ML20210H555

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Testimony of DG Pardus Re Transfer of Bangor Hydro Electric Co,Central Maine Power Co,Maine Public Svc Co & Central Vermont Public Svc Corp Shares in Seabrook Project to Eua Power Corp
ML20210H555
Person / Time
Site: Seabrook  NextEra Energy icon.png
Issue date: 08/26/1985
From: Pardus D
EASTERN UTILITIES ASSOCIATES
To:
Shared Package
ML20205L098 List:
References
NUDOCS 8604030093
Download: ML20210H555 (23)
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Text

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setta%oent 6 Part 11 s

e' EUA Power Corporation Docket No. EL85-Exhibit No. (EUA-200)

~ PREPARED DIRECT TESTIMONY OF DONALD G. PARDUS I. INTRODUCTION 1

.1. Q. Please state your name and business address.

2. A. My name is Donald G. Pardus and m'y business address is One
3. Liberty Square, Boston, Massachusetts 02107.
4. Q. Mr. Pardus, will you please state your present positions with

! 5. Eastern Utilities Associates and its subsidiaries?

6. A. I am Executive Vice President, Chief Financial OfScor, Treasurer
7. and a Trustee of Eastern Utilities Associates ("EUA"). I am also i- 8. Vice President and member of the Board of Directors of the other i
9. EUA subsidiary companies, Montaup Electric Company ("Montaup"),
10. Blackstone Valley Electric Company ("Blackstone Valley"). Eastern
11. Edison Company (" Eastern Edison") and EUA Service Corporation.
12. Q. What positions do you hold in the applicant here. EUA Power
13. Corporation ("EUA Power")?
14. A. I am Treasurer and a member of the Board of Directors.
15. Q. Will you describe your education and business background?
16. A. I am a graduate of the University of Hartford, Connecticut with a
17. Bachelor of Science degree in Business Administration and an
18. Accounting major. I am also a graduate of Harvard University
19. Graduate School of Business Administration -

Program for

~

20. Management Development. Prior to joining EUA in June,1979, I was
21. employed for twenty-one years by Northeast Utilities (" Northeast")
22. in Hartford, Connecticut. At the time 1 left. I had responsibility t

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1. f*F OR*nci"1 Pl anning and investor relations activities for Northeast
2. and its sixteen subsidiary companies. I have been directly involved
3. in the issuance of over $1.4 billion of permanent securities for
4. Northeast and EUA.
5. Q. What are the responsibilities of your present position?
6. A. As Chief Financial OfScer of EUA, I am responsible for arranging
7. the necessary temporary and permanent Snancing for the system.
8. In discharging this responsibility, I work closely with the commercial 4
9. and investment bankers who handle short-term, intermediate-term i
10. and long-tem Snancings for the system and for the utility industry
11. in general .
12. Q. Do you belong to any industry or professional organizations?

t

13. A. I am a member of the Edison Electric Institute's Finance Division
14. Finance Committee. I am also Chairman of the Financial and
15. Accounting Advisory Board of the Electric Council of New England
16. and Chairman of the Finance Committee of the New England Power
17. Pool. My professional memberships include the Financial Executives
18. Institute and the Boston Public Utility Analysts group.
19. Q. Have you testined before any regulatory agencies?
20. 'A. Yes. I have appeared as a witness before this Commission in the i
21. proceeding in Docket Nos. ER81-749-000 and ER82-325-000 concerning
22. Montaup's M-7 Sling and the CWIP surcharge to that Sling. I have
23. also appeared before the Massachusetts Department of Public

- 24. Utilities, the Connecticut Public Utilities Control Authority and the

25. Rhode Island Public Utilities Commission in numerous proceedings
26. involving Snancing authorizations. I have testined on Snancial
27. matters in rate proceedings for Blackstone Valley before the Rhode f

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g, Island Public Utilities Commission. I have also testiSed on financial

2. matters in rate proceedings before the Massachusetts Department of
3. Public Utilities on. behalf of Eastern Edison.

4, Q. What is the subject of your testimony in this proceeding?

