File No. 70-8823
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 2
to
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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The Application-Declaration heretofore filed in this proceeding, as
amended by Amendment No. 1, is now further amended and restated in its entirety
to read as follows:
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
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other interests in any one or more specified categories of energy-related
facilities or businesses (referred to as "Energy- 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.
Specifically, Holdings proposes herein that the Commission (i) modify the
February 1996 Order to permit 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 incidental related services
to customers; and (ii) eliminate the restriction imposed under the February 1996
Order on the geographic region in which such marketing and brokering activities
may be conducted, subject to
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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.
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certain qualifications and limitations as regards retail sales of electricity
and natural gas. Holdings is not herein requesting any other modifications to
the terms of the February 1996 Order.
1.2 Recent Developments in the Electric and Gas Industries.
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," "exempt wholesale
generators" and independent power marketers and brokers. In addition, recent
energy policy initiatives at the federal level are clearly designed to promote
competition in wholesale markets by requiring that the local electric utility
provide transmission access to competing buyers and sellers.2
The States are also actively considering a variety of measures designed
to promote competition among electricity suppliers at the retail level.
According to a survey conducted
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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), adopted April 24, 1996 as Order 888,
FERC Stats. & Regs. P. 31,036 (1996); and sections 721 and 722 of
the Energy Policy Act of 1992, Pub. L. No. 102-486, 106 Stat.
2776 (1992).
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by the Edison Electric Institute ("EEI")3, 47 States and the District of
Columbia have initiated legislative or administrative processes for the purpose
of addressing retail wheeling, industry restructuring, retail competition or
alternative regulation. Since the beginning of 1995, bills addressing these
matters have been introduced in 33 State legislatures, and the utility
commissions in 37 States and the District of Columbia have initiated, completed,
or participated in generic, company specific or informal proceedings on various
proposals to promote retail competition.4 Also, pilot programs for retail
wheeling have been approved in Idaho, Illinois, Massachusetts, Michigan, New
Hampshire, New York, Pennsylvania and Washington.5
Although Rhode Island is the only State that has yet passed legislation
establishing retail access for all electric
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3 See "Retail Wheeling & Restructuring Report," Vol. 3,
No. 1 (Edison Electric Institute, June 1996). EEI is an industry
trade organization whose membership consists of investor-owned
electric utilities.
4 Id. at pages 2 - 3. A more recent survey on retail competition measures by the
States conducted by Regulatory Research Associates, Inc., an independent
research organization, generally confirms the data presented in the EEI survey.
See "Regulatory Focus" - "Electric Industry Restructuring Update" (Regulatory
Research Associates, Inc., July 12, 1996). 5 Under the New Hampshire pilot
program, for example, certain large customers may gain access through their
local utility to alternative suppliers. 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 (King
Publishing Group, February 20, 1996); "Smallest State Takes Big Step Toward
Competition," The Energy Daily (King Publishing Group, February 8, 1996).
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customers,6 it is evident that a significant number of other States are fairly
far along in their consideration of substantive restructuring measures which,
once implemented, would enable non-traditional power suppliers, including power
marketers, to compete with local franchised utilities for sales to retail
electric customers, similar to the kind of competition among long-distance
carriers that has evolved in the telephone industry.
Retail and wholesale competition in the natural gas industry has
evolved more quickly. 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,
essentially transforming interstate pipelines into common carriers under the
open-access provisions of the Federal Energy Regulatory Commission's ("FERC's")
Order No. 636.7 As a result, local gas distribution companies (LDCs) and most
large industrial customers today have the ability to contract directly with gas
producers or
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6 See Electric Utility Week (McGraw-Hill, August 12, 1996),
p. 8.
7 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). FERC initiated efforts to promote competition in 1985
when it issued Order 436, which offered certain incentives to
interstate pipelines to provide open access, non-discriminatory,
transportation to end-use customers, thereby enabling such
customers to contract for gas supplies directly with producers
and gas marketers. See "Regulation of Natural Gas Pipelines
After Partial Wellhead Decontrol," Order No. 436, FERC Stats. &
Regs., Regulations Preambles P. 30,665, 50 Fed. Reg. 42,408
(October 18, 1985).
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other suppliers (i.e., independent gas marketers) for necessary
supplies.
