ML19347E641
| ML19347E641 | |
| Person / Time | |
|---|---|
| Site: | Crane  |
| Issue date: | 02/17/1981 |
| From: | Speicher J AMERICAN SOCIETY OF UTILITY INVESTORS, MERKEL, SPANG & WEIDNER |
| To: | PENNSYLVANIA, COMMONWEALTH OF |
| Shared Package | |
| ML19347E637 | List:
|
| References | |
| R-80051196, NUDOCS 8105130166 | |
| Download: ML19347E641 (34) | |
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._- ____________ __ ________ __________________ _______________ ___ _
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f COMMONWEALTH OF PENNSYLVANIA.
i~s PENNSYLVANIA PUBL:C UTILITY COMMISSION
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i PENNSYLVANIA PUBLIC UTILITY COMMISSION, et a1 vs.
In rei-R-80051196, etc.
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METROPOLITAN EDISON COMPANY t
BRIEF OF AMERICAN SOCIETY OF UTILIT.Y INVESTORS l
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J HISTORY OF THE CASE On November 13, 1980, the American Society of Utility Investors a non-profit corporation whose members consists of 3,300 common equity owners of General Public Utilities, hereinafter referred to as GPU, filed a Complaint against..atropolitan Edison Company, hereinaf ter referred to as Met-Ed, alleging that hiat-Ed's proposed 76.5 million dollar rate in-crease, to Docket No. R-80051196, is. insufficient as a matter of law in that it fails to provide common equity owners of GPU a return of their -
investment commensurate to that earncd by equity owners of other indus-tries having comparable risks.
On or about December 11, 1980, Administrative Law Judge, O
(/ Joseph P. Matuschak permitted the American Society of Utility Investors to intervene in the foregoing proceedings. through. said. Complaint.
This brief is being submitted in support of the legal positions of the American Society of Utility Investors.
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.s STATEMENT OF QUESTIONS PRESENTED O
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I.
WOULD THE GRANTING OF THE 76.5 MILLI 0N DOLLAR RATE INCREASE REQUESTED BY METROPOLITAN EDISON COMP.ANY PROVIDE JUST AND REASONABLE RATES SUFFICIENT TO ENABLE METROPOLITAN EDISON COMPANY TO RAISE CAPITAL AND MAINTAIN CREDIT?
II.
WOULD THE 76.5 MILLION DOLLAR RATE INCREASE.
REQUESTED BY METROPOLITAN EDISON COMPANY PROVIDE.JUST AND REASONABLE RATES SUFFICIENT -
TO PROVIDE SHAREHOLDERS A RATE OF RETURN COMMENSURATE WITH RETURNS OF INVESTMENTS IN OTHER ENTERPRISES HAVING CORRESPONDING RISK?
O[
.e-III.
,DOES THE PENNSYLVANIA PUBLIC UTILITY
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COMMISSION HAVE THE POWER AND THE ' DUTY '"'
TO ESTABLISH JUST AND REASONABLE RATES, EVEN IF SUCH RATES MUST BE SET AT A HIGHER LEVEL THAN THE RATES REQUESTED BY THE UTILITY, METROPOLITAN EDISON COMPANY?
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A_ _R _G U M _E _N T_
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I.
WOULD THE GRANTING OF THE 76.5 MILLION DOLLAR RATE INCREASE REQUESTED BY METROPOLITAN EDISON COMPANY PROVIDE JUST AND REASONABLE RATES SUFFICIENT TO ENABLE METROPOLITAN EDISON COMPANY TO RAISE CAPITAL AND MAINTAIN CREDIT?
The American Society of Utility Investors contends the answer to the foregoing question to'be-in the' negativ'e.
The granting of the full amount of Metropolitan Edison Company's requested rate. increase of 76.5 Million Dollars will not provide just and reasonable rates in that it-will be insufficient to enable Met-Ed to raise capital and maintain credit.
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Under the Pennsylvania ~Public Utility Code, 66 Pa. C.S.A. 1309, it states:
"Whenever the Commission after reasonable notice and hearing, upon its own motion or upon complaint, finds that the existing rates of any public utility for any service are unjust, unreasonable,.or in any way in violation of any provision of law, the Com-mission shall determine the just and reasonable rates, including maximum and minimum rates, to be thereafter observed and enforced, and shall fix the same by order to be served upon the public utility, and such rates shall constitute the legal rates of the public utility until changed as provided in this part..."
(Emphasis added.)
Despite thb mandate that the Commission shall determine "the just and reasonable rates", the Code fails to define what constitutes "just and
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reasonable".
Various judicial decisions, however, have established ggg standards which define this term.
In the case of Federal Power Commissi vs. Hope Natural Gas Company, 320 US 591, (1944), the Supreme Court of the United States stated that the rate making process involves the balancing of the investor and the consumer interest, but that there must be sufficient revenue generated for the. operating expenses and capital cost of the business, including the servicing of debt and the paying of dividends to the investors.
The Court stated:
"By that standard (of providing sufficient revenues for operating expenses and capital cost of the: business, including servicing of debt and paying of dividends of stock) the return to the equity owner should be com-mensurate with returns on investments in other enter-prises having corresponding risk.
The return, moreover, should be sufficient to insure confidence so as to main-tain its credit and attract capital-." at p. 603.
O Since the Hope decision, other cases decided by the Supreme Court of the United States have reaffirmed the Court's position that Hope -
established the applicable constitutional standards'with which to detere mine what constitutes "just and reasonable" rates in utility cases, See Permian Basin Rate' Cases 390 US 747 (1968).
The Pennsylvania Public l
Utility Commission has recently recognized the necessity of following th l
Hope criteria in its Order approved March 22, 1979, and entered May 29, 1979, in the Metrocolitan Edison case in.R.I.D. 626, when the Commissios l
l stated:
"...the ultimate obj ective of a rate of return determination, [which) is to derive a weighted number,...when multiplied by a rate base, will produce a fair return.
