ML20127D574
| ML20127D574 | |
| Person / Time | |
|---|---|
| Site: | Palo Verde  |
| Issue date: | 12/14/1984 |
| From: | Ruhter W ARIZONA, STATE OF |
| To: | Martin J NRC OFFICE OF INSPECTION & ENFORCEMENT (IE REGION V) |
| Shared Package | |
| ML20126E093 | List: |
| References | |
| FOIA-85-37 NUDOCS 8504180281 | |
| Download: ML20127D574 (30) | |
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.N.e. M. J.N.8.N.S ARIZONA CO R PO R ATION COMMISSION December 14, 1984 Mr. John Martin Region 5 National Regulatory Commission 1450 Maria Lane Suite 210 Walnut Creek, California 94596
Dear Mr. Martin:
On November 28, 1984 the Arizona Corporation Commission issued a rate case order for Arizona Public Service Corporation.
A significant feature of that order was the introduction of an incentive regulation plan regarding completion and operation of the Palo Verde Nuclear Power Plant.
I have enclosed a copy of the Commission's order.
When issuing its order, the Co amission directed its staff to inform the Nuclear Regulatory Commission of the incentive plan and to request that the Nuclear Regulatory Commission inform me of any safety problems associated with the plan.
Would you please review the plan that the Corporation Commission adopted and provide me with an analysis of its implications for the safe construction i
and operation of Palo Verde.
Should you need addi-l tional information, please contact me.
1 With the Seas
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I Wayna Ruhter Di.act Utilit es Division O h #f-
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Cu1RmN JUNzUn awr m NOV 2 81984 i
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mRIANNE M. JENNINGS p4 ED sv COBOLIS810NER 5
IN TEE mTTER OF TEE APFLICATION W
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Ik uzI 50. U-1345-83-155 ARizmA nal.IC SERVICE CarANT nt A
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EEARING TO DETERMINE TEE FAIR TALUE
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0F TEE UTILITY FROPERTY OF TEE COMPANT )
DECISION NO. S d J d 7 9
FOR RATE MARING FURPOSES, TO FIE A
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JUST AND REASONAsLE RATE OF RETURN
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g TREREON, AND TEEREAFTER TO APPROTE
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RATE SCEDULES DE81GND TO DITILOF
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0FINION AND ORDER sVCs RETURN.
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(Electric-Phase 11) 10 DATES CF REARING:
Jaamary 30,1984 (Pre-haaring Conference) 11 Febraary 6, 7, 8. 9, 10, 14, 15, 16, 17, 21, 22, 23, 24, 27 and 28; March 1, 5, 9, 20 and 21; April 3,17 12 (Pre-Bearing Conference),18 and 30; May 1, 2, 3, 4, 17,18, 21, 22, 23, 24, 29 and 30; Jane 5, 6, 7, 8,19 13 and 20; August 27 (Pre-hearing Motions); October 2 (h*-h*aring Conf erence), 5 (Prehearing Motions), 9, 14 10, 11, 15, 16, 17, 18, 19, 22 and 23, 1984.
15 FLACE W EEARING:
Phoenix, Arisons 16 PRESIDING OFFICERS:
Ms. L Giese Thomas L. Masaw 17 H ATTENDANCE:
Comissimr Richard Kimball, Chairman l
gg Commissioner Jamiss Boffman Comissioner Mariam M. Juniass 19 20 APPEARANCES:
Jaron B. Borberg, Vice President, and Raymond F.
Beyman, Legal Department, and Snell & Wilmer, by Steven M. Ubu l u, on behalf of Arisona Pablic Service Company 21 James M.
Flammer, Chief Counsel. Ana Garriott and 32 Timothy Bogan, Legal Division, on behalf of the Arisonsi Corporation Commission staff 33 Ben F. Marshall, Assistaat City Attorney, on behalf of,
the City of Phoenix, City of Scottsdale, City of 34 Cleadale, and City of Tempe 25 Roger A. Schwerts, on behalf of the Residential Utility,
i 26 Consumer Office l
Berusa J. Farsta Assistant Cosasel, Raval Facilities 27 28 Engineering Command, on behalf. of the Department of Defense and Federal Execative Agencies 1
\\\\
U-1345-83-155 this Docket commenced on October 9,1984, in Phoenix, Arizona.
After ten (10) g days f hearings, this matter was adjourned pending submission of a Recommended 2
Opinion and Order by the Presiding Officer to the Commission.1 3
})CEPTIVE RBCUIATION 4,
One d the beinion's primary interuts in this prueeding hu bun the 5
utablishment of incentive mechanisms which would both offut the perceived 6
reduction in construction incentives which allegedly accompanies the inclusion 7
of construction work in progress ("CVI?") in a public service company's " fair g
value" rate base and provide additional motivation for the afficient operation 9
of the company.
Although we agree with the general proposition that the 10 adoption of specific incentive provisions does not and should not relieve the 11 Cosesission of its responsibility to examine expenditures and investments in 1
12 23 utility plant for imprudency during the course of general rate increase It is our proceedings, such an esamination is, of necessity, af ter the fact.
34 15 hope that the implementation of explicit and, to a large aztent, automatic incentive mechanisms will provide a badly needed dose of preventive medicine to 16
- Patient afflicted with the age-old malady of " cost plus" regulation.
17 The Only APS has proposed a comprehensive package of incentive plans.
gg Comission's *Dtilitics Division Staff (" staff"),2 the Residential Utility gg 2.0 Consmer office ("RUC0"), the Coalition for Responsible Energy Education
(" CREE"), and the Commission's own independent expert. Dr. Leland L. Johnson of.
' 21 the Rand Corporation, have provided critiques of APS's proposal and have 22 23 Where relevant, the previous record from Phase I was also incorporated in g4 1.
Consequently, the hearing dates as well as the appearances entered Phase II.
in Phase I have been carried over to this Decision, even though the record will indicate that some parties did not actively participate in Phase 11 25 26 proceedings.
27 2.
staff was represented by the private consulting firm of Imbov, Mezay, Stevens & Lewis.
28
-onan
U-1345-83-155
'[
h
{J operations have been completed, it is egually true that many of these test g
anst be repeated at 100% of licensed power.
Likewise, we find it significan 2
that AFS witness Van Brust was very emphatic about the need to make th 3
" warranty rum"4 at 1001 power because that was the level st which the plan 4
would Md mar ly # Mute.
M-I wu designed and built to opute at 1MI pw.
5 whenever it was capable of running at all.
There are many potential problem 6
which could arin betwus the 80% and 1HI pown twel.
The risk of sue 7
problems ought to be lef t with A75 to the maximum estent possible.
8 f
In adopting Staff's recoussendation that at least a 951 power level 1 9
attained for at least 100 contimeous hours before declaring M-I coeurcial, i 10 hope to avoid quibbling between AFS and the parties herein as to whether or as 11 M-I was at IMI or 99% of liunsed reactor power.
Suf&e it to my that t:
12 33 goal should remain 100% of licensed power for 100 hours0.00116 days <br />0.0278 hours <br />1.653439e-4 weeks <br />3.805e-5 months <br />.
- Likewise, o-determination herein abould not be construed as being binding regarding M-14 and M-III.
should AFS demonstrate with M-I that our concuns about utilisi 15 a lesser standard are unfounded, we are prepared to reconsider AF5's positi 16
- 1**** ""it
17 Allowance for runds used Durina construction ofre t 1R
- CWIP I"*l*d*d 18 E8t* E"'
19 Beginning in Decision No. 53909 (January 30, 1984) sad again in Decisi 2.0 21 No. 54204, the Commission 'has recessised that the extraordinary inclusion Palo Verde CWIP accessitates an equally satraordinary reward to ratepayers for l
I 22 25 24 25 4*
A* th' **"* implies, this is the pulod of operation when it is deterwir whether or mot parts of the plant are operating la accordance with contra 8pecifications, thus entitling parties to whatever payments AFS has previous 26 withheld on their respective contracts.
It is to both AF8's and i ratepayers' advantage to postpons the " warranty rum" as long as possible, a 27 thus its ase as a definition of " commercial operation" would provide AFS vf 28 conflicting incentives. Decision No. W J M
U-1345-83-155 Q.
