ML19305A666
| ML19305A666 | |
| Person / Time | |
|---|---|
| Site: | Crane  |
| Issue date: | 09/26/1979 |
| From: | Holcombe E GENERAL PUBLIC UTILITIES CORP. |
| To: | |
| References | |
| TASK-TF, TASK-TMR NUDOCS 8001160728 | |
| Download: ML19305A666 (52) | |
Text
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i l
NUCLE AR REGUL ATO RY COMMISSION i
I i
l IN THE MATTER OF:
t TMI SPECIAL INQUIRY l
DEPOSITION i
I' DEPOSITION OF EDWARD HOLCOMBE i
l I
Place - Parsippany, New Jersey Date - Wednesday, September 26, 1979 Pages 1 - 51 s
T.enen.:
(*C2) 347-37CC ACE -FEDERAL REPORTERS,INC.
OffiaalReponers A44 Nenh Cecitei Street Washington. D.C. 20001 NATIONWIDE COVEltAGE. DAILY s
8001160718 [3
1 NUCLEAR REGULATORY COMMISSION THREE MILE ISLAND SPECIAL 2
INQUIRY GROUP 3
4' DEPOSITION OF EDWARD HOLCOMBE 5
0F GENERAL PUBLIC UTILITIES 6
by NRC/TMI SPECIAL INQUIRY GROUP TRANSCRIPT Or 7
INTO THE ACCIDENT AT THREE MILE PROCEEDINGS 8
ISLAND 9 I ------------------
10 GPU Headquarters 260 Cherry Hill Road 11 Parsippany, New Jersey Wednesday, September 2ti, 1979 j A P P E A R A'N C E S :
13 14 l DAVID J. EVANS, ESQ.
R. LAWRNECE VANDENBERG 15 j NRC/TMI Special Inquiry Group 16 JAMES B. LIBERMAN, ESQ.
, General Counsel for General Public
.ilities 17 li DOUGLAS E. DAVIDSON, ESQ.
18 19 l
l i
- 6 20 l
l l
REPORTED BY:
MARGARET J. TEILHABER, C.S.R.
21 I
22l!
l!
23 24 1
Ace - Feceral Reporters, Inc.
I 254 i
2 1
INDEX 2 l WITNESS DIRECT I
3 EDWARD HOLCOM3E 4
By Mr. Evans 4,46 i
5 By Mr. Vandenberg 24 6
7 EXHIBITS 8
NUMBEe DESCRIPTION FOR IDENT.
9 1110 Accounting effects of TMI-2 3
1 10 j 1111 Letter dated August 18, 1979 3
to FERC from Edward Holcombe 11
~
1112 Revenue Rule 76-428 11 12 13 l
14 !
15 l 16 17 18 l 19 i
20 l 21 !
i 22 l l
23l 24 i Ac2-Feceral Re orter:, Inc. f 9e t
se i
j
3 1 l (Exhibit 1110, Accounting Effects of l
2 TMI-2, and Exhibit lill,. Letter dated August 18, 3 !
1979 to FERC from Edward Holcombe,are received i
4 and marked for identification.)
5 MR. EVANS:
This is a depo::ition of Mr.
Edward Holcombe, comptroller of the General Pub-7 lic Utilities Corporation being held by the NRC/
8 TMI Special Inquiry Group.
It,'s being held at 9
the headquarters of GPU in Parsippany, New Jerse7, 10 on September 26, 1979.
II Present in addition to Mr. Holcombe is 12 Mr. Jim Liberman,' general counsel of GPU, and 13 Mr. Doug Davidson, also with Mr. Liberman.
14 Also present is Mr. Larry Vandenberg and i
15 David Evans of the Special Inquiry Group.
16 Mr. Holcombe, I've given you a letter I7 !
tcday signed by Mitchell Rogovin.
Have you had 18 l an oportunity to read that letter and do you I9 understand its contents?
I 20 MR. HOLCOMBE:
Yes, I do.
21 MR. EVANS:
I have also given you a i
22 !
Witness Notification form.
Have you had a chance 23 f to read that and do you understand its contents?
I 2#
MR. HOLCOMBE :
Yes, I do.
Aes-Fe eral Reporters, Inc.
l 25 MR. EVANS:
Do you have any objections l
n V
I
4 1
to proceeding at 'chis eine?
2 MR. HOLCOMBE:
No.
3 MR. EVANS:
Would you stand and raise 4
your right hand.
5 EDWARD H 0 L C 0 M B E, having been duly sworn,according o:
to law, testified as follows:
7 DIRECT, EXAMINATION 8
BY MR. EVANS:
9 Q
Mr. Holcoube, would you please state your full 10 name for the record and also your current position with GPU and 1I GPUS.
12 A
My name is Edward Joseph Holcombe.
My current position 13 with General Public Utilities is comptroller of the parent cor-14 ! poration and vice-president / comptroller of the General Public l
15 ! Utilities Service Corporation.
16 Q
Could you describe briefly in those two positior.s your responsi-l you just mentioned to whom you report and what 17 18 !bilitiesare.
I 19 A
My responsibilities pursuant to the bp-laws of the cor-20 poration are to have general responsibility for all of the re-21 cords and books of account of the corporation -- that's both, 22 the parent corporation and the GPU Service Corporation -- and ec li be responsible for making reports from time to time to the Boards 23 24 of Directors of those corporations.
Ac. - F.e.eai n. eon ters. inc.
25 In addition to that, as a general responsibility my l
l g
Holcombe - direct 5
1 office coordinates with the subsidiary comptrollers accounting 2 jpolicy within the GPU system.
3 l My office is also responsible for preparing the consoll-4 dated financial results of General Public Utilities system.
I 5 report directly in certain capacities to the Boards of Directors 6,but in a line responsibility in the organization to the executiv e 1
7 vice-president of finance.
8 Q
Who is that executive vice-president?
9 A
Mr. Verner Condon.
10 Q
Would it be fair to say that in your position i1 you are responsible for the tax planning and preparing the tax 12 return of the corporation, the parent corporation?
13 A
Yes, it's fair to say that I am that but it's not just 14 a tax return of the corporation.
It's the consolidated tax re-
~
15 : turn of the GPU system.
My office is responsible for the plan-16,ning of that and the recommendations for that to the GPU manage-1 17 l ment.
I 18 Q
Would you be the individual responsible for co-lordinatingthetaxplanningofamajorgeneratingunit?
19 20 A
I don't understand the question of what tax planning is fofthemajorgeneratingunit.
21 I
22 Q
Let me ask it this way.
Would you be consulted lbythecorporationindecidingwhenitwouldbepropertoclaim 23 l
24 certain tax treatment of a generating unit?
AC2-Federal Recor:ers, loc.
i 25 A
No.
I think the corporation would look to my recommen-0 i
t
lHolcombe-direct 6
1 dations based upon the information of the physical status of a 2
unit with respect to the tax rules and regulations.
They would
- look to my recommendation on this, and if there were uncertain-3 4
ties and questions with respect to those, we would look to our 5
outside tax counsel for cdvice from them.
6 Q
Did you in fact provide such recommendations as 7
to the proper tax treatment for Three Mile Island Unit Number 8
2?
9 A
With respect to Three Mile Island Number 2, we would 10 have a number of situations in recent history where new gener-11 ating units went into service at different times and the tax 12 treatment given by the Internal Revenue Service given those 13 units has generally been well known to us.
I 14 Therefore, there was not a specific reason for recommen-i 15 dations in doing our planning and forecasting during the year.
16 l It was automatically done on the basis of the estimates of when 17 that plant would be ready and available.
18 We subsequently did hold discussions of that matter at l
the Three l the service company board level as to whether or not 19 20 lMileIslandNumber2plantmet the criteria of the revenue regu e
l lations.
21 22 Q
You did not consult outside counsel in the mat-
- 23) ter of Unit Number 2; is that correct?
I 24 j A That's correct.
Ace-Foceral Reperters, tric, I i
25 Q
Did yet. feel it necessary to consult other coun i
i I
Holcombe - direct 7
I sel, that.being general counsel of the corporation or any other 2
attorneys, on the interpretation of revenue rulings with regard 3
to Unit Number 2?