That product should be h
sufficient to:
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1.
assure confidence in the financial soundness
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of the utility; 2.
maintain and support its credit; and, 3.
raise money necess'ary for the proper dis-charge of its public duties.
It should also be:
4.
e' qual tc that being made at the same time in the same general part of the c6untry on investments and other business undertakings attended by corres-ponding risks and uncertainties.
Despite the Commission'_s apparent. recognition-of the-constitutional.
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standards -that must be met in rate making' proceedings;,e a review of the- '
evidence presented at.the. rate hearing in this proceeding.; indicate -that -
decisions of the Commission in dealing with Met-Ed rate requests recent have not permitted rates to be established to meet any of the. criteria O
set forth in the Hope case and as reiterated by the Co'mmission in its above-quo ted -Or' der entered May-29,~ 1979.F. It..is. also apparent.,that Net Ed's financial structure has..been so damaged by these decisions.of the -
,Commis'sion since.the Three Mile'-Island.~ accident. that even.if.the:-Coin-.
mission grants the entire 76.5 Million Dollar rate increase requested by Met-Ed, said rate increase will not be sufficient to enable Met-Ed to raise capital and maintain its credit.
According to the testimony of Philip C. Kron, a Vice President of Citibank, in charge of said Bank's Eastern Energy Department and Robert Gillham, a Vice President of Chemical Bank, in charge of said Bank's, O
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Utility Group, the failure of the Commission to act affirmatively on Met-Ed's Petition for Extraordinary Rate Relief on August 28, 1980, ggg resulted in the forty-five (45) banks who are presently lending money to Met-Ed limiting the amount of credit available to Met-Ed to a level related to " liquid Assets" (N.T. p. 2 rebuttal of Citibank and Chemical Bank, see also Met-Ed Exhibit "E-19-1").
In explaining the reasons for this limitation on credit.
Messrs. Kron'and Gillham stated:
...we have expressed our concern to the other parties regarding the lack of Met-Ed's earnings and the failure of the Commission to issue an order that will enable Met-Ed to recover financial viability.
In addition, after the failure of the Commission to act affirmatively on the Petition for Extraordinary Rate Relief on August 28, 1980, a meeting of the banks was held on September 3, 1980.
As a result of that meeting, considering the rate at which deferred energy-the asset we had financed, - was being amortized without a concomitant reduction in the balance of our loan under the RCA, we issued a letter to GPU and its subsidiaries dated September 5, 1980, (Met-Ed llh Exhibit "E"-19-1) essentially limiting the amount of borrowing to a level related to ' liquid assets' as defined in the referenced Exhibit."
(N.T. p. 2 rebuttal of Citibank and Chemical Bank).
Messrs. Kron and Gillham went on to categorize the Trial Staff's recom-mendation of a rate increase of 9.7 Million Dollars, and the Consumer Advocate's recommendation of a rate increase somewhere between 2.9 Million Dollars and 5.2 Million Dollars as "a road map to bankruptcy" for Met-Ed (see N.T. p. 4 rebuttal of Citibank and Chemical Bank).
Mr. Kron added further clarification of the banks' position when asked on cross examination, "Do you have an opinion as to what amount in between what Trial Staff has recommended and what Met-Ed is asking for., that being the 9.7 and the 76.5, what would be a cutoff, in your j
opinion, as to being (an)' adequate (rate in-
- lll, crease) vs. inadequate?"
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A.
(Kron) "I guess it is my view that the 76.5 million dollars is inadequate, in light of.the problems facing this company, and I think we are all kidding ourselves even with the full anount of the requested rate relief that'we have a financially viable kind of a utility '
here, so since the. company has requested 76.5 million dollars, and I believe that not to restore financial viability, but.at least it is an amount that would give the company some running room through its forecasted needs for a period ending in April of 1982, which is the next tax payment after this April, I think we strongly feel the Company needs the full 76.5 million dollars.
It needs the 76 million in terms of additional charges to the customer coupled possibly with some other creative rate making that would allow possibly the banks to extend additional financing."
(N.T. p. 2567).
i When asked whether in his opinion the 76.5 million' dollar rate
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increase was the bare minimum that was necessary just to maintain the al-ready reduced level of credit, Mr. Gillham responded in part, "To the degree that the amount of rate relief requested by the company falls short of the mark, it seems to me that it is going to send a' signal-
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to the bank, it is going to send a signal to the other parties, that there is not a sense of realism eminating from the Commission as regard the situation with Metropolitan Edison." (N. T. pp. 2569, 2570).
The above-cited portions of the testimony given by Mr. Kron and Mr.
Gillham are indicative of their overall testimony which expresses the view that recent actions of the Commission and the present recommendations of the Consumer Advocates and Trial Staff are totally unrealistic, inade-l quate and provide a road map to bankruptcy for Metropolitan Edison Company
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Their testimony further illustrates that even if Mot-Ed's entiro rcto in-crease is granted, said increase would only allow Met-Ed to maintain its c1 ready decreased level of credit and would do nothing more than buy time until other sources of capital can be sought out.
In addition to Met-Ed being unable to maintain its pre-September 3, 1980, level of credit, Met-Ed is also unable to attract capital.
This problem uas dealt with at length during the testimony given by Carl H.
Seligson, a Vice President of Merrill Lynch, Pierce, Fenner and Smith when he stated that his firm has unsuccessfully attempted Io obtain in-t stitutional investors to purchase Met-Ed securities since the Three Mile Island accident in March of 1979, and confirmed that the lack of interest in Met-Ed securities has continued to present and has been reinforced by decisions of the Commission (see p. 3 of direct testimony of Carl H.
Infurthercommentingontheactionsofthe~CommissioninllI Seligson).
dealing with Met-Ed, especially~ on its Order of May 23', 1980,'Mri Seligson stated:
"In addition, the Commission's May 23, 1980, Order did not recognize the attrition which has occurred in Met-Ed's operating expenses as a re-sult of inflation since Met-Ed's base rates were last changed.
