ML19308C381
| ML19308C381 | |
| Person / Time | |
|---|---|
| Site: | Crane  |
| Issue date: | 09/26/1979 |
| From: | Evans D, Graham J GENERAL PUBLIC UTILITIES CORP., NRC - NRC THREE MILE ISLAND TASK FORCE |
| To: | |
| References | |
| TASK-TF, TASK-TMR NUDOCS 8001230351 | |
| Download: ML19308C381 (49) | |
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O N U CL E A R R E G U L ATO R 'I CO MM I S S I O N I
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IN THE MATTER OF:
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TMI SPECIAL INQUIRY DEPOSITION i
DEPOSITION OF JOHN GRAHAM O
Place. Parsippany, New Jersey Date - Wednesday, September 26, 1979 pag s 1 - 48
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NATIONWIDE COVERAGE DAILY
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1 NUCLEAR REGULATORY COMMISSION p)
THREE MILE ISLAND SPECIAL
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2 INQUIRY GROUP O
~~-~~---------
4 DEPOSITION OF JOHN GRAHAM 5
0F GENERAL PUBLIC UTILITIES 6; by NRC/TMI SPECIAL INQUIRY GROUP TRANSCRIPT I
OF 7
INTO THE ACCIDENT AT THREE MILE PROCEEDINGS 8
ISIAND i
9 10 GPU Headquarters 260 Cherry Hill Road 1I Parsippany, New Jersey Wednesday, September 26, 1979 12 O
13 APPEARANCES :
14 DAVID J. EVANS, ESQ.
R. LAWRENCE VANDENBERG 15 NRC/TMI Special Inquiry Group 16 JAMES B. LIBERMAN, ESQ.
General Counsel for General Public Utilities 17 DOUGLAS E. DAVIDSON, ESQ.
18 1
19
-J 20 REPORTED BY:
MARGARET J. TEILHABER, C.S.R.
O 22 23 j
24 pea-r.e.r.i n.no,t.,s, inc.
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2 i
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INDEX f(
2 WITNESS DIRECT 3
JOHN GRAHAM p\\m/
4l By Mr. Evans 4
1 Si By Mr. Vandenberg 22 l
6!
l 7
8 9
EXHIBITS 10 NUMBER DESCRIPTION FOR IDENT.
11 1113 Letter dated July 19, 1978 15 12 1114 Response to R.C. Arnold 15 O
~
20, 1978 23 13 1115 Letter dated 0ctober 14l l
15l l
16I 17 l
18 19 c
20 21 0
22
()
24 in-ree:<ai neportees, ine.
25
3 1i MR. EVANS:
This is a deposition of Mr.
2 John Graham being conducted by the NRC/TMI Special 3
Inquiry Group.
It's being held at headquarters 4
of GPU in Parsippany, New Jersey, on September 5
26, 1979.
6 Present in addition to Mr. Graham is Mr.
7 Jim Liberman, general counsel of GPU.
With him 8
is Mr. Doug Davidson.
9 Also present is Larry Vandenberg and 10 David Evans of the Special Inquiry staff.
II Mr. Graham, have you had an opportunity 12 to read the Witness Notification statement and O
13 the letter addressed to you by Mitchell Rogovin I4 which I had given to you:. earlier today?
15 MR. GRAHAM:
Yes, I have.
16 MR. EVANS:
Do you understand their con-I7 tents?
18 MR. GRAHAM:
Yes.
19 MR. EVANS:
Do you have any objections 20 to proceeding at this time?
21 MR. GRAHAM:
No.
O 22 MR. EVANS:
Would you please stand and 23 raise your right hand.
24 J0HN G R A H A M, having been duly sworn according to law, Ace-Federal Repotters, Inc.
t 25 testified as follows:
5 1
DIRECT EXAMINATION g
()
2 BY MR. EVANS:
n 3
Q Would you state your full name for the record, V
4 please.
5 A
John G. Graham.
6 Q
Mr. Graham, what's your current position with l
7 GPU or GPU Service Corporation?
8 A
I'm treasurer of General Public Utilities Corporation.
9 I'm vice-president and treasurer of GPU Service Corporation.
10 I'm also acting treasurer and secretary of Jersey Central Power 11l and Light, just for a few weeks.
12 Q
In that position to whom do you report?
O 13 A
Verner Condon, chief financial officer.
14 Q
Could you briefly describe your areas of re-15 sponsibility in your current position.
16 A
For GPU and GPU Service Corporation, I am responsible 17 for the cash management in investor relations, bank relations, 18 pension, fund administration, pension plan administration, long-19 run financial planning for the whole GPU system and I coordinated-20 the activities of the treasurers of the three operating com-21 panies.
O 22 Q
Do you in your background have some experience 23 with regulation matters?
,o) n 24 A
By education, I'm an attorney and I practiced law in Ace - Federal Reporters, Inc.
25 the field of regulated industries for quite a while.
I teach
)
Graham - direct 5
1 in that field and I have functioned in that field with the GPU 2 system.
p 3
Q Did you have any involvement in that field before V
4 coming with GPU?
5_A Yes.
I practiced law in New Jersey and in other states 6l in the field of regulated industries.
I 7'
Q Did you have any public employment in the area
)
8 of utilities?
9 A I was not employed but I was retained as what is called 10 rate counsel in New Jersey to represent the public in rate pro-11 ceedings in many gas and electric and telephone and water company 12 cases including cases involving the Jersey Central Power and Ligh t.
O 13 Q
In your retail rate work for GPU, and I am assum-14 ing it was retail, did you do wholesale work as well?
15 A You mean before I came with the company?
16 Q
No.
I now mean for GPU.
17 A I never represented the company in any wholesale cases 18 but I was involved in them to some extent.
l9 Q
Let me focus on your retail rate work and ask if
~
in your employment for GPU you were involved with retail rate 20 1
21 cases involving-Three Mile Island Unit Number 2.
o 22 A When I was with Jersey Central Power and Light, I was in-23 O
volved in the retail New Jersey rate case that was filed in an-O 24 ticipation of TMI-2 being placed in commercial service.
Phase 2 Ac2-Federal Reporters, Inc.
25 of that case was ongoing when I left Jersey Central to come with
Graham - direct 6
1 GPU.
I did not appear as counsel in that case but I worked on g-)
U 2
the case from the point of view of the company.
3 Q
Af ter coming with GPU and assuming the position (v~)
4j of treasurer, did you have continued involvement with retail rate 5 cases involving Three Mile Island Unit 27 6i A I had continued involvement.
I did not have direct re-7 sponsibility.
8 Q
Did you testify in proceedings on that matter?
9 A
No, not prior to the accident.
10 Q
Would you explain your involvement, then?
11 A
Well, as one of the financial officers of the company, 12 I'm involved in meetings and discussions involving rate cases,
(~'/
13 both because of my position as treasurer and because I came out 14 of regulation and rate work and there tends to be a group manage-15 ment at GPU so I'm just involved in the discussions.
16 Q
The questien that I would like to ask if you 17 would feel qualified today to discuss some of these retail rate 18 cases involving Three Mile Island Unit Number 2.
19 A
Yes.
~
20 Q
Could you briefly attempt to describe the retail 21 rate cases in which an attempt was made to include Unit Number 2
, -)
V 22 in the rate base of the various GPU companies to the best of 23 O
your ability.
\\-)
24 THE WITNESS:
Can we go off the record Ace - Fedef al Repot ters, Inc.
25 for a second?
b
l Graham-direct 7
I MR. EVANS :
Yes.
2 (A discussion was had off the record.)
