File No. 70-8823
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 5
(Post-Effective Amendment No. 3)
to
FORM U-1
APPLICATION OR DECLARATION
under
The Public Utility Holding Company Act of 1935
SOUTHERN ENERGY, 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
Southern Energy, 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 Southern Energy, 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.
This Post-Effective Amendment No. 3 fully restates and wholly
supersedes Post-Effective Amendment No. 2 in this File.
1.1 Background. Southern Energy, Inc.(`Southern Energy"), formerly
known as SEI Holdings, Inc. , 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"). By order dated
September 26, 1996 (the "September 1996 Order"), the Commission authorized
Southern Energy, through one or more subsidiaries referred to as "Marketing
Subsidiaries," to broker or market electricity and other forms of energy
commodities, including natural gas, oil and coal, within the United States, and
to provide incidental related services to customers, subject to certain
qualifications and limitations as regards retail sales of electricity and
natural gas. Under the September 1996 Order, the Commission reserved
jurisdiction over activities by Marketing Subsidiaries outside the United States
pending completion of the record.
Southern Energy now requests that the Commission release jurisdiction
heretofore reserved over activities by Marketing Subsidiaries in Canada to
permit Marketing Subsidiaries to engage in Canada in any of the activities that
may be conducted by Marketing Subsidiaries in the United States. Such Marketing
Subsidiaries will not make any sale of electricity or natural gas to a wholesale
or retail customer in Canada unless authorized or permitted to make such sale
under all applicable laws. Southern Energy is not herein requesting any other
modification to the terms or conditions of the September 1996 Order, and
requests that the Commission continue to reserve jurisdiction over activities by
Marketing Subsidiaries outside the United States and Canada.
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Southern Energy submits that approval of this request is appropriate in
that (i) the North American energy market has already evolved into an integrated
market in terms of both physical interconnection and the volume of cross-border
electricity and gas sales; (ii) such approval would enable Marketing
Subsidiaries of Southern Energy to compete with other large independent power
and gas marketers that have already established a presence in the Canadian
market with resulting benefits for both consumers and investors; (iii) such
approval would enable Southern Energy to establish a presence in the Canadian
market without the need to invest significant sums in sources of production or
supply in that country; (iv) the types of activities in which Marketing
Subsidiaries will engage in Canada are the same types of activities in which
Marketing Subsidiaries are engaged in the United States and will be subject to
the same risk mitigation measures and (v) legislative and administrative actions
by Congress and other U.S. regulatory bodies, including the Energy Policy Act of
1992 ("EPAct"), the North American Free Trade Agreement ("NAFTA"), the sharp
increase in export licenses granted by the Department of Energy ("DOE"), and
recent rulings by the Federal Energy Regulatory Commission ("FERC") conditioning
market rate orders granted to power marketing affiliates of Canadian utilities
upon the existence of open access to the transmission systems of such Canadian
utilities, all underscore the importance of promoting free and unfettered
competition in the North American energy market as a national goal. Finally,
Southern Energy believes that considerations underlying the recent orders of the
Commission authorizing subsidiaries of registered holding companies to engage in
demand-side management and energy efficiency activities in Canada are equally
applicable to the proposal contained herein. Indeed, because gas and electric
power markets are converging rapidly, in order for an electric utility holding
company system to serve its traditional utility customers most efficiently, a
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system such as Southern's must develop expertise in natural gas marketing and
the converging energy services market that can only be achieved by competing
effectively within the natural gas and electricity commodity market that in fact
exists and that is continuing to evolve--the North American market that includes
Canada. Therefore the reasoning of Eastern Utilities Associates, HCAR 26232 (
February 15, 1995) 1995 SEC LEXIS 395, and HEC,Inc., HCAR 26108 (August 19,1994)
, pertaining to the benefits to utility operating subsidiaries of the holding
company system developing the employee skill base in emerging energy markets
applies as well to the pending Application.
The energy marketing and brokering activities of Marketing Subsidiaries
in Canada would likely be carried out principally through Southern Company
Energy Marketing L.P. ("SCEM"), its subsidiary Southern Company Retail Energy
Marketing L.P. ("SCREM"), and other yet to be formed subsidiaries of SCEM.
