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 June 30, 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 AUGUST 6, 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,


·
            the impact of
      the PUCO’s rulemaking process on the Ohio Companies’ ESP and MRO
      filings,


·
            economic or
      weather conditions affecting future sales and
  margins,


·
            changes in
      markets for energy services,


·
            changing
      energy and commodity market prices and
  availability,


·
            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 impact of
      the U.S. Court of Appeals’ July 11, 2008 decision to vacate the CAIR
      rules and the scope of any laws, rules or regulations that may ultimately
      take their place,


·
            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 NSR
      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 andResults of Operations
            1-42Report of
      Independent Registered Public Accounting Firm
            43Consolidated
      Statements of Income
            44Consolidated
      Statements of Comprehensive Income
            45Consolidated
      Balance Sheets
            46Consolidated
      Statements of Cash Flows
            47FirstEnergy Solutions
      Corp.Management's
      Narrative Analysis of Results of Operations
            48-50Report of
      Independent Registered Public Accounting Firm
            51Consolidated
      Statements of Income and Comprehensive Income
            52Consolidated
      Balance Sheets
            53Consolidated
      Statements of Cash Flows
            54Ohio Edison
    CompanyManagement's
      Narrative Analysis of Results of Operations
            55-56Report of
      Independent Registered Public Accounting Firm
            57Consolidated
      Statements of Income and Comprehensive Income
            58Consolidated
      Balance Sheets
            59Consolidated
      Statements of Cash Flows
            60The Cleveland Electric
      Illuminating CompanyManagement's
      Narrative Analysis of Results of Operations
            61-62Report of
      Independent Registered Public Accounting Firm
            63Consolidated
      Statements of Income and Comprehensive Income
            64Consolidated
      Balance Sheets
            65Consolidated
      Statements of Cash Flows
            66The Toledo Edison
      CompanyManagement's
      Narrative Analysis of Results of Operations
            67-68Report of
      Independent Registered Public Accounting Firm
            69Consolidated
      Statements of Income and Comprehensive Income
            70Consolidated
      Balance Sheets
            71Consolidated
      Statements of Cash Flows
            72





i





TABLE
OF CONTENTS (Cont'd)











Jersey Central Power & Light
      Company
            PagesManagement's
      Narrative Analysis of Results of Operations
            73-74Report of
      Independent Registered Public Accounting Firm
            75Consolidated
      Statements of Income and Comprehensive Income
            76Consolidated
      Balance Sheets
            77Consolidated
      Statements of Cash Flows
            78Metropolitan Edison
      CompanyManagement's
      Narrative Analysis of Results of Operations
            79-80Report of
      Independent Registered Public Accounting Firm
            81Consolidated
      Statements of Income and Comprehensive Income
            82Consolidated
      Balance Sheets
            83Consolidated
      Statements of Cash Flows
            84Pennsylvania Electric
      CompanyManagement's
      Narrative Analysis of Results of Operations
            85-86Report of
      Independent Registered Public Accounting Firm
            87Consolidated
      Statements of Income and Comprehensive Income
            88Consolidated
      Balance Sheets
            89Consolidated
      Statements of Cash Flows
            90Combined Management’s Discussion
      and Analysis of Registrant Subsidiaries
            91-106Combined Notes to Consolidated
      Financial Statements
            107-140Item
      3.       Quantitative and Qualitative
      Disclosures About Market Risk.
            141Item
      4.       Controls and Procedures –
      FirstEnergy.
            141Item
      4T.     Controls and Procedures – FES, OE, CEI,
      TE, JCP&L, Met-Ed and Penelec.
            141Part
      II.    Other InformationItem
      1.       Legal Proceedings.
            142Item
      1A.    Risk Factors.
            142Item
      2.       Unregistered Sales of Equity
      Securities and Use of Proceeds.
            142Item
      4.       Submission of Matters to a
      Vote of Security Holders.
            143-144Item
      5.       Other
      Information.
            144Item
      6.       Exhibits.
            144-145

















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, Incorporated, 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
    subsidiaryThe following
      abbreviations and acronyms are used to identify frequently used terms in
      this report:ACO
            Administrative
      Consent OrderAEP
            American
      Electric Power Company, Inc.ALJ
            Administrative
      Law JudgeAMP-Ohio
            American
      Municipal Power-Ohio, Inc.AOCL
            Accumulated
      Other Comprehensive LossAQC
            Air Quality
      ControlARB
            Accounting
      Research BulletinARO
            Asset
      Retirement ObligationASM
            Ancillary
      Services MarketBGS
            Basic
      Generation ServiceCAA
            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”





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 GroupMEW
            Mission Energy
      Westside, Inc.MISO
            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 CorporationPCAOB
            Public Company
      Accounting Oversight BoardPCRB
            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 PlanRTC
            Regulatory
      Transition ChargeRTO
            Regional
      Transmission OrganizationS&P
            Standard &
      Poor’s Ratings ServiceSB221
            Amended
      Substitute Senate Bill 221SBC
            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”





iv
 GLOSSARY
OF TERMS, Cont’d.








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”SFAS
      162
            SFAS No. 162,
      “The Hierarchy of Generally Accepted Accounting
  Principles”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
second quarter of 2008 was $263 million, or basic earnings of $0.86 per share of
common stock ($0.85 diluted), compared with net income of $338 million, or
basic earnings of $1.11 per share of common stock ($1.10 diluted) in the second
quarter of 2007. Net income in the first six months of 2008 was $539million, or basic
earnings of $1.77per share of common
stock ($1.75diluted), compared with
net income of $628 million, or basic earnings of $2.03 per share of common stock
($2.01 diluted) in the first six months of 2007.





Change
      in Basic Earnings Per Share
              From
      Prior Year Periods
            
            Three
      Months Ended June 30
            
            Six
      Months
              Ended
      June 30Basic Earnings
      Per Share – 2007
            
            $
            1.11
            
            $
            2.03Gain on
      non-core asset sales – 2008
            
            
            -
            
            
            0.06Litigation
      settlement – 2008
            
            
            0.03
            
            
            0.03Saxton
      decommissioning regulatory asset – 2007
            
            
            -
            
            
            (0.05
            )Trust
      securities impairment
            
            
            (0.02
            )
            
            (0.04
            )Revenues
            
            
            0.24
            
            
            0.79Fuel and
      purchased power
            
            
            (0.40
            )
            
            (0.82
            )Depreciation
      and amortization
            
            
            (0.02
            )
            
            (0.04
            )Deferral of
      new regulatory assets
            
            
            (0.10
            )
            
            (0.13
            )General
      taxes
            
            
            0.02
            
            
            (0.01
            )Corporate-owned
      life insurance
            
            
            (0.04
            )
            
            (0.09
            )Other
      expenses
            
            
            0.04
            
            
            0.01Reduced common
      shares outstanding
            
            
            -
            
            
            0.03Basic Earnings
      Per Share – 2008
            
            $
            0.86
            
            $
            1.77


Regulatory
Matters - Ohio


Legislative Process
 
 On May 1, 2008,
Governor Strickland signed SB221, which became effective on July 31, 2008.
The bill requires all utilities to file an updated rate plan, now called an ESP,
with the PUCO. A utility is also permitted to simultaneously file an MRO in
which it would have to demonstrate certain objective market criteria. On July
31, 2008, FirstEnergy filed both an ESP and an MRO on behalf of its Ohio
Companies. The comprehensive ESP includes supply and pricing for retail
generation service for up to a three-year period, in addition to seeking
approval of outstanding issues currently pending before the PUCO in the Ohio
Companies’ distribution rate case. The MRO filing outlines a CBP for providing
retail generation supply if the ESP is not approved and implemented. The CBP
would use a “slice-of-system” approach where suppliers bid on tranches
(approximately 100 MW) of the Ohio Companies’ total customer load. A PUCO
decision on the ESP is required, by SB221, within 150 days and on the MRO within
90 days. New rates under the ESP would be effective for retail customers on
January 1, 2009.
 On July 2, 2008, and
July 23, 2008, the PUCO staff issued proposed rules addressing portions of SB221
for comment. Stakeholder comments on the first set of rules have been submitted
for consideration by the PUCO, and comments and reply comments on the second set
are due August 12, 2008 and August 22, 2008, respectively. Proposed rules
addressing other portions of SB221, including the alternative energy portfolio
standard, are expected to be issued in late August. Final rules are expected to
be adopted in late September. The rules will then be subject to review by the
Joint Committee on Agency Rule Review (a group consisting of five State
Representatives and five State Senators).
 
 RCP Fuel Remand
 
 On June 3, 2008,
FirstEnergy made a filing on behalf of the Ohio Companies to suspend the
procedural schedule in its application to recover the companies’ 2006-2007
deferred fuel costs and associated carrying charges since its ESP filing
contains a proposal addressing the recovery of these deferred fuel costs. On
June 4, 2008, the PUCO Staff issued a report in accordance with its
previously established procedural schedule and on June 11, 2008, the PUCO
denied FirstEnergy’s request to suspend proceedings until the ESP case is
completed and revised the procedural schedule. Testimony is now due
August 29, 2008, and an evidentiary hearing is scheduled for September 29,
2008.






1








Regulatory
Matters - Pennsylvania





Penn’s
Interim Default Service Supply





In April and May
2008, Penn held RFPs to procure its power supply for default service for
residential customers for the period June 2008 through May 2009 and a portion of
the load for June 2009 through May 2010. The PPUC approved the resulting bids
and on May 20, 2008, Penn filed compliance tariffs with the new default service
generation rates for residential customers, which the PPUC then certified on May
21, 2008. Penn’s new default service rates were effective June 1, 2008. RFPs for
the remainder of the June 2009 through May 2010 residential customers’ load are
scheduled for October 2008 and January 2009.





Met-Ed
and Penelec Transmission Service Charge Filing





On May 22, 2008, the
PPUC approved Met-Ed’s and Penelec’s annual updates to their TSC riders for the
period June 1, 2008, through May 31, 2009. The approved TSCs include a
component for under-recovery of actual transmission costs incurred during prior
periods and future transmission cost projections for June 2008 through May 2009.
Met-Ed’s TSC includes a transition approach that will recover past
under-recovered costs plus carrying charges through the new TSC, with deferral
of a portion of the projected costs plus carrying charges for recovery through
future TSCs by December 31, 2010. Various intervenors filed complaints
against Met-Ed’s and Penelec’s TSC filings. In addition, the PPUC ordered an
investigation to review the reasonableness of Met-Ed’s TSC, while at the same
time allowing the company to implement the rider June 1, 2008, subject to
refund. On July 15, 2008, the PPUC directed the ALJ to consolidate the
complaints against Met-Ed with its investigation, and a litigation schedule was
adopted with hearings for both companies scheduled to begin in January
2009.





Generation





Fremont
Plant





In January 2008,
FGCO acquired a partially complete 707-MW natural gas fired generating plant in
Fremont, Ohio from Calpine Corporation for $253.6 million. FGCO completed an
engineering study in June 2008, indicating an estimated additional
$208 million of capital expenditures will be required to complete the
project. Approximately $41 million of the incremental capital is expected
to be invested in 2008 with planned commercial operation of the plant expected
to begin in December 2009.





Refueling
Outage and Power Uprates





On May 22, 2008, the
868-MW Beaver Valley Unit 2 returned to service following its regularly
scheduled refueling outage that began on April 14, 2008. Major work
activities completed during the outage included replacing approximately
one-third of the fuel assemblies in the reactor and the high pressure turbine
rotor. During the refueling outage, the final phase of an extended power uprate
project was completed. This is the unit’s second uprate in the past 19
months.





On June 30, 2008,
the NRC approved a 12 MW uprate at the 893-MW Davis-Besse Nuclear Power Station.
These uprates were achieved in support of FirstEnergy’s strategy to maximize the
full potential of its existing generation assets.





Financial
Matters





New Long-Term Fuel Supply
Arrangements





On July 16, 2008,
FirstEnergy Ventures Corp., a subsidiary of FirstEnergy, entered into a joint
venture with the Boich Companies, a Columbus, Ohio-based coal company, to
acquire a majority stake in the Bull Mountain Mine Operations near Roundup,
Montana. This transaction is part of FirstEnergy’s strategy to secure
high-quality fuel supplies at attractive prices to maximize the capacity of its
existing fossil generating plants. FirstEnergy will make a $125 million equity
investment in the joint venture. Under an acquisition and development agreement,
the joint venture will acquire 80 percent of the Bull Mountain mining operations
and 100 percent of the transportation operations, with FirstEnergy owning a 45
percent economic interest and an affiliate of the Boich Companies owning a 55
percent economic interest in the joint venture, with both parties having a 50
percent voting interest in the joint venture. After January 2010, the joint
venture will have 18 months to exercise an option to acquire the remaining 20
percent stake in the mining operations. In a related transaction, FirstEnergy
has entered into a 15-year agreement to purchase all production up to 10 million
tons of bituminous western coal annually from the mine. FirstEnergy also reached
tentative agreements with the rail carriers associated with transporting coal
from the mine to its generating stations, and it expects to begin taking
delivery of the coal in late 2009 or early 2010. The joint venture has the right
to resell FirstEnergy’s Bull Mountain coal tonnage not used at FirstEnergy’s
facilities and has call rights on such coal above certain levels.








2








Acquisition
of Additional Equity Interests in Beaver Valley Unit 2 and Perry





On May 30, 2008, NGC
purchased 56.8 MW of lessor equity interests in the OE 1987 sale and leaseback
of the Perry Plant. On June 2, 2008, NGC purchased approximately 43.5 MW of
lessor equity interests in the OE 1987 sale and leaseback of Beaver Valley Unit
2. Between June 2, 2008 and June 9, 2008, NGC purchased an additional 158.5 MW
of additional lessor equity interests in the TE and CEI 1987 sale and leaseback
of Beaver Valley Unit 2, which purchases were undertaken in connection with the
previously disclosed exercise of the periodic purchase option provided in the TE
and CEI sale and leaseback arrangements. The Ohio Companies continue to lease
these MW under the respective sale and leaseback arrangements and the related
lease debt remains outstanding.





Refunding
of Auction Rate Bonds





In June 2008, FGCO
and NGC refunded all of the $455.7 million of PCRBs previously issued on
their behalf as auction rate securities and recently repurchased in response to
disruptions in the auction rate securities market. The new PCRBs were issued in
variable-rate modes supported by bank LOCs. FirstEnergy no longer holds auction
rate securities.





New
Credit Facility





On May 30, 2008,
FirstEnergy and FES entered into a new $300 million, 364-day revolving credit
facility. The pricing, terms and conditions are substantially similar to those
contained in the current FirstEnergy $2.75 billion revolving credit
agreement.





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 Ended June 30
            
            Six
      Months Ended June 30Increase
            
            
            
            Increase2008
            
            2007
            
            (Decrease)
            
            2008
            
            2007
            
            (Decrease)(In
      millions, except per share data)Net
      IncomeBy
      Business Segment:Energy
      delivery services
            
            $
            193
            
            $
            207
            
            $
            (14
            )
            $
            372
            
            $
            425
            
            $
            (53
            )Competitive
      energy services
            
            
            66
            
            
            142
            
            
            (76
            )
            
            153
            
            
            240
            
            
            (87
            )Ohio
      transitional generation services
            
            
            20
            
            
            30
            
            
            (10
            )
            
            43
            
            
            53
            
            
            (10
            )Other and
      reconciling adjustments*
            
            
            (16
            )
            
            (41
            )
            
            25
            
            
            (29
            )
            
            (90
            )
            
            61Total
            
            $
            263
            
            $
            338
            
            $
            (75
            )
            $
            539
            
            $
            628
            
            $
            (89
            )Basic
      Earnings Per Share
            
            $
            0.86
            
            $
            1.11
            
            $
            (0.25
            )
            $
            1.77
            
            $
            2.03
            
            $
            (0.26
            )Diluted
      Earnings Per Share
            
            $
            0.85
            
            $
            1.10
            
            $
            (0.25
            )
            $
            1.75
            
            $
            2.01
            
            $
            (0.26
            )





*
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 –
Second Quarter 2008 Compared with Second Quarter 2007





Financial results
for FirstEnergy's major business segments in the second quarter of 2008 and 2007
were as follows:




OhioEnergy
              
              
              Competitive
              
              
              Transitional
              
              
              Other
      andDelivery
              
              
              Energy
              
              
              Generation
              
              
              Reconciling
              
              
              FirstEnergySecond
      Quarter 2008 Financial Results
              
              Services
              
              
              Services
              
              
              Services
              
              
              Adjustments
              
              
              Consolidated(In
      millions)Revenues:ExternalElectric
              
              $
              2,030
              
              
              $
              324
              
              
              $
              670
              
              
              $
              -
              
              
              $
              3,024Other
              
              
              152
              
              
              
              51
              
              
              
              13
              
              
              
              5
              
              
              
              221Internal
              
              
              -
              
              
              
              704
              
              
              
              -
              
              
              
              (704
              )
              
              
              -Total
      Revenues
              
              
              2,182
              
              
              
              1,079
              
              
              
              683
              
              
              
              (699
              )
              
              
              3,245Expenses:Fuel and
      purchased power
              
              
              998
              
              
              
              537
              
              
              
              555
              
              
              
              (704
              )
              
              
              1,386Other
      operating expenses
              
              
              413
              
              
              
              312
              
              
              
              81
              
              
              
              (25
              )
              
              
              781Provision for
      depreciation
              
              
              104
              
              
              
              59
              
              
              
              -
              
              
              
              5
              
              
              
              168Amortization
      of regulatory assets
              
              
              235
              
              
              
              -
              
              
              
              11
              
              
              
              -
              
              
              
              246Deferral of
      new regulatory assets
              
              
              (98
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (98
              )General
      taxes
              
              
              149
              
              
              
              24
              
              
              
              2
              
              
              
              5
              
              
              
              180Total
      Expenses
              
              
              1,801
              
              
              
              932
              
              
              
              649
              
              
              
              (719
              )
              
              
              2,663Operating
      Income
              
              
              381
              
              
              
              147
              
              
              
              34
              
              
              
              20
              
              
              
              582Other Income
      (Expense):Investment
      income
              
              
              40
              
              
              
              (8
              )
              
              
              (1
              )
              
              
              (15
              )
              
              
              16Interest
      expense
              
              
              (100
              )
              
              
              (38
              )
              
              
              -
              
              
              
              (50
              )
              
              
              (188
              )Capitalized
      interest
              
              
              1
              
              
              
              10
              
              
              
              -
              
              
              
              2
              
              
              
              13Total Other
      Expense
              
              
              (59
              )
              
              
              (36
              )
              
              
              (1
              )
              
              
              (63
              )
              
              
              (159
              )Income Before
      Income Taxes
              
              
              322
              
              
              
              111
              
              
              
              33
              
              
              
              (43
              )
              
              
              423Income
      taxes
              
              
              129
              
              
              
              45
              
              
              
              13
              
              
              
              (27
              )
              
              
              160Net
      Income
              
              $
              193
              
              
              $
              66
              
              
              $
              20
              
              
              $
              (16
              )
              
              $
              263
 
 4
  OhioEnergy
                  
                  
                  Competitive
                  
                  
                  Transitional
                  
                  
                  Other
      andDelivery
                  
                  
                  Energy
                  
                  
                  Generation
                  
                  
                  Reconciling
                  
                  
                  FirstEnergySecond
      Quarter 2007 Financial Results
                  
                  Services
                  
                  
                  Services
                  
                  
                  Services
                  
                  
                  Adjustments
                  
                  
                  Consolidated(In
      millions)Revenues:ExternalElectric
                  
                  $
                  1,933
                  
                  
                  $
                  359
                  
                  
                  $
                  612
                  
                  
                  $
                  -
                  
                  
                  $
                  2,904Other
                  
                  
                  162
                  
                  
                  
                  39
                  
                  
                  
                  13
                  
                  
                  
                  (9
                  )
                  
                  
                  205Internal
                  
                  
                  -
                  
                  
                  
                  691
                  
                  
                  
                  -
                  
                  
                  
                  (691
                  )
                  
                  
                  -Total
      Revenues
                  
                  
                  2,095
                  
                  
                  
                  1,089
                  
                  
                  
                  625
                  
                  
                  
                  (700
                  )
                  
                  
                  3,109Expenses:Fuel and
      purchased power
                  
                  
                  879
                  
                  
                  
                  460
                  
                  
                  
                  537
                  
                  
                  
                  (691
                  )
                  
                  
                  1,185Other
      operating expenses
                  
                  
                  410
                  
                  
                  
                  277
                  
                  
                  
                  87
                  
                  
                  
                  (24
                  )
                  
                  
                  750Provision for
      depreciation
                  
                  
                  100
                  
                  
                  
                  51
                  
                  
                  
                  -
                  
                  
                  
                  8
                  
                  
                  
                  159Amortization
      of regulatory assets
                  
                  
                  242
                  
                  
                  
                  -
                  
                  
                  
                  6
                  
                  
                  
                  (2
                  )
                  
                  
                  246Deferral of
      new regulatory assets
                  
                  
                  (93
                  )
                  
                  
                  -
                  
                  
                  
                  (55
                  )
                  
                  
                  -
                  
                  
                  
                  (148
                  )General
      taxes
                  
                  
                  155
                  
                  
                  
                  26
                  
                  
                  
                  1
                  
                  
                  
                  7
                  
                  
                  
                  189Total
      Expenses
                  
                  
                  1,693
                  
                  
                  
                  814
                  
                  
                  
                  576
                  
                  
                  
                  (702
                  )
                  
                  
                  2,381Operating
      Income
                  
                  
                  402
                  
                  
                  
                  275
                  
                  
                  
                  49
                  
                  
                  
                  2
                  
                  
                  
                  728Other Income
      (Expense):Investment
      income
                  
                  
                  62
                  
                  
                  
                  5
                  
                  
                  
                  -
                  
                  
                  
                  (37
                  )
                  
                  
                  30Interest
      expense
                  
                  
                  (118
                  )
                  
                  
                  (47
                  )
                  
                  
                  -
                  
                  
                  
                  (40
                  )
                  
                  
                  (205
                  )Capitalized
      interest
                  
                  
                  2
                  
                  
                  
                  5
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  7Total Other
      Expense
                  
                  
                  (54
                  )
                  
                  
                  (37
                  )
                  
                  
                  -
                  
                  
                  
                  (77
                  )
                  
                  
                  (168
                  )Income Before
      Income Taxes
                  
                  
                  348
                  
                  
                  
                  238
                  
                  
                  
                  49
                  
                  
                  
                  (75
                  )
                  
                  
                  560Income
      taxes
                  
                  
                  141
                  
                  
                  
                  96
                  
                  
                  
                  19
                  
                  
                  
                  (34
                  )
                  
                  
                  222Net
      Income
                  
                  $
                  207
                  
                  
                  $
                  142
                  
                  
                  $
                  30
                  
                  
                  $
                  (41
                  )
                  
                  $
                  338Changes
      Between Second Quarter 2008 andSecond
      Quarter 2007 Financial ResultsIncrease
      (Decrease)Revenues:ExternalElectric
                  
                  $
                  97
                  
                  
                  $
                  (35
                  )
                  
                  $
                  58
                  
                  
                  $
                  -
                  
                  
                  $
                  120Other
                  
                  
                  (10
                  )
                  
                  
                  12
                  
                  
                  
                  -
                  
                  
                  
                  14
                  
                  
                  
                  16Internal
                  
                  
                  -
                  
                  
                  
                  13
                  
                  
                  
                  -
                  
                  
                  
                  (13
                  )
                  
                  
                  -Total
      Revenues
                  
                  
                  87
                  
                  
                  
                  (10
                  )
                  
                  
                  58
                  
                  
                  
                  1
                  
                  
                  
                  136Expenses:Fuel and
      purchased power
                  
                  
                  119
                  
                  
                  
                  77
                  
                  
                  
                  18
                  
                  
                  
                  (13
                  )
                  
                  
                  201Other
      operating expenses
                  
                  
                  3
                  
                  
                  
                  35
                  
                  
                  
                  (6
                  )
                  
                  
                  (1
                  )
                  
                  
                  31Provision for
      depreciation
                  
                  
                  4
                  
                  
                  
                  8
                  
                  
                  
                  -
                  
                  
                  
                  (3
                  )
                  
                  
                  9Amortization
      of regulatory assets
                  
                  
                  (7
                  )
                  
                  
                  -
                  
                  
                  
                  5
                  
                  
                  
                  2
                  
                  
                  
                  -Deferral of
      new regulatory assets
                  
                  
                  (5
                  )
                  
                  
                  -
                  
                  
                  
                  55
                  
                  
                  
                  -
                  
                  
                  
                  50General
      taxes
                  
                  
                  (6
                  )
                  
                  
                  (2
                  )
                  
                  
                  1
                  
                  
                  
                  (2
                  )
                  
                  
                  (9
                  )Total
      Expenses
                  
                  
                  108
                  
                  
                  
                  118
                  
                  
                  
                  73
                  
                  
                  
                  (17
                  )
                  
                  
                  282Operating
      Income
                  
                  
                  (21
                  )
                  
                  
                  (128
                  )
                  
                  
                  (15
                  )
                  
                  
                  18
                  
                  
                  
                  (146
                  )Other Income
      (Expense):Investment
      income
                  
                  
                  (22
                  )
                  
                  
                  (13
                  )
                  
                  
                  (1
                  )
                  
                  
                  22
                  
                  
                  
                  (14
                  )Interest
      expense
                  
                  
                  18
                  
                  
                  
                  9
                  
                  
                  
                  -
                  
                  
                  
                  (10
                  )
                  
                  
                  17Capitalized
      interest
                  
                  
                  (1
                  )
                  
                  
                  5
                  
                  
                  
                  -
                  
                  
                  
                  2
                  
                  
                  
                  6Total Other
      Expense
                  
                  
                  (5
                  )
                  
                  
                  1
                  
                  
                  
                  (1
                  )
                  
                  
                  14
                  
                  
                  
                  9Income Before
      Income Taxes
                  
                  
                  (26
                  )
                  
                  
                  (127
                  )
                  
                  
                  (16
                  )
                  
                  
                  32
                  
                  
                  
                  (137
                  )Income
      taxes
                  
                  
                  (12
                  )
                  
                  
                  (51
                  )
                  
                  
                  (6
                  )
                  
                  
                  7
                  
                  
                  
                  (62
                  )Net
      Income
                  
                  $
                  (14
                  )
                  
                  $
                  (76
                  )
                  
                  $
                  (10
                  )
                  
                  $
                  25
                  
                  
                  $
                  (75
                  )








5





Energy Delivery Services – Second
Quarter 2008 Compared with Second Quarter 2007





Net income decreased
$14 million to $193 million in the second quarter of 2008 compared to
$207 million in the second quarter of 2007, primarily due to higher fuel
and purchased power expenses partially offset by increased revenues.





Revenues –





The
increase in total revenues resulted from the following sources:





Three
      MonthsEnded
      June 30
            
            IncreaseRevenues
      by Type of Service
            
            2008
            
            2007
            
            (Decrease)(In
      millions)Distribution
      services
            
            $
            919
            
            $
            948
            
            $
            (29
            )Generation
      sales:Retail
            
            
            772
            
            
            756
            
            
            16Wholesale
            
            
            252
            
            
            148
            
            
            104Total
      generation sales
            
            
            1,024
            
            
            904
            
            
            120Transmission
            
            
            196
            
            
            194
            
            
            2Other
            
            
            43
            
            
            49
            
            
            (6
            )Total
      Revenues
            
            $
            2,182
            
            $
            2,095
            
            $
            87








The
decrease in distribution deliveries by customer class is summarized in the
following table:





Electric
      Distribution KWH DeliveriesResidential
            
            
            (5.0
            )%Commercial
            
            
            (2.1
            )%Industrial
            
            
            (0.3
            )%Total
      Distribution KWH Deliveries
            
            
            (2.4
            )%





The decrease in
electric distribution deliveries to residential and commercial customers was
primarily due to reduced weather-related usage during the second quarter of 2008
compared to the same period of 2007, as cooling and heating degree days
decreased 11% and 7%, respectively. In the industrial sector, a decrease in
deliveries to automotive manufacturers was nearly offset by an increase in usage
by steel and refining customers. The lower distribution revenues primarily
resulted from the reduction in sales volume, as unit prices were virtually
unchanged from the previous year.





The following table
summarizes the price and volume factors contributing to the $120 million
increase in generation revenues in the second quarter of 2008 compared to the
second quarter of 2007:





Sources
      of Change in Generation Revenues
            
            Increase
                (Decrease)(In
      millions)Retail:Effect
      of 4.2% decrease in sales volumes
            
            $
            (32
            )Change
      in prices
            
            
            4816Wholesale:Effect
      of 3.0% increase in sales volumes
            
            
            5Change
      in prices
            
            
            99104Net Increase
      in Generation Revenues
            
            $
            120





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 and the weather-related
impacts described above. The increase in retail generation prices during the
second quarter 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 JCP&L selling additional available power into the PJM
market. The increase in prices reflected higher spot market prices for PJM
market participants.





Transmission
revenues increased $2 million primarily due to higher transmission rates
for Met-Ed and Penelec resulting from the annual update to their TSC riders,
which became effective June 1, 2008. 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 $108 million
increase in expenses due to the following:





·
            Purchased
      power costs were $122million higher in the
      second quarter 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.
      However, 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
            
            $
            141Change due to decreased
      volumes
            
            
            (22
            )119Purchases from
      FES:Change due to decreased unit
      costs
            
            
            (2
            )Change due to decreased
      volumes
            
            
            (7
            )(9
            )Decrease in
      NUG costs deferred
            
            
            12Net Increase
      in Purchased Power Costs
            
            $
            122





·
            Other
      operating expenses increased $3 million due primarily to the net
      effects of the following:





-
            an increase in
      labor expenses of $7 million primarily due to an increase in the
      number of employees in the second quarter of 2008 compared to 2007 as a
      result of the segment’s workforce
initiatives;





-
            reduced life
      insurance investment values of $5 million during the second quarter of
      2008;





-
            a decrease of
      $4million in
      MISO and PJM transmission expenses, resulting primarily from lower
      congestion costs; and,





-
            reduced tree
      trimming expenses of
$2 million.





·
            Amortization
      of regulatory assets decreased by $7 million compared to the second
      quarter of 2007, due primarily to the full recovery of certain regulatory
      costs for JCP&L.





·
            The deferral
      of new regulatory assets during the second quarter of 2008 was
      $5 million higher primarily due to an increase to the societal
      benefits cost deferral.





·
            Depreciation
      expense increased $4million due to
      property additions since the second quarter of
  2007.





·
            General taxes
      decreased $6 million due to lower property
  taxes.





Other Expense –





Other expense
increased $5million
in the second quarter of 2008 primarily due to lower investment income ($22million) resulting from the
repayment of notes receivable from affiliates since the second quarter of 2007,
partially offset by lower interest expense (net of capitalized interest) of
$17million due to
redemptions of pollution control notes and term notes and reduced money pool
borrowings.





Competitive Energy Services – Second
Quarter 2008 Compared with Second Quarter 2007





Net income for this
segment was $66million in the second
quarter of 2008 compared to $142million in the same period
in 2007. The $76 million reduction in net income reflects a decrease in
gross generation margin and higher operating costs partially offset by lower
interest expense.





7








Revenues –





Total revenues
decreased $10million
in the second quarter of 2008 due to lower non-affiliated generation sales
partially offset by higher unit prices on affiliated generation sales to the
Ohio Companies and higher transmission revenues.





The
net decrease in total revenues resulted from the following sources:





Three
      MonthsEnded
      June 30
            
            IncreaseRevenues
      By Type of Service
            
            2008
            
            2007
            
            (Decrease)(In
      millions)Non-Affiliated
      Generation Sales:Retail
            
            $
            154
            
            $
            185
            
            $
            (31
            )Wholesale
            
            
            170
            
            
            174
            
            
            (4
            )Total
      Non-Affiliated Generation Sales
            
            
            324
            
            
            359
            
            
            (35
            )Affiliated
      Generation Sales
            
            
            704
            
            
            691
            
            
            13Transmission
            
            
            33
            
            
            22
            
            
            11Other
            
            
            18
            
            
            17
            
            
            1Total
      Revenues
            
            $
            1,079
            
            $
            1,089
            
            $
            (10
            )





The lower retail
revenues resulted from decreased sales in the PJM market due primarily to lower
contract renewals for commercial and industrial customers. Lower non-affiliated
wholesale revenues resulted from the effect of reduced generation available for
sale to that market as total generation output declined by 8% from the second
quarter of 2007. An increase in prices for non-affiliated wholesale sales,
reflecting higher spot market prices, partially offset the decline in
volume.





The increased
affiliated company generation revenues were due to higher unit prices for sales
to the Ohio Companies, partially offset by reduced volumes and lower unit prices
for the Pennsylvania Companies. The higher unit prices reflected increases in
the Ohio Companies’ retail generation rates. The reduction in PSA sales volume
to the Ohio and Pennsylvania Companies was due to the milder weather discussed
above and reduced default service requirements in Penn’s service territory
as a result of its RFP process (see Outlook – State Regulatory Matters –
Pennsylvania).





The following tables
summarize the price and volume factors contributing to changes in revenues from
generation sales:





Source
      of Change in Non-Affiliated Generation Revenues
            
            Increase
      (Decrease)(In
      millions)Retail:Effect of 16.4% decrease in sales
      volumes
            
            $
            (30
            )Change in prices
            
            
            (1
            )(31
            )Wholesale:Effect of 15.3% decrease in sales
      volumes
            
            
            (27
            )Change in prices
            
            
            23(4
            )Net Decrease
      in Non-Affiliated Generation Revenues
            
            $
            (35
            )








Source
      of Change in Affiliated Generation Revenues
            
            Increase
      (Decrease)(In
      millions)Ohio
      Companies:Effect of 2.6% decrease in sales
      volumes
            
            $
            (14
            )Change in prices
            
            
            3723Pennsylvania
      Companies:Effect of 4.3% decrease in sales
      volumes
            
            
            (7
            )Change in prices
            
            
            (3
            )(10
            )Net Increase
      in Affiliated Generation Revenues
            
            $
            13





Transmission
revenues increased $11 million due primarily to an increase in transmission
prices in the PJM market.





8








Expenses -





Total expenses
increased $118 million in the second quarter of 2008 due to the following
factors:





·
            Fossil fuel
      costs increased $14 million due primarily to higher unit prices
      ($58 million) partially offset by lower generation volumes
      ($44 million). The increased unit prices primarily reflect higher
      coal transportation costs (including surcharges for increased diesel fuel
      prices) in the second quarter of 2008. Nuclear fuel expense increased $4
      million due to increased
generation.





·
            Purchased
      power costs increased $59 million due primarily to higher market
      rates, partially offset by reduced volume
  requirements.





·
            Other
      operating expenses were higher by $35 million due, in part, to an
      increase in scheduled outage activity for fossil units ($24 million),
      a decrease in gains from the sale of excess emission allowances ($7
      million), the assignment of CEI’s and TE’s leasehold interests in the
      Bruce Mansfield Plant to FGCO in the fourth quarter of 2007
      ($12 million) and reduced life insurance investment values during the
      second quarter of 2008
($4 million).





·
            Higher
      depreciation expense of $8 million was due to property additions
      since the second quarter of 2007.





Partially offsetting
the higher costs were:





·
            Nuclear
      operating costs decreased $8 million, as expenses associated with
      this year’s Beaver Valley Unit 2 refueling outage were comparatively less
      than the Perry outage in the second quarter of 2007. In 2007, Perry’s
      outage extended 11 days beyond the original
  plan.





·
            Transmission
      expense declined $4 million due to reduced PJM congestion charges of
      $17 million partially offset by increased MISO transmission expense
      of $13 million.





·
            Lower general
      taxes of $2 million resulted from lower property
    taxes.





Other Expense –





Total other expense
in the second quarter of 2008 was $1million lower than the
second quarter of 2007, primarily due to a decrease in interest expense (net of
capitalized interest) of $14 million from the repayment of notes payable to
affiliates since the second quarter of 2007, partially offset by a
$13 million decrease in earnings from nuclear decommissioning trust
investments, which included a $12 million increase in securities
impairments.





Ohio Transitional Generation Services –
Second Quarter 2008 Compared with Second Quarter 2007





Net income for this
segment decreased to $20million in the second
quarter of 2008 from $30 million in the same period of 2007. Higher
purchased power expenses and lower cost deferrals were only partially offset by
higher generation revenues.





Revenues –





The
increase in reported segment revenues resulted from the following
sources:





Three
      MonthsEnded
      June 30Revenues
      by Type of Service
            
            2008
            
            2007
            
            Increase(In
      millions)Generation
      sales:Retail
            
            $
            587
            
            $
            544
            
            $
            43Wholesale
            
            
            3
            
            
            2
            
            
            1Total
      generation sales
            
            
            590
            
            
            546
            
            
            44Transmission
            
            
            93
            
            
            79
            
            
            14Total
      Revenues
            
            $
            683
            
            $
            625
            
            $
            58








9








The following table
summarizes the price and volume factors contributing to the net increase in
sales revenues from retail customers:





Source
      of Change in Retail Generation Revenues
            
            Increase
      (Decrease)(In
      millions)Effect of 2.5% decrease in sales
      volumes
            
            $
            (14
            )Change in prices
            
            
            57Net
      Increase in Retail Generation Revenues
            
            $
            43





The decrease in
generation sales was primarily due to lower weather-related usage in the second
quarter of 2008 compared to the same period of 2007 partially offset by reduced
customer shopping. Cooling degree days in OE’s, CEI’s and TE’s service
territories decreased by 26%, 16% and 33%, 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 to 14.7% in the second quarter of
2008 from 15.2% in the same period in 2007.





Increased
transmission revenue resulted from a PUCO-approved transmission tariff increase
that became effective July 1, 2007.





Expenses -





Purchased power
costs were $18million
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 decreased unit
      costs
            
            $
            (1
            )Change due to decreased
      volumes
            
            
            (3
            )(4
            )Purchases from
      FES:Change due to increased unit
      costs
            
            
            36Change due to decreased
      volumes
            
            
            (14
            )22Net Increase
      in Purchased Power Costs
            
            $
            18





The decrease in
purchase volumes from FES was due to the lower 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 decreased $6 million due primarily to lower MISO
transmission-related expenses. The difference between transmission revenues
accrued and transmission expenses incurred is deferred, resulting in no material
impact to current period earnings.





The deferral of new
regulatory assets decreased by $55 million in the second quarter of 2008 as
compared to the same period in 2007. MISO transmission deferrals and RCP fuel
deferrals each decreased $28 million as more transmission and generation costs
were recovered from customers through PUCO-approved riders.





Other – Second Quarter 2008 Compared
with Second Quarter 2007





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 $25 million increase in FirstEnergy’s net income in the
second quarter of 2008 compared to the same period in 2007. The increase
primarily resulted from a $15 million litigation settlement relating to
formerly-owned international assets, $6 million of interest income related
to the settlement and a $9 million reduction of interest expense associated
with the revolving credit facility.


.





