ML19291B891

Pleading Re Applicants' Financial Qualifications.Total Cost of Project Exceeds Applicants' Figures.Certificate of Svc Encl

ML19291B891
Person / Time
Site:	Skagit
Issue date:	11/09/1979
From:	Leed R LEED, R.M.
To:	Atomic Safety and Licensing Board Panel
References
NUDOCS 7912140025
Download: ML19291B891 (12)

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In the Matter of )

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PUGET SOUND POWER & LIGHT ) DOCKET NCS. STN 50-522 COMPANY, et al., ) 50-523

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(Skagit Nuclear Power Project, )

Units 1 and 2) )

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EE. FINANCIAL QUALIFICATIONS

1. Under the provisions of 10 CFR 50.33(f) and Appendix C, Applicants must demonstrate, with reasonable assurance, that they can obtain financing sufficient to cover the esti-

. mated construction cost of the project and its related fuel cycle costs.

2. Various estimates of the total project cost have appeared in this record. Based on Applicants' submissions to the NRC Staf f in May, 1978, a project cost figure of $2.57 billion (exclusive of interest charges) was evaluated by the Staff. SER Supplement 1, sect ions 20.2 et seg. Subsequently,

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financial information supplied by Applicants a year later resulted in a cost estimate of $3.087 billion (exclusive of interest charges). Olson, Coberly, Pack and Coombs (Applicant panel) prefiled testimony fol. Tr. 14,886, Table 1.1; Gittleman (NRC Staff) prefiled testimony fol. Tr. 14,625, p. 2. Addi-tion to this figure of interes,t charges during the construc-

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tion period yield a total project cost estimate of approxi-mately S3.8 billion. Tr. 14,654-56. ,

3. When Applicants revised their cost estimate to

$3.087 billion, they also revised their project construction schedule to reflect LWA in. September, 1979, and initial commercial operation of the two units by September, 1986 and September, 1988. These schedule adjustments represent eighteen months extension of the milestone dates appearing in Applicants' submission of May, 1978. Applicant panel pre-filed testimony, fol. Tr. 14,886, Tables 1.1 and 1.2. In view of the fact that LWA was not granted in September, 1979, and that NRC has taken recent steps which will delay LWA in -

definitely, we find that Applicants' estimated project com-pletion dates are no longer valid, and that a mininum delay of nine months to two years beyond Applicants' estimates is to be expected.

4. SCANP witness Lazar's review of recent literature on nuclear project construction schedules identifies a high probability of further delay in completion of the project.

Lazar prefiled testimony, fol. Tr. 14,711, pp. 2-6. .,

A RAND Corporation study prepared for the Department of Energy

(" Cost Analysis of Light Water Reactor . Power Plants") pro-vides a regression an,alysis~model, which, as applied to the Skagit project, indi, cates a 107-month construction period, _

far in excess of the 72-month period, envisioned by Appli-cants. Fol. Tr. 14,711, p. 2. The General Accounting Office's evaluation of Tennessee Valley Authority's cost r

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and schedule estimates identifies a distinct trend towards lengthening construction periods, again well beyond the Applicants' estimate. Fol. Tr. 14,711, pp. 3-4. Finally, the Washington Public Power Supply System analyzed all nuclear power projects built or under construction in the United States. On the basis of this analysis, WPPSS.esti-mated a construction period of 100 months between first concrete and fuel load, and an additional lapse of six months between fuel load and commercial operation. Fol. Tr. 14,711, pp. 5-6. While each of these studies project construction periods considerably longer than that proposed by Applicants for the Skagit project, there is nothing in this record to substantiate Applicants' assumption that their project can 4

achieve commercial operation by September, 1986 and Septem-ber, 1988. We therefore find that Applicants' proposed completio,n dates are excessively opt.imistic, and that delays of up to four years or more beyond such dates can reasonably be expected.

5. Construction schedule revisions have been accompan-ied by escalated cost estimates throughout this proceeding.

FES Table 9.2; SER supplement 1, Sections 20.1 et seq.; -

Applicant panel fol. Tr. 14,886, Table 1-1. That future schedule revisions will, result _in,further cost estimate in- .

creases has been characterized as a matter of common know-

_ ledge. Lazar, fol..-Tre.14,711, pt-7.. The Boardsfinds'that modifications to Applicants' construction schedule will con-tinue to reflect escalations in total project costs.

