ML19347E674
| ML19347E674 | |
| Person / Time | |
|---|---|
| Site: | Crane  |
| Issue date: | 12/19/1980 |
| From: | Budetti F BUDGETTI, F.R. |
| To: | |
| Shared Package | |
| ML19347E637 | List:
|
| References | |
| G-80060098, G-80070101, I-79080320, P-80100242, NUDOCS 8105130210 | |
| Download: ML19347E674 (62) | |
Text
,
' ;=
-[*.
O O
COMMONWEALTH OF PENNSYLVANIA PUBLIC UTILITY COMMISSION DOCKET NOS.
I - 79080320 G - 80060098 G - 80070101 P - 80100242 Testimony On Proposed Management Combination of Pennsylvania Electric Co.
and Herropolitan Edison Co.
Frank R. Budetti, Witness For.7ARI, Inc., et al December 19, 1980 I
' O
!8105130$0p l
l 1
~>
AV TABLE OF CONTENTS Page I.
Statement of Qualifications 1
II.
Purpose and Scope of Testimony 4
III.
Conclusions Reached in this Testimony 7
IV.
Background of the Issues 11 l
THE MANAGEMENT PROCESS V.
The Presence of Top Management 16 VI. The P'rocess of Top Management Reorganization 22 VII. The Time Available to Top Management 25 VIII.
The 75 ue Cost of Savings of the Consolidation 30 THE REGULATORY PROCESS IX.
A Certificated A'rea Should Stand Alone 36 X.
Loss of Service A.ea Identity 40 XI.
A Different Merger Scenario 43 THE FINANCIAL PROCESS XII.
Are They Now One?
47 XIII. The Benefits are Not Penelec's 52 i
I O
l ' a, O
1, 2
1.
STATEMENT OF QUALIFICATION 3 3
4 Q.
Please state your name, business address and occupation for 5
the record?
6 A.
My name is Frank R. Budetti.
I am president of my own finn 7
and'a Certified Management Consultant. My business address is I
8 1415 Elbridge Payne Drive, Suite 120, Chesterfield, Missouri 9
63017.
10 11 Q.
Mr. Budetti, what is your experience in the matter before O
12 this commission?
13 A.
In the utility and regulatory 6re, I have parformed cost 14 of service studies, rate design 1niastigations, energy clause 15 analyses and have analyzed, critiqued or testified on 16 utility filings in thirty-seven separate engagements in some 17 twenty different jurisdictions, including Alaska, Arkansas, 18 Florida, Georgia, Iowa, Kansas, Maryland, Massachusetts, 19 Minnesota, Missouri, Nevada, New Jersey, New Mexico, New York, 20 Ohio, Pennsylvania, Tennessee, Texas, Vermont and the Virgin 21 Islands.
22 In addition, I have had overall control of a Federal 23 Energy Administration grant to conduct an experimental rate O
24 design pro 3ect for the Arkansas euslic Service Commission and 25 Arkansas Power and Light Comnany.
I deveinned and testi?1ed 1
on fuel clause designs for the Kansas Corporation Comission 2
on all electric and gas utilities within the state.
3 4
Q.
Have you performed management audits and organizational reviews 5
of regulated utilities and public entities?
6 A.
Yes, I have.
I have been in charge of the following managemnt 7
reviews: The Trans - Alaska Pipeline System, Pennsylvania Power 8
Co., Iowa Electric Co., the Missouri Public Service Comission, the 9
City of Newark, N.J., the St. Louis County Circuit Court, the 10 City of St. Louis Circuit Court, Anchorage Sewer Utility, and the 11 City of Garland Sewer Utility.
12 I worked on specific areas of the following management 13 audits, as well as performing a partner level review of the 14 final products: the Western Electric Co., the Public Utility 15 Commission of Ohio, and the New Mexico Public Service Comission.
16 17 Q.
What is your educational background?
18 A.
I received an A.B. degree in Engineering Science (mechanical,
.19 civil and electrical engineering combination) and a Bachelor 20 of Mechanical Engineering degree from the.Thayer School of 21 Engineering; and a Master of Business Administration degree, 22 cum laude (major: Production Management, minor:
Finance) 23 from the Amos Tuck School of Business Administration, all at O
24 Dartmouth College in New Hampshire.
25 2
i 2
O 1
Q.
What was your position prior to having your own consulting 2
fim?
3 A.
I was a consulting partner with Touche Ross and Co., and 4
I directed the St. Louis consulting practice.
I also served 5
on the fim's Regulatory Consulting Policy Group.
Further 6
infomation on sty background and experience is contained 7
in the resume which is included in this testimony as Schedule 1.
8 9
Q.
Have you testified before this Comission in previous matters?
10 A.
Yes, I have.
I testified on the management audit of the 11 Pennsylvania Power Co. for Touche Ross & Co., the fim chosen O
12 hy the Comission to Rerfom the audit.
I have recent,y 13 testified in the West Penn Power Co. rate case for the 14 Pennsylvania Office of Consumers' Advocate.
15 16 17 18 19 I
20 21 22 23 O
24 25 3
I 3
1 II.
PURPOSE AND SCOPE OF TESTIMONY 2
3 Q.
Mr. Budetti, wnat is the purpose of your testimony?
4 A.
The purpose of this testimony is to reach a conclusion as to 5
the appropriateness of the Gsneral Public Utilities Corporation
~
6 (GPU) suggested management merger of Metropolitan Edison Company 7
(Met Ed) and Pennsylvania Electric Company (Penelec).
I will 8
then reconnend a course of action to the Pennsylvania Public 9
Utilities Comnission (PUC).
10 l
~11 Q.
Who do you represent in this matter?
O 12 A.
I have been retained by the iaw fir. of Strassworg'er Mcxenna 13 Messer Shilobod & Gutnick who represent intervenors in this 14 proceeding. The intervenors are Johnstown Area Regional 15 Industries, Inc., Johnstown Area Econon:ic Development Corporation, 16 Johnstown Industrial Development Corporation, and Johnstown 17 Industrial Park, Inc.
18 19 Q.
Have you been asked by your clients to provide a special 20 Perspective on this matter before the PUC?
21 A.
Yes, I have.
I agreed with my client that it would be appropriate 22 to perform my analysis from the point of view of the customers 23 of Penelee.
Penelec holds che certificate to provide electric O
24 service under euC surisdict. ion in this service area.
25 4
1 a
O 1
Q.
Were you asked to consider the merger from the point of 2
view of GPU?
3 A.
No.
I was informed that GPU is not a regulated Company 4
and does not hold a. certificate in the Penelec service area.
5 6
Q. Were you asked to consider the merger from the point of 7
view of Met Ed?
8 A.
No, I was informed that Met Ed does not have a regulated 9
service area that coincides with Penelec and, in fact, 10 cannot have one since both Penelec and Met Ed provide the 11 same service to their customers.
I was infonned Met Ed has Q
i 12 its own certicficate to provide service elsewhere, and that PUC 13 law and rulings to date did not ailow subsidization of Met Ed and 14 its customers, or of GPU, by Penelec customers. Many of my 15 conclusions as to the impact of the merger on Penelec hold, 16 however, for the Met Ed customer.
17 18 Q.
Was this te timony prepared by you or under your direction?
19 A.
Yes, it was.
20 21 Q.
What sources of information were you able to use?
22 A.
I have reviewed a significant amount of material in this case.
23 Some of that material is the following:
O 24 Cross-examination of J.G. Graham and F.D. Hafer 25 and the direct cross-examination of William G. Kuhns 5
O 1
and Herman Dieckamp 2
Testimony of Theordore Barry & Associates.
Perry L. Wheton and Thomas E. Dewey, Jr.
Testimony of Theodore Barry & Associates, 4
Robert B. Parente and James M. Hogan; testimony of James K. Maden 5
Three. Mile Island Socio-economic Impact Study 5
prepared by the Governor's Office of Policy &
Planning 7
Conservation and Load Management Master Plan 8
prepared by General Public Utility 9
Report of the Governor's Commission of Three Mile Island 10 Volume 1, (Parts 1,2, and 3); Volume II, (Parts 11 1, 2, and 3) A Report to the Comissioners and to the Public.
