ML19305A665
| ML19305A665 | |
| Person / Time | |
|---|---|
| Site: | Crane  |
| Issue date: | 01/16/1980 |
| From: | Graham J GENERAL PUBLIC UTILITIES CORP. |
| To: | |
| References | |
| TASK-TF, TASK-TMR NUDOCS 8001160726 | |
| Download: ML19305A665 (26) | |
Text
,_
DOCKET NO. ER 78-494 TESTIMONY OF JOHN G.
GRAHAM ON BEHALF OF PENNSYLVANIA ELECTRIC COMPANY 1.
Q.
Pleast state your name, business address and present 2.
employment.
3.
,4.
. A, My name is John G. Graham and my business address is
~-5.
260 Cherry Hill Road, Parsippany, N. J.
I am Treasurer 6.
of General Public Utilities Corporation ("GPU") and Vice 7.
President and Treasurer of GPU Service Corporation s
8.
("GPUSC").
9.
10.
Q.
Please state your educational background and your 11.
professional and business experience.
12.
13.
A.
The details are set forth in Appendix A to this 14.
testimony.
As a summary of that material as relevant 15.
here, I am a lawyer by professional training and, for the 16.
period 1965 to 1971, I was a full-time member of the 17.
faculty of Rutgers University Law School with the 18.
academic rank of Associate Professor.
For a part of 19.
that period, I was Assistant Dean of the Law School.
20.
I ceased to be a member of the Rutgers Law School 21.
f aculty in 1971, but I have continued teaching as a 22.
member of the adjunct f aculty of Seton Hall University 23.
Law School, giving courses in Public Utilities, Regulated 24.
Industries and Administrative Law.
25.
26.
I left the Law School for the private practice of law 27.
in New Jersey which I carried on during the period 28.
through 1965.
During this time, I practiced law and 29.
engaged u,
- nsulting activities in the public utility 30.
field in hew Jersey and elsewhere.
In the course of 31.
that private practice, I was designa:
- by the Attorney 32.
General of the State of New Jersey on several occasions 3^.
to serve as public rate counsel in various public 34.
utility rate proceedings before the New Jersey Board of 35.
Public. Utility Commissioners, including proceedings 36.
relating to electric utilities.
37, 38.
In October 1976, I left the private practice of law to 39.
become Vice President-Law of Jersey Central Power &
40.
Light Company (" Jersey Central"), one of the three I
41.
operating utility subsidiaries of GPU and an affiliate 42.
of Pennsylvania Electria Company ("Penelec") and Metro-43 politan Edison Company (" Met-Ed").
Effective September 1, 44.
1978, I resigned my position with Jersey Central and was 45.
elected to my present positions with GPU and GPUSC.
t 60 7M 80011 l
_3_
1.
Q.
What is the purpose of your testimony in these proceedings?
2.
3.
A.
.It is two-fold.
First, I wish to address the con-
.4.
siderations involved in the treatment for ratemaking of 5.
the investment in Three Mile Island Unit No. 2 ("TMI-2")
6.
for the purpose of this proceeding.
To the extent that 7.
that treatment involves legal decisions, I have applied 8.
my experience as a professor of law and practicing 9.
attorney specializing in the field of public utility t10.
regulation.
In that context, I intend *o present what I 11.
understand to be the governing legal concepts and then 12.
present the facts concerning TMI-2 for application of 13.
those concepts.
Second, I wish to present my views as 14.
Treasurer of GPU and GPUSC concerning the level of 15.
revenues that are required to enable Penelec and its 16.
affiliates to maintain their credit, to attract addi-17.
tional capital on reasonable terms in order to enable 18.
them to discharge their public utility responsibilities 19.
and to maintain the integrity of their existing capital, 20.
in the light of both their present capitalization and 21.
their prospective requirements for capital.
22.
23.
Q.
Are you personally actively involved in these matters for 24.
Penelec?
25, 26.
A.
Very much so.
A major part of my direct responsibility 27.
is that of the financial planning for the GPU System.
28.
The, raising of additional capital and the maintenance of 29.
balanced capital structures for each of the GPU companies, 30.
it.cluding Penelec, has always required a high degree of 31.
coordination which has been ef fected through the GPU 32.
Treasurer's Office.
Since the TMI-2 accident, this 33.
coordination has been, and will continue to be, even 34.
more essential.
During the past three months, I have 35.
participated very fully in the analyses, negotiations 36.
and regulatory proceedings which led to a GPU System 37.
revolving credit agreement that was placed in effect on 38.
June 20, 1979 and in the similar matters that are 39.
related to a private placement by Penelec of $50 million 40.
of bonds.
41.
i 42.
Q.
Will you please summarize your views on the considera-
' l 43.
tions applicable to the treatment of TMI-2 for revenue 44.
purposes in this proceeding.
(
9
. 1.
A.
The starting point has to be the determination of what 2.
legal or similar considerations, if any, must govern 3.
such treatment.
There are some legal considerations to 4,
which I shall refer.
However, I should like to make 5.
clear that, in my view the fact that TMI-2 is not pre-
-6.
sently operating is not such a legal consideration.
7.
.- 8.
As, student and teacher of public utility regulation, I 9.
have been troubled for some time by the fact that, in 10.
many rate proceedings, there are extended debates about 11.
the sterile question of whether a particular component 12.
of utility property was "used and useful" without 13.
addressing the ultimate question of a rate proceeding, 14.
i.e., what level of revenues would best balance the 15.
interests of censumers and investors.
However, while I 16.
was a student and teacher, I never expected to be a 17.
financial officer of a company involved in rate procced-18.
ings in which this question would be posed so dramatically 19.
and, in my judgment, so uselessly.
Yet, that has been i
20.
exactly the experience that I have had in the last two 21.
months.
In that light, I find it appropriate to go back 22.
to fundamentals.
23.
24.
The basic criterion in the Federal Power Act under 25.
Sections 205 and 206 is that such rates be "just and 26.
reasonable" -- the same standard that is applicable 27.
under the Natural Gas Act and that was applicable under 28.
the District of Columbia Code considered in the Washinc-29.
ton Gas Licht Co.
v.
Baker decision of the U. S. Court 30.
of Appeals for the District of Columbia,188 F. 2d 11 31.
(1950), cert. denied 340 U.S. 952 (1951).
- 32.
33.
In Baker, the Court traced the development of the "used 34.
and useful" doctrine, as applied to abandoned procertv.
35.
It stated that the doctrine appeared to have arisen in 36.
Smvth v. Ames, 169 U.S. 466 (1898), in which the Court 37.
employed an eminent domain analogy to determine the 38.
constitutional units on rate regulation - 1. e.,
39.
that rate regulation was a form of "taking" for which 40.
the utility was entitled to "just compensation".
41.
