File No. 70-8173
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 2
Form U-1
APPLICATION OR DECLARATION
under
The Public Utility Holding Company Act of 1935
THE SOUTHERN COMPANY
64 Perimeter Center East
Atlanta, Georgia 30346
THE SOUTHERN DEVELOPMENT AND INVESTMENT GROUP, INC.
64 Perimeter Center East
Atlanta, Georgia 30346
(Name of company or companies filing this statement
and addresses of principal executive offices)
THE SOUTHERN COMPANY
(Name of top registered holding company parent
of each applicant or declarant)
Tommy Chisholm, Secretary
The Southern Company
64 Perimeter Center East
Atlanta, Georgia 30346
(Name and address of agent for service)
The Commission is requested to mail signed copies of all
orders, notices and communications to:
W.L. Westbrook John F. Young
Financial Vice President Vice President
The Southern Company Southern Company Services, Inc.
64 Perimeter Center East One Wall Street, 42nd Floor
Atlanta, Georgia 30346 New York, New York 10005
Robert E. Jones John D. McLanahan, Esq.
President Troutman Sanders
Southern Development 600 Peachtree Street, N.E.
& Investment Group Suite 5200
64 Perimeter Center East NationsBank Plaza
Atlanta, Georgia 30346 Atlanta, Georgia 30308-2216
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INFORMATION REQUIRED
The Application or Declaration as filed in this proceeding
is amended and restated in its entirety as follows:
Item 1. Description of Proposed Transactions.
1.1 Background.
The Southern Company ("Southern") is a registered holding
company under the Public Utility Holding Company Act of 1935 (the
"Act"). Among its subsidiaries are Alabama Power Company,
Georgia Power Company, Gulf Power Company, Mississippi Power
Company and Savannah Electric and Power Company, each conducting
in its respective service area the business of an operating
electric utility company (collectively, the "Operating
Companies"), and Southern Company Services, Inc. ("Services"), a
subsidiary service company.
Southern also owns all of the common stock of two non-
utility subsidiaries, Southern Electric International, Inc.
("SEI") and The Southern Development and Investment Group, Inc.
("Development"). In accordance with its original authorization
(Holding Company Act Release Nos. 22132 and 22315A, dated July 17
and December, 18, 1981, respectively) (the "Original SEI
Orders"), SEI provides technical services to industrial and
commercial concerns, unaffiliated utilities and foreign
governments in both domestic and international markets, and
markets "Intellectual Property" (as defined in such orders),
acquired or created by Southern System companies to unaffiliated
third parties. Pursuant to authorization granted in 1987, SEI
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also engages in the development of independent power projects,
including investments therein, and provides construction,
operating and other services to associate project entities
(Holding Company Act Release No. 24476, dated October 20, 1987)
(the "1987 Order").
In accordance with its original authorization (Holding
Company Act Release No. 23440, dated October 1, 1984) (the "1984
Order"), Development (formerly Southern Investments Group, Inc.)
engages in the preliminary study, investigation, research and
development of new business or investment opportunities and the
direction, coordination and conduct of such activities. Under
the 1984 Order, Southern was also authorized to purchase up to
75,000 shares of the outstanding common stock of Integrated
Communications Systems, Inc. ("ICS"), a company that was
organized for the purpose of financing and developing computer
software and hardware for a two-way communications system over
local telephone lines with a capability of providing a wide range
of energy-related services in the residential and small
commercial markets. The investment by Southern in ICS will be
unaffected by this filing.
As a part of a plan to reorganize and redirect the focus of
certain of Southern's non-utility business activities along
functional lines, Southern and SEI are proposing in a separate
proceeding to restate SEI's operational and financing authority.
(See File No. 70-7932). Generally, it is proposed that SEI's
businesses will be limited to domestic and foreign power project
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development activities, including making investments therein,
rendering services related to such activities, and to certain
other related activities. It is proposed in this proceeding
that technical consulting activities of the type formerly
conducted by SEI will be performed by Development, and that, in
conjunction therewith, the operational and financing authority of
Development will also be restated in its entirety in order to
include other new activities and business functions in which
neither SEI nor Development is currently engaged.
1.2 Summary of Requested Authorization.
In this Application, Southern and Development are requesting
authority for Development to engage in the following activities
and businesses:
a. Research and Development Activities
b. Commercialization of and Investments in POWERcall(tm)
Technology
c. Investments in a Prototype Energy Management System
d. Providing Other Energy Management and Efficiency
Services
e. Technical Consulting Activities
f. Licensing of Intellectual Property to Non-Affiliates
g. Development of/Investments in Energy Recovery
Facilities
These are hereinafter referred to collectively as "Business
Lines."
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In connection with the foregoing activities and businesses,
Southern is proposing herein to make additional investments in
Development of up to $275 million from time to time through
December 31, 1998. Such additional equity investments are
required for the following purposes: (i) to enable Development to
develop, construct, and/or acquire the energy management
prototype network described below; (ii) to fund the estimated
costs of commercializing the POWERcall(tm) technology; (iii) to
finance the costs of equipment and/or provide customer financing
of equipment in connection with energy management and efficiency
services provided by Development; (iv) to pay development costs
associated with potential investments in other energy management
facilities and energy recovery facilities, as described below;
and (v) to provide Development with necessary working capital in
connection with its research and development and technical
consulting activities, as well as to pay other general and
administrative expenses.
It is proposed that the Commission's order approving the
transactions proposed in this Application replace and supersede
the authority heretofore granted in the 1984 Order (other than
the investment in ICS) and relevant portions of the Original SEI
Orders.
1.3 Development's Proposed Business Activities.
(a) Research and Development. It is proposed herein that
Development will continue to engage in its research and
development activities, namely, the preliminary study,
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investigation, research and development of new business or
investment opportunities and the direction, coordination and
conduct of such activities. Development cannot fully anticipate
the types or kinds of inventions or ideas that others will
generate in the future which bear upon the generation,
transmission and distribution of electricity, reductions in
demand, new uses of electricity, alternative technologies, and
technologies and systems bearing upon or affecting the business
of providing electric utility service. Any new business
opportunity related to the foregoing may be the subject of
research and development by Development. Development will
explore and conduct market, technical and financial tests and
studies of technology, systems, and businesses affecting the
environment; information systems and computer software and
applications thereof; energy management technologies, programs
and systems; energy recovery facilities, projects, equipment and
technologies; electrotechnologies; communications equipment,
technologies and systems; waste to energy projects and biomass
technology applications; environmental systems and equipment;
alternative fuels; improved fuel utilization; and alternative
energy technologies. The kinds of new business opportunities
that Development will explore will include new ventures utilizing
new communications technologies, including but not limited to
continuing efforts to develop the ICS system described below.
Where Development expends money in connection with its
research and development and aids in the development of new
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technologies or intellectual properties as described in this
Section 1.3, it may receive a license to use, or sublicense, the
property or technology developed.
Development is now studying and being called upon by
associate companies in the Southern System to support preliminary
evaluation and development activities relating to several
technologies, such as computerized utility information systems,
remote meter reading, power usage monitoring and other rapidly
developing technologies. For example, Development has
participated in a pilot test to determine the commercial
potential for a utility customer service, referred to as
POWERcall(tm), which would involve the installation of a device
at a customer's premises which would monitor and automatically
report power outages to a utility's operations center. This
pilot test is now underway in two localities in Alabama Power
Company's Birmingham service division, and was designed and
implemented with a view to determining the capabilities and
limitations of the equipment and associated software and the
potential for POWERcall(tm), by itself or in combination with
other features, as a commercial venture. The POWERcall(tm)
technology and Development's proposal to make certain investments
therein to commercialize it are discussed in greater detail in
Item 1.3(b), below.
Development is also continuing to study and test numerous
potential business opportunities, particularly in the areas of
communications, load management, and information systems.
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Specifically, Development will continue to fund research and
development of remote meter reading technologies and
communications modes which facilitate utility-related
technologies, energy conservation and demand reduction
technologies, and uses of optical fiber cables. Ultimately, it
is Southern's intention to concentrate in Development all of the
new business research and development activities of the Southern
System companies in these areas.
Development will continue to monitor the progress of ICS and
its system, as well as inventions competitive therewith. ICS is
currently developing a system, including computer software and
hardware, for two-way communications to provide a wide range of
energy-related services in the residential and small commercial
markets. Such services include: (a) an energy optimization
program, permitting the consumer to optimize the operation of
major energy-using appliances; (b) load management; (c) remote
meter reading; (d) rate design; and (e) remote connection or
disconnection of service. While such utility applications will
predominate, other providers could offer certain other services
through the ICS system including: (a) home security; (b)
entertainment (e.g., pay-per-view cable television and electronic
games); (c) information (e.g., financial and commercial data
bases, education or home study programs, and electronic mail);
and (d) transactions (e.g., electronic banking, home shopping,
and automatic billing). The foregoing functions are the
functions which have been disclosed to the Commission from the
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inception of Southern's investment in ICS. Advancements in
technology call for continuing evaluation. As an example, the
ICS system may work in conjunction with a variety of thermostats
useful in home heating. Thus, Development must constantly
evaluate new generations of thermostats that become available.
In addition, an ICS-like system may be useful in connection with
remote or automated meter reading. In consequence, Development
has been called upon from time to time to participate in the
evaluation of a wide range of remote or automated meter reading
devices, in some cases in connection with local telephone
companies that have systems which are complementary to, or
exclusive of, the ICS system, and in other instances in
connection with radio or wireless control automated meter reading
devices, or technologies which incorporate use of fiber optic
connections. Development has also studied solutions utilizing
radio in conjunction with vehicles traveling along the streets.
Another question relating to the ICS-type system is the
extent to which advancements in communications technologies will
or are likely to affect the potential use or obsolescence of the
twisted pair copper wire telephone system now in place, the
potential use of fiber optics for communication in conjunction
with the ICS system or comparable technologies, or the use of
satellite or radio technologies. All of these are the subject
of continuous development, frequent new proposals to Southern,
and the need for coordinated study and evaluation.
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Development has also participated in the development of a
computer software program known as Enerlink, which would enable
consumers of electric energy to monitor time-of-use pricing of
electricity and plan their operations based upon time-of-use
pricing. SEI is currently attempting to license this energy
optimization program to some commercial accounts within the
Southern System, and has licensed the program to Boston Edison
for use in a test to evaluate its efficacy and market acceptance.
It is anticipated that Enerlink will prove commercially viable
and will become the basis of a commercial venture to be
undertaken by Development. The software may also be licensed to
third parties as Intellectual Property in accordance with the
proposed authorization of Development discussed in Item 1.3(f)
hereof.
Development is also evaluating a variety of other new and
existing communications technologies for possible use in utility
related applications. For example, it has examined and
considered competing equipment and systems for radio
communications in the 800 MHz band, as well as a variety of
devices that would enhance the use of fiber optic and coaxial
cables, such as technologies developed or in the process of
development by First Pacific Networks, AT&T, BellSouth and
Scientific Atlanta, as examples. Finally, Development is
examining and conducting investigation and research with respect
to the potential use of waste as fuels (biomass) and technologies
associated therewith.
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(b) Commercialization of POWERcall(tm) The device that
has been utilized in the POWERcall(tm) pilot test in the
Birmingham area, as discussed above, is essentially off-the-shelf
equipment incorporating certain design specifications required by
Alabama Power Company. It was selected for the Birmingham pilot
test primarily because of the ease with which it can be
integrated with Alabama Power Company's existing computerized
interactive voice response units. The device plugs directly into
a standard telephone jack on the customer's premises, and a
transformer/power supply cord which is connected to the device
plugs into a standard duplex outlet. The device will sense any
loss of power at the location and, after a delay, dial a
preprogrammed telephone number which will be answered by Alabama
Power Company's computerized interactive voice response units.
The device and technology are adaptable to the interactive voice
response units of other utilities, including those of the other
Operating Companies.
POWERcall(tm) provides utility customers with the assurance
that power outages are reported automatically to their serving
electric utility, whether or not a customer is at home.
Development believes that if a sufficient number of such devices
are deployed within an area, the utility will be better able to
determine the locations of problems that are causing outages and
will thus be able to improve the promptness, efficiency and
safety of the service restoration process. Realization of this
operational improvement is, however, heavily dependent upon a
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sufficiently large number of customers in an area subscribing to
POWERcall(tm).
Development's market studies, which have been confirmed in
the Birmingham area pilot test, indicate that residential and
other utility customers would be interested in POWERcall(tm) but
that the demand for this service by itself is not sufficiently
large to realize the operational improvements desired by the
Operating Companies or to generate an adequate revenue stream.
In order to increase customer usage and acceptance, therefore,
Development is investigating the additional capabilities of the
monitoring device and its related software to determine the
commercial feasibility of providing certain monitoring services
in addition to POWERcall(tm). Such additional services would
include both energy-related services, such as automated meter
reading and temperature monitoring, and other services, such as
fire, intrusion and health alarm monitoring services. The off-
the-shelf device which met Alabama Power Company's specifications
is already capable of performing many of these functions and will
provide some of them with its existing capability unless they are
deactivated.
In this regard, Development believes that multi-functional
equipment similar to that used in the Birmingham area pilot test
is available or, with minor modifications, can be obtained on
commercially reasonable terms. The equipment may utilize
existing telephone lines at a customer location, as in the pilot
program, or it may be designed to communicate over television
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cables, other dedicated cables, or via radio channels. It is
contemplated that POWERcall(tm) would be offered to customers for
a standard monthly charge that would cover a basic package of
information services, including the power outage monitoring and
reporting feature, extreme temperature variation warning, smoke
and fire alarm, health emergency alarm and intrusion alarm.
These can be provided without modification of the POWERcall(tm)
device. In any case, the objective will be to design equipment
and related software programs that incorporate as much
functionality and flexibility as possible, subject only to cost
and technology constraints.
Development contemplates that the POWERcall(tm) equipment
would be installed in a subscribing customer's home or business
for a charge and that the monthly monitoring and service fee
would be collected as an add-on to the customer's electric bill.
Although neither the equipment nor the installation service will
involve a significant investment, Development anticipates the
need to make and warehouse volume purchases of the POWERcall(tm)
device in order to obtain available manufacturer discounts.
Development will contract with its associate companies in the
Southern System or with interconnected utilities, as the case may
be, to perform the actual installation, servicing, monitoring and
customer billing functions. Development will also utilize
independent contractors extensively for the installation of the
equipment. Development will reimburse any associate Operating
Company currently for the full cost of such services in
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accordance with Rules 90 and 91. The Operating Companies will
not make any associated investment in the POWERcall(tm) business
line, will not provide any warranties or agree to assume any
liabilities in connection with the quality or performance of the
POWERcall(tm) devices and related programs offered, and will be
indemnified by Development for all costs, liabilities, or other
claims of third parties relating in any way to POWERcall(tm)
through insurance.
Development requests authorization herein to undertake
development activities, advertising and marketing studies,
additional pilot tests, testing of various manufacturers'
equipment, and purchases of equipment and software enhancements
with a view to commercializing POWERcall(tm) and monitoring and
reporting services employing the device and similar devices
throughout Alabama and Georgia and in the Gulf region of
Mississippi and Florida. Specifically, Development will offer
the POWERcall(tm) service within the Southern electric system
service territories of Mississippi Power and Gulf Power in
Mississippi and Florida. It will offer these services throughout
the states of Alabama and Georgia. With respect to Georgia,
Savannah Electric and Georgia Power collectively serve 156 of the
159 counties in Georgia and have interconnections with other
utilities throughout the state. Georgia Power is party to
ownership in an integrated transmission system with other
utilities throughout the state. Moreover, the state of Georgia
by law allows customer choice throughout the state which is a
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one-time selection of the preferred electric supplier by certain
classes of customers. For all those reasons, it is considered
that the entire state of Georgia is part of the integrated
Southern electric system. With reference to Alabama, Alabama
Power serves all of the state except extreme northern Alabama and
maintains relationships and interconnections with the utilities
serving other portions of the state. Development also requests
authority to enter into agreements with utilities located in
Mississippi, Louisiana, Georgia, Alabama, Florida, Tennessee and
the Carolinas that are interconnected with Southern System
companies pursuant to which Development would offer POWERcall(tm)
and monitoring and reporting services employing the device or
similar devices to the customers of such non-affiliated
utilities. Revenues derived from POWERcall's(tm) service outside
of the service territories of the Operating Companies of the
Southern electric system will not exceed those derived from
within the territory and Applicants consent to a restriction to
that effect. Development estimates the need to expend up to $10
million in connection with these activities. Development states
that, to the extent POWERcall(tm) is offered to customers of
affiliated or non-affiliated utilities with enhancements enabling
monitoring of home security systems, Development will maintain a
list of approved independent contractors. This would permit a
utility customer to arrange for a contractor of the customer's
choice to provide and install sensors or other related equipment
and services.
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(c) Development and Investment in Energy Management
Prototype System. Development also requests authority to
develop, purchase, construct, own and operate a prototype energy
management communications network at various locations within the
Southern System. Utilizing this prototype network, Development
proposes to offer to customers power usage and outage monitoring
services (including POWERcall(tm)), two-way customer/utility
communications, automated billing, energy and conservation
information, including "Good Cents" messages and information, and
communications-based programs, such as "distance learning," that
may be offered in conjunction with a utility's industrial
development activities, among other potential utility and
utility-related interactive communications services. While the
primary purpose of these utility services is for electric
service, in order to achieve economies of scale and consumer
acceptance of such items as new billing programs and automated
billing the information and interactive services would, where
desired by the consumers and other providers, include automated
billing for other utilities such as providers of water or gas.
The network may also be used for internal system communication of
voice and data. Development will sell communications services of
the type described to Services and the Operating Companies on an
"at cost" basis in compliance with Rules 90 and 91, or, where
rates are normally subject to State Commission or F.C.C.
regulation, pursuant to Rule 81. Sales of such services directly
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to customers will be charged at fair market value or tariff as
provided by Rule 81.
The term "communications based programs" means programs
dependent upon a communications link which facilitate activities
of the integrated electric utility system in connection with the
generation, transmission, marketing, sale, and distribution of
electric energy, the improvement of environmental impacts
associated with such activities, energy or demand-side management
or the enhancement of industrial development and community based
activities. The Southern electric system presently broadcasts
current energy news via video to many of its business locations.
These broadcasts consist of wire service type information, as
well as video of major company and industry conferences and
public statements. They may be transmitted in the future to
customers, as well as to company employees.
Distance learning is the process by which persons may learn
through interactive communication at some distance through
television or personal computer networking. It includes the
viewing of educational programs offered by accredited high
schools, colleges and universities. It also includes such
programs offered by vocational institutions. It may involve a
single course or a curriculum of courses leading to an award of a
degree. The university system of the state of Georgia,
educational officers of the state of Alabama, Georgia State
University, the Medical College of Georgia, Emory University,
Georgia Tech, and representatives of a satellite based
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educational institution have all requested inclusion in fiber
optic communications by the Southern electric system.
The internal communication of voice and data would apply to
transmission of voice and data between and among Southern system
personnel and between and among those personnel, facilities and
equipment of the Southern electric system, on the one hand, and,
on the other, retail and wholesale customers of the Southern
electric system.
This network will incorporate technologies developed by
Development under its existing development arrangements with ICS,
technologies acquired from or developed with First Pacific
Network, and other available interactive technologies, such as
those under development by Scientific Atlanta, Microsoft and
AT&T. The prototype network would consist of fiber optic lines,
coaxial cables, computers, software and other intellectual
properties and other related telecommunications facilities and
equipment. Initially, Development contemplates that the networks
would be constructed at up to eight locations, including
Pensacola, Panama City and Gulfport, where Development has
already conducted certain preliminary studies, Birmingham,
metropolitan Atlanta, Augusta and Savannah.
