ML19322C243
| ML19322C243 | |
| Person / Time | |
|---|---|
| Site: | Crane  |
| Issue date: | 08/15/1979 |
| From: | Dieckamp H GENERAL PUBLIC UTILITIES CORP. |
| To: | |
| References | |
| TASK-TF, TASK-TMR NUDOCS 8001160681 | |
| Download: ML19322C243 (15) | |
Text
. _ _
b5 4
i, i
DEPOSITION OF HERMAN M. DIECKAMP Before President's Commission on the Accident at Three Mile Island August 15, 1979 at the offices of Shaw, Pittman Portions relevant to COMMERCIAL Operation i
I i
)
J l
k i
i r
1
.) 80011 eog/
7 4
s
_ _ - ~. -
~
l-Dieckamp 104 5.17 2
looked into that matter.
3 g
Could you explain what it means to have 4
a nuclear plant declared commercial?
C.j%
5 A
Yes.
It goes back to FPC and FERC accounting, 6
and it means a number of things in a number of senses.
7 One thing that it means, which is a less in-8 portant thing, but one thing that it means within 9
the PJM families of companies that form that po 1i 10 that when we declare a plant commercial, it is made 11 available to the system dispatchers to call upon that 12 plant for generation when it is needed.
So it is, 13 in effect, officially made available to provide power 14 to the pool, but that is I don't know -- not a 15 terribly significant thing.
16 The more critical feature relates to the FPC 17 accounting rnles, which I think needs to be there, is, as 18 I was saying, that while I am sure that there is an un-19 derlying presumption that " commercial" means that the 20 plant has reached some degree of dependability relative 21 to usefulness and power output and availability and 22 reliability,'There are no criteria along that line 23 that, to my knowledge, are articulated or are 24 available or established by the FPC.
The only 25 evidence of a rule or regulation says that in the B ENJAMIN R EPO RTIN G SERVICE
1 Dieckamp 105 2
event that 120 days passes from the time of initial 3
power operation and the plant has not been dec?ared 4
commercial, you are obligated to inform the FPC as
(~~
\\_
5 to why that has not occurred.
6 The specific things, then, that happen that 7
are important to the company relative to declaring 8
it commercial are that you change the accounting basis; 9
you no longer capitalize the interest charges, and you 10 no longer capitalize the operating and maintenance 11 costs associated with startup.
You being to charge 12 those operating and maintenance costs to the income 13 statement.
You begin to take depreciation charges 14 against income. You cease the capitalizing of the 15 returns on investment, sometimes referred to as the 16 Arc -- in other words, you begin again to incur 17 expenses directly reflected in the income statement 18 for the interest on any associated bonds, preferred 19 stock, or common stock dividends, and they now are 20 reflected directly against the operating income 21 statement of the company, and so now, absent rate 22 reiief or rate recognition that grants operating 23 revenues to offset those items of expenses tha.t are 34 now recognized currently,.the income of the' company l
25 begins to suffer a significant impact.
And; tha'.t B ENJAMIN R EPO RTIN G SERVICE
l 1
Dieckamp 106 2
is really the most concrete and definitive thing that 3
'happens when you declare a plant commercial.
4 So in these times, probably more so than in b) 5 periods 20 years ago or 15 years ago, with the extreme t,
6 investments of, you know, several hundred million 7
dollars that are outstanding at the time that a plant 8
is ready to be made commercial, it becomes terribly 9
important that rate-making activities with the State 10 regulators have a chanc'- to go forward so as to 11 a t t e m p e., as best you can, to synchronize the granting 12 of revenues to offset those expenses and the time 13 at which you declare the plant commercial and begin 14 to incur those expenses.
If you do not, there is a 15 time period of expense for those items of OsM 16 depreciation and fixed charges that are forever lost 17 and directly impact the income of the company.
18 (Continued on Page 107.)
19 20 21 22 23 24 25 BENJAMIN R EPO RTING S ERVICE l
1 Dieckamp 107 sw 2
Q Were there certain tax advantages that 6.1 3
would accrue to the company if Unit 2 was declared 4
commercial prior to the end of 1978?
)
5 A
Let me just back up one minute and say that I s
6 am sure that in the material that you have collected 7
through the, you know, the process of subpoena and 8
the like has provided a letter in 1978 to the 9
Pennsylvania PUC and the Jersey PUC in which we 10 attempted to, as simply as possible, protray the exact 11 effects and criteria and results of declaring the 12 plant commercial.
So there is a good reference from 13 our point of view.