O 12 Photocopy of the direct testimony of Theodore 13 Barry & Associates.
Combined Management Agreement of Met Ed and Penelec 14 15 Petition to intervene by my clients before FERC 16 GPU Companies Response to Petition before FERC Theodore Barry & Associates (TB & A) preliminary 17 report on management combination dated. June 26, 1980 18 TB & A September, 1980 report on GPU Pennsylvania 19 operations Transcript of depostions in Docket fI-79040308 of 20 Kuhns and Dieckamp I also reviewed material submitted by the Penelec attorney's 22 to my client after pre-hearing conferences held in itovember,1980, in'Harrisburg before Administrative Law Judpe Edward Casey.
0 24 25 6
I 1
III.
CONCLUSIONS REACHED IN THIS TESTIMONY 2
3 Q. Mr. Budetti, what conclusions have you reached regarding 4
the issues in this matter before the PUC?
5 A.
I have concluded that the management combination would 6
not be in the interest of Penelec customers at this time.
7 I have reached this conclusion for the following reasons:
8 1.
The TB & A report, prepared by the consultant g
the PUC chose to perform a management audit of 10 Penelec and Met Ed have 'not proven in their 11 report of September, 1980, that the combination 12 is in the best interest of the public of Penelec.
13 2.
The plans submitted'by Penelec, who as I understand 14 bears the burden of proof in this hearing, do not 15 prove that the combination would benefit the 16 Penelee ratepayer.
No compelling financial 17 reason or subjective reasons have been provided 18 in support of the merger.
19 3.
At the present time the problems of GPU and Met Ed 20 will require intense management attention and time 21 to keep the'se two companies out of reorganization 22 or bankruptcy. To move all of Penelec's top 23 management to the task of solving the GPU/ Met Ed C
24 problem can only cause long tenn costs to Penelec 25 customers.
iO 1
4.
Using the TB & A report, there are over $2 2
billion of present value savings in energy 3
production, division consolidation, load 4
management and conservation measures to be 5
pained by using management time and dollar 6
resources in these specified areas. To forao 7
these savings or delay them because of time comittments to solve the GPU/ Met Ed problems g
are not in th. best interests of Penelec customers.
The potential of $1.2 million savinas from manaaement consolidation in future years is not a prudent offset Q
to the savings to be pained in other areas.
5.
In times.of sinnificant corporate problems or 13 large potential savings to be developed, most 14 corporations bring more mangement to bear on 15 the problem or opportunities, not less.
It is 16 not a prudent management decision to reduce
,, Penelec's top mangement group at this time, nor 1
is it prudent to reduce mananement time to be soent 19 on Met Ed's problems.
20 6.
The very process of management reorganization is 21 time and money consuming.
Given the present 22 problems facing Met Ed, the consolidated management 23 probably will not have the time to effect a smooth 24 and orderly transition to new management practices and 25 personnel'.
8
i o
1 7.
The consolidated management will find it diffic, ult 2
to respond to two separate' directives from the Boards 3
of Directors and to two separate operating and 4
financial conditions for Penelec and Het Ed. The 5
opportunities lost to Penelec resulting from an overcomittment of resources to Met Ed could be 6
significant.
7 8.
The regulatory identity of Penelec, vthich has 8
been based on the unique history, growth, and service area characteristics of Penelec, will be lost by the consolidated management. J.The notentials 11 for conflict between the two separate certificated h
12 areas could be great.
13 9.
Penelec, as a stand alone company, would never 14 chrose to denude itself of its top management and 15 become a $1.3 billion division of a financially I
troubled company.
I 10.
If GPU and/or Het Ed were to go into reorganization 18 or bankruptcy, which is a real possibility 19 according to TB & A, then Penelec will reouire 20 its own full-time management to deal with the i
l 21 fall-out from such a situation. There are 22 constraints on the management of a reorganizing-23 company which might not allow adequate time to be spent O 24 worrying the day to day to, management concerns.of 25 Penelec.
Met Ed, as a company in reoroanization or bankruptcy, would also need its own full time manaaement.
O 1
- 11. The financial risks o' Met Ed.and GPU may be 2
spread to Penelec at a result of the consolldstion.
3 4
Q.
Have you expanded on these reasons in the following sections 5
of your testimony?.
6 A.
Yes, I have.. Each section contains the support behind these 7
conclusions.
8 9
10 11
> ( ])
~
12 13 14 15 16 17 18.
19 20 21 22 23
()
24 1
25 l
10
~
O l
IV.
BACKGROUND OF THE ISSUES
~
E 3
Q.
Mr. Budetti, could you present a short background of haopenings 4
leading to the issues in this hearing?
5 A.
Yes, I can. Without restating the volumes of material that 6
has preceeded this hearing, the following is a synopsis of 7
crucial events:
8 1.
After the nuclear accident in March,1979, the 9
Pennsylvania PUC asked for a management audit of 10 GPU and the Pennsylvania companies, Penelec and 11 Met Ed. TB & A was chosen to perform the audit.
O-12 2.
In January,1980, top m.iagement of GPU presented 13 testimony announcing the fomation of a. new operating 14 subshn, GPU Nuclear, which would assume all 15 management, engineering, and operating responsiblities 16 for GPU run nuclear plants. Management also announced a plan 17 to consolidate or merge the top management of 18 Penelec and Het Ed, and to base the management groun at l
Met Ed's headouarters in Reading, Pennsylvania.
yg 3.
A preliminary report on the preposed management 20 e nsolidation was issued by Theodore Barry & Associates 21 (T8 & A) in June,1980.
22 4.
Many internal reports and memos were prenared by 23 l O company management in support of the consoiidat4on.
2, l
25 1
11
l l0 1
I characterized the reports as implementation 2
documents, done prior to analyses of benefits 3
to consumers and certainly prior to approval under 4
the affiliated interests concept.
5.
The final TB & A report issued in September,1980, 6
stated, with regard to the management consolidation, 7
that TB & A endorsed the plan.
The inference in the
)
8 report was to $18 million saving from.the consolidation.
g 6.
Filings before the PUC and FERC are now pending 10 with regard to the public interest'.being served by 11 the proposed management consolidation.
,O
~
Q. At the time the final TB & A report was issued, what
'was the overall situation from your point of view?
A.
As I shall explain in detail later in my testimony, the 15 following situations exist:
16 1.
Met Ed is in extremely poor financial and 17 cash flow condition, as is the parent, GPU, 18 and TB & 6 warns of impending conditions for 19 bankruptcy of Met Ed.
20 2.
Major programs are reovired to run GPU, Met Ed, 21 Penelec, and Jersey Central Power & Light Co.,
22 (JCP & L) another GPU subsidiary, on a daily 23 basis in addition to the huge management and O
24 financial program required to save Het Ed from 25 financial disaster.
3.
Major management and financial connittments are e--
c-
---c
O 1
required to affect TB & A's estimated savinns in 2
the areas of energy generation, conservation, load 3
management, and divisione.1 reorganizations.
4 5
Q.
Based on the present situation, what do you perceive the 6
response of GPU is to this situation?
7 A.
As I see it, GPU wants to accomplish the following as 8
quickly as possible:
9 1.
Use the consolidated management and available 10 credit to save Met Ed from bankruptcy.
11 2.
Use the consolidated management and available O.
12 cash to effer.t the major programs required to 13 consolidate the management.
14 3.
Carry out the necessary steps to effect the over 15
$2 billion present value savings identified in the 16 TB & A report.
~17 4.
Lise the consolidated management and available 5
gg cash to develop systems required to support the g
management Consolidation. TB &. A estimates some of l
20 these systems will take 5 years to complete.
5.
In the event of bankruptcy, which act may be 21 utside of the control of either the PUC and the 22 companies (GPU, Met Ed), GPU will leave a 23 Ou consolidated management at Met Ed under the strict bankruptcy law management constraints, to
1 solve Met Ed's problems as well as the orablems 2
of the $1.3 billion division, Penelec, which may 3
have major problems due to the fall-out from a 4
Met Ed bankruptcy.
5 Q.
And based on the present situation you developed earlier, 6
what is the situation before t'te Pennsylvania PUC?
7 A., The PUC is faced with the following:
g 1.