Development estimates that its equity investment in the
prototype systems, which would cover design and marketing costs
and the costs of building, purchasing, or leasing fiber and
coaxial cable lines and related equipment, facilities and
properties, will be approximately $175 million. The specific
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estimated budget is attached as Exhibit B-3. Studies explaining
use of the system on which the estimate is based are enclosed as
Exhibit B-4.
Because the capacities associated with certain
communications mediums, particularly optical fiber, are so great,
the capacity of the prototype network described herein will be
significantly greater than necessary for the utility and utility-
related applications described above. In this regard, however,
Development states that it intends to utilize or reserve for
future utilization by it, Services, the Operating Companies, and
the proposed affiliate Southern Communications, at least 50% of
the bandwidth of the fiber optic communications network
exclusively for such utility and utility-related applications.
Development proposes to make available the balance of the
bandwidth capacity to other communications providers of voice,
data, and video services, such as cable television companies,
local and long distance telephone companies, computer networkers,
commercial merchants (e.g., home shopping networks), or large
private users, such as banks, pursuant to leases, network sharing
agreements or licensing transactions negotiated at arms' length
for varying terms at market values. In connection with the
foregoing, Development will provide the necessary system
operations and maintenance services and will charge third party
communications providers the fair market value of such services
based on their level of use of the system. Access to and use of
Development's equipment and facilities will likewise be
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negotiated with third party communications providers on the same
basis, where feasible. It is anticipated that many leases,
particularly those in the early development of the prototype
energy management system, will be for experimental purposes and
of indeterminate or short-term duration. It would simply not be
feasible or practical either from the standpoint of time or cost
to require lease by lease approval by the Commission for leases
of that type. Indeed, requiring lease by lease approval of
shorter term leases would unduly inhibit potential innovation and
experimentation. Accordingly, Development proposes to enter into
leases with unaffiliated third parties having a term of one year
or less, without further Commission approval. Renewals of such
leases beyond one year and leases having a term of more than one
year would be the subject of future applications.
(d) Other Energy Management/Efficiency Services.
Development also proposes to offer to utility customers directly,
or indirectly through public utility companies, a broader range
of energy management services, including demand-side management
("DSM") measures, and, in connection therewith, proposes to
invest in energy management equipment and/or provide customer
financing for the purchase of equipment from third party vendors
and suppliers. Development believes that there is a significant
demand for energy management services in the Southern System
service territory, and states that certain of the Operating
Companies have adopted a range of DSM programs, including energy
audits of customer sites, design review of new construction and
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major renovations, direct installation of energy conservation
equipment at customer sites and subsidies for the installation of
energy conservation equipment. Energy management measures would
include evaluation of energy conservation measures and evaluation
of the efficiency of various programs. Accurate monitoring and
knowledgeable evaluation of installed energy conservation
measures and devices are essential components to achieving cost-
effective conservation. Development's technical and management
experience in designing and implementing DSM programs is directly
applicable to monitoring and evaluating installed measures.
Such services would also include evaluation of the potential
impact of energy conservation measures on the use of other
resources in a customer's process or facility (e.g., water,
labor, maintenance, materials). For example, in the provision of
energy management services, there is often an economic trade-off
between conserving energy and conserving water in a customer's
process or facility. Since the costs of water and sewer services
are rising sharply in many areas, energy management services
firms must also address these costs in their work in order to
minimize the customer's total costs and identify the most
economically efficient approach. An example of one such
conservation measure is the recovery of heat from waste hot
water.
In auditing a facility and implementing a conservation
program, the energy management services firm acquires in-depth
knowledge of the customer's systems and operation. This
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knowledge enables the energy management firm to solve systems and
process design issues more creatively and effectively than other
outside firms. Therefore, effective energy management services
means taking an integrated approach that addresses all resources
used in a process or by a facility.
Based on its evaluation of the market for energy management
services and its experience and skills in related fields,
Development requests that its authorization include all of the
following specific services:
1. Energy Management Services including: (i) the
identification of energy and other resource (water,
labor, maintenance, materials) cost reduction
opportunities; (ii) design of facility and process
modifications and/or enhancements to realize such
opportunities; (iii) design of new and retrofit
heating, ventilating and air conditioning, electrical
and power systems, motors, pumps, lighting, water and
plumbing systems and related structures to realize
energy and other resource efficiency; (iv) the
management or direct installation of energy
conservation equipment; (v) performance contracts,
i.e., contracts under which Development is paid for its
services and the equipment it installs based on the
energy savings that result from such services and
equipment; (vi) assistance in identifying and arranging
third-party financing for energy conservation programs;
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(vii) training of client personnel in the operation of
equipment; (viii) system commissioning, i.e., observing
the operation of the installed system to insure that it
meets design specifications; and (ix) reporting of
system results.
2. DSM services including: (i) design of energy
conservation programs; (ii) implementation of energy
conservation programs; (iii) performance contracts for
DSM work; and (iv) monitoring and/or evaluation of DSM
programs, including metering and site inspections.
Development requests authority to provide the energy
management and DSM services described above to customers, without
limitation, located in the Southern System service territory and
to provide limited services outside this area, with the
restriction that revenues attributable to customers outside of
the Southern System service territory do not exceed the revenues
attributable to customers inside this region (the "50% Revenue
Restriction"). The 50% Revenue Restriction would assure that
Development's energy management and DSM activities will primarily
serve the Southern System by helping to maximize (through
conservation and load management) existing generating and
transmission resources, thereby delaying the future need for
additional generating and transmission capacity. Subject to the
50% Revenue Restriction, Development would provide energy
management and DSM services outside the Southern System service
territory to fully utilize its resources and skills and to profit
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from attractive opportunities to employ its excess resources.
See e.g., Jersey Central Power & Light Company Order Authorizing
Licensing of Computer Programs, HCA Rel No. 35-24348 (March 18,
1987).
In addition, Development requests authority to use up to $50
million of the funds provided by Southern, as discussed in Item
1.4(b), below, to make equity investments in energy efficiency
and conservation assets and/or loans to customers to enable such
customers to finance the purchase of such assets. Such assets
would consist of, among other things, manufactured energy savings
and conservation products and other facilities and equipment
directed at the efficient use of energy. The assets so acquired
may be leased or sold to customers at prices to be negotiated
based upon the fair market value thereof. Such assets would also
be used by Development in connection with providing energy
conservation and efficiency services to the Operating Companies
in accordance with Rules 90 and 91, or in connection with
services to non-affiliated entities, including industrial and
retail customers of the Operating Companies, at prices based on
the fair market value thereof. Development may retain title to
the facilities and equipment it uses to engage in these
activities.
Customer financing in conjunction with its energy management
services business will enable Development's customers to purchase
goods and services from third party vendors and suppliers of
their own choosing on terms and conditions negotiated directly by
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them. Loans to customers for this purpose will be evidenced by
the customers' promissory notes.
The actual form of customer financing arrangements will vary
from customer to customer and situation to situation. As an
example, there are private and state supported university
institutions which are desirous of obtaining energy efficiency
equipment and services, and which are eligible for tax exempt
financing. Other anticipated arrangements will involve providing
equipment pursuant to capitalized leases. Depending upon the
useful life of the equipment which is the subject of the
capitalized lease, the term of the lease will vary. Other
customers will seek operating leases to achieve off-balance sheet
financing. Again, the terms and conditions of such arrangements
and their duration will be dependent upon the application of
generally accepted accounting principles, the anticipated useful
life of the particular equipment involved, and the facts and
circumstances surrounding each specific transaction. Still other
customers will purchase equipment pursuant to conditional sales
contracts. Thus, Development will employ forms of financing
including capitalized leases, operating leases, tax exempt
financings, promissory notes, and conditional sales contracts.
The term and duration of such arrangements will vary from one
year to thirty years. All such arrangements will be priced at
the fair market value, including the cost of the equipment, the
interest rates and cost of capital prevailing at the time of the
transaction, and Development's assessment of the credit
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worthiness of the particular customer and arrangement involved.
All such arrangements will be designed to provide Development
with a rate of return at least equal to the authorized rates of
returns for the Operating Companies, and all such transactions
will be undertaken with the intent of profit. All such
arrangements will be negotiated and entered into on an arm's
length basis.
(e) Consulting Services.
Southern and Development also request authority for
Development to provide the following general types of technical
consulting services (the "Consulting Services") to non-affiliated
entities, including utilities, industrial and commercial concerns
and governments: management expertise, such as strategic
planning, finance, feasibility studies, organization, energy
efficiency, safety, environmental and conservation matters,
policy matters and management services; technical services and
expertise, such as design, engineering, procurement, construction
supervision, information systems and services, environmental and
conservation planning, auditing, engineering and construction,
engineering and construction planning and procedures, data
processing, system planning and operational planning; training
expertise, including training in the area of operation, equipment
repair, and maintenance; and technical and procedural resources
and systems, such as are embedded in computer, information, and
communications systems, programs or manuals developed or acquired
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by Southern System companies. Contracts for such services will
be negotiated and entered into on an arms' length basis.
The Consulting Services described also include services that
SEI now provides to public utility companies and others having
need for the procurement of materials, machinery, equipment,
services and supplies used in the generation, transmission, and
distribution of electric power and the maintenance of inventories
of spare parts, such as through joint procurement organizations
(e.g. "PIMS,"or Pooled Inventory Management Services), which may
include, as members, participants, or shareholders, companies
that are subsidiaries of Southern. Those services involve
management and implementation of joint procurement programs and
organizations. Development seeks authority to render such
Consulting Services in the future and to assume SEI's obligations
under existing contracts to the extent that they can be assigned.
Consulting Services offered by Development, as proposed
herein, will generally be different in type and character from
the services that SEI is proposing to offer in File No. 70-7932,
although both SEI and Development may render services to similar
kinds of clients or customers (e.g., unaffiliated utilities).
However, while SEI's proposed consulting activities will
generally be limited to providing services and expertise in
connection with power plant design, construction and operations,
independent power project development, and utility system
transmission and distribution, among others, Development will
pursue consulting opportunities in other, primarily non-utility,
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fields, such as in communications, resource recovery, and energy
efficiency and management. Accordingly, Southern and Development
believe that there will be very few, if any, instances in which
Development and SEI would engage in consulting activities that
are in direct competition with each other. Further, Development
and SEI intend to coordinate their respective business
development activities to avoid or minimize any such competition,
including taking appropriate steps to screen potential business
opportunities for possible referral to one another. Development
will not, without obtaining the prior approval of the Commission
in a separate proceeding, render services to any associate
company that is an "exempt wholesale generator" or "foreign
utility company" within the meaning of Sections 32 and 33 of the
Act, respectively.
(f) Marketing of Intellectual Property. Under the
Original SEI Orders, SEI is authorized to resell or license to
third parties "Intellectual Property," defined therein as "any
process, program or technique which is protected by the
copyright, patent or trademark laws, or as a trade secret, and
which has been specifically and knowingly incorporated into,
exhibited in, or reduced to a tangible writing, drawing, manual,
computer program, product or similar manifestation or thing." If
Intellectual Property developed by an Operating Company is sold
or licensed to a third party and, as a result thereof, it is no
longer available to Services or the Operating Company providing
it, then such company is entitled to receive seventy percent
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(70%) of the net profits therefrom (after deducting marketing and
other applicable expenses) and SEI is entitled to receive 30% of
the net profits as a commission. If such Intellectual Property
is made available for disposition or licensing to third parties
but use thereof is retained by the associate company providing
it, SEI is obligated to reimburse its associate company only for
the actual expenses incurred.1
Development, Services and the Operating Companies propose to
continue these arrangements for the use and disposition of
Intellectual Property, subject to the following changes. First,
in the event that an Operating Company invests in the development
of Intellectual Property which is not ultimately used by it,
resulting in a disallowance of any associated development costs
by state regulatory authorities having jurisdiction, and such
Intellectual Property is thereafter sublicensed by Development to
third parties, Development will pay a royalty of thirty percent
(30%) of net sublicense revenues (after deduction of costs and
expenses of Development) until the development costs have been
fully reimbursed to such Operating Company. And second, where
Development and Services or one or more of its associate
Operating Companies agree to jointly develop or acquire
Intellectual Property with the specific understanding that such
1 The existing Service Agreement between Development and Services
contains an identical definition of "Intellectual Property," and
the terms approved in the 1984 Order for compensating other
Southern System companies which have developed such Intellectual
Property are also identical.
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Intellectual Property would be both used by Services or such
Operating Company and remarketed to third parties by Development,
Development will pay for fifty percent (50%) of the cost of the
acquisition or development thereof, but shall have no further
financial obligation to Services or such Operating Company, as
the case may be. Subject to the foregoing modifications,
Development requests authorization to continue to offer to third
parties Intellectual Property created or acquired by its
associate companies within the Southern System. The terms of
such arrangements regarding the use and disposition of
Intellectual Property are contained in the proposed form of
amended Service Agreements filed herewith as Exhibits B-1 and B-
2, as applicable.
g. Development of and Investments in Energy and Resource
Recovery Facilities. Development also proposes to undertake
development activities with respect to potential investments in
energy and resource recovery facilities and technologies,
including but not limited to coal gasification facilities and
other synthetic fuels technologies, landfill gas recovery, refuse
derived fuels, biomass derived fuels and other alternative fuels
technologies. Development's development activities would be
limited to design and concept review, engineering, siting and
environmental studies, negotiation of various fuel and energy
purchase and joint venture contracts with potential users and
suppliers, site acquisition, financial modeling and feasibility
studies, negotiation of financing structures and terms, due
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diligence, equipment procurement and other similar kinds of
activities incidental to the development and financing of such
facilities.
Fuels or other energy sources produced using any of the
foregoing technologies may be sold to utilities (including any of
the Operating Companies) for power generation and to industrial
users as boiler fuel. Development will seek to maximize the use
of available income tax credits that may be available for
investments in such facilities.
Development proposes that not more than 50% of its equity
investments in energy and resource recovery facilities of the
types described above shall be located outside the four state
area served by the Operating Companies. Development will not
make any equity investment in any such facility exceeding $1
million individually or $10 million in the aggregate ("Small
Projects"), except in accordance with an order of the Commission
in a separate proceeding or as described below.
There are several business forces which would require
Southern, as an integrated electric system, to develop energy
resource and recovery facilities, technologies and projects, and
to have expertise with respect thereto. First, there is the
legal compulsion and the agreement with the Clinton
Administration (the Southern electric system has entered into
President Clinton's Climate Challenge Program and Southern must
present its outline of proposed actions under such program to the
Department of Energy by October 1994, which outline will include
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reduction in emission levels of greenhouse gases through biomass
gasification efforts) for the Southern electric system to develop
technologies and applications to reduce CO2 and other greenhouse
emissions. To the extent that projects can be developed using
biomass, in whole or in part, for the production of electric
energy at generating plants, this will assist compliance.
Several of these projects with existing Southern electric system
generating plants are now under study. Reduction of such
emissions by industrial accounts in the same locale or reduction
in energy demand as a result of biomass technologies will also
enhance system generation compliance by reducing emissions in the
area, and therefore improve air quality. Second, there is a
customer industrial development and economic driver for these
technologies and projects. To the extent that the electric
utility can assist an industrial account in the utilization of
biomass technologies for the reduction of emissions or the
reduction of electric energy usage, such industries may be
retained as customers (rather than being forced to close or
curtail operations in the territory) or new industries may be
attracted to the service territory. Third, because the
availability of Section 29 alternative fuel federal tax credits
is limited to situations where the entity producing the biomass
gas is not the entity which purchases the gas, Development, in
conjunction with customers, may assist operating utilities and
customers in gaining the economic advantage of the tax credits.
Because all of the activities cited will be related either to
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generation facilities of the Southern electric system, demand-
side and environmental activities of customers having an impact
on the utility, or industrial development activities of the
utility, all of the activities described are reasonably
incidental, economically necessary and appropriate to the
operation of the integrated utility system and in fact, in most
instances, are directly functionally related to the operation of
the integrated utility system.
In order to qualify for the Section 29 credits, partnerships
will have to be created, contracts entered into, and individual
biomass gasification facilities designed, all to be completed
prior to January 1, 1996. The facilities must be in service
prior to January 1, 1997. Because construction must be
coordinated with planned major outages of generating plants,
arrangements to accomplish all of this must be made by November,
1994. Moreover, we are obligated to report our plans under the
Clinton Administration challenge by October, 1994.
There are two basic types of projects now under active
planning.
The first type of project concerns gasification of waste
materials such as wood waste with the use of the gas produced at
Operating Company generating plant sites within the Southern
electric system. The gas produced would displace a portion of
the coal now used to generate electricity, thereby reducing coal
emissions for compliance with the Clean Air Act and the Clinton
Challenge. The first such project will be undertaken at Alabama
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Power's Plant Barry. Five other generating plants within the
Southern electric system, at a minimum, will be identified. In
each instance the gasification project will be owned by a
partnership composed of Development and an unaffiliated third
party. Development will own no more than fifty percent of each
partnership and expects to own fifty percent of each partnership.
Development will have the operation and maintenance
responsibility for the partnership. It will render such
operation and maintenance services on behalf of the partnership
and be reimbursed by the partnership for its costs on a fully
allocated basis. Development hereby requests that it be
permitted to enter into up to eight partnerships in which it and
a non-affiliated third party each own fifty percent of biomass
gasification projects which are located at and provide biomass
gases and fuels to Southern electric system generating plants.
The partnerships will sell the gases to the generating plants on
the basis of Rule 92 for fair market value, not to exceed system
marginal fuel costs. In no event would the price charged exceed
the fair market value of the gas produced. This complies with
Rule 92 and the partnership will not sell the gas to the system
generating plants and Operating Companies at a price which
exceeds the price at which the purchaser might reasonably be
expected to obtain comparable goods elsewhere having due regard
to quality, quantity, regularity of supply and other factors
entering into the calculation of a fair price.
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The other type of transaction and project which is
contemplated is closely related to the objectives of the first,
which is to achieve reductions in emissions in the general area
of system operations. A generating utility must be mindful of
emissions not only caused by it, but caused by others within the
same vicinity. Only through such a total and coordinated
response can the objectives of the Clean Air Act and the Climate
Challenge be truly achieved and further, more stringent,
limitations on generating plant activities avoided. Several
manufacturers of paper and paper products, forest products and
chemicals have requested that Development assist them in
reduction of their consumption of conventional energy, and in
their reduction of regulated emissions through the installation
of electrotechnology and biomass gasification. The biomass
gasification projects for third parties would be conducted within
the Southern electric system operating territory or areas
proximate thereto within the states of Florida, Georgia, Alabama,
Mississippi, Louisiana, Tennessee, North Carolina and South
Carolina. There would be up to twelve such projects. In order
to assure Section 29 compliance and eligibility for the tax
credit, if partnerships are formed, Development will have a fifty
percent or greater interest, not to exceed ninety-nine percent in
each partnership. Without a partnership, Development will own
one hundred percent of the project. Development would provide
operation and maintenance services for the partnership in the
operation of the gasification project, and would charge the
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partnership on the basis of the fair market value of the services
rendered with the intent of profit for such services. The gas
would be sold to the host third party industrial account on the
basis of the fair market value of the gas arrived at through
arm's length negotiation. Because of the timing involved and the
necessity for identification, negotiation and formation of the
partnerships within the October-November, 1994 time frame as
previously explained, it is requested that approval of this
application permit Development to enter into such partnerships.
The Commission will be notified of the formation of any
partnership within ten (10) days of the execution of partnership
documents. In all instances in connection with all partnerships,
whether they involve system generating plants or sales to third
party entities, the liability of Development pursuant to the
partnership agreements would be limited to the amount of its
equity investment. All investments in these projects or
partnerships beyond development of the projects (other than Small
Projects) will be the subject of additional filings with the
Commission, as will permanent financings and related matters.
