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File No. 70-8711
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 5
TO
FORM U-1 APPLICATION
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
_______________________________________________
PUBLIC SERVICE COMPANY OF OKLAHOMA
212 East 6th Street
Tulsa, Oklahoma 74119-1212
(Names of company filing this statement and
address of principal executive office)
___________________________________________________
CENTRAL AND SOUTH WEST CORPORATION
(Name of top registered holding company parent)
___________________________________________________
Shirley S. Briones, Treasurer
Public Service Company of Oklahoma
212 East 6th Street
Tulsa, Oklahoma 74119-1212
Stephen J. McDonnell, Treasurer
Central and South West Corporation
1616 Woodall Rodgers Freeway
Dallas, Texas 75202
Joris M. Hogan, Esq.
Milbank, Tweed, Hadley & McCloy
1 Chase Manhattan Plaza
New York, New York 10005
(Name and addresses of agents for service)
Public Service Company of Oklahoma, an Oklahoma corporation
(the "Company"), a wholly-owned electric utility subsidiary of
Central and South West Corporation ("CSW"), a Delaware
corporation and a registered holding company under the Public
Utility Holding Company Act of 1935, as amended (the "Act"),
hereby files this Amendment No. 5 to the Form U-1 Application in
File No. 70-8711 in order to amend and restate the Application in
its entirety to read as follows:
Item 1. Description of Proposed Transaction
The Company hereby requests authority to make an equity and
debt investment in RIKA Management Company, LLC, an Oklahoma
limited liability company ("RIKA"), to make an equity investment
in Universal Power Products Company, L.L.C., an Oklahoma limited
liability company ("Universal"), and to acquire certain equity
interests in Automated Substation Development Company, L.L.C., an
Oklahoma Limited liability company ("Automated"), and RC
Training, L.L.C., an Oklahoma limited liability company
("Training", and together with RIKA, Universal and Automated,
collectively, the "RIKA Companies", and, individually, a "RIKA
Company"), all pursuant to an Agreement (the "Agreement") dated
as of July 17, 1995, by and among the Company, RIKA, Universal,
Automated, Training, Richard H. Smith, Monika Smith and Dennis J.
Loudermilk. Such debt and equity investments and acquisition of
equity interests are collectively referred to herein as the
"Transaction".
Background
Relay Concepts, Inc. ("Relay"), an Oklahoma corporation, was
founded in 1991 in Tulsa, Oklahoma. Relay was established to
provide improved computer automation solutions to certain aspects
of the electric power industry. Relay focused on three main
product and service categories: relay testing software,
electrical substation automation systems and software, and
personnel training services.
Relay Testing Software
The most critical piece of a transmission and distribution
system is the protective relay, which is a device that recognizes
any faults or disturbances in the electric current being supplied
and prevents catastrophic damage to the electric system and
customer equipment. Every relay manufacturer develops a relay
test set to maintain and test its relay equipment.
Unfortunately, there are no standardized communications protocols
for relay test sets. Relay developed a relay testing software
package, known as Ultratest, which is the first automated relay
testing software capable of communicating with and controlling
the testing instruments made by almost all major relay
manufacturers. The Ultratest program provides a seamless
communication between the user and the test set regardless of the
communications protocol being used.
The Ultratest program provides the relay engineer with a
standard test procedure and output format regardless of the relay
being tested. The program also allows the utility to consider
purchasing relays from manufacturers whose products were
previously not practical to purchase because of the time required
to learn and integrate a new relay testing package. Finally, the
program provides a historical data base, allowing the utility to
monitor a relay over a certain time period and establish an
appropriate maintenance program tailored to each relay.
Substation Automation
Relay has also begun the definition phase of a substation
project that will combine off-the-shelf hardware with specially
developed software to provide substation communications,
maintenance support and testing. A substation is comprised of
several discrete components. These components include meters,
relays, circuit breakers, a digital fault recorder and the Remote
Terminal Unit ("RTU"). The substation communications project
will convert the protocols and baud rates from each of the
substation devices into a single protocol, transfer the
information back to a single point at the utility's central
office, and then distribute the information to end users through
a wide area network. (End users of substation information
include the central control center, technical design, technical
operations, billings and rates, and marketing.)
Upon its completion, the substation automation project will
provide the following substation operation improvements: a
single monitoring point from a substation, a simplified user
interface, improved "just in time" maintenance and a migration
path for substation automation. The substation automation
project will provide better information for planning, customer
inquiries and operations, will allow utilities to utilize
advanced component features as they are developed and will
decrease response time during outages. The substation automation
system will be used on new as well as existing substations and
has the potential to replace the substation RTU.
The substation automation system will use off-the-shelf,
micro-processor based hardware at the substation to download data
and upload preset device settings. Software will be developed to
convert communications protocols associated with all prevalent
brands and types of substation equipment into a single common
protocol. Information from the substation devices, once
converted to the common protocol, will be transmitted to the end-
user. The end-user will be able to define the priority and type
of information to be collected, and the software will collect,
prioritize and filter the information to minimize the impact on
the communications path. The end-user interface will use a
common graphical interface that is MS Windows compatible. The
graphics will be similar and consistent for each user. While the
"look" and "feel" of the substation automation system will be
similar for all users, each user will be able to customize the
screens for his or her specific information needs.
Training Services
Relay has also established a training facility, named Power
Industry Learning Center ("PILC") and located in Phoenix,
Arizona. PILC will provide training to electric utility
personnel relating to automated systems for relays, substations
and other electric utility facilities and certain basic courses
in electric generating and distribution systems. The PILC
training facilities utilize a decommissioned but fully operable
substation furnished by the Salt River Project. Other than
training with respect to products developed by the RIKA
Companies, no formal training programs have been developed. In
addition to training related to such products, PILC will assist
Company employees in maintaining their "leading-edge" knowledge
of the latest industry practices and techniques and in keeping
abreast of the latest capabilities of various pieces of
substation equipment.
