SEC File No. 70-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-1
APPLICATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 ("Act")
GPU, INC. ("GPU")
GPU SERVICE, INC. ("GPUS")
100 Interpace Parkway
Parsippany, New Jersey 07054
GPU INTERNATIONAL, INC. ("GPUI")
One Upper Pond Road
Parsippany, New Jersey 07054
GPU GENERATION, INC. ("GENCO")
1001 Broad Street
Johnstown, Pennsylvania 15907
(Names of companies filing this statement and
addresses of principal executive offices)
GPU, INC.
(Name of top registered holding company parent of applicants)
M.A. Nalewako, Secretary Douglas E. Davidson, Esq.
M.J. Connolly, Esq. Berlack, Israels & Liberman LLP
Director of Legal Services 120 West 45th Street
GPU Generation, Inc. New York, New York 10024
GPU Service, Inc.
100 Interpace Parkway
Parsippany, New Jersey 07054
W.S. Greengrove, Secretary
GPU International, Inc.
One Upper Pond Road
Parsippany, New Jersey 07054
(Names and addresses of agents for service)<PAGE>
Item 1. Description of Proposed Transaction.
A. GPU proposes to engage, through one or more direct or
indirect subsidiaries, which may be existing or newly formed
subsidiaries (each, an "Energy Subsidiary"), in the business
("Energy Commodities Business") of brokering and marketing a
variety of energy commodities as more fully described below
("Energy Commodities").
B. Through one or more Energy Subsidiaries, GPU proposes
to engage in all forms of brokering and marketing transactions
involving electricity and other types of energy commodities,
including, without limitation, oil, natural gas and coal, and in
providing incidental related services to customers, such as fuel
management, storage and procurement services. The Energy
Subsidiaries would engage in such activities without regard to
the location or identity of customers or source of revenues;
provided, however, that (i) unless additional approvals are
obtained from the Federal Energy Regulatory Commission ("FERC")
under the Federal Power Act ("FPA"), the Energy Subsidiaries will
not sell electricity to GPU's electric utility subsidiaries,
Jersey Central Power & Light Company ("JCP&L"), Metropolitan
Edison Company ("Met-Ed"), or Pennsylvania Electric Company
("Penelec", collectively, the "Utility Subsidiaries") and (ii)
the Energy Subsidiaries will not make any sales of electricity or
natural gas to retail customers in any state unless authorized or
permitted to make such sales under the laws of that state. The
Energy Subsidiaries would not include the Utility Subsidiaries or
become subsidiaries thereof. In addition, GPU requests that the
Commission reserve jurisdiction over any sales by Energy<PAGE>
Subsidiaries of natural gas or electricity to customers outside
the United States pending completion of the record in this
proceeding.(1)
C. It is also proposed that Energy Subsidiaries may, from
time to time through December 31, 2000, invest up to $50 million
at any one time outstanding to acquire or construct physical
assets that are incidental and reasonably necessary in the day-
to-day conduct of marketing operations, such as oil and gas
storage facilities, gas or coal reserves, or a pipeline spur that
is needed in order to make deliveries of fuel to an industrial
customer; provided, however, that, without the further order of
the Commission, no Energy Subsidiary will acquire any facilities
if, as a result thereof, it would be or become an "electric
utility company," as defined in Section 2(a)(3) of the Act, or a
"gas utility company," as defined in Section 2(a)(4).
D. The Energy Commodities Business in which it is proposed
that the Energy Subsidiaries engage is more specifically
described below.
Brokering Activities. Brokering generally involves bringing
two parties (typically a buyer and seller) together for a fee or
commission which one party agrees to pay. In a brokering
transaction, Energy Subsidiaries would neither buy nor sell
Energy Commodities, and there would be no price exposure or
significant
____________________________
1 It is not intended that such proposed reservation of
jurisdiction would in any way limit or restrict GPU or any of its
affiliates from making sales of electricity or gas outside the
United States through "exempt wholesale generators" or "foreign
utility companies," as defined in Sections 32 and 33 of the Act,
respectively, subject to satisfying the specific requirements of
those sections.
2<PAGE>
financial risk. In addition, brokering, as such, is not regulated
by the FERC as the sale of power under the FPA or any state
regulatory scheme. The Commission has, however, approved
proposals involving electricity and gas brokering activities as
an acquisition of an interest in a non- utility business that is
incidental and ancillary to the principal business of a
registered holding company system.(2)
Marketing Activities. Marketing transactions may take a
variety of different forms. They generally involve, however, the
obligation by one party to make or take physical delivery of
electricity, gas or other energy commodities, as well as the
purchase and sale of commodity-based derivative contracts, such
as options, swaps and exchange-traded futures contracts, under
which physical delivery may or may not in fact occur.(3)
Thus a marketer, unlike a broker, usually takes title to the
commodity and bears both market risk and the risk of enforcement
_______________________
2 See, e.g., Entergy Corp., HCAR No. 25848 (July 8, 1993)
(authorizing sale of consulting services to nonaffiliates,
including expertise relating to brokering of power resources);
and UNITIL Corp., HCAR No. 25816 (May 24, 1993) (authorizing
organization of an energy subsidiary to serve as a power
brokering agent).