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6. Applicants' present ations and proje ct ions rega rding their financial ability to complete the project rely on a number of assumptions. Among the most pervasive of these is Puget's assumption (fol. Tr. 14,886, Table 2-2) that inflation will average seven percent, compounded annually throughout the construction period. Puget shows declining inflation rates (Table 2-2, item 3) between 1981 and 1986, encompassing the construction years during which the Appli-cants show the least financial coverage. See fol. Tr.

14,886, Tables 2-1, 2-6, 2-9, and 2-11. These tables reflect low levels of retained earnings and common equity, while they show high long-term debt, maturing bond obligations and issues of common and preferred stock, between the years 1982 and 1985. These projections demonstrate reduced financial flexibility, and a continuation of present double-digit inflation.through the mid-1980's would undermine Applicants' marginal ability to maintain an appropriate debt coverage ratio during these years. Lazar. fol. Tr. 14,711, pp. 7-10, 21-22; Olson, Tr. 14,909-11. Applicants have presented no evidence in support of the anticipated decrease in annual inflation, nor have-they allowed for any increase over the cost of construction ~ anticipated by Puget. Fol. Tr. 14,711,

p. 21. By way of contrast, expected increases in the real ._

prices of oil and electricity over the next decade will tend

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to maintain annual inflation at or near its present- level.

Tr. 14,789-90. We find that Applicarats have seriously

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underestimated the p:cbable level of future inflation, the true costs of construction, and the time required for con-s tru ct ion, and therefore we cannot find that they have demonstrated financial qualifications or an ability to complete construction of the project under economic condi-tions likely to prevail in the 1980's.

7. In a similar vein, Applicants have assumed that long-term interest rates will remain in the 8.5-10.25 percent range during the construction period. Applicant panel, fol. Tr. 14,886, Tables 2.3, 2.7, 2.10,'2.12. Applicants themselves are aware that this projection is too low --

Portland General Electric, for example, in testimony before the Oregon Public Utility Commissioner, stated that its estimates of 10.5-11.0 percent interest obligations on mortgage debt securities was conservative and understated the actual yield to be provided by PGE. Lazar, fol. Tr. 14,711,

p. 17; Tr. 14,856. In this proceeding, however, PGE pro-jected a long-term interest range of 8.6-10.5 percent.

Applicant panel, fol. Tr. 14,886, Table 2-7. Meanwhile, the prime lending rate in August, 1979 was 12.25 percent.

Gittleman, Tr. 14,658-59. .In view of the. considerable long-term debt element (between 49 and 56 percent) of Appli-cants' capital resources during the peak construction years (fol. Tr. 14,886, Tables.2-3, 2-7, 2-10, 2.-12 ) , any substan-tial increase over the optimistic costs of capital projected by Applicants will result in significant increases in the total project cost, and will place in serious doubt the ability of the Applicants to achieve rate relief or attract equity investment necessary to cover construction costs.

SCANP witness Lazar testified that conservatism and prudence would dictate that Applicants consider the high current cost of capital in their financial projections. Tr. 14,855.

Aside from personal convictions that economic c<nditions for utilities must improve, Applicants submitted nothing to this record that would indicate immediate or even middle term relief from the high interest rates prevailing today. We find that the f ailure to project capital costs in a manner consistent with recent experience results in an unduly low total project cost cost estimate and precludes a meaningful -

evaluation of Applicants' ability to meet a more realistic estimate of the cost of completing the project.

8. Applicants demonstrate a heavy reliance on common stock issues as a primary component of their external financing throughout the construction period. Fol. Tr.

