ML20069F989
| ML20069F989 | |
| Person / Time | |
|---|---|
| Site: | Limerick  |
| Issue date: | 09/23/1982 |
| From: | Sugarman R DEL-AWARE UNLIMITED, INC., SUGARMAN & ASSOCIATES |
| To: | Harold Denton Office of Nuclear Reactor Regulation |
| References | |
| NUDOCS 8209280316 | |
| Download: ML20069F989 (49) | |
Text
P-SUGARM AN & DENWORTH ATTORN EYS AT LAW suaTE e03 ROB ERT J. SUGARM AN susTE 510, NORTH AM ERICAN BUILDIN G
C O O JOANNE R.DENWORTH 121 SOUTH BROAD STREET emoan rar-44eo PHILADELPHIA. PEN NSYLVANIA 19107 (295) 54 6-0462 ROBERT RAYMON D ELLIOTT, P. C.*
COUNSEL
- w osestito em Pa September 23, 1982
- Te pQ*
Cp'd?0 9'
J Mr. Harold Denton
'$ U Director Division of Nuclear Reactor Regulation U.S. Nuclear Regulatory Commission Washington, D.C.
20555
Dear Mr. Denton:
I acknowledge receipt of Mr. Eisenhut's letter of September 10, 1982, concerning Del-AWARE's Section 2.206 Request regarding the Limerick Generating Station.
Unfortunately, as I have repeatedly stated to the staff, the current proposal is for this project to be under construction on December 15, 1982.
Mr. Eisenhut's letter continues the Staff's refusal to act on the Request in a timely fashion.
Indeed, re-viewing the NRC regulations, I observed that the Commission re-serves a 25 day period following the staff decision in order to decide what to do about such decisions.
See 10 CRF Section 2.206 (C-1).
Thus, the staff timetable will preclude any assurance that the Commission will reach a decision or take action prior to the time of proposed inception of construction.
The staff's non-responsiveness to the merits of the Petition is inexplicable.
Thia is especially true in light of the de-cision of the Pennsylvania PUC, which I called to your attention on September 3, 1982, calling for the cessation of construction on Unit 2, and the consequent need for a new benefit-cost deter-mination to reflect the need for the Delaware River diversion.
I call your attention to people of the State of Illinois vs. NRC, U.S. Ct. App. September, 1980, and the Boston Edison case of 1981.
It is with some growing frustration over Del-AWARE's in-ability to obtain any responsive answer that I now request once again that the staff respond to our Request in a timely manner.
I also wish, once again, to call your attention to the fact that we have been requesting such action of the staff since June, 1981, and in fact, the staff letter to PECo dated January 5, 1981, in-dicated that the staff was aware of its responsibility at that time.
0209200316 820923
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PDRADOCKOSOOO3gg a
Mr. Harold Denton September 23, 1982 Any indicatio-that the Licensing Board hearings should be relied upon as the asis for decision on this Request is obviously inappropriate, in view of the fact that the Licensing Board itself stated that we should apply to the staff for this relief because the issues to be raised here are not appropriate in the Licensing Board proceeding.
Again, in view of the overlapping factual setting of this request with the Operating Licensing Board hearings scheduled for October 4-8, I think I am at least entitled to an answer to the questions, "Why does it not make sense to combine these proceedings?"
"Why cannot the staff take timely action in eighteen months?"
A responsive response, I suggest, is the least relief to which Del-AWARE is entitled.
I am also enclosing another copy of the Pennsylvania PUC Order directing the cessation of construction on Unit 2, and in light of recent electrical utilization trends as reported, showing continuing downward use, I suggest that the staff must take account of the fact that there will likely never be any need for any further action with respect to Unit 2, and the con-sequent necessity to reevaluate supplemental cooling water alternatives.
In this connection, I also wish to bring to your attention a September 14, 1982 letter from U.S. Fish & Wildlife Service to the Army Corps of Engineers suggesting the necessity for re-considering their alternative evaluation in light of the Pennsylvania PUC action, and further proposing an alternative l
in the Schuylkill River basin for obtaining supplemental cooling water, in light of the likely reduced need.
While the Operating License Board has noted, without endorsing or relying upon, the statement of the director of the Neshaminy Resources Authority that the project would be con-structed even without PECo participation, I wish to bring to your attention a letter obtained from PECo filos showing that the opposite statement was in fact made by the same individual, thus rendering his affidavit unbelieveable and incredible.
A copy is enclosed.
I request a responsive an wer by September 30, 1982.
t cere r,
Robert S
arman RJS/llw Enclosures
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1 Suite 322 315 South Allen Street State College, PA 16801 September 14, 1982 1.t. Col onel Roger h.
Baldwin District Engineer, Philadelphia District U.S. Army Cor ps o f EngInee rs Custom House, 2nd and Chestnut Streets Ph il adel ph i a, PA 19106
Dear Colonel Daldwin:
This refers to the i:esh. uni ny Wa t e r Resource Authority's permit applicalion, Pnhlic ?:a t i c e MAPOP -R 0534-3, dat ed April 6,1981, concerning an intake structure and associat.ed activity in the Del mia s e Ri ver a t Point Pleasant, Pe n nsy l v.i n i a.
As you.:ay recall, on.Tuly 17, 1987, Mr. 7 or. 4n R.
Chopp,ent you a let t er wi h a 1ist of.pecific qu e 4 t i r.n s t o be uldi c:.ed as part of your i n.Te;n. nh n t. nv i i on.nen t al se-m:nt of the ceimit applicalion.
To date, we have not icecived a res;onse t o t hat letter.
In a ;at t er rela t ed t o the pe:mit application, it has been biooght to our att.ation that iinit 2 of the bimer ick !!ncl ea r Ci ne ra t ion 91 t ion..ay not he e.pl e t ed.
Should this lie the c.re, the Philadelphia Fleelric Ce.yaoy koold
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only n. ed aLont hal f of t he pi o c : < d 49.td disersion from the D.,1 ;. wa r e niver, o
and, if i_.plemented, could seduce M ands aid piovide several ot her, l e.s envi r on;.ent ally dmaaning al t ei na l i vet. to the proposed Point Plece ont Divencion p i oj i c t, r.uch as water : t o r.me :n the 'Trimy l k i l l D i ve r E. > i n.
l' ve you t c.L en int o scroont all of her al t ei not Ives that are l e. s env f r oui..en t a l l y d.
ming that could meet the w:ter copply needs for LI:.erick.nd the ::e.h a m i ny Wa t e r P.soorre /othority?
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In another matter related to the permit application, we are aware that Philadelphia Elec t ric Company received a na tionwide permit in July 1980 fo y an fatake structure on the Perkiomen Creek along Route 29.
However, the Environmental Report for the Ope,ating License Stage of the Limerick Nuclear Generating St ation describes another type of intake on the Perkiomen Creek.
'Ih e r e fo re, it seems that a new application should be filed for a Department of the Army permit to cover the most recent design changes for the Perkiomen Creek intake.
In order to avoid a fragmented revit.w of the total proj ect impacts, we reconnend that intakes for the proper.ed Merrill Creek, Point Pleacant, and Perkiomen Creek pr ojects he consider ( d together.
This will ensu.e that the total adverse i c.pa c t s from these interrelated projects are given f all con-sideration before any decision is made to cou.mit these valuable natural re,ources.
Pl c. se let us hear from you on these inatters as soon as possible.
Sincerely,
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Cha rl es J Ku p Fi el d So.>ervisor 1
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,$EP 1 7 fil9 Mr. Robert A. Flouera, Faceutive Director I;cchaminy Untor Resoureco Authority Box //6 Croaa Keys Offico Center 4259 Suamp lld.
Ibylestoun, Pa.
18901
Subject:
Foint Pleasant Project Corrhined Facilitica Dear Mr. Flo;; eros This is to confirm our telephonc conversation on Septe:daer 13, 1979, relating io the completion of final engineering decicn of the dual use port. ion of the Point Plencant Divornlon Project.
I requent that you authorize the ec:::plei, ion of engineering of the joint u;ter ou,3 ply facJlitieu ubich aro the subject of the preponed
/ cree.nent trenrmitted to you by ray le Li,ur da Led June 15, 1979 By eccoletiw such engineering at Lhia tim, conu true i, ion Lay u t, art coon.
y r.fter the required approvala have h0en received. '7ne project can therefore be cepleted earlice and at a loucr coa t than if.nducerin; is delayed
..h any furuler.
s I understand the IT.01A's hesitance to spend additional funds at this tira in the absence of fIra agrea:.anta with the potential usera of these 4
for its Therefore, we hereby offer to reimburae the JT. lit /t fnciliti en.
ch: re of pertinent cosis for auch enginecej ng, performed auberquent to y
nt is rec.ched between t.Le ifr:E. and U1e date of this letter, if no nt;rce:
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- s, Philadelphia Elee Lej c Cu:gany uithin one year of the De3 nuare illver Tru:in 9
Cc :nicu5 en's final action on the project.
k9 the eeat,inued coups.utive ef for t-u of the U.MA n
1 luoh furuard to hia Klee f eic Co..:pny in. t ouring ihe ee eletion of these j
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PUBLIC UTILITY COMMISSION liarrisburg, PA 17120
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Public Meeting held May 7, 1982 x-Concaissioners Present:
Susan M. Shanaman, Chairman Michael Johnson James H. Cawley (opinion and statement attached)
Linda C. Taliaferro, concurring in part and dissenting in part (opinion Clifford L. Jones attached)
Limerick 'Juclear Generating I-80100341 Station I.
4tigation OPINION AND ORDER BY THE CO.1 MISSION:
Before us for disposition is the Initial Decision of Adminis-trative Law Judge (ALJ) Joseph J. N1ovekorn in the above-captioned pi o c e ed i n;;, wherein the ALJ makes several findings regarding, inter alia, the c onst ructica of the Limerick Nuclear Generating Station.
For the rea:.ons stat ed below, we disagree with several of these findings and shall modify the ALJ's Initial Decision.
Prior to the discussion of the positions advocated by the parties and our disposition of the issues presented, we note that this fact finding investigation and this Cpinion and Order is the result of countless hours of preparation on the part of the parties and of the ALJ.
k'e commend the parties and the ALJ on their fine ef forts in dealing with the complex issues raised.
In rendering a decision in this investigation, we are aware that our options are limited.
Unlike a traditic,nal ratcmaking case, in this proceeding, we are not presented with any claim which would af fect current rat es or rates for the in ned i a te future.
Rath.'r, we have under-taken this invest igat ion to ascert ain t he appr opriat eness of the decisic"s unde rl yi n t, the construction of the Limerick Nuclear Generating Station and the aced to continue const ruct ion at this time, given the potential for le.sd growth in TECO's service territory, alternative means of meeting that load growth, and the financial ability of PECO to continue construc-t ion of this station.
In performing our analysis, we are cognizant of the fact that many of the calculations and figures presented in the centext of t his proceeding are somewhat speculative.
Although no one can perfectly see the fut ure, we a re convinced that t hose estimat es represent more than educat ed guesswor k on the pa rt of the wit nesses.
c' I.
Background
On August. 7, 1980, the Office of Consumer Advocate (OCA) filed a Petition, docketed at P-80080236, secking (1) an Order to Show Cause why the continued construction of the Limerick Nuclear Generating Station (Limerick) of Philadelphia Electric Company (PECO or the company) is in the public interest and (2) a Commission investi and economy of Limerick.
'Fation into the need for On August 26, 1980, an Answer was filed by the Company opposing the OCA's request. for an order to show cause, taking no position on the request for an investigation, and petitioning that any investigation be consolidated with PECO's then pending rate investigation at R-80061225.
