ML19340B596
| ML19340B596 | |
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| Site: | Crane  |
| Issue date: | 09/30/1980 |
| From: | THEODORE BARRY & ASSOCIATES/TB&A GROUP CO. |
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1 I
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General Public Utilities Corporation Pennsylvania Operations Management and Operations Study Commonwealth of Pennsylvania Public Utility Commission l
September 1980 l
THIS DOCUMENT CONTAINS POOR QUAllTY PAGES
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1eocore 3arrt &Associa:es ATBMGroupcompany 30u2203$3 L0s Angeles. New York. Atlanta Chicago. Portland. Wasnington. D.C.
TABLE OF CONTENTS CHAPTER PAGE I.
INTRODUCTION.
OBJECTIVES AND SCOPE I-l APPROACH AND' METHODOLOGY I-3 COMPANY OVERVIEW I-4 REPORT ORGANIZATION I-6 II.
SUMMARY
OVERVIEd AND PERSPECTIVE II-l OVERALL ASSESSENT II-4
SUMMARY
OF STRATEGIC RECOME NDATIONS II-9 III.
FINANCE BACKGROUND III-l Electric Utility Industry III-l General Public Utilities III-2 Hignlights of TB&A Testimony III-3 Actions by the Pennsylvania PUC III-5 Subseouent Developments III-6 I
KEY ISSUE ANALYSIS III-7 Clean-up and Restoration Costs III-8 i
TMI 1 III-10 TMI 2 III-il Forked River III-12 Deferred Energy III-13 Loss Contingencies III-15 i
Tax Losses III-18 Access to Capital Markets III-18 Potential Impact of Clean-up and -
Restoration Costs on Revenues III-19 Bankruptcy III-20 l
L Reorganization Outside Chapter 11 III-22 Restoring GPU's Finnncial Viability III-24 STRATEGIC RECOMMENDATIONS III-26 Joint Task Force III-27 Interim Action Plan III-28 Emergency Plan III-28 IV.
ENERGY BACKGROUND IV-1 Oil IV-1 Coal IV-1 Uranium IV-2 Natural Gas IV-2 Power Pools IV-3 GPU System Load and Caoacity IV-5 Pennsylvania's Opportunities IV-6
TABLE OF CONTENTS (Continued)
CHAPTER PAGE i
IV.
(Continued)
KEY ISSUE ANALYSIS IV-7 Power Production IV-7 Fuels IV-ll Purchased Power -
IV-16 Load Management and Conservation IV-19 STRATEGIC RECOMNENOATIONS IV-21 1980 TMI 2 Major Commitment Review Options IV-22 Plant Availability and Output IV-24 Energy Options Strategic Plan IV-25 Load Management, Conservation and 1
Cogeneration IV-26 The " Pennsylvania Solution" IV-27 V.
NUCLEAR BACKGOUND V-1 Highlights of TB&A Testimony V-?
Ccvelopments Since the Accident V-2 GPU Actions V->
KEY ISSUE ANALYSIS V-4 Organization V-5 Major Contractors / Contract Administration V-8 Project Management Systems V-11 Construction / Clean-up Management V-12
' Support Activities V-14 STRATEGIC RECOMHINDATIONS V-15 Organization V-16 Project Controls V-17 Methods Improvement Program V-17 Puolic Relations V-17 Public Committees V-17 NRC Delays V-18 VI.
ORGANIZATION SACKGROUND VI-l Role of TB&A VI-l
{
Evaluative Criteria VI-2 1
GPU's Pennsylvania Operations VI-4 GPU Service Corporation VI-9 l
-TABLE OF CONTENTS (Continued)
CHAPTER PAGE VI.
(Cc7tinued)
KEY ISSUE ANALYSIS VI-12 The mnagement Comoination VI-12 Consolidation of Divisions VI-17 GPU Service Corporation VI-19 STRATEGIC RECOMMENDATIONS VI-20 The e nagemen (.omaination VI-21
. ' Consolidation of Divisions VI-22 Organizational Development VI-23 1
'(
TABLE OF EXHIBITS FOLLOWING EXHIBIT PAGE INTRODUCTION I-l The General Public Utilities System I-5 I-2 Present Corporate Organization Structure of GPU I-5
SUMMARY
II-l Summary of Strategic Recommendations II-10 FINANCE III-l Comparison of Power Production Costs For GPU and Other Electric Utilities-1978 III-2
-2 Comoarison of Power Production Costs for Met-Ec:,
Penelec ar._ Other Pennsylvania Utilities-1978 III-2
-3 Residentisl DJstomer Revenues for Northeastern Utilities-1979 III-3
-4 Potential Impact of Clean-up and Restoration Costs on Metropolitan Edison Revenues III-19 ENERGY IV-1 GPU Existing Net Installed Capacity IV-7
-2 Factt s Affecting the Productivity of Power Plants IV-8
-3 Fuel lost Comparison IV-9
-4 Hignlights of Plant Performance Analysis IV-10
-5 Maste. Plan For Target Load Reductions in 1990 IV-21
-6 Potential Savings from Reduced Forced Outage Rates IV-25 NUCLEAR V-1 Inree Mile Island Organization - Prior to Maren 28, 1979 V-5
-2 Organization Of Tne TMI Generation Group V-5
-3 Future Overall GPU Organization V-6
-4 Future GPU Nuclear Corporation V-6
-5 Secntel Organization For Clean-up Activities V-9
-6 Major Contractors and Vendors To TMI 1 & 2 V-9
-7 Organizational Responsibilities For Project Management Systems V-11
-S Work areakdown Structure For TMI 2 V-ll
-9 Radiological Control Management Plan V-14 ORGANIZATION VI-1 Present Corporate Organization of Metropolitan Edison Company VI-A
-2 Present Corporate Organization of Pennsylvania Electric Company VI-A
-3 Present Organization Structure of the GPU Service Corporation VI-9
-A Proposed Management Comoination Organization for GPU's Pennsylvania Operations VI-12
I - INTRODUCTION j
In September 1979 the Pennsylvania Public Utility Commission (PUC or the Commission) requested proposals to conduct a comprehensive management and operations study of Metropolitan Edison Company (Met-Ed), Pennsylvania Electric Company (Penelec) and General Public Utilities, Inc. (GPU or the Company). The request stated that the study would be performed in two phases. The first phase (Poase I) would consist of two components.
One component would be a broad but comprehensive review of the management and entire operations of the company. While tne scope of this review would be broad,-its depth would be sufficient to identify significant cost savings, improvements in management methods or service to customers.
The second component would be an in-depth analysis of the specific objectives detailed below. These analyses would be sufficient to provide responsible opinions, judgments and recommendations for specific changes together with projected costs and potential savings, if any. These analyses would also assist the Commission in carrying out its regulatory responsibilities.
The second phase (Phase II) would consist of in-depth analyses of areas where cost savings and potential improvements warrant a more detailed investigation than could be conducted during Pnase I and the development and l
implementation of those proprem3 and systems identified in Phase I that are authorized oy the Commission This authorization will follow the Com-mission's consiceration or the recommendations in the R1ase I report and a cost / benefit analysis of each proposed program.
In November 1979, Theodore Barry & Associates (TB&A) was selected to l
perform the study. The audit began on December 17, 1979.
This report l
presents the results of Phase I.
This chapter outlines the objectives and scope of the study, the approach and methodology used, an overview of GPU operations and the organization of this report.
03]ECTIVES AND SCOPE The overall objectives of this study included the determination of what improvements, if any, could be accomplished in the management and op.
erations of GPU and, specifically, which, if any, cost saving measures could be instituted. The ultimate purpose was to explore all economically prac-ticable opportunities for providing ratepayers with lower rates and/or bet-ter service.
In addition, as requested by the PUC, the following specific ob-jectives were to be addressed:
Review the prior management and operations study of GPU and the prior review of the construction management of TMI 2 to become aware of. the major issues developed during these studies.
These reports were used as a starting point to identify the sub-stantive issues early in the review and to isolate the recom-mendations made in these studies that have not been implemented.
I-l
Review the financial condition of CPU and address the following specific questions:
o diat is the current and prospective financial condition of I
GPU assuming the continued unavailacility of nuclear units TMI 1 and TMI 2?
o Has the Comptey considered and actively pursued all pos-sibilities ior the procurement of capital?
Conduct a detailed review of the Company's efforts to find eco-nomical replacement power and note the successes and failures.
Examine the management actior.3 and decisions involved in the following, in order to make a determination as to the adequacy of the past and present management of Met-Ed:
o The construction, maintenance and operation of TMI 2 o
The NRC modification order on TMI 1 i
o The actions and responses of Met-Ed during the PUC hear-ing. The Commission order as a result of tais hearing was part of the RFP.
This order addressed the very complex issues concerning who should pay for-the costs of the accident.
t Examine customer service and other related issues developed as a result of interviews with the Director of the PUC's Bureau of Consumer Services.
In addition to the overall and specific objectives citeo above, TB&A suggested tne following sub-objectives:
t Evaluate manage.nent of major operations and determine how ef-ficiently Company resources are being used, if adequate and efiective policies and procedures are in force and being con-q i
sistently followed, and what improvements, if any, can be in-
?
stituted by the Company.
i Identify areas in which management and operational practices can be strengtnened and in which cost benefits can be realized, and l
l make recommendations for specific practical actions that will I
achieve these benefits.
Evaluate the effectiveness of toe organization of GPU to op-timally allocate management time, material and capital resources.
l l
j I-2
Identify and assess major external s' actors which may be con-3 tributing to present or potential management problems, and recommend improvements which the Company could make in carrying out its external relations responsibilities, and in responding to these factors.
Provide a vehicle for improving the crediollity and relation-ships of the Company and the PUC with political entities, with the press, with customers, and with the money markets by preparing an accurate and well-balanced report on management and operations. The report should put company performance in proper perspective, and describe strengths, as well as areas for im-provement.
There are many operational and financial ties between Met-Ed, Penelec, GPU and JCP&L.
These include the construction and ownership of power plants, energy exchange and purchase agreements, cross-loan guarantees, financial and cost allocation practices and executive level organization and decision making.
The scope of the study included all functional areas of Met-Ed, Penelec and GPUSC.
This study did not examine the management and operations of JCP&L, but it did examine financial and operational interfaces among all GPU operating companies and the service company.
APPROACH AND METH000 LOGY From mid-December 1979 through September 1980 TB&A consultants spent almost four man-years of effort on the Phase I elements of the management and operations study of Metropolitan Edison, Pennsylvania Electric Company, and General Public Utilities.
TB&A's initial proposal outlined a compre-hensive review for each of the Company's functional areas. Subseouent to initial interviews with GPU's senior management and upon completion of a review of relevant prior studies, TB&A refined its work plan to focus on these areas of major concern expressed by the Pennsylvania Public Utility Commission. Following review and approval by the PUC's Bureau of Audits, TB&A proceeded with the detailed technical work, which was conducted in two stages.
The first stage encompcssed a reconnaissance of each functional area to develop findings for usc by the PUC in the rate proceedings involving Met-Ed and Penelec in Doc <et m. 1-79040308. Because of the critically of these proceedings, the PUC Bureau of Audits reauested TB&A to:
Conduct on orientation of major functional areas to obtain first-hand knowledge of the needs of the Commission and the details of the problems facing Company management; Perform more in-depth reviews of certain areas idcntified by Commission staff; I-3 I
F Provide input to the Commission in its deliberations; ano Finalize a work plan for the remainder of Phase I activities.
8
{
TB&A's findings and conclusions were filed as testimony on March 4,1980.
Subseouent to prosiding testimony, T8&A initiated the second stage of the Phase I work.. Prior to undertaking this portion of the study, the wor <
plans were revised to reflect recent developments and the particular concerns of the PUC.
The major elements of this second stage of the work program consisted of a continuation of the review of nuclear and financial issue, an analysis of the characteristics of GPU's energy position and a review of the Company's proposed management wnbination and division consolidation of the Pennsylvania operating companies.
Throughout the course of the Phase I work, TB&A staff interviewed corporate personnel and managers in each functional area, reviewed docu-mentation regarding policies, procedures, and implementation plans already underway, and visited most major corporate facilities.
Interviews were also conducted with Commission staff members, the NRC, the SEC, the Lieutenant Governor of Pennsylvania, representatives of the Company's legal firms, i
representatives of the investment community including banks, investment firms and rating agencies and representatives of other interested parties Such as Johnstown Area Regional Industries (JARI).
After completion of the data gathering, TB&A staff analyzed and eval-uated GPU's operations to develop a profile of the Company.
Corporate docu-ments, reports from other utility companies, and TBLA's research materials formed the basis for the development of preliminary findings, conclusions and recommendations.
The preliminary findings and conclusions were verified with appropriate levels of management and subseauently incorporated into presentations to the Commission staff. A draft copy of this report was then prepared for review by the Commission staff and subsecuently Dy GPU prior to the issuance of this final report.
As a result of the review process, the findings and conclusions in the report are based on facts which are accurate to the best knowledge of GPU management, the Commission's Bureau of Audits, and TB&A personnel.
The findings, conclusions, and recommendations presented in the report are TB&A's and are not necessarily shared by GPU f
management or the Commission's staff, except as noted.
COMPANY OVERVIEW General Public Utilities Corporation (GPU) is an electric utility holding company that provides electricity to some 4 million people living in New Jersey, Pennsylvania and a small part of New York State.
It distributed more than 30 hillion kilowatt-hours of electricity in 1979. Of this total, approximately 34 percent went to residential customers, 23 percent to commercial accounts, and 37 percent to industry.
I-4
a The GPU System includes three operating companies:
Jersey Central
. Power &-Light Company-(JCP&L) in New Jersey and Metropolitan Edison Company 6
(Met-Ed)'and Pennsylvania' Electric Company (Penelec) in Pennsylvania (See Exhibit-1).
The_ System has total assets of $5 billion, making it the 14th largest of the nation's 210 Class A and B investor-owned electric utilities.
As.a holding company, GPU has certain external considerations which are not shared by many other electric utility companies. Since GPU has operating cc.npanies which serve areas of three different states -- New Jersey, Pennsylvania, and New York -- it must-of necessity deal with the respective regulatory bodies in each state. Due to the unique needs of each state the regulatory commissions do not necessarily operate in conformity and consistency with each other.
Both operating. companies in Pennsylvania are subject to rate and other comprehensive regulation by the Pennsylvania Public Utility Commission (PUC). As-subsidiaries of GPU, a registered holding company which holds all of the operating companies' common stock, both companies are subject to regulation by the SEC with respect to accounting, the issuance of securities, the acquisition and sale of utility assets, securities or any other interest in any business, the entering into and performance of, service, sales and construction contracts and other miscellaneous matters.
Both companies are also subject to regulation by the Federal Energy Regulatory Commission (FERC) under the Federal Power Act as a company I
engaged in the transmission or sale at wholesale of electric energy in interstate commerce, and by the Nuclear Regulatory Commission (NRC) as part owners of the Tnree Mile Island (TMI) nuclear generating station.
The business of the operating companies consists predominantly of the generation, purchase, transmission, distribution and sale of electric
-energy.
The GPU Service Corporation (GPUSC) provides management, financial, engineering, operating and administrative support services for the operating companies in the generation, power supply, transmission, distribution, ad-ministrative and general areas. GPUSC plans and supervises new construction work and is responsible for system-wide planning of power supplies, coordi-nation of safety programs, centralized computer services, purchasing, stores, labor relations, wage and salary administration and insurance.
The current organization structure of the overall CPU System is shown in Exhibit I-2.
Metropolitan Edison provides retail service in all or portions of four cities, 92 boroughs'and 155 townships, located within 14 counties in the eastern and central parts of. Pennsylvania, having an estimated population of 830,000. ~It also sells electricity at wholesale to five_ municipalities having an estimated population of 17,500, to an electric company serving substantially all of one township and to a rural electric cooperative corporation. Met-Ed's only subsidiary, York H2iven Power Company, is the owner and licensee of the York Haven hydro-electric project.
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Pennsylvania Electric Company provides electric service within a territory located in western, northern and south. central Penn-sylvania, extending from the Maryland state line norther to the New York state line, I
with a' population of about-1,500,000 approximately 30 percent of which is concentrated in ten cities and thirteen boroughs, all with populations over 5,000. Penelec, as lessee of the property of the-Waverly Electric Light and
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Power Company, a wholly-owned subsidiary, also services a population of
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about 8,400'in Waverly, New York and vicinity.
The Company's other subsidiary, Ninevah Water Company, which is also wholly-owned, supplies water to one of the Company's generating stations and to private customers in and around Seward,. Pennsylvania.
The generating and transmission facilities of JCP&L, Met-Ed and Penelec are interconnected and are operated as an integrated and coordinated system. Major facilities of the integrated system are designed and in-stalled on an over-all system basis to acnieve maximum operating economy consistent with service reliability.
The electric transmission facilities of the integrated system are also physically interconnected with neighboring non-affiliated utilities in Pennsylvania, New Jersey, Maryland, Ohio and New York. The Company is a mer' er of the Pennsylvania-New Jersey-Maryland In-terconnection (P.N) and the Mid-Atlantic Area Courcil, an organization providing coordinated review of the planning of electric utilities in the PJ4 area. The interconnection facilities are used for substantial capacity and energy interchange and purchased power transactions, as well as emergency assistance.
As _ of January 1,1980, ' Met-Ed had 2,123 employees (excluding personnel associated with nuclear generation) and Penelec, 3,239 (excluding 781 on site staff at jointly owned plants).
In addition to its wholly owned gen-eration, Met-Ed is the' operator for the jointly owned Three Mile Island nuclear plant. Penelec operates eight coal-fired plants, including one jointly owned with New York State Electric & Gas, two owned by a group of other PJM utilities, and two hydro plants.
It also operates pumped storage and diesel facilities for joint owners.
The employee totals include those devoted to operating facilities for other owners.
REPORT ORGANIZATION 1
This report contains six chapters and is organized as follows:
I INTRODUCTION - (this chapter)
II SU MARY -
presents an overview of the significant issues facing the Company and summary of strategic recommendations.
I-6
.l The~ review of the Company's operations is divided into the following (four chapters.
In each chapter, TB&A presents relevant background material,..
b an analysis of key issues, and strategic recomendations.
III -FINANCE IV EERGY V
NUCLEAfi VI ORGANIZATION APPENDIX.- provides a' list.of all recommendations contained in-the report.
l o
~
s I.
II -
SUMMARY
This chapter summarizes the key issues and recommendations of Phase 1 of -
li the Management' and Operations Study of the Pennsylvania operations of General Public-Utilities.
It provides an overview and perspective of.tne
' Company, reviews certain key issues to provide an overall assessment and outlines recommendations that must ce implemented.
- j..
OVERVIEW AND PORSPECTIVE At the end of 1978 the future' was promising for GPU, its ratepayers and investors.. GPU is now a candidate to be the first major utility to go bank-rupt since the Depression. Prior to the accident at TMI 2, GPU's finances -
were sound and. improving. The commercial start-up of TMI 2 in December 1978 marked the completion of a major construction program which would provide the Company and its customers with an abundant source of low-Cost energy.
Wnile it still faced major. construction reouirements in Pennsylvania and even more so in New Jersey, GPU had reached an enviable position' relative to the rest of the electric utility industry, and to northeastern utilities in particular.
It'had a low-cost generation mix due to its higner than average nuclear capacity; GPU's production costs from internal generation, in 1978, 4
were almost 7% lower than the national average and more than 15% lower than the average for other Pennsylvania companies.
Ine accident at TMI on March 28, 1979 predipitated a financial crisis that is without precedent for a utility company. The major players - GPU, the Pennslyvania PUC, the New Jersey Board of PuDlic Utilities, the state legislators and governors,. tne Federal Government and tne NRC - need to resolve the present financial predicament for the ratepayers, stockrolders and creditors. - Failure to do so presents a potential danger to public health and safety. The Company, while ouick to perceive the immediate impact of the-accident and respond effectively, has had difficulty in finding solu-
. tions to its long-term financial problems.
The Pennsylvania Public utility Commission has conducted numerous puolic hearings'to resolve key-regulatory issues emanating frum the accident. The Commission reached its decisions based on the information placed on the record by' the Company, intervenors and its own staff. The Commission's decisions have rested on its needs to address various ouestions'in lignt of regulatory law and precedent. Tr.e Commission's order of May ~23, 1980 pro-vided sufficient cash flow to maintain the solvency of the Company in the i
short-tenn. However, it now appears tnat uninsured costs to clean-up and restore TMI 2 may approach' $1.Dillion and uncertainty exists as to where the funds will come from. Uncertainty also exists as to when the NRC will allow.
TM1 l to return to service. The PUC's Septemoer 18, 1980 order nas clari-fled its position that ~ customer revenues cannot be used to finance the clean-up of TMI 2.
Without 'taking into account-the regulatory Constraints of the Commis-sion, a different structure to' the May rate order would have provided the same cash flow but with greater earnings and better coverage ratios without enanging the level of rates cnarged to customers.
In light of the Commis-I II-l n
p a
+ - - -, -
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r sion's recent order prohibiting the use of customer revenues to fund tne clean-up, the absence of third-party funding for the clean-up and witn GPU's
/
lack of financial flexibility, few options to fund the clean-up of TMI 2 1
exist. Without adeouate earnings and interest coverage, the Company cannot borrow funds in the amounts recuired over the next several years to continue providing reliable service to existing customers and to clean-up and restore TMI 2.
Six indisputable facts must be recognized to understand GPd's very real and pressing problems.
GPU Is In Great Jeopardy.
The Company's major snort-term and long-term financial problems need to be resolved, and the possibility of bankruptcy or a major reorganization of the Company is far from remote.
The Problems Involved And The Solutions Raouired Are Complex.
i Tnere is a growing sense of frustration oue to the inacility of the institutions involved to improve the situation without adopting unpala-table alternatives.
The Chairman of the Pennsylvania Commission nas made strenuous attempts to convince the Federal Government tnat it has significant responsioilities and coligations.
The Company has initiated severe cutbacks in many of its operations.
However, no vehicle has
{
surfaced to address the complex proolems and provide for an orderly resolution to all of the issues arising from this crisis.
The following circumstances contrioute to the proolems:
- Fragmentation of responsioilities.
The responsiollites of tne key players (the Company, ratepayers, the NRC, investors, the banks, the SEC, the Commissions in both states, the Federal Government, and others) frecuently conflict and overlap within tne current regula-i tory, financial, and legal constraints.
- Institutional ennui. Considering that eighteen months have passed since the accident, the situation has not improved substantially.
T71s environment fosters a feeling emong the' players of weariness and dissatisfaction with the process.
It appears that the existing in-stitutional framework is unable to resolve the problems.
- Rablic health and safety. The clean-up of TMI 2 must be completed as soon as practically poss1 Die.
Tne plant appears to be in a stacle condition and the Company has succeeded in releasing the Krypton gas and gaining entry into the containment building. However, the accident occurred 18 months ago and there are still hundreds of thou-sands of gallons of radioactive water in tne containment building and a complex clean-up program is reouired.
II-2 i
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- Public_ uneasiness. The continued escalation of rates,'particularly the funding of purcnased power costs, and ouestions of puolic nealth and safety contribute to tne public's concerns.
. Limited options. The money to pay for tne clean-up, purchasad power and Company operations must come from somewhere. The only possible candidates are.the ratepayers, the stockholders, the creditors, tne
. state or Federal governments or pernaps tne electric utility indus-t ry. OJrrently, Met-Ed's customer revenues are 25 to 30 percent higner than would have oeen the case if the TMI 2 accident had not
. occurred. Tnese increases are largely attributable to replacement power costs. Stockholders nave suffered paper losses approximating
$775 million as the price of GPU's common stock has decreased from
$18 to $5 a share. Shareholders nave also lost more than $100 mil-lion as-a result of dividend decreases and _ omissions. Met-Ed may Oc hard pressed to continue paying dividends on its preferred stock.
The Company's licuidity continues to deteriorate thereby increasing the chance that an event of default will occur and trigger bankruptcy.
- Increased uncertainties. Tne return to service of TMI 1 and 2 are not just uncertainties, but unknowns.
There is a growing awareness tnat tne' uncertainty surrounding wnen - if ever - they will return to service may oe key.
The Proolems Are Resolvaale.
If the problems are not solved, in tne near future, it will be because
~
principles nave prevailed over pragmatics. Given tne appropriate regu-latory assurances, and the return to service of TMI 1, GPU could finance-all expected clean-up costs witnin the existing financial and regulatory framework. This~is'not to imply that the solution would be resolved without increased costs. However,.even if'tne costs of-clean-up and restoration of TMI 2 are $1 oillion net of insurance, the revenues re-ouired will most likely be' less than ten percent over current levels assuming TMI 1 is returned to service and costs are recovered over at least five years. The return to service of TMI 1 is a necessary step to relieving the financial needs of GPU and its customers.
Time Is of The Essence.
i The world of _ tne practical will not wait for.the resolution of concep-tual issues. Financial markets can be auite unforgiving. Repairing tne damage to GPU's financial,viaDility will no doubt ninge on actions not intentions, results not efforts.
A Broad Perspective Will Be Necessary To Resolve Tne Problems.
i The issues t raised-are auestions of principle and policy. Tne issues take on greater meaning wnen viewed in terms of the role nuclear power plays in the nation's energy plans. One central auestion is wnetner tne l
II-3 l
m
[
h
- i NRC or the Federal government should oe held.accountacle for the finan-cial implications.of tneir decisions. That is, are the costs of tne
' continued outage of TMI 1 being. fairly weigned, of the NRC and,' if not,
-(
should ic or the Federal government provide financial relief to GPU and its'ratepayers?
(
OVERALL ASSESSMINT
(
Tnis section reviews.the results of TB&A's analysis of the key issues in four major areas:
- Finance
- Energy
- Nuclear
- Organization These areas are expanded on in the subseouent chapters of this report.
FINANCE
.l The financial health of CPU cannot be restored overnight. Once earnings i
sufficient to satisfy miminum coverage tests are acnieved, it could take l
another year before.the Company will be able to access the puulic bond mar-Kets since bond indentures reouire-tnat-the coverage ratio be met for 12 out I
of 15 months. The PUC may have to resolve a conflict that nas subsequently developed between two positions it has taken. On tne one nand tne PUC stated that it. "will provide Met-Ed the means of financial rehabilitation,"
but on the other nand it has prohibited the recovery of clean-up costs from ratepayers. _This position was developed when the uninsured amount was a relatively manageaole $100 million (versus $1 oillion today). Evants nave i
changed considerably since the Commission took these two positions.
Tne.
uninsured clean-up costs are now so great that GPU cannot nandle them with-out either rate relief or third-party funding.
The ultimate disposition of the TMI units and the Company's aoility to-recover its investment in Forked River, are still unknowns. Because tne range of possible outcomes is so great, bankers, trustees and rating agen-cies who must make decisions.about long-term commitments are unlikely to lend, invest.or' recommend investment of funds where preservation of capital' and reliaoility of income from the investment are so unsure.
Besides the ratepayers, tne only other candidates to fund the clean-up.
are either stockholders or a' third party,.suen as the Federal Government, t
state government or a utility industry group. GPU's stockholders have al-l ready suf fered massive losses.from.the severe decline in the market value of' l
their.. holdings (GPU stock.is, selling at 25% of book value as of mid-1980 versus 85% for the-industry) and from the discontinuance of dividends.
It is unlikely that the Company will be able to issue new equity as long as it p-II-4 d
warrants classification as a speculative investment. Tne continued erosion of the Company's eouity case will also impair the Company's ability to issue bonds since bond investors reouire a minimum amount of eouity " cushion" as a
)
condition of lending. Although the Company has brought suit against Babcock
& Wilcox, the designer / vendor of the damaged unit, it is unlikely that the suit will be settled before the clean-up costs reouire funding. The PUC has I
stated its belief that. the Federal Government has an obligation to underwrite the clean-up costs on tne basis that the Federal Government has pre-empted authority for the development of commercial applications of nuclear power and also that the increase in rates is an excessive burden on the Company's ratepayers. The White House has responded that is has no statutory authority to provide direct financial assistance to GPU and its ratepayers.
Ine average rates for Met-Ed and Penelec are not among the highest in the Northeast. Some combinations of events could result in much higher rates than at present.
If ratepayers funded the clean-up costs, they could find that TMI 2 (or worse yet both TMI 1 and 2) will not be allowed to re-turn to service. GPU's customers would then have paid almost $1 Dillion in clean-up costs only to be faced with continuing replacement power costs, which now total $325 million per year for both TMI 1 and 2 for the entire GPU system, and with non-productive investments valued at over $1 billion.
If there were a high degree of assurance that both Units would return to service, and that TMI 1 would return to service during 1981, the cost of funding the clean-up through rates mignt be a viable option.
If the projected $934 million in clean-up and restoration costs were funded entirely tnrougn rates on a current basis, the approximate impact on Met-Ed revenue reouirements would De less than 10% above current levels, based on a full current payment of clean-up costs and reflecting an allow-ance for inflation. Alternatively, if the costs were to be financed and amortized over 20 years, the net increase Could be Very small. Without the return to service of TMI 1, however, the increase in revenues reouired to fund clean-up costs through rates would be in the range of 10% to 25% over current levels for Met-Ed depending on the rate-making treatment afforded various items.
One argument for payment by the Federal Government is the prolonged outage of TMI 1 due to the actions, or inactions, of the NRC.
If the pro-longed outage of TMI 1 relates to double standards applied to it by the NRC i
in comparison to other Babcock & Wilcox generation stations of like design and construction, the NRC might have a responsibility to compensate those affected financially by its actions. By the end of 1980, the additional cost reouired to purchase replacement power for TMI 1 alone will total al-most $300 million.
While the NRC is not charged with responsibility for the financial via-bility of a company operating a nuclear generating station, it can withhold licensing if a company is not deemed financially sound.
If GPU is not judged financially sound, then licenses to operate the TMI units must be withheld. Yet, it is the prolonged outage of both units - particularly TMI 1 - (plus the uncertainity relating to either or both returning to service)
II-5
r that is seriously aggravating tn2 Company's financial position. For eacn month that the undamaged TMI 1 remains out of service, GPU's ratepayers incur another $14 million in extra costs and stocknolders must pay an k
additional $4.5 million in fixed charges (0&M, depreciation, interest and preferred dividends). Furthermore, the application of subjective ratner than definitive criteria in deciding on the restart nas created an environ-ment in which it is difficult to assess the likely outcome.
(
There 13 the potential for a domino effect whicn could adversely impact this situation.
If, for example, clean-up costs are ultimately determined to be unrecoverable througn rates and no third party steps forward to pay for them, those costs would have to be written-off against stockholders' eouity. The effect of writing-off $700 million (Pennsylvania's 754 share of
$934 million net clean-up costs) against an eouity base of $1.4 billion would reduce the Company's eouity ratio (based on 1979 year-end amounts) to well under 30% of capitalization. Such an event would imply continued low bond ratings and, unless another means is provided to generate earnings sufficient to more than offset the earnings impacts, the continuation of unsatisfactory interest coverage ratios.
The bankruptcy of one of the oper-1 ating companies would have a domino effect throughout the GPU systein, and possioly a serious impact on other PJ4 companies. Within the GPU system, even Panelec - which is in a much stronger financial position tnan the other i
operating companies - might be forced into bankruptcy, because it would not be aDie to obtain capital from the parent and because it could also be pre-cluded from obtaining any external financing.
Neither ratepayers nor investors would benefit from precipitating tne bankruptcy of any of the GPU companies. Perhaps the most disturbing facet of a financial calamity is that the companies might not be aole to continue the clean-up of TMI 2.
As TB&A testified in March 1980, "it appears that no one has a contingency plan to maintain the safety of TMI 2 and proceed with its clean-up in the event that Met-Ed/GPU can no longer do so."
Although I
the NRC is apparently preparing contingency plans for taking over the clean-up operation if necessary, those plans relate to the overall management of the project, not to the staffing of tne operation or liability for the costs l
incurred.
1 If CPU is not allowed to recover clean-up costs hrough rates and if the Federal Government does not offer financial assistance, then bankruptcy or a reorganization is probably Doth imminent and certain. All available infor-mation indicates that there will be additional costs under either a bank-ruptcy or a reorganization outside of Chapter 11.
ENERGY It appears that the Company could have devoted more attention to power plant productivity and maintenance during the mid-1970's, but did move ouickly to improve its performance in these areas in the late 1970's.
As a consecuence, the condition of tne plants worsened during tne 1977-78 period.
Significant improvements in results were realized in 1979 and early 1980.
The decline in plant performance is partly attributable to diverting resources to bring major new generating plants on line and to meet evolving II-6 j
environmental regulations.
In spite of the recent improvement in perfor-mance, there are some causes for concern.
Tne fact that megawatt hours lost
)
to forced outages nas not significantly declined since its 18 percent in--
crease in 1977 may indicate tnat eouipment and maintenance proolems still exist. Furthermore, the transfer of GPUSC's Generation Productivity Depart-ment personnel to work on TMI-related problems may negatively impact power
)
plant performance in future years. Opportunities exist to improve fossil-fuel power plant performance by 3% which could provide over $13 mil-lion of annualized. savings to GPU, exclusive of capital investments reodired.
The Company's overall performance in tne fuels area nas been good.
It strengthened its procurement organization and procedures to correct the fuel procurement weaknesses that led to the coal overpayments by Met-Ed in the mid-1970's.
Its uranium supply. activities prior to TMI were appropriate.
The Comoany, however, has not taken full advantage of its strategic oppor-tunities in tne fuels area. For example, GPU did not aggressively pursue the conversion of Met-Ed oil-fired combustion turbines to gas until January 1980. If the economic eva]Uations and the processes for securing regulatory approval had begun at the end of 1978, or immediately after the TMI accident when GPU began to purchase large volumes of intercnange power priced on a split savings basis against its combustion turbines, the Company mignt have realized some benefits by the spring of 1980. GPU now estimates that it will not realize tne $4 million annualized benefits from the conversions until the spring or summer of 1981.
GPU has made aggressive efforts to lower the costs of purchased power and has already acnieved substantial savings of over $100 million in pur-chased power costs. At the same time, the Company has exercised caution where warranted such as the rejection of Pennsylvania Power & Light's offer of firm power from the SusQuehanna nuclear units, and the attempt to nego-tiate with Ontario Hydro a pricing formula to reduce the financial risks of a potential Canadian energy export tax.
GPU'_s Load Management and Conservation Master Plan is comprehensive and reflects a careful, phased approach.
It identifies large potential Savings with a present value of $2 billion.
It employs a well-calanced, time-phased approach toward implementation.
Tne Plan, however, does not contain short-term options for achieving immediate reductions in load, and there are early indications tnat there may be more load reduction potential available from cogeneration than was evident at the time the Master Plan was developed.