3 A
l'm not familiar w!th the wholesale cases, but with re-4 spect to Jersey Central Power and Light Company, there was a 5 rate case filed in 1976 in which we had asked for construction 6
work in progress to be allowed in the rate base and which it con-7 cluded with a substantial portion of Three Mile Island Unit 2 8
being allowed in the rate base.
I believe that was about S100 9
million of the plant investment.
10 In the fall of 1977 a new rate case was filed for Jersey II Central which was the case designed to reflect TMI-2 in the base 12 races of that company.
There was also an amount requested re-O 13 lating to the ongoing attrition or inflation effects on the oper 14 ations of Jersey Central.
In the spring of 1978 as it became apparent that TMI-2 15 16 would not be ready to go into commercial service in June as we I7 had originally thought; it was agreed with the staff and with i
I8 the public advocate in New Jersey that that case would be divided I9 in'to'a phase one case and a phase two case.
Phase one dealt with-20 the catch-up part of the cesp, the part relating to inflation 21 or attrition, and an order was entered.
22 Phase two was to deal with TMI-2.
It was agreed that a 23 O
test year of 12 conths ending August 31, 1978 would be used.
We U
24 then thought the plant would go in service in October or that
- Ace-Federal Reporters, Inc.
25 time frame and the phase two order was designed to reflect TMI-2
Graham - direct 8
I (D
in the base rates of Jersey Central.
w) 2 The intention was that that order would become effective 3
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very close to the date that the plant was actually placed into 4
commercial service.
5 With respect to Penelec Electric Company there was a 6
1977 rate case that dealt with that company placing Homer City-7 3 into commercial service and I can't recall whether any con-8 cention was made in that case for Three Mile Island Unit 2 My 9
recollection is that there was noc but I may be wrong on this.
10 Then there was a case filed early in 1978 or late in 11 1979 designed to reflect in the rates of Penelee the operation 12 of Three Mile Island Unit 2 That case used a 1978 test year.
(v~)
13 With respect to Metropolitan Edison Company, there has I4 been a 1977 case that had asked for about $50 million, as I re-15 call, most of which was for Three Mile Island Unit 2 In May of 16 1978 the Pennsylvania Commission entered an order allowing Met-I7 ropolitan Edison to increase its rates by $2.6 million.
Those 1
18 dollars were all unrelated to TMI-2.
The commission said that i
I9I it would not enter an order reflecting TMI-2 in Met-Ed's base 20 rates until the plant was either in or about to go into commer-21 p
cial service and suggested that another rate case be filed.
v 22 There was also, as I recall, discussion in that order 23 (7
that such a rate case would be expedited.
The rates from the L/
increase 24
$2.6 million/actually went into effect in about September, 1978.
Ace -Feceral Reporters, Inc.
25 In the summer of 1978 I think actually before the $2.6 millien
IGraham - direct 9
(
1 began to be collected.
We did file the TMI-2 rate case as sug-2 gested by the commission and that was designed to place TMI-2 in 3 the base rates of Met-Ed.
When we filed that in the summer of 4 1978, it was anticipated that the unit would go into service in 5j the fall -- I think we were then looking at October -- and that':
l 6j the case that came to conclusion just before the accident and I
7-rate order was to become effective just about the time of the 8 accident.
9 Q
Thank you very much.
10 MR. LIBERMAN:
Off the record for just 11 one thing.
12 (A discussion was had off the record.)
0 13 Q
Based upon that summary which you have just givert 14 us, Mr. Graham, is it accurate to state that during calendar year 15 1978 all three subsidiaries had retail rate cases pending, either 16 in Pennsylvania or New Jersey, which sought inclusion of Three 17 Mile Island-2 in a rate base?
18 A Yes.
I am troubled by the final clause stating that it
- 19. sought TMI-2 in a rate base.
What those rate cares were designe e 2
to do was to reflect in our rates the inves,ent and the opera-21 tion and associated fuel savings fro TMI-2 so they would not 22 just reflect TMI-2 in the rate bases of the company to the extent 23 that had not already been done as'in Jersey Central but those 24 cases would also have included the operating expenses, the taxes
- Ace-Federti Reporters, Inc.
25 associated with the plant, and the fuel savings anticipated from
Graham - direct 10 1
the operation of the plant.
2 In fact, it was expected, for instance, in Jersey Centr: 1, p
3 that the rate order would have very little effect on the cus-d 4
tomers.
I think the same thing was true in the other companies.
5j Q
Do you recall what the test years were of rele-6 vance in those cases pending in 1978?
7 A
In Jersey Central's case, the test year originally -- I 8
can't remember.
I think it was 12 months ending March 31, 1978 -
9 but as regards TMI-2, by Leipulation among the parties and as 10 accepted by the commission when it established a phase one and a 11 phase two, the test year was August 31, 1978 for purposes of re-12 flecting TMI-2 in the base rates of Jersey Central.
O 13 August 31 was chosen because we were then looking at an 14 October in-service date.
15 Penelec used an 1978 test year, in other words 12 months 16 ending December 31, 1978.
Metropolitan Edison used a test year 17 of 12 months ending March 31, 1979 in the case that was pending.
18 Q
Could you briefly explain to us the consequences 1
19 of bringing a unit into commercial service on a date outside its -d 20 test year, if there are any consequences.
21 A
Your question is stated in general terms.
Let me just O
22 answer it as regards regulation in New Jersey and Pennsylvanic 23 e3 and the pending rate cases.
L) 24 In the case of Jersey Central and the case that was cend-Aca-Federal Reporters, Inc.
ing before the New Jersey Commission, it was understood by stip-25
Graham - direct 11 I
]
ulation by the parties that the test year would be one which was actually 2 prior to the time when the plant /would have gone into service.
l Q The notion of the phase two order was that a test year of August 3
4 31, 1978, would be used but that the plant was then expected to 5 come into service about two months after that.
6 In Pennsylvania the kind of regulation that developed in 7 New Jersey where the staff of the commission and the parties fre 8 quently are able to work out a stipulation has not materialized 9
and the cases tend to be litigated more formally in that juris-10 diction.
II MR. LIBERMAN:
Off the record just a min-12 ute.
13 (A discussi'on was had off the record.)
I4 A
With respect to Penelec, while there is some discussion 15 and stipulation of issues, our experience in the 1977 Met-Ed casa 16 led us to realize that there would be an isiue raised by inter-I7 venors and perhaps by the commission staff if the cases that were 18 designed to do almost nothing other than reflect TMI-2 in the I9 rates of the companies used'the test year that was different fror -
20.'the time when the plant went in service.
21 q
So we recognized that there would be an issue raised.
I O
22 don't think it's clear-cut what the results would have been but 23 pJ we believe that it would have been very surprising if, for in-24 stance, if the Penelec case, which used a 1978 test year and was Aca-r.o.rai Reporters, inc.
c a case designed to.do almost nothing other than -- let me start
Graham - direc*.
12 1
over again.
It was a case that a large element of it had to do 2
with TMI-2, the commission would not have included it.
We did 3
see a potential for argument and perhaps for delay.
4 In Met-Ed's case, the test year was March 31, 1979 so l
5 there was a three month time when the plant was in service in 6 lthe test year.
We would have been surprised if there was enough 7
of a delay in the availability of the plant to have that be a 8 problem.
were 9
In that case virtually all of the requests / associated 10 with TMI-2 and it would have been silly to have a case that, 11 that if the plant was only available a few days outside the test l
12 year that the commission wouldn't have included it.
O 13 So I guess my answer comes down to the fact that from 14 the point of view of trying the rate case, the desire to have an 15 expeditious result, it would be undesirable because there would 16 clearly be more issues to argue about.
I don't think I can stat 17 with certainty that the outcome of the case would have been to 18 not reflect the plant in the base rates of the company.
