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File No. 70-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM U-1 DECLARATION
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
______________________________________
CENTRAL AND SOUTH WEST CORPORATION
and
CENTRAL AND SOUTH WEST SERVICES, INC.
1616 Woodall Rodgers Freeway
P.O. Box 660164
Dallas, Texas 75202
(Names of companies filing this statement and
addresses of principal executive offices)
_____________________________________
CENTRAL AND SOUTH WEST CORPORATION
(Name of top registered holding company parent)
____________________________________
Stephen J. McDonnell
Treasurer
Central and South West Corporation
1616 Woodall Rodgers Freeway
P.O. Box 660164
Dallas, Texas 75202
Joris M. Hogan
Milbank, Tweed, Hadley & McCloy
One Chase Manhattan Plaza
New York, New York 10005
(Names and addresses of agents for service)
with copies to
Messrs. George J. Forsyth, Guilford W. Gaylord & Rodrigo J. Howard
Milbank, Tweed, Hadley & McCloy
One Chase Manhattan Plaza
New York, New York 10005
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Item 1. Description of Proposed Transactions.
A. Introduction
Central and South West Corporation ("CSW"), a Delaware corporation
and a holding company registered under the Public Utility Holding Company Act
of 1935, as amended (the "Act"), and Central and South West Services, Inc.
("CSWS"), a wholly owned subsidiary service company of CSW, submit this
declaration (the "Declaration") pursuant to a letter of the Staff of the
Securities and Exchange Commission (the "Commission") dated July 15, 1994
concerning certain aspects of a restructuring of CSW's business and
centralization of certain service and management functions in CSWS (the
"Restructuring"). CSWS provides services to CSW's four electric public
utility companies -- Central Power and Light Company ("CPL"), Public Service
Company of Oklahoma ("PSO"), Southwestern Electric Power Company ("SWEPCO"),
and West Texas Utilities Company ("WTU") -- and to CSW's other subsidiaries,
including Transok, Inc. ("Transok"), CSW Energy, Inc. ("CSW Energy"), CSW
Credit, Inc. ("CSW Credit"), CSW Leasing, Inc. ("CSW Leasing"), and CSW
Communications, Inc. ("CSW Communications"). As used in this Declaration, the
term "Electric Operating Companies" refers to CPL, PSO, SWEPCO and WTU; the
term "Operating Companies" refers to the Electric Operating Companies and
Transok; and the term "CSW System" refers to CSW, the Operating Companies and
the other subsidiaries of CSW described above.
B. Overview
In November 1993, CSW announced its intention to undertake a
restructuring designed to consolidate and restructure its operations in order
to meet the challenges of the changing electric utility industry and to
compete effectively in the years ahead. The Restructuring is a response to
two major factors: a long-term reduction in the rate of growth in the use of
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electricity and increasing competition among suppliers of electricity as a
result of the Energy Policy Act of 1992. As a result of these changes, CSW
believes that the electric utility industry itself faces a restructuring that
will cause changes in the way all electric utilities do business. The
underlying goal of the Restructuring is to enable the Electric Operating
Companies to focus on and be accountable for serving the customer.
CSW expects to realize a number of benefits from the Restructuring.
Beginning in 1994 and continuing into the future, increased efficiencies and
synergies are expected to be realized with the elimination of previously
duplicated functions. This leads to enhanced communication and efficiency,
which should translate into a reduction in the rate of growth in operating and
maintenance ("O&M") costs and thereby minimize the need for future rate
increases.
In general, the Restructuring is designed to consolidate and
centralize in CSWS certain functions heretofore separately performed by each
of CSW's four Electric Operating Companies. In part, the Restructuring shifts
certain management functions relating to the operation of power plants,
certain engineering activities and certain administrative and support
functions from the Electric Operating Companies to CSWS, thereby reducing
costs and freeing the Electric Operating Companies to focus on customer
service, marketing and economic development.
The Restructuring is intended to standardize certain practices
throughout the CSW System and to streamline management. By reducing layers of
management, management will be closer to operations and communication should
be enhanced. In addition, managers throughout the CSW System are charged with
completing and implementing a program -- the Business Improvement Plan --
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established in 1991 to identify, analyze and implement the best business
practices throughout the CSW System. Through this standardization process,
the CSW System seeks to achieve further operational efficiencies.
Organizationally, the Restructuring establishes new functional
business units (described more fully below), but does not involve the
formation of new entities and will not require utility assets to be
transferred among companies within the CSW System.
At the holding company level, to delineate functional lines more
clearly, the Restructuring aligns CSW management into two principal units --
"CSW Electric," covering the CSW System's electric utility operations, and
"CSW Enterprises," covering CSW's other businesses, including Transok, CSW
Energy, CSW Communications, and the mergers and acquisitions and strategic
planning departments. CSW Electric and CSW Enterprises are functional
business designations only, not new subsidiaries. CSW executive vice
presidents have been named as presidents for each unit and report to the
chairman of CSW.
At the service company level, which is aligned under CSW Electric,
the Restructuring groups CSWS's services that primarily serve the Electric
Operating Companies into three functional areas, "Operation Services" and
"Production Services," with a new CSWS president for each, and a marketing and
business development staff headed by a vice president.
"Operation Services" encompasses services in four main areas:
* administration services, including services in the areas of
planning and analysis, accounting, treasury, human resources
and human resources program consulting, procurement,
administrative services and communications;
* transmission and substation engineering services, including
project management and engineering support, engineering
design, standards, research, integrated resource planning and
transmission planning;
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* information resource services, including information services
and telecommunications; and
* system process improvement services, which include existing
Business Improvement Plan projects and a focus on process
"re-engineering."
"Production Services" encompasses four main areas:
* plant (fossil-fueled) services, which will provide management
services in such areas as unit commitment, maintenance
scheduling and plant management;
* fuel supply services;
* production engineering services, including production
dispatch, environmental services, and engineering and
construction services; and
* nuclear services, which will provide administrative and
support services with respect to the ownership interest held
by CPL in the South Texas Project nuclear electric generating
station. (CPL is not the operator of the South Texas
Project, and CSWS will perform no operational services with
respect to the facility.)
In addition, the Restructuring centralizes a small marketing and business
development staff in CSWS to render support services to the Electric Operating
Companies in the areas of marketing, economic development, power marketing and
rates and regulation. These organizational arrangements are reflected in the
organizational charts set forth in Exhibits 1 through 12, which depict
reporting lines from the Electric Operating Companies to CSW and from CSWS to
CSW Electric and CSW Enterprises.
The presidents of CSWS Production Services and CSWS Operation
Services, the vice president of CSWS Marketing and Business Development, and
the presidents of the four Electric Operating Companies all report to an
executive vice president of CSW who also holds the title of president and
chief executive officer of CSW Electric. CSWS will also continue to render
support services to the non-utility business units of the CSW System,
including those aligned under "CSW Enterprises". Exhibit 13 shows the primary
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"customers" -- CSW and its subsidiaries -- served by CSWS Operation Services,
CSWS Production Services, and CSWS Marketing and Business Development, and the
principal services provided by CSWS.
C. Control Over CSWS Services
CSWS operates with a Board of Directors which includes the
presidents of each of CSW's four Electric Operating Companies. In addition,
the Restructuring places CSWS under CSW Electric, the CSW management unit
responsible for electric operations. These and other factors discussed below
ensure that CSWS will continue to be responsive to the needs of the Electric
Operating Companies and to provide the Electric Operating Companies with means
to judge independently the need for inter-affiliate services and to monitor
the quality and value of the services being provided.
In addition to being represented on CSWS's Board of Directors by
their presidents, the interests of the Electric Operating Companies will be
represented at CSWS by other mechanisms that enhance the Electric Operating
Companies' ability to judge independently the need for, and monitor the
quality of, CSWS's services. Among other things, CSWS and the Electric
Operating Companies will continue to use controls and procedures relating to
the existing work order accounting system reviewed by the Commission pursuant
to a prior audit. These procedures ensure that costs associated with the
services performed by CSWS on behalf of the Electric Operating Companies are
properly authorized, allocated and tracked. Specifically, requests for CSWS's
services for the Electric Operating Companies are initiated through a request
for, and authorization of, a work order that accumulates costs relating to
those services. A sample copy of a work order authorization form is set forth
in Exhibit 14. CSWS assigns appropriate billing formulas to work orders based
on the nature of the services covered by the work order request and
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discussions with employees of the company requesting the services. Electric
Operating Company personnel can monitor CSWS's charges to the Electric
Operating Companies through review of on-line work order information.