While the Plan calculates savings on a discounted cash flow basis, it does not project the program's impact on revenue reouirements or such financial measures as: earnings, interest coverage, and level of short-term debt.
The Plan does not explicitly consider the impact of other companies' load management efforts, or time of day profiles of future purchased power sour-ces upon the economics of load snift programs. Finally, even though there is a high degree of uncertainty as to whether all forecast benefits of the program will be realized,.no sensitivity analysis was performed to cuantify tne impact of this uncertainty. A major obstacle to the successful imple-mentation of the Master Plan is GPU's current financial situation which may place serious constraints on the availability of needed manpower and invest-ment funds.
II-7
E l
NUCLEAR As a result of the visibility of the accident at Three Mile. Island, GPU-l
..is faced with complex institutional and political issu'es that could conceiv-l acly seve;ely constrain its ability to clean up TMI 2 and restart TMI 1.
4 Many of ;he restrictions being placed on GPU are far more stringent than those imposed on otner utilities witn operating nuclear plants. The clean-up and restart efforts will reauire that specific actions be taken promptly by.all-parties involved in order to ensure the timely and safe clean-up and restart of the units at a minimum cost.
L The Company has taken numerous steps at Three Mile "sland which have l
resulted 'in identifiable progress toward the safe clean up of TMI 2 and tha l
restart of TMI 1.
Tne concept of the nuclear organization is appropriate, i
but clear roles and functions need to be documented. (PU has substantially strengthened various functions at TMI through the addition of outside per-sonnel. The selection of Bechtel as the major contractor for the clean-up of TMI 2 is reasonable and prudent. The project controls to be used by GPU and Bechtel need to be more adeouately defined and implemented and a formal i
methods improvement program for the clean-up and restart efforts needs to be implemented. GPU puolic relations efforts with respect to the TMI 2 clean-up need to be strenghtened, and consideration should be given to increasing public involvement. GPU should develop and implement a specific program to communicate the adverse effects of NRC delays to its public and elicit their support to encourage the NRC to provide proper criteria for evaluation.
The issues associated with TMI are so complex that they cannot be ade-ouately addressed in the normal regulatory process. The regulatory and political problems facing GPU will probably continue to adversely affect the ability of the Company to clean-up and restart the units in a timely and safe manner. Numerous controlling " critical paths" may affect the clean-up and restart efforts, and many of these actions may be outside the control of GPU alone. It is therefore important that GPU address these outside forces
-- i.e., tne NRC and various other regulatory agencies -- to assure that the clean-up and restart are. accomplished in as cost effective a manner as pos-sible~ consistent with puolic health and safety considerations.
ORGANIZATION i
I GPU is attempting to make significant changes in its organization and j
methods of operation during a very difficult period. The accident at TMI was followed by a series of events which reouired GPU management's time and
.i attention above and beyond the reouirements of day-to-day operations. These-events included the need for crisis management at TMI, the recovery effort at TMI,. numerous studies and investigations, a rapidly deteriorating finan-cial condition, numerous rate and other public hearings, the proposed for-mation of GPU tbclear Corporation, the proposed management combination of the Pennsylvania operations and a strike at Penelec. The _ occurrence of any one of these events might cause. strain in the management of any company.
l II-8 l
w
-a.
rnrough the holding company arrangement and memJership in the P.M, ~GPJ has attained benefits sucn as economics of scale in central dispatch, aoil-ity to obtain financing, load diversification, and econonles of scale in-generation planning and construction. Ebwever, a number of significant q.
benefits can be acnieved, botn near-term and long-term, througn a comoina-tion of the Pennsylvania operating companies. Tnese cenefits include:
concentrated coal-fired generation expertise in the western Pennsylvania coal area; streamlined and strengtnened corporate staffs; more consistent and timely response to Pennsylvania publics; more standardized methods of operation and consistent levels of service; improved career development opportunities and ability to attract and retain personnel; and a more streamlined and consistent organization structure.
The Company has publicly committed itself to attain $18 million of annualized cost savings and cost avoidance through the management combination without impairing tne level of service delivered by Met-Ed and Penelec.
There do not appear to be any convincing arguments against the proposed management combination. GPJ nanagement is committled to limiting the net impact of the combination on employment in the Johnstown area. Because the proposed reorganization is a management combination, not a merger, the legal entities will continue 'to be separate for financing and ratemaxing pur-poses.
The only significant financial implication of tne proposed combina-tion is the potential to reduce future operating costs celow the level they might otherwise attain.
The original draft plan for the management combination prepaced by GPU in late March 1980 did not clearly identify how tne management comoination -
would benefit Pennsylvania ratepayers. Considerable modification was re-ouired to the original proposal to address the needs and Concerns of the Company's various publics.
The dynamic and complex nature of corporate reorganizations necessitates an iterative approacn. That is, reorganization evolves from an original proposal that is continuously refined as new facts-and persoectives present tnemselves.
Tnis iterative process is enaracteris-tic of tne proposed management combination of GPU's Pennsylvania operating companies. During the time period of tnis study, Td&A monitored and criti-oued this iterative process.
The Company's proposal now includes an im-proved organization plan, an oojective process for selecting key personnel, detailed plans for communicating the management combination to all parties, and the identification of and coanitment to the significant oualitative and ouantitative benefits whicn would accrue to the company and the ratepayers of Pennsylvania.
SUMM RY OF STRATEGIC RECOM:ENDATIONS Exhibit II-1 provides seventeen strategic recommendations for'implemen-tation.
There are also over eighty detailed recommendations which are -
listed in the appendix-and which reouire action on tne part of GPU, the Pennsylvania PUC or other groups. The specifics of each recommendation Can be found-in Chapters-III tnrougn VI.
The relative priorities of the strategic recommendations are bas 2d on the perceived needs of the Company, tne Commission and GPU's Pennsylvania II-9
~
ratepayers.
To' provide a basis for selecting the appropriate level of priority, tne following cr' 4.a were used to evaluate each recommendation:
Quantitative t3enefits Improved performance levels
- Potential cost savings I
- Potential cost avoidance Qualitative Benefits
- Meets cnallanges of cnanging environment Contributes to effective management
- Improves service For each ouantitative and oualitative benefit a High, Medium, or Low classi-fication was assigned to each recommendation.
The cost benefits of the recommendations can be categorized as: improved cash flow, avoidance of operation and maintenance expenses, reduction of operation and maintenance i
expenses, avoidance of capital expenditures and reduction of inventory levels.
The costs reouired to attain the substantial and necessary benefits are difficult to cuantify because they consist of a numoer of elements, in-cluding fees for external assistance, management time for development and implementation of new procedures, and on-going maintenance expenses. How-ever, in each recommendation outlined in Exhibit II-1, the benefits should more tnan offset the implementation and maintenance costs. All of the rec-ommendations are likely to produce indirect benefits to wnich specific dol-lar values cannot easily be attacned, but which will result in more effi-cient and economical operations.
Three levels of priority were assigned.
A-Essential that action on the recommendation be implemented imme-diately.
B-Recommendation will materially contribute to performance, and specific action should be taken within three months.
C-Recommendation will materially contribute to long term performance, and specific action should be taken within one year.
With regard to potential Pnase II projects, outside involvement should be considered in the implementation of each of the seventeen Strategic recommendations.
II-10
SUMMARY
OF STRATEGIC FECOMENDATIONS Page Reference Recommendation Quantitative Qualitative PriorPJ III-27 Estaclish a JOINT TASK FORCE consisting of representatives from GPU, Commissions and state governments of Pennsylvania and New Jersey, the Federal Government and tne High High A
electric utility industry to address al-ternative courses of actions and develop and implement a comprehensive plan of ac-tion relative to critical issues facing GPU.
III-28 In conjunction with tne Pennsylvanit and New Jersey commissions, develop an INTERIM ACTION PLAN to provide GPU with financial High Medium A
stability pending the complete resolution of key issues by the Joint Task Force.
III-28 Prepare to implement an EMERGENCY PLAN of action to forestall bankruptcy if tne due process reouirements of regulation will not allow the resolution of major issues, Low Low A
or the implementation of an interim plan in the very near future.
IV-22 Pursue the options indentified in the 1980 TMI 2 MAJOR COMMITENTS REVIEd OPTIONS.
3p Continue to. explore and expand upon all off-
,q $
site, non-conversion alternatives to tne High Hign A
~$
TMI 2 restore option to provide a margin of c, -
safety should the TMI 2 restore option become
* [
infeasible.
",L
m.__
4 4
Page
' Reference Recommer,Jation Quantitative Qualitative Priority.
IV-24
'. Expand and pursue the plan of action to
, optimize non-nuclear PLANT AVAILABILITY AND Hign Medium.
d OUTPUT in order to. reduce GPU's purcr.ased power reouirements.
-IV-25'
' Accelerate development of a formal ENERGY OPTIONS STRATEGIC PLAN which includes an assessment of relevant: regulatory, government policy, and fuels market factors and the Medium Low
.C initiatives that are contempleted in response to the problems and opportunitias represented by these factors.
IV-26 Furtner expand the LOAD MANAGEMENT, CONSER-VATION AND CO-GENERATION efforts to maximize high High 8
the load reduction potential.
IV-27 Expand'and pursue the " PENNSYLVANIA SOLUTION" opd ons, that is, initiatives sponsored oy Pennsylvania regulatory autnorities to develop a Hign.
Hign A
- statewide approacn to utilization of tne energy reserves of Pennsylvania, including generating
. facilities.
V-16 Expedite the development of formal roles and 7 nt functions of the GPU Nuclear Corporation Low High 8
c3 5 EE Organization.
f
" L.
e 9
P
- b
Page Re ference Recommendation Uuantitative Qualitative Priority V-17 Finalize the PROJECT CONTROLS to be used be-tween Becntel and GPU during the clean-up Medium Medium o
effort.
V-17 Develop and implement an effective METH005 IMPROVEMENT PROGRAM at TMI.
Medium Medium S
V-17 Continue to strengtnen the PUBLIC RELATIONS efforts for GPU NJclear Corporation.
Hign Hign A
V-17 Coerdinate PUBLIC COMMITTEES for each nuclear facility wnich will oe actively involved in High Hign d
the review of management actions.
V-18 Develop a specific program to communicate the adverse effects of NRC DELAYS to the Company's various puolics, iicluding the Pennsylvania High Hign A
and New Jersey Commissions, state legislatures and governors in order to apply pressure to the NRC to expedite its decision-making process tnrough all available means.
V-21 Complete the MANAGEMENT COMBINATION of the Pennsylvania companies.
Hign High A
V-22 Take the necessary steps to complete the CONSOLIDATION OF DIVISION OPERATIONS of High High 8
ym the Pennsylvania companies.
gg
"' E V-23 Develop a formalized organization planning u;
process to determine the long-term needs Medium Medium C
5,,,
and strategy of GPU for ORGANIZATIONAL g7 DEVELOPENT.
III - FINANCE BACKGROUND OJring the last decade the financial pressures facing the electric utility industry have intensified significantly as a result of inflation, higher interest costs, soaring fuel and construction costs and decreasing returns on equity. This section traces the effect of tnese changes on the industry and outlines GPU's financial position at the time of the accident.
In addition, this section provides highlights of T8&A's March 1980 testi-mony, relating to financial issues, the major elements of the Pennsylvania PUC's rate order of May 23, 1980 and a summary of developments since those events.
ELECTRIC UTILITY INDUSTRY There are 210 Clas, A & B investor-owned electric utilities in the U. S.
with net utility plant of $183 oillion and revenues of $65 billion serving over 67 million customers.
Toese companies account for 78% of all electri-city generated in the United States.
In the years 1969 to 1978 the nation's investor owned electric utilities increased their generation of electricity by 56%. DJring the same period operating expenses increr. sed almost 300%,
with fuel costs accounting for almost half of the increase in costs. Higher operating expenses accounted for 85% of the increase ir, revenues, which in 1973 were three and one-half times the 1969 level.
In order to satisfy the increased demand for elec tricity, utilities invested almost $110 billion in additional plant bet seen 1969 and 1978.
Financing was provided by issuing bonds and preferred stock in the amount of
$50 billion and $15 billion respectively with increases in common stock-holders equity providing an additional $42 billion.
The funds obtained by the electric industry through public financings between 1969 and 1978 represent a suustantial and increasing proportion of all funds obtained from public offerings.
., proximately 30% of utility financing was from common stock offerings and i3 presents an even higher proportion of total common stock offerings by all companies on the public markets.
This reflects the fact that electric utilities are capital intensive; in order to generate a dollar of revenue, utilities must invest three dollars in utility plant. This compares with $.70 in assets per dollar of revenue for the 1,000 largest industrial corporations in the U. S.
Slightly over 10% of the Fortune 1,000 require more than one dollar of assets to generate a dollar of revenue, and only a handful of those require more than $1.25 in assets per revenue dollar," The electric utility industy is far more highly leveraged than would be considered prudent for an industrial concern.
Electric utilities have a debt to equity ratio of 1.7 to 1 whereas for industrials a debt / equity ratio of 1 to 1 or greater-woJ1d be considered imprudent.
III-l
GENERAL P'JB.IC UTILITIES At the end of 1979, GPU had net utility plant of $4.2 0111i00 and revenues of $1.5 billion.
The Corporation's capital structure was as follows:
12/3U79 Capital Ratio (a)
Item Anount (1)
(2)
(Billions) tong-term debt
$ 2.2 53.7%
51.2%
Preferred stock 0.5 12.2 11.6 Common equity 1.4 34.1 32.5 Subtotal
$ 4.1 100.0%
95.3%
tbtes Payaole 0.2 4.7 Total
$ 4.3 100.0%
(a) The amounts shown in column (1) are those traditionally taken into consideration for rate-making purposes. The amounts in column (2) include short-term deot. Rating agencies now attach greater importance to the use of short-term debt because it is a key indi-cator of a company's financial flexibility.
When a company's short term obligations reach 5% of capitalization, it is assumed that toe amount is part of capitalization since, it is considered, it shoulo at that level be funded out oy long-term obligations.
Prior to the accident at TMI 2, GPU was in a sound Tinancial position with a bright outlook for the future. The initiation of commercial service at TMI 2 in December 1978 marked the completion of a major construction program which would provide the Company and its customers with an abundant source of low cost energy. While it still faced major construction require-ments in Pennsylvania and even more so in New Jersey, the Company had reached a plateau which put it in an enviaole position relative to the rest of the electric utility industry, and to northeastern utilities in parti-cular.
It had a low-cost generation mix due to its higher than average af nuclear capacity. Even using 1978 data (see Exhibits III-l and III-2),
which do not reflect the contribution that TMI 2-would have made, GPU's prodJction costs from internal generation were almost 7% lower than the national average and more than 15% lower than the average for other Pennsylvania companies.
The addition of TMI 2 would have further strength-
)
ened the Company's position.
Tne Company's financial position was sound and improving and it was under consideration for an upgrading of its credit rating.
In line with its conservative financial policies, GPU had not entered into many of the un-conventional financing practices now common in the industry.
The fact tnat GPU had not already financed its nuclear fuels and had recently reduced its short-term lines of credit proved to be most helpful when it sougnt the III-2
COMPARISON OF POWER PRODUCTION COSTS FOR GPU AND OTHER ELECTRIC UTILITIES 1978 All Class A & B Utilities Nortneastern Companies (d)
GPU Average Source as Ave.ge Source as Average Source as Cost Percent of Cost Percent of Cost Perca,t of Source Per M#H Net Generation Per M#H Net Generation Per MWH Net Ge icr9ti.nn Steam Conventional (a)
$17.47 80.3%
$22.77 73.U%-
$17.87 62.8%
Steam Naclear 6.71 13.5 8.48 22.7 5.69 33.4 Hydro 1.97 4.8 3.05 3.1 5.65 0.8 Other(D) 35.80 1.4 58.05 1.2 44.28 3.0 Total (c)
$15,54 100.0%
$19.36 100.0%
$14.49 100.0%
(a)
Includes both coal and oil-fired generaticn.
(b) Predominantiy.,3s turbines.
(c) Excludes pumped storage.
(d) See Exhibit III-3.
txcludes GPU companies.
Source:
Statistics of Privately Owned Electric Utilities in the United States - 1978 Department of Energy, October 1979; and Uniform Statistical Reports - 1978 E5 R-m-
L
COMPARISOM OF PO R PRODUCTION COSTS FOR FET-ED, PENELEC AND OTHER PENNSVLVANI A UTILITIES 1978 Otner Me t-Ed Penelec Pennsylvania Utilities (d)
Average Source as Average Source as Average Source as Cost Percent of Cost Percent of Cost Percent of Source Per MNH Net Generation Per M#H Net Generation Per MiH Net Generation Steam Lonventional(a)
$17.96 58.4%
$16.19 85.1%
$18.15 84.0%'
Steam t4; clear 4.38 37.8 4.38 12.8 9.10 11.9 Hydro 5.05 1.6 6.34 0.9 3.18 2.4 Other(b) 48.58 2.2 39.82 1.2 44.81 1.7 Total C)
$13.31 100.0%
$14.86 100.0%
$17.19 100.0%
l (a)
Includes both coal and oil-fired generation.
(b) Predominantly gas turbines.
(c) Excludes pumped storage.
(d) Duquesne Light, Pennsylvania Power, Pennsylvania Power & Light, Pniladelpnia Electric and West Penn Power Source:
011 form Statistical Reports - 1978
.-.er T~
Revobing Credit Agreement' immediately follodng the TMI accident.
In fact,
~
as indicated in TB&A's March 1980 testinony, severel members of the finan-cial community were of the opinion that negotiating the Revolving Credit I
Agreement plus two private placements represented "a remarkable achievement, and one which few managements in toe. industry would have been equal to."
Additionally, several~ of. those interviewed told us that they could think of a number of. companies in the utility industry that would not have survived an occurrence such as the accident at.TMI 2.
HIGHLIGHTS OF TB&A MARCH 1980 iESTIMONY The major findings in TBA's' testimony related to financial issues were -
as follows:
- The $55 million' rate request for Met-Ed represented the company's minimam requirement.
(The PUC's May 23rd Order granted the full apaunt-requested, plus rapid recovery of deferred energy costs.-)
The Company would require additional rate relief in the near future.
(Met-Ed and Penelec filed rate requests for an additional $75 million and $65 million per year, respectively, during 3;1y 1980.)
- Even with the oscalation in its costs sir.ce the accident, it does not appear likely that Met-Ed's rates will become the highest in the Northeast.
(See Exhibit III-3. )
- Witnout he ability to obtain external financing it will oe diffic<t-for GPU t undertake a major spending program such as the clean-up of TMI 2.
~
Tne Company's $400 'million estimate of the clean-up costs was a
" soft". number.. The actual costs will most likely be much higher.
(In August of 1980 GPU released a revised estimate of clean-up and restoration costs of $855 million.)
l The greatest cost of tne accident is the cost of replacement power and those costs ($127 million and $325 million per year for Met-Ed and GPU, respectively) were subject to potentially significant change due to circumstances outside the Company's control.
(While the Com-pany's cost of replacement power has not increased, this is in large -
measure due to GPU's success in obtaining purchased power.from coal- -
oased utilities outslue PJ4. This has reduced the. sensitivity of GPU's'repl8 cement power costs to escalation in oil-prices.)
' If GPU is to obtain external financing, it must obtain a level of revenues that will convince its creditors that it can recover their costs.
-- The Company's' cash flow position has deteriorated to the point where -
it might not be acle to deal with another major unforeseen event..
III-3
EXHIBIT III-3 RESIDENTIAL CUST0tER REVENUES FOR NORTHEASTERN UTILITIES ~
)
loh Average M;mber of Residental Utility DJstOmers Revenue per MWH Con Edison 2,367,539
$ 105.19 Long Island Lighting 806,262 71.62 PSE&G 1,486,142 70.08 Boston Edison 486,368 63.88 Duquesne 493,509 62.30 Jersey Central Power & Light 617,515 60.50(a)
New England Electric System 935,915 60.21 Central Hudson Gas & Electric 181,631 60.10 Delmarva Power & Light 240,401 58.62 Philadelphia Electric 1,171,340 57.86 Penelec 447,063 52.64(a)
Northeast Utilties 957,417 52.02 New York State Electric & Gas 586,665 49.78 i
Metropo itan Ediaon 314,219 49.14(a)
Rochester Oas & Electric 253,069 45.69 i
Niagara Mohwk 1,206,469 43.27 Potomac Electric 215,090 41.26
[
Average for 210 Class A&B Electric Utilities 59,311,000 43.10(b)
Source: Uniform Statir ical Reports for 1979 and Statistics of Privately j
Owned Electric Utilities in the United States - 1978
)
l (a)
For the 12 months ended June 30, 1980 the average revenues per megawatthour (MM) for residential customers were $55.20, $54.60 and i
$68.90 for Met-Ed, Penelec and JCP&L, respectively. These amounts more. fully reflect the impact of rate decisions since tne accident.
l However, information was not availaole to compute recent comparaole figures for_ the other companies.
(b)
-1978 average.
l
The loss of its ao111ty to obtain external financing will have a severe negative impact on the Company's ability to maintain service to customers and expedite the clean-up of TMI 2.
- The uncertainties associated with bankruptcy pose risks to rate-payers, regulators and investors.
These risks, which cannot be com-pletely quantified, should be avoided.
- Customers of all utilities dependent on the PJM power pool could be impacted due to the lack of planning by the PJM for a bankruptcy of a member company.
- Efforts to clean up TMI 2 might be slowed due to uncertainty with respect to responsibility for the clean-up thereby potentially endan-gering the public health and safety.
- No evidence was found to indicate that ratepayers would benefit financially from bankruptcy; the existence of a new untested bank-ruptcy law leaves too many questions with respect to the eventual outcome of such a proceeding.
- The cost of u;tside capital is not of as much concern to the GPU companies as the availability of such capital.
- The question of the Met-Ed franchise should either be deferred until all available options are studied or resolved in favor of the status quo. (The franchise issue was dismissed by the PUC in its May 23rd order.)
- The banks in the Revolving Credit Agreement attached symbolic and strategic importance to maintaining TMI 1 ln the rate base.
(The PUC removed TMI L from the rate base in its May Rd Order. )
- The banki in the Revolving Credit Agreement will be reluctant to advance funds without assurance as to the source of funds to rep 3y the loans.
(In September 1980, subsequent to the denial of eme' gency rate relief by the PUC, the banks in the Revolving Credit Agreement linked the amount of credit available to Met Ed to its rapidly declining deferred energy balance. The progressive reductions in credit caused by this action will be partly offset by the pledge of Met Ed's accounts receivable, as approved by the PUC on September 18, 1980.
The receivables will provide security for $20 million of borrowings under the RCA. )
- The " material adverse change" clause allows the banking group to withdraw from the Revolving Credit Agreement.
III-4
ACTIONS BY THE PENNSYLVANI A PUC The PUC's rate order of May 23, 1980 was a major milestone in the resolution of GPU's financial crisis.
The Cammission removed orc of the greatest uncertainties facing the Company by dismissing the order to show cause on the revocation of Met-Ed's certificate of public convenience:
"#e must conclude that based upon this record no modification or revocation of Met-Ed's certificate is required at this time because we find no imminent and foreseeable threat to continued provision of adequate and reliable service at reasonable rates."
More importantly, the Commission enunciated its position on Met-Ed's role in providing electric service in its franchise territory and on the support that could be anticipated from the PUC:
"The basic conclusion of the Commission in this order is that Met-Ed should continue to operate as a public utility. The Commission will provide Met-Ed the means of financial rehabilitation."
In addition, the order provided for approximately current recovery of energy costs and a rapid recoupment of deferred energy costs to provide increased cash flow. This ensured the company's viaollity in the short term and pruvided time to study the longer-term issues. Other major elements of the May 23rd order related to TMI 1 rate base treatment, clean-up costs and the role of the Federal Government.
The removal of TMI 1 from the rate base, a decision viewed oy the 03mmission as subject to review when warranted by a change in circumstances, was based on the finding that the uncertainties surrounding the restart were so great as to c ause it to fail die test of " imminence and certainty" of returning to sertice to the public.
In the May 23ro order the Commission stated, without expansion, that "nothing negated" the oosition it took in its order of June 19, 1979 regarding clean-up costs:
"The Commission is of tne view that none of the costs of responding to Die incident, int'uding repair, disposal of wastes and decontami-nation are recoverable from ratepayers.
These costs are and should be insurable."
The PUC decried the Federal Government's lack of financial assistance on the grounds that Federal intervention was implicit in the enactment and extension of the Price-Anderson Act.
In 1957 the Joint Committee on Atomic Energy commented that:
"Ble chance that a reactor will run away is too small and the fore-seeable possible damages of the reactor are too great to allow the III-5 i
accumlation of a fund which wo;1d be adequate.
If this unlikely event were to occur, the contrioutions of tne companies protected are likely to be too small by far to protect the puolic, so Federal ac-tion is going to be required anyway."(1)
And in 1975 the statute itself included the following provision:
"Provided, that in the event of a nuclear incident involving damages in excess of the amount of aggregate litility, the Congress will thorou111y review the particular incident and will take whatever action is deemed necessary and appropriate to protect the puolic from the consequences of a disaster of such niagnitude."(2)
Based on these findings, the Federal Government was called on to recognize its responsibilities and honor its cormiitment to GPU and its ratepayers.
SU8 SEQUENT DEVELOPENTS Subsequent to TB5A's March 1980 testimony and the Commission's final rate order of May 23, 1980, tnis study focused on those underlying issues affecting the long-term viability of the companies.
It is now apparent that the optimal resolution of the major issues cannot be achieved within a nar-row framework.
The interests of the ratepayers of both Pennsylvania operat-ing companies are inextricaaly intertwined with those of GPd's New Jersey ratepayers and also with the fortunes of the Company's investors. Further-more, toe NJclear Regulatory Commission, Congress and the Department of Energy are major players in the resolution of the financial issues.
The NRC is a key if silent - player with regard to financial issues.
me action or inaction of this agency will, to a much greater extent than initially perceived, influence tne outcome of major financial issues.
Congress and tne Department of Energy have emerged as parties in interest.
me value of oil required to produce the same amount of electri-city that could be provided by TMI 1 and 2 is $235 million and $270 million per year, respectively.
In 1980, the United States will pay almost $100 billion to OPEC. This is nearly ten times what it was five years ago and equal to 10% of the value of all stocks listed on the New York Stock Exchange.
The implications are as ominous as they are obvious.
It is not overly dramatic to relate the GPU predicament to national energy policy or to underscore the profound change that has affected one of the major under-pinnings of our economic strength:
a stacle supply of cheap energy.
Tnis (1) S. Rep. No. 296, 85th Cong.,1st >ss. reprinted in (1957] U.S. Code Cong, i Ad. NErws 1910-11.
(2) 42 U.S.C.
2210(e)(Supp.1979).
III-6
concern is regnified by the growing awareness that we rmast revitalize our industrial base -- and a major obstacle to any reindustrialization program will be the poor financial condition of the electric utility industry.
Tne treatment accorded GPU and the precedents set in resolving the pro-blems brought on by the accident will have significant implications for the future of nuclear energy, the nation's fuel consumption patterns and the cost of energy. The electcic utility industry will be given clear signals on how to proceed -- be it through legislative flat, the imposition of regu-latory criteria that cause the construction cost of nuclear stations to become prohibitively expensive, or an increase in the cost or lack of availability of caoital for nuclear projects due to investor perceptions of increased risks.
While the average costs of constructing coal vs. nuclear generation have nistorically been close, it is also apparent that the economics vary signi-ficantl, oy region.
The Northeast and Atlantic seaboard favor nuclear and tha nest favors Coal-fired generation. However, a de jure or de facto mora-torium on nuclear construction may lead to a sub-optimal fulfillment of future energy needs.
The same result could be brought about by the inclu-sion of a risk premium in the cost of capital for nuclear generation which might lead utilities to shift toward more fuel intensive capacity in an effort to keep total costs and risks as low as possible.
3, In addition to national economic considerations, there are also unre-solved questions regarding the more specific responsibilities of the Federal Government to GPU in the wake of the eccident.
The form and structure of Federal involvement as well as the types and extent of costs to be covered, if any, will require clarification. A study recently completed by the General Accounting Office on behalf of the Senate Committee on Environment and Public Works has called for the Department of Energy to undertcke a more detailed study, KEY ISSUE ANALYSIS The five key financial issues facing GPU are:
- Clean-up and restoration costs
- TMI 1
- TMI 2
- Forked River
- Deferred energy.
Otner factors must also be considered:
- Loss contingencies
- Tax losses
- Potential. impact of clean-up costs on revenues
- Access to capital markets
- Bankruptcy
- Reorganization
- Restoring financial viability III-7
The manner in which thase issues are resolved will determine tne fate of the GPU System. The unfavorable resolution of any one of tnese issues - all of which have a potential major impact on earnings and capital - could trig-ger bankruptcy. The amounts involved, excluding any tax effect, and indi-cators of their relative magnitude are shown in the taale which follows.
Order of Magnitude of Key Issues Item As A Percent Of:
Net Utility Equity Item Anount Plant Capital (Millions)
Clean-up and restoration costs (l)
$ 555 13%
40%
(net of insurance)
TMI 1 3 80 9
27 TMI 2 715 17 51 Forked River 390 9
28 Deferred Energy 238 6
17 (1)
Current Company Estimate Toese issues are critical and require resolution, or at least substan-tial clarification, in the near term because of their potential not only to destroy the Company's equity base, but also to so impair earnings that tne Company would be precluded from the financial markets.
Blis latter event could also bankrupt GPU.
The amounts involved are so large that any one of them could have a major unfavoracle impact on ble 03mpany.
In fact, the uncertainty Ulat currently surrounds the possible outcomes is by itself contributing to the financial instaoility of the Company.
CLEAN-U' AND RESTORATION COSTS Clean-up and restoration costs were orginally estimated by Bechtel to approximate $400 million, of whien $300 million would be covered by the company's insurance, and $100 million would oe funded from other sources.
At present there are two questions related to clean-up and restoration costs:
- How much will the costs really De, and
- How will die uninsured portion De funded?
III-8
As indicated in TEMA's March 1980 testimony, "the $400 million estimate was a 'sof t' number and would likely be much hiper." In regard to the first question, GPU's most recent estimate of clean-up and restoration costs was $855 million, and a recent GA0 study estimated the costs at $900 million.
These estimates do not reflect insurance recoveries.
No estimate can yet ce considered firm because of the many uncertainties remaining.
In fact, an analysis of the Company's most recent estimate indi-cates that the ultimate net cost of the clean-up could easily oe higher by several hundred million dollars simply as the result of inflation.
Analysis of Clean-up and Hestoration Costs Estimated Item Cost (Millions)
Current estimate of costs to complete
$503 clean-up, 1980 forward Clean-up costs incurred in 1979 95 Cost of damaged core 37 Unrecovered operations and maintenance 90 costs during outage Total clean-up costs
$725 J
Less:
Insurance 300 Net Clean-up cost
$425 Plus: Reconstruction and restoration and replacement core 257 Clean up and restoration cost - 1930 dollars
$682 Estimated impact of inflation (10% annualized) 252 Total
$934
~
If all costs attributaole to the outage of TMI 2 clean-up are included, and if inflation is factored in, the ultimate net cost of the clean-up and restoration could well approach $1 billion.
In addition, the existing estimates do not reflect the costs of any, as yet unknown, additional NRC requirements or further regulatory or other delays affecting the pace of the clean-up efforts.
III-9
With regard to the second critical question on funding clean-up costs the Pennsylvania PUC has stated:
"The Commission is of the view that none of tne costs of responding to the incident, including repair, disposal of wastes and decontami-nation are recoverable from ratepayers.
These costs are and should be insuraole."
This statement was made without benefit of more recent estimates, nor were those estimates available when the Commission referred to this state-ment in the May 23rd order. When the accident occurred, GPU's insurance coverage was tne maximum available at the time.
When the uninsured portion was estimated at $100 million and the Company was still generating earnings and still had adequate interest coverage, the Commission's statement may have caused concern among the Company's lenders and potential lenders, but the amount was not so large for a major utility that the funding question had to be resolved immediately, particularly in view of the other, more urgent, questions oefore the Commission.
The tenfold increase in the uninsured cost has changed this situation radically. Although the insurance proceeds will cover the bulk of the cleaa-up costs through 1981, the uninsured costs are now so great that a continuation of the uncertainty surrounding the source of funding could well preclude any external financing even if tne Company's earnings sod coverage were restored to acceptable levels.
In fact, if this issue is not resolved promptly, the Company's existing borrowing arrangements could be jeopardized.
In its t rder of September 18, 1980 the PUC denied emergency rate relief to Met-Ed. The PUC again reaffirmed its opposition to collecting clean-up costs from ratepayers and Fucther stated that
" clean-up costs and expenditures not covered by insurance ultimately are the responsibility of the Company's stockholders and/or the Federal Government; however, they are not the responsibility of ratepayers."
Af ter noting that a portion of the deferred energy costs collected from Met-Ed customers are funding some of the uninsured clean-up costs, the PUC ordered the Company to " cease and desist from using any operating revenues for uninsured clean-up and restoration costs."
TMI 1 The combined investment in TMI 1 is $380 million.
The base revenues and earnings associated with this asset are $57 million and $28 million, respec-tively. The ultimate question is whether or not it will be allowed back in the rate base, and, if so, when.
The position taken by the PUC has in turn linked these questions to the NRC's decisions on granting a license to re-start.
The proceedings concerning the restart involve lengthy public l
III-]O
l i
I hearings and have already suffered significant delays.
In addition, the Atomic Safety and Licensing Board has recommended that the NRC establish "psycholG;;3 cal stress" as one of.the criteria for determining whether the reactor shoud be allowed to restart. This opens the possiollity that, even if there are li sufficient technical, engineering or safety reasons for
]
delaying or refusing the restart, the plant might still not be licensed.
These factors have greatly increased the uncertainty surrounding the likely outcome of this issue.
In addition, the NRC must be assured of the financial integrity of GPU to operate nuclear stations. BJt with botn TMI 1 and TMI 2 out of the rate base, the Company's financial. position is continually deteriorating.
In June 1980 GPU showed a consolidated loss. With its existing rate orders, the Corporation will probably have very low earnings and may well incur a loss for the full year. Because of these unfavorable trends and the Company's inability to obtain external funds, the NRC may be hard-pressed to allow restart if the' financial condition of the companies is allowed to worsen.
TMI 2 The combined investment of the GPU System companies in TMI 2 is $715 million, or more than half of the Corporation's equity base. Shortly after the accident, the investment in TMI 2 was excluded from the rate base for each of the operating. companies. As a result, base revenues and earnings were reduced by the following amounts:
Reductions In Base Revenues and Earnings (Millions Per Year)
GPU Me t-Ed Penelec (Includes JCP&L)
Revenues
$52(a)
$27(b)
$108 Earnings
$26
$14
$ 56 (a)
TMI 2 component of case rate increase approved in March 1979, out not implemented due to accident.
