ML20195H126

Requests That Director Affirm Settlement Proposal Negotiated in Matter Re Util Financial Obligations & Bring Matter to Close.Pc Kron Affidavit Encl

ML20195H126
Person / Time
Site:	Farley
Issue date:	06/17/1988
From:	Bouknight J ALABAMA POWER CO., NEWMAN & HOLTZINGER
To:	Vogler B NRC
Shared Package
ML20195H131	List: ML20195H126 ML20195H415
References
A, NUDOCS 8806280222
Download: ML20195H126 (18)

Text

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-o, a.- - c . . . t June 17, 1988 Benjamin H. Vogler, Esq.

Office of the Executive Legal Director U.S. Nuclear Regulatory Commission One White Flint North 11555 Rockville Pike Rockville, MD 20852 RE: Alabama Power Company Joseph M. Farley Nuclear Plant, Ullits 1 and 2 Docket Nose 50-348A, 50-364A

Dear Mr. Vogler:

This responds to AEC's submittal of June 8, 1988 ("AEC 1

Letter") summarizing its presentation at the meeting of June 1, 1988. The only question before the Director is whether AEC has produced any compelling new information that should require the NRC Staff to withdraw from a settlement it has negotiated with 050 3 PDR gj91

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a Nzww w & Hot.Tz Nossi, P. C.

Benjamin H. Vogler, Esq.

June 17, 1988 -

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'Page 2 APCO. . As was evident at the meeting, and as is not surprising given the length of time over which AEC has succeeded in pro-tracting this matter, AEC has no new arguments to make or information to provide. It simply echoes the contentions it has propounded over the last several years while refusing to nego-tiate about or even discuss the assurance of payment issue. All of these contentions have been previously answered repeatedly by APCO and fully considered by the NRC Staff.

What is surprising here, however, is that even now AEC does not address the sole material issue, i.e.:

Whether, given the current crisis surrounding the obligations of G&T cooperatives involved in economically troubled nuclear plants, it is reasonablt for APCO to seek provisions v51ch assure that AEC's obligations will be performed if unforeseen economic problems occur at the Farley Plant.

Instead of coming to grips with this issue, AEC's submittal is devoted mcstly to efforts to assassinate APCO's character or l impugn its affiants. The merits on the question for decision are 1

ignored. It is clear why AEC side-steps the issue. The undis-puted facts show overwhelmingly that the heavily subordinated guarantees contained in the settlement proposal are both reason-

, able and necessary. Hence, AEC recognizes that if the NRC focuses on this issue, as the License Conditions require, there is only one possible result.

NzwxAN & Hon.Tz NORD. P. C.

Benjamin H. Vogler, Esq.

June 17, 1988 Page 3 It is APCO's understanding that this response, at long last, closes the record in this matter. We turn first to the question that under the License Conditions is decisive: why the guarantees contained in the settlement proposal are needed.

I. The Need for Assurance that AEC's Ownership Oblications Will Be Performed Under the License Conditions (which AEC does not mention), APCO is entitled to contractual provisions which assure that APCO will be paid for AEC's share of Plant Farley's "total cost," including "all costs of . . . ownership. . . . " 1/ So long as the plant is operating economically, AEC and its members would benefit, and would have no incentive not to pay these costs. However, in the event of a catastrophe or other unfore-seen circumstances which cause the plant to be disabled or decommissioned, they would no longer be able to look forward to the benefits of its output, and the consequent uninsured liabil-ity might be huge, perhaps exceeding $1 billion. In these circumstances, AEC and its members (who, it should not be forgotten, control AEC) would have an undeniable incentive to stop paying for their share of these costs.

1/ Plant Farley License Conditions 1 2, Alabama Power CQ2 (Joseph M. Farley Nuclear Plant, Units 1 and 2), ALAB-646, 13 NRC 1027, 1112 (1981).

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McwxAx0 H:LTz:w:mo,P.C, l **

' Benjamin H. Vogler, Esq.

