SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM U-1
APPLICATION OR DECLARATION
under
The Public Utility Holding Company Act of 1935
SEI HOLDINGS, INC.
900 Ashwood Parkway
Suite 500
Atlanta, Georgia 30338
(Name of company or companies filing this statement
and addresses of principal executive offices)
THE SOUTHERN COMPANY
(Name of top registered holding company parent of
each applicant or declarant)
Thomas G. Boren, President
SEI Holdings, Inc.
900 Ashwood Parkway
Suite 500
Atlanta, Georgia 30338
(Name and address of agent for service)
The Commission is requested to mail signed copies of all orders,
notices and communications to:
W.L. Westbrook Thomas G. Boren, President
Financial Vice-President SEI Holdings, Inc.
The Southern Company 900 Ashwood Parkway
270 Peachtree Street, N.W. Suite 500
Atlanta, Georgia 30303 Atlanta, Georgia 30338
John D. McLanahan, Esq.
Troutman Sanders LLP
600 Peachtree Street, N.E.
Suite 5200
Atlanta, Georgia 30308-2216
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Item 1. Description of Proposed Transactions.
1.1 Background. SEI Holdings, Inc. ("Holdings") is a wholly-owned
non-utility subsidiary of The Southern Company ("Southern"), a registered
holding company under the Public Utility Holding Company Act of 1935, as amended
(the "Act"). Holdings, directly and through various subsidiaries, is primarily
engaged in the business of developing, owning, managing and rendering services
to independent power projects and foreign utility systems, including "qualifying
facilities," as defined under the Public Utility Regulatory Policies Act of
1978, as amended; "exempt wholesale generators" and "foreign utility companies,"
as defined under Sections 32 and 33 of the Act, respectively; and other power
projects which constitute a part of Southern's integrated electric utility
system. Reference is made to File No. 70-8733, and to the order of the
Commission dated February 2, 1996 (Holding Co. Act Rel. No. 26468) (the
"February 1996 Order") approving the application-declaration of Southern,
Holdings, and certain other direct and indirect subsidiaries of Southern, for a
more complete description of Holdings, its operations, and its current
authority.
Under the terms of the February 1996 Order, Holdings is authorized,
subject to certain limitations, to acquire, directly or indirectly through one
or more subsidiaries (referred to as "Intermediate Subsidiaries"), in one or
more transactions from time to time through December 31, 2000, the securities of
or other interests in any one or more specified categories of energy-related
facilities or businesses (referred to as "Energy-
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Related Companies"), including, among others, any company that derives
substantially all of its revenues from brokering and marketing of electric
energy, provided that the buyer or seller, or both the buyer and seller, are
located within the area covered by the Southeastern Electric Reliability Council
("SERC"). Southern's operating electric utility subsidiaries, Alabama Power
Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company,
and Savannah Electric and Power Company (collectively, the "Operating
Companies"), are members of SERC.1
Holdings now seeks a modification in the terms of the
February 1996 Order solely as it relates to the authority of
Holdings to engage through one or more Energy-Related Companies
in the business of marketing and brokering electric energy.
Specifically, Holdings proposes herein that the Commission (i)
eliminate the restriction imposed under the February 1996 Order
on the geographic region in which such marketing and brokering
activities may be conducted; and (ii) expand the terms of the
February 1996 Order to allow Holdings, through one or more
subsidiary Energy-Related Companies (hereafter referred to as
"Marketing Subsidiaries"), to broker or market other forms of
energy commodities, in addition to electricity, including natural
gas, oil and coal, and to provide related services to customers.
Holdings is not herein requesting any other modifications to the terms of the
February 1996 Order.
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1 In addition to Georgia, Alabama, Mississippi and Florida, the electric utility
members of SERC provide retail and wholesale electric service in all or parts of
North and South Carolina, Virginia, Tennessee and Kentucky.
3
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The electric utility industry has experienced dramatic changes over the
past 15 years, with an accelerating trend towards deregulation in the name of
enhanced competition, lower cost and better service. Today, traditional
utilities must compete for new load (as well as to retain existing load) with a
variety of legislatively or administratively created entities not known until
recently, including "qualifying facilities," industrial self generators,
independent power producers, "exempt wholesale generators," and independent
power marketers and brokers. In addition, recent energy policy initiatives are
clearly designed to promote competition among traditional utilities themselves
by requiring that they provide transmission access to competing buyers and
sellers.2
The natural gas industry has experienced a similar evolution in recent
years. Today, most aspects of natural gas production have been deregulated, and
the transportation and storage functions of the interstate pipelines have been
"unbundled" from the merchant (gas sales) function, making the pipelines
essentially common carriers under the open-access provisions of the Federal
Energy Regulatory Commission's ("FERC's") Order No.
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2 See "Promoting Wholesale Competition Through Open Access
Non-discriminatory Transmission Services by Public Utilities and
Recovery of Stranded Costs by Public Utilities and Transmitting
Utilities," Notice of Proposed Rulemaking and Supplemental Notice
of Proposed Rulemaking, IV FERC Stats. & Regs. P. 32,514, 60 Fed.
