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File No. 70-8517
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
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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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, hereby file this
Amendment No. 1 to the Form U-1 Declaration in File No. 70-8517 for the
purpose of amending and supplementing Items 1.B, 1.C, 1.D, 1.E, 1.F.2 and 6 to
respond to certain questions raised by the Staff of the Commission by letter
dated January 24, 1995. As so amended, the Declaration is hereby restated in
its entirety as set forth below.
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
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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
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
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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 --
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. In addition, the
Restructuring does not require the writedown of any rate base assets.
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
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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;
* 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, and 3 through 12, which depict
reporting lines from the Electric Operating Companies to CSW and from CSWS to
CSW Electric and CSW Enterprises, and in Exhibit 2.1, which sets forth
staffing following the Restructuring.
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
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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
"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
A number of factors 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. These factors include Commission-approved work order procedures to
track and document the initiation of services, billing and review procedures
designed to ensure the accuracy of CSWS billings, internal audit controls
designed to ensure the fairness of CSWS charges, and independent approval
and/or review of work orders and/or billings by independent Electric Operating
Company representatives. In addition, CSWS operates with a Board of Directors
which includes the presidents of each of CSW's four Electric Operating
Companies. The Restructuring reinforces these safeguards by placing CSWS
under CSW Electric, the CSW management unit responsible for electric
operations. 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.
Work Order Procedures. 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
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Exhibit 14; copies of work order procedures, and procedures for obtaining on-
line information on work orders, are set forth in Exhibits 14.1, 14.2 and
14.3. CSWS assigns appropriate billing formulas to work orders based on the
nature of the services covered by the work order request and 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.
Under work order procedures implemented in 1992, all work orders
for a single Electric Operating Company in excess of $25,000 are required to
be approved by an Electric Operating Company representative whose line of
authority does not run to CSWS (an "Independent EOC Representative").
Approvals for these work orders can only be given by managers or higher-
ranking personnel of each Electric Operating Company. The title and line of
authority of the Independent EOC Representative will vary depending on the
type of work. For example, the vice president of operations would sign a work
order for substation repair, while the vice president of administration would
sign a work order for a special training program. These vice presidents --
i.e., the vice presidents of administration, operations and engineering, and
marketing and business development -- report directly and solely to the
president of each respective Electric Operating Company. At present, the only
circumstance in which a single-party work order does not require Electric
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Operating Company approval is when the amount is less than $25,000. Such
smaller work orders typically involve limited activities, and the effort and
cost required to obtain written authorization from the Operating Companies in
many cases would exceed that required to perform the request.
Work orders for multiple Electric Operating Companies are
informally approved at the time the work is requested. CSWS communicates with
the Electric Operating Companies regarding the work to be performed, and
determines which companies will benefit from the services provided. The
services are billed at the end of each month to the Electric Operating
Companies receiving such services, and the charges for such services are
reviewed by analysts in the planning and analysis department of each Electric
Operating Company. As noted above, the planning and analysis function reports
to the vice president of administration of the Electric Operating Company, who
in turn reports solely and directly to the president of the Electric Operating
Company (i.e., by Independent EOC Representatives). Review and acceptance of
these charges confirms Electric Operating Company approval.
All services rendered by CSWS are associated with a work order.
All CSWS work orders in excess of $25,000 and charged out via an allocation
method are informally approved as described above by Independent EOC
Representatives. As a gross estimate, 95% of total CSWS affiliate billings
are made pursuant to work orders in excess of $25,000.
When one or more of the affected Electric Operating Companies
disagrees with either the nature of the service or the allocation method
chosen, a number of procedures are available to resolve the disagreement. In
general, disagreements are resolved, if possible, by direct communication and
negotiation between the Electric Operating Company and CSWS. If it is
determined that a particular Electric Operating Company will not benefit from
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the work performed, a work order supplement (see Exhibits 14.1 and 14.2 to the
Declaration) can be submitted requesting a change in the allocation. Where
the disagreement relates to a billing or allocation error, charges may be
reallocated the following month and the allocation adjusted. Where consensus
on a selected allocation method or service cannot be reached, the matter is
referred to executive management at each of the Electric Operating Companies
and CSW.