Most States have also implemented measures designed to encourage LDCs
to provide transportation separately from sales of natural gas, as a result of
which industrial and large commercial gas customers now generally have the
ability to make direct purchases of gas from producers and gas marketers.
According to U.S. Department of Energy sources, by 1995, approximately 78% of
all gas sales to industrial customers were made by sellers other than LDCs, and
26% of gas sales to commercial customers were delivered, but not sold, by LDCs.8
It is evident, therefore, that significant steps have already been taken to
deregulate end-use gas sales, at least to certain categories of customers
(industrial and large commercial customers).
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.9 These developments
underscore that the electricity and
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8 See U.S. Department of Energy - Energy Information Administration Natural Gas
Monthly, Table 24 (February 1996). 9 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."
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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 that different forms of energy, particularly electricity and natural
gas, are interchangeable. 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
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source procurement services covering all of the customer's energy needs.
Moreover, today's energy markets are national in 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 these developments 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").
More recently, in Consolidated Natural Gas Company, et al., Holding Co.
Act Rel. No. 26512 (April 30, 1996) ("Consolidated Natural Gas"), the Commission
authorized a registered gas utility holding company 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. In its order,
the Commission again took note of the "increasing integration of energy markets"
and observed that "the restructuring of the electric industry now underway will
dramatically affect all United States energy markets as a result of the growing
interdependence of natural gas transmission and
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electric generation, and the interchangeability of different forms of energy,
particularly gas and electricity."10 Further, although the Commission reserved
jurisdiction over Consolidated's proposal to market electricity and gas to
retail customers, it took note of the rapid developments in retail electric
competition due to State initiatives and of the positioning by both traditional
utilities and other suppliers to compete in retail electric markets as they
open.11
1.3 Relationship to Other Authorizations. Southern Company
Services, Inc. ("SCS"), a subsidiary service company of Southern,
as agent for the Operating Companies, has been authorized by FERC
to sell electricity at wholesale to unaffiliated entities at
market-based rates.12 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 the Act,13 which has also been authorized by FERC
to sell electricity at wholesale at market-based rates.14 As a
consequence, there may be occasions when Holdings (through
Southern Energy or a Marketing Subsidiary) will compete with SCS
and the Operating Companies for wholesale customers. However,
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10 Consolidated Natural Gas at pp. 11 - 12.
11 Id., note 12.
12 See Southern Company Services, Inc., 75 FERCP. 61,130
(April 30, 1996).
13 See Southern Energy Marketing, Inc., 71 FERC P. 61,376 (1995). 14 See
Southern Company Services, Inc., et al., 72 FERC P. 61,324 (1995), order on
reh'g, 74 FERC P. 61,141 (1996).
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such competition is the inevitable consequence of limitations that are embodied
in certain "Codes of Conduct" that were filed with FERC as a part of the
separate market-rate applications of SCS and of Southern Energy.15 In general,
the Codes of Conduct, which apply to all of Southern's subsidiaries, prohibit
SCS and the Operating Companies from disclosing to any other subsidiary of
Southern non-public information known to them 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 such customers. In order to
compete effectively in all wholesale markets, therefore, Southern is committed
to developing a marketing capability on each side of this FERC-imposed
information barrier.
Although Southern Energy may market electricity on a national scale, as
an "exempt wholesale generator" it may not make domestic 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
services that it may offer to potential customers.16 Thus, subject to
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15 The Codes of Conduct were originally filed with FERC as a part of Southern
Energy's 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. The Codes of Conduct have been revised several times, most
recently as a part of a compliance filing to the market-rate order issued April
30, 1996 to SCS and the Operating Companies. See Southern Company Services,
Inc., supra n. 12. 16 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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receipt of an order in this proceeding, Holdings may elect to decertify Southern
Energy as an "exempt wholesale generator" (in which case Southern Energy would
be treated as a Marketing Subsidiary of Holdings subject to all of the terms and
conditions of the February 1996 Order, as modified by the Commission's order in
this proceeding) 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.