3 The purchase and sale of commodity-based derivatives in a
commodity business (generally, options, futures contracts and
swaps) may be for the purpose of hedging (or offsetting) an
existing position under a contract calling for physical delivery
of a commodity, or as a substitute for a position to be taken at
a later time in a physical market, for example, to lock in the
price of a block of electricity or gas that will be needed in the
future in order to supply new customers. For an electricity/gas
marketer, the purchase and sale of energy-based derivatives may
be a less risky means to take a position in a commodity than
other alternatives, such as building expensive power plants or
purchasing and holding large inventories of a commodity.
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of performance of the contract (counterparty credit risk).
Consequently, as described in greater detail below, successful
marketing requires the use of various risk mitigation measures to
balance overall portfolio position in order to limit the
financial impact of any loss that may be sustained on any
particular commodity transaction due to adverse market price
movements or counterparty defaults. Such measures may include
entering into offsetting physical delivery contracts (i.e.,
offsetting purchases and sales of electricity, gas, etc.), the
purchase and sale of derivative instruments, such as options and
futures contracts, for purposes of hedging a physical position,
and an appropriate mix of long and short-term contracts.
GPU represents that, in the ordinary course of business of
any Energy Subsidiary, it will take appropriate measures to
mitigate the market and counterparty credit risks associated with
the portfolio of electricity and fuel purchase or sales contracts
of these subsidiaries. As previously indicated, such measures may
include matching long-term firm or variable price electricity
sales contracts with long-term firm or variable price fuel
purchase contracts. An Energy Subsidiary may also hedge fuel
price risk through the purchase of fuel or fuel reserves or
options on fuel reserves.
In addition, Energy Subsidiaries may purchase or sell
commodity-based derivative instruments, such as electricity or
gas futures contracts and options on electricity or gas futures,
such as are traded on the New York Mercantile Exchange, and gas
and oil price swap agreements in order to hedge positions under
existing
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contracts for physical delivery.(4)
Price risk exposure may also be hedged under a purchase or
sale contract by taking an opposite position to that purchase or
sale. Similarly, in a portfolio of purchase and sales contracts,
risk may also be limited through an appropriate mix of long-term
and short-term contracts, and diversification of the mix of
customers and suppliers regionally and across industry lines.
Finally, GPU will endeavor to limit risk exposure through
contract provisions (i.e., liquidated damages) that would place a
ceiling on the amount of damages payable when performance failure
occurs and/or exclude consequential damages.
An energy commodity marketer must be able to manage a "book"
of contracts involving purchases, sales and trades of electricity
and other energy commodities. The marketer will seek to hedge the
risk associated with these contracts through a combination of
physical assets, balanced physical purchases and sales, purchases
and sales on futures markets, or other derivative risk management
tools. To accomplish this, the marketer needs to have the ability
to participate in all the energy markets, both physically and
financially.
E. Authorization is also sought for any Energy Subsidiary
to enter into arrangements with GPUS and GENCO, pursuant to which
personnel and other resources may be made available to the Energy
________________________
4 A beneficial feature of exchange-traded commodities futures
contracts (such as exist for electricity, gas and oil), in
addition to their liquidity, is that they tend to virtually
eliminate counterparty credit risk since the exchange itself acts
as the counterparty.
5
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Subsidiaries, upon request, to support the Energy Subsidiaries in
connection with their authorized activities. Pursuant to these
arrangements, GPUS and GENCO will provide, account for and bill
their services to the Energy Subsidiaries, utilizing a work order
system, on a full cost reimbursement basis in accordance with
Rules 90 and 91 under the Act. The reimbursed cost of services
identified through the work order system will include all direct
charges and a prorated share of other related costs.(5)
GPUS and GENCO will make warranties of due care and
compliance with applicable laws to the Energy Subsidiaries
concerning the performance of the services requested, but failure
to meet these obligations will not subject them to any claim or
liability, other than to reperform the work at cost in accordance
with the work order. Likewise, GPUS and GENCO will be indemnified
by the Energy Subsidiaries against liabilities to or claims of
third parties arising out of the performance of the services on
behalf of the Energy Subsidiaries.
GPUS and GENCO will make available personnel or
resources requested by the Energy Subsidiaries, if it has or can
make available such personnel or resources. GPUS and GENCO will
determine the availability of its personnel and resources.
No more than 5% of the total employees of the GPU
System will, at any one time, directly or indirectly render
services to the Energy Subsidiaries in connection with the Energy
Commodities Business.
_____________________
5 Such activities or services may also be provided by GPUI and
the Utility Subsidiaries on a full cost reimbursement basis in
accordance with Rules 90 and 91.
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F. GPU and GPUI also request authority to acquire the
securities of one or more Energy Subsidiaries in connection with
the formation thereof. Under Rule 52, the issuance of additional
securities as specified therein by the Energy Subsidiaries as
well as their acquisition is exempt from prior Commission
approval under the Act. Rule 45(b)(4) exempts from prior
Commission approval the making of cash capital contributions to
the Energy Subsidiaries. GPU and GPUI do not expect to invest, in
the aggregate, more than $20 million in the Energy Subsidiaries
prior to December 31, 2000, either by acquisition of securities
or by making capital contributions.
