ML19347E672
| ML19347E672 | |
| Person / Time | |
|---|---|
| Site: | Crane  |
| Issue date: | 12/19/1980 |
| From: | Graham J GENERAL PUBLIC UTILITIES CORP. |
| To: | |
| Shared Package | |
| ML19347E637 | List:
|
| References | |
| NUDOCS 8105130207 | |
| Download: ML19347E672 (40) | |
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4 ME/PN Statement E Supplement 2
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Rebuttal Testimony of John G. Graham The Rates Recommended Rates By the Staff and Consumer Advocate Testimony concerning the financial needs of ME and PN has been presented by the Staff and the Consumer Advocate.
In summary, these parties recommend base rate increases in the following amounts:
(Millions)
ME PN Staff
$9.7
$16.5 Consumer Advocate
$2.9 to $5.2
$27.4 to $31.5 I have submitted testimony describing the cash needs of ME and the cash and credit resources which would be available to that Company with these levels of rate increase. The bottom line effect of implementation of either party's
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recommendation is the bankruptcy of Met-Ed.
(ME/PN Statement E, Supplement 1, page 7) Both the Staff and Consumer Advocate witnesses employ a series of sterile, formula-oriented exercises designed to reduce the Companies' rate requests without any relationship to tiie realities of the financial resources necessary to serve these electric systems and to keep even a minimally adequate level of credit available. The positions have no foundation in fact and no 1
basis in reality.
In our view, the positions of the Staff and the Consumer Advoete are fundamentally inconsistant with the Commission's determination in its May 23, 1980 Order.
By their refusal to deal with the stark facts of the Companies' cash and credit needs and indispensible expenditures for Met-Ed and Penelec as10s1309JD' '
for non-TMI activities and for the resumption of TMI-1 generation, the Staff and the Consumer Advocate have made the task and responsibilities of the
(-~)s s-Administrative Law Judge and the Commission unneccessarily difficult.
The Commission stated in its May 23, 1980 Order that it would closely monitor the operations of the Companies to assure the continued provi-sion of safe, adequate and reliable service at reasonable rates. For our part, we have sought to provide the Commission with detailed information to facilitate such monitoring, including monthly reports on precisely where we were and our best estimate of the near-term future. Since the situation of Met-Ed is most critical I shall first address that situation.
In our letter dated September 12, 1980, we advised the Commission of the actions which had to be taken by Met-Ed and of the prospective cash requirements and available bank credit under the RCA (Exhibit E-25).
Those results were also shown graphically in Exhibit E-26.
As therein set forth,
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it was then enticipated that Met-Ed's cash needs would outstrip its available cash resourcec about April, 1981.
In testifying about this subject, I and other Compar.y witnesses have attempted to make clear that the current level of revenues make no provision for any margin and that we are dealing with complex operations where it is impossible to forece t futura results with absolute precision. As Mr. Dieckamp testified on January 20, 1981, Met-Ed's annual revenues are in excess of $400 million, so that a deviation of $1 million from forecast represents a deviation of less than one quarter of 1%.
As we reported in our letters dated October 13, 1980, November 14, 1980, and December 17, 1980 results in September, October and November were somewhat more favorable than had been forecast in the September 12, 1980 letter.
t These results were the basis of my testimony on December 19, 1980. At that 4
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e time, I intrcductd Exhibit E-28 which'show2d thct, without rata relief, tha cash needs of Met-Ed would (1) exceed the available credit in June or Jely 1981 and A
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(2) be deficient at year-end 1981 by $45 million.
I also testified that, because s
of cash constraints, Met-Ed was not spending at the level inherent in this pro-jection ($165 million annually) but, instead, was spending at a level of $146 million essentially consistent with our September 12, 1980 letter to the Commis-sion (Tr. 1672). This, I stated, would extend the cross-over point to "somewhere around October" (Tr. 1674) and would reduce the deficiency from about $^5 million to about $26 million. Unfortunately, so far as cash and credit availability is concerned, the results of December,1980 offset completely the favorable results in the preceeding three months. As a consequence, our projected cash requirements for 1981 are essentially where they were projected to be in September, 1980.
Revised Exhibit E-28 (Exhibit E, Supplement 1, page 2) is based upon (1) projections of spending for 1981 as reflected in our January 16 letter to the Commission (Exhibit J-6) and (2) actual results of operations thrcugh the O
end of 1980.
Both have contributed to an increase in the projected need for cash in 1981. The result is that our current best estimate (reflected in Revised Exhibit E-28) is that without rate relief and assuming the continted availibility of credit under the liquid assets formula we would run out of cash in May, 1981.
(Statement E, Supplement 1, page 5.)
I would like to explain each of the three components which contributed to this change:
- First, in refining the forecast during the 1981 budgeting process, the $146 million spending level for 1981 I previously described had to become
$150 million. This is described in Mr. Dieckamp's letter of January 16 and is largely a result of inflation and higher expenditures associated with TMI-l I
restart.
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Sccend, nst btnk bcrrowings by M:t-Ed at yccr-cnd 1980 wsro $61 million rather than the $51 million assumed in Exhibit E-28.
This $10 million
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difference was a result of $3.0 million lower revenues in December 1980 than had been projected, $5.8 million higher expenditures for fuel and purchased power, and the remainder for several small items.
Third, November's deferred energy balance that was used in calculating bank credit available for December 1980 was $5 million less than had been projected due to lower fuel costs.
There is an interplay between the second and third items that deserves attention. We were able to purchase substantial amounts of coal-fired energy from western utilities in December.
But, in order to purchase this energy, we had to make advance payments and thus increase our borrowings.
Our purchases were so lar;;e that we were net sellers of substantial amounts of interchange to PJM. These sales were advantageous in total costs to Met-Ed.
But, under the PJM contract, we do not collect for those sales until the 20th of the following month, so that there is approximately a 40 day lag between the advance payment and collection from PJM. This causes a need for working capital. The net consequence is that we achieve lower energy costs for our customers but somewhat higher borrowings and more rapid exhaustion of available cash and credit. Our current forecast assumes the continued availability of substantial coal-fired energy, which is clearly in our customers' best interest.
It is critical to understand that forecasting of short-term debt and bank credit available is exceedingly difficult.
It is the end result of all changes in the balance sheet and the income statement from that which was anticipated. The kinds of changes we saw in December are to be expected -
particularly given the fact that in September, October and November things had gone the other way. As shown in our January 16 letter, for the four month p riod Szptcmb3r thrcugh D ccrbar, when ona cdjuato for tha cecelorcesd inrurcncs recovery, our actual year-end short-term debt was only $2.5 million different p
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from that which we projected in September.
Some of what happened in December may well be timing differences.
I have taken this into account in Revised Exhibit E-28 insofar as I know what these items are and can account for them.
It may well be that things could change early in 1981 as they did in several months of 1980.
For instance, while Revised Exhibit E-28 projects Met-Ed's short-term debt at $53 million at the end of January, my best estimate now is that the figure will be $4 million less.
I fully understand the frustration which the Commission must feel in dealing with the variations in these projections.
The simple fact is that the business is too large and too complex to be able to project down to the last few million dollars.
