ML19322C343
| ML19322C343 | |
| Person / Time | |
|---|---|
| Site: | Crane  |
| Issue date: | 01/16/1980 |
| From: | Carroll T, Graham J, Hafer F GENERAL PUBLIC UTILITIES CORP., PENNSYLVANIA ELECTRIC CO. |
| To: | |
| Shared Package | |
| ML19322C344 | List: |
| References | |
| TASK-TF, TASK-TMR NUDOCS 8001160881 | |
| Download: ML19322C343 (10) | |
Text
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DOCKET NO.78-494 PENNSYLVANIA ELECTRIC COMPANY INDEX OF WITNESSES I
Witness Exhibit Series i
Fred D.
Hafer 300 Thomas L.
Carroll 100 Stewart Gordon, Jr.
200 i
l L. Sanford Reis 400 John G. Graham 500 1
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Docket No. ER 7 8-4 94 SUPPLEMENTAL TESTIMONY OF FEED D. HAFER ON BEHALF OF PENNSYLVANIA ELECTRIC COMPANY 1
Q.
Are you the same Fred D. Haf er who has previously 2
submitted testimony in this proceeding?
3 4
A.,.Yes, I am.
5 6
Q.
Mr. Hafer, what is the purpose of your supplemental 7
testimony?
8 9
A.
At the prehearing conference on April 16, 1979, it 10 was agreed that, in view of the accident at the Three 11 Mile Island No. 2 nuclear generating unit, it would be 12 appropriate for Penelec to present a supplemental case 13 indicating its position with respect to the rate increase 14 at issue here in light of the events at Three Mile 15 Island No. 2.
It is the purpose of my testimony to 16 describe briefly the scope and content of Penelec's 17 supplemental case, to explain the position which we take, 18 and to sponsor various exhibits and testimony, filed in 19 other proceedings, but which are pertinent here.
20 21 Q.
Would you describe briefly the contents of Penelec's supple-22 mental case?
23 24 A.
Yes.
Our supplemental case will cover the following areas:
25 26 1.
A brief description of the accident at TMI-2 and the 27 current prognosis for the plant; 28 29 2.
A brief description of our insurance coverages, the 30 potential for recovery, and additional expense items 31 which Penelec will incur which are not likely to be 32 recovered by insurance; 33 34 3.
An analysis of the benefits which our customers have 35 received in the past by virtue of Penelec (and 36 GPU's) investment in nuclear generating facilities; 37 38 4.
Items directly related to the question of the reten-39 tion of TMI-2 investment in rate base, including evi-40 dence with respect to our actual investment in TMI-2 41 (as opposed to our estimate) evidence with respect 42 to the current limited usefulness of the plant; and 43 evidence with respect to the appropriate legal con-44 siderations which apply.
PCg; 2 1
5.
Updated evidence with respect to the current cost of 2
common c;dity capital for Penelec; and 3
4 6.
A revised cost of service exhibit which illustrates 5
a method of sharing the cost of the temporary loss of 6
TMI-2 among shareholders and ratepayers.
7 8
Q.
Mr. Hafer, how will this evidence be presented?
,9 10 A.
Mr. Sanford Reis will present updated testimony as to 11 our current cost of common equity capital.
Mr. Thomas 12 Carroll and Mr. Stewart Gordon will each present portions 13 of the revised cost of service analysis which I mentioned.
14 Mr. John Graham will testify with respect to legal and 15 f actual considerations applicable to the question of 16 retaining the TMI-2 inve s tment in Penelec's rate base.
17 18 With respect to the other subjects I described, these 19 subjects have already been addressed in testimony and c
20 exhibits presented before the Pennsylvania Public 21 Utilities Commission in their investigation entitled 22 "Me t-Ed, Penelec, Docke t No. I-7 9 04 030 8. "
23 24 I understand that the testimony and exhibits filed by 25 the Company and by other witnesses in the Pennsylvania 26 proceeding have been made available to all parties to 27 this proceeding.
We have not attempted to repeat the 28 entire record of that proceeding, but rather to present 29 the portions of that proceeding which we deem relevant 30 here.
Other parties, of course, are free to utilize 31 additional portions of any testimony or exhibits by 32 witnesses whose testimony is being introduced here.
