ML19220C712
| ML19220C712 | |
| Person / Time | |
|---|---|
| Site: | Crane  |
| Issue date: | 04/23/1979 |
| From: | Kuhns W GENERAL PUBLIC UTILITIES CORP. |
| To: | |
| Shared Package | |
| ML19220C706 | List: |
| References | |
| ACRS-SM-0087, ACRS-SM-87, NUDOCS 7905140065 | |
| Download: ML19220C712 (14) | |
Text
.
-~
O TESTIMONY BEFORE THE SUBCOMMITTEE ON NUCLEAR REGULATION OF THE SENATE CO!!MITTEE ON ENVIRONMENT AND PUBLIC WORKS BY W.
G.
KUHNS, CHAIRMAN GENERAL PUBLIC UTILITIES CORPORATION APRIL 23, 1979 101 184 79051400G5 sh-as 7
~
b t
STATEMENT OF W.
G.
KUHNS, CHAIRMAN GENERAL PUBLIC UTILITIES CORPORATICN One of the subjects that your Ccmmittee asked us to address was the appropriate allocation of the costs resulting from the Three Mile Island Unit No. 2 accident.
I will attempt to address that question briefly, but, of course, the rate regulatory agencies will soon be addressing it in depth.
Essentially there are two major groups of uninsured costs involved, namely, (1) the replacement power costs during the period that TMI-2 (and TMI-l until it can be placed back ir operation) are not operating and (2) the interest on bonds, the dividends on preferred stock, common stock earnings requirements, depreciation and the other fixed charges associated with the investment in TMI-2.
Our estimate is that the replacement power costs are approximately $24 million oer month while both units are out of service and will then drop to approximately $10 million per month when TMI-l is restored to service.
We are making strenuous efforts to mitigate those replacement power costs and are optimistic that substantial progress en that score can be made within the next month.
The fixed charges associated with the investment, apart from associated tax costs, are approximately
$8 million per month.
We believe that, for a variety of reasons, these costs should be shared by stockholders, customers and employees.
It 101 185
2.
seems to us totally unrealistic for anyone to suggest, as some have, that consumers should bear no part of either of these ecsts.
Essentially, the result would ce to mandate that the companies should furnish free electricity to their customers.
One of the fundamental reasons we believe that the sharing approach we have advocated is appropriate is that the alternative will almost certainly be much more costly in the long run to custcmers served by our own companies, by other electric utilities in the State and, indeed, by customers throughout the Nation.
This is becausc the rate regulatory process as it has been applied in practice has limited rates of electric utilities on a basis which makes no provision for stockholders to bear the uninsured cocts involved in this accident.
Electric utilities are regulated en a cost of service basis, with the earnings that inure to cormon stockholders repre-senting little r. ore than interest on a bond.
All the economies achieved from application of new technologies, improved produc-tivity and the like have been passed along to customers, and that is as I think it should be.
It is also important to note the typical electric utility company has a capital structure of about 50% ds at, 15% preferred stock and 351 common stock equity.
As compared to a non-regulated industrial company, the amount of senior securities is very high, so that the over-all cost of capital is thereby reduced and the rates charged to customers reflect that reduction.
In a capital-intensive industry such as electric utilities, the cost of capital is an important compon'nt
'^
3.
of the total cost, and therefore of the price that must be charged for electric service.
If the net result of the ratemaking treatment for TMI-2 is to saddle the GPU shareholders with all the fixed charges associated with the investment in TMI-2 for the period that it is out of service, the market for all the securities of electric utilities throughout the Nation is likely to be seriously affected.
This is not only our own conclusion.
It is the conclusion of the investment bankers and the commercial bankers with whom we have discussed the subject.
Even the con-sumer advocates who testified in hearings on April 5th before the Subcommittee on Energy of the Joint Economic Committee chaired by Senator Kennedy appeared to re ognize that there would be this type of impact on capital costs.
We have asked an economic consulting firm, National Economic Research Associates
("NERA"), to see if they could quantify the change in over-all costs of capital if this development were to occur.