Effective July 17, 1995, Relay reorganized its corporate
structure into four limited liability companies: RIKA, Universal,
Automated and Training, each of which was organized under the
Oklahoma Limited Liability Company Act. An Oklahoma limited
liability company is controlled by managers ("Managers"), rather
than by a board of directors, equity in a limited liability
company is represented by units of membership ("Units") rather
than shares of company stock, and holders of Units are referred
to as members ("Members") rather than shareholders. In
connection with Relay's reorganization, Universal, Automated and
Training (collectively, the "RIKA Operating Companies") will each
acquire certain portions of Relay's operations. Although there
is no management contract or other formal agreement among the
RIKA Companies, RIKA will provide management oversight and
administrative support and control of the RIKA Operating
Companies.
Universal is the primary marketing and sales arm of the RIKA
Companies. Automated is a research and development company, with
no sales or support function. It will license Universal to
market and sell the products it develops. Training will develop,
market and operate training programs as a separate business.
Currently, the RIKA Companies expect to engage only in the
business activities described herein, and shall not engage in
non-related activities.
Each RIKA Operating Company has a distinct management team,
performance goals and budget. RIKA charges each of the RIKA
Operating Companies for all direct and allocated costs plus a
management fee equal to 5% of all cost billings. While the
operating relationship among the RIKA Operating Companies is
primarily arms-length, continuity is maintained by common
ownership and common director-level oversight. This multi-
company format has been implemented to account for and maintain
separately the profits, losses, assets, liabilities and
obligations of each RIKA Company. This structure allows closer
monitoring of the performance of each product line or service.
On July 17, 1995, the Company and RIKA entered into a
Software Application Development Agreement (the "Development
Agreement") to develop certain substation automation software
applications for the Company (the "Software"). RIKA will develop
the Software for the Company in accordance with the concepts,
specifications, schedules and limitations set forth in the
Development Agreement. Except as limited in the Development
Agreement, the Company and RIKA shall each have a perpetual, non-
exclusive and unrestricted license to use, modify, sublicense,
sell or otherwise transfer the Software. Notwithstanding its
license under the Development Agreement to sublicense, sell or
otherwise transfer the Software to non-affiliates, the Company
does not intend to engage in the licensing of the Software to
non-affiliates and is not requesting authority from the
Securities and Exchange Commission (the "Commission") to engage
in such activity. Rather, the Company's right to license third
parties will be terminated upon consummation of the Transaction.
The Company will designate a project director who will be
authorized to provide RIKA with such information as it may
require from time to time in order to perform its services under
the Development Agreement. The project director will also be
authorized to act on behalf of the Company, to issue instructions
to RIKA, and to approve on behalf of the Company any changes to
the Development Agreement or its schedules.
On or about the date scheduled for delivery of the Software,
RIKA shall deliver a machine executable copy of the Software on
appropriate media together with all other material required under
the Development Agreement. The Company will have a period of 90
days from the date of delivery to accept the Software, or to
reject the Software as not complying with the specifications
under the Development Agreement. For a period of one year
following the acceptance of the Software by the Company, RIKA
shall use its best efforts to correct significant Software
errors. After expiration of the one year period described in the
previous sentence, RIKA will provide maintenance and support
services to the Company upon such terms and conditions as the
parties shall agree.
Maintenance and support services to be provided by the RIKA
Companies under the Development Agreement shall consist of the
following, as well as any other software maintenance services
which the RIKA Companies furnish to users of similar software:
(i) on-site or telephone consultation relative to the use and
trouble-shooting of the Software; (ii) notice to the Company of
coding errors and other problems in the Software promptly after
the same first become known to the RIKA Companies; (iii) use of
best efforts to correct any coding errors and other problems in
the Software brought to the RIKA Companies' attention; (iv)
delivery to the Company of all releases, corrections and changes,
including those relating to program code and documentation,
reflecting corrective action taken by the RIKA Companies; (v)
furnishing of new releases, updates or versions developed by the
RIKA Companies to improve the efficiency, reliability or
functioning of existing Software commands and features; and (vi)
on-site or telephone consultation relative to the installation
and use of corrected software and new releases, updates and
versions.
The Software will be a direct result of Automated's
substation automation project, but will incorporate further
product development and will be customized for the Company's
applications. The Company believes that the Software will allow
the Company to enhance significantly the efficiency of its
substation operations. The benefits to the Company and its
electric customers are expected to be substantial.
It is important that a third party develop the Software,
rather than the Company or a device manufacturer. The Company
could independently develop the Software, but it would, as a
practical matter, only develop a product for the devices
currently in use in the CSW system. Similarly, a device
manufacturer could develop a software product, but would have
difficulty getting the proprietary protocols of a competitor.
Development by RIKA assures a more widely acceptable product that
will preserve the future product development path.
In consideration for RIKA's services under the Development
Agreement, the Company has agreed to pay RIKA up to $3,050,000,
to be made available to RIKA in periodic installments, commencing
upon the execution of the Development Agreement and continuing
through March 31, 1996. As of October 30, 1995, $1,500,000 has
been expended in this manner.
Pursuant to the Agreement, if the Company receives approval
of the Commission for the transactions herein requested, the
Company will execute a Member Agreement (the "Member Agreement")
which will govern the proposed acquisitions of equity interests
by the Company.