Reg. 17,662 (April 7, 1995); Energy Policy Act of 1992, Pub. L.
No. 102-486, 106 Stat. 2776 (1992).
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636.3 As a result, local gas distribution companies today can contract directly
with gas producers or other suppliers (i.e., independent gas marketers) for
necessary supplies. Further, due to the increasing importance of natural gas as
a fuel for electric generation, many of the larger natural gas producers and
pipeline concerns, including Enron Corporation (Enron Power Marketing, Inc.),
Amoco Corp. (Amoco Power Marketing Corporation), Panhandle Eastern Corporation
(Associated Power Services, Inc.) and Noram Energy Corporation -- formerly
ArkLa, Inc. (NorAm Energy Services, Inc.), have organized and are very actively
engaged in the business of power marketing on a national scale.4 Consolidated
Natural Gas Company, a registered gas
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3 See "Regulation of Natural Gas Pipelines After Partial
Wellhead Decontrol," Order No. 636, III FERC Stats. & Regs.,
Regulations Preambles P. 30,939, 57 Fed. Reg. 13,267 (April 16,
1992).
4 In this regard, it is significant to note that the Act, as it has apparently
been construed by the Division of Investment Management, imposes no limitation
whatsoever on the ability of companies outside of registered holding company
systems to organize national power marketing subsidiaries to sell electricity at
wholesale or retail anywhere in the United States. Specifically, the Division of
Investment Management has concurred in a series of no-action letters that a
company organized to engage in electricity marketing is not an "electric utility
company" within the meaning of Section 2(a)(3) of the Act if it does not own or
operate physical "facilities" for the generation, transmission, or distribution
of electric energy. Hence, the acquisition of the securities of such a marketing
subsidiary by a company that is not in a registered holding company system is
not subject to the Commission's jurisdiction under Section 9(a) of the Act, and
the acquiring company does not become a statutory "holding company" or
"affiliate" of a public utility company as a result thereof. See Enron Power
Marketing, Inc., SEC No-Action Letter dated January 5, 1994 (Ref. No.
94-1-OPUR); CRSS Power Marketing, Inc., SEC No-Action Letter dated March 31,
1994 (Ref. No. 94-4-OPUR); Electric Clearinghouse, Inc., SEC No-Action Letter
dated April 13, 1994 (Ref. No. 94-5-OPUR); Inter-Coast Power Marketing Co., SEC
No-Action Letter dated December 6, 1994 (Ref. No. 95-15-OPUR); and AIG Trading
Corporation, SEC No-Action Letter dated January 20, 1995 (Ref. No. 95-1-OPUR).
In each of these no-action letters, the company emphasized that, since a power
marketer would remain subject to regulation by FERC under the Federal Power Act,
no regulatory "gap" would result if the entity were treated for purposes of the
Act as a non-utility. In the Electric Clearinghouse no-action letter request,
the company also stressed the pro-competitive nature of power marketers, arguing
that any determination to treat a marketer as an "electric utility company"
under Section 2(a)(3) of the Act would have a "chilling effect on the
development of a competitive electric power industry as the regulation to which
power marketers would then be subjected to [sic] under the Act would serve as a
significant deterrent to entry."
5
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utility holding company, has followed this trend by proposing to acquire an
interest in a venture that will supply, sell, purchase, market, broker or
otherwise trade electricity or fuel, and provide electricity or fuel management
services, and carry on activities, or perform services related to the
foregoing.5
As these developments clearly demonstrate, the electricity and natural
gas industries are no longer separate and distinct and immune from competition
with each other. Indeed, the energy industry is becoming increasingly integrated
and competitive at all levels, with the growing recognition of the
interchangeability of different forms of energy, particularly electricity and
natural gas. To be competitive in this emerging market, energy suppliers must be
able to offer large customers energy options, the benefits and savings
associated with the ability to aggregate supplies, fuel switching capabilities,
and single source procurement services covering all of the customer's energy
needs. Moreover, today's energy markets are national in
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5 See Consolidated Natural Gas Company, et al., Holding Co.
Act Rel. No. 26304 (June 9, 1995) (File No. 70-8631).
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scope, as the ability to both purchase and deliver electricity and gas is
subject to fewer and fewer physical and regulatory barriers.
In 1994, the Commission itself took note of many of these trends in its
"Request for Comments on Modernization of the Regulation of Public-Utility
Holding Companies" (Holding Co. Act Rel. No. 26153, dated November 2, 1994),
which culminated in June 1995 with the presentation by the Division of
Investment Management of a series of proposals and recommendations designed
generally to reduce regulatory burdens on registered holding company systems in
order to enable them to compete more effectively with other utilities and
alternative energy suppliers in the increasingly competitive energy markets (the
"Report on Regulation of Public-Utility Holding Companies"). Similarly, the
Commission has recognized the changing nature and extent of services provided to
electric customers in its analysis and resultant easing of the so-called "50%
limitation" in connection with the proposed expanded activities of an energy
management services and consulting subsidiary of a registered holding company.
