ML20003B550

Transcript of PA Public Util Commission 801208 Restart Hearing in Harrisburg,Pa.Pp 358-521

ML20003B550
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Site:	Crane
Issue date:	12/08/1980
From:	PENNSYLVANIA, COMMONWEALTH OF
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{

1 r4 L' 358 7_(_/

1 COMMONWEALTH OF PESUSYLVANIA

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PUBLIC UTILITY COMMISSION 3

---

x 4

Pennsylvania Public Utility Commission Docket Nos.

I versuc Metropolitan Edison Company and I-79080320 5

Pennsylvania Electric Company, Respondents.

6 x

7 Operating agreement among Jersey Central G-80060098 Power and Light Company, Metropolitan Edison 8

Company, Pennsylvania Electric Company and GPU Nuclear Corporation.

l 9

i x

to Affiliated interest agreement between G-80070101 11 Metropolitan Edison Company and Pennsylvania Electric Company, relating to the proposed

(^'i 12 combined management of' the two companies.

V I

~

13 x

14 Petition of JARI, Incorporated, et al.,for P-80100242 an injunction to enjoin Pennsylvania Electric 15 Company and. Metropolitan Edison Company, and for hearings.

16

____________________x 17 i

i Pages 358 through 521 Hearing Room Number 1 j

18 l

North Office Building i

Harrisburg, Pe6nsylvania t

19

~

i Monday, December 8, 1980 i

20

'l Met, pursuant to adjournment, at 10':15 a.m.

21 1

I BEFORE:

22 7s EDWARD CASEY, Administrative Law Judge

(

23

+-

24 25 8102120 34(6)

I CCMMO7%^WL9ec rYrJ.YXnraR CoTMW '999 T0 91N

w l

1r42 358-A l'

t i

1 APPEARANCES:

2l SAMUEL B.

RUSSELL, Esquire l

l ALAN MICHAEL SELTZER, Esquire 3

Ryan, Russell and McConaghy P.O. Box 699 4

Reading, Pennsylvania 19603 (For Met-Ed and Penelec) 5 DENNIS S. SHILOBOD, Esquire 6

HOWARD F. MESSER, Esquire Strassburger, McKenna, Messer, 7

Shilobod and Gutnick 3101 Grant Building 8

Pittsburgh, Pennsylvania 15219 (For JARI, Incorporated) 9 IRA H. JOLLES, Esquire 1

10 Berlack, Israels and Liberman l

l 26 Broadway i

11 !

New York, New York 10004 l

(For General Public Utilities Corporation) ll[

12 l I

STEVEN A. MC CLAREN, Esquire j

13 j Deputy Chief Counsel l

l P.O. Box 3265 l

14 l Harrisburg, Pennsylvania 17120 i

(For PUC Trial Staff) 15 i

1 j

16 l

17 18 19 l

1 20 21 22 23 l 5

24 i

l 25 i 1

i i

359 jl2

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q g g T_ E E T g I

2 WITNESSES DIRECT CROSS REDIRECT RECROSS 3

William A. Verrochi 4

By Mr. Russell 365 512 5

By Mr. Messer 367 433 6

506 By Mr. McClaren 479 7

8 9

10

_E _X _H _I _B. _I _T. _S.

33 NUMBER FOR IDENTIFICATION IN EVIDENCE em

'\\

In Penelec/ Met-Ed 13 Statement C 362 14 Penelec/ Met-Ed Exhibit No. 7 363 15 Penelec/ Met-Ed 16 Exhibit No. 8 363 I

Penelec/ Met-Ed Exhibit No. 9 363 18 JARI Exhibit No. 2 493 512 19 20 21 22 7

4

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23 24 25 m....m....,-.,

.., m m.m.m.,, - -...,.. ~,.,,..,..,

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1rl 360 l

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- - - - - - - _I _N _G _S PROCEED JUDGE CASEY:

I will call the hearing to order 2

at this ti,me.

j 3

I.

This is a further hearing or the second day l

4 of evidentiary hearings in the consolidated cases of which 5

there are four in number.

I won' t read the captions this 6

l morning since we are all familiar with the affiliated interest 7

g agreements, the Commi'ssion's management audit investigation 9

and the JARI petition for an injunction.

I will simply direct the court reporter to make 10 sure that the four docketed cases appear in the caption of it 12 the transcript of this hearing.

13 I had the opportunity to peruse or review the i4 transcript from the first day of hearing that was held on I

15 Wednesday, December 3, 1980, and with the exception of j

is some minor errors, I think the record pretty clearly states I

i l

17 the testimony and the answers to cross-examination.

l t

18 However, I notice that the term "Cona:aaugh,"

I i

19 which refers to one of the Penelec generation statements, i

l 20 was routinely spelled in phonetic fashion throughout the l

21 transcript.

I think it was spelled C-o-n-o-m-a.

That should l

22 be corrected.

It is C-o-n-e-m-a-u-g-h.

So we will note lll l

23 that correction.

24 In attempting to demonstrate my reading and 25 literary ability, I think on page 290 I made a statement and t

COMMON WEALTH REPO RTIN G. C O M PAN Y

. t7 t 7 L Z61 -71 S O

1 1r2 361 r~

1

said, "I think the news media characterized New York Central 2

as the ' Green Team' that stayed in New York and the ' Red Team' 3

stayed in Philadelphia, and never the twain did meet."

4 The reporter construed that as, "and never between did meet."

5 So we will make that minor correction.

G MR. RUSSELL:

I thought you were going to say, 7

"and never the trains did meet."

8 JUDGE CASEY:

"Never the trains did meet;" that 9

would be even better.

10 On Wednesday, December 3, we heard from GPU's 11 President, Mr. Herman Dieckamp, who submitted prepared

(~',

12 testimony into the record an'd then was cross-examined by LJ 13 all parties who were interested in questioning him.

He 14 was excused at the end of the day, and we were informed 15 by Mr. Russell that Mr. Verrochi, who is the current President 16 with the Pennsylvania Electric Company, would be the 17 lead witness today, and I believe that Mr. Verrochi's 16 prepared testimony was distributed on Wednesday; is that l

19 correct, Mr. Russell?

20 MR. RUSSELL:

Yes.

21 JUDGE CASEY:

Does everyone have a copy of the l

1 22 prepared testimony?

(,!

23 MR. MESSER:

Yes.

24 JUDGE CASEY:

I also have the prepared testimony 25 of Mr. Donofrio, which has a cover letter dated December 5, COVVCNW!"ALTH REPORTING COMP ANY

'7 f 76 761 7110

v

(

Ir3 362 1

1980 from Mr. Russell.

That was on my desk.

Apparently it O 2

is dated stamped on December 5.

3 So is that prepared testimony available to all the 4

interested parties?

5 MR. RUSSELL:

It has been distributed.

6 You have gotten it, have you not, Mr. Schannauer?

7 MR. SCHANNAUER:

Yes.

8 MR. RUSSELL:

Yes, it has been.

9 JUDGE CASEY:

Now., the prepared testimony of Mr.

10 W. A.

Verrochi has been premarked for identification, and 11 we will adhere to that.

It is PN/ME,-meaning Penelec/ Met-Ed 12 Statement B; is that correct?

g 13 MR. RUSSELL:

Yes.

14 JUDGE CASEY:

Mr. Donofrio's prepared 15 testimony has been premarked for identification as PN/ME 16 Statement C.

We will preserve that identification throughout 17 the record.

18 (Whereupon, the document was marked Penelec/ Met-Ed Statement 19 C for identification.)

20 JUDGE.CASEY:

One more thing.

Mr. Russell 21 handed me a prospective exhibit or a potential exhibit which 22 will probably come into the case at a later point -- it is 23 actually a response to the TB and A report-- when that repojll 24 is presented or excerpts thereof are presented by the PUC 25 Administrative Staff.

This is the GPU response to the TB and i

NTPDG CXIPF)C]TINB G8MPANY.17171 761-7150

i Ir4 363 A report and the tindings of that report, and that exhibit

()

has been premarked as PN/ME Exhibit Number 9.

2 (Whereupon, the document was 3

marked Penelec/ Met-Ed Exhibit No. 9 for identification.)

4 MR. RUSSELL:

I might mention, if I may, in 5

connection with that that this exhibit which has just 6

been marked for identification as PN/ME Exhibit 9 is not 7

the full response by the GPU companies to the TB and A 8

9 report, but it does represent the portions of that report that apply to the GPU Nuclear and the combined management 10 I

and divisional reorganization sdctions.

l 11 If anybody wants to see the full report, we have j

12 a copy here that is available for inspection.

33 JUDGE CASEY:

Thank you for that clarification.

14 15 MR. RUSSELL:

One further matter, if I may.

16 Attached to PN/ME Statement C, Mr. Donofrio's testimony, 17 were two exhibits, PN/ME Exhibits 7 and 8.

We would also f

18 ask that they be marked for identification as such; 19 JUDGE CASEY:

Very good.

We will direct the I

i 20 reporter to mark and include those exhibits with Mr. Donofrio's b

I l

1 21 prepared statement.

l l

22 (Whereupon, the documents were marked as Penelec/ Met-Ed Exhibits

()

and 8 for identification.h 23 Nos. 7 24 MR. RUSSELL:

May we proceed?

l I

25 JUDGE CASEY:

Yes, t

g*nuunkwr Al TW BESOBTIMG f"QMDAh f 17171 7.81

4 Ir5 364 1

MR. RUSSELL:

Your Honor has indicated some desireO 2

I believe, earlier in this proceeding to see the Board action 3

by the two companies with respect to the GPU Nuclear and 4

the combined management agreement.

5 I think the Met-Ed Board is meeting this morning, 6

so we wouId propose to present the respective Board action 7

of both companies.

8 Is it the desire of the parties that they want a secretary or assistant secretary from each company here 9

10 to identify them, or would you be prepared to accept them 11 upon our representation that these are, in fact, the action 12 that the respective Boards have taken?

ggg 13 MR. MESSER:

I think that if we have a certified 14 copy attested to by the secretary or the assistant secretary, 15 that that would be sufficient.

I personally don't see any 16 reason to require the attendance of the secretary or the 17 assistant secretary to note the verification.

18 JUDGE CASEY:

Is that agreeable, Mr. McClaren?

l l

19 MR. MC CLAREN:

I would join with Mr. Messer.

I 20 JUDGE CASEY:

That is satisfactory.

This may 21 illustrate some gap in my knowledge.

I am a little rusty 22 in corporation law, especially with reference to the Public 4h 23 Utilities Holding Company Act; but would it also be necessary for the parent, the holding company, to have a 24 25 resolution of their Board of Directors authorizing the two t.

Ir6 365 I

subsidiaries to proceed and enter into such agreements?

/

s V

2 Is there a legal requirement along those lines?

3 MR. JOLLES:

The only action that the parent has 4

taken is to authorize the application of the entire system 5

to the SEC asking for approval for the formation of the 6

nuclear company, and that application describes both 7

transactions and operating approval.

8 JUDGE CASEY:

So as long as they have complied 9

with the SEC filing requirement, it is all right.

10 MR. JOLLES:

And the SEC has issued an order.

11 JUDGE CASEY:

Mr. Russell, you may proceed.

l

,7~'y 12 Whereupon, V

13 WILLIAM A. VERROCHI 14 having been duly sworn, testified as follows:

15 DIRECT EXAMINATION 16 BY MR. RUSSELL:

17 Q

Would you state your name and address, please, 18 Mr. Verrochi?

i 19 A

My name is William A. Verrochi, and my business 20 address is 1001 Broad Street, Johnstown, Pennsylvania 15907.

21 Q

Do you have before you a document which has been 22, marked for identification as PN/ME Statement B?

i

(,,)

23 A

Yes, I do.

v 24 Q

Does that represent your prepared testimony in this i

25 proceeding?

l COMMENWEAATH REPoRTINA CRRMPANY #717: 701 71 ETO

1r7 366 1

A It does.

g 2

0 If I were today, while you are on the stand, to ask 3

you the same questions that appear in that statement, would 4

your answers be the same as those therein contained?

5 A

yes, l

8 Q

Do you also have before you a document which has 7

been marked for identification as ME/PN Exhibit 2?

8 A

yes, I do.

Q Was that prepared'by you or under your supervision?

9 10 A

It was prepared under my supervision.

l 11 Q

And could you identify briefly what is represented h!

12 on that exhibit?

13 A

It shows the planned organization chart for the 14 combination of the Met-Ed and Penelec managements.

15 Q

I-will preliminarily ask you some quest:ons with 16 res'pect to PN/ME Exhibit 9.

Can you identify what is 17 represented on that exhibit?

l I8 A

Yes.

These are several pages out of a document 19 called the

" Implementation Plan, Management and operations 20 Study," prepared by General Public Utilities Corporation for

'l its Pennsylvania operations.

~

22 This is a document that ns submitted to the

'3 Pennsylvania Public Utility Commission in November of 1980,

~

24 and the specific pages that are included in this exhibit deal

'S with the proposed plan, timetable plan of action in connection

~

l CO MMONW EA LT H R EPQ RTI N G CO M P A N Y

'717) 761 7150

lh8 367 with the formation of the GPU Nuclear Corporation and for the 1

'~'

2 combined 1..anagement of Penelec and Met-Ed.

3 0

Would you be sponsoring that exhibit as part of the rebuttal in this proceeding?

4 A

Yes.

5 MR. RUSSELL:

Mr. Verrochi is available for cross-6 examination.

7 8

JUDGE CASEY:

Mr. Messer, can you proceed, or do 9

you.need a few moments?

i MR. MESSER:

We are ready to proceed, Your Honor.

10 11 JUDGE CASEY:

Very good.

CROSS-EXAMINATION

'^

s, 12 C/

13 BY MR. MESSER:

14 Q

Mr. Verrochi, by whom are you employed?

15 A

Pennsylvania Electric Company.

16 Q

Do you devote any of your time currently to the l

17 management or operation of any other entity of GPU other 18 than Penelec?

}

I 19 A

Penelec has a few subsidiary companies, and I do l

I 20 spend some time on them, a very modest amount of time; i

21 Nineveh Water Company and -- I guess Waverly is not a 22 subsidiary, but we do get involved in that.

l /~l 23 0

Other than those subsidiary companies of Penelec,

, xy 24 do you devote any time to any other entities owned and l

25 operated by GPU?

COMMONWEALTH REPORTING COMPANY (717) 761-7150

Ir9 368 A

Yes, I do.

3 O

2 Q

Would you indicate which ones those are, please?

A I am a member of the Board of Directors of the 3

GPU Service Corporation, and in that capacity we meet 4

periodically, certainly in the order of once a month, at 5

which time we review the operations of the other subsidiary s

7 companies, Jersey Central Power and Light, Metropolitan g

Edison, and th,e GPU Nuclear group that has been recently 9

formed.

10 Q

Any other activities, sir?

11 A

No, sir.

That is all I can think of.

12 Q

What is the. purpose of the GPU Service Corporatic 13 A

The purpose of the GPU Service Corporation 'is to pr>-

14 vide specified services to each of the operating companies of 15 the GPU system, Penelec, Met-Ed and Jersey Central.

I 16 think it also provides services to the parent corporation, 17 General Public Utilities Corporation.

18 Q

Do you recall when GPU Service Corporation was 19 established?

20 A

Yes, I do.

21 Q

When was that?

22 A

It was incorporated in May of 1971, I believe.

23 Q

How long has it been fully operational?

lll 24 A

It has been fully operational since at least that 25 time.

As a matter of fact, it started functioning -- or the L

s7 6 n53 w

ir10 369 1

concept started fuller development in late 1969.

In fact,

,s

!\\s; 2

I went east in late 1969 to help form the GPU Service 3

Corporation.

4 Q

And it has continued to function in the same 5

manner since 1969 to 1971 until today, as far as you are 6

aware?

7 A

Generally, yes, but as with any organization, the a

breadth and depth of the scope of operations and responsi-9 bilities does get modified from time to time.

There have 10 been modest reorganizations in the GPU Service Corporation.

11 Q

What would you indicate to us would be the

()

12 primary duties of the GPU Se'rvice Corporation today?

^

J 13 A

The primary services have been to -- I think 14 would be in the area of the financing, corporate financing 15 for the parent company as well as the operating company.

Is That is done on a combined basis.

17 The service company provides planning, corporate la planning and capacity planning functions for the three l

19 companies.

20 Up until recently, it was very actively involved 1

21 in licensing, design and construction activities for the 22 major capacity additions, generating capacity additions,

[I 23 for each of the three operating companies.

He have always i

22 done that on a consolidated basis,'and the GPU Service 25 Corporation did that with its staff rather than develop l

(R6MM9NW7AATH REPORTINA COMPANY e 7171 761 7150

j 1r11 370 staffs for each of the three companies.

1 9

2 It does auditing for. each of the three companies, 3

a certain amount of accounting,' interchange planning and 4

accounting, and I am sure there are several others.

I would have to look at some notes.

But I don't think I have left 5

a out anything of major importance.

Those are the kinds of 7

things it does.

a Q

Would it be fair for me to assume then that one l

9 of the functions of the GPU Service Corporation is to 10 coordinate long-term corporate planning and development?

~

i 11 A

That is a fair assumption.

l t

33 Q

You are a member o~f the Board of Directors of gg i

13 that corporation?

t 14 A

Of the GPU Service Corporation, yes.

15 Q

That is what we are speaking about.

i 16 A

Yes.

17 Q

Mr. Verrochi, during your Board meetings at i

18 GPU Service Corporation, when was the idea of a combined I

l l

19 management and reorganization of Penelec and Met-Ed first 20 brought up?

21 A

It is hard to put your finger on exactly when it 22 was brought up, and I am not sure it was ever specifically 23 brought up as an agenda item ac GPU Service Company 30ard h

24 meetings.

25 It was brought up rather by the key people in the 1

f* F V M F N W F A ' *H R F"P e P N ri f' F Y P A N Y

'7 9 7' 791 7 ' Y

Irl2 371 1

GPU Service Corporation, many of whom also serve as O

2 Directors of Penelec, Met-Ed and Jersey Central.

So it 3

was the top management that I think could be characterized 4

as having started and developed the discussion.

5 0

Would you identify then that the concept of the 6

combined management was generated within GPU and not 7

outside?

8 A

Yes, I think that is a fair statement.

9 Q

When?

10 A

We really started doing a lot of work on it, as 11 I remember, in December of 1979, and obviously since that 12 time in January of 1980 and beyond we have done an awful 13 lot of work.

14 It is my memory that almost from the time of the 15 Three Mile' Island accident,' informal discussions and 16 comments were made as how best to structure the organization 17 of GPU and its operating companies in the post-TMI era.

18 0

Uould you consider that this decision or thought 19 process of top management, I believe you indicated, was a 20 result of the TMI accident?

think it was primarily triggered'by the situation i 21 A

I I

22 following the Three Mile Island accident, yes.

I am sure

()

23 that that was one of the major reasons for thinking about it 24 now.

25 Q

Would my recollection be correct that prior to the COMMONWEALTH REPORTING COMPANY 87171 761-7150

j 1r13 372 1

TMI accident that the GPU Service Corporation would have n 2

written records of any recommendation to the Board of 3

Directors or any other body of any type of combined management 4

for Penelec and Met-Ed?

5 A

I am not sure I know the answer to that, but I i

6 suspect --

7 Q

From my knowledge.

8 A

From my knowledge; from my knowledge, I would say 9

the answer is that there were no specific recommendations 10 in such Board meetings.

i 11 Q

Would it be correct' for me to assume, based upon 12 documents that I have' read thus far, that the Booz-Allen ll 13 report of May, 1978 did not recommend combined management i

1 l

l 14 between Met-Ed and Penelec?

i 15 A

I don' t recall that the Booz-Allen-Hamilton report 16 that you mention made that as a specific recommendation.

17 Q

How would you characterize the Booz-Allen investiga-

~

14 tion of the operations of GPU, Penelec, Met-Ed and Jersey 19 Central?

20 A

It was a very thorough, broad investigation into 21 the management of the three companies and the holding 22, company and the service company; the three operating companies,.

23 the service company and the holding company.

24 It looked ir considerable depth into these 25 operations both internally and looked at the interfaces among P 9 h4 Ai^ %f url" 9 f 'W Q F'P^ DTf N f" f* n %A P A N Y

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1 these entities, with the hope of identifying what they

,o 2

call opportunities for improvement.

I think it was a fairly thorough and detailed l

3 investigation, and the report, I think, indicates that.

4 5

It was a study that was initiated by the GPU system.

We thought we would benefit from having su'ch a study.

So the 6

7 scope was fairly broad.

3 0

This was not a study that was requested by the Commission?

g I

A It was not.

We notified the Commission that we 10 i

it were planning to do it, and I think the Commission suggested

,m 12 a few functional areas that we hadn'.t-planned to investigate,

k-]

13 which we did incorporate.

j

\\

14 Q

In your testimony, you have indicated that the I

15 planned management combination is not limited to the matters

{

16 which appear on the face of the combined management agree-l 17 ment, namely the common officerships, directorships of la Penelec and Met-Ed.

l 19 Would you indicate for us, please, what areas l

l 20 were the scope of the areas you were talking about which are 21 not contained in that agreement?

l 22 A

I am not sure --

1 23 MR. RUSSELL:

Could you direct his attention to --

}

21 BY MR. MESSER:

25 Q

On page 2 of your testimony, Mr. Verrochi, it says, l

COMMONWEALTH REPORTING COMPANY (7171 761 7150

e 1r15 374 l

l 1

" Question:

Based upon one of your earlier answers, is it 2

correct that the scope of the planned Penelec/ Met-Ed manage-3 ment reorganization is not limited to the matters which 4

appear on the face of the combined management agreement,"

5 and so on, and then it continues on I believe to the next 6

page, which is page 3.

7 A

Yes.

As I indicate in my direct testimony, as 8

a parallel effort, we are looking into the realignment, 9

reorganization, consolidatibn, whatever you want to call it, i

10 of the operating divisions, certainly of Penelec and 11 probably of Met-Ed.

I lg) '

12 That ef fort' has been underway -- in f act, that 13 effort was started somewhat before the combination was --

14 Q

As far as Penelec is concerned?

15 A

Yes, as far as Penelec is concerned.

i 16 Q

far along had that procedure or investigation I

17 developed pi to the submission of the planned combination 18 agreements?

19 A

Certainly not anywhere near as far as it has been 20 developed now.

My memory is that at the time of the end of 21 last year, in connection with the question we had asked

,ourselves, should we appoint a successor to a retiring 22 23 division manager of, I think, our Oil City division.

Woulc 24 it be wise to consider at that time perhaps realigning or 25 consolidating some of our division activities?

In a n ad1 A Aktia/ c. f

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1r16 375 I

t connection with that, we had a study made, an internal I

l 2

study, to try to identify what criteria one would use in j

i 3

determining how big or small a division should be and what I

(

4 the lines of authority and responsibility should be from 5

corporate headquarters to a division and, in turn, through 6

the districts, and our thinking was moving in the direction 7

of coming to a larger number of divisions and eliminating l

I 8

districts per se to eliminate a layer of management.

9 One other thing worthy of note:

there was a 4

to parallel study going on at about that time -- I think it 11 was about that time -- which I think was precipitated by em 12 one of the findings in the Booz-Allen-Hamilton study, in (v) 13 which they commented that each of the three operating 14 companies had a somewhat different organizational structure is and lines of responsibility in its division operations.

16 That GPU Service Company study pointed these 17 differences out and came up with some suggestions as to 18 how to make each of the three companies a little cioser 19 together in terms of how they organized their divisicas, 20 both the functional and the technical end as well as the 21 customer service end.

1 22 So all of these things preceded December of last

(~}

23 year, I think.

24 Q

Would I be correct in assuming then that the 25 differences among the three operating companies were COMMONWEALTH REPORTING COMPANY 4717' 761 7150

376 Irl7 functional in nature as far as the organization goes?

I 2

A We are talking specifically about the operating divisions?

3 4

Q Yes.

A The divisions that serve customers and read meters 5

and handle customer inquiries and so forth?

6 7

Q Yes.

3 A

Yes, each of the three companies is organized 9

somewhat differently in terms of how they handle their 10 cur come rs.

11 Q

And each of them could be organized similarly 12 without a combined management, couldn't they?

13 A

Yes, that is an alternative you could investigate.

14 0

And each of those three different functioning 15 utilities could report directly to GPU Service Corporation 16 the same as they currently do; isn't that right, sir?

l 17 A

I don't think that they report now to the service l

18 company.

The service company performs the service-to the 19 operating companies.

The operating companies have the 20 responsibility for customer --

21 Q

Who do you report to currently in the system?

What 22 is the chain up frcm you?

23 A

I report to the Chairman of the Board of the (gg 24 Pennsylvania Electric Company; William Kuhns, Bill Kuhns.

He 25 is the Chairman and Chief Executive Of ficer of Penelec.

He is COMMONWEALTH REPORTING COMPANY (717' 761 7150

Ir18 377 1

my boss.

O 2

Q And the same is true for Jersey Central and Met-Ed; 3

is that correct?

4 A

Yes.

Mr. Kuhns is the Chairman and Chief Executive 5

of all three of the operating companies.

6 Q

So that basically if I were to submit to you the 7

hypothetical that if all of the operating companies were 8

organized in a similar manner.and in a consistent similar 9

manner, the method or manner of organization is not to dependent upon the, combination of management, is it?

11 A

No, it is not exclusively dependent upon that, no.

12 Q

Now in the answer 'to.this question that you were 13 asked on page 2, you have indicated that one of the areas 14 of attention is to review the operating division alignments, 15 in the case of Penelec, to reduce the size of certain large 16 divisions to provide for a closer relationship, which you 17 have already identified for us.

~

18 A

Yes.

19 Q

In regard to that planned reduction of the divisionsq 20 is there any negative impact on Penelec costwise, if you know?

i 21 A

There would be, yes.

22 Q

In regard to the review as to Metropolitan Edison 1

(}

Company, you indicate that you would consider a consolidation 23 24 of two divisions and to close smaller, less efficient l

25 business operations, and to centralize various function and.

9

< COMMONWEALTH REPORTING COMPANY (7171 761 7150

1r19 378 l

division headquarters, and to institute additional standardi 1

2 tion of policies and procedures throughout the two companies.

