Amendment No. 4 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
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(Names of companies filing this statement
and addresses of principal offices)
GPU, INC.
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(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
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(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 heretofore amended, 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.
4. This functional consolidation has produced, and is expected to continue
to produce, cost savings and increased operational synergies through the
elimination of previously
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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% 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 Purdon's Pa. C.S.A.
ss.2801 et seq.
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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 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
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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 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
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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."
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
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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 (e.g., for maintenance) 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. The transfer of employees will not
impact the responsibility of the boards of directors and officers of the GPU
Energy Companies for overseeing and managing the operations of such companies.
Unless and until the Commission otherwise determines by order or "no-action"
letter, GPUS will be deemed an electric utility company (as an operator) as
defined in Section 2(a)(3) under the Act.
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
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would be acquired and inventoried by GPUS and sold to the appropriate GPU Energy
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. 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 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
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transactions. In addition, it is anticipated that the Corporate Division of GPUS
will, as it does today, assist in maintaining 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 officers' 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
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particular service zone is, or is not, affected by the storm. By conducting the
restoration activities with the information and 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
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JCP&L 1,650 240 1890
Met-Ed 625 1220 1845
Penelec 800 270 1070
It is anticipated that the non-transferred employees will retain substantially
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:
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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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Transmission/Distribution Dispatch Center 80(3)
Non-Nuclear Generation Operation (union only) 1630
Nuclear Generation Operation (union only) 1100
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(4). The timing
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(3) The personnel based in the New Jersey dispatch center will be employees of
JCP&L and the personnel based in the Pennsylvania dispatch center will be
Met-Ed employees.
(4) On August 3, 1998, GPU announced that it had reached an agreement to sell
its 50% interest in the Homer City Generating Station to Edison Mission
Energy, and on November 9, 1998, GPU announced that it had signed
agreements to sell 23 generating stations to Sithe Energies, Inc. and its
20% interest in the Seneca Station to FirstEnergy Corporation. Sithe
Energies will also acquire Genco. In order to provide the buyers with
flexibility, GPU did not obligate the buyers to offer employment to all
employees presently in the Genco or GPU Energy Companies' work force. It
is expected, however, that the 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). The 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, the 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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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 October 15, 1998, GPU announced
that it had signed an agreement to sell to AmerGen Energy Company, LLC 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 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
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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.
26. It is estimated that the implementation of SAP with its enhanced tools
for materials resource planning, field planning and scheduling, in addition to
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 (as discussed more fully in paragraph G(2) below). With respect
to vendor stocking programs, SAP will facilitate the interchange of electronic
data necessary to support these programs, which are intended to move the
materials necessary to perform the work from the vendor directly to the job,
with the result of reducing GPU Energy inventory, generally to emergency stock
levels. 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. The most effective way to accomplish these savings with the
SAP software is to consolidate the inventory tasks into one GPU System company
(i.e., GPUS). While it would be possible to modify or customize SAP to enable
the inventory tasks to continue to be performed separately by each GPU Energy
Company and at the same time realize such savings, such customization would have
two significant detriments, as follows:
(1) GPU Energy would incur an initial additional up-front
customization cost, estimated at $1.5 - $2 million, to construct and test
the modifications to SAP; and
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(2) A customized configuration of SAP would jeopardize the GPU
Energy Companies' ability to cost-effectively upgrade their system in the
future with subsequent improvements provided by SAP. (As discussed in
paragraph 11 above, a major benefit of the "off-the-shelf" feature of SAP
is that it enables the quick and cost-effective installation of upgrades
to reflect "best industry practice" approaches to information technology.
Updates are offered frequently by SAP and, indeed, in the last upgrade,
SAP changed 600 of the 2000 transactions structures included in GPU
Energy's SAP system.) The Applicants estimate that attempting to adopt
these future upgrades with non-standard alterations, as would be required
if inventory tasks were not consolidated in GPUS from the outset, could
result in an additional $1.5-$2 million expense for each future upgrade to
SAP which impacts inventory. Given these potential detriments GPU Energy
elected to consolidate the inventory tasks into GPUS and not to customize
SAP. 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:
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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.
28.(a) 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
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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. 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.
28.(b) To summarize, prior to emphasizing business processes, GPU Energy's
organizational focus was primarily on individual functions (i.e., engineering,
line work, etc.) and geography, with Directors accountable for doing all the
field activities within a given area. GPU Energy will not be engaging in any new
work with this change, but instead the workforce will be structured around
completing a "process" from beginning to end.
28.(c) For example, prior to the realignment around processes, field
activities for meter reading and collections were under the responsibilities of
Regional Directors in the engineering and Operations functions, and remittance
was under the Treasury function. Now the entire billing and collection process
- -- from the time the meter is read, through billing, remittance and collections
- -- is under one manager's organization. Efficiencies are gained by having all
employees
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accountable for the common goal of billing and collecting monies owed to the
company, without having resources fragmented and subject to reallocation to
other initiatives local management may deem appropriate (as was the case under
the functional approach). Resources can be reallocated within the process to
effectively complete or improve the process because they are within the same
organization.
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 is focused on and committed to the target of that
process - a product or service delivered to satisfy, or even exceed, customer
expectations.(5) By grouping people who work in a process into one organization,
hand-offs are reduced, thus creating more efficient coordination within the
company, with less work done to inspect, review, evaluate, and summarize, and
less time to process the work. Grouping does not necessarily imply
centralization, but rather that employees who are working toward delivering a
specific service to the customer (e.g., new service connection) or a desired
outcome for the company (e.g.,
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(5) When work is "handed-off from one department to another, the work is
inspected, reviewed, evaluated, and/or summarized by the "handing-off"
department before delivery of the work to the receiving department. The
receiving department, in turn, will inspect, review, evaluate and/or plan
its next steps. Not only may these hand-offs not be adding value to the
customer, they can slow down the process. There is also a gap from the
time one department concludes the work and the next department commences
its work. Errors in communications are also a by-product of handing off
work between departments, which may cause rework or delays.
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revenues received) work in the same organization to minimize unproductive
hand-offs.
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 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 will not change the legal
employer of the employees (which will remain GPUS) and is intended solely to
reduce the potential for the imposition of incremental New Jersey sales/use tax.
