SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27775; 70-10162)
CenterPoint Energy, Inc., et al.
Order Authorizing Formation of a Service Company and Service Arrangements
December 18, 2003
CenterPoint Energy, Inc. ("CenterPoint"), Houston, Texas, a registered holding company under the Public Utility Holding Company Act of 1935, as amended ("Act"); and its subsidiary, Utility Holding, LLC1 ("Holding"), Wilmington, Delaware (together, "Applicants") have filed with the Securities and Exchange Commission ("Commission") an application/declaration ("Application") under sections 6, 7, 9, 10, 12(b), and 13 of the Act and rules 45, 54, 88, 90 and 91 under the Act. A notice of the Declaration was issued on October 10, 2003 (Holding Company Act Release No. 35-27735).
I. Prior Authorizations
By order dated July 5, 2002 (Holding Company Act Release No. 27584) ("July Order") the Commission authorized the formation of CenterPoint as a new registered holding company, and the distribution to shareholders of the remaining common stock of Reliant Resources, Inc. ("Distribution"). The formation of CenterPoint and the Distribution were part of a plan adopted in 2000 for the restructuring of Reliant Energy, Incorporated under the requirements of the Texas electric restructuring legislation adopted in 1999. The Distribution, which was made on September 30, 2002, completed the separation from CenterPoint of the merchant power generation and energy trading and marketing business of Reliant Resources, Inc. Since CenterPoint expected to qualify for an exemption from registration under the Act within a year of the July Order, CenterPoint did not intend to form a service company following the restructuring. Instead, the July Order authorized CenterPoint to provide a variety of services to its subsidiaries on an interim basis, including accounting, rates and regulation, internal auditing, strategic planning, external relations, legal services, risk management, marketing, financial services and information systems and technology.
Since the July Order, CenterPoint has announced that it will remain a registered holding company under the Act. In its order dated June 30, 2003 (Holding Company Act Release No. 35-27692), the Commission noted that CenterPoint intended to form a service company and granted CenterPoint interim authority to continue to provide goods and services to its subsidiaries through December 31, 2003.
II. Formation of the Service Company and Provision of Services
A. Summary of Requests
Applicants request that the Commission: (1) approve the formation and capitalization of CenterPoint Energy Service Company, LLC ("ServiceCo"); (2) approve the designation of ServiceCo as a subsidiary service company in accordance with the provisions of rule 88 under the Act and find that ServiceCo is organized and will conduct its operations so as to meet the requirements of section 13 of the Act and the rules under the Act; (3) approve the master services agreement in the form attached as Exhibit B-1 to the Application ("Master Services Agreement"), and the service agreement for services rendered by system companies in the form attached as Exhibit B-5 to the Application ("System Services Agreement"); (4) authorize, to the extent not exempt under rules 81 and 87, CenterPoint and certain CenterPoint subsidiaries to provide certain services and goods to associate companies; and (5) authorize ServiceCo's provision of transitional goods and services to third parties. Applicants undertake to file a service agreement procedures manual by May 1, 2004. If the Commission shall notify ServiceCo within 60 days of the filing of the manual that a question exists as to whether the proposed manual is consistent with the provisions of section 13 of the Act, or of any rule, regulation or order under section 13, then the proposed manual shall not become effective until ServiceCo shall have filed with the Commission an appropriate declaration regarding the proposed manual and the Commission shall have permitted the declaration to become effective.
B. Formation of the Service Company
ServiceCo was formed in Texas as a limited liability company in reliance on rule 58 under the Act, and does not currently hold any assets. Applicants propose that ServiceCo will be a direct, wholly-owned subsidiary of Utility Holdings, LLC. ServiceCo will begin operations no later than January 1, 2004. ServiceCo will have a minimal equity capitalization of not more than 1,000 membership interests with total equity capitalization of not more than $1,000. Initially ServiceCo will be staffed by transferring approximately 1,100 people from CenterPoint and approximately 6 people from CenterPoint Energy Resources Corp. ("GasCo"). ServiceCo will derive substantially all of its additional working capital from borrowings under CenterPoint's money pool and/or additional investments by CenterPoint under rule 45 and/or rule 52, as applicable. ServiceCo will only borrow money from the money pool or CenterPoint.
C. Intra-system Provision of Services
1. ServiceCo's Provision of Services to Associates
Beginning January 1, 2004, ServiceCo will provide recipients2 administrative and service functions involving system-wide coordination and strategy, compliance and oversight, including accounting, internal auditing, finance and treasury, communications, legal, human resources, executive, regulatory and governmental affairs, information systems and technology, mainframe operations, business services, and leasing services, as described in detail in Exhibit I to the Master Services Agreement. ServiceCo will also administer the CenterPoint money pool. Applicants state that no core public utility operations or functions, such as dispatch or delivery of energy, will be performed by ServiceCo.
