ML19347E667
| ML19347E667 | |
| Person / Time | |
|---|---|
| Site: | Crane  |
| Issue date: | 12/19/1980 |
| From: | PENNSYLVANIA, COMMONWEALTH OF |
| To: | |
| Shared Package | |
| ML19347E637 | List:
|
| References | |
| G-80060098, G-80070101, I-79080320, P-80100242, NUDOCS 8105130200 | |
| Download: ML19347E667 (75) | |
Text
{{#Wiki_filter:. 994 I j78 COMMONWEALTH OF PENNSYLVANIA g PUBLIC UTILITY COMMISSION 2 i - - - - - - - - - - - - - - -x l 3 Pennsylvania Public Utility Commission Docket Nos. l 4 versus Metropolitan Edison Company and I-79080320 I Pennsylvania Electric Company, Respondents. 5 Operating agreement among Jersey Central 4 7 G-80060098 Power and Light Company, Metropolitan Edison Company, Pennsylvania Electric Company and g GPU Nuclear Corporation 9 10 Affiliated interest agreement between Mctropolitan Edison Company and Pennsylvania G-80070101 gt Electric Company, relating to the proposed () combined management of the two companies. 12 Petition of JARI, Incorporated, et al. for 14 P-80100242 an injunction to enjoin Pennsylvania Electric 15 Ccapany and Metropolitan Edison Company, and 'l for hearings. 16
x 17 Pages 994 through 1069 Executive Chambers 18 North Office Building Harrisburg, Pennsylvania 19 Friday,. December 19, 1980 20 Met, pursuant to adjournment, at 10:05 a.m.
21 BEFORE: 22 EDWARD R. CASEY, Administrative Law Judge CE) 2 24 blO0h.OO 25
f 9 994-A j79 1 APPEARANCES: t i 2 SAMUEL B. RUSSELL, Esquire ALAN MICHAEL SELTZER, Esquire 3 Ryan, Russell and McConaghy P.O. Box 699 i 4 Reading, Pennsylvania 19603 f (For Met-Ed and Penelec) 5 DENNIS S. SHILOBOD, Esquire 6 Strassburger, McKenna, Messer, e Shilobod and Gutnik i 7 3101 Grant Building Pittsburgh, Pennsylvania 15219 e, i 8 '(For JARI, Incorporated) f 9 STEVEN A. MC CLAREN, Esquire i P.O. Box 3265 ll i 10 Harrisburg, Pennsylvania 17120 -+ (For PUC Trial Staf f) 'f' f ~' 11 7 LEE E. MORRISON, Esquire .[ g:, 12 P.O.. Box 3265 W-p Harrisburg, Pennsylvania 17120 l 13 '(For PUC Administrative Staff) i l ? 14 f 15 a l ~. 16 -I. 17 4 i 18 l l 19 20 21 22, 23 J 24 t l 25 i l l
e t 995- 'r j80 il ( C O.N T E N T S i i Page 2 i, Bench. Decision and Order 995-A 3 t 4 WITNESSES DIRECT CROSS REDIRECT RECROSS S Frank R. Budetti 1003 1005 - 6 1048 7 8 g 9 EfHIBITS 10 NUMBER FOR ID5:NTIFICATION IN EVIDENCE I l, 11 JARI, Incorporated 1002 1002 12 Exhibit No. 5 .I l 13 Statelaent A 1002 4 3 14 l 1 15 1 16 17 l 18 I. 19 20 1 21 i 22 O 23 l 24 25 i
-.. ~ - e 995-A 31 Bench Decision and Order i I In its OrJer adopted on October 24, 1980, the 2 Commission. directed that the four above-captioned cases be . 3 1 consolidated for the purpose of hearings and ordered that the j 4 entire matter be referred to the Office of Administrative 5 Law Judge to conduct evidentiary hearings and to render a 6 Recommended Decision in the case within 90 days of the 7 adoption date of the aforementioned order. g ~ Pursuant to that directive, the undersigned 9 Administrative Law Judge was designated as the presiding go officer over this consolidated proceeding and, after due 11 notice was furnished to all interested parties, scheduled a g 12 series of hearings to be held on the fo11'owing dates: 13 Friday, November 7,1980 - Preliminary Conference 34 i 15 Friday, November 14, 1989 - Prehearing Conference { Evidentiary Hecrings-16 17 Monday, December 1, 1980 ) ) Cancelled 18 Tuesday, L3cember 2, 1980 ) 19 Wednesday, December 3, 19,80 20 Monday, December 8, 1980 21 Tuesday, December 9, 1980 22 Wednesday, December 10, 3980 23 Friday, December 19, 1984 g 24 As of today's date, _ W her 19, 1990, it has 25 become obvious to all parties of rorord, as well as the
995-D ' j2 C' presiding officer, that the testimony in the case cannot be 3 completed and the record closed unless two additional days of-2 hearings ccn be arranged at the earliest possible time; which 3 we have determined to be on Wednesday, January 7, 1981 and-Thursday, January 8, 1981. 5 Thereafter, the parties must have at least a minimum 6 period of time in which to prepa: e and file main briefs and. 7 reply. briefs in the case and the presiding officer will'then 8 have approximately 15 days to write a Recommended Decision; g e i whichwillbfsubjecttoexceptionsthatwillhavetobe 10 filed withi 5a severely abbreviated time period before the 31 matdercan, thereafter, properly be considered by the 12 3 Commission a't its next regular Public Meeting. 13 ? .I 14 The entire time-table for these events has been Ji l summarized and spelled out in the transcript which follows l 15 this Order and this arrangement has the consent of all 16 ?: 17 parties, subject to the approval of the Commission. l Accordingly, we deem it absointely essential to 18 the crderly conduct of this proceeding and, in the interest 19 20 of observing due process requirements, that the Commission-l e 21 fixed. deadline for completion of the case be extended for a i ~ 22 period of approximately thirty (30) days from January 24, 1981,-- O 22 or t ee=*===11 the co 1==1o= rue 11o *eeti=9 to de he1a i ' ) 24 on Thursday, February 22, 1981. 25 Therefore, it is ordered: t l
995-C j3 And now, this 19th day of December 1980, based 1 upon all of the foregoing considerations, we hereby order 2 and direct that the original 90 day reporting period 3 specified by the Commission's Order, adopted on October 24, l ~ 4 1980, -be extended for an additional -thirty (30) days -- the ji 5 iI minimal amount of time which has been deemed necessary to 6 conclude the case in accordance with the mandate contained. 7 I within the bommission's initial Order of October 24, 1990. i g AID IT IS SO ORDERED, Subject to the app'roval of 9 the Commission. T 10 l r 11 12 i. Edward R. Casey l 3 Administrative Lae Judge 13 1. r i 15 g 16 ~. 17 18 l 19 20 21 i f 22 l i 23 O 24 25 i
996 3 4 (~'\\ k# PROCEEDINGS 1 JUDGE CASEY: At this time I will call the hearing 2 t rder. I would first like to.ask the court reporter to { 3 continue with the same caption as appeared on the previous transcripts in the case. I believe the next page for your 5 P P U 6 This morning's hearing, as you know, is scheduled 7 f r the purpose of permitting JARI, Incorporated and those 8 associated with them, the industrial concerns, to open their 9 case and preseit expert testimony in support of their 10 Position. 11 (,) On Wednesday of this week, December 17, 19S0, a 12 I I copy of the prepared testimony submitted by Mr. Frank R. 13 2 I -I would assume that all Budetti arrived at my office. 14 Parties in the case have been provided with a copy of that 15 Prepared testimony at this point; is that correct? 16 9 MR. RUSSELL: A copy arrived.at my office yesterday 17 18 morning. As I indicated in the last session, I had to be in ~ Philadelphia yesterday; so the first I.had a chance to read 19 the thing was last night. 20 MR. MC CLAREN: Your Honor, I received a copy in 21 hand this morning. Apparently there was an ov:'rsight in 22 (~) mailing and I did not receive it prior to this morning. ij 23 1 j 24 JUDGE CASEY: I am simply looking at the date stamp l on the top of my copy; and it may have been hand-delivered -- 25
f 9 997 j5 I'm not sure.whether it was mailed -- but that is when it 'h arrived in my office. I, too, have had but limited time to I review the testimony, but I have read through it. If you feel that you would be disadvantaged by not having an opportunity to review the testimony, if you want to suspend for a half-hour or so, I would be willing to do that if you feel it is essential. MR. MORRISCN: Your Honor, if I might, I received a'. t copy achaHy late. Wednesday a he moon. However,1 am de 9 ,l ). attorney representing the Administrative Staff; from my g r perspective, I have extremely limited knowledge of these gg The firm of Theodore Barry and Associates has not g matters. 12 received a copy of this testimony at all, so I don't know 13 that even any time this morning woulc. place me in a greater 14 p sition. I have a considerable prc,blem with presenting any 15 cmssbexaminadon at Ms point, amough I wouM pmbaMy 16 have just a few questions of fir. Budetti. 17 But I think, fron our perspective, that to the 18 extent that the testimony deals with the TD&A report, we simply 19 have not had an opportunity at all to review the testimony. 20 The extent of my review would not change that significantly. j 21 l l 'E CASEY: The problem works both ways, of 22 I I Budetti had to wait until the conclusion of theS: 23 course. .\\lr. i December 10 hearings to review the testimony as well as the 24 Theodore Barry and Associates final report to the Commission; 25
998 j6 /~'; and I am somewhat surprised, with the time' constraints, that g he was able to get his testimony here. So it has been a 2 problem for everyone associated with the case to be on top 3 .of all the testimony. I dcn't know what we can do about that, 4 i except to realistically present the problem to the Commission 5 and request an extension. 6 But with the time factor,.having to give JARI a 7 fair opportunity to present their position, and then 8 9 Mr. Russell, I think, has a pending request to present rebuttal testimony, we may need an additional hearing beyond to 11 today. The only thing I can think of is perhaps a day between Christmas and New Years. But unless we get a (/ 12 13 general extension of some kind, I have a' deadline of s January 19 staring me in the face, and we have to get in some- ' 14 kind of a briefing schedule at the close of the evidentiary 15 i 16 hearings. So-I don't know what we can do about that -- and 17 18 Mr. Budetti is here today and has traveled a great distance 19 from St. Louis, Missouri. If you might be suggesting.that he 20 be available at a subsequent date so that the Theodore Barry 21 and Associates witnesses will have a chance to review his prepared testimony and then you can engage in cross-examinatieng 22 23 that is a difficult thing to accomplish because of the ( }) 24 expense. 25 Now, the JARI interests, of c^urse, are paying
999 l l I j7 Mr.Budetti'switnessfee--Iassumethattheyare;andifhh ,i had to come back, I'm sure it might be at considerable inconvenience to himself and added expense. 3 I'm open to suggestions if anyone has any 4 I observations or suggestions. 5 MR. RUSSELL:.May we go off the record? 6 JUDGE CASEY: Yes; we will go off the record. 7 (Discussion off the re.ord.) 8 JUDGE CASEY: We will go back on the rec'ord at this I 9 time. 10 I As a result of a discussicn off the record, with 13 the assistance of all attorneys of record and, in particularggg' 17
- 4r. Samuel Russell who spelled out a chronology of events, 33,
i all the things that must be accomplished before the record in 14 i l this case can be closed, I will ask Mr. Russell if he will 13 read the various dates and the events that will occur in this ig, y. 1; l[ case, which will require a 30-day e:: tension from the 22nd of P d i ic'; January, which would take us 30 days beyond the expiration t I O l 29 ' date as set forth in the Commission's Order of October 24, i 20 1980. So at this time I will ask Mr. Russell to read into i 21 the record the schedule which we hvie agreed upon during the I I l 23 'off-the-record conference. I hi < l' j
- j HR. RUSSELL.
