Amendment No. 2 to
SEC File No. 70-9201
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")
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 addresses of principal offices)
GPU, INC.
(Name of top registered holding company
parent of the applicants)
M. A. Nalewako, Secretary Douglas E. Davidson, Esq.
M. J. Connolly, Esq., Berlack, Israels & Liberman LLP
Assistant General Counsel 120 West 45th Street
GPU Service, Inc. New York, New York 10036
300 Madison Avenue
Morristown, New Jersey 07962
S. L. Guibord, Esq.
Secretary
Jersey Central Power &
Light Company
Metropolitan Edison Company
Pennsylvania Electric Company
300 Madison Avenue
Morristown, New Jersey 07962
(Names and addresses of agents for service)
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GPU, GPUS, JCP&L, Met-Ed and Penelec hereby amend their Application on
Form U-1, docketed in SEC File No. 70-9201, as follows:
1. By amending Item 1 thereof to read in its entirety as follows:
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. 1. In 1971, GPU organized GPUS to consolidate
various functions within a service company organization, including
management, planning, engineering, coordinating and administrative services.
HCAR No. 35-17112 (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).
2. 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
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moves toward deregulation and retail access (1). In 1994, GPU functionally
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.
3. Finally, personnel performing services applicable across the GPU
System, such as legal services and consolidated accounting services, are
employed by GPUS.
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(1)InNew Jersey, the Board of Public Utilities issued an "Energy Master Plan"
which recommended that customers be permitted to chose their retail
electric suppliers, commencing with 10% of load in October 1998 and
expanding to full retail choice by July 2000. See Docket No. EX94120585Y.
These 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
Purcon's Pa. C.S.A. Section 2801 et seq.
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4. 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.
5. Currently, the GPU System's union personnel remain employed by each
separate GPU Energy Company and have not been functionally consolidated
(although they are managed by the consolidated management team).
6 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. As discussed below, the
GPU Energy Companies have also announced an agreement to sell the Three Mile
Island Unit I nuclear generating facility.
7. 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
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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.
8. 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 Jersey as 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.
9. 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 "enterprise" solutions that incorporate industry "best
practices", as the supplier of that system.
10. The GPU Energy Companies anticipate that implementation of the SAP
system will: (i) replace the major existing
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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 the information systems beyond 1999 (i.e., Year
2000 Compliance).
11. 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 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."
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12. Accordingly, in order to implement the single service company
approach, the GPU Energy Companies intend to continue these initiatives by
transferring substantially all of their personnel, including the union
personnel, to GPUS. However, it is contemplated that approximately 80 personnel
who are responsible for transmission and distribution dispatching would not be
transferred, and would remain employed by one or more of the GPU Energy
Companies. (The dispatch operators monitor the demand placed upon the
transmission and distribution system by its users. Employees use switches within
the system to operate the system within the design limits. They also identify
areas of the transmission and distribution grid which are either intentionally
(for repairs for example) or unintentionally (e.g., storms, accidents) taken out
of service. This function routes power to minimize the users who are without
power. It also determines the portions of the grid where service has been
disturbed and directs repair crews to those areas to restore service.) Other
personnel, i.e., those being transferred to GPUS, design, construct and maintain
those systems, but they are not involved in the day-to-day operation.
13. The realignment is not, however, expected to involve the physical
relocation of a substantial number of employees.
14. 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 Company, at cost, when needed. GPUS may
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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. GPUS will employ the facilities and properties of the GPU
Energy Companies in carrying out its responsibilities, and agreements with
nonaffiliated entities will be entered into either directly by the owners of the
generation facilities involved or by GPUS as agent for such companies.
15. 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 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, legal,
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. Although the officers of the GPU Energy
Companies will serve in the dual role as officers of the GPU Energy Companies
and of the GPUS Operations Division, GPU believes that a number of factors will
ensure a continuation of arms length bargaining in intra-system transactions.
First, as officers, they owe fiduciary duties to the GPU Energy Companies they
serve to treat them fairly with respect to intra-system transactions. In
addition, it is anticipated that the Corporate Division of GPUS will, as it does
today, assist in maintaining
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arms length bargaining through the internal audit function described below. Few,
if any, of the officers of that Division will be officers of the Operations
Division. Also, as discussed below under "Controls", Operations Division
officers will have an incentive to aggressively manage the GPU Energy Companies'
costs inasmuch as GPU Energy profitability will be an important component of
such officer's incentive compensation.
16. Exhibit I contains a chart which shows the current organizational
structure of GPUS prior to the consolidation. Exhibit L shows GPUS's structure
after the consolidation.
17. 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.
18. Following the consolidation, individual line crews will be assigned to
work centers for work within a certain geographic territory. Any projects,
whether construction or maintenance, will be scheduled based on the budgets for
each GPU Energy Company. When storms occur, all managers accountable for
reliability across the GPU transmission and distribution system will be involved
in the restoration effort whether their particular service zone is, or is not,
affected by the storm. By conducting the restoration activities with the
information and
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the management personnel needed to make informed decisions, the impact of
reassigning line crews can quickly be determined. In that way, customers
affected by the storm are restored in the shortest possible time with the least
disruption to the priority work in unaffected areas.