The outcome is that Met-Ed cannot cover its preferred dividend requirements with l
its current rates and, absent a base rate in-crease to restore earning power, Met-Ed is totally unable to access long-termed financing." (p. 5 of direct testimony of Carl H. Seligson).
When asked on cross examination.whether the Three Mile Islar l
accident and the subsequent May 23, 1980, decision of the Commission lessened the public's confidence in Metropolitan Edison Company and O
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Penelec, so that they now cannot maintain credit and attract capital,
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Mr. Seligson responded:
"No question, but not through the loss of con-fidence per se as it has been through the loss of all the financial measures that are necessary to.do so.
The confidence may have been the first step to go, but not the most serious in terms of the raising of debt capital in particular.
The investors in utilit?' debt are less interested in confidence as they are in ha'rd cold numbers and when they didn't see the numbers or when the numbers they saw were not adequ' ate for them, that is when they said we are not interested and they continue not to be interested and the Company now, in terms of its indenture and Charter with regard to preferred stocki,does<not have.thecability-to: issues. either, perferred' stock'or anything:" (N.'T pp. 1543', 1544' cross examination of' Carl H.Seligson)..
When asked'. if confidence. would '.b'e : res tored '.in.. the inves tment: public:
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if Met-Ed were granted its full 76.5 million dollar rate increase, Mr.
Seligson responded:
O "Well, it would.. Substantial,Idon'tknowdHat it means:. It would return somezconfidencerc3.erdl 5 and'indicatee that they. were3on,the road toward55. y'
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seeing the l'ight' at the' end of the-tunnel.
Iti-wouldn't necessarily,be the;1ight..
3 Q.. Evennif that.was. granted,. it would-stihl:
not be competitive..with other. electrical uti3i' ties?-
A.
Clearly."
(N.T. p. 1545 cross examination of Carl H. Seligson)..
When Dr. Eugene F. Brigham, Graduate Research Professor of Finance and Director of the Public Utility Research Center at the University of l Florida, was asked whether he felt at the present time that GPU is com-petitive with other utilities in Pennsylvania as far as its ability to attract capital, Dr. Brigham responded:
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"No.
It would have more difficulty attracting capital than other utilities." (N.T. p. 14*/0 lll cross examination of Dr. Brigham).
-In reviewing the above-cited testimony, and the-entire evidence on the record, it is clear that since the Three Mile Island accident, Met-Ed's ability to maintain credit and attract capital has been eroded by the decision of the Commission.
Even if Met-Ed's full 76.5 million dollar rate increase were granted, credit would not be restored to its pre-September 3, 1980, level, and Met-Ed would not regain its ability to attract capital as it had prior to the accident.
Said increase would only allow the investment public to fee 1~that 'they were on the road to-wards seeing the light at the end of the tunnel'.
Trial Staff for the PUC seems to ignore this evidence which cle y
sets forth [ hat the Commission, itself, has exacerbated ~the-inability os Met-Ed to maintain its credit and attract capital.
During the testimong of Trial Staff witness, Robert L. Packard, the following exchange took place:
"Q.
In terms of items other than the clean-up is the thought of desperation from Met-Ed re-lated in any way to its lack of adequate cash-revenue at the present time, adequate rates?
A.
In one sense if you throw enough money at a problem you don't have a cash and solvency problem.
That's the difficulty in answering the question of whether the current rates are just and reasonable.
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Is it not true that the lack of availability 1
of credit has been directly geared to the rate-making actions of the Commission?
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I believo personally that tho availability of credit, the declining availability of credit, is,
direce;f related to the financial condition of Met-Ed.
Two very principle concerns must be
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weighing on the banks, TMI-1 is not in service and there is n'o near term prospect for it, and Met-Ed is being held liable for its share of the clean-up of TMI-2.
I think given those two con-straints the rate making in this jurisdiction is a relatively minor role in what must be driving i
the banks' concerns and their determination to systematically reduce the line of credit." (N.T.
Pp. 2655,2656 cross examination of R.L. Packard).
The above responses by Mr. Packard manifest his total disregard for ;
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i the testimony -of Messrs. Kron-and.Gillham.for_the banks.and arecbased:r. !
solely on unfounded personal-beliefsl. Mr. Packard in'later cross examin-ation went on tu express his view thau even.if credit-cannot be-maintaine; by Met-Ed, rates should not be increased.
Said exchange went as follows:
"Q.
Mr. Packard, I am really just trying to find out..let me put.my question differently.
I look m
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at the facts presented in this record e it is perfectly ~ clear that the rates:which.the Staff.:-
has recommended are not. sufficient.-to maintain the ' credit"of the -Company and -it 'is perfectly -
clear hat the-Staff recognizes that fact.-
t Nevertheless,.the-Staff..says.what we.are recommending -
is j ust und reasonable. - I am. trying -to -find -the. -
criteria which enables the.. Staff to reach that...
conclusion.
A.
If I can try an. analogy.
.I purchase. my son a bicycle and he agrees to maintain it when I purchased it.
He has no source of income other than what I provide for him.
He went out and did something very stupid and almost destroyed the bicycle.
I choose not to repair the bicycle and,-
consequently, he doesn' t have the bicycle to Tide. "
(N.T. pp. 2671, 2672 cross examination of R.L. Packard).
Packard subsequently went on to state his belief that Met-Ed Mr.
should not be permitted to become insolvent or go bankrupt but only be-cause bankruptcy did not present a viable alternative at present.
(N.T.
2675, cross examination of R.L. Packard.)
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If the Commission were to follow the rocommandation of Trial Staff as shown through Mr. Packard's testimony, the constitutional criteria set forth in the Hope case would be ccmpletely ignored.
Mr. Packard does not deny his feelings that Met-Ed and its shareholders should be punished for the Three Mile Island accident as a child is punished who
" stupidly" damages his bicycle.