GPU, a non-regulated company, is trying to retain control of the stock of it's subsidiaries -
10 and save itself from bankruptcy.
11 2.
A revolving credit agreement (RCA) where GPU O.:
12 has collateralized the RCA with the common 13 stock of Penelec, Met Ed. and JCP & L.
If GPU 14 goes into bankruptcy, the coenon stock will.
transfer to the banks in the RCA.
16 3.
Penelec, as a Pennsylvania regulated utility, is 17 haina presented as a possible avenue to use to make the 18 Met Ed problem go away (and, in fact, to make Met Ed, 19 the company, go away) and to save Met Ed, GPU, 20 and their banks and investors.
21 22 Q.
Given the current situation, what are your conclusions as to 23 alternatives available that will best serve the public interest of i Q 24 Penelec, as reouired in the affiliated interest statement:
25 There are presented only two alternatives: The first is to effect 14
O 1
2 the merger of Met' Ed and Penelec. This alterhative does not, 3
in my opinion, serve the public interest of Penelec. The 4
alternative, in fact, will hurt the Penelee public. The second alternative is tc leave Penelec ma.nagement alone to effect the billions of dollars 5
of savings available to it. ' GPU should then restructure Met Ed, which 6
will have no nuclear operations.
In the following sections of my 7
testimoriy I will expand on each of the issues I have raised in this 8
section.
9 10 11
(}
12 13 14 15 16 17 18 19 l
20 l
21 1
22 23 l O 25
O THE MANAGEMENT PROCESS 1
2 V.
THE PRESENCE OF TOP MANAGEMENT 3
4 0.
Mr. Budetti, what conclusions have you reached about the 5
presence of top management that are supportec! in this section?
6 A.
I have concluded that the loss of full-time ranagement from the 7
Penelec headquarters and service area would be detrimental B
to the Penelec customers. My conclusions are based on the 9
following findings:
10 1.
In a decentralized organization such as 11 Penelec's, top management has been an integral O
12 a rt ar the aa$taria9 ad caatra' =rsta - s'ac-13 there is no system in place to replace them, the 14 loss of top management could cause problems for 15 Penelec and its customers.
16 2.
Planning for a company is best accomplished by 17 a top management that has now and will always 18 have detailed operating knowledge gained from 19 being in the service area and from being an integral 20 part of the comunities they serve.
21 3.
Execution of top management level decisions is 22 more efficiently accomplished by on-site top 23 management.
24 4.
Penelec, which will become a $1.3 billion division 25 to the new management group, has had a full-time 16
O I
management team present and yet, according to 2
TB & A, still has major cost savings to be realized 3
in the areas of energy efficiency, divisional 4
consolidation, energy conservation and load manape-5 ment.
It is not apparent inat these areas of 6
saving can be worked on to the benefit of Penelec's y
customers by moving Penelec's management and increasing a
managements' responsibilities to include the 9
financially troubled Met Ed.
10 11 Q.
Mr. Budetti, what are some of the basic tenets of management 12 that are crucial to the issue of the required hesence of 13 top management at Penelee?
14 A.
In my experience, all management is performed by people at 15 varying levels of responsibility and authority. This is 16 true from the Chief Executive Officer or President down to 17 the lowest classification of laborer. Each level of manage-18 ment, whether operational or staff, provides their time and 19 talents to managing the classic items-money, material, manpower, 20 machinery, and markets.
21 22 Q.
What differs at the various levels of management that 23 differentiate er.e level from another?
~
l 24 A.
Each level of manag~ ement assumes a different level of i O l
25 authority and responsibility over the four' basic functions l
37
]
O 1
of managing one or more of the five items in the previous 2
answer. The four functions are organization, planning.
3 execution, and monitoring or control. While one can visualize 4
that even the lowest classification of laborer performs, to 5
some degree, each of these four functions in his job, the 6
overwhelming responsibility for all these actions on a 7
company-wide level falls wit'h higher levels of management.
8 The levels of responsibility and authority associated with the 9
four functions are the differentiating reatons, obviously, for 10 the vast difference in compensation between the highest and 11 lowest levels of an organization.
12 1
13 Q.
What does the presence of top levels of management add to 14 the efficient running of a company?
15 A.
Top levels of management are crucial to efficient operation 16 of a corporation. The majority of all planning is done by 17 the Board of Directors and top management. The organization 18 of a company is defined by the Board of Directors and top 19 management.
Execution, which is policy adaptation, is 20 performed by all layers of the company, although top 21 management performs most important decision making on a day to 22 day basis. Monitoring and control is almost exclusively 23 a top management function. Without the time and talent of top management required to perform these crucial functions on 24 a a y s,
rganizations tend to kaak down.
Q 25 18
i
,o 1
Q.
Organizations can take the basic management form of 2
decentralized or centralized.
Do these two forms differ 3
significantly in their requirements for the presence of 4
management?
'5 A.
Yes, they do. A decentralized organization, such as Penelec.
6 keeps major authority and responsibility for p'ichning, 7
execution, and control with top management who are close 8
to operations and involved in day to day operations. The g
reouirements for strong monitorino systems are lessened with 10 this type of organization when compared to a centralized 11 organization. A centralized organization keeps much more
,,O 12 of the o,e,ations decision ma=ing away from the o,e,at4 ns, 13 and relies on very strong on-site lower level management 14 people controlled by very demanding reporting and monitoring 15 systems. Almost all major decisions must be cleared 16 through top management in the centralized organization.
17 18 Q.
Why is the presence of management important in a decent %11 zed Ig company such as Penelec?
20 A.
The presence of management is the substitute for elaborate
~
l 21 and demanding reporting and monitoring systems. Additionally, 22 the management of large geographic area companies is easier and 23 more efficient with decentralized management. By olacing i
24 more freedom and autonomy on the top manaoement located on 25 site, day to day operating decisions can be made on information l
(
19
t O
I collected verbally or written daily.
~
2 3
Q. Mr. Budetti, does TB & A address the problem of losing the 4
presence of Penelec's management on the PeneleC oDerations 5
and, ultimately, on the Penelec customer?
6 A.
No, they are very much silent on the role of top management in 7
the organization change. The TB & A reference to Penelec's needs 8
is on page VI-6 of the TB & A September, 1900 report. There 9
they state that "the relatively more decentralized management 10 approach attributed to Penelec may have resulted from (and, in 11 fact been more desirable due to) the more widely dispersed service O
territoryandgreaterdistances,betweendivisiJnsandcor, orate 12 13 headquarters." One must wonder how quickly things will deteriorate 14 for Penelec customers when the proposed management combination,
15 pulls top management out of the same size service area to 16 corporate headquarters located at an even farther distance.
17 18 0.
What was the GPU statement relative to the presence of managenent?
19 A.
In a deposition taken on April 3,1980. Messrs Kuhns and
-20 Diekamp ellude to management maintaining an office in Johnstown 21 and comuting between Johnstown and Reading on a weekly basis.
22 The concept of eleven top executives commuting weekly between 23 Johnstown and Reading is ludicrous.
'I#
Q I
25 Q.
Mr. Budetti, do you think that GPU or their Pennsylvania 20
O I
companies have proven that a part-time, connuting management 2
team can improve the Penelec operations for the benefit of 3
the Penelec customer?
4 A.
No.
I think t.ht ; full-time presence of top management is 5
required at Penelec.
For Penelec to become a $1.3 billion 6
asset division of Met Ed. managed part time by a centralized 7
management team, located in Reading, Pennsylvania, is to 8
the detriment of the Penelec consumer.
9 10 11
~
~
O 12 13 14 15 16 17 18 19 20 21 22 I
23 24 O
25 21
I
~
l 1
VI. THE PROCESS OF TOP MANAGEMENT REORGANIZATION 2
i 3
Q. Mr. Budetti, what conclusions have you reached in this 4
section regarding the process of merging the top management 5
of two separate operating companies, with differing 6
management philosophies and service area characteristics?
7 A.
The merger.of management being recommended in this instance 8
is a project most major corporations like Met Ed and 9
Penelee would consider a major project demanding full 10 management and staff attention and time. The system 11 consolidations and changes, corporate identity and logo Q
12 changes, logistics of moving, building of new management 13 relationships, coordination of all control and monitoring 14 reports, and assignment and realization of new respon-15 sibilities and authorities of management will require 16 large sums of money and top management attention.