5.- .A. First, I will sponsor exhibits setting forth the costs of EUA Power's l

6. acquisition of the Seabrook shares of Bangor Hydro Electric

! 7. Company, Central Maine Power Company, Central Vermont Public j 8. Service Corporation and Maine Public Service Company, collectively 9, referred to here as "the Sellers." The exhibits also show, for i 10. comparison to the purchase price, the Sellers' investment in the

11. assets to be acquired as of June 1.1985. Second, I explain the
12. capital structure and rates of return that are involved in EUA's
13. Proposal and the reasons for the selection of the capital structure
14. and rates of' return. Third, I describe the effect of acquisition by
15. EUA Power of the Sellers' Seabrook shares on ratepayers in Maine
16. and Vermont and upon ratepayers elsewhere in New England.

I 3 17, II. COST OF ACQUISITION

18. Q. What types of assets will EUA Power acquire from the Seller?
19. A. They will consist of (1) plant under construction and (2) nuclear
20. fuel.
21. Q. What base' price will EUA Power pay for the plant portion of the 3

1

, 22. acquisition as it existed as of June 1,1985 and what was the Sellers' I 1

i'

23. investment in the plant portion as of that date? l

)

24 A. The base price of the Seabrook Unit No.1 plant as of June 1,1985

! 24 is $36.0 million. The Sellers' investment in Seabrook Unit No. 1

26. plant as of that date is $433.9 million, including Allowance For Funds
1. Used During Construction. EUA Power will thus be acquiring the
2. SeHers'~ Seabrook Unit No.1 plant investment through June 1,1985
3. at a discount of $397.9 million. That represents a purchase price of
4. approximately 8.3 cents on the donar of investment.
5. Because Seabrook Unit No. 2 has been indefinitely postponed,
6. the Seabrook Unit No. 2 plant is valueless and is being conveyed to
7. EUA Power without charge.
8. Q. What is the base price and the Sellers' investment as of June 1,1985
9. in the nuclear fuel portion of the acquisition?
10. A. The base price for the nuclear fuel portion of the acquisition will be
11. $29.4 million. The Sellers' investment in nuclear fuel on June 1
12. 1985 is the same amount. EUA will pay the Sellers dollar for dollar
13. the amount of their investment in nuclear fuel.

14 Q. What is the total base price that EUA Power will pay to the Sellers

15. for both plant and nuclear fuel?
16. A. It is $65.4 million, consisting of the above stated amounts of $36.0
17. million for plant and $29.4 million for nuclear fuel.
18. Q. Have you developed the price and investment for plant and nuclear
19. fuel by individual sellers?
20. A. Yes. My Exhibit No. _ (EUA-201) sets out those data.
21. Q. As Mr. Eichorn testified, certain payments in addition to the base
22. payment will be made to the Sellers. These payments are
23. reimbursement of progress payments from June 1,1985, accrued 24 carrying charges on the base payments and progress payments and
25. payments for delay in the closing date beyond October 31. 1985.
26. Have you computed EUA Power's total payments to the Sellers,
27. including these additional payments?

4 .

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1. A. Yes, I have, assuming two closing dates. One assumed closing date
2. . is October 31, 1985; the other is March 31, 1986. The latter date is
3. the date as of w"hich the Sellers, at their option, may cancel the

_4. purchase and sale agreements if closing has not yet occurred. My

~

5. ' computations assume the cash construction costs to go set out in Mr.  ;
6. Eichorn's Exhibit No. _ (EUA-105).

1

7. Q. What are the results if closing occurs on October 31, 1985?
8. A. EUA Power would pay the SeBers approximately $96 million as j 9. follows:
0. CMP BHE CV MFS 4

Total

, II. (oog)

12. Plant Expenditures $34,210 .$12,402 $ 9.123 $ 8.294 $64,029
13. Puel Expenditures $17.319 $ 6.146 $ 4.533 $ 4.205 $32.203 I 14 Total $51.529 $18.548 $13.656 $12.499 $96.232
15. The above data are derived in my Exhibit No. _ (EUA-202). ,

- 16. Q. What are the results if closing occurs on March 31, 1986?

17. A. EUA Power would pay the Sellers approximately $149 million as
18. follows:
19. CMP BHE CV MPSP Total
20. (000)
21. Plant Expenditures $61,065 $22,069 $16,405 $14,868 $114,407
22. Fuel Expenditures $18.491 $ 6.564 $ 4.840 $ 4.489 $ 34,384
23. Total $79.556 $28.633 $21.245 $19.357 $148.791 24 The above data are derived in my Exhibit No. _ (EUA-203).
25. Q. What is the total amount of debt and equity financing required by
26. EUA Power to pay the Sellers and to pay for completion of Seabrook
27. Unit No. I assuming a closing with the Sellers on October 31, 1985
28. and, alternatively, on March 31, 1986.

