %Industrial
              
              
              
              (1.3
              )%Net
      Increase in Distribution Deliveries
              
              
              
              0.4
              %
 
 63
 
 
 Expenses
 
 Total expenses
increased by $113 million in the first three months of 2008 as compared to
the same period of 2007. The following table presents changes from the prior
year period by expense category:
 
 Expenses  -
      Changes
              
              
              Increase
                (Decrease)(In
      millions)Purchased
      power costs
              
              
              $
              110Other
      operating costs
              
              
              
              4Provision for
      depreciation
              
              
              
              3Amortization
      of regulatory assets
              
              
              
              (4
              )Net
      increase in expenses
              
              
              $
              113
 
 Purchased power
costs increased in the first three months of 2008 primarily due to higher unit
prices resulting from the BGS auction effective June 1, 2007, partially
offset by a decrease in purchases due to the lower KWH sales discussed above.
Other operating costs increased in the first three months of 2008 primarily due
to higher expenses related to JCP&L’s customer assistance programs.
Depreciation expense increased primarily due to an increase in depreciable
property since the first quarter of 2007. Amortization of regulatory assets
decreased in the first three months of 2008 primarily due to the completion in
December 2007 of certain regulatory asset amortizations associated with
TMI-2.
 
 Other Expenses
 
 Other expenses
increased by $6million in the first
three months of 2008 as compared to the same period in 2007 primarily due to
interest expense associated with JCP&L’s $550 million issuance of
senior notes in May 2007 ($3 million) and reduced income on life insurance
investments ($2 million).
 
 Sale of Investment
 
 On April 17, 2008,
JCP&L closed on the sale of its 86-MW Forked River Power Plant to Maxim
Power Corp. for $20 million. In conjunction with this sale, FES entered
into a 10-year tolling agreement with Maxim for the entire capacity of the
plant. The sale is subject to regulatory accounting and will not have a material
impact on the JCP&L’s earnings in the second quarter of 2008. The New Jersey
Rate Counsel has appealed the NJBPU’s approval of the sale to the Appellate
Division of the Superior Court of New Jersey, where it is currently
pending.
 
 
 Legal
Proceedings
 
 See the “Regulatory
Matters,” “Environmental Matters” and “Other Legal Proceedings” sections within
the Combined Management’s Discussion and Analysis of Registrant Subsidiaries for
discussion of other legal proceedings applicable to JCP&L.
 
 New Accounting Standards and
Interpretations
 
 See the “New
Accounting Standards and Interpretations” section within the Combined
Management’s Discussion and Analysis of Registrant Subsidiaries for discussion
of new accounting standards and interpretations applicable to
JCP&L.
 
 
 64
 
 
 
 Report
of Independent Registered Public Accounting Firm
 
 
 
 
 
 
 
 
 To the Stockholder
and Board of
 Directors of Jersey
Central Power & Light Company:
 
 We have reviewed the
accompanying consolidated balance sheet of Jersey Central Power & Light
Company and its subsidiaries as of March 31, 2008 and the related consolidated
statements of income, comprehensive income and cash flows for each of the
three-month periods ended March 31, 2008 and 2007. These interim financial
statements are the responsibility of the Company’s management.
 
 We conducted our
review in accordance with the standards of the Public Company Accounting
Oversight Board (United States).  A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting
matters.  It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.  Accordingly, we
do not express such an opinion.
 
 Based on our review,
we are not aware of any material modifications that should be made to the
accompanying consolidated interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
 
 We previously
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet as of December
31, 2007, and the related consolidated statements of income, capitalization,
common stockholders’ equity, and cash flows for the year then ended (not
presented herein), and in our report (which contained references to the
Company’s change in its method of accounting for uncertain tax positions as of
January 1, 2007 and defined benefit pension and other postretirement plans as of
December 31, 2006, as discussed in Note 8 and Note 4 to the consolidated
financial statements) dated February 28, 2008, we expressed an unqualified
opinion on those consolidated financial statements.  In our opinion,
the information set forth in the accompanying consolidated balance sheet
information as of December 31, 2007, is fairly stated in all material respects
in relation to the consolidated balance sheet from which it has been
derived.
 PricewaterhouseCoopers
      LLP
                Cleveland,
      Ohio
                May 7,
      2008
 
 
 
 
 65
 
  JERSEY
      CENTRAL POWER & LIGHT COMPANYCONSOLIDATED
      STATEMENTS OF INCOME AND COMPREHENSIVE INCOME(Unaudited)Three
      Months EndedMarch
      31,2008
                  
                  
                  2007(In
      thousands)REVENUES:Electric
      sales
                  
                  $
                  781,433
                  
                  
                  $
                  670,907Excise tax
      collections
                  
                  
                  12,795
                  
                  
                  
                  12,836Total
      revenues
                  
                  
                  794,228
                  
                  
                  
                  683,743EXPENSES:Purchased
      power
                  
                  
                  496,681
                  
                  
                  
                  386,497Other
      operating costs
                  
                  
                  78,784
                  
                  
                  
                  74,651Provision for
      depreciation
                  
                  
                  23,282
                  
                  
                  
                  20,516Amortization
      of regulatory assets
                  
                  
                  91,519
                  
                  
                  
                  95,228General
      taxes
                  
                  
                  17,028
                  
                  
                  
                  16,999Total
      expenses
                  
                  
                  707,294
                  
                  
                  
                  593,891OPERATING
      INCOME
                  
                  
                  86,934
                  
                  
                  
                  89,852OTHER
      INCOME (EXPENSE):Miscellaneous
      income (expense)
                  
                  
                  (389
                  )
                  
                  
                  3,061Interest
      expense
                  
                  
                  (24,464
                  )
                  
                  
                  (22,416
                  )Capitalized
      interest
                  
                  
                  276
                  
                  
                  
                  513Total other
      expense
                  
                  
                  (24,577
                  )
                  
                  
                  (18,842
                  )INCOME
      BEFORE INCOME TAXES
                  
                  
                  62,357
                  
                  
                  
                  71,010INCOME
      TAXES
                  
                  
                  28,403
                  
                  
                  
                  32,664NET
      INCOME
                  
                  
                  33,954
                  
                  
                  
                  38,346OTHER
      COMPREHENSIVE INCOME (LOSS):Pension and
      other postretirement benefits
                  
                  
                  (3,449
                  )
                  
                  
                  (2,115
                  )Unrealized
      gain on derivative hedges
                  
                  
                  69
                  
                  
                  
                  97Other
      comprehensive loss
                  
                  
                  (3,380
                  )
                  
                  
                  (2,018
                  )Income tax
      benefit related to other comprehensive loss
                  
                  
                  (1,470
                  )
                  
                  
                  (984
                  )Other
      comprehensive loss, net of tax
                  
                  
                  (1,910
                  )
                  
                  
                  (1,034
                  )TOTAL
      COMPREHENSIVE INCOME
                  
                  $
                  32,044
                  
                  
                  $
                  37,312The
      accompanying Notes to Consolidated Financial Statements as they relate to
      Jersey Central Power & Light Companyare an
      integral part of these statements.
  66
 JERSEY
      CENTRAL POWER & LIGHT COMPANYCONSOLIDATED
      BALANCE SHEETS(Unaudited)March
      31,
                  
                  
                  December
      31,2008
                  
                  
                  2007(In
      thousands)ASSETSCURRENT
      ASSETS:Cash and cash
      equivalents
                  
                  $
                  40
                  
                  
                  $
                  94Receivables-Customers
      (less accumulated provisions of $3,400,000 and $3,691,000,respectively,
      for uncollectible accounts)
                  
                  
                  299,104
                  
                  
                  
                  321,026Associated
      companies
                  
                  
                  1,757
                  
                  
                  
                  21,297Other
                  
                  
                  53,553
                  
                  
                  
                  59,244Notes
      receivable - associated companies
                  
                  
                  18,410
                  
                  
                  
                  18,428Prepaid
      taxes
                  
                  
                  1,302
                  
                  
                  
                  1,012Other
                  
                  
                  20,609
                  
                  
                  
                  17,603394,775
                  
                  
                  
                  438,704UTILITY
      PLANT:In
      service
                  
                  
                  4,208,016
                  
                  
                  
                  4,175,125Less -
      Accumulated provision for depreciation
                  
                  
                  1,524,495
                  
                  
                  
                  1,516,9972,683,521
                  
                  
                  
                  2,658,128Construction
      work in progress
                  
                  
                  98,143
                  
                  
                  
                  90,5082,781,664
                  
                  
                  
                  2,748,636OTHER
      PROPERTY AND INVESTMENTS:Nuclear fuel
      disposal trust
                  
                  
                  176,107
                  
                  
                  
                  176,512Nuclear plant
      decommissioning trusts
                  
                  
                  168,056
                  
                  
                  
                  175,869Other
                  
                  
                  2,054
                  
                  
                  
                  2,083346,217
                  
                  
                  
                  354,464DEFERRED
      CHARGES AND OTHER ASSETS:Regulatory
      assets
                  
                  
                  1,475,802
                  
                  
                  
                  1,595,662Goodwill
                  
                  
                  1,825,716
                  
                  
                  
                  1,826,190Pension
      assets
                  
                  
                  106,211
                  
                  
                  
                  100,615Other
                  
                  
                  15,107
                  
                  
                  
                  16,3073,422,836
                  
                  
                  
                  3,538,774$
                  6,945,492
                  
                  
                  $
                  7,080,578LIABILITIES
      AND CAPITALIZATIONCURRENT
      LIABILITIES:Currently
      payable long-term debt
                  
                  $
                  27,735
                  
                  
                  $
                  27,206Short-term
      borrowings-Associated
      companies
                  
                  
                  82,380
                  
                  
                  
                  130,381Accounts
      payable-Associated
      companies
                  
                  
                  18,699
                  
                  
                  
                  7,541Other
                  
                  
                  168,178
                  
                  
                  
                  193,848Accrued
      taxes
                  
                  
                  32,968
                  
                  
                  
                  3,124Accrued
      interest
                  
                  
                  26,656
                  
                  
                  
                  9,318Other
                  
                  
                  107,879
                  
                  
                  
                  103,286464,495
                  
                  
                  
                  474,704CAPITALIZATION:Common
      stockholder's equity-Common stock,
      $10 par value, authorized 16,000,000 shares-14,421,637
      shares outstanding
                  
                  
                  144,216
                  
                  
                  
                  144,216Other paid-in
      capital
                  
                  
                  2,655,248
                  
                  
                  
                  2,655,941Accumulated
      other comprehensive loss
                  
                  
                  (21,791
                  )
                  
                  
                  (19,881
                  )Retained
      earnings
                  
                  
                  201,542
                  
                  
                  
                  237,588Total common
      stockholder's equity
                  
                  
                  2,979,215
                  
                  
                  
                  3,017,864Long-term debt
      and other long-term obligations
                  
                  
                  1,554,064
                  
                  
                  
                  1,560,3104,533,279
                  
                  
                  
                  4,578,174NONCURRENT
      LIABILITIES:Power purchase
      contract loss liability
                  
                  
                  682,481
                  
                  
                  
                  749,671Accumulated
      deferred income taxes
                  
                  
                  798,967
                  
                  
                  
                  800,214Nuclear fuel
      disposal costs
                  
                  
                  194,034
                  
                  
                  
                  192,402Asset
      retirement obligations
                  
                  
                  91,025
                  
                  
                  
                  89,669Other
                  
                  
                  181,211
                  
                  
                  
                  195,7441,947,718
                  
                  
                  
                  2,027,700COMMITMENTS
      AND CONTINGENCIES (Note 10)$
                  6,945,492
                  
                  
                  $
                  7,080,578The
      accompanying Notes to Consolidated Financial Statements as they relate to
      Jersey Central Power & Light Companyare an
      integral part of these balance sheets.
  67
 JERSEY
      CENTRAL POWER & LIGHT COMPANYCONSOLIDATED
      STATEMENTS OF CASH FLOWS(Unaudited)Three
      Months EndedMarch
      31,2008
                  
                  
                  2007(In
      thousands)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                  
                  $
                  33,954
                  
                  
                  $
                  38,346Adjustments to
      reconcile net income to net cash from operating
activities-Provision for
      depreciation
                  
                  
                  23,282
                  
                  
                  
                  20,516Amortization
      of regulatory assets
                  
                  
                  91,519
                  
                  
                  
                  95,228Deferred
      purchased power and other costs
                  
                  
                  (40,293
                  )
                  
                  
                  (78,303
                  )Deferred
      income taxes and investment tax credits, net
                  
                  
                  723
                  
                  
                  
                  8,076Accrued
      compensation and retirement benefits
                  
                  
                  (15,113
                  )
                  
                  
                  (8,374
                  )Cash
      collateral from (returned to) suppliers
                  
                  
                  (502
                  )
                  
                  
                  1Pension trust
      contribution
                  
                  
                  -
                  
                  
                  
                  (17,800
                  )Decrease
      (increase) in operating assets:Receivables
                  
                  
                  48,733
                  
                  
                  
                  (23,381
                  )Materials and
      supplies
                  
                  
                  255
                  
                  
                  
                  (1
                  )Prepaid
      taxes
                  
                  
                  (290
                  )
                  
                  
                  11,946Other current
      assets
                  
                  
                  (1,305
                  )
                  
                  
                  454Increase
      (decrease) in operating liabilities:Accounts
      payable
                  
                  
                  (14,511
                  )
                  
                  
                  (62,038
                  )Accrued
      taxes
                  
                  
                  29,844
                  
                  
                  
                  31,599Accrued
      interest
                  
                  
                  17,338
                  
                  
                  
                  9,794Other
                  
                  
                  13,302
                  
                  
                  
                  (555
                  )Net cash
      provided from operating activities
                  
                  
                  186,936
                  
                  
                  
                  25,508CASH
      FLOWS FROM FINANCING ACTIVITIES:New
      Financing-Short-term
      borrowings, net
                  
                  
                  -
                  
                  
                  
                  37,071Redemptions
      and Repayments-Long-term
      debt
                  
                  
                  (5,872
                  )
                  
                  
                  (9,569
                  )Short-term
      borrowings, net
                  
                  
                  (48,069
                  )
                  
                  
                  -Dividend
      Payments-Common
      stock
                  
                  
                  (70,000
                  )
                  
                  
                  (15,000
                  )Net cash
      provided from (used for) financing activities
                  
                  
                  (123,941
                  )
                  
                  
                  12,502CASH
      FLOWS FROM INVESTING ACTIVITIES:Property
      additions
                  
                  
                  (56,047
                  )
                  
                  
                  (40,015
                  )Loan
      repayments from associated companies, net
                  
                  
                  18
                  
                  
                  
                  532Sales of
      investment securities held in trusts
                  
                  
                  56,506
                  
                  
                  
                  26,436Purchases of
      investment securities held in trusts
                  
                  
                  (61,290
                  )
                  
                  
                  (30,437
                  )Other
                  
                  
                  (2,236
                  )
                  
                  
                  5,479Net cash used
      for investing activities
                  
                  
                  (63,049
                  )
                  
                  
                  (38,005
                  )Net change in
      cash and cash equivalents
                  
                  
                  (54
                  )
                  
                  
                  5Cash and cash
      equivalents at beginning of period
                  
                  
                  94
                  
                  
                  
                  41Cash and cash
      equivalents at end of period
                  
                  $
                  40
                  
                  
                  $
                  46The
      accompanying Notes to Consolidated Financial Statements as they relate to
      Jersey Central Power & Light Companyare an
      integral part of these statements.
 
 
 68
  
 
 
 METROPOLITAN
EDISON COMPANY
 
 MANAGEMENT’S
      NARRATIVE
 ANALYSIS
      OF RESULTS OF OPERATIONS
 
 
 Met-Ed is a wholly
owned electric utility subsidiary of FirstEnergy. Met-Ed conducts business in
eastern Pennsylvania, providing regulated electric transmission and distribution
services. Met-Ed also provides generation service to those customers electing to
retain Met-Ed as their power supplier.
 
 Results of
Operations
 
 Net income decreased
to $22 million in the first quarter of 2008, compared to $32million in the same
period of 2007. The decrease was primarily due to higher purchased power costs,
increased other operating costs and a decrease in the deferral of new regulatory
assets, partially offset by higher revenues.
 
 Revenues
 
 Revenues increased
by $30 million, or 8.1%, in the first quarter of 2008, compared to the same
period of 2007, primarily due to higher retail and wholesale generation revenues
combined with higher distribution throughput revenues, partially offset by a
decrease in PJM transmission revenues.
 
 In the first quarter
of 2008, retail generation revenues increased $6million primarily due to
higher KWH sales to the residential and commercial customer classes and higher
composite unit prices in all customer classes, partially offset by lower KWH
sales to the industrial customer class.
 
 Changes in retail
generation sales and revenues in the first quarter of 2008 compared to the same
period of 2007 are summarized in the following tables:
 
 IncreaseRetail
      Generation KWH Sales
              
              (Decrease)Residential
              
              
              4.6
              %Commercial
              
              
              4.1
              %Industrial
              
              
              (1.8
              )%Net
      Increase in Retail Generation Sales
              
              
              2.7
              %
 
 IncreaseRetail
      Generation Revenues
              
              (Decrease)(In
      millions)Residential
              
              $
              4Commercial
              
              
              3Industrial
              
              
              (1
              )Net
      Increase in Retail Generation Revenues
              
              $
              6
 
 Wholesale revenues
increased by $27million in the first
quarter of 2008, compared to the same period of 2007, primarily reflecting
higher spot market prices for PJM market participants.
 
 Revenues from
distribution throughput increased $4 million in the first quarter of 2008,
compared to the same period in 2007, due to higher KWH deliveries in the
residential and commercial customer classes, partially offset by decreased KWH
deliveries to industrial customers.
 
 Changes in
distribution KWH deliveries and revenues in the first quarter of 2008 compared
to the same period of 2007 are summarized in the following tables:
 
 69
 
 
 
 IncreaseDistribution
      KWH Deliveries
              
              (Decrease)Residential
              
              
              4.6
              %Commercial
              
              
              4.1
              %Industrial
              
              
              (1.8
              )%Net
      Increase in Distribution Deliveries
              
              
              2.7
              %
 
 
 Distribution
      Revenues
              
              Increase(In
      millions)Residential
              
              $
              1Commercial
              
              
              3Industrial
              
              
              -Increase
      in Distribution Revenues
              
              $
              4
 
 PJM transmission
revenues decreased by $7million in the first
quarter of 2008 compared to the same period of 2007, primarily due to decreased
PJM FTR revenue. Met-Ed defers the difference between revenue from its
transmission rider and transmission costs incurred, resulting in no material
effect to current period earnings.
 
 Operating Expenses
 
 Total operating
expenses increased by $42 million in the first quarter of 2008 compared to
the same period of 2007. The following table presents changes from the prior
year by expense category:
 
 Expenses
      – Changes
              
              Increase(In
      millions)Purchased
      power costs
              
              $
              25Other
      operating costs
              
              
              9Provision for
      depreciation
              
              
              1Amortization
      of regulatory assets
              
              
              1Deferral of
      new regulatory assets
              
              
              5General
      taxes
              
              
              1Increase
      in expenses
              
              $
              42
 
 Purchased power
costs increased by $25 million in the first quarter of 2008, primarily due to
higher composite unit prices combined with increased KWH purchased to source
increased generation sales. Other operating costs increased by $9 million in the
first quarter of 2008 primarily due to higher transmission expenses associated
with increased transmission volumes and increased labor and contractor service
expenses for storm restoration work performed during the first quarter of
2008.
 
 The deferral of new
regulatory assets decreased in the first quarter of 2008 primarily due to the
absence of the 2007 deferral of decommissioning costs ($15 million)
associated with the Saxton nuclear research facility (see Note 11(C)), partially
offset by increased transmission cost deferrals.
 
 Other Expense
 
 Other expense
increased in the first quarter of 2008 primarily due to a decrease in interest
earned on regulatory assets, reflecting a lower regulatory asset base, combined
with an increase in other expenses, primarily due to reduced income from life
insurance investments.
 
 Legal
Proceedings
 
 See the “Regulatory
Matters,” “Environmental Matters” and “Other Legal Proceedings” sections within
the Combined Management’s Discussion and Analysis of Registrant Subsidiaries for
discussion of legal proceedings applicable to Met-Ed.
 
 New Accounting Standards and
Interpretations
 
 See the “New
Accounting Standards and Interpretations” section within the Combined
Management’s Discussion and Analysis of Registrant Subsidiaries for discussion
of new accounting standards and interpretations applicable to
Met-Ed.
 
 70
 
 
 
 Report
of Independent Registered Public Accounting Firm
 
 
 
 
 
 
 
 
 To the Stockholder
and Board of
 Directors of
Metropolitan Edison Company:
 
 We have reviewed the
accompanying consolidated balance sheet of Metropolitan Edison Company and its
subsidiaries as of March 31, 2008 and the related consolidated statements of
income, comprehensive income and cash flows for each of the three-month periods
ended March 31, 2008 and 2007. These interim financial statements are the
responsibility of the Company’s management.
 
 We conducted our
review in accordance with the standards of the Public Company Accounting
Oversight Board (United States).  A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting
matters.  It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.  Accordingly, we
do not express such an opinion.
 
 Based on our review,
we are not aware of any material modifications that should be made to the
accompanying consolidated interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
 
 We previously
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet as of December
31, 2007, and the related consolidated statements of income, capitalization,
common stockholders’ equity, and cash flows for the year then ended (not
presented herein), and in our report (which contained references to the
Company’s change in its method of accounting for uncertain tax positions as of
January 1, 2007, defined benefit pension and other postretirement plans as of
December 31, 2006 and conditional asset retirement obligations as of December
31, 2005, as discussed in Note 8, Note 4, Note 2(G) and Note 11 to the
consolidated financial statements) dated February 28, 2008, we expressed an
unqualified opinion on those consolidated financial statements.  In
our opinion, the information set forth in the accompanying consolidated balance
sheet information as of December 31, 2007, is fairly stated in all material
respects in relation to the consolidated balance sheet from which it has been
derived.
 PricewaterhouseCoopers
      LLP
                Cleveland,
      Ohio
                May 7,
      2008
 
 
 71
 
 
 METROPOLITAN
      EDISON COMPANYCONSOLIDATED
      STATEMENTS OF INCOME AND COMPREHENSIVE INCOME(Unaudited)Three
      Months EndedMarch
      31,2008
                  
                  
                  2007(In
      thousands)REVENUES:Electric
      sales
                  
                  $
                  379,608
                  
                  
                  $
                  352,136Gross receipts
      tax collections
                  
                  
                  20,718
                  
                  
                  
                  18,120Total
      revenues
                  
                  
                  400,326
                  
                  
                  
                  370,256EXPENSES:Purchased
      power
                  
                  
                  216,982
                  
                  
                  
                  191,589Other
      operating costs
                  
                  
                  107,017
                  
                  
                  
                  98,018Provision for
      depreciation
                  
                  
                  11,112
                  
                  
                  
                  10,284Amortization
      of regulatory assets
                  
                  
                  35,575
                  
                  
                  
                  34,140Deferral of
      new regulatory assets
                  
                  
                  (37,772
                  )
                  
                  
                  (42,726
                  )General
      taxes
                  
                  
                  21,781
                  
                  
                  
                  21,052Total
      expenses
                  
                  
                  354,695
                  
                  
                  
                  312,357OPERATING
      INCOME
                  
                  
                  45,631
                  
                  
                  
                  57,899OTHER
      INCOME (EXPENSE):Interest
      income
                  
                  
                  5,479
                  
                  
                  
                  7,726Miscellaneous
      income (expense)
                  
                  
                  (309
                  )
                  
                  
                  1,109Interest
      expense
                  
                  
                  (11,672
                  )
                  
                  
                  (11,756
                  )Capitalized
      interest
                  
                  
                  (219
                  )
                  
                  
                  260Total other
      expense
                  
                  
                  (6,721
                  )
                  
                  
                  (2,661
                  )INCOME
      BEFORE INCOME TAXES
                  
                  
                  38,910
                  
                  
                  
                  55,238INCOME
      TAXES
                  
                  
                  16,675
                  
                  
                  
                  23,599NET
      INCOME
                  
                  
                  22,235
                  
                  
                  
                  31,639OTHER
      COMPREHENSIVE INCOME (LOSS):Pension and
      other postretirement benefits
                  
                  
                  (2,233
                  )
                  
                  
                  (1,452
                  )Unrealized
      gain on derivative hedges
                  
                  
                  84
                  
                  
                  
                  84Other
      comprehensive loss
                  
                  
                  (2,149
                  )
                  
                  
                  (1,368
                  )Income tax
      benefit related to other comprehensive loss
                  
                  
                  (970
                  )
                  
                  
                  (692
                  )Other
      comprehensive loss, net of tax
                  
                  
                  (1,179
                  )
                  
                  
                  (676
                  )TOTAL
      COMPREHENSIVE INCOME
                  
                  $
                  21,056
                  
                  
                  $
                  30,963The
      accompanying Notes to Consolidated Financial Statements as they relate to
      Metropolitan Edison Companyare an
      integral part of these statements.
  72
 METROPOLITAN
      EDISON COMPANYCONSOLIDATED
      BALANCE SHEETS(Unaudited)March
      31,
                  
                  
                  December
      31,2008
                  
                  
                  2007(In
      thousands)ASSETSCURRENT
      ASSETS:Cash and cash
      equivalents
                  
                  $
                  132
                  
                  
                  $
                  135Receivables-Customers
      (less accumulated provisions of $4,483,000 and $4,327,000,respectively,
      for uncollectible accounts)
                  
                  
                  144,865
                  
                  
                  
                  142,872Associated
      companies
                  
                  
                  55,776
                  
                  
                  
                  27,693Other
                  
                  
                  20,673
                  
                  
                  
                  18,909Notes
      receivable from associated companies
                  
                  
                  12,828
                  
                  
                  
                  12,574Prepaid
      taxes
                  
                  
                  56,202
                  
                  
                  
                  14,615Other
                  
                  
                  850
                  
                  
                  
                  1,348291,326
                  
                  
                  
                  218,146UTILITY
      PLANT:In
      service
                  
                  
                  1,997,131
                  
                  
                  
                  1,972,388Less -
      Accumulated provision for depreciation
                  
                  
                  758,228
                  
                  
                  
                  751,7951,238,903
                  
                  
                  
                  1,220,593Construction
      work in progress
                  
                  
                  32,946
                  
                  
                  
                  30,5941,271,849
                  
                  
                  
                  1,251,187OTHER
      PROPERTY AND INVESTMENTS:Nuclear plant
      decommissioning trusts
                  
                  
                  271,771
                  
                  
                  
                  286,831Other
                  
                  
                  1,377
                  
                  
                  
                  1,360273,148
                  
                  
                  
                  288,191DEFERRED
      CHARGES AND OTHER ASSETS:Goodwill
                  
                  
                  424,070
                  
                  
                  
                  424,313Regulatory
      assets
                  
                  
                  530,006
                  
                  
                  
                  494,947Pension
      assets
                  
                  
                  54,198
                  
                  
                  
                  51,427Other
                  
                  
                  31,097
                  
                  
                  
                  36,4111,039,371
                  
                  
                  
                  1,007,098$
                  2,875,694
                  
                  
                  $
                  2,764,622LIABILITIES
      AND CAPITALIZATIONCURRENT
      LIABILITIES:Short-term
      borrowings-Associated
      companies
                  
                  $
                  167,070
                  
                  
                  $
                  185,327Other
                  
                  
                  250,000
                  
                  
                  
                  100,000Accounts
      payable-Associated
      companies
                  
                  
                  25,556
                  
                  
                  
                  29,855Other
                  
                  
                  56,797
                  
                  
                  
                  66,694Accrued
      taxes
                  
                  
                  1,501
                  
                  
                  
                  16,020Accrued
      interest
                  
                  
                  7,059
                  
                  
                  
                  6,778Other
                  
                  
                  25,191
                  
                  
                  
                  27,393533,174
                  
                  
                  
                  432,067CAPITALIZATION:Common
      stockholder's equity-Common stock,
      without par value, authorized 900,000 shares-859,000 shares
      outstanding
                  
                  
                  1,202,833
                  
                  
                  
                  1,203,186Accumulated
      other comprehensive loss
                  
                  
                  (16,576
                  )
                  
                  
                  (15,397
                  )Accumulated
      deficit
                  
                  
                  (116,922
                  )
                  
                  
                  (139,157
                  )Total common
      stockholder's equity
                  
                  
                  1,069,335
                  
                  
                  
                  1,048,632Long-term debt
      and other long-term obligations
                  
                  
                  513,661
                  
                  
                  
                  542,1301,582,996
                  
                  
                  
                  1,590,762NONCURRENT
      LIABILITIES:Accumulated
      deferred income taxes
                  
                  
                  456,126
                  
                  
                  
                  438,890Accumulated
      deferred investment tax credits
                  
                  
                  8,234
                  
                  
                  
                  8,390Nuclear fuel
      disposal costs
                  
                  
                  43,831
                  
                  
                  
                  43,462Asset
      retirement obligations
                  
                  
                  163,239
                  
                  
                  
                  160,726Retirement
      benefits
                  
                  
                  7,621
                  
                  
                  
                  8,681Other
                  
                  
                  80,473
                  
                  
                  
                  81,644759,524
                  
                  
                  
                  741,793COMMITMENTS
      AND CONTINGENCIES (Note 10)$
                  2,875,694
                  
                  
                  $
                  2,764,622The
      accompanying Notes to Consolidated Financial Statements as they relate to
      Metropolitan Edison Company are an integralpart of these
      balance sheets.
  73
 METROPOLITAN
      EDISON COMPANYCONSOLIDATED
      STATEMENTS OF CASH FLOWS(Unaudited)Three
      Months EndedMarch
      31,2008
                  
                  
                  2007(In
      thousands)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                  
                  $
                  22,235
                  
                  
                  $
                  31,639Adjustments to
      reconcile net income to net cash from operating
activities-Provision for
      depreciation
                  
                  
                  11,112
                  
                  
                  
                  10,284Amortization
      of regulatory assets
                  
                  
                  35,575
                  
                  
                  
                  34,140Deferred costs
      recoverable as regulatory assets
                  
                  
                  (10,628
                  )
                  
                  
                  (19,160
                  )Deferral of
      new regulatory assets
                  
                  
                  (37,772
                  )
                  
                  
                  (42,726
                  )Deferred
      income taxes and investment tax credits, net
                  
                  
                  17,307
                  
                  
                  
                  16,178Accrued
      compensation and retirement benefits
                  
                  
                  (9,655
                  )
                  
                  
                  (7,683
                  )Cash
      collateral
                  
                  
                  -
                  
                  
                  
                  3,050Pension trust
      contribution
                  
                  
                  -
                  
                  
                  
                  (11,012
                  )Increase in
      operating assets-Receivables
                  
                  
                  (30,863
                  )
                  
                  
                  (49,818
                  )Prepayments
      and other current assets
                  
                  
                  (41,088
                  )
                  
                  
                  (27,131
                  )Increase
      (decrease) in operating liabilities-Accounts
      payable
                  
                  
                  (14,196
                  )
                  
                  
                  (58,986
                  )Accrued
      taxes
                  
                  
                  (14,519
                  )
                  
                  
                  (9,835
                  )Accrued
      interest
                  
                  
                  281
                  
                  
                  
                  1,243Other
                  
                  
                  3,892
                  
                  
                  
                  3,939Net cash used
      for operating activities
                  
                  
                  (68,319
                  )
                  
                  
                  (125,878
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:New
      Financing-Short-term
      borrowings, net
                  
                  
                  131,743
                  
                  
                  
                  150,619Redemptions
      and Repayments-Long-term
      debt
                  
                  
                  (28,515
                  )
                  
                  
                  -Net cash
      provided from financing activities
                  
                  
                  103,228
                  
                  
                  
                  150,619CASH
      FLOWS FROM INVESTING ACTIVITIES:Property
      additions
                  
                  
                  (31,296
                  )
                  
                  
                  (18,803
                  )Sales of
      investment securities held in trusts
                  
                  
                  40,513
                  
                  
                  
                  25,323Purchases of
      investment securities held in trusts
                  
                  
                  (43,391
                  )
                  
                  
                  (28,519
                  )Loans to
      associated companies, net
                  
                  
                  (254
                  )
                  
                  
                  (2,822
                  )Other
                  
                  
                  (484
                  )
                  
                  
                  79Net cash used
      for investing activities
                  
                  
                  (34,912
                  )
                  
                  
                  (24,742
                  )Net change in
      cash and cash equivalents
                  
                  
                  (3
                  )
                  
                  
                  (1
                  )Cash and cash
      equivalents at beginning of period
                  
                  
                  135
                  
                  
                  
                  130Cash and cash
      equivalents at end of period
                  
                  $
                  132
                  
                  
                  $
                  129The
      accompanying Notes to Consolidated Financial Statements as they relate to
      Metropolitan Edison Company arean integral
      part of these statements.
  