Moreover, the CSWS accounting function periodically reviews all work orders,
and the CSW Internal Audit Department regularly reviews work order system
controls. Work orders are established and administered in accordance with the
Commission's Uniform System of Accounts for Mutual and Subsidiary Service
Companies. CSW believes that the CSWS work order system provides effective
controls that are similar to those used by other registered holding company
systems.
Further, as an adjunct to the Restructuring, CSWS is currently
developing a new Customer/Supplier Partnership program. The Customer/Supplier
Partnership is a structured program through which both users and suppliers of
services within the CSW System will actively participate in determining how
services are provided, how performance will be measured and reported, and how
these results will be utilized on a continuing basis to reduce the cost and
improve the quality of services utilized by the Electric Operating Companies.
In other words, the program is designed to assist the Electric Operating
Companies in measuring and monitoring the quality and cost of the services
they utilize.
The Customer/Supplier Partnership is a phased program that will put
CSWS services under a systematic review process. The quality and cost of
CSWS services will be examined from the Electric Operating Companies'
perspective to determine appropriate measures of quality. After appropriate
qualitative measures are determined, quality and cost will be measured and
CSWS and the Electric Operating Companies will determine whether CSWS is
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providing necessary and appropriate services, whether improvements in services
may be made by CSWS, and whether CSWS or another party is the best choice as
supplier of those services.
CSWS is implementing the Customer/Supplier Partnership in three
phases, scheduled to culminate in its widespread use in operations by April
1995. CSWS Production Services and Operation Services organizations have been
trained as to the Customer/Supplier Partnership process and are now defining
the services that they provide to internal customers -- the consumers of CSWS
services within the CSW System. CSWS employees, in cooperation with Electric
Operating Company personnel, currently are developing appropriate units of
measure, dimensions of customer satisfaction and performance indicators for
each of their services. As part of this process, CSWS will hold meetings with
a cross-section of Electric Operating Company personnel, from the vice
presidents of operations and administration of each Electric Operating Company
down to personnel at the "line" level. In this manner the Customer-Supplier
Partnership process will provide the Electric Operating Companies with
immediate input into the scope of services and will enhance their ability to
assess service in the future. Additional meetings to review the cost,
quantity and quality of CSWS services will be held annually as part of the
CSWS budgeting process and will provide the Electric Operating Companies with
further input into the quantity, cost and quality of CSWS services.
The following examples illustrate a number of potential applications
of the work order process and the Customer/Supplier Partnership program.
Because service parameters are still being developed, these examples are
hypothetical only; actual service parameters will be developed following
meetings between CSWS and Electric Operating Company personnel and may vary
from the hypotheticals described below.
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In the human resources area, for example, CSWS and the Electric
Operating Companies may define "payroll processing" as a service category for
measurement, tracking and reporting purposes. The unit of measure to be used
for tracking the volume of payroll processing services could be the number of
employees per company or the number of pay periods. The dimensions of
customer satisfaction or quality could be timeliness and accuracy. A work
order for payroll services for the relevant time period would be prepared and
would become effective upon approval by an appropriate officer of CSWS and an
appropriate officer of the applicable Electric Operating Company (such as the
vice president of operations or administration). As indicated in Exhibit 14,
the work order would set forth a description of the work to be performed
(i.e., payroll processing), the basis for billing (i.e., direct billing and/or
allocation based on number of employees or computer resource units), the start
date of the work order (e.g., January 1, 1995), the completion date for the
work order (e.g., December 31, 1995), and other information. CSWS employee
time and expenses would be accumulated under the applicable work order number
and would periodically be charged and reported to the applicable Electric
Operating Companies. In addition, the payroll area would track the number of
employees paid each month by company, any occurrences of employees not being
paid on time, the number of errors on payments and the cost of paying
employees (total and rate per payment). This information would be made
available periodically to the management of the payroll area as well as to
CSWS's customers (i.e., the Electric Operating Companies). The goal would be
to minimize the cost per payment and maximize customer satisfaction through
systematic monitoring of this information. This analysis could lead to
elimination of certain administrative functions (e.g., maintaining a paper
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file of pay advices), the redesign of the entire process (e.g., distributing
time entry to remote locations), or, if the desired cost per unit cannot be
achieved by CSWS, outsourcing the payroll work.
"Medical insurance claim processing" may be defined as another
service category. As in the payroll example described above, a work order
along the lines of Exhibit 14 would be prepared for approval by an appropriate
officer of the Electric Operating Company, setting forth a description of the
work to be performed (i.e., processing of medical insurance claims), the basis
for billing (i.e., direct billing and/or allocation based on number of
employees or computer resource units), the start date of the work order (e.g.,
December 1, 1994), the completion date for the work order (if any), total
expenditures authorized and other information. CSWS employee time and
expenses would be accumulated under the applicable work order number and would
periodically be charged and reported to the applicable Electric Operating
Company. Quantitatively, one way of measuring claim processing services would
be by the number of claims processed. Alternatively, CSWS and the Electric
Operating Companies might determine that other quantitative and qualitative
measures would be more useful -- e.g., dollar volume of claims processed (or
paid). Depending on the units of measure chosen, each Electric Operating
Company would receive quantitative reports on the number (or dollar volume) of
claims processed (or paid) by CSWS and the cost per claim (or the cost per
dollar of claims) for CSWS processing services, as well as qualitative
information on the accuracy of CSWS's claim processing services (e.g., number
of resubmitted or disputed claims or by audit of claim payments) and the
average time required by CSWS to process a claim (or a given dollar volume of
claims). As in the case of payroll processing, this information could also
help assess the possibility of outsourcing.
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In the engineering area, a work order might be initiated for an
engineering evaluation of a proposed transmission upgrade. As in the examples
described above, a work order along the lines of Exhibit 14 would be prepared
for approval by an appropriate officer of each applicable Electric Operating
Company, setting forth a description of the work (e.g., engineering services
in connection with upgrade of a transmission interconnection), the basis for
billing (e.g., direct billing and/or allocation based on peak load, average
number of ultimate customers, KWH sales, peak load/average customers/KWH sales
and/or total gross utility plant), the start date of the work order (e.g.,
January 30, 1995), the projected completion date for the services (e.g., on or
before July 1, 1995 based on existing scope of project), total expenditures
authorized (e.g., projected or budgeted outlays based on existing scope of
project), and other information. CSWS employee time and expenses would be
accumulated under the applicable work order number and would periodically be
charged and reported to the applicable Electric Operating Companies. In
addition, management reports would track CSWS's performance versus budgets and
schedules and any other dimensions of customer satisfaction developed in the
Customer/Supplier Partnership process.
D. Services affected by the Restructuring
The services centralized in CSWS as a result of the Restructuring
represent an incremental extension of services to reflect changed business
conditions and cost reduction opportunities. Thus, CSWS continues to render
services similar to those it has previously rendered, including supervisory
and management services, system coordination, and a variety of administrative
and support services. In several areas, the Restructuring adds CSWS
management and supervisory services in addition to support and/or
administrative services. In addition, the Restructuring centralizes several
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services heretofore performed by each individual Electric Operating Company --
accounting and finance functions (including treasury), certain generation and
dispatch functions (in particular, production dispatch, generating unit
commitment, power pool coordination and communication with neighboring
utilities, and power plant management), the processing of payrolls and
employee medical insurance claims, certain areas of procurement, transmission
and substation engineering, and certain environmental services -- in CSWS,
thereby eliminating the need for duplicate staffs at each Electric Operating
Company. These aspects of the Restructuring are discussed in greater detail
below.
CSW officers and other CSW corporate staff will continue to be
employees of CSWS and on CSWS's payroll. These personnel will continue to be
designated as "CSW corporate" personnel for internal purposes either because
they hold CSW offices or perform essential CSW functions. Such personnel will
also continue to provide services to the other companies in the CSW System.
1. Accounting and finance
Certain accounting functions have historically been performed
centrally by CSWS for the Electric Operating Companies, but most accounting
functions have been performed separately by each Electric Operating Company
using its own accounting staff. The Restructuring centralizes and
consolidates all accounting functions other than data gathering and entry.
Under the restructured reporting relationships, local data gathering and entry
staffs report to a CSWS Operation Services Assistant Controller. Since each
Electric Operating Company heretofore had its own accounting staff,
centralization of accounting functions in CSWS is expected to result in
significant economies.
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For similar reasons, the Restructuring centralizes a number of
finance functions previously performed separately by treasury departments at
each Electric Operating Company, including remittance processing.
2. Generation and dispatch
In the areas of generation and dispatch, the Restructuring provides
more centralized coordination by CSWS, with the aim of reducing the CSW
System's costs of electrical production.