J

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1. A. Assuming an October 31, 1935 closing, EUA Power would require the
2. total of $35 adllion equity finsncing from EUA and a total of $139
3. million debt Snancing from other investors. For a March 31, 1986
4. closing, EUA Power would require $38 million equity Snancing and
5. $151 million debt Snancing. The Snancing amounts represent the
6. proposed debt / equity ratio of 80%/20% which would exist at Seabrook
7. Unit No. l's assumed commercial operation date of October 31, 1986.
8. Q. Mr. Pardus, I ask you now to assume that the closing occurs on
9. March 31,1986. What would be the ' capital structure of EUA Power
10. at the October 31, 1986 commercial operation date, assuming a March
11. 31, 1986 closing date?
12. A. The capital structure would depend on the interest rate on EUA
13. Power's debt, a factor that cannot be precisely known at this time.

14 Below are two capital structures, the Srst assuming the 30% interest

15. rate considered maximum by Merrill Lynch and the second a 25%
16. interest rate.
17. 30% Interest Rate Weighted
18. h Amount 1 Cost Cost 19* Debt $153,775 80.00% 30.00% 24.00%

20' Preferred $ 38,434 19.99% 25.00% 5.00%

21. Common Equity $ 10 .01% 25.00% .00%
22. .

$192.219 100.00% 29.00%

i

1. 25% Interest Rate

. Weighted

2. h Amount } Cost Cost 3* Debt $150,565 80.00% 25.00% 20.00%

4 Preferred $ 37,631 19.99% 25.00% 5.00%

5. Common Equity $ 10 .01% 25.00% 0.00%
6. $188,206 100.00% 25.00%
7. Q. Mr. Pardus, assuming a closing date of March 31, 1986 and interest
8. rates of both 30% and 25%, what would be the costs of power to EUA
9. Power from Seabrook Unit No.1?
10. A. The estimated cost of Seabrook No.1 power in the unit's Srst year
11. of operation would be 12 cents per kilowatt-hour assuming a 30%
12. interest rate on EUA Power's debt and 11 cents per kilowatt-hour
13. assuming a 25% interest rate. The derivation of the above costs is 4
14. set out in my Exhibit No. _ (EUA-204). ,

. 15. Q. Mr. Pardus, is EUA Power exploring leasing the nuclear fuel

16. acquired from the Sellers?
17. A. Yes, it is. It is not clear whether or not such a leasing
18. arrangement is possible. If it were possible, the leasing
19. arrangements would remove the nuclear fuel from the balance sheet,
20. and the capital requirements of EUA Power would be reduced by the
21. amount invested in fuel when the project goes on line. The above
22. capital structures would be altered accordingly. The reduction in
23. capital requirements would be $40.3 million and would apply ratsbly i

l 24 to the debt and equity components.

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g, III. CAPITAL STRUCTURE AND RATES OF RETURN

2. Q. Mr. Pardus, please describe the proposed capital structure of EUA
3. Power.
4. A. The debt / equity ratio during the construction period of Seabrook
5. No. I will be 80%/20%. There may be, and probably will be.

, 6. departures from that ratio caused by the timing of the issuance of j

7. securities, but any departures will be temporary. After Seabrook
8. No. 1 is placed in commercial operation, the common equity
9. percentage may. increase relative to the debt percentage as a result
10. of the accumulation of retained earnings and possible further
11. contributions of equity by EUA.
12. Q. Why was a debt / equity ratio of 80%/20% selected? '
13. A. The 80%/20% ratio requires EUA to put up an estimated $38 million in
14. equity capital. This is approximately the limit of equity capital that I
15. EUA is willing to commit to acquisition of additional Seabrook shares.
16. It is important to EUA that the debt investors assume a major part
17. of the risk of loss of capital. Merrill Lynch has advised that a i 18. debt / equity ratio of 80%/20% is commen for project financings and
19. would be acceptable to potential investors in debt securities. Merrill
20. Lynch further advised that it could raise up to $200 million in debt, i 21. which is more than enough to cover the anticipated $151 million
22. required of debt investors in the debt / equity ratio 80%/20%. Thus,
23. the debt / equity ratio was adopted for four reasons: (1) it 24 accommodates the amount of capital that EUA is willing to place at j 25. risk for this project; (2) it distributes the risk of loss of capital to
26. debt investors to the maximum extent feasible; (3) it is a ratio l