However, the fundamentals of the problem have not changed since last 4
U Even assuming the continued availability of credit under the liquid summer:
asset formula, Met-Ed will run out of cash in 1981 without additional rate relief and the deficiency at year-end 1981 will be about $43 million. That latter figure has not varied materially since our September 12, 1980 letter.
We face two critical points almost immediately:
(1) The outstanding loans under the RCA mature on April 1, 1981; if the banks are unwilling to renew those loans, Met-Ed will be insolvent.
(2) Assuming the banks renew these loans on April 1, 1981, Met-Ed must borrow about $20 million in April to pay its state taxes and its purchased power bills. The Commonwealth has refused Met-Ed's request for an extension of the payment date for the taxes.
If Met-Ed cannot borrow these funds, it will be insolvent. The banks will be submitting their testimony on that subject. However, I have noted that Mr. Packard testified on January 19, 1981 that, if he were a banker, he would noc lend additional funds based on the situation that would result from adoption by the Commission of his recommendation.
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Ascuming, es I do, thct ths Commicesien mernt whct it scid in its June 19, 1979 and May 23, 1980 Orders, the Staff and the Consumer Advocate do the Administrative Law Judge and the Commission a great disservice in submitting recommendations which, if adopted, would frustrate and, indeed, reverse the basic conclusions of these Orders.
The Overall Level of Just and Reasonable Rates A glaring deficiency in the Staff and the Consumer Advocate testimony 1
is that they have not sought to address the governing statutory standards, the judicial interpretations of those standards, or the application of those standards and interpretations to the facts of these proceedings.
In this portion of my rebuttal testimony, I deal with those matters.
1 A.
The Prevailing Legal Standard. The Public Utility Code provides that:
"Every rate, made, demanded, or received by any public utility * *
- shril be just and reason-able and in conformity with regulations or orders of the commission." (Section 1301)
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It is my understanding that the standard governing these proceedings, both as i
to the disposition of the proposed general rare increases and the complaints against the temporary races, is that the resulting rates established by the Commission shall be "just and reasonable".
The Public Utility Code does not set forth the criteria for "just and reasonable" rates. Consequently, I have turned to the judicial decisions bearing on that matter to present.the factual material to enable a determina-tion of 'whether the requests of the Companies or the recommendations of the !
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j Stoff cnd Censumer Adycccto's witnsesss mest chase critoric. As a secrting point, I have referred to the recent decision of the Pennsylvania Supreme L
Court rendered on February 1, 1980 in the Pennsylvania Cas and Water Company case where the Court stated in part:
"There is ample authority for the proposition that the power to fix 'just and reasonable" rates imports a flexibility in the exercise of a complisated regu-latory function by a specialized decision-making body and that the term 'just and reasonable' was not in-tended to confine the ambit of regulatory discretion to an absolu e or mathematical formulation but rather to confer upon the regulatory body the power to make and apply policy concerning the appropriate balance between prices charged to utility customers and returns on capital to utility investors consonant with constitu-tional protections applicable to both."
Elsewhere in that same decision the Court referred to the decision of the United States Supreme Court in FPC v. Natural Gas Pipeline Company, 315 U.S.
571, 586 (1942) summarizing the holding in that case as:
O "The constitution does not bind rate making bodies to the service of any single formula or combination of formulas."
".he "just and reasonable rate" standard ia also the standard pre-scribed in the Federal Natural Gas Act and in the Federal Power Act.
In the series of decisions beginning with FPC v. Hope Natural Gas Company, 320 U.S.
_C 591 (1944), the United States Supreme Court has set forth the criteria by which "just and reasonable rates" are to be established, emphasizing that:
"The rate making process under the act, i.e.,
the fixing i
of 'just and reasonable ~ races, involves a balancing of the investor and consumer interest."
In Hope, the Court did not identify the criteria to be applied to consumer interests, other than to note that the " primary aim of [the Natural O.
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Ga3 Act] w o to praccet ccusumers egninst exploitction at tha hcnds of not-ural gas companies" which were beyond the reach of State regulation. (page o\\
6'10) The Court was, however, much more explicit about the criteria to be applied in balancing the investor interests.
In that context, the Court stated in Hope (at 603):
"From the investor or company point of view it is im-portant that there be enough revenue not only for operating expenses but also for the capital costs of the business. These include service on the debt and dividends on the stock. * *
- By that standard th(
return to the equity owner should be commensurate with returns on investments in other enterprises having cor-responding ri =ks.
That return, moreover, should be sufficient to assure confidence in the financial in-tegrity of the enterprise, so as to maintain its credit and to attract capital."
I have also noted that the Court stated, in Permian Basin Rate Cases, 390 U. S. 747 (1968), that:
"* *
- the just and reasonable standard of the Natural Gas Act ' coincides' with the applicable constitutional standa-s * * *" (at page 770)
On this basis, I conclude that the criteria that should be applied in assess-ing whether the general rate increases proposed by Met-Ed and Penelee or the recommendations of the Staff and the Consumer Advocate are "just and reasonable" are the criteria laid down in Hope and its progeny.
The view has been specifically endorsed by the Commission in its Order, approved March 22, 1979 and entered May 29, 1979, in the Metropolitan Edison case in R.I.D. 626. There the Commission stated:
"* *
- the ultimate objective of a rate of return determination, [which] is to derive a weighted number, * *
- when multiplied by a rate base, will
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produco a fair return. That product shculd bs sufficient to:
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(1) assure confidence in the financial sound-ness of the utility; (2) maintain and support its credit; and, (3) raise the money necessary for the proper discharge of its public duties.
It should also be:
(4) equal to that being made at the same time in the same general part of the country on investments in other business under-takings attended by corresponding risks and uncertainties."
B.
Application of the Standard to These Facts. Against this background, I shall now apply these criteria to the facts here presented.
1.
If the Commission were to grant the rate increase requests of Met-Ed and Penelec in their general rate increase requests, would such
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rates result in " exploiting" customers. The answer to this question must be "No". Exhibit E-33 for Met-Ed and Exhibit E-26 for Penelec presents a compari-son of the residential rates which would result from granting the Met-Ed and Penelee proposed general rate increases with the rates of other utilities in the Commonwealth and in neighboring states. Data for other residential customers and for other rate classes would not be significantly different.
Similar comparisons have also been presented in the report of Theodore Barry &
Associates and in the report of the United States Comptroller-General. Those comparisons demonstrate that the resulting rates for Met-Ed and Penelec would neither be the lowest nor the highest in the Commonwealth. They would be below the rates paid by consumers in the area served by Philadelphia Electric Company (the City of Philadelphia and environs) and in the area served by C,4
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Duquesn3 Lighting Comp:ny (the City of Pittsburgh cnd snvirens). Thus, thsre are large numbers of consumers in Pennsylvania who would be paying higher rates
,O than Met-Ed and Penelec customers. Moreover, the rates so to be charged by Met-Ed and Penelec would be below the rates charged by the major utilities in
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New Jersey and by several of the electric utilities in New York. In the face of these facts, there can be no factual basis for a conclusion that such rates would " exploit" Met-Ed or Penelec consumers.
2.
Turning now to the question of whether the rates recsested by Met-Ed and Penelec would produce revenues in excess of those required for balancing of the investor interests under the Hope standards, once again, I believe that the answer must be "No".