GPU also requests authority through December 31, 2000
to guarantee the debt and other obligations of any Energy
Subsidiaries. Obligations of the Energy Subsidiaries (other than
guaranteed debt) may take the form of bid bonds or performance or
other direct or indirect guarantees of contractual or other
obligations. Such arrangements may be necessary in order for the
Energy Subsidiaries to satisfy a seller or customer that they
have the support for their contractual obligations. The maximum
amount of debt and other obligations proposed to be guaranteed at
any one time is $150 million.
Debt financing of any Energy Subsidiaries which is so
guaranteed will not exceed a term of 15 years and will bear
interest and carry fees at negotiated rates based on prevailing
market conditions.
GPU will not seek recovery through higher rates to the
Utility Subsidiaries' customers in order to compensate GPU for
any possible losses that may be sustained in connection with the
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Energy Commodities Business or related investments in the Energy
Subsidiaries or for any inadequate returns therefrom or thereon.
G. The authorization requested herein with respect to the
acquisition of securities of any Energy Subsidiaries shall expire
upon the first to occur of (i) December 31, 2000 and (ii) the
adoption by the Commission of proposed Rule 58 (HCAR No. 35-
26313, June 20, 1995) or such other rule, regulation or order as
shall exempt the transactions as herein proposed from Section
9(a) of the Act.
H. Recent Industry Developments
The electric utility industry has experienced dramatic
changes over the past decade, with an accelerating trend towards
deregulation, enhanced competition, lower cost and better
service. Today, traditional utilities must compete for new load
(as well as to retain existing load) with a variety of entities,
including "qualifying facilities," "exempt wholesale generators"
and independent power marketers and brokers. In addition, recent
federal energy policy initiatives have been expressly designed to
promote competition in wholesale markets by requiring electric
utilities to provide open and comparable transmission access to
third parties.(6)
_______________________
6 See, "Promoting Wholesale Competition Through Open Access
Non-discriminatory Transmission Services by Public Utilities and
Recovery of Stranded Costs by Public Utilities and Transmitting
Utilities," Notice of Proposed Rulemaking and Supplemental Notice
of Proposed Rulemaking, 60 F.R. 17662 (April 7, 1995), adopted
April 24, 1996 as FERC Order 888, 61 F.R. 21540 (May 10, 1996);
and sections 721 and 722 of the Energy Policy Act of 1992.
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The states are also actively considering a variety of
measures designed to promote competition among electricity
suppliers at the retail level. According to a survey conducted by
the Edison Electric Institute ("EEI"), 47 States and the District
of Columbia have initiated legislative or administrative
processes to address retail wheeling, industry restructuring,
retail competition or alternative regulation. Since the beginning
of 1995, proposed legislation addressing these matters has been
introduced in 33 state legislatures, and the utility commissions
in 37 states and the District of Columbia have initiated,
completed, or participated in generic, company specific or
informal proceedings on various proposals to promote retail
competition. Also, pilot programs for retail wheeling have been
approved in Idaho, Illinois, Massachusetts, Michigan, New
Hampshire, New York, Pennsylvania and Washington.(7)
Although Rhode Island is the only state that has thus far
adopted legislation establishing retail access for all electric
customers,(8) a number of other states are fairly far along in
their consideration of substantive restructuring measures which,
once implemented, would enable non-traditional power suppliers,
including power marketers, to compete with local franchised
utilities for sales to retail electric customers, similar to the
kind of competition among long-distance carriers that has evolved
in the telephone industry.
_____________________
7 See "Retail Wheeling & Restructuring Report," Vol. 3, No. 1
(Edison Electric Institute, June 1996). EEI is the principal
industry trade organization representing investor-owned electric
utilities.
8 See, Electric Utility Week (August 12, 1996) at p. 8.
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Retail and wholesale competition in the natural gas industry
has evolved more quickly. Most aspects of natural gas production
have been deregulated, and the transportation and storage
functions of the interstate pipelines have been "unbundled" from
the merchant (gas sales) function, essentially transforming
interstate pipelines into common carriers under the open-access
provisions of the FERC's Order No. 636.(9) As a result, local
gas distribution companies ("LDCs") and most large industrial
customers today can contract directly with gas producers or other
suppliers (i.e., independent gas marketers) for necessary
supplies.
Most states (including New Jersey) have also implemented
measures designed to encourage LDCs to provide transportation
separately from sales of natural gas, as a result of which
industrial and large commercial gas customers now generally have
the ability to make direct purchases of gas from producers and
gas marketers. Indeed, by 1995, approximately 78% of all gas sales
to industrial customers were made by sellers other than LDCs, and 26%
of gas sales to commercial customers were delivered, but not sold, by
LDCs.(10) It is evident, therefore, that significant steps have
___________________________
9 See, "Regulation of Natural Gas Pipelines After Partial
Wellhead Decontrol," Order No. 636, 57 F.R. 13267 (April 16,
1992). FERC initiated efforts to promote competition in 1985 when
it issued Order 436, which offered certain incentives to
interstate pipelines to provide open access, non-discriminatory,
transportation to end-use customers, thereby enabling such
customers to contract for gas supplies directly with producers
and gas marketers. See "Regulation of Natural Gas Pipelines After
Partial Wellhead Decontrol," Order No. 436, 50 F.R. 42408
(October 18, 1985).
