ML20209H015

Urges That NRC Not to Approve Util Request to Amend License NPF-66 or Determine That No Significant Hazards Exist W/O Holding Adjudicatory Hearings on Financial Qualifications Issues Raised by Request to Restructure Facility Ownership

ML20209H015
Person / Time
Site:	Byron
Issue date:	04/29/1987
From:	Cassel D BUSINESS & PROFESSIONAL PEOPLE FOR THE PUBLIC INTERES, SINNISSIPPI ALLIANCE FOR THE ENVIRONMENT (SAFE)
To:	Office of Nuclear Reactor Regulation
References
NUDOCS 8705010120
Download: ML20209H015 (8)

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Business and Professional People for the Public Interest 109 North

Dearborn Street,

Suite 1300 Chicago, ll!inois 60602 Telephone: (312) 641-5570 y

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• BY FEDERAL EXPRES'S April 29, 1987 Thomas E. Murley, Director Office of Nuclear Reactor Regulation U.S. Nuclear Regulatory Commission Washington, D.C. 20555 Re: Byron Station Unit 2 Application by Commonwealth Edison Company for Amendment to Facility Operating License NPF-6 and Appendix A, Technical Specifications NRC Docket No. 50-455

Dear Mr. Murley:

Business and Professional People for the Public Interest (BPI) and the Sinnissippi Alliance for the Environment (SAFE),

by their undersigned attorney, urge the NRC not to approve Commonwealth Edison Company's request for an amendment of the operating license for Byron 2, and not to determine that no significant hazard exists, without first holding adjudicatory hearings on the serious financial qualifications issues raised by Edison's proposed restructuring of the ownership of Byron 2.

In addition, BPI and SAFE believe that serious antitrust issues are raised by Edison's proposal, as more fully set forth below.

SAFE has long been one of the intervenors in the operating license hearings on Byron. Among other issues, SAFE long ago raised questions concerning Edison's financial qualifications (FQ) to operate Byron. However, SAFE's FQ contention was dismissed after the NRC amended its rules to preclude case-by-case FO review for regulated utilities.  ;

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BPI is a non-profit law center. Its attorneys represent SAFE and other intervenors in the Byron operating license proceeding. In addition, BPI was one of the consumer groups participating in extensive, unsuccessful negotiations with Edison over the company's proposal to restructure the ownership of Byron 2 and Braidwood 1 and 2. BPI is an interveror in the current proceedings before the Illinois Commerce Commission in which Edison seeks state regulatory approval of the proposal.

I. THE EDISON PROPOSAL.

Edison proposes to alter the ownership and financing arrangements for Byron 2 and the 2 Braidwood units in a manner that will significantly affect the financial qualifications of the proposed co-licensees (Edison and its subsidiary, the Central Illinois Electric Generating Company), as well as raising new antitrust concerns.

In summary, Edison will transfer ownership to the subsidiary, whose sole assets will consist of these three units.

(Memorandum of Understanding ("MU"), 11.) During the first five years, Edison will buy energy produced by the three units at fuel cost. (Id., 15.) The subsidiary's only other income, except for bonus payments in the event the three units' output exceed projections (id.), will be monthly _ capacity payments of $55 million. Id. Edison officials have repeatedly explained that these capacity payments are projected to be enough only to cover the subsidiary's depreciation costs, projected O&M costs, and return on debt (but not on equity). (E.g., Deposition of Edison Vice President George Rifakes in Illinois Commerce Commission Docket 87-0043, April 28, 1987. Transcript not yet available.)

Thus, if O&M costs of the units exceed projections, or if substantial backfit costs are required, the subsidiary may well lack sufficient funds to cover these costs. Indeed, the proposed Financing Agreement ("FA") expressly recognizes that in order to meet its obligations, the subsidiary "may be required to make expenditures in excess of the revenues received by it from sales of power." (FA, Art.I(b).)

During this five-year period, Edison itself commits to make all necessary O&M and backfit expenditures for the three units.

(MU, 11; Construction and Operating Agreement, 14.) However, Edison's ability to carry out this commitment is significantly constrained. Edison is to be reimbursed by the subsidiary for all such expenses. (Id., 113,5,7.) In the event the subsidiary lacks sufficient funds, Edison cannot simply "give" the subsidiary funds, because the agreement expressly prohibits

! Edison from providing any subsidy to the subsidiary. (MU 11.)