In this context, it is necessary to differentiate between a rate making method or formula that the Commission might elect to adopt and the realities of the costs being experienced by a utility. Specifically, for example, the Commission may elect to adopt a rate OV making formula or method which takes the ecsts associated with only certain of the utility's properties into consideration. But the fact that the Commission adopts such a formula does not mean that such costs cease to exist. They continue and must be met, wholly without regard to the par-ticular rate making method or formula selected by the Commission. Me t-Ed 's share of the current level of the TMI-1 cash operating and maintenance costs is approximately $21 million. These involve cash expenditures which must be paid every day. In addition, Met-Ed has long-term debt interest and preferred stock dividend costs associated with the investment in TMI-l of approximately
$9 million and these too, must be paid in cash. Regardless of the rate making formula selected by the Commission, the Hope requirement that the rates fixed by the Comnission be sufficient to recover operating expenses and llO ccpital'ecces will n:t bo met 11.no revenues resulting from such rates will j
not be sufficient to meet such costs.
4 3.
The next step in the analysis is whether the revenues resulting from the rate increases sought by Met-Ed and Penelec would be in excess of those required "to assure confidence in the financial integrity of the enterprise, so as to maintain its credit and attract capital." Once again, the answer must be "No".
As Statement E, Supplement 1 shows, if the general ~ rate increase requested by Met-Ed is granted in full, the resulting return on common equity for 1981 would be only 0.50% and interest coverage would be only 1.54 times. For Penelec, 1981 return on common equity would be 7.9% and interest coverage 2.43 times. Without further rate relief, 1982 4
would be less. By themselves, such returns would not be sufficient to assure confidence in the financial 'ntegrity of Met-Ed and Penelec. However, they 1
would be an important step on the road to recovery.
Initially, they would not result in Met-Ed and Penelec regaining access to capital markets. Such returns would, however, start the laborious process of rebuilding earnings levels for the time when such access could be restored.
In the meantime, they would enable Met-Ed and Penelee to retain their existing levels of bank credit
.on which they are wholly dependent.
Indeed, if the Coinsission were to imple-ment the suggestion in its May 23, 1980 Order of restating Met-Ed's deferred i
energy balance to reflect its determination (in response to the complaints) that the temporary rates established by that Order were too low, under the existing formula governing Met-Ed's available bank credit, Met-Ed's bank l
credit wonid be restored to a level near that which existed prior to that Order.
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I 4.
I next turn to the criterion of whether the revenues re-sulting from the general rate increases requested by Met-Ed and Penelec would cause the return to the equity owner to be in excess of the return on in-vestments in other enterprises having corresponding risks. Once again, the answer must be "No".
As I have just indicated, the resulting returns on the common stock equity would be so low that no one could poseibly present a factual foundation for the position that these returns would be in excess of those for enterprises with comparable risks.
5.
Finally, there is a criterion stated in the Commission's March 1979 rate order in the Met-Ed case, even though not stated in those terms in Hope, namely, whether the resulting revenues would be in excess of 3
those required to enable Met-Ed and Penelee to raise the monies necessary to discharge their public duties. The record in this case demonstrates that the answer must once again be "No".
In the case of Met-Ed, we have repeatiday o
pointed out that the cach contraints to which it is subject by reason of the existing level of.its rates preclude Met-Ed from making the operating and maintenance and capital expenditures it should and would if the Company had adequate cash resources. The same thing is true, although to a lesser degree, of Penelec. If the general rate increases requested by Met-Ed and Penelee were authorized, the Companies would not have to reduce further their operating and maintenance and capital expenditures and could begin to increase such expenditures modestly toward normal levels.
It necessarily follows that the miniscule increases in revenues recommended by the Staff and Consumer Auvocate witnesses are several orders of magnitude below those required to meet the Hope criteria.
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Specifically, tha rccommended levolo of rcycnue incrocsos cro fcr short of those needed to meet the operating and capital costs of Met-Ed and I_,)
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Penelec. They do not make any provision for assuring the f'inancia'. integrity of the two Companies. They clearly do not enable the Companies to maintain their credit, let alone make any provision toward restoring their ability to attract capital. Those cecommendations would not provide sufficient funds to enable the Companies to maintain their public duties. They would provide only a small fraction of the return earned by other enterprises having compar-able risks.
Indeed, those recommendations are misleading because they ignore reality and focus on formulae without giving consideration to the consequences which would result if such recommendations were adopted.
Mr. Packard locks at only a part of one of these criteria and suggests it as the standard to be applied, i.e., base rates should be set which will " enable Met-Ed and Penelec to meet their cash obligations as they become due".
(Testimony, page 8) Unfortunately, his recommended rates do not
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ever eet this partial statement of the controlling legal standard.
Met-Ed, with a $9.7 million rate award, would not be able to meet its obligations as they become due.
In his cross-examination, Mr. Packard stated that he had met this criteria by having provided $55.6 million of return and that this was about $1 million in excess of Met-Ed's capital requirements.
(TR. 2128-2131; 2145-2151).
This, he apparently believes, acets the legal standard of providing the revenues necessary to meet the capital obligations of the utility. There simply is no truth to the analysis. Attachment 2 to Statement E, Supplement 1 details the cash requirements for Met-Ed in 1981. Cash capital requirements i
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in 1981 cra $50 tillien fcr intorest cnd $10 tillien for praforred stock dividends.
(Mr. Packard apparently forgot that interest on short-term debt must be paid). He also neglects to account for $36 million of construction;
$31 million for TMI-1 (which he strongly encourages to get that Unit back on line); $9 million for TMI-2 operations and maintenance expense (and, contrary to Mr. Packard's dark insinuations, there is nothing in there for clean up),
$2 million for refinancing; and $16 million for payments of liabilities and working capital changes.
In total, bank borrowings of $26 million would be needed to meet cash requirements. With his recostaended rate relief, this would only be decr;ased by $6 million.
Clearly, the rates he recommends are grossly insuff!.ent to pay the operating and capital costs of the utility.
C.
Rate Making Bases for Allowing Just and Reasonable Rates. Against I
this background, I turn to the question of the basis upon which the Commission could grant the general rate increaser, proposed by Met-Ed and Penelec. My starting point is the broad flexibility in the selection of rate making methods and formulae that the Connaission possesses, as established by the United States Supreme Court and the Pennsylvania Supreme Court, so long as the ultimate criteria of " balancing consumer and investor interests" is met.
Within that framework, I suggest the following as examples, but there are undoubtedly other methods available to the Commission:
1.
The Commission could conclude that, in the light the circum-stances and conditions faced by Met-Ed and Penelec, it is appropriate to include TMI-1 in rate base and the associated TMI-1 operating and maintenance expenses O
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In those currently allowable for rate making purposes. The long history of f
l n benefit to the customers from that unit justifies this result.
I find nothing
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in the Public Utility Code that would preclude that decision.
I have also noted that in the decision of the Pennsylvania Commonwealth Court in West Penn l
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Power Company v. Pennsylvania Public Utility Coennission, 412 A 2d 903, 35 PUR i
4th 393 (1980), the Court held that the Commission had not abused its discre-tion by including West Per.n's investment in Mitchell Unit No. 3 in the original cost measure of value while eliminating it from the five-year average price level. According to the Connonweal th Court's decision, the Federal government had forced the closing of :iitchell No. 31.- 1977 due to environmental regula-tions and the unit had not resumed operation by the time of the Court's decision.