It is 17 my conclusion that the two companies do not fully under-18
. stand the consequences of the change in terms of management 19 attention and time and corporate funds. The TB & A report 20 deals with the issue only briefly. The customers of Penelec 21 will be hurt by the time and money reouired to simply make 22 the management consolidation happen, notwithstanding the 23 other requirements of management stated in other sections of my 24 testimony.
O 25 Q.
Is the change from a relatively decentralized operation to 22
O I
a centralized operation a difficult process?
~
2 A.
Yes it is, for reasons I have mentioned in previous sections.
3 While momentum of the remaining lower management team would allow 4
some efficient operations to continue, the loss of the top 5
management team ca'n quickly lead to a loss of control in many i
6 organizatioris. Some of the management resources presently with i
7 the companies required to cope with the issues of consolidation may 8
be those individuals slated for reduction in the consolidation.
9 10 0.
What kind of effort is required to consolidate management of 4
11 two separate companies?
- O 12 A.
As one moves to the top of a management organization, the 13 issues and decisions required to make a company run efficiently t
l 14 become more complex. At a lower level of managemer.t such as 15 divisional operations, my experience is the same as TB & A j
16 reports on page VI-22 of their report. There, speaking of i
17 divisional management consolidation, they state:
18 "TB & A's exoerience with other utilities which 19 have consolidated division operations is that the 20 planning and mechanics of consolidation (such as i
21 budget and accounting revisions and selection of l
22 management team) take about one year and that com'lete p
23 implementation can be achieved in two to three years."
24 If one would agree that the efficient implementation of the 25 management consolidation of top management is much more 23
e i'O I
difficult than that at the divisional levels, one can see l
2 that the two to three year time period is more reasonable.
3 i
4 0.
Based on your readings and experience, will the manaoement 5
consolidation be easy to accomolish?
6 A.
No, it will not, especially in view of all other problems now j
7 existing in the Met Ed/GPU Coarianies.
i 8
i 10 11
~
!O 22 13 i
f 14 i
is i
16 1
e i
17 i
18
)
19 1
20 4
]
21 l
22 23 O
25 1
24
i O
1 VII THE TIME AVAILABLE TO TOP MANAGEMENT 2
3 Q. Mr. Budetti, what conclusions have you reached about the 4
time available to top management that are suonorted in 5
this section?
6 A.
I have concluded that the time available to the consolidated 7
management nroup, in view of the problem facing GPU and 8
Met Ed and in view of the opportunities facino Penelec, will 9
not be sufficient to give Penelec customers the full time 10 management team they have been used to. Additionally, Penelec
- 11 customers will not be able to benefit from cost savinas in h
12 as timely a manner. The TB & A analysis has shown that 13 Penelec customers have paid unnecessary costs, in my opinion, 14 for the instances when top managements time was spent dealino 15 with other major problems in the GPU system.
16 17 Q. What will impact the time available to management in the 18 current situations you briefly out1.ined in Section IV of this ig testimony?
20 A.
Volumes have been written on the problems currently facino 21 GPU and its operating companies. The press and public 22 understand the problems. TB & A, on nage II-2 and 3, describe 23 five indisputable facts that face GPU/ Met Ed.
Notice that 24 the section does not include Penelec as facing these problems.
.O 25 I have paraohrased tne five facts as foiiows:
l l
u
l 0 I
1.
GPU is in great jeopardy.
2 2.
The problems involved and the solutions required are comolex.
3 The following circumstances contribute to the problems and the new management must spend 4
considerable if not full. time resolving them.
a.
Fragmentation of responsibility.
5 b.
Institutional weariness and dissat-isfaction over slow prooress.
6 c.
Public health and safety.
~
d.
Public uneasiness.
7 e.
Limited financial options, including Met /Ed being unable to pay dividends 8
on preferred stock, and deteriorating liquidity of the Company which may 9
lead to default and bankruptcy.
10 3.
The problems are resolvable, but they must be solved within a short time frame.
11 4.
Time is of the essence.
.O 22 5.
A broad perspective may be necessary to resolve 13 the problems.
14 A layman can appreciate that these facts present an 15 incredible task to the management that must face them. Saving 16 a company from impending bankruptcy is a full-time manaoement 17 effort.
18 19 Q.
How would.most companies deal with these set of facts't 20 A.
Most cocpanies, when faced with major problems, bring 21 more talent to bear on the problem. This fact is the 22 reason that most consultants and financial advisors have 23 an incredibly large number of opportunities available to 24 assist organizations. To the extent Met Ed and GPU will
~
.O 25 be meeting with advisors, financial 4nstitutions, ani 26 other experts, additional top mnaoement time will be 26
i i
required with the=e peonie.
2 3
Q.
What haopens to operations when top management cannot 4
place their full attention on those operatiuns?
5 A.
Operations, in the long run, will suffer. The momentum 6
of an operating organization may carry it efficiently for 7
a short time period (i.e. six months), but after that 8
performance usually breaks down. TB & A highlights in its g
report, on page II-6, the result of diverting management time 10 and attention from the nomal business:
11 "It appears that the Company could have devoted more i
~
Q 12 attention to power plant productivity and maintenance during
~
13 the mid-1970..........
The decline in plant performance is 14 partly attributable to diverting resources to bring major 15 new generating plants on line and to meet evolving environ-16 mental regulations.
In spite of the recent improvement in 17 oerformance there are some causes for concern. The fact 18 that megawatt hours lost to forced outages has not signifi-39 cantly declined since its 18 percent increase in 1977 may 20 indicate that equipment and maintenance problems still j
21 exist.
Furthermore, the transfer of GPUSC's Generation i
Productivity Department personnel to work on TMI-related 22 l
23 problems may negatively impact power plant oerfomance in 24 future years. Opportunities exist to improve fossil-fuel 25 power plant performance by 3% which could provide over 26
$13 million of annualized savings to GPU, exclusive of 27
l
-Q I
capital investments requirect,"
2 3
Q. What can you conclude from the TB & A finding?
4 A.
The first conclusion is their conclusion, that costs may
-5 increase in future years because management time has been 6
diverted from Penelec's operations. Additionally I would 7
conclude that Penelec's rate payers, since the mid-70's, 8
may have incurred over $40 million in revenue requirements 9
($10 million per year for four years, 1977-1980) because 10 of management inattention. This revenue requirement was 11 incurred during the mid to late 70's when no crisis existed O
12 sim41ar to that now fac4ng,uinet Ed.
13 14 Q.
Since the reorganization in itself is a major change to 15 which most corporations devote full time, what warning 16 has TB & A made in 1-report as to available management 17 time?
18 A.
TB & A puts the management reorganization challenge in 19 perspective on page VI-22. They state "with other pressing 20 demands on management time, it may be difficult for the 21 company to devote the resources and organizational expertise 22 necessary to implement the managemnt combination in a 23 timely fashion." Given all of the warnings as to the required 24 management time needed to save GPU/ Met Ed from bankruptcy, it O
2s is my conclusioa that little time exists to accomplish a ma3or 28
i l
l 0
1 1
reorganization. GPU/ Met Ed management time is needed to 2
save themselves. TB & A has identified programs yielding 3
billions in sayings that must be staffed (costing dollars) 4 and managed (costing time). To add the consolidation project 5
to this list and to leave Penelec without top management 6
will not be in the best interest of Penelec's customers.
7 8
0 Will additional demands be put on management's time by 9
proups with differing responsibilities?
10 A.
Yes. A single management team running two companies with necessarily 11 separate boards of directors will face an interesting dilema 12 when time comitments to carry out board directives become 13 too great.
Given a Board of Directors (Met Ed) working on 14 saving a company from bankruptcy, the Penelec Board my be 15 left without sufficient management time to work on Penelec's 16 problems. No one can measure, but it is easy to guess at 17 the large size of, lost opportunities to Penelee resulting 18 from an overcomitment of resources to a struggling company.
19 20 21 22 23 24 O
25 29
O 1
VIII. THE TRUE COST OR SAVINGS OF THE CONSOLIDATION 2
3 0.