10








Summary of Results of Operations –
First Six Months of 2008 Compared with the First Six Months of 2007





Financial results
for FirstEnergy's major business segments in the first six months of 2008 and
2007 were as follows:




OhioEnergy
                
                
                Competitive
                
                
                Transitional
                
                
                Other
      andDelivery
                
                
                Energy
                
                
                Generation
                
                
                Reconciling
                
                
                FirstEnergyFirst
      Six Months 2008 Financial Results
                
                Services
                
                
                Services
                
                
                Services
                
                
                Adjustments
                
                
                Consolidated(In
      millions)Revenues:ExternalElectric
                
                $
                4,080
                
                
                $
                613
                
                
                $
                1,361
                
                
                $
                -
                
                
                $
                6,054Other
                
                
                314
                
                
                
                91
                
                
                
                29
                
                
                
                34
                
                
                
                468Internal
                
                
                -
                
                
                
                1,480
                
                
                
                -
                
                
                
                (1,480
                )
                
                
                -Total
      Revenues
                
                
                4,394
                
                
                
                2,184
                
                
                
                1,390
                
                
                
                (1,446
                )
                
                
                6,522Expenses:Fuel and
      purchased power
                
                
                1,981
                
                
                
                1,070
                
                
                
                1,143
                
                
                
                (1,480
                )
                
                
                2,714Other
      operating expenses
                
                
                858
                
                
                
                621
                
                
                
                158
                
                
                
                (56
                )
                
                
                1,581Provision for
      depreciation
                
                
                210
                
                
                
                112
                
                
                
                -
                
                
                
                10
                
                
                
                332Amortization
      of regulatory assets
                
                
                484
                
                
                
                -
                
                
                
                20
                
                
                
                -
                
                
                
                504Deferral of
      new regulatory assets
                
                
                (198
                )
                
                
                -
                
                
                
                (5
                )
                
                
                -
                
                
                
                (203
                )General
      taxes
                
                
                322
                
                
                
                56
                
                
                
                3
                
                
                
                14
                
                
                
                395Total
      Expenses
                
                
                3,657
                
                
                
                1,859
                
                
                
                1,319
                
                
                
                (1,512
                )
                
                
                5,323Operating
      Income
                
                
                737
                
                
                
                325
                
                
                
                71
                
                
                
                66
                
                
                
                1,199Other Income
      (Expense):Investment
      income
                
                
                85
                
                
                
                (14
                )
                
                
                -
                
                
                
                (38
                )
                
                
                33Interest
      expense
                
                
                (203
                )
                
                
                (72
                )
                
                
                -
                
                
                
                (92
                )
                
                
                (367
                )Capitalized
      interest
                
                
                1
                
                
                
                17
                
                
                
                -
                
                
                
                3
                
                
                
                21Total Other
      Expense
                
                
                (117
                )
                
                
                (69
                )
                
                
                -
                
                
                
                (127
                )
                
                
                (313
                )Income Before
      Income Taxes
                
                
                620
                
                
                
                256
                
                
                
                71
                
                
                
                (61
                )
                
                
                886Income
      taxes
                
                
                248
                
                
                
                103
                
                
                
                28
                
                
                
                (32
                )
                
                
                347Net
      Income
                
                $
                372
                
                
                $
                153
                
                
                $
                43
                
                
                $
                (29
                )
                
                $
                539
  11
   OhioEnergy
                  
                  
                  Competitive
                  
                  
                  Transitional
                  
                  
                  Other
      andDelivery
                  
                  
                  Energy
                  
                  
                  Generation
                  
                  
                  Reconciling
                  
                  
                  FirstEnergyFirst
      Six Months 2007 Financial Results
                  
                  Services
                  
                  
                  Services
                  
                  
                  Services
                  
                  
                  Adjustments
                  
                  
                  Consolidated(In
      millions)Revenues:ExternalElectric
                  
                  $
                  3,808
                  
                  
                  $
                  635
                  
                  
                  $
                  1,226
                  
                  
                  $
                  -
                  
                  
                  $
                  5,669Other
                  
                  
                  327
                  
                  
                  
                  84
                  
                  
                  
                  19
                  
                  
                  
                  (17
                  )
                  
                  
                  413Internal
                  
                  
                  -
                  
                  
                  
                  1,404
                  
                  
                  
                  -
                  
                  
                  
                  (1,404
                  )
                  
                  
                  -Total
      Revenues
                  
                  
                  4,135
                  
                  
                  
                  2,123
                  
                  
                  
                  1,245
                  
                  
                  
                  (1,421
                  )
                  
                  
                  6,082Expenses:Fuel and
      purchased power
                  
                  
                  1,722
                  
                  
                  
                  907
                  
                  
                  
                  1,081
                  
                  
                  
                  (1,404
                  )
                  
                  
                  2,306Other
      operating expenses
                  
                  
                  819
                  
                  
                  
                  575
                  
                  
                  
                  138
                  
                  
                  
                  (33
                  )
                  
                  
                  1,499Provision for
      depreciation
                  
                  
                  199
                  
                  
                  
                  102
                  
                  
                  
                  -
                  
                  
                  
                  14
                  
                  
                  
                  315Amortization
      of regulatory assets
                  
                  
                  487
                  
                  
                  
                  -
                  
                  
                  
                  11
                  
                  
                  
                  (1
                  )
                  
                  
                  497Deferral of
      new regulatory assets
                  
                  
                  (217
                  )
                  
                  
                  -
                  
                  
                  
                  (75
                  )
                  
                  
                  -
                  
                  
                  
                  (292
                  )General
      taxes
                  
                  
                  320
                  
                  
                  
                  55
                  
                  
                  
                  2
                  
                  
                  
                  15
                  
                  
                  
                  392Total
      Expenses
                  
                  
                  3,330
                  
                  
                  
                  1,639
                  
                  
                  
                  1,157
                  
                  
                  
                  (1,409
                  )
                  
                  
                  4,717Operating
      Income
                  
                  
                  805
                  
                  
                  
                  484
                  
                  
                  
                  88
                  
                  
                  
                  (12
                  )
                  
                  
                  1,365Other Income
      (Expense):Investment
      income
                  
                  
                  132
                  
                  
                  
                  8
                  
                  
                  
                  1
                  
                  
                  
                  (78
                  )
                  
                  
                  63Interest
      expense
                  
                  
                  (227
                  )
                  
                  
                  (100
                  )
                  
                  
                  (1
                  )
                  
                  
                  (62
                  )
                  
                  
                  (390
                  )Capitalized
      interest
                  
                  
                  4
                  
                  
                  
                  8
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  12Total Other
      Expense
                  
                  
                  (91
                  )
                  
                  
                  (84
                  )
                  
                  
                  -
                  
                  
                  
                  (140
                  )
                  
                  
                  (315
                  )Income Before
      Income Taxes
                  
                  
                  714
                  
                  
                  
                  400
                  
                  
                  
                  88
                  
                  
                  
                  (152
                  )
                  
                  
                  1,050Income
      taxes
                  
                  
                  289
                  
                  
                  
                  160
                  
                  
                  
                  35
                  
                  
                  
                  (62
                  )
                  
                  
                  422Net
      Income
                  
                  $
                  425
                  
                  
                  $
                  240
                  
                  
                  $
                  53
                  
                  
                  $
                  (90
                  )
                  
                  $
                  628Changes
      Between First Six Months 2008and
      First Six Months 2007Financial
      Results Increase (Decrease)Revenues:ExternalElectric
                  
                  $
                  272
                  
                  
                  $
                  (22
                  )
                  
                  $
                  135
                  
                  
                  $
                  -
                  
                  
                  $
                  385Other
                  
                  
                  (13
                  )
                  
                  
                  7
                  
                  
                  
                  10
                  
                  
                  
                  51
                  
                  
                  
                  55Internal
                  
                  
                  -
                  
                  
                  
                  76
                  
                  
                  
                  -
                  
                  
                  
                  (76
                  )
                  
                  
                  -Total
      Revenues
                  
                  
                  259
                  
                  
                  
                  61
                  
                  
                  
                  145
                  
                  
                  
                  (25
                  )
                  
                  
                  440Expenses:Fuel and
      purchased power
                  
                  
                  259
                  
                  
                  
                  163
                  
                  
                  
                  62
                  
                  
                  
                  (76
                  )
                  
                  
                  408Other
      operating expenses
                  
                  
                  39
                  
                  
                  
                  46
                  
                  
                  
                  20
                  
                  
                  
                  (23
                  )
                  
                  
                  82Provision for
      depreciation
                  
                  
                  11
                  
                  
                  
                  10
                  
                  
                  
                  -
                  
                  
                  
                  (4
                  )
                  
                  
                  17Amortization
      of regulatory assets
                  
                  
                  (3
                  )
                  
                  
                  -
                  
                  
                  
                  9
                  
                  
                  
                  1
                  
                  
                  
                  7Deferral of
      new regulatory assets
                  
                  
                  19
                  
                  
                  
                  -
                  
                  
                  
                  70
                  
                  
                  
                  -
                  
                  
                  
                  89General
      taxes
                  
                  
                  2
                  
                  
                  
                  1
                  
                  
                  
                  1
                  
                  
                  
                  (1
                  )
                  
                  
                  3Total
      Expenses
                  
                  
                  327
                  
                  
                  
                  220
                  
                  
                  
                  162
                  
                  
                  
                  (103
                  )
                  
                  
                  606Operating
      Income
                  
                  
                  (68
                  )
                  
                  
                  (159
                  )
                  
                  
                  (17
                  )
                  
                  
                  78
                  
                  
                  
                  (166
                  )Other Income
      (Expense):Investment
      income
                  
                  
                  (47
                  )
                  
                  
                  (22
                  )
                  
                  
                  (1
                  )
                  
                  
                  40
                  
                  
                  
                  (30
                  )Interest
      expense
                  
                  
                  24
                  
                  
                  
                  28
                  
                  
                  
                  1
                  
                  
                  
                  (30
                  )
                  
                  
                  23Capitalized
      interest
                  
                  
                  (3
                  )
                  
                  
                  9
                  
                  
                  
                  -
                  
                  
                  
                  3
                  
                  
                  
                  9Total Other
      Expense
                  
                  
                  (26
                  )
                  
                  
                  15
                  
                  
                  
                  -
                  
                  
                  
                  13
                  
                  
                  
                  2Income Before
      Income Taxes
                  
                  
                  (94
                  )
                  
                  
                  (144
                  )
                  
                  
                  (17
                  )
                  
                  
                  91
                  
                  
                  
                  (164
                  )Income
      taxes
                  
                  
                  (41
                  )
                  
                  
                  (57
                  )
                  
                  
                  (7
                  )
                  
                  
                  30
                  
                  
                  
                  (75
                  )Net
      Income
                  
                  $
                  (53
                  )
                  
                  $
                  (87
                  )
                  
                  $
                  (10
                  )
                  
                  $
                  61
                  
                  
                  $
                  (89
                  )





12







Energy
Delivery Services – First Six Months of 2008 Compared to First Six Months of
2007





Net income decreased
$53 million to $372 million in the first six months of 2008 compared
to $425 million in the first six months of 2007, primarily due to increased
operating expenses and lower investment income partially offset by higher
revenues.





Revenues –





The
increase in total revenues resulted from the following sources:





Six
      MonthsEnded
      June 30
            
            IncreaseRevenues
      by Type of Service
            
            2008
            
            2007
            
            (Decrease)(In
      millions)Distribution
      services
            
            $
            1,874
            
            $
            1,892
            
            $
            (18
            )Generation
      sales:Retail
            
            
            1,562
            
            
            1,476
            
            
            86Wholesale
            
            
            471
            
            
            281
            
            
            190Total
      generation sales
            
            
            2,033
            
            
            1,757
            
            
            276Transmission
            
            
            393
            
            
            376
            
            
            17Other
            
            
            94
            
            
            110
            
            
            (16
            )Total
      Revenues
            
            $
            4,394
            
            $
            4,135
            
            $
            259





The
decrease in distribution deliveries by customer class are summarized in the
following table:





Electric
      Distribution KWH DeliveriesResidential
            
            
            (1.0
            )%Commercial
            
            
            (0.1
            )%Industrial
            
            
            (0.7
            )%Total
      Distribution KWH Deliveries
            
            
            (0.6
            )%





The decrease in
electric distribution deliveries to customers was primarily due to lower
weather-related usage during the first six months of 2008 compared to the same
period of 2007, as cooling degree days decreased by 11% and heating degree days
decreased by 2%. The lower revenues reflected the decreased distribution
deliveries and 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 $276 million
increase in generation revenues in the first six months of 2008 compared to the
same period of 2007:





IncreaseSources
      of Change in Generation Revenues
            
            (Decrease)(In
      millions)Retail:Effect
      of 2.4% decrease in sales volumes
            
            $
            (36
            )Change
      in prices
            
            
            12286Wholesale:Effect
      of 5.9% increase in sales volumes
            
            
            16Change
      in prices
            
            
            174190Net Increase
      in Generation Revenues
            
            $
            276





The decrease in
retail generation sales volumes reflected an increase in customer shopping in
Penn’s and JCP&L’s service territories and the weather-related impacts
described above. The increase in retail generation prices during the first six
months of 2008 was due to higher 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 wholesale prices reflected higher spot market prices for PJM market
participants.





Transmission
revenues increased $17 million primarily due to higher transmission rates
for Met-Ed and Penelec resulting from the January 2007 PPUC authorization of
transmission cost recovery and the annual update to their TSC riders, which
became effective June 1, 2008. 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).





13








Expenses –





The
net increases in revenues discussed above were more than offset by a
$327 million increase in expenses due to the following:





·
            Purchased
      power costs were $260million higher in the
      first six months of 2008 due to higher unit costs and a decrease in the
      amount of NUG costs deferred. The increased unit costs primarily reflected
      the effect of higher JCP&L costs resulting from the BGS auction
      process. 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
            
            $
            225Change due to decreased
      volumes
            
            
            (40
            )185Purchases from
      FES:Change due to decreased unit
      costs
            
            
            (7
            )Change due to increased
      volumes
            
            
            103Decrease in
      NUG costs deferred
            
            
            72Net Increase
      in Purchased Power Costs
            
            $
            260








·
            Other
      operating expenses increased $39million due to the
      net effects of:





-
            an increase of
      $11million in
      MISO and PJM transmission expenses, resulting primarily from higher
      congestion costs (see transmission revenues discussion
    above);





-
            reduced life
      insurance investment values of $12 million during the first six months of
      2008; and





-
            an increase in
      labor expenses of $16million primarily due
      to an increase in the number of employees in the first six months of 2008
      compared to 2007 as a result of the segment’s workforce
      initiatives.





·
            A decrease of
      $3 million in amortization of regulatory assets compared to 2007 due
      primarily to the complete recovery of certain regulatory costs for
      JCP&L.





·
            The deferral
      of new regulatory assets during the first six months of 2008 was
      $19 million lower primarily due to the absence of the one-time
      deferral in 2007 of decommissioning costs related to the Saxton nuclear
      research facility.





·
            Depreciation
      expense increased $11 million due to property additions since the
      second quarter of 2007.





·
            General taxes
      increased $2 million due to higher gross receipts and payroll
      taxes.





Other Expense –





Other expense
increased $26 million in the first six months of 2008 compared to 2007
primarily due to lower investment income of $47 million, resulting
primarily from the repayment of notes receivable from affiliates since the
second quarter of 2007, partially offset by lower interest expense (net of
capitalized interest) of $21 million.








Competitive Energy Services – First Six
Months of 2008 Compared to First Six Months of 2007





Net income for this
segment was $153million
in the first six months of 2008 compared to $240million
in the same period in 2007. The $87 million reduction in net income
reflects a decrease in gross generation margin and higher other operating costs
which were partially offset by lower interest expense.





14





Revenues –





Total revenues
increased $61million
in the first six 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
partially offset by lower retail sales.





The
increase in reported segment revenues resulted from the following
sources:





Six
      MonthsEnded
      June 30
            
            IncreaseRevenues
      by Type of Service
            
            2008
            
            2007
            
            (Decrease)(In
      millions)Non-Affiliated
      Generation Sales:Retail
            
            $
            315
            
            $
            359
            
            $
            (44
            )Wholesale
            
            
            298
            
            
            276
            
            
            22Total
      Non-Affiliated Generation Sales
            
            
            613
            
            
            635
            
            
            (22
            )Affiliated
      Generation Sales
            
            
            1,480
            
            
            1,404
            
            
            76Transmission
            
            
            66
            
            
            45
            
            
            21Other
            
            
            25
            
            
            39
            
            
            (14
            )Total
      Revenues
            
            $
            2,184
            
            $
            2,123
            
            $
            61





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
higher spot market prices in PJM, partially offset by decreased sales volumes in
MISO.





The increased
affiliated company generation revenues were due to higher unit prices for the
Ohio Companies and increased sales volumes to the Pennsylvania Companies,
partially offset by lower unit prices for the Pennsylvania Companies. 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, partially offset by lower sales to Penn
due to decreased default service requirements in the first six months of 2008
compared to the first six months of 2007.





The following tables
summarize the price and volume factors contributing to changes in revenues from
generation sales:





IncreaseSource
      of Change in Non-Affiliated Generation Revenues
            
            (Decrease)(In
      millions)Retail:Effect of 12.8% decrease in sales
      volumes
            
            $
            (46
            )Change in prices
            
            
            2(44
            )Wholesale:Effect of 7.6% decrease in sales
      volumes
            
            
            (21
            )Change in prices
            
            
            4322Net Decrease
      in Non-Affiliated Generation Revenues
            
            $
            (22
            )




IncreaseSource
      of Change in Affiliated Generation Revenues
            
            (Decrease)(In
      millions)Ohio
      Companies:Effect of 0.6% decrease in sales
      volumes
            
            $
            (7
            )Change in prices
            
            
            8073Pennsylvania
      Companies:Effect of 2.8% increase in sales
      volumes
            
            
            10Change in prices
            
            
            (7
            )3Net Increase
      in Affiliated Generation Revenues
            
            $
            76





Transmission
revenues increased $21 million due to higher transmission rates in MISO and
PJM. Other revenue decreased $14 million primarily due to lower interest
income from short-term investments.





15








Expenses -





Total expenses
increased $220 million in the first six months of 2008 due to the following
factors:





·
            Fossil fuel
      costs increased $82 million due to higher unit prices
      ($90 million) partially offset by lower generation volumes
      ($8 million). The increased unit prices primarily reflect higher coal
      transportation costs (including surcharges for increased diesel fuel
      prices) and increased emission allowance costs in the first six months of
      2008. Nuclear fuel expense was $3 million higher in the first half of
      2008.





·
            Purchased
      power costs increased $78 million due primarily to higher spot market
      prices, partially offset by reduced volume
  requirements.





·
            Nuclear
      operating costs increased $15 million in the first six months of 2008
      due to an additional refueling outage during the 2008
    period.





·
            Other expense
      increased $33 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 ($20 million) and reduced life insurance
      investment values during the first six months of 2008
      ($9 million).





·
            Higher
      depreciation expenses of $10 million were due to property additions
      since the second quarter of 2007.





·
            Fossil
      operating costs were $8 million higher due to planned maintenance
      outages in 2008, employee benefits and reduced gains from emission
      allowance sales.





·
            Higher general
      taxes of $1 million resulted from higher payroll
  taxes.





Partially offsetting
the higher costs above was a decrease in transmission expense of
$11 million due to reduced PJM congestion charges and a change in MISO
revenue sufficiency guarantee settlements.





Other Expense –





Total other expense
in the first six months of 2008 was $15million lower than the
first six months of 2007, primarily due to a decline in interest expense (net of
capitalized interest) of $37 million from the repayment of notes payable to
affiliates since the second quarter of 2007, partially offset by a
$22 million decrease in earnings from nuclear decommissioning trust
investments due primarily to securities impairments.





Ohio Transitional Generation Services –
First Six Months of 2008 Compared to First Six Months of 2007





Net income for this
segment decreased to $43million in the first six
months of 2008 from $53 million in the same period of 2007. Higher
operating expenses, primarily for purchased power, and a decrease in the
deferral of new regulatory assets were partially offset by higher generation
revenues.





Revenues –





The
increase in reported segment revenues resulted from the following
sources:





Six
      MonthsEnded
      June 30Revenues
      by Type of Service
            
            2008
            
            2007
            
            Increase(In
      millions)Generation
      sales:Retail
            
            $
            1,193
            
            $
            1,090
            
            $
            103Wholesale
            
            
            5
            
            
            4
            
            
            1Total
      generation sales
            
            
            1,198
            
            
            1,094
            
            
            104Transmission
            
            
            186
            
            
            150
            
            
            36Other
            
            
            6
            
            
            1
            
            
            5Total
      Revenues
            
            $
            1,390
            
            $
            1,245
            
            $
            145








16








The following table
summarizes the price and volume factors contributing to the net increase in
sales revenues from retail customers:




Source
      of Change in Generation Revenues
            
            Increase
      (Decrease)(In
      millions)Retail:Effect of 0.5% decrease in sales
      volumes
            
            $
            (5
            )Change in prices
            
            
            108Net
      Increase in Retail Generation Revenues
            
            $
            103





The decrease in
generation sales volume in the first six months of 2008 was primarily due to
milder weather in the second quarter, which was partially offset by the higher
weather-related usage in the first quarter and reduced customer shopping.
Cooling degree days in OE’s, CEI’s and TE’s service territories for the first
six months of 2008 decreased by 26%, 17% and 34%, respectively. Average prices
increased primarily due to an increase in the Ohio Companies’ fuel cost recovery
riders 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 to 14.3% in the first half of 2008
from 14.8% in the same period in 2007.





Increased
transmission revenue resulted from a PUCO-approved transmission tariff increase
that became effective July 1, 2007. The difference between transmission
revenues accrued and transmission expenses incurred is deferred, resulting in no
material impact to current period earnings.





Expenses -





Purchased power
costs were $62million
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:





IncreaseSource
      of Change in Purchased Power
            
            (Decrease)(In
      millions)Purchases from
      non-affiliates:Change due to decreased unit
      costs
            
            $
            (3
            )Change due to decreased
      volumes
            
            
            (8
            )(11
            )Purchases from
      FES:Change due to increased unit
      costs
            
            
            80Change due to decreased
      volumes
            
            
            (7
            )73Net Increase
      in Purchased Power Costs
            
            $
            62





The higher unit
costs reflect the increases in the Ohio Companies’ retail generation rates, as
provided for under the PSA with FES. The decrease in purchase volumes from FES
was due to the lower retail generation sales requirements described
above.





Other operating
expenses increased $20 million due to lower associated company cost
reimbursements related to the Ohio Companies’ generation leasehold interests
partially offset by lower MISO transmission-related expenses.





The deferral of new
regulatory assets decreased by $70 million in the first six months of 2008
as compared to the same period in 2007. MISO transmission deferrals decreased
$34 million and RCP fuel deferrals decreased $36 million as more
transmission and generation costs were recovered from customers through
PUCO-approved riders.





Other – First Six Months of 2008
Compared to First Six Months of 2007





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 $61 million increase in FirstEnergy’s net income in the first
six months of 2008 compared to the same period in 2007. The increase resulted
primarily from the sale of telecommunication assets ($19 million, net of
taxes), a $15 million litigation settlement relating to formerly-owned
international assets and associated interest of $6 million, and a
$20 million reduction of interest expense associated with the revolving
credit facility.








17








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.





As of June 30,
2008, FirstEnergy’s net deficit in working capital (current assets less current
liabilities) was principally due to  short-term borrowings to fund
capital expenditures for environmental compliance 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 six months of 2008, FirstEnergy received
$200 million of cash dividends from its subsidiaries and paid
$335 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 June 30,
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
$316 million and $170 million in the first six months of 2008 and
2007, respectively, as summarized in the following table:





Six
      MonthsEnded
      June 30Operating
      Cash Flows
            
            2008
            
            2007(In
      millions)Net
      income
            
            $
            539
            
            $
            628Non-cash
      charges
            
            
            414
            
            
            277Pension trust
      contribution
            
            
            -
            
            
            (300
            )Working
      capital and other
            
            
            (637
            )
            
            (435
            )$
            316
            
            $
            170





Net cash provided
from operating activities increased by $146 million in the first six months
of 2008 compared to the first six months of 2007 primarily due to the absence of
a $300 million pension trust contribution in 2007 and a $137 million
increase in non-cash charges, partially offset by a $202 million decrease
from working capital and other changes and an $89 million 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 purchased power
costs. The deferral of new regulatory assets decreased primarily as a result of
the Ohio Companies’ transmission and fuel recovery riders that became effective
in July 2007 and January 2008, respectively, and the absence of the deferral of
decommissioning costs related to the Saxton nuclear research facility in the
first six months 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 higher materials and supplies inventories and increased tax
payments, partially offset by a $146 million change in the collection of
receivables and a $124 million change in the settlement of accounts payable
compared to the first six months of 2007.




Cash
Flows From Financing Activities





In the first six
months of 2008, cash provided from financing activities was $1.2 billion
compared to $454 million in the first six months of 2007. The increase was
primarily due to lower debt issuances and higher short-term borrowings in the
first six months of 2008, and the absence of the redemption of common stock in
the first six months of 2007. The following table summarizes security issuances
and redemptions.











18








Six
      MonthsEnded
      June 30Securities
      Issued or Redeemed
            
            2008
            
            2007(In
      millions)New
      issuesPollution
      control notes
            
            $
            529
            
            $
            -Unsecured
      notes
            
            
            20
            
            
            800$
            549
            
            $
            800RedemptionsFirst mortgage
      bonds
            
            $
            1
            
            $
            275Pollution
      control notes
            
            
            529
            
            
            -Senior secured
      notes
            
            
            15
            
            
            43Unsecured
      notes
            
            
            175
            
            
            153Common
      stock
            
            
            -
            
            
            918$
            720
            
            $
            1,389Short-term
      borrowings, net
            
            $
            1,705
            
            $
            1,308





FirstEnergy had
approximately $2.6 billion of short-term indebtedness as of June 30,
2008 compared to approximately $903 million as of December 31, 2007.
Available bank borrowing capability as of June 30, 2008 included the
following:





Borrowing
      Capability (In
      millions)Short-term
      credit facilities(1)
            
            $
            3,170Accounts
      receivable financing facilities
            
            
            550Utilized
            
            
            (2,606
            )LOCs
            
            
            (50
            )Net available
      capability
            
            $
            1,064(1)
      Includes the $2.75 billion revolving credit facility described below, a
      $100 million revolving credit facility that expires in December 2009,
      a $300 million revolving credit facility that expires in May 2009 and a
      $20 million uncommitted line of credit.





As of June 30, 2008,
the Ohio Companies and Penn had the aggregate capability to issue approximately
$3.5 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 $579 million, $459 million and
$124 million, respectively, as of June 30, 2008.  On June
19, 2008, FGCO established an FMB indenture. Based upon its net earnings and
available bondable property additions, as of June 30, 2008, FGCO had the
capability to issue $2.8 billion of additional FMB under the terms of this new
indenture.





As of June 30, 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. FirstEnergy currently intends to replace this
registration statement by filing an automatic shelf registration statement that
will not be required to specify the amount of securities to be offered thereon.
As of June 30, 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 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.





19





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 June 30, 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 the $300 million and $100 million facilities
referenced in the footnote to the borrowing capability table above and an
aggregate $550 million ($294 million unused as of June 30, 2008) of
accounts receivable financing facilities for OE, CEI, TE, Met-Ed, Penelec and
Penn, are used 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 June 30, 2008, FirstEnergy’s and its
subsidiaries' debt to total capitalization ratios (as defined under the
revolving credit facility) were as follows:





BorrowerFirstEnergy
            
            60.0
            %OE
            
            40.3
            %Penn
            
            19.5
            %CEI
            
            56.5
            %TE
            
            39.3
            %JCP&L
            
            33.8
            %Met-Ed
            
            45.3
            %Penelec
            
            49.6
            %FES(1)
            
            64.9
            %(1)
      FES expects to remain in compliance with its debt covenant
      limitation.





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.





On May 30,
2008, FirstEnergy and FES entered into a new $300 million, 364-day
revolving credit facility. The pricing, terms and conditions are substantially
similar to those contained in the current FirstEnergy $2.75 billion
revolving credit agreement.





20





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 six months of 2008 was 3.24% for the regulated
companies’ money pool and 3.21% 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 June 30, 2008. On August 1, 2008, S&P
changed its outlook for FirstEnergy and its subsidiaries from negative to
stable. 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





Cash Flows From Investing
Activities





Net cash flows used
in investing activities resulted principally from property additions. Additions
for the energy delivery services segment primarily include expenditures related
to transmission and distribution facilities. Capital spending by the competitive
energy services segment is principally generation-related. The following table
summarizes investing activities for the six months ended June 30, 2008 and 2007
by business segment:





Summary
      of Cash Flows
            
            PropertyUsed
      for Investing Activities
            
            Additions
            
            Investments
            
            Other
            
            TotalSources
      (Uses)
            
            (In
      millions)Six
      Months Ended June 30, 2008Energy
      delivery services
            
            $
            (451
            )
            $
            44
            
            $
            (4
            )
            $
            (411
            )Competitive
      energy services
            
            
            (1,145
            )
            
            (9
            )
            
            (62
            )
            
            (1,216
            )Other
            
            
            (21
            )
            
            49
            
            
            6
            
            
            34Inter-Segment
      reconciling items
            
            
            -
            
            
            (12
            )
            
            -
            
            
            (12
            )Total
            
            $
            (1,617
            )
            $
            72
            
            $
            (60
            )
            $
            (1,605
            )Six
      Months Ended June 30, 2007Energy
      delivery services
            
            $
            (400
            )
            $
            67
            
            $
            (1
            )
            $
            (334
            )Competitive
      energy services
            
            
            (263
            )
            
            (9
            )
            
            2
            
            
            (270
            )Other
            
            
            (3
            )
            
            (25
            )
            
            -
            
            
            (28
            )Inter-Segment
      reconciling items
            
            
            (31
            )
            
            (14
            )
            
            -
            
            
            (45
            )Total
            
            $
            (697
            )
            $
            19
            
            $
            1
            
            $
            (677
            )





Net cash used for
investing activities in the first six months of 2008 increased by $928 million
compared to the first six months of 2007. The increase was principally due to a
$920 million increase in property additions, which reflects AQC system
expenditures, the purchase of lessor equity interests in Beaver Valley Unit 2
and Perry and the acquisition of a partially completed natural gas fired
generating plant in Fremont, Ohio.  Cash used for other investing
activities increased primarily due to the purchase of future vintage emission
allowances partially offset by cash proceeds from the sale of telecommunication
assets.





21








During the second
half of 2008, capital requirements for property additions and capital leases are
expected to be approximately $938 million. FirstEnergy and the Companies
have additional requirements of approximately $151 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
$2.1 billion applies to 2008. Investments for additional nuclear fuel
during the 2008-2012 period are estimated to be approximately $1.2 billion,
of which about $171 million applies to 2008. During the same periods,
FirstEnergy's nuclear fuel investments are expected to be reduced by
approximately $895 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 June 30,
2008, FirstEnergy’s maximum exposure to potential future payments under
outstanding guarantees and other assurances approximated $4.3 billion, as
summarized below:





MaximumGuarantees
      and Other Assurances
            
            Exposure(In
      millions)FirstEnergy
      Guarantees of SubsidiariesEnergy and
      Energy-Related Contracts (1)
            
            $
            402LOC (long-term
      debt) – interest coverage (2)
            
            
            6Other (3)
            
            
            503911Subsidiaries’
      GuaranteesEnergy and
      Energy-Related Contracts
            
            
            86LOC (long-term
      debt) – interest coverage (2)
            
            
            11FES’ guarantee
      of FGCO’s sale and leaseback obligations
            
            
            2,5912,688Surety
      Bonds
            
            
            74LOC (long-term
      debt) – interest coverage (2)
            
            
            5LOC (non-debt)
      (4)(5)
            
            
            657736Total
      Guarantees and Other Assurances
            
            $
            4,335





(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
              PCRBs with
      various maturities. The principal amount of floating-rate PCRBs of
              $2.1 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
      $50 million issued for various terms pursuant to LOC capacity
      available
              under
      FirstEnergy’s revolving credit
facility.


(5)
            Includes
      approximately $182 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 and 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.





22








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 June 30,
2008, FirstEnergy’s exposure under these collateral provisions was
$542 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.





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. The total present value of these
sale and leaseback operating lease commitments, net of trust investments,
decreased to $1.7 billion as of June 30, 2008, from $2.3 billion as of
December 31, 2007, due primarily to NGC’s purchase of certain lessor equity
interests in Perry Unit 1 and Beaver Valley Unit 2 (see Note 8).





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 changes in the fair value of commodity derivative contracts related
to energy production during the three months and six months ended June 30, 2008
are summarized in the following table:





23








Three
      Months
            
            Six
      MonthsIncrease
      (Decrease) in the Fair Value
            
            Ended
      June 30, 2008
            
            Ended
      June 30, 2008of Commodity Derivative
      Contracts
            
            Non-Hedge
            
            Hedge
            
            Total
            
            Non-Hedge
            
            Hedge
            
            Total(In
      millions)Change
      in the Fair Value ofCommodity
      Derivative Contracts:Outstanding
      net liability at beginning of period
            
            $
            (655
            )
            $
            (20
            )
            $
            (675
            )
            $
            (713
            )
            $
            (26
            )
            $
            (739
            )Additions/change
      in value of existing contracts
            
            
            (33
            )
            
            (13
            )
            
            (46
            )
            
            (33
            )
            
            (24
            )
            
            (57
            )Settled
      contracts
            
            
            72
            
            
            (4
            )
            
            68
            
            
            130
            
            
            13
            
            
            143Outstanding
      net liability at end of period (1)
            
            
            (616
            )
            
            (37
            )
            
            (653
            )
            
            (616
            )
            
            (37
            )
            
            (653
            )Non-commodity
      Net Assets at End of Period:Interest rate
      swaps (2)
            
            
            -
            
            
            3
            
            
            3
            
            
            -
            
            
            3
            
            
            3Net
      Liabilities - Derivative Contracts
              at
      End of Period
            
            $
            (616
            )
            $
            (34
            )
            $
            (650
            )
            $
            (616
            )
            $
            (34
            )
            $
            (650
            )Impact
      of Changes in Commodity Derivative Contracts(3)Income
      Statement effects (pre-tax)
            
            $
            1
            
            $
            -
            
            $
            1
            
            $
            1
            
            $
            -
            
            $
            1Balance Sheet
      effects:Other
      comprehensive income (pre-tax)
            
            $
            -
            
            $
            (17
            )
            $
            (17
            )
            $
            -
            
            $
            (11
            )
            $
            (11
            )Regulatory
      assets (net)
            
            $
            (38
            )
            $
            -
            
            $
            (38
            )
            $
            (96
            )
            $
            -
            
            $
            (96
            )





(1)
            Includes
      $616 million in non-hedge commodity derivative contracts (primarily
      with NUGs) that 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 June 30, 2008 as
      follows:





Balance
      Sheet Classification
            
            Non-Hedge
            
            Hedge
            
            Total(In
      millions)Current-Other
      assets
            
            $
            1
            
            $
            78
            
            $
            79Other
      liabilities
            
            
            -
            
            
            (108
            )
            
            (108
            )Non-Current-Other deferred
      charges
            
            
            27
            
            
            11
            
            
            38Other
      non-current liabilities
            
            
            (644
            )
            
            (15
            )
            
            (659
            )Net
      liabilities
            
            $
            (616
            )
            $
            (34
            )
            $
            (650
            )




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 June 30, 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
            
            $
            4
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            7Other external
      sources(3)
            
            
            (102
            )
            
            (208
            )
            
            (159
            )
            
            (110
            )
            
            -
            
            
            -
            
            
            (579
            )Prices based
      on models
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (33
            )
            
            (48
            )
            
            (81
            )Total(4)
            
            $
            (99
            )
            $
            (204
            )
            $
            (159
            )
            $
            (110
            )
            $
            (33
            )
            $
            (48
            )
            $
            (653
            )





(1)     For
the last two quarters of 2008.


(2)     Represents
exchange traded NYMEX futures and options.


(3)     Primarily
represents contracts based on broker and ICE quotes.


(4) Includes
$616 million in non-hedge commodity derivative contracts (primarily with
NUGs) that are offset by a regulatory asset.





24








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 June 30, 2008. Based on derivative contracts held as of June 30,
2008, an adverse 10% change in commodity prices would decrease net income by
approximately $8 million during the next 12 months.





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 June 30, 2008, the debt underlying the $150million outstanding
notional amount of interest rate swaps had a weighted average fixed interest
rate of 5.5%, which the swaps have converted to a current weighted average
variable rate of 4.4%.





June
      30, 2008
            
            December
      31, 2007Notional
            
            Maturity
            
            Fair
            
            Notional
            
            Maturity
            
            FairInterest
      Rate Swaps
            
            Amount
            
            Date
            
            Value
            
            Amount
            
            Date
            
            Value(In
      millions)Fair value
      hedges
            
            
            
            
            
            
            
            
            
            
            $
            100
            
            
            2008
            
            $
            -$
            150
            
            
            2015
            
            $
            (3
            )
            
            150
            
            
            2015
            
            
            (3
            )$
            150
            
            
            
            
            $
            (3
            )
            $
            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 six months of 2008, FirstEnergy entered into
forward swaps with an aggregate notional value of $850 million and
terminated forward swaps with an aggregate notional value of $650million. FirstEnergy
paid $14 million in cash related to the terminations, $5 million of
which was deemed ineffective and recognized in current period earnings. The
remaining effective portion will be recognized over the terms of the associated
future debt. As of June 30, 2008, FirstEnergy had outstanding forward swaps
with an aggregate notional amount of $600 million and an aggregate fair
value of $6 million.





June
      30, 2008
            
            December
      31, 2007Notional
            
            Maturity
            
            Fair
            
            Notional
            
            Maturity
            
            FairForward
      Starting Swaps
            
            Amount
            
            Date
            
            Value
            
            Amount
            
            Date
            
            Value(In
      millions)Cash flow
      hedges
            
            $
            100
            
            
            2009
            
            $
            (1
            )100
            
            
            2010
            
            
            --
            
            
            2015
            
            
            -
            
            $
            25
            
            
            2015
            
            $
            (1
            )350
            
            
            2018
            
            
            8
            
            
            325
            
            
            2018
            
            
            (1
            )50
            
            
            2020
            
            
            (1
            )
            
            50
            
            
            2020
            
            
            (1
            )$
            600
            
            
            
            
            $
            6
            
            $
            400
            
            
            
            
            $
            (3
            )





Equity Price Risk





Included in nuclear
decommissioning trusts are marketable equity securities carried at their market
value of approximately $1.2 billion and $1.4 billion, as of
June 30, 2008 and December 31, 2007, respectively. A hypothetical 10%
decrease in prices quoted by stock exchanges would result in a $118million reduction in
fair value as of June 30, 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.





25








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 June 30, 2008,
the largest credit concentration was with one party, currently rated investment
grade that represented 9.3% of FirstEnergy’s total approved credit
risk.  Within FirstEnergy’s unregulated energy subsidiaries, 98% of
credit exposures, net of collateral and reserve, were with investment-grade
counterparties as of June 30, 2008.





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 certain 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 $129 million as of June 30, 2008
(JCP&L - $73 million and Met-Ed - $56 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:





June
      30,
            
            December
      31,
            
            IncreaseRegulatory
      Assets*
            
            2008
            
            2007
            
            (Decrease)(In
      millions)OE
            
            $
            683
            
            $
            737
            
            $
            (54
            )CEI
            
            
            839
            
            
            871
            
            
            (32
            )TE
            
            
            171
            
            
            204
            
            
            (33
            )JCP&L
            
            
            1,404
            
            
            1,596
            
            
            (192
            )Met-Ed
            
            
            550
            
            
            495
            
            
            55ATSI
            
            
            36
            
            
            42
            
            
            (6
            )Total
            
            $
            3,683
            
            $
            3,945
            
            $
            (262
            )





*
            Penelec had
      net regulatory liabilities of approximately $79 million and
      $74 million as of June 30, 2008 and December 31, 2007,
      respectively. These net regulatory liabilities are included in Other
      Non-current Liabilities on the Consolidated Balance
  Sheets.








26








Regulatory assets by
source are as follows:





June
      30,
            
            December
      31,
            
            IncreaseRegulatory
      Assets By Source
            
            2008
            
            2007
            
            (Decrease)(In
      millions)Regulatory
      transition costs
            
            $
            1,992
            
            $
            2,363
            
            $
            (371
            )Customer
      shopping incentives
            
            
            473
            
            
            516
            
            
            (43
            )Customer
      receivables for future income taxes
            
            
            290
            
            
            295
            
            
            (5
            )Loss on
      reacquired debt
            
            
            55
            
            
            57
            
            
            (2
            )Employee
      postretirement benefits
            
            
            35
            
            
            39
            
            
            (4
            )Nuclear
      decommissioning, decontaminationand spent fuel
      disposal costs
            
            
            (94
            )
            
            (115
            )
            
            21Asset removal
      costs
            
            
            (201
            )
            
            (183
            )
            
            (18
            )MISO/PJM
      transmission costs
            
            
            397
            
            
            340
            
            
            57Fuel costs -
      RCP
            
            
            228
            
            
            220
            
            
            8Distribution
      costs - RCP
            
            
            405
            
            
            321
            
            
            84Other
            
            
            103
            
            
            92
            
            
            11Total
            
            $
            3,683
            
            $
            3,945
            
            $
            (262
            )








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 (the PUCO, the FERC, the 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 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 the 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 result in the imposition of financial penalties
and thus 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
October 2008. FirstEnergy currently does not expect any material adverse
financial impact as a result of these audits.