Southern Energy owns 60% of SCEM and SCREM through subsidiaries. Both SCEM and
SCREM are Marketing Subsidiaries. SCEM engages in wholesale sales of energy
commodities, while SCREM focuses principally upon retail sales. Both SCEM and
SCREM are limited partnerships. The general partner in each is Southern Company
Energy Marketing G.P., L.L.C. ("SCEM-GP"), a limited liability company that owns
a 1% general partner interest in each of SCEM and SCREM. SCEM owns the remaining
99% limited partner interest in SCREM. With regard to SCEM, SC Energy Ventures,
Inc., an indirect wholly owned subsidiary of Southern Energy, owns a 59.4%
limited partner interest in SCEM, and the remaining 39.6% of the ownership
interests in SCEM is owned by a subsidiary of Vastar Resources, Inc., which is
not affiliated with Southern.
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Vastar Resources, Inc. also owns 40% of the member interest in SCEM-GP.
The remaining 60% of the member interest in SCEM-GP is owned by SC Ashwood
Holdings, Inc., an indirectly wholly owned subsidiary of Southern Energy. SC
Energy Ventures, Inc. and SC Ashwood Holdings, Inc. are both wholly owned
subsidiaries of Southern Energy Trading and Marketing, Inc., which in turn is a
wholly owned subsidiary of Southern Energy Ventures, Inc. Southern Energy North
America, Inc. owns 100% of Southern Energy Ventures, Inc., and Southern Energy
owns 100% of Southern Energy North America, Inc.
1.2 The North American Energy Market Constitutes a Single Market. There
are few, if any, remaining physical barriers to electricity and gas transactions
across the U.S.-Canada border. The electricity transmission grids in Canada and
the United States are interconnected at many points. Certain U.S. and Canadian
utility systems have been operated synchronously for decades and coordinate
operations and planning through membership in regional reliability councils.
Likewise, there are several large natural gas pipelines between the U.S. and
Canada.
The Western Systems Power Pool ("WSPP") is one of the best examples of
the increasingly integrated, international nature of the North American
electricity market. The WSPP functions as a marketplace where members can trade
electricity under favorable regulatory conditions. The organization began in
1987 as an experiment involving 15 utilities in or near California. Since then,
it has grown to include over 140 members located throughout the United States
and Canada, including Canadian entities such as Edmonton Power, Powerex (an
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affiliate of B.C. Hydro), TransAlta Utilities Corp., TransCanada Power Corp. and
West Kootenay Power.1 Southern Energy Trading and Marketing, Inc. and SCEM have
been members of WSPP, and SCEM is currently a member.
In recent years, the volume of cross-border gas and electricity sales
has grown dramatically and is projected to grow well into the future. In 1996,
the U.S. imported (mostly from Canada) 12.4% of its total gas consumption, which
is expected to increase to 15.2% by 2020 as additional pipeline capacity is
constructed.2 Canadian exports of gas to the U.S. in 1994 amounted to
approximately 50% of Canada's total domestic production, up from 28% a decade
ago.3 In 1996, the U.S. imported 46.8 billion kWhs of electricity (again, mostly
from Canada) and exported 9.3 billion kWhs. While U.S. imports of electricity
are not projected to grow, exports of electricity from the U.S. are expected to
double by 2020.4
1.3 Other Energy Marketers With Which Southern Energy Competes Have
Already Established a Presence in the Canadian Markets. Many U.S. power
producers and marketers have already sought and obtained export authorizations
from the Department of Energy ("DOE") under Section 202(e) of the Federal Power
Act. For example, within the past few years, North American Energy Conservation,
U.S. Generating Company, CNG Energy Services, Inc., Destec Power Services, Inc.
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1 See Western System Power Pool Transmission and Ancillary Services
Tariff and Revisions to WSPP Agreement to Unbundle Transmission from
Sales Prices Filed with the Federal Energy Regulatory Commission, Dec.
30, 1996, F.E.R.C. Docket No. OA97-220-000.
2 See "Annual Energy Outlook 1998," Dept. of Energy, Energy Information
Admin. - 0383(98) (December 1997), p. 61.
3 "International Energy Outlook 1996," Dept. of Energy, Energy
Information Admin. - 0484(96) (May 1996), p. 40.
4 "Annual Energy Outlook 1998," supra, n. 2, p. 115.