See Eastern Utilities Associates, et al., Holding Co. Act Rel. No. 26232
(February 14, 1995) (noting "significant changes in the utility industry" since
the applicants' original 1986 application and that energy management services,
which are "closely related" to applicants' core utility business, have become an
important complement to the utility business).
1.2 Relationship to Other Authorizations. Southern Company
Services, Inc. ("SCS"), a subsidiary service company of Southern,
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and the Operating Companies are concurrently herewith filing a joint
application-declaration with the Commission in which they are requesting
authority, to the extent that the Commission may have jurisdiction, to engage in
a variety of electricity brokering and marketing activities involving third
parties, fuel- for-electricity swaps (so-called "tolling" arrangements), and
fuel brokering and marketing activities that are incidental thereto. (See File
No. 70-[____]).6 Generally, it is contemplated that the activities described in
that proceeding would be primarily confined to the area defined by the
membership of SERC and adjoining utility systems.
If the application-declaration in this proceeding and the
application-declaration in File No. 70-[____] are both granted, there may be
occasions when the Operating Companies and Holdings (through a "Marketing
Subsidiary") would compete for wholesale or, where permitted, retail electricity
sales to the same potential customers. However, because of limitations imposed
by FERC upon any affiliate of the Operating Companies that seeks authority under
the Federal Power Act to sell power at wholesale at market rates, non-public
information acquired by SCS or the Operating Companies concerning the identity
of any actual or potential wholesale customer, or the terms under which the
Operating Companies have sold or offered to sell power to any
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6 The Operating Companies, through SCS as their agent, have also filed a
market-based wholesale power sales tariff with FERC in respect of proposed
long-term and short-term wholesale electricity sales to unaffiliated entities.
(See Southern Company Services, Inc., Docket No. ER96-780-000, filed January 11,
1996.).
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such customers, may not be disclosed to any other affiliate of Southern other
than SCS and the Operating Companies. These limitations, which are embodied in
"Codes of Conduct" that were filed with FERC, apply to all of Southern's
subsidiaries.7 The primary purpose for the joint application-declaration by SCS
and the Operating Companies, therefore, is to enable the Operating Companies
(and SCS as their agent) to take advantage of wholesale power marketing
opportunities that they may learn about in the course of the day-to-day
activities of the Operating Companies' electric utility operations. Because of
the Codes of Conduct, such opportunities (if based on non-public information
known only to SCS or the Operating Companies) would be lost to the Southern
System as a whole if the Operating Companies were unable to pursue them on their
own.
Holdings' ability to engage through a Marketing Subsidiary in power
marketing activities with direct retail customers is also currently limited
under the laws of most States, which generally prohibit or greatly limit retail
sales by other than franchised utilities. Nevertheless, it is expected that
retail
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7 The Codes of Conduct were a part of the market-rate application filed by
Southern Energy Marketing, Inc. ("Southern Energy"), an indirect subsidiary of
Holdings. See Southern Company Services, Inc., et al., 72 FERC P. 61,324 (1995),
order on reh'g, 74 FERC P. 61,141 (1996). In its market-rate application,
Southern Energy proposed two Codes of Conduct, one applicable to SCS and the
Operating Companies and the other applicable to Southern Energy and to all other
subsidiaries of Southern other than SCS and the Operating Companies. Subsequent
to the FERC's order granting Southern Energy's market-rate application, Southern
Energy on October 30, 1995 filed modified Codes of Conduct to comply with the
terms of that order; and on February 28, 1996, filed an amendment in that
proceeding further revising the two Codes of Conduct.
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competition may become a reality in some areas of the country in the not too
distant future,8 and it is Holding's desire to position itself in that market
when and as it develops. Any Marketing Subsidiary that engages in retail sales
would be subject to whatever regulation is imposed upon retail sellers of
electricity by the State in which the sale occurs. The authority requested in
this application-declaration would not in any way preempt or otherwise interfere
with such State regulation or allow retail competition in any State where none
is currently permitted under applicable laws, rules and regulations.
As a result of the foregoing, Holdings believes that instances in which
a Marketing Subsidiary, on the one hand, and SCS and the Operating Companies, on
the other hand, would compete for the same wholesale or retail electricity
customers are likely to be infrequent. Further, any competition at the retail
level will be dependent almost entirely on legislative and administrative
actions by the States themselves designed to promote such competition.
Holdings also currently owns, indirectly, all of the stock of Southern
Energy Marketing, Inc. ("Southern Energy"), an "exempt wholesale generator"
within the meaning of Section 32 of
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8 For example, utilities in Massachusetts and Rhode Island
have agreed to a timetable that would phase in retail competition
in those states beginning as soon as January 1, 1998. See "No
Doubt About It: Massachusetts Utilities See No Choice But
Choice," The Energy Daily (Feb. 20, 1996); "Smallest State Takes
Big Step Toward Competition," The Energy Daily (Feb. 8, 1996).
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the Act.9 Although Southern Energy may market electricity on a national scale,
as an "exempt wholesale generator" it may not make retail sales, and is
restricted under current FERC interpretations of Section 32 in the amount of
fuel marketing and brokering activities that it may engage in or related "value
added" services that it may offer to potential customers.10 Thus, subject to
receipt of an order in this proceeding, Holdings may either relinquish the
"exempt wholesale generator" status of Southern Energy and/or organize one or
more new Marketing Subsidiaries to engage in the broader range of wholesale and
retail energy marketing activities, and other activities related thereto, as
described below.