The first project at a non-generating plant location will be
built at a manufacturing location near Albany, GA. Development
will own 100% of the gasification project and total cost will be
$2,500,000. The gasifier will be completed by the third quarter
of 1995 and will gasify wood waste, thereby achieving the
emission reduction and energy conservation goals.
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Sales of the fuels identified in this Item g will not be
made to other utilities except to the extent that they are co-
owners with Southern electric system Operating Companies of
common facilities.
1.4 Requested Financing Authority.
Southern hereby requests authority to commit up to an
aggregate of $275,000,000 outstanding at any one time through
December 31, 1998 through any combination of purchases of
Development's common stock, cash capital contributions or loans
to Development, conversions of any such loans to equity
investments, guarantees of loans to Development by banks or other
lending institutions, or guarantees by Southern of other recourse
liabilities (e.g., payments under leases or installment purchase
obligations) of Development. To the extent such investments
involve loans from Southern to Development, such loans will be
made from time to time prior to December 31, 1998, with
maturities no later than December 31, 2003. Such loans will bear
an interest rate equal to a rate not to exceed the prime rate in
effect on the date of the loan at a bank designated by Southern.
Where non-affiliate loans to Development are involved, the loans
will be made with maturities of no later than December 31, 2013
and with an interest rate not to exceed the greater of 12% per
annum or 3% over the lender bank's prime rate. Pursuant to Rule
50(a)(2), such lenders would be limited to commercial banks,
insurance companies or similar institutions who acquire notes for
investment and not for resale to the public.
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It is anticipated that any notes sold to a lender other than
Southern may be guaranteed by Southern as to principal, premium,
if any, and interest. In connection with any such sale, lender
fees such as underwriting and commitment fees may be paid in an
amount not greater than 3% of the principal amount of any note.
The name or names of the lender or lenders other than Southern,
principal amounts and terms of other notes will be filed
quarterly as a part of Development's quarterly certificates under
Rule 24, as more fully described in Item 1.9, below.
Based upon the current prime rate of 6%, notes issued to
Southern would bear a rate not exceeding 6% and notes issued to
lenders other than Southern would bear a rate not exceeding 12%.
It is further proposed that any notes issued to Southern
hereunder may, at the option of Southern, be converted to capital
contributions to Development through Southern's forgiveness of
the debt represented thereby.
Investments by Southern in Development would be utilized by
Development in order to fund its authorized investments and
activities, as follows:
(a) Investments Relating to Energy Management Prototype
Network. Southern and Development anticipate that up to $175
million in funding and/or guarantees from Southern will be
required by Development from time to time through December 31,
1998, in order to develop, design, engineer, acquire and
construct the proposed energy management prototype network, as
described in Item 1.3(c) hereof.
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(b) Investments in or Financing of Other Energy Management
Measures. Investments by Southern will also be utilized by
Development to purchase energy conservation and efficiency
equipment and/or to provide customer financing. Southern
anticipates that the aggregate amount of funding and/or
guarantees to Development for such purposes would not exceed $50
million at any one time outstanding. Any unutilized portions may
be used for permitted investments in energy resource and recovery
facilities.
Notes issued to Southern to enable Development to provide
customer financing in connection with the sale of energy
management services may be unsecured, or secured by Development's
customer contracts. Further, Development may assign evidences of
customer indebtedness to Southern in consideration of a reduction
in the amount of outstanding notes, in which case the aggregate
amount of outstanding customer indebtedness held by Southern
would be added to the aggregate amount of outstanding notes
issued by Development and held by Southern for purposes of the
proposed $50 million limit.
(c) Working Capital Authority. Southern estimates
that aggregate investments of up to $50 million at any time
outstanding will be required in order to enable Development to
finance the estimated costs associated with commercializing
POWERcall(tm) (estimated at $10 million) and development costs
associated with potential investments in other energy management
and recovery facilities; to permit Development to invest in
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energy and resource recovery facilities described as Small
Projects; to provide Development with working capital needed in
connection with Development's consulting and energy management
services activities; and to pay certain ongoing general and
administrative costs, including personnel, accounting, marketing,
engineering, legal, financial and other necessary support
functions, required in connection with developing and
administering its Business Lines.
1.5 Indemnifications and Guarantees. Southern also
proposes, from time to time, to guarantee or to act as surety
itself on bonds, indebtedness and performance and other
obligations issued or undertaken by Development in connection
with its business. In the ordinary course of its business, it is
anticipated that Development will be required to furnish various
types of bonds including bid bonds, performance bonds, and
material and payment bonds, and must provide commercial sureties
for its obligations under certain of such bonds. The proposed
indemnification by Southern of such sureties will facilitate
Development in obtaining the necessary bonds when needed and at
more favorable rates than if such obligations were not
guaranteed.
In the past, Southern has been called upon from time to time
to provide performance guarantees and to undertake other
contractual obligations with respect to the performance and other
obligations of SEI under contracts and bids involving consulting
activities. Similarly, Southern believes that the inability of
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Development to provide such parent guarantees of Development's
performance and other obligations in the future would prevent
Development in many cases from participating in projects, or
make its participation more costly. Thus, Southern believes that
it will be necessary to provide guarantees of Development's
performance and other obligations under contracts and bids with
third parties in order to facilitate Development in obtaining
such contracts and to enhance the competitiveness of Development
in the marketplace.
In addition, in order to maintain this competitiveness in
the marketplace, Development must have the ability to bid on or
otherwise pursue multiple contracts or bids on a simultaneous
basis and to provide evidence of its authority to provide the
proposed guarantees or indemnifications of sureties by Southern
at the time of contract negotiation or bid. Southern's
theoretical exposure on such guarantees and indemnifications of
sureties will be limited by the fact that many of these
guarantees provided at the time of bid will not be activated
unless and until Development actually receives a contract award
and by the relatively low likelihood that Development will be
awarded contracts on all bids. Southern's exposure will also be
limited to the extent that Development may participate in any
particular project through a joint venture arrangement with third
parties in which the partners share the responsibility of such
guarantees and indemnifications of sureties.
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These forms of credit enhancement or assurance are typical
in the marketplace. As an example, preliminary bids or proposals
often must be accompanied by bid bonds so as to evidence the
seriousness and financial responsibility of the bidder. In the
case of such bids by Development, the bid may be conditioned upon
governmental approval, including any approval that may be
required under the Act, as well as other business and legal
conditions. A bid bond merely assures that the bidder, if
successful, will act in accordance with the terms of the bid or
forfeit the bond. However, the warranties and degree of credit
support are the result of arms' length bargaining and are usually
subject to limitations as to duration and amount and normally
exclude consequential damages. It is often the case that the
amount of liability is related to all or a portion of the
consulting contract price or stipulated liquidated damages,
rather than the value of the project.
Despite the fact that Southern has guaranteed or agreed to
act as surety or indemnitor on SEI's behalf pursuant to long-
standing Commission authorization under the 1987 Order, there has
not been a single claim against any bonds, guarantees or
suretyships which have been issued. They exist, nevertheless, as
a necessary commercial practice, particularly with reference to
engineering, design, construction and operational assurances
which are required in the commercial marketplace.
It is therefore proposed that Southern have the authority
under this Item 1.5 to provide such guarantees of and similar
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provisions and arrangements concerning Development's performance
and undertaking of other obligations, in an aggregate amount
outstanding at any one time (including all commitments that could
be called) of $200,000,000 through December 31, 2003; provided,
that any guarantees or indemnifications outstanding at December
31, 2003 shall continue until expiration or termination in
accordance with their terms, but in no event shall such guarantee
or indemnification continue beyond December 31, 2018. For
purposes of computing the above limitations, neither Southern's
agreements to provide guarantees or indemnifications of sureties
of Development which have not actually been issued, nor the
respective shares of any such obligations or indemnification of
sureties held by any joint venture partner of Development, will
be counted. It is further proposed that, because Development's
need for such Southern guarantees and indemnifications cover a
range of contracts too broad to describe all of their natures at
this time, Southern and Development have the flexibility to
negotiate specific guarantees and similar provisions and
arrangements with third parties, and indemnifications of
sureties, as the need to do so arises, without further Commission
authorization.
1.6 Authorization of Transactions with Associate Companies.
Development will maintain its staff of employees who will deal
primarily with the management, marketing, development, accounting
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and administrative functions of the corporation.2 Utilizing a
work order procedure, this staff will request the Operating
Companies and Services to provide such personnel and other
resources as are needed, from time to time, to consult and assist
in marketing, engineering and other required functions in
connection with Development authorized business activities.
Additional required personnel and resources not then obtainable
from within the Southern System will be obtained or hired from
external sources. Development proposes to enter into new service
agreements (the "Service Agreements") with Services and each of
the Operating Companies that will be substantially identical to
the existing agreements between Development and Services, with
the changes discussed elsewhere in this filing. Drafts of these
agreements are attached hereto as Exhibits B-1 and B-2.
Selection of the Southern System personnel to be utilized in
connection with Development's activities will be based upon
projected personnel availability for the duration of an activity,
expertise in the type of work involved and access to resources
within the Southern System needed to perform the work. However,
the Service Agreements will provide that any Southern System
company may, in its absolute discretion, elect not to
participate, either through personnel or other resources, in any
of Development's projects.
2 Upon receipt of the Commission's order in this proceeding,
approximately 30 of the 200 current employees of SEI will be
transferred to Development.
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Services will also continue to provide assistance in
connection with financial, accounting, and internal auditing
functions for Development, utilizing those accounting systems
which are economically justifiable under the circumstances. The
accounts of Development will continue to be subject to audit by
the independent accountants of Southern.
The use of available expertise and personnel of the Southern
System to support Development's authorized business activities
will enable Southern to optimize the efficient and economic
utilization of existing human resources and other capabilities.
It will also enable affiliates to have the benefit of knowledge
and experience gained by Development from its outside activities.
An important result of this efficient allocation of technical
resources within the Southern System is that it will keep such
expertise and capabilities available to the Operating Companies,
as well as enabling Southern and Development to earn a profit on
and minimize the cost of maintaining such resources which are
considered necessary to the adequate servicing of existing
Southern System plants and capacity.
Under the terms of the existing Service Agreement between
Development and Services, Development is obligated to make any
"Intellectual Property" developed in the course of its business
available for utilization by Services without charge, except for
the actual expenses incurred in making the same available, to the
extent that Development has or retains proprietary rights
therein. Likewise, Development has the reciprocal right to
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receive from Services without charge any such Intellectual
Property, except for the actual expenses incurred in making the
same available.
This system of compensation and reciprocal availability of
Intellectual Property has existed for many years. It provides a
benefit to the Operating Companies and consumers as well as to
Development and ensures that there is no subsidization of
Development at the expense of the Operating Companies.
Southern System companies providing services to Development
will be reimbursed promptly for their costs incurred in
connection therewith. All accounting procedures previously
employed will be utilized by Development. They are described in
Exhibit B-5. For its part, each Southern System company
providing services for or material to Development will utilize
cost accounting procedures designed to identify promptly all
direct and indirect costs, including overheads, which are
applicable to the work being performed by or with such Southern
System company personnel, material or other assets. Services
will account for, allocate and charge its costs to Development,
using procedures permitted under Rules 90 and 91 and currently
applicable methods of allocation.
All transactions between Development and any other Southern
System company (except as noted below in the case of projects
which are co-owed by Southern or an associate of Southern and
unaffiliated parties) will be at cost in compliance with
Section 13 and Rules 90, 91 and 92.
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1.7 Accounting for Transactions with Non-Associate
Companies. Fees for Consulting Services and Energy Management
and Efficiency Services provided by Development to clients or
customers who are not affiliated with Southern or which are co-
owners or investors in projects with Southern or its associate
companies (other than any of the Operating Companies), will be
calculated to reimburse all applicable costs, including
overheads, plus produce a profit for Development.
All of Development's costs will be identified and expensed
promptly. Development will continue to use portions of systems
also employed by Services to account for those costs and
segregate them by project and Southern System company performing
the services. Development will retain such earnings as remain
after reimbursement to the Southern System companies of these
costs and payment or funding of other costs, liabilities, fees or
charges. These retained earnings will then be used to offset
capital needs of Development or will be paid to Southern.
1.8 Other Matters. The consolidated federal income tax
liability of the Southern System is allocated among the members
of the consolidated group in accordance with the provisions of
subparagraph (a)(1) of Section 1552 of the Internal Revenue Code
of 1986, as amended, and the applicable requirements of Rule
45(c), as modified by certain orders of the Commission.
Development will continue to be allocated a portion of the
consolidated federal income tax liability based upon those
provisions.
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1.9 Reporting Obligations. Southern and Development agree
that the Commission's order to be issued in connection with this
filing shall be subject to the terms and conditions prescribed in
Rule 24 promulgated under the Act, except that it is proposed
that certificates regarding the activities of Development
required to be filed thereunder may continue to be filed on a
quarterly basis, not later than 60 days after the end of each
quarterly period. Such certificates shall include the following:
(1) A copy of Development's balance sheet and
income statement;
(2) A narrative description of Development;s activities
during the quarter just ended organized by business
category (project development, project related
services, consulting, demand-side management, sale
and/or license of intellectual property,
telecommunications and other), and within each
category, a description of new developments by project
type;
(3) Amounts and forms of: (i) guarantees of, and
similar provisions and arrangements concerning
performance and undertaking of other obligations
by Development; and (ii) indemnifications of and
with respect to persons acting as sureties on
bonds or other obligations issued on behalf of
Development;
(4) Amounts and forms of: (i) guarantees of, and
similar provisions and arrangements
concerning performance and undertaking of
other obligations by Development; and (ii)
indemnifications of and with respect to
persons acting as sureties on bonds or other
obligations on behalf of Development which
Southern has granted and are currently
effective;
(5) A description of services obtained from associate
companies, specifying the type of service, the number
of personnel from each associate company in providing
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services during the quarter and the total dollar value
of such services;
(6) A description of services provided to associate
companies which identifies the recipient company, the
service, the charge to the associate and whether the
charge was computed at cost, market or pursuant to
another method, which method shall be specified.
Development will file a Form U-13-60 (as modified) as an
exhibit to Southern's annual report on Form U5S.
1.10 Legal Discussion. Each of the Business Lines sought
to be authorized by Southern and Development in this
Application/Declaration is consistent with the Act and is
reasonably necessary, incidental or appropriate for the operation
of the Southern integrated electric utility system. The
authorizations requested herein comply with Section 13 of the Act
as construed by the Commission.
We will proceed to an item by item examination of these
Business Lines.
The research and development activities proposed to be
conducted by Development are neither new nor novel. Research and
development is at the heart of the evolving character of any
electric utility. It provides the basis for improved service,
reduced costs, advances in technology and other direct utility
and consumer benefits. By having a separate subsidiary which
focuses on technological developments, Southern is able to
effectively reduce costs, confusion and duplication of efforts.
Prior Commission precedent, such as the 1984 order itself,
evidences that research and development activities are vital to
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the operation of an integrated utility system and are clearly
permissible.
Similarly, the rendition of technical consulting activities
is a traditional and valuable part of electric utility
operations. These types of activities began in the 1930's, if
not before. In those days, electric utilities employed persons
who did everything from go to the home to demonstrate residential
uses of electric appliances to the factory, industry and
commercial account to demonstrate and devise systems which used
electricity. The interest of electric utilities today is much
broader, relating as much to the conservation of energy as to its
use. But the thrust remains the same. A consulting arm of an
electric utility enables it to hone its skills and to apply its
expertise. Over the years, we have found that experts in
particular areas of engineering or technology who were valuable
to the system did not, at times, have sufficient work to justify
their retention on a full-time basis. Consulting activities
enabled the utility to maintain the cadre of experts by finding
other work and other applications for them. Moreover, by
employing them outside of the system operating territory, the
electric utility became exposed to problems and solutions which
it would have to confront in the future within its territory.
Over the years, the consulting activities of the Southern
electric system have benefitted hundreds of utilities, agencies
of the United States of America itself such as the Department of
Energy, industries, and even the electric utility operations of
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other nations. These consulting activities have been undertaken
and provided by the Southern electric system without depriving
the core business of required expertise and competencies. They
have enabled system personnel to become familiar with a host of
technologies and issues relating to everything from cogeneration
to internal utility communication, even before operating
circumstances indicated a requirement in the South. In other
words, the consulting activities outside of the Southern electric
system often enable the system to acquire, in advance, the
expertise, knowledge and experience which they ultimately
require.
For all of these reasons, the formation of a consulting
subsidiary was long ago found to be legally permissible and
desirable under the Act, and nearly all registered electric
utility holding companies are now authorized to conduct such
activities through separate subsidiaries. The original SEI
orders constitute but one example of Commission precedent
recognizing these values and affirming the appropriateness of
such subsidiaries.
The licensing of intellectual property to non-affiliates is
a related but somewhat different matter. Historically, as
evidenced by the Original SEI Orders, consulting subsidiaries
have been permitted by the Commission to license intellectual
property to non-affiliates. The Southern electric system has
engaged in licensing activities through a separate subsidiary
since the Original SEI Orders were issued in 1981. These
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activities were based upon so-called reciprocal licensing in
which the separate subsidiary received the license from the
Operating Companies for their intellectual properties which could
be sub-licensed to others and, in turn, provided the Operating
Companies with intellectual properties developed by the
subsidiary. This had many beneficial impacts upon the Operating
Companies. It also had public interest beneficial effects. Some
of the better examples are as follows. The "Good Cents" program,
an energy conservation and environmental program, was made
available to hundreds of member utilities throughout the United
States. This promoted energy efficiency and conservation and
environmental benefits throughout the nation. As other utilities
sought updates and new approaches, through SEI's consulting and
licensing programs, the "Good Cents" program was continuously
modernized and updated. The updated and modernized programs were
then, in turn, provided to the Operating Companies at no cost.
Another example has been Enerlink. Enerlink is a computer
software program which enables a utility to offer highly
effective time of use price models for industrial and commercial
accounts and enables the industrial and commercial accounts to
plan their energy consumption based upon access to real time
energy pricing information. Originally, Georgia Power
experimented with an early development of similar software, but
abandoned that software. Development and SEI conducted research
and development activities which led to the development of the
Enerlink software program. The program was then licensed by SEI
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to Boston Edison and several other utilities are considering its
adoption because of industrial and commercial customer demand for
the program. In turn, the enhanced software which is represented
by Enerlink has now been provided back to Georgia Power at no
cost, except for the actual cost of making customized changes
requested by Georgia Power to meet its specific requirements. In
short, The Southern Company, not ratepayers, took the major
portion of technological development risk and the license fees
from transactions with third parties will pay for that cost,
providing the Operating Companies and their ratepayers with an
enhanced and modern intellectual property at no cost. Had there
been no mechanism for licensing of Enerlink to third parties
through a separate subsidiary, the Operating Companies and their
ratepayers would either have been deprived of the development of
this technology, or they would have had to bear the full cost,
without obtaining offsetting revenues from third parties. And,
in part, the knowledge of consultants obtained by dealing with
other utilities which were experimenting with real time pricing,
allowed Southern to become aware of the need for, and opportunity
with respect to, time of use pricing, communications-based
software programs.
The instant Application/Declaration goes further. For
future transaction, if intellectual property is sold or licensed
to a third party and that intellectual property has been
developed by the Operating Companies or the Service Company but
would no longer be available to them, the developing company
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would be entitled to receive 70 percent of the net profits
derived from marketing and licensing. If the intellectual
property is made available but use is also retained by the
Operating Company or Services, the Operating Company or Services
will be reimbursed for the actual expenses it has incurred. If
an Operating Company invests in the development of intellectual
property which is not ultimately used by it resulting in a
disallowance by a State Commission and such property is
thereafter licensed by Development to third parties, Development
will pay a royalty until the Operating Company's development
costs have been fully reimbursed. Where it is the intention to
develop property for joint use by both the Operating Companies
and third parties, the Operating Company will have its cost of
development reduced to a maximum of 50 percent. All of these
arrangements are fully consistent with and intended to achieve
the amortization of cost of developing intellectual properties
over a larger customer base, with little or no risk to the
Operating Companies. They make available skills and products
which, due to the difficult and expense involved in development,
might not otherwise be as available to the public.