(b)
Base rates reduced by $25 million; deferred energy cost amortization increased by $2 million.
Neverthless the Company must continue to pay the fixed costs associated with the plant. The major fixed-cost elements are as follows:
Major Fixed Costs of TMI 2 (Millions Per Year).
GPU Me t-Ed Penelec-(Including JCP&L) 05N and Deoreciation $
17 8
34
. Deut 14 7
27 l
Preferred Dividends 3
2.
6 Total
$- 34 17 67 III-11
~
+
,n
dith respect to TMI 2, the most important question is when - if ever -
it will return to _ service. At present, and perhaps for several years into the future, this question cannot be answered. H] wever, the question that can be answered - and in all probability cannot be postponed for years - is who will pay for it, particularly if it is not allowed to return to service.
Even if all the other issues are favorably resolved, the continuing prospect of writing off a substantial part or all of the TMI 2 investment against equity capital could in and of itself impede external financing. As with TMI 1, the fact that TMI 2 is excluded from the rate base without allowance for any element of cost is an indication that such a possibility is very real.
In fact, a write-off against equity is exactly what is accomplished by exclusion from the rate base, albeit over a much longer period of time.
The longer the unit remains out of the rate base, the greater will be the pressure on the Company to make provision in its accounts for an estimate of the full loss.
While the accounting profession defers to regulators in applying accounting principles to utilities, it may be expecting too much to assume that an asset of such magnitude will be allowed to be written off - with no recovery - over 30 years.
And if the accountant.s delay in requiring recognition of tne loss, analysts and poteatial lenders will most likely assume it has happened and adjust their projections accordingly.
Due to the prolonged period of tne outage, the regulatory treatment afforded thus far, and uncertainty as to whether it will return to service, the recoverability of the investment is in doubt.
If these circumstances contireue and if the PUC does not allow the Campany to recover these costs er if it becomes clear that the costs of the unit will oe borne by investors until the unit returns to commercial operation, then it is reasonable to expect pressure on GPU to recognize the loss of value during the expected period of the outage. Assuming the earliest restart (return to commercial service) at July 1,1987, the Corporation could oe required to write down its investment in TMI 2 to recognize the impairment in value of tne asset.
Currently GPU is charging off over $'30 million per year - excluding equity return - in unrecovered costs associated with TMI 2.
The longer that the recovery of TMI 2 costs remains unresolved, the more compelling will be the pressure to recognize the impairment of value by a writedown against equity.
FORKE0 RIVER Although it is owned entirely by JCP&L, Forked River has a potential impact on the Pennsylvania operating companies and their ratepayers and reflects the broader issues facing the GPU System. JCPiL now has $390 million (including $30 million previously allowed in the rate base) invested in its Forked River project. The project, initiated in 1969, was planned as a nuclear generating station.
Prior to the accident it was expected to be completed in December 1983, providing capacity of 1168 M4. The most recent cost estimate prior to the accident was $1.2 billion.
I l
III-12
Follo41ng' the accident, GPU slashed its construction program to conserve cash - principally by deferring or cancelling expenditures for Forked River.
The reductions in spending for Forked River represent 47% and 64% of the total' construction cut-b 1cks for 1979 and 1980 respectively. The project, on which less than 30%_of the costs had been incurred, has been suspended.
indefinitely and the Company ceased accruing AFUCC (allowance'for funds used i
during construction) in April 1980. Therefore, the approximately $35
.million of carrying costs on this investment will have to be recognized out.
2 of_ current revenues.
If work on Forked River is not resumed in the reasonably near future, its status as a non-earning and non-prodJctive asset must be resolved.
The Rey question here,;as with the other major issues, is the impact on earnings and equity.
If, at one extreme, the investment must be written off, the result would be to reduce JCP&L's common equity by 60% (cased on 1979 data).
This represents an almost 30% reduction in GPd's consolidated common eouity. The effect would reduce JCPiL's equity ratio from 37% to 19%.
Since the only source of equity capital for the operating companies is tne 4
i parent company, GPU Corporation -- which cannot obtain external financing --
JCP&L would oe left with an equity base insufficient to support debt financing. The result would be that JCP)L would be pushed into a financial crisis--a crisis that would probaoly affect the rest of the GPU system.
Alternatively, the costs mi@t be amortized through rates.
This prac-tice, whicn has been applied in the past to other utility company investment programs that have been cancelled, would probably allow recapture of cost without any earnings (i.e., with the unamortized investment excluded from rate base). One of the questions regarding this approach is the amount of investment the company would be allowed to recover.
It is possible for example that some portion of the AFU0C increment ($35 million) mi@t be.
disallowed since this represents prior earnings on the project costs incurred as of the date the investment qualified as a dead asset.
j To the extent that Jersey Central's _ investment in Forked River is not a j
recoverable asset, the Corporation's earnings and equity capital will be j
impacted. On a statewide basis, both Pennsylvania and New Jersey have i
approximately equal distributions of consolidated equity capital. Con-sequently, an impairment in one state could have an unfavoracle effect on the other.
DEFERRE0 ENERGY The current deferred energy balance is approximately $238 million for the GPU system and represents the smallest dollar amount of the major issues. Although the rate action in the PUC's May 23rd order provides for 1
rapid amortization of the balances, the issue has a significant relationship J
III-13
-.m
-.wr,.
i
'witn the Dampany's short-term borrowings.. Die-recent deferred energy and short-term debt balances for the companies are as follows:
t Deferred Energy 00sts (000's)
Estimated c
12/31/78 12/31/79 6/30/80 12/31/80 l
l Me t-Ed
$ 23,221
$ 82,499
$ 85,640 16 51,000 1
Penelec 23,312 12,985 16,839 11,000-JCP&L.
56,405' 77,286 135,808 105,000 Total GPU
$102,938
$172,770
$238,287
$167,000 t
I
- Short Term Debt (000's)
Estinated 12/31/78 12/31/79 6/30/80 12/31/80 Ne t-Ed
$ 35,000
$ 68,000
$ 94,000(o)
$ 91,003(o)
Penelec 500 JCP&L 54,100 45,000 133,000 120,000 l'
GPU Corp.
58,000 47,000 43,000 1,-
Total GPU
$ 90,100
$171,000
$274,000
$254,000 (a) Includes $13 million of first mortgage bonds issued and outstanding with the Revolving Credit Banks.
Based on the rapid recovery of deferred energy allowed the companies, the unrecovered costs incurred since the accident will be substantially l
reduced by the end of 1980 and almost eliminated by the end of 1981. ~ There
~
l-are two concerns with respect to this issue:
i When the deferred energy balances are exhausted, the Company's cash
[
flow will drop significantly unless other sources are provided; and
- Based on current projections, the level of snort-term debt does not appear to be decreasing in tandem with reductions in the deferred energy balances for all the com; anies.
t The Pennsylvania Commissi7n's May 23rd order provided for Met-Ed and Penelec to recover their deferred energy. costs ~over 18 montns. While.
Penelec has only'a small balance and an otherwise satisfactory cash. flow,.
the-accelerated recovery-is critical to Met-Ed.
When the 18 month amortization period ends, because of Met-Ed's current tax loss position, cash' flow will drop.by' the ~ full revenue reduction of $56 million per-year based on the level'of. annual sales assumed in the Commission's May order.
i s
I
-III-14 i
\\
While these revenues do' not reflect earnings, they provide vital cash flow, that is, approximately 12% of Met-Ed's current collections from customers.
j Althcogh the rapid recoupment of the unrecovered energy costs is a i
significant benefit to Met-Ed, it is only temporary relief.
Th? more immediate concern about the deferred energy balance relates to Me t-Ed.. Based on the experience since implementing the Commission's May 23rd order it ' appears that Met-Ed's short-term debt is not being reduced at
+
the same rate as its deferred energy balance. This is particularly discon-certing to the banks participating in the Company's Revolving Credit Aree-
-ment. As the bankers view the situation, the proceeds of their loans were to finance the rapid growth in tne deferred energy balance. D; ring the period following the accident, the two balances moved up in tandem.
It now appears that for Met-Ed, at least, the reverse may not be true. Although -
the deferred energy balance for Met-Ed will decline by $35 million between 3Jne 30 and year end, the Company projects that Met-Ed's short-term deot l
will oe reduced by only $4 million.
j The major elements causing this imbalance, excluding current operating and maintenance expenses, are construction costs which include expenditures 4
for the distribution system (new customers) and modifications to TMI 1, con-tract retention payments to 00E for prior fuel enrichment services, and man-datory sinking fund payments and tefinancings.
Since, GPU's quart.erly insurance recoveries approximate two-tnirds of the amounts spent on the clean-up, Met-Ed has also funded its share of the unrecovered costs.
i The bankers' concern is heightened in light of the prior question regarding the unrecovered energy costs -- within a snort time the deferred energy balance will be exhausted and the Company may find it even more dif-4 ficult to repay the loans, particularly if access to capital markets remains blocked.
In early September 1980, the banking group imposed new repayment terms. The banks have li 'ced the amount of credit available to Met-Ed to the unrecovered balance of anergy costs. As a result, the credit availaole to the Company will be steadily reduced.
If. Met-Ed and its parent company continue to be unable to access capital markets, the reduction in credit' available to Met Ed could lead to a cash flow crisis far more severe than experienced to date.
In fact, the projected cash flow for Met-Ed indicates the need for, an increase -in its existing corrowing limit to fund a $26 mil-lion gross receipts tax payment to the State of Pennsylvania in April 1981.
The state cannot allow deferral of this payment without action by the State Legislature. W]*ever, non-payment of the tax would be an event of default j
under various of the Company indentures.
l LOSS CONTINGENCIES The most current estimate of clean-up and restoration cost represents approximately 40 percent of GPU's equity capital; the underlying investment.
r in TMI 2 represents half the equity base. If TMI 2 is not cleaned up, restored and returned to service, the Company's ability to recover its original investment would be in doubt. If GPU and its investors are to be the sole source of funding for clean-up and restoration costs, the Company may be required to make provision for significant loss contingencies in its financial statements well before the costs are incurred.
III-15
. Accounting princip'es require that a'companylprovide for a loss if it is-l probable that an asset is impaired or that a liability exists and if the -
amount of the loss can be reasonaoly estimated. Accounting principles are applied differently to regulated industries "because of tne effect in
.regJlated businesses of the rate-making process, a phenomenon not present in non-regulated businesses."(1) A regalated company can postpone writing-off expenses or writing-down assets "if it is clear that the cost will be re-coverable out of-future revenues.(1)
In the case of GPU, the issue of whether its costs or asset values will be fully recoverable can be deter-mined only through a formal rate proceeding oefore the PUC.
The accounting rules, however, do not'specify a time limit within which these issues must be settled.; On the other hand, once it is judged that there is considerable doubt about the recoverability of costs or asset values "because of economic conditions, or for other reasons",(1) then even a regulated company must recognize the loss.
The recoverability. of the Company's-investments in assets that are not currently earning a return could well hinge on the PUC's determination re-
' garding clean-up costs. A sequence of events such as the following probably must take place before tne financial reporting issues can be settled:
GPU must request a rate-making determination on clean-up costs.
Until the Company files a formal request through a rate application, 4
the PUC cannot make a determination.
In the absence o' a determi-nation, favorable or otherwise, the PUC's prior comments on cleanJJP costs cannot be construed to reflect its ultimate intent.
The PUC must make. a rate-making determination on. clean-up costs.
Once GPU petitions the PUC t c rate-making treatment (either revenue relief to cover the clean-up ccsts or earnings sufficient to finance the costs over a long period of time, coupled with regulatory assur-ance that adequate funds will be provided to allow the Company to repay the loans), the Commission must make ~a judgment on the facts presented and issue a rate order. -
If the rate' order provides funding for clean-up costs, this issue will be settled.
If, on the other hand, the rate order is unfavor-able, the Company will probably.have to take the issue to-the courts.
i If.the courts issue a stay order, the issue will be suspended pending a final decision.
If the final decision supports the authority of i
the PUC, GPU might be able to appeal.to the Federal Government for emergency assistance. If Federal: assistance were forthcoming in the for:a of grants or direct loans, the crisis might pass, although the other major: issues would still have to be resolved. However,- if no-Federal funds were granted, or if Federal assistance were coupled with the assumption of ownership of TMI 2 (and possibly TMI 1) in return for assuming liability for the clean-up, the satisfactory-resolution to funding the clean-up costs would create other problems
. to be addressed.
. (1) Addendum, Opinion No. 2, Accounting Pri g b ; 3cced III-16
~
i 1
Under one of1the possiole. "unfavoraale" scenarios (no funding from any source,'or funding coupled with-loss of ownership to the-Federal Govern--
^ ment), the Company:would have-no immediate. prospect for completing the -
clean-up and. returning the plants 'to service or it would -lose ownership in the_ asset (s). 'If one of.these eventualities came about, the Company's only
_ remaining option would be to petition the PUC for recovery'of the investment 4
value on' assets thbt WoJld have little or no likelihood of returning to -
-service. If:the Company'sL request were refused, then (and perhaps only then) would the Company be required to account for the loss contingency oy a E
write down of asset values.
While this sequence of events may appear to be a somewhat contrived road i-to bankruptcy, itishould be noted that:
The Compa.q has not yet requested rate-making treatment of clean-up costs.
The next_ opportunity to file for rate-making treatment will be after -the conclusion of its current rate case, in March or Aprii o f 1981.
l Based on the revised Bechtel clean-up schedule, the insurance proceeds will be depleted by the end of-1981.
- The PUC has gone on -record several imes opposing the recovery of l
clean-up costs from ratepayers.
4 The White House has indicated that it has no statutory authority to p'rovide direct financial assistance.
No other source has yet been identified to fund the clean-up costs.
1 In the meantime, other events may overtake the 03mpany and its. regJla-tors. First, each operating company must issue - with the concurrence of a
its external. auditors - a statement on retained earnings to its Board of Directors before declaring quarterly preferred dividends.
This statement requires that the operating company's retained earnings are_not impaired by any loss contingencies. -If this certification cannot be provided, and if preferred dividends are omitted,; the preferred stockholders would gain a direct voice in the management of the individual operating companies followin; the tnird consecutive dividend' omission.
In addition, the
~ Company's bankers could invoke the " material adverse change" clause soon after an unfavorable decision by the PUC. And even 1f the banking group
~
stayed such action for a while, it is unlikely that they would await a final
.1 4
determination on how the contingency would be treated in the financial statements.
.If' a loss contingenc, were to be provided for, the Company's equity ratio could drop _ from approximately 33% to well under' 30%.
The SEC, through the Public Utility Holding Company Act, requires that GPU maintain a minimum 30% equity ratio.1 Violating this standard would undoubtedly have grave consequences. - At'its current market price, GPU would have to more than douale the number of shares outstanding to restore the equity' base. 9JCh a consideration may be moot in the face of possible stockholder suits and a x111-17 i
~_
market unwilling to digest a speculative issue of such magnitude, even if the requisite approvals could be obtained from the SEC.
TAX LOSSES If any of the operating companies are required to write-off significant assets, corresponding tax losses will be created.
In terms of net income I
this represents a potential benefit since tax losses can De utilized to shelter income. In theory, then, if GPU were to write-of f assets or expense -
unrecovered costs, the _ net cost to'the company would be the loss offset Oy-the tax effect.
A review of the Company's present tax position indicates that there is very limited benefit to be gained from substantial tax losses unless taxable-income is very high during the seven carryforward years allowed oy the tax code. If the tax loss were created by the write-off of rate-base assets, the return on equity required to provide a level of income hi@ enougn to utilize significant tax losses could be extraordinarily high.
ACCESS TO CAPITAL MARKETS Prior to the accident, GPU's investment program called for spending more than $8.5 billion during the 1980's. While this level of spending is not unusual for an electric utility, it reflects the Company's need for_ capital.
Without'the ability to issue bonds and new equity, the capital spending required to expand the transmission and distribution system, expand generation capacity and reinforce and improve system reliability to meet future demand will have to be severely curtailed or cancelled. Even if the Campany is successful in its plans to reduce the level of future demand, its capital spending requirements will remain substantial. Following the accident, GPU reduced its spending programs to minimm levels. Although minimum spending levels can be tolerated for a short while, the' lead time required to plan and complete many construction programs requires a healthy capital investment program. There will undoubtedly be an unfavorable impact on the level and quality of service in the future if such an investment program is not. resumed within the next several years.
In order to satisfy these capital needs - without addressing any addi-tional needs for the clean-up of TMI.~2 - GPU will have to regain its ability to access capital markets. For this to happen, several events must take place. First~, the_ major uncertainties now facing the Company must oe-resolved.' Once the major issues are resolved, GPU must achieve acceptacle earnings and regain respectable coverage ratios.
These two events will enacle the Company ~ to access bond markets and issue preferred stock. At this point, the Company should have reached a plateau which will enable it-to satisfy its capital requirements'for a short to intermediate period of time. However, at some point.GPU will.also have.to issue new common stock to. replenish its equity base. While' the industry has demonstrated that it is possible to market new equity at less than book value, GPU's ability to issua new-stock at a deep discount from book values is somewhat problema-tic. Regaining earnings will hdp, but since utility common stocks compete with bonds, the resumption of dividend payments on common stock mst take place well before attempting to market new shares.
III-18
POTENTIAL-IWACT OF CLEAN-LP AND RESTORATION COSTS ON REVENUES Exhibit III-4 illustrates the impact of funding clean-up and restoration costs through rates on Met-Ed's revenue requirements..If TMI 1 returns to service,~ and if the full amount of the Company's current rate request is included, the level of revenues -- after deferred energy costs are collected
-- will be less than 10% above current levels. This is based on full payment of clean-up and restoration costs over five years cased on an estimate that reflects an allowance for inflation. Alternatively, if tne costs were to be financed and amortized over 20 years, the net increase could be very small, less than one perec n Since Penelec's share of the ownership is smaller than Met-Ed's and Penelec is a larger company, it could anticipate smaller increases to fund clean-up and restoration costs.
Without the return to service of TMI 1, the net increase in revenues required to fund clean-up and restoration costs through rates would be approximately 15% - 25% over current levels for Met-Ed depending on the rate-making treatment afforded various items.
In the scenario with the lower range of increases - return of TMI 1 in 1981 with the ultimate return of TMI 2 reasonably close to schedule and with uninsured clean-up costs not exceeding $934 million - the Company and the Commission would undoubtedly have more flexibility availaole to manage the level of revenues required. The more unfavorable scenario - up to a 25%
increase in revenues with no return of-TMI 1 - would probably also De coupled with less stability in revenue requirements due to the continuing dependence on substantial amounts of purchased power.
If clean-up and restoration costs were to oe fui.ded entirely through rates, further increases in the clean-up and restoration costs would imply further increases in revenues. If the pessimistic scenario (both units out of service) were extended to encompass an increase in uninsured clean-up costs to $2 oillion, the incremental revenues required to fund the costs throu@ current revenues on a pay as you go basis over five years could be as high as 50% over current levels. However, a consideration with this scenario is that it may not be possible to spend $2 billion on clean-up and restoration activities within five years.
If the increase related to expanding the scope of work, it is more likely that the clean-up and restor-ation senedule would be extended and a smaller increase in the annual reve-nues would be required to fund all costs throup rates on a current basis.
These estimates include the full amount of the current rate request which the Company anticipates will provide some earnings. However, these earnings may not restore a financing capability sufficient to resume a capi--
tal spending program commensurate with its ptc-accident plans. Addition-.
ally, under those scenarios based on funding all clean-up and restoration costs throu@ current rates on a pay as you go basis, there would be a commensurate reduction in rates at the end of tne clean-up and restoration program.
j III-19
i POTENTIAL IMPACT OF CLEAN-UP AND RESTORATION COSTS ON PETROPOLITAN EDISON REVENUES
($ Millions)
-TMI.-l In Service TMI 1 Out of Service Hypothetical Case; 5 year 20-year
.5-year 20-year 5-year Item Recovery Recovery Recovery Recovery Recovery-Cleanup and Restoration Costs ~
.$934
$934
$934
- $934
.$2000.
.(net of insurance)~
Current Annualized Revenues
'454 454 454 454
'454 Plus: Met-Ed share of ~
cleanup and restoration costs
- 5 years 93 93' 200 J20 years 50 50 Current rate request 76 76 76 76
- 76 Less: Deferred energy cost amrtization (56)
(56)
(56)
(56)
(56)
TMI 1 Replacement Power Costs (74)
(74)
Adjusted Annualized Revenues
$493
$450
$567
$524
. $ 674.-
i
% Increase 8.6%
0.8%
24.9%
15.4%-
48.5%
4 9,
x E
. Source: T8&ALAnalysis Z
[.i T
A furtner concern is that if ratepayers fund the clean-up costs tney may theq find that TMI 2 (or both TMI L and 2) will not be allowed to return to service.
GPU's customers could then have paid almost $1 oillion in clean-up costs only to be faced with continuing replacement power costs which now total $325 million per year for both TMI 1 and 2 for the entire GPU system, and with non-productive investments valued at over $1 billion.
The coligation of ratepayers to fund the clean-up costs has advocates on ooth sides. One viewpoint is that ratepayers will receive no oenefit from tne clean-up costs and tnat such payments are underwriting tne ris<s of investors. On the other hand, it is argued that investors earneo no more on a nuclear generating plant than on coal or oil-fired generation out tne ratepayers eenefited from the low cost of generation. Wnatever the outcome of this issue, the total cost of cleanup and restoration would procaoly oe minimized by expediting the pace of the clean-up to the maximum extent feasiole.
SANKRlPTCY Due to the precarious financial position of GPU, various parties have given a consideraule amount o f attention to tne topic o f bankruotcy.
Some perceive that the banxtuptcy courts might provide a suitaole forum fur deal-ing with the Company's proolems, and that a dectot-in-possesion might pro-vide a vehicle to deal with toe multitude of issues which are seemingly unresolvable througn existing channels.
However, bankruptcy is, the most extreme of the possible outcomes to GRPs crisis and the following points should be considered in assessing the prospects of bankruptcy:
- The bankruptcy laws deal only witn the financial issues, toe deotor in possession will not have summary powers that GPU does not possess to force the NRC to restart TMI 1.
It appears hicply unlikely tnat GPU could meet the finanical requirements to qualify for NRC relicensing if in bankruptcy. In fact, it may even find that tne license to operate its Oyster Creek nuclear plant is suspended.
- While oankruptcy provides for settling deots at less than the full amount owed, it should De noted that tnis can arise only from liqui-i dation or from a financial restructuring. When an industrial concern fails, tne assets may be sold of f either to' competitors or to a com-pany in another industry. However the ability of potential customers to suostitute or do without the product or service of tne bankrupt company is implicit in being able to settle the contractual claims of secured creditors at less than tne full amount.
It is unthinkaole that the courts would allow dissolution of a franchised monopoly providing a vital puolic service.
Consequently, it is the common stoc4 holders' values that are most likely to oe impaired. It is likely that stocknolder suits would be forthcoming in response to such actions.
Further, if attempts were made to sell off assets that would continue in service to the puolic, they might oc sold at fair market value instead of cook value.
In the electric utility indus-try, replacement costs, which might ce an indicatot of fair market III-20
value are generally between _two-and tnree times book ~ values. Under
--bankruptcy of al utility, it is not clear what basis would oe used to value assets.
^
r The. debtor in possession during a barr Acy assumes the authority of
~
act-to court supervision. The cthe compan/'s Board of Directors, i
s company would be underf the protection of the bankruptcy court to
~
ensure that the claims of. some'creditots are not peremptorily sett1ed at ~ the expense of others. IT a moratorium on payments to creditors j
.would allow tne distressed company to regain sufficient financial i-viability to resume ~ payments ~to creditors, the protection of the.
courts will also ensure tnat toe company has a reasonaole opportunity
~
to reconstitute _itself without naving_its revenue producing acility
. impoverished by:the: incursions of creditors in the interim. All of l
the parties.have-the rignt to argue their case before tne courts.
A-j major complicating' factor -in~ tne barJ<roptcy of a regulated company will be the ricpts of customers. While the bankruptcy of the rail-roads did not cause major _ distress to the puolic because of tne availability of alternate forms of transportation, toe electric utility customer does not.have ready access to alternate energy sources to replace existing electric service.
Once an event of default is declared,'tne interest that accrues on all of the Company's interest oearing obligation is the highest in-terest rate on the Company's books. Tne liacility for i,ncreased interest costs would accrue at the rate of over $70 million pr.r year for GPU.
These claims would have to oe settled as part of the bank-ruptcv proceeding.
- It is possible that the deotor in possession during bankruptcy would determine.that thel interest of all of the parties involved would oe 7
~
best served cyfleaving the GPU system intact and petition the state regulatory autnority for additional rate relief.
Access to capital markets would no doubt be ' foreclosed for the dura-
' tion of a. bankruptcy. ' Consequently, all capital spending require-ments for everything from nook-ups for new customers to repairing storm damage would have to oe satisfied througn rates.
It is nig11y unlikely that the company would be able to pursue a. normal capital 1
spending program - let alone the clean-up and restoration of TMI 2 -
during the course of cankruptcy.
l
- Tne new bankruptcy law has enhanced the standing of secured credi-tors. How the courts would adjudicate. claims that electric service -
was being provided at less than costs and wnether-tne courts would allow cash collections to be diverted to pay the claims of secured creditors:to' tne detriment of customer service are issues that cannot even be conjectured.
i i
i III-21
(
. ~.
- Finuly, bankruptcy would probably halt cork on the clean-up of TMI 2; however it could not abrogate GPU's ooligations, contractual, moral or otherwise to discharge its clean-up responsibilities.
An in-ability to disclarge contractual ooligations because of financial distress does not automatically absolve a bankrupt company from its legal liaoility.
If, for example, the Federal Government found it necessary to prosecute and fund the clean-up in order to protect the 17alth and safety of the puolic, it might also file a claim in the bankruptcy court to recover any costs incurred. Such an event woulo uncouotedly further complicate an already complex litigation.
In summary, bankruptcy for a major electric operating company involves ve1turing into the unknown and is likely to lead to higner rates for custo-mers. As stated during TtMA's March 1980 testimony:
The uncertainies associated with oankruptcy are sufficiently great and pose risks - risks tnat cannot be completely quantified - to ratepayers, regulators and' investors that they should oe avoided.
REORGANIZATION OUTSIDE OF CHAPTER 11 Reorganization, a financial restructuring of the GPU system outside of a formal proceeding under 01 apter 11 in bankruptcy, would no doubt ce complex, lengthy and costly. Furthermore a reorganization, in and of itself, will not solve the proolems associated with the clean-up and recovery of TMI 2, nor is it likely to produce lower rates for customers.
Nevertheless, there are two possible reasons for reorganizing tne Corporation:
- If it is judged that GPU's financial viability is so severely im-paired that its aoility to access capital' markets in general and equity markets in particular will not recover sufficiently, or rapidly enough, to enaole tne Company to pursue capital spending program. Under this hypothesis, the operating companies could be sold to other utilities or perhaps spun off as independent companies.
If, in the process of doing this, the operating companies could oe sold / spun off witnout their ownership interest in the TMI units and without any clean-up ooligations, the separated operating companies, either on the strengtn of the buying company's credit rating or on their own, wou; ; have immediate access to equity and bond markets and could immediately pursue the capacity axpansion programs necessary for the franchise areas.
- If it is determined that the outcome of the accident is so uncertain that it would be preferaole to L._.ter ratepayers from potential unfavorable future developments.
This scenario would not directly addresss the technical, financial or regulatory proolems of clean-up and restoration, let alone questions of public health and safety.
However, it might provide a means of isolating the ownership respon-sibility in one entity separated from ratepayers.
In snort, such an approach might envision selling / spinning-off all of the assets except III-22
~
L, thel THI-units and transferring the franchise responsibilities to another legalientity. ' Ultimately,' GPU would be left with oath TMI t units.and the cash proceeds, if. any', o f the sales / spin-offs.
L If,:for. whatever. reason, a reerganization is undertaken, it would proca-l aly require' supportive regulatorylovolvement 'and rate-maxing assurmaces or
- decisions. Favorable, regulatory trectment implies ' increased rates. forJsome or-_all of 'ble existing ratepayers.
It would oe necessary to ensure blat no-
. responsibility for THI attached to the new/ merged company.
This might -
require ~ assurance that.any premium over book value paid for the assets
~
~ acquired would be a!' owed for rate-making purposes or assurance of higher 4
- returns on equity to 'a ouying/ independent company to compensate for toe increased business risk. 9;ch actions,.which might be necessary incentives, would undouotedly -increase. rates.. In addition, other issues such as the -
treatrent of deferred energy. costs, deferred taxes, investment tax credits, unfundad pension ooligations 'and otner employee rights would require _nego-E tiation and regJlatory.
I Any attempt to reorganize would also have to serve the interests.of
.bondaalders and preferred stockholders. Without their agreement, a reorganization will fail. And unless productive assets can be sold at j
prices substantially above book values (i.e., at values reflecting replace-t ment cost vs. historical costs)-the. concept of a financial reorganization-hinges on eviscerating stockholders' values to preserve the values of senior creditors.
To the extent this takes place, stockholder suits can ce expected.
On the other hand, if senior creditors perceive tnat their values -
are ceingLimpaired,L or their protection lessened, they mig 1t also take 'l~egal-action. A ~ reorganization woulJ also require agreement by the SEC,' and j.
perhaps also the NRC.
Finally, when the. reorganization was complete (assuming it could'oe 4
-accomplished at all), GPU would.beza company with two nuclear generating -
plants, an indeterminant amount of cash, and responsibility for the opera-tion of-TMI 1 and toe. clean-up of TMI-2.
Any conceptual, moral or legal obligations to. conduct' the clean-up would, in practical terms, extend only to the amount of cash tnen available. Additional funding would very likely still be required, althougl perhaps not immediately.
It is difficult to.
1 l
imagine how-the PUC could provide revenues to a company 'that is not selling
. energy. -This problem could ce further compounded if the then remaining GPU determined that whatever cash it bien had was insufficient to fuld Ole clean-up beyond the level of-insurance available, and was forced to shut-j '.
down the clean-up effort.
)
' On the other hand, ~if;some form of third party assistance were provided
- or if the-net cost to complete clean-up and restoration ~were Ulen suffi-ciently limited and:NRC: relicensing achievaole. - 'the Company might be able i
to either sell ble units to another utility, or operate as a' generation company supplying' powers to other utilities.
1 i
i I
i e
a III-23
Another 'possible outcome is that in the event of abandonment, tne Federal Government might be forced to take over the site, or at least TMI 2, to complete the cleans;p.
dien this was completed, ~however, it is possiole that-the unit would be maintained as a federally-owned unit, assuming that NRC relicensing was achieved. It is also conceivable' that, again assuming successful relicensing, the plant might be auctioned.to a utility company.
dhile it is conceivable that some-form of reorganization might be possi-ble, the decision to follow such a course of action will rest on the goals of those in a position to influence the outcome. Cost reduction is not one of tne potential benefits, although cost avoidance and risk avoidance might be. A further potential benefit might be earlier access to capital markets than might be achieved otherwise.
One of the overriding considerations must be the expected benefit for the time and effort and costs that would be required. At present (albeit without a detailed study of the option), it does not appear that the expected benefits warrant underta'<ing a reorganization.
However, if TMI 1 will not be allowed to return to service until toe clean-up of TMI 2 is completed, and further if it appears that TMI 2 will never be allowed to return to service then closer consideration of a planned reorganization i
would be warranted.
If sufficient earnings and coverage are not provided in the near term, then the question of a planned reorganization will_cecome academic.
It will then only'be available at the discretion of the debtor-in-possession during a bankruptcy.
RESTORING GPU's FINANCIAL VIABILITY If TMI 1 returns to service in the reasonably near future, the outcome likely to require the lowest overall cost and have ble least likelihood of adversely impacting customer service resulting from severe financial con-straints is to restore -die financial viability of GPU. Contrary to popular belief, toe revenue increases required to restore the viability of Met-Ed and the GPU System are fractional, not order of magnitude changes.
If TMI 1 returns to service in 1981 and TMI 2 returns close to schedule, Ulen a net increase of less than 10% over current ratepayers levels appears to be sufficient to fund the current estimate of clean-up and restocation costs.
The " worst case", namely no return to service for either TMI 1 or 2, _
would require revenue increases of between 10% and 25% to recover all clean-up and restoration costs, depending on the rate-making treatment-of various-items and also on whether the costs were financed and amortized over 20 years or paid currently. If the " worst case" scenario were extended to '
assume that the uninsured cleanup costs would be $2 billion then the revenues might have to be increased by as much as 50% over current levels-to fund the costs.
Electric utilities are highly leveraged and under the best of circunk stances have limited liquidity. As a result, stable revenues and earnings are far-more important to utilities than to most industrial concerns.
If i
.III-24
electric utilities most be. prepared to withstand the financial shock of a drop in revenues and a loss of earnings, their capital ratios will nave to move away from the present 65% fixed income ooligations and 35% equity to one that more closely reflects the average for industrials: 35% debt and 65%
equity. SJch a change in the capital structure of a utility would provide much more flexibility to withstand fluctuations in revenues and earnings without risking a financial crisis. However, several other implications are I
associated with such a capital restructuring and all of them imply higner rates.
In order to attract equity capital in an environment where dividends may fluctuate and perhaps be eliminated for considerable periods of time and also where the possibility exists that stockholders ms f have to absorb sig-nificant asset write-offs, the financial markets will impose a nigler earn-ings requirement as compensation for the increased investment risk. Com-pounding the effect on revenue required is the effect of federal income tax. In order to provide an additional dollar of earnings for the common stockholder, almost two dollars in additional revenues are required oecause of the impact of income taxes. Finally, and perhaps most significantly in terms of revenue requirements, an electric utility would nave to satisfy much more of its capital requirements through revenues in order to keep its debt to minimal levels.
Regarding GPU, the factors favoring a restoration of the Company's financial viability emanate from the fact that while it was prudently capi-talized within tne framework established by the Public Utility Holding Com-pany Act of 1935, and also with repect to the standards of the industry, its capitalization is one geared to providing the benefit of leverage in its cost structure. As such, it does not have the resilience found in companies outside the arena of regulated monopolies.
In short, the downside effects of nigh fixed-costs cannot be long endured by a thinly capitalized corporate giant.
On the other hand, a relatively small increase in revenues can go a long way, if it produces earnings.
If TMI 1 returns to service in the near future, all of the currently estimated clean-up costs could be funded with a net rate in',rease of oetween zero and 104. Withou t t., return of TMI L the revenue increase required would range between 10% and 25% over current levels.