10 See U.S. Department of Energy - Energy Information
Administration Natural Gas Monthly, Table 24 (February 1996).
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already been taken to deregulate end-use gas sales, at least to
industrial and large commercial customers.
Further, due to the increasing importance of natural gas as
a fuel for electric generation, many of the larger natural gas
producers and pipeline concerns, including Enron Corporation,
Amoco Corp., Panhandle Eastern Corporation and NorAm Energy
Corporation and their respective affiliates have organized and
are very actively engaged in the business of power marketing on a
national scale.(11) Indeed, the energy industry is becoming
increasingly integrated and competitive at all levels, with the
growing recognition that different forms of energy, particularly
electricity and natural gas, are interchangeable. To be
competitive in this emerging market, GPU believes that energy
suppliers must be able to offer large customers energy options,
the benefits and savings associated with the ability to aggregate
supplies, fuel switching capabilities, and single source
procurement services covering all of the customer's energy needs.
Moreover, the emerging energy markets are national in scope, as
the ability to both purchase and deliver electricity and gas has
become subject to fewer and fewer physical and regulatory
barriers.
____________________
11 We would note that in responses to requests for "no-action"
advice, the Staff has not imposed any real limitation on the
ability of companies outside of registered holding company
systems to organize power marketing subsidiaries to sell
electricity at wholesale or retail anywhere in the United States.
See, Enron Power Marketing Inc., SEC No-Action letter dated
January 5, 1994 (Ref. No. 94-1-OPUR); CRSS Power Marketing, Inc.,
SEC No-Action Letter dated March 31, 1994 (Ref. No. 94-4-OPUR);
Electric Clearinghouse, Inc., SEC No-Action Letter dated April
13, 1994 (Ref. No. 94-5-OPUR); Inter-Coast Power Marketing Co.,
SEC No-Action Letter dated December 6, 1994 (Ref. No. 95-15-
OPUR); and AIG Trading Corporation, SEC No- Action Letter dated
January 20, 1995 (Ref. No. 95-1-OPUR).
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In 1994, the Commission itself took note of these
developments in its "Request for Comments on Modernization of the
Regulation of Public-Utility Holding Companies" (HCAR No. 35-
26153, November 2, 1994), which resulted in the Staff's June 1995
proposals and recommendations designed generally to reduce
regulatory burdens on registered holding company systems in order
to enable them to compete more effectively with other utilities
and alternative energy suppliers in the increasingly competitive
energy markets (the "SEC Staff Report").
Subsequently, in Consolidated Natural Gas Company, et al.,
HCAR No. 35-26512 (April 30, 1996) ("Consolidated Natural Gas"),
the Commission authorized a registered gas utility holding
company to acquire an interest in a venture that will supply,
sell, purchase, market, broker or otherwise trade electricity or
fuel, and provide electricity or fuel management services, and
carry on activities, or perform services related to the
foregoing. And most recently, in SEI Holdings, Inc., HCAR No.
35-26581 (September 26, 1996) ("SEI"), the Commission granted
expanded authorization to a registered electric utility system to
perform a wide range of activities involving the brokering and
marketing of a variety of energy commodities including natural
gas, electricity, coal and oil and to perform services related
thereto. In the SEI order, the Commission noted that while it had
not previously considered a request by a registered electric
utility system to engage in retail marketing of natural gas
[c]onsidering . . . the increasing integrated nature of the
energy markets. . ., and consistent with the orders authorizing
registered electric systems to engage in the marketing of other
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energy commodities, in wholesale markets, authorization of these
activities presents no more significant issues in addition to
those raised in connection with the retail marketing of electric
power." (SEI at p. 13.)
I. Legal Analysis Under Sections 9 and 10
Section 9(a) of the Act provides that without prior approval
of the Commission under Section 10, "it shall be unlawful . . .
for any registered holding company or any subsidiary company
thereof . . . to acquire, directly or indirectly, any securities
or utility assets or any other interest in any business."
Section 10 requires, among other things, that the acquisition not
be detrimental to the carrying out of the provisions of Section
11. Finally, Section 11(b)(1) limits GPU to a single integrated
public utility system and such other businesses as are reasonably
incidental, or economically necessary or appropriate to the
operations of such integrated public utility system. The last
sentence of Section 11(b)(1) states that the Commission may
permit as reasonably incidental, or economically necessary or
appropriate to the operations of one or more integrated public
utility systems the retention of an interest in any business
which the Commission shall find necessary or appropriate in the
public interest or for the protection of investors or consumers
and not detrimental to the proper functioning of such system or
systems.
The Commission has previously approved pursuant to the
standards of Sections 10 and 11(b) proposals by registered
holding companies to engage in a variety of energy marketing and
brokering activities. Further, the Commission has included "the
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brokering and marketing of energy commodities, including but not
limited to electricity or natural gas" among the permitted
activities of "energy-related companies" in which a registered
holding company may conditionally invest under proposed Rule 58,
predicated upon earlier case-by-case determinations that such
activities satisfy the standards of Sections 10 and 11(b) of the
Act.(12)
In Consolidated Natural Gas, supra, the Commission for the
first time approved a proposal by a registered gas utility
holding company to acquire an interest in the business of a power
marketer. Subsequently, in UNITIL Corporation, et al., HCAR No.