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and NorAm Energy Services, Inc. have all sought and obtained licenses to export
power at specified interconnection points.5 In 1996, DOE granted, with
conditions, Enron Power Marketing, Inc.'s request for "blanket" authority to
export power across all interconnection points into Canada.6 A number of U.S.
energy producers and marketers are already actively engaged in natural gas
marketing in Canada either directly or through affiliates, including Enron,
Pacific Gas and Electric, Natural Gas Clearinghouse, Coral Energy, Duke Energy,
El Paso, Koch, and Williams Energy.
Of course, energy marketing does not simply involve exporting U.S.
produced power or gas into Canada. Marketers also need the flexibility to
purchase sources of supply within Canada either for import into the United
States or for resale to customers in Canada. Although Marketing Subsidiaries of
Southern Energy may, consistent with the terms of the September 1996 Order,
purchase energy supplies in Canada for resale in the United States, and may sell
U.S. produced power and gas at the border, they are restricted under the
September 1996 Order from making sales in Canada. This restriction will place
Marketing Subsidiaries of Southern Energy at a competitive disadvantage
vis-a-vis other marketers, especially as deregulation of energy markets in
Canada evolves. For example, the restriction in the September 1996 Order would
presumably prevent Marketing Subsidiaries from selling U.S. produced power to a
customer in Canada if the delivery point (viz., the point where title typically
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5 Southern Energy Trading and Marketing, Inc. had been added to WSPP's
license to export electricity to WSPP members in western Canada while
it was a member of WSPP.
6 See Enron Power Marketing, Inc., Order No. EA-115 (September 26, 1996).
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passes) is on the Canadian side of the border, and would preclude Marketing
Subsidiaries from agreeing to supply all of the facilities of a "national
account" customer (e.g., a supermarket chain) if some of those facilities are
located in Canada.
1.4 Allowing Marketing Subsidiaries To Engage in Business in Canada
Would Enable Southern Energy to Participate in the Canadian Energy Markets
Through Marketing Transactions Without Having to Make Any Significant Foreign
Investment in Facilities. Southern Energy has in the past investigated
investment opportunities in Canada. A significant benefit to Southern Energy in
being able to engage in energy marketing in Canada is that it may obviate the
need to make any capital investment in facilities in Canada solely for the
purpose of establishing a "presence." Instead, Southern Energy would be able to
participate in the energy market in Canada in a material way through marketing
transactions without investing the significant sums required to develop or
acquire sources of production or supply.
1.5 In Canada Marketing Subsidiaries Will Engage in the Same Types of
Activities They Do in the United States and Will Utilize the Same Risk
Mitigation Measures. The activities in which Southern Energy proposes to engage
in Canada are the same activities in which it is currently engaged in the United
States. Southern Energy proposes to engage, in Canada as well as the United
States, through one or more Marketing Subsidiaries, in all forms of brokering
and marketing transactions involving electricity and other types of energy
commodities and in providing incidental related services to customers. Brokering
generally involves bringing two parties (typically a buyer and seller) together
for a fee or commission that one of the parties has agreed to pay. Marketing
transactions may take a variety of forms. In general, however, marketing
transactions involve contracts under which the performance of the parties is
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expressed in terms of the obligation to make or take physical delivery of
electricity, gas or other energy commodities or the purchase and sale of
commodity-based derivatives contracts, such as options, swaps and
exchange-traded futures contracts, under which physical delivery may or may not
in fact occur.
Moreover, the use of various risk mitigation techniques available to
energy marketers and already utilized by Marketing Subsidiaries of Southern
Energy will enable Marketing Subsidiaries to participate in Canadian energy
markets, as well as the U.S. energy markets, while limiting financial risk. The
trading and marketing activities that would be engaged in by Marketing
Subsidiaries in Canada are the same as those engaged in by Marketing
Subsidiaries in the United States. The only difference in risk imposed by
conducting such activities in Canada is currency risk, which risk can be
mitigated through derivative instruments, such as currency swaps. A key element
of successful energy marketing is the use of risk mitigation measures to balance
overall portfolio positions in order to limit the losses that may be sustained
on any particular commodity transaction due to fluctuations in the market price
of the commodity (market price risk) or to a failure by the other party to the
contract to perform (counter-party credit risk). Such risk mitigation measures
include entering into off-setting physical delivery contracts (i.e., off-setting
purchases and sales of electricity, gas, etc.), the purchase and sale of
derivative instruments (such as options, futures contracts and swap agreements)
for purposes of hedging a physical position, an appropriate mix of long and
short-term contracts, evaluating creditworthiness of counter-parties and
limiting exposure to counter-parties based upon their creditworthiness through
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contractual rights to liquidate positions, rights to require posting of
collateral, parental guarantees or other forms of credit support. The Marketing
Subsidiaries of Southern Energy have to date successfully employed such
techniques to minimize losses incurred on individual energy transactions while
growing to become among the largest marketers of electricity and natural gas in
the United States.
