ML19308B899

Commercial Operations Telcon Record Re Financial Info for June-Sept 1979

ML19308B899
Person / Time
Site:	Crane
Issue date:	06/13/1979
From:	Evans D NRC OFFICE OF THE EXECUTIVE LEGAL DIRECTOR (OELD)
To:
References
TASK-TF, TASK-TMR NUDOCS 8001170546
Download: ML19308B899 (59)

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NOTE T0: WAYNE LANNING FROM: DAVID EVANS June 13, 1979 JoeMalafsta,DeputyChiefCounselofthePennsylvaniaPUC,has informed me that the key determination for when a plant is in commercial operation ("used and useful") is when it begins producing power into the cretrical grid for ultimate use of the consumer. This seems to be somewhat at variance with the statement in the I&E report (attached) which stated: "On December 30, 1978 when Unit 2 was classified as in commercial operation,startup testing at about 95% power was underway."

(emphasis added).

The allgeation of " rush to commercial operation" pertains to the inclu-sion of TMI-2 in the rate base of Met-Ed and not to the tax advantages ir. going on line in 1978, according to Trowbridge of Shaw-Pitman. He will male available to us the material which the Presidential Commission has requested on this same subject ("all documents relevant to the decision to put TMI in operation").

It is possible we will want to limit, or eliminate, much of this information, which will not be ready for a couple of weeks.

The very fact that going on line the end of 1978 proved to be beneficial toMet-Edwasalmostcoincidentiai,accordingtoMala%sta. Met-Ed happened to be involved in a rate proceeding at that time and was therefore able to include TMI-2 in the rate base. Ohterwise, it would have been forced to wait for the next rate proceeding, in order to include TMI-2 in its rate base.

In fact, that possibility was raised during the OL hearing on TMI-2. A financial expert for Met-Ed testified that the " prime objective" of the Company was to get TMI-2 on line and not worry about the rate proceeding. He said Met _Ed could 4 finance construction of TMI-2 through short term borrowing if necessary, and not be forced to wait for the money from the rate proceeding.

(TR: May 17, 1977 at p. 1252)

If there is more information you need on this pleas let me know.

Evans 80011 70 %g y

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MEM0 TO COMMERCIAL OPERATIONS FILE September 10, 1979 This morning I called David Barash (pronounced: Barish) of the Pennsylvania Office of the Consumer Advocate. (0CA).

Barash had been quoted in the Philadelphia Inquirer that there certainly was rate base incentive for GPU to complete TMI-2 before the end of 1978.

Barash said he had talked to the newspaper only once and had been misquoted somewhat. He told the papers only that there was rate base incentive, not that there had been a rush nothing with regard to tax matters.

We talked briefly about the history of the GPU cases, including the attempt to transfer 25% ownership of TMI-2 to JCPSL. The first proceeding in which GPU attempted to gain rate base recognition for TMI-2 was #434, when Met-Ed owned 25%.

In the middle of that case the Pa.PUC denied the transfer. The second casgto seek rate relief, reflecting Met-Ed's 50% ownership, was 4M..

In that first case, Met-Ed made the Jersey argument (that it should be allowed to include TMI-2 in the rate base, even though not "used and useful", but would not collect money until it went into commercial operation.)his argument may be the difference in treatment given to Barash said the difference between Penn. and N.J. in accepting t CWIP; Penn. does not recognize its inclusion in the rate base, Jersey does.

Focusing on the second case, Barash noted Chairman's Goode's remarks in the press that if TMI-2 had not been " operational" during the course of the rate proceeding, "it wouldn't have gotten a penny."

Barash said the record on that proceeding closed on December 18th or 20th and the parties were expecting GPU to announce that TMI-2 had gone " operational" any moment. The parties went home over the Christmas break to write their briefs and then GPU sent a telegram to the ALJ (and the parties) stating that the unit had gone commercial on 12-30 at 11 p.m.

The record had been held open at oral argument precisely to receive this information. But when oral argument before the ALJ yas held, the plant had experienced another difficulty and l

was damn Barash said this had a noticeable effect on the ALJ. GPU

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l of course argued that, despite this problemi, the plant was operational.

l I raised the point that the TY for this case was the end of March, so why should the closing dates make a difference? Barash said that it was more a matter of regulatory attitude than law. True, evidence of plant operation would be accepted up through the end of March but it made it more difficult to convince the Commission of its l

status if it wasn't operating before the record below closed.

Barash sees three reasons for the importance of a December date,

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A Barash, 2 although he isn't sure they are of major importance. They are:

1. record was still open at that point (see above)

2. inclusion in annual report

3. possibility suggested by someone that ability of companies to float paper (bond indentures?) in coming years may have depended on assets at end of 1978.

I asked Barash the connection between used and useful and commercial operation. He said he was not familiar with a decision which equated the two but, by practice, the standards for the two have developed along the same lines.

Since Barash was apparently being called on another mattert, we had 4p cut our telephone conversation short.

I therefore scheduled a meeting with him while we were going to be in the area for THURSDAY SPETEMBER JSth at 9:00 a.m.

Barash's office is in Strawberry Square, State Office Tower,14th floor, near the government complex we earlier visited.

His phone is 717-783-5048.

I asked him to be prepared, as well, on the issue of the Lonergan steam valves. He said the attorney who handled that for the OCA was Barabara Smith, who recently left to go into private practice.

But h-is familiar as well and we will be able to talk about it.

I promised to attempt to locate a copy of the I/E report to bring with me.

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MEM0 0F TELCON COMMERCIAL OPERATION 9-4-79 This afternoon I talked with J. McGurren at 0 ELD regarding the VERMONT YANKEE inerting decision and the remarks made by Larry Quarles and Dr. John Buck, who sat on that appeal board.

J.

remembered the case and said he believed the staff witness who testified as to the impossibility of hydrogen explosion was Dr. Joseph Hendrie.

I mentioned that we thought it might have been Matson or Stello, but Hendrie could be the witness.

I asked J. to investigate the issue by having someone in the OELD mailroom dig out the TRs. He said he would attempt to do so but said he might need our " clout" to get some action.

I told him to call if he needed that.

i He will be in touch when he has something to report.

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MEMO 0F TELCON l

COMMERCIAL OPERATION 9-4-79 This afternoon I received a call from Jim Petersen at NRR/ Financial Analysis (27331).

He was returning my call Of last week regarding the paper before the Commission recomending a streamlining of the fin, qual. analysis.

I asked him if they had considered updating the I(E remark that no safety had been compromised for financial purposes in light of TMI. He said they had been unsure what role to play and asked what I knew. Since it is a matter of public record (or will be) I told Petersen that I had been contacted by a member of a Comissioner's Staff and explained my recommendation.

Petersen and I had a brief chat as to the failure of the Commission to believe anything is important to safety unless i' is hardware.

I expressed my view that the " soft sciences" reviews wuld become more important in the future.

I offered to make a draft of the comercial operation section available to Petersen on a confidential basis when we reach that stage.

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TELCON MEMO TO COMMERCIAL OPERATION FILE I called UE&C to speak to Roger Reynolds and was referred to Earl Nagle.

Nagle said that he had spoken with the V.P. and was prepared to meet with us as requested. He explained that he had been the TMI-2 project manager for construction from 12/70 through UE&C's withdrawal from the unit. He said he still had to check with Colin Shipman (sp?), the corporation counsel on the meeting. As project manager, Nagle spent three days a week at the site and the remainder in Philladelphia so he would be in a position to comment on the areas we want investigated.

Later in the day after returning from a meeting, I returned the call of Bernard J. Smolens, an attorney with the finn of Schnader, Hanso,h is Siegel and Lewis (all of those names are suspect spelling), which represents UE&C on an outside basis. Smolens said he had been called by Nagle, who had expressed concern at the broadness of the areas we wanted to cover. Smolens suggested that we drafts questions or areas we want to cover and send them in advance to Nagle.

I agreed that this would be a good idea and promised to send them out by tomorrow (9-5).

Smolens also said that Nagle had problems with the time we had originally set (9-13 at 9:00 a.m.).

I then called Nagle bhek and we agreed on a 1:30 p.m. meeting, Friday Sept.14.

As it was left, I will send out the areas we intend to cover; Nagle will be in touch; and we will all plan on the Sept. 14 date.

dje Sept. 4,1979 Smolens firm phone:

215-988-2438 UE&C phone:

215-422-3000

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17M Thk'd W ]ya Mil 4J et ekin, PA.

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MEM0 TO COMMERCIAL OPERATION FILE September 5, 1979 This afternoon I contacted Lonergan Company.

The correct name of the company is G.E. Lonergan Company; the President is Richard Anderson.

The phone is 215-677-1710.

I told Anderson that we were interested in arranging a meeting and he asked what we wanted to know.

I briefly explained why we were interested in knowing why the valves had to be replaced and what kind of pressure Lonergan was under. He said that the Company and GPU had law suits pending against each other over the valve issue. He said the value of the contract was $50,000.

He said that he would contact his attorney: HERMAN OBERT (phone:

215-735-4868) regarding our request for a meeting. He said he had to be in Springfield, Ma. on the 16th but could probably make a meeting the morning of Friday, Sept.14.

1 Later in the day I received another call from Mr. Anderson, which I returned. He explained that he had contacted his attorney and he would be in contact. He also was curious as to why an attorney from the NRC had called, saying that in taking another call regarding TMI he had referred an NRC person to his attorney and the NRC official had seemed disturbed at that.

I said there was no connection and that I had called simply because there are attorneys working on the project.

He seemed to accept that with no problem.

So as we left it, OBERT will call me regarding the problem of the litigation and the meeting is tenatively set for 9-14 at a.m.

at the attorney's office.

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U C) n MEM0 TO COMMERCIAL OPERATION FILE August 30, 1979 This morning I r-n sed a call from Jim Brown at ERA (Department ofEnergy).

Brown was returning my call, after I had obtained his name from Dick Weiner at ERA.

Brown's direct dial number is 254-8247. (Weiner is at 254-8260; other contacts: Frank Hanes (634-1811); JimBarker(254-8240))

I told Brown I was interested in learning what position Met-Ed and the other GPU companies were in vis-a-vis the PJM Pool in 1977 and the middle of 1978. He said the best place to obtain that information would be from the company itself, or the PJM Pool]

as DOE does not have this information.

He suggested we ask Met-Ed to obtain this pool information, as PJM itself probably would not give it to us wihtout the company's pemission. He also suggested that we ask for the data from 1977 and the first 6 months of 1978 showing a break-down by purchasers /

sellers into the, pool. Brown was confident this infomation exists in order to allow the accountants to draw up the itemized statements we are seeking.

He said the pool might have the information in GPU form but this could be further broken down into the constituent companies.

Brown noted that the joint generation planning committee which we had earlier thought was part of the PJM operation may in fact be part of the Mid Atlantic Coordinating Council (MACC).

He said that council must approve each additional unit of generation.

At PJM, Brown said he wuld talk to Wilmer Klimbach (sp?) or Bob Woodward.

Brown added that he would be interested in seeing the information we get from the company in response to our concerns.

Brown agreed that the pool deficiency penalty could be an incentive to complete a unit, since the penalty is charged every hour-that the utility can not trieet its load. The pool would then auto-matically fill in' the slack and charge the company for the energy and tha penalty. Brown described the PJM pool as being highly integrated, even more so than NEP00L, althoughhe is not very familiar with the latter. PJM has free flow transmission ties and operates units on the basis of econ;my; he said that each GPU unit was controlled by the pool and the company does not operate as a whole vis-a-vis the pool. This is contrary to the impression I got from Connie Six at the PaPUC.

cc: Larry Vandenberg

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NOTE TO FILE TELEPHONE CALL FROM William Lord of UE&C August 29, 1979 This morning William Lord, V.P. for sales V United Engineers &

Constructors, (Philadelphia) returned my all regarding a September 13 meeting. Mr. Lord said that he would be out of town on vacation and that Roger Reynolds joined the firm after TMI-2 and, therefore, neither of them would be much help in answering TMI related questions. He said if I would tell him what we were interested in learning, he would locate the proper people.