The differences in the ranges for each set o f opproximations is accounted for principally by the difference between financing the costs over 20 years or current payment over 5 years. Financial assistance from the Federal Lovernment or another tnied party would reduce the level of in-creases required.
In addition to avoiding the uncertainties attendant to bankruptcy and the complexities and uncertain benefits of a financial reorganization, there are other compelling arguments favoring the restoration of GPU's viability.
First, in addition to clean-up costs the Company still faces substantial capital spending requirements to maintain service to existing customers and provide for future demand.
The Company will not be aole to proceed with these investment programs if it does not have access to capital markets.
The Corporation's equity capital cannot be selectively penalized.
Snare-holders interests are not compartmentalized and associated with specific L11-25
.. ~.
Lassets and, as such, any; impairment of earnings' affects all equity holders.
BJt witnout a healthy equity cushion or adequate coverage ratios, debt financing is impossiole. Without the aoility to ;obtain external financing, capital spending must cease.
Another factor favoring restoration of GPU's financial viability is tnat it is prooably the most direct approach' to ensuring adequate service to
- customers at the lowest possible cost and the quickest route to regaining access to capital marxets.with'a suosequent resumption of capital invest-ment. The other possible outcor.es would most likely involve complex and lengthy litigation, -the outco ne of. which is difficult to forecast.
In order to regain financial 'viaoliity for GPU, the following events must take place:
The major uncertainties now facing the Company must be orought to the fore and resolved expeoitiously;
- The Company.must achieve adequate earnings and respectacle coverage ratios; and
- Dividends on common stock must ce resumed.
While the restoration of financial viability-to GPU appears to oe ble oest option at present, achieving it might require regJlatory precedents that are both innovative and pragmatic.
Further, it should oe noted tnat the actions of the NRC will have a significant effect on the ease or diffi-4 culty with which it is accomplished.
If it is determined that the reasons for requiring a continuing outage el TMI.1 do not bear a reasonaale rela-tionship to the costs incurred by one Co,npany, its ratepayers and investors, then.other avenues for obtaining Federal assistance should be investigated.
Finally, pursuing a course of action to restore ble financial health of GPU shoJid not preclude a resolution of those issues of principle and policy that have.oeen raised as a result of the accident.at TMI 2.
STRATEGIC RECOMMENDATIONS l
The strategic recommendations presented in this section are designed to address the most critical issues confronting GPU today.
They.are grouped into three approacnes which recognize the institutional and time requirements.
Tney are:
- Establish a joint task force composed of tne major parties to address the proolems i
- Develop an interim action plan to stablize GPU's financial position so tnat sufficient time is availaole to address the major issues Implement an emergency plan to forestall bankruptcy.
.III-26
.c.-
3
. - ~. _
+ -,., - -,
4
_~
s 30INTiTAS'KF($CEl u
12 -
L
- Establish a (joint task force to analyze 'the situation, assess the -
I
. options' then' and develop and implement a.comprenensive plan of action. One
' of. the. major obstacles to dealing with the current crisis is the fragmenta-tion of. authorities and responsibilities as well as tne differing, and sometimes conflicting, interests of, the various parties.. One approach to p
overcoming tnese difficulties, which are largely institutional in nature, would be.to. establish a joint task force with authoritative representation from the Company, both tne commissions and state governments of Pennsylvania and New Jersey, the Federal Governmant and tne electric. utility _ industry.
As the situation currently. stands, the state regulatory authorities must '
Dear the' brunt of; dealing not only with major rate-making issues but also with the sioe effects of actions taken by Federal regulatory agencies.
Furthermore,-it is unreasonable to expect those issues which are national-in
~
scope and:which relate to questions'of principle and policy to De addressed without the active participation of the Feoera; government and its agencies.
The issues are also of major importance _to the antire electric utility industry, and since some proposed options involve. industry participation, it also should be: involved.
The-creation of a task force would provide a forum for airing all of the issues. 'It would also provide.for improved communication and establish a mechanism for. developing a consolidated approacn to the multiple facets of the problem. The study proposed to be undertaken by the Department of-Energy, as. recommended by the GAO, or the initiatives sponsored by the Pennsylvania Congressional delegation, could serve as a starting point for such a group.
Some specific issues which the task force might review and study in greater detail are:
- Bankruptcy;
- Reorganization;
- Restoration of financial viaoility to GPU;
- Industry involvement';
- Fedecal financial assistance;
- Federal ~ takeover;
. Legislative initiatives; and
- Creation of a State. Power Autnority III-27~
D**D
- DT
, INTERIM ACTION PLAN
.1 \\ b do o
GPU management, the Pennsylvania PUC and the New Jersey %ard of Puolic Utilities snould jointly conduct an overall assessment of all of the major issues which threaten the Company's continuing viability.
Given the Company's extreme situation and recognizing the institutional
(
constraints governing the procedure for addressing, analyzing and resolving the issues affecting toe Company's financial position, it is imperative tnat an interim plan of action be developed as expeditiously as possible. While each of the major financial issues warrants detailed study, a piecemeal approach to dealing with the proolems may allow events to overtake the Com-pany and its regulators.
The urgency of the situation requires swif t action to ensure that, at a minimJm, an economic bridge is constructed to avoid losing control over events. Tnis interim action plan would provide GPU with financial st rility pending tne complete resolution of the issues by the joint task force.
However, the institutional constraints of toe regulatory process may not allow this issue to be raised in Pennsylvania prior to com-pletion of the current Met-Ed and Penelec rate cases in March or April of 1981.
Additional time may also be required to accommodate the due process requirements of the regulatory environment.
EMcRGOCY PLAN Tne Company should oe prepared to implement an emergency cash reduction and caso flow conservation program to forestall nnxruotcy _f toe due process requirements of regulation will not allow for resolution of toe major issues.
Implementation of suct
,o'
> dll exteno the time available to the various p act:
ta m solve Loe issues.
a The sole objective of such a program would oe to ouy time; extending an event of default for several additional months may be sufficient to allow an orderly resolution of the crisis witnin the framework of regulation.
Tne impact of any actions on current levels of service or future costs would have to be subordinated to the immediate, in fac'., sole objective: cut costs and preserve cash. Elements of a crash program would include:
- Manpower reductions:
Workforce redactions should oe considered for all out the most essential functions.
- Sell unpledged and unencumoered assets:
To the extent that the Com-pany can sell assets such as its inventories of coal, fuel oil and the unpledged portion of its uranium it will oe aole to raise cash to contribute to its short-term working capital requirements.
Actions such as toese are necessarily short-sighted in that the inventories will probably require replenishment in the future, nodever, in order to provide toe margin necessary to avoid bankruptcy they may be unavoidable.
1 111-28
. Halt all construction spending: While the Ce,any' has slasned its
)
major construction programs, there are stil. ngoing expenditures j
which might be eliminated to' further redJCe u 3sh requirements.
~ Implementing such actions might require suspension of new customer hook-ups and a halt to the NRC required modifications to TMI 1 and perhaps also the clean-up of TMI'2.
1 The severe cost-cutting measures outlined-above would have to be imple-mented in a company that has recently undergone several successive cost redJction programs. An emergency program as outlined above would widoubt-edly create additional problems for the future -- perhaps the near future --
and their effects on future service cannot be estimated.
Fordiermore, the benefit of extending the life of the Company for a short time must ce weighed against the difficulty of undoing the side effects of the emergencf actions. Despite these concerns, the Company should give consideration t; implementing such an emergency program.
Note:
In late September.1980 the Company announced plans to lay off a aprox-imately 700 workers including over 200 GPU employees.
4 III-29 L
IV-ENER3Y BACKGROUND DJring the past decade, as unprecedented changes transpired in the fuels I
area, GPU aggressively pursued its ~ fuel related opportunities. Furthermore, its generation planning resulted in a low cost fuel mix that would have been almost. optimal if the TMI. accident had not occurred.
This~ section discusses relevant issues and developments related to:
pricing of oil, coal and uranium; natural gas supplies and regulation; ano pricing of interchange power. It also presents an analysis of load versus capacity for the GPU System and a review of opportunities for Pennsylvania to benefit from the country's efforts to displace oil with coal-based fuels.
OIL DJring the 1970's', the world cost of crude oil increased more than fifteen fold, from less than $2 per barrel to more than $30 per barrel.
The full impact of this increase has only recently been felt in the United States. Crude oil price controls and the entitlements program, which in effect subsidized OPEC oil imports, significantly moderated the increases for domestic consumers.
This situation will not continue.
011 price con-trols are being phased out and will end in late 1981.
Unfortunately,.while tne prospect of crude oil decontrol has stinalated domestic exploration and drilling activity. to near record levels, the re-sults have been disappointing. Department of Energy and leading petroleum company forecasters are now predicting significant declines in domestic oil production in the 1980's even with the full crude oil price decontrol and widespread use of exotic oil recovery techniques..This, in turn, will gen-erate enormous pressures on the country to accelerate its transition to a non-oil based economy and make major improvements in the efficiency of its energy utilization. Imaginative exploitation of alternatives might help to reduce somewhat the rate of increase in the costs of electricity to Penn-sylvania's ratepayers.
These alternatives are explored at the end of this section.
COAL DJring the mid 1970's coal prices fluctuated greatly.
U. S. average contract prices.Jncreased 40% in 1974 and 34% in 1975.
U. S. average spot prices increasea 144% in 1974 but declined 9% in 1975. Tnese gyrations were largely due to panic buying in response to the oil enbargo, and: concern over the reliability a supplies during coal strikes.
In the late 1970's the market became mo',
stable, with prices rising essentially in step with in-flation induced p oduction cost' increases.
-IV-1 m.
m In th= unstacle~ coal market environment of-1974 and 1975 a number of
-l
- utilities including Met-Ed and Penelec, did not diligently enforce their
-i contractual rights against defaulting coal: suppliers. With regard to Met-Ed's coal procurement activities in 1974, the Pennsylvania Public
. Utility. Comission found that there was insufficient justification for its failure.to enforce -its coal contract pricing ' provisions.
The Commission
~
recently ordered Met-Ed to refund to customers through tus. fuel adjustment clause $3.6 million plus -interest in unjustified coal price overcharges.
Met-Ed has appealed tnis order. Met Ed's coal procurement practices in 1975, and Penelec's coal procurement practices in 1974 and 1975, are still-under investigation by the Commission.
The dollar amounts involved in these-investigations are small in: comparison to total coal purchases.
URANIUM-During the mid 1970's uranium oxide prices ro<,e from less -than $8 per pound to.more than $40 per pound. DJring the san,e period, producers of nuclear reactors and fuel assemblies such as Westinghouse and Exxon, uni-laterally reneged on their obligations to supply nuclear fuel at prices that had been-negotiated before uranium oxide experienced its five-fold price escalation. Many of the litigations arising out of th. failure by suppliers to deliver fuel at. contract prices have been settled. Usually.the de-faulting supplier has offered a package of cash, services, products it pro-duces and uranium such that the value to the. utility agreeing to the ^ settle-ment is significantly greater than the cost to the defaulting supplier. GPU is involved in extensive litigation with Exxon related to the pricing of uranium for Jersey Central Power & Light's Oyster. Creek plant.
To date, despite prelitigation attempts at a resolution of the dispute, there has been no significant movement toward a settlement.
The Westinghouse default of nuclear fuel supplies resulted iWextensive '
efforts by the utility industry to secure nuclear fuel on a long term basis; additionally, government requirements for enrichment service contracts com-pounded the price escalation impact of the cartel.
This market situation has been almost completely reversed within the past year.
The large number of nuclear plant deferrals and cancellations, coupled with TMI related un-certainties, drove down the. price of uranium oxide from about $40 per pound at the end of 1979 to approximately $32 per pound in 3J1y 1980. Fu rther-more, a large amount of uranium mining capacity has been installed worldwide in response to high pre-TMI uranium prices, and tnis capacity may innioit
~
any significant price escalations in the future.
In fact, the soft market, excess capacity situation and production cost uncertainties apparently caused Gulf 011 to-terminate the development of its large Mt. Taylor uranium mine after investing over $200 million.
NATURAL GAS ~
The passage of the Natural Gas Policy Act (NGPA) late in 1978 resulted in a partial decontrol of natural. gas prices which will become fully ef-fective in 1985 for new gas ~ discovered since 1978.
In contrast to the-IV-2
i situation in crude oil, the partial decontrol has resulted in significant increases in domestic gas prodJCtion.
In those areas Where gas supplies are obtained largely from domestic sources (sucn as the GPU service area),
natural gas is much cheaper than number 2 fuel oil, diesel fuel or low sul-fur residual oil. Furthermore, gas is much easier to use and causes fewer environmental compliance problems than alternative fuels. These advantages of gas, coupled with the extreme uncertainty in oil supplies, have generated an enormous demand for conversions from oil to gas throughout the country on the part of residential consumers, industry and utilities. As a result, the current surplus or " gas _ bubble" that resulted from the passage of NGPA may soon be consumed, and curtailments of interstate pipeline supplies may soon be resumed. Consequently, pipeline suppliers ill not guarantee the avail-aoility of gas on a firm basis even Wough there is currently a surplus.
The Federal Energy Regulatory Commission (NRC) nas established a natural gas curtailment priority system whercey residential service is as-signed the higlest priority and large industrial coller fuel service the lowest. Within tnis set of priorities are some further gradations. For examole, griculture has a higher priority than industry in general and the textile.ndustry, because of its relationship to agriculture, also has a higher cartallment priority than general industry. Should large pipeline gas curtailments again become necessary, securing a higher priority class-ification for a user's gas supply will become increasingly valuable.
As discussed in the strategic recommendations section, this fact might possibly be exploited by GPU to foster the Company's load management and conservation objectives.
POER POOLS The GPU group is a full member of tne Pennsylvania Jersey Maryland In-terconnect (PJ4), and the three individual GPU companies are signatories to the agreement. Power pool membership allows meaner companies to achieve fuel cost savings since the most economic generation in the pool is dis-patched to meet the pool-wide load at any given time (economic dispatch).
The pool meaners pay for power purchased from the pool and are compensated for power sold to the pool, using the split savings method for pricing such interchanged power.
The split savings price is based on a marginal cost approach and is essentially an average of the highest cost generation being sold in the pool at a given time, and the cost that the purchasing utility would have to pay to generate the power if it were not able to purchase it from the pool.
This method of pricing is specified by the agreements governing PJ4 membership, and has been approved as a tariff by FERC under its authority to regulate electricity sold to other tnan ultimate
~
customers. Split savings pricing is one of the pricing methods typically used by power pools throughout the country. Another pricing method'is often used for emergency sales of power which are typically priced at 110% of the selling utility's marginal cost of generation, IV-3 i
I I -
The PJMlintercha"ge pricing algorithm ha's four major consequences that-impact net intercha.ge' purchasers within PJ4,= including GPU.
The price of interchange power'is based to a significant extent on oil-fired generation. costs. Although PJ4 has 'consideraole coal and nuclear capacity,. there are also many oil-fired plants in Pie system,
~
which constitute toe most expensive base load generation in PJ4.
Tne' cost of fuel:for these oil-fired plants is averaged with the purchasing utility's alternate y*rdion _ cost under split ~ savings since the_ entire PJM load often canst ce met entirely from its coal-and nuclear generation.
Even if. pricing were done on a cost rather than on a split savin 0s basis, the price of intarchange power would still-be based to a significant extent on oil-Cred generation costs.
- The split savings feature imposes additional penalties upon GPU.
Because the GPU System is short of base load capacity. in the absence of.TMI, its alternate generation cost is the cost of generation via 4
i combustion-turbine-peaking units. 'These units use very expensive l
number 2 011 and also have a significaM '_y higher heat rate than base load units. This results in a very high alternate generation cost-which is averaged with the highest PJM generation cost being used to meet-the' load to determine the price of GPU's purchase of PJ4 inter-chans power at any given time.
The split savings penalty is -
i greatest at those times when low cost (coal or nuclear) interchange power is available.
- Since the PJ4 interchange pricing formula has been approved by FERC as a wholesale ' electric tariff, it can be changed only by unanimous -
agreement of all PJM members or as a. result of a formal FERC hear-ing. Tne latter proceeding can take many years before all potential-appeals and court challenges are resolved.
4 Since the GPU group is a full PJM member and Penelec, Met-Ed and Jersey Central are signatories, the individual companies account for interchange power purchases and sales among themselves before tne GPU System accounts for interchange transactions with PJ4.
The inter-i change accounting among the GPU companies is done at cost under the 4
GPU power pooling contract (which has been approved by FERC). Tne Pennsylvania companies are net sellers to Jersey Central.
If the Pennsylvania GPU companies were individual memoers of PJ4 rather than associate members of the GPU group, they and their ratepayers would -
realize a premium from split savings pricing of their interchange power sales-to _ Jersey Central', as long as split savings pricing ~is approved by FERC. Conversely they.would lose the benefits derived '
from the GPU power ' pooling contract. Also it would not be legal' for Penelee to charge another GPU member comp?ny for wheeling this energy because under the Fblding Companies Act truisactions of_ this type.are to be billed 'at cost.
[
IV i q
It should be noted that prior to the accident, GPU had attempted to increase Jersey Central's share of TMI ownership and reduce its snare of Forked River to provide a better balance among member companies' generation.
The Pennsylvania Commission did not approve GPU's ap-
. plication for tnis' change in ownership. Furthermore, since the ac-cident Penelec has not had sufficient generation to meet its net p
system requirements (between January and June of 1980 Penelec gen-erated only 5,529 GWH of its 6,264 G#H net system requirements).
It appears, therefore,- that Penelec's sales to Jersey Central have been primarily from Penelec's excess purenased power rather than from Penelec's own generation.
GPU SYSTEM LOAD AND CAPACITY GPU's net generation, net power purchased and interchanged, and total net system requirements for 1977 through 1979 were as follows:
Thousands of MdH 1977 1978 1979 Net Generation 26,576 29,747 26,891 Power Purchased and Interchanged (net) 5,926 4,275 7,982 Total het System Requirements 32,502 34,022 34,873 The variation in net generation from year to year reflects the inter-action of performance factors, as discussed in the section on Power Production.
The addition of Homer City Unit 3 accounted for a jump in gen-erating capacity in 1978, and the TMI accident accounted for a decrease of generating capacity in 1979.
If the accident had not occurred, GPU would have been a net energy seller. However, with the loss of TMI the shortfall in generating capacity increased in 1979 by almost 87%.
Some of this short-fall could be met through increased generation from older, less efficient power plants, but it would be more costly and have an adverse effect on-GPU's cash flow.
j During the last five years, even with conservation efforts and rapidly i
rising energy _ costs, growth of demand in the GPU System has varied between 2.5 and 7%. 'It is realistic to project that unconstrained, overall demand will continue to grow from 2 to 4% each year for the next five years.
The absolute' magnitude of the growth will depend not only on the success of conservation efforts and the rate at' which energy prices rise, but also on the number of new industries and customers that locate wiU11n toe GPU system. GPU's Master Plan-for Load Management and Conservation projects a 1.5% growth in summer peak demand, but anticipates most of the reduction in the growth of sumner peak will not occur until the 1985-1990 period.
IV-5
-TB&A analyzed the projected growth in demand and-net generation of the Pennsylvania c~ompanies for the next 5 years.
Tnis analysis assumed -in-
~
creases in load growth of 2% and 5% and increases in-net generation of 34 per year with and without TMI-l on-line. Under this scenario, the 3% in-
- crease -in generation would have to come from increased system efficiency and
- reliability..While this is theoretically achievable it will require con-s'
.sidereole management effort-and assumes the availaallity of funds for capital improvements.
Annual net generation could ' increase if decreases occurred in the number of megawatt hours lost to forced and partial outages
.and to economic system dispatch.
Overall GPU will continue to facs a lack of economic capacity (i.e.,
poder that can 'oe produced at a.lc<er cost than available purchased power) even with TMI 1 on line, until additional generating units can be built.
The Pennsylvania companies face the same situation, although they are in a sliditly better position than the overall GPU system because of Penelec's capacity.
Jersey Central Power & Light Company (JCP&L) is the GPU subsidiary that t
has the most severe shortfall of economic generating capacity.
Even before the loss of TMI, JCP&L-was purchasing monthly net amounts of from i.
350,000 to 500,000 MWH. During all of 1979 JCP&L purchased net 5.3 million M#H of electricity, Met-Ed purchased 3.4 million MiH and Penelec had net sales of 0.7 million MWH.
Should both of' the TMI units come back on line soon, Met-Ed's economic capacity will closely approximate its demand, but Jersey Central will still be forced to buy considerable amounts of power.
-PENNSYLVANIA'S OPPORTUNITIES Pennsylvania is in a strong position to benefit from certain emerging trends in the U.S. energy situation.
The country is committed to a reduc-tion in its-dependence on OPEC and, as the commitments made at the recent Venice Economic Summit indicate, increasing the usage of coal and toe ef-ficiency of energy. utilization are key elements in achieving this reduc-tion.
Increasing the usage'of coal, however, will require the solution of difficult environmental problems ~ There is a growing concern that the acid rain produced by.the; combustion o.f sulfur impurities in coal will cause extensive damage to lakes and rivers in'the Northern Hemisphere.
Two of the
)
more conventional solutions to -this problem, the use of low sulfur ' coal and the use of flue gas scrubbers, are of limited applicability in the North-east.
Reserves of low sulfur coal are very limited in the Eastern U.S.,' and.
high transportation costs make it impractical for Eastern. utilities to burn low sulfur Western coal.
Many of the East's oil fired generation plants that can be converted to coal do not have' the space available to permanently store the enormous amount of sludge produced by flue. gas scrubbers.
Furthermore,' the growing national concern about the dangers of toxic wastes will make it increasingly difficult and expensive to permanently store scrubber sludge in densely populated regions such as the Northeast.
i e
4
. IV-6
Because the! largest potential for displacing oil with coal in ele'ctric sgeneration is on the East-Coast, pressures' will increase to develop in-novative solutions to the coal conversion and environmental protection -
problems... Coal cleaning and coal'gasification are two technologics that can be used :ta solve :tnese proolems and, because both involve the use of large.
quantities of process. heat, they offer potential cogeneration opportun--
F ities. Pennsylvania!s' large coal reserves and central location in 'the Eastern part of the-country put it in a strong position to develop a coal cleaning / coal gasification/ cogeneration. industry. Given tha national.
urgency of reducing our dependence on OPEC while avoiding environmental degradation, Federal support might be secured to develop a synfuels industry'
'in Pennsylvania. The electricity produced oy such an industry, in turn,
. might reduce the need for GPU to build additional conventional generation during the 1980's. GPU has been active in coal cleaning-technology. Tne
- Homer City Unit 3 employs an innovative coal cleaning process, and the EPRI R&D-coal cleaning facility has been located at Homer City.
KEY ISSUE ANALYSIS Tnis 'section of the chapter discusses tne four key energy related ' issues confronting GPU:
- Power Production
- Fuels Purchased Power
- Load Management and Conservation.
POWER PRODUCTION GPU has generating facilities with the net installed capacity:shown in.
Exhioit IV-1.
-These facilities represent a broad range of size and fuel mix although the GPU system would depend primarily on coal (67%) and nuclear (25%) if TMI 1 and-2 were operating.
The accident at TMI-2 represented a loss of 1,706 megawatts of winter.
generating capacity from the GPU system and has put a strain on GPU's fossil-fired units.' To the. extent that those' units cannot provide economic capacity, power must be purchased from other utilities to meet demand re-quirements.
Available data was reviewed to assess whether GPU's emphasis on the
~
nuclear generating stations resulted in a deterioration in the capaoilities of its ' fossil generating stations and to evaluate the extent to which-im-provements in plant productivity mig 1t be achieved and reduce GPU's purchased power needs.
Plant' Performance Analysis The performance of individual units at the following seven major gen-erating stations owned by Met-Ed.anu/ar Penelec was analyzed for the five year period from 1975 to 1979:
-IV-7
l t
. EXHIBIT IV-3 GPU EXISTING NET INSTALLED CAPACITY SUMtER RATINGS AS OF MAY 1980
'PN Units (MW)
ME Unit's (MW)
JC Units (MW)-
Homer City 1,'2 & 3 (942)
Conemaugh 1 & 2 (280)
Keystone l'& 2 (2*
Secard-5 (136)
Portland 1 & 2 (401)
Oyster Creek 1 (6h Shawville 1-4 (606)'
Three Mile Island 1 (388)
Three Mile Island 1'
. (ISj
.Three Mile. Island 1 (194)
Three Mile Island 2
.(440)
Three Mlle Island 2.
(23 Three Mile Island 2 (220)
. York Haven 1-20 (19)
. arren 1 & 2
'(86)~
W Williamsburg 5 (33)-
Total Base
- ( 2 ' '217)
Total Base (1 528)
Total Base (1 31 i
Front St. 1-5 (118)
Titus 1-3 (234)
Gilbert 3 (i
Secard 4 (62)
Gilbert 4-8 (3$
Sayreville 4 & 5 (24 j
Werner 4 (9
Total Intermediate (180)
Total Intermediate (234)
-Total Intermediate (7d i
Total Base + Inter.
(2.397)
Total Base + Inter.
(1 762)
Total Base + Inter.
(2_
'Daep Creek 1 &.2 (18)
Ccmbustion Turbines (266)
Gilbert'l & 2 Piney 1-3
-(27)
Diescis (2)
Sayreville 1 _ (
(-
Seneca 1-3
'(76)
Yards Creek 1 (1 4
Combustion Turbines
.(71 i
Combustion Turbines (130)
Diesels
-.1 Diesels (13)
~ :
Total Peaking (264 Total Peaking (268)
Total Peaking
- (fi
-Total Capacity (2 661)
Total Capacity (2 030)
Total Capacity (3 O(
Total GPU "apacity:
7 707 MW Definitiens:
i Base-
- Normally-to economic to run 24 hrs / day, 7 days /wk.
Intermediate - Averages more than 12 hrs /wk. day but less than 24 hrs / day, 7 days /wk.:
Peaking
- Normally avt, des less than 12 hrs /wk. day.
i Y
w y
e
~,
I i
-- atmer: City..
'- -Conemaugh 4
- Shcwville:
'Seward Portland
- Titus Front' Street Analyzing plant performance is difficult because no one indicator gives ~
a precise. picture of.the afficiency. of a generating' unit or which elements
~
' af fecting-that efficiency are controllaole. Various factors affect a unit's -
j ef ficiency, such as:
1 Design '- The trend toward bigger, more sophisticated units created maintenance problems attributaale to the actual design of the.
units.
These ' problems af fect generation capabilities, particularly, in the'early years 'of a unit's life, and may require consideraole manpower and financial resourc%.to " work out the bugs."
\\
Utility Involvement in Construction - To the degree that utility.
4 l
managerr. ant becomes involved. in monitoring ano assisting contractors during construction, future operation and maintenance proolems can of ten be foreseen -and avoided, s
~
Aoility of the Operators - Operating a plant at peak efficiency and -
anticipating emergencies and maintenance problems depends on the
[
many factors thu affect plant operators such as training, turnover rate, management effort and morale.
i l
431raenance - An important determinant of plant availability and efficiency is the effectiveness of long-term preventive and pre-1 dictive maintenance.
lhe ability of maintenance to respond to emergencies and breakdowns is important, but the very need for such -
responses is ind.icative of deeper maintenance problems.
Size and Type of Equipment, and Conditions - Several equipment-factors affect plant performance such as mature versus immature units, cyclic versus base load units, once-througn versus drum type -
boilers, steam temperatures, megawatt size of the unit, and type and quality of fuel used.
I Because of the above variables, as wcll as the inconsistency of: tne data reported by utilities to EEI, direct comparisons between units ate' tenuous.
Overall comparisons can be made, however,L and by. reviewing trends in variods i,
plant. performance -indicators, the benefits and ccets of plant improvement-programs can be evaluated. Exhibit IV-2_ graphically. presents the factors that. affect toe productivity.of power plants.
The operating cost of producing electric. power in any particular unit depends on the unit's relative efficiency'and the cost of fuel.
For tnis reason,' the. larger; newer units (which are generally more fuel efficient) f i
-IV-8 I:
l t
FACTORS AFFECTING THE PRODUCTIVITY OF POWER PLANTS Y~
~Y l
l ~ ~ ~l
~
RATED RESERVE CAPACITY l PSO g' I
I g
PFO V
I I
I I
I I
5 I
I I
l FO j
SO j
TOTAL 0-PRODUCTION l
l 1
1 l
l 1
TOTAL HOURS OUTAGE 840URS T
SERVICE HOURS FORCED AVAILABLE HOURS
' ' OUTAGE HOURS '
PFO - PARTIAL FORCED OUTAGE (OPERATING PROBLEMS FORCE LOAD REDUCTION)
PSO - PARTIAL SCHEDULED OUTAGE (LOAD REDUCTION TO PERMIT MAINTENANCE, AND SO ON)
ESD - ECONOMY SHUTDOWN (NOT ECONOMICAL TO GENERATE)
FO - FORCED OUTAGES (EQUIPMENT FAILURES, ACCIDENTS, ENVIRONMENTAL FACTORS)
SO - SCHEDULED OUTAGES (ROUTINE OR PLANNED MAINTENANCE, INSPECTION, AND SO ON) x I
E
."5w e
are baseloaded wnile the older units are used more for intermediate or peak -
loads.. Likewise units using cheaper fuel (uranium ano coal) are used more than tnose that ourn expensive fuels (suen as oil and natural gas). Exnioit
.IV-3 shows the fuel costs per KWH for the various GPU generating plants
- during 1979.
)
Tu main purpose of this performance analysis was to determine wnether
-- the generating plants were showing signs of deterioration. For tnat. reason,.
the. indicators that were selected enable each plant to oe clearly compared to itself rather than to'the industry as.a whole.
The performance indices used here also focused on some factors that would predict future equipment -
~
proolems. Whenever possiale, megawatt hours lost, as opposed to ratios, were used to emphasize the economic impact of unit downtime. The six performance indices 'used for the analysis were as follows:
Heat Rate - plant efficiency as measured 'oy BTU per KWH gew %ted.
MWH Lost to Forced OJtage - the amount of power lost because c ?
full or partial forced outages.
MWH Lost to Planned 0Jtage - the amount of power lost because of full or partial planned outages.
MWH Lost to Economic System Dispatch - the amount of power that the unit was capaale of delivering, out did not deliver because a lack of demand did not make it economically justifiaale to do so.
Contractor Costs - the annual amount spent on outsioe-contractors for maintenance or equipment additions.
Maintenance Overtime - the total manhours of overtime spent ' y o
maintenance personnel.
Individually these indicators do not necessarily present an accurate picture of. power plant performance. Taken together, however, they can give an overall indication of tne effectiveness of any unit over time. Heat rates and MdH lost to forced outage give the best overall indication of.tne efficiency of a plant.and how well it ~nas been maintained. Deteriorating trends;in these two indices indicate problem areas that nee d to be ad-dressed. The other four indices are used.primarily. to gain a better 'overall picture of the conditions that impact plant operations. Megawatt-hours lost to planned outages are to be expected and in some. years may show a jump because of major overhaul work that occurs only once every four or five years.
Upward trends, however, can-indicate that additional work is ceing deferred for these outages (a partial result of increased maintenance problems) or that the craft maintenance work force is not being properly managed.
Additional maintenance requirements can ce met by the use of contractors or by increased maintenance overtime. An upward trend in these two indices might suggest that maintenance-problems are increasing and may be reflected IV-9
-<m i
FTL COST COMPARISON
^
Average
' Fuel, Cost; Cost Per-Per KWH'-
Station Fuel!
Million BTU Heat Rate (Mills)'
Three Mile Island
- Nuclear 14.43d 11,246 1.62
,l
. Oyster Creek Nuclear.
30.90
-10,351 3.20
- Keystone.
Coal
.119.25 9,952-11.87
. Homer City'
- Coal-119.25-10,133' 12.08 1
Conemaugh Coal 119.25
.10,161 12.12 Shawville~
Coal' 119.25 10,835 12.92 Seward Coal /0il-119.25 11,168 13.32-Portland-Coal 142.02 10,448 14.84 Titus' Coal 142.02 10,575 15.02 Warren Coal 119.25 13,053 15.57
~
. Willi w.sburg Coal 119.25 13,133-15.67 Front St.
Coal 119.25 13,526
-16.13 i
g Sayerville Gas /0il 273.10 11,045 30.16
- Werner Gas /Dil 273.10 11',402 31.14 Gilbert
- 011 318.40 12,315 39.21-Combustion Turbines Gas /011 239.03-11,533 to 22,606 27.57.to 54.04 m.
3' F
w Source: 'TB&A anal sis of 1979 data.-
p.
- :-.--:------ - r-.
i.
~.
Lin nigher planned and forced outage rates:in tne future. ' Megawattnours lost to economic dispatch indicates the demand for a. unit's generating capacity; an upward trend indicates that the. demand for ~ a unit's generation is de-clining.
4 Exhibit IV 4 sumarizes, in narrative form, highlicpts of the 3'
performance analysis for the Homer City,' Conemaugh, Shawville, Seward, f
Portland, Titus, and Front Street plants. Overall performance trends de _
i teriorated in 1977 and 1978 but ' improved 'in 1979. The-deteriorating trends in 1977 and 1978 may have resulted from a lack of attention to the units in:
previous. years, from'various equipment design problems, devoting resources to bring new plants.on line, environmental compliance programs or from a combination of these factors.
The trends also seem to correspond to budget restrictions during 1977 and 1978 and the subsequent renewed appreciation of coal as a major generating source.. The one station that seems to oe con-tinuing to deteriorate is Met-Ed's Portland Generating Station.' Applica. tion J
of Penelec's resources toward reversing these trends would be one major.
benefit of the proposed Penelec-Met-Ed management combination. A Generation i
Productivity department was estaolished in the GPU Service Company in JJoe 1978.' This department initiated programs' to improve plant reliability, out-i put and thermal efficiency.
Its resources were dedicated to the solution of TMI related problems in March 1979,-and the department was disbanded in July 1979.
I Fossil Generating Planti Performance. Improvement Programs
. In recent years, - GPU, and specifically Penelec, has developed and <imh-4 j
plement various. plant performance improvement programs.
The most signif-L-
icant of these are described below:
4 DJtage Planning.GPU established an -internal committee, made up of-memoers of the three operating companies,- to draf t a generic accu-
. ment'on ' outage planning and scheduling. Using this document as a guide,'each operating company developed its own specific proce-dures. Thice procedures are currently being performed manually bui. ;
there are plans to automate them-in the future..
1 l
Station Operating Procedures - More specific operating procedures are being developed.