In the area of generation, the Restructuring centralizes certain
management and supervisory services previously provided by separate staffs at
each of the four Electric Operating Companies. Generating units will continue
to be operated and maintained by Electric Operating Company personnel, but
local production staff will receive management services from, and report to, a
central CSWS Production Services management team at CSWS. The CSWS Production
Services management team will provide operating policies and maintenance
schedules and will manage generating unit commitment, power pool coordination,
communication with neighboring utilities, and production dispatch. The
Restructuring does not alter the ownership of any generating facilities, and
on-site operating crews remain the employees of each Electric Operating
Company.
In the area of dispatch, the Restructuring streamlines procedures.
In the past, each Electric Operating Company had a production dispatch
computer which received information from that company's generating units and
from neighboring utilities. The Electric Operating Companies' dispatch
computers each obtained indications of load and line load and forwarded
information to a Central Control Center operated by CSWS in Dallas (the
"CCC"). A System-wide CCC dispatch computer calculated the optimal System-
wide dispatch schedule, factoring in off-system transaction requirements, and
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sent back an interchange schedule to the Electric Operating Companies'
computers. The Electric Operating Companies' dispatch computers then
recalculated the dispatch schedule and sent command signals to their
respective generating units to regulate output.
The Restructuring eliminates the intermediate step in the production
dispatch process and connects generating units directly to the CCC, which
receives information from, and provides command signals directly to,
generating units. In practice, because the CCC computers and the Electric
Operating Companies' computers all run the same dispatch program, the
centralization of dispatch does not change the manner in which the CSW System
is dispatched for production purposes.
The Restructuring makes no change in distribution dispatch, which
will continue to be handled locally by each Electric Operating Company.
Under Section 6.07 (Energy Exchange Pricing) of the Restated and
Amended Operating Agreement dated October 1, 1993 among CPL, PSO, SWEPCO, WTU
and CSWS (the "CSW System Operating Agreement") (Exhibit 15 hereto), each
Electric Operating Company receives the benefit of its lowest cost
generation.[1] This is accomplished through the economic loading of CSW
System generating units and the allocation, in an after-the-fact dispatch
reconstruction process, of generating costs to individual Electric Operating
Companies.
__________________________
[1] The CSW System Operating Agreement was filed with the Federal Energy
Regulatory Commission ("FERC") on October 15, 1993 in Docket No.
ER94-32-000. This form of the CSW System Operating Agreement became
effective on January 1, 1994 by FERC order issued November 15, 1993 in
that docket. A copy of the FERC filing was provided to each of the state
utility regulatory commissions having jurisdiction over the Electric
Operating Companies and to the New Mexico Public Utility Commission,
which regulates El Paso Electric Company ("EPE"). CSW has entered into
an agreement to acquire EPE and has filed an Application-Declaration on
Form U-1 in connection with the proposed acquisition (Commission File
No. 70-8339).
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In present-day CSW System operations, CSW System generating units
are committed to load and then dispatched in a manner designed to achieve the
lowest overall System cost. In selecting generating units to be committed to
load for a given day, those generating units that must be on line for
"security" purposes and those generating units which otherwise "must run" are
committed to load. Generating capability expected to be needed to serve load
over and above these "must run" requirements are selected in the order of
lowest running cost. The units thus committed to load are then operated,
first, as needed to meet "must run" requirements, and otherwise, in the most
economic firing order.
On a daily basis, the CCC "reconstructs" the dispatch in a process
by which the costs of producing energy on the previous day are allocated among
the Electric Operating Companies in accordance with Section 6.07 of the CSW
System Operating Agreement. Section 6.07 provides as follows:
For the purpose of pricing Energy exchange among the
[Electric Operating] Companies, CSW System resources
shall be utilized to serve System requirements in the
following order:
(a) Those Generating Units which are designated
not to be operated in the order of lowest to highest
Variable Cost due to [Electric Operating] Company
operating constraints shall be allocated to the
[Electric Operating] Company requiring the Generating
Unit.
(b) The lowest Variable Cost generation of each
[Electric Operating] Company's Hourly Capability shall
first be allocated to serve its Own Load.
(c) The next lowest Variable Cost portion of each
[Electric Operating] Company's remaining Hourly
Capability shall be allocated to serve Pool Energy
requirements of [Electric Operating] Companies under
System Economic Dispatch. Pool Energy shall be priced
in accordance with Schedule E.
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(d) The next lowest Variable Cost portion of each
[Electric Operating] Company's remaining Hourly
Capability shall be used to supply Internal Economy
Energy to [Electric Operating] Companies under System
Economic Dispatch. Internal Economy Energy shall be
priced in accordance with Schedule F.
These provisions have been included in CSW System operating agreements since
the adoption of the initial agreement and were developed by a committee which
included representatives of the Electric Operating Companies. The provisions
therefore represent a collective determination by the Electric Operating
Companies of their best interests.
The Restructuring does not change the "reconstruction" process
described above. Each of the Electric Operating Companies will continue, in
accordance with Section 6.07 of the CSW System Operating Agreement, to retain
the benefit of its lowest cost generating resources. By participating in
central economic dispatch, each Electric Operating Company will also continue
to receive the benefit of energy produced by sister Electric Operating
Companies that can generate electricity more cheaply than that company's more
expensive generating units to meet higher levels of loads. This economic
sharing of generating resources produces the lowest overall System costs and
thus substantial benefits for the consumers served by the Electric Operating
Companies.
The only change in operation that the Restructuring effects is that
unit commitment decisions will no longer be made by Electric Operating Company
personnel, but by personnel at the CCC. However, the basis upon which unit
commitment decisions are made is unchanged. Units will continue to be
committed first to meet system "security" and other "must run" requirements.
Thereafter, CSW System generating units and other power supply resources will
be deployed in economic order with a view to effecting the lowest overall
system operating cost.
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3. Payroll and medical insurance claim processing
In place of separate staffs at each of the Electric Operating
Companies, the Restructuring centralizes the processing of medical benefit
claims and paychecks -- a purely administrative function -- in CSWS.
4. Procurement
To take advantage of economies of scale and purchasing power, the
Restructuring centralizes most procurement services in CSWS. Each Electric
Operating Company will continue to have a local procurement group of its own
employees for local procurement needs, and these local procurement groups will
participate in the centralized procurement process and will report to CSWS
procurement personnel. As with the fuel procurement services currently
performed by CSWS, CSWS will render procurement services as agent for the
Electric Operating Companies and will purchase as agent for the Electric
Operating Companies.
5. Engineering
In the engineering area, the Restructuring eliminates a management
layer at each of the four Electric Operating Companies and centralizes
transmission and substation engineering services in CSWS. The centralization
of management services in the engineering area is intended to cut costs and
standardize construction standards across the CSW System.
6. Information and telecommunications services
In the area of information and telecommunications services, the
Restructuring centralizes management of the Electric Operating Companies'
information and telecommunications services at the CSWS level, thereby
eliminating a layer of management duplicated at each of CSW's Electric
Operating Companies. Each Electric Operating Company will continue to have
operating-level information service and telecommunications personnel, but they
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will report to a System-wide CSWS telecommunications director and a System-
wide information services vice president performing supervisory and management
services for the four Electric Operating Companies. Under the restructured
reporting relationships, certain local information service personnel at the
four Electric Operating Companies report to a CSWS Operation Services Director
of Information Services/Client Services, and local telecommunications
operations and maintenance staffs at the Electric Operating Companies report
to a CSWS Operation Services Operations/Maintenance Manager. As before, CSWS
will also continue to perform support functions in these areas.
No data processing or telecommunications equipment has been or will
be conveyed in the Restructuring, and the scope and character of the CSW
System's information services and telecommunications functions remain
essentially the same.
The Restructuring will reduce information and telecommunications
costs and lead to more efficient System-wide use of information and
telecommunications resources. In addition, the centralization will promote
System-wide standardization of equipment, which in turn should lead to uniform
quality and performance and lower procurement costs for information systems
and telecommunications equipment.
CSWS Operation Services currently performs many telecommunications
functions for the CSW System. Its telecommunications personnel manage,
design, build or contract, operate, maintain and administer the
telecommunications systems and leased public services required for the day-to-
day operations of the CSW System. Such systems and services include public
and private network, mobile radio, cellular, phone switches, public switched
services and video conferencing services. Some of these functions, and
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communications services required for demand-side management and other advanced
services being developed, will be assumed by CSW Communications to the extent
cost-effective and subject to further Commission authorization as needed.
