ML19347E675
| ML19347E675 | |
| Person / Time | |
|---|---|
| Site: | Crane  |
| Issue date: | 02/17/1981 |
| From: | Mcclaren S PENNSYLVANIA, COMMONWEALTH OF |
| To: | PENNSYLVANIA, COMMONWEALTH OF |
| Shared Package | |
| ML19347E637 | List:
|
| References | |
| C-80072106, R-80051196, R-80051197, R-80072105, NUDOCS 8105130211 | |
| Download: ML19347E675 (26) | |
Text
A
.,4 1-BEFORE THE PENNSYLVANIA PUBLIC UTILITY COMMISSION Os PENNSYLVANIA PUBLIC UTILITY COMMISSION Docket No.
v.
R-80051196 METROPOLITAN EDISON COMPANY PENNSYLVANIA PUBLIC UTILITY COMMISSION Docket No.
v.
R-80051197 PENNSYLVANIA ELECTRIC COMPANY :
METROPOLITAN EDISON COMPANY Docket No.
v.
C-80072105 PENNSYLVANIA PUBLIC UTILITY CCMMISSION PENNSYLVANIA ELECTRIC COMPANY :
O Docket No.
v.
C-80072106 PENNSYLVANIA PUBLIC UTILITY CCMMISSION l
STAFF BRIEF ON ISSUES OF FINANCIAL VIABILITY, INSOLVENCY, AND TEMPORARY RATES Steven A. McClaren Deputy Chief Counsel Bohdan R. Pankiw Julian S.
Suffian l
Assistant Counsel
({}
Attorneys for the Commission Prosecutory Staff February 17, 1981 8105130% 4.
O TABLE OF CONTENTS V
Page I.
SUMMARY
OF ARGUMENT.
1 II.
ARGUMENT.
2 A.
Financial Viability.
2 1.
Respondents' financial viability is undermined by events which transcend these proceedings 4
2.
Rate relief will not materially improve Respondents' financial condition.
4 B.
Insolvency.
8 1.
Met Ed's claimed cash shortfall at year end 1981 is accepted.
8
()
2.
Cash effect of Staff's position on Met Ed's test year revenue requirement 10 3.
Cash effect of increasing the allowed cost of equity.
13 4.
Cash effect of allowing TMI-1 restart costs as current expenses 14 5.
Cash effect of restatement of the deferred energy balance 15 C.
Temporary Rates.
17 1.
Respondents' have failed to present a prima facie case for changing the temporary rates set by the Commission on May 23, 1980 19 III. CONCLUSION.
23 i
-i-
I.
SUMMARY
OF ARGUMENT 7,)
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There are not four separate and distinct cases before the Commission here.
There is but one overriding issue:
What level of rates should be fixed for Met Ed and Penelec given the presently unalterable constraints of an extended outage of TMI-l and the liability for a billion dollar clean-up of TMI-2?
Met Ed and Penelec have no access to the normal capital markets.
They face a declining level of short term credit.
The liability of Met Ed for its share of the clean-up of TMI-2 equals the net worth of that utility.
Met Ed is not now financially viable; and no amount of current rate relief will alter that hard reality.
The Staff does not want Met Ed or Pen 21ec to become O
insolvent or bankrupt.
At the same time, the S aff urges the Commission not to attempt to cure Respondents' ficancial pro-blems with ratepayers' money.
Rate relief can enable Met Ed and Penelec to avoid insolvency for the near term; and such rate relief should be promptly granted.
However, rate relief cannot and will not restore Met Ed's financial viability.
Only the return of TMI-l to service and the altering of Respondents' liability for the clean-up of TMI-2 will restore the financial viability of Met Ed.
Until t' hen, for the short run, rate relief should be granted which will maintain Respondents' solvency and not more.
! (
l
i t
II.
ARGUMENT
()
A.
Financial Viability Three levels of analysis have been developed in these proceedings with respect to setting prospective rates for Respon-dents:
(1) what are Respondents' revenue requirements when calculated according to accepted ratemaking/ test year principles; (2) what rates are required in order to maintain Respondents' financial viability; and (3) what rates are required in order to avoid insolvency of Respondents.
