ML20138E162
| ML20138E162 | |
| Person / Time | |
|---|---|
| Site: | Palo Verde  |
| Issue date: | 11/20/1985 |
| From: | Dircks W NRC OFFICE OF THE EXECUTIVE DIRECTOR FOR OPERATIONS (EDO) |
| To: | |
| References | |
| TASK-PINV, TASK-SE SECY-85-367, NUDOCS 8512130355 | |
| Download: ML20138E162 (11) | |
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o, k . . . . . ,o POLICY ISSUE November 20, 1985- SECY-85-367 (Notation Vote)
For: The Comissioners .
From: William J. Dircks Executive Director for Operations
Subject:
PUBLIC SERVICE COMPANY OF NEW MEXIC0'S PROPOSED SALE AND LEASEBACK OF ITS OWNERSHIP SHARE OF PALO VERDE UNIT 1
Purpose:
To provide the Commission with the Staff's recommendation concerning the proposed sale and lease-back of the Palo Verde Nuclear facility.
Sumary: In SECY-85-350 the Staff advised the Comission of the receipt of an application filed on behalf of Public Service Company of New Mexico (PNM) se, eking Comission approval of a sale and leaseback transaction under which PNM would sell some or all of its interest in the Palo Verde Nuclear Generating Station, Unit 1 (PVNGS), to an owner-trustee for the benefit of several institutional investors; possession of the facility would then be leased back to PNM under a long term lease. In this SECY paper the Staff also advised the Comission of certain legal reservations which it had concerning this first of a kind transaction, but stated that it would consider the matter further and provide the Comission with a recommendation on the application. Having now completed its review of the application, the Staff is persuaded that the legal concerns previously expressed should not stand as a bar to the approval of the requested trans-action, as proposed, and accordingly recommends that the Comission approve the pending application.
Application: The application filed with the Comission on behalf of PNM states that under the terms of the proposed transaction, PNM will refinance its construction cost for PVNGS Unit 1 by entering into two or more sale and leaseback transactions relating to all or a portion of its 10.2 percent undivided ownership interest in Unit 1. The leases will be with an owner-trustee
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acting for the several institutional investors.
Trusts formed by the investors will hold title to the respective purchased shares in the facility. The owner-trustee or lessor will then lease the facility back to PNM under separate, but simultaneously executed, leases.
The application reflects that the basic term of each of the leases is expected to be 281 years. At the end of the basic tem, PNM expects to have an option, but no obligation, to renew each of the leases for a renewal term of approximately 21 years. The fixed rent renewal period may be extended under limited circumstances, but in any event, PNM will have the option, but no obligation, to centinue renewing each of the leases at fair market rentals for the remaining life of the facility. PNM will also have the option, but no obligation, at the end cf the basic term and at the end of each renewal term to purchase the facility at its fair market value at that time. The lease will also provide that so lona as PNM is in compliance with the terms of the leases, PNM's sole possession and use of, and rights with respect to, the facility will not be interrupted by the lessors or any person claiming through the lessor.
PNM will also be empowered with respect to the facility to be and act as the " Participant" under the Arizona Nuclear Power Project Participation Agreement which sets forth thy rights and duties Additionally, of each PNM of thethe will retain owners of exclusive PVNGS. 1 right to sell and dispose of its share of the power and energy derived from PVNGS, Unit 1. The leases will be
" net leases" under which PNM will be responsible for paying all taxes, insurance premiums, operating and maintenance costs, and all other similar costs associated with its share of the facility. In addition, PNM will make semiannual lease payments to the lessors which will repay and provide a return on the investor's capital One of the primary obligations assumed by the Participants under the
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agreeu nt is the obligation to share the costs of construction, operacion, maintance, decommissioning and capital improvements of PVNGS.
investment and which will pay principal and int the debt obligation issued for this financing. grest on The application further provided that any approval granted by the Comission for this sale and leaseback transaction would be subject to the following conditiens:
(a) The rights acquired by the owner-trustee and any equity investor and any successors and assigns (including any mortgagee or secured party of such owner-trustee) in and to PVNGS Unit 1 may be exercised only in compliance with and subject to the same requirements and restrictions as would apply to PNM pursuant to the provisions of the Facility Operating License No. NPF-41 (the_ License), the Atomic Energy Act of 1954, as amended I (the Act), and the regulations issued by the Comission pursuant to the Act: and (b) Neither the owner-trustee nor any equity investor nor any of their respective successors or assigns may take possession of any interest in PVNGS Unit 1 prior to either (1) the issuance of a license from the Comission authorizing such possession or (2) the transfer of the license authorizing PNM to possess an interest in PVNGS Unit 1 upon an application for transfer of such license filed pursuant to 10 CFR 50.80(b).