14,886, Tables 2-1, 2-6, 2-9, 2-11. Their ability to issue common stock in the volume indicated in the source of funds tables relies on Applicant's postulated ability to maintain a f avorable ratio of market-to-book value - each assumes that this ratio will be greater than one 'during .'the years of construction. Fol. Tr. 14,886, Tables 2-3, 2-7, 2-10, 2-12. This assumption is without foundation; none of the

. applicants shows a year-end market-to-book ratio greater

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than .9 5 in 1978. Puget has not been above one since 1975, and they show a steady decline from 1977 on. Portland General Electric's market-to-book ratio dropped f rom 1.05 at the end of 1977 to .91 a year later, and Pacific showed almost as great a decline for the same period. Washington Water Power's ratio has not been as high as one since 1976.

Foll. Tr. 14,886, Tables 4-5, 4-7, 4-8, 4-9. The market value of Puget's common shares was 89% of book in August, 1979. Olson, Tr. 14,925. To issue common shares at an unf avorable market-to-book ratio would be to dilute the equity of present shareholders. Lazar, Tr. 14,862; Olson,

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Tr. 14,926. If applicants are unable to maintain a market-to-book ratio of 1 or greater, the common stock revenue entries in the source of funds tables will be distorted, for the earnings available for common will decrease in propor-tion to " common dividends. See Tables 2-1, 2-3. The NRC staff witness stated that Applicants' presentations on financing through common stock issues rely substantially on assumptions that market conditions for utilities will improve. Gittleman, Tr. 14,670. The Board finds that such self-serving assumptions are inconsistent with both recent experience and the standard of conservatism in predicting

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future conditions ~. We cannot find that Applicants have _

demonstrated ability to finance the project from sales of

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common shares. - '

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9. Exhioit 223, a Salomon 3rothers report on invest-r.e n t trends in the electric utility industry, cacts doubts on Applicants' ability to attract capital at reasonable levels of return. The twelve highest-yield utilities listed in the report all have nuclear generation facilities either operating or under construction; the higher the yield, the higher the perceived risk to the investor. Of the ten lowest-yield utilities, or those most attractive to inves-tors, only three are either operating or building nuclear proj e ct s. Lazar, Tr. 14,872-73. Exhibit 223 also ranks utilities by their market-to-book ratios on common stocks.

This list shows only 11 of the 100 largest utilities in the nation selling stocks above book value, and of these 11,

, four have nuclear projects under construction and none currently operate nuclear plants. Of the ten utilities with the lowest market-to-book ratios, eight are either operating or constructing nuclear projects. Lazar, Tr. 14,873-74. We find that investor confidence in nuclear-dependent utilities is low, and that applicants have underestimated their return obligations on preferred issues as well-as the marketability of their common stocks.

10. Applicants project retu rn-to-equity rates in the range of 13 to 14%. throughout the construction period.

Gittleman, Tr. 14,639; Applicant Panel Fol.- Tr. 14,886, Tables 2-2, 2-7, 2-10, 2-12. These rates are based, however, 15J2 iL4

on applicant's projections in the source of funds and input assumption tables. See Tables 2-1 through 2-12, follow ing Tr. 14,886. If Applicants f ail to realize the external financing resources outlined in these tables, they will need to generate additional internal revenues to meet the short-fall. A high rate of return to equity would increase internal cash flow (Gittleman, Tr. 14,639), but would also increase the cost of power from the project. Gittleman, Tr.

14,657; Lazar, Fol. Tr. 14,711, pp. 17-21; Tr. 14,854.

A return of 15 to 16% annually has been identified as more characteristic of Applicants' internal financing needs.

Lazar, Tr. 14,854. To maintain this high rate of return would result in 450-500% increases in present power rates by E

1990. Ibid. In view of findings 4 through 9 under the present heading, we find that applicants will be required to request significantly higher rates of return to equity than they presently project; as a result, Applicants ' ratepayers will be forced to bear the cost of construction to a much greater extent than is shown in Applicants' submissions.

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11. We have'seen the questionability of many of Appli-cants' assumptions and projections regarding their ability to build the proposed project. Findings 4 through 10, supra.

The NRC staf f's evaluation oT applicant's financial qualifi-cations appears not to have entailed review of the tenabi-s,. . - _ _

lity of any of appl'icants' cost and schedule estima~tes

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beyond a comparison with results f rom the staf f's CONCEPT model, nor has the NRC staf f evaluated independently any of Applicants' source of funds projections and their inherent assumptions. Gittleman, fol. Tr. 14,625, pp. 1-6; Tr.