In the mggregate, these three levels of analysis provide a measure of "just and reasonable" rates for Respondents.
The Prosecutory Staff (Staff) position with respect i
to Respondents' revenue requirements, calculated in accordance with accepted ratemaking/ test year principles, is set forth fully in the separate volume which deals with general rate in-crease issues.
The Staff urges the Administrative Law Judge and the Commission to find, 'cr ratemaking purposes, that Met Ed's test year revenue requirement supports an annual rate increase of not more than $8,882,000 and that Penelec's i
test year revenue requirement supports an annual rate increase of not more than $11,758,000.
We submit, however, that such findings would not be, of themselves, a complete or sufficient basis for setting Respondents' rates.
The presiding Administrative Law Judge
{)
and the Commission must consider as well whether the rates, _
I calculated according to accepted ratemaking/ test year principles,
()
as advocared by the Staff, will maintain the Respondents' financial viability and solvency.
This section will treat the issue of financial viability.
Insolvency will be addressed in the next section of this brief.
Unfortunately, the reality here is that Met Ed is not i
now financially viable.
In the 1979 Annual Reports to the shareholders of GPU and Met Ed, Coopers & Lybrand (the corporate auditors) voiced a grave concern:
"The Corporations' subsidiaries are currently not receiving a level of revenues sufficient to assure their ability to continue as a going concern.
The' continua-tion of the Corporation as a going concern is dependent upon obtaining adequate and timely rate relief and maintaining and in-creasing the availability of credit under the revolving credit agreement."
ME/PN Exhibit No. E-2; GPU 1979 Annual Report, page 17.
Since the issuance of that annual report, the earnings of the GPU Companies have declined even further; Met Ed has been denied extraordinary rate relief; the Commission has barred the use of intrastate revenues for the clean-up of TMI-2; the estimate of the cost to clean-up TMI-2 has been increased; and the banks have reduced the credit available to Met Ed and Penelec under the Revolving Credit Agreement.
In light of all of those events, Staff witness Robert L.
Packard testified that:
"The hard, cold reality is that Met Ed is not a financially viable entity.
Penelec suffers from association with Met Ed and
(])
from the cloud of uncertainties.".-.
l Staff Statement RLP-2, page 4.
The question for the presiding Administrative Law Judge and the Commission thus becomesh What reasonable level of rate relief will restore Respondents' finan-cial viability?
1.
Respondents' financial viability is undermined by events which transcend these proceedings.
It requires no reference to the record to state that the root of Respondents' financial dilemma is the accident at TMI.
The principal financial consequences of that accident are that the undamaged TMI-1 unit continues to ba out of service and that Respondents are responsible for the cost to clean-up TMI-2.
As Staff witness Packard put it:
O
" As long as TMI-l remains out-of-service,
and as long as Met Ed remains liable for its share of the costs of cleaning up TMI-2, Met Ed will in effect be precluded from the capital markets."
Staff Statement RLP-2, page 2.
Neither the Administrative Law Judge nor the Commission has the authority or the opportunity to alter the protracted schedule for a restart of TMI-l or to shift the responsibility i
l for the clean-up of TMI-2.
Those actions await a federal l
response.
1 2.
Rate relief will not materially improve.
Respondents' financial condition.
The financial viability of Respondents should
.O. -
i' be restored,-if possible.
However, throwing ratepayer money l
e
l i
i at the problem is not a solution.
This record fairly reflects that rate relief - even all of the rate increase requested by Respondents - will not restore their financial viability.
With full rate relief, Met Ed's interest coverage at the end of 1981 will be only 1.54 times.
ME/PN Statement E, supplement 1, page 7.
This is insufficient to meet the technical coverage test, even assuming that a market exists for Met Ed securities.
With full rate relief, Respondents will remain liable for the clean-up of TMI-2.
GPU Vice President, Fred Hafer, testified with respect to the magnitude of that liability, I
as follows:
the facts are as follows:
the current estimated clean-up costs at Three
()
Mile Island No. 2 is a billion dollars.
There is $300 million of property insurance, leaving a balance of $700 million.