26527 (May 31, 1996) ("UNITIL"), the Commission authorized an
affiliate of an electric utility holding company to broker and
market gas and other fuels, as well as electricity, finding that
the proposal was consistent with the Consolidated Natural Gas
precedent.
And most recently, in SEI, supra, the Commission authorized
an affiliate of an electric utility holding company to engage in
brokering and marketing of gas, electricity and other fuels at
both wholesale and retail, again finding that the applicant's
proposal was consistent with prior Commission precedent.
In its orders on power marketing issued prior to
Consolidated Natural Gas, the Commission typically imposed
geographic limits on where marketing activities could be
conducted. In Consolidated Natural Gas and again in UNITIL, after
considering the national scope of the evolving energy markets and
the initiatives of other regulatory bodies in promoting wholesale
electric competition on a
____________________
12 See, Notice of Proposed Rulemaking, HCAR No. 26313 (June 20,
1995). Proposed Rule 58 would conditionally exempt pursuant to
Section 9(c)(3) of the Act certain acquisitions of securities of
non-utility companies from the pre-approval requirements of
Section 10. If adopted, acquisitions permitted under proposed
Rule 58 would be considered to be "appropriate in the ordinary
course of business" within the meaning of Section 9(c)(3).
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national scale, the Commission determined not to impose any
geographic or revenues restrictions on the applicant with respect
to wholesale marketing activities.(13) And finally, in SEI, the
Commission went even further and agreed that there was no further
need to reserve jurisdiction over retail gas or electric sales,
finding as follows:
In view of the pace of developments in the
industry, the Commission believes that retail marketing
proposals that satisfy the statutory requirements
should not be subject to the delays inherent in a
reservation of jurisdiction. Industry trends and
competitive pressures make it important for registered
system companies to be proposed to compete in new
markets as they are created. Such participation would
appear to promote the goals of United States energy
policy, including increased competition and lower
utility rates. In addition, such participation is
consistent with the statutory goals to ensure a sound
utility industry and the protection of the interests of
consumers, and to facilitate effective state
regulation. There is no reason to believe that state
programs to facilitate competition in retail energy
markets would be incompatible with the goals of the Act
and, among other things, such programs will provide
protections to consumers, including reliable energy
supply. On the basis of these considerations, the
Commission approves [SEI's] proposal to engage, through
Marketing Subsidiaries, in retail marketing of energy
commodities, subject to compliance with applicable
state law. [footnotes omitted](14)
A narrow construction of Sections 10 and 11(b) of the Act
that would limit, geographically or otherwise, full participation
in this emerging market serves no legitimate regulatory purpose
and, in fact, would frustrate the goal of promoting competition
in the increasingly integrated energy markets. It would place
registered
____________________
13 In its release proposing Rule 58, the Commission indicated
that it did not consider it necessary to limit the extent to
which an "energy-related company" may engage in business
activities with non-associate companies.
14 SEI at pp. 13-14.
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holding company systems at a significant competitive disadvantage
to other companies, including interstate pipeline companies, oil
and gas producers and electric and gas utility companies not
registered under the Act. Indeed, in SEI, the Commission
concluded that it was unnecessary to reserve jurisdiction over
retail electric or gas sales either to protect consumers and
investors or to preserve effective state regulation of these
matters.(15)
In this regard, GPU would point out that the Commission's
order in this proceeding will not have the effect of authorizing
or allowing Energy Subsidiaries to engage in any business
activity that would otherwise be unlawful or unauthorized under
applicable state law. Section 21 of the Act expressly provides
that "[n]othing in [the Act] shall affect . . . the jurisdiction
of any other commission, board, agency, or officer of the United
States or any State or other political subdivision of any State,
over any person . . . insofar as such jurisdiction does not
conflict with any provision of [the Act] . . . ." The states have
the power to regulate the sale of electricity and gas to retail
customers, whether they choose to exercise such regulatory power
in all cases or not. Moreover, the Commission and the courts have
long recognized that the Act was not intended to preempt state
jurisdiction over utilities even where there may be
jurisdictional overlap.(16) In any event, GPU has represented in
this Application
_____________________
15 SEI at pp. 13-14.
16 See, e.g., Alabama Electric Cooperative, Inc. v. Securities
and Exchange Commission, 353 F.2d 905 (D.C. Cir. 1965). "[T]he
purpose of the Public Utility Holding Company Act, as shown by
its legislative history, was to supplement state regulation --
not to supplant it." Id. at 907.
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that it will not make retail sales of electricity or gas unless
authorized or allowed under applicable state laws and
regulations.