The Transaction
Pursuant to the terms of the Member Agreement, the Company
will agree, subject to the approval of the Commission, to (i)
convert $750,000 of the amount paid to RIKA to fund the
development of the Software into a capital contribution to
Automated, (ii) convert the balance of the amount paid to RIKA to
fund the development of the Software into a loan to RIKA,
(iii) commit to loan additional funds to RIKA to complete the
development of the Software, in an aggregate principal amount up
to a maximum of the unfunded amount due under the Development
Agreement, (iv) make a capital contribution to Universal in the
amount of $450,000, and (v) memorialize the respective rights and
obligations of the Company and the RIKA Companies regarding the
development of the Software and the management of the businesses
in which the RIKA Companies are engaged.
(A) Payments under the Development Agreement.
As discussed above, pursuant to the terms of the
Development Agreement, the Company has agreed to pay RIKA
$3,050,000 in periodic installments through March 31, 1996. Upon
execution of the Member Agreement, the Company will commit to
loan to RIKA an aggregate of $2,300,000 in exchange for RIKA's
promissory note to the Company (the "Promissory Note") in the
form set forth in Exhibit I to the Member Agreement. All funds
in excess of $750,000 paid under the Development Agreement by the
Company to RIKA prior to the execution of the Member Agreement
will be deemed a first advance against the Promissory Note. The
balance of the $2,300,000 will be advanced under the Promissory
Note according to the funding schedule established in the
Development Agreement. All amounts paid or to be paid by the
Company under the Development Agreement or the Member Agreement
shall be paid out of internally generated funds.
The Promissory Note shall mature on the fifth anniversary
thereof. Simple interest on the outstanding principal amount
under the Promissory Note shall accrue, until the Promissory Note
shall be paid in full, at the rate of eight percent (8%) per
annum, such interest to be paid quarterly on each January 15,
April 15, July 15 and October 15 (the "Interest Payment Dates")
during the term of the Promissory Note. Prepayments of principal
may be made under the Promissory Note at any time and in any
amount without penalty or premium. Mandatory prepayments of
principal shall be made on each Interest Payment Date in an
amount equal to the excess of gross license revenues received by
RIKA during the previous calendar quarter over the aggregate
direct operating expenses incurred during the same period. Upon
the occurrence of any event of default specified in the Member
Agreement, all amounts then unpaid on the Promissory Note may be
declared to be immediately due and payable.
In consideration of the Company's loan commitment to
RIKA, RIKA will issue to the Company Units of membership interest
in RIKA, which Units, upon issuance, shall comprise 50% of RIKA's
outstanding Units of membership. As further consideration for
the Company's loan commitment to RIKA, each other RIKA Company
shall agree to take all action as may be needed to allow the
Company the right to purchase a non-exclusive license to use the
Software under the same terms and conditions as the license RIKA
will offer to non-affiliated utilities. The license granted to
the Company, however, shall be a perpetual, unrestricted license
to use and modify the Software at a fee no greater than the fee
RIKA shall pay Automated for the right to market the Software to
non-affiliated utilities. This new licensing arrangement will
result in the termination of the Company's right to license the
Software to third parties.
(B) Equity Investments.
Upon execution and delivery of the Member Agreement,
the Company shall pay to Universal the sum of $450,000. In
consideration of the payment of such amount by the Company,
Universal will issue to the Company Units of membership interest
in Universal, which Units, upon issuance, shall comprise 48% of
Universal's outstanding Units of membership.
In addition, upon execution of the Member Agreement,
the Company and RIKA shall convert $750,000 of the amount paid to
RIKA under the Development Agreement into a capital contribution
to Automated. In consideration of such conversion, Automated
will issue to the Company Units of membership in Automated
comprising 71% of Automated's outstanding Units of membership.
After payment in full of the Promissory Note, however, the
Company's membership interest in Automated shall be reduced from
71% to 48%.
In consideration of the above financial contributions
to be made by the Company toward implementation of the business
plan for the RIKA Companies, the Company shall also be issued
Units of membership in Training comprising 48% of Training's
outstanding Units of membership.
The remaining equity in the RIKA Companies will be owned by
Richard Smith and Dennis Loudermilk. Richard Smith was the first
and currently is the only investor in the RIKA Companies. He
provides management expertise as well as capital to the RIKA
Companies. Dennis Loudermilk provides the technical expertise
and was the founder of Relay and the developer of the Ultratest
software. Richard Smith has more than twenty years experience
restructuring and reorganizing companies as large as $2 billion
in annual revenues with as many as 350 subsidiaries. Mr. Smith
served as a member of the Board of Directors, and as the Western
United States Partner in Charge of Reorganization, Restructuring
and Bankruptcy, for a "Big Six" accounting and consulting firm.
Dennis Loudermilk has more than ten years experience working in
every aspect of electrical transmission and distribution systems.
In 1991, Mr. Loudermilk founded Relay Concepts, Inc.
(C) Rights and Obligations of the Parties.
Contemporaneously with the execution and delivery of
the Member Agreement, Amended and Restated Articles of
Organizations will be filed with the Oklahoma Secretary of State,
containing the provisions described below, and Amended and
Restated Operating Agreements will be executed, for each RIKA
Company.
(i) Duration of Corporate Existence
Each of the RIKA Companies was formed upon the filing
for record of their respective Articles of Organization with the
Oklahoma Secretary of State, and shall continue its existence
until 12:00 midnight, December 31, 2015, unless sooner terminated
as provided in its Amended and Restated Operating Agreement.