By way of background, 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 cease to 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
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of Taxation ("NJDOT") 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 from such tax. While it would be possible
to customize SAP in order to permit the JCP&L-designated employees to remain as
JCP&L employees (and not be consolidated into GPUS and then leased back), such
customization would result in the same two detriments discussed in paragraph 25
above in the case of inventory customization, namely: (1) an up-front
customization cost estimated at $1.5 - $2 million, plus (2) additional costs
estimated at $1.5 - $2 million to customize each future SAP upgrade.(6)
Management thus determined that the most cost-effective way to avoid the sales
tax in New Jersey was to consolidate all employees (including JCP&L employees)
into GPUS and lease the JCP&L-designated employees back to JCP&L, and not to
customize SAP.
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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(6) The $1.5 - $2 million up-front cost and the $1.5 - $2 million estimated
cost to customize future upgrades, are the aggregate estimated
customization costs, irrespective of whether the customization involves
inventory, employees or both.
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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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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 an Operations Division service is rendered for the benefit of
two or more companies and the benefits cannot be directly charged, the costs
will be shared by the receiving companies in proportion to the average of: (1)
gross distribution plant, (2) energy delivered to ultimate customers 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 formula eliminates the
need to maintain a multitude of factors, which avoids the cost of such an
effort.
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Below are examples of the multiple factors, based on 1997 cost and statistical
data:
Multiple Factor Formula Allocation Percentages
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JC PN ME GPUNC Genco
All 5 Companies 39.52 24.44 21.23 9.69 5.12
Excludes Genco 40.55 26.24 23.52 9.69
Excludes Genco and 46.32 28.85 24.83
GPUN
When a Corporate Division service which is principally utilized only
by the GPU Energy Companies (and/or GPUN and Genco) cannot be directly charged,
the multiple factor allocation formula described above will be utilized. In
cases when a Corporate Division service is also utilized by other GPU System
Companies and cannot be directly charged, the cost thereof will be allocated
based on the direct payroll cost ratio formula.(7) This formula is based on the
amount of payroll and payroll overheads directly charged to individual GPU
System Companies as a percent of the total payroll and payroll overheads charged
to all GPU System Companies including non-utility subsidiaries. The direct
payroll cost ratio formula, which will be a new allocation
- --------
(7) GPUS will not utilize any allocation formulas (or suballocations including
suballocations of the 3/5 multiple factor formula) other than (i) those
set forth in this Application and (ii) a suballocation of the multiple
factor formula for charges to be allocated between Met-Ed and Penelec,
without providing the Commission advance notice by submission of a 60-day
letter. For example, allocation methods currently on file with the
Commission relating to generation will no longer be used by GPUS,
including the size factor, conventional steam capacity, nuclear steam
capacity and combustion turbine capacity, unless a 60-day letter has been
submitted.
21
<PAGE>
formula for GPUS, will equitably allocate the costs of Corporate Division
services to all GPU System Companies since the bulk of the allocated costs
associated with the Corporate Division is represented by payroll.
A comparison of the new allocation methods and the allocation
methods previously used is illustrated by the table filed as Exhibit P hereto.
Among other things, the comparison shows for 1998, using budgeted dollars, that
the new allocation will result in a reduction of approximately $4.8 million in
allocated charges which were borne by the GPU Energy Companies.
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.
22
<PAGE>
E. Controls
-- --------
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
24
<PAGE>
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.
(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,(8)
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 8).
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
- --------
(8) 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.
<PAGE>
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.(9) (The
- --------
(9) GPU Energy is developing formal written procedures which would be utilized
by the Finance Sub-Process in this review process. GPU Energy expects to
finalize these procedures by March 31, 1999, and will file a copy of the
procedures in this docket, as an exhibit to a Certificate Pursuant to Rule
24.
25
<PAGE>
Finance Sub-Process reports to the comptroller of the GPU Energy Companies.)
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, 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.
(The allocation methods will also be reviewed by the GPUS Corporate Division
accounting department, as well as by the Internal Auditing Division of the
Corporate Division, as discussed below.) 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
26
<PAGE>
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, initially on a two - year cycle (which, following the first
cycle, may be changed to a three-year cycle). The main objectives of
Internal Auditing's review will be to determine whether internal controls
over the distribution billing process are adequate and effective, as well
as to review the allocation methods then in effect and the application of
those methods. This would include a review to assure compliance with SEC
and other 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 Director of Auditing will
continue to have open and direct access to the Chairman
27
<PAGE>
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 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 in an aggregate amount not exceeding $60,000,000, with the actual
principal amounts for each GPU Energy Company determined based on inventory
levels at December 31, 1998. Such loans would be payable on demand and would
bear interest at each GPU Energy Company's average short term interest rate (for
1997, such rate was 5.82% for JCP&L, 5.70% for Met-Ed and 5.78% for Penelec). 28
<PAGE>
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 for identical items of
inventory by storeroom location,(10) and will be charged only for materials and
fuel actually delivered to the site. The cost assigned by GPUS to each item of
inventory acquired by bulk purchase, and utilized to calculate the average unit
price of such item for the relevant storeroom, would be identical (regardless of
the storeroom location to which such item was shipped).
The normal turnover of inventory items is 8-12 months. On occasion,
inventory may be transferred among storerooms, or to a GPU Energy Company from a
storeroom not within its service territory. The decision to make such transfers
depends on where the inventory is most available and overall sourcing/delivery
strategies. While unit price may vary among storerooms, such variances are not
significant (due to centralized purchasing practices which have been in use for
several years by the GPU Energy Companies) and are not a factor in such
decision. The inventories of the GPU Energy Companies will be purchased by GPUS,
at the actual book cost of the GPU Energy
- --------
(10) However, certain special or serialized items will be priced on a unit
basis and not average cost. Only a minor portion of the inventory would be
priced in this manner.
29
<PAGE>
Companies, at December 31, 1998.(11) 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 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. For example, assume the following are the average unit prices on December
31, 1998 for cable and arrestors located in the Forked River Regional Warehouse
in New Jersey:
Unit Price Quantity Dollars
---------- -------- -------
Cable $.828/ft 125,000 ft $103,500.00
Arrestor $20.25 550 $ 11,137.50
Under this example, GPUS would acquire the 125,000 feet of cable and 550
arrestors from JCP&L for $103,500 and $11,137.50, respectively.