2.
The Commission's Order, dated September 18, 1980, in this case directed consideration of the possibility of transferring the investment in TMI-1 and TMI-2 to plant held for future use. The Commission has a long history of including plant held for future use in rate base if the utility has definite plans to place such property in service within ten years.
In the case of TMI-1, the Company has definite plans te resume generation as soon as Federal regulation will permit. The Commission and the New Jersey Board of Public Utilities have actively encouraged such efforts. The record in these proceedings contains information on the continuing progress being made toward that end.
I suggest that a decision by the Commission to include TMI-1 in rate base as plant held for future use could not possibly be viewed as an abuse of discretion.
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O While we are less certain when or whether TMI-2 will be permitted to 1
resume generation, our best information to date is that this should be feasible j
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as a physical matter and that it would be beneficial to customers from an economic point of view. Our current expectation is that this should be feasible within the umaal 10-year standard for including plant held for future use in rate base. Conceivably, the Commission might wish to include part, but not all, of the TMI-2 investment in rate base as plant held for future use.
I do not believe that this would be an abuse of discretion.
3.
While it is conventional to link recognition of operating and maintenance costs for a particular facility with recognition of investment in rate base, there is no requirement that this be done. On that basis, the Commission could allov the operating and maintenance costa for TMI-1, even though the investment is excluded from rate base.
Indeed, it could do the same for TMI-2.
Mr. Packard states that the Commission should " vigorously encourage" the return of TMI-1 to service. The undisputed record in this case shows that, in 1981, Met-Ed must spend at least $31 million to be in a position to do this.
Yet, Mr. Packard would not make available the cash resources necessary for this task -- dollars of great value to the ratepayer but of little value to the investor who is not being compensated for them. His recommendations are glaringly inconsistent. At page 5 of his testimony, Mr.
Packard seems to recognize the fact that the level of rates he recommends will not be adequate to permit TMI-1 to restart. He may have in mind either inability to meet NRC financial qualification criteria or inability to spend the money necessary for restart. He says the Commission should " seriously l
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con 3idar cny rcto rolisf that will cnable TMI-1 to esfoly raturn to sarvico."
The Commission's legal obligation is greater:
It can and should grant adequate relief in this proceeding.
4.
The Commission's May 23, 1980 Order has imposed on the common stock equity holder not only elimination of all the common stock equity investment in TMI but also all the interest and preferred stock dividend costs associated with that investment. This is not required by the Public Utility Code. The Commission could exclude the TMI investment from rate base but make provision in the rates for the continued payment of interest and preferred stock dividends without regard to the utility property in which those funds have been invested, given the simple fact that Met-Ed and Penelec cannot remain financially viable unless provision is made for these obligations. Indeed, Mr. Packard stated, in his oral testimony, that unless provisions were made for the payment of interest on debt and dividends on preferred stock, he believed the result would be " confiscatory" (Tr. 2129),
and that he was, therefore, measuring his revenue requirements against the interest costs and preferred stock dividend requirements on all Met-Ed's outstanding funded debt and preferred stock (including that associated with TMI-1 and TMI-2). As was demonstrated previously, Mr. Packard's revenues will not in fact make provisions for such interest and preferred stock costs and is incorrect on that score.
But, his yardstick for " confiscation" (which we believe falls far short of the confiscatory measure) is implicit agreement that those fixed charges for TMI should be provided for in establishing just J
and reasonable rates, notwithstanding his exclusion of TMI from rate base.
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a 5.
In its Order in the Pennsylvania Cas & Water Company case, the Commission set forth its rationale for excluding from the latter's rate O
V base property equivalent to a condemnation payment which that Coupany had 1
1 received from the State. The Supreme Court found that rationale was so persuasive that it quoted at length from the Commi,sion's Order.
Included in that quotation was the following:/?
" Property, which is used or useful in rendering a public utility service and which has been a part of a public utility's rate base is dedicated to a public use, and is impressed with a public trust.
It (or the proceeds or accruals therefrom) is subject to regulation by the properly designated regulatory body and remains subject to that regulation until such time as that regulatory body duly finds it in the public interest to approve its release from public service.
Such property must be regu-laced in the interest of the public no less than in the interest of the utility. Equities must be balanced and justice must be done to all concerned. Accordingly, when a utility suffers extraordinary losses in service value of utility property abandoned or otherwise retired from service, or suffers unforeseen damages to property
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which damages could not reasonably be anticipated, and where the utility has not otherwise recovered its invest-ment, this Commission can, and, where equities require, does permit the utility to recover from the ratepayers, as a proper and necessary expense of rendering the public service, the necessary amount to make the utility whole."
The rationale is not limited to abandonment or retirements. The rationale can, and should, be applied to the facts of this case.
Specifically, i
both TMI-l and TMI-2 were previously recognized in Commission Orders as componencs of rate base. When, in 1977, both Met-Ed and Penelee sought authority from the Commission to sell interests in TMI-2, the Commission denied such authority, even though TMI-2 had not yet been placed in service.
TMI-2 has certainly suffered unforeseen damages which could not have been anticipated. Met-Ed and Penelee have not otherwise recovered their investments.
e Tha qustsd pnscogs would clearly hcva cruced tha Court to balisva that, undar those circumstances, the Companius would be made whole.
Moreover, I see nothing in that quoted passage to suggest that a similar approach should not be taken with respect to the TMI 1L costs, for which the Companies'are not being reimbursed.
6.
In the 1979 Order of the Commission in the Met-Ed case in R.I.D. 626, the Commission strongly indicated that a rate base-rate of return calculation was unnecessary.
It stated, that an appropriate method was to:
"* *
- derive the number of dollars necessary for in-terest, preferred stoc't dividends and earnings for common equity, the totality of which are earnings availeJ)1e for return, from which gross revenues may be derived. A rate of return as such need not be de-rived but may be if desired for some reason."/?
This statement was made in the context of the Commission's extensive exposition of its view that the allowable dollars of return should be the same, whether the Co.nmission used a fair value or an original cost rate base.
I suggest that the same view could properly be employed in the current situation, by determining the dollars of revenue required (1) to meet the operating costs of the business as they actually exist (2) tur interest on debt, dividends for preferred stock and earnings for commen stock,as such requirements actually exist, and (3) then expressing that result as a do).lar return related to whatever rate base is selected by the Commission without determining a rate base or rate of return.
7.
To the extent required, the Commission could properly find a return on common stock equity justifying the requested general rate increases.
Dr. Brigham has submitted extensive testimony and detailed studies on that subject.
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Tha Companico clain for a 151/2% raturn on common squity was submitted with respect to a rate base that included TMI-1.
As I previously noted, the Commission's Order in the Met-Ed rate case in Docket No. 626 pointed out that the essential step is to determine the dollars required which may then be expressed as a rate of return if anyone insists on doing so.