June 17, 1988 Page 4 Without the guarantees requested by APCO, they could succeed in doing so. Because AEC is in effect a corporate shell, a wholly-owned subsidiary of its members, those members could declare AEC bankrupt. In such event, AEC's assets would provide no meaningful remedy to APCO. In its current submittal, AEC trumpets its annual report showing utility plant of over $300 million, but neglects to mention that its net capital equity --

the amount that APCO and other creditors could look to in the event of a bankruptcy -- is less than $7 million and, in recent years, has hovered between this figure and below zero. 2/ Thus, APCO would be able to recover AEC's shara of Plant Farley cost only to the extent that it could rely on AEC's receipt of payment from its member cooperatives. 3/ I l

Now that AEC has finally provided APCO and the NRC Staff with a sample of its long-term contracts, it is clear that they obligate a distribution member to pay AEC only to the extent l

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l 2/ AEC 1987 SEC Annual Report at 24-25, 31, Exh. 5 to AEC Letter.

2/ Mr. Parish, in his memorandum, contends that AEC is as well-situated to deal with catastrophic costs as APCO, because the cost would represent comparable percentages of the annual revenue of each entity. AEC Letter, Exh. 7 at 2.

He omits the fact that APCO's balance sheet reflects over

$2.3 billion dollars in equity, as contcasted with the nominal amount of equity maintained by AEC. APCO 1987 SEC Annual Report at 20.

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.Newnix 0 Met.Tz1N2 EO. P. C.

Benjamin H. Vogler, Esq.

June 17, 1988 ,

l Page 5 that AEC "shall have power and energy available." 1/ AEC's reliance on provisiens in its mortgages which permit it to charge i increased rates for all maintenance costs is disingenuous, at best. This argument ignores: (1) the possibility that AEC will i

be declared bankrupt by its member-appointed directors and seek to have the contractual relationship between AEC and its members restructured by a bankruptcy courts and (2) the fact that states have asserted the authority to refuse to allow G&T cooperatives

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to raise their rates to cover the cost of maintaining facilities that arguably are not "used and useful." 5/ Of course, there is some risk that a distribution cooperative's ability to perform under a guarantee will be impaired by similar events. The difference is that the distribution cooperatives, unlike AEC, are the repository of equity capital. The board of a distribution cooperative cannot seek refuge in bankruptcy or accede to unfavorable ratemaking actions without putting this equity capital in peril.

1/ Centract for Wholesale Power Service between AEC and Covington Elec. Cooperative at 5 (Oct. 22, 1970), Exh. 3 to AEC Letter.

1/ 111, gzgt, In re Petition of Wabash Vallev Power Ass'n, Inc.

for Acoroval of a Chance in Its Rates and Charoes for Elec.

Service to Its Member Systems, Cause No. 37472 (Ind. Public Service Comm'n Jan. 14, 1987) (Lexis, States library, Inpuc file).

NzwxAx a Hon.Tz Nase. P. C.

Benjamin H. Vogler, Esq.

June 17, 1988 -

Page' 6 For all of these reasons, as APCO's previous sub-missions have demonstrated, the wholesale power contracts between the distribution members and the G&T co-ops in recent years have proven inadequate where extraordinary nuclear power plant costs are concerned. Largely because those contracts do n21 Provide adequate assurance that the G&T co-ops' obligations will be performed, the financial and contractual problems of G&T co-ops participating in economically troubled plants have reached crisis proportions.

AEC ignores all this. Rather than confront commercial reality in today's world, AEC instead recites fifteen instances in which co-op owners of nuclear plants were not asked to provide guarantees in the past. 5/ What AEC fails to mention is that in the last few years at least five of the fifteen plants cited by 1/ AffidavitofOIFranklinRogers (Feb. 20, 1986), Exh. J to AEC Letter to Benjamin O. Vogler (Apr. 29, 1988).

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Nzwxur & HoLTzawoco, R C, s

Benjamin H. Vogler, Esq.

-June 17, 1988 .