On that basis, the utility could not expect a return (or 42.
just compensation) for property which could not and 43.
would not be "taken" because it was no longer "used and 44.
useful".
This eminent domain parentage of Smyth v. Ames 15.
was acknowledged in the concurring opinion of Justices 46.
Black, Douglas and Marphy in Federal Power Commission 47.
- v. Natural Gas Pipeline Co., 315 U.S. 575, 602 (1942).
(
'l.
Before going on to the next context in which the "used 2.
and useful" concept was employed, I want to point out 3.
that TMI-2 is not abandoned procertv.
On the contrary, 4.
the GPU companies have every intention of returning it-5.
to service and have been advised that such a return to
..6.
service is technically and economically feasible.
7.
8.
Q.
In the case of abandoned propertv, did the eminent 9.
domain analogy concept as employed in Smvth v. Ames 10.
inva'riably require that no return be provided on the 11.
investment in the abandoned property?
12.
13.
A.
No.
One particularly striking illustration of the 14.
difficulty presented to a court that continued to apply 15.
the eminent domain analogy of Smvth v. Ames was presented 16.
in Pacific Gas Company v. San Francisco, 265 U.S.
403 17.
(1924).
In that case, the Court was f aced with the 18.
ratemaking treatment to be given to abandoned components 19.
of plant, when the abandonment was occasioned by new 20.
inventions permitting the utility to provide service at 21.
lower cost.
The lower court had excluded the abandoned 22.
facilities from rate base, had refused the allowances of 23.
extraordinary charges for the amortization of the 24.
abandoned plant and had refused to assign more than cost 25.
to the patents for the new process.
In reversing, the 26.
majority of the Court held (at 415-416), that its duty 27.
was to 28.
29.
" uphold the guaranties which inhibit the taking of 30.
private property for public use without just compensa-31.-
tion ***.
- After adopting the reduced costs of manufacturc for estimating net returns, the [ lower]
32.
s 33.
court gave no proper valuation to the inventions 34.
which caused the reduction, and thereby permitted 35.
property to be taken without just compensation."
36, 37.
The majority finessed the question of the exact method 38.
to be employed in dealing with the situation, suggesting 39.
that. rate base might be increased by adding a fair value 40.
for the patent rights or recoupment by an obsolescence al-42.
lowance for the abandoned property, or by some other method.
43, 44.
Q.
The Court in Bak'er referred to the fact that, as 45.
reproducticn cost became the favored method for determin-46.
ing rate base, the "used and useful" standard shifted 47.
from its original constitutional basis based upon the 48.
eminent domain analogy and became identified with the
< 49.
reproduction cost method of valuation.
How was that 50, shift evidenced?
i 1.
A. The employment of a reproduction cost standard of value 2.
carries with it the implication that one would not 3.
reproduce plant that has been abandoned or that has 4.
become so obsolete that it would not be replaced.
It is 5.
in that. sense that the term "used and useful" was 6.
employed in connection with reproduction cost valuations
'. 7.
to eliminate from that valuation property that would not 8.
be reproduced.
9.
.10.
Q.
In that context, is there a basis for excluding TMI-2 11.
from rate base?
13.
.13. -
A.
I believe not.
While there will undoubtedly be some 14.
minor modifications in TMI-2 to incorporate additional 15.
safety factors as a result of the TMI-2 accident, we 16.
expect that TMI-2 as it was in service during the 17.
quarter of 1979 will be essentially the same facility 18.
after it is restored to service.
We expect that the 19.
turbo-generator, containment vessels, cooling towers and 20.
many other facilities will be used.
There will be 21.
replacement of damaged instruments, the core, etc.
221 Until the containment vessel can be opened for inspection 23.
we will not know the exact extent of any required replacement.
24.
But we do expect to use a large part of the existing 25.
investment.
Therefore, it is not appropriate to character-26.
ize TMI-2 as not "used and useful" as that term was used 27.
for reproduction cost purposes.
Such a characterization 28.
would have no basis in fact or logic.
29, 30.
Q.
Before turning to other concepts, did Mr. Justice Brandeis 31.
have any views that are relevant to this situation?
32.
33.
A.
He clearly did.
In his celebrated dissenting opinion 34.
(in which Mr. Justice Holmes concurred) in Southwestern 35.
Bell Telephone Co. v. Public Service Commission, 262 36.
U.S.
290 (1923), Mr. Justice Brandeis emphasized that 37.
investors supply capital, not physical property, to a 3 8..
utility and that they are entitled to expect that the 39.
rates of the utility would be set at a level to cover 40.
all -its costs, including the costs of return of, and 41.
return on, the capital prudently invested in the enter-42.
prise.
The next year, in the Pacific Gas & Electric 43.
Corporation case to which I previously referred, 265 44.
U.S. 403 (1924), he submitted (again with Mr. Justice 45.
Holmes' concurrence) a dissenting opinion which under-46.-
scored his views.
He stated that every public utility 47.
must, at its peril, provide an adequate amount to cover 48.
depreciation.
He also stated that if.the depreciation i
49.
rate employed does not prove precisely accurate in end 50.
result, the proper action to be taken is to adjust the 51.
financial consequences to the facts.
For example, he 52.
- stated,
s 9
- 1.
"If, when plant must be replaced, the amount set 2.
aside.for depreciation proves to be inadequate, and 3,
investment of dew capital is required, the utility is 4.
permitted to earn the annual cost of the new capital.
+-
If a new device is adopted which involves
, 5.-
~~6.
additional investment (to buy a new plant or a patent 7.
r ight) the company's investment on which the return 8.
must be paid, is increased by that amount.
If the 9.
new device does not involve new investment, but the-10.
innovation involves increas'ed current payments (the 11.
royalties for use of a process) the additional 12.
disbursement is borne by the community as an operating 13.,
expense.
The cost of a scrapped plant is carried as 14.
part of the investment on which a return must be paid 15.
unless and until it has been retired, that is fully 16.
paid fer, out of the depreciation reserve.
- Thus, 17,.
justice both to the owners of the utility and to the 18.
public is assured." (at page's 424-5).
19.
20.
Q.
How do Mr. Justice Brandeis' criteria apply to TMI-2?
21.
22.
A.
It is clear that his criteria would mrndate current
(
23.
revenues for the investment in TMI-2.
In the sense that 24.
Mr. Justice Brandeis employed the term, the capital 25.
investment in TMI-2 was clearly " prudent".
Penelec and 26 its affiliates sought to employ adequate depreciation 27.
rates to amortize that investment.
At this time there 28.
has not been an opportunity to amortize via depreciation 29.
anything other than about 1% of that investment.
Even 30.
if TMI-2 were to be retired, Mr. Justice Brandeis' 31.
opinions would allow the cost of that unamortized 32.
investment for ratemaking parposes.
