SEC File No. 70-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-l
APPLICATION UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 ("Act")
GPU, INC.("GPU")
GPU SERVICE, INC. ("GPUS")
300 Madison Avenue
Morristown, New Jersey 07962
JERSEY CENTRAL POWER & LIGHT COMPANY ("JCP&L")
METROPOLITAN EDISON COMPANY ("Met-Ed")
PENNSYLVANIA ELECTRIC COMPANY ("Penelec")
P. O. Box 16001, Reading, Pennsylvania 19640
(Names of companies filing this statement
and address of principal 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
Assistant General Counsel LLP
GPU Service, Inc. 120 West 45th Street
300 Madison Avenue New York, New York 10036
Morristown, New Jersey 07962
S. L. Guibord, Esq.
Secretary
Jersey Central Power &
Lignt Company
Metropolitan Edison Company
Pennsylvania Electric Company
300 Madison Avenue
Morristown, New Jersey 07962
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(Names and addresses of agents for service)
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Item 1. Description of Proposed Transactions.
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A. JCP&L, Met-Ed and Penelec (which conduct business under the trade name
"GPU Energy" and are herein referred to as the "GPU Energy Companies") and GPUS,
a mutual service company, have heretofore entered into a services agreement. The
GPU Energy Companies and GPUS now propose to enter into an amended services
agreement which would permit GPUS to perform expanded functions, including
inventory management and procurement, for the GPU Energy Companies.
B. Background. In 1971, GPU organized GPUS to consolidate various
functions within a service company organization, including management, planning,
engineering, coordinating and administrative services. HCAR No. 35-17122 (April
29, 1971). GPU Nuclear, Inc. ("GPUN") and GPU Generation, Inc. ("Genco") were
subsequently organized to operate and maintain the nuclear and non-nuclear
generation facilities, respectively, of the GPU System. HCAR No. 35-21708 (Sept.
5, 1980); HCAR No. 35-26463 (Jan. 26, 1996).
GPU has undertaken a number of restructuring efforts and initiatives in
recent years in an effort to enhance efficiency and to remain competitive as the
electric industry moves toward deregulation and retail access.(1) In 1994, GPU
functionally
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1 In New Jersey, the Board of Public Utilities issued an "Energy Master Plan"
which recommended that customers be permitted to choose their retail electric
suppliers, commencing with 10 percent of load in October 1998 and expanding to
full retail choice by July 2000. See Docket No. EX94120585Y. These
<PAGE>
combined the energy services and delivery businesses of Met-Ed and Penelec. In
1996, GPU combined the energy services and delivery business of JCP&L with those
of Met-Ed and Penelec. As a result of this realignment, a single management team
became responsible for the combined energy services and delivery businesses of
the GPU Energy Companies. In addition, in 1996, certain GPUS personnel
performing services related to energy services and delivery were functionally
realigned to report to the GPU Energy Companies management team. These services
included: library services, graphic resources, forms management, general books
and plant accounting, payroll and accounts payable, interconnected transmission
services, power services, procurement, facilities management, materials and
supplies, transportation, information technology services, human resources,
communications and environmental affairs.
Finally, personnel performing services applicable across the GPU System,
such as legal services and consolidated accounting services, are employed by
GPUS.
This functional consolidation has produced, and is expected to continue to
produce, cost savings and increased operational synergies through the
elimination of previously duplicated functions. The personnel performing these
consolidated functions are, in general, employed by one of the GPU Energy
Companies.
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recommendations require enabling legislation. In 1996, Pennsylvania enacted
comprehensive legislation under which one third of retail customers are to have
retail access by January 1999, two-thirds by January 2000, and all customers by
January 2001. See Pennsylvania Public Utility code, 66 Purdon's Pa. C.S.A.
Section 2801 et seq.
<PAGE>
Currently, the GPU System's union personnel remain employed by each
separate GPU Energy Company and have not been functionally consolidated
(although In furtherance of its restructuring initiatives and in an effort to
focus on its core energy services and delivery businesses, in October 1997 the
GPU Energy Companies announced their intention to begin the process of divesting
all of their non-nuclear generation facilities. The facilities are currently
owned by the GPU Energy Companies and operated by Genco.
For a variety of business reasons, the GPU Energy Companies are now
embarked on an ambitious program to replace most of their existing information
systems and to further reorganize from a function-based business model to one
based upon core business processes. This program began several years ago when
the GPU Energy Companies began to review their more than 150 information systems
which are used to provide and/or support customer service, work management,
financial management, materials management and human resources activities. These
systems were developed over many years and reflected the different philosophies
and work practices of the three (then separately managed) GPU Energy Companies.
They did not easily allow for the exchange of information between companies and
many of them needed extensive and expensive modifications in order to operate
beyond the year 1999.
In addition, the GPU Energy Companies faced the need to make a significant
investment to upgrade their customer service information systems because of the
customer choice legislation in Pennsylvania and anticipated legislation in New
<PAGE>
Jersey noted above. The new customer information system must be able to
accommodate, among other things, customer choices of one or more energy
supplier(s) and must integrate that information and the billing therefor with
data relating to the provision of, and billing for, retail electric delivery
services.
After an extensive review of various options, the GPU Energy Companies
determined that it was in their best interests and the best interests of their
customers to purchase a new integrated core information system. The GPU Energy
Companies selected SAP America, Inc. ("SAP"), a worldwide leader in developing
computer software solutions that incorporate industry "best practices", as the
supplier of that system.