Page 7 AEC have had payment obligations refused or jeopardized due to the involved cooperatives' bankruptcy or other actions. 1/

1/ The five plants, out of the fifteen that AEC lists, are Clinton, Marble Hill, Fermi-2, River Bend, and Comanche Peak. With respect to Clinton, two of its cooperative co-owners, Soyland and Western Illinois Power Cooperative (WIPCO), have experienced significant financial problems as a result of their participation in Clinton,.and have had to refinance their high-interest REA loans (in WIPCO's case to escape bankruptcy). Egg REA Aarees to Reduce Co-oo's Clinton Plant Pavnents, UPI Press Release, Apr. 10, 1987; Sovland Co-oo is First G&T to Refinance Federal Debt Under

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New Rules, Elec. Util. Wk., Mar. 30, 1987, at 11. In addition, Soyland and WIPCO have filed suit in state court against Illinois Power Company to recover some of their investment in Clinton. Ett Analysts Say Timina Could Hurt Clinton Rate Case in Illinois, Nucleonics Wk., Mar. 26, 1987, at 10-11; Illinois Power Co. 1987 SEC Annual Report at 34.

Second, Wabash Valley Power Association, a participant in the Marble Hill nuclear plant, filed for bankruptcy on May 23, 1985. Egg 1985 Form 10-K of the National Rural Utilities Cooperative Finance Corp. at 15.

Termi-2 also has experienced problems. In late 1987, Wolverine Power Supply Cooperative narrowly avoided bankruptcy by withdrawing from its 20% participation in the nuclear plant. Detroit Edison assumed the co-op's REA-guaranteed debt to the Federal Financing Bank, and the REA will most likely end up absorbing at least some of Wolverine's remaining debt. Egg REA, Detroit Ed and Wolverine Cut Deal for Co-oD to Shed Fermi-2, Elec. Util.

Wk., Dec. 21, 1987, at 3.

Cajun Electric Power Cooperative, Gulf States Utilities' partner in the River Bend nuclear plant, recently announced that it is unable to repay its $3 billion REA loan. GSU says it would be hard hit by a financial failure of Cajun, especially in the event GSU is stuck paying for all of River Bend. Egg Gulf States fGSUI Partner Cannot Pay Q1hl, Reuters, May 13, 1988.

Lastly, two Comanche Peak minority partners, Brazos (footnote continued)

NzwNAN & Hon.Tzmoza. P. C.

Benjamin H. Vogler, Esq.

June 17, 1988 -

Page 8 Similar conduct has occurred with respect to other plants and cooperatives not mentioned by AEC. 8/ In short, approximately one out of every three nuclear plants involving G&T co-op participation in the last few years has had to deal with the spectre of co-op bankruptcy or withdrawal from their contractual (footnote continued from previous page)

Electric Power Cooperative and Tex-La Electric Cooperative, have sued Texas Utilities, seeking a refund of their

., investment in Comanche Peak. Second Amended Counterclaim of Defendant Brazos Electric Power Cooperative; Second Amended Counterclaim and First Amended Cross-Claim of Tex-La Electric Cooperative of Texas, Inc. and Texas Municipal Power Agency, Texas Utilities Elec. Co. v. Tex-Lo Eles2 Coco., Inc., No. 86-6809-A (Tex. Dis. Ct. filed July 23, 1987) (Texas Municipal Power Agency withdrawn from suit).

8/ For instance, several cooperative owners of Seabrook have defaulted on their obligations to the project. Egg, tzgt, Utility in Seabrook Write-off Accord, N.Y. Times, June 4, 1988, 5 1, at 37, col. 3; Seabrook Burden Forces N.H. Elec.

to Default, 10 N.H. Bus. Review S 1, at 1 (Mar. 25, 1988).

Another example is Washington-St. Tammany, a member co-op that has declared bankruptcy and seeks to reject its power sale agreement with Cajun Electric Power Co-op out of displeasure over the costs of Cajun's investment in the River Bend nuclear plant. Egg Louisiana Co-oo to Seek Chaoter 11; Fears Nuclear-Related Rate Impacts, Elec. Util.

Wk., June 22, 1987, at 1, 4.

Cooperative owners of coal plants also have had serious financial troubles. Sunflower Electric, unable to pay for a coal-fired plant it constructed, recently was on the verge of bankruptcy. Egg Sunflower rebt Reworkinc Okaved by Kansas Re=ulators; Still Bio Ifs, Elec. Util. Wk., Mar. 21, 1988, at 6-7. In 1985, Big Rivers Electric Corporation defaulted on REA-guaranteed loans used to construct a coal plant when the cooperative discovered that it could not use the additional capacity. Big Rivers is still financially strapped. Egg 1985 Form 10-K of the National Rural U:llities Cooperative Finance Corp. at 15; Uncle Sam Pulls in_e Plue on A Rural Cocoerative, Bus. Wk., Feb. 4, 1985; (footnote continued)

Szwx x & HoLTz Norm, R C.