)
g circumstances had prevented the commercialisation of P7-1 and thus avoid the penalty.
2 APS has also based this target date on its definition of commercial operation, a
definition rejected
- above, and has further limited its 3
applicability to twelve (12) months.
4 I
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6 as it does, with the 1.2/1 offset.
Bovever, the force majeure escape clause 9
causes us trouble much as it does with regard to other aspects of APS's g
g incentive proposal.
Iovever, totally rejecting same form of force majeure 10 prw ision may produce unreasonable and perhaps harmful (to the ratepayers' long i
11 run istuests) ru ults.
We further agru (with Dr. Ma n) that the carts muld 12 probably insert such as "out" for APS even if the Commission vue to 13 specifically rejut it.
Eowan, force majeure is a legal term of art which l
14 curies with it connotations derived from contract law whica are inappropriate 15 l'
- r*sulatory contest.
The New York Public Service Commission has adopted 16 the term "utraordinary event" for its incentive mechanisms, and Dr. Johnson 17 has recommended its use for our purposes.
We wholeheartedly agree and will 18 furth u state that while it is impu sible to precisely deflee what is or is not l
19 an "estraordinary event," the criteria for finding the esistence of such 20 circumstances are higher than for a simple contract force majeure.
In i
i 21 addition, we su ao ruson why APS should receive eyes 50I of the equity 22 component of AFUDC if FT-I is delayed for reasons not attributable to an i
l 23 "estraordiaary event."
Iass of all farther equity AFUDC seems a minimum 34 penalty for such contissed delays.
~
25 Two (2) renaising issues out be addressed.
The first is the effect of 26
- r prior determination concerning commucial operation on the timetable 27 propo ud by APS for completion of FT-I.
While we bellen that the see of a 95I 28 standard for sommercist operation (rather than sa 805 standard) will have
l U-1345-83-155 O
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i incestives to semplete and operate FT-1 sight induce APS to downta 5
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6 of the total project.
As to the precise amosat of the say, there were clearly 9
l two (2) schools of thoesht.
g Dr. Johnsos, and to a lesser entent AFS, believed the say should be l
9
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consideration of the sosts incurred to date.
m aumd ituu a 101 gg costissency over and above its previously seted estimates, while Dr. Johnson l
12 believed that the shances of Ars sissificantly esseedist its present estimates 13 for reasons not emessed by as "estraordinary mat" (yet smehw stiu not g4 15 fairly attributable to APS) me sHaht.
Nor m, aere are contingency amounts already incorporated in Ars's surrent cost estimates.
Consequently, ha 16 ersed that the additional 101 sentissesey be eliminata er drastically reduced.
17 i
Os the other hand, EDC0 and CREE attempted to determine the total value of l
18
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f** **te makiss purposes by means of a comparison of total,alo 19 Torde sosts (Sapital and operating) with that of alternative coal-fired 20 21
- Pacity additions.
Is both instances, this souparison led to recomended seestreetles sost says which were sypresimately $1,000,000,000 less than APS's 22 I
estimated sempleties soot and which were several hundreds of millies g3 present xs d.u -a less nas a. es--t
_t es,ewa b,
.a,ne,eae.
Deaa..o. um, a -. sota aat retr.s,e.u.e 3a.
ets.a raio voue,
- '** If *PPropriate for purposes of deternising the fisst amount of the project 26 l
to be incised is rate base, are frassht with sacertaisties.
APs has shown f
27 seen that sitimate sosclusions are largely dependest spos numerous variables.
l 28 C
Decisies Boo M
11-1345-83-155 o
a produces the most vamaosable result.
It should keep APs's feet to the fir without tossima the company into the furnace. _ To allow for the fact that g
APs's prospects of getting all the CV1p allowances it will roguest for Pal 3
g Verde (when requasted) range between slim and nose; the Caamission's rejectio
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and, to provide for some mialaus additional sentissency, we will utilise Ars' 6
altenative estimate of M.M.M.M as our constuction esp.
Rather tha 7
utilising either the concept of force majeure er "estraordinary event," the es g
will be construed as creating a presumption of imprudency, thus transformii 9
as issue into ese of den of, roof.
uomatses,eaa h, m ersa sh, 2,
ae
.a, will be,res.m a to ha,e he. is,ra estly inesua.
no....,
21 presumption of prudency will attach to amounts expended up to the esp simp 12 because of the existence of the esp.0 33
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14 This represente yet another example of the synergistic nature of incesti 15 sechanims.
Facing the prupact of swen penalties should FT-1 he delayed 16 total project cost estimates exceeded, APs might be tempted to "sut corner 17 during construction which wesid reamit in seerer operatina performance af t 18
- "sercialisation. since the economics of any base lead sait (but especially 19 seclear unit) derive frem its relatively low cost of ernations, incentives f 20 their proper etwaties are as ogsally importsat as, and indeed complimes l
21 1
seastructies incentives.
22 APS has proposed that both Falo Verde and Four Corners be subjected 33 operating incentive plans which, enlike the previous incentive mechanisms, 34 25 6.
The absence of any presumptions would represent the worst possit position AFs seald find itself facing in any subsequest rate applicati 26 M8 seeking inc1ssies of Falo Verde investment in rate base, absent the cap.
states have found that a stility's investments are presumptively erudent., a 27 that management is entitled to a presumption of good faith business judgemes l
28 There appear to be no Arisena seert decisions directly es point.
1 Decision No. 84 W )
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U-1345-83-155 U
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sait will be towards the bottom of the proposed " dead band" rather than meer the top.
Therefore, if the " dead band" is to represent the cessensus of what 7
is reaseambly likely, APS's proposal appears resseamble.
On the other hand, l
3
~
- 4. RUC0 argues that APS should be besad by its predictions ef a 741 CF with a serresponding speard adjustment to the " dead band."
We find merit to both l
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haussently, n will slightly marrw the prepond " dead band" to &751.
7 Dr. Jobson's suggestions aise lead as to fashies the reward and penalt:
l g
fasetiene alens the lines of avoided aest rather than the arbitrary selectie:
9 of a fisen of $15, m. m.
Although Dr. Joha ns aise educated use e 10 inermental 06M aeste sad the adjustant of the reward / penalty functions en I
11 seasonal basis, w find, as die Ars's vitausu, that the admitted increase i 12 the ausrate tracing to total an ided aests is effut by administrativ 13 semplexity.
usema, w betim that APs's papesed yrmy for swided fue
\\
l 14 sat (whether en a paspective basis er en as as actually eaurred basis f
15 reases.9 This se est first venture f l
should be adopted for the same 16 fashiesias operating incenti m for g e rating plaats, and administratia l
17
'I"plicity as well as public asseptance 1 mast, of necessity, assume seasiderab'.
18 importance in our deliberations.
l gg On the issue of symmetry, we agree with Dr. Johnses that it is the les:
20 I"portant goal is Lesentin resslation.
As meted by Dr. Pflam, the mista 21 or assemistence of symmetry does met appear to materially affect the finasci 22 commaity's persepties of risk.
Oyametry is primarily a questies of "fairses 33 to the stility's shareholders, and ese's esbjective assessment of the relati l
34
- ff***I'***** 'I Piti'* 'h segative reinforcement in ashievias 25 26 As is set forth ta Mr. Bart's testimony (APS tahibit No. A-4), this prc l
27 weste be the weighted average feel seat for all ApS evned facilities oscissi 9.
33 of FT-1 and Four Corners.
assisies sen M.
is
U-1345-83-155 U
O this to be two (2) months following seemercialisation of FY-I rather than a g
(6) months.
Bowever, we de agree that two (2) years is a minimum time peri 2
for performance criteria to be affective.
This is not to say that hist,
3 standards for FT-II and FT-III might not."be established g.
performance
)
subsequent proceedings or that the Commission might not also impose an over.
5 7818 T8248 W 8t**d*rd is 84d18108 to or in 11M #f 8t**derd8 fM 88th 8' Par 6
mait.
In addition, the Commission will impose certain procedural safegua 9
for the benefit of consumers.
He reasons for such safegards are, in g
opinios, fairly obvious, and they will not be discussed individually.
Final 9
the penalties and z.ards for modestly per/sood perfumance should be 1 i
10 th** I *EC#Ptionally poor /sood performance.