Mr. Wagner's re-commendation is that the S700 million be charged immediately and currently to the income of the companies.
Half that, S350 million would be therefore charged to Met Ed.
The total net worth of Met Ed is only about 5360 or S370 million."
Tr. 2491-2491A.
The GPU witness was responding to testimony by Staff witness Errol K. Wagner that recognition of the loss due to clean-up costs was inevitable and that the conditions for accrual of a loss had already been met pursuant to the Financial Accounting Standards Board's Standard No. 5 - Accounting For Loss Contingencies.
Staff Statement EKW-1; Staff Exhibit EKN-1A.
Staff witness Robert L. Packard addressed this problem
(}
directly:
5-
f-
"Q.
What factors have led you to now conclude
(_)3 that, absent return of TMI-l to service and absent some form of federal assistance for clean-up of TMI-2, no reasonable level of rates will materially improve Met Ed's financial condition?
A.
Three new constraints now exist:
(1) the Banks have reduced the amount of credit available under the RCA, and have tied that reduced level of credit to Met Ed's liquid assets; (2) the Commission in its September 18 Pre-hearing Statement and Order directed that Met Ed " cease and desist from using any operating revenues for uninsured clean-up and restoration costs"; and (3) it now appears certain that Met Ed will ultimately have to declare the estimated clean-up costs of TMI-2 as a loss.
(see testimony by Mr. Uagner, T.S.
Exhibit No.
EKW-1).
)
Q.
Would substantial rate relief, even the entire amounts requested by Met Ed and Penelec, make it possible for either Met Ed or Penelec to begin the process of restoring their earnings and provide access to the financial market?
A.
Given these added constraints, no.
The hard, cold reality is that Met Ed is not a financially viable entity.
Penelec suffers from association with Met Ed and from the cloud of uncertainties."
Staff Statement RLP-2, pages 3-4.
The position of the Prosecutory Staff is simply this:
The Commission has a statutory and constitutional obligation to set rates which will maintain or which will restore the financial viability of Respondents, if there is a demonstrated relationship between rate relief and financial viability and if a reasonable increase in rates would have a significant effect
(~s
()'
upon financial viability.
In this case, there is no demonstrated (or observable) relationship between rate relief and Respondents'
.O financial viability because rate relief will not address the causes of Respondents' financial difficulties.
I Rate relief substantially in excess of that recommended by the Staff would amount to throwing good money after bad.
A rate increase will not alter the regulatory process for a re-start of TMI-1; nor will such funds alter Respondents' liability for the clean-up of TMI-2.
Rate relief will not even increase the amount of short term credit available, except to the extent that net liquid assets are increased.
The member banks to the Revolving Credit Agreement have limited (and have given every indication that they will continue to limit) available credit to an amount corresponding to 80% of
()
certain liquid assets.
ME/PN Exhibit E-31; Bank Statement 1.
Each dollar of rate relief will actually be expended for new t
customer hook-ups, operations and maintenance, or restart modifications of TMI-1, without materially altering Respon-dents' net liquid asset position.
The Staff urges the presiding Administrative Law Judge and the Commission not to attempt to cure Respondents' financial ills by throwing ratepayer money at the problem.
l A reasonable regulatory goal is to maintain the solvency of Met Ed and Penelec until the larger problems are resolved.
l CE) 4 - -
.~.
.=
(])
3.
Insolvency The Staff advocates that rates should be set for Respondents which are sufficient to avoid. insolvency.
Given the absence of an alternative supplier to Met Ed and Penelec customers, insolvency would not be in the public interest.
Since only Respondent - Met Ed has claimed that it faces the threat of insolvency, the argument in this section will be confined to Met Ed.
Where, however, an issue is common to Penelec, the Staff would apply its position equally to Penelec.
1.
Met Ed's claimed cash shortfall at year end 1981 is acceoted.
i In rebuttal testimony, Staff witness Packard stated O
that he had reviewed and examined Met Ed's claimed cash short-fall at year end 1981 without rate relief of $26 million and that he accepted that claim.
Tr. 2638-2639.
The claim was reaffirmed by GPU Treasurer, John Graham, in supplemental testimony.