1.3 Description of Proposed Activities. Holdings proposes to engage,
through one or more Marketing Subsidiaries, in all forms of brokering and
marketing transactions involving electricity and other types of energy
commodities, including, without limitation, oil, natural gas and coal, and in
providing related "value added" services to customers, such as fuel
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9 See Southern Energy Marketing, Inc., 71 FERC P. 61,376 (1995). 10 An "exempt
wholesale generator" is defined in Section 32(a) as any person determined by
FERC "to be engaged directly, or indirectly through one or more affiliates . .
., and exclusively in the business of owning or operating, or both owning and
operating, all or part of one or more eligible facilities and selling electric
energy at wholesale." (Emphasis added). FERC has interpreted Section 32 to
prohibit an "exempt wholesale generator," such as Southern Energy, from engaging
in fuel delivery and transmission transactions except to the extent necessary to
effectuate its own sales of power. See CNG Power Services Corporation, 69 FERC
P. 61,002 (1994); CNG Power Services Corporation, 71 FERC P. 61,026 (1995); and
CNG Power Services Corporation, 71 FERC P. 61,378 (1995).
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management, storage and procurement services. Such transactions will be entered
into only with customers other than the Operating Companies and SCS. Although
such subsidiaries may acquire physical assets that are necessary and appropriate
to the conduct of such business (such as oil and storage facilities, gas
reserves, gas pipeline facilities and coal), Holdings represents that no
Marketing Subsidiary will acquire any assets if, as a result thereof, it would
be or become an "electric utility company," as defined in Section 2(a)(3) of the
Act, or a "gas utility company," as defined in Section 2(a)(4). Holdings
proposes to engage in wholesale electricity marketing on a national scale, and,
to the extent now or hereafter permitted under State law, retail electricity
marketing as well.
Brokering Activities. Brokering generally involves bringing two parties
(typically a buyer and seller) together for a fee or commission which one of the
parties has agreed to pay. As the Marketing Subsidiary would neither buy nor
sell power or energy in a brokering transaction, there would be no price
exposure or significant financial risk. In addition, brokering, as such, is not
regulated as the sale of power under the Federal Power Act or any state
regulatory scheme. The Commission has, on several occasions, approved proposals
involving electricity and gas brokering activities as an acquisition of an
interest in a non-
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utility business that is incidental and ancillary to the
principal business of a registered holding company system.11
Marketing Activities. Marketing transactions can take a variety of
different forms, including direct sales of electricity purchased from third
party generators, including utilities and independent power producers, and
energy swaps (such as fuel-for- electricity "tolling" arrangements under which a
Marketing Subsidiary may agree to provide fuel to the owner of a generating
facility in exchange for the electricity output). Generally, what distinguishes
marketing from brokering is that the marketer takes title to the commodity (in
this case, electricity, gas, oil, etc.) and bears the market risks associated
with the commodity itself, as well as the ability to guaranty delivery and to
enforce performance by third parties under purchase, sales and transportation
contracts. As described in greater detail below, a critical aspect of successful
marketing involves the use of hedging instruments, such as options and futures
contracts, and balancing of portfolio risk through off-setting transactions and
an appropriate mix of long and short-term contracts.
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11 See Entergy Corp., Holding Co. Act Rel. No. 25848 (July
8, 1993) (authorizing sale of consulting services to non-
affiliates, including expertise relating to brokering of power
resources); and UNITIL Corp., Holding Co. Act Rel. No. 25816 (May
24, 1993) (authorizing organization of a new subsidiary to serve
as a power brokering agent). Other "consulting services" orders
issued over the years have not imposed any geographic
limitations. See e.g., The Southern Company, Holding Co. Act
Rel. No. 22132 (July 17, 1981); American Electric Power Company,
Inc., Holding Co. Act Rel No. 22468 (April 28, 1982); and Middle
South Utilities, Holding Co. Act Rel. No. 22818 (January 11,
1983). Hence, the geographic limitation contained in the
February 1996 Order, insofar as it applies to brokering, is at
odds with established Commission precedent.
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Although it is not Holdings' purpose here to describe with
particularity the form of each marketing transaction in which a Marketing
Subsidiary may engage, the following describes some of the more typical
arrangements that are contemplated:
(a) Electricity and/or Fuel Arbitrage Transactions. Marketing may
involve a simple fuel-for-electricity exchange in which a Marketing Subsidiary
may commit to purchase fuel from an electricity producer and, in turn, supply
electricity at an agreed price. A Marketing Subsidiary in this case would seek
to participate in the evolving integrated energy market by identifying and
capturing the electric and/or fuel arbitrage profits that are inherent in the
wholesale electric and natural gas business.