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1. known and acceptable to debt investors in this type of investment:
2. and (4) the debt requirement from outside investors is within the 1 3. amount that Merrill Lynch states that it can raise for EUA Power.
4. Q. In the event Seabrook Unit No. I were to be cancelled, would the
5. write off of EUA's $38 million equity investment jeopardine its ability
6. to pay dividends to its common shareholders?
7. A. No. EUA currently has approximately $45.1 million of unrestricted
8. retained earnings from which it can pay dividenda. This amount
9. continues to increase since EUA does not pay out 100% of its
10. earnings in the form of dividends. A write off of its $38 million 11.

equity investment would result in a net charge to retained earnings ,

12. of approximately $19 million. This charge would in no way inhibit
13. EUA's ability to pay dividends.

14 Q. You mentioned that, once Seabrook Unit No.1 goes into commercial

! 15. operation, the equity percentage may increase from the accumulation

16. of retained earnings. Why would EUA Power accumulate retained
17. earnings instead of paying out full earnings to its parent?

1

18. A. Any nuclear project has on-going requirements for new investment.
19. such as retrofit obligations, replacements and repairs. It may be
20. prudent for EUA Power to retain some cash to meet the need for i
21. additional ir. vestments in the plant. Also, EUA may make additional
22. common equity contributions to EUA Power for these or other
23. purposes.
24. Q. Does the 80%/20% debt / equity ratio leave the equity holder with +
25. unusually high risks?

j 26. A.

The greater the leverage in a capital structure, the greater are the i

27.

risks to the common stockholder fmn a fluctuating net income. The i

l 1

l 10 -

g, proposed capital structure therefore poses more risks to the equity 7, holder than would a typical utility capital structure. And, of

3. course, the risks are particularly troublesome for an entity like EUA .

4, Power which is a new entrant into the power supply market which  ;

5. has no established share of the market and must market its share in
6. the open wholesale market. Any inadequacy of sales revenues to
7. cover costs would quickly impact the equity holder. But EUA l
8. considers the risks tolerable, if it is aBowed the opportunity to
9. charge market-based rates or to earn the equity return sought here
10. . under cost-based rates.

, it, Q. What equity structure does EUA Power propose?

12. A. EUA Power proposes to raise almost the entire equity component of
13. the capital structure through issuance of preferred stock to EUA.

14, A nominal amount of common stock win be issued to EUA in order

15. that the parent may retain voting control of the subsidiary, but this i
16. amount of capital raised by the issuance of the common stock will d
17. only amount to approximately $10,000. ,

i 18. Q. What is the purpose of employing preferred stock to raise the vast l

19, bulk of the equity component?

20. A. The purpose is to establish a contractuaHy committed dividend to
21. which EUA is entitled over the life of the project. EUA sees the

~

22. investment as a high risk investment in which a substantial part of 23, the risk -- that related to construction delays, cost overruns and
24. Possible cancellation -- occurs in the early years. EUA is unwilling
25. to make the investment unless it has contractual assurances from the
26. subsidiary that the 25% return win continue in later periods when

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. 1. the risk, though remaining relatively high by utility standards, is

2. certainly diminished.
3. Q. Do you consider a declaratory order approving a 25% preferred stock
4. dividend as confering a greater assurance of acceptance by a future