The POWERcall(tm) system was developed specifically with the
needs of the operating utilities and their customers in mind.
While area-wide power outages and their cause are often not too
difficult to identify and correct, there are aspects of power
outage which have proven difficult and expensive to detect and
correct. In the case of natural events such as hurricanes, ice
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storms, and snow storms, two particular phenomena prove
vexatious. One of these is that customer reports made by a
conventional telephone are inadequate. They either overwhelm the
telephone company's central switch, or the customer gets a busy
signal when reaching the customer service number. The other
problem is that causes of general wide area outages may be
identified and fixed, but a specific home in that area may be
overlooked and its outage may be due to a downed tree or power
line affecting only that residence or street. POWERcall(tm)
pinpoints the problem house by house. If sufficient
POWERcall(tm) devices are installed, it will also identify the
patterns of wider disruptions. It provides for automatic
computerized notification to the power company, thereby
eliminating the problem of the "busy signal." Hence the basic
device and its installation is clearly part and parcel of the
rendition of electric service and its restoration and
maintenance. However, the device has other functionality. Some
of that functionality is also helpful or necessary in the
rendition of electric utility service. If a customer chooses to
install temperature sensors to interface with the device, the
device will notify the power company of extreme temperature
variance which, in the winter, will indicate possible electric
failure due to extreme cold, and, in the summer, electric failure
through the presence of extreme heat. It will do so even if the
home or business is unoccupied. Similarly, if the customer
chooses to interface smoke and fire sensors with the device, the
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power company will be automatically notified of the presence of
fire or smoke. This is extremely helpful to electric utilities
because the knowledge that a power outage is associated with a
fire requires a different electric utility response and will
enable the electric utility to coordinate its activities with
police, fire and other emergency services. Thus, power
monitoring, temperature monitoring and fire and smoke alarm
monitoring are all related directly and importantly to service,
maintenance and restoration. The other functions, such as
intrusion, require no additional utility investment, but will
appreciably increase the amount of customer penetration and
acceptance of the device. The more widespread the deployment of
the device, the more accurately the power company can monitor and
react to outage situations, particularly in storms and other
natural calamities. Since the device has all of this
functionality at no additional investment to the utility, the use
of the complete functionality would help defray costs of
implementation of the system and will enhance the degree of
deployment. Moreover, it offers a wide-spread public benefit of
offering an expensive means by which the public can avail itself
of these services.
In CSW Credit, Inc. and Central and Southwest Corporation,
HCAR No. 25995 (March 2, 1994) (hereinafter "CSW Credit"), the
Commission articulated criteria with respect to the Section 13(b)
issue. The functional relationship of the basic POWERcall(tm)
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device is so obvious that it should not be at issue. The
Commission at page 7 of CSW Credit stated as follows:
"Jersey Central addressed a line of cases that,
although similar to and philosophically consistent with
the excess capacity line of decisions and the
functionality related test, differed factually because
the non-affiliated business exceeded the affiliated
business. That analysis should be limited to factual
situations similar to those cited in Jersey Central.
In such cases, the approved businesses involved 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. Moreover, these endeavors generally
required 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. Thus, Jersey Central
identified a specific fact situation where, because of
the direct benefit to the utility or amortizing the
costs of developing a business over a larger customer
base, and because of the negligible risks to the
holding company in pursuing the endeavor, the business
could be said to be 'primarily' devoted to the
operation of the utility system even though it failed
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the mathematical application of the 50% test.
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." (Emphasis supplied).
One gleans from CSW Credit four elements critical to an
analysis of the acquisition of an interest in another business
and whether that business is functionally related. These are (1)
whether the product was developed at considerable cost for the
benefit of the Operating Companies; (2) whether the product is
not readily available to the public from other sources; (3)
whether there is little or no incremental investment in non-
utility activities; and (4) whether authorizing the activity will
enable the efficient amortization of investment.
Here, the POWERcall(tm) system is designed specifically for
utility use. It is for the clear benefit of the Operating
Companies and its customers, and it has been developed at
considerable cost. No other entity offers POWERcall(tm) within
the Southern electric system. Computerized automatic
notification of the power company is not available from any other
source, nor does any other source offer a reporting and
monitoring service where they interface between the customer and
the utility. There is absolutely no incremental investment
required to utilize the functionality of POWERcall(tm) for the
various monitoring and notification services. Most of them have
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a clear nexus to utility need, and those that don't, such as
intrusion or health emergency, would nevertheless serve a public
benefit and would enhance deployment of the system which is the
objective and goal of the utilities. The more they are deployed,
the more effective, from a utility point of view, they become in
service restoration.
Finally, authorizing the activity to the fullest extent
requested enables the efficient amortization of investment.
The investment in the prototype energy management
communications system is plain and unambiguous. It is driven by
the need of the Southern electric system for the completion of a
fiber optic backbone, the installation of metropolitan area
network rings of fiber optic communication around the cities of
Atlanta and Birmingham, and experimental energy conservation and
management systems for residential customers in approximately
eight cities. The analysis provided as an exhibit shows that
Southern has a present and foreseeable future need for 24 to 30
fibers to achieve its communication objectives. These
communications objectives are directly related to the operation
of an integrated utility system. Southern has operated an
extensive internal communications system for over 40 years
without any thought of outside commercial endeavor. It currently
operates fiber optics, microwave, mobile radio, video, data and
other systems and networks. All of these have been installed
purely for the utility. Indeed, they are at the heart of the
ability to integrate a utility system. Thus, the proposal at
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issue here is not in any sense overreaching. Southern proposes
to install a fiber optic system using 36 to 48 fibers, of which
it has a present and foreseeable need for 24 to 30 fibers. The
economics of installation are such that it is cheaper to install
36 to 48 fiber networks and lease out 50% of them than it is to
install a system of 24 fibers or 30 fibers restricted solely to
utility usage. These benefits are outlined in Exhibit B-4.
Thus, the proposal meets the criteria of Section 13(b), satisfies
the guidelines of CSW Credit, and is consistent with the recent
decision in Central and Southwest Corporation, HCAR No. 35-26061
(June 3, 1994) wherein Central and Southwest was authorized to
create a specialized communications subsidiary for the
installation of a fiber optic line and allowing CSW to 50 percent
of the capacity to third parties.
The provision of other energy management and efficiency
services and investment in equipment to achieve energy management
and efficiency, including the financing of customer purchase or
lease of such equipment, is not a new or revolutionary idea.
This Commission has previously authorized Northeast Utilities,
Entergy and other registered holding company systems to form
subsidiaries and engage in such activities. The applicants
propose that such activities be subject to a 50 percent revenue
restriction. These activities are necessary from a utility
perspective for a number of reasons. The integrated electric
utility system is required by State Commissions to offer and
foster such programs. Moreover, such programs are consistent
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with national goals for reductions in the cost and use of energy
and the enhancement of the environment. That other registered
systems have been authorized and now operate energy service
companies within the Southern electric system territory only
evidences the need. Entergy, as an example, actively uses its
subsidiary in the Mississippi Power territory and in the Georgia
Power territory as well. Thus, for competitive reasons, it is
necessary to have a service offering through a separate
subsidiary which is comparable to that provided by affiliates of
other registered holding companies within Southern's own
operating territory. Since the proposed activities are
consistent with, if not virtually identical to, activities
authorized to be engaged in by other registered holding
companies, no valid Section 13 obstacle is perceived. Southern
has agreed to a 50 percent revenue restriction so that the
activities can be presumed, consistent with CSW Credit, to be
primarily for the integrated electric utility system.
Finally, the proposal to develop and invest in energy
resource and recovery facilities, particularly biomass
gasification projects, is primarily directed at system needs.
These projects will enhance Clean Air Act and Clinton Climate
Challenge initiatives and requirements. They will have
beneficial impacts on the environment and reduce the need for
more costly and more stringent restrictions on generation. Since
the burden of law and public policy is on electric utilities to
effect cleaner air and cleaner water, this Commission should not
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hold that such activities are in any way unrelated to the
operation of an integrated electric utility system. A separate
subsidiary, authorized to engage in partnerships on a limited
basis, is necessary to achieve compliance with the tax credit
requirements of Section 29. Thus, the proposal is a response to
tax policies of the federal government and environmental policies
of the federal government. In no sense is this intended to be
"another business"; rather, it is the preferred means of
achieving a need of the primary business. Again, to avoid any
misunderstanding on that point, Southern has agreed to a 50
percent revenue restriction. Accordingly, it should be presumed
that the Business Line proposed complies with Section 13.
Item 2. Fees, Commissions and Expenses.
Fees, commissions and expenses expected to be incurred by
Development in connection with the Application are as follows:
Holding Company Act filing fee ......... $ 2,000
Counsel fees:
Troutman Sanders .................. $15,000*
Miscellaneous and incidental expenses .. $ 1,000*
*Estimated amount
Total $18,000
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Item 3. Applicable Statutory Provisions.
The issuance and sale by Development of common stock and
notes is subject to Sections 6 and 7 of the Act, and the
acquisition thereof by Southern is subject to Sections 9(a) and
10. The making of cash capital contributions by Southern to
Development and the proposed guaranty by Southern of notes issued
by or other recourse liabilities of Development to third parties
are subject to Section 12(b) and Rule 45 thereunder. The
issuance by Development of notes will be excepted from the
competitive bidding requirements of Rule 50 pursuant to
paragraphs (a)(2) or (a)(3) thereof, as applicable. The
conversion of borrowings by Development from Southern to capital
contributions is also considered subject to Section 12(b) of the
Act and Rule 45.
The proposals by Development to engage in the various
different lines of business summarized in this filing are subject
to Sections 9(a) and 10 of the Act.
The acquisition by Development of promissory notes
evidencing the indebtedness of customers in connection with
financing energy management and efficiency equipment is subject
to Sections 9(a)(1) and 10, but may be exempted therefrom
pursuant to Rule 40(a)(4) under the Act.
The rendering of services and other contemplated
transactions between Development, on the one hand, and Services
and the Operating Companies, on the other, at cost or subject to
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tariff, is subject to Sections 13(b) and Rules 81, 87, 90, 91 and
92 thereunder.
The proposed transactions will be carried out in accordance
with the procedures specified in Rule 24 of the Act and pursuant
to an order of the Commission with respect thereto.
Item 4. Regulatory Approval.
The proposed transactions are not subject to the
jurisdiction of any state commission or of any federal commission
other than the Commission.
Item 5. Procedure.
Development and Southern request that the Commission's order
be issued as soon as the rules allow, and that there be no
thirty-day waiting period between the issuance of the
Commission's order and the date on which it is to become
effective. Development and Southern hereby waive a recommended
decision by a hearing officer or other responsible officer of the
Commission and hereby consent that the Division of Investment
Management may assist in the preparation of the Commission's
decision and/or order in the matter unless such Division opposes
the matters covered hereby.
Item 6. Exhibits.
A - Form of Note from Development to Southern.
B-1 - Form of Service Agreement between Development
and Services.
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B-2 - Form of Service Agreement between Development
and an Operating Company.
B-3 - Estimated Budget. (Filed pursuant to request
for confidential treatment/Rule 104)
B-4(a) - Survey of Communications Needs/Studies. Fiber
Optic Usage
B-4(b) - Survey of Communications Needs/Studies.
Telecommunications Networks - Opportunities for
the Present.
B-4(c) - Survey of Communications Needs/Studies.
Defining Southern's Core Business Strategy for
Energy Information and Communication Services
(Filed pursuant to request for confidential
treatment/Rule 104)
B-5 - Accounting Procedures to be Utilized by
Development.
C - None.
D - None.
E - None.
F - Opinion of Troutman Sanders. (To be filed by
amendment).
G - Form of Notice. (Previously Filed)
Item 7. Information as to Environmental Effects.
(a) In view of the nature of the proposed transactions as
described in Item 1 hereof, the Commission's action in this
matter will not constitute any major federal action significantly
affecting the quality of the human environment.
(b) No other federal agency has prepared or is preparing an
environmental impact statement with regard to the proposed
transactions.
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SIGNATURE
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, the undersigned companies have duly caused
this Statement to be signed on their behalf by the undersigned
thereunto duly authorized.
Dated: September 9, 1994 THE SOUTHERN COMPANY
By:/s/Tommy Chisholm
Tommy Chisholm
Secretary
THE SOUTHERN DEVELOPMENT AND
INVESTMENT GROUP, INC.
By:/s/Tommy Chisholm
Tommy Chisholm
Vice President and Secretary
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Exhibit A
PROMISSORY NOTE
$(___________) Dated: (_________)
FOR VALUE RECEIVED, the undersigned, SOUTHERN DEVEOPMENT &
INVESTMENT GROUP, INC., ("Maker"), promises to pay to THE SOUTHERN
COMPANY, (hereinafter referred to, together with any subsequent
holder or transferee hereof, as "Holder"), the principal sum of
(____________________) and No/100 Dollars ($(___________)) (the
"Principal") together with interest on so much thereof as from
time to time shall be outstanding and unpaid, accruing on and
after the date hereof at the prime lending rate as in effect at
(_______________________), expressed in simple interest terms and
computed on a three hundred sixty-five (365) day year. Principal
and interest accrued thereon shall be due and payable on
(___________________).
Maker shall be entitled, at any time and from time to time,
without the consent of Holder and without paying any penalty or
premium therefor, to prepay all or any portion or portions of the
outstanding Principal and accrued interest thereon.
No delay or omission on the part of Holder in exercising any
right hereunder shall operate as a waiver of such right or any
other right under this Note. A waiver of any right or remedy on
any one occasion shall not be construed as a bar to or waiver of
any right or remedy on any future occasion.
Maker hereby waives presentment, demand for payment, notice
or dishonor and all other notices or demands in connection with
the delivery, acceptance, performance, default or endorsement of
this Note.
IN WITNESS WHEREOF, the undersigned has caused its duly
authorized representative to execute this Note to be effective as
of the day and year first above written.
"Maker"
SOUTHERN DEVELOPMENT & INVESTMENT GROUP,
INC.
By: ____________________________________
President
<PAGE>
Exhibit B-1
AGREEMENT BETWEEN
SOUTHERN COMPANY SERVICES, INC. and
SOUTHERN DEVELOPMENT AND INVESTMENT GROUP, INC.
THIS AGREEMENT, made and entered into as of July 17, 1981 by
and between SOUTHERN COMPANY SERVICES, INC., a corporation
organized under the laws of the State of Delaware, party of the
first part (hereinafter sometimes referred to as "SCS") and
SOUTHERN DEVELOPMENT AND INVESTMENT GROUP, INC., a corporation
organized under the laws of Georgia, party of the second part
(hereinafter sometimes referred to as "Client Company"),
W I T N E S S E T H:
WHEREAS, SCS and Client Company are both direct subsidiaries
of The Southern Company ("Southern") and, together with
Southern's other operating subsidiaries, Southern Electric
International, Inc., Southern Company Services, Inc. and
Southern, form the Southern electric system; and
WHEREAS, SCS is organized, staffed and equipped and is
authorized by the Securities and Exchange Commission (the
"Commission") to render to Client Company services as herein
provided; and
WHEREAS, in the course of its operations, SCS has acquired
and will acquire certain,properties and other resources; and
WHEREAS, Client Company is authorized by order of the
Commission dated _______________________ (the "Order") to utilize
those services, properties and resources of SCS, as well as those
<PAGE>
provided by other members of the Southern electric system, to
sell management, technical and training services and expertise to
non-affiliate companies, agencies and other business concerns,
including domestic and foreign governmental agencies, public
utilities, industrial concerns, or entities owning, operating or
performing services for any of them as well as conduct other
activities as permitted by the Order; and
WHEREAS, economies and increased efficiencies will result
from the performance by SCS of services for Client Company and
the provision of certain property and resources to Client Company
as herein provided as well as the performance by Client of
services for SCS; and
WHEREAS, subject to the terms and conditions herein
described, the parties hereto are willing, upon request by each
other, to render such services and provide such property and
resources to each other at cost, determined in accordance with
applicable rules, regulations and orders of the Commission,
taking into consideration the fulfillment of SCS's utility
responsibilities;
NOW, THEREFORE, in consideration of the premises and of the
mutual agreements herein, the parties hereto hereby agree as
follows:
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1. Definitions
As used hereinafter, the following terms, in addition
to those elsewhere defined in this Agreement, shall have the
following meanings unless the context otherwise requires:
A. "Services" shall mean those services described in
Articles 3, 4 and 5 hereof.
B. "Non-Affiliate" means any corporation, company,
agency, government, business, entity or person other than
Southern, a direct or indirect subsidiary of Southern, or a
person employed by Southern or any of such subsidiaries.
C. "Intellectual Property" means any process, program
or technique which is protected by the copyright, patent or
trademark laws, or as a trade secret, and which has been
specifically and knowingly incorporated into, exhibited in,
or reduced to a tangible writing, drawing, manual, computer
program, product or similar manifestation or thing.
2. Agreement to Furnish Service
A. Upon its receipt of a work order or other request
therefor from a party hereto, the other party hereto will,
if it has or can have available the personnel and resources
needed to fill the work order on request, furnish to the
requesting party upon the terms and conditions hereinafter
set forth such of the Services, at such times, for such
periods and in such manner as the party may from time to
time request; provided, however, that the determination of
whether SCS has the available personnel and resources to
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perform in accordance with the work order or request will be
entirely within the discretion of SCS, and SCS may at its
option elect not to perform any requested Service, except
that, once having agreed to perform pursuant to a work order
or request, SCS cannot withdraw or depart from such
performance without the consent of Client Company, which
consent will not be unreasonably withheld.
B. The provision of Services by a party hereto
pursuant to this Agreement shall in all cases and
notwithstanding anything herein contained to the contrary be
subject to any limitations contained in authorizations,
rules or regulations of those governmental agencies, if any,
having jurisdiction over SCS, Client Company, or such
provision of Services.
3. Description of Services
The Services to be provided hereunder are described as
follows:
A. General Engineering. Perform general engineering
work, including system production and transmission studies;
prepare and analyze electrical apparatus specifications,
distribution studies and standards, civil engineering and
hydraulic studies and problems, fuel supply studies, advice
and assistance in connection with analyses of operations and
operating and construction budgets. Each party's personnel
will routinely keep informed as to improvements and
developments in the art of generation, transmission and
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distribution of electricity through frequent contacts with
the manufacturers of electrical equipment, through
membership in the various national and regional engineering
societies and through participation in the committee work of
such societies and the trade associations of the utility
industry. Each party will make available to the other the
information thus gained with respect to such developments.
B. Design Engineering. Perform detailed design work
for steam plants, hydro plants, transmission and
distribution lines and substations and otherwise as
requested by a party hereto; make available to and for the
use of a party as required, the services of a specialist or
specialists on various phases of plant operation and
maintenance; and also make available, as required,
inspection and supervision personnel for generating plant,
transmission line and substation and other construction,
maintenance and operation.
C. Accounting and Statistical. Advise and assist a
party in connection with the installation of accounting
systems and similar problems, requirements of regulatory
bodies with respect to accounting, studies of accounting
procedures, and practices to improve efficiency, book
entries resulting from unusual financial transactions,
internal audits, employment of independent auditors,
preparation and analyses of financial and operating reports
and other statistical matters relating to customers of
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Client Company, preparation of annual reports to
stockholders, regulatory commissions, insurance companies
and others, standardization of accounting and statistical
forms in the interest of economy, and other accounting and
statistical matters.