I told him we were interested in learning if whether, during UE&C's involvement with the project, the client (GPU et al.) in any way applied pressure to complete work by a certain time, other than the normal pressure in any large construction project. Toward this end, I told Lord we were interested in speaking to the contact

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person who dealt with the client, as well as someone who was at the site and would have the chance to observe any pressure toward meeting deadlines.

I suggested the project manager would be the right person and Lord agreed. He told me that he had already called the P.M. for TMI-2 and told him to keep the 13th open.

In addition, Lord said he would probably also want to have this man's boss present. He asked if it would be inappropriate to have corporation counsel present and I said no: at some point these infonnal discussions may evolve into depositLns.

Lord promised to call back with the name of this P.M. after checking with him. We have, however, tenatively set the meeting up for 9 a.m. on Thursday, September 13 at the UE&C offices, 30 South 17th St. (check this), Philadelphia. Lord said there is a Holiday Inn very near by at 18th and Marl'et. The UE&C office is just off Market Street, cc: Larry Vandenberg

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NOTE TO:

George Frampton FROM:

David Evans Task Group 1

SUBJECT:

Documents Neede from Metropolitan Edison August 29, 1979 Pursuart to our discussion this morning, I have reviewed John Herbein's deposition before the President's Commission on August 9, and have identified the following documents which we should request from Met-Ed prior to our deposition of Mr. Herbein. The transcript page reference is the first page in which the documents are mentioned.

DOCUMENT DESCRIPTION TR PAGE REF.

Finfrock Exh. 2*

Summary of meeting of GPU 39 Commercial Operation Review Committee meeting held 10-26-78 at TMI site.

Miller

• Exh. 112 Final report of CORC following 53 subcommittee evaluation of-problems identified at 10-26 meeting.

Report is dated 12-29-78.

Supplement A to

? unclear-- appears to be 55 Miller Exh. 112 form signed by members of CORC subcommittee approving TMI-2 commercial operation as of 12-29-78 It is my understanding that you intend to request these documents from Matt Diaz.

If we come across other documents of this nature in reviewing depositions we will inform you.

• Apparently these documents were uncovered by the President's Commission in depositions of the named individuals, me: Larry Vandenberg, Bill Parler

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c, UNITED STATES

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E WASHINGTON, D. C. 20555 o *lr b RECORD OF TELEPHONE CONVERSATION Monday, August 20, 1979 2:15 p.m. - 3:45 p.m.

Mr. A. N. (Tony) Fasano Reactor Inspector NRC-IE-Region I 8-488-1348 Tony will send prepared testimony given to the ASLB on Beaver Valley that describes the inspection program.

He believes commercial operations means when the dispatcher takes a controlling role of reactor.

TMI-2 suffered from frequent changes of in-charge inspectors.

DuringconstructionphaseklouNarro was lead inspector (or project inspector).

Wnen preop phase began (before construction inspection 7hase complete) the lead inspectors were:

A.N. Fasano Feb 1976 to May 1977 P. J. Kellogg May 1977 to Feb 1978 D. R. Haverkamp Feb 1978 to present (months are approximate)

When Tony was on TMI-2, no pressure was put on him to hurry testing program.

Good people to talk to about test rush would be people who comprised GPUSC Startup G roup.

I These people felt, reportedly, that the Startup Group was " terminated too soon."

IMaxNelson wrote many test procedures Ron Toole Sup't. of Test 3

Carl Gaddio 5

J Steve Pojo Section 13 of FSAR covers preop and power ascension testing.

On observation ities seem to like to g OL quickly as possible, Tony could see n ncentive e cept to meet internal e points.

In reality, getting an OL often n i

• ifficult the completing f construction and conduct of preop j

test program.

For example rod ej ction and temperature coe icient tests are sometimes done after receipt of OL but a e easier if done befor fuel loaded. Additionally, once a G

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r Record of Telephone Conversation 2

August 20, 1979 licensee has an OL, there are continuing responsibilities to live up to the OL license conditions:

the Tech Specs, security program, restricted areas, surveillance, etc.

Therefore, it's just more difficult to perform otherwise

)(L[f routine test and construction items.

One item to look at to determine if there was a rush would be to look at the number of items on the licensee's punch list. The punch list is a list of reactor systems, components, and tests, test exceptions and items missing.

Items missing range from "needs paint" to " pump not operating." The IE project manager must go over punch list, compare to FSAR and evaluate if system can function once core loaded.

Tony feels it's impossible to meet the letter of FSAR: rather inspector must judge the intent of FSAR.

Also suggests looking at NSSS and A/E for completion motivations regarding warranties.

R. L. Vandenberg

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RECORD OF TELEPHONE CONVERSATION Monday, August 20, 1979 8:15 a.m. - 8:25 a.m.

Mr. Lou Narrows Reactor Construction Inspector IE Region I 8-488-1285 I called Lou to find cut the background behind a statement in a letter from Met Ed to Region I.

The letter from R. C. Arnold, dated March 16, 1977, was in response to IE Inspection Report No. 50-320/77-02.

The statement referencing schedule pressures is enclosed.

Shortly after the site inspection, R. W. (Dick) Heward, then the GPU Project Manager, called Lou Narrows to discuss the unusually large number (three) of noncompliances.

This was normal procedure for Heward, who apparently liked to find out the inspector's point of view and insight into the causes for the noncompliances. No record was made of the phone conversation.

Lou recalls that "we knew they were under pressure to get the job completed."

Asked how he knew, L_ou resoonded that thay fIF1 iicensee was behind Le naw rne srhedule, knew from the Site Construction Manaapr. W. T. (Bill) Gunn, that ~

he was pushing hard to complete construction,and further the inspectors could see a builauo or mannnwor Acnarla t iv in the 91petrie:1 ' area. wnich is iiormally the last item to be completed.

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Lou reports gha+ IE inenactinns at that time focused on the qualifications N of licenss oEftTrical inspecto7tNutd that IE encouraged the licensee to bring on additional inspectors.

It knew the licensee was pushing hard and IE wanted to make sure that the quality of the construction program did not suffer.

Heward and Gunn were responsible for establishing the schedule subject to approval at the V.P. level.

Lou felt that even though there was pressure for completion, there was nothing unusual or detrimental about it.

R. L. Vandenberg

Enclosure:

Statement

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METHOPOLITAN EDISON COMPANY su:::w < : av.m eueu vnurses conpanzriou POST OFFICE BOX M2 RE ADING, PENNSYLVANI A 19603 TELEPHONE 215 - 929-3601 March 16, 1977 N

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Dear Sir:

Three Mile Island Nuclear Station Unit 2 (TMI-2)

License No. CFis-66 Docket No. 50-320 inspection Report Nc. 50-320/77-02 This letter is in response to the subject inspection report resulting from Mr.

Narrov's inspection of January 10 through 13, 1977 and the firidings thereof.

Response is given below to the infractions identified in the report.

Apnarent Infraction 77-02-01:

Nonconforming conditions in Emergency Feedvater and Main Steam Lines.

" Contrary to 10CFR50, Appendix B, Criterion X, Sections of the emergency feedvater and main steam lines which had been accepted by Field QC did not conform to the drawings and specifications."

Response to Apnarent Infraction (Emergency Feedvater):

The emergency feedvater line had been inspected for phase I turnover and accepted.

The NRC inspector found that hanger EFH-h5S did not have the clearance specified on Bergen-Paterson Draving No. 1691-1.

Hanger EFH-h5S had been previously inspected during QC phase I inspection and was found to have been installed in accordance with the requirecents of Bergen-Paterson Drawing No.

1691-1. However, at the time of phase I inspectien, the piping was not complete in that certain spool pieces were missin6 (as documented on the phase I punch' list).

Subsequent to the QC phase I inspection, but prior to the NRC inspection, the piping department installed missing spool piece 2-F-33 It is concluded that during this installation the clearance on hanger ETH-h5S was changed.

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2; paragraph 5t of the in:pectors detailed report observation that ECP-3-2 did not conform to Burn's & hoe specification 2555-70 Ap/

and that cables in circuit HH30? had been accepted by the QC inspector without g

heat shrink insulation.

In March,1976, Burns & Roe issued ECM 3k16 which established the requirenent for the heat shrink insulation. Burns & Roe specification 2555-70 was not revised to incorporate this ECM until Novenber,1976.

The ECF was not revised v1.cn the ECM was issued as explained above.

However, a normal part of the QC phase I inspection is a separate review made to ensure that appropriate inspections are performed to determine co=pliance with outstanding ECM's.

At the phase I Inspection of circuit HH30P this was done and the QC inspector had in fact rejected the circuit for lack of heat shrink insulation.

Action Taken:

ECP-B-2 has nov been revised to comply with Burns & Roe specification 1.

2555-7J.

ECP-3-2 vill be revised to comply with Burns & Roe specification 2555-70 2.

by March 30, 1977 An inspection for heat shrink insulation has been added to the phase I QC 3

checklist for electrical inspections.

Steps Taken to Avoid Future Recurrence None required.

As construction activities focus more on tasks leading 'directly to fuel loading and eventually to Ocs;;rciel ^raration. ve are as concerned as the NRC that these schedule pressures not result'in any degradation in the Quality Assurapce program at TMI-2.

Both Quality Assurance and Project Management personnel are

'conmittea tv that degradation does not happen.

Since December 1976 ve muc have taken the following specific steps:

A total of 15 first level inspection personnel have been added to the 1.

TMI-2 Quality Control staff.

This increase has been predominently in the electrical / instrumentation area (9).

Or.c additional Quality Assurance Engineer has been assigned to the phase 2.

I documentation review and turnover activity.

t been authorized for Quality Assurance Engineers to insure l

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vnurb os of review and minimum quality risk from schedu e pressures.

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Specific policy guidance has been reiterated to QC inspection, and site construction and management functions, concerning proper interfacing of construction and test schedules with site quality control.

This policy attempts to minimize schedule pressure on first Ja.el inspection personnel.

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Ma~he eh cwnte ave. c Accee ws sos e ssss August 17, 1979 Mr. Larry Vandenberg U.S. Nuclear Regulatory Commission AR 400 Washington D.C. 20555

Dear Mr. Vandenberg:

This letter is in response to our August 14, 1979 conversation concerning accounting for the transfer of plant from construction work in progress (CWIP) to plant in service.

You have researched the standards for transfer for income tax purposes.

The criteria set forth in Revenue Rulings76-256 and 76-428 define the procedural considerations necessary to declare a unit (tossil or nuclear) as "in service" for tax purposes.

From our experience these same standard _s are generally used by utility regulators in their evaluation oT plant p

assets with resnect to rho ennenne nf "used and useful"- a concept which (JN

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often underlies the inclusion of an asset in rt.te base'.

(hbg' We discussed the importance of regulatory treatment, in a broad sense, on 6

F financial accounting. As a general condition, financial accounting is to reflect economic reality; a significant portion of a utility's " economic reality" is established through the rate orders of the related regulatory authorities.

In some cases, accounting for economic reality in a public utility requires an extension of generally accepced accounting principals 4

(GAAP) from those that would be applied in a nonregulated industry.

The Addendum to Accounting Principles Board Opinion No. 2 generally provides for such an extension of GAAP to include the effects of regulation and rate making in public utilities.

The appropriateness of the Addendum has been recently restudied; enclosed is a copy of a docum2nt entitled " Discussion Mcmorandum -Effect of Rate Regulation on Accounting to be Applied to Regulated Industries".

The Discussion Memorandum was prepared by a task force of the Financial Accounting Standards Board and is scheduled for official distribution, with possible revision, in late 1979.

The significance

. of the Addendum is also discussed in FPC Order No. 505B; a copy is enclosed.

You inquired if AFUDC is included in the base on which ITC may be claimed.