Accuracy Review -- Billing Procedures. CSWS invoices for services
rendered are sent to the Electric Operating Companies on a monthly basis.
Invoices are detailed by company, by cost category (i.e., administrative and
general, production, transmission,), by work order indicating expense or
investment and displaying the percent billed, and by Commission chart of
accounts. Detailed information (i.e., time sheets, invoices) is available
upon request. To assure the accuracy of the invoices several steps are taken
monthly. All billable costs require a work order. Pursuant to controls built
into CSWS accounting systems, a transaction requiring a work order will not be
processed unless there is a work order attached to the transaction. CSWS
accounting verifies that every work order has the correct formula (allocator).
A billing program is run to produce the CSWS monthly invoices. The
preliminary invoices are then reconciled to the general ledger. Any
discrepancies are researched and corrected before final invoices are sent to
the Electric Operating Companies (and other CSW System companies served by
CSWS). After the Electric Operating Companies receive their invoices, CSWS
accounting works very closely with each Electric Operating Company researching
and answering all questions concerning its bill. Any discrepancies with
either the nature of the service or the allocation method are discussed, and
any required corrections or reallocations are effected the following month.
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Within each Electric Operating Company, there is a planning and
analysis function that is responsible for reviewing the reasonableness of CSWS
billings. The planning and analysis function of each Electric Operating
Company reports to the vice president of administration, who in turn reports
solely and directly to the president of such Electric Operating Company.
Under procedures initiated prior to the Restructuring, budget analysts in each
Electric Operating Company receive a monthly report listing CSWS charges.
Each of the four Electric Operating Companies uses an informal process similar
to the following in reviewing this report:
(1) The analyst checks the summary report listing the monthly charges from
CSWS by Commission chart of accounts.
(2) If the analyst has a question about a particular account, the analyst
refers to the detailed breakdown of the charges by work order provided in the
report.
(3) The CSWS manager responsible is then contacted by Electric Operating
Company personnel and asked to explain the variance.
(4) The charge is adjusted if a mistake has been made.
(5) The variance, plus or minus, is then reported on the Electric Operating
Company's budget variance report.
To supplement the report discussed above, a number of improvements in the
process have been, or are in the process of being, implemented in 1995. These
improvements include:
(1) A new CSWS budget variance report will provide CSWS managers with monthly
and year-to-date information regarding their actual and budgeted expenditure
levels, allowing them to review more detailed information than in the past.
(These reports will also be distributed to the Electric Operating Company
planning and analysis groups.)
(2) Actual and budgeted work order costs will be available on-line through
the use of FOCUS software, allowing Electric Operating Company personnel to
compare budgeted and actual work order charges in a timely manner.
(3) The billing report has been modified to be more "user-friendly" so that
Electric Operating Company personnel can more easily identify the source of
charges. For example, work orders will be sorted by major organizational
groups such as Operation Services, Production Services, Marketing and Business
Development and Corporate.
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(4) Representatives from Electric Operating Company Planning and Analysis
staffs will be available to review CSWS charges when they receive the CSWS
bill in the current month. Discrepancies will be corrected the following
month. This will save time and provide more accurate invoices for each
Electric Operating Company.
Review -- Internal Audit. CSW's Internal Auditing function
continually conducts audits of CSWS functions throughout the year to ensure
that CSWS activities are properly authorized, documented and accurately
recorded in its books and records. Internal Auditing also conducts annual
audits to ensure that the process for allocating costs to the Electric
Operating Companies has proper integrity in terms of producing reliable
calculations that are in compliance with the Commission-approved methodologies
and intends to maintain this level of review in the future. Internal Auditing
has recently completed an extensive and thorough audit of the allocation
process. The scope of this audit included all work orders. A copy of the
audit report dated February 16, 1995 is annexed as Exhibit 14.4 hereto. The
Director of Corporate Audits reports directly to the Chairman of the Board,
President and Chief Executive Officer of CSW and also has reporting
responsibilities to the Chairman of the Corporate Audit Committee of the Board
of Directors of CSW (the "Corporate Audit Committee") and attends each meeting
of the Corporate Audit Committee. The Director of Corporate Audits has
further reporting responsibilities to the chairman of each of the four
Electric Operating Company Audit Committees and attends meetings of the
Electric Operating Company Audit Committees.