 74
  
 
 PENNSYLVANIA
ELECTRIC COMPANY
 
 MANAGEMENT’S
      NARRATIVE
 ANALYSIS
      OF RESULTS OF OPERATIONS
 
 
 Penelec is a wholly
owned electric utility subsidiary of FirstEnergy. Penelec conducts business in
northern and south central Pennsylvania, providing regulated transmission and
distribution services. Penelec also provides generation services to those
customers electing to retain Penelec as their power supplier.
 
 Results of
Operations
 
 Net income decreased
to $21 million in the first quarter of 2008, compared to $32 million in the same
period of 2007. The decrease was primarily due to increased purchased power
costs and other operating costs and a decrease in the deferral of new regulatory
assets, partially offset by higher revenues.
 
 Revenues
 
 Revenues increased
by $40 million, or 11.1%, in the first quarter of 2008 as compared to the same
time period of 2007, primarily due to higher retail and wholesale generation
revenues, distribution throughput revenues and PJM transmission
revenues.
 
 In the first quarter
of 2008, retail generation revenues increased $5 million primarily due to higher
KWH sales to the residential and commercial customer classes and higher
composite unit prices in all customer classes, partially offset by lower KWH
sales to the industrial customer class.
 
 Changes in retail
generation sales and revenues in the first quarter of 2008 compared to the same
period of 2007 are summarized in the following tables:
 
 Retail
      Generation KWH Sales
              
              Increase
                (Decrease)Residential
              
              
              4.5
              %Commercial
              
              
              3.0
              %Industrial
              
              
              (1.6
              )%Net
      Increase in Retail Generation Sales
              
              
              2.2
              %
  Retail
      Generation Revenues
              
              Increase(In
      millions)Residential
              
              $
              3Commercial
              
              
              2Industrial
              
              
              -Increase
      in Retail Generation Revenues
              
              $
              5
 
 Wholesale revenues
increased $21 million in the first quarter of 2008, compared to the same period
of 2007, primarily reflecting higher spot market prices for PJM market
participants.
 
 Revenues from
distribution throughput increased $4 million in the first quarter of 2008
compared to the same period of 2007, due to increased usage in the residential
and commercial customer classes, partially offset by decreased KWH deliveries to
industrial customers.
 
 Changes in
distribution KWH deliveries and revenues in the first quarter of 2008 compared
to the same period of 2007 are summarized in the following tables:
 
 75
 
 
 Distribution
      KWH Deliveries
              
              Increase
                (Decrease)Residential
              
              
              4.5
              %Commercial
              
              
              3.0
              %Industrial
              
              
              (1.5
              )%Net
      Increase in Retail Generation Sales
              
              
              2.1
              %
  Distribution
      Revenues
              
              Increase(In
      millions)Residential
              
              $
              2Commercial
              
              
              2Industrial
              
              
              -Increase
      in Retail Generation Revenues
              
              $
              4
 
 PJM transmission
revenues increased by $10 million in the first quarter of 2008 compared to the
same period of 2007, primarily due to higher transmission volumes. Penelec
defers the difference between revenue from its transmission rider and total
transmission costs incurred, resulting in no material effect to current period
earnings.
 
 Operating Expenses
 
 Total operating
expenses increased by $49 million in the first quarter of 2008 as compared with
the same period of 2007. The following table presents changes from the prior
year by expense category:
 
 Expenses
      - Changes
              
              Increase(In
      millions)Purchased
      power costs
              
              $
              20Other
      operating costs
              
              
              12Provision for
      depreciation
              
              
              1Amortization
      of regulatory assets
              
              
              1Deferral of
      new regulatory assets
              
              
              13General
      taxes
              
              
              2Increase
      in expenses
              
              $
              49
 
 Purchased power
costs increased by $20 million, or 10.2%, in the first quarter of 2008 compared
to the same period of 2007, primarily due to increased composite unit prices
combined with higher KWH purchases to source increased retail and wholesale
generation sales. Other operating costs increased by $12 million in the first
quarter of 2008 principally due to higher congestion costs and other
transmission expenses associated with increased transmission
volumes.
 
 The deferral of new
regulatory assets decreased in the first quarter of 2008 primarily due to the
absence of the 2007 deferral of decommissioning costs ($12 million) associated
with the Saxton nuclear research facility (see Note 11) and a decrease
in transmission cost deferrals.
 
 In the first quarter
of 2008, general taxes increased $2 million as compared to the same period of
2007, primarily due to higher gross receipts taxes.
 
 Other Expense
 
 In the first quarter
of 2008, other expense increased primarily due to higher interest expense
associated with Penelec’s $300 million senior note issuance in August 2007
and reduced income from life insurance investments.
 
 Legal
Proceedings
 
 See the “Regulatory
Matters,” “Environmental Matters” and “Other Legal Proceedings” sections within
the Combined Management’s Discussion and Analysis of Registrant Subsidiaries for
discussion of legal proceedings applicable to Penelec.
 
 New Accounting Standards and
Interpretations
 
 See the “New
Accounting Standards and Interpretations” section within the Combined
Management’s Discussion and Analysis of Registrant Subsidiaries for discussion
of new accounting standards and interpretations applicable to
Penelec.
 
 76
 
 
 
 Report
of Independent Registered Public Accounting Firm
 
 
 
 
 
 
 
 
 To the Stockholder
and Board of
 Directors of
Pennsylvania Electric Company:
 
 We have reviewed the
accompanying consolidated balance sheet of Pennsylvania Electric Company and its
subsidiaries as of March 31, 2008 and the related consolidated statements of
income, comprehensive income and cash flows for each of the three-month periods
ended March 31, 2008 and 2007. These interim financial statements are the
responsibility of the Company’s management.
 
 We conducted our
review in accordance with the standards of the Public Company Accounting
Oversight Board (United States).  A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting
matters.  It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.  Accordingly, we
do not express such an opinion.
 
 Based on our review,
we are not aware of any material modifications that should be made to the
accompanying consolidated interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
 
 We previously
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet as of December
31, 2007, and the related consolidated statements of income, capitalization,
common stockholders’ equity, and cash flows for the year then ended (not
presented herein), and in our report (which contained references to the
Company’s change in its method of accounting for uncertain tax positions as of
January 1, 2007, defined benefit pension and other postretirement plans as of
December 31, 2006 and conditional asset retirement obligations as of December
31, 2005, as discussed in Note 8, Note 4, Note 2(G) and Note 11 to the
consolidated financial statements) dated February 28, 2008, we expressed an
unqualified opinion on those consolidated financial statements.  In
our opinion, the information set forth in the accompanying consolidated balance
sheet information as of December 31, 2007, is fairly stated in all material
respects in relation to the consolidated balance sheet from which it has been
derived.
 PricewaterhouseCoopers
      LLP
                Cleveland,
      Ohio
                May 7,
      2008
 
 
 77
 
 
 PENNSYLVANIA
      ELECTRIC COMPANYCONSOLIDATED
      STATEMENTS OF INCOME AND COMPREHENSIVE INCOME(Unaudited)Three
      Months EndedMarch
      31,2008
                  
                  
                  2007(In
      thousands)REVENUES:Electric
      sales
                  
                  $
                  376,028
                  
                  
                  $
                  339,226Gross receipts
      tax collections
                  
                  
                  19,464
                  
                  
                  
                  16,680Total
      revenues
                  
                  
                  395,492
                  
                  
                  
                  355,906EXPENSES:Purchased
      power
                  
                  
                  221,234
                  
                  
                  
                  200,842Other
      operating costs
                  
                  
                  71,077
                  
                  
                  
                  59,461Provision for
      depreciation
                  
                  
                  12,516
                  
                  
                  
                  11,777Amortization
      of regulatory assets
                  
                  
                  16,346
                  
                  
                  
                  15,394Deferral of
      new regulatory assets
                  
                  
                  (3,526
                  )
                  
                  
                  (17,088
                  )General
      taxes
                  
                  
                  21,855
                  
                  
                  
                  19,851Total
      expenses
                  
                  
                  339,502
                  
                  
                  
                  290,237OPERATING
      INCOME
                  
                  
                  55,990
                  
                  
                  
                  65,669OTHER
      INCOME (EXPENSE):Miscellaneous
      income (expense)
                  
                  
                  (191
                  )
                  
                  
                  1,417Interest
      expense
                  
                  
                  (15,322
                  )
                  
                  
                  (11,337
                  )Capitalized
      interest
                  
                  
                  (806
                  )
                  
                  
                  258Total other
      expense
                  
                  
                  (16,319
                  )
                  
                  
                  (9,662
                  )INCOME
      BEFORE INCOME TAXES
                  
                  
                  39,671
                  
                  
                  
                  56,007INCOME
      TAXES
                  
                  
                  18,279
                  
                  
                  
                  24,263NET
      INCOME
                  
                  
                  21,392
                  
                  
                  
                  31,744OTHER
      COMPREHENSIVE INCOME (LOSS):Pension and
      other postretirement benefits
                  
                  
                  (3,473
                  )
                  
                  
                  (2,825
                  )Unrealized
      gain on derivative hedges
                  
                  
                  16
                  
                  
                  
                  16Change in
      unrealized gain on available-for-sale securities
                  
                  
                  11
                  
                  
                  
                  (3
                  )Other
      comprehensive loss
                  
                  
                  (3,446
                  )
                  
                  
                  (2,812
                  )Income tax
      benefit related to other comprehensive loss
                  
                  
                  (1,506
                  )
                  
                  
                  (1,298
                  )Other
      comprehensive loss, net of tax
                  
                  
                  (1,940
                  )
                  
                  
                  (1,514
                  )TOTAL
      COMPREHENSIVE INCOME
                  
                  $
                  19,452
                  
                  
                  $
                  30,230The
      accompanying Notes to Consolidated Financial Statements as they relate to
      Pennsylvania Electric Companyare an
      integral part of these statements.
  78
 PENNSYLVANIA
      ELECTRIC COMPANYCONSOLIDATED
      BALANCE SHEETS(Unaudited)March
      31,
                  
                  
                  December
      31,2008
                  
                  
                  2007(In
      thousands)ASSETSCURRENT
      ASSETS:Cash and cash
      equivalents
                  
                  $
                  43
                  
                  
                  $
                  46Receivables-Customers
      (less accumulated provisions of $4,201,000 and $3,905,000,respectively,
      for uncollectible accounts)
                  
                  
                  141,316
                  
                  
                  
                  137,455Associated
      companies
                  
                  
                  23,396
                  
                  
                  
                  22,014Other
                  
                  
                  28,833
                  
                  
                  
                  19,529Notes
      receivable from associated companies
                  
                  
                  16,923
                  
                  
                  
                  16,313Prepaid gross
      receipts taxes
                  
                  
                  41,242
                  
                  
                  
                  -Other
                  
                  
                  2,426
                  
                  
                  
                  3,077254,179
                  
                  
                  
                  198,434UTILITY
      PLANT:In
      service
                  
                  
                  2,230,667
                  
                  
                  
                  2,219,002Less -
      Accumulated provision for depreciation
                  
                  
                  843,500
                  
                  
                  
                  838,6211,387,167
                  
                  
                  
                  1,380,381Construction
      work in progress
                  
                  
                  33,727
                  
                  
                  
                  24,2511,420,894
                  
                  
                  
                  1,404,632OTHER
      PROPERTY AND INVESTMENTS:Nuclear plant
      decommissioning trusts
                  
                  
                  132,152
                  
                  
                  
                  137,859Non-utility
      generation trusts
                  
                  
                  113,958
                  
                  
                  
                  112,670Other
                  
                  
                  536
                  
                  
                  
                  531246,646
                  
                  
                  
                  251,060DEFERRED
      CHARGES AND OTHER ASSETS:Goodwill
                  
                  
                  777,616
                  
                  
                  
                  777,904Pension
      assets
                  
                  
                  69,405
                  
                  
                  
                  66,111Other
                  
                  
                  29,770
                  
                  
                  
                  33,893876,791
                  
                  
                  
                  877,908$
                  2,798,510
                  
                  
                  $
                  2,732,034LIABILITIES
      AND CAPITALIZATIONCURRENT
      LIABILITIES:Short-term
      borrowings-Associated
      companies
                  
                  $
                  183,102
                  
                  
                  $
                  214,893Other
                  
                  
                  150,000
                  
                  
                  
                  -Accounts
      payable-Associated
      companies
                  
                  
                  61,476
                  
                  
                  
                  83,359Other
                  
                  
                  50,516
                  
                  
                  
                  51,777Accrued
      taxes
                  
                  
                  9,302
                  
                  
                  
                  15,111Accrued
      interest
                  
                  
                  13,677
                  
                  
                  
                  13,167Other
                  
                  
                  23,330
                  
                  
                  
                  25,311491,403
                  
                  
                  
                  403,618CAPITALIZATION:Common
      stockholder's equity-Common stock,
      $20 par value, authorized 5,400,000 shares-4,427,577
      shares outstanding
                  
                  
                  88,552
                  
                  
                  
                  88,552Other paid-in
      capital
                  
                  
                  920,265
                  
                  
                  
                  920,616Accumulated
      other comprehensive income
                  
                  
                  3,006
                  
                  
                  
                  4,946Retained
      earnings
                  
                  
                  79,336
                  
                  
                  
                  57,943Total common
      stockholder's equity
                  
                  
                  1,091,159
                  
                  
                  
                  1,072,057Long-term debt
      and other long-term obligations
                  
                  
                  732,465
                  
                  
                  
                  777,2431,823,624
                  
                  
                  
                  1,849,300NONCURRENT
      LIABILITIES:Regulatory
      liabilities
                  
                  
                  67,347
                  
                  
                  
                  73,559Accumulated
      deferred income taxes
                  
                  
                  220,500
                  
                  
                  
                  210,776Retirement
      benefits
                  
                  
                  41,644
                  
                  
                  
                  41,298Asset
      retirement obligations
                  
                  
                  83,129
                  
                  
                  
                  81,849Other
                  
                  
                  70,863
                  
                  
                  
                  71,634483,483
                  
                  
                  
                  479,116COMMITMENTS
      AND CONTINGENCIES (Note 10)$
                  2,798,510
                  
                  
                  $
                  2,732,034The
      accompanying Notes to Consolidated Financial Statements as they relate to
      Pennsylvania Electric Company are anintegral part
      of these balance sheets.
  79
 PENNSYLVANIA
      ELECTRIC COMPANYCONSOLIDATED
      STATEMENTS OF CASH FLOWS(Unaudited)Three
      Months EndedMarch
      31,2008
                  
                  
                  2007(In
      thousands)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                  
                  $
                  21,392
                  
                  
                  $
                  31,744Adjustments to
      reconcile net income to net cash from operating
activities-Provision for
      depreciation
                  
                  
                  12,516
                  
                  
                  
                  11,777Amortization
      of regulatory assets
                  
                  
                  16,346
                  
                  
                  
                  15,394Deferral of
      new regulatory assets
                  
                  
                  (3,526
                  )
                  
                  
                  (17,088
                  )Deferred costs
      recoverable as regulatory assets
                  
                  
                  (8,403
                  )
                  
                  
                  (18,433
                  )Deferred
      income taxes and investment tax credits, net
                  
                  
                  10,541
                  
                  
                  
                  13,366Accrued
      compensation and retirement benefits
                  
                  
                  (10,488
                  )
                  
                  
                  (8,786
                  )Cash
      collateral
                  
                  
                  301
                  
                  
                  
                  1,450Pension trust
      contribution
                  
                  
                  -
                  
                  
                  
                  (13,436
                  )Increase in
      operating assets-Receivables
                  
                  
                  (13,701
                  )
                  
                  
                  (30,050
                  )Prepayments
      and other current assets
                  
                  
                  (40,591
                  )
                  
                  
                  (36,225
                  )Increase
      (Decrease) in operating liabilities-Accounts
      payable
                  
                  
                  (23,144
                  )
                  
                  
                  (46,168
                  )Accrued
      taxes
                  
                  
                  (5,809
                  )
                  
                  
                  (9,152
                  )Accrued
      interest
                  
                  
                  510
                  
                  
                  
                  5,518Other
                  
                  
                  4,991
                  
                  
                  
                  3,920Net cash used
      for operating activities
                  
                  
                  (39,065
                  )
                  
                  
                  (96,169
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:New
      Financing-Short-term
      borrowings, net
                  
                  
                  118,209
                  
                  
                  
                  119,361Redemptions
      and RepaymentsLong-term
      debt
                  
                  
                  (45,112
                  )
                  
                  
                  -Net cash
      provided from financing activities
                  
                  
                  73,097
                  
                  
                  
                  119,361CASH
      FLOWS FROM INVESTING ACTIVITIES:Property
      additions
                  
                  
                  (28,902
                  )
                  
                  
                  (20,404
                  )Sales of
      investment securities held in trusts
                  
                  
                  24,407
                  
                  
                  
                  12,758Purchases of
      investment securities held in trusts
                  
                  
                  (29,083
                  )
                  
                  
                  (15,509
                  )Loan
      repayments from (loans to) associated companies, net
                  
                  
                  (610
                  )
                  
                  
                  708Other
                  
                  
                  153
                  
                  
                  
                  (747
                  )Net cash used
      for investing activities
                  
                  
                  (34,035
                  )
                  
                  
                  (23,194
                  )Net change in
      cash and cash equivalents
                  
                  
                  (3
                  )
                  
                  
                  (2
                  )Cash and cash
      equivalents at beginning of period
                  
                  
                  46
                  
                  
                  
                  44Cash and cash
      equivalents at end of period
                  
                  $
                  43
                  
                  
                  $
                  42The
      accompanying Notes to Consolidated Financial Statements as they relate to
      Pennsylvania Electric Company arean integral
      part of these statements.
 
 
 80
 
 
 COMBINED
MANAGEMENT’S DISCUSSION
 AND
ANALYSIS OF REGISTRANT SUBSIDIARIES
 
 
 The following is a
combined presentation of certain disclosures referenced in Management’s
Narrative Analysis of Results of Operations of FES and the Companies. This
information should be read in conjunction with (i) FES’ and the Companies’
respective Consolidated Financial Statements and Management’s Narrative Analysis
of Results of Operations; (ii) the Combined Notes to Consolidated Financial
Statements as they relate to FES and the Companies; and (iii) FES’ and the
Companies’ respective 2007 Annual Reports on Form 10-K.
 
 Regulatory
Matters(Applicable to each of
the Companies)
 
 In Ohio, New Jersey
and Pennsylvania, laws applicable to electric industry restructuring contain
similar provisions that are reflected in the Companies' respective state
regulatory plans. These provisions include:
 
 ·
              restructuring
      the electric generation business and allowing the Companies' customers to
      select a competitive electric generation supplier other than the
      Companies;·
              establishing
      or defining the PLR obligations to customers in the Companies' service
      areas;·
              providing the
      Companies with the opportunity to recover potentially stranded investment
      (or transition costs) not otherwise recoverable in a competitive
      generation market;·
              itemizing
      (unbundling) the price of electricity into its component elements –
      including generation, transmission, distribution and stranded costs
      recovery charges;·
              continuing
      regulation of the Companies' transmission and distribution systems;
      and·
              requiring
      corporate separation of regulated and unregulated business
      activities.
 
 The Companies and
ATSI recognize, as regulatory assets, costs which the FERC, PUCO, PPUC and NJBPU
have authorized for recovery from customers in future periods or for which
authorization is probable. Without the probability of such authorization, costs
currently recorded as regulatory assets would have been charged to income as
incurred. Regulatory assets that do not earn a current return totaled
approximately $137 million as of March 31, 2008 (JCP&L -
$78 million and Met-Ed - $59 million). Regulatory assets not earning a
current return are expected to be recovered by 2014 for JCP&L and by 2020
for Met-Ed. The following table discloses regulatory assets by
company:
 
 March
      31,
              
              December
      31,
              
              IncreaseRegulatory
      Assets*
              
              2008
              
              2007
              
              (Decrease)(In
      millions)OE
              
              $
              710
              
              $
              737
              
              $
              (27
              )CEI
              
              
              854
              
              
              871
              
              
              (17
              )TE
              
              
              188
              
              
              204
              
              
              (16
              )JCP&L
              
              
              1,476
              
              
              1,596
              
              
              (120
              )Met-Ed
              
              
              530
              
              
              495
              
              
              35ATSI
              
              
              39
              
              
              42
              
              
              (3
              )Total
              
              $
              3,797
              
              $
              3,945
              
              $
              (148
              )
 
 *
              Penelec had
      net regulatory liabilities of approximately $67 million and
      $74 million as of March 31, 2008 and December 31, 2007,
      respectively. These net regulatory liabilities are included in Other
      Non-current Liabilities on the Consolidated Balance
  Sheets.
 
 Ohio(Applicable to OE, CEI and TE)
 
 The Ohio Companies
filed an application and stipulation with the PUCO on September 9, 2005
seeking approval of the RCP, a supplement to the RSP. On November 4, 2005,
the Ohio Companies filed a supplemental stipulation with the PUCO, which
constituted an additional component of the RCP. On January 4, 2006, the
PUCO approved, with modifications, the Ohio Companies’ RCP to supplement the RSP
to provide customers with more certain rate levels than otherwise available
under the RSP during the plan period. The following table provides the estimated
net amortization of regulatory transition costs and deferred shopping incentives
(including associated carrying charges) under the RCP for the period 2008
through 2010:
 
 81
 
 
 Amortization
                
                
                
                
                
                
                
                
                
                
                TotalPeriod
                
                OE
                
                CEI
                
                TE
                
                Ohio(In
      millions)2008
                
                $
                204
                
                $
                126
                
                $
                118
                
                $
                4482009
                
                
                -
                
                
                212
                
                
                -
                
                
                2122010
                
                
                -
                
                
                273
                
                
                -
                
                
                273Total
      Amortization
                
                $
                204
                
                $
                611
                
                $
                118
                
                $
                933
 
  On January 4,
2006, the PUCO issued an order authorizing the Ohio Companies to recover certain
increased fuel costs through a fuel rider and to defer certain other increased
fuel costs to be incurred from January 1, 2006 through December 31,
2008, including interest on the deferred balances. The order also provided for
recovery of the deferred costs over a twenty-five-year period through
distribution rates. On August 29, 2007, the Supreme Court of Ohio concluded that
the PUCO violated a provision of the Ohio Revised Code by permitting the Ohio
Companies “to collect deferred increased fuel costs through future distribution
rate cases, or to alternatively use excess fuel-cost recovery to reduce deferred
distribution-related expenses” and remanded the matter to the PUCO for further
consideration. On September 10, 2007 the Ohio Companies filed an
application with the PUCO that requested the implementation of two
generation-related fuel cost riders to collect the increased fuel costs that
were previously authorized to be deferred. On January 9, 2008 the PUCO approved
the Ohio Companies’ proposed fuel cost rider to recover increased fuel costs to
be incurred in 2008 commencing January 1, 2008 through December 31, 2008, which
is expected to be approximately $189 million (OE - $91 million, CEI - $72
million and TE - $26 million). In addition, the PUCO ordered the Ohio Companies
to file a separate application for an alternate recovery mechanism to collect
the 2006 and 2007 deferred fuel costs. On February 8, 2008, the Ohio
Companies filed an application proposing to recover $226 million (OE - $114
million, CEI - $79 million and TE - $33 million) of deferred fuel costs and
carrying charges for 2006 and 2007 pursuant to a separate fuel rider, with
alternative options for the recovery period ranging from five to twenty-five
years. This second application is currently pending before the PUCO and a
hearing has been set for July 15, 2008.
 
 The Ohio Companies
filed an application and rate request for an increase in electric distribution
rates with the PUCO on June 7, 2007. The requested increase is expected to
be more than offset by the elimination or reduction of transition charges at the
time the rates go into effect and would result in lowering the overall
non-generation portion of the average electric bill for most Ohio
customers.  The distribution rate increases reflect capital
expenditures since the Ohio Companies’ last distribution rate proceedings,
increases in operation and maintenance expenses and recovery of regulatory
assets that were authorized in prior cases. On August 6, 2007, the Ohio
Companies updated their filing supporting a distribution rate increase of
$332 million (OE - $156 million, CEI - $108 million and TE -
$68 million). On December 4, 2007, the PUCO Staff issued its Staff Reports
containing the results of their investigation into the distribution rate
request. In its reports, the PUCO Staff recommended a distribution rate increase
in the range of $161 million to $180 million (OE - $57 million to
$66 million, CEI - $54 million to $61 million and TE -
$50 million to $53 million), with $108 million to $127 million for
distribution revenue increases and $53 million for recovery of costs
deferred under prior cases. This amount excludes the recovery of deferred fuel
costs, whose recovery is now being sought in a separate proceeding before the
PUCO, discussed above. On January 3, 2008, the Ohio Companies and
intervening parties filed objections to the Staff Reports and on January 10,
2008, the Ohio Companies filed supplemental testimony. Evidentiary hearings
began on January 29, 2008 and continued through February 25, 2008. During
the evidentiary hearings, the PUCO Staff submitted testimony decreasing their
recommended revenue increase to a range of $114 million to
$132 million. Additionally, in testimony submitted on February 11,
2008, the PUCO Staff adopted a position regarding interest deferred for
RCP-related deferrals, line extension deferrals and transition tax deferrals
that, if upheld by the PUCO, would result in the write-off of approximately
$45 million (OE - $31 million, CEI - $9 million and TE - $5 million) of
interest costs deferred through March 31, 2008 ($0.09 per share of common
stock). The PUCO is expected to render its decision during the second or third
quarter of 2008. The new rates would become effective January 1, 2009 for
OE and TE, and approximately May 2009 for CEI.
 
 On July 10, 2007,
the Ohio Companies filed an application with the PUCO requesting approval of a
comprehensive supply plan for providing retail generation service to customers
who do not purchase electricity from an alternative supplier, beginning
January 1, 2009. The proposed competitive bidding process would average the
results of multiple bidding sessions conducted at different times during the
year. The final price per KWH would reflect an average of the prices resulting
from all bids. In their filing, the Ohio Companies offered two alternatives for
structuring the bids, either by customer class or a “slice-of-system” approach.
A slice-of-system approach would require the successful bidder to be responsible
for supplying a fixed percentage of the utility’s total load notwithstanding the
customer’s classification. The proposal provides the PUCO with an option to
phase in generation price increases for residential tariff groups who would
experience a change in their average total price of 15 percent or more. The PUCO
held a technical conference on August 16, 2007 regarding the filing.
Initial and reply comments on the proposal were filed by various parties in
September and October 2007, respectively. The proposal is currently pending
before the PUCO.
 
 82
 
 
 On April 22,
2008, an amended version of Substitute SB221 was passed by the Ohio House of
Representatives and sent back to the Ohio Senate for concurrence. On
April 23, 2008, the Ohio Senate approved the House's amendments to
Substitute SB221 and forwarded the bill to the Governor for signature, which he
signed on May 1, 2008. Amended Substitute SB221 requires all electric
distribution utilities to file an RSP, now called an ESP, with the PUCO. An
ESP is required to contain a proposal for the supply and pricing of retail
generation and may include proposals, without limitation, related to one or more
of the following:
 
 ·
              automatic
      recovery of prudently incurred fuel, purchased power, emission allowance
      costs and federally mandated energy
taxes;
 
 ·
              construction
      work in progress for costs of constructing an electric generating facility
      or environmental expenditure for any electric generating
      facility;
 
 ·
              costs of an
      electric generating facility;
 
 ·
              terms related
      to customer shopping, bypassability, standby, back-up and default
      service;
 
 ·
              accounting for
      deferrals related to stabilizing retail electric
  service;
 
 ·
              automatic
      increases or decreases in standard service offer
  price;
 
 ·
              phase-in and
      securitization;
 
 ·
              transmission
      service and related costs;
 
 ·
              distribution
      service and related costs; and
 
 ·
              economic
      development and energy efficiency.
 
 A utility could also
simultaneously file an MRO in which it would have to demonstrate the following
objective market criteria: The utility or its transmission service affiliate
belongs to a FERC-approved RTO having a market-monitor function and the ability
to mitigate market power, and a published source exists that identifies
information for traded electricity and energy products that are contracted for
delivery two years into the future. The PUCO would test the ESP and its pricing
and all other terms and conditions against the MRO and may only approve the ESP
if it is found to be more favorable to customers. As part of an ESP with a plan
period longer than three years, the PUCO shall prospectively determine every
fourth year of the plan whether it is substantially likely the plan will provide
the electric distribution utility a return on common equity significantly in
excess of the return likely to be earned by publicly traded companies, including
utilities, that face comparable business and financial risk (comparable
companies). If so, the PUCO may terminate the ESP. Annually under an ESP, the
PUCO shall determine whether an electric distribution utility's earned return on
common equity is significantly in excess of returns earned on common equity
during the same period by comparable companies, and if so, shall require the
utility to return such excess to customers by prospective adjustments. Amended
Substitute SB221 also includes provisions dealing with advanced and renewable
energy standards that contemplate 25% of electrical usage from these sources by
2025. Energy efficiency measures in the bill require energy savings in excess of
22% by 2025. Requirements are in place to meet annual benchmarks for renewable
energy resources and energy efficiency, subject to review by the PUCO.
FirstEnergy is currently evaluating this legislation and expects to file an ESP
in the second or third quarter of 2008.
 Pennsylvania(Applicable to FES, Met-Ed, Penelec, OE and Penn)
 
 Met-Ed and Penelec
purchase a portion of their PLR and default service requirements from FES
through a fixed-price partial requirements wholesale power sales agreement. The
agreement allows Met-Ed and Penelec to sell the output of NUG energy to the
market and requires FES to provide energy at fixed prices to replace any NUG
energy sold to the extent needed for Met-Ed and Penelec to satisfy their PLR and
default service obligations. The fixed price under the agreement is expected to
remain below wholesale market prices during the term of the agreement. If Met-Ed
and Penelec were to replace the entire FES supply at current market power prices
without corresponding regulatory authorization to increase their generation
prices to customers, each company would likely incur a significant increase in
operating expenses and experience a material deterioration in credit quality
metrics. Under such a scenario, each company's credit profile would no longer be
expected to support an investment grade rating for their fixed income
securities. Based on the PPUC’s January 11, 2007 order described below, if
FES ultimately determines to terminate, reduce, or significantly modify the
agreement prior to the expiration of Met-Ed’s and Penelec’s generation rate caps
in 2010, timely regulatory relief is not likely to be granted by the
PPUC.
 