4 A
The general counsel to the corporation is in attendance 5
at our service company board meetings, at our service company 6 board meeting, and I believe it was the December, 1978 board 7
meeting.
At that time I requested Mr. Robert Arnold, vice-presi 8 dent of engineering and construction, to review the regulations 9
to advise us at that time as to whether that plant met the cri-10 teria of the revenue rulings.
Our counsel was present at that II meeting and was involved at least in that review of the regu-I 12 lations and discussions with Mr. Arnold.
13 I did not seek specific counsel from our counsel on this I#
matter.
That would have been an easier way, I guess, to have 15 answered that one.
16 MR. EVANS:
Off the record.
I7 (A discussion was had off the record.)
18 Q
Mr. Holcombe, does Mr. Arnold usually attend l meetings of the GPUS Board of Directors?
19 I
0 A
Do I understand the question, GPU Service Cocaany Board 21
!.of Directors?
22 i
j Q
Yes.
I 23 i
i A Yes, he does.
~
)
Q du's b W mxW as a che d de Ac. - F.eersi n ocre rs. ine.
5 corporation?
Holcombe - direct 8
1 A
As as officer of the CPU Service Corporation, yes, it 2
is.
3 Q
Let me understand that the meeting that you nen-4 tioned in December of 197.8 was a meeting of the Board of Direc-5 tors of GPUS, was it not?
6 A
Yes.
7 Q
Can you describe a bit more fully how you asked 8 Mr. Arnold to review the status of Unit Number 2 in creparison 9
to the revenue rulings.
Tell me how that was done mechanically.
10 A
Yes.
Since we were coming to the end of 1978, it was 11 more important in our preparing for the close of our books of 12 accounts in the month of December, it was necessary for me to 13 assure myself beyond the basic documents that were available to 14 !us with respect to the physical construction of a plant.
I want ed 15 Mr. Arnold to be aware of what the revenue regulations said to 16 get his interpretation of the physical characteristics of the 17 construction of the plant as to whether they met those.
18 At that meeting I secured from my tax department copy I9 of the regulations and presented those to Mr. Arnold.
I believe
}i a tthat time we may have also given him one of the private rul-20 l
21 ' ings where the IRS had allowed the deduc. tion for a particular l
22 I nuclear plant in a ceriod and he reviewed those at that meeting
- They were handed to him verbally and asked him to review those 23 24 and he spent some moments in reading and reviewing those and Ac3.. Federal Rooorters, Inc.
25 jhisresponseverballytothegroupwasthat if they are the l
l
Holcombe - direct 9
5 0
1 criteria, then TMI-2 meets those criteria, now meets those cri-2 teria and has for sometime.
3 Q
To put a date on this discussion, this would be 4
early December?
5 A
We can check that as to the actual date of the service
~
6 company board meeting.
My guess is -- it may have even been the 7 late November one.
The service. company board meets late in the 8 month.
We may have had a special meeting at that time.
We will 9
verify it for you.
10 Q
Let me understand that when Mr. Arnold came to 11 this meeting he did not know this would be'a topic of discussion.
12 A
It was not on the agenda for that meeting.
13 Q
Can you explain why it was added after the fact.
14,Was it just an afterthought after the agenda had been prepared?
15 A
Can I go off the record for a minute and I will go.back 16 on with an answer if you wish me to.
17 MR. EVANS:
Off the record.
18l (A discussion was had off the record.)
19 Q
Mr. Holcombe, off the record we were talking 20 jabout the unusualness of not having something on the agenda for 21 the GPUS Corporate Board of Directors meeting.
Would you commen t 22 )onthat.
1 23 :A The GPU Service Company Boards of Directors meetings, 24 while having an official agenda of items, also under the categor y Ace - Feoeral Recetters, Inc.
25 of "any other business" could come before that meeting, provides i
Holcombe - direct 10 1 an opportunity for many staff issues to be, many issues to be i discussed at the staff level.
My questioning of Mr. Arnold with 2
respect to the TMI readiness to meet the requirements of the IRS 3
4-rulings was done at that time.
~
5 Q
Were the other people present at this meeting 6 interested in Mr. Arnold.'s response to your question as to the 7 readiness of Unit Number 27 8
A I would say the answer to that has to be yes.
The degree 9 to which each and every participant at that meeting was inter-10 ested in that discussion probably varied.
I was not involved 1I in discerning what the degree of interest of all the individuals 12 was, but I'm sure as responsible officers, all of them vere in-13 terested.
14 Q
What I'm trying to understand is if, while you 15 verbally presented this issue to Mr. Arnold and then, as. I under 16 stand what you said, gave him some documents to read and he took 17 time to read it, if the meeting came to a halt while'Mr. Arnold 18 and read documents.
sat I9 lA No.
The meeting did not come to a halt while Mr. Arnold 1
20 lsatandreadthedocuments.
21 l Q
So I understand that the meeting proceeded and 22 at some point later you asked Mr. Arnold to respond to the Board lofDirectorspresentastohisopinion.
23 24 'A I really asked him to respond to me at that meeting.
Ace-Federal Re:orters, Inc.
25
- His response was heard by anyone interested in listening to it.
r
{Holcombe-direct 11 0
1 Q
You mentioned that you provided Mr. Arnold with 2
regulations and private rulings.
Did you provide him with what 3
is commonly called a Revenue Ruling on this subjectf 4
A I believe that we provided Mr. Arnold with Revenue Rula-5 ing -- this number will be subject to check -- but it's 7248 --
6 is that the -- what is the basic --
7 MR. LIBERMAN:
It's Revenue Ruling 76-42B, 8
I believe.
9 Q
Mr. Holcombe, I have present a photocopy of what 10 is titled Revenue Ruling 76-428.
Would you look at it and see 11 if that's the same ruling that you showed to'Mr. Arnold.
12 A
Yes, I believe that it is.
13 MR. EVANS:
Can I ask the reporter to 14 mark this for identification.
If (Exhibit 1112, Revenue Rule 76-428, is 16 received and marked for identification.)
17 MR. EVANS :
The record should also re-18 1 flect that what has been marked as Exhibit 1112 i
19 contains other interpretations of various pro-20 visions of the Internal Revenue Code including 21 Revenue Ruling 76-256.
Q Now, Mr. Holcombe, you also mentioned that you 22 23 showed Mr. Arnold the regulations.
Did you in fact have in your l
Internal Revenue Code regulations?
24 l presence copies of the l
Ace -Feceral Recorters, Inc.
lA My memory is not clear on that at this time.
25 l
\\
I r
Holcombe - direct 12 1
Q What has been marked as Exhibit 1112 contains 2
an additional Revenue Ruling entitled 76-256.
Would you review 3
that and see if you also provided that to Mr. Arnold.
4 A
I do not believe that at that tims we specifically gave 5
Mr. Arnold 76-256.
6 Q
Let me be clear that when you asked Mr. Arnold 7
to review the Revenue Rulings and provide his opinion it was as 8
to whether the engineering criteria in the Revenue Ruling had 9
been met at Unit Number 2.
10 A
Yes, I believe that was the basis.upon which the request-1I was made of Mr. Arnold.
12 l Q
Did you verbally go through each of the criteria 13 forth in the Revenue Ruling or did you just ask Mr. Arnold set 14 to review them all and give his opinion?
15 ;A I asked Mr. Arnold to review them all and give his opin-16 ion.
17 Q
Subsequent to that meeting of the GPUS Board of 18 Directors of which we have been speaking, did you prepare a I9 l memorandum which summarized the applicable tax criteria as scated i
20 in revenue rulings and other regulatory guides and then reached 21 ! a conclusion as to whether Unit Number 2 had met those criteria 1
l 22 lA No.
I did not prepare such a memorandum.
They were i
i 23 reviewed and within our own tax department consulted with me l
I 2 ' the determinations of our ability to claim that deduction in Ace - Federal Reporters, Itic. !
OC i
! 1978 were determined then at that level.
I li i
i
'Holcombe - direct 13 1
Q If I understand, the tax department answers to 2
you?
3 A
Yes, it does.
4 Q
Do you know if anyone else in the corporation 5
prepared such a memorandum?