19 I think one of the things you have to remember is that
-o
)
20 the commission knows that the very substantial fuel savings from l
21 that plant would be there so if it didn't give the return on the
- 22. plant and the operating expenses associated with the plant, you 23 (N
would actually have a decrease in rates in the Pennsylvania ecm-
%.)
24 panies and I don't think the commission would have found that to Oc3-Federal Reporters, Inc.
c 25 be a sensible result.
t
Graham'- direct 13 1
Q Unit Number 2, according to my understanding, is
'2. owned by the three GPU operating companies in the amounts of 50 3 percent being Metropolitan Edison Company, 25 percent being 4 Penelec, and 25 percent being owned by JCP & L.
Is that an 5 accurate statement?
6 A
That's correct.
They own undivided interests in the 7
plant in those proportions.
8 Q
In planning for the unit as a whole, is any con-9 sideration given to the weight which the operating companies own 10 in planning for the rate proceedings which were then pending?
11 MR. LIBERMAN:
I don't understand that 12 question.
O 13 Q
Would you like me to rephrase the question?
14 A
I think I understand it.
The question is, I believe, 15 whether, when the ownership decision was made in allocating TMI-2, 16 for instance, the rate cases and the ability to reflect the plant 17 in the base rates of the company was one of the factors entering 18 into that allocation.
19 Q
No.
I think I probably should have restated the 20 question._ Let me ask the question this way.
21 Did the fact that Metropolitan Edison Company 22 owned 50 percent of Unit Number 2 and had a later test year than 23 the other companies place a lesser importance on completing a 24 unit by_ calendar year 1978?
Ace -Federal Reporters, Inc.
q 25 A
I guess implicitly the answer is yes, but the major de-1 1
)
1 i
i Graham - direct 14 o
I terminant in completing the test program for TMI-2 was a sched-
?
L) 2 ule of events that had to happen and tests that had to be passed i
(-)
3 and that was being done on the technical side of the company.
U 4
I don't think that the test years played a very material role at 5
all in the decision to place the plant into commercial service.
6 People were aware of it.
People were aware of the fact that we 7
were working awfully hard to complete those rate cases and to 8
match the in-service date of the unit with the completion of the 9
test years to the extent possible.
10 If you looked at it just from the point of view of the 11 rate cases, the incentive would have been to delay the plant for 12 another three months because we had the Jersey Central case set-13 tied and could get the rate order whenever the plant went in ser-14 vice.
The test year for Metropolitan Edison was three months 15 further on and so it looks as if we would be able to accrue AFC 16 for another three months and come out a little bit ahead.
1
I don't think anybody thought of that strategy anymore 18 than they thought of the strategy of putting it in service before 19 December 31 in order to keep it within the Penelee test year.
~
i 20-Q Do you know if commitments, representations, were i
21 ma.e to the Pennsylvania Public Utilities Commission that a test r
22 program at Unit Number 2 would be complete before the unit was 23 O
declared in commercial service?
O 24 MR. LIBERMAN:
Off the record.
Oce -Federal Reporters, Inc.
i (A discussion was had off the record.)
25
l i
Graham - direct 15 I
,q MR. EVANS:
Mark this as 1113 and then V
2 this as 1114.
p 3
v (Letter dated July 19, 1978 to the 4l Pennsylvania Public Utilities Commission from 5
GPU and a response to R.C. Arnold are received 6l and marked Exhibit 1113 and 1114 respectively 7
for identification.)
8 Q
Mr. Graham, I want to show you --
9 THE WITNESS:
There is a pending ques-10 tion.
11 MR. EVANS:
Would you read back the ques i
12 tion that was open before we took a recess.
b) 13 (The pending question is read back by the 14 court reporter.)
15 A
rim troubled by the use of the word " commitment."
I knou 16 that ttere were discussions and correspondence with the commis-I7 sion with respect to the criteria and the test program that would 18 have to be met and completed before the plant would be placed in l9 commercial service.
20 Q
Mr. Graham, I'm going to show you what has been 21 marked for identification as Exhibit 1113.
Is that part of the 22 correspondence to which you've just referred on this issue?
23 !A Yes, it is.
j (T u) 24 Q
Were you involved in discussions before that Ace -F;dIral Repotters, Inc.
25 correspondence was sent to the Pennsylvania PUC on that topic?
Graham - direct 16 1
A No, I wasn't.
At that point I was not yet the treasurer p
V 2
of GPU.
I was still at Jersey Central.
I was concerned about 3
and involved in the Jersey Central rate making proceeding.
I 4
received copies of correspondence and generally knew what was 5
happening in Pennsylvania but I wasn't directly involved.
6 Q
I would also like to show you what has been 7
ma_ked for identification as Exhibit 1114 and ask if you can 8
identify that or have seen that before.
9 A
This is a copy of the testimony of Robert C. Arnold from 10 the Met-Ed rate case.
It was a response to a request of the iI administrative law judge who had asked for a description of the 12 meaning of "in commercial operation."
V 13 I note that a copy of Exhibit 1113 is attached to it so 14 I presume that.it was prepared and submitted subsequent to July 15 19,,1978.
Other than that, I don't know exactly what the date 16 would have been when this was submitted in the Met-Ed rate casa.
17' Q
Did you have any involvement in preparing this 18 response of Mr. Arnold?
19 A
I did not.
20 Q
Just to summarize this point to complete this 21 area of questioning, in your opinion would it be unfair and in-22 accurate to state that Exhibits 1113 and 1114 constitute a com-23 p
mitment to the Pennsylvania PUC connecting testing, completion a
24 of the test program, and comme cial service?
Ace - Federal Reporters, Inc.
25 I would chink that the word " reporting" is a more ac-A
Graham - direct 17 f^3 1 curate characterization than the word "comitment."
The word V
2 " commitment" tends to carry with it some kind of an implication O
'""' * **'"'"* " " d
'""d"
" * = ""* '"' ""*
- 4 made the report, and I know of no such quid pro quo or commit-5. ment.
6 Q
Mr. Graham, do you know if in January of 1979 7 rin the then pending Metropolitan Edison case an oral agrument 8 had been scheduled before the ALJ to hear that proceeding?
9 A
I do not know enough about that proceeding'to answer tha t.
I 10 That sounds about right in the time context of that rate case.
11 Q
But you are testifying that you were not involve d
12 in that oral argument or assisting the attorneys or accounting qV 13 personnel that were involved in that argument?
14 A
No, I was not.
15 Q
Can you tell me, Mr. Graham, if you are familiar 16 with either formal rules or adjudicatory decisions or any other 17 standard which equates the date, which equates the term "commer-
.18 cial service" or " commercial operation" with the statutory con-19 cept of used and useful in either Pennsylvania or New Jersey?
-- l 20 A
Let me say first of all I have difficulty with the char-21 acterization, the concept of used and useful as being a statutory nU 22 concept.
It would seem to me that it makes sense that there is p
23 some relationship between the idea of used and useful which the O
24 Pennsylvania commission had equated with something being in rate i Ac2-Fsd:ral Reporters, Inc.
25 base and'therefore something providing a cash return and the idea l
l
Graham - direct 18 1
of something being placed in commercial service because placing 2!
the unit in commercial service from a financial or accounting 3
point of view simply means that we stop taking an allowance for 4
fund used during construction on that investment, so there's 5
certainly some correlation between the two.
6 I would hava a lot more difficulty about saying that 7
about New Jersey ragulation because in New Jersey they have 8
placed most of the investment in rate base.
We were not taking 9
an allowance for funds used during construction on it.
It really 10 then had much less to do with the rate base concept than with 11 the operating side of it, the income statement side of it, so I 12 think my answer has to be that in New Jersey I don't think there O
13 is any such relationship.
In Pennsylvania, at least with the i
14 benefit of hindsight, we have learned that there is such a rela-15 tionship.