ServiceCo will provide all services to associate companies on an "at cost" basis as determined by rules 90 and 91 of the Act. ServiceCo will distribute all charges among Recipients, to the extent possible, based on direct assignment. Amounts remaining after direct assignment shall be allocated among Recipients in a fair and equitable manner, using the allocation methods set forth in Exhibit I to the Master Services Agreement. ServiceCo's accounting and cost allocation methods and procedures are structured so as to comply with the Commission's standards for service companies in registered holding company systems.
ServiceCo's billing system will use the Commission's "Uniform System of Accounts for Mutual Service Companies and Subsidiary Service Companies," as may be adjusted to use the Federal Energy Regulatory Commission's uniform system of accounts.
All ServiceCo employees, including executives, will be required to keep time records supporting labor charged to separately identifiable goods and services performed for Recipients. Employees will record time daily in a minimum of half-hour increments. The employee's supervisor or the supervisor's authorized delegate will review and approve time reports. ServiceCo will use an electronic time entry system for its employees. Time records will be maintained in accordance with the record retention requirements set forth in 17 CFR 257, but in any event will be maintained for at least six years.
ServiceCo's Internal Audit department will conduct periodic reviews of ServiceCo's business processes and systems to ensure that the services provided are properly documented and charged to the Recipients on an appropriate basis.
No change in the organization of ServiceCo, the type and character of the companies to be serviced, the methods of allocating cost to Recipients, or in the scope or character of the services to be rendered that are subject to section 13 of the Act, or any rule, regulation or order under section 13 shall be made until ServiceCo shall first have given the Commission written notice of the proposed change not less than 60 days prior to the proposed effectiveness of any change. If, upon the receipt of a notice, the Commission shall notify ServiceCo within the 60-day period that a question exists as to whether the proposed change is consistent with the provisions of section 13 of the Act, or of any rule, regulation or order under section 13, then the proposed change shall not become effective until ServiceCo shall have filed with the Commission an appropriate declaration regarding the proposed change and the Commission shall have permitted the declaration to become effective.
2. Associates' Provision of Services to ServiceCo
Applicants request authority for ServiceCo to lease office and other space currently owned by CenterPoint Energy Properties, Inc. ("Properties"), and from time-to-time lease other space that may be acquired by Properties either in fee or by lease. ServiceCo will enter into one or more lease agreements with Properties and, as applicable, will enter into subleases with Recipients, in a form attached as Exhibit B-3 to the Application, that occupy space obtained from Properties, at cost in accordance with the Act and the applicable rules under the Act. Applicants state that none of the property proposed to be occupied, used by, or provided to ServiceCo constitute facilities used for the production, transmission, transportation, or distribution of electric energy or natural or manufactured gas.
Applicants request authority for ServiceCo to license, lease, sublease or enter into service arrangements with CenterPoint and T&D Utility for the use of computer hardware, software, communications facilities (including local, long distance, internet and wireless services), office equipment and furnishings, and vehicles currently owned, licensed or leased by CenterPoint or T&D Utility at cost in accordance with the Act and the applicable rules under the Act. Applicants state that none of the property proposed to be occupied, used by, or provided to ServiceCo constitutes facilities used for the production, transmission, transportation, or distribution of electric energy or natural or manufactured gas.
3. T&D Utility and GasCo's Shared Services
Applicants request authorization for the T&D Utility and GasCo to provide the following services to each other in their overlapping service territory: meter reading, trenching operations, vehicle maintenance, line locating, call center, and credit and collections functions when the companies determine it is efficient and cost effective to do so under a System Services Agreement. The companies also share common warehouse space. Some of these functions are provided by GasCo to the T&D Utility and others are provided by the T&D Utility to GasCo. In addition, the T&D Utility provides GIS mapping for GasCo and its pipeline subsidiaries, Texas Genco, and other CenterPoint system companies. When the services are provided, costs are allocated based on appropriate cost allocation measures, such as number of meters with respect to meter reading, square footage occupied and location of shared space. All of these services are, and will continue to be, provided at cost in accordance with rules 90 and 91 under the Act.