Under the contemplated schedule, the ll 1 record would close either on Januar 8 or possibly January 9, f Il
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1000 { j8-i i 1 1 1981. Main briefs would be due approximately 15 days 2 thereafter on January 23,~1981 -- and I think it is under-3 stood that the main briefs are to be delivered by that date 4 to the respective parties. Reply briefs woutd be mailed i I 5 out not later than January 28, 1981. The Judge's Recommended j 6 Decision would be handed down on February 13; and the parties 7 would have until February 19, 1981 within.which to file any' 8 exceptions to the Recommended Decision. e 9 JUDGE CASEY: Gentlemen, is that agreed as read 10 into the record?, j U l MR. SHILOBOD: That is agreeable to me, Your Honor. ( 12 MR. MC CLAREN: Yes; it is to the Trial Staff. I i 13 JUDGE CASEY: 'The Commission Administrative Staff? 14 MR. MORRISON: Yes. 15 . JUDGE CASEY: Also the counsel for JARI, Incorporated 16 and associated interests. And it is agreeab'e to the l 17 Administrative Law Judge. I la Off the record. i' 19 (Discussion of f the record. ) 20 JUDGE CASEY: On the record. i 21 At this time, having disposed of all of the 22 scheduling problems, we again have Mr. Frank R. Budetti, the () 23 expert witness for JARI, Incorporated available. His pre-24 pared testimony in this case has been pre-marked for purposes 25 of identification and distributed by his counsel, m
1001 i i t WewilldefertoMr.Shilobodatthisllk Mr. Dennis Shilobod. 3 point and ask him to identify Mr. Budetti and submit the 2 prepared testimony in lieu of direct examination. 3 MR. SHILOBOD: If Your Honor please, I would like 4 to request that before I proceed with Mr. Budetti that I be 5 Permitted to have another exhibit marked for identification o purposes and introduced into the record. 7 JUDGE CASEY: Very good. 8 g MR. SHILOBOD: I request that there be marked for identification purposes as JARI Exhibit No. 5 a three-page 10 document, which is a letter from the Washington offices of 11 the chief counsel for GPU, who happen to be the-attorneys 12 ~) representing the various applicants of Penelec and Met-Ed 13 before the Federal Energy Regulatory Commission with respect 14 15 to the request for approval of the various officers to serve 16 more than one capacity in each utility. I 17 I won't read the contents of the letter. The gist j la of it is that it sets forth with particularity the specific j i 19 provisions and the reasons why a merger, in its purest 20 sense, is not permitted under the various mortgage bond 21 indentures and debenture indentures. 22 I would request that that be marked for.identifica-23 tion purposes as JARI Exhibit No. 5 and introduced into the 24 record. 25 JUDGE CASEY: Any objection? j
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-i[,' - f. r jl0 ~) MR. RUSSELL: No objection. t li 2 MR. MC CLAREN: No. JUDGE CASEY: It will be so marked and admitted.- 3 into evidence. 4 s (Whereupon, the document was. marked _ / 5 as JARI Exhibit No. 5 for identifi- - 6 cation and was ::eceived in evidence.) J. 7 MR. SHILOBOD: Three copies of that have been \\ 8 given to the court reporter. t 9 I I also request that there be marked as JARI State-E 10 ment No. A a.60-page document setiting forth the direct 11 5'. tesi-imony of Mr. Frank R. Ducletti'. The heading of the page. 12 i states it is the " Testimony on Proposed Management Combina- ' l. 13 tion of Pennsylvania Electric Company and Metfopolitan Edison I 14 Company." May it be so marked? j-15 JUDG2 CASEV: Yes, it may be marked. 16 i (Whereupon, the document was marked 17 as JARI-Statement No. A for ,{ identification.) 18 MR. SHILOBOD: May we have Mr. Budetti sworn? 19 J'JDGE CASEY: Yes. 20 Whereupon, 21 FRANK R. BUDETTI i 22 I having been duly sworn, testified as follows: 24 . n...:._.:. ,.c. 25 9 +
~ w- . 'if 4 f (*, . :s toof jll 1 DIRECT EXAMINATION l 2 BY MR. SHILOBOD: 3 0' Please state your name.and.'usiness address? b 4 A-
- My name is Frank R. Budetti.
My business address 5 is 1415 Elbridge Payne Drive, Chesterfield,. Missouri, 6301'T s 0- . Did you prepare the written testimony that has been marked as JARI Statement N[. A? S. 7 i. 8 A. Yes, I did. 8 a ,8 ,0 If I were to ask you kIle cuestion's as set forth in c lik ih;- ~ JARI Statement No. Al would youriYanswers bel the same? 10 . p,. '. O -q. -: s Yes, they would. -f ..E<: 11 L A. M g -JA. ..,. v. "t Q. Are tiiey true and cor$5ht to the$est of your ' h ) 12 0 .:}: 13 know1' edge, information and belief? . ]h, 1 b- .-z. 14 A. Yes, they are. '}[- YL 4 15 MR. SHILOBOD: If Your'.Henor please, I would like y 16 to introduce into evidence JARI Sta ement No. A, subject to such cross-examination and motions to stri5i,e as may be 17 .T 18 developed in cross-examination. I8 MR. RUSSELL: I would object to the offer at this 20 point in the game before any of ttese other things have taken
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'I think in due course, when cross-examination is 22 finished, it would be a far more appropriate time to make an
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offer of this statement. g 23 i 24 f MR. MC CLAREN: I would jcin in Mr. Russell's 25 comments. I think the offer should await cross-examination.
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.[ (dV- [1004 'bj;. c g- ,s,... j l2.,, y,.*, t m? a c, c . ~. f 4 -1 JUDGE CASEY: It may be just as well that the intro-2 duction of this prepared testimony be deferred, because . 2 Mr. Budetti in icated that there might'be amendments .4. necessary, and perhaps supplemental testimony, af ter he has-5 had the opportunity to review other information and evidence y:76 in the case. So I will grant that objection at this time. 7' It has been referred to for purposes of identification, but-8 its introduction into the record will be delayed until subse-quent hearings. 9 10 MR. SHIIDBOD: Mr. Budetti is available for cross-11 examination. k- ~ h-MR. MC CLAREN: Your Honor, since I received the 12 c l v) 13 testimony in hand only this morning,. I cannot go forward with e e 14 cross-examination now. I may have some later this afternoon, 2 15 and would reserve the right to cross-examine Mr.. Budetti a't a 16 subsequent hearing. 17 MR. SHILOBOD-If Your Honor ~please, I would like to-18 on the record extend my' apologies to Mr. McClaren. Mr. Budetti 19 served copies of this testimony on the various parties last 20 Tuesday by Express Mail. For some reason our office must not 21 have given him Mr. McClaren's name, because it does not appear 27 on Mr. Budetti's cover letter. 'I did not realize that until last night and, as a result, Mr. McClaren was not given a 23 V. J 24 v I hope no offense is taken; copy until early this morning. +... 25 it was just an oversight. g:
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t 10057 'i s e ' h 3: ,_ ;... j;.1 ^ .s u. ~ .:g::. r.. jl3 i gy .~ a MR. MC CLAREN: No offense is taken. W 1 v 2 JUDGE CASEY: I understand. l 1 3 Mr; Russell, do you have -- ( MR. RUSSELL: We received Mr. Budetti's testimony. .I I 4 yest.arday and have not'been able to complete preparations for ~ 5 .~ s a fully definitive and, substantive cross-examination. N w-We have a number of. things which'we would like to-7 T disposeofthiswaybywayofperhapsinformationalcrossy. 8-5 9 examination. Lv 10-JUDGE CASEY: Very good. Proceed. 7., I 4 CROSS-EXAMINATION 11 t, i l C',,' ~ BY MR. RUSSELL: ~ ' - t 12 i v h l e 13 4 Mr. Budetti, what, shall we say, full corporate.. i 4 g a w mergers of two or more electric utilities have you personally' 14 15 participated in? { 16 A. None. j i 17 g would the answer be the same with respect to 1 i 18 utilities other than electric companie'? s l l 19 A. Pending your definition of " utilities." 20 g Public utilities. l 21 A. I was involved with the corporate merger of 22 Colorado Interstate Gas Company and Coastal States Gas Company i 23 when one purchased the other. They had distribution regula l 'v' ) 24 ted utilities, so to the extent -- l 25 4 Was that the purchase of facilities?
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u .. a . ~.. n. ,m.. The purchase of one-company by a; other. It was a I 1 S 'A g v merger of stock under whatever class or whatever action that.. 2 3 . was. .c ~ .4 4 What combinations 'of. management of two or more y.. x.. . electric: utilities similar to ~ the present. proposed combination-5 of Met-Ed and Penelee management have you personally partici. 6 y . pated'in?~ '4' O.c. 7 8 A Isn't that the same as the first question? Did you: 9 ask me what - ~ to 4 What combinations of management comparable to the. proposed combination of management here of Met-Ed and Penelec -11 have you personally participated iri? f-1, 12 13 A You're differentiating " combination" and " merger"?" ~ 14 S I will. state the question again. I am talking 15 about the proposed management combination here as against the 16 full formal corporate' merger. I am refer-ing you now to the ' 17 proposed. management combination which is one of the subjects la of this proceeding. What such similar co ntations of manage-19 ment of two or more electric utilities have you personally 20 participated in? 21 A None.- l 22 4 Would the same be true with respect to public l 23 utilities other than electric companies? f 24 i A No. The Colorado Interstate and' Coastal States.are .r. ' ) ] i l l 25 loth public utilities, have public utility aspects to them. j i 1
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.~ - y,_.., ; .g ~: y. .,,e y, ,,,3 .~ m, f i g Was that a combination of inanagement similar to wh 2 is proposed here?
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A. You're in the middle of semantics. The companies' 4 merged, and.they put their management'together. To thatl
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s a; tent, they combined their management. 1.3 6 4 Youfre saying'it was a formal merger though? 7 L Financial or management? 8 4 Whichever. 9 A. There is a difference. I draw no distinction t l ? 10 between taking managements and putting them together. You can e A 2 7 11 call that a merger; you can call.that a consolidation; you ~ O 12 can call that a combinationr..you can call' t at an integratic v, q 13 you can call it whatever you want. They put both their' ~ W 14 managements together; they also put their financials together. Thatistheones.tuationyouhavecitedheretofore.l 15 4 16 A. Yes, sir. 1.- r ~ 17 g Directing'your attentien t'o page l of your testimony,j l i 1 i 18 would it be correct to state that the bulk of your appearances : 19 before regulatory agencies has been in connection with rate 20 case matters? ) 21 A. Including tariff design'in rate case matters? 22 g Yes. 23 A. es, sir. h
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. n y) 1 A. I am a certified management consultant and president ~ 2 of a regulatory consulting firm that has me, one' secretary .q 3 and two people who work'on a free-lance basis, if you will,< 4:~ =. . s 4 for mm. L also have a business.. brokerage'companyfunder-that.'W3: '.v,
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. e s What was your assignment in this proceeding,
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7 4 .~ r 'id%, Q ' D.'., ~ 8 Mr. Budetti? L ' ns. e u J... ~. x. J 9 A My assignment was to review the petition by the. 9 ~ 10 companies for a merger or consolidation of management and, to ~
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the petition came out. I first re'ceived just the basic, 14 -15 petition of the company, the filing before FERC, JARI's. 16 intervention request; I started looking at the material at
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17 that time ~periodi. 3 4 Approximately how many' hours have you spent' working .18 19 on that assignment?. 20 A Hundreds. g Can you give us your best estimate? 21 22. A Between 200 and 300 bours. g. Approximately how many hours did you spend in pre - T 23 V i .,4 paring your testimony, wricing'your testimony?- 25 A That was all part of it. .I.c ~ < ~ ' m.-- e w .e w.
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'%f ~ .i fu i. j l7'.. p 1 4 Approximately how many? 2 A. I have no idea. l 3 4 . Could you give us your best est.fmate? .t. ~ A. Q.1 write itr in sections.- 'I jot down notes as I read; 4 . x Every-time I come across an ' area 'I disagree with or I high-5 light,. I take it and put it onto a separate piece of paper., a . s, Y' I have no idea.' i 7 8 4 Would it have been half of the 200 to 300 hours?- ~,' 9' T A. 'I don't know. 10 4 .Can you state what you have been or expect to be 11 Paid as a result of working on this assignment?. 'l ~ 12 A Can I or would I? ) '.Would you?',. .[ 13 0 s e 14 A. Do I have to? I e '15 g Well, I will ask you if you.will state for the i 16 record. 17 A. S25,000. 18 0 Is that amount predicated upon the expenditure of 1 f 19 any specific amount of time? 20 A It is an upper level guarantee; so the answer would 21 be yes. If I exceed the number of hours at my billing rate, l 22 then I don't charge them for that time. f gli 23 g What is your hourly billing rate? V ) 24 A. When I'm on the stand, $100;.otherwise it is $80 an l 25 ' hour. [ ~ 1 iI
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3.: , _ ~,.,. %~ ': " L ~ -4 e- +.%- -w ^' ^ A:! $18 = ~ u) ). ' g 4 Directing your attention to pag'e 4 of your testi-1 v 2 . mony, Mr. Budetti, you refer to the= suggested management mergerofMetroholitanEdisonCompanyandPennsylvania- ' i ~ 4 Electric Company. Could.you~ define the term " merger" as you,; . 1. c 5 use it at that place? 1j ,y 6 A " Merger" is the, putting together.of two managements 7 -4 Could you be a ~1ittle more, specific 7 ~ 5 8 'A You mean how you put them together? 9 What you mean by putting together two managements. 10 A D9 fining a new management structure;. taking a 1 I 11 management.from one. company, taking a management from another company, determining which,. if any, of those positions would-12 la exist within the new one and merging the two together. 14 G Are you aware of the. possibility that the term
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" merger" may have other definitions than what you have just ^ 16 given? ? 17 A " Management. merger" or " merger"? 1. 18 G The term " merger" in any sense that you -- 19 A " Merger" has many different meanings, I'm sure, to 1 1 20 many different people. 21 g Well, to the extent that you have used the term 22 " merger" in your testimony in referring to a merger of Met-Ed 23 and Penelec, are you limiting its use to the combination of' ) 24 the management personnel of the two companies? ' 25 A Yes, sir.
