Allegheny Power 2010 Annual Report Download - page 68

53
Regulatory Accounting
FirstEnergy’s energy delivery services segment is subject to regulation that sets the prices (rates) the Utilities are
permitted to charge customers based on costs that the regulatory agencies determine the Utilities are permitted to
recover. At times, regulators permit the future recovery through rates of costs that would be currently charged to expense
by an unregulated company. This ratemaking process results in the recording of regulatory assets based on anticipated
future cash inflows. FirstEnergy regularly reviews these assets to assess their ultimate recoverability within the approved
regulatory guidelines. Impairment risk associated with these assets relates to potentially adverse legislative, judicial or
regulatory actions in the future.
Pension and Other Postretirement Benefits Accounting
FirstEnergy’s reported costs of providing noncontributory qualified and non-qualified defined pension benefits and OPEB
benefits other than pensions are dependent upon numerous factors resulting from actual plan experience and certain
assumptions.
Pension and OPEB costs are affected by employee demographics (including age, compensation levels, and employment
periods), the level of contributions FirstEnergy makes to the plans and earnings on plan assets. Pension and OPEB costs
may also be affected by changes to key assumptions, including anticipated rates of return on plan assets, the discount
rates and health care trend rates used in determining the projected benefit obligations for pension and OPEB costs.
In accordance with GAAP, changes in pension and OPEB obligations associated with these factors may not be
immediately recognized as costs on the income statement, but generally are recognized in future years over the
remaining average service period of plan participants. GAAP delays recognition of changes due to the long-term nature
of pension and OPEB obligations and the varying market conditions likely to occur over long periods of time. As such,
significant portions of pension and OPEB costs recorded in any period may not reflect the actual level of cash benefits
provided to plan participants and are significantly influenced by assumptions about future market conditions and plan
participants' experience.
FirstEnergy recognizes the overfunded or underfunded status of the defined benefit pension and other postretirement
benefit plans on the balance sheet and recognize changes in funded status in the year in which the changes occur
through other comprehensive income. The underfunded status of FirstEnergy’s qualified and non-qualified pension and
OPEB plans at December 31, 2010 was $1.7 billion. FirstEnergy voluntarily intends to contribute $250 million to its
pension plan in 2011.
In selecting an assumed discount rate, FirstEnergy considers currently available rates of return on high-quality fixed
income investments expected to be available during the period to maturity of the pension and other postretirement
benefit obligations. The assumed discount rates for pension were 5.50%, 6.00% and 7.00% for December 31, 2010,
2009 and 2008, respectively. The assumed discount rates for OPEB were 5.00%, 5.75% and 7.0% as of December 31,
2010, 2009 and 2008, respectively.
FirstEnergy’s assumed rate of return on pension plan assets considers historical market returns and economic forecasts
for the types of investments held by the pension trusts. In 2010, FirstEnergy’s qualified pension and OPEB plan assets
earned $492 million or 10.1% compared to amounts earned of $570 million or 13.6% in 2009. The qualified pension and
OPEB costs in 2010 and 2009 were computed using an assumed 8.5% and 9.0% rate of return, respectively, on plan
assets which generated $397 million and $379 million of expected returns on plan assets, respectively. The expected
return of pension and OPEB assets is based on the trusts’ asset allocation targets and the historical performance of risk-
based and fixed income securities. The gains or losses generated as a result of the difference between expected and
actual returns on plan assets are deferred and amortized and will increase or decrease future net periodic pension and
OPEB cost, respectively.
FirstEnergy’s qualified and non-qualified pension and OPEB net periodic benefit cost was $138 million in 2010 compared
to $197 million in 2009 and credits of $116 million in 2008. FirstEnergy expects the 2011 qualified and non-qualified
pension and OPEB costs (including amounts capitalized) to be $103 million.
On June 2, 2009, FirstEnergy amended the health care benefits plan for all employees and retirees eligible that
participate in that plan. The amendment, which reduces future health care coverage subsidies paid by FirstEnergy on
behalf of participants, triggered a remeasurement of FirstEnergy’s other postretirement benefit plans as of May 31, 2009.
On September 2, 2009, the Utilities and ATSI made a combined $500 million voluntary contribution to their qualified
pension plan. Due to the significance of the voluntary contribution, FirstEnergy elected to remeasure the qualified
pension plan as of August 31, 2009. In the third quarter of 2009, FirstEnergy also incurred a $13 million net
postretirement benefit cost (including amounts capitalized) related to a liability created by the VERO offered by
FirstEnergy to qualified employees. The special termination benefits of the VERO included additional health care
coverage subsidies paid by FirstEnergy to those qualified employees who elected to retire. A total of 715 employees
accepted the VERO.