ITC may be claimed on the depreciable tax bas _is of utility propertv whi_gg day, out venerally does not, include the interest portion of AFUDC.

Ihat portion of AFUDC which relates to equity runds Is cetinitely noc eligible-N, for 1TC.

The interest portion of AFUDC relating to " borrowed funds" is generally N not eligibic for ITC because nearly all utilities elect to deduct all interest, including that portion embedded in AFUDC, as a current deduction: therefore, the canitalized tax basis of the propert> eligible for ITC does not ne t.. u.c.

include any portion of AFUDC._ 11 you desire d.uccaer delination 01 the two somponents at Ac Uac, you shotild refer to 13 CFR Part 101. page 298 of the April 1, 197S edition.

,f x August 16, 1979 Mr. Larry Vandenberg page two Please do not hesitate to contact either Jim h'ilsen or me at (303) 861-5555 if we may be of additional assistance.

Very truly vours, i

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MEh0 TO FILE August 10, 1979 Yesterday, Thursday August 9, Larry Vandenberg, myself, Mitch Rogovin and Jane

, a tax attorney in Rogovin's fim, met with Jean Dobres of the IRS. Jean, who is an attorney, had invited an engineer from one of the IRS technical branches to also attend; his name is Al Larry and I had prepared a list of questions which we wanted to ask the IRS. Mitch answered some before we went downtown; other we got answers for from the Service; and other were not asked. The list is attached.

The first thing which happened at the meeting was that Rogovin presented his " lost depreciation" theory (see Question 13 on list). Jean disagreed that the depreciation was lost, since assets do not have an inherent -ULS but a UL based upon "use in the business." Thus, a car which was purchased as a personal vehicle and is then pressed into service for the production of income has act lost 2 years of its

" inherent UL" while it was personal property. Rather, the UL for tax purposes is how long it is expected to last in the business (2 years).

This is distinguished from the concept of economic life: how long an asset will last, how long it has value to the tax payer.

But apparently this has no tax consequences.

Mitch then asked the ultimate question: how long must a plant " operate without failure" before it is allowed tax treatment? This confused Jean Dobres and we had to carefully go through the REV.RULs. This was made more complex by some confusion by Mitch on which REV.RUL.

set the " operate without failure" standard. He cited 76-428, when it was actually 79-98. Having straightened this out I explained the importance of the steam valve replacement, passing out the attached time-line on events at TMI-2.

I bel,ieve Jean and Al eventually sav the problem which we were addressing.

Jane Kept referring to REV.RUL 76-255, which refers to the requirement that a coal plant demonstrate " daily operation." She asked whether this could be equated with the concept of " operation without failure."

The IRS people didn't answer that question.

It is my personal opinion that the REV.RULS (Compare REV.RUL 76-256 with REV.RUL 76-428) recognize different standards for coal and nuclear plants because of very real engineering differences. Although a coal plant may experience some difficulties in its first year of operation, it does not scram, as does a nuclear facility. Thus, a standard of daily operation--while achieveable for a coal plant--would be difficult for a nuclear plant to meet.

Unfortunately, neither Jean nor Al could tell us how long a plant had to operation without failure before the tax credits etc. would be available. She agreed with Mitch that the tax provisions as currently written provide an incentive to complete a unit before the end of a

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IRS Meeting 8-10 page 2 tax year. Of course, both IRS people noted that this same incentive exists for all large projects and that there are pressures other than tax incentives which drive projects forward.

There was a great deal of discussion about refonning the Code so that this incentive could be minimized. Mitch appears to favor a provision which would force them to operate for seven months after commercial operation to demonstrate their qualifications for the ITC and depreciation.

In other words, he appears particularly concerned about the poor performance of TMI-2 after the 12-30-78 declaration of comercial operation. Jean cited some current special provisions in the regulations: thel citrus groves, where depreciation is allowed at an earlier time.

I asked (as did Larry) about the 1975 progress expenditure amendment of section 46. This seems to @iminish the lump-sum incentive which can be built up if ITC comes due all in one year. Jean confirmed that the pro ;ress expenditure treatment is not proper for a project begun before 1975; the treatment must be consistent. Therefore,

TMI-2 (which was begun in 1969) cannot claim progress expenditures for post-1975 work.

I am somewhat confused by Mitch's approach.

Initially, I thought his position was that the Service's rules were too tough, forcing utilities into rushing projects to meet the criteria.

I don't see how a seven month (for example) post-completion analysis is any lightening-up. Rather, it seems to me this would just push any rush back seven months, making the predicting even more complex.

It is possible the 75 amendments (progress expenditures) have helped ease the problem.

In later discussions, Jean suggested that the ITC is passed through to the retail rate payers (although she noted the AT&T California litigation has been given new life).

In other words, whatever tax benefits are obtained by getting the ITC, they don't accrue to the Company but to the ratepayers. She also said the $40m is similar to a taxfree lean, and the PUCs would so treat it in setting rates. (Check these two items out et the Comissions.)

The suggestions we had on leaving: w.ite to Commissioner of IRS and present the problem and seek his advice.

It is my understanding that Mitch is going to do this.

I am to draft a document request for Liberman seeking the tax documents, although MiMh is concerned about privilege claims.

I was also instructed NOT to commef[the ' CeJre-T Philadelphia auditors, whose names Fred Bones gave me.

I am to contact Bones to attempt to get further information on the " court case" he mentioned to me, which Jean or Al had not heard about.

See attached question list for other matters and disposition.

dje8-10-79

N NI-C QUESTIONS / ISSUES FOR DISCUSSION WITH IRS L(1MI ggg,,)

August 9, 1979 cj N

1. We understand there was a nuclear plant which experienced a defect failure after initial synchrbnization and sought an

'J6AtJ informal revenue ruling from the IRS that it would still be g Ac /Jrr ' proper to include the plant in the ITC/ depreciation allowed g[ggp gr for that tax year. We further understand that the IRS refused such treatment and that the taxpayer has taken subsequent

~

court action. Are you familiar with that case?

pcudgj o 2. Explanation of the qualified progress expenditure provision of section46(d)isneeded. Could such treatment be claimed on that portion of a project begun before 1975 which was constructed after 19757 I

[

3. Explanation of flow-through provisions of section 46(f). Does l

that provision prevent PUCs from passing through, via adjustments to rates or rate bases, the benefits of the ITC?

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4. What of the carryover and carryback provisions of the ITC?

GPU's 1978 return showed an " anticipated" ITC of $55 million kbT A n d. g but after " limitations" this was reduced to $18 million.

What happens to the balance? Can it be carried back three and forward seven?

5. Must a utility file a final enginnering report or certificate

?

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• of completion with the IRS in claiming ITC/ depreciation on a yM [1 new unit in a particular year?

6. When a return containing such an item is audited, what documentation does the IRS look for?

Uni A5f eO %7. Is there any difference between the criteria used in determining when ITC is applicable and when depreciation allowances are applicable?

WT AsgED -> 8. What is the " typical" or " average" useful life claimed for a nuclear plant?

Y6R Sat d.Y 9. Is AFUDC allowed in the ta',x basis of a nuclear plant?

tea n T g p g3 p-o.

10. Is there any possible advantcge to a utility delaying seeking ITC q met, and depreciation treatment for a new plant?

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11. How long would a unit have to operate after synchronization and p hgo)6, pp p "without failure" in any particular tax year in order to get the advantages of ITC and depreciation? One day? One hour? One month?

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-p 12. Any conments or observations on Critical Mass stuoy and allegation py that ta;: provisions provide incentive? What of refoms contemplated?

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13. Loss of depreciation for UL years lost while plant is being completed.

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1 TMI-2 CHRON0 LOGY (Events of Possible Significance for Tax Analysis) 1978 NRC Operating License issued February 8 (functional tests of components required before initial fuel load)

Initial fuel loading February 6 - 14 Initial criticality achieved on 3 RCPs March 28 i

Mode 1 (power operation) entered April 18 Initial synchronization of turbine-generator April 21 with electrical grid; first production of net electrical energy Reactor turbine trip; Main Steam relief valves April 23 cause excessive blowdown, bellow lines blown from discharge stacks; ECCS activation commence M.S. relief valve testing May 18 testing complete; cooldown to replace valve May 27 valve tested May 31 - June 4 plant cooled down pending decision on valves June 5 all valves removed from steamline June 21 i

Crouse Nuclear begins modification of M.S. line June 26 I

valves installed June 26 - August 23 new valve testing August 24 - August 31 M.S. hanger installation September 1 - September 8 Return to mode 1 level; total time down for September 18 steam valves = 48 days Turbine generator on line September 18 Reactor trip November 7 i

Turbine screen outage November 8 - November 20 Oil contamination outage November 22 - November 29 Return to criticality December 1 j

Unit placed on line December 2 Test program resumes at full power December 24 Satisfactory completion of full power testing; December 28 performed generator trip test; test program completed Maintenance outage; return to power

. December 29, Power escalation; unit declared commercial (80%)

December 30

o o

TMI-2 Chronology Page 2 1979 Turbine removed from service to repair January 14 leak on governor valve; reactor shut down Return to criticality January 15 Loss of vacuum in condenser, resulting in rupture of expansion joint bellows in dump line; power to pressurizer heater January 15 lost, reactor trips at 18% power Atmospheric dump valve bellows and pressurizer instrumentation replaced during shutodown Unit returned to service January 31 Month of February -- no trips, production of February net electrical energy on each of 28 days Reactor trip due to generator trip March 6 TMI-2 Feedwater Transient and subsequent fuel March 28 failure (the accident) i

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August 9, 1979 MEMORANDUM FOR: David Evans FROM:

Mitchell Rogovin

SUBJECT:

TELCON WITl! JAMES LIBERMAN (212/248-6900) 1.

GPU took 1/2 year depreciation for 1978.

C 2.

lie believes Rev Rul 76-256 met in September 1978.

3.

Ilis firm not tax counsel:

Guggenheimer and Uttenmeyer a.

Jerry !!e11erstein b.

George Menken 4.

Believes there were communications between G6U and GPU's Comptroller re ITC and dep, for 1978.

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MEM0 TO FILE August 8, 1979 This morning I had a call from Bill Clements, Special Assistant in Comissioner Bradford's Office. Actually, I was instructed to call him after he called Dick DeYoung.

Clements told me that the Commission now has before it a Staff recomendation to reduce the financial analysis of applicants such that that analysis will be deemed complete if (a) its a regulated utility and (b) it has an "a" or "aaa" rating from Standard and Poor's or Moody's.

I told him, in my opinion,that was unacceptable.

I also told him that -- although our regulattens sound great --

cctual Staff practice in investigating financial qualification is not as impressive.

I gave him Jim Petersen's name.

Another feature of the Staff paper, according to Clements, would eliminate a financial qualification investigation at the OL stage.

I described what our investigation has uncovered and the suggestion that the NRC should be spending more time in this area, which is one of foggy jurisidiction. That is: perhaps the financial analysis should extend through the OL life. That is: if the financial health of the company effects saftey or creates incentives which should be guarded against, we should be aware of that.

I brielfy touched on the $40m incentive vs. no-NRC analysis on the' other hand.

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.c I volunteeerd to be of whatever additional assistance I could and noted that I had been very candid in expressing my personal ideas and conclusions; that caveats of all kinds should be added. He agreed, saying whatever thoughts of mine he used would be expressed in his own words.

dj e8-8-79

O 4

aa MEM0 TO FILE August 4, 1979

SUBJECT:

MEETING WITH FERC COUNSEL On Friday, August 3,1979, Larry Vandenberg and I kept an appointment with Ray DeLevie, the attorney at FERC who is handling the GPU cases. (Lou Konski is going to be out for a while for personal reasons.)

Ray gave us the following information on the on-going GPU cases:

PENELEC (Docket ER-78-494)

FERC Staff will file pleadings 8-24 company files 9-21 hearing latter part of October (As in the cases below, FERC will attempt to settle these cases on an arrangement whereby the companies withdraw TMI-2 from their rate base and FERC allows them to earn AFC on the plant while being " repaired.")