The GPU Energy Companies anticipate that implementation of the SAP system
will: (i) replace the major existing information systems and provide a single
integrated information system for all major GPU Energy activities; (ii)
standardize and align work processes; (iii) avoid the difficult and expensive
integration of existing systems; and (iv) provide for the operation of these
activities beyond 1999 (i.e., Year 2000 Compliance).
In addition, the evaluation, choice and implementation of this integrated
information system has led the GPU Energy Companies to further evaluate their
business practices and structure. In order to maximize the benefits,
efficiencies and effectiveness of the SAP system, which, to a large degree, is
comprised of "off-the-shelf" software, the GPU Energy Companies have concluded
that it is necessary to formally combine their human, technical, material and
operational resources into a single service company. The single service company
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approach will allow for the most effective use of the new integrated information
system and will minimize the need for costly and complex customization of the
core components of the SAP system. This, in turn, will allow the GPU Energy
Companies to quickly and cost effectively install and utilize the initial SAP
software, as well as to implement future upgrades of that system. Indeed, one of
the significant values which SAP offers with this type of system is its
continuing software development to reflect best practice business approaches.
Further, it is anticipated that the software will continue to be benchmarked to
reflect best practices for future upgrades, thus allowing GPU to maintain its
systems as "state of the art."
Accordingly, the GPU Energy Companies intend to continue these initiatives
by transferring substantially all of their personnel, including the union
personnel, to GPUS.(2) The realignment is not, however, expected to involve the
physical relocation of a substantial number of employees. As part of this
consolidation, the purchasing and inventory functions for the transmission and
distribution systems would also be assumed by GPUS, such that equipment and
materials would be acquired and inventoried by GPUS and sold to the appropriate
GPU Energy
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2 However, it is contemplated that the personnel responsible for transmission
and distribution dispatching would not be transferred, and would remain employed
by one or more of the GPU energy Companies.
<PAGE>
Company, at cost, when needed. GPUS may also procure fuel (in particular,
natural gas and transportation) and resell same, at cost, to the appropriate GPU
Energy Company for an owned generation plant or for a non-utility generator with
which a GPU Energy Company has a power supply agreement.
As part of the consolidation, GPUS will create an Operations Division. The
Operations Division will include substantially all of the employees of the GPU
Energy Companies involved in energy-related functions who are to be transferred
to GPUS. Officers of the GPU Energy Companies are expected to serve as officers
of the GPUS Operations Division as well. The personnel involved in corporate,
treasury, accounting and certain other functions, who are currently GPUS
employees, will continue to provide these same corporate services in what is
anticipated will become the Corporate Division of GPUS.
The consolidation of the union personnel will result in GPUS becoming a
successor employer under the several collective bargaining agreements with local
unions of the International Brotherhood of Electrical Workers to which JCP&L,
Met-Ed and Penelec, respectively, are parties, and a fourth agreement between
Penelec and the Utility Workers Union of America. GPUS will notify the unions
involved and become the employer party to those agreements and formally adopt
their terms.
<PAGE>
There are currently approximately 670 employees at GPUS.(3) The
realignment is expected to involve the transfer from the GPU Energy Companies to
GPUS of approximately 3,040 union and 1,760 non-union employees, having a yearly
budget payroll of approximately $265 million. Following the completion of the
realignment, the only employees of the GPU Energy Companies will be
approximately 50 personnel in the dispatch center.(4)
The realignment will not involve the formation of any new legal entities,
the write-down of any rate-based assets or the transfer of any utility assets
(as defined in the Act).
Such consolidation is intended to, among other things, ameliorate the
existing payroll, operational and administrative complexities of having
functionally-related personnel employed by more than one GPU Energy Company.
Additionally, the GPU Energy Companies believe that the consolidation will allow
for a more focused and efficient management of human resources, avoid data
replication in different entities and provide other similar
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3 In 1991, prior to the shifting of certain functions to the GPU Energy
Companies as described above. GPUS had 1,021 employees.
4 In addition, approximately 1,100 union employees of the GPU Energy Companies
who, through GPUN, provide operation and maintenance services ("O&M") for GPU's
nuclear generating assets are expected to be transferred to GPUS in 2000, when
nuclear O&M services are incorporated into the SAP computer system. In
anticipation of the sale of GPU's non-nuclear generating assets in 1999, the
1,630 union employees of the GPU Energy Companies who provide O&M services for
such assets through Genco will not be transferred to GPUS.
<PAGE>
advantages. The GPU Energy Companies also expect that the consolidation of the
purchasing and inventory tasks will enable them to more cost-effectively manage
and allocate resources.
As mentioned above, this restructuring and the purchase of the SAP
computer system are also tied to the decision of GPU Energy management to
undertake a realignment of departmental and functional resources into a
process-based organization. As a transmission and distribution company focused
on satisfying customer needs, GPU Energy has determined that its business is, or
should be, focused on three core business processes and three support processes,
as listed on Exhibit G hereto. The three core business processes are as follows:
Manage and Service Delivery Assets;
Provide Customer Service; and
Manage Energy Risk
The three support processes are as follows:
Provide Support Services;
Manage Financial Performance; and
Develop Business Opportunities.