7. Environmental
The Restructuring also consolidates environmental services from
separate environmental units at each Electric Operating Company. As a result
of the Restructuring, environmental permitting, compliance (including
environmental auditing and occupational health) and technical services are
centralized at CSWS. Customer and governmental relations for environmental
matters will continue to be handled at the Electric Operating Companies but
with coordination and central management by CSWS. Environmental laboratory
services will also remain at the Electric Operating Companies but will be
consolidated into a smaller number of laboratories. Certain additional
policy-level support services continue to be provided by the environmental
services arm of CSWS in Dallas.
E. Financial Impact
The initial estimate of the costs of the Restructuring was
approximately $97 million which was expensed in 1993. CSW expects to incur
approximately $6 million of additional restructuring costs in 1994.
Approximately $75 million of the Restructuring costs will be paid from general
corporate funds. The remaining $28 million will be paid from retirement plan
trusts; this amount represents the present value of enhanced early retirement
benefit amounts to be paid to participants over future years in accordance
with the early retirement program. These costs will be funded from general
corporate funds to the benefit plan trusts over future years.
CSW expects to realize a number of benefits from the Restructuring.
Beginning in 1994 and continuing into the future, increased efficiencies and
synergies are expected to be realized with the elimination of previously
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duplicated functions. This should translate into a reduction in the rate of
growth in O&M costs and minimize the need for future rate increases. The
Restructuring costs described above are expected to be recovered within 18-24
months after implementation of the restructuring changes. The targeted
reduction in O&M growth over the 1994-1997 period is set forth in Confidential
Exhibit 19 and amounts to approximately twice the costs of the Restructuring.
On a System-wide basis, the Restructuring results in a decrease of
approximately 750 positions and the reduction of an additional 100 full-time
non-employee contractors. Because many of the anticipated benefits will be
realized by consolidating and centralizing certain functions, the
Restructuring increases the staff of CSWS from approximately 400 to
approximately 930, with approximately 660 located in Tulsa and the remainder
located in Dallas. In selecting the location of Operation Services and
Production Services, several factors were considered as part of a cost-benefit
analysis with respect to these cities. The primary factors that led to the
decision to locate Production Services in Dallas included the following: (i)
the location in Dallas of the CCC, which would be extremely expensive to move,
(ii) the location in Dallas of CSW Energy, which will be one of Production
Services' primary clients, and (iii) the availability of space in the CSW
Center in Dallas sufficient to hold Production Services and CSW Energy. CSW
Energy, which has nationwide and potentially global operations, has a need for
the superior airport transportation available in Dallas.
The primary factors that led to the decision to locate the Operation
Services and CSWS marketing and business development employees in Tulsa,
Oklahoma, included the following: (i) the desirability of locating non-
production services in the service territory of one of the operating
companies, (ii) the availability and favorable price of office space in Tulsa,
<PAGE> 21
and (iii) the quality of the airport transportation service and
telecommunications infrastructure available in Tulsa. In addition, CSW
expects to receive approximately $9.6 million in direct cash payments over the
first ten years under the Oklahoma Quality Jobs Program. CSWS will also be
eligible for free employee training and other benefits under this program.
CSWS will allocate all direct cash payments to the Electric Operating
Companies (and other companies in the CSW System) based on the total CSWS
billing (less indirect costs and interest) to each CSW System company.
Although the Restructuring increases the number of CSWS employees,
CSWS will still represent only about 11% of the CSW System's total workforce.
Exhibit 17 shows the approximate staffing levels for CSWS, CSW's corporate
employees, the Electric Operating Companies, Transok, and CSW Energy, both
before and after the Restructuring. Exhibit 18 shows the areas of each
Electric Operating Company affected by the Restructuring.
Because the Restructuring increases the amount of services rendered
by CSWS, it is expected that the absolute amount of CSWS billings to the
Operating Companies will increase. But this increase will be more than offset
by savings resulting from centralization, standardization, and the elimination
of the need for certain duplicate facilities and equipment so that the
Operating Companies' overall growth in O&M costs will be lower than previously
projected.
The targeted reduction in O&M growth consists almost entirely of
labor-related cost savings from the planned reductions in staffing. These
targets assume prompt implementation of the Restructuring. Any delay in
implementation may affect both the timing and amount of these targets.
Confidential Exhibit 19 sets forth projected O&M expenses by company without
the Restructuring and the targeted impact of the Restructuring on projected
<PAGE> 22
O&M expenses for the 1994-1997 period. A number of assumptions are built into
these projections based on the best judgment of management. The projections
are to a considerable extent dependent on costs and circumstances which are
beyond CSW's control.
F. Allocation Methods
Under existing Commission authority, each of the Operating Companies
pays to CSWS all costs which reasonably can be identified and related to a
particular transaction or service performed by CSWS on its behalf. These
costs are captured in work orders in accordance with the Commission's Uniform
System of Accounts for Mutual Service Companies and Subsidiary Service
Companies. Where one or more companies from the CSW System is involved in or
receives benefits from a transaction or service performed, costs are allocated
among the companies on the basis most directly related to the transaction or
service performed. Costs incurred by CSWS which are not directly chargeable
to one or more of the CSW System companies -- i.e., indirect costs -- are
allocated among and billed to the companies using an appropriate formula as
authorized by the Commission.[2]
The foregoing billing principles will remain the basis for CSWS's
charges to the CSW System companies unless and until modified or new
principles are adopted and reported to and/or approved by the Commission in
__________________________
[2] Pursuant to Section 3 of the Service Agreement between CSWS and the CSW
Electric Operating Companies (Exhibit 20 hereto), "[a]s compensation for
services rendered, each of the System Companies [shall] pay to the
Service Company all costs which reasonably can be identified and related
to particular transactions or services performed by the Service Company
for or on its behalf. Where more than one System Company is involved in
or has received benefits from a transaction or service performed, cost
will be allocated among such companies on the basis most directly related
to the transaction or service performed. Allocated costs will be billed
using an appropriate formula as authorized by the Commission."
<PAGE> 23
accordance with the procedures set forth in the Commission's March 20, 1969
order authorizing the formation of CSWS (Rel. No. 35-16317) (the "1969
Order"). The services centralized in CSWS as a result of the Restructuring
represent an incremental extension of existing services to reflect changed
business conditions and cost reduction opportunities. They therefore do not
represent a fundamental change in the essential scope or character of services
to be rendered by CSWS, and will be billed in the same manner, using the same
existing allocation methods, as similar services heretofore provided by CSWS.
Accordingly, there are no immediate plans to change existing allocation
methods or to adopt new allocation methods for CSWS's services except as
otherwise noted herein. However, CSW will continue working with the
Commission to ensure that the allocation methods used are effective in
allocating costs according to benefits received.
The allocation methods employed by CSWS for billings of indirect
costs, and for direct costs benefitting more than one operating company,
include the following: (1) total assets with 20 percent allocated to CSW, (2)
total assets, (3) peak load, (4) average number of ultimate customers, (5) KWH
sales, (6) peak load/average customers/KWH sales, (7) average peak load for
past three years, (8) computer resource units, (9) number of employees, (10)
total gross utility plant, (11) total common stock equity with 20 percent
allocated to CSW, (12) number of leases (joint fuel projects only), and (13)
total CSWS billing less indirect costs and interest, and such other methods as
are approved by the Commission. The appropriate allocation method is
determined on a case-by-case basis by CSWS at the time the work order is
initiated, and notice of the allocation method is given to the companies
affected. Any questions about allocated items are discussed and resolved
through discussions between the companies affected and CSWS personnel.
<PAGE> 24
As described above, CSWS personnel will be working in partnership
with Electric Operating Company personnel to define, measure, and plan the
delivery of products and services to the Electric Operating Companies.
Set forth below is a summary of the CSWS services affected by the
Restructuring and the billing methods that CSWS currently uses and CSW and
CSWS believes are appropriate for use in allocating the costs of those
services. CSW and CSWS will continue to work with the Commission to ensure
that the allocation methods used are effective in allocating costs according
to benefits received.
Function Billing Method
1. Accounting and finance
Accounting Direct billing to extent identifiable to a
particular operating company. For other
charges, allocation methods include: average
number of ultimate customers (for customer-
related accounting services), number of
employees (for employee-related accounting
services), computer resource units, and/or
total assets (either with or without 20%
allocated to CSW) (for property accounting
services).
Treasury and Finance Direct billing to extent identifiable to a
(remittance processing) particular operating company. For other
charges, allocation methods include: average
number of ultimate customers and/or KWH
sales.
Treasury and Finance Direct billing to extent identifiable to a
(treasurer functions) particular operating company. For other
charges, allocation methods include: total
common stock equity with 20% allocated to
CSW, total assets, and/or total CSWS billing
less indirect costs and interest.