See, ME/PN Statement E, Supplement 1, page 5.
The Staff accepts Met Ed's claimed cash shortfall at year end 1981 and asserts that that shortfall should be met by 4
whatever rate relief is granted by the Commission.
Assuming average sales throughout the year 1981 and assuming chat rate relief is granted effective for service rendered on and after May 1, 1981, Met Ed will be able to collect seven and one half months revenues by year end.
This is 7.5/12ths
! m kl of the annual revenue increase granted, or 62.5%.
Stated in the I
alternative, the aggregate annual revenue increase required in i -
I
order to generate $26 million in 1981 is 1.6 (the reciprocal r\\
k/
of 62.5%) times $26 million, or S41.6 million.1./
If the Com-mission grants Met Ed an annual rate increase of $41.6 million or more, then Met Ed's entire claimed cash shortfall will have been met and nothing further is required.
Staff, however, assumes that the presiding Administra-tive Law Judge and the Commission will adopt substantially the Staff position on Met Ed's test year revenue requirement, and therefore, consideration is required of additional rate relief for the purpose of maintaining Met Ed's solvencv.
l i
l
-1/
The Staff does not advocate a S41.6 million rate increase; the calculation is provided only to illustrate the rela-tionship between an annual revenue increase and 1981 collec-O tiens..-
/~~
2.
Cash effect of Staff's position on Met Ed's test year revenue require-ment.
The Staff position on Met Ed's test year revenue requirement, if adopted, would permit Met Ed to collect S5.6 million of additional revenues in 1981.
That figure can be derived as follows:
a/
Rate Base per Staff
$522,453,000 b/
x overall return 10.53%-
Required Income Available For Return 55,014,300 Less Income Available For Return From Present Rates, As Adjusted By
_46,310,000 f c
Staff Additional Income Available For Return To Be Allowed By Staff 8,704,300 O
Annual Revenue Increase (assumes no state or federal income taxes and includes 2% GRT) 8,881,940 Cash Flow Available From Annual Revenue Increase (62.5% of annual amount) 5,551,212 a/
Source:
Staff Brief on General Rate Increase issues, Table II (Met Ed).
b/
Source:
Appendix A to this brief.
c,/
Source:
Staff Brief en General Rate Increase issues, Table IV (Met Ed).
(.-.
,a
_4 s
In rebuttal testimony, Staff witness Packard recog-
/~%
nized that the Staff position on Met Ed's test year revenue
(_)
requirement would not meet Met Ed's cash shortfall and suggested three solutions:
"In the short run Met Ed needs an addi-tional S26 million over existing rates, that's
$26 million in cash, based on various projections of Mr. Graham.
Unfortunately, using standard anadditional$9.7million.j2ifhgs only justified rate-making criteria, Met E However, insolvency is not a solution and the Trial Staff do not advocate bankruptcy for Met Ed.
Some method of rationale must be used on bridging the gap between the revenue require-ments of an additional $9.7 million and the short term cash need of an additional $26 million.
Consistent with direct testimony, Trial Staff suggests the following possibilities with providing Met Ed with additional cash.
First:
although Met Ed has failed to make such a claim, the cost of equity capital may be as high as
(])
25 percent.
Second:
in order to fund the early restart of TMI-1, which would have
[a salutory] effect on energy and purchase of power costs, up to $11 million may be allowed for the express purpose of enabling TMI-1 to return to service.
Third:
a restatement of the amortization of deferred energy balances, may produce up to an additional $24 million in bank credit.
Some combination of these i
three possibilities may be appropriate and nec-essary to meet Met Ed's short term cash needs.
Trial Staff considers these three possibilities far more just and reasonable than requiring i
ratepayers to fund fuel supplies that do not exist, to supply a return on a plant that is i
not used and useful, or to make payments for taxes that will never be paid or even booked."
Tr. 2626-2637.
-2/
The Staff's position on Met Ed's test year revenue requirement of $9.7 million, as stated in testimony, has been refined to $8.9 million, as stated in the brief on general rate increase issues..-
It should be noted that these additional suggestions
)
are not modifications of the Staff position on Met Ed's test year revenue requirement.