In addition to such risk mitigation techniques, the Marketing
Subsidiaries of Southern Energy utilize trading and risk management control
systems that are periodically reviewed by outside experts to ensure that they
are state of the art. Currently, the energy marketing and brokering activities
of Marketing Subsidiaries are carried out principally through SCEM and SCREM.
The board of governors of SCEM-GP (the "SCEM Board"), the general partner of
both SCEM and SCREM, has adopted a formal risk management policy (the "Risk
Management Policy") that applies to SCEM, SCREM, and any direct or indirect
subsidiaries of SCEM that may be created in the future. The Risk Management
Policy identifies those commodities with respect to which such Marketing
Subsidiaries are authorized to enter into transactions with third parties and
for all such commodities collectively, and for each individual commodity,
establishes limits on the exposure to risk of loss due to changes in market
price that such Marketing Subsidiaries may assume. For each such commodity, SCEM
maintains a risk book, in which it tracks all transaction risk related to
changes in market prices for purposes of valuing, monitoring, managing and
reporting that risk.
The Marketing Subsidiaries use value at risk methodologies to measure
such price risk exposure on an ongoing basis. The particular methodology used to
calculate the value at risk for each commodity is approved by the Risk
Management and Control Committee (the "Risk Management Committee"), which
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includes the President and Chief Executive Officer of SCEM, Chief Financial
Officer of SCEM, the Vice President Treasurer and Controller of Southern Energy
and the Vice President and Controller of Vastar Resources, Inc. Any new
commodities authorized by the SCEM Board cannot be traded until the Risk
Management Committee has approved methodologies for measuring value at risk for
such commodities. For purposes of estimating value at risk, positions are
aggregated by delivery point and time period and are reported separately for
each approved commodity. Any commodity transactions used as cross-commodity
hedges are included in the portfolio hedged. The Risk Management Committee has
to approve the initial correlations or hedge ratios for commodities used as
cross-commodity hedges. Except as necessary to report cross-commodity hedges,
each approved commodity's risk is viewed independently and summed for purposes
of applying the value at risk limits.
Each day a risk report is prepared that sets out a variety of
information, including the net long or short positions from all risk books for
the approved commodities, the change in the daily portfolio value on a marked to
market basis, the value at risk, and a full description of any violations of the
Risk Management Policy. If the end of day change in the marked to market value
in the trading risk books is above certain levels (whether such change is
positive or negative), then the President of Southern Energy and the Chief
Financial Officer of Vastar Resources, Inc. are notified. Depending on the
magnitude of the change, the Risk Management Policy may also require that the
Chief Financial Officer and the Chairman of Southern be notified. The Risk
Management Policy anticipates that the limits on value at risk that it
establishes may be exceeded on an infrequent basis. If such a limit overage does
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occur, the Risk Management Policy requires that it be reported to the Chairman
of the Risk Committee together with an explanation and recommended course of
action to attain compliance with the Risk Management Policy. Prior to SCEM
entering into any transaction that is likely to cause the risk limits to be
exceeded, the justification must be provided to and approval obtained from the
Chairman of the Risk Committee.
All physical or financial transactions engaged in by Marketing
Subsidiaries are carried out in accordance with the risk management practices
described above. For example, the Risk Management Policy adopted by the SCEM
Board described above sets an overall value at risk limit that applies on an
aggregate basis to all brokering and marketing transactions entered into by
SCEM, SCREM and any future subsidiaries of SCEM, regardless of the commodity
involved or whether the transactions are physical or financial. SCEM also
applies the procedures it has implemented to minimize counter-party credit risk
to all such transactions. By having Marketing Subsidiaries engaging in
transactions in Canada, as well as the United States, Southern Energy will
develop expertise that will allow Marketing Subsidiaries, and ultimately the
public utility affiliates of Southern Energy, to compete much more effectively
for energy commodity sales in the deregulated markets that are currently
evolving in the United States and Canada.