1.4 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 incidental related services to customers, such as fuel management,
storage and procurement services. Holdings proposes that Marketing Subsidiaries
may engage in such activities without regard to the location or identity of
customers or source of revenues, provided, however, that (i) unless additional
approvals are obtained from FERC, Marketing Subsidiaries will not sell
electricity to the Operating Companies, and (ii) Marketing
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Subsidiaries will not make any sales of electricity or natural gas to retail
customers in any State unless authorized or permitted to make such sales under
the laws of that State. In addition, Holdings requests that the Commission
reserve jurisdiction over any sales by Marketing Subsidiaries of natural gas or
electricity to customers outside the United States pending completion of the
record in this proceeding.17
It is also proposed that Marketing Subsidiaries may, from time to time
through December 31, 2000, invest up to $300 million at any one time outstanding
to acquire or construct physical assets that are incidental and reasonably
necessary in the day-to-day conduct of marketing operations, such as oil and gas
storage facilities, gas or coal reserves, or a pipeline spur that is needed in
order to make deliveries of fuel to an industrial customer; provided, however,
that, without the further order of the Commission, no Marketing Subsidiary will
acquire any facilities 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).
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
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17 It is not intended that such proposed reservation of jurisdiction would in
any way limit or restrict Holdings' ability to make retail sales of electricity
or gas outside the United States through "exempt wholesale generators" or
"foreign utility companies," as defined in Sections 32 and 33 of the Act,
respectively, subject to satisfying the specific requirements of those sections.
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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- utility business that is incidental
and ancillary to the principal business of a registered holding company
system.18
Marketing Activities. Marketing transactions may take a variety of
different forms. In general, however, these transactions involve contracts under
which the performance of the parties is expressed in terms of the obligation to
make or take physical delivery of electricity, gas or other energy commodities,
as well as the purchase and sale of commodity-based derivative contracts, such
as options, swaps and exchange-traded
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18 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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futures contracts, under which physical delivery may or may not
in fact occur.19
Generally, what distinguishes a marketer from a broker is that a
marketer, unlike a broker, usually takes title to the commodity (in this case,
electricity, gas, oil, etc.) and bears the risks associated with market price
fluctuations of the commodity (market risk) and the ability to enforce
performance by the other party to the contract (counter-party credit risk). As
described in greater detail below, a critical aspect of successful marketing
involves the use of various risk mitigation measures to balance overall
portfolio position in order to limit the financial impact of any loss that may
be sustained on any particular commodity transaction due to adverse market price
movements or counterparty defaults. Such measures may include entering into
off-setting physical delivery contracts (i.e., offsetting purchases and sales of
electricity, gas, etc.), the purchase and sale of derivative instruments, such
as options and futures contracts, for purposes of hedging a physical position,
and an appropriate mix of long and short-term contracts.
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19 The purchase and sale of commodity-based derivatives in a commodity business
(generally, options, futures contracts and swaps) may be for the purpose of
hedging (or off-setting) an existing position under a contract calling for
physical delivery of a commodity, or as a substitute for a position to be taken
at a later time in a physical market, for example, to lock in the price of a
block of electricity or gas that will be needed in the future in order to supply
new customers. For an electricity/gas marketer, the purchase and sale of
energy-based derivatives may be a less risky means to take a position in a
commodity than other alternatives, such as building expensive power plants or
purchasing and holding large inventories of a commodity.
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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.20 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, as well as power marketers, 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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20 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 (McGraw-
Hill, 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.
1.5 Use of Risk Mitigation Measures. Holdings represents that, in the
ordinary course of business of any Marketing Subsidiary, it will take
appropriate measures to mitigate the market and counterparty credit risks
associated with the portfolio of electricity and fuel purchase or sales
contracts of these subsidiaries. As previously indicated, 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, a Marketing Subsidiary may purchase or sell
commodity-based derivative instruments, such as electricity or gas futures
contracts and options on electricity or gas futures, such as are traded on the
New York Mercantile Exchange, and gas and oil price swap agreements in order to
hedge positions under existing contracts for physical delivery.21
Holdings may also hedge 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
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21 In this regard, it should be noted that one of the attractive features of
using exchange-traded commodities futures contracts (such as exist for
electricity, gas and oil), in addition to their liquidity, is that they tend to
virtually eliminate counterparty credit risk due to the fact that the exchange
itself acts as the counterparty.
20
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of long-term and short-term contracts, and diversification of the mix of
customers and suppliers regionally and across industry lines. Finally, Holdings
will endeavor to limit risk exposure through contract provisions (i.e.,
liquidated damages) that would place a ceiling on the amount of damages payable
when performance failure occurs and/or exclude consequential damages.