For example, suppose a municipal electric system ("MuniPower") has
entered into a long-term, fixed-price, gas contract to purchase gas which it
uses to generate electricity. Because MuniPower has a source of fixed-price gas,
it essentially produces fixed-price power. If events (e.g., an unusual cold
spell) were to drive up gas demand and hence spot gas prices, MuniPower would
have an opportunity to sell its gas supply on the spot market at a profit, but
would be prevented from doing so since its gas supply is essentially dedicated
to producing its electricity requirements. In such a case, a Marketing
Subsidiary could enable MuniPower to realize a profit on the sale of its gas,
but without any interruption in the supply of electricity to MuniPower's
customers. Specifically, a Marketing Subsidiary could contract with third party
power producers for an
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alternative supply of lower-cost electricity to meet MuniPower's needs in
exchange for the right to MuniPower's gas supply, which the Marketing Subsidiary
would then resell on the spot market at a profit. In this example, MuniPower
would benefit from the lower cost source of electricity and/or through a sharing
of the profit realized by the Marketing Subsidiary in remarketing MuniPower's
gas supply.
(b) Dispatch Control of Energy Assets. Another example is a transaction
in which an owner of generation and related energy assets wants to "outsource"
dispatch control (but not physical operation) of its generating facilities in
return for fixed price electricity. To illustrate, suppose a generation
cooperative ("Coop") has a mix of generation assets which it uses to supply its
member cooperatives' power needs. The Coop fuel generation mix includes gas, oil
and coal, which Coop purchases on the spot market. As long as Coop purchases its
fuel on the spot market, its electricity cost will fluctuate with the spot
market for fuel. Coop could reduce or eliminate such price volatility by
entering into a contract with a third party who agrees to take over the fuel
procurement and dispatch responsibilities of all of Coop's generation assets in
exchange for Coop's agreement to purchase power under a long-term fixed price
contract.
In this situation, a Marketing Subsidiary could offer Coop what is
essentially a "fixed-for-floating swap." The Marketing Subsidiary would expect
to realize a profit on the transaction through its ability to achieve overall
savings on fuel cost and by controlling the dispatch of Coop's generating units
in order
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to assure that the units with the lowest fuel cost at any time are dispatched
first.12 The Marketing Subsidiary could supply Coop with power from either
Coop's own generation assets, or from more economic facilities, depending on the
current market for power. Further, the Marketing Subsidiary may have the
opportunity to maximize the value of any excess Coop generating capacity by
marketing such capacity to a much greater number of potential purchasers than
Coop on its own would be able to do. The net result for Coop is a lower cost of
power which it can pass on to its member cooperatives.
(c) Sale of Options on Capacity or Energy. In another type of
transaction that is becoming increasingly common in the electric utility
industry, many utilities, instead of asking for bids for firm power to meet
future energy needs, have begun asking for options on capacity or energy. This
allows utilities to avoid additional capital spending in an uncertain market
environment, and allows them to quickly assess the cost of meeting future energy
needs.
To illustrate, suppose that a utility has completed its resource
planning which indicates the need for a certain amount of additional capacity
several years in the future. Instead of requesting bids for fixed-price energy
or capacity, the utility may prefer to request bids for options on that energy
or capacity. A Marketing Subsidiary, in this situation, could sell
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12 This type of "fixed-for-floating swap" transaction was
recently offered by Oglethorpe Power Corp., the largest electric
cooperative in the United States. See Power Markets Week
(February 12, 1996), pp. 1-3.
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such an option for a premium paid up front. However, if the purchasing utility
operates in a market where spot electricity prices are driven by the cost of
gas-fired generation, and the Marketing Subsidiary's position under the option
contract sold to the utility is covered by rights to gas-fired generation which
the Marketing Subsidiary has acquired or owns, the Marketing Subsidiary would be
exposed under the option contract to the risk of any increase in the price for
natural gas. A Marketing Subsidiary could hedge this risk by purchasing an
option in the natural gas futures market.
(d) National Energy Supplier. The fourth example involves making retail
sales to a large energy consumer with facilities in many different locations who
wishes to "outsource" all of its energy needs at all locations in order to
achieve overall savings, by, among other means, obtaining volume discounts that
a single source supplier could offer, and by eliminating the high cost of
administering separate procurement programs at each location. To illustrate,
suppose that a national department store chain has stores in all fifty States
and wishes to engage an "energy partner" to advise it on its current energy
purchases. A Marketing Subsidiary could address this customer's needs in several
ways. Initially, it could begin advising the customer on fuel procurement
practices in order to identify lower cost supplies, and undertake to represent
the customer in negotiations with its various electric utility, gas utility and
fuel suppliers. Ultimately, and subject to necessary changes in State
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laws, the Marketing Subsidiary may itself wish to become the electricity
supplier at each of the customer's stores.
All Marketing activities, including the fuel-for-energy (arbitrage) and
energy commodity brokering and marketing activities described above, will
generally be carried on by personnel employed by Southern Electric
International, Inc., a wholly-owned subsidiary of Holdings, who are already
experienced in the day-to-day power marketing activities of Southern Energy and
fuel procurement activities of Holdings' associate independent power projects.