16 Q
What do you mean by hindsight?
Are you referrin; 17 to a specific case?
18 A
I'm suggesting that may be a way of reading the June order 19 of the commission.
20 Q
To clarify that, is a June order with regard to 21 Three Mile Island Unit 2 and its inclusion.in the rate base?
l 22 A
Yes.
23 p
MR. LIBERMAN:
I suggest you might want sJ 24 to identify that as June, 1979.
Aes-Federal Reporters, Inc.
25 THE WITNESS:
Yes.
I Graham - direct 19 1
Q Let me turn to a different area now and ask you 2
if you recall the transient which occurred at Three Mile Island 3
Unit 2 on April *t3, 1978, involving the main steam relief valve.
4 A
I have difficulty because I don't know whether the word 5
" transient" is a correct one to use and it's because I'm not a 6
nuclear engineer or a nuclear operating person.
I know that dur-7 ing the test program it was discovered that the main steam re-8 lief valves had not been properly designed to do their job and 9
I don't remember whether that was in April or later in the year 10 but I assume that's the event that you're referring to.
II Q
Do you recall that following this event there 12 was a need to shut the plant down for a period of time?
O v
13 A
Yes.
Is this the Lonergan valves, if I can just ask, 14 to make sure that I have --
15 Q
That is the answer, yes.
16 A
Fine.
I'm familiar with that situation.
17 Q
During that down period following the Lonergan 18 valve incident, were you working at corporate headquarters here 19 in Parsippany?
20 A
It was during that period of time I switched from Jersey 21 Central to here.
22 Q
So you were here in March during a period at 23 p
which the plant was down to replace those valves.
24 A
Yes.
- Ac2-Federal Reporters,Inc.
25
-Q Could you characterize for us the mood here at t
Graham - direct 20 o
I headquarters regarding that incident.
U 2
A Let me say first of all that when it was first discovered, 3
I was at Jersey Central and I met with Bcb Arnold and other 4 people here at the company to arrange for a presentation by Bob 5
to the Jersey commission staff and the participants in the Jersey 6
rate case to separate it.
7 I am not sure how to describe mood.
I know Bob expressed 8
disappointment to me that what was a fairly minor component in 9
a complex piece of equipment in the whole plant was going to 10 cause a delay and as I recall his description to me, what had II happened was that there was a perfectly good design for a valve 12 that worked when that valve was of a size of, say, three inches O
13 or four inches but that when one made that identical valve bigger, 14 say six inches or nine inches or something like that, something 15 quite unexpected about the steam flows and the movement of air 16 and gases through the valve made it so that it didn't work.
17 I remember discussing with Bob why it was that somebody 18 couldn't have figured that out and be said that it would have 19 required having something like 60 megewatts of steam available 20 to do it.
21 I think probably disappointment is the best way to char-22 acterize my perception of how Bob felt about it.
By the time 23 that I came to GPU on September 1, the valve problem had been 24 something that was kind of in the past.
By then the company was l Acs-Fed:tal Reporters, Inc.
l 25 well into replacing the valves so it wasn't something that was
Graham - direct 21 1
talked about a lot here at that point and I don't know that I p
a 2 could characterize a mood about it at that time.
3 Q
Was there a mood toward completing the project 4 now that this major hurdle had been over?
j 5A Well, everyone's incentive and desire was to complete 6
the project.
With the engineers it becomes kind of a personal 7
goal.
That's what you are trying to do.
That's what you want 1
8 to get done.
When you're involved in the rate cases, you are 9 trying to complete the. case in a way that produces a result that 10 is good and so we all wanted the plant done so that we could com-11 plete the rate cases and get on to something else.
12 I don't think that the steam valve problem made people
- 13. want to finish the plant any more or any less.
In the spring 14 people wanted the plant through its test program and done and on 15 the line and in the fall they did and in the winter they did.
16 When you work within a corporation, things are never dona 17 in the sense that there's always something that's going.to take 18 up your time and become the thing you're trying to accomolish.
19 There's no question but that completion of TMI-2 was a 20 major corporate objective simply because it was being built for 21 3
a longer time, was a major investment, would produce a lot of (V
22 energy at a low fuel cost, and was an awfully good thing to have 23 behind us.
l 24 MR. EVANS:
Off the record, please.
, Ace-Federal Reporters, Inc.
[
25 (A discussion was had off the record.)
L d
Graham - direct 22 1
BY MR. VANDENBERG:
2 Q
Mr. Graham, I would like to cover with you the 3 financing needs of GPU and its operating companies, especially 4
with a view to determine the extent to which the completing of 5 TMI-2 was in any way important in securing financing for GPU and 6
its subs.
7 I think a place to start is with the attachments 8 to an October 20, 1978 letter from Dennis Baldassari to Standard 9 & Poor Corporation and the attachment to that contains schedules, 10 three schedules fo:. each of the three operating companies, and of Il the three for each company, one covers some operating data, a
12 second, in general terms, outlines the construction financing O
13 needs, and the third, again for each company, lays out the capi-14 tal requirements and forecasted sources of those capital require-15 ments and some other financial information.
16 A
Yes.
17 Q
First let's cover 1978, a time period when, is 18 it fair to say, that the financial community was aware that TMI-2 19 was nearing completion?
20 A
That's correct.
What that means to their financial com-21 p
munity is they recognize that you have large portions of your O
22 earnings as AFC and they are looking to see how and when you will 23
(]
turn those those earnings into cash earnings.
24 Q
Is it true that a utility with a high percentago l Ace-Federal Reporters, Inc.
25 of book earnings being AFC is somehow considered to be a company J
Graham - direct 23 q
l with low quality earnings?
V 2
A The easy answer is yes, except that in the electric in-3 dustry, because of the cycle of building and completing gener-4 ating units, you can have a company that in one particular year 5 will have a very high percentage of its earnings in AFC.
6 As I recall last year Jersey -- GPU was about 50 percent,
7 but an analyst will look not at that just in a particular year 8
but prior years and their anticipation of subsequent years but 9
it is an indicia analysts used and generally speaking a higher 10 proportion in cash earnings as opposed to AFC is a desirable 11 financial indicator.
12 MR VANDENBERG:
I would like to intro-
.s 13 duce and have marked as an exhibit this October 14 20, 1978 letter.
That will be marked as Exhibit 15
- liig, 16 (Letter dated October 20,1978 to Ann 17 Faber of Standard & Poor's Corporation from GPU 18 is received and marked Exhibit 1115 for identi-19 fication.)
20 Q
Am I right that the major financings in calendar 21 year 1978 were a 45 million first mortgage bond for Penelec, 50 pJ s.
22 million first mortgage bond for Met-Ed and 50 million in first 23 mortgage bond for JCP & L7 i
\\~
j 24 MR. VANDENBERG:
Off the record.
Qce -Feeral Reporters, Inc.
(A discussion was had off the record.)
Graham - direct 24 1
Q Were those the three major bond financings in p
a 2
1978?
(U3 3
A Yes.
4 Q
In your view, was the status of TMI-2 relevant 5 at all to the issuing of those bonds?
6 A
1978?
7 Q
Yes.
8 A
No.
By the status, I assume you mean it's being placed 9
in commercial service.
The commercial community knew that the 10 plant was being completed.
As I recall when we met with the II analyst in connection with the Met-Ed financing, with the rating 12 agencies in connection with the Met-Ed financing, there was no 3) 13 substantial concern about the plant.
14 Q
What kinds of questions were asked about TMI-2?
15 A
When you go to Moody's and Standard & Poor's and meet 16 with analysts, they always ask you about your rate cases and so 17 they would have been asking about how is the Met-Ed rate case 18 coming along.