By Order entered October 10, 1980, we concluded that an inves-tigation should be opened "so that information can be gathered in an orderly and ditions manner, before PECO seeks to include Limerick in its rate basi _ as used and useful property." Further, we concluded t. hat an independent investigation of Limerick was appropriate so as to prevent the then pending rat.e investigation f rom becoming burdened with. addi-tional issues which would have had to be decided within the statutory period set forth in Section 1308 of the Public Ut_ility Code.
In initiating the investigation, we ordered:
1.
That the issue we incorporated into the rate proceeding at R-80061225 on August 28, 1980, concerning an estimate of the additional corts occasioned by defer rals of the Limerick con-struction schedule, be climinated from that proceeding.
2.
That an investigation be, and is hereby, under-taken to determine:
(a) The cost of cons,truction delays at.
Limerick and whether those delays were reasonable; (b) The escalation of cost estimates for Limerick and whether those costs for the plant are r e;i sonabi c ;
and (c) The eventual impact of Limerick on PECO's capacity and reserve margins and t he reascaableness thereof.
3.
That the petition ffled by the OCA, and docketed a t. P-80080236, be den *ed, except to the ext ent that it is granted ly t he opening of t his inves-tigation.
o 4
That Commission staff, Philadelphia Electric Coa.pany and the Of fice of Consumer Advocate are hereby made parties to this investigation pro-ceeding.
5.
That copies of this order be served on all parties to the proceeding at R-80061225, Pennsylvania Public Utility Commission v. Philadelphia Electric Company.
6.
That the Office of Administrative Law Judge assign this matter to an Administrative Law Judge for prompt hearing and initial decision.
By letter dated November 8, 1980, believing that our initial Order may have been too restrictive, we directed that the investigation address, but not be limited to, the following irsues:
(a) The costs of construction delays at Limerick and whether those delays were reasonable.
(b) The escalation of cost estimates for Limerick and whether those costs for the plant are reasonable.
(c) The eventual impact of Limerick on PECO's capacity and reserve margins and the reason-ableness thereof.
(d) What alternatives PECO considered at the time the decision was made to build the plant and the projected cost of each alternative.
(e) Could any currently available alternate scurces of energy, conservation / lead management acti-vities, improvements in existing power plants' pe r fo rma nce, etc. (to) replace Limerick at a
lower cost to the consumer asswning that:
(1) expended costs are amortized over reasonabic period; or a
(2) expended costs are not amortized or collected from ratepayers; or (3) expended costs are shared among stockholders and ratepayers.
(f) The potential of large electric consumers directly buying the capacity and/or energy associated with Limerick.
Thirty-eight days of evident iary hearings and three non evidentiary hearings were held in Philadelphia, Harrisburg, Poylestcwn, und Pottstown. _
Briefs have been filed by PECO, the OCA, the Pennsylvania Public Utility Commission's Trial Staff (Trial Staff), the City of Philadelphia (City),
the Consumer Education and Protective Association, et al. (CEPA), the Philadelphia Area Industrial Energy Users Group (PAIEUG), Limerick Ecology Action (LEA) and the Keystone Alliance (Keystone). Reply Briefs were filed on February 3, 1982, by the above parties as well as Mr. Marvin Lewis. On March 26, 1982, Administrative Law Judge Klovekorn issued the Initial Decision currently before us.
Exceptions have been filed by the OCA, CEPA, Keystone, the City, PECO, Trial Staff, and thirty-two individ-uals. Reply exceptions have been filed by OCA, CEPA, PECO, and Trial Staff.
After an extensive review of the record, the Initial Decision and all briefs, exceptions, and reply exceptions we find and conclude:
1.
That based upon all of the facts presented in the proceedings before us, particularly the Commis-sion's inability and unwillingness to provide the necessary revenues to ccmplete both units at the Limerick Nuclear Generating Station as proposed, the completion of Limerick II by 1987 is not financially feasible.
In order to ensure the continued maintenance of reliable and safe service to the public, this Cornission finds that either the cancellation or suspension of construction at Limerick Unit II would be in the public interest.
2.
That should the Ccapany choose to cancel Limerick Unit II then the future treatment of any sunk costs arr,0ciated therewith shall be deter.nined at such time as the Company specifically requests recovery of such costs.
~
3.
That should Philadelphia Electric C apany chocse not to suspend construction of Limerick II, then the Commission, pending ccepletion of Unit I:
(a) shall not approve any new securities issu-ances, the proceeds of which will be used, in whole or in pa rt, for construction at Unit II, and (b) shall deny recovery of ATUDC (Allowance for Funds Used During Construct ion) on any addi-tional invest:acnt. in Unit II at such time as recove ry i s sought.
4.
That. Philadelphia Electric Company shall inform this Corznission of its decision regarding the implementation of paragraph I above within 120 days of t he entry of the final opinion and Order in this proceeding.
5.
That. it would be in the public interest. for the Cor.pany t o pursue an aggressive conservation program designed to substartially offset the cancellation or suspension of Limerick II.
r-
6.
That the Ccmmission immediately open a general
. vestigation designed to implement a policy, applicable to all electric utilities, whereby regulatory incentives would be afforded to any conservation inducing investment designed to lower a utility's need to install additional capacity.
Further, at a minimum the investigation should address:
conservation financing programs for residential and small ccmmercial customers, joint customer / company financed alternate supply projects, rate induced or company controlled load management programs with corresponding investment programs, appropriate company informa-tional activities required to support the company's programs, any necessary changes in existing service regulations in order to ensure efficient utiliza-tion of electricity, and any legislation which may be necessary to implement or enhance conservation or provide alternative supply opportunities.
That the Ccmmission invite all interested electric utilities or other parties to participate and shall direct the Commission's Bureau of Conservation, Econcmics and Energy Planning to actively parti-cipate in the investigation.
II.
The Construction Delays The initial issue to be addressed is an examination of the decision by PECO to begin construction of the Limerick Nuclear Generating Station. PECO witness, Vincent Boyer, Senior Vice President, Nuclear Fower, and Emil Kasum, Chief System Planning Engineer, System Planning Division, testi fied at length to the planning process and decisions to build Limerick (PECO Stmts. 1 & 2).
Mr. Boyer begins by expressing the view shared by many utilities in the late 1960's and early 1970's; that regulatory measures enacted during that period encouraged utilitice to add new capacity.
He cites the prespect of PECO being faced wit'a a capacity short age which, in turn, could lead to brownouts and nlackouts.
Specifically, he recites regulatory actions taken in 1966 when PECO and other cocpanics, parties to the Pennsylvania - New Jersey - Maryland Interconnection Agreement (PJM) were told by their respective regulatory cocaissions to increase reserve capacity from the then existing 12-15%
to a point where the reserve margin equalled 20%.
To indicate the Commission's concern, PECO points to our March 12, 1972 Order instituting an investigation to determine the need for additional generating and t ransmission facilities.
In light of this regulator concern, and forecast of future annual sales peak demands,yj PECO, in 1967, PECO's determined that additional capacity was necessary.
1/
PECO's 1967-1968 forecast project ed reserve ma rgins of 11.5% in 1975, 6.0% in 1976, and 0.9% in 1977 even including Peach Bottom Nuclear Gcnerating Units No. 2 & 3 then under construct ion. _
Having reached the conclusion that additional capacity was needed, PECO analyzed the options available.
A 1965 study claimed that thelevelizedcostofnuclearpowerwas3p3 mills /kwhascomparedtoa levelized cost of 4.71 mills /kwh of coal.7 Moreover, an analysis of the capital costs of coal and nuclear units indicated that the capital costs of nuclear plants, $206 to $230 million, exceeded coal plant capital costs, $176 to $205 million.
However, it was anticipated that the initially higher capital costs of the nuclear unit would be recap-tured within three years because of the operating savings derived from the lower cost of nuclear fuel compared to coal.
It was anticipated that over its life, the nuclear plant would produce a levelized annual revenue savings to the ratepayers of $6,500,000 over the coal alternative.
Having decided that a nuclear plant was the best alternative, PECO was faced with the prospect of choosidg a site.
In choosing the existing site, PECO considered topography, access to read and rail facilities, availability of water supply, land procurement costs, general geology and seismology, population density and proximity, meteorology, costs of transmission rights-of-way and facilities, and improvements to roads and bridges necessary for the transport of the reactor vessel and other super-heavy components to the site.
In this proceeding, the primary objection to the site chosen was raised by Limerick Ecology Action which pointed out that the plant's construction permit is con-tingent upon the units being operated as a " river follower",
i.e., would only be permitted to operate providing the Schuylkill River contained suf ficient water to service the plant in addition to meeting the needs of those downstream, which would cause the kwh output of the units to flucuate depending upon the flow of the Schuylkill River.
While we are convinced that PECO appropriately considered relevant options in chcosing the plant site, we acknowledge that there may be occasions when the supply of water will be such as to affect the sicultaneous operation of f
Limerick Units I and II at full capacity.
However, even with this possible infirmity, we agree with the finding of the Nuclear Regulatory Commission, that the site chosen was the best available.
Further, it should be relatively simple to chart the rise and fall of the river and adjust usage accordingly.
We also note that construction of the Point Pleasant Pumping Station and the Merrill Creek Reservoir will be neces-sary to provide Limerick with the necessa ry wat er.
We cannot speak for the Neshaminy Water Resources Authority's ability to finance such projects, but based upon the record before us, we do not foresce any long-term inability to secure water f rom these proj ects.
2/
In further support of its position PECO points to a 1976 study by Mr. Leonard Reichle, Senior Vice President of Ebasco Service, Inc. which concluded that nuclear power was 27% cheaper than a cocpa rable coal alternative (PECO St. 1C, p.
10); testimony by Mr. Gordon Casey of Commonwealth Edison which concit.ded that nuclear genera' ion was 20% cheaper than coal in its service ter rit ory; and a 1979 report published by the National Academy of Scirnces which endorsed the need to develop nuclear energy given its "ccmpetitive econcmics" (PECO St. IB, p.,5). -
Having determined that construction of a nuclear facility at Limerick was appropriate, PECO selected General Electri vendor for nuclear equipment and the turbine generator.gj(GE) as the In August 1969, PECO awarded a contract to Bechtel Corporation to perform architectual/ engineering and construction work on the proposed stations.
For the purpose of our discussion of the construction and any delays in that construction, we shall divide the construction schedule into three parts:
(1) the planning and early construction phase; (2) the 1974-1977 phase; and (3) 1978 to the present.
A.
Planning and Early Construction At the heart of PECO's decision to build the Limerick St'ation was PECO's perception, shared by many in the industry, that the high rate of load growth experienced in the 1960's and early 1970's would continue unabated.
As was stated earlier, PECO's forecasts which assumed the continuation of high load growth and a need to increase its reserves from 15% to 20%, showed an ever decreasing reserve during the 1975-1977 period. Concerned interruption rule,g; bout preserving the general one-in-ten year service PECO ccmmitted itself to build base load plant.
Primary criticism of the Company's actions prior to 1974 comes f r om the OCA.
The OCA points to t he det erioration of PECO's finanical (ondition in the late 1960's (PECO Stat. 9, p. 4) concomit ant. with a
$500milliongroductionplant t oast ruction program for the two Peach Ecttom units-the Croydon ccabuction turbines and tbc Eddystone No. 3 oil-fired unit (Id. p. 5; OCA Ex, 1, IR-2, 7-30), and the construction budget associated with the Salem and Limerick Units.
The OCA con-siders the estimated $3.3 billion construction budget for the 1974 tbrough 1978 period, forecast in 1974 and mounting to 165% of the 1974 rate base, to be indicative of potential future financial difficulties by creating, at this ea rly date, cash flow constraints and virtually elirainating any financial ficxibility.