6J A I believe Mr. Daley of my department who was assistant 7
comptroller of GPU, not with respect to Revenue Rulings 428 or 8
256, but in connection with his reviewing certain private opin-9 ions or private rulings, whatever the correct terminology is, 10 did prepare a memorandum late in 1978 with respect to that Rev-i 11 enue Ruling, evaluating that private opinion.
12 Q
Do you remember which private opinion this was?
13 A
I can verify that for you.
14 MR. EVANS:
Off the record.
15 (A discussion was had off the record.)
16 Q
Mr. Holcombe, did the review of this private j opinion have anything to do with Unit Number 27 I7 1
18 iA Yes.
It evaluated Unit Number 2's position with respect 19 to, in his judgment with respect to that private opinion.
20 Q
Did the private opinion have to do with the en-21 gineering criteria for obtaining tax treatment?
22 A
It had to do with a company who had declared a plant in 23 commercial service after it had reached on one day a relatively 24 {lowlevelofpowerwhotheverynextdayhadshutdownandwhict Ac]-Peettal ReDotters, Inc.
i 25 condition-was not remedied for some nine months to a year later
14 Holcombe - direct 1
and that that company had taken the tax deduction in the year 21 that it declared it commercial service which was denied by the i
3 ! IRS on audit.
4 Q
Was this a nuclear generating station?
5 A
I believe that it was.
6 Q
Can you tell me why Mr. Daley thought it was
,7 7
important to review that Revenue Ruling -- excuse me.
It's my 8
understanding it's a Revenue Ruling.
It may be a private ruling 9
I believe is what Mr. Holcombe said.
10 A
Mr. Daley reviewed it as part of his responsibility, II reviews all those Revenue Rulings, and he was aware as I was
- 2 aware of the testing program of the Three Mile Island-2 station 13 and knew that there were a couple of tests remaining to be made 14 the end of 1978, and his memorandum dealt with the question at 15 I of whether or not that would affect the tax deduction in 1978 of 16 Three Mile Island-2, whether the completion of those tests on a 17 satisfactory basis.
Those tests -- in fact, Mr. Daley was un-18 aware as he wrote that memorandum to me of the completion of the 19 testing program right at that time -- that we then successfully l completed either on the 28th or the 29th and he was unaware of 20 fthatatthattime.
He raised the question as to whether or not 21 22 failure to complete the test would in fact give us a question 23 on audit as a result of th'is private ruling.
2 '. l' In our judgments, we believed that the level of contin-l h
Ace - Federal Reporters, Inc.
25 uous operations -- I say continuous operations but power levels f
h l
l
R Holcombe - direct 15 1
of sustained power levels that Three Mile Island-2 experience 2
considerably before late December and the nature of the tests 3
that were to be completed did not give us great concern as to the support of the deductibility in 1978, notwithstanding Mr.
4 5
Da1ey's' memorandum.
6 Q
Do I understand that Mr. Daley wrote this memor-7 andum to you?
8 A
I was on vacation at the time.
It was basically pre-9 pared for me.
I believe it was distributed to the General Fi-10 nancial Group and the officers here at GPU.
Il Q
Do you know if there was any distribution outsid e 12 of that group?
13 A
No, I do not believe there was any distribution outside I4 of that group.
15 Q
Specifically, do you know if Mr. Arnold received 16 a copy of that memorandum?
I7 A
Mr. Arnold did not receive a copy of that memorandum.
18 l
Q Were the contents of the memorandum discussed i
I9 with Mr. Arnold or any other people involved in the generation 20 side of GPU?
I 21 The contents of that memorandum have been discussed with A
22 Mr. Arnold, yes,
i l
Q Were they discussed before the end of 1978 with 23 l
i 24 lMr. Arnold?
Aco-reeeral Recerters. Inc.
I 25 lA No, they were not disc-sed with Mr. Arnold at the end i
l
)
,--v
1
! Holcombe - direct 16 1
of 1978.
2 Q
I'm a little perplexed.
What was the purpose 3
of talking about the contents of that memorandum with Mr. Arnoic 4
after 1978 if,.in fact, you had reached.the conclusion that the test program had been run successfully and there was no problemi 5
6 A
In the course of reviewing all of the matters thct took t
7 place at the time, I felt that it was best that all of these 8
things be reviewed, particularly since Mr. Arnold and I both 9
have been interrogated with respect to these matters, and I 10 thought that it was important that he at least know that memor-1I andum was in existence.
(
12 Q
So following the March 28th,1979, accident at 13 the site, Mr. Arnold was shown this memorandum?
14 A
No.
I believe Mr. Arnold was not shown the memorandum.
15 The memorandum was discussed with Mr. Arnold.
i l
16 Q
And prior to that time, there was no discussion 17 with Mr. Arnold or other --
18 A
No, there was not.
19 Q
Could we ask you to provide us a copy of this 20 memorandum.
21 A
Yes.
22 MR. EVANS:
Off the record.
23 (A discussion was had off the record.)
24 Q
Mr. Holcombe, can you tell me who received Mr.
. Act - Federal Reporters, Inc.
25 Daley's memo in your absence, if anyone, other than the finan-
Holcombe - direct 17 1
cial group that you've previously stated.
2 A
I would believe Mr. Dieckamp had a copy of that memor-3 andum, Mr. Herman Dieckamp.
4 Q
Upon your return from vacation, were you' involved 5
in discussions concerning Mr. Daley's memo?
6 A
With Mr. Daley, yes.
7
-Q Were you involved in discussions with Mr. Dieckamp?
8 A
No, I was not.
9 Q
Discussions with any other members of the'finan-10 cial group?
11 A
At that time, no.
12 Q
At what time did you have such ' discussions?
13 A
I discussed the matter with Mr. Condon before the closing 14 of the financial books for the year 1978.
I told him of the 15 determinations that I had made with respect to that memorandum.
16 Q
After receiving Mr. Daley's memo uponryour re-I7 turn from vacation and you met with him, how was the matter re-18 solved?
19 A
The matter was resolved that since the final determina-20 tion was mine, that I told Mr. Daley that I thought that since 21 those tests were completed and it was known to us at that time 22 and Mr. Daley had not known that in the writing of his memoran-l'dum, 23 that we had information that they were completed, success-i 24 !fullycompleted,thatIdidn'tthinkthatthatprivaterevenue Ace-Focetat Reporters, Inc. l 25 iruling was really a matter for the concern that he was raising i
k L
Holcombe - direct 18 1
in his questions.
2 He tended to agree with me at that point.
In fact, it was my view that on the basis of the revenue rulings that ex-3 4
isted that even if those tests had not been successfully com-5 pleted before December 31 but had been earlyfon in 1979, that
~
6 would not have precluded us from taking the deduction and Mr.
7 Daley concurred with me at that time.
It was those conditions 8
would have been significantly different than the private revenue 9
ruling wherein there was a major fault in the plant that was 10 left uncorrected for nine months to a year.
I1 Q
Do you know if Mr. Daley was also concerned not 12 only with this test schedule but also with the significant down 13 time that had been reflected in the private ruling?
I would 14 like to say that I haven't seen the memo and I am not familiar 15 with the private ruling, but your description here today was 16 that that unit described in the private reling had been down I7 for nine months because of a major problem.
Is that an accurate--
18 A
I would like to correct that assumption, that that unit 19 had only achieved something on the order of 40 or 50 percent of 20 power at one time and that time being late in December of the 21 year in which the taxpayer took the deduction and immediately 22 shut down the day af ter with a major fault that was not cor-23 ' rected till well and beyond that tax year.
l i
24 i They were certainly not the conditions of Three Mile' he-Feceral Reperters. Inc.
25 Island-2.
Its testing program, its power levels that it had i
l t
Holcombe - direct 19 I ' achieved, so that we were not concerned further with that private 2
revenue ruling.
3 Q
Thank you for the correction.
Let me re-state it asking if Mr. Daley was drawing a comparison between the 4
5 shutdown at that unit described in the private ruling and the 6
problem with the steam valves and the Unit Number 2.
~7 A
No, he was not.
8 Q
Did that raise any question in your mind?
9 A
No, it did not.
The test that remained was not related 10 to that problem at the time we were making that judgment..
II Q
After receiving Mr. Daley's memo,. did you have 12 any informal or formal di cussions with Mr. Arnold to be brought I3 up to date on the status of Unit Number 2?