Finally, the application requests that the Comission conclude that neither the owner-trustee nor the investors must be named as licensees on the existing Pale Verde license. Indeed, the Applicant has orally advised the Staff that the sensitivities in the investment comunity are such that if either the trustee or the investors is required to be a named licensee, the transaction nay well not be successfully concluded.
2/ The lessors will borrow approximately 70 percent to 80 percent of the purchase price of the share of the facility from a funding corporation formed for this purpose. The funding corporation, in turn, will borrow the debt portiun of the purchase price by issuing public debt that will be non-recourse to the lessors and the investors. The public debt, which must be issued on terms acceptable to PNM, will be indirectly secured by a security interest in the facility and will be payable frcm the rentals due from PNM under the leases. The public debt will be structured to have principal and interest payments that correspcnd to the receipt of rental payments under the leases.
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In support of the application, PNM states that the proposed transaction will be beneficial in twc respects.
First, the proposed transaction will result ir a long-term savings of some 5400 million to the ratepayers of PNM, and second, that the required lease rryments will represent a lower cost o capital to PNM than it is currentlyexperiencing.jj In addition, since the cost will be constant throughout the term of the lease, the revenue requirements associated with PNM's capital cost in PVNGS Unit I will be levelized over the life of the facility.
As explained by the Applicant:
The leveling of revenue requirements over time yields several benefits. Under conventional utility regulation, carrying charges are determined by the asset's net book value, which declines over time as the asset is depreciated. This produces so-called
" front-end" loading--the familiar situation in which the stream of revenue requirements falls over time while the actual value of the plant output rises over time. Front-end loading is eliminated with the proposed sale and leaseback transaction because a fixed lease payment replaces the conventional "high front-end" revenue requirements stream, thus benefiting PNM's ratepayers by insulating them from potential " rate shock."
The Applicant also states that for the reasons discussed above, the proposed sale and leaseback will serve to enhance PNM's overall financial stability.
Discussion: The present application presents the Comission with a question of first impression: whether the transfer of legal title from a utility to one or more financial investors -- under the circumstances as described above
-- will reauire licensing action by the Commission. Or stated differently, is the Commission required under Section 101 of the Atomic Energy Act to exercise its licensing jurisdiction over transfers of legal title which are instituted solely for the purpose of effecting long-term capital financing, and do not include the
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As a result of these savings to both the ratepayers and the utility, applicant has advised that if this first of a kind transaction is approved by the Commission, many other utilities will also be seeking to enter into such sale and leaseback transactions.
traditional indicia of ownership such as possession, control and influence.
Section 101 of the Act expressly provides that:
It shall be unlawful...for any person within the United States to transfer or receive in interstate commerce, manufacture, produce, transfer, acquire, possess, use, import, or export any utilization or production facility except under and in accordance with a license issued by the Comission pursuant to section 103 or 104.
In a case decided in 1978, O the Atomic Safety and Licensing Appeal Board had occasion to consider the meaning of Section 101 in seeking to resolve the question raised therein of whether a co-cwner of a nuclear facility also has to be a co-applicant. The specific question before the Board was whether Section 101 of the Atomic Energy Act explicitly forbids one from owning a nuclear plant without a license, or whether the Act only requires a license for those who would possess the facility.
In its decision the Appeal Board resolved the question by concluding that under the statute the owner of a facility must be included as a licensee. Specifically, the Appeal Board rejected the argument that the absence of the word "own" in Section 101 of the Act was an indication of Congressional intent to exempt from licensing requirements those who owned, but did not possess a nuclear facility.
The Board stated:
[The applicant] presents us with no reason why Congress would want to exempt owners of nuclear power plants from Comission regulation. And we can think of none ourselves. To the contrary, it takes little to appreciate that an owner can influence the actions and attitudes of its tenants and agents without technically being in " possession" of the premises. Given the safety considerations with which Congress was primarily concerned in the Atemic Energy Act, it takes much more than bare assertion and imaginative statutory construction to convince Public Service Co. cf Indiana (Marble Hill Generating Station Units 1 &
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2), ALAB-459, 7 NRC 179, 198-201 (1978).
us that those who would own a nuclear power plant do not need to apply for a license from the Conraission.
In so ruling, the Appeal Board overruled a decision by the L' censing Board which concluded that non-cperating owneri need not be included as a licensee. Omaha Public Power 21 strict (Fort Calhoun Station, Unit 2), LBP-77-5, 5 NRC 437 (1977).
In seeking to resolve the question posed by the pending application, the Commission can quite properly adopt the reasoning set forth above by the Appeal Board in its Marble Hill decision, and conclude that the owners under I the present application, that is, the trustee and the investors, must be included on the Palo Verde license.