19. There are currently approximately 670 employees at GPUS,(2)516
non-union employees at Genco and 219 non-union employees at GPUN. The
realignment is expected to involve the transfer from the GPU Energy Companies to
GPUS of approximately 3,075 union and 1,730 non-union employees, having a yearly
budget payroll of approximately $265 million, as follows:
Union Non-Union Total
----- --------- -----
JCP&L 1,650 240 1890
Met-Ed 625 1220 1845
Penelec 800 270 1070
The non-transferred employees will retain the same job responsibilities and
duties after the realignment.
20. Following the completion of the realignment but subject to the
generation asset divestiture discussed below, the only employees of the GPU
Energy Companies will be as follows:
Transmission/Distribution Dispatch Center 80
Non-Nuclear Generation Operation (union only) 1630
Nuclear Generation Operation (union only) 1100
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(2) In 1991, prior to the shifting of certain functions to the GPU Energy
Companies as described above, GPUS had 1,021 employees.
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21. In anticipation of the sale of all GPU's non-nuclear generation in
1999, the 1630 union employees of the GPU Energy Companies performing operation
and maintenance services may not initially be transferred to GPUS. However, it
is anticipated that any such employees who are not hired by the buyer(s) of the
generation assets, and who remain employed with the GPU Energy Companies and
Genco, would be transferred to GPUS (3). The timing of such transfer may depend
in part on the timing of the sale of GPU's generation assets.
22. Similarly with respect to GPUN, on July 17, 1998, GPU announced an
agreement in principle to sell the Three Mile Island Unit 1 nuclear generating
facility. GPUN is also in the process of determining whether to continue to
operate or to effect an
______
(3) In order to provide buyers with flexibility, GPU does not intend to require
the generation asset buyers to offer employment to all employees presently
in the Genco or GPU Energy Companies' work force. It is expected, however,
that buyers will need to retain many, if not all, of the existing workforce
to continue to operate and manage the generation facilities in a safe,
efficient and reliable manner. It is the GPU Energy Companies' intent to
provide for an effective transition plan which covers all employees
affected by the divestiture. Pursuant to labor agreements with the GPU
Energy Companies' three bargaining union locals, the buyers will be
required to assume the existing collective bargaining agreements and
recognize these unions for collective bargaining purposes (separate
bargaining units may be established for specific generating facilities if
necessary). Buyers may, at their discretion, determine the number of
positions to be filled, but the GPU Energy Companies' bargaining unit
employees must be hired to fill existing bargaining unit positions. With
respect to non-bargaining unit employees, buyers will be obligated to use
their reasonable efforts to hire Genco personnel to the extent employees
are hired by the buyer to operate and maintain the generating plants or to
serve in an administrative/support capacity. The GPU Energy Companies
intend to retain all pension and other assets related to employee benefit
programs accrued through the closing date, and administer these programs
for employees in accordance with accrued plan requirements.
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early retirement of the Oyster Creek nuclear generating facility, the only other
nuclear facility operated by GPUN. Pending the final disposition of the nuclear
generating assets, GPU does not intend to transfer the nuclear operating
personnel of GPUN or the GPU Energy Companies to GPUS.
23. 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).
24. 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 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.
25. The benefit derived from the transfer of the purchasing and inventory
tasks is expected to result from more efficient resource planning because of the
access to on-line, "real time" data relating to material requirements and work
plans and schedules across all of the GPU Energy Companies. The most effective
way to accomplish such resource planning with the SAP software is to consolidate
the inventory tasks into one company. Other configurations would result in
expensive and unorthodox
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modifications to the software, thus jeopardizing the GPU Energy Companies'
ability to upgrade their installation with subsequent improvements provided by
SAP.
26. It is estimated that the inventory consolidation, the implementation
of SAP with its enhanced tools in the areas of materials resource planning and
field planning and scheduling, and strategic vendor alliances and vendor
stocking programs which are facilitated by the SAP system, could result in an
inventory reduction of $8 million over a period of time. It is also expected
that savings will accrue in the form of reduced carrying charges of
approximately $1.2 million annually, associated with the inventory reduction.
Thus, if the inventory tasks are not transferred to GPUS, the potential
detriment will be a loss of these savings.
27. 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, the GPU Energy Companies have determined that
their 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
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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.
28. 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
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integrated tool for the core business processes and their respective
sub-processes. As another example, billing and metering services are grouped
together with call center operations and other direct customer services to
create one business process: Provide Customer Service. Jobs, skills and
management systems are then built around the process, which should result in
operational efficiencies, increased productivity and improved customer service.
29. 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. These efficiencies are thus gained not through the physical
relocation of personnel, but rather through more efficient coordination and
grouping of existing personnel.
30. 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, although it is contemplated that only New
Jersey based employees will be leased, as discussed below. It is expected that
the lease term would be on a year to year basis, and renewed automatically
unless terminated by JCP&L. All union personnel formerly employed by JCP&L are
expected to be leased. The rental will be equivalent to the cost of service of
such employees had
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they not been leased and had the services been provided directly. The leasing of
employees 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.