Mr. Budetti, what is your conclusion regarding the potential 4
cost of the management consolidation that is based on the facts 5
and findings presented in this'section?
6 A.
Based on the fa:ts presented in the TB & A rer?rt and based 7
on my experience, the $1.2 million potential savino predicted 8
from the management consolidation may not be realized and, in fact, g
substantial costs will arise when all of the considerations 10 arising out of the mananement merger are considered.
11 4
Q.
What are the early credictions as to the near-term saving of the 12 O
ca 6'"a"'
13 34 On pane VI-13 of the TB & A renort, the saving is estimated at A.
m n annua y.
n u m yea n s expectd, as 15 stated on pace VI-14, that $8 million will be realized throuah cost avoidance.
18 0.
What are the present predictions as.to the near-term savings of the manaoement combination?
20 A.
Mr. F.A. Donofrio, in his December,1980 testimony, now estimates i
the benefit of the corporate consolidation (PN/ME Exhibit 7) at 22 only $1.2 million. The remaining $8.8 million in savin'gs is now 23 classified as divisional savings. TB & A did not assume manacement 24 consolidation savings and divisional savings as both beinn part O
23
,,,,,s,,,m,,,,,,,,,,,,,,,,,,,,,,,,,,,,,
30
O 1
0.
What is the support for these savings?
2 A.
I could find very little support for the estimated savings.
3 Starting with preliminary management reports on the impact 4
of th'e consolidation, which were first released in April of 5
1980, divisional savings of $6.2 million from personnel 6
attrition was est'imated.
However TB & A, in its September 7
report, stated that the divisional consolidation "could be 8
achieved independent of a management combination" (page VI-17, 9
TB & A September,1980 report).
It also stated, on pape 10 VI-19, that there is a need for more in-depth analysis of the divisional consolidation. This indicates to me that the $6.2 33 million saving is certain1v in nuestion.
In fac,t, by time the 12 June 10,1980 BlueBookraport(ManagementCombinatinnPlanninn 13 Draft prepared by Penelec/ Met Ed management revised 6-4-80)
Was prepared, the Cost benefit of the management consolidation was as follows (page 66 of report):
Year Cost Savinos
- 1
$1.198 Million 18 2
$.315 million 3
3.315 million 19 4 and future 5.703 million 20 Workpapers supplied by the Company show calculations of $8.48 21 million in consolidation reduction, of which $3.1 million is 22 Penelee and $5.3 million is Met Ed (analysis completed approx-23 imately 6-4-80)..The 7-21-80 analysis shows the same $8.4 24 million of annual savinos from the consolidation.
However 1 Q
25 did not find these figures in any internal reported dated after 6-4-80 or in the TB & A report in the detail shown on the 31 l
l l
V'O I
workpapers.
2 3
0.
What is your conclusion as to the timino to the potential $1.2 million 4
consolidation savings, the $8.8 million divisional savings, and 5
the $8 million of cost avoidance?
6 A.
On pace 43 of the June li,1980 Draft Summary Report, it states 7
that the ultimate reduction is 250 people or $10 million.
Based i
8 on all analysis I have seen to date, the $10 million savino is 9
at least 5 years off.
In fact, the consolidation will cost almost 10
$1.2 million in its first year, a share of the cost which Met Ed at least, cari not afford at the present time. The cost avoidance g
is a future year estimate.
i 12 Q. Mr. Budetti, TB & A shows in their report that to implement the conservation and load management program an additional 200 employees will be needed. rias that 200 employee addition, or approximately $8 million using We Company's proportions of 16 cost to staffing level, bgsn t c1Wed in the analyses?
17
- i A.
T do not see that calculation in the wrkpaners or reoorts.
19 TB & A does mention the requirement. But the tutal cost / benefit i
20 of the consolidation and TB & A cost reduction rarograms are 21 never consolidated. The analyses is still very fragmented and, 22 in my opinion, not realistic.
23 24 0
What other costs are usually associated with a management meraer O 23
,,,, c,,,,,,1e 4,e,,,,,c,,,,,,
,,,,c,,,e,,,,,, o,o,,,,,,,,,,,
32 i
O 1
of Penelee to replace Met Ed in Penelect 2
A.
There are costs, which have not been included in any of the 3
reports I have seen, to accomplish the followinn:
4 1.
Consolidate systems 5
2.
Develop new systems for use in cost avoidance areas 6
3.
Move equipment and furniture 4.
Sub-let presently occupied space 7
5.
Increase transportation costs for maraaement 8
"9 ""
9 6.
Change 1000 and corporate identity for buildings, eauipment, stationery, and other documents In a corporation the size of Penelec, these costs could be millions 12 O
or do11 rs-13 14 f!. What savings did TB & A discuss in their report that are outside the 15 effects of the management consolidation?
16 A.
TB & A speaks of the following potential savings areas:
17
- Fossil - fuel plant efficiencies-18
$13 million annually 19
- Conservation and Load Management Mater Pl c 20 implementation-21
$2 billion present worth 22 15 man corporate staff proposed 23 200 additional field emnloyees recuired 24 '
-Divisional consolidation-25 No estimate of savinas, although it is mentioned they could be substantial l
33 r
l
_. I
O 1
No estimate of staff requirements 2
3 Q.
Does TB & A distinguish between the $18 million in management 4
consolidation savinns and the divisional consolidation savings?
A.
Yes, they do. In their report they have stated the divisional 5
6 consolidation costs and savings need additional study to accomolish, and no estimate is made of the savings. The 7
$18 million figure is related only to management consolidation. Mr.
8 Donofrio has now chanced all past understandinos and characterizations 9
to show only $1.2 million savings from the management conLolidation.
It is not clear from Exhibit 7 and 8 of_Mr. Donofrio's testimony 11 whether the $1.2 million first year cost is netted aoainst the 12
-O saving.
In his cross-examination Mr. Donofrio states that the 13
$1.2 million first year costs is not netted aoainst first years
__ 14 savinos of S.7 million and second year additional savings of S.5 15 million.
16 Q.
Is it clear that these savings can be realized with a reduction II in ton manacement?
19 A.
In my opinios, with reduced top management, it will be extremely 20 difficult to achieve the cost savings in a timely manner.
21 Additionally, when one considers the requirement of startina 22 a new 15 man corporate staff for the Conservation and Lead 23 Mananement Master Plan, as well as brinnino on 200 additional 24 emnloyees, a need for more full-time top mananement, not less, 25 is obvious.
34
l _ _
O 1
0.
Mr. Budetti, then khat are the true costs of imnlementino the management corisblidation?
2 3
While the costs could be sizeable, no analysis has been A.
presented to show what the estimitted figure would be.
4
- 5 O.
Mr. Budetti, what are th true savings of implementino the management. consolidation?
A.
B Without costs, the true savinos are undeterminable.
9 0
What are the savings associated with a full-time management 10 working on the TB & A recognized savings?
11 A.
Without recognition for costs, the TB & A report estimates 12 a present value of well over $2 billion.
13 l'
O.
From a Penelec customer benefit point of view, what would 15 make the most economic sense?
16 A.
I recommend that the real savings associated with TB & A 17 recognized areas outside the consolidation be started imediately.
18 The divisional consolidation savings should be worked on separately 1 9 by present management of both companies, since TB & A seems optimistic as 20 to the large dollar potential of an effective divisional consolidation.
21 Penelec customers should not be funding, in effect, a mananement 22 subsidy of Met Ed by movino and consolidating the top management team.
23 There are overwhelming savinas to be realized by keeoing Penelec 24 manacement in place and concerned with Penelec customers and rate-25 payers.
i l
l 35
O 1
THE REGULATORY PROCESS 2
3 IX. A N RTIFICATED AREA SHOULD STAND ALONE 4
5 Q. Mr. Budetti, what is the conclusion you reach in this section 6
relative to the regulation of the Penelec certificated area?
7 A.
As a representative of customers of the Penelec certificated 8
- area, I am asking that the PUC review the merger from the g
impact on Penelec only.
It is my conclusion that the TB & A 10 study in support of the management consolidation and'the 11 testimony and depositions of company officials are founded on 12 the benefits of the consolidation to GPU, a non-regulated 13 company, and the combined Met Ed/Penelec company.