MET-ED (Docket ER-79-58) settlement conference 9-25 if no settlment, parties file 12-19 At issue in the Met-Ed case is not only the cost of service matters but an alleged price squeeze, brought by some municipalities. A hearing 9 set for 12-19-79.

JCP&L (Docket No. ER-79-12) setttlement conference 8-7 hearing, if no settlement 11-13 Ray wants to borrow a copy of the I&E/ TMI-2 report in an attempt to show the companies the advantages to settling, since so many issues could be raised regarding TMI-2.

At issue in all three GPU cases, according to DeLevie is the rate base treatment of TMI-2. Should the unit be excluded or included? should the companies be allowed to charge the customers AFC? Wholesale customers have petitioned FERC to remove the plant from the rate base, so as to prevent an inconsistency with the finding of the PaPUC.

FERC staff argued egainst summary disposition on this issue, saying much had to be investigated.

They apparently won this.

Tracing the history of these cases (alb of which began before the accident at TMI) is a nightmare.

FERC just doesn'.s appear to be well organized in this matter. DeLevie is going to supply us with certain information (the companies' filings, the docket index, the FERC suspension orders, Form is, etc) which should make our analysis easier. But from what I was able to learn l

Friday, here is the history:

i

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FERC/p.2 July, 1978 Penelec files for increased rates (TMI-2 included?)

October,1978 JCP&L receives FERC order approving $1 million r?. crease in rates; TMI-2 was probably not'in this filing's rate base, because FERC uses "used and useful" standard, although its meaning is unclear.

Whether it = commercial operation is a matter of dispf ute, DeLevie is to supply company;s brief on this issue.

November Met-Ed files for $7.6m increase in rates December JCP&L files for additional $2.1m probably reflecting inclusion of TMI-2 in rate base.

December, 1978 Penelec places in effect July filing mid, 1979 Met-Ed and JCP&L increases (November, December) to go into effect.

l It is important to understand that, although FERC can suspend filings for investigation, after five months, the filed rates go into effect, subject to refund. Th6s, wholesale customers of the GPU companies are probably paying for a portion of TMI-2 in their rates, since these were calculated in the companies' filings.

Whatever the outcome of the current FERC hearings, the companies may be requiried to refund the money they have collected wink which can be traced to TMI-2's inclusion in the rate bases.

That was about all the information we obtained from 2 hours2.314815e-5 days <br />5.555556e-4 hours <br />3.306878e-6 weeks <br />7.61e-7 months <br /> at FERC.

DeLevie is to contact us with the information he has promised and we intend to keep the channels of communication open with FERC.

dje8 4-79 i

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MEM0 TO FILE August 4, 1979 1

SUBJECT:

GPU Consolidated Tax Returns for 1977 and 1978 On Friday, August 3,1979, Larry Vandenberg and I went to the offices of Shaw, Pitman Fox & Trowbridge to examine the consolidated tax returns of General Public Utilities Company. By way of reference, these returns had been made available to Fox Trowbridge by GPC's New York ta)( counsel, Jim Liberman, after George Frampton of this Special Inquiry had requested there production from Ernie Blake, also an attorney of Shaw Pitman.

(During the course of our visit to Shaw Pitman's offices, Fox Trowbridge showed us a copy of a letter sent to him by Liberman authorizing him to show SIG represena-tives copies of the returns.)

Larry and I arrived at the offices shortly after 10:30 a.m. and spent about 2 hours2.314815e-5 days <br />5.555556e-4 hours <br />3.306878e-6 weeks <br />7.61e-7 months <br /> examining the return. Attached are typed portions of my rough notes on material taken from the 1978 return.

Trownridge would not allow us to photocopy portions of the return without checking with Liberman, so these represent the best infor-mation we could obtain.

In general these are my observations:

Both Larry and I were disappointed that more material was not available. Although we had understood that the detailed records which support the return would not be made available (although they are available in Parsippany, N.J.; Liberman's letter said the stack of this computer printouts is 7 inches), the returns themselves are rather sparse without this material.

Nonetheless, we did see enough to provide some figures and raise some questions. The questions follow:

1. What is the distinction between tax " flow through" and " pass through" treatment? (Larry suggest the former is the tax advantage in calculating book and tax depreciation by different methods; the latter being a regulatory requirement that these advantages be made available to the customer via lower rates.) (Again, I suggest Pretti in California might help shed some light on this.)

2. Did GPU claim progress payments on portions of the TMI-2 project under the ITC provisions? (Because the GPU return itself does not distinguish TMI related treatment from general matters, questions such as this were impossible to answer; often Larry and I found ourselves guessing at the meaning.

I suggest calling the Pa. IRS people to see if thoy have audited the return. )

3. Were any ITC credits carried over or back from 1978? (The return speaks in terms of $55m being the anticipated ITC but " limitations" reduce it to a total of $18m. What happens to the balance; is it simply lost, or is it carried over? Compare the Annual Report notation on this with the returns ambiguity on this point.)

O O

Taxes /2

4. As noted above, we found it impossible in many cases to determine what portions of claimed tax treatment represented TMI-2.

We should ask Liberman to identify a person who could-assist us in this regard.

The figures in this area are confusing.

For example, we found that adding up all the depreciation deductions for which TMI-2 appears responsible (we did this simply by using the new property added in 1978 figure, admitting there was more than TMI-2 added in the year) and the total $18 m in ITC (again, this figure is inflated by:the fact that GPU added more new property than TMI-2), we concluded GPU received a maximum tax benefit of $51m for TMI-2 in 1978.

(15m + 8M+ 10m = 33m + 18m = 51m, - for all subsidiaries of GPU).

This is a very sizeable amount, although admittedly on the high side, and requires further investigation.

Our current approach will be the following:

1. Write Liberman and ask him to identify the people we should speak to on these matters, this per George's instruction to raise the issue with Trowbridge and the latters agreement that this was the only way to proceed.

2. Interview those people and the people who prepared the return.

3. Perhaps use Mitch Rogovin's connections to get IRS assistance in reviewing GPU's more detailed records in N.J. is 1 - 2 are not of assistance.

4. Again, using Rogovin's connections, get an informal REVRUL from the Commissioner of IRS on the treatment TMI-2 would have received based upon our knowledge of their situation.

NOTE: The attached notes from GPU's return should be treated with extreme CONFIDENCE, in light of the arrangement by which GPU has made them available to us.

J

O O

TYPED NOTES OF GPU 00NSOLIDATED TAX RETURN FOR 1978:

Total assets 4,612,682,885 (instruction K)

Depreciation claimed 210,490,882 (line21) investment tax credit 18,530,462 TOTAL TAX 4,759,424 Capital gains / capital losses intercompany deferred gain--sale of TMI-1 385,026 intercompany deferred gain--sale of TMI-2 36,556 (for depreciation table, see next page)

Company took election pursuant to Regulation 1.167(a)-12(b)(3)(iii)

(CHECK: to see what this means)

Company also elected half-year convention for depreciation treatment (per checkoff on form

).

Company received six months treatment for any property placed into service in last six months of year.

Under CLADR guideline class table, company reported following:

JCP&L class 49.12 (nuclear production class) current years additions 160,755,730 basis at years end (missing--I did not record) depreciation on this yr additions 10,047,233 l

MET-ED class 49.12 current years additions 256,590,537 basis at yr end 417,350,372 depreciation this yr. add.

15,093,561 PENELEC class 49.12 current years additions 129,359,770 basis at yr end 223,914,901 deprec on yr. add.

8,084,987 (Q: Note if you add up all the " current additions" it comes to only 547m; the estimated cost of TMI-2 is $700m. Why the difference?,

l

GPU 1978 CONSOLIDATED TAX RETURN DEPRECIATION TABLE (copied from D. Evans rough notes, omitting adjustments to total column, which peceeded " allowed" col.)

COMPANY Straight-line sum of year's digits declining bal.

total allowed Met-Ed 3,261,701 57,550,337 69,909 60,881,947 60,658,740 J

JCP&L 1,680,762 61,135,684 15,983,561 78,800,007 78,136,341 PENELEC 5,244,022 55,017,621 11,016,354 71,277,997 70,918,876 TOTAL 10,252,788 174,249,099 27,234,989 211,736,876 210,490,882

.B. The various methods of calculating depreciation are not alternatives, but different nethods used for different types of property, according to Larry Vandenberg.

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GPU CONSOLIDATED TAX RETURN of 1978 FORM 3468: Computation of Investment Tax Credit New property of UL greater than seven years COST or applicable QUAL. INVESTMENT BASIS new property (1978) 1 292,347,302 100 292,347,302 qualified progress payments 1975,76,1977:

66,124,106 20 13,224,803.

1978:

94,210,182*

80 75,360,146 (THE TABLE AT THIS POINT ADDED IN PROPERTY WITH A UL LESS THAN SEVEN YEARS: ALL OF THIS WAS NEW PROPERTY, I SAW NO CLAIM FOR OLD PROPERTY ITC)

TOTAL:

395,840,759 359,840.759 10% of total 39,584,076 7% of certain property (4% for some public utility prop.)

10,833,382 carrover or carryback tenative investment credit 55,828,340 (limitations)

TOTAL CREDIT 18,530,462 QUESTIONS: What happened to carryover and carrybacks?

At what % was ITC calculated: 10, 7 or 4%?

O O

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U Es l / 7 1 NOTE:

While Konski is out of the office our contact at FERC is RAY LeLevie Phone: 275-4290 Room: 8013 (North Capitol St.)

(He may also be in Konski's office at Rm. 8003) l

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y RECORD OF TELEPHONE CONVERSATION July 30, 1979 3:00 p.m. - 3:45 p.m. and 4:15 p.m. - 4 :20 p.m.

Mr. Gordon Murdock Assistant Director Division of Rates and Corporate Regulation Office of Electric Power Regulation FERC When asked what would be changed from FERC's viewpoint if TMI-2 came on line in January or February of 1979 rather than on December 30, 1978, Gordon replied that he could see no change in the handling or disposition of GPU (all subs) rate increase applications.

The only benefit he could see was the Investment Tax Credit being applied to Met Ed's 1978 taxes rather than 1979 taxes.

He also noted that in his experience if a utility, near end of a tax year, is close to point of bringing a unit on line, the utility will try very hard to get the unit on line and secure the ITC.

He also said that a commercial operation decision was purely the utility's.

m Met Ed filed a rate increase application with FERC on November 13, 1978, asking for a January 12, 1979 effective date.

18 CFR 35.3, dealing with notice require-ments, requires applications to be submitted not more than 120 days prior to the date on which electric service is to commence.

This would imply that Met Ed believed TMI-2 would begin commercial operations be+L March 13,1979 (November 13

+ 120 days).

0FC Further, because FERC rate increase applications are based on a projected test year, a conmercial operation decision by Met Ed in January or February would have no impact on the FERC rate increase.

Under the projected fest year con-cept, rates are based on what costs are projected or estimated to be. After the test period, actual costs are compared to the projections as a way to determine if the projections were reasonable.

If there were substantial differences between projections and actuals caused by, say, TMI-2 not coming on line until July 1979 even though test year started in January 1979, then during FERC hearings arguments would be presented that the plant was not in service long enough to justify increased rates for that year.

As it turns out, FERC in January 1979 delayed the effective date of Met Ed's rate increase request for five months, the maximum amount of time, from January 12 to June 13 1979.

3 Penelec had also requested a FERC rate increase based on TMI-2, filing an application l

on July 18, 1979.

FERC issued a deficiency letter (citing inadequacies in the l

1

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Record of Telephor' Conversation 2

July 30, 1979 application) on August 14.

Penelec completed the application on September 1 whereupon FERC suspended the increase until December 1,1978.

Gordon explained that for rate making purposes, ITC is flowed through to customers ratably over the life of the asset. This circumvents the Internal Revenue Regulation requirement that the benefit not be passed on to customers all in one year.