.5. Commission than an order approving the same level of return for

o. common equity?
7. A. Yes, I do. The reason is the contractual character of the preferred ,
8 stock dividend.- The contractual character leaves no mistake that
9. the intent was that the rate be continued unchanged throughout the
10. life of the project. That, I beneve, would make it relatively more
11. difficult for a future Commission to retreat from any approval of the
12. rate given by this Commission. Obviously, EUA must be concerned
13. that, once it has taken the risks of this acquisition, if its decision
14. proves well-advised, the rirk will seem to have been not so great as -
15. it in fact 'was, and the pressure then might build to lower the
16. allowed return for incurring the risk. It is a central point of EUA i 17. Power's petition here to alleviate that concern.
18. Q. Mr. Pardus, what rate of return do you request be approved for the
19. equity portion of capital structure?
20. A. The requested rate of return on equity capital is 25% per annum,
21. both for the preferred stock portion and the common stock portion.
22. This rate 'of return is the rate which is necessary to attract EUA's
23. investment of the required equity capital in view of the risks
24. discussed by Mr. Eichorn and Mr. Benderly. I point out that EUA
25. stands to lose its entire equity investment if the plant is cancelled.
26. The salvage value of a cancelled nuclear plant is negligible or
27. negative. Not even the nuclear fuel would be salvageable. Once

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1. nuclear fuel is fabricated, the fuel becomes essentiauy valueless.
2. since the fuel is fabricated specificany to the requimments of the
3. specific plant. The fabrication process has already commenced.
4. The 25% rate of return, I believe, is substantiaHy lower than i
5. the rate of return that would be required by equity investors from
6. the venture capital market. Mr. Hildreth of Merrill Lynch testifies
7. that a return of 40% would be required to raise equity investment in
8. the venture capital market.
9. Q. Is it not true that normally the return on common stock'would be
10. , higher than the dividend rate for preferred stock?

i

! 11. A. Yes. The common equity investment is normally considered more

12. risky than a puferred stock investment, since the dividend on
13. preferred stock is contractuaBy fixed and takes precedence over i
14. common stock dividends. In this case, however, the common stock
15. is not reaHy a capital raising vehicle; its purpose is to' confer
16. control. In the circumstances, while the common stock does bear a

. 17. greater risk than the preferred stock, EUA believes that it is

18. simplest for the common stock to earn the same rate of return as the 1 19.

preferred stock. The common stock will not produce enough dollar 20.

return to warrant the trouble and expense of a separate analysis to

21. establish a separate rate of return for it.
22. Q. Mr. Pardu's, does EUA request that any equity contributions made 2 3.-

by EUA after Seabrook Unit No. I has become commercially operable i

24. be included in its capital structure at the 25% rate of return?
25. A. No, it does not.

i Any contributions after that date would bear a 26.

8 lower risk, and EUA would expect that the determination sought here 27.

wculd not apply to such contributions. The rate of return for such f

d

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  • 1
1. contributions would be established on rate filings made with this
2. Commission. The rate of return for such contributions would be
3. that appropriate to EUA Power in the post-commercial operation
4. period.
5. Q. Does EUA request that EUA Power's retained earnings accumulated
6. after commercial operation be included in its capital structure for
7. ratemaking purposes at the 25% rate of return?
8. A. No. Since risk will be reduced after that date, retained earnings
9. accumulated after commercial operation are not requested to be
10. included in the capital structure for ratemaking purposes at the 25%
11. rate of return. EUA intends that they be included in the capital
12. structure at a rate of return appropriate for EUA Power in the
13. post-commercial period.
14. Q. Mr. Pardus, what will be the rate of return on the debt portion of
15. the capital structure?
16. A. The rate of return on the debt portion will be established at the
17. weighted average of the interest rates actually experienced on the
18. various debt issues. While we ask that the Commission approve this
19. approach for EUA Power I note that there is nothing out of the
20. ordinary in the approach; it is the Commission's usual practice in
21. developing the allowed rate of Mturn on debt in wholesale
22. ratemaking.
23. Q. What levels of rate of mturn on debt may be anticipated?
24 A. According to Merrill Lynch, the interest rates on the initial issue of
25. debt during the construction period will likely be in the
26. neighborhood of 30% per annum maximum. The rate represents the
27. risks perceived by the market in an investment in a generating

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.14 -

1. company whose only asset is 'the unSnished Seabrook Unit No.1.
2. EUA.will not guarantee in any way the debt, and the debt investors,
3. like EUA Power as the equity investor, will stand to lose their  !
4. principal if Seabrook Unit No.1 is cancelled.