His is inherest la the coac 11 i
of the " dead band" since small fluctuations around its midpoint produce gg 23 !,ensity - r.aa.
His
..e,ria.i,1e.hos1d be -tended to fructuae around the " dead band."
14
- *ratina incentive plan which we find appropriate is as follows:
15 16 1) a " dead band" for FT-1 will be established at a CF of 40-753; A.
CF's between 50-401 and 75-85I will ruelt in APS being 17 penalised/ rewarded by an amount equal to one half the
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18 such costs the weighted average fuel cost at all APS owned generating facilities (other than Four Corners and Palo gg Verde) operated (whether by APS or another party) during the 2.0 Period in question; 5.
CF's greater than 851 and below 50I (but not below 351) will 21 result in APS belas rewarded /penalised by an amount equal to I
the additional fuel easts avoided / incurred, using the prosy 22 established hereinaboveg 23 a " dead band" for Four Corners will be established at an E& of 2) g4 65-75Es 25 A.
IA's at Four Corners betwees 55-651 and 75-85I will result i AFS being penalised/ rewarded by as amount equal to one-half additional fuel sosts incurred / avoided, using the proxy 26 established hereinaboveg 21 EA's at Four Corners betwen 40-55I and 85-100% will result 3.
APS being penalised/ rewarded by as amount equal to the 33 additional fuel seats incurred / avoided, using the proxy eetablished hereinabove: Decision No. g f
_ _ ___ ~ _ _ - _. _
U-1345-83-155 0
()
encourage total fim efficiency.
In the meantime, we would like to reemphasise two (2) earlier points.
ne first is that any claims concerning "estraordinar:
2 events" will be thoroughly scrutinised.
APs is arsed to avoid a waste o:
g 4, everyone's time by refrainias from claims involving minor pro *blems of the sor-l 5
faced by any utility trying to semplete and operate a generating plant or thos.
which anyone shoosing to seastreet a aselear plant ohnid han fonseen.
n.
6 9
second point is that est selecties of a seastruction sap of $2,860,000,000 fo g
Falo Verde does 331 imply that this anomat will be placed is rate base or eve:
9 that it is any more likely than before to be included is rate base.
I 10 E
l 11 ne only revemme requirement issue in this puceeding was whether or so-l l
12 additional amounts of CWIP should be included la APs's ute base spos 23 s.- essfui iosding of f. 1 at rV-I.
- n. trat., art of thi. i...e is that th.
l 14 incl.sion of. ore c.1, na have -1, ese o>,ossibie effut on APs's woul:
l 15 eenings, and that is to reduce those earnings from what they othenin mule ;
16 have bees. As such, this potential increase in current rates is different frot 17 the esmal " step" increases pnposed by stilitin.
18 ne instaat procuding again raised all the eraments for and againt cut:
19 previously disenssed and smalysed in Decision so. 54204.
We will not rehast 20 then argents, but it is mesessary for es to plainly dispell same of the 21 recurrent anythology" surrounding inc1ssion of cuir in rate base:
^
22 1) inclusion of CWIP is rate base shifts substantial amounts of business risk from the shareholder to the ratepayerg 2)
,maresulated firms is the private oceaemy can not charge customers 24 f*' C'I'3 25 3) inclusion of cw1F is sentrary to rational and fair monomic pricias prlaciples3 26 4) say benefits of including CWIF are intangible er are realised os13 27 over the very long rung and, 28 l.
~11-Decision Bo. A"W st Y 7
~ - - -
11-1345-83-155 g
and against CWIP are largely independent of prudency issues.
As was noted by each of the expert witnesses guestioned, the benefits of CWIP are fully 2
realised by ratepayers ao long as the amount of CVIP included in rate base is 3
less than or equal to the amount ultimately permitted la rate base subsequent 4
Ena Palo Ver a's out datuuined crit u an ut ted that 5, to emp et on.
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6 al== sranted by this Caminion.
l 7
The Cosmaission has, la previous decisions, included CWIP largely as a g
means of addressing critical cash flow problema for public service corporations 9
or to Prevent certain 17 Pes of earnings attrition.
Neither justification i
10 affects our deliberations herois.
AF8's critical cash flow problems were 11 addressed by our award la Phase I of these proceedings.
Barring unforeseen 12 difficulties at Falo verde or disturbances in the financial markets, such a 13 cash crisis as was faced by AFS and this Commission early in 1984 sho,ald not 14 reoccur in 1985.
Likewise, as was stated earlier, the inclusion of more CWIP 15 in AFs's rate base will sanat rather than prevent earnings attrition.
Our 10 saiding Principlu in this can an the economic buefits to ratepayers fra 17 further CWIP inclusion and the avoidance of " rate shock" in the AFS service 18 19 territory.
staff witness Pflausa demonstrated that the af ter tax return to ratepayers 20 for their CWIP "isustment" was at least 17I. With the adjustments to the 1.2/1 21 offset recommended by Staff and adopted herein, it is estimated that the after 22 tax retura rises to the level of 30% or more.
This Commission generally has 25 little oPPortanity to mallaterativ affect the level of stility costs passed on 24 to consumers.
In this instance, the inclusion of additional tv-I CWIF will 25 26 substantially reduce costs whleh. meld otherwise he nronariv charmeable to 27 ratenavers.
This assortunity to effect true cost savinne will he lost forever once Palo Tarda la e - lated.
28 Decision No. # W 4/7
~ - - -
l U-1345-83-155 associated with MF imelusion.
Based upon Staff's analysis in Phaos I, th tan impact of CWIP imelusion is a linear fsaction, and thus includin g
$200,000,000 in CWIP increases TT operating income by $5,014,000. Finding of 3
4 Fact No.10 in Decision No. 54204 most be modified accordingly.
Finally, tt fair rate of return on MP is, of conne, the cost of capital since for al 5
- ** # I ' "
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- ** * ** **** '8 6
separate rate of retors for the CWIP composest of FY13 and another for tl 7
non-CVIF porties, we will weight the components to produce an overall rate i g
retors of 9.742.
9 A"'0"I" "CI"88 10 I
11 Nuttiplying the 9.74I reterm by the revised FR3 of $2.858,858,0 12 Pd* *" **9'id
'I"8
- I '"' l' I"**"e of $278.453,000.
Adjusted 13
' I '" ' l' 'Pti"8 i***** ****' ***** *pProved in Decision No. 54204 s ;
14
$252,592.Mo plus $5,014,H0 or $257,606.000.
ne difference of $20,847,000 uniciplied by the revenue soaversion factor of 2.0897 to prodsee an authoria 15 16 increase in TT electric operating revasses of $43,564,000 or approzinatsiy 4.
17 over the level authorised by Decision so. 54204.13 nis compares with an A han II requ o t of some $132,000,000 (151) and staff's recoussendation 18 19 betwas $32,000,000 and $42,000,000.
RATE DEston 20 l
21 ne esty witnesses whs opined en this esbject recommended use of the as r
l modified "across the board" technique adopted in Decision Bos. 54204 and 32 23 34 25 26
- 13. One eesta just as easily compute the entire increase fer Phase I and Phs II by using the difference betwun the adjusted TT operating income femad 27 Decision No. 54204 and $278.453,000 times the rnesse conversion ractor.
Tt amount less the grant in Phase I ($48,273,000) equals the increase authoris 28 herein.
=21-Doeislea No.#dJdi
U-1345-83-155
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Application, but later reversed that Decision in Decision No. 54025.
y 8.
Decision No. 54025 indicated that Step II (therein denominated as g
" Phase II") would be addressed in a separate hearing and order, with said 3
4, hearing to begin on October 9, 1984.
9.
In Decision No. 56 (May 30, 1984), the Caminion uparately 5
8pproved an increase in gas rates for APS, thus removing another portion of the 6
original application.
7 10.
APS's adjusted electric operating
- revenues, expenses and TY g
g operating income are
$895.933,000; 4638,327,000;
- and,
$257.606,000, 10 respectively.
11.
APS's 0CRB is $2.161,666,000 for electric operations.
11 12.
Ars's acts is $3,556.050,000 for electric operations.
12 13.
Ars's Fvas is $2.858,858,000 for electric operations.
13 14.
A reasonable rate of return on APS's FY1B is not less than 9.741.