(ii) Authorization and Issuance of Units
Each RIKA Company shall have the authority to issue an
aggregate of one hundred Units. The Company shall be issued 50
Units of RIKA, 48 Units of Universal, 48 Units of Training, and,
initially, 71 Units of Automated. Upon payment in full of the
Promissory Note, the Company's Unit ownership in Automated will
be reduced to 48 Units. The various rights of the Members in
respect of voting and management of the RIKA Companies are
described in paragraphs (C)(iii)-(v) below.
(iii) Allocations and Distributions
Distributions of all cash available for distribution
from a RIKA Company shall be made as determined by majority vote
of the voting rights of the Members of such RIKA Company. Any
distribution of property shall be treated as a distribution of
cash in the amount of the fair market value of such property.
Distributions shall be made by a RIKA Company to its Members pro
rata, according to the number of Units held by each Member, with
all outstanding Units being treated alike. All items of income,
loss, deduction or credit shall be allocated to all Members or
their assignees in accordance with such Members' respective Unit
ownership, all Units being treated equally.
(iv) Management and Operation of Business
Management of each RIKA Company shall be vested in two
Managers, who, in the case of the RIKA Companies other than RIKA,
shall be elected by majority vote of the voting rights of the
Members of such RIKA Company at any annual or special meeting
called for that purpose. Each manager of a RIKA Company shall
have one vote in all matters coming before a vote of the managers
of such RIKA Company. Any person serving as a Manager for a RIKA
Company shall be able to exercise all the powers of such company,
whether derived from law, such company's Articles of Organization
or its Amended and Restated Operating Agreement, except such
powers as are vested solely in the Members of such RIKA Company.
Unless and until there shall have occurred an event of
default under the Member Agreement (an "Event of Default"), no
Manager of a RIKA Company shall have the authority to cause such
RIKA Company to do or commit to do any of the following acts
without the prior unanimous written consent by the Members of
such RIKA Company: (a) borrow money in excess of $10,000
($50,000 for RIKA), (b) sell any assets of such RIKA Company
having a fair market value over $10,000 ($50,000 for RIKA),
(c) enter into any contract involving an anticipated total
expenditure of over $10,000 ($100,000 for RIKA), (d) do any act
which would make it impossible to carry on the ordinary business
of such RIKA Company, (e) compromise any claim over $10,000
($50,000 for RIKA), (f) admit a person or entity as a Member, (g)
knowingly perform any act that would subject a Member to personal
liability, (h) amend such RIKA Company's Articles of
Organization, or (i) approve any business plan of such RIKA
Company. Upon the occurrence of an Event of Default, each
Manager of a RIKA Company shall have the authority to cause the
Company to do or commit to do the foregoing acts upon a majority
vote of the Members of such RIKA Company. An Event of Default
will occur if (i) the RIKA Companies fail to meet specified
financial goals, (ii) the RIKA Companies exceed, in any quarter,
105% of budgeted expenses, (iii) any RIKA Company defaults on any
material term, covenant or agreement in any material contract,
document or instrument to which such RIKA Company is a party, and
such default remains uncured beyond any applicable grace periods,
(iv) any false representation or warranty made in the Member
Agreement or in connection with the transactions contemplated
therein results in a material adverse effect on a RIKA Company,
(v) any RIKA Company shall make an assignment for the benefit of
creditors, or shall become insolvent or bankrupt, or shall take
any action toward the dissolution or liquidation of such RIKA
Company, or (vi) any event occurs that would result in the
dissolution of a RIKA Company under the laws of the State of
Oklahoma.
Unless and until there has occurred an Event of
Default, one of the two RIKA managers shall be designated by the
Company (the "Company Manager"). The Company Manager need not be
a RIKA Member. Upon the occurrence of any Event of Default, the
holder of a majority of the voting rights of RIKA shall be
entitled to designate both managers of RIKA. At no time,
however, will more than one director-level management position be
held by an employee of the Company or any of its affiliates. At
no point will the managers of the other RIKA Companies be
officers or employees of the Company, nor will such managers be
designated by the Company. The Company shall promptly notify the
Commission upon the occurrence of an Event of Default.
(v) Rights and Obligations of Members
Actions requiring a vote of the Members of a RIKA
Company may be taken upon a majority vote of such Members.
Unless and until there shall have occurred an Event of Default,
the Company shall hold four percent (4%) of all voting rights of
each RIKA Company. Upon the occurrence of an Event of Default,
RIKA shall hold one hundred percent (100%) of the voting rights
of Universal, Automated and Training, and the voting rights of
RIKA shall be reapportioned among the Members of RIKA so that the
voting rights held by the Company on one hand, and the other
Members of RIKA on the other hand, shall be in proportion to the
amounts of principal and interest then outstanding under the
Promissory Note and any RIKA promissory notes held by the other
RIKA Members, respectively. It is expected that the Promissory
Note will have an initial aggregate principal amount of
$2,300,000, and that at the time of execution of the Member
Agreement one other RIKA promissory note will be outstanding in
favor of one other Member of RIKA, with an aggregate principal
amount of approximately $500,000. Therefore, an Event of Default
shortly after execution of the Member Agreement would cause the
Company to obtain a majority of the voting rights of RIKA.
As the Company will not hold "voting securities" within
the meaning of the Act in excess of 5% of the issued and
outstanding voting rights of any RIKA Company after the
consummation of the Transaction, it is the Company's position
that such companies will not be subsidiary companies of the
Company within the meaning of Section 2(a)(8)(A) of the Act, nor
will they be affiliates of the Company within the meaning of
Section 2(a)(11)(A) of the Act. In addition, except possibly in
certain situations after an Event of Default, the amount and type
of securities of any RIKA Company held by the Company would not
provide the Company with the means to direct the management and
affairs of any RIKA Company. If an Event of Default shall occur,
the Company would limit its control over RIKA to one or more of
the following: (i) electing a new management team, (ii)
overseeing the development of a restructured operating plan,
and/or (iii) liquidating the RIKA Companies' assets.