I4 A
No.
I read the reports that were issued by his organi-lzation.
15 16 Q
What are those reports?
Can you describe them 17 for us.
18 A
They are monthly reports issued by his manager of pro-jects, I believe, that gave the status of the testing progra a, 20 the condition, the actions that have been taken, the schedule 21 and the timing of those actions, and report of power levels i
22 achieved at the plant, generally the condition of the constru -
l 93 tion and testing program.
24 i
Ace - ree.rai n.conters, ine. )
9
" "ND M""
25 i A Yes, they are.
Holcombe - direct 20 1
Q When would the monthly report for December, 2
1978 have been available to you?
3 A
Early January.
I do t.ot remember the precis'e date of 4
the formal report..
S Q
So I understand that you had final.responsibil-ity and did in fact take, make the final decision on Mr. Daley' n 6
7 memorandum and the concerns that were raised in that.
8 A
Yes.
I would have made the final decision on Mr. Daley s
9 memorandum.
10 Q
And you in fact did.
11 A
And I in fact did.
12 Q
Was any action taken on Mr. Daley's memo prior 13 to your return from vacation?
I4 A
No, there was not.
15 Q
Let me go back for a minute to the. time before 16 carly December, 1978 meeting of the GPUS Board of Directors.
17 Prior to that time or before that meeting even began, did you lhaveanyinformaldiscussionswithMr.Arnoldaboutthestatus 18 19 of the plant with regard to its availability for tax treatment?
20 A
No, I did not.
21 Q
Would you say it would be unusual for you to 22 call up Mr. Arnold and chat about such issues?
23 lA If I understand your cuestion, would it be unusual to i
ldoitperiodicallyduringtheconstructiontimeframe?
24 Ace - Foceral Reporters, Inc.
'j 25 Q
That's fairly stated.
1' 21 Holcombe - direct think 1
A Yes, I would/ that that would be unusual.
2 Q
So generally you and Mr. Arnold have fairly 3
formal contacts.
4 A
That's not true.
We many times will have. formal or in-5 formal contacts.
6 Q
. What you are telling me is that this issue 7
wasn't raised in a formal setting before that December meeting?
8 A
No, it was not.
9 Q
And that's the first time that you talked with 10 Mr. Arnold?
II A
With respect to the tax deductibility questions.
12 Q
Do you have regular contact with.the comptrollers 13 of the operating companies?
I4 A
Daily.
15 l
Q Do you share concerns of the parent corporation 16 with them in regard to the. consolidated tax return?
I7 A
Absolutely.
18 Q
Did you have conversations with the comptroller I9 of Metropolitan Edist.n Company with regard to the tax treatment l
l 20 of Unit Number 2?
i 21 A
Yes, I did have conversations with him.
l 22 Q
And again, these conversations were on a daily 23 basis?
24 Ace-Fse;ral Recorters. Inc.
fdaily.
The basic principles of this question are well known to I
n
fHolcombe-direct 22 1 lhim as they are to myself.
I advised him of the status and Mr.
t 2
Arnold's comments on the condition of TMI-2.
3i Q
Did you share with -im Mr. Daley's memorandum 4
concerns?
5 A
I believe that they were n.st specifical~ay directed. back 6
to Mr. Werts, the comptroller of Metropolitan Edison Company.
7 Q
That's Mr. Raymond E. Werts?
8 A
Yes.
9 Q
Can you tell me, Mr. Holcombe, if you're familiaz 10 with an organization at GPU or GPUS entitled the Commercia*
per -
11 ation Review Board?
12 A
I am only generally familiar with it.
13 Q
Can you tell me if the decisions of that board 14 with regard to Three Mile Island Unit 2 had any'effect on your 15 decision makt.ng in the tax area?
16 A
I believe that their specific decision making did not I7 at that time.
Mr.' Arnold's direct response to'me with res wet
~
18 ltothecriteria,.thestatusofTMI-2,wasthebasisforit,uy I9 comfort in our electing to take the tax deduction in 1978.
- 9
~
Q If I understand, you spoke to Mr. Arnold in his 21 capacity as vice-president of generation and not as chairman of 22 the Commercial Operation Review Board.
Is that fair to say?
23
,A That's fair but it was whatever capacity he serves in i
lI spoke to Mr. Arnold because I believed him to be the highest 24 Ace -Feesrat Reporters. Inc.
25 source of information on this subject.
tI
. - ~ _
23 Holcombe - direct 1
Q Let me explore for a little 171t the investment 2
tax credit which was claimed for Unit Number 2.
Can you describ e 3
for me if there-was more than one form in which.that was taken?
4 A
I'm afraid I don't understand the question since in a
(
5 sense the investment tax credit form is a credit against tax, 6 against tax to be paid in a year.
I need an elaboration on the 7
question.-
2 Q
Specifically was a portion of the investment i9E tax credit properly allowable to Unit Number 2 taken in the forn 10 of progress expenditure payments?
11 A
The GPU system elected progress payments basis for clainl 12 ing federal income tax or investment tax credits in 1976, I be,-
13 lieve.
That basis of tax credit claims had been available 14 earlier.
Because of GPU's tax status at that time, I did not 15 elect to take investment credits on a progressive basis at the 16 earliest time was available because it would have jeopardized, i
17 it could have jeopardized the ultimate collection of those in-18 vestment credits, but when it did so, it began to use the phase I9 I in program permissible under the IRS regulations for a progress payments basis.
That left a piece of the TMI investment credit 20 21 available when the plant went in service.
That piece was claime d' 22 for 1978.
i 23 Q
In your opinion, Mr. Holcombe, does Revenue Rul
]
L ing 76-428, which is contained in Exhibit 1112, accurately stata-1 24 Ace -reo.i i n cori.ii, inc. l l
25 let me ask.
Is that the criteria against which'you judged Unit i
i I
l.
24
! Holcombe - direct I
1 Number 2 in making your decision as to whether the unit could 2
properly be deducted or investment tax credits taken for it in 3
1978?
4 A
Yes, I believe that was the basic Revenue Ruling that 5
we looked at as well as the specific regulations themselves.
6 We did have the opportunity as set forth in Mr. Daley's memor-7 andum for he and I to review the possible effects of that revenue 8
private ruling as it might or might not effect our decision in 9
this case.
10 DIRECT EXAMINATION II BY MR. VANDENBERG:
l 12 Q
Mr. Holcombe, I would like to spend some time 13 now reviewing a document you provided to us earlier which the 14 court reporter has marked as Exhibit 1110.
Is that the same 15 document you provided to us earlier which generally character-16 izes the changes in taxes and cash flow resulting from change I
17 in status of TMI-2 in 1978?
18 A
Do you mean change in status being one from being for-19 mally under construction versus now being placed in service?
l I
20 Q
L s, and of course also the changes due to the 21 j c1. aiming of' tax credits on TMI-2.
I think that document.
22 A
This statement sets forth the tax effects in 1978 which 23 larethenormaltaxeffect;thatwouldtakeplacewithanyof 24 these plants being clafmed for the deductions for tax purposes.
l Ace - Feceret Recorters, Inc.
25 i Q
Fine.
Thank you.
I would like to walk through
I 25 I Holcombe - direct l
I that on the record and make sure I have a clear understanding,of 2' this because basically it leads down to a single figure showing 3
the net change in net income and in cash flow.
4 First, I just want to make cl' ear that my under-5 standing is that the column here titled " Financial Statements 6
12/31/78 Including TMI-2 and Service" contains the same figures 7 a nd net income as in the published financial statements as pre-8 sented in the 1978 GPU Annual Report.
9 A
They absolutely should.
i 10 Q
So that shows a net income of 138,774 and, of II course, all f.igures are expressed in thousands.
12 A
That's correct.
13 Q
The second column showing " Financial Statements, 14 December 31, '78 Excluding TMI-2" shows a lower net income fig-15 ure of 133,635.
Could you explain to me how you arrived at the re 16 numbers and what is the difference between those two columns.
17 A
First, let us understand that we can only deduct the 18 ' asset value of any asset once and not twice, as seems to be a 19 concern or consideration at some of the questioning that cakes I
20 lplacesowearereallytalkingaboutthetimingofthetaxde-21 ductions and their effect on the income statements of GPU.