Ultimately, a successful energy commodity marketer must be able to
manage a "book" of contracts involving purchases, sales and trades of
electricity and other energy commodities. 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, both physically and
financially.
1.6 Other Matters. As indicated above, 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
21
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any Marketing Subsidiary may be required from time to time, and will count the
amount of any such guarantees against the overall limitations set forth in the
February 1996 Order.
Holdings, on its own behalf and on behalf of Southern, undertakes that
it will not seek recovery through higher rates to the Operating Companies'
customers in order to compensate Southern and Holdings for any possible losses
that they may sustain on investments in Marketing Subsidiaries or for any
inadequate returns on such investments.
All Marketing activities, including the fuel-for-energy (arbitrage) and
energy commodity brokering and marketing activities described above, will be
carried on by personnel employed by Southern Electric International, Inc.
("Southern Electric"), a wholly-owned subsidiary of Southern, 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.
Any services that Southern Electric may render to a Marketing
Subsidiary will be rendered at cost in accordance with Rules 90 and 91 and the
Commission's order dated December 31, 1994 (Holding Co. Act Rel.
No. 26212).
Item 2. Fees, Commissions and Expenses.
The fees, commissions and expenses paid or to be paid in
connection with the proposed transaction are estimated not to exceed $29,000,
inclusive of the Commission's $2,000 filing fee.
22
<PAGE>
Item 3. Applicable Statutory Provisions.
Sections 9(a) and 10 of the Act and Rules 23 and 54
thereunder are applicable to the proposed transactions and activities described
herein, certain aspects of which have been approved as a part of the February
1996 Order. Holdings states that the proposed transactions satisfy all of the
applicable standards of Section 10 and of Section 11(b), to which Section 10(c)
refers.
Section 10 Analysis: For purposes of Sections 9(a)(1) and 10 of the
Act, Holdings' proposal to engage in the activities described in this
Application-Declaration constitutes an acquisition of securities and of an
interest in a non-utility business.22 In order to approve the
Application-Declaration, the Commission must find that the applicable standards
of Section 10(b) are satisfied. Further, the Commission may not approve the
proposal if it finds, pursuant to Section 10(c)(1) of the Act, that the
acquisition "is detrimental to the carrying out of the provisions of section 11"
of the Act.
The Commission has previously approved pursuant to the standards of
Sections 10 and 11(b) proposals by registered holding companies to engage in a
variety of marketing and brokering activities. Further, the Commission has
included "the brokering and marketing of energy commodities, including but not
limited to electricity or natural gas" among the permitted activities of
"energy-related companies" in which a registered
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22 See Consolidated Natural Gas, page 8.
23
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holding company may conditionally invest under proposed Rule 58, predicated upon
earlier case-by-case determinations that such activities satisfy the standards
of Sections 10 and 11(b) of the Act.23
In Consolidated Natural Gas, the Commission for the first time approved
a proposal by a registered gas utility holding company to acquire an interest in
the business of a power marketer. Subsequently, in UNITIL Corporation, et al.,
Holding Co. Act Rel. No. 26527 (May 31, 1996) ("UNITIL"), the Commission
authorized an affiliate of an electric utility holding company to broker and
market gas and other fuels, as well as electricity, holding that the applicant's
proposal was consistent with the precedent established in Consolidated Natural
Gas.
To be successful, a power marketer must be able to acquire, hold, trade
and sell interests in fuel in arbitrage transactions, to hedge market price risk
under power contracts, and to be able to provide customers with complete energy
options, such as fuel switching and sole source procurement services. Moreover,
as recognized in both the Report on Regulation of Public-Utility Holding
Companies and, more recently, in the Consolidated Natural
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23 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 1490. Proposed Rule 58
would conditionally exempt pursuant to Section 9(c)(3) of the Act
certain acquisitions of securities of non-utility companies from
the pre-approval requirements of Section 10. If adopted,
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). Id. at 1494.
24
<PAGE>
Gas and UNITIL cases, the energy industry today has 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.