The 33 witnesses presenting testimony with respect to the 34 various subjects I have described, are busily occupied 35 with other matters to such an extent that we felt that 36 it was most appropriate to proceed in this fashion.
In 37 this way, the latest available information can be 38
, presented here in our supplemental case and, if desired, 39 these witnesses can be made available for cross-examination 40 at the hearing which I now understand to be scheduled 41 for some time in September.
42 43 Q.
Mr. Hafer, turning to your first subject, who is to 44 testify with regard to the accident and the current 45 prognosis for TMI-2?
Page 3.
1 A.
I am sponsoring as Exhibit No.
(PN-307), a five 2
page document, consisting of a report on the TMI-2 3
accident presented at the annual GPU shareholders 4
meeting on May 9, 1979 by Mr. Herman Die kamp.
Mr.
5 Dieckamp describes the accident in terms readily under-6 stood by a layman.
7 8
Since the causes of the accident are being *horoughly 9+-
examined elsewhere, we do not intend to pre.,ent any 10 further detail with respect to this subject in this 11 proceeding.
12 13 Q.
Mr. Hafer, Mr. Dieckamp states that GPU expects the plant 14 to be out of service for approximately three years.
15 Has there been any change in this prognosis?
16 17 A.
No.
It is difficult to estimate the time it will 18 take to bring the unit back on line and we currently 19 expect it to be out of service for two to four years.
20 21 Q.
Who will testify with respect to insurance recoveries?
22 23 A.
I am sponsoring as Exhibit No.
(PN-308) a ceven 24 page document, the cover page of which is entitled 25
" Testimony and Exhibits Presented by Mr. Harry Gerety 26 before the Pennsylvania Public Utilities Commission in 27 Docket No. I-79040308."
28 29 Q.
Mr. Hafer, are there additional expense items which Penelec 30 will incur as a result of the TMI-2 accident which are 31 definitely not covered by insurance?
32 33 A.
Yes.
As Mr. Gerety notes, the cost of replacement power 34 is not covered by insurance.
In this respect, our FERC 35 fuel clause will recover for the various GPU Companies, 36 after the lag period, the actual energy-related cost of 37 replacement power purchased on an economy dispatch 38 basis.
However, to minimize the cost of purchasing 39 replacement power through the PJM Power Pool, the GPU 40 Companies have been able to arrange at least two nego-41 tiated arrangements outside the Pool for the purchase of 42 replacement power, 43 44 One of these arrangements, a 200 megawatt sale by APS 45 to the GPU Companies, does entail payment of some demand 46 related costs which are not recoverable under our FERC 47 fuel clauses.
Even though we will incur additional 48 demand related costs, the arrangement is still attractive 49 on an overall basis because it is cheaper than buying 50 replacement energy through the PJM Power Pool.
The
(
Pego 4 1
demand related costs associated with this arrangement 2
are $100 per MW-day, and Penelec's share on an annual 3
basis would be approximately, S1.8 million.
These demand 4
related costs, of course, were not included in our cost 5
of service estimate filed in support of the rate 6
increase at issue here.
7+-
s 8
Our second arrangement consists of a sale of energy 9
by Pennsylvania Power and Light Company to the GPU 10 Companies out of their Martins Creek Units 3 and 4.
11 No demand related charges are involved.
We are 12 actively seeking to negotiate any other purchases 13 which would help to alleviate our replacement power 14 costs.
15 16 Q.
Mr. Hafer, are there other potential items which will 17 not be covered by insurance?
18 19 A.
Yes, there are.
While the insurance companies will pay us 20 for the costs of decontamination, they have advised us 21 that they will not pay for any of the costs associated 22 with bringing the plant to a cold shutdown status.
We 23 have not as yet been able to analyze the costs incurred 24 during the time from the accident until the plant was 25 brought into a cold shutdown status in sufficient detail 26 to isolate those particular costs which may not be 27 recoverable.
28 29 In addition, the insurance coverage does not extend 30 to any costs associated with the payment of premium 31 wage rates for overtime.
32 33 Q.
Is it possible for you to estimate today the amount of 34 additional expenses GPU Companies will incur as a result 35 of the accident which costs are not covered by insurance?
36 37 A.