 83
 
 
 Met-Ed and Penelec
made a comprehensive transition rate filing with the PPUC on April 10, 2006
to address a number of transmission, distribution and supply issues. If Met-Ed's
and Penelec's preferred approach involving accounting deferrals had been
approved, annual revenues would have increased by $216 million and
$157 million, respectively. That filing included, among other things, a
request to charge customers for an increasing amount of market-priced power
procured through a CBP as the amount of supply provided under the then existing
FES agreement was to be phased out. Met-Ed and Penelec also requested approval
of a January 12, 2005 petition for the deferral of transmission-related
costs incurred during 2006. In this rate filing, Met-Ed and Penelec requested
recovery of annual transmission and related costs incurred on or after
January 1, 2007, plus the amortized portion of 2006 costs over a ten-year
period, along with applicable carrying charges, through an adjustable rider.
Changes in the recovery of NUG expenses and the recovery of Met-Ed's non-NUG
stranded costs were also included in the filing. On May 4, 2006, the PPUC
consolidated the remand of the FirstEnergy and GPU merger proceeding, related to
the quantification and allocation of merger savings, with the comprehensive
transition rate filing case.
 
 The PPUC entered its
opinion and order in the comprehensive rate filing proceeding on
January 11, 2007. The order approved the recovery of transmission costs,
including the transmission-related deferral for January 1, 2006 through
January 10, 2007, and determined that no merger savings from prior years
should be considered in determining customers’ rates. The request for increases
in generation supply rates was denied as were the requested changes to NUG
expense recovery and Met-Ed’s non-NUG stranded costs. The order decreased
Met-Ed’s and Penelec’s distribution rates by $80 million and
$19 million, respectively. These decreases were offset by the increases
allowed for the recovery of transmission costs. Met-Ed’s and Penelec’s request
for recovery of Saxton decommissioning costs was granted and, in January 2007,
Met-Ed and Penelec recognized income of $15 million and $12 million,
respectively, to establish regulatory assets for those previously expensed
decommissioning costs. Overall rates increased by 5.0% for Met-Ed
($59 million) and 4.5% for Penelec ($50 million).
 
 On March 30, 2007,
MEIUG and PICA filed a Petition for Review with the Commonwealth Court of
Pennsylvania asking the court to review the PPUC’s determination on transmission
(including congestion) and the transmission deferral. Met-Ed and Penelec filed a
Petition for Review on April 13, 2007 on the issues of consolidated tax savings
and the requested generation rate increase. The OCA filed its Petition for
Review on April 13, 2007, on the issues of transmission (including
congestion) and recovery of universal service costs from only the residential
rate class. From June through October 2007, initial responsive and reply briefs
were filed by various parties. Oral arguments are scheduled to take place in
September 2008. If Met-Ed and Penelec do not prevail on the issue of congestion,
it could have a material adverse effect on the results of operations of Met-Ed,
Penelec and FirstEnergy.
 
 On April 14, 2008,
Met-Ed and Penelec filed annual updates to the TSC rider for the period
June 1, 2008, through May 31, 2009. The proposed TSCs include a
component for under-recovery of actual transmission costs incurred during the
prior period (Met-Ed - $144 million and Penelec - $4 million) and future
transmission cost projections for June 2008 through May 2009 (Met-Ed - $258
million and Penelec - $92 million). Met-Ed has proposed a transition
approach that would recover past under-recovered costs plus carrying charges
through the new TSC over thirty-one months and defer a portion of the projected
costs ($92 million) plus carrying charges for recovery through future TSCs
by December 31, 2010.
 
 On March 13, 2008,
the PPUC approved the residential procurement process in Penn’s Joint
Petition for Settlement. This RFP process calls for load-following,
full-requirements contracts for default service procurement for residential
customers for the period covering June 1, 2008 through May 31, 2011. The PPUC
had previously approved the default service procurement processes for
commercial and industrial customers. The default service procurement for small
commercial customers was conducted through multiple RFPs, while the default
service procurement for large commercial and industrial customers will utilize
hourly pricing. Bids in the two RFPs for small commercial load were approved by
the PPUC on February 22, 2008, and March 20, 2008. On March 28, 2008, Penn filed
compliance tariffs with the new default service generation rates based on the
approved RFP bids for small commercial customers which the PPUC then certified
on April 4, 2008. On April 14, 2008, the first RFP for residential customers’
load was held consisting of tranches for both 12 and 24-month supply. The PPUC
approved the bids on April 16, 2008. The second RFP is scheduled to be held on
May 14, 2008, after which time the PPUC is expected to approve the new rates to
go into effect June 1, 2008.
 
 84
 
 
 On February 1, 2007,
the Governor of Pennsylvania proposed an EIS. The EIS includes four pieces of
proposed legislation that, according to the Governor, is designed to reduce
energy costs, promote energy independence and stimulate the economy. Elements of
the EIS include the installation of smart meters, funding for solar panels on
residences and small businesses, conservation and demand reduction programs to
meet energy growth, a requirement that electric distribution companies acquire
power that results in the “lowest reasonable rate on a long-term basis,” the
utilization of micro-grids and a three year phase-in of rate increases. On
July 17, 2007 the Governor signed into law two pieces of energy
legislation. The first amended the Alternative Energy Portfolio Standards Act of
2004 to, among other things, increase the percentage of solar energy that must
be supplied at the conclusion of an electric distribution company’s transition
period. The second law allows electric distribution companies, at their sole
discretion, to enter into long term contracts with large customers and to build
or acquire interests in electric generation facilities specifically to supply
long-term contracts with such customers. A special legislative session on energy
was convened in mid-September 2007 to consider other aspects of the EIS. The
Pennsylvania House and Senate on March 11, 2008 and December 12, 2007,
respectively, passed different versions of bills to fund the Governor’s EIS
proposal. Neither chamber has formally considered the other’s bill. On
February 12, 2008, the Pennsylvania House passed House Bill 2200 which
provides for energy efficiency and demand management programs and targets as
well as the installation of smart meters within ten years. Other legislation has
been introduced to address generation procurement, expiration of rate caps,
conservation and renewable energy. The final form of this pending legislation is
uncertain. Consequently, Met-Ed, Penelec, OE and Penn are unable to predict what
impact, if any, such legislation may have on their operations.
 
 New Jersey(Applicable to JCP&L)
 
 JCP&L is
permitted to defer for future collection from customers the amounts by which its
costs of supplying BGS to non-shopping customers and costs incurred under NUG
agreements exceed amounts collected through BGS and NUGC rates and market sales
of NUG energy and capacity. As of March 31, 2008, the accumulated deferred cost
balance totaled approximately $264 million.
 
 In accordance with
an April 28, 2004 NJBPU order, JCP&L filed testimony on June 7,
2004 supporting continuation of the current level and duration of the funding of
TMI-2 decommissioning costs by New Jersey customers without a reduction,
termination or capping of the funding. On September 30, 2004, JCP&L
filed an updated TMI-2 decommissioning study. This study resulted in an updated
total decommissioning cost estimate of $729 million (in 2003 dollars)
compared to the estimated $528 million (in 2003 dollars) from the prior 1995
decommissioning study. The DRA filed comments on February 28, 2005
requesting that decommissioning funding be suspended. On March 18, 2005,
JCP&L filed a response to those comments. JCP&L responded to additional
NJBPU staff discovery requests in May and November 2007 and also submitted
comments in the proceeding in November 2007. A schedule for further NJBPU
proceedings has not yet been set.
 
 On August 1, 2005,
the NJBPU established a proceeding to determine whether additional ratepayer
protections are required at the state level in light of the repeal of the PUHCA
pursuant to the EPACT. The NJBPU approved regulations effective October 2,
2006 that prevent a holding company that owns a gas or electric public utility
from investing more than 25% of the combined assets of its utility and
utility-related subsidiaries into businesses unrelated to the utility industry.
These regulations are not expected to materially impact JCP&L. Also, in the
same proceeding, the NJBPU Staff issued an additional draft proposal on
March 31, 2006 addressing various issues including access to books and
records, ring-fencing, cross subsidization, corporate governance and related
matters. With the approval of the NJBPU Staff, the affected utilities jointly
submitted an alternative proposal on June 1, 2006. The NJBPU Staff
circulated revised drafts of the proposal to interested stakeholders in November
2006 and again in February 2007. On February 1, 2008, the NJBPU accepted
proposed rules for publication in the New Jersey Register on March 17,
2008. A public hearing on these proposed rules was held on April 23, 2008
with comments from interested parties due on May 16, 2008.
 
 New Jersey statutes
require that the state periodically undertake a planning process, known as the
EMP, to address energy related issues including energy security, economic
growth, and environmental impact. The EMP is to be developed with involvement of
the Governor’s Office and the Governor’s Office of Economic Growth, and is to be
prepared by a Master Plan Committee, which is chaired by the NJBPU President and
includes representatives of several State departments. In October 2006, the
current EMP process was initiated through the creation of a number of working
groups to obtain input from a broad range of interested stakeholders including
utilities, environmental groups, customer groups, and major customers. In
addition, public stakeholder meetings were held in the fall of 2006 and in early
2007.
 
 85
 
 
 On April 17, 2008, a
draft EMP was released for public comment. The draft EMP establishes four major
goals:
 
 ·
              maximize
      energy efficiency to achieve a 20% reduction in energy consumption by
      2020;
 
 ·
              reduce peak
      demand for electricity by 5,700 MW by 2020 (amounting to about a 22%
      reduction in projected demand);
 
 ·
              meet 22.5% of
      the state’s electricity needs with renewable energy by 2020;
      and
 
 ·
              develop low
      carbon emitting, efficient power plants and close the gap between the
      supply and demand for electricity.
 
 Following the public
comment period which is expected to extend into July 2008, a final EMP will be
issued to be followed by appropriate legislation and regulation as necessary. At
this time, JCP&L cannot predict the outcome of this process nor determine
the impact, if any, such legislation or regulation may have on its
operations.
 
 On February 13,
2007, the NJBPU Staff informally issued a draft proposal relating to changes to
the regulations addressing electric distribution service reliability and quality
standards. Meetings between the NJBPU Staff and interested stakeholders to
discuss the proposal were held and additional, revised informal proposals were
subsequently circulated by the Staff. On September 4, 2007, proposed
regulations were published in the New Jersey Register, which proposal will be
subsequently considered by the NJBPU following comments that were submitted in
September and October 2007. Final regulations (effective upon publication) were
published in the New Jersey Register March 17, 2008. Upon preliminary review of
the new regulations, JCP&L does not expect a material impact on its
operations.
 
 FERC Matters(Applicable to FES and each of the Companies)
 
 Transmission Service between MISO and
PJM
 
 On November 18,
2004, the FERC issued an order eliminating the through and out rate for
transmission service between the MISO and PJM regions. The FERC’s intent was to
eliminate so-called “pancaking” of transmission charges between the MISO and PJM
regions. The FERC also ordered the MISO, PJM and the transmission owners within
MISO and PJM to submit compliance filings containing a rate mechanism to recover
lost transmission revenues created by elimination of this charge (referred to as
the Seams Elimination Cost Adjustment or “SECA”) during a 16-month transition
period. The FERC issued orders in 2005 setting the SECA for hearing. The
presiding judge issued an initial decision on August 10, 2006, rejecting the
compliance filings made by MISO, PJM, and the transmission owners, and directing
new compliance filings. This decision is subject to review and approval by the
FERC. Briefs addressing the initial decision were filed on September 11, 2006
and October 20, 2006. A final order could be issued by the FERC in the second
quarter of 2008.
  PJM
Transmission Rate Design
 
 On January 31, 2005,
certain PJM transmission owners made filings with the FERC pursuant to a
settlement agreement previously approved by the FERC. JCP&L, Met-Ed and
Penelec were parties to that proceeding and joined in two of the filings. In the
first filing, the settling transmission owners submitted a filing justifying
continuation of their existing rate design within the PJM RTO. Hearings were
held and numerous parties appeared and litigated various issues concerning PJM
rate design; notably AEP, which proposed to create a "postage stamp", or average
rate for all high voltage transmission facilities across PJM and a zonal
transmission rate for facilities below 345 kV. This proposal would have the
effect of shifting recovery of the costs of high voltage transmission lines to
other transmission zones, including those where JCP&L, Met-Ed, and Penelec
serve load. On April 19, 2007, the FERC issued an order finding that the PJM
transmission owners’ existing “license plate” or zonal rate design was just and
reasonable and ordered that the current license plate rates for existing
transmission facilities be retained. On the issue of rates for new transmission
facilities, the FERC directed that costs for new transmission facilities that
are rated at 500 kV or higher are to be collected from all transmission zones
throughout the PJM footprint by means of a postage-stamp rate. Costs for new
transmission facilities that are rated at less than 500 kV, however, are to be
allocated on a “beneficiary pays” basis. The FERC found that PJM’s current
beneficiary-pays cost allocation methodology is not sufficiently detailed and,
in a related order that also was issued on April 19, 2007, directed that
hearings be held for the purpose of establishing a just and reasonable cost
allocation methodology for inclusion in PJM’s tariff.
 
 86
 
 
 On May 18, 2007,
certain parties filed for rehearing of the FERC’s April 19, 2007 order. On
January 31, 2008, the requests for rehearing were denied. The FERC’s orders on
PJM rate design will prevent the allocation of a portion of the revenue
requirement of existing transmission facilities of other utilities to JCP&L,
Met-Ed and Penelec. In addition, the FERC’s decision to allocate the cost of new
500 kV and above transmission facilities on a PJM-wide basis will reduce future
transmission revenue recovery from the JCP&L, Met-Ed and Penelec zones. A
partial settlement agreement addressing the “beneficiary pays” methodology for
below 500 kV facilities, but excluding the issue of allocating new facilities
costs to merchant transmission entities, was filed on September 14, 2007. The
agreement was supported by the FERC’s Trial Staff, and was certified by the
Presiding Judge. The FERC’s action on the settlement agreement is pending. The
remaining merchant transmission cost allocation issues will proceed to hearing
in May 2008. On February 13, 2008, AEP appealed the FERC’s orders to the
federal Court of Appeals for the D.C. Circuit. The Illinois Commerce Commission,
the PUCO and Dayton Power & Light have also appealed these orders to the
Seventh Circuit Court of Appeals. The appeals of these parties and others have
been consolidated for argument in the Seventh Circuit.
 
 Post
Transition Period Rate Design
 
 The FERC had
directed MISO, PJM, and the respective transmission owners to make filings on or
before August 1, 2007 to reevaluate transmission rate design within the MISO,
and between MISO and PJM. On August 1, 2007, filings were made by MISO, PJM, and
the vast majority of transmission owners, including FirstEnergy affiliates,
which proposed to retain the existing transmission rate design. These filings
were approved by the FERC on January 31, 2008. As a result of the FERC’s
approval, the rates charged to FirstEnergy’s load-serving affiliates for
transmission service over existing transmission facilities in MISO and PJM are
unchanged. In a related filing, MISO and MISO transmission owners requested that
the current MISO pricing for new transmission facilities that spreads 20% of the
cost of new 345 kV and higher transmission facilities across the entire MISO
footprint (known as the RECB methodology) be retained.
 
 On September 17,
2007, AEP filed a complaint under Sections 206 and 306 of the Federal Power Act
seeking to have the entire transmission rate design and cost allocation methods
used by MISO and PJM declared unjust, unreasonable, and unduly discriminatory,
and to have the FERC fix a uniform regional transmission rate design and cost
allocation method for the entire MISO and PJM “Super Region” that recovers the
average cost of new and existing transmission facilities operated at voltages of
345 kV and above from all transmission customers. Lower voltage facilities would
continue to be recovered in the local utility transmission rate zone through a
license plate rate. AEP requested a refund effective October 1, 2007, or
alternatively, February 1, 2008. On January 31, 2008, the FERC issued an order
denying the complaint. A rehearing request by AEP is pending before the
FERC.
 
 Distribution of MISO Network Service
Revenues
 
 Effective February
1, 2008, the MISO Transmission Owners Agreement provides for a change in the
method of distributing transmission revenues among the transmission owners. MISO
and a majority of the MISO transmission owners filed on December 3, 2007 to
change the MISO tariff to clarify, for purposes of distributing network
transmission revenue to the transmission owners, that all network transmission
service revenues, whether collected by MISO or directly by the transmission
owner, are included in the revenue distribution calculation.  This
clarification was necessary because some network transmission service revenues
are collected and retained by transmission owners in states where retail choice
does not exist, and their “unbundled” retail load is currently exempt from MISO
network service charges. The tariff changes filed with the FERC ensure that
revenues collected by transmission owners from bundled load are taken into
account in the revenue distribution calculation, and that transmission owners
with bundled load do not collect more than their revenue requirements. Absent
the changes, transmission owners, and ultimately their customers, with unbundled
load or in retail choice states, such as ATSI, would subsidize transmission
owners with bundled load, who would collect their revenue requirement from
bundled load, plus share in revenues collected by MISO from unbundled customers.
This would result in a large revenue shortfall for ATSI, which would eventually
be passed on to customers in the form of higher transmission rates as calculated
pursuant to ATSI’s Attachment O formula under the MISO tariff.
 
 Numerous parties
filed in support of the tariff changes, including the public service commissions
of Michigan, Ohio and Wisconsin. Ameren filed a protest on December 26,
2007, arguing that the December 3, 2007 filing violates the MISO
Transmission Owners’ Agreement as well as an agreement among Ameren (Union
Electric), MISO, and the Missouri Public Service Commission, which provides that
Union Electric’s bundled load cannot be charged by MISO for network service. On
February 2, 2008, the FERC issued an order conditionally accepting the
tariff amendment subject to a minor compliance filing, which was made on March
3, 2008. This order ensures that ATSI will continue to receive transmission
revenues from MISO equivalent to its transmission revenue requirement. A
rehearing request by Ameren is pending before the FERC.
 
 On February 1, 2008,
MISO filed a request to continue using the existing revenue distribution
methodology on an interim basis pending amendment of the MISO Transmission
Owners’ Agreement. This request was accepted by the FERC on March 13, 2008. On
that same day, MISO and the MISO transmission owners made a filing to amend the
Transmission Owners’ Agreement to effectively continue the distribution of
transmission revenues that was in effect prior to February 1, 2008. This matter
is currently pending before the FERC.
 
 87
 
 
 MISO Ancillary Services Market and
Balancing Area Consolidation
 
 MISO made a filing
on September 14, 2007 to establish an ASM for regulation, spinning and
supplemental reserves, to consolidate the existing 24 balancing areas within the
MISO footprint, and to establish MISO as the NERC registered balancing authority
for the region. This filing would permit load serving entities to purchase their
operating reserve requirements in a competitive market. FES, CEI, OE, Penn and
TE support the proposal to establish markets for Ancillary Services and
consolidate existing balancing areas. On February 25, 2008, the FERC issued an
order approving the ASM subject to certain compliance filings. MISO has since
notified the FERC that the start of its ASM is delayed until September of
2008.
 
 Duquesne’s
Request to Withdraw from PJM
 
 On November 8, 2007,
Duquesne Light Company (Duquesne) filed a request with the FERC to exit PJM and
to join the MISO. In its filing, Duquesne asked the FERC to be relieved of
certain capacity payment obligations to PJM for capacity auctions conducted
prior to its departure from PJM, but covering service for planning periods
through May 31, 2011. Duquesne asserted that its primary reason for exiting PJM
is to avoid paying future obligations created by PJM’s forward capacity market.
FirstEnergy believes that Duquesne’s filing did not identify or address numerous
legal, financial or operational issues that are implicated or affected directly
by Duquesne’s proposal. Consequently, FirstEnergy submitted responsive filings
that, while conceding Duquesne’s rights to exit PJM, contested various aspects
of Duquesne’s proposal. FirstEnergy particularly focused on Duquesne’s proposal
that it be allowed to exit PJM without payment of its share of existing capacity
market commitments. FirstEnergy also objected to Duquesne’s failure to address
the firm transmission service requirements that would be necessary for
FirstEnergy to continue to use the Beaver Valley Plant to meet existing
commitments in the PJM capacity markets and to serve native load. Other market
participants also submitted filings contesting Duquesne’s plans.
 
 On January 17, 2008,
the FERC conditionally approved Duquesne’s request to exit PJM. Among other
conditions, the FERC obligated Duquesne to pay the PJM capacity obligations
through May 31, 2011. The FERC’s order took notice of the numerous transmission
and other issues raised by FES and the Companies and other parties to the
proceeding, but did not provide any responsive rulings or other guidance.
Rather, the FERC ordered Duquesne to make a compliance filing in forty-five days
detailing how Duquesne will satisfy its obligations under the PJM Transmission
Owners’ Agreement. The FERC likewise directed the MISO to submit detailed plans
to integrate Duquesne into the MISO. Finally, the FERC directed MISO and PJM to
work together to resolve the substantive and procedural issues implicated by
Duquesne’s transition into the MISO. These issues remain unresolved. If Duquesne
satisfies all of the obligations set by the FERC, its planned transition date is
October 9, 2008.
 
 On March 18, 2008,
the PJM Power Providers Group filed a request for emergency clarification
regarding whether Duquesne-zone generators (including the Beaver Valley Plant)
could participate in PJM’s May 2008 auction for the 2011-2012 RPM delivery year.
FirstEnergy and the other Duquesne-zone generators filed responsive pleadings.
On April 18, 2008, the FERC issued its Order on Motion for Emergency
Clarification, wherein the FERC ruled that although the status of the
Duquesne-zone generators will change to “External Resource” upon Duquesne’s exit
from PJM, these generators can contract with PJM for the transmission
reservations necessary to participate in the May 2008 auction. FirstEnergy has
complied with FERC’s order by obtaining executed transmission service agreements
for firm point-to-point transmission service for the 2011-2012 delivery year
and, as such, FirstEnergy satisfies the criteria to bid the Beaver Valley Plant
into the May 2008 RPM auction. Notwithstanding these events, on April 30, 2008
and May 1, 2008, certain members of the PJM Power Providers Group filed further
pleadings on these issues. On May 2, 2008, FirstEnergy filed a responsive
pleading. FirstEnergy is participating in the May 2008 RPM auction for
the 2011-2012 RPM delivery year.
 
 MISO
Resource Adequacy Proposal
 
 MISO made a filing
on December 28, 2007 that would create an enforceable planning reserve
requirement in the MISO tariff for load serving entities such as the Ohio
Companies, Penn Power, and FES. This requirement is proposed to become effective
for the planning year beginning June 1, 2009. The filing would permit MISO to
establish the reserve margin requirement for load serving entities based upon a
one day loss of load in ten years standard, unless the state utility regulatory
agency establishes a different planning reserve for load serving entities in its
state. FirstEnergy generally supports the proposal as it promotes a mechanism
that will result in long-term commitments from both load-serving entities and
resources, including both generation and demand side resources that are
necessary for reliable resource adequacy and planning in the MISO footprint.
Comments on the filing were filed on January 28, 2008. The FERC approved MISO’s
Resource Adequacy proposal on March 26, 2008. Rehearing requests are pending on
the FERC’s March 26Order.  A
compliance filing establishing the enforcement mechanism for the reserve margin
requirement is due on or before June 25, 2008.
 
 88
 
 Organized
Wholesale Power Markets
 
 On February 21,
2008, the FERC issued a NOPR through which it proposes to adopt new rules that
it states will “improve operations in organized electric markets, boost
competition and bring additional benefits to consumers.” The proposed rule
addresses demand response and market pricing during reserve shortages, long-term
power contracting, market-monitoring policies, and responsiveness of RTOs and
ISOs to stakeholders and customers. FES and the Companies do not believe that
the proposed rule will have a significant impact on their operations. Comments
on the NOPR were filed on April 18, 2008.
 
 Environmental
Matters
 
 Various federal,
state and local authorities regulate FES and the Companies with regard to air
and water quality and other environmental matters. The effects of compliance on
FES and the Companies with regard to environmental matters could have a material
adverse effect on their earnings and competitive position to the extent that
they compete with companies that are not subject to such regulations and,
therefore, do not bear the risk of costs associated with compliance, or failure
to comply, with such regulations. FES and the Companies estimate capital
expenditures for environmental compliance of approximately $1.4 billion for
the period 2008-2012.
 
 FES and the
Companies accrue environmental liabilities only when they conclude that it is
probable that they have an obligation for such costs and can reasonably estimate
the amount of such costs. Unasserted claims are reflected in FES’ and the
Companies’ determination of environmental liabilities and are accrued in the
period that they become both probable and reasonably estimable.
 
 Clean Air Act
Compliance(Applicable to FES)
 
 FES is required to
meet federally-approved SO2 emissions
regulations. Violations of such regulations can result in the shutdown of the
generating unit involved and/or civil or criminal penalties of up to $32,500 for
each day the unit is in violation. The EPA has an interim enforcement policy for
SO2
regulations in Ohio that allows for compliance based on a 30-day averaging
period. FES believes it is currently in compliance with this policy, but cannot
predict what action the EPA may take in the future with respect to the interim
enforcement policy.
 
 The EPA Region 5
issued a Finding of Violation and NOV to the Bay Shore Power Plant dated June
15, 2006, alleging violations to various sections of the CAA. FES has disputed
those alleged violations based on its CAA permit, the Ohio SIP and other
information provided to the EPA at an August 2006 meeting with the EPA. The EPA
has several enforcement options (administrative compliance order, administrative
penalty order, and/or judicial, civil or criminal action) and has indicated that
such option may depend on the time needed to achieve and demonstrate compliance
with the rules alleged to have been violated. On June 5, 2007, the EPA
requested another meeting to discuss “an appropriate compliance program” and a
disagreement regarding the opacity limit applicable to the common stack for Bay
Shore Units 2, 3 and 4.
 
 FES complies with
SO2
reduction requirements under the Clean Air Act Amendments of 1990 by burning
lower-sulfur fuel, generating more electricity from lower-emitting plants,
and/or using emission allowances. NOX reductions
required by the 1990 Amendments are being achieved through combustion controls
and the generation of more electricity at lower-emitting plants. In September
1998, the EPA finalized regulations requiring additional NOX reductions
at FES' facilities. The EPA's NOX Transport
Rule imposes uniform reductions of NOX emissions
(an approximate 85% reduction in utility plant NOX emissions
from projected 2007 emissions) across a region of nineteen states (including
Michigan, New Jersey, Ohio and Pennsylvania) and the District of Columbia based
on a conclusion that such NOX emissions
are contributing significantly to ozone levels in the eastern United States. FES
believes its facilities are also complying with the NOX budgets
established under SIPs through combustion controls and post-combustion controls,
including Selective Catalytic Reduction and SNCR systems, and/or using emission
allowances.
 
 On May 22, 2007,
FirstEnergy and FGCO received a notice letter, required 60 days prior to the
filing of a citizen suit under the federal CAA, alleging violations of air
pollution laws at the Bruce Mansfield Plant, including opacity limitations.
Prior to the receipt of this notice, the Plant was subject to a Consent Order
and Agreement with the Pennsylvania Department of Environmental Protection
concerning opacity emissions under which efforts to achieve compliance with the
applicable laws will continue. On October 18, 2007, PennFuture filed a
complaint, joined by three of its members, in the United States District Court
for the Western District of Pennsylvania. On January 11, 2008, FirstEnergy filed
a motion to dismiss claims alleging a public nuisance. On April 24, 2008, the
Court denied the motion to dismiss, but also ruled that monetary damages could
not be recovered under the public nuisance claim.
 
 89
 
 
 On December 18,
2007, the state of New Jersey filed a CAA citizen suit alleging NSR violations
at the Portland Generation Station against Reliant (the current owner and
operator), Sithe Energy (the purchaser of the Portland Station from Met-Ed in
1999), GPU, Inc. and Met-Ed.  Specifically, New Jersey alleges that
"modifications" at Portland Units 1 and 2 occurred between 1980 and 1995 without
preconstruction NSR or permitting under the CAA's prevention of significant
deterioration program, and seeks injunctive relief, penalties, attorney fees and
mitigation of the harm caused by excess emissions. On March 14, 2008, Met-Ed
filed a motion to dismiss the citizen suit claims against it and a stipulation
in which the parties agreed that GPU, Inc. should be dismissed from this case.
On March 26, 2008, GPU, Inc. was dismissed by the Court. Although it remains
liable for civil or criminal penalties and fines that may be assessed relating
to events prior to the sale of the Portland Station in 1999, Met-Ed is
indemnified by Sithe Energy against any other liability arising under the CAA
whether it arises out of pre-1999 or post-1999 events.
 
 National Ambient
Air Quality Standards(Applicable to FES)
 
 In March 2005,
the EPA finalized the CAIR covering a total of 28 states (including Michigan,
New Jersey, Ohio and Pennsylvania) and the District of Columbia based on
proposed findings that air emissions from 28 eastern states and the District of
Columbia significantly contribute to non-attainment of the NAAQS for fine
particles and/or the "8-hour" ozone NAAQS in other states. CAIR requires
reductions of NOX and
SO2
emissions in two phases (Phase I in 2009 for NOX, 2010 for
SO2
and Phase II in 2015 for both NOX and
SO2).
FES' Michigan, Ohio and Pennsylvania fossil generation facilities will be
subject to caps on SO2 and
NOX
emissions. According to the EPA, SO2 emissions
will be reduced by 45% (from 2003 levels) by 2010 across the states covered by
the rule, with reductions reaching 73% (from 2003 levels) by 2015, capping
SO2
emissions in affected states to just 2.5 million tons annually. NOX emissions
will be reduced by 53% (from 2003 levels) by 2009 across the states covered by
the rule, with reductions reaching 61% (from 2003 levels) by 2015, achieving a
regional NOX cap of 1.3
million tons annually. CAIR has been challenged in the United States Court of
Appeals for the District of Columbia. The future cost of compliance with these
regulations may be substantial and may depend on the outcome of this litigation
and how CAIR is ultimately implemented.
 
 Mercury Emissions(Applicable to FES)
 
 In December 2000,
the EPA announced it would proceed with the development of regulations regarding
hazardous air pollutants from electric power plants, identifying mercury as the
hazardous air pollutant of greatest concern. In March 2005, the EPA finalized
the CAMR, which provides a cap-and-trade program to reduce mercury emissions
from coal-fired power plants in two phases; initially, capping national mercury
emissions at 38 tons by 2010 (as a "co-benefit" from implementation of
SO2
and NOX emission
caps under the EPA's CAIR program) and 15 tons per year by 2018. Several states
and environmental groups appealed the CAMR to the United States Court of Appeals
for the District of Columbia. On February 8, 2008, the court vacated the
CAMR, ruling that the EPA failed to take the necessary steps to “de-list”
coal-fired power plants from its hazardous air pollutant program and, therefore,
could not promulgate a cap and trade program.  The EPA must now seek
further judicial review of that ruling or take regulatory action to promulgate
new mercury emission standards for coal-fired power plants. FGCO’s future cost
of compliance with mercury regulations may be substantial and will depend on the
action taken by the EPA and on how they are ultimately implemented.
 