In accordance with New York Stock Exchange listing requirements, the Corporate
Audit Committee is comprised solely of outside directors.
In October of each year, the subsequent year's audit plan is
reviewed and approved by the Corporate Audit Committee and each of the four
Electric Operating Company Audit Committees. Additionally, department heads
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and officer level employees throughout the CSW System provide essential input
into the risk assessment process used to develop the plan, and critique the
final plan developed independently by Internal Audit.
To resolve problems identified by Internal Audit, where CSWS and/or
an affected EOC cannot reach agreement with the auditors, first, the reason
for the disagreement would be carefully reviewed and steps would be taken to
ensure that all the facts are known and correct. The matter would then be
referred to the officer responsible for the activity in question. If the
disagreement cannot be resolved in this manner then it is communicated to
executive management and to the Corporate Audit Committee for resolution.
Copies of audit reports dated February 16, 1995 and December 6,
1993 are included as Exhibit 14.4 and 14.5 hereto, respectively.
Customer/Supplier Partnership. As a further 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
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CSWS and the Electric Operating Companies will determine whether CSWS is
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 by April 1995. The
"three phases" include (1) defining, through dialogue with the electric
operating companies, the products/services, customers, units of measure,
dimensions of customer satisfaction and performance indicators for each
department in Operation Services; (2) tracking the volumes, cost and
performance indicators of each product/service defined in the first phase; and
(3) planning and budgeting for 1996 based on the Customer Supplier
methodology.
The first phase of the Customer/Supplier Partnership is in
progress, with a completion date of April 1, 1995. As part of this process,
CSWS is holding 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 provides the Electric
Operating Companies with immediate input into the scope of services and
enhances 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. After completion of the first phase of the Customer/Supplier
Partnership process, a meeting will be held to discuss proposed
Customer/Supplier Partnership products/services, customers, units of measure,
and performance indicators.
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The tracking phase of the Customer/Supplier Partnership is
scheduled to commence on April 1, 1995. An application is being developed
that will be used by each department to track their Customer/Supplier
Partnership volumes and performance data. Each manager will have access to
the new Customer/Supplier Partnership tracking application and the cost
information in order to calculate unit rates associated with their
products/services.
In the third phase, the 1996 budgeting process will utilize the
information gathered during the tracking phase. The 1996 budgeting process
will begin in late summer to early fall.
The Customer/Supplier Partnership is a new management philosophy
for managing administrative functions. The dialogue that takes place between
Operation Services and the Electric Operating Companies during the first phase
of the Customer/Supplier Partnership will identify any issues associated with
the allocation of costs. The Customer/Supplier Partnership process will focus
on resolving these issues, if any, as well as provide a management framework
into the future.
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.
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
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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
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
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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.
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
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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.
Currently, competitive cost analyses are performed in certain
areas. For example, the Information Services Data Center performs ongoing,
periodic benchmarking associated with mainframe computer operations.
Information Services has also "outsourced" personal computer maintenance based
on a cost study. Under the Customer/Supplier Partnership process, it is
anticipated that CSWS will conduct ongoing cost-benefit analysis of other
services provided by Operation Services. Such analyses will be implemented
once CSWS has accumulated sufficient history of costs associated with
Operation Services products/services, to ensure the lowest cost for services
provided to the Electric Operating Companies.
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
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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. 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.
All CSW "corporate" personnel are paid by CSWS. These costs are then billed
out to the respective CSW System Companies, including CSW Corporation, using
the Commission-approved allocation methods.
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
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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.
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.
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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
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
<PAGE> 21
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.
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.
____________________
[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).
<PAGE> 22
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.
"(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
<PAGE> 23
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.
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.
<PAGE> 24
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
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
<PAGE> 25
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
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.
<PAGE> 26
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 costs of the Restructuring were initially estimated to be $97
million and were expensed in 1993. After progressing with the Restructuring,
the final costs were approximately $88 million. Approximately $84 million of
the Restructuring costs were incurred in 1994, with the remaining $4 million
to be incurred in 1995. Approximately $60 million of the Restructuring costs
were or will be paid from general corporate funds. The remaining $28 million
will be paid from benefit plan trusts; this amount represents the present
value of enhanced 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
duplicated functions. This should translate into a reduction in the rate of
<PAGE> 27
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 Exhibit 19.1
and amounts to approximately twice the costs of the Restructuring.