D. Rates. Advise a party on matters relating to
rates and valuation, the design of new and improved rate
schedules, and their effect upon revenues, the cost of
competitive services, earnings trends, the desirability of
rate changes, rate audits, service rules and regulations,
commodity and tax clauses, minimum charges, metering
problems, special industrial contracts, resale rates and
rural extension plans; and assist in the preparation of
petitions and applications required in connection with rate
changes.
E. Budgeting. Advise and assist a party in matters
involving the preparation and development of construction
and operating budgets, cash and cost forecasts, and
budgetary controls.
F. Business Promotion and Public Relations. Advise
and assist a party in the development of marketing and sales
programs, in the preparation and use of advertising and
sales materials, and in the determination and carrying out
of promotional programs.
G. Systems and Procedures. Advise and assist a party
in the formation of good operating practices and methods of
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procedure, the standardization of forms, the purchase,
rental and use of mechanical and electronic data processing,
computing and communications equipment, in conducting
economic research and planning and in the development of
special economic studies.
H. Access to and Use Of Facilities. Subject to those
conditions set forth in Article 5B, make available to a
party and/or its customers access to, use of, or rights in
all facilities, products, processes, techniques, computer
hardware and software, technical information, training aids
and properties, Intellectual Property, vehicles, equipment,
machines and other property, whether owned, leased, licensed
or otherwise by a party hereto.
I. Training. Assist a party in providing training to
personnel of the other party or of Non-Affiliates; develop
and make available training procedures, materials and
facilities, and provide instructors.
J. General. Make available services in the areas of
construction planning and supervision, design, management
programs, quality assurance, licensing matters, research and
development, and communications systems and procedures.
K. Other Services. Render advice and assistance in
connection with such other matters as either party may
request and which the parties may be able to perform with
respect to their respective business and operations.
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<PAGE>
4. Provision of Personnel
Where specifically requested by one party hereto, the
other party will loan its employees to the requesting party. In
that event, such loaned employees will be under the sole
supervision and control of the party borrowing the employee for
such period or periods of time as are necessary to complete the
work to be performed by such employees. Such employees may be
withdrawn by the loaning party from tasks assigned by the
borrowing party only with the consent of the lender, which
consent will not be unreasonably withheld. The borrower Company
will be responsible for the actions and activities of such
employees while engaged in the performance of the work to the
same degree as though such persons were employees of the borrower
Company. However, as part of Services, the lender during periods
when such employees are loaned to the borrower will continue to
provide to, and with respect to such employees those same
payroll, pension, savings, tax withholding, unemployment,
bookkeeping and other personnel support services then being
utilized by such party in connection with compensating and
benefiting such employees.
5. Exchange of Intellectual Property
A. Should Client Company in the course of its
business develop Intellectual Property, it will make such
Intellectual Property available for utilization by SCS
without charge (except the actual expenses incurred by
Client company in connection with making such new
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Intellectual Property so available), provided, however, that
such availability shall be dependent upon and subject to any
contractual.commitments of Client Company to Non-Affiliates,
applicable laws and regulations, and the legal rights and
entitlements of others.
B. (i) As part of the Services, SCS will make
available to Client Company for use or for re-sale or
licensing to Non-Affiliates all Intellectual Property
heretofore or hereafter developed or obtained by SCS without
charge (except for the actual expenses incurred in making
the same available, and except as otherwise provided in
Article 8 below), provided, however, that such availability
shall be dependent and subject to any contractual
commitments of SCS to Non-Affiliates, applicable laws and
regulations, and the legal rights and entitlements of
others.
(ii) In the event that SCS invests in the
development of Intellectual Property which is not ultimately
used by it, resulting in a disallowance of any associated
development costs by state regulatory authorities having
jurisdiction, and such Intellectual Property is thereafter
licensed by Client Company to third parties, Client Company
will pay a royalty of thirty percent (30%) of net sublicense
revenues (after deduction of costs and expenses of Client
Company) until the development costs have been fully
reimbursed to SCS.
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(iii) Where Client Company and SCS agree to
jointly develop or acquire Intellectual Property with the
specific understanding that such Intellectual Property would
be both used by SCS and remarketed to third parties by
Client Company, Client Company will pay for fifty percent
(50%) of the cost of acquisition or development thereof, and
SCS will pay the remaining cost of the acquisition or
development thereof, and Client Company shall have no
further financial obligation to SCS.
6. Compensation of SCS
As compensation for services actually requested by one
party and rendered to it by the other, the parties hereby agree
to reimburse each other respectively for all Costs properly
chargeable or allocable thereto, as controlled through a work
order procedure. Such Costs shall be determined in accordance
with subparagraphs 6A, 6B and 6C below and as outlined on
Exhibit A attached hereto and incorporated herein by reference:
A. Direct Cost. Direct Cost consists of Direct Labor
Costs, Direct Labor Benefits, Material, Vehicle and
Equipment Usage, and Meals, Lodging and Miscellaneous
Expenses. Direct Labor Costs shall be based on the wage
rates of assigned employees and the actual number of hours
devoted to providing the Service. Direct Labor Benefits
include the costs of paid, excused absences, such as
vacations and holidays, and shall be based on a recovery
factor applied to the Direct Labor Costs. Material which is
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withdrawn from a party's inventory shall be billed by that
party on the same basis as SCS uses to charge such costs to
its utility customers, plus a stores handling expense.
Material purchased directly from vendors for use on a
particular project shall be billed at invoice cost. Vehicle
and Equipment Usage shall be billed at the appropriate cost
thereof by vehicle class, which costs shall provide for the
allocation of all direct and indirect costs associated with
SCS's fleet operation. Meals, Lodging, Transportation and
Miscellaneous Expenses shall be billed at actual cost.
B. Indirect Cost. Indirect Cost consists of Indirect
Labor Cost, Engineering and Supervision, and Administrative
and General Expenses. Indirect Labor Costs include pension
costs, insurance, payroll taxes, employee savings plan, and
similar payroll items. Where applicable, Engineering and
Supervision shall be determined by asset classification
based on SCS's total engineering and supervision expenses
and total direct costs. Administrative and General Expenses
shall be based on each party's administrative and general
expenses and total applicable costs. Each type of Indirect
Costs shall be applied to Direct Labor Costs and Direct
Labor Benefits to the extent reasonably allocable thereto.
There shall be no duplication of Direct Costs and Indirect
Costs.
C. Cost of Funds Advanced. For the recovery of the
cost of funds advanced for Services provided, each party
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will be charged a cost of funds based on the actual time
period from billing date of such costs to date of receipt of
payment. The costs of funds shall be the annual rate
associated with the higher of the costs to the party of its
most recent first mortgage bond issue or its most recent
short-term borrowings. The costs of funds factor shall be
applied to each monthly billing to a party after receipt of
payment by the other party; provided, however, that the last
monthly billing to a party for a project shall include a
cost of funds amount based on an assumed thirty (30) day
time period.
7. Work Orders
The Services will be performed in accordance with work
orders or requests issued or made by or on behalf of one party
and accepted by the other, and all Services will be assigned an
applicable work order number to enable specific work to be
properly allocated by project or other appropriate basis. Work
orders shall be as specific as practicable in defining the
Services requested to be performed. A party shall have the right
from time to time to amend, alter or rescind any work order,
provided that (i) any such amendment or alteration which results
in a material change in the scope of the work to be performed or
equipment to be provided is agreed to by the party performing, or
to perform the work; (ii) the costs for the Services covered by
the work order will include any expense incurred as a direct
result of such amendment, alteration or rescission of the work
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<PAGE>
order, and (iii) no amendment, alteration or rescission of a work
order will release any party from liability for all costs already
incurred or contracted for by the other party pursuant to the
work order, regardless of whether the work associated with such
costs discontinued by such amendment, alteration or rescission.
8. Disposition of Intellectual Property. In the event
Client Company sells or licenses to Non-Affiliates Intellectual
Property heretofore or hereafter developed by SCS for its own
use, and as a result of such sale or license such Intellectual
Property is no longer available for use by SCS, Client Company
shall receive, as and when received from such Non-Affiliates, a
commission of thirty percent (30%) of all net profits (after
deducting marketing and any other applicable expenses incurred by
Client Company) earned from such sale or licensing, and SCS shall
receive seventy percent (70%) of such net profits.
9. Responsibility for Work; Limitation of Liability;
Indemnification:
A. In performing Services under Articles 4 and 5(B)
hereof (i.e., the provision of personnel and making
available to Client Company of Intellectual Property),
neither party, their agents, servants and employees shall
have no responsibility whatsoever to the other for any
claims, liabilities, injuries, damages or other
consequences of providing such Services under any theory of
liability, whether in contract, in tort (including
negligence and strict liability) or otherwise, it being
understood and agreed that (1) with respect to loaned
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employees such employees are furnished without warranty as
to their suitability or expertise; (2) with respect to the
making available of Intellectual Property, such property is
made available by SCS "as is" and "where is" without
warranty of any type including warranty of title, without
indemnity against patent or copyright infringement, and
without warranty or representation that transfer of the
Intellectual Property does not constitute a violation of a
trade secret, proprietary right or contract right of a third
party.
B. In performing Services under Article 3 hereof, the
parties hereto will exercise due care to perform the
Services in a workmanlike manner and in accordance with the
specifications set forth in the applicable work order or
request. A party's sole and exclusive responsibility for
deficiencies in such Services shall be limited to the
correction, on a reimbursable basis so that the Services are
performed in a workmanlike manner.
C. WITH RESPECT TO ALL SERVICES, INCLUDING ANY
TRANSFER OF PROPERTY, THE PARTIES HERETO MAKE NO WARRANTY OR
REPRESENTATION OTHER THAN AS SET FORTH ABOVE, AND THE
PARTIES HEREBY AGREE THAT NO OTHER WARRANTY, WHETHER
STATUTORY, EXPRESS OR IMPLIED (INCLUDING, BUT NOT LIMITED
TO, ALL WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE AND WARRANTIES ARISING FROM COURSE OF
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DEALING OR USAGE OF TRADE) SHALL BE APPLICABLE TO THE
SERVICES PERFORMED BY A PARTY HEREUNDER.*
D. Client Company shall and does hereby agree to save
harmless and defend SCS, its agents, servants and employees,
and employees of SCS loaned to Client Company under Article
4, from the payment of any sum or sums of money on account
of, or resulting from, claims or suits growing out of (a)
injuries to or the death of any person, (b) damage to or
loss of any property, and/or (c) other damages which are in
any way attributable to or arise out of the performance and
prosecution of any project or work performed by or on behalf
of Client Company for Non-Affiliates or Services rendered by
SCS to Client Company, whether or not the same results from
or is contributed to by (i) the claimed or actual active,
passive, affirmative, sole or concurrent negligence or
strict liability on the part of SCS, its agents, servants or
employees, or of employees of SCS loaned to Client Company
under Article 4, (ii) the breach of any duty owed by an
employee of SCS loaned to Client Company hereunder to his
co-employee, (iii) the breach of any statutory duty (whether
non-delegable or otherwise) on the part of SCS, its agents,
servants or employees, or of an employee of SCS loaned to
Client Company hereunder, (iv) liability imputed as a matter
* The remedies stated herein are exclusive and shall constitute the
sole and exclusive remedy of a party for a failure by the other
party to comply with its warranty obligations.
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<PAGE>
of law to SCS, its agents, servants, or employees, or an
employee of SCS loaned to Client Company hereunder, (v) the
failure of, or any condition in property, or faulty
workmanship furnished by SCS, its agents, servants or
employees or an employee loaned by SCS to Client Company
hereunder, or (vi) any breach of warranty or contract by
SCS, its agents, servants or employees, or employees of SCS
loaned to Client Company hereunder. Further, Client Company
shall and does hereby indemnify and agree to save harmless
and defend SCS (a) from any and all liens, garnishments,
attachments, claims, suits, costs, attorneys' fees, cost of
investigation and of defense resulting from, incurred in
connection with, or relating to any such claims,. (b) from
the payment of any such sum or sums of money, and (c) from
the payment of any penalties, fines, damages, suits or
claims (and any liens or attachments asserted in connection
therewith) arising out of (i) any alleged or actual
violation of law, court order, or governmental agency rule
or regulation committed by or existing with respect to
Client Company or its employees, agents or subcontractors
(including SCS when such payments relate to performing
Services hereunder), or (ii) any alleged or actual breaches
of contract by Client company, or (iii) any claims made by
or on account of any employee, agent or subcontractor of
Client Company associated with work being performed for Non-
Affiliates, or for (iv) services or labor performed,
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<PAGE>
materials, provisions or supplies furnished or board of men
which have been purchased or allegedly contracted for, by or
on behalf of the Client Company, its employees, agents or
subcontractors (except SCS when not performing services
hereunder).
E. SCS shall within five (5) business days after it
receives notice of any claims, action, damages or liability
against which it will expect to be indemnified pursuant to
Article 9D, notify Client Company of such claims, actions,
damages or liabilities. Thereafter, Client Company may at
its own expense, upon notice to SCS, defend or participate
in the defense of such action or claim or any negotiation
for settlement of such action or claim, provided that unless
Client Company proceeds promptly and in good faith to pay or
defend such action or claim, then operating Company shall
have the right (but not the obligation), in good faith, upon
ten (10) days' notice to Client Company, to pay, settle,
compromise or proceed to defend any such action or claim
without the further participation by Client Company. Client
Company will immediately pay (or reimburse SCS, as the case
may be) any payments, settlements, compromises, judgments,
costs or expenses made or incurred by SCS in or resulting
from the pursuit by SCS of such right. If any judgment is
rendered against SCS and any such action defended by Client
Company or from which SCS is otherwise entitled to
indemnification under Article 9D, or any lien attaches to
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the assets of SCS in connection therewith, Client Company
immediately upon such entry or attachment shall pay the
judgment in full or discharge any such lien unless, at its
expense and direction, appeal shall be taken under which the
execution of the judgment or satisfaction of the lien is
stayed. If and when a final and unappealable judgment is
rendered against SCS in any such action, Client Company
shall forthwith pay such judgment or discharge such lien
prior to the time that SCS would be legally held to do so.
F. Client Company shall maintain at all time adequate
levels of insurance to discharge financially its obligations
under this Article 9 and all such policies of insurance
shall name SCS as additional insured.
10. Miscellaneous
This Agreement shall be binding upon the successors
and assigns of the parties hereto, provided that operating
Company shall not be entitled to assign or subcontract out any of
its obligations under this Agreement or under any purchase order
or work order issued hereunder without the prior written approval
of Client Company. This Agreement may not be modified or amended
in any respect except in writing executed by the parties hereto.
This Agreement shall be construed and enforced under and in
accordance with the laws of the State of Georgia. This Agreement
may be executed in counterparts, each one of which when fully
executed shall be deemed to have the same dignity, force and
effect as if the original. No provision of this Agreement shall
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be deemed waived nor breach of this Agreement consented to unless
such waiver or consent is set forth in writing and executed by
the party hereto making such waiver or consent.
IN WITNESS WHEREOF, the parties hereto have caused this
agreement to be executed in their respective corporate names by
their respective Presidents or one of their respective Vice-
Presidents and their respective seals to be hereunto affixed and
attested by their respective Secretaries or one of their
respective Assistant Secretaries as of the day and year first
above written.
SOUTHERN COMPANY SERVICES, INC.
(SCS)
ATTEST:
__________________________
By:________________________________
Secretary President
Date Executed: ____________________
SOUTHERN DEVELOPMENT AND INVESTMENT
GROUP, INC.
(Client Company)
ATTEST:
__________________________
By:________________________________
Secretary President
Date Executed: ____________________
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<PAGE>
EXHIBIT "A"
SAMPLE ACCOUNTING AND BILLING PROCEDURE TO BE
EMPLOYED BY SYSTEM OPERATING COMPANIES IN BILLING
COSTS OF WORK PERFORMED FOR NEW SUBSIDIARY
I. INTRODUCTION
The purpose of this procedure is to establish guidelines which
provide uniform and consistent methods of billing for services
rendered to "New Subsidiary" by The Southern Company System
Operating companies. These billings include direct costs related
to services provided and indirect costs that are normally
incurred by the operating company in its operations. Revenues
and costs related to these billings will be recorded in the
accounting records of the Operating company in accordance with
Generally 0 Accepted Accounting Principles and FERC (Federal
Energy Regulatory Commission) guidelines.
II. METHOD OF BILLING
Each separate service provided by The Southern Company System
operating companies to New Subsidiary is accounted for and billed
on a job order account. Charges to each project are made to the
designated job order through the appropriate source documents or
source system. Charges for these projects are billed on a
monthly basis.
III. CALCULATION OF BILLS
The costs of services provided to New Subsidiary are calculated
and billed, based on individual projects or jobs, in accordance
with the guidelines set forth in this section.'
A. Labor
Labor costs billed for services provided to New
Subsidiary include salaries and related indirect labor
costs for employees on both fixed and variable salary
distributions.
1. Direct Labor Costs
Direct labor costs are based on the wage rates of
assigned employees and the actual number of hours
that are charged to The Job Order Account on the
Payroll Time Report.
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2. Indirect Labor Costs
a. Directly Loaded Costs
Certain indirect labor costs are developed
mechanically on a monthly basis relative to
each indirect labor cost. These indirect
payroll loadings include:
(1) Pension Costs
(2) Insurance
(3) Federal and State Payroll Taxes
(4) Employee savings Plan
(5) Non-productive Time
(a) Vacation and holidays
(b) Inclement weather
(c) Sick leave and occupational injury
(d) Payroll clearing, other (jury duty,
civic activities, etc.)
b. Indirectly Loaded Costs
Certain indirect labor costs are developed
manually on an annual basis relative to each
indirect labor cost. These Indirect Payroll
loadings include:
(1) Employee Stock option Plan
(2) Miscellaneous (Service awards,
educational assistance program, etc.)
B. Material
Material withdrawn from a Southern Company System
Operating company's inventory is billed at the
average commodity price plus a stores handling
expense. Material purchased directly from vendors
for use on a particular project is billed at
invoice cost.
C. Vehicle and Equipment Usage
Usage of fleet vehicles and equipment is recorded
on the monthly Vehicle and Equipment Usage Report.
Vehicle and equipment usage is billed at the cost
provided by the Transportation Source System.
This cost is based on an absorption rate
calculated monthly by vehicle class. The
absorption rate provides for the allocation of all
direct and indirect costs associated with fleet
operations.
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D. Meals, Lodging and Miscellaneous Expenses
Meals, lodging and miscellaneous expenses are
billed at actual cost. Vehicles and equipment not
included in the operating company's fleet will be
billed at actual cost under this expense category.
E. Engineering, Supervision and Administrative
Expenses
Engineering, supervision and administrative
expenses are defined as those expenses for project
support services which cannot be identified with
or directly charged to a specific project. These
expenses are allocable to the total cost of each
project based upon an allocation factor developed
in the following manner:
1. Engineering and Supervision
Engineering and supervision expenses are
recorded for the following asset classifica-
tions:
Major generating projects
Minor generating projects
Transmission lines
Transmission and distribution
substations
Distribution lines
An annual allocation factor is developed by
dividing total annual engineering and
supervision expense for these asset
classifications by the total annual direct
cost charged to work orders for these asset
classifications.
2. Administrative and General Expenses
An annual allocation factor for
administrative and general expenses
calculated by dividing total applicable
annual administrative and general expenses by
the total applicable annual costs.