 Pennsylvania has
submitted a new mercury rule for EPA approval that does not provide a
cap-and-trade approach as in the CAMR, but rather follows a command-and-control
approach imposing emission limits on individual sources. It is anticipated that
compliance with these regulations, if approved by the EPA and implemented, would
not require the addition of mercury controls at the Bruce Mansfield Plant, FES’
only Pennsylvania coal-fired power plant, until 2015, if at all.
 
 W. H. Sammis
Plant(Applicable to FES, OE and Penn)
 
 In 1999 and 2000,
the EPA issued an NOV and the DOJ filed a civil complaint against OE and Penn
based on operation and maintenance of the W.H. Sammis Plant (Sammis NSR
Litigation) and filed similar complaints involving 44 other U.S. power plants.
This case, along with seven other similar cases, are referred to as the NSR
cases.
 
 On March 18, 2005,
OE and Penn announced that they had reached a settlement with the EPA, the DOJ
and three states (Connecticut, New Jersey and New York) that resolved all issues
related to the Sammis NSR litigation. This settlement agreement, which is in the
form of a consent decree, was approved by the court on July 11, 2005, and
requires reductions of NOX and
SO2
emissions at the Sammis, Burger, Eastlake and Mansfield coal-fired plants
through the installation of pollution control devices and provides for
stipulated penalties for failure to install and operate such pollution controls
in accordance with that agreement. Consequently, if FirstEnergy fails to install
such pollution control devices, for any reason, including, but not limited to,
the failure of any third-party contractor to timely meet its delivery
obligations for such devices, FGCO, OE and Penn could be exposed to penalties
under the Sammis NSR Litigation consent decree. Capital expenditures necessary
to complete requirements of the Sammis NSR Litigation consent decree are
currently estimated to be $1.3 billion for FGCO for 2008-2012
($650 million of which is expected to be spent during 2008, with the
largest portion of the remaining $650 million expected to be spent in
2009). This amount is included in the estimated capital expenditures for
environmental compliance referenced above.
 
 90
 
 On April 2,
2007, the United States Supreme Court ruled that changes in annual emissions (in
tons/year) rather than changes in hourly emissions rate (in kilograms/hour) must
be used to determine whether an emissions increase triggers NSR. Subsequently,
on May 8, 2007, the EPA proposed to revise the NSR regulations to utilize
changes in the hourly emission rate (in kilograms/hour) to determine whether an
emissions increase triggers NSR.   The EPA has not yet issued a
final regulation. FGCO’s future cost of compliance with those regulations may be
substantial and will depend on how they are ultimately implemented.
 
 Climate Change(Applicable to FES)
 
 In December 1997,
delegates to the United Nations' climate summit in Japan adopted an agreement,
the Kyoto Protocol, to address global warming by reducing the amount of man-made
GHG emitted by developed countries by 2012. The United States signed the Kyoto
Protocol in 1998 but it failed to receive the two-thirds vote required for
ratification by the United States Senate. However, the Bush administration has
committed the United States to a voluntary climate change strategy to reduce
domestic GHG intensity – the ratio of emissions to economic output – by 18%
through 2012. Also, in an April 16, 2008 speech, President Bush set a
policy goal of stopping the growth of GHG emissions by 2025, as the next step
beyond the 2012 strategy. In addition, the EPACT established a Committee on
Climate Change Technology to coordinate federal climate change activities and
promote the development and deployment of GHG reducing
technologies.
 
 There are a number
of initiatives to reduce GHG emissions under consideration at the federal, state
and international level.  At the international level, efforts to reach
a new global agreement to reduce GHG emissions post-2012 have begun with the
Bali Roadmap, which outlines a two-year process designed to lead to an agreement
in 2009. At the federal level, members of Congress have introduced several bills
seeking to reduce emissions of GHG in the United States, and the Senate
Environmental and Public Works Committees have passed one such bill. State
activities, primarily the northeastern states participating in the Regional
Greenhouse Gas Initiative and western states led by California, have coordinated
efforts to develop regional strategies to control emissions of certain
GHGs.
 
 On April 2, 2007,
the United States Supreme Court found that the EPA has the authority to regulate
CO2
emissions from automobiles as “air pollutants” under the CAA. Although this
decision did not address CO2 emissions
from electric generating plants, the EPA has similar authority under the CAA to
regulate “air pollutants” from those and other facilities.
 
 FES cannot currently
estimate the financial impact of climate change policies, although potential
legislative or regulatory programs restricting CO2 emissions
could require significant capital and other expenditures. The CO2 emissions
per KWH of electricity generated by FES is lower than many regional competitors
due to its diversified generation sources, which include low or non-CO2 emitting
gas-fired and nuclear generators.
 
 Clean Water Act(Applicable to FES)
 
 Various water
quality regulations, the majority of which are the result of the federal Clean
Water Act and its amendments, apply to FES’ plants. In addition, Ohio, New
Jersey and Pennsylvania have water quality standards applicable to FES'
operations. As provided in the Clean Water Act, authority to grant federal
National Pollutant Discharge Elimination System water discharge permits can be
assumed by a state. Ohio, New Jersey and Pennsylvania have assumed such
authority.
 
 On September 7,
2004, the EPA established new performance standards under Section 316(b) of the
Clean Water Act for reducing impacts on fish and shellfish from cooling water
intake structures at certain existing large electric generating plants. The
regulations call for reductions in impingement mortality (when aquatic organisms
are pinned against screens or other parts of a cooling water intake system) and
entrainment (which occurs when aquatic life is drawn into a facility's cooling
water system). On January 26, 2007, the United States Court of Appeals for the
Second Circuit remanded portions of the rulemaking dealing with impingement
mortality and entrainment back to the EPA for further rulemaking and eliminated
the restoration option from the EPA’s regulations. On July 9, 2007, the EPA
suspended this rule, noting that until further rulemaking occurs, permitting
authorities should continue the existing practice of applying their best
professional judgment (BPJ) to minimize impacts on fish and shellfish from
cooling water intake structures. On April 14, 2008, the Supreme Court of
the United States granted a petition for a writ of certiorari to review certain
aspects of the Second Circuit’s decision. FirstEnergy is studying various
control options and their costs and effectiveness. Depending on the results of
such studies, the outcome of the Supreme Court’s review of the Second Circuit’s
decision, the EPA’s further rulemaking and any action taken by the states
exercising BPJ, the future costs of compliance with these standards may require
material capital expenditures.
 
 91
 
 
 Regulation of
Hazardous Waste(Applicable to FES and each of the
Companies)
 
 As a result of the
Resource Conservation and Recovery Act of 1976, as amended, and the Toxic
Substances Control Act of 1976, federal and state hazardous waste regulations
have been promulgated. Certain fossil-fuel combustion waste products, such as
coal ash, were exempted from hazardous waste disposal requirements pending the
EPA's evaluation of the need for future regulation. The EPA subsequently
determined that regulation of coal ash as a hazardous waste is unnecessary. In
April 2000, the EPA announced that it will develop national standards regulating
disposal of coal ash under its authority to regulate non-hazardous
waste.
 
 Under NRC
regulations, FES and the Companies must ensure that adequate funds will be
available to decommission its nuclear facilities.  As of
March 31, 2008, FES and the Companies had approximately $2.0 billion
invested in external trusts to be used for the decommissioning and environmental
remediation of Davis-Besse, Beaver Valley, Perry and TMI-2. As part of the
application to the NRC to transfer the ownership of Davis-Besse, Beaver Valley
and Perry to NGC in 2005, FirstEnergy agreed to contribute another $80 million
to these trusts by 2010. Consistent with NRC guidance, utilizing a “real” rate
of return on these funds of approximately 2% over inflation, these trusts are
expected to exceed the minimum decommissioning funding requirements set by the
NRC. Conservatively, these estimates do not include any rate of return that the
trusts may earn over the 20-year plant useful life extensions that FirstEnergy
and FES (and Exelon for TMI-1 as it relates to the timing of the decommissioning
of TMI-2) seeks for these facilities.
 
 The Companies have
been named as PRPs at waste disposal sites, which may require cleanup under the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980.
Allegations of disposal of hazardous substances at historical sites and the
liability involved are often unsubstantiated and subject to dispute; however,
federal law provides that all PRPs for a particular site may be liable on a
joint and several basis. Therefore, environmental liabilities that are
considered probable have been recognized on the Consolidated Balance Sheet as of
March 31, 2008, based on estimates of the total costs of cleanup, the Companies'
proportionate responsibility for such costs and the financial ability of other
unaffiliated entities to pay. Total liabilities of approximately
$92 million (JCP&L - $65 million, TE - $1 million, CEI -
$1 million and FirstEnergy Corp. - $25 million) have been accrued
through March 31, 2008. Included in the total for JCP&L are accrued
liabilities of approximately $56 million for environmental remediation of
former manufactured gas plants in New Jersey; which are being recovered by
JCP&L through a non-bypassable SBC.
 
 Other Legal
Proceedings
 
 Power Outages and
Related Litigation(Applicable to JCP&L)
 
 In July 1999, the
Mid-Atlantic States experienced a severe heat wave, which resulted in power
outages throughout the service territories of many electric utilities, including
JCP&L's territory. In an investigation into the causes of the outages and
the reliability of the transmission and distribution systems of all four of New
Jersey’s electric utilities, the NJBPU concluded that there was not a prima
facie case demonstrating that, overall, JCP&L provided unsafe, inadequate or
improper service to its customers. Two class action lawsuits (subsequently
consolidated into a single proceeding) were filed in New Jersey Superior Court
in July 1999 against JCP&L, GPU and other GPU companies, seeking
compensatory and punitive damages arising from the July 1999 service
interruptions in the JCP&L territory.
 
 In August 2002, the
trial court granted partial summary judgment to JCP&L and dismissed the
plaintiffs' claims for consumer fraud, common law fraud, negligent
misrepresentation, and strict product liability. In November 2003, the trial
court granted JCP&L's motion to decertify the class and denied plaintiffs'
motion to permit into evidence their class-wide damage model indicating damages
in excess of $50 million. These class decertification and damage rulings were
appealed to the Appellate Division. The Appellate Division issued a decision in
July 2004, affirming the decertification of the originally certified class, but
remanding for certification of a class limited to those customers directly
impacted by the outages of JCP&L transformers in Red Bank, NJ, based on a
common incident involving the failure of the bushings of two large transformers
in the Red Bank substation resulting in planned and unplanned outages in the
area during a 2-3 day period. In 2005, JCP&L renewed its motion to decertify
the class based on a very limited number of class members who incurred damages
and also filed a motion for summary judgment on the remaining plaintiffs’ claims
for negligence, breach of contract and punitive damages. In July 2006, the New
Jersey Superior Court dismissed the punitive damage claim and again decertified
the class based on the fact that a vast majority of the class members did not
suffer damages and those that did would be more appropriately addressed in
individual actions. Plaintiffs appealed this ruling to the New Jersey Appellate
Division which, in March 2007, reversed the decertification of the Red Bank
class and remanded this matter back to the Trial Court to allow plaintiffs
sufficient time to establish a damage model or individual proof of damages.
JCP&L filed a petition for allowance of an appeal of the Appellate Division
ruling to the New Jersey Supreme Court which was denied in May
2007.  Proceedings are continuing in the Superior Court and a case
management conference with the presiding Judge is scheduled for June 13, 2008.
JCP&L is defending this class action but is unable to predict the outcome of
this matter.  No liability has been accrued as of March 31,
2008.
 
 92
 
 
 Nuclear Plant
Matters(Applicable to FES)
 
 On May 14, 2007, the
Office of Enforcement of the NRC issued a DFI to FENOC, following FENOC’s reply
to an April 2, 2007 NRC request for information, about two reports prepared by
expert witnesses for an insurance arbitration (the insurance claim was
subsequently withdrawn by FirstEnergy in December 2007) related to Davis-Besse.
The NRC indicated that this information was needed for the NRC “to determine
whether an Order or other action should be taken pursuant to 10 CFR 2.202, to
provide reasonable assurance that FENOC will continue to operate its licensed
facilities in accordance with the terms of its licenses and the Commission’s
regulations.” FENOC was directed to submit the information to the NRC within 30
days. On June 13, 2007, FENOC filed a response to the NRC’s DFI reaffirming that
it accepts full responsibility for the mistakes and omissions leading up to the
damage to the reactor vessel head and that it remains committed to operating
Davis-Besse and FirstEnergy’s other nuclear plants safely and responsibly. FENOC
submitted a supplemental response clarifying certain aspects of the DFI response
to the NRC on July 16, 2007. On August 15, 2007, the NRC issued a
confirmatory order imposing these commitments. FENOC must inform the NRC’s
Office of Enforcement after it completes the key commitments embodied in the
NRC’s order. FENOC’s compliance with these commitments is subject to future NRC
review.
 
 Other Legal
Matters(Applicable to OE, JCP&L and FES)
 
 There are various
lawsuits, claims (including claims for asbestos exposure) and proceedings
related to FirstEnergy's normal business operations pending against FirstEnergy
and its subsidiaries. The other potentially material items not otherwise
discussed above are described below.
 
 On August 22, 2005,
a class action complaint was filed against OE in Jefferson County, Ohio Common
Pleas Court, seeking compensatory and punitive damages to be determined at trial
based on claims of negligence and eight other tort counts alleging damages from
W.H. Sammis Plant air emissions. The two named plaintiffs are also seeking
injunctive relief to eliminate harmful emissions and repair property damage and
the institution of a medical monitoring program for class members. On
April 5, 2007, the Court rejected the plaintiffs’ request to certify this
case as a class action and, accordingly, did not appoint the plaintiffs as class
representatives or their counsel as class counsel. On July 30, 2007,
plaintiffs’ counsel voluntarily withdrew their request for reconsideration of
the April 5, 2007 Court order denying class certification and the Court
heard oral argument on the plaintiffs’ motion to amend their complaint which OE
opposed. On August 2, 2007, the Court denied the plaintiffs’ motion to
amend their complaint. The plaintiffs have appealed the Court’s denial of the
motion for certification as a class action and motion to amend their
complaint.
 
 JCP&L's
bargaining unit employees filed a grievance challenging JCP&L's 2002
call-out procedure that required bargaining unit employees to respond to
emergency power outages. On May 20, 2004, an arbitration panel concluded
that the call-out procedure violated the parties' collective bargaining
agreement. At the conclusion of the June 1, 2005 hearing, the arbitration
panel decided not to hear testimony on damages and closed the proceedings. On
September 9, 2005, the arbitration panel issued an opinion to award
approximately $16 million to the bargaining unit employees. On February 6,
2006, a federal district court granted a union motion to dismiss, as premature,
a JCP&L appeal of the award filed on October 18, 2005. A final order
identifying the individual damage amounts was issued on October 31, 2007.
The award appeal process was initiated. The union filed a motion with the
federal court to confirm the award and JCP&L filed its answer and
counterclaim to vacate the award on December 31, 2007. The court held a
scheduling conference in April 2008 where it set a briefing schedule with all
briefs to be concluded by July 2008. JCP&L recognized a liability for the
potential $16 million award in 2005.
 
 The union employees
at the Bruce Mansfield Plant have been working without a labor contract since
February 15, 2008. The parties are continuing to bargain with the
assistance of a federal mediator. FirstEnergy has a strike mitigation plan ready
in the event of a strike.
 
 FirstEnergy accrues
legal liabilities only when it concludes that it is probable that it has an
obligation for such costs and can reasonably estimate the amount of such costs.
If it were ultimately determined that FirstEnergy or its subsidiaries have legal
liability or are otherwise made subject to liability based on the above matters,
it could have a material adverse effect on FirstEnergy's or its subsidiaries'
financial condition, results of operations and cash flows.
 
 93
 
 
 New
Accounting Standards and Interpretations(Applicable to FES and
each of the Companies)
 
 SFAS 141(R) – “Business
Combinations”
 
 In December 2007,
the FASB issued SFAS 141(R), which requires the acquiring entity in a business
combination to recognize all the assets acquired and liabilities assumed in the
transaction; establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed; and requires the
acquirer to disclose to investors and other users all of the information they
need to evaluate and understand the nature and financial effect of the business
combination. SFAS 141(R) attempts to reduce the complexity of existing GAAP
related to business combinations. The Standard includes both core principles and
pertinent application guidance, eliminating the need for numerous EITF issues
and other interpretative guidance. SFAS 141(R) will affect business combinations
entered into by FES or any of the Companies that close after January 1,
2009. In addition, the Standard also affects the accounting for changes in tax
valuation allowances made after January 1, 2009, that were established as
part of a business combination prior to the implementation of this Standard. FES
and the Companies are currently evaluating the impact of adopting this Standard
on their financial statements.
 
 SFAS 160 - “Noncontrolling Interests in
Consolidated Financial Statements – an Amendment of ARB No. 51”
 
 In December 2007,
the FASB issued SFAS 160 that establishes accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. This Statement is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. Early adoption is prohibited. The Statement is not expected
to have a material impact on FES’ or the Companies’ financial
statements.
 
 SFAS
      161 - “Disclosures about Derivative Instruments and Hedging Activities –
      an Amendment of FASB Statement No.
133”
 
 In March 2008, the
FASB issued SFAS 161, which enhances the current disclosure framework for
derivative instruments and hedging activities. The Statement requires that
objectives for using derivative instruments be disclosed in terms of underlying
risk and accounting designation. This disclosure better conveys the purpose of
derivative use in terms of the risks that the entity is intending to manage. The
FASB believes disclosing the fair values of derivative instruments and their
gains and losses in a tabular format is designed to provide a more complete
picture of the location in an entity’s financial statements of both the
derivative positions existing at period end and the effect of using derivatives
during the reporting period. Disclosing information about credit-risk-related
contingent features is designed to provide information on the potential effect
on an entity’s liquidity from using derivatives. Finally, this Statement
requires cross-referencing within the footnotes, which is intended to help users
of financial statements locate important information about derivative
instruments. FES and the Companies are currently evaluating the impact of
adopting this Standard on their financial statements.
 
 
 94
 
 COMBINED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 
 1.  ORGANIZATION
AND BASIS OF PRESENTATION
 
 FirstEnergy is a
diversified energy company that holds, directly or indirectly, all of the
outstanding common stock of its principal subsidiaries: OE, CEI, TE, Penn (a
wholly owned subsidiary of OE), ATSI, JCP&L, Met-Ed, Penelec, FENOC, FES and
its subsidiaries FGCO and NGC, and FESC.
 
 FirstEnergy and its
subsidiaries follow GAAP and comply with the regulations, orders, policies and
practices prescribed by the SEC, the FERC and, as applicable, the PUCO, the PPUC
and the NJBPU. The preparation of financial statements in conformity with GAAP
requires management to make periodic estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses and disclosure of
contingent assets and liabilities. Actual results could differ from these
estimates. The reported results of operations are not indicative of results of
operations for any future period.
 
 These statements
should be read in conjunction with the financial statements and notes included
in the combined Annual Report on Form 10-K for the year ended December 31,
2007 for FirstEnergy, FES and the Companies. The consolidated unaudited
financial statements of FirstEnergy, FES and each of the Companies reflect all
normal recurring adjustments that, in the opinion of management, are necessary
to fairly present results of operations for the interim periods. Certain prior
year amounts have been reclassified to conform to the current year presentation.
Unless otherwise indicated, defined terms used herein have the meanings set
forth in the accompanying Glossary of Terms.
 
 FirstEnergy and its
subsidiaries consolidate all majority-owned subsidiaries over which they
exercise control and, when applicable, entities for which they have a
controlling financial interest. Intercompany transactions and balances are
eliminated in consolidation. FirstEnergy consolidates a VIE (see Note 8)
when it is determined to be the VIE's primary beneficiary. Investments in
non-consolidated affiliates over which FirstEnergy and its subsidiaries have the
ability to exercise significant influence, but not control (20-50% owned
companies, joint ventures and partnerships) follow the equity method of
accounting. Under the equity method, the interest in the entity is reported as
an investment in the Consolidated Balance Sheets and the percentage share of the
entity’s earnings is reported in the Consolidated Statements of
Income.
 
 The consolidated
financial statements as of March 31, 2008 and for the three-month periods
ended March 31, 2008 and 2007 have been reviewed by PricewaterhouseCoopers
LLP, an independent registered public accounting firm. Their report (dated
May 7, 2008) is included herein. The report of PricewaterhouseCoopers LLP
states that they did not audit and they do not express an opinion on that
unaudited financial information. Accordingly, the degree of reliance on their
report on such information should be restricted in light of the limited nature
of the review procedures applied. PricewaterhouseCoopers LLP is not subject to
the liability provisions of Section 11 of the Securities Act of 1933 for their
report on the unaudited financial information because that report is not a
“report” or a “part” of a registration statement prepared or certified by
PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the
Securities Act of 1933.
 
 2.  EARNINGS
PER SHARE
 
 Basic earnings per
share of common stock is computed using the weighted average of actual common
shares outstanding during the respective period as the denominator. The
denominator for diluted earnings per share of common stock reflects the weighted
average of common shares outstanding plus the potential additional common shares
that could result if dilutive securities and other agreements to issue common
stock were exercised. The pool of stock-based compensation tax benefits is
calculated in accordance with SFAS 123(R). On March 2, 2007, FirstEnergy
repurchased approximately 14.4 million shares, or 4.5%, of its outstanding
common stock through an accelerated share repurchase program at an initial price
of approximately $900 million. A final purchase price adjustment of
$51 million was settled in cash on December 13, 2007. The following
table reconciles basic and diluted earnings per share of common
stock:
 
 Reconciliation
      of Basic and Diluted
                
                Three
      Months Ended
                  March
      31,Earnings
      per Share of Common Stock
                
                2008
                
                2007(In
      millions, except
                  per
      share amounts)Net
      income
                
                $
                276
                
                $
                290Average shares
      of common stock outstanding – Basic
                
                
                304
                
                
                314Assumed
      exercise of dilutive stock options and awards
                
                
                3
                
                
                2Average shares
      of common stock outstanding – Dilutive
                
                
                307
                
                
                316Basic earnings
      per share of common stock
                
                $
                0.91
                
                $
                0.92Diluted
      earnings per share of common stock
                
                $
                0.90
                
                $
                0.92
 
 95
 
 
 3.  DIVESTITURES
AND DISCONTINUED OPERATIONS
 
 On March 7, 2008,
FirstEnergy sold certain telecommunication assets, resulting in a net after-tax
gain of $19.3 million. As a result of the sale, FirstEnergy adjusted
goodwill by $1 million for the former GPU companies due to the realization of
tax benefits that had been reserved in purchase accounting. The sale of assets
did not meet the criteria for classification as discontinued operations as of
March 31, 2008.
 
 4.  FAIR
VALUE MEASURES
 
 Effective January 1,
2008, FirstEnergy adopted SFAS 157, which provides a framework for measuring
fair value under GAAP and, among other things, requires enhanced disclosures
about assets and liabilities recognized at fair value. FirstEnergy also adopted
SFAS 159 on January 1, 2008, which provides the option to measure certain
financial assets and financial liabilities at fair value. FirstEnergy has
analyzed its financial assets and financial liabilities within the scope of
SFAS 159 and, as of March 31, 2008, has elected not to record eligible
assets and liabilities at fair value.
 
 As defined in SFAS
157, fair value is the price that would be received for an asset or paid to
transfer a liability (exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between willing market
participants on the measurement date. SFAS 157 establishes a fair value
hierarchy that prioritizes the inputs used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted market prices in active markets
for identical assets or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3). The three levels of the fair value hierarchy
defined by SFAS 157 are as follows:
 
 Level 1 – Quoted
prices are available in active markets for identical assets or liabilities as of
the reporting date. Active markets are those where transactions for the asset or
liability occur in sufficient frequency and volume to provide pricing
information on an ongoing basis. FirstEnergy’s Level 1 assets and liabilities
primarily consist of exchange-traded derivatives and equity securities listed on
active exchanges that are held in various trusts.
 
 Level 2 – Pricing
inputs are either directly or indirectly observable in the market as of the
reporting date, other than quoted prices in active markets included in Level 1.
FirstEnergy’s Level 2 consists primarily of investments in debt securities held
in various trusts and commodity forwards. Additionally, Level 2 includes those
financial instruments that are valued using models or other valuation
methodologies based on assumptions that are observable in the marketplace
throughout the full term of the instrument, can be derived from observable data
or are supported by observable levels at which transactions are executed in the
marketplace. These models are primarily industry-standard models that consider
various assumptions, including quoted forward prices for commodities, time
value, volatility factors, and current market and contractual prices for the
underlying instruments, as well as other relevant economic measures. Instruments
in this category include non-exchange-traded derivatives such as forwards and
certain interest rate swaps.
 
 Level 3 – Pricing
inputs include inputs that are generally less observable from objective sources.
These inputs may be used with internally developed methodologies that result in
management’s best estimate of fair value. FirstEnergy develops its view of the
future market price of key commodities through a combination of market
observation and assessment (generally for the short term) and fundamental
modeling (generally for the longer term). Key fundamental electricity model
inputs are generally directly observable in the market or derived from publicly
available historic and forecast data. Some key inputs reflect forecasts
published by industry leading consultants who generally employ similar
fundamental modeling approaches. Fundamental model inputs and results, as well
as the selection of consultants, reflect the consensus of appropriate
FirstEnergy management. Level 3 instruments include those that may be more
structured or otherwise tailored to customers’ needs. FirstEnergy’s Level 3
instruments consist of NUG contracts.
 
 FirstEnergy utilizes
market data and assumptions that market participants would use in pricing the
asset or liability, including assumptions about risk and the risks inherent in
the inputs to the valuation technique. These inputs can be readily observable,
market corroborated, or generally unobservable. FirstEnergy primarily applies
the market approach for recurring fair value measurements using the best
information available. Accordingly, FirstEnergy maximizes the use of observable
inputs and minimizes the use of unobservable inputs.
 
 The following table
sets forth FirstEnergy’s financial assets and financial liabilities that are
accounted for at fair value by level within the fair value hierarchy as of March
31, 2008. As required by SFAS 157, assets and liabilities are classified in
their entirety based on the lowest level of input that is significant to the
fair value measurement. FirstEnergy’s assessment of the significance of a
particular input to the fair value measurement requires judgment and may affect
the valuation of fair value assets and liabilities and their placement within
the fair value hierarchy levels.
 
 
 
 96
 
 
 March
      31, 2008Recurring
      Fair Value Measures
              
              Level
      1
              
              Level
      2
              
              Level
      3
              
              Total(In
      millions)Assets:Derivatives
              
              $
              4
              
              $
              98
              
              $
              -
              
              $
              102Nuclear
      decommissioning trusts(1)
              
              
              1,070
              
              
              953
              
              
              -
              
              
              2,023Other
      investments(2)
              
              
              21
              
              
              303
              
              
              -
              
              
              324Total
              
              $
              1,095
              
              $
              1,354
              
              $
              -
              
              $
              2,449Liabilities:Derivatives
              
              $
              -
              
              $
              98
              
              $
              -
              
              $
              98NUG
      contracts(3)
              
              
              -
              
              
              -
              
              
              682
              
              
              682Total
              
              $
              -
              
              $
              98
              
              $
              682
              
              $
              780
 
 (1)
              Balance
      excludes $2 million of receivables, payables and accrued
      income.
 (2)
              Excludes
      $318 million of the cash surrender value of life insurance
      contracts.
 (3)
              NUG contracts
      are completely offset by regulatory
assets.
 
 The determination of
the above fair value measures takes into consideration various factors required
under SFAS 157. These factors include the credit standing of the
counterparties involved, the impact of credit enhancements (such as cash
deposits, LOCs and priority interests) and the impact of nonperformance
risk.
 
 Exchange-traded
derivative contracts, which include some futures and options, are generally
based on unadjusted quoted market prices in active markets and are classified
within Level 1. Forwards, options and swap contracts that are not
exchange-traded are classified as Level 2 as the fair values of these items are
based on ICE quotes or market transactions in the OTC markets. In addition,
complex or longer term structured transactions can introduce the need for
internally-developed model inputs that may not be observable in or corroborated
by the market. When such inputs have a significant impact on the measurement of
fair value, the instrument is classified as Level 3.
 
 Nuclear
decommissioning trusts consist of equity securities listed on active exchanges
classified as Level 1 and various debt securities and collective trusts
classified as Level 2. Other investments represent the NUG trusts, spent nuclear
fuel trusts and rabbi trust investments, which primarily consist of various debt
securities and collective trusts classified as Level 2.
 
 The following table
sets forth a reconciliation of changes in the fair value of NUG contracts
classified as Level 3 in the fair value hierarchy for the three months ended
March 31, 2008 (in millions):
 
 Balance as of
      January 1, 2008
              
              $
              750Realized
      and unrealized gains (losses)(1)
              
              
              (58
              )Purchases,
      sales, issuances and settlements, net(1)
              
              
              (10
              )Net
      transfers to (from) Level 3
              
              
              -Balance as of
      March 31, 2008
              
              $
              682Change in
      unrealized gains (losses) relating toinstruments
      held as of March 31, 2008
              
              $
              (58
              )(1)Changes in the
      fair value of NUG contracts are completely offset by regulatory
                assets and do not impact earnings.
 
 Under FSP FAS 157-2,
FirstEnergy has elected to defer, for one year, the election of SFAS 157 for
financial assets and financial liabilities measured at fair value on a
non-recurring basis. FirstEnergy is currently evaluating the impact of
FAS 157 on those financial assets and financial liabilities measured at
fair value on a non-recurring basis.
 
 5.  DERIVATIVE
INSTRUMENTS
 
 FirstEnergy is
exposed to financial risks resulting from the fluctuation of interest rates and
commodity prices, including prices for electricity, natural gas, coal and energy
transmission. To manage the volatility relating to these exposures, FirstEnergy
uses a variety of derivative instruments, including forward contracts, options,
futures contracts and swaps. The derivatives are used principally for hedging
purposes. FirstEnergy's Risk Policy Committee, comprised of members of senior
management, provides general management oversight for risk management activities
throughout FirstEnergy. They are responsible for promoting the effective design
and implementation of sound risk management programs. They also oversee
compliance with corporate risk management policies and established risk
management practices.
 
 97
 
 
 FirstEnergy accounts
for derivative instruments on its Consolidated Balance Sheet at their fair value
unless they meet the normal purchases and normal sales criteria. Derivatives
that meet those criteria are accounted for at cost. The changes in the fair
value of derivative instruments that do not meet the normal purchases and normal
sales criteria are recorded as other expense, as AOCL, or as part of the value
of the hedged item, depending on whether or not it is designated as part of a
hedge transaction, the nature of the hedge transaction and hedge effectiveness.
FirstEnergy does not offset fair value for the right to reclaim collateral or
the obligation to return collateral.
 