Assume further that on January 10, 1999, GPUS acquired from third parties
25,000 feet of new cable at $1.00/ft and 200 arrestors at $18 each, and shipped
same to the Forked River Regional Warehouse. The new average unit prices for the
cable and arrestors sold to JCP&L by GPUS from that storeroom would be
- --------
(11) The book value of the inventory at December 31, 1998 was approximately
$49 million.
30
<PAGE>
determined as follows:
New
Average
Unit Price
----------
Cable: (125,000 @ .825/ft) + (25, 000 @ 1.00/ft)/$150,000 = $ .86
Arrestor: (550 @ 20.25) + (200 @ 18)/$750 = $ 19.65
GPUS will not 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 (provided that sales of excess inventory would also be
made at prices which are not less than GPUS' cost, unless the Commission
otherwise authorizes) and any profits resulting therefrom will be applied to
offset the cost of capital to be charged to the GPU Energy Companies.(12)
Applicants believe that sales of excess inventory will occur only
infrequently.(13)
- --------
12 See 17 CFR 256.01-2
13 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).
31
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
32
<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.(14) (It is anticipated that the savings
will be shared in the following approximate percentages: 46% by JCP&L, 25%
by Met-Ed and 29% by Penelec, estimated based on the allocation factors
discussed in paragraph D of Item 1.) 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. As discussed below,
the GPU Companies also estimate that the aggregate cost of the implementation
($108 - $115 million) will be recovered through savings by year 2005. The GPU
Energy Companies are directly funding the cost of the SAP System with
internally generated funds inasmuch as the GPU Energy Companies are the only
GPU System Companies currently receiving any significant benefit from the SAP
System. If in the future,
- --------
(14) These savings are the basis for, and a more updated estimation of, the $18
million of savings referred to in Strategic Plan for GPU Energy Core
Information Systems filed in Exhibit N.
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<PAGE>
other GPU System Companies utilize the SAP System in any significant manner, GPU
would allocate to such companies an equitable share of the costs and savings
based on the facts and circumstances existing at that time.
2. Cost Benefit Analysis.
As part of its "scoping and planning" for the SAP system, GPU
conducted a cost-benefit analysis. In sum, the net financial savings of the
system, including the software and hardware and the consolidation of employees
and inventory, is as follows -- projected through 2005 ($ millions):
Annual
Costs
Gross (excluding Net Net
Annual Implementation Implementation Annual Cumulative
Savings(15) Costs Costs) Savings Savings
----------- ----- ------ ------- -------
1997 $ 0.0 $19.0 $0.0 ($19.0) ($ 19.0)
1998 $ 0.0 $68.0 $0.3 ($68.3) ($ 87.3)
1999 $ 1.6 $21.0 $2.1 ($22.5) ($109.8)
2000 $23.3 $3.2 $20.3 ($ 89.5)
2001 $23.7 $3.6 $20.1 ($ 69.4)
2002 $23.7 $3.6 $20.1 ($ 49.3)
2003 $23.7 $3.6 $20.1 ($ 29.2)
2004 $23.7 $3.6 $20.1 ($ 9.1)
2005 $23.7 $3.6 $20.1 $11.0
- ----------------
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
- --------
(15) GPU estimates that the savings will be shared in the following
percentages: JCP&L - 46%; Met-Ed - 25% and Penelec - 29%, estimated based
on the allocation factors discussed in paragraph D (1) of this Item 1.
34
<PAGE>
and materials management. The implementation costs of $19 million in 1997, $68
million in 1996 and $21 million in 1999 provide the basis for the $108 - $115
million aggregate cost estimate described in paragraph G.1 above. The $23.7
annual savings which begin in year 2001 is comprised of the following:
$20 - Labor (25% from elimination of information technology
positions; 50% from reduction in use of independent
contractors; 20% from reduction in overtime; 5% from
reduction in management positions)
$ 1.2 - Reduction in inventory carrying cost
$ 2.5 - Reduction in information-technology hardware
and licensing/maintenance fees relating to software
being replaced by SAP.
---------
$23.7 - Total(16)
Ongoing incremental costs ($3.6 million) 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 (and not from the consolidation of inventory storerooms which will
remain in four locations as discussed above). 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 (i.e., reducing
by $8 million the amount of inventory to be purchased in
- --------
16 The total does not include the $8 million reduction in inventory levels.
35
<PAGE>
2000) and an ongoing annual savings of $1.2 million starting in 2000 based on
the carrying cost reductions due to inventory optimization. The $8 million has
been estimated based on benchmark data of savings experienced by other
comparable users of SAP and has not been specifically allocated among the GPU
Energy Companies. However, GPU believes the savings will likely be experienced
in proportion to overall inventory levels as of the end of 1997 as follows:
47%-JCP&L, 23%-Met-Ed and 30%-Penelec.
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 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
36
<PAGE>
which it may invest in EWGs and FUCOs. At June 30, 1998, GPU's average
consolidated retained earnings was approximately $2,135 million and GPU's
aggregate investment in EWGs and FUCOs was approximately $1,279 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.
(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;
37
<PAGE>
(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
38
<PAGE>
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.(17) 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 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.
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(17) 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.
39
<PAGE>
(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).(18)
(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
- --------
(18) 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.
40
<PAGE>
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 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.(19)
- --------
(19) 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.
41
<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.(20)
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 June 30, 1998 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.
2. By filing the following additional exhibits in Item 6:
B Revised Form of New Services Agreement
F-1 Opinion of Berlack, Israels & Liberman LLP
F-2 Opinion of Ryan, Russell, Ogden & Seltzer
F-3 Opinion of Ballard, Spahr, Andrews & Ingersoll LLP
- --------
(20) 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.
42
<PAGE>
D-2(a) Mutual Assistance Agreement(21)
H GPU actual and pro forma capitalization at June
30, 1998.
P Analysis of New Allocation Formulas
- --------
(21) GPU Energy does not charge any construction costs pursuant to Rule 90(b),
which is quoted on Attachment 1 to this Agreement.