31. The leasing of employees by GPUS to JCP&L is intended to reduce the
potential for the imposition of incremental New Jersey sales/use tax. In
general, services performed by an employee for his or her employer are exempt
from this tax in New Jersey. Since JCP&L intends to transfer its employees to
GPUS, the employees performing services for JCP&L would no longer be its
employees and the services would not be exempt from sales tax. It has been
estimated that approximately $8 million of additional sales tax would be
incurred annually. However, the New Jersey Division of Taxation has advised
JCP&L that in JCP&L's factual circumstances, if JCP&L leases the employees from
GPUS, the employees will be deemed to be employees of JCP&L for New Jersey
sale/use tax purposes and the services performed would continue to be exempt
such tax.
C. Requested Authorization.
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1. 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
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inventory to GPUS, at cost, in accordance with Rules 90 and 91 under the Act.
2. The inventories consist of approximately 22,000 categories of items
that are grouped into four major areas, namely, Materials & Supplies, Meters,
Substation Items, and Transformers. These items are utilized in all facets of
the operation and maintenance of the transmission and distribution system.
Examples include the infrastructure, i.e., poles, wire, cable, transformers,
meters, etc. which are necessary to provide service, as well as the items that
are required to operate, maintain and support the infrastructure, such as safety
supplies, tools, arrestors, cutouts, fuses and fuse links, substation spare
parts, etc. This inventory is utilized in upgrades to existing electrical
services, system reinforcement to support new load, and repair and/or
replacement of the existing transmission and distribution system.
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, the fees and other
charges of contractors supplying goods and services, and related expenses such
as insurance, taxes, pensions and other employee welfare expenses. In addition,
the Corporate Division of GPUS
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will maintain records of general administrative expenses, which will include the
costs of operating GPUS as a corporate entity.
Whenever possible, 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
and the benefits cannot be directly allocated, 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. The formula will
be applied to those functions that provide support services for the operation of
the GPU Energy Companies and their affiliates, GPUN and Genco. Examples of these
services are human resources, communications, accounting, budgeting, payroll and
the overall general management of the GPU Energy Companies' operation. Use of
the multiple factor formula, which gives weight to more than one measure of the
size or operation of the companies, is appropriate to apply to these types of
services, because no one facet of the GPU Energy Companies' operations is able
to inordinately influence the allocation of the cost. In addition, the
versatility of the multiple factor eliminates the need to maintain a multitude
of factors, which avoids the cost of such an effort. Below are
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examples of the multiple factors, based on 1997 cost and statistical data:
ALLOCATION PERCENTAGE
JC PN ME GPUNC Genco
All 5 39.52 24.44 21.23 9.69 5.12
Companies
Excludes 40.55 26.24 23.52 9.69
Genco
Excludes 46.32 28.85 24.83
Genco and
GPUN
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.
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.
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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) Officer Supervision. 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.
(b) Budgets. 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. These budgets will be prepared by the Finance Sub-Process (as
defined below) based on input from the relevant business
processes/subprocesses. 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
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reviewed by the GPU Energy Boards of Directors and are issued to the
public and state regulatory commissions quarterly.
(c) Billing and Review Procedures. 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,(4)
collectively, "work orders") numbers in accordance with the FERC's Uniform
System of Accounts. The time records system that GPUS will use following
the transfer of the GPU Energy Companies' employees to GPUS will be
"CA-TS" (Cross-Application Time Sheet) from the SAP system and will be
very similar to GPU Energy's current time sheet systems. All employees
will be required to record their hours on the CA-TS timesheet using cost
collectors such as "orders", "cost centers", and WBSs (see footnote 4).
The cost collectors will identify the work performed and the GPU Energy
Company to be billed (direct or allocated). The approval process within
GPUS will require all time reports to be reviewed and approved by an
immediate
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(4) The SAP system has three costs collectors which are equivalent to work
orders: "orders", "cost centers" and "work breakdown structures" ("WBSs").
Orders include work orders, sales orders, internal orders and service
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.
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supervisor before the time record is forwarded to payroll for
processing.
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 that the proper work order number was charged. Pursuant
to controls built into the SAP 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).
GPUS bills to the GPU Energy Companies, which are generated by
the Accounting Sub-Process, are reviewed 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 Operations Division managers for
explanations of unusual items. In general,
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disagreements will be 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 and
Rules 90 and 91 under the Act. The GPUS accounting staff verifies that
every multiple party work order has the correct cost allocation method.
(d) Other Controls. 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. The Internal Auditing Division will continue to provide a
periodic review of GPUS charges. The main objective of Internal Auditing's
review will be to determine whether internal controls over the
distribution billing process are adequate and effective. This would
include a review to assure compliance with SEC and other
23
<PAGE>
applicable regulatory requirements and GPU policies and procedures
pertaining to billing. The specific audit procedures to be utilized will
include interviews, observations, tests, and other procedures deemed
necessary to accomplish audit objectives. The audit procedures will test
the process that ensures costs associated with the services performed by
GPUS on behalf of the GPU Energy Companies are properly authorized,
allocated and tracked. 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. 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.
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.
(e) Incentive Compensation. Finally, an important factor
in determining incentive compensation for GPUS non-union personnel is
the profitability of the GPU Energy
24
<PAGE>
Companies. This should also provide a strong incentive to ensure that
services are provided efficiently and economically.