 FirstEnergy hedges
anticipated transactions using cash flow hedges. Such transactions include
hedges of anticipated electricity and natural gas purchases and anticipated
interest payments associated with future debt issues. The effective portion of
such hedges are initially recorded in equity as other comprehensive income or
loss and are subsequently included in net income as the underlying hedged
commodities are delivered or interest payments are made. Gains and losses from
any ineffective portion of cash flow hedges are included directly in
earnings.
 
 The net deferred
losses of $84 million included in AOCL as of March 31, 2008, for
derivative hedging activity, as compared to $75 million as of
December 31, 2007, resulted from a net $21 million increase related to
current hedging activity and a $12 million decrease due to net hedge losses
reclassified to earnings during the three months ended March 31, 2008.
Based on current estimates, approximately $19 million (after tax) of the
net deferred losses on derivative instruments in AOCL as of March 31, 2008
are expected to be reclassified to earnings during the next twelve months as
hedged transactions occur. The fair value of these derivative instruments
fluctuate from period to period based on various market factors.
 
 FirstEnergy has
entered into swaps that have been designated as fair value hedges of fixed-rate,
long-term debt issues to protect against the risk of changes in the fair value
of fixed-rate debt instruments due to lower interest rates. Swap maturities,
call options, fixed interest rates received, and interest payment dates match
those of the underlying debt obligations. As of March 31, 2008, FirstEnergy
had interest rate swaps with an aggregate notional value of $250 million
and a fair value of $5 million.
 
 During 2007 and the
first three months of 2008, FirstEnergy entered into several forward starting
swap agreements (forward swaps) in order to hedge a portion of the consolidated
interest rate risk associated with the anticipated issuance of variable-rate,
short-term debt and fixed-rate, long-term debt securities by one or more of its
subsidiaries as outstanding debt matures during 2008 and 2009. These derivatives
are treated as cash flow hedges, protecting against the risk of changes in
future interest payments resulting from changes in benchmark U.S. Treasury and
LIBOR rates between the date of hedge inception and the date of the debt
issuance. During the first three months of 2008, FirstEnergy terminated swaps
with a notional value of $300 million and entered into swaps with a
notional value of $500 million. FirstEnergy paid $18 million related
to the terminations, $1 million of which was deemed ineffective and
recognized in current period earnings. FirstEnergy will recognize the remaining
$17 million loss over the life of the associated future debt. As of
March 31, 2008, FirstEnergy had forward swaps with an aggregate notional
amount of $600 million and a fair value of $(8) million.
 
 6.  ASSET
RETIREMENT OBLIGATIONS
 
 FirstEnergy has
recognized applicable legal obligations under SFAS 143 for nuclear power plant
decommissioning, reclamation of a sludge disposal pond and closure of two coal
ash disposal sites. In addition, FirstEnergy has recognized conditional
retirement obligations (primarily for asbestos remediation) in accordance with
FIN 47.
 
 The ARO liability of
$1.3 billion as of March 31, 2008 is primarily related to the future
nuclear decommissioning of the Beaver Valley, Davis-Besse, Perry and TMI-2
nuclear generating facilities. FirstEnergy utilized an expected cash flow
approach to measure the fair value of the nuclear decommissioning
ARO.
 
 FirstEnergy
maintains nuclear decommissioning trust funds that are legally restricted for
purposes of settling the nuclear decommissioning ARO. As of March 31, 2008,
the fair value of the decommissioning trust assets was approximately
$2.0 billion.
 
 98
 
 
 The following tables
analyze changes to the ARO balance during the first quarters of 2008 and 2007,
respectively.
 
 ARO
      Reconciliation
              
              FirstEnergy
              
              FES
              
              OE
              
              CEI
              
              TE
              
              JCP&L
              
              Met-Ed
              
              Penelec(In
      millions)Balance,
      January 1, 2008
              
              $
              1,267
              
              $
              810
              
              $
              94
              
              $
              2
              
              $
              28
              
              $
              90
              
              $
              161
              
              $
              82Liabilities
      incurred
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Liabilities
      settled
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Accretion
              
              
              20
              
              
              14
              
              
              1
              
              
              -
              
              
              1
              
              
              1
              
              
              2
              
              
              1Revisions in
      estimated cash flows
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Balance, March
      31, 2008
              
              $
              1,287
              
              $
              824
              
              $
              95
              
              $
              2
              
              $
              29
              
              $
              91
              
              $
              163
              
              $
              83Balance,
      January 1, 2007
              
              $
              1,190
              
              $
              760
              
              $
              88
              
              $
              2
              
              $
              27
              
              $
              84
              
              $
              151
              
              $
              77Liabilities
      incurred
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Liabilities
      settled
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Accretion
              
              
              18
              
              
              12
              
              
              1
              
              
              -
              
              
              -
              
              
              2
              
              
              2
              
              
              1Revisions in
      estimated cash flows
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Balance, March
      31, 2007
              
              $
              1,208
              
              $
              772
              
              $
              89
              
              $
              2
              
              $
              27
              
              $
              86
              
              $
              153
              
              $
              78
 
 
 7.  PENSION
AND OTHER POSTRETIREMENT BENEFITS
 
 FirstEnergy provides
noncontributory defined benefit pension plans that cover substantially all of
its employees and those of its subsidiaries. The trusteed plans provide defined
benefits based on years of service and compensation levels. FirstEnergy’s
funding policy is based on actuarial computations using the projected unit
credit method. FirstEnergy uses a December 31 measurement date for its
pension and other postretirement benefit plans. The fair value of the plan
assets represents the actual market value as of December 31, 2007.
FirstEnergy also provides a minimum amount of noncontributory life insurance to
retired employees in addition to optional contributory insurance. Health care
benefits, which include certain employee contributions, deductibles and
co-payments, are available upon retirement to employees hired prior to
January 1, 2005, their dependents and, under certain circumstances, their
survivors. FirstEnergy recognizes the expected cost of providing pension
benefits and other postretirement benefits from the time employees are hired
until they become eligible to receive those benefits. In addition, FirstEnergy
has obligations to former or inactive employees after employment, but before
retirement, for disability-related benefits.
 
 The components of
FirstEnergy's net periodic pension cost and other postretirement benefit cost
(including amounts capitalized) for the three months ended March 31, 2008 and
2007, consisted of the following:
 
 Pension
      Benefits
              
              Other
      Postretirement Benefits2008
              
              2007
              
              2008
              
              2007(In
      millions)Service
      cost
              
              $
              21
              
              $
              21
              
              $
              5
              
              $
              5Interest
      cost
              
              
              72
              
              
              71
              
              
              18
              
              
              17Expected
      return on plan assets
              
              
              (115
              )
              
              (112
              )
              
              (13
              )
              
              (13
              )Amortization
      of prior service cost
              
              
              2
              
              
              2
              
              
              (37
              )
              
              (37
              )Recognized net
      actuarial loss
              
              
              1
              
              
              10
              
              
              12
              
              
              12Net periodic
      cost (credit)
              
              $
              (19
              )
              $
              (8)
              
              $
              (15
              )
              $
              (16
              )
 
 Pension and
postretirement benefit obligations are allocated to FirstEnergy’s subsidiaries
employing the plan participants. The Companies capitalize employee benefits
related to construction projects. The net periodic pension costs and net
periodic postretirement benefit costs (including amounts capitalized) recognized
by each of the Companies for the three months ended March 31, 2008 and 2007
were as follows:
 
 Pension
      Benefit Cost (Credit)
              
              Other
      Postretirement
                Benefit
      Cost (Credit)2008
              
              2007
              
              2008
              
              2007(In
      millions)FES
              
              $
              4
              
              $
              -
              
              $
              (2
              )
              $
              -OE
              
              
              (7
              )
              
              (4
              )
              
              (2
              )
              
              (3
              )CEI
              
              
              (1
              )
              
              -
              
              
              1
              
              
              1TE
              
              
              (1
              )
              
              -
              
              
              1
              
              
              1JCP&L
              
              
              (4
              )
              
              (2
              )
              
              (4
              )
              
              (4
              )Met-Ed
              
              
              (3
              )
              
              (2
              )
              
              (3
              )
              
              (2
              )Penelec
              
              
              (3
              )
              
              (3
              )
              
              (3
              )
              
              (3
              )Other
      FirstEnergy
                  subsidiaries
              
              
              (4
              )
              
              3
              
              
              (3
              )
              
              (6
              )$
              (19
              )
              $
              (8
              )
              $
              (15
              )
              $
              (16
              )
 
 99
 
 
 8.  VARIABLE
INTEREST ENTITIES
 
 FIN 46R addresses
the consolidation of VIEs, including special-purpose entities, that are not
controlled through voting interests or in which the equity investors do not bear
the entity's residual economic risks and rewards. FirstEnergy and its
subsidiaries consolidate VIEs when they are determined to be the VIE's primary
beneficiary as defined by FIN 46R.
 
 Trusts
 
 FirstEnergy’s
consolidated financial statements include PNBV and Shippingport, VIEs created in
1996 and 1997, respectively, to refinance debt originally issued in connection
with sale and leaseback transactions. PNBV and Shippingport financial data are
included in the consolidated financial statements of OE and CEI,
respectively.
 
 PNBV was established
to purchase a portion of the lease obligation bonds issued in connection with
OE’s 1987 sale and leaseback of its interests in the Perry Plant and Beaver
Valley Unit 2. OE used debt and available funds to purchase the notes issued by
PNBV. Ownership of PNBV includes a 3% equity interest by an unaffiliated third
party and a 3% equity interest held by OES Ventures, a wholly owned subsidiary
of OE. Shippingport was established to purchase all of the lease obligation
bonds issued in connection with CEI’s and TE’s Bruce Mansfield Plant sale and
leaseback transaction in 1987. CEI and TE used debt and available funds to
purchase the notes issued by Shippingport.
 
 Loss
Contingencies
 
 FES and the Ohio
Companies are exposed to losses under their applicable sale-leaseback agreements
upon the occurrence of certain contingent events that each company considers
unlikely to occur. The maximum exposure under these provisions represents the
net amount of casualty value payments due upon the occurrence of specified
casualty events that render the applicable plant worthless. Net discounted lease
payments would not be payable if the casualty loss payments are made. The
following table shows each company’s net exposure to loss based upon the
casualty value provisions mentioned above as of March 31, 2008:
 
 Maximum
      Exposure
              
              Discounted
                Lease
                Payments,
      net
              
              Net
                Exposure(in
      millions)FES
              
              $
              1,364
              
              $
              1,216
              
              $
              148OE
              
              819
              
              628
              
              191CEI
              
              782
              
              77
              
              705TE
              
              782
              
              457
              
              325
 
 In
October 2007, CEI and TE assigned their leasehold interests in the Bruce
Mansfield Plant to FGCO. FGCO assumed all of CEI’s and TE’s obligations arising
under those leases. FGCO subsequently transferred the Unit 1 portion of these
leasehold interests, as well as FGCO’s leasehold interests under its
July 2007 Bruce Mansfield Unit 1 sale and leaseback transaction to a newly
formed wholly-owned subsidiary in December 2007. The subsidiary assumed all
of the lessee obligations associated with the assigned interests. However, CEI
and TE will remain primarily liable on the 1987 leases and related agreements as
to the lessors and other parties to the agreements. FGCO remains primarily
liable on the 2007 leases and related agreements, and FES remains primarily
liable as a guarantor under the related 2007 guarantees, as to the lessors and
other parties to the respective agreements. These assignments terminate
automatically upon the termination of the underlying leases.
 
 On March 3, 2008,
notice was given to the nine owner trusts that are lessors under sale and
leaseback transactions, originally entered into by TE in 1987, that NGC would
acquire the related 18.26% undivided interest in Beaver Valley Unit 2 through
the exercise of the periodic purchase option provided for in the applicable
facility leases. The purchase price to be paid by NGC for the undivided interest
will be equal to the higher of a specified casualty value under the applicable
facility leases (approximately $239 million in the aggregate for the equity
portion of all nine facility leases) and the fair market sales value of such
undivided interests. Determination of the fair market sales value may become
subject to an appraisal procedure provided for in the lease documentation. An
additional payment of approximately $236 million would be required to
prepay in full the outstanding principal of, and accrued but unpaid interest on,
the lessor notes of the nine owner trusts. Alternatively, this amount would not
be paid as part of the aggregate purchase price if the lessor notes are instead
assumed at the time of the exercise of the option. If NGC determines to prepay
the notes, it is possible that the proceeds from such prepayment may not be
sufficient to pay the principal of, and interest on, the bonds as they become
due. If that is the case, NGC would provide a mechanism to address any such
potential shortfall in a timely manner.
 
 100
 
 
 Power Purchase Agreements
 
 In accordance with
FIN 46R, FirstEnergy evaluated its power purchase agreements and determined that
certain NUG entities may be VIEs to the extent they own a plant that sells
substantially all of its output to the Companies and the contract price for
power is correlated with the plant’s variable costs of production. FirstEnergy,
through its subsidiaries JCP&L, Met-Ed and Penelec, maintains approximately
30 long-term power purchase agreements with NUG entities. The agreements were
entered into pursuant to the Public Utility Regulatory Policies Act of 1978.
FirstEnergy was not involved in the creation of, and has no equity or debt
invested in, these entities.
 
 FirstEnergy has
determined that for all but eight of these entities, neither JCP&L, Met-Ed
nor Penelec have variable interests in the entities or the entities are
governmental or not-for-profit organizations not within the scope of
FIN 46R. JCP&L, Met-Ed or Penelec may hold variable interests in the
remaining eight entities, which sell their output at variable prices that
correlate to some extent with the operating costs of the plants. As required by
FIN 46R, FirstEnergy periodically requests from these eight entities the
information necessary to determine whether they are VIEs or whether JCP&L,
Met-Ed or Penelec is the primary beneficiary. FirstEnergy has been unable to
obtain the requested information, which in most cases was deemed by the
requested entity to be proprietary. As such, FirstEnergy applied the scope
exception that exempts enterprises unable to obtain the necessary information to
evaluate entities under FIN 46R.
 
 Since FirstEnergy
has no equity or debt interests in the NUG entities, its maximum exposure to
loss relates primarily to the above-market costs it may incur for power.
FirstEnergy expects any above-market costs it incurs to be recovered from
customers. Purchased power costs from these entities during the three months
ended March 31, 2008 and 2007 are shown in the following
table:
 
 Three
      Months EndedMarch
      31,2008
              
              2007(In
      millions)JCP&L
              
              $
              19
              
              $
              20Met-Ed
              
              
              16
              
              
              15Penelec
              
              
              8
              
              
              8$
              43
              
              $
              43
 
 Transition Bonds
 
 The consolidated
financial statements of FirstEnergy and JCP&L include the results of
JCP&L Transition Funding and JCP&L Transition Funding II, wholly owned
limited liability companies of JCP&L. In June 2002, JCP&L Transition
Funding sold $320 million of transition bonds to securitize the recovery of
JCP&L's bondable stranded costs associated with the previously divested
Oyster Creek Nuclear Generating Station. In August 2006, JCP&L Transition
Funding II sold $182 million of transition bonds to securitize the recovery
of deferred costs associated with JCP&L’s supply of BGS.
 
 JCP&L did not
purchase and does not own any of the transition bonds, which are included as
long-term debt on FirstEnergy's and JCP&L's Consolidated Balance Sheets. As
of March 31, 2008, $391 million of the transition bonds were
outstanding. The transition bonds are the sole obligations of JCP&L
Transition Funding and JCP&L Transition Funding II and are collateralized by
each company’s equity and assets, which consists primarily of bondable
transition property.
 
 Bondable transition
property represents the irrevocable right under New Jersey law of a utility
company to charge, collect and receive from its customers, through a
non-bypassable TBC, the principal amount and interest on transition bonds and
other fees and expenses associated with their issuance. JCP&L sold its
bondable transition property to JCP&L Transition Funding and JCP&L
Transition Funding II and, as servicer, manages and administers the bondable
transition property, including the billing, collection and remittance of the
TBC, pursuant to separate servicing agreements with JCP&L Transition Funding
and JCP&L Transition Funding II. For the two series of transition bonds,
JCP&L is entitled to aggregate quarterly servicing fees of $157,000 payable
from TBC collections.
 
 9.  INCOME
TAXES
 
 On January 1, 2007,
FirstEnergy adopted FIN 48, which provides guidance for accounting for
uncertainty in income taxes recognized in a company’s financial statements in
accordance with SFAS 109. This interpretation prescribes a recognition
threshold and measurement attribute for financial statement recognition and
measurement of tax positions taken or expected to be taken on a company’s tax
return. FIN 48 also provides guidance on derecognition, classification,
interest, penalties, accounting in interim periods, disclosure and transition.
The evaluation of a tax position in accordance with this interpretation is a
two-step process. The first step is to determine if it is more likely than not
that a tax position will be sustained upon examination, based on the merits of
the position, and should therefore be recognized. The second step is to measure
a tax position that meets the more likely than not recognition threshold to
determine the amount of income tax benefit to recognize in the financial
statements.
 
 101
 
 
 As of January 1,
2007, the total amount of FirstEnergy’s unrecognized tax benefits was
$268 million. FirstEnergy recorded a $2.7 million cumulative effect
adjustment to the January 1, 2007 balance of retained earnings to increase
reserves for uncertain tax positions. Of the total amount of unrecognized income
tax benefits, $92 million would favorably affect FirstEnergy’s effective tax
rate upon recognition. The majority of items that would not have affected the
effective tax rate would be purchase accounting adjustments to goodwill upon
recognition. During the first three months of 2008 and 2007, there were no
material changes to FirstEnergy’s unrecognized tax benefits. As of
March 31, 2008, FirstEnergy expects that it is reasonably possible that
$8 million of the unrecognized benefits will be resolved within the next
twelve months and is included in the caption “accrued taxes,” with the remaining
$263 million included in the caption “other non-current liabilities” on the
Consolidated Balance Sheets.
 
 FIN 48 also requires
companies to recognize interest expense or income related to uncertain tax
positions. That amount is computed by applying the applicable statutory interest
rate to the difference between the tax position recognized in accordance with
FIN 48 and the amount previously taken or expected to be taken on the tax
return. FirstEnergy includes net interest and penalties in the provision for
income taxes, consistent with its policy prior to implementing FIN 48. The
net amount of interest accrued as of March 31, 2008 was $57 million,
as compared to $53 million as of December 31, 2007. During the first
three months of 2008 and 2007, there were no material changes to the amount of
interest accrued.
 
 FirstEnergy has tax
returns that are under review at the audit or appeals level by the IRS and state
tax authorities. All state jurisdictions are open from 2001-2007. The IRS began
reviewing returns for the years 2001-2003 in July 2004 and several items are
under appeal. The federal audits for the years 2004-2006 are expected to close
before December 2008, but management anticipates certain items to be under
appeal. The IRS began auditing the year 2007 in February 2007 and year 2008 in
February 2008 under its Compliance Assurance Process experimental program.
Neither audit is expected to close before December 2008. Management believes
that adequate reserves have been recognized and final settlement of these audits
is not expected to have a material adverse effect on FirstEnergy’s financial
condition or results of operations.
 
 10.  COMMITMENTS,
GUARANTEES AND CONTINGENCIES
 
 (A)    GUARANTEES
AND OTHER ASSURANCES
 
 As part of normal
business activities, FirstEnergy enters into various agreements on behalf of its
subsidiaries to provide financial or performance assurances to third parties.
These agreements include contract guarantees, surety bonds and LOCs. As of
March 31, 2008, outstanding guarantees and other assurances aggregated
approximately $4.4 billion, consisting of parental guarantees -
$0.9 billion, subsidiaries’ guarantees - $2.7 billion, surety bonds -
$0.1 billion and LOCs - $0.7 billion.
 
 FirstEnergy
guarantees energy and energy-related payments of its subsidiaries involved in
energy commodity activities principally to facilitate normal physical
transactions involving electricity, gas, emission allowances and coal.
FirstEnergy also provides guarantees to various providers of credit support for
the financing or refinancing by subsidiaries of costs related to the acquisition
of property, plant and equipment. These agreements legally obligate FirstEnergy
to fulfill the obligations of those subsidiaries directly involved in energy and
energy-related transactions or financing where the law might otherwise limit the
counterparties' claims. If demands of a counterparty were to exceed the ability
of a subsidiary to satisfy existing obligations, FirstEnergy's guarantee enables
the counterparty's legal claim to be satisfied by other FirstEnergy assets. The
likelihood is remote that such parental guarantees of $0.4 billion
(included in the $0.9 billion discussed above) as of March 31, 2008
would increase amounts otherwise payable by FirstEnergy to meet its obligations
incurred in connection with financings and ongoing energy and energy-related
activities.
 
 While these types of
guarantees are normally parental commitments for the future payment of
subsidiary obligations, subsequent to the occurrence of a credit rating
downgrade or “material adverse event,” the immediate posting of cash collateral
or provision of an LOC may be required of the subsidiary. As of March 31,
2008, FirstEnergy's maximum exposure under these collateral provisions was
$440 million.
 
 Most of
FirstEnergy's surety bonds are backed by various indemnities common within the
insurance industry. Surety bonds and related guarantees of $66 million
provide additional assurance to outside parties that contractual and statutory
obligations will be met in a number of areas including construction contracts,
environmental commitments and various retail transactions.
 
 FirstEnergy has also
guaranteed the obligations of the operators of the TEBSA project, up to a
maximum of $2 million (subject to escalation) under the project's
operations and maintenance agreement. In connection with the sale of TEBSA in
January 2004, the purchaser indemnified FirstEnergy against any loss under this
guarantee. FirstEnergy has also provided an LOC ($19 million as of
March 31, 2008), which is renewable and declines yearly based upon the
senior outstanding debt of TEBSA.
 
 102
 
 In July 2007,
FGCO completed a sale and leaseback transaction for its 93.825% undivided
interest in Bruce Mansfield Unit 1. FES has unconditionally and irrevocably
guaranteed all of FGCO’s obligations under each of the leases. The related
lessor notes and pass through certificates are not guaranteed by FES or FGCO,
but the notes are secured by, among other things, each lessor trust’s undivided
interest in Unit 1, rights and interests under the applicable lease and rights
and interests under other related agreements, including FES’ lease
guaranty.
 
 (B)
              ENVIRONMENTAL
      MATTERS
 
 Various federal,
state and local authorities regulate FirstEnergy with regard to air and water
quality and other environmental matters. The effects of compliance on
FirstEnergy with regard to environmental matters could have a material adverse
effect on FirstEnergy's earnings and competitive position to the extent that it
competes with companies that are not subject to such regulations and, therefore,
do not bear the risk of costs associated with compliance, or failure to comply,
with such regulations. FirstEnergy estimates capital expenditures for
environmental compliance of approximately $1.4 billion for the period
2008-2012.
 
 FirstEnergy accrues
environmental liabilities only when it concludes that it is probable that it has
an obligation for such costs and can reasonably estimate the amount of such
costs. Unasserted claims are reflected in FirstEnergy’s determination of
environmental liabilities and are accrued in the period that they become both
probable and reasonably estimable.
 
 Clean Air Act Compliance
 
 FirstEnergy is
required to meet federally-approved SO2 emissions
regulations. Violations of such regulations can result in the shutdown of the
generating unit involved and/or civil or criminal penalties of up to $32,500 for
each day the unit is in violation. The EPA has an interim enforcement policy for
SO2
regulations in Ohio that allows for compliance based on a 30-day averaging
period. FirstEnergy believes it is currently in compliance with this policy, but
cannot predict what action the EPA may take in the future with respect to the
interim enforcement policy.
 
 The EPA Region 5
issued a Finding of Violation and NOV to the Bay Shore Power Plant dated June
15, 2006, alleging violations to various sections of the CAA. FirstEnergy has
disputed those alleged violations based on its CAA permit, the Ohio SIP and
other information provided to the EPA at an August 2006 meeting with the EPA.
The EPA has several enforcement options (administrative compliance order,
administrative penalty order, and/or judicial, civil or criminal action) and has
indicated that such option may depend on the time needed to achieve and
demonstrate compliance with the rules alleged to have been violated. On
June 5, 2007, the EPA requested another meeting to discuss “an appropriate
compliance program” and a disagreement regarding the opacity limit applicable to
the common stack for Bay Shore Units 2, 3 and 4.
 
 FirstEnergy complies
with SO2 reduction
requirements under the Clean Air Act Amendments of 1990 by burning lower-sulfur
fuel, generating more electricity from lower-emitting plants, and/or using
emission allowances. NOX reductions
required by the 1990 Amendments are being achieved through combustion controls
and the generation of more electricity at lower-emitting plants. In September
1998, the EPA finalized regulations requiring additional NOX reductions
at FirstEnergy's facilities. The EPA's NOX Transport
Rule imposes uniform reductions of NOX emissions
(an approximate 85% reduction in utility plant NOX emissions
from projected 2007 emissions) across a region of nineteen states (including
Michigan, New Jersey, Ohio and Pennsylvania) and the District of Columbia based
on a conclusion that such NOX emissions
are contributing significantly to ozone levels in the eastern United States.
FirstEnergy believes its facilities are also complying with the NOX budgets
established under SIPs through combustion controls and post-combustion controls,
including Selective Catalytic Reduction and SNCR systems, and/or using emission
allowances.
 
 On May 22, 2007,
FirstEnergy and FGCO received a notice letter, required 60 days prior to the
filing of a citizen suit under the federal CAA, alleging violations of air
pollution laws at the Bruce Mansfield Plant, including opacity limitations.
Prior to the receipt of this notice, the Plant was subject to a Consent Order
and Agreement with the Pennsylvania Department of Environmental Protection
concerning opacity emissions under which efforts to achieve compliance with the
applicable laws will continue. On October 18, 2007, PennFuture filed a
complaint, joined by three of its members, in the United States District Court
for the Western District of Pennsylvania. On January 11, 2008, FirstEnergy filed
a motion to dismiss claims alleging a public nuisance. On April 24, 2008, the
Court denied the motion to dismiss, but also ruled that monetary damages could
not be recovered under the public nuisance claim.
 
 On December 18,
2007, the state of New Jersey filed a CAA citizen suit alleging NSR violations
at the Portland Generation Station against Reliant (the current owner and
operator), Sithe Energy (the purchaser of the Portland Station from Met-Ed in
1999), GPU, Inc. and Met-Ed.  Specifically, New Jersey alleges that
"modifications" at Portland Units 1 and 2 occurred between 1980 and 1995 without
preconstruction NSR or permitting under the CAA's prevention of significant
deterioration program, and seeks injunctive relief, penalties, attorney fees and
mitigation of the harm caused by excess emissions. On March 14, 2008, Met-Ed
filed a motion to dismiss the citizen suit claims against it and a stipulation
in which the parties agreed that GPU, Inc. should be dismissed from this case.
On March 26, 2008, GPU, Inc. was dismissed by the Court. Although it remains
liable for civil or criminal penalties and fines that may be assessed relating
to events prior to the sale of the Portland Station in 1999, Met-Ed is
indemnified by Sithe Energy against any other liability arising under the CAA
whether it arises out of pre-1999 or post-1999 events.
 
 103
 
 
 National Ambient Air Quality
Standards
 
 In March 2005,
the EPA finalized the CAIR covering a total of 28 states (including Michigan,
New Jersey, Ohio and Pennsylvania) and the District of Columbia based on
proposed findings that air emissions from 28 eastern states and the District of
Columbia significantly contribute to non-attainment of the NAAQS for fine
particles and/or the "8-hour" ozone NAAQS in other states. CAIR requires
reductions of NOX and
SO2
emissions in two phases (Phase I in 2009 for NOX, 2010 for
SO2
and Phase II in 2015 for both NOX and
SO2).
FirstEnergy's Michigan, Ohio and Pennsylvania fossil generation facilities will
be subject to caps on SO2 and
NOX
emissions, whereas its New Jersey fossil generation facility will be subject to
only a cap on NOX emissions.
According to the EPA, SO2 emissions
will be reduced by 45% (from 2003 levels) by 2010 across the states covered by
the rule, with reductions reaching 73% (from 2003 levels) by 2015, capping
SO2
emissions in affected states to just 2.5 million tons annually. NOX emissions
will be reduced by 53% (from 2003 levels) by 2009 across the states covered by
the rule, with reductions reaching 61% (from 2003 levels) by 2015, achieving a
regional NOX cap of 1.3
million tons annually. CAIR has been challenged in the United States Court of
Appeals for the District of Columbia. The future cost of compliance with these
regulations may be substantial and may depend on the outcome of this litigation
and how CAIR is ultimately implemented.
 
 Mercury Emissions
 
 In December 2000,
the EPA announced it would proceed with the development of regulations regarding
hazardous air pollutants from electric power plants, identifying mercury as the
hazardous air pollutant of greatest concern. In March 2005, the EPA finalized
the CAMR, which provides a cap-and-trade program to reduce mercury emissions
from coal-fired power plants in two phases; initially, capping national mercury
emissions at 38 tons by 2010 (as a "co-benefit" from implementation of
SO2
and NOX emission
caps under the EPA's CAIR program) and 15 tons per year by 2018. Several states
and environmental groups appealed the CAMR to the United States Court of Appeals
for the District of Columbia. On February 8, 2008, the court vacated the
CAMR ruling that the EPA failed to take the necessary steps to “de-list”
coal-fired power plants from its hazardous air pollutant program and, therefore,
could not promulgate a cap-and-trade program. The EPA must now seek further
judicial review of that ruling or take regulatory action to promulgate new
mercury emission standards for coal-fired power plants. FGCO’s future cost of
compliance with mercury regulations may be substantial and will depend on the
action taken by the EPA and on how they are ultimately implemented.
 
 Pennsylvania has
submitted a new mercury rule for EPA approval that does not provide a
cap-and-trade approach as in the CAMR, but rather follows a command-and-control
approach imposing emission limits on individual sources. It is anticipated that
compliance with these regulations, if approved by the EPA and implemented, would
not require the addition of mercury controls at the Bruce Mansfield Plant,
FirstEnergy’s only Pennsylvania coal-fired power plant, until 2015, if at
all.
 
 W. H. Sammis Plant
 
 In 1999 and 2000,
the EPA issued an NOV and the DOJ filed a civil complaint against OE and Penn
based on operation and maintenance of the W.H. Sammis Plant (Sammis NSR
Litigation) and filed similar complaints involving 44 other U.S. power plants.
This case, along with seven other similar cases, are referred to as the NSR
cases.
 
 On March 18, 2005,
OE and Penn announced that they had reached a settlement with the EPA, the DOJ
and three states (Connecticut, New Jersey and New York) that resolved all issues
related to the Sammis NSR litigation. This settlement agreement, which is in the
form of a consent decree, was approved by the court on July 11, 2005, and
requires reductions of NOX and
SO2
emissions at the Sammis, Burger, Eastlake and Mansfield coal-fired plants
through the installation of pollution control devices and provides for
stipulated penalties for failure to install and operate such pollution controls
in accordance with that agreement. Consequently, if FirstEnergy fails to install
such pollution control devices, for any reason, including, but not limited to,
the failure of any third-party contractor to timely meet its delivery
obligations for such devices, FirstEnergy could be exposed to penalties under
the Sammis NSR Litigation consent decree. Capital expenditures necessary to
complete requirements of the Sammis NSR Litigation consent decree are currently
estimated to be $1.3 billion for 2008-2012 ($650 million of which is
expected to be spent during 2008, with the largest portion of the remaining
$650 million expected to be spent in 2009). This amount is included in the
estimated capital expenditures for environmental compliance referenced
above.
 