And indeed such an approach has many reasons to commend
- it. First, to follow the Marble Hill approach would clearly continue a long standing agency practice regarding licensing, which as the Appeal Board's decisicn indicates, is grounded upon a persuasive interpretation of Section 101 of the Atomic Energy Act. Second, such an approach would also eliminate any concern as to the absence of any agency control over the actual owner if PNM were to fail to comply with the terms of the lease.
In addition, the Marble Hill interpretation would provide the NRC with knowledge of and some control over subsequent actions by the owner-trustee which are not now anticipated under the proposed transaction. And finally, to require that the owners be named on the license would clearly avoid the concern expressed by the Appeal Board that failing to take such licensing action could place "the Commission's regulatory authority...under a cloud..." 7 NRC 179, 201.
However, in a supplemental brief submitted by the applicant and forwarded by the Staff to the Corraission on November 6,1985, the Applicant argues that the Marble Hill situation is clearly distinguishable from the situation now before the Conmission and shculd not be followed in the present circumstance. Specifically, the Applicant states that:
In Marble Hill, Public Service Company of Indiana (hereinafter Indiana) argued that a co-owner /
co-participant (Wabash Valley Power Association, a not-for-profit corporation) (hereinafter Wabash Valley) did not require a license under the Atcmic Energy Act. The heart of the Appeal Board's
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rationale for its conclusion that a co-owner such l as Wabash Valley required a license was as follows:
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"...it takes little to appreciate that an owner can influence the actions and attitudes of its :
tenants and agents without technically being in
' possession' of the premises..." ,
This conclusion applies forcefully in Marble Hill and '
is quite analogous to the existing PVNGS situation in !
which PNM is a co-owner /co-participant with the operating agent and other utilities. PNM is licensed !
to " possess" PVNGS Unit i under Facility Operating License hPF-41, for the precise reasons enumerated in Marble Hill. PNM does exercise influence over !
the actions and attitudes of its operating agent, ,
APS, through its participation on the various l committees which are established in the ANPP Participation Agreement (See Appendix 0 to the ;
Memorandum). As we will show, by virtue of the provisions of the ANPP Participation Agreement (See Appendix E to the Memorandum), PNM will be and remain j the sole ANPP Participant in respect of all PNM's interests in and to PVNGS Unit 1. PNM is not and
, will not be the agent of the lessors or equity i investors; PNM is the sole principal in respect of its 10.2% interest in PVNGS Unit 1.
T The most critical point to note is that Wabash Valley's participation in Marble Hill is clearly i distinguishable from the situation of the Owner -
, Trustee and the equity investors in the proposed financing transaction, in that: [
i Wabash Valley is entitled to its ownership !
percentage (17%) of the power and energy from the plant ...; the Owner Trustee and equity investors will not receive power and energy, 3 all of which will go to the lessee, PNM; and j Wabash Valley is obligated to pay its percentage l share of all costs of the project, without limitation; the Owner Trustee and equity i investors in a sale and leaseback financing have ,
no obligation during the lease term with respect '
to such costs once the initial investment has been made.
1 As described in the Application and Memorandum, neither the Owner Trustee nor any equity investor l
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1 will become a " Participant" in PVNGS during the term of the lease. Thus, such parties will have no positicn on the Administrative Conmittee er any other PVNGS committee and, in every sense, will be truly " passive investors." In contrast to the non-passive position of Wabash Valley with respect to its participati'on in the Harble Hill plant, a lessor in a sale and leaseback transaction has only what one might call " bare" title to the asset. All other rights and obligations--cominion and control, use, operation, financial responsibility, regulatory compliance and disposition of power and energy--remain with the Lessee by virtue of such transaction.
Thus the Applicant concludes, "[i]t is not necessary for health and safety reasons for the Commissicn to extend its licensing reach to passive investors. PNM will remain, unchanged, as the licensee entitled to possession of the facility, consistent with its ccntinuation, unchanged, as the Participant under the ANPP Participation Agreement.
The Commission can readily ccnclude that its exercise of licensing jurisdiction over the party tgt is the
' Participant' is all that is required" -
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Recommendation:
The Staff believes that the Marble Hill case was properly decided, upon the facts then before the Appeal Board, and thus its ruling should continue to be followed in all cases involving traditional transfers of ownership.