Compounding PECO's difficulties 3_/
It should be not ed t hat. GE presented PECO wit h the lowest capital cos ts of t hree bidders and furnished equipment similar to PECO's Prach Bott om Units.
4/
The one-in-ten rule represented a desire to only permit a service interruption due to a forced outage once in a ten yea r period.
5/
FECO cwned a 42.59% interest in these plants.
6/
42.59% owned by PECO.
was the escalation in the price of oil,7/ high interest rates, general inflation, and a sharp reduction in the rate of growth of sales. Although the OCA admits that many of these factors were beyond the control of PECO, the OCA opines that these factors should have indicated to PECO that it had vastly underestimated the costs and subsequent construction periods of its incomplete nuclear vaits and shculd have caused PECO to question any financial planning stich was based upon a reliance on the 1974 architect / engineer estirnates.
Second, the OCA faults PECO for its lack of a detailed genera-tion planning study, pointing out that the most detailed comparison of nuclear and alternative forms of generation was carried out in 1963 "grior to the commitment decision for the Peach Bottom and Salem Units."
(PECO Stmt. la p. 16.)
In his Initial Decision, ALJ Klovekorn finds that PECO's
" actions in the 1968-1974 period were reasonable and its decision at that time to construct a nuclear unit at Limerick was a valid exercise of managerial discretion." We agree.
In addressing these concerns, initially, we note that PECO's financial condition in the late 1960's and early 1970's was not as precarious as it is at present. While it is true that PECO cmbarked upon an ambitious construction program, it could not have forseen the extent of those factors which influenced the entire econcmy, i.e. the OPEC oil embargo, rapid inflation, etc., which served to exacerbate PECO's financial condition. Further, PECO constantly reviewed its decision as to capacity type considering changing capital, fixed costs, and fuel costs (PECO Ex. VSB-2, EB). We find t hat although PECO's const r uct ion plans may have been somewhat opt imistic, its financial condition was not such as to indicate its future difficulties or that the units were not economically feasible.
As further support for PECO's construction plans, during this period of time, we grant ed PECO's application for a finding of necessity associated with certain construction at Limerick.
We stated:
In this connection, the Commission is of the opinion that it is of paramount importance that applicant proceed forthwith with all such construc-tion as it may lawfully undertake pzeliminary to the final AEC detemination with respect to the nuclear facilities involved.
Applicant is faced with the necessity of expending many millions of dollars to augment its electric generation within the next several years in order to provide adequate and reliabic service to its patrons.
The proposed 7/
As PECO was a heavy oil user for generating purposes, the Company was particularly vulnerable to c,il price increases and the 1973 OPEC oil robargo. _
e Limerick Generating Station is one of several impartant power production facilities which appli-cant must complete on schedule in order to meet its ever growing customer demands for electric service.
Application of Philadelphia Electric Company, A. 96108 (1971). As is readily apparent, even at this early date, we foresaw the need for the rapid construction of the units.
Similarly, the Atomic Energy Commission, Directorate of Licensing found, in its November 1973 Final Environmental Statement, PECO's expan-sion of plant capacity to be a prudent and necessary action to satisfy the growth requirements of its service area (PECO Ex. VSB-2, SD).
In view of the foregoing, we are of the opinion that PECO's initial decision to build a nuclear station at Limerick, was reasonable at the time it was made, and was a valid exercise of managerial dis-cretion.
B.
The 1974 Extension Due primarily to a delay in the from the Atomic Energy Commission,gyeceipt of a construction permit construction on the station did not begin until the smraer of 1974.
In October 1974, FECO announced delay in Limerick's construction schedule, postpc.ning the projected a
in-service dates by two years.
As stated by Mr. Joseph F. Paquette, Jr. Vice President of Finance and Accounting, the decision to delay construction was due to adverse financial factors affecting the company.
Mr. Paquette noted that during the 1950's and 1960's, PECO's finar.cial condition improved considerably resulting in regular increases in its dividend.
Beginning in the late 19CO's, increasing inflation caused PECO's financial con-dition to deteriorate. For exampic, PECO's return on equity, approxicately 12% from 1965 to 1967, dropped to 9.4% in 1970 and remained in the range of 10%-11% for the next three years.
PECO's pre-tax interest coverage ratio decreased from 5.1 times in 1968 to 2.6 times in 1970, and remained in the range of 2.7 to 2.9 times through 1971.
Further, PECO's mortgage coverage ratio declined f rom 5.8 times in 1965 to 2.4 times in 1973.
PECO's stock dropped in price from $40.50 per share to $17.00 in 1973.
As a result of this deteriorating condition, PECO's credit rating was lowered by Standard and Poor's from AAA te AA in 1968 and to A in 1974.
Corapounding PECO's financial problems was the 1973 Arab oil enhargo. The experienced price increases in oil, which caused PECO's S/
The permit was received June, 1974.
.=
fuel adjustment surcharge to increase substantially, the general re-cession then in progress, and increased consumer awar conserva-led to reduction in energy consumption.gpess o#
tion methods, PECOplacedintoserviceapproximately$500millionofnewplant-ply, Concurryg increasing its rate base from $1.5 to $2.0 billion. Further depletion of PECO's earning was occasioned by the cessation of AFUDC (Allowance for Funds Used During Construction.)}by accrual of Although PECO construction financing,yyps confident that it could complete its five year
- Consolidated Edison Company's omission of its dividend in April 1974, significantly shook investors' onfidence in the electric industry, causing common stock prices to drop.yd/
In addition, AA utility bond interest rates, changed significantly, rising from about 8% to 11%.
Of greater significance to the Company specifically, was the decline of,PECO's interest coverage ratio below 2.0 foreclosing thepossibilityofPECOissuingnewmortgagebonds.7gjmes, Mr. Paquette testified that as conditions deteriorated, the company decided to cut its near-term construction expenditures.
The obvious method of cutting costs, according to Mr. Paquette, was to reduce spending at Limerick, as tha*. project represented the major portion of PECO's construction budget.
PECO claims that the 1974 decision to delay construction cost $36.6 million, while the OCA estimates the cost at $372 million.
9/
PECO's peak load for 1974 was 5,431 megawatts, a reduction of about 6% from 1973. Further kwh sales decreased in 1974 by approximately 3% from 1973.
10/ New plant consisted of the two Peac,h Ecttom units, the Croydon combustion turbines, and the Eddystone No. 3 oil-fired unit.
11/ Accrual of AFUDC is an accounting treatment recognizing the cost of the carrying charges associated with plant investment.
This amount is added to the basic cost of the plant when included in rate base to be recovered from ratepayers over the life of the plant.
l2/ In 1974, PECO predicted that its five year construct ion expendi-tutes would amount to $3.3 billion for the period 1974 through 1978 and that it would have to finance about $2.5 billion of that with new securities.
1_3/ The price of PECO's stock decreased from over $19.00 per share to below $10.00 per share immediately after the Con Ed action and fluctuated between $10.00 and $12.00 a share approximately 50% of book value, for the rest of the year.
14/ Under the t ems of PECO's indenture, when the interest coverage ratio falls below 2.0 times, new bonds could be issued only upon retirement of older bonds.
r The OCA and Staff, while not disputing the fact that the preceding events have occurred, both point to 1974 as the turning point in Limerick's construction. The OCA argues that the company should have been aware then of the quagmire of direct construction cost escalations and in-service delays experienced by PECO at its other principal con-j struction sites (OCA Main Brief, p. V-11).
The Trial Staff argues that f
PECO should have either cancelled the units at this time or built the plant as quickly as possible.
Staff criticizes the Company for choosi.g the worst possible path--not cancelling before the bulk of construction was begun, but not pressing forward in completing the plant in light of the optimistic economic forecasts for 1976-1978 (OCA Ex. 23, N.T. 1, 9).
C.
The 1976 Extension In 1976, to match growth in capacity additions with a lower spring 1976 load forecast, PECO further delayed construction and revised the in-service dates for the Limerick Units Nos. 1 & 2 from April '81/
April '82 to April '83/ April '85 respectively.
According to Mr. Paquette, the decision to further delay construction was based upon a continued deterioration of PECO's retura on common equity, the price of its stock, and a further reduction in its 9
bond rating to A.
Addi reduce PECO's peak load.-}jpnally, the wave of conservation ccatinued to At this time, FECO revised its forecast grcwth rate from its pre-1974 level of 7% per year downward to 5%, a revision which effectively lowered PECO's estimated peak load by almost 1,000 negawatts.
As a further delay of the Limerick units would lower its projected capacity by 1,055 megawatts in the years 1981 to 1984 inc!usive, construction was delayed.
Mr. Paquette stressed that in evaluating the 1976 postponement, "it is important to appreciate the context within which these decisions were being made."
(PECO Stat. No. 9, p.
10).
Ee noted that concern about bringing a unit on line prior to its being necessary, creating excess capacity, was brought to the fore in the ecmpany's 1975 and 1976 rate proceedings.
Although any excess capacity adjustment was rejected in that proceeding, we requi:ed PECO to justify its installed capacity in its next proceeding.
According to Mr. Paquette, in such an environ-ment the company coucluded that the public interest did not warrant a speedy cer.pl et ion o f Liu.erick.
It appears that the company felt that there was son.e risk that. i f the Lin.erick units were brought on line in 1981 and 1982, the Commirsion might deem the plant s to be unnecessary for the service of its custemers and exclude any costs from rate base and prohibit recovery of any expenses associated with the operation of the units with dire financial consequcnces to the Ccmpany (PECO Stat.
No. 9, p. 11).
15/ PECO's peak load was 530 megawatts, again below the 1973 record.
The OCA raises two major objections to PECO's 1976 decision to delay Limerick's construction schedule, arguing that thL slippage evi-dences a corporate attitude to react to load growth by building more and more capacity instead of attempting to control such growth (OCA Main Brief, p. V-15) and criticizes tne company for failing to analyze what
~
capacity would be needed if load growth continued to deescalate.
The OCA contends that it would have been appropriate for PECO to consider.
cancellation of one or both units at this time.
The OCA sets the cost of this delay at $202 million of direct costs (OCA Ex. No. 20, IR-2, 1-3).
Trial Staff criticizes the delay, contending, through testi-mony of Witness Donald Muth, that PECO's financial condition was such that it would have been able to issue sufficicnt additional mortgage bonds in 1976-1978 to eliminate the need for the postponement (T.S.
S tat. DlIM-2, pp. 2-3).
In addition, Mr. Muth concludes that the Ccopany could have financed the construction in a variety of ways in 1976, i.e.
the issuance of a combination of common stock, short term debt, and long term debt, rather than delaying construction.
In addressing PECO's argument that construction was delayed because of a reduction in load, Trial Staf f opines that if this were the case, ccustruction at Limerick would still be delayed, as load has not grown significantly in recent years.
If however, financial considerations were foremost, Staff suggests that instead of postponing constructing in 1976 and 1978, PECO should have either cancelled in 1974 when PECO's financial position was bleakest, or it should have built the plant as quickly as possible.
In rebuttal, PECO maintains that Trial Staff's hypothetical financing program is not fiscally sound.
If its suggested financing proposals were added to the amounts actually issued by the Company through the same period, PECO vould have been left with an indenture coverage below 2.0 times in 1979, precluding further mortgage bond financing (PECO Stmt. 11D, p. 5).
PECO claims that in the 1975 to 1979 7
period, it could have issued cnly a total of about $30 to $40 million in additional mortgage bonds while maintaining a 2.0 times mortgage ratio in 1979. Finally, PECO argues that the issuance of common stock as suggested by Staff would merely have diluted earnings to a level insuf-firent to cover PECO's dividend.
(PECO Stmt. 11D, p. 5).
D.