1.4 Risk Hedging Measures. It is anticipated that in the ordinary
course of business any Marketing Subsidiary would take appropriate measures to
hedge the risk associated with electricity and fuel purchase or sales contracts
it enters into. Such measures may include matching long-term firm or variable
price electricity sales contracts with long-term firm or variable price fuel
purchase contracts. A Marketing Subsidiary may also hedge fuel price risk
through the purchase of fuel or fuel reserves or options on fuel reserves.
In addition, the Marketing Subsidiary may use available hedging tools,
such as gas futures contracts and options on gas futures, such as are traded on
the New York Mercantile Exchange, and gas and oil price swap agreements and
other, primarily commodity based, derivative instruments. Holdings represents
that a Marketing Subsidiary will not deal in derivative products for purposes of
speculative trading. In this regard, it should be noted that such speculative
trading in derivative instruments
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is prohibited by corporate policy which has been adopted by
Southern and is applicable to all of its subsidiaries.
Holdings may also offset price risk exposure under a purchase or sale
contract by taking an opposite position to that purchase or sale. Similarly, in
a portfolio of purchase and sales contracts, risk could also be limited through
an appropriate mix of long-term and short-term contracts.
Holdings also anticipates limiting risk exposure through contract
provisions (i.e., liquidated damages) that would place a ceiling on the amount
of damages payable when performance failure occurs. A Marketing Subsidiary would
also generally seek to exclude consequential damages.
Ultimately, a successful power marketer must be able to manage a "book"
of various energy contracts involving purchases, sales and trades of oil, gas,
and electricity. The marketer will seek to hedge the risk associated with these
contracts through a combination of physical assets, balanced physical purchases
and sales, purchases and sales on futures markets, or other derivative risk
management tools. A successful marketer will need a strong physical presence
(assets), as well as the capability to participate in the growing financial
market for energy-related products. In this connection, the value added by the
marketer, from the perspective of its customer, is the superior ability of the
marketer to aggregate risks so as to manage them as efficiently as possible. In
order to do this, the marketer needs to have the ability to participate in all
the energy markets related to electricity, both physically and
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financially. Unless a power marketer can utilize risk management tools in all
these markets, that marketer will be unable to manage risks as effectively or
efficiently as a full-service energy services provider, and hence will be at a
significant competitive disadvantage.
1.5 Other Matters. The aggregate amount of investment made by Southern
in order to finance Holdings' investment in any Marketing Subsidiary will be
subject to all of the limitations applicable to investments in Energy-Related
Companies, as set forth in the February 1996 Order. Similarly, Holdings
anticipates that guarantees of performance by any Marketing Subsidiary may be
required from time to time, and will count the amount of any such guarantees
against the overall limitation set forth in the February 1996 Order to the
extent that it is ultimately supported by the agreement or undertaking of
Southern itself.
Item 3. Applicable Statutory Provisions.
Holdings states that Sections 9(a) and 10 of the Act and
Rules 23 and 54 thereunder are applicable to the proposal described herein,
which consists solely of a request for certain modifications to the terms of the
February 1996 Order, which was granted under Sections 9(a) and 10 and other
applicable provisions of the Act.
Section 10 Analysis: The Commission has previously
authorized registered holding companies to engage in a variety of
marketing and brokering activities, including the authorization
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granted Holdings in File No. 70-8733, and has included "the brokering and
marketing of energy commodities, including but not limited to electricity or
natural gas" among the categories of "energy-related companies" in which a
registered holding company may conditionally invest under proposed Rule 58.13 In
its release proposing Rule 58, the Commission stated that it did not consider it
necessary to limit the extent to which an "energy-related company" may serve
non-associate companies, citing its recent decision in Eastern Utilities
Associates14 as precedent for abandoning the imposition of artificial
limitations such as this. In that case, the Commission granted Eastern
Utilities' request to eliminate the percentage limitation that had previously
been imposed upon the energy management services business of its subsidiary. The
Commission's decision was based on a number of considerations, including
evidence of fundamental changes in the utility industry which indicate that
electric utilities no longer depend solely on constructing new power plants in
order to meet customer demand. Further, the Commission noted that energy
conservation and demand-side management measures are today "an important
complement to the utility
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13 See Notice of Proposed Rulemaking, Holding Co. Act Rel.
No. 26313 (June 20, 1995) ("Exemption of Acquisition By
Registered Public-Utility Holding Companies of Securities of
Nonutility Companies Engaged in Certain Energy-Related and Gas-
Related Businesses"), 59 SEC Docket at 1495. If adopted, all
acquisitions permitted under proposed Rule 58 would be considered
to be "appropriate in the ordinary course of business" within the
meaning of Section 9(c)(3) of the Act, and therefore exempt from
the application requirements of Section 9(a). Id. at 1494.
14 Eastern Utilities Associates, Holding Co. Act Rel. No.
26232 (February 15, 1995).
21
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business," and that Eastern Utilities' commitment to the energy services
business would further an important national policy, namely, the promotion of
energy conservation and efficiency.