He further indicates that ifbankruptcyl did provide a viable alternative to consu.mers, the Commission should be in a position to consider that as an alternative to allowing Met-Ed to continue to exist.
The fact that p..st decisions of the Commission have resulted in reducing Met-Ed's credit level and have prevented Met-Ed '
from being able to attract capital, does not seem to concern Mr. Packardo noi does the fact that Trial Staff's present recommendation will d'o' little or nothing to correct these problems.
Trial Staff's recommendatic therefore, in light of the fact that testimony indicates that Met-Ed's entire 76.5milliondollarrateincreasewillnotmeettheHopecritht is totally unconscionable and'in violation of law..'
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_: U In a case recently decided by the Commonwealth Court of PennsylvEni8 City of Pittsburgh v. Pennsylvania Public Utility Commission, 423 A.2d (1980), the Court was asked to review whether the Public Utility Com 454 mission had the implied power (under the old PUC Code) to allow emergenc:
rate relief of 60 million dollars which th'e Duquesne Light Company alleg it needed pending an investigation into a proposed 127.9 million dollar rate increase.
The Court found such powers did exist so that the PUC could properly balance the interest of the consumers with the utility's '
8: right to receive a fair return.
Judge MacPhail stated:
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"Thus, although iS.e PUC must not ignore customer's rights, it also has a duty to consider other factors (s -
in protecting the right of a public utility to re-ceive a fair return on its investment.
In the instant i
case, Duquesne's primary concerns in its request for emergency relief were its inability to provide adequate interest coverage for new bonds, its inability to main-tain an AA rating for its bonds and problems with the issuance of preferred stock.
All of theserconcerns in '
dicated that an immediate adjustment in utility rates was required in order that those rates might remain
'just and reasonable'.
We conclude that the PUC had the implied power to proceed as it did." at p. 456.
The above-cited decision illustrates that the PUC has the power and the duty to maintain a utility's credit rating in order that the utility.
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be given a fair return on its investments.
This decision is consistent with the Hope criteria which mandates the balancing of interest of the consumers with the interest of the utility and its shareholders.
No where in the law is it stated that the PUC car stand idly by and permit O
the credit level of a utility to be destroyed or severely lessened and set rates so low that the utility cannot attact capit:I$ even if the Commission believes such action to be in the interest qf the consumer.
Such action would totally ignore the constitutional standards which were established in the Hope case and have been repeatedly reaffirmed by appellate courts in Pennsylvania and in the Federal Court system as hereinabove cited.
The rates to which Met-Ed are entitled must be ' j us t and reasonable' when viewed from both the consumer's view and the share-holder's view. The record clearly shows that the shareholder's interest t
have not been protected in the recent decisions of the PUC and that even if Met-Ed were granted the full 76.5 million dollar rate increase it is requesting, said increase would not be enough to enable the company to
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ARGUMENT II O
WOULD THE 76.5 MILLION DOLLAR ? ATE. INCREASE REQUESTED BY METROPOLITAN EDIBGN COMPANY PROVIDE JUST AND REASONABLE RATES SUFFICIENT TO PROVIDE SHAREHOLDERS A RATE OF RETURN COMMENSURATE WITH RETURNS ON INVESTMENTS IN OTHER ENTERPRISES HAVING CORRESPONDING RISK?
The American Society of Utility Investors contends the answer to the foregoing question to be in the negative.
Even if Met-Ed is granted the full 76.5 million dollar rate increase that IS is presently requesting, said increase will not provide just and rc hable rates as it will fail to provide shareholders with a rate of return commensurate
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withreturnsoninvestmentsinotherente[priseshavingcorresponding risk.
Constitutional criteria established for rate making as set forth in the Hope case =provides that, "the return to. the., equi 2;y owner
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should be commensurate with returns on investments in,other enterprises having corresponding risks." (page 603).
The Commission i,n its Order
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of May 29, 1979, in the Metropolitan Edison case in R.I.D. 626, a
reaffirmed this constitutional 1y mandated criteria when it stated thac f
the return for a utility should be,
... equal to that being made at the same time in the same general part of the country on investments in other business undertakings attended by corresponding risks and uncertainties."
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1 ggg From reviewing the evidence on the record in this proceeding, it is apparent that the rate increase requested by Met-Ed will not provide a rate of return to its equity owners commensurate with returns on investments in other enterprises with corresponding' risk.
In fact, the evidence indicates that little or no attempt was even made to provide such a return, and that the general assumption seems to be that the equity owners will get nothing from this rcte increase, except for the fact that the Company may avoid bankruptcy.
In' comparing the risk.which equi.ty owners of General Public'..
Utilities have ccmpared-to the risk of equi.ty owners of other industries Dr. Eugene F. Brigham testified,
" Based on all the facts I have just discussed, I conclude that GPU's stock is now more risky than the stocks i
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of most of large industrial companies.
Companies like those in the SSP industrial.index generally face more. competition than GPU does, but GPU'.s.. greater. regulatory and -financial.m 2 risks l. plus.2he 'uncertaint'y created.by iTMI',.'produc'e...a ver.y. _-
high risk. situation..".
(N.T.'p. 17 direct testimony of Dr.-
Br i gh am)...
While Dr. Brigham's test-imony. indicates that the risk of GPU's stoc) had been increasing since the mid-1960's, it was not until the TMI-2 accident that the risk factor greatly increased.
(see N.T. p. 17 direct of Dr. Brigham).
While equity owners perceived certain risk in owning GPU stock prior l 1
to March 29, 1979, they did not perceive the risk of having to bear the financial burden of a nuclear accident such as the one that occurred at
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b TMI-2, and in turn they did not receive a return on their ' investment q
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that was commensurate witn haviag to bear such a risk.
As Dr. Brigham stated during direct examination, I
" Prior to the TMI-2 accident, the risk perceived by investors in terms of delays in licensing anc/the lixe, but not in terms of accident costs.