14,669. The CONCEPT model has been criticized, and in some areas, abandoned, for its f ailure to predict accurately the cost and time commitments of nuclear plant construction.

Lazar, fol. Tr. 14,711, pp. 11-12. Rather than apply-ing a conservative approach to balance the bias of appli-cants, the CONCEPT model relies on the basic input of a minimum plant cost estimate at an hypothetically ideal

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site, which is then adjusted for local and temporal condi-tions. In short, CONCEPT represents a "best possible" cost model used to evaluate Applicants' "best possible" estimate.

Lazar, fol. Tr. 14,711, p. 11. In view of our previous findings *regarding the quality of Applicants' projections and assumptions, we cannot afford evidentiary weight to any review of Applicants' submissions that fails to confront the question of their validity.

12. On the basis of the above findings, we mu st con-clude that the eventual total cost of the project will exceed the figures subm;itted by- Applicants, and we find that Applicants have failed to demonstrate, to any degree of assurance, their ability to finance construction of the proje ct. .. ._

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NUC" EAR REGULATORY COMMISSION

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, p BEFORE THE ATOMIC SAFETY AND LICENSING BOARD '- -

In the Matter of )

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PUGET SOUND POWER & LIGHT ) DOCKET NOS. STN 50-522 COMPINY, et al., ) 50-523

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(Skagt t Nuclear Power Proj0ct, )

Units 1 and 2) )

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CERTIFICATE OF SERVICE I hereby certify that copies of: 1ITIER TO V. DFALE and INTERVENOR'S PROPOSED FINDINGS OF FACT .ON FINANCIAL QUALIFICATIONS dated November 9, 1979, have been served on the following by depositing the same in thr. United States mail, postage prepaid,, on this 9th day of November, 1979.

Valentine B. Deale, Esq., Chairman Docketing and Service Section Atomic Safety and Licensing Board Office of the Secretary U.S. Nuclear Regulatory U.S. Nuclear Regulatory Commission Commission 1001 Connecticut Avenue N.W. Washington, D.C. 20555 washington, D.C. 20036 Richard L. Black, Esq.

Dr. Frank F. Hooper, Member Counsel for NRC Staff Atomic Safety and Licensing Board U.S. Nuclear Regulatory School of Natural Resources Commission University of Michigan Office of the Executive Legal Ann Arbor, MI. 48104 Director Washington, D, C. 20555 Gustave A. Linenberger, Member Atomic Safety and Licensing board Nich'olas D. Lewis,. Chairman U.S. Nuclear Regulatory Energy Facility Site Evaluation Commission Council Washington, D.C. 20555 820' East Fif th Avenue Olympia, Washington 98504 Certificate - 1 1Eb2 107

Richard M. Sandvik, Esq., Russel W. Busch Assistant Attorney General Evergreen Legal Services Dep.tetment of Justice 520 Smith Tower 500 Pacific Building Seattle, Washington 98104 520 S. W. Yamhill Portland, Oregoa 97204 Thomas Moser Deputy Prosecuting Attorney Robe rt Lowenstein, Esq. Skagit County Courthouse Lowenstein, Newman, Reis & Mt. Vernon, Washington 93273 Axelrad -

1023 Connecticut Avenue, N.W. Warren Hastings Washington, D.C. 20036 Portland General Electric Co.

James W. Durham, Esq.

121 S.W. Salmon Street TB 13 Portland General Electric Co. Portland, Oregon 97204 121 S.W. Salmon Street

'TB 17 Portland, Oregon 97204 CFSP and FOB E. Stachon & L. Marbet 19142 S. Bakers Ferry Road Boring, Oregon 97009 Canadian Consulate General Peter A. van Brakel Vice-Consul 412 Plaza 600 6th and Stewart Street Seattle, , Washington 98101 F. Theodore Thomsen Perkins, Cole, Stone, Olsen.

& Williams 1900 Washington Building Seattle, Washington 98101 Alan P. O' Kelly Paine, Lowe, Coffin, Herman

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1400 Washington Trust Financial -

Center Spokane, Washingtoa , 99204 -

DATED. / -

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ROGER M. LEED.

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