It seems to me that in a review of this answer 3

that the flow or the development of standardization procedures 4

is more applicable to Met-Ed than it is to Penelec; is that 5

correct?

6 A

No, I don't think that is true.

7 8

Q Aren't there certain standardization procedures l

9 currently in effect in the GPU system?

l There are a whole very wide assortment of standardizal-A in tion and procedures among each of the. operating companies ti 12 and in GPU, more as a function of the. functional area gg 13 ! you are talking about than anything else.

14 For example, there are standard procedures that 15 Penelec might have in accounting that Met-Ed might not have f

16 exactly the same.

The procedures may not be similar.

l l

17 There are an awful lot of procedures covering 18 functional activities, and you have got the whole spectrum j

i 19 as to how close some of Penelec's operating procedures are 20 in each of their functions as compared to the other two 21 companies; so it is hard for me to give you an answer other i

22 than that.

There is a whole spectrum.

23 The attempt, of course, has been to standardize llll 24 where we can, and we have got a number of committees and 25 subcommittees in the functioning groups who have been doing e m a.m aa n kr u; c s t T h.J c r Dt3D?! M M /*t3&J D A A Y

?f7 7A 1.71 em

1r20 379 1

that, trying to do it for years.

They continue to try to O

2 do it.

It is a long, slow process.

3 Q

And it is a complicated process?

4 A

Yes, sir, it is.

5 Q

And, in fact, one of the recommendations of the 6

Booz-Allen report was to attempt to develop standardized 7

procedures throughout the systemt isn't that right?

a A

Yes.

9 Q

Including New Jersey?

t 10 A

Yes.

j 11 Q

Do you k.ori whether that has been fully implemented j 12 or not?

13 A

Well, the word " fully, of course, bothers me.

i l

14 I know that we are working quite diligently in the system 15 on the implementation of the opportunities for improvement 16 identified by Booz-Allen-Hamilton and which we accepted l

17 and we report quarterly, I think, as to what our progress is.

i 18 I think the last time I looked in Penelec's 19 case, we were probably 75 or 80 percent implemented.

This is 20 across the board.

I don't know to answer your specific 21 question, however.

22 Q

In regard to Met-Ed, what percentage of implementa-

{}

23 tion has been achieved there?

24 A

I don't know.

I imagineLit is similar to what I 25 reported for Penelec, but I don't know.

COMMONWEALTH REPORTING COMPANY (7171 761-7150

Ir21 380 1

JUDGE CASEY:

Mr. Messer, for the benefit of the O

2 record, can we establish when the Booz-Hamilton audit 3

report became available to the GPU companies; how long ago?

4 MR. MESSER:

I do not want to undertake to 5

represent that, Your Honor, but it is indicated on the 6

cover sheet of the report that I have that the date of the 7

report is May, 1978.

I have no knowledge as to when any 8

preliminary report or any other information was available i

9 to GPU.

+

i 10 JUDGE CASEY:

Was it in several parts and then

{

i 11 broken down and distributed among --

12 MR. RUSSELL:

There were parts with respect to g,

13 each company and with respect to GPU.

I 14 THE WITNESS:

Each company had an executive 15 summary that was specific to it, and then there was an 16 executive summary for the GPU system as a whole, and then 17 there was an executive summary in detail for each of the i

,t j

three operating companies and the service company." So there 18 19 were quite a number of reports.

20 JUDGE CASEY:

My point in asking is to determine 1

21 whether there were parts that were submitted by the consultant 1

1 22 on dates other than the May, 1978 date.

23 THE WITNESS:

I think the final reports -- and lh 24 there are a whole flock of them -- came out at just about the 25 same time.

I would suspect they all have the same date.

Mere COMMONWEALTH REPORTING COMPANY 47171 761-7150 at

1r22 381 I

were a lot of preliminary reports and review and discussion.

2 JUDGE CASEY:

If you know, Mr. Verrochi, what i

3 was the duration of the audit?

When did it commence, and l

when did it end?

4 5

THE WITNESS:

The audit ran for about a year, I i

6 believe, Your Honor.

7 JUDGE CASEY:

Thank you.

8 Go ahead, Mr. Messer.

,9 BY MR. MESSER:

1 10 Q

During the year that it ran, were you the President i i

11 of Penelec?

I b' came President of Penelec in 12 A

No, I wasn't.

}

e 13 September of 1977.

When the audit first started, I was 14 Vice-President of Generation for the GPU Service Corporation.

i i

15 0

S.o that sometime after it began, that is when 16 you became President of Fenelec?

{

i l

17 A

Yes, sir.

la Q

Mr. Verrochi, how familiar are you with Ehe 19 Metropolitan Edison system?

20 A

I am not as familiar with it as I am with Penelec.

21 Q

How would you characterize your familiarity with 22 the system?

( ))

23 A

I am reasonably familiar with many of the aspects 24 of Met-Ed's operation -because of my involvement in the 25 service corporation, my prior involvement, and because of COMMQNWEALTH RE80RTING QQMTAN (799 760 705%

'382 Ir23 the present work we have been doing here on this proposed 3

combination of the two managements.

I have some familiarity 2

I guess it would depend in what area you are concerned with.

3 Q

What I am concerned with is that the allegation or 4

the assumption is being made that the combination of the 5

management of the two companies would be strengthened by 6

the jointure, and your testimony indicates that you also 7

believe that to be true.

8 I am wondering if, you can enumerate in detail 9

f r us how you feel the management will be strengthened 10 by the combination rather than by serving separate interests 11 of two different certificated utilities.

12 13 i A

There are a nunber of factors which lead me to conclude that both Met-Ed and Penelec would be strengthened 14 15 by the proposta combination.

Penelec has certain organizational strengths.

16 1;

I think Mr. Dieckamp identified one of them just by virtue 18 of the fact that Penelec has been asked to operate,a large number of coal-fired power plants and has been doing so for 19 20 many years.

I think it is fair to say that Penelec is 21 a fairly competent operator of coal-fired plants.

22 Met-Ed, on the other hand, in my judgment, has 23 a much better developed corporate staff in the operating 24 division, customer service area than Penelec does, just the 25 way they grew and the way we grew.

COMMONWEALTH REPORTING COMPANY (717i 761 7150 jj

I 1r24 383 I

I coI think that Penelec would benefit from the I

combination by bringing into the combined operation some i

2 of the strengths, the depth of organization and background that Met-Ed has in this particular area.

4 Penelec is better organized, if you will, at i

corporate for the generation divisions, and I think Met-Ed is better organized and has more competent people and experience in division operations.

These are two of the g

areas.

g I pointed out a while ago that in.any of these combinations, you are going to -- we have analyzed what g

the impact would be on cost, and, as with any activity, 73 g

V there are negatives and there are positives.

Some of the negatives are you have to relocate 14 people, and that costs money; but some of the positives are 13 n

y o

p o

o e you could do with 16 l

l fewer people in a combined basis.

17 The net effect, we are convinced, would be from 33 I

the dollar point of view; that the operating costs would gg I

be reduced for both companies if we combined the managements 20 and the officers and the managers.

i 21 1

Q That is a forecast, isn't it?

22

(~

A Yes, it is.

It is an analysis that we have made.

\\_-)

23 24 It is an estimate.

l 25 0

And there is no guarantee that, in fact, any cost CoMMoNWEAt.TH REPORTING COMPANY 17176 761 7150

1r25 384 j

avoidance will result, is there?

O, j

2 A

I think there is a guarantee just based on the 3

present situation and what we propose the combined operations 4

to look like.

5 Q

Are you indicating to us at this point in time in December of 1980 that you can guarantee that the long-term 6

effect of this combined management reorganization will result 7

8 in certain dollar cost avoidance, sir?

9 A

I guess I wouldn't be able to guarantee specific

.i 10 numbers, but I do think that a careful analysis of what 11 we have in place now versus what we propose to have in place 12 would indicate quite strongly that the question of co ts ggg 13 would be answered by the fact that the costs would be 14 less with the combination than they are now.

We have 15 estimated what they are, and we have reported that.

16 Q

I believe you used a figure -- or somebody has I

17 indicated a figure of approximately $18 million.

i 16 A

Yes, that is the number we have develope'd.

19 Q

That is Mr. Donofrio's territory; is that right?

f l

20 A

Yes.

He can answer the details certainly better 21 than I, Mr. Messer.

22 Q

Now on page 4 of your testimony you have indicated llh 23 certain objectives of the two proposals, and I suppose you 24 are referring there to the combined management agreements i

i 25 that we had previously stated to the Commission at the

.a.m a a n a n a r t a e r A I T LJ C E D A D T P A t f*

F O LJ D $ fd V i T 17 9 TNT 7TMO

1r26 385 Penelec/ Met-Ed annual revieu on June 26, 1980.

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)

Number 1 is to continue to provide ratepayers 2

with reliable electric service at the lowest possible cost.

3 That is an objective of the utility regardless of this 4

combined management service, isn't it?

5 A

It is; that is true.

6 7

Q Number 2, to increase the degree of dedication to customer service and a commitment to conservation at the 8

9 people to people level.

That is also a commitment of the utility regardless of the combined management survey, 10 isn't it, sir?

it A

Yes, it is..

/^;

12

\\.

i 13 Q

Number 3, to enhance the center of excellence in Johnstown for GPU owned and operated coal-fired generation.

a 15 Now, am I to understand that because Met-Ed has a less te efficient management team in regard to coal-fired generation 17 Lhat the Johnstown system will be used to support that team?

18 Is that what I understand?

19 A

I don't know if I would say that Met-Ed was less 20 e f ficien t.

I think the fact is that Met-Ed, when you strip 21 it of the responsibility for operating and maintaining the 22 nuclear units at Three Mile Island, when that organizational fi 23 responsibility becomes turned over to the GPU N:lclear v

24 Corporation, then the remaining power plants that come under i

25 the responsibility of Met-Ed are primarily fossil plants; in 8

COMMONWEALTH REPORTING COMPANY (7171 761 7150

Ir27 386 I

f act, a f ew hydro, but mostly fossil, and just by virtue 9

2 of their size, the number and size of these stations, Met-Ed 3

is a smaller operation than Penelec.

It is probably on 4

the order of 15 percent the size of Penelec.

5 Q

As far as coal-fired generation?

6 A

Coal-fired; and it is for that reason that we 7

felt that the Penelec organization which is already in 8

place would be able to pick up the additional responsibility 9

and some of the Met-Ed people for operating the Met-Ed 10 units too.

11 Q

What I am wondering about is that I thought this

[

12 was a combined management study where the top management (g[

t 13 of both Met-Ed and Penelec was to be reorganized and combined.;

14 A

That is the case.

15 Q

It seems to me that what this statement indicates is 16 that in addition to the combination of management, you are l

17 going to have a combination of employees.

la In other words, it doesn't seem to me that the 19 technical application that would arise in Johnstown could 20 be applied to Met-Ed without the participation of a great 21 many technical and support staff from Johnstown going into 1

22 Met-Ed territories.

Is that an incorrect assumption?

h 23 A

Parts of it certainly are.

If you would like, I 24 could try to elaborate.

I am not sure --

25 Q

As I understand it, you want the technical rnw

.nnSa e

Ir28 387 excellence of the Johnstown/Penelec group to be apolied to 3

C) i the GPU owned and coal-fired generation of Met-Ed; isn't l

2 that right?

l 3

A Yes, in part, but I think the thing we may be 4

losing sight of, Mr. Messer, is this:

that if we decide --

5 One of the clearest benefits we see from this proposed 6

combination of managements is that the generating function 7

for both companies would be under the senior Vice-President g

of Generation, Ralph Conrad, and he would have working for 3

l him three Vice-Presidents and a couple of Directors, and l

10 l

those Vice-Presidents and Directors, in turn, would have l

11 l

r-working for them identified Managers to handle project work

%.T g,~

)

l or operating or maintenance or scheduling and planning ma]or 13 outages, major inspections of these units.

14 15 The plan looks in great detail to what sort of. organiza tional structure should there be under each of l

16 17 these Vice-Presidents and Managers, and where should those

[

la people come from.

t We have identified that these positions that we 19 20 have identified would be filled by a mixture of Penelec 21 and Met-Ed people.

22 In the case of generation, the headquarters group

()

23 would be in Johnstown.

They are currently responsible, for 24 example, for giving headouarter support out of Johnstown to 25 power plants that are running up in Warren, Pennsylvania,'and

l 1r29 388 1

Erie, Pennsylvania, Williamsburg, and pretty much scattered O 2

throughout the Penelec system.

3 So that headquarters support that currently 4

exists, Penelec versus Penelec stations, could very easily 5

be -- with the addition of some Met-Ed managers 6

and staff people -- could be easily broadened to include 7

the few coal-fired plants that Met-Ed currently has, and a

that is what we are planning to do.

We are simply planning I

9 to have generation headquartered at Johnstown because it 10 seems to be closer to the large concentration of coal-fired i

11 generating stations in that area.

But that group can serve, and it does serve gi 12,

13 ef fectively now generating units which are hundreds of 14 miles away.

15 Q

I am not concerned so much about the topographical 16 location.

What I am concerned about is how the standardiza-17 tion of procedures in regard to the spread of the excellence 18 located in Johnstown inures to the benefit of Penelec.

Unless, 19 it seems to me,there is an expansion of staff to accommodate 20 this particular matter, what you are doing is spreading i

21 yourself thin.

Is that correct or incorrect?

22 A

I don't think we are spreading curselves thin.

23 For each of these functional areas -- and perhaps Mr. Donofdlh 24 can give you the details better than I; I have got some of 25 them here -- for each of these functional areas, we have

• 44 8 8 ^ "J \\\\# f 1 I

• M Q f PO Q?T MC O O h8 Q d %J Y

• "F $ 7 9% j 7 9 %Q

Ir30 389 tr:ed to identify -- we can identify as of January 1, 1980 cm k'

~~

2 what the manning levels are in each of the functional areas 3

and where they were located, whether in Johnstown -- this is corporate people -- at Johnstown or Reading.

4 In our planning, we critically reviewed with 5

the benefit of the responsible managers and officers of each 6

7 of the two companies what we think the new organizational a

setup ought to be and where those people should be located.

9 In some cases, when you add the numbers up, I

10 there are fewer people after the combination in a given 11 function than there were with the two companies separate.

(~1 12 In other cases, there were more people than there currently 13 a r e.1 14 The net change in numbers as far as corporate 15 people is concerned is relatively modest, and I think that i

16 it.is well to understand that the question of costs, while 17 it is a very important one, in our judgment should be 18 addressed from the point of view that as long as the net costs i l

i 19 are going to be in the right direction, i.e. a cost saving, 20 at least that disposes of the fact that the costs won't 21 be excessive, and therefore that is a deterrent to doing it.

22 In the case of generation, I think you will find f%

)

23 that we would propose to end up with more people in a 24 combined operation than we currently have separately, and 25 that is one of the reasons that the so-called cost avoidance i

COMMONWEALTH REPORTING COMPANY 47171 761-7150

l 1r31 390 considerations come to bear.

3 2

If Met-Ed tried to go it alone, they would have 3

to add a lot of people to their relatively small generation functional staff at corporate headquarters in Reading.

4 But I think it is a matter, Mr. Messer, as to 5

6 which function you are talking about.

Some of the functional 7

groups will end up with more people than they currently a

have; some will be with less.

The overall will be a slight 9

decrease than what we currently have at corporate headquarters 10 at Reading, Pennsylvania and Johnstown.

11 0

You have indicated that you believe that if Met-Ed and 12 j Penelec go it alone, that in regard to coal-fired generatioggg 13 there would have to be a large increase in staff at 14 Metropolitan Edison.

Do I understand your testimony 15 correctly?

16 A

Yes.

1; Q

And this would be in response to operating two is coal-fired generation plants?

19 A

And a few combustion turbines, and I think a 20 hydro station or two.

l l

21 Q

Is it your opinion then that the impact upon i

22 Metropolitan Edison in regard to the number of staf f that 23 are necessary would be large and expensive?

llh, l

24 A

In this point, yes.

Met-Ed, if it went it alone --

l l

l 25 this is one of the key areas where their costs could be quite ;

C O M M O N W E A LTHR Po R TJ N G C oM P A N Y.

d2R52dTh>2RPR

k32 391 I

high if they tried to develop a staff of comparable quality, O

2 if you will, to the one Penelec has.

I 3

Q My question to you is:

where are they going to 4

get that staff under the combined management agreement; and 5

if it is very expensive and will take a great many people to serve thak staff function, who is going to bear that s

7 expense, and where is the increase in staff going to come a

from under the combined management system?

9 MR. RUSSELL:

When you say where are they going to get' 8

f t

to it, you mean where is the combined management going to get it?

11 BY MR. MESSER:

e~

12 Q

Where, number one, are the large amount of N_b i

13 employees necessary for staff in Met Ed's situation going i

14 to come from, and who is going to bear the cost of that

\\,

15 staff?

A The costs will be borne, of course, by Met Ed.

IG 17 Any work that is done on Met Ed facilities will be accounted 18 for and charged to Met Ed.

19 I think I could answer your --

20 Q

Excuse me.

Just to follow up on that point, then 21 if Met Ed is going to be charged with that cost, which I 22 suppose would be billed by Penelec, wouldn't it?

{}

23 A

No, it wouldn't be billed by Penelec.

24 Q

Maybe I didn't understand the response to my 25 question.

You told me that Metropolitan Edison was going to-l CoMMoNWCALTH REPORTING COMPANY (717) 768 7150

Ir33 392 bear the cost.

What cost are we talking about, and how ggg 2

are they going to bear that cost?

3 MR. RUSSELL:

Perhaps we can clarify this.

Are 4

you talking about the situation of Met-Ed without a i

5 combined management or Met-Ed with combined management?

{

6 MR. MESSER:

I am talking about this specific simple 7

example.

It is my understanding of Mr. Verrochi's testimony 8

that without the combined management, it would cost 9

Metropolitan Edison Company'a lot'of money to hire additional 10 staff to provide competent people for their operating 11 facilities, both steam, coal and hydro, and that under the 12 combined management there st'ill is going to be a cost factodlh 13 involved there that Metropolitan Edison is going to pay for.

14 What I am trying to understand is after -- let's 15 say there is a combined management.

Who is going to pay 16 that additional cost; the people at Penelec or the people 17 at Metropolitan Edison?

IS MR. RUSSELL:

I think this question is totally 19 unclear.

Are you talking about the additional cost that 20 Met-Ed would pay if it goes it alone; who is going to pay 21 that cost if there is a combination?

Is that the question?

l 22

. MR. MESSER:

Mr. Verrochi has identified for me 23 the fact that if there is no combination, that Metropolitan 24 Edison Company will have to hire additional staff and l

25 employees and incur a substantial cost in relation to the

l 1rJ4 393 i

1 operation of coal and hydroelectric power operation now

(~h.

l t

a 2

conducted by Met-Ed.

g

\\'

i 3

He has also identified for me that even if there 4

is a management combination, Metropolitan Edison Company 3

must also bear the cost of the increased staff or the a

increased technological know-how that must come obviously 7

from Penelec to serve the same function.

8 I am now asking him whose responsibility under j

9 the combined management agreement will it be to pay that 10 additional cost?

i 11 MR. RUSSELL:

Mr. Verrochi has said that any work i

12 done for Met-Ed is going to be borne by Met-Ed.

This

,s

(

i w/

13 question, I think, is unclear.

14 Which cost are you talking about; the cost with 1

15 or without a combined, management?

i 16 MR. MESSER:

I have already identified that.

What l

i i

17 I am talking about is --

t 18 MR. RUSSELL:

I think you have not identified it.

l i

1 I

l 19 Could you just simply respond?

Is it the additional cost 20 with or without the combined management for Met-Ed's 21 generation?

22 BY MR. MESSER:

l l'

)

23 Q

Either way, Mr. Verrochi.

Why don't you take them 24 l one at a time?

With the combined management, who is going 25 to bear the cost?

COMMONWEALTH REPORTING COMPANY r7175 761 7150

i 1r35 394 i

A With the combined management, we wil.1 pool the O

2 corporate headquarters people that currently exist in Met-Ed's 3

organization, whether it is 35 or 40 people, with the 120 4

to 130 people that are currently at corporate headquarters

{

5 in Penelec's generation division in Johnstown.

I 6

In addition, there will be a few more people added 7

because the work scope has changed; but there will be a pool 8

of people -- I don't know what the number is.

Let's say, 9

for the sake of illustration, there is 150 people, including to officers, who are at corporate headquarters for the 11 combined managements in Johnstown, Pennsylvania.

That group ofpeople,whichincludesengineersandmanagersandofficeg 12 13 and

~ # orth, will account for their time in accordance 14 wit.. cate case accounting practices and however they account 15 for their time, they will fill out time sheets.

If they 16 are working on a specific project, and that project happens 17 to be a Met-Ed project or a Met-Ed generating station, whoever 18 the person is doing that work, that tims and the associated 19 costs will be charged to that generating station.

If it is 20 a Met-Ed generating station, it will be charged there.

21 JUDGE CASY:

I would like to break in at this p int 22 because I think the, testimony, at least in my mind, injects lll 23 a note of confusion.

24 I think you are talking, Mr. Verrochi, about 25 combining generation activities in Johnstown.

You hace COMMQNWEALTM CEGOETING CONNN

'997^ TOO995a

1s36 395 referred to Johnstown several times as the corporate head-3 quarters for coal-fired generation activity; is that correct?

2 THE W TNESS:

I didn't mean to confuse you, Your 3

Honor.

The functional corporate group whose respor sibility 4

it is to construct, operate and maintain generating stations, 5

that group of people will be stationed in Johnstown.

They 6

are part of the corporation of the combined managements.

.I Ralph Conrad would be a Vice-President of both Met-Ed and 8

Penelec.

Does that clarify,it?

9 JUDGE CASEY:

So you will have a senior Vice-10 President in charge of generation with the emphasis on coal 11 12 heading a team in your Johnstown headquarters?

THE WITNESS:

Yes, sir.

13 JUDGE CASEY:

But your actual combined management 14 15 team, your Board of Directors, and you top officers will function at the new overall corporate headquarters in 16 17 Reading, Pennsylvania; is that correct?

l T!!E WITNES':

Yes.

I guess the confusion comes 18 S

39 from the fact that the single function that'will not be 20 headquartered in Reading will be the generating function.

l All the other senior Vice-Presidents and the l

21 22 Vice-Presidents will be headquartered in Reading.

l 23 JUDGE CASEY:

Is that clear to you, Mr. Messer?

i 24 MR. MESSER:

I understood that.

25 l

COMMONWEALTH REPORTING COMPANY. 47176 761 7150 MmI i

i

a 1r37 396 BY MR. MESSER:

O 1

2 Q

The problem I am having conceptualizing the 3

cost savings, if any, in this particular matter is this; and that is that the excellence of the staff is not just 4

5 limited to the top management, is it, in Johnstown, of coal-fired generation?

Would you say that that is the 6

only place that the Penelec people have excellence in the a

ability to operate coal-fired plants, or does it flow through l

9 the entire line of employees?

10 A

The headquarters group in Johnstown in generation 11 i includes employees with a great variety of talents and job 12 titles and classifications; engineers, clerks, managers, gl 13 supervisors, and so forth.

14 0

And those are the day-to-day people that apply 15 the proper engineering principles and use their experience to 16 on a day-to-day basis operate the coal-fired plants; is that 17 right?

18 A

That is right; to provide corporate guidance to --

19 the coal-fired plants themselves have at the generating l

20 station sites superintendents and quite an extensive 21 organization to run the power plants.

There are several 22 hundred people in many cases.

l 23 {

JUDGE CASEY:

The way I understand the thrust of 24 Mr. Verrochi's position is that although Penelec may have

{

25 a number of management and organizational strengths, that the l

a

Ir38 397 one significant area where they could make an outstanding contribution to Met-Ed would be in the coal-fired generation 2

area because they've been running a number of coal-fired plants 3

successfully over the years, and in his earlier testimony 4

I think he said Met-Ed had peculiar strength in the customer 5

relations aspect of the business, the marketing aspect 6

of the business --

7 THE WITNESS:

As examples, yes, sir.

8 JUDGE CASEY:

-- which they, in turn, would 9

attempt to contribute to Penelec's situation.

Is that a good 10 overview?

3g THE WITNESS:

I think it is.

^

12

'w)

JUDGE CASEY:

Go ahead.

33 BY MR. MESSER:

14 0

Do both companies operate on long-term coal 15

~

Supply agreements with coal suppliers?

16 A

I know Penelec has a wide variety of coal procurement g7 3g strategies and contracts.

We do have some long-term coal supply contracts in Penelec, We have some short-term, and 4:e 19 20 also buy coal on the so-called spot market, month to =cnth.

21 Q

What percentage of the coal that Penelec purchasas l

l 22 is based upon long-term supply contracts?

23 A

I don't have the statistics handy, but

(^')

R./

Penelec burns roughly for its own generating staticns about 24 23 5 million tons of coal a year.

My memory is that rcughly COMMONWEAL.TH REPORTING COMPANY (717i 761-7150

Ir39 398 i

i 2 million of that. perhaps on that order, one-third to 40 ggg 2

percent, would be on long-term contracts.

I am talking a

25 or 30 years.

Perhaps a third would be term contracts 4

on the order of 2 to 10 years, and then the other third 5

roughly would be on a so-called spot basis; whether it is 6

a month or six months or a year, it is that sort of a thing.

7 That is roughly it.

8 I have better statistics, if you want me to put 9

my hands on them.

10 0

What about Met-Ed?

11 A

I don' t know what Met-Ed's coal procurement 12 practices are in any detail.

h i

13 JUDGE CASEY:

Could you give us a breakdown on i

i 14 the amount that is purchased under either long or shor t-term 15 contracts against coal that is produced by your own company-16 owned mines?

17 THE WITNESS:

If you would allow me for a minute, la I might have something in my file.

19 (Pause.)

20 Tile WITNESS:

I am sorry, Your Honor.

I thought --

23 we put out a pamphlet, and we have just recently revised 22

.it, oad it covers those points very well.

I don't have h

+i a copy handy.

21 JUDGE CASEY:

An approximation would be -- could 25 you give me some ratio --

mm m m m.