Likewise, for the reasons described in Item 1.1 above, the marketing
and brokering of electricity to non-associates is an "important complement" of
the electric utility business, in that the skills and resources needed to
succeed in that business are the same as those applied on a day-to-day basis in
the conduct of the electric utility business. Moreover, there can be little
doubt that competition among electricity suppliers, including non-traditional
suppliers, is the cornerstone of today's national energy policy. In this sense,
limiting the scope of Holdings' marketing and brokering activities by reference
to a particular region of the country, namely, SERC, serves no useful purpose
and would be an impediment to achieving the goal of competition. In fact, as
previously described, because of the need to observe restrictions prohibiting
the flow of certain non-public information from SCS and the Operating Companies
to Southern's other (non-utility) subsidiaries, it is likely that many or most
of the marketing opportunities that Holdings will be able to pursue will be
outside the retail service territory of the Operating Companies.
Another reason to eliminate the geographic limitation on Holdings'
brokering and marketing activities is to "level the playing field" between a
Marketing Subsidiary of Holdings, on the one hand, and, on the other hand, all
other companies, including interstate pipeline companies, oil and gas producers,
and
22
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electric utilities that are not in registered holding company systems. In this
regard, as previously indicated, supra note 4, the Act is not a deterrent to
power marketing activities by companies that are not in registered holding
company systems. Thus, in the last two years, we have witnessed a stampede of
integrated oil and gas producers, pipelines, investment bank affiliates,
commodity trading firms, affiliates of large industrial concerns and exempt
electric utility holding companies to establish national power marketing
organizations. A narrow construction of Section 10 of the Act that would limit,
geographically or in other terms, the ability of the few registered electric
utility holding company systems to participate fully and at all levels of this
emerging market would serve no legitimate regulatory purpose and, in fact, would
frustrate the goal of promoting competition in the increasingly integrated
energy markets.
Holdings' proposal to engage in marketing and brokering of other energy
commodities, such as gas, oil and coal, is likewise consistent with the
standards of Section 10, as interpreted in recent cases, including Eastern
Utilities Associates, supra, for at least two reasons. First, as discussed
above, to be successful, a power marketer must be able acquire, hold, trade and
sell interests in fuel both to hedge its position under power contracts, as well
as to be able to provide customers with energy options, such as fuel switching
and sole source procurement services. Second, as noted in the Report on
Regulation of Public-Utility Holding Companies, the energy industry today has
23
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become increasingly integrated and competitive at all levels. Electric and gas
companies are rapidly being integrated into a market that trades on Btu (British
thermal unit) values rather than discrete quantities of electricity or gas.
Rule 54 Analysis: Rule 54 provides that, in determining whether to
approve an application which does not relate to any "exempt wholesale generator"
or "foreign utility company," the Commission shall not consider the effect of
the capitalization or earnings of any such subsidiary of a registered holding
company if the requirements of Rule 53(a), (b) and (c) are satisfied. In this
regard, Holdings represents that each of the conditions of Rule 53(a) are met,15
and that none of the circumstances described in Rule 53(b) has occurred, thereby
making the provisions of Rule 53(c) inapplicable.
Item 4. Regulatory Approval.
The proposed transactions are not subject to the
jurisdiction of any state commission or of any federal commission other than the
Commission. The approval of FERC would be required as to rates and charges
imposed in any wholesale electric power sales contracts or tariffs entered into
by a Marketing Subsidiary. Any retail sale of electricity (to the
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15 In a separate, pending, proceeding (File No. 70-8725), Southern is seeking
relief which, if granted, would allow Southern to issue securities (including
guaranties) in order to finance investments in "exempt wholesale generators" (as
well as "foreign utility companies") in amounts which would exceed the
limitation in Rule 53(a)(1). Holdings' representation regarding compliance with
Rule 54 is therefore expressly subject to the Commission's action in File No.
70-8725.
24
<PAGE>
extent that it may be allowed under applicable state law), would be subject to
potential regulation by the appropriate state public utilities commission.
Item 5. Procedure.
Holdings requests that the Commission's order be issued as soon as the
rules allow, and that there be no thirty-day waiting period between the issuance
of the Commission's order and the date on which it is to become effective.
Holdings hereby waives a recommended decision by a hearing officer or other
responsible officer of the Commission and hereby consents that the Division of
Investment Management may assist in the preparation of the Commission's decision
and/or order in the matter unless such Division opposes the matters covered
hereby.
Item 6. Exhibits and Financial Statements.
(a) Exhibits.
F - Opinion of Troutman Sanders LLP. (To be
filed by amendment).
G - Form of Federal Register Notice.
(b) Financial Statements.
Not applicable.
Item 7. Information as to Environmental Effects.
(a) In light of the nature of the proposed transactions, as
described in Item 1 hereof, the Commission's action in this
25
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matter will not constitute any major federal action significantly affecting the
quality of the human environment.
(b) No other federal agency has prepared or is preparing an
environmental impact statement with regard to the proposed transactions.
SIGNATURE
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, the undersigned companies have duly caused
this statement to be signed on their behalf by the undersigned
thereunto duly authorized.
Dated: March 15, 1996
SEI HOLDINGS, INC.