(vi) Transfer of Units
No transfer of Units by any Member of a RIKA Company
shall be made if the transfer (a) would violate applicable
federal and state securities laws or rules and regulations of the
Commission, any state securities commission or any other
governmental authority with jurisdiction over the transfer, (b)
would materially adversely affect the classification of such RIKA
Company as a partnership for federal or (as applicable) state
income tax purposes, or (c) would affect such RIKA Company's
qualification as a limited liability company under the Oklahoma
Limited Liability Company Act, as amended. No Units may be
transferred by a Member of any RIKA Company unless a majority
vote of the Members of such RIKA Company approving such transfer
has been obtained, provided, however, that no such approval shall
be required with respect to any transfer of Units by the Company
to CSW or any direct or indirect subsidiary of CSW. Any transfer
of Units of any RIKA Company not made in accordance with such
RIKA Company's Amended and Restated Operating Agreement shall be
null and void.
(vii) Dissolution and Liquidation
A RIKA Company shall be dissolved and its affairs shall
be wound up upon the occurrence of any of the following: (a) the
term of such RIKA Company as stated in its Amended and Restated
Articles of Organization expires, (b) all Members of such RIKA
Company vote to dissolve, or (c) if, upon the occurrence of an
Event of Dissolution (as defined below), the remaining Members
fail to continue the company pursuant to the terms of such RIKA
Company's Amended and Restated Operating Agreement. Upon
dissolution of a RIKA Company, such company shall immediately
commence to liquidate and wind up its affairs. The Members of
such RIKA Company shall continue to share profits and losses
during the period of liquidation and winding up in the same
proportion as before commencement of winding up and dissolution.
Upon the death, incapacity, resignation, expulsion,
bankruptcy or dissolution of a Member of a RIKA Company, or the
occurrence of any other event which terminates the continued
membership of a Member of a RIKA Company (any of such events
being defined herein as an "Event of Dissolution"), such RIKA
Company shall dissolve and its affairs shall be wound up unless
there is at least one remaining Member of such RIKA Company and
within sixty days after the occurrence of an Event of
Dissolution, all the remaining Members of such RIKA Company
unanimously agree to continue such RIKA Company. No Member of a
RIKA Company may voluntarily resign from such RIKA Company until
after the second anniversary of the date of such RIKA Company's
Amended and Restated Operating Agreement.
The Company has not established a divestment strategy with
respect to its investment in the RIKA Companies. The Company
views its investment in the RIKA Companies as a way efficiently
to utilize and retain its expertise in electric transmission and
distribution on a long term basis, rather than as a traditional
investment with a strong bias towards realization of profit. The
Company expects the RIKA Companies to be the catalyst for other
utility products and services to be developed in the future,
which will benefit the Company and its customers.
Request For Authority
The Company hereby requests authority to engage in the
Transaction as described herein, including authority (i) to
convert $750,000 of the funds paid by the Company to RIKA under
the Development Agreement into a capital contribution to
Automated in exchange for Units to be issued by Automated
pursuant to the Member Agreement, (ii) to convert the balance of
the funds paid by the Company to RIKA under the Development
Agreement into a loan to RIKA in exchange for the Promissory Note
to be issued by RIKA to the Company under the terms of the Member
Agreement, (iii) to commit to loan additional funds to RIKA to
complete the development of the Software, in an aggregate
principal amount of up to a maximum of the unfunded amount due
under the Development Agreement, in exchange for Units to be
issued by RIKA, and (iv) to make a capital contribution to
Universal in the amount of $450,000, in exchange for Units to be
issued by Universal pursuant to the Member Agreement, all as
described herein. To the extent that any other aspects of the
Transaction require authority from the Commission, the Company
hereby requests the same.
The Company agrees to file semi-annual certificates of
notification, no later than sixty (60) days after the end of each
semi-annual period, concerning the business activities carried
out pursuant to any order approving this Application, which
certificates of notification shall contain, inter alia, the
following information: (i) a description of all products and
services that were developed, are in the process of development
or are being considered for development by the RIKA Companies
during the period; (ii) a description of any software or
ancillary services provided to the Company by the RIKA Companies
during the period; (iii) a statement of any dividends or interest
paid to the Company, both for the period and cumulatively, as a
result of its debt and equity holdings in the RIKA Companies; and
(iv) a statement regarding the nature and consequences of any
Event of Default under the Member Agreement occurring during the
period, including any resulting change in the voting interests
held by the Company in any of the RIKA Companies and any exercise
of control by the Company over the management and affairs of any
of the RIKA Companies.
Item 2. Fees, Commissions and Expenses
The estimate of the approximate amount of fees and expenses
payable in connection with the transactions is as follows:
Holding Company Act filing fee.......... $ 2,000*
Legal Fees and Expenses
Milbank, Tweed, Hadley & McCloy
New York, New York................... 10,000
Doerner, Saunders, Daniel
& Anderson
Tulsa, Oklahoma...................... 14,000
Miscellaneous and incidental
expenses including travel,
telephone and postage................ 500
-------
$26,500
=======
_______________
* Actual Amount.