I don't recall specifically but I'm sure that l9 would have been one of the subjects of discussion.
-4 20 Q
And what general kind of response would you have 21
/
probably given to those questions?
V]
22 A
I think in connection with the Met-Ed bond financing
.23 Q
which was in the fall of 1978, we would have been describing the it 24 May order and probably trfing to put/in its best light by em-Ace -Federal Reporters, Inc.
phasizing the fact that the commission had told us to file again i
l
! Graham - direct 25 i
i for 311-2 and had talked about expediting the case.
2 Q
With regard to 1979, I would like to go through 3 the operating companies one by one, looking primarily at the
]
4 Sources of Capital section of the relevant schedule.
5 Since Jersey Central Power & Light Company hap-6 pens to be first, let's look at that one.
There are five sources 7 of capital listed, the first one being internal funds and the 8
last one being short-term borrowings net.
Could you briefly 9
describe what that means as a source of capital.
10 A
This is a condensed sources and applications of funds II exhibit with respect to the applications of funds, the capital 12 requirements.
Up at the top the three-page components, the con-qU 13 struction program, the requirement for siniting funds and the re-14 quirement for refinancing maturing debt, it totals $341 million.
15 Q
Before 1979.
16 A
Yes.
The second category is the Sources of Capital, the 17 question of where those funds will come from.
As you noted, 18 there are five categories shown.
The first one is Internally 19 Generated Funds, and if you look down below, you see that we 20 set forth for the investment community the major components of 21 the internally generated funds and those happen to fall into twc 22 categories.
23
]
One is depreciation and amortization which would producc l
24 approximately $75 million of internally generated funds, de-Oce-Federal Reporters, Inc.
25 l
ferred taxes and investment tax credits would be the second.
l l
l -
~.
Graham - direct 26 1
They would produce about $32 million of internally generaced 2
funds.
There would also be some minor items and some changes 3
in working capital and things like that.
They would total $110 4
million and go up above.
5 Those are the funds that come from within the corroany.
6 In the case of our subsidiaries, they do not include any retained 7
earnings because our policy had been to pay out to the parent 8
100 percent of earnings and then inject back in as capital con-9 tributions the needed equity for ':he subs.
10 The second category is long-term debt.
In Jersey Cen-11 tral's case, that was to be three issues, a $6 million pollutior 12 control issue in the winter of 1979, which we did accomplish, a
- 0 13
$75 million debt issue, first mortgage bonds, in June of 1979 14 which.was'~ cancel' led and replaced after the accident, and a $75 15 million bond issue in the fall of 1979.
16 We are now trying to privately place some bonds for I7 Jersey Central.
18 We had also anticipated marketing $25 million of pre-I9 ferred stock.
Actually, as I recall, we had hoped to market 20
$45 million of preferred stock and to require a 13 percent pre-21 ferred that is now outstanding and that came out of its no call 22 period tiis. fall.
l 23 We had expected to inject $60 million of equity capital 24 from GPU into Jersey Central and.then the result of all this e -reeerai aeoorters, inc.
25 would be that'we would have paid down short-term debt from its
' Graham - direct 27 O
I outstanding level at the end of 1978 of $66 million to $56 mil-V 2
lion.
'That's why the negative 10 is shown on the short-term
]
3 borrowings line.
4 Q
So in summary, then, in October of 1978 GPU is 5 forecasting that JCP & L would require capital of $341 million 6 of which $156 million was planned to come from external finan-7 cing outside of the GPU companies.
8 A
Well, no.
156 of debt and 25 million of preferred but, 9 of course, some of the equity, the 60 million, would have come 10 from outside the GPU companies because of the TRAESOP in the II dividend re-investment programs producing new equity capital but 12 g
that would have come through GPU rather than Jersey Central di-v 13 rectly goin<.; to the equity markets.
14 Q
Let's look at Metropolitan Edison.
Again for
^
15 1979, this shows the capital requirements of $62 million and the 16 source is solely from internal funds; is that right?
17 A
Yes.
18 Q
That means strictly internal to Metropolitan 19 Edison; it doesn't include any payment from the parent company 20 to the subsidiary.
21 A
That is correct.
Before we leave Met-Ed, if I can just, 22 I think it's important that you understand what you're seeing on 23
(]
this page.
Met-Id is a company with more than a billion dollars 24 of capitalization, about a billion one at the end of 1978, and Ace-Fed;ral Reporters, Inc.
25 a construction program of less than six percent of that which
I Graham - direct 28
' ' "" * "c
i"d"7
- ectri "ti t'7 i' " "*'7 * "
O 2
struction program.
That's because Met-Ed had completed Dil-2 Q
and had the generation that it needed and would not be going 3
4 back to constructing generation for sometime so that the deprec-5 iation and the deferred taxes were producing enough cash to sup-6 port the company and it could have stayed away from the capital 7
markets for maybe three years.
8 Q
In Penelec's case, the $129 million of capital 9 requirements for 1979 shows as being financed -- again, primarily 10 in internal funds with some capital contribution from the parent II company and some 24 million additional short-term borrowings; is 12 that right?
13 A
That's correct.
Again, the company with a relatively I4 small' construction program generating most of its funds intern-15 311,
7 16 Q
As a result of looking at all three of these, I7 could you draw some conclusions as to which subsidiary had the 18 heaviest financing needs?
I9 A
Sure.
You are only~looking at one year but it happens 20 that the one year that the company that had the heaviest finan-21 cing needs the, and would have them through the first half of 22 the 1980's was Jersey Central.
Met-Ed had completed TMI-2 but 23 when it did it, only had three percent of its capitalization in 24 short-term debt and was not at all strained in having completed
. Ace -Federal Reporters, Inc.
25 TMI-2.
Graham - direct 29 1
Penelec is in a similar kind of position with a very 2 small level of short-term debt and also was not strained in hav-Q 3 ing completed TMI-2.
V 4
Jersey Central has been short on base load capacity.
At 5 the same time it was completing its share of TMI-2.
It was start--
6 ing up construction again at Forked River and you can see that 7 its construction program, looking out into the early 1980's, is 8 substantially larger than the other companies and is a larger 9
proportion of its capitalization.
10 Q
As a way of determining any possible influerce 1I that the completion of TMI-2 might have had on these 1979 finan-12 eings, ignoring the accident, can you describe for me, and I O
13 realize it's a very complex picture involving the rate cases and 14 all the rest, but nonetheless, can you describe for me the po-15 tential impact on the financing needs if TMI-2 had not been de-16 clared to be in commercial operation until, say, any time during 17 the first quarter of 1979.
18 A
When the plant was declared in commercial service would 19 not have been particularly material to their financing program.
20 When the three companies were allowed to change their rate so as 21 to reflect that plant in the tariffs of the companies would have 22 had.some impact on the financing program so its not putting the 23
(]
plant in commercial service that would be the key from a finan-v 24 cing point of view but rather the rates that would be the key Ace - Federal Reporters, Inc.
25 from that point of view.
Graham - direct 30 O
1 In Jersey Central's case, the company has a coverage V
2 problem and has had a coverage problem.
I haven't really done 3
an analysis but I presume that company would have had something
{
4 more of a coverage problem if the rate case had been delayed 5 materially beyond February, but in Jersey Central's case, most 6 of its investment was already in the rate base and providing 7 coverage so that it would have been a much smaller effect than 8
in the Penelec companies.
The Penelec companies, Penelec re-9 ceived a $50 million rate order of which $25 was associated, as 10 I recall, with TMI-2.
Its: failure to receive those revenues in 11 a timely fashion would not have made any difference because it 12 did not intend to go to public markets in 1979.
O 13 The same thing would be true of Met-Ed according to the 14 schedule but as I recall Met-Ed did market a small amount of 15 pollution control bonds in January, 1978.