On that basis, the Commission then stated that, if rate base is to be expressed in terms of a fair value that includes an element of reproduction cost, the required number of dollars should then be expressed as a lower allowance for common stock equity. The inescapable correlary is that, if the rate base employed excludes a significant component of investments, the required number of dollars should be expanded as a higher rate of return.
I would also point that, when thcce general rate increases were filed in July 1980, the prime rate was approximately 11% and the yield on outstanding Baa-rated bonds (which bear a much lower yield than Met-Ed and Penelec bonds) was a little below 13%.
Since that time, the prime interest rate has risen to a high of 21.5% and the yield on Baa-rated bonds has risen to 15.3%.
(See Exhibits ME E-34/PN E-27 and ME E-35/PN E-28 attached.)
In his testimony, Mr. Packard suggested that the interest cost on the RCA borrowings might well be viewed as a proxy for the cost of the common stock equity capital of Met-Ed and Penelec, in the light of the pledge of the Met-Ed and Penelec common stock under the RCA and tnat this measure would support a common stock equity allowance of up to approximately 25% (Tr. 2144).
The Commission's function is to establish "just and reasonable" rates.
If, because of intervening events or the use of a ratemaking methodology different from that employed by the utility, the Commission finds it appropriate to utilize a higher common stock equity allowance that that employed by the I '
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s utility in its filing, it hcs discretion to do co.
Tha only licitetion in that the resulting revenues not exceed the level requested by the utility and Ov that there is support for that rate in the record.
Both of these conditions would be met.
8.
The Commission might take some combination of the ratemaking opportunities in this case to provide the revenues necessary to set just and 4
reasonaDie rates. For instance, starting with the Staff recommendation of a
$9.7 million base rate increase, the Commission could decide to (1) reject the Staff's income tax adjustment of about $24 million and (2) allow an equity return of 20.5% providing additional revenues of approximately $18 million.
This would then allow a total base rate increase of $52 million which, if added to a restatement of deferred energy of $24 million, would produce the $76 million needed for Met-Ed to meet its cash requirements.
D.
Conclusion. In concluding this portion of my testimony, I would emphasize that the Commission's broad authccity in the selection of ratemaking methods clearly permit it to balance consumer and investor interests in a way which enables Met-Ed and Penelee to continue to serve their customers without imposing burdensome or unreasonable rates upon those customers.
If the Commission wishes to mitigate the impact of the proposed general rate increases at this time and thus smooth the transition to the time when the lower cost TMI-l energy is again available, it could reduce the energy sur-charge and spread the recovery of the deferred energy over a longer period.
The prior Orders of this Commission and of the New Jersey Board of Public Utilities reflect the view that the interests of consumers of the GPU l
companiss will ba bsst corysd by tha continusd viability of the Comp:nies --
a view that is confirmed by the Theodore Barry and Arthur Young reports,
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the General Accounting Office study and numerous other analyses.
It would be most unfortunate - and inconsistent with governing legal criteria -- -
if, by a misconception of the actual requirements, this Commission were to deny Met-Ed and Penelee the revenues required to permit their continued operations.
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R0buttal to Specific Recommendations Made by the Staff and the Consumer Advocate r
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While the presentations made by the Staff and the Consumer Advocate ignore the overall standards and requirements for rate making, they do make specific suggestions as to treatment of several items in their application of a rate making formula. Many of their recommendations demonstrate a complete lack of reality. This portion of my testimony addresses these issues.
A.
Disallowance of TMI-1 Capital and Oper. ting Costs. My earlier testimony, speaking as to the overall standard of just and reasonable rates, addressed the treatment of TMI-1. The Staff and Consumer Advocate witnesses recommend setting rates without giving any con. ideration to the levels of costs being incurred for TMI-1.
They do not address the substantial benefits
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the customers have received from that unit. They do not address the discrimin-ation by this Commission against TMI-1 (which has been an exceptionally well performing unit, not damaged in the acident and would have been and still may be in an operating condition upon short notice) nor of the discrimination by the NRC (in singling out TMI-l as the only B&W unit not permitted to operate since the accident). They ignore the significant dollars being expended by the Companies to bring TMI-1 back into operation so the significant energy savings from the operation of that plant can again be realized by the customer.
They ignore the dollars being expended each day to operate and maintain that plant. They ignore the cost of servicing the debt and preferred stock capital invested in the plant.
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Othtr Adjuatments to Rr.te Bree end Oparnting Income.
1.
Depreciation Expense and Reserve.
It is my understanding that a Pennsylvania utility is entitled to recover in rates an alleged depreci-ation deficiency if it demonstrates that it has not received revenues sufficient to pay all its operating expenses together with a fair return on its rate base during the years when the deficiency was created.
Met-Ed/s Exhibit G-24 traces the history of Met-Ed's depre-ciation reserve and a comparison with the theoretical reserve requirements as determined by engineering studies.
Staff witness Gruber now claims that there is an excess of the theoretical reserve requirements over the book reserve of
$4.1 million. Assuming that this were true - which Met-Ed disputes
, the alleged deficiency arose subsequent to March 31, 1974, notwithstanding the fact that Met-Ed's depreciation accruals since that time have been in confor-mity with the depreciation rates fixed by the Commission in rate proceedings.
During the period subsequent to March 31, 1974, Met-Ed has never earned the fair rate of return fixed by the Commission. As a consequence, the Staf f's proposed reduction of rate 'sase should be disallowed or, alternatively, operating expenses should be increased to amortize that alleged deficiency via rates.
Specifically, in 1974 Met-Ed filed for a base rate increase which was docketed in R.I.D. 170-71. The Commission's decision in that case was not entered until June 22, 1976.
In that case, the book reserve for non-TMI-1 property at March 31, 1974 was $143,373,778 and the reserve requirement found.by the Commission (based on the Staff reconnendation) l l l l
l
w:o $142,348,978, or approximately $1 million less. Tha Company hed no bock reserve at that date for TMI-l which was placed in service on September 2, 1974, but in that Order the Commission attributed a reserve requirement of
$712,277. On a total plant basis, the Company's book reserve was then approxi-mately $300,000 in excess of the reserve requirement as determined by the Commission.
Following the entry by the Commission of that Order, Met-Ed adopted functional accrual rates (and rates by acconnts for new units) pursuant to those reflected in the June 22, 1976 Order.
Exhibit G-24 also sets forth the fact that there were numerous engineering studies made by independant engineers during the period subsequent to 1950 and prior to 1974.
In each case, the book reserve was greater than the theoretical reserve requirement, although the total dollars involved were significantly less than those at the present time, since plant investment was much smaller.
In 1977, Met-Ed filed another rate case which was docketed in O
R.I.D. 434. The accrued depreciation was determined in that case at March 31, 1977. The book reserve at that date was $181,910,787, or 21.0% of total plant. The theoretical reserve requirement was $187,687,555, or about 21.7%
of total plant. Thus, in the three year period since March 31, 1974, a theoretical deficiency of approximately $5.8 million had apparently developed, notwithstanding accruals conforming to Commission accrual rates and starting from a point at March 31, 1974, where the book r4 derve slightly exceeded the theoretical rese-ve requirement. Met-Ed had included in its rate filing a request to amortize that deficiency by an annual charge of $216,000, but this j
was denied by the-Commission.