Item 3. Applicable Statutory Provisions
General
Sections 9, 10 and 11 of the Act and Rule 23 under the
Act are or may be applicable to the proposed transactions
described herein. Sections 9(a)(1) and 10 are applicable to the
Company's acquisition of the Units in the RIKA Companies and the
acquisition of the Promissory Note. Section 9(a) of the Act
makes unlawful the acquisition by a subsidiary of a registered
holding company of "any securities . . . or any other interest in
any business" without the prior approval of the Commission under
Section 10. Under Section 10(c)(1), the Commission may not
approve an acquisition of securities or any other interest in any
business if the proposed acquisition is "detrimental to the
carrying out of the provisions of Section 11." Under Section
11(b)(1), the Commission must limit the operations of public
utility holding companies and their subsidiaries to such other
businesses as are reasonably incidental, or economically
necessary or appropriate, to the operations of such integrated
public-utility system. The Commission may permit as reasonably
incidental, or economically necessary or appropriate to the
operations of one or more integrated public-utility systems the
retention of an interest in any business (other than the business
of a public-utility company as such) which the Commission shall
find necessary or appropriate in the public interest or for the
protection of investors or consumers and not detrimental to the
proper functioning of such system or systems.
The Company's participation in the development and
commercialization of the Software satisfies the requirements of
Sections 9(a)(1) and 10 in that it is incidental, and
economically necessary or appropriate to, the Company's core
business of generating, transmitting and distributing electric
energy and in that such participation will primarily benefit the
Company and its customers. The proposed Transaction is also
appropriate in the public interest and is not detrimental to the
proper functioning of the Company or the CSW system. The
software development and ancillary services to be provided by the
RIKA companies, such as maintenance and support services to be
provided under the Development Agreement, as described above, and
training services to be provided by Training, will result in
significant benefits to the Company's customers through increased
efficiency and reduced costs resulting from automated substation
operations and maintenance. In addition, the Promissory Note and
the Company's equity position in the RIKA Companies will provide
the Company with an opportunity to offset its cost of funding the
development of the Software. The Company's investment in the
RIKA Companies will be small relative to the Company's total
financial resources. Risks to the financial position of the
Company also will be limited because the Company will not be
obligated to make further capital contributions beyond its
initial equity investment. The Company will not seek recovery
through higher rates from utility customers to compensate for
possible future losses or inadequate returns on capital invested
in the RIKA Companies, and the Company's shareholders will bear
any risks associated with the Transaction.
Likewise, the Transaction is fully consistent with
proposed Rule 58 under the Act, and falls within two or more of
the categories of energy related activities which would be
permitted thereunder. Paragraph (b)(1)(ii) of proposed Rule 58
would permit the Company to acquire the securities of a company
which derives or will derive substantially all of its revenues
from the "development and commercialization of electro-
technologies related to ... energy efficiency ...." Paragraph
(b)(1)(vii) would permit the Company to acquire the securities of
a company primarily involved in the sale of technical,
operational, management, and other similar kinds of services and
expertise, developed in the course of utility operations in such
areas as power plant and transmission system engineering,
development, design and rehabilitation; construction; maintenance
and operation ... and other similar areas." The RIKA Companies
will derive substantially all of their revenues from (i)
marketing and supporting the Ultratest software, (ii) the
development and commercialization of substation automation
software, which enhances the efficiency of substation operation
and maintenance, and (iii) the sale of training courses relating
to all phases of automated testing and maintenance systems as
well as on-site training and consulting services to purchasers of
Ultratest and the substation automation software.
The Transaction also satisfies the two-pronged
"functional relationship" test established by the United States
Court of Appeals for the District of Columbia Circuit in Michigan
Consolidated Gas Co. v. SEC, 444 F.2d 913 (D.C. Cir. 1971), which
traditionally has been used by the Commission in applying Section
11(b)(1) of the Act. Under the "functional relationship" test,
an integrated public-utility system may retain an interest in
another business if (i) the additional business is "reasonably
incidental or economically necessary or appropriate" to the
integrated system, and (ii) the retention of the additional
business is in the public interest. Michigan Consolidated at
916. As discussed in the preceding paragraphs, the Transaction
satisfies the first prong of the "functional relationship" test
in that it is reasonably incidental and economically necessary
and appropriate to the Company's core business.
As discussed in In the Matter of CSW Credit, Inc.,
Holding Co. Act Release No. 25995 (March 2, 1995), "when a
utility holding company has a non-utility business that is
functionally related to the utility operations and that has
capacity in excess of the utility operations' requirements, the
excess capacity may be sold to non-affiliates, but the non-
utility business must be 'primarily' devoted to serving the
operations of the utility system." While the term "primarily"
has not been specifically defined, the cases dealing with "excess
capacity" have held that "where the portion of the other business
which is functionally related to the utility operations exceeds
the portion which is not, the other business may be acquired or
retained." CSW Credit, Inc. at 5. Thus, as was the case in CSW
Credit, a situation where non-affiliated business exceeds
affiliated business generally will not be permitted. In 1987,
however, the Commission established an exception to this so
called "50% test." In Jersey Central Power & Light, Holding Co.
Act Release No. 24348, 37 SEC Docket 1660 (March 18, 1987), the
Commission, citing several cases approving non-utility businesses
which failed the 50% test, established an exception from the 50%
test for businesses which involve "the sale or lease of products
or skills of some complexity developed by the holding company at
considerable expense for the benefit of its utility subsidiaries
and not readily available to the rest of the public from other
sources." CSW Credit, Inc. at 7. The rational behind this
exception also turned on the fact that "these endeavors generally
require[d] little or no further investment by the holding
company, and permitting the proposed activities would permit
amortization of product development expenses with little or no
risk." Id., citing Jersey Central at 1664-65. "Furthermore, in
such a situation the public interest is served by making
available skills or products that, due to the difficulty and
expense involved in their development, might not otherwise be as
available to the public." Id. This three pronged test was
recently reaffirmed in The Southern Company, Holding Co. Act
Release No. 26211 (December 30, 1994).