A GPU Energy Vice President is responsible for each process and the multiple
sub-processes beneath it. The core business processes and sub-processes cut
across formerly functional/departmental lines to effectively group the types,
kinds and number of personnel necessary to deliver a particular distribution
product or service to the customer in a manner designed to result in maximum
customer satisfaction. The support processes and sub-processes resemble the
former functional/departmental alignment of GPU Energy insofar as the kinds of
personnel in them are concerned. However, these support processes are designed
as "centers of excellence" which have centralized management responsibility for
the resources. Such arrangement allows the core processes to remain undistracted
by the management of support needs.
<PAGE>
For instance, the three core business processes will require the
management of human resources issues including hiring, training, benefits, etc.
The "Provide Support Services" process will be responsible for providing, among
other things, these types of resources or services to the core business
processes. This will be accomplished through the sub-processes referred to as
"Attract, Retain and Develop Personnel" and "Manage Employee Relations". These
sub-processes will provide the coordinated expertise of human resource
professionals as an integrated tool for the core business processes and their
respective sub-processes.
One of the key efficiencies gained through this process orientation is the
elimination of transactions or "hand-offs" between former functions or
departments. The entire "team" of employees grouped in any core business process
or in any support process are focused on and committed to the target of that
process - a product or service delivered to satisfy, or even exceed, customer
expectations.
<PAGE>
The proposed new services agreement permits one or more of the GPU
Energy Companies to request that GPUS lease or otherwise provide employees to
perform Operations Division tasks. The leasing of employees is intended to
reduce the potential for the imposition of sales and use taxes relating to the
performance of services in New Jersey and is not expected to restrict employees
leased to one GPU Energy Company from providing services to the other GPU Energy
Companies or the allocation of costs among such companies.
C. Requested Authorization.
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Accordingly, the GPU Energy Companies propose to enter into a new
services agreement substantially in the form of Exhibit B hereto ("New Services
Agreement") with GPUS which would permit GPUS to perform the expanded functions
described above. The GPU Energy Companies also propose to sell up to $60 million
aggregate book value of existing transmission and distribution inventory to
GPUS, at cost, in accordance with Rules 90 and 91 under the Act. GPUS will pay
for the inventory with the proceeds from borrowings under a new GPUS credit
facility. (See paragraph E.5. below.) Future inventory purchases by GPUS will be
funded with the proceeds of the sale of inventory to the GPU Energy Companies
and, to the extent necessary, by credit facility borrowings or GPU advances.
<PAGE>
D. Cost Allocation.
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1. The New Services Agreement will provide that the services
rendered by GPUS will be furnished at cost. Records will be maintained by each
core business or support process of the Operations Division of GPUS in order to
accumulate all costs of doing business and to determine the cost of service.
These costs will include wages and salaries of employees and related expenses
such as insurance, taxes, pensions and other employee welfare expenses. In
addition, the Corporate Division of GPUS will maintain records of general
administrative expenses, which will include the costs of operating GPUS as a
corporate entity.
Where appropriate, charges for services rendered or personnel assigned or
leased to a particular GPU Energy Company and related expenses and non-personnel
expenses (e.g., use of automotive equipment, etc.) relating to a particular GPU
Energy Company will be billed directly to such GPU Energy Company.
When a service is rendered for the benefit of two or more companies, the
costs will be shared by the receiving companies in proportion to the average of:
(1) gross distribution plant, (2) energy delivered to ultimate consumers in KWH,
and (3) operating and maintenance expense excluding purchased power. This
multiple factor formula is the one currently in use and the factors are updated
annually.
All other costs will be fairly and equitably allocated in accordance with
Rules 90 and 91 of the Act. Calculations under these allocation formulae will be
reviewed periodically and revised as appropriate to fully allocate all costs by
each year-end.
<PAGE>
All charges for services will be determined from the time records of
employees. Records of such related expenses will be maintained and subjected to
periodic review.
Out-of-pocket expenses which are incurred for a GPU Energy Company will be
billed at cost. Charges for non-personnel expenses, such as for use of
automobiles not assigned exclusively to a GPU Energy Company, will normally be
computed on the basis of costs per hour.
The foregoing billing principles will remain the basis for GPUS' charges
to the GPU Energy Companies unless and until modified or until new allocation
formulas and standards are adopted and reported to the Commission by a 60-day
letter.
E. Controls
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A number of factors ensure that the GPU Energy Companies have the
means to judge the need for GPUS services and to monitor the quality and value
of the services being provided. These factors, which are described below,
include the budget process, work order procedures to track and document the
initiation of services, billing and review procedures to ensure the accuracy of
GPUS billings, review and approval of work orders and billings by personnel who
are separate from the billing function, and internal audit examinations.
(a) It is anticipated that the President of the GPU Energy
Companies will serve as a member of the GPUS Board of Directors and as
President of the GPUS Operations Division. In addition, all GPU Energy
officers are expected to serve as officers of the Operations Division.
Consequently, GPU Energy officers will be informed of, and directly
participate in, all material decisions of the GPUS Operations Division.
<PAGE>
(b) As in the past, operating and construction budgets will
continue to be prepared separately for the GPU Energy Companies, for
review and approval by their respective Boards of Directors. Expenditures
are monitored against these budgets on a monthly basis. Each GPU Energy
Company's financial results are produced quarterly for internal analysis
and are reviewed by the GPU Energy Boards of Directors and are issued to
the public and state regulatory commissions quarterly. The internal
auditing department will continue to review GPUS charges. Separate
individual audit opinions of the financial condition and results of
operations of each GPU Energy Company are obtained annually from an
independent public accounting firm.