They have not completed their analysis, but they have suggested to us that in their judgment it would result in a 20% over-all increase in the cost of capital which would ultimately have to be borne by the consumers.
They said this increase would take place in two ways:
(a)
Knowledgable investors in bonds and preferre d stock would insist on a significant reduction in those components of capital structure, with a corresponding increase in the common stock equity component which 101 187
4.
would increase the over-all cost of capital and associated taxes, and (b) The realized return on common stock equity would have to be increased to make provision for the new perception by common stockholders that they would be experiencing this type of risk.
Let me just apply that judgment to the cost of capital for the GPU System.
The total GPU System capitalization is now approximately S5 billion and the over-all annual cost of capital before the TMI-2 accident was about 10% per year, or approximately $500 million per year.
A 201 increase in the cost of capital for the GPU stockholders would mean an increase in capital costs of $100 million per year and very substantial increases in tax costs; such increases would continue indefinitely.
By contrast the additional costs of capital involved in TMI-2 while it is out of service would be for a finite period, which I understand the NRC staff has estimated at 2 to 4 years.
Now let me apply the same concept to just those electric utility companies in the Nation that have some nuclear capacity.
Their total capitalization is about $100 billion we were advised by NERA.
A 20% over-all increase in their cost of capital would be an annual additional cost of S2 billion per year for the indefinite future.
The heart of the problem is th a't there has not been available any insurance arrangement to cover the contingency of 101
\\83
5.
loss of use of a nuclear plant for a substantial period and the cost of replacement power during that period.
We have had the public liability insurance and indemnity provided by the combina-tion of insurance policies written by comT.ercial insurance companies, the assessment system for utilities owning nuclear reactors and government indemnity arrangements.
We have had the maximum property damage insurance provided by the insurance companies.
But there has not been available from any source any insurance to cover carrying charges on the investment while the plant is out of service and replacement power.
I do not know what it would cost in the way of premiums to operate such an insurance arrangement.
But even if it were limited only to companies with nuclear capacity, I have to believe that the premium cost woulc uc significantly less than S2 billion per year.
In the hearing before the Subcommittee chaired by Senator Kennedy, to which I previously referred, Congress-woman Heckler put her finger on this situation very specific-ally, I believe.
She suggested that an arrangement analogous to that envisaged by Price-Anderson to cover the two types of risks that I mentioned should be put in place.
I am not sure whether this will require legislation.
It may be that utility companies can organize for the future some kind of insurance arrangement and/or assessment system that would deal with this problem.
If so, I can see no reason why the premium payments would not be properly allowable operating 101 189
6.
expenses in dt'ermining the rates to be charged to customers, at least so long as they were less than the alternative of higher requirements for capital costs because of a new dimen-sion of perceived risk and therefore cost of capital.
That may help for the future, but does not come to grips with our immediate problem.
Another element that affects this matter of equit-able allocation of costs should involve a recognition of the benefits that GPU customers have had in the past as a result of our building nuclear facilities. GPU serves an area from Lake Erie in the West to Asbury Park on the Atlantic Ocean in the East.
A large part of our service area is in the Central and Western coal fields of Penns,1vania and for many years we were "ery heavily concentrated in coal-fired generation.
Not only did we promote the coal-by-wire concept for our System opera-tions. We played an important leadership role in expanding that concept with neighboring utilities so that there are now in Pennsylvania.hree large jointly owned mine-mouth coal-fired plants with an aggregate capacity of approximately 5,000 mega-watts in which the GPU System is a participant, as well as our wholly owned large coal-fired installations.
The Atomic Energy Act of 1954 proceeded from the National perception that nuclear power stations were safe and that their construction should be encouraged.
We shared that perception.
We began installing nuclear generation in the GPU System for three reasons:
101 190
7.
(1) because it appeared to us to be the most economic alternative that we could achieve; (2) because it gave us diversity of fuel sources; and (3) because the increasing stringent air quality requirements in the Eastern part of our System made it impossible to install coal-burning units in those locations and System reliability considerations made it essential that we hace come generation in the Eastern part of our System.