I have 14 concluded that there are no benefits to Penelec as a stand 15 alone company in a separate certificated area.
16
^
17 Q.
What is the specific objective and scope of the TB & A report?
18 A.
Starting on page I-I of the TB & A report introduction, the 19 objective of the audit is identified:
20 "The overall objectives of this study included the 21 determination of what improvements, if any, could be 22 accomplished in the management and operations of GPU......"
23 The scope of the audit, in the third sentence of that page, 24 is a comprehensive management and operations study of t
Q 25 Met Ed, Penelec, and GPU or the Company.
3ti
l 1
TB & A's evaluative criteria identified on page VI-2 and VI-3 2
used in the analysis of the organizational consolidation, were 3
used, according to the report, to insure that "the best interests 4
of ratepayers, investors, and employees of GPU will be served..."
5 While GPU management would certainly want an analysis perfonned 6
from the GPU point of view, my experience with the regulatory 7
-process indicates the only appropriate point of view is that 8
of each individual, regulated, certificate-holding company.
9 10 Q.
Can you expand on this point of view?
11 A.
Yes. The Pennsylvania PUC is faced with a holding company and 12 two regulated companies arguing, in total, such things as Q
13 why bankruptcy or reorganization is inappropriate and why the 14 management consolidation is very appropriate.. These arguments 15 may not be true, from a bankruptcy and reoroanization point of 16 view, from the public's (Penelec's) point of view. The' 17 arguments are clearly not true, in y opinion, with regard 18 to the management consolidation from only the public's 19 (Penelec) point of view.
It will take a very concientious
_, 20_
effort on the part of the PUC to look at the total oroblem 21 from the certificated area point of view.
22 23 0.
Where do you get the information relative to the regulatory 24 perspective you have just presented?
25 A.
I have been informed by attorneys, and have read and presented
~
37
O 1
here, the pertinent section of the Pennsylvania State Code 2
dealing with Public Utility Regulation, Section 2101(b),
3 which state that for management consolidations (affiliated 4
intererts), the following regulatory measure applies:
5 "The commission shall approve such contract or arrangement......
6 only if it shall clearly appear and be established upon 7
investigation that it is reasonable and consistent with the 8
public interest (emphasis added)".
9 10 Q..Mr..Budetti, if the merger is, as suggested, so obviously in 1.1,..
the interest of the Penelec customers, why wasn't it accorn-l O
12 p11shed earlier?
13 A.'
That is not cle6r. GPU has experience with management 14 consolidations in the early 1970's, when the two New Jersey 15 subsidiaries merged. No action was taken to merge the two 16 Pennsylvania companies at that time.
17 18 Q.
But companies perspectives change over time.
What is indicated 19 in the Booz Allen report completed in 1978 relative to the 20 consolidation?
21 A.
I understand that no mention is made of the consolidation in 22 the report. Perhaps the current management was not at GPU, 23 Met Ed and Penelec at the time of that report.
24 O
25 Q.
Has anything significant happened since 1978 that would cause l
l 38 I
J
O 1
management to want Penelee to be a part of Met Ed, with the 2
same name, and under the same financial status umbrella as 3
explained in later sections of your testimony?
4 A.
Only the nuclear accident.
5 l
6 7
8 9
10 11
'O
'2 13 14 15 16 17 18
~
19 20 21 22 i
l 23 24 IO as l
39 l
O 1
X.
LOSS OF SERVICE AREA IDENTITY 2
3 0.
Mr. Budetti, what conclusion have you reached as to the 4
impact of the consolidation on the service area identity of 5
Penelec?
6 A.
I have concluded that the consolidation will change, to the 7
Penelec customers' detriment, the identity of the service. area which 8
heretofore has been regulated as a separate environment with its 9
own unique regulatory requirements.
10 Q.
What does the TB & A report say relative to the distinctions 11 between Het Ed and Penelee that might be important in the O
22 13 A.
TB & A agrees that there are significant, though subtle 14 differences, between the two organizations. On page VI-4 15 of their report, TB & A state:
" Existing organizational 16 differences evolved over time in response to the unique needs 17 of the two companies. Some of the implications of these 18 organizational differences are included in the following 19 section. The similarities of,the two Pennsylvania operating 20 companies far outnumber the differences, primarily because of 21 the commonalities of the utility industry and the standardizino 22 influence of the GPU System.
Nevertheless, a number of 23 differences do exist. These have resulted from the unique 24 historical development of each company, different philosoohies O
2s of management, or the narticuiar re2uirements or their ooeratine 40 lt
' ~" ~
~ ~ ~
l
,O 1
environments. While the differences may appear to be subtle 2
and qualitative in nature, they could become significant 3
impediments or opportunities for improvement in the proposed 4
management combination". This finding is significant to the 5
fact that different regulatory environments have existed for 6
both company's and their management has maintained control 7
of the two separate envircaments before the PUC. The merger 8
will destroy or, at least ignore, the differences in certificated 9
areas, to the detriment of Penelec.
10 11 Q. Why is maintaining the service area identity important from a
~
O 22 13 A.
To the extent that the two certificated service areas have differina 14 customer characteristics, growth characteristics, and geo-15 graphical differences that impact customer service from a time 16 and distance to serve point of view, then the PUC can deal 17 with each service area independently. As a consolidated 18 management tries to make all conditions uniform, which is 19 what consolidation of systems, budgets, policies, and management 20 will do (in fact, the objective of centralized management is 21 that uniformity), then the Penelee service area will take on 22 characteristics of the Met Ed area, without regard as to 23 benefit to Per.elec.
When the uniqueness of the Penelec area 24 is no Jonger considered in the regulatory process, then Penelec
.O 25 customer s most expect a,ess resnonsive level of reouiation 41
O 1
since the Company controls what is presented to the PUC.
2 3
Q.
Can one management maintain separate regulatory identities 4
for two separate certificated areas?
3 A.
I think it would be difficult for the. management to maintain 6
two separate identities of the certificated areas. The potentials 7
for conflict are too great.
It is interesting to note, for 8
instance, that in an internal memorandum of June 30, 1980, where 9
questions and answers on the merger were presented, that the 10 contribution policies and amount contributed. once a Penelec 11 area responsibility, wil'. now ba done on a systemwide basis.
-Q 12 While contributions may be outside the regulatory sphere of 13 control in Pennsylvania, the "systemwide policy concept" is 14 the beginning of a service area c9solidation witnout regard 15 to the particular needs of the consumers end public in each I6 certificated area.
If the PUC does allow this merger, the 17 PUC will have to be very thorough in its analysis of management 18 time (which is also money) and available funds that might be 19 used to prc4uce the greatest possible return to investors 20 as opposed to being used in terms of the business needs of 21 one or the other of. the two certificated companies.
1 22 23 24 25 42
l
- O 1
XI. A DIFFERENT MERGER SCENARIO 2
3 Q.
Mr. Budetti, what is your conclusion as to the impact on i
1 4
Penelec's customers of the forced consolidation due to being 5
in the GPU environment?
6 A.
While it is c' fact of business that Penelec is an operating 7
subsidiary at GPU, from a regulated utility point cf view 8
Penelec, in my judgement, would not chose to denude'itself 9
of its top management as a matter of Penelec management 10 prerogative and become a division of a financially troubled 11 coesny.
~
12 13 Q.
What has GPU argued as to the act of management consolidation 14 being within the rights of management and therefore outside 15 of regulatory review?
16 A.
Analogies have been made to the merger being similar to service 17 companies providing services to operating companies or to 18 holding company services provided to operating companies.
19 Services provided in suprart of mainstream operations are 20 appropriate when supplieo ilding or service comoanies.
21 The concept of Penelec, a regulated company that has been a 22 stand alone operations, becoming a part-time top-management 23 division of Met Ed is a distinctly different process renuiring 24 regulatory approval and review.
O 2s 43
O 1
0.
What would you recommend that the PUC consider when lookina 2
at the decision to merge management?