1978 Extension In May 1978, PECO announced a decision to reschedule Units I and II from 1983-85 to 1985-87 respectively.
Although PECO witness Paquette testified that from 1978 to 1980 the Company authorized and spent menies to maintain the 1983-85 service dates, the record indicates that direct expenditures during that period were reduced from the budgeted amount of $529 million to $479 million (OCA Exh. 23, N.T.1, 7).
Accord-ing to the witness, the 1978 delay was caused by the same factors as the 1976 delayn, i.e. no load growth, inadequate rate relief increasing financial const raints, and a concern about a possibic excess capacity adjustment.
PECO, however, maintained its options with regard to its construction timetable due to the fact that escalating oil costs made it.
appear that completion of Limerick at an early date might be advanta-geous to customers, even if the capacity wa; not required, since the fuel cost savings resulting from Limerick's operations would more than offset. the carrying costs of the plant (PECO Stmt. No. 9, p. 14).
I Unlike the 1976 delay (N.T. 502), PECO performed an analysis I
to determine the level of short-term savings vs. long-term costs attri-butable to deferring completion of the plant.
The OCA points out, in response, that PECO's concern over an excess capacity adjustment should not have entered into PECO's planning picture, in that ALJ Matuschak's decision in R.I.D. 438 recommending an cxcess capacity adjustment, came months af ter the deci. ion to delay was announced. OCA also claims that PECO failed to adequately analyze the econc,mic and financial implications of the delay and the possible can-cellation of at least one unit (OCA Brief p. V-24-26).
Trial St af f takes the same position with regard to this delay as the 1976 delay.
E.
Discussion Ve note a t. the outset of our discussion, that to adopt any proposed adjustments or calculations presented to us, at this time, would be inappropriate.
T!.e record presented is inadequate to accurately guage the costs of delay.
Nor is t he issue ripe for decision.
Only when the plants are ccrplete and the attendant cost claimed will the costs of delay he susceptible to accurate assessment.
Accordingly, we shall not attenrpt to quantify the costs of the various delays at. this time.
In order to judge the rearonableness of the actions taken by PECO's canagement in delaying the construction of the Limerick plants, we cust initially establish a standard by which we can measure PECO's actions.
PECO would have us apply a riarula rd of management imprudence a rguing that so long as t here exists a rational basis for t he rendering of any of it s decisiens, those decisions may not be critici:ed.
We anc guided by Coply C gent thnnfacturing_Coppany v. Public Service Commission, i
271 Pa. 58, 114 A. 649 (1921) wherein the Pennsylvania Supreme Court stated:
l It was not intended by the legislature t hat the Coranission should he a board of managers to con-duct and cont.rol the af fairs of public service companies, but it was ucant that where certain of their powers and chligations had intimate relation to t he public t hrough fai cness,
accom-rroda t icn or convenience, the commission should have an inquisit orial and correct ive authority _
,o to regulate and control the utility in the field specifically brought within the commis-sion's jurisdiction.
While it is not our duty to become PECO's Board of Directors, it is our duty to ascertain what the conduct of a prudent management would have been under a given set of circumst.ances and utilize that standard to determine whether actions taken by a particular utility, resulting in costs to be borne by ratepayers, are reasonable.
Pennsylvania Power and Light Company v. Public Service Commission, 128 Pa. Superior Ct.
195, 216-217 (1937). Our process may be analogized to that of a court of law when it applies a reasonable man standard to proceedings before it.
k's find the opinion of the New York Public Service Commission is appropriate to utilize in determining whether management practices were reasonable.
In Consolidated Edison Company of New York, Case 27123, Opinion 79-1 (January 16, 1979), the New York Public Service Commission stated:
...the company's conduct. should be judged by ashing whether the conduct was reasonable at. the time, under all the circumstances, considering that the company had to solve its problems prospectively rather than.in reliance on hindsight.
In effect, our responsibility is to determine how reasonable peop?e would have performed the tasks that con-fronted the company.
See also, Case 27565, Niavara Mohawk Power Corp. (Opinion 80-25 issued June 24,1980), Case 27869, Consolidat ed Edison Cwpany of New York Inc.-(Opinion 82-2, issued January 21, 1982).
Thus, a standard of
" reasonable care" rather than a " rational basis", as suggested by PECO, appears appropriate.
Perhaps the ALJ summed up this approach best when he stated that "PECO's conduct in delaying construction shall be judged on the basis of how reasonable people would have responded
- o the events of 1974-1978 and whether PECO's response was satisfactory in light of all those conditions and circumstances".
By utilizing such a standard we are attempting to balance the right of the ratepayers to be treated fairly and the inherent right of PECO to manage its own affairs.
With this st andard in mind, t he ALJ concluded t hat. PECO's 1974 delay was reasonable and that the 1976 and 1978 delays inay have been unreasonable.
As previously noted, the ALJ did not find it appropriate to a cccemend any specific action rega rding the 1976 and 1978 delays he tahen at this time.
However, he did conclude that the risk of large units should be shared by stockholders (R.D. at 54).
He states:
" Con-sumers should not be expected to pay for delay which results from a c onscious mar;agement decision to prot ect its 0wn int erest s without adequate weight being given to its ratepayers interests.
To these findings PECO, the OCA, and the Keystone Alliance except.
In its exceptions, the OCA argues that i f, in a future rate proceeding, the Commission determines that. an adjustment is appropriate, "then in all fairness to ratepayers the ef fect on st ockholders should be
assessed and compared to the approximate $200-300 million loss sprend over ten years that would result from stockholders' absorption of one-half of the after-tax sunk cost of Limerick Unit No.
2."
Keystone Alliance excepts to that portion of the Initial Decision wherein the ALJ found PECO's pre-1974 actions to be prudent, arguing that PECO was committed to nuclear power plant construction rather than viewing nuclear generation with prudence.
They also argue, that the ALJ erred in not finding that construction should have been halted in 1974.
PECO, in its exceptions, initially lends its support to the ALJ's conclusion that we lack authority to order prospective rate base adjustments and that such an adjustment, if adopted at this time, would interfere with PECO's ability to finance plant completion on the least cost Forecast 5 Schedule and would increase financial costs.
Briefly, PECO argues that we should reject the ALJ's con-clusions:
because (1) the Initial Decision has erroneously sinaarized PECO's evidence as to the reasons for its scheduling decisions, (2) has failed entirely to discuss or describe a material and substantial part of PECO's evidence in support of those deci-sions and (3) has erroneously accepted unproven and erroneous cost-benefit assumptions presented by Trial Staff.
Initially, we disagree with Keystone's asse tions that the 1974 construction extension decision was not prudently undertaken. As noted previously, at the time the construction permit was issued, PECO had no firm indication that demand would be reduced substantially.
It is readily apparent that the decrease in c. mand was due primarily to the increased price of oil and rapid inflation, which in turn resulted in ever increasing rates. As there was no indication that this demand decrease would continue, we cannot conclude, as did Keystone, that con-struction should have been halted at this point in time.
If anything, we would have concluded, as did Trial Star f, t hat in light of subsequent developments, the Limerick construction schrdule should have been advanced.
However, placing ourselves in the position of PECO's managcment with the facts and trends available to it at that. time, we cannot conclude that management was imprudent and unreasonable in its decision in 1974 to delay construction.
With regard to the OCA's exception, we reiterate our position that as no claim has been made for inclusion or exclusion of costs associated with Limerick, we deem it inappropriate to allocate these costs.
The issue of any allocation or sharing of costs is properly reserved for a future rate proceeding.
Turning to the 1976 and 1978 extensions, we note that at the t in.e of these decisions, PECO had two and four years of additional informat ion indicating that the decline in demand was cc,ntinuing, and, despite increases in rates approved by us, further deterioration of PECO's financial condition had occurred.
The ALJ has found that the 1976 postponement was "made without careful analysis of the impact of such delay on ratepayers" and that
"[c]onsumers should not be expected to pay for delay which results (from} a conscious management decision to protect its own interests without adequate weight being given to its ratepayers' interest." To the ALJ's finding of imprudence PECO bas excepted, arguing that the Initial Decision fails to provide ar assessment of the relative economic benefits and detriments to ratepayers and shareholders of earlier versus later plant completion, in addition to disregarding the evidence of PECO's precarious financial condition during the 1974-80 period and evidence that the reduced load growth permitted delaying completion of Limerick without threatening service reliability.
It appears, from the record before us, that PECO's 1976 and 1978 construction !alays were caused by PECO's financial difficulties, which in turn were caused by its ambitious construction program and its ever decreasing load growth; conditions similar to those causing the u
1974 delay.
While it is true that PECO's financial condition deteri-orated from its 1974 levels, we are of the opinion that, at the least, PECO's ambitious construction plans exacerbated its financial dif fi-culties. We are convinced that FECO's financial dif ficulties, proffered as a reason for delaying construction, would have been less acute if construction at Liuerick had been terminated.
PECO now argues that one of the price considerations in delaying construction was a continued reduction in PECO's load growth.
Although PECO's spring 1976 load forecast projected a lower load growth than ea rl,ier anticipated, it appears that even this projection was overly optimistic.
We note that in PECO's 1977-78 rate proceeding, PECO reduced its forecasted growth rate from 5% to 3%.
Pennsylvania Public Utility Cormnission v. Philadelphia Electric Company, R.I.D. 438 (February 5, 1979). Apparently, this 1978 reduction was an acknowlcogement that the trend evidenced in 1974 was continuing.
r~ spite this now obvious trend, PECO delayed construction in the hope that load would icprove.
PECO's final argument, that the relative economic benefits and.
detriments to ratepayers and shareholders of earlier versus later plant c apletion favored delay, is unpersuasise.
We find this argument curious in light of the fact that PECO stresses that, because load growth has declined, the Limerick Units' main purpose is to replace oil fired generating capacity.
If Limerick can be economically justified when compared to a combication of alternative sources of power and the re-tirement of oil fired plants, which by now have been extensively depreciated, the relative benefit to current ratepayers would have been grcater if the oil capacity, and their associated costs, had been retired earlier by way of compressing rather than expanding the construction schrdule. Further, as the nation as a whole experienced a period of doubic digit inflation and rising interest rates, delaying the necessary financing did and will continue to increase the ulti:aate costs of the plant financing.
Considering the foregoing, we are of the cpinion that PECO management did not exercise judgment sufficient to meet our reasonable man standard in delaying construction at Limerick in 1976 and 1978.
Having so found, we are requested by Staff and the OCA to quantify the cost of the delay to ratepayers.
We are of the opinion that to do so at this time is inappropriate. We have not been presented, in this pro-ceeding, with a claim for recovery of any of the costs associated with the construction of the plants.
Consequently, we can make no adjustment to any claim. Further, should PECO sell all or part of the Limerick plant or its capacity to other utilities, the deduction of all or part of the costs of delay from PECO's claim, if any, would be materially affected. We therefore find it unnecessary to quantify, at this time and in this proceeding, the costs associated with the 1976 and 1978 delays.
III. Management Oversight of the Project Following the selection of Bechtel Power Corporation as the architect / engineer and contractor for Limerick, and General Electric to provide the steam generator, PECO management assigned responsibility for planning, scheduling and cost control to its Engineering and Research (E & R) Department.
The managonent of this department holds weekly meetings with the heads of the six divisions comprising the department.
Individual divisions have bi-weekly meetings to review Limerick activities. A departmental report is prepared and sent monthly to PECO's Chairman of the Ecard.
The Vice President of PECO's E & R Department reports signi-ficant events to top management at weekly and bi-weekly meetings.
In addition, a major project coordination meeting is held monthly, usually at the construction site and is attended by PECO and Bechtel personnel.
Additional periodic meetings are held between General Electric, Bechtel c-and PECO management groups to review the overall project status (PECO Statement No. IB, p. 2).