In its orders on power marketing issued prior to Consolidated Natural
Gas, the Commission typically imposed geographic limits on where marketing
activities could be conducted. In the February 1996 Order, for instance,
Holdings' authority to engage in electricity brokering and marketing activities
was limited to the area defined by the States served by the electric utility
members of SERC, of which the Operating Companies are a part. However, in
Consolidated Natural Gas, after considering the national scope of the evolving
energy markets and the initiatives of other regulatory bodies in promoting
wholesale electric competition on a national scale, the Commission determined
not to impose any geographic or revenues restrictions on the applicant with
respect to wholesale marketing activities.24 Likewise, no geographic limitation
was imposed on wholesale power marketing activities of the applicant in UNITIL.
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24 Earlier, in its release proposing Rule 58, the Commission had indicated that
it did not consider it necessary to limit the extent to which an "energy-related
company" may engage in business activities with non-associate companies, citing
its decision in Eastern Utilities Associates, et al., Holding Co. Act Rel No.
26232 (February 14, 1995) as precedent for abandoning the imposition of
artificial geographic or revenues limitations on certain categories of
non-utility business activities of registered holding companies that are closely
related to the traditional utility business and would further an important
national policy objectives, such as, for example, the promotion of energy
conservation and efficiency.
25
<PAGE>
These recent actions clearly establish a precedent for the Commission to remove
the geographic restriction imposed in the February 1996 Order on Holdings'
marketing and brokering activities. A narrow construction of Sections 10 and
11(b) of the Act that would limit, geographically or in other terms, the ability
of Holdings 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.
Another reason to eliminate the geographic limitation on Holdings'
brokering and marketing activities is to "level the playing field" between
Holdings, on the one hand, and, on the other hand, all other companies,
including interstate pipeline companies, oil and gas producers, and electric
utilities that are not in registered holding company systems. In this regard, as
previously indicated, supra note 9, the Act is not a deterrent to power or gas
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.
Although the Commission did not impose any geographic limitations on
the wholesale power marketing activities approved in Consolidated Natural Gas
and UNITIL, it did reserve jurisdiction over sales of gas and electricity by the
applicant
26
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to retail customers pending completion of the record. (In UNITIL, the Commission
approved retail sales in certain States that were identified in the
application). In each case, the Commission held that, pending implementation of
measures permitting retail wheeling of electricity, it was unable to determine
whether the applicable standards of Section 11(b)(1) of the Act would be
satisfied.25 Holdings submits, however, that there is no need for the Commission
to reserve jurisdiction over retail sales of electricity or gas by Marketing
Subsidiaries in the name of consumer or investor protection or to preserve
effective local regulation of these matters, for at least two reasons. First, as
described in Item 1.2, above, the vast majority of States have already
undertaken studies of, initiated or adopted measures to promote retail
competition in both gas and electric markets. Competition between LDCs and
non-traditional gas suppliers already exists in most areas, at least with
respect to sales to industrial and large commercial customers, and some States
are now experimenting with programs to extend customer choice to residential
customers as well. While competition and unbundling of the commodity and
transmission functions of
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25 Consolidated Natural Gas, n. 25. Under Section 11(b)(1), the Commission shall
not permit a registered holding company to retain an interest in a non-utility
business unless it finds such interest to be "necessary or appropriate in the
public interest or for the protection of investors or consumers . . .." Holdings
understands that the Commission's reluctance to authorize retail electricity and
gas sales, based on the state of the record that Consolidated had developed, may
have been founded upon its sensitivity over the uncertain impact that such an
approval might have on the States while they are considering a variety of
industry restructuring measures.
27
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traditional electric utilities have not progressed nearly so far, it is clear,
as the Commission itself acknowledged in both Consolidated Natural Gas and
UNITIL, that retail electric competition is developing rapidly. To reserve
jurisdiction over retail sales of electricity pending consideration of the
status of these initiatives on a State-by-State basis will serve no regulatory
objective and would merely impose an added burden on Holdings that could impede
its ability to react quickly as the States implement retail competition
measures.