Our first nuclear plant, Oyster Creek, was placed in service a little less than 10 years ago.
If we had not installed Oyster Creek, the most likely alternati.ve would have been to install an oil-burning unit in New Jersey.
If we had done that, our customers would have paid, over the 1970-1978 period, approximately $400 million more than they actually paid for the service they received during that period.
- Moreover, they would be today paying S71 million more per year and that disparity would be increasing.
Our second nuclear unit, Three Mile Island-1, was placed in commercial service in September 1974.
If we had not installed that unit, I am not clear whether we would have installed an oil-fired or a coal-fired unit, because the economics of Three Mile Island-l appeared to be so clearly
,n 4
1oi
8.
favorable that we never were faced with the hard choice of sub-stituting either an oil-fired or a coal-fired unit for it.
However, I would point out that we were giving serious considera-tion to installing an oil-fired unit in our Portland Station on the Delaware River at about that same time and, indeed, were well-involved in negr.i.ations for participation in an oil pipeline to serve sucn a unit.
Moreover, in that same time period, our neighbor, Pennsylvania Power & Light Company which has mcat -f its generation in coal-burning stations, installed two large oil-fired units a few miles upstream from Portland on the Delaware.
The total savings that Three Mile Island-l has achieved for our customers in the four-and-a-half years since it was placed in service, as against an oil-fired unit, have amounted to approximately $300 million and are currently running at $88 million a year.
We are going to make a similar analysis with respect to coal-fired units, but the matter is more complex and we have been so preoccupied with other things that we have not had a chance to complete such an analysis.
I do want to emphasize that our investors have re-ceived no part of these savings that Oyster Creek and Three Mile Island-1 have produced.
All of the benefits have gone to our customers, and we believe that this is appropriate.
It does not seem inequitable to me to have our customers now bear, during the period when Three Mile Island-2 is out of service, some part of the carrying charges on the investment in the unit, and thereby in effect to return a part of the savings that they have already enjoyed.
101 192
9.
In the same Committee hearings to which I refer, Senator Kennedy asked whether or not it was appropriate to ask GPU stockholders to bear these costs since they had received the benefit of a 13% return.
I want to note that in my jud: ment a 13% return would not provide compensation for the type of risk that is here involved.
The NERA analysis suggests a return for common stock on the order of 18% would be required.
- But, even assuming that a 13% realized return would provide compensa-tion for that risk, there are three important f actual ass 2mptions involved.
First, GPU has not been earning anything like 13% on its common book capital.
As shown in Table I attached, GPU's return on equity did not get as high as 11% in any year in the past decade and has averaged 9.5% during that period.
Since A-rated utility wonds have had an average yield during that same period of 8.7%, GPU stock has actually carned less than 11 more than the interest on A-rated bonds, which is certainly nothing comparable to the compensation that would have been required for the additional risk factor if GPU stockholders are required to bear the uninsured costs of the TMI-2 accident.
Second, what the investor actually gets is not the earnings of GPU, but the dividends it pays plus whatever capital gains there are.
Between 1968 and 1978 GPU dividends per share rose from $1.57 to S1.77, an increase of not quite 13%.
This was a time when the cost of living almost doubled.
In terms of the purchasing power of the dividends per share, those dividends have declined by 40% since 1968, which is equivalent to a 5% annual decline.
101 193
- Tnird, the price there hav of e
in 1968 GPU sto k been 10 not c
declined capi tal to an the decline average from gains.
518.80 erage
- Instead, an of av was 34 pur hasing in terms in 1975 of about c
pow Betw 528.60 pur ha ing er, a $10,000 of market 3968 eer.
c s
pow inv price and 1978 estm and i l a 10% annu l er in 1978 of abent made in 1968 terms a
of stock.
de line in th c
out $3,250, ould w
The e pur hasing which hav se e a price calculatio c
is equiv le t of pow GPU ns do a
er n
the increas sto k since th reflect c
not of the to v lu a
e e in the e TMI-2 acciden the declin GPU p
of suggests to cost of t,
e in the the premisliving since 19 nor do they r fl r
somehow e that or 78 e
other ect re e tha t All of they should ceiv d a the GP this e
r tur U sha from equitably assu n in the past whireholders hav e
an incor me rect the e
factual assumcost of
- h means that the a
Since ption.