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The only other planned alternative source of funds for the subsidiary would be loans,_ capital advances or capital contributions by Edison. (FA, Art. II,III.) However, these too may well not be available. The agreement recognizes that the affiliated interest provisions of the Illinois Public Utilities Act will govern relationships between Edison and the subsidiary.

(MU, 11.) Under those provisions, the Illinois Commerce Commission would be precluded from approving such loans, advances or contributions, unless the subsidiary has a sufficient assurance of being able to repay the loan or pay a return on the contribution. (See Ill.Rev. Stat. 111-2/3,SS7-101,102.) Given the subsidiary's limited assets and limited income, if the expenses required to meet NRC standards for O&M or retrofits substantially exceed projections, it is unlikely that the Illinois Commerce Commission would allow Edison to pour money into a failing subsidiary.

Finally, even if Edison were to be permitted to provide funds to the subsidiary, Edison itself would have mixed incentives at best. Because of the five-year rate freeze, Edison would be unable to recover any extra costs from ratepayers.

(MU, 112-4.)

The foregoing difficulties undermine the financial qualifications of the subsidiary, and of Edison with respect to Byron 2, during the first five years. After the first five years, the FQ picture is even worse.

The proposal contemplates that the Illinois Commerce Commission will select one of three options to govern the period from year six through the end of the NRC operating license for Byron 2. (MU, 15.)

Under the first option, all three units are in the marketplace. (MU, 15a.) If the market for nuclear power is strong, the subsidiary may do well. But if the market is weak, the subsidiary has neither any assured demand for its power, nor any assured floor under the price at which its power may be sold.

(FERC may or may not regulate the price the subsidiary may charge, but FERC can offer no assurance that any customers will be willing to buy the power at all, let alone at the offering price.)

1 Indeed, Edison admits as much. In its Antitrust Review, 1 Attachment 2 to its letter of April 16, 1987 to Mr. Murley, Edison notes, "The Subsidiary, unlike Edison, has no service territory and thus, has no assured market for power. This means that the Subsidiary may be unable to sell the power at prices equivalent to those permitted by regulation. In that circumstance, the power will be sold at rates determined by competitive market forces."

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I Moreover, under: this' option,' the subsidiary is no: longer-1 entitled to receive capacity. payments from-Edison. (Power Supply Agreement,_14.1.) Its only' income.is from whatever payments it

. negotiates for'the. power it sells; if Byron 2 were to be' shut -

down,.one third of_the subsidiary'scincome-earning potential-

.would be unavailable.

_.Meanwhile, under,this option, Edison continues after year 5

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to-be1 constrained with respect to Byron 2 by the Illinois Public Utilities'Act (MU,.11), and by the prohibition in the' Memorandum oof Understanding on the subsidiary. Id,.

The'second option does contemplate a life-of-plant power

purchase ~ contract for Byron'2 (though not'necessarily for either of the Braidwood units). (MU, 15b.) -However,Lif the midwest market for nuclear power._ continues to be a buyer's rather than a seller's market,1 the~ Illinois Commerce Commission,is unlikely to-select this' option.- 7 The third option is merely-an extension for three more years of the-financial relationships'between. Edison and the subsidiary

{ prevailing in the first five years. After the three year-

! extension, the Illinois Commerce Commission would still be lef t j to decide _between the first two options. (MU, 15c.)

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II. FINANCIAL QUALIFICATIONS.

BPI and SAFE suggest that if the proposed restructuring is accomplished, neither Edison nor its proposed subsidiary will be

an " electric utility" as defined in 10 CFR 50.2(x). _Neither

! Edison nor the subsidiary, therefore, will be exempt from_FQ 4

review, under 10 CFR 50.33(f), 50.40(b) and 50.57(a)(4).

In the alternative, in the event the foregoing suggestion is

! rejected, BPI and SAFE urge the NRC to find.that even if the FQ.

exemption rule technically applies, Edison'c new proposal creates an exceptional case in which " case-by-case litigation.of-the  !

financial qualification of such applicants-is warranted."