These procedures cover unit-start-up,-
shut-down and emergencies as well as normal operations for optimal
. thermal efficiency. -1here are no sign-off or testing procedures-but Penelec management intends to include such procedures in future l
labor contract negotiations.
Generation Maintenance System (GMS) - Met Ed generating stations have recently implemented an automated maintenance system covering 4
planned maintenance and breakdown work. Penelec-is in the final stages;of. implementing a planned maintenance system in all of its plants. Penelec expects GMS to be implemented in 1981.
1 i
IV-10 u-
Y' l
I EXHIBIT IV-4 l
PAGE 1 0F 3 HIGHLIGHTS OF PLANT PERFORMANCE ANALYSIS HOMER CIfY (Units 1 and 2 only) o High forced outage rates in 1976-77 indicate eouipment problems that seem to have been resolved.
I o
High planned outage rate, contractor costs, and maintenance over-l time indicate that major. work was undertaken in 1978.
This re-sulted.in improved performance in these areas in 1979.
o Heat rate is gradually declining, indicating improved operations and maintenance, l
CONEMAUGH o
Increasing forced outage rates in 1977-78 indicates serious I
eculpment and maintenance problems..The trend began to reverse in 1979 but is still high..
l 0
The rise in' heat rates in 1977-78 indicates plant deterioration.
l A decrease in heat rate in 1979 indicates some improvement.
O Planned outage rates, heat rates, contractor costs and main-tenance overtime data indicate that much work was done in 1979 to improve deteriorating trends in plant performance.
o Overall, significant. problems appear to have been resolved in i
1978, and better performance trends should be expected in the future.
SHAWVILLE Increasing forced outage rates through 1978 indicate increased o
eculpment and maintenance problems during that period. 1979 marked.tte beginning of a' turnaround.
o that rate' increased in 1978 but seems to have leveled off.
In-crease in heat rates may have been the result of eculpment
~ additions (e.g., pollution control devices) but need to be
-improved.
o Decreasing number'of MWH's lost to economic system dispatch in-dicates;an increased need for Shawville power arvi would justify increased efforts to upgrade plant. performance.
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EXHIBIT IV-4 PAGE 2 0F 3 j
SEWARD o
1977-78 showed a jump in forced outage rates, indicating coulp-ment anJ maintenance proolems in those years which were possibly caused by the severe area flood.
This was preceded in 1976 oy a high planned outage rate (probaoly completed by outside con-tractoru since that cost also jumped in 1976).
o Increased overtime corresponds to increased forced outage rate in 1977.
This may be of a result:of flood restoration work.
o H3at rates seem to be improving, particularly in 1979.
This would indicate improving operations and maintenance.
o Increase in MWH'3 lost to economic system dispatch would indicate that Seward's power is becoming increasingly more costly vis-a-vis other generating stations.
Additional resources to upgrade facilities and improve plant performance may not be justified.
PORTLAND Forced outage rate had been constant but a large jump in 1979 o
indicates eauipment and maintenance problems that may not have been resolved.
This corresponds to significant increases in maintenance overtime in 1978-79.
o Heat rate has held constant through the five year period.
Substantial reduction in the amount of planned outage work in recent years may contribute to future problems, o
Sharp declines in MWH's lost to economic system dispatch in-dicates increasing needs for Portland's power.
TITUS o
An exceptional jump in the_ _forcea outage rate in 1978 indicates considerable eauipment and maintenance proolems, o
Heat rate has shown an overall increasing trend although it did decrease in 1979.
The overall increase indicates possible gen-eral declines in operations, maintenance, and condition of the
. plant.
o All trends improved in 1979.
= ~..
EXHIBIT IV-4 PAGE 3 Or 3 FRONT STREET o
High forced outage rate and contractor costs in 1977 indicate eauipment problems in that year.
o Heat rates are showing a general decline indicating the condition and operation of the plant are improving.
o Maintenance evertime has generally increased year to year, per-haps as a result of increased attention ~to the condition of the plant or improper maintenance scheduling.
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Generation Productivity Improvement Program (GPIP) - GPIP involves toe devalopment and implementation of two automated programs - RAM (Rellaaliity, Availacility, Maintainacility) and PEPSE (Performance Evaluation of Power System Efficiency). RAM is an automated system to maintain EEI requested performance data. A planned $ase two to this program calls for an interface witn the GMS system to facil-itate equipment maintenance analysis. PEPSE is a computer modeling program that projects the impact on system neat rate from changes made to specific pieces of equipment.
The first phase was scheduled for implementation in late 1979 out has oeen delayed; it will cover the turbine, heaters and associated equipment. A planned second phase will include the boilers and associated equip-ment.
Generation Thermal Performance Improvement Program (GTPIP) - This program is designed to prepare operators to maintain peak thermal efficiency on an hourly basis.
The development of this program is approximately 50% complete.
This program provides performance curves of various operatino parameters at all loads to guide op-erators in interpreting hourly readings.
Generation Unit Performance Testing - Penelec has developed a comprehensive equipment testing program for four main equipment areas (turbine, air heater, feed water heater, and boiler).
Staff engineers and plant engineers perform the equipment tests.
Tne program is not being fully carried out at present due to manpower constraints. Penelec is also in toe process of centralizing some test stations to reduce the time and manpower neaded to complete these tests. Written procedures have been issued for all electri-cal tests and are in draft form for all mechanical tests.
FUELS' GPU uses the full spectrum of generation fuels: uranium, coal, oil, and natural gas. As with most integrated utilities, fuel represents a major portion of total revenue requirements.
In 1979, total fuel expenditures were almost $346 million, or 23% of total system revenue requirements.
Tne most significant fuel-related issues are:
The Exxon uranium pricing litigation GPU's uranium inventory position GPU's coal reserves Conversion of combustion turbines to dual fire natural gas and oil Fuel cost reduction and procurement efforts The Exxon Uranium Pricing Litigation CPU is in litigation with Exxon concerning the pricing of uranium and fabrication services for Jersey Central's Oyster Creek Plant. GPU's General IV-11
Counsel believes that GPU's case has merit; however, many of tne facts re-lated to the case were not made available on the grounds of client / attorney confidentiality. Exxon continued supplying uranium, in spite of its pricing dispute with GPU, until December 1978..In Novemaer 197d dxxon submitted bills for $33 million for reloads supplied in 1977 and 1978 and to be sup-plied in 1979. GPU claims that approximately $?9 million of tnose bills are not justified.
There is also a dispute over th pricing of uranium oxide and faorication services for six annual reloads that were to be delivered after tevember 1979.
Prior to filing the suit GPU attempted to move the dispute toward set-tiement rather than litigation. Meetings were held between GPU and Exxon top management over the course of a year in an effort to develop a mutually satisfactory basis for settlement. GPU management nas indicated that Exxon demonstrated little willingness to compromise.
Tne recent sharp declines in uranium prices may further decrease Exxon's incentive to reach a settlement.
GPU's Uranium Inventory Position GPU owns certain uranium inventories and coal reserves that it might be aale to sell or pledge as loan collateral.
There are, however, certain restrictions concerning such conversion. First, the debentures of three operating companies have negative pledge provisions.
These prevent pledging of any property owned or thereafter acquired unless the company makes ef-fective provision to secure the outstanding debentures equally and rataaly J
with other indebtedness which is to be secured by such pledge.
Second, tne decentures of Metropolitan Edison and Jersey Central contain an exception that allows pledging to secure short-term, less than one year maturity, indebtedness under certain conditions, but the debentures of Penelec do not contain such an exception.
This exception allowed certain Met-Ed and Jersey Central uranium inventories to be pledged to secure the Revolving Credit Agreement negotiated after the Three Mile Island accident. Restrictions in the debenture indentures prevent the companies from selling tb31r property substantially as an entirety. It is not clear whether those restrictions prevent the Company from selling piece-meal assets, such as uranium in-ventories and coal reserves. Further, the sale of some of tnis inventory, if achelvaale, will need to be weighed against maintaining prudent operating supplies.
j GPU has uranium inventories in three different forms at separate loca-tions:
At Kerr-Md3ee there are 1,062,500 lbs of Jersey Central material J
and 975,000 lbs of Met-Ed material.
These inventories were used to -
secure the Revolving Credit Agreement.
In addition, there were i
362,500 lbs of Penelec material that could not be pledged.
As-suming the Penelec material could be sold for $27 per pound, almost
$10 million could be realized.
IV-12
At DOE there are 812,500 lbs of Jersey Central material, 125,000 los of Met-Ed material and 62,000 los of Penelec material.
The General Counsel has indicated that it might ce legally possible to sell this material without the consent of tne can<s participating in the Revolving Credit Agreement and without applying the net proceeds of the sale to the repayment of the borrowings under that agreement..However, the General Counsel is concerned that such action might endanger the continuing financial support of the participating banks.
The General Counsel was also of the opinion.
that the U.S. Government contracts pursuant to wnich the material was held at 00E do not provide a convenient mechanism for pledging it. The sale of the material would require a release from the first mortgage bond liens.
If the material could be sold for $27 per pound, GPU would raise almost $27 million.
There are two fabricated fuel reloads in inventory.
These were fabricated for reload #1 of TMI 2 and reload #5 cf TMI 1.
Tnese are owned 25% by Penelec, 25% by Jersey Central, and 504 by Me t-Ed. According to GPU, these are each worth at least $25 mil-tion.
This material is not currently pledged to secure indebted-ness; however, it is much less fungible than other uranium in-ventories.
It can be used only in a 8M reactor of the same design as the TMI units, a fact that may make them unmarketaole or require a steep discount to realize their sale. GPU approached other BM reactor owners in the summer and found no interest in purchasing the reloads. Discussions are currently underway with another utility for enle ef.se2112 mounts of uranium.
The above amounts of patential cash realizations are gross figures and do not consider the amount of money paid for the material nor the carrying charges accrued to date. GPU's uranium inventory planning had ueen oriented toward a conservative two to three year forward inventory position.
It had opened a New Mexico office in 1977 when uranium was difficult to obtain and closed it us a result of the TMI accident.
The indefinite suspension of Forked River and the TMI accident resulted in a long uranium inventory posi-tion.
If both TMI units are allowed to 6esume operations and a new core is facticated for TMI 2, the Company does not need new uranium supplies until at least 1985.
If the TMI units are not brought oack into service, current uranium inventories will represent about a 15-year supply.
Since the TMI accident, GPU manogement nas periodically considered sel-ling the uranium that was not pledged to support the Revolving Credit Agree-ment. DJring this period tGere was strong evidence that the market was likely. to soften and prices decrease:
A large number of nuclear plants on order had oeen cancelled.
The THI~ accident had caused great uncertainty over the future of the nuclear industry.
IV-13
Large increases in worldwide uranium mining capacity had oeen or were in the process of being installed.
The Tennessee Valley Authority bro <e a major uranium supply con-tract because of its excessive price.
The potentially saleaole inventories probaoly decreased by $8 per pound in value between December 1979 and July 1980 since the market price cf uranium oxide decreased from $40.per pound to $32 per pound during that period.
Such a decrease represents almost $11 million in potential cash realiza-tion. -In spite of ble evidence of likely price declines, GPU did not elect 3
to try to sell the uranium until the Spring of 1980.
It was the judgment of management during this Ceriod that attempting to sell the uranium might result in unacceptably negative perceptions of GPU's viability by the finan-cial community.
GPU's Coal Reserves 4
1 GPU has two major coal reserves. Penelec and Jersey Central jointly control the Reesdale coal reserves in Armstrong 03unty, vennsylvania. Ac-cording to GPUSC fuels personnel, the Reesdale reserves contain approxi-mately 40 million tons. Both deep and strip mineaole, these reserves are largely. owned oy GPU; the remainder are controlled by lease.
These reserves might net $7 to $3 million to GPU if they were sold.
In addition, GPU has acquired control of approximately 40 million tons of coal in Central Penn-sylvania as a result of a joint drilling program wito.R4P Coal Company.
According to GPUSC fuels personnel, these reserves are controlled primarily via lease rather than ownersnip, and they are in noncontigJous blocks.
These reserves might realize $4 million in an outright sale. The_Penelec portion of the Reesdale reserves is attached by a mortgage.
The status of the Jersey Central portion is unclear. GPU has. not made any. investment to develop mines in these reserves.
J GPU explored the possibility of selling its cual rcserves after the Three Mile Island incident, but little interest was shown by potential buyers at that time. -It should be noted that the coal market has oeen very soft during the last year.
It is possible,'however, that current concerns over reliability of Middle East oil supplies may result in an acceleration of utility oil-to-coal conversions.
This, in turn, might make these properties more marketable than they were last year.
1 Donversion of Combustion Turbines to DJal-Fire Natural Gas and Cil
. Fuels personnel at Met-Ed and GPUSC have identified approximately 160 MW of Met-Ed combustion turbine capacity that could be converted to gas if a capital investment of about $2 million were made.
These conversions could save over $4 million.per year in fuel and interchange power costs, the lat-ter resulting from a lowering of GPU's alternative generation cost used in the split savings pricing method. While the gas suppliers currently nave gas available,: they-will not maka a written commitment to guarantee supply.
Due to.this uncertainty, GPU:has been reluctant to make the capital invest-ment for conversion.
IV-14
9Jch capital investment could readily be justified.if the Company were to obtain (via a 00E ruling or a special law) a preferential allocation or curtailment priority of natural gas to meet all its conversion needs, wnile the success of an effort to obtain a preferential allocation or curtailment priority is far from certain, the Company may have ample bases to pursue it. It could for example, be requested to help ameliorate the economic impacts to GPU's ratepayers arising from the TMI accident.
TB&A's recommendation that GPU thoroughly explore the benefits and risks of converting its combustion turoines to gas was presented to tne Company in January 1980. GPU had already performed some evaluation in this area, and has taken further steps to implement the conversion.
To date the Company has:
Identified the most promising locations for installation of dual oil / gas firing capaoility based on die risks of gas supply dis-ruption and the payback period for required c ;pital investcr..ts.
Filed with the Economic Regulatory Admini?cration of DOE a request for a temporary public interest exemption permitting the burning of natural gas at combustion turbine installations.
Conducted negotiations with gas suppliers for service pending re-ceipt of necessary regulatory approvals.
Ordered long lead time items for metering and hook up of gas service and installation of dual fuel capacility on the comoustion turbines.
The Company, however, has not attempted to obtain a preferential allocation or curtailment priority of natural gas to meet all of its combustion turbine conversion needs. While such a priority would undoubtaoly be difficult to obtain it might form part of federal assistance pad < age.
It is estimated that lead times required to obtain necessary regJlatory approvals will pre-vent the use of gas in the converted units before the spring or summer of 1981.
Fuel Cost Reduction and Procurement Efforts There may be potential fuel cost re);ction opportunities asiociated with the Conemaugh station, which is approximately one-sixth owned by Met-Ed.
Approximately 80% of the cua'. for this station is supplied under contract from the Florence Mining Com)any. Florence derives this coal from its own mines and from market purchasas. Tne coal mined oy Florence is charged to the plant owners on an essentially cost plus basis. GPUSC personnel project that if the Conemaugh owners required the Florence Mining Company to close its I/2 mine and substitute purchased coal for it, it could realize signif-icant savings. GPU has been attempting to secure the agreement of the other -
- owners necessary to achieve tnis change.
4 IV-15
GPU has taken steps to eliminate the weaknesses in~its fuel procurement operations that led.to the Pennsylvania Commission requiring Mat-Ed to re-fund $3.6.million of overcharges related to 1974 coal procurement.
me Company nas established formal materials management organizations at the
~
operating companies and has staffed them with personnel who ' possess many 4
years of professional procurement experience. These materials management
. organizations are responsible for fuel procurement. Furthermore, GPU has developed formal written purchasing procedures for fuels procurement. GPUSC:
fuels personnel prepare a comprehensive fuels report monthly.
It presents in graphical form for each operating company and jointly-owned plant the cost.(contract, spot and average), consumption and inventory position of each type of fossil fuel.
Data are presented by month for the current and twelve previous months.. The report is circulated to top management and to the materials management personnel of the-service company and the operating companies. The report should provide warning of trends that may oe in-dicative of problems in the fossil fuels area.
PURCHASED PO#ER-GPU has actively worked to reduce its very high expenditures for purchased power, which have averaged $37 million per month since the TMI accident. Efforts have been made to:
Ootain approval for a more equitaole pricing of PJM interchange pmer tnan the tradional split savings method s
Purchase short-term (week to week) firm power from utilities di-rectly interconnected to GPU'or from which power can be eco-nomically wheeled to GPU Purchase long-term firm power.-
PJM Power Policy Obtaining approval.of a more equitable oasis for PJ4 interchange pricing 1
has been a slow process. GPU is of_ the opinion that FERC favors cost-based rather than split savings-based pricing of interchange' power; however, the 1
legal process for obtaining a change could take two or more years. GPU, therefore, has attempted to obtain agreement among PJ4 members on the some-what less desirable cost plus 10% pricing basis in order to provide an in-centive to net PJ4 sellers to reach a compromise agreement in lieu of a prolonged legal confrontation. me net PJM sellers are Pennsylvania Power &-
Licpt (PP&L), Baltimore Gas & Electric (EE), and Potomac Electric Power Company (PEPCO).
The Pennsylvania Commission has approved PP&L's agreement to cost plus 10% pricing. The Maryland and Virginia Commissions have not yet ruled on EE's and PEPCO's request for approval of the agreement.
The District of Columbia Commission has rejected PEPCO's request for approval of the agreement..In March 1980, GPU filed a formal request witn FERC to in-stitute cost basis pricing of PJ4 interchange power. -Interim relief, with pricing subject to refund, has been requested in order to speed up the l1 IV-16'
.~
~
. process of implementing' the change.
On JJ1y 31, 19_80, a. tenta tive. agreement
-was reached by. the P34 members-to a stipulation of cost plus 104 pricing k
subject.to: limits on hourly and annual quantities a'vailaole on-this oasis.
/
It is not being considered for final certification and approval oy FERC and could be effective as early.as Septemoer 1980.
Soort-Term Power Purchases Ef forts ~ to purchase short term lower cost :ower from neighboring >
- utilities nave. yielded tangiole benefits to date. As'shown' below, GPU es--
timates that through-June 1980 these purchases saved over $114 million in 4 -
costs relative to the costs of other availaole energy sources, such as PJM interchange power or GPU oil-fired units:
Avoided Company G41 Cost Costs (Millions) 1 Penelec-1,915
$ 59,091
$21.9 Me t-Ed
-3,775 115,125 52.2 Jersey _ Central 3,616 115,492 41.2 Total 9,306
$289,708
$114.3 As advantageous as-these purchases are, they have two significant draw-oacks..To date GPU has not been able to obtain-firm commitments of power at attractive prices for periods longer than one week. Although the recession may weaken electric demand in the Midwest during' the coming year and al-though low cost coal-fired power will prooably continue to be available on a week-to-week basis.in the short _ term, there is no certainty that attractively priced power will continue to be available in the future.
Second, the necessity of paying a wheeling charge to each system between the selling utility and CPU greatly limits the geographic area from which GPU can' purchase power economically. As an example, ~ GPU was recently offered
- 400 MW of oil-fired energy from Central H;dson, a neighboring utility with j
significant' excess oil fired capacity, at 43.8 mils'per KwH. GPU is currently purchasing 150 MW, wnich can be transmitted over a small directs line without wheeling charges and is therefore economic. The remaining 250 M4 had to be declined because it would have had to be transmitted over Dan-I solidated Edison and_Puolic Service Electric & Gas lines.
The two wheeling charges would have made the power economically unattractive.
Long-Term Firm Power 4
According to GPU,Ithere appear to oe only three possiailities for long-term purchase of non-oil-fired baseload energy that _would not involve-prohibitive wheeling costs. Pennsylvania Power & Light has offered GPU tne opportunity to purchase power from its Susquehanna 1 and 2 nuclear units.
Philadelphia Electric may possibly have excess capacity available from.its j
Limerick 1 and 2 nuclear units in the late 1980's. Ontario-Hydro (OH) will-4 L
IV-17
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-+a
.y-v
have over 1000 MW of coal-fired energy avallaale on a firm connitment oasis until 1994. The PP&L option would help meet the needs of GPU's Pennsylvania companies whereas the OH connection would provide 'CP&L's power requirements in the absence of Forked River.
The long-term firm purchase of power from the PP&L Susquehanna nuclear units has been rejected by GPU.
The capacity factor risk associated with firm purchases from specific nuclear plants was judged to be unacceptable given the loss of TMI nuclear capacity. As an alternative, GPU has proposed to purchase,on a firm basis one-half of PP4L's excess generation. Since the purchase would oe from PP&L's overall system capacility rather than from specific nuclear units, the capacity factor risk was judged to De accept-able.
To date, PP&L has not made a decision on GPU's proposal. Purcha3e of firm power from Philadelphia Electric's Limerick 1 and 2 nuclear units, should it become availaale, would result in a capacity factor risk similar to that associated with firm power purchases from PP4L's Susquehanna units.
This potential purchase, therefore, has not been pursued.
Large volume purchases of Ontario-Hydro coal-fired energy would require the construction of a cable under Lake Erie between Ontario and Penn-sylvania.
The cost of this line would be shared equally by GPU and OH.
GPU's latest estimates indicate that its share of the cost would be $275 million.
This would have to be amortized over 9-3/4 years, the period be-tween the line's projected in service date of 1985 and the end of Qi's firm capacity commitment in September of 1994.
This results in a yearly aaerti-zation of $30 million.
GPU estimates the overall benefits of the Lake Erie cable /Ontarin-Hydro purchase vs. purchase of PJM interchange priced on a split savings basis to be significantly in excess of the other alternatives over the 9-3/4 years.
GPU's amortization of the caole would reduce the benefit by $80 million per year.
Furthermore, this project would be less costly to finance than an alternative source of coal-fired capacity; for example, a new Pennsylvania coal plant might cost in the neighborhood of $1 billion.
Os the other hand, a new coal-fired plant would provide firm capacity for up to 30 years vs.
the 9-3/4 years provided by this project. If PP&L accepts 1PU's proposal to purchase its systemwide excess capacity, GPU's Pennsylvania compaqles would derive little benefit from the Ontario-Hydro purchase.
The Ontario-Hydro project faces a major uncertainty that could influence its economic viability. The Canadian Federal Government could impose an energy export tax on the purchase which would consume much or all of the differential between the OH selling price and CPU's cost of alternative energy.
The line would qualify as PJM installed capacity.
The imposition of a tax may wipe out the energy savings, but the capacity would still bers efit GPU relative to its PJM commitments.
The possibility of such a tax is very.eal.
The Canadian Feoeral Governmant has set energy export taxes on pettoleum and natural gas.
These taxes essentially result in charges to U.S. consumers which reflect world rather than Canadian prices for these energy commodities. GPU is currently attempting to negotiate with OH a IV-18
pricing _ formula which 4111 reduce the financial. risks to it associated with an energy export tax. The success of tnese negotiations is far from certain.
The most significant factor will be the absolute magnitude of the tax imposed. A low tax may not affect the economics significantly.
PJM Membership-An issue related to purchased power is the appropriateness of the cur-
~
rent GPU membership arrangements witnlo PJ4 All three operating corpanies are signatories to the agreement out their relations witn P34 are handled centrally by GPU. GPU has not formally investigated the trade-of fs involved in restructoring PJ4 membership so that full membersnip would oe at the operating company rather than the GPU group level. GPU believes that there would be a significant financial disadvantage to full PJ4 membership at the operating company level, due to significant increases in personnel and other operating costs and loss of benefits under the GPU power pooling agreement such as tne diversity bet.veen summer and winter load. As indicated previously, it appears that post TMI sales of power from Penelec (the prin-cipal seller) to Jersey Central have been primarily from Penelec's excess purchased power rather than from its own generation.
Tne GPU membership arrangenents within PJ4, therefore, appear to be appropriate at the present. Should in the future Penelec and Met-Ed sell significant amounts i
of the power they generate to JCP&L, the appropriateness of these arrange-ments should be reevaluated.
LUAD MAmOEMi-ST AND'CONSERVATIUM i
GPU, with encouragement from the Pennsylvania Commission, has been pur-suing load management and conservation opportunities since 1974.
The Company estimates that by 1990 existing load management programs will reduce its system winter peak by 490 M4 and its summer peak oy 270 M4.
In its rate order of June 19, 1979, the Pennsylvania Comnission directed Metropolitan Edison and Pennsylvania Electric Company to submit for Canission approval conservation plans which reflected an aggressive, imaginative program of encouraging conservation in order to reduce purchased power costs.
In its rate order of May 9,1980, the Pennsylvania Commission stated that Met-Ed's costs must be reduced through load management and conservation-inducing rate structure changes, although the actual changes to the rate structure would be the subject of a future hearing.
In July 1980, GPU implemented a Peak Alert Program to pursue voluntary load reductions at times of high energy costs, menever the G"U running rate exceeds 100 mils per KWH and GPU is also purchasing interchange power, it issues appeals to residential, ladustrial and commercial uustomers to reduce their usage in order to minimize increases in their subsequent.
electric oills.
On March 28, 1980 GPU issued a report outlining a comprehensive Master Plan for Load Management and Conservation designed to reduce by half the expected system load growth between 1980 and 1990.
This represents a net IV-19 m
.-3,_
y 9._y.
g m.
9
redJction of 994 M4 and 1333 Md in the expected summer and winter peaks respectively. As indicated in Exhioit IV-5, the Master Plan outlined a careful, phased approach and identified the general methods to be employed and the expected M4 redJctions to be achieved by each method.
It did not,.
however, adadress the many implementation details necessary to carry it out. These will be addressed during the latter part of 1980.
The Plan proposes a " Capacity Offset" approach, in wnich GPU will justify required capital investments if its costs are lower than the incremental costs of building new generation to meet the load deferred or eliminated by the Plan. As a corollary to the approach, GPJ proposes making investments in load management equipment on its customers' premises, principally residences, and including such investments in its rate base. Tne Plan emphasizes the use of proven technology and approaches found successful oy other utilities.
In addition to a red)Ction in summer and Winter peak loads, the suc-cessful implementation of the Plan will change the GPU system from a winter summer leapfrogging system to an increasingly summer peaking system, tous reducing the GPU system's PJM reserve obligation from 25% to 22% of the summer peak load. This will further reduce GPU's PJ4 capacity obligation beyond the M4 reductions realized directly from the Plan's implementation.
Furthermore, there will oe redJctions in peaking purchased power and overall purchased power since achievement of the Plan's objectives will help to offset GPU's short capacity situation resulting from the TMI recident. Tnus implementation of the Plan will reduce GPU's petroleum based ei.ergy costs (combustion turbines, PJ4 interchange power purchases) as well as defer or eliminate investments in new generation capacity.
The total present value savings from the Master Plan due to deferring or eliminating new generating capacity and reductions in energy costs is projected to be about $2 billion.
The projections assume a Master Plan budget for GPU of aoout $580 million between 1980 and 1990, and a 13%
discount rate. The latter is based on: assumed capitalization ratios of 53%,12% and 35% for long term debt, preferred stock and common equity; and assumed average costs of 12.25%,12.50% and 14.50% for long term deot, preferred stock and common equity.
91ould GPU's financial difficulties j
result in higher costs of capital, the discount rate will correspondingly Increase, thus redJcing the present value savings. On the other hand, con-tinued financial difficulty will impair GPU's ability to ouild new gen-eration capacity, thus increasing the necessity to reduce load growth, i
Tne plan projects for Met-Ed and Penelec a total budget of $230 million for residential vs. $90 million for C&I load management and conservation programs, even though the Commercial and industrial (C&I) programs are projected to produce larger reductions in both winter peak (535 Mi and 483 MN) and summer peak (400 Md vs 257 M4).
The Master Plan was developed on an overall GPU system rather than on a state-by-state basis. An analysis, therefore, was made to determine if tne Plan gave GPd's Pennsylvania companies their proportionate snare of the 1
IV-20
program effort. Based on the analysis, the Pennsylvania cynpanies represent 55 percent of toe Master Plan program oudget expenditures and 52 percent and 56 percent of the summer and winter peak load reductions respectively.
Thus, the data indicates that the Master Plan has provided the Pennsylvania companies their proportionate share of the program effort.
Tne Master Plan calls for a three-phase program. Pnase I - Securing RegJiatory Approval - is scheduled to be completed by January 1981. Phase II - Initial Implementation - is sched;1ed to be completed oy the end of 1983.
Tnis pnase will involve demonstration of each major load management pr3 gram in the Plan, and verification of tne load reductions and cost ef-fectiveness expected of each program.
Phase III would be full-scale im-plementation of each program in the Plan found to oe cost ef fective in Phase II. -It is scheduled for the 1934 througn 1990 time frame, and possioly ceyond 199J.
As indicated previously, the March 28, 1980, Master Plan report did not address the many implementation details necessary to carry it out. GPU is in the process of formulating detailed implementation plans.
The key im-plementation requirements of the Master Plan are as follods:
Secure regulatory approval for capacity offset rate case treatment from Pennsylvania and New Jersey Dammissions.
Develop and secure approval of related rate design criteria.
Establish procedures and reporting for review and monitoring by Commissions.
Resolve organizational issues related to implementation.
Develop customer load research data base and analytical tecnniques.
Resolve potential legal matters including anti-trust aspects re-lated to supplying load management equipment to residential customers.
Develop load management marketing capability.
Arrange for and manage logistics related to die resioential load management program, including the supply, installation and maio-tenance of load management devices.
STRATEGIC RECOME NDATIONS The strategic recommendations for GPU in the energy area fall into five categories:
Pursue the options identified in GPU's 1980 TMI 2 Major Connitment Review.
IV-21
EXHIBIT IV-5 MASTER PLAN FOR TARGET LOAD REDUCTIONS ~IN 1990.
(Megawatts).
Residential:
Winter Summer Time of Day Rates 37 49 i
' Storage Space Heat 476' 208 208 Storage Water Heat 104 256 Weatherization/AudDs Subtotal 55
'5IT Commercial and Industrial:
Time of Day Rates /QJstomer Contact
. Program:
General 464 420 l-raoling/teating _ Storage 100 53 j
Feat Recovery 204 48 i
Curtailable Rates 100 100
. Cogeneration 130 130 Subtotal 998 751 Master Plan Total 1,823 1,264-l l
Existing Load Management Programs
-490
-270 4
Net effect of the Master Plan on 1,333 994 1980 Forecast i
1 4
i i
k
' Aggressively upgrade the perfonnance (plant availability and out-
~
-put) of existing power plants.
Improve fuel-related strategic performance.
Aggressively pursue load management, conservation and cogeneration efforts.
Expand and pursue The " Pennsylvania Solution" options, t
i.
These recommendations are not mutually exclusive, and two or more can be pursued to~ advantage. For ' example, GPU's. analysis of tne TMI 2 Major Coas mitment' Review options is based on the need for additional-capacity even if the load.redaction _ targets'in the Master Plan for load management and con-l L
servation are achieved.
The recommendations will in most cases require significant capital-investments over and above capital required for system maintenance and reliability.
In view of GPU's severe financial problems, i
the relative benefits of each recommendation will need to be weighed against' the availability of capital since while all of them should improve GPU's.
long-term situation they require short-term funding.
1980 TMT 2 MAJOR C04MITMENT REVIEW OPTIONS This review examined four approaches to meeting GPU's projected future electric demand:: restore TMI 2 and build a 472 Md coal-fired plant; convert TMI 2 to a 1352 MW coal-fired plant; convert TMI 2 to a 1375 Md gas-fired
_ plant, run for five years, and then conve:t to a 1352 MW coal-fired plant; replace TMI 2 with two offsite coal plants totalling 1352.Md. GPU astimates that restoring TMI 2 is by far the most economic option and that conversion I
would be slightly more economic than the entirely new coal-fired option, as shown in the table below.
I Average Aveiage 1984-1996 Net Capital Cost per/KdH Monthly Cost Penalty Option Cost 1984-1996-Me t-Ed Penelec (Millions)
- 1. Restore Plus Coal 745 7.60d
- 2. Convert
. Gas / Coal-
-1658 10.60
$4.23
$1.58
- 3. Convert - Coal 1377 11.15' 5.04 1.89
- 4. Replace-Of fsite 03al 1846 11.25 5.19 1.94 r
Die.least expensive option is, overall, the riskiest. GPU estimates that the.first option (restore TMI_2) could incur an overrun of more that'
- $1 billion before its _ average cost of electricity equals that of the second least expensive option (convert TMI 2 to gas / coal).
The first option is estimated to require between $600 million and $1.1 billion less in net cap-ital cost than the other options.
Die attractiveness of these numbers, l-IV-22
however, must ce balanced against the short-and long-term risxs. GPU as-sumes that the NRC's decision on approval / disapproval for TMI 1 operation during 1931 will provide a signal as to whether tne TMI 2 restore option can be pursued. Such a signal, however, could be delayed or misleading:
Because of the many political and psychalogical factors, the decision on TMI 1 may drag on well.ceyond 198l.
As indicated in TBM's March 1980 testimony, there is a strong probability that tne restart of TMI 1 will be delayed significantly beyond tne scheduled date of January 1,1981.
In fact, it may never be clear whether tne NRC will approve or disapprove operation.
The aanger exists, there-fore, that GPU will lose valuable lead time in pursuing otner al-ternatives.'
TMI 1 could oe approved for operation in 1961, but subsequent events might make it impossiale to restore TMI 2.
l The TMI 2 conversion options may have some capital investment and eco-I nomic advantages over the option of building new coal-fired replacement capacity offsite. However, the risks of the conversion outweigh the bene-fits. There could be reliability proclems since a conversion of the magnitude involved would be unprecedented. Furthermore, financing dif-l ficulties might prevent the conversion, but still allow one of the two off-site coal plants to be built. The conversion could not ce practically sub-divided to ease potential cash flow proolems. Finally, the conversion op-tion exposes GPU to the risk that the converted plant may oecome inoperable shoJ1d pualic pressures result in the TMI 1 plant being put out of operation again in the future.
The 1980 Major Commitment Review recommends: commiting to the TMI 2 restore option; redirecting GPU's resources, to the extent possiole, to building offsite coal plants to replace TMI 2 should either TMI 1 not be allowed to restart or. restoring TMI 2 is found to be impractical. While the thrust of the recommendations is reasonable, t5ev s,.; not go f ar enough.
Specifically, they do not include initiatives tsc: attempting to speed up tne licensing and building of new coal-fired plants; obtaining federal as-sistance for demonstration plants of innovative coal-related technology; and developing rate incentives which accelerate load management and con-servation.
The success of these initiatives is far from certain, nowever, they can provide an essential margin of safety should the TMI 2 restore option become infeasicle. Furthermore, tnair pursuit will require a small fraction of the cost of starting to build coal-fired capacity or converting TMI 2.