14 One of the motivations for us having done that 15 with the absence of definitive criteria on books of
~
16 the FPC that could be used, so we were attempting to 17 provide a set of ground rules that everyone coi A work 1
18 to, j
- -- 19 Now, on the ma ', ce r o f taxes, let's just l
20 identify that there are two tax related items that 1
21 are of significance; one, the investment tax credit, j
22 and that tax credit is taken in a way with respect to l
l 23 deferral of taxes such that the effect of that tax I
24 credit shows up in the income state =ent over a period 25 of years and gets recognized in the rate-making so SENJAMIN REPORTING S ERVICE
1 Dieckamp 108 6.2 2
that any benefits of the investment tax credit flow 3
to the rate payer and not to the investor, so that 4
th at tax credit gets recognized in calculating or
()
5 reflecting the tax oblipations of the company which, 6
in turn, the derivation of the revenues required or i
7 thus the rates that the customers must pay.
So since i
8 that credit is reflected in these tax obligations in 9
the future over a normalizing time period of some 10 number of years I think generally over the life of 11 the plant -- in effect, the tax credits flow to the 12 customer and do not flow to the investors.
13 The second area of tax effects relate to what 14 is sometimes, I guess, called the half year conven-15 tion on depreciation that says if a plant goes in 2
16 seevice anytime during the year, and let's say 4
17 specifically the last half of the year, for tax 18 purposes, you are able to take a full half year of 19 depreciation but you need to show on the books for 20 income purposes only a pro rata share of appreciation 21 in accordance with the actual number of days, weeks
(:~.
22 or months that the plant is in service.
So there can
(
23 be, in effect then, acceleration of the availability 24 of that tax deduction associated with accelerated t
25 depreciation which can be of benefit to the conpany B ENJAMIN R EPO RTING S ERVICE
1 Dieckamp 109 l
n p.3 in terms of cash flow which, in turn, gets recognized 3
many times in rate making as being called customer supplied capital.
It is not capital that we had to I
D 5
I
..)
put up by selling bonds or stock but rather capital 6
that is made available by the customers having paid 7
revenues but we did not have to pay the tax obligatiens 0
until later.
So there is some cash leftover in the 9
meantime, so there is that effect, but that gets 10 recognized in rat e-making.
Then there is the further effect then that to 12 the extent that that depreciation impact in a year in one of our jurisdictions, in New Jersey, is normalized 14 that is spread over the future, again so that it 15 gets recognized in rate-making whereas in Pennsylvania 16 they do not recognize normalization and thus it can be 17 taken currently and can have a minor impact on the 18 stated income of the company for that time period, 19 keeping in mind though that to the extent that you "O
~
have taken that tax effect and that credit down, it ol
~
isn't available to you later at some other time in the life of the property.
So it is really a timing 23 difference on that depreciation benefit of property 24 ownership.
25 So, yes, there is a degree of benefit to thn BENJAMIN R EPO RTIN G S ERVICE
I Dieckamp 110 6.4 g
company from the six-month convention on accelerated 3
depreciation if we could get to tha point where the 4
plant could be recognized as depreciable property in
(<
.sj 5
this time period before the end of the year.
1
\\j
, _j 6
Detailed looks at the tax law indicate so that one 7
did not have to declare the plant commercial in order g
to be able to do that.
There are tax cases in the 9
case histories and records, or whatever you legal 10 folks call them, that say that when the plant gets to 11 a certain degree of readiness to operate or some 12 fuzzy measure of operability, that then one can 13 qualify for this six-month conventional depreciation 14 and the impact that has on the income statement and 15 the like.
16 Q
Were you advised of that in the. fall or late 17 fall of 19787 18 A
We"were aware of that tax effect and that _
19 accounting treatment.
Frankly, we worried mostly 20 about whether or not the regulatory environment, 21 whether we should treat the Pennsylvania piece the 22 same way as the Jersey piece, namely of normalizing it 23 so it would be spread over the life of the property 24 and subsequently taken to account in rate making or 25 whether to do it immediately as an effect on 1978 I
BENJAMIN R EPO RTING S ERVICE l
1 Dieckamp 111
.5 2
income.
That was the principal feature of our concern, 3
again re ognizing that the rate-=cking process is eno 4
that has so many degrees of freedom in terms of the
[
5 manner in which costs and expenses and revenues are
's j
6 adjusted and normalized and rates of return are 7
established in that the regulator always has the 1
8 ability to adjust the numbers to get the end results, 9
and so one can simply fool himself by trying to take 10 advantage of a timing dif ferential on the reccgnition 11 of a certain tax deduction.