On a System-wide basis, the Restructuring results in a decrease of
approximately 680 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 860, with approximately 690 located in Tulsa and the remainder
located in Dallas. (As of December 31, 1994, 661 employees had been
relocated. This consisted of 554 exempt and 107 non-exempt employees.
Seventeen employees will be relocated in 1995. The bulk of these moves
occurred in the second and third quarters of 1994.) 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
<PAGE> 28
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,
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
<PAGE> 29
implementation may affect both the timing and amount of these targets.
Exhibit 19.1 sets forth projected O&M expenses by company without the
Restructuring and the targeted impact of the Restructuring on projected 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]
____________________
[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> 30
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
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
<PAGE> 31
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.
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 (remittance processing): Direct billing to extent
identifiable to a particular operating company. For other charges, allocation
methods include: average number of ultimate customers and/or KWH sales.
Treasury and Finance (treasurer functions): Direct billing to extent
identifiable to a 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.
2. Generation and Dispatch
Management services (incl. operating policies and maintenance schedules and,
management of generating unit commitment): Direct billing to extent
identifiable to a particular operating company. For other charges, 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.
Dispatch (incl. pool coordination and communication with neighboring
utilities): For CCC, same billing and allocation methods currently used for
costs arising from CSWS's operation of the CCC, i.e., average peak load for
past three years. For other charges, allocation methods include: peak load,
<PAGE> 32
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 information and telecommunications services: Direct
billing to extent identifiable to a particular operating company. For other
charges, allocation methods include: computer resource units and/or number of
employees.
Support functions: Same direct billing and allocation methods as presently
used for support services already provided by CSWS.
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. environmental auditing and occupational health): 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.
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 management of customer and regulatory/ community relations:
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
number of employees.
________________________________
<PAGE> 33
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.
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
(actual amount) ............................. $ 2,000
Legal fees and expenses:
Milbank, Tweed, Hadley & McCloy ............. 70,000
Other expenses, including consultants'
fees and reimbursed employee expenses ....... *
-------
Total .................................... $72,000
=======
_______________
* Other costs relating to the Restructuring are described in
Item I.E of the Declaration
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.
<PAGE> 34
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.
Section of the Act/Transactions to which sections are or may be applicable
13(b): Services by CSWS to associate companies
Rules
Rules 80 through 94: Services by CSWS to associate companies
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.
<PAGE> 35
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
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
<PAGE> 36
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:
* 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.
<PAGE> 37
* 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 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
____________________
[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> 38
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
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.
<PAGE> 39
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 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.
<PAGE> 40
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, the
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
the nature or extent of services to be provided to the Electric Operating
Companies. It is anticipated that the 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 the 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
(continued)...
<PAGE> 41
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).
____________________
[5]...(continued)
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).
[7] 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> 42
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 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.
<PAGE> 43
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 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.
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
<PAGE> 44
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
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> 45
Item 6. Exhibits.
Exhibit descriptions followed by "*" were filed with the original
U-1 Declaration.
