ML19308B793
| ML19308B793 | |
| Person / Time | |
|---|---|
| Site: | Crane  |
| Issue date: | 12/11/1979 |
| From: | Owen W DUKE POWER CO. |
| To: | Rogovin M NRC - NRC THREE MILE ISLAND TASK FORCE |
| References | |
| TASK-TF, TASK-TMR NUDOCS 8001170317 | |
| Download: ML19308B793 (4) | |
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Duns PowEn COMPANY I' owl It IlUILn:NG. CII AltLorris. N. C. 282 :2 W. M. OWEN (704) 373-4120
.amson voca ensessen, December 11, 1979
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Mr Mitchell Rogovin, Director NRC/THI Special Inquiry Group Nuclear Regulatory Commission Washington, D C 20555
Dear Mi tch:
We have reviewed the' draf t you gave me and offer our comments on the financial portions only.
This draf t generally offers a compelling argument followed to logical conclusions; certain of the subsequent recommendations, however, rely on questionable assumptions. My detailed comments follow, each referenced to the applicable portion of the draft.
Section ll:
Page 11 The premise is advanced that shareholders assume additional risk v
aft r a unit is declared in commercial operation, because any further
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micerial expenditures incurred af ter that date could not be recovered.
l would characterize this premise as narrow and unfair.
Depending
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u>on the nature of the expenditure, a regulatory commission usually v.ill permit the utili ty to either capitalize the cost as part of the plant cost, or include it in the next rate appilcation as an operating expense.
Utilities make capital additions to facilities throughout their depreciable lives, long after the cessation of allowance for funds (AFDC) at the date of commercial operation.
Pa e 12 Referring to AFDC as a " safe harbor" simply imparts an erroneous flavor.
AFDC is a proper but of ten misunderstood accounting procedure wi th some lack of credence in the -
4 investors.
It repre-k, sents a " safe harbor" only regardikear..., hand the financial com-nin t
munity often discounts earnings of which a material portion is due L
to AFDC.
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l Mr Mi tchell Rogovin Page 2 December 11, 1979 l
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Page 12 The terms fair value and original cost are not interchangeable in the electric utility industry.
Reduction of allowed AFDC will certainly reduce the original cost of a plant but, depending upon the Jurls-(/
diction, may or may not reduce its fair value.
Page 22-On page 26, the draf t summarizes that GPU received about $165 million
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26 in rate relief in 1979, reflecting "to a large extent the addition of
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'( TMl-2 to the companies' rate bases and associated regulatory treatment."
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This should be quantified: What constitutes "a large extent"? Our calculations from data provided would suggest a maximum of $103 million File I rpStation (TMI).
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s to Unit 2 of T d w lsland Nuc1oTwV
%n<. Vew-The idea that "only a small percentage" of rate increases accrues to Page 26 the shareholders of a utili ty ignores the role of the shareholder as the risk-bearing party receiving only the residual af ter the company While only a small portion of the $165 I
meets all other requi rements.
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million of rate increases may have been allocated to the shareholders, (N
that small percentage is at the margin.
Any reduction in the amounts l
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of the rate decisions would have reduced only two Items:
earnings f
for common stock and income taxes.
Page 42-The draf t must explain the distinction between straight-line and The reference to "Ill gotten gains" on accelerated depreciation.
page 42 must refer to the deferral of income taxes through accelerated depreciation, as indeed must the reference to incentives to invest at the beginning of the paragraph. The description provided,
- however,
"... simply a recognitien that the value of an asset
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deteriorates over time.
A taxpayer, therefore, is allowed to deduct from his tax base a portion of the value of the asset each year as compensation for this ' wear and tear. '" - clearly relates to the
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Without accelerated Ig concept of straight-line or economic depreciation.
depreciation there are no tax advantages, simply recovery of an invest-ment on an economic basis.
The " benefits and Ilabill ties of taxation" are not generally shared P e 43 Ratepayers are responsible for the between investors and ratepayers.
taxes as a cost of service and hence benefit almost exclusively if The only real exception to this a utility con reduce its tax liability.
/}h De-is the small return allowed utilities on investment tax credit.
ferred taxes, for example, are generally treated as either a reduction L
I in rate base or cost-free capi tal. The benefits discussed throughout this draf t are benefits that GPU sought on behalf of its ratepayers not its investors.
It should either 43, The description of normalization is unintelligible.
Pa be expanded or discarded.
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Mr Mitchell Rogovin p['
Page 3 December 11, 1979 age 62 It is also important to consider the financial condition of GPU in late 1978 to understand the weight they may have attached to advancing the receipt of the $28 million, if they anticipated possible uprating of their bonds from single-A to double-A, they probably were financially healthy and fairly IIquid.
Page 71 Concern about deterioration of earnings coverage of fixed charges should only have encouraged GPU, if considered from a financial viewpoint only, to delay commercial operation of THI Unit 2 as long as possible.
Given the future test periods used in two of the three pending rate j
cases, delay of the uni t would not have af fected the revenues resulting 1
f rom those applications but would have increased earnings f rom AFDC.
Section V:
Pages The incentives regarding the timing of commercial operation relative 1
-150 to rate treatment depend upon whether a utility uses historical or future test periods.
The report should address these differences before making recommendations for the entire industry.
Section VI:
The recommendation on pages 158-160 that the Nuclear Regulatory Commission (NRC) increase the scope of its financial qualification review seems misguided.
Utilities are economic entitles; not Just investor-owned utilities but all utilities with cost sensitivity strive with varying degrees of success to provide adequate service at the lowest possible cost.
It is the nature of economic entitles constantly to seek efficiencies and cost reductions.
Utilities are always on a critical path and always pressured to complete a project, and failure to grasp that fact represents a fundamental lack of com-prehension of business and economic environments.
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Legions of additional accountants at the NRC will only be able to N
reaf fi rm that there are always opportunities to reduce costs, and such opportuni ties do Indeed represent incentives to economic enti tles.
i To the extent that a utility, proceeding in good faith, attains economies through trade-offs which do not affect the safety of a facility, those
- trade-offs are desi rable.
Cost effectiveness represents a far different criteria than that used by the NRC, which sets standards for safe operation which must be met regardless of cost.
/How can this report conclude that efforts at efficiency played no discernable role in the accident at THI, and then recommend financial regulation involving "the most intimate financial details of a licensee's operations"? Given that there is no evidence presented in this report that financially strong utilities build and operate nuclear plants more
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Mr Hitchell Rogovin Page 4 December 11, 1979 safely than do financially weaker utilities, the NRC should devote its energies to enforcing its technical regulations, whatever they might be, fully cognizant that to the extent compatible with safety, all licensees will attempt to build and operate their facilities more efficiently.
Other recommendations in this draf t, such as increased rellar.ce on construction work-in progress in rate base and better coordination between various regulatory agencies, are commendable.
These reconnenda-tions could produce real changes in the incentives that concern the authors.
That represents a far more realistic approach than added NRC financial surveillance of literally thousands of such incentives over a period of a decade most of which are perfectly unrelated to safety and quite constructive in their effect.
hope these comments will be of use to you in preparing your report.
Very truly yours, b
{lWO'" Y W H Owen WH0/mk Dictated but not read by W H Owen.
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