Finally, GPU's request provides sufficient protections for
its Utility Subsidiaries' customers against the risks that are
inherent in a commodity marketing business. GPU submits that
these protections adequately support a finding that the
Commission must make under Section 10(b)(3) of the Act.(17) Any
potential detriments to the Utility Subsidiaries' customers will
be minimized through the segregation of such activities in
separate subsidiaries and GPU's limited investment; the use of
risk reduction measures to limit GPU's overall exposure to both
market price and counter-party credit risks, as described above;
the limitations that without additional approvals of FERC, Energy
Subsidiaries will not sell electricity to the Utility
Subsidiaries and that Energy Subsidiaries are effectively
prevented under the "Codes of Conduct" which will be filed with
FERC from appropriating and using non-public price and customer
information available to the Utility Subsidiaries concerning
wholesale electricity opportunities;(18) and the representation
that GPU will not attempt to seek recovery
____________________________
17 See, Consolidated Natural Gas, at n. 36.
18 In Order 889 (a companion order to Order 888), the FERC has
required that jurisdictional utilities adopt certain "Codes of
Conduct" in connection with their open access, comparable
transmission service tariffs. These Codes of Conduct are
designed to prevent utility employees who are engaged in power
marketing functions from obtaining preferential access to the
Open Access Same-time Information System ("OASIS") - related
information or from engaging in unduly discrimination business
practices. The Codes also require the functional separation of
utility transmission/operations and marketing functions to insure
that transmission related information is made available to the
public on an equal basis.
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through higher rates to the Utility Subsidiaries' customers to
compensate GPU for possible losses that it may sustain on or
inadequate returns from power and energy commodity marketing
activities.
Accordingly, GPU believes that its engaging in the Energy
Commodity Business will aid in the development of a more
competitive energy marketplace. Participation by power and other
energy marketers will increase the likelihood that new products
and services will develop as market needs are identified, leading
to increased customer choice. The Commission should therefore
grant the authorization herein requested, which, as noted, would
be consistent with prior authorizations granted to other holding
company systems. This will enable the GPU System to engage in the
Energy Commodities Business and to compete in the marketplace on
the same basis as other energy delivery companies.
J. GPU submits that all of the criteria of Rules 53 and 54
under the Act with respect to the proposed transactions are
satisfied:
The average consolidated retained earnings
for GPU and its subsidiaries, as reported for the four
most recent quarterly periods in GPU's Annual Report on
Form 10-K for the year ended December 31, 1995 and
Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1996 and June 30, 1996, as filed under the
Securities Exchange Act of 1934, was approximately
$2.054 billion. As of June 30, 1996, GPU had invested,
or committed to invest, directly or indirectly, an
aggregate of approximately $241 million in exempt
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wholesale generators ("EWGs") and $673 million in
foreign utility companies ("FUCOs"), which as of that
date would permit GPU to make additional such
investments of approximately $113 million and remain
within the 50% ("safe harbor") limitation of Rule 53.
GPU's aggregate investment in EWGs and FUCOs, including
amounts invested pursuant to all outstanding or pending
authorizations to make investments in EWGs or FUCOs,
will not at any time exceed the "safe harbor"
limitation imposed by Rule 53 without prior Commission
authorization.(19)
GPU maintains books and records to identify
investments in, and earnings from, each EWG and FUCO in
which it directly or indirectly holds an interest.
(A) For each United States EWG in which GPU
directly or indirectly holds an interest:
(1) the books and records for such EWG
will be kept in conformity with United States
generally accepted accounting principles ("GAAP");
(2) the financial statements will be
prepared in accordance with GAAP; and
(3) GPU directly or through its
subsidiaries undertakes to provide the Commission
access to such books and records and financial
statements as the Commission may request.
_____________________
19 GPU intends to file with the Commission a Post-Effective
Amendment to its Application on Form U-1 in Docket No. 70-8593
requesting authorization to increase this limitation to 100% of
GPU's "consolidated retained earnings".
19
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(B) For each FUCO or foreign EWG which is a
majority-owned subsidiary of GPU:
(1) the books and records for such
subsidiary will be kept in accordance with GAAP;
(2) the financial statements for such
subsidiary will be prepared in accordance with
GAAP; and
(3) GPU directly or through its
subsidiaries undertakes to provide the Commission
access to such books and records and financial
statements, or copies thereof in English, as the
Commission may request.
(C) For each FUCO or foreign EWG in which
GPU owns 50% or less of the voting securities, GPU directly
or through its subsidiaries will proceed in good faith, to
the extent reasonable under the circumstances, to cause
(1) such entity to maintain books and
records in accordance with GAAP;
(2) the financial statements of such
entity to be prepared in accordance with GAAP; and
(3) access by the Commission to such
books and records and financial statements (or
copies thereof) in English as the Commission may
request and, in any event, will provide the
Commission on request copies of such materials as
are made available to GPU and its subsidiaries. If
and to the extent that such entity's books,
records or financial statements are not maintained
20
<PAGE>
in accordance with GAAP, GPU will, upon request of
the Commission, describe and quantify each
material variation therefrom as and to the extent
required by subparagraphs (a) (2) (iii) (A) and
(a) (2) (iii) (B) of Rule 53.
(iii) No more than 2% of GPU's domestic public
utility subsidiary employees will render any services,
directly or indirectly, to any EWG or FUCO in which GPU
directly or indirectly holds an interest.
(iv) Copies of this Application are being provided
to the New Jersey Board of Public Utilities and the
Pennsylvania Public Utility Commission, the only federal,
state or local regulatory agencies having jurisdiction over
the retail rates of GPU's electric utility subsidiaries.(20)
In addition, GPU will submit to each such commission copies
of any Rule 24 certificates required hereunder, as well as a
copy of Item 9 of GPU's Form U5S and Exhibits H and I
thereof (commencing with the Form U5S to be filed for the
calendar year in which the authorization herein requested is
granted).
(v) None of the provisions of paragraph (b) of
Rule 53 render paragraph (a) of that Rule unavailable for
the proposed transactions.