The Company's investment in the RIKA Companies, and the
development and commercialization of the Software, clearly fits
within the Jersey Central exception to the 50% test. The
Software to be marketed to non-affiliates will be developed at
considerable expense for the benefit of the Company and its
affiliated operating companies; the Software, or similar software
products, are not readily available to the public from other
sources; and a relatively small portion of the capitalization of
the RIKA Companies will be required to facilitate the proposed
transactions with non-affiliates, and such transactions will
permit the amortization of development expenses with little or no
risk to the Company. See, also, Eastern Utilities Associates,
Holding Co. Act Release No. 26232 (February 15, 1995), in which
the Commission recognized that the plain language of Section 11
of the Act is a sufficient basis on which to grant authorization
for the sale of services to non-affiliates, without a 50%
limitation, when those services constitute a close complement to
the applicant's core business.
The acquisition of an interest in Training is fully
consistent with a line of Commission decisions granting authority
for registered holding companies or their subsidiaries to acquire
or retain interests in a consulting or training business where a
majority of such business would be with non-affiliates. See,
e.g., American Electric Power Company, Inc., Holding Co. Act
Release No. 22468 (April 21, 1982)(holding company subsidiary to
sell management, technical, and training expertise in the open,
competitive market to non-affiliated entities); The Southern
Company, Holding Co. Act Release No. 22132 (July 17, 1981)(new
subsidiary of registered holding company to sell management,
technical and training services to non-affiliates). In addition,
Training will reduce the Company's need to develop and support
in-house training programs and its decommissioned substation will
provide hands-on training not currently available to the Company.
The Company believes that it is particularly appropriate
and necessary for the Company to acquire an equity interest in
the RIKA Companies as described herein. As a Member in each of
the RIKA Companies, the Company will be in a position to monitor
(but not control) the development of the Software and to share
sensitive market and other information with the RIKA Companies
without the chilling effects on the free flow of information that
can be present in a relationship that is purely between supplier
and customer. The Company believes that its equity interests
will thus foster the development of the Software in a fashion
that will best serve the needs of the Company and its retail
electric customers. In addition, the Company's equity interests
will permit it to share appropriately in the profits that will be
realized by the RIKA Companies if the Software and other
products, supported by the Company's funding during critical
early stages of development, are successful. Other products and
services to be developed by the RIKA Companies will evolve from
the development of the Software or other phases of the substation
automation project and will be dedicated solely to the provision
of improved substation control, automation, maintenance, testing,
reporting and utilization. Activities involving products and
services other than those described in the foregoing sentence
will not be funded by the Company without further Commission
approval.
The Company also believes that its maintenance of equity
interests in the RIKA Companies will be consistent with GPU
Nuclear Corporation, Holding Co. Act Release No. 26139 (October
7, 1994). In that order, GPU Nuclear Corporation was authorized
to offer to non-affiliates services based on expertise, resources
and facilities developed in the course of the corporation's core
business operations. The corporation was permitted, during an
initial three year period, to enter into agreements, with terms
of up to ten years, to provide such services to non-affiliates.
In the instant case, the Company will participate, indirectly, on
a long-term basis, in the offering of core business products and
services developed with the considerable support of the Company.
To the extent any other sections of the Act may be
applicable to the proposed transactions, the Company hereby
requests appropriate orders thereunder.
Rule 54
No proceeds from the Transactions will be used by CSW or
any subsidiary thereof for the direct or indirect acquisition of
an interest in an exempt wholesale generator, as defined in
Section 32 of the Act ("EWG"), or a foreign utility company, as
defined in Section 33 of the Act ("FUCO"). Rule 54 promulgated
under the Act states that in determining whether to approve the
issue or sale of a security by a registered holding company for
purposes other than the acquisition of an EWG or a FUCO, or other
transactions by such registered holding company or its
subsidiaries other than with respect to EWGs or FUCOs, the
Commission shall not consider the effect of the capitalization or
earnings of any subsidiary which is an EWG or a FUCO upon the
registered holding company system if Rule 53(a), (b) and (c) are
satisfied. As set forth below, all applicable conditions set
forth in Rule 53(a) are, and, assuming the consummation of the
transactions proposed herein, will be, satisfied and none of the
conditions set forth in Rule 53(b) exist or will exist as a
result of the transactions proposed herein.
CSW Northwest GP, Inc., CSW Northwest LP, Inc., CSW
Development-3, Inc. and Northwest Power Company, LLC
(collectively, the "CSW EWG's"), each an indirect subsidiary of
CSW, are the only EWGs in which CSW has equity interests. CSW,
through its subsidiary CSW Energy, Inc., has invested an
aggregate of $3,500 in the CSW EWG's as of September 30, 1995, or
less than 1% of $1.83 billion, the average of CSW's consolidated
retained earnings for the four consecutive quarters ended
September 30, 1995 ("Average Retained Earnings"). Seeboard plc,
a regional electric company organized in the United Kingdom in
which CSW holds an indirect 27% equity interest, is the only FUCO
in which CSW has an equity interest. CSW, through its subsidiary
CSW International, Inc., had invested approximately $680 million
in Seeboard as of November 15, 1995, or approximately 37% of
Average Retained Earnings. CSW thus satisfies Rule 53(a)(1).
CSW will maintain and make available the books and records
required by Rule 53(a)(2). No more than 2% of the employees of
CSW's operating subsidiaries will, at any one time, directly or
indirectly, render services to an EWG or FUCO in which CSW
directly or indirectly owns an interest, satisfying
Rule 53(a)(3). And lastly, CSW will submit a copy of Item 9 and
Exhibits G and H of CSW's Form U5S to each of the public service
commissions having jurisdiction over the retail rates of CSW's
operating utility subsidiaries, satisfying Rule 53(a)(4).