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on pag'e 13 and various other places throughout yog S 3 l testimony.you make reference to'the term " consolidation of 2 l management," or " consolidated management." In using that l 3 l 4 term,. are you referring to the same concept as.you have j. ~ 's defined.as being referred 'to in your 'use of the term " merger"? E*S* 5 L-t* - ^' A-6 I_ 7 g So would it be correct to say that throughout your' testimony where you use.the term " management merger" or 8 9 " management comb 3 nation," you'rs referring to the same ConCGpt? ~ 10 A. Yes;-and add " consolidation" to that, which is the 11 12 other word you saw. l 13 JUDGE CASEY: ' Meaning that you're using these 14 terms interchangeably in different areas of your testimony? 15 THE WITNESS: Yes. I received, Your Honor, docuyents 16 from - "The Combined Management of Penelec and Met-Ed, 17 Preliminary Allocation'of Payroll and Related Expenses," for 18 instance. And they talk about combined management; they talk 19 about corporate merger, when Mr. Donofrio got up. They then 20 call it combination -- I think they're meaning the same thing 21 I'm meaning, but ycu'll find it in the corporate records; 22 corporate merger, for iratance. I was just using it the way 23 the company was using it. C. l ) 24 BY MR.,RPdSZLL: 25 (L Ytie were using it as you have stated it here on the 'l l - _.,.,,. ~... -., _,, - _.. _,,,,,,,,,.,,
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~ .s - .a". j g ..,s , r. Shilobod sent all' material to me. 3:f?J. .:g3 'E: M 1 , n. '~ 7 G' Are the-various items' referred 'to on pages: 5 and 6 8 still available to you?' 9' A. Yes -- let me make one correction. I also received. some material ~from a firm called Georgetown Consulting Group.. to it They had.some of the old testimony from the GPU and. Met-Ed ~ 12 cases. And yes,j it is still available to me. ~. j' 4 13 4' ' On the. bottom of page 5 you refer to the cross-e e 14 examination of J.G. Graham and F.D. Hafer a-.d the direct cross- ? 15 examination of William G. Kuhns and Herman Dieckanp. Can you 16 identify which cross-examination and direct exas.ination 17 you're referring to there, which testimony 1.n which case, so .18 we understand each other, what we're talking abcut? 19 A. _Mr.' Russell, I didn't bring that with me. I have -- 20 g Maybe I can help you. I'm not.interes ed in 21 trapping you. .I just want to get the information. Would this 22 have been testimony of those persons in sc-called Phase 2 this 23 past spring in the proceeding at I-308? ,d 24 A. I-don't know what it was. I sin.p'.y read it in its s-
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+. .w ~ head yes, so-I assume that is correct. ) g 2 g would the same source apply to the next two i ems,. . the testimony of Theodore Barry and Associates', Perry Wheton 3 s.. ~ r.. and Thomas Dwey and 'of : Robert Parente, James Hogan..and ~[hM ,3yj&. ~- 4 i .q .... " ~ 5 tastimony.of] James K..Maden? J.i jy;. g. N ay', j. ~ if on want me. to. 6 A Subject to check. I do have-that, J lock, but subject to check,-if you're telling are it is, it may .g be. g Well,I'mjustsayingsubjectto. check,'istha[ 9 0 correct? 7' 10 .c A .Yes. Subject to check, the majo,rity of this' 'If 11 material dealt with either the accident and everything that' 12 A. x..m.. - U T e n 13 happened in late 1979 into 1980. ff. :+:f, ' .E* -
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14 0 At line 11 on page 6 you refer to " Volume I, Pa ts-1, '15 2.and.3, Volume II, Parts 1., 2 and 3, A Report to the, i a Commissioners and to the Public." Could you identify those. 16 17 volumes? l 18 A Those were, I believe, the NRC one. The one above-it was the ' Governor's Commaission -- again, I'believe that 19 l l 20 that was probably NRC material.- 21 g Well, would you advise us in the interim if it were-22 something other than NRC material? 23 A Yes, sir.. 24 MR. MC CLAREN: Could we also have it identified v' 25 as to which NRC material? ~ ~ I
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I will prepare the titles and the.,. ~ . ~3;- ,', 4 dates off. of all of those ami send that to you; then you wi1I ~. ~ .~ w ~ "..'at,W know what I used -as backup.( . j .. m.. ,5 ~,,.._.g '?,h.h,?. ,g BY MR. RUSSELL: ];, O I .,9 Kh 1 S. On line 13 you refer. to a photocopy of direct 121 7 testimony of Theodore Barry and Associates. Could you identify ,...s what that was? g A. It was the testimony early this year of Mr. Wicker-go and people like that, if I remember correctly. 11 ,~.y 4 My question is: ' is this something different from ,e. - 12 ~ whct appeared earlier in li== 2,. 3' and 4? .y. [ I 13 A.' It may be. Again, I will give you the list. 14 Lis g All right. Will you ide.ntify what that -is. A. Yes. 16 n G . Would it be correct it:r, say - well, we hold further questioning until you can 4d==+""y specifically what these are-is l as' to subject matter. 19 ~ Could you identify, :Htr - Budetti, what, in connection-20 21 with the preparation of your_ toessimony, was the most recent:. ~ Met-Ed balance. sheet and income statement that you studied? 22 23 A. No; I cannot identify.. h 24 Could you give us. an tqproximate timing? a ). i( ?. 25 l A It would have been -the related to one of the rate ~l 1 ll ,1 -e_: q - ri U o
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.S 4 g What operating statistics'.of Penelec,- Met;Ed or GPU~ G{). did you study in connection with th'e preparationfof'.your. f. r 12 L v. .v 't. 2,: -:: y ~ 13 .e e. 1 c testimony? r 34 . 7: .T + T s ~ A. The material contained int the; TB&A report' and, th'e -15 = f y .A. Booz-Allen reports. {, j 16 7 Did you review the revo.lvi'ng credit agreement to 17 4 4 ~ ? which I think you make some reference in your statement? 18 A I read it. 19 l 20 g' Who supplied that? 21 A. That may have been the material from Georgetown 22 Consulting Group. i 23 4 Could you identify when you provide the other infor-t mation exactly what it was the Georgetown Consulting Group l *) 24 h 1 ? s l " ' ~ 25 provided you with? l 1 o i I i 1
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8 .w g . I looked [5t other-reports and material I had.i_n t. y: textbooks, et ceterg. Just a general. background preparation g 4 7 fro:n an organizational concept point of view, just to d 11 + t refresh my. memory in..a lot o those areas. 12 When you, say.you looked. at orgsnizational worg ~ 7c .q. 4 }. 33 j-that you had done in connection with Touch Ross, you mean g what? 15 A Well, when we do any consulting jobs -- and 300 or 16 400.of those -- you always, obviously; start up in a manage-3., ment review,-looking at organization charts snd the manage-la ment process, because almost all consulting tihat we did starts 39 with that kind of approach, if you will. 20 ~ We did what is called general management consulting, 21 'ihich meant we started with the overall level of management's.. 22 organization, controls, authorities, resp,nsibilities and-23 how those permeated down to the other levels of the organiza-24 tion and how decisions are.made. 25 ~ l
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'e '.j f 0 + 1.i.:. j 251 ; - 7,,, O-B In the pe Tormance of management consulting work g with respect to any of the given work that you may have done 2 before for Touch Ross, did you go out to. visit the company 4 3 = and inspect the company's operations? m:.T.- E' . 7. - h.5 A- .Usually we did; yes, sir..:.:- ,c Didyou.VisitPenelec'sheadquartersin-Johnstownh.\\ 6 h 'A No, T. did not. 7 you dsh MebW s hea@aders in ReaMng? 8 A No, I did not. g 4 Did you. Visit any district offices of either rf the. gg 1 two companies? 11 A. No, I did not. 12 g
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companies? 14 A. No, I did not. -15 4 Did you visit or inspect any. portion of either one. 16 of the companies' service territories? 17 A. No, I did not. 18 l t l g What interviews, if any, did you.have in prepari..g, 19 your testimony with management personnel of Me -Ed, Penele2 20 or GPU? 21 ~ Interview summaries or interviews? 22 23 4 Interviews. O 24 L I had interview summaries. I did no interviews. ] 25 G Did you have any interviews with any non-managenent _., j. } 0 .e B
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%"U ' - j-g !5 -{ h, sire fif-S i 4: 1Directingyour. attention,topage9of:your.testiIn.- a s' 1 a mony,-at or about line 8 you refer to 4 concept of the .g 7 regulatory identity of Penelec. Could you define what you a a -i mean by that term?' 4 E' _. y - to 'A. Yes, sir. Page 40 and -41 of my testimony I talk e (_ - tt about regulatory identity that has built up over time. I by r.z 12 that mean'the differing,in thit, instance between Penelec and )
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7 o. 4 _C Met-Ed, customer characteristics,;the growth, characteristic, ' 13 14 geographical differences that impact customer service from a 's time and distance to serve point of view and other regulatory - i 16 kinds of treatments of finam-iial, tariff, et' cetera, that.are , 17 presented specifically for Penelec. That may be different -- the, point I'm making here - from that of Met-Ed. I have la lg quoted -- and' I don't need to read it -- the' subtle differences 20 that TB&A reports about the different environments that the 21 tw'o utilities grew up in and 'the fact that there are signifi. ~ 22
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- 23 G I'm puzzled by the term " regulatory" as an adjective o) . 24 for " identity," Mr. Budetti. Could you perhaps be a little ~, 25 more specific as to the meaningfulness of that adjective in 9 g g b b N l ?
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$ 27-lgll the use of this term? ] 1 A. When you're. looking at an af filiated intere;;; point 2 of view, in my perspective,.and'you..look at the. material.that 3 is presented. before aL regulatory body and you. are' locking at{ a 1 -: 4 .,. ~.. l .,,"s certificated area, " regulatory identity" means all.cf theseq' ) ~ . things that are uniquely and specifica. ly,important n that;. g } -3 certificated area, ' to that utility and,to,its custaine s within s that particular area. e*. e'm t.' s To the extent you choose to nrge and n % : mmon,. g. j. .r. 4 - g. to .if you will, all of the management polnies, procedur.s, to ~,, - f. g .t - 11 the extent you leave 'less than'.a full :..anagement tea- :here 3 q- ~ e 12 to present the specifics of thaticerti;icated area, ..on the g l 5 %,{- W l1 is a regulatory-identity point';of' view problem, in}my :: pinion. 13 14 That is what " regulatory identity" mear.a to me. T ~15 4 Are you familiar with the mar.ner in which, -1 16 Pennsylvania Electric Company,.:for ext:, ale, reached ..; point it presently stands at in terms of ser cice territo$y c.1d 17 i-1 18 operations? 19 A. At what point in time, sir? 20 g Today. Are you familiar wit..- its corporat.1 ,istory, 21 how it developed the corporate service territory and ::e 22 operations that it has today? 23 A. I read how, from the early 1900's, the thir; was I .s put together by merging of small, stan.-alone utilit:,s. f) 24 25 g Are you familiar with the Nr cthern Pennsyl. ciia O L----
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s x, n / .'E g 1 gs, You make reference ist your. testimony, Mrd Budettih j.f J. y Lj ^ 1 s to centralized and decentrali==C management. Could you .4-23 H iy .c define 'in some reasonable detail what,.in.your opinion, a? "- 7 \\^ 's centralized electric. utility organization'would look'like? f y y.. .w.