They would neces-33.
sarily do so when TMI-2 is to be restored to service.
34.
35.
Q.
Do the opinions of Mr. Justice Brandeis to which you 36.
referred indicate that he viewed the opportunity to earn 37.
a fair return on unamortized prudent investment as 38.
guaranteed by the Federal Constitution?
39.
40.
Yes.
He so stated expressly in his Southwestern Bell 41.
Telephone Comoany opinion, 262 U.S. 290.
In his 42.
Pacific Gas & Electric opinion, he sta,ted that "the cost
- 4 3 '.
of a scrapped plant is carried as part of the investment 44.
on which a return must be paid unless and until it has 45.-
been retired, that is fully paid for, out of the depreci-46.
ation reserve."
47.
J 48.
Q.
Why do you regard this as relevant to the instant proceeding?
l
=
- 1.
A.
The " fair value" doctrine of Smyth v. Ames was 2.
eventually rejected implicitly in Federal Power Commis-3.
sion v. Natural Gas Pipeline Co., 315 U.S. 575 (1942) 4.
and explicitly in Federal Power Commission v. Hoce 5..
Natural Gas Co. 320 U.S. 591 (1944).
The concurring 6.-
opinion of Justices Black, Douglas and Murphy in the
.,7.
Natural Gas Pipeline case relies heavily on Mr. Justice 8.
Brandeis' opinion in Southwestern Bell Telephone and 9.
states that, both under the opinion of the majority and 10.
that concurring opinion, the FPC could adopt, if it 11.
chose, prudent investment as rate base and that there 12.
could be no Constitutional objection if the commission 13.
adhered to that formula and rejected all others.
14.
However, the concurring opinion in Pipeline also went on 15.
to emphasize that the Commission has broad discretion 16.
for selection of an appropriate rate base and that the 17.
requirements of the just and reasonable rate do not 18.
depend upon the particular formula employed -
i.e.,
that 19.
the " investor interdst is adequately served if the 20.
utility is allowed to earn the cost of service", as 21.
defined by Mr. Justice Brandeis.
22.
23.
Similarly, the majority opinion in Hoce expressly relied 24.
upon the opinion of Mr. Justice Brandeis in Southwestern
- 25..
Bell Telephone Co.
A regulatory agency applying the 26.
and reasonable" standard is not restricted by the 27.
Federal Constitution to-the use of any ratemaking 28.
formula, but is obligated to give the investbr interest 29.
an opportunity to earn the cost of service, including
- 30. -
both operating expenses and capital charges, subject to 31.
the caveat that that may not result in rates which are l
32.
grossly unjust to consumers - such as could be the case 33.
where values have been lost by the operation of economic 34.
forces, as, for example, the impact of competing methods 35.
of transportation in the case of a toll turnpike 36.
(Covincton & Lexincton Turnoike Co. v. Sandford, 164 37.
U.S.
578, 596) or cable car railway (Market Street 38.
Railway Co.
v.
Commission, 324 U.S. 548, 567.)
39, 40.
Q.
Do'y.ou understand.that the "used and useful" standard 41.
is a part of the prudent investment theory ~of rate base?
42, 43.
A.
It is my understanding that it is not.
The Court of 44.
Appeals in the Baker ca.a held so expressly (at 19),
45.
titing Justice Brandeis' opinion in Pacific Gas &
'4 6.
Electric Company and in United Railways v. West, 280 47.
U.S.
234, 279 (1930).
48.
49.
-Q.
Is it your understanding that the "used and useful" 50.
-standard is a part of the criteria established in the 51.
Natural Gas Pipeline and Hope cases?
, 1.
A..
It is my understanding that it is not.
The Natural 2.
Gas Pipeline case involved a rate order largely
'3.
predicated on the basis of reproduction cost and it 4.
would not have been surprising if some elements of 5.
property had been excluded on the basis that they would
- 6..
not have been reproduced.
However, neither in the
- .7._*"
majority nor in the concurring opinions is the "used and 8.
useful" concept referred to in that context.
There is a 9.
reference to "used and useful" equipment at page 590, 10.
but it is in a wholly different setting.
There the 11.
utility had operated for seven years prior to being 12.-
subjected to regulation under the Natural Gas Act.
The 13.
utility sought to add to a reproduction cost rate 14.
base an allowance for capitalizing the maintenance cost 15.
of excess plant capacity in the early years of its 16.
operation before the business was subject to regulation.
17.
In rejecting that claim, the Court said 18.
19.
"It is only on the assumption that excess capacity is 20.
a part of the utility's equipment used and useful in 21.
the regulated business, that it can be included as a 22.
part of the rate base on which a return may be 23.
earned.
When so included, the utility gets its 24.
return not from capitalizing the maintenance cost, i
25.
but from current earnings by rates sufficient, having 26.
in view the character of the business, to secure a 27.
fair return upc the rate base, provided the business 28.
is capable of ecrning it.
But regulation does not i
29.
insure that the business shall produce net revenues, 1
30.
nor does the Constitution require that the losses of 31.
the business in one year shall be restored from 32.
future earnings by the device of capitalizing the 33.-
losses and adding them to the rate base on which a 34.
fair return and depreciation allowance is to be 34.
earned."
36.
37.
- Given the emphasis in Natural Gas Pipeline that "[t]he 38.
Constitution does not bind rate-making bodies to the 39.
service of ar.y single formula or combination of formulas, 40.
'I do not-believe that this reference to the "used and 4
.41.
useful" concept can be fairly read as incorporating that 42.
concept into the rate regulatory criteria of the Natural 43.
Gas Piceline decision.
44.
45.
-Q.
How about the Hope decision?
4 6..
47.
A.
The "used and useful" phrase.does not appear in that 48.
decision and the entire decision is incompatible with
'the concept.that rate regulation under the Natural Gas 49.
~
1 50.I Act~or the Federal Power Act mandates the utilization of 51.
the "used and useful" standard.
L
. 1.
Q.
You previously referred to the Baker decision of 2.
the U. S. Court of Appeel.c ich involved construc-3.
tion of the "just and rea...iaole rates" standard of the 4.
District of Columbia Code.
Pid that decision involve 5.
the question as to whether the "used and useful" standard
' te regulation under the "just is.a necessary part of
^,6.
~.
7.
and reasonable rates t_andard?
8.
9.
A.
Yes.
10.
11.
Q-What conclusic7 did the Court reach in the Baker decision?
12.
13.
A.
The Court held hat the District of Columbia rate 14.
regulatory Commission did not err as a matter of law in 15.
deciding to include in rate base (1) the remaining investment (i.e., original cost less applicable accumu-
- 16..
lated depreciation) in a gas manufacturing plant which 17.