34 15.
Electric operating income of $278,453,000 is seensary to produce a 15 l
9.74% rate of return on that portion of APs's Fyns devoted to electric service.
16 l'*
31**tri" ***ratina revenues for the TT (in addition to the increases 17 18 authorised by Decision Bos. 53909 and 54204) must be increased by $43,564,000 j
19 to produce the required operating income, said increase to be inclusive of escise (sales) and other " add on" taxes.
l 20 i
21 17.
Ars's proposed increase would produce an excessive rate of return on l
the FYR3 established herein.
22 23 18.
The increase required for electric service pertains solely to 24 non-inel sosts.
25 19.
The modified "across the board" methodology proposed by AFs will serve to move rates closer to c0s.
26 20 Commercial operation for FT-1 should be defined as operating 95% of 27 28 licensed reactor power for 100 consecutive hours.
21.
AF5's present estimate of $2,860,000,000 for total Falo Yards DecisionNo._f2/J4/?
./
U-1345-83-1.
sun 1
IT IS TEIREroEE CEDnIt that Arisona Public Service Company be, and the 2
same is hereby authorised and directed to file a revised schedste of rates and 3
g charges for electric service la accordance with the discuss' ion. Findings, and I
Co-1.sions of ae Co issi
, herei b-e.
n a Fann como aat as abo,e eaded saa.ie of rates and cher es shall be effective for all service rendered on and after the first day of the 9
embaission to the Commission of an affid==le = =-* Hw ho g, month following the that fuel has been successfully loaded at Palo Verde Unit il, or five (5) days f
9 m
after the filing of said tariffs, which w comes latu.
10 IT IS MRnIt ORDERE that Arizona Public Service Company shall motify l
gg each of its customers of the incrused rates and charges authorised herein by 12 l
means of an insert la said customer's next regularly scheduled billing.
23 IT IS FUtun ORDERE that Arizona Public Service Company shall implement 14 th*
i****ti F an discussed at Pages 3-17 of this Decision and summarised on l
15 16 F*ses 16 and 17 thereof.
17 IT Is Fann caDIaED that Arisona Public Service Company shall file tariff sheets os or before December 14, 1984, detailing the administration o:
i 18 gg the operating incentive provisions relative to Foar Corners and Falo Verde 20 8"it #1-n Is fun nit caDERED that la accordance with our Findings and Conclusions 21 herein and la Decision No. 54204. Arisoma Public Service Company shall credi' 22 its AFUDC secruals os Palo Verde Dait il by an amount equal to $1.20 for eac:
23
$1.00 La cash earnings derived from the inclusion in FTR8 of CWIF.
34 IT Is Funn otDERED that Arisosa Public Service Company shall contino 25 j
26 to submit to the commission's stilities Divisien Staff monthly report 27 reflecting the proper calesistion of the above eredit la accordance vit 28 Finding of Fast No. 22. hereinabove.
=25-DesisionNo.f4/2U) i l
h e
- x.f W,
M ons corperstion conwniss:gn DOCKETED BEFORE THE ARIZONA CORPORATION COMMISSION 1
OCT 111984 RICHARD KIMBALL E
CHAIRMAN ancasTED SY JUNIUS HOFFMAN gg*
3 COMMISSIONER MARIANNE M. JENNINGS 4
COMMISSIONER 5
IN THE MATTER OF THE APPLICATION OF
)
DOCKET No. U-1345-83-155 ARIZONA PUBLIC SERVICE COMPANY FOR A
)
O HEARING TO DETERMINE THE FAIR VALUE
)
0F THE UTILITY PROPERTY OF THE COMPANY )
DECISION NO. 5 4h 6 7
FOR RATE MAKING PURPOSES, TO FIX A
)
JUST AND REASONABLE RATE OF RETURN
)
g THEREON, AND THEREAFTER, TO APPROVE
)
RATE SCHEDULES DESIGNED TO DEVELOP
)
9
)
OPINION AND ORDER SUCH RETURN.
)
(Electric-Phase I) 10 DATES OF HEARING:
January 30, 1984 (Pre-hearing Conference) 3 February 6, 7, 8, 9, 10, 14, 15, 16, 17, 21, 22, 23,
24, 27 and 28; March 1, 5, 9, 20 and 21; April 3, 17 12 (Pre-Hearing Conference), 18 and 30; May 1, 2,
3, 4,
17,18, 21, 22, 23, 24, 29 and 30; June 5, 6, 7, 8,19 13 and 20, 1984 PLACE OF HEARING:
Phoenix, Arizona PRESIDING OFFICERS:
- h. R. Giese Th **
- I" """*"
16 IN ATTENDANCE:
Commissioner Richard Kimball, Chairman 17 Commissioner Junius Hoffman C ""Ii'"" "**i*""' "* J'""i"8' 18 APPEARANCES:
Jaron B. Norberg, Vice President, and Raymond F.
19 Heyman, Legal Department, and Snell & Wilmer, by Steven H. Wheeler, on behalf of Arizona Public Service Company 20 James M.
Flenner, Chief Counsel, and Ann Carriott, 21
-Legal Division, on behalf of the Arizona Corporation Cosmaission Staff 22 Ben P. Marshall, Assistant City Attorney, on behalf of 23 the City of Phoenix, City of Scottsdale, City of Glendale, and City of Tempe 24 R ger A. Schwartz, on behalf of the Residential Utility 25 Consumer Office
\\
Norman J. Furuta. Assistant Counsel, Naval Facilities 27
\\
Engineering Command, on behalf of the Department of Defense and Federal Executive Agencies 28 Wentworth & Lundin, by John E.
Lundin, on behalf of Arizona Public Service Company Shareholders Associatior M
7 k U-134.483-155 1
Application in newspapers of general circulation throughout its service 2
territory. AFS also mailed said Notice to each of its customers.
3 Subsequent to the filing of the Application, numerous Petitions seeking 4
leave to intervene were filed on behalf of various interested parties.
These 5
Petitions were granted by Procedural Order prior to the hearing.
6 In accordance with the above Notice, the Application came on for hearing 7
before a duly authorised nearing Officer of the commission at its offices in 0
Phoenix, Arizona, on February 6, 1984.
Dereat, statements from the public 9
were received and made a part of the record as were numerous petitions and 10 letters in opposition to the Application.
AFS, the Commission's Utilities 11 Division staff (" staff")l, as well as the Intervenors set forth above, entered 12 appearances.
ne proceeding was continued from time to time, and in total, 1
there were forty (40) days of evidentiary hearings.2 14 During the course of these hearings, the Application underwent several 5
- changes, ne most significant was the separation of the requested increase in 10 gas rates from the electric portion of the Application.
After presentation of 17 a stipulated agreement negotiated by APS and the Residential Utility Consumer 10 of fice ("RUC0"), the Comission approved an increase in gas rates in Decision 19 Nos. 54056 (May 30,1984) and 54183 (September 26, 1984).
Byen with regard to 20 the electric increase, APg's original proposal for a five (5) step increase was 21 pared to two (2) steps at APS's request.
Moreover, the commission initially 22 dismissed even the second step of the Application in Decision No. 54018 (April 26, 1984) but later reversed itself in Decision No. 54025 (May 17,1984). ne i
24 25 1.
Staff was represented by the private consulting firms of Lubow, McKay, j
stevens & 1, wis and QED Research, Inc., for purposes of the instant proceeding.
l 26 l
2.
There were also two (2) prehearing conferences.
ne initial ecnference l
27 l
was held on January 30, 1984.
ne second, scheduled af ter the first of several 28 major revisions to APS's Application, was held on April 17, 1984.
l Decision No. 8 h W.
-- x - -
I U-1345-83-155 1
commercial operation late in 1985.
PV-II is similarly estimated at 98.9%
2 complete, while PV-III is presently believed to be 87% complete.
Commercial 3
operation of PV-II and PV-III are presently planned for the summers of 1986 o 4
1987, respectively.
As of June 30, 1983, APS had invested approximately 5
$850,000,000 in PV-I alone.
APS's total cost for all three (3) units is 6
presently estimated at over $2.700,000.000, inclusive of capitalised financing 7
and overhead.