January '78.
I'm 16 getting mixed up.
That's before.
.No, it was Jersey Central 17 that had the pollution control bonds.
18 Q
In 1979?
19 A
1979, yes.
It wouldn't have made a difference to Met-Ed -
20 because they were not going to the markets anyway.
21 Now, in Penelec's case, I should point out that the one 22 effect it might have had is that Penelee has a split rating be-23 tween a Baa and an A.
24 Q
Excuse me.
When you say a split rating, you art Ace-Fed:ral Reporters, Inc.
25 talking about the rating of its first mortgage bonds?
4 c
Graham - direct 31 r~T 1
A Yes.
We had a very clear indication from Standard &
V 2, Poor's that they were ready to upgrade Penelee's debt rating and 3 delay in the rate case may have delayed our ability to accomplisn
{')
4 that.
That would n't have any immediate effect on the company but 5 it would have an effect on the next time, that Penelec would go 6 back to the debt market because it would bcth make the debt more 7 marketable and reduce the cost.
8 Q
You mean by having the rate case in effect the 9 rating companies would have as I indicated to you increased or 10 had a higher quality rating on the bonds, a lower net interest 11 cost for the company?
12 A
It wasn't quite that way.
What they said was Penelec O
13 j.sfinishingupTMI-2,it'sgoingtohaveitsratecase,we 14 would like to talk to you in the spring, and in connection with 15 6at conversation, it was quite clear that they were prepared 16 to upgrade Penelec's first mortgage bond rating.
17 Q
When was that discussion?
18 A
Just prior to the accident, as I recall, February or so.
19 Q
I mean when they first gave you the indication.
20 A
About then.
I think it was after the Penelec rate order 21 had co.ae out and they saw where the company stood and they knew q/
w 22 the company was in pretty healthy shape and, from time to time 23 when we have talked with the rating agencies, we felt that
{;
24 Pennsylvania bond rating was unfair, that it was too low and we Aca - Fedef at Repotters, Inc.
25 had the strong impression that they then agreed with us.
Graham - direct 32 I
(A discussion was had off the record.)
2 Q
Mr. Graham, would you capsulize what you've just 3 been through in terms of as you see it the worst possible effect 4 on GPU or subsidiary companies' financing of a delay in the com-5 mercial operation declaration of TMI-2 to as late as March of 6
'79.
7 A
If the plant had been declared in commercial service in 8 March of 1979, I think the following things would have happened.
9 First of all, you would have had three more months of an allow-10 ance for fund used from construction on that portion of the plan:
II that was accruing AFC.
That would have increased earnings over 12 what we saw, what we actually saw in the first quarter period.
O 13 'I then have to make an assumption as to what would have happened 14 to the three rate cases ehen the plant was placed in commercial 15 service.
Perhaps we would have seen more of a delay between the 16 date of placing it in service and getting it into the three tar-17 iffs or perhaps we would have seen less of a delay.
18 If we saw more of a delay, you would then have a second 19 quarter of 1979 vith quite low earnings.
If we saw less of a 20 delay, you would see a second quarter of 1979 with better earn-21 ings.
22
. All of this would have some effect on what GPU's reporte:1 23
]
1979 earnings would be.
I can't tell you whether they would hav2 24 been higher or lower and the composition between cash and AFC Ac3-Fedical Reporters, Iric.
25 would have been different.
Graham - direct 33 I
(]
With respect to senior securities, the two Pennsylvania 2
companies were not going to the public markets in 1979 so it
(
3 wouldn't have had any effect there.
Jersey Central was going to 4
the public markets four times, twice for first mortgage bonds,
5 once for first mortgage bonds on a pollution control financing, 6
and once for preferred stock.
7 Jersey Central had relatively low coverage.
Those AFC 8
earnings can only partially be used for coverage but Jersey 9
Central had most of the plant in rate base so it may or may not 10 have had an effect upon our ability to accomplish those Jersey II Central financings.
I have to assume that it would have been 12 probably a little more difficult if the plant had been delayed 13 than with Jersey Central starting to collect those cash revenues 14 as it did in February.
15 Just to complete the picture, the other constraint in 16
.sey Central in 1979 would have been potentially bondable 17 property.
That was more a function of our activities at Forked 18 River and how much of that became bondable than a function of I9
~
TMI-2.
0 Q
With regard to the potential to continue to col-21
]
lect AFC on TMI-2, if it had remained construction in progress 22 work and status until 1979, did you feel that was in any way a
[-)
viable option for the company.
24 i
Aca -Federal Reporters, Inc.
and Mr. Arnold and the people responsible for completion of the l
rGraham - direct 34 G
l test program had not said that it was complete, the plant would O
\\
2 have stayed in construction work in progress and would have con-Q tinued to accrue AFC on that portion that was accruing AFC.
3 4
Q Would that have been of concern to you?
l 5
A Only in the sense that completion of TMI-2 was very 6 clearly one of the things we wanted to have behind us.
I don' t 7
think it would have had a major impact on my ability to finance 8 the company.
9 Q
Was there any concern that the amount of AFC 10 might.be getting excessive?
I1 A
As you are probably aware, there had been a construction 12 audit in the two states on behalf of the public advocates in the O
13 two states,.and one of the conclusions reached there was that 14 there liad been a period of time when the plant was delayed when 15 it perhaps should not have been and there had been a contention 16 that some of the investment associated with that delay should be I7 eliminated, the investment being the AFC during that period.
18 I guess that given that context, the potential for some-
- I9 one to make an attack on the time in the fall and winter of 1978
^
20 on the AFC and I guess the longer that you accrued AFC the more 21 potential developed.
l 22 Q
Was that potential ever discussed here at head-23 p
quarters?
J 24 A Yes, in the context of the construction audit, that we l Ace-Fed;ral Reporters, Inc.
25 knew that that was an area that they were looking at.
I don't
~ -
Graham - direct 35 (q
1 think it had any significant impact on the decision to place the V
2 plant in service.
3 Q
Was any concern about that communicated back to 4 any of the operating people to your knouledge?
5 A
Not to my knowledge.
The only operating people with 6 whom I had any material contact was the chief operating officer, 7 Mr. Dieckamp, and Bob Arnold.
I don't remember any discussions 8 along that line with Mr. Arnold when I was there, but I had 9
fairly extensive discussions with Mr. Arnold of the construction 10 audit results.
1I Q
Also in this whole financing area, we have men-12 tiened t;te term " coverage ratios".
g U
13 First, could you describe that term and then 14 state to the best of your recollection what the coverage ratios 15 were for the three subs, and if they were close, to any limit 16 prescribed by existing indentures.
17 A
Coverage is the term that is used in analyzing senior 18 securities.
In the context of bonds essentially what you do is 19 you take the annual interest expense, the annual return for equity,-
20 the annual income taxes and add those all together and divide 21 p
them by the annual interest expense.
It gives you an indicatior v
22 of the number of times that you have the cash available to pay 23 the debt.
I 24 Generally speaking, the indentures of an electric util-Oce - Fed;ral Reporters, Inc.
25 ity will say that you cannot sell new debt unless your coverage l
Graham - direct 36 1 ratio including the cost of new debt, interest on the new debt, 2 is at least two times.
3 Q
And that would be coverage after income taxes.
4 A If that's the before income tax coverage, that is looked 5 at.
6 Q
Then the two times ratio is a pre-tax coverage?
7 That's right.
8 Q
Do the rating services primarily deal in pre-tax 9 or after-tax coverage?
10 A Pre-tax.
They look at both but for the most part they IIllookatpre-tax.
12 Q
Was the 2.0 coverage the rule in effect for the 13 three operating companies?