With the application of accepted principles of ratemaking/ test year analysis, Met Ed has shown the need for not more than 58.9 annually.
It is Met Ed's investment in, and expenses from, the non-used and useful TMI facilities that give rise to distortions in Met Ed's actual versus ratemaking revenue requirements.
Those distortions are not a justification for, in effect, a distortion of standard rate-making concepts.
These additional suggestions are also not an attempt to restore Met Ed's financial viability.
That restoration must await the return of TMI-l to service and the resolution of the liability for the clean-up of TMI-2.
These additional
)
suggestions are solely justified by the need to maintain the current solvency of Met Ed.
Staff witness Packard stated the Staff position succinctly in response to e oss-examination:
I attempted this morning to give the Administrative Law Judge and the Commission some suggestions and some tools.
Staff are convinced of the propriety and reasonableness of the adjustments which they have made which produced the Trial Staff's position of 59.7 million additional rate increase.
We are also convinced there is a cash problem and these tools are intended to bridge that gap between 59.7 million and the cash shortage of $26 million at year end.
The purpose is, one, to give the Commission, the Administrative Law Judge and the Com-f~i mission, the tools to use in any f ashion they see appropriate.",
Tr. 2650.
Staff doso not advocata any particular mix of responses to Met Ed's cash problems.
We advocate only that (d
Met Ed's current cash needs be mot through the use of one or
~N more of these suggestions.
3.
Cash effect of increasing the allowed cost of equity.
i If the Staff position on Met Ed's test year revenue requirement is adopted, and if Met Ed's allowed cost of equity is increased to 25%, Met Ed would be able to collect S16.6 million of additional revenues in 1981, or $11.0 million more than if the Staff position is adopted with a 15.5% cost of equity.
This can be shown as follows:
a/
Rate Base per Staff
$522,453,000 x overall return 13.84%57 Required Income Available I
For Return 72,307,495 Less Income Available For Return From Present Rates, As Adjusted By Staff 46,310,000 /
c Additional Income Available For Return To Be Allowed By Staff 25,997,495 Annual Revenue Increase (assumes no state or federal income taxes and includes 2% GRT) 26,528,056 Cash Flow Available From Annual Revenue Increase (62.5% of annual amount) 16,580,034 Less Cash Flow From Annual Revenue Increase With 15.5% Cost of Ecuity 5,551,212 Cash Generated By Increase Of Cost of Equity 11,028,822 a/
Source:
Staff Brief on General Rate Increase issues, O
2 ate rr caet za)-
b/
Source:
Appendix A to this brief.
l c/
Source:
Staff Brief on General Rate Increase issues,
~
Table IV (Met Ed).
l l. _ _.
4.
Cash effect of allowing TMI-l s
restart costs as current expenses.
')
(
I In a letter to the Commission, dated January 16, 1981 Mr. Herman Dieckamp, Acting President of Met Ed, identified the TMI-l restart expenses to be incurred in 1981:
" Work at TMI-l on the modifications necessary for the restart of that unit is progressing on a schedule for restart toward the end of this year.
The costs of necessary OEM expense at TMI-l (and all other nuclear plants) have risen dramatically as a result of lessons learned from the accident.
Met Ed's share of the annual O&M expenses at TMI-1 is more than $10 million greater than that pre-viously recognized in rates.
In addition, Met Ed spent $8.5 million in 1980 and will spend S10 million to $11 million in 1981 for the re-start modifications.
These have been a signifi-cant drain on Met Ed's rescucres and have been paid by its shareholders.
Their expenditure will, however, be of significant benefit as
,O the savings associated with the operation of that unit are again realized, representing energy savings for the Mat Ed customers of ld per Kwh."
i i
ME Exhibit 5-6, pages 4-5.
The Commission has the authority to allow, as current operating and maintenance expenses, costs associated with the return of plant to service, where the benefit to the i
public is foreseeable and substantial.
The Staff has consistently urged the Commission to encourage the prompt return of TMI-l to service.
The allowance of restart costs as current operating and maintenance expenses will enable Met Ed to prepare the unit for operation as soon as regulatory approvals are given.