Applicable administrative and general
expenses for purposes of this procedure are
generally identified as follows:
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FERC ACCOUNT TITLE
920 A & G Salaries
921 A & G Office Supplied
923 Outside Services employed
924 Property Insurance
925 Injuries and Damages
931 Rents
932 Maintenance of General
Plant
3. Cost of Funds Advanced
A factor for the recovery of the cost of
funds advanced for services provided is
calculated as a proration of the annual rate
associated with the higher of the cost to the
Company of its most recent first mortgage
bond issue or its most recent short-term
borrowings. The New Subsidiary will be
charged an appropriate cost of funds based on
the actual time period from date of
incurrence of such cost to date of receipt of
payment from New Subsidiary.
Annual Rate
360 Days x No. of days = factor
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Exhibit B-2
AGREEMENT BETWEEN
OPERATING COMPANY and
SOUTHERN DEVELOPMENT AND INVESTMENT GROUP, INC.
THIS AGREEMENT, made and entered into as of July 17, 1981 by
and between _______________________________________________, a
corporation organized under the laws of the State of
____________, party of the first part (hereinafter sometimes
referred to as "Operating Company") and SOUTHERN DEVELOPMENT AND
INVESTMENT GROUP, INC., a corporation organized under the laws of
Georgia, party of the second part (hereinafter sometimes referred
to as "Client Company"),
W I T N E S S E T H:
WHEREAS, Operating Company and Client Company are both
direct subsidiaries of The Southern Company ("Southern") and,
together with Southern's other operating subsidiaries, Southern
Electric International, Inc., Southern Company Services, Inc. and
Southern, form the Southern electric system; and
WHEREAS, Operating Company is organized, staffed and
equipped and is authorized by the Securities and Exchange
Commission (the "Commission") to render to Client Company
services as herein provided; and
WHEREAS, in the course of its operations, Operating Company
has acquired and will acquire certain,properties and other
resources; and
<PAGE>
WHEREAS, Client Company is authorized by order of the
Commission dated _______________________ (the "Order") to utilize
those services, properties and resources of Operating Company, as
well as those provided by other members of the Southern electric
system, to sell management, technical and training services and
expertise to non-affiliate companies, agencies and other business
concerns, including domestic and foreign governmental agencies,
public utilities, industrial concerns, or entities owning,
operating or performing services for any of them as well as
conduct other activities as permitted by the Order; and
WHEREAS, economies and increased efficiencies will result
from the performance by Operating Company of services for Client
Company and the provision of certain property and resources to
Client Company as herein provided as well as the performance by
Client of services for the Operating Company; and
WHEREAS, subject to the terms and conditions herein
described, the parties hereto are willing, upon request by each
other, to render such services and provide such property and
resources to each other at cost, determined in accordance with
applicable rules, regulations and orders of the Commission,
taking into consideration the fulfillment of Operating Company's
utility responsibilities;
NOW, THEREFORE, in consideration of the premises and of the
mutual agreements herein, the parties hereto hereby agree as
follows:
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1. Definitions
As used hereinafter, the following terms, in addition
to those elsewhere defined in this Agreement, shall have the
following meanings unless the context otherwise requires:
A. "Services" shall mean those services described in
Articles 3, 4 and 5 hereof.
B. "Non-Affiliate" means any corporation, company,
agency, government, business, entity or person other than
Southern, a direct or indirect subsidiary of Southern, or a
person employed by Southern or any of such subsidiaries.
C. "Intellectual Property" means any process, program
or technique which is protected by the copyright, patent or
trademark laws, or as a trade secret, and which has been
specifically and knowingly incorporated into, exhibited in,
or reduced to a tangible writing, drawing, manual, computer
program, product or similar manifestation or thing.
2. Agreement to Furnish Service
A. Upon its receipt of a work order or other request
therefor from a party hereto, the other party hereto will,
if it has or can have available the personnel and resources
needed to fill the work order on request, furnish to the
requesting party upon the terms and conditions hereinafter
set forth such of the Services, at such times, for such
periods and in such manner as the party may from time to
time request; provided, however, that the determination of
whether Operating Company has the available personnel and
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resources to perform in accordance with the work order or
request will be entirely within the discretion of Operating
Company, and Operating Company may at its option elect not
to perform any requested Service, except that, once having
agreed to perform pursuant to a work order or request,
Operating Company cannot withdraw or depart from such
performance without the consent of Client Company, which
consent will not be unreasonably withheld.
B. The provision of Services by a party hereto
pursuant to this Agreement shall in all cases and
notwithstanding anything herein contained to the contrary be
subject to any limitations contained in authorizations,
rules or regulations of those governmental agencies, if any,
having jurisdiction over Operating Company, Client Company,
or such provision of Services.
3. Description of Services
The Services to be provided hereunder are described as
follows:
A. General Engineering. Perform general engineering
work, including system production and transmission studies;
prepare and analyze electrical apparatus specifications,
distribution studies and standards, civil engineering and
hydraulic studies and problems, fuel supply studies, advice
and assistance in connection with analyses of operations and
operating and construction budgets. Each party's personnel
will routinely keep informed as to improvements and
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developments in the art of generation, transmission and
distribution of electricity through frequent contacts with
the manufacturers of electrical equipment, through
membership in the various national and regional engineering
societies and through participation in the committee work of
such societies and the trade associations of the utility
industry. Each party will make available to the other the
information thus gained with respect to such developments.
B. Design Engineering. Perform detailed design work
for steam plants, hydro plants, transmission and
distribution lines and substations and otherwise as
requested by a party hereto; make available to and for the
use of a party as required, the services of a specialist or
specialists on various phases of plant operation and
maintenance; and also make available, as required,
inspection and supervision personnel for generating plant,
transmission line and substation and other construction,
maintenance and operation.
C. Accounting and Statistical. Advise and assist a
party in connection with the installation of accounting
systems and similar problems, requirements of regulatory
bodies with respect to accounting, studies of accounting
procedures, and practices to improve efficiency, book
entries resulting from unusual financial transactions,
internal audits, employment of independent auditors,
preparation and analyses of financial and operating reports
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and other statistical matters relating to customers of
Client Company, preparation of annual reports to
stockholders, regulatory commissions, insurance companies
and others, standardization of accounting and statistical
forms in the interest of economy, and other accounting and
statistical matters.
D. Rates. Advise a party on matters relating to
rates and valuation, the design of new and improved rate
schedules, and their effect upon revenues, the cost of
competitive services, earnings trends, the desirability of
rate changes, rate audits, service rules and regulations,
commodity and tax clauses, minimum charges, metering
problems, special industrial contracts, resale rates and
rural extension plans; and assist in the preparation of
petitions and applications required in connection with rate
changes.
E. Budgeting. Advise and assist a party in matters
involving the preparation and development of construction
and operating budgets, cash and cost forecasts, and
budgetary controls.
F. Business Promotion and Public Relations. Advise
and assist a party in the development of marketing and sales
programs, in the preparation and use of advertising and
sales materials, and in the determination and carrying out
of promotional programs.
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G. Systems and Procedures. Advise and assist a party
in the formation of good operating practices and methods of
procedure, the standardization of forms, the purchase,
rental and use of mechanical and electronic data processing,
computing and communications equipment, in conducting
economic research and planning and in the development of
special economic studies.
H. Access to and Use Of Facilities. Subject to those
conditions set forth in Article 5B, make available to a
party and/or its customers access to, use of, or rights in
all facilities, products, processes, techniques, computer
hardware and software, technical information, training aids
and properties, Intellectual Property, vehicles, equipment,
machines and other property, whether owned, leased, licensed
or otherwise by a party hereto.
I. Training. Assist a party in providing training to
personnel of the other party or of Non-Affiliates; develop
and make available training procedures, materials and
facilities, and provide instructors.
J. General. Make available services in the areas of
construction planning and supervision, design, management
programs, quality assurance, licensing matters, research and
development, and communications systems and procedures.
K. Other Services. Render advice and assistance in
connection with such other matters as either party may
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request and which the parties may be able to perform with
respect to their respective business and operations.
4. Provision of Personnel
Where specifically requested by one party hereto, the
other party will loan its employees to the requesting party. In
that event, such loaned employees will be under the sole
supervision and control of the party borrowing the employee for
such period or periods of time as are necessary to complete the
work to be performed by such employees. Such employees may be
withdrawn by the loaning party from tasks assigned by the
borrowing party only with the consent of the lender, which
consent will not be unreasonably withheld. The borrower Company
will be responsible for the actions and activities of such
employees while engaged in the performance of the work to the
same degree as though such persons were employees of the borrower
Company. However, as part of Services, the lender during periods
when such employees are loaned to the borrower will continue to
provide to, and with respect to such employees those same
payroll, pension, savings, tax withholding, unemployment,
bookkeeping and other personnel support services then being
utilized by such party in connection with compensating and
benefiting such employees.
5. Exchange of Intellectual Property
A. Should Client Company in the course of its
business develop Intellectual Property, it will make such
Intellectual Property available for utilization by Operating
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Company without charge (except the actual expenses incurred
by Client company in connection with making such new
Intellectual Property so available), provided, however, that
such availability shall be dependent upon and subject to any
contractual.commitments of Client Company to Non-Affiliates,
applicable laws and regulations, and the legal rights and
entitlements of others.
B. (i) As part of the Services, Operating Company
will make available to Client Company for use or for re-sale
or licensing to Non-Affiliates all Intellectual Property
heretofore or hereafter developed or obtained by Operating
Company without charge (except for the actual expenses
incurred in making the same available, and except as
otherwise provided in Article 8 below), provided, however,
that such availability shall be dependent and subject to any
contractual commitments of Operating Company to Non--
Affiliates, applicable laws and regulations, and the legal
rights and entitlements of others.
(ii) In the event that an Operating Company
invests in the development of Intellectual Property which is
not ultimately used by it, resulting in a disallowance of
any associated development costs by state regulatory
authorities having jurisdiction, and such Intellectual
Property is thereafter licensed by Client Company to third
parties, Client Company will pay a royalty of thirty percent
(30%) of net sublicense revenues (after deduction of costs
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and expenses of Client Company) until the development costs
have been fully reimbursed to such Operating Company.
(iii) Where Client Company and Operating
Company agree to jointly develop or acquire Intellectual
Property with the specific understanding that such
Intellectual Property would be both used by an Operating
Company and remarketed to third parties by Client Company,
Client Company will pay for fifty percent (50%) of the cost
of acquisition or development thereof, and the Operating
Company will pay the remaining cost of the acquisition or
development thereof, and Client Company shall have no
further financial obligation to such Operating Company.
6. Compensation of Operating Company
As compensation for services actually requested by one
party and rendered to it by the other, the parties hereby agree
to reimburse each other respectively for all Costs properly
chargeable or allocable thereto, as controlled through a work
order procedure. Such Costs shall be determined in accordance
with subparagraphs 6A, 6B and 6C below and as outlined on
Exhibit A attached hereto and incorporated herein by reference:
A. Direct Cost. Direct Cost consists of Direct Labor
Costs, Direct Labor Benefits, Material, Vehicle and
Equipment Usage, and Meals, Lodging and Miscellaneous
Expenses. Direct Labor Costs shall be based on the wage
rates of assigned employees and the actual number of hours
devoted to providing the Service. Direct Labor Benefits
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include the costs of paid, excused absences, such as
vacations and holidays, and shall be based on a recovery
factor applied to the Direct Labor Costs. Material which is
withdrawn from a party's inventory shall be billed by that
party on the same basis as Operating Company uses to charge
such costs to its utility customers, plus a stores handling
expense. Material purchased directly from vendors for use
on a particular project shall be billed at invoice cost.
Vehicle and Equipment Usage shall be billed at the
appropriate cost thereof by vehicle class, which costs shall
provide for the allocation of all direct and indirect costs
associated with Operating Company's fleet operation. Meals,
Lodging, Transportation and Miscellaneous Expenses shall be
billed at actual cost.
B. Indirect Cost. Indirect Cost consists of Indirect
Labor Cost, Engineering and Supervision, and Administrative
and General Expenses. Indirect Labor Costs include pension
costs, insurance, payroll taxes, employee savings plan, and
similar payroll items. Where applicable, Engineering and
Supervision shall be determined by asset classification
based on Operating Company's total engineering and
supervision expenses and total direct costs. Administrative
and General Expenses shall be based on each party's
administrative and general expenses and total applicable
costs. Each type of Indirect Costs shall be applied to
Direct Labor Costs and Direct Labor Benefits to the extent
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reasonably allocable thereto. There shall be no duplication
of Direct Costs and Indirect Costs.
C. Cost of Funds Advanced. For the recovery of the
cost of funds advanced for Services provided, each party
will be charged a cost of funds based on the actual time
period from billing date of such costs to date of receipt of
payment. The costs of funds shall be the annual rate
associated with the higher of the costs to the party of its
most recent first mortgage bond issue or its most recent
short-term borrowings. The costs of funds factor shall be
applied to each monthly billing to a party after receipt of
payment by the other party; provided, however, that the last
monthly billing to a party for a project shall include a
cost of funds amount based on an assumed thirty (30) day
time period.
7. Work Orders
The Services will be performed in accordance with work
orders or requests issued or made by or on behalf of one party
and accepted by the other, and all Services will be assigned an
applicable work order number to enable specific work to be
properly allocated by project or other appropriate basis. Work
orders shall be as specific as practicable in defining the
Services requested to be performed. A party shall have the right
from time to time to amend, alter or rescind any work order,
provided that (i) any such amendment or alteration which results
in a material change in the scope of the work to be performed or
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equipment to be provided is agreed to by the party performing, or
to perform the work; (ii) the costs for the Services covered by
the work order will include any expense incurred as a direct
result of such amendment, alteration or rescission of the work
order, and (iii) no amendment, alteration or rescission of a work
order will release any party from liability for all costs already
incurred or contracted for by the other party pursuant to the
work order, regardless of whether the work associated with such
costs discontinued by such amendment, alteration or rescission.
8. Disposition of Intellectual Property. In the event
Client Company sells or licenses to Non-Affiliates Intellectual
Property heretofore or hereafter developed by Operating Company
for its own use, and as a result of such sale or license such
Intellectual Property is no longer available for use by Operating
Company, Client Company shall receive, as and when received from
such Non-Affiliates, a commission of thirty percent (30%) of all
net profits (after deducting marketing and any other applicable
expenses incurred by Client Company) earned from such sale or
licensing, and Operating Company shall receive seventy percent
(70%) of such net profits.
9. Responsibility for Work; Limitation of Liability;
Indemnification:
A. In performing Services under Articles 4 and 5(B)
hereof (i.e., the provision of personnel and making
available to Client Company of Intellectual Property),
neither party, their agents, servants and employees shall
have no responsibility whatsoever to the other for any
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<PAGE>
claims, liabilities, injuries, damages or other
consequences of providing such Services under any theory of
liability, whether in contract, in tort (including
negligence and strict liability) or otherwise, it being
understood and agreed that (1) with respect to loaned
employees such employees are furnished without warranty as
to their suitability or expertise; (2) with respect to the
making available of Intellectual Property, such property is
made available by Operating Company "as is" and "where is"
without warranty of any type including warranty of title,
without indemnity against patent or copyright infringement,
and without warranty or representation that transfer of the
Intellectual Property does not constitute a violation of a
trade secret, proprietary right or contract right of a third
party.
B. In performing Services under Article 3 hereof, the
parties hereto will exercise due care to perform the
Services in a workmanlike manner and in accordance with the
specifications set forth in the applicable work order or
request. A party's sole and exclusive responsibility for
deficiencies in such Services shall be limited to the
correction, on a reimbursable basis so that the Services are
performed in a workmanlike manner.
C. WITH RESPECT TO ALL SERVICES, INCLUDING ANY
TRANSFER OF PROPERTY, THE PARTIES HERETO MAKE NO WARRANTY OR
REPRESENTATION OTHER THAN AS SET FORTH ABOVE, AND THE
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PARTIES HEREBY AGREE THAT NO OTHER WARRANTY, WHETHER
STATUTORY, EXPRESS OR IMPLIED (INCLUDING, BUT NOT LIMITED
TO, ALL WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE AND WARRANTIES ARISING FROM COURSE OF
DEALING OR USAGE OF TRADE) SHALL BE APPLICABLE TO THE
SERVICES PERFORMED BY A PARTY HEREUNDER.*
D. Client Company shall and does hereby agree to save
harmless and defend Operating Company, its agents, servants
and employees, and employees of Operating Company loaned to
Client Company under Article 4, from the payment of any sum
or sums of money on account of, or resulting from, claims or
suits growing out of (a) injuries to or the death of any
person, (b) damage to or loss of any property, and/or (c)
other damages which are in any way attributable to or arise
out of the performance and prosecution of any project or
work performed by or on behalf of Client Company for Non-
Affiliates or Services rendered by Operating Company to
Client Company, whether or not the same results from or is
contributed to by (i) the claimed or actual active, passive,
affirmative, sole or concurrent negligence or strict
liability on the part of Operating Company, its agents,
servants or employees, or of employees of Operating Company
loaned to Client Company under Article 4, (ii) the breach of
any duty owed by an employee of Operating Company loaned to
* The remedies stated herein are exclusive and shall constitute the
sole and exclusive remedy of a party for a failure by the other
party to comply with its warranty obligations.
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Client Company hereunder to his co-employee, (iii) the
breach of any statutory duty (whether non-delegable or
otherwise) on the part of Operating Company, its agents,
servants or employees, or of an employee of Operating
Company loaned to Client Company hereunder, (iv) liability
imputed as a matter of law to the Operating Company, its
agents, servants, or employees, or an employee of Operating
Company loaned to Client Company hereunder, (v) the failure
of, or any condition in property, or faulty workmanship
furnished by Operating Company, its agents, servants or
employees or an employee loaned by Operating Company to
Client Company hereunder, or (vi) any breach of warranty or
contract by Operating Company, its agents, servants or
employees, or employees of Operating Company loaned to
Client Company hereunder. Further, Client Company shall and
does hereby indemnify and agree to save harmless and defend
Operating Company (a) from any and all liens, garnishments,
attachments, claims, suits, costs, attorneys' fees, cost of
investigation and of defense resulting from, incurred in
connection with, or relating to any such claims,. (b) from
the payment of any such sum or sums of money, and (c) from
the payment of any penalties, fines, damages, suits or
claims (and any liens or attachments asserted in connection
therewith) arising out of (i) any alleged or actual
violation of law, court order, or governmental agency rule
or regulation committed by or existing with respect to
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Client Company or its employees, agents or subcontractors
(including Operating Company when such payments relate to
performing Services hereunder), or (ii) any alleged or
actual breaches of contract by Client company, or (iii) any
claims made by or on account of any employee, agent or
subcontractor of Client Company associated with work being
performed for Non-Affiliates, or for (iv) services or labor
performed, materials, provisions or supplies furnished or
board of men which have been purchased or allegedly
contracted for, by or on behalf of the Client Company, its
employees, agents or subcontractors (except Operating
Company when not performing services hereunder).
E. The Operating Company shall within five (5)
business days after it receives notice of any claims,
action, damages or liability against which it will expect to
be indemnified pursuant to Article 9D, notify Client Company
of such claims, actions, damages or liabilities.
Thereafter, Client Company may at its own expense, upon
notice to Operating Company, defend or participate in the
defense of such action or claim or any negotiation for
settlement of such action or claim, provided that unless
Client Company proceeds promptly and in good faith to pay or
defend such action or claim, then operating Company shall
have the right (but not the obligation), in good faith, upon
ten (10) days' notice to Client Company, to pay, settle,
compromise or proceed to defend any such action or claim
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<PAGE>
without the further participation by Client Company. Client
Company will immediately pay (or reimburse Operating
Company, as the case may be) any payments, settlements,
compromises, judgments, costs or expenses made or incurred
by Operating Company in or resulting from the pursuit by
Operating Company of such right. If any judgment is
rendered against Operating Company and any such action
defended by Client Company or from which Operating Company
is otherwise entitled to indemnification under Article 9D,
or any lien attaches to the assets of Operating Company in
connection therewith, Client Company immediately upon such
entry or attachment shall pay the judgment in full or
discharge any such lien unless, at its expense and
direction, appeal shall be taken under which the execution
of the judgment or satisfaction of the lien is stayed. If
and when a final and unappealable judgment is rendered
against Operating Company in any such action, Client Company
shall forthwith pay such judgment or discharge such lien
prior to the time that Operating Company would be legally
held to do so.