1 m m m m m. m - - m. m.

Ir40 399 MR. RUSSELL:

May I just have a point of clarifica-g O

tion?

Your Honor referred to company-owned mines.

2 Would you respond to that, Mr. Verrochi?

3 THE WITNESS:

Penelec doesn't own any mines.

We 4

have -- in connection with the Homer City generating station, 5

which we own 50 percent of jointly with New York State 6

Electric and Gas, we have two mine-mouth mines there, one 7

of which is a subsidiary of R and P Coal Company, the other g

of North American Coal Company.

9 Those mines are owned by the subsidiaries of the in coal companies.

However, they are financially guaranteed 11 by Penclec and New York State through.the long-term contracts.

,/

12 JUDGE CASEY:

So, in effect, you are a purchaser 13 of all your coal, even though you have ownership interests 14 15 in certain generating stations?

THE-WITNESS:

Yes.

We don't own any operating IG 17 coal mines.

JUDGE CASEY:

I understand.

e 18 Suppose we take a five-minute recess, ig 20 (Recess.)

l 21 22 24 1

l l

25 i

i l

COMMONWEAt.TH REPORTING COMPANY (7171 761 7150

r1 400 I

i I,

I T2,51 1!

JUDGE CAS EY :

We are ready to resume.

3ack on th 2

record 3

Mr. Messer, you may continue.

4 BY MR. MESSER:

5 0

Mr. Verrochi, previously you indicated that the 6

Concept in regard to the management consolidation was arrived 7

at sometime af ter the TMI incident and came to the front, as 8

far as top management was concerned, sometime in, I believe, I

9 late 1979; is that correct?

10 A

Yes.

11 Q

And up to that point in time, had there been any detailedanalysisrequestedofthePenelecorMet-Edstaffgggf 12 13 regard to the cost impact of the consolidation?

14 A

Prior,to Decamber of

'79, roughly?

15 Q

Yes, sir.

16 A

No.

17 Q

So, we can assume that the decision to proceed with 18 the management consolidation was made without the support of 19 any cost impact studies, can we not, as of December, 1979?

20 A

That is pretty hard to be real specific on.

21 Certainly, there were no specific detailed studies made, but 22 ',the concept of combining managers and officers and people 23 I think -- I know we discussed it based on our experience, llh 24 example, with what happened at Jersey Central and Jersey Power 25 and Light Company, that combination.

l l

cn'*v CNWEA LIH R EmoRIlN G-CORP A N Y '73 7L961-7130 l

r,2 401 We knew that there would be an overall reduction in 1

CE) 2 cost.

It was just a matter of not knowing how much it was and 3

how to quantify it at the time, but we certainly didn't think 4

it would add to our collective costs for the two companies.

5 JUDGE CASEY:

Excuse me, gentlemen.

In your earlier i

j 6

testimony, Mr. Verrochi, I understood you to say that this 7

subject really came up the first. time som6 time around September 8

of 1979.

Did you mean to say December, or did I hear it 9

incorrectly?

to on the subject of combining the management,you were 11 talking about it was not an agenda item on the GPU service

/"N 12 corporation agenda at'one of.the Board meetings, and your V

l 13 best recollection was that it came up initially sometime 14 around September,of '79, or was it December?

15 THE WITNESS:

I am sorry, Your Honor.

I think I

l 16 was talking December for the specific combination.

I might i

I 17 have mentioned September in connection with some of the other 14 studies on the division realignment, reorganization.

13 JUDGE CASEY:

All right; I will make that 1

20 correction then.

It was December of '79?

21 THE WITNESS:

Yes.

I i

22 BY MR. MESSER:

()

23 Q

At that time, Mr. Verrochi, was the TB and A study 24 1 an ongoing process?

Was it in process at that time?

A I think the TB and A study was just getting started 25 MMMNWGASTH REPORTING COMPANY s7171 761 7150

i 402 r3 I

I in late December of

'79.

O Did you have any specific conversations with any of l 2

3 the Commission Staff with regard to this proposed combination 4

before the TB and A study began?

5 A

No, sir, I did not.

I think Herman Dieckamp has 6

testified; I think the first notification to the Commission 7

occurred when Mr. Kuhns notified them on January 17 of 1980.

8 Q

Is that, to the best of your knowledge, Mr. Verrochi, that the first notification to the Commission or any member of its staff occurred in January, 1980?

l to s

11 A

I don' t know whether or not Mr. Kuhns and/or Mr.

12 Dieckamp discussed any of this with any of the members of 13 the Commission Staff prior to Mr. Kuhns testimony on the 17th I4 of January.

15 JUDGE CASEY:

These would have been preliminary 16 discussions, but the formal announcement was actually made at f

the public meeting of January 17, 1980?

i 18 j

THE WITNESS:

Yes, sir.

l JUDGE CASEY:

By Mr. Kuhns?

'~O THE WITNESS:

That is right.

j

.,~1 JUDGE CASEY:

And he was accompanied by Mr. Dieckamp.

",.on that day?

h-23 j

THE WITNESS:

I believe he was on that day.

tg

~

MR. RUSSELL:

I don't believe Mr. Verrochi indicated i

23 i that there were any.

ci

403 r4 1

THE WITNESS:

I don' t know.

l J

2 JUDGE CASEY:

You personally are not aware of any, y

3 but if there were, it might have involved Mr. Kuhns and Mr.

4 Dieckamp?

5 THE WITNESS:

Yes; that would be my answer.

G MR. MESSER:

Excuse me for just a moment.

7 (Pause.)

8 BY MR. MESSER:

9 Q

Mr. Verrochi, you' authored certain draft memorandums to in regard to the organizational plan, did you not?

11 A

Yes.

)

12 Q

In January of 1980 or before that, if you know?

13 f A

If you can show me what you --

l 14 Q

I have one draft I believe to be yours dated January 9, 1980, although I am not certain this is your draft 15 IG memorandum.

I7 (Document handed to witness.)

l 18 A

Yes.

Q Is that your draf t memorandum, sir?

19 A

I think it is.

It is WAV-CQ.

So, that is certainly 20 21 mine.

Q Who directed you to compile that draft organization 22 m

23, plan?

l A

Mr. Kuhns asked me to develop that.

l 24 Q

Did you draft that in cooperation with the TB and A 25 1".n&dAdnatWEALTM REPoERTINC COMPANY 7 f 7' 781 7 f 50

404 r5 j

i i

I people or independently of them?

gggl 2l A

This was independently of them.

i 3

Q Did you forward a copy of that draf t memorandum to l

4 the TB and A people?

5 A

I don't recall; probably not at the time, if ever.

l 6

Q Would that be one of the forerunners of what we have 7

referred to previously in this hearing as the " Blue Book"?

a A

Yes; this would be one of the documents preliminary l 9

to that and preparatory to 'that.

10 0

Were you responsible or in any way given any 11 responsibility for the drafting of the " Blue Book" documents?

12 A

I was very actively involved in that. IguessIwlll I

13 responsible for it, yes.

14 Q

Now, at the time the initial " Blue Book" was I

15 compiled, had you directed or had anybody requested any cost I

I 16 impact studies in regard to the negative or positive ef fects 17 from this combination as to Met-Ed or Penelec?

l 18 A

I think the " Blue Book" itself has some discussion 19 and some tables addressing some of the aspects of cost increases 20 and decreases.

2' Q

Who did those compilations; do you know?

22 l A

Primarily Mr. Donofrio; most of the cost numbers were til 43 developed under his control.

24 Q

Did you have any input into the cost analysis of i

d these reports?

a

405 r&

1 A

Did I?

Os 2

Q Yes.

3 A

Yes, I did.

4 Q

In what regard?

5 A

I would review them and comment upon them, see if I 6

could understand what the document said and indicated to make 7

sure it was clear and if it was justified and based upon a 8; reasonably objective analysis of the situation.

I wanted to 9

satisfy myself on some of those points.

10 Q

Who furnished the information in regard to the 11 integration of the Met-Ed statistics into ':he report?

()

12 l A

Floyd Smith'who is Senior Vice-President of Met-Ed i

13 l functioned in that capacity.

He funneled information from 14 the Met-Ed organization, reviewed it and passed it on.

He and i

1 15 Mr. Donofrio worked quite closely together.

16 Q

Now, this, again just for the sake of simplicity, 17 initial " Blue Book" and the subsequent generation of " Blue Books" was compiled principally at the Penelec offices?

18 I

19 !

A It was.

l 20 j, Q

Under your direction?

?

i i

21 A

Yes, sir.

i 22 j Q

And all of the information that was generated in i

I f

regard to Metropolitan Edison was done under Mr. Smith's l

'3

'4hcontrol, is that right, as far as you know?

h 25l A

As far as I know, sure.

l

~

18AmRemNaur?dEBRErdgermuy en 7,. 7a s.7, 33

r7 40.6 i

l i

0 Was there any attempt to have an independent audit I

1 b

i 2

of the information you received from Metropolitan Edison 3

in regard to the information you received and integrated into i

i 4'

this report?

5 A

Independent in what sense, Mr. Messer?

6 A

Well, did TB and A have any responsibility in regard 7

to the generation of that information and the coordination of a

that information?

9' A

At the time of th'e development of the original 10 )

" Blue Book," which I think was in January sometime -- I i

imagineitwas--TBandAwaspreoccupiedwithothermatters,l 11 12 l didn' t get involvewithanysignificantreviewandparticipdll 13 tion until, I think, along around March or April of the year.

They may have been given -- I am sure they were 15 given access to everything we did, and they may have been 16 ; given copies of the " Blue Book" after we had worked on it.

i 1

II Perhaps they read it in March or April, I would guess, but they were not involved at the time of the origina1' development I8 I9 of the " Blue Book."

,o !

i O

It is my information that the original " Blue Book," ;

~

i

,1

~,

the first generation " Blue Book" came out on March 26, 1980

,and was subsequently revised on May 7, 1980, and the third

~~!

0i

'3 generation was June 4, 1980.

Would those be --

24 '!

A Let me have those dates again.

The original " Blue

'1

~s i; Book" was when?

l u21aa

407 r8

• 1 Q

March 26, 1980, May 7, 1980 and June 4, 1980.

2 A

All right.

May I correct something?

3 Q

Certainly.

4 A

The book I was referring to, and I did not mean to 5

confuse you, Your Honor, early in January, we developed a l

6 very thick book.

7 I didn't mean to confuse you.

What I am trying to 8

say in a million words is that I guess the " Blue Book" was 9

officially covered and made a document, which we reviewed, at 10 the time of the end of March with Theodore Barry and with i

11 some of the Commission Staff at a meeting in Parsippany.

12 There was a lot of work done on the material in 33 January and February and March that ultimately got into the 34

" Blue Book" that Theodore Barry was not involved in.

I don't 15 know if that clarifies it.

16 Q

Would I be correct in assuming then that TB and A I

received a copy of the March 26, 1980 " Blue Book" and that 18 subsequent revisions occurred after that in which they were i

19 involved?

'O A

I would say yes to that.

~

'l

~

Q Do you know, Mr. Verrochi, whether Penelec has an

. independent credit agreement with any banks outside of the I

]

,3 participating credit agreement which Mr. Dieckamp referred to?!

~

94

~

A I think we do.

I 25 Q

Pardon me?

CCRMMoNWEA(L,TH REPORTING, COMP ANY _ (717L 7617150

r9 408 i

i i

1 A

Yes, we do, I believe.

!O 2

Q Are you knowledgeable about those agreements, sir?

l 3

A Really not very knowledgeable.

I think the total l

4 amount is of the order of S10 million.

5 MR. RUSSELL:

Mr. Donofrio is here.

This is ruore 6

his end.

If you want to ask him a question, well, throw it at 7

him.

8 JUDGE CASEY:

Were these in existence before or was 9

this credit agreement in existence before the revolving 10 credit agreement involving the entire system?

j l

,f 11 TIIE WITNESS:

Penelec, of course, had lines of t

12 credit and, at various times throughout its corporate lire, 13 has borrowed money from a large number of banks, but I can't i 14 be specific as to whether or not the current lines of credit 15 with banks.who are not members of the revolving credit 16 agreement are banks with whom we did business prior to the II revolving credit agreement.

18 Mr. Donofrio may be able to give you those specifics j

19 better than I.

20 BY MR. MESSER:

23 Q

I guess the question would be then:

prior to the 22 revolving credit agreemenet, Penelec had an independent

! arrangement with one or a number of banks, is that right, inllk 23

'4 regard to borrowing?

I 1

l

'S A

Tha t ' s true.

I h

COMMONWEALTH REPORTING COMPANY

'717' 761-7150

,r10,

409 e

Q Do you know whether or not at the time this new 7s I

2 revolving credit agreement was negotiated whether Penelec had s

used up their lines of credit with the independent banks 4

outside of the agreement, if you know?

5 A

I don't know.

We were not in a borrowing position 6

to any great extent, if at all, at that timc and still are not.

i 7

So, our need for borrowing has not been very great in the pre and post-TMI accident era; but Mr.' Donofrio, I think, can 8

9 give you more specifics on what our cash balances were and so.

I I

10 forth at the time you are concerned about.

11 Q

At any point in time, did Penelec extend their lines 10 of credit for the benefit of GPU?

()

l 13 A

I don't know the answer to that question.

l 14 MR. RUSSELL:

Mr. Donofrio is here if you want to I

15 pose it to him, i

16 MR. MESSER:

Mr. Donofrio, do you know whether or 17 not prior to the negotiation of the revolving credit agreementi 18 and prior to the accident at TMI whether Perelec eftended its 19 line of credit for the benefit of GPU?

l l

t 20 MR. DONOFRIO:

Penelee had lines of credit, about 21 S120 million of which we were reducing, because we had no need; l

22 for short-term debt.

l ()

23 MR. MESSER:

This is prior to TMI?

24 MR. DONOFRIO:

Prior to the accident, that's correct.:

25 We did not have any loans outstanding against any of those COMMONWEALTH REPORTIN@ COMPANY (7171 761 7150

rli 410 1

lines.

2 The one piece on which I am not specific is whether, 3'

as a result of the accident, our lines were pulled back and 4

then revolving credit was formed or not.

5 John Graham, Herman Dieckamp -- I was not involved j

6 in the personal negotiations of that.

7 The fact is today, outside of the revolving credit 8

agreement, some banks are the same, some are not.

We have a 9

line of credit of about $16,122,000 of which we have never 10 borrowed a penny.

It We have about $50 million in the bank as of today.

12 l We do not foresee during thd next year involving ourselves lll l

I3 with any short-term borrowing unless something happens above I4 l and beyond our plans.

I 15 l The other point was when you said our individual 16 lines of credit before the accident; even though we had banks 17 in our line, S120 million, the other companies also had those I8 same exact banks.

l I8 l

A lot of the New York banks extended us credit, 20 !

Met-Ed credit and Jersey Central credit.

When you say 21

(

" independently," I am not so sure that is a good word.

l

, i MR. RUSSELL:

What is the credit available to

'~

O

'3 [! Penelec under the revolving credit agreement?

W

~

L

'l

~

MR. DONOFRIO:

Right now, our line is $116 millicn.

5l MR. MESSER:

What was it before?

l i

rl2 411 l

i i

1 MR. DONOFRIO:

As I said before, under the

(

)

2 independent, as you phrased it, lines of credit, it was about 3

S120 million.

Again, we were in the process of reducing that !

4 S120 million before the accident.

5 MR. MESSER:

Maybe you could clarify this for me, 6

Mr. Donofrio.

7 Prior to TMI, under the $120 million line of 8

credit, no matter how we characterize it, that Penelec had, 9

how much of that had been ubed?

i 10 MR. DONOFRIO:

I don' t believe there was anything

-l I

l 11 l outstanding at the time of the accident.

I can double-check 12 the figures for you on that.

("3 Cz' 13 MR. MESSER:

Then was that merged or somehow consolidated in negotiation of the revolving credit agreement; 15 do you know?

e i

MR. DONOFRIO:

Again, I was not involved in the 16 17 negotiations, but when you say you have $120 million lines of l credit, you really don't know that you have that cfedit until I8 i

i' 19 the physical loan is made.

20 l There is no guarante-3 sanctuous obligation that the

'l l

bank has to loan you money.

i

-- l 49 j, MR. MESSER:

I am not asking you about the intention

<~s

,3-j or whether, in fact, you got the money.

The fact was that l

)

44 l you were working under the assumption that you had approximately o*

t a $120 million line of credit; isn't that right?

I i

l COMMONWEALTH REPORTING COMPANY 87171 761 7150

412 r13 I

MR. DONOFRIO:

Yes.

I 2

MR. MESSER:

And your expeccation would be that j

3 you would be able to borrow that or close to that amount of 4

money, wouldn't it?

5 MR. DONOFRIO:

No.

6, MR. MESSER:

It wouldn' t?

7 MR. DONOFRIO:

No.

3 MR. MESSER:

Well, how much would your expectation 9

be if you had a S120 millio'n line of credit that you would 10 be able to borrow?

i 11 MR. DONOFRIO:

I would have to get our specifics lll 12 from our budgeting process at that point in time, which I 13 could provide; but, normally, notes payable are used as 14 interim financing by all of the GPU companies, Penelec 15 included.

l What would happen is, as your construction program l

16 i

3,*

needed funds, you would borrow short-term from the banks.

You{

may get it up to, let's say, a $50 million limit. 'Then you 18 19 would go out and issue $50 million worth of bonds and repay

-,0 those notes payable.

'l It is just a turnover or interim measure of

~~l. financing your needs, mainly construction.

,3

~ i MR. MESSER:

Would I be then correct in assuming I

i

.y' that that line of credit, whatever the amount may be, is now

~

,5. merged into the revolving line of credit agreement as far as

-....r.

.. r-

.u

,---n,s-

-,.,ns.~

,,,-..n

413 l,

.r14 1

Penelec is concerned?

You don' t have an independent, pardon my 2

word, $120 million line of credit?

You have whatever credit 3

is available under the revolving credit agreement; isn't that i

4 right?

5 MR. DONOFRIO:

We have $10 million outside of the i

i 6

revolving credit, plus $160 million inside the revolving 7

credit.

1 i

8 MR. MESSER:

How much of the $10 million has been 9

used, if any, as of today? '

to MR. DONOFRIO:

Zero.

11 MR. MESSER:

How much of the Sil6 million has been

(~ }

12 used as of today, if any?

I3 MR. DONOFRIO:

Zero.

I4 BY MR. MESSER:

1 15 Q

Mr. Verrochi, in very summarily leafing through the i

16 Booz-Allen Report this morning, there were certain representa-I7 tions made in the executive and maragement summaries that the strength of the corporation was in the management Issociated 18 I9 with the three operating utilities and the standardization 20 process that was trying to be created by GPU Service 21 Corporation.

~

22 They indicated in there that there were certain

/~)T

,3

~

financial and auditing controls already in effect by GPU

(_

'4 Service Corporation.

'5 !

Now, are you familiar with those processes?

a COMMONWEAt.TH REPORTING COMPANY (717i 761 7150

414 r15

}

i l

t t

1 A

I was at. the time with the report you talked about I

2l I am somewhat familiar, I am sure.

l 3

Q There is something called COMEC or something of that l 4

nature?

I l

5 A

Yes.

6 Q

Would you describe that for us, please?

7l A

Again, Mr. Donofrio is the expert on that.

That is t

the Construction, Operating and Maintenance Expense Control 9

System which is a major effbrt to develop an automated or 10 computerized program for doing that.

i l

Il i It requires tremendous modification to a lot of i

I i

itwill[

12 the input documents, time sh'eets and so forth, so that I

13 function.

I i

14 COMEC is not yet in place.

It has been in the 15 developmental stage for the past several years, somewhat set I

i 16 back because of the Three Mile Island accident.

l 1

17 It is my current understanding that COMEC will be j

18 first employed by and developed for use by the GPU' Nuclear i

19 Corporation, and then one of the three operating companies 20 '

will absorb and start operating with COMEC, perhaps within 21 three to six months after that.

22 l Q

What is the purpose of COMEC?

A The purpose is to provide better control of 23 4

,4 construction and operating and maintenance expenses throughout 25 the GPU system in all functions, including budgeting, improve J

r1&

415 l

()

the budgeting process and the cost control, both things.

I 2

O Isn't that one of the benefits that you claim will 3

be associated with this combination?

4 MR. RUSSELL:

Isn' t what one of the benefits?

5 BY MR. MESSER:

6 Q

The purpose of COMEC.

7 A

I don't think we are talking about COMEC here, 8 !

Mr. Messer.

I guess I don' t understand your question.

Try it i

9 again, please.

10 0

One of the benefits that you indicated in your 11 testimony on page 8 is that the control of budgets, operating

' ()

12 and maintenance expen'ditures, facilit'ies, management,and 13 construction modifications will be a benefit that results 14 from the combination of the management; is that right, or am I 15 misunderstanding what you are saying?

16 A

That is true.

I Q

Is that correct?

A Yes; that's true.

1 Q

Doesn't that serve the same purpose as COMEC?

I9

'O A

COMEC is being designed to accomplish some of that,

~

91 yes, but not on its own.

You need organizations to put input ;

~

'2

,into COMEC and to work with COMEC.

l

~

l(

'3 So, I am talking here about the organization, not

~

'~4 l

the system -- not only the system; it is both.

5 COMEC is the tool in other words; it is not the l

f 416 r17 i

l l

1 answer.

2 O

I believe Mr. Dieckamp indicated to us that the i

3 savings that allegedly will be generated from any management l

4 combination will be in the area of cost avoidance; is that 5

right?

Is that your understanding as well?

6 A

There are two pieces of the identified savings.

One 7

is cost avoidance, and the other is cost savings.

I 8,

O I understood Mr. Dieckamp to say that the bulk of i

9l the savings would result from cost avoidance, and I will ask 10 you the question as to whether or not you agree or disagree I

11 i with that statement.

I i

i Ithinkthatinthemanagementcombinationaspectll)>

12 !

A 13 of it, the bulk of the savings would be associated with cost 14 avoidance.

I think that is a fair statement.

15 Q

I.n terms of the cost avoidance, would these cost l

16 avoidance savings be a result of the economies of scale?

l l

17 A

They would be more the result of avoiding the need is to duplicate management and staff.

l 19 Q

Would you consider that an economy of scale or not?

l 20 A

I suppose you could characterize it as being part 21 of the benefits of the economy of scale or the strength of 22

, scale.

23 l 0

Would it be my understanding then, Mr. Verrochi, 24 that in the event that the management system which has been i

25 : proposed had to be restructured to increase the management i

u t

rA8 417 I

l i

l 1

I team to eliminate some of the problems which you may encounter 2

in the administration of your combination, that to the extent i i

i 3

that the management has increased, the cost savings would i

4 decrease?

5 MR. JOLLES:

You are asking whether that is your i

6 understanding?

7 BY MR. MESSER:

8 Q

Would that be a correct statement or not?

A Would you rephras*e that?

j 9

Q Let's assume. Mr. Verrochi, that the management j

10 I

f 11 i system which is proposed does not function precisely as we 12

^

({}

sitting here today would -- as you would want it to function 13 and it is necessary then to increase staff and support staff I

I4 for the additional managers that are necessary to solve the i

I I3 problems that may develop, to the extent that you add 16 additional staff, would that decrease the cost savings to f

both Met-Ed and Penelec customers?

f.

17 A

In the example you cite, if the need wer#e identified.

18 I8 for additional people, obviously that would increase the cost.

I

~O' Q

Has it been your experience that management

'l combinations of this type necessarily result in decreased

~

. management staff?

i

)

23 A

It has been my experience.

'~4 Q

What has your experience been in that regard?

1

'5 A'

My experience has been -- I guess one of the most

~

I CCMMONWEAL.TH REPORTING COMP ANY 5717' 761 7150

418 r19 pertinentexamplesisIwasamemberoftheBoardofDirectqgg I

2l of Jersey Central Power and Light during a time when they 9

3 decided to combine the managements of Jersey Central Power andj 4

Light and New Jersey Power and Light, and they were operating 5

both utility companies with a common set of officers and i

6l managers.

7 Clearly, that would be less expensive than having 8

two sets of officers and managers.

So, that is, I think, the 9

most pertinent example in my own experience.

10 The other experience, of course, I have had on the t

II l economies of scale, and you alluded to it a while ago, again, J

my experience with Penelec goes back 'o the generating lll 12 t

i 33 function.

14l 1.came to work for Penelec in 1961 as Superintendent 15 of Production which meant manager of the generating station.

I6 One of the major advantages.we continue to feel 17 l for Penelec managing all these coal-fired generating stations la ! that we either don' t own or only own a part of is 'the l

i 19 i economies of scale.

I l

Clearly, the current Penelee organization in total is

,o' l

~I a lot less than it would be if each of these stations had j.to have a corporate staff supporting it.

JUDGE CASEY:

Mr. Verrochi, was the Jersey Centra I

~4 i and the New Jersey Power, whateve r it was called, was that a l

l 25 true merger?

l t

r2a 419 1

THE WITNESS:

It turned out that it was, Your Honor.

2 The companies operated prior to the formal merger, which I 3

think took place in -- I am reminded that the formal merger 4

occurred in 1973, at which time Jersey Central Power and 5

Light, which was a considerably larger corporation, absorbed 6

and merged into it the assets of New Jersey Power and Light.

7 However, they operated as a combined management 3

and of ficer group for about a 13-year period prior to that.

9 of course, they were two subsidiaries and sister companies.

10 JUDGE CASEY:

Of GPU?

11 THE WITNESS:

Of GPU and sister companies of Penelec,

()

12 JUDGE CASEY':

And Jersey Central Power and Light 13 was the surviving corporation after the merger in 1973?

14 THE WITNESS:

Yes, sir; that's correct.

15 BY MR. MESSER:

16 Q

Would you indicate to us, Mr. Verrochi, that the 17 Metropolitan Edison Company is a substantially smaller 18 company than Penelec?

l 19 A

No; it is not substantially smaller.

It is 75 or 80 percent, I guess, of the assets.

So, we are fairly similar 20 21 in size.

22 O

So that the experience that may have developed in

(~T s/

,3 the New Jersey situation wouldn't be totally applicable to i

I 21 our discussion here today, would it?