49 Fed. Reg. 35747 at 35750.  ;

4 Under either alternative, the seriousness of the'FQ proposal

warrants-an adjudication hearing on its requested amendment prior to any finding of no significant hazard. 10 CFR 50.91,-50.92..

Under the second alternative, an exception to the FQ exemption

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2 rule should he made for the hearing, pursuant to 10 CFR 2.758 on the ground that Edison's new proposal. and the "inancial

{ relationships and conditions it would create, constitute "special

' circumstances." See 49 Fed. Reg. at 35751.

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'A. Neither Edison Nor The Subsidiary Is A.n_," Electric Utility."

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For-purposes of^the exemption'from FQ review, an "electr'ici '

utility" is one which' generates or distributes electricity

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and "which recoversothe cost.of'this electricity, either<directly or indirectly, through rates established by.the entity;itself or: ,

by a separate regulatory authority." 10 CFR 50.2(x). .This-definition mustJbe applied, over.the 40-year period of the operating-license, since applicants must.show their financial-

' qualifications "for the period of the license."

10 CFR 50.33(f)(2). i Naither Edison nor the subsidiary meets this cost-recovery test with. respect to Byron Unit 2. Neither purports to set' rates itself. Each relies instead on an alleged " separate regulatory ,

author ity" to set rates sufficient to recover its Byron 2 costs.

In fact, as shown-below, no such regulatory authority exists for-either entity.

i~ in the case of Edison itself,'underlthe proposal'the' companya antil now a regulated utility, would become .the parent-company c% two. major components. One would continue as.a

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, regulated utility under the jurisdiction of the Illinois Commerce '

Commission; it would include all Edison's generating' stations.

4 other than Byron 2 and Braidwood 1 and 2.

); The other component, the subsidiary: owning Byron 2 and-Braidwood 1 and 2, would not be under the rate-setting jurisdiction of the Illinois Commerce Commission. -(MU,.11.) ~

While the Edison proposal contemplates that FERC would regulate the subsidiary's rates (although, it should be noted, Edison has.

yet to file its proposal in any manner with FERC), any such'FERC~

regulation would not' assure cost recovery by-the subsidiary..

Under the Memorandum of Understanding (16(c); seeTalso Power Supply Agreement, 14.3) FERC would be asked not to upset the terms of the agreement which, as discussed at length'in Part I-above, expressly contemplate less than full cost" recovery.- Thus,

FERC would not qualify as a " separate regulatory authority" under-10 CFR 50.2(x), and the subsidiary would not.qualifyrasJan i " electric utility" as defined therein.

By the same token, since Edison itself would no-longer have-assured cost recovery from its ratepayers of costs' associated with. Byron 2, which would be owned by the subsidiary, Edison

, would not be an " electric utility" under 10lCFR 50.2(x) with l respect to Byron 2. Stated otherwise, Edison would become a two-part company. One part would continue to be an " electric

utility," while the other would not, and Byron 2 would be in.the

part that would not continue to be an " electric utility".-

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4 B. Even If Edison Or The Subsidiary Were Deemed'To Be An-

" Electric-Utility," An Exception To The FQ Exemption ~Should Be'Made, Due To Special Circumstances.

The rule exempting regulated-electric utilities from case- ~

by-case FQ review rests "on the genericLconclusion that.the rate process assures for. regulated electric utilities (or those

. utilities able to set their.own rates) the funds needed for safe

, operation of a nuclear power facility."~ 49 Fed. Reg. at 35755 l(Chairman Palladino); see id..at.35748, 35749-50.

As shown~in Part.I above, neither the. Illinois Commerce Commission nor-the FERC " rate process" will, under Edison's proposal,'any-longer assure that all funds needed for operation.

of. Byron 21will~be available.-

. . This case is thus one of thosen"special circumstances" in which an exception to the'FQ rule, pursuant to 10 CFR 2.785, was expressly contemplated:

i F-r example,.such an:exceptionoto permit financial 4 qualification review for an operating license

. applicant might be appropriate.where a threshold l showing is made that, in a particular case, the-

" local-public utility commission will not allow.

- the total cost of ' operating - the f acility to be j recovered through rates.

49-Fed. Reg. at 35751.