F. Financial
---------
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 similar to the procedures
currently employed by GPUS, GPUN and Genco.(The initial inventory will be
acquired by GPUS from the GPU Energy Companies with the proceeds of loans from
the GPU Energy Companies which are exempt from Commission authorization pursuant
to Rule 52(b)).
2. 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" basis, calculated at average unit prices by storeroom location,(5)and
will be charged only for materials and fuel actually delivered to the site.
The inventories of the GPU Energy Companies will be purchased by
GPUS, at the actual book cost of the GPU Energy Companies, at December 31, 1998.
The inventories are primarily stored in one of four storeroom locations: two are
located in New Jersey in the JCP&L service territory, and the remaining two are
located in Pennsylvania with a separate storeroom serving each of
- ------
(5) However, certain special or serialized items will be priced on a unit
basis and not average cost.
25
<PAGE>
the Met-Ed and Penelec service territories, respectively. Since it is
anticipated that inventory purchased by a GPU Energy Company from GPUS would
come from the storeroom located in such GPU Energy Company's service territory,
the "repurchase" price thereof will be consistent with such GPU Energy Company's
sale price and in accordance with Rules 90 and 91.
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 level of other expenses to be charged to the GPU
Energy Companies.(6)
- ------
(6) The Commission has previously authorized service companies to perform
transactions with third parties at market rates. See e.g., Central and
South West Services, Inc., HCAR No. 35-26898 (July 21, 1998) (authorizing
service company to use excess resources in its engineering and
construction department to provide engineering, construction,
environmental and equipment maintenance services to non-associate
companies); GPU Generation Corporation, HCAR No. 35-26570 (Sept. 11, 1996)
(authorizing Genco to enter into operation and maintenance agreements with
non-associate companies); Central and South West Services, Inc., HCAR No.
35-26206 (Dec. 28, 1994) (authorizing service company to license and sell
computer programs and provide support services to non-associate
companies); GPU Nuclear Corporation, HCAR No. 35-25464 (Jan. 31, 1992)
(authorizing GPUN to provide consulting and technical services to
non-associate companies.
26
<PAGE>
3. 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 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.
-----------------
1. 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
27
<PAGE>
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. The cost of the SAP computer system will be allocated among the GPU
Energy Companies using the multiple factor formula discussed above.
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-$44 million) will
be recovered through savings in two to three years. The GPU Energy Companies are
directly funding the cost of the SAP system implementation with internally
generated funds.
2. Cost Benefit Analysis.
----------------------
As part of its "scoping and planning" for the SAP system, GPU
conducted a cost-benefit analysis. In sum, the net financial savings of the
system, including the software and hardware and the consolidation of employees
and inventory, is as follows -- projected through 2003 ($ millions):
Implementation Incremental
Savings Costs Costs Net
------- ----- ----- ---
1997 0.0 19.0 0.0 (19.0)
1998 0.0 68.0 0.3 (68.3)
1999 1.6 21.0 2.1 (22.5)
2000 23.3 3.2 20.3
2001 23.7 3.6 20.1
2002 23.7 3.6 20.1
2003 23.7 3.6 20.1
28
<PAGE>
Significant benefits are anticipated through the implementation of an
integrated system. Some of the key benefits include fewer systems and
interfaces, access to real-time information, improved ability to understand
costs and resource utilization, consistent and uniform data, and improved
scheduling and materials management. Ongoing incremental costs ($3.6 millions)
are primarily due to software license fees for SAP.
The benefit derived from the consolidation of purchasing and
inventory comes from the integration of Work Management and Materials and
Services. Substantial benefits are expected from more efficient material
resource planning because of the on-line, real time data access for
up-to-the-minute status of material requirements and work plans and schedules
across all of GPU Energy. This equates to an expected one-time benefit of $8
million in year 2000 based on inventory reductions and an ongoing annual savings
of $1.2 million starting in 2000 based on the carrying cost reductions due to
inventory optimization.
H. Rule 54 Analysis.
-----------------
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
29
<PAGE>
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 June 30, 1998, GPU's
average consolidated retained earnings was approximately $2,135 million.
Accordingly, under the November 5 Order, GPU may invest up to an additional $856
million in EWGs and FUCOs as of June 30, 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.
30
<PAGE>
(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
31
<PAGE>
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.
(ii) 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.
(iii) 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.(7) In addition, GPU will
submit to each such commission copies of any amendments to this
Application, 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
- ------
(6) Penelec is also subject to retail rate regulation by the New York Public
Service Commission with respect to retail service to approximately 13,700
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% of Penelec's total operating revenues.
32
<PAGE>
the Form U5S to be filed for the calendar year in which the
authorization herein requested is granted).
(iv) 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.
(B) GPU's average consolidated retained earnings for the
four most recent quarterly periods (approximately $2,135 million)
represented a decrease of approximately $52.8 million (or
approximately 2.5%) compared to the average consolidated retained
earnings for the previous four quarterly periods (approximately
$2,187 million).(8)
(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
- ------
(8) As discussed in GPU's June 30, 1998 Quarterly Report on Form 10-Q, the
decrease is attributable to an extraordinary charge of $275.1 million
(after tax) as a result of the Pennsylvania Public Utility Commission's
June 30, 1998 restructuring orders on Met-Ed's and Penelec's restructuring
plans.