I I A

Not totally, but certainly there are many i

5 i

mw c2naSnL71F@

l t -

a

r21 l

470 i

i i

I I

t' similarities.

l 2'

O I explored with Mr. Dieckamp the other day the I

i l

1 3j disparity between the amount of employees which was used by 4

Penelec to produce coal-fired megawatts and those which are 5

used by Met-Ed with the same number of employees to produce 6

Substantially smaller amounts of electrical power from its 7,

coal-fired and hydro plants.

I 8

I am wondering whether or not you could explain 9

how the combination or the ' management combination intends to l

l have any economies in regard to Met-Ed with the reduction in 10 11 the number of employees that might result from the management?

12 A

I guess I am not too f amili~ar with your discussiorgg!

13 with Mr. Dieckamp, although I was in the room.

When you 14 mentioned number of employees, the disparity, are you talking i

about corporate type people, people that would be at Reading 15 i

i 16 I and/or Johnstown versus in the power plants?

I

\\

1 l

l Q

No, I'm not.

As I understand the situation from the 18hTheodoreBarryReport--whileImmleafingthrougnhere, it I

19 is my understanding that Penelec has approximately 3,300 j

l l

20 i employees involved in its production of electricty and a

21 distribution and so on; and that Met-Ed, if you eliminate

\\

22,those employees directly related to the production of nuclear 23 power, has approximately 2,200 employees.

i a4 a

~ l I suppose my question is:

given the fact that the b

.,3 o9 coal-fired generation of electricity by Met-Ed is a much o

I,!

d om

r32 421 I

smaller part of their production than Penelec's, how do you l

2 plan to absorb into your combined management plan the excess 3

number of employees you are going to have involved with 4

Met-Ed?

4 1

1 5

MR. RUSSELL:

I think this is a misleading question.

6 It referred previously to Mr. Dieckamp's testimony, and Mr.

7 Dieckamp pointed out very clearly that the total number of 3

employees and its correlation to the output of coal-fired l

9 generation is a totally meahingless comparison for a single

'l i

l company alone; and when you try to compare it with two 10 1

11 companies, it is even more meaningless.

So, I think the

()

12 question is misleading.

j 13 BY MR. MESSER:

I4 Q

I certainly, Mr. Verrochi, am not attempting to 15 mislead you.

16 A

I appreciate that, Mr. Messer.

1 II JUDGE CASEY:

I can remember the discussion and the way the question was phrased.

It seemed as though'he was 18 l

18 saying with the Met-Ed Company where you have a larger 20 number of employees dedicated to producing so many hundred 21 megawatts and proportionately with Penelec, you have fewer i

ns l t

, producing much greater; and Mr. Dieckamp'had difficulty with 23 that and indicated -- I don' t want to paraphrase what he did a4 say, but he mentioned that there were quite a few employees who were not involved in generation activities.

1

472 r23 i

i He made a statement about comparing a fish factory 2

with something else.

3 THE WITNESS:

If you will, Your Honor, I can maybe i

try to clarify.

I am not sure I will be any more successful j

i 5

than Herman was.

If you taxe a look at Penelec as of January 1, 1980 8

1 I

and Met-Ed as of January 1, 1980 and since we seem to be hung 7

i l

up on generation, allow me just for a few minutes.

The 8

number of employees, includ'ing of ficers, supervisory, exempt, 9

non-bargaining unit and bargaining unit type employees that 19 II were at corporate headquarters in Penelec as of January 1, 1980, or at least the official budget, if you will, forpeodll

~

12 33 '

was about 136 in generation.

At that time, Met-Ed had 34 people.

So, if you add I4 I

i 15 those two numbers up, you get 170 people in the two companies 16 independently involved each with their own generating 17 function.

I8 By the way, again, I have to come back to it; 34

'9 people in Met-Ed's corporate headquarters is not adequate to O l provide the corporate services at Reading and support to the 91 operating generating stations at Portland and Titus and

~

~~

.elsewhere.

arebestdoneatlh

' 31 There are certain functions that l

24 9 1 the corporate level, and that number is inadequate.

It l

25 '

represents the tremendous reduction that comes about from i

I l

5

• r24' 423 t I

taking some of the key Met-Ed officers and senior managers 2

and turning their efforts or separating them completely from 4

i 3

Met-Ed so that they can provide management services for the j

4 nuclear plants.

5 So, Met-Ed is defic.ient, and we estimate that 6

Met-Ed would certainly have to add 50 to 75 people to that 7

34 people to get them up to some reasonable number to provide 8

the kind of corporate support in that direction for a 9

relatively small generating function.

10 You will notice that that total would be of the or-i 11 der at most of 109 to 110 people which is less than 136 people

()

12 that Penelec has.

13 So, theoretically, Met-Ed could get by with 25 or j

i 14 30 people fewer in recognition of the fact.

15 Now, that is what you would have to do if Met-Ed 16 went it alone.

4 17 Now, obviously, those numbers I am giving you are 18 i

l only ballpark.

If we really and truly were going to continue 18 to operate Met-Ed alone for the indefinite future, we would 20 sit down and really figure out exactly how many people we 21 l

need doing what function, and ue would be guided by our past l

22

, experience.

Ok-23 JUDGE CASEY :

I can see that you are concentrating l

24 l

on the ;2nerating activities.

O THE WITNESS:

Well, we can talk about another I

r25 l

4 %4 ;

l t

i I

function if you would like.

2l JUDGE CASEY:

I think the thrust of the question, I

i 3

if it is possible to shglify it, in the Met-Ed system, you had ;

i 4

more people who were producing fewer megawatts of power for 5

few customers than you did comparing it to Penelec.

6 They had a smaller work staff overall and yet had a 7

bigger service territory and had something like 200,000 more l

customers.

They were producing how many more megawatts?

8 i

9 !

MR. MESSER:

Ten ' times.

10 l JUDGE CASEY:

Ten times; so that if you compare it 8

11 in that overall sense, why shouldn' t Met-Ed be able to 12 l itsworkforceproportionatelytotheperformanceoflll:

reduce 13 Penelec or something along those lines?

Is that what you are 14 driving at, Mr. Messer?

l l

l Ib BY MR. MESSER:

l 16 Q

As of January 1, Mr. Verrochi, according to the TB and A report, Met-Ed had 2,123 employees, excluding personnel 17 1

10 associated with nuclear generation, and Penelec had 3,239 i employees, excluding 781 on-the-site staf f at jointly-owned 19

'O

~

plants.

71 j A

Yes.

~

i

~~i.

O And I believe th'e Judge has understood the question 3

the way I mean it to be understood by you; and that is:

ca N

~

you explain why, with fewer people, Penelec can produce and i

generate and deliver quite a bit more electricity to many more L

t.521ep

425 r26 1

customers than Met-Ed can?

2 A

The numbers you gave me were 3,239 for Penelec?

3 0

3,239.

4 A

And 2,123 for Met-Ed?

5 Q

That's correct.

6 A

That is proportionately more.

Penelec has about 7

500,000 customers, and Met-Ed has about 350,000.

I think the 8

number of --

[

Q Mr. Verrochi, jus't so I understand the thrust of 8

your comment, how much coal-fired and hydro power does Met-Ed to 11 produce?

O I3 A

Met-Ed overetee for coe1 end e11 end hydro eeoue 922 megawatts, and Penelec owns and operates fossil and hydro 13 I4 stations.

The total megawatts is 6,898.

Are those the 15 numbers you are looking for?

16 Q

Yes, sir.

l 17 A

But these numbers you are giving me, the 3,239 and 16 2,123, are all corporate employees, not only just ' generating I9 s ta tions; it's everything.

20 Q

I understand that.

i r

I

'l A

I still don't understand.

i

~

i 2'

-JUDGE CASEY:

You are right.

Total numbers of j

~

J

'3 employees, Penelec does have nore people eT all classes than

~

Met-Ed.

THE WITNESS:

Sure.

I L

tmm? saw, son.90ga

r27 426 i o

tryingtosayG; 1

JUDGE CASEY:

And I think what he is 2

is:

if you took the total number of employees in each 3

separate company and divided it into the total amount of 4

megawatts--we are striving for a man-hour type figure; is 5

that correct, Mr. Messer?

6 MR. MESSER:

That is correct.

7 JUDGE CASEY:

-- and then you compare the two ; in a

his view, you are getting more production and more capability i

i i

9 out of the Penelec system than you are out of the Met-Ed system, if it is capable of being broken down in that fashion?

to 11 THE WITNESS:

I don't think it is appropriate to l

i thetotalPenelecandMet-EdpayrollsandmaPg' 12 take a look at 13 that judgment,

'4 At the risk of offending you, I think we have to l

15 l look at -.if we are talking generation --

16 JUDGE CASEY:

You are not offending me.

l I

l THE WITNESS:

I meant at the risk of offending 1

18 anybody.

If we want to make a comparison of the nt'imber of I

19 ll employees both at the generating stations and at corporate

'O j headquarters for Met-Ed per megawatt of installed capacity

~

21 {iand make a similar analysis for Penelec for megawatt of

~

92 '

~ ;, installed capacity, that is something, but none of the numbers we have here give us that kind of relationship.

h.

i

,4 -

- i We are not talking about -- and I tried a minute ago

'5 U

' j' to point out that as f ar as corporate headquarters is-COMMONWEALTH REPORTING COMPANY s717' 761 7150

i r28 427 l

11 l I

concerned, Met-Ed is a lot smaller than Penelec.

It just is.

{}

2 So, I am not sure I understand what you are getting at, Mr.

3 Messer.

4 BY MR. MESSER:

5 Q

Mr. Verrochi, it is my understanding -- maybe I am l

6 not making myself clear, but it is my understanding that the 7

GPU Nuclear Corporation, which is now going to be spun-off 8

from Met-Ed, is going to be charged with the responsibility of; 9

operating Three Mile Island; and that is not going to be t

to part of the responsibility of the chief operating officer of 11 the combined management unit; is that' correct?

()

12 A

That's right.

13 Q

So, it would be my assumption, based upon that 14 representation in the management agreements, that all is personnel associated with nuclear generation will be under the i

16 authority of the Nuclear Operating Corporation.

Is that a fair 17 assumption?

3 s

la A

Yes, sir.

i 19 0

Which would mean, ifIam correct, that 2,123 20 employees would remain under the control of the chief operating j

21 officer of Met-Ed; is that right?

l l

22 ?

A Assuming your numbers are right, and I have no reason 23 to disagree, that's right; sure.

l 24 Q

If that is true, you would have 2,123 employees 25 producing, if you will, or have the support to produce 922 megawatts of power; is that right or is that wrong?

4 e.m mcwru

428 r29 1

A That's wrong.

lll 2

3p. RUSSELL:

Could you show Mr. Verrochi the TB and 3

A statement you are referring to?

4 MR. MESSER:

Certainly.

5 MR. RUSSELL:

Have it explicitly stated on the 6

record what you are referring to.

7 BY MR. MESSER:

Q Well, Mr. Verrochi, I am referring to 8

9 I-6 of the Theodore Ba'rry Report dated September, 1980 page 10 where it says, "As of January 1, 1980, Met-Ed had 2,123 11 employees (excluding personnel associated with nuclear 12 generation) and Penelec 3,239 (exclud'ing 781 on-site staff h

13 at jointly-owned plants)."

li i Continuing, it says, "In addition to its wholly-owned generation, Met-Ed is the operator for the jointly-owned 15

(

16 Three Mile Island nuclear plant.

17 "Penelec operates eight coal-fired plants including 18 one jointly owned with New York State Electric and Gas, and j two owned by a group of other PJM utilities and two hydro l9 20 plants.

I 1.

"It also operates pump storage and diesel facilities 21 l

1 22 l.for joint owners.

'3 "The employee totals include those devoted to

- h e

'4 operating facilities for other owners."

~

~,- i l

All right; now, it was my understanding from Mr.

r30 429 I

I~(-)-

1 Dieckamp that Met-Ed had two coal-fired generating facilities; 2

is that right?

i 3

A That's right.

4 Q

And I believe you told me today that, in addition, 5

they had one hydro station; is that correct?

6 A

And they have severa.1 combustion turbines.

7 Q

And combustion turbines?

8 A

Yes.

9 Q

That was going to be my next question.

Now, at the 4

10 risk of being totally redundant, it appears to me that the 11 proposed Met-Ed organization --

O)

(_

12 MR. RUSSELLi May I just interject for purpo,ses of I

1 13 clarity? You were also talking about a certain amount of i

14 kilowatt hours or megawatt hours.

Could you identify what 15 reference you are making there?

i l

16 MR. MESSER:

I didn' t make the reference; Mr.

17 Verrochi told me that the Met-Ed group produces 922 megawatts la and that Penelec produces 6,898 megawatts.

l i

19 BY MR. MESSER:

l 20 Q

Is that correct?

21 A

They operate; that is generating capacity.

22 JUDGE CASEY: 'About 2,000 of that goes to -- as I 23 !

recall from my reading, roughly 2,000 of the 6,000 total I

I 24 generated goes directly into Penelec's system; the rest is l

25 l distributed among the'other members of PJM?

I

r31 410 l

1 THE WITNESS:

Yes.

2 BY MR. MESSER:

3 Q

I suppose what I am trying to ask is:

in the Penelec 4

system, you have 3,239 employees deveced to the production, 5,

distribution, generation of the 6,898 megawatts; is that 6

right?

7 A

No.

I think you quoted that the 3,239 for Penelec i

i 8

does not include employees involved with the operation of 9!

joint-owned stations.

10 Q

All right.

How does that aff90c what we are talking, 11 about?

12 A

Then the amount of installed capacity that Peneleql(

i 13 l owns, including hydro and combustion turbines and so forth, i

i 14 !

but not including nuclear -- Penelec has 2,247 megawatts of i

l 15 installed capacity tha't i t own s, and these 3,239 people l

16 include generating station employees to operate that 2,247 17 megawatts.

18 So, we are really comparing a Penelec organization 19 which has 3,239 employees, some of whom work in generation and i

20 operate and maintain 2,247 megawatts of generation; and Met-Ed has 2,123 employees, some of whom are involved at corporate 21 22,and generating station locations, and they are responsible k

23 for 922.

24 I think the danger of saying that the ratio of 25 total employees in Penelec and Met-Ed ought to be somehow or

" m t u n M a f t* f. ? T W Qf pFR*tNC Fn%f P A NY r79 7 7F 1 M T V

. r32 431 1

other in the same combination as to the capacity that they T'~')

C, 2

own and operate in generating stations is, I think, a danger; 3

and that may be leading to our confusion.

4 I think you have to look at the corporate head-5 quarters for all the functions including generation and make 6

comparisons on that basis.

By the way, Theodore Barry did i

exactly that.

a Q

What was their conclusion?

9 A

I don't recall that they had a strong conclusion as 10 to whether we were under-manned or over-manned.

i 11,

Q When you say "we," who are you speaking of?

I (q;

12 A

Penelec and/or Met-Ed with the exception of corporate 13 headquarters where we all know they are under-manned.

Whether 14 '

we are over-manned or under-manned, it was kind of a wash.

15 Q

So, are you indicating that it is your belief that 16 Met-Ed is under-manned currently in their executive staff l

17 at headquarters?

18 A

In the generating function, yes.

l9 Q

In their generating function?

20 A

Yes.

21 Q

In any other function?

i

,o I A

With the recent layoffs, I am not sure whether I s,

J 23 could address that.

There is a possibility that they are a l

little leaner than they should be in a lot of functions, but 24

,"-I I really don't know.

1 d"C M M O N W C A t.TH REPOWWG CoxP8N 6/0 7 7Q t -7 9 50

432 o

r33 r

gg)

Q And you are now speaking at the executive level 2

again; is that right, just for my purposes?

i t

3 A

Corporate level, I would say.

i 4

Q Corporate, that is how you would define it?

i 5

A Corporate headquarters, yes.

6 JUDGE CASEY:

Let's not skip over that.

They are l

7 substantially under-manned in the generating function as of f

8, January 1, 1980, even with TMI-1 and TMI-2 off line and they l

9' simply have the two coal-fired and the one steam turbine, and 10 ;

they are still under-manned with that 34 people who are 11 committed to that function?

12 THE WITNESS:

Yes, sir.

We would estimate at lead 13 another 50 people to that to 75 more in order to provide I4 corporate support and control.

15 l JUDGE CASEY:

Would their responsibilities continue 16 or increase, Mr. Verrochi, because of the purchased power 17 Situation that is going on with Met-Ed?

Do they also have s

I3 l functions to perform in that context?

i THE WITNESS:

Yes, they do.

They are accounting l

19 l 20 !

functions.

While much of the negotiations for those procure-

'l' ments and contracting for them is done at the service company

~

1 22 l level for all three companies, the operating companies do h

'1 have some work load associated with interchange.

~

l l JUDGE CASEY:

We will recess now for lunch mitdl 1:30 p.:

I 43 i (Whereupon, at 12:27 p.m.,

the hearing was adjourned,

~

,to be reconvened at 1:30 p.m.,

this same day.)

t

433

r34, l

9 1

AFTERNOON SESSION t

(q) 2 (1:30 p.m.)

l T3,Sl 3

JUDGE CASEY:

Back on the record.

i 4

Whereupon, 5

WILLIAM A. VERROCHI 6

having previously been duly sworn, testified further as 7

follows:

8 CROSS-EXAMINATION (Continued)

I 2<

9 i.

~tsY MR, MESSER:

10 Q

Mr. Verrochi, in your assessment of the proposed 11 combination, what do you perceive as the negative impact on

{

i

()

12 Penelec?

i, 13 A

I think the negative impact on Penelec deals i

i primarily with the need to relocate some of the employees.

14 i

15 The cost associated with that, of course, is a once and done i

thing, but it is sizeable to pay the moving expenses for an l

16 17 employee, the disruption to their lives of relocating from 18 one city to another.

These are some of the negatife impacts-I I

19 i that come to mind.

l 20 Q

Are you saying that morale will suffer as a result 21 of the relocation?

22 A

I don' t think it will suffer, and tha,t is based on

()

23 our experience even during this past year when the implementa-l l tion of this plan has been delayed far beyond our expectations.

24 In my judgment, and I think it is shared by my associates from

. 25 i

to-COMMONWEALTH REPORTING COMPANY #717' 761 7150

r35 434 I

what we can see, morale continues to be pretty good.

O 2

Q What I am, I suppose, getting at is that you have 3

indicated that the negative impact on Penelec will be the 4

relocation of employees.

I 5

Now, how would that be a negative impact?

6 A

I think it is more a general sort of a comment.

I 7

When you reorganize and relocate functions and close down 8

facilities at one place or reduce facilities one place and 9

increase in another, you in'evitably have to relocate employees 10 or you have to terminate some and some of these people will be 11 laid off.

12 All of these actions do tend to be negative.

Theggg 13 employees don' t particularly like to be relocated, and some i

14 !

of tha wives don' t like to go along with it, but I think it is 15 the sort of thing one expects in business.

l 16 l I have moved a lot of times, and a lot of our l

employees have, but it is a negative factor; it certainly is 17 18 not the reason you do it.

19 Q

And the second impact of a negative nature would be 20 '

the cost associated with that relocation?

21 A

Yes.

We have tried in our estimates to identify 22 what the costs associated with relocation of the designated i

llh 23hemployeeswouldbe, and we have, in fact, identified them.

'4 l Other than those two circumstances, did you consider Q

l 23!

any other negative impact upon Penelec?

COMMONWEALTH REPORTING COMPANY (7175 761 7150 e

435 r36 1

A We did, of course, consider quite a bit the

()

i 2

negative impact the proposed and the announced move had on 3

the City of Johnstown and some of its leaders.

i 4

Q Mr. Verrochi, I am not speaking of the impact upon 5

the community.

I am speaking strictly looking at it as a l

6 corporate officer.

What other negative impacts would there be 7

upon Penelec, other than the two items that you mentioned?

8 A

I think the three I mentioned are costs associated 9

with relocation, the natura'l inclination against pulling up i

10 roots and relocating to another city that employees and their 11 l families normally have; and the third'one, of" course, is that I

()

~

12 some of the employees would not be relocated and would,, in l

13 3 fact, be terminated either through attrition or otherwise.

i 14 Some of the people are going to lose jobs, a small number.'

15 Other than that, I cannot think of any negative i

16 impacts.

II JUDGE CASEY:

I think your answer mentions what 18 the impact would be on individual officers and employees who 19 would be involved in the shift from headquarters.

O If I am not mistaken, I think Mr. Messer also

'l intended to include in that question what impact would it have 1

22 j. on the corporate entity known as Penelec in the overall.

l "T

i i

^)

63 MR. RUSSELL:

Negative impact.

94 THE WITNESS:

Negative impact, Your Honor?

25 JUDGE CASEY: 'Yes, negative impact.

I

r37 43,6 I

1 THE WITNESS:

Now that you have phrased it that wa -,

2 obviously any change in the way one does business versus the 1

way it used to be does create a certain amount of confusion, 3

4 and I am sure that during that stage of readjusting to the 5

new lines of authority, the new corporate structure, one 6

could easily expect some inefficiencies.

7 It is hard to quantify, but certainly they would 8

be there.

You have to be sensitive to them.

9 BY MR. MESSER:

I 10 Q

Other than that factor of confusion, have you seen i

any other evidence or have you considered any*other negative Il l

12 l impactthatyoumight'havedismissedinyourconsideration?ggg 13 A

I think in my direct testimony, I have addressed j

t t'

that.

If you will permit me, I will look at it to make sure I4 '

15 I haven't missed something that I said there.

i' 16 (Witness perusing document.)

A Yes, I think my memory was about right on that j

II I8 subject.

i I9 l Q

Previously, you indicated to me that the responsi-l

'O bility for preparing the Blue Book and its subsequent genera-

.l

'I tion of Blue Books was the responsiblity of Penelec with the 22. help of Mr. Smith providing documentation from Met-Ed. Is that 4

a fair recollection of what you said or not?

i MR. RUSSELL:

Of Penelec alone as a corporation?

I Sh p

MR. MESSER:

It was my understanding that Mr.

1

@@MMM4NWGALTH REPORTING COMPANY 4717 761 7150

r36 437 i

Verrochi told me that Mr. Donofrio and other employees at 2

Penelec, as well as himself, prepared the actual Blue Book 3

with input coming from Mr. Smith providing information.

4 THE WITNESS:

I guess where I am hung up, Mr. Messer, 5

is in the subsequent issues, the green and the white and the 6

red and the yellow and all that, those later issues represent an increasing amount of involvement of lower levels 7

8 of the organization both in Penelec and Met-Ed, and they also represent, after we had idehtified the key players and, 9

10 therefore, made it possible, the effort of the participation 11 of a lot of people in both organizations working, if you will,

(])

without needing to go' through me.

I 12 13 They were working at their own level and exchanging I4 information and working things out.

So, the subsequent issues of the Blue Book 15 l

represent an increasing amount of involvement of a larger 18 number of people in management and at the management and 17 18 officer level.

I9 BY MR. MESSER:

Q Would you say there was a great deal of time 20

'l devoted to the Blue Book and its progeny or not?

l'

~

22 !

A That is a matter of --

(^

3 N

Q In your judgment.

(

34 think the documents represent quite a concerted A

I 23 effort on the part of those of us involved with the COMMONWEALTH REPCRTING COMPANY 4717 761 7150 1

A

438 r39 i

4 l

l 1

I responsibility to develop the plan.

ggf 2!

I cannot say that I spent half my time doing it, l

3 but I spent quite a bit of time; and I know Mr. Donofrio did.

4 I would say it was a sizeable effort, sure.

5 Q

Do you still have the time records that were kept 6

in regard to the preparation of these particular documents?

7 A

I am not sure that we keep our time that accurately 8i at the officer level.

j l

I 9'

MR. DONOFRIO:

The time sheets would not show the j

10 j time being spent on a particular book versus being spent on j

i 11 l the other particular events.

I 12 My time sheet and Bill's time sheet shows thatwekhh' i

13 charge administrative and general salaries for seven a nd one-14lj, half hours a day.

15 BY MR. MESSER:

l l

i 16 !

O What I am getting at is how did you allocate the II cost of the preparation of these documents between Met-Ed and la Penelec?

l l

19 A

We didn't allocate them, except to the extent that 20 l. the Met-Ed participants atthe manager and officer level 21 charged their time to Met-Ed and the Penelec participants 22, charged our time to Penelec in accordance with established k

a3 : accounting practices.

1 yI Q

Did you prepare or did anyone under your supervision 25 on behalf of Penelec prepare any type of written documentation

r40 439 l

l 1

in regard to the potential bankruptcy of !!etropolitan Edison 3

s/

2 Company and the effect that that bankruptcy might have on the 3

combined management situation?

4 A

I don' t think we in Penelec --

5 MR. RUSSELL:

Perhaps I may interject here.

In 6

phase two of proceedings at I 308 before this Commission, that 7

was developed at length and there was testimony prepared by 8

Harvey Miller, an expert in bankruptcy, that was presented i

9 to this Commission and his cross-examination with respect to 10 it is there.

l 11 I would say that certainly would be one specific

()

detailed treatment of the subject.

12 I

13 JUDGE CASEY:

Mr. Harvey Miller was retained as an 14 I expert, so-ca11ed,on the subject --

15 MR. RUSSELL:

Of bankruptcy.

16 JUDGE CASEY:

-- to present what he thought the 17 impact would be on the GPU system.

18 MR. RUSSELL:

He discussed the issue of cankruptcy, f

19 the advantages and disadvantages of bankruptcy, the problems 20 !' arising out of the new bankruptcy code, the uncertainties that it would entail, the levels of cost ^that bankruptcy would i

21

, provide as an overlay, whether or not operating costs would be 22

[')%

43 ;

any different for purchased power, for example, under

(

l'

'4 bankruptcy versus no bankruptcy, and came forth with specific 25 recommendations as to the undesirability of bankruptcy as an COMMONWEAL TH REPORTING COMPANY e717, 761 7150

440 r41 i

l I

alternative to the maintainance of the operating companies-as9:

2 viable utilities.

I 3

MR. MESSER:

I think, Your Honor, that I would 4

request that my question be permitted to stand.