- ccident, the proc n v re is eeds agu e terms, po a tendency to th
- r lev ssi bly endow d wi ink of e
ant to e
examine completed a who the GPU sh endless shareholders th p
surv reso GPU ey of ur commo the ar holders ces, I e
think n stock.
registered are.
- o t of We In 19 78, u
and ten individualreceiv d 70,000 r beneficial e
ey.
atta hed shareholde espons holders I hav 6 '- #
e which emerged to this rs participatedes i.e.,
abc c
ut ry elements om that statement fr in the a bo klet Fifte surv y.
o e
incom en percent of Let me ju t giving the Jal e of s
ide tify a 15,000 less A majo i than 510,000 the GPU shareh n
- 351 hav olders hav r ty of homemakers, the GPU shar nnual e a e
and a incom nother 151 areeholders es are within fiv
- retired, e years I
of 7p au,3..%.3 apw.omn9n, ibik
- n. m o rs hhk 2 k'b h O qp.
i
..... ~ m
- <~
~ " ' ' ^ '
11.
retirement.
The median size of the holdings is below 200 shares.
In the aggregate, before the TMI accident, GPU had about 200,000 shareholders.
I do not know, of course, what the situation is today since the volume of trading in GPU stock has been so heavy since the accident.
But this large group of elderly individuals, with limited income, are hardly those who can equitacly be expected to bear all or ever.
m.
large part of the burden on the ground either that they have been well compen-sated in the past for their investment by the rate regulatory process, or that they have the financial means which would permit them to absorb that burden without serious harm.
I am not suggesting that shareholders should not bear some part of the cost of the accident.
But I think the part that they should bear should recognize how the ratemaking pro-cess has worked in the past in fact and what the consequences would be, not only to them, but in the long run to all customers, if the GPU stockholders are required to bear an intolerable por-tion of that cost.
So far as GPU employees are concerned, they too will have to bear some part of the costs.
Some personnel reduc-tions will take place, salary reductions and/or withholding of pay increases that otherwise would be clearly justified are inevitable, and other personnel actions may also be necessary.
)0\\
E S
\\
12.
I do hope that when emotions have cooled down, in a the rate-regulatory process will be permitted to work way that is consistent with the past treatment of both customers and shareholders and does not subject either group to an intolerable share of the burdens resulting from the accident.
I think this would better serve the long-Jun of customers than any other allocation approach interest that is feasible.
Thank you for the privilege of allowing me to appear before you.
101 196
_ TABLE 1 GCiERAL P' CLIC UTILITIES CORPCRATICN J
FITJPJi CN CCS'liCN ECUITY A';D MOCOY'S YIEL;S ON CUTSTANOING A PATED FUBLIC UTILITi EONDS 1968 - 1978 ticody 's Average of Yields on G P'J Outstanding Return en A Rated Cc=.c n Public Year Equitv Utility Bende Difference (1)-(2)
(1)
(2)
(3) 1968 10.0%
6.51%
3.5%
1969 9.2 7.54 1.7 1970 7.7 8.69
-1.0 i
1971 9.0 8.16 Cet 1972 9.4 7.72 1.7 1973 9.8 7.84 I<0 1974 9.8 9.50 0.3 1975 8.9 10.09
-1.2 1976 10.3 9.29 1.0 1977 10.9 8.61 2.3 1978 10.2 9.29 0.9 1969-1978 Average 9.5 8.67
0.8 Source
Col. (1) :
The value Line Invest ent Survey, January 5, 1979.
General Puclic Utilities Corporetien, 197E Annual Recort.
Col. (2): Mccdy's Investers Service, Mccdy's Public Utility Manual, 1978 and Meccy's Scnd Surfey, January 15, 1979.
i
\\o1
\\'
s 1 A!O 'l'!Pt