3 A.
The PUC should look at the companies as separate utilities that 4
want to merge. The logic of the argument is as follows:
5
-GPU is a non-regulated entity, under controls of the 6
Holding Company Act, which is precluded froc.i.sking management 7
and financial decisions which r 2 to benefit one operating 8
company at the expense of another.
l 9
-Penelec is a regulated utility with a top-management team 10 in place, that it can afford to pay, which is involved in the 11 mainstream ope.ations of the company.
12
-Met Ed is a similar regulated utility in another certificated O
is 34
-Penelec, by itself, would never choose to remove its top g
management and become a part-time managed division of Met Ed.
The PUC should not force a decision different from one that would be made if Penelec were a stand alone company.
18 0.
Would the PUC look to consolidate the Penelee management into Met Ed's if the companies were not part of the same holdino 20 company?
21 A.
I would not think so. -However, if it makes theoretical sense to 22 nerform a management consolidation, with no fina.ncial merger, of two 23 comprnies who have separate regulated areas, I assume it would make 24 sen.;e to do that for other companies as well. Therefore one could 25 44
O 1
consider merging JCP & L's management into the new group.
2 Additionally, if the Company's and TB & A's projected cost 3
savings will happen, non-affiliated companies lying between 4
Fe. alec and Met Ed should also be asked if they would like 5
to be part of the management consolidation.
By consolidating 6
top-manag e snt, generating' groups, and divisional operations, 7
millions of dollars could, in theory, be saved by the rate-8 Payers of all companies. The commonality o'f electric utilities 9
would theoretically give a basic starting point to the combination.
10 The fact that most generation is controlled and monitored by g
interstate power pools would theoretically also give support to the con-solidation. Accurate records kept of time and expenses would O
theoret4 cal,r insure that costs were properly chareed to the correct y
certificated area.
If one considers the improbability of such a theory working it is improbable that the PUC would countenance the management consolidation.
16 Q.
Wouldn't there be financial implications to this kind of consolidation?
17 A.
If GPU's position were accepted, the answer would be not really.
18 To the extent no financial merger is effected, theoretically the 19 separate companies would continue to float debt and eouity in their 20 present manner. The benefits of management consolidation would simply 21 accrue to all companies in the combination.
22 23 0.
What would be your final recorrmendation in this area?
24 A.
To the extent the PUC accept's the management consolidation, O
23 1
45 1
LO l
1 it should be accomolished by looking to the further savings 2
to be generated by including JCP & L in the consolidation 3
(top-management time would be spread among three comnanies, 1
4 with a resultant decrease in cost to Penelec). Additionally, 5
companies surrounding Penelec and Met.Ed, or companies who 6
are part of the PJM power pool, should be asked to join the 7
consolidation to effect even greater savings for all service areas 8
of all the regulated companies. Obviously, if the theory holds j
9 for two cc.ipanies then it will hold for many more companies.
If 10 the PUC does not think the theory is appropriate for many comoanies, 11 then I would submit it is not appropriate for Penelee and Met
~
O 12 to-13 14 15 16 17 18 19 20 21 22 23 24 O
25 46
O THE FINANCIAL PROCESS I
2 XII. ARE THEY NOW ONE?
3 4
Q.
Mr. Budetti, what will the management consolidation do to 5
Penelec from a financial point of vi.ew?
6 A.
The management consolidation will.ssociate with Penelec 7
the financial risks associated with Met tid and GPU at 8
the time. Said another way, the financial risks to Met Ed/
9 GPU may now be spread to Penelec.
10 11 Q.
Wasn't this process started with the Revolving Credit O
~
12
^9reemeat (RCA)?
13 A.
Yes, it was. The RCA has, as its collateral, the stock 14 of Penelec. To the extent GPU or Met Ed cannot pay in 15 accordance with the tems of the RCA the creditors would 16 receive the Penelec stock now he.ld by GPU.
17 18 Q.
How would this process be expanded by the merger?
19 A.
With a common menagement tie, the failure of Het Ed could 20 be construed to be a failure of Penelec. By this I mean 21 that common manauement is the first attempt at complete 22 merger by the company.
In fact the only reason financial 23 merger is not taking place is because language in the 24 indentures of Met Ed prohibit it from a debt issuance and 25 debt cost point of view rFrom my understanding of the law as a lay person this prncess, construed as a first attempt at total 47.
\\
O 1
merger, may allow creditors of Met Ed and GPU to attempt to 2
pierce the corporate veil around Penelec to recover their Met Ed 3
debts. Penelec's exposure would then be substantially creater 4
than the mere exchange of comon stock.
5 6
Q.
In the event of the successful piercing of the corporate veil, what would 7
be the effect on the public in Penelec?
8
. A.
Penelec's customers would incur the debts of both GPU and 9
Met Ed,.to their obvious detriment.
10 Q.
If GPU and Met Ed were to go into bankruptcy or reorganization, 11 12 what would be the impact on Penelee with the management consolidation?
O A.
The conso,ieated management grou, wou1d have to dea, w4th ali 1,
matters involved with a reorganization, for instance, either with a 3
trustee or under strict court rules. The amount of time available to manage the normal operations of Penelec wo21d be again severely reduced.
If you can assume that Penelec would suffer some consecuence, of the Met Ed reorganization or bankruptcy, such as supplier credit pro-blems, then even less time would be 'available to run Penelec in a 19
~
normal fashion.
I 20 21 i
Q.
To the extent that the scenario of Bankrurtcy or reorganization is unable to be charted, as stated by TB & A, what is the p6tential 23 impact on Penelec customers?
A.
It is my opinion that one operating management could not w
25 48 l
I
' O 1
l l
1 independently manage two companies with differing financial 2
situations.
In the first instance the Board of Directors 3
of the two companies would necessarily have different operatinn 4
directives for the two companies. More important, however, 5
is the inability of management to fairly manage two companies, 6
one of which could have a set of restraints and conditions 7
which are presently unknown. The management of Penelec, to the 8
possible detriment of Penelec customers, should not be burdened g
with this situation.
10 1
l 11 Q.
TB & A stated in its report that one of the possible conditions G
' V 12 of bankruptcy might be the sale of Met Ed. What would be the 13 impact of a possible sale on Penelec?
14 A.
Any purcheser of Met Ed would want, in my opinion, a management 15' team to run the new entity. To the extent that the consolidated 16 management stayed with the purchaser, Penelec would be without 17 management. To the extent that the consolidated management would 18 not go with the purchaser, Penelec's proposed savings would 19 disappear and, more importantly it is unlikely that Met Ed could 20 be sold.
If there is any credence to the TB & A warnings of 21 impending bankurptcy, the management consolidation will not 22 help the Met Ed public.
23 24 Q.
There have been references to the possible financial merger 25' of the two companies. Other than the bondholder requirements
O I
and connon stockholder approvals to accomplish this merger, 2
who else must approve the merger?
3 A.
In addition to regulatory and other governmental unit approvals, 4
the preferred stockholders must approve the financial meraer.
5 I would assume Penelec's preferred stockholders would only 6
want to approve the financial merger if Met Ed were on a 7
financially sound standing or if a substantial premium were 8
paid. What is not clear to me, however, is the preferred g
stockholders' rights when top management of their company is 10 removed and replaced with a; cart-time, commutino management 11 team. Ny business experience would indicate that purchase 12-of preferred stock was done under a prospectus or indications i
i 13 in an annual report of a top management team in existence at l
14 Penelec.
I would be concerned as a preferred stockholder if 15 management is removed, just as the Met Ed preferred stockholders 15 must be concerned about the ability of Met Ed to pay the 17 preferred dividend.
18 19 Q.
What is the total impact on Penelec of the GPU RCA action l
20 and the proposed consolidation?
21 A.
GPU has initiated, in my opinion. exploitation of Penelec's 22 financial standing, name, and management to save Met Ed and GPU.
23 The consolidation is the only final act ava'ilable (since financial 24 merger is not possible) to GPU to complete the exploitation.
It 25 is not an act Penelec would have performed if it were by itself 26 or in control of 4ts c'estiny, nor would the sinnino of the P.CA 50
l O
1 been an act Penelec would have completed. All financial 2
considerations which result from the consolidatio, are to 3
benefit GPU. TB & A on page III-26, indicates that the 4
financial issues addressed are to " regain financial viability 5
for GPU", and does not really mention Penelec's continued 6
financial viability.