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9 A. Yes, sir. ' Depending on the ' decision-making process;; q y.3 Lv. Y. io that is going to occur, a ' centralized eledtric' utility would - c ..? d.. t e have the majori,ty.of,its decision-making made~by a.few key,,b.- 4 11 4...c. p.. t. e M, top executives, not 'unlike. the. organization for the proposed.M. 12 Ac :- ,k.jp }. ? ,j s) { 13 management combination of GPU's Pennsylvan,ia operations) -( cip, ~g c.. v. Exhibit VI-4 on page,p.6135-- well, it is be' tween page.12 and 13 [ 14 .g 4 c. ,?. .15 of the TBEA report. 3 .-t. 4. . J'.. [ h '.s ~ .' " (' Y, IS A centralized operation should have, in an' x .r electric utility, a very 6 > @ and a very comprehensive..;'J l i 3 17 .. t. q management informe. tion and wi.ing system that collects.as- ? l 18 19 much information as it possihty.can at the lowest levels of 20 management; because in centralized organizations, the 21 decisions that typically would be made'at the field. level-22 with the 15 formation that' mrints' at field level or any other-low operational level is no lager being used to make key - 23 <.g managementi decisions in that point, but. instead flows. to the - 24 ...f, top where the ' centralized organization' takes and pulls that. i 'is .p,
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i > -^ .h O information together and then makes the decision. g v A centralized electric utility organization would 2 additionally hatte, and should have, some very strong manage-3 ment.at three or four key, top positions. In this instance. m. the keys defined by,' at least, TBu are Senior VP-Customer.;2 5 Operations, Senior VP of Generation, Senior..VF and Chief - -6 t..* Financial ' Officer, the three of them're, porting.to the. 7 ~ President.- 8 Those; positions must be filled with very strong.., _ p people who, given. the-source of information beneath them, are, l J., to .\\ i 4-able to begin t$ make themselves many of the day-to-day .'s 11 . p, ' p. ex s. operating and cbordinating decisions reckuired to run.an. m - f-12 r)) \\. v,., ..e electric utility. the size, let's say, of 'Penelec or-Met-Ed..,', j; 13 .Could.you identify more specifically.the table of L. j. f 14 4 '15 a centralized organization you made reference to? Were you w s. 16 referring to the TB&A study? .i d,u s. 17 A. That's what I said. I said' Exhibit VI-4 in the h is TE&A report. s 1 19 4 Under a centralized organization as you view it, what kind of decisions, if any, would be made at the district 20 21 level? k Few, if any. 22 23 4 Pardon. ) 24 A. Few. ~ What kind of decisions would be made at the division 25 g 'N
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1*V817 1 A. Dependir9 on what you're including in your 2 3 . If ycn*re including.some transmission, distribu. divisional. 1 tion, you would bc making people-related decisions at that w 4 .c, arear but all tec2.dcal decisions,'. all planning decisions, ' y s all construction cadgeting decisions, if you will, are p ~ probably all goi.g to be pulled up to ag much higher level, { 7 2-than they would F. at either the - at the divisional. s reference to transmission and distribution g 4 You :nad p matters at divi:1cm - Would you explain what you.were 3o -l 11 referring to? I": 2:ot sure I understand. 12 A. It de m !3 on what ou're doing at division.- If. 3- ) you have operat.m.1 divisions as opposed to customer relations l 13 and installat1CD Oi services, you may be doing at something 14 '15 called the div5:i"- -- I don't know what your terms are; I'm. using sry t erms "' division" meaning a smaller un'it, 16 geographic area ci size at which a number of functions are 17 la Performed. Tram,-iission problems, not transmission construc-tion -- clearly, nia distribution level power lines, an 19 extension of t3_w.e to new customers is typically done at some. 20 t 21 smaller unit - w!'::e saying divisional as that smaller unit.. 22 There ::afy be. billing, or at least collection offices 23 in a division 'Fm:e is engineering at the customer and v3 24 distribution Iewm ' typically done at those kind of areas. .,2 - - m 25 Some af einose functional things, like engineering, (.Q _ ^-
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THE WITNESS: VI-2 in the TB&A report, the g September report It says, "Present corporate organization' 9 .of. Pennsylvania. Electric Company," and it is two pages a te. g VI-4. You will.see that there there was a VP of Operations gg and a VP-Technical and some division inanagers. Now,if you 12 y stop and think ~about what ~is happening, under VP of Ganeration. 13 ~ and.VP.of Customer. Operations I now have some very specific 14 kinds of things happening: the VP-Divisional Operatic::s, -33 VP-tid Engineering and Operations. There is no such thing is in the present Penelec organization, for instance, at least. 17 e-shown on the chart. is VP-Generation Engineering as opposed to Senior VP-19 Generation looks like an additional functional engine c::ing 20 organization being set up under that Senior VP of Generation. 21 VP-General Project Management, VP-General Maintenance l 22 and Construction, those are functional kinds of operations 23 e O) that are now taking back to them in one location; and I 24 assume, "if' I~ remember correctly, all of these people - a now 25 j l
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'q.:., q of' these VP'si-I- assume some of those will be there..,The:.Q., 5 4 . generation,.if.I remember correctly, is in Johns r.:n. Chief. 6-M O.;, Financial Officer --- and I don't know where the stomer - 7 C 3 t.. operations are going to be split up into. i M g .,.c. ,~ . V-g . But they will be centralized. You wil _.: ring it.. -2 I. r - k .h- .-e back to an offices if you will, one place to make decisions' to N w that typically would have been made ac lower levc ' in a 11 .. f decentralized operation. 9 12 a .y a., ~ 13 4. Firs't oI,, all, mir question relatied to d;. ;sions; and i d*, using the term "d;i. visions," shall-we use them it. nhe sense 14 g 15 that both Met-Ed.hnd Penelec uses them and " dis.
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,Y 16 in the sense that,', Met-Ed and Penelec use them a:. my g 4 17 question was: as you would see~it, in a central: red organiza-l 18 tion, what functions would take place at the divir.~.on level? ,i I - 19 A. In a centralized? 20 g Yes, and without reference to the prc:. .d manage-l 1 .21 ment reorganization.. I'm asking you as a matter ' manage-1 22 ment consulting practice, what functions would tn.e place at j 23 the division level in a centralized organizatior.: structure?. l v 1' ~..I 24 A-No. re.fe..rence to any of.this material t.'-t-is.in 25 front of me? [
1D25 *l j33 l l 4 No. 1 A Just the general eiectric or any other utility? 2 3 g In electric utility operations, what, as you view it, would be those circumstances taking place at the division g level? 5 A Assuming that we do not use any of this material -- 6 you do not want me to.use anything that is presented. 7 g g I am asking for general information without being g bogged down with these specifics. i A But these specifics are also general. I mean, 10 there aren't that many things that happens in electric -- 11 12 g I posed to you my question. Would you do your best I k 13 to respond to it? 14 A Without looking at any of this material, in a 15 general centralized organization at a divisional level as 0 16 opposed to a district level, and assuming that above the i 17 divisional level there is a Vice-President or Manager or 18 Director level, and above that is a Senior VP level and above that is a President's level -- taking it functionally, We 19 20 would have te worry about the few things that an electric 21 utility does. It gen 3 rates, transmits and distributes. It l 22 has a series of customer operational kinds of things. It has l l l t 23 financial and it has what I will call suprort ser/ ices. 24 Taking a separate cut in terms of some of the majo 25 functions that we talked about in terms of budgeting, _ couronwqrrce caccx-wr:m u megom m sp.y,,
1026 l 34 r~^ l (_) 3 l sc-caul _ ig - - that is of equipment, scheduling of equipment Il ' P U ' '. ' e, financial reporting, operational reporting, 2[d ! pc sonnel hiring and firing -- 3 4 Ycu're now talking about the division level? 4 A I'm going down to that. You can't just say what y they're going to do. When you're talking about a centralized 6-organization, nll of those functions have to happen. Some of 7 them may or may not happen at the division level, depending a h g how nuch you pull away from there. You've asked me to do my description of the to d' isional level as dietinct from the district level. I'm 11 hr ;ing to take the assumption -- and I'm saying yob are also () 12 ) 13 ar
- aing, therefore, that it is distinct'from the VP-Manager-14 D2 ector level and clearly distinct from the Seniot-VP level.
15 l '. i.e just that one layer in the management organization. 16 do, since you don't want me to look over here, I'm 17 sc.ng t. do my own which, I have to tell you, is not going to 18 1 't much differently than that, but I will put that aside. 19 And we are going to find out what is going to last at 20 e 'sicnal. sutting together an organization is something that 21 22 i: s inc to take me a few minutes, or are you looking for.. l 23 l 'm 2 answer? c l 24 G I'm looking for a responsive answer. .,i 25 4 line. So at the divisional ;avel, there. y be the .s !i
1027 335 ,gi i beginning of budgeting. 2 g And by that you mean what? l 3 A The first budget preparation for people levels. 4 O The initial step with respect to that ~ district's 5' budget? 6 A There may be. It depends on which area. If 7 customer operations is the only thing at the division, then 8 one would start there. Financial, probably none. Typically, 9 in a centralized organization, the ca1culation of the costs 10 of people is done at a much higher level rather than imposing 11 upon the lower levels of management all the requirements for the benefits and the overhead associated with carrying an llh 12 I 13 individual insurance, FICA, things such as that. 14 Transmission and distribution; there may be some 15 construction budgeting done there. Typically, it is done at 16 a much higher level than the divisional level in a cedtral-17 ized organization. 18 Remember the concept we're trying to get is by the time you get to the divisional level in a centralized organi-l 19 20 zation, everything is pushed down. In a decentralized 21 organization, everything is pushed up. By that I mean the l 22 decisions are made in a decentralized organization at the 23 divisional and district levels and fed up in your working l l-exceptions at the top. In a centralized operation, all of 24 I i 25 that stuff, in terms of the major day-to-day operation, l 1 1
i 1028 I j36 i ~ decisions, policies, coordination, starts at the top and is ( ') 3 ws pushed down. 2 i So we're talking about, again, the divisional. 3 Scheduling of people is probably done at the divisional andu 4 district level. It is difficult to sort through that. Mostm 5 divisionals that I looked at also happened to be a district. 6 There could be some scheduling done. C,1early, line crews 7 and people such as that are done at the district level also. g Equipment requirements; there may be some initia-g tion of that at the divisional level. People requirements; ~ go i the same way. { 11 Financial; usually nothing. In fact, when you have ,N 12 %-) a centralizecl organization, the reporting system has to 13 + collect infortation very, very much,. but you very rarely, if j 14 i 15 ever, send very much information down cc the divisional 4 level in the way of budget and financial information because 16 he doesn't have the right to make the decisions on that 17 I information anyway; whereas in a decentralized, you would. 18 It is a matter of authority and responsibility, if you will. 19 Personnel; he probably is asking personnel to do 20 21 screening, hiring, if you will, to him. He puts in a request 22 and that is done at another level. Administrative and support services; he may have 23 I,_s'~') 24 some of those there. 25 Generation; I don' t know that anything would ba done eamcascwsoma cmcaarma comonrm m y,yeom so
f 1629 1, $37 i 1 at the divisional level from a generation point of view. 2 First of all, there is usually no generation in the division 3 unless they happen to hsve some hydro or something else 4 sitting out there that they can handle. Usually that is all 5 under generation. I 6 Custosmer operations is the other thing that may 7 be at a divisional level. Again, bt?geting would be one thing that may be 8 9 initiated there. There probably are some financial things 10 in terms of collection of records and assisting pecple wit.h 11 I their bills. 12, Scheduling of people may be at the divisional le.e 13 Mr. Bude. i, as you see it,.'oes a utility organiza 14 ltion have two opticas, namely a centrc. ized organization on 15 j. one hand or a decestralized organization on the other hand, i 16 j or are there, in fact, many gradation:, in between uhe two? f 17 A. There are other mixtures, ii you will, t.at could 18 be put in. 'l 19 4 What stn6ies have you made pursonally with respect l 1 1 20 to the comparative degree of centralization of Met -Ed versus i 21 Penelec? 22 A. I have simply relied on TBE..;'s statement that 23 Penelec is decentralized and Met-Ed is centralized. generall 24 speaking. 25 Isn't it a f act that TB&A's statement wa.; th 2t g r nw.- ieusev=nx m me
~ 1030 j00 p) Penelec is relatively more decentralized than Met-Ed? (_ 1 l 2 A Well, we can find out.