The 22 change in net income --
23k Q
Well, let's break there for a second.
Let's l
24 clarify the' nature of the changes which are first that there Ace - Federal Reoorters, Inc.
i 25 ; was a change in TMI-2 being reclassed to construction work in i
{
j
Holcombe - direct 26 0
1 progress to plant in service which resulted in. depreciation be-2 ' ing allowed on the capital asset basis in 1978.'
3' MR. LIBERMAN:
I don't understand the 4
question phrased that way.
'R.
VANDENBERG:
Off.the record.
5 6
(A discussion was h,ad off the reccrd.)
7 Q
Mr. Holcombe, could you continue to describe 8
this first page of this Exhibit 1110.
9 A
The Exhibit 1110 shows the effects of the tax deductions 10 associated with Three Mile Island-2 investment in.the year 1978 l
11 as opposed to not having those tax deductions in 1978.
They in 12 essence show you that those tax credits, both Federal and State 13 income tax credits amounting to approximately $31 million, that 14 roughly $26 million were deferred and therefore would not have 15 any effect on the reported income results, net income results, 16 for the year 1978; that approximat 5-
$5 million of those tax 17 credits which were not deferred but which were reflected as in-18 come in 1978 and effected net income, those $5 million of credit s 19 larethoseassociatedwiththelifedifferencesbetweenthose I
20 jpermissible for tax purposes and those reported for financial 21 reporting purposes which such differences have always been 22, treated in the State of Pennsylvania rate making as flowed throtgh l
23 and not to be deferred and the accounting is consistent with 24 that rate making treatment.
It is why there is a $5 million Ace - Feceral Reporters, Inc.
25 affect on net income in 1978.
r k
9
Holcombe - direct 27 1
Q The explanation you gave refers primarily to-2 this column called "Effect of TMI-2 on Books of Account."
3 A
That's correct.
4 Q
Which sums up to a decrease in book net. income 5
of five million one thirty-nine.
6 A
I believe that depends on how you're making your compar-7 ison in relationship when you say a decrease in net income as 8
opposed to not having the TMI-2 deduction, net income is five 9
million one thirty-nine lower than it was with TMI-2 deduction.
10 Q
Let's turn to the effect on income tax return 11 which is reflected in the last column on this first page of 12 Exhibit 1110.
Would you explain that column.
13 A
Between the closing of the books of account in any year 14 and the filing of the actual tax return, there are any one of a 15 number of refinements in plant values that are determined in the 16 course of the actual closings of the work orders and that sort 17 of thing, so minor variations do occur and we attempt to clean 2
18 those all up by the time of the filing of the tax return so that 19 ! the small variations that you see in relation to those compar-(
20 able numbers on the tax return are as a result of that activity 21 and, of course, they are insignificant.
4 22 Q
Which small variations are you talking about?
23 A
The variations between the column described as "Effect i
i 24lofTMI-2ontheBooksofAccount" and thoss aken in the ine'ome Ace - Feoeial Reoor ters, Inc, l
25 j tax return.
I
~-
__..-.__-_,._._l
28 Holcombe - direct 1
Q For example, the difference between-28,423 for 2
the same item.
3 A
That's correct.
4 Q
The tax return for 1978 was filed quite late in 5 1978; is that right?
6 A
Not quite late in 1979.
It was filed June 15th, I be-7
- lieve, 8
Q Okay.
You signed that tax return for the cor-9 poration?
10 A
Yes, I did.
II Q
Could you explain what page two of this exhibit 12 shows.
I3 A
Page 2 of the exhibit provides by subsidiary company l ownership of the Three Mile Island-2 planc a basis for determin-I#
I ing the tax deductions for depreciation by showing the actual 15 16 ' tax basis of the plant values, the basis for the maximum tax I7 depreciation deduction, the Pennsylvania income tax rate as well 18 as the Federal income tax rate applied on that basis.
It shows I9 the components of the tax credits that are deferred and it also
, shows at the top of the schedule the actual accounts consistent 20 21 l with those that appear on the income statement, account descrip-22 tions that appear on the income statement.
23 Q
You are talking about of the published income i
24 ! statement?
Ace - Feceral Recot ters, Inc.
25 A
Yes, by subsidiary comoany.
l
Holcombe - direct 29 1
Q So in essence the so-called depreciation expense 2
recorded with a combined total of 67 means that $67,000 of de-3 preciation expense was recorded in 1978 that would not have 4
been if TMI-2 was still classed as construction work in progresa 5
at the end of the year.
6 A
I believe that's correct.
7 Q
And then the rest of the top part of the sched-8 ule shows the increase in book or taxable net income.
9 A
The top part of the schedule will identify for you the 10 reduction in income taxes associated with the d preciation S
11 claimed for taxes which is altogether different than a depreci-12 ation recorded, the book depreciation recorded, for financial 13 statement purposes.
14 Q
The lower half of the schedule, would,you ex-15 plain that, please.
16 A
The section entitled " Current Income. Taxes" shows.you I7 the tax basis of the plant values, how much the maximum taxed 18 j depreciation is permissible.
Line 2 of that section which we i
i 19 ; use the sum of the years digit methad of depreciation under the l
1 20 accelerated methods permissible and the Pennsylvania income tax 21 associated there with on that depreciation. That is what is the 22 l deduction of that tax depreciation worth in tax for Pennsylvania 23 income tax as well as Federal income tax as shown on Line 4 94 l Let me ask you some specific cuestions about a Q
i Ace -mersi neooeters, inc.
l couple of combined numbers.
The tax basis for depreciation of 25
~
Holcombe - direct 30 1
plant shown as 507,297, that, then, is the tax, depreciable tax 2
basis, for TMI-2 at the end of 1978.
3 A
That's correct.
4 Q
Does that number include'any allowance for funds 5
used during construction?
6 A
No, it does not.
That is the primary difference betweer 7
that value and total book asset values reflected for the TMI-2 8
investment.
9 Q
When you say it includes no AFC, you mean both 10 of the standard components, equity and an interest component.
11 Neither of those are reflected.
12 A
That's correct.
None of those form tax basis for de-13 preciation.
I4 Q
And this number 13,178 then represents the -
15 and perhaps you can help me out here -- the Federal income tax 16 that would have been -- let me start over again -- represents 17 Federal income tax expense if there were no investment tax credi ts 18 related to TMI-2.
19 A
It is the amount of the Federal income tax at the statu-I
- i..
20 ;tery rate of 48 percent applied to the depreciation deduction i
21 chat is permissible.
It is the tax equivalent after considering 22 the deduction of the Pennsylvania State income tax.
l 23 Q
The bottom portion of Page 2 is entitled "De-24 ferred income tax."
Is there some simple explanation you can Ace-Feceral Reporters, Inc.
25 give of deferred income taxes.
I h
N Holcombe - direct 31
- 1. A With respect to the depreciation deductions,, yes.
The 1
2 rate making treatment that has been accorded tax, accelerated 3
tax deductions in the State of New Jersey, has been for the 4
treatment that does not pass those credits on in' cost in ser-5 vice to customers at the time the credits are received from the 6
IRS but distributes those credits to the customers in their 7
cost of service ratably over the life of that property invest-8 ment.
Therefore, the mechanics of financial reporting and rate 9
making treatment call for the deferred recognition of those 10 credits in the reporting of financial results and rate making 11 evaluations.
12 In the State of New Jersey those determinations are 13 made on the basis of all of the differences between book de-14 preciation and tax depreciation; that is to say, the customers 15 rates are not allowed to be lower at that point because of tax 16 deductions that the tax laws permit to be taken in advance of 17 !theuseoftheplant.
18 In the State of Pennsylvania, however, they required 19 in the rate making determination, though, the differences be-20 l tween book depreciation and the tax straight-line depreciation, 21 the accelerated methods but the tax straight-line, that the se not 22 tax credits be flowed through and recognized currently as they 23 l would effect customers ' bills, currently.
24 That section sets forth by components by subsidiary l
' tce - Fecef al Re: otters, in:.
i 25 lcompanyandconsequentlytheStatetreatmentthosepieceswhich l
s
Holcombe - direct 32 1
are then deferred and those pieces which have been permitted to 2 l flow through to income.