27








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 $194 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. Recovery of the
deferred fuel costs will now be addressed in the Ohio Companies’ comprehensive
ESP filing, as described below, unless the MRO is implemented.





On June 7, 2007, the
Ohio Companies filed an application for an increase in electric distribution
rates with the PUCO and, on August 6, 2007, updated their filing to support
a distribution rate increase of $332 million. On December 4, 2007, the
PUCO Staff issued its Staff Reports containing the results of its 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. 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 and
filing of briefs, the PUCO Staff decreased their recommended revenue increase to
a range of $117 million to $135 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 $51 million of interest costs deferred through
June 30, 2008 ($0.10 per share of common stock). The Ohio Companies’
electric distribution rate request is addressed in their comprehensive ESP
filing, as described below.





On May 1, 2008,
Governor Strickland signed SB221, which became effective on July 31, 2008.
The bill requires all utilities to file an ESP with the PUCO. A utility also may
file an MRO in which it would have to prove the following objective market
criteria:





·
            the utility or
      its transmission service affiliate belongs to a FERC approved RTO, or
      there is comparable and nondiscriminatory access to the electric
      transmission grid;





·
            the RTO has a
      market-monitor function and the ability to mitigate market power or the
      utility’s market conduct, or a similar market monitoring function exists
      with the ability to identify and monitor market conditions and conduct;
      and





·
            a published
      source of information is available publicly or through subscription that
      identifies pricing information for traded electricity products, both on-
      and off-peak, scheduled for delivery two years into the
      future.





On July 31, 2008,
the Ohio Companies filed with the PUCO a comprehensive ESP and MRO. The MRO
outlines a CBP that would be implemented if the ESP is not approved by the PUCO.
Under SB221, a PUCO ruling on the ESP filing is required within 150 days and an
MRO decision is required within 90 days. The ESP proposes to phase in new
generation rates for customers beginning in 2009 for up to a three-year period
and would resolve the Ohio Companies’ collection of fuel costs deferred in 2006
and 2007, and the distribution rate request described above. Major provisions of
the ESP include:





·
            a phase-in of
      new generation rates for up to a three-year period, whereby customers
      would receive a 10% phase-in credit; related costs (expected to
      approximate $430 million in 2009, $490 million in 2010 and $550 million in
      2011) would be deferred for future collection over a period not to exceed
      10 years;





·
            a reconcilable
      rider to recover fuel transportation cost surcharges in excess of $30
      million in 2009, $20 million in 2010 and $10 million in
    2011;





28





·
            generation
      rate adjustments to recover any increase in fuel costs in 2011 over fuel
      costs incurred in 2010 for FES’ generation assets used to support the
      ESP;





·
            generation
      rate adjustments to recover the costs of complying with new requirements
      for certain renewable energy resources, new taxes and new environmental
      laws or new interpretations of existing laws that take effect after
      January 1, 2008 and exceed $50 million during the plan
    period;





·
            an RCP fuel
      rider to recover the 2006 and 2007 deferred fuel costs and carrying
      charges (described above) over a period not to exceed 25
      years;





·
            the resolution
      of outstanding issues pending in the Ohio Companies’ distribution rate
      case (described above), including annual electric distribution rate
      increases of $75 million for OE, $34.5 million for CEI and
      $40.5 million for TE. The new distribution rates would be effective
      January 1, 2009, for OE and TE and May 1, 2009 for CEI, with a
      commitment to maintain distribution rates through 2013. CEI also would be
      authorized to defer $25 million in distribution-related costs
      incurred from January 1, 2009, through April 30,
  2009;





·
            an adjustable
      delivery service improvement rider, effective January 1, 2009, through
      December 31, 2013, to ensure the Ohio Companies maintain customer
      standards for service and
reliability;





·
            the waiver of
      RTC charges for CEI’s customers as of January 1, 2009, which would
      result in CEI’s write-off of approximately $485 million of estimated
      unrecoverable transition costs ($1.01 per share of common
      stock);





·
            the continued
      recovery of transmission costs, including MISO, ancillary services and
      congestion charges, through an annually adjusted transmission rider; a
      separate rider will be established to recover costs incurred annually
      between May 1st
      and September 30th
      for capacity purchases required to meet FERC, NERC, MISO and other
      applicable standards for planning reserve margin
    requirements;





·
            a deferred
      transmission cost recovery rider effective January 1, 2009, through
      December 31, 2010 to recover transmission costs deferred by the Ohio
      Companies in 2005 and accumulated carrying charges through December 31,
      2008; a deferred distribution cost recovery rider effective
      January 1, 2011, to recover distribution costs deferred under the
      RCP, CEI’s additional $25 million of cost deferrals in 2009, line
      extension deferrals and transition tax
  deferrals;





·
            the deferral
      of annual storm damage expenses in excess of $13.9 million, certain line
      extension costs, as well as depreciation, property tax obligations and
      post in-service carrying charges on energy delivery capital investments
      for reliability and system efficiency placed in service after December 31,
      2008. Effective January 1, 2014, a rider will be established to collect
      the deferred balance and associated carrying charges over a 10-year
      period; and





·
            a commitment
      by the Ohio Companies to invest in aggregate at least $1 billion in
      capital improvements in their energy delivery systems through 2013 and
      fund $25 million for energy efficiency programs and $25 million for
      economic development and job retention programs through
    2013.





The Ohio Companies’
MRO filing outlines a CBP for providing retail generation supply if the ESP is
not approved and implemented. The CBP would use a “slice-of-system” approach
where suppliers bid on tranches (approximately 100 MW) of the Ohio Companies’
total customer load. The Ohio Companies have requested PUCO approval of the MRO
application by late October 2008, to allow for the necessary time to conduct the
CBP in order for rates to be effective January 1, 2009.  The Ohio
Companies included an interim pricing proposal as part of their ESP filing, if
additional time is necessary for final PUCO approval of either the ESP or MRO.
FES will be required to obtain FERC authorization to sell electric capacity or
energy to the Ohio Companies under the ESP or MRO, unless a waiver is
obtained.





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.





29








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 May 22, 2008, the
PPUC approved the Met-Ed and Penelec annual updates to the TSC rider for the
period June 1, 2008, through May 31, 2009. Various intervenors filed
complaints against Met-Ed’s and Penelec’s TSC filings.  In addition,
the PPUC ordered an investigation to review the reasonableness of Met-Ed’s TSC,
while at the same time allowing the company to implement the rider June 1,
2008, subject to refund. On July 15, 2008, the PPUC directed the ALJ to
consolidate the complaints against Met-Ed with its investigation and a
litigation schedule was adopted with hearings for both companies scheduled to
begin in January 2009. The 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 received approval from the PPUC of 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.
Bids on the two RFPs for residential customers’ load were approved by the PPUC
on April 16, 2008 and May 16, 2008. On May 20, 2008, Penn filed
compliance tariffs with the new default service generation rates based on the
approved RFP bids for residential customers which the PPUC certified on
May 21, 2008. The new rates were effective June 1, 2008.





30








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. As part of the 2008
state budget negotiations, the Alternative Energy Investment Act was enacted
creating a $650 million alternative energy fund to increase the development and
use of alternative and renewable energy, improve energy efficiency and reduce
energy consumption. Other legislation has been introduced to address generation
procurement, expiration of rate caps, conservation and renewable energy;
however, consideration of these issues was postponed until the legislature
returns to session in fall 2008. 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. However, Met-Ed and Penelec intend
to file rate mitigation plans with the PPUC later this year.





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 June 30, 2008, the accumulated deferred
cost balance totaled approximately $293 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 and comments from interested parties were submitted by
May 19, 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 2006, 2007 and the first half
of 2008.





On April 17, 2008, a
draft EMP was released for public comment. The draft EMP establishes five 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;





31








·
            meet 22.5% of
      the state’s electricity needs with renewable energy by
    2020;





·
            develop low
      carbon emitting, efficient power plants and close the gap between the
      supply and demand for electricity;
and





·
            invest in
      innovative clean energy technologies and businesses to stimulate the
      industry’s growth in New Jersey.





Following the public
hearings and comment period which extended 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.





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 multiple transmission charges for a single transaction between the
MISO and PJM regions. The FERC also ordered 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 by year-end 2008.  In the meantime, FirstEnergy affiliates
have been negotiating and entering into settlement agreements with other parties
in the docket to mitigate the risk of lower transmission revenue collection
associated with an adverse order.





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 the
costs of future transmission to be recovered 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 were the
subject of a hearing at the FERC in May 2008. Reply briefs and briefs on
exceptions are due in the merchant proceeding in July and August, respectively,
with an initial decision by the Presiding Judge to follow. On February 11,
2008, AEP appealed the FERC’s April 19, 2007 and January 31, 2008 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.





32








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 1, 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. On
May 12, 2008, the FERC issued an order approving this
amendment.





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. Numerous parties filed requests for
rehearing on March 26, 2008. On June 23, 2008, the FERC issued an
order granting in part and denying in part rehearing. MISO has since notified
the FERC that the start of its ASM will be delayed until September 9,
2008.





33





On February 29,
2008, MISO submitted a compliance filing setting forth MISO’s Readiness Advisor
ASM and Consolidated Balancing Authority Initiative Verification plan and status
and Real-Time Operations ASM Reversion plan. FERC action on this compliance
filing remains pending. On March 26, 2008, MISO submitted a tariff filing in
compliance with the FERC’s 30-day directives in the February 25 order. Numerous
parties submitted comments and protests on April 16, 2008. The FERC issued
an order accepting the revisions pending further compliance on June 23,
2008. On April 25, 2008, MISO submitted a tariff filing in compliance with
the FERC’s 60-day directives in the February 25 order. FERC action on this
compliance filing remains pending. On May 23, 2008, MISO submitted its amended
Balancing Authority Agreement. On July 21, 2008, the FERC issued an order
conditionally accepting the amended Balancing Authority Agreement and requiring
a further compliance filing.





Interconnection
Agreement with AMP-Ohio





On May 4, 2007,
AMP-Ohio filed a complaint in Franklin County, Ohio Common Pleas Court against
FirstEnergy and TE seeking a declaratory judgment that the defendants may
not terminate certain portions of a wholesale power Interconnection Agreement
dated May 1, 1989 between AMP-Ohio and TE, nor further modify the rates and
charges for power under that agreement. TE has served notice of termination of
the Interconnection Agreement on AMP-Ohio to be effective December 31,
2008. AMP-Ohio claims that FirstEnergy, on behalf of TE, waived any right to
terminate the Interconnection Agreement according to the terms of a June 6, 1997
merger settlement agreement with AMP-Ohio. Both the Interconnection Agreement
and merger settlement agreement were approved by the FERC. On June 15, 2007, TE
filed notice of removal of the case to United States District Court for the
Southern District of Ohio. On July 11, 2007, TE moved to dismiss on the
grounds that the FERC has exclusive jurisdiction over the subject matter of the
complaint, or alternatively, primary jurisdiction over this matter. Responsive
pleadings were filed by both parties and on March 31, 2008, the district court
issued an order dismissing the matter for lack of subject matter jurisdiction.
However, AMP-Ohio informed TE that it continues to object to cancellation of the
power sales provisions of the Interconnection Agreement.





On May 29, 2008, TE
filed with the FERC a proposed Notice of Cancellation effective midnight
December 31, 2008, of the Interconnection Agreement with AMP-Ohio. AMP-Ohio
protested this filing. TE also filed a Petition for Declaratory Order seeking a
FERC ruling, in the alternative if cancellation is not accepted, of TE's right
to file for an increase in rates effective January 1, 2009, for power
provided to AMP-Ohio under the Interconnection Agreement. AMP-Ohio filed a
pleading agreeing that TE may seek an increase in rates, but arguing that any
increase is limited to the cost of generation owned by TE affiliates. TE has
requested FERC action on both filings and expects the FERC to act on this
request in the third quarter 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 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 MISO to submit detailed plans to integrate
Duquesne into MISO. Finally, the FERC directed MISO and PJM to work together to
resolve the substantive and procedural issues implicated by Duquesne’s
transition into MISO. These issues remain unresolved. If Duquesne satisfies all
of the obligations set by the FERC, its planned transition date is
October 1, 2008.  On July 3, 2008, Duquesne and MISO filed a
proposed plan for integrating Duquesne into MISO.  On July 24, 2008,
numerous parties filed comments and protests to the proposed
plan. FirstEnergy filed comments identifying numerous issues that must be
addressed and resolved before Duquesne can transition to MISO. FirstEnergy
continues to evaluate the impact of Duquesne’s withdrawal from PJM on its
operations and financial condition; however, the full consequences cannot be
determined until the FERC rules on the pending issues.





34





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 could contract with PJM for the transmission
reservations necessary to participate in the May 2008 auction. FirstEnergy has
complied with the 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 satisfied 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. Given that the FERC outlined the conditions under which
FirstEnergy could bid the unit into the auction and FirstEnergy complied with
the FERC’s conditions, FirstEnergy does not anticipate that the FERC will grant
the relief requested in the pleadings.  Based on this expectation,
FirstEnergy believes that the auction results would not be changed.





Complaint
against PJM RPM Auction





On May 30,
2008, a group of PJM load-serving entities, state commissions, consumer
advocates, and trade associations (referred to collectively as the RPM Buyers)
filed a complaint at the FERC against PJM alleging that three of the
four transitional RPM auctions yielded prices that are unjust and
unreasonable under the Federal Power Act. Most of the parties comprising
the RPM Buyers group were parties to the settlement approved by the FERC that
established the RPM. In the complaint, the RPM Buyers request that the
total projected payments to RPM sellers for the three auctions at issue be
materially reduced. On July 11, 2008, PJM filed its answer to the
complaint, in which it denied the allegation that the rates are unjust and
unreasonable. Also on that date, FirstEnergy filed a motion to
intervene.





If the FERC were to
rule unfavorably on this matter, the impact for the period ended June 30,
2008, would not be material to FirstEnergy’s results of operations, cash flows
or financial position, as FES only began collecting RPM revenues for the Beaver
Valley Power Station on June 1, 2008.  However, such an unfavorable
ruling by the FERC could have a material adverse impact on the revenues of the
Beaver Valley Power Station in subsequent periods if these proceedings were to
result in a significant loss of FES’ RPM revenues.





FES believes that
the FERC is unlikely to grant the relief sought in the RPM Buyers’ complaint,
since it largely deals with legal issues concerning the fundamentals of the RPM
markets that are already at issue in a separate D.C. Circuit Court appellate
proceeding. Nevertheless, FES is unable to predict the outcome of these
proceedings or the resulting effect on FirstEnergy’s or FES’ results of
operations, cash flows or financial position.





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 believes the proposal promotes a mechanism
that will result in 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 conditionally approved
MISO’s Resource Adequacy proposal on March 26, 2008, requiring MISO to
submit to further compliance filings. Rehearing requests are pending on the
FERC’s March 26 Order. On May 27, 2008, MISO submitted a compliance
filing to address issues associated with planning reserve margins. On
June 17, 2008, various parties submitted comments and protests to MISO’s
compliance filing. FirstEnergy submitted comments identifying specific issues
that must be clarified and addressed. On June 25, 2008, MISO submitted a
second compliance filing establishing the enforcement mechanism for the reserve
margin requirement which establishes deficiency payments for load serving
entities that do not meet the resource adequacy requirements. Numerous parties,
including FirstEnergy, protested this filing. A FERC decision on this filing is
expected this fall.





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 21, 2008.





35





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 emission limits 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 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.





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 United States
District Court. The scope of Met-Ed’s indemnity obligation to and from Sithe
Energy is disputed.  Met-Ed is unable to predict the outcome of this
matter.





36








On June 11, 2008,
the EPA issued a Notice and Finding of Violation to MEW alleging that
"modifications" at the Homer City Power Station occurred since 1988 to the
present without preconstruction NSR or permitting under the CAA's prevention of
significant deterioration program. MEW is seeking indemnification from Penelec,
which was the co-owner (along with New York State Electric and Gas Company) and
operator of the Homer City Power Station prior to its sale in
1999.  Although it remains liable for civil or criminal penalties and
fines that may be assessed relating to events prior to the sale of the Homer
City Power Station in 1999, the scope of Penelec’s indemnity obligation to and
from MEW is disputed.  Penelec is unable to predict the outcome of
this matter.





On May 16, 2008,
FGCO received a request from the EPA for information pursuant to Section 114(a)
of the CAA for certain operating and maintenance information regarding the
Eastlake, Lakeshore, Bay Shore and Ashtabula generating plants to allow the EPA
to determine whether these generating sources are complying with the NSR
provisions of the CAA. On July 10, 2008, FGCO and the EPA entered into an
ACO modifying that request and setting forth a schedule for FGCO’s response.
FGCO intends to fully comply with the ACO, but, at this time, is unable to
predict the outcome of this matter.





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 would have
required 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),
ultimately capping SO2 emissions
in affected states to just 2.5 million tons annually and NOX emissions
to just 1.3 million tons annually. CAIR was challenged in the United States
Court of Appeals for the District of Columbia and on July 11, 2008, the Court
vacated CAIR “in its entirety” and directed the EPA to “redo its analysis from
the ground up.” The court ruling also vacated the CAIR regional cap-and-trade
programs for SO2 and
NOX,
which is currently not expected to, but may, materially impair the value of
emissions allowances obtained for future compliance. The future cost of
compliance with these regulations may be substantial and will depend on the
action taken by the EPA or Congress in response to the Court’s
ruling.





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 petitioned for rehearing
by the entire court, which denied the petition on May 20, 2008.  The
EPA must now petition for United States Supreme Court 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.





37








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.





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 was never submitted 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. On July 11, 2008, the
EPA released an Advance Notice of Proposed Rulemaking, soliciting input from the
public on the effects of climate change and the potential ramifications of
regulation of CO2 under the
CAA.





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.





38








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 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 one significant
aspect of the Second Circuit Court’s opinion which is whether
Section 316(b) of the Clean Water Act authorizes the EPA to compare costs
with benefits in determining the best technology available for minimizing
adverse environmental impact at cooling water intake structures. 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 best professional judgment, 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.





Under NRC
regulations, FirstEnergy must ensure that adequate funds will be available to
decommission its nuclear facilities. As of June 30, 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
June 30, 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
$95 million (JCP&L - $68 million, TE - $1 million, CEI -
$1 million and FirstEnergy Corp. - $25 million) have been accrued
through June 30, 2008. Included in the total for JCP&L are accrued
liabilities of approximately $57 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.





39








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 was held on June 13,
2008.  At that conference, the plaintiffs stated their intent to drop
their efforts to create a class-wide damage model and, instead of dismissing the
class action, expressed their desire for a bifurcated trial on liability and
damages.  The judge directed the plaintiffs to indicate, on or before
August 22, 2008, how they intend to proceed under this
scenario.  Thereafter, the judge expects to hold another pretrial
conference to address plaintiffs' proposed procedure.FirstEnergy is defending
this action but is unable to predict the outcome of this matter.  No
liability has been accrued as of June 30, 2008.





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 has conducted the employee training required by one portion
of the confirmatory order and a consultant has performed follow-up reviews to
ensure the effectiveness of that training.  The NRC continues to
monitor FENOC’s compliance with all the commitments made in the confirmatory
order.





In August 2007,
FENOC submitted an application to the NRC to renew the operating licenses for
the Beaver Valley Power Station (Units 1 and 2) for an additional 20 years. The
NRC is required by statute to provide an opportunity for members of the public
to request a hearing on the application. No members of the public, however,
requested a hearing on the Beaver Valley license renewal application. The
NRC is expected to issue its draft supplemental Environmental Impact Statement
and Safety Evaluation Report with open items in 2008. FENOC will continue to
work with the NRC Staff as it completes its environmental and technical reviews
of the license renewal application, and expects to obtain renewed licenses for
the Beaver Valley Power Station in 2009. If renewed licenses are issued by the
NRC, the Beaver Valley Power Station’s licenses would be extended until 2036 and
2047 for Units 1 and 2, respectively.








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.





40








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.





On July 22, 2008 and
July 23, 2008, three complaints were filed against FGCO in the United States
District Court for the Western District of Pennsylvania as well as in the Beaver
County Court of Common Pleas seeking damages based on Bruce Mansfield Plant air
emissions. In addition to seeking damages, two of the complaints seek to enjoin
the Bruce Mansfield Plant from operating except in a “safe, responsible, prudent
and proper manner,” one being a complaint filed on behalf of twenty-one
individuals and the other being a class action complaint, seeking certification
as a class action with the eight named plaintiffs as the class representatives.
FGCO believes the claims are without merit and intends to defend itself against
the allegations made in these complaints.





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. JCP&L and the
union filed briefs in June and July of 2008. Oral arguments have been requested
and are expected to take place in fall 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.





NEW
ACCOUNTING STANDARDS AND INTERPRETATIONS





SFAS 141(R) – “Business
Combinations”





In December 2007,
the FASB issued SFAS 141(R), which: (i) requires the acquiring entity in a
business combination to recognize all the assets acquired and liabilities
assumed in the transaction; (ii) establishes the acquisition-date fair value as
the measurement objective for all assets acquired and liabilities assumed; and
(iii) 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. 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 - “Non-controlling 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.





41








SFAS
      161 - “Disclosures about Derivative Instruments and Hedging Activities –
      an Amendment of FASB Statement No.
133”





In March 2008, the
FASB issued SFAS 161 that 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. The FASB believes that additional required
disclosure of the fair values of derivative instruments and their gains and
losses in a tabular format will 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. This Statement also requires cross-referencing within the
footnotes to help users of financial statements locate important information
about derivative instruments. The Statement is effective for fiscal years
beginning on or after December 15, 2008. FirstEnergy is currently
evaluating the impact of adopting this Standard on its financial
statements.





SFAS
      162 - “The Hierarchy of Generally Accepted Accounting
      Principles”





In May 2008, the
FASB issued SFAS 162, which is intended to improve financial reporting by
identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with GAAP. The FASB believes that the GAAP hierarchy should be
directed to reporting entities, not the independent auditors, because reporting
entities are responsible for selecting accounting principles for financial
statements that are presented in conformity with GAAP. This Statement is
effective 60 days following the SEC’s approval of the PCAOB amendments to U.S.
Auditing Standards Section 411, The
Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles, which has not yet occurred. The Statement
will not have an impact on FirstEnergy’s financial statements.








42











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 June 30, 2008 and the related consolidated statements of
income and comprehensive income for each of the three-month and six-month
periods ended June 30, 2008 and 2007 and the consolidated statement of cash
flows for the six-month periods ended June 30, 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 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
              August 7,
      2008













43








FIRSTENERGY
      CORP.CONSOLIDATED
      STATEMENTS OF INCOME(Unaudited)Three
      Months
              
              
              Six
      MonthsEnded
      June 30
              
              
              Ended
      June 302008
              
              
              2007
              
              
              2008
              
              
              2007(In
      millions, except per share amounts)REVENUES:Electric
      utilities
              
              $
              2,865
              
              
              $
              2,718
              
              
              $
              5,778
              
              
              $
              5,377Unregulated
      businesses
              
              
              380
              
              
              
              391
              
              
              
              744
              
              
              
              705Total revenues
      *
              
              
              3,245
              
              
              
              3,109
              
              
              
              6,522
              
              
              
              6,082EXPENSES:Fuel and
      purchased power
              
              
              1,386
              
              
              
              1,185
              
              
              
              2,714
              
              
              
              2,306Other
      operating expenses
              
              
              781
              
              
              
              750
              
              
              
              1,581
              
              
              
              1,499Provision for
      depreciation
              
              
              168
              
              
              
              159
              
              
              
              332
              
              
              
              315Amortization
      of regulatory assets
              
              
              246
              
              
              
              246
              
              
              
              504
              
              
              
              497Deferral of
      new regulatory assets
              
              
              (98
              )
              
              
              (148
              )
              
              
              (203
              )
              
              
              (292
              )General
      taxes
              
              
              180
              
              
              
              189
              
              
              
              395
              
              
              
              392Total
      expenses
              
              
              2,663
              
              
              
              2,381
              
              
              
              5,323
              
              
              
              4,717OPERATING
      INCOME
              
              
              582
              
              
              
              728
              
              
              
              1,199
              
              
              
              1,365OTHER
      INCOME (EXPENSE):Investment
      income
              
              
              16
              
              
              
              30
              
              
              
              33
              
              
              
              63Interest
      expense
              
              
              (188
              )
              
              
              (205
              )
              
              
              (367
              )
              
              
              (390
              )Capitalized
      interest
              
              
              13
              
              
              
              7
              
              
              
              21
              
              
              
              12Total other
      expense
              
              
              (159
              )
              
              
              (168
              )
              
              
              (313
              )
              
              
              (315
              )INCOME
      BEFORE INCOME TAXES
              
              
              423
              
              
              
              560
              
              
              
              886
              
              
              
              1,050INCOME
      TAXES
              
              
              160
              
              
              
              222
              
              
              
              347
              
              
              
              422NET
      INCOME
              
              $
              263
              
              
              $
              338
              
              
              $
              539
              
              
              $
              628BASIC
      EARNINGS PER SHARE OF COMMON STOCK
              
              $
              0.86
              
              
              $
              1.11
              
              
              $
              1.77
              
              
              $
              2.03WEIGHTED
      AVERAGE NUMBER OF BASIC SHARES OUTSTANDING
              
              
              304
              
              
              
              304
              
              
              
              304
              
              
              
              309DILUTED
      EARNINGS PER SHARE OF COMMON STOCK
              
              $
              0.85
              
              
              $
              1.10
              
              
              $
              1.75
              
              
              $
              2.01WEIGHTED
      AVERAGE NUMBER OF DILUTED SHARES OUTSTANDING
              
              
              307
              
              
              
              308
              
              
              
              307
              
              
              
              313DIVIDENDS
      DECLARED PER SHARE OF COMMON STOCK
              
              $
              -
              
              
              $
              -
              
              
              $
              0.55
              
              
              $
              0.50* Includes
      excise tax collections of $100 million and $101 million in the three
      months ended June 30, 2008 and 2007, respectively, and$214
      million and $209 million in the six months ended June 2008 and 2007,
      respectively.The
      accompanying Notes to Consolidated Financial Statements as they relate to
      FirstEnergy Corp. are an integral part of these
statements.
 
 44
  
 FIRSTENERGY
      CORP.CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOME(Unaudited)Three
      Months
              
              
              Six
      MonthsEnded
      June 30
              
              
              Ended
      June 302008
              
              
              2007
              
              
              2008
              
              
              2007(In
      millions)NET
      INCOME
              
              $
              263
              
              
              $
              338
              
              
              $
              539
              
              
              $
              628OTHER
      COMPREHENSIVE INCOME (LOSS):Pension and
      other postretirement benefits
              
              
              (20
              )
              
              
              (11
              )
              
              
              (40
              )
              
              
              (22
              )Unrealized
      gain (loss) on derivative hedges
              
              
              8
              
              
              
              (1
              )
              
              
              (5
              )
              
              
              20Change in
      unrealized gain on available for sale securities
              
              
              (23
              )
              
              
              46
              
              
              
              (81
              )
              
              
              63Other
      comprehensive income (loss)
              
              
              (35
              )
              
              
              34
              
              
              
              (126
              )
              
              
              61Income tax
      expense (benefit) related to othercomprehensive
      income
              
              
              (14
              )
              
              
              10
              
              
              
              (47
              )
              
              
              19Other
      comprehensive income (loss), net of tax
              
              
              (21
              )
              
              
              24
              
              
              
              (79
              )
              
              
              42COMPREHENSIVE
      INCOME
              
              $
              242
              
              
              $
              362
              
              
              $
              460
              
              
              $
              670The
      accompanying Notes to Consolidated Financial Statements as they relate to
      FirstEnergy Corp. are an integral part ofthese
      statements.
 
 45
 
 FIRSTENERGY
      CORP.CONSOLIDATED
      BALANCE SHEETS(Unaudited)June
      30,
                
                
                December
      31,2008
                
                
                2007(In
      millions)ASSETSCURRENT
      ASSETS:Cash and cash
      equivalents
                
                $
                70
                
                
                $
                129Receivables-Customers
      (less accumulated provisions of $29 million and$36 million,
      respectively, for uncollectible accounts)
                
                
                1,365
                
                
                
                1,256Other (less
      accumulated provisions of $3 million and$22 million,
      respectively, for uncollectible accounts)
                
                
                188
                
                
                
                165Materials and
      supplies, at average cost
                
                
                583
                
                
                
                521Prepayments
      and other
                
                
                629
                
                
                
                1592,835
                
                
                
                2,230PROPERTY,
      PLANT AND EQUIPMENT:In
      service
                
                
                25,744
                
                
                
                24,619Less -
      Accumulated provision for depreciation
                
                
                10,606
                
                
                
                10,34815,138
                
                
                
                14,271Construction
      work in progress
                
                
                1,565
                
                
                
                1,11216,703
                
                
                
                15,383INVESTMENTS:Nuclear plant
      decommissioning trusts
                
                
                1,988
                
                
                
                2,127Investments in
      lease obligation bonds
                
                
                675
                
                
                
                717Other
                
                
                752
                
                
                
                7543,415
                
                
                
                3,598DEFERRED
      CHARGES AND OTHER ASSETS:Goodwill
                
                
                5,606
                
                
                
                5,607Regulatory
      assets
                
                
                3,683
                
                
                
                3,945Pension
      assets
                
                
                745
                
                
                
                700Other
                
                
                558
                
                
                
                60510,592
                
                
                
                10,857$
                33,545
                
                
                $
                32,068LIABILITIES
      AND CAPITALIZATIONCURRENT
      LIABILITIES:Currently
      payable long-term debt
                
                $
                2,508
                
                
                $
                2,014Short-term
      borrowings
                
                
                2,608
                
                
                
                903Accounts
      payable
                
                
                930
                
                
                
                777Accrued
      taxes
                
                
                231
                
                
                
                408Other
                
                
                860
                
                
                
                1,0467,137
                
                
                
                5,148CAPITALIZATION:Common
      stockholders’ equity-Common stock,
      $.10 par value, authorized 375,000,000 shares-304,835,407
      outstanding
                
                
                31
                
                
                
                31Other paid-in
      capital
                
                
                5,461
                
                
                
                5,509Accumulated
      other comprehensive loss
                
                
                (129
                )
                
                
                (50
                )Retained
      earnings
                
                
                3,858
                
                
                
                3,487Total common
      stockholders' equity
                
                
                9,221
                
                
                
                8,977Long-term debt
      and other long-term obligations
                
                
                8,603
                
                
                
                8,86917,824
                
                
                
                17,846NONCURRENT
      LIABILITIES:Accumulated
      deferred income taxes
                
                
                2,724
                
                
                
                2,671Asset
      retirement obligations
                
                
                1,307
                
                
                
                1,267Deferred gain
      on sale and leaseback transaction
                
                
                1,043
                
                
                
                1,060Power purchase
      contract loss liability
                
                
                644
                
                
                
                750Retirement
      benefits
                
                
                919
                
                
                
                894Lease market
      valuation liability
                
                
                330
                
                
                
                663Other
                
                
                1,617
                
                
                
                1,7698,584
                
                
                
                9,074COMMITMENTS,
      GUARANTEES AND CONTINGENCIES (Note 10)$
                33,545
                
                
                $
                32,068The
      accompanying Notes to Consolidated Financial Statements as they relate to
      FirstEnergy Corp. are an integral part of thesebalance
      sheets.
  46
    FIRSTENERGY
      CORP.CONSOLIDATED
      STATEMENTS OF CASH FLOWS(Unaudited)Six
      MonthsEnded
      June 302008
                
                
                2007(In
      millions)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                539
                
                
                $
                628Adjustments to
      reconcile net income to net cash from operating
activities-Provision for
      depreciation
                
                
                332
                
                
                
                315Amortization
      of regulatory assets
                
                
                504
                
                
                
                497Deferral of
      new regulatory assets
                
                
                (203
                )
                
                
                (292
                )Nuclear fuel
      and lease amortization
                
                
                51
                
                
                
                50Deferred
      purchased power and other costs
                
                
                (119
                )
                
                
                (185
                )Deferred
      income taxes and investment tax credits, net
                
                
                129
                
                
                
                85Investment
      impairment
                
                
                38
                
                
                
                12Deferred rents
      and lease market valuation liability
                
                
                (101
                )
                
                
                (92
                )Accrued
      compensation and retirement benefits
                
                
                (140
                )
                
                
                (69
                )Stock-based
      compensation
                
                
                (72
                )
                
                
                (37
                )Commodity
      derivative transactions, net
                
                
                3
                
                
                
                4Gain on asset
      sales
                
                
                (41
                )
                
                
                (12
                )Cash
      collateral
                
                
                67
                
                
                
                (19
                )Pension trust
      contribution
                
                
                -
                
                
                
                (300
                )Decrease
      (increase) in operating assets-Receivables
                
                
                (136
                )
                
                
                (282
                )Materials and
      supplies
                
                
                (31
                )
                
                
                22Prepayments
      and other current assets
                
                
                (399
                )
                
                
                (157
                )Increase
      (decrease) in operating liabilities-Accounts
      payable
                
                
                152
                
                
                
                28Accrued
      taxes
                
                
                (190
                )
                
                
                (17
                )Electric
      service prepayment programs
                
                
                (39
                )
                
                
                (36
                )Other
                
                
                (28
                )
                
                
                27Net cash
      provided from operating activities
                
                
                316
                
                
                
                170CASH
      FLOWS FROM FINANCING ACTIVITIES:New
      Financing-Long-term
      debt
                
                
                549
                
                
                
                800Short-term
      borrowings, net
                
                
                1,705
                
                
                
                1,308Redemptions
      and Repayments-Common
      stock
                
                
                -
                
                
                
                (918
                )Long-term
      debt
                
                
                (720
                )
                
                
                (471
                )Net controlled
      disbursement activity
                
                
                8
                
                
                
                32Stock-based
      compensation tax benefit
                
                
                23
                
                
                
                14Common stock
      dividend payments
                
                
                (335
                )
                
                
                (311
                )Net cash
      provided from financing activities
                
                
                1,230
                
                
                
                454CASH
      FLOWS FROM INVESTING ACTIVITIES:Property
      additions
                
                
                (1,617
                )
                
                
                (697
                )Proceeds from
      asset sales
                
                
                56
                
                
                
                12Sales of
      investment securities held in trusts
                
                
                726
                
                
                
                583Purchases of
      investment securities held in trusts
                
                
                (775
                )
                
                
                (630
                )Cash
      investments
                
                
                65
                
                
                
                54Other
                
                
                (60
                )
                
                
                1Net cash used
      for investing activities
                
                
                (1,605
                )
                
                
                (677
                )Net decrease
      in cash and cash equivalents
                
                
                (59
                )
                
                
                (53
                )Cash and cash
      equivalents at beginning of period
                
                
                129
                
                
                
                90Cash and cash
      equivalents at end of period
                
                $
                70
                
                
                $
                37The
      accompanying Notes to Consolidated Financial Statements as they relate to
      FirstEnergy Corp. are an integralpart of these
      statements.
  47
    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 and default service requirements. These
affiliated power sales include a full-requirements PSA with OE, CEI and TE to
supply each of their default service 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 default
service 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 a portion of Penn’s
default service requirements at market-based rates as a result of Penn’s 2008
competitive solicitations. FES’ existing contractual obligations to Penn expire
on May 31, 2009, 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 six
months of 2008, net income decreased to $158million from $254million 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 $83million in the
first six 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. Increased 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 higher spot market
prices in PJM, partially offset by decreased sales volumes in MISO.





The increase in
affiliated company wholesale sales was due to higher unit prices for the Ohio
Companies and increased sales volumes to the Pennsylvania Companies, partially
offset by lower unit prices for the Pennsylvania Companies reflecting a lower
composite rate. Higher unit prices on sales to the Ohio Companies 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, partially offset by lower sales to Penn due to decreased default
service requirements in the first six months of 2008 compared to the first six
months of 2007.





Transmission revenue
increased $21 million due to higher transmission rates in MISO and PJM.
Other revenue increased by $8 million principally due to revenue from affiliated
companies for the lessor equity interests in Beaver Valley Unit 2 and Perry that
were acquired by NGC during the second quarter of 2008.





Changes in revenues
in the first six months of 2008 from the same period of 2007 are summarized
below:





Six  Months
      EndedJune
      30,
            
            IncreaseRevenues
      by Type of Service
            
            2008
            
            2007
            
            (Decrease)(In
      millions)Non-Affiliated
      Generation Sales:Retail
            
            $
            315
            
            $
            359
            
            $
            (44
            )Wholesale
            
            
            298
            
            
            276
            
            
            22Total
      Non-Affiliated Generation Sales
            
            
            613
            
            
            635
            
            
            (22
            )Affiliated
      Generation Sales
            
            
            1,480
            
            
            1,404
            
            
            76Transmission
            
            
            66
            
            
            45
            
            
            21Other
            
            
            11
            
            
            3
            
            
            8Total
      Revenues
            
            $
            2,170
            
            $
            2,087
            
            $
            83





48








The following tables
summarize the price and volume factors contributing to changes in revenues from
non-affiliated and affiliated generation sales in the first six months of 2008
compared to the same period last year:





IncreaseSource
      of Change in Non-Affiliated Generation Revenues
            
            (Decrease)(In
      millions)Retail:Effect of 12.8% decrease in sales
      volumes
            
            $
            (46
            )Change in prices
            
            
            2(44
            )Wholesale:Effect of 7.6% decrease in sales
      volumes
            
            
            (21
            )Change in prices
            
            
            4322Net Decrease
      in Non-Affiliated Generation Revenues
            
            $
            (22
            )





IncreaseSource
      of Change in Affiliated Generation Revenues
            
            (Decrease)(In
      millions)Ohio
      Companies:Effect of 0.6% decrease in sales
      volumes
            
            $
            (7
            )Change in prices
            
            
            8073Pennsylvania
      Companies:Effect of 2.8% increase in sales
      volumes
            
            
            10Change in prices
            
            
            (7
            )3Net Increase
      in Affiliated Generation Revenues
            
            $
            76





Expenses





Total expenses
increased by $218 million in the first six 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 six months of 2008
from the same period last year:





Source
      of Change in Fuel and Purchased Power
            
            Increase
                (Decrease)(In
      millions)Fossil
      Fuel:Change due to increased unit
      costs
            
            $
            68Change due to volume
      consumed
            
            
            60128Nuclear
      Fuel:Change due to increased unit
      costs
            
            
            2Change due to volume
      consumed
            
            
            -2Non-affiliated
      Purchased Power:Change due to increased unit
      costs
            
            
            120Change due to volume
      purchased
            
            
            (42
            )78Affiliated
      Purchased Power:Change due to increased unit
      costs
            
            
            7Change due to volume
      purchased
            
            
            (94
            )(87
            )Net Increase
      in Fuel and Purchased Power Costs
            
            $
            121





Fossil fuel costs
increased $128 million in the first six months of 2008 as a result of the
assignment of CEI’s and TE’s leasehold interest in the Bruce Mansfield Plant to
FGCO in October 2007 and higher unit prices due to increased coal transportation
costs (including surcharges for increased diesel fuel prices) and emission
allowance costs.





49








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; prior to the assignment, FGCO
purchased the associated KWH from CEI and TE. Purchased power costs from
non-affiliates increased primarily as a result of higher market prices in MISO
and PJM partially offset by reduced volumes reflecting lower retail sales
requirements.





Other operating
expenses increased by $88million in the first six
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 ($22 million) and the sale and leaseback of
Mansfield Unit 1 ($48 million) completed in the second half of 2007. Higher
nuclear operating costs were due to an additional refueling outage during the
first six months of 2008.  Higher fossil operating costs were
primarily due to additional planned maintenance outages at the Mansfield and
Ashtabula Plants in 2008 and reduced gains from excess emission allowance
sales.





Depreciation expense
increased by $9 million in the first six months of 2008 primarily due to
fossil and nuclear property additions since the second quarter of
2007.