33
<PAGE>
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.
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 June 30, 1998 consolidated capitalization consists of 42.9%
equity and 57.1% debt. Thus, since the date of
34
<PAGE>
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)
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
- ------
(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.
(10) As discussed in the November 5 Order, GPU incurred a loss for 1997 from
its investments in EWGs and Focus as a result of the 1997 windfall profits
tax imposed on Midlands Electricity, plc.
35
<PAGE>
transactions will not have a material impact on GPU's capitalization or
earnings.
2. The date of the PaPuc Order referred to in the second paragraph
of Item 4 is changed to December 15, 1993.
3. By filing the following additional exhibits in Item 6:
D-2 Copy of Order dated December 15, 1993 of PaPuc.
I Current GPUS Organizational Structure.
J GPUS Structure following consolidation.
K FERC Legal Analysis (Inventory).
L Description of SAP System.
M Public Utility Legal Analysis.
N GPU Internal Reports -- filed separately pursuant
to a request for confidential treatment.
36
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE PUBLIC UTILITY HOLDING COMPANY
ACT OF 1935, THE UNDERSIGNED COMPANIES HAVE DULY CAUSED THIS APPLICATION 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: August 24, 1998
EXHIBITS TO BE FILED BY EDGAR
Exhibit:
D-2 -Copy of Order dated December 15, 1993 of PaPUC.
I - Current GPUS Organizational Structure.
J - GPUS Structure following consolidation.
K - FERC Legal Analysis (Inventory).
L - Description of SAP System.
M - Public Utility Legal Analysis.
Exhibit D-2
PENNSYLVANIA
PUBLIC UTILITY COMMISSION
Harrisburg, PA 17105-3265
Public Meeting held December 15, 1993
Commissioners Present:
David W. Rolka, Chairman
Joseph Rhodes, Jr., Vice Chairman
John M. Quain
Lisa Crutchfield
John Hanger
Affiliated Interest Agreement Between Docket No.
Metropolitan Edison Company, Pennsylvania G-00930355
Electric Company, Jersey Central Power & Light
Company, GPU Service Corporation and GPU
Nuclear Corporation
OPINION AND ORDER
BY THE COMMISSION:
On September 30, 1993, an Affiliated Interest Agreement ("Agreement")
between Metropolitan Edison Company ("Met-Ed"), Pennsylvania Electric Company
("Penelec"), Jersey Central Power & Light Company ("JCP&L"), GPU Service
Corporation ("GPUSC") and GPU Nuclear Corporation ("GPUNC") was filed to become
effective October 30, 1993, setting forth the terms and conditions whereby GPUSC
and GPUNC would furnish management, supervisory and engineering services to
Met-Ed, Penelec and JCP&L ("GPU System Companies"). On October 28, 1993, the
Commission extended the period for consideration of this Agreement to December
31, 1993.
The Agreement is filed in accordance with the requirements of Section 2102 (b)
of the Public Utility Code, 66 Pa. C.S. Section 2102(b).
This Agreement is an update of an Agreement which was approved in an
Order entered October 1, 1982 at Docket No. G-820167. The proposed Agreement
reflects the GPU System Companies understanding and agreement with respect to
additional goods and services.
Examples of additional goods are electric generating, other production,
transmission, distribution, office, administrative
<PAGE>
and general plant materials, supplies and equipment not "in place" or
"installed". With respect to services, examples include, but are not limited to,
reprographic services, restoration, maintenance and repair services for
generation, transmission and distribution facilities, remittance processing
services, treasury services, accounts payable services, use of office,
warehouse, storage and other space and facilities, data processing and other
computer services and legal services.
Consideration for the transfer of goods and services among the GPU
System Companies will be at cost. The transfer of goods and services will not
result in any interruption or curtailment of existing services to the public,
nor will they result in any adverse impact on the rates for service to Met-Ed
and Penelec customers.
The Commission has examined the Application and has determined that the
Contract appears to be reasonable and consistent with the public interest;
however, approval of the Agreement does not preclude the Commission from
investigating during any formal proceeding, the reasonableness of charges
incurred under the Agreement; THEREFORE,
IT IS ORDERED:
1. That the Affiliated Interest Agreement between Met-Ed, Penelec,
JCP&L, GPUSC and GPUNC be and hereby is approved.
2. That approval does not preclude the Commission from investigating
during any formal proceeding the reasonableness of charges incurred under the
Agreement.
BY THE COMMISSION
John G. Alford,
Secretary
(SEAL)
ORDER ADOPTED: December 15, 1993
ORDER ENTERED: Dec. 17, 1993
-2-
Exhibit I
GPU SERVICE, INC.
PRE-CONSOLIDATION ORGANIZATIONAL CHART
Title
- -----
Chairman, President & CEO
Executive Vice President & CFO
Senior Vice President - Financial Controls
Assistant Comptroller
Vice President & Treasurer
Assistant Treasurer
Executive Vice President & General Counsel
Corporate Secretary
Assistant Secretary
Assistant General Counsel
Vice President - Government Affairs
Vice President - Internal Audit
Vice President - Corporate Restructuring
Senior Vice President - Corporate Affairs
Exhibit J
GPU Service, Inc.