18.
had been abandoned,'(2) the remaining investment in 19.
another gas manufacturing plant which was scheduled to 20.
be abandoned at an early date, or (3) the unamortized 21.
balance of the cost of converting customers' appliances 22.
to the use of natural gas.
The Court held, however, 23 that it was 24.
25.
"*** relevant to determine whether or not investors 26.
have, during the useful life of this property, been 27.
compensated for assuming that it would become inade-28.
quate or obsolete before the investment was entirely 29.
recovered.
Such compensation may have been made 30.
either through inclusion of obsolescence (1) as one 31.
of the elements used in calculating depreciation 32, expense, or (2) as a risk considered in fixing the 33.
permissible rate of return."
(emphasis supplied) 34, 35.
Q.
How would you apply the Baker decision to this proceeding?
36.
37.
A.
If it is not erroneous as a matter of law to include 38.
-in rate base abandoned property or property that is 39.
nearing abandonment or past investments in converting 40.
-customers appliances, it clearly would not be erroneous 41.
to include in rate base Penelac's investment in TMI-2 42.
which is expected to be restored to service.
43.
44.
Q.
How about the qualifications expressed by the Court 45.
in Baker as to whether-investors had been compensated 46.
for the risk of inadequacy or obsolescence?
i l
4 e
1.
A.
In Baker, the Court related that question to the 2.
particular property.
In the case of TMI-2, it is clear 3.
that the investors have not received such compensation, J4.
since rates based on the investment in TMI-2 have been 5.
collected for so short a period that there is no way in 6.
which they could have realized such compensation.
7.
8.
- 'Q.
Do you regard the facts involved in the Baker decision 9.
as being applicable on all counts to the facts here
)
10.
presented?
11.
l 12.
A.
No.
Baker involved property which had been abandoned or 13.
was nearing abandonment and past expenditures for 14.
appliance conversion.
If it is not error to include 15.
such property or expenditures in rate base, it seems all 16.
the more evident that it is not legally erroneous to 17, include in rate base the investment in plant which, 18.
early in its career, has suffered an interruption of 19.
service but is expected to be restored to service.
20.
21.
Q.
Have the GPU stockholders received a return on their 22.
investment which could reasonably be said to compensate 23.
them'for being required to bear all of the costs 24.
associated with TMI-2 during the period when it is
'5.
not available?
26.
27.
A.
I don't believe so.
There is annexed a table which sets 28.
forth the GPU common stock earnings for the past decade 29.
and the interest rate on public utility bonds.
As the 30.
table shows, the average GPU common stock earnings over that )
31.
period have been less than 1% in excess of that bond 32.
interest rate.
No one could reasonably contend that such 33.
earnings provided compensation for assuming such a ris...
34.
35.
Q.
What relevance does past compensation have to the issues 36.
here presented?
37.
.3 8.
A.
In the Baker case, as well as in some of the other deci-39.
sions to which I referred, the Court held that it was a 40.
relevant inquiry and that is one of the reasons that I 41.
have addressed it.
I might also mention that the Court 42.
of Appeals for the District of Columbia, in the case of 43.
Democratic Central Committee v. Washincton Metropolitan 44 Area Transit Commission, 485 F2d 786 (1973) discussed 45.
that subject at some length and concluded that the 46.
economic burdens and economic benefits of particular 47.
utility operations should go hand in hand.
On that 48.
basis, the GPU customers who have received the past 49.
economic benefits.and will receive the future benefits 0.
of GPU's construction of nuclear generating facilities
~g'11.
should also bear at least a part of the economic burdens 52, of the TMI-2 accident.
53.
o 1.-
Q.
How about the analogy to construction work in progress 2.
("CWIP")?
'3.-
. In its Order No. 555, issued Novemberr 8, 1976, the 4.
A.
5.
Federal Power Commission reviewed the matter of rate-6.
making treatment of CWIP and held that there is no legal 1
7.
barrier to the inclusion of CWIP in rate. base and that, 8'.
to a limited extent, it would include CWIP in rate base.
9.
Its action in so doing was summarily affirmed by the 10.
Court of Appeals for the District of Columbia.
The 11.
Commission observed in that connection that:
12.
13.
"*** it will not adhere to an absolute rule that 14.
plant must be "used and useful" in the traditional 15.
sense before it may be included in rate base.
Of 16.
course, in a very real sense, a plant under construc-17.
tion, which will go on line in the future, is quite 18.
useful to customers."
(slip. op. p. 7) 19.
20.
Q.
Did Order No. 555 state that regulation has always 21.
recognized that the expense of financing construction to 22.
serve customers is itself a legitimate expense which 23.
must ultimately be borne by ratepayers?
24.
4
'5.
A.
Yes.
Order No. 555 contains that statement on page 2.
26.
27.
Q.
If it is legally permissible to include CWIP in 28.
rate base, would that reinforce the view that it is 29.
legally permissible to include Penelec's investment in 30 TMI-2 in rate base and to provide a current return on 31.
that investment?
32.
33.
A.
Th.at is my view.
34.
35.
Q.
If this Commission and the PaPUC exclude Penelec's invest- ;
36.
ment in TMI-2 from rate base and do no more, what is the 37, consequence?
38, 39.
A.
Penelec's investment in TMI-2 is on the order of $200 mil 40, lion.
If nothing more were done, Penelec would be deprived!
41.
of the capital and operating costs associat.?d with that 42.
investment.
That does not, of course, mean that these
'1 43.
costs cease.
Rather, if not provided in rates, they are 44.
paid by the shareholders out of the return intended for 45.
them on their other investments which are in rate base 46.
or accruing AFUDC.
47.
48.
~49.
l' O.
al.~
i 5 2. -
53.
11.
One possibility, of course, would be for this 2.
Commission and the PaPUC to authorize the accrual of 3.
AFUDC on TMI-2, and the cessation of the accrual of 4.
depreciation of the Unit until the repair of TMI-2 has 5.
been completed, on the basis that the additional AFUDC 6.
and absence of depreciation accruals would be recognized 7
for ratemaking purposes when the Unit is restored to 8',
service.
I am not aware of any provision of the Un'iform 9.
System of Accounts or existing interpretation that would 10.
permit that treatment, but I assume that it would be 11.
feasible.
12, 13.
Q.
Assuming that this Commission and the PaPUC did nothing more, 14.
what is the approximate amount of the deprivation that Penelec 15.
would suffer?
16.
17.
A The revenue requirements associated with Penelec's share 18.
of TMI-2 are approximately $27 million annually.
Penelec 19.
has a 25% undivided -interest in TMI-2.
If its affiliates, 20.
Met-Ed, which owns a 50% interest in TMI-2, and Jersey 21.
Central, which owns a 25% interest in TMI-2, were 22.
subjected to a similar deprivation, the impact on the 23.