APS owns 29.11 of Palo Verde and is the manager of the project j
0 for a consortium of California, Arizona, New Mexico and Texas utilities.
Each 9
member of the Palo Verde group pays a proportionate share of all construction 10 costs and will, upon commercialisation of the units, pay a commensurate amount 11 of the operating expenses.
Although no portion of this massive investment has 12 previously been included in the calculation of APS's " fair value" rate base, Decision No. 53909 (January 30, 1984), wherein the Counission granted APS an emergency rate hike, implicitly recognised the tremendous strain Palo Verde has 5
exerted upon APS's cash resources.
16 PROPOSED INCREASE 17 APs has requested that its operating revenues for electric service be 10 increased by $122,115,000 (16.12%) based upon sales levels for the year ending June 30, 1983.
Somewhat = ara tu $55.000.000 of this amount represents 20 confirmation of the interim amermancy increase granted in Decision No. 53909.
I 21 As was noted earlier, AP5's original Application contained four (4) additional 22 f
rate steps based upon certain milestones of construction at Palo Verde.
All 23 but the second step, consisting of some $79,000,000, has been dismissed, and only the first step will be addressed herein.
APS's last permanent rate increase was authorised by Decision No. 53761 (September 30, 1983).
20 TEST YEAR 27 APS originally proposed a Test' Year ("TY") consisting of calendar year 28 1982.
The Commission's Rate Case Procedural Order of July 19, 1983, rejected DecisionNo.8
6
^
U-1345-83-155 4
j 1
OPERATING INCOME E
APS's statement of TY electric operating income is found in the "C"
~-
f 3
Schedules of Exhibit No.
1.
The actual TY results were modified by the
)
4 following pro forina adjustments:
5 (1)
TY operating revenues were increisad by $54,042,000 to reflect the net effect of the higher bass, and fuel and purchased power 6
adjustment clause ("PTFAC"),. rates authorized by Decision No. 53761; i
the higher rates sought,in FERC Docket No.82-481; the loss of both 7
j jurisdictional and FERC sales; the addition of " wheeling" revenue; the substitution of Southern California Edison for Utah Power &
O I
Light with regard to the Cholla Unit #4 layoff sale; and, the actual 1983 Commission and RUC0 regulatory assessment; 9
(2)
TY operating expenses were increased by $28,170,000 to reflect the g
corresponding expense adjustments related to the increased revenue included above; n
(3)
TY operating expenses were increased by $691,000 to reflect the net 12 t
(after income taxes) effect of a five (5) year amortization of APS's I"***** I" th' #*1* Y' U***i"" Y******i 13 (4)
TY operating expenses were in:reased by $543,000 to reflect the net 3
effect of the three (3) year amortization of the accounting changes mandated by FASB d43 and approved in Decision No. 53761;
-15 i
(5)
TY operating expenses were increased by $805,000 to reflect the 16 estimated net effect of increased ad valorum taxes during the second half of 1982; p
(6)
TY operating expenses were decreased by $284.000 to reflect the net yg change in expenses at the West Phoenix Steam plant which was "a thballed"'during the TY; 19 (7)
TY operating expenses were increased by $3,268,000 to reflect the 20 net effect of the 802 removal project at the Four Corners Generating Station, which project is presently scheduled for completion in 21 December of 1784; 22 (8)
TY operating expenses vere increased by $565,000 to reflect the net effect of annualized changes in the Four Corners Operating 23 Agreement; E4 (9)
TY operating expenses were increased by $160,000 to reflect the net effect f annualizing the expenses incurred by the particulate 25 removal project equipment installed at Four Corners late in 1982; j
4 26 i
(10) TY operating expenses were increased by $2,086,000 to reflect the net effect of annualized depreciation and amortization for plant in 27 service as of June 30, 1983; 26 Decision No. [
26 -
U-1345-83-155 (5) operating income was increased by $198,000 as a result of using i'
1 Apge s presently effective rates for wheeling service; 2
(6) operating income was reduced by $11,854,000 to reflect layoff sales from Cholla Unit #4 during the time rates approved herein will be in 3
effect rather than those during the first year of operation of PV-I; 4
(7) operating income was reduced by
$2,129,000 as a
result of a
alisi g wage a d salary increases granted by APS during the TY; i
5 (8) operating income was further reduced by $263,000 to reflect APS's 6
share of FICA taxes resulting from the above wage and salary adjustments; 7
(9) operating income was increased by $464,000 to reflect savings g
accrued through APS's early retirement program; 9
(10) operating income was increased by $1,130,000 as a result of changes in the effective ad valorum tax rate less the additional tax due on 10 property additions between June 30, 1983 and November 30, 1983; 11 (11) operating income was reduced by $1,292,000 due to the increased a nualized depreciation on the above property additions; 12 (12) operating income was reduced by $122,000 to reflect the net effect g
of interest on customer deposits; 14 (13) operating income was increased by $638,000 by the disallowance of APS's proposed adjustment for losses incurred in the Palo Verde 15 Uranium Venture; (14) operating income was increased by $2,298,000 by the disallowance of APS's proposed adjusttent for the operating costs of the S02 removal 17 equipment at Four Corners; 10 (15) operating income was increased by $101,000 to reflect revisions to APS's earlier estimates as to the effects of changes to the Four 19 Corners Operating Agreement and the Four Corners particulate removal Project; 20 (16) operating income was increased by $151,000 to reflect the allocation 21 to FERC jurisd'iction of a reasonable portion of R & D expenses; 22 (17) operating income was increased by $197,000 to reflect removal from TY results of all nuclear advertising and the Palo Verde Information 23 Center; t<
l 24 (18) operating income was increased by $1,276,000 by the elimination of the Energy Control Credit Program ("ECCP");
25 (19) perr*ing income was increased by $20,748,000 through a reduction in 26 income tax expense resulting from such nonoperating items as the annualized effects of FERC Order No. 144 normalization, changes in 27 depreciation practices not normalized, and intereat synchronization.
28 Decision No.
M
U-1345-83-155 1
We 'believe that APS's rebuttal evidence has been persuasive.
It is i
2 clearly unfair to reflect pro forma adjustments which increase TY operating 3
income without making corresponding adjustments to reduce operating income.
4 APS's incremental adjustment to annual labor expense is consistent with Staff's 5
inclusion of pro forma customer levels, Staff's pro forma adjustments to rate 6
base, and with its previous labor adjustment.
With the above adjustments to 7
Staff's computations, we find adjusted TY operating revenues to be O
$827,660,000; adjusted TY operating expenses to be $607,739,000; and, adjusted 9
TY operating income to be $219,921,000.7 10 RATE BASE 11 In comparison with pro forma TY operating income, there were relatively 12 few adjustments to TY original and reproduction cost new rates bases ("0CRB and RCRB") made by either APS or Staff other than those adjustments related to Palo 14 Verde.
Moreover, no other participant in these proceedings presented testimony 15 on any rate base item other than Palo Verde.
Consequently, the Palo Verde 16 issue will be addressed separately within this portion of the Decision.
17 APS made only three (3) basic adjustments to its June 30, 1983, plant 10 balances.
It increased depreciation reserve to reflect the annualized i
l 19 j
depreciation taken for income statement purposes.
It added pro forma 20 adjustments for improvements to APS's 500 KV transmission line system and the l
21 addition of 802 removal equipment at Four Corners.
Finally, APS included Plant 22 Reid for Future Use.
23 Staff disallowed each of APS's adjustments except the increased 4
depreciation reserve.
Even that figure had to be modified since Staff utilized 5
November 30, 1983, plant balances except where such balances were not found to l
26 be representative or consistent with Staff's earlier operating income 27 28 7.
Includes effects of $260,000,000 in Palo Verde CWIP. DecisionNo.I
- _ = _ _ _
U-1345-83-155 1
discourage. prudent investments by APS in property later needed by its 2
ratepayers.
3 We find that APS should be permitted to include both the 500 KV Yuma 4
transmission line and the Four Corners SO2 project in its rate base.
The 5
former was clearly in service by the close of the hearings in this proceeding, 6
was not revenue producing, would provide cost savings which would go directly 7
to the ratepayer rather than partially or wholely offsetting the project's O
capital costs, and will improve the quality of electric service enjoyed by 9
APS's Yuma customers.