1 Organizational Chart Before the Restructuring*
2 Organizational Chart After the Restructuring*
2.1 Detailed Organizational Charts 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*
<PAGE> 46
14.1 Work Order Procedures and Forms
14.2 Excerpt from CSW Policy and Procedures Manual
14.3 Work Order Information System Procedures
14.4 Audit Report dated December 6, 1993
14.5 Audit Report dated February 16, 1995
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)*
17 CSW Restructuring Staffing Changes, 1993 to 1994*
18 Effects of Restructuring on Various Areas of Each Electric
Operating Company*
19 Cost/Benefit Analysis*
19.1 Updated 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> 47
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: February 17, 1995
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 P
2 Organizational Chart After the Restructuring P
2.1 Detailed Organizational Chart After the P
Restructuring
3 Lines of Authority From CSWS to CSW Electric P
4 Lines of Authority from Electric Operating P
Companies to CSWS and from CSWS to CSW Electric:
Fossil Generation
5 Lines of Authority from Electric Operating P
Companies to CSWS and from CSWS to CSW Electric:
Nuclear Services
6 Lines of Authority from Electric Operating P
Companies to CSWS and from CSWS to CSW Electric:
Environmental Services
7 Lines of Authority from Electric Operating P
Companies to CSWS and from CSWS to CSW Electric:
Information Services
8 Lines of Authority from Electric Operating P
Companies to CSWS and from CSWS to CSW Electric:
Controller and Accounting Services
9 Lines of Authority from Electric Operating P
Companies to CSWS and from CSWS to CSW Electric:
Telecommunications Services
10 Lines of Authority from Electric Operating P
Companies to CSWS and from CSWS to CSW Enterprises:
Other Services
11 Lines of Authority from Electric Operating P
Companies to CSWS and from CSWS to CSW Electric:
Procurement
12 Lines of Authority from Electric Operating P
Companies to CSWS and from CSWS to CSW Electric:
T&S Engineering
13 Primary Customers of CSWS Operation Services, P
CSWS Production Services, and CSWS Marketing
and Business Development
14 Sample Work Order Authorization P
<PAGE> 2
INDEX OF EXHIBITS
(CONTINUED)
EXHIBIT TRANSMISSION
NUMBER EXHIBIT METHOD
- ------- ------- ------------
14.1 Work Order Procedures and Forms P
14.2 Excerpt from CSW Policy and Procedures Electronic
Manual
14.3 Work Order Information System Procedures P
14.4 Audit Report dated December 6, 1993 Electronic
14.5 Audit Report dated February 16, 1995 Electronic
15 Restated and Amended Operating Agreement By
(previously filed with the Commission as Reference
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
Operating Agreement (previously filed with Reference
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 P
to 1994
18 Effects of Restructuring on Various Areas P
of each Electric Operating Company
19 Cost/Benefit Analysis Electronic
19.1 Updated Cost/Benefit Analysis Electronic
20 CSWS Service Agreement (previously filed By
with the Commission as Exhibit B-6 to the Reference
Form U-1 Application-Declaration of CSW
in File No. 70-8339)
21 OCC Order No. 383885 in Cause No. PUD 940 P
000353 (June 6, 1994)
22 Proposed Notice of Proceeding Electronic
<PAGE> 1
EXHIBIT 14.2
------------
WORK ORDER PROCEDURES
__________________________________________________
Summary The purpose of the work order accounting system is to:
* allocate expenditures properly
* accumulate project costs
* authorize activities
* segregate regulated versus non-regulated
expenditures
__________________________________________________
Work Order Billable
Categories
Indirect work orders are used for charging general
expenditures which do not relate to any other work
order category. Each department in the company has
one indirect work order available for charging these
general expenditures.
Direct work orders are used for charging specific
types of expenditures which are over $25,000 per year
and recur annually or those in which the billing
formula of the work order is different than that of
the originating department's indirect work order.
Examples include printing of CSW annual report or
corporate policy maintenance.
Specific project work orders are used to accumulate
expenditures for an identifiable project which has a
definite start and stop date. A work order of this
type is established when the total estimated
expenditures of the project are over $25,000 or the
billing formula of the work order is different than
the originating department's indirect work order.
Examples include computer system development or an
analysis of plant modifications for an operating
company.
<PAGE> 2
WORK ORDER PROCEDURES, CONTINUED
EDP application work orders are used for capturing
computer resource costs for specific computer system
applications.
__________________________________________________
Non-Billable
CSWS construction work orders are used to accumulate
expenditures for construction of CSWS property.
Deferred work orders are used to accumulate
expenditures for activities awaiting final disposition
to either expense or capital accounts. Examples
include organization cost for proposed subsidiaries or
costs related to pending litigation.
Fixed asset work orders are used to accumulate
expenditures for purchases of CSWS fixed assets.
Furniture and equipment over $500 per item are
considered fixed assets. Any purchase of furniture or
equipment over $25,000 must be authorized by a
specific work order. Purchase of furniture and
equipment of $500 or less should be expensed (account
92181). Items included with the initial purchase of
personal computers that render the system functional
will be capitalized. Purchased software costing over
$500,000 and internally developed projects costing
over $500,000 to develop are capitalized. All
external costs for outside consultants and others are
capitalized along with all costs incurred after
feasibility.