- l 3
(Witness perusing documents.) 4 One comment is on page VI-6 of the TB&A' report f } 5 where~they state that "the relatively more decentralized i management approach attributed to Penelec may have resulted l 6 1 f 7 from and, in fact, been more desirable due to the more i I 8 widely dispersed service territory and greater distances 9 between divisions and corporate headquarters." 10 Booz-Allen -- 11 4 And what is the sentence that follows that? (]} 12 A I haven't finished.. - 13 g What is the sentence that followed your c:ste i 14 from TB&A? 15 A I'm not allowed to finish my sentence? Do you wan-16 me to do something else? 17 4 I'm asking you to give the full quotation of the 18 paragraph that you started to read. 19 JUDGE CASEY: What.page are you reading from? 20 THE FITNESS: VI-6. 21 "However, inflation, increasing rates, declining 22 productivity and the resultant financial constraints are new 23 demanding more corporate guidance and professional directicn (} 24 in areas such as work methods, nroductivity standards, e uipment standards, work priorities and cost control." 25 1
1031 i j39 l 1 O All right. Now will you go ahead and finish the ll 2 answer as you had contemplated it? 3 1 A The TB&A suggestion after that sentence that you 4 just put in is their apparent attempt - "Therefore, the 5 management of the GPU operating companies has taken several 6 actio'ns to strengthen essential control over the same 7 divisional operations." And'just paraphrasing: establishment 8 of a centralized materials management organization, establish-9 ment of operations analysis function in each company, j 10 coordinating through the GPU service corporation; and 11 initiation of functional committees. i gggi 12 G As yc 2 have used -- l 13 MR. SHILOBCD: Excuse me) he hasn't finished the 14 original question. 15 MR. RUSSELL: I'm sorry, i 16 THE WITNESS: In the Booz-Allen report issued in l t 17 May 1978, talking about the Penelec Corporation on page 2-4: f l'l 18 "Penelec's organizational structure and management systems l 19 have a strong functional orientation." ll 20 I am going to have to find the other informati:n. 21 I will include in the supplemental I bring in other quotes l l 22 from this, rather than k;2) searching for the thing. 23 BY HR. RUSSELL: 24 g Directing your attention to page 26 of your state-25 ment, you make the t.tatement at line 2 that the problems with
l 1032 L j40 0 which the GPU =cmpanies are involved are complex; is that 3 O si correct? 2 A. That is ::y paraphrase of TB&A; yes, sir. 3 G Do you disagree with that statement by TB'sA? 4 A. No, I cr,not. 5 t 4 On the :;attom of page 25, lines 21 and 22 you say, 6 "The press and 9. ; public understand tige problems." Could j 7 -you give us the : - tual basis for your statement that the I 3 i press and the r- ~ c understand these complex problems? g A.
- Well,
- t sentence relates to:
" Volumes hsve been 10 written on the p' _blems currently facing GPU and its 11 operating corpe..:.6 5. " n 12 L.-). I bcv ust from my St. Louis papers, varying 13 articles that ' - - across -- here is a " Wall Street Journal" g4 15 dated December 3,. .980; here is a " Wall Street Journc !." on 16 Friday, Noven';.cr i. I have some " Post Dispatch" material, 17 which is a St. s paper, which I can also bring ir., which 18 talks about such .ings as: "The Three Mile Island Clean-up t Costs Soar; CFC crii Regulators Turn to Uncle ' Sam"; "Three f 19 20 Mile Island I.n. .t Helped Some People and Hurt Others 21 Financially in C.:icious Ways. " I hh r r that the other bits of informatica that 22 23 have been sern.'. have led people to understand, number one, O 24 that GPU and ::n - NI have some fairly serious financial 25 problems; twe, they obviously have some problems ,EASTH R(RPQ.7 TIN @ Gyl@MPANY _ '7 175 701 7190
1033 j41 relativetotheTMI-IandIIshutdownandpotentialstartupggg t of one or the other or both; and that the management problems 2 associated with solving those things have got to be a fairly 3 major kind of thing. If you raad these articles, that is the 4 5 tone: GPU and Met-Ed are in trouble. They need financial i and management help to solve their problems. That is the j s l ref erence:- "The precs and public under, stand the problems." 7 And you've taken me back tc, "The problems involved and the g solutions required are complex." p I don't think the press and the public understand 10 the colutions. If they did, somebody would have stepped 11 forward and sold them to you. 12 13 4 May I make this a general request, Mr. Budetti, that if you find any newspaper articles that genuinely under-14 stand the problens, will you let me have copies of them and 15 s 16 send copies to this Cormission? 17 A Yes, sir. 18 4 Speaking of regulatory bodies, to what regulatory 19 bodies, as you have considered it, are GPU, Met-Ed and Penelec subject to the jurisdiction of such bodies? 20 21 A I didn"t think GPU was subject to anybody. I think Met-Ed and Penelec are subject to -- are you talking about 22 regulatory, utility regulatory -- I'll start all cver. 23 O Penelec is respassible to the Public Utility Commission of 24 L5 Pennsylvania. A;parently they ha"e a subsidiary, if I L
1034 j42 remember correctly, up in New York; and to that extent, I (v] don't know whether it is Penelec or its subsidiary is 2 responsible, I assume, to the New York commission. !!et-Ed is 3 responsible to Pennsylvania Public Utility Commission.
- GPU, 4
I assume,has stocks regulated by the SEC. I don't know the 5 wnership of the plants that are in the power pool. I know 6 you have some. I know there is a PJM pool. I assume that 7 ayo ose tariffs for wholesale electricity go before 8 FERC. g To the extent that GPU charges in its GPU service 10 company are reviewed by any commission, I assume GPU also is 11 1 oked at by the New Jersey commission through JCP&L. 12 /T \\/ G I can't put my finger on it at'the moment, but you 13 do make reference, do you not, in your testimony to the 14 Public Utility Holding Company Act? 15 A Yes, sir. 16 17 Q As you viewed it, to what regulation under the Public Utility Holding Company Act is GPU, Met-Ed or Penelec gg 19 subject to? A I don' t know that I used it in that context. I 20 thought I said that.the Holding Company Act. precluded GPU 21 from taking and using the assets of one company, or the 22 23 revenues or the financial ability or v.hatever you want to call 24 it, in favor of another. I thought that's what I said. l 25 G I'm not disputing what you ray have said, but are CoMMr JWEALTH REPORThG COMP 4Y s717 761 7150
1D35 j43 you suggesting that the SEC under the Holding Company Act 3 can do that without regulating GPU? 2 l A. I don't understand your question. I already said 3; I' GPU was regulated by the SEC. i 4 g With respect to what? 5 } ecur M es and hchange Commission re W ates e 6, i companies relative to, at least most corporations, rheir l 7 securities an'd utilities relative to-the Holding Co pany Act 3 8 g ll which precludes them from doing some other kinds of things to benefit the securities lile, if I remember correctly, 30 11 . owning a manufacturing plant. 1 What is your concept of the scope of regulation 12 I ' under the-Public Utility Holding Company ' Act? 33 I A. I don' t believe I - well, I haven't talked about 14 it in my testimony. Do you want my general opinicns about 13 s . the Public Utility Holding Ccmpany Act and the SEC. 16 17 j 4 I want your understanding as you may have utilized i is l it and reflected in the preparation of your testincny as to l what the regulatory scope crf jurisdiction of' the Public 19 20 [ Utility Holding Company Act would be insofar as it relates cc F 21 '[ GPU, Met-Ed or Penelec. 22 A. Why don' t we go bark to where that is then? 23 f G I tried to find it., but in the time available tc =e 24 I wasn't able to -- yes, I fcund it, page 44. 25 ; A. Yes. I said, "GPU is a non-regulated snt y under e mecememm eme-wa e-may. var m.7 3:
1036 j44 L controls of the Holding Company Act, which is precluded from I gy 3 \\~) !i making management and financial decisions which are to benefit; 2 1 one operating company at the expense of another." 3 The section deals with the merger scenario within 4 the Public Utility Commission's constraints. GPU is not 5 regulated by them; however., their stocks and the controls of 6 the-Holding Company Act do put them und,er a regulated 7 environment differing from this one. 3 g g Differing from -- A That of the PUC's. j 10 i g I'm asking you to give us your understanding as to 11 what types of controls GPU and its subsidiaries are subject 12 -s > r ) ('# to under the Holding Company Act. f 33 i. Is the one you cited the only one which you 14 15 considered or -- + = h. It is the only one that concerned me; yes, sir. l 16 17 4 Is that the only one of which you are aware that is 18 an area of jurisdiction of the Holding Company Act over 19 these companies? 20 A No. We talked about just a few minutes ago the 21 fact that I think -- again, if memory serves me correctly -- that the Holding Company Act precludes GPU from operating 22 23 within the same context of this, if you will, a for-profit, [b i 24 non-regulated company. l i 25 Third, and I do not know, but there are some CoM ONWEAt.TH REPORTING COMPANY '717 761 7150
1037
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j45 l regulation; relative to the issuances of securities and the {ll 1 2 constraints on those that are under SEC control. But I don't know the details, and they were not important to me in this l 3 h instance. l 4 5 4 On page 35 of your testimony you make the state-I menc on line 21 that "Penelec customers should not be 6 7 funding, in effect, a management subsidy of Met-Ed..." Could i 8l you explain the factual basis for the statement on your part l 9L that there is any intention under this contract between the i t i 1; two ccapanies that Penelec customers would be funding a
- 1 11]managementsubsidyofMet-Ed?
O l 12 ;f A. Yes, sir. To the extent that Met-Ed's problems } = !. i 12 j are greater or as great as they are, and to the extent that j 'i u."i Penelec still has cost saving opportunities in front of it !i i 15 -l that demand top management time, and you take canagement away l s I i 16 h from Penelec and have them start worrying about Met-Ed, while ; i 17 keeping track of their time they will allocate the cost of 18 the management that worked on Met-Ed to Met-Ed and the cost 19 of the time to work on Penelec to Penelec, the fact that they 20 do not have the time to work on Penelec, because it is with i 21 Met-Ed, to deal with a' 'r opportunities, other cost reduc-22 tion opportunities to make them happen faster will, in effect, 23 cost the Penelec customer at some point in time. h 24 g What is the basis of your assumption that they will l t i 25 not have time to work on Penelec's problems? l l l .......,.. ~,,,,.,,,,,,..