14 A Yes.
15 Q
Were any the companies close to that point?
A Met-Ed and Penelec were not close to that.
They had 17 coverages in the high two times to three times range.
Jersey 18 Central was not in a position where it would get down to two 19 times, where it couldn't sell the bonds, according to the plans 20 that.we saw before the accident, but Jersey Central had what I 21 would' characterize as a low coverage, 2.2 times, somewhere arounc.
22 there.
That meant that in bad economic periods it is more diffi-23 p) cult to sell the bonds of that company.
u 24 It also means that you will pay more because it's a lowe:
Ac3-Federal Reporters, Inc.
25 rated security, but it was something that we believed we could
Graham - direct 37 1
deal with as we went forward constructing Forked River because 2 the Jersey commission had pursued a policy of allowing construc-3 tion work in progress in the rate base of Jersey Central as needed 4 to give it at least the minimum coverage that it needed to be 5
able to market senior securities.
6 Q
Finally with regard to financing and its relatio, 7
to TMI-2, what is your view -- strike that.
8 Did the commercial operation delcaration of. TMI-2 9 areate any new borrowing capacity for any of the GPU companies?
10 A
No, I did not.
11 In fact, until the rate order are received, it 12 takes away some financing capability because the loss of the O
T3 AFC. earnings has the effect of reducing coverage until you get I4 your rate order and begin to recover the cash earnings at which 15 time there is an improvement in the financing capability.
16 Q
Did the commercial operation declaration of TMI-2 I7 create anymore bondable plant against which first mortgage bond 18 could be issued?
I9 A
No.
Under our indentures, the declaration of the plant
- 20. as being in commercial service is not material to the issue of 21 bondability.
22 Q
Why is that?
23 O
A We amended our indentures in the early 1970's so as to v
24 allow the bonding of construction work in progress.
We had
?ce -Fedtral Reporters, Inc.
3 25 bonded'TMI as it met the criteria of the indentures and whether i
Graham - direct 38 I
]
it's in commercial service or not in commercial service simply 2
doesn't make a difference for purposes of certifying bondable
~]
3 property additions to the various trustees.
4 It does make a difference under the indentures of many 5
electric utilities.
6 Q
As of the end ot December, 1978, were there bond s 7 outstand _.ig secured by the TMI-2 plant?
8 A
Yes, there were, in each of the three companies.
9 Q
Can you estimate the dollar n' umber of the total 10 cost of TMI-2 which was bonded?
II A
Well, I have to be careful in answering by saying bonded.
12 We had. certified substantial dollars to the trustees as being 13 b'ondable.
Whether all of those dollars had been used up and 14 there were actually bond outstanding -- of course, you could 15 trace the dollars -- I can't say but what I can say is that we 16 had certified bondable property additions to the trustees.
Thos e 17 certifications will be accepted and bonds will be authenticated 18 based upon those certifications and those dollars included in-I9
~~ "
vestment at 2MI-2.
20 I can't say that there's a bond somewhere that I can
" "'ib"'" *
- ** " "' d
=
' *""**'=""' "' '*'-2.
Thae s O
22 the only distinction I'm making.
23 (Q
MR. DAVIDSON:
Off the record, please.
l 24 l
(A discussion was had off the record.)
See - Federal Reporters, Inc.
s A
Perhaps I should add that the first mortgage bond in-
! raham - direc-39 G
fl 1 dentures of the operating companies are open ended mortgages V
2 which means that the companies can add to the property that is
{])
subject to the indenture that allows them to sell new bonds and 3
4 that each bond is a lien against all of the property that has 5 been added to the invest ent of the company.
6 Q
The GPU was going to issue some short-term com-7' mercial' paper in early 1979; is that right?
Was that planned?
8 A
Not GPU but one of the subsidiaries, Metropolitan Edison 9
Q And Met-Ed was chosen because it was the most 10 financially sound subsidiary?
II A
That's right.
It was a Straight A rated company, the 12 only of our operating companies that had an A rating from both 13 of the major rating houses.
'14 Q
Just prior to the accident, you had applied for 15 ratings.
The ratings were supplied by the rating companies, 16 arrangements had been made to sell the paper, and you were just I7 about ready to do so; is that right?
18 A
I only have difficulty with the "just prior to."
I thin't l9 we had actually started talking about the rating agencies six to c
20 eight months before and had been in the process of obtaining rat 21 ings and --
22 Q
By "just prior to," I meant the actual sale of 23 Q
,the paper was due just prior.to the accident, a couple of days
\\s 24 before.
Ace-Federal Reporters, Inc.
A That's right.
I think we were going to, we had arranged 25
Graham - direct 40 rA 1
to sell the first paper on March 29, as I recall.
U 2
Q Would you have been able to sell that commercial 3 paper entirely if TMI-2 had not been in commercial operation?
4 A
In my opinion, yes.
5 Q
Now --
6 A
I don't know that without the rate order.
We could have 7 kept an A-1 rating, but I believe we could have sold the commer-8 cial paper.
9 Q
Was that an A-1 rating from both of the major 10 rating services?
11 A
No.
What happened was we applied to Moody's and we ap-12 plied to Standard & Poor's.
We received an A-1 rating from v
13 Standard & Poor's.
We received a P-2 rating from Moody's.
Moody's 14 said,that they would review that P-2 rating after receiving the 15 rate order from Pennsylvania.
We rejected the P-2 rating becaus e 16 we did not want to have our paper carried, the lower rating.
We 17 arranged with the investment banking firm that was going to handle 18 our commercial paper that they would handle the paper on a tem-19 porary basis with one rating.
Normally the paper has to have two -
20 ratings and that we would go back to Moody's sometime after the 21 rate order had been received and they had had a chance to an-22 alyze it and try to convince them that a P-1 was the proper rat-23 ing for the Met-Ed paper.
-24 Q
Did they give you any additional feedback as to Ace - Fed:ril Repotters, Inc.
25 why they issued a P-2 rating?
I Graham - direct 41 1
A The Pennsylvania commission is one that is viewed with 2
some degree of hesitancy in the investment community.
3 THE WITNESS:
Off the record.
4 (A discussion was had off che record.)
5 A
Perhaps I should clarify my answer a little bit.
We re-6 ceived the A-1 rating from Standard & Poor's, as I recall, prior 7
to the completion of the Met-Ed rate case.
I think it was about 8
in January that we were told that and we proceeded to arrange tc 9
market a small amount of Met-Ed commercial paper at that time.
10 It was the rating from Moody's that they wanted to wait and see I1 what the Pennsylvania commission would do before they were will-12
'ing.to give us a P-1 rating so they assigned a P-2 rating with
~
13 the understanding that if we accepte3 that rating, they would 14 r.cview it after receipt of the rate order.
15 Instead we rej ected the rating.
16 Q
Mr. Graham, in another area, I was wondering if 17 you could review with me the groups or organizations that regu-18 late GPU in different ways..You have, as I understand it, have in been in the utility business /several different sides over several- ]
19 20 different years and certainly you've had some extensive exper-21 ience here at GPU.
From your vantage point, who are the primary O
22 regulators?
23 (A discussion was had off the record.)
24 A
Taking first the major State and Federal agencies that Aca-Federal Reporters, Mc.
25 regulate the electric power indust;.y and GPU in particular,
Graham - direct 42 I
there's the FERC.
That has jurisdiction over our accounting and 2
over that portion of our rates that pertains to the wholesale 3
side of business.
The Public Utilities Commissions in the states Q
4 of Pennsylvania and New Jersey have jurisdiction over our retail 5
rates.
They also have jurisdiction over quality of service, ove-6 mergers, abandonments, things like that, over securities issues, 7
over condemnation authority.
They are the regulatory bodies 8 with general jurisdiction over the operations of the companies.