3 Q
And then could you characterize --
4 A
That's not very siinple.
5 Q
Could you characterize the $10,360,000 figure 6
that's the combined total of.the deferred income taxes section.
7 A
I would characterize that as it relates to the computa-8 tion of the total incore tax deductions that were available or 9
income tax credits that were available to us under the current 10 income tax section whereby you see that the State was two mil-II lion three eight-eight and the Federal was thirteen million one seventy-eight for a total of about fifteen million four hundred 12 13 thousand, five hundred thousand, that of those tax credits, ten I#
million three hundred sixty thousand were deferred and approx-15 imately five million were recorded in net income in 1978.
16 Q
When you used net income in the last sentence, j
17 you were then talking about income as reported under generally 18 accepted accounting principles as opposed to an income tax re-I9 turn income statement?
20 A
That's correct because those generally accepted account 21 ing principles recognize the primary principle that the account 22 I, ing rules will follow, the rate making for a regulated industry,
I 23 Q
On page 3 of Exhibit 1110 is a handwritten sched-24 tce -Pederal Reportets, Inc.
- A It was prepared under my direction.
ll a--
a
Holcombe - direct 33 1
Q Okay.
And am I right that this schedule attempt:s 2
to show the affect on cash or cash flow of the tax effects clained 3
for TMI-2 in 19787 4
A Yes, it does.
5 MR. VANDENBERG:
Off the record.
6 (A discussion was had off the record.)
7 Q
Mr. Holcombe, the third page of Exhibi.t 1111 8
shows some of the cash benefits to GPU resulting from taking in-9 vestment tax credits on Unit 2 for the calendar year 1978.
Coul d 10. you state the source, the major sources, of those cash benefits.
11 A
The sources of the cash benefits, of course, come from 12 the ability to take the depreciation' deduction for the plant as 13 well as investment tax credit deductions.
14 Q
And. being able to take the depreciation deduction 15 as an expense on your tax return of course reduces taxable in-16 come and therefore reduces the current tax liability and of 17 course the investment tax credit is a direct credit against the 18 i otherwise payable tax bill; is that right?
19 A
That's correct.
20 Q
Could you go on to explain the timing of the 21 l availability of these cash benefits.
22 A
The ability to take the deductions permissible for 1978 23 as opposed to not having the same level of deductions available 24'1l to a company were apareximately S2 million reduced cash payments j
Ace -Pecetal Reporters. In:.
25 ! in 1978, and in 1979 approximately $26 million for six to nine i
34 l Holcomba - dircet 4
months in advance of when that cash would have been available 1
2 had the total investment tax credits been deductible in 1979.
3 j Q
So you are saying that if the decision had been l
4 l made that the final investment tax credits on TMI-2.were avail-5 able r.ot for tax year 1978 but rather for 1979 that the timing 6
of the availability of cash would in your view not have been 7
significant.
8 A
It would have been the effect of that cash availability 9
for six to nine months in advance of what it would have been 10 had it not been deductible in 19 -- or had it been deductible 11 in 1979 which at the time capital values of GPU would in my 12 view net be considered significant to GPU.
13 Q
Could you provide for us a schedule that shows 14 or presents the GPU position as to the total extent of the cash 15 and tax benefits available by claiming depreciation and invest-16 ! ment tax credits for the unit in 1978 versus doing so in 1979.
17 A
I answered that question for the record and off the re-18 cord I'm going to say to you thr.t of the two schedules hopefull:r 19 present that to you and I will clean up the third on cash on a lformalbasisforyouandsothatthenumbers,youwouldhaveno 20 i
21 trouble tracing the numbers from here to there and hopefully 22 tie them to the reported income statements.
I i
23 MR. EVANS :
I believe that your previou:s I
24 statement was on the record.
Do you have any Ace - Fettal Re:ot ters, ltic.
25 problem with making that on the record?
i i
Holcombe - direct 35 1
MR. VANDENBERG:
Off the record for a 2
second.
3i (A discussion was had off the record.)
4 Q
Mr. Holcombe, I would like to switch to another 5
area now and that is your communications with the Federal Energ7 6 i Regulatory Commission, FERC, and in particular your communica-7 tions with them about whct's known as Electric Plant Instruction 8
9D containing the 120 day rule.
First could you explain-to me 9
your understanding of the 120 day rule?
10 A
The 120 day rule is essentially a bench mark for the 1I FERC so as to avoid the prolonged treatment of test periods in-l 12 discriminately by utility companies being regulated by FERC.
13 Q
When you say a bench marc for FERC, do you mean 14 that there's a requirement on utilities?
15 A
I believe there is a requirement on the utility compania s 16 that if their test period is going to exceed that period of time 17 they must report to FERC the conditions requiring.that extended 18 l test period and basically have their acquiescence with that.
19 l Q
Am I right that 9D requires the utilities submit I
20 ; to FERC an explanation of any test period for a nuclear plant l
21 that runs longer than 120 days from the date of initial syn-22 chronization?
i 23 A
I believe that's correct.
24l Q
To your knowledge when was the initial synchro-i Ace -Federal Reporters. Itic. d 25 nization of TMI-2?
f.
Holcombe - direct 36 O
I A
I believe April, 1978.
2 Q
And then after the transient during which there 1
3l was a difficulty with main steam release valves, did it become 4 clear to you that the test period was going to run longer than 5 120 days from initial synchronization?
6 A
Yes.
7 Q
What did you decide to do about that?
8 A
Well, I believe that it was necessary that we communicat e 9 with the FERC the information we believe that -- what had hep-10 pened here was a synchronization and starting of tF.e testing 11 iprogram resulted in an action that would not,illow a construction 12 re-do that would really not permit us to complete the testing 13 program in t.he 120 days and I wrote to the Federal Power Com-l
, mission seeking their approval for a starting of the test period l
14 lWhen that problem had been corrected we gave them an estimate of l
15 lwhen that would be -- I think it was September -- and suggested 16 17 to them that it would be better under the conditions that. cook 18, place that it would be better that the recognition of the start-
~
I
- ing of the test period would start with September.
19 20 Q
Prior to the time you wrote that letter to FERC, 1
21 !didyouhavetelephoneconversationswithpeopleatFERC,and 22 if so, what were the nature of those conversations?
lA I did not have telephone conversations prior to the sub-23 24 l mission of that letter.
I Ace - F.e.rai neneiters. inc.
25 l MR. LIBERMAN:
Off the record for a l
f
Holcombe - direct 37 I
second.
2 (A discussion was had off the record.)
3 Q
Mr. Holcombe, this exhibit that's been marked 4
as Exhibit 1111 is a copy of a letter from you to Mr. Drennan 5
(phonetically), chief accountant at FERC.
Is that the letter you wrote to him that you were discussing?
6 7
A Yes.
8 Q
And that's dated August 18, 1978.
As I recall 9
what you said, the purpose of that letter was to request that 10 the 120 day period not start with che date in April but rather II start with a date that you forecasted to be in September which 12 TMI-2 would again be synched with a grid.
13 A
That's correct.
I4 I
Q Did you talk with Mr. Drennan or other people 15 at FERC about this matter after you wrote this letter?
6 16 lA Yes, I did.
I7 Q
And what was the substance of those 'conversa-18 tions?
I9 i A My conversations were with Mr. Morris Fit:: gerald, the 20 head of the Division od Audits, and the substance of that con-21 versation was that Mr. Fitzgerald felt that we should not make 22 laformalrequestofthemtoextendthetestperiodortorestar t 23 the. test period, that there were certainly provisions within th e
2 Federal Power Commission that if the basis for the extended Ace -Pecetal Reporters, Inc. j 25 ' test period starting with its. initial date of synchronization,
Holcombe - direct 38 O
1 if there were good and sufficient cause for that, that they had 2' no problem with essentially waiving that and accepting that, 3 that he felt that that would be a better basis for handling the problem than a ee, quest to avoid the earlier start of.120 day 4
5 period.
He suggested that at the time of the compl'etion of the 6
7 station and its pir.cing in commercial service that, or at the 8 end of the test period, that we file with them a log of all of 9 the testing programs and the reasons for delays and that he didn 't 10 feel that there would be annessential problem w'ith their recog'-
Il nition of the extended test period.