{ 5. Q. Does EUA Power plan to raise the debt capital in one issue or over a

6. series of issues?
7. A. I believe it likely that the debt capital will be raised in one issue,
8. but it is possible that it could be raised in several issues.
9. Q. When will the initial issue of the deb't capital mature?
10. A. It will have a term of up to ten years. However EUA Power will
11. seek the right to call this debt in as few as three years. The
12. potential investors in debt securities see that many~of the risks of
13. the project occur during the construction period and, in return for J 14 assuming those risks, they seek to obtain the relatively high returns
15. of the initial issue over as long a period as they can obtain. The
16. shorter the term of the debt securities, the higher will be the rate i
17. of interest that they demand. EUA Power will negotiate the best

, 18. balance of length of term and rate of interest. By best balance, I i 19. mean the balance producing the lowest debt costs over time.

20. Q. What will happen when the initial issues mature?

l 21. A. ~ The debt component of the capital structure will be re8nanced. The i 22. reSnancing'will occur after Seabrook Unit No.1 has been placed in

23. service. If EUA Power has succeeded in marketing its share of the
24. power from the project, the interest rates on the reSnanced debt
25. should be considerably lower than the interest rates on the initial 1
26. debt. I believe, however, that the interest rate on the rennanced 1
27. debt would be closer to, but higher than, the interest rate for a i

1 i

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1. typical electric utility. The rate would be higher than the interest '
2. rate for a typical electric utility because of the higher debt

! 3. component of capitalization and the unusual risks of a single asset

4. nuclear generating company without an established customer base.
5. Q. Does EUA Power have any plans to issue short-term debt during the

, 6. construction period?

1

7. A. We believe that it will be impossible to obtain any bank loans during
8. the construction period because banks are unwilling to take the
9. signiScant risks associated with cancellation or delay.

i 10.' Q. Mr. Pardus, for accounting and ratemaking purposes how does EUA

11. Power intend to treat the carrying charges on its capital costs
12. incurred during construction? t
13. .A. It intends to accrue those carrying costs as allowance for funds used  !

i

14. during construction pursuant to this Commission's regulations 2
15. promulgated in Order No. 561, 57 F.P.C. 608 (1977), reh. denied,  !

' 16. 59 F.P.C.1340 (1977). The amounts so accrued will.be added to

17. rate base when Seabrook Unit No.1 enters service.
18. Q. Mr. Pardus, Mr. Eichorn indicated that EUA Power seeks a

] 19. determination in this proceeding regarding the effect of any

20. subsequent imprudence findings with respect to expenditures on l
21. unfinished construction as of the closing date. Please explain the
22. determination sought.
23. A. The determination sought here relates to the treatment that  !
24. 1 would be accorded to EUA Power in the event that in such a '
25. proceeding some costs of unfinished construction incurred before I
26. the closing were found to be imprudent. EUA Power asks for a
27. determination that any disallowance of such costs would not affect its
1. rates unless the disanowance were to reduce the aDowed rate base 1
2. for construction before the closing to a level below the total
3. Purchase price that EUA paid for the unfinished construction as of
4. the closing date.
5. To iBustrate, assume that the Seders' investment in unfinished
6. construction work at the closing date was $500 adllion. Further
7. assume that EUA Power's total purchase price.at that date was $150 '
8. million. If in a subsequent proceeding the Commission were to '
9. disallow as imprudent say, $10 minion of the $500 million of SeHers'
10. investment at the closing date, EUA Power's rates would not be
11. affected. ~But if the Commission were to disallow, say, $400 million 12.

of the costs expended before the closing date, EUA Power's rate

13. base for the plant acquired as of that date would be reduced from 14 Its $150 million acquisition price to $100 million (6500 million udnus
15. $400 million equals $100 million).

! 16.

I emphasize that EUA Power does not seek in this proceeding 17.

any determination as to whether or not any Seabrook expenditures to 18.

date were prudent. Any determination on the prudence of particular i

19.

{

I expenditures would be appropriately made in any proceeding in.

20.

which EUA Power filed a rate schedule for sales to a customer under

21. a cost-based rate (note that prudence would not be an issue in
22. respect to a market-based rate).

23.