I do not think it is possible to come up with any reason-38 able estimate at this date.
It is likely that the 39 subjects I have discussed, i.e.,
the cost of bringing 40 the plant to cold shutdown, premium wage costs, and 41 other potential items will be the subject of negotiations 42 and possible litigation with our insurance carriers.
43 44 Q.
Turning to your next subject, Mr. Hafer, who will testify 45 as to past benefits of nuclear power?
46 47 A.
I am sponsoring as Exhibit No.
(PN-309), a fourteen 48 page document, the first page of which is entitled i
l 49
" Testimony and Exhibits Presented by Mr. B. H. Cherry in L
50 Pennsylvania PUC Docket No. I-79040308."
Mr. Cherry l
51 discusses the past benefits which have accrued to our 52 customers as a result of GPU's investment in nuclear 53 generating units.
Page 5 1
Q.
Mr. Hafer, it has been suggested that it has been 2
unfair for the company to collect the rate at issue here 3
for the first 29 days of December last year, since the 4
TMI-2 plant was not placed into commercial operation 5
until December 29th.
What is your response to this 6
suggestion?
7
'8 A.
Ideally, the effective date of the rate should coincide with 9
the date of commercial operation of a major plant such as 10 TMI-2, where the investment in that plant is included in Il the rate-base calculation used to support the rate.
12 This synchronization did not occur with respect to 13 Penelec, in that the Commission allowed the rate to 14 become effective approximately 29 days prior to the 15 commercial operation date of TMI-2.
With respect to the 16 other GPU subsidiaries, the effective date authorized 17 by FERC for the resale rates was several months after 18 commercial operation date of TMI-2.
19 20 In view of this fact, I believe that it might be appro-21 priate to analyze some of the actual facts with respect 22 to the TMI-2 plant as they may have differed from the 23 company's estimate.
Such an analysis leads me to conclude 24 that no adjustment to the rate is appropriate here.
25 26 Q.
How do you reach this conclusion?
27 26 A.
I started by determining the total amount of revenues 29 which Penelec collected during the month of December, 30 1978, as a result of including its investment in 31 TMI-2 in our cost of service estimate.
For that month, 32 we collected from Penelec's customers approximately 33
$170,000 as a result of including this plant in our cost 34 of service estimate.
35 36 Q.
Would it not be appropriate for Penelec to refund this 37 S170,000 to its wholesale customers?
38 39 A.
I do not believe so.
The S170,000 arises because Penelec's 40 estimate of the in-service date of TMI-2 did not coincide 41 with actual events.
Our estimate of the total invest-42 ment in TMI-2 also did not coincide with actual events.
43 When the plant went into commercial operation and the 44 books were closed with respect to our total investment 45 in T'iI-2, it was found that our actual investment was 46 some $15 million higher than the total investment which 47 we had estimated for purposes of our cost of service 48 used in calculating the rate.
Pcgo 6 1
Q.
What is the approximate impact of this difference?
2 3
A.
For Penelec, the aporoximate impact of this $15 million 4
under-estimate of ar total investment in TMI-2 is 5
approximately $20.<00 per month.
In other words, the 6
rate is deficier. oy $20,000 per month to recover the 7
appropriate returi, taxes and depreciation expense on 8
our actual investraent in TMI-2.
In a space of 9 months, 9
our undercollection will have more than matched the
' 10 overcollection which occurred during the month of 11 December 1978.
Under these circumstances, I believe 12 that it is fair and equitable that no adjustment be made 13 because of the fact that the plant did not go into com-14 mercial operation until 29 days af ter the rate became 15 effective.
16 17 Q.
Mr. Hafer, you indicated that the fMI-2 plant ought to 18 be of some limited usefulness to the current GPU rate-19 payer.
Could you explain, please?
20 21 A.
The TMI-2 plant continues to be recognized as installed 22 capacity by the PJM power pool although it is suffering 23 a forced outage.
The continued recognition of the plant 24 as " installed capacity" saves GPU approximately $12 25 million per year in capacity payments to the pool.
This 26 represents $12 million in legitimate cost of service 27 expense which would otherwise be imposed on current rate-28 payers.