_________________________________________________
Authorization A CSWS director may authorize work orders of $25,000
or less. Work orders over $25,000 are authorized by a
division head.
Work orders requested by operating companies will be
approved by the operating company requesting the work
if the amount is greater than $25,000.
_________________________________________________
<PAGE> 3
Supplements Work order supplements must be prepared when any of
the following situations occur:
* Actual amounts exceed or are expected to
exceed authorized amounts by 10% and
$10,000
* There is a significant change in the scope
of the activity
* There is a change in the billing formula
* There is a change in the person
responsible for the work order
_________________________________________________
Completion Work order completion forms must be prepared when work
orders are to be closed.
_________________________________________________
<PAGE> 1
EXHIBIT 14.4
------------
[CSW LETTERHEAD]
To: Susan Everett
Date: December 6, 1993
Internal audit has completed a review of the Work Order Allocation System.
This review was conducted as part of our annual financial systems review
and was performed by Shawna Molinar.
The objectives were to:
* Assess the work order system controls to ensure charges are
distributed to the appropriate companies with emphasis on regulated
versus non-regulated distribution.
* Assess controls ensuring accuracy of service rendered billing
calculations.
* Assess controls for assigning allocation formulas to projects.
* Assess overall controls over the work order system ensuring:
management approvals, use of edit reports to identify non-existent
or closed work orders, and SEC approvals.
* Support Arthur Andersen & Co. evaluation of the corporate financial
statements.
In addition to these objectives, the original objectives communicated to
management included testing system access controls and tracking of work
order dollar limits. Information was gathered during this audit
concerning access; however, testing was performed in the annual General
Controls Review. Internal audit and accounting determined work order
dollar limits are controlled through other expenditure controls. Testing
for expenditure controls will be performed during internal audit's annual
expenditure cycle testing.
In our opinion, the work order system controls are adequate to ensure the
above stated objectives.
<PAGE> 2
As part of internal audit's audit procedures, we interviewed selected
individuals from the operating company accounting departments. Those
interviewed appreciated CSWS accounting's prompt responses to questions
concerning the service rendered billings. Internal audit would like to
thank the accounting department for their assistance during the review.
/s/ T. Bart Edwards
T. Bart Edwards
Director of Audits
cc: F. Bourland
L. Connors
R. Spratling
T. Taylor
<PAGE> 1
EXHIBIT 14.5
------------
CENTRAL AND SOUTH WEST SERVICES
AUDIT SERVICES
WORK ORDER ALLOCATION REVIEW
<PAGE> 2
Central and South West Services
Audit Services
Date: February 16, 1995
Subject: Review of the CSWS Work Order Allocation Process
To: Terry Taylor, CSWS General Accounting Manager
From: Kirk Cleveland, Audit Service Manager
==========================================================================
Enclosed is a copy of the report which includes our opinion on the adequacy
and effectiveness of the internal controls for the work order process,
improvement opportunities and related resolutions. The resolutions, if
effectively implemented, should adequately address the issues raised.
Also included is an Audit Effectiveness Questionnaire for this audit
project. Please take a few moments to complete the form and forward it to
me. Your feedback is valued as a basis for improving our service to you and
the Company.
During the course of our review, your department was cooperative and
receptive to opportunities for change. We appreciate the help received from
all personnel contacted.