As noted above, PECO's E & R department is composed of 6 divi-sions. As described by PECO, the overall coordination and administration of the project rests in the Mechanical Engineering Division, and the designated Project Manager, Richard A. Mulford, is located in that division. This division also fo]Iows the mechanical design aspects of
'he plant, reviews and interacts with the piping and instrument system diagrams and plant layouts prepared by Bechtel, reviews and approves equipreent speci fica tions and drawings, and reviews bidders lists and equipment purchase recommendations.
The division also performs a similar monitoring function for General Electric, the vendor of the nuclear steam supply system. Following the start of construction, a PECO Resideat Project Manager was assigned to Bechtel in San Francisco; there are now three PECO employees situated there.
The Electrical Engineering Division follows the electrical aspects of the plant's design.
Personnel in this division perform functions parallel to their counterparts in the Mechanical Engineering Division, working through an electrical project Engineer who coordinates his activities and report s through Mr. Mulford.
.----.-- e.
.. a The Construction Division is responsible for monitoring the actual construction of the project and as such, works closely with Bechtel. A Project Manager--Construction, James Clarey, is assigned to directly supervise site activities.
IV.
Future Construction and the Need for Limerick A.
The Need and Justification for Limerick The central focus of this investigation has been whether continued construction and completion of the Limerick Units is in the best interest of the Company and its ratepayers from the perspective of re.isonabic rates and system reliability.
Large investments have already been made in the two units.
As of April 30, 1982 (hearings were com-pleted on Novembet 13, 1981), PECO estimated that $2.23 billion would be spent at the Limerick site.
Approximately $1.8 billion of that amount represents the investment in Unit 1, which would be 76-79% complete.
The remaining $410 million is attributable to Unit 2, which PECO fore-casts would be 42-43% complete.
When originally conceived and proposed, the Limerick project was considered necessary to meet. system demand, which was growing at 6%
~
annually and for ecasted to be 7%.
However, since approxin;ately 1974, load growth has severely diminished.
In this proceeding PECO has pro-jected system load growth of 2.3-2.8% and the OCA's growth figures for FECO range from 1.1% (base case) to -0.5% (conservation case).
E o ally, declining growth rates may translate into " excess" capacity if aponse to reduce planned capacity additions is made by re the utility.
For PECO the late 1970's have been a period of large reserve capacity (PECO St. 2, p.
14).
In 1973 PECO's reserve capacity was 10.7%.
By 1977 the reserve margin was 39.3%, declining to 26.3% in 1980. The Company anticipates growth in peak demand of 100 MW annually or an average growth factor of approximat ely 1.6%.
Assuming the addi-tion of Limerick Units 1 and 2 (1,055 MW per unit) in 1985 and 1987, respectively, and Salem 2 in 1985 (474 MW), as well as the retirement of 1,215 MW of va rious oil and gas t urbines, the Company anticipates reserves of 36% in 1985 and 37% in 1988, declining slightly to 33% by 1990 (PECO St. 2, Table II).
These margins would be much higher without the retire-ment of t he fessil fuel plants prwaturely, prior to the end of their l
useful life.
Prior t o 1966 a reserve margin of 12-15*? was censidered adequate.
Concern in the 1960's about blackouts t riggered a revised requirement of a 20% margin.
PJM's present reliability standard of one day in ten years requires a reserve margin of 26.5% (See, Footnote 4, supra). The Commission held at R.I.D. 865 that an average reserve of 18% (range of 14-22%) was reasonable.
Pcnnsv1vania Public Utility Co rr.m i s s i o n v. Philadelp_hia Electric Co., R-79060865, 54 Pa.PUC 220, 226, 37 FUR 4th 381 (May 9, 1980).
No party to this investigation has attempted to justify the cont inued < nst ruction and completion of Limerick on the bnis of grow-i ing systra demand and the need to add new capacity.
The central con-l t roversy turns on whet her the Limerick Units are the most reliable and
economic method oi replacing PECO's fossil fuel fired generation. The cost of continued use of the Company's fossil fuel plants, as contrasted to replacement of these units with Limerick or some other alternative (e.g., conservation, smaller coal-fi-ed units, purchase of capacity at PP&L's Susquehanna Steam Station), has been extensively debated by the parties.
Both PECO and the OCA, as well as the other parties, have performed extensive inalysis of the many options available to determine which is the most cost effective. The conclusions reached by the parties vary widely depending upon the assumptions made regarding the capital and operating costs of Limerick, outage rates, capacity factors, future cost of fuel, PJM wholesale rates and a host of other factors.
ALJ Klovekorn has performed an admirable job of distilling and discussing the various proposals, and we shall not ettempt to repeat his detailed discussion here, but shall instead sur.marize the positions of the parties.
Analyzing the 1980 through 1994 time frame, PECO witness Lawrence claimed that completion of both units would result in savings ranging from $1.9 to $7.5 billion depending upon the alternative studied.
Ccapletion of Limerick Unit I and cancelle' ion of Limerick Unit 2 without replacement would " cost" consumers $1,930,000,000 relative to completion of both units, whereas cancellation of both Limeri~ck Units without replacement would cost ratepayers an additional $7,470,000,000 in revenue requirements.
Analysis of the alternatives to Limerick does not include recognition of the additional capital costs associated with Limerick's sunk investment of approx 2mately $2.23 billion at April 30, 1982.
Dr. Perl performed a second PECO study focusing on the coal alternative only. The results of his statistical cr.a!ysis are that the "most likely" Icvelized cost of Liroerick will be 13 cents per }Vli.
The cost of replace-ment by coal is forecasted at 19.4 cents per KWll.
Over the life of Limerick, Dr. Perl claims, savings of $5.7 billion will accrue to rate-payers ccr. pared to reliance upon the coal capacity alternative.
Due to the ccmputational and other errors disecvered during the hearings, the OCA presented a progressive series of analyses. The "bott om line" of the OCA's positions, however, is a SOBIG computer run by PECO witness liieronymus which includes OCA assumptions regarding the capital and operating costs of Limerick, capacity factor, PJM wholesale rat es and all ot'aer factors (PECO Exh.
W'.T.i-3, Sch. G).
The results indicate savinr,.s ranging from $21 mill value) under che conservation scenariojgp to $364 million (present
, _if one agrees with a prospec-tive average load growth rate of negative.5%.
All other growth scenarios indicate that ccepletion of both units is the cheapest alternative.
16/ It should be noted that the estimates under the conservation case include savings to non-electric heating custcmers (oil and gas customers) of approximately $2.3 billion and assumes rate-payers pay all costs of censervation.
The City of Philadelphia presented a conservation study modeled af ter programs undertaken by the Tennessee Valley Authority and several west coast electric utilities and claimed that if an agressive conservation program were implemented by PECO with expenditures of $45-60 million annually, the need for Limerick Unit. 2 would be of fset wit h attendant savings of $445 million.
This analysis covers the time frame 1982 through 1989.
After hearing and considering all of the evidence presented, ALJ Klovekorn concluded:
[T}here can be no doubt as to the economics of and need for the completion of both Limerick unis.s.
There has been no analysis presented which, using plausible asstunptions, has shown Limerick to be uneconomic.
Rather, all reasonable analyses have shown that Lin,erick will produce economic benefits to ratepayers over any proposed alternative.
Recommended Decision at. 238.
The ALJ recommended that the plants be br ought on line as soon as possible and that the Commission monit or the Cc,tpany's pr ogress.
As the above brief recitation of the evidence illustrates, the range of forecasted savings is broad depending upon the assumptions made and the alt ernat ives studied.
While we generally agree with the conclu-sions of Administrative Law Judge Klovekorn, a short review of the appropriateness of scme of these adjustnents is proper.
Several of PECO's u s tmptiens, specifically the $4.6 billion cost of Limerick, a 70% capacit.y factor and a future load growth of 2.3%/2.6% (FECO/ PJM) seem exaggerated.
Limerick will likely cost more in ihe range of five to six billion dollars with a mid point of $5.5 billion.
A capacity factor of 60-65% is more realistic, although all nuclear power plants, as Pennsylvania painfully Icarned at. Three Mile Island, carry the po-tential for lengthy and unpredictable chutdowns.
The ESRG (OCA) base case load growth fact or for PECO of 1.1% is reasenable, as is their PJM forecast. On t he other hand, the OCA's forecast of a 14.7% discount rate, 14% inflation in OMi expense and $6.6 billion cost of Limerick seco high, although the lat ter is not at all ir:possibic.
Our discussion of the conservation i nue may be found in a subsequent. section.
Recovery of the < xisting investarnt. at Limerick (sunk costs) and the quer.t ion of whether amortized expenses should be given rate base treottent is a decision t o be made by t his Cornission.
Depending upon I
t he posit ion talen, corapletion of one or both units may or may not be economic, due t o t he magnit ude of capital already invested at Limerick.
The t reatment of sunk cost.s is, therefore, a key imput assim.ption.
PECO's total sunk investment in Limerick at April 30, 1982 was estimated l
t o be approximately $2.23 billion (PECO St. 11G, pp. 1-2).
Approximately
(
$410 million of that t otal represents PECO's investment in Limerick l
Unit 2.
It should be noted that recoyery of sunk cost s is an isrue only if one (or both) of t he units is canceiled.
l At this time, prior to the presentation of any claim by the Company for recovery of the sunk costs, the Commission is not prepared to definitively state how it will treat such cost.s.
To do so might be construed as. prejudicial to the resclution of any claim the Ccmpany might make in the future. We have no such desire and repudiate any such intent. Further, an insufficient record exists t, adjudge the issue here. For the purposes of their analysis all parties have assumed sunk costs in Unit 2 of approximately $410 million as of April 30, 1982.
This figure, however, is a projection and does not include any addi-tional losses (e.g., cost to modify Limerick to a single unit station and to terminate Unit 2) or gains (e.g., salvage) which may be attendant to cancellation.
Further, the tax effect of abandonment is an important factor which chould be considered.
Undoubtedly, there are other items which are also relevant. The absence of these adjustments renders the present record incomplete.
B.
Financial Condition The greatest impediment to a timely and, hence, economic completion of the Limerick units is the financial condition of the Company. As the preceding discussion makes cicar, the continued and repeat *ed delays of the project undertaken large1_y_for financial reasons has resulted in massive cost overruns and the resultant lossoof savings which consumers might have realized.
While there still do exist poten-tial savings which we desire to retain for the benefit of consumers, we are concerned that, given the present financial straits of PECO and the prospective improbability that such stress will abate until Unit 1 is on line and in reflected rates, the cost savings claimed in this proceeding will be diminished and deferred.
PECO's financial condition has deteriorated to a grossly subrtandard level.
As we noted in PECO's recent base rate proceeding, Pennsylvania Public Utility Ccmmisrion v.
Philadelphia Electric Company, R-811626 (May 21, 1982), "FECO's most recent mortgage debt issue (April 1982) sold for 18.2%" and currently carries a BBB rating.
In that proceeding it was projected that without substantial rate relief earnings per share would decrease from $2.26 in 1981 to $2.09 in 1982, and $1.75 in 1983, which would be insuf ficient to cover PECO's current $2.00 dividend. More importantly, int erest cove rage (with AFUDC) would fall to 2.03 times and 1.76 times in 1982 and 1983, respectively, and to 1.42
(
times and 1.08 t imes without AFUDC.
Despite our recent allowance of an increase in annual operating revenues o' approximately $221,708,000, i
l PECO's interest ccverage is less than 2./ times with AFUDC and is dangerously close to those levels which will prevent the issuance of the i
bends necessary for the continued construction of both units.
In light of PECO's BBB rating, issuance of the amount of new bonds required to finance construction on both units would certainly be at a high cost and i
at great risk, which in turn would lead to a further downgrading of its l
securities.