(c) Each GPU Energy Company pays to GPUS all costs that
reasonably can be identified and related to a particular transaction or
service performed on its behalf. These costs will be documented using work
order (or equivalent costs collectors,(5) collectively, "work orders")
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5 The SAP system has three costs collectors which are equivalent to work
orders: "orders", "cost centers" and "work
<PAGE>
numbers in accordance with the FERC's Uniform System of Accounts. The Plan
and Analyze Finances Sub-Process ("Finance Sub-Process"), which is
separate from the Manage Accounting Operations Sub-Process ("Accounting
Sub-Process"), analyzes each month's GPUS departmental billing summaries
to the GPU Energy Companies to ensure billing to the proper company. All
GPU Energy time documents are reviewed and approved by a GPUS Operations
Division business process manager, including review of the time document
charges in relationship to a process and employees' work schedules. The
review also ensures that the time document indicates the work order number
charged. Pursuant to controls built into GPUS's accounting system, a
transaction requiring a work order will not be processed unless there is a
work order number provided. All project work orders for one or more GPU
Energy Companies in excess of $50,000 must be approved by an Operations
Division process manager (with officer and, ultimately, board approval
required for higher thresholds).
(d) GPUS bills to the GPU Energy Companies, which are
generated by the Accounting Sub-Process, are reviewed
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breakdown structures" (WBSs"). Orders include work orders, sales orders,
internal orders and services orders. Each employee will be assigned to a
cost center which will be responsible for collecting routine costs such as
for meter reading and line repairs. WBSs are analogous to work orders and
are required for projects exceeding certain dollar thresholds or
durations, or which involve investing in capital assets. To ensure proper
record-keeping, every employee will be required to charge time against a
designated order, WBS or cost center number.
<PAGE>
and approved by individuals in the Finance Sub-Process. Detailed GPUS
information (i.e., time sheets, invoices) is available upon request. Such
Finance Sub-Process individuals will, if necessary, contact responsible
GPUS managers for explanations of unusual items. In general, disagreements
are resolved, if possible, by direct communication and negotiation between
such individuals and the appropriate GPUS Operations or Corporate
Division. When consensus on selected matters cannot be reached, the matter
will be referred to GPU Energy Company and GPUS executives. The basis for
the allocation of costs will be reviewed annually by each sub-process to
ensure that the allocation basis continues to be reasonable and to have a
relationship to the types of services or functions provided by the
sub-process cost centers. GPUS will continue to work with the staff of the
Commission to ensure that the allocation methods effectively allocate
costs according to benefits received. The GPUS accounting staff verifies
that every multiple party work order has the correct cost allocation
method.
(e) Another control which is performed every month is the
reconciliation of GPUS billings to GPUS expenses with regard to services
rendered for the GPU Energy Companies. Such reconciliation ensures that
all expenses have been billed, and it also immediately detects any over-or
under-billings. Internal audits provide an additional control measure. All
GPUS charges will be processed through the SAP system, which will be
subject to periodic internal audit. This system will accumulate charges
utilizing work orders. Therefore, an evaluation of the work order process
will be an integral part of the audit. The GPUS internal audit department,
which is independent of the Operations Division, will continue to meet at
least twice a year with the Audit Committee of the GPU Board of Directors
(which Audit Committee is comprised solely of outside directors), and the
Boards of the GPU Energy Companies, to review audit plans and findings. In
addition, the GPUS Vice President-Audit will continue to have open and
direct access to the Chairman of the Audit Committee. These procedures
will ensure that costs associated with the services performed by GPUS on
behalf of the GPU Energy Companies are properly authorized, allocated and
tracked.
(f) Finally, an important factor in determining incentive
compensation for GPUS non-union personnel is the profitability of the GPU
Energy Companies. This should also provide a strong incentive to ensure
that services are provided efficiently and economically.
F. Financial
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1. Article 6 of the New Services Agreement provides for a Working
Capital Account pursuant to which each GPU Energy Company will provide necessary
working capital to GPUS from time to time. This is consistent with the
procedures currently employed by GPUS, GPUN and Genco.
<PAGE>
2. In accordance with Rule 91 under the Act, to the extent that GPU
provides capital to GPUS in the form of open account advances, it would charge
GPUS for the reasonable cost of such capital at a rate equal to GPU's average
weighted cost of long and short term debt for the preceding quarter. If and to
the extent that there is such a cost of capital charge, GPUS would allocate and
charge such cost to the GPU Energy Companies.
3. GPUS intends to enter into a credit facility or lines of credit,
in reliance on Rule 52(b) under the Act, to provide funds for inventory
procurement (including the initial purchase from the GPU Energy Companies)(6).
So that such borrowings may be made on favorable terms and rates, GPU proposes,
from time to time through December 31, 2003, to enter into guaranty or support
agreements on behalf of GPUS in an aggregate amount not exceeding $100 million.
The borrowings would have maturities not exceeding five years, bear interest at
market rates and be subject to customary fees and other terms and conditions.
4. With respect to inventory, GPUS will become a wholesaler of the
transmission and distribution materials, and fuel, to be used by the GPU Energy
Companies. The GPU Energy Companies will pay for these materials and fuel on an
"at cost"
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6 In the event GPU were deemed a "public utility company" as defined in the Act,
the exemption provided by Rule 52(b) would not be available. In such case, GPUS
hereby requests Commission authorization to make such borrowings on the terms
described above.