43
<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:/s/ T. G. Howson
--------------------
T.G. Howson
Vice President and Treasurer
Date: January 22, 1999
44
EXHIBITS TO BE FILED BY EDGAR
Item 6:
Exhibits
B - Revised Form of New Services Agreement
D-2(a) - Mutual Assistance Agreement
F-1 - Opinion of Berlack, Israels & Liberman LLP
F-2 - Opinion of Ryan, Russell, Ogden & Seltzer
F-3 - Opinion of Ballard, Spahr, Andrews & Ingersoll LLP
H - GPU actual and pro forma capitalization at June
30, 1998.
P - Analysis of New Allocation Formulas
EXHIBIT B
GPU SERVICE, Inc.
300 Madison Avenue
Morristown, New Jersey 07962
SERVICE AGREEMENT
As of --------------
TO: [Insert name and address of 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. (a) In addition to the services provided to you under Section 1,
Service Company has and will maintain a staff trained and experienced in the
analysis and evaluation of investment opportunities and their structure and
implementation.
(b) Service Company also will, after consultation with You
concerning services to be rendered pursuant to your request, arrange for
services of non-affiliated experts and consultants.
2
<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 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. In providing services related to the operation and management of
utility facilities and the handling and management of utility-related inventory,
materials and services, if you so request, Service Company employees performing
such Operations Division services and functions will be leased to You. The lease
of such employees will be at the actual cost thereof as provided in Section 4.
3
<PAGE>
6. An accounting of services performed will be rendered as soon as
practicable after the close of each month.
7. 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 or pursuant to other mutually agreeable procedures.
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.
8. 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. This agreement will also be subject to termination or modification
at any time if and to the extent its performance may conflict with any federal
or
4
<PAGE>
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 its execution and delivery of performance.
GPU SERVICE, INC.
By:
-------------------------
Name:
-------------------------
Title:
------------------------
Accepted:
[Company]
By: ----------------------------
[Name]
[Title]
5
<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.
Customer and Revenue Cycle Services.
- ------------------------------------
Provide customer service and revenue cycle services including billing,
meter reading, bill printing, collections, responding to and processing customer
complaints, inquiries and claims, and customer call center services and
remittance processing.
6
<PAGE>
Design Services.
- ----------------
The design of, and preparation of specifications and standards for,
transmission and distribution facilities; technical advice, supervision,
planning, research, and testing of such facilities and of specialized technical
equipment.
Executive and Administrative.
- -----------------------------
Management, administrative and consulting services in connection with
utility operations and 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.
Information Technology Services
- -------------------------------
Manage, maintain and operate computer operations centers, data processing
hardware and software, information systems design
7
<PAGE>
and development, and procurement of equipment, hardware, software and related
information technology and systems services.
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.
Legal.
- ------
Services related to general corporate legal matters and affairs including
supervision of inside and outside counsel legal services.
8
Personnel.
- ----------
Assistance relating to wage and salary administration, employment
procedures and policies, employee training and safety and recruitment.
Public Information and Relations.
- ---------------------------------
Services relating to information to and relations with the public,
including customers, security holders, employees, financial analysis, rating
agencies, federal and state regulations, investment firms and employees.
Purchasing and Storing.
- -----------------------
Services with respect to purchase and storing of materials, supplies,
equipment and fuel. Inventorying same for resale to associate companies.
Rates and Research.
- -------------------
Review, design, interpretation, analysis and other services relating to
rates and rate structure; assembly of data and coordination of presentation for
rate proceedings; preparation and review of economic and depreciation studies;
budget analyses. Services relating to research of financial and investment
opportunities and ways to utilize capital resources.
9
Research and Development.
- -------------------------
Services relating to research and development of facilities and uses
involved in the conduct of electric utility operations.
System Planning and Development.
Planning and other services for supply of electric power, and negotiation
of contracts therefor; load and capacity forecasting; system and regional
planning studies.
Taxes.
- ------
Services relating to federal, state and municipal taxes, including but not
limited to sales and use taxes, property, utility and corporate taxes,
preparation of federal, state and local returns and handling of federal state
and local audits and claims.
Transmission and Distribution Operations
- ----------------------------------------
The construction, operation and maintenance of the transmission and
distribution facilities including, without limitation, performing or, if deemed
desirable, contracting for any and all activities associated with the repair,
modification, rehabilitation, maintenance, renewal and replacement required to
place, keep and maintain Your transmission and distribution
10
<PAGE>
facilities in good and efficient operating condition, to protect the
properties on which such facilities are located, to conductresearch and
development with respect to transmission and distribution and to disburse or
receive funds in connection therewith. Obtain and supervise non-affiliated
contractors. Such work and contracts relating thereto shall be subject to normal
and customary Service Company review and approval procedures.
Wholesale and Retail Energy and Transmission/Distribution Sales and Services.
- -----------------------------------------------------------------------------
Review, evaluation and analysis of opportunities to develop, market and
sell energy and energy-related services and transmission/distribution and
transmission/distribution services, including arrangements with and for
associate companies. Engage in such transactions as you may request on your
behalf. Provide "supplier of last resort" energy services.
11
<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
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, 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, records will be maintained to accumulate
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
12
<PAGE>
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 as set forth in SEC File No.
70-9201.
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 yearend.
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
13
<PAGE>
to the GPU Energy Companies, will normally be computed on the basis of
costs per hour.
14
Exhibit D-2(a)
MUTUAL ASSISTANCE AGREEMENT
THIS AGREEMENT, dated as of October 28, 1993, between and among JERSEY
CENTRAL POWER & LIGHT COMPANY ("JCP&L"), METROPOLITAN EDISON COMPANY ("MET-ED"),
PENNSYLVANIA ELECTRIC COMPANY ("PENELEC"), GPU SERVICE CORPORATION ("GPUSC") AND
GPU NUCLEAR CORPORATION ("GPUN") (individually a "Company" and collectively the
"Companies"), each a wholly-owned subsidiary of General Public Utilities
Corporation ("GPU"), a public utility holding company registered under the
Public Utility Holding Company Act of 1935 ("Act").