 On April 2,
2007, the United States Supreme Court ruled that changes in annual emissions (in
tons/year) rather than changes in hourly emissions rate (in kilograms/hour) must
be used to determine whether an emissions increase triggers NSR. Subsequently,
on May 8, 2007, the EPA proposed to revise the NSR regulations to utilize
changes in the hourly emission rate (in kilograms/hour) to determine whether an
emissions increase triggers NSR.   The EPA has not yet issued a
final regulation. FGCO’s future cost of compliance with those regulations may be
substantial and will depend on how they are ultimately implemented.
 
 104
 
 
 Climate Change
 
 In December 1997,
delegates to the United Nations' climate summit in Japan adopted an agreement,
the Kyoto Protocol, to address global warming by reducing the amount of man-made
GHG emitted by developed countries by 2012. The United States signed the Kyoto
Protocol in 1998 but it failed to receive the two-thirds vote required for
ratification by the United States Senate. However, the Bush administration has
committed the United States to a voluntary climate change strategy to reduce
domestic GHG intensity – the ratio of emissions to economic output – by 18%
through 2012. Also, in an April 16, 2008 speech, President Bush set a
policy goal of stopping the growth of GHG emissions by 2025, as the next step
beyond the 2012 strategy. In addition, the EPACT established a Committee on
Climate Change Technology to coordinate federal climate change activities and
promote the development and deployment of GHG reducing
technologies.
 
 There are a number
of initiatives to reduce GHG emissions under consideration at the federal, state
and international level.  At the international level, efforts to reach
a new global agreement to reduce GHG emissions post-2012 have begun with the
Bali Roadmap, which outlines a two-year process designed to lead to an agreement
in 2009. At the federal level, members of Congress have introduced several bills
seeking to reduce emissions of GHG in the United States, and the Senate
Environmental and Public Works Committees have passed one such bill. State
activities, primarily the northeastern states participating in the Regional
Greenhouse Gas Initiative and western states led by California, have coordinated
efforts to develop regional strategies to control emissions of certain
GHGs.
 
 On April 2, 2007,
the United States Supreme Court found that the EPA has the authority to regulate
CO2
emissions from automobiles as “air pollutants” under the CAA. Although this
decision did not address CO2 emissions
from electric generating plants, the EPA has similar authority under the CAA to
regulate “air pollutants” from those and other facilities.
 
 FirstEnergy cannot
currently estimate the financial impact of climate change policies, although
potential legislative or regulatory programs restricting CO2 emissions
could require significant capital and other expenditures. The CO2 emissions
per KWH of electricity generated by FirstEnergy is lower than many regional
competitors due to its diversified generation sources, which include low or
non-CO2 emitting
gas-fired and nuclear generators.
 
 Clean Water Act
 
 Various water
quality regulations, the majority of which are the result of the federal Clean
Water Act and its amendments, apply to FirstEnergy's plants. In addition, Ohio,
New Jersey and Pennsylvania have water quality standards applicable to
FirstEnergy's operations. As provided in the Clean Water Act, authority to grant
federal National Pollutant Discharge Elimination System water discharge permits
can be assumed by a state. Ohio, New Jersey and Pennsylvania have assumed such
authority.
 
 On September 7,
2004, the EPA established new performance standards under Section 316(b) of the
Clean Water Act for reducing impacts on fish and shellfish from cooling water
intake structures at certain existing large electric generating plants. The
regulations call for reductions in impingement mortality (when aquatic organisms
are pinned against screens or other parts of a cooling water intake system) and
entrainment (which occurs when aquatic life is drawn into a facility's cooling
water system). On January 26, 2007, the United States Court of Appeals for the
Second Circuit remanded portions of the rulemaking dealing with impingement
mortality and entrainment back to the EPA for further rulemaking and eliminated
the restoration option from the EPA’s regulations. On July 9, 2007, the EPA
suspended this rule, noting that until further rulemaking occurs, permitting
authorities should continue the existing practice of applying their best
professional judgment (BPJ) to minimize impacts on fish and shellfish from
cooling water intake structures. On April 14, 2008, the Supreme Court of
the United States granted a petition for a writ of certiorari to review certain
aspects of the Second Circuit’s decision. FirstEnergy is studying various
control options and their costs and effectiveness. Depending on the results of
such studies, the outcome of the Supreme Court’s review of the Second Circuit’s
decision, the EPA’s further rulemaking and any action taken by the states
exercising BPJ, the future costs of compliance with these standards may require
material capital expenditures.
 
 Regulation of Hazardous
Waste
 
 As a result of the
Resource Conservation and Recovery Act of 1976, as amended, and the Toxic
Substances Control Act of 1976, federal and state hazardous waste regulations
have been promulgated. Certain fossil-fuel combustion waste products, such as
coal ash, were exempted from hazardous waste disposal requirements pending the
EPA's evaluation of the need for future regulation. The EPA subsequently
determined that regulation of coal ash as a hazardous waste is unnecessary. In
April 2000, the EPA announced that it will develop national standards regulating
disposal of coal ash under its authority to regulate non-hazardous
waste.
 
 105
 
 
 Under NRC
regulations, FirstEnergy must ensure that adequate funds will be available to
decommission its nuclear facilities.  As of March 31, 2008,
FirstEnergy had approximately $2.0 billion invested in external trusts to
be used for the decommissioning and environmental remediation of Davis-Besse,
Beaver Valley, Perry and TMI-2. As part of the application to the NRC to
transfer the ownership of Davis-Besse, Beaver Valley and Perry to NGC in 2005,
FirstEnergy agreed to contribute another $80 million to these trusts by 2010.
Consistent with NRC guidance, utilizing a “real” rate of return on these funds
of approximately 2% over inflation, these trusts are expected to exceed the
minimum decommissioning funding requirements set by the NRC. Conservatively,
these estimates do not include any rate of return that the trusts may earn over
the 20-year plant useful life extensions that FirstEnergy (and Exelon for TMI-1
as it relates to the timing of the decommissioning of TMI-2) seeks for these
facilities.
 
 The Companies have
been named as PRPs at waste disposal sites, which may require cleanup under the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980.
Allegations of disposal of hazardous substances at historical sites and the
liability involved are often unsubstantiated and subject to dispute; however,
federal law provides that all PRPs for a particular site may be liable on a
joint and several basis. Therefore, environmental liabilities that are
considered probable have been recognized on the Consolidated Balance Sheet as of
March 31, 2008, based on estimates of the total costs of cleanup, the Companies'
proportionate responsibility for such costs and the financial ability of other
unaffiliated entities to pay. Total liabilities of approximately
$92 million (JCP&L - $65 million, TE - $1 million, CEI -
$1 million and FirstEnergy Corp. - $25 million) have been accrued
through March 31, 2008. Included in the total for JCP&L are accrued
liabilities of approximately $56 million for environmental remediation of
former manufactured gas plants in New Jersey; which are being recovered by
JCP&L through a non-bypassable SBC.
 
 (C)   OTHER LEGAL
PROCEEDINGS
 
 Power Outages and Related
Litigation
 
 In July 1999, the
Mid-Atlantic States experienced a severe heat wave, which resulted in power
outages throughout the service territories of many electric utilities, including
JCP&L's territory. In an investigation into the causes of the outages and
the reliability of the transmission and distribution systems of all four of New
Jersey’s electric utilities, the NJBPU concluded that there was not a prima
facie case demonstrating that, overall, JCP&L provided unsafe, inadequate or
improper service to its customers. Two class action lawsuits (subsequently
consolidated into a single proceeding) were filed in New Jersey Superior Court
in July 1999 against JCP&L, GPU and other GPU companies, seeking
compensatory and punitive damages arising from the July 1999 service
interruptions in the JCP&L territory.
 
 In August 2002, the
trial court granted partial summary judgment to JCP&L and dismissed the
plaintiffs' claims for consumer fraud, common law fraud, negligent
misrepresentation, and strict product liability. In November 2003, the trial
court granted JCP&L's motion to decertify the class and denied plaintiffs'
motion to permit into evidence their class-wide damage model indicating damages
in excess of $50 million. These class decertification and damage rulings were
appealed to the Appellate Division. The Appellate Division issued a decision in
July 2004, affirming the decertification of the originally certified class, but
remanding for certification of a class limited to those customers directly
impacted by the outages of JCP&L transformers in Red Bank, NJ, based on a
common incident involving the failure of the bushings of two large transformers
in the Red Bank substation resulting in planned and unplanned outages in the
area during a 2-3 day period. In 2005, JCP&L renewed its motion to decertify
the class based on a very limited number of class members who incurred damages
and also filed a motion for summary judgment on the remaining plaintiffs’ claims
for negligence, breach of contract and punitive damages. In July 2006, the New
Jersey Superior Court dismissed the punitive damage claim and again decertified
the class based on the fact that a vast majority of the class members did not
suffer damages and those that did would be more appropriately addressed in
individual actions. Plaintiffs appealed this ruling to the New Jersey Appellate
Division which, in March 2007, reversed the decertification of the Red Bank
class and remanded this matter back to the Trial Court to allow plaintiffs
sufficient time to establish a damage model or individual proof of damages.
JCP&L filed a petition for allowance of an appeal of the Appellate Division
ruling to the New Jersey Supreme Court which was denied in May
2007.  Proceedings are continuing in the Superior Court and a case
management conference with the presiding Judge is scheduled for June 13,
2008.  FirstEnergy is defending this class action but is unable to
predict the outcome of this matter.  No liability has been accrued as
of March 31, 2008.
 
 106
 
 
 Nuclear Plant Matters
 
 On May 14, 2007, the
Office of Enforcement of the NRC issued a DFI to FENOC, following FENOC’s reply
to an April 2, 2007 NRC request for information, about two reports prepared by
expert witnesses for an insurance arbitration (the insurance claim was
subsequently withdrawn by FirstEnergy in December 2007) related to Davis-Besse.
The NRC indicated that this information was needed for the NRC “to determine
whether an Order or other action should be taken pursuant to 10 CFR 2.202, to
provide reasonable assurance that FENOC will continue to operate its licensed
facilities in accordance with the terms of its licenses and the Commission’s
regulations.” FENOC was directed to submit the information to the NRC within 30
days. On June 13, 2007, FENOC filed a response to the NRC’s DFI reaffirming that
it accepts full responsibility for the mistakes and omissions leading up to the
damage to the reactor vessel head and that it remains committed to operating
Davis-Besse and FirstEnergy’s other nuclear plants safely and responsibly. FENOC
submitted a supplemental response clarifying certain aspects of the DFI response
to the NRC on July 16, 2007. On August 15, 2007, the NRC issued a
confirmatory order imposing these commitments. FENOC must inform the NRC’s
Office of Enforcement after it completes the key commitments embodied in the
NRC’s order. FENOC’s compliance with these commitments is subject to future NRC
review.
 
 Other Legal Matters
 
 There are various
lawsuits, claims (including claims for asbestos exposure) and proceedings
related to FirstEnergy's normal business operations pending against FirstEnergy
and its subsidiaries. The other potentially material items not otherwise
discussed above are described below.
 
 On August 22, 2005,
a class action complaint was filed against OE in Jefferson County, Ohio Common
Pleas Court, seeking compensatory and punitive damages to be determined at trial
based on claims of negligence and eight other tort counts alleging damages from
W.H. Sammis Plant air emissions. The two named plaintiffs are also seeking
injunctive relief to eliminate harmful emissions and repair property damage and
the institution of a medical monitoring program for class members. On
April 5, 2007, the Court rejected the plaintiffs’ request to certify this
case as a class action and, accordingly, did not appoint the plaintiffs as class
representatives or their counsel as class counsel. On July 30, 2007,
plaintiffs’ counsel voluntarily withdrew their request for reconsideration of
the April 5, 2007 Court order denying class certification and the Court
heard oral argument on the plaintiffs’ motion to amend their complaint which OE
opposed. On August 2, 2007, the Court denied the plaintiffs’ motion to
amend their complaint. The plaintiffs have appealed the Court’s denial of the
motion for certification as a class action and motion to amend their
complaint.
 
 JCP&L's
bargaining unit employees filed a grievance challenging JCP&L's 2002
call-out procedure that required bargaining unit employees to respond to
emergency power outages. On May 20, 2004, an arbitration panel concluded
that the call-out procedure violated the parties' collective bargaining
agreement. At the conclusion of the June 1, 2005 hearing, the arbitration
panel decided not to hear testimony on damages and closed the proceedings. On
September 9, 2005, the arbitration panel issued an opinion to award
approximately $16 million to the bargaining unit employees. On February 6,
2006, a federal district court granted a union motion to dismiss, as premature,
a JCP&L appeal of the award filed on October 18, 2005. A final order
identifying the individual damage amounts was issued on October 31, 2007.
The award appeal process was initiated. The union filed a motion with the
federal court to confirm the award and JCP&L filed its answer and
counterclaim to vacate the award on December 31, 2007. The court held a
scheduling conference in April 2008 where it set a briefing schedule with all
briefs to be concluded by July 2008. JCP&L recognized a liability for the
potential $16 million award in 2005.
 
 The union employees
at the Bruce Mansfield Plant have been working without a labor contract since
February 15, 2008. The parties are continuing to bargain with the
assistance of a federal mediator. FirstEnergy has a strike mitigation plan ready
in the event of a strike.
 
 FirstEnergy accrues
legal liabilities only when it concludes that it is probable that it has an
obligation for such costs and can reasonably estimate the amount of such costs.
If it were ultimately determined that FirstEnergy or its subsidiaries have legal
liability or are otherwise made subject to liability based on the above matters,
it could have a material adverse effect on FirstEnergy's or its subsidiaries'
financial condition, results of operations and cash flows.
 
 107
 
 
 11.  REGULATORY
MATTERS
 
 (A) RELIABILITY
INITIATIVES
 
 In late 2003 and
early 2004, a series of letters, reports and recommendations were issued from
various entities, including governmental, industry and ad hoc reliability
entities (PUCO, FERC, NERC and the U.S. – Canada Power System Outage Task Force)
regarding enhancements to regional reliability. The proposed enhancements were
divided into two groups:  enhancements that were to be completed in
2004; and enhancements that were to be completed after 2004.  In 2004,
FirstEnergy completed all of the enhancements that were recommended for
completion in 2004. FirstEnergy is also proceeding with the implementation of
the recommendations that were to be completed subsequent to 2004 and will
continue to periodically assess the FERC-ordered Reliability Study
recommendations for forecasted 2009 system conditions, recognizing revised load
forecasts and other changing system conditions which may impact the
recommendations. Thus far, implementation of the recommendations has not
required, nor is expected to require, substantial investment in new or material
upgrades to existing equipment. The FERC or other applicable government agencies
and reliability coordinators may, however, take a different view as to
recommended enhancements or may recommend additional enhancements in the future
that could require additional material expenditures.
 
 As a result of
outages experienced in JCP&L’s service area in 2002 and 2003, the NJBPU
performed a review of JCP&L’s service reliability. On June 9, 2004, the
NJBPU approved a stipulation that addresses a third-party consultant’s
recommendations on appropriate courses of action necessary to ensure system-wide
reliability. The stipulation incorporates the consultant’s focused audit of, and
recommendations regarding, JCP&L’s Planning and Operations and Maintenance
programs and practices. On June 1, 2005, the consultant completed his work and
issued his final report to the NJBPU. On July 14, 2006, JCP&L filed a
comprehensive response to the consultant’s report with the NJBPU. JCP&L will
complete the remaining substantive work described in the stipulation in
2008.  JCP&L continues to file compliance reports with the NJBPU
reflecting JCP&L’s activities associated with implementing the
stipulation.
 
 In 2005, Congress
amended the Federal Power Act to provide for federally-enforceable mandatory
reliability standards. The mandatory reliability standards apply to the bulk
power system and impose certain operating, record-keeping and reporting
requirements on the Companies and ATSI. The NERC is charged with establishing
and enforcing these reliability standards, although it has delegated day-to-day
implementation and enforcement of its responsibilities to eight regional
entities, including the ReliabilityFirst
Corporation.  All of FirstEnergy’s facilities are located within the
ReliabilityFirst
region. FirstEnergy actively participates in the NERC and ReliabilityFirst stakeholder processes,
and otherwise monitors and manages its companies in response to the ongoing
development, implementation and enforcement of the reliability
standards.
 
 FirstEnergy believes
that it is in compliance with all currently-effective and enforceable
reliability standards.  Nevertheless, it is clear that NERC,
ReliabilityFirst and
the FERC will continue to refine existing reliability standards as well as to
develop and adopt new reliability standards. The financial impact of complying
with new or amended standards cannot be determined at this time. However, the
2005 amendments to the Federal Power Act provide that all prudent costs incurred
to comply with the new reliability standards be recovered in rates. Still, any
future inability on FirstEnergy’s part to comply with the reliability standards
for its bulk power system could have a material adverse effect on its financial
condition, results of operations and cash flows.
 
 In April 2007,
ReliabilityFirst
performed a routine compliance audit of FirstEnergy’s bulk-power system within
the Midwest ISO region and found it to be in full compliance with all audited
reliability standards.  Similarly, ReliabilityFirst has scheduled a
compliance audit of FirstEnergy’s bulk-power system within the PJM region in
2008. FirstEnergy currently does not expect any material adverse financial
impact as a result of these audits.
 
 108
 
 
 (B) OHIO
 
 On January 4,
2006, the PUCO issued an order authorizing the Ohio Companies to recover certain
increased fuel costs through a fuel rider and to defer certain other increased
fuel costs to be incurred from January 1, 2006 through December 31,
2008, including interest on the deferred balances. The order also provided for
recovery of the deferred costs over a twenty-five-year period through
distribution rates. On August 29, 2007, the Supreme Court of Ohio concluded that
the PUCO violated a provision of the Ohio Revised Code by permitting the Ohio
Companies “to collect deferred increased fuel costs through future distribution
rate cases, or to alternatively use excess fuel-cost recovery to reduce deferred
distribution-related expenses” and remanded the matter to the PUCO for further
consideration. On September 10, 2007 the Ohio Companies filed an
application with the PUCO that requested the implementation of two
generation-related fuel cost riders to collect the increased fuel costs that
were previously authorized to be deferred. On January 9, 2008 the PUCO approved
the Ohio Companies’ proposed fuel cost rider to recover increased fuel costs to
be incurred in 2008 commencing January 1, 2008 through December 31, 2008, which
is expected to be approximately $189 million. In addition, the PUCO ordered
the Ohio Companies to file a separate application for an alternate recovery
mechanism to collect the 2006 and 2007 deferred fuel costs. On February 8,
2008, the Ohio Companies filed an application proposing to recover
$226 million of deferred fuel costs and carrying charges for 2006 and 2007
pursuant to a separate fuel rider, with alternative options for the recovery
period ranging from five to twenty-five years. This second application is
currently pending before the PUCO and a hearing has been set for July 15,
2008.
 
 The Ohio Companies
filed an application and rate request for an increase in electric distribution
rates with the PUCO on June 7, 2007. The requested increase is expected to
be more than offset by the elimination or reduction of transition charges at the
time the rates go into effect and would result in lowering the overall
non-generation portion of the average electric bill for most Ohio
customers.  The distribution rate increases reflect capital
expenditures since the Ohio Companies’ last distribution rate proceedings,
increases in operation and maintenance expenses and recovery of regulatory
assets that were authorized in prior cases. On August 6, 2007, the Ohio
Companies updated their filing supporting a distribution rate increase of
$332 million. On December 4, 2007, the PUCO Staff issued its Staff Reports
containing the results of their investigation into the distribution rate
request. In its reports, the PUCO Staff recommended a distribution rate increase
in the range of $161 million to $180 million, with $108 million to $127 million
for distribution revenue increases and $53 million for recovery of costs
deferred under prior cases. This amount excludes the recovery of deferred fuel
costs, whose recovery is now being sought in a separate proceeding before the
PUCO, discussed above. On January 3, 2008, the Ohio Companies and intervening
parties filed objections to the Staff Reports and on January 10, 2008, the Ohio
Companies filed supplemental testimony. Evidentiary hearings began on January
29, 2008 and continued through February 25, 2008. During the evidentiary
hearings, the PUCO Staff submitted testimony decreasing their recommended
revenue increase to a range of $114 million to $132 million.
Additionally, in testimony submitted on February 11, 2008, the PUCO Staff
adopted a position regarding interest deferred for RCP-related deferrals, line
extension deferrals and transition tax deferrals that, if upheld by the PUCO,
would result in the write-off of approximately $45 million of interest
costs deferred through March 31, 2008 ($0.09 per share of common stock).
The PUCO is expected to render its decision during the second or third quarter
of 2008. The new rates would become effective January 1, 2009 for OE and
TE, and approximately May 2009 for CEI.
 
 On July 10, 2007,
the Ohio Companies filed an application with the PUCO requesting approval of a
comprehensive supply plan for providing retail generation service to customers
who do not purchase electricity from an alternative supplier, beginning
January 1, 2009. The proposed competitive bidding process would average the
results of multiple bidding sessions conducted at different times during the
year. The final price per KWH would reflect an average of the prices resulting
from all bids. In their filing, the Ohio Companies offered two alternatives for
structuring the bids, either by customer class or a “slice-of-system” approach.
A slice-of-system approach would require the successful bidder to be responsible
for supplying a fixed percentage of the utility’s total load notwithstanding the
customer’s classification. The proposal provides the PUCO with an option to
phase in generation price increases for residential tariff groups who would
experience a change in their average total price of 15 percent or more. The PUCO
held a technical conference on August 16, 2007 regarding the filing.
Initial and reply comments on the proposal were filed by various parties in
September and October 2007, respectively. The proposal is currently pending
before the PUCO.
 
 On April 22,
2008, an amended version of Substitute SB221 was passed by the Ohio House of
Representatives and sent back to the Ohio Senate for concurrence. On
April 23, 2008, the Ohio Senate approved the House's amendments to
Substitute SB221 and forwarded the bill to the Governor for signature, which he
signed on May 1, 2008. Amended Substitute SB221 requires all electric
distribution utilities to file an RSP, now called an ESP, with the PUCO. An
ESP is required to contain a proposal for the supply and pricing of retail
generation and may include proposals, without limitation, related to one or more
of the following:
 
 109
 
 
 ·
              automatic
      recovery of prudently incurred fuel, purchased power, emission allowance
      costs and federally mandated energy
taxes;
 
 ·
              construction
      work in progress for costs of constructing an electric generating facility
      or environmental expenditure for any electric generating
      facility;
 
 ·
              costs of an
      electric generating facility;
 
 ·
              terms related
      to customer shopping, bypassability, standby, back-up and default
      service;
 
 ·
              accounting for
      deferrals related to stabilizing retail electric
  service;
 
 ·
              automatic
      increases or decreases in standard service offer
  price;
 
 ·
              phase-in and
      securitization;
 
 ·
              transmission
      service and related costs;
 
 ·
              distribution
      service and related costs; and
 
 ·
              economic
      development and energy efficiency.
 
 A utility could also
simultaneously file an MRO in which it would have to demonstrate the following
objective market criteria: The utility or its transmission service affiliate
belongs to a FERC-approved RTO having a market-monitor function and the ability
to mitigate market power, and a published source exists that identifies
information for traded electricity and energy products that are contracted for
delivery two years into the future. The PUCO would test the ESP and its pricing
and all other terms and conditions against the MRO and may only approve the ESP
if it is found to be more favorable to customers. As part of an ESP with a plan
period longer than three years, the PUCO shall prospectively determine every
fourth year of the plan whether it is substantially likely the plan will provide
the electric distribution utility a return on common equity significantly in
excess of the return likely to be earned by publicly traded companies, including
utilities, that face comparable business and financial risk (comparable
companies). If so, the PUCO may terminate the ESP. Annually under an ESP, the
PUCO shall determine whether an electric distribution utility's earned return on
common equity is significantly in excess of returns earned on common equity
during the same period by comparable companies, and if so, shall require the
utility to return such excess to customers by prospective adjustments. Amended
Substitute SB221 also includes provisions dealing with advanced and renewable
energy standards that contemplate 25% of electrical usage from these sources by
2025. Energy efficiency measures in the bill require energy savings in excess of
22% by 2025. Requirements are in place to meet annual benchmarks for renewable
energy resources and energy efficiency, subject to review by the PUCO.
FirstEnergy is currently evaluating this legislation and expects to file an ESP
in the second or third quarter of 2008.
 (C) PENNSYLVANIA
 
 Met-Ed and Penelec
purchase a portion of their PLR and default service requirements from FES
through a fixed-price partial requirements wholesale power sales agreement. The
agreement allows Met-Ed and Penelec to sell the output of NUG energy to the
market and requires FES to provide energy at fixed prices to replace any NUG
energy sold to the extent needed for Met-Ed and Penelec to satisfy their PLR and
default service obligations. The fixed price under the agreement is expected to
remain below wholesale market prices during the term of the agreement. If Met-Ed
and Penelec were to replace the entire FES supply at current market power prices
without corresponding regulatory authorization to increase their generation
prices to customers, each company would likely incur a significant increase in
operating expenses and experience a material deterioration in credit quality
metrics. Under such a scenario, each company's credit profile would no longer be
expected to support an investment grade rating for their fixed income
securities. Based on the PPUC’s January 11, 2007 order described below, if
FES ultimately determines to terminate, reduce, or significantly modify the
agreement prior to the expiration of Met-Ed’s and Penelec’s generation rate caps
in 2010, timely regulatory relief is not likely to be granted by the
PPUC.
 
 110
 
 
 Met-Ed and Penelec
made a comprehensive transition rate filing with the PPUC on April 10, 2006
to address a number of transmission, distribution and supply issues. If Met-Ed's
and Penelec's preferred approach involving accounting deferrals had been
approved, annual revenues would have increased by $216 million and
$157 million, respectively. That filing included, among other things, a
request to charge customers for an increasing amount of market-priced power
procured through a CBP as the amount of supply provided under the then existing
FES agreement was to be phased out. Met-Ed and Penelec also requested approval
of a January 12, 2005 petition for the deferral of transmission-related
costs incurred during 2006. In this rate filing, Met-Ed and Penelec requested
recovery of annual transmission and related costs incurred on or after
January 1, 2007, plus the amortized portion of 2006 costs over a ten-year
period, along with applicable carrying charges, through an adjustable rider.
Changes in the recovery of NUG expenses and the recovery of Met-Ed's non-NUG
stranded costs were also included in the filing. On May 4, 2006, the PPUC
consolidated the remand of the FirstEnergy and GPU merger proceeding, related to
the quantification and allocation of merger savings, with the comprehensive
transition rate filing case.
 
 The PPUC entered its
opinion and order in the comprehensive rate filing proceeding on
January 11, 2007. The order approved the recovery of transmission costs,
including the transmission-related deferral for January 1, 2006 through
January 10, 2007, and determined that no merger savings from prior years
should be considered in determining customers’ rates. The request for increases
in generation supply rates was denied as were the requested changes to NUG
expense recovery and Met-Ed’s non-NUG stranded costs. The order decreased
Met-Ed’s and Penelec’s distribution rates by $80 million and
$19 million, respectively. These decreases were offset by the increases
allowed for the recovery of transmission costs. Met-Ed’s and Penelec’s request
for recovery of Saxton decommissioning costs was granted and, in January 2007,
Met-Ed and Penelec recognized income of $15 million and $12 million,
respectively, to establish regulatory assets for those previously expensed
decommissioning costs. Overall rates increased by 5.0% for Met-Ed
($59 million) and 4.5% for Penelec ($50 million).
 
 On March 30, 2007,
MEIUG and PICA filed a Petition for Review with the Commonwealth Court of
Pennsylvania asking the court to review the PPUC’s determination on transmission
(including congestion) and the transmission deferral. Met-Ed and Penelec filed a
Petition for Review on April 13, 2007 on the issues of consolidated tax savings
and the requested generation rate increase. The OCA filed its Petition for
Review on April 13, 2007, on the issues of transmission (including
congestion) and recovery of universal service costs from only the residential
rate class. From June through October 2007, initial responsive and reply briefs
were filed by various parties. Oral arguments are scheduled to take place in
September 2008. If Met-Ed and Penelec do not prevail on the issue of congestion,
it could have a material adverse effect on the results of operations of Met-Ed,
Penelec and FirstEnergy.
 
 On April 14, 2008,
Met-Ed and Penelec filed annual updates to the TSC rider for the period
June 1, 2008, through May 31, 2009. The proposed TSCs include a
component for under-recovery of actual transmission costs incurred during the
prior period (Met-Ed - $144 million and Penelec - $4 million) and future
transmission cost projections for June 2008 through May 2009 (Met-Ed - $258
million and Penelec - $92 million). Met-Ed has proposed a transition
approach that would recover past under-recovered costs plus carrying charges
through the new TSC over thirty-one months and defer a portion of the projected
costs ($92 million) plus carrying charges for recovery through future TSCs
by December 31, 2010.
 
 On March 13, 2008,
the PPUC approved the residential procurement process in Penn’s Joint
Petition for Settlement. This RFP process calls for load-following,
full-requirements contracts for default service procurement for residential
customers for the period covering June 1, 2008 through May 31, 2011. The PPUC
had previously approved the default service procurement processes for
commercial and industrial customers. The default service procurement for small
commercial customers was conducted through multiple RFPs, while the default
service procurement for large commercial and industrial customers will utilize
hourly pricing. Bids in the two RFPs for small commercial load were approved by
the PPUC on February 22, 2008, and March 20, 2008. On March 28, 2008, Penn filed
compliance tariffs with the new default service generation rates based on the
approved RFP bids for small commercial customers which the PPUC then certified
on April 4, 2008. On April 14, 2008, the first RFP for residential
customers’ load was held consisting of tranches for both 12 and 24-month supply.
The PPUC approved the bids on April 16, 2008. The second RFP is scheduled to be
held on May 14, 2008, after which time the PPUC is expected to approve the
new rates to go into effect June 1, 2008.
 
 111
 
 On February 1, 2007,
the Governor of Pennsylvania proposed an EIS. The EIS includes four pieces of
proposed legislation that, according to the Governor, is designed to reduce
energy costs, promote energy independence and stimulate the economy. Elements of
the EIS include the installation of smart meters, funding for solar panels on
residences and small businesses, conservation and demand reduction programs to
meet energy growth, a requirement that electric distribution companies acquire
power that results in the “lowest reasonable rate on a long-term basis,” the
utilization of micro-grids and a three year phase-in of rate increases. On
July 17, 2007 the Governor signed into law two pieces of energy
legislation. The first amended the Alternative Energy Portfolio Standards Act of
2004 to, among other things, increase the percentage of solar energy that must
be supplied at the conclusion of an electric distribution company’s transition
period. The second law allows electric distribution companies, at their sole
discretion, to enter into long term contracts with large customers and to build
or acquire interests in electric generation facilities specifically to supply
long-term contracts with such customers. A special legislative session on energy
was convened in mid-September 2007 to consider other aspects of the EIS. The
Pennsylvania House and Senate on March 11, 2008 and December 12, 2007,
respectively, passed different versions of bills to fund the Governor’s EIS
proposal. Neither chamber has formally considered the other’s bill. On
February 12, 2008, the Pennsylvania House passed House Bill 2200 which
provides for energy efficiency and demand management programs and targets as
well as the installation of smart meters within ten years. Other legislation has
been introduced to address generation procurement, expiration of rate caps,
conservation and renewable energy. The final form of this pending legislation is
uncertain. Consequently, FirstEnergy is unable to predict what impact, if any,
such legislation may have on its operations.
 