He was not sure of GPU's exact position with regard to the Pa.-Md.-N.J. Pool, but believed GPU has been in a deficit position both on purchased power and capacity for many years. Mr. Gene Ball, 275-4693, may have additional information on the Pool.

The analyst on all three GPU subsidiary rate cases is currently participating in the rate cases and therefore cannot discuss them at this time.

R. L. Vandenberg i

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RECORD OF TELEPHONE CONVERSATION July 27,1979 10:00 a.m. - 10:10 a.m.

Mr. Lorin H. (Mike) Drennan Chief Accountant, FERC g g, ygg'f Room 3410 North Building 825 North Capitol Street Washington, D. C.

20426 Since Mike had only a few minutes at this time, I quickly went over the question areas I wanted to discuss later on either with Mike or members of his staff.

1.

Since Met Ed anticipated and needed additional financing in 1979 (per SEC Form 10K and FERC Form 1) would having TMI-2 in commercial service by the end of calendar year 1978 affect the financing alternatives available to Met Ed or the cost of the various alternatives?

Mike believed the commercial operatien decision would have an impact but could not answer definitively.

Perhaps a commercial operation declaration was a precondition to making TMI-2 bondable plant.

2.

What are the FERC criteria for changing from CWIP to Plant in Service?

Merely at end of test period.

3.

Does Met Ed receive benefit from Investment Tax Credit or is benefit

" flowed through" to rate payers?

(will discuss later) 4.

When does FERC's 120-day test period start for a nuclear unit and did Met Ed file with FERC on explanation of why TMI-2 testing extended beyond 120 days.

This report would have been referred to the Office of Electric Power Generation.

5.

From the information in the FPC Form 1,it is n9t clear if Met Ed/GPU was in a surplus or deficit position with the Pa. N.J.-Md. Pool. What was status before and after declaring TMI-2 to be in commercial operation?

l

r Record of telephone conversation 2

July 27, 1979 Will probably need additional information from Met Ed to supplement FERC data to determine position with pool.

6.

What was the status of TMI-2 in FERC rate case?

FERC rate people may have answer.

7.

Need copy of FERC Uniform System of Accounts with full explanation.

Code of Federal Regulations, Title 18, Parts 0-49 latest edition 4/1/79 contains complete set of accounts for electric utilities and explanations.

Record of telephone conversation July 30, 1979 Mike Drennan called again,10:30 a.m. Monday, July 30, and provided the following information: '

l.

Met Ed did not submit a report indicating that test period extended beyond 120 days so FERC assumes that test period was less than~

120 days.

2.

FERC conducted audit of Met Ed in 1978 for year ending December 1977.

Purpose of audit was to assure compliance with FERCts Uniform System of accounts particularly to assure correct classification and reporting of plant expenditures, 3.

Met Ed, per 1978 FERC Form 1, was clearly in a deficit position with respect to ParN,J.-Md. Pool. Could have been caused by coal strike, 4.

Mr. Gordon Murdock, Office of Electric Power Regulation, 275-4667 has worked on TMI and is available to provide more detailed answers to our questions, R. L. Vandenberg i

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/l gv..... "e RECORD OF TELEPHONE CONVERSATION JULY 26, 1979 2:00 p.m. - 2:30 p.m.

Mr. Sheldon Chasson

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Director, Accounting and Auditing Division Rural Electrification Administration 447-7221 I asked Sheldon two questions:

1.

What are the accounting criteria for transferring nuclear plants from " Construction Work in Progress" (CWIP) to " Plant in Service"?

2.

Would a utility (or a coop that issues bonds commercially) ever have an incentive t3 bring plant into commercial service in order to either (a) secure good bond ratings, or (b) maintain require-ments of indentures of existing bonds?

Sheldon responded to question No.1 that accounting classification always follows the engineering criteria. The constructing engineer (and also the consulting engineer, if any) must issue a written certification that the plant has passed all appropriate tests and is complete and ready for service.

The certification will specify a completion date. The certification is the basis for the accounting change from CWIP to Plant in Service and is also the basis for halting the capitalization of interest during construction (AFC) and beginning depreciation.

There are specific engineering criteria to be fulfilled in order for engineers to sign certification.

Also suggests I call Mr. Mike Drennan, Chief Accountant for FERC.

Phone:

275-4031 - 825 North Capitol Street.

Regarding question No. 2, he remembers a case where a utility requested a rate of return increase because a plant was completed and came on line prior to projected date of service.

However, he is not sure if plant in service vs.

CWIP status affects bond rating decisions. Basic financial tests are: 1) Times Interest Earned, and 2) Debt Service Coverage. Believes basic questions to ask investment specialist are:

What profile analysis is performed?

What ratios utilize plant in service and CWIP amounts?

(Note: Moody's, per my phone call last week with Peter Jodrosick, is sending us copy of most recent review of Met-Ed.

This should disclose any profile analysis and ratio bests used in determining bond ratings.)

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July 26, 1979 Sheldon will send an example of an engineering certification of the type relied on by REA in their audits of electric coops.

R. L. Vandenberg

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RECORD OF TELEPHONE CONVERSATION July 19,1979 Mr. Tom Fendrick Managing Vice President, Public Utility Ratings Standard & Poor's Corporation 212-248-2532 S&P is now in process of updating Met Ed rating in light of Pa PUC. decisions in June.

Fendrick will mail us copies of published analyses appearing in

" Fixed Income Investor."

S&P reviews ratings:

- annually

- whenever company has new financing

- major actions

- quarterly review if company has commercial paper outstanding.

Met Ed prior to accident was nearly ready to issue co:miercial paper.

S&P had issued an A 1 rating which Met Ed asked S&P to withdraw after the accident.

Historically, GPU companies were financially strained in 1973/1974, but have become financially more conservative.

Even if TMI-2 had not gone in service in December 1978, first mortgage ratings would have remained unchanged.

S&P considered Met Ed a relatively sound A rating.

Penelec & Jersey Central were both BBB.

Before accident S&P looking to improve Penelec rating from BBB to A since TMT-2 into rate base.

Jersey Central is the fastest growing of three companies; therefore wanted greater ownership of TMI-2.

Jersey Commission approved ownership change, but Pa.PUC did not because Pa.PUC wanted cheap nuclear power owned by company in Pa.

When referring to a company's bond rating, generally refer to rating of senior debt.

For utilities, this is generally first mortgage bonds.

Utility debentures are usually one grade lower than first mortgage bonds.

Preferred stock usually same grade as first mortgage or debentures depending on amount outstanding, etc.

b

~

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Record of Telephone Conversation 2

S&P felt Met Ed's cash position was strong, TMI-l was working well. S&P was looking to see several months of reasonable operation from TMI-2, rather than persistent problems such as at Arkansas plant. As a result, it was incon-sequential to S&P if TMI-2 in commercial operation Dec. 30 or aan, Feb, mar.

dt IW9.

Katings are planned to be long-term ratings and should override -

~any temporary adversity. Also whether Ma Ed/Go" get

=n investment tax credit in 1978 or 1979 wouWave no impact on ratings.

Fendrick believed Met Ed, under current mortgage restrictions could not bond plant unless the plant had an operating license. Believed this restriction was probably solved by TMI-1.

If restriction not lifted, would mean Met Ed could issue only debentures, not bonds and thus would incur higher interest costs.

S&P feels regulatory treatment more important than anything else in rating of public utilities.

Of course looks at interest expense coverage by operating earnings and capital ratios, but these are result of regulatory decisions as much as management decisions.

Many Pa. utilities have had bond ratings reduced over past five years.

Again, with regard to getting TMI-2 into commercial operation and then into rate base, Fendrick notes that in many jurisdictions several months to a year or more often pass from time utility plant changes from CWIP to plant in service to the time the plant is actually considered in the rate base and earning a, return for the company.

Even now, S&P has changed rating only from A to BBB because basically believes (from financial view) there is a regulatory problem not a nuclear problem.

R. L. Vandenberg

)

L

O O

RECORD OF TELEPHONE CONVERSATION July 19, 1979 Mr. Bob Burke Senior Vice President -

Regulated Industries Moody's Investors Service, Inc.

(202) 553-0364 (gjaccc$fik First Mortgage bond ratings now Baa for Met. Ed, Penelec, and Jersey Central.

a (See below for history of rate changes and rating scale.)

Moody's conducts a full scale review every time company has new financing.

However, without files in front of him, difficult to answer questions.

Through 1978 and 1979, before the accident, there was no chance of Met. Ed's bond ratings being upgraded from then A to Aa.

When asked what other than an accident would have caused Moody's to decrease Met. Ed's ratings, Burke reponded that no one single factor would have dropped the rating.

Burke added that Moody's is reluctant to reduce ratings and doesn't li':e to precipitously reduce ratings.

He felt that the delays in putting TMI-2 in commercial service were not such that would cause a rate reduction and that Met. Ed was in position to absorb some delay.

However, sometimes delays can reduce financial protection measure-ments to point where ratings are reduced. An indefinite delay on TMI-2 would cause Moody's to seriously review Met. Ed's ratings.

Transferring TMI-2 from

~ Construction Work in Progress to Utility Plant is an important part of rating determination..fw.% - lbulq 5 e hPac 7 8

Burke can't say for sure if delay of one year in securing investment tax credit would cause a change in Moody's ratings.

When asked to send copies of work papers, Burke responded that he could send copies of published reports but g usually release work papers.

I asked him to call me back when he had the Met. Ed files available, especially the last two reviews in 1978 and first review in 1979.

Either he or Peter Jadrosich will call.

R. L. Vandenberg Moody's Bond Ratings Moody's Pfd. Stock Ratings Aaa Baa Caa aaa baa caa Aa Ba Ca aa ba A

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f RECORD OF TELEPHONE CONVERSATION July 19,1979 Mr.PeterJadrosick' Moody's Mr. Jadrosich will send us a copy of the most recent review of Met Ed done on September 4, 1978.

No other reviews were done from that time up to the accident.

Also, he will send portions of published bond ratings.

He feels that while there certainly is a financial impact of December 30 commercial operation decision, that for Moody's purposes things are just not looked at that closely.

In fact if financial condition (and rating) were dependent on the Dec. 30 decision, then most likely the rating would have been in jeopardy long before.

cl %

Further, it is not to utility's benefit to prematurely }ccicx commercial s

i operation.

In cases like Palisades (Consu nrs Power) and Duane Arnold

?

(Iowa), the plants were declared in comme ial operation, then went out I

of service and utilities couldn't recover from rate payers the cost of F

purchased power and therefore took a beating financially, Also unconcerned whether balance sheet shows plant to be classified as CWIP or Plant in Service; he is concerned only with whether plant is in rate base.

1 R. L. Vandenberg t

l 1

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MEM0 TO FILE Telcon with Jim Augger, General Counsel, Cataltytic, Inc.

7-18 and 7-17, 1979 On July 17 I received an unsolicited call from Jim Augger, Cataltyic Inc.'s g.c.

He said Joe Murphy had contacted him with some confusion over what material I wanted.

I repeated for Augger what I asked Murphy for: a list of subs who worked under Cataltyic from June,1977 to December,1978. Augger repeated Murphy's story of Cataltyic's involvement, which I again set forth: UE&C was the general contractor. Catalytic became involved in June,1977 when it entered into a contract with Met-Ed to:

(1) complete punch list construction items These were items not completed by the general contractor.

Generally there aren't many but in the case of TMI-2 there were "quite a few", according to Agger.

(2) stay on and do supportive maintenance work.

Agger said the company had limited involvement with subcontractors.

Most of the subs were those hired by UE&C who stayed on after the company left. Catalytic worked at the direction of Met-Ed, as did the UE&C subs.

But the majority of the work performed during the period of Catyltic's involvement was done by that Company itself. When he called on 7-18, Agger provided the following list of subs hired by that company:

(a)Modesto,Inc.

-- CRANE AND HEAVY LIFTING WORK P.O. Box 306 (still at site)

Orivigsburg, Pa.17961 CRANE AND HEAVY LIFTING u s Hill Drive Hunningdon Valley, Pa.