Other
Expense





Other expense
increased by $6million in the first six
months of 2008 from the same period of 2007 primarily as a result of an increase
in nuclear decommissioning trust securities impairments and lower interest
income due to reduced loans to the unregulated money pool, partially offset by
lower interest expense (net of capitalized interest). Lower interest expense
reflected the repayment of notes issued to associated companies in connection
with the transfers of generation assets in 2005.





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.











50











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 June 30, 2008 and the related consolidated statements of
income and comprehensive income for each of the three-month and six-month
periods ended June 30, 2008 and 2007 and the consolidated statement of cash
flows for the six-month periods ended June 30, 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 stockholder’s equity, and cash flows for the year then ended (not
presented herein), and in our report 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
              August 7,
      2008











51





FIRSTENERGY
      SOLUTIONS CORP.CONSOLIDATED
      STATEMENTS OF INCOME AND COMPREHENSIVE INCOME(Unaudited)Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007(In
      thousands)REVENUES:Electric sales
      to affiliates
              
              $
              704,283
              
              
              $
              690,697
              
              
              $
              1,480,590
              
              
              $
              1,404,371Electric sales
      to non-affiliates
              
              
              324,276
              
              
              
              358,901
              
              
              
              612,617
              
              
              
              635,030Other
              
              
              42,719
              
              
              
              19,133
              
              
              
              77,187
              
              
              
              47,623Total
      revenues
              
              
              1,071,278
              
              
              
              1,068,731
              
              
              
              2,170,394
              
              
              
              2,087,024EXPENSES:Fuel
              
              
              310,550
              
              
              
              268,880
              
              
              
              632,239
              
              
              
              502,415Purchased
      power from non-affiliates
              
              
              220,339
              
              
              
              162,873
              
              
              
              427,063
              
              
              
              349,076Purchased
      power from affiliates
              
              
              34,528
              
              
              
              70,585
              
              
              
              60,013
              
              
              
              147,068Other
      operating expenses
              
              
              287,738
              
              
              
              233,145
              
              
              
              584,284
              
              
              
              496,741Provision for
      depreciation
              
              
              56,160
              
              
              
              48,520
              
              
              
              105,902
              
              
              
              96,530General
      taxes
              
              
              19,795
              
              
              
              20,910
              
              
              
              42,992
              
              
              
              42,628Total
      expenses
              
              
              929,110
              
              
              
              804,913
              
              
              
              1,852,493
              
              
              
              1,634,458OPERATING
      INCOME
              
              
              142,168
              
              
              
              263,818
              
              
              
              317,901
              
              
              
              452,566OTHER
      INCOME (EXPENSE):Miscellaneous
      income (expense)
              
              
              (2,074
              )
              
              
              15,369
              
              
              
              (4,978
              )
              
              
              35,101Interest
      expense - affiliates
              
              
              (10,728
              )
              
              
              (22,817
              )
              
              
              (17,938
              )
              
              
              (52,263
              )Interest
      expense - other
              
              
              (24,505
              )
              
              
              (21,693
              )
              
              
              (49,040
              )
              
              
              (39,051
              )Capitalized
      interest
              
              
              10,541
              
              
              
              4,423
              
              
              
              17,204
              
              
              
              7,632Total other
      expense
              
              
              (26,766
              )
              
              
              (24,718
              )
              
              
              (54,752
              )
              
              
              (48,581
              )INCOME
      BEFORE INCOME TAXES
              
              
              115,402
              
              
              
              239,100
              
              
              
              263,149
              
              
              
              403,985INCOME
      TAXES
              
              
              47,308
              
              
              
              87,684
              
              
              
              105,071
              
              
              
              150,065NET
      INCOME
              
              
              68,094
              
              
              
              151,416
              
              
              
              158,078
              
              
              
              253,920OTHER
      COMPREHENSIVE INCOME (LOSS):Pension and
      other postretirement benefits
              
              
              (1,821
              )
              
              
              (1,360
              )
              
              
              (3,641
              )
              
              
              (2,720
              )Unrealized
      gain (loss) on derivative hedges
              
              
              (17,920
              )
              
              
              (13,170
              )
              
              
              (12,202
              )
              
              
              4,588Change in
      unrealized gain on available-for-sale securities
              
              
              (17,709
              )
              
              
              41,340
              
              
              
              (69,561
              )
              
              
              58,790Other
      comprehensive income (loss)
              
              
              (37,450
              )
              
              
              26,810
              
              
              
              (85,404
              )
              
              
              60,658Income tax
      expense (benefit) related to othercomprehensive
      income
              
              
              (13,313
              )
              
              
              9,226
              
              
              
              (30,716
              )
              
              
              21,559Other
      comprehensive income (loss), net of tax
              
              
              (24,137
              )
              
              
              17,584
              
              
              
              (54,688
              )
              
              
              39,099TOTAL
      COMPREHENSIVE INCOME
              
              $
              43,957
              
              
              $
              169,000
              
              
              $
              103,390
              
              
              $
              293,019The
      accompanying Notes to Consolidated Financial Statements as they related to
      FirstEnergy Solutions Corp. are an integral part ofthese balance
      sheets.
 
 52
  
 FIRSTENERGY
      SOLUTIONS CORP.CONSOLIDATED
      BALANCE SHEETS(Unaudited)June
      30,
              
              
              December
      31,2008
              
              
              2007(In
      thousands)ASSETSCURRENT
      ASSETS:Cash and cash
      equivalents
              
              $
              2
              
              
              $
              2Receivables-Customers
      (less accumulated provisions of $7,378,000 and $8,072,000,respectively,
      for uncollectible accounts)
              
              
              117,858
              
              
              
              133,846Associated
      companies
              
              
              473,974
              
              
              
              376,499Other (less
      accumulated provisions of $2,516,000 and $9,000,respectively,
      for uncollectible accounts)
              
              
              7,956
              
              
              
              3,823Notes
      receivable from associated companies
              
              
              554,279
              
              
              
              92,784Materials and
      supplies, at average cost
              
              
              489,544
              
              
              
              427,015Prepayments
      and other
              
              
              172,409
              
              
              
              92,3401,816,022
              
              
              
              1,126,309PROPERTY,
      PLANT AND EQUIPMENT:In
      service
              
              
              9,741,996
              
              
              
              8,294,768Less -
      Accumulated provision for depreciation
              
              
              4,134,280
              
              
              
              3,892,0135,607,716
              
              
              
              4,402,755Construction
      work in progress
              
              
              1,221,289
              
              
              
              761,7016,829,005
              
              
              
              5,164,456OTHER
      PROPERTY AND INVESTMENTS:Nuclear plant
      decommissioning trusts
              
              
              1,234,635
              
              
              
              1,332,913Long-term
      notes receivable from associated companies
              
              
              62,900
              
              
              
              62,900Other
              
              
              65,992
              
              
              
              40,0041,363,527
              
              
              
              1,435,817DEFERRED
      CHARGES AND OTHER ASSETS:Accumulated
      deferred income tax benefits
              
              
              247,968
              
              
              
              276,923Lease
      assignment receivable from associated companies
              
              
              67,256
              
              
              
              215,258Goodwill
              
              
              24,248
              
              
              
              24,248Property
      taxes
              
              
              47,774
              
              
              
              47,774Pension
      assets
              
              
              15,417
              
              
              
              16,723Unamortized
      sale and leaseback costs
              
              
              73,378
              
              
              
              70,803Other
              
              
              28,792
              
              
              
              43,953504,833
              
              
              
              695,682$
              10,513,387
              
              
              $
              8,422,264LIABILITIES
      AND CAPITALIZATIONCURRENT
      LIABILITIES:Currently
      payable long-term debt
              
              $
              1,938,215
              
              
              $
              1,441,196Short-term
      borrowings-Associated
      companies
              
              
              1,216,707
              
              
              
              264,064Other
              
              
              1,000,000
              
              
              
              300,000Accounts
      payable-Associated
      companies
              
              
              347,806
              
              
              
              445,264Other
              
              
              214,738
              
              
              
              177,121Accrued
      taxes
              
              
              72,538
              
              
              
              171,451Other
              
              
              264,225
              
              
              
              237,8065,054,229
              
              
              
              3,036,902CAPITALIZATION:Common
      stockholder's equity-Common stock,
      without par value, authorized 750 shares-7 shares
      outstanding
              
              
              1,162,977
              
              
              
              1,164,922Accumulated
      other comprehensive income
              
              
              85,966
              
              
              
              140,654Retained
      earnings
              
              
              1,256,733
              
              
              
              1,108,655Total common
      stockholder's equity
              
              
              2,505,676
              
              
              
              2,414,231Long-term debt
      and other long-term obligations
              
              
              478,312
              
              
              
              533,7122,983,988
              
              
              
              2,947,943NONCURRENT
      LIABILITIES:Deferred gain
      on sale and leaseback transaction
              
              
              1,043,442
              
              
              
              1,060,119Accumulated
      deferred investment tax credits
              
              
              58,822
              
              
              
              61,116Asset
      retirement obligations
              
              
              836,198
              
              
              
              810,114Retirement
      benefits
              
              
              66,515
              
              
              
              63,136Property
      taxes
              
              
              48,095
              
              
              
              48,095Lease market
      valuation liability
              
              
              330,457
              
              
              
              353,210Other
              
              
              91,641
              
              
              
              41,6292,475,170
              
              
              
              2,437,419COMMITMENTS
      AND CONTINGENCIES (Note 10)$
              10,513,387
              
              
              $
              8,422,264The
      accompanying Notes to Consolidated Financial Statements as they related to
      FirstEnergy Solutions Corp. are an integral part ofthese
      balance sheets.
 
 53
 
 FIRSTENERGY
      SOLUTIONS CORP.CONSOLIDATED
      STATEMENTS OF CASH FLOWS(Unaudited)Six
      Months EndedJune
      30,2008
                
                
                2007(In
      thousands)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                158,078
                
                
                $
                253,920Adjustments to
      reconcile net income to net cash from operating
activities-Provision for
      depreciation
                
                
                105,902
                
                
                
                96,530Nuclear fuel
      and lease amortization
                
                
                51,207
                
                
                
                49,406Deferred rents
      and lease market valuation liability
                
                
                (52,537
                )
                
                
                -Deferred
      income taxes and investment tax credits, net
                
                
                51,961
                
                
                
                48,026Investment
      impairment
                
                
                33,533
                
                
                
                10,856Accrued
      compensation and retirement benefits
                
                
                (8,399
                )
                
                
                (2,597
                )Commodity
      derivative transactions, net
                
                
                3,705
                
                
                
                2,727Gain on asset
      sales
                
                
                (8,836
                )
                
                
                (12,105
                )Cash
      collateral, net
                
                
                (5,355
                )
                
                
                (3,120
                )Pension trust
      contribution
                
                
                -
                
                
                
                (64,020
                )Decrease
      (increase) in operating assets:Receivables
                
                
                (86,773
                )
                
                
                (42,901
                )Materials and
      supplies
                
                
                (27,867
                )
                
                
                14,492Prepayments
      and other current assets
                
                
                (14,512
                )
                
                
                (8,270
                )Increase
      (decrease) in operating liabilities:Accounts
      payable
                
                
                (37,794
                )
                
                
                (148,755
                )Accrued
      taxes
                
                
                (98,948
                )
                
                
                4,452Accrued
      interest
                
                
                (1,603
                )
                
                
                387Other
                
                
                (16,743
                )
                
                
                12,177Net cash
      provided from operating activities
                
                
                45,019
                
                
                
                211,205CASH
      FLOWS FROM FINANCING ACTIVITIES:New
      Financing-Long-term
      debt
                
                
                455,735
                
                
                
                -Equity
      contribution from parent
                
                
                -
                
                
                
                700,000Short-term
      borrowings, net
                
                
                1,652,643
                
                
                
                364,847Redemptions
      and Repayments-Long-term
      debt
                
                
                (458,377
                )
                
                
                (745,536
                )Common stock
      dividend payments
                
                
                (10,000
                )
                
                
                (37,000
                )Net cash
      provided from financing activities
                
                
                1,640,001
                
                
                
                282,311CASH
      FLOWS FROM INVESTING ACTIVITIES:Property
      additions
                
                
                (1,152,502
                )
                
                
                (302,424
                )Proceeds from
      asset sales
                
                
                10,875
                
                
                
                12,120Sales of
      investment securities held in trusts
                
                
                384,692
                
                
                
                367,924Purchases of
      investment securities held in trusts
                
                
                (404,502
                )
                
                
                (389,286
                )Loans to
      associated companies, net
                
                
                (461,496
                )
                
                
                (184,176
                )Other
                
                
                (62,087
                )
                
                
                2,326Net cash used
      for investing activities
                
                
                (1,685,020
                )
                
                
                (493,516
                )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 related to
      FirstEnergy Solutions Corp. are anintegral
      part of these balance sheets.
  54


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
six months of 2008, net income decreased to $93 million from $100 million in the
same period of 2007. The decrease primarily resulted from a decrease in the
deferral of new regulatory assets and
lower investment income, partially offset by higher electric sales revenues and
lower purchased power costs.


Revenues




Revenues increased
by $40 million, or 3.3%, in the first six months of 2008 compared with the same
period in 2007, primarily due to increases in retail generation revenues ($26
million) and distribution throughput revenues ($13 million).





Retail generation
revenues increased primarily due to higher average prices across all customer
classes, partially offset by decreased KWH sales to all sectors. The higher
average prices included the 2008 fuel cost recovery rider that became effective
January 16, 2008 (see Regulatory Matters). Milder weather conditions in the
first six months of 2008 primarily caused the lower KWH sales (cooling
degree days decreased in OE’s and Penn’s service territories by 25.5% and 21.6%,
respectively, from the same period in 2007). Commercial and industrial
retail generation KWH sales were also impacted by increased customer shopping in
Penn’s service territory in the first six months of 2008.





Changes in retail
generation sales and revenues in the first six months of 2008 from the same
period in 2007 are summarized in the following tables:




Retail
      Generation KWH Sales
              
              DecreaseResidential
              
              
              (1.4)
              %Commercial
              
              
              (2.7)
              %Industrial
              
              
              (4.9)
              %Decrease
      in Generation Sales
              
              
              (2.9)
              %





Retail
      Generation Revenues
            
            Increase(In
      millions)Residential
            
            $
            14Commercial
            
            
            3Industrial
            
            
            9Increase
      in Generation Revenues
            
            $
            26




Revenues from
distribution throughput increased by $13 million in the first six months of 2008
compared to the same period in 2007 due to higher average unit prices for all
customer classes, partially offset by lower KWH deliveries to all sectors. The
higher average prices resulted from a transmission rider increase effective
July 1, 2007. The lower KWH deliveries to residential and commercial
customers reflected the milder weather conditions described
above.





Changes in
distribution KWH deliveries and revenues in the first six months of 2008 from
the same period in 2007 are summarized in the following tables.





55








Distribution
      KWH Deliveries
            
            DecreaseResidential
            
            
            (0.7)
            %Commercial
            
            
            (0.5)
            %Industrial
            
            
            (1.7)
            %Decrease
      in Distribution Deliveries
            
            
            (1.0)
            %





Distribution
      Revenues
            
            Increase(In
      millions)Residential
            
            $
            4Commercial
            
            
            5Industrial
            
            
            4Increase
      in Distribution Revenues
            
            $
            13





Expenses





Total expenses
increased by $23 million in the first six 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
            
            $
            (24
            )Other
      operating costs
            
            
            (3
            )Provision for
      depreciation
            
            
            5Amortization
      of regulatory assets
            
            
            5Deferral of
      new regulatory assets
            
            
            40Net
      Increase in Expenses
            
            $
            23





Lower purchased
power costs in the first six months of 2008 primarily reflected the lower retail
generation KWH sales requirements. The decrease in other operating costs for the
first six months of 2008 was primarily due to lower MISO transmission expenses,
partially offset by increased costs associated with OE’s leasehold interests in
Beaver Valley Unit 2, due to a refueling outage in the second quarter of 2008.
Higher depreciation expense in the first six months of 2008 reflected capital
additions subsequent to the second quarter of 2007. Higher amortization of
regulatory assets in the first six 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 six months of 2008 was primarily due to lower
MISO cost deferrals ($16 million) and lower RCP fuel deferrals
($19 million), as more transmission and generation costs were recovered
from customers through PUCO-approved riders.


Other
Income





Other income
decreased $20 million in the first six months of 2008 as compared with the same
period of 2007 primarily due to reductions in interest income on notes
receivable from associated companies due to principal payments since the second
quarter of 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 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.





56











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 June 30, 2008 and the related consolidated statements of
income and comprehensive income for each of the three-month and six-month
periods ended June 30, 2008 and 2007 and the consolidated statement of cash
flows for the six-month periods ended June 30, 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 stockholder’s equity, and cash flows for the year then ended (not
presented herein), and in our report 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
              August 7,
      2008








57





OHIO
      EDISON COMPANYCONSOLIDATED
      STATEMENTS OF INCOME AND COMPREHENSIVE INCOME(Unaudited)Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007(In
      thousands)REVENUES:Electric
      sales
              
              $
              583,268
              
              
              $
              569,430
              
              
              $
              1,205,539
              
              
              $
              1,163,774Excise tax
      collections
              
              
              26,287
              
              
              
              27,351
              
              
              
              56,665
              
              
              
              58,605Total
      revenues
              
              
              609,555
              
              
              
              596,781
              
              
              
              1,262,204
              
              
              
              1,222,379EXPENSES:Purchased
      power
              
              
              308,049
              
              
              
              322,639
              
              
              
              648,235
              
              
              
              672,491Other
      operating costs
              
              
              137,619
              
              
              
              147,086
              
              
              
              277,945
              
              
              
              280,101Provision for
      depreciation
              
              
              21,414
              
              
              
              19,110
              
              
              
              42,907
              
              
              
              37,958Amortization
      of regulatory assets
              
              
              47,856
              
              
              
              46,126
              
              
              
              96,394
              
              
              
              91,543Deferral of
      new regulatory assets
              
              
              (25,901
              )
              
              
              (54,344
              )
              
              
              (51,312
              )
              
              
              (90,993
              )General
      taxes
              
              
              44,389
              
              
              
              45,393
              
              
              
              94,842
              
              
              
              95,138Total
      expenses
              
              
              533,426
              
              
              
              526,010
              
              
              
              1,109,011
              
              
              
              1,086,238OPERATING
      INCOME
              
              
              76,129
              
              
              
              70,771
              
              
              
              153,193
              
              
              
              136,141OTHER
      INCOME (EXPENSE):Investment
      income
              
              
              11,488
              
              
              
              21,346
              
              
              
              26,543
              
              
              
              47,976Miscellaneous
      income (expense)
              
              
              (285
              )
              
              
              2,319
              
              
              
              (4,091
              )
              
              
              2,692Interest
      expense
              
              
              (16,901
              )
              
              
              (21,416
              )
              
              
              (34,542
              )
              
              
              (42,438
              )Capitalized
      interest
              
              
              159
              
              
              
              152
              
              
              
              269
              
              
              
              262Total other
      income (expense)
              
              
              (5,539
              )
              
              
              2,401
              
              
              
              (11,821
              )
              
              
              8,492INCOME
      BEFORE INCOME TAXES
              
              
              70,590
              
              
              
              73,172
              
              
              
              141,372
              
              
              
              144,633INCOME
      TAXES
              
              
              21,748
              
              
              
              27,559
              
              
              
              48,621
              
              
              
              44,985NET
      INCOME
              
              
              48,842
              
              
              
              45,613
              
              
              
              92,751
              
              
              
              99,648OTHER
      COMPREHENSIVE INCOME (LOSS):Pension and
      other postretirment benefits
              
              
              (3,994
              )
              
              
              (3,424
              )
              
              
              (7,988
              )
              
              
              (6,847
              )Change in
      unrealized gain on available-for-sale securities
              
              
              (2,803
              )
              
              
              5,099
              
              
              
              (10,374
              )
              
              
              4,973Other
      comprehensive income (loss)
              
              
              (6,797
              )
              
              
              1,675
              
              
              
              (18,362
              )
              
              
              (1,874
              )Income tax
      expense (benefit) related to othercomprehensive
      income
              
              
              (2,564
              )
              
              
              388
              
              
              
              (6,826
              )
              
              
              (1,115
              )Other
      comprehensive income (loss), net of tax
              
              
              (4,233
              )
              
              
              1,287
              
              
              
              (11,536
              )
              
              
              (759
              )TOTAL
      COMPREHENSIVE INCOME
              
              $
              44,609
              
              
              $
              46,900
              
              
              $
              81,215
              
              
              $
              98,889The
      accompanying Notes to Consolidated Financial Statements as they relate to
      Ohio Edison Company are an integral partof these
      statements.
 
 58
  OHIO
      EDISON COMPANYCONSOLIDATED
      BALANCE SHEETS(Unaudited)June
      30,
                
                
                December
      31,2008
                
                
                2007(In
      thousands)ASSETSCURRENT
      ASSETS:Cash and cash
      equivalents
                
                $
                889
                
                
                $
                732Receivables-Customers
      (less accumulated provisions of $6,222,000 and $8,032,000,respectively,
      for uncollectible accounts)
                
                
                262,717
                
                
                
                248,990Associated
      companies
                
                
                174,773
                
                
                
                185,437Other (less
      accumulated provisions of $30,000 and $5,639,000,respectively,
      for uncollectible accounts)
                
                
                10,094
                
                
                
                12,395Notes
      receivable from associated companies
                
                
                472,884
                
                
                
                595,859Prepayments
      and other
                
                
                15,833
                
                
                
                10,341937,190
                
                
                
                1,053,754UTILITY
      PLANT:In
      service
                
                
                2,819,937
                
                
                
                2,769,880Less -
      Accumulated provision for depreciation
                
                
                1,093,194
                
                
                
                1,090,8621,726,743
                
                
                
                1,679,018Construction
      work in progress
                
                
                40,065
                
                
                
                50,0611,766,808
                
                
                
                1,729,079OTHER
      PROPERTY AND INVESTMENTS:Long-term
      notes receivable from associated companies
                
                
                257,940
                
                
                
                258,870Investment in
      lease obligation bonds
                
                
                248,894
                
                
                
                253,894Nuclear plant
      decommissioning trusts
                
                
                117,941
                
                
                
                127,252Other
                
                
                32,205
                
                
                
                36,037656,980
                
                
                
                676,053DEFERRED
      CHARGES AND OTHER ASSETS:Regulatory
      assets
                
                
                682,844
                
                
                
                737,326Pension
      assets
                
                
                243,348
                
                
                
                228,518Property
      taxes
                
                
                65,520
                
                
                
                65,520Unamortized
      sale and leaseback costs
                
                
                42,632
                
                
                
                45,133Other
                
                
                32,017
                
                
                
                48,0751,066,361
                
                
                
                1,124,572$
                4,427,339
                
                
                $
                4,583,458LIABILITIES
      AND CAPITALIZATIONCURRENT
      LIABILITIES:Currently
      payable long-term debt
                
                $
                159,659
                
                
                $
                333,224Short-term
      borrowings-Associated
      companies
                
                
                -
                
                
                
                50,692Other
                
                
                122,874
                
                
                
                2,609Accounts
      payable-Associated
      companies
                
                
                112,484
                
                
                
                174,088Other
                
                
                24,654
                
                
                
                19,881Accrued
      taxes
                
                
                58,265
                
                
                
                89,571Accrued
      interest
                
                
                21,126
                
                
                
                22,378Other
                
                
                64,332
                
                
                
                65,163563,394
                
                
                
                757,606CAPITALIZATION:Common
      stockholder's equity-Common stock,
      without par value, authorized 175,000,000 shares -60 shares
      outstanding
                
                
                1,220,424
                
                
                
                1,220,512Accumulated
      other comprehensive income
                
                
                36,850
                
                
                
                48,386Retained
      earnings
                
                
                400,028
                
                
                
                307,277Total common
      stockholder's equity
                
                
                1,657,302
                
                
                
                1,576,175Long-term debt
      and other long-term obligations
                
                
                838,283
                
                
                
                840,5912,495,585
                
                
                
                2,416,766NONCURRENT
      LIABILITIES:Accumulated
      deferred income taxes
                
                
                779,427
                
                
                
                781,012Accumulated
      deferred investment tax credits
                
                
                15,015
                
                
                
                16,964Asset
      retirement obligations
                
                
                96,469
                
                
                
                93,571Retirement
      benefits
                
                
                174,592
                
                
                
                178,343Deferred
      revenues - electric service programs
                
                
                25,078
                
                
                
                46,849Other
                
                
                277,779
                
                
                
                292,3471,368,360
                
                
                
                1,409,086COMMITMENTS
      AND CONTINGENCIES (Note 10)$
                4,427,339
                
                
                $
                4,583,458The
      accompanying Notes to Consolidated Financial Statements as they relate to
      Ohio Edison Company are an integral partof these
      balance sheets.
  59
 OHIO
      EDISON COMPANYCONSOLIDATED
      STATEMENTS OF CASH FLOWS(Unaudited)Six
      Months EndedJune
      30,2008
                
                
                2007(In
      thousands)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                92,751
                
                
                $
                99,648Adjustments to
      reconcile net income to net cash from operating
activities-Provision for
      depreciation
                
                
                42,907
                
                
                
                37,958Amortization
      of regulatory assets
                
                
                96,394
                
                
                
                91,543Deferral of
      new regulatory assets
                
                
                (51,312
                )
                
                
                (90,993
                )Amortization
      of lease costs
                
                
                (4,399
                )
                
                
                (4,367
                )Deferred
      income taxes and investment tax credits, net
                
                
                7,059
                
                
                
                3,017Accrued
      compensation and retirement benefits
                
                
                (31,579
                )
                
                
                (25,829
                )Pension trust
      contribution
                
                
                -
                
                
                
                (20,261
                )Decrease
      (increase) in operating assets-Receivables
                
                
                30,159
                
                
                
                (60,535
                )Prepayments
      and other current assets
                
                
                (2,485
                )
                
                
                (3,162
                )Increase
      (decrease) in operating liabilities-Accounts
      payable
                
                
                (56,831
                )
                
                
                10,080Accrued
      taxes
                
                
                (31,306
                )
                
                
                (87,969
                )Accrued
      interest
                
                
                (1,252
                )
                
                
                (1,306
                )Electric
      service prepayment programs
                
                
                (21,771
                )
                
                
                (19,144
                )Other
                
                
                2,671
                
                
                
                4,545Net cash
      provided from (used for) operating activities
                
                
                71,006
                
                
                
                (66,775
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:New
      Financing-Short-term
      borrowings, net
                
                
                69,573
                
                
                
                2,859Redemptions
      and Repayments-Common
      stock
                
                
                -
                
                
                
                (500,000
                )Long-term
      debt
                
                
                (175,577
                )
                
                
                (1,181
                )Dividend
      Payments-Common
      stock
                
                
                -
                
                
                
                (50,000
                )Net cash used
      for financing activities
                
                
                (106,004
                )
                
                
                (548,322
                )CASH
      FLOWS FROM INVESTING ACTIVITIES:Property
      additions
                
                
                (92,061
                )
                
                
                (66,607
                )Sales of
      investment securities held in trusts
                
                
                79,613
                
                
                
                22,225Purchases of
      investment securities held in trusts
                
                
                (84,130
                )
                
                
                (25,878
                )Loan
      repayments from associated companies, net
                
                
                123,905
                
                
                
                670,774Cash
      investments
                
                
                5,000
                
                
                
                -Other
                
                
                2,828
                
                
                
                14,770Net cash
      provided from investing activities
                
                
                35,155
                
                
                
                615,284Net increase
      in cash and cash equivalents
                
                
                157
                
                
                
                187Cash and cash
      equivalents at beginning of period
                
                
                732
                
                
                
                712Cash and cash
      equivalents at end of period
                
                $
                889
                
                
                $
                899The
      accompanying Notes to Consolidated Financial Statements as they relate to
      Ohio Edison Company are an integralpart of these
      statements.
  60




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 six months of 2008 decreased to $124 million from $132 million
in the same period of 2007. The decrease resulted primarily from lower
revenues,  higher purchased power costs and reduced regulatory asset
deferrals, 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 $19 million, or 2%, in the first six months of 2008 compared to the same
period of 2007 primarily due to a decrease in wholesale generation revenues
($61million),
partially offset by an increase in retail generation revenues ($32 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 in October 2007. Prior to the assignment, CEI
sold power from its interests in the plant to FGCO.





Retail generation
revenues increased in the first six months of 2008 due to higher average unit
prices across all customer classes, partially offset by a slight decrease in
sales volume to all sectors 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). Milder weather in the
first six months of 2008 compared to the same period of 2007 primarily
contributed to the decreased sales volume (cooling degree days decreased
17%).





Changes in retail
generation sales and revenues in the first six months of 2008 compared to the
same period in 2007 are summarized in the following tables:





Retail
      Generation KWH Sales
            
            DecreaseResidential
            
            
            (0.4
            )%Commercial
            
            
            (0.7
            )%Industrial
            
            
            (0.1
            )%Decrease
      in Retail Generation Sales
            
            
            (0.3
            )%








Retail
      Generation Revenues
            
            Increase(in
      millions)Residential
            
            $
            10Commercial
            
            
            7Industrial
            
            
            15Increase
      in Generation Revenues
            
            $
            32





Revenues from
distribution throughput increased by $10 million in the first six months of
2008 compared to the same period of 2007 primarily due higher average unit
prices for all customer classes, partially offset by a slight decrease in KWH
deliveries to all sectors. The higher average unit prices resulted from a
transmission rider increase effective July 1, 2007. The lower KWH
deliveries in the first six months of 2008 reflected the weather impacts
described above.





61








Changes in
distribution KWH deliveries and revenues in the first six months of 2008
compared to the same period of 2007 are summarized in the following
tables.





Distribution
      KWH Deliveries
            
            DecreaseResidential
            
            
            (0.6
            )%Commercial
            
            
            (1.3
            )%Industrial
            
            
            (0.1
            )%Decrease
      in Distribution Deliveries
            
            
            (0.5
            )%








Distribution
      Revenues
            
            Increase(In
      millions)Residential
            
            $
            2Commercial
            
            
            3Industrial
            
            
            5Increase
      in Distribution Revenues
            
            $
            10





Expenses





Total expenses
decreased by $9 million in the first six 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
            
            $
            (28
            )Purchased
      power costs
            
            
            19Other
      operating costs
            
            
            (30
            )Amortization
      of regulatory assets
            
            
            8Deferral of
      new regulatory assets
            
            
            22Net
      Decrease in Expenses
            
            $
            (9
            )





The absence of fuel
costs in the first six months of 2008 was due to the assignment of CEI’s
leasehold interests in the Mansfield Plant to FGCO in October 2007. Prior
to the assignment, CEI incurred fuel expenses and other operating costs related
to its leasehold interest in the plant. Higher purchased power costs reflected
higher unit prices, as provided for under the PSA with FES, partially offset by
a decrease in volume due to lower KWH purchases. Other operating costs were
lower primarily due to the assignment of CEI’s leasehold interests in the
Mansfield plant as described above. Higher amortization of regulatory assets was
primarily due to increased transition cost amortization ($7 million) under the
effective interest methodology. The decrease in the deferral of new regulatory
assets was primarily due to lower MISO cost deferrals ($14 million) and RCP fuel
costs ($12 million), as more transmission and generation costs were recovered
from customers through PUCO-approved riders.





Other
Expense





Other expense
increased by $11 million in the first six 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 June 2007 on notes receivable from
associated companies. The lower interest expense is primarily due to long-term
debt redemptions ($386 million) since the second quarter of
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 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.





.





62







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 June 30, 2008 and the related consolidated
statements of income and comprehensive income for each of the three-month and
six-month periods ended June 30, 2008 and 2007 and the consolidated statement of
cash flows for the six-month periods ended June 30, 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 stockholder’s equity, and cash flows for the year then ended (not
presented herein), and in our report 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
              August 7,
      2008











63





THE
      CLEVELAND ELECTRIC ILLUMINATING COMPANYCONSOLIDATED
      STATEMENTS OF INCOME AND COMPREHENSIVE INCOME(Unaudited)Three
      Months Ended
                
                
                Six
      Months EndedJune
      30,
                
                
                June
      30,2008
                
                
                2007
                
                
                2008
                
                
                2007(In
      thousands)REVENUES:Electric
      sales
                
                $
                418,194
                
                
                $
                433,014
                
                
                $
                836,902
                
                
                $
                855,819Excise tax
      collections
                
                
                16,195
                
                
                
                16,468
                
                
                
                34,795
                
                
                
                34,495Total
      revenues
                
                
                434,389
                
                
                
                449,482
                
                
                
                871,697
                
                
                
                890,314EXPENSES:Fuel
                
                
                -
                
                
                
                14,332
                
                
                
                -
                
                
                
                27,523Purchased
      power
                
                
                185,611
                
                
                
                178,669
                
                
                
                378,855
                
                
                
                359,326Other
      operating costs
                
                
                62,659
                
                
                
                83,075
                
                
                
                127,777
                
                
                
                158,026Provision for
      depreciation
                
                
                17,744
                
                
                
                18,713
                
                
                
                36,820
                
                
                
                37,181Amortization
      of regulatory assets
                
                
                38,525
                
                
                
                35,047
                
                
                
                76,781
                
                
                
                68,176Deferral of
      new regulatory assets
                
                
                (26,019
                )
                
                
                (43,059
                )
                
                
                (55,267
                )
                
                
                (77,016
                )General
      taxes
                
                
                32,425
                
                
                
                34,098
                
                
                
                72,508
                
                
                
                72,992Total
      expenses
                
                
                310,945
                
                
                
                320,875
                
                
                
                637,474
                
                
                
                646,208OPERATING
      INCOME
                
                
                123,444
                
                
                
                128,607
                
                
                
                234,223
                
                
                
                244,106OTHER
      INCOME (EXPENSE):Investment
      income
                
                
                8,394
                
                
                
                16,324
                
                
                
                17,582
                
                
                
                34,011Miscellaneous
      income (expense)
                
                
                (739
                )
                
                
                3,226
                
                
                
                (205
                )
                
                
                3,957Interest
      expense
                
                
                (30,935
                )
                
                
                (37,267
                )
                
                
                (63,455
                )
                
                
                (73,007
                )Capitalized
      interest
                
                
                188
                
                
                
                141
                
                
                
                384
                
                
                
                346Total other
      expense
                
                
                (23,092
                )
                
                
                (17,576
                )
                
                
                (45,694
                )
                
                
                (34,693
                )INCOME
      BEFORE INCOME TAXES
                
                
                100,352
                
                
                
                111,031
                
                
                
                188,529
                
                
                
                209,413INCOME
      TAXES
                
                
                33,779
                
                
                
                42,082
                
                
                
                64,105
                
                
                
                76,915NET
      INCOME
                
                
                66,573
                
                
                
                68,949
                
                
                
                124,424
                
                
                
                132,498OTHER
      COMPREHENSIVE INCOME (LOSS):Pension and
      other postretirement benefits
                
                
                (213
                )
                
                
                1,203
                
                
                
                (426
                )
                
                
                2,405Income tax
      expense (benefit) related to other comprehensive income
                
                
                (390
                )
                
                
                357
                
                
                
                (109
                )
                
                
                712Other
      comprehensive income (loss), net of tax
                
                
                177
                
                
                
                846
                
                
                
                (317
                )
                
                
                1,693TOTAL
      COMPREHENSIVE INCOME
                
                $
                66,750
                
                
                $
                69,795
                
                
                $
                124,107
                
                
                $
                134,191The
      accompanying Notes to Consolidated Financial Statements as they relate to
      The Cleveland Electric Illuminating Company are anintegral part
      of these statements.
  64
 THE
      CLEVELAND ELECTRIC ILLUMINATING COMPANYCONSOLIDATED
      BALANCE SHEETS(Unaudited)June
      30,
                
                
                December
      31,2008
                
                
                2007(In
      thousands)ASSETSCURRENT
      ASSETS:Cash and cash
      equivalents
                
                $
                239
                
                
                $
                232Receivables-Customers
      (less accumulated provisions of $5,951,000 and $7,540,000
                
                
                286,275
                
                
                
                251,000respectively,
      for uncollectible accounts)Associated
      companies
                
                
                92,179
                
                
                
                166,587Other
                
                
                11,354
                
                
                
                12,184Notes
      receivable from associated companies
                
                
                22,174
                
                
                
                52,306Prepayments
      and other
                
                
                3,022
                
                
                
                2,327415,243
                
                
                
                484,636UTILITY
      PLANT:In
      service
                
                
                2,173,276
                
                
                
                2,256,956Less -
      Accumulated provision for depreciation
                
                
                836,523
                
                
                
                872,8011,336,753
                
                
                
                1,384,155Construction
      work in progress
                
                
                36,281
                
                
                
                41,1631,373,034
                
                
                
                1,425,318OTHER
      PROPERTY AND INVESTMENTS:Investment in
      lessor notes
                
                
                425,719
                
                
                
                463,431Other
                
                
                10,265
                
                
                
                10,285435,984
                
                
                
                473,716DEFERRED
      CHARGES AND OTHER ASSETS:Goodwill
                
                
                1,688,521
                
                
                
                1,688,521Regulatory
      assets
                
                
                838,612
                
                
                
                870,695Pension
      assets
                
                
                66,522
                
                
                
                62,471Property
      taxes
                
                
                76,000
                
                
                
                76,000Other
                
                
                8,888
                
                
                
                32,9872,678,543
                
                
                
                2,730,674$
                4,902,804
                
                
                $
                5,114,344LIABILITIES
      AND CAPITALIZATIONCURRENT
      LIABILITIES:Currently
      payable long-term debt
                
                $
                207,296
                
                
                $
                207,266Short-term
      borrowings-Associated
      companies
                
                
                308,214
                
                
                
                531,943Other
                
                
                135,000
                
                
                
                -Accounts
      payable-Associated
      companies
                
                
                78,565
                
                
                
                169,187Other
                
                
                6,993
                
                
                
                5,295Accrued
      taxes
                
                
                56,337
                
                
                
                94,991Accrued
      interest
                
                
                14,073
                
                
                
                13,895Other
                
                
                34,468
                
                
                
                34,350840,946
                
                
                
                1,056,927CAPITALIZATION:Common
      stockholder's equity-Common stock,
      without par value, authorized 105,000,000 shares -67,930,743
      shares outstanding
                
                
                873,433
                
                
                
                873,536Accumulated
      other comprehensive loss
                
                
                (69,446
                )
                
                
                (69,129
                )Retained
      earnings
                
                
                809,852
                
                
                
                685,428Total common
      stockholder's equity
                
                
                1,613,839
                
                
                
                1,489,835Long-term debt
      and other long-term obligations
                
                
                1,447,851
                
                
                
                1,459,9393,061,690
                
                
                
                2,949,774NONCURRENT
      LIABILITIES:Accumulated
      deferred income taxes
                
                
                712,467
                
                
                
                725,523Accumulated
      deferred investment tax credits
                
                
                17,637
                
                
                
                18,567Retirement
      benefits
                
                
                94,951
                
                
                
                93,456Deferred
      revenues - electric service programs
                
                
                15,646
                
                
                
                27,145Lease
      assignment payable to associated companies
                
                
                38,420
                
                
                
                131,773Other
                
                
                121,047
                
                
                
                111,1791,000,168
                
                
                
                1,107,643COMMITMENTS
      AND CONTINGENCIES (Note 10)$
                4,902,804
                
                
                $
                5,114,344The
      accompanying Notes to Consolidated Financial Statements as they relate to
      The Cleveland Electric Illuminating Companyare an
      integral part of these balance sheets.
  65
 THE
      CLEVELAND ELECTRIC ILLUMINATING COMPANYCONSOLIDATED
      STATEMENTS OF CASH FLOWS(Unaudited)Six
      Months EndedJune
      30,2008
                
                
                2007(In
      thousands)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                124,424
                
                
                $
                132,498Adjustments to
      reconcile net income to net cash from operating
activities-Provision for
      depreciation
                
                
                36,820
                
                
                
                37,181Amortization
      of regulatory assets
                
                
                76,781
                
                
                
                68,176Deferral of
      new regulatory assets
                
                
                (55,267
                )
                
                
                (77,016
                )Deferred rents
      and lease market valuation liability
                
                
                -
                
                
                
                (45,858
                )Deferred
      income taxes and investment tax credits, net
                
                
                (12,125
                )
                
                
                (7,103
                )Accrued
      compensation and retirement benefits
                
                
                (4,027
                )
                
                
                1,594Pension trust
      contribution
                
                
                -
                
                
                
                (24,800
                )Decrease
      (increase) in operating assets-Receivables
                
                
                73,484
                
                
                
                156,526Prepayments
      and other current assets
                
                
                (689
                )
                
                
                163Increase
      (decrease) in operating liabilities-Accounts
      payable
                
                
                (88,924
                )
                
                
                (308,551
                )Accrued
      taxes
                
                
                (38,654
                )
                
                
                (40,119
                )Accrued
      interest
                
                
                178
                
                
                
                3,117Electric
      service prepayment programs
                
                
                (11,498
                )
                
                
                (11,129
                )Other
                
                
                2,291
                
                
                
                689Net cash
      provided from (used for) operating activities
                
                
                102,794
                
                
                
                (114,632
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:New
      Financing-Long-term
      debt
                
                
                -
                
                
                
                247,426Redemptions
      and Repayments-Long-term
      debt
                
                
                (335
                )
                
                
                (103,397
                )Short-term
      borrowings, net
                
                
                (100,562
                )
                
                
                (52,894
                )Dividend
      Payments-Common
      stock
                
                
                -
                
                
                
                (104,000
                )Net cash used
      for financing activities
                
                
                (100,897
                )
                
                
                (12,865
                )CASH
      FLOWS FROM INVESTING ACTIVITIES:Property
      additions
                
                
                (67,206
                )
                
                
                (64,366
                )Loan
      repayments from associated companies, net
                
                
                30,132
                
                
                
                2,292Collection of
      principal on long-term notes receivable
                
                
                -
                
                
                
                133,341Redemption of
      lessor notes
                
                
                37,712
                
                
                
                56,175Other
                
                
                (2,528
                )
                
                
                70Net cash
      provided from (used for) investing activities
                
                
                (1,890
                )
                
                
                127,512Net increase
      in cash and cash equivalents
                
                
                7
                
                
                
                15Cash and cash
      equivalents at beginning of period
                
                
                232
                
                
                
                221Cash and cash
      equivalents at end of period
                
                $
                239
                
                
                $
                236The
      accompanying Notes to Consolidated Financial Statements as they relate to
      The Cleveland Electric Illuminating Companyare an
      integral part of these statements.