 (D) NEW JERSEY
 
 JCP&L is
permitted to defer for future collection from customers the amounts by which its
costs of supplying BGS to non-shopping customers and costs incurred under NUG
agreements exceed amounts collected through BGS and NUGC rates and market sales
of NUG energy and capacity. As of March 31, 2008, the accumulated deferred cost
balance totaled approximately $264 million.
 
 In accordance with
an April 28, 2004 NJBPU order, JCP&L filed testimony on June 7,
2004 supporting continuation of the current level and duration of the funding of
TMI-2 decommissioning costs by New Jersey customers without a reduction,
termination or capping of the funding. On September 30, 2004, JCP&L
filed an updated TMI-2 decommissioning study. This study resulted in an updated
total decommissioning cost estimate of $729 million (in 2003 dollars)
compared to the estimated $528 million (in 2003 dollars) from the prior
1995 decommissioning study. The DRA filed comments on February 28, 2005
requesting that decommissioning funding be suspended. On March 18, 2005,
JCP&L filed a response to those comments. JCP&L responded to additional
NJBPU staff discovery requests in May and November 2007 and also submitted
comments in the proceeding in November 2007. A schedule for further NJBPU
proceedings has not yet been set.
 
 On August 1, 2005,
the NJBPU established a proceeding to determine whether additional ratepayer
protections are required at the state level in light of the repeal of the PUHCA
pursuant to the EPACT. The NJBPU approved regulations effective October 2,
2006 that prevent a holding company that owns a gas or electric public utility
from investing more than 25% of the combined assets of its utility and
utility-related subsidiaries into businesses unrelated to the utility industry.
These regulations are not expected to materially impact FirstEnergy or
JCP&L. Also, in the same proceeding, the NJBPU Staff issued an additional
draft proposal on March 31, 2006 addressing various issues including access
to books and records, ring-fencing, cross subsidization, corporate governance
and related matters. With the approval of the NJBPU Staff, the affected
utilities jointly submitted an alternative proposal on June 1, 2006. The
NJBPU Staff circulated revised drafts of the proposal to interested stakeholders
in November 2006 and again in February 2007. On February 1, 2008, the NJBPU
accepted proposed rules for publication in the New Jersey Register on
March 17, 2008. A public hearing on these proposed rules was held on
April 23, 2008 with comments from interested parties due on May 16,
2008.
 
 New Jersey statutes
require that the state periodically undertake a planning process, known as the
EMP, to address energy related issues including energy security, economic
growth, and environmental impact. The EMP is to be developed with involvement of
the Governor’s Office and the Governor’s Office of Economic Growth, and is to be
prepared by a Master Plan Committee, which is chaired by the NJBPU President and
includes representatives of several State departments. In October 2006, the
current EMP process was initiated through the creation of a number of working
groups to obtain input from a broad range of interested stakeholders including
utilities, environmental groups, customer groups, and major customers. In
addition, public stakeholder meetings were held in the fall of 2006 and in early
2007.
 
 On April 17, 2008, a
draft EMP was released for public comment. The draft EMP establishes four major
goals:
 
 ·
              maximize
      energy efficiency to achieve a 20% reduction in energy consumption by
      2020;
 
 ·
              reduce peak
      demand for electricity by 5,700 MW by 2020 (amounting to about a 22%
      reduction in projected demand);
 
 112
 
 
 ·
              meet 22.5% of
      the state’s electricity needs with renewable energy by 2020;
      and
 
 ·
              develop low
      carbon emitting, efficient power plants and close the gap between the
      supply and demand for electricity.
 
 Following the public
comment period which is expected to extend into July 2008, a final EMP will be
issued to be followed by appropriate legislation and regulation as necessary. At
this time, FirstEnergy cannot predict the outcome of this process nor determine
the impact, if any, such legislation or regulation may have on its operations or
those of JCP&L.
 
 On February 13,
2007, the NJBPU Staff informally issued a draft proposal relating to changes to
the regulations addressing electric distribution service reliability and quality
standards. Meetings between the NJBPU Staff and interested stakeholders to
discuss the proposal were held and additional, revised informal proposals were
subsequently circulated by the Staff. On September 4, 2007, proposed
regulations were published in the New Jersey Register, which proposal will be
subsequently considered by the NJBPU following comments that were submitted in
September and October 2007. Final regulations (effective upon publication) were
published in the New Jersey Register March 17, 2008. Upon preliminary review of
the new regulations, FirstEnergy does not expect a material impact on its
operations or those of JCP&L.
 
 (E) FERC MATTERS
 
 Transmission Service between MISO and
PJM
 
 On November 18,
2004, the FERC issued an order eliminating the through and out rate for
transmission service between the MISO and PJM regions. The FERC’s intent was to
eliminate so-called “pancaking” of transmission charges between the MISO and PJM
regions. The FERC also ordered the MISO, PJM and the transmission owners within
MISO and PJM to submit compliance filings containing a rate mechanism to recover
lost transmission revenues created by elimination of this charge (referred to as
the Seams Elimination Cost Adjustment or “SECA”) during a 16-month transition
period. The FERC issued orders in 2005 setting the SECA for hearing. The
presiding judge issued an initial decision on August 10, 2006, rejecting
the compliance filings made by MISO, PJM, and the transmission owners, and
directing new compliance filings. This decision is subject to review and
approval by the FERC. Briefs addressing the initial decision were filed on
September 11, 2006 and October 20, 2006. A final order could be issued by
the FERC in the second quarter of 2008.
  PJM
Transmission Rate Design
 
 On January 31, 2005,
certain PJM transmission owners made filings with the FERC pursuant to a
settlement agreement previously approved by the FERC. JCP&L, Met-Ed and
Penelec were parties to that proceeding and joined in two of the filings. In the
first filing, the settling transmission owners submitted a filing justifying
continuation of their existing rate design within the PJM RTO. Hearings were
held and numerous parties appeared and litigated various issues concerning PJM
rate design; notably AEP, which proposed to create a "postage stamp", or average
rate for all high voltage transmission facilities across PJM and a zonal
transmission rate for facilities below 345 kV. This proposal would have the
effect of shifting recovery of the costs of high voltage transmission lines to
other transmission zones, including those where JCP&L, Met-Ed, and Penelec
serve load. On April 19, 2007, the FERC issued an order finding that the PJM
transmission owners’ existing “license plate” or zonal rate design was just and
reasonable and ordered that the current license plate rates for existing
transmission facilities be retained. On the issue of rates for new transmission
facilities, the FERC directed that costs for new transmission facilities that
are rated at 500 kV or higher are to be collected from all transmission zones
throughout the PJM footprint by means of a postage-stamp rate. Costs for new
transmission facilities that are rated at less than 500 kV, however, are to be
allocated on a “beneficiary pays” basis. The FERC found that PJM’s current
beneficiary-pays cost allocation methodology is not sufficiently detailed and,
in a related order that also was issued on April 19, 2007, directed that
hearings be held for the purpose of establishing a just and reasonable cost
allocation methodology for inclusion in PJM’s tariff.
 
 On May 18, 2007,
certain parties filed for rehearing of the FERC’s April 19, 2007 order. On
January 31, 2008, the requests for rehearing were denied. The FERC’s orders on
PJM rate design will prevent the allocation of a portion of the revenue
requirement of existing transmission facilities of other utilities to JCP&L,
Met-Ed and Penelec. In addition, the FERC’s decision to allocate the cost of new
500 kV and above transmission facilities on a PJM-wide basis will reduce future
transmission revenue recovery from the JCP&L, Met-Ed and Penelec zones. A
partial settlement agreement addressing the “beneficiary pays” methodology for
below 500 kV facilities, but excluding the issue of allocating new facilities
costs to merchant transmission entities, was filed on September 14, 2007. The
agreement was supported by the FERC’s Trial Staff, and was certified by the
Presiding Judge. The FERC’s action on the settlement agreement is pending. The
remaining merchant transmission cost allocation issues will proceed to hearing
in May 2008. On February 13, 2008, AEP appealed the FERC’s orders to the
federal Court of Appeals for the D.C. Circuit. The Illinois Commerce Commission,
the PUCO and Dayton Power & Light have also appealed these orders to the
Seventh Circuit Court of Appeals. The appeals of these parties and others have
been consolidated for argument in the Seventh Circuit.
 
 113
 
 
 Post
Transition Period Rate Design
 
 The FERC had
directed MISO, PJM, and the respective transmission owners to make filings on or
before August 1, 2007 to reevaluate transmission rate design within MISO, and
between MISO and PJM. On August 1, 2007, filings were made by MISO, PJM, and the
vast majority of transmission owners, including FirstEnergy affiliates, which
proposed to retain the existing transmission rate design. These filings were
approved by the FERC on January 31, 2008. As a result of the FERC’s approval,
the rates charged to FirstEnergy’s load-serving affiliates for transmission
service over existing transmission facilities in MISO and PJM are unchanged. In
a related filing, MISO and MISO transmission owners requested that the current
MISO pricing for new transmission facilities that spreads 20% of the cost of new
345 kV and higher transmission facilities across the entire MISO footprint
(known as the RECB methodology) be retained.
 
 On September 17,
2007, AEP filed a complaint under Sections 206 and 306 of the Federal Power Act
seeking to have the entire transmission rate design and cost allocation methods
used by MISO and PJM declared unjust, unreasonable, and unduly discriminatory,
and to have the FERC fix a uniform regional transmission rate design and cost
allocation method for the entire MISO and PJM “Super Region” that recovers the
average cost of new and existing transmission facilities operated at voltages of
345 kV and above from all transmission customers. Lower voltage facilities would
continue to be recovered in the local utility transmission rate zone through a
license plate rate. AEP requested a refund effective October 1, 2007, or
alternatively, February 1, 2008. On January 31, 2008, the FERC issued an order
denying the complaint. A rehearing request by AEP is pending before the
FERC.
 
 Distribution of MISO Network Service
Revenues
 
 Effective February
1, 2008, the MISO Transmission Owners Agreement provides for a change in the
method of distributing transmission revenues among the transmission owners. MISO
and a majority of the MISO transmission owners filed on December 3, 2007 to
change the MISO tariff to clarify, for purposes of distributing network
transmission revenue to the transmission owners, that all network transmission
service revenues, whether collected by MISO or directly by the transmission
owner, are included in the revenue distribution calculation.  This
clarification was necessary because some network transmission service revenues
are collected and retained by transmission owners in states where retail choice
does not exist, and their “unbundled” retail load is currently exempt from MISO
network service charges. The tariff changes filed with the FERC ensure that
revenues collected by transmission owners from bundled load are taken into
account in the revenue distribution calculation, and that transmission owners
with bundled load do not collect more than their revenue requirements. Absent
the changes, transmission owners, and ultimately their customers, with unbundled
load or in retail choice states, such as ATSI, would subsidize transmission
owners with bundled load, who would collect their revenue requirement from
bundled load, plus share in revenues collected by MISO from unbundled customers.
This would result in a large revenue shortfall for ATSI, which would eventually
be passed on to customers in the form of higher transmission rates as calculated
pursuant to ATSI’s Attachment O formula under the MISO tariff.
 
 Numerous parties
filed in support of the tariff changes, including the public service commissions
of Michigan, Ohio and Wisconsin. Ameren filed a protest on December 26, 2007,
arguing that the December 3, 2007 filing violates the MISO Transmission Owners’
Agreement as well as an agreement among Ameren (Union Electric), MISO, and the
Missouri Public Service Commission, which provides that Union Electric’s bundled
load cannot be charged by MISO for network service. On February 2, 2008, the
FERC issued an order conditionally accepting the tariff amendment subject to a
minor compliance filing, which was made on March 3, 2008. This order ensures
that ATSI will continue to receive transmission revenues from MISO equivalent to
its transmission revenue requirement. A rehearing request by Ameren is pending
before the FERC.
 
 On February 1, 2008,
MISO filed a request to continue using the existing revenue distribution
methodology on an interim basis pending amendment of the MISO Transmission
Owners’ Agreement. This request was accepted by the FERC on March 13, 2008. On
that same day, MISO and the MISO transmission owners made a filing to amend the
Transmission Owners’ Agreement to effectively continue the distribution of
transmission revenues that was in effect prior to February 1, 2008. This matter
is currently pending before the FERC.
 
 MISO Ancillary Services Market and
Balancing Area Consolidation
 
 MISO made a filing
on September 14, 2007 to establish an ASM for regulation, spinning and
supplemental reserves, to consolidate the existing 24 balancing areas within the
MISO footprint, and to establish MISO as the NERC registered balancing authority
for the region. This filing would permit load serving entities to purchase their
operating reserve requirements in a competitive market. FirstEnergy supports the
proposal to establish markets for Ancillary Services and consolidate existing
balancing areas. On February 25, 2008, the FERC issued an order approving the
ASM subject to certain compliance filings. MISO has since notified the FERC that
the start of its ASM is delayed until September of 2008.
 
 114
 
 
 Duquesne’s
Request to Withdraw from PJM
 
 On November 8, 2007,
Duquesne Light Company (Duquesne) filed a request with the FERC to exit PJM and
to join the MISO. In its filing, Duquesne asked the FERC to be relieved of
certain capacity payment obligations to PJM for capacity auctions conducted
prior to its departure from PJM, but covering service for planning periods
through May 31, 2011. Duquesne asserted that its primary reason for exiting PJM
is to avoid paying future obligations created by PJM’s forward capacity market.
FirstEnergy believes that Duquesne’s filing did not identify or address numerous
legal, financial or operational issues that are implicated or affected directly
by Duquesne’s proposal. Consequently, FirstEnergy submitted responsive filings
that, while conceding Duquesne’s rights to exit PJM, contested various aspects
of Duquesne’s proposal. FirstEnergy particularly focused on Duquesne’s proposal
that it be allowed to exit PJM without payment of its share of existing capacity
market commitments. FirstEnergy also objected to Duquesne’s failure to address
the firm transmission service requirements that would be necessary for
FirstEnergy to continue to use the Beaver Valley Plant to meet existing
commitments in the PJM capacity markets and to serve native load. Other market
participants also submitted filings contesting Duquesne’s plans.
 
 On January 17, 2008,
the FERC conditionally approved Duquesne’s request to exit PJM. Among other
conditions, the FERC obligated Duquesne to pay the PJM capacity obligations
through May 31, 2011. The FERC’s order took notice of the numerous transmission
and other issues raised by FirstEnergy and other parties to the proceeding, but
did not provide any responsive rulings or other guidance. Rather, the FERC
ordered Duquesne to make a compliance filing in forty-five days detailing how
Duquesne will satisfy its obligations under the PJM Transmission Owners’
Agreement. The FERC likewise directed the MISO to submit detailed plans to
integrate Duquesne into the MISO. Finally, the FERC directed MISO and PJM to
work together to resolve the substantive and procedural issues implicated by
Duquesne’s transition into the MISO. These issues remain unresolved. If Duquesne
satisfies all of the obligations set by the FERC, its planned transition date is
October 9, 2008.
 
 On March 18, 2008,
the PJM Power Providers Group filed a request for emergency clarification
regarding whether Duquesne-zone generators (including the Beaver Valley Plant)
could participate in PJM’s May 2008 auction for the 2011-2012 RPM delivery year.
FirstEnergy and the other Duquesne-zone generators filed responsive pleadings.
On April 18, 2008, the FERC issued its Order on Motion for Emergency
Clarification, wherein the FERC ruled that although the status of the
Duquesne-zone generators will change to “External Resource” upon Duquesne’s exit
from PJM, these generators can contract with PJM for the transmission
reservations necessary to participate in the May 2008 auction. FirstEnergy has
complied with FERC’s order by obtaining executed transmission service agreements
for firm point-to-point transmission service for the 2011-2012 delivery year
and, as such, FirstEnergy satisfies the criteria to bid the Beaver Valley Plant
into the May 2008 RPM auction. Notwithstanding these events, on April 30, 2008
and May 1, 2008, certain members of the PJM Power Providers Group filed further
pleadings on these issues. On May 2, 2008, FirstEnergy filed a responsive
pleading. FirstEnergy is participating in the May 2008 RPM auction for
the 2011-2012 RPM delivery year.
 
 MISO
Resource Adequacy Proposal
 
 MISO made a filing
on December 28, 2007 that would create an enforceable planning reserve
requirement in the MISO tariff for load serving entities such as the Ohio
Companies, Penn Power, and FES. This requirement is proposed to become effective
for the planning year beginning June 1, 2009. The filing would permit MISO to
establish the reserve margin requirement for load serving entities based upon a
one day loss of load in ten years standard, unless the state utility regulatory
agency establishes a different planning reserve for load serving entities in its
state. FirstEnergy generally supports the proposal as it promotes a mechanism
that will result in long-term commitments from both load-serving entities and
resources, including both generation and demand side resources that are
necessary for reliable resource adequacy and planning in the MISO footprint.
Comments on the filing were filed on January 28, 2008. The FERC approved MISO’s
Resource Adequacy proposal on March 26, 2008. Rehearing requests are pending on
the FERC’s March 26Order.
A compliance filing establishing the enforcement mechanism for the reserve
margin requirement is due on or before June 25, 2008.
 
 Organized
Wholesale Power Markets
 
 On February 21,
2008, the FERC issued a NOPR through which it proposes to adopt new rules that
it states will “improve operations in organized electric markets, boost
competition and bring additional benefits to consumers.” The proposed rule
addresses demand response and market pricing during reserve shortages, long-term
power contracting, market-monitoring policies, and responsiveness of RTOs and
ISOs to stakeholders and customers. FirstEnergy does not believe that the
proposed rule will have a significant impact on its operations. Comments on the
NOPR were filed on April 18, 2008.
 
 115
 
 
 12.  NEW
      ACCOUNTING STANDARDS AND
INTERPRETATIONS
 
 SFAS 141(R) – “Business
Combinations”
 
 In December 2007,
the FASB issued SFAS 141(R), which requires the acquiring entity in a business
combination to recognize all the assets acquired and liabilities assumed in the
transaction; establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed; and requires the
acquirer to disclose to investors and other users all of the information they
need to evaluate and understand the nature and financial effect of the business
combination. SFAS 141(R) attempts to reduce the complexity of existing GAAP
related to business combinations. The Standard includes both core principles and
pertinent application guidance, eliminating the need for numerous EITF issues
and other interpretative guidance. SFAS 141(R) will affect business combinations
entered into by FirstEnergy that close after January 1, 2009. In addition,
the Standard also affects the accounting for changes in tax valuation allowances
made after January 1, 2009, that were established as part of a business
combination prior to the implementation of this Standard. FirstEnergy is
currently evaluating the impact of adopting this Standard on its financial
statements.
 
 SFAS 160 - “Noncontrolling Interests in
Consolidated Financial Statements – an Amendment of ARB No. 51”
 
 In December 2007,
the FASB issued SFAS 160 that establishes accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. This Statement is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. Early adoption is prohibited. The Statement is not expected
to have a material impact on FirstEnergy’s financial statements.
 
 SFAS
      161 - “Disclosures about Derivative Instruments and Hedging Activities –
      an Amendment of FASB Statement No.
133”
 
 In March 2008, the
FASB issued SFAS 161, which requires enhancements tothe current
disclosure framework for derivative instruments and hedging activities. The
Statement requires that objectives for using derivative instruments be disclosed
in terms of underlying risk and accounting designation. This disclosure is
intended to better convey the purpose of derivatives use in terms of the risks
that the entity is intending to manage. The FASB believes disclosing the fair
values of derivative instruments and their gains and losses in a tabular format
is designed to provide a more complete picture of the location in an entity’s
financial statements of both the derivative positions existing at period end and
the effect of using derivatives during the reporting period. Disclosing
information about credit-risk-related contingent features is designed to provide
financial statement users information on the potential effect on an entity’s
liquidity from using derivatives. Finally, this Statement requires
cross-referencing within the footnotes, which is intended to help users of
financial statements locate important information about derivative instruments.
FirstEnergy is currently evaluating the impact of adopting this Standard on its
financial statements.
 
 13.  SEGMENT
INFORMATION
 
 FirstEnergy has
three reportable operating segments: energy delivery services, competitive
energy services and Ohio transitional generation services. The “Other” segment
primarily consists of telecommunications services. The assets and revenues for
the other business operations are below the quantifiable threshold for operating
segments for separate disclosure as “reportable operating
segments.”
 
 The energy delivery
services segment designs, constructs, operates and maintains FirstEnergy's
regulated transmission and distribution systems and is responsible for the
regulated generation commodity operations of FirstEnergy’s Pennsylvania and New
Jersey electric utility subsidiaries. Its revenues are primarily derived from
the delivery of electricity, cost recovery of regulatory assets and default
service electric generation sales to non-shopping customers in its Pennsylvania
and New Jersey franchise areas. Its results reflect the commodity costs of
securing electric generation from FES under partial requirements purchased power
agreements and from non-affiliated power suppliers as well as the net PJM
transmission expenses related to the delivery of that generation
load.
 
 The competitive
energy services segment supplies electric power to its electric utility
affiliates, provides competitive electric sales primarily in Ohio, Pennsylvania,
Maryland and Michigan, owns or leases and operates FirstEnergy’s generating
facilities and purchases electricity to meet its sales obligations. The
segment's net income is primarily derived from the affiliated company PSA sales
and the non-affiliated electric generation sales revenues less the related costs
of electricity generation, including purchased power and net transmission
(including congestion) and ancillary costs charged by PJM and MISO to deliver
electricity to the segment’s customers. The segment’s internal revenues
represent the affiliated company PSA sales.
 
 116
 
 
 The Ohio
transitional generation services segment represents the regulated generation
commodity operations of FirstEnergy’s Ohio electric utility subsidiaries. Its
revenues are primarily derived from electric generation sales to non-shopping
customers under the PLR obligations of the Ohio Companies. Its results reflect
the purchase of electricity from the competitive energy services segment through
full-requirements PSA arrangements, the deferral and amortization of certain
fuel costs authorized for recovery by the energy delivery services segment and
the net MISO transmission revenues and expenses related to the delivery of
generation load. This segment’s total assets consist of accounts receivable for
generation revenues from retail customers.
 
  Segment
      Financial InformationOhioEnergy
                
                
                Competitive
                
                
                TransitionalDelivery
                
                
                Energy
                
                
                Generation
                
                
                
                
                
                ReconcilingThree
      Months Ended
                
                Services
                
                
                Services
                
                
                Services
                
                
                Other
                
                
                Adjustments
                
                
                Consolidated(In
      millions)March 31, 2008External
      revenues
                
                $
                2,212
                
                
                $
                329
                
                
                $
                707
                
                
                $
                40
                
                
                $
                (11
                )
                
                $
                3,277Internal
      revenues
                
                
                -
                
                
                
                776
                
                
                
                -
                
                
                
                -
                
                
                
                (776
                )
                
                
                -Total
      revenues
                
                
                2,212
                
                
                
                1,105
                
                
                
                707
                
                
                
                40
                
                
                
                (787
                )
                
                
                3,277Depreciation
      and amortization
                
                
                255
                
                
                
                53
                
                
                
                4
                
                
                
                -
                
                
                
                5
                
                
                
                317Investment
      income
                
                
                45
                
                
                
                (6
                )
                
                
                1
                
                
                
                -
                
                
                
                (23
                )
                
                
                17Net interest
      charges
                
                
                103
                
                
                
                27
                
                
                
                -
                
                
                
                -
                
                
                
                41
                
                
                
                171Income
      taxes
                
                
                119
                
                
                
                58
                
                
                
                15
                
                
                
                14
                
                
                
                (19
                )
                
                
                187Net
      income
                
                
                179
                
                
                
                87
                
                
                
                23
                
                
                
                22
                
                
                
                (35
                )
                
                
                276Total
      assets
                
                
                23,211
                
                
                
                8,108
                
                
                
                257
                
                
                
                281
                
                
                
                558
                
                
                
                32,415Total
      goodwill
                
                
                5,582
                
                
                
                24
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                5,606Property
      additions
                
                
                255
                
                
                
                462
                
                
                
                -
                
                
                
                12
                
                
                
                (18
                )
                
                
                711March 31, 2007External
      revenues
                
                $
                2,040
                
                
                $
                321
                
                
                $
                619
                
                
                $
                12
                
                
                $
                (19
                )
                
                $
                2,973Internal
      revenues
                
                
                -
                
                
                
                714
                
                
                
                -
                
                
                
                -
                
                
                
                (714
                )
                
                
                -Total
      revenues
                
                
                2,040
                
                
                
                1,035
                
                
                
                619
                
                
                
                12
                
                
                
                (733
                )
                
                
                2,973Depreciation
      and amortization
                
                
                220
                
                
                
                51
                
                
                
                (15
                )
                
                
                1
                
                
                
                6
                
                
                
                263Investment
      income
                
                
                70
                
                
                
                3
                
                
                
                1
                
                
                
                -
                
                
                
                (41
                )
                
                
                33Net interest
      charges
                
                
                107
                
                
                
                49
                
                
                
                1
                
                
                
                2
                
                
                
                21
                
                
                
                180Income
      taxes
                
                
                148
                
                
                
                65
                
                
                
                15
                
                
                
                5
                
                
                
                (33
                )
                
                
                200Net
      income
                
                
                218
                
                
                
                98
                
                
                
                24
                
                
                
                1
                
                
                
                (51
                )
                
                
                290Total
      assets
                
                
                23,526
                
                
                
                7,089
                
                
                
                246
                
                
                
                254
                
                
                
                675
                
                
                
                31,790Total
      goodwill
                
                
                5,874
                
                
                
                24
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                5,898Property
      additions
                
                
                155
                
                
                
                124
                
                
                
                -
                
                
                
                1
                
                
                
                16
                
                
                
                296
 Reconciling
adjustments to segment operating results from internal management reporting to
consolidated external financial reporting primarily consist of interest expense
related to holding company debt, corporate support services revenues and
expenses and elimination of intersegment transactions.
 
 14.  SUPPLEMENTAL
      GUARANTOR INFORMATION
 
 On July 13, 2007,
FGCO completed a sale and leaseback transaction for its 93.825% undivided
interest in Bruce Mansfield Unit 1. FES has unconditionally and irrevocably
guaranteed all of FGCO’s obligations under each of the leases. The related
lessor notes and pass through certificates are not guaranteed by FES or FGCO,
but the notes are secured by, among other things, each lessor trust’s undivided
interest in Unit 1, rights and interests under the applicable lease and rights
and interests under other related agreements, including FES’ lease
guaranty.
 
 The consolidating
statements of income for the three months ended March 31, 2008 and 2007,
consolidating balance sheets as of March 31, 2008 and December 31, 2007 and
condensed consolidating statements of cash flows for the three months ended
March 31, 2008 and 2007 for FES (parent and guarantor), FGCO and NGC
(non-guarantor) are presented below. Investments in wholly owned subsidiaries
are accounted for by FES using the equity method. Results of operations for FGCO
and NGC are, therefore, reflected in FES’ investment accounts and earnings as if
operating lease treatment was achieved. The principal elimination entries
eliminate investments in subsidiaries and intercompany balances and transactions
and reflect operating lease treatment associated with the 2007 Bruce Mansfield
Unit 1 sale and leaseback transaction.
 