Post-Consolidation Organizational Chart
GPU SERVICE, INC.
|
------------------------------------------------------------
| |
CORPORATE OPERATIONS
DIVISION (SEE DIVISION
EXHIBIT I) |
|
DIVISION
PRESIDENT
|
|
DIVISION
VICE
PRESIDENTS
|
|
--------------------------------------------------------
| | | | | |
Processes:
Manage & Manage Manage Develop Provide Provide
Service Financial Energy Business Support Customer
Delivery Performance Risk Opportu- Resource Service
Assets nities
Subprocesses:
| | | | | |
-Telecommu- -Budget & -Supply -Communi- -Human -Customer
nications Cost Planning cations Resources Care
-Transmission Analysis -Project -Gov't & -Labor -Revenue
-Distribution -System Customer & Reg. Relations Operating
-Infrastruc- Accounting Choice Affairs & Safety -Project
ture ser- -Rates (PA) -Power NJ -Environ- Enterprise
vices -Rates (NJ) Con- -Business mental
tracts Develop- Affairs
-Resource ment -Materials
Manage- -Organiza- and
ment tional Services
Develop- -Information
ment Technology
EXHIBIT K
---------
FERC Analysis (Inventory Transfers)
-------------
Section 203 of the Federal Power Act [provides in relevant
part that "[n]o public utility shall sell...the whole of its facilities subject
to the jurisdiction of the commission, or any part thereof of a value in excess
of $50,000...without first having secured an order of the [Federal Energy
Regulatory] Commission authorizing it to do so." For the following reasons, GPU
does not believe it likely that the FERC would assume jurisdiction under this
provision over the proposed reorganization.
First, the only aspect of the inventory realignment that GPU
believes might conceivably implicate the FERC's jurisdiction under section 203
is the contemplated transfer of inventories from the GPU Energy Companies to
GPUSC. The FERC's jurisdiction would thus turn on the question of whether the
inventories constitute "facilities subject to the jurisdiction of the [FERC]."
Facilities subject to the FERC's jurisdiction include transmission lines and
other facilities used to transmit electricity in interstate commerce. See Jersey
Central Power & Light Co. v. FPC, 319 U.S. 61 (1943). No transmission facilities
that are used for that purpose will be transferred as part of the
reorganization.
Second, GPU does not believe that the FERC would consider
equipment in inventory, but not in service, to constitute such facilities. GPU
is not aware of any case in which the FERC has exercised jurisdiction over a
public utility's transfer only of items held in inventory that were not then and
had never been in service, even if those items would have been considered
"transmission facilities" once they were placed in service. The FERC's only
reference to the applicability of section 203 to inventories of equipment that
was not in service concerned a transaction in which in-service jurisdictional
facilities were being transferred. See Virginia Electric & Power Co., 25 FERC P.
61.261 (1983).
Third, the exercise of jurisdiction by the FERC over the
transfer of inventories in this instance would be inconsistent with its past
practice involving the GPU Energy Companies. On prior occasions when one of the
GPU Energy Companies sold equipment not in service, no approval was required or
obtained under section 203. The FERC was aware of these transactions, because it
granted approval to the book entries memorializing the transactions, but did not
require an application under section 203.
<PAGE>
Finally, of the inventory being transferred, only a limited
number of transformers and meters would even be considered transmission
facilities once they are taken from inventory and placed in service. This
realignment thus involves no substantial transfer of transmission inventory and
there is no reason to expect the FERC to modify its past practice.
EXHIBIT L
---------
Description of SAP System
-------------------------
Called "Project Enterprise", SAP is intended to provide GPU
with the tools it needs to successfully manage its work and to provide a high
level of customer satisfaction. The effort is in direct support of GPU's
strategic goal to become the best at the delivery of electricity services (i.e.,
infrastructure) and to implement world class customer service.
The SAP system is designed to improve the information basis
for business decisions, improve company flexibility and adaptability to the
changing business environment in order to respond to electric industry
deregulation and impending competition and, finally to increase the focus on
customer satisfaction.
Project Enterprise is intended to enhance GPU's ability to
monitor work and asset performance. It will provide real time project planning,
scheduling and tracking, thereby maximizing cost effectiveness and minimizing
facility down time.
SAP software will provide the core processes of Manage and
Service Delivery Assets, Provide Customer Service and Manage Energy Risk with
new tools to improve cost planning, time scheduling and work force capacity
planning. The various SAP modules support all activities associated with
planning and processing construction, maintenance and service requests. These
activities range from urgent repair orders when breakdowns occur to scheduling
maintenance and inspection tasks. During order preparation, maintenance requests
are analyzed according to type and urgency, responsibilities are determined,
deadlines set, time plans and cost projections produced, and budget releases
granted.
When an order is placed, SAP integrates the tasks in capacity
planning, material reservation and purchase order placement while providing the
necessary field documents to perform the work. After completion, the order is
settled to asset and cost accounts according to regulations and is archived and
available for analysis and statistical purposes.