In addition, the allowance of such expenses will i(}
permit Met Ed to collect an additional S7 million of revenues 14 -
i in 1981.
This can be shown as follows, again assuming k-average sales throughout the year 1981 and assuming that rate relief is granted effective for service rendered on and after May 1, 1981:
Annual Operating and Maintenance Expense Allowance
$11,000,000 Divided by.98 (to include 2% GRT) 11,224,489 Cash Flow Available From Annual Revenue Increase (62.5% of annual amount) 7,015,305 5.
Cash effect of a restatement of the deferred enerav balance.
As argued in the next section of this brief, the statutory remedy for temporary rates which are less than
()
final rates is to " consider the effect of such rates" in setting final rates.
To the extent that the presiding i
Administrative Law Judge and the Commission finds that the final rates reflect the level of temporary rates which should have been in effect since June 1, 1980, the Commission may credit the Respondents' deferred energy balance in an amount equal to that which would have been collected in excess of existing rates.
This can be done quite apart from the need to avoid insolvency.
If the Commission is not responding to the need to avoid insolvency and is only attempting to meet the statutory requirement to " consider the effect of such rates in fixing, l
(~S determining, and prescribing rates to be thereafter demanded l (/
l or received", then the Respondents' deferred energy balance l
should be' increased by not more than ll/12ths (for the period
_7)
'A June 1, 1980'to May 1, 1981) of the annual test year revenue m
increase advocated by the Staff.
If, however, the Commission is attempting to avoid insolvency of Met Ed by increasing the deferred energy balance, a liquid asset under the RCA, then Met Ed's deferred energy balance could be credited with 11/12ths of the annual revenua increase with a 25% cost of equity as advocated by the Staff, or $24 million (which is S26,528,056 x.917 = S24,326,227).1/
The Staff recognizes that there is no assurance that a restatement of the deferred energy balance will in fact result in an increase in the short term credit available to Met Ed under the RCA and thereby provide additional cash in
()
1981.
However, Met Ed's Acting President, Mr. Dieckamp suggested that more credit could be available if the deferred energy balance were increased; the Staff simply supports a positive response to that sugges*.s;n.
ME/PN Statement J-1, pages 6-7.
-3/
Since the restatement of the deferred energy balance is in
~
concept a correction for past rates which were set too low, it would not be appropriate to also recognize the 1981 TMI-l
/-
(_T restart expenses which the Staff would otherwise allow.
). -
C.
Temporary Rates j
(%
\\J There is no need to attempt to recapture all of the events pertinent to Respondents' complaints against the temporary rates set by the Commission in its order of May 23, 1980.
The starting point for the Staff's analysis is the interim order of presiding Administrative Law Judge Matuschak issued October 16, 1980 and entitled " Decision In The Matter Of The Consolidation Of Complaints Against Temporary Rates And General Rate Increase Proceedings of Metropolitan Edison Company and Pennsylvania Electric Company."
The Staff accepts the conclusion of that order wherein Judge Matuschak stated:
"We conclude that the simultaneous C_)T filing by Met Ed and Penelec of their temporary rate complaints and the tariff supplements proposing rate increases, pre-sent no tenable problems of legality or propriety.
Further, due process, constitu-tional requirements, and statutory mandate require that both the temporary rate pro-ceedings and the general rate increase inves-tigations should proceed to final determina-tion."
Mimeo, p.
8.
The Staff also accepts the decision of Judge Matuschak to consolidate these matters "for the limited purpose of hearing".
In one crucial respect, however, the interim order must be without ambiguity.
Judge Matuschak ruled:
"It is not incompatible in simultaneous proceedings to treat temporary rates previous-ly established by the Commission and the general rate increase investigation subsequently ini-(--)
l tiated.
The timing and the nature of the l
l l
i.
l I
permanent rates established in the temporary
' ate proceedings and the permanent rates es-r
(_s) tablished in the general rate proceeding need not be identical."
Mimeo, p.
6.
There are only two rates to be set here:
(1) prospective rates for the period April 27, 1981 and thereafter and (2) retroactive rates for the period June 1, 1980 through April 27, 1981.