<PAGE> 25
2. Generation and Dispatch
Management services Direct billing to extent identifiable to a
(incl. operating particular operating company. For other
policies and charges, allocation methods include: peak
maintenance schedules load, KWH sales, average number of ultimate
and, management of customers, peak load/average customers/KWH
generating unit sales, average peak load for past three
commitment) years, and/or computer resource units.
Dispatch (incl. pool For CCC, same billing and allocation methods
coordination and currently used for costs arising from CSWS's
communication with operation of the CCC. For other charges,
neighboring utilities) allocation methods include: peak load, KWH
sales, average number of ultimate customers,
peak load/average customers/KWH sales,
average peak load for past three years,
and/or computer resource units.
3. Payroll and Medical Insurance
Claim Processing Direct billing to extent identifiable to a
particular operating company. For other
charges, allocation methods include: number
of employees and/or computer resource units.
4. Procurement Direct billing to extent identifiable to a
particular operating company. Otherwise,
allocation methods include: peak load,
average number of ultimate customers, KWH
sales, peak load/average customers/KWH
sales, and/or number of employees.
5. Transmission & Substation
Engineering Direct billing to extent identifiable to a
particular operating company. For other
charges, allocation methods include: peak
load, average number of ultimate customers,
KWH sales, peak load/average customers/KWH
sales, and/or total gross utility plant.
6. Information and Telecommunications
Services
Management services for Direct billing to extent identifiable to a
information and particular operating company. For other
telecommunications charges, allocation methods include:
services computer resource units and/or number of
employees.
Support functions Same direct billing and allocation methods
presently used for support services already
provided by CSWS.
<PAGE> 26
7. Environmental
Permitting Direct billing to extent identifiable to a
particular operating company. For other
charges, allocation methods include: peak
load, average number of ultimate customers,
KWH sales and/or peak load/average
customers/KWH sales.
Compliance (incl. Direct billing to extent identifiable to a
environmental auditing particular operating company. For other
and occupational health) charges, allocation methods include: peak
load, average number of ultimate customers,
KWH sales and/or peak load/average
customers/KWH sales.
Technical services Direct billing to extent identifiable to a
particular operating company. For other
charges, allocation methods include: peak
load, average number of ultimate customers,
KWH sales and/or peak load/average
customers/KWH sales.
Coordination and Direct billing to extent identifiable to a
management of customer particular operating company. For other
and regulatory/ charges, allocation methods include: peak
community relations load, average number of ultimate customers,
KWH sales, peak load/average customers/KWH
sales, and/or number of employees.
________________________________
The actual billing and allocation methods used will depend on the
exact nature of the services performed and further analysis of appropriate
billing and allocation methods. In addition, as noted above, CSWS will be
reviewing its authorized allocation methods to determine what, if any,
additional allocation methods or changes in existing allocation methods may be
advisable in light of further experience and analysis. If any changes or
additional methods are indicated, CSWS will advise the Commission in
accordance with the 60-day letter procedures set forth in the 1969 Order
before implementing any such changes or methods.
<PAGE> 27
Item 2. Estimated Fees, Commissions and Expenses.
The projected fees, commissions and expenses to be paid or
incurred by CSW in connection with the Transaction are estimated as follows:
Approximate
Amount
-----------
Holding Company Act filing fee ............. $ 2,000*
Legal fees and expenses:
Milbank, Tweed, Hadley & McCloy .......... 50,000
Other expenses, including consultants'
fees and reimbursed employee expenses .... 8,000
-------
Total ................................. $60,000
=======
_______________
* Actual Amount.
No person to whom fees or commissions are to be paid in connection
with the proposed transaction is an associate company or affiliate of CSW or
an affiliate of an associate company.
Item 3. Applicable Statutory Provisions.
The following sections of the Act, and the rules promulgated by the
Commission pursuant to the Act, are or may be applicable to the Restructuring
and other transactions described herein.
Transactions to which sections
Section of the Act are or may be applicable
13(b) Services by CSWS to associate companies
Rules
Rules 80 through 94 Services by CSWS to associate companies
<PAGE> 28
Analysis
The Restructuring has and will not result in the creation of any new
subsidiaries, the acquisition of any interest in another business or the
transfer of ownership of any utility assets, and therefore does not involve
any action requiring the approval of the Commission under Section 9 of the
Act. With respect to the scope and character of services to be rendered by
CSWS, CSW believes that CSWS is already authorized to perform all of the
services it will perform following completion of the Restructuring. The
services centralized in CSWS by the Restructuring represent an incremental
extension of existing services to reflect changed business conditions and cost
reduction opportunities. They therefore do not represent a fundamental change
in the essential scope or character of services to be rendered by CSWS.
Because no change will be made in the corporate organization of CSWS or the
general scope and character of the services rendered by CSWS, it does not
appear that the approval of the Commission is required under Section 13. To
the extent that the Commission deems that such approval is necessary, the
declarants herein hereby request authority under all applicable provisions of
the Act to implement the Restructuring as described in this Declaration.
Section 13(b) of the Act makes it unlawful for any subsidiary of a
registered holding company to enter into a service or sales contract by which
such company undertakes to perform services or sell goods to any associate
company "except in accordance with such terms and conditions and subject to
such limitations and prohibitions as the Commission by rules and regulations
or order shall prescribe as necessary or appropriate in the public interest or
for the protection of investors or consumers and to insure that such contracts
are performed economically and efficiently for the benefit of such associate
companies at cost, fairly and equitably allocated among such companies." The
<PAGE> 29
terms, conditions and limitations under which registered holding company
subsidiaries may enter into service contracts with associate companies are
provided by Rules 80 through 94, which were adopted by the Commission in
connection with Section 13.
In the 1969 Order, the Commission authorized the formation of CSWS
(formerly CSR Services, Inc.) to perform services for CSW and its System
companies. On April 21, 1978, the Commission issued an order (Rel. No. 35-
20512) (the "1978 Order") authorizing the establishment and operation of the
CSW corporate data center to provide a variety of data processing services to
the CSW System companies. On December 30, 1982, the Commission issued an
order (Rel. No. 35-22808)(the "1982 Order") authorizing a new system of cost
allocation for CSWS. On October 23, 1985, the Commission issued an order
(Rel. No. 35-23876)(the "1985 Order") that authorized additional methods of
allocating costs.
Pursuant to the 1969 Order, CSWS has provided, and is authorized to
provide, "a variety of management . . . services for CSW and its subsidiary
operating companies," including services that can be characterized as
supervisory in nature. In addition, the 1969 Order explicitly contemplated
that CSWS would be staffed by persons who were also officers of CSW, and that
all or part of such officers' salaries would be paid by CSWS, in proportion to
their time devoted to CSW and CSWS, respectively. As stated in the 1978
Order, CSWS is generally authorized to provide "a variety of management,
administrative, engineering, financial, support and coordination services for
CSW and its subsidiary operating companies." CSWS will continue to provide
such services following the Restructuring, with the modifications described
above. In addition, as set forth more fully below, CSWS is specifically
authorized to perform services in many of the areas involved in the
Restructuring:
<PAGE> 30
* Accounting and finance: CSWS is authorized to perform accounting
and finance services for the CSW System. See 1969 Order
(authorizing CSWS to provide "finance" services); 1978 Order (CSWS
authorized to provide "property accounting" and "general
accounting" services); 1982 Order (CSWS authorized to provide "tax,
accounting, budgeting and financing services"); 1985 Order
("finance and accounting are all performed by CSWS on behalf of
[CSW] and other members of the holding company system"). The
Restructuring merely centralizes and consolidates certain
accounting and treasury functions in CSWS and does not involve
CSWS in any unauthorized service.
In the treasury area, the Restructuring centralizes remittance
processing in CSWS. Since the 1978 Order notes that CSWS is
authorized to provide services relating to the processing of
customer billing and revenues, remittance processing is within the
scope of services that CSWS is authorized to perform.
* Generation and dispatch: As noted in the Commission's 1978 order,
CSWS is authorized to provide a "variety of management,
administrative, . . . and coordination services for CSW and its
subsidiary companies." In addition, under the CSW System Operating
Agreement, CSWS is already responsible for coordinating emergency
and economy energy interchanges among the Electric Operating
Companies, off-system sales and purchases, and the economic
dispatch of the CSW System.
* Payroll and medical insurance claim processing: The 1978 Order
notes that CSWS is authorized to provide services relating to
"payrolls" and the 1969 Order authorizes CSWS to provide "insurance
administration and coordination services."