Moreover, the climate was one in which the benefits of successful nuclear performance inured solely to customers, as, for examp1.e, in the case of TMI-I, which I understand operated at a level much better than the industry average prior to its shutdovn that followed the TM1-2 accident.
If the. regulatory environment is that of a
' heads i Sin, tails you lose' world, that is, an environment where customers gain the benefit of successful applications of technology but. investors bear the full costs of any failure new then tnis would immediately cause a complete and total re-assessment of tne investment merits of utility securities.
Utilities would be regarded as among the most risky types of investments in the economy., and their cost of. capital, especially equity capital, would go through the roof.
They would have limited upside potential because of their regulated rates of return, but unlimited downside risk in the event of some type of accident.
Under these conditions, the easic cost of equity capital for a utility would be mucn higher than tnat of a typical (
)
large industrial company." _(N.T. Pp. 26, 27 direct of Dr.
Brigham).
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When Dr. Brigham was asked if customers have been paying, and utilities have been earning returns sufficient to offset the possibility of losses from a TMI-2 -type accident, Dr. Brigham responded, "No.
It is very clear that the utilities have not been earning, hence consumers have not been paying, returns designed to compensate for extraordinary losses.
This is obvious from the facts (1) that utilities, on average, are currently selling at only about 75% of their book values, and (2) that tne utility industry has on average, not nad as high an ROE as the industrial average since 1970, while GPU has never had as high an ROE as the industrials back as far as the data go (see Senedule 1, page 7).
(N.T. p.
28 of direct of Dr righam).
Despite the fact that shareholders did not receive the benefit of l a nigh rate of' return commensurate with a risx of a nuclear accient pri
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i to TMI-2 accident, the Commission through its orders dealing with Met-Ed t
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after the TMI-2 accident placed the entire burden of the accident on th G
shareholders without permitting a rate of return commensurate with that According to Dr. Brigham, the return on equity for Met-Ed should risk.
such.
be in the range of 17% to 18.5% if the risk of a nuc1, ear acc1 dent If the risk 'of such an accident as TMI-2 is not upon the shareholders.
is upon the shareholders, Dr. Brigham feels that the range should be between 18.5% and 19.5%.
(N.T. p. 49 of direct of Dr. Brigham).
Trial Staff, on the other hand, has indicated that the risk of a nuclear accident is, and always has been, on tne shareholders and that the cost of equity for Met-Ed may be as high as 25% at the present time L. Packard).
Despitz (see N.T. p. 2636 of direct examination of Robert the fact that the evidence indicates that the lowest rate of return O
desed on the cost of eau 1tv shou 1d ee 17%. ene deatins 1th the rea11t:
as viewed by the Trial Staff may be as high as 25%, the full rate incre of tnat Met-Ed is requesting, if granted, would only provide a rate return of 15.5% on tne cost of equity and a return on common equity of only one-nalf of one percent.
(see N.T. p.11 Tebuttal testimony of Jonn G. Graham).
When asked i,f the 15.5% rate of return by Met-Ed is lower than vnat the company is entitled to, on a cost of equity basis,
f Dr. Brigham on cross-examination explained, "Well, when a utility company requests or files rates, the utility ccupan l
they use some rate of return and I think tnat takes into consideration a number of fa tors, one of which Is I have tne impact a particular rate increase would nave, but certainly known companies that have asked for less than the l
l cost of capital that I have recommended and that the company
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thought I should got in one shot because they thought it I
I would be more appropriate to phase it in and build it up over say two rate cases over a two or three year period and I have really not gotten into Met-Ed's reasoning behind requesting 15hs rather than some nigner cost of capitel which I believe could be supported, but there are really a number of considerations and being realistic about it, utility commissions normally recently have not been autnorizing companies to earn the rate of return the companies have requested.
The company sometimes then tries to remove as much controversy from the rate case as they can by requesting the lower rate of return hoping that they will get a return as close to the perceived cost of capital _by asking for less."
(N.T. p. 1465 cross-examination of Dr. Brigham).
It is the position of the American Society of Utility investors the Commission has ignored the constitutional criteria established that by the Hope case in approving the establishment of rates of return for the equity owners of GPU that are not commensurate with returns of otheri I
industries bearing comparable risk.
Trial staff's position througnout _
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these proceedings has indicated a resolve to ignore the plight of the common equity owners of GPU and to concentrate solely on the interests of the consumers.
When Robert Packard was asked the following question on cross-examination, "You had stated on cross-examination earlier that you had been attempting to balance various interests to determine wnat rate of return should be given.
Where do the shareholders come in on that balancing act that you use in the proceeding?"
Mr. Packard responded to said question as follows, i
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"Because of the very large liability at this point n/
in time fer the clean-up of TMI-2 as a practical matter where the shareholders come in is keeping the compan'y solvent so that the hope remains that, at some point, either through a federal grant for clean-up and of course t.e restart of TMI-I, k
that the elements could cnange sufficiently to provide a positive income for Met-Ed.
Certainly that is the goal."
(N.T. p. 2707,. cross-examination of Robert L. packard).
Mr. Packard vent on to state, "Another way of saying it is that there are not too many benefits, if you are a shareholder of a company t. hat has a nuclear accident."
(N.T. p.2708, cross-examination of Robert L..packard).
Earlier during his cross-examination, Mr. Packard set forth Trial Sta f f's position' tnat the Hope criteri should be ignored in part when-setting rates, said exchange went as follows,
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"Q.
Does the fact that tnere was an accident notwithstanding prudent conduct on the part of the utility
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provide a basis. for: denying the comp.any the revenues-to whicn.
it would.be entitled-:in. order. to: satisfy, the Hope criteria?!
A.
Let me rephrase the question if-I.may and if:
that is not satisfactory.1 will answer it as you nave asked it.
There -are u-number. of ~thingss. This is.a_very complex situation.
In;my opinion; Metropolitan Edison, GPU, put too many eggs in one basket when tney -built both units on -
Three Mile Island.
That is my opinion.