By: /s/Tommy Chisholm
Tommy Chisholm
Secretary
26
EXHIBIT G
FORM OF FEDERAL REGISTER NOTICE
SEI Holdings, Inc. ("Holdings"), Atlanta, Georgia, a wholly-owned
non-utility subsidiary of The Southern Company ("Southern"), a registered
holding company, also of Atlanta, Georgia, has filed an application pursuant to
Sections 9(a) and 10 of the Act and Rule 54 thereunder in which it requests
certain modifications to the terms of an order issued February 2, 1996 (HCAR No.
26468) (the "February 1996 Order").
Holdings directly and indirectly holds Southern's interests in various
"exempt wholesale generators" and "foreign utility companies" and certain other
non-utility subsidiaries. Under the February 1996 Order, Holdings is authorized
to, among other things, acquire directly or indirectly through other
subsidiaries (called "Intermediate Subsidiaries") the securities of one or more
subsidiaries (called "Energy-Related Companies") that derive or will derive
substantially all of their revenues from certain specified activities, including
brokering or marketing of electricity, provided that the purchaser or seller, or
both the purchaser and seller, are located within the area covered by the
Southeastern Electric Reliability Council ("SERC").
Holdings now requests that the Commission modify the February 1996
Order to (i) remove the restriction on the geographic area in which any such
Energy-Related Company (hereafter referred to as a "Marketing Subsidiary") may
conduct its business, and (ii) expand the scope of such marketing and brokering
activities to include the purchase, sale, and trading
<PAGE>
of other forms of energy commodities including, without limitation, natural gas,
oil and coal. Holdings is not seeking any other changes or modifications to the
terms of the February 1996 Order.
Holdings states that power marketing and brokering activities have now
become national in scope, and notes that many energy companies, including
natural gas producers and pipelines and oil companies, investment bank
affiliates, and electric utilities that are not in registered holding company
systems have established and are actively engaged in power brokering and
wholesale power marketing on a national scale, and that many states are
considering a variety of measures designed generally to promote retail
competition among electricity suppliers. Holdings refers to various legislative
and administrative initiatives at the federal level that are specifically
designed to promote competition for wholesale electricity sales among
traditional utilities as well as non-traditional suppliers, such as exempt
wholesale generators, qualifying facilities, and independent power marketers.
Further, Holdings states that, because of the interchangeability of
different forms of energy, particularly electricity and natural gas, profits may
be earned through arbitrage transactions involving various different types of
fuel- for-electricity transactions. The application also describes other typical
forms of marketing activities all of which are based on an integrated energy
company's ability to provide energy savings and/or price certainty to customers
through its superior
<PAGE>
ability to aggregate supply and manage risks.
Holdings states that, in order to compete at all levels of the evolving
national energy markets, it is necessary to offer potential customers other
energy products and services such as fuel switching options, fuel management,
storage and delivery services, and single source energy procurement services.
Holdings seeks to engage in all of these related activities through one or more
Marketing Subsidiaries. Initially, Holdings expects that power marketing
activities would be limited to wholesale transactions, but wishes to position
itself to engage in competing for retail electricity customers as and when
changes in state laws and regulations allow such activities. Holdings provides,
as an example, a situation where a large energy consumer (a department store
chain) with facilities in many states may wish to contract with a single energy
supplier in order to fill all of its energy needs at all locations.
Holdings states that, as a practical matter, its ability to compete
(through a Marketing Subsidiary) in wholesale electricity markets in the
Southern system's franchised service territory is limited. Specifically,
Holdings refers to certain "Codes of Conduct" submitted to the Federal Energy
Regulatory Commission ("FERC") as a part of the market-based wholesale rate
application under the Federal Power Act filed by Southern Energy Marketing, Inc.
("Southern Energy"), a subsidiary of Holdings and an "exempt wholesale
generator," which prohibits Southern's operating electric utility subsidiaries
(the "Operating Companies") from providing non-public information available to
them concerning the
<PAGE>
identity of any actual or potential wholesale customer, or the price or other
terms under which they have sold or offered to sell power to any such wholesale
customer, to any other subsidiary of Southern. Further, although Southern
Energy, as an "exempt wholesale generator," may compete in the wholesale
electricity markets nationally, under current FERC interpretations of Section 32
it could not engage generally in fuel marketing or many of the other expanded
fuel-related activities for which Holdings is now seeking approval.
Any Marketing Subsidiary of Holdings would, in the ordinary course of
its business, seek to hedge against the price and other risks involved in
marketing activities through managing a portfolio of offsetting contracts,
investing in assets such as fuel reserves and fuel storage facilities, and
trading in financial or commodity-based derivative products, such as oil or gas
futures contracts. Holdings represents that it will not engage in speculative
trading of derivative products, and states that corporate policy adopted by
Southern prohibits such speculative trading. Holdings states that, to the extent
any contractual obligation of a Marketing Subsidiary must be guaranteed, the
amount thereof would be counted against the limitation authorized under the
February 1996 Order to the extend supported by an agreement or undertaking by
Southern itself. Holdings represents that no Marketing Subsidiary will acquire
any facilities or assets that would result in such Marketing Subsidiary becoming
an "electric utility company" or "gas utility company," as those terms are
defined under the Act.