Second, and far more central to the issue of the impact of the
Commission's approval on investors and consumers and on the effectiveness of
local regulation, the Commission's order in this proceeding will not have the
effect of authorizing or allowing Marketing Subsidiaries to engage in any
business activity that would otherwise be unlawful or unauthorized under
applicable State law. In this regard, Section 21 of the Act provides in clear
terms that "[n]othing in [the Act] shall affect . . . the jurisdiction of any
other commission, board, agency, or officer of the United States or any State or
political subdivision of any State, over any person . . . insofar as such
jurisdiction does not conflict with any provision of [the Act] . . .." There can
be little doubt that the States have the power to regulate the sale of
electricity and gas to end-use (i.e., retail) customers, whether they choose to
exercise such regulatory power in all cases or not. Moreover, the Commission and
the courts have long recognized that the Act was not intended to preempt the
States in
28
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the exercise of jurisdiction over utilities even where there may exist some
degree of overlapping jurisdiction under the Act.26
For present purposes, Holdings' representation that it will not make
sales of electricity or gas to retail customers unless authorized or allowed
under applicable State laws and regulations may be regarded as a restriction or
condition imposed on the authority that is requested herein. Such restriction or
condition, when incorporated into the terms of the Commission's order, will
eliminate any possible question of a conflict between the Commission's order in
this proceeding and actions that may or may not be taken by State legislatures
or commissions.27
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26 It has been stated that the Act was intended to back-stop
and not to replace or supplant the jurisdiction of state
regulatory commissions over the operations of electric and gas
utilities. See e.g., Alabama Electric Cooperative, Inc. v.
Securities and Exchange Commission, 353 F.2d 905 (D.C. Cir.
1965). There, the court stated that "[t]he purpose of the Public
Utility Holding Company Act, as shown by its legislative history,
was to supplement state regulation -- not to supplant it." Id. at
907. See also Municipal Electric Association of Massachusetts v.
Securities and Exchange Commission, 413 F.2d 1052, 1057 (D.C.
Cir. 1969); and American Power & light Co. v. Securities and
Exchange Commission, 158 F.2d 771, 778 (1st Cir. 1946). In
Baltimore Gas and Electric Company, et al. v. Heintz, et al., 760
F.2d 1408 (4th Cir. 1985), cert. denied 474 U.S. 847 (1985), the
court rejected an argument that Sections 9 and 10 of the Act,
under which the Commission would have jurisdiction over
acquisitions creating new holding companies, was intended preempt
State laws that would regulate holding companies differently, in
this instance a Maryland law that simply prohibited the formation
of holding companies with respect to Maryland utilities. 158
F.2d at 1414 - 1415.
27 In this regard, the Commission's Rule 24(b) states that:
"Every order granting an application or making effective a
declaration shall, unless otherwise therein expressly stated,
impose upon the applicant or declarant the obligation to comply
with any restriction or condition which the application or
declaration proposes shall be imposed by the Commission in
connection therewith."
29
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Finally, Holdings' proposal provides sufficient protections for
Southern system utility customers against the risks that are inherent in any
commodity marketing business, which adequately supports the findings that the
Commission must make under Section 10(b)(3) of the Act.28 Any potential
detriments to Southern system utility customers will be minimized through the
segregation of such activities in separate subsidiaries and Southern's limited
investment; the use of risk reduction measures to limit Holdings' overall
exposure to both market price and counterparty credit risks, as described in
Item 1.4, above; the limitations that, without additional approvals of FERC,
Marketing Subsidiaries will not sell electricity to the Operating Companies and
that Marketing Subsidiaries are effectively prevented under the Codes of Conduct
filed with FERC from appropriating and using non-public price and customer
information available to the Operating Companies concerning wholesale
electricity opportunities; and the representation that Southern and Holdings
will not attempt to seek recovery through higher rates to the Operating
Companies' customers to compensate Holdings for possible losses that it may
sustain on or inadequate returns from power and energy commodity marketing
activities.
Rule 54 Analysis: The proposed transaction is also subject to Rule 54,
which provides that, in determining whether to approve an application which does
not relate to any "exempt wholesale generator" ("EWG") or "foreign utility
company"
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28 See Consolidated Natural Gas, n. 36.
30
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("FUCO"), the Commission shall not consider the effect of the capitalization or
earnings of any such EWG or FUCO which is a subsidiary of a registered holding
company if the requirements of Rule 53(a), (b) and (c) are satisfied.