1038 ('~; i A That is the basis of my whole testimony. We're in V 2 the question of the time available to management. This does 3 not happen to be in that section, but it is a good time to l 4 bring it up. If we look at the fact that a full-time management 5 currently exists at Penelec and that they are dealing with 6 7 not only the day-to-day operating problems at Penelec -- for j i a instance, Booz-Allen states, on page 2-4 of the Booz-Allen l 9 report, "The President serves as Chief 0,,erating Officer lo ' overseeing and coordinating the day-to-day activities of the 11 functional departments of Penelec." To the extent he and his l 12 management are required to do that on an ongoing basis, number .f s (.l 13 one. Number two, that they have in front of them a j 14 divisional consolidation which is an effort over and above the l 15 effort af putting together the management consolidation. i a 10 Three, that there is some $13 million of annual savings from 17 fossil fuel deficiencies that can be gained. Four, that the is divisional consolidation has something -- the load management 19 and conservation program has a net worth value of over $2 20 billion. Those, in and of themselves, are substantial manage-21 ment time-consuming efforts. 22 Now take and add to that the concept of trying to 23 make the consclidation happen, which is en additional time-(_ 24 consuming effort. And I finally add to that going to a '^ 25 company that, at least in my understanding and in quotes from CoMMoNL EALTH REPORTING compt. 717 761 7 "9
1039 .i j47 i TB&A, is in a financially precarious position and trying.to 3 I i save that company from bankruptcy. There is no way, in my 2 opinion,that management will have the time to devote fully 3 to Penelec, fully to the consolidation, folly to the $2 billion 4 savings, fully to any of those pieces and still try to deal j 5 with the Met-Ed situation. There is no way. 6 I j'ust finished going through, personally, for a 7 friend and couldn't do it in November of 1978 -- trying to a g take care of a company that was on the verge of bankruptcy. io I was doing that on a half-time basis, so I thought, and 11 consulting on the other half-time. Well, the half-time 12 obviously disappeared. It was full-time; it was more than G; i 13 full-time. The bankruptcy was outside of the centrol of l 14 things we could do for any number of-reasons, the major one 15 being the economy; and the company finally went bankrupt. b It is an incredible amount of time to deal with 16 17 saving a company from bankruptcy, no matter what the size. la And I don't understand how management is going to have the 19 time to do all of this. 20 g As you understand it, who in the GPU system, presently 21 as well as prospectively under this proposed management ccm-I 22 bination, would be doing the basic work with the bankruptcy 23 issue? 24, A The bankruptcy issue permeates all the way through 25 In my opinion, it would be Met-Ed plus -- h @@MM@NWCALTH REPORTfNG COMPANY 717 761 7150
i 1040 j48 4 / MR. RUSSELL: I move the answer be stricken and g that the witness be directed to answer the cuestion 2 responsively. 3 JUDGE CASEY: I think that is an answer, ! j 4 ll ^ Mr. Russell. Are you asking what individuals in the GPU l 5 J system would be -- 6 t MR. RUSSELL: Yes; and he hag done everything but l 7 l l answer the question. 8 MR. SHILOBOD: I disagree. 9 JUDGE CASEY: I think it is speculative anyway. go MR. RUSSELL: Could I have the question back? 11 i JUDGE CASEY: Yes, yo,u can have the quesrion bat 12 l MR. RUSSELL: And the answer so far. 33 l la ' (Whereupon, the reporter read fron the record, as 15 requested.) ]* r 16 MR. RUSSELL; I asked for a personnel identifictrion 17 and he starts *,alking about general trouble:;. I 18 JUDGE CASEY: No. Objection overruled. Let's go 19 off the record for a moment. 20 (Discussion off the record.) 21 JUDGE CASEY: Back on the record. 22 I believe, Mr. Budetti, you were in the proces: of 23 giving an answer; that you had responded initially that y a .( 24 thought that the bankruptcy, if that were t-come to pase, 25 would have an effect or permeate the entire.rganizatic _s acumcnenwsmam-naam
1041 j49 lll that correct? g THE WITNESS: Yes, I did. My answer was going to 2 be that the executives and the staff of Met-Ed, based on my i 3 experience, all the way down to the accounts payable clerk 4 aregoingtobeimpactedandaffectedinworkingoncensidera-j 5 tions and problems associated with the bankruptcy, in 6 addition to the fall-out I believe wi'l occur in the way of l 7 supplier credit restraints and other kinds of problems that 8 9 will fall back to the Penelec people; " people" meaning both to management and staff. JUDGE CASEY: Does the answer that you havc just 11 12 given presume that a bankruptcy occurs before the proposed gg 13 management combination goes through and the bankruptcy 14 initially affects Metropolitan Edison as a public utility in 15 Pennsylvania as we know it today, or are you answering as if 16 the proposed management combination has been approved by the 17 Commission? Can you tell me whether you see any distinction? 18 THE WITNESS: Yes, sir. There is a distinction. 19 There would be an impact even before the merger. If the 20 merger happened, there would be a distinct disadvantage -- 21 and my conclusion is in my testimony, so I'm not saying 22 anything more than that -- to the Penelec Company, because 23 its management is now part of this constrained management 24 under the Chapter 11 or the reorganization; I forget which 25 number is which. One is complete bankruptcy, folding of the
1042 i c-j50 i company,and the other is reorganization. I assume it would ('T U 2 reorganize since we need the utility. The mo't serious problem, obviously, is if the l 3 l combination occur s. That does not mean there will not be j 4 t 5 problems if the combination does not occur. ? I JUDGE CASEY: Go ahead, Mr. Russell. 6 7 BY MR. RUSSELL: 8 G On page 17 of your testimony you refer to the 9 financially troubled Met-Ed. Would you identify, as you understood it, what the financial troubles of Met-Ed are? go i JUDGE CASEY: Off the record again for a coment. 11 (Discussion off the record.) 12 13 JUDGE CASEY: Back on the record. 14 BY MR. RUSSELL: 15 G Do you have page 17, Mr. Budetti? 16 A Yes. 17 G Do you see the reference to "the financially 18 troubled Met-Ed"? 19 A Yes, sir. That is my characterization of the 20 information I gleaned from reading the TB&A report, which 21 speaks about cash flow of Met-Ed; potential inability to pay 22 the aferred dividend at this point in time cf Met-Ed; ti. 3 t 23 serious, in fact, closing access to capital markets of Me -Ed; } 24 the requirement for the RCA to again increase the cash require-1 l 25 ments for Met-Ed; and, I think, just an overall opinion, chen I C@MM@NWEALTH REPORTIN8 @oM68 ANY 47. 761 7'50 t
1043 *'l $51 I see words like " bankruptcy," that Met-Ed has some O. 3 financial problems, 2 i l, g Y u take this from TB&A's report; is that right? 3 A Yes, sir. 4 g What is the purpose of your including those various 5 items in your testimony? Do you adopt them? 6 A Don't have to adopt them. 7 G Just a basis of your opinion? These are facts on g which you based opinions or what is the purpose of"your 9 quoting them here in your testimony in the first place? o s' A The basis is to present at least TB&A's analysis it of the problems,from a financial and operational point of view, 12 13 that will face any management, new or otherwise, that is in front of Met-Ed. 14 15 My purpose, since the thing already exists and is not consolidated, is that unless things are getting very much is better -- and I don't understand that they are in my readings 17 -- these things probably still exist here in December -- and 18 this report came out in September -- and that the new manage-19 n.ent is going to face some very, very severe financial ones. 20 21 G For purposes of your testimony, are you accepting 22 these statements from TB&A as facts? l 23 A TB&A, other things I have read, the rate case thecomments--wIh ) .' 4 materials that have been presented to me, can go back to which information -- are you asking: did I 25 l COMMONWEAL's H REPORTING COMP ANY (717' 761 7150
1044 j52 only rely cn TBEA? No, sir. 3 g I'm asking you whether you accepted the statements 2 you cited f rom TE&A as facts for the purpose of your 3 expression of qpini;cn. { 4 t A. . assamed: they were -- I accepted them and have
- 1 5
rl found other supgert for those comments in other areas; and, s 7 therefore, I hawe accepted them as f acts, yes. t' 8 4 I;cv,ats you understand it, what is the occasion fc= 9 the distressed fina.cial troubles of Met-Ed? What reasons, what causes nawt led to that financial distress? to 3; ! . U D G E C A E r.'l : The witness answered to some length -- l I will perrit idim tu answer again; but he read off a litany 12 \\ 13 of four or five 2:.;:.gs, as I understand it. = e 14 i ou.mEir. Vhat led to the problem? 15 I F3 RWEE ~: What were the basic causes that have led to Met-id's f;nancial distress? He characterized what 16 17 the financial zfistress was: the ability tc raise capital and is that kind c f thing.. I'm asking him what were the basic 19 reasons tha lea to, that distressed financial' condition, at 20 least as he endars: cod it for preparation e f his testimony. 21 ' !".2. S IC I C E C D : If Your Honor plezse, how they got 22 there I don't thdnic is all that important as to the f act that 23 that is where we are now. That is the issue which'the i O 24 Commission is gcung. to be presented. 25 Ji.7GE CA5X": I think so. What :=:d to it? I don't i CW s. 3'
- TALTH REPORTING COMP ANY < * ' ' 761-7150 J
g
1045.+l j53 know whether the witness can tell us for the benefit of the $, record what led to it. I know what led to it. 2 i MR. RUSSELL: He can give us his understanding if 3 he has any understanding. 4 WDGE N EY: I know what. led to it. I don't know 5 e e as an Mea R not. 6 To the degree that you understand the question -, j 7 not what the current financial situation is right now, the s various crises circumstances; but what led up to those? rnat g precipitated the Met-Ed financial crisis? in THE WITNESS: A series of things, as I understand it l 13 Precipitated it. The first one clearly was the Three Mile 12 Island nuclear accident which in and cf itself may or may no l 13 have contributed to the total problem. 14 Given the oie unit being in trouble, the bringing on, 15 if you will, of the next unit or the start-up of the second 16 17 u.u t, has obviously put, since it is not in the rate base, tremendous cash drain requirements sir.ce they're building up is i 19 AFUDC and paying interest, I assume, on whatever costs they 20 had there. There is a requirement to collect that; since it 21 is not in rate base, they don't collect it. The shut-down was one. The start-up of the second 22 23 is another. The escalating cost to c:ean up is a third. The purchase power problem and the loss of the deferred fuel h 24 25 costs -- however that accounting worF ; and I'm not an COMMONWEAt.TH REPORTING COM6 NY 8717 7831 7150 E
1046 'j54 () accounting witness -- is a fourth. Impact on cash flow. 3 The present inability, if you will, given the accident and 2 all the problems of GPU, to raise additional cash at reason-3 able costs or at any costs on the open market is probably the ! 4 fifth. 5 I would think there is a fairly large scenario of 6 7 reasons why. They are not all just the Three Mile Island I accident; they all kind of surround it, though. 8 BY MR. RUSEZLL: g 10 0 Unless I was mistaken, my question was directed to Met-Ed. You mentioned G?U. Are the items that y0a mentionti 11 12 applicable specifically to Met-Ed? () 13 MR. SEILOBC : When are you speakin, Mr. Russell? You mean at the time -hat it initially happened or now? g4 15 MR. RUSSELL: At any time. 16 MR. SHILOBLL: They may not be the same. 17 MR. RUSSEII: Well, if there is a distinction, he l 18 can point it out. l l 19 THE WITNESS: You asked about Met-Ed. The plant 20 going down impacted E n-Ed and, of course, a little bit 21 Penelec. Met-Ed was -he-greater percentage. 22 Clean-up, lat-Ed's problem, although Penelec has t's 23 its share. It sounds :o me like it is all three. I haven': %-] 24 done an in-depth anal;:-is of this. I was not pcrt of the 25 rate cases. But GPU rs its own distinct problems raising ~
1047 j55 common stock. Since Met-Ed is not in the strek.arket, thatg 3 is not their problem. Indirectly, obviously, it is. The cash flow.from the deferred fuc, that is 3 Met-Ed's problem. All of them touch Met-Ed that I just s:Ited.. If I 3 said GPU, I misspoke in some instances. 6 JUDGE CASEY: We will recess acw natil 2:15. 3 (Whereupon, at 1:07 p.m., the hearing was 9 adjourned, to be reconvened at 2:15 p.m., this c4.e day.) I 10 11 i I O! 9 '3 I'
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1048 j56 f~'s (_) AFTERNOON SESSION 3 (2:20 p.m.) 2 JUDGE CASEY: We will go back on the record at this ! 3 point. 4 Mr. Russell, you may continue in your preliminary 5 cross-examination of Mr. Budetti. 6 7 Whereupon, FRANK R. BUDETTI 8 9 having previously b0en duly sworn, testified further as ~ follows: to 11 l CROSG-EXAMINATION (Continued) () 12 BY MR. RUSSELL: 13 G Mr. Budetti, I direct your attention to page 47 of 14 your testimony, the second question and answer appearing on 15 that page which relates to the revolving credit agreement. You refer to the stock of Penelec as having been 16 17 utilized as collateral under the revolving credit agreement; 18 is that correct? j l 19 A That is my understanding; yes, sir. l 20 MR. SHILOBOD: May we go off the record? 21 JUDGE CASEY: Yes. 22 (Discussion off the record.) 23 JUDGE CASEY: We will go back on the rec'ord. (-} x-Did you hear and understand the last question posed l 24 25 by Mr. Russell, Mr. Budetti?