F. Client Company shall maintain at all time adequate
levels of insurance to discharge financially its obligations
under this Article 9 and all such policies of insurance
shall name Operating Company as additional insured.
10. Miscellaneous
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This Agreement shall be binding upon the successors
and assigns of the parties hereto, provided that operating
Company shall not be entitled to assign or subcontract out any of
its obligations under this Agreement or under any purchase order
or work order issued hereunder without the prior written approval
of Client Company. This Agreement may not be modified or amended
in any respect except in writing executed by the parties hereto.
This Agreement shall be construed and enforced under and in
accordance with the laws of the State of Georgia. This Agreement
may be executed in counterparts, each one of which when fully
executed shall be deemed to have the same dignity, force and
effect as if the original. No provision of this Agreement shall
be deemed waived nor breach of this Agreement consented to unless
such waiver or consent is set forth in writing and executed by
the party hereto making such waiver or consent.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
agreement to be executed in their respective corporate names by
their respective Presidents or one of their respective Vice-
Presidents and their respective seals to be hereunto affixed and
attested by their respective Secretaries or one of their
respective Assistant Secretaries as of the day and year first
above written.
___________________________________
(Operating Company)
ATTEST:
__________________________
By:________________________________
Secretary President
Date Executed: ____________________
SOUTHERN DEVELOPMENT AND INVESTMENT
GROUP, INC.
(Client Company)
ATTEST:
__________________________
By:________________________________
Secretary President
Date Executed: ____________________
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EXHIBIT "A"
SAMPLE ACCOUNTING AND BILLING PROCEDURE TO BE
EMPLOYED BY SYSTEM OPERATING COMPANIES IN BILLING
COSTS OF WORK PERFORMED FOR NEW SUBSIDIARY
I. INTRODUCTION
The purpose of this procedure is to establish guidelines which
provide uniform and consistent methods of billing for services
rendered to "New Subsidiary" by The Southern Company System
Operating companies. These billings include direct costs related
to services provided and indirect costs that are normally
incurred by the operating company in its operations. Revenues
and costs related to these billings will be recorded in the
accounting records of the Operating company in accordance with
Generally 0 Accepted Accounting Principles and FERC (Federal
Energy Regulatory Commission) guidelines.
II. METHOD OF BILLING
Each separate service provided by The Southern Company System
operating companies to New Subsidiary is accounted for and billed
on a job order account. Charges to each project are made to the
designated job order through the appropriate source documents or
source system. Charges for these projects are billed on a
monthly basis.
III. CALCULATION OF BILLS
The costs of services provided to New Subsidiary are calculated
and billed, based on individual projects or jobs, in accordance
with the guidelines set forth in this section.'
A. Labor
Labor costs billed for services provided to New
Subsidiary include salaries and related indirect labor
costs for employees on both fixed and variable salary
distributions.
1. Direct Labor Costs
Direct labor costs are based on the wage rates of
assigned employees and the actual number of hours
that are charged to The Job Order Account on the
Payroll Time Report.
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2. Indirect Labor Costs
a. Directly Loaded Costs
Certain indirect labor costs are developed
mechanically on a monthly basis relative to
each indirect labor cost. These indirect
payroll loadings include:
(1) Pension Costs
(2) Insurance
(3) Federal and State Payroll Taxes
(4) Employee savings Plan
(5) Non-productive Time
(a) Vacation and holidays
(b) Inclement weather
(c) Sick leave and occupational injury
(d) Payroll clearing, other (jury duty,
civic activities, etc.)
b. Indirectly Loaded Costs
Certain indirect labor costs are developed
manually on an annual basis relative to each
indirect labor cost. These Indirect Payroll
loadings include:
(1) Employee Stock option Plan
(2) Miscellaneous (Service awards,
educational assistance program, etc.)
B. Material
Material withdrawn from a Southern Company System
Operating company's inventory is billed at the
average commodity price plus a stores handling
expense. Material purchased directly from vendors
for use on a particular project is billed at
invoice cost.
C. Vehicle and Equipment Usage
Usage of fleet vehicles and equipment is recorded
on the monthly Vehicle and Equipment Usage Report.
Vehicle and equipment usage is billed at the cost
provided by the Transportation Source System.
This cost is based on an absorption rate
calculated monthly by vehicle class. The
absorption rate provides for the allocation of all
direct and indirect costs associated with fleet
operations.
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D. Meals, Lodging and Miscellaneous Expenses
Meals, lodging and miscellaneous expenses are
billed at actual cost. Vehicles and equipment not
included in the operating company's fleet will be
billed at actual cost under this expense category.
E. Engineering, Supervision and Administrative
Expenses
Engineering, supervision and administrative
expenses are defined as those expenses for project
support services which cannot be identified with
or directly charged to a specific project. These
expenses are allocable to the total cost of each
project based upon an allocation factor developed
in the following manner:
1. Engineering and Supervision
Engineering and supervision expenses are
recorded for the following asset classifica-
tions:
Major generating projects
Minor generating projects
Transmission lines
Transmission and distribution
substations
Distribution lines
An annual allocation factor is developed by
dividing total annual engineering and
supervision expense for these asset
classifications by the total annual direct
cost charged to work orders for these asset
classifications.
2. Administrative and General Expenses
An annual allocation factor for
administrative and general expenses
calculated by dividing total applicable
annual administrative and general expenses by
the total applicable annual costs.
Applicable administrative and general
expenses for purposes of this procedure are
generally identified as follows:
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FERC ACCOUNT TITLE
920 A & G Salaries
921 A & G Office Supplied
923 Outside Services employed
924 Property Insurance
925 Injuries and Damages
931 Rents
932 Maintenance of General
Plant
3. Cost of Funds Advanced
A factor for the recovery of the cost of
funds advanced for services provided is
calculated as a proration of the annual rate
associated with the higher of the cost to the
Company of its most recent first mortgage
bond issue or its most recent short-term
borrowings. The New Subsidiary will be
charged an appropriate cost of funds based on
the actual time period from date of
incurrence of such cost to date of receipt of
payment from New Subsidiary.
Annual Rate
360 Days x No. of days = factor
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Exhibit B-4(a)
MEMO
TO: Bob Jones, President
Southern Development & Investment Group, Inc.
FROM: Bill Kirby
RE: Fiber Optic Usage
DATE: June 1, 1994
-----------------------------------------------------------------
You have asked me to confirm in writing our discussions with
respect to our need for the digital communications system
involving fiber optic cable utilization, and our relative need
for fiber optic cable capacity, particularly as these questions
relate to the installation of the system-wide prototype energy
management network.
The general design of the system, as now contemplated, would
be as follows. It is important to reach diverse areas reflecting
a variety of demographic groups, a variety of sizes of cities and
towns, and a dispersion among the operating companies so as to
detect any differences in utility or consumer behavior among the
various operating companies within the Southern Electric system.
While initially we had hoped to confine the prototype system to
3500 to 5000 residences and establishments, both long distance
carriers and cable television providers, as well as other
experts, have consistently told us that to have real validity,
the test should embrace 6000 to 10,000 such units at a minimum.
The target cities and towns to be employed in the prototype study
are: Atlanta (including one of its northern suburbs, probably
Sandy Springs); Warner Robins/Macon, GA; Panama City, FL (with
the possibility of Pensacola or a corridor between the two);
Gulfport, MS; Birmingham, AL (including a selected suburb);
Augusta, GA; Savannah, GA; Montgomery, AL; Mobile, AL; and
Tuscaloosa, AL.
Birmingham, AL will serve as a central point for control and
monitoring of the overall energy management system because system
generation and transmission is monitored and controlled from that
point. A basic backbone system has been in the process of
construction for many years utilizing fiber optic cable. Over
1700 miles of cable is already in place, but another
approximately 300 miles of cable will have to be installed and
the remaining cable capacity upgraded so that Birmingham can be
interconnected with the energy management/fiber optic
distribution networks to be installed throughout the system.
Although only ten points within the system are initially
contemplated, they are geographically dispersed and there is no
practical reason to avoid completion of the backbone system and
<PAGE>
its upgrade now so that if the system proves successful and we go
to more wide-spread deployment, there will be no need for
additional backbone installations of a large magnitude later. In
short, to build a temporary backbone which would have to be
replaced if the networks prove successful would achieve no
economic benefits and could be a waste. Moreover, we now use
some 347,000 circuit miles of microwave as the essential core of
our telecommunications transport backbone network. The FCC
wishes to auction off much of these frequencies for new uses such
as PCS, forcing us to move. This increases the need for a
complete and upgraded backbone. The basic distribution system
will be interconnected with the backbone system. Fiber optic
cable will be run from the backbone system to substations, and
then from the substations to nodes and to any company facilities
such as district offices or other facilities which are passed.
The substation would serve as a head end, and each head end would
be connected to the central point in Birmingham through the
backbone system. From the node, ordinary coaxial cable will be
run to each residence or business establishment to be included
within the prototype energy management network.
In both the Atlanta area and the Birmingham area, Southern
operates many critical facilities. Southern Company Services has
significant facilities on the outskirts of Birmingham, as well as
in downtown Birmingham, and Alabama Power has its headquarters
and many critical functions located in downtown Birmingham, as
well as other functions dispersed in the Birmingham metropolitan
area. Similarly, in Atlanta, SCS has numerous functions located
in a suburb of Atlanta, while Georgia Power has vital
installations in downtown Atlanta, as well as at several points
on the outer perimeter of the Atlanta metropolitan area. These
facilities in both Birmingham and Atlanta should be
interconnected by fiber rings around the city or metropolitan
area. These types of rings are referred to in the Booz-Allen
study as Metropolitan Area Networks.
You have asked me to discuss and determine what capacity of
the network will be required by the Southern electric system and
what portion of the capacity of the system would be available for
use by others. In order to arrive at an answer, one must be
familiar with the present and future requirements and vision of
the Southern electric system with respect to the part that
telecommunications plays and will play in the operation of our
core electric utility business. A brief outline of this was
contained in our May 24, 1993 report entitled "Telecommunication
Networks Opportunities for the Present: A Vision for the Future
of The Southern Company". This report examined various functions
of the telecommunications network and is attached. We have also
employed an outside consultant to consider present and future
telecommunications needs and strategies, as well as other
matters. Not all of their report is relevant to the issue at
hand, but I am enclosing copies of their pertinent slide
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presentation which forms the background of management thinking
and outside consultant expertise.
As noted, the portion of the system which runs from the node
to the residence or business location is to be coaxial cable. As
a result, there is no issue as to capacity because we are really
installing the lowest possible capacity component. The
installation of fiber from substation to node would probably be
undertaken with standard dielectric cable. The installed cost of
such cable for 24 fibers is estimated to be $16,000 to $18,000
per mile, and the installed cost of 36 fibers of such cable is
estimated to be $20,000 to $22,000 per mile. The fiber to be run
to the substation would be overhead protected ground wire. The
cost of 24 fibers for such wire or cable on an installed basis is
estimated to be $43,000 per mile, and for 36 fibers, it is
estimated to be $48,000 per mile. The choice of overhead
protected ground wire ("OPGW") versus standard dielectric cable
is dictated not by capacity considerations, but by route
distances and safety and reliability considerations. Thus, the
only capacity consideration to be determined is whether to
install cable or wires with 24 fibers or with 36 fibers.
Our fiber need is estimated as follows. We will need two
fibers for the energy management system itself, plus one spare
fiber for that system on a dedicated basis to be used in the
event of electronic failure, break in the line, or other similar
event, failure, or interruption. This provides for a downstream
and upstream path. We will need two fibers for the use of the
Southern electric system internal voice network. The voice
network is briefly described on page 4 of my prior report. We do
not intend to use these two fibers for commercial telephone
service, but to use them for the internal voice requirements of
the system, including communications with offices, substations,
generation facilities, and in the future, key office parks and
industrial locations and dispersed generation facilities.
Southern also requires communication for its Supervisory Control
and Data Acquisition System (SCADA). To quote from my prior
report:
"Transmission monitor/control points total 114,000 in 1,328
locations, while distribution points number 37,000 at 1,060
sites. This system represents a $130 million investment and
will consume a tremendous amount of telecommunications band
width when fully operational."
This system will require a minimum of two fibers. However, there
are other functions and services which the company utilizes for
the overall benefit of the system. These include the Southern
Company Television Network (SCTN) and the Interactive Distance
Learning Network (IDLN), the Information Resources Data Network,
the Systems Network Architecture Traffic, and the Multi Protocol
Wide Area Network. All of these relate to system programs and
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data applications. Both SCTN and IDLN are utilized for
communication with and education of system personnel. Some of
the programming of SCTN is suitable for education of customers
with respect to energy conservation and other energy related
issues, new electric energy devices and appliances and similar
matters. This programming might be extended to the home, but the
overall system on the fiber will be for the interconnection of
company facilities. Initially, these functions can be subsumed
within the three fibers for energy management and the two fibers
for SCADA, but eventually, they will require two fibers of their
own, probably within the next three to five years.
The wireless communication system is presently being
installed. It will require hard wire connections between
transmitter and tower sites, substations and other important
company facilities, in order to transport computer messages,
facilitate switching between towers, transport billing
information, and serve as a backup hard wire alternative in the
event of weather or other emergency-caused interruptions. The
purpose of the hard wire connection is for internal requirements
and two fibers will be required, one downstream and one upstream.
There will be a minimum of two automatic protection systems,
one for local traffic and one for inter-city traffic. These
consist of two spares each, which back up the general traffic and
are controlled by an electronic device which automatically
switches to a spare in the event of an electronic or other
failure or event in order to avoid the interruption of traffic.
This is standard industry practice. Given the diversity of the
needs and the overall requirements of system reliability, it is
my recommendation that we have a minimum of four spare fibers.
Georgia Power and Alabama Power now are in the process of
developing automated dispatch of standby and dispersed
generation. The present method of communicating with such
generation and dispatching same is via telephone lines which are
very expensive and which offer only 95 percent reliability in
contrast to the system requirement of 99 percent reliability or
greater. It is proposed that two fibers, one inbound and one
outbound, would be utilized for dispatch and control of standby
generators and dispersed generation. All indications are that
this will be a growing activity in the future, as evidenced by
Virginia Power's recent proposal to build a significant number of
dispersed generation facilities as an alternative to self
generation by customers.
An additional consideration is the impact of wholesale
wheeling, retail wheeling, power brokering and power marketing.
These issues are discussed in the independent consultant's
report. Wholesale wheeling has been emerging over the last two
years since the passage of the Energy Policy Act, and power
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brokering and marketing has also commenced. Retail wheeling
remains under discussion and can result at any time either from
state commission action or from the passage of new legislation.
Already California and Michigan have proposed retail wheeling.
The independent consultant's report recommends that in designing
communications systems, the Southern electric system make
provision for the necessary communications infrastructure to
support these developments now. Accordingly, we will need two
fibers dedicated to high speed data lines.
Based upon this analysis, we will two lines for energy
management, two lines for wireless traffic, two lines for the
voice network, two lines for power control, two lines for the
SCTN, IDLN, IRDN, SNA functions, two lines for dispersed and
standby generation, and two lines for high speed data, together
with two automatic protection systems, including four fibers and
two dark spare fibers for maintenance purposes. This creates a
present and foreseeable need for 20 fibers. The impact of loss
of microwave might increase this number.
We must make provision for undefined future uses and future
applications. What we have learned is that there will be future
uses and future applications, but that these cannot be identified
and defined with precision now. It is my recommendation that the
system have available to it at a minimum six to twelve fibers for
undefined future uses. Thus, we have a present need for 20
fibers and a "prudent" need for 26 to 32 fibers, including
spares. As one concerned with the maintenance of the reliability
of the network, it would be our recommendation that we have
adequate spare fibers. This permits maintenance, repair and
replacement without service interruption. I believe this accords
with industry practice.
Assuming fairly immediate use of 20 fibers, either actively
or as spares, the most economic decision is to deploy 36 fibers
rather than 24. This accords with long term potential use of 26
to 32 fibers, but it also offers greater ability to offset cost
of deployment by spreading the cost of installation of fibers to
include the opportunity to earn revenues from outside parties.
If 24 fibers were deployed and we used 18, we would be in a
position to lease or otherwise make arrangements with outside
parties with respect to the use of six fibers. If we merely
recaptured the proportionate cost from outsiders, it would reduce
our cost of 18 fibers by 25%. This means that with respect to
OPGW, our net cost for the 18 fibers when we lease out six fibers
would be reduced from $43,000 per mile to about $32,000 per mile.
However, if we deployed 36 fibers, we would be in a position to
lease out or make other arrangements with respect to 18 of the
fibers, or 50%. This would reduce our net cost for our 18 fibers
to $24,000 per mile. Similar economies would be realized with
respect to standard dielectric cable. I would anticipate,
however, that we could actually realize greater savings than that
- 5 -
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depicted because revenues from outside parties would probably
exceed their proportionate costs since an outsider would compare
our rental rate to his own option of installing his own fiber.
Accordingly, I recommend that where fiber is to be
installed, the Southern electric system install cable with 36 or
more fibers. Further, I conclude that we have a present and near
term need for at least 20 fibers, including spares, and a future
need for 26 to 32 fibers. Additionally, I believe that the
ability to garner revenues from others for excess fibers will
materially reduce costs to the Southern electric system and its
ratepayers by spreading the infrastructure cost over a broader
base. This is best achieved by the installation of 36 or more
fibers.
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EXHIBIT B-4(b)
Southern Company College
Student of the Business Report
TELECOMMUNICATIONS NETWORKS
OPPORTUNITIES FOR THE PRESENT
A VISION FOR THE FUTURE OF THE SOUTHERN COMPANY
Charles Brazemore
Homer Cotton
Ellis Hinson
Van Horne
Bill Kirby
Bob Moore
Joe Webb
Steve Weber
PRESENTED MAY 23, 1994
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I. EXECUTIVE SUMMARY
The purpose of this report is to examine the Southern Company's
private communications network as a strategic asset that can be
leveraged to expand internal capabilities and strengthen the
competitive position of our core business in a retail access
environment. Opportunities exist to utilize our capabilities to
provide a variety of competitive telecommunications services in
the Southeast. The report also defines network assets, proposes
potential interfaces, and outlines a vision of how the Southern
telecom system can be leveraged to meet these goals.
As a result of our investigation, the team concludes that
telecommunications is vital to operating the core business. We
see usage of these assets increasing over time since they are an
enabler of both the present and future core business.
Furthermore, the basic infrastructure, in terms of people,
expertise and investment, is in place to leverage any excess
telecommunications capabilities for additional profits. Due to
the highly competitive situation in the communications business,
the team further concludes that time is of the essence if
Southern is going to take advantage of the existing
opportunities.
Recommendations of the team include full incorporation of
telecommunications into the Southern Company strategy. We
further see that Southern needs to make a strategic commitment to
establish a communications path to every customer's premises. A
major vehicle for beginning this process is the annual
Telecommunications Strategic Plan. The Telecommunications
Coordination Group (TCG) could expand this document to include a
methodology for identifying current assets capable of addressing
external opportunities. The TCG should also play a greater role
in final selection of communications hardware and software for
internal applications, with the intent of standardizing common
facilities, products and usage across the company. In
conjunction with the previous two recommendations, Southern
management must adopt procedures to allow rapid analysis,
approval, and implementation of projects for both internal and
external applications.