9 The Securities Exchange Commission regulates us as a 10 registered holding company under the Holding Company Act of 1935.
II They also regulate us as regards the issuance of securities as 12 they do other companies with publicly held securities.
O 13 The Nuclear Regulatory Commission regulates that side of I4 our $usiness pertaining to nuclear activities, both as to safety 15 of nuclear plants, environmental impacts, financial qualifications,,
16 things like that.
I7 The Environmental Protection Agency regulates the com-panies as.regards air quality standards, water quality standards, 18 toxic waste disposal, ash disposal, things like that.
20 In each of the states in which we operate, the Department 21 of Environmental Protection or it has a different name in Pennsyl-22 vania, also regulates certain activities as regards air quality, 23 (J
water quality, things like that, and then there are many other 7
24 aspects of the operation of the business that are regulated.
Ace-Federal Repotters, Inc.
25 The Corps of Engineers, the Department of Transportatior
Graham - direct 43 3
1 of the two states, the Department of Transportation of the Fed-
[V 2 eral government, the Department of Energy of the United States (V
has jurisdiction over other activities of the company.
3 3
4
'ihe Department of Energy of the State of New Jersey has 5 statutory jurisdiction over many of the activities of the Jersey 6 Central Power & Light Company.
7 Q
Would nearly all of those regulators have an in-8 terest or might they be concerned with the time for the complet-9 ing of the construction and testing of a nuclear plant?
10 A
Certainly the first four do, the FERC because of their lI primary jurisdiction over our books of account, the Public Util-12 ities Commissions because of their jurisdiction over rates, the bs 13 SEC,.because of the requirement of making adequate disclosure as 14 to
..te activities and state of affairs of the company, and the 15 Nuclear Regulatory Commission because of its obligations under 16 the Atomic Energy Act.
17 I don't know the extent to which the Department of En-18 vironmental Protection or the Environmental Protection Agency I9 would become directly involved in the declaration of a nuclear
-i 20 plant as being in commercial service and I don't know that any 21 n
of the others would be unless it happened that you had a particu-V.
22 lar license that had some particular qualifications pertaining 23 (v"')
to the operation of the plant.
It seems to me, for instance, 1
24 that the Su'squehanna River has an authority thct controls the i Ace-Federal Reporters, loc.
use of the river.
Whether that permit might or might not have 25
! Graham - direct 44
^[ ';
Ij anything to do with the plant being placed in commercial service, y
2 1 don't kn.'w.
I doubt it.
(]
Q Do you see or have you ever in your experience 3
4 here at GPU or prior seen an example where actions or require-S ments of these regulators might lead to conflicting pressures 6
on the time for completing a plant?
7 A
Yes.
There was, for instance, a conflict in that regarc 8
between the Pennsylvania Public Utilities Commission and the 9
FERC as regards Philadelphia Electricity Salem plant and the 10 accrual of AFC.
I don't know the extent co which I can draw on II actual conflicts between what we are told by different agencies 12 as much as I would say that as we try to go about our business, v
13 we see areas where there may be a conflict.between what one I4 agency wants and what another agency w2nts and we have to try 15 to work out our affairs in such a way as to accommodate all of 16 those interests.
I7 Q
Would you include the Internal Revenue Service 18 in this list of regulators that have an interest in the time?
I9 A
I don't think of the IRS as being regulators.
They cer 20, tainly have rules, regulations, and interpretations of the Interr al 21 Revenue Code that one has to conform to.
I guess I don't think (v]
22 of them as regulators because I think of regulators as a board 23
(]
that makes a decision, gives a license, or that kind of thing, t
24 so I don't put the IRS in that kind of category.
Ace-Federal Reporte s, Inc.
25 MR. VANDENBERG:
Off the record, i
Graham - direct 45 f
1 (A discussion was had off the record.)
1 s
Q Mr. Graham, would you be willing to sometime in 3 the near future talk with us further about this broad issue?
4 A
I'd be more chan happy to.
5 MR. EVANS:
To clarify, Mr. Graham, it's 6
our intention to have those discussions informal:.y.
At this time I would like to ask if you have any 7
8 other comments or topics you would like to draw J
9 to the attention of this Special Inquiry Group.
10 THE WITNESS:
No.
1I MR. EVANS:
Mr. Liberman and Mr. Davidson-o 121 (A discussion was had off the record.)
13~
MR. LIBERMAN:
I have a couple of commen1:s 14 that I would like to make.
From Mr. Graham's 15 1
statement he referred to the Touche-Ross con-16 struction review and I would like to call to the i
17 Inquiry's attention the fact that the positions 18 taken by Touche-Ross in that review were challenged l9 in' extensive hearings before both the Pennsyl-20 vania Public Utility Commission and the New Jersey 21 Commission and were the subject of extensive 22 testimony before both bodies, and the result was 23 that Touche-Ross' construction review recommenda.
24 tions were not accepted by those bodies.
Ace -Federal Reporters, inc, 25 I should add that in the case of Penelec d
Graham - direct 46 1
where the construction review dosament was first 2
presented, the administrative law judge held Q
3 that they were submitted too late in the case 4
for consideration by him.
5 In the case of the Metropolitan Edison 6
rate case, they were rejected by the administra-7 tive law judge in his decision.
My recollection 8
is that the commission said if they were to be 9
presented, they would be presented at a later 10 date; it could be presented at a later date.
11 It's not clear what disposition might 12 have occurred in the absence of the accident.
13 In the New Jersey Central case, they 14 were not accepted by the commission.
There was 15 a further proceeding which I believe never re-16 sulted in a decision because the accident in-17 tervened and the matter became really irrelevant 18 but there was substantial testimony as I have in-19 dicated, both seeking to rebut the assertions 20
.made in the report and there was extensive cross
~
21 examination of the Touche-Ross principals as to 22 the claimed basis for the statements made.
23 Secondly, in connection with the rate 24 cases, I think it's relevant to point out that
- Aca-Fedical Reporters,Inc.
25 the orders were entered by the two commissions y
I 47 Graham - direct I
about a month after the declaration of commer-(
2 cial service for TMI-2 in the case of Penelec
{}
3 and about three months in the case of Metropoli-4 tan Edison and my recollection is one month in 5
the case of Jersey Central and in no one of 6
those decisions was a question raised by any 7
party to the proceeding with respect to the 8
status of the TMI-2.
9 If there are any other additional docu-10 ments on any of these that the Inquiry would II like, I would be glad to make them available.
12 MR. EVANS:
Thank you; we would like to pO 13 thank you for your cooperation in making both 14 the documents and officers and employees of the 15 corporations available to us.
16 At this time, Mr. Graham, I'm going to I7 recess this deposition rather than terminate it 18 on the possibility that we might want to speak-I9 to you:further under oath.
We will make every 20 effort not to be forced to do so but we would 21 f]
like that opportunity available to us should it 22 l
become necessary.
I 23 1 y/q I would like to thank you for coming 24 here today and testifying before the Special
- Ace-Federal Reporters,Inc.
25 Inquiry Group.
(The deposition is recessed at 5:10 p.m.)
48 I,
A 1
CERTIFICATE
't) 2 I, MARGARET TEILHABER A Notary Public and Certi-3 fled Shorthand Reporter of the State of New Jersey, do hereby 4
certify that the foregoing is a true and accurate transcript 5
of the proceedings in the above-entitled matter as reported 6
by me stenographically on the date and at the time and place 7
hereinbefore set forth.
8 I DO FURTHER CERTIFY that I am neither of counsel nor 9
attorney for any party in this action and that I am not in-10 terested in the event nor outcome of this litigation.
I1 12 13 14
//
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1-15 A' Notary'Public of New Jersey
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