19006 (c) Aycock Inc.

CRANE AND HEAVY LIFTING 82 Johns Rd. and Reading RR Camp Hill, Pa.

17011 4

(d) Action Crane Rentals Inc.

CRANE AND HEAVY LIFTING 24 Brookside Dr.

Wilmington, Del.

ELECTRICAL SUPERVISION STAFF (e) Harry F. Ortlip, Inc.

50 North 18th St.

Philadelphia, PA.

19103 In sum, with the excpetion of Ortlip, all Catalytic subs were Crane rental outfits and probably wouldn't prove too helpful on the issues we want to investigate.

O O

AGGER, page 2 Agger said he believed it was " unusual" to have an outfit such as Cataltyic take over construction at the end of a project, as it did from UE&C. He said -- although he couldn't say for certain --

that it "probably indicates some dissatisfaction" with UE&C.

Cataltyi be regreting its involvement now, however; Agger said the company is involved in many TMI-2 related lawsuits.

The company considers this unfair, since it did not build the majority of the plant. However, its name is on the sign in front of the plant and, therefore, it has been named as a defendant.

Agger agreed to cooperate with us.

I told Agger that, in light of the large amount of work done by Cataltyic, it was probable that we would want to talk to some of his people. The problem that he informed me of 7-18 was that the lowest level of supervision in his office of permanent nature was Murphy, the Project Manager and the PM assistant.

Foremen are recruited from the craft (union) list. However. Agger agreed that the company would have a list of those forepeople who were on their payroll during the applicable time period.

I said I would study the issues a bit more closely next week and then get back in touch as to when I would want to talk to Murphy and others more fully. My current throughts are for a trip to Pennsylvania (Philadelphia) in 2 weeks, the last week of the month.

UE&C could also be visited at that time.

dje 7-18-79 t

s

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MEMO TO FILE TelCon with Lbuis Konski, FERC Attorney 7-16-79 L(uis Konski called and we talked about several issues. The initial purpose of his call was apparently to correct my understanding on the relevance of FERC Instruction 9(d) to " commercial operation."

However, after I had stated my undarstanding (that it is a limitation on the period of testing after which an explanation will be demanded by FERC), it was clear that we had no confusion. As Konski restated it: the 9(d) instruction is a reporting requirement; it has nothing to do with when a unit is declared in commercial operation.

If a unit is being tested extensively, a report must be given to FERC.

Konski spoke about the cases currently pending before FERC.

It should be understood that -- unlike' the State regulatory commissions -- FERC still has pending the GPU companies requests for inclusion of TMI-2 in their rate bases.

Penelec filed on 7-78, using TY = 7-78 through 6-79 Med-Ed and JCP&L filed in 11-78, using TY = calendar 1979 (apparently FERC uses future TY)

Penelec admitted that TMI-2 should not be included in the rate base in its TY.

Konski later said that there is some though$ hat Penelec was avoiding (" hedging") the declaration of commecia' operation so as to avoid FERC suspension of its proceeding. Apparently, FERC requires a TY to begin on the date of filing or 6 months thereafter.

But FERC only has a five month suspension period. The alleged Penelec plan was to state that TMI-2 would be declared commercial in six months (at the start of the TY) but -- by that time -- FERC authority to suspend the proceeding would have lapsed (5 months).

FERC also uses a USED AND USEFUL standard, which is basically read to mean DECLARATION OF COMMERCIAL OPERATION and ABLE TO PRODUCE POWER.

The latter standard he latter stated as not involving " irreversible damage." Thus, in some ways this parallels the IRS standard of major failure.

In surveying the different "used and useful" standards I l

discussed the Ohio case and gave him Price's phone number.

He suggested running "used p/2 useful" through JURIS in F.2d, S.C.

and Cir.Cet. modes. FERC decisions are not on JURIS but are available from Federal Power Service (? private group).

Konski's focus now is on the issue of whether TMI-2 should be excluded from the pending rate bases. He is concerned that treatment along the lines of the state regulatory commissions -- exclusion from rate base and N0 AFUDC or other treatment -- will raise a serious public policy problem: another " rush to commercial operation." That is: in l

order to again make money on TMI-2 the company will rush to complete repairs to the damaged unit before it is ready to be put in service.

l That's an interesting idea but I told him this Connission was paying close attention to the repairs to unit 2 and it was unlikely that it would be allowed to t eturn to servic.e until everyone was completely sure that it was reaty to do so.

i

"N O

(J V

t Konski, p. 2 Konski will send us copies of FERC forms 1 for the 3 GPU subsidiaries for the years 1978 and 1979. The consolidated tax returns of the companies are not on file at FERC but Konski intends to seek them via a document request in this proceeding.

Konski called back and asked the question we began this inquiry with:

What are the legal and financial effects of declaring a nuclear unit to be in commercial operation? Apparently he was under the mistaken' impression that the fact the unit was nuclear made us an expert on this matter.

I explained my current understanding that, other than passing reference in the NRC Regs as a time-standard, the date of declaration of coninercial operation is irrelevant to the NRC.

It is my understanding, I told him, that this was an accounting declaration, at which time AFUDC stopped being accrued and the unit was applied to be included in the rate base.

I explained the problem of the regulatory gap: the is, the attempt by the utility to plan the declaration as close to the i,. hase decision as possible so as to minimize the amount of interest creoit lost.

(It was at this the Penelec " hedging" mention, supra.) point that Konski discussed Konski asked several good questions, which I promised to respond to:

1. What was the date of MODEillapproval by the NRC?

2. Name of person at President's Commission who he could contact.

3. Could FERC attend our depositions of GPU personnel? (He said if the NRC objected, he would not seek to attend.

If FERC did attend it would be in a listenting capacity only; it would not ask any questions.)

On a persm note, Konski said he was 2 doors up the hall from Mel Burger and had worked on the St.Lucie case. His home phone is 340-7386.

dje7-16-79 approx. 1:30 p.m.

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O MEMO of TELCON July 13, 1979 Talked with Jean Sass of N.J. Board of Public Utilities, returning her call (attached).

She said that she had mailed to me in today's mail a copy of:

(a) Part I of January,1979 N.J. BPU decision on JCP&L (b) Part II of (same)

(c) Copy of Touce Ross study She also wanted to inform me that the issue investigated in the Touche Ross study -- alleged underfunding of the TMI project, etc. --

will again be subject to investigation and litigation in the rate request increase which JCP&L is expected to request in the near future. (At this proceeding the management study mentioned in the emergency fuel adjustment proceeding will probably be conducted.)

I thanked her for supplying the information.

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MEM0 TO FILE July 10, 1979 RE:' Subs who worked on TMI-2 This date I talked by telephone with a Mr. TDE Murphy of Catalytic, Inc., the maintenance contractor who completed work on TMI-2 after UE&C left.

Murphy's direct number is 215-864-8431(Philadelphia)

The number for Catalytic is: 215-864-8000

Background:

Catalytic was hired in June, 1977 as the maintenance contractor for TMI.

Its job was to (1) do maintenance work on unit 1; (2) to perfonn the tasks required to start-up Unit 2.

Within two months after this contract was entered into UE&C was discharged and Catalytic took over its functions. (Q: Was UE&C discharged as planned or was it released over some dispute? Murphy made it sound like the latter.) After UE&C left, Catalytic's job became the following: (1) assist GPU in administering the subcontracts held by UE&C; (2) issue new subcontracts as needed to complete the work; (3) do some direct hiring to have work done which UE&C itself would have done.

This expanded work was under both construction and maintenance contracts, as appropriate.

Catalytic is still at the site today.

Mur hy asked for some time limitations on a list of subs because of their continuing involvement.

I said June, 1977 - December 1978 was appropriate. I explained what our reason for seeking this information was and it seemed to help him limit the list, for example he will not provide those subs who worked on roads, etc.but only those who worked on plant itself.

I also told Murphy that at some point we might want to talk to Cataltyic i tsel f.

(He is fairly cooperative, having served as an Asst. Manager for Operations in Skenecteny (sp.)).

He said he would gather the list and call me by phone to confirm its contents.

dje7-10-79 CROSS

REFERENCE:

On 7-9-79 I spoke with UE&C. See letter of 7-10 in correspondence file.

1

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MEM0 TO FILE -- Connercial Operation; State PUCs July 5, 1979 Spoke this afternoon with JEAN SASS of the New Jersey Board of Public Utilities (direct phone -- 201-648-2417)

She said Jersey Central Power and Light had just completed an expedited hearing on increasing their energy adjustment clause.

Sass agreed with my statement that this was designed to deal with the issue of replacement cost power. Jersey Central filed the request sometime the end of May/beginning of June.

Sass said that decision of June 18 contains a discussion of TMI-2 and its place in the rate base.

I said I would look it over before doing anything more. She said if I had questions she couldn't answer she would refer me to the two men who handled the case previously.

She seemed in a rush so I didn't get all the information I wanted.

The following questions should be asked next time:

1. In the 1-79 proceeding, what was the test year?

2. What is the significance of " commercial operation" in N.J.?

3. What does she know about allegations of rush to commercial operation?

N.B. Sass did note that N.J. uses the FERC Unifonn System of Accounts.

evans 7-5-79 N.J. Board of Public Utilities Newark, N.J.

general phone: 201-648-2026

O O

Mdh-A. -.. _

QA s'g n

Jere are the materials you c

have requested.

'\\:

8 Thank you for your interest.

g

/7' If we can be of further I J-assistance, please let us know.

NEW JERSEY s

. DEPARTMENT OF ENERGY lu1RD OF PUEEIU UTILITIES 101 Commerce Street

)

Newark, New Jersey 07102 9

Gen $.'es en Ga.s1

_ A d.: n.s be h<e k>s is b f gt dd/- 6 Y8-J V/7

O O

MEM0 TO FILE -- Sources, Comercial Operation July 11, 1979 This date I spoke by phone with Connie Six, Director of Conservation Economics and Energy Planning at PaPUC. He was returnin on issue of PJM (Pennsylvania, Jersey and Maryland Pool)g my call We discussed the $23/kw penalty built into the PJM agreement. Six said this provision is designed to prevent one of the pool companies from not carrying enough capacity to meet its load and thereby

" riding" off the other companies. He agreed it was a stiff penalty.

In fact, Met-Ed embarked on its TMI (both 1 & 2) project around 1965 - 70 because it was accused of riding tTie pool.

EPA was also on Met Eds back because its old, coal units were heavy polluters.

Ergo, the decision to build Three Mile Island.

However, with TMI-1 on line in 1978, Met Ed was meeting its load.

That is: it was not being penalized by the PJM Pool, although it was buying economy energy (such as hydro power).

Of course, in its current state Met Ed is buying from the pool and the penalty provision would be in force, except that Six believes a waiver has been granted.

The PJM Pool appears to be fairly sophisticated, operating much like NEP00L in the following manner: centralized pool-operated dispatch (Valley Forge, Pa.); planning coordination (no plant can be built until pool members have agreed and studied its integration into the pool); buying and selling with other pools; shutting down least economic unit in pool system.

The GPU companies operate as if one utility from the systems dispatch center in Reading, Pa, That is: economies are first shared among the GPU subsidiaries before the pool economies are considered.

The conclusion from the above is that the PJM pool played a very small role in providing an economic incentive to get on line, other than the simple availability of generation for sale.

Six l

agreed Met Ed would have been in a sell mode, but noted that they would have sold their older, more expensive power -- not TMI-2.

Whether there was an economy market for that power is questionable and that appears questionable in light of the "everyone carry their own load" philosophy of the pool.

I For more infonnation contact WILMER (male) KLEINBACH, Manager of PJM Interconnection, in Pennsylvania (Philadelphia) at 215-666-7560.

dje7-11-79

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MEM0 TO FILE -- Sources, Commercial Operation July 11, 1979 I had another discussion with Fred Bones of the IRS today on the question of the tax criteria for ITC and depreciation.