Future action steps are as follows:
-Form an unregulated telecommunications subsidiary from
existing internal resources and other assets, as
appropriate. Any skills sets that are weak or missing
should be augmented by hiring talent from outside the
company.
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-Primary mission of the new subsidiary will be to provide
various telecommunications services to the Southern Electric
System and its customers. The secondary mission would be to
expand the company's unregulated markets by bringing
communications services to new customers outside the service
territory.
-The above steps should be implemented by forming strategic
alliances and partnerships with other telecommunications
companies through joint ventures, mergers, or acquisitions.
II. INTRODUCTION
The electric utility industry as many of us have known it during
our careers is undergoing a tremendous metamorphosis. Work is
under way to re-regulate the business at both the national and
state level. Electric energy will soon join the ranks of other
industries, such as airlines, banking, investment,
telecommunications, and natural gas, that have experienced the
monumental changes wrought by re-regulation.
In the past, electric utilities have been able to build new
generating capacity as demand for energy has gone up. While this
was a desirable action in a regulated, rate of return
environment, the luxury of adding new generation facilities to
our rate base is rapidly disappearing. Regulatory change now
permits cogeneration (Cogen) and independent power producers
(IPPs) to construct the plants instead. The Federal Energy
Regulatory Commission (FERC) also has mandated wholesale wheeling
of power, thus creating competition for bulk sales and possibly
constraining our transmission facilities for delivery of energy
to our own customers. The state of Georgia already allows large
customers to choose the provider of their electricity. Retail
access to all classes of customers is a distinct possibility in
the near future. Environmental policies of the government and
concerns of certain activist groups also hamper any efforts to
launch large scale generation projects. A declining rate base
for these assets is inevitable.
This new environment, in its purest form, will decrease prices
and drive electric energy to a commodity product. Under those
circumstances price becomes the main decision point for
purchasing and generally is offset only by some other perception
of value received from the provider of the commodity. Today, all
consumers (particularly large commercial and industrial
organizations) spend more wisely in order to meet their own goals
and thus will scrutinize their decisions very carefully.
Consequently, the Southern Company and other investor-owned
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utilities (IOUs) will feel great pressure on their financial
performance and marketing capabilities. Any who do not lower
costs and find ways to increase the value of their product will
succumb to the demands of a free, open, competitive marketplace.
In order to meet the challenge of competition, Southern will have
to implement both defensive and offensive strategies. The main
thrust of this effort should center on defending the core
electric service business. Superior marketing capabilities are
needed to ensure that our customers hear our story and know our
total capabilities. Enhanced customer service plays a major role
in keeping current users of energy and gaining new ones. Lower
operating costs will form the real foundation for staying
competitive. However, care must be exercised in driving the
company toward becoming a "low cost" provider. Unwise choices in
cost-cutting can ultimately lead to counterproductive operations
that actually decrease our ability to compete. A better
philosophy is that of the "best cost" provider, where the company
would take all reasonable measures to provide competitive prices
but create a high perception of value in the customers' eyes
through quality of the product and enhanced service.
A good offensive strategy is closely related to the last point.
By providing additional services to the existing customer base,
Southern not only improves perception of value but also has the
opportunity to produce additional revenues. Should these new
services be placed in a new subsidiary, some of the regulatory
process of the core business is avoided (although different forms
of regulation may be encountered, depending upon the type of
business and its products or services), and returns higher than
those of the regulated core can be enjoyed. This option is
particularly attractive if the products and services are natural
extensions of our core energy business.
Similarly, if certain assets derived from the core, such as skill
sets and knowledge, can be leveraged to expand into new markets,
higher returns are possible, although at higher risk. For
example, Southern Electric International (SEI) has entered the
IPP business as a generating company in Hawaii, New York and,
soon, Virginia. SEI has also acquired a stake in the Freeport
(Bahamas) Power Company and has investigated projects in
Australia, Argentina, China, and several other countries.
The guidelines for examining any of these new business
opportunities are fairly straightforward. First, we must seek to
leverage Southern's existing skills and assets. A second major
objective is to strengthen, either directly or indirectly, the
core business. As with any business opportunity, we would invest
only in projects that provide attractive returns or create an
important strategic advantage to the core, thus enhancing its
ability to earn higher returns. Finally, another major purpose
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of implementing these strategies is to build Southern's
attractiveness as an investment.
With this philosophy in mind, our team looked at the major parts
of the utility business (generation, transmission, and
distribution of electric energy) and hypothesized that
communications is the unseen glue that ties power operations
together and allows us to function as a single system. Good,
effective telecommunications have a direct impact on reliability
of the power supply, effective trouble restoration, lower costs
through automated operations, and overall responsiveness to the
customer. Therefore, in a competitive environment,
telecommunications will play a major role in the Southern
Company's future success (or failure).
The following analysis is not intended to be an exhaustive
research of the telecommunications capabilities and potential of
Southern. Such a treatise is far beyond the purview of a project
for Student of the Business. Rather, we seek to point out some
of the fundamental issues and facts and present a set of ideas to
capture the imagination of management. Our purpose is to create
a strategic vision that will enable possibilities to become fact.
III. ISSUE ANALYSIS
The Southern Company maintains an extremely large private
communications network for internal voice, data, and video
communications. Electric utilities as a whole are the second
largest owners of telecommunications facilities but the single
largest user of telecommunications capacity in the US today. We
rely on these systems for many functions, such as: data
acquisition from various components and subsystems in the
transmission and distribution system; supervisory control of
these components and subsystems; communication between
dispatchers and line crews to find and isolate faults; and
communications with adjacent utilities as we buy and sell power
to each other.
As of December 31, 1992, Southern's investment in
telecommunications assets was approximately $274 million. Annual
operating costs are over $30 million, which includes 250 full-
time equivalent employees. Should existing capabilities be sold
only to outside customers, the implied revenues of our system
would be $75 to $80 million per year. A brief description of the
various parts of our network follows, with statistics summarized
in Figure 1.
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A. Transport Facilities
The backbone of the entire telecommunications network is the
transport system. It uses a combination of microwave and fiber
optic facilities to tie together all of our operations and
administrative locations and enables a variety of applications to
function system-wide. While both analog and digital technologies
are used today, the strategic direction for transport facilities
is to become all digital. Digital facilities may include fiber
optic cables on power transmission and/or distribution rights-of-
way, digital microwave radio, satellites, digital compression
techniques on analog facilities, and others.
Latest numbers show that microwave facilities cover some 347,000
circuit miles in the Southern system. Investment in microwave
totals about $80 million. Fiber optics provide an additional
145,000 circuit miles (approximately 3,400 cable miles, vis-a-vis
BellSouth's 200,000) and represent a $20 million investment.
Annual operations and maintenance (O&M) costs are $4 million,
with total annual operating costs of facilities about $20
million.
B. Voice Network
The internal voice network is probably the single most familiar
telecommunications asset for Southern employees. Voice traffic
uses about one third of the transport network's capacity. Our
system has 165 PBX (private branch exchange) switches to serve
some 29,000 access lines in the four state area. While these
numbers are small compared to BellSouth, they would qualify
Southern as the 42nd largest telephone system in the US, if all
service was made available to the public on a commercial basis.
Total investment in the network, minus telephones and other
station equipment, is on the order of $18 million. Annual costs
of operating the network is $1.5 million, with usage of the
public switched telephone network (PSTN) and long distance
charges adding another $6 million. As the migration to digital
services and integration of voice and data continues, we would
expect continued significant investment in the network. However,
much greater capabilities through new applications and added
efficiencies will result.
C. Wireless Services
Southern operates both mobile radio and paging systems for
internal use. Some of these systems, and all cellular telephone
units, are leased from outside vendors. Current totals for these
units is 12,000 radio and 3,750 pagers. Over 1,400 cellular
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phones are being used internally by the company. Total annual
costs for all these services is estimated at $34 million. Total
investment is estimated to be near the same amount.
A tremendous amount of change is taking place in wireless
technologies. There is a fundamental shift in base technological
design from analog to digital. All digital systems which provide
greater performance at comparable cost will be available within
one to three years. Another advantage of the new systems will be
ease of integration with the digital transport network to improve
service coverage and quality.
D. Power Control Systems
The most critical communications service in Southern is the Power
Management System (PMS), which controls the energy generated and
distributed throughout the electric service area. The telecom
portion of this system, located in the system dispatch center in
Birmingham, costs $5 million per year to operate.
Southern is also implementing an energy management/transmission
supervisory control and data acquisition (SCADA) system.
Transmission monitor/control points total 114,000 in 1,328
locations, while distribution points number 37,000 at 1,060
sites. This system represents a $130 million investment and will
consume a tremendous amount of telecommunications bandwidth when
fully operational.
E. Other Services
The transport facilities carry a number of other important system
services. Southern's Video Conference Network is experiencing
increased usage, with facilities installed at all company
headquarters locations. Its success probably contributed to the
recent approval of the Southern Company Television Network (SCTN)
and Interactive Distance Learning Network (IDLN). Additional
services include the Information Resources (IR) Data Network,
Systems Network Architecture (SNA) traffic, and multiprotocol
Wide Area Network (WAN).
F. The Integrated Network
The above discussion provides an idea of the extent to which
Southern relies on telecommunications to operate the business.
Virtually every organization in the company depends on some
aspect of the communications network to perform its work
functions. If prior experience is any indication, changes in
technology and new applications will drive up demand for services
and, consequently, bandwidth. We can no longer afford to look at
impacts on a group by group or company by company basis. The
telecommunications system must be viewed as a whole and as a
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major component of conducting the power utility business. Figure
2 gives a graphic presentation of the integrated communications
system.
This system is a strategic asset that can be leveraged to expand
internal capabilities and ultimately strengthen the competitive
position of our core business in a retail access environment.
Furthermore, opportunities exist to expand this asset to provide
a variety of competitive telecommunications services in the
Southeast. By linking the components together (physically and as
a part of our thought processes) and augmenting where necessary,
a totally integrated voice, data, and video network could be
developed.
G. The Telecommunications Vision
As the Southern Company faces a new competitive marketplace, we
would do well to learn from the experiences of businesses that
have already dealt with these forces in the "Information Age" of
the eighties and nineties. One consultant in the communications
industry has stated that corporate prosperity today hinges on the
ability to process, store, access, and transport information
efficiently, inexpensively, and better than the competition.
"Communications Revolution" from the May, 1993 issue of Nation's
Business presents a good discussion of the rapid changes taking
place in the way companies conduct their business with
communications. This article is reproduced in Appendix A.
As competition has heated up in many industries in the recent
past, several major corporations have exploited
telecommunications (both voice and data) in order to create new
opportunities, provide new revenue streams, and gain "plain old"
competitive advantage.
- General Motors acquired EDS and built an extensive
communications network that now is the heart of its service
business at GM dealerships. Auto mechanics no longer tune
up an engine and make final adjustments "by ear." Instead,
they interface a car's on-board computer system into a
network that diagnoses problems, enters a repair "manual"
thousands of pages long, and provides the correct
information and procedures for that particular automobile.
- Wal-Mart has created a nationwide integrated voice, data,
and video network that connects over 1,600 locations.
Functions of the system include point-of-sale (POS) and
inventory control, credit card verification, data
processing, and voice service to corporate headquarters.
Video is broadcast for marketing, training, and corporate
communication. Even background music and advertising are
broadcast over the system.
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- Cox Cable and Telecommunications, Inc. (TCI) acquired
ownership of Teleport Communications Group in 1992. TCI is
the largest cable TV multiple system operator (MSO) and
Teleport is the largest, most successful of the competitive
access providers (CAPs) in the US. Cox has openly stated
that they intend to use their upgraded fiber-coax hybrid
network as a technology platform to extend the reach of
Teleport into business parks and other locations to which
they normally would not build facilities for access.
- Federal Express has built an extensive VSAT (very small
aperture terminal) network to monitor and track the status
of shipments. They have capitalized on this capability in a
number of different TV commercials. Others companies with
telecom strategies include Hughs Aircraft, Holiday Inn,
Toyota (Lexus), and BP Oil.
Analysis of the electric utility business indicates a number of
applications that are currently planned, or at least, are desired
to be implemented by various organizations. For internal
operations, Automatic Meter Reading (AMR), remote
connect/disconnect of service, a work management system, and
others have a very positive impact on lowering costs, raising
productivity, and generally improving customer satisfaction with
our service. Products and services that are directed
specifically toward the customer include POWERlert (Alabama Power
Co.), surge suppression, demand side options (DSOs), security
systems, and so forth. While these are intended to generate new
revenues and improve customer satisfaction, they also can impact
cost, productivity, and power reliability.1 Several of these
potential applications and services are shown in Figure 3 as an
integrated part of the existing network.
By comparing new services, such as those outlined above, with the
integrated telecommunications network, one easily visualizes an
end-to-end, completely transparent network in the future. It is
also easy to see this network as a critical factor to our long-
term competitive viability.
III. FINDINGS
This analysis has led our team to reach the following
conclusions:
1 Specific details of external applications have
intentionally been omitted from this section of the analysis in
order to protect proprietary information and to preclude
disclosure of certain projects currently under development by
Southern Company.
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- Telecommunications is an essential part of our core
business. It not only allows us to run a utility in
accordance with the expectations of regulators and customers
but also provides the possibility of direct access to the
customer himself. This fact could make a critical
difference when competing with IPPs and others for our
existing customer base.
- Telecommunications is a major enabler of the present and
future core business. Applications such as SCADA, DSOs
(particularly when mandated by the regulators), AMR, and so
forth cannot be implemented without proper communications
systems.
- The basic infrastructure, in the form of people, expertise,
and other assets, is in place to expand the capabilities of
our telecommunications organization.
- Tremendous opportunities exist in the unregulated (or
lesser regulated) telecommunications business to apply
excess capacities (again, people and assets) to generate
profits higher than in the core regulated business.
- Competition already exists in the telecommunications
industry. Therefore, if Southern is to take advantage of
these opportunities, time is of the essence!
IV. RECOMMENDATIONS AND FUTURE ACTION STEPS
The recommendations presented by our team are as follows:
- Corporate commitment to telecommunications should be
incorporated into a total strategy for all parts of the
company. While embracing the total concept, Southern should
also make a strategic commitment to establish a direct
communications path to every customer's premises.
- The annual Telecommunications Strategic Plan should be
expanded to address external opportunities and develop
appropriate implementation procedures. The main goal of
this action would be to identify assets that could be used
for these purposes.
- The TCG should also be more empowered in the selection and
implementation of common telecommunications facilities,
products, and usage across the Southern system. While the
Telecommunications Strategic Plan establishes the overall
direction for the network and gives appropriate
recommendations, the final decision still lies with each
operating company. A more formal vendor/customer
arrangement may be a desirable solution.
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- Southern management must adopt procedures to allow rapid
analysis, approval, and implementation of projects, for both
internal and external projects. The market dynamics will
not allow us to take the usual utility approach to making
decisions if we expect to compete.
Therefore, these future action steps are recommended:
- Southern should form an unregulated telecommunications
subsidiary from internal human resources and other assets,
as appropriate. Any missing skill sets should be filled by
hiring outside talent from within the industry. A part of
this organization's mission would be the provision of
telecommunication services to the regulated companies of the
Southern Electric System.
- In order to start this origination rapidly and establish a
position in the competitive marketplace, Southern should
aggressively form strategic alliances and partnerships with
other telecommunications firms through joint ventures,
mergers or acquisitions.
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EXHIBIT B-5
SOUTHERN DEVELOPMENT AND INVESTMENT GROUP
NEW SUBSIDIARY
ACCOUNTING AND BILLING PROCEDURE
I. INTRODUCTION
The purpose of this procedure is to establish guidelines which
provide uniform and consistent methods of billing for services
rendered to "New Subsidiary" by the Southern Company System
Operating companies. These billings include direct costs related
to services provided and indirect costs that are normally
incurred by the Operating company in its operations. Revenues
and costs related to these billings will be recorded in the
accounting records of the Operating company in accordance with
Generally Accepted Accounting Principles and FERC (Federal Energy
Regulatory Commission) guidelines.
II. METHOD OF BILLING
Each separate service provided by The Southern Company Operating
companies to New Subsidiary is accounted for and billed on a job
order account. Charges to each project are made to the
designated job order through the appropriate source documents or
source system. Charges for these projects are billed on a
monthly basis.
III. CALCULATION OF BILLS
The cost of services provided to New Subsidiary are calculated
and billed, based on individual projects or jobs, in accordance
with the guidelines set forth in this section.
A. Labor
Labor costs billed for services provided to New Subsidiary
include salaries and related indirect labor costs for
employees on both fixed and variable salary distributions.
1. Direct Labor Costs
Direct labor costs are based on the wage rates of
assigned employees and the actual number of hours
that are charged to The Job Order Account on the
Payroll Time Report.
2. Indirect Labor Costs
a. Directly Loaded Costs
Certain indirect labor costs are developed
mechanically on a monthly basis relative to
each indirect labor cost. These indirect
payroll loading include:
(1) Pension costs
(2) Insurance
<PAGE>
(3) Federal and State Payroll Taxes
(4) Employee Savings Plan
(5) Non-productive Time
(a) Vacation and holidays
(b) Inclement weather
(c) Sick leave and occupational injury
(d) Payroll clearing, other (jury duty,
civic activities, etc.)
b. Indirectly Loaded Costs
Certain indirect labor costs are developed
manually on an annual basis relative to each
indirect labor cost. These Indirect Payroll
loadings include:
(1) Employee Stock Ownership Plan
(2) Miscellaneous (Service awards,
educational assistance program, etc.)
B. Material
Material withdrawn from a Southern Company System
Operating company's inventory is billed at the average
commodity price plus a stores handling expense.
Material purchased directly from vendors for use on a
particular project is billed at invoice cost.
C. Vehicle and Equipment Usage
Usage of fleet vehicles and equipment is recorded on
the monthly Vehicle and Equipment Usage Report.
Vehicle and equipment usage is billed at the cost
provided by the Transportation Source System. This
cost is based on an absorption rate calculated monthly
by vehicle class. The absorption rate provides for the
allocation of all direct and indirect costs associated
with fleet operations.
D. Meals, Lodging and Miscellaneous Expenses
Meals, lodging and miscellaneous expenses are billed at
actual cost. Vehicles and equipment not included in
the operating company's fleet will be billed at actual
cost under this expense category.
E. Engineering, Supervision, and Administrative
Expenses
Engineering, supervision, and administrative expenses
are defined as those expenses for project support
services which cannot be identified with or directly
charged to a specific project. These expenses are
allocable to the total cost of each project based upon
an allocation factor developed in the following manner:
1. Engineering and Supervision
Engineering and supervision expenses are recorded
for the following asset classifications:
Major generating projects
Minor generating projects
Transmission lines
Transmission and distribution substations
Distribution lines
An annual allocation factor is developed by
dividing total annual engineering and supervision
expense for these asset classifications by the
total annual direct cost charged to work orders
for these asset classifications.
2. Administrative and General Expenses
An annual allocation factor for administrative and
general expenses calculated by dividing total
applicable annual administrative and general
expenses by the total applicable annual costs.
Applicable administrative and general expenses for
purposes of this procedure are generally
identified as follows:
FERC ACCOUNT TITLE
920 A&G Salaries
921 A&G Office Supplied
923 Outside Services Employed
924 Property Insurance
925 Injuries & Damages
931 Rents
932 Maintenance of General Plant
3. Cost of Funds Advanced
A factor for the recovery of the costs of funds
advanced for services provided is calculated as a
proration of the annual rate associated with the
higher of the cost to the Company of its most
recent first mortgage bond issue or its most
recent short-term borrowings. The New Subsidiary
will be charged an appropriate cost of funds based
on the actual time period from date of incurrence
of such cost to date of receipt of payment from
New Subsidiary.
Annual Rate
360 Days x No. of days = factor
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