W I T N E S S E T H:
--------------------
WHEREAS, JCP&L, Met-Ed and Penelec are public utility companies engaged in
the production, generation, transmission, distribution and sale of electricity
to and for the public in their respective service territories; and
WHEREAS, GPUSC and GPUN are mutual service companies under Section 13 of
the Act providing services pursuant to service agreements with their affiliates;
and
WHEREAS, Met-Ed and Penelec have heretofore filed an agreement with the
Pennsylvania Public Utility Commission ("PaPUC") pursuant to the then Section
701.1 of the Pennsylvania Public Utility Law -- now Section 2102 of the
Pennsylvania Public Utility Code (the "Code") -- with respect to the exchange of
services and goods by and between them and their affiliated companies, which
agreement was approved by the PaPUC by Order entered on October 1, 1982 at
Docket No. G-820167; and
WHEREAS, the subject of said Order was an agreement between the Companies
which provided examples of the services contemplated thereunder such as: (a)
design, engineering, construction, operation, maintenance and fuel procurement
for coal-fired generating stations, (b) other fossil fuel generation services;
(c) lab testing, research and development, engineering and support services for
generation, transmission and distribution, construction and maintenance; (d)
microfilming; (e) records retention and storage; and (f) goods incidental to
such services; and
WHEREAS, from time to time various opportunities arise for the Companies
to effect economies and better utilization of available resources through
transfers of a broader range of goods and services by, between and among the
Companies than
<PAGE>
contemplated by the aforementioned regulatory authorization for Met-Ed and
Penelec; and
WHEREAS, the Companies desire to obtain such additional authorization as
is necessary to expand the scope of goods and services that may, if requested
and available, be furnished from time to time by, between and among the
Companies;
NOW, THEREFORE, the Companies, intending to be legally bound, agree as
follows:
1. As used herein "Services" refers, but is not limited, to (i)
reprographics services, (ii) restoration, maintenance and repair services for
generation, transmission and distribution facilities, (iii) remittance
processing services, (iv) treasury services, (v) accounts payable services, (vi)
use of office, warehouse, storage and other space or facilities, (vii) data
processing and other computer services and (viii) legal services. The foregoing
are examples of the opportunities that have arisen or may arise for the more
efficient use of resources by the parties hereto and are in addition to those
examples of services set forth in the agreement referred to in the PaPUC Order
of October 1, 1982.
2. As used herein, "Goods" refers, but is not limited, to electric
generating, other production, transmission, distribution, office, administrative
and general plant materials, supplies and equipment not "in place" or
"installed". As contemplated hereunder, transactions in Goods may, but need not
be, incident to the provision of Services. The foregoing are examples of
opportunities that have arisen or may arise for the more efficient use of
resources by the parties hereto.
3. From time to time, each Company, as it in its sole discretion may
determine, upon the request of another Company, will furnish to such other
Company, upon the terms and conditions set forth herein, one or more of the
Goods and Services (including, but not limited to, in the case of Goods, those
which at the time are inadequate, obsolete, unfit, or unnecessary or unadapted
for use in the operations of the Company to which such request is made).
4. All transactions carried out pursuant hereto shall be effected at cost
in the case of the performance of Services, or cost less depreciation in the
case of the sale of Goods, in accordance with the Act and the regulations
promulgated thereunder (including, without limitation, Rules 90 and 91 under the
Act, copies of which are attached hereto as Attachment I).
5. All Services provided hereunder shall be priced at the cost thereof
(including all applicable direct and indirect costs of the furnishing Company).
-2-
<PAGE>
6. All Goods provided hereunder shall be priced at the cost less
depreciation thereof (including all applicable direct and indirect costs of the
furnishing Company) in accordance with the Companies' accepted and usual
accounting policies and procedures as follows:
a. Materials and supplies (M&S) included by the Companies under
Inventory Account No. 154.000 (and any successor provision thereto), will
be sold at the average unit price of such goods as determined by the
furnishing party's Material Inventory Control System plus an appropriate
equitable allocation of the furnishing Company's "stores" and "purchasing"
overhead expenses.
(i) Bills will be rendered as soon as practical after the
close of each month and will be payable within thirty days following
receipt; provided, however, that at the election of the furnishing
Company, the requesting Company shall advance, with its request,
funds sufficient to enable the furnishing Company to pay therewith
any significant amount of out-of-pocket expenses associated with the
furnishing of the requested Goods.
b. Goods included under Capital Account No. 101.000 (and any
successor provision thereto), will be sold at cost less depreciation as
carried on the books of the furnishing Company.
(i) Separate bills for the sale of such Goods will be
rendered, and acceptable documentation of title transfer, if
required, will be provided as soon as practical after the close of
each month and will be payable within thirty days following receipt;
provided, however, that at the election of the furnishing Company,
the requesting Company shall advance, with its request, funds
sufficient to enable the furnishing Company to pay therewith any
significant amount of out-of-pocket expenses associated with the
furnishing of the requested Goods.
7. In view of the fact that the Goods and Services to be furnished
hereunder are to be furnished at cost less depreciation, if any, and to
facilitate the undertaking of this Agreement, each Company expressly waives any
right it may have to recover from the other Companies for any losses, damages,
penalties, liabilities, claims or expenses (including damage to its own property
or liabilities to third parties) for any cause whatsoever including without
limitation the negligence of the other Companies, its employees and agents in
connection with the provision of Goods and Services hereunder.
8. The provision of Goods and Services hereunder by and for any Company
hereto shall be subject to the receipt of any
-3-
<PAGE>
other regulatory approvals which may pertain to or be necessary for a
particular transaction.
9. This Agreement may be terminated with respect to any Company, effective
as of the end of any calendar month, upon at least thirty days' prior written
notice of such termination by such Company to the other Companies.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written:
JERSEY CENTRAL POWER & LIGHT COMPANY
By:
---------------------------------
METROPOLITAN EDISON COMPANY
By:
--------------------------------
PENNSYLVANIA ELECTRIC COMPANY
By:
--------------------------------
GPU SERVICE CORPORATION
By:
--------------------------------
GPU NUCLEAR CORPORATION
By:
--------------------------------
-4-
<PAGE>
ATTACHMENT I
------------
"Rule 90. Transactions Limited to Cost
(a) Except as permitted by this rule, or any other applicable rule,
regulation, or order of the Commission.