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A subscqusnt rete case was filed by Met-Ed and docketed in R.I.D. 626. That case was decided by the Commission's Order approved March 22, j
1979. This time the Commission found that the theoretical reserve requirement was $4,414,000 in excess of the book reserve, and denied amortization of the alleged deficiency. Since the rates established by that Order were never permitted to become effective, and the TMI-2 accident intervened, there was no opportunity to seek rehearing or otherwise contest these determinations. The accruals since that Order, however, have been in conformity with that Order.
In summary, we believe that the foregoing data establish that the alleged deficiency in the book reserve has arisen since March 31, 1974.
I now turn to the question as to whether Met-Ed has received revenues sufficient to pay all of its operating expenses and a fair return on its rate base during the period subsequent to March 31, 1974.
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There is attached as Exhibit E-36, a schedule showing (1) the allowed rates of return on common equity (as restated to be on an original cost rate base) in the succession of rate cases to which I have referred and (2) the realized returns on common equity. As that Exhibit demonstrates, the returns actually realized on ecmmon equity have fallen significantly below the fair rates of return on common equity determined by the Consission.
There is an inherent lack of esquity in the Staff's methodology with respect to depreciation, namely, that it ignores the reality of the capital invested in the business and the way in which rates provide for the recovery o f tha t inve s tment. There is no reason to value the rate base on a theoretical O G
l bcsic wh2n the invantment end book raserva, tha trus mensura of the dollers which have actually been invested in the business and recovead from the Otj customer, is available.
Mr. Gruber's methodology simply produces significant uncompensated dollars of investment.
But, if the Comission employs the theoretical reserve requirement technique, the facts in this case demonstrate that either (a) the adjustment to rate base recomended by the Staff by reason of an alleged excess of reserve requirement over book reserve must be rejected or (b) the allowance for depreciation expense must be increased.
There is another area in which the Staff's recommendation with respect to depreciation must be adjusted. The Staff witness with respect to total rate base did not contest the fact that the method employed with respect to the plant investment component inherently assumes that the depreciation applicable to the last month of the test year has been collected from customers through rates. This assumption is contrary to fact. The lead-lag study for working capital demonstrates that there is a lag of 30 days or more between the increase of an expense and the collection from customers. This can be dealt with either as an adjusticent (increase) in working capital or as an adjustment (decrease) in the theoretical reserve requirement deduction from gross plant investment with a corresponding increase in the net plant investment component of rate base. Details of this adjustment on the latter method will be presented by Messrs. Huff and Carroll in connection with their wrap-up exhibit.
2.
Disallowance of Unamortized Expenses from Rate Base. Tho Staff and Consumer Advocate each recommend disallowance from rate base of
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d cartcin un mortized beltnces of daferrsd costs from rate bcce (dafarrsd energy expense, abandonments of the Stoney Creek and Berne projects, rate case
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expense and storm damage expense) although agreeing to the recovery of those costs without rate base treatment. Staff relies upon certain Pennsylvania court decisions which suggest that a utility may not both recover an expense and receive a return on it.
The Consumer Advocate witness gives no reason other than "past Commission policy".
(Page 19)
There is no question but that these are valid expenditures which have been incurred and that the dollars are invested in the business pending recovery from customers either as a result of specific Commission Orders or established Commission policy.
In the case of deferred energy, the Commission made the decision to defer those costs and to smooth out their recovery from ratepayers. The cost of carrying those investments has been extensive with the prime rate at historic highs.
Mr. Packard has testified that, under such circurastances, he would recommend accrual of carrying charges on the deferred energy, but he would propose that carrying charges be collected via the energy surcharge rather that in base rates (Tr. 2124).
The reliance of the Staff witness, Mr. Kleha, on certain court decisions is misplaced - implying, as it does, double recovery through allowance of the amortization and of the unamortized portion in rate base.
The unamortized portion is only the balance remaining a.t the end of the test year. None of the amount reflected in expenses in the test year is included in rate base. Thus, the statement in the UGI Corp. case quoted by Mr. Kleha - _.
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e is nst violatsd.- (Tsstimony Pcgs 5) Thass costs cra not includsd in rete base and "at the same time" recovered as an expense from ratepayers.
!qb 3.
Fuel Reserves. Met-Ed estimated a level of fuel reserves as' of the close of the test year based upon its expectation of being able to support reasonably normal levels of inventory. Subsequent to the denial of extraordinary relief, Met-Ed was forced to reduce its level of expenditure in all phases of its operation, including the levels of its fuel reserves, because it was, and is, running out of money.
(See Exhibit E-25.)
Staff I
finds this fact to be a reason to reduce Met-Ed's rate base. Clearly, the exact opposite is the only proper inference to be drawn:
Met-Ed, because of its limited fiaancial capability, has not been able to carry the kind of fuel inventory which it should (particularly when facing the potential of a coal strike) and it needs a higher -- not lower -- rate base so it may do so. The unreality which surrounds this proposed adjustment demonstrates the lack of
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relationship between the Staff's recommendations and the financial needs of the Company to serve the customers.
4.
Income Tax Expense.
Staff recommends that the level of income tax expense claimed by the Companies be reduced by an amount resulting from the deductions associated with TMI-l and 2 costs, e.g., interest and O&M expense.
Staff is suggesting that although the customers should not pay these costs, the tax deductions resulting from them should be given to the customers.
Staff suggests a treatment of income tax expense such that the amount allowed for rate making would be set for J't-Ed and Penelee at a rate significantly f -.
e icwer th:n if th2ae comp:nisa did not own TMI-1 cnd TMI-2.
Tha adjuotment f
reduces the revenue requirement by about $24 million for Met-Ed and $32 0)
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million for Penelee. The calculation of income tax expense in our claim is identical to that used by the Commission in its Orders removing TMI-l and 2.
Now, however, the Staff would have the Commission go further, i.e., not only to have the customers not pay for TMI-l nor 2 but give the customers the benefit of the tax deductions associated with the unrecognized costs of those plants. In the process of bringing in this adjustment, the Staff would produce the bankruptcy of Met-Ed and, eventually, Penelec.
Mr. Wilso: relies upon several court decisions which, he claims, support his view of the tax adjustment he proposes. He fails to distinguish between tax normalization, i.e., timing decisions and utility versus unrelated enterprise decisions and the situation presented in this case. For instance, he relies heavily upon FPC vs. United Gas Pipeline Co., 368 U.S. 237 (1967).
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There, the United States Supreme Court upheld the use, by the FPC, of a method-ology for allocating tax expense between various enterprises. The Court did not, as Mr. Wilson states, " adopt the disallowance of hypothetic taxes that have not or will not soon be incurred." All the Court did was hold that it was within the discretion of the regulatory agency to make such an adjustment scL long as the final result met the standards of just and reasonable rates and the requirements of Hope Natural Gas.
Mr. Wilson, in recommending an adjust-ment that would bankrupt Met-Ed if adopted, makes no attempt to relate the adjustment to the realities of the financial needs of the utility.
He mechani-cally follows a formula.
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1 Tha so-callsd "cctual tex" methodology thct Mr. Wilson rscommends wse explicitly rejected by..angress in connection with the job development tax credit._ It was explicitly rejected by Congress with respect to liberalized depreciation for post-1969 property in the Tax Reform Act of 1969.