Even if Met-Ed is not at all to blame for that accident, it was totally beyond its control, either NRC or the contractor or somebody else is totally to blame, there remains the issue of wny did you put both of those units on one island?
I if I were providing advice or if I were making l
a decision in private inaustry or-in a regulated utility I would never put all those eggs percentage wise in one basket.
All investor supplied capital is supplied at risk.
It seems to me that they supplied it at risk and because the risks were all in one basket there are some now necessary consequences regardless of whether or not Met-Ed is responsible for that I
accident."
(N.T. Pp. 2666, 2667, cross-examination of Robert
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L. Packard).
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a from the testimony of Trial Staff as lll It appears, therefore, presented by Robert L. Packard, that there is an intention to PJnish the sha.
alders for the TMI-2 accident and for having both TMI-I amd TMI-2 on one island, and that the punishment, has resulted in and will con-in the snareholders receiving no meaningful retien on tinue to result for an' indefinite time into the future.
their investment o ignore tne Hope criteria as it applies to the The deci shareholders is even more unconscionable considering the fact hat the han any of the financial burcen 56 the ratepayers of Met-Ed nave not tnat they recessed the TMI-2 accident placed on them, aespite the fact financial benefits of the two nuclear plants when they were oPeating--
as the equity owners of GPU receive no retur2 successfully.
At present, Met-Ed and Penelec ratepayers are enarged ess i
at on their investment,
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tne consumers being servea by Philadelphia Electric Company anE the Even if Met-Ed's full 76.5 million do2ar uuquesne Light Company.
Met-Ed customers wou1d still be 'pagng less rate increase were granted, than the consumers in the Philadelphia and Pittsburgh areas. ' 95.T'.
It is i42n-Pp. 9 and 10, rebuttal testimony of John G. Graham)'.
situation, witn Met-Ea anc Penele:being ceivable that in the present the only two utility companies in Pennsylvania having experienta the tnat their consumers shouAE still financial horror of TMI-2 acciaent, be paying lower rates than millions of other consumers in the Commonwealth of Pennsylvania, while GPU equity owners are tolethat tne O
l.
cannot expect to receive a dividend or get a return on tneir investment
( h comparable to returns of other industries bearing comparable risk.
Such octiun is in violation of the constitutional criterla established by the Hope case and is without any legal justification whatsoever.
In I
addition, this course of action has tnreatened the Epture viability i
8 of Met-Ed, and GPU as a whole, by frightening investors and the lending I
t community.
The actions of tne Commissior in dealing witn Met-Ec received t
harsh criticism from Mr. Kron of Citibank when he testifica as fcIlows,
"...I would merely point out that in Mr..'Gi11 ham's and my discussions with various people in the Indnstry as we see them in the course of our day-to-day business, we franx1y feel anc find very,little-sentiment in tne industry to helping Metropolitan-Edison Company, h'aving their ratepayers-in a sense subsidize the electric cost of Met-ed ratepayers when Met-Ed ratepayers are not even paying the highest rate in the state.
To bring this even closer to home, and while i
I have not spcken specifically to represensatives of uuquesne
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g Electric or Philadelphia Electric on the subject, I would think that.they.would have a very difficult time p.assing;on deditionalicos.t'to.th'elr ratepayers-to subs 2di:e ene rates.of~
Met Ed* s-ratepayers wh'en their ratepayers are-aircady paying.
a higher rate in terms of cents per' kilowatt hour for their-electri'c."
(N. T'.. Pp;. 2 5 5.5.,. 2 5 5 5.,. direct. testimony of Phi ~ lip C.. Kr on J '..
I In the City of Pittsburgh vs Pennsylvania Puolic Utility Commission, the Commission maintcined the opposite position being supported supra.,
by Trial Staff in these proceedings, when it granted emergency rate the relief to Duquesne Light Company of 60 million dollars to protect rights of tne utility to receive a fair return on its investment.
De spite l
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tho fact that Duquasno Lignt Company customars pey one of tha highast rates in the state and pay higher rates for their electrici'ty than thdlh Met-ed customers do, tne Commission used " implied power" to protect return o;f tne utility.
The use of sucn implied power by the Commission tne utility's return was upheld by the Commonwealth Court.
to protect f
In the present case, Trial Staff appears to be advocating the use of " implied powers" to ignore the constitutional mandate of the Hope to prevent Met-Ed from receiving the return on its investment which
- case, the law states that it is entitled to receive.
In the present situation it is imperative that tne Commission use its eipress and a rate increase sufficient to implied powers, if necessary, to grant give equity owners a return on their investment comparable to the' return
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of other industries bearing comparable risk.
Part of the justification that Trial Staff has made denying any
..... g..,-
. r meaningful re' turn on investment to tne aquity owners of GPU is based.
on the Commission's removing TMI-I from Met-Ed's rate base on the grounds tnat it is not "used and useful".
Tnis decision to exclude TMI-1 frou Met-Ea's rate base was a discretionary act on the part of the commission-which has further led to the inability of the equity owners of GPU to receive a return on tneir investment.
The Commission clearly has the power to have all or part of TMI-I in tne rate case.
In the Commonwealto Court's decision in West Penn Power Company vs The Pennsylvania Public Utility Commission, 412 A.2d 903 (1980), the Court determined that tne Commission nal not abused its aiscretion by including the utility's 01.
m
8 Mitchell No. 3 Unit coal generating plant in its original cost measure
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l for rate making purposes, despite the fact that the plant had been l
closed down by the Federal Government, apparently for environmental reasons.
The Court recognized that the Commission could allow the utility to receive part but not a full return on the unit.
In the Pennsylvania Gas and Water Company case,'
A.2d (1980), tne Supreme Court of Pennsylvania, quoting from a Commissien Order stated as follows, "Accordingly, when a utility sufters extraordinary losses in service value of utility property abandoned or otherwise retired from service, or suffers unforeseen damages to property which damage could not reasonably be anticipated, and where the utility nas not otherwise recovered its investment, this commission can, and, where equity is requirea, does permit the utility to recover from the ratepayers, as a proper and ncessary expense of rendering the public service, the necessary amount to make the utlity whole."