(1) No registered holding company shall perform any service or
construction for, or sell any goods to, any associate company thereof which is a
public-utility company, a mutual service company, or a company engaged in the
business of performing service or construction for, or selling goods to,
associate public-utility companies, or enter into any contract to do so, and
(2) No subsidiary company of a registered holding company (including a
mutual service company) shall perform any service or construction for, or sell
any goods to, any associate company thereof, or enter into any contract to do
so, at more than cost as determined pursuant to Rule 91 or any other applicable
rule, regulation, or order of the Commission, or in the absence thereof, in
accordance with sound methods of determining cost. In the case of a sale of used
goods the price shall be not more than cost less depreciation. Any charges on a
basis of estimated cost shall be readjusted to actual cost at least annually, if
for services or goods, and upon completion of individual projects, in case of
construction.
(b) In the case of construction for an association company of a specific
project, building, or unit on which substantial expenses were incurred before
August 26, 1935, pursuant to a contract made before that date, the holding
company or subsidiary performing the construction shall be entitled to the
proportion of its profit or fee earned prior to April 1, 1936.
(c) If a sale of goods is merely incidental to a sale of an entire
business or a substantial portion thereof, or to a sale of assets other than
goods, a lump sum price for the entire transaction may include such goods
without the assignment of a specific portion of the price to the cost of such
goods.
(d) The price of services, construction, or goods need not be limited to
cost although the transaction comes within the terms of paragraph (a) of this
rule if,
(1) Neither the company performing the services or construction, or
selling the goods, nor the associate company receiving such services or
construction, or buying such goods, is (i) a public utility or holding company,
(ii) an investment company or investment trust, including any company or trust
which is a medium of investment in securities for the benefit of a registered
holding company or its employees or officers, or (iii)
-5-
<PAGE>
a company engaged in the business of selling goods to associate companies or
performing services or construction, or (iv) a company controlling, directly or
indirectly, any company specified in (i), (ii), or (iii) above; or
(2) Such transaction consists of a sale of goods produced by the seller."
"Rule 91. Determination of Cost.
(a) Subject to the provisions of this rule and of any other applicable
rule, regulation, or order of the Commission, a transaction shall be deemed to
be performed at not more than cost if the price (taking into account all
charges) does not exceed a fair and equitable allocation of expenses (including
the price paid for goods) plus reasonable compensation for necessary capital
procured through the issuance of capital stock (or similar securities of an
unincorporated company).
(b) Direct charges shall be made so far as costs can be identified and
related to the particular transactions involved without excessive effort or
expense. Other elements of cost, including taxes, interest, other overhead, and
compensation for the use of capital procured by the issuance of capital stock
(or similar securities of an unincorporated company) shall be fairly and
equitably allocated. Interest on borrowed capital and compensation for the use
of capital shall represent a reasonable return only the amount of capital
reasonably necessary for the performance of services or construction for, or the
selling of goods to, customers for whom transactions are required by the rules
of the Commission to be performed at cost. Such amount shall not include the
cost of assignment of, or any capitalization of, any service, sales, or
construction contract.
(c) Any expense (including the price paid for goods) incurred in a
transaction with an associate company of the performing or selling company
(directly or through one or more other associate companies thereof), to the
extent that it exceeds the cost of such transaction to such associate company,
shall not be included in determining cost to such performing or selling company.
(d) Any expense (including the price paid for goods) incurred in a
transaction with a person other than an associate company but not at
arm's-length, to the extent that it exceeds the expense at which the performing
or selling company might reasonably be expected to obtain elsewhere, or to
furnish itself, comparable performance, goods, capital, or other items of
expense involved (giving due regard to quality, quantity, regularity of supply,
and other factors entering into the calculation of a fair price), shall not be
included in determining cost to such performing or selling company."
-6-
Exhibit F-1
January 22, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: GPU, Inc.
Jersey Central Power & Light Company
Metropolitan Edison Company
Pennsylvania Electric Company
Application on Form U-1
SEC File No. 70-9201
--------------------
Ladies and Gentlemen:
We have examined the Application on Form U-1, dated May 6, 1998,
under the Public Utility Holding Company Act of 1935 ("Act"), filed by GPU, Inc.
("GPU"), a Pennsylvania corporation, and its subsidiaries, Jersey Central Power
& Light Company ("JCP&L"), a New Jersey corporation, Metropolitan Edison Company
("Met-Ed"), a Pennsylvania corporation, and Pennsylvania Electric Company
("Penelec"), a Pennsylvania corporation (JCP&L, Met-Ed and Penelec are
collectively referred to as the "GPU Energy Companies"), and GPU Service, Inc.
("GPUS"), a Pennsylvania corporation, with the Securities and Exchange
Commission ("Commission"), and docketed by the Commission in SEC File No.
70-9201, as amended by Amendment No. 1 thereto, dated May 14, 1998, Amendment
No. 2 thereto, dated August 24, 1998, Amendment No. 3 thereto, dated September
24, 1998, and Amendment No. 4 thereto, dated this date, of which this opinion is
to be a part. (The Application, as so amended and as thus to be amended, is
hereinafter referred to as the "Application").
The Application requests authorization for, among other things, (i)
GPUS to perform expanded functions for the GPU Energy Companies and (ii) the
making of loans by the GPU Energy Companies to GPUS to finance GPUS' initial
purchase of inventory in an aggregate amount of up to $60,000,000 (the notes
evidencing such loans are referred to as "Notes"), and from time to time for
GPUS' working capital purposes.
Securities and Exchange Commission
January 22, 1999
Page 2
We have been counsel to GPU and its subsidiaries for many years. In
that connection, we have participated in various proceedings relating to the
issuance of securities by GPU and its subsidiaries, and we are familiar with the
terms of the outstanding securities of the corporations comprising the GPU
holding company system.