12 Q
Are you saying that Mr. Fitzgerald orally told youthatyouhadapprovaltorunthetestperiodlongerthAg[
13 I4 120 days?
15 A
I don't believe Mr. Fitzgerald actually put himself in
(
16 a position of saying " Fine, go ahead."
.I think what Mr. Fitz-I7 gerald said was "You file the log at the end and if your test l period results in being 240 or 350 days, we will judge it on the 18 19 jbasis of the facts of what cause that had extended the test i
20 + period."
I believe that was the substance of Mr. Fitzgerald's 2I comments to me.
22 i
Q Did you talk to anyone in the office of Electric 23' Power Regulation?
I 24 'A I did not.
Ace -Federal Recorters, Inc. I^
25 Q
Why did you address your l'etter to Mr. Drennan, 1
Holcombe - direct 39 I
chief accountant?
2 A
Because these matters generally find their way home to 3
being in connection with the' financial audits of the Federal 4
Power Commission which are generally conducted with Mr. Drennan 5
and his staff and in particular Mr. Fitzgerald.
The letter was 6
obviously given to him by Mr. Drennan for action, that it gen-7 erally is a matter that relates to if they have a disagreement 8
with our handling of the test period and they feel that the 9
allowance for funds taken was taken and extended beyond reason-10 ableness; it will generally be a matter that's handled and eithe r Il negotiated or settled on an audit or in hearings before the 12 Federal Power Commission if they do s.ot' accept the audit find-13 ings.
I4
- These matrars are generally conducted with Mr. Drennan' a 15 office on that front end and not by the Bureau of Power.
I 16 know it as the Bureau of Pover, whatever the proper division of I7 the FERC is.
18 Q
When you say Bureau of Power, you mean not Mr.
I9 Drennan's office.
l 20 A
Yes.
21 Q
You do mean Mr. Drennan's office?
)
A 1 do not mean Mr. Drennan's office.
I am not absolutely f
22 t
23 i familiar with the re-organization of the Federal Power Commis-i i
lsionintoallitsdivisions.
It was formerly-known as the 24 Aca-Federst Reporters, Inc.
I 25 Bureau of Power.
i
{Holcombe - direct 40 1
MR. LIBERMAN:
Off the record.
2 (A discussion was had off the record.)
3 Q
Mr. Holcombe, when you had the telephone dis-4 cussion with Mr. Fitzgerald and you, as understand it essen-5 tially made an agreement to file a report with FERC once the testing program was done, what could you foresee as any possible 6
7 adverse or detrimental action to GPU resulting from that?
8 A
The possible detrimental action for the Federal Power 9
Commission to deny an extended test period and hold fast to the 10 120 day rule which would certainly indicate:that we should have 1I completed the testing program and that the allowance for funds 12 that we had continued to take on that plant beyond that time 13 could possibly be in jeopardy as far as the Federal Power Com-14 mission was concerned.
15 Q
When you say that an AFC would be in jeopardy, 16 you mean that the FERC would disallow that from your rate base I7 and from, and rate base and from FERC's point of view that whole-18
! sale rate?
lA It is not only a question of denial of it from rate bas l9 e
20 and denial of it for wholesale rates but the FERC has jurisdie-21 tion over the accounting reports of the electric utilities sub-22 ject to its authority.
They could very well order the complete
,3 disallowance of that incremental AFC and require us to report j
i
'4 our financial statements in that manner.
Ace-Feceral Reporters, Inc.
25 !
Q When you say they have authority caer your ac-1
Holcombe - direct 41 I
1 counts, you mean in terms of your published financial statements 2
as published in the GPU Annual Report and perhaps that you also 3 I mean accounts and figures used in State regulatory matters?
4 A
They do have jurisdiction over the published financial 5 reports, the accounting results in those reports.
The State jurisdiction might very well. require a separate ac, ounting treat 6
c 7
ment.
They might very well take a different accounting treat-8 ment for the determination or a different rate making treatment 9 for the base rate determinations, notwithstanding that the Fed-10 eral Power Commission has the authority to require us to state II our financial reports under their determinations.
12 I Q
So just to nail this down. dealing just with the 13 published financial statements, if, for example, FERC at any l time disallowed some portion of an AFC on any unit, what would 14 15 be the affect on your published financial statements, both bal-16 ance sheet and income statement?
I7 A
If they made that determination and we subsequently did 18 not appeal it before the Federal Power Commission, we would be 19 required to make an adjustment in our accounts and report it in 20 accordance with generally accepted accounting principles in our 21 financial statements that way notwithstanding what State regu-22 lators might have done.
23 Q
What would that change?
What would the nature 24 f of that change be, a reduction in asset values?
Ace - Feceral Reportets, Inc.
25 In this case as you desc*ibed there were excess AFC taken, A
Y l
l Holcombe - direct 42 1
it would be a reduction in the asset values.and the correspond-2 ing adjustment to the earnings, either on a current or prior 3
period basis, depending upon the conditions that was determined, 4
Q When you say an adjustment to earnings, would 5
you be more specific?
6 A
An adjustment to the net income of the corporation, be 7
it in the current period or in a prior period of adjustment.
8 Q
Reported earnings would decline.
9 A
That's correct.
10 Q
Why were you the person to conduct these nego-11 tiations in essence with FERC as opposed'to someone else with 12 an GPU or GPU Service or one of the operating companies?
13 A
Generally our accounting financial matters which, the 14 accounting matters, with the Federal Power Commission, Securities 15 and Exchange Commission, as they deal with a generic p.roblem 16 that goes across our subsidiary comp; are handled and coor-17 dinated by my office rather than my counterpart in the sub-18 sidiary company.
19 As we explained earlier, this is a matter that relates j
20 to the application of the system of accounts and, therefore, 21 that falls within my jurisdiction and is coordinated here at
,the service company level because it involved a'll of the sub-22 23,sidiary companies of GPU in this case, i
l Q
Because all of the subsidiary companies had an 24 A:e - Federal Reporters, Inc.
1
(
25 interest in TMI-2, an ownership interest.
l l
Holcombe - direct 43
~
1 A
That's correct.
That does not mean that there may not 9
2 be a specific subsidiary problem where I know the same kind of 3
a question might also be' handled through my office.
Many times j
4 we will do it on a joint basis together where myself and the 5
comp *. roller of the subsidiary company will review it~with the 6
FERC or the SEC.
7 Q
What comunications have you had with FERC sub-8 sequent to your conversation with Mr. Fitzgerald discussing the 9
August 18 letter?
10 A
We have had none at this point.
We would have official Ly, II we would have been in the posture of whenever the crush of end 12 of year work in 1979 would have been over that we would have 13 pulled together the complete log and record of the TMI construc-I4 tion and testing effort and filed a follow-up letter with the 15 FERC on this matter.
16 That probably would have normally fallen in somewhere I7 about the time frame in which the TMI incident took place, some 18 where around the end of the first quatter of 1979.
It; 1s a mat -
I9 ter that while we like to get those things resolved and out of the way, simply because FERC audits ti;:;he ot take place, it 21 wasn't absolutely commanding upon us to do ic January 1 or 22 January 5 or any time frame like that.
It's not been done sub-23 ' sequently simply because of the effects of the TMI incident 24 n Nn m a m
e w ed a mMg M da Ac. - r.o.rai n.oorteis, ine.
25 l these days.
It will be done.
It will be done and completed i
l I Holcombe - direct 44 I
with the PERC.
It has not been done at this point.
2 Q
Prior to the sccident, was it your intention to 3<
submit a follow-up letter that layed out the actual course of 4
the testing program and would attempt to show that the delay 5
was no more than was absolutely essential and la'y a case that 6
there would be no reason at all for FERC to question the allow-7 ance of AFC during that period?
8 A
I think the letter would have been sent to them much in 9
the vein of this letter really to give them the log that said 10 that there was good and sufficient cause f,or the extended test 11 period.
Yes, that was our intent.
12 Q
Did you think there was any exposure to GPU by 13 not having this agreement in writing?
14 A
There is always that exposure that is there with respect:
15 to any plant investment we put into service.