* Procurement: As noted by the Commission in its 1985 Order, CSWS is
authorized to provide procurement services for the CSW System.
* Engineering: As set forth in the 1969 Order, and as noted in the
1978 and 1982 Orders, CSWS is authorized to provide "engineering"
and "engineering planning" services.
* Information and telecommunications services: The 1969 and 1978
Orders give CSWS authorization to provide data processing services
and other services, such as telecommunications, that would
otherwise be performed by outside suppliers.
* Environmental services: Under the authority granted in the 1969
Order to provide support and coordination services for the CSW
System, and to provide consultation, analysis and advice regarding
legal, business and other issues, CSWS has provided a variety of
environmental services for the CSW System, including, as noted in
the 1982 Order, environmental licensing services. In addition,
CSWS has performed industrial hygiene services for the Electric
Operating Companies. CSWS will continue to provide these services
following the Restructuring. The Restructuring centralizes in CSWS
<PAGE> 31
certain environmental services previously performed by the Electric
Operating Companies, including certain technical environmental
services and coordination and management of customer and
governmental relations in the environmental area. These services
are of a character which CSWS is generally authorized to perform.
In addition, CSWS's activities will be consistent with the activities
of service companies in other registered holding company systems. Similar
functional realignments by other registered holding companies and their
subsidiaries recently centralized many similar services, including management
of fossil-fueled generation.
Localized Management: The Restructuring is designed to enhance the
effectiveness of localized management and at the same time improve efficiency
across the CSW System. Even apart from the dictates of the Act,[3] CSW wants
to maintain the "advantages of localized management" as a matter of business
necessity. CSW recognizes that its Electric Operating Companies must stay
close to their customers to survive and thrive in today's more competitive
power markets. However, the Electric Operating Companies need not be burdened
with the redundancy arising from local management of functions more
efficiently handled centrally. Accordingly, a fundamental element of the
Restructuring is to free the Electric Operating Companies from functions which
are more efficiently performed centrally and redirect local efforts to
increased customer service and business development.
In the area of power generation, the functions affected by the
Restructuring do not involve areas where centralization would impair any
"advantages of localized management." After the Restructuring, direct
__________________________
[3] Section 2(a)(29)(A) of the Act defines an "[i]ntegrated public utility
system" as a system which is "not so large as to impair (considering the
state of the art and the area or region affected) the advantages of
localized management."
<PAGE> 32
management and operation of generation plants continue to be located on-site
at the Electric Operating Companies. The only change is in reporting lines.
Instead of reporting to four sets of managers at four Electric Operating
Companies, on-site electric production crews report to a central CSWS
Production Services staff in Dallas. On-site production employees continue to
be employed by the Electric Operating Companies. Ownership of generation
assets remains at the Electric Operating Companies.
In the area of production dispatch, the Restructuring eliminates the
need for dispatch computers at each Electric Operating Company, and connects
generating units directly to the CCC, which will receive information from, and
provide command signals directly to, generating units. In practice, because
the CCC computers and the Electric Operating Companies' computers all run the
same dispatch program, the centralization of dispatch will not change the
manner in which the CSW System is dispatched. The production dispatch
functions which have been selected for centralization are more efficiently
performed on a centralized basis because of economies of scale, standardized
operating and maintenance practices and closer coordination of system-wide
matters. Distribution dispatch will continue to be handled locally by
personnel at each Electric Operating Company.
The true advantages of localized management rest in functions that
are visible to the customer -- those functions that affect the quality or
reliability of electric service or the responsiveness of the Electric
Operating Company to local needs. The Restructuring is designed to preserve
and enhance these functions.
Among other things, the Restructuring does not affect line crews and
other local service personnel, who continue to be employed at each Electric
Operating Company. Customers will therefore continue to receive quick
<PAGE> 33
responses from line crews and other service personnel to solve electric
service problems. Although the Restructuring centralizes remittance
processing and many accounting functions, customers will continue to have
local contacts for questions about their bills and the Electric Operating
Companies' handling of their accounts. The Electric Operating Companies will
continue to maintain offices or direct contacts in each service area to
respond to service calls. In addition, all employees will remain involved in
community affairs in their service areas, and key job descriptions have been
redefined to include such community participation. CSW also expects to
reallocate personnel to provide localized business development and other
services to industrial customers.
The other services centralized in CSWS by the Restructuring --
treasury functions; payroll and benefit claim processing; certain areas of
procurement; transmission and substation engineering; environmental
permitting, auditing and technical services; and management of information and
telecommunications services -- are all "support" functions that can be
performed more efficiently on a centralized basis by CSWS without any loss of
the advantages of localized management.
As described above, CSWS is instituting a new process, the
Customer/Supplier Partnership, which is expected to provide the Electric
Operating Companies and CSWS with much more standardized, precise and
routinely deployed systems of measurement of the performance of CSWS services
than they have had previously over the nature, level, and cost of services
provided by CSWS. The controls currently in place regarding establishment of
work orders will continue to be followed. As currently envisioned,
Customer/Supplier Partnership will be a "partnership" between CSWS and the
companies it serves, rather than a mechanism by which CSW or CSWS may dictate
<PAGE> 34
the nature or extent of services to be provided to the Electric Operating
Companies. It is anticipated that Customer/Supplier Partnership will be a
source of continuous feedback to CSWS on the nature and level of various
services required by the Electric Operating Companies. Through March 1995,
CSWS and the companies it serves will be in the initial phases of establishing
the framework for Customer/Supplier Partnership.
The Commission's past decisions on "localized management" confirm
that the Restructuring fully preserves and even enhances the advantages of
localized management in the CSW System. In these cases, the Commission has
evaluated localized management in terms of responsiveness to local needs,[4]
whether management and directors were drawn from local utilities,[5] the
preservation of corporate identities,[6] and the ease of communication.[7]
CSW's Restructuring satisfies all of these factors.
__________________________
[4] American Electric Power Co., Fed. Sec. L. Rep. [paragraph] 81,647 at
80,602 (1978) (advantages of localized management evaluated in terms
of whether an enlarged system could be "responsive to local needs");
General Public Utilities Corp., 37 SEC 28, 36 (1956) (localized
management evaluated in terms of "local problems and matters involving
relations with consumers").
[5] See Centerior Energy Corp., 35 SEC Docket 769, 775 (1986) (advantages of
localized management would not be compromised by the affiliation of two
electric utilities under a new holding company because the new holding
company's "management [would be] drawn from the present management" of
the two utilities); Northeast Utilities, 47 SEC Docket 1270, 1285 (1990)
(advantages of localized management would be preserved in part because
the board of New Hampshire utility, which was to be acquired by an out-
of-state holding company, included "four New Hampshire residents").
[6] See Northeast Utilities, 47 SEC Docket 1270, 1285 (1990) (utilities "will
be maintained as separate New Hampshire corporations ... [t]herefore the
advantages of localized management will be preserved"); Columbia Gas
System, Inc., 40 SEC Docket 654, 656 (1988) (benefits of local management
maintained where the utility to be added would be a separate subsidiary).
(continued...)
<PAGE> 35
CSW's Restructuring maintains the corporate structures of the
Electric Operating Companies. The Electric Operating Companies retain their
local corporate identities and maintain their headquarters, corporate names,
and boards of directors. As before, the Board of Directors of each Electric
Operating Company will continue to consist primarily of Electric Operating
Company executives and independent business leaders from the local community.
Moreover, local interests are well represented in the management of
CSWS. CSWS's board of directors includes the presidents of each Electric
Operating Company, and CSWS is staffed in part with personnel drawn from the
Electric Operating Companies. In addition, the Boards of Directors of the
Electric Operating Companies will continue to have the right to direct the
purchase by their respective companies of services from non-associate
companies. Moreover, under applicable state law the boards of the respective
Electric Operating Companies continue to have the nondelegable responsibility
to manage the affairs of their companies. Finally, in addition to the Staff's
oversight under Section 13 and attendant rules under the Act, the purchase of
services by the Electric Operating Companies has a "cost of service" aspect
which will continue to be subject to oversight and review in proceedings
before the applicable state regulatory commissions (e.g., in rate proceedings
filed in those jurisdictions).
Even though the Restructuring's centralization of functions creates,
in some cases, added distance between personnel who serve the operating
companies and some of the operating companies, distance is far less important
today than when the Act was passed almost sixty years ago. As the Commission
__________________________
[7](...continued)
See American Electric Power Co., Fed. Sec. L. Rep [paragraph] 81,647
at 80,602 (1978) (distance of corporate headquarters from local
management was a "less important factor in determining what is in the
public interest" given the "present-day ease of communication and
transportation").