66








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 six months of 2008 decreased to $38million from $48million 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 other operating
costs.





Revenues





Revenues decreased
$48million, or
10%, in the first six months of 2008 compared to the same period of 2007
primarily due to lower wholesale generation revenues ($77 million),
partially offset by increased retail generation revenues ($24million) and
distribution revenues ($5million).





The decrease in
wholesale revenues was primarily due to lower associated company sales of KWH
from TE’s leasehold interests in generating plants.  Revenues from
TE’s leasehold interests in Beaver Valley Unit 2 decreased by $31 million due to
the unit’s 39-day refueling outage in the second quarter of 2008 and the
incremental pricing impacts related to the termination of TE’s sale agreement
with CEI. At the end of 2007, TE terminated its Beaver Valley Unit 2 sale
agreement with CEI and is currently selling the 158 MW entitlement from its
18.26% leasehold interest in the unit to NGC. Revenues from PSA sales decreased
by $48 million in the first six months of 2008 due to the assignment of TE’s
leasehold interests in the Bruce Mansfield Plant to FGCO in October 2007. Prior
to the assignment, TE sold power from its interests in the plant to
FGCO.





Retail generation
revenues increased in the first six months of 2008 due to higher average prices
across all customer classes and increased KWH sales to commercial customers
compared to the same period of 2007. The higher average prices included the 2008
fuel cost recovery rider that became effective January 16, 2008 (see
Regulatory Matters). The decrease in sales to residential customers reflects
milder weather in the first six months of 2008 (cooling degree days decreased
33.7% from the same period of 2007). The increase in sales to commercial
customers was due to less customer shopping; generation services provided by
alternative suppliers as a percentage of total sales delivered in TE’s franchise
area decreased by three percentage points. Industrial KWH sales decreased due in
part to lower sales to the automotive sector and a maintenance outage for a
large industrial customer during the first six months of 2008.





Changes in retail
electric generation KWH sales and revenues in the first six months of 2008 from
the same period of 2007 are summarized in the following tables.





IncreaseRetail
      Generation KWH Sales
            
            (Decrease)Residential
            
            
            (0.4
            )%Commercial
            
            
            3.9
            %Industrial
            
            
            (1.9
            )%Net
      Decrease in Retail Generation Sales
            
            
            (0.4
            )%





Retail
      Generation Revenues
            
            Increase(In
      millions)Residential
            
            $
            5Commercial
            
            
            6Industrial
            
            
            13Increase
      in Retail Generation Revenues
            
            $
            24





Revenues from
distribution throughput increased by $5 million in the first six months of
2008 compared to the same period in 2007 due to higher average unit prices for
all customer classes, partially offset by lower KWH deliveries to all sectors.
The higher average prices resulted from a transmission rider increase effective
July 1, 2007. The lower KWH deliveries to residential and commercial
customers in the first six months of 2008 reflected the weather impacts
described above.





67








Changes in
distribution KWH deliveries and revenues in the first six months of 2008 from
the same period of 2007 are summarized in the following tables.





Distribution
      KWH Deliveries
            
            DecreaseResidential
            
            
            (1.0
            )%Commercial
            
            
            (0.3
            )%Industrial
            
            
            (1.9
            )%Decrease
      in Distribution Deliveries
            
            
            (1.2
            )%





Distribution
      Revenues
            
            Increase(In
      millions)Residential
            
            $
            2Commercial
            
            
            2Industrial
            
            
            1Increase
      in Distribution Revenues
            
            $
            5





Expenses





Total expenses
decreased $24 million in the first six 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
            
            $
            12Other
      operating costs
            
            
            (49
            )Provision for
      depreciation
            
            
            (1
            )Amortization
      of regulatory assets
            
            
            1Deferral of
      new regulatory assets
            
            
            13Net
      Decrease in Expenses
            
            $
            (24
            )





Higher purchased
power costs primarily reflected higher unit prices as provided for under the PSA
with FES. Other operating costs decreased primarily due to the reversal of the
above-market lease liability ($15 million) associated with TE’s leasehold
interest in Beaver Valley Unit 2 as a result of the termination of the CEI sale
agreement described above and lower fuel costs ($18 million) and other operating
costs ($19 million) due to the assignment of TE’s leasehold interests in the
Mansfield Plant in October 2007. These decreases were partially offset by
increased costs ($7 million) associated with TE’s leasehold interests in Beaver
Valley Unit 2, due to a refueling outage in the second quarter of 2008. The
change in the deferral of new regulatory assets was primarily due to lower
deferred MISO transmission expenses ($5 million), RCP distribution costs
($3 million) and fuel costs ($6 million).


Other
Expense





Other expense
decreased $4million in the first six
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 lower money pool borrowings from associated
companies in the first six months of 2008 and the redemption of long-term debt
($85 million principal amount) since the second quarter of 2007. The
decrease in investment income resulted primarily from the principal repayments
since the second 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.





.





68







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 June 30, 2008 and the related consolidated statements of income
and comprehensive income for each of the three-month and six-month periods ended
June 30, 2008 and 2007 and the consolidated statement of cash flows for the
six-month periods ended June 30, 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 stockholder’s equity, and cash flows for the year then ended (not
presented herein), and in our report 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
              August 7,
      2008











69








THE
      TOLEDO EDISON COMPANYCONSOLIDATED
      STATEMENTS OF INCOME AND COMPREHENSIVE INCOME(Unaudited)Three
      Months Ended
                
                
                Six
      Months EndedJune
      30,
                
                
                June
      30,2008
                
                
                2007
                
                
                2008
                
                
                2007(In
      thousands)REVENUES:Electric
      sales
                $
                214,353
                
                
                $
                233,637
                
                
                $
                418,022
                
                
                $
                466,693Excise tax
      collections
                
                7,153
                
                
                
                6,700
                
                
                
                15,178
                
                
                
                14,100Total
      revenues
                
                221,506
                
                
                
                240,337
                
                
                
                433,200
                
                
                
                480,793EXPENSES:Purchased
      power
                
                102,850
                
                
                
                96,276
                
                
                
                204,148
                
                
                
                192,445Other
      operating costs
                
                50,805
                
                
                
                74,471
                
                
                
                96,134
                
                
                
                145,260Provision for
      depreciation
                
                7,941
                
                
                
                9,127
                
                
                
                16,966
                
                
                
                18,244Amortization
      of regulatory assets
                
                25,360
                
                
                
                24,948
                
                
                
                50,385
                
                
                
                48,824Deferral of
      new regulatory assets
                
                (8,929
                )
                
                
                (18,247
                )
                
                
                (18,423
                )
                
                
                (31,728
                )General
      taxes
                
                12,605
                
                
                
                13,000
                
                
                
                26,982
                
                
                
                26,734Total
      expenses
                
                190,632
                
                
                
                199,575
                
                
                
                376,192
                
                
                
                399,779OPERATING
      INCOME
                
                30,874
                
                
                
                40,762
                
                
                
                57,008
                
                
                
                81,014OTHER
      INCOME (EXPENSE):Investment
      income
                
                5,224
                
                
                
                7,309
                
                
                
                11,705
                
                
                
                14,534Miscellaneous
      expense
                
                (1,949
                )
                
                
                (2,056
                )
                
                
                (3,463
                )
                
                
                (5,156
                )Interest
      expense
                
                (5,578
                )
                
                
                (8,916
                )
                
                
                (11,613
                )
                
                
                (16,419
                )Capitalized
      interest
                
                88
                
                
                
                164
                
                
                
                125
                
                
                
                247Total other
      expense
                
                (2,215
                )
                
                
                (3,499
                )
                
                
                (3,246
                )
                
                
                (6,794
                )INCOME
      BEFORE INCOME TAXES
                
                28,659
                
                
                
                37,263
                
                
                
                53,762
                
                
                
                74,220INCOME
      TAXES
                
                7,352
                
                
                
                15,392
                
                
                
                15,440
                
                
                
                26,489NET
      INCOME
                
                21,307
                
                
                
                21,871
                
                
                
                38,322
                
                
                
                47,731OTHER
      COMPREHENSIVE INCOME (LOSS):Pension and
      other postretirement benefits
                
                (64
                )
                
                
                573
                
                
                
                (127
                )
                
                
                1,146Change in
      unrealized gain on available-for-sale-securities
                
                (2,481
                )
                
                
                (669
                )
                
                
                (520
                )
                
                
                (290
                )Other
      comprehensive income (loss)
                
                (2,545
                )
                
                
                (96
                )
                
                
                (647
                )
                
                
                856Income tax
      expense (benefit) related to othercomprehensive
      income
                
                (914
                )
                
                
                (43
                )
                
                
                (186
                )
                
                
                291Other
      comprehensive income (loss), net of tax
                
                (1,631
                )
                
                
                (53
                )
                
                
                (461
                )
                
                
                565TOTAL
      COMPREHENSIVE INCOME
                $
                19,676
                
                
                $
                21,818
                
                
                $
                37,861
                
                
                $
                48,296The
      accompanying Notes to Consolidated Financial Statements as they relate to
      The Toledo Edison Company are an integralpart of these
      statements.
  70
   THE
      TOLEDO EDISON COMPANYCONSOLIDATED
      BALANCE SHEETS(Unaudited)June
      30,
                
                
                December
      31,2008
                
                
                2007(In
      thousands)ASSETSCURRENT
      ASSETS:Cash and cash
      equivalents
                
                $
                22
                
                
                $
                22Receivables-Customers
                
                
                1,251
                
                
                
                449Associated
      companies
                
                
                13,465
                
                
                
                88,796Other (less
      accumulated provisions of $174,000 and $615,000,respectively,
      for uncollectible accounts)
                
                
                9,901
                
                
                
                3,116Notes
      receivable from associated companies
                
                
                56,912
                
                
                
                154,380Prepayments
      and other
                
                
                1,157
                
                
                
                86582,708
                
                
                
                247,628UTILITY
      PLANT:In
      service
                
                
                852,806
                
                
                
                931,263Less -
      Accumulated provision for depreciation
                
                
                397,496
                
                
                
                420,445455,310
                
                
                
                510,818Construction
      work in progress
                
                
                6,111
                
                
                
                19,740461,421
                
                
                
                530,558OTHER
      PROPERTY AND INVESTMENTS:Investment in
      lessor notes
                
                
                142,687
                
                
                
                154,646Long-term
      notes receivable from associated companies
                
                
                37,384
                
                
                
                37,530Nuclear plant
      decommissioning trusts
                
                
                68,002
                
                
                
                66,759Other
                
                
                1,712
                
                
                
                1,756249,785
                
                
                
                260,691DEFERRED
      CHARGES AND OTHER ASSETS:Goodwill
                
                
                500,576
                
                
                
                500,576Regulatory
      assets
                
                
                171,030
                
                
                
                203,719Pension
      assets
                
                
                30,240
                
                
                
                28,601Property
      taxes
                
                
                21,010
                
                
                
                21,010Other
                
                
                62,686
                
                
                
                20,496785,542
                
                
                
                774,402$
                1,579,456
                
                
                $
                1,813,279LIABILITIES
      AND CAPITALIZATIONCURRENT
      LIABILITIES:Currently
      payable long-term debt
                
                $
                34
                
                
                $
                34Accounts
      payable-Associated
      companies
                
                
                44,205
                
                
                
                245,215Other
                
                
                4,339
                
                
                
                4,449Notes payable
      to associated companies
                
                
                34,954
                
                
                
                13,396Accrued
      taxes
                
                
                22,322
                
                
                
                30,245Lease market
      valuation liability
                
                
                36,900
                
                
                
                36,900Other
                
                
                15,256
                
                
                
                22,747158,010
                
                
                
                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
                
                
                173,170
                
                
                
                173,169Accumulated
      other comprehensive loss
                
                
                (11,067
                )
                
                
                (10,606
                )Retained
      earnings
                
                
                213,940
                
                
                
                175,618Total common
      stockholder's equity
                
                
                523,053
                
                
                
                485,191Long-term debt
      and other long-term obligations
                
                
                303,386
                
                
                
                303,397826,439
                
                
                
                788,588NONCURRENT
      LIABILITIES:Accumulated
      deferred income taxes
                
                
                100,308
                
                
                
                103,463Accumulated
      deferred investment tax credits
                
                
                9,753
                
                
                
                10,180Lease market
      valuation liability
                
                
                291,550
                
                
                
                310,000Retirement
      benefits
                
                
                65,291
                
                
                
                63,215Asset
      retirement obligations
                
                
                29,225
                
                
                
                28,366Deferred
      revenues - electric service programs
                
                
                6,622
                
                
                
                12,639Lease
      assignment payable to associated companies
                
                
                28,835
                
                
                
                83,485Other
                
                
                63,423
                
                
                
                60,357595,007
                
                
                
                671,705COMMITMENTS
      AND CONTINGENCIES (Note 10)$
                1,579,456
                
                
                $
                1,813,279The
      accompanying Notes to Consolidated Financial Statements as they relate to
      The Toledo Edison Companyare an
      integral part of these balance sheets.
  71
 THE
      TOLEDO EDISON COMPANYCONSOLIDATED
      STATEMENTS OF CASH FLOWS(Unaudited)Six
      Months EndedJune
      30,2008
                
                
                2007(In
      thousands)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                38,322
                
                
                $
                47,731Adjustments to
      reconcile net income to net cash from operating
activities-Provision for
      depreciation
                
                
                16,966
                
                
                
                18,244Amortization
      of regulatory assets
                
                
                50,385
                
                
                
                48,824Deferral of
      new regulatory assets
                
                
                (18,423
                )
                
                
                (31,728
                )Deferred rents
      and lease market valuation liability
                
                
                (39,045
                )
                
                
                (41,981
                )Deferred
      income taxes and investment tax credits, net
                
                
                (3,113
                )
                
                
                (11,924
                )Accrued
      compensation and retirement benefits
                
                
                (1,160
                )
                
                
                1,277Pension trust
      contribution
                
                
                -
                
                
                
                (7,659
                )Decrease
      (increase) in operating assets-Receivables
                
                
                76,978
                
                
                
                (21,594
                )Prepayments
      and other current assets
                
                
                (292
                )
                
                
                59Increase
      (decrease) in operating liabilities-Accounts
      payable
                
                
                (201,120
                )
                
                
                (56,784
                )Accrued
      taxes
                
                
                (7,923
                )
                
                
                751Electric
      service prepayment programs
                
                
                (6,017
                )
                
                
                (5,334
                )Other
                
                
                870
                
                
                
                2,569Net cash used
      for operating activities
                
                
                (93,572
                )
                
                
                (57,549
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:New
      Financing-Short-term
      borrowings, net
                
                
                21,558
                
                
                
                88,686Redemptions
      and Repayments-Long-term
      debt
                
                
                (17
                )
                
                
                -Dividend
      Payments-Common
      stock
                
                
                -
                
                
                
                (40,000
                )Net cash
      provided from financing activities
                
                
                21,541
                
                
                
                48,686CASH
      FLOWS FROM INVESTING ACTIVITIES:Property
      additions
                
                
                (34,388
                )
                
                
                (19,804
                )Loan
      repayments from (loans to) associated companies, net
                
                
                97,479
                
                
                
                (19,546
                )Collection of
      principal on long-term notes receivable
                
                
                135
                
                
                
                32,327Redemption of
      lessor notes
                
                
                11,959
                
                
                
                14,846Sales of
      investment securities held in trusts
                
                
                21,791
                
                
                
                32,499Purchases of
      investment securities held in trusts
                
                
                (23,581
                )
                
                
                (34,271
                )Other
                
                
                (1,364
                )
                
                
                2,812Net cash
      provided from investing activities
                
                
                72,031
                
                
                
                8,863Net change in
      cash and cash equivalents
                
                
                -
                
                
                
                -Cash and cash
      equivalents at beginning of period
                
                
                22
                
                
                
                22Cash and cash
      equivalents at end of period
                
                $
                22
                
                
                $
                22The
      accompanying Notes to Consolidated Financial Statements as they relate to
      The Toledo Edison Company are anintegral part
      of these statements.
  72




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 six months of 2008 decreased to $77million from $88million in the same
period in 2007. The decrease was primarily due to higher purchased power costs
and other operating costs, partially offset by higher revenues and lower
amortization of regulatory assets.





Revenues





In the first six
months of 2008, revenues increased $165 million, or 11.3%, as compared with the
same period of 2007. Retail and wholesale generation revenues increased by
$96million and
$84million,
respectively, and distribution revenues decreased by $12 million in the first
six months of 2008.





Retail generation
revenues from all customer classes increased in the first six months of 2008
compared to the same period of 2007 due to higher unit prices resulting from the
BGS auctions effective June 1, 2007, and June 1, 2008, partially offset by
decreased retail generation KWH sales. The decreased sales volume was primarily
caused by milder weather and customer shopping. In the first six months of 2008,
heating and cooling degree days decreased 7.9% and 1.7%, respectively, as
compared to the first six months of 2007. Customer shopping in the commercial
and industrial customer sectors increased by 4.2 percentage points and 1.8
percentage points, respectively, in the first six months of 2008.





Wholesale generation
revenues increased $84million in the first six
months of 2008 due to higher market prices, partially offset by a slight
decrease in sales volumes as compared to the first six months of
2007.





Changes in retail
generation KWH sales and revenues by customer class in the first six months of
2008 compared to the same period of 2007 are summarized in the following
tables:





Retail
      Generation KWH Sales
            
            DecreaseResidential
            
            
            (3.9
            )%Commercial
            
            
            (6.7
            )%Industrial
            
            
            (8.0
            )%Decrease
      in Generation Sales
            
            
            (5.2
            )%








Retail
      Generation Revenues
            
            Increase(In
      millions)Residential
            
            $
            55Commercial
            
            
            36Industrial
            
            
            5Increase
      in Generation Revenues
            
            $
            96





Distribution
revenues decreased $12 million in the first six months of 2008 as compared to
the same period of 2007 due to lower KWH deliveries, reflecting the weather
impacts described above, partially offset by a slight increase in composite unit
prices.





Changes in
distribution KWH deliveries and revenues by customer class in the first six
months of 2008 compared to the same period in 2007 are summarized in the
following tables:





Distribution
      KWH Deliveries
            
            DecreaseResidential
            
            
            (3.9
            )%Commercial
            
            
            (1.5
            )%Industrial
            
            
            (0.7
            )%Decrease
      in Distribution Deliveries
            
            
            (2.4
            )%





73








Distribution
      Revenues
            
            Decrease(In
      millions)Residential
            
            $
            (9
            )Commercial
            
            
            (3
            )Industrial
            
            
            -Decrease
      in Distribution Revenues
            
            $
            (12
            )





Expenses





Total expenses
increased by $181 million in the first six 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
            
            $
            180Other
      operating costs
            
            
            7Provision for
      depreciation
            
            
            5Amortization
      of regulatory assets
            
            
            (11
            )Net
      increase in expenses
            
            $
            181





Purchased power
costs increased in the first six months of 2008 primarily due to higher unit
prices resulting from the BGS auctions effective June 1, 2007, and June 1,
2008, partially offset by a decrease in purchases due to the lower KWH sales
discussed above. Other operating costs increased in the first six 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 second quarter of 2007. Amortization of
regulatory assets decreased in the first six months of 2008 primarily due to the
completion in December 2007 of certain regulatory asset amortizations associated
with TMI-2 and lower transition cost amortization due to the lower KWH sales
discussed above.





Other Expenses





Other expenses
increased by $8million in the first six
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 ($4 million) and reduced life insurance investment values ($3
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 did not have a material
impact on JCP&L’s earnings in the first six months 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.











74











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 June 30, 2008 and the related consolidated
statements of income and comprehensive income for each of the three-month and
six-month periods ended June 30, 2008 and 2007 and the consolidated statement of
cash flows for the six-month periods ended June 30, 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 stockholder’s equity, and cash flows for the year then ended (not
presented herein), and in our report 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
              August 7,
      2008











75








JERSEY
      CENTRAL POWER & LIGHT COMPANYCONSOLIDATED
      STATEMENTS OF INCOME AND COMPREHENSIVE INCOME(Unaudited)Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007(In
      thousands)REVENUES:Electric
      sales
              
              $
              823,104
              
              
              $
              768,190
              
              
              $
              1,604,537
              
              
              $
              1,439,097Excise tax
      collections
              
              
              11,639
              
              
              
              11,845
              
              
              
              24,434
              
              
              
              24,681Total
      revenues
              
              
              834,743
              
              
              
              780,035
              
              
              
              1,628,971
              
              
              
              1,463,778EXPENSES:Purchased
      power
              
              
              534,177
              
              
              
              464,505
              
              
              
              1,030,858
              
              
              
              851,002Other
      operating costs
              
              
              77,569
              
              
              
              74,564
              
              
              
              156,353
              
              
              
              149,215Provision for
      depreciation
              
              
              23,543
              
              
              
              21,319
              
              
              
              46,825
              
              
              
              41,835Amortization
      of regulatory assets
              
              
              86,507
              
              
              
              93,890
              
              
              
              178,026
              
              
              
              189,118General
      taxes
              
              
              15,538
              
              
              
              15,553
              
              
              
              32,566
              
              
              
              32,552Total
      expenses
              
              
              737,334
              
              
              
              669,831
              
              
              
              1,444,628
              
              
              
              1,263,722OPERATING
      INCOME
              
              
              97,409
              
              
              
              110,204
              
              
              
              184,343
              
              
              
              200,056OTHER
      INCOME (EXPENSE):Miscellaneous
      income
              
              
              1,413
              
              
              
              3,238
              
              
              
              1,024
              
              
              
              6,299Interest
      expense
              
              
              (24,840
              )
              
              
              (24,494
              )
              
              
              (49,304
              )
              
              
              (46,910
              )Capitalized
      interest
              
              
              430
              
              
              
              563
              
              
              
              706
              
              
              
              1,076Total other
      expense
              
              
              (22,997
              )
              
              
              (20,693
              )
              
              
              (47,574
              )
              
              
              (39,535
              )INCOME
      BEFORE INCOME TAXES
              
              
              74,412
              
              
              
              89,511
              
              
              
              136,769
              
              
              
              160,521INCOME
      TAXES
              
              
              31,468
              
              
              
              39,698
              
              
              
              59,871
              
              
              
              72,362NET
      INCOME
              
              
              42,944
              
              
              
              49,813
              
              
              
              76,898
              
              
              
              88,159OTHER
      COMPREHENSIVE INCOME (LOSS):Pension and
      other postretirement benefits
              
              
              (3,449
              )
              
              
              (2,115
              )
              
              
              (6,898
              )
              
              
              (4,230
              )Unrealized
      gain on derivative hedges
              
              
              69
              
              
              
              69
              
              
              
              138
              
              
              
              166Other
      comprehensive loss
              
              
              (3,380
              )
              
              
              (2,046
              )
              
              
              (6,760
              )
              
              
              (4,064
              )Income tax
      benefit related to other comprehensive loss
              
              
              (1,469
              )
              
              
              (995
              )
              
              
              (2,939
              )
              
              
              (1,979
              )Other
      comprehensive loss, net of tax
              
              
              (1,911
              )
              
              
              (1,051
              )
              
              
              (3,821
              )
              
              
              (2,085
              )TOTAL
      COMPREHENSIVE INCOME
              
              $
              41,033
              
              
              $
              48,762
              
              
              $
              73,077
              
              
              $
              86,074The
      accompanying Notes to Consolidated Financial Statements as they relate to
      Jersey Central Power & Light Company are an integralpart of
      these statements.
 
 76
  
 JERSEY
      CENTRAL POWER & LIGHT COMPANYCONSOLIDATED
      BALANCE SHEETS(Unaudited)June
      30,
              
              
              December
      31,2008
              
              
              2007(In
      thousands)ASSETSCURRENT
      ASSETS:Cash and cash
      equivalents
              
              $
              232
              
              
              $
              94Receivables-Customers
      (less accumulated provisions of $2,815,000 and $3,691,000,respectively,
      for uncollectible accounts)
              
              
              380,491
              
              
              
              321,026Associated
      companies
              
              
              63
              
              
              
              21,297Other
              
              
              71,997
              
              
              
              59,244Notes
      receivable - associated companies
              
              
              19,081
              
              
              
              18,428Prepaid
      taxes
              
              
              138,018
              
              
              
              1,012Other
              
              
              19,235
              
              
              
              17,603629,117
              
              
              
              438,704UTILITY
      PLANT:In
      service
              
              
              4,270,624
              
              
              
              4,175,125Less -
      Accumulated provision for depreciation
              
              
              1,543,779
              
              
              
              1,516,9972,726,845
              
              
              
              2,658,128Construction
      work in progress
              
              
              73,438
              
              
              
              90,5082,800,283
              
              
              
              2,748,636OTHER
      PROPERTY AND INVESTMENTS:Nuclear fuel
      disposal trust
              
              
              180,676
              
              
              
              176,512Nuclear plant
      decommissioning trusts
              
              
              165,543
              
              
              
              175,869Other
              
              
              2,168
              
              
              
              2,083348,387
              
              
              
              354,464DEFERRED
      CHARGES AND OTHER ASSETS:Regulatory
      assets
              
              
              1,403,794
              
              
              
              1,595,662Goodwill
              
              
              1,825,716
              
              
              
              1,826,190Pension
      Assets
              
              
              118,234
              
              
              
              100,615Other
              
              
              15,022
              
              
              
              16,3073,362,766
              
              
              
              3,538,774$
              7,140,553
              
              
              $
              7,080,578LIABILITIES
      AND CAPITALIZATIONCURRENT
      LIABILITIES:Currently
      payable long-term debt
              
              $
              28,287
              
              
              $
              27,206Short-term
      borrowings-Associated
      companies
              
              
              294,739
              
              
              
              130,381Accounts
      payable-Associated
      companies
              
              
              9,953
              
              
              
              7,541Other
              
              
              287,733
              
              
              
              193,848Accrued
      interest
              
              
              9,264
              
              
              
              9,318Cash
      collateral from suppliers
              
              
              66,412
              
              
              
              583Other
              
              
              100,363
              
              
              
              105,827796,751
              
              
              
              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
              
              
              2,655,338
              
              
              
              2,655,941Accumulated
      other comprehensive loss
              
              
              (23,702
              )
              
              
              (19,881
              )Retained
      earnings
              
              
              138,486
              
              
              
              237,588Total common
      stockholder's equity
              
              
              2,914,338
              
              
              
              3,017,864Long-term debt
      and other long-term obligations
              
              
              1,547,529
              
              
              
              1,560,3104,461,867
              
              
              
              4,578,174NONCURRENT
      LIABILITIES:Power purchase
      contract loss liability
              
              
              643,958
              
              
              
              749,671Accumulated
      deferred income taxes
              
              
              789,475
              
              
              
              800,214Nuclear fuel
      disposal costs
              
              
              194,745
              
              
              
              192,402Asset
      retirement obligations
              
              
              92,401
              
              
              
              89,669Other
              
              
              161,356
              
              
              
              195,7441,881,935
              
              
              
              2,027,700COMMITMENTS
      AND CONTINGENCIES (Note 10)$
              7,140,553
              
              
              $
              7,080,578The
      accompanying Notes to Consolidated Financial Statements as they relate to
      Jersey Central Power & Light Company arean integral
      part of these balance sheets.
 
 77
 
 JERSEY
      CENTRAL POWER & LIGHT COMPANYCONSOLIDATED
      STATEMENTS OF CASH FLOWS(Unaudited)Six
      Months EndedJune
      30,2008
                
                
                2007(In
      thousands)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                76,898
                
                
                $
                88,159Adjustments to
      reconcile net income to net cash from operating activities
    -Provision for
      depreciation
                
                
                46,825
                
                
                
                41,835Amortization
      of regulatory assets
                
                
                178,026
                
                
                
                189,118Deferred
      purchased power and other costs
                
                
                (93,040
                )
                
                
                (111,517
                )Deferred
      income taxes and investment tax credits, net
                
                
                (8,656
                )
                
                
                (3,116
                )Accrued
      compensation and retirement benefits
                
                
                (28,695
                )
                
                
                (11,467
                )Cash
      collateral received from (returned to) suppliers
                
                
                66,040
                
                
                
                (23,905
                )Pension trust
      contribution
                
                
                -
                
                
                
                (17,800
                )Decrease
      (increase) in operating assets-Receivables
                
                
                (79,001
                )
                
                
                (137,492
                )Materials and
      supplies
                
                
                348
                
                
                
                90Prepaid
      taxes
                
                
                (137,006
                )
                
                
                (109,058
                )Other current
      assets
                
                
                186
                
                
                
                2,540Increase
      (decrease) in operating liabilities-Accounts
      payable
                
                
                96,297
                
                
                
                (4,438
                )Accrued
      taxes
                
                
                (1,972
                )
                
                
                27,515Accrued
      interest
                
                
                (54
                )
                
                
                (3,837
                )Tax
      collections payable
                
                
                (12,493
                )
                
                
                (12,478
                )Other
                
                
                9,599
                
                
                
                459Net cash
      provided from (used for) operating activities
                
                
                113,302
                
                
                
                (85,392
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:New
      Financing-Long-term
      debt
                
                
                -
                
                
                
                550,000Short-term
      borrowings, net
                
                
                164,358
                
                
                
                77,269Redemptions
      and Repayments-Long-term
      debt
                
                
                (12,079
                )
                
                
                (304,579
                )Common
      Stock
                
                
                -
                
                
                
                (125,000
                )Dividend
      Payments-Common
      stock
                
                
                (176,000
                )
                
                
                (15,000
                )Net cash
      provided from (used for) financing activities
                
                
                (23,721
                )
                
                
                182,690CASH
      FLOWS FROM INVESTING ACTIVITIES:Property
      additions
                
                
                (98,068
                )
                
                
                (95,310
                )Proceeds from
      asset sales
                
                
                20,000
                
                
                
                -Loan
      repayments from (loans to) associated companies, net
                
                
                (653
                )
                
                
                765Sales of
      investment securities held in trusts
                
                
                113,970
                
                
                
                77,941Purchases of
      investment securities held in trusts
                
                
                (122,324
                )
                
                
                (85,961
                )Other
                
                
                (2,368
                )
                
                
                5,313Net cash used
      for investing activities
                
                
                (89,443
                )
                
                
                (97,252
                )Net increase
      in cash and cash equivalents
                
                
                138
                
                
                
                46Cash and cash
      equivalents at beginning of period
                
                
                94
                
                
                
                41Cash and cash
      equivalents at end of period
                
                $
                232
                
                
                $
                87The
      accompanying Notes to Consolidated Financial Statements as they relate to
      Jersey Central Power & Light Companyare an
      integral part of these statements.
  78
   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 $42 million in the first six months of 2008, compared to $51million in the same
period of 2007. The decrease was primarily due to higher purchased power and
other operating costs, partially offset by higher revenues.





Revenues





Revenues increased
by $60 million, or 8.2%, in the first six months of 2008 primarily due to
higher wholesale generation revenues. Wholesale revenues increased by $60million in the first six
months of 2008, compared to the same period of 2007, primarily reflecting higher
spot market prices for PJM market participants. Increased retail generation
revenues and higher distribution throughput revenues were offset by a decrease
in PJM transmission revenues.





In the first six
months 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 six months of 2008 compared to the
same period of 2007 are summarized in the following tables:





IncreaseRetail
      Generation KWH Sales
            
            (Decrease)Residential
            
            
            1.2
            %Commercial
            
            
            3.3
            %Industrial
            
            
            (1.7
            )%Net
      Increase in Retail Generation Sales
            
            
            1.1
            %





IncreaseRetail
      Generation Revenues
            
            (Decrease)(In
      millions)Residential
            
            $
            3Commercial
            
            
            4Industrial
            
            
            (1
            )Net
      Increase in Retail Generation Revenues
            
            $
            6








Revenues from
distribution throughput increased $7 million in the first six months of
2008, compared to the same period in 2007. Higher transmission rates resulting
from the annual update of Met-Ed’s TSC rider effective June 1, 2008 (see
Regulatory Matters) were partially offset by decreased distribution rates.
Increased KWH deliveries in the residential and commercial customer classes were
partially offset by decreased KWH deliveries to industrial
customers.





Changes in
distribution KWH deliveries and revenues in the first six months of 2008
compared to the same period of 2007 are summarized in the following
tables:





79








IncreaseDistribution
      KWH Deliveries
            
            (Decrease)Residential
            
            
            1.2
            %Commercial
            
            
            3.3
            %Industrial
            
            
            (1.7
            )%Net
      Increase in Distribution Deliveries
            
            
            1.1
            %





Distribution
      Revenues
            
            Increase(In
      millions)Residential
            
            $
            1Commercial
            
            
            5Industrial
            
            
            1Increase
      in Distribution Revenues
            
            $
            7





PJM transmission
revenues decreased by $13million in the first six
months 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 net transmission costs incurred in PJM, resulting in no
material effect to current period earnings.





Operating Expenses





Total operating
expenses increased by $73 million in the first six months of 2008 compared
to 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
            
            $
            60Other
      operating costs
            
            
            15Provision for
      depreciation
            
            
            1Amortization
      of regulatory assets
            
            
            2Deferral of
      new regulatory assets
            
            
            (6
            )General
      taxes
            
            
            1Net
      Increase in expenses
            
            $
            73





Purchased power
costs increased by $60 million in the first six months of 2008 due to higher
composite unit prices in PJM combined with increased KWH purchased to source
increased generation sales. Other operating costs increased by $15 million in
the first six months of 2008 primarily due to higher transmission expenses
associated with increased transmission volumes combined with increased labor and
contractor service expenses for storm restoration work performed during the
first six months of 2008.





The deferral of new
regulatory assets increased in the first six months of 2008 primarily due to
increased transmission cost deferrals ($19 million) and universal service charge
deferrals ($3 million), partially offset by the absence of the 2007 deferral of
previously expensed decommissioning costs ($15 million) associated with the
Saxton nuclear research facility (see Regulatory Matters).





Other Expense





Other expense
increased $5 million in the first six months of 2008 primarily due to a decrease
in interest earned on stranded regulatory assets, reflecting lower regulatory
asset balances, and reduced life insurance investment values, partially offset
by lower interest expense.





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.