~ 1049 j57 1 THE WITNESS: Yes, Your Honor; and the answer is, llh 2 yes, I'm talking about Penelec's stock being collateralized. 2 BY MR. RUSSELL: 4 4 At least as you understand it, was that the sole j 5 collateral provided under the revolving credit agreement? 6 A I don't remember whether it was or it wasn't, 7 Mr. Russell. i a G Do you have any understanding as to the purpose 9 for which the collateral has been placed under the credit 10 agreement? 11 A I understand the meaning of collateral. If it is 12 something different than that, then I don't understand. gg 13 0 Well, the collateral, as you understood it, was it 14 provided for some security for some borrowings? 15 A Correct. 16 O For whose borrowings was the stock pledged? 1: A The stock was pledged for each of the individual is corporations' borrowing, as I understand it, Met-Ed's or 19 Penelec's. I don't believe, but I don't remember whether GPU 20 was doing any borrowing at all. 21 O On page 50, I refer your attention to the first 22 sentance in that answer. "In addition to regulatcry and cther 22 governmental unit approvals, the preferred stockholders must 24 approve the financial merger." You do make that staterent, 25 do you not? a
1050 j58
- l A
Yes, I do. j! (} g What is the basis upon which you make that 2 i statement? j 3 l A only that the stock would have to be reissued; and 4 to call in all the stock -- I assume; I have not read the 5 i stock certificate -- in most instances, preferred stockholders ' would have to give those up for the stock of the new 7 finan ially merged company. 8 m not interested in most instances. I' m 9 interested in this specific instance of Penelec, for example. gg You say you have not read the terms of the Penelec stock? 31 A I have not read the preferred stockholder; no, sir. (-) 12 %3 g S, of y ur own knowledge, you^cannot say whether 13 or not approval is required under the terms of the steck? y A N I said I would assume Penelec's -- 15 G You say they would approve it only if certain g conditions obtained? 17 A Those are general understandings. If I were going 18 i to turn in my preferred stock and I were a preferred stock-19 holder, I would want to get either a very large premium to 20 cover the risk I was taking, or I wouldn't mind if it were a 21 company on equally sound footing with the stock I had. 22 m 23 G You are assuming in the first instance that share-4J s holder approval of the preferred stockholders would be ) 24 required in connection with a financial merger? 25
1051 j59 A Yes, sir. h G Going to page 16 of your testimony, you use a 2 term " presence." Could you define that term, please? j 3 JUDGE CASEY: Is it on a certain line of page 16, 4 Mr. Russell? 5 1 MR. RUSSELL: Line 2, "The Presence of Top 6 Management." 7 THE WITNESS: Yes. By "the presence of top 8 management" I mean the location of management at t'he entity g where the decisions must be made. 10 BY MR. RUSSELL: 11 G Is the term " presence" a commonly-used management 12 l h I 13 ' organization analysis term? A It is for me. 14 15 i G Well, now, we can agree that you are an uncommon 16 gentleman, Mr. Budetti. I'm talking about a commonly-used 17 term. 18 A Yes. ig G Could you cite to us any treatises'or texts where we could find a reference to that term in the management 20 21 organizational analysis content? 22 A Most organization charts and most books dealing with organization talk about -- they may use a different werd l 23 they.ayuse"thepositioningof,"dlh 24 rather than " presence"; ~ I "the location." By that I mera one assumes in a management 25 COMMONWEALTH REPCF NG COMPe NY #717 ~ 61 7150 JL
1052 j60 i organization that one's superior is close by as opposed to (v") i two miles away, let's say. There is a proximity question 2 relative to the working of people. 3 S Mr. Budetti, would you please provide, if you can, 4 any references to textbooks, treatises, management periodicals 5 or pamphlets where the term " presence" has been used? 6 MR. SHILOBOD: If Your Honor please, I submit that 7 the request is unreasonable and has no real probative value a here. To take one sord out of a 50-some page stat'ement and g i ask for presentation of treatises and so on on where that to it specific word was used, I think is an unreasonable request. I can' t see how that is going to help the opponents here meet 12 ( N. 13 their burden of proof. 2 JUDGE CASEY: As I look at page 16 of the witness' 14 15 prepared testimony, he has titled that, "The Management is Process." That has some significance in the breakdown of his 17 testimony,with a subtitle, "V. The Presence of Top l 18 Management." And there is a question posed to him, which I i assume might have been phrased by counsel or'there was an 19 20 understanding: "Mr. Budetti, what conclusions have you 21 reached about the presence of top management that are 22 supported in this section?" 23 In the context of this proceeding where we have ( testimony by the corporate offices of GPU and Penelec and we ~~' ! 24 25 have references in the Theodore Barry and Associates report CONOWMEALVM DECoNG COWVW '909 T61 9 9 50
id53 j61 j to the fact that there would be a relocation in connection 1 with the management combination where these people would 2 physically be headquartered in Reading, Pennsylvania as 3 opposed to the former position or presence of Penelec manage-i ment in Johnstown, Pennsylvania, I think it has relevance in i 5 relation to the testimony in the case. Now, Mr. Russell, whether the term " presence of j 7 g e an used -in management adM d 8 management organizational considerations, I can't tell you. 9 The witness says that he has used the term and he has taken 10 it -- it might mean the opposite of absentee management or 11 absentee ownership, in that relation. 0 12 So I am not persuaded that he should have to look 13 for treatises or find treatises, because I think it may be g just a selected term by him, which is illustrative of manage-15 nent no longer being in Johnstown as far as Penelec is 16 concerned. 17 MR. SHILOBOD: That is what he specifically refers 18 to in the very first sentence of the answer,~Ycur Honcr. 39 MR. RUSSELL: I think this is an issue of which 20 i JARI has made quite a bit, and I am endeavoring, in checking 21 the credibility of this witness' testimony, to find out is 22 this something that he has cooked up on his own, or is this a 23 term that has been used with some frequency and meaning in ) 24 terms of management organization analysis. 25 -m....m.m.,e.,-u o c om o-, m, r rm.......
\\ 1054 -l j62 f') .MR. SHILOBOD: If Your Honor please, I submit that g v the common interpretation of any testimony is that the words j 2 l are to be interpreted according to their dictionary meaning 3 i, unless there is some clear indication otherwise. To somehow l 4 t f take one word such as the word " presence" and use " presence," l 5 I could probably get you 3 million books or more that have -- i 6 I JUDGE CASEY: I think it really goes to one of the 7 basic issues in the case. You have maintained in your j a 1 testimony that the physical absence or lack of presence of g high corporate officers in Johnstown will not prevent the to active management of Penclec, even though there may some 11 geographic or physical distance; and Mr. Budetti takes a (v], 13 contra point ci view based on his review ~of the testimony and 13 2 his own expericace in the management consulting field. 14 But I don't think there is any magic in the term 15 " Presence" itself. It is descriptive of the factual situation 16 that appears in this case in connection with the management 17 combination being at former Met-Ed or GPU headquarters in 18 i 19 Reading as opposed to Johnstown. 20 MR. KUSSELL: All right. I will proceed with 21 another matter. 22 BY MR. RUSSELL: 23 G On page 16 in the same line 2 you refer ~to " top j gS %) 24 management." Is that a term that you are able to define? 25 A Yes. " Top management" consists of these levels of -,....m. ..,-,,.,,,,-m......- ,.m.....~ ,,,,,,.m
1055 i j63 policy and decision-makers that are integral to the effectiv 3 and efficient running of the company. 4 2 l G Could you be more specific? How far down the
- l 3
ladder does top management go -- your use of the term go? Is 4 i it just the Chairman of the Board, or does it go down to the j 5 a or, o ow ar down does your use of de tem %op 6 management" extend? 7 o A. In a decentralized organization, top management goes ! 3 I. down pretty far. If you use top management as the* people g making some of the key decisions on a day-to-day basis, it in could go down into the division. 11 On a centralized, it is much closer to the top. g 12 You would have to talk about a specific job and the break-off 13 between responsibility and authority of different jobs to 34 say whether it is top management or not. 15 It is being used in a collective sense to deal 16 with those areas or levels of management wherein the critical 17 'decision-making on an exception basis or otherwise is being is performed. 19 20 4 Have you any familiarity with Penelec's present l l 21 managerial structure? A. Yes. 22 23 Where, as you would define it, would Penelec's present top management be physically located? i 24 25 A Physically located? I can show it on your location
1056 j64 chart -- 3 4 " Presence" means the physical location of somebody; 2 l is that right? 3 A It means -- yes, a physical presence somewhere; 4 i correct. 5 4 Of somebody? 6 A Of some person. 7 I 4 Now, where in Penelec's present organizational l g structure would you find " top management" as you h' ave defined 9 the term? 10 A In Johnstown, I assume. I have never visited, but 11 I assume there is a headquarter building where the majority 12 O of the 12 or 13 people that report to "errochi-sit. 3 MR. RUSSELL: Your Honor, ccasidering the 14 definitions that we have received to several of these terms, 15 there are a number of the areas that I was going to get 16 involved in cross-examination that beccme unnecessary. So I 17 I think that concludes what we are able to do so far today in 18 cross-examination of Mr. Budetti. 19 20 JUDGE CASEY: All right, sir. 21 Mr. Budetti, have you used -- and I don't want to 22 put words in your mouth or steer your testimony in any way, 23 shape or form. When you use the term " top management," are l p/ ) you using that as synonymous with the ccrporate of ficert cf N-24 l l 25 the Pennsylvania Electric Company, Pe n _ '- ec? l COMMONWEAt.TH REPORTING CoM- '717 761-7150
1057 ' j65 THE WITNESS: It would be at least that group, g Your Honor, but it may go lower than that. For instance, 2 l there are some Director of Material Management, for instance, 3 t and Director of Public Affairs in the current organization of j i Penelec that would not be considered in normal terminology as 5 part of the corporate officers. ~" Officers" usually means s Vice-President level and above. 7 l They are not Vice-President levels. They are 3 9 Directors and, for instance, Managers would also be a part of the top management decision team. 10 i If you wanted to pursue it deeper, when you talk 11 about " top management," you're talking about those people 12 who have the responsibility to make a decision on an excepti 13 J operation and have it stand -- about a fairly important level 14 15 of the company. Presidents, of course, typically are coordinating 16 17 and making day-to-day decisions, not on when to turn the i 18 switch to turn the lights on, but exception kinds of things, 19 because they could never handle all the information that comes up to them and then kind of filters down through the 20 l 21 organization. There is no word, or there ir, no cut-cdf in the 22 23 art about what top management is. It is a group of pecple 24 with a certain level of authority'and respcasibility where you would say 80 percent of the things are prob bly being 25 U C QMMQW'/U LTt') CDF.60M. Concs v pgp. pgg. gg _ _ ____ _
1058 i, l j66 'l decided. There is another 20 percent elsewhere. I ~N (G JUDGE CASEY: I think you said -- correct me if I am 2 wrong again -- in not a centralized control, but in more of a 3 decentralized situation that the management decisions could 4 go down as low as the division heads at the division level; 5 was that your observation? 6 THE WITNESS: That is correct. 7 1 JUDGE CASEY: And you also stated earlier in your 8 testimGny that in a centralized management type sikuation j 9 i that most of the decisions are made at the very top level after o the information upon which those decisions would have to be i 11 based are funneled up toward the top; is that correct? 12 4 i THE WITNESS: Correct.- There is a set of very 13 strict operating policies and procedures that get forced down i 14 15 for people to do. JUDGE CASEY: Bow, in your experience with manage-16 17 ment situations and corporate structures, taking Penelec in .18 its present position as a separate company in the GPU system ill of companies, with Mr. Verrochi or any other' person occupvine 19 !I 20 the office of President of ths company and being in Johnstown,', i Pennsylvania, would you feel that he would be more familiar 21 22 with the day-to-day operations of Penelec and more involved in. 23 the policy and management decisions of Penelec than he would () be if he was the President of the combined management of 24 25 Penelec and Met-Ed sitting in "eading, Pcnnsylvania in an CoMMoNWE A1.TH FU ' - NG COMPANY <717' 7617150 q
r 1059 I j67