1.6 Actions to Promote Energy Competition in the North American Energy
Market. Several Canadian provinces have taken deregulation actions that will
open provincial electric markets to competition by U.S. and other suppliers and
enable Canadian producers and marketers to sell directly to industrial customers
in the U.S.7 In turn, marketers affiliated with Canadian utilities have sought
approval from the FERC to charge market-based rates in connection with their
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7 B. C. Hydro, Canada's third largest utility, has already granted open
access to its transmission network and it and the Bonneville Power
Administration are using each other's transmission network in pursuing
large direct sales accounts. See Energy Economist, November 1996 (The
Financial Times Limited).
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wholesale sales of electricity in the United States. In Energy Alliance
Partnership, 73 F.E.R.C. P. 61,019 (1995), FERC, in its review of a market-based
rate application filed by a power marketer affiliated with a Canadian utility
(Hydro-Quebec), determined that it was appropriate to apply the same general
standards that are applied in similar cases to a marketer affiliated with a U.S.
utility. These standards include proof that the applicant does not have, or has
adequately mitigated, market power in generation and transmission and may not
impose other barriers to market entry. In Energy Alliance, the applicant argued
that its affiliation with a Canadian utility with an extensive transmission
network located exclusively in Canada should be ignored for purposes of this
analysis since the FERC would have no jurisdiction over the affiliate in any
event. FERC rejected this argument, although acknowledging that it would be
powerless to order open access to the Canadian utility's transmission grid. The
policy objective, as FERC stated, is not to open Canadian transmission in order
to serve Canadian load; rather, it is to ensure that other potential suppliers
to the U.S. market would have non-discriminatory access to the Canadian
affiliate's transmission. 73 F.E.R.C. at 61,030-31. On the facts of the case,
FERC was not satisfied that such non-discriminatory access to Hydro-Quebec's
transmission grid existed.
Subsequently, FERC granted a similar market-based rate request to a
marketer affiliated with another Canadian utility (TransAlta Utilities
Corporation, located in Alberta) upon finding that transmission grid access
arrangements existing in Alberta were sufficient to enable all potential
competitors to use that transmission system subject to the same rates, terms and
conditions in order to reach loads in the United States. See TransAlta
Enterprises Corporation, 75 F.E.R.C. P. 61,268 (1996). In addition, FERC
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indicated that a further consideration in its analysis of such foreign marketer
cases is whether the affiliate's transmission arrangements in Canada are such as
to allow power sellers in the United States to use the transmission system in
order to reach potential markets in Canada on a reciprocal basis.8
The clear implication of these market-based rate orders is that FERC
strongly favors competition on a reciprocal basis in cross-border transactions,
and that it does not believe that relevant power markets in North America are
defined by the international boundaries. As these actions demonstrate, FERC has
taken a strong stand (within the limits of its jurisdiction) to promote
wholesale electric competition in cross-border transactions. The underlying
premise in all of these actions, of course, is that the U.S. and Canadian
markets cannot be divorced from each other and that the public interest will be
served by actions designed to promote competition on both sides of the border.
1.7 The Relevance of Other Legal Developments Promoting Competition in
the North American Energy Markets. EPAct, which amended the Act by adding new
Sections 32 (regarding investments in EWGs) and 33 (regarding investments in
FUCOs), expresses a clear Congressional intent to eliminate the Act as an
artificial restraint in the development of international energy markets in the
name of promoting competition in the U.S. wholesale electric market and
facilitating export of U.S. expertise in the electric and gas utility
industries. Thus, a foreign corporation can now acquire and own a wholesale
electric generating subsidiary in the United States without being subject to
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8 In British Columbia Power Exchange Corporation, 78 F.E.R.C. P. 61,024
(1997), FERC again rejected a market-based rate application filed by a
power marketer affiliated with a Canadian utility (British Columbia
Hydro and Power Authority) because it was not satisfied that the
utility affiliate's tariffs satisfied FERC's non-discriminatory
transmission access requirements. FERC reiterated that, in its review
of these filings, it will also seek to assure reciprocal service into
and out of Canada.