We are members of the Bars of the States of New York and New Jersey
and do not purport to be expert on the laws of any jurisdiction other than the
laws of the States of New York and New Jersey. The opinions expressed herein are
limited to matters governed by the laws of the States of New York and New Jersey
and the Federal laws of the United States. As to all matters which are governed
by the laws of the Commonwealth of Pennsylvania insofar as they relate to
Met-Ed, we have relied on the opinion of Ryan Russell Ogden & Seltzer filed as
Exhibit F-2 to the Application. As to all other matters of Pennsylvania law, we
have relied on the opinion of Ballard Spahr Andrews & Ingersoll, LLP filed as
Exhibit F-3 to the Application.
Based upon and subject to the foregoing and such additional
assumptions and qualifications as are set forth in the aforementioned opinions,
and assuming that the transactions therein proposed are carried out in
accordance with the Application, we are of the opinion that when the Commission
shall have entered an order forthwith granting the Application,
(a) all State laws applicable to the proposed transactions will
have been complied with;
(b) Each GPU Energy Company and GPUS is validly organized and
duly existing;
(c) the Notes will be valid and binding obligations of GPUS in
accordance with their terms, subject to the effect of any
applicable bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other similar laws affecting
creditors' rights generally and general principles of equity
limiting the availability of equitable remedies;
(d) the GPU Energy Companies will legally acquire the Notes; and
(e) the consummation of the transactions proposed in the
Application will not violate the legal rights of the holders
of any securities issued by GPU or any "associate company"
thereof, as defined in the Act.
<PAGE>
Securities and Exchange Commission
January 22, 1999
Page 3
We hereby consent to the filing of this opinion as an exhibit to the
Application and in any proceedings before the Commission that may be held in
connection therewith.
Very truly yours,
BERLACK, ISRAELS & LIBERMAN LLP
Exhibit F-2
January 22, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: GPU, Inc.
Jersey Central Power & Light Company
Metropolitan Edison Company
Pennsylvania Electric Company
Application on Form U-1
SEC File No. 70-9201
--------------------
Ladies and Gentlemen:
We have examined the Application on Form U-1, dated May 6, 1998,
under the Public Utility Holding Company Act of 1935 ("Act"), filed by GPU, Inc.
("GPU"), a Pennsylvania corporation, and its subsidiaries Jersey Central Power &
Light Company ("JCP&L"), a New Jersey corporation, Metropolitan Edison Company
("Met-Ed"), a Pennsylvania corporation, and Pennsylvania Electric Company
("Penelec"), a Pennsylvania corporation (JCP&L, Met-Ed and Penelec are
collectively referred to as the "GPU Energy Companies"), and GPU Service, Inc.
("GPUS"), a Pennsylvania corporation, with the Securities and Exchange
Commission ("Commission"), and docketed by the Commission in SEC File No.
70-9201, as amended by Amendment No. 1 thereto, dated May 14, 1998, Amendment
No. 2 thereto, dated August 24, 1998, and Amendment No. 3 thereto, dated
September 24, 1998, and Amendment No. 4 thereto, dated this date, of which this
opinion is to be a part. (The Application, as so amended and as thus to be
amended, is hereinafter referred to as the "Application").
The Application requests authorization for, among other things, (i)
GPUS to perform expanded functions for the GPU Energy Companies and (ii) the
making of loans by the GPU Energy Companies to GPUS to finance GPUS' initial
purchase of inventory in an aggregate amount of up to $60,000,000 (the notes
evidencing such loans are referred to as "Notes"), and from time to time for
GPUS' working capital purposes.
We have been counsel to Met-Ed for many years. We are members of the
Bar of the Commonwealth of Pennsylvania and do not purport to be expert on the
laws of any other jurisdiction.
Based upon and subject to the foregoing, and assuming that the
transactions therein proposed are carried out in accordance with the
Application, we are of the opinion that when
<PAGE>
Securities and Exchange Commission
January 22, 1999
Page 2
the Commission shall have entered an order forthwith granting the
Application,
(a) all Pennsylvania laws applicable to Met-Ed's participation in
transactions will have been complied with;
(b) Met-Ed is validly organized and duly existing;
(c) Met-Ed will legally acquire the Notes; and
(d) the consummation of the transactions proposed in the Application will
not violate the legal rights of the holders of any securities issued by Met-Ed.
We hereby consent to the filing of this opinion as an exhibit to the
Application and in any proceedings before the Commission that may be held in
connection therewith.
Very truly yours,
RYAN, RUSSELL, OGDEN & SELTZER LLP
56435
Exhibit F-3
January 22, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: GPU, Inc.
Jersey Central Power & Light Company
Metropolitan Edison Company
Pennsylvania Electric Company
Application on Form U-1
SEC File No. 70-9201
--------------------
Ladies and Gentlemen:
We have examined the Application on Form U-1, dated May 6, 1998,
under the Public Utility Holding Company Act of 1935 ("Act"), filed by GPU, Inc.
("GPU"), a Pennsylvania corporation, and its subsidiaries Jersey Central Power &
Light Company ("JCP&L"), a New Jersey corporation, Metropolitan Edison Company
("Met-Ed"), a Pennsylvania corporation, and Pennsylvania Electric Company
("Penelec"), a Pennsylvania corporation (JCP&L, Met-Ed and Penelec are
collectively referred to as the "GPU Energy Companies"), and GPU Service, Inc.
("GPUS"), a Pennsylvania corporation, with the Securities and Exchange
Commission ("Commission"), and docketed by the Commission in SEC File No.
70-9201, as amended by Amendment No. 1 thereto, dated May 14, 1998, Amendment
No. 2 thereto, dated August 24, 1998, Amendment No. 3 thereto, dated September
24, 1998, and Amendment No. 4 thereto, dated this date, of which this opinion is
to be a part. (The Application, as so amended and as thus to be amended, is
hereinafter referred to as the "Application").
The Application requests authorization for, among other things, (i)
GPUS to perform expanded functions for the GPU Energy Companies and (ii) the
making of loans by the GPU Energy Companies to GPUS to finance GPUS' initial
purchase of inventory in an aggregate amount of up to $60,000,000 (the notes
evidencing such loans are referred to as "Notes"), and from time to time for
GPUS' working capital purposes.
We have been Pennsylvania counsel to GPU, GPUS and Penelec for many
years. In connection with the delivery of this opinion, we have examined such
documents and made such investigation as we deemed necessary as the basis for
this opinion.