. Benjamin H. Vegler, Esq.

June 17, 1988 -

Page 9 obligations. This fact, never addressed in any of AEC's sub-missions, illustrates more cogently than could any argument that the assurances sought by APCO are not only reasonable, but essential.

Not only does AEC fail to address the basic issue of law now before the Director, it continues to propound a para-doxical approach which defies the rules of logic. Consistent with its prior submissions, AEC's latest submittal vacillates between describing the proposed guarantees as superfluous --

because AEC's contracts already fully obligate members to pay for Farley costs (AEC Letter at 3) -- and ruinous -- because the guarantees impose new obligations that would weaken the "strength of AEC/ member contracts." 14. at 9. AEC has never explained how a guarantee which merely confirms that its members will make payments that they are already obligated to make can attenuate the pre-existing obligation. AEC's only answer is that the guarantee "cast (s) a cloud" over the contractual obligation. Id.

at 4. In other words, AEC objects to the guarantees because accepting them would adrit the possibility that they might be (footnote continued from previous page)

Feds Acree to Rate Hike for Bia Rivers, UPI Press Release, Aug. 28, 1987.

Newww & Hon.rz:xorn. R C.

Benjamin H. Vogler, Esq.

June 17, 1988 Page 10 -

needed, and that its members might be able to reject or avoid their wholesale power racts. Yet AEC ultimately acknowl-edges, as it must, that this 11 a real possibility. By asking for a guarantee, APCO does not make this eventuality any more likely (it probably makes it less likely, in fact), but rather merely protects itself from having to bear AEC's share of Plant Farley ownership cost if it occurs.

In the end, AEC's argument virtually becomes if we act as if the crisis that has surfaced in the commercial world in the last few years cannot affect us, maybe it will not. But pre-tending that the problem does not exist vill not make it go away.

II. The License Conditions, Not the Preferences pf AEC's creditors. Are Decisive Here As in its prior submissions, AEC once again cites to the preferences of the REA and the CFC that guarantees be foregone here. 9/ It is understandable that the REA and CFC, entities which exist to propagate transactions involving G&T '

A/ It is clear that this preference is not based on any impair-ment of any existing credit obligations, for as Mr. Gill of the CFC admits: "A third party's request for the guaranty by the distribution system, in order to be approved by existing lenders, would be required to be positioned behind a sufficient number of other obligations to render it meaningless." Affidavit of Charles B. Gill 1 5 (Apr. 26, 1988), attachment to AEC Letter to Benjamin H. Vogler (Apr. 29, 1988). Rather, this preference is based on the ground that the guarantees may prompt others, who might otherwise have overlooked the implications of the on-going financial problems described above, to consider the need for similar assurances.

,Nzwwax & Ha1.TalNozo, P. C, Benjamin H. Vogler, Esq.

June 17, 1988 Page 11 '

co-ops, would prefer that private parties dealing with such co-ops be willing to venture forward without any recognit' ion of -

the serious problems surrounding their financial obligations in today's world. Unfortunately, however, the simple truth is that there exists a generic problem in the industry regarding the obligations of G&T co-ops involved in troubled projects. While all entities in the electric utility industry, both regulated and unregulated, might yearn for a return to the days of Camelot, this universal nostalgia for a simpler, innocent past cannot overcome the stark facts of commercial reality or the unequivocal requirements of the License Conditions.

Ultimately, this matter is controlled by one funda-mental issue. All the License Conditions require, as articulated by the Appeal Board and affirmed by the Eleventh Circuit, is that APCO make a reasonable offer which insures that it will be reimbursed for its "total cost." Whether or not the REA is prepared to permit cooperatives to go forward under terms that manifestly reflect commercial reality is a matter between the REA and its constituency. The issue here is whether APCO's proposal is reasonable, and on this score the evidence is undisputed and overpowering.

Szwx4x & HotTz NODC. P. C.

Benjamin H. Vogler, Esq.

June 17, 1988 -

Page' 12 .