Given GPU's severe financing constraints, it is probaoly limited in its ability to track morc than one option. Pursuit of these initiatives
-therefore, is probacly the only way GPU can acquire a margin of safety.
It should be noted in this regard that Penelec is continuing its licensing and engineering support efforts related to Seward 7 and Omho even though a final decision to build them has act Deen reached. Tnis is appropriate since GPU will not lose time in building these plants should tney be needed as an alternative to the TMI 2 restore option.
l IV-23
PLANT AVAILABILITY A'O 0JTPUT Improved plant performance can significantly redJCe GPJ's _ purchased poder requirements and hence costs of electricity.
These improvements, while requiring a major effort from the company, are, in our opinion, achievable. Achieving them, however, will require:
- A high priority effort on the part of the Company
- Significant capital investment
- Close monitoring of progress by the Commission
- Possioly a strong set of rate-related incentives and penalties.
Some of the expenditures for capital invest:nents and improved main-tenance will have to be made one or more years prior to the acolevement of improved results. Furthermore, improvements _may require increases in scqeduled outages (maintenance) which will decrease availability and output in toe near term. To ensure that short-term budgetary and cash flow con-siderations do not endanger the success of the plant improvement programs, GPU should investigate the potential feasibility of:
Fuel and energy adjustment clauses that specify targats for plant performance indicators. The targets would span several years but would specify annual performance levels based on realistic engi-neering estimates of improvement potential and required lead times.
GPU would participate in developing the targets, and they would be implemented if CPU approved them as being achievaale. Tne Penn-sylvania Commission is currently exploring innovative incentive fuel and energy adjustment clauses.
Developing the oudgets necessary to achieve the targeted plant performance improvements.
These budgets would also indicate the required increases, if any, in scheduled maintenance.
These oudgets would be given a high priority for funding when rates are set.
Possibly, they would oe added to test year expenses or funded throutp the energy adjustment clause.
Deveioping reporting and auditing procedures so that the Commission 4
can verify that the company is effectively pursuing the plant performance objectives and is reporting performance indicators correctly.-
In addition to pursuing the aforementioned incentive programs, GPJ should continue and expand its efforts to ma<e operational improvements to
- its plants throup:
Tracking and identifying trends in plant performance indicators Implementing a comprehensive planned maintenance program Instituting engineering analysis of. equipment history files IV-24
Estao11shing a complete vibration and infrared analysis program
^
Tigatening control procedures on planned outages Identifying methods for upgrading plant equipment Developing continuous operator training program Posting and widely disseminating performance trend information:
Establishing a comprehensive program of testing and analyzing specific pieces of equipment Establishing performance improvement goals The performance trends indicate that the Pennsylvania companies improved the performance of their generating stations in 1979 and may do so again in 1980. Nevertheless, there is room for additional improvement.
Blis law provement will be reflected as fewer M4H's lost to forced and planned out-ages, lower heat rates, and lower costs for maintenance overtime and the use of contractors. Better performance in each of these areas can be quantified. Exhibit IV-6 presents an estimate of the annual savings that would result from red 3cing the forced outage rate for each plant from the 1979 level to the lowest level achieved during the past five years. Similar analyses can be made of tne other performance indicators to show toe potential dollar benefits of improvement in these areas.
Improvement in plant performance presents one of the best short-term alternatives for in-creasing net generation and diereby decreasing GPd's need to purchase power.
ENERGY OPTIONS STRATEGIC PLAN GPU should develop a formal energy options strategic plan. This plan, which should oe developed annually for review by top management, should include:
an assessment of relevant regulatory, government policy, and fuels market factors; the strategic initiatives that are contemplated in response 1
to the problems and opportunities represented by these factors; and tne risks and uncertainties involved in implementing these initiatives.
The plan should be updated informally and presented to top management at least semi-annually.
This will help improve the Company's energy related strategic performance in several ways.
It will focus top management attention on the consideration of high payout but risky initiatives that mig 1t otherwise have been prematurely rejected at a lower level in the organization.
The plan can also provide valuaole input for the Company's annual presentation to the Pennsylvania 03rnnission.
It can help bring to the Commission's attention as soon as possible those state and federal regulatory and policy issues that will have the greatest benefit for Pennsylvania ratepayers should they be resolved in a satisfactory fashion.
i l
IV-25
EXHI8IT IV-6 POTENTI AL' SAVINGS FROM REQUCED FORCED OUTAGE RATES MWH Lost MWH Loss
- Potential (c)
Plant In 1979 Target Dif ference Savings (Millions) t Homer City 1 & 2(a)'
3,750,000 3,500,000 125,000
$ 1.25 Conemaugh(b) 5,700,000 4,000,000 283,333 2.83 Shawville 820,000 640,000 180,000 1.80 Seward 125,000 125,000 Purtland 1,400,000 700,000
-700,000 7.00 Titus 200,000 175,000 25,000 0.25 Front St.
98,000
__ 65,000 33,000 0.33 Total 12,093,000 9,205,000 1,346,333
$13.46 i
(a)
(b)50% owned by Penelec 16.45% owned by Met-Ed (c)These figJres are gross potential savings and do not reflect the capital investment ~ requirements required to achieve them.
i t
i
GPU recently considered instituting a plan 11ng procedJre similar to toe recommended energy options strategic plan. Howevar, competing and ni per priority demands on management's time resulting from the TMI accident ap-parently prevented its complete implementation.
LOAD mNAGEENT, CONSERVATION AND C0 GENERATION If the Pennsylvania Master Plan M4 reductions for 1980-1990 are real-ized, Seward 7 could oe deferred beyond 1990 (assuming TMI 1 and 2 resume operation). Furtnermore, GPJ's most recent efforts to develop cogeneration applications have uncovered significantly greater potential than was antic-ipated when the Master Plan was developed.
Thus, GPU should target a crash program toward large industrial and comercial custo.ners since they represent the best combination of short lead time load reduction potential and miniMJm required expenditures of GPU fuads. GPU nas already taken steps in this direction. Furthermore, prior-ity should be given to developing the load reduction potential in cogen-eration, mandatory super insulation standards, and commercial and industrial heat storage and heat recovery applications as these offer an attractive comoination of probably high load reduction and minimum expenditure of GPU funds. GPU should also explore possibilities for innovative financing or end user purchase of load management equipment to reduce the need for its investment in suco equipment.
A priority effort should be directed toward developing the load research data base and analytic tools necessary to provide management control of toe program. Go/No-Go milestones should be established for the residential load management program since the combination of large expenditures and un-certainty of results make it the area of greatest potential risk in the Master Plan. Ebth the Company and Commission should carefully monitor progress against these milestones. Given the large expenditures required oy the Master Plan and its large benefits if implemented successfully, GPU should develop an approach for increased communication, coordination and joint planning with the Commission regarding load management and conserva-tion.
To give proper focus to load management and conservation, the program should initially be centralized in one organization.
The Master Plan in-volves a high degree of uncertainty.
If it is not centralized in one organ-ization, there is a strong possibility that it will not compete successfully for manapement time and effort.
In addition, it will be necessary to up-grade GP 3 marketing expertise and develop a comprehensive load management and conservation marketing plan.
The elimination of promotional efforts in recent years had eroded this capability.
Toe following steps should be taken to achieve or exceed the Master Plan goals.
IV ~26
The Pennsylvania Comission should seek 00E support, under tne PURPA Innovative Rates program, for the development of rate structures wnich will help to win public acceptance of the Master Plan programs. These innovative rates should seek to provide the maximum economic incentive for customer load management, conservation and cogeneration consistent with GPU's financial requirements and ap-plicable legal considerations. Subsequent to a TBiA suggestion, GPU and the Commission staff developed a coordinated effort whereby the Comission filed an application with the 00E for $500,000 official 1981 funding of such a program with GPU's Pennsylvania companies serving.as the pilot utilities.
If approved by DOE, the program would be completed over a two year time period.
GPU should lobby with 00E and FERC to obtain a ruling which would give industrial gas users who cogenerate a higher gas curtailment priority than non-cogenerating industrial gas users. To the extent feasible, the Commission should provide incentives for use of gas in cogeneration applications.
GPU should lobby with state and federal agencies for air quality regulations that would not discourage coal-fired industrial cogen-eration. Perhaps, the recent EPA " Bubble Concept" of setting over-all emission limits for mlti-emitting source industrial sites might be interpreted to provide. imputed emission credits to cogenerators cased on the higher energy efficiency of cogeneration.
THE " PENNSYLVANIA S0_UTION" The term "Pennsyvlania Solution" refers to intiatives sponsored by Penn-sylvania regulatory authorities to develop a state-wide approach to utiliza-tion of the energy resources of Pennsylvania, including generating facilities. Under the " Pennsylvania Solution", Met-Ed and Penelec mignt De considered for generation purposes as a stand-alone Pennsylvania company rather than as members of an interstate system.
In this regard several points are noted.
Even with both TMI units out of service, the Pennsylvania GPU companies are closer to self-sufficiency than the GPU system as a whole, but they' are still in a precarious position.
For example, Penalec/ Met-Ed's combined reserve factor (their ability to meet their peak annual load with their own capacity) without TMI is -2.9%
while for the GPU system it is +6.2%.
If the TMI units are restored to service in 1981 and 1986, the Penn-sylvania companies can meet their generation capacity requirements entirely through the peak load reductions targeted in the Master Plan for Load Management and Conservation.
IV-27
. Pennsylvania has greater resources availaole to help amelMJrate the impact of the TMI. accident upon ratepayers tnan does New Jersey.
. For example, Pennsylvania-Power 4. Light has significant excess cap-i acity and GPU has proposed purchasing tnis capacity on a PP&L system wide ratner that plant-specific basis.
In addition, Pennsylvania's l
current air quality situation allows the operation of coal-fired power. plants. Because New Jersey's does not, GPU's mast expensive source of base load power are its New Jersey oil-fired plants.
t GPU should continue its efforts to purchase PP&L capacity On a system-wide rather than plant-specific basis. GPU should also explore other initiatives to lower the costs of energy to its Pennsylvania rate payers.
The large reserves of Pennsylvania coal, coupled with the urgent national need to displace oil in electric generation, might provide'the foundation for one sudi initiative. GPU should consider advocating the establishment of a Pennsylvania Energy Development Authority to operate federally assisted demonstration plants for innovative coal generation technology. Such demon-stration plants might include: coal cleaning electric cogeneratior systems; coal liquification/gasification electric cogeneration systems; atmodpheric l
fluid bed and fluid ced combined cycle electric generation systems. Because of federal financial assistance which might include grants and/or loan guarantees, a Pennsylvania Energy Development Authority might be able to j
build electric generation capacity less expensively than GPU. Furthermore, j
by meeting the generation requirements resulting from Met-Ed's and Penelec's load growth, such an authority micfit redJce GPU's long-term capital require-ments for financing new plant construction.
Conceptually, the establishment of a federally-assisted Pennsylvania Energy Devalopment Authority might b'e similar to the establishment of the Power Authority of New York (PASNY).
In the case of PASNY, the availability of a large national energy resource (Niagara Falls and St. Lawrence Seaway hydro-electric potential) provided the oasis for establishing a puolic power 1
agency which provides electricity to local ratepayers at favoracle rates.
]
Given the urgent need to displace oil in electric generation with coal in an environmentally acceptaale manner, the Penncylvania coal reserves might be viewed as a national resource similar to Niagara or the St. Lawrence hydro-J
~
electric potential.
I In addition to reducing the degree of rate relief needed by Penelec and '
Met-Ed, a Pennsylvania Energy Development Authority based on federally as-l sisted advanced coal technology demonstration plants might provide another benefit. Perhaps the banks participating in the Revolving Credit Agreement
!~
could be offered preferential participation in federally guaranteed loans l
for innovative coal demonstration plants as an inducement for their con-tinued support of the Revolving Credit Agreement.
This initiative is innovative and subject to great uncertainties.
tbw-ever, during the last decade two investor-owned utilities with serious proalems in financing the construction of generation facilities developed innovative solutions involving public power agencies. Consoliated Edison IV-28
sold two power plants under construction.to the Poder Authority of toe State of New York and transferred its public agency load to this authority.
In a similar situation, Georgia Power sold a major interest in two cosi fired plants under construction to a new generation and transmission cooperative, Oglethorpe Power Corporation. A loan guarant9ed by the RJral Electrifica-tion Administration provided a substantial portion of tne purchase financing.
4 Ele M3y 1980 Staff Draft of " Pennsylvania Energy Choices" prepared by the Governor's Energy Council was reviewed to determine if this potential
)
i
' initiative was consistent with the recommendations of the Council.
It was not proposed in _" Pennsylvania Energy Cnoices"; nowever, it appears to be consistent with the thrust of blat document. Specifically,- in its dis-cussion on cogeneration the Council'noted that if national estimates (of cogeneration potential) can be scaled down to determine Pennsylvania's i
potential, cogeneration would nave the " technical" potential of providing' 20 -
to 40 percent of. projected electric sales and 10 to 21 percent of planned electrical generating capacity for 1985. Furthermore, the potential 4
initiative is consistent with the spirit of several recommendations pre-sented in the Action Agenda of the draft report. In its discussion of tne i
last recomnandation listed, the Councti said "Th; Connonwealth has vast coal resources whidi could be utilized for coal gasification projects. The use
]
of methane resources from coal seams could also increase Pennsylvania's availaole natural gas supplies.
The state should support the development of new and existing technologies to enable us to make use of our coal resources as supplemental gas supplies."
4 I
J.
i
-IV-29
l V.
NUCLEAR ISSUES BACKGROUND
.The General Public Utilities System has an installed generating capacity i
of 8,262 megawatts, of which 28 percent is nuclear generation. The three i
nuclear generating stations are:
Commercial Operation Station Capacity Date (megawatts)
Dyster Creek 650 1969 Three Mile Island 1 800 1974 Three Nile Island 2 900 1978 The two nuclear units at Three Mile Island, which represent approximately 20 percent.of GPU's generating capacity, are located on a small island in the 9Jsquehanna River about 10 miles south of Harrisburg, Pennsylvania.
The station is jointly owned by GPU's three operating companies, and is operated by Metropolitan Edison.
From start-up until the time of the accident, TMI 1 nad a capacity factor of 76 percent, which is well above the national average for nuclear-fueled electric generating plants. As of June 1980, TMI 1 still had a better availability factor than many other operating nuclear plants in the United States even though it had not been operating for more than a year.
As a result of the damage caused to TMI 2 by the accident and the subsequent order to shutdown TMI 1,1,700 of tne 8,262 magawatts of installed capacity was no longer availacle to the GPU' System. This has substantially affected the generation mix of the GPU System. In 1978, nuclear generation was 34 percent of U1e generation mix, exclusive of purchased power, while in 1979 nuclear generation was 25 percent of the total. Oyster Creek, the only nuclear plant currently operated oy GPU, represents less than 8 percent of installed generating capacity. -Since nuclear-generated electricity is substantially less costly than coal and especially oil or gas fired generation, one financial ramification of the accident was toe economic impact on GPU's ratepayers of. replacing TMI's 1,700 megawatts of capacity eith power either generated by more expensive sources of generation or-purchased at substantially higher costs.
The financial and purchased power implications of the accident were addressed in previous sections of this
- report, i
l l
HIGHLIGHTS OF TtHA TESTIMONY Four key findings and conclusions related to nuclear issues were contained in TB&A's March 1980 testimony oefore the Pennsylvania Pualic Utility Commission:
)
- TMI 2 appears to be in a relatively stable state, out requires continuous management and operator attention to maintain this staale state.-
- Because of the many uncertainties surrounding the damage and status of TMI 2, tne Company should decontaminate and defuel TMI 2 as expedi-tiously as possible to assure the health and safety of the public.
- No one has a contingency plan to maintain the safety of TMI 2 and proceed with its clean-up in the event that GPU can no longer do so.
- There is no precedent for the hearing on the restart of TMI 1; there-i fore, many uncertainties could further delay the hearing process on TMI 1 wnich would delay the restart of the unit beyond the then scheduled January 1,1981 restart date.
DEVELOP!ENTS SINCE THE ACCIDENT The accident at Three Mile Island placed unprecedented management and technical demands on GPU. GPU found itself in a reactive mode of operation immediately following tne accident. A great numoer of decisions had to be made, based on a limited amount of available information, and with insuffi-cient time to analyze all considetations thoroughly.
The issue of large quantities of radioactive wastes had to be immediately addressed, and at the same time steps taken to oegin planning for the cleansJp of TMI 2 and the restart of TMI 1.
The " lessons learned" from the accident have uppled throughout the industry -- various modifications have been ordered for such areas as hardware, training, emergency planning and public information, j
tomerous external studies have focused on the various environmental, technical, socio-political, anu other aspects of the actions that were taken preceding, during, and after the accident. The initial studies performed immediately following the accident indicated that recovery activities would cost $400 million over approximately 48 months.
There were numerous uncertainties and caveats associated with these estimates because they were based upon limited information cbout the status of the unit as of June 1979 and "reasonaole" expectations regarding the regulatory and political environment that would exist in the post accident time period. The recent experience of the Company with various governmental and regulatory agencies proved that the recovery cost and timeframe estimates were overly optimistic.
A recent example of the cumbersome decision-making process is illustrated by the Krypton venting decision. Although venting of Krypton j
V-2
from the containnent was carried out within release levels oelow those currently permitted by other operating nuclear plants, permission to perform this venting took approximately one year to ootain.
The Company evaluated r.umerous alternatives to venting and submitted a lengthy report to the NRC in fbvemoer 1979.
The venting option proposed was well within existing regulations.
The NRC did not approve the venting plan until May 1980 and only after:
- Public hearings were held; The Union of Concerned Scientists and tne National Committee on Radiation Protection (NCRP) stated that the release would cause no undue health risk to the public; and The Governor of Pennsylvania publicly backed the venting proposal.
Although all of the above were undoubtedly necessary to assure the safe cleanup of TMI 2, as a result of these and other factors, gaining full access to the containment in April 1980, as was forecasted in the original recovery plan, will oe delayed until the middle of 1981.
The overall schedule for cleanup of the unit has been lengthened and the overall costs have increased as a result.
The " visibility" of the accident has resulted in complex regulatory and political issues which ceuld conceivaoly constrain GPU's ability to clean-up TMI 2 and restart TMI 1 more than any of the technical issues involved. As a result of these factors, many of the restrictions placed on GPU are more stringent than tnose faced by otner utilities with operating nuclear plants. As noted in TMA testimony, the clean-up and restart efforts will require that specific actir.,ns be taken promptly by all parties involved --- principally GPU, the Penn3ylvania Public Utility Commission, the f4Jclear Regular.ory Commission, otner state and federal agencies, and intervenors -- in order to ensure the timely and safe clean-up and restart of the units at a minimum cost to tae ratepayers of Pennsylvania.
The above factors, exacercated oy the state of the overall economy, primarily inflation and interest rates, complicate GPU's efforts to clean-up TMt 2 and restart TMI 1.
GPU will continue to be the " goldfish bowl" of the nuclear industry for some time into the future.
GPU ACTIONS These complicating factors notwithstanding, GPU has taken numerous steps to togin the clean-up and restart processes. Among GPU's accomplishments are the following:
- Tne Company has performed various planning studies for the recovery effort and facilities are currently being designed and constructed to facilitate clean-up activities.
V-3
- Approximately 400,000 gallons of lower level radio ctive easto v:ater have been processed by the Epicor 11 system. A submerged demineral-izuc system is oeing procured to process 800,000 gallons of the higher activity waste water.
(NRC approval or disapproval of the demineral-izer system will be the next major milestone in the regulatory /
political environment of GPU.)
- The Company has continued to keep open the options for the disposal of low level radioactive waste.
- A restart program has been developed for TMI 1.
Modifications are being made to the unit to permit the restart to proceed as quickly as possible.
- Permission to vent the Krypton from the containment was obtained and venting is now completed.
- GPU has retained Bechtel to beg!n the clea&up of the TMI 2 contain-ment building
- GPU has signed a site-wide labor agreement with the crafts to facilitate the safe and expeditious clean-up and recovery of TMI 2.
- CPU has made numerous changes in key management positions to bring to bear the necessary management and technical skills on the TMI units.
KEY ISSUE ANALYSIS The review of GPU's nuclear operations was structured to analyze several of the key management areas associated with the clean-up and restart efforts at Three Mile Island. The areas reviewed were:
- Organization - The existing organization at TMI and the organization planning currently being undertaken for the GPU Nuclear Corporation were reviewed relative to organizational responsibilities, mission and functions, and staffing.
- Major Contractors / Contract Administration - GPU's use and administra-tion of contractors were assessed.
- Project Management System - Current and contemplated managemerit systems for planning, scheduling, estimating and reporting progress on the clean-up and restart efforts were assessed.
- Construction / Cleanup Management - The " hands on" utilization of the work force at TMI was analyzed, as were the steps that are being taken to monitor and improve productivity and minimize overall costs (where safety considerations will permit).
V-4
ISupport Functions - Supportifunctions,-including ' licensing, radio-logical' controls, -materials management and _ quality assurance, were -
investigated..
~
ORGANIZATION The organization of the engineering, construction and operations activi-ties at Three Mile. Island has changed substantially since the accident..
Prior to the accident, responsiollity for the operation o_f the units was contained within toe Metropolitan Edison organization. Engineering and construction (design and build _ responsibility) activities associated.with the units were primarily the responsiollity of the Generation organization located within the GPU Service Corporation, as illustrated in Exhioit V-1.
DJring 1977,'GPU's top management began studying possible alternative organizations which would provide:
- Sufficient in-house capability to adequately develop " base line" engineering for new stations.
- A closer coupling between in-hr.se engineering and plant operations.
Various studies were performed during the 1976-78 period by both GPU personnel and outside consultants to formulate possible organizational-alternatives that would address tne above cojectives.
TMI Generation Group h
The accident at TMI resulted in an unprecedented technical effort by both the GPU.and Met-Ed generation organizations.
Tne competition for in-house technical resources to support these efforts resulted in the formation of a separate organization, called the TMI Generation Group, on JJ1y 30, 1979.
This organization was formed by consolidating management and techni-cal personnel from the generation departments of GPUSC and Met-Ed in one-i organization to address operating, engineering and construction activities -
associated with the restart of TMI 1 and the clean-up of TMI 2.
The TMI-Generation Group has undergone numerous organization changes since its inception. At the time of TBiA's review, _it was organized ~as shown on Exhibit V-2.
This reorganization has dictated tne need to find appropriate l
management personnel to assume responsibilities for tne functional areas shown on the exhioit. The_ senior management of TMI, which prior to the accident was totally staffed by Met-Ed personnel, is now staffed _ primarily by people brought in from the Service Company (GPUSC) or hired from the.
outside.
t The TMI Generation Group was an interim organization.
The GPU Nuclear Corporation was originally envisioned to De in place by June 1,1980. GPU-Nuclear-Corporation will be a separate-company whose primary responsibility will be the operation of existing nuclear facilities, engineering and con-i struction of modifications and improvements to these facilities, and, per-haps at:some future date, the engineering and construction of new nuclear V-5 r-
~
,, ~
+ - -...
.n e,,
EXHIBIT V-1 THREE MILE ISLAND ORGANIZATION PRIOR TO MARCH 28,1979 i
GEhERAL PUBLIC UTILITIES CORPORATION BOARD OF DIRECTORS CHAIRMAN AND CHIEF EXECUTIVE OFFICER (HOLDING CO. SERVICE CORP. AND OPERATING COMPANIE$l
/
\\
PRESIDENT AND CHIEF PRESIDENT AND CHIEF OPERATING OFFICER OPERATING OFFICER GPU ?ERVICE CORP.
METROPOLITAN EDISON CO.
\\
/
L
/
p_______.____.m.____,,________
'll DESIGN OPERATING VICE PRES 10ENT VICE PRESIDENT BUILD GENERATION lI RESPONSIBILITY GENERATION l
l RESPONSIBILITY l
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I I
N
/
N
/
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ll1 I
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GENERATION GENERATION GENERAil04 TECHNICAL PROJECTS ENVIRONMENTAL l
AFFAIRS MAINTENANCE OPERATIONS ENGINEERING 1
I l
1l I
I I
lI I
i m________________J TMt UNITS (1) Service Corporation also provides staff and oversight functions to operating companies
m w
25 4
4 EXHIBIT V-2 ORGANIZATION OF THE TMI GENERATION GROUP SEDNNIWP.NETED TW GiafAA GA0dP MASAGEA V P. &
OIRECTOR DefCT0g
,I TW ERY A0WelsfRAil0g RA0 OG L g
g A
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p 6/1/80 i
facilities.
This organization will be assimilated into the GPU group of operating companies as shown on Exhioit V-3.
The contemplated organization of GPU NJclear Corporation, as snown on Exhibit V-4 is an evolution from tne l
TMI Generation organization.
In September 1980, GPU announced the formation of the GPU NJclear Group which is a further evolutionary step towards the GPU Nuclear Corporation.
It permits the structure shown in Exhibit V-4 to operate pending full regulatory approval of the new corporation.
GPU Nuclear Corporation Ine overall concept of the nuclear organization is appropriate, out its roles and functions have not been fully documented. Various studies con-ducted prior to the accident had indicated that rome organizational changes would be necessary to adequately manage the operation, maintenance, engi-neering and construction of nuclear facilities.
The accident accelerated the formation of a new organization to manage the activities associated with Three Mile Island.
Other utilities are investigating or implementing somewhat similar nuclear organizations. The NRC draf t criteria on management and organization for nuclear plants are also providing an impetus to develop corporation separate nuclear organizations. A formal evaluation of the GPU Nuclear organization will be a part of the Atomic Safety and L censing Board
( ASLB) hearings, which are seneduled to begin in October 1980.
The concept of the nuclear organization concentrates all the major activities associated with TMI. under one organizational entity.
Some of the benefits of such a nuclear organization are:
- Improved upper management visibility of nuclear activities
- A greater depth and breadth of specialized technical skills
- Improved communications with outside agencies
- An ability to attract better people
- Full-time dedication of the organization to safe operation.
The speed at which the nuclear organization s is developed and the current state of flux that exists as the Company moves to create the GPU NJClear Corporation have not permitted the complete documentation of well defined roles and functions. To provide assurance that individual talents are used effectively, that redJndancies and duplications of effort are avoided, and that lines of responsibility and organizational interfaces are clearly understood, the details of the organization must be clearly defined and documented.
V-6
EXHIBIT V-3 FUTURE OVERALL GPU ORGANIZATION GENERAL PUBLIC UTILITIES CORPORATION BOARD OF OIRECTORS CHAIRMAN A40 CHIEF EXECUTIVE OFFICER (H0lclNG CO, SERVICE CORP.
AND OPERATING COMPANIES)
JERSEY CENTRAL METROPOLITAN PENNSTLVAtlA GPU SERVICE CORP.
GN NUCLEAR CORP.
POWER & LIGHT CO.
EDISON CO.
ELECTRIC CO.
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Staff Levels Althou$ sonie operational efficiencies may be achieved by the reorganization, the number of personnel required for nuclear activities will-
. increase. Prior to the accident, the Company estimates that approximately
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1,000 GPU personnel were associated with all nuclear activities. Addition-ally, approximately 200 contractors (such as guards, and technical personnel on secunding agreements) were engaged in support of nuclear activities, resulting in a total resource commitment of sli@tly more than 1,200 people. ' By.early 1980, the number of people involved with nuclear activi-ties approached 1,500, and it is highly likely that this number could exceed 1,800 by 1981.- :This would. result in an increase of approximately 450 full
, time company personnel over the previous manpower commitment to nuclear activities. It is expected that the reorganization will minimize duplications between the operating companies and GPUSC in the engineering, licensing, construction, and quality assurance areas.
Althou@ some of this increase in personnel is expected as a result of the recovery effort, a significant portion of this increase will probably continue even after both units are again operational.
Tne accident and subsequent NRC actions will have the long term effect of increasing the need for' higher levels of manpower to adequately and safely' operate and maintain nuclear generating facilities 'throu@out the country.
Various legal regulatory hurdles must be addressed prior to the forma-tion of GPU NJclear Corporation. Legal cooperation and regulatory hurdles may dictate the rate at which GPU Nuclear can be formed. The operating license for the plant must be modified to reflect the delegation of operat-ing responsibility. Furthermore, numerous other permits and licenses may have to be transferred prior,to the formation of GPU MJclear Corporation.
Public Relations GPU's public relations efforts with respect to the TMI 2 cleanup need to 1
- be strengthened. Public relations activities are currently coordinated at GPUSC by a Vice President of Communications, and over the past year _various personnel have been located at the island to improve the communications function. The emphasis to'date has been primarily on dealing with the various news media and selected puolic officials. The information needs of the public are not being met by such a program.
j A review of public meetings held in the local community revealed many
-l areas where the Company could improve its public relations efforts.
Examples of these improvements include:
- Placing greater emphasis on converting technical terms into a language the public understands, e.g., expressing curies in terms of x-ray dosages; V-7 mw 4
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- Properly focusing and structuring all puolic presentations to meet the net:ds of the audience involved and dispersing with unnecessary technical discussions;
- Providing public spear.ing and human relations training to L L Comaany personnel who may appear before the pualic; and
- Providing a feedback mechanism to critique toe effectiveness of these meetings.
The Company has taken several steps to improve its public relations efforts, such as sending Company personnel to public speaking and human relations courses.
It is also anticipated that GPU Nuclear Corporation will have ~ its own co.nmunications function headed by a professional communications manager.
MAJOR CONTRACTORS / CONTRACT ADMINISTRATION Several external vendors are under contract to assist the TMI Generation Group in designing, engineering, licensing and constructing the modifica-tions required prior to TMI 1 restart and in the clean-up activities on TMI 2.
The major contractors are described below.
GPU has designated Glicert Associates, Inc. (GAI) as the primary exter-nal arenitect/ engineer to provide basic design engineering support on TMI 1.
Major GAI responsibilties include: engineering and designing structures, systems, and components as requested by a GPU Project Engineering Manager; preparation of revised system design oescriptions for modifications af fecting major plant systems; and preparation of installation instructions and cable routing requirements for appropriate tasks.
Babcock & Wilcox Company (BM) was the original vendor for the TMI Nu-clear Steam Supply System (NSSS). Under the current contract, BH is re-quired to furniso engineering, safety analysis, licensing, startup and test, proccdural development and training services necessary to assure the timely restart of TMI 1.
BH also performs generic safety analyses and design changes utilizing an NRC approved computer code. Litigation is pending between GPU and BM on the original design and construction of TMI 1.
Catalytic, Inc. is the primary external construction contractor for the modifications to existing structures, systems, and components and for the installation of new structures, systems, and components required for the TMI 1 restart. Catalytic also serves as tne primary maintenance contractor, providing support for preventive, repair and surveillance maintenance.
Catalytic's primary responsibilities include performing field construction in accordance with toe Work Authorization Notice for each task, assuring that materials and equipment are available for construction tasks, and preparing purchase requisitions.
i V-8
1
).
Bechtel Corporatio.n isL responsible'to GPU for the planning,7engi--
neering design, clean-up, procurement, and construction activities i
- associated with-the clean-up of the TMI 2 containment-building.
The_ plan-
- ning and engineering required for the entry -into the containment building, fuel removal and disposition, and decontamination require extensive -
4 professional time and highly proficient technical expertise. Tne Bechtel
~
j organization,_ which will report to the Manager of the Recovery Program, is being ' uniquely structured for this_ purpose. Exnioit V-5 illustrates the currently contemplated organization which Bechtel is in toe process of._
implementing to manage the clean-up of toe unit. The responsioility for conceptual planning and alternative planning scenarios'will oe tne function of Bechtel's f)Jclear Fuel Operations organization. Once the alternative plans have been developed and evaluated and the most appropriate plan chosen j
by GPU, the detailed work will oe performed by Bechtel's Project Operations organization.
In addition to the four major contractors, numerous other contractors-and vendors provide various tecnnical, construction, and support services at TMI.. These major contractors and vendors and the services provided by-them are summarized on Exhibit V-6.
GPU requires contractual agreements for vendors supplying equipment, labor, complex engineering or design services
'or consulting services. ' Standardized contract forms are used for labor,
' consulting agreements, technical services, vendor supplied equipment, construction services and leasing operations.
Each contract itemizes 4
l performance minimum standards and nighlights pertinent contract provisions.
Engineering an, construction contractors for TMI 1 are utilized 4
appropriately. The engineering and design support supplied by Gilbert Associates and Babcock 4 Wilcox is well managed.by GPU.
Individual tasks are assigled to the vendors when additional manpower is required, sucn as when the vendor can supply technical expertise not available in-house.
i Catalytic, Inc. supplies construction labor for TMI 1 modifications and continues to function as tne maintenance contractor for both units. The 3
labor forces are well utilized by both the' construction and' maintenance -
~
functions and between the nuclear units. _ This minimizes the costs 4
associated with conducting Radiation Work Permit (RWP) training of craft a-workers by-retraining them on the island between particular construction tasks.
Contract Policies And Contractor Selection 3-l Standard contract policies are clearly defined, reasonable and flexible. Sealed aid procedures are used for orders exceeding $250,000.
Written quotation' are solicited in all other cases except in an emergency s
i or when the: item or service to be purchased is of a routine. nature and is
' valued under $5,000.'
For routine items,- sucn as materials, supplies or repair and maintenance, annual. requirements are assessed and clanket commitments used with predetermined limitations. _ Negotiated or non-i competitive awards are made only when there is a singularly qualified or
-economic supplier or for professional services.
When a sole source of i
V-9 a,
EXHIBIT V-5 BECHTEL ORGANIZATION FOR CLEAN-UP ACTIVITIES BECHTEL PROJECT TECHNICAL SUPPORT BECHTEL PROJECT OPERATIONS NUCLEAR FUEL OPERATIONS BECHTEL NORTHERN SAN FRANCISCO, CALIFORNIA GAITHERSBURG, MARYLAND PROJECT TECHNICAL ORGANIZATION PROJECT OPERATIONS ORGANIZATION BECHTEL BECHTEL PROJECT PROJECT MANAGER MANAGER FUNCTIONS FUNCTIGNS
-PLANNING
-0ETAll ENGINEERING
-DEVELOPMENT OF ALTERNATIVES
-PROCUREMENT
-PREllMINARY ENGINEERING
-QUALITY ASSURANCE
-EXTERNAL INTERFACES
-CLEAN-UP
-LICENSING SUPPORT
-CONSTRUCTION MANAGEMENT l
-CONSTRUCTION
-COST AND SCHEDULE
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supply exists, alternative acceptacle products are examined._ Negotiated and cost plus contracts are used when the scope of work is'ill-defined.or the:.
j other types of contracts would oe costlier because of various contingencies; j
Contracts are normally fixed price, unit cost or cost-plus and specify either a guaranteed maximum, a fixed fee or an incentive fee. Cost-plus contracts are used exclusively wnen other types of contracts will not produce reasona~le results. Cost-plus contracts require higher levels of o
approval than other types of contracts.