It is my 5

understanding that that testimony was offered before these i

6 combined management agreements were filed.

i 7

I don' t know whether that testimony and don ' t believe 8l that testimony relates to my spscific question.

9j Specifically what*I am asking is whether Mr.

I 10 !

Verrochi or anyone under his control prepared any written 11 memorandums in regard to the effects of a Met-Ed bankruptcy 12 on the proposed merger.

13 l MR. RUSSELL:

I think Mr. Dieckamp covered that, as 14,

I recall, in his testimony either on direct or cross, if I am 15 not mistaken.

I 16 '

JUDGE CASEY:

He may have referred to it in general 17 terms in his testimony, but I think Mr. Messer is asking I

18q Mr. Verrochi whether he, as an individual, exchanged any --

h 19 THE WITNESS:

And I answered that by saying I didn't.

I 20 '

JUDGE CASEY:

Whether he was in a discussion group h'

210 as to the impact of bankruptcy.

I 22 j THE WITNESS:

I tried to answer that, Judge, by saying that I did not, neither did anybody that works formllh 23 24 !, at Penelec, get involved as far as I know.

i Il 250 MR. SHILOBOD:

If Your Honor please, Mr. Russell put 0

l

[

COMMONWEALTH REPORTING COMPANY #717 761-7150

~

r42, 441 I

I a statement on the record of the testimony of a witness in gS

%.)

l 2

another case and his conclusions. I submit that that is not i

3 proper for evidentiary purposes in this proceeding, particularly 4

in light of the fact that there are major areas of cross-5 examination that were never looked into that could have had 6

a direct bearing on the conclusion.

7 So, I don' t think it would be proper for Your Honor 8

to take any of that into account.

9 JUDGE CASEY:

Believe me, I wouldn't be swayed in 10 any way or influenced.

I think he is simply trying to 11 summarize what Mr. Harvey Miller testified about.

l

(~')

12 This man is a lawyer.

I am aware he testified.

~

x_/

13 I have not reviewed his testimony.

I don't know what inroads i l

14 were made against that testimony by adversary parties in the case.

So,.it would make no difference at all to me in this is f

16 proceeding.

17 I think what he tried to say is that anything l

l dealing with the general subject of bankruptcy, the company's IS

+

I 19 position follows along the lines of the testimony of Mr. Miller 20 in the I 308 proceedings.

Is that a correct statement, Mr.

21 Russell?

22 MR. RUSSELL:

I was suggesting to counsel where he (m_)

23 could find some testimony with respect to the subject of 2'

bankruptcy.

I was not purporting to testify in this proceeding and I certainly would not want what I said construed as such.

25 I

COMMONWEALTH REPORTING COMPANY t717 7617150

442 r43 i

1 JUDGE CASEY:

Nevertheless, thatwasthepositiong 2

a third party who had been hired by GPU to come in as an I

3 expert to describe for the benefit of the Commission the 4

impact it would have on the company, but I think 2:r. Messer 5

is interested in whether the corporate officers and the 6

various directorships within the system had discussions pertaining to bankruptcy and what would be done in the event 7

t I

8 of bankruptcy and whether this affiliated interest, the two contracts, should be pursued in the light of possible and 9

to pending bankruptcy; is that correct?

i 11 MR. MESSER:

That is correct, Your Honor.

I Mr.Verrochihasinhisposses,sionMh 12 MR. RUSSELL:

13 least a document, not a study, but a document that does 14 bear on, I think, the issue that Mr. Messer is relating to.

15 It involved correspondence between Mr. Kuhns of GPU and 18 a legislator in the Penelec tarritory.

II If Mr. Messer would like to see it, I would be glad j 18 to have him see it.

19 MR. MESSER:

I am always looking for. additional f

nformation, 20 i

Mr. Russell.

I (Document handed to Mr. Messer.)

22 MR. MESSER:

If you would give me an opportunity 43 '

just to review it for a moment, Your Honor.

24 (Pause.)

'5 I

~ '

MR. MESSER:

May we have a copy of this, Mr. Russell?

l It

.r44 443 1

MR. RUSSELL:

Surely.

(')

(j 2

BY MR. MESSER:

3 Q

Going back to my question, Mr. Verrochi, a follow-up 4

question to the one, I believe, that you answered that no one l

5 under your control and you did not prepare any documents of 6

that nature; is that right?

{

f 7

A I was involved withthat document only to the extent 8

of reviewing it and giving Mr. Kuhns some input, and I think I had Al Donofrio and'Roy Simmons review it, but other 9

10 than that, we didn't spend any time on the bankruptcy 11 question.

7s

(

)

12 Q

Since the date of that letter or previous to,that, 13 have you formulated in your own mind any type of contingency 14 plan or operational plan in the event that Met-Ed is not able 15 to meet its debts as they become due?

16 A

Each of the two companies quite a while ago initiated l

17 a contingency plan dealing with primarily how we would manage 18 cash flow and tried to prioritize what we would do in terms of 39 providing customer service and taking care of the operating 20 and maintenance needs, procurement, to stretch our cash out as 21 much as we could.

Met-Ed prepared such a document and updated 22

.it and so did Penelec.

'3 K1 I was involved in reviewing, of course, the l

'4 Penelec document and its updates, and I have also reviewed

~

^5 the Met-Ed documents and their updates.

I rnVMO*lWf*a? TH 9 ePORTING cnMP A NY

'7' 7' '61 71 M

444 r45 I

We strived through our controllers of the two

ggg, 2

companies to make them as similar as possible.

3 Q

Would the bankruptcy of Met-Ed adversely affect l

4 Penelec?

5 A

Some of that has legal connotations, and I hesitate 6

to answer it as an expert; but from all I have been able to i

7 ascertain, the bankruptcy of Met-Ed, while it would obviously l 8

primarily affect Met-Ed, could cause some secondary or 9

tertiary impacts and effects on Penelec.

I I don't know enough about it to tell you specifically 10 11 how that would happen.

12 O

Would the combined management agreements increase llh.

13 decrease the adverse effects on Penelee as a result of a i

14 Met-Ed bankruptcy?

15 A

All the advice I have been able to get both 16 internally and externally to GPU is that the combination would II not increase Penelec's exposure to bankruptcy.in the event Met-Ed went bankrupt.

In fact, it would help the ' situation, 18 19 but fairly modestly.

I think Herman Dieckamp testified on

'O that the other day.

~

2; Q

Have you been able or has Mr. Donofrio been able 9,

.to quantify the budget that would be necessary to run the

~~

'3 combined management of Penelec and Met-Ed if this plan is

'4 approved?

'5 I A

I don't know if Al has developed specific numbers as

~

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• f* AM D A M Y 1717t 7 A 1.7 i MA

445 46 l

l 1

to what the combined operation would look like, say, in 1981 2

versus the way the budgets are currently prepared.

Maybe you 3

can answer that, Al.

4 MR. DONOFRIO:

Specifically, the two budgets that 5

are prepared right now are on a single company basis.

We are 6

just in the throes of doing ourbudgets for 1981.

They have 7

not, as yet, been approved by the Board of Directors of 8

either of the companies.

That will not happen until probably 9

late December or early Janu'ary.-

10 Right now, until we have the go ahead on here, we do not have I we are putting in time'on that.

(

11 12 A lot of the construction programs of the T and D 13 and the generation area will be the same with the combination 14 of the companies.

15 MR. MESSER:

That is not the question I am asking.

l 16 MR. RUSSELL: You said a single company basis.

Are 17 you talking about the two companies as a single company, or 18 each company _ separately?

I9 MR. MESSER:

You are talking about two independent 20 budgets that you have right now?

21 MR. DONOFRIO:

Yes, for each individual Board of 2

. Directors.

3 MR. MESSER:

What I am asking is that you propose a Combined management team for the operation of the two 25 companies.

t i

I COMMONWEASTH REPORTING COMPANY (7175 76l 7150

r47 44'6 i

1 MR. DONOFRIO:

Yes,. sir.

llI 2

MR. MESSER:

And above a certain level, the 3

executives, as I understand it, are going to be responsible 4

for the management of those two companies.

5 What I want to know is if you have a ballpark figure 6

for the operationa.1.;udget for those executive s and their 7

support staff.

8 MR. DONOFRIO:

On an individual company basis, yes.

l 8

MR. f ESSER:

On a combined basis?

MR. DONOFRIO:

The only thing that we do have is on IO II an individual company basis, we have where we are today.

What, 1

we do have is shown in our filing here, what the change woul9!

l'

~

IU be if we do go combined.

I.

14 MR. MESSER:

Could you give me a rough addition in i

15 your head of what the cost of independent operations for each I6 is that would be allocable or combined in the combined l

t I

management agreement?

s 18 MR. DONOFRIO:

The portion allocable; out of a total :

19 of e. bout 6,100 employees, because it is mainly. payroll costs

'O we are talking about now --

~

9~1 MR. RUSSELL:

Is that the total of one company or

'two companies?

~3 MR. DONOFRIO:

I am sorry ; that would be the ccmbined 24 total after a management combination.

25 MR. MESSER:

6,100 employees?

=

r48 447 1

MR. DONOFRIO:

Approximately 6,100 employees.

Of

}.

2 that, all except about 1,100, would be in either physical 3

generating stations and/or district division offices in the 4

T and D area, away from corporate headquarters.

5 None of those would be the allocation formulas.

Out 6

of the 1,100 corporate employees, about 270 or thereabouts 7

would fall underneath the allocation agreement.

That is about 8

four percent of the total employees is all we are speaking of.

There can be some' employees in this four percent 9

i 10 that would charge direct.

There could be some employees 11 outside of this four percent that could be allocable, but my

()

12 general prognosis is that about four percent of the to,tal I

13 employees is all we are speaking of here.

14 MR. MESSER:

How much in terms of dollars in regard 15 to these 270 employees?

What type of money are we talking i

is about for their salaries, their support staff, that would be 1

l

\\

l 17 directly allocable to the combined management. agreement?

s t

18 MR. DONOFRIO:

You are talking probably around a 19 total of about $11 million being allocated somewhere around l

20 55 percent /45 or 60/40.

21 MR. MESSER:

Among the companies.

'So,we are talking' l

22

.in the area of about $11 million per annum for'these combined l (k /

i 23 l

officers and executives?

l 24 MR. DONOFRIO:

Key corporate staff.

l 25 MR. MESSER:

Allocated 60/40 or --

rouunMwr a s TM D FDADTrue. PMMD A MV.

r49 448 i l

i l

l 1

MR. DONOFRIO:

About that, yes.

2 BY MR. MESSER:

3 Q

Mr. Verrochi, let's assume that the Commission would 4

grant the request to combine the management and let's further 5

assume that Met-Ed would be unable to meet its debts as they 6

become due, who would have to pay Met-Ed's share of the administrative costs and expenses involved in this $11 millioni 7

i t

8 A

Met-Ed would have to.

l 9

Q Let's say they couldn' t pay it.

10 A

Penelec wouldn't.

4 I

Q So that if there was a bankruptcy or an inability of 11 12 :

Metropolitan Edison to pay its debts as they became due, lll 13 ! Penelec, under these agreements, would have to pay a total of 14

$11 million?

1 15 A

No; no, I just said no.

le Q

They wouldn't?

5 17 A

They would not have to.

1 18 Q

Who would?

I9 A

Penelec would pay its share.

I don't know who would 20 pay the Met-Ed share.

It all depends on how the bankruptcy

'l proceedings go, but Penelec has no way of paying them.

We

~

can't; we won't.

~'

3 Q

They would have no way of paying it?

t A

No way of paying.

They are not legitimate expenses,

'S for Penelec.

So, therefore, we wouldn' t pay them.

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Q Do you think that the employees would continue to v

2 work if they were not being paid?

3 A

That is a different question.

4 MR. RUSSELL:

If Your Honor please, I would object 5

to this line of questioning because of, I think, a misleading 6

assumption that it embodies; that as a result of the 7

bankruptcy proceeding, there would be no mechanism through the 3

Bankruptcy Court or otherwise to see to it that the ongoing I

9 expenses necessary to enable Met-Ed to render service to the 10 public would not be provided for.

I think that is clearly not 11 the case.

l (w;

12 Obviously, the Bankrupty Courts, the last th,ing in I

13 the world that they would permit would be circumstances to I4 arise that would prevent Met-Ed from rendering service to the is public.

16 I think, in that sense, it is a misleading i

question and line of questioning, because it has assumed l

II 18 something which, I think, obviously is not going to be the IU case.

O JUDGE CASEY:

I think it is rather speculative.

We

'~l are not even sure whether the management combination, if it is i

no approved by the Commission, would remain intact after

~~

t

'3 bankruptcy or reorganization under Chapter 11.

There are a

~

7~4 lot of speculative matters; and whether the Bankruptcy Court

'5 would expect certain officers who have been assigned from one t" A M M A N W I"

• f T W QFPORT!NC cdMPANY 717 7 f11 718!O

450 r51 i

t i

company to the management team would go without remunerationggf i

2 while others -- I just can't see some being paid, some not 3

being paid bec tuse one company is unable to discharge 4

certain of its obligations.

5 MR. MESSER:

That is my point.

My point is in th9 6

interim until the reorganization plan is adopted and orders 7

are forthcoming from the Court, it may be necessary for I

a Penelec to extend credit to the management combination 8l agreement in order to keep it running in the meantime.

10 !

Therefore, you have a negative impact upon Penelec, i

I 11 because their ratepayers are now paying the Met-Edeshare of 12 the management combination expenses.

If that is true.3 Ithdlh 13 that is a negative impact, but I think we have explored it to i

14 the extent I feel necessary.

JUDGE CASEY:

I think perhaps the basic issue or the 15 16 real issue is whether the proposed combination makes sense 17 from a number of various viewpoints in light of the possible 13 impending bankruptcy.

I8 Will the two companies be better off.after oo bankruptcy than they were with this combination management

'l f team, or will they be worse off?

That is very difficult to 22 predict, but they have more expertise in that area than any cf 23 i us, I assume.

a4 I

BY MR. MESSER:

~

^5 Q

Mr. Verrochi, in regard to the current management cr b

~

r.52 451.

1 your current management of Penelec, what do you consider to be

,-m.

()

2 the most pressing issue that confronts you in the operations 3

of Penelec?

4 A

Pretty much a continuation of what has always been 5

our most pressing issues, the need to serve our customers as s

well as we can, to be responsive to their needs, to develop 7

priorities in operation, maintenance and construction, to 3i make sure that we fulfill these obligations; and that is, in I

9l fact, to be more astute tha'n ever in developing and controlling 10 !

costs controls, developing budgets and controlling costs.

11 l Penelec is again in relatively good shape.

Al I

I

{~

12 :

mentioned the 1981 budget.

With the exception of delaying thei l

13 i start of construction for a major capacity addition, Seward 7, i

14 ! which would cost us some S20 million or $25 million in 1981--

15 we have delayed that. unit.

I think Herman described why.

I i

16 With that single major exception, I am quite l

i 17 comfortable that Penelec has the resources, the dollars, the I

i 18 attitude and the pecple to continue to provide good quality i

19If service to our customers.

Now, that's

'81.

20 I guess my biggest concern is that one of these l

21 j days, Penelec will, in fact, need to go outside and do some i

l I

22 !. financing for some major capacity additions.

i

/~T

,3

- i We are in pretty good cash shape now for

'80,

'81,

()

I 24 ! perhaps into ' 82; but one of these days, we are going to have i

l l.

to be in the position to do some external financing.

i COMMONWEALTH REPORT!NG COMP ANY 1717 7617t 50

452 r53 l

1 We can't do it unless Met-Ed and Jersey Central, tggg 2

of our sister companies, are in better financial shape.

So, if 3

I want to worry, I worry about that sort of thing.

4 JUDGE CASEY:

Excuse me for a minute.

Why did you 5

include Jersey Central in that last statement, Mr. Verrochi?

6 Other than their 25 percent interest in Three Mile Island, 7

which is in jeopardy, is there anything in particular about 3

Jersey Central --

9 THE WITNESS:

Well, if GPU, as a system, and each of to the operating cocpanies individually want to maintain 11 acceptable capithlization ratios, whatever they ere, one cf 12 ; these days, wewillhavetomake--inadditiontoeachofdlh I

13 i sub'sidiaries selling bonds or preferred stocks, the GPU, the i

14 j stockholder of all three of the companies, will want to issue 15llsome new common stock.

It is very difficult for them to do 16 that now.

17 JUDGE CASEY:

I understand that, but I think you s

la made the statement to the effect that Penelec's borrowing 19 ability for this purpose is contingent upon Met-Ed and Jersey 20 Central getting themselves into better financial condition.

21 Is there something peculiar to Jersey Central that would --

22 THE WITNESS:

No, Your Honor, I don't think so.

91 23 l Perhaps I should hav_ said, if I didn't, that in order for l

t 24 Penelec to build major r.ew generation and in order for Jersey f 25 Central and Met-Ed, our sister companies, in order for them l

r54 450 S

1 and us to build new generating stations, which we are going

('J L.

2 to need, we will have to do some external financing; and that 3

external financing will depend upon the financial help of each 4

sf the three operating companies.

Did I clarify it any?

5 JUDGE CASEY:

That's correct; you did in a way, but 6

your first answer in your testimony left me with the impressior 7

that while Penelec i's pretty sound fiscally and has been 8

right along, that it is going to have problems if the " h ?r two sister companies don' t ' aise their financial circumstances 9

r 10 to an appropriate --

11 THE WITNESS:

Again, I guess it is an engineer I j 12 talking finances and perhaps I can clarify it.

13 Penelec is not in good' shape physically; our 14 earnings are very poor.

Our interest coverage is below the 15 level which would permit us or will soon get below the level is which would permit us to sell even first mortgage bonds.

17 So, I didn' t mean to imply that Penelec is in good 18 fiscal shape or financial shape.

We are in good ' shape in 19 terms of cash.-

As Al pointed out, we are not in a borrowing 20 pocition, but that will very soon dry up.

21 We wil1 need some external financing certainly by i

22

.'82, roughly.

In order for us to do that, both we and our (m

23 two sister companies have to be in much better financial l

24 fiscal shape than we are now.

25 crvvr Nwr ar Tw nrpenmNn courn"v

<?,7 vn t ?* 96

r55 454 1

BY MR. MESSER:

2 Q

Mr. Verrochi, do you perceive of any conflict of 3

interest in serving as the President of both Met-Ed and 4

Penelec under the combined management agreement?

5 A

No, I don't.

6 Q

What if it were in the best interest of the stock-7 holders and the ratepayers of Penelec to decommission Three 3

Mile Island, would you be in a position of a conflict of 9

interest at that time?

3 MR. RUSSELL:

Again, I think this is speculative, 11 to assume that decommissioning would be in the best interest

, ofonecompanybutno'ttherestoftheownersofthestatiojll 12 13 :

MR. MESSER:

I am just asking a hypothetical 14 question regarding conflict of interest, Your-Honor.

15 THE WITNESS:

That conflict exists now.

Penelec 16 owns 25 percent of Three Mile Island-2.

With or without 17 the combination, that would be a question we have to address. ;

s 13 BY MR. MESSER:

19 Q

There are different considerations, aren't there, 20 Mr. Varrochi,'for Penelec and Met-Ed in that equation?

21 A

Those differences, if they exist, exist today.

The l l

22. combination doesn't create those differences.

Penelec has l

1 23 currently got its own ratepayers and, of course, its ccmmon l

24 stock is owned by GPU.

25 l

Q What if it was in the best interest of the l

P A e a a a F kinat C 4 i *tI

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455

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(~';

I ratepayers and the shareholders in Penelec to decommission LJ l

2 Three Mile Island, but not in the interests of the share-

]

3 holders and the ratepayers o ~ Met-Ed to decommission?

4 MR. RUSSELL:

Are you assuming that Met-Zd and 5

Penelec will have different common stock shareholders?

l 6

MR. MESSER:

I am assuming that they will have 7

different deferred shareholders, which we have already 8

established on the record.

9 JUDGE CASEY:

I t'hink what he may be trying to say 10 is that because of the ownership difference, the different i

i 11 ratio, the 50 percent to the 25 percent, that from the l

I

()

12 standpoint of generatbrr capability, there might indeed be 13 different considerations for the two compaaies; but as far as l l

14 the stock ownership in a holding company situation, it is hard:

15 to make a subtle distinction of that nature.

16 THE WITNESS:

I guess I would further add that just 17 as the Board of Directors of Penelec would meet now and try to; hypothetical question raised -- and i't is a very 18 address that l

19 difficult one to consider -- they will continue to meet after 20 the combination, and 1 am sure that we tried to focus on, 21 sitting as Penelec Directors, what is good for the Penelec 22

.ratepayers.

s

(

1

'3 We would have to then sit as Met-Ed Directors and try to wear that hat.

I think we could do it, but two Bcards 24

~

would be meeting -- the same Board would be meeting separately,

'5

-nuur-e s Tw Drpc DT'Yn FoVP S NY

'7'T 761.719 P

r57 456 t

l I

once as Met-Ed and the other time as Penelec.

I O-'

2 BY MR. MESSER:

3 Q

But there is a potential conflict there, is there 4

not?

5 A

I' don't consider it a potential conflict.

I don't 6

See it, but that is my opinion.

7 JUDGE CASEY:

After the change, the Board of 3

Directors would be the same.

Are you indicating that that 9

that is the same individuals, would sit one month same group, l

10 l as the Board of Directors of Penelec-East and then, a month i

11 later, they would sit as the Board of' Directors of Penelec-1 or would they sit. at a single time and try to resolve (g)I 12

West, the policy decisions and the problems facing both companies 13 I4 in tandem together?

i 15 THE WITNESS:

I think it would be the former, Your is Honor; I think we would meet separately, at separate times I

i and separate agendas.

la I would remind you that the current Board of 19 Directors, the present Board of Directors of Met-Ed and.of 20 Penelac have five PeoP e who are the same.

Bill Kuhns is the l

21 Chairman; Herman Dieckamp, Vern Condon, Fred Hafer -- I am 2

sorry; there are four who are the same.

O 23 BY MR. MESSER:

w 24 Q

Out of how many?

'S

~

A Out of about seven or eight.

The others are made up

@@MM@NWEALTH REPORTING QOMPANY 4717' 761-7150

r58 457 f'N 1

of the operating company officers.

For example, I am a member i V 2

of the Penelec Board of Directors currently, but I am not a 3

member'of the Met-Ed Board of Directors.

4 So, there has been a long tradition through the f

5 years of each of the operating companies having certainly a 6

number of directors who are the same for all three companies, i

and it is the key management of GPU that does that.

We do now a

meet separate and look at separate agendas.

I l

9 So, I think it would be a continuation, more of i

i 10 that as a matter of practice.

11 Q

Have you addressed in your own mind the negative

()

12 impact of this combined management agreement upon Metropolitan:

f 13 Edison Company?

14 A

only in vague terms.

I haven't sat down and 15 specifically thought it through.

16 Q

Have you seen any reports or studies by any group i

I 17 or individual detailing the negative impact of a potential i

J I

18 combined management upon Met-Ed?

i 19 A

I have seen no such reports.

20 0

Can you indicate to me what you feel would be the negative impact upon Met-Ed operating under the combined 21 I

i 22 management agreement?

Os A

I think my answer would have to be sim'_lar to what

\\/

23 I defined as being the potential negative impacts on Penelec 24 25 and its employees.

2

r59 458 1

1 There would be a similar set of potential negative 2

impacts on Met-Ed as an organization and its employees with 3

probably not as much relocation being required on the part of i

4 Met-Ed employees.

So that problem would be, if anything, I

5 perhaps somewhat less.

I 6

0 Which entity F.o you believe will most profit from j

7 the combined management?

8 A

I think they will both profit quite a bit.

I don't i

9!

see that either one will get the lion's share of the benefits l

I to i either in terms of dollars saved or dollars reduced or, more l

I 11 j importantly, the impact on the type and quality of service to llh 12 customers.

l 13 '

I think that is the big'est area that both g

i I can' t quantify it.

We tried to 14 lcompanieswillbenefit.

,~

15 quantify tehat the allocations of the dollars would be, and they 16 are reasonably close te being the same; Met-Ed a little bit 17 better than Penelec because of cost avoidance considerations, e

18 but I think both companies will benefit quite a bit.

I9 JUDGE CASEY:

Before we leave that area -- and I 20 don' t mean to be facetious at all, but there are a lot of 21 People, members of the public and people in regulation

.that have the idea that Met-Ed has no place to go but up and

~~

.' 3 that the reason they are surviving as they are now, as long -.

24 they have, is because they are an integral part of the GPU 25 system which presents a better overall picture in the a

r6d 459

(')

I financial community and to the public knowing that Penelec 3

2 is well managed enc has been a sound comp'any; if Met-Ed wasn't,'

3 blended in with that combination, that they might be in worst 4

straits than they are now, if that is at all possible.

9 5

So, when Mr. Messer says, "Which company do you I

I l

6 feel would benefit most," is that really your answer; that 7

they would both benefit a great deal?

8l I know you said that one would benefit because of the 9

other's customer relations,' sophisticated scheme that they 10 have.

11 THE WITNESS:

Met-Ed gets high grades in that i

(

)

12 regard, they really do.

13 JUDGE CASEY:

So, Penelec would benefit from that and Met-Ed, in turn, would benefit from your coal generation l

14 l

expertise; is that correct?

16 THE WITNESS:

Yes.

JUDGE CASEY:

Taking those things apart, would 10 you have any general gut reaction, I will use the term, as to which company would benefit the most from this combinatien of I9 90 management and directors?

~

THE WITNESS:

Here again, at the risk of pride sf

'2. authorship, I recognize that the situation of Met-Ed is c.uch

~

,s s '/

93 more critical than Penelec's in terms that they were the enes

~

that operated Three Mile Island.

'5 Their financial situation and their cash situation I

..,-- m,m e u e m m e mc ovime enuosmv

.,,,.-m_u m _

p3 460' F

i I call it horrible.

I dtr't think, Cortunngggy is just about 2,or unfortunately for Met-Ed, that the combination of the two 3

managements is going to materially improve the situation in 4

Met-Ed vis-a-vis its extreme cash bind, its inability to get i

5

.,quate rates for whatever reason to even serve its custom (

"4 6

So I think that Met-Ed is going to benefit modestly, if you will, from a combination with Penelec, but I don't see this as an attempt or as jthis is not an attempt U',a step that is going to sudd'enly solve Met-Ed's horrendonr Id ' problems; so I guess I would say, Your Honor, that with or 11 ;without the combination, Met-Ed is in severe shape.