(A) Neither GPU nor any subsidiary of GPU is
____________________
20 Penelec is also subject to retail rate regulation by the New
York Public Service Commission with respect to retail
service to approximately 11,300 customers in Waverly, New
York served by Waverly Electric Power & Light Company, a
Penelec subsidiary. Waverly Electric s revenues are
immaterial, accounting for less than 1% of Penelec s total
operating revenues.
21
<PAGE>
the subject of any pending bankruptcy or similar proceeding.
(B) GPU's average consolidated retained
earnings for the four most recent quarterly
periods (approximately $2 billion) represented an
increase of approximately $63 million (or
approximately 3%) in the average consolidated
retained earnings for the previous four quarterly
periods (approximately $1.9 billion).
(C) GPU did not incur operating losses from
direct or indirect investments in EWGs and FUCOs
in 1995 in excess of 5% of GPU's consolidated
retained earnings.
(iv) In accordance with Rule 54, the requirements of
Rule 53(a), (b) and (c) are fulfilled.
Item 2. Fees, Commissions and Expenses.
The estimated fees, commissions and expenses to be incurred
in connection herewith will be filed by amendment.
Item 3. Applicable Statutory Provisions.
Sections 9(a) and 10 of the Act and Rule 54 are
applicable to the acquisition of an interest in the Energy
Commodities Business and to the initial acquisition of securities
of any Energy Subsidiary. Sections 6, 7 and 12(b) of the Act and
Rule 45 thereunder are applicable to the proposed guarantees of
the debt an other obligations of any Energy Subsidiary. Section
13(b) and Rules 90 and 91 thereunder are applicable to the
services proposed to be provided by GPUS and GENCO to Energy
Subsidiaries.
Reporting
It is requested that Certificates Pursuan to Rule 24
22
<PAGE>
under the Act be required to be filed hereunder within 60 days of
the end of each of the first three calendar quarters of each year
and within 90 days of the end of the fourth calendar quarter.
Such certificates will (a) include copies of the by-laws and
charter documents of any Energy Subsidiary formed during such
period; (b) identify each investment (including guarantees) made
in connection with the Energy Commodities Business by GPU in any
Energy Subsidiary in the previous quarter; (c) a quarter-end
balance sheet and three-month and twelve-month income and cash
flow statements for each Energy Subsidiary in connection with the
Energy Commodities Business; and (d) a description of services
obtained by any Energy Subsidiary from associate companies in
connection with the Energy Commodities Business, specifying the
type of service, the number of personnel from each associate
company providing services during the quarter and the total
dollar value of such services. To the extent such certificates
contain confidential or proprietary business or commercial
information, confidential treatment under Rule 104 may be sought.
Item 4. Regulatory Approval.
The approval of the FERC under Section 205 of the FPA
is required with respect to rates and charges for wholesale for
resale sales of electricity. Retail sales of electricity and gas
and in certain instances wholesale electric sales, may be subject
to regulation by the appropriate state commission.
Other than as set forth above, no state or federal
commission (other than your Commission) has jurisdiction with
respect to the proposed transaction.
23
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Item 5. Procedure.
It is requested that the Commission issue an order with
respect to the transactions proposed herein at the earliest
practicable date but, in any event, not later than December 20,
1996. It is further requested that (i) there not be a
recommended decision by an Administrative Law Judge or other
responsible officer of the Commission, (ii) the Office of Public
Utility Regulation be permitted to assist in the preparation of
the Commission's decision, and (iii) there be no waiting period
between the issuance of the Commission's order and the date on
which it is to become effective.
Item 6. Exhibits and Financial Statements.
(a) Exhibits:
A Not applicable.
B Not applicable.
C Not applicable.
E Not applicable.
F-1 Opinion of Berlack, Israels & Liberman
LLP -- to be filed by amendment.
F-3 Opinion of Ballard Spahr Andrews &
Ingersoll -- to be filed by amendment.
G Proposed form of public notice.
(b) Financial Statements:
1 None.
Note: GPU Corporate and consolidated actual
and pro forma financial statements are
omitted since they are not deemed to be
material or relevant or necessary for a
proper disposition of the proposed
transactions.
2 None.
24
<PAGE>
3 None.
4 None.
Item 7. Information as to Environmental Effects.
The proposed transactions are for the purpose of
engaging in the Energy Commodities Business. Consequently, the
issuance of an order by your Commission with respect to the
subject transactions is not a major Federal action significantly
affecting the quality of the human environment.
No federal agency has prepared or is preparing an
environmental impact statement with respect to the subject
transactions. Reference is made to Item 4 hereof regarding
regulatory approvals with respect to the proposed transactions.
25
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SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE PUBLIC UTILITY
HOLDING COMPANY ACT OF 1935, THE UNDERSIGNED COMPANIES HAVE DULY
CAUSED THIS STATEMENT TO BE SIGNED ON THEIR BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
GPU, INC.
GPU GENERATION, INC.
GPU SERVICE, INC.
By:
T. G. Howson, Vice President
and Treasurer
GPU INTERNATIONAL, INC.
By:
B. L. Levy, President
Date: October 18, 1996<PAGE>
EXHIBITS TO BE FILED BY EDGAR
Item 6. Exhibits and Financial Statements.