<PAGE> 36
noted in the American Electric Power case, the distance of corporate
headquarters from local management was "a less important factor in determining
what is in the public interest" given the "present-day ease of communication
and transportation."
Thus, at its most fundamental level, the Restructuring is designed
to make the CSW System more efficient and responsive to local needs and
therefore preserves the advantages of localized management.
Item 4. Regulatory Approval.
With the exception of ministerial matters relating to the physical
location of records, CSW believes (based on review of applicable state laws
and the other factors described below) that no state approvals are required
for the implementation of the Restructuring. CSW has, however, endeavored to
keep state regulatory authorities apprised of the Restructuring, and has
provided information on the Restructuring to commissioners or members of the
staffs of the Public Utility Commission of Texas ("PUCT"), the Oklahoma
Corporation Commission ("OCC"), the Arkansas Public Service Commission
("APSC"), and the Louisiana Public Service Commission ("LPSC"). The
Commission staff has provided certain documents to the OCC and PUCT staffs.
In addition, examination of certain aspects of the Restructuring may
occur at pending and future rate cases at the above commissions. Among other
things, in such proceedings, such commissions may make determinations as to
the appropriateness of costs and charges for affiliate transactions for which
the CSW operating companies will seek recovery. Applicable state law imposes
specific statutory requirements for the recovery of affiliate costs.
Oklahoma: Under Oklahoma law, CSW believes that the approval of the
OCC is not required for an internal restructuring such as the Restructuring.
In January 1994, representatives of PSO met with all three Commissioners of
<PAGE> 37
the OCC to advise them on the Restructuring. In April 1994, the chief
executive officer and a representative of PSO again met with two of the three
OCC Commissioners and the OCC Staff. Neither the Commissioners nor the OCC
Staff have indicated any objections to the Restructuring.
The OCC Rules Governing Electric Utilities require certain records
to be kept within Oklahoma at the office of the utility and are to be open for
examination by the OCC or its representatives. While the records detailing
the cost of PSO's property will remain in Oklahoma after the Restructuring,
certain other records will be kept in Dallas, Texas. On June 6, 1994, the OCC
issued Order No. 383885 in Cause No. PUD 940 000353 ("Order"). The Order, a
copy of which is filed as Exhibit 21 hereto, specifically found that an
exception to the OCC's rule on the keeping of company records within Oklahoma
should be granted and that "PSO should be allowed to move the records required
because of the restructuring from Tulsa, Oklahoma to Dallas, Texas." The
Order further provided that PSO will make the records moved to Dallas
available as if they were located within Oklahoma.
Texas: CSW believes that the only required filing with respect to
the Restructuring is a filing under the provisions of Section 33 of the Texas
Public Utility Regulatory Act and PUCT Substantive Rule [section] 23.14,
seeking to maintain certain Electric Operating Company records outside of
Texas. CSW made this filing on May 6, 1994 and received interim relief on
June 17, 1994 to enable it to move and maintain such company records outside
of Texas. An order permitting the Electric Operating Company records to be
maintained outside of the State of Texas was administratively approved and
became effective on September 19, 1994.
<PAGE> 38
The Staff of the PUCT has been provided with information regarding
the Restructuring. In April and May 1994, executives and other
representatives of CSW met with the three PUCT Commissioners and with members
of the Staff of the PUCT, and provided such information as CSW could provide
consistent with restrictions on ex parte communications relating to pending
rate proceedings at the PUCT.
Additional information regarding the Restructuring was conveyed to
the PUCT through responses to questions asked in connection with at least one
contested proceeding before the PUCT.
Arkansas: Under Arkansas law, CSW believes that state regulatory
approval is not required for the Restructuring. In November 1993, CSW System
representatives met with the Staff of the APSC to discuss the Restructuring,
and answered Staff questions, dealing with the potential impact of the
Restructuring on SWEPCO, the percentage decrease in employees, and the effect
the Restructuring would have on SWEPCO personnel responsible for regulatory
liaison. In April 1994, CSW discussed further details regarding the
Restructuring with the APSC by telephone. The APSC Staff does not seek
additional information concerning the Restructuring at this time.
Louisiana: CSW believes that prior LPSC approval is not required
for the Restructuring. Since January 1994, representatives of SWEPCO
including its president and chief executive officer, have met and spoken with
Commissioner Don Owen of the LPSC, whose district covers SWEPCO's entire
Louisiana service territory, and his Staff. Commissioner Owen has been fully
briefed on the Restructuring and all of his questions have been answered by
CSW and SWEPCO representatives. Commissioner Owen understood the reasoning
behind the Restructuring and supported measures to cut costs, while also
<PAGE> 39
expressing concern for the decrease in the number of jobs in the Shreveport-
Bossier City area. All requested information has been furnished, and there
are no outstanding requests from the LPSC for additional information.
Item 5. Procedure.
CSW respectfully requests that the Commission issue notice of this
Declaration not later than November 4, 1994 and issue an order approving the
same, and permitting the Declaration to become effective promptly following
the expiration of the period set forth in such notice.
CSW requests the Commission to issue its notice of proceedings as
soon as is reasonably practicable and to make the notice sufficiently broad so
that subsequent re-noticing will not be required if the details in the way the
Restructuring is implemented should be modified or if the Restructuring itself
should be modified.
No recommended decision by a hearing officer or other responsible
officer of the Commission is necessary or required in this matter. The
Division of Investment Management of the Commission may assist in the
preparation of the Commission's decision in this matter. There should be no
thirty-day waiting period between the issuance and the effective date of any
order issued by the Commission in this matter, and it is respectfully
requested that any such order be made effective immediately upon the entry
thereof.
<PAGE> 40
Item 6. Exhibits.
Exhibit Description
1 Organizational Chart Before the Restructuring
2 Organizational Chart After the Restructuring
3 Lines of Authority From CSWS to CSW Electric
4 Lines of Authority from Electric Operating Companies to CSWS
and from CSWS to CSW Electric: Fossil Generation
5 Lines of Authority from Electric Operating Companies to CSWS
and from CSWS to CSW Electric: Nuclear Services
6 Lines of Authority from Electric Operating Companies to CSWS
and from CSWS to CSW Electric: Environmental Services
7 Lines of Authority from Electric Operating Companies to CSWS
and from CSWS to CSW Electric: Information Services
8 Lines of Authority from Electric Operating Companies to CSWS
and from CSWS to CSW Electric: Controller and Accounting
Services
9 Lines of Authority from Electric Operating Companies to CSWS
and from CSWS to CSW Electric: Telecommunications Services
10 Lines of Authority from Electric Operating Companies to CSWS
and from CSWS to CSW Enterprises: Other Services
11 Lines of Authority from Electric Operating Companies to CSWS
and from CSWS to CSW Electric: Procurement
12 Lines of Authority from Electric Operating Companies to CSWS
and from CSWS to CSW Electric: T&S Engineering
13 Primary Customers of CSWS Operation Services, CSWS
Production Services, and CSWS Marketing and Business
Development
14 Sample Work Order Authorization
15 Restated and Amended Operating Agreement (previously filed
with the Commission as Exhibit B-4 to the Form U-1
Application-Declaration of CSW in File No. 70-8339 and
hereby incorporated by reference)
16 Agreement to Amend Restated and Amended Operating Agreement
(previously filed with the Commission as Exhibit B-5 to the
Form U-1 Application-Declaration of CSW in File No. 70-8339
and hereby incorporated by reference)
<PAGE> 41
17 CSW Restructuring Staffing Changes, 1993 to 1994
18 Effects of Restructuring on Various Areas of Each Electric
Operating Company
19 Confidential Exhibit -- Cost/Benefit Analysis
20 CSWS Service Agreement (previously filed with the Commission
as Exhibit B-6 to the Form U-1 Application-Declaration of
CSW in File No. 70-8339 and hereby incorporated by
reference)
21 OCC Order No. 383885 in Cause No. PUD 940 000353 (June 6,
1994)
22 Proposed Notice of Proceeding.
Item 7. Information as to Environmental Effects.
The proposed transaction does not involve major federal action
having a significant effect on the human environment. No federal agency has
prepared or is preparing an environmental impact statement with respect to the
proposed transaction.
