ML19312C973
| ML19312C973 | |
| Person / Time | |
|---|---|
| Site: | Crane  |
| Issue date: | 09/18/1979 |
| From: | Whitman M WHITMAN & CO., INC. |
| To: | PRESIDENT'S COMMISSION ON THE ACCIDENT AT THREE MILE |
| Shared Package | |
| ML19312C974 | List: |
| References | |
| TASK-TF, TASK-TMR NUDOCS 8001170602 | |
| Download: ML19312C973 (4) | |
Text
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ger M n m e-4 tri u q F//
September 18, 1979 President's Commission on the Accident at Three Mile Island 2100 "M" Street, N. W.
Washington, D. C. 20037 RE: Financial Practices of General Public Utilities Corporation 1968 Throuch March 1979 Gentlemen:
You have retained us to examine the financial practices of General Public Utilities Corporation and Subsidiaries (GPU cr the Utility) from 1968 through March 1979 to ascertain if, and how, such financial practices contributed to the March 28, 1979 accident at the Three Mile Island 2 Nuclear Station (TMI 2).
The results of this examination are contained in the report accompanying this letter.
The report is in two parts. First, there is a description of the environment in which the industry operated from 1968 through March 1979 and an examination of electric utility financial practices. Second, there is an examination of GPU's financial practices, how they compared with other utilities that we deem to be most comparable to GPU, and how these financial practices might have contributed to the March 1979 accident. In the examination of financial facters in late 1978-early 1979, emphasis is placed on a) GPU's access to outside sources of finance l
as of late 1978-early 1979 relative to the Utility's cash requirements, b) income tax implications in bringing IMI 2 into ccmmercial service befcre the end of cal-l endar 1978, and c) rate increases granted GPU as a result of TMI 2 being brought into ccmmercial ser Ace.
In brief, we drew the following conclusions:
1)
The U.S. Investor-owned electric utility industry was viab[e during the relevant period but, because of general economic conditions, and the financial practices followed, companies in the industry lost considerable financial integrity after 1968.
8001170[ @
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Preside-t's Commission on the Accident at Three Mile Island September 18, 1979 l !
The basic financial practices followed by companies in the industry 2) were as follows:
a) finance the bulk of construction expenditures by recourse to out-side financing through the sale (mostly public sale as distinct from private placement) of debt and equity securities b) pay a large portion of net income to common stockholders as dividends and sell new issues of common stock periodically to the public.
3)
The general economic climate worsened for companies in the industry after 1968 because of the following:
l a) rapid increases in fuel costs b) increases in the price of money, both for debt and equity securi-ties c) huge inflation in construction costs, including the costs of nu-clear generating facilities.
4)
GPU followed general industry practices and, after reconciling indi-vidual company differences, probably was not materially different tri its financing practices, and results achieved, from the other electric utilities which had fact!!ttes in New Jersey or Pennsylvania.
5)
While GPU was anxious to place TMI 2 on stream as soon as possible in order to include these facilities in its rate base, there is no evi-dence that the financial position of GPU was such that its viability would have been threatened had Unit 2 remained inoperative for an indefinite period. The evidence indicates the following:
I a)
GPU had reasonable access to outside financing within the fi-nancial community to cover its 1979 construction and debt re-tirement programs. While the Utility's access to outside sources of finance, especially debt finance, was restricted during periods in the 1970's, including portions of 1974 and again in 1976, GPU appeared to have ready access to capital markets in lcte 1978 and early 1979.
j m
President's Ccmmission on the Accident at Three Mile Island September 18, 1979 l a b) the Utility, alternatively and supplementarily, had unused bank lines of credit c)
GPU could. count on generating an historically high 50% or so proportion of its 1979 construction budget from internal sources, albeit the percentage of funds generated internally for construc-l tion probably would have declined for 1980 through 1983.because of projected large increases in capital spending.
d)
GPU probably had sources from which it could obtain power if l
Unit 2 did not become operative, including access to the PIM interconnect.
6)
Een if 'IMI 2 were not in commercial service by the end of 1978, GPU would have had an opinion of counsel that, for inccme tax pur-poses, TMI 2 would have gone into service for investment credit and depreciation purposes not later than the fall of 1978. GPU counsel would have relied on Internal Revenue Ruling 76-428 and would have deemed TMI 2 in service no later than October 1978, because TMI 2, in the language of 76-428, "had been placed in the control of the tax-payer by the contractor, and the generating unit had been synchron-1:ed into the taxpayer's power grid for its function in the business of generating nuclear electric energy for the production of income, even though the generating unit would undergo further testing to eliminate any defects... and to demonstrate reliability.' Income taxes, too, should he netted in that tax effects are taken into account in deter-mining appropriate rates by the utility commissions in Pennsylvania l
and New Jersey. Thus, had GPU not deducted depreciation and in-vestment tax credits attributable to TMI 2 in 1978, the Utility's sub-l sequent rate base would have been larger than was the case because of deductions taken in 1978.
7)
In Pennsylvania, and in large measure in New Jersey, TMI 2 was in-cluded in the rate base for regulatory purposes when final rate orders were issued in January through March 1979, which final rates would not have been issued until the facility entered commercial service.
The cost of delays, of weeks, or n.cnths, around the end of 1978, in having TMI 2 enter commercial service does net appear to have been critical to GPU in the Utility's over-ell financial context.
l
o President's Commission on the Accident at ihree Mlle Island September 18, 1979 We would be pleased to discuss in detail the contents of this letter and the acccmpanying report, with the Commission and the Staff, either individually or collecttwly, at a mutually convenient time.
Sincerely yours, M. J. WHITMAN & CO., INC.
Martin J. Whitman, C.F. A.
President MJW:mh Attachments
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