Hcwever, where as here, the sale of the facility is simply a step in a transaction involving the refinancing of capital, and where the investor owner only serves in a passive role with no authority or control over the nuclear facility, the Staff can perceive of no regulatory purpose which would be served by an interpretation of 4
Section 101 of the Atomic Energy Act, which requires the 5/ The Federal Energy Regulatory Cormission has in analogous rulings disclairred jurisdiction over utility owners who have no control or possession of utility facilities in sale and leaseback situations, although the Federal Pcwer Act (FPA), 49 U.S.C. is 824(e), 824b(a), i states that all owners of utility facilities are "public utilities" ,
subject to the agency's jurisdiction and that those utilities may not I dispose of their facilities without that agency's approval. See Pacific Power and Light Co. , 3 FERC 1 16,110 (1978); Public Service Co. of New Mexico, 29 FERC 5 61,387 (1984).
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licensing of such financial investors, and the Narble Hill decision does not appear to compel such an interpretation. Moreover, where the lease expressly provides that PNM will: (i) continue to be licensed to pcssess the facility; (ii) continue to serve as a Participant under the ANPP Participation Agreement; and (iii) continue its responsibility for the payment of its 10.2 percent share of all taxes, insurance premiums, operating and maintenance cost on PVNGS, as well as its share of all decommissioning costs, the Staff does not view the approval of the proposed transaction as presenting any public health and safety concerns. 6/
Similarly, in that the investor owners will not be acquiring any right to the electric power generated at the Palo Verde facility, and such electricity will continue to be distributed in the same manner as is now set forth in the Participation Agreement, the transaction does not present any antitrust considerations not previously considered at the time of licensing. Thus, the Staff recommends that the Commission not require the licensing of the owner-trustee or the investors as part of the proposed sale and leaseback transaction; b however,
-6/ The proposed sale and leaseback is a financing transaction and could be viewed as much like mortgage and lien transactions permitted without specific licensing action by section 184 of the Atomic Energy Act and 10 C.F.R. 9 50.81. Hcwever, it is not technically such a transaction as the security does not automatically revert back to the original owner at the conclusion of the transaction.
7/ Counsel for PNM has advised the Staff that Burnham Leasing Corporation is expected to be one of the equity investors in this transaction. This corporation is 100% owned by D.B.L. Group Inc. and is an affiliate of Drexel Burnham Lambert Incorporated, also a wholly-owned subsidiary of D.B.L. Group, Inc. The shares of D.B.L. Group, Inc. are owned by two groups: (i) 33% is owned by Lambert Brussels Corporation which is the United States holding company for Group Brussels Lambert and other French and Belgian interests; and (ii) 67% is owned as follows: (a)26*'
by the Drexel tjurnham Lambert Stock Bonus Trust, all of the trustees of which are United States citizens and (b) 41% by employees of D.B.L.
Inc., virtually all of whom are United States citizens. It is currently contemplated that BLC's equity position may be $100 tc $150 million.
If the Commissicn concludes that no license is required for the investor owners in this transaction, it need not address the prohibition of (Footnote Continued on next pagel
because the Staff's health and safety conclusions are grounded upon the representations set forth in the application as to the terms of the agreenent documents, the Staff recommends that the PNM operating license be amended to expressly require that the NRC be notifieo in writing prior to any change in: (i) the executed lease agreements; (ii) the ANPP Participation Agreement; or (iii) the existing insurance policies. In addition, the license should also be & mended to require prompt notification to the NRC of any action by the lessor or others which may have an adverse effect on the safe
.operaticn of the facility. Finally, the PNM operating license should be amended to reflect PNM's position as a lessee of the facility.
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WFfliam J. Dircks Executive Director
'for Operations 4
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(Footnote Continued from previous page)
Section 103d of the Act that "[n]o license [for a utilization facility]
may be issued to an alien or any corporation or other entity if the Conmission knows or has reason to believe it is owned, controlled or dominated by an alien, a foreign corporation, or a foreign Government".
However, even if a license were required, Section 103d should not serve as a bar to the present transaction. As the Atomic Energy Commission observed in the "SEFOR case", In the Matter of General Electric Company and Southwest Atomic Energy Associates, 3 AEC 99, 101 (1966), "the j
words ' owned, controlled or dominated' refer to relationships where the will of one party is subjugated to the will of another, and that the Congressional intent was to prohibit such relationships where an alien has the pcwer to direct the actions of the licensee." As the above facts reflect, no such relationship exists under the proposed transaction by cwnership or otherwise.
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0 D The Commission has been asked to act expeditiously, therefore, Commissioners' comments or consent should be provided directly to the Office of the Secretary by c.o.b. Monday, December 2, 1985.
Commission Staff Office comments, if any, should be submitted to the Commissioners NLT Tuesday, November 26, 1985, with an information copy to the Office of the Secretary. If the paper is of such a nature that it requires additional time for analytical review and comment, the Commissioners and the Secretariat should be apprised of when comments may be expected.
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