The core processes rely on the following functionality provide
by various SAP modules:
WORK MANAGEMENT
- -- Improve the ability to report project costs at different levels through the
definition of structures and multiple costs objects within SAP
<PAGE>
- -- Improve the ability to monitor maintenance costs and manage external
contractors at a sub-station level
- -- Achieve real time cost reporting to permit effective monitoring and
modification to project/program plans and schedules
- -- Improve the quality and consistency of designs through the use of
compatible units that can be verified against historical performance and
updated accordingly
- -- Improve resource allocation/utilization and capacity evaluation/leveling
through the use of SAP work centers, work breakdown structures and
network/inter-dependency scheduling
- -- Manage all assets (equipment) from a single SAP database that defines the
technical structures and maintains historical usage and problem information
CUSTOMER CARE
- -- Provide a "front office" environment that guides the customer
representative through the business process that reduces errors while
permitting the representative to focus on the customer rather than the
procedure
- -- Support real time posting of information to expedite the customer's request
- -- Provide the customer representative real time information to act as the
single point of contract to satisfy the customer's request/inquiry
- -- Permit the scheduling of work by the customer representative
- -- Support the move to deregulation by providing the customer choices on
energy suppliers, flexible billing and accounts receivable options
The ability to integrate the major processes and support processes will
provide for increased productivity and reduced costs. The ability to get real
time access to the cost of labor, material and resources for a project, work
center, region or company will help to ensure that the right work is getting
done at the right time with the right resources. It will also allow the for
timely communication to customers of customer information and scheduled work
information.
SAP's strengths lie not solely in the individual elements but in the
dynamics of the combination. The result is a system that provides smooth
integration between the business processes, people and technology. It eliminates
the non-value-added work inherent in hand-offs and departmental focus, and
replaces it with processing that emphasizes operational interaction and
-2-
<PAGE>
teamwork. The result is an entire organization that is more attuned to the
competitive needs of managing in a deregulated marketplace. The core processes
of Manage & Service Delivery Assets, Provide Customer Service and Manage Energy
Risk integrate significantly with the Provide Support Service and Manage
Financial Performance support processes in SAP, as follows:
PROVIDE SUPPORT SERVICE
- -- Logistics Subprocess
-- Provide accurate and accessible equipment and material availability
data to planners and schedulers
-- Link the work plans from the master schedule to the supply, delivery
and stock of equipment and material
- -- Human Resources Subprocesses
-- Process timesheets and integrate that information to projects, cost
collectors and orders
-- Provide accurate workforce information such as training,
qualifications, special skills and availability to the work
management planning and scheduling activities
- -- Materials and Service Subprocesses
-- Create and maintain purchase requisitions, material and services
purchase orders and receipts
-- Reduce construction and maintenance delays through fully integrated
materials resource planning
MANAGE FINANCIAL PERFORMANCE
- -- Financial Subprocesses
- -- Provide the ability to establish a budget, acquire funds to perform
construction and maintenance activities, measure performance and
profitability
- -- Ensure accurate recording for all of the regulatory requirements
The following summary technical description of SAP's software modules has
been taken from materials supplied by SAP regarding SAP's "R/3" software which
GPU has purchased:
Enterprise Controlling. Allows you to monitor your utility's financial
performance. A submodule, the Executive Information System, is a powerful
management tool that displays information
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<PAGE>
in an easy-to-use graphical format for management decision support.
Investment Management. This comprehensive module expands options in capital
investment controlling, allocates budgets and plans costs for capital investment
activities.
Controlling. A powerful cost accounting and management reporting module that
includes extensive activity-based costing and profitability analysis
capabilities.
Human Resources/Payroll. Meets the requirements of reporting and administrative
aspects of HR management. Controls labor costs through workforce planning.
Work Management. A tightly integrated approach that allows unprecedented work
management. Whether generated at a plant or by a customer request, a complete
work life cycle can be tracked and managed. Included are quotes, cost estimates,
tasks, capacity planning, commitments, history and analysis. All complemented by
interfaces to popular GIS and AM/FM systems.
Treasury. Active cash and treasury management. Components include electronic
banking, planning and portfolio, liquidity control and risk evaluation.
Financial Accounting. A complete, utility-oriented accounting system capable of
handling multiple ledgers - legal and regulatory - as well as accounts payable
and accounts receivable.
Asset Management. A comprehensive asset management system that supports utility
requirements such as unitization and grouped assets.
Industry Solution Utilities. This customer information and billing system,
IS-U/CIS will monitor consumption sales for all sectors and services of a
utility and will offer complete integration to R/3 accounting and logistics
modules (currently under development). IS-U/FERC helps streamline cumbersome
regulatory reporting requirements.
SAP Business Workflow. A powerful capability that allows automation of your
business processes to increase your efficiency.
Materials Management. Lowers utility inventory and procurement costs with tools
for handling purchasing, inventory and warehousing. Analysis tools are available
to evaluate the performance of procurement and your vendors, allowing you to
optimize your material management processes.