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It should be noted that TMI-I nas.1ot been abandoned or retired._
and is practically ready to resume operation as soon as GPU receives the go aneac from tne Nuclear negulatory Commission.
There is 11ttle doubt that if the equities require, as they certainly do in tais case, the Lemmission can permit all or part of TMI-I in Met-Ed's rate base.
A review of tne evidence on the record indicates that the investors who spent their money so that consumers of Met-Ed could enjoy the benefits of inexpensive electrical costs have not gotten a return on their investment and are now being punished, while tne consumers of Met-Ed still enjoy rates below those assessed against millions of consumers in the Pittsburgh and Pni1adelphia areas.
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The lack of rationality of tne Commission's cont 2nua117 refus2ng {
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to permit TMI-I in the rate base for Met-Ed is best illustrated by the testimony of Carl H. Seligson when he stated, "TMI-I is out of rate base beer.use the Commission says they are not entitlea to a return on the p1, ant.
But that money was spent.
It was investor's money.
The money was borrowed or raised from stock investors.
The taxes still go The depreciation still goes on, The money is there and on.
being spent.
Now where did the Company get the money to pay the bills of the investors who lent that money?
To tell the Company that they are not entitlea to nave TMI-I in rate base in an absuraity, nothing else."
(N.T. Pp. 1511, 1512 on cross-examination of Carl H. Seligson).
.Mr.
Seligson went on to state, "I don't think there is any question about tnat this Commission felt until Maren 29th, 1979, tnat TMI was a damn good plant and a gooo investment and it was a proper investment and a good operating plant, and unen it stopped working >.nd the world's eyes pointed at Harrisourg, tnen the Commission realized they had one hell of a problem and I know they have got one hell of a problem.and it is an on-going problem, but.I am suggesting in this testimony, in my prior testimon.y, and in everything that I ever say about the situation, that it is improper to penalize the investor in this situation because he didn't know what he was getting into.
He had no concept.
Nobocy had any concept tnat this would happen and how it would be dealt with.
I sat in the office of the then Chairman of this commission after TMI happened discussing tnis question with him and he said nobody knows how to handle this.
He said it has never happened before.
We don't know what to do, and I beleive thaz summarizes the situation clearly.
I am suggesting tnat what was finally decided as what shoula be cone was an improper decision.
(N.T. Pp. 1526, 1327, cross of Carl n. Seligson).
i
f Tne Commission must make a decision whether it is to follow tne constitutional criteria as set,forth in the Hope case or whether it will ignore these criteria and substitute some arbitrary definition of what constitutes "just and reasonable rates" in the pre 3ent situation.
It is that Trial Staff wants other criteria to be applied, (see
- clear, cross-examination of Robert L. Packard,'Pp. 2660, 2661).
Apparently these criteria di not include balancing the interest of shareholders against the interests of tne consumer.
The record c1_early indicates the ourcen of tne TMI-2 accident nas f allen entirely indicates tnat upon the shareholders, and tnat they are now oeing punished for this while the ratepayers continue to enjoy lesser rates than thosey
- accident, The being paid by millions of other consumers in the Commonwealth.
l record is clear that even by granting Met-Ed's entire 76.5 million dolla
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increase, the equity owners of GPU will not get.a rate of return
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w rate comparable to a return on an investment of similar industries having similar risks.
It is the auty of the commission, tnereofre, to estaolish rates that are just and reasonable anc provice for a return on for the equity owner as mandated by the Hope case.
investment l
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d AREUMENT h
III.
DOES THE PENNSYLVANIA PUBLIC UTILITY COMMISSION HAVE THE POWER AND THE DUTY TO ESTABLISH JUST AND REASONABLE RATES,~
EVEN IF SUCH RATES MUST BE SET AT A HIGHER LEVEL THAN THE RATES REQUESTED BY THE UTILITY, METROPOLITAN EDISON COMPANY?
The American Society of Utility Investors contends that the answer to the foregoing to be in the affirmative, the Pennsylvania Public
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Utility Commission has the power and the duty to establish just and rea-sonable rates even if such rates must be set at a higher level than the rates requested by Met-Ed.
As previously set forth in this brief, Section 1309 of the Pennsyl vania Public Utility Code provides that the Commiss' ion has the legal duty to establish "just and reasonable rates" if it finds that the rates of the utility for any service, are unjust, unreasonable or in any way violative of law.
The Hope criteria, as has been repeatedly set forth herein, established the Constitutional standards by which the term "just
.and reasonable" is defined.
It is within the framework of the Hope i
standards that the Commission must apply Section 1309 of the Code.
The question which must be addressed by the Commission is whether through the application of these standards, it has the power and duty to set rates higher.than those requested by the utility if the evidence
, warrants such rates?
The answer is clearly yes.
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'In The City of Pittsburgh vs. Pennsylvania Public Utility Commission,
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supra., the Commonwealth Court found that the Commission had implied j
power to take such action as was necessary to protect the utility's right to receive a fair return on investment.
The duty to follow the standards established by the Hope case, therefore, created nece.ssary implied power in the Commission so that the law could be properly applied.
In the Keystone Wayer Company, White Deer District vs. Pennsylvania Public Utility' Commission, P.A. 385 A.2d 946 (1978), the Supreme Court of Pennsylvania, in finding that the Public Utility Commission had erred in removing over 57 thousand dollars from a general rate increase of that' utility, reiterated many fundamental constitutional principles that the Commission must follow in reviewing and establishing rates, including the
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premise that:
" Rates which are not sufficient to yield a rehsonable return on the value of the property used...are... con-fiscatory, and their enforcement deprives the public utility company of its property in violation of the Fourteenth Amendment." citing Bluefield Water Works '
vs. Public Service Commiss' ion, 262 US 679 (1925), at page 953..