80











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 June 30, 2008 and the related consolidated statements of
income and comprehensive income for each of the three-month and six-month
periods ended June 30, 2008 and 2007 and the consolidated statement of cash
flows for the six-month periods ended June 30, 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 stockholder’s equity, and cash flows for the year then ended (not
presented herein), and in our report 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
              August 7,
      2008











81





METROPOLITAN
      EDISON COMPANYCONSOLIDATED
      STATEMENTS OF INCOME AND COMPREHENSIVE INCOME(Unaudited)Three
      Months Ended
                
                
                Six
      Months EndedJune
      30,
                
                
                June
      30,2008
                
                
                2007
                
                
                2008
                
                
                2007(In
      thousands)REVENUES:Electric
      sales
                
                $
                373,821
                
                
                $
                344,241
                
                
                $
                753,429
                
                
                $
                696,377Gross receipts
      tax collections
                
                
                18,158
                
                
                
                17,502
                
                
                
                38,876
                
                
                
                35,622Total
      revenues
                
                
                391,979
                
                
                
                361,743
                
                
                
                792,305
                
                
                
                731,999EXPENSES:Purchased
      power
                
                
                217,743
                
                
                
                182,818
                
                
                
                434,725
                
                
                
                374,407Other
      operating costs
                
                
                117,028
                
                
                
                111,105
                
                
                
                224,045
                
                
                
                209,123Provision for
      depreciation
                
                
                10,940
                
                
                
                10,531
                
                
                
                22,052
                
                
                
                20,815Amortization
      of regulatory assets
                
                
                31,166
                
                
                
                30,972
                
                
                
                66,741
                
                
                
                65,112Deferral of
      new regulatory assets
                
                
                (42,811
                )
                
                
                (31,895
                )
                
                
                (80,583
                )
                
                
                (74,621
                )General
      taxes
                
                
                20,076
                
                
                
                20,170
                
                
                
                41,857
                
                
                
                41,222Total
      expenses
                
                
                354,142
                
                
                
                323,701
                
                
                
                708,837
                
                
                
                636,058OPERATING
      INCOME
                
                
                37,837
                
                
                
                38,042
                
                
                
                83,468
                
                
                
                95,941OTHER
      INCOME (EXPENSE):Interest
      income
                
                
                4,873
                
                
                
                7,775
                
                
                
                10,352
                
                
                
                15,501Miscellaneous
      income
                
                
                789
                
                
                
                1,498
                
                
                
                480
                
                
                
                2,607Interest
      expense
                
                
                (10,980
                )
                
                
                (13,424
                )
                
                
                (22,652
                )
                
                
                (25,180
                )Capitalized
      interest
                
                
                199
                
                
                
                388
                
                
                
                (20
                )
                
                
                648Total other
      expense
                
                
                (5,119
                )
                
                
                (3,763
                )
                
                
                (11,840
                )
                
                
                (6,424
                )INCOME
      BEFORE INCOME TAXES
                
                
                32,718
                
                
                
                34,279
                
                
                
                71,628
                
                
                
                89,517INCOME
      TAXES
                
                
                12,921
                
                
                
                14,809
                
                
                
                29,596
                
                
                
                38,408NET
      INCOME
                
                
                19,797
                
                
                
                19,470
                
                
                
                42,032
                
                
                
                51,109OTHER
      COMPREHENSIVE INCOME (LOSS):Pension and
      other postretirement benefits
                
                
                (2,233
                )
                
                
                (1,453
                )
                
                
                (4,466
                )
                
                
                (2,905
                )Unrealized
      gain on derivative hedges
                
                
                84
                
                
                
                84
                
                
                
                168
                
                
                
                168Other
      comprehensive loss
                
                
                (2,149
                )
                
                
                (1,369
                )
                
                
                (4,298
                )
                
                
                (2,737
                )Income tax
      benefit related to other comprehensive loss
                
                
                (971
                )
                
                
                (693
                )
                
                
                (1,941
                )
                
                
                (1,385
                )Other
      comprehensive loss, net of tax
                
                
                (1,178
                )
                
                
                (676
                )
                
                
                (2,357
                )
                
                
                (1,352
                )TOTAL
      COMPREHENSIVE INCOME
                
                $
                18,619
                
                
                $
                18,794
                
                
                $
                39,675
                
                
                $
                49,757The
      accompanying Notes to Consolidated Financial Statements as they relate to
      Metropolitan Edison Company are an integralpart of these
      balance sheets.
  82
   METROPOLITAN
      EDISON COMPANYCONSOLIDATED
      BALANCE SHEETS(Unaudited)June
      30,
                
                
                December
      31,2008
                
                
                2007(In
      thousands)ASSETSCURRENT
      ASSETS:Cash and cash
      equivalents
                
                $
                130
                
                
                $
                135Receivables-Customers
      (less accumulated provisions of $3,452,000 and $4,327,000respectively,
      for uncollectible accounts)
                
                
                158,715
                
                
                
                142,872Associated
      companies
                
                
                13,834
                
                
                
                27,693Other
                
                
                29,520
                
                
                
                18,909Notes
      receivable from associated companies
                
                
                12,179
                
                
                
                12,574Prepaid
      taxes
                
                
                40,933
                
                
                
                14,615Other
                
                
                346
                
                
                
                1,348255,657
                
                
                
                218,146UTILITY
      PLANT:In
      service
                
                
                2,016,366
                
                
                
                1,972,388Less -
      Accumulated provision for depreciation
                
                
                767,153
                
                
                
                751,7951,249,213
                
                
                
                1,220,593Construction
      work in progress
                
                
                42,922
                
                
                
                30,5941,292,135
                
                
                
                1,251,187OTHER
      PROPERTY AND INVESTMENTS:Nuclear plant
      decommissioning trusts
                
                
                268,939
                
                
                
                286,831Other
                
                
                985
                
                
                
                1,360269,924
                
                
                
                288,191DEFERRED
      CHARGES AND OTHER ASSETS:Goodwill
                
                
                424,070
                
                
                
                424,313Regulatory
      assets
                
                
                550,286
                
                
                
                494,947Pension
      assets
                
                
                56,969
                
                
                
                51,427Other
                
                
                30,762
                
                
                
                36,4111,062,087
                
                
                
                1,007,098$
                2,879,803
                
                
                $
                2,764,622LIABILITIES
      AND CAPITALIZATIONCURRENT
      LIABILITIES:Currently
      payable long-term debt
                
                $
                28,500
                
                
                $
                -Short-term
      borrowings-Associated
      companies
                
                
                107,812
                
                
                
                185,327Other
                
                
                250,000
                
                
                
                100,000Accounts
      payable-Associated
      companies
                
                
                28,867
                
                
                
                29,855Other
                
                
                75,093
                
                
                
                66,694Accrued
      taxes
                
                
                1,569
                
                
                
                16,020Accrued
      interest
                
                
                6,809
                
                
                
                6,778Other
                
                
                25,334
                
                
                
                27,393523,984
                
                
                
                432,067CAPITALIZATION:Common
      stockholder's equity-Common stock,
      without par value, authorized 900,000 shares-859,500 shares
      outstanding
                
                
                1,202,879
                
                
                
                1,203,186Accumulated
      other comprehensive loss
                
                
                (17,754
                )
                
                
                (15,397
                )Accumulated
      deficit
                
                
                (97,125
                )
                
                
                (139,157
                )Total common
      stockholder's equity
                
                
                1,088,000
                
                
                
                1,048,632Long-term debt
      and other long-term obligations
                
                
                513,691
                
                
                
                542,1301,601,691
                
                
                
                1,590,762NONCURRENT
      LIABILITIES:Accumulated
      deferred income taxes
                
                
                465,330
                
                
                
                438,890Accumulated
      deferred investment tax credits
                
                
                8,078
                
                
                
                8,390Nuclear fuel
      disposal costs
                
                
                43,992
                
                
                
                43,462Asset
      retirement obligations
                
                
                165,776
                
                
                
                160,726Retirement
      benefits
                
                
                6,449
                
                
                
                8,681Other
                
                
                64,503
                
                
                
                81,644754,128
                
                
                
                741,793COMMITMENTS
      AND CONTINGENCIES (Note 10)$
                2,879,803
                
                
                $
                2,764,622The
      accompanying Notes to Consolidated Financial Statements as they relate to
      Metropolitan Edison Company are an integralpart of these
      balance sheets.
  83
   METROPOLITAN
      EDISON COMPANYCONSOLIDATED
      STATEMENTS OF CASH FLOWS(Unaudited)Six
      Months EndedJune
      30,2008
                
                
                2007(In
      thousands)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                42,032
                
                
                $
                51,109Adjustments to
      reconcile net income to net cash from operating
activities-Provision for
      depreciation
                
                
                22,052
                
                
                
                20,815Amortization
      of regulatory assets
                
                
                66,741
                
                
                
                65,112Deferred costs
      recoverable as regulatory assets
                
                
                (12,468
                )
                
                
                (38,540
                )Deferral of
      new regulatory assets
                
                
                (80,583
                )
                
                
                (74,621
                )Deferred
      income taxes and investment tax credits, net
                
                
                29,113
                
                
                
                27,069Accrued
      compensation and retirement benefits
                
                
                (14,819
                )
                
                
                (11,150
                )Cash
      collateral
                
                
                -
                
                
                
                4,850Pension trust
      contribution
                
                
                -
                
                
                
                (11,012
                )Increase in
      operating assets-Receivables
                
                
                (31,840
                )
                
                
                (64,465
                )Prepayments
      and other current assets
                
                
                (25,316
                )
                
                
                (8,994
                )Increase
      (decrease) in operating liabilities-Accounts
      payable
                
                
                7,411
                
                
                
                (62,308
                )Accrued
      taxes
                
                
                (14,451
                )
                
                
                (10,788
                )Accrued
      interest
                
                
                31
                
                
                
                (446
                )Other
                
                
                7,608
                
                
                
                8,124Net cash used
      for operating activities
                
                
                (4,489
                )
                
                
                (105,245
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:New
      Financing-Long-term
      debt
                
                
                28,500
                
                
                
                -Short-term
      borrowings, net
                
                
                72,485
                
                
                
                214,229Redemptions
      and Repayments-Long-term
      debt
                
                
                (28,637
                )
                
                
                (50,000
                )Net cash
      provided from financing activities
                
                
                72,348
                
                
                
                164,229CASH
      FLOWS FROM INVESTING ACTIVITIES:Property
      additions
                
                
                (62,011
                )
                
                
                (49,852
                )Sales of
      investment securities held in trusts
                
                
                81,538
                
                
                
                55,603Purchases of
      investment securities held in trusts
                
                
                (87,193
                )
                
                
                (61,457
                )Loans from
      (to) associated companies, net
                
                
                395
                
                
                
                (3,290
                )Other
                
                
                (593
                )
                
                
                9Net cash used
      for investing activities
                
                
                (67,864
                )
                
                
                (58,987
                )Net decrease
      in cash and cash equivalents
                
                
                (5
                )
                
                
                (3
                )Cash and cash
      equivalents at beginning of period
                
                
                135
                
                
                
                130Cash and cash
      equivalents at end of period
                
                $
                130
                
                
                $
                127The
      accompanying Notes to Consolidated Financial Statements as they relate to
      Metropolitan Edison Company are an integralpart of these
      balance sheets.
  84





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 $40 million in the first six months of 2008, compared to $51 million in
the same period of 2007. The decrease was primarily due to increased purchased
power costs, net amortization of regulatory assets and interest expense,
partially offset by higher revenues.





Revenues





Revenues increased
by $60 million, or 8.7%, in the first six months of 2008 primarily due to higher
retail and wholesale generation revenues, distribution throughput revenues and
PJM transmission revenues. Wholesale revenues increased $46 million in the first
six months of 2008, compared to the same period of 2007, primarily reflecting
higher spot market prices for PJM market participants.





In the first six
months of 2008, retail generation revenues increased $6 million primarily due to
higher KWH sales and composite unit prices in all customer classes.





Changes in retail
generation sales and revenues in the first six months of 2008 compared to the
same period of 2007 are summarized in the following tables:





Retail
      Generation KWH Sales
            
            IncreaseResidential
            
            
            1.5
            %Commercial
            
            
            1.5
            %Industrial
            
            
            0.3
            %Increase
      in Retail Generation Sales
            
            
            1.1
            %




Retail
      Generation Revenues
            
            Increase(In
      millions)Residential
            
            $
            2Commercial
            
            
            3Industrial
            
            
            1Increase
      in Retail Generation Revenues
            
            $
            6








Revenues from
distribution throughput increased $2 million in the first six months of 2008
compared to the same period of 2007. Increased usage in all customer classes
along with an increase in transmission rates resulting from the annual update of
Penelec’s TSC rider effective June 1, 2008 (see Regulatory Matters) was
partially offset by a decrease in distribution rates.





Changes in
distribution KWH deliveries and revenues in the first six months of 2008
compared to the same period of 2007 are summarized in the following
tables:





85








Distribution
      KWH Deliveries
            
            IncreaseResidential
            
            
            1.5
            %Commercial
            
            
            1.5
            %Industrial
            
            
            2.9
            %Increase
      in Distribution Deliveries
            
            
            2.0
            %




Distribution
      Revenues
            
            Increase
              (Decrease)(In
      millions)Residential
            
            $
            1Commercial
            
            
            2Industrial
            
            
            (1
            )Net
      Increase in Distribution Revenues
            
            $
            2





PJM transmission
revenues increased by $6 million in the first six months 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 net
transmission costs incurred in PJM, resulting in no material effect to current
period earnings.





Operating Expenses





Total operating
expenses increased by $70 million in the first six months 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
            
            $
            42Other
      operating costs
            
            
            4Provision for
      depreciation
            
            
            2Amortization
      of regulatory assets, net
            
            
            20General
      taxes
            
            
            2Increase
      in expenses
            
            $
            70





Purchased power
costs increased by $42 million, or 10.8%, in the first six months of 2008
compared to the same period of 2007 due to higher composite unit prices in PJM
combined with increased KWH purchased to source increased generation sales.
Other operating costs increased by $4 million in the first six months of 2008
principally due to higher expenses related to Penelec’s customer assistance
programs. Depreciation expense increased primarily due to an increase in
depreciable property since the second quarter of 2007.





Amortization of
regulatory assets (net of deferrals) increased in the first six months of 2008
primarily due to the absence of the 2007 deferral of previously expensed
decommissioning costs ($12 million) associated with the Saxton nuclear research
facility (see Regulatory Matters) and decreased transmission cost deferrals ($11
million), partially offset by an increase in universal service charge deferrals
($3 million).





In the first six
months of 2008, general taxes increased $2 million as compared to the same
period of 2007, due to higher gross receipts taxes.





Other Expense





In the first six
months 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 life insurance investment values.





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.





86











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 June 30, 2008 and the related consolidated statements of
income and comprehensive income for each of the three-month and six-month
periods ended June 30, 2008 and 2007 and the consolidated statement of cash
flows for the six-month periods ended June 30, 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 stockholder’s equity, and cash flows for the year then ended (not
presented herein), and in our report 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
              August 7,
      2008











87





PENNSYLVANIA
      ELECTRIC COMPANYCONSOLIDATED
      STATEMENTS OF INCOME AND COMPREHENSIVE INCOME(Unaudited)Three
      Months Ended
                
                
                Six
      Months EndedJune
      30,
                
                
                June
      30,2008
                
                
                2007
                
                
                2008
                
                
                2007(In
      thousands)REVENUES:Electric
      sales
                $
                335,382
                
                
                $
                315,745
                
                
                $
                711,410
                
                
                $
                654,971Gross receipts
      tax collections
                
                16,040
                
                
                
                15,672
                
                
                
                35,504
                
                
                
                32,352Total
      revenues
                
                351,422
                
                
                
                331,417
                
                
                
                746,914
                
                
                
                687,323EXPENSES:Purchased
      power
                
                205,791
                
                
                
                184,494
                
                
                
                427,025
                
                
                
                385,336Other
      operating costs
                
                50,100
                
                
                
                58,267
                
                
                
                121,177
                
                
                
                117,728Provision for
      depreciation
                
                13,918
                
                
                
                12,335
                
                
                
                26,434
                
                
                
                24,112Amortization
      of regulatory assets, net
                
                19,111
                
                
                
                13,481
                
                
                
                31,931
                
                
                
                11,787General
      taxes
                
                18,345
                
                
                
                18,350
                
                
                
                40,200
                
                
                
                38,201Total
      expenses
                
                307,265
                
                
                
                286,927
                
                
                
                646,767
                
                
                
                577,164OPERATING
      INCOME
                
                44,157
                
                
                
                44,490
                
                
                
                100,147
                
                
                
                110,159OTHER
      INCOME (EXPENSE):Miscellaneous
      income
                
                1,058
                
                
                
                2,135
                
                
                
                867
                
                
                
                3,552Interest
      expense
                
                (14,901
                )
                
                
                (13,072
                )
                
                
                (30,223
                )
                
                
                (24,409
                )Capitalized
      interest
                
                70
                
                
                
                285
                
                
                
                (736
                )
                
                
                543Total other
      expense
                
                (13,773
                )
                
                
                (10,652
                )
                
                
                (30,092
                )
                
                
                (20,314
                )INCOME
      BEFORE INCOME TAXES
                
                30,384
                
                
                
                33,838
                
                
                
                70,055
                
                
                
                89,845INCOME
      TAXES
                
                11,987
                
                
                
                14,375
                
                
                
                30,266
                
                
                
                38,638NET
      INCOME
                
                18,397
                
                
                
                19,463
                
                
                
                39,789
                
                
                
                51,207OTHER
      COMPREHENSIVE INCOME (LOSS):Pension and
      other postretirement benefits
                
                (3,474
                )
                
                
                (2,825
                )
                
                
                (6,947
                )
                
                
                (5,650
                )Unrealized
      gain on derivative hedges
                
                16
                
                
                
                17
                
                
                
                32
                
                
                
                33Change in
      unrealized gain on available-for-sale securities
                
                (21
                )
                
                
                (13
                )
                
                
                (10
                )
                
                
                (16
                )Other
      comprehensive loss
                
                (3,479
                )
                
                
                (2,821
                )
                
                
                (6,925
                )
                
                
                (5,633
                )Income tax
      benefit related to other comprehensive loss
                
                (1,520
                )
                
                
                (1,302
                )
                
                
                (3,026
                )
                
                
                (2,600
                )Other
      comprehensive loss, net of tax
                
                (1,959
                )
                
                
                (1,519
                )
                
                
                (3,899
                )
                
                
                (3,033
                )TOTAL
      COMPREHENSIVE INCOME
                $
                16,438
                
                
                $
                17,944
                
                
                $
                35,890
                
                
                $
                48,174The
      accompanying Notes to Consolidated Financial Statements as they relate to
      Pennsylvania Electric Company are an integralpart of these
      statements.
  88
 PENNSYLVANIA
      ELECTRIC COMPANYCONSOLIDATED
      BALANCE SHEETS(Unaudited)June
      30,
                
                
                December
      31,2008
                
                
                2007(In
      thousands)ASSETSCURRENT
      ASSETS:Cash and cash
      equivalents
                
                $
                38
                
                
                $
                46Receivables-Customers
      (less accumulated provisions of $3,197,000 and $3,905,000respectively,
      for uncollectible accounts)
                
                
                137,431
                
                
                
                137,455Associated
      companies
                
                
                12,309
                
                
                
                22,014Other
                
                
                31,998
                
                
                
                19,529Notes
      receivable from associated companies
                
                
                16,464
                
                
                
                16,313Prepaid gross
      receipts taxes
                
                
                25,202
                
                
                
                -Other
                
                
                11,245
                
                
                
                3,077234,687
                
                
                
                198,434UTILITY
      PLANT:In
      service
                
                
                2,267,105
                
                
                
                2,219,002Less -
      Accumulated provision for depreciation
                
                
                852,428
                
                
                
                838,6211,414,677
                
                
                
                1,380,381Construction
      work in progress
                
                
                22,457
                
                
                
                24,2511,437,134
                
                
                
                1,404,632OTHER
      PROPERTY AND INVESTMENTS:Nuclear plant
      decommissioning trusts
                
                
                132,904
                
                
                
                137,859Non-utility
      generation trusts
                
                
                115,152
                
                
                
                112,670Other
                
                
                303
                
                
                
                531248,359
                
                
                
                251,060DEFERRED
      CHARGES AND OTHER ASSETS:Goodwill
                
                
                777,616
                
                
                
                777,904Pension
      assets
                
                
                72,698
                
                
                
                66,111Other
                
                
                29,333
                
                
                
                33,893879,647
                
                
                
                877,908$
                2,799,827
                
                
                $
                2,732,034LIABILITIES
      AND CAPITALIZATIONCURRENT
      LIABILITIES:Currently
      payable long-term debt
                
                $
                145,000
                
                
                $
                -Short-term
      borrowings-Associated
      companies
                
                
                211,773
                
                
                
                214,893Other
                
                
                100,000
                
                
                
                -Accounts
      payable-Associated
      companies
                
                
                24,434
                
                
                
                83,359Other
                
                
                45,418
                
                
                
                51,777Accrued
      taxes
                
                
                12,393
                
                
                
                15,111Accrued
      interest
                
                
                13,167
                
                
                
                13,167Other
                
                
                25,515
                
                
                
                25,311577,700
                
                
                
                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
                
                
                920,293
                
                
                
                920,616Accumulated
      other comprehensive income
                
                
                1,047
                
                
                
                4,946Retained
      earnings
                
                
                97,732
                
                
                
                57,943Total common
      stockholder's equity
                
                
                1,107,624
                
                
                
                1,072,057Long-term debt
      and other long-term obligations
                
                
                632,687
                
                
                
                777,2431,740,311
                
                
                
                1,849,300NONCURRENT
      LIABILITIES:Regulatory
      liabilities
                
                
                79,304
                
                
                
                73,559Asset
      retirement obligations
                
                
                84,428
                
                
                
                81,849Accumulated
      deferred income taxes
                
                
                214,642
                
                
                
                210,776Retirement
      benefits
                
                
                41,186
                
                
                
                41,298Other
                
                
                62,256
                
                
                
                71,634481,816
                
                
                
                479,116COMMITMENTS
      AND CONTINGENCIES (Note 10)$
                2,799,827
                
                
                $
                2,732,034The
      accompanying Notes to Consolidated Financial Statements as they relate to
      Pennsylvania Electric Company arean integral
      part of these statements.
  89
 PENNSYLVANIA
      ELECTRIC COMPANYCONSOLIDATED
      STATEMENTS OF CASH FLOWS(Unaudited)Six
      Months EndedJune
      30,2008
                
                
                2007(In
      thousands)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                39,789
                
                
                $
                51,207Adjustments to
      reconcile net income to net cash from operating
activities-Provision for
      depreciation
                
                
                26,434
                
                
                
                24,112Amortization
      of regulatory assets, net
                
                
                31,931
                
                
                
                11,787Deferred costs
      recoverable as regulatory assets
                
                
                (13,288
                )
                
                
                (34,691
                )Deferred
      income taxes and investment tax credits, net
                
                
                12,760
                
                
                
                13,548Accrued
      compensation and retirement benefits
                
                
                (16,293
                )
                
                
                (12,130
                )Cash
      collateral
                
                
                301
                
                
                
                3,250Pension trust
      contribution
                
                
                -
                
                
                
                (13,436
                )Increase in
      operating assets-Receivables
                
                
                (11,082
                )
                
                
                (39,530
                )Prepayments
      and other current assets
                
                
                (33,370
                )
                
                
                (20,819
                )Increase
      (decrease) in operating liabilities-Accounts
      payable
                
                
                (64,438
                )
                
                
                (70,070
                )Accrued
      taxes
                
                
                (11,804
                )
                
                
                (8,750
                )Accrued
      interest
                
                
                -
                
                
                
                181Other
                
                
                9,714
                
                
                
                5,447Net cash used
      for operating activities
                
                
                (29,346
                )
                
                
                (89,894
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:New
      Financing-Long-term
      debt
                
                
                45,000
                
                
                
                -Short-term
      borrowings, net
                
                
                96,880
                
                
                
                166,303Redemptions
      and Repayments-Long-term
      debt
                
                
                (45,320
                )
                
                
                -Dividend
      Payments-Common
      stock
                
                
                -
                
                
                
                (25,000
                )Net cash
      provided from financing activities
                
                
                96,560
                
                
                
                141,303CASH
      FLOWS FROM INVESTING ACTIVITIES:Property
      additions
                
                
                (57,314
                )
                
                
                (43,904
                )Loan
      repayments from (loans to) associated companies, net
                
                
                (151
                )
                
                
                1,285Sales of
      investment securities held in trust
                
                
                45,108
                
                
                
                26,882Purchases of
      investment securities held in trust
                
                
                (53,537
                )
                
                
                (33,680
                )Other
                
                
                (1,328
                )
                
                
                (1,996
                )Net cash used
      for investing activities
                
                
                (67,222
                )
                
                
                (51,413
                )Net decrease
      in cash and cash equivalents
                
                
                (8
                )
                
                
                (4
                )Cash and cash
      equivalents at beginning of period
                
                
                46
                
                
                
                44Cash and cash
      equivalents at end of period
                
                $
                38
                
                
                $
                40The
      accompanying Notes to Consolidated Financial Statements as they relate to
      Pennsylvania Electric Company are anintegral
      part of these statements.





90








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 certain 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 $129 million as of June 30, 2008 (JCP&L -
$73 million and Met-Ed - $56 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:





June
      30,
            
            December
      31,
            
            IncreaseRegulatory
      Assets*
            
            2008
            
            2007
            
            (Decrease)(In
      millions)OE
            
            $
            683
            
            $
            737
            
            $
            (54
            )CEI
            
            
            839
            
            
            871
            
            
            (32
            )TE
            
            
            171
            
            
            204
            
            
            (33
            )JCP&L
            
            
            1,404
            
            
            1,596
            
            
            (192
            )Met-Ed
            
            
            550
            
            
            495
            
            
            55ATSI
            
            
            36
            
            
            42
            
            
            (6
            )Total
            
            $
            3,683
            
            $
            3,945
            
            $
            (262
            )





*
            Penelec had
      net regulatory liabilities of approximately $79 million and
      $74 million as of June 30, 2008 and December 31, 2007,
      respectively. These net regulatory liabilities are included in Other
      Non-current Liabilities on the Consolidated Balance
  Sheets.








91








Ohio(Applicable to OE, CEI and TE)





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 $194 million
(OE - $96 million, CEI - $71 million and TE - $27 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. Recovery of the deferred fuel costs will now be
addressed in the Ohio Companies’ comprehensive ESP filing, as described below,
unless the MRO is implemented.





On June 7, 2007, the
Ohio Companies filed an application for an increase in electric distribution
rates with the PUCO and, on August 6, 2007, updated their filing to support
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 its
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. 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 and filing of briefs, the PUCO Staff decreased their recommended
revenue increase to a range of $117 million to $135 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 $51 million (OE - $35
million, CEI - $11 million and TE - $5 million) of interest costs deferred
through June 30, 2008. The Ohio Companies’ electric distribution rate
request is addressed in their comprehensive ESP filing, as described
below.





On May 1, 2008,
Governor Strickland signed SB221, which became effective on July 31, 2008.
The bill requires all utilities to file an ESP with the PUCO. A utility also may
file an MRO in which it would have to prove the following objective market
criteria:





·
            the utility or
      its transmission service affiliate belongs to a FERC approved RTO, or
      there is comparable and nondiscriminatory access to the electric
      transmission grid;





·
            the RTO has a
      market-monitor function and the ability to mitigate market power or the
      utility’s market conduct, or a similar market monitoring function exists
      with the ability to identify and monitor market conditions and conduct;
      and





·
            a published
      source of information is available publicly or through subscription that
      identifies pricing information for traded electricity products, both on-
      and off-peak, scheduled for delivery two years into the
      future.





On July 31, 2008,
the Ohio Companies filed with the PUCO a comprehensive ESP and MRO. The MRO
outlines a CBP that would be implemented if the ESP is not approved by the PUCO.
Under SB221, a PUCO ruling on the ESP filing is required within 150 days and an
MRO decision is required within 90 days. The ESP proposes to phase in new
generation rates for customers beginning in 2009 for up to a three-year period
and would resolve the Ohio Companies’ collection of fuel costs deferred in 2006
and 2007, and the distribution rate request described above. Major provisions of
the ESP include:





·
            a phase-in of
      new generation rates for up to a three-year period, whereby customers
      would receive a 10% phase-in credit; related costs (expected to
      approximate $430 million in 2009, $490 million in 2010 and $550 million in
      2011) would be deferred for future collection over a period not to exceed
      10 years;





·
            a reconcilable
      rider to recover fuel transportation cost surcharges in excess of $30
      million in 2009, $20 million in 2010 and $10 million in
    2011;





92





·
            generation
      rate adjustments to recover any increase in fuel costs in 2011 over fuel
      costs incurred in 2010 for FES’ generation assets used to support the
      ESP;





·
            generation
      rate adjustments to recover the costs of complying with new requirements
      for certain renewable energy resources, new taxes and new environmental
      laws or new interpretations of existing laws that take effect after
      January 1, 2008 and exceed $50 million during the plan
    period;





·
            an RCP fuel
      rider to recover the 2006 and 2007 deferred fuel costs and carrying
      charges (described above) over a period not to exceed 25
      years;





·
            the resolution
      of outstanding issues pending in the Ohio Companies’ distribution rate
      case (described above), including annual electric distribution rate
      increases of $75 million for OE, $34.5 million for CEI and
      $40.5 million for TE. The new distribution rates would be effective
      January 1, 2009, for OE and TE and May 1, 2009 for CEI, with a
      commitment to maintain distribution rates through 2013. CEI also would be
      authorized to defer $25 million in distribution-related costs
      incurred from January 1, 2009, through April 30,
  2009;





·
            an adjustable
      delivery service improvement rider, effective January 1, 2009, through
      December 31, 2013, to ensure the Ohio Companies maintain customer
      standards for service and
reliability;





·
            the waiver of
      RTC charges for CEI’s customers as of January 1, 2009, which would
      result in CEI’s write-off of approximately $485 million of estimated
      unrecoverable transition costs;





·
            the continued
      recovery of transmission costs, including MISO, ancillary services and
      congestion charges, through an annually adjusted transmission rider; a
      separate rider will be established to recover costs incurred annually
      between May 1st
      and September 30th
      for capacity purchases required to meet FERC, NERC, MISO and other
      applicable standards for planning reserve margin
    requirements;





·
            a deferred
      transmission cost recovery rider effective January 1, 2009, through
      December 31, 2010 to recover transmission costs deferred by the Ohio
      Companies in 2005 and accumulated carrying charges through December 31,
      2008; a deferred distribution cost recovery rider effective
      January 1, 2011, to recover distribution costs deferred under the
      RCP, CEI’s additional $25 million of cost deferrals in 2009, line
      extension deferrals and transition tax
  deferrals;





·
            the deferral
      of annual storm damage expenses in excess of $13.9 million, certain line
      extension costs, as well as depreciation, property tax obligations and
      post in-service carrying charges on energy delivery capital investments
      for reliability and system efficiency placed in service after December 31,
      2008. Effective January 1, 2014, a rider will be established to collect
      the deferred balance and associated carrying charges over a 10-year
      period; and





·
            a commitment
      by the Ohio Companies to invest in aggregate at least $1 billion in
      capital improvements in their energy delivery systems through 2013 and
      fund $25 million for energy efficiency programs and $25 million for
      economic development and job retention programs through
    2013.





The Ohio Companies’
MRO filing outlines a CBP for providing retail generation supply if the ESP is
not approved and implemented. The CBP would use a “slice-of-system” approach
where suppliers bid on tranches (approximately 100 MW) of the Ohio Companies’
total customer load. The Ohio Companies have requested PUCO approval of the MRO
application by late October 2008, to allow for the necessary time to conduct the
CBP in order for rates to be effective January 1, 2009.  The Ohio
Companies included an interim pricing proposal as part of their ESP filing, if
additional time is necessary for final PUCO approval of either the ESP or MRO.
FES will be required to obtain FERC authorization to sell electric capacity or
energy to the Ohio Companies under the ESP or MRO, unless a waiver is
obtained.





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.





93








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
and Penelec.





On May 22, 2008, the
PPUC approved the Met-Ed and Penelec annual updates to the TSC rider for the
period June 1, 2008, through May 31, 2009. Various intervenors filed
complaints against Met-Ed’s and Penelec’s TSC filings.  In addition,
the PPUC ordered an investigation to review the reasonableness of Met-Ed’s TSC,
while at the same time allowing the company to implement the rider June 1,
2008, subject to refund. On July 15, 2008, the PPUC directed the ALJ to
consolidate the complaints against Met-Ed with its investigation and a
litigation schedule was adopted with hearings for both companies scheduled to
begin in January 2009. The 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 received approval from the PPUC of 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.
Bids on the two RFPs for residential customers’ load were approved by the PPUC
on April 16, 2008 and May 16, 2008. On May 20, 2008, Penn filed
compliance tariffs with the new default service generation rates based on the
approved RFP bids for residential customers which the PPUC certified on
May 21, 2008. The new rates were effective June 1, 2008.





94








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. As part of the 2008
state budget negotiations, the Alternative Energy Investment Act was enacted
creating a $650 million alternative energy fund to increase the development and
use of alternative and renewable energy, improve energy efficiency and reduce
energy consumption. Other legislation has been introduced to address generation
procurement, expiration of rate caps, conservation and renewable energy;
however, consideration of these issues was postponed until the legislature
returns to session in fall 2008. The final form of this pending legislation is
uncertain. Consequently, Met-Ed and Penelec are is unable to predict what
impact, if any, such legislation may have on their operations. However, Met-Ed
and Penelec intend to file rate mitigation plans with the PPUC later this
year.





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 June 30, 2008, the accumulated deferred
cost balance totaled approximately $293 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 and comments from interested parties were submitted by May 19,
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 2006, 2007 and the first half
of 2008.





On April 17, 2008, a
draft EMP was released for public comment. The draft EMP establishes five major
goals:





·
            maximize
      energy efficiency to achieve a 20% reduction in energy consumption by
      2020;





95








·
            reduce peak
      demand for electricity by 5,700 MW by
2020;





·
            meet 22.5% of
      the state’s electricity needs with renewable energy by
    2020;





·
            develop low
      carbon emitting, efficient power plants and close the gap between the
      supply and demand for electricity;
and





·
            invest in
      innovative clean energy technologies and businesses to stimulate the
      industry’s growth in New Jersey.





Following the public
hearings and comment period which extended 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.





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 multiple transmission charges for a single transaction between the
MISO and PJM regions. The FERC also ordered 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 by year-end 2008.  In the meantime, FirstEnergy affiliates
have been negotiating and entering into settlement agreements with other parties
in the docket to mitigate the risk of lower transmission revenue collection
associated with an adverse order.





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 the
costs of future transmission to be recovered 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 were the
subject of a hearing at the FERC in May 2008. Reply briefs and briefs on
exceptions are due in the merchant proceeding in July and August, respectively,
with an initial decision by the Presiding Judge to follow. On February 11,
2008, AEP appealed the FERC’s April 19, 2007 and January 31, 2008 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.





96








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 1, 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. On
May 12, 2008, the FERC issued an order approving this
amendment.





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. Numerous parties filed requests for
rehearing on March 26, 2008. On June 23, 2008, the FERC issued an
order granting in part and denying in part rehearing. MISO has since notified
the FERC that the start of its ASM will be delayed until September 9,
2008.





97





On February 29,
2008, MISO submitted a compliance filing setting forth MISO’s Readiness Advisor
ASM and Consolidated Balancing Authority Initiative Verification plan and status
and Real-Time Operations ASM Reversion plan. FERC action on this compliance
filing remains pending. On March 26, 2008, MISO submitted a tariff filing in
compliance with the FERC’s 30-day directives in the February 25 order. Numerous
parties submitted comments and protests on April 16, 2008. The FERC issued
an order accepting the revisions pending further compliance on June 23,
2008. On April 25, 2008, MISO submitted a tariff filing in compliance with
the FERC’s 60-day directives in the February 25 order. FERC action on this
compliance filing remains pending. On May 23, 2008, MISO submitted its amended
Balancing Authority Agreement. On July 21, 2008, the FERC issued an order
conditionally accepting the amended Balancing Authority Agreement and requiring
a further compliance filing.





Interconnection
Agreement with AMP-Ohio





On May 4, 2007,
AMP-Ohio filed a complaint in Franklin County, Ohio Common Pleas Court against
FirstEnergy and TE seeking a declaratory judgment that the defendants may
not terminate certain portions of a wholesale power Interconnection Agreement
dated May 1, 1989 between AMP-Ohio and TE, nor further modify the rates and
charges for power under that agreement. TE has served notice of termination of
the Interconnection Agreement on AMP-Ohio to be effective December 31,
2008. AMP-Ohio claims that FirstEnergy, on behalf of TE, waived any right to
terminate the Interconnection Agreement according to the terms of a June 6, 1997
merger settlement agreement with AMP-Ohio. Both the Interconnection Agreement
and merger settlement agreement were approved by the FERC. On June 15, 2007, TE
filed notice of removal of the case to United States District Court for the
Southern District of Ohio. On July 11, 2007, TE moved to dismiss on the
grounds that the FERC has exclusive jurisdiction over the subject matter of the
complaint, or alternatively, primary jurisdiction over this matter. Responsive
pleadings were filed by both parties and on March 31, 2008, the district court
issued an order dismissing the matter for lack of subject matter jurisdiction.
However, AMP-Ohio informed TE that it continues to object to cancellation of the
power sales provisions of the Interconnection Agreement.





On May 29, 2008, TE
filed with the FERC a proposed Notice of Cancellation effective midnight
December 31, 2008, of the Interconnection Agreement with AMP-Ohio. AMP-Ohio
protested this filing. TE also filed a Petition for Declaratory Order seeking a
FERC ruling, in the alternative if cancellation is not accepted, of TE's right
to file for an increase in rates effective January 1, 2009, for power
provided to AMP-Ohio under the Interconnection Agreement. AMP-Ohio filed a
pleading agreeing that TE may seek an increase in rates, but arguing that any
increase is limited to the cost of generation owned by TE affiliates. TE has
requested FERC action on both filings and expects the FERC to act on this
request in the third quarter 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 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 MISO to submit detailed plans to integrate
Duquesne into MISO. Finally, the FERC directed MISO and PJM to work together to
resolve the substantive and procedural issues implicated by Duquesne’s
transition into MISO. These issues remain unresolved. If Duquesne satisfies all
of the obligations set by the FERC, its planned transition date is
October 1, 2008.  On July 3, 2008, Duquesne and MISO filed a
proposed plan for integrating Duquesne into MISO.  On July 24, 2008,
numerous parties filed comments and protests to the proposed
plan. FirstEnergy filed comments identifying numerous issues that must be
addressed and resolved before Duquesne can transition to MISO. FirstEnergy
continues to evaluate the impact of Duquesne’s withdrawal from PJM on its
operations and financial condition; however, the full consequences cannot be
determined until the FERC rules on the pending issues.





98





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 could contract with PJM for the transmission
reservations necessary to participate in the May 2008 auction. FirstEnergy has
complied with the 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 satisfied 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. Given that the FERC outlined the conditions under which
FirstEnergy could bid the unit into the auction and FirstEnergy complied with
the FERC’s conditions, FirstEnergy does not anticipate that the FERC will grant
the relief requested in the pleadings.  Based on this expectation,
FirstEnergy believes that the auction results would not be changed.





Complaint
against PJM RPM Auction





On May 30,
2008, a group of PJM load-serving entities, state commissions, consumer
advocates, and trade associations (referred to collectively as the RPM Buyers)
filed a complaint at the FERC against PJM alleging that three of the
four transitional RPM auctions yielded prices that are unjust and
unreasonable under the Federal Power Act. Most of the parties comprising
the RPM Buyers group were parties to the settlement approved by the FERC that
established the RPM. In the complaint, the RPM Buyers request that the
total projected payments to RPM sellers for the three auctions at issue be
materially reduced. On July 11, 2008, PJM filed its answer to the
complaint, in which it denied the allegation that the rates are unjust and
unreasonable. Also on that date, FirstEnergy filed a motion to
intervene.





If the FERC were to
rule unfavorably on this matter, the impact for the period ended June 30,
2008, would not be material to FES’ results of operations, cash flows or
financial position, as FES only began collecting RPM revenues for the Beaver
Valley Power Station on June 1, 2008.  However, such an unfavorable
ruling by the FERC could have a material adverse impact on the revenues of the
Beaver Valley Power Station in subsequent periods if these proceedings were to
result in a significant loss of FES’ RPM revenues.





FES believes that
the FERC is unlikely to grant the relief sought in the RPM Buyers’ complaint,
since it largely deals with legal issues concerning the fundamentals of the RPM
markets that are already at issue in a separate D.C. Circuit Court appellate
proceeding. Nevertheless, FES is unable to predict the outcome of these
proceedings or the resulting effect on FirstEnergy’s or FES’ results of
operations, cash flows or financial position.





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 believes the proposal promotes a mechanism
that will result in 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 conditionally approved
MISO’s Resource Adequacy proposal on March 26, 2008, requiring MISO to
submit to further compliance filings. Rehearing requests are pending on the
FERC’s March 26 Order. On May 27, 2008, MISO submitted a compliance
filing to address issues associated with planning reserve margins. On
June 17, 2008, various parties submitted comments and protests to MISO’s
compliance filing. FirstEnergy submitted comments identifying specific issues
that must be clarified and addressed. On June 25, 2008, MISO submitted a
second compliance filing establishing the enforcement mechanism for the reserve
margin requirement which establishes deficiency payments for load serving
entities that do not meet the resource adequacy requirements. Numerous parties,
including FirstEnergy, protested this filing. A FERC decision on this filing is
expected this fall.





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 21, 2008.





99





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 estimates 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 emission limits 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 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.





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.





100








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 United States
District Court. The scope of Met-Ed’s indemnity obligation to and from Sithe
Energy is disputed.  Met-Ed is unable to predict the outcome of this
matter.





On June 11, 2008,
the EPA issued a Notice and Finding of Violation to MEW alleging that
"modifications" at the Homer City Power Station occurred since 1988 to the
present without preconstruction NSR or permitting under the CAA's prevention of
significant deterioration program. MEW is seeking indemnification from Penelec,
which was the co-owner (along with New York State Electric and Gas Company) and
operator of the Homer City Power Station prior to its sale in
1999.  Although it remains liable for civil or criminal penalties and
fines that may be assessed relating to events prior to the sale of the Homer
City Power Station in 1999, the scope of Penelec’s indemnity obligation to and
from MEW is disputed.  Penelec is unable to predict the outcome of
this matter.





On May 16, 2008,
FGCO received a request from the EPA for information pursuant to Section 114(a)
of the CAA for certain operating and maintenance information regarding the
Eastlake, Lakeshore, Bay Shore and Ashtabula generating plants to allow the EPA
to determine whether these generating sources are complying with the NSR
provisions of the CAA. On July 10, 2008, FGCO and the EPA entered into an
ACO modifying that request and setting forth a schedule for FGCO’s response.
FGCO intends to fully comply with the ACO, but, at this time, is unable to
predict the outcome of this matter.





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 would have
required 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),
ultimately capping SO2 emissions
in affected states to just 2.5 million tons annually and NOX emissions
to just 1.3 million tons annually. CAIR was challenged in the United States
Court of Appeals for the District of Columbia and on July 11, 2008, the Court
vacated CAIR “in its entirety” and directed the EPA to “redo its analysis from
the ground up.” The court ruling also vacated the CAIR regional cap and trade
programs for SO2 and
NOX,
which is currently not expected to, but may, materially impair the value of
emissions allowances obtained for future compliance. The future cost of
compliance with these regulations may be substantial and will depend on the
action taken by the EPA or Congress in response to the Court’s
ruling.





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 petitioned for rehearing
by the entire court, which denied the petition on May 20, 2008.  The
EPA must now petition for United States Supreme Court 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.





101








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, 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 for FGCO ($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.