The S02 project may be considered a form of nonrevenue 10 producing CWIP.
We believe that strong public policy considerations support 11 prompt rate base treatment for pollution control equipment.
It should be noted IE that even those jurisdictions which generally do not permit CWIP in rate base (even in cases of financial need) make an exception for pollution control 14 projects.
This investment by APS in better air quality is hardly insignificant 15
($39,334,000).
For APS to bear this investment without renumeration until yet 16 another rate application has been heard, having already done so prior to the 17 effectiva date of this Decision, seems to us both unfair and possibly 10 counterproductive should such a result discourage APS from making future 19 investment decisions of this kind.
20 APS presents us with a close case with its revised oil inventory 21 adjustment.
However, we will continue to accept Staff's figure for several 22 reasons.
First, while APS has shown that Staff's methodology has produced 23 allowances which are clearly excessive for one plant and clearly inadequate for 24 another, it has yet to show that the overall Staff allowance for oil inventory 25 is inadequate.
Second, APS has a previous " track record" concerning excessive 26 inventory levels which does not lead us to accord management its usual degree 27 of deference in this area.
We note that APS has continually reduced its level 28 of oil inventory over the past few years.
The incentive for efficiency which Decision No. [
U-1345-83-155 1
least) exhibits were devoted to the issue of whether or not m ain e nortion of 2
Palo Verde should be includ=d in rate h===
ma CWIP.
Most of that testimony and 3
the great majority of the exhibits were based upon the premise that if Palo 4
Verde were demonstrated to be an imprudently conceived and managed project or 5
that at the very least, mistakes had been made during its long construction, it 6
would logically follow that 3g Palo Verde related CWIP should be placed into 7
rate base.
That premise is not shared by the majority of this Commission.
O That the original idea to build Palo Verde was, in some sense, imprudent 9
seems doubtful given the state of then existing knowledge.
Whether Palo Verde 10 will prove to be imprudent with the aid of "20/20" hindsight remains to be 11 determined by the course of future events.
There are still far too many 12 variables concerning the final construction costs of Palo Verde, its operating 13 behavior, the costs of coal (including possible " acid rain" and solid waste 4
i disposal costs), etc., to warrant the hasty conclusions reached by some parties 15 herein.
Certainly errors were made in Palo Verde's construction.
Of this we I
16 l
vere fully aware even before being inundated by " CAR's" and other such Nuclear 17 Regulatory Conunission ("NRC") ' documents.
After all, Palo Verde is being built i
10 by human beings, not mistake-proof automata.
Only a comprehensive and 19 independent construction audit can assure us that Palo Verde's total cost is 20 reasonable, i.e.,
that instances of good judgement and prudent management 21 outweighed the inevitabit examples to the contrary.
Such an audit is being 22 planned by this Commission at the present time.
In the meantime, it is our 23 responsibility to see that our own mistakes are not added to any made by APS.
24 No witness has seriously disputed the Commission's observation that the 25
~
inclusion of CWIP in rate base saves ratepayers money over the life of the 26 included asset.
Indeed, with the $1.20 AFUDC reduction for each $1.00 in CWIP
~
27 cash earnings, the financial deck is stacked in favor of the ratepayer.
In
~
28 Decision No. 53761, the primary reason cited by the Commission for rejecting a Decision No. [
wv-
--w-
-m..--
.-y..y
--,-..-,-y a
---m.----
--r
U-1345-83-155 1
five (5) years hence.
PV-I is little over a year from completion.
Again we 2
are faced with a very small, if any, " inequity" versus a very large increase in 3
total project cost for all ratepayers.
The final argument is that some 4' ratepayers simply can not afford any additional electric rate increases.
The 5
inability of some members of society to pay for even basic levels of electric 6
service is not a trivial matter.
However, it would seem that postponing a 7
smaller increase today in favor of an even larger one tomorrow will do such 0
individuals little good.
9 Both Staff and APS have supported inclusion of various levels of CWIP.
10 APS originally sought $425,000,000 while Staff argued that only $325,000,000 11 was necessary to achieve satisfactory cash flow criteria.
This is our first 12 decision allowing permanent Palo Verde CWIP in the rate base.
We do it for two 13 reasons.
First, to preserve APS's financial viability; second, and equally 14 important, it will encourage optimal pricing of baseload facilitiese Since we 15 look forward to the development of more sophisticated and effective pricing and 16 incentive mechanisms in Phase II and other upcoming cases, the allowance of 17 CWIP in this case should not be deemed to be a precedent for any principle of 10 general CWIP allowance in rate base.
Moreover, and contrary to both APS and the Staff, we believe that an amount of $260.000,000 of CWIP will be sufficient l
20 to achieve present satisfactory cash flow criteria.
l Rate Base Summary l
22 l
The addition of $260,000,000 in CWIP to the OCRB and RCRB figures l
23 previously cited produces a total OCRB of $1,961,666,000 and a total RCRB of 24
$3,3 56,050,000 for the TY.
The Commission has traditionally weighted OCRB and 1
1 25 RCRB "50/50" in the determination of " fair value."
No party has suggested a O
l different procedure, and we can find no rationale in this record which would 27 l
support any change from our previous position. Consequently, we will_ find the i
28 l
" fair value" of APS's rate base to be $2,658,858,000. Decision No. [
U-1345-83-155 1
At one (1) end of the range, Staff's and APS's experts recommended returns of 2
17.50% and 17-18%.
APS had originally requested a return of 17% in this b
proceeding, and its latest filing in Exhibit No. I reflects an equity cost of 4
17.50%.
On the other hand, RUC0 and various other Intervenors have presented 5
experts supporting cost estimates of between approximately 13% and 15.6%.
Most 6
also indicated that the Commission's inclusion of CWIP would serve to lower 7
their estimates of capital costs.
Dr. Trout of Staff attempted to quantify the 8
effect as approximately 20 basis points, while Mr. Parcell for the Department 9
of the Navy put the "CWIP effect" in the range of 50-60 basis points.
10 All of the witnesses utilized market measures for determining cost of 11 common equity, although Mr. Parce11 and Dr.
Smith also studied, so called 12 comparable earnings, and various other experts performed types of " risk 13 premium" analyses wherein cost of common equity was related to the current cost 14 (interest rate) of certain types of debt instruments.
The differences among these witnesses largely arise from the selection of data for their respective i
l 16 studies.
Those witnesses who attempted to directly gauge future growth 17 expectations, whether by direct inquiry or by resort to popular financial 10 publications having supposed influence with the investor,. tended to come up 19 with high growth estimates, and consequently, high returns given the relative 20 agreement as to APS's present dividend yield.
On the other hand, witnesses who 21 concentrated on recent
- historical results concluded that there was little
~2 9
growth potential for APS.
23 We believe that gli the rate of return witnesses have managed to be at the 24 same time both wrong and right about growth.
It is true APS's recent performance with regard to earnings and book value growth has been poor.
This 26 reflects the strain of Palo Verde construction combined with a relatively high 27 rate of dividend growth and numerous issuances of common stock below book 28 value.
For the short-ters, little improvement is to be expected in earnings, Decision No. [
r l
U-1345-83-155 1
its total cost of providing electric service, including capital costs.
E Although some witnesses have argued that APS should receive less than its 3
actual costs because of allegations concerning Palo Verde, we continue to view 4
this matter as a rate base issue and will treat it accordingly.
5 AUTHORIZED INCREASE 6
Multiplying the 9.50% rate of return found to be reasonable by APS's " fair 7
value" rate base produces required operating income of $252,592,000 for O
electric operations.
This is $32,671,000 more than was produced by APS's 9
adjusted TY.
As was alluded to earlier, APS has modified its original RCF to 10 reflect the extension of Arizona's " temporary" sales tax surcharge.
So 11 modified, the RCF of 2.0897 produces a required increase in TY operating 12 revenues of $68,273,000 or 8.25%.
Of this total, it should be remembered that 1
some $55,363,000 (6.70%) was previously authorized by Decision 'lo.
53909, and 14 that the incremental increase is less than 1.5090%.
15 RATE DESIGN 16 APS's rate design incorporates two (2) distinct concepts.
Specific rate 17 increases were proposed for connect and reconnect services, dusk to dawn 18 lighting, and various miscellaneous items.