There cannot be more than one permanent, pros-pective base rate effective at the same time.
Therefore, as a result of the Respondents' general rate increase filing pursuant to Section 1308 of the Public Utility Code, there is to be a final rate set for each of the Respondents at the end of the suspension period.
Respondents' future test year / general rate increase filing, and the evidence of all parties presented with respect thereto, is the basis for the
()
setting of that rate.
The rate (for each of the respondents) for the period June 1, 1980 through April 27, 1981 (the end of the statutory suspension period for the general rate increase filing) could have been set or changed, either as a temporary rate or (for part of the period) as an extraordinary rate increase.
Respondent Met Ed requested and was denied an extraordinary rate increase, and did not renew that request pursuant to Section 1308.
Therefore, the only remaining basis for a rate change for the period June 1, 1980 through April 27, i
1981 is as a temporary rate.
The question presented here is:
whether Respondents have presented a prima facie case l
(])
for a retroactive temporary rate change for the period June 1, 1980 through April 27, 1981?
1.
Respondents have failed to present a
()
prima facle case for changing the temporary rates set by the Commission on May 23, 1980.
The nature of the prima facie case required for changing Respondents' temporary rates is defined by the circumstances of these proceedings.
Respondents' have filed for general rate increases pursuant to Section 1308.
Respondents' final rates will be' fixed prospectively (and thereby all prospective issues concerning temporary rates will be resolved).
When the Commission undertakes to set now final rates, the Public Utility Code provides a specific procedure for dealing with rates already in effect.
Section 1308 (d) provides that:
"The rate in force when the tariff stating such new rate was filed shall con-()
tinue in force during the period of suspen-sion unless the Commission shall grant extraordinary rate' relief as prescribed in subsection (c).
The commission shall con-sider the effect of such suspension in finally determining and prescribing the rates to be thereafter charged and collected by such public utility, except that the commission shall have no authority to prescribe, deter-mine or fix; at any time during the pendency of a general rate increase proceeding or prior to a final determination of a general rate increase request, temporary rates as provided in Section 1310, which rates may provide retroactive incrg/ases through recoup-ment."
(emphasis added)-
4/
Note here that the Staff accepts the interim order of
~
Judge Matuschak, dated October 16, 1980, which rules that Section 1308(d) does not bar a change of temporary O
rates which were in existence at the time a general rate increase was filed.
9M m
m
i Similarly, Section 1310(e) provides that:
(3 k>
" Temporary rates so fixed, determined, and prescribed under this section shall be effective until the final-determination of the rate proceeding, unless terminated sooner by the commission.
In every proceeding in which tamporary rates are fixed, determined and pre-scribed under this section, the commission shall consider the effect of such rates in filing, determining, and prescribing rates to be there-after demanded or received by such public utility on final determination cf the rate proceeding."
(emphasis added).
The mandatory language that the Commission "shall con-sider", and the extensive legislative concern with rate changes pending hearing and a final determination (witness, Sections 1308(d) and (e)), reflect a legislative intent to provide an exclusive statutory remedy.
In short, the Public Utility Code provides that the only remedy for temporary rates which are less than final rates lies.in the setting of prospective, final rates.
This' interpretation of the Public Utility Code is reflected in the May 23, 1980 order of the Commission at Docket No. I-79040308 wherein the Commission stated:
"If Respondents file a complaint against the temporary rates set by this order and subsequently the Commission deter-mines that the temporary rates were set un-reasonably low, an adjustment can be granted through restatement of Respondents' balances of deferred energy costs.
However, the inclusion of TMI-l in Respondents' base rates will not be retroactively restated, even if TMI-l returns to service as expected by Res-pondents and is determined by the Commission once again to be used and useful in the public service."
()
Mimeo, p.
22.
The Commission has already rejected any retroactive restatement of rates, and obviously intends to adjust only the final rate relief, to the extent necessary.
-l
The only available foundation for a retroactive restate-()
ment of the temporary rates in effect during this proceeding would be a claim that Respondents' constitutional rights were violated in-that the rates were confiscatory.
Cf.