PECO's currect rate precludes inclusion of TECO's bonds in various instit ut ional port folios and any further downgrading would further rest rict the population of investors willing or able t o purchase t
l
those bonds.17/
Indeed, in 1974,1975and1980,BBBratedsecur{gjes could not be sold by a number of companies (PECO St. 13, p. 17).--
For 1981, the Company's achieved equity return was approximately.
12%, although the Commission authorized return was 15.5% (PECO St. 1A, Table 4).
The Company's actual returns during the latter part of the 1970's and early 1980's place PECO "at or near the bottom of the actual returns within the utility industry" (PECO St. 1, p. 7).
Cash coveraga of its dividend in 1980 was only 1.06 times.
In 1981 the Company in-creased its dividend to $2.00 per share, only the second increase in ten years (PECO St. 1, p. 8).
PECO's 1981 equity offerings sold at a mere 65% of book value per share (PECO Exh. JFB 1, Sch. 12, p.
13).
Should the market to book rat io fall much further, PECO may be unable to issue additional equity shares because the cost, in terms of dilution to existing shareholders, would be prohibitive.
The singic most important reason for PECO's present financial ills is the large magnitude of its constr etion program.
AFUDC repre-sented a staggering 84% of PECO's 1981 carnings (PECO St. 1A, Table 4).
Over the five year period ended 1980, cash as a percentage of construc-tion expenditures averaged only 26% and in 1980 fell to 12% (PECO St. 13, pp. 5-6).
In 1981 this figure dropped to a dismal 5.2%.
Nor will the pressure of construction abate in the near future.
PECO has budgeted an
$876 million construction budget for 1982, with an additienal $870 million planned for 1983 (PECO St. 1A, pp. 1-2).
The Company's financial plight endangers its construction program.
Mr. Paquett e stated on hdalf of PECO that.:
The Company har an urgent need for substantial rate relief which is requi: ed to achieve an adequate rate of return on our investment in electric facilities serving the public and improve our extremely low w
Icvels of internal cash flow and interest coverage ratios.
Unless we are able to substantially improve our financial perforrance, I believe we will be unable to centinue to finance our planned conrtruc-tion program.
If that occurs, it could have severe, long-run adverse effects on our customers and the entire Delaware Valley.
17/ PEC0's current rating by Standard and Poor of EEB represents a corporate bond of the lowest investment grade rating. A decrease in rating to BB represents a speculative bond con-sidered below investment grade.
18/ Unless otherwise noted, statement and exhibit references in this section are from Pennsylvar.ia Public Utility Commission v.
Philadelphia Electric Ccgpany, R-611626.
. ~
(Emphasis in original)
PECO St 1,
pp. 3-4.
In the rate case at R-811626 a major element of the " substantial rate relief" referred to by Mr. Paquette was in the form of PECO's request to include $500 million of Limerick related CWIP in rate base.
- Company further stressed that allowance of the { YIP claim was necer.s_ty to improve its bond rating above the BBB level.
If the Company cannot improve its bond rating above BBB, I believe there is a serious possibility that we would have to delay the Limerick project because of our inability to sell additional securities in a limited market.
(PECO St. 5, p. 5).
We denied the Company's claim for inclusion of Limerick-related CWIP in our Order at R-811626 for the reasons stated there.
C.
Commission Conclusion Ve find that continued construction of both Limerick units simultaneously is not in the public interest.
The public interest requires:
1_9/ Mr. Paquet te stated that with a revenue allowance of $238 million at R-811626, substantially above that increase the Commission actually allowed PECO, "we would be able to temporarily delay another dos.ngrading.
IIowever, we would not expect to see an improvement in our rating for some time to come" (PECO St. 1A,
- p. 5).
The Company also stated that the ALJ's allowance of almost $210 million would most likely occasion a downgrading, because PECO's financial indicators for 1982 at that level of revenues would be only marginally within indicators achieved by other BBB companies.
PECO Exceptions, at 1-27.
As.was stated in the Moody's Bond Survey of February 8,1982 with regard to PECO specifically:
Without CWIP in rate base, it would be difficult to achieve adequate financial measurecents and internally generated fonds for the continuing heavy capital needs expected to total almost
$3.5 billion over the next four years.... Main-tenance of the current "baa" rating is highly doubtful if Limerick construction proceeds according to the present schedule without CWIP in rate base.
S_e_e also, PECO Sts. 13 and 14.
g
a)
Preservation of PECO's financial integrity; b)
Protection of the public from unjust and unreasonable rate increases; c)
Protection of adequate service; and d)
Timely completion of Limerick Unit 1.
For these reasons, we find that either the cancellation or suspension of construction at Limerick Unit 2 is in the public interest.
Given our inability and unwillingness to provide rate base recognition of Limerick related CWIP at R-811626 and the resultant probability that the Company's bond rating will not improve above its present FBB and may in fact slide further, it would not be in the public interest for the Company to continue present construction of Liinerick Unit 2.
Were the Company to attempt the impossible feat of continuing to build both units as scheduled, we believe the impact on PECO's finances would be catastrophic and would occasion further slippage in coverages and a downgrading of PECO's bond rating.
This slide downward into a financial abyss would in all likelihood preclude PECO's access to the financial markets altogether. Even were the BBB rating maintained, constructicn of both units could be accomplished only at an exorbitant cost of capital, as evidenced by PECO's most recent debt issuance at a cost of 18.2%.
The only other meaningful alternative to adjusting the Limerick construction schedule is to recognize the capital cost s of const ruction in present rates by including the construction won k in progress (CWIP) in rate base.
For the reasons we stated in our rate order at R-811626, based upon the record adduced there, our statutory duty to protect. the public from unjust and unreasonable rate increases precludes this avenue e
for PECO.
If we were to do nothing, allowing the Company to continue the Sisyphean task of building both unit.s simultaneously with endless delays and attendant cost overr ns, the ultimate cost of the plant could well he excessive and the resultant tari f f cha rges, were the plant included in rates, unjust and unrc;sonabic.
As of this point in time, customer savings associated with the complet ion of the units still do exist, albeit smaller in magnitude than if the origiual constr uct ion schedules had been adhered to.
Furtherdelaysofbothunitswillonlyfjirther crode, and might porsibly extinguish, the remaining savings.-
20/ The Company har estimated that a six inonth delay in completion of the Limerick Units as a result of financial pressure would add $250 million in rests (Tr. 1113).
To sanction the continued construction of both Limerick units under these circumstances could jeopardize PECO's ability to adequately fund its continuing operations thereby resulting in a deterioration of service. We find the completion of both units by 1985 and 1987 is not financially feasible if PECO is to insure the continued maintenance of safe and reliable service to the public.
On the other hand, we are of the opinion that sufficient funds at reasonable cost arg of Unit 1 on schedule-ypvailable to allow PECO to complete construction and we encourage the Company to complete this unit as rapidly as possible consistent with the public safety.
In reaching this conclusion we are driven by the desire to retain for ratepayers the lower future revenue requirements and customer savings t
which both the Company and the OCA have identified in their various computer models relative to any plausible alternative, including con-tinued reliance on fossil fuel fired capacity.
Having decided that continued construction of Unit 2 at the present time is not in the public interest, we are of the opinion that it is proper to defer to Company management the decision as to whether construction on Unit 2 should be suspended or cancelled.
This decision is properly within the domain of management and an area into which we do not desire to intrude.
However, in view of the above findings, at the present time and before Unit 1 is completed, we dec?are that we shall not approve any new securities issuances, the proceeds of which would be used, in whole or part, for construction at Unit 2 and, further, we shall deny recovery of AFUDC dditional investment in Unit 2 (at such time as recovery is sought)32.ny
-- pending completion of Unit 1.
Ve will also permit the Ccapany to finance and accrue AFUDC on the incremental costs attendant to shutting down construction at Unit 2 and maintaining that unit in a safe condition pending the resumption of construction should the Company er opt to suspend construction at that unit.
The former may include items such as:
the cost of terminating presently effective construction contracts; protecting the site from the elements; or completing certain portions of the project so that construction nay be resumed efficiently.
The latter would encompass any additional investment necessary to protect the safety of the public or the construction employees.
21/ We deem PECO's currently scheduled in-service date for Unit 1 of 1985 to be appropriate.
22/ Ve will allow PECO to continue to accumulate AFUDC cn the existing CWIP balance at the Unit, if it elects to suspend construction.
Under cur Uniform System of Accounts AFUDC may not be accumulated if Unit 2 is cancelled and, hence, no longer under construction.
n a D.
Legal Authority In view of the unique nature of these proceedings, we deem it appropriate to clearly set forth the legal. authority upon which this decision is grounded.
It has been repeatedly held that the Commission has exclusive, original jurisdiction over the reasonableness, adequacy, and sufficiency of public utility service. Elkin v. Bell Telephone, 491 Pa.123, 420 A.2d 371 (1980); Duquesne Light Co. v.
Borough of Monroeville, 449 Pa. 573, 298 A.2d 252 (1972); Allport Water Authority v.
Winburne Water Co., 258 Pa. Superior Ct. 555, 393 A.2d 673 (1978);
Elkin v. Bell Telephone, 247 Pa. Superior Ct. 505, 372 A.2d 1203 (1977).
The Commission's jurisdiction to supervise the operations of public utilities is clearly expressed in the Public Utility Code.
Section 501 of the Code, 66 Pa. C.S.
501,, provides in pertinent part:
(a) Enforcement of provisions of part.
In addition to any powers expressly enumerated in this part, the commission shall have full power and authority, and it shall be its duty to enforce; execute and carry out, by its regulations, orders, or otherwise, all and singular, the provisions of this part, and the full intent thereof; and shall have the power to rescind or modify any such regulations or orders. The express enumeration of the powers of the commission in this part shall not exclude any pcwer which the commi+sion would otherwise have under any of the provisions of this part.
(b) Administrative authority and regulations.
The commission shall have general administrative gower and authority to supervise and regulate all public utilities doing business within this Conconwea l th.
The ccmmission may make such regu-lations, not inconsistent with law, as may be necessary or proper in the exercise of its powers or for the performance of its duties.
(Emphasis added).
The character of the service which must be provided by a public utility is defined in Section 1501' of the Ccde, 66 Pa. C.S. S1501, which provides in pertinent part:
Every public utility shall furnish and main-tain adequate, efficient, safe, and reasonable service and facilities, and shall make all such repairs, changes, alterations, substitutions, extensions, and isprovements in or to such servi'ce and facilities as shall be necessary or proper for the acconmodation, convenience, and safety of its patrons, employees, of the public.
Su_ch service also shall be reasonably continuous and without unreasonable interruptions or delay.
Such service
. -~
and facilities shall be in conformity with the regulations and orders of the conmission.
(Emphasis added).
The standards by which the rates charged by a utility must be evaluated by the Commission are set forth in Section 1301 of the Code, 66 Pa. C.S. s1301, which provides:
Every rate made, demanded, or received by_any public utility, or by any two or more public utilities jointly, shall be just and reasonable, and in confonnity with regulations or orders of the commission.
Only public utility service being furnished or rendered by a municipal corporat, ion, or by the operating agencies of any municipal corporation, beyond its corporate limits, shall be subject to regulations and control by the commission as to rates, with the same force, and in like manner, as if such service were rendered by a public utility.
(Emphasis added).
Taken together, these sections provide the Commission with the power and authority to supervise and regulate the rates and service of all public utilities subject to its jurisdiction.
Each utility is required to provide service which is adequate, efficient, safe, and reasonably continuous. At the same time, the rates charged for that service must be just and reasonable.
It is our view that this investigat ion goes to the very core of PECO's ability to fulfill its obligation to render adequate service at reasonable rates at present, while the Company is involved in the construction of both Limerick units, and later, after the units have been completed.
The findings set forth in this Order clearly rupport this conclusion.