III. AEC's Remainina Tanaents The remainder of AEC's submittal can be dealt with succinctly:

(a) The charge that the settlement proposal is designed to be unacceptable to the REA is demonstrably untrue.

The guarantee proposed was advanced by APCO years ago. For several years now APCO has implored AEC to come to the bargaining table and discuss reasonable terms that will assure fulfillment of AEC's ownership obligations. AEC has met these pleas with intransigence. Nonetheless, APCO has responded reasonably and constructively in each instance in which coherent issues have been raised about its proposal. In the settlement negotiations with the NRC Staff, APCO agreed to subordinate its rights under the guarantee to the distribution cooperatives' debt obligation to REA and CTC. When, most recently, AEC raised the question whether the guarantee would be subordinate to any obligation that a distribution cooperative might be found to have under its wholesale power contract with AEC, APCO came forth promptly with clarification. These are the actions of a party that is trying, in good faith, to fashion a fair, cor.mercially reasonable proposal.

(b) Much of AEC's letter (pages 6-9) consists of attempts to resuscitate the arguments made on its behalf by Mr. Edmiston and to refute the observations and facts submitted

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,NtwxAN & HoLTztwora. P. C. '

l Benjamin H. Vogler, Esq. l June 17, 1988 j Page 13 -

upon behalf of APCO by Mr. Kron of Citibank. AS/ It is telling j that in this effort AEC prefers to mischaracterize rather than squarely debate Mr. Kron's observations. AEC's comments, which Mr. Edmiston evidently could not be prevailed upon to endorse personally, are addressed substantively in the supplemental Affidavit of Mr. Kron submitted herewith as Exhibit A.

It suffices to note here that: (1) contrary to AEC's letter (page 7), and as cited above, even its own witnesses have testified that the proposed guaranties have no effect upon AEC's "existing financing"; (2) AEC is correct that APCO stands in somewhat different shoes than a creditor of AEC here, but the chief relevant difference is that a creditor's liability is finite (and is virtually never undertaken without unsubordinated guarantees from the REA), whereas APCO's liability here is of lE/ Try as it might, AEC cannot circumvent the sworn testimony of Mr. Edmiston's colleague, Mr. Kovich, provided when Shearson Lehman Hutton was appearing as an disinterested expert in the Wabash Valley bankruptcy proceedings, which recognizes the need for guarantees. AEC asserts that Mr. Kovich's testimony merely makes clear that the "attractiveness" of a G&T to financial markets depends on the enforceability of its contracts with its members. But, unfortunately for AEC, Mr. Kovich was forthright about the inadequacy of the contracts, standing alone. His testimony addresses whether an investor would part with money merely in reliance upon those contracts. His answer, in substance was, no, not without guarantees. In the end, his own words provide a prescription for APCO: "I would ask Wabash . . .

to have those contracts either reaffirmed or guaranteed by its members. . . ." S. Paul Kovich testimony at 25 (Mar.

20, 1987), Exhibit D to APCO's Letter to Benjamin H. Vogler (May 24, 1988).

N;wxxx 0 Hon.tz N o z n. P. C.

n Benjamin H. Vogler, Esq.

June 17, 1988 Page 14 -

potentially so enormous a magnitude that it cannot be bounded with any confidence (and APCO seeks merely subordinated guaran-tees from the entity receiving the benefits); (3) what is significant about Citibank's experience is that the REA, which promised to stand behind Citibank's loan to Cajun, has reneged on that assurance, leaving Citibank with a $90 million exposure.

Unfortunately, this is not "passing strange" (AEC Letter at 8),

but is becoming all too common, and hence it is hard to conceive of a more straightforward example of the need in today's world to have a G&T co-ops' payment obligations for a nuclear project independently guaranteed. Egg supplemental Kron Affidavit at 4-5 (June 17, 1988), attached hereto as Exhibit A.

(c) Ironically, while AEC's twelfth hour letter of credit proposal grudgingly recognizes that APCO needs payment '

assurances, it is so woefully inadequate that it makes clear that AEC wants to reserve the right n21 to pay in the event of economic troubles at Farley. 11/

Indeed, AEC is careful nevet to 11/ The gross inadequacy of AEC's $5-7 million letter of credit proposal is discussed fully in APCO's letter of May 24, 1988 at pages 10-11. In Exhibit 7 to AEC's latest letter, the argument is propounded by Mr. Parish of Southern Engineering Company that the inadequacy of AEC's token letter of credit should be ignored because the letter of credit would be cumulative with other sources of funds that are available to AEC "as of today," which might permit it to meet its Farley ,

responsibilities in the event of an uninsured contingency.