GPU System would be a deprivation of annual revenues on 24.
the order of $110 million.
3.
26.
Q.
Do these figures include the income and revenue taxes 27.
associated with the return requirements?
28.
29.
A.
Yes, they do.
30.
31.
Q.
Why have you included income taxes in these figures?
32.
33.
A.
I have done so because interest coverage for purposes 34.
of the issuance of new funded debt and preferred stock 35.
is usually determined on a before-income tax basis 36, and thus assumes revenues to cover income taxes.
One 37.
important aspect of the issue to which my testimony is 38.
directed is the impact of particular ratemaking treat-39.
ment on the futare financing capability of Penelec 40, and the GPU System, 41.
42.
Q.
Have you made any estimate of the potential impact of 43.
such treatment on the after-tax annual operating income 44.
of the GPU System?
45.
46.
A.
Yes.
I estimate that such treatment would reduce the 47.
.after-tax consolidated operating income of the GPU 48 System by approximately $56 million annually.
89.
J.
51.
i 52.
53.
~
1.
Q.
Have you made any estimate of the potential impact of 2.
such treatment on the consolidated net income avail-3.
able for GPU common stock?
4.
5.
A.
Yes.
Such treatment woold reduce the consolidated net 6.
income available for common stock by the same amount, 7.
i.e.,
approximately S56 million annually.
On the basis of the 61 million shares of GPU common stock now out-8, 9.
standing this would amount to approximately S.92 per 10.
share annually.
As against the 1978 earnings per 11.
share of S2.30, this would represent a 40% reduction.
12.
13.
Q.
Will Penelec and its affiliates continue to be obli-14.
gated to pay the interest on the bonds and dividends 15.
on the preferred stock which they issued to finance 16.
the construction of TMI-2?
17.
18.
A.
Yes.
19.
20.
Q.
Will Penelec and its ' affiliates continue to be obli-21.
gated to pay the real property and other taxes and 22.
charges associated with TMI-2?
23.
24.
A.
Yes.
25.
C.
Q.
You previously referred to the decision of the U. S.
27.
Supreme Court in the Hoce case.
Does that decision 28.
establish any criteria from the investor or company 29.
viewpoint in determining just and reasonable rates?
30.
31.
A.
Yes.
At page 603 of that decision, the Court stated:
32.
33.
"The rate-making process under the Act, i.e.,
34.
the fixing of 'just and reasonble' rates, involves 35.
a balancing of the investor and the consumer 36, interests.
Thus we stated in the Natural Gas i
37.
Pipeline Co. case that ' regulation does not insure 38.
that the business shall produce revenues.'
315 39.
U.S. p.590.
But such considerations aside, the 40.
investor interest has a legitimate concern with 41.
the financial integrity of the company whose rates 42.
are being regulated.
From the investor or company 43.
point of view it is important that there be enough 44.
revenue.not only for operating expenses but also 45, for the capital costs of the business.
These 46.
include service on the debt and dividends on the 47, stock.
Cf. Chicago & Grand Trunk Rv. Co. v.
48.
49.
40.
1.
52.
53.
1.
Wellman, 143 U.S. 339, 345-346.
By that standard 2.
the return to the equity owner should be commen-3.
surate with returns on investments in other 4.
enterprises having corresponding risks.
That 5.
return, moreover, should be sufficient to assure
- 6.
confidence in the financial integrity of the 7.
enterprise,_so as to maintain its credit and to
.8.
attract capital See Missouri ex rel. Southwestern Bell Tel. Co. v. Public Service Commission, 262
,9 la.
U.S. 276, 291 (Mr. Justice Brandeis concurring).
11.
The conditions under which more or less might be 12.
allowed are not important here.
Nor is it important 13.
to this case to determine the various permissible 14.
ways in which any rate base on which the return is 15.
computed might be arrived at."
16.
17.
Q.
Let us take the various criteria set forth in that quota-18.
tion and apply them to Penelec.
If TMI-2 were excluded 19.
from Penelec's rate bcse and nothing more were done, 20.
would the end result be that Penelec would receive enough 21.
revenue not only for operating expenses but also for the 22.
capital costs of the business, including service on the 23.
debt and dividends on the stock?
24.
26..
A.
No.
After providing for the operating costs of the busi-25.
ness and service on the outstanding debt and preferred i
.7.
stock, Penelec would have only approximately S31 million 28.
available for return on its common stock, based on the 29.
pro forma adjusted earnings for the period ending 30.
May 31, 1979.
This would be a return of approxi-31.
-mately 7.4% on its total common stock equity at that 32.
date of approximately $417 million.
33.
34.
Q.
Would that return to the equity holder be sufficient in 35.
your judgment to assure confidence in the financial 36.
integrity of the enterprise so as to maintain its 37.
credit and to attract capital?
38.
39.
A.
No.
Penelec is today selling an issue of S50 million 40.
of its first mortgage bonds with an interest rate 41.
of 11-3/4% and a net cost, after expenses of issue, 42.
of approximately.12%.
These bonds are nonrefundable for 43.
10 years and carry other restrictions over and above
' 4 4.
those usually found in utility financings.
Clearly, the 45.
return requirement on the common stock would have to be 46.
substantially higher in order to maintain confidence in k
I F
1.
the, financial integrity of the enterprise.
This is 2
demonstrated also by the recent market price for GPU 3.
shares which has been in the neighborhood of $10 per 4.
share or less than 50% of the book value of approximately 5.
S22.40 per share.
One way of looking at the level of 6.:
required return in order to maintain the integrity of 7.
existing capital is to develop a return level that 8,
would be required under current conditions to permit the sale of additional shares at a price sufficiently 9.
'10.
above book to absorb the expenses of issuance of the 11.
new shares and to avoid dilution of the outstanding 12.
~ shares.
Mr. Reis has done this and on this basis has 13.
developed a return requirement of 25.8% in order to 14.
enable the shares to sell at 120% of book value.
Since 15.
our claim in this proceeding for return is nowhere near 16.
that amount, I have not attempted to review that estimate 17.
in detail.
But I don' t see how there can be' any question 13.
that, if the rate base is to be reduced by eliminating 19.
TMI-2, a very substantial increase in the allowed return 20.
on common stock equity associated with the reduced rate 21.
base must be authorized in order to maintain the integrity 22.
of existing capital.
23.
24.
Investors don't supply capital for discrete parts of 25.
the enterprise.
They supply capital for the total enter-26, price and the equity investors share in whatever earnings 27.
are produced for the total enterprise.
Elimination of a 28.
part of the base upon which earnings are permitted, 29.
means that the allowed return on the remainder must be 30.
increased or the integrity of existing capital is 31.
undermined.
32.
33.
Q.
How about the ability of Penelec to maintain its credit?
34.