These latter increases were based 19 upon the higher cost of providing such specialized services and account for 20 some $2,199,000 of the authorized rate increase.
The bulk of the remaining 21 revenue requirement is realized by a modified "across the board" increase on 22 the base (non-fuel) portion of electric rates.
This general principle is 23 modified because strict application of the methodology followed in Decision 24 No.53671 would not produce sufficient revenues from the irrigation class.
APS 25 therefore raised irrigation rates by the same percentage as its residential 26 customers.
Another variation was with reference to the street lighting rate 27 schedule.
APS's proposed increase for that class of service was in accordance 28 with the Consnis sion's previous direction in Decision No.
53615 (June 27 Decision No. E e
n
U-1345-83-155 I
schedule, and no voltage distinctions were incorporated into the PPFAC portion 2
of rate design.
APS likewise failed to show its rate of return by rate 3
schedule under its proposed rates and did not separately allocate wheeling 4
costs as is presently required by TERC.
The 4-CP method was also inconsistent 5
with APS's use of five (5) months for purposes of billing demand charges and 6
the 80% (single month) demand ratchet.
Finally, it was suggested by several 7
expert witnesses that the 4-CP method should be reconsidered after PV-I has O
been placed into service because of its dramatic effect upon the configuration 9
of system costs.
Each of these criticisms scens, in large part, to be valid, 10 and APS should attempt to incorporate as many of these changes as is possible 11 in future studies.
Although Staff's analysis shows that at the present time, 12 use of another embedded cost methodology such as " average and excess" does not 13 significantly affect the final result. this may no longer be true af ter PV-I i
14 comes on line.
Consequently, we will require APS to provide COS analyses based 15 on both 4-CP and " average and excess" methodologies.12 (In the alternative, 16 APS may substitute a 12-CP. study for one based on " average and excess.")
17 Criticisms aside, however, it is not clear to the Comission that APS's studies 10 are so flawed as to negate their conclusion that the modified "across the 19 board" rate spread represents continued progress toward COS based rates.
While 20 some parties have argued that APS has not moved far and fast enough in this i
21 l
regard, we are persuaded by Staff's and the Center's witnesses that some 22 caution should be exercised in attempting to precisely mirror COS studies which 23 24 12.
While there would be some comfort in adopting the same methodology for b th juri8dicti D81 8eParations and COS as is presently used at FERC, we do not 25 view this as an absolute necessity.
APS's contention that it would under or ver rec ver its t tal costs if differing methods are adopted assumes a 26 symmetry betweeen state and federal proceedings which simply does not exist.
More ver, the overwhelming majority of APS's business is under the Commission's 27 i
jurisdiction.
To adopt an allocation methodology which we find inappropriate l
r merely because FERC has used it is clearly a case of the tail wagging the dog.
l 28 l Decision No. [
L
u-AJ63-eJ-133 1
location, there is no assurance that even this massive increase in tariff 2
complexity will produce any more equity by the precise matching of burdens with 3
benefits.
4 MISCELLANEOUS In Decision No. 53909, the Commission required that APS forego $1.20 in 6
AFUDC earnings for each $1.00 in cash earnings granted by reason of that 7
Decision.
At that time, it was not specifically contemplated that such a O
" premium" would necessarily be demanded in the context of a permanent rate 9
Application. However, APS itself has conceded that this 20% " premium" for cash 10 earnings over AFUDC earnings is not unreasonable and serves as a powerful Al ll incentive to complete PV-I as quickly as possible.
! 10 accrual rate equal to the after tax cost of capital as determined herein, we hI could simply order APS to cease accruals of AFUDC on $312,000,000 of PV-I CWIP L
14 in exchange for including $260,000,000 of such CWIP in its " fair value" rate 1'15 base. Unfortunately, the AFUDC rate, although in part determined by the 10 l
Commission's cost of capital allowance, is seldom if ever exactly equal to 17 APS's effective original cost return.
In addition, the AFUDC rate can be 10 changed over time.15 We will therefore simply instruct APS to continue to credit PV-I AFUDC by $1.20 for each $1.00 in earninas derived from our 20 inclusion of CWIP in " fair value" rate base.
To insure that APS has 21 appropriately calculated this amount, APS shall be required to file monthly 22 reports with the Commission's Staff detailing how the aforementioned credit has 23 been determined and applied.
4 On March 19, 1984, RUC0 filed a series of Motions with the Commission, 25 26
Although the Consnission could specifically require that l
27 a different rate be used for ACC jurisdictional purposes, this has not been the l
23 Commission's policy.
1 l
' Decision No. 3 i
~
~
l v-ia*s-oa 4ss a
1 specific legislative or constitutional enactment.
Therefore, RUCO's Motion for 2
costs and attorneys' fees will be denied.
i 3
4 Having considered the entire record herein and being fully advised in the 5
premises, the Commission finds, concludes and orders that:
6 FINDINGS OF FACT 7
1.
APS is an Arizona corporation engaged in providing electric service 8
to the general public within portions of Arizona pursuant to authority granted 9
by this Commission.
10 2.
On July 5,
1983, APS filed an Application with the Commission 11 wherein it requested an increase.n its rates and charges for electric service.
1 3.
In accordance with A.C.R.R.
R14-3-101, Rate Case Procedural Orders I
were issued by the Commission on July 19 and November 7,1983, and January 20, 14 1984.
15 4.
Pursuant to said Rate Case Procedur.a1 Orders, as amended, Notice of the Application and the scheduled hearing date thereon was published in 17 newspapers of general circulation throughout APS's service territory and was 10 mailed to each of APS's customers by First Class U.S. Mail.
19 5.
Subsequent to said Notice, public hearings on the Application were 20 held in Phoenix, Arizona, on the dates indicated hereinabove.
21 6.
On March 9,1984, APS withdrew Steps III, IV and V of its original Application.
23 7.
On April 26,
- 1984, the Commission dismissed Step II of the 4
Application, but later reversed that Decision in Decision No. 54025.
25 26 27 28 Decision No. S n o y' 4
1 1
17.
APS's proposed increase of $122,115,000 would produce an excessive 2
rate of return on the portion of APS's " fair value" rate base devoted to 3
electric service.
4 18.
The increase required for electric service pertains solely to 5
,,,_fo,1 co,t,,
6 19.
The modified "across the board" methodology proposed by APS will 7
serve to move rates closer to COS.
0 l
20 APS's proposed increases for street lighting, dusk to dawn lighting,
{
9 connect and reconnect charges, miscellaneous charges, and contract i
10 rates have not been specifically opposed by any party herein and follow general 11 l
COS principles.
12 22.
The changes in APS's proposed rates and charges set forth at pages 1
(
21-25 of this Decision are likewise consistent with CDS principles.
4 23.
Cash earnings on CWIP are more valuable to APS at this time than 75 l
would be a corresponding amount of FUDC earninas.
16 CONCLUSIONS OF LAW 1.
APS is a public service corporation within the meaning of Article IV 10 of the Arizona Constitution and A.R.S. Sections40-250 and 40-251.
19 Comunission has jurisdiction over APS and of the subject matter 2.
The 20 of the Application.
21 3.
Notice of APS,'s Application and proposed tariffs was given in the 22 manner prescribed by law.
I 23 24 25 26 27 28
... Decision No.
U~ A J se )* OJ ~ a s J 1
monthly reports to the Connaission's Utilities Division Staff wherein the amount 2
of the above credit is calculated and applied to the appropriate construction 3
account, the first of said reports to be due no later than November 1, 1984.
4 IT IS FURTHER ORDERED that the Motions of the Residential Utility Consumer 5
office requesting costs and attorneys' fees, and seeking a construction audit 6
of Palo Verde in the form attached thereto, shall be denied.
7 IT IS FURTHER ORDERED that the interim rates and charges authorized by 8
Decision No. 53909 are hereby confizzed and any potential refund obligation of Arizona Public Service Company established therein is hereby discharged.
O IT IS FURTHER ORDERED that this Decision shall be effective upon entry.