None of the conditions described in Rule 53(b) exist
with respect to CSW or any of its subsidiaries, thereby
satisfying such rule and making Rule 53(c) inapplicable.
Item 4. Regulatory Approval
No state regulatory authority and no federal regulatory
authority, other than the Commission under the Act, have
jurisdiction over the proposed transactions.
Item 5. Procedure
It is requested that the Commission provide expedited
treatment to this Application and that an order granting and
permitting this Application to become effective be issued no
later than December 31, 1995. Expedited treatment is requested
because of the need to meet intense commercial pressures as to
the timing of completion of the proposed transaction and of
developing the RIKA Companies' products and services and because
delay could cause substantial adverse tax consequences to the
RIKA Companies.
It is requested that the Commission issue and publish no
later than December 1, 1995, the requisite notice under Rule 23
with respect to the filing of this Application, such notice to
specify a date not later than December 21, 1995, as the date
after which an order granting and permitting this Application to
become effective may be entered by the Commission and the
Commission enter not later than December 22, 1995, an appropriate
order granting and permitting this Application to become
effective.
No recommended decision by a hearing officer or other
responsible officer of the Commission is necessary or required in
this matter. The Division of Investment Management of the
Commission may assist in the preparation of the Commission's
decision in this matter. There should be no thirty-day waiting
period between the issuance and the effective date of any order
issued by the Commission in this matter, and it is respectfully
requested that any such order be made effective immediately upon
the entry thereof.
Item 6. Exhibits and Financial Statements
Exhibit 1 -
Preliminary Opinion of Milbank, Tweed, Hadley & McCloy,
counsel to the Company (previously filed).
Exhibit 2 -
Final or "Past Tense" opinion of Milbank, Tweed, Hadley
& McCloy, counsel to the Company (to be filed with
Certificate of Notification).
Exhibit 3 -
Proposed Notice of Proceeding (previously filed).
Exhibit 4 -
Financial Statements of Public Service Company of
Oklahoma, as of September 30, 1995 (previously filed).
Exhibit 5 -
Agreement dated as of July 17, 1995 by and among the
Company, the RIKA Companies and certain Individuals
(previously filed).
Exhibit 6 -
Software Application and Development Agreement dated as
of July 17, 1995 by and between the Company and RIKA
(previously filed).
Exhibit 7 -
Form of Member Agreement by and between the Company and
the RIKA Companies (previously filed).
Exhibit 8 -
Form of Articles of Organization of RIKA Management
Company, L.L.C. (previously filed).
Exhibit 9 -
Form of Operating Agreement of RIKA Management Company,
L.L.C. (previously filed).
Exhibit 10 -
Form of Articles of Organization of Universal Power
Products Company, L.L.C. (previously filed).
Exhibit 11 -
Form of Operating Agreement of Universal Power Products
Company, L.L.C. (previously filed).
Exhibit 12 -
Form of Articles of Organization of Automated Substation
Development Company, L.L.C. (previously filed).
Exhibit 13 -
Form of Operating Agreement of Automated Substation
Development Company, L.L.C. (previously filed).
Exhibit 14 -
Form of Articles of Organization of RC Training, L.L.C.
(previously filed).
Exhibit 15 -
Form of Operating Agreement of RC Training, L.L.C.
(previously filed).
Item 7. Environmental Effects
The proposed transaction does not involve major federal
action having a significant effect on the human environment. To
the best of the Company's knowledge no federal agency has
prepared or is preparing an environmental impact statement with
respect to the proposed transaction.
S I G N A T U R E
- - - - - - - - -
Pursuant to the requirements of the Public Utility
Holding Company Act of 1935, as amended, the undersigned company
has duly caused this document to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: December 18, 1995
PUBLIC SERVICE COMPANY
OF OKLAHOMA
By: /s/SHIRLEY S. BRIONES
Shirley S. Briones
Treasurer
INDEX OF EXHIBITS
EXHIBIT TRANSMISSION
NUMBER EXHIBITS METHOD
- ------- -------- ------------
1 Preliminary Opinion of Milbank, ---
Tweed, Hadley & McCloy, counsel
to the Company (previously filed).
2 Final or "Past Tense" opinion of ---
Milbank, Tweed, Hadley & McCloy,
counsel to the Company (to be filed
with Certificate of Notification.)
3 Proposed Notice of Proceeding ---
(previously filed).
4 Financial Statements of Public ---
Service Company of Oklahoma, as of
September 30, 1995 (previously filed).
5 Agreement dated as of July 17, 1995 ---
by and among the Company, the RIKA
Companies and certain Individuals
(previously filed).
6 Software Application and Development ---
Agreement dated as of July 17, 1995
by and between the Company and RIKA
(previously filed).
7 Form of Member Agreement by and ---
between the Company and the RIKA
Companies (previously filed).
8 Form of Articles of Organization of RIKA ---
Management Company, L.L.C. (previously
filed).
9 Form of Operating Agreement of RIKA ---
Management Company, L.L.C. (previously
filed).
10 Form of Articles of Organization of ---
Universal Power Products Company, L.L.C.
(previously filed).
11 Form of Operating Agreement of Universal ---
Power Products Company, L.L.C. (previously
filed).
12 Form of Articles of Organization of ---
Automated Substation Development Company,
L.L.C. (previously filed).
13 Form of Operating Agreement of Automated ---
Substation Development Company, L.L.C.
(previously filed).
14 Form of Articles of Organization of RC ---
Training, L.L.C. (previously filed).
15 Form of Operating Agreement of RC ---
Training, L.L.C. (previously filed).