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 was never submitted 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. On July 11, 2008, the
EPA released an Advance Notice of Proposed Rulemaking, soliciting input from the
public on the effects of climate change and the potential ramifications of
regulation of CO2 under the
CAA.





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.





102








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 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 one significant
aspect of the Second Circuit Court’s opinion which is whether
Section 316(b) of the Clean Water Act authorizes the EPA to compare costs
with benefits in determining the best technology available for minimizing
adverse environmental impact at cooling water intake structures. FES 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 best professional judgment, the future costs of compliance
with these standards may require material capital expenditures.





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 their nuclear facilities. As of June 30, 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 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
June 30, 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
$95 million (JCP&L - $68 million, TE - $1 million, CEI -
$1 million and FirstEnergy Corp. - $25 million) have been accrued
through June 30, 2008. Included in the total for JCP&L are accrued
liabilities of approximately $57 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.





103








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 was held on June 13,
2008.  At that conference, the plaintiffs stated their intent to drop
their efforts to create a class-wide damage model and, instead of dismissing the
class action, expressed their desire for a bifurcated trial on liability and
damages.  The judge directed the plaintiffs to indicate, on or before
August 22, 2008, how they intend to proceed under this
scenario.  Thereafter, the judge expects to hold another pretrial
conference to address plaintiffs' proposed procedure.JCP&L is defending
this action but is unable to predict the outcome of this matter.  No
liability has been accrued as of June 30, 2008.





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 has conducted the employee training required by one portion
of the confirmatory order and a consultant has performed follow-up reviews to
ensure the effectiveness of that training.  The NRC continues to
monitor FENOC’s compliance with all the commitments made in the confirmatory
order.





In August 2007,
FENOC submitted an application to the NRC to renew the operating licenses for
the Beaver Valley Power Station (Units 1 and 2) for an additional 20 years. The
NRC is required by statute to provide an opportunity for members of the public
to request a hearing on the application. No members of the public, however,
requested a hearing on the Beaver Valley license renewal application. The
NRC is expected to issue its draft supplemental Environmental Impact Statement
and Safety Evaluation Report with open items in 2008. FENOC will continue to
work with the NRC Staff as it completes its environmental and technical reviews
of the license renewal application, and expects to obtain renewed licenses for
the Beaver Valley Power Station in 2009. If renewed licenses are issued by the
NRC, the Beaver Valley Power Station’s licenses would be extended until 2036 and
2047 for Units 1 and 2, respectively.





Other Legal
Matters(Applicable to OE, JCP&L and FES)





There are various
lawsuits, claims (including claims for asbestos exposure) and proceedings
related to normal business operations pending against FES and the Companies. The
other potentially material items not otherwise discussed above are described
below.





104








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.





On July 22, 2008 and
July 23, 2008, three complaints were filed against FGCO in the United States
District Court for the Western District of Pennsylvania as well as in the Beaver
County Court of Common Pleas seeking damages based on Bruce Mansfield Plant air
emissions. In addition to seeking damages, two of the complaints seek to enjoin
the Bruce Mansfield Plant from operating except in a “safe, responsible, prudent
and proper manner,” one being a complaint filed on behalf of twenty-one
individuals and the other being a class action complaint, seeking certification
as a class action with the eight named plaintiffs as the class representatives.
FGCO believes the claims are without merit and intends to defend itself against
the allegations made in these complaints.





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. JCP&L and the
union filed briefs in June and July of 2008. Oral arguments have been requested
and are expected to take place in fall 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.





FES and the
Companies accrue legal 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. If it were ultimately determined that FES and the
Companies have legal liability or are otherwise made subject to liability based
on the above matters, it could have a material adverse effect their financial
condition, results of operations and cash flows.





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 and 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.





105








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’ and 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 that 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. The FASB believes that additional required
disclosure of the fair values of derivative instruments and their gains and
losses in a tabular format will 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. This Statement also requires cross-referencing within the
footnotes to help users of financial statements locate important information
about derivative instruments. The Statement is effective for fiscal years
beginning on or after December 15, 2008. FES and the Companies are
currently evaluating the impact of adopting this Standard on their financial
statements.





SFAS
      162 - “The Hierarchy of Generally Accepted Accounting
      Principles”





In May 2008, the
FASB issued SFAS 162, which is intended to improve financial reporting by
identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with GAAP. The FASB believes that the GAAP hierarchy should be
directed to reporting entities, not the independent auditors, because reporting
entities are responsible for selecting accounting principles for financial
statements that are presented in conformity with GAAP. This Statement is
effective 60 days following the SEC’s approval of the PCAOB amendments to U.S.
Auditing Standards Section 411, The
Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles, which has not yet occurred. The Statement
will not have an impact on FES’ and the Companies’ financial
statements.








106








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 June 30, 2008 and for the three-month and
six-month periods ended June 30, 2008 and 2007, have been reviewed by
PricewaterhouseCoopers LLP, an independent registered public accounting firm.
Their report (dated August 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:





107








Three
      Months
            
            Six
      MonthsEnded
      June 30
            
            Ended
      June 30Reconciliation
      of Basic and Diluted Earnings per Share
            
            2008
            
            2007
            
            2008
            
            2007(In
      millions, except per share amounts)Net
      income
            
            $
            263
            
            $
            338
            
            $
            539
            
            $
            628Average shares
      of common stock outstanding – Basic
            
            
            304
            
            
            304
            
            
            304
            
            
            309Assumed
      exercise of dilutive stock options and awards
            
            
            3
            
            
            4
            
            
            3
            
            
            4Average shares
      of common stock outstanding – Dilutive
            
            
            307
            
            
            308
            
            
            307
            
            
            313Basic earnings
      per share
            
            $
            0.86
            
            $
            1.11
            
            $
            1.77
            
            $
            2.03Diluted
      earnings per share
            
            $
            0.85
            
            $
            1.10
            
            $
            1.75
            
            $
            2.01





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
June 30, 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 June 30, 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.





108








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 June
30, 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.





June
      30, 2008Recurring
      Fair Value Measures
            
            Level
      1
            
            Level
      2
            
            Level
      3
            
            Total(In
      millions)Assets:Derivatives
            
            $
            7
            
            $
            110
            
            $
            -
            
            $
            117Nuclear
      decommissioning trusts(1)
            
            
            1,040
            
            
            950
            
            
            -
            
            
            1,990Other
      investments(2)
            
            
            21
            
            
            309
            
            
            -
            
            
            330Total
            
            $
            1,068
            
            $
            1,369
            
            $
            -
            
            $
            2,437Liabilities:Derivatives
            
            $
            -
            
            $
            123
            
            $
            -
            
            $
            123NUG
      contracts(3)
            
            
            -
            
            
            -
            
            
            644
            
            
            644Total
            
            $
            -
            
            $
            123
            
            $
            644
            
            $
            767





(1)
            Balance
      excludes $2 million of net receivables, payables and accrued
      income.


(2)
            Excludes
      $312 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 tables
set forth a reconciliation of changes in the fair value of NUG contracts
classified as Level 3 in the fair value hierarchy for the three and six months
ended June 30, 2008:





Three
      Months
            
            
            Six
      MonthsEnded
      June 30, 2008
            
            
            Ended
      June 30, 2008(In
      millions)Balance at
      beginning of period
            
            $
            682
            
            
            $
            750Realized
      and unrealized gains (losses)(1)
            
            
            (30
            )
            
            
            (88
            )Purchases,
      sales, issuances and settlements, net(1)
            
            
            (8
            )
            
            
            (18
            )Net
      transfers to (from) Level 3
            
            
            -
            
            
            
            -Balance as of
      June 30, 2008
            
            $
            644
            
            
            $
            644Change in
      unrealized gains (losses) relating toinstruments
      held as of June 30, 2008
            
            $
            (30
            )
            
            $
            (88
            )(1)Changes in the
      fair value of NUG contracts are completely offset by regulatory assets and
      do not impact earnings








109





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.





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 $78 million included in AOCL as of June 30, 2008, for
derivative hedging activity, as compared to $75 million as of
December 31, 2007, resulted from a net $15 million increase related to
current hedging activity and a $12 million decrease due to net hedge losses
reclassified to earnings during the six months ended June 30, 2008. Based
on current estimates, approximately $28 million (after tax) of the net
deferred losses on derivative instruments in AOCL as of June 30, 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 June 30, 2008, FirstEnergy
had interest rate swaps with an aggregate notional value of $150 million
and a fair value of $(3) million.





During 2007 and the
first six 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 six months of 2008, FirstEnergy terminated swaps with
a notional value of $650 million and entered into swaps with a notional
value of $850 million. FirstEnergy paid $14 million related to the
terminations, $5 million of which was deemed ineffective and recognized in
current period earnings. FirstEnergy will recognize the remaining loss over the
life of the associated future debt. As of June 30, 2008, FirstEnergy had
forward swaps with an aggregate notional amount of $600 million and a fair
value of $6 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 of
$1.3 billion as of June 30, 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 June 30, 2008,
the fair value of the decommissioning trust assets was approximately
$2.0 billion.





110








The following tables
analyze changes to the ARO balance during the three months and six months ended
June 30, 2008 and 2007, respectively.





ARO
      Reconciliation
            
            FirstEnergy
            
            FES
            
            OE
            
            CEI
            
            TE
            
            JCP&L
            
            Met-Ed
            
            Penelec(In
      millions)Balance, April
      1, 2008
            
            $
            1,287
            
            $
            824
            
            $
            95
            
            $
            2
            
            $
            29
            
            $
            91
            
            $
            163
            
            $
            83Liabilities
      incurred
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Liabilities
      settled
            
            
            (1
            )
            
            (1
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Accretion
            
            
            21
            
            
            13
            
            
            1
            
            
            -
            
            
            -
            
            
            1
            
            
            3
            
            
            1Revisions in
      estimated cash flows
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Balance, June
      30, 2008
            
            $
            1,307
            
            $
            836
            
            $
            96
            
            $
            2
            
            $
            29
            
            $
            92
            
            $
            166
            
            $
            84Balance, April
      1, 2007
            
            $
            1,208
            
            $
            772
            
            $
            89
            
            $
            2
            
            $
            27
            
            $
            86
            
            $
            153
            
            $
            78Liabilities
      incurred
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Liabilities
      settled
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Accretion
            
            
            21
            
            
            13
            
            
            2
            
            
            -
            
            
            -
            
            
            1
            
            
            3
            
            
            1Revisions in
      estimated cash flows
            
            
            (1
            )
            
            (1
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Balance, June
      30, 2007
            
            $
            1,228
            
            $
            784
            
            $
            91
            
            $
            2
            
            $
            27
            
            $
            87
            
            $
            156
            
            $
            79





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
            
            
            (1
            )
            
            (1
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Accretion
            
            
            41
            
            
            27
            
            
            2
            
            
            -
            
            
            1
            
            
            2
            
            
            5
            
            
            2Revisions in
      estimated cash flows
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Balance, June
      30, 2008
            
            $
            1,307
            
            $
            836
            
            $
            96
            
            $
            2
            
            $
            29
            
            $
            92
            
            $
            166
            
            $
            84Balance,
      January 1, 2007
            
            $
            1,190
            
            $
            760
            
            $
            88
            
            $
            2
            
            $
            27
            
            $
            84
            
            $
            151
            
            $
            77Liabilities
      incurred
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Liabilities
      settled
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Accretion
            
            
            39
            
            
            25
            
            
            3
            
            
            -
            
            
            -
            
            
            3
            
            
            5
            
            
            2Revisions in
      estimated cash flows
            
            
            (1
            )
            
            (1
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Balance, June
      30, 2007
            
            $
            1,228
            
            $
            784
            
            $
            91
            
            $
            2
            
            $
            27
            
            $
            87
            
            $
            156
            
            $
            79








7.  PENSION
AND OTHER POSTRETIREMENT BENEFITS





FirstEnergy provides
noncontributory defined benefit pension plans that cover substantially all of
its subsidiaries’ employees. 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 and six months ended June
30, 2008 and 2007, consisted of the following:





Three
      Months
            
            Six
      MonthsEnded
      June 30
            
            Ended
      June 30Pension
      Benefits
            
            2008
            
            2007
            
            2008
            
            2007(In
      millions)Service
      cost
            
            $
            21
            
            $
            21
            
            $
            41
            
            $
            42Interest
      cost
            
            
            72
            
            
            71
            
            
            144
            
            
            142Expected
      return on plan assets
            
            
            (116
            )
            
            (113
            )
            
            (231
            )
            
            (225
            )Amortization
      of prior service cost
            
            
            3
            
            
            3
            
            
            5
            
            
            5Recognized net
      actuarial loss
            
            
            1
            
            
            11
            
            
            3
            
            
            21Net periodic
      cost (credit)
            
            $
            (19
            )
            $
            (7
            )
            $
            (38
            )
            $
            (15
            )











111








Three
      Months
            
            Six
      MonthsEnded
      June 30
            
            Ended
      June 30Other
      Postretirement Benefits
            
            2008
            
            2007
            
            2008
            
            2007(In
      millions)Service
      cost
            
            $
            5
            
            $
            5
            
            $
            9
            
            $
            10Interest
      cost
            
            
            18
            
            
            17
            
            
            37
            
            
            34Expected
      return on plan assets
            
            
            (13
            )
            
            (12
            )
            
            (26
            )
            
            (25
            )Amortization
      of prior service cost
            
            
            (37
            )
            
            (37
            )
            
            (74
            )
            
            (74
            )Recognized net
      actuarial loss
            
            
            12
            
            
            11
            
            
            24
            
            
            23Net periodic
      cost (credit)
            
            $
            (15
            )
            $
            (16
            )
            $
            (30
            )
            $
            (32
            )





Pension and
postretirement benefit obligations are allocated to FirstEnergy’s subsidiaries
employing the plan participants. FES and 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 FES and each of the Companies for the three months and six months
ended June 30, 2008 and 2007 were as follows:





Three
      Months
            
            Six
      MonthsEnded
      June 30
            
            Ended
      June 30Pension
      Benefit Cost (Credit)
            
            2008
            
            2007
            
            2008
            
            2007(In
      millions)FES
            
            $
            4
            
            $
            5
            
            $
            8
            
            $
            10OE
            
            
            (7
            )
            
            (4
            )
            
            (13
            )
            
            (8
            )CEI
            
            
            (1
            )
            
            -
            
            
            (3
            )
            
            1TE
            
            
            (1
            )
            
            -
            
            
            (1
            )
            
            -JCP&L
            
            
            (4
            )
            
            (2
            )
            
            (8
            )
            
            (4
            )Met-Ed
            
            
            (3
            )
            
            (2
            )
            
            (5
            )
            
            (4
            )Penelec
            
            
            (3
            )
            
            (2
            )
            
            (7
            )
            
            (5
            )Other
      FirstEnergy subsidiaries
            
            
            (4
            )
            
            (2
            )
            
            (9
            )
            
            (5
            )$
            (19
            )
            $
            (7
            )
            $
            (38
            )
            $
            (15
            )





Three
      Months
            
            Six
      MonthsEnded
      June 30
            
            Ended
      June 30Other
      Postretirement Benefit Cost (Credit)
            
            2008
            
            2007
            
            2008
            
            2007(In
      millions)FES
            
            $
            (2
            )
            $
            (2
            )
            $
            (4
            )
            $
            (5
            )OE
            
            
            (2
            )
            
            (3
            )
            
            (3
            )
            
            (5
            )CEI
            
            
            1
            
            
            1
            
            
            1
            
            
            2TE
            
            
            1
            
            
            1
            
            
            2
            
            
            2JCP&L
            
            
            (4
            )
            
            (4
            )
            
            (8
            )
            
            (8
            )Met-Ed
            
            
            (3
            )
            
            (3
            )
            
            (5
            )
            
            (5
            )Penelec
            
            
            (3
            )
            
            (3
            )
            
            (6
            )
            
            (6
            )Other
      FirstEnergy subsidiaries
            
            
            (3
            )
            
            (3
            )
            
            (7
            )
            
            (7
            )$
            (15
            )
            $
            (16
            )
            $
            (30
            )
            $
            (32
            )





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.





112








Loss
Contingencies





FES and the Ohio
Companies are exposed to losses under their applicable sale and 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 June 30, 2008:





Maximum
      Exposure
            
            Discounted
              Lease
      Payments, net
            
            Net
              Exposure(in
      millions)FES
            
            $
            1,339
            
            $
            1,189
            
            $
            150OE
            
            806
            
            583
            
            223CEI
            
            748
            
            78
            
            670TE
            
            748
            
            413
            
            335





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 May 30, 2008, NGC
purchased 56.8 MW of lessor equity interests in the OE 1987 sale and leaseback
of the Perry Plant. On June 2, 2008, NGC purchased approximately 43.5 MW of
lessor equity interests in the OE 1987 sale and leaseback of Beaver Valley Unit
2. Between June 2, 2008 and June 9, 2008, NGC purchased an additional
158.5 MW of additional lessor equity interests in the TE and CEI 1987 sale
and leaseback of Beaver Valley Unit 2, which purchases were undertaken in
connection with the previously disclosed exercise of the periodic purchase
option provided in the TE and CEI sale and leaseback arrangements. The Ohio
Companies continue to lease these MW under the respective sale and leaseback
arrangements and the related lease debt remains outstanding.





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 and
six months ended June 30, 2008 and 2007 are shown in the following
table:





113











Three
      Months
            
            Six
      MonthsEnded
      June 30
            
            Ended
      June 302008
            
            2007
            
            2008
            
            2007(In
      millions)JCP&L
            
            $
            22
            
            $
            21
            
            $
            41
            
            $
            41Met-Ed
            
            
            16
            
            
            12
            
            
            32
            
            
            27Penelec
            
            
            8
            
            
            7
            
            
            17
            
            
            15Total
            
            $
            46
            
            $
            40
            
            $
            90
            
            $
            83





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 June 30, 2008, $385 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.





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, if recognized in 2008. The majority of items that would not affect the
2008 effective tax rate would be purchase accounting adjustments to goodwill, if
recognized in 2008. During the first six months of 2008 and 2007, there were no
material changes to FirstEnergy’s unrecognized tax benefits. As of June 30,
2008, FirstEnergy expects that it is reasonably possible that approximately
$155 million of the unrecognized benefits may be resolved within the next
twelve months, of which $54 million to $134 million, if recognized,
would affect FirstEnergy’s effective tax rate.  The potential decrease
in the amount of unrecognized tax benefits is primarily associated with issues
related to the capitalization of certain costs, capital gains and losses
recognized on the disposition of assets and various other tax
items.





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 June 30, 2008 was $60 million, as
compared to $53 million as of December 31, 2007.





114





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 appealed.
The IRS began auditing the year 2007 in February 2007 and the 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
June 30, 2008, outstanding guarantees and other assurances aggregated
approximately $4.3 billion, consisting of parental guarantees -
$0.9 billion, subsidiaries’ guarantees - $2.7 billion, surety bonds -
$0.1 billion and LOCs - $0.6 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 June 30, 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 June 30,
2008, FirstEnergy's maximum exposure under these collateral provisions was
$542 million.





Most of
FirstEnergy's surety bonds are backed by various indemnities common within the
insurance industry. Surety bonds and related guarantees of $74 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.





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.





115





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 emission limits 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 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.





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 United States
District Court. The scope of Met-Ed’s indemnity obligation to and from Sithe
Energy is disputed.  Met-Ed is unable to predict the outcome of this
matter.





On June 11, 2008,
the EPA issued a Notice and Finding of Violation to MEW alleging that
"modifications" at the Homer City Power Station occurred since 1988 to the
present without preconstruction NSR or permitting under the CAA's prevention of
significant deterioration program. MEW is seeking indemnification from Penelec,
which was the co-owner (along with New York State Electric and Gas Company) and
operator of the Homer City Power Station prior to its sale in
1999.  Although it remains liable for civil or criminal penalties and
fines that may be assessed relating to events prior to the sale of the Homer
City Power Station in 1999, the scope of Penelec’s indemnity obligation to and
from MEW is disputed.  Penelec is unable to predict the outcome of
this matter.





On May 16, 2008,
FGCO received a request from the EPA for information pursuant to Section 114(a)
of the CAA for certain operating and maintenance information regarding the
Eastlake, Lakeshore, Bay Shore and Ashtabula generating plants to allow the EPA
to determine whether these generating sources are complying with the NSR
provisions of the CAA. On July 10, 2008, FGCO and the EPA entered into an
ACO modifying that request and setting forth a schedule for FGCO’s response.
FGCO intends to fully comply with the ACO, but, at this time, is unable to
predict the outcome of this matter.





116





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 would have
required 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),
ultimately capping SO2 emissions
in affected states to just 2.5 million tons annually and NOX emissions
to just 1.3 million tons annually. CAIR was challenged in the United States
Court of Appeals for the District of Columbia and on July 11, 2008, the Court
vacated CAIR “in its entirety” and directed the EPA to “redo its analysis from
the ground up.” The court ruling also vacated the CAIR regional cap and trade
programs for SO2 and
NOX,
which is currently not expected to, but may, materially impair the value of
emissions allowances obtained for future compliance. The future cost of
compliance with these regulations may be substantial and will depend on the
action taken by the EPA or Congress in response to the Court’s
ruling.





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 petitioned for rehearing
by the entire court, which denied the petition on May 20, 2008.  The
EPA must now petition for United States Supreme Court 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.





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 was never submitted 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.





117





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. On July 11, 2008, the
EPA released an Advance Notice of Proposed Rulemaking, soliciting input from the
public on the effects of climate change and the potential ramifications of
regulation of CO2 under the
CAA.





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 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 one significant
aspect of the Second Circuit Court’s opinion which is whether
Section 316(b) of the Clean Water Act authorizes the EPA to compare costs
with benefits in determining the best technology available for minimizing
adverse environmental impact at cooling water intake structures. 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 best professional judgment, 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.





Under NRC
regulations, FirstEnergy must ensure that adequate funds will be available to
decommission its nuclear facilities.  As of June 30, 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.





118








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
June 30, 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
$95 million (JCP&L - $68 million, TE - $1 million, CEI -
$1 million and FirstEnergy Corp. - $25 million) have been accrued
through June 30, 2008. Included in the total for JCP&L are accrued
liabilities of approximately $57 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 was held on June 13,
2008.  At that conference, the plaintiffs stated their intent to drop
their efforts to create a class-wide damage model and, instead of dismissing the
class action, expressed their desire for a bifurcated trial on liability and
damages.  The judge directed the plaintiffs to indicate, on or before
August 22, 2008, how they intend to proceed under this
scenario.  Thereafter, the judge expects to hold another pretrial
conference to address plaintiffs' proposed procedure.FirstEnergy is defending
this action but is unable to predict the outcome of this matter.  No
liability has been accrued as of June 30, 2008.





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 has conducted the employee training required by one portion
of the confirmatory order and a consultant has performed follow-up reviews to
ensure the effectiveness of that training.  The NRC continues to
monitor FENOC’s compliance with all the commitments made in the confirmatory
order.





119








In August 2007,
FENOC submitted an application to the NRC to renew the operating licenses for
the Beaver Valley Power Station (Units 1 and 2) for an additional 20 years. The
NRC is required by statute to provide an opportunity for members of the public
to request a hearing on the application. No members of the public, however,
requested a hearing on the Beaver Valley license renewal application. The
NRC is expected to issue its draft supplemental Environmental Impact Statement
and Safety Evaluation Report with open items in 2008. FENOC will continue to
work with the NRC Staff as it completes its environmental and technical reviews
of the license renewal application, and expects to obtain renewed licenses for
the Beaver Valley Power Station in 2009. If renewed licenses are issued by the
NRC, the Beaver Valley Power Station’s licenses would be extended until 2036 and
2047 for Units 1 and 2, respectively.





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.





On July 22, 2008 and
July 23, 2008, three complaints were filed against FGCO in the United States
District Court for the Western District of Pennsylvania as well as in the Beaver
County Court of Common Pleas seeking damages based on Bruce Mansfield Plant air
emissions. In addition to seeking damages, two of the complaints seek to enjoin
the Bruce Mansfield Plant from operating except in a “safe, responsible, prudent
and proper manner,” one being a complaint filed on behalf of twenty-one
individuals and the other being a class action complaint, seeking certification
as a class action with the eight named plaintiffs as the class representatives.
FGCO believes the claims are without merit and intends to defend itself against
the allegations made in these complaints.





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. JCP&L and the
union filed briefs in June and July of 2008. Oral arguments have been requested
and are expected to take place in the fall. 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.





120





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 (the PUCO, the FERC, the 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 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 the 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 result in the imposition of financial penalties
and thus 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
October 2008. FirstEnergy currently does not expect any material adverse
financial impact as a result of these audits.





(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 $194 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. Recovery of the
deferred fuel costs will now be addressed in the Ohio Companies’ comprehensive
ESP filing, as described below, unless the MRO is implemented.





121








On June 7, 2007, the
Ohio Companies filed an application for an increase in electric distribution
rates with the PUCO and, on August 6, 2007, updated their filing to support
a distribution rate increase of $332 million. On December 4, 2007, the
PUCO Staff issued its Staff Reports containing the results of its 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. 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 and
filing of briefs, the PUCO Staff decreased their recommended revenue increase to
a range of $117 million to $135 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 $51 million of interest costs deferred through
June 30, 2008 ($0.10 per share of common stock). The Ohio Companies’
electric distribution rate request is addressed in their comprehensive ESP
filing, as described below.





On May 1, 2008,
Governor Strickland signed SB221, which became effective on July 31, 2008.
The bill requires all utilities to file an ESP with the PUCO. A utility also may
file an MRO in which it would have to prove the following objective market
criteria:





·
            the utility or
      its transmission service affiliate belongs to a FERC approved RTO, or
      there is comparable and nondiscriminatory access to the electric
      transmission grid;





·
            the RTO has a
      market-monitor function and the ability to mitigate market power or the
      utility’s market conduct, or a similar market monitoring function exists
      with the ability to identify and monitor market conditions and conduct;
      and





·
            a published
      source of information is available publicly or through subscription that
      identifies pricing information for traded electricity products, both on-
      and off-peak, scheduled for delivery two years into the
      future.





On July 31, 2008,
the Ohio Companies filed with the PUCO a comprehensive ESP and MRO. The MRO
outlines a CBP that would be implemented if the ESP is not approved by the PUCO.
Under SB221, a PUCO ruling on the ESP filing is required within 150 days and an
MRO decision is required within 90 days. The ESP proposes to phase in new
generation rates for customers beginning in 2009 for up to a three-year period
and would resolve the Ohio Companies’ collection of fuel costs deferred in 2006
and 2007, and the distribution rate request described above. Major provisions of
the ESP include:





·
            a phase-in of
      new generation rates for up to a three-year period, whereby customers
      would receive a 10% phase-in credit; related costs (expected to
      approximate $430 million in 2009, $490 million in 2010 and $550 million in
      2011) would be deferred for future collection over a period not to exceed
      10 years;





·
            a reconcilable
      rider to recover fuel transportation cost surcharges in excess of $30
      million in 2009, $20 million in 2010 and $10 million in
    2011;





·
            generation
      rate adjustments to recover any increase in fuel costs in 2011 over fuel
      costs incurred in 2010 for FES’ generation assets used to support the
      ESP;





·
            generation
      rate adjustments to recover the costs of complying with new requirements
      for certain renewable energy resources, new taxes and new environmental
      laws or new interpretations of existing laws that take effect after
      January 1, 2008 and exceed $50 million during the plan
    period;





·
            an RCP fuel
      rider to recover the 2006 and 2007 deferred fuel costs and carrying
      charges (described above) over a period not to exceed 25
      years;





·
            the resolution
      of outstanding issues pending in the Ohio Companies’ distribution rate
      case (described above), including annual electric distribution rate
      increases of $75 million for OE, $34.5 million for CEI and $40.5 million
      for TE. The new distribution rates would be effective January 1, 2009, for
      OE and TE and May 1, 2009 for CEI, with a commitment to maintain
      distribution rates through 2013. CEI also would be authorized to defer $25
      million in distribution-related costs incurred from January 1, 2009,
      through April 30, 2009;





·
            an adjustable
      delivery service improvement rider, effective January 1, 2009, through
      December 31, 2013, to ensure the Ohio Companies maintain customer
      standards for service and
reliability;





·
            the waiver of
      RTC charges for CEI’s customers as of January 1, 2009, which would
      result in CEI’s write-off of approximately $485 million of estimated
      unrecoverable transition costs ($1.01 per share of common
      stock);





122





·
            the continued
      recovery of transmission costs, including MISO, ancillary services and
      congestion charges, through an annually adjusted transmission rider; a
      separate rider will be established to recover costs incurred annually
      between May 1st
      and September 30th
      for capacity purchases required to meet FERC, NERC, MISO and other
      applicable standards for planning reserve margin
    requirements;





·
            a deferred
      transmission cost recovery rider effective January 1, 2009, through
      December 31, 2010 to recover transmission costs deferred by the Ohio
      Companies in 2005 and accumulated carrying charges through December 31,
      2008; a deferred distribution cost recovery rider effective
      January 1, 2011, to recover distribution costs deferred under the
      RCP, CEI’s additional $25 million of cost deferrals in 2009, line
      extension deferrals and transition tax
  deferrals;





·
            the deferral
      of annual storm damage expenses in excess of $13.9 million, certain line
      extension costs, as well as depreciation, property tax obligations and
      post in-service carrying charges on energy delivery capital investments
      for reliability and system efficiency placed in service after December 31,
      2008. Effective January 1, 2014, a rider will be established to collect
      the deferred balance and associated carrying charges over a 10-year
      period; and





·
            a commitment
      by the Ohio Companies to invest in aggregate at least $1 billion in
      capital improvements in their energy delivery systems through 2013 and
      fund $25 million for energy efficiency programs and $25 million
      for economic development and job retention programs through
      2013.





The Ohio Companies’
MRO filing outlines a CBP for providing retail generation supply if the ESP is
not approved and implemented. The CBP would use a “slice-of-system” approach
where suppliers bid on tranches (approximately 100 MW) of the Ohio Companies’
total customer load. The Ohio Companies have requested PUCO approval of the MRO
application by late October 2008, to allow for the necessary time to conduct the
CBP in order for rates to be effective January 1, 2009.  The Ohio
Companies included an interim pricing proposal as part of their ESP filing, if
additional time is necessary for final PUCO approval of either the ESP or MRO.
FES will be required to obtain FERC authorization to sell electric capacity or
energy to the Ohio Companies under the ESP or MRO, unless a waiver is
obtained.





(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.





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).





123








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 May 22, 2008, the
PPUC approved the Met-Ed and Penelec annual updates to the TSC rider for the
period June 1, 2008, through May 31, 2009. Various intervenors filed
complaints against Met-Ed’s and Penelec’s TSC filings.  In addition,
the PPUC ordered an investigation to review the reasonableness of Met-Ed’s TSC,
while at the same time allowing the company to implement the rider June 1,
2008, subject to refund. On July 15, 2008, the PPUC directed the ALJ to
consolidate the complaints against Met-Ed with its investigation and a
litigation schedule was adopted with hearings for both companies scheduled to
begin in January 2009. The 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 received approval from the PPUC of 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.
Bids on the two RFPs for residential customers’ load were approved by the PPUC
on April 16, 2008 and May 16, 2008. On May 20, 2008, Penn filed
compliance tariffs with the new default service generation rates based on the
approved RFP bids for residential customers which the PPUC certified on
May 21, 2008. The new rates were effective 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. As part of the 2008
state budget negotiations, the Alternative Energy Investment Act was enacted
creating a $650 million alternative energy fund to increase the development and
use of alternative and renewable energy, improve energy efficiency and reduce
energy consumption. Other legislation has been introduced to address generation
procurement, expiration of rate caps, conservation and renewable energy;
however, consideration of these issues was postponed until the legislature
returns to session in fall 2008. 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. However, Met-Ed and Penelec intend
to file rate mitigation plans with the PPUC later this year.





(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 June 30, 2008, the accumulated deferred
cost balance totaled approximately $293 million.





124








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 and comments from interested parties were submitted by
May 19, 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 2006, 2007 and the first half
of 2008.





On April 17, 2008, a
draft EMP was released for public comment. The draft EMP establishes five 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;





·
            meet 22.5% of
      the state’s electricity needs with renewable energy by
    2020;





·
            develop low
      carbon emitting, efficient power plants and close the gap between the
      supply and demand for electricity;
and





·
            invest in
      innovative clean energy technologies and businesses to stimulate the
      industry’s growth in New Jersey.





Following the public
hearings and comment period which extended 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.





(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 multiple transmission charges for a single transaction between the
MISO and PJM regions. The FERC also ordered 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 by year-end 2008.  In the meantime, FirstEnergy affiliates
have been negotiating and entering into settlement agreements with other parties
in the docket to mitigate the risk of lower transmission revenue collection
associated with an adverse order.





125








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 the
costs of future transmission to be recovered 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 were the
subject of a hearing at the FERC in May 2008. Reply briefs and briefs on
exceptions are due in the merchant proceeding in July and August, respectively,
with an initial decision by the Presiding Judge to follow. On February 11,
2008, AEP appealed the FERC’s April 19, 2007 and January 31, 2008 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.





126





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 1, 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. On
May 12, 2008, the FERC issued an order approving this
amendment.





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. Numerous parties filed requests for
rehearing on March 26, 2008. On June 23, 2008, the FERC issued an
order granting in part and denying in part rehearing. MISO has since notified
the FERC that the start of its ASM will be delayed until September 9,
2008.





On February 29,
2008, MISO submitted a compliance filing setting forth MISO’s Readiness Advisor
ASM and Consolidated Balancing Authority Initiative Verification plan and status
and Real-Time Operations ASM Reversion plan. FERC action on this compliance
filing remains pending. On March 26, 2008, MISO submitted a tariff filing in
compliance with the FERC’s 30-day directives in the February 25 order. Numerous
parties submitted comments and protests on April 16, 2008. The FERC issued an
order accepting the revisions pending further compliance on June 23, 2008. On
April 25, 2008, MISO submitted a tariff filing in compliance with the FERC’s
60-day directives in the February 25 order. FERC action on this compliance
filing remains pending. On May 23, 2008, MISO submitted its amended Balancing
Authority Agreement. On July 21, 2008, the FERC issued an order conditionally
accepting the amended Balancing Authority Agreement and requiring a further
compliance filing.





Interconnection
Agreement with AMP-Ohio





On May 4, 2007,
AMP-Ohio filed a complaint in Franklin County, Ohio Common Pleas Court against
FirstEnergy and TE seeking a declaratory judgment that the defendants may
not terminate certain portions of a wholesale power Interconnection Agreement
dated May 1, 1989 between AMP-Ohio and TE, nor further modify the rates and
charges for power under that agreement. TE has served notice of termination of
the Interconnection Agreement on AMP-Ohio to be effective December 31,
2008. AMP-Ohio claims that FirstEnergy, on behalf of TE, waived any right to
terminate the Interconnection Agreement according to the terms of a June 6, 1997
merger settlement agreement with AMP-Ohio. Both the Interconnection Agreement
and merger settlement agreement were approved by the FERC. On June 15, 2007, TE
filed notice of removal of the case to United States District Court for the
Southern District of Ohio. On July 11, 2007, TE moved to dismiss on the
grounds that the FERC has exclusive jurisdiction over the subject matter of the
complaint, or alternatively, primary jurisdiction over this matter. Responsive
pleadings were filed by both parties and on March 31, 2008, the district
court issued an order dismissing the matter for lack of subject matter
jurisdiction. However, AMP-Ohio informed TE that it continues to object to
cancellation of the power sales provisions of the Interconnection
Agreement.





127








On May 29, 2008, TE
filed with the FERC a proposed Notice of Cancellation effective midnight
December 31, 2008, of the Interconnection Agreement with AMP-Ohio. AMP-Ohio
protested this filing. TE also filed a Petition for Declaratory Order seeking a
FERC ruling, in the alternative if cancellation is not accepted, of TE's right
to file for an increase in rates effective January 1, 2009, for power provided
to AMP-Ohio under the Interconnection Agreement. AMP-Ohio filed a pleading
agreeing that TE may seek an increase in rates, but arguing that any increase is
limited to the cost of generation owned by TE affiliates. TE has requested FERC
action on both filings and expects the FERC to act on this request in the third
quarter 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 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 MISO to submit detailed plans to integrate
Duquesne into MISO. Finally, the FERC directed MISO and PJM to work together to
resolve the substantive and procedural issues implicated by Duquesne’s
transition into MISO. These issues remain unresolved. If Duquesne satisfies all
of the obligations set by the FERC, its planned transition date is
October 1, 2008.  On July 3, 2008, Duquesne and MISO filed a
proposed plan for integrating Duquesne into MISO.  On July 24, 2008,
numerous parties filed comments and protests to the proposed
plan. FirstEnergy filed comments identifying numerous issues that must be
addressed and resolved before Duquesne can transition to MISO. FirstEnergy
continues to evaluate the impact of Duquesne’s withdrawal from PJM on its
operations and financial condition; however, the full consequences cannot be
determined until the FERC rules on the pending issues.





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 could contract with PJM for the transmission
reservations necessary to participate in the May 2008 auction. FirstEnergy has
complied with the 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 satisfied 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. Given that the FERC outlined the conditions under which
FirstEnergy could bid the unit into the auction and FirstEnergy complied with
the FERC’s conditions, FirstEnergy does not anticipate that the FERC will grant
the relief requested in the pleadings.  Based on this expectation,
FirstEnergy believes that the auction results would not be changed.





Complaint
against PJM RPM Auction





On May 30,
2008, a group of PJM load-serving entities, state commissions, consumer
advocates, and trade associations (referred to collectively as the RPM Buyers)
filed a complaint at the FERC against PJM alleging that three of the
four transitional RPM auctions yielded prices that are unjust and
unreasonable under the Federal Power Act. Most of the parties comprising
the RPM Buyers group were parties to the settlement approved by the FERC that
established the RPM. In the complaint, the RPM Buyers request that the
total projected payments to RPM sellers for the three auctions at issue be
materially reduced. On July 11, 2008, PJM filed its answer to the
complaint, in which it denied the allegation that the rates are unjust and
unreasonable. Also on that date, FirstEnergy filed a motion to
intervene.





128








If the FERC were to
rule unfavorably on this matter, the impact for the period ended June 30,
2008, would not be material to FirstEnergy’s results of operations, cash flows
or financial position, as FES only began collecting RPM revenues for the Beaver
Valley Power Station on June 1, 2008. However, such an unfavorable ruling by the
FERC could have a material adverse impact on the revenues of the Beaver Valley
Power Station in subsequent periods if these proceedings were to result in a
significant loss of FES’ RPM revenues.





FES believes that
the FERC is unlikely to grant the relief sought in the RPM Buyers’ complaint,
since it largely deals with legal issues concerning the fundamentals of the RPM
markets that are already at issue in a separate D.C. Circuit Court appellate
proceeding. Nevertheless, FES is unable to predict the outcome of these
proceedings or the resulting effect on FirstEnergy’s or FES’ results of
operations, cash flows or financial position.





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 believes the proposal promotes a mechanism
that will result in 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 conditionally approved
MISO’s Resource Adequacy proposal on March 26, 2008, requiring MISO to
submit to further compliance filings. Rehearing requests are pending on the
FERC’s March 26 Order. On May 27, 2008, MISO submitted a compliance
filing to address issues associated with planning reserve margins. On
June 17, 2008, various parties submitted comments and protests to MISO’s
compliance filing. FirstEnergy submitted comments identifying specific issues
that must be clarified and addressed. On June 25, 2008, MISO submitted a
second compliance filing establishing the enforcement mechanism for the reserve
margin requirement which establishes deficiency payments for load serving
entities that do not meet the resource adequacy requirements. Numerous parties,
including FirstEnergy, protested this filing. A FERC decision on this filing is
expected this fall.





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 21, 2008.




12.  NEW
ACCOUNTING STANDARDS AND INTERPRETATIONS





SFAS 141(R) – “Business
Combinations”





In December 2007,
the FASB issued SFAS 141(R), which: (i) requires the acquiring entity in a
business combination to recognize all the assets acquired and liabilities
assumed in the transaction; (ii) establishes the acquisition-date fair value as
the measurement objective for all assets acquired and liabilities assumed; and
(iii) 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. 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 - “Non-controlling 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.