But we ulti=ately did go 12 ahead and take advantage of that six-=onth convention 13 in the Pennsylvan'ia portion of our revenues and 14 expenses and earnings, keeping in mind then that this 15 was not a unique situation; this absence of the 16 nor=alization procedure is pretty well established in 17 the Pennsylvania regulation.
It had been done before 18 by us and others with other plants.
I could hardly 19 identify it as having been a major consideration 20 relative to the specific activities of the plant 21 startup program.
22 Q
In 1978 did GPU take that half year 23 convention or what they called a modified half year 24 convention?
23 A
Joan, you are beyond =y detailed knowledge of B ENJ AMIN R E AC RW NH SE ICE fhh hIjk1 A_
w
=
-m.
m
.m.
m m
1 Dieckamp 112 6.6 2
the tax law with respect to that difference, whatever 3
it is.
4 MS. GOLDFRANK:
I would like to request 5
that we be provided wi>:
the GPU consolidated
(
6 tax return for 1978.
7 Q
Ycu indcated that with respect to invest-8 ment tax credits, that that would be passed onto the 9
consur..r in establishing the rates.
10 A
Yes.
11 Q
Would all of that be passed onto the 12 consumer or is a certain percentage of it 13 A
I think all of it because it all shows up in 14 calculating the tax obligations of the company and 15 thus the revenue requirements to provide a given level 16 of earnings in the regulatory process.
17 Q
It is all calculated in to determine the 18 rate base: is that how 19 A
not the rate base, the earnings required to give 20 a rate of return so, you know, after we get down to 21 the operating revenue, operating income and after we k-22 take off'the income taxes, which income tax is then an 23 add in the income taxes, which income taxes may be 2?
reduced by virtue of some i nve s t=e n't tax credits.
25 That, in turn, leads then to an operating inco=e of S ENJ AMIN REPORTING service l
{,
g j\\\\
i..ayu4, p n,m! _
o g
ii i
1
1 Dieckamp 113
.7 2
income taxes which the regulator then relates to a 3
rate of return on the capital that is employed in the 4
business, giving recognition to the actual interests 5
costs, the actual pre ferred dividend costs, and then I
6 setting an all. owed rate of return on the common equity 7
and then using those three parameters against the 8
capitali=ation ratios, and many times also adding a 9
fourth increment of capital, namely customer-supplied 10 capital at a zero rate of return.
Then it equates 11 this income to that rate of return on rate base and 12 the income is calculated, recognizing any income tax 13 obligations that are there.
14 Again, that can be different on a cash flow 15 basis.
While one has a statement of income tax obli-16 gation, those taxes may not be paid in cash in that 17 time period but ultimately they have to be paid if 18 normalized and spread over some time period in the 19 future.
20 Q
You indicated that you were aware that this 21 half year convention could apply independent of when
~'
22 Unit 2 was declared commercial.
23 A
Yes.
24 Q
Were you aware of that in 19787 25 A
Yes.
B EN.JAMI N R EPO RTIN G S ERvlCE
.. _ N_ _ _
i 1
Dieckamp 334 6.8 2
Q And who advised you as to that?
3 A
I think it came as a combination from our 4
comptroller and the Tax Department that reportr to him
()
5 and the general counsel of the corporation.
6 (Discussion was held off the record.)
7 MS. GOLDFRANK:
If the manner in which 8
Unit 2 was depreciated by GPU in 1978 is not i
9
.ttached to its consolidated tax return, we I
10 would request that we be provided with a 11 schedule of that depreciation.
12 Q
In the fall of 1978 a Commercial Operation 13 Review Board was established?
14 A
Yes.
15 Q
To determine the technical and operational 16 readiness of Unit 2 to be declared commercial?
17 A
Yes.
18 Q'
were you involved in establishing that 19 board, that mechanism?
20 A
Yes, I was involved in establishing the mechanism 21 and I think it effectively was applied before Unit 2 of N-22 TMI.
It seemed to me that because of the interface, 23 organizational interface relationship between the 24 service company conducting the design and the 25 construction and the operating companies being the B ENJ AMIN REPORTING S ERVICE
I Dieckamp 333
.9 2
owners of the plant and the subsequent operators of 3
the plant, there was a need for a degree of formali-4
=ation of this transition in responsibility, and as C..