KC:js
.cc Sandra Bennett Bob Carey Dennis Sharkey Eddie Peebles
Russell Davis Melanie Richardson Bob Zemanek Terri Midyett
Wendy Hargus Dick Bremer Mary Polfer
Larry Connors Jerry Googe James McGrew
Bruce Evans Pete Churchwell Kim Bryan
<PAGE> 3
Central and South West Services
Work Order Allocation Review
(FI-94-48)
Objective & Scope
The objective of this review was to evaluate the adequacy and test the
effectiveness of the internal controls associated with the CSWS work order
allocation and billing process. The scope covered 1994 work orders and was
performed from October 1994 through February 1995. The review included the
specific testing noted in accordance with each of the major cost allocation
processes below:
1. Establishing and maintaining cost allocation formulas that comply with
SEC regulations
* Reviewed formulas for SEC authorization and accurate computation
2. Approval and application of cost allocation formulas to transactions
* Reviewed all work orders to determine if the appropriate formula was
assigned
* Reviewed all work orders for proper service and operating company
approval
* Reviewed a sample of employee labor charges to ensure they were
coded to the assigned work order
* Reviewed employee system access to the critical data files used in
the allocation and billing process
* Reviewed formulas in the billing program data files for accuracy
3. Preparation of billings for system companies
* Recomputed a sample of work order charges to ensure the billing
program accurately allocated the charges to the appropriate
companies
* Agreed the service company trial balance to the service company
billing Agreed the bill for each company to the appropriate company
general ledger
* Reviewed each company's annual billing for reasonableness
* Reviewed prior SEC audit recommendations and action taken by CSWS to
determine compliance
Additionally, due to the transition of certain business functions from the
Electric Operating Companies and the Dallas Service Company to the Service
Company in Tulsa, this audit was intentionally scoped to be more
comprehensive than prior audits of the work order allocation process. The
increased risk of allocation error was addressed by reviewing in detail the
formula assigned to each service company work order to ensure appropriate
allocation of CSWS charges.
The audit was performed by Jan Soward, Beth Reeves, and Glenn Young.
<PAGE> 4
Conclusion
The internal controls associated with the CSWS work order and billing
process are adequate and effective to ensure that CSWS costs are allocated
to system companies on the basis most directly related to the service or
transaction performed. Our review did however identify the improvement
opportunities noted below which require corrective action. These items
occurred during the transfer of processes from the Dallas service company to
the Tulsa location. Our conclusion on the internal controls reflects the
temporary nature and limited extent of these items.
Improvement Opportunities
1. Certain work order formula assignments require further analysis and
potential correction.
2. Approximately 11% of CSWS work orders initiated during 1994 require
signature authorization by Electric Operating Company management.
3. Work order set-up screen access should be limited to those with a need
for the access.
The above opportunities are described in detail in the Improvement
Opportunities and Resolution attachment.
<PAGE> 5
Improvement Opportunities and Resolutions
1. Work Order/Formula Assignments
A joint review was performed by accounting and audit to determine if the
formula assigned to each CSWS work order allocated costs on the basis most
directly related to the transaction or service performed. The following
situations were noted:
* The Transok billing increased because certain work order formulas were
not changed to fairly reflect the corporate reorganization impact.
* Several work orders were identified which need further investigation
regarding a formula change due to the corporate reorganization.
Accounting is in the process of determining if formula changes are
necessary.
Responsible Party: Terry Taylor, CSWS General Accounting Manager
Target Date: March 31, 1995
Brief Description of Action Planned:
An adjustment was made to settle the 1994 Transok cost allocation of
approximately $200,000. CSWS Accounting and Transok as well as all CSW
system subsidiaries continuously analyze cost/service allocations and
make adjustments if necessary.
Review of the remaining work order formulas will be complete by
March 31,1995.
2. Work Order Authorization
Of the 590 CSWS Work Orders initiated during 1994, 68 (11%), do not
display signature approval of Electric Operating Company management as
required by the SEC and CSW Work Order procedures. This situation is due
to a lag in the timing of the approval process during the relocation of
the service company from Dallas to Tulsa. Accounting is currently in the
process of obtaining all needed approvals.
Responsible Party: Terry Taylor, CSWS General Accounting Manager
Target Date: March 15, 1995
Brief Description of Action Planned:
This situation was a one-time event related to the transition of the
service company and is not an ongoing problem with the process. We
will obtain all needed authorization signatures for remaining work
orders by March 15, 1995.
<PAGE> 6
3. Work Order Screen Access
System access to the General Ledger screen that allows the assignment of
work orders and formulas was not adequately restricted. During the
transition, a number of employees had access to establish and update work
orders or formulas that did not have a need for this access which
presented an increased risk of allocation error. Our testing of the 1994
cost allocations did not indicate any problems as a result of this
situation.
Responsible Party: Terry Taylor, CSWS General Accounting Manager
Brief Description of Action Taken:
Access to establish and update work orders or formulas has been
restricted to seven employees who currently need the access.
