ML19344A115

Testimony of Ah Meltz Re Financial Costs of Delay (Excluding Replacement Power).Prof Qualifications Encl

ML19344A115
Person / Time
Site:	Midland
Issue date:	11/05/1976
From:	Meltz A NRC COMMISSION (OCM)
To:
Shared Package
ML19344A106	List: ML19344A105 ML19344A110 ML19344A115 ML19344A117 ML19344A119
References
NUDOCS 8007310617
Download: ML19344A115 (7)

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.. UNITED STATES 10F AMERICA'

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NUCLEAR-REGULATORY COMMISSION-l

BEFORE THE ATOMIC' SAFETY-AND LICENSING' BOARD l

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? CONSUMERS POWER ; COMPANY -

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'NRC STAFF TESTIMONY OF ARNOLD.H.'MELTZ u

~0N THE FINANCIAL'-COSTS OF DELAY (EXCLUDING REPLACEMENT POWER)

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' Gilbert S. Keeley, thel Project Manager for Consumers Power Company's h

Midland nuclear. plant, filed.an affidavit dated October 22, 1976.

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(Affidavit of Gilbert S.cKeeley on Behalf of Consumers Power Company) 5-in. support of " Response of: Consumers Power Company" to the. October 13, Y

1976Lletter of:the Commission. A portion ~of this affidavit deals 'with:

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the'dhlay costs associated with suspending construction for five months Land nine months.' Attached:as. Exhibit'3-to th.is affidavit in a comparison-

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of the currentibudget..: broken down intol major cost components, with those 1

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.which would result from a-' construction 'suspen ion for the periods men-j.=

.tioned. ?According:to the dataishown.in Exhibit 3, the current budget for.

the: Midland. nuclear plant is. $1.67 billion and a nine-month suspension in

. construction'wi.l1Lboost'the totalg plant cost t6 $1.92 billion, an increase

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'of'$250 million.1 As shown,"these figures ~ do:not include' nuclear; fuel ' costs.

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iThe' purpose of thisitestimonygis to provide an explanation of what the-

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[$250LmillionLconsists' of, how it was arrived at,.and.how one might. assess Tits ' magnitude ^.~.

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1 Exhtbit 3 tndicates that about $120 million,.or almost half of the projected increase, is attributable to the allowance for funds used during~ construction (AFUDC). According to the Federal Power Com-mission's Uniform System of Accounts,.AFUDC includes "the net cost for.

the-period of construction of Sorrowed funds.used for construction purposes and a reasonable rate on other funds when so used." Therefore, AFUDC is equivalent to the cost of capital used over the period of con-struction:

interest charges paid on_ debt, dividends paid on preferred 1

stock,-and a fair return'on the common equity.

Although these costs are properly includible in the electric plant accounts as a cost of construc-tion,- ratepayers nonnally do. not provide revenues to cover these costs until the construction is complete and the plant goe:: into commr.'cial operation.

Since construction work-in-progress is not generally con-sidered "used and useful in the public service," it is not allowed into the utility's. rate base for rate setting purposes.

This means that Consumers Power Company and most other electric utilities with large

-construction programs expend sizeable amounts of money on which they receive no cash return until the '"used and useful" test is satisfi.ed.

Over the period of construction, the costs associated with construction

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, activities,' including AFUDC are capitalized on the books of the utility as part.of construction work-in-progress. An off-setting credit is then L

made on the income statement under "Other Income." The dollar amount of AFUDC to.be capitalized is computed by multiplying the weighted average g

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cost of capi.tal,. called the AFUDC rate, by the average construction work-in-progress. Therefore, the longer a project is in the construc-tion work-in-progress. stage and-the highee the dollar value of that

" construction work-in-progress', the more AFUDC will be capitalized and

the higher the amount which will eventually go into the rate base.

This is essentially the explanation for. the increased AFUDC of $120 million. ~

Consumers Power has already invested about-$400 million (see Exhibit 2 to -

Keeley Affidavit), and this amount will cumulate for. an additional year or more at an AFUDC rate of 0.5% because of a nine-month suspension in con -

struction.

In addition, increased AFUDC will result because of a large amount of miscellaneous ' shutdown and startup expenses directly.related to the suspension.

Finally, the inflationary impact of the suspension on the remaining' construction expenditures will also cause additional AFUDC to be recorded.

The significant point to-keep in mind with respect to AFUDC, however, is that the incremental amount resulting from a construction sus-pension will not.necessarily involve an out-of-pocket expense borne by

. Consumers Power.. Its economic impact will be felt primarily by the Company's ratepayers in the form of a higher price per kWh once the plant goes into operation.

Up until-that time, the incremental AFUDC is little more than

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an accounting procedure.

This contrasts sharply with most.of the other incremental costs resulting from a suspension..which will require the Company to actually expend more dollars-over the balance of the construction period. -This analysis does not consider the possibility that' additional

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4-securities ~xill have to Be issued to-h,elp finance the larger construction program or the somewhat more subtle point. th.at financing costs may increase somewhat over the. period of construction'because of the presence of;more non-cash AFUDC in reported earnings.