<PAGE> 42
S I G N A T U R E
- - - - - - - - -
Pursuant to the requirements of the Public Utility Holding Company
Act of 1935, as amended, the undersigned company has duly caused this document
to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: November 2, 1994
CENTRAL AND SOUTH WEST CORPORATION
By: /s/ STEPHEN J. MCDONNELL
Stephen J. McDonnell
Treasurer
<PAGE> 1
INDEX OF EXHIBITS
EXHIBIT TRANSMISSION
NUMBER EXHIBIT METHOD
- ------- ------- ------------
1 Organizational Chart Before the Restructuring SE
2 Organizational Chart After the Restructuring SE
3 Lines of Authority From CSWS to CSW Electric SE
4 Lines of Authority from Electric Operating SE
Companies to CSWS and from CSWS to CSW
Electric: Fossil Generation
5 Lines of Authority from Electric Operating SE
Companies to CSWS and from CSWS to CSW
Electric: Nuclear Services
6 Lines of Authority from Electric Operating SE
Companies to CSWS and from CSWS to CSW
Electric: Environmental Services
7 Lines of Authority from Electric Operating SE
Companies to CSWS and from CSWS to CSW
Electric: Information Services
8 Lines of Authority from Electric Operating SE
Companies to CSWS and from CSWS to CSW
Electric: Controller and Accounting
Services
9 Lines of Authority from Electric Operating SE
Companies to CSWS and from CSWS to CSW
Electric: Telecommunications Services
10 Lines of Authority from Electric Operating SE
Companies to CSWS and from CSWS to CSW
Enterprises: Other Services
11 Lines of Authority from Electric Operating SE
Companies to CSWS and from CSWS to CSW
Electric: Procurement
12 Lines of Authority from Electric Operating SE
Companies to CSWS and from CSWS to CSW
Electric: T&S Engineering
13 Primary Customers of CSWS Operation SE
Services, CSWS Production Services, and
CSWS Marketing and Business Development
<PAGE> 2
INDEX OF EXHIBITS
(CONTINUED)
EXHIBIT TRANSMISSION
NUMBER EXHIBIT METHOD
- ------- ------- ------------
14 Sample Work Order Authorization SE
15 Restated and Amended Operating Agreement By Reference
(previously filed with the Commission as
Exhibit B-4 to the Form U-1 Application-
Declaration of CSW in File No. 70-8339)
16 Agreement to Amend Restated and Amended By Reference
Operating Agreement (previously filed with
the Commission as Exhibit B-5 to the Form
U-1 Application-Declaration of CSW in File
No. 70-8339)
17 CSW Restructuring Staffing Changes, 1993 SE
to 1994
18 Effects of Restructuring on Various Area SE
of each Electric Operating Company
19 Confidential Exhibit -- Cost/Benefit SE
Analysis (Confidential Treatment)
20 CSWS Service Agreement (previously filed By Reference
with the Commission as Exhibit B-6 to the
Form U-1 Application-Declaration of CSW in
File No. 70-8339)
21 OCC Order No. 383885 in Cause No. SE
PUD 940 000353 (June 6, 1994)
22 Proposed Notice of Proceeding. Electronic
<PAGE> 1
EXHIBIT 22
----------
SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-____)
Filings Under the Public Utility Holding Company Act of 1935 ("Act")
_________, 1994
Notice is hereby given that the following filing(s) has/have
been made with the Commission pursuant to provisions of the Act and rules
promulgated thereunder. All interested persons are referred to the
application(s) and/or declaration(s) for complete statements of the
proposed transaction(s) summarized below. The application(s) and/or
declaration(s) and any amendments thereto is/are available for public
inspection through the Commission's Office of the Public Reference.
Interested persons wishing to comment or request a hearing on the
application(s) and/or declaration(s) should submit their views in writing
by November 4, 1994 to the Secretary, Securities and Exchange Commission,
Washington, D.C. 20549, and serve a copy on the relevant applicant(s)
and/or declarant(s) at the address(es) specified below. Proof of service
(by affidavit or, in case of an attorney at law, by certificate) should be
filed with the request. Any request for hearing shall identify
specifically the issues of fact or law that are disputed. A person who so
requests will be notified of any hearing, if ordered, and will receive a
copy of any notice or order issued in the matter. After said date, the
application(s) and/or declaration(s), as filed or as amended, may be
granted and/or permitted to become effective.
<PAGE> 2
Central and South West Corporation
and Central and South West Services, Inc. (70-______)
Central and South West Corporation ("CSW"), a Delaware
corporation and a holding company registered under the Public Utility
Holding Company Act of 1935, as amended (the "Act"), and Central and South
West Services, Inc. ("CSWS"), a wholly owned subsidiary service company of
CSW, have filed a declaration (the "Declaration") pursuant to a letter of
the Staff of the Securities and Exchange Commission (the "Commission")
dated July 15, 1994 concerning certain aspects of a restructuring of CSW's
business and centralization of certain service and management functions in
CSWS (the "Restructuring"). CSWS provides services to CSW's four electric
public utility companies -- Central Power and Light Company ("CPL"), a
Texas corporation, Public Service Company of Oklahoma ("PSO"), an Oklahoma
corporation, Southwestern Electric Power Company ("SWEPCO"), a Delaware
corporation, and West Texas Utilities Company ("WTU"), a Texas corporation
(the "Electric Operating Companies") -- and CSW's other subsidiaries,
including Transok, Inc. ("Transok" and, together with the Electric
Operating Companies, the "Operating Companies"), CSW Energy, Inc. ("CSW
Energy"), CSW Credit, Inc. ("CSW Credit"), CSW Leasing, Inc. and CSW
Communications, Inc. ("CSW Communications")
In November 1993, CSW announced its intention to undertake a
restructuring designed to consolidate and restructure its operations in
order to meet the challenges of the changing electric utility industry and
to compete effectively in the years ahead. The Restructuring is a
response to two major factors: a long-term reduction in the rate of growth
in the use of electricity and increasing competition among suppliers of
<PAGE> 3
electricity as a result of the Energy Policy Act of 1992. As a result of
these changes, CSW believes that the electric utility industry itself
faces a restructuring that will cause changes in the way all electric
utilities do business. The underlying goal of the Restructuring is to
enable the Electric Operating Companies to focus on and be accountable for
serving the customer.
CSW expects to realize a number of benefits from the
Restructuring. Beginning in 1994 and continuing into the future,
increased efficiencies and synergies are expected to be realized with the
elimination of previously duplicated functions. This leads to enhanced
communication and efficiency, which should translate into a reduction in
the rate of growth in operating and maintenance ("O&M") costs and thereby
minimize the need for future rate increases.
In general, the Restructuring is designed to consolidate and
centralize in CSWS certain functions heretofore separately performed by
each of CSW's four Electric Operating Companies. In part, the
Restructuring shifts certain management functions relating to the
operation of power plants, certain engineering activities and certain
administrative and support functions from the Electric Operating Companies
to CSWS, thereby reducing costs and freeing the Electric Operating
Companies to focus on customer service, marketing and economic
development.
Organizationally, the Restructuring establishes new functional
business units but does not involve the formation of new entities and will
not require utility assets to be transferred among companies within the
CSW System.
<PAGE> 4
The services centralized in CSWS as a result of the Restructuring
represent an incremental extension of services to reflect changed business
conditions and cost reduction opportunities. CSWS continues to render
services similar to those it has previously rendered, including
supervisory and management services, system coordination, and a variety of
administrative and support services. In several areas, the Restructuring
adds CSWS management and supervisory services in addition to support
and/or administrative services. In addition, the Restructuring
centralizes several services heretofore performed by each individual
Electric Operating Company -- accounting and finance functions (including
treasury), certain generation and dispatch functions (in particular,
production dispatch, generating unit commitment, power pool coordination
and communication with neighboring utilities, and power plant management),
the processing of payrolls and employee medical insurance claims, certain
areas of procurement, transmission and substation engineering, and certain
environmental services -- in CSWS, thereby eliminating the need for
duplicate staffs at each Electric Operating Company.
The initial estimate of the costs of the Restructuring was
approximately $97 million which was expensed in 1993. CSW expects to
incur approximately $6 million of additional restructuring costs in 1994.
Approximately $75 million of the Restructuring costs will be paid from
general corporate funds. The remaining $28 million will be paid from
retirement plan trusts; this amount represents the present value of
enhanced early retirement benefit amounts to be paid to participants over
future years in accordance with the early retirement program. These costs
will be funded from general corporate funds to the benefit plan trusts
over future years.
<PAGE> 5
CSW expects to realize a number of benefits from the
Restructuring. Beginning in 1994 and continuing into the future,
increased efficiencies and synergies are expected to be realized with the
elimination of previously duplicated functions.
The services centralized in CSWS as a result of the Restructuring
will be billed in the same manner, using the same existing allocation
methods, as similar services heretofore provided by CSWS.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Jonathan G. Katz
Secretary