We would be derelict in our duty to protect the rate-payer, if we declined to act.
Having undertaken this investigation and having made the various findings alluded to, we find it appropriate to issue this order in accordance with Section 331(f) of the Code, 66 Pa. C.S 3331 (f),
which authorizes us to issue a decla ratory order to terninate a contro-versy or remove uncertainty.
Section 1903 of the Code, 66 Pa. C.S. s1903, requires this Coramission to register a securities certificate if we find the issuance of the securities proposed therein is necessary or proper for the present and probable future capital needs of the public utility filing the c e rt i fi ca te.
Based on the record established in this proceeding, which we belicve reflects the present and possible future capital needs of PECO in regard to the siroultaneous construction of Units 1 and 2, we declare that at this time the approval of new securities issuances to finance construction of Unit 2 would be neither necessary, proper, nor in the public interest.
Therefore, no new securities issuances should he approved to finance Unit 2, and furt her, we c ust deny recovery of
, I
AFUDC on any additional investment in Unit 2 pending completion of Unit 1.
We are of the opinion that we would be remiss if we did not declare these conclusions in this Order. We believe that the public interest demands that we exercise our discretion and issue this declara-tory order so that PECO can take appropriate action in response.
IV.
Conservation As was stated earlier, a portion of PECO's experienced decline in consumption and load growth has been due to a commendable effort on the part of PECO's customers to conserve electricity.
Several parties to this proceeding, OCA, the City and CEPA, have set forth conservation and alternate energy source programs which they claim are feasible and lower cost alternatives to the completion of Limerick.
However, the record developed on these programs is not sufficient for us to initiate specific programs at this time.
There are still too many unanswered questions regarding the potential costs and benefits of the proposed conservation options and alternate energy soirces, as well as unforeseen institutional barriers.
We must be confident that these programs are the most desirable supply options available.
Throughout this proceeding, PECO has been criticized for failing to pur sue an active conservation program (e.g. City M.B. pp. 21-26; OCA M.B. pp. IV 34-45; CEPA M.B., pp. 60-63; Keystone M.B.,
pp. 14-25),
and unfavorable comparisons have been drawn between PECO's expenditures in this area and those of several other utilities.
We did not intend to reach a conclusion as to the adequacy of PECO's past-and current conser-vation programs.
However, we strongly urge PECO to develop and implement aggressive conservation and alternate energy programs to offset future energy demands.
s To these ends we will direct PECO to pursue an aggressive conservation program designed to substantially offset the suspension or cancellation of Limerick Unit 2.
Further, we will direct the Secretary to open an investigation docket in order to develop a Commission policy, applicable to all electric utilities, whereby regulatory incentives would be af forded to any cost-ef fective conservation inducing investment designed to lcwcr a utility's need to install additional capacity; THEREFORE, IT IS ORDERED:
1.
_That the Philadelphia Electric Company inform us of its decision to ruspend or cancel construction at Limerick Unit 2, in light of the conclusions of this Opinion and Order, within 120 days of the entry of this Opinion and Order and provide an explanation thereof.
2.
That the Philadelphia Electric Company pursue an aggressive conservation pregiam des!gned to substantially offset the suspension or c.ince11ation of Limerick Unit 2 in consultation with our Eureau of Conservat ion, Economics and Energy Planning.
The Company shall submit _
e
,e an initial conservation program plan within 120 days of the entry of this Opinion and Order.
3.
That the Secretary immediately open an investigation docket the purpose of which is to develop a Commission policy, appli-cable to all electric utilities, whereby regulatory incentives would be afforded to any cost-effective conservation inducing investment designed to lower a utility's need to install additional capacity.
4.
That at' a minimum the aforementioned investigation should address:
conservation financing programs for residential and small commercial customers, joint customer / company financed alternate supply proj e ct s, rate induced or company controlled load management programs with corresponding investment programs, appropriate company informa-tional activities required to support the company's programs, any necessary changes in existing service regulations in order to ensure ef ficient utilization of electricity, and any legislation which may be necessary to implement or enhance conservation or provide alternative supply opportunities.
5.
That the Secretary invite all interested electric utilities or other parties to participate and direct the Commission's Bureau of Conservation, Economics and Energy Planning to actively par-ticipate in the investigation.
6.
That the Initial Decision of Administrative Law Judge Joseph Klovekorn is adopted to the extent consistent with this Opinion and Order.
BY TifE COMMicSION, d
~
Jerry Rich Se c reta ry (SEAL)
ORDER ADOPTED:
May 7, 1982 ORDER ENTERED:
Aucust 27, 1982 PENNSYLVANIA PUBLIC UTILITY COMMISSION, et al.
V.
PHILADELPHIA ELECTRIC COMPANY
~
R-811626 Limerick Nuclear Generating Station Investigation CONCURRING OPINION OF COMMISSIONER JAMES H.
CAWLEY l supported the Chairman's motion in this case, the intent of which is carried out in this Order, but I feel com-pelled to express my misgivings about this action.
I believe that if we were to base our determination in this proceeding strictly upon the record evidence, this Com-mission should have reached the same conclusion as the Administrative Law Judge.
At page 245 of his Recommended Decision the Judge states, "the timely completion of Limerick Units I and II is in the best interests of PECO and its rate-payers."
No one knows what the future will bring, but, based upon the information available to us today, there does not appear to be an economical alternative to Limerick.
Unfortunately, we cannot make decisions of this magnitude in a vectum.
The Ccmpany's ability to proceed with this project is inextricably linked to the amount of rate relief which it receives.
The ccmpany has statcd on the record here that maintenance of its construction schedule assumes adequate rate allowances.
This Commission, in the Company's last rate case, voted to disallow the Company's claim for major project construction work in progress (CWIP) related to the Limerick Project (my views on the subject of CWIP, as stated in that rate case, are attached hereto as an appendix).
By so doing the Com-nission rejected a significant portion of the Company's total rate increase request.
It would be foolish for this Commission not to consider the potential impact of this disallowance in its deliberations on the Limerick investigation.
Likewise, I believe it would l
be foolish.for the Company not to carefully weigh this action in its decision to either cancel, suspend, or proceed with the construction of Unit II.
/
/
JA 4ES H.
CAWLEY, COMMISSIONER 837 EL
_. ~,
4-PENNSYLVANIA PUBLIC UTILITY COMMISSION, et.al.
v.
PHILADELPHIA ELECTRIC COMPANY R-811626 PRELIMINART STATEMENT OF COMISSIONER CAWLEY CONCERNING CONSTRUCTION WORK IN PROGRESS (CWIP):
When discussing the subject of construction work in progress (CWIP), I am reminded of a conversation between California Governor Jerry Brown and Robert Batinovich.
Brown was trying to l
persuade Batinovich to accept a position on the California Public
' Utilities Commission.
As Batinovich recalls it, Brown said, 4
"It's a terrible jo'o.
You won't please anybody, but it has to be done and I want you to do it. "
3-Should CWIP be included in an electric utility's rate i
base?
Using the premise that a primary objective of rate 4
regulation is ' assuring that utility companies are able to pursue j
all capital programs necessary to assure reliable electricity supply at a minimum cost, CWIP SHOULD BE CONSIDERED AS ONE OF SEVERAL REGULATORY TOOLS THAT CAN BE USED TO THIS END.
A decision
'I on CWIP can only be evaluated in the context of the Commission's i
entire set of regulatory policies, including policies on allowed
(
rate of return, rate base assessment, suspension periods, etc.
(
The argunents on both sides of the CWIP issue have i
matured to a point where new perspectives are in frequent.
The opposition of CWIP is generally on the grounds of:
J
- - - - =. -
1.
INTERGENERATIONAL INEQUITIES--Current consumers should not pay for a plant from which they may not be around to henefit.
2.
"USED AND USEFUL" CRITERION--Strict interpr tion j
of this regulatory principle can lead one to a conclusion that r
because construction programs are not yet "used and useful" they 1
should not be allowed in the rate base.
J 3.
AVERCH-JCHNSON PRENCMENON--This concept, developed in the early 1960's, maintains that the utilities will invariably seek to overbuild their systems.
The financial disincentive of not allowing CWIP in the rate base is seen as counteracting this tendency.
l 4.
ANTI-NUCLEAR AND ANTI-CENTRAL STATION BI AS--Anti-nuclear interests have used the CWIP issue to retard construction of new nuclear plants.
The relatively lengthy construction cycles of nuclear power plants make them more subject to problems of inadequate internal cash generation if the utility constructing
+
I the plant does not have CWIP in the rate base.
This explains i
much of the opposition to CWIP in jurisdictions with nuclear power i
plants planned or under construction.
3 5.
CWIP INCREASES RATES--A switch to CWIP on a given system will generally cause rates to rise for some period of time.
Although the early rate increases associated with any particular plant will be offset by decreases in subsequent years, 1
this causes CWIP to be perceived as anti-consamer.
i l
i e
r P
f
,,-w..-,y ww...w
..,-.e__
,.m-_-_
_ _, ~.,.
. ~, -., ~...
m For each of these arguments against CWIP there are corresponding arguments in favor of CWIP:
5 1.
NEW CONSTRUCTION SERVES EXISTING RATEPAYERS--The t
intergenerational inequity and "used and useful" objections to i
CWIP are generally countered with arguments that the need to meet
{
the power demands of current ratepayers leads to the need for new plants, and, therefore, current ratepayers should shoulder their 4
share of the burden.
Others make statistical arguments that the majority of ratepayers will stay on the system through a normal construction cycle.
2.
THE AVERCH-JOHNSON PHENOMENON IS NO LONGER APPLI-4 4
CAELE--Even if it did apply in the early 1960's, there is little 3
current credibility to the A-J phenomenon given the current depressed financial condition of the industry.
3.
CWIP DOES NOT INCREASE RATES OVER TIME--Even though it can increase rates in the short term, CWIP will not l
I increase rates in the long term or increase the net present value of all futu. e rates paid.
4.
INCLUSION OF CWIP LOWERS THE COST OF CAPITAL--This argument augments the point that CWIP does not increase rates on a net present value basis and has been the focus of substantial statistical analysis.
5.
CWIP GIVES A MORE " MARKET-LIKE" SIGNAL TO CONSUMERS--
With CWIP in' the rate base, electricity prices are a closer surrogate to marginal cost pricing in many circumstances.
This is an interesting argument in concept, but its validity is a 4
l i f
,4 s
..._,.,.._,-,.,_____.__,.,_...__.......,-_.m_,___m._.
i.
~
function of the particular circumstances of any given utility.
It is probably most appropriate for utilities which do not have oil and natural gas generation in baseload since this can cause long run marginal cost to be less than average cost.
It is unlikely that these arguments will ever lead to.a satisfactory resolution of whether CWIP is innately fair and equitable.
I.t is far more important not to lose sight of the vital issue of how necessary future system expansion will be acccmplished.
We could better spend our time focusing on whether undue and unnecessary financial constraints are leading us toward a future of insufficient electricity supply and the attendant problems of unnecessarily high electricity prices, unnecessarily high oil consumption and reduced economic growth.
These questions transcend the close-in arguments on CWIP that turn on relatively technical points of consumer discount rates and impacts on ost of capital.
If current financial constraints will prevent utilities
~
frem making prudent investments in the best interest of ratepayers, '
the rate reculatory policy must adjust.
Clearly, such chance is in the best interest of both the consumer and the investor.
CWIP is one of several tools that can and should be used to make this judcment.
I believe that an electric utility should finance its i
construction' program without charging curren't custcmers for the financing of construction as long as such financing is cost effective.
However, in recent years, the costs of construction i
i -
'e.-
programs have increased to the point that continued reliance only on internally generated funds (without CWIP and with a reasonable return on equity), borrowed funds and stock sales, is often.
unsa tis factory.