It was also rejected by the U.S. Supreme Court, six years after the United Gas Pipeline case, in FPC v. Memphis Light, Gas and Water Division, 411 U.S. 458 (1973), where the Court held that the FPC, in fixing just and ressanable rates, could properly allow normalization of liberalized depreciation on 5
pre-1970 property even though normalization was not required by the Tax Reform Act of 1969.
In point of actual fact, the FPC has explicitly repudiated the formula employed in United Gas Pipelina because it makes no financial sense.
Mr. Wilson tailed to bring this to the Commission's attention, just as he ignored the Congressional activities and the Memphis Light decision.
In Florida Gas Trans-()
mission Co., 47 FPC 341 (1972), the Commission noted the inappropriateness of the formula as applied to the gas exploration industry, because its application "would be discouraging to the very enterprise we now want to encourage".
(at 362) Then, in Southern California Edison (Attachment 3), the Commission stated its intention to depart from earlier policy regardless of the particular industry involved. And, in that case, the Commission suggested a test as to when any consolidated tax savings would be justifiably allocable to a regulated company's consumers. As described in a subsequent decision, summarizing the Southern California Edison case, "The test is whether the consumers paid the l
expenses which created the deductions used to achieve the tax savings." (Columbia Gulf l
Transmission Co.
(Attachments 1 and 2)
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In ths Columbia Gulf ccce, the FPC statcd that th2 customers-only receive the tax savings in those instances where "the savings
- ,Q y._,e could legitimately be attributable to the regulated company's consumers."
This thought follows from a similar one in the Southern California Edison case:
"Certainly... it would be difficult to justify the appropriation of any tax savings attributable i
to this subsidiary by the jurisdictional customers when the same customers did not pay the expenses which created the deductions for tax purposes."
If the Commission decides that the customers will pay no TMI expenses,there can be no basis for giving the tax deductions to the customers when they have not paid the expenses producing the deductions resulting in tax savings.' Hiding behind language such as " actual tax" does not change this fundamental fact. All the adjustment does is to find a basis in ratemaking to further reduce needed revenues for Met-Ed.
6.
Reserve Capacity Expense. The Consumer Advocate's witness would reduce operating expense by $23.1 million for Met-Ed and $11.4 million for Penelee representing the reserve capacity benefits of TNi-1 and 2 under the PJM Agreement. Our claim treats 'his issue exactly as did the Commission in removing the costs associated *.ch TMI-l and 2 from customers rates. The Consumer Advocate would go further and treat the reserve capacity benefit 4
i associated with the Units as if they were operating. To the extent that TMI-1 l
or 2 actually are in service and produce power, the customers will get the reserve capacity credits' as a reduction in O&M expenses. When the units are not operating and the customers are not paying the expenses of the units, there can be no justification for pricing electric service as if this credit were available..
Mr. Dirmeier churceterizss this as a " windfall" income itss to Mit-Ed and Penelec. (Page 25) Nothing could be further from the truth.
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All we have done is to price the electric service as if there was no TMI-l or 2.
This is fully consistent with the Commission's orders.
l 6.
Rate Base Deduction for Accumulated Deferred Income Taxes.
Mr. Dirmeier adjusts rate base for both companies by $155,000 for Met-Ed and $66,000 for Penelee reflecting the difference between the average and year-end balance in the accumulated deferred income tax accounts.. The difference is so small -- reflecting a revenue requirement of only about
$30,000 for each Company -- it is hardly worthy of mention in the context of this proceeding and the needs of Met-Ed and Penelec. The issue revolves around the interpretation of the Internal Revenue Code and whether use of year-end figures might put in jeopardy the Companies' right to use the liberalized depreciation allowance in the tax laws. We continue to believe that it would
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be contrary to good judgment to put this significant tax benefit at risk for an adjustment that is so small as to be lost in the rounding process.
9.
Tax Effect of Capitalized Overheads and Interest.
Mr. Dirmeier has proposed that the income tax deductions associated with interest deductions and pensions for construction work in progress be reflected in reductions for charges to current customers even though current customers are paying no part of the costs that give rise to such deductions.
Even though this policy has been followed in the past by the Commission, we urge, that it be reexamined. We believe that the FERC's Notice of Proposed Rulemaking and associated study by its Staff demonstrate that this is poor regulatory policy, just as it is inconsistent with generally accepted account-ing principles.
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10.
Income Attributable to Non-Jurisdictional Eusiness.
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The tenor of Mr. Kleha's testimony on the matter of assignment of b
revenues to wholesale customers is misleading. He suggests that Met-Ed has been derelict in failing to seek an adequate return from its wholesale customers and that Met-Ed is attempting to " foist" costs on its retail customers. He also states that the rate of return being realized from wholesale customers is 5.45% under present rates.
Mr. Kleha knows, or should know, that the facts are different.
Met-Ed has, for purposes of this analysis, two groups of wholesale customers, namely, (1) the borough of Middletown and (2) all other wholesale customers. For the second group, the Company has been successful in its efforts to obtain rate increases, so that the return being realized on such sales is in excess of that being realized on its retail sales. This Commission
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was an intervener in Met-Ed's last wholesale rate case before FERC and at no time did its counsel in that case suggest that Met-Ed was seeking less than it should.
In the case of Middletown, Met-Ed has a contract made by a predecessor in about 1906. That was several years before the first Public Service Commis-sion was established in Pennsylvania.
It is a contract that provides for a fixed rate of one cent per kwh in perpetuity. Met-Ed filed a petition under Section 206 of the Federal Power Act seeking to have the FPC determine that the rate was not just and reasonable and should be put aside. When it was unsuccessful before the FPC, Met-Ed appealed to the Court of Appeals, again without success. This Commission did not intervene in that case or in that appeal.
If it had done so, it is conceivable that the outcome would have been
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different. !
D Met-Ed is suffsring a subst(ntial less undar thet Middletown centrcct.
Given Met-Ed's circumstances, I suggest that it is not an inequitabe balancing A()
of consumer and investor interests to take cognizance of that loss and not to attribute to Met-Ed revenues from Middletown that Met-Ed has no chance of
-collecting during the next year.
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Insofar as Penelec is concerned, Mr. Kleha has failed to recognize that he treated that Company differently from Met-Ed.
As he recognized in his Met-Ed testimony, Penelee has attributed additional revenues to sales to its wholesale customers, based on the level of its requested increase. Since the present Penelec rates to wholesale customers are providing a greater rate of return than from retail customers, the increase to wholesale customers result-ing from that attribution is about twice that requested from retail customers.
Correspondingly, the amount to be t.ttributed to Penelec's wholesale customers would be wholly eliminated if the Staff's revenue recommendations were to be
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adopted, and would be sharply reduced if less than Penelec's full request were granted.
Mr. Kleha was silent on this subject in his testimony and, so far as I am aware, it has not been reflected in the Staff adjustments in the case of Penelec. Yet, in the case of Met-Ed, Mr. Kleha was careful to recognize that this adjustment would be reduced if the Staf f recommendations were adopted./?.
C.
Rate of Return: The Allowance for Common Equity 1
The Companies filings included a stated return for common equity of 15.5%.