5 I say, it seemed to me to be an appropriate thing to 6
formalize that transition and to provide some assur-7 ance that the state of the job was known at the time 8
of the transition and that any remaining problems 9
were identified on a punch list for completion, that 10 responsibility for that completion was assigned and 11 that there was evidence that the operating companies 12 were aware of what they were getting, you know, and 13 had gone through a systematic review of the pieces and 14 parts and systems and equipment and everything asso-15 ciated with the plant.
It just seemed to me like a i
n 16 good way to do business.
17 Q
This is what we have previously marked as 18 Finfrock Exhibit 2,
an October 26, 1978 pamphlet 10 concerning the Commercial Operation Review Board 20 manual.
Were you involved in establishing the criteria 21 that begins on Page 2 of this Exhibit which was used to C
22 assess the readiness of Unit 27 23 A
Joan, I think I would say that'I was involved in 2%
terms of discussions at the tine.
I think this was this is Three Mile 2 -- but what led to this 25 before B ENJ AMIN R EPO RTING S ERVICE L
1 Dieckamp 116
'6.10 2
manual started out to be put into place earlier than 3
the Three nile 2 application.
t 4
I notice this is dated 6/27/78.
The concept of
('
5 the service company manual was sort of in process for 6
a couple of years.
I think the basic concept of the 7
formalized aspect of the turnover, maybe some elements 8
of it, were applied to TMI 1, but then I think the 9
next level o'f refinement on that approach showed up 10 on the Homer City 3 plant and I am sure that I was 11 involved both with Bill Verrochi and hie 3taff and 12 then Bob Arnold and his staff and indicating the areas 13 that I thought were important for such a review to 14 include, but I was not involved in the specifics of 15 enumerating them or the specific language or that sort 16 of thing.
I left that to the staff to arrive, them-17 selves, at what those things should be.
18 Q'
Do you know if outside o f Me t Ed or GPU 19 anybody or any organi stion was contacted or consulted 20 concerning the criteria for determining readiness of 21 Unit 27
(-
22 A
Not that I know of, no.
I am sure that I
23 suspect I have I guess I shouldn't say "sure" 24 to suspect or assume that in the course of the review 25 Bsw and Burns & Roe in some ways participated in that EENJAMIN R EPO RTIN G S ERVICE
~
1 Dieckamp 117 6.11 3
review, but I don't think, to my knowledge, they were 3
involved or even should have been involved in the 4
establishment of these criteria for the turnover.
As i
5 far as I was concerned, that was an internal manage-6 ment discipline kind of matter, internal to GPU.
7 Now, whether there was someone along the line g
of a consultant of some sort that we might have talked 9
to about this, I don't know.
You know, it is conceiv-l 10 able that there could be, but.I don't know, you know, 11 of any conscious study where we went to somebody and l
12 said, " Hey, if you want to do this, what do you thin' 13 you ought to do," and therefore wrote a set of recom-14 mendations to us.
15 Q
so as far as you know there wasn't any 16 contact or consultation with the NRC?
17 A
Not to my knowledge at all.
This is not a 18 requirement of the NRC in anyway, to my knowledge.
19 I think, you know, the NRC regulations don't particu-20 larly contemplate the kind of organizational structure 21 or arrangement that we have. I don't know of any NRC 22 involvement in this.
Of course, being able to fulfill 23 the NRC requirements on procedures, quality assurance 24 plans, and things like that, certainly are an element l
25 of readiness, but the concept of a formalizing of the 1
i 8ENJAMIN R EPO RTIN G S ERVICE
1 1
e 3
1 Dieckamp 118 6.12 2
turnover and a review of the state of readiness as we 3
go through it, I have no knowledge at all of any 4
relationship between that and the NRC.
)
5 You know, in a sense, maybe some of this comes t
l 6
out of my background with some of the space program 7
activities where we tended to have these kinds of you passed a piece of 8
formalized turnover reviews as 9
equipment from one set of organizational responsi-1 10 bilities to another.
s 11 Q
As of March 1,
1979, Gary Miller was made 12 a manager reporting directly to the vice-president of 13 generation.
14' A
Right.
15 Q
As opposed.to reporting to the manager for 16 generation operations.
17 A
Nuclear operations or something, who was Sandy 18 Lawyer, yes.
19 Q
old you have any involvement in the deci-20 sion to raise Gary Miller to the position of station 21 manager reporting directly to the vice-president?
22 A
You know, while it did not happen as a result 23 of my strict direct directions, I certainly feel that 24 I influenced the organization and the direction of 25 the organization because I felt that there was no BENJAMIN REPORTING S ERVICE