4. GasCo and GasCo's Pipeline Subsidiaries' Shared Services
ServiceCo will provide most corporate and shared services functions for GasCo and its subsidiaries. However, Applicants request authorization for GasCo to share with GasCo's pipeline subsidiaries and GasCo's other subsidiaries certain services when the companies determine it is efficient and cost effective to do so under a System Services Agreement. Services proposed to be shared are environmental services provided to GasCo by personnel from its pipeline subsidiaries, along with support for compliance with the new pipeline integrity law. In addition, GasCo's telephone operations provide some services to its pipeline subsidiary, and pipeline personnel use office and warehouse space in GasCo facilities. GasCo and its subsidiary, CenterPoint Energy Gas Transmission Company ("CEGT"), share signals from a system that electronically monitors the physical operating conditions of the distribution system, with CEGT maintaining the equipment. CEGT and GasCo also share meter testing responsibilities, with GasCo testing small pipeline meter stations and CEGT testing large distribution meters. Similarly, GasCo and CEGT share some cathodic protection from rectifiers at certain points on the system, and GasCo reads some rural and town border station meters where CEGT maintains the equipment. All of these services are provided at cost in accordance with rules 90 and 91 under the Act.
D. Provision of Goods and Services to Third Parties
Applicants request authority for ServiceCo to assume CenterPoint's current obligation to provide transition services and facilities, including business, corporate, and information technology services to Reliant Resources, Inc., which obligations will largely terminate in early 2004.3 In addition, Applicants request authority for ServiceCo to assume CenterPoint's current obligation to provide business, corporate, and information technology services to Texas Genco at cost in accordance with the Act and the applicable rules under the Act, until CenterPoint's investment in Texas Genco is sold, and for a brief transition period after a sale.4
The proposed transaction is subject to rule 54 under the Act, which refers to Rule 53. Rule 54 under the Act provides that in determining whether to approve certain transactions other than those involving exempt wholesale generators ("EWGs") or foreign utility companies ("FUCOs"), the Commission shall not consider the effect of the capitalization or earnings of any EWG or FUCO which is a subsidiary of a registered holding company if the requirements of rule 53(a), (b) and (c) under the Act are satisfied.
As a result of the restructuring authorized in the July Order, CenterPoint has negative retained earnings. Thus, although CenterPoint's aggregate investment (as defined in rule 53(a)(1)(i) under the Act), in EWGs and FUCOs as of December 31, 2002 was approximately $8 million, CenterPoint is not currently in compliance with the requirements of rule 53(a)(1) under the Act. As a result, the Commission has considered the effect on the CenterPoint system of the capitalization or earnings of any CenterPoint subsidiary that is an EWG or FUCO, as each is defined in sections 32 and 33 of the Act. Further, Applicants state that CenterPoint has disposed of its remaining interests in its FUCOs. Texas Genco has been qualified as an EWG, and Reliant Resources, Inc., has an option to acquire CenterPoint's remaining interest in Texas Genco.
CenterPoint complies with, and will continue to comply with, the record-keeping requirements of rule 53(a)(2) under the Act, the limitation under rule 53(a)(3) under the Act on the use of domestic public-utility company personnel to render services to EWGs and FUCOs, and the requirements of rule 53(a)(4) under the Act concerning the submission of copies of certain filings under the Act to retail regulatory commissions. Further, none of the circumstances described in rule 53(b) under the Act has occurred or is continuing. Rule 53(c) under the Act is by its terms inapplicable to the transactions proposed herein that do not involve the issue and sale of securities (including guarantees) to finance an acquisition of an EWG or FUCO.
Fees, commissions and expenses incurred or to be incurred in connection with the transactions proposed are anticipated not to exceed $50,000. Applicants indicate that the formation of ServiceCo will not require prior approval from regulatory authorities other than the Commission. The subject services agreements will be submitted for review and/or approval by the Minnesota Public Utilities Commission and the Mississippi Public Service Commission.
Due notice of the filing of the Application has been given in the manner described in rule 23 under the Act, and no hearing has been requested of or ordered by the Commission. On the basis of the facts in the record, the Commission finds that the applicable standards of the Act and rules under the Act are satisfied, and no adverse findings are necessary.
IT IS ORDERED under the applicable provisions of the Act and the rules under the Act, that the Application is granted and permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24.
IT IS FURTHER ORDERED, that Applicants will file certificates under rule 24 with the Commission as follows: (1) on or before April 30, 2004 calculations showing the application of the allocation factors set forth in Exhibit I to the Master Services Agreement to services provided as of January 1, 2004; and (2) on or before August 30, 2004, calculations showing the application of the allocation factors set forth in Exhibit I to the Master Services Agreement to services provided as of June 30, 2004.
For the Commission, by the Division of Investment Management, pursuant to delegated authority.
Margaret H. McFarland
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