Prendergast v. New l
York Telephone Company, 262 U.S.
43, 47 S.Ct. 466, 67 L.Ed 853 (1926) (wherein an injunction was upheld based upon a finding by a lower court that temporary rates were confiscatory).
Other than the base assertion in the complaints at Docket Nos. C-80072105 and C-80072106 that the temporary rates are confiscatory, Respon-dents have neither claimed nor proven that the temporary rates are confiscatory.
On the. contrary, Respondents themselves describe their case as grounded upon the general rate increase presentations.
In their memorandum submitted December 31, 1980 in response to a request by the presiding Administrative Law l'
Judge, Met Ed and Penelec state:
"It is the position of Met Ed and Penelec that its future test year and historical test i
year prese'ntations are clearly relevant to the level of rates which should have been in effect as of June 1, 1980 when the Commission removed TMI-l costs'from their base rates.
While Met Ed and Penelec are mindful that the Administra-tive Law Judge has expressed a possible concern that a future test year presentation may not be appropriate for analyzing temporary rates, i
it is submitted that neither the legal require-l ments of the Code nor the regulations thereunder prevent such a test year from being utilized to meet the utilities' burden of proof.
Section 315 of the Public Utility Code, 66 Pa.C.S. Section 315, and 52 Pa. Code Section 3.271 clearly provide for the utilization of a future test year in meeting the burden of proof in rate proceedings.
[
While Met Ed and Penelec have offered as i
evidence in the Complaint proceedings all of i ~ {T the testimony and exhibits relating to both s/
its futu~e test year and historical test year i
presentations (since such exhibits'and testi-many provide backup support for the data) the r"_')
(
. Administrative Law Judge has declined to date to rule on the relevancy of such data.
Met Ed and Penelec submit that such data is clearly relevant and probative in the Complaint pro-ceedings."
l Memorandum, pp. 7-8.
l The Staff submits that those presentations do no more than present a basis for adjusting rates prospectively; they do not demonstrate, on their face, that with TMI-1 properly excluded Respondents have been unable to earn a return on the remaining property in service to the public.1/
Thus, Respondents have failed to present a prima facie case for changing the temporary rates retroactively.
The task of the presiding Administrative Law Judge
(}
and the Ccmmission with respect to Respondents' temporary rates, is to "considct the effect of such rates in fixing, determining, and prescribing rates to be thereafter demanded or received by (Respondents] on final determination of the rate i
proceeding" and not more.
66 Pa.C.S. S S1308 (d) and 1310 (e).
^
-5/
Met Ed Exhibit 3-131 shows Met Ed's own calculation of return on remaining property in rate base at existing rates.
According to that exhibit the equity return un-adjusted for the twelve months ended September, 1980 was 7.93% and the equity return adjusted for the twelve months ended September, 1980 was 10.13%.
Although low by current standards, such returns are clearly not confiscatory.
They exceed substantially the cost rates of debt and preferred stock.
~.
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i i
III.
CONCLUSION
/m u
The Prosecutory Staff respectfully submits that the Commission should find that the test year revenue requirements of Met Ed and Penelec support annual increases in rates of not more than 58.9 million and $11.8 million respectively and that Met Ed should be granted such other additional rate relief as will meet Met Ed's projected cash shortfall at year end 1981.
Respectfully submitted, h
' Steven A.
MdClaren
~
Deputy Chief Counsel Bohdan R. Pankiw Julian S.
Suffian Assistant Counsel Attorneys For The Prosecutory Staff of the Pennsylvania Public Utility Commission February 17, 1981 23 -
APPENDIX A Metropolitan Edison Company Weighted Cost of Capita.1.*
Weighted Cost Rates Capital Components Cost Rates 4.12%
Long-Term Debt 51.7%
x 8.0%
=
.98 Preferred Stock 13.3 x
7.4
=
5.43 - 8.74%
Common Equity 35.0 x
15.5**-25.0%
=
10.53 - 13.84%
- Source:
Staff St. RLP-2, Sch. 1, p. 3.
()
- Cost of common equity claimed by Met Ed at Met Ed Ex. B-1, Part I, p. 14.
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