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unnecessary regulation as a holding company under the Act, and U.S. companies
(including registered holding companies) may acquire and hold electric and gas
utility subsidiaries which operate outside the United States.
The action requested herein would also be consistent with the goals of
increased trade between the United States and Canada as expressed in NAFTA. The
public policy enunciated in NAFTA encourages the reduction of barriers to trade
and the enhancement of investment opportunities between the United States and
Canada, to the betterment of consumers.
1.8 The Rationale Articulated in the Commission's Recent Orders on
D.S.M./Energy Efficiency Activities in Canada Is Equally Applicable to Southern
Energy's Request. The SEC itself has previously recognized the appropriateness
of permitting a registered holding company to engage in certain energy-related
activities outside the United States. Specifically, by orders dated September
30, 1994 (Holding Company Act Release No. 26135) and February 15, 1995 (Holding
Company Act Release No. 26232), the SEC authorized EUA Cogenex Corporation, a
subsidiary of Eastern Utilities Associates, to engage in demand-side management
activities in Canada. As indicated in Section 1.1, supra, the February 15, 1995,
Cogenex Order specifically referenced the development of system employee
expertise that would inure to the benefit of the affiliated utility operating
company subsidiaries.
These considerations apply with at least equal force to the
participation in natural gas marketing by employees of an electric utility
holding company because energy and fuel substitution is resulting in the
convergence of gas and electricity markets, a development acknowledged by the
September 1996 Order. Moreover, skills in the trading and marketing of both
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physical and financial gas and electricity products are becoming increasingly
important to maximizing the value of generating assets. Participation in the
natural gas and electricity commodity market that already exists, the integrated
North American market, is critical to the success of Marketing Subsidiaries of
Southern Energy and therefore in turn to the development of the trading and
marketing skills by employees of those Marketing Subsidiaries that will inure to
the benefit of the operating company affiliates of Southern Energy as
competitive markets continue to develop in the United States generally and in
particular in their service territories. The skills being developed by the
Marketing Subsidiaries that will benefit the operating company affiliates of
Southern Energy include (1) maximizing the value of generating assets through
short term and long term energy trades, (2) developing measures of price risk
exposure and techniques for managing and mitigating such risk, (3) developing
means for managing counter-party credit risk, (4) understanding the various
regional markets for energy that exist in North America, and (5) understanding
how different energy commodities, regional markets and types of transactions may
be correlated.
Approval similar to that granted EUA was granted to HEC, Inc., a
subsidiary of Northeast Utilities (Holding Company Act Release Nos. 26108 and
26335, dated August 19, 1994 and July 19, 1995, respectively). In the second EUA
order, which eliminated a revenues-based restriction on the amount of such
activities that EUA could engage in outside its sales area, the Commission held
that the provision of energy management services in Canada, including
conservation and demand-side management services, is "closely related" to EUA's
core utility business, and that Congress, through EPAct and other legislation,
had stated that there is a "strong national interest in promoting energy
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conservation and efficiency." Such benefits, which the SEC concluded should not
be denied to registered holding companies, would include reduced emissions of
pollutants, improved balance of payments, and expanded jobs. (Holding Company
Act Release No. 26232, n. 13). Further, the Commission found that such
activities would not require significant investment or expose EUA to significant
risks.
As discussed in Section 1.1, supra, a similar analysis would lead to
the conclusion that energy marketing activities of affiliates of a registered
holding company should also be allowed in Canada (subject to complying with
applicable laws). First, the Commission has already determined in the September
1996 Order that power and energy marketing and brokering activities of a
registered holding company are closely-related to its core utility business,
even when conducted outside its service territory, and that the risks of the
business can be managed through appropriate hedging mechanisms. See also
Consolidated Natural Gas Co., Holding Company Act Release No. 26512 (April 30,
1995). Second, important national goals expressed in EPAct and NAFTA would be
served by allowing marketing activities in Canada, including the promotion of
competition in wholesale electric markets, and the expansion of markets for U.S.
produced electricity, some of which may be excess to the needs of the U.S.,
which will contribute towards the positive balance of payments. And third,
marketers outside of registered holding company systems are largely free from
U.S. imposed regulatory constraints on energy transactions in Canada. No public
interest would be served by an interpretation of the Act that would create or
impose an artificial barrier on the full participation in the North American
energy market solely by registered holding companies.