The current savings will be eliminated in large 29 measure in the mid-1980's when the capacity recognition 30 given the TMI-2 plant is reduced due to the forced outage 31 rate it is currently suffering.
Nevertheless, the plant 32 does constitute a $12 million annual benefit to the 33 current ratepayer.
34 35 Q.
Mr. Hafer, has the accident at TMI-2 had any impact on 36 Penelec's cost of common equity capital?
37 38 A.
GPU and all of its subsidiaries have suffered a severe 39 financial crisis as a result of the TMI-2 accident.
40 The accident has greatly increased the risks of invest-41 ment in GPU.
Investor perception of this increased risk 42 has caused a quantum leap in the cost of common equity 43 capital.
Mr. Sanford Reis testifies with respect to
.44 this increase and he finds that the cost of common 45 equity capital to GPU and to Penelec is at least 16%.
46 47 Q.
Is Penelec claiming a 16% return on common equity in
-48 this proceeding?
Page 7 1
A.
No.
Our request remains at the level of 14.5% as 2
originally submitted.
I would note, however, that a 3
return of 16% is justified, and if granted, such a 4
return would have a considerable impact on our cost 5
of service.
Mr. Gordon sponsors a summary cost of 6
service exhibit showing the revenue requirement needed 7
to produce a 16% return on common equity.
8
-9 Q.' Mr. Hafer, would you describe briefly the revised 10 cost of service exhibit which is part of Penelec's 11 Supplemental Case?
12 13 A.
Yes.
This revised cost of service exhibit makes a 14 number of relatively minor changes and one major change.
15 The relatively minor changes are as follows:
16 17 (1)
We have utilized a revised and up-dated capital 18 structure; 19 20 (2)
We have changed to the use of the 46% tax rate 21 in view of the recent legislation which reduced 22 the corporate income tax rate; 23 24 (3)
We have made a number of minor changes which were 25 agreed to as a result of settlement discussions 26 among Penelec, staff, and the customers.
27 28 The major change in this cost of service exhibit deals 29 with the question of our investment in TMI-2.
The cost 30 of service exhibit is designed to show our overall and 31 our allocated cost of service if the Commission were to 32 determine that GPU's shareholders should receive a 33 zero-return on the common equity portion of our 34 investment in TMI-2..
Mechanically, this is accomplished 35 by removing 32.17% of our investment in TMI-2 from 36 rate-base, since 32.17% represents the common equity 37 proportion of Penelec's total capital.
The details of 38 this adjustment are described by Mr. Carroll.
39 40 Q.
Mr. Hafer, is Penelec recommending the adoption of this 41 revised cost of service exhibit?
42 43 A.
No, we are not.
We do believe, however, that it constitutes 44 an approach which merits consideration by the Commission.
45 Regardless of the status of the plant, Penelec must 46 continue to pay the fixed charges (debt interest and 47 preferred dividends) on the debt and preferred capital 48 invested in the plant, as well as meeting the ongoing 49 O&M expenses associated with the plant.
l-Pcgo 8 1
There are obviously conflicting considerations at play 2
here.
On the one hand, it seems fair that investors 3
should suffer some portion of the loss associated with 4
the TMI-2 accident.
On the other hand, the long-term 5
best interests of consumers rests in a financially 6
viable company capable of attracting capital en reasonable 7-terms to continue to meet its public utility responsibility.
' 8 This case merits a careful consideration of the long-term 9
best intererts of both rate payers and investors.
GPU
'10 must be restored to a semblance of financial viability if 11-it is to meet the needs of its consuming rutepayers in 12 the near -future and the Commission might well. conclude 13
' that the long-term public interest is best served by 14 including the entire TMI-2 investment in Penelec's rate 15 base.
'Mr. Reis and Mr. Graham address this subject in
'16 more detail.
17 18 Q.
Does this conclude your supplemental testimony?
19 20 A.
Yes, it does.
4 1
e a
AFF1DAUlf STATE OF NE*4 JERSEY
)
)
ss.
COUNTY OF MORRIS
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Affiant, being first duly sworn, deposes and says that he has read the foregoing testimony, that if asked the questions therein his answers would be as shown, and that the facts contained in those answers are true and correct to the best of his knowledge, information, and belief.
/
fer X Sworn to and subscribed 8
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