I would hope th at thereareproceedingsunderwadlh 1:

13.to help remedy Met-Ed's iinancial and public image situation.

" 'I don't see that the combination is going to have any material 15 impact on those two important points.

I l

Having said it that way, for the benefits that IT I have described that I foresee that would come from the

' combination of the two managements, and in terms o f' Met-Ed's i

situaticr.,

they are relatively modest benefits; they really 20 are, and I think we would more or less share similarly.

21 l

Does that clarif? it at all?

v JUDGE CASEY:

It does.

The only gray area that I have in my own mina is whether the management combination 24 during normal times, pre-TMI-2, may or may not have been a

~"

good idea; but taking it now under abnormal circumstances camxrm-

461 p4 I

!.i

(}

I ' financially and fiscally, is it a good idea and will it benefit 2 Met-Ed or Penelec or both, or will it create more borrowing 3

leverage in the marketplace?

4l THE WITNESS:

Again, I don't see it as creating i

5 more borrowing leverage, to use your term, if we combine.

I i

Gf think Herman Dieckamp touched on that point.

i

- l It is conjectural as to whether or not in the o

ajabsenceofThreeMileIslandtherewouldhavebeenidentified ll 9 i!the need such as exists now 'to effect the combination of the 39 two companies; and whether we would have done it at this

" : particular time in life I don't know.

The only thought I have n

/~

1

'()T 12 'along those lines is that the.whole history of the invc,stor-I3 [ owned utility industry has been toward fewer and fewer 0

i companies serving about a fixed percentage of 79 percent to the 34

,~.

11

" 4 otal population in the United States.

t There are a couple of hundred such companies new, I 13;jand several years ago there were naybe double that, so he 38 j:iwhole tendency of the utility industry, in order to just e

V

'9 survive even in the absence of the Three Mile Island :atastrcphe

-,9.

~

has been toward consolidation and toward economies of scale

' l l

and fewer larger systems.

l 22 hether or not that would have precipitated our i

(

~

doing it now, I certainly doubt it.

I think the Three Mile y

Island accident helped brirg some of these things in:0 focus.

25 P

1 O

d I

onw mm

p5 462 1

BY MR. MESSER:

2i G

When were you advised, Mr. Verrocl.i. that you 3

were going to be the chief operating of ficer of the new -- or 4 -l proposed combination?

5h A

I think this particular approach seas in December i

6 ' of last year; December of 1979.

I i-]

G When the initial idea sort of gelled?

8 A

Yes.

That is a good way of expressing it.

9 G

In the foreseeable future, Mr. Verrochi, do you 10 believe that Penelec will be able to maintain its preferred 11 dividend payments, its preferred stock dividend payments?

12 A

Again, th't is conjectural, but I think t.ey llh a

M will be able to, yes.

G Would you consider your position with tne proposed 14 15 combined management to give you the same rasponsibility that 16j ycu now have, more,or less responsibility?

a 1

II.;

A I will have somewhat more responsibility.

l i

G Would that be true even if TMI had not happened; there would be an increase in responsibility in the general 20 economic conditions other than the fact that you have to deal e

U with all of the other problems associated with the accident?

22 A.

I am sorry; maybe I didn't understand your previous question.

What are you saying now about Three Mile Island?

a My previous question was: did you perceive that f

463 p6' h

l.

1 you would have the same or more or less responsibility as a Ov 2 i result of the prcposed combination?

A Yes; and I answered that by saying --

3 i,

a 4y G

You said "somewhat."

5l A

-- that I thought I would have somewhat more.

G Now, does that mean that that takes into considera-G 7 ]l tion the additional problems that you are going to have to deal with because of the TMI incident and its aftermath?

3 9

A Penelec has had considerable problems as part to l owner of Three Mile Island 1 and 2, so we have been dealing with them from Penelec's point of view; and, of course, Met-Ed^

11 12 has had even~1arger problems.

13 JUDGE CASEY:

Does your question assume th'at there l

. would be increased responsibilities on Mr. Verrochi's part i4 15 under the new management combination with or without TMI?

MR. MESSER:

I am assuming that in spite of TMI 16 1; q!there would be additional management responsibility under the J

1a ;! agreement, and that there would further be increase over and beyond the natural increase in responsibility, further

n responsibility generated as a result of the problems that 20 ;

21 are currently prevailing.

l 22 JUDGE CASEY:

I think the first part of your

':0 question stands to reason. ~He'wbuld be taking 6n another

[)

u, M [ company; and whether his responsibilities will be further l

25 burdened by TMI, he had to answer t.

t.

l f

L cow <c~y yt a w,.v,v, o.= v : r

.n - -,. m

97 464-BY MR. MESSER:

O 2'

Q Would you agree with my statement then, Mr.

2 Verrochi?

i 4g You nodded your head yes before.

a MR. RUSSELL-Is this in the presence or absence 7

i i

l 6'

of the other piece of this, the GPU Nuclear.

Will you I

[ identify what your question is?

4 4

8 i JUDGE CASEY:

I don't think he gave any considera-9 tion to the presence of GPU Nuclear at all.

10 MR. RUSSELL:

Could yc". clarify the question 1:

by identifying whether it is before or after any such UPU lll 12 Nuclear --

i

3 BY MR. MESSER:

1+

4 Let me put it this way, Mr. Verrochi: it is my

5 assumption that if it were simply a merger or consolidaticn 16 of two operating utilities without consideration of TMI thac

,; you would have an increase in responsibility; would you

~

15 consider that to be true?

e E

A I would agree with that; sure.

g I am also assuming that because of the TMI 20 problem, if I can refer to it i n that manner, that you sould 21 22 have additional responsibilities over and above those ehich would normally be associated with the combination; cald tha h

24 24 be a fair assumption?

A Yes, exccpt that there would be somewhat o# a b

CO t/ M C S

'rF

'w

F C -

Of'P

• ' 3 1 - 7 * ** f.

465 p8 1

.i discount or a negative or a subtraction because the responsi-I 2 ! bilities associated with the operation and maintenance of 3

Three Mile Island would not come under my jurisdiction, and c

but there are non-operation and 4 !; that is a major problem; 5 ';l maintenance problems associated with Three Mile Island that

l 6

impact on Met-Ed and Penelec, and certainly I would be

!i i

I ; involved with those.

I expect to be involved with trying to 3

solve them.

i!

G Well, in the discounting factor that you just 9

i 1"

talked about, isn't it correct that you are going to be on 1

Il the Board of. Directors of the new GPU Nuclear group?

12 A

That is correct..

(~)

G So that really, in essence, although it may not 33 34 seem that way, you are assuming two new roles which you didn't ti "f! have previously, aren't you?

,i A

As far as serving as the Director on the GPU I6 [

.i Nuclear Corporation -- well, that is a different title.

We have II 0

' had in the GPU sys':.em for the past several years that we call I8 a Management Committee, which includes the Presidents of the 30 operating companies, and we met at least once'a year and more

~y,

a

"' ij frequently with the staff at each of the operating plants.

22 So I think that we have already started doing some

()

of that work; now to the extent that the Nuclear Corporation

t y-Board might meet more frequently, perhaps it is an extra workload.

But we already have been involved at the corporate 4

h e

co.mcusec.m nucume cw oy m;, m3, e

p9 466

' l.

level in reviewing these things because we are owners of the 2

stations.

2 4

Then under the proposed management agreement, you 4

would be representing 75 percent of the ownership versus 25 5j,ercent?

a 6 :l',

A From the operating company input, yes.

!I Th G

Will any of the union personnel that are employed J

8' by Met-Ed and Penelec lose any positions as a result of this 0

combined management situation?

10 A

I think Al can answer that specifically.

From the 11 point of view of the management combination, I don't think 12 there is any impact on bargaining unit positions.

lll 13 From the point of view of the consolidation or the 14 reorganization of divisions at Penelec, one of our divisions, the Easton. Division, has agreements with the Utility Workers 10 Union of America, and in that division chere are bargaining 17 unit employees involved in the clerical and administrative I?

jobs, and I think some of those numbars might be affected by the division consolidation; but in the combination, the answer on to your question is no material impact at all on bargaininc U

unit jobs.

22 G

Does the same union represent Met-Ed and Penelec W

employees?

' 4 A

Met-Ed has an agreement with the IBEW for its 23 bargaining unit jobs.

Perelee has agreements with the ISEN n :

.n m

--,w,

467 p10 for the bulk of its employees, maybe 2,100; and with the J

2 UWUA for about 300.

Those are roughly the numbers.

3 But we have separate agreements; Met-Ed and Penelec 4 i have separate agreements.

l 0

Separate expiration dates?

5 6

A.

I think that is right; yes.

7 4

Separate bargaining authorities for each agreement, 3

I would suppose?

9 A.

Yes.

The operating companies each have their 10 own bargaining units, and grievance handling teams and so forth.

12 4

So the new combined management team then culd have to negotiate and bargain both contracts instead of ene?

I' 14 A.

We really haven't really figured out who ought to be on which team.

Initially, I don't think it will be the l

i same people bargaining with each of the IBEW system councils, M

i but we haven't really thoroughly addressed that yet, Mr. Messer-II 13 So there is no way to quantify the typt cf impac g

that that separation of labor agreements and the negotiation on new agreements would have upon the combined canagemen ;

is that right?

~

A.

If we continue to have the same group in ?enelec

[\\

()

negotiate with the Penelec IBEW and the same with ::et-Ed, : hen 3.,

there would be no changes in numbers and no real change in i

responsibility, except at the officer level; so I don't think-cavve n+ r.u.m n e=c asna c~wn:~

m-c, l

468 pli j

i I

we are talking about too many people in either event.

g 2

To answer your question, we really haven't thought that one specifically through in t 'rms of number of people 4

involved.

f G

Have you been privy to and/or had any input into 6

the GPU Master Plan?

-0 A

I have been involved in reviewing it, yes; and

, some of the people that work with me have been more intimately involved than I in developing it.

+

nI G

What ten-year period does that plan cover?

11 1 A.

I thought it covered a ten-year period from the la

~

time of receipt of the approval from the necessary regulato agencAes, one of which I believe is the PUC, and I am not sure who else has to approve it; and I.think our plans would 15 ' be that we would hopefully start in 1981 or something like thatc n ;.

G When was that plan proposed?

1 A

I don't really remember.

It has been within -- I d

is '

think it is within the past year.

I think.it is about that timeframe, mayba more than that.

20 MR. RUSSELL:

To the best of my recollection, it 21 was this past summe r sometime, after the hearings closed in 7'

308, I believe; late spring or early summer.

BY MR. MESSER:

24 G

ces that plan take into account the combined 2.,

management agreement?

N 3

cn s,..

_ m.,,. ;. n.- -

.,s.,.3c

469 p12

i A

I don't think it specifically does.

I dcn't think 2

the plan does.

The combined management organizations, however, l recognize that one of the workloads that we were going to be h

4 1 involved with, one of the big workloads, is implementation of a

5 ;i the Master Plan.

That involves quite an additional workload i

6 on each of the two companies, and we have tried to identify

_i what that would mean in terms of people and budgets beginning 8

in 19.81.

l 4

Mr. Verrochi, would you outline for me please 9

I"'

your experience in nuclear power?

,' l 31 d A

Well, it has been kind of checkered, Mr. Messer.

()

U I am a mechanical engineer, and I remember years ago spendir.g some time on the West Milton project of the General Electric 4

i' Company; that would be in the late

'40,'s and early '50's doing some project engineering work in association with a nuclear I

i

",; facility there.

I ' ]l At various times when I was working for Jackson

.i and Moreland, which was a consulting engineering firm, some of our projects there involved studies or computer programs

+i and design involving nuclear work; but I think my major

~~ '

0

~'p T-i experience in that field has been in the GPU System.

22 '

I went East in 1969 -- I think October of '69 --

h)

~I to take over the Nuclear Power Activities Group preparatory ss

~q to the formation of the GPU Service Corporation.

~n !.

(

I think, as my professional resume indicates,

.y a-

.L.

.e w..., - w er +cm..~.,

n

pl3

+ 470-o I

job roughly from the end of '69 through June of '77 when I returned to Penelec was as initially Vice-President of Design and Construction for the GPU Service Corporation, and then 4; later on as Vice-President of Generation.

3 I In both of those jobs, one of my responsibilities O

G !. had to deal with the design, licensing, construction, and 1

7 initial operation and startup and test of GPU's generating 5

stations, and I was intimately involved in that period of time L'

with two nuclear projects, Three Mile Island I and Three Mile i

10 Island 2.

i I

When I got East in 1969, I got involved my stages of the starttJgg 12 '

people and I got involved with the last M

and test program for Oyster Creek.

Oyster Creek went in

! service in December, 1969, so I spent a few months on that.

13 The bulk of my experience in all of this has not M

been so much as a project engineer or a nuclear expert, but 1

rather as a program manager or project manager to make sure E that the projects were, in fact, done as effectiveIy and as l

cost-effectively in accordance with specs and nuclear i

1 2

requirements -- regulatory requirements -- so it was more in 2'

a specific progamming and the administrative end rather than 22

, technical end.

Q.

As differentiated from design and application?

A Yes.

I don't consider myself to be a nuclear

design expert or a nuclear analyst.

I am an engineer, a pretty cc usw.. t

_ m e 3. c. y n. 1

.y

pl4 471 good engineer, but I don't pretend to be a nuclear engineer.

2 G

Mr. Verrochi, could you indicate for me what it 3

would be necessary for Met-Ed to do in order to provide the 4

same type of service that is planned under the combined i

3 management agreement?

i 6 '

A I thir.k a detailed analysis of that would have to 7e be made.

3 G

Has a detailed analysis of that ever been attempted?

A I don't think you would call it a complete 9

I 10 ' exhaustive detailed analysis, but both Met-Ed officers and 3:

Penelec's people f1 m time to time have made comparisons as 1

(-}

to the organizational ~-- organizations for the operating 12

v C

companies in term s of all functions, including gener tion.

16 I think what you would have to -- I think that Mj in estimating the need for 50 to 75 people in generation and

.!! staff support and staff people at Reading for Met-Ed, if it 16 li ;li stood alone, those numbers come from an analysis -- a brief is.'i analysis made by Floyd Smith and Jim Bartonoff an& some of their people at Met-Ed, and reviewed by and with the input 20 of Ralph Conrad and some of the Penelec people; so it is kind of a consensus as to whuc kind of people would need to M

,be added to the Met-Ed staff that they don't currently have E

()

in terms of engineering support, outage planning, cualir/

24 environmental affairs, and all the functions that assurance, naturally come under the problems or the responsibility of i

l i

ec..m._ : ; m g _ :c m 3, e u r,,,..

.r.;

.n.-.,-

472 p15 1

d i

the generating function.

O 2

G Why don't they have these people?

3 A

I guess for at least two very important reasons.

4 One, Met-Ed has been on an extreme cash crunch situation; it

.l; has been very difficult for them to provide adequate manning 5

6 ] levels in all of their functional areas, including generation.

7j They have had a hiring freeze for quite a period of time, so 1

3 there has been quite a bit of attrition, both natural and

-- I was going to say " unnatural" -- I will strike that; both 9

natural and due to people quitting, natural attrition being 19 11 retirements and so forth.

'O There has been quite a bit of attrition, and, g

!3 of course, it has been sporadic.

~4 Secondly, of course, the Met-Ed generating group, just by the very nature of its responsibilities, kind cf M

P5 evolved through the years into being strongly positioned in 17 nuclear talent, in nuclear know-how; so most of the top 4

people in the Met-Ed organization -- the generation organiza-P tion -- were nuclear type people.

Bob Arnold used to be there; Jack Herbein and so forth.

So with the tremendous demands placed upon the

, Met-Ed organization for the safe shutdown anc cleanup and 22 startup -- the cleanup of Unit 2 and the startup and test -llh startup of Unit 1; just because of those demands, the fossil side, the coal side and oil and gas-fired piece of their U

cov -

s. = - cenou rmc - = w

-r

pl6

~j 473 1

I generation operation suffered a bit from -- I wouldn't call it 2

neglect, but it just wasn't as important.

3 So now that we are forming the Nuclear Corporation Il 4d and we have defined that it.is in Met-Ed's best interests --

i 5 i they own 50 percent of that unit -- to put the best possible l

' management team together; and one of the results of that is --

6 i

if you will, is that the Met-Ed fossil

',[ one of the negatives,

8 generation group is sparce.

It should have more people and 9 ; more talented people.

So it is kind of a combination of the emphasis i

1 on TMI and the cash crunch that made it difficult for Met-Ed

~

()

to anticipate this and to do something about it.

Instead of adding people, they are laying people off in all functions.

14 0

Is there coing to be a net addition to staff

s ' devoted to the Met-Ed segment of this management agreement or I

j a net reduction in employees?

17 A

Al, again, could discuss that better than I.

We have chosen,just to keep our thinking straight, td'look at i

the impact on manning levels, personnel levels, kind of in a

• ~ ('

sequential approach.

The first one: what would we need if I

at

~

we wanted to go it alone, and what additional personnel are

. we avoiding the need to add if we have a combination?

The second is: how many people, how many positiens t

n could you cut off, could you eliminate, if.you had one man 25 that is serving the function instead of two, and one

_ w u ? ' h ~;; L " r n r _ ue

= ~ w n :-

pl7 474 d

secretary inscead of two, and 20 engineers instead of 20 10 and 10 not adding up to 20, but adding up to 19.

31 We estimate that the combination alone will effect i

4 a modest reduction in the total number of at-work people in 3

both Penelec and Met-Ed, just the combining of the two

'i h functions without any change in responsibilities or without I

9

'.! any recognition of the need to add staff; so the first step i

8j is that if you do combine, yes, there will be a reducticn

't both in Met-Ed and Penelec.

.i l

However, if you fill the identified organizaticnal I"

I' needs in terms of additional responsibilities which I nave described, for exampl', intheMasterPlan,bothmanagementlll 12 e

and so forth, and in generation and in other areas, I think I'

the numbers indicate that there will be more people combined 15 j the corporate level than existed as of January 1, 1980.

at I think that is correct.

Q So that would have been required anyway, wculdn't it, under the Master Plan?

A Yes.

One of the things that we would need is

-. c.

you have to have people both for the Met-Ed staff and the Penelec staff to implement this very ambitious Master Olan.

We think that if 'a have a combined organization 8

.ta t the total additional personnel levels will be scme;hin:W

~t less than the sum of the two, and, again, this is --

g These $18 million figures don't take into acccunt a

mMM F.

~ 2M

475 pl8 1

the additional personnel required in the Master Plan, do i

2P they?

a 3h A

I don't think they do; no.

9 4

G In regard to this continuing saga of Met-Ed, you 5b have indicated that they need approximately, in your opinion 1

Il 6j or in the general opinion of the people who have given you 1

7 ;i information, approximately 50 to 75 people in generation.

.1 i

3' A

Yes.

9 G

Did they have other shortcomings that they would 10 need to fill?

11 A

Yes.

I can give you a summary of this, and, 12 > again, if you need more detail -- in terms of the nutber of

[}

personnel we could avoid adding if we combined the two 13 14 h managements, our best guess is that in generation Met-Ed could avoid,abou.t 75 people and Penelec none; in the T&D area --

15 M d that is operations as well as engineering associated, and N

17j customer service and so forth -- we think Met-Ed would have 0

M no additions and Penelec maybe 50; in conservatione and load management, we think that both companies would require 15

'9 20 more people than they currently have, or that they would have if they went it separately; rate case management, five and 21 2

five; policy and procedure development, ten for Met-Ed and

()

none for Penelec; materials management, ten for Met-Ed and 2

23 ten for Penelec; and communications, five for Met-Ed and five for Penelec; and if you add these numbers up the Met-Ed total-25 Ih a

cb d O k $Ii 9(kh

,.h CQMD1f IV f'7 9 ] j.7 j #5

1 476 pl9

I.

avoid estimate is about 120, and Penelec's total estimated 0 avoidance of additional personnel is 85.

- 3 I

These are our rough estimates as to what we are 4

talking about in these areas.

3 4

This would be the avoidance of hiring new 11 6

people?

7I A.

Yes.

G Let me see if I can get an understandine in my 8

.i 9

own mind what these figures represent, so we don't get 1

Mlinvolvedintalkingabout apples and oranges here.

A I would like *o avoid that.

g I2 0.

If there was no combination of management, in

'3 your opinion or in the opinion of whoever sponsors t'..ese 14 figures, Met-Ed would have to add approximately 120 people in 15 staff to manage the same functions; is that right?

I f' [

A.

That is right.

d II G

Is that executive level staff, or is that staff

"' all the way down the line?

A.

It is primarily -- i~ is staff.

Again, we have identified the kinds of people.

It is managers and super"is;rs 2I technical people, clerical, administrative-type people.

2-a These individuals are not part of the innagemen:

involved in the combined manag h,

executive level team that is ment agreement; would that be a fair summary, or are scre of them involved and some of them not?

l C3 /O*4 / _l'._* 'C?.

3 C O M P '-.r

'6t.7'?

477 p20 l

A These are people we are avoiding, and so --

2 G

Are they on the level of which we are concerned i

3 about where we have the combined management of the two 4

companies; are any of them on that level or above it?

5]

A Yes.

Some of them certainly would be the kind --

0 6 lj would be at a job level, were they physically in Johnstown, T.i! that we would consider paying the expense of relocating them s, to Reading rather than saying: let's eliminate the job in 9

Johnstown; we can hire that kind of person or that type of

!l I9 ' talent in Reading a lot cheaper, a lot cheaper than moving; Il so some of them are that kind of a person that you would

()

bear the expense.

I2 Has that been broken out?

I l

I*

I 'on't think it has.

d A

No, I don't think it has.

..; We are hoping to avoid those costs.

We haven't really talked much about how many of them we would relocate if we, in fact,

,'h'i added them.

I8 MR. MESSER:

Your Honor, may we.take about five l

1 minutes?

Would this be an appropriate time?

~%

JUDGE CASEY:

Yes, we will take a five-minute

' recess.

(Recess.)

~~

(v~)

n 14 I

25 t

Ia T,twcNwtt.Ln. R EProite:G CC'4P U: f 7

701 r'"'

478 i

T4,Sl:JT 3 1 JUDGE CASEY:

Back on the record.

1 MR. MESSER:

Your Honor, I believe at this point in time that I have finished this portion of my cross-3 1

examina' tion of Mr. Verrochi.

However, I understand that the 4

remaining portions of the Booz-Allen Report are to be 5

furnished tomorrow morning -- is that correct, Mr. Russell?

6 MR. RUSSELL:

We understand Mr. Kelley is bringing i

7 in the Penelec counterpart of the other companies' data that 8

you have.

3 MR. MESSER:

The Booz-Allen Report that I have 10 i

received so far relates only to Met-Ed and GPU and not to 11 (gg I Penelec.

12.

i 13 -

I would appreciate the opportunity of having at lcast some time to review that information, and I may have 14 15 additional questions that I would like to ask of Mr. Verrochi i

in that regard.

IG 17 MR. RUSSELL:

He will be available.

JUDGE CASEY:

We will try to fit that if. tomorrow 18 l

l 19 i if necessary, after you have seen the other material that you 1

20 want to review.

l 21 MR. MESSER:

Thank you.

At this time I ha/e no 22 further questions of Mr. Verrochi.

23 !

JUDGE CASEY:

Mr. McClaren, does the Cc= mission hi I

24 Trial Staff have any questions of Mr. Verrochi?

l 25 MR. MC CLAREN:

Your Honor, I think Mr. Aesser has

479 }

32 l

done an excellent job of questioning Mr. Verrochi.

He has O

satisfied most of our concerns.

There is just one thing I 2

wanted to raise.

3 CROSS-EXAMINATION 4

BY MR. MC CLAREN:

5 l

G Mr. Verrochi, do you recall in the Booz-Allen Management Report with respect to Met-Ed -- and I suppose it 7

may have also been made with respect to Penelec -- that there 8

were certain findings with respect to legal services?

, 9 i

?

I have a vague recollection of that.

33 0

There is a recommendation in the May 1978 report 11 with respect to Met-Ed, Volume MII, that states as follows:

12 J

~

"The legal department's organization structure provides an 33 efficient staff utilization, but insufficient control of 14 outside counsel"; and another states, "The policies and 15 procedures for the use of outside legal services are informal 16 and require strengthening."

37 My question to you is whether this management 13 combination in any way addresses that major concern.

39,

A.

Mr. McClaren, I'm not sure it specifically 20 addresses that point.

It may well be that in our implementa- !

21 tion plans to date from May of 1978 that some of those 22 l

rec==e"a 'i " "^ve-ia rect-bee" e"' i" e ece r ^re i" O

22 24 progress.

But to answe your question, I do not specifically know of anything we're doing here that would add to what we're 25 COMMONWEALTH REPORTING COMPANY 17171 761 7150

.c

480 j3 already doing to correct or to implement that recommendation.

O' g

In the period of time since the accident, when 2

you put together the present plan for management combination, 3

has there been specific consideration and discussion of that issue?

5 I

A.

Not to my knowledge.

g MR. MC CLAREN:

That's all the questions I have.

7 JUDGE CASEY:

I have a few, but do you have 3

redirect?

9 MR. RUSSELL:

I have a little bit of redirect.

gg I'11 be glad to defer if you want to proceed.

I1 Just a few things on the organiza G JUDGE CASEY:

33 tional background; a few questions I have.

33 Mr. Verrochi, in September of 1977 you became 34 the President of Penelec and also around the same time you 15 became a Director of the GPU Service Corporation; is that 16 correct?

17 TiiE WITNESS:

Yes, sir.

e 18 JUDGE CASEY:

As an officer of Penelec, as the 39 20 President, that is a line or an operations function; is that j

33 right?

Tile WITNESS:

It is.

22 JUDGE CASEY:

Who do you report to directly in 23 24 caain of command as President of renelec?