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1.9 Releasing Jurisdiction Over Activities by Marketing Subsidiaries in
Canada Will Not Have Any Detrimental Effect on Any Utility Subsidiary of
Southern. All of Southern's investments in Marketing Subsidiaries are segregated
from Southern's domestic public utility subsidiaries (the "Operating
Companies"). No Operating Company has extended credit or pledged its assets
directly or indirectly to any Marketing Subsidiary, or will in the future do so,
although to the extent permitted by applicable law other than the Act, Operating
Companies and Marketing Subsidiaries may in the future engage in commodity
transactions with each other in the ordinary course of business, which
transactions may involve each party extending trade credit to the other from
time to time. No indebtedness of any Marketing Subsidiary is otherwise recourse
to any Operating Company. Southern represents that it will not seek recovery
through higher rates to the Operating Companies' utility customers for any
possible losses it may sustain on investments in Marketing Subsidiaries engaged
in activities in Canada or for any inadequate returns on such investments.
1.10 Other Matters - Reporting Requirements. Applicants propose that
Southern Energy will file certificates in accordance with Rule 24 within 45 days
after the end of each calendar quarter and 120 days after the end of the fiscal
year, that provide the following reports, in addition to those required by order
of the Commission dated February 2, 1996 (Holding Co. Act Release No. 26468):
(1) the name and purpose of any new Marketing Subsidiary formed during the
period and of any existing Marketing Subsidiary not previously disclosed; (2) a
balance sheet as of the end of the period and a statement of income and expense
for the period for each Marketing Subsidiary, including accompanying notes or,
if accounting notes are not provided for the period, a narrative discussion of
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any losses incurred during the period; (3) a narrative description of the
specific activities conducted by each Marketing Subsidiary during the period;
and (4) a statement for the period indicating the amount of revenues
attributable to physical sales of power, natural gas, and any other energy
commodity, expressed as a percentage of total revenues from the physical sale of
energy commodities during the period.
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 $10,000.
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 of Marketing
Subsidiaries. The Commission has previously determined in the September 1996
Order that energy marketing activities by Southern Energy satisfy the standards
of Section 10 and Section 11, to which Section 10(c) refers, even in the absence
of any direct nexus between such marketing activities and Southern's core
electric utility operations. This Post-Effective Amendment, if granted, would
simply enable Southern Energy to engage in the same marketing activities outside
the United States. In this regard, however, neither Section 11 nor any other
provision of the Act limits the non-utility activities of a registered holding
company to the United States.
Rule 54 Analysis: The proposed transaction is also subject to Rule 54,
which provides that, in determining whether to approve an application which does
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not relate to any EWG or 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 criteria of Rule 53(a), except for
clause (1). At December 31, 1998, Southern's "aggregate investment," as defined
in Rule 53(a)(1), in EWGs and FUCOs was approximately $ 3.566 billion, or
approximately 90 % of Southern's "consolidated retained earnings," also as
defined in Rule 53(a)(1), for the four quarters ended September 30, 1998 ($3.935
billion)9. With respect to Rule 53(a)(1), however, the Commission has determined
that Southern's financing of investments in EWGs and FUCOs in an amount greater
than the amount that would otherwise be allowed by Rule 53(a)(1) would not have
either of the adverse effects set forth in Rule 53(c). See The Southern Company,
Holding Company Act Release Nos. 26501 and 26646, dated April 1, 1996 and
January 15, 1997, respectively.
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 domestic utility subsidiary 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. Further, none of the circumstances described in Rule 53(b) has
occurred.
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
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9 The average consolidated retained earnings for the four quarters ending
December 31, 1998, is approximately $ 3.944 billlion.
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company system were considered, there would be no basis for the Commission to
withhold or deny approval for the proposal made in this Post-Effective
Amendment. The action requested in the instant filing (viz. permission for
Southern Energy to conduct certain non-utility activities that are very
closely-related to Southern's core utility operations in Canada, in addition to
the U.S.) 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, Southern Energy believes that approval of the proposal contained
in this Post-Effective Amendment would have a modest beneficial effect on the
Southern system, because it will enable Southern Energy and its associate
companies to remain competitive with other energy suppliers and generate an
additional source of revenues from activities that are closely related to
Southern's core utility business.