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EXHIBIT M
---------
Public Utility Legal Analysis
I. Federal Power Act
-----------------
Following the reorganization, the employees who will remain in
the GPU Energy Companies will be responsible for the dispatching of electricity
over the transmission and distribution systems owned by those companies.
Included in this group will also be those employees who will identify outages
and arrange for the identification and resolution of storm and other
disaster-related damage. In performing these functions with respect to the GPU
Energy Companies' transmission facilities, those employees will take direction
from PJM Interconnection, LLC ("PJM"), which has been found by the FERC to be
the entity with "control over the operation of the interconnected transmission
facilities within its region," including those of the GPU Energy Companies.
Pennsylvania-New Jersey-Maryland Interconnection. 81 FERC P. 61.275, 62.268
(1997). In addition, officers of the GPU Energy Companies will be responsible
for requesting GPUS personnel to perform specific services, including those
relating to the construction and maintenance of transmission and distribution
facilities.
Under these circumstances, GPUS will not be in the position of
"operating" the GPU Energy Companies' transmission assets and, therefore, will
not become a "public utility" as defined in Section 201 of the Federal Power
Act.(1) In addressing the question of whether an entity "operates" transmission
facilities for purposes of rendering that entity a public utility, the FERC has
looked to whether the entity has "control and decision making authority" over
the facilities, or whether it acts as the agent of another party that wields
such authority, to carry out that party's instructions. See Prior Notice and
Filing Requirements Under the Federal Power Act, 64 FERC P. 61.139, 61.993,
clarified, 65 FERC P. 61.081 (1993), Bechtel Power Corp., 60 FERC P. 61.136,
61.572 (1992). GPUS will not be in the position either of directly manipulating
the GPU Energy Companies' transmission facilities or of exercising control over
the operation of those facilities. The former activities will be conducted by
GPU Energy Companies' personnel. The latter function is assumed by PJM. GPUS
will be undertaking the kinds of activities performed by other systems' service
company subsidiaries, which the FERC has long acknowledged without considering
those companies to be public utilities. See, e.g., IES Utilities, Inc., 81 FERC
P. 61.187, 61.819-20 (1997); Wisconsin Electric Power Co., 79 FERC P. 61.158
(1997).
- ------ (1) Section 201 defines a public utility as "any person which owns or
operates facilities subject to the jurisdiction of the [Federal Energy
Regulatory] Commission."
<PAGE>
The GPU Energy Companies will continue to be subject to FERC
jurisdiction as public utilities since they will own and operate the
jurisdictional transmission facilities.
II. Public Utility Holding Company Act of 1935 ("Act")
--------------------------------------------------
GPU does not believe that GPUS will be an "electric utility company"
as defined in the Act. However, the GPU Energy Companies, which will continue to
own the GPU System's transmission and distribution assets, will continue to be
electric utility companies as defined in the Act.
Section 2(a)(3) defines electric utility company as "any company which
owns or operates facilities used for the generation, transmission or
distribution of electric energy for sale." GPUS will own only inventory and will
not hold any assets which are, prior to the sale thereof to the GPU Energy
Companies, "used" for any of the foregoing purposes; accordingly, GPUS will not
be an owner of electric utility assets within the meaning of the foregoing
definition.
GPU also does not believe that GPUS will be an operator of
distribution or transmission assets. The Commission has recently had occasion to
consider whether entities which provide certain day-to-day operational services
are in fact "operators" within the meaning of Section 2(a)(3) of the Act. See,
e.g., Houston Industries Incorporated (available June 18, 1997); Wolf Creek
Operating Corp. (available December 11, 1995); Ebasco Services, Inc. (available
September 16, 1982). For example, in Wolf Creek, the Commission evaluated
whether a company which was established to operate a jointly owned nuclear
generating station would be deemed a public utility. In that case, operation of
the station was subject to the decision making authority of the owners, and the
operator provided the day to day operation of the plant, maintenance and
administrative services. The operator had "no independent decision making
authority over the station, other than authority delegated to it by the owners."
In addition, the operator did not sell electricity or receive revenues from the
sale of electric energy or own the fuel supply, and its costs of operation were
paid by the owners in proportion to ownership share. Expenditures were based on
budgets approved by the owners.
GPUS' authority to provide day-to-day operational services will be
delegated to it by the GPU Energy Companies pursuant to the services agreement;
however, GPUS will be subject to the ultimate control and decision making
authority of the GPU Energy Companies, including through the budget approval
process (as described in Item 1). Moreover, as described in Item 1 and in part 1
of this Exhibit, GPUS will in fact not be exercising day-to-day operational
control over the GPU System's transmission and distribution facilities, which
control will remain with the
<PAGE>
dispatch employees of the GPU Energy Companies and PJM. As in Wolf Creek, GPUS
will not be paid a fee, but will only receive reimbursement for its cost of
service. GPUS will also not own the electricity produced by the facilities or
the revenues therefrom. (In addition, ownership of the fuel supply is irrelevant
since GPU is divesting all generation assets.)
Thus, for the foregoing reasons, GPU does not believe that GPUS will
be an electric utility company as defined in the Act. GPU also believes that,
because GPUS will be subject to Commission regulation as a system service
company, there are no important policy reasons which would necessitate such a
finding.