<PAGE>
basis, calculated at GPU System average unit prices,(7) and will be charged only
for materials and fuel actually delivered to the site.
It is not currently contemplated that GPUS will engage in the sale
of inventory to persons other than the GPU Energy Companies, except in cases of
emergency or in those instances when inventory levels are substantially in
excess of the GPU Energy Companies' requirements. Any transactions with (x)
other associates will be effected at cost in accordance with Rules 90 and 91,
and (y) non-associates will be made at current market prices or at prices
determined through arms length bargaining and any profits resulting therefrom
will be applied to reduce the cost of other expenses to be charged to the GPU
Energy Companies.
In connection with the purchase of inventory and/or fuel from third
parties, it may be necessary for GPUS, which, as a service company, may not be
deemed sufficiently credit-worthy by suppliers, to provide credit support for
its payment or purchase obligations. Accordingly, GPU proposes, from time to
time through December 31, 2003, to enter into guaranty or support agreements on
behalf of GPUS in an aggregate amount not exceeding $50 million.
5. The Applicants agree that no change in the organization of GPUS,the
type and character of the companies to be serviced, the methods of allocating
costs to the GPU Energy Companies, or in the scope or character of the services
to be
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7 However, certain special or serialized items will be priced on a unit
basis and not average cost.
<PAGE>
rendered subject to Section 13 of the Act, or any rule, regulation or order
thereunder, shall be made unless and until GPUS shall first have given the
Commission written notice of the proposed change not less than 60 days prior to
the proposed effectiveness of any such change. If, upon the receipt of any such
notice by the 60-day letter procedure, the Commission shall notify GPUS within
the 60-day period that a question exists as to whether the proposed change is
consistent with the provisions of Section 13 of the Act, or of any rule,
regulation or order thereunder, then the proposed change shall not become
effective unless and until GPUS shall have filed with the Commission an
appropriate application or declaration regarding such proposed change and the
Commission shall have issued an order declaring such application or declaration
effective under the Act.
G. Financial Impact.
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GPU estimates that the aggregate cost of the implementation of the SAP
computer system (including process redesign, hardware, software, data
conversions, testing and training) will be $108-$115 million. GPU also
estimates, however, that it would have been necessary to spend approximately $71
million for necessary computer system upgrades relating to compliance with
retail access initiatives and Year 2000 compliance if it had not decided to
implement the SAP system and to consolidate all employees in GPUS. Accordingly,
the incremental cost of the implementation of the SAP computer system, relating
principally to the replacement of the existing systems with SAP and the change
to a process-oriented management approach, is estimated at approximately $37 to
$44 million.
<PAGE>
GPU estimates that the implementation of the SAP computer system
will result in significant financial savings, in addition to the efficiencies
described above. In particular, GPU estimates labor-related savings of
approximately $20 million annually. Accordingly, it is expected that the
incremental cost of the implementation of the new system ($37-$44 million) will
be recovered through savings in two to three years.
H. Rule 54 Analysis.
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The proposed transactions contemplate, among other things, the issuance or
acquisition of securities by the Applicants which do not relate to exempt
wholesale generators ("EWGs") and foreign utility companies ("FUCOs") (the
"Transactions"). Accordingly, the Transactions are subject to Rule 54, which
provides that, in determining whether to approve an application which does not
relate to any EWG or FUCO, the Commission shall not consider the effect of the
capitalization or earnings of any such EWG or FUCO which is a subsidiary of a
registered holding company if the requirements of Rule 53 (a), (b) and (c) are
satisfied.
(a) As described below, GPU meets all of the conditions of Rule 53, except
for Rule 53(a)(1). By Order dated November 5, 1997 (HCAR No. 35-26773) (the
"November 5 Order"), the Commission authorized GPU to increase to 100% of its
"average consolidated retained earnings," as defined in Rule 53, the aggregate
amount which it may invest in EWGs and FUCOs. At December 31, 1997, GPU's
average consolidated retained earnings was approximately $2,171 million.
Accordingly, under the November 5 Order, GPU may invest up to an additional $754
million in EWGs and FUCOs as of December 31, 1998.
(i) 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.
(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, GPU 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 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 and FUCO in which GPU directly or
indirectly holds an interest.
(iv) Copies of this Application on Form U-1 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.(8)
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 having a book value
exceeding 10% of GPU's consolidated retained earnings is the subject
of any pending bankruptcy or similar proceeding.
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8 Penelec is also subject to retail rate regulation by the new York Public
Service Commission with respect to retail service to approximately 3,700
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 percent of Penelec's total operating revenues.
<PAGE>
(B) GPU's average consolidated retained earnings for the four
most recent quarterly periods (approximately $2,171 million)
represented an increase of approximately $21.6 million (or
approximately 1.0%) compared to the average consolidated retained
earnings for the previous four quarterly periods (approximately
$2,149 million).
(C) GPU did not incur operating losses from direct or indirect
investments in EWGs and FUCOs in 1997 in excess of 5% of GPU's
December 31, 1997 consolidated retained earnings.
As described above, GPU meets all the conditions of Rule 53(a), except for
clause (1). With respect to clause (1), the Commission determined in the
November 5 Order that GPU's financing of investments in EWGs and FUCOs in an
amount greater than 50% of GPU's average consolidated retained earnings as
otherwise permitted by Rule 53(a)(1) would not have either of the adverse
effects set forth in Rule 53(c).