35.
A.
We have been through a very trying period in the last 36.
three months.
For years, even including the very difficult 37.
period in 1973-4 following the Arab oil embargo, the OPEC 3A.
pricing actions and the Con Edison dividend omission, 39.
the GPU companies were able to effect bank borrowings in
-40.
very substantial amounts through normal informal bank 41.
lines of credit.
Shortly after the TMI-2 accident and 42.
the early actions taken by the'PaPUC, our lines of credit 43.
virtually evaporated.
As a result of the most strenuous 44.
efforts, we were finally successful in completing, on 45.
June 20, 1979, a revolving credit agreement for the GPU 46.
System companies with a group of 43 banks.
But that 1.
revolving credit agreement is a very restrictive agree-2.
ment and is secured in-a variety of ways, including the 3.,
pledge-by GPU of all the common stock of Penelec, Met-7;d
'4.
and Jersey Central.
At the level of over-all return 5.
predicated on the common stock equity return allowed 6.
-prior to the TMI-2 accident but applied to a base which 7.
excludes the TMI-2 investment, we clearly have been and are' unable to maintain credit in a way that is normal
' jB.
.,, s
'9..
for an electric utility.
10.
11.
Q.
How about the attraction of capital?
'12.
is on the
' 13.
A.
The current level of earnings, predicated' as it 14.
allowed returns which reflect pre-accident conditions but 15.
which has been applied to a base which excludes the invest-
_16.
ment in TMI-2, will not permit the GPU System to attract 17.
the; capital needed to enable the GPU System to build 18.
the additional facilities required to provide, safe,
- 20..
adequate and reliable service to our customers.
We need, 19.
for example, to construct additional base load generating 21.
facilities.
Even before the accident, the financial 22.
burden of doing so was a very heavy one.
We have cut 23.
our construction program out of sheer financial necessity.
24.
These construction cuts should be eliminated.
The 25.
TMI-2 accident has not reduced our need to attract
(.
26.
capital; it has increased it.
Consequently, we need 27.
more earnings -- not less earnings -- in order to 28.
attract the capital required to discharge our public 29.
utility responsibilities.
Adherence to the pre-accident 30.
levels of return applied to a rate base which eliminates 31.
the investment in TMI-2 necessarily means that we will not 32.
have the return necessary for the attraction of the capital 33.
that we require.
34.
35.
Q.
One of the elements in the Hope criteria is that the 36.
return to the equity owner should be commensurate with 37.
returns on investments in other enterprises having cor-38.
responding risks.
How is that criterion to be applied 39.
in the current situation?
40.
41.
A.
This is one of the most difficult matters to quantify.
42.
Mr. 'Hildr eth, the Merrill Lynch official in charge of that 43.
firm's public utility investment banking activities, 44.
testified before the PaPUC that before the accident no 45.
potential investor in public utility securities had ever 4 6.-
raised with him the potential risk on investment of a 47.
nuclear accident.
Since TMI-2 that risk is very much 48.
on everybody's mind.
However, it is still too early to 49.
know the definitive regulatory response or the way in 50.;
t 51.
[
52, 53, 54.
1.
which those factors will be reflected in investors' 2.
required returns.
Mr. Hildeth's informed judgment was 3.
that it would be a substantial factor and in my dis-4.
cussions with other investment bankers, institutional 5.
investors and~ members of the financial community, this 6.
assessment was shared.. By the time of the hearings in 7.
September 1979i it may be feasible to quantify this 8.
risk.
' 9,.
10.
Q.
One of the matters mentioned in the passage from the 11.
Hope case that you quoted was the balancing of investor 12.
and consumer interests.
Will you please comment on this 13.
element?
14.
15.
A.
Virtually from the outset of the accident, it has been 16.
the GPU position that it is both equitable and necessary 17.
that the costs arising from the accident should be shared 18.
by investors, customers and employees, which we believe 19.
is the kind of balancin'g that is appropriate in those 20..
circumstances.
So far investors and employees have 21.
shared such costs, but the customers have not.
We hope, 22.
as a result of this proceeding and comparable proceedings 23.
before the State regulatory agencies that customers will 24.
bear a fair share of such costs.
25.
26.
Q.
Did the GPU System submit a specific proposal on this
'; -17.
score?
28.
29.
A.
Yes.
In the State rate proceedings, the GPU Companies 30.
suggested that retail rates be established on a basis 31.
which would eliminate one-half of the return requirement 32.
on the common stock equity investment in TMI-2 until the 33.
unit was restored to service.
Let me add that the 34.
way in which those proceedings have gone to,date, 35.
this proposal did not receive much attention.
- Instead, 36.
the entire investment in TMI-2 (including the debt 37.
and preferred stock components, as well as all the 38.
common stock) has been eliminated from rate base.
For 39.
the reasons I have indicated, I don't believe that 40.
result is equitable or that it serves the public 41.
interest.
l 1.
Q.
Has such a proposal been made in these proceedings?
2.
3.
A.
It is my understanding that a formal proposal to that 4.
end has not been submitted, but that a revised cost of j
5.
service which would eliminate all return requirements on 6.
the common stock equity investment in TMI-2 is being 7.
submitted for the purpose of evaluating the reasonableness
- .8. -
of the rates being charged.
9.
i 10.
Q.
So far as retail customers are concerned, what is the 11.
current situation?
12.
13.
A.
In order to respond to that question, I must first 14.
describe the problem that was facing the GPU Sub-15.
sidiaries following the TMI-2 accident and the relief i
16.
that they requested.
17.
18.
The consequence of the TMI-2 accident was to deprive 19.
the GPU Companies of approximately 1,700 MW of base 20.
load generation with an energy cost of about 3 mills 21.
per kwh and to require them to purchase power from 22.
neighboring utilities at a cost approximating 33 mills 23.
per kwh.
We estimated that the dif ference in cost would 24.
average approximately $24 million a month while both 25.
TMI units were out of service and would be reduced 26.
to about S10 million a month when TMI-l returned to 27.
service.
About a year ago the PaPUC prescribed a 28.
generic energy adjustment clause for all electric utili-29.
ties in the State which in effect provides for replacement 30.
power cost based on the prior 6-month experience with a 31.
1-month lag.
In form, then, that clause would have 32.
permitted recovery of these replacement power costs 33.
being experienced by Penelec and Met-Ed but with a sub-34.
stantial lag which would require the Pennsylvania GPU 35.
Companies to finance in the interim very substantial 36.
amounts for replacement power cost during the intervening 37.
7-month period.
Moreover, the Consumer Advocate in Penn-38.
sylvania and the staff of the PaPUC itself filed 39.
complaints against the operation of the nat energy 40.
clause under the circumstances resulting from the 41.
accident.