When this occurs, necessary construction projects are either postponed or the utility's security rating falls, driving borrowing costs up.
When utilities face coverage problems, we are forced to choose between increasing the utility's allowed rate of return to an unrealistically high level or including CWIP (or some portion of CWIP) in the rate base.
Given a need to improve cash ficw or coverage, including CWIP in the rate base benefits consumers in two ways, relative to arbitrarily increasing the allowed return on common equity.
First, upon ecmpletion of the asset, it will be put in the rate base at a lower amcuat than if AFUDC had been accrued.
This should lead to lower ft ture rates.
Second, there is an income tax advantage associated with interest payments.
Since current ratepayers are providing a return on the CWIP, they should also benefit from any available tax deductions for interest expense.
Alternatively, we could improve an electric utility's financial rating by increasing the overall rate of return.
Since the coupon rate on both bends and pre ferred stock is fixed, increases in the overall rate of return can only be acccmplished by allowing substantial increases in the return on ccmmon equity.
Allcwing unreasonably high returns on common equity violates the re gulatory principle that calls for only reasonabic returns on invested capital.
o To the extent that ratepayers pay financing costs on uncompleted projects, they are paying for assets that are not at that moment used and u se ful.
However, as noted previously, o
inclusion of CWIP in the rate base may be the best remedy for a cash flow or coverage problem, a cure for which ultimately benefits ratepayers.
The regulatory process works best when all considerations to an issue are weighed.
We should not be restricted with mandated requirements.
We should ha.;e flexibility to rule as circumstances and the record before us dictate.
However, before this regulatory tool can be used with any e f fectivenes s in Pennsylvania, important legislation is needed.
This Commission (or some other appropriate agency) should be given the authority to approve large construction projects at their inception--so-called "c e rti fica te of need" legislation.
s Then, as the project progresses, periodic re-approvals should be required.
A Commonwealth-appointed (and paid) construc-tion engineer should be onsite at all times so that the Commission could be independently assured of the accuracy of completion estimates, the necessity for cost overruns, and the like.
As the cuid oro cuo, the utility would be permitted a percentage of CWIP depending on the percentage of cons truction ccmpleted.
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Projects presently underway would require special treatment.
This proposal has several advantages.
The principal point is this:
It is in everyone's best_ interest to complete needed plant as quickly as possible in times of inflation.
Investor capital (if the project is not to be entirely financed with CWIP, which is probably the more prudent course) will be more easily obtained at Icwer cost if ratt.syers demon-strate financial resolve to speed completion of the proj ect.
If CWIP is utilized, less money will be borrowed and therefore less interest will be paid.
When the plant is completed and allowed in rate base, its value for purposes of return on the investment will be far
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less, as will the returns of the investment (depreciation expense) and tax expense.
In short, there will not be the sudden and dramatic
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jump in rates as presently occurs when the actual construction costs plus accumulated and comoounded carrvina charces go into the rate base upon ccmpletion of a project.
Perhaps most importantly, i f, because of a decline in grcwth or customer usage, or beccuse of a lack of Nuclear Regu-latory Ccamission approval, or because of many other unforeseen dif ficulties; the plant is no longer needed or capable of operating, this prcposal would detect such an eventuality sooner in order to stop, postpone, or end the project before any more money is poured into it.
6 Thoughtful consideration to the details of this proposal is required, and legislative hearings before drafting legislation is essential.
This would provide an opportunity for comments and suggestions from interested parties.
Unless this kind of legislation is forthecming, I cannot support CWIP for major project construction, even though I firmly believe that CWIP can be very beneficial to ratepayers and utilities alike.
As was said in a utility regulation treatise in 1941:
"It should be borne in mind, by those in charge of the adminis-tration of the laws;. that the course which may be popular at the
=cment may be neither just nor for the best interest of the public in the l<.,1g run."
For these rea d,
my position is this:
1.
Whenever their financial position permits, we shculd require utilities to finance construction programs without the inclusion of CWIP in rate base.
y 2.
However, when the use of these traditional financing methods creates severe financial problems for a utility, proposals to include come CWIP in the rate base--without corresponding o f fsets for AFUDC--chould not be rejected out of hand.
- However, certificate of need/CWIP legislation must exist be fore major project CWIP can be utili::ed in order to mitigate or prevent financial calamity.
3.
In instances where a utility cannot meet financial tests without including a portion of CWIP or being allowed an t
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inordinately high rate of return, it is preferable to include some CWIP in the rate base without AFUDC offsets.
4.
CWIP should not be used as a technique-to cure al'1 utility ills, but rather should be applied judiciously in concert with a determination of a realistic rate of return on equity.
Rates should be designed and perform so that a utility can maintain its bond rating and be able to sell common stock without dilution of the ownership of present stockholders (meaning the market / book ratio of the company's shares must equal at least 1; if the shares are selling for less than the book value of a share, the ratio will be less than 1).
5.
Utility ratemaking practices should not be adopted that would tend to absolve utility management from pursuing improvements in performance.
It is the responsibility of utility management to pursue construction project completion and general operations in an effective, efficient manner.
6.
Statues should not be enacted that prescribe the x
ratemaking treatment of CWIP for utilities.
CWIP treatment should remain a matter of regulatory discretion, which should not be foreclosed by legislation.
May 7, 1982
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Release Date:
May 7, 1982 Public Meeting Date:
May 7, 1982
? e OPINION OF COMMISSIONERLINDA C. TALIAFERRO
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I-80100341 - LIMERICK NUCLEAR GENERATING STATION INVESTIGATION When I began my term as a Commissioner, I was given some ad -
vice, nasely, to never compromise principles but where and if neces-sary, to compromise only on questions of tactics.
One of the principles in which I strongly believe is main-taining the integrity of the administrative process and procedural safeguards followed by thi's Commission for our investigations, and rate cases, and rulemaking procedures, and informal investigations.
All of these proceedings are done in accordance with publicly avail-able, published rules and regulations which are largely modeled upon the practices of the Judiciary.
The controversy presently surrounding this investigation into Linerick is, in my view, largely still a reflection of strong feel-ings existing in this State as in other parts of this Nation about using nuclear power to generate electricity.
As I see it, this is primarily because of most people's safety-related questions or concerns.
The feelings run strong for both the Pro as well as the Anti-nuclear positions.
However, the sa fety question or questions are not before this Commission -- can not legally be reviewed and ruletl upon by this Commission and, properly, were not addressed by the Administrative Law Judge.
Nor shall I address such issues.
The "juiy" for these pressing question (s) concerning nuclear safety and reliability, namely -- the NRC'and the U.S. Congress, are still
- Limerick-Investigation Page Two cf Fiva
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out debating.
I ' j oin many of you in wishing that this Country-could get on with the business of doing something about these. questions, rather than debating.
However, be that as it may, I set aside the safety-related questions to only focus on the issue-before this Commission as a result of our initiated investigation into Limerick.
The questions this Commission asked are spelled out on pages one through~three of the Initial Decision.
As usual, all interested groups were free to participate in this investig.cion, to have their say regardless of age,. race, creed, financial status.
Several thousand pages of 8
transcript and documents exchanged hands among parties, were reviewed by them and our Administrative Law Judge, Joseph Klovekorn.
The hearings for this investigation-into Limerick Station-were conducted by on'e of the best Administrative Law Judges at the PUC.
Hi; opinion has been written and the record he compiled I have l
reviewed.
Ecginning at page 30 of that Decision and continuing as on page 54, and at page 70 and-at page 147 and again at page 153, 154, 155, this Administrative Law Judge answers each question care--
fully, thoughtfully, reasonably.
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I have reviewed his answers and I hope both he and I are proven wrong -- I really do.
But I can' find no legal reason to arbitrarily set aside his decision, developed carefully and in ac-cordance with the existing regulatory law, rules and procedures.
Therefore, while I can support wholeheartedly paragraph six of the j
motion and do vote "yes" as to that part, I cannot support paragraphs 1-4, and I cannot do so for the following reasons:
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Limerick Investigation Page Three of Five AS TO NOTION PARAGRAPH 1
~ The United States St$preme Court has long established the legal guidelines, which are consisten with relevant, applicable economic principles.
cases-1/ ~
I am referring to the Hope and Bluefield which spelled out that the criteria of reasonableness to be followed and applied by State Public Utility Commissions requires.
that the returns allowed to utility equity owners be sufficient:
-- to maintain the credit of the enterprise and confidence in^its financial integrity;
-- to permit the enterprise to attract the required capital on reasonable terms; and
-- to provide the enterprise and its investors an opportunity to earn a return on the value of the property used and useful in providing the utility service commensurate with the returns ai ailable on~ 'invas tments in other enterprises having corresponding risks.
The three tests telling independent utility regulatory bodies what we must do are all interrelated and stand in direct contradiction to line one, paragraph one of the Motion which says
. particularly the Commission's inability and unwillingness to provide necessary revenues to complete both units In my opinion this could c1carly be viewed as to constitute a basis for reversibic error by the Courts; let alone.to be against our oath of office.
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FYC v. Hone Natural Gas Co~., 320 US 591, 88 L.Ed 333; 51 PUC TNS)'IT2, 2 00,7T1 (19'aT).
~ B1'ue fi el d Wa t e r h'o rks 6 Inurovement Co.
v.
West Virginia Public Service Conmission, 262 US 679, oY2T3, 67 Ct D T76, PITC 19 2~3CTF 71.
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' Limerick Investigation Page Four of Five AS TO MOTION PARAGRAPH 2 In my view, there is little dispute as to the proper treat-ment to be accorded by this Commission fcr all sunk costs associated therewith.
I refer particularly to the Initial Decision of the Ad-ministrative Law Judge at pages 202-209, wherein the strong posi-tion of the Consumer Advocate's Of fice' on these points is closely scrutinized.
The ALJ says:
The carrying costs associated with sunk invest-ment are not avoided or made to disappear simply because (this) Commission non-recognition upon Limerick termination.
As the OCA witness, Mr. Czahar stated these costs are very substantial and very real. (TR 3495).
If not recognized in the revenue requirement analysis, these costs are simply as borne by the investors.
However, the Commission is obligated,
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'both under PA statute law and the Federal Consti-tution, to consider the interests of investors as'well as those of rate payers.
Commission action (see Motion Paragraph 1) which would threaten a utility 's financial integrity as would, disa1]owance of carrying costs on sunk investment would not be in the public interest.
As to the sunk costs themselves, at p. 208 the ALJ shows how the Consumer Advocate's own position is piers.ed by the Consumer Advocate's own expert witness' words taken from the transcript at (TR 2111-2313).
Finally, there is the additional comparison developed by OCA's Expert Witness which established that when one compared the revenue requirements necessary for completing both Units I and II
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Limerick Investigation Page Five of Five and even OCA assumed the inclusion of an allowance of 605 CWIP for the 1982-86 period, with the 1979 present revenue requirements for only completing Unit I.
(Schedule E, OCA Statement 2-B).
The results were $22,340 and $22,341, respectively.
Translated into plain English, the total revenue requirements are approximately equal.
So, in my view, anyone who has the mistaken impression that cancellation saves ratepayers or investors money, or is in any way an economic advantage to someone is, in my view, mistaken.
- However, I can hope that I am proven wrong.
For all Pennsylvania ratepayers of any PA utility, I hope that I am wrong.
AS TO MOTION PARAGRAPH 3 As for this paragraph, in my view, it is redundant, merely restating the obvious fact that if Unit II is suspended, no new securities for it will be needed.
However, the AFUDC -
so-called
" funny money" to investors continues to accrue.
For the above reasons, I dissent from Paragraphs 1-3 but I support paragraph 6 of the Motion.
h dl-_ s DAM (17 1
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