Moreover, even if the effect of the capitalization and earnings of
subsidiary EWGs and FUCOs were considered, there is no basis for the Commission
to withhold or deny approval for the transactions proposed in this Application.
The transactions would not, by themselves, or even considered in conjunction
with the effect of the capitalization and earnings of GPU's subsidiary EWGs and
FUCOs, have a material adverse effect on the financial integrity of the GPU
system, or an adverse impact on GPU's public utility subsidiaries, their
customers, or the ability of State commissions to protect such public utility
customers.
<PAGE>
The November 5 Order was predicated, in part, upon the assessment of GPU's
overall financial condition which took into account, among other factors, GPU's
consolidated capitalization ratio and the recent growth trend in GPU's retained
earnings. As of June 30, 1997, the most recent quarterly period for which
financial statement information was evaluated in the November 5 Order, GPU's
consolidated capitalization consisted of 49.2% equity and 50.8% debt. As stated
in the November 5 Order, GPU's June 30, 1997 pro forma capitalization,
reflecting the November 6, 1997 acquisition of PowerNet Victoria, was 39.3%
equity and 61.7% debt.
GPU's December 31, 1997 consolidated capitalization consists of 40.4%
equity and 59.6% debt. Thus, since the date of the November 5 Order, there has
been no material adverse change in GPU's consolidated capitalization ratio,
which remains within acceptable ranges and limits as evidenced by the credit
ratings of GPU's electric utility subsidiaries. Moreover, on February 12, 1998,
GPU sold an additional 7 million shares of common stock and applied
approximately $229 million of the net proceeds to reduce outstanding
indebtedness.
- -----------------------
9 The debt ratings of GPU's electric utility subsidiaries have not changed since
the issuance of the November 5 Order. Moreover, on February 27, 1998, Standard
and Poor's Corporation assigned an "A-" credit rating to the A$1,925 million
senior bank debt of GPU PowerNet.
<PAGE>
GPU's consolidated retained earnings grew on average approximately 4.5%
per year from 1991 through 1997. Earnings attributable to GPU's investments in
EWGs and FUCOs have contributed positively to consolidated earnings, excluding
the impact of the windfall profits tax on the Midlands Electricity plc
investment.(10)
Accordingly, since the date of the November 5 Order, the capitalization
and earnings attributable to GPU's investments in EWGs and FUCOs have not had
any adverse impact on GPU's financial integrity.
Reference is made to Exhibit H filed herewith which sets forth GPU's
consolidated capitalization and earnings at December 31, 1997 and after giving
effect to the transactions proposed herein. As set forth in such exhibit, the
proposed transactions will not have a material impact on GPU's capitalization or
earnings.
Item 2. Fees, Commissions and Expenses.
-------------------------------
The estimated fees, commissions and expenses to be incurred in connection
with the proposed transactions will be filed by amendment.
- ------------------------
10 As discussed in the November 5 Order, GPU incurred a lost for 1997 from its
investments in EWGs and Focus as a result of the 1997 windfall profits tax
imposed on Midlands Electricity, plc.
<PAGE>
Item 3. Applicable Statutory Provisions.
--------------------------------
A. The entering into of the New Services Agreement with GPUS is subject
to Section 13 and Rule 87 under the Act.
B. The guaranty by GPU of GPUS' borrowings and purchase agreement
obligations, is subject to Sections 9(a) and 10 and Section 12(b) of the Act and
Rule 45 thereunder. GPU's proposed open account advances are also subject to
Sections 6(a) and 7 and 9(a) and 10 of the Act and Rule 45 thereunder
C. It is further requested that GPUS be permitted to file with the
Commission Form U-13-60, supplemented by the FERC Uniform System of Accounts, as
described in CFR Part 101, in lieu of any Certificates pursuant to Rule 24 under
the Act.
Item 4. Regulatory Approval.
--------------------
Since the New Services Agreement is believed to be a "management, advisory
service, construction or other engineering contract" within the meaning of
Section 48:3-7.1 of the New Jersey Statutes, JCP&L's execution thereof will
require the approval of the New Jersey Board of Public Utilities ("NJBPU"). The
transfer of inventory by JCP&L to GPUS will also require approval of the NJBPU
pursuant to Section 48:3-7 of the New Jersey Statutes. JCP&L will file a
Petition with the NJBPU seeking such approvals.
PaPUC authorization will not be required for GPUS to perform the
expanded functions, however, inasmuch as the PaPUC has previously authorized
Met-Ed and Penelec to obtain such services from GPUS. See Order dated Oct. 28,
1993, Docket No. G-00930355.
<PAGE>
To the extent that any of the initial inventory which is transferred to
GPUS constitutes transmission facilities which are subject to the jurisdiction
of the Federal Energy Regulatory Commission ("FERC"), the FERC may have
jurisdiction over such transfer under Section 203 of the Federal Power Act. In
such case, the Applicants will file an application with the FERC seeking such
approvals as are necessary.
Except as set forth above, no state or federal commission (other than your
Commission) has jurisdiction with respect to the proposed transactions.
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 September 30, 1998. 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.
----------------------------------
1. Exhibits:
A Not Applicable.
B Form of New Services Agreement
C Not applicable.
<PAGE>
D-1 Copy of Petition filed by JCP&L with the NJBPU -- to be
filed by amendment.