7 8
9 10 11 0
~
12 13 14 15 16 17 18 19 20 21 22 l
l 23 24 25 51
O~
1 XIII. THE BENEFITS ARE NOT PENELEC'S 2
3 0
TB & A, as well as GPU management, have presented a list 4
of benefits to come from the merger.
Do you agree with 5
conclusions?
6 A.
No, I do not.
I will list each of the near-term and long-term 7
benefits, and give my opinion on each.
8 1.
The first benefit deals with concentrated 9
coal-fired generation expertise in the Western 10 Pennsylvania coal area.
Il Penelee already has this expertise. Top management 12 does not have to be consolidated for this to happen, 13 but instead the Met Ed generation needs can be 14 contracted for from Penelec. Then benefits can 15 accrue to Met Ed and Penelec without a top manage-16 irdat cciiselidation.
17 2.
Streamlined and strengthened corporated staff.
18 More streamlined and consistent organization 19 structure.
20 The decentralized structure works well for Penelec.
21 It has kept them out of their own finanacial and 22 operating problems. There is no indication of a 23 need for streamlining the Penelec staff groups.
I 24 In light of the billions of dollars of savinos O
25 available, the staff group will have to be expanded to l
52
'O 1
reach the savings.
2 3.
More consistent and timely response to Pennsylvania 3
oublics. This is.a GPU reouirement.
If Penelec 4
needs a stronger presence in Harrisburg, it should 5
locate a VP-Regulation' or VP-Legislative and Public 6
Relations in that town.
It is obvious that GPU 7
and Het Ed need a better image in Pennsylvania.
8 The consolidation will not benefit Penelec.
9 4.
More standardized methods of operation and consistent 10 levels of service.
11 Other than divisional operations, addressed in No. 7, O
12 Penelec was not observed to have problems with operations 13 or service at the top management levels of the organization.
14 It is not clear who would benefit from this generalized 15 statement.
16 5.
Improved career development opportunities and ability 17 to attract and retain personnel.
18 A young management person in Penelec can now look up 19 to a number of advancement positions in Penelec, Met Ed, 20 JCP & L, or GPU Service. By consolidating similar 21 positions i'n Penelec and Met Ed, and reducing staffino 22 by 117 my mathematics show less, not more, opportunities 23 for advancement. Attraction of personnel has nothinn to do with consolidation, and often little to do with 24 l
25 loca tion.
Retention of personnel is corporate financial l
53
~.
1 health related.
No member of lower manaament will 2
benefit overall from the consolidation.
3 6.
Consolidated in number 2.
4 7.
Met Ed's approach to centralized control over division operations has been effective and should bring about 5
greater. methods standardizations and improved levels 6
of customer service.in Penelec's operations.
7 k' hat does introduction of s.tandard methods and the 8
possible centralization of divisional management 9
(even though TB & A states that the decentralized g
management of divisions is appropriated for the Penelec service area) have to do with top management 12 O
consolidation? Nothing. Once a'dditional study is comnleted, 13 as recommended by TB & A, of the division level consolidation, 14 the form of that organization, levels and numbers of mananers re,
15 quired, and estimated savings, then the divisional consolidation 16 can be reviewed for implementation. TB & A states, on 17 page VI - 18, that " opportunities for achievino cost savings 18 through (division) consolidation are substantial".
If true, a benefit would accrue to Penelec from this act. Met 20 l
Ed, according to TB & A, is already well run at the divisional 21 3,y,),
22 23 0.
1!ill the financial standing of Met Ed be improved by the nrono,ed l
24 consolidation?
i 25 54
'Y i
1 A.
No, not as lonc as Net Ed is' regulated.
All reductions in 2
personnel and operating costs flow directly to the ratepayer 3
through rate proceedings before the PUC.
4 5
6 7
8 9
10 11 2
O 13 14 15 16 17 18 19 20 21 22 23 24 O
25 55
t}'
Schedule 1 Resume of FRANK R..BUDETTI, CMC REGULATORY CONSULTING EXPERIENCE Accounting and Rate of Retuen analysis, Tariff analysis and Tariff design of the following companies or government entities:
Alaska Anchorage Water Co.
Anchorage Sewer Co.
Arkansas Southwestern Bell Tel. Co. ~
Q Arkansas Power & Light Co.
V Federal Energy Agency:
Arkansas Electric Utility Rate Experiment Delaware Wilmington Water Dept.
~
Florida Southwestern Bell Tel. Co.
South a stern Telephore Co.
City of Key West ~ Water Dept.
Georgia Southwestern Bell Tel. Co.
Iowa Northwestern Bell Tel. Co.
Kansas Fuel clause design for all regulated gas and electric companies City of Overland Park Street Light Dept.
Maryland Washington Gas Light Co.
Massachusetts New England Bell Tel-. Co.
O Minnesota Northern States Power Co.
V Nm thwestern Bell Tel. Co. '
sr,
s-Missouri Southwertern Bell Tel. Co.
Union Electric Co.
Missouri Public Service Co.
City of Columbia Electric Utility City of O'Fallon Sewer Utility City of Lake Saint Loui: Sewer Utility City of Kansas City Street Lighting & Traffic Signal Dept.
Nevada Nevada Bell Tel. Co.
New Jersey New Jersey Bell Tel. Co.
Bergen County Sewer Authority New Mexico Rockland Electric Co.
Mountain Bell Tel. Co.
New York New York Bell Tel. Co.
Rochester Power & Light Co.
Ohio Columbia Gas Co. of Ohio Cincinnati Gas & Electric Co.
Lorain Tel. Co.
Madison Water Co.
Ohio Gas Co.
West Ohio Gas Co.
East Ohio Gas Co.
Pennsylvania Philadelphia Electric Co.
Pennsylvania Bell Tel. Co.
West Penn Power Co.
Tennessee United Inter-Mountain Telephone Co.
Texas Canadian River Municipal Water Authority Southwestern Bell Tel. Co.
General Telephone Co. of the Southwest City of Garland Sewer Utility City of Garland Electric Utility City of Austin Electric Utility 1
l Vermont Central Vermont Public Service Corp.
Virgin Islands Virgin Islands Tel. Co.,
i Q
'57
,O GENERAL MANAGEMENT CONSULTING EXPERIENCE In-depth experience in all aspects of organization, operations improvement and market improvement for a wide range of industrial, government and service industry clients.
The types of projects:
Cost reduction and profit improvement Organization rev:ews Cost accounting and pricing analysis-Market analysis Management information systems Manufacturing controls
~
Inventory control systems
~
Production control systems Labor control systems Marketing controls Sales reporting and sales analyses systems
~
Salesmen compensation programs Warehouse and manufacturing facilities layout and review The projects were performed for the following clients:
Federal government State government Municipal and County governments Manufacturing Shoe h
Cut and sew i
58
7
~,
g Injection molding Q
Assembly Sheet retal bending and welding Electrical equipment Toys Consumer products Utilities Water, sewer, electric, gas, and telephone Food warehousing and retailing Service industries Magazine circulation and subscription Cable television Nursing homes O
Wholesalin9 Drugs, health and beauty products Women's wear.
Publishing Electrical supolies Chemicals PREVIOUS EXPERIENCE Touche Ross & Co., consulting partner - Directed the St. Louis Consulting Practice. Member of the Regulatory Consulting Advosory Board.
l The Panacea Corporation, Chief Executive Officer, Women's Wear Clothing Designers, Manufacters and Whoesalers.
O 59
..v.
John Wood Co., Operations Assistant to the $anior Vice Presid; tnt. Mini-conglomerate with secondary metal manufacturing subsidiaries.
Xerox Corporation, Manufacturing Manager.
EDUCATION Dartmouth College, A.B. in Engineering Science:
Thayer School of Engineering, Bachelor of Mechanical Engineering Amos Tuck School of Business Administration M.B.A. in Production Management, mince in Finance PROFESSIONAL ORGANIZATIONS Certified Management Consultant American Society of Mechanical Engineer Dartmouth Society of Engineers American Water Works Association Water Pollution Centrol Federation American Public Power Association Missouri Association of Municipal Utilities I
O' D
60
_