Consequently, not only did the GPU Companies 42.
face the enormous burden of financing these replacement 43.
power costs, but there was uncertainty as to whether 44, the clause would be permitted to operate.
From our 45, 46.
47.
48.
49.-
50.
U 51.
52.
53.
54.
_._ 1.
discussion with the commercial banks, it became clear 2.
.that those banks would not provide financing to carry 3.
those costs while that situation continued.
In New 4.
Jersey the result was similar although the particular 5.
structure of the energy adjustment clause was different.
6.
7.
- The consequence was that we were f aced with 8.
an imperative need to obtain prompt authorization from
'9.
the PaPUC.and NJBPU to cover these replacement power 10, costs on a basis which wou?d satisfy the banks and 11.
persuade them to provide interim financing until the 12.
energy adjustment clauses provided reimbursement of 13.
those costs.
The revolving credit agreement could not 14.
be finalized until such Orders were received and, in
.15.
fact, we reachpd a point where some GPU Companies could 16.
only borrow from banks on the basis of a security 17.
interest in a marketable commodity.
We were not in a 18.
position to pursue the questions that I have been 19.
discussing on the merits in the State proceedings and 20.
it became clear that any effort to do so would delay 21.
resolution of questions relating to the energy cost 22.
recoveries which we needed so desperately to have 23.
resolved.
We reluctantly agreed in those proceedings 24.
to orders which did provide, on certain assumptions, 25.
for such energy cost recoveries over the 18-month 26.
period, July 1, 1979-D cember 31, 1980, on a levelized 27.
basis and which eliminated the revenue requirements 28.
with TMI-2 from base rates.
We do not believe that 29.
these are final determinations and we expect to be in a 30.
position to address with those Commissions at a later 31.
date the same issues that are presented here.
32.
33.
The net result is that the GPU retail customers in 34.
Pennsylvania and New Jersey are today receiving service 35.
as if TMI-2 had never been built.
Indeed, by reason 36.
of the assumptions that are built into the level of the 37.
energy adjustment charges, they are receiving service 36, at a cost that is less than that they would be paying 39.
if TMI-2 had never been built.
40.
41.
We do not believe that this ic equitable; we do not 42, bel-leve that it is compatible with the just and reasonable 43.
standard; we do not believe it to be compatible with 44, the long-run best interests of the customers themselves; 45, and we' don't believe that it is compatible with sound 46.
47.
[
f48.
l 49.
50.
51.
l 52.
53.
54.
1.
public utility regulation.
We hope that we will 2.
be able to have a reasoned re-examination and modifica-3.
tion of that result when we are not faced with a crisis 4.
such as we were experiencing in these past :hree 5.
months.
6.
7.
Q.
What has been the consequence to date so far as investors are concerned?
8.
'9.
10.
A.
The impact on the holders of senior securities to 11.
date has been less drastic than that on the holders of 12.
GPU common stock.
The holders of the senior securities 13.
have continued to receive their interest payments and 14.
preferred stock dividend payments.
However, the 15.
ratings of Met-Ed bonds and preferred stocks have been 16.
sucpended and those of Jersey Central preferred stocks 17.
have been reduced. The market prices of the outstanding 18.
bonds, debentures and preferred stocks of all three GPU 19.
subsidiaries have declined and this, of course, adversely 20.
affects the holders of such securities.
21.
22.
The impact on the holders of GPU Common Stock has beer 23.
severe.
The market price of the GPU common stock has 24.
declined by almost 50%.
The quarterly dividend rate was 25.
reduced from 454 per share to 254 per share, a 44%
i 26.
reduction.
27.
28.
Q.
What has been the impact on employees?
29.
30.
A.
The salaries of the two senior officers were reduced to 31.
levels established two years ago and the salaries of 32.
all other officers were frozen at levels established 33.
more than a year ago.
There is a freeze on new hirings 34.
and a reduction of personnel is under way.
35.
36.
Q.
You previously referred to the " prudent investment" rate 37.
base concept recommended by Justices Brandeis and Holmes 38.
and referred to in the concurring opinion of the Pipeline 39.
decision and in the Baker decision.
What do you mean 40.
by " prudent investment"?
41.
42.
A.
I use.that term in the same sense that Justice Brandeis 43.
defined it.
Specifically, in footnote 1 on page 289 of 44.
his dissenting opinion in the Southwestern Bell Telephone 45.
case he stated:
46.
47.
48.
45.
50.
(
51.
52.
-53.
94.
1.
"The term prudent investment is not used in a
' 2.
critical sense.
There should not be excluded from 3.
the finding of the base, investments which, under 4,
ordinary circumstances, would be deemed reasonable.
5.
The term is applied for the purpose of excluding 6.
what might be found to be dishonest or obviously 7.
wasteful or imprudent expenditures.
Every invest-6.
ment may be assumed to have been made in the exer-9.
cise of reasonable judgment, unless the contrary is
- .10.
shown."
11.
12.
O.
How would that standard be applied to the investment in 13.
TMI 14.
15.
A.
I don't believe that that standard would permit the 16.
investment in TMI-2 to be classified as other than 17.
prudent.
18.
19.
There have been suggestions from various quarters during 20.
the last three months that somehow the customers of the GPU 21.
Companies are entitled to be subsidized and to receive i
22.
electric service at prices below the cost of providing 23.
such service for reasons that have been characterized as 24.
" management imprudence" or "f ault" or something analogous 25.
thereto.
These are at best simplistic notions which do
'2 5.
not come to grips with the real problem.
They also do 27.
not employ the concept of " prudent investment" as 28.
Justice Brandeis and others inave employed the term.
29.
For example, Professor Bonbright, in his book Princioles 30.
of Public Utility Pates, stated at page 174:
31.
32.
"' Prudent' imports the requirement that the 33.
investment, in order to gain recognition in the rate base, must have been prudently incur-34.
35.
red in the light of foresight rather than of 36.
hindsight."
37.
38.
Some, for example, would take the position that 39.
TMI-2 should be excluded from rate base because 40.
they are now, and perhaps for some period have been, 41.
opposed to nuclear power.
But it is not that it was
^
42.
just the GPU System that decided that commercial 43.
nuclear power should be developed.
This decision was 44.
made by the Congress of the United States and President 45.
Eisenhower some 25 years ago and it has been National 46.
policy ever since that time.
The Congress of the 4 i.
United States has repeatedly endorsed that National
.48.
policy during the past quarter century as have the five 49.
Presidents of the United States since President Eisenhower.
50.
It is apparent that generation from existing nuclear 51.
plants is indispensable if the Nation is not to become
(
52.
even more dependent upon OPEC.
53.
54.
_ 1.
Q.
What motivated the construction by the GPU Companies of 2.
nuclear generating capacity?
3.
4.
A.