D-1(a)Copy of order of NJBPU -- to be filed by amendment.
E Not applicable.
F-1 Opinion of Berlack, Israels & Liberman LLP -- to be filed
by amendment.
F-2 Opinion of Ryan, Russell, Ogden & Seltzer LLP -- to be
filed by amendment.
F-3 Opinion of Ballard Spahr Andrews & Ingersoll, LLP -- to
be filed by amendment.
G Structure of Operations Division.
H GPU Actual and Pro form Capitalization -- to be filed by
amendment
2. 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.
3 None.
4 None.
<PAGE>
Item 7. Information as to Environmental Effects.
----------------------------------------
The proposed transactions are designed to combine in a single organization
responsibility for the operation and maintenance of the GPU System transmission
and distribution facilities, but not otherwise to affect the manner in which
such facilities are operated. 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.
<PAGE>
SIGNATURES
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.
JERSEY CENTRAL POWER & LIGHT
COMPANY
METROPOLITAN EDISON COMPANY
PENNSYLVANIA ELECTRIC COMPANY
GPU SERVICE, INC.
By: ______________________________
T.G. Howson
Vice President and Treasurer
Date: May 6, 1998
TO BE FILED BY EDGAR
--------------------
Item 6. Exhibits and Financial Statements.
----------------------------------
B Form of New Services Agreement
G Structure of Operations Division.
Exhibit B
GPU SERVICE, INC.
300 Madison Avenue
Morristown, New Jersey 07962
SERVICE AGREEMENT
As of __________
TO: [Insert name of and address GPU Energy Company]
("Company")
GPU Service, Inc. (hereinafter called "Service Company") is a company
engaged in the rendering of services to companies in the GPU, Inc. holding
company system. The organization, conduct of business and method of cost
allocation of Service Company are designed to meet the requirements of Section
13 under the Public Utility Holding Company Act of 1935 and the rules and
regulations promulgated thereunder to the end that services performed by the
Service Company for said associate companies will be rendered to them at cost,
fairly and equitably allocated. Services will be rendered by Service Company
only upon receipt from time to time of specific or general requests therefor.
Said request may always be modified or canceled by the serviced company at its
discretion. The parties hereto agree as follows:
<PAGE>
1. Service Company agrees to furnish the Company and any subsidiaries of
the Company including those to be formed or acquired in the future (collectively
and individually referred to as "You"), upon the terms and conditions herein set
forth, such of the services described in Schedule I hereto as You may from time
to time request. Service Company will also furnish, if available, such services
which are not described in Schedule I but which are generally related to such
services as You may request.
2. If You so request, Service Company will act as Your agent,
attorney-in-fact and representative to sign such instruments and do such things
as You may from time to time authorize in connection with the services to be
furnished hereunder.
3. Service Company has and will maintain a staff trained and experienced
in the analysis and evaluation of investment opportunities and their structure
and implementation. In addition to the services of its own staff, Service
Company will, after consultation with You concerning services to be rendered
pursuant to your request, arrange for services of non-affiliated experts and
consultants. If You so request, Service Company employees performing Operations
Division functions will be leased to You. The lease of such employees will be at
the actual cost thereof as provided in Sections 4 and 5.
<PAGE>
4. All of the services rendered under this agreement will be at the actual
cost thereof, and paid for in accordance with the provisions set forth in
paragraph 5 hereof. Direct charges will be made for services where a direct
allocation of cost is possible. The methods of determining such costs and the
allocation thereof are set forth in Schedule II hereto. These methods are
reviewed periodically as deemed appropriate by You and Service Company. Such
methods may be modified or changed by Service Company without the necessity of
an amendment of this agreement, provided that in each instance all services
rendered hereunder will be at actual cost thereof, fairly and equitably
allocated, and all in accordance with the requirements of the Public Utility
Holding Company Act of 1935 and the rules and regulations and orders thereunder.
You will be advised from time to time of any material changes in such methods.
5. Bills will be rendered as soon as practicable after the close of each
month and will be payable within ten days after receipt. This agreement may be
terminated at any time by either party giving at least thirty days' written
notice to the other of such termination as at the end of any month.
<PAGE>
6. Service Company shall arrange for a working capital account ("Working
Capital Account") to be established for You, from which Service Company shall
make payments for all costs incurred in providing its services and in
discharging its responsibilities hereunder. You agree to fund your Working
Capital Account by providing or transferring funds promptly on receipt of
telephone or other notice or direction from or on behalf of Service Company of
your obligation therefor.
Upon termination of this agreement, as hereinafter provided, any residual
unexpended balance in the Working Capital Account after payment of the costs
actually incurred, and reasonable commitments therefor, as set forth in Section
4 hereof shall be credited to You.
7. This agreement will be subject to termination or modification at any
time if and to the extent its performance may conflict with any federal or state
law or any rule, regulation or order of a federal or state regulatory body
having jurisdiction. This agreement will be subject to approval of any federal
or state regulatory body whose approval is a legal prerequisite to
8. its execution and delivery of performance.
<PAGE>
GPU SERVICE, INC.
By: _______________________________
Name: _____________________________
Title:_____________________________
Accepted:
[Company]
By: _________________________
[Name]
[Title]
<PAGE>
SCHEDULE I
Description of Services which are available from
GPU SERVICE, INC.
Accounting and Auditing.