'The suspension in ccnstruction for nina months wi.11-cause.Bechtel's

.s balance of plant-costs to increase ~ by almost $47 million due to escalation alone. The escalation' rate being used by Bechtel.is 7% for the period be-ginning January 1,1977.

Even assuming a more favorable inflationary envi-ronment in the future than expertenced in the recent past, such a rate ap-pears reasonable when compared _ with the average annual increase-of approxi-nately 11% over the five years ended 1975 in the Handy-Whitnan Construction Cost Ind": for the electric, light, and power industry. Aside from the $8 million increase in Bechtel's contingency allowances, the remaining incre-mental costs,'as shown on Exhibit 3, consist of.various miscellaneous items,

- most of which.can prrbably be attributed, either directly or indirectly, to shutdown'and startup activities.

LAt the request'of the NRC staff, Consumers Power Company submitted data presenting estimated annual expenditures under(the present budget and with a nine-month: suspension, both including and excluding AFUDC, as follows:

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(Annual Expenditures in Millions).

Present Budget Present Budget'9-Month Suspen-9-Month Suspen-Date With AFUDC.

-Without AFUDC sion With AFUDC sion Without AFUDC Thru 1976

$ 430

$ 368-

$ 430

$ 368 1977 245 -

202 175-138 1978 310 248 278 226-1979 299 21 9 341-269.

1980 220 127 268 177-1981 126.

72 238 134 1982 40 32 147 67 1983 42 18

1984 1

1 Total

.$1,670

$1,268

$1,920

$1,398 i

Since the dollars being expended by the Company-occur over a number of years, one can get an. improved perspective on the incremental costs of delay if the estimated annual expenditures under the present budget and with a nine-month suspension are discounted to present worth.

In this iner, future dollars can be converted into equivalent 1976 dollars. As t

preytously_ mentioned, the incremental amount of AFUDC occasioned by a 4

suspensionLwi.11 not necessarily result in more dollars being expended by the Company over the. balance of the construction period.

Consequently, Et chose to dibcount the estimated annual expenditures. excluding AFUDC 3:

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'to isolate 1the impact a suspension will'haYe on the Company's cash Loutflow. The Company's present plan shows total expenditures after 1976Lof $900 million,: excluding AFUDC, and with a nine-month suspension, the total 1 increases to $1,030 million, or a difference of $130 million.

'If these projected annual expenditures are-discounted to present worth at a 10% rate,' reflecting an assumed opportunity cost of capital, -the expenditures'come to $703 million under the present plan and $765 million

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with a nine-month suspension, or a difference of $62 million.

One should l

ider:that a portion of these projected expenditures represent a so cons contingency allowances and will therefore not necessarily result in cash

. expenditures.

However one might view the incremental costs of delay, it is apparent that they will be substantial.

Although the irereased financial burden will fall most directly on the Company over the period of construction, the Company's ratepayers will feel the impact' for many years after the plant goes into commercial operation.

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~ ARNOLD'H. MELTZ

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. PROFESSIONAL'QUALIFICATIONSi

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I am currently the Sent' r Financial Analyst at the U. S. Nuclear o

Regulatory;Commissionfand am responsible for' coordinati.ng all-financial.' qualifications review'. activities during the. licensing process.; In this.' regard, ILplan.andfdirect the staff financial' LevaluationLof specific-faci;it: applications.

These evaluations:

include a review ofTestimated construction-costs or operating ex-

-penses,-projected financing methods and underlying assumptions, regulatory trends, and money _and; capi.tal market ldeveloprents.

I-have; also_ served :as an expert l witness. in certain' safety hearings-

'before the Atomic Safety and Licensing'. Board-when financial quali-Efications wa's:.a contested issue.

-I was. graduated from Boston-University in 1965 with a'-B.S.B.A. in.

' Finance"and received an M.B.A.'in Finance in'1966 and a J.D. in Lawlin 1969 from the University of California at Berkeley.

I am

a. member of., Beta Gamma Sigma, the' national business 'adtr.inistration

.ho_norary society,ithe New York'Bar, and the ' American_ Bar Association

and' its.Section of-Public. Utility' Law.

Prior?to joining the Nuclear Regulatory Commission in December 1974, sI. spent over)two' years with the-New York Public Service Commission

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as a financial analyst' in the: Utility Finance Section o.f the Office T of' Accounting and Utility _ Finance.

My respon'sibilities in this position included preparing ' testimony and exhibits in the cost of zcapital'and rate of; return areas and_ serving as an expert witness on:thesecsubjects in rate proceedings.

I have testified in cases dealing with' electric, gas,-itelephone, and wa_ter" companies.- My duties 'also involved making. recommendations to Lthe Commission on the s'uitability-ofJ utilities' financing petitions-after an analysis

' ofe their financial condition,' construction program,"and ability-.to

- raise "shortland long-term, capital.

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