25 THE WITNESS:

I report directly to Mr. Kuhns, who 26MMSNW7AATH REPORTING COMP ANY s7171 761 715C

481 j4 is Chairman and Chief Executive Officer of Penelec.

f 1

JUDGE CASEY:

He is Chairman and Chief Executive 3

Officer of --

i THE WITNESS:

-- of Pennsylvania Electric Company, 4

l 3

and I am Pre 3ident and Chief Operating Officer; so he is my e

immediate superior.

i 7

JUDGE CASEY:

He is your immediate supervisor.

8 And at the same time he is also Chief Executive Officer 9

and Chairman of the GPU Corporation?

10 THE WITNESS:

Yes, sir.

11 JUDGE CASEY:

Now, you serve as a Directcr on the 12 Service Corporation Board.

Who is the Chairman of the Board

(}

13 of Directors of the Service Corporation?

j i

)

14 THE WITNESS:

Mr. Kuhns is also Chairman of that, 15 and Chief Executive Officer.

Il l

16 JUDGE CASEY:

So Mr. Kuhns has direct authority s

17 over you in your line function, and he is also the presiding 18 official on. the Board of Directors as the Chairmad'; is that 19 correct?

20 THE WITNESS:

The Board of Directors of both the 21 Service -- oh, Penelec; yes, sir; that is correct.

22 JUDGE CASEY:

Would you say that being a Director, n

23 serving on the Board of Directors,is an advisory, policy-(_)

24 making type of function?

25 THE WITNESS:

For Penelec?

@61%1MANWR/2MiD') R@P@RTIN@ C@MPANY f7171 761 7150 9-

4.82 35 JUDGE CASEY:

Yes; for whatever Board you would serve on.

7 THE WITNESS:

Advisory and what, Your Honor?

3 JUDGE CASEY:

Well, what is the fundamental pur-

{

4 l

pose of a corporate Board of Directors, if you will?

5 l

THE WITNESS:

The fundamental purpose, as I see it,t 3

for a Director in an operating company Bctrd of Directors l

7 such as Penelec is to review periodically -- we have what we 8

call a level of signature authority.

In other words, we g

in '

review periodically such things as budgets and capacity planning additions, contracts, both internal and external, 31 intermsof--perhapsmajorcontractsintermsog contracts i3 construction or interchange and so forth; a general overview 13 of the operations.

We review and approve work orders, if the y

dollar value is big enough, work orders for the procurement of 15 equipment or for outside services.

l 16 As I say, we approve budgets.

We review and 17 I

is approve budgets and adjustments thereto, or changoe thereto, to We get involved with review of the asset management, make I sure the property is acquired and sold in accordance with 20 l

21 accepted practice and procedure.

I In addition, increasingly we have been trying, 22

.!3 j since we've got that senior group of people get together h

I 21! periodically, to seek input from some of the operating, I

I 25 i functional officers in the operating companies to both inforr

483 I

j6 j

the Board on one hand and seek their involvement on the 1

other.

2 It is that sort of thing there, Your Honor.

I 3

don't know how to put more specific words on it.

4 JUDGE CASEY:

That is your description of the 5

function of the operating utility, that is Penelec's, Board 6

of Directors.

7 I

THE WITNESS:

Yes, sir.

l a

JUDGE CASEY:

Is there a substantial difference in 9

the responsibilities and duties of the GPU Service Corporation; 10 11 Board of Directors?

THE WITNESS:

Yes.

They don't get involved quite 12 as much in some of the matters I have described, work order f

13 I

14 approval, and so forth.

They do get involved in review and I

15 approval for the service company of pension plans and salary 16 administration, salary review and that sort of thing.

In 17 fact, we do that on the operating ccmpany level.

Y la At the. service 4 company, however, we also spend a 5

I 19 pretty good day a month at the Board meeting reviewing the 1

l 20 operations of the service company in the GPU System.

Attending those meetings would be the members of the Board of 21 22 Directors of the service company, which are the company O

23 eresiae=es e=a ar-otecxeme xua=e, neeer e=a coeao=-

24 IIn addition, the officers of the GPU Service

~

Corporation attend GPU Service Corp. Board meetings.

So this 25 I

I

@OMM@NWEALTH REPORTING COMPANY (717' 761 7150

484-l i

37 l

gives us a chance, kind of at the staff level, to keep each h

ther posted as to what is happening and what we're doing.

2 I

S that serves a dual function, it seems to me; 3

kind of an operating / review meeting.

4 JUDGE CASEY:

When you act as a Penelec Director, 5

atever the Board decides, the Penelec Board, eventually you 6

have to implement those plans as the Chief Operating Officer 7

of Penelec; is that correct?

3 THE WITNESS:

Yes, sir.

9 JUDGE CASEY:

I assume that you have some input, 10 some say or vote when you're acting as a Director of the 33 l

Penelec Board; is that correct?

3 i

1; I

THE WITNESS:

Yes, sir; I do.

13 JUDGE CASEY:

In your professional resume, your 9

background of experience and qualifications, you make several 15 references to being elected by the various Boards to serve --

13 7i for instance, you were elected to the Board of Pennsylvania f

i l

1

' Electric Company in October of 1976; is that right2 l

13 l

{

39 l THE WITNESS:

Yes, sir.

i i

JUDGE CASEY:

Does that mean that the existing l

20 21 '

Board of Directors sat at a reorganization meeting and cast f

i a vote as to whether you would hold a seat on that Board, or 22 23 did Mr. Kuhns appoint you as a member of the Board of lll i

24,

Directors?

How does that work?

I THE WITNESS:

We have an organization meeting

~3 um

485 l

i j8 i

every year, of course, that the Secretary calls and renewal O

2 of Directorship comes about then.

I don't remember specifically in October of 1976, 3

4 but it is quite possible I was nominated by Mr. Kuhns to fill 5

a vacancy of some officer reti;.ing, or whatever, or some 6

Board member retiring as of October 1976.

I was with the 7

Service company at that time.

8 JUDGE CASEY:

Mr. Messer I think asked you when i

9 and under what circumstances you were notified that you to would be the Chief Operating Of ficer or President of the 11 combined management team that is proposed in the affiliated 12 interest contract.

I~think you gave us a time frame and the 13 circumstances.

14 I hope this isn't personally embarrassing to you 15 in any way.

'Were you the logical contender for that post in 16 view of the vacancy in Met-Ed's presidency at the time.

Were you the only remaining President of the operating utility, or 17 i

18 is it your experience and associations with the GPC System t

i in the past and your progressive upward progress in that area 19 20 that resulted in your being named for this position?

21 THE WITNESS:

It'is hard to say why.

May I jusi-22

,briefly expla n as follows:

There are three operating i

( ')

companies and at the time, December of last year, Walter 23 24 Creitz, as you know, had resigned; so there was just myself 25 and Dr. Bart anof f, who is President - and Chief Operating COMMONWEALTH REPORTING COMPANY 47171 761-7150 t

486 i

J' Officer of Jersey Central.

O

) iruld like to think I would be a logical 2

candidate to handle both jobs because of my experience and 3

backgrt, _:o ; and I think, in part, because I had sperit some 4

time not only at Penelec before the service company, I spent 5

time at the service company and here I was coming back.

So 6

I had a pretty good working relationship with an awful lot of 7

people in the GPU System.

g But just to go a step further, if I may, during 9

the course of 1979, there were several very informal in discussions -- I would bump into Mr. Kuhns and Mr. Dieckamp, it y u know, at some Congressional meeting and we would treet g 12 in the hall; and some of the possibilities for reorganizing 13 Met-Ed were discussed very briefly with me; seeking an out-34 15 side person of some national stature, for example, as one 16 possibility, to serve as President of Met-Ed.

At the time 17 the discussions, as Herman indicated, on the nuclear

~

18 corporation were going on.

1 do remember -- I'll get to the point -- I do ig 20 remember, perhaps in the summer of 1979, Bill Kuhns suggesting to me that one of the possibilities would be that I would 21 serve as President of Met-Ed.

That was one of the alterna-22 23 tives he was persuing.

And I frankly don't remember if he h 24 said that that would be in addition to or instead of.

l 2s I just point it out to illustrate the point that e aaaaaaaita=F ee vI a M F Pt M F4 f f k i /*

1. • M & J F1 A h a V 117

• F E 1

P 1 E S

487 jl0 l

\\

there was an awful lot of alternative considerations, O

alternative solutions considered for how to manage Met-Ed, I

Penelec, the nuclear corporation, the service corporation.

i 3

I am sure that Mr. Kuhns -- I could tell from the 4

f way he talked to me -

.sd this as one of the pressing 5

)

U 6

Board.' embers and so forth of the GPU Board. 'So it is kind 7

f hard to say,how it all came about.

a JUDGE CASEY:

Are there any Jersey Central 9

officers involve'd in this new proposed combination, to your 10 l

I knowledge, or was their President ever under consideration 33 for the top spot?

12 THE WITNESS:

I don't know if Bill considered l

g3 1

their President.

I do know that in the program whereby we g4 try to identify candidates, at least three candidates for 15 each of the key positions, officers and key managers, that 16 we considered some of the Jersey Central names, some of the l

37

~

existing officers nd managers of Jersey Central.,

is I know we haven't ended up with any of their 19 officers coming over to the combined operation.

I'm not 20 even sure if any of their key managers are coming over.

But 21 they certainly were considered.

22 JUDGE CASEY:

Taking the Direct rs f the various O

23 companies in the system, whether it is service companies, 24 operating companies or the parent company itself, are there 25 I

MMMENWEAL.TH REPORTING COMPANY #717 761 7150

486 l

jll l

i any outside members, either business or professional people 1

or common corporate executives, that serve on any of the l

2 t

existing Boards of Directors or the proposed combined 3

Board of Directors?

4 THE WITNESS:

The only outside Diret; ors that 5

exist in the GPU System are those who serve on the GPU, 6

General Public Utilities Corporation Board; and there, with 7

f a

the exception of Mr. Kuhns and Mr. Dieckamp, who sit I

l 9 l because of their of fice, all the Directors are outside i

i Di.re cto rs ; some fairly prominant, capable people.

10 l!

i 11 So the primary source of input from outside 12 type people is at the GPU Corporate Board level; andthingsllg-l 13 1 that are happo,.ing in the operating companie.s, if they are l

t I

J 14 t considered to be of enough importance, are, in fact, reviewed, 15 either to get a consensus or a sentiment or, in fact, u.scme

(

16 cases, Board action.

17 f The only other thing that ccmes to mind is that, la as I say all of our existing operating company and service 19 company Board members are officers cf the GPU System in one 20 capacity or another.

1 21 '

We have been looking real hard at forming a i

22, consumer advisory panel for.ach of the operating cenpanies.

h 23 That was under consideration before the accident -

.'e have 21l kind of tabled it as being of lesser priority -- in which 25 I case we would bring in maybe ten or fifteen people from

489

)

p1 fis jll i

f throughout the Penelee system to act in an advisory capacity O.

to the Peneluc Board.

2 That is in addition to some ten et,csumeradvisory 2

4dpanels which are kind of at the local level.

5j That was the GPU solution to bringing outside s

influence, if you will -- input into the operating company i

I

. boards.

Rather than add outside directors, we thought perhaps g ' making use of that advisory panel would be an approach.

JUDGE CASEY:

Concentrating for a romant on v

the GPU Board of Directors that you say contains a number of to prcminent outside professionals or people from the business it community, was this idea of the GPU nuclear corporation of the

()

12 combined management team ever aired at any meeting ofE5he GPU I

's 14 Board of Directors, to your knowledge?

5 THE WITNESS:

My only knowledge specifically is what I think FMrman Dieckamp stated during direct and cross 16 1

the other day.

I do know that -- I think from that and other sources that Mr. Kuhns and others did discuss these concepts 13 with some or all of the Board members from t'ime to time; Ia r:

sure especially the formation of the nuclear corporation.

20 M

I think Herman indicated that that idea has been kind of stewing and brewing for much more time than the last n

year.

I think it preceded the accident, as a matter o# "a :,

()

j and I am sure that Mr. Kuhns did d"scuss it with the Board 21 25 members to get their advice.

comm%ivre wp - rire. cc gea..j n

490 p2 o

3 I

t JUDGE CASEY:

One final question from me, and it is really in the form of a clarification of your testimony i

a!rather than a new question: I want to make sure of the timing;

'i I

I think that the Commission issued an order sometime in June

j 5 or July of 1979 requiring the institution of an investigation 1jof the past and present management practices, and coincidental 6

with that order they said that an independent auditing concern 3 or consultant should be appointed to conduct that investigation.

9 The name Theodcre Barry and Associates did not i

10 l appear in the order, but I assume that it was not too many 1: ! weeks or months after the Commiscion's order when they appointed 1

!; ! Theodore Barry and Associates.

1 i

Nevertheless, that firm was conducting their i

14 audit as of Decem ar of 1979 when the initial decision by the

!GPU System was made to put together this management combination.

15

.I 16 that we know about in these agreements; but I am not quite

I li ;too clear about what input, if any, Theodore Barry and IB ' Associates had in that decision.

1 Was the deciaion already made and submitted to 20 them for their comment and reaction, or did they supply any of 2: the impetus for this type of decision on their own?

Can you l

22 clear that up for me?

jg THE WITNESS:

I wish I could, Your Honor.

The I' 'only problem is I don 't recall being involved with Theodore 25 Barry personally in December right after they had been engaged COMMONWCALTH RCPCCTING COMPANY

'7'7 761 7 ? Sr.

p21 L

491 i

2 1I by the Commission to conduct this ovecall audit.

I know I 1

2 didn't talk to him at all about it.

s 3

I am not sure whether Bill Kuhns and/or Herman it 41 Dieckamp advised the senior Theodore Barry people, Perry o

1 5f Wheaton and others, that we were going to make the announcement 6

on January 17, 1980.

It is possible that Bill did.

q q

7 ll I don't think we sought or got very much input 1 from Theodore Barry as to the concept at that time as to the 0

l 1

9 make-up of it.

I am sure we felt it was a corporate decision, i

l 10 j but again I am kind of hedging here because I am not sure 1

11 ; whether those senior people were informally apprised of the i

1 12 decision to do it.

I 13 l But I don't recall in any of our discussions i

a 34)shortlyaftertheendoflastyearandearlyinthisyear i

13 f when we were getting these things down on paper when the t

16. !i'; interim process began where we had too much Theodore Barry q

II I think l

ij input as to the specifics as to how to organize. it.

i 3 3 <, that came later on when they were freer to provide such I

U review and input.

20 JUDGE CASEY:

Do you recall when it was when these Theodore Barry auditors first came to Penelec and spoke with

,, 3 i

-- i.you initially'as the chief operating officer, or did they lO talk to subordinates initially?

THE WITNESS:

I think the first person they talked

.,4 to at.Penelec was me.

4

-.~__..m.

492 p22 If you will pardon me for a moment, I might have O

2 some notes on that so I can give you the chronology.

3I (Pause.)

4l MR. MESSER:

Your Honor, while Mr. Verrochi is 5

looking at his notes, we would like to introduce as JARI d

6 '! Exhibit Number 2 certain documents that were turnished to us a

7$ this morning by Mr. Russell.

The initial page is just marked 1

8 December 27, 1979, to J.A.

Kelley from W.G.

Kuhns, and it I

contains a number of, apparently, memoranda, December 21, 9

a M

1979 regarding what I believe were notes of a meetitg between Mr. Kuhns and Perry Wheaton, Nancy Bord, Jim Hogan, John Dial I2 and Paul Foster; that relates specifically to the manageren audit, the question that we are concerned with at this

,".. I proceeding, and was produced as a result of a request made U

of Mr. Russell during Mr. Dieckamp's cross-examination.

"1 I have marked it as JARI Exhibit Number 2 for 1

11

" l identification, and I would like to introduce it into the i

e 13 1" record.

o MR. RUSSELL:

That is the only copy that I have, m

and that was made available for inspection and ccpying.

~ ',

a 1

MR, MESSER:

I apologize.

I thought that you just I

+

"w gave it to me.

Could we go off the record for a second?

llh

l JUDGE CASEY:

Yes.

(Discussion off the record.)

4 couvc nve:.w = cuccina cc.w., :r m,s

- se

'23 ji 493 p

i i

l a

L (Whe reupon, the document was marked as JARI Exhibit No. 2 for 2:

identification.)

i 3h MR. RUSSELL:

May I have an offer please?

i i

l 4

l JUDG2 CASEY-

"es.

l I

1 i

5; Mr. Messer, this document that you have offered 6

GI as JARI Exhibit Number 2 will not be supported by independent l

testimony, so will you make an offer as to what you intend l

7 g

1 h

3' to establish by offering those documents which may or may not

.i 9'

contradict something that was said in the direct evidence i

q

!" {l! offered by the company's witnesses?

l MR. MESSER:

Your Honor, I believe, first of all, i

e,

(~S l., U is extremely relevant to the proceeding, and not only it

(_/

i 13 L relevant but probative, in that the discussions in the f

i i:

I4 memoranda are the statements -- at least I believe they are -,

f i

35 of -- recorded statements of Mr. Kuhns in regard to an l

In; interview that he had with the Theodore Barry representatives.

17 In this particular written reflection of his e

13 'I understanding of the interview, he indicates that discussions ;

were held with members of the Commission staff as well as 20 the Theodore Barry people, and that certain actions would 2~1 be taken as a response to the suggestions, that certain 4s. procedures are outlined in regard to the scope of what is

()

1' going to be looked at or undertaken not only by Theodore

~u, Barry but by GPU;

'at j' addition the concentration or the l

5 Barry report may be shifted in some orientation of the u l

n i

is L

U

~, - -.. ~. _

494-p24 J

i toduplicatetheBooz-AllenO

' way because of the response not report; and it fully indicates, I believe, and supports some 2

of the issues and the understanding of the issues that we

?

4 have in this situation, and would be relevant and probative 5 j in that regard.

d ij Further, it contales a memorandum for the file 4

which apparently is the memorandum again of Mr. Kuhns --

7 excuse me, of Mr. Dieckamp, who also delves into the same 3

areas and the same issues and poses questions and reservations

0 about not only this particular area, but others as well.

II It is, I believe, probative in an additional 12 sense as to whether or not thestructureoftheTBandAregggt M

or the conclusions of the TB and A report are all that independent, and I believe it further goes to indicate that 14 23 the orientation of the report may have been based upon a l

joint effort rather than an independent study.

i JUDGE CASEY:

Are there two separate documents, l

one purportedly a memo from Mr. Kuhns and, secondl"f, one from Mr. Dieckamp?

1 S

MR. MESSER:

Your Honor, there are three separate i

documents, as I understand what is contained here.

There is a memorandum of Mr. Kuhns, there is a memo for the file of 22 Mr. Dieckamp, and a memo to the file by Mr. Condon; allthrlhh gentlemen have been referred to in this proceeding, although I do not know or can't recall at this point Mr. Condon's h

"wu -um m v w

495

1. 25 4

P d

position with the company.

2' Those three documents are contained in what we have marked for identification as JARI Exhibit Number 2.

a 1

4 !i JUDGE CASEY:

Is it an exchange within the GPU 5,

System, a memo to certain executives or chief executives?

l MR. MESSER:

It is my understanding that it is.

q

!i 7, '. However, I am not certain that all of the individuals who 1

i S

i; s ; are carbon copied at the bottom of this sheet are all employees a

9 of GPU, although I believe they are.

to There are eight on Mr. Kuhns' memortndum, there 11 are ten on Mr. Dieckamp's, and there are four on Mr. Condon's.

la I do not know whether they are all in the GPU System; however,

()

they are denominated memos to the file rather than corres-i la i+

pondence.

5d I suppose Mr. Russell could more fairly answer I

i 10 j that question.

I i

I 17 JUDGE CASEY:

Does it state essentially that some l

a understanding or agreement was reached as to the scope of the 10 Theodore Barry and Associates audit and what activities would 12 20 be highlighted?

M MR. MESSER:

I believe it does, and that is my it is obviously not in_ evidence, 22 interpretation without A

D and I wouldn't want to quote from the report, but it is

()

j l

my interpretation that the information contained in this M

l 25 memorandum is that in fact there was agreement in December of 1

ahI P e~ h-

$4 M YQf \\ U I I ' /I

• 47_

"Fg y,$ 3 7 '

'496 p26 t

l 1979 regarding the direction of the Theodore Barry report.

G 2

JUDGE CASEY:

Does it indicate that the Commission 3

or the Commission's employee or representative was in basic 4

agreement following a meeting that was held to discuss the 5

matter?

6 :l, MR. MESSER:

It does.

i t

i JUDGE CASEY:

It does.

l d i It says that there is no misunderstanding on Theodore Barry and Associates' part as to what they are 9

10 supposed to do with respect to the management combination by 1:

GPU Nuclear Corporation?

revealingthecontents,Yog 12 MR. MESSER:

Without 13 Honor, it is my understanding and impression from re'ading this 1

document that thera would be little left to the imagination of the Theodore Barry people as to what the purpose of their 15 study would be after reading this memorandum, if we assume I

that this memorandum accurately sets forth the discussions M

that occurred at that tima.

l MR. RUSSELL:

May I comment with respect to it?

20 JUDGE CASEY:

Yes.

21 MR. RUSSELL:

I suggest, Your Honor, that as subscantive evidence this is irrelevant and immaterial to this 2

proceeding.

l' For impeachment purposes, I suggest that for the impeachment of the witnesses so far presented on behalf of the

p27 h

497 i

3 GPU companies and their subsidiaries, there is nothing 2

material that I have heard in the discussion.

a 3

It seems to me that what Mr. Messer has mentioned i

4 ll so far would appear to be some possible use for the purpose 5

of impeachment of the TB and A witness or witnesses, whoever f

1 o

Gj they may be, as to the scope of their undertaking, any alleged i

7 'i guiding by them by somebody other than this Commission as to

)1

4. where they were going to go and so on; so it seems to me that 3

i the basic use of these documents, as it has been represented t'

10 here, is in that arena, which I would say at this point is 11 premature because they have not been on the stand as of yet, J

(])

32 and, secondly, the introduction of the documents themselves without some prior qualification of them in terms of crcss-13 14 examination of the TB and A witnesses would seem to be M

improper.

l M;

JUDGE CASEY:

As far as your observation on using 17 it with the TB and A witnesses who are testifying, after they i

18 ' have testified for impeachment purposes, I am notebuite sure that it would be valuable for that purpose.

Since T3 and A E

is not a signatory or a party or a distributee of this l

information, they could simply say: well, that may hate been i

U 22.the understanding of the top two officials at the GPC sys:em,

(

but we had a different theory.

We are an independen audi:::

^

retained by the Commission to go in and look at the presen:

t and past management practices.

If they think that we are b

_--_.._-.___,_.._.,s_,_

.., _. _,, _ _.. _,.._ C O W i O V * ~ M F-_. {Ef i { L M C OP*At**

[

N.-7'{

498 p28 e

going to concentrate or cooperate with them on the two af filiated interest agreements, they are mistaken.

So that 3

could go out the window.

4 The first thing is: if you did not want this in, 5

there is nothing to prevent Mr. Messer or Mr. Shilobod from 1 subpoenaing either Mr. Kuhns or Mr. Dieckamp or both, calling 6

them as on cross-examination to say: was this not your i,.

intent and your state of mind as of December, 1979, to 9

actively enlist TB and A or to direct them to do things in M

their audit, since, after all, you are paying the freight to the tune of over S700,000?

l-I think you could do that.

I am not too sure 0 establish times wNen that it is not relevant to at least N

discussions and meetings took place, unless you are in a position to say that no such meeting ever took place between 15 or among the Commission audit staff, TB and A, and various M

officials of the GPU System.

l 18 MR. RUSSELL:

Mr. Dieckamp has already testified l

to the December 17 meeting.

MR. MESSER:

Excuse me; if that is the case, that he has already testified to it, then I think now that 2' 2 establishes the relevance and the probative value of the i

document; and I think --

ggg JUDGE CASEY:

When was that available to you,

~

2 those documents?

c -

ru n,-.n.:<

.,w---

29' 499 p

I l

MR. MESSER:

These documents were delivered to O

me about 9:00 this morning by Mr. Russell.

3 MR. SHILOBOD:

If Your Honor please, these are 4

in response to requests I made during the cross-examination of Mr. Dieckamp.

5 '

6, JUDGE CASEY:

I will have to overrule your objectien because if they had had these documents immediately i

following Mr. Dieckamp's testimony, they would have been tools u

9 for cross-examination at least to explore what these things say; but since they were promised later they have the option 10 11 to either recall Mr. Dieckamp and question him about these O

mettere or offer ehem for the surgo e ehet ar Meeeer hee 13 just indicated.

1*

MR. MESSER:

We would, therefore, Your Honor, 15 like to offer into evidence JARI Exhibit Number 2, and I guess I will undertake the responsibility of having the proper 16 17 photocopies made.

I'S JUDGE CASEY:

I would preserve your o8jection, 3

but unless you are in a position to challenge the authenticity 3'

of those documents, the fact that they do not exist in the original thereof and this is not a true copy -- but I think 2I

, it came from your hands and was provided to him.

22 MR. RUSSELL:

I would say that I am somewhat puzzled by what appears to be the responding party at this 2'

~

point making offers in evidance of documents when we haven't 20 ii 1

-~...c. m.

u c _,. - - _ a.: n -_ __ _ __

500 l

c p30 1

finished our case yet.

I have no problem if they want to ma 2

the offer when it is their turn in the order of proof, and 3

in the meantime copies can be supplied.

4 JUDGE CASEY:

Usually when a matter is under 5

consideration, at the time that is the time to make an offer 6

even if it is not in your direct case.

7 Since you are just bringing it up sort of at the a

close of your cross-examination, I will agree with Mr. Russell 9

that it may be better to defer the offer of those exhibits 10 until when you come to your part of the case.

11 You will be calling witnesses; is that correct?

12 MR. MESSER:

Yes, we will.

The reason I b, rough 13 it up and wanted to offer it at this point, Your Honor, was 14 in regard to the questions that you were asking as to the time 15 frame and what was happening.

16 I think that maybe Mr. Verrochi will agree with 17 me that the information as contained in here relates directly l

e la to your line of examination.

That is the reason I chose to l

19l; do it at this time, l

20 l JUDGE CASEY:

I think you-have to be a little l

21 careful.