The GPU System built Oyster Creek, TMI-l and TMI-2 to 5.
provide lower cost power to their customers and to 6.
achieve diversity of fuel supply.
The Arab oil embargo 7.
and OPEC pricing actions and the recent coal strike 8.
have confirmed the wisdom of a policy which was not dependent upon non-diversified sources of fuel supply.
1.
+-
10.
How can this possibly be characterized as " manage-11.
ment imprudence"?
12.
13.
The nuclear steam supply system for TMI-2 was 14.
selected after competitive bidding and was furnished by 15.
a company that was well-regarded and which was supplying 16.
nuclear steam facilities to the Government in its naval 17.
program as well as to a number of electric utilities 18.
for the commercial power program.
The construction and 19.
operati n of TMI-2 was licensed by the Government in 20.
accordance with the elaborate procedures specified by 21.
the NRC and its predecessor.
How can these actions be 22.
characterized as management imprudence?
23.
24.
Q.
How would you describe the TMI-2 accident?
25.
26.
A.
The fact is that the TMI accident was just exactly that an accident.
All the contributing factors and
(
,7.
28.
their relativa importance cannot now be identified.
29.
Those are matters which are being and will be exhaust-30.
ively considered during the course of the many investi-31.
gations that are under way.
But in our complex society, 32.
it is unrealistic to attempt to deal with such matters 33.
on a basis which attempts to ignore the fact that 34.
accidents do happen.
Instead, it must be realized that 35.
accidents will happen, that they will have costs and 36.
that the costs must be distributed in a way that 37.
is consistent with (a) the purposes for which the 38.
project was undertaken, (b) the past allocation of the 39.
benefits that have resulted from such undertakings, and 40.
(c) the means available to deal with such' costs.
41.
42.
Q.
Do you believe that public utilities can and should 43.
be regulated on a basis in which costs are allocated on 44.
the basis of the negligence of employees, contractors 45.
or government officials, assuming that necligence in 46.
some quarters is ultimately established?
(
l 1.
A.
No. _ Simplistic attempts to assign costs on the basis 2.
of negligence concepts miss the whole nature of the 3.
electric utility industry in general and the construc-4.
tion and operation of nuclear power plants, in particular, 5.
even assuming that it were possible to make fault 6.
determinations at this time.
In order to provide for 7.
the costs, insurance is purchased to the extent that it 8.
is available.
GPU did purchase the maximum insurance 9.
available.
Unfortunately, no insurance was available 10.
to cover the costs of replacement power or the costs of 11.
required return on investment.
12.
13.
Q.
Will you comment on the cost of replacement power?
14.
15.
A.
As a result of the TMI-2 accident, the replacement power 16.
being supplied to GPU's customers is predominantly coming 17.
from oil-fired generation.
It is so expensive because 18.
the OPEC cartel has achieved the economic position which 19.
enables it to impose such exactions upon those who import 20.
fuel oil from them.. Are the GPU stockholders at fault be-21.
cause the OPEC Nations have achieved a position to impose 22.
such exactions?
Would the GPU customers be better off if 23.
TMI-2 had, instead, been an oil-fired unit (such as PP&L's 24.
Martins' Creek units) as might well have been the case?
25.
Indeed, if TMI-2 had been an oil-fired unit, the GPU
( 26.
customers would now be paying eneroy costs substantially 27.
similar to those involved in the replacement energy costs 28.
being paid by GPU and would also have been paying the 29.
fixed charges on the investment in such oil-fired plants.
30.
Measured against an oil-fired alternative, Mr. Cherry 31.
testified that Oyster Creek had benefitted Jersey Central 32.
customers approximately S300 million and that TMI-l had 33, already benefitted GPU customers by another $325 million.
34.
35.
The decision facing the Commission should be an easy 36.
one in terms of practicalities; customers should pay the 37.
reasonable costs of the purchase of replacement energy 38.
because there is no other way in which such service may be 39.
provided.
It should be an easy one from the point of view 40.
of the merits; there can be no justification for requiring 41.
GPU to provide energy to its customers at an out-of-pocket 42.
loss.
43.
44.
Q.
How about the return on the investment in TMI-27 45.
46.
A.
Since that investment, and the investment in Oyster Creek 47.
and TMI-1, was made for the purpose of enabling the GPU 48.
Companies to provide service to their customers at the b
r 1.
lowest cost and with the advantages of diversified fuel 2.
supply and since the customers have heretofore enjoyed 3.
all the benefits of such investments, a strong case 4.
could be made that they should bear all the return 5.
requirements on that investment during the period it is 6.
being restored to service..They will receive all of 7.
its benefits when it is returned to service just as
'O.
our customers have received the benefits of TMI-l and Oyster Creek.
As I have stated, that is not our 10.
position.
Instead, we believe that those costs 11.
should be shared by customers, investors and employees.
(
i i
n
- 1..
Statement of Background and Qualifications o'f 2.
John G. Graham 3.
4.
I am the Treasurer of General Public Utilities Corporation 5.
and Vice President and Treasurer of GPU Service Corporation.
6.
I have served in those capacities since September 1, 1978.
My
.7.
responsibilities in these positions include the availability of 8.
. adequate cash resources for the GPU System, relationships with 9.
the banking and investment communities, assurance of the comple-10.
tion of regulatory filings and approvals for the GPU System in ll, connection with financial matters, and responsibility for GPU 12.
System financial forecasting.
I also coordinate all of these 13.
activities with the Treasurers of the three operating utilities 14.
within the GPU System including Metropolitan Edison and Penn-15.
sylvania Electric Company.
16.
17.
Prior to my appointment as Treasurer, I served from October, 18.
1976 as Vice President for Law of Jersey Central Power & Light 19.
Company, another subsidiary in the GPU System.
Before that time, 20.
I practiced law, mainly.in the field of the regulation of public 21.
utilities, in Newark, New Jersey.
From 1965 to 1971, I served as 22.
Associate Professor of Law and Assistant Dean of Rutgers Law 23.
School, Newark, New Jersey.
Most of my research and teaching 24.
activity, at that time, was in the fields of Civil Procedure, 25.
Criminal Law and the Administration of the Criminal Law.
Since 26.
1972 I have also served as an adjunct member of the faculty of the 27.
Law School of Seton Hall University in Newark, New Jersey.
I 28.
teach in the field of Administrative Law, Regulated Industries 29.
and Public Utilities.
30.
31.
I am a graduate of Upsala College in East Orange, New 32.
Jersey with the Degree of Bachelor of Arts in Mathematics and 33.
Economics.
I am also a graduate of Rutgers Law School with the
)
34.
Degree of Juris Doctor.
35, 36, 37 38, 39.
40.
41.
42, 43.
44.
45.
46.
47.
48.
49.
50.
51.
52, 53.
54.