I explained the TMI-2 history: synchronization early in the year (date still unknown -- ask), followed by NRC granted OL (presumably the synchronization, which requires greater than 15% power from the reactor was obtained during the testing period which produces that much), followed by shutdown to replace major defect, followed by return to grid (,_ synchronization) and finally commercial operation on Dec. 30.

I asked if this would be sufficient for tax treatment in 1978 TY.

I apparently have missed something, since Fred said the key was why did they shut down?

If they shut down to make a major repair of a defect found during start-up testing, they would have to have synchronised again during the year and remained operational without a major defect.

Thus, the key appears to be wbther they operated after repairing the steam valves without another major failure. Apparently the numerous minor ups and downs TMI had before the end of the year (and thereafter) would not be enough to prevent the companyyfrom getting the tax credit.

Bone instructed me to read the material he had earlier cited and suggested I contact poeple in the Philadelphia office to see if they audited the return of Met Ed on this issue. He suggested calling:

Leo Frangepani (ph. sp.) at 215-597-4000 Mr. Kyhkyuen (CQ) at 215-597-4093 h Lla U h % $ 5 5 [T~ DL{ ~9qqd I

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a MEM0 TO FILE Commercial Operation -- Tax Advantages After working through the IRS bureaucracy the following person was identified as our most valuable contact:

FRED B0NE Engineering Branch 566-4440 or 566-4463 Bone noted at the outset that there are no special tax advantagesd to any utility other than those available to all under the Code, Regs, and RevRulings.

,There is a new, relevant revenue ruling involving a plant in Minnesota:

(REV.RUL.79-98) fBone summarized it as holding that a unit gets ITC treatment and k.

/ depreciation when first placed in service -- that is, when operational, y

although not accepted from the contractor until a later date (a turnkey approach).

Bone said the unit in Minnesota was on line in March and producing

/

electricity which was s'old.

It got ITC for the entire year and cf

(

depreciation treatment as well.

Bone said the IRS' two conventions 0[g for depreciation allow treatment by the half year: that is, if the c

unit was comercial in the first half of the year it would get qf 8167 treatment for the whole year. (1f 2,J I/t - N yreat m f,}

The key for tax treatment is COMMERC-IAL-OPERATION-- when the unit was OPERATIONAL. This has two components:

a. synchronization of the generator with the grid b.iperational thereafter without failure

. Another TP]had synchronized and then had a failure; he sought tax q

pD treatmentkhic)htheIRSdeniedin private ruling. He has taken themtofourt. tvo gsca.UL Each case is, of course, judged on an individual basis. Whether a unit which was down 197 of 284 days following synchronization (?

when TMI synchronized) would be operational in that year.

Bone called that a " good close question."

Bone noted the Reg writers should have had something more definitive th MODerational" but did not. The date of declaration of COMMERCIAL

?

OPERATION has NO TAX RAMIFICATIONS -- although Bone agreed it has state r latory meaning.

Must se REV.RUL 79-98 (Internal Revenue Bulletin 3-19-79)

Section 48 regulations Cther IRS contacts: Bill Dwyer (Sec. 48 area but not engineering) 566-3755

,, W'to y

James Ranson (? area) 566-4495 g 'g O

Basic IRS Tel. No.

566-5000

O O

IRS 7-3-79/page 2 The issue all of this raises, of course, is that there could have certainly been presure to complete the repairs necessary to TMI-2 in order to be synchronized and operational be the end This information makes the period following the granting of an OL to declaration of commercial operation vital: during that period were there shortcuts taken t3 enable the plant to get operational in December and ergo take the ITC? Who did this work? What do the I&E inspection reports of this repair show?

The point is: that may be tensior between the money available from tax treatment and safe construction or repair of a unit.

If that tension exists, and even assuming that the utility is neutral, what counterbalances that tension? The conclusion seems to be: the I&E audit inspection.

Is that enough?

N.B. We should contact Bone again on the pas-through issue.

dje7-3-79 l

O O

^

MEM0 TO FILE RE: Telephone Conversation with Jim Pretti of California PUC (Financial Analyst)

TEL: 415-557-3119 Date: July 2,c1979 Jim Pretti had been referred to me by Walter Cavagnaro of the CalPUC.

He appears to be an accountant and he is especially knowledgeable in utility tax matters (for purposes of caluclating operating expenses).

He outlined amendments in the Investment Tax Credit provision (26 U.S.C. 548) which allow utilities to take investment tax credits (ITCs) for qualified progress For example, PG&E took $3.5m (payments on major uncompleted projects.

in 1976), $7m (in 1977) and $13m (in 1978) on Diablo Canyon. However, he noted that this provision wasn't applicable until 1975 so probably wasn't involved in the TMI-2 treatment.

The "old" method of ITC required that the plant be in a certain phase before ITC was available.

Pretti said this phase required:

a final engineering repor1 that the plant was complete and ready to begin service.

Note that this can occur during the testing phase.

The CalPUC has apparently in the past read commercial operation (that accounting shift from CWIP to rate base) as the appropriate time for taking tax advantages. This preceeds on the assumption that a utility will declare a unit operational as soon as its ready to begin producing power.

I did mention our finding that commercial operation may not be crucial from a Federal tax standpoint.

The CalPUC requires a final engineers report. This report states that construction is complete and the unit is ready to begin service.

This report is certified and the Commission will not shift to rate base treatment until it is filed. Pretti said that this requirement causes massive amounts of paperwork to be completed in December.

Utilities must close the plant on the books to get the ITC--that is:

they must close out the work orders. Pretti believes much work is done before December but units--seeking the ITC -rush to complete' the paperwork and declare commercial operation in December. This raises the possibilitity that the high statistical December declarations is simply paperwork which has been left behind.

Pretti agreed with Cavagnaro's comment that the rate base proceeding rationale for rushing is nonexistent in California, because of the future TY procedure.

In California, there is a schedule for filing rate proceedings: there is an attempt to insure that the rates ordered are put into effect during the TY.

Pretti saw the same potential for abuse of AFUDC we have previously heard. Staying on AFUDC allows a utility to continue accruing the money on the plant, while shifting off it ends capitalization of the interest costs. This interest seems lost forever and is simply part of the price of running a plant, it seems.

l w-

O' O

'r MEM0 TO FILE Jim Pretti, page 2 i

Note that ir. California they have CWIP.

Pretti noted that AFUDC is part of CWIP. (That is: that capitalized interest cost is to the consumer as part of Construction Works In Progress) passed on 4

Pretti agreed to be available. for future consultation on these matters. Note that he does not have an IRS contact. When there is a need for such guidance the CalPUC requests the affected utility to seek a REV.RUL.

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MEM0 TO FILE RE: COMMERCIAL OPERATION July 2-79 Spoke this morning with DENNIS PINES, Legal Director, Ohio PUC, re: article in WALL STREET JOURNAL of 6-29.

Pines said the-issue in the Ohio case is exactly opposite that which I described as the TMI-2 issue. There he said (in the Davis-Besse matter) the assertion was that the plant was included in the rate base too early.

If anything, the utility was slow in putting the plant on line, as it was achieving rate base treatment even before it was producing net electrical energy.

There was no evidence of a rush, Pines said, and all parties before the Ohio S.C. so stipulated.

Some key dates in the Davis-Besse plant, according to Pines:

synchronization (of generator w/ system?) -- August 28, 1977 net electrical energy produced included in rate base (still in testing)ll -- Sept.

20, 1977

-- Sept. 1, 1977 declaration of commercial operation

-- Nov. 21, 1977*

(accounting shift from AFUDC)

(*--NRC Graybook shows Nov. 25, 1977 as date of comercial operation)

Pines agreed to send me a copy of the Ohio S.C. decision and the relevant portion of the PUC decision.

Note that Pines was not the atty directly responsible for the Davis-Besse matter but was the supervisor of that Atty-Examiner.

1/ The question, according to Pines: "Was the unit 'used and useful' on this date?"

dje7-2-79 I reached Pines by calling 614-466-3016 i

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nuclear power plant here, has one more.

After the Three Mile Island, Pa., nuclear

~

I accident, federal regulators criticimi it for j' sloppy safety practices, and the unit was 1,,,

4 one of several cited in orders to make safe-

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ty related changes before resuming opera- (,

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m tions.

c Now, the Ohio supreme court w tha t

plant was cebnted _tno early as part of 'Ib-n o

ledo Edison's rate base, The court rukd that 4

C f'

the state Public (f rility ecmm'ee%n ertwf in n

ene t r f% r t.e rA nt when it emtM ToIMo p y

Emnn m rA a r-onne ennal rete increasp s:

T fn Jure 1978.

d, 3-For Toledo Edison, howeser, the rulirg

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. Initially just means more litigation. The util.

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ity commission hasn't indicated what it will l

8 do; meanshile, the rate increase remains in lr 8

' effect. Toledo Edison vowed to" explore fur-

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I ther legal proceedings." including an appeal directly to the U.S. Supreme Court '! neces-p sary.

The Ohio court's' ruling cime in a chal-

'8 j_ 1eere of the rate increase IQt by the Ohio ome, nf rnac 3mers C mmelIJohn P.

'% kins associate consemers' counsel, I

e' outcome as a ' major consuner (I

wui victory" and asserted t'.iat it could save Ohio residential consurr.ers $6 million to $8 J

m!!!!on in future electr city bills.

Ifowever, he co. ceded that that stuld I

happen only if the state utility inard or-dered lower rates in response to the court's ruling. There isn't any provision in state law y

for the commission to order refunds to cus ' j tomers for the higher rates that have been t

^ charged over the past year, he added. 7 4

3 The _ dispute l's over a technical interpre-tation et the <tnta'e e an-i u.6 m coE I

'rion for the inr%n nf a eeneratine tinit inf i the utme

"'a Mu The et*ta utthty com-J mission find accepted Toledo Edison's argu-ment InaL Ine un n onx piant net me g

ihndard 'wnnu 1: had Deen sDowfl ODerr gby Sect.1. W7. the care or me rm _

i b-110 wever, the Ohio supreme court up-i

.e. the more-often used rule mat me plant a

'shouldn't have been included until it was put into commercial operation, which was Novi g

21. 1977.

i g

In a statement. Toledo Edison main-1 t

tained that "our customers would find that t

the lower costs of operatirig the Davis-Pase r nuclear unit are benefiting them. If the unit k

wasn't included as a facility on which reve-i Y

i r

~N 3

g@

nues can be earned during the period in a

i Tl question, then neither can the lower-cost c'p-s 6 Q,,

W M<L' erating expenses of that period." It argued that a rate reduction thus isn't justified.

g.

I The 906,'000 kilowatt Davis-Iiesse' unit t

has been closed since March for maintenance d

s t

)l and sa'ety checks. A company spokesman said safety-related changes ordered by the Nuclear Regulatory Cominission on the Bab-1 cock & Wilcox-built reactor have been com-i s

pleted and the company is awalttng NRC

)

l clearance to return the unit to operation.

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MEM0 TO FILE RE: Telephone Conversation with Walter Cavagnaro, Staff Director (? title),

California PUC On June 28, 1979 I contacted Mr. Cavagnaro, a resource person suggested by Bill Busbaum at NARUC (see previous memo to file).

After briefly outlining the issue of commercial operation which we were investigating I asked Cavagnaro to give us whatever assistance he could or refer us to someone who could assist us.

He said the issue of " commercial operation" is one of State law and it would be important for us to speak to the PaPUC.

I told him we had already done so.

4 We spke briefly about the California system.

He said since they used a Future TY the exact date of commercial operation was not too critical. He mentioned something about all states modifying their TY procedure, which I took as a vague reference to something in PURPA but can't be sure.

Cavagnaro did say that commercial operation date might be crucial in some proceedings.

For example, in Calif. they're going to use a special proceeding for determining when Diablo Canyon can be included in PG&E's rate base--and they will thus depart from their usual practice.