Standard service, equipment, and construction contracts have appropriate cost and schedule controls.
Several contracts were reviewed during the audit. Standard terms and agreements are provided for material and equipment, outside labor, consulting services, land rights and easements, leases, fuels, and power agreement contracts. Standard terms vary by contract type,- but all contain comprehensive terms and every contract contains an upper price boundary.
The selection processs for the contractors on TMI 1 appears to have been reasonable and justifiable. The selection of Gilbert Associates and Sabcock
& Wilcox was predicated upon their prior involvement in the design of TMI 1.
Similarly, Cetalytic, Inc. was the maintenance contractor for both units. Because of their prior familarity with design and construction of TMI 1, experience with maintenance procedures, and access to local laoor markets, these contractors were the logical choice at a time when decisions had to be made quickly to stabilize the conditions at Three Mile Island.
The selection of Bechtel Corporation as the cleanup contractor on TMI 2, although not well documented initially, was appropriate.
Immediately fol-lowing the accident, GPU management recognized tnat the assistance of an outside firm or firms would be required for the clean-up activities.
Several' possible candidates were reviewed, and 8echtel was tentatively chosen as the major contractor for the TMI 2 cleanup. Becntel began per-forming studies for GPU oased upon a letter of intent. GPU is negotiating a contract with Bechtel for the remainder of the clean-up at the TMI containment building.
The selection of Bechtel was based primarily upon several factors:
- Prior nuclear power plant experience, including engineering design, procurement, construction, and start-up experience;
- Prior experience in designing and ouilding nuclear fuel reprocessing facilities;
- Knowledge of governmental and other agency interfaces;
- Willingness to make a unique commitment of an organization dedicated to the planning function; and
- Management skills in engineering and constructing projects ranging from power plants to pipelines.
V-10
Formal documentation justifying the selection of Becntel as the contractor for the clean-up activities did not exist. Because this contract will be significant, both in terms of toe dollars involved and tne magnitude of the problems with TMI, a clearly justifiable decision process on this selection should exist to witnstand any possible future scrutiny. During the course of tnis study, GPU management reevaluated Bechtel's selection anJ provided adequate documentation of blis selection.
PROJECT MANAGEMENT SYSTE4S Responsibility for develogiag and implementing project management systems resides in the Managoment Services Group of the Generation Division o f GPUSC.
The day-to-day operation of such systems is a function of toe specific project grouo, as shown on Exnibit V-7.
These responsibilitiec are in the process of becoming a part of the administration group of tne TMI Generation Group and the eventual GPU NJclear Corporation. GPU nas developed its own Project Control System (PCS) to oe utilized on TMI 2 for accounting, budget and cost control functions.
The PCS is a modified version of the Construction Management System (CMS) used during the construction of TMI 2.
The development of a more sophisticated control system for the Forked River project, which is Dased on " Earned Value" concepts, nas been delayed because of a lack of funding.
Work Breakdown Structure GPU nas modified its work breakdown structJre for utilization at TMI 2.
Tne Work Breakdown Structure cunsists of approximately 45 work packages, as schematically shown on Exhibit V-8.
Each work package identifies a scope of work to be performed. Although at this time it is not possible to complete-ly quantify all of these work packages over the lite of the project, esti-mates have oeen made for the work packages in 1980. Specific individuals in the TMI Generation Group have been assigned responsibility for accomnlishing specific tasks in the work packages within the approveo budget guidelines.
These work packages are basically " cost centers" at a relatively high level in the organization.
Project Management Systems and Controls Tne project management systems contemplated for TMI 2 appear to be appropriate. Various levels of schedules are planned for use at TMI 2.
These are referred to as the key plan, level one, ana level two scheoules.
Die detailed sdiedules and estimates for activities of tne various organiza-tional groups involved in the clean-up of TMI 2 are the responsibility of tnose groups to produce. Schedules of the level two detail are maintained by the cognizant organization responsible for that portion of tne work.
These schedules are then coordinated and integrated into the level one and key plan schedules. A 90-day "look ahead" is also contemplated; this will focus on activities to be undertaken immediately.
V-ll
b EXHIBIT V-7 '
ORGANIZATIONAL RESPONSIBILITIES FOR PROJECT MANAGEMENT SYSTEMS TMi
. GENERATION GROUP (1)
TE TMI #1 TMi #2 ADMINISTRATION yg
\\
/
\\
/
\\
l l
RESTART RECOVERY SUPPORT FISCAL PROJECT PROGRAMS SERVICES ENGINEERING ADMINISTRATIVE MANAGER MANAGEMENT OVERALL PROJECT COST SCHEDULING PROJECT MANAGEMENT SYSTEMS MANAGEMENT SYST
-MAINTENANCE
-POLICIES & PROCE
-CONSOLIDATION
-0EVELOPMENT
-TRAINING l
(1) Technical Functions has engineering responsibility for TMI-1 and TMI-2
.i i
I WORK BREAKDOWN STRUCTURE FOR TMI-2 TMI-2 GENERATION GROUP i
l I
I RECOVERY PLANT GENERAL PLANT OPERATIONS RECONSTRUCTION ADMINISTRATION OPERATIONS I
I I
I I
I I
I I
I TECHNICAL PLANT DECON-SITE TECHNICAL HI RO M p
CONSTRUCTION
. OPERATIONS SUPPORT TAMINATION FACILITIES SUPPORT SUPPORT SUPPORT RECOVERY NORM M PROJECT /CONSTR MGT PLANT DEM CONTAINMENT BLOG.
PLANT SYSTEMS PROJECT CONSTR MGT PLANT PROJ/CONST MGT.
GENERAL PLANT 0&M CONSTRUCTION OPERATIONS REMOVAL lCONSTRUCil0N l CONSTRUCTION SYSTEMS l GENERAL SECURITT OPERATIONS OPERATIONS MAINTENANCE DECON CONSULTANTS l CONSTRUCT. CONSULTANTS ACCOUNTING MAINTENANCE DECON RA0 CONTROL AUX!OTHER BLOG.
AC LITI S l CONSTRUCTIONAUX l0THER BLOG.
l GENERAL PROCUREMENT WASTE PROCESS; l 0PERATIONS REMOVAL ENGINEERING l CONSTRUCT.ENGINEERING QAiQC STORAGEJ WASTE PROCESSING DECON l CONSTRUCTION CONTAINMENT DOCUMENT DISPOSAL l0PERATIONS Bull 0 LNG CONTROL 01 SA A lES WASTE STORAGU l CONSTRUCTION CONSTJGENERAL DISPOSAL DECON FACILITIES OTHER FACIL.
AUDITING OPERATIONS l0PERATIONS l CONSTRUCTION l CONSTRUCTION LABOR RELATIONS WASTE PROCESS; DECON
~ TEMP. I ACILITIES AFOC l CONSTRUCTION l AIDC DISTRIBUTABLES STORAGEl (OPERATIONS LEGAL TEMP.FACIL'TIESI ENGINEERING SERVICES.
ACCTG. CONTROL LICENSING l0PERATIONS LIABILITIES PUBLIC RELATIONS CONSTRUCTION OPERATIONS RECEIVA8LES DATA PROCESSING Q
REMOVAL CLEARING TAXES 5
DECOM ADMIN;0THER WASTE PROCESSI STORAGEf OISPOSAL
Project controls to be used by Bechtel and GPU were not defined at the time of TtO's review. Becntel will nave a major responsibility for the detailed project management systems on the TMI 2 clean-up. As the major contractor, Bechtel will carry out the detailed planning, scheduling, estimating, and cost control functions.
It is expected that Bechtel's project management systems will be modified to interface with GPU's project management systems; however, the precise details of this interface, i
reporting frequencies, and informatico formats had not ' een clearly o
l-defined. GPU management has suosequently indicated that controls have been agreed upon and are now being implemented.
CONSTRUCTION / CLEAN-UP MANAGEtENT As' discussed previously, construction activities associated wito TMI 1 and 2 and cleanup activities associated with TMI 2 are primarily the I
responsibility of various contractors retained by GPU.
Inese wor < forces are managed either directly or indirectly by GPU personnel.
l Labor Agreement The recently signed site-wide labor agreement, which covers all main-tenance and construction activities, provides unusual flexibility to GPU.
The contract recognizes the unique impact that radiological controls will have on the clean-up and recovery process. GPU was able to negotiate numerous items which will provide greater protection to craft workers, improve productivity, and permit the clean-up to be expedited.
These provisions include:
- Working nours cased on an alternating 4x10 hour shift basis if desired; l
- A strong "no-strike /no-backout" provision with expedited arbitration;
- Tne right for GPU to direct workmen unilaterally in the radiological l
control and other areas;.
l-
- The ability of GRJ to use its own employees as well as contractors in performing the initial clean-up, decontamination, and radioactive i
waste processing work; The ability to transfer operating engineers from one piece of equipment to another during a shif t; and j
- The formation of a joint labor-management-owner comnittee to interpret l
the agreement as necessary.
Methods Improvement Program l
Productivity at TMI could be increased oy estaolishing a full-time methods improvement program. Work sampling and methods improvement analyses can yield significant improvements in productivity. Experience at other l
V-12
construction sites indicates that sig11ficant cost savings are achievable over ble' life of a project and proouctivity. increases of 15% and more have been realized as a result of effective methods improvement programs. While radiological considerations will:have a significant' impact on cleanup activities at THI, it is reasonable to assume -that'some productivity improvements will be possible with a concerted methods improvements thrust.
GPU has performed work sampling since.1975, when studies were conducted at the Three Mile Island units and ble Forked River project..These techniques have been used during both the construction and operation phase (primarily refueling) of the Three Mile Island units. ' GPU recently conducted and is in the process of evaluating work sampling studies of activities at Three Mile. Island. Steps have been taken to minimize delays and increase direct work utilization at TMI. Support facilities (lunch rooms, etc.) have.been located as close as possible to the craftsmen's work area to minimize travel associated delays, and the optimal location of tools and other items is being studied.
Nevertheless, the current methods improvements focus at TMI is under-staffed, and investigations are performed less frequently than is desiracle to achieve the maximum cost avoidance.
Construction Clean-up Delays Construction clean-up activities are experiencing a variety of delays because of financial and regulatory constraints. As noted in TB&A's testimony, clean-up activities have been impacted because of financial constraints. Clean-up activities are oeing planned and revised as necessary in reponse to regulatory constraints, tne expected schedule of NRC actions, availaoility of technical information and financial limitations. Bechtel's engineering and planning activities associated with the clean-up are being delayed. Similar delays are being experienced with attempts to bring TMI 1 back into service.
Activities that were initially contemplated to begin in 1980 are being curtailed because.of regulatory delays. The NRC has not ' developed criteria for performing the clean-up and recovery of the units. The criteria that govern activities at other nuclear facilities are not being applied to TMI.
Additional delays could occur because of NRC's lack of approval or disapproval of GPU's plan to use the Submerged Demineralizer: System. (SDS) for processing hign activity water..The water in the containment building constitutes ble single largest danger to U1e public at this time. To minimize this danger, the radioactivity contained in this water must be captured and immooilized. _To minimize any regulatory delays, GPU has asked the NRC to separate its review of the SDS from the Environmental Impact Statement.
In AJgJst 1980 the NRC advised Met-Ed that it was its intention not to approve the operation of the SDS until after the final Programmatic Environ-
~
mental Impact Statement which is unlikely to be issued until February 1981.
V-13 d
L
Conversely, the DOE has indicated blat it believes that GPU "could use ble SDS to decontaminate the water in the containment ouilding and then store the radioactive resins until the disposal question is resolved adequately to permit further processing of tne contaminated resins. An environmental assessment of the SDS operation (similar to tnat done for EPIOGR and the Krypton purging) would form the basis for this decision, and would be completely consistent with the requirements of tne National Environmental Policy Act. Thus, clean-up of the water could proceed when the SDS is completed at the end of 1980 and not await the completion of a full generic Environmental Impact Statement." These delays and uncertainties are materially contributing to increased costs for the clean-up and restoration o f TMI.
SU3 PORT ACTIVITIES l
l Several support activities were investigated during this review including:
l l
- Licensing
- Radiological Controls
- Materials Management
- QJality Assurance Licensing i
The licensing area was reviewed during tne reconnaissance pnase of the review and was addressed in TB&A's testimony of March,1980. The primary l
conclusion of the review was tnat the regulatory process rather than the resolution of technical issues would be the main factor in controlling tne i
restart of TMI 1 and the clean-up timeframe for TMI 2.
l l
Radiological Controls l
Radiological controls et TMI have oeen substantially improved in the last year. In response to studies conducted by such groups as NRC's Blue Ribbon Panel of Radiological Controls, audit teams composed of individuals l
from the Electric Boat and Yankee Atomic organizations and numerous other radiation control consultants, GPU has rec 7gnized the need to restructure l
the radiological controls programs at TMI. A radiation protection plan was l
prepared and submitted to the NRC for approval in Decemoer 1973. Exhibit V-9 lists many of the programs that are currently underway to address the various audit findings and recommendations of tnese studies. Organizatiors ally, radiological control nas been split into two units. Radiological control areas will report to a Vice President of Radiological and Environ-mental Controls in GPU NJclear Corporation which should provide assurance that this key function will nave appropriate visibility and management attention.
V-14
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Materials Management i
The materials management functions at TMI;are appropriately managed.
Tne materials management function, which includes purchasing, warehousing, and computer support systems, is the responsibility of the Director of Administration in the GPU NJclear Group (who also serves as the Vice President of Materials Management for GPUSC). GPU is beginning to achieve the Denefits of several years of systems development work in ble materials management area. Requisitions can be tracked oy an on-line purchasing system, and warehouses at TMI are appropriately organized and secured.
The GPU System, in committing funds for its projects and operations, employs a review system to assure that such commitments are made in accordance with system-wide policies and plans. Levels of authority for r.pproval, review, coordination, and signature are well defined, comprehensive, and adequate to assure control over the materials management and procurement functions.
-OJality Assurance The Company is taking appropriate steps to upgrade the cuality assurance
. programs for the nuclear units. As a result of lessons lectned from the TMI 2 accident and suosequent studies, the Company is aggressively reviewing and upgrading its quality assurance programs. Roles and responsibilities are being redefined consistent with the concept of a nuclear organization.
STRATEGIC RE,0MENDATIDNS In the nuclear area, GPU management must focus its efforts on several key issues. Prompt consideration and implementation of the recommendations presented below will ensure that die GPU nuclear organization quickly reaches its full potential.
The strategic recommendations for GPU's nuclear organization fall into six categories:
- Organization
- Project Controis
- Methods Improvement Program
- Puolic Relations
- Public Forums
- NRC Delays V-15
2 d
. ORGANIZATION I
GPU/Ne't-Ed should-expedite the development of formal roles and functions E for tne GPU Nuclear Corporation. Specific issues that should be addressed
. and resolved include: =
c-Personnel locations.
. Salary ranges -
- Modifications to:various GPU procedures.
- The development of detailed. missions and functions
- Clarification of organization interfaces
- Gevelopment of -job descriptions
- Personnel selection for the various positions
- A study of the space and logistical requirements for the Parsippany Headquarters of GPU Nuclear Corporation.
Particular empnasis needs to ce placed ~on:
- The role of tne Board of Directors of GPU Nuclear Corporation
-1The role and function of the President's office to. provide assurance that the span of control is' appropriate and tnat all nuclear activities receive sufficient management attention
- The organizational interface oetween the operating plants and the technical functions groups
- The relationship between-the Nuclear Safety Assessment Group, the General Operating Review B3ard (GORB), the Generation' Review Committee (GRC), and the Plant 0perations Review Committee (PORC)
~
- U1e various support-functions, such as accounting, personnel,- wage and compensation, to avoid-any overlapping responsibilities oetween GPUNC and GPUSC.
V-16
> PROJECT COGROLS The project. controls to'oe used oy_ GPU and Bechtel should be reviewed for adequacy and properly implemented. ' Interfaces between GPU and Becntel project-management systems should ue resolved promptly. Reporting frequency, report layouts, and areas of responsibility need to oe clearly de fined. This effort should produce a Bechtel/GPU project controls manual for use during the clean-up effort tnat is similar to the Bechtel/GPU'
- Procurement. Manual that is under development.
METH00S IMPROVEMENT PROGRAM-An effective Methods Improvement Program should be established for TMI.
GPU personnel should be assigned to a methods improvement department at TMI 1.
Additional people may oe required on.a part-time basis to help with work sampling or operational analysis programs. Studies and analysis
. conducted by sucn a group would result in better utilization of the workforce at TMI and suostantial costs avoidance.
PUBLIC RELATIONS GPU_ should continue to improve its public relations efforts. The highly sensitive and emotional nature of the public reaction to nuclear power and the multitude of erroneous beliefs about its dangers necessitate consider-aole corporate emphasis on puolic relations. As mentioned previously, one
~
of the very real constraints to-the restart of TMI 1 and 2 may oe the atti-tudes of local _ residents and otner puolics. Dr. Karl Cohen of Stanford.
~
University told a Congressional-Committee on May 7,1979 that the experience at Three Mile Island-persuaded him tnat "The principal adverse effect on toe public is psychic damage, inflicted by panic-mongers of every stripe." In so far as this is true, the importance of good puolic relations cannot ce over emphasized. GPU must consider not only the local area but its entire service territory and all other interested publics such as the financial
~
community and the l~ederal Government. GPU has begun to address its public relations proolems and is actively searching for an individual to head up the communications function for the GPU Nuclear Group.
PUBLIC COMMITTEES l
. GPU. snould de_velop a forum for directly involving the local community -
and other puDlic representatives in the ' evaluation of TMI related issues.
In view of the extreme importance of the public's attitude and the need to develop greater puolic awareness of the ability of GPU to. effectively manage the restart of the TMI units, GPU should consider the formation of "Public.
Committees" for each of its nuclear facilities. These committees would
. provide another window on company operations and ~an open forum for discus-sion of issues of general concern. These committees should be composed of community leaders and local citizens and snould be actively involved in the review of-management actions.
1 V-17 o
-m-
-,~n n7
NRC DELAYS F-GPU should develop a specific' program _tc communicate the adverse effects
-of NRC delays to its publics and should encourage the NRC to quickly provide
-specific criteria for evaluation. While recognizing the unique circum-
- stances and political sensitivity of the TMI-accident, the NRC's inde-cisiveness and the resulting' delays in the clean-up process are not ac-ceptable.- Tne delay. in the Krypton venting activity is an example of the NRC's inability to make decisions'in a timely manner. The NRC's refusal to condone GPU's pursuit of various alternatives for the clean-up process --
alternatives that are within the limitations of criteria used oy the NRC in evaluating operations of other nuclear plants -- is difficult to rationalize.
The NRC is responsible for public-Safety and yet many of tne delays it is causing may well contribute to greater long-term hazards. Since the NRC appears to be insensitive to the Company's needs, the Company should attempt to solicit the. support of its~various publics, including the Pennsylvania and New Jersey Commissions, state legislatures, and governors _to apply pres-sure to the NRC to expedite its decision-making process through all avail-able means.
-V-18
VI - ORGANIZATION BACKGROUND Since the late 1960's, the utility operating and management environ-ment has become much more complex as costs and rates have risen, regulation has increased, and the future has.become extremely unpredictable.
To meet these conditions,- GPU, -like many other public utility holding companies, recognized the.need for a higher degree of coordination and Centralization of certain services to maintain and improve overall system operating ef-fectiveness ~and ~ efficiency. ' To provide. this greater centralization and system-wide coordination, the ';PU Service Corporation (GPUSC) was created in 1971.
As with many utilities, mergers,-acouisitions, and combinations have been an' integral part of-the development of GPU and its operating companies.
The mergers of North Penn Power with Penelec and New Jersey Power and Light with Jersey Central Power and Light are recent precedents for management combinations within the' GPU system. Between 1951 and 1958, one individual was President of both Penelec and Met-Ed.
On January 17, 1980, in response to Commission inouires about GPU's long-term plans, the Cnairman of GPU disclosed a proposal to combine the managements of GPU's Pennsylvania operating companies.
Tne Commission asked TB&A to evaluate the proposal, as part of the ongoing mandated management and operations study, to ensure that it would be in the best interests of GPU's Pennsylvania customers.
Tne proposed management combination would not entall a financial and legal merger of the two companies. Stated simply, it would bring together under one management team the combined operations of Metropolitan Edison Company and Pennsylvania Electric Company and would produce most of the benefits associated with a' financial merger.
This section reviews TB&A's role in refining the original managenent combination proposal, the criteria used to evaluate the proposal and the characteristics of GPU's Pennsylvania operations and GPU Service Corporation.
ROLE Or TB&A i
The focus of TB&A's review was on organizational issues as they re-late to the proposed combination. Methods _and systems were reviewed to the extent that they might impact the proposed combination.
Tne scope of the review included the transmission and distribution, business office, non-nuclear generation,. financial, and administrative support organizations of both Pennsylvania operating companies and GPU Service Corporation (GPUSC).
i Tne role of GPUSC and its relationships with the Pennsylvania operating companies were reviewed to the extent that they might be affected by the proposed combination.
The TS&A project team consisted of consultants experienced in each
-area reviewed.. Eacn consultant was assigned responsibility for-reviewing a functional area -in all three organizations; for example, the same consultant 2
i VI l 1-
reviewed tne transmission-and distribution operations in Pennsylvania Electric-Company, Metropolitan Edison Company;and GPU Service Corporation.
This provided for consistent' treatment of each functional area and an ob-jective and realistic assessment of the managerial needs of a combined op-eration.
The dynamic and complex nature of corporate reorganizations necessitates' an iterative.approacn.
Th&t.is,1 reorganizations. evolve typically from an original proposal that is continuously refined as new facts and perspectives.
present themselves.. This-iterative process is characteristic of the pro-posed management combination of GPU's Pennsylvania operating companies.
In the past few months, TB&A has monitored and critioued this iterative process..TB&A's inputchas resulted in a number of significant changes to the original proposal, = such as an improved organization plan, the formula-tion of an objective process for selecting key personnel, the preparation of detailed plans for communicating the management combination to all parties, the preparation of-an implementation plan and the ' identification of and
. commitment to the significant cualitative and cuantitative benefits which j
would accrue to the Company and the-ratepayers of Pennsylvania.
On Jane. 26, 1980 as part of its annual review with the Commission GPU i
management made public its top level organizational plan for the comoined managements and described the cualitative and cuantitative benefits the Company expected to achieve. At this review TB&A presented a report on the status of its management and operations study and an interim report on the proposed management combination.
EVALUATIVE CRITERIA In its review of the proposed-combination, TB&A assessed the costs of comoining managements and the benefits that might accrue, such as:
1 Economies of scale, either in technology, support systems, direct or-indirect labor.
Cost savings, either in direct cost reductions or avoided future costs Improved customer service levels
{_
The enhanced ability.to redirect-corporate strategy
- More widespread application of expertise through greater functional
^
specialization Increased organizational flexibility and adaptibility in the future
~
- 14 ore consistent and timely response to external puolics Improved career development opportunities -for the Company's employees
.and. concomitantly, the aoility to attract personnel 4
4 VI-2 m
m.
m-F u-T T
- e---r
The opportunity to minimize the negative impacts-of other necessary changes
- Improved control over operations.
.In evaluating the proposed organization,-several key ouestions were.
posed:
Is the' corporate organization structure logical and is it conducive to meeting stated corporate goals? Are the missions and functions clearly defined and understood? Is it cost effective?
Are interfaces logical, well defined and understood? Between line and staff departments? Between operating companies? -With GPUSC?
Are there overlapping or duplicative responsibilities between depart-ments?-
Is the organization consistent with geography and customer density?
Can existing or improved levels of customer service be maintained?
Can consistency in operations be maintained?
- Is the degree of centralized control and authority appropriate? Are spans of control appropriate?
- Do management systems for planning, administration, and control sup-port the combined organization anr1 achievement of corporate goals?
Do they support decision-making and communication? Are they con-sistent with the organization structure?
Are staffing levels, both in numbers and expertise, appropriate and do they support the achievement of corporate goals?
Are potential cost reduction and efficiency gains significantly re-duced by the restrictions on relocating personnel?
- Is the combination in conflict with, or is it impacted by, any other organizational proposals within GBJ7
- What are the major operating improvements? Can they be cuantified?
- Are there major increases in the scope of existing functions? Can they be documented? Are the new functions proposed by various de-partments necessary?
The best interests of ratepayers, investors and employees of GPU will be served only if the proposed organization satisfies the above criteria and achieves the previously descrlbed benefits.
VI-3
GPU'S PENNSYLVANIA OPERATIONS Exhibit VI-l and VI-2 show the current organizations of Met-Ed and Penelec, respectively. Existing organizational differences evolved over time in response to the unique needs of tne two companies.
Some of tne implications of these organizational differences are included in the fol-lowing section. The similarities of the two Pennsylvania operating companies far outnumber the differences, primarily because of the common-ali&ies of the utility industry and the standardizing influence of tne GPU System.
Nevertheless, a number of differences do exist.
These have re-sulted from the unique historical development of each company, different philosophies of management, or the particular requirements of their op-erating-environments. While the differences may appear to be subtle and qualitative in nature, they could become significant impediments or op-portunities for improvement in the proposed management combination.
Current methods of operations are discussed in three sections:
- Generation; which includes non-nuclear power plant operations and maintenance
- Customer operations; which includes, transmission and distribution construction, operations, and maintenance and business office operations, consumer services, conservation and load management
- support functions; which includes, accounting, treasury; personnel, communications, and materials management Generation The most significant differences between the companies lie in the gen-eration area.
The Met-Ed and Penelec Generating Divisions evolved with similar missions and functions out with slightly different emphases. Me t-Ed owns a 50% share and is the operator of the Three Mile Island nuclear power plant. That 50% share represents over 40% of Met-Ed's total generating capacity.
Its only other major generating stations are two coal-fired plants, Portland and Titus. Penelec, on the other hand, operates no nuclear plants (althougn it has a 25% interest in TMI), and uses coal almost ex-clusively for its generation.
This difference in generating mix caused a significant difference in manpower requirements and technical expertise. Since Three Mile Island was the " flagship" of Met-Ed generation, primary emphasis was on operating the nuclear units. As public concern over nuclear power induced additional regulatory requirements in recent years, more resources were devoted to Three Mile Island, tbclear generation expertise became so specialized that two staffs were established; one for nuclear and one for coal-fired gen-eration.
The accident at TMI caused a severe drain on the Met-Ed generation l
staff since most nuclear-associated staff were relocated to the TMI site.
F11s was also a time when Met-Ed's need for fossil generation increased greatly.
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In September 1979 separated from nuclear, Met-Ed's fossil generation organization was formally generation and reorganized.
One purpose of the separation was to establish a dedicated department that would provide on-site and off-site technical support, engineering, licensing and reg-ulatecy activities, budgeting and cost control, training, material acaulsi-tion, maintenance planning and scheduling and overall administration, as t: ell as line responsibility for fossil gen,eration.
The staff was culte small, because of the continued need for resources at TMI and the cor-responding financial restrictions the accident placed on th3 other opera-tions of the company. Since, a large staff could not be justified for two generating stations, the primary ertphasis was on maintaining the two sta-tions and only limited efforts were made to enhance unit performance.
Penelec's generation department was in a different position.
The company headouarters in 1hnstown and most of its service territory are located in an area whose economy depends heavily on coal mining and associ-ated industries. Power plants located in this area minimize the high cost of coal transportation.
Because of these logistics and the increasingly favorable environment for coal-fired generation, Penelec began operating power plants in which it shares ownership with other utilities that are located some distance from the plants.
In addition, two plants, Keystone and Conemaugh, are operated oy Penelec even though it has no ownership interest in either of them.
These two plants represent GPU's leadership in the development' of coal-fired generation. While GPU did not need the total capacity of these plants, it recognized the economies of their size, their future value to the PM power pool, and Penelec's unique capability to operate them. Because Penelec operates a large number of plants, it is able to support a much larger and more expert support staff, particularly in engineering, and can apply to each plant the specific expertise reauired.
The capabilities of this staff were demonstrated in solving design problems in the newer units at Homer City. Moreover, the management of Penelec's Generation Division employs state-of-the-art systems for maintaining its generating plants.
Customer Operations Customer operations refers primarily to the line functions that are decentralized throughout the service territories of the two companies.
Tnese functions tend to be facilities-related or customer-related, as illustrated below:
o Facilities-related
- Construction and maintenance of distribution facilities
- Construction and maintenance of subtransmission facilities
- Operation and maintenance of electrical eauipment
- Provision of new service
- Tree trimming
- Right-of-way maintenance VI-5
o Customer-related
- Meter reading
- Credit and collection
- Customer accounting
- Responding to customer inouiries
- Community services
- Consumer services
- Conservation and load management promotion These field operations are organized in geographical divisions in both companies, and have the same scoces of responsibility.
Penelec has five divisions serving its 509,000 customers, while Met-Ed's four divisions serve 358,000 customers; these divisions are further broken down into 23 and 15 districts, respectively. Because customer density is higher in Met-Ed's service territory, Penelec's divisions serve larger geographic areas.
Although the overall responsibilities of the divisions are the same, there are a number of significant differences in how these responsiollities are carried out by the two companies and by each Company's divisions.
Tne companies use different forms, procedures, management systems and operating metnods.
There are also differences in the management systems used within the Penelec divisions.
Corporate staff support for division customer operations is the re-sponsibility of the Vice President Consumer Affairs, and the Vice President Engineering (or Technical) in each Company.
Although the primary roles and responsiollities of the corresponding staffs are essentially the same in each Company, the method of execution differs and the functional emphasis is not the same. For instance, Penelec has undertaken several transmission construction and improvement programs recently because of system reouire-ments.
This has reouired a correspondingly larger staff in transmission engineering and construction management at Penelec.
As pointed out previously, direct line responsibility for division customer operations varies between the two companies.
At Penelec, the di-vision managers report to the Vice President Operations, who has a small administrative staf f reporting to him.
At Met-Ed tne division managers report to the Senior Vice President; the Vice President Operations has a large administrative staf f for division customer operations which also in-cludes corporate personnel and services.
The perception is widely held among GPU personnel that there is more centralized control over division customer operations at Met-Ed. tbwever, the difference in division manager autonomy in the two companies is a matter of degree.
A certain amount of decision making authority is granted the division managers in both companies.
The relatively more decentralized management approacn attributed to Penelec may have resulted from (and, in fact been more desirable due to) the more widely dispersed service territory and greater oistences between di-visions and corporate headouarters.
Fbwever, inflation, increasing rates, VI-6
declining productivity and the resultant financial constraints are now de-manding more corporate guidance and professional direction in areas such as work methods, productivity standards, eouipment standards, work priorities, and cost control.
The management of the GPU operating companies has taken several actions to strengthen the central control over division operations:
Establishnent of a centralized materials management organization in eacn Company as well as at GPUSC to achieve the most efficent and effective acouisition and distribution of materials.
Establishment of an Operations Analysis iunction in each Company with coordination through SPUSC. Tnese groups have developed productivity standards, manpower planning, and performance reporting systems-in a number of functional areas.
Initiation of functional committees which are chaired by personnel from various GPUSC departments and are made up of officers and man-agers of the respective departments in the operating companies.
The purpose of these committees is to coordinate similar activities among the companies, to standardize operating methods and pro-cedures, and to develop firm-wide policies.
Aside from these activities, the two Pennsylvania operating companies have taken different courses to achieve centralized control within their respective operations.
As noted previously, the Vice President Operations at Penelee maintains a small administrative staff to support division op-erations. Wnile It is difficult to achieve functional control with this staff, Penelec has installed an effective management reporting system to monitor budget performance. Met-Ed has taken a more direct approach to achieving functional control by forming the eouivalents of the GPU func-tional committees among the various customer operations functions in the division.
These committees have helped achieve greater standardization of methods and procedures among tM four divisions, ensured the iniplementation of corporate policies and programs, and served as a forum for discussing operating plans and performance. Met-Ed staff tend to make more field visits because of the more compact service area.
As a result they are more involved in day-to-day field activities and exercise more influence on the decision-making process for projects.
The fact that the Vice President Operations at Met-Ed is also responsible for the corporate personnel, trans-portation, and building services functions provides additional leverage for exercising such control.
Support Functions Financial operations in GPU's operating companies are predominantly accounting oriented. Many of the treasury functions typically performed by independent utilities are carried out by GPUSC for the operating companies.
Cash flow is the primary treasury function assigned to the operating companies.
The operating company financial staffs also provide supporting analysis, information, documentation, and witnesses for rate cases.
VI-7
Although the titles of the managers vary, responsibilities are sim-ilar. Penelec requires a larger accounting staff because it serves more customers, must account for the pintly owned power plants which it op-erates, has a more centralized budget analysis function, and has a less automated accounting system.
Die other difference is that tne Secretary and Treasu er positions are combined at Penelec and separate at Met-Ed.
There are some differences in the relative mix of personnel assigned to tne various financial functions in tne two companies.
This reflects the fact that the two companies are at different stages of development in im-plementing various mechanized accounting systems. New computerized ac-counting systems are developed for GPU system-wide implementation. These systems are typically scheduled to be implemented in a phased manner in the three operating companies. For example, the Base Customar Accounting System is already in place in Met-Ed and scheduled for installation in Penelec over the next two years. Penelec, on the other hand, has a more fully developed management reporting system, particularly for budget-performance, than does Me t-Ed.
Different accounting systems, mechanized or otherwise, require dif'erent levels of manpower to support them.
Although there are some differences between the accounting systems in the two companies, they are necessarily compatible. FERC and other external reporting requirements have had a standardizing influence on methods of utility accounting. In addition, internal corporate accounting for GPU requires consistent information for budgeting, planning, forecasting, and management reporting purposes. The trend toward standardization will con-tinue in order to avoid the proliferation and the prohibitive costs of main-taining unique systems for each company.
Other support functions include, materials management, communications, public affairs, transportation and personnel.
In both companies, materials management and puolic affairs are headed by directors who report directly to a senior officer of the company. Also in both companies the transportation function is a responsibility of tne Vice President Operations and the com-munications function is located in Consumer Affairs.
One of the organiza-tional differences between the two companies' support functions is the reporting relationship of the personnel departments.
At Met-Ed this function is a responsibility of the Vice President Operations, whereas at Penelec the Vice President Personnel re-ports directly to the President.
There are very few significant differences between the methods of operation of the support ' functions of the two companies. The accident at TMI required a substantial communications effort on the part of Met-Ed and a number of employees were relocated to the site. A communications function has been proposed in the nuclear generation organization and would become part of GPU Nuclear Corporation. Otherwise the two comnunications organ-izations have similar responsibilities.