- ------------------------
The keeping of accounts and collateral activities, including billings,
collections and payments, preparation of reports and preservation of records,
review of internal controls and audits, preparation of statistical data and
reports and analyses.
Corporate and Corporate Records.
- --------------------------------
Cooperation with officers and counsel of associate companies on corporate
matters, regulation, contracts, claims, litigation, financial affairs, and
investments, including debt and equity securities, leveraged leases and private
placements. Services in connection with stockholders' and directors' meetings
and keeping of corporate records.
Data Processing.
- ----------------
Maintenance and operation of a data processing center and equipment for
accounting, engineering, administration and other functions, and development of
systems therefor.
<PAGE>
Executive and Administrative.
-----------------------------
Consultation and services in management and administration of all aspects
of financial and investment transactions.
Financing.
----------
Services in connection with interim and permanent financing of associate
companies, determination of capital needs, cooperation with officers and counsel
of associate companies on financing matters, including registration statements
and regulatory applications; cash management; budgeting; preparation of
financial and statistical reports.
Insurance and Employee Benefit Programs.
----------------------------------------
Development, placement and administration of insurance coverage and
employee benefit programs, including group insurance, pensions, hospitalization
and similar programs; property inspections and valuations for insurance.
Investment Operations.
----------------------
Receipt, review, evaluation of investment opportunities and ways and means
to utilize capital resources, communications with investment, merchant and
commercial bankers, broker-dealers, investment advisors, portfolio managers,
economists and other representatives of investment and financial institutions
and funds; negotiation, structuring and implementation of investment decisions
and the preparation and execution and delivery of agreements therefor.
<PAGE>
Operations Division.
--------------------
The operation and maintenance of the transmission and distribution
facilities.
Personnel.
----------
Assistance relating to wage and salary administration, employment
procedures and policies, employee training and safety and recruitment.
<PAGE>
Retail Energy Sales and Services.
---------------------------------
Review, evaluation and analysis of opportunities to develop, market and
sell energy and energy-related services, including arrangements with and for
associate companies.
Public Information and Relations.
---------------------------------
Services relating to information to and relations with the public,
including customers, security holders, employees, financial analysis, rating
agencies, investment firms and employees.
Purchasing.
-----------
Services with respect to purchase of materials, supplies, equipment and
fuel reference works. Inventorying same for resale to associate companies.
Research.
---------
Services relating to research of financial and investment opportunities
and ways to utilize capital resources.
<PAGE>
Taxes.
------
Services relating to federal, state and municipal taxes, preparation of
federal returns and handling of federal return audits and claims.
Legal.
------
Services related to general corporate legal matters and affairs including
supervision of inside and outside counsel legal services.
<PAGE>
SCHEDULE II
Determination of Cost of Service
and Allocation Thereof
Cost of service will be determined in accordance with the Public Utility
Holding Company Act of 1935 and the rules and regulations and orders thereunder,
and will include all costs of doing business incurred by Service Company.
Records will be maintained by each core business or support process of the
Operations Division of Service Company in order to accumulate all costs of doing
business and to determine the cost of service. These costs will include wages
and salaries of employees and related expenses such as insurance, taxes,
pensions and other employees welfare expenses. In addition, the Corporate
Division of Service Company will maintain records of general administrative
expenses, which will include the costs of operating Service Company as a
corporate entity.
Where appropriate, charges for services rendered or personnel assigned or
leased to a particular GPU Energy Company and related expenses and non-personnel
expenses (e.g., use of automotive equipment, etc.) relating to a particular GPU
Energy Company will be billed directly to the owner of such GPU Energy Company.
<PAGE>
When a service is rendered for the benefit of two or more companies, the
costs will be shared by the receiving companies in proportion to the average of:
(1) gross transmission and distribution plant, (2) energy delivered to ultimate
consumers in KWH, and (3) operating and maintenance expense excluding purchase
power.
All other costs will be fairly and equitably allocated in accordance with
Rules 90 and 91 of the Public Utility Holding Company Act of 1935. Calculations
under these allocation formulae will be reviewed periodically and revised as
appropriate to fully allocate all costs by each year-end.
All charges for services will be determined from the time records of
employees. Records of such related expenses and will be maintained and subjected
to periodic review.
Out-of-pocket expenses which are incurred for a GPU Energy Company will be
billed at cost. Charges for non-personnel expenses, such as for use of
automobiles not assigned exclusively to the GPU Energy Companies, will normally
be computed on the basis of costs per hour.
Exhibit G
<TABLE>
GPU ENERGY BUSINESS PROCESS MODEL
(March 1998)
<CAPTION>
Core Processes Support Processes
- -------------- -----------------
<S> <C> <C> <C> <C> <C>
Manage and Manage Provide Manage Develop Provide
Service Energy Customer Financial Business Support
Delivery Risk Service Performance Opportunities Resources
Manage Assess the Respond to Plan and Develop and Provide
Delivery Energy Inquiries/ Analyze Retain Physical
Assets Market Customer Finances Business Resources
Relations
Design & Minimize Bill & Manage Develop the Provide
Construct Energy Risk Collect Accounting Organization Information
Revenues Operations Technology
Maintain Satisfy Establish Communicate Attract, Retain
Reliability Energy Appropriate to the Public & Develop
Requirements Rates & Employees Personnel
Customer Manage Manage
Choice Constituents Employee
Relations
Manage Manage
Legislative/ Environmental
Gov't Affairs Programs
</TABLE>