He suggested the large number of plants declaring themselves in commercial operation in December must be related to tax advantages because it would be highly unlikely all those units would be in the midst of rate proceedings by which they could take advantage of operation in a particular year.

Cavagnaro referred us to a financial person on his staff:

Mr. Pretti CalPUC Tel: 415-557-3119 (Addenda: Pretti called afternoon of 6-28 when I was away from my desk.

I could not reach him that afternoon and left a message for Vandenberg to try on 6-29.

However, he was away for training on that date.

I will try on 7-2) dje7-2-79

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MEM0 TO FILE COMMERCIAL OPERATION, paPUC On June 26, 1979 Larry Vandenberg and I met with Joe Malatesta TVpt a m and Al Johnson of the PaPUC legal staff to discuss the issue of commercial operation. The bulk of this meeting is recorded on ts; as (2).

Noted that the Consumer Advocate position in Penn. is statutorily" created. Attorney handling case for this office in most recent proceeding was David Barasch.

Malatesta had available a great deal of material for us, including recent orders of the PUC involving Met-Ed and TMI and the most recent decision of 6-15-79 on the pass-through matter.

He also gave us a copy of the PA. Statutory provisions, although he noted the law in Penn. 12 so broad its questionable how valuable the stats are.

Briefly, a utilit files for a rate increase 60 days before they want it to go int effect.

The law then provides for an autilomatic 7 months for an nvestigation. At the end of that time, the increase must be granted unless the Comm. has completed its study and decided on a lower increase. The increase can be granted subject to a refund. Note that ALJs usually hear a case first with review by the Commission, although the Commission itself heard the most recent case to expedite the matter.

TMI-2 is now entirely excluded from the Met-Ed and Penelec rate bases.

Joe had assembled copies of the TR in the most recent proceeding.

They are available from Mohrbach and Marshal, Inc.; 27 North Lockwillow Ave., Harrisburg, PA.11712. The DC KET NOS. are C-79040814, C-79040815, and C-79040816.

Whether a generating unit is "used and useful" is a mixed question of law and fact.

In Malatesta's opinion its when the unit is generating "useful power."

(At this point Al Johnson joined the discussion)

PaPUC utilizes the FERC Joint System of Accounts. Thus, they utilize the shift from AFUDC to capitalization, as does FERC. Johnson explained AFUDC as follows: during the construction of a plant, the cost of borrowing money to build the unit (debt financing) is kept in a spearate account. When the unit is capitalized into the rate base, the money represented by this account is capitalized as well, Thus, the interest cost is eventually recouped from the rate payers just as is the concrete and steel.

(COMPARE CWIP which immediately passes the intsamst cost on through to the customer.)

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P PaPUC page 2 Johnson sees large advantages in a plant remaining on AFUDC to a certain point.

In addition to the uncertainty of a rate proceeding, the utility is capitalizing its interest costs -- this could be lost in the " gap" before the regulatory commission finally acts.

In fact this gap seemed to be a central point. Assume a plant declares itself comercial on 12-30.

If the PUC does not act until 10 months later, during that " gap" the utility is not being compensated for its interest costs.

Thus utilities apparently try to time these two occurances as close together as possible:

they want to declare commercial operation and gets the unit included in their rate base the next day. -Of course, this doesn't normally happen.

Even TMI-2, which went commercial 6n 12-30-78, did not get relief (inclusion in the rate base) until 3-29-79 (of course, that was immediately suspended).

On the issue of TEST YEARS:

According to the papers we were given, the TY for the Penelec proceeding was calendar 1978. BUT the TY for the Met-Ed proceeding was such that it e ended on 3-31-79.

Both Malatesta and Johnson stated that from their perspective THERE WAS NO ADVANTAGE TO DECLARING COMMERCIAL OPERATION ON 12-30-78 FOR MET-ED because of this arrangement.

The members of the PJM pool were discussed and are listed on the copy of the agreement we received (also on tape). Neither attorney was familiar with its operation and suggested we speak to Connie Six (CQ--that's his name) if we want more infomation. Johnson noted that there was a penalty provision in the Pool agreement but did not know if it was involved in the TMI matter.

Further notes:

Johnson's phone: 717'i83-2804 Met-Ed rate attorney (local): Sam Russell of Reading, Pa.

Most relevant TR portions: Dieckamp: all of 5-2-79 5-31-79 (pp.1485-1572)

I would recommend getting all but imagine it would be expensive. We have Dieckamp's prepared testimony from Liberman, which he simply read on the stand. The issue wasn't explored in depth in the proceeding because Maltesta didn't believe it relevant to the proceeding.

(NOTE: Distinction rate attys make between RATE BASE -- all property included in proceeding from which rate of return in calaculated and BASE RATES -- rate of returr. (profit) plus Net Fuel Charge (pass through matters). This was raised by Widoff's (pronounced MXX WHID-0FF) quote in newspaper that $33m of rate base was TMI-2.

In fact that

$33m was portion of base rates traceable to TMI-2, actually amount in j

rate base was higher. See TAPE discussion (Tape 2 toward end)).

l D. Evans 6-27-799

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MEM0 TO FILE Meeting with Jim Petersen, NRR Financial Analysis June 21, 1979 Attending: Evans, Vandenberg, Petersen Petersen allowed us to look through his files on TMI. Mostly the material dealt with financial analysis material, including a Petition to Amend the TMI-2 CP to provide for different shares of ownership among the GPU companies.

(This was subsequently withdrawn when the PaPUC refused to permit realignment.)

Petersen's files also contained many press clippings, including one from the WASHINGTON STAR of April 5,1979 entitled,

"'78 OPENING SAVED POWER COMPANY MILLIONS." (looks like a sidebar piece).

(We should attempt to get WASHINGTON POST, WALL STREET JOURNAL, NEW YORK TIMES reports of same.)

Petersen did not have the 1978 Annual Reports of the GPU Companies.

Larry spoke to Petersen about Moody's and got some names to contact.

Petersen's major interest now seems to be in what effect the TMI accident will have on future financing of nuclear units--and not the past problems.

There is information in his files from the " financial qualification" review for Met-Ed's 1969 CP to build TMI-2. However, he noted that it wasn't very elaborate at that time. The financial analysis is now placed in the docket as a supplement to the SER although at that time it may simply have been part of the SER.

Financial analysis is also placed in testimony, especially if there is a contested hearing.

Petersen said he would put together a list of 3 intervenors who are especially perceptive in this area for Larry. (E.G., he mentioned the Pilgrim proceeding.)

Petersen's phone is: 27331; his office is Rm. 262 in the 3 story Phillips Building. He referred us to several people, including his former boss, Walter (?) Meltz, now serving on a D0E/TMI Task Force and Frank Dorsey at PPUC (office of special assistance, 717-787-1827).

After speaking with Petersen we saw Ira Dinitz (AIG) and Jerry Saltzman (AIG). They had copies of the 1978 Met-Ed report but would not let us have them, they are to request them for us and send to Larry. Larry also asked for the Attorney General's review letter in the Forked River proceeding. (TMI was licensed before the antitrust review).

N.B. Forked River involved a GPU review, not the individual companies.

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NOTE TO FILE

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Telephone Conversation with Fox Trowbridge 6-19-79 Will send some material prepared for Presidential Commission, especially testimony of DiecKamp before PaPUC on issue of commcericla operation, tax advantages, etc.

But he said we don't get in situation of duplicating for Nrc all things sent to Pres. Comm.

I asked him what he me.nt--what things are being made available to Pres. Comm that we won't get.

For example, he mentioned there is a COMMERCIAL REVIEW BOARD within GPU which decides when a plant is to go into Commercial Operation, for purposes of pool participation.

I asked him to send us the material we had originally agreed sd /

upon and '

would later consider additional requests.

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NOTE TO FILE Telephone Conversation with FERC Personnel

. EEEBk 6-19-79 3 Ernest Lehman, Economist (reached via 275-4724)

- plant in service" is criteria for inclusion in rate base; TMI-2 in still in that status

-no special advantage in placing plant in operation 12-30 from FERC standpoint

-value of plant is weighed on a monthly basis It was his belief that the triggering device Dr inclusion in the rate base was went the plant was certified as operational.

It was his understanding that this certification came from the NRC.

Louis Konski Attorney (handling TMI-2 rate base proceeding) 275-4227 Konski was unfamiliar with the provision in the Federal Power Act cited by MET-ED.

He said he thought they were confused with FERC filin8 requirements.

c He said FERC was involved in a Penn. Power rate proceeding which had as a test yeat Middle 78 - Middle 79.

TMI-E received its OL in March but had trouble with testing beginning in June, 1978. The point he seemed to be making was that FERC was having difficulty including TMI-2 in the Penn. Power rate base when the plant was having difficulty and was not " commercial."

I agreed to send Konski the following: (1) re'evant portions of 5/30 testimony before Rammi Pres Comm; Rev. Ruling (when it arrives).

Address for Konski Ltuis Konski, Esq.

Federal Energy Regulatory Commission 825 North Capitol St., N.E.

Washington, D.C. 20426

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June 19, 1979

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TelephoneConver tion with DdNV" 5'"

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Jim Liberman of Berlack (sp?), Israel (? & Liberman N.Y.

212-248-6900 L,

o His firm represents GPU in tax and rate matters (as consult to local counsel).

Allegation of tax advantages for going commercial in 1978 is " wrong."

They were looking at REV. RULING 7f-428 (I.R.Bulletin 76-45) (He is to send me a copy) involving anot'ler nuclear plant.

In that ruling the IRS determined 'that a plant which had its OL, had loaded its fuel, had comp 1r c0 preop testing and was at 17% power level, could take ad';catage of the tax investment credit (646 of IRC) and depreciation provisions (%167 of IRC).

The poi-nt is that TMI-2 was at this position long before 12/30/78 when it declared itself in commercial operation. THUS, tax advantages for 1978 were available to Met-Ed even if it had not met the conmercial operation status,

-f

%a r g u n.. _ tg_ayh QWiZdshia]gggyg n,; _..... _. a m

. -,D. - =NfraT tiii s wa s n n M~. - -

.. ~ _ _ _

1978 -

m-uen w

+: rei m

r che :::mr "1 icr # M r tM- % in 1978.-)

w COMMERCIAL OPERATION is important only for accounting purposes.

It is a declaration by a company that it is shifting over from AFUDC (r- --" gx allowance for funds utilized in construction --

which apparently is a form of earnings) to the rate base / rate of return capcitalization procedure.

FERC is involved in that a failure to go " commercial" within 120 days after start-up testing must be reported to FERC; thists.is designed to mitigateg against )

abuse of AFUDC.

p In sum, it appears a declaration of commercial operation has no tax advantages. Of course, this there is an advantage from a rate making point of view.

(E.g., for TMI-2 there was an on-going rate prcoeeding and 1978 was the test year; inclusion in that test year rate base would obviously be very adtantageous to the company.)

Li erman said a high level of management decide /s when to make that switch--and he mentioned something about SWI GPU Service.

Perhaps the Trowbridge material will shed some light on this, evans

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4 Meno to File Telephone Conversation with FOX TR0WBRIDGE Date: 6-8-79 Pursuant to Wayne's Request to find out what " commercial operation" is important for, I called Fox Trowbridge (after being so referred by Bruce Churchill

)

Trowbridge told me commercial operation is important to the rate treatment of Met-Ed but not for tax purposes.

He said he was assembling information for the President's Commission under a request for all documents " relevant to the decision to put TMI in operation." This information is du(6-15 but Trowbridge said he would not meet that deadline.

I said I would call back in about a month to get the 19Finformation.

D. evans (typed 6-28-79) i i

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NOTE TO R.IKRX FILE j

Rana Contacts for Tax / Financing assignment:

Bill B Nusbaum, Asst. Gen. Counsel, 4

National Association of Regulatory Utility Commit sioners i

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contact name given: Walter J. Cavagnaro l

California PUC S.F. Tel = 415-557-3927 Chariman, Staff Subcommittee or, Electricity i

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