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1 I THE WITNESS: By definition he would have to be. He 2 3 would physically be there. The number of things that would come to him could be, not necessarily, but eculd be mere and 4 more often. In other words, more things would come t: him 5 a more often because he physically is located in a place where 7 people can get to hit. 8 Having to manage over the phone, if you will, or on 9 a commuting basis has never been an appropriate and acceptable i 10 manner of efficiently running a company; and you only need j 11 to look at a few examples that you could think of in your i l i 12 own mind about what happens in widely-dispersed geographical l h: 13 situations particularly. You know, do you leave your 14 operating. company in Louisiana with pretty much just die head i 15 of manufacturing cr do you worry about putting more down there 16 in terms of personnel and a little bit of a financial Oor. trol 17 and clearly an engineering control? In other words, d, central-18 ize it; get a lot of those functions down ur. der that c.no guy 19 to run his little plant. That is the classic decent ;_ized 20 operation. He has engineering; he has operations; ht .s 21 finance; he has personnel; and he is making most of t.. day-j l 22 to-day and exception decisions in terms of running ths 23 company as opposed to having everything happen, let's.;ay, in lh 24 Pittsburgh at Westinghouse. 25 JUDGE CASEY: I don' t know whether you obst
- d in COMMONWEALTH REPt TING COMPANY * ~ 75 761.*f 150
1060 j63 your testimony, but Theodore Barry and Associates did and it s t 2 is in evidence in this case, or it is in the testimony, that i 1 3 there was a prior experience in the GPU system -- that is, sometime back in the early '70's or in the '60's -- where j 4 1 5 two New Jersey wholly-owned companies had a combined manage-l ment team and functioned that way for approximately 13 years 6 7 until che time was ripe or propitious to completely merge the a companies, both financial and management. Doyourecallthat?{ 9 THE WITNESS: Yes, I do. That was the dPU-Jersey i 10 Central Merger. 11 JUDGE CASEY: Do you have any firsthand knowledge or 12 experience with how that system works? Does the management ("% ~/' one day concentrate on problems which are peculiar to the one 13 1 14 company and then the next day they take up matters that per-15 tain to the other, the sister company, or do they inter-16 changeably consider the problems of both~ companies in any 17 given Working day; the officers, not the Bourd of Directors? 18 THE WITNESS: Top management manages, traditionally, 19 in an exception basis and,as a consequence, what comes to it 20 -- two things; it does exception and in does planning. In 21 other words, it has to make decisions about a problem coming 22 up or it needs to be planning about certain things that are l 23 going to happen, being budgeting, capital, personnel, produe: 24 change, whatever it mignt be; okay? 1 l 25 The very first regulatory case I did back in '71 was l l COMMONWEALTH REPORTING COMPA' Y (717' 761.*.150 l
1061 l i j69 + Jersey Central Powe and Light andNewJerseyPowerandLighh 1 b JUDGE CM.'Y: It was Jersey Central. 2 I i THE WIT d~ES: Yes. At that time, in 1970, I thought. 3; i t they were still se;arne. I don't remember. I thought they I 4 had said that it serged! sometime in the early '70's; '71 or i 5 ' 72 or sometiine tiu.:.e'.. 6 You wonid. he se to get very apacific about what was 7 left. I thought i, vn a very tiny company, as I remember it, 8i that didn't even ir.'e the ability to do its own financial e g go - kinds of things a::.. ..erefore, it made an awful lot of sense lltojustfolditd.. 11 JUDGE C.:.i: What you say, may be true. I think 12 13 l there were statem>. - r c. admissions in the record that the u situation was not c::ecnly comparable, because while the 15 Met-Ed and Penele.c : :.c anies are slightly different in siza, 16 Penelec being scmu, .1. larger in service territory -- 17 MR. SBT_ ^.F.Cre: Five times larger, Your Honor. 18 JUDGE Cr~I: -- in service territory, but l Ig approximately - 20 THE WI"'.T'.m Approximately the same size in 21 financial. that the New Jersey was a substc.r.- 22 JUDGE 0:J:1"i:: l 23 ' tially smaller c r.pr.t than Jersey Central; that i's true. O 24 f THE WI ' ': That is correct. And if you're try:ng e 25 t o make correlat. - - ad if I remember correctly, that li-tle A
1062 i' j70 -s I company was not in trouble either. It did not have major i 2 financial problems. It.'.id not have impending bankruptcy. i 3 It did not have nuclear plant problems. A whole series of l l 4 different aspects of the merger. i 5 What people are trying to do -- when I listen to the i i 6 "I already did that," or "I'Ve got those same problems" -- 7 they're trying to equate size and numbers in putting things-8 together. In other v 3rds, can you put two companies the sarae 9 size together; they're both electrical? 10 When you talk about managing on an e::ception basis, j ? 11 you're talking about dealing with problems. You're talking i 12 about dealing with opportunities. ( )' 13 There is a whole series of opportunities and present! 14 problems that Penelec has. There is an incredibly large set i 15 that Met-Ed has. And we're now saying all of those will be 16 handled by not two groups spending all the time necessary to 17 do it, but by one group and, essentially, one position now 18 looking at all of those things. That is a considerably 19 different problem than merging Jersey Central and New Jersey s 20 Power and Light, in my opinion. 21 JUDGE CASEY: Do you have reason to believe rhat the 22 new combined management would, of necessity, become preoccu-pied with Met-Ed's financial problems and rumored impending 23 C). \\ 24 bankruptcy to the detriment of the operational functioning of 25 Fenelec? COMMONWEALTH REPORTING COMPANY #717' 761-7150
1563 i j71 THE WITNESS: Only i.f ii wanted to save it would i 1 I mean, only if the new managemtrr. wanted to save Met-Ed 2 would it spend an awful lot of tinie. 3 4 If you talk about pri ::.t.ses and sitting down at 4 I your desk every day and putti.ng :: e :op problem at the top of l 5 i your list and working on that hrst, which is what top 6 7 management does, I would think ::.e top of the list every day l i 1 is that " Met-Ed can go bankrupt .tiay." And if it is, then j a g you had better be working on th. If you're not working on it, then you've got yourself a.rcry, very serious problem. 11 Management by exceptic. ' y top level managers r 12 occurs through that kind of pris. itization. If you look at O i 13 any management courses, you pm " wn what is most important 2 a and work on the first one first. Jo not go to the second or.e 14 15 because it is easy. Make sure. first one gets settled. 16 And as long as that Met-Ed prnL. - exists, I don't know what 17 else they would work on. 18 JUDGE CASEY: Do ynu h.ow of a situation or do yoc think it is practically and leca _2r possible for two unrelated ' 19 i 20 electric utilities to have a:rc..;cnent combination and keep separate companies absent a holi s company situation? Do 21 l 22 you follow my thought?- l 23 THE WITNESS: I don""' bcu' of one. You're obvicusly l O 24 referring to the dif fering mere- - e enario I put in my l 25 testimony where I said if it 3-nod for Met-Ed and m-
1064 t j72 t Penclec, why isn't it so good for West Penn Power and everybody i g s 1 ,D (v. i e.lse to get folded into that same picture? Because if, in j 2 feet, the concept is that any matiagement can manage any two, 3 three, four, five, six or seven electric utilities with the and all one needs to do is allocate one's cost of sarae ease, 5 1 1 n.anaging to each company to keep it separate for regulatory 6 7 purposes, then one should be doing that. In fact, I submit, a lot of people would have already done that. I don't think ( 8 that is possible. a 10 l JUDGE CASEY:- Did you indicate somewhere in your l p.% pared testimony that you think GPU's objective here is to 11 l , r....vage or save Met-Ed and that they think this night be done g3 ll i O>
- nrough the management combination?
33 I s THE WITNESS: I remember reading, subject to check, 14 !!in Mr. Kuhns' or Mr. Dieckamp's deposition that what they 15 b raid is they were fighting for the life of their certificated 16 l 17 crea. MR. RUSSELL: That who was? l 18 l THE WITNESS: "They" being GPU -- is fighting for 19 } 20
- .he life of the certificated Met-Ed area.
And then I thought 21
- understood that this PUC had, in fact, raised the issue of t'.e Met-Ed certification and whether that should stay here 22 23 tt some point in time.
l 24 l My answer is, the only reason one would do what t 23 l t"c'- r.ro doing here is an attempt to get what I assume is COMMONWEALTH REPOR78NG COMPANY #717 761 7150 i
1065 j73 l 4 bettermanagementoutofPenelecandoverintoMet-Edtogetll 3 that problem solved; and, secondly, to mche tne whole pot j 2 i one. 3 I think, from a business point of view, if I were 4 GPU, I would put all of the eggs in one basket and lose then 5 all or lose none. 6 Now, from a regulatory point of view, obviously, 7 that doesn't make much. sense. But fror a buciness point of 8 v.iew, I would put them altogether. The FCA,r.s thfe first 9 1 i step. The merger of management or the c;..solidaticn is the [ ( 3a second step. And they all admit that i. chey could, the 13 financial merger would be the next step " hen it is all cr g 12 W 3 ' nothing. And that doesn't make bad sen: fren a business 13 point of view. 14 i JUDGE CASEY: Taking the Thre. *.ile Island accident 15 out of the picture, would the affiliate- _ .+.-ast agreement, 16 17 the one pertaining to the management cc '.; nation, make sense to you as a management consultant or sc~,+cne who advises la 19 corporate management? 20 THE WITNESS: My answer to tP-has always been no, because I have dealt with other compani-m tece:her. What 21 would make sense is additional service --.,1.iss. To the 22 23 ' extent you want to take away some of tb
- ctiona1 suppcrt O 24 areas, like GPU service corporation.
Ei if j^u read the 25 Booz-Allen report, you'll see that even '.978, Penele 's w
e 1066 I j74 h management hadn't really fully accepted -- this was my I interpretation of it -- the GPU service people as their equals,I i 2 I if you will, and there is always a question of who is respon-l 3 sible for this Penelec? !s it that service company in 4 - ParsippanyorReading,orwherevertheyhappentobe,orisit! 5 i us here in the Johnstown Fenelec service area, if you will? I 6 I don' t think tie-merger 'would make some sense. 7 Some consolidation and pct.entially some setting up of service 3 businesses, a service com:any - t.o pool talents together, would g i make some sense. TB&A a12ndes that, for instance, in the 10 4 generation. Remember, i-t would move all of Met-Ed's genera-11 tion to Penelec -- they ey on one of their pages that there 12 13 is going to be sor prohlem -- on VI-15 -- there is going to s e be some problem - "the fen that the generation organization 34 would be physically separate from the rest of the company 15 may pose problems in cour:iination, communications, control 16 17 and policy adherence - they're saf ng that about the generation group f 18
- Now, that is going to happen tat is going to be in Johnstown and 19 the relationship back to the GPU service company which has a 20 21 group called a Projects f:ntrol Functi'on.
In other words, by keeping them separate and nct being consolidated, then there 22 ' a problem with making -he thing work very well. 23 O i 24 JUDGE CASEY: '"his is the fossil or coal-fired generation operation in.!chnstown, excluding nuclear -- 25
1067
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1 THE WITNESS: Nuclear, which s another corporatio 2 JUDGE CASEY: The nuclear cc: oration which would 3 be based in New Jersey and has nothing -o do with the j 4 Johnstown operation. 5 THE WITNESS: That is correct. j l 6 JUDGE CASEY: I have no further questions at this 7 time. j 8 Mr. Russell, if you have any additional questions 9 or Mr. Shilobod. 10 MR. RUSSELL: I have nothinc. 11 ' JUDGE CASEY: I think it is c9derstood that 12 Mr. Budetti will try to make himself s"-ilable at the time o the continued hearings which we are se.;ing uy for January 13 14 7 and 8. 15 !!R. RUSSELL: I was just goin; to ask; it is the-16 7th and 8th? 17 JUDGE CASEY: January 7 and E. I have included 18 that in my order which I am going to dictate to the reporter 19 at the close of the hearing. l 20 MR. MC CLAREN: I have no cr s-examination l 21 questions of Mr. Budetti at this time; I may have on the 7th l l 22 i or 8th. 23 JUDGE CASEY: All right, Mr.
- cClaren.
Ycu will 94 have the opportunity. I guess the 7th fcfinitely, and then 23 there may be an additional witness or a to be heard from -- COMMONWEAL.TH REPORTING COM7 717 75' 7150
l l 4 10C3 i j76 j () MR. SHILOBOD: Do you contemplate that I should g bring all the witnesses in on the 7th, Mr. Russell? 1 2 I MR. RUSSELL: I am sure we will be in touch in the l 3 i meantime as our respective plans gel and see what we can 4 i come up with. 5 l I MR. SHILOBOD: Unless I hear otherwise, I will 6 presume that I have to bring them all in. If it looks like. 7 you'll take up the full day with Mr. Budetti or one of the i 8 9 others, I would appreciate it if you would let me know. (Witness excused.) 10 i 11 JUDGE CASEY: All right, gentlemen, thank you very 12 much. This hearing is adjourned. We are in recess now until (} 13 10:00 a.m. on January 7, 1981, which is a Wednesday. 14 (Whereupon, at 2:55 p.m., the hearing was 15 adjourned, to be reconvened at 10:00 a.m. on Wednesday, 16 January 7, 1981 in Harrisburg, Pennsylvania.) 17 18 19 20 21 22 23 3 J 24 25
1069 j77 E E E I I E l E A. I E i I hereby certify, as the stenographic reporter, 3 i that the foregoing proceedings were taken stenographically 3 by me and thereafter reduced to typewriting by me or under j i I my direction; and that this is a true and correct record 5 e i to the best of my aliility. 6 COMMONWEALTH REPORTING COMPANY, INC. i 7 8 OY' ?' ' !r' ?- VY 9 (Judith A. Toberman 10 11 12 13 e e 14 15 16 17 18 l 19 20 21 22 G '3 21 25 i .}}