<PAGE>
Based upon the subject to the foregoing, and assuming that (i) the
transactions therein proposed are carried out in accordance with the Application
and (ii) upon the sale by Penelec of the initial inventory to GPUS, Penelec
obtains the release of the lien of its Indenture date as of January 1, 1942, as
amended (the "Indenture") on the initial inventory in accordance with the terms
of the Indenture, we are of the opinion insofar as its relates to matters of
Pennsylvania law that when the Commission shall have entered an order forthwith
granting the Application:
(a) all Pennsylvania laws applicable to the proposed transactions
by GPU, GPUS and Penelec will have been complied with;
(b) GPU, GPUS and Penelec and each validly organized and duly
existing;
(c) the Notes will be valid and binding obligations of GPUS in
accordance with their terms, subject to the effect of any
applicable bankruptcy, insolvency, reorganization, fraudulent
conveyance, moratorium or other similar laws affecting
creditors' rights generally and general principles of equity
limiting the availability of equitable remedies;
(d) Penelec will legally acquire the Notes to be acquired by
it; and
(e) the consummation of the transactions proposed in the
Application will not violate the legal rights of the holders
of any securities issued by GPU, GPUS, Penelec or any
subsidiary of Penelec.
We hereby consent to the filing of this opinion as an exhibit to the
Application and in any proceedings before the Commission that may be held in
connection therewith.
Very truly yours,
Ballard Spahr Andrews & Ingersoll, LLP
EXHIBIT H
Page 1 of 2
CAPITALIZATION AND CAPITALIZATION RATIOS
----------------------------------------
(IN THOUSANDS)
The capitalization of GPU, Inc. and Subsidiary Companies at June 30,
1998 is as follows:
Actual Pro Forma (3)
----------------- -------------------
Amount % Amount %
--------- ----- ---------- -----
Long-term debt(1) $4,392,057 51.4 $4,392,057 51.5
Notes payable 487,160 5.7 487,160 5.7
Preferred stock (2) 155,478 1.8 155,478 1.8
Subsidiary-obligated
mandatorily redeemable
preferred securities 330,000 3.9 330,000 3.9
Common equity 3,172,886 37.2 3,160,786 37.1
--------- ---- --------- ----
$8,537,581 100.0 $8,525,481 100.0
========== ===== ========== =====
(1) Includes securities due within one year of $350,671.
(2) Includes securities due within one year of $2,500.
(3) The pro forma capitalization excludes approximately $735 million of
GPU's proportionate share of non-recourse debt used to finance the
acquisition of exempt wholesale generators and foreign utility companies,
as defined under the Public Utility Holding Company Act of 1935, which
debt is not consolidated for financial reporting purposes. After giving
effect to the non-recourse debt, the pro forma percentages would be as
follows: Long-term debt 55.4%; Notes payable 5.2%; Preferred stock 1.7%;
Subsidiary-obligated mandatorily redeemable preferred securities 3.6%; and
Common equity 34.1%.
<PAGE>
EXHIBIT H
Page 2 of 2
PRO FORMA ADJUSTMENTS
---------------------
(IN THOUSANDS)*
The pro forma adjustments affecting the common equity portion of GPU's
capitalization are as follows:
Amount
--------
Annual SAP savings (primarily
labor-related costs) $ 23,700
One-time benefit related to
inventory reductions 8,000
Annual reduction of inventory
carrying costs 1,200
SAP implementation excluding
capitalized costs(7/1/98-12/31/99) (55,200)
Annual incremental costs(primarily
due to software license for SAP) (3,600)
One-time reversal of deferred income
taxes associated with meters and
transformers sold to GPUS 3,100
Income tax benefit related to the net
effect of the proposed transactions
(41.2% tax rate) 10,700
----- ------
Total $ (12,100)
==========
* GPU estimates that these savings/costs will be shared in the following
percentages: JCP&L-46%, Met-Ed-25%, and Penelec-29%.
Exhibit P
---------
Governance Cost Distribution Exercise
Explanatory Note
The table has been prepared to illustrate the impact of the use by GPUS of a new
allocation formula (the direct payroll cost ratio formula), which GPUS proposes
to adopt. The table uses 1998 budgeted charges for those services of GPUS which
will form the "Corporate Division" and which are not directly allocated to a GPU
System company.
Factors 3 and 5 represent the multiple factor formula which is currently in use
by GPUS, as described in the Application. Factors 6 and 7 (which are the new
factors), represent the direct payroll cost ratio formula factors. As
illustrated in the table, the adoption of this new formula will result in GPU
and its non-utility subsidiaries bearing a greater share of charges than was the
case previously.
<PAGE>
<TABLE>
Governance Cost Distribution Exercise
Using Budget 1998 Dollars
<CAPTION>
Jersey
GPU Inc. GPU Intl GPU Nuclear Central Met Ed Penelec GPU Genco Total
Proposed
Method
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Factor 3 - - - 399,117 213,948 248,587 - 861,652
Factor 5 - - 496,272 1,882,561 1,293,121 1,461,956 260,927 5,394,837
Factor 6 - 25,911 24,026 111,601 62,558 74,060 21,342 319,498
Factor 7 3,287,420 1,488,970 1,380,760 6,410,361 3,592,572 4,256,982 1,224,937 21,642,003
-------- ------- --------- ---------- --------- --------- --------- ----------
Total
3,287,420 1,514,881 1,901,058 8,803,640 5,162,200 6,041,584 1,507,206 28,217,990
========= ========= ========= =========== ========== =========== ========= ==========
Current Method
3/5 Factor
- _- 2,223,481 11,499,843 6,245,491 7,070,757 1,178,418 28,217,990
-------- ------- --------- ---------- --------- --------- --------- ----------
Total
- - 2,223,481 11,499,843 6,245,491 7,070,757 1,178,418 28,217,990
========= ======= ========= =========== ========== ========== ========= ==========
Variance 3,287,420 1,514,881 (322,423) (2,696,203) (1,083,291) (1,029,172) 328,788 -
========= ========= ========= =========== ========== =========== ========= ==========
</TABLE>