<PAGE> 1
<TABLE>
EXHIBIT 19.1
<CAPTION>
Cost/Benefit Analysis --
Projected Total O&M Expenses
With and Without Restructuring
($ millions)
1993 1994 1995
---- ------------------------------------ -----------------------------------------
Actual Targeted
Projected Reduction Actual Projected Reduction Projected
Actual O&M w/o in O&M O&M with O&M w/o in O&M O&M with
O&M Restructuring Growth Restructuring Restructuring Growth Restructuring
------ ------------- --------- ------------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
CPL 336 298 5 293 297 21 276
PSO 197 171 6 165 183 24 159
SWP 198 161 4 157 167 10 157
WTU 90 82 3 79 83 7 76
TOK 57 54 1 53 59 3 56
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
1996 1997
------------------------------------------ --------------------------------------------
Targeted Targeted
Projected Reduction Projected Projected Reduction Projected
O&M w/o in O&M O&M with O&M w/o in O&M O&M with
Restructuring Growth Restructuring Restructuring Growth Restructuring
------------- --------- ------------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
CPL 321 21 300 332 23 309
PSO 191 25 166 206 26 180
SWP 173 11 162 178 11 167
WTU 86 8 78 87 9 78
TOK 61 3 58 63 3 60
Notes:
1. All CSWS costs/savings are direct-billed or allocated to the Operating Companies based on
existing approved formulas.
2. 1993 actual O&M figures include a charge of $97 million for estimated Restructuring-related
costs. 1994 actual O&M figures include a credit of $9 million to true up Restructuring-related
costs.
3. Labor savings calculated based primarily on results of Electric Business Study (FBS) transition
team groups. Major assumptions included:
- Payroll tax overhead rate of 8%.
- General and administrative overhead rate of 14%
- 5% salary escalation for payroll and contractors.
- Eliminated System-wide total of 100 contractors at $60K per year.
4. Benefits were estimated for the three types of employees (new hires, retirees, and severed).
Much of the information was obtained through discussions with Hewitt Associates, an independent
consulting firm specializing in benefits analysis. Major assumptions included:
- Benefits allocated based on net change in positions by work location. This includes
ongoing SFAS 87 and 106 cost/benefits.
(continued)...
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C> <C>
4. (contineud)...
- Active Medical Plan New hires:
Average cost $5,000 per employee.
171 new employees hired
Medical costs escalate 5% per year
- Active Medical Plan Severed employees:
Average cost $5,000 per employee
516 employees served
Benefits bridged for 12 months after severance
Medical costs escalate 5% per year
- Company matching thrift payments - 611 retirees
75% company match pursuant to Thrift plan
100% participation
4% contribution rate
Salary per Hewitt Associates, escalating 5% per year
All 611 retirees will have retired by 2003
Ramped down over last four years (2000-2003)
- Company matching thrift payments - severance
50% company match pursuant to Thrift plan
90% participation
4% contribution rate
Average salary $36,000 per year, escalating 5% per year
- Company matching thrift payments - new hires
50% Company match pursuant to Thrift plan
90% participation
4% contribution rate
Average salary $36,000 per year, escalating 5% per year
One year service before participation, pursuant to Thrift plan
5. Early retirement window
- Early retirement accepted by 611 employees (actual acceptance)
6. New building leased in Tulsa
- Cost of any permanent purchased facility excluded
- Lease extended at current terms
- Operating costs increase 5% per year
- Includes benefits obtained from avoiding other third-party
leases
7. Tax incentives
- Consists of personal property tax, training incentive credit,
PSO jobs retained credit and jobs program credit
</TABLE>
<PAGE>
<PAGE> 1
EXHIBIT 22
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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 costs of the Restructuring were initially estimated to be $97
million and were expensed in 1993. After progressing with the
Restructuring, the final costs were approximately $88 million.
Approximately $84 million of the Restructuring costs were incurred in
1994, with the remaining $4 million to be incurred in 1995. Approximately
$60 million of the Restructuring costs were or will be paid from general
corporate funds. The remaining $28 million will be paid from benefit plan
trusts; this amount represents the present value of enhanced 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