The Rule 53(c) Order was predicated, in part, upon an assessment of
Southern's overall financial condition which took into account, among other
factors, Southern's consolidated capitalization ratio and the recent growth
trend in Southern's retained earnings. As of December 31, 1995, the most recent
fiscal year preceding the Rule 53(c) Order, Southern's consolidated
capitalization consisted of 49.3% equity (including mandatorily redeemable
preferred securities) and 50.7% debt (including $1.68 billion of long-term,
non-recourse debt and short-term debt related to EWGs and FUCOs). As of year-end
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1997, that ratio was 47.5% equity and 52.5% debt (including $4.593 billion of
long-term, non-recourse debt and short-term debt related to EWGs and FUCOs).
Southern's consolidated capitalization as of September 30, 1998, was 49.4
percent equity, 50.6 percent debt including all non-recourse debt, and 61.45
percent equity and 38.55 percent debt excluding all non-recourse debt. Both are
within accepted industry ranges and within the limits set by independent rating
agencies ( such as Standard and Poor's) for "A" rated utilities.
Thus, since the date of the Rule 53(c) Order, there has been no
material change in Southern's consolidated capitalization ratio, which remains
within acceptable ranges and limits of rating agencies as evident by the
continued "A" corporate credit rating of Southern. Specifically, in January 1997
Standard & Poor's assigned Southern its corporate credit rating of "A," which
was consistent with the implied corporate rating previously held by Southern.
This implied rating had been in effect since May 1995. Therefore, since the
April 1996 issue of the Rule 53(c) Order, the Southern consolidated credit
rating has remained at "A" thereby demonstrating Southern's continued strong
financial integrity. In addition, the underlying ratings of the affiliated
operating companies, which have a strong influence on the Southern corporate
rating, are all "A+". As a point of reference, the pro forma percentage of debt
in the total capital structure of the Southern domestic operating utility
companies is 43.1%, which is at the median total debt ratio of the Standard &
Poor's "A" rated vertically integrated utilities.10
Southern's consolidated retained earnings grew on average approximately
8.6% per year from 1992 through 1996. In 1997, consolidated retained earnings
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10 Currently, capitalization ratios, including short-term debt, for "A"
rated vertically integrated electric utilities have a median total debt
to total capital ratio of 45% as noted by Standard & Poor's in May 1997
for companies rated both publicly and confidentially. Prior to issuing
this rating standard, the Standard & Poor's total debt to total capital
benchmark for an "A" rated vertically integrated investor-owned-utility
having an average business position was 47%.
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increased approximately $78,148,000, or slightly more than 2%. The reduction in
the rate of earnings growth in 1997 was primarily due to a $111 million windfall
profits tax assessed against South Western Electricity in the United Kingdom.
The total windfall profits tax for South Western Electricity was $148 million;
however, the $111 million reflects only Southern's 75% ownership. Despite the
impact of such tax, earnings attributable to Southern's investment in EWGs and
FUCOs have made a positive contribution to earnings in the two calendar years
after the issuance of the Rule 53(c) Order.
Accordingly, since the date of the Rule 53(c) Order, the
capitalization and earnings attributable to Southern's investments in EWGs and
FUCOs has not had any adverse impact on Southern's financial integrity.
Item 4. Regulatory Approval.
No State or Federal commission (other than this Commission) has
jurisdiction over the proposed activities of Marketing Subsidiaries that are
conducted exclusively in Canada. 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. Within the United States
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 State public utility commission. As indicated elsewhere, the export
of power and gas to Canada requires approval by DOE. With these exceptions, no
other State or Federal commission (other than this Commission) has jurisdiction
over the proposed transactions.
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Item 5. Procedure.
Southern Energy 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. Southern Energy 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.
H -Revenues, Gross Margins, and Net Income of Marketing
Subsidiaries ( filed separately pursuant to Rule 104(b))
(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.
(b) No other federal agency has prepared or is preparing an
environmental impact statement with regard to the proposed transactions.
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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: April 23, 1999
Southern Energy, Inc.
By: /s/Tommy Chisholm
Tommy Chisholm
Secretary
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