What Mr. Parish fails to recognize is that even if these ,

sources still existed in the future whenever a contingency occurs, they would n21 be accessible to APCO. Any extant (footnote continued)

NEwMAN CI HOLT 21NGEO. P. C.

s Benjamin H. Vogler, Esq.

June 17, 1988 Page 15 -

represent that AEC or its members would continue to pay for Plant Tarley costs in the event serious contingencies arise. This is precisely why APCO needs guaranteed payment assurances.

(d) A few final words are in order on the issue of how deconmissioning costs are treated in the offer of sale. The issue was first raised in AEC's submittal of April 29, 1988.

However, APCO pointed out, in its responsive submission of May 24, 1988, that under the offer of sale the purchase price to AEC is reduced by the entire amount of depreciation recorded in APCO's books, and that this issue has been resolved for years.

AEC, evidently realizing upon reflection that this approach is very favorable to it, states no objection now. It explains that it merely sought to "clarify" this point because of certain "ambiguities" in APCO's "discussions." APCO believes that its (footnote continued from previous page) lines of credit could be exercised only by AEC, and could be withdrawn at the option of the financial institution ,

involved -- which would happen instantaneously if AEC's '

members placed AEC in bankruptcy. The REA's refusal to honor its Set Asides in the Cajun matter shows that even where express assurances of credit availability are made by outside sources they cannot be relied upon. Here APCO would have nothing more than a hope to rely on. In short AEC's  :

patently inadequate letter of credit proposal has now devolved into a line of credit proposal that would provide no payment assurance to APCO whatsoever. ,

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,SEwx AN O Hon.TzlNcDM, P. C.

Benjamin H. Vogler, Esq.

-June 17, 1988 Page 16 -

position has been ur. ambiguous since at least the fall of 1983, 12/ but in any event, since the parties are both c1'early in accord, the issue is now resolved.

12/ AEC cites to Mr. Parish's Memorandum (Exh. 7 to AEC Letter),

which notes that in June of 1983, AEC expressed objections to APCO's initial methodology for handling decommissioning t costs. However, Mr. Parish apparently is unaware of the subsequent correspondence. On June 24, 1983, AEC wrote APCO proposing a pricing methodology that would be based on "reasonable net adjusted investment (less depreciation and estimated decommissionine costs) as of a date certain subject to a final audit." AEC letter of June 24, 1983, at 9 (emphasis added) (submitted herewith as Exhibit B, at 1).

This matter was discussed in negotiations between the parties and on August 16, 1983, Mr. Vogtle of APCO wrote Mr. Lowman of AEC stating "APC's sales price will be adjusted to give AEC a pro rata credit for decommissioning costs collected prior to the date for which the sales price is computed." APCO letter of Aug. 16, 1983, at 2 (submitted herewith as Exhibit B, at 2). Finally, on September 26, 1983, when APCO undertook to summarize the status of discussions between the parties in an effort to narrow the issues in dispute, Mr. Vogtle wrote to Mr. Lowman:

APCO has acreed to AEC's criterion by adjusting the sales price to give AEC a pro rata credit for the decommissioning funds collected prior to the closing date, with AEC having total responsibility for a pro rata share of total decommissioning costs.

APCO letter of Sept. 26, 1983 at 11 (emphasis added) ,

(submitted herewith as Exhibit B, at 3).

i d

Szwx4x & HoLTz worn, R C.

I Benjamin H. Vogler, Esq.

June 17, 1988 Page 17 For all of the foregoing reasons the Director should affirm the settlement proposal that has been negotiated in this matter, and finally bring this matter to a close.

Respectfully submitted, bkNCN J .hJ Bouknight , Jk . /

Douglas G. Green Newman & Holtzinger, P.C.

1615 L Street, N.W.

Washington, P.C. 20036 Counsel for Alabama Power Company cci Joseph P. Rutberg D. Biard MacGuineas  ;

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