Accordingly, even if it were deemed that Edison or the subsidiary qualifies as an " electric utility" under 10 CFR

50.2(x), an exception to the. rule against FQ review should be made in this case.

C. A Finding Of No Significant Hazard Should Not Be Made, And Certainly Not Prior To Hearing, In The Face Of Serious.FQ Questions. '

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.Under 10 CFR 50.92, a finding of no significant hazard is

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warranted only when operation ofLthe facility in accordance~with' the proposed amendment "would not

(1). Involve a significant increase'in the probability . . . of:an accident previously evaluated;' . . .

Serious FQ issues, such as those raised by Edison's i

. proposal, do involve a significant increase in accident probability. As Commissioner Asselstine noted when the new FQ rule was promulgated:

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.Unfortunately,-financial considerations.can and do-llead toLsafety(weaknesses;inisome instances.

There have!been instances, some recently, in which "r'egulated-utility licensees with operating power .

reactors'have emphasized. maximizing electricity _

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(generation over safety,.. . . . . In many_ .

' instances, financial considerationsz appear to'be a signficant contributor toLthese. Utility 7 decisions.

Some of these' safety. weaknesses have been of

. continuing duration, and not all have been detected.or correcte'd'by.our inspection.and enforcement program.- These' examples would appear to indicate l clearly that: financial considerations can-and do affect safety in some instances.

49 Fed. Reg.: at :35754. -3 The other-. Commissioners, while noting some support.for a contrary view, made no. contrary finding on the~1 ink-between _

financial considerations and. safety; rather they~found financial Equalifications sufficiently shown whereiregulatory assurance of cost: recovery exists. Id. at 35751, 35755 (Palladino). In-fact,

- the full Commission noted a persuasive rationale supporting a link between financial difficulties and safety hazards:

A financial disability is not a safety hazard per '

.se because the. licensee can- , and-under the Commission's regulations ~would be obliged to, simply cease operations if necessary funds to operate safely.were not available. At most,'the ~

Atomic Energy Commission, in drafting the rule ,

must have intuitively concluded.that a licensee-in financially straitened circumstances would'be under more pressure to commit safety violations or take safety " shortcuts" than oneLin goo'd financial shape. Accordingly, the drafters of the: rule sought to achieve some level of assurance, prior ,

to licensing, that licensees would not be forced by financial. circumstances to' choose ~between-shutting down or taking shortcuts while tne-license was in effect.

Id. at 35749.

Yet that is precisely the choice-that may confront-Edison's subsidiary in the event of financial' difficulties: ~ the choice between' shutting down or'taking shortcuts.-- Forsan entity likes the subsidiary, which has no-generating stationsfother than Byron 2 and Braidwood, and'which could find itself insolvent if.

one or.more of its three units is shut down for an extended period, that' choice will be unusually difficult. Even for Ediso'n, the prospect of insolvency of a subsidiary owning a major portion of-the Company's entire assets would not be viewed-lightly. And if theishut-down option is viewed as unaffordable, . ,

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-there will be higher than normal pressure to opt in favor..of taking shortcuts.

For the . foregoing reasons, a finding of ru) signficant hazard, prior to an adjudication hearing on Edison's and its.

subsidiary's financial qualifications, would be inappropriate and

'should not be made.

III. ANTITRUST REVIEW BPI and SAFE are advised that _the City of Chicago expects to file a separate letter concerning the serious antitrust questions raised by Edison's proposal, but glcssed over in Attachment 2 to-Edison's letter of April 16, 1987 to Mr. Murley.

Since some of BPI's member business executives could potentially purchase lower cost power from Edison's competitors, j they stand to be injured by contractual provisions which have the effect of increasing the price at which the subsidiary would sell power to utilities other than Edison, or which have the effect of diminishing competition between Edison and other utilities.. The same is true for those of BPI's members who are residents of the City of Chicago, which is presently studying various options for producing or purchasing power from sources other than Edison.

Thank you for your timely consideration of the foregoing Comments.

Sincerely,.

Douglas W. Cassel, Jr.

One of the Attorneys for BPI-and SAFE-cc: Leonard N. Olshan U.S. Nuclear Regulatory Commission 7920 Norfolk Avenue Bethesda, MD. 20814 DWC/sp 8

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