The Court additionally ruled that the Commission was not free to abandon the " rate base technique" for establishing rates and follow a
" free form end result" approach to rate making.
Justice Pomeroy stated:
" Absent the legal standards implicid in the present rate base-rate of return model, a Commission Order and judicial review thereof would be transformed into an uncertain groping for the elusive standards of 'just-ness' and ' reasonableness' (or the equally vague factors identified in the quoted passage from Hope, suora.).
While the judgment of the Commission is entitled to O;
great weight, it should be effectively conclusive upon l
t a reviewing court.
We think it would not become so if the l
ephemeral approach now advocated were to prevail." p. 954.
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l From this case, and the others cited above, it is clear that the Commission must follow the minimum constitutional standards o~f Hope in providing a fair rate of return for the common equity shareholders, in the shareholders from suffering a confiscation of their order to prevent The Commission is not free to utilize " free. form end result" property.
cpproaches as advocated by Robert L. Packard of Trial Staff, which might be more "just and reasonable" for the consuming public but which ignore the rights of shareholders.
Nor is the Commission free to accept rates which obviously fall short of.iccting these constitutional standards.
No party in the present proceeding has presented evidence which suggests that Met-Ed's 76.5 million dollar proposed rate increase would the Hope standards by providing a rate of return comparable'to a
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meet return on investments in other industries having comparable risk.
NoneO presented any evidence to indicate that the full rate increase proposed by Met-Ed would reinstate Met-Ed's level of credit to the pre-September 3 1980 level, let alone to the level prior to the TMI-2 accident.
And no evidence has been presented to suggest that the 76.5 million dollar rate increase will enable Met-Ed to once again attract capital as it had prior to the TMI-2 accidunt.
John G. Graham testifying for Met-Ed admitted that the proposed rate increase would not fulfill the Hope criteria when he stated during direct rebuttal:
"By themselves, such returns would not be sufficient to assure confidence in the financial intergrity of l
f Met-Ed and Penelec.
However, they would be an impor-11 tant step on the road to recovery.
Initially, they I
would not result in Met-Ed and Penelec regaining l
access to capital markets.
Such returns would, however, start the laborious process of rebuilding earnings a
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levels for the time when such access could be restored...I next turn to the criterian of
(>3 whether the revenues resulting from the general rate increases requested by Met-Ed and Penelec would cause the return to the equity owner to be in excess of the return on investments and other enterprises having corresponding risks.
Once again, the answer must be
'no'.
As I have _just indicated, the resulting return on the common stock equity would be so low (1/2 of 1%) that none could possibly present a factual foundation for the position that these returns would be in excess of those for enterprises with comparable risks. (Pp.11,12 rebuttal testimony of John G.
Graham).
It is respectfully contended that the evidence on the record clearly shows that the rate increase requested by Metropolitan-Edison-Company is-insufficient as a matter of law and that it is incumbent upon the Com-mission to establish rates which will allow Metropolitan Edison Company
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to attract capital, maintain credit and provide a rate of return for its equity shareholders comparable to;. returns enjoyed by shareholders of..
other industries having comparable risks.
Failure on the par.t of the Commission to take such action when the evidence clearly warrants it,-
amounts to a confiscation of the shareholder's property in violation of the Fourteenth Amendment of the United States Constitution.
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PROPOSED FINDINGS OF FACT 1.
The 76.5 million dollar rate increase proposed by Met-Ed will not enable Met-Ed to attract capital.
_f 2.
The 76.5 million dollar rate increase proposed by Met-Ed will not enable Met-Ed to maintain its pre-September 3, 1980, level of credit.
3.
The 76.5 million dollar rate increase proposed by Met-Ed will not enable Met-Ed to provide a rate of return to the common equity owners of GPU commensurate with returns earned by equity owners of other industries having comparable risks.
4.
Met-Eds proposed 76.5 million dollar rate increase will provide a rate of return of 15.5 %.
5.
Met-Ed is justified in having a rate of re turn of 251.
6.
The Nuclear power plant, known as TMI-1 is neither abandoned nor retired and may be returned to service within the foreseeable future.
G
O PROPOSED CONCLUSIONS OF LAW
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1.
The Pennsylvania Public Utility Commission is bound by the constitutional criteria as set forth in the Hope case in establishing rates for public utilities.
2.
The 76.5 million dollar rate increase proposed by Met-Ed does not fullfil the Hope criteria and is insufficient as a matter of law in tnat:
(a) the increase will not enable Met-Ed to attract captial;..
(b) the increase will not restore Met-Ed's' pre-September 3, 1980,. level of credit; and.
(c) the increase will not provide a rate of. return to.
the utility owners of GPU commensurate with. returns....
earned in other industries having comparable. risks.
3.
The Nuclear power plant known as TMI-1 is "used and useful" and is to be included in Met-Ed's rate base.
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4.
The Pennsylvania Public Utility Commission has the power to grant higher rates than those. requested by the utility.
when it 'is necessary.-to.do so to comply' with the Hope;.-
criteriac-
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O CONCLUSION It is respectfully submitted by the American Society of Utility Investors that the proposed 76.5 million dollar rate,. increase is
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insufficient as a matter of law for the reasons set forth above, and that the Commission has the power and duty to establish rates that are "just and reasonable", even if it is necessary to establish rates higher than those proposed by the utility.
The equity owners of-GPU are entitled to a higher return than the proposed _76.5 million dollsr rate increase.will provide.
The Commission-therefore, should establish rates at a level sufficiently above the rates proposed by Met-Ed to provide the equity owners with a return to llh which they are entitled.
Furthermore,- th6 American Society of Utility-Investors contends -
that, for -the : purpose of establishing '!just and reasonable" rates herein, the nuclear power plant known as TMI-1 should be included in Met-Ed's-rate base.
Respectfully submitted, MERKEL, SPANG 6 WEIDNER i
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By:
Mu M_
JcmFJ. Speichrr,pjguire Attorneys for Am v.ican Society of Utility Investors g
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