Obviously this ono 16 is big but we have constantly audit problems in this regard with 17 respect to the property terminations of AFC and the taking of 18 AFC.
This is not the first time we have had this kind of a question.
Certainly we knew there could be a possibility of 19 20 that but looking at the record of what the problems were, we 21 felt that they would sustain themselves with FERC and in effect
'22 with respect we did submit at that time a log of the problems and what was happening.
IwouldsaythetoneoNthecenversa-23 24 tions of Mr. Fitzgerald certainly indicated that for good and j Ace -Federal Reporters, Inc, q i
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' sufficient reason they would extend this test period on a numbe r
d 45 Holcombe - direct I
of occasions.
2 Q
When you say at that time you submitted a log, 3
do you mean this attachment to the letter called Summary of TMI" 4
A I think that was there.
I'm not sure that there was an 5
absolutely -- I'm not sure whether there was a specific log of 6
the dates and incidents of the test and the cut-outs and that 7
sort of thing.
It may have only been this one.
8 Q
Does FERC audit GPU and subsidiary companies for 9
every year?
10 A
FERC doesn't normally have authority to audit the GPU ll parent company or the service corporation.. In effect we per-12 mitted them to do an audit, partial audit' work, of the service 13 company in connection with their audit of the subsidiary com-14 i
l panes, i
15 Secondly, they do not audit it every year.
They have a 16 rotating basis on which they do it.
We have been hitting it I7 rather regularly over the past ten years, probably every two to 18 three years.
I9 Q
Is the AFC allowance issue one of FERC's prime
' issues in your view?
20 21 A
Yes, I think it always is.
They pay very careful atten-22 tion to the application of AFC.
I think they belit.ve they have 23 !a very strong mandate on the part of the Federal' Power Act to be 24 l
- very protective of the asset values which form ti m basis for
- Ae-FMetal Recorwrs, tec.
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! earning power for the companies.
I I
46 Holcombe - direct 1
MR. EVANS:
Off the record.
2 (A discussion was had off the record.)
3 BY MR. EVANS :
4 Q
Mr. Holcombe, let me cicar up a couple of things.
5 Do you know if the Pennsylvania Public Utilities Commission or the New Jersey Board of Public Utility Control use the FERC 6
7 uniform system of accounts in their rate making?
8 A
I would say they do not always adhere to the FERC systen 9
of accounts in their rara making.
10 Q
Is it their stated policy to use the FERC uni-11 form system of accounts?
Do you know?
12 A
Yes, I believe that doch of these commissions have adop1:ed 13 the NARUC system of accounts which is the national association 14 which is blessed by FERC.
15 Q
And those include Instruction 9D in'the State 16 commissions as well.
l 17 A
That's correct.
18 Q
Have you been involved in testimony before the lPennsylvaniaPublicUtilitiesCommissioninvolvingThreeMile l9 l
20 Island-27 l
21 A
No, I have not.
l l
22 Q
Do you regularly testify before the utilities 23 commissions, either in Pennsylvania or New Jer: 2y?
24 A
I do not regularly testify before them.
Generally with
,' Aci-ree rai n.arters. inc.
25 respect to tax matters, with respect to service company matters i
I f
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Holcombe - direct 47 1
there could be some basis of other concerns that I. might be 2
called specifically to testify.
I have testified on most of 3
those issues in the past at the Pennsylvania Commission level.
4 I've not done it at the Jersey Commission level.
5 Q
Were you aware of a commitment that had been 6
made to the Pennsylvania Public Utilities Commissi~on with regar i 7
to the test program at Three Mile Island-27 8
A If you could explain the basis of your understanding of 9
a commitment, I might be able to better --
10 Q
Let me specify that it was a_ letter to the Com-1I mission in which GPU made a representation that it would com-12 plete the testing program as specified i'n the NSAR of the FRC 13 before putting the unit into commercial operation.
14 ;A I am not aware of such a letter.
l Mr. Holcombe, do you know of any,other informa-15 Q
16 tion in the years which we have discussed today which should be 17 I made available to this Special Inquiry?
18 A
No, I do not.
19 MR. DAVIDSON:
That's a little broad.
20 Do you think you could be a little more specific, l
21 Mr. Evans?
l 22 Q
Do you have any other documents in your files lwhichwouldfitthefol'--ingdescriptions:
All documents re-23 I
24 lating to any requests for private ruling from the Internal Aes-Feceral ReDorters, Inc.
25 Revenue Service on the proper tax treatment of TMI-2.
i i
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48 I Holcombe - direct 1
A There are none.
2 Q
All the documents relating to the tax implica-3 tions of putting TMI-2 into commercial operation.
4 A
As previously stated, we will furnish you Mr. Daley's 5
copy of Mr. Daley's nemorandum on that subject..
6 Q
And finally, all documents analyzing the applie-7 able standards of the Internal Revenue Service which TMI-2 woulc 8
have to meet in order to obtain investment tax credit and de-9 preciation allowances in 1978.
10 A
We have, I believe, furnished you with copies of the II Revenue Rulings that we have examined in that'; regard.
12 Q
Mr. Holcombe, have you had di'scussions or given 13 testimony in this matter of the Three Mile I'sland-2 accident and 14 broadly the areas of financial and tax matters in connection wit h 15 Three Mile Island-2 before any official bodies investigating the 16 accident?
I7 A
None other than your own.
18 Q
Are there any other statements you would like tc 19 ; make today on the record?
i 20 'A No.
21 MR. EVANS :
Mr. Liberman or Mr. Davidsor, 22 do you have any questions or remarks?
23 MR. LIBERMAN:
A couple, I think.
One 24 I think,-we ought to verify the date of that Ece - Feceral Reporters, Inc. !
25 !
meeting of the service comoany board that Mr.
l i
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Holcombe - direct 49 i
1 Holcombe referred to.
2 I think also I would like to point out 3
that Mr. Daley was not in attendance at that 4
board meeting discussion.
5 THE WITNESS:
I think that did come 6
across in the record.
I'm not sure.
I think I 7
did make'.that statement finally.
8 MR. LIBERMi.N:
I didn't hear it.
There "
9 fore, I don't believe that Mr. Daley was privy 10 to that discussion.
11 More as a matter of flavor than anything else, I think you should be aware of the fact 12 13 that the audit process of the FERC, although not:
14 done annually, covers a group of years.
Typical 15 ly they will have audited every year's capital-16 izations and that kind of thing.
They will do 17 it on a cycle basis, and there are ongoing dis-18 cussions with the staff of the audit section 19 almost monthly so that if a relationship that 20
- s relaxed and informal and sometimes in those 21 discussions somebody from the Bureau of ' Power 22 will participate.
I do have a recollection that
(
23
~it may very well have been in connection with 24 l
one of the other company audits that Mr. Holcomt e Ace -Fecerai moorters, Inc.
first alluded to the steam relief valve problem.
l l
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Holcombe - direct 50 1
It was kind of a follow-up on that that that 2
letter was written.
At least that's my recol-3 lection of it.
I just want to be.sure.
4 THE WITNESS:
Yes, it was.
5 MR. EVANS:
Mr. Holcombe, at this time 6
we are going to recess this deposition rather 7
than terminate it on the possibility that in 8
the future there will be other areas we would 9
like to discuss with you.
10 We will make every attempt,not to re-11 quire you to appear *uefore us, but we are going 12 to keep that option open'.
13 Thank you very much for your attendance 14 here today.
15 (Proceedings recessed at.'1:55 a.m.)
16 17 18 19 l 20 21 1
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CERTIFICATE 2
I, MARGARET TEILHABER A Notary Public and Certified 3
Shorthand Reporter of the State of New Jersey, do hereby 4 certify that the foregoing is a true and accurate transcript
~
5 of the proceedings in the above-entitled matter as reported 6 by me stenographically on the date and at the time and place 7 hereinbefore set forth.
8 I DO FURTHER CERTIFY that I am neither of ecunsel nor 9 attorney for any party in this action and that I am not in-10 terested in the event nor outcome of this litigation.
11 12
.h.w.. /~7 a
e 14 A Notary Public of New Jersey 15 16 17 18
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24 l Ace - Feoeral Reporters, Inc.
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