The personnel function in both companies is decentralized. The corporate personnel staf fs are responsible for developing policies and VI-8
procedures for the operating companies and for administering those policies and procedures for the corporate staff. The generat. ion and customer opera-tions functions in both companies maintain adidnistrative staffs to handle personnel matters for employees in the field.
T.e materials manage.nent function was estaolished at each company
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several years ago as part of a CPU system-dide program. Systems and pro-cedures were developed for all of the companies and are coordinated by GPUSC. Although this function is still in a developmental stage, the methods of operation at the two companies are very similar.
GPU SERVICE CORPORATION The GPU Ser/ ice Corporation acts essentially as staff to the operating companies.
The current organization of GPUSC is shown in Exhibit VI-3.
The functional officers of GPUSC correspond to many of the functions in the operating companies. Certain services are provided on a centralized basis by GPUSC because the Company believes it is cost effective to do so.
In other functional areas, GPUSC helps establish uniform polices and practices among the operating companies and provides a mechanism for intercompany enchange of ideas.
The GPUSC Board of Directors, which consists of the Chairman of the Board and the Executive Vice President of GPU and the Presidents of GPUSC and the three operating companies, provides the focus for manag,ement control of operations and reviews operating and financial results at its monthly meetings. To further support operating company management, a number of information systems have been developed on a GPU systemwide basis, including a corporate goals and objectives program.
The role of the service company in she GPU organization is typical of utility holding companies in the U.S.
As is also typical, the costs of the GPUSC services are allocated to the operating companies cased on actual usage and/or other equitable allocation methods. GPUSC has a total staff of about 900; over 500 of these people arc located in Pennsylvania, primarily at the Reading facility. The proposed formation of GPU Nuclear Corporation would reduce the GPUSC staff by about 365 persons. Of the remaining per-sonnel, about 375 perform systemwide functions (such as information services, system operations, internal auditing, corporate planning and rate case management) for the operating companies.
About 70 persons are involved in coordination or support activities for functions in the operating companies (sucn as operations analysis, corporate secretary, materials man-agement, and telecommunications) and about 90 persons provide support (such as transportation, building and reproduction services) to GPUSC itself. The following paragraphs describe the roles and responsibilities of GPUSC in each functional area.
VI-9
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' Generation /NtJclear GPUSC has historically managed design and construction of nuclear gen-erating facilities.
This organization is heavily involved at Three Mile Islant' and will Decome part of the proposed GPU Nuclear Corporation which would also have responsibility for the operation of Oyster Creek and TMI.
Information Services This function provides all of the data processing and system develop-ment support to GPU, GPUSC and the operating companies.
System Operations And Power Supply System Operations functions include dispatch, production planning, generation and interchange forecasting, coordinated maintenance scheduling, and the design and construction management responsibility 'for system-wide transmission projects. Power Supply is responsible for power pooling and cheeling arrangements with PM and other outside pools or companies; intra-GPU power pooling and transmission contracts and arrangements; coordination of all PJM committee activities and purchased power contracts; and communications with state and federal energy policy (FEA) organizations, including the FERC, on matters other than license and resale rate filings.
Corporate Planning The Corporate Planning organization.has responsibility for long-range load forecasts including leadership of the load research, load analysis, load management and conservation activities of the operating companies; site planning and water resources analysis for power plants, including small hydro design and planning; maintenance of the long-range corporate plan enich recognizes generation mix, transmission needs, fuel trends, environ-mental obligaticns, financial constraints, and capital priority and alloca-tion; development of analytical tools.and models to aid in forecasting and decision making; and management of research and development activities of the corporation. All of these activities reouire extensive interaction with the operating companies to obtain data and translate the corporate plan into operational goals and oojectiv s.
Internal Audit This function provides internal financial auditing on a systemwide basis and assists the outside public accountants in the independent audit of financial statements.
Rate Case Management The Rate Case Management organization has responsibility for: con-ducting all New Jersey, Pennsylvania, and Federal rate cases; communicating with all rate regulatory _ agencies; supporting the operating companies' cost-VI-10
of service analysis anJ rate design; communicating revenue reouirements and the impact of regulatory action to customers and investors; planning the rate-making needs of eac.h operating company; and monitoring rate-making trends in GPU jurisdictions and the nation as a whole.
Tne Rate Case Man-agem<.ot organization coordinates all interactions with rate regulatory bodies, with support from the operating companies.
Accounting The Vice President and Comptroller is the principal accounting of-ficer of GPU and is accountable to the Board of Directors.
This function is ultimately responsible for all accounting activities, including coordi-nating all financial information, consistency and integrity, establishing accounting systems, operations analysis (including manpower control) and reviewing all transactions affecting financial results.
Treasurer Tnis function is responsible for overall control and coordination of all state and federal filings, and provides a focal point for the cash man-
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agement functions performed in the operating companies.
The Treasurer han-dies all outside financings and working relationships with rating agencies, banks and otner members of the financial community.
This function also has responsibility for financial planning, financial forecasting, and the admin-istration of pensions and payroll for GPUSC.
Corporate Secretary Tnis function supports the officers and legal counsels of the operating companies on corporate matters, regulation, contracts, claims, litigation, securities transfer, preferred stock dividend, interest and sinking fund disbursements. Services are also provided in connection with stockholders' and directors' meetings, and maintenance of corporate records, procedure manuals, and organization charts.
This function also provides word proces-sing and graphics support to GPUSC.
Materials Management Tnis function develops policies and systems and coordinates the ma-terials management functions in the operating companies.
It is also re-sponsible for procurement and rentals for GPUSC.
Telecommunications This function is responsible for the microwave relay system used in transmission dispatch and the computer data linkage between key generating stations and the computer facility in Reading.
In addition, it has re-sponsibility for the n.eds assess,nent and specification of telephone systems in the operating companies.
VI-ll
PROPOSED MANAGEMENT COMBINATION ORGANIZATION FOR GPU'S PENNSYLVANIA OPERATIONS l
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Communications This function has responsiollity for investor communications, public communications at the corporate level, communications policy, the annual report, and the quarterly report to stockholders.
It also coordinates ous-iness office and consumer a3rvices activities among the three operating companies.
Transportation This function supplies the transportation requirements of GPUSC, and is responsiole for transportation policy across the system, including setting standards and specifications.
Administration This function develops corporate policy and provides coordination in the areas of wages, salaries, labor relations, EEO, and fringe benefits.
This function also provides all GPUSC building services in Parsippany and Reading.
KEY ISSUE ANALYSIS The issues discussed in this section relate directly to the proposed management comoination, the proposed consolidation of division operations and the role of GPU Service Corporation.
Those related to the management combination are organized by functional area.
THE MANAGEMENT COMBINATION General Issues GPU management has proposed a streaml!.ned functional organization for the combined management of its Pennsylvania operating companies. Exhioit VI-4, which shows the proposed organization, incorporates the changes made as part of TB&A's review and critique of GPU's original proposal.
The hignlights of this restructured organization are:
l Single point responsibility is established for each of the major utility functions: customer operations, generation, and finance.
i
- Responsiollity for the Company's conservation and load management efforts is assigned to one individual at the executive level.
The independence and nign priority of materials management, par-ticularly fuel procurement, are reflected in its direct reporting relationship to the President.
1 VI-12
me importance of communications, particularly with reg;1atory en-tities, is supported.by the executive level position reporting di-rectly to the President.
The President's span of control is appropriate.
his organizational structure is appropriate for the Pennsylvania operating companies at this time and should provide significant benefits to GPU's Pennsylvania ratepayers. A number of the benefits of the comoination ate qualitative in nature and would prod;Ce suostantial tangiDie oenefits in the longer term. These benefits are as follows:
The combined management will oe able to respond in a more con-sistent and timely manner to the company's many puolics, specif-ically the Pennsylvania Public Utilities Commission, the Penn-sylvania legislature, other Pennsylvania regulatory agencies, and the' general public of the Commonwealth of Pennsylvania.
The comoination will capitalize on the unique expertise, exper-lence, and proven techniques of each company.
Penelec's expertise and extensive experience in coal-fired gen-eration should produce substantial benefits, particularly through improved plant performance.
Met-Ed's approach to centralized control over division operations has been effective and should bring about greater methods standardization and improved levels of customers service in Penelec's operations.
- To the extent tnat Penelec's management reporting system can be integrated with Met-Ed's accounting systems, centralized cost con-trol would be enhanced.
The combination will provide tne opportunity to integrate the management strengths of the two existing companies and will pro-vide career development opportunities for employees.
0;antifiaale savings can also be achieved in the near term through the management comoination. The Company's original proposal did not identify the attainment of significant savings as a result of the management comoi-nation. The Company in its annual meeting with the Pennsylvania Commission in June,1980 puolicly corrmitted, to achieving $18 million in annual cost savings and cost avoidance in the near future. The Company has stated that
$10 million of those annual savings will be in the form of reduced workforce expenses, including payroll, fringe cenefits, associated materials and supplies, transportation, office space and other miscellaneous items.
The Company expects a 10% reduction in tne size of the corporate staff at tne time of the comoination. These savings need to ce individually identified and a scledule prepared for acnieving them. Furtner workforce reductions VI-13
are expected to result from the consolidation of division operations and the streamlining of corporate staff functions that will be possible following the conversion to common systems and methods of operation in all functional areas.
The remaining $8 million in ultimate annual savings are expected to be realized through the avoidance of costs. A return to normal operations following tne accident at TMI would reouire additional staff in a number of areas other than generation.
The management comoination provides an op-portunity to return to normal operations without any net additions to staff. Another example of cost avoidance savings is the ability to staff new or expanded functions, such as the implementation of the 10-year Con-servation and Load Management Master Plan, at least in part with existing staff. Other types of cost avoidance savings include improvements in labor productivity, customer service; public relations, fuel procurement, and legislative affairs. Tnese improvements would result from the specialized strengths of a combined staff which could not be achieved with two separate
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staffs. While these savings would be substantial, they are difficult to estimate.
The Company's estimate of $8 million in ultimate annual cost avoidance appears to be conservative.
In its original plan, GPU underestimated the resources, time reouire-ments and overall magnitude of implementing the management combination.
Considering the other demands on management, the sensitivity of the issue to GPU's many publics, external constraints, and the mechanics of the imple-mentation itself, the original implementation schedule proposed by GPU management was unrealistic.
The amount of time needed to consummate the combination and achieve the benefits will probably depend more on the time reouired to obtain the,necessary regulatory approvals than on any other single factor.
Generation The proposed management combination would permit Penelec expertise to be applied to plant performance improvements at Met-Ed. Penelec's consideraole experience in operating coal-fired generation has resulted in the develop-ment of relatively sophisticated plant performance monitoring and improve-ment programs.
The application of this expertise to Met-Ed's coal-fired plants should produce significant benefits in the form of improved plant performance and reduced purchased power costs.
The benefits of combining generation organizations need to be cuanti-fled. Penelec's Generation group is currently compiling the costs of iden-tified eoulpment improvements as well as the benefits associated with each as expressed in thermal improvements (reduced BTU /KWH) or forced outage ratios.
The dollar values (benefits less cost) of these improvements should be mcre clearly identified.
Similar improvements at Met-Ed's plants could be achieved under the combined management due to the expanded staff capabil-ities. For example, the recent performance of Met-Ed's Portland station is below that of the average Penelec plant, and could be expected to improve as a result of the combination.
VI-14
The management comoination would merge the Met-Ed non-nuclear generation organization with the Penelec Generation organization to effectively in-crease coverage of Met-Ed's power plants.
This combination would oring additional staff to the generation headouarters in Johnstown.
The proposed combined generation organization structure is an enlarged version of Penelec's current urganization and as such would not reouire significant restructuring. With the national emphasis on switching to coal cased technology, the importance and size of the generation organization in Johnstown should grow correspondingly.
Tne proposed combined Generation organization does not provide near term cost savings through reductions in corporate staff.
While the comoination would have little effect on the staffing at generating stations, some head count reductions mignt be expected through the elimination of duplicate positions and functions. By maintaining existing staffing levels, GPU expects to. improve plant performance.
The companies do not currently cor-relate plant performance improvement with staff additions on a return-on-investment basis. Witrout such a methodology, it is difficult to make an objective evaluation of staffing reouirements.
The future roles of mobile maintenance and project management need to be clarified. Penelec uses roving maintenance crews to augment on-site plant maintenance crews during outages and emergencies.
The disposition of these crews, as well as their reporting relationship in the proposed combination, are unclear. Penelec and Met-Ed territories are served by different union locals, so that using the mobile maintenance force concept at Met-Ed's plants may have to be negotiated.
Recent load projections, the potential impact of the 10-year Conserva-tion and Load Management Master Plan, and GPU's flaancial condition raise uncertainty about GPU's ability to undertake maj 7 generating projects in the foreseeaole future. While there will be an ongoing need to modify and improve existing facilities, the need for a major project management func-tion reouires furtner analysis.
The role of the proposed combined non-nuclear generation organization may change in tne future.
The proposed combined generation organization includes what is now the Project Controls function at GPUSC.
This function serves all of the operating companies and it is not clear where JCP&L would ootain such support in the future.
The fact tnat the generation organiza-tion would be physically separate from the rest of the company may pose problems in coordination, communications, control, and policy adherence.
Estao11sning separate company for fossil generation similar to the proposed GPU Nuclear Corporation might be desirable in the future.
Customer Ooerations The majority of employees in the proposed Customer Operations organ-ization would be located in the divisons.
These personnel directly affect the level of service delivered to customers. Both Met-Ed and Penelec have VI-15
h excellent records of performance in customer service, as measured by the numbers of complaints to the PUC and GPU's customer attitude surveys.
There is no indication that the proposed combination would have any negativo ef-fect on the level of service.
The proposed combination of corporate staffs should enhance centralized control over field operations and could improve the level of service to
^e customers. Both Met-Ed and Penelec offer unioue strengths in managing customer operations. Met-Ed's experience in achieving functional control over field operations should help standardize methods of operation and en-courage more consistent levels of service. _ Penelec's strength in budget control snould help minimize the cost of field operations.
The effect on the staffing reouirements in the operating companies of 2
implementing the 10-year Conservation and Load Management Master Plan needs to be determined.
The role and responsibilities of GPUSC need clearer definition with respect to research, program development, administration, advertising, or monitoring.
In addition, it is not apparent that organi-zation and staffing reouirements for the operating companies were developed j
as part of the Master Plan. A fifteen-person corporate staff is proposed for Conservation and Load Management in the combined Pennsylvania companies, j
This organization would have program development, administration, and some research responsibilities.
1 Of greater concern are the organization and staffing reouirements in the divisions.
The skills reouired for Conservation and Load Management most closely resemble those currently possessed by consumer service representa-tives, of which there are now approximately 100 in the two companies.
If the GPU Master Plan called for the present level of effort but with a more focused approach, a separate Conservation and Load Management organization.
may not ce recuired in the field. Some preliminary estimates of field staf-fing recuirements for implementing the Master Plan call for as many as 240 representatives devoted exclusively to conservation and load management.
In
^
view of the ongoing need for service consultation in the field, this would reouire the addition of over 200 employees.
The ability of GPU to finan-cially support the additional employees and the rate treatment given to the Master Plan by the PUC will affect the final implementation plans.
l The decision on a proposal to centralize various transmission engi-neering and construction functions in GPUSC will affect the organization planning for the proposed combination. A proposal to centralize transmis-sion planning, engineering, and construction, as well as some suo-trans-1 mission functions in GPUSC for all the operating companies could eliminate
{
the need for an additional 60 to 70 staff in tne proposed combined Pennsyl-vania organization.
It would also produce immediate savings in the form of a net cost reduction of some 50 manpower eoulvalents, across all GPU i
companies, or about 17% of existing engineering staff. Since the trans-mission system _in fact serves all GPU companies, and particularly because i
the associated workload is not uniformly distributed over time for any one
. company, the proposal has both logical and economic value.
The timin implementation, should be coordinated with the proposed comoination, g of i
4 VI-16
=
_ Accounting Since the two companies would remain as separate legal and financial entities in the proposed combination, consolidation of the accounting staffs is not reouired in the near term. Separate books, payables, receivables, rates, and legal documents would need to be maintained for the two com-panies. Tnis situation would reouire proper coordination and communication on a corporate basis. While financial staffs could be centralized over time, the current status of financial systems in the two companies would complicate the creation of a combined financial staff. While the two sets of systems are generally compatible, and will become more standardized over time, some modifications would be reouired. While such modifications would not be complex, they may not be economical in light of the near term implementation of various standard systems.
Administrative Services t
The benefits of a combined materials management function would be only i
slightly complicated by the continued existence of separate legal entities.
There are potential benefits in further centralization of inventory manage-ment and material procurement. While separate purchase orders, invoices, vouchers, and inventory records would have to be maintained, this would not preclude attainment of the operational benefits of the combination. Modifi-cations to the materials management systems would probably be reouired.
A combined communications organization would improve the timeliness and consistency of the company's response to its Pennsylvania publics. One of the primary oualitative benefits of combining the companies would be to consolidate GPU's legislative, regulatory, media, and public relations ef-forts in the state of Pennsylvania.
The management comoination would pro-vide for more consistent and timely responses to its Pennsylvania publics, and would make available a broader set of resources for those responses.
This could improve the relationships between the Company and its regulators.
CONSOLIDATION OF 0IVISIONS Division consolidation refers to a streamlining of organization, loca-tions, and methods of operation of personnel in the field. Significant eenefits could accrue from a consolidation of division operations.
Tnese benefits could be achieved independent of a management combination. A management comoination would directly affect corporate staff personnel, but would not necessarily affect personnel in the divisions.
The benefits of a management combination could be achieved with no enange in division opera-tions.
H3 wever, there are potential synergistic benefits in coordinating the implementation of a management combination and division consolidation.
GPU has pursued several cost effective methods of operation in the di-visions. Over the past several years, both companies have moved toward VI-17
o consolidating division operations by closing smaller, less efficient Opera-tions and centralizing various functions in division or district head-Quarters. Several district manager positions are vacant in preparation for further consolidation. Although such consolidation could be achieved with-out a management combination, there are advantages to a more ambitious con-solidation program as part of the management combination. A coordinated approach to the consolidation and the comoination would be desirable for several reasons:
The strengthened management team resulting from the comoination would be better able to achieve the benefits of consolidation.
Communicating the consolidation plans as part of the management combination would create a positive impression about GPU's overall plan to restructure its operations.
The same mechanism could be used for candidate selection and out-i placement (if necessary) in both efforts.
GPU could capitalize on the spirit of change and improve organi-zational stability.
While the intention to assess the division organizations and configura-tion is appropriate, efforts to date are insufficient to actually proceed with a consolidation.
The opportunities for achieving cost savings through consolidation are substantial, and in fact represented the bulk of the savings associated with the combination as originally proposed by GPU man-agement.
The future needs of division operations reouire further evaluation and a realistic, comprehensive plan of action or schedule for implementation must be prepared. Planning for the consolidation reouires more detailed analyses, such as:
The impact of closing business offices on sucn factors as customer traffic patterns, transferable workload, and political ramifications.
Whether existing information systems (CIS and base CAS) would sup-port such centralization at this time.
Assessing supervisory spans of control; those proposed maybe too broad, particularly for meter reading and line crews in outlying service centers.
Objective workload analysis, of the type performed by Operations Analysis, for the purposes of calculating staffing reouirements.
A racssessment of the assumption that Consumer Affairs activities should remain geograpnically dispersed and that functions could not be combined.
1 VI-18
A reassessment of the assumption that the present T&D facilities configuration is appropriate.
An assessment of the number of Qualified staff reouired to support highly technical functions, such as electrical eculpment, if the number of divisions nere increased.
There is clearly a need for more in-depth analysis of the consolida-tion, especially considering the sensitivity of the issue and the large numbers of employees affected.
If sucn analysis is to be meaningful, sub-stantial involvement and contributions from division personnel will be re-Ouired.
GPU SERVICE CORPORATION The role and responsibilities of GPUSC are appropriate and offer a number of benefits to the operating companies.
The concept of a service company, as it is applied by GPU and other holding companies in the utility industry, is to provide services to the operating companies which are more efficiently and effectively performed on a centralized basis. Some of the more substantial benefits to the operating companies which result from the centralization of functions in GPUSC include:
Economics of scale in generation planning and construction, fi-nancing, and data processing The ability to concentrate expertise and take advantage of a greater experience base
- Better coordInatio'n innd control of corporate and system planning,
~
policy development and administration Oue to the infrecuent occurrence of certain activities, better utili-zation of resources can be achieved by centralizing certain functions for the three operating companies. Other special efforts, such as the Conserva-tion and Load Management Master Plan, become more justifiaole when the ben-efits accrue to three companies, rather than to one.
The services provided by GPUSC to the operating companies appear to be cost effective.
The staffing levels in GPUSC are appropriate. While a detailed work-load analysis of staffing levels was not performed as part of this study, it appears that GPUSC staffing levels are not out of line with those of other utility holding companies. Roles and responsibilities are documented and generally understood, so that there is little duplication of effort between GPUSC and the operating companies.
GPUSC services appear to be provided on a cost effective basis. For example, the data processing and system de-velopment functions costs are below average for a utility of GPU's size.
It is unlikely that either the services offered by GPUSC or the nature of the demand for -those services would cnange as a direct result of the proposed management combination.
The proposed management combination does VI-19
not change the relative roler of the operating companies and GPUSC.
It is also unlikely-that the combination would affeet the current demand for-services fom the two separate Pennsylvania operating companies.
There are
- other changes being proposed which affect GPUSC and the operating companies, such as the formation of GPU melear Corporation and the further centrali-zation of transmission and distributico engineering activities. While they are not directly related to the proposd combination, coordination and im-plementation of any such changes would be desirable.
The proposed changes in GPU's_ organization as well as some perceived GPUSC needs, indicate that a reassessment of the service company's future role would be approoriate. Since its formation in 1971, CPUSC has evolved to meet the needs of GPU and its operating companies.
The proposed forma-tion of GPU mclear Corporation, the concentration o? non-nuclear generation functions in western Pennsylvania, and the combination of the Pennsylvania operating companies will necessitate changes in the roles and responri-bilities of GPUSC.
Tnere are several additional concerns over the roles and responsibil-ities within GPUSC. For example, the data processing function, which serves all the companies across all functions, may not be optimally located in the financial organization at GPUSC. This location was natural in the past, as most of the early data processing applications were in the accounting and j
financial areas. mwever, the data processing function has now reached a J
size and diversity of user base sufficient to consider separation from the financial organization in GPUSC.
1 Tne role played by GPUSC in rate cases of the operating companies may have a negative impact on those proceedings.
GPUSC personnel are likely to be seen as outsiders in that process as they are perceived to be only in-directly involved with the operating companies. Development of a rate case strategy and provision of technical support are appropriate functions for GPUSC to perform for the operating companies. By playing a stronger role in rate case management, preparation and presentation, the operating companies could better respond to each state's unioue needs.
i' STRATEGIC RECOMMENTATIONS TB&A believes that thrse broad areas of action should be pursued by GPU in the area of organization:
Management combination of the Pennsylvania operating companies Consolidation of Pennsylvania division operations l
Future organizational development of GPU.
r VI-20
T m
THE MANAGEtENT COMBINATION The management combination should produce substantial oenefits for Pennsylvania ratepayers and snould be completed.
It is clear, however, tnat continued detailed planning and analysis will oe required and that more substantial resources should ce devoted to tnis effort than in the past.
Specific activities that should be performed include:
Develop detailed organizational and staffing requirements for each function.
Select candidates for key positions and involve them in further or-ganization development and assessment.
Determine disposition of all current employees, and the timing and logistics of all relocations.
Establish a task force to coordinate the implementation of the man-agement comoination.
Quantify the specific costs assumed, cost reductions, and costs avoided through the management comoination.
Establish a formal process whereby tne achievement of savings can be monitored and the results of the comoination evaluated.
Report implementation status and achievement of savings on a regular basis.
- Study all the major operating systems' and methods and procedures, identifying the similarities and differences between the two conw panies, and then establish a set of common corporate operating -
systems, metnods, and procedures.
Evaluace the ability of existing management systems to support a combined operation and lay out a timetabl2 for necessary enhancements *or upgrades.
Coordinate workferce management systems between the two companies and continue to monitor staffing levels and ne,eds.
Establish a formal generation plant improvement program, set performance targets, quantify the dollar benefits of improving performance, and base manpower planning on return-on-investment criteria.
- hssess the potential benefits, costs, and timing of a financial and legal merger of the two companies.
VI-21
4 Wnile the Company has begun some of these activities, it is essential to encore that an oojective assessment is made of future organizational Meds and that the potential cualitative and cuantitative benefits are c hieved. With other pressing demands on management's time, it may be difficult for the Company to devote the resources and organizational expertise necessary to implement the management comoination in a timely fashion. The spec (11 interests and concerns of the Company's puolics regarding the propwad changes will also reouire careful consideration.
Barring any unforeseen or regulatory constraints, the additional planning.
and analysis reouired to begin implementation would probably take three to six months, and the first phase of relocations could oe completed within -
eighteen months. Other func-tional comoinations which reouired system changes, sucn as in accounting and materials management, may take as long as five years to complete.
1 CONSOLIDATION OF DIVISIONS Considering the substantial potential benefits and the opportunities presented by the management combination to implement other changes, a more detailed analysis of the Consolidation of division operations should De performed.
This would include:
)
I analysis of such factors as customer traffic, transferable work--
load, and political value in determining the economic viability of i
{
business offices.
P l
An evaluation of the potential for centralizing various activities.
An assessment of the ability of existing systems (such as CIS, CAS, j
and COMEC) to support consolidation.
1 A determination of the optimal configuration of line crew and service center locations.
4 Utilization of Operations Analysis personnel to perform workload analysis and develop staffing reouirements by location.
A determination of the most appropriate organization structure for division operations, addressing supervisory and managerial spans oT
^
]
control, line and staff responsiDilities, and the number of divisions and districts.
Tne involvement of current division personnel would be critical in these analyses and would help ensure a successful implementation.
An implementation plan should be developed and coordinated with a similar plan for the management comoination. TB&A's experience with other utilities which have consolidated division operations is that. the planning and a
mechanics of consolidation (such as budget and accounting revisions and selection of a management team) take about one year and that complete implementation can be achieved in two to.three years.
VI-22
ORGANIZATIONAL DEVELOPHENT In light of the significant changes that are being proposed or recom-mended for GPU's organization structure, a formalized organization planning process should be established to determine the long-term needs and strategy of the Company.
The series of historical events and recent developments represent an evolution in GPU's organization toward more centralized control and functional responsibility.
A formalized planning process would develop an organizational strategy, establish future plans,- and include periodic reassessment of needs and plans.
These plans would assess the current and future roles and responsi-bilities of eacn function and examine staffing needs, management succession, personnel evaluation processes, training reouirements, and career develop-ment plans. Particular attention should be paid to the roles, responsiDil-ities and staffing of the service company.
D1 the near term, consideration should be given to transferring more of the responsibility for rate case management, preparation, and presentation to the operating Companies.
VI-23 a
SUMMARY
OF RECOMeOATIONS PAGE NUMBER RECOMENDATION REFERENCE 1
JOINT TASK FORCE III-27 a.
Estaolish Task Force b.
Analyze the situation c.
Assess the options d.
Develop plan of action e.
Implement plan of action 2
INTERIM ACTION PLAN III-28 a.
Convene meeting of GPU Management, Pennsylvania PVC and New Jersey Board of Public utilities b.
Analyze the situation c.
Assess the options d.
Develop interim action plan e.
Implement interim action plan 3
EE RGENCY PLAN III-28 a.
Prepare to implement cash reduction and casn flow conservation program 4
THI-2 MAJOR COMMITTMENT-REVIEW OPTIONS IV-22 a.
Pursue the restoration of TMI 1 and building of an off-site coal plant or
. tne replacement of TMI 2 with two I
off-site coal plants b.
Develop initiatives to speed up the licensing and building of new coal-fired plants c.
Seek Federal assistance for demon-stration plants of innovative coal-related technology 4
PAGE NUMBER RECOMEtOATION REFERENCE d.
Work with the regulatory authorities to develop rate incentives which accelerate load management and conservation 5
PLANT AVAILABILITY Ato OUTPUT IV-24 a.
Investigate the potential feasibility of fuel and energy adjustment clauses that specify targets for plant performance b.
Develop budgets to achieve the targeted plant performance improvements c.
Develop reporting and auditing proce-dures to permit Commission verification of plant performance improvements d.
Expand and pursue the plan of action to optimize non-nuclear plant availability and output through:
Tracking and identifying trends in plant performance indicators
- Implementing a comprehensive planned maintenance program
. Instituting engineering analysis of eoulpment nistory files Establishing a complete vibration and infrared analysis program
- Tightning control procedures on planned outages
- Identifying methods for upgrading plant eauipment Developing continuous operator training program
- Posting and.widely disseminating performance trend information Establishing a coriiprehensive pro-gram of testing and analyzing specified pieces of eoulpment _
t PAGE NUMBER RECOMENDA. ?N4 REFERENCE
- Establishing performance improve-ment goals.
6 ENERGY OPTIONS STRATEGIC PLAN IV-25 a.
Develop an energy options strategic plan including an evaluation of:
- Regulatory policies Federal policies
- Fuels market factors
- Contemplated strategic initiatives Associated risks and uncertainties 7
LOAD MANAGEENT, CONSERVATION AND C0 GENERATION IV-26 a.
Crash program for large industrial and commercial customers b.
Develop load reduction potential in cogeneration c.
Develop mandatory super-insulation standards d.
Develop commercial and industrial heat storage and heat recovery applications e.
Develop load research data base and analytic tools f.
Establish go/r o-go milestones for resi-dential load management program and monitor progress-g.
Centralize load management and conser-vation responsibility in one organiza-tion for the Company h.
Upgrade the Company's marketing expertise 1.
Develop a comprehensivt !
.1 manage-ment and conservation mas..eting plan J. Monitor progress of PURPA proposal for innovative rate treatment PAGE NtNBER RECOMENDATION REFERENCE k.
Lobby with DOE and FERC for a higher gas curtailment priority for cogenerators 1.
Lobby with state and federal agencies for our cuality regulations that woeld not discourage coal-fired industrial cogeneration 3
8 THE " PENNSYLVANIA SOLUTIONa IV-27 a.
Continue efforts to purchase PP&L l
capacity on a system-wide rather than L
plant-specific basis b.
Explore other initiatives to lower the costs of energy to its Pennsyl-vania ratepayers c.
Consider advocating the establishment of a Pennsylvania Energy Development Autnority to operate federally assisted demonstratition plants for innovative coal generation technology 9
GPU NUCLEAR CORPORATION ORGANIZATION
'V-16 a.
Develop de'. ailed organizational missions, functions and organiza-tional interfaces b.
Develop job descriptions and salary I
ranges 1
c.
Select personnel for various positions 1
d.
Study space and logistical reouirements for the Parsippany. Headouarters of GPU Nuclear Corporation e.
Document the role and function of the Board of Directors of GPU Nuclear Corporation f.
Document the role and function of the Office of the President _ _ _ _ _ _ - _ _.
~,
PAGE N1.NBER RECOMENDATION
-REFERENCE g.
Document the organizational _ interfaces between the operating plants and the technical functions groups h.
Document the relationship between the Nuclear Safety Assessment Group, the General Operating Review Board (GDRB),
the Generation Review Committee (GRC),
and the Plant Operations Review Committee (PORC) 1.
Document the role of and relationships between the various support functions of CPU NJclear Corporation and CPUSC 10 PROJECT CONTROLS V-17 Finalize the project controls to be used betwaen Bechtel and GPU during the clean-up effort-11 M6THODS IMPROVEMENT PROGRAM V-17 Develop and implement an effective Methods Improvement Program at TMI 12 PUBLIC RELATIONS V-18 Cbntinue to strengthen _the RJblic Relations efforts for GPU Nuclear Corporation 13 PUBLIC COMMITTEES V-19 Coordinate RJbliC Committees for each nuclear facility which will be actively involved in the review of management actions 14
-NRC DELAYS V-20 Develop a specific program to communicate the adverse effects of NRC Delays to the Company's various publics, including the Pennsylvania and New Jersey Commissions, state legislatures and governors in order to apply pressure to the NRC to expedite its decision _ making process through all available means 1 -
PAGE NUMBER RECOMENDATION REFEENCE 15 MANAGEMENT COMBINATION V-21 Complete tne Management Comoination of the Pennsylvania companies a.
Develop detailed organizational and staffing reouirements for each function b.
Select candidates for xey positions and involve them in further organiza-tion development and assessment c.
Determine disposition of all current employees, and the timing and logis-tics of all relocations d.
Establish a task force to coordinate the implementation of the management comaination Quantify the specific costs assumed, e.
cost reductions, and costs avoided through the management combination f.
Estaolish a formal process whereby the achie/ement of savings can be monitored and the results of the combination evaluated g.
Report.tmplementation status and achievement of savings on a regular basis s
h.
Study all tne major operating systems and metyods and procedures, identify-ing the. similarities and differences between 'the two companies, and then estaolinh a set of common corporate operating systems, methods and pro-cedures 1.
Evaluate the ability of existing management systems to support a com-bined operation and lay out a time-table for necessary ennancements or upgrades J. Coordinate workforce management systems between the two companies and continue to monitor otaff levels and needs l
q PAGE N94BER ' RECOMENDATION REFERENCE f
16 CONSOLIDATION OF DIVISION OPERATIONS V-22 Takelthe necessary steps tc ' complete the
-consolidation of: division operations of. tne -
Pennsylvania companies
- a.. Consider customer traffic, transferable work load, and political value in determining the.eConomlC viability of -
business offices b.
Evaluate the potential for centralizing j
various activities c.
Evaluate the ability of existing systems (e.g., -CIS,.CAS, ODEC) to
-support the consolidation i
l d.
Determine the optimal: configuration of line crew and service computer locations e.
Utilize Operations Analysis personnel to I
perform workload analysis and develop staffing reouirements by location f.
Determine the most appropriate organi-zation structure for division operations 17 ORGANIZATIONAL DEVELOPMENT V-23 Develop a formalized organization planning process to determine the long-term needs and strategy of GPU for organizational development a.
Develop organizationalfstrategy b.
Establish future plans including:
- Process for periodic reassessment of needs and plans Assessment of current and future roles-and responsibilities of each
. function -
-. Examination of staffing needs 4-(~
PAGE NUMBER RECOMMENDATION REFERENCE Management succession
- Personnel evaluation processes Training reauirements
- Career development plans c.
Consider transferring more of tne j
rate case management, preparation l
and presentation responsibility to the operating companies l
I t
' _____.