129








SFAS
      161 - “Disclosures about Derivative Instruments and Hedging Activities –
      an Amendment of FASB Statement No.
133”





In March 2008, the
FASB issued SFAS 161 that 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. The FASB believes that additional required
disclosure of the fair values of derivative instruments and their gains and
losses in a tabular format will 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. This Statement also requires cross-referencing within the
footnotes to help users of financial statements locate important information
about derivative instruments. The Statement is effective for fiscal years
beginning on or after December 15, 2008. FirstEnergy is currently
evaluating the impact of adopting this Standard on its financial
statements.





SFAS
      162 - “The Hierarchy of Generally Accepted Accounting
      Principles”





In May 2008, the
FASB issued SFAS 162, which is intended to improve financial reporting by
identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with GAAP. The FASB believes that the GAAP hierarchy should be
directed to reporting entities, not the independent auditors, because reporting
entities are responsible for selecting accounting principles for financial
statements that are presented in conformity with GAAP. This Statement is
effective 60 days following the SEC’s approval of the PCAOB amendments to U.S.
Auditing Standards Section 411, The
Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles, which has not yet occurred. The Statement
will not have an impact on FirstEnergy’s 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 electricity 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.





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.





130





Segment
      Financial InformationOhioEnergy
                
                
                Competitive
                
                
                TransitionalDelivery
                
                
                Energy
                
                
                Generation
                
                
                
                
                
                ReconcilingThree
      Months Ended
                
                Services
                
                
                Services
                
                
                Services
                
                
                Other
                
                
                Adjustments
                
                
                Consolidated(In
      millions)June 30,
      2008External
      revenues
                
                $
                2,182
                
                
                $
                375
                
                
                $
                683
                
                
                $
                20
                
                
                $
                (15
                )
                
                $
                3,245Internal
      revenues
                
                
                -
                
                
                
                704
                
                
                
                -
                
                
                
                -
                
                
                
                (704
                )
                
                
                -Total
      revenues
                
                
                2,182
                
                
                
                1,079
                
                
                
                683
                
                
                
                20
                
                
                
                (719
                )
                
                
                3,245Depreciation
      and amortization
                
                
                241
                
                
                
                59
                
                
                
                11
                
                
                
                1
                
                
                
                4
                
                
                
                316Investment
      income
                
                
                40
                
                
                
                (8
                )
                
                
                (1
                )
                
                
                6
                
                
                
                (21
                )
                
                
                16Net interest
      charges
                
                
                99
                
                
                
                28
                
                
                
                -
                
                
                
                -
                
                
                
                48
                
                
                
                175Income
      taxes
                
                
                129
                
                
                
                45
                
                
                
                13
                
                
                
                (1
                )
                
                
                (26
                )
                
                
                160Net
      income
                
                
                193
                
                
                
                66
                
                
                
                19
                
                
                
                26
                
                
                
                (41
                )
                
                
                263Total
      assets
                
                
                23,423
                
                
                
                9,240
                
                
                
                266
                
                
                
                281
                
                
                
                335
                
                
                
                33,545Total
      goodwill
                
                
                5,582
                
                
                
                24
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                5,606Property
      additions
                
                
                196
                
                
                
                683
                
                
                
                -
                
                
                
                9
                
                
                
                18
                
                
                
                906June 30,
      2007External
      revenues
                
                $
                2,095
                
                
                $
                398
                
                
                $
                625
                
                
                $
                9
                
                
                $
                (18
                )
                
                $
                3,109Internal
      revenues
                
                
                -
                
                
                
                691
                
                
                
                -
                
                
                
                -
                
                
                
                (691
                )
                
                
                -Total
      revenues
                
                
                2,095
                
                
                
                1,089
                
                
                
                625
                
                
                
                9
                
                
                
                (709
                )
                
                
                3,109Depreciation
      and amortization
                
                
                249
                
                
                
                51
                
                
                
                (49
                )
                
                
                1
                
                
                
                5
                
                
                
                257Investment
      income
                
                
                62
                
                
                
                5
                
                
                
                -
                
                
                
                -
                
                
                
                (37
                )
                
                
                30Net interest
      charges
                
                
                116
                
                
                
                42
                
                
                
                -
                
                
                
                1
                
                
                
                39
                
                
                
                198Income
      taxes
                
                
                141
                
                
                
                96
                
                
                
                19
                
                
                
                (3
                )
                
                
                (31
                )
                
                
                222Net
      income
                
                
                207
                
                
                
                142
                
                
                
                30
                
                
                
                6
                
                
                
                (47
                )
                
                
                338Total
      assets
                
                
                23,602
                
                
                
                7,284
                
                
                
                260
                
                
                
                236
                
                
                
                651
                
                
                
                32,033Total
      goodwill
                
                
                5,874
                
                
                
                24
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                5,898Property
      additions
                
                
                245
                
                
                
                139
                
                
                
                -
                
                
                
                2
                
                
                
                15
                
                
                
                401Six
      Months EndedJune 30, 2008External
      revenues
                
                $
                4,394
                
                
                $
                704
                
                
                $
                1,390
                
                
                $
                60
                
                
                $
                (26
                )
                
                $
                6,522Internal
      revenues
                
                
                -
                
                
                
                1,480
                
                
                
                -
                
                
                
                -
                
                
                
                (1,480
                )
                
                
                -Total
      revenues
                
                
                4,394
                
                
                
                2,184
                
                
                
                1,390
                
                
                
                60
                
                
                
                (1,506
                )
                
                
                6,522Depreciation
      and amortization
                
                
                496
                
                
                
                112
                
                
                
                15
                
                
                
                1
                
                
                
                9
                
                
                
                633Investment
      income
                
                
                85
                
                
                
                (14
                )
                
                
                -
                
                
                
                6
                
                
                
                (44
                )
                
                
                33Net interest
      charges
                
                
                202
                
                
                
                55
                
                
                
                -
                
                
                
                -
                
                
                
                89
                
                
                
                346Income
      taxes
                
                
                248
                
                
                
                103
                
                
                
                28
                
                
                
                13
                
                
                
                (45
                )
                
                
                347Net
      income
                
                
                372
                
                
                
                153
                
                
                
                42
                
                
                
                48
                
                
                
                (76
                )
                
                
                539Total
      assets
                
                
                23,423
                
                
                
                9,240
                
                
                
                266
                
                
                
                281
                
                
                
                335
                
                
                
                33,545Total
      goodwill
                
                
                5,582
                
                
                
                24
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                5,606Property
      additions
                
                
                451
                
                
                
                1,145
                
                
                
                -
                
                
                
                21
                
                
                
                -
                
                
                
                1,617June 30, 2007External
      revenues
                
                $
                4,135
                
                
                $
                719
                
                
                $
                1,245
                
                
                $
                20
                
                
                $
                (37
                )
                
                $
                6,082Internal
      revenues
                
                
                -
                
                
                
                1,404
                
                
                
                -
                
                
                
                -
                
                
                
                (1,404
                )
                
                
                -Total
      revenues
                
                
                4,135
                
                
                
                2,123
                
                
                
                1,245
                
                
                
                20
                
                
                
                (1,441
                )
                
                
                6,082Depreciation
      and amortization
                
                
                469
                
                
                
                102
                
                
                
                (64
                )
                
                
                2
                
                
                
                11
                
                
                
                520Investment
      income
                
                
                132
                
                
                
                8
                
                
                
                1
                
                
                
                -
                
                
                
                (78
                )
                
                
                63Net interest
      charges
                
                
                223
                
                
                
                92
                
                
                
                1
                
                
                
                2
                
                
                
                60
                
                
                
                378Income
      taxes
                
                
                289
                
                
                
                160
                
                
                
                35
                
                
                
                2
                
                
                
                (64
                )
                
                
                422Net
      income
                
                
                425
                
                
                
                240
                
                
                
                53
                
                
                
                7
                
                
                
                (97
                )
                
                
                628Total
      assets
                
                
                23,602
                
                
                
                7,284
                
                
                
                260
                
                
                
                236
                
                
                
                651
                
                
                
                32,033Total
      goodwill
                
                
                5,874
                
                
                
                24
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                5,898Property
      additions
                
                
                400
                
                
                
                263
                
                
                
                -
                
                
                
                3
                
                
                
                31
                
                
                
                697




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.





131








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.
This transaction is classified as an operating lease under GAAP for FES and
FirstEnergy and a financing for FGCO.





The consolidating
statements of income for the three-month and six-month periods ended
June 30, 2008 and 2007, consolidating balance sheets as of June 30,
2008 and December 31, 2007 and condensed consolidating statements of cash flows
for the six-months ended June 30, 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.





132







FIRSTENERGY
      SOLUTIONS CORP.CONSOLIDATING
      STATEMENTS OF INCOME(Unaudited)For
      the Three Months Ended June 30, 2008
              
              FES
              
              
              FGCO
              
              
              NGC
              
              
              Eliminations
              
              
              Consolidated(In
      thousands)REVENUES
              
              $
              1,064,627
              
              
              $
              565,225
              
              
              $
              287,028
              
              
              $
              (845,602
              )
              
              $
              1,071,278EXPENSES:Fuel
              
              
              3,605
              
              
              
              277,192
              
              
              
              29,753
              
              
              
              -
              
              
              
              310,550Purchased
      power from non-affiliates
              
              
              220,339
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              220,339Purchased
      power from affiliates
              
              
              842,670
              
              
              
              2,932
              
              
              
              34,528
              
              
              
              (845,602
              )
              
              
              34,528Other
      operating expenses
              
              
              29,842
              
              
              
              124,173
              
              
              
              121,534
              
              
              
              12,189
              
              
              
              287,738Provision for
      depreciation
              
              
              1,600
              
              
              
              30,027
              
              
              
              25,893
              
              
              
              (1,360
              )
              
              
              56,160General
      taxes
              
              
              4,727
              
              
              
              11,504
              
              
              
              3,564
              
              
              
              -
              
              
              
              19,795Total
      expenses
              
              
              1,102,783
              
              
              
              445,828
              
              
              
              215,272
              
              
              
              (834,773
              )
              
              
              929,110OPERATING
      INCOME (LOSS)
              
              
              (38,156
              )
              
              
              119,397
              
              
              
              71,756
              
              
              
              (10,829
              )
              
              
              142,168OTHER
      INCOME (EXPENSE):Miscellaneous
      income (expense), includingnet income
      from equity investees
              
              
              98,590
              
              
              
              489
              
              
              
              (9,449
              )
              
              
              (91,704
              )
              
              
              (2,074
              )Interest
      expense - affiliates
              
              
              (50
              )
              
              
              (7,920
              )
              
              
              (2,758
              )
              
              
              -
              
              
              
              (10,728
              )Interest
      expense - other
              
              
              (6,663
              )
              
              
              (23,697
              )
              
              
              (10,632
              )
              
              
              16,487
              
              
              
              (24,505
              )Capitalized
      interest
              
              
              28
              
              
              
              9,856
              
              
              
              657
              
              
              
              -
              
              
              
              10,541Total other
      income (expense)
              
              
              91,905
              
              
              
              (21,272
              )
              
              
              (22,182
              )
              
              
              (75,217
              )
              
              
              (26,766
              )INCOME
      BEFORE INCOME TAXES
              
              
              53,749
              
              
              
              98,125
              
              
              
              49,574
              
              
              
              (86,046
              )
              
              
              115,402INCOME
      TAXES (BENEFIT)
              
              
              (14,345
              )
              
              
              38,467
              
              
              
              20,838
              
              
              
              2,348
              
              
              
              47,308NET
      INCOME
              
              $
              68,094
              
              
              $
              59,658
              
              
              $
              28,736
              
              
              $
              (88,394
              )
              
              $
              68,094
  
 133
  
 FIRSTENERGY
      SOLUTIONS CORP.CONSOLIDATING
      STATEMENTS OF INCOME(Unaudited)For
      the Three Months Ended June 30, 2007
              
              FES
              
              
              FGCO
              
              
              NGC
              
              
              Eliminations
              
              
              Consolidated(In
      thousands)REVENUES
              
              $
              1,074,858
              
              
              $
              453,553
              
              
              $
              279,092
              
              
              $
              (738,772
              )
              
              $
              1,068,731EXPENSES:Fuel
              
              
              7,513
              
              
              
              235,653
              
              
              
              25,714
              
              
              
              -
              
              
              
              268,880Purchased
      power from non-affiliates
              
              
              162,873
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              162,873Purchased
      power from affiliates
              
              
              731,260
              
              
              
              57,291
              
              
              
              20,806
              
              
              
              (738,772
              )
              
              
              70,585Other
      operating expenses
              
              
              30,519
              
              
              
              65,694
              
              
              
              136,932
              
              
              
              -
              
              
              
              233,145Provision for
      depreciation
              
              
              469
              
              
              
              25,239
              
              
              
              22,812
              
              
              
              -
              
              
              
              48,520General
      taxes
              
              
              5,602
              
              
              
              9,050
              
              
              
              6,258
              
              
              
              -
              
              
              
              20,910Total
      expenses
              
              
              938,236
              
              
              
              392,927
              
              
              
              212,522
              
              
              
              (738,772
              )
              
              
              804,913OPERATING
      INCOME
              
              
              136,622
              
              
              
              60,626
              
              
              
              66,570
              
              
              
              -
              
              
              
              263,818OTHER
      INCOME (EXPENSE):Miscellaneous
      income (expense), includingnet
      income from equity investees
              
              
              74,781
              
              
              
              (622
              )
              
              
              4,215
              
              
              
              (63,005
              )
              
              
              15,369Interest
      expense - affiliates
              
              
              -
              
              
              
              (17,990
              )
              
              
              (4,827
              )
              
              
              -
              
              
              
              (22,817
              )Interest
      expense - other
              
              
              (5,773
              )
              
              
              (6,116
              )
              
              
              (9,804
              )
              
              
              -
              
              
              
              (21,693
              )Capitalized
      interest
              
              
              6
              
              
              
              3,056
              
              
              
              1,361
              
              
              
              -
              
              
              
              4,423Total other
      income (expense)
              
              
              69,014
              
              
              
              (21,672
              )
              
              
              (9,055
              )
              
              
              (63,005
              )
              
              
              (24,718
              )INCOME
      BEFORE INCOME TAXES
              
              
              205,636
              
              
              
              38,954
              
              
              
              57,515
              
              
              
              (63,005
              )
              
              
              239,100INCOME
      TAXES
              
              
              54,220
              
              
              
              12,892
              
              
              
              20,572
              
              
              
              -
              
              
              
              87,684NET
      INCOME
              
              $
              151,416
              
              
              $
              26,062
              
              
              $
              36,943
              
              
              $
              (63,005
              )
              
              $
              151,416
  
 134
 
 
 FIRSTENERGY
      SOLUTIONS CORP.CONSOLIDATING
      STATEMENTS OF INCOME(Unaudited)For
      the Six Months Ended June 30, 2008
              
              FES
              
              
              FGCO
              
              
              NGC
              
              
              Eliminations
              
              
              Consolidated(In
      thousands)REVENUES
              
              $
              2,164,475
              
              
              $
              1,132,926
              
              
              $
              612,712
              
              
              $
              (1,739,719
              )
              
              $
              2,170,394EXPENSES:Fuel
              
              
              5,743
              
              
              
              568,431
              
              
              
              58,065
              
              
              
              -
              
              
              
              632,239Purchased
      power from non-affiliates
              
              
              427,063
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              427,063Purchased
      power from affiliates
              
              
              1,734,649
              
              
              
              5,070
              
              
              
              60,013
              
              
              
              (1,739,719
              )
              
              
              60,013Other
      operating expenses
              
              
              67,438
              
              
              
              231,340
              
              
              
              261,129
              
              
              
              24,377
              
              
              
              584,284Provision for
      depreciation
              
              
              1,907
              
              
              
              56,626
              
              
              
              50,087
              
              
              
              (2,718
              )
              
              
              105,902General
      taxes
              
              
              10,142
              
              
              
              23,074
              
              
              
              9,776
              
              
              
              -
              
              
              
              42,992Total
      expenses
              
              
              2,246,942
              
              
              
              884,541
              
              
              
              439,070
              
              
              
              (1,718,060
              )
              
              
              1,852,493OPERATING
      INCOME (LOSS)
              
              
              (82,467
              )
              
              
              248,385
              
              
              
              173,642
              
              
              
              (21,659
              )
              
              
              317,901OTHER
      INCOME (EXPENSE):Miscellaneous
      income (expense), includingnet income
      from equity investees
              
              
              220,315
              
              
              
              (719
              )
              
              
              (15,986
              )
              
              
              (208,588
              )
              
              
              (4,978
              )Interest
      expense - affiliates
              
              
              (132
              )
              
              
              (13,209
              )
              
              
              (4,597
              )
              
              
              -
              
              
              
              (17,938
              )Interest
      expense - other
              
              
              (10,641
              )
              
              
              (49,665
              )
              
              
              (21,650
              )
              
              
              32,916
              
              
              
              (49,040
              )Capitalized
      interest
              
              
              49
              
              
              
              16,084
              
              
              
              1,071
              
              
              
              -
              
              
              
              17,204Total other
      income (expense)
              
              
              209,591
              
              
              
              (47,509
              )
              
              
              (41,162
              )
              
              
              (175,672
              )
              
              
              (54,752
              )INCOME
      BEFORE INCOME TAXES
              
              
              127,124
              
              
              
              200,876
              
              
              
              132,480
              
              
              
              (197,331
              )
              
              
              263,149INCOME
      TAXES (BENEFIT)
              
              
              (30,954
              )
              
              
              77,752
              
              
              
              53,602
              
              
              
              4,671
              
              
              
              105,071NET
      INCOME
              
              $
              158,078
              
              
              $
              123,124
              
              
              $
              78,878
              
              
              $
              (202,002
              )
              
              $
              158,078
   
 135
 
 FIRSTENERGY
      SOLUTIONS CORP.CONSOLIDATING
      STATEMENTS OF INCOME(Unaudited)For
      the Six Months Ended June 30, 2007
              
              FES
              
              
              FGCO
              
              
              NGC
              
              
              Eliminations
              
              
              Consolidated(In
      thousands)REVENUES
              
              $
              2,094,245
              
              
              $
              1,004,908
              
              
              $
              513,183
              
              
              $
              (1,525,312
              )
              
              $
              2,087,024EXPENSES:Fuel
              
              
              9,880
              
              
              
              436,884
              
              
              
              55,651
              
              
              
              -
              
              
              
              502,415Purchased
      power from non-affiliates
              
              
              349,076
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              349,076Purchased
      power from affiliates
              
              
              1,515,432
              
              
              
              118,727
              
              
              
              38,221
              
              
              
              (1,525,312
              )
              
              
              147,068Other
      operating expenses
              
              
              81,768
              
              
              
              164,789
              
              
              
              250,184
              
              
              
              -
              
              
              
              496,741Provision for
      depreciation
              
              
              922
              
              
              
              50,175
              
              
              
              45,433
              
              
              
              -
              
              
              
              96,530General
      taxes
              
              
              10,536
              
              
              
              19,618
              
              
              
              12,474
              
              
              
              -
              
              
              
              42,628Total
      expenses
              
              
              1,967,614
              
              
              
              790,193
              
              
              
              401,963
              
              
              
              (1,525,312
              )
              
              
              1,634,458OPERATING
      INCOME
              
              
              126,631
              
              
              
              214,715
              
              
              
              111,220
              
              
              
              -
              
              
              
              452,566OTHER
      INCOME (EXPENSE):Miscellaneous
      income, includingnet income
      from equity investees
              
              
              188,729
              
              
              
              294
              
              
              
              9,415
              
              
              
              (163,337
              )
              
              
              35,101Interest
      expense - affiliates
              
              
              -
              
              
              
              (42,321
              )
              
              
              (9,942
              )
              
              
              -
              
              
              
              (52,263
              )Interest
      expense - other
              
              
              (7,158
              )
              
              
              (12,876
              )
              
              
              (19,017
              )
              
              
              -
              
              
              
              (39,051
              )Capitalized
      interest
              
              
              11
              
              
              
              5,155
              
              
              
              2,466
              
              
              
              -
              
              
              
              7,632Total other
      income (expense)
              
              
              181,582
              
              
              
              (49,748
              )
              
              
              (17,078
              )
              
              
              (163,337
              )
              
              
              (48,581
              )INCOME
      BEFORE INCOME TAXES
              
              
              308,213
              
              
              
              164,967
              
              
              
              94,142
              
              
              
              (163,337
              )
              
              
              403,985INCOME
      TAXES
              
              
              54,293
              
              
              
              62,181
              
              
              
              33,591
              
              
              
              -
              
              
              
              150,065NET
      INCOME
              
              $
              253,920
              
              
              $
              102,786
              
              
              $
              60,551
              
              
              $
              (163,337
              )
              
              $
              253,920
    136
  
 FIRSTENERGY
      SOLUTIONS CORP.CONSOLIDATING
      BALANCE SHEETS(Unaudited)As
      of June 30, 2008
              
              FES
              
              
              FGCO
              
              
              NGC
              
              
              Eliminations
              
              
              Consolidated(In
      thousands)ASSETSCURRENT
      ASSETS:Cash and cash
      equivalents
              
              $
              2
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              2Receivables-Customers
              
              
              117,858
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              117,858Associated
      companies
              
              
              419,402
              
              
              
              259,454
              
              
              
              80,249
              
              
              
              (285,131
              )
              
              
              473,974Other
              
              
              1,475
              
              
              
              1,376
              
              
              
              5,105
              
              
              
              -
              
              
              
              7,956Notes
      receivable from associated companies
              
              
              554,279
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              554,279Materials and
      supplies, at average cost
              
              
              2,942
              
              
              
              281,275
              
              
              
              205,327
              
              
              
              -
              
              
              
              489,544Prepayments
      and other
              
              
              141,414
              
              
              
              30,300
              
              
              
              695
              
              
              
              -
              
              
              
              172,4091,237,372
              
              
              
              572,405
              
              
              
              291,376
              
              
              
              (285,131
              )
              
              
              1,816,022PROPERTY,
      PLANT AND EQUIPMENT:In
      service
              
              
              82,280
              
              
              
              5,385,410
              
              
              
              4,666,202
              
              
              
              (391,896
              )
              
              
              9,741,996Less -
      Accumulated provision for depreciation
              
              
              9,411
              
              
              
              2,684,494
              
              
              
              1,609,851
              
              
              
              (169,476
              )
              
              
              4,134,28072,869
              
              
              
              2,700,916
              
              
              
              3,056,351
              
              
              
              (222,420
              )
              
              
              5,607,716Construction
      work in progress
              
              
              11,373
              
              
              
              1,064,083
              
              
              
              145,833
              
              
              
              -
              
              
              
              1,221,28984,242
              
              
              
              3,764,999
              
              
              
              3,202,184
              
              
              
              (222,420
              )
              
              
              6,829,005OTHER
      PROPERTY AND INVESTMENTS:Nuclear plant
      decommissioning trusts
              
              
              -
              
              
              
              -
              
              
              
              1,234,635
              
              
              
              -
              
              
              
              1,234,635Long-term
      notes receivable from associated companies
              
              
              -
              
              
              
              -
              
              
              
              62,900
              
              
              
              -
              
              
              
              62,900Investment in
      associated companies
              
              
              2,677,674
              
              
              
              -
              
              
              
              -
              
              
              
              (2,677,674
              )
              
              
              -Other
              
              
              2,323
              
              
              
              63,467
              
              
              
              202
              
              
              
              -
              
              
              
              65,9922,679,997
              
              
              
              63,467
              
              
              
              1,297,737
              
              
              
              (2,677,674
              )
              
              
              1,363,527DEFERRED
      CHARGES AND OTHER ASSETS:Accumulated
      deferred income taxes
              
              
              16,722
              
              
              
              480,721
              
              
              
              -
              
              
              
              (249,475
              )
              
              
              247,968Lease
      assignment receivable from associated companies
              
              
              -
              
              
              
              67,256
              
              
              
              -
              
              
              
              -
              
              
              
              67,256Goodwill
              
              
              24,248
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              24,248Property
      taxes
              
              
              -
              
              
              
              25,007
              
              
              
              22,767
              
              
              
              -
              
              
              
              47,774Pension
      assets
              
              
              3,211
              
              
              
              12,206
              
              
              
              -
              
              
              
              -
              
              
              
              15,417Unamortized
      sale and leaseback costs
              
              
              -
              
              
              
              23,282
              
              
              
              -
              
              
              
              50,096
              
              
              
              73,378Other
              
              
              8,473
              
              
              
              58,569
              
              
              
              8,813
              
              
              
              (47,063
              )
              
              
              28,79252,654
              
              
              
              667,041
              
              
              
              31,580
              
              
              
              (246,442
              )
              
              
              504,833$
              4,054,265
              
              
              $
              5,067,912
              
              
              $
              4,822,877
              
              
              $
              (3,431,667
              )
              
              $
              10,513,387LIABILITIES
      AND CAPITALIZATIONCURRENT
      LIABILITIES:Currently
      payable long-term debt
              
              $
              4,679
              
              
              $
              873,562
              
              
              $
              1,077,289
              
              
              $
              (17,315
              )
              
              $
              1,938,215Short-term
      borrowings-Associated
      companies
              
              
              -
              
              
              
              774,490
              
              
              
              442,217
              
              
              
              -
              
              
              
              1,216,707Other
              
              
              1,000,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,000,000Accounts
      payable-Associated
      companies
              
              
              275,820
              
              
              
              253,818
              
              
              
              93,599
              
              
              
              (275,431
              )
              
              
              347,806Other
              
              
              81,252
              
              
              
              133,486
              
              
              
              -
              
              
              
              -
              
              
              
              214,738Accrued
      taxes
              
              
              1,162
              
              
              
              58,976
              
              
              
              19,393
              
              
              
              (6,993
              )
              
              
              72,538Other
              
              
              116,036
              
              
              
              98,885
              
              
              
              14,607
              
              
              
              34,697
              
              
              
              264,2251,478,949
              
              
              
              2,193,217
              
              
              
              1,647,105
              
              
              
              (265,042
              )
              
              
              5,054,229CAPITALIZATION:Common
      stockholder's equity
              
              
              2,505,676
              
              
              
              1,071,297
              
              
              
              1,596,565
              
              
              
              (2,667,862
              )
              
              
              2,505,676Long-term debt
      and other long-term obligations
              
              
              41,317
              
              
              
              1,312,162
              
              
              
              421,815
              
              
              
              (1,296,982
              )
              
              
              478,3122,546,993
              
              
              
              2,383,459
              
              
              
              2,018,380
              
              
              
              (3,964,844
              )
              
              
              2,983,988NONCURRENT
      LIABILITIES:Deferred gain
      on sale and leaseback transaction
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,043,442
              
              
              
              1,043,442Accumulated
      deferred income taxes
              
              
              -
              
              
              
              -
              
              
              
              245,223
              
              
              
              (245,223
              )
              
              
              -Accumulated
      deferred investment tax credits
              
              
              -
              
              
              
              34,646
              
              
              
              24,176
              
              
              
              -
              
              
              
              58,822Asset
      retirement obligations
              
              
              -
              
              
              
              24,274
              
              
              
              811,924
              
              
              
              -
              
              
              
              836,198Retirement
      benefits
              
              
              9,590
              
              
              
              56,925
              
              
              
              -
              
              
              
              -
              
              
              
              66,515Property
      taxes
              
              
              -
              
              
              
              25,329
              
              
              
              22,766
              
              
              
              -
              
              
              
              48,095Lease market
      valuation liability
              
              
              -
              
              
              
              330,457
              
              
              
              -
              
              
              
              -
              
              
              
              330,457Other
              
              
              18,733
              
              
              
              19,605
              
              
              
              53,303
              
              
              
              -
              
              
              
              91,64128,323
              
              
              
              491,236
              
              
              
              1,157,392
              
              
              
              798,219
              
              
              
              2,475,170$
              4,054,265
              
              
              $
              5,067,912
              
              
              $
              4,822,877
              
              
              $
              (3,431,667
              )
              
              $
              10,513,387
   
 137
    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
              )
              
              
              695,682$
              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
              
              
              
              2,437,419$
              3,162,511
              
              
              $
              4,452,888
              
              
              $
              4,092,883
              
              
              $
              (3,286,018
              )
              
              $
              8,422,264
   
 138
  
 FIRSTENERGY
      SOLUTIONS CORP.CONDENSED
      CONSOLIDATING STATEMENTS OF CASH FLOWS(Unaudited)For
      the Six Months Ended June 30, 2008
              
              FES
              
              
              FGCO
              
              
              NGC
              
              
              Eliminations
              
              
              Consolidated(In
      thousands)NET
      CASH PROVIDED FROM (USED FOR)OPERATING
      ACTIVITIES
              
              $
              (138,894
              )
              
              $
              109,372
              
              
              $
              82,857
              
              
              $
              (8,316
              )
              
              $
              45,019CASH
      FLOWS FROM FINANCING ACTIVITIES:New
      Financing-Long-term
      debt
              
              
              -
              
              
              
              276,235
              
              
              
              179,500
              
              
              
              -
              
              
              
              455,735Short-term
      borrowings, net
              
              
              700,000
              
              
              
              535,705
              
              
              
              416,938
              
              
              
              -
              
              
              
              1,652,643Redemptions
      and Repayments-Long-term
      debt
              
              
              (792
              )
              
              
              (285,567
              )
              
              
              (180,334
              )
              
              
              8,316
              
              
              
              (458,377
              )Common stock
      dividend payment
              
              
              (10,000
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (10,000
              )Net cash
      provided from financing activities
              
              
              689,208
              
              
              
              526,373
              
              
              
              416,104
              
              
              
              8,316
              
              
              
              1,640,001CASH
      FLOWS FROM INVESTING ACTIVITIES:Property
      additions
              
              
              (20,176
              )
              
              
              (584,151
              )
              
              
              (548,175
              )
              
              
              -
              
              
              
              (1,152,502
              )Proceeds from
      asset sales
              
              
              -
              
              
              
              10,875
              
              
              
              -
              
              
              
              -
              
              
              
              10,875Sales of
      investment securities held in trusts
              
              
              -
              
              
              
              -
              
              
              
              384,692
              
              
              
              -
              
              
              
              384,692Purchases of
      investment securities held in trusts
              
              
              -
              
              
              
              -
              
              
              
              (404,502
              )
              
              
              -
              
              
              
              (404,502
              )Loan
      repayments from (loans to) associated companies, net
              
              
              (530,508
              )
              
              
              -
              
              
              
              69,012
              
              
              
              -
              
              
              
              (461,496
              )Other
              
              
              370
              
              
              
              (62,469
              )
              
              
              12
              
              
              
              -
              
              
              
              (62,087
              )Net cash used
      for investing activities
              
              
              (550,314
              )
              
              
              (635,745
              )
              
              
              (498,961
              )
              
              
              -
              
              
              
              (1,685,020
              )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
   
 139
 FIRSTENERGY
      SOLUTIONS CORP.CONDENSED
      CONSOLIDATING STATEMENTS OF CASH FLOWS(Unaudited)For
      the Six Months Ended June 30, 2007
                
                FES
                
                
                FGCO
                
                
                NGC
                
                
                Eliminations
                
                
                Consolidated(In
      thousands)NET
      CASH PROVIDED FROM (USED FOR)OPERATING
      ACTIVITIES
                
                $
                (77,782
                )
                
                $
                255,301
                
                
                $
                33,686
                
                
                $
                -
                
                
                $
                211,205CASH
      FLOWS FROM FINANCING ACTIVITIES:New
      Financing-Equity
      contribution from parent
                
                
                700,000
                
                
                
                700,000
                
                
                
                -
                
                
                
                (700,000
                )
                
                
                700,000Short-term
      borrowings, net
                
                
                500,000
                
                
                
                -
                
                
                
                -
                
                
                
                (135,153
                )
                
                
                364,847Redemptions
      and Repayments-Long-term
      debt
                
                
                -
                
                
                
                (616,792
                )
                
                
                (128,744
                )
                
                
                -
                
                
                
                (745,536
                )Short-term
      borrowings, net
                
                
                -
                
                
                
                (135,153
                )
                
                
                -
                
                
                
                135,153
                
                
                
                -Common stock
      dividend payment
                
                
                (37,000
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (37,000
                )Net cash
      provided from (used for) financing activities
                
                
                1,163,000
                
                
                
                (51,945
                )
                
                
                (128,744
                )
                
                
                (700,000
                )
                
                
                282,311CASH
      FLOWS FROM INVESTING ACTIVITIES:Property
      additions
                
                
                (9,466
                )
                
                
                (215,804
                )
                
                
                (77,154
                )
                
                
                -
                
                
                
                (302,424
                )Proceeds from
      asset sales
                
                
                -
                
                
                
                12,120
                
                
                
                -
                
                
                
                -
                
                
                
                12,120Sales of
      investment securities held in trusts
                
                
                -
                
                
                
                -
                
                
                
                367,924
                
                
                
                -
                
                
                
                367,924Purchases of
      investment securities held in trusts
                
                
                -
                
                
                
                -
                
                
                
                (389,286
                )
                
                
                -
                
                
                
                (389,286
                )Loan
      repayments from (loans to) associated companies, net
                
                
                (376,444
                )
                
                
                -
                
                
                
                192,268
                
                
                
                -
                
                
                
                (184,176
                )Investment in
      subsidiary
                
                
                (700,000
                )
                
                
                -
                
                
                
                -
                
                
                
                700,000
                
                
                
                -Other
                
                
                692
                
                
                
                328
                
                
                
                1,306
                
                
                
                -
                
                
                
                2,326Net cash
      provided from (used for) investing activities
                
                
                (1,085,218
                )
                
                
                (203,356
                )
                
                
                95,058
                
                
                
                700,000
                
                
                
                (493,516
                )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
  140




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 June 30, 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 June 30, 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.











141





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





FirstEnergy’s Annual
Report on Form 10-K for the year ended December 31, 2007 includes a detailed
discussion of its risk factors. The information presented below updates
certain of those risk factors and should be read in conjunction with the risk
factors and information disclosed in FirstEnergy’s Annual Report on Form
10-K.





The Uncertainty of the Form of the
Rules Ultimately Adopted By the PUCO to Implement SB221





The PUCO has yet to
finalize the rules to implement SB221, including the rules for the filing of
ESPs or MROs or rules implementing the other provisions of the legislation.
These filing rules may not be finalized before the end of 2008, and were not
finalized when the Ohio Companies made their ESP and MRO filings in July 2008.
Those filings were made pursuant to proposed rules, subject to such applications
being modified to conform to the final rules upon their issuance. Consequently,
the uncertainty surrounding the ultimate form of these rules could impact the
results FirstEnergy expects to receive from the Ohio Companies’ filings and
could negatively impact its results of operations and financial
condition.





The
Potential Impact of the U.S. Court of Appeals’ July 11, 2008 Decision to Vacate
the CAIR Rules and The Uncertainty Surrounding the Form of any Laws, Rules or
Regulations That May Take its Place





On July 11, 2008,
the United States Court of Appeals for the District of Columbia vacated the CAIR
rules. The impacts of this decision may include, but are not limited to, the
potential for an asset impairment charge for a portion of FirstEnergy’s annual
NOx emission allowances. FirstEnergy continues to consider the implications of
the Court’s decision, and currently believes it has no material asset
impairment issue. To the extent the laws, rules or regulations that ultimately
may replace CAIR differ significantly from the original
rules, FirstEnergy’s results of operations and financial condition could be
negatively affected.





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.




PeriodApril
      1-30,
              
              May
      1-31,
              
              June
      1-30,
              
              Second2008
              
              2008
              
              2008
              
              QuarterTotal Number
      of Shares Purchased (a)
              
              237,587
              
              207,833
              
              556,691
              
              1,002,111Average Price
      Paid per Share
              
              $74.46
              
              $77.77
              
              $80.22
              
              $78.35Total 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.




142








ITEM
4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS





(a) The
annual meeting of FirstEnergy shareholders was held on May 20,
2008.





(b) At this
meeting, the following persons (comprising all members of the Board) were
elected to FirstEnergy's Board of Directors for one-year
terms:





Number
      of VotesFor
            
            
            WithheldPaul T.
      Addison
            
            166,788,020
            
            
            94,286,065Anthony J.
      Alexander
            
            166,689,752
            
            
            94,384,333Michael J.
      Anderson
            
            167,838,258
            
            
            93,235,827Dr. Carol A.
      Cartwright
            
            136,292,273
            
            
            124,781,812William T.
      Cottle
            
            137,139,127
            
            
            123,934,958Robert B.
      Heisler, Jr.
            
            166,413,896
            
            
            94,660,189Ernest J.
      Novak, Jr.
            
            166,845,340
            
            
            94,228,745Catherine A.
      Rein
            
            166,260,804
            
            
            94,813,281George M.
      Smart
            
            136,474,908
            
            
            124,599,177Wes M.
      Taylor
            
            166,721,392
            
            
            94,352,693Jesse T.
      Williams, Sr.
            
            136,872,458
            
            
            124,201,627








(c) (i) At this
meeting, the appointment of PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as auditor for
the year 2008 was ratified:





Number of VotesFor
            
            Against
            
            Abstentions254,692,023
            
            2,847,986
            
            3,534,076








(ii)
            At this
      meeting, a shareholder proposal recommending that the Board of Directors
      amend the company’s bylaws to reduce the percentage of shareholders
      required to call a special shareholder meeting was approved (approval
      required a favorable vote of a majority of the votes
  cast):





Number of VotesBrokerFor
            
            Against
            
            Abstentions
            
            Non-Votes154,287,388
            
            75,561,339
            
            4,966,165
            
            26,259,193





Based on this
result, the Board of Directors will further review this proposal.








(iii)
            At this
      meeting, a shareholder proposal recommending that the Board of Directors
      adopt a policy establishing an engagement process with proponents of
      shareholder proposals that are supported by a majority of the votes cast
      was not approved (approval required a favorable vote of a majority of the
      votes cast):





Number of VotesBrokerFor
            
            Against
            
            Abstentions
            
            Non-Votes96,151,699
            
            131,452,822
            
            7,210,371
            
            26,259,193








(iv)
            At this
      meeting, a shareholder proposal recommending that the Board of Directors
      adopt simple majority shareholder voting was approved (approval required a
      favorable vote of a majority of the votes
cast):





Number of VotesBrokerFor
            
            Against
            
            Abstentions
            
            Non-Votes181,558,191
            
            48,325,314
            
            4,931,387
            
            26,259,193





Based on this
result, the Board of Directors will further review this proposal.








143







(v)
            At this
      meeting, a shareholder proposal recommending that the Board of Directors
      adopt a majority vote standard for the election of directors was approved
      (approval required a favorable vote of a majority of the votes
      cast):





Number of VotesBrokerFor
            
            Against
            
            Abstentions
            
            Non-Votes164,594,559
            
            65,276,860
            
            4,943,473
            
            26,259,193





Based on this
result, the Board of Directors will further review this proposal.




ITEM
5.   OTHER INFORMATION
 
 Effective August 6,
2008, Mr. Gary R. Leidich, Executive Vice President of FirstEnergy (Company) and
President of FirstEnergy Generation, entered into a Special Severance Agreement
(Agreement) with the Company. The Agreement shall expire by its terms on
December 31, 2009, but will be reviewed annually by the Board of Directors which
will decide whether to extend its term for an additional year. If at any time
within twenty-four months after a change in control (as defined in the
Agreement) Mr. Leidich’s employment is involuntarily terminated for any reason
other than cause (as defined in the Agreement) or voluntarily terminated for
good reason (as defined in the Agreement), the Company shall pay him a lump-sum
severance benefit payable in cash of his full base salary through the date of
his termination of employment, plus 2.99 times his annual salary as of the date
of his termination of employment, plus the target annual short-term incentive
amount in effect for him under the FirstEnergy Corp. 2007 Incentive Compensation
Plan.
 
 The description of
the potential payments set forth above does not purport to be complete and is
qualified in its entirety by reference to the Form of Special Severance
Agreements which was filed as Exhibit 10.1 to FirstEnergy’s Form 10-K for the
year ended December 31, 2007 and is incorporated herein by reference as part of
this item.




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 1350






144






Penelec12
            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.





145





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.








August 7,
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)









146