Southern currently meets all of the conditions of Rule 53(a). At July
31, 1996, Southern's "aggregate investment," as defined in Rule 53(a)(1), in
EWGs and FUCOs was approximately $864,800,000, or about 24.6% of Southern's
"consolidated retained earnings," also as defined in Rule 53(a)(1), for the four
quarters ended June 30, 1996 ($3,523.2 million). In addition, Southern has
complied and will continue to comply with the record-keeping requirements of
Rule 53(a)(2), the limitation under Rule 53(a)(3) on the use of Operating
Company personnel to render services to EWGs and FUCOs, and the requirements of
Rule 53(a)(4) concerning the submission of copies of certain filings under the
Act to retail rate regulatory commissions. Accordingly, since the requirements
of Rule 53(a) are currently met and none of the circumstances described in Rule
53(b) has occurred, the provisions of Rule 53(c) are currently inapplicable.
Moreover, even if the effect of the capitalization and earnings of EWGs
and FUCOs in which Southern has an ownership interest upon the Southern holding
company system were considered, there is no basis for the Commission to withhold
or deny approval for the proposal made in this Application- Declaration. The
action requested in the instant filing (viz. approval for certain activities
that are very closely related to
31
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the Southern's subsidiary electric utility operations) would not, by itself, or
even considered in conjunction with the effect of the capitalization and
earnings of Southern's EWGs and FUCOs, have a material adverse effect on the
financial integrity of the Southern system, or an adverse impact on Southern's
public- utility subsidiaries, their customers, or the ability of State
commissions to protect such public-utility customers. On the contrary, Holdings
believes that approval of the proposal contained in this Application-Declaration
would have a modest beneficial effect on the Southern system, because it will
enable Holdings and its associate companies to remain competitive with other
energy suppliers and generate an additional source of revenues from activities
that are, if anything, even more closely related to Southern's core utility
business than the operations of associate EWGs and FUCOs.
Item 4. Regulatory Approval.
The approval of FERC under Section 205 of the Federal Power Act is
required as to rates and charges imposed in any domestic wholesale electric
power sales contracts or tariffs entered into by a Marketing Subsidiary that are
subject to FERC jurisdiction. The status of current FERC approvals affecting
Southern Energy and SCS and the Operating Companies is discussed in Item 1.3,
above. Retail sales of electricity or gas (to the extent allowed under
applicable state law) and, in certain instances, wholesale sales of electricity
or gas that are not subject to FERC jurisdiction, may be subject to regulation
by the appropriate
32
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State public utilities commission. With these exceptions, no other State or
Federal commission (other than this Commission) has jurisdiction over the
proposed transactions.
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.
G - Form of Federal Register Notice. (Previously
filed).
(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 matter will not
constitute any major federal action significantly affecting the quality of the
human environment.
33
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(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 company has duly caused this statement to be signed on
its behalf by the undersigned thereunto duly authorized.
Dated: August 21, 1996
SEI HOLDINGS, INC.
By: /s/Tommy Chisholm
Tommy Chisholm
Secretary
34
Exhibit F
Troutman Sanders LLP
600 Peachtree Street
Atlanta, GA 30308
404-885-3000
August 21, 1996
Securities and Exchange Commission
Washington, D.C. 20549
Re: SEI Holdings, Inc. - Application or
Declaration on Form U-1 (File No. 70-8823)
Ladies and Gentlemen:
We are familiar with the statement on Form U-1 filed by SEI Holdings,
Inc. ("Holdings"), a wholly-owned subsidiary of The Southern Company, a
registered holding company, in the above-referenced proceeding, as it has been
amended, and are furnishing this opinion with respect to the actions requested
therein, which, if granted, would authorize Holdings, through one or more
special purpose subsidiaries (called "Marketing Subsidiaries"), to engage in
certain power and energy commodity brokering and marketing transactions.
We are of the opinion that Holdings is a validly organized and duly
existing corporation under the laws of the State of its incorporation and that,
upon the issuance of your order or orders herein, and in the event the proposed
transactions are carried out in accordance with the terms of such statement on
Form U-1, as amended, and your order or orders:
(a) all state laws applicable to the proposed
transactions will have been complied with; and
(b) the consummation of the proposed transactions will not
violate the legal rights of the holders of any securities issued by
Holdings or any associate company of Holdings.
We hereby consent to the use of this opinion in connection with the
filing of such statement on Form U-1.
Very truly yours,
/s/Troutman Sanders LLP
Troutman Sanders LLP