(a) Exhibits:
G Proposed form of public notice.<PAGE>
Exhibit G
SECURITIES AND EXCHANGE COMMISSION
(Release No. 35- ); 70-________
GPU, Inc. ("GPU"), 100 Interpace Parkway, Parsippany, New
Jersey 07054, a registered holding company, and GPU Service, Inc.
("GPUS"), 100 Interpace Parkway, Parsippany, New Jersey 07054,
GPU International, Inc. ("GPUI"), One Upper Pond Road,
Parsippany, New Jersey 07054 and GPU Generation, Inc. ("GENCO"),
1001 Broad Street, Johnstown, Pennsylvania 15907, wholly owned
non-utility subsidiaries of GPU, have filed an application
pursuant to sections 663, 7, 9(a), 10, 13(b) and 15(b) of the Act
and rules 45, 54, 90 and 91 thereunder.
GPU proposes to engage, through one or more existing or
newly-formed subsidiaries ("Energy Subsidiaries") in the business
of brokering and marketing a variety of energy commodities,
including, without limitation, electric power, natural gas, oil
and coal, and to provide related services to customers.
In particular, GPU proposes to engage in wholesale and
retail power marketing on a national scale. GPU also proposes to
provide related "value added" services to customers, such as fuel
management, storage and procurement services. Although the Energy
Subsidiaries might acquire physical assets that are necessary and
appropriate to the conduct of such business, such as oil and
storage facilities, gas reserves, gas pipeline facilities and
coal, GPU represents that no Energy Subsidiary will acquire any
assets if, as a result thereof, it would be or become an
"electric utility company" or a "gas utility company" under the
Act.
GPU proposes that the Energy Subsidiaries be authorized to
engage in such activities without regard to location or identity
of customers provided that the customers will not include
customers of the electric public utilities within the GPU System.
GPU also states that the Energy Subsidiaries will not sell
electric power at retail unless such sale is approved or allowed
under applicable state law.
It is anticipated that in the normal course of business the
Energy Subsidiaries would take appropriate measures to hedge the
risk associated with electric power and fuel purchase or sales
contracts. Such measures could include matches between long-term
firm or variable price electric power sales contracts and long-
term firm or variable price fuel purchase contracts. The Energy
Subsidiaries might also hedge fuel price risk through the
purchase of fuel or fuel reserves or options on fuel reserves.
In addition, the Energy Subsidiaries may use available
hedging tools, such as gas futures contracts and options on gas<PAGE>
futures, similar to those traded on the New York Mercantile
Exchange, and gas and oil price swap agreements and other,
primarily commodity based, derivative instruments.
GPU might also offset price risk exposure under a purchase
or sales contract through an opposite position to that purchase
or sale. Similarly, in a portfolio of purchase and sales
contracts, risk could also be limited through an appropriate mix
of long-term and short-term contracts.
Ultimately, the Energy Subsidiaries will seek to manage a
"book" of various energy contracts involving purchases, sales and
trades of oil, gas and electric power. The Energy Subsidiaries
will seek to hedge the risk associated with these contracts
through a combination of physical assets, balanced physical
purchases and sales, purchases and sales on futures markets, or
other derivative risk management tools.
GPU also seeks authorization for the Energy Subsidiaries to
enter into arrangements with GPUS and GENCO to provide services
and personnel in connection with their activities. GPUS and GENCO
would charge the Energy Subsidiaries for such services at cost in
accordance with Rules 90 and 91 under the Act. GPU also
represents that no more than 5% of the employees of the GPU
System would at any one time render services to the Energy
Subsidiaries in support of their business activities.
GPU and GPUI may acquire securities of one or more new
Energy Subsidiaries in connection with the formation thereof. It
is not expected that GPU and GPUI would, in the aggregate invest
more than $20 million in the Energy Subsidiaries through December
31, 2000 either through the acquisition of securities or cash
capital contributions.
GPU also requests authority through December 31, 2000 to
guarantee the debt and other obligations of any Energy
Subsidiaries. Such obligations (other than guaranteed debt) may
take the form of bid bonds or performance or other direct or
indirect guarantees of contractual or other obligations. Such
arrangements may be necessary in order for the Energy
Subsidiaries to satisfy a seller or customer that they have the
support for their contractual obligations. The maximum amount of
debt and other obligations proposed to be guaranteed at any one
time is $150 million.
Debt financing of any Energy Subsidiaries which is so
guaranteed will not exceed a term of 15 years and will bear
interest and carry fees at negotiated rates based on prevailing
market conditions.
GPU represents will not seek recovery through higher rates
to the customers of its electric utility subsidiaries in order to
compensate GPU for any possible losses that may be sustained in
connection with their activities or related investments in the
Energy Subsidiaries or for any inadequate returns therefrom or
thereon.
2<PAGE>
Interested persons wishing to comment or request a hearing
on the application(s) and/or declaration(s) should submit their
views in writing by December 19, 1996, to the Secretary,
Securities and Exchange Commission, Washington, D.C. 20549, and
serve a copy on the applicants at the addresses specified above.
Proof of services (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, as filed or amended, may be granted and or permitted
to become effective.
For the Commission, by the Division of Investment
Management, pursuant to delegated authority.
3<PAGE>