The basis for the filing however, was the additional base revenues necessary to finance the business and to provide some minimal return to investors.
It was stated on the basis of a rate base which included TMI-l l_
investment and other investments which some parties have suggested eliminating,
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b e.g.,
the book dzpracicticn ressrva. If, howavar, ths rets beme is restatsd, or the level of claimed operating expenses changed, the needed additional i
revenues of $76.5 million for Met-Ed and $67.4 million for Penelec will not change. The 15.5% return on equity was simply an initial characterization, one way of stating what is needed.
The Staff and Consumer Advocate testimony as to the cost of common equity do not help much. The Consumer Advocate recommends the " industry averag/'
based on a distorted view of the nature of regulation as a replacement for competition.
Mr. Rothschild overlooks the fundamental fact that an unregulated business can, and would, reduce its levels of investment and output after an accident taking a major production facility out of service. A regulated utility cannot do so.
Met-Ed and Penelee have not done so.
We have a legal obligation to provide adequate service. This obligation forces the utility to continue to expend and invest. Met-Ed and Penelec, as a result of the removal
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of the costs of TMI-l and 2 from rates, are not like other utilities. They do, in fact, have a higher cost of capital.
Mr. Rothschild, in recommending a return for common equity of 13.4% to 14.0% states that, "just as in the competitive world, utilities have a cost of equity which is above the risk-free rate."
But, today, one can purchase risk-free securities, Treasury Bills, yielding 15.75%.
Or, one can deposit his money in an insured savings and loan association at 14.72%.
Mr.
Rothschild's figures are lower than the current yields on Met-Ed and Penelec bonds and preferred stocks -- which are hardly risk-frr.e investments.
What Mr. Rothschild fails to comprehend is that utilties must expend and invest to serve. Unregulated businesses have no legal obligation to do f-s.
so.
If it maximizes profit for a manufacturing company to reduce output, it y
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iiJ does'so. A utility must attreet ecpital. Rothschild's idaa of punishing
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managers and investors (see pages 50 to 52 of his testimony) is simply incon-sistent with the attraction of sufficient capital to have an adequate, reliable electric system. Our customers and this Commonwealth cannot afford the costs which would result from his theorizing.
)
Mr. Packard does not tell what he believes to be the proper cost of equity capital for Met-Ed and Penelec. He says it might be higher than 15.5%
-- or it might be lower.
'e says the " burden of supporting" the claimed rate of return is on Met-Ed and Penelee and then says that Staf f has " adopted, and recommend, the rates of return claimed by Met-Ed and Penelec."
i Mr. Packard also suggests that there is a basis for using the returns on common equity set in Met-Ed's and Penelec's last rate cases because this would " eliminate the effects of the nuclear accident at TMI-2 on the allowable rates of return." Aside from the obvious fact that all money costs are now significantly higher than they were two years ago, the simple fact is that the accident and resulting rate actions of the Commission have disclosed risks to the investor that were not reflected in those prior decisions. The prior allowed rates of return are completely and obviously inadequate.
These Companies have proven that their capital costs and required rates of return are significantly in excess of those of other utilities.
Today, the current yield on an existing Met-Ed bond is about 17.5% to 18%
and on a Met-Ed preferred stock about 18%. Penelec bonds are yielding about 17.5% and its preferred stock about the same. The prime rate is 20% and the cost of short term borrowing to Met-Ed is about 22%. A return on common equity, supported by Dr. Brigham's testimony, of 20% is easily justified.
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D.
Oth;r Fin'_ncici Incuts in the Proceeding.
1.
Depreciation of TMI-l and 2.
In its Order of September 18, O
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1980, the Commission directad that the patties in this proceeding address the issue of the continuation of depreciation on TMI-1 and 2.
With respect to TMI-1, there is no reason why that Unit should not be in rate base and the expenses associated with it allowed in rates. Deprecia-tion is one such expense.
If, however, the Commission continues to refuse to recognize the costs associated with Unit 1, then cessation of depreciation, beginning when the Unit was removed from rate base, is appropriate. This will preserve the TMI-l investment for recovery when it is again generating power.
We do not understand that any party takes exception to this change in deprecia-tion for Unit 1 if TMI-l costs are not provided in current rates. To accomplish this result, however, it is necessary to give reasonable assarance that future ratemaking will be consistent with the revised method of accounting for the
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investment. The Staff of the FERC, which has primary jurisdiction over the accounting of regulated electric utilities, has stated that that agency will require a specific statement with respect to future ratemaking treatment af the TMI-l investment, i.e., that it will be recognized at its undepreciated cost. The Companies believe that they and the other parties to this proceeding can agree as to the specific language appropriate to provide the necessary assurance to FERC to permit this accounting change and expect to submit such an exhibit in this regard to the Administrative Law Judge.
Staff recommands that depreciation of TMI-2 also be ceased.
However, there is significancly more doubt about that asset, i.e.,
its return to service and its future ratemaking treatment, than there is about TMI-1.
l Given the position taken by this Commission as to costs associated with TMI-2,
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e no inv20 tor or-pstsntici invastor would rely up:n earnings rsportsd on tha basis failing to depreciate TMI-2.
The banks would certainly not rely upon GO such earnings to extend credit. The accounting treatment adopted by the Companies, of continuing to depreciate Unit 2, is a conservative position which is intended to reduce that asset on the books of the Companies over time. The Staff of the FERC has expressed opposition to the cessation of depreciation of TMI-2.
That body, as noted previously, has primary jurisdic-tion over the accounting of Met-Ed and Penelec.
2.
Complaints against the Temporary Rates: Restatement of the Deferred Energy Balance.
In its Order of May 23, 1980, the Commission stated that if the temporary rates set by that Order were " unreasonably low" r
then "an adjustment can be granted through restatement of (Met-Ed's and Penelec's) balances of deferred energy costs." The Companies have presented evidence to demonstrate the unreasonableness of the rates set by those Orders in terms of a then historic test year (i.e., 12 months ended March 31, 1980) and a partially-projected test year (i.e., 12 months ended March 31, 1981).
This is true even on a basis which fully reflects the Commission's prior position with respect to the ratemaking treatment of TMI-l and 2.
CONCLUSION A forecast of the cash needs of Met-Ed demonstrates conclusively that it requires additional cash revenues and/or credit of about $76 million j
through the Spring of 1982, i.e., the time when its next rate case could be completed.
Prior to that time, Met-Ed must induce its banks to renew about
$55 to $60 million of notes which mature on April 1,1981; must borrow an additional $20 million from the banks to pay state revenue taxes in mid-April, O
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O 1981; must obtcin renewal of ths rsvolving crsdit egraiment wh2n it maturcs en October 1, 1981; and must be in a position to again pay its state taxes in the Spring of 1982. The full rate relief requested hece is the minimum necessary to do this. The controlling legal standard of just and reasonable rates would certainly not be violated by granting these rates. There are techniques available - extending the collection of deferred energy at a lower level and restating the deferred energy to recognize the unreasonably lov level of current base rates - to accomplish this result. The many adjustments of the Staff and the Consumer Advocate - suggested without regard to any basis in financial needs or realities - simply can not be permitted to stand in the way of reaching a proper result in these proceedings.
OV 1
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