BY ORDER OF THE ARIZONA CORPORATION COMMISSION 12 13 a# D #
14 OCOMMI$IONER COMMISSIONEk{(
CHAIRNAN 15 IN sW TNESS WHEREOF, I, LORRIE DROBNY, Executive Secretary of the Arizona Corporation 16 Cossaission, have hereunto set my hand and caused the this //gd at official seal of this Cosmtission to be aff the 17 day Cap City of Phoenix, Mb
[V 19 ORRIE DROBNY Executive Secretary 20 21 O
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22 DISSENT j
j 23
.lg 24 25 26 27 26 Decision No. 3
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- TEMPE. AZ 85282 * (602) 968-2179 k amhar 18, 1984 To: Harold Denton Office of Nuclear Reactor Regulation U.S. Nuclear Regulatory Conmission Washington, D.C. 20555 Re: Palo Verde Nuclear Generating Station Unit 1 Expeditious Consideration Requested
Dear Sir:
I am writing on behalf of the Coalition for Responsible Energy Education re-garding the application of the Arizona Nuclear Power Project and Arizona Public Service as project manager for an operating license for and p2rmission to conmence low-power testing of Palo Verde Nuclear Generating Station U6iti.1. We belieue that the effect of certain incentive plans (some of which have been implemented by the applicant utility and others imposed by'the state utilities conmission, the Arizo-na Corporation Comission), and the effect of the applicant's financial constraints f
on emergency preparedness require a thorough consideration before issuance of the l
license. Because of the interests of everyone involved in a timely resolution of these questions, we request that this letter be treated as involving a potential show cause issue and be processed as expeditiously as possible consistent with
' adequate review.
Our organization is a coalition of several central Arizona organizations, in-r cluding the Palo Verde Intervention Fund, the organizational representative of in-tervenor lee Hourihan. The Coalition is currently administering the Fund on a
, day-to-day basis due to personnel ttransition and therefore we are writing to you directly.
'D The issues we address below'were only inade public or brought to a decision point during the past three weeks. Therefore, we were unable to bring them to g(
our attention before this time. In light of the recent and pending status of these issues, we believe that the applicants have acted precip tously in filing their licensing request when they did.
C
page 2 On November 28, 1984, the Arizona Corporation Comission adopted an incentive regulation package for Palo Verde.
(A copy of pertinent portions of Comission Decision No. 542' 7 accWes this letter.) That package included a delay 4
penalty dependent upon Unit 1 comercial operation, a total project construction
~
cost ceiling, and an operating efficiency performance incentive including Palo Verde. In addition, the Comission rejected an APS request for a force maieure exmption provision, substituting an "ecraordinary event" 1:rovision. The incentive plan resebled one subnitted by APS in general form, but differed as regards specific performance targets and standards, and the utility has filed an Application for Reconsideration of some of its provisions, claiming they create financial pressures on the company.
Efforts by this Coalition (CREE) to introd N.e into evidence materials regard-ing the potential for perverse incentives whr safety is concerned (including NRCdocumentsissuedbyyouandothers)weredenied,APSfilednotestimonyonthis issue, there was no general discussion of the potential safety implications prior to the issuance of Decision No. 54247, and such concerns were nowhere reflected in the Corporation Comission's final order. Therefore, the safety issue is far from S
resolved at this time.
Fortunately, Corporation Comission Gairman Richard Kimball stated, on Novem-
.: ber 28, that he shared CREE's concerns and ordered the entire package subnitted to 1
the NRC for review and, if desired, coment, pursuant to a suggestion made by CREE.
A second CREE suggestion, that the package reflect NRC fines in the incentive for-g,wasnotadopted.
We are informed that the Corporation Comission has forewarded the plan to Region V.
However, we are concerned that most of the critical involvement with this issue has amenated from the national level, from you, Comissioner Asselstine, Mr.
Rowesome, etc. Accordingly, we seek to alert you to these events and involve you in the decisional process.
pag 2 3
,=l In addition, Arizona Public Service has filed its application with the NRC prior to the receipt of any NRC coments, and we str'ongly believe that this and related issues should be incorporated into any decision on that appeal.
If the concern over incentive regulation that has been expressed by the NRC is to be taken seriously by utilities comissions and the public, ue believe the Comission must seek to facilitate dialog among all involved - administrative agencies, utilities, and citizens concerned both about safety and about costs.
Closed decisions involving only NRC regional and site personnel and the utilities to be regulated must be avoided. And the effects, both those anticipated and those that may already have,taken place in light of impending incentive regulation, must be thoroughly address'ad. We are very concerned, for example, about information we have received from a state agency that the Region V office has stated that it is i
not generically concerned with capacity factor incantives that operate over the l
l short-term, clearly contradicting the expressions of concern that have been made by you, Comissioner Asselstine, etc.
We are particularly concerned that APS has not meaningfully comunicated with the NRC about its incentive proposals before-the-fact, according to testimony before the Corporation Comission, and that what comunication.,has taken place subsequently b
(based on observations during Comissioner Zech's site visit, etc.) has been cursory and largely screened from public knowledge, j;
In this context, it is also important to Inention an APS bonus plan (enclosure) in effect since sumner under which key personnel are to be rewarded for early fuel
' load. During Comissioner Zech's site visit, I dNussed this matter with Roy
@, the resident inspector. Mr. Ziirrcir.g. asserted that.he had been unable to discern any negative impacts as a result of that plan, but it was apparent that no special procedures, inspections, etc., had been implemented to detect the same.
All these concern, logically, relate to the assunption that financial pressures can have a negative impact on plant safety. In this regard, you also should be aware ofrecentfindingsbytheAuditorGeneral(enclosure)thatstateandlocalagencies responsible for Palo Verde emergency preparedness are underfunded and may be under-
pegn 4
.t staffed, largely due to concern about APS' financial condition.
We are, of course, aware that the NRC has promtilgated a new rule change abolishing OL stage financial qualification requirements, and also that that rule change is being appealed. APS and several other Palo Verde partners have experi-enced significant financial pressures in recent years, and we are concerned that these could result, sooner or later, in unsafe operation. If the public is to be-lieve that the NRC is not merely trying to license plants come-what-may through the new rule, it must review seriously the sort of problems. discussed above. To reiterate, CREE contends that:
a.) incentive regulations imposed by the Arizona Corporation Comission have not been adequately reviewed for tM ir potential safety impact on Palo Verde; b.) the APS fuel load bonus plan on its face couruidses safe testing and startup and should be reviewed and/or special inspections conducted to guarantee that no adverse safety implications have or will occur; c.) until the funding issue is resolved, emergency preparedness for Palo Verde is inadequate; and d.) no license should be issued for Palo Verde Unit 1 until these issues are resolved.
In support of the above, I wish to close by sketching several factors that we feel lend weight to our concern. It should be added that CREE has only very recently Wa= involved in these issues, and because of that, we must apologize for any lack of detail. We do subnit the following as contentions, but as background.
As regards the general problem of corner-cutting, we would remind you of alle-O gations by former a former worker regarding existence of a " bean count" for q.a.
personnel. Although some of the broader allegations were not supported by the NRC investigation, many of the specific allegations,' including the falsification of re-J' I
cords, was substantiated. Therefore, it is not a question of determining whether pressures could result in corner cutting at Palo Verde; it already has.
We have been informed by a professional engineer with an Arizona state agency who has toured the plant during the last six months that both safety and other equip-ment, appeared to be undertested, and, of course, simh concerns have been raised
~
by the Goverreent Accountability Project.
Finally, regarding the precipitousness of APS' application, we point out that early in November, at the time of Comissioner Zech's visit, the utility presented a schedule reflecting a December 14 date for comencement of fuel load activities, despite the existence of over 2,000 unresolved open items and being over two weeks behind schedule. APS was not able to close all those items according to its own schedule. Nevertheless, it filed its application on that date, W har 14. Con-
8 s
page 5 ideration of that date in light of the incentive regulations adopted by the Comission raise serious questions.
l Therefore,'.we request that our three concerns - incentive package and bonus plan review and resolution of mergency preparedness problems - be seriously addressed, preferably before a decision on APS' application, and that we be kept informed of developnents on your end..
Sincerely, m
h,.
L. Scott executive director, o
Coalition for Responsible Energy Education ec: Comissioner Asselstine Jack Martin Nadine Wettstein (atty for CREE)
Arizona Coraoration Com. Chair. R. Kimball Lynne Berna'Dei, G.A.P.
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