 117
 
 
 FIRSTENERGY
      SOLUTIONS CORP.CONSOLIDATING
      STATEMENTS OF INCOME(Unaudited)For
      the Three Months Ended March 31, 2008
                
                FES
                
                
                FGCO
                
                
                NGC
                
                
                Eliminations
                
                
                Consolidated(In
      thousands)REVENUES
                
                $
                1,099,848
                
                
                $
                567,701
                
                
                $
                325,684
                
                
                $
                (894,117
                )
                
                $
                1,099,116EXPENSES:Fuel
                
                
                2,138
                
                
                
                291,239
                
                
                
                28,312
                
                
                
                -
                
                
                
                321,689Purchased
      power from non-affiliates
                
                
                206,724
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                206,724Purchased
      power from affiliates
                
                
                891,979
                
                
                
                2,138
                
                
                
                25,485
                
                
                
                (894,117
                )
                
                
                25,485Other
      operating expenses
                
                
                37,596
                
                
                
                107,167
                
                
                
                139,595
                
                
                
                12,188
                
                
                
                296,546Provision for
      depreciation
                
                
                307
                
                
                
                26,599
                
                
                
                24,194
                
                
                
                (1,358
                )
                
                
                49,742General
      taxes
                
                
                5,415
                
                
                
                11,570
                
                
                
                6,212
                
                
                
                -
                
                
                
                23,197Total
      expenses
                
                
                1,144,159
                
                
                
                438,713
                
                
                
                223,798
                
                
                
                (883,287
                )
                
                
                923,383OPERATING
      INCOME (LOSS)
                
                
                (44,311
                )
                
                
                128,988
                
                
                
                101,886
                
                
                
                (10,830
                )
                
                
                175,733OTHER
      INCOME (EXPENSE):Miscellaneous
      income (expense), includingnet income
      from equity investees
                
                
                121,725
                
                
                
                (1,208
                )
                
                
                (6,537
                )
                
                
                (116,884
                )
                
                
                (2,904
                )Interest
      expense to affiliates
                
                
                (82
                )
                
                
                (5,289
                )
                
                
                (1,839
                )
                
                
                -
                
                
                
                (7,210
                )Interest
      expense - other
                
                
                (3,978
                )
                
                
                (25,968
                )
                
                
                (11,018
                )
                
                
                16,429
                
                
                
                (24,535
                )Capitalized
      interest
                
                
                21
                
                
                
                6,228
                
                
                
                414
                
                
                
                -
                
                
                
                6,663Total other
      income (expense)
                
                
                117,686
                
                
                
                (26,237
                )
                
                
                (18,980
                )
                
                
                (100,455
                )
                
                
                (27,986
                )INCOME
      BEFORE INCOME TAXES
                
                
                73,375
                
                
                
                102,751
                
                
                
                82,906
                
                
                
                (111,285
                )
                
                
                147,747INCOME
      TAXES (BENEFIT)
                
                
                (16,609
                )
                
                
                39,285
                
                
                
                32,764
                
                
                
                2,323
                
                
                
                57,763NET
      INCOME
                
                $
                89,984
                
                
                $
                63,466
                
                
                $
                50,142
                
                
                $
                (113,608
                )
                
                $
                89,984
   118
   FIRSTENERGY
      SOLUTIONS CORP.CONSOLIDATING
      STATEMENTS OF INCOME(Unaudited)For
      the Three Months Ended March 31, 2007
                
                FES
                
                
                FGCO
                
                
                NGC
                
                
                Eliminations
                
                
                Consolidated(In
      thousands)REVENUES
                
                $
                1,019,387
                
                
                $
                551,355
                
                
                $
                234,091
                
                
                $
                (786,540
                )
                
                $
                1,018,293EXPENSES:Fuel
                
                
                2,367
                
                
                
                201,231
                
                
                
                29,937
                
                
                
                -
                
                
                
                233,535Purchased
      power from non-affiliates
                
                
                186,203
                
                
                
                2,367
                
                
                
                -
                
                
                
                (2,367
                )
                
                
                186,203Purchased
      power from affiliates
                
                
                784,172
                
                
                
                59,069
                
                
                
                17,415
                
                
                
                (784,173
                )
                
                
                76,483Other
      operating expenses
                
                
                51,249
                
                
                
                99,095
                
                
                
                113,252
                
                
                
                -
                
                
                
                263,596Provision for
      depreciation
                
                
                453
                
                
                
                24,936
                
                
                
                22,621
                
                
                
                -
                
                
                
                48,010General
      taxes
                
                
                4,934
                
                
                
                10,568
                
                
                
                6,216
                
                
                
                -
                
                
                
                21,718Total
      expenses
                
                
                1,029,378
                
                
                
                397,266
                
                
                
                189,441
                
                
                
                (786,540
                )
                
                
                829,545OPERATING
      INCOME (LOSS)
                
                
                (9,991
                )
                
                
                154,089
                
                
                
                44,650
                
                
                
                -
                
                
                
                188,748OTHER
      INCOME (EXPENSE):Miscellaneous
      income (expense), includingnet income
      from equity investees
                
                
                113,948
                
                
                
                916
                
                
                
                5,200
                
                
                
                (100,332
                )
                
                
                19,732Interest
      expense to affiliates
                
                
                -
                
                
                
                (24,331
                )
                
                
                (5,115
                )
                
                
                -
                
                
                
                (29,446
                )Interest
      expense - other
                
                
                (1,385
                )
                
                
                (6,760
                )
                
                
                (9,213
                )
                
                
                -
                
                
                
                (17,358
                )Capitalized
      interest
                
                
                5
                
                
                
                2,099
                
                
                
                1,105
                
                
                
                -
                
                
                
                3,209Total other
      income (expense)
                
                
                112,568
                
                
                
                (28,076
                )
                
                
                (8,023
                )
                
                
                (100,332
                )
                
                
                (23,863
                )INCOME
      BEFORE INCOME TAXES
                
                
                102,577
                
                
                
                126,013
                
                
                
                36,627
                
                
                
                (100,332
                )
                
                
                164,885INCOME
      TAXES
                
                
                73
                
                
                
                49,289
                
                
                
                13,019
                
                
                
                -
                
                
                
                62,381NET
      INCOME
                
                $
                102,504
                
                
                $
                76,724
                
                
                $
                23,608
                
                
                $
                (100,332
                )
                
                $
                102,504
 
 119
   FIRSTENERGY
      SOLUTIONS CORP.CONSOLIDATING
      BALANCE SHEETS(Unaudited)As
      of March 31, 2008
                
                FES
                
                
                FGCO
                
                
                NGC
                
                
                Eliminations
                
                
                Consolidated(In
      thousands)ASSETSCURRENT
      ASSETS:Cash and cash
      equivalents
                
                $
                2
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                2Receivables-Customers
                
                
                125,116
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                125,116Associated
      companies
                
                
                285,350
                
                
                
                231,049
                
                
                
                96,852
                
                
                
                (295,511
                )
                
                
                317,740Other
                
                
                1,174
                
                
                
                1,050
                
                
                
                -
                
                
                
                
                
                
                
                2,224Notes
      receivable from associated companies
                
                
                668,376
                
                
                
                -
                
                
                
                69,011
                
                
                
                -
                
                
                
                737,387Materials and
      supplies, at average cost
                
                
                2,849
                
                
                
                264,501
                
                
                
                207,275
                
                
                
                -
                
                
                
                474,625Prepayments
      and other
                
                
                107,798
                
                
                
                26,208
                
                
                
                1,728
                
                
                
                -
                
                
                
                135,7341,190,665
                
                
                
                522,808
                
                
                
                374,866
                
                
                
                (295,511
                )
                
                
                1,792,828PROPERTY,
      PLANT AND EQUIPMENT:In
      service
                
                
                35,302
                
                
                
                5,359,381
                
                
                
                3,700,973
                
                
                
                (391,896
                )
                
                
                8,703,760Less -
      Accumulated provision for depreciation
                
                
                7,810
                
                
                
                2,655,103
                
                
                
                1,537,747
                
                
                
                (168,115
                )
                
                
                4,032,54527,492
                
                
                
                2,704,278
                
                
                
                2,163,226
                
                
                
                (223,781
                )
                
                
                4,671,215Construction
      work in progress
                
                
                10,792
                
                
                
                881,899
                
                
                
                165,389
                
                
                
                -
                
                
                
                1,058,08038,284
                
                
                
                3,586,177
                
                
                
                2,328,615
                
                
                
                (223,781
                )
                
                
                5,729,295OTHER
      PROPERTY AND INVESTMENTS:Nuclear plant
      decommissioning trusts
                
                
                -
                
                
                
                -
                
                
                
                1,263,338
                
                
                
                -
                
                
                
                1,263,338Long-term
      notes receivable from associated companies
                
                
                -
                
                
                
                -
                
                
                
                62,900
                
                
                
                -
                
                
                
                62,900Investment in
      associated companies
                
                
                2,598,022
                
                
                
                -
                
                
                
                -
                
                
                
                (2,598,022
                )
                
                
                -Other
                
                
                2,529
                
                
                
                21,657
                
                
                
                202
                
                
                
                -
                
                
                
                24,3882,600,551
                
                
                
                21,657
                
                
                
                1,326,440
                
                
                
                (2,598,022
                )
                
                
                1,350,626DEFERRED
      CHARGES AND OTHER ASSETS:Accumulated
      deferred income taxes
                
                
                10,518
                
                
                
                495,131
                
                
                
                -
                
                
                
                (248,666
                )
                
                
                256,983Lease
      assignment receivable from associated companies
                
                
                -
                
                
                
                67,256
                
                
                
                -
                
                
                
                -
                
                
                
                67,256Goodwill
                
                
                24,248
                
                
                
                
                
                
                
                -
                
                
                
                -
                
                
                
                24,248Property
      taxes
                
                
                -
                
                
                
                25,007
                
                
                
                22,767
                
                
                
                -
                
                
                
                47,774Pension
      assets
                
                
                3,214
                
                
                
                12,856
                
                
                
                -
                
                
                
                -
                
                
                
                16,070Unamortized
      sale and leaseback costs
                
                
                -
                
                
                
                38,120
                
                
                
                -
                
                
                
                47,575
                
                
                
                85,695Other
                
                
                18,177
                
                
                
                49,393
                
                
                
                5,188
                
                
                
                (37,939
                )
                
                
                34,81956,157
                
                
                
                687,763
                
                
                
                27,955
                
                
                
                (239,030
                )
                
                
                532,845$
                3,885,657
                
                
                $
                4,818,405
                
                
                $
                4,057,876
                
                
                $
                (3,356,344
                )
                
                $
                9,405,594LIABILITIES
      AND CAPITALIZATIONCURRENT
      LIABILITIES:Currently
      payable long-term debt
                
                $
                -
                
                
                $
                738,087
                
                
                $
                887,265
                
                
                $
                (16,896
                )
                
                $
                1,608,456Notes
      payable-Associated
      companies
                
                
                -
                
                
                
                885,760
                
                
                
                260,199
                
                
                
                -
                
                
                
                1,145,959Other
                
                
                700,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                700,000Accounts
      payable-Associated
      companies
                
                
                554,844
                
                
                
                1,419
                
                
                
                119,773
                
                
                
                (270,368
                )
                
                
                405,668Other
                
                
                55,614
                
                
                
                130,090
                
                
                
                -
                
                
                
                -
                
                
                
                185,704Accrued
      taxes
                
                
                3,378
                
                
                
                116,383
                
                
                
                47,292
                
                
                
                (24,219
                )
                
                
                142,834Other
                
                
                85,100
                
                
                
                107,791
                
                
                
                9,731
                
                
                
                45,484
                
                
                
                248,1061,398,936
                
                
                
                1,979,530
                
                
                
                1,324,260
                
                
                
                (265,999
                )
                
                
                4,436,727CAPITALIZATION:Common
      stockholder's equity
                
                
                2,460,215
                
                
                
                1,011,907
                
                
                
                1,579,614
                
                
                
                (2,591,521
                )
                
                
                2,460,215Long-term debt
      and other long-term obligations
                
                
                -
                
                
                
                1,320,773
                
                
                
                62,900
                
                
                
                (1,305,717
                )
                
                
                77,9562,460,215
                
                
                
                2,332,680
                
                
                
                1,642,514
                
                
                
                (3,897,238
                )
                
                
                2,538,171NONCURRENT
      LIABILITIES:Deferred gain
      on sale and leaseback transaction
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,051,871
                
                
                
                1,051,871Accumulated
      deferred income taxes
                
                
                -
                
                
                
                -
                
                
                
                244,978
                
                
                
                (244,978
                )
                
                
                -Accumulated
      deferred investment tax credits
                
                
                -
                
                
                
                35,350
                
                
                
                24,619
                
                
                
                -
                
                
                
                59,969Asset
      retirement obligations
                
                
                -
                
                
                
                24,947
                
                
                
                798,739
                
                
                
                -
                
                
                
                823,686Retirement
      benefits
                
                
                9,332
                
                
                
                56,016
                
                
                
                -
                
                
                
                -
                
                
                
                65,348Property
      taxes
                
                
                -
                
                
                
                25,329
                
                
                
                22,766
                
                
                
                -
                
                
                
                48,095Lease market
      valuation liability
                
                
                -
                
                
                
                341,881
                
                
                
                -
                
                
                
                -
                
                
                
                341,881Other
                
                
                17,174
                
                
                
                22,672
                
                
                
                -
                
                
                
                -
                
                
                
                39,84626,506
                
                
                
                506,195
                
                
                
                1,091,102
                
                
                
                806,893
                
                
                
                2,430,696$
                3,885,657
                
                
                $
                4,818,405
                
                
                $
                4,057,876
                
                
                $
                (3,356,344
                )
                
                $
                9,405,594
   120
 
 FIRSTENERGY
      SOLUTIONS CORP.CONSOLIDATING
      BALANCE SHEETS(Unaudited)As
      of December 31, 2007
                
                FES
                
                
                FGCO
                
                
                NGC
                
                
                Eliminations
                
                
                Consolidated(In
      thousands)ASSETSCURRENT
      ASSETS:Cash and cash
      equivalents
                
                $
                2
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                2Receivables-Customers
                
                
                133,846
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                133,846Associated
      companies
                
                
                327,715
                
                
                
                237,202
                
                
                
                98,238
                
                
                
                (286,656
                )
                
                
                376,499Other
                
                
                2,845
                
                
                
                978
                
                
                
                -
                
                
                
                -
                
                
                
                3,823Notes
      receivable from associated companies
                
                
                23,772
                
                
                
                -
                
                
                
                69,012
                
                
                
                -
                
                
                
                92,784Materials and
      supplies, at average cost
                
                
                195
                
                
                
                215,986
                
                
                
                210,834
                
                
                
                -
                
                
                
                427,015Prepayments
      and other
                
                
                67,981
                
                
                
                21,605
                
                
                
                2,754
                
                
                
                -
                
                
                
                92,340556,356
                
                
                
                475,771
                
                
                
                380,838
                
                
                
                (286,656
                )
                
                
                1,126,309PROPERTY,
      PLANT AND EQUIPMENT:In
      service
                
                
                25,513
                
                
                
                5,065,373
                
                
                
                3,595,964
                
                
                
                (392,082
                )
                
                
                8,294,768Less -
      Accumulated provision for depreciation
                
                
                7,503
                
                
                
                2,553,554
                
                
                
                1,497,712
                
                
                
                (166,756
                )
                
                
                3,892,01318,010
                
                
                
                2,511,819
                
                
                
                2,098,252
                
                
                
                (225,326
                )
                
                
                4,402,755Construction
      work in progress
                
                
                1,176
                
                
                
                571,672
                
                
                
                188,853
                
                
                
                -
                
                
                
                761,70119,186
                
                
                
                3,083,491
                
                
                
                2,287,105
                
                
                
                (225,326
                )
                
                
                5,164,456OTHER
      PROPERTY AND INVESTMENTS:Nuclear plant
      decommissioning trusts
                
                
                -
                
                
                
                -
                
                
                
                1,332,913
                
                
                
                -
                
                
                
                1,332,913Long-term
      notes receivable from associated  companies
                
                
                -
                
                
                
                -
                
                
                
                62,900
                
                
                
                -
                
                
                
                62,900Investment in
      associated companies
                
                
                2,516,838
                
                
                
                -
                
                
                
                -
                
                
                
                (2,516,838
                )
                
                
                -Other
                
                
                2,732
                
                
                
                37,071
                
                
                
                201
                
                
                
                -
                
                
                
                40,0042,519,570
                
                
                
                37,071
                
                
                
                1,396,014
                
                
                
                (2,516,838
                )
                
                
                1,435,817DEFERRED
      CHARGES AND OTHER ASSETS:Accumulated
      deferred income taxes
                
                
                16,978
                
                
                
                522,216
                
                
                
                -
                
                
                
                (262,271
                )
                
                
                276,923Lease
      assignment receivable from associated companies
                
                
                -
                
                
                
                215,258
                
                
                
                -
                
                
                
                -
                
                
                
                215,258Goodwill
                
                
                24,248
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                24,248Property
      taxes
                
                
                -
                
                
                
                25,007
                
                
                
                22,767
                
                
                
                -
                
                
                
                47,774Pension
      asset
                
                
                3,217
                
                
                
                13,506
                
                
                
                -
                
                
                
                -
                
                
                
                16,723Unamortized
      sale and leaseback costs
                
                
                -
                
                
                
                27,597
                
                
                
                -
                
                
                
                43,206
                
                
                
                70,803Other
                
                
                22,956
                
                
                
                52,971
                
                
                
                6,159
                
                
                
                (38,133
                )
                
                
                43,95367,399
                
                
                
                856,555
                
                
                
                28,926
                
                
                
                (257,198
                )
                
                
                695,682TOTAL
      ASSETS
                
                $
                3,162,511
                
                
                $
                4,452,888
                
                
                $
                4,092,883
                
                
                $
                (3,286,018
                )
                
                $
                8,422,264LIABILITIES
      AND CAPITALIZATIONCURRENT
      LIABILITIES:Currently
      payable long-term debt
                
                $
                -
                
                
                $
                596,827
                
                
                $
                861,265
                
                
                $
                (16,896
                )
                
                $
                1,441,196Short-term
      borrowings-Associated
      companies
                
                
                -
                
                
                
                238,786
                
                
                
                25,278
                
                
                
                -
                
                
                
                264,064Other
                
                
                300,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                300,000Accounts
      payable-Associated
      companies
                
                
                287,029
                
                
                
                175,965
                
                
                
                268,926
                
                
                
                (286,656
                )
                
                
                445,264Other
                
                
                56,194
                
                
                
                120,927
                
                
                
                -
                
                
                
                -
                
                
                
                177,121Accrued
      taxes
                
                
                18,831
                
                
                
                125,227
                
                
                
                28,229
                
                
                
                (836
                )
                
                
                171,451Other
                
                
                57,705
                
                
                
                131,404
                
                
                
                11,972
                
                
                
                36,725
                
                
                
                237,806719,759
                
                
                
                1,389,136
                
                
                
                1,195,670
                
                
                
                (267,663
                )
                
                
                3,036,902CAPITALIZATION:Common
      stockholder's equity
                
                
                2,414,231
                
                
                
                951,542
                
                
                
                1,562,069
                
                
                
                (2,513,611
                )
                
                
                2,414,231Long-term debt
      and other long-term obligations
                
                
                -
                
                
                
                1,597,028
                
                
                
                242,400
                
                
                
                (1,305,716
                )
                
                
                533,7122,414,231
                
                
                
                2,548,570
                
                
                
                1,804,469
                
                
                
                (3,819,327
                )
                
                
                2,947,943NONCURRENT
      LIABILITIES:Deferred gain
      on sale and leaseback transaction
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,060,119
                
                
                
                1,060,119Accumulated
      deferred income taxes
                
                
                -
                
                
                
                -
                
                
                
                259,147
                
                
                
                (259,147
                )
                
                
                -Accumulated
      deferred investment tax credits
                
                
                -
                
                
                
                36,054
                
                
                
                25,062
                
                
                
                -
                
                
                
                61,116Asset
      retirement obligations
                
                
                -
                
                
                
                24,346
                
                
                
                785,768
                
                
                
                -
                
                
                
                810,114Retirement
      benefits
                
                
                8,721
                
                
                
                54,415
                
                
                
                -
                
                
                
                -
                
                
                
                63,136Property
      taxes
                
                
                -
                
                
                
                25,328
                
                
                
                22,767
                
                
                
                -
                
                
                
                48,095Lease market
      valuation liability
                
                
                -
                
                
                
                353,210
                
                
                
                -
                
                
                
                -
                
                
                
                353,210Other
                
                
                19,800
                
                
                
                21,829
                
                
                
                -
                
                
                
                -
                
                
                
                41,62928,521
                
                
                
                515,182
                
                
                
                1,092,744
                
                
                
                800,972
                
                
                
                2,437,419TOTAL
      LIABILITIES AND CAPITALIZATION
                
                $
                3,162,511
                
                
                $
                4,452,888
                
                
                $
                4,092,883
                
                
                $
                (3,286,018
                )
                
                $
                8,422,264
 
 121
  
 FIRSTENERGY
      SOLUTIONS CORP.CONDENSED
      CONSOLIDATING STATEMENTS OF CASH FLOWS(Unaudited)For
      the Three Months Ended March 31, 2008
                
                FES
                
                
                FGCO
                
                
                NGC
                
                
                Eliminations
                
                
                Consolidated(In
      thousands)NET
      CASH PROVIDED FROM (USED FOR)OPERATING
      ACTIVITIES
                
                $
                273,827
                
                
                $
                (122,171
                )
                
                $
                8,108
                
                
                $
                188
                
                
                $
                159,952CASH
      FLOWS FROM FINANCING ACTIVITIES:New
      Financing-Short-term
      borrowings, net
                
                
                400,000
                
                
                
                646,975
                
                
                
                234,921
                
                
                
                -
                
                
                
                1,281,896Redemptions
      and Repayments-Long-term
      debt
                
                
                -
                
                
                
                (135,063
                )
                
                
                (153,540
                )
                
                
                -
                
                
                
                (288,603
                )Common stock
      dividend payments
                
                
                (10,000
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (10,000
                )Net cash provided from financing activities
                
                
                390,000
                
                
                
                511,912
                
                
                
                81,381
                
                
                
                -
                
                
                
                983,293CASH
      FLOWS FROM INVESTING ACTIVITIES:Property
      additions
                
                
                (19,406
                )
                
                
                (375,391
                )
                
                
                (81,545
                )
                
                
                (187
                )
                
                
                (476,529
                )Proceeds from
      asset sales
                
                
                -
                
                
                
                5,088
                
                
                
                -
                
                
                
                -
                
                
                
                5,088Sales of
      investment securities held in trusts
                
                
                -
                
                
                
                -
                
                
                
                173,123
                
                
                
                -
                
                
                
                173,123Purchases of
      investment securities held in trusts
                
                
                -
                
                
                
                -
                
                
                
                (181,079
                )
                
                
                -
                
                
                
                (181,079
                )Loans to
      associated companies, net
                
                
                (644,604
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (644,604
                )Other
                
                
                183
                
                
                
                (19,438
                )
                
                
                12
                
                
                
                (1
                )
                
                
                (19,244
                )Net
      cash used for investing activities
                
                
                (663,827
                )
                
                
                (389,741
                )
                
                
                (89,489
                )
                
                
                (188
                )
                
                
                (1,143,245
                )Net change in
      cash and cash equivalents
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Cash and cash
      equivalents at beginning of period
                
                
                2
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2Cash and cash
      equivalents at end of period
                
                $
                2
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                2
  
 122
 
 FIRSTENERGY
      SOLUTIONS CORP.CONDENSED
      CONSOLIDATING STATEMENTS OF CASH FLOWS(Unaudited)For
      the Three Months Ended March 31, 2007
                
                FES
                
                
                FGCO
                
                
                NGC
                
                
                Eliminations
                
                
                Consolidated(In
      thousands)NET
      CASH PROVIDED FROMOPERATING
      ACTIVITIES
                
                $
                65,870
                
                
                $
                55,003
                
                
                $
                177,456
                
                
                $
                -
                
                
                $
                298,329CASH
      FLOWS FROM FINANCING ACTIVITIES:New
      Financing-Equity
      contribution from parent
                
                
                700,000
                
                
                
                700,000
                
                
                
                -
                
                
                
                (700,000
                )
                
                
                700,000Short-term
      borrowings, net
                
                
                250,000
                
                
                
                -
                
                
                
                -
                
                
                
                (52,269
                )
                
                
                197,731Redemptions
      and Repayments-Long-term
      debt
                
                
                -
                
                
                
                (616,728
                )
                
                
                (128,716
                )
                
                
                -
                
                
                
                (745,444
                )Short-term
      borrowings, net
                
                
                -
                
                
                
                (52,269
                )
                
                
                -
                
                
                
                52,269
                
                
                
                -Net cash provided from (used for) financing activities
                
                
                950,000
                
                
                
                31,003
                
                
                
                (128,716
                )
                
                
                (700,000
                )
                
                
                152,287CASH
      FLOWS FROM INVESTING ACTIVITIES:Property
      additions
                
                
                (214
                )
                
                
                (81,400
                )
                
                
                (35,892
                )
                
                
                -
                
                
                
                (117,506
                )Sales of
      investment securities held in trusts
                
                
                -
                
                
                
                -
                
                
                
                178,632
                
                
                
                -
                
                
                
                178,632Purchases of
      investment securities held in trusts
                
                
                -
                
                
                
                -
                
                
                
                (188,076
                )
                
                
                -
                
                
                
                (188,076
                )Loans to
      associated companies, net
                
                
                (316,003
                )
                
                
                -
                
                
                
                (3,895
                )
                
                
                -
                
                
                
                (319,898
                )Investment in
      subsidiary
                
                
                (700,000
                )
                
                
                -
                
                
                
                -
                
                
                
                700,000
                
                
                
                -Other
                
                
                347
                
                
                
                (4,606
                )
                
                
                491
                
                
                
                -
                
                
                
                (3,768
                )Net cash used for investing activities
                
                
                (1,015,870
                )
                
                
                (86,006
                )
                
                
                (48,740
                )
                
                
                700,000
                
                
                
                (450,616
                )Net change in
      cash and cash equivalents
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Cash and cash
      equivalents at beginning of period
                
                
                2
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2Cash and cash
      equivalents at end of period
                
                $
                2
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                2
 
 123
 
 
 ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
 
 See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations –
Market Risk Information” in Item 2 above.
 
 ITEM
4. CONTROLS AND PROCEDURES
 
 (a)   EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES – FIRSTENERGY
 
 FirstEnergy’s chief
executive officer and chief financial officer have reviewed and evaluated the
registrant's disclosure controls and procedures. The term disclosure controls
and procedures means controls and other procedures of a registrant that are
designed to ensure that information required to be disclosed by the registrant
in the reports that it files or submits under the Securities Exchange Act of
1934 (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange Commission's
rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by an issuer in the reports that it files or submits under that Act is
accumulated and communicated to the registrant's management, including its
principal executive and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure. Based on that evaluation, those officers have concluded that the
registrant's disclosure controls and procedures are effective and were designed
to bring to their attention material information relating to the registrant and
its consolidated subsidiaries by others within those entities.
 
 (b)   CHANGES
IN INTERNAL CONTROLS
 
 During the quarter
ended March 31, 2008, there were no changes in FirstEnergy’s internal control
over financial reporting that have materially affected, or are reasonably likely
to materially affect, the registrant’s internal control over financial
reporting.
 
 ITEM
4T. CONTROLS AND PROCEDURES – FES, OE, CEI, TE, JCP&L, MET-ED AND
PENELEC
 
 (a)    EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
 
 Each registrant's
chief executive officer and chief financial officer have reviewed and evaluated
such registrant's disclosure controls and procedures. The term disclosure
controls and procedures means controls and other procedures of a registrant that
are designed to ensure that information required to be disclosed by the
registrant in the reports that it files or submits under the Securities Exchange
Act of 1934 (15 U.S.C. 78a et seq.) is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by an issuer in the reports that it files or submits
under that Act is accumulated and communicated to the registrant's management,
including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure. Based on that evaluation, those officers have concluded
that such registrant's disclosure controls and procedures are effective and were
designed to bring to their attention material information relating to such
registrant and its consolidated subsidiaries by others within those
entities.
 
 (b)    CHANGES
IN INTERNAL CONTROLS
 
 During the quarter
ended March 31, 2008, there were no changes in the registrants' internal control
over financial reporting that have materially affected, or are reasonably likely
to materially affect, the registrants' internal control over financial
reporting.
 
 
 
 124
 
 PART II. OTHER
INFORMATION
 
 ITEM
1.     LEGAL PROCEEDINGS
 
 Information required
for Part II, Item 1 is incorporated by reference to the discussions in
Notes 10 and 11 of the Consolidated Financial Statements in Part I, Item 1
of this Form 10-Q.
 
 ITEM
1A.  RISK FACTORS
 
 See Item 1A RISK
FACTORS in Part I of the Form 10-K for the year ended December 31, 2007 for
a discussion of the risk factors of FirstEnergy and the subsidiary registrants.
For the quarter ended March 31, 2008, there have been no material changes
to these risk factors.
 
 ITEM
2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
 
 (c)    FirstEnergy
 
 The
table below includes information on a monthly basis regarding purchases made by
FirstEnergy of its common stock.
 
 PeriodJanuary
      1-31,
              
              February
      1-29,
              
              March
      1-31,
              
              First2008
              
              2008
              
              2008
              
              QuarterTotal Number
      of Shares Purchased (a)
              
              329,106
              
              16,853
              
              988,386
              
              1,334,345Average Price
      Paid per Share
              
              $76.56
              
              $71.68
              
              $68.55
              
              $70.57Total Number
      of Shares PurchasedAs Part of Publicly Announced
      Plansor Programs (b)
              
              -
              
              -
              
              -
              
              -Maximum Number
      (or Approximate DollarValue) of Shares that May Yet
      BePurchased Under the Plans or
      Programs
              
              -
              
              -
              
              -
              
              -
 
 (a)
              Share amounts
      reflect purchases on the open market to satisfy FirstEnergy's obligations
      to deliver common stock under its 2007 Incentive Compensation Plan,
      Deferred Compensation Plan for Outside Directors, Executive Deferred
      Compensation Plan, Savings Plan and Stock Investment Plan. In addition,
      such amounts reflect shares tendered by employees to pay the exercise
      price or withholding taxes upon exercise of stock options granted under
      the 2007 Incentive Compensation Plan and the Executive Deferred
      Compensation Plan, and shares purchased as part of publicly announced
      plans.(b)
              On
      December 10, 2007, FirstEnergy’s plan to repurchase up to
      16 million shares of its common stock through June 30, 2008, was
      concluded.
 
 
 
 
 
 
 
 
 
 
 
 
 125
 
 ITEM
6.    EXHIBITS
 
 Exhibit
                NumberFirstEnergy12
              Fixed charge
      ratios15
              Letter from
      independent registered public accounting firm31.1
              Certification
      of chief executive officer, as adopted pursuant to Rule
      13a-14(a)31.2
              Certification
      of chief financial officer, as adopted pursuant to Rule
      13a-14(a)32
              Certification
      of chief executive officer and chief financial officer, pursuant to 18
      U.S.C. Section 1350FES31.1
              Certification
      of chief executive officer, as adopted pursuant to Rule
      13a-14(a)31.2
              Certification
      of chief financial officer, as adopted pursuant to Rule
      13a-14(a)32
              Certification
      of chief executive officer and chief financial officer, pursuant to 18
      U.S.C. Section 1350OE12
              Fixed charge
      ratios15
              Letter from
      independent registered public accounting firm31.1
              Certification
      of chief executive officer, as adopted pursuant to Rule
      13a-14(a)31.2
              Certification
      of chief financial officer, as adopted pursuant to Rule
      13a-14(a)32
              Certification
      of chief executive officer and chief financial officer, pursuant to 18
      U.S.C. Section 1350CEI31.1
              Certification
      of chief executive officer, as adopted pursuant to Rule
      13a-14(a)31.2
              Certification
      of chief financial officer, as adopted pursuant to Rule
      13a-14(a)32
              Certification
      of chief executive officer and chief financial officer, pursuant to 18
      U.S.C. Section 1350TE31.1
              Certification
      of chief executive officer, as adopted pursuant to Rule
      13a-14(a)31.2
              Certification
      of chief financial officer, as adopted pursuant to Rule
      13a-14(a)32
              Certification
      of chief executive officer and chief financial officer, pursuant to 18
      U.S.C. Section 1350JCP&L31.1
              Certification
      of chief executive officer, as adopted pursuant to Rule
      13a-14(a)31.2
              Certification
      of chief financial officer, as adopted pursuant to Rule
      13a-14(a)32
              Certification
      of chief executive officer and chief financial officer, pursuant to 18
      U.S.C. Section 1350Met-Ed31.1
              Certification
      of chief executive officer, as adopted pursuant to Rule
      13a-14(a)31.2
              Certification
      of chief financial officer, as adopted pursuant to Rule
      13a-14(a)32
              Certification
      of chief executive officer and chief financial officer, pursuant to 18
      U.S.C. Section 1350Penelec12
              Fixed charge
      ratios15
              Letter from
      independent registered public accounting firm31.1
              Certification
      of chief executive officer, as adopted pursuant to Rule
      13a-14(a)31.2
              Certification
      of chief financial officer, as adopted pursuant to Rule
      13a-14(a)32
              Certification
      of chief executive officer and chief financial officer, pursuant to 18
      U.S.C. Section 1350
 
 Pursuant to
reporting requirements of respective financings, FirstEnergy, OE and Penelec are
required to file fixed charge ratios as an exhibit to this Form
10-Q.
 
 Pursuant to
paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, neither FirstEnergy,
FES, OE, CEI, TE, JCP&L, Met-Ed nor Penelec have filed as an exhibit to this
Form 10-Q any instrument with respect to long-term debt if the respective
total amount of securities authorized thereunder does not exceed 10% of its
respective total assets, but each hereby agrees to furnish to the SEC on request
any such documents.
 
 126
 
 SIGNATURES
 
 
 
 Pursuant to the
requirements of the Securities Exchange Act of 1934, each Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
 
 
 May 8,
2008
 
 
 
 
 
 FIRSTENERGY
      CORP.RegistrantFIRSTENERGY SOLUTIONS
      CORP.RegistrantOHIO EDISON
      COMPANYRegistrantTHE
      CLEVELAND ELECTRICILLUMINATING
      COMPANYRegistrantTHE TOLEDO EDISON
      COMPANYRegistrantMETROPOLITAN EDISON
      COMPANYRegistrantPENNSYLVANIA ELECTRIC
      COMPANYRegistrant
 
 
 
 /s/  Harvey
      L. WagnerHarvey L.
      WagnerVice
      President, Controllerand Chief
      Accounting Officer
 
 
 
 JERSEY CENTRAL POWER
      & LIGHT COMPANYRegistrant/s/  Paulette
      R. ChatmanPaulette R.
      ChatmanController(Principal
      Accounting Officer)
 
 127