I am questioning him personally about his initial l

22

. contact with TB and A and what was going to happen with the light of their blue or yellow books or what-have-yd 23 audit in 24. and the announcement the company made on January 18.

I 25 With respect to something that Mr. Kuhns, the r e* y *,e mj uf p s e eu oroeorfqq mvp4Nv 797 761.7150

501 p31 l

(')

1 Chairman of the Board did, which would amount to prior know-

%J 2

ledge on his part, it doesn't necessarily follow that he t

i 3

communicated his knowledge of December to his chief operating !

4 officers in the chain of command.

5 Is he on the distribution list?

6 MR. MESSER:

Yes.

7 JUDGE CASEY:

I see your point then.

3 THE WITNESS:

I am confused.

What document is 9

that?

10 MR. MESSER:

I will let you have a copy of it.

i 11 It is the memorandums that were sent around with regard to the'

('l 12 meeting with Theodore ~ Larry, with a carbon copy to you.

q) 13 THE WITNESS:

Sure.

14 (Document handed to witness by Counsel Messer. )

15 JUDGE CASEY:

Off the record.

16 (Discussion off the record.)

t 17 JUDGE CASEY:

Back on the record.

l 18 THE WITNESS:

Some of this may be covered by others.

19 but my notes indicate that on October 16, 1979 the Pennsylvania 20 PUC issued a management audit of Met-Ed and Penelec.

21 On November 29, 1979 the PA PUC announced the 22 -, selection of Theodore Barry and Ass-ciates to conduct the

(_,/

23 management audit; and as an aside to that, they invited 24 Penelec and Met-Ed to participate with them in reviewing tha proposals submitted by Theodore Barry and several other firms.

25 I

M M */ n N W F' A L TH RFPORTf NG COMP ANY

'717 761 7950

,502 p32

{

i 1

"they," the 1

While they reserved the right h

I 2; Commission staf f -- reserved the right to make that selection, i

3 we were involved in the review, and certainly had no objection!;

l to Theodore Barry.

j l

5' On December 17, there was a meeting at Reading j

I 6

in which the Theodore Barry audit team -- it was a kick-off 1

meeting and initial interviews with all of the key officers 7

l 8l of Service Corp, Met-Ed and Penelec; and that was our first 9 !

meeting with Theodore Barry.

10 )

My memory is -- I don't recall on December 17 t

11 ;

that we got into any specifics as to the aanagement combitatior 12 or anything else.

W 13 JUDGE CASEY:

Was that meetina attended by any i

14 !

PUC representatives?

I i

I 15 I THE WITNESS:

I don't recall if John Dial --

i I

16 John Dial was there with several of his staf f, yes.

The 17 i Director of the Bureau of Audits was there with several of e

IO I his staff people.

l 1

I9 JUDGE CASEY:

Who issued the invitation, or under l

whose auspices was the meeting held, the one on December 17th?

gi THE WITNESS:

It was either by Theodore Barry or o

j team

-- l.1.y John Dial to give the Met-Ed and Penelec msnagement 23 and service team an opportunity to learn what this audit wah I j

going to encompass and how it was going to be conducted.

,5!

JUDGE CASEY:

Was the meeting formal?

Was it l

L'

503 s

p33 ll chaired by someone; was it structured; or was it just a rouad-

.l()

I 2

table discussion?

i 3

THE WITNESS:

No.

Bill Kuhns introduced it, and l'

it was more a presentation by one of the Theodore Barry i

4 5

project teams to describe to us what they were planning to do 6

and how they were planning to do it, and it was an opportunity.

i for thost of us seated in the audience to ask questions, which 7

l 8

we did.

I l

During the course of that and before and after, I

9 f

Theodore Barry used this occasion as an opportunity for them l

10 11 to conduct their first meetings with some of the key officers; f'

I

(

12,

so, for example, I went up into one of the rooms and three f

1 I

13 of their people got together and started talking to me, and I

14 I it was that kind of an cccasion.

l I

15 It was kind of a kick-off meeting.

16 JUDGE CASEY:

An exploratory interview?

l Ii 17 THE WITNESS:

Yes.

s 18 JUDGE CASEY:

The initial interview.

4 i

19 THE WITNESS:

Yes, the initial interview.

r 20 Then, of course, you know that in January -- on January 4th there was a meeting in Parsippany with the top 21 management of GPU and Met-Ed and Penelec, at which we sat down:

22

,3 and really started firming up some of these ideas.

'4 I don't recall that The3dore Barry was involved i

x I

P:

25 in any of that.

~

.e s.

N.

..--.-_,__.N

'N ?

504 P34 i

8 O

I i

t i

l 1

1i JUDGE CASEY:

I think my next question might be:

l l

I 2

in reviewing these various memos involving Mr. Kuhns and l

3 Mr. Dieckamp, which have been marked for identification as JARI Exaibit Number 2, are you able to determine whether the 4

subject matter of those discussions happened to be discussed 5

6 and decided, at least in principle, at the December 17 meeting l

7 which was held in Reading?

8, THE WITNESS:

If the subject matter is -- to the l

i I

9l extent that the subject matter is trying to define a role or l

10 I an involvement of Theodore Barry and Associates, specifically i

in the reviewing on and comment upon the proposed combined 11 managements at Met-Ed and Penelec and/or the Nuclear Corpor 12 13 l tion, I don't recall that that was discussed or defined at 14 l that time.

15 I think my memory as to the first time the suspicion that Theodore Barry would take time in the overall 16 i M

conduct of the audit to get involved in a review of the l

l l

l management of the proposed combination of Penelec.end Met-Ed l

1 l

is l

19 l came about as a result of the second meeting we had with the l

20fJohnstownJARI anc Congressman Murtha and Senator Coppersmith l t

I

'i 21 1 and others.

I j

22 i, We had one meeting on January 28th with some of l

l 23 those key people with Mr. Kuhns and me in Parsippany, and l h) l 24 l then on February 1st, we met again, it turned out, at Newark 23 Airport.

enw.:nn wrA trs _a r pe nnsa_caypessum

p35, 505 I

i b

("x At the February 1st meeting, the question about N_)

2 TB and A's specific role in this proposed combination was, 3

if you will, negotiated with the JARI members and with the 4

political people at that meeting.

5 We agreed on the wording of a very sharp press 6

release, and if you will permit me I will read it because I 7

hope it succinctly states what we agreed to.

8i This does define, I think, my first knowledge 9

of Theodore Barry.

10 It says, "As a result of discussions with l

11 l Congressman Murtha, Senator Coppersmith and JARI leaders, l

I I

12 Charles Kunkle, Jr.,

H.M.

Picking, Jr. and G.W.

Swatsworth, l{ }

13 GPU Chairman W.G. Kuhns and Penelec President W.A.

Verrochi 14, have agreed today to delay implementation of the proposed

• 5 consolidation of the management of Penelec and Met-Ed until 16 they are in a position to explain the plan in more detail in 17 conjunction with whatever review by Theodore Barry and 18 Associates (the management audit firm engaged by the Pennsyl-M, vania PUC) is considered appropriate by the Pennsylvania PUC.

i 20 l It is expected that this process will be completed within the 1

21 next three monthi."

l 22 i So, in essence, my memory is that the first attempt i

rw i

at defining the involvement of Theodore Barry in the specific 23 l

24 l review of this proposed combination, I think, had its birth l

25 at the meeting on February 1st.

j l

COAIMONWEAI THEEEORTJNG COMP ANY '777 7 fit 71*n

50g p36 MR. MESSER:

May I ask a question, Your Honor?

JUDGE CASEY:

Yes.

2-CROSS-EXAMINATION (Continued)

BY MR. MESSER:

4 g

Mr. Verrachi, I am being confused a little as you 5

go along here.

I am going to read you a statement from the s

December 21, 1979 memorandum of Mr. Kuhns', and he lists in that memorandum 15 different points that he characteriz;s by s

the following, saying that, "Following that, a free-wheeling discussion involved the following points:"

" Point number 2, 6

interest was expressed in considering the combination to great of our two Pennsylvania operating companies.

Perry Wheaton l'

and John Dial suggested strongly that we explore with them II>

12 on a cooperative basis the possibilities of such a move, l'

indicating that it could be one of the most important suggestions to come out of their audit."

u

3 That is on a memorandum dated December 21, 1979 Kuhns regarding the interview with Theodore Barry and W.G.

'I on December 17, 1979.

Were you in attendance at that meeting, or have M

any discussion with Mr. Kuhns regarding that?

A.

The meeting generally, or the meeting between Mr.

E Kuhns and Mr. Wheaton?

a The meeting between Mr. Kuhns,Mr.Wheatonandggg the employees of -- I suppose Mr. Dieckamp, Hafer, Condon, Verrochi --

~

y.

~ ~.. _-

= - - -

.a c., m.

a

p37 507 t

MR. RUSSELL:

You suppose; let's be specific in 2

your questions.

BY MR. MESSER:

4 G

I ask you then, Mr. Verrochi, if you attended this n

5 l meeting.

d l

l 6

A I don't --

7 MR. RUSSELL:

Which meeting?

i f

MR. MESSER:

Of December 17, 1979.

MR. RUSSELL:

'The general meeting?

Pil MR. MESSER:

In regard to the discussion of the I;

combination of managements.

l-I MR. RUSSELL:

I think the question, to be specific,

[}

M was he there in either the general meeting or in a was:

I' separate meeting with Mr. Kuhns and Mr. Wheaton?

II' THE WITNESS:

I was not at the separate meeting with Mr. Kuhns and Mr. Wheaton.

I was at the general meeting; I

and then af ter the general meeting involving a large number of people, I went into a separate room with some of tie program people in Theodore Barry, who subsequently got involved in the review of tDe operations of the operating companies.

So I was not at that meeting there.

I was at the i

i i

, general meeting.

I

()

BY MR. MESSER:

v Q.

Did you receive a copy of this memo?

A Yes, I did.

l l

c e ".t c..

L s ar c

; m e -- en.ss 7-s.

p38 508 o

G Is it your best recollection then that, to your O knowledge, you did not discuss on December 17th the combined a

management?

4 A

That is my recollection; yes, sir.

r, G

You don't know whether it was discussed by some-6 body else?

7 A

If the memo says it was, it was.

~

G Thank you.

?

A At the risk of prolonging things, I was trying to 10 define by the statement I read on February 1st what my under-standing was of the actual Theodore Barry and Associates' 12 involvement in the proposed combination.

ggg

3 THE WITNESS:

Let me add a few other dates, Your N

Honor, if that will be of any help to you.

23 JUDGE CASEY:

All right. <You may as well complete your chronology.

17 THE WITNESS:

That was the meeting on February 1st.

18 My recollection is that again because d-I think it was discussed at various times around the first of February that Theodore Barry would not be able to focus on their involvement in the review because they had more pressing things 2

to do in connection with a detailed review of the financial situation of GPU and its subsidiaries, andpreparingtestimdEh for it.

~

?;

We met -- I think the next significant meeting is c o..c.

u,.,gw:.-

I

. p39, 509 1

we met on March 26th.

I think this was the first meeting I 2

attended in which we met with Theodore Barry Associates, their personnel and PUC Bureau of Audits personnel in Parsippany with Met-Ed, Penelec and GPU, and that was the first planned -- there we discussed the first planning draft, namely the Blue Book, and that was distributed and discussed 6

7 at great length.

6 Two other dates; on April 16th Theodore Barry 9

issued a work plan -- or a draft work plan for their effort 10 in the combination consolidation study; so it was April 16.

3!

We met on May 6th with Theodore Barry in

'2 Parsippany and we discussed organization, comparison with othercompaniesandsoforth;savingsandfirstconsikeration 3

I' of cost avoidance.

So from my notes and my recollection, the i

I" Theodore Barry detailed review did not start on February 1st.

They were delayed, and they just started sometime toward the end of April -- the end of March and into April. What is all I remember.

JUDGE CASEY:

I might say that the revelation of these documents, to my way of thinking, doesn't have too great 2

an impact on the credibility of Mr. Verrochi's testimony.

O whee te ao11e aow= to aere is verhees ehet che1teese is to be made -- and I sense it -- against the integrity and independence of the Theodore Barry and Associates report.

=cwcuwuus n rec = wn c.. :.c

~vv-

^

519 p40 I think that question zeroes in on whether the O 2

Commission was part and parcel to the agreement and, in fact, 1

encouraged it in the beginning where Theodore Barry and

-j Associates during the course of their management audit 5

would take an active interest in the proposed management i

u combination, and above and beyond that supply their own expert advice in this regard, which the company might follow; 3

or is it something that was sub-rosa in nature, something that the Commission wasn't aware of, that wasn't part of the

.c j original scope of the management audit as that management 1:

audit was described in the Commission's order.

In other words, you can equate it with a situatj where a bank has suspected shortages in their accounts, shall 1;

we say; and a bank examiner is sent in.

He is supposed to a

find out what is going on with the bookkeeping system and whether there is any employee embezzlement and so forth.

17 He is not supcoFed to sit down and play a k

consultant's role.

In other words, he is confined,to a detective type of role.

Is that what the Commission envisioned for Theodore Barry and Associates, to look at the past management practices and what the company may or may not be doir7 right at the present? But shculd they act as a consultant asifllly have been hired by GPU directly to he.'p tnem put '0gether i

2 this management combination and the GPU Nuclear Corporation?

t

~

m

.m m,.., _

511 p41 s

l That seems to be the problem with the report.

2 MR. MESSER:

I was not intending to impeach Mr.

3 1 Verrochi by way of bringing up this document.

4 jl JUDGE CASEY:

I didn't think that was your 3i objective.

6f MR. MESSER:

I was trying to create the actual I

i7 !! course of events chronologically, and I felt that maybe Mr.

t

li3 !! Verrochi had forgotten about this memorandum or hadn't had an opportunity to review it, and I was trying to put it in its 9

N 19hproperframeofreference.

l 11 The expectation is that we believe that what our I

{}

arguments would be are fundamentally supported by these 1

do~cuments, and certainly any effect on the credibility of Mr.

I 14. Verrochi was not intended.

h 150 JUDGE CASEY:

I will permit the offered exhibit 1"

into evidence.

It is a business record, and it is contemporan-if M ' eous with the test-imony from Mr. Verrochi dealing with the 1

sequence of events.

I will permit it.

I overrule the objec-2" C'

tion.

You can preserve your objection.

You can take a position against it if you think it is critical to your 2', case in your brief.

l()

23 MR. RUSSELL:

You have ruled on the matter; that is the end of it.

25

-i n'"

91 7 3 r.

Co " *JC va r T. P S :. -'N rt C O'

• p ;

,512, p42 t

(Whe reupo n, the document markedlll as JARI Exhibit No. 2 was received in evidence.)

I MR. RUSSELL:

I still have some redirect for Mr.

i Verrochi.

May I proceed?

JUDGE CASEY:

Be fore you begin

- another

'i interruption -- I think Mr. Shilobod wanted to ask some residual questions of Mr. Donofrio.

You might have questions I

based on his prepared testimony.

3 MR. SHILOBOD:

I have a lot for Mr. Donofrio.

JUDGE CASEY:

What is our situation with respect to tomorrow?

The Commission administrative staff

'I is not going to bring in Theodore Barry witnesses until I2 Wednesday, so can we use tomorrow for Mr. Donofrio's testimony?

P MR. RUSSELL:

And any JARI witnesses, i'. they are available.

JUDGE CASEY:

If you can finish with your redirect, 1

l it might be a good time to break, or would you like to start on your cross-examination of Mr. Donofrio?

MR. RUSSELL:. I have just two or three questions of Mr. Verrochi on redirect.

~

JUDGE CASEY:

Let's get them out of the way then.

REDIRECT EXAMINATION lll BY MR. RUSSELL:

G Mr. Verrochi, during the course of your cross-examination, you were asked whether there were any negative co e..

=.s y.

pd3 513

]O impacts with respect to the proposed divisional reorganization, and I believe your answer was that yes, you thought there were?

A Yes.

O You were not asked to identify those negative 4 *

~

3 impacts.

Cc uld you do so at this time?

6 A

The negative impacts are similar to the negative 1

i impacts that I described in connection with the planned

" ' combination of the managements of Met-Ed and Penelec.

9 They have to do with relocation of employees, i

D'] which has the negative impact both in the personal lives to 1

a certain extent -- most employees don't like'to be relocated --

(~/)

and of course the expense acsociated with relocating employees.

12

\\_

If I could charactarize that compared to' the a

management combination, I would say, Mr. Russell, that we U'

don't expect any wholesale relocation of employees in the, I

reorganization effort of the Penelec operating divisions.

I" G

You were also questioned on cross-examination wi-h respect to comparisons concerning Met-Ed and Pe.nette, of their respective to*al number of employees and the total generating 2'

capacity; fossil, I believe it was, of the two companies.

Can you express any opinion as to the validity of i

any such comparison?

t

. ()

A I think a comparison which looks only at the total m

l number of employees in an operating company like Penelec

~'

, compared to the installed capacity of the fossil and hydro i

, e =.u.s w m :n.

c m.

r 514 p44 e

e generating stations that it happens to be responsible for, O that comparison can lead to some very simplistic and erroneous conclusions.

The number of megawatts that Penelec rnd Met-Ed 4

happen to have installed have a different relationship to 5

6 their total requirements.

For example, Penelec pretty much

~

takes care of its own generating needs; whereas Met-Ed is supplying its own needs with its own generation, only about 5

58 percent of that.

M So it is very dif ficult to make this kind of an analysis and draw any conclusions from i'..

I' If, for e'xample, Met-Ed didn't do any generatior it would still need a lot of employees, and it would'look like Met-Ed was profligate in having any employees because it doesn't do any generation itself.

That is the kind of error one can be drawn to.

4 Mr. Verrochi, can you state how the total amount of electric energy delivered by Penelec to its customers compares with the total amount delivered by Met-Ed to its custome.s?

(Pause.)

~

A.

I just reviewed some of our statistics, Mr.

Met-Elll

~

Russell, and for the ten months ending October, 1980,

~

had megawatt hour sales delivered to its customers equal to

~

6,512,522 megawatt hours of sales.

c c.. -..,.

-...,7 c.e v m a. -

.4

- r r, 2

, e

I p45 i 515 i

.s

,i For that same period of ten months, Penelec delivered 9,188,478.

Pene.lec had approximately 509,000 3

customers at that time at the end of October, and Met-Ed had, 4 i I think, around 350,000.

3 MR. RUSSELL:

Mr. Verrochi will be available for 1

6 j. recall tomorrow.

'I 7 i JUDGE CASEY:

Is that all you have?

8 MR. RUSSELL:

That is all I have today.

1 9?

JUDGE CASEY:

You do intend to aopear tomorrow,

,i 1

10 h Mr. Verrochi?

II THE WITNESS:

I will be here.

32 JUDGE ~2SEY:

Very good.

Thank you.

(}

M (Witness excused.)

d MR. RUS'. 3LL :

Mr. Donofrio is available.

Should 5+

7 j

M j we start with him and get as far as we are prepared to go?

3 6 f, MR. SHILOBOD:

I think that.we are going to have

.l 37 adequate time tomorrow with Mr. Donofrio and Mr. Verrochi,

" " to finish with them, provided that we can get an atequate opportunity to review the Booz-Allen report.

2 JUDGE CASEY:

I might say I hated to characterize and issue a ruling on this JARI Exhibit Number 2 without f

,seeing it.

I hope you will have it reproduced somewhere and

~

give the reporter three copies.

MR. MESSER:

I'will.

l r

~"

MR. SHILOBOD:

Your Honor, I would like to make n

.f.-.-.,

.~.. -.,,,.

~+

c.-*3:

f

< g o,

• r; m*. : a. va r e, pc -*g N g - c s r a.

516 e

946 another document request.

I would like to have a copy of t g

contract between Penelec, GPU et al and Theodore Barry and Associates.

MR. RUSSELL:

What contract?

MR. SHILOBOD:

I believe that there was a contract 1

signed, was there not, for a management audit?

MR. RUSSELL:

A contract between these companies

,1 and Theodore Barry?

9 MR. SHILOBOD:

I assume, since the company is in

~

paying the bill that there is some contractual obligation.

I MR. RUSSELL:

The company is paying the bill because the Commission said: we contracted for it andthisllh IJ is the cost; you pay it.

1 JUDGE CASEY:

I think it is binding and legal.

15 Theodore Barry Associates, being the state's censulting firm, 3'"

may have insisted that there is an acknowledgement in writing l 'T which could be gratuitous and without consideration.

MR. SHILOBOD:

I have seen it in other, instances 13 L

where there was an agreement signed with the utility itself.

n JUDGE CASEY:

Was there such an agreement?

MR. DONOFRIO:

I don't know.

If there was, we will get it.

MR. RUSSELL:

We will look.

I would be astonisi.md t:

if there is any such thing because it was the Commission that r.

contracted with Theodore Barry.

517 jl3 JUDGE CASEY:

If there was, it may only have O

O involved GPU, if tnere is such a document.

All right, we have come to the end of a wonderful 4

day --

5 MR. RUSSELL:

Before we close, I think there are il a number of housekeeping and prospective matters we should 7

at least direct some attention to.

b I gather that it is not contemplated that any

.t JARI witnesses will be available tomorrow?

h MR. SHILOBOD:

We did not contemplate that we 1:

would get to the JARI case.

You had spoken about taking it 12 in order, and I had not planned on calling our witnesses

{)

in until you 1.ad completed.

W However, Mr. Russell did indicate to me that he is going to want three of my clients or employees of my 13 16 clients for cross-examination; and I am not sure just what 17 their time schedule is on that.

I? l MR. RUSSELL:

Well, we have tomorrow t-hat h

apparently is going to be limited to Mr. Donofrio and, possibly, Mr. Verrochi.

We have Wednesday that is dedicated 2"

to Theodore Barry.

That is all the hearings that have been

'-, scheduled; so it seems to me that some quick action would be

/~'\\

()

in order to try to nail down another hearing date or dates to 2'

try to finish up the evidence.

23 r

23 JUDGE CASEY:

You suggested some dates at the a

il

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. C W 4 0Y' * " '

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'M

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^' ' ' D ':

518 is jl4 l

' prehearing conference.

I know I'm getting a little crowded this part of the month and we can't go into January.

We'll 1

never have the time, unless we can get an extension from the 4

Commission.

~

MR. RUSSELL:

_ would say comparable to what we 6,,have done thus far, last week and this, is there any possibility of something early next week, Monday or Tuesday 8

of next week?

3 JUDGE CASEY:

I'll check.

What are those dates, 10 Mr. Russell?

MR. RUSSELL:

That would be the 15th and 16th.

1:

MR. MESSER:

Your Honor, I am due to be in New York, leaving, I believe, late Monday afternoon and i4 coming back Tuesday of next week.

But I will be available 3

Wednesdcy, Thursday and Friday.

G MR. RUSSELL

Could Mr. Shilobod function?

17 MR. SHILOBOD:

It all depends what you do.

IS MR. RUSSELL:

I think we would basicalfy be putting 2

on JARI's case.

2' MR. SHILOBOD:

Mr. Russell, one of the reasons Mr. Messer is with me is because of a health problem.

I'm

,just not sure what's happening.

2 JUDGE CASEY:

I will have to check my hearing lll

~

' calendar.

The ore I have in front of me here only takes me up to the end of this week.

I wouldn't be adverse to meeting co. vt :

y.

,p.-,-

519 t

jl5 any two open days that I have next week.

I cannot tell you 2

what they are at the moment.

I could in about a five-minute recess.

4 MR. SHILOBOD:

We could get them tomorrow.

l JUDGE CASEY:

Yes.

I think if we had a little 3

I of'timeovernighttoreviewourschedule,Iwouldbeabletolet

you know first thing in the morning.

T By the way, I think we were scheduled to start 3

I 9

at 9:00 this morning, but we formally agreed that it was a

[! travel day; but I think we are scheduled to begin at 9:00 10 tomorrow and I want to make sure that everyone is aware of II L

i']that, as well as Wednesday.

MR. SHILOBOD:

Will the Theodore Barry w[tness be I*l available tomorrow.f tnere should be additional time?

o I".!9 MR. RUSSELL:

I cannot tell you.

E lt JUDGE CASEY:

That is up to Mr. Morrison, right?

II MR. MC CLAREN:

That's right.

From what I under-e 18 stand, they are not available.

E JUDGE CASEY:

They won't be available until Wednesday morning.

23 MR. MC CLAREN:

That's right.

2-JUDGE CASEY:

We 're talking about two, or at

()

1 east one day in the week of December 15.

That is Our target date and that would be reserved for your case; and then

, Mr. Russell wants to call three JARI employees as on l

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529O 4

jl6 cross-examination.

Have you asked for subpoenas to be issued?

MR. RUSSELL:

I have talked to Mr. Shilobod, and 3

he said that he would have them available.

If he said he would not, I would have asked for -

,oenas.

3 i

JUDGE CASEY:

If you can do it by agreement, 6

that is better.

i MR. RUSSELL:

The one day next week -- we have r,

c.

hearings in the rate cases Wednesday, Thursday and Friday; I would say Thursday is the one day of that that I don't think

o I can be available.

But I would say Monday through Wednesday, la or, if need be, Friday T could be available.

JUDGF FM,EY :

Let's take that up as the f'irst

3 order of business tomorrow morning and try and tie it down.

14 13 It is not going to be too easy for me to schedule a hearing with the reporter, but I will do my best.

l We will recess now until 9:00 a.m.

tomorrow l

y' morning.

e (Whe re upon, at 4:15 p.m. the hearing was 2:

adjourned, to be reconvened at 9:00 a.m. on Tuesday, December 9,

1980 in Harrisburg, Pennsylvania.)

2.

2 h

b k

g

I 521 ep 1r43 CERTI FICATE~

i O

~~~~~~~~~

2 I hereby g3rtify, as the stenographic reporter, 1

j 3

that the foregoing p oceedings were taken stenographically i

4 by me, and thereafter reduced to typewriting by me or under 5

my direction; and that this transcript is a true and accurate 6

record to the best of my ability.

7 COMMONWEALTH REPORTING COMPANY, INC.

8 9

By:

f// //., D //v 3 %

Judith Toberman 10 i

11 O

13 I

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