IV. EFFECT OF ACQUISITION ON RATEPAYERS 24 Q. Mr. Pardus, would you assess the effect of EUA Power's acquisition 24 of Seller's Seabrook shares on ratepayers?

l l

l

1. A. Yes. I begin with a perhaps somewhat obvious statement that is
2. nonetheless of underlying importance in assessing the impact of the
3. acquisition on ratepayers: Since EUA Power has no committed l 4. customer base and must sell its power on the open market, it can
5. make sales only if the sales are beneScial to the purchasing utility
6. and themfom to that utility's ratepayers. Put differently, no utility '

7, will make purchases from EUA Power unless the purchase is less  !

8. expensive than the purchasing utility's next most economic source of
9. power - that is, is below the purchasing utility's decremental costs.
go, . Therefore, any power that EUA Power sells - whether the price is
11. market-ba nd or cost-based - will be of benent to ratepayers. if
12. the sale of power by EUA Power is not of beneSt to ratepayers, it
13. will not be made, because there will be no purchasers.

14, Q. Please proceed with your analysis,

15. A. My analysis of ratepayer impact of the acquisition examines f
16. separately the effect upon ratepayers in Maine and Vermont and the

. 17, effect on ratepayers elsewhere in New England, since the impact

/

18. upon these two groups is necessarily different.

l 19. Q. What would be the effect of the acquisition on ratepayers in Maine i

i

20. and Vermont?
21. A. The effect on ratepayers in Maine and Vermont is twofold. On the
22. one hand, 'the ratepayers enjoy the beneSt of being freed of the
23. .

obligation of continuing to support the project. That in turn frees

24. them of two risks: (1) that the project may eventually be cancelled l
25. and that they may have to bear the write off of amounts that could
26. be avoided by disengagement and (2) that the project may be
27. completed but that the power from the project may not be needed by i

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l g, them or may not be the most economic power available to them. On

2. the other hand, the ratepayers assume two detriments: (1) they
3. immediately bear the write off of the difference between the
4. investment in Seabrook and the very considerably lower payment that
5. they will receive from EUA Power for the unfinished plant and (2)
6. they lose the opportunity to maHze any benefit from Seabrook No.1
7. if it is completed and proves to be an economic project.
8. Whether or not the benefits of disengagement outweigh the 9 .' detriments is a question that involves assessment of various facts
10. and judgment on a number of imponderables. In my view, the
11. resolution of the question is best left to the Sellers and the state
12. regulatory commissions that regulate them, since they are in a
13. position to best know the facts and therefore to best make th'e
14. decision. They are also the ones who will have to live with the
15. results.
16. Q. How would the ratepayers in Maine and Vermont be affected if it
17. transpires that they require power from Seabrook Unit No.1 and
18. their utilities then turn to EUA Power to supply the power?

l

19. A. The answer depends on whether the Commission endorses EUA
20. Power's market-based price proposal or its cost-base rate proposal.
21. Under the market-based price pmposal, the ratepayers in Maine and
22. Vermont, depending on market conditions, might pay either more or
23. less for Seabrook power than they would have paid if their utilities
24. had not disengaged from the project.
25. Under the cost-based proposal, they would pay less to EUA
26. Power for the Seabrook power than they would have paid to their
27. own utilities for the same power, but they would also be making
1. write off payments to their own utilities. The reason that they
2. would be paying less to EUA Power for the Seabrook power is that,
3. while EUA Power under its cost-based proposal would earn higher
4. rates of return than would the Maine and Vermont utilities, the rates
5. of return would be applied to a vastly reduced rate base. _The
.6. effect of the rate base reduction more than offsets the effect of the
7. higher rates of return.

! 3. Presumably, however, as I said, the ratepayers in Maine and

9. Vermont will be independently bearing, through retail and . wholesale
10. rates paid to their utilities, the write off of the losses that the
11. utilities experienced on their sale of the Seabrook shares to EUA
12. Power. The amount of the Maine and Vermont utilities' losses on the
13. pmject equal, of course, the rate base reduction that the ratepayers 14 enjoy under EUA Power's rates. Thus, the Maine and Vermont
15. ratepayers would bear the entire cost of recovery of the investment
16. in Seabrook Unit No.1. But they would pay a higher rate of
17. return on a part of that investment if the purchase of Seabrook
18. power is made from EUA Power. Thus, they would be somewhat i
19. disadvantaged in the event that thelr utilities sell their shares in the j 20. project but then are compelled to buy back project power.

j 21. Q. Is this fact disturbing

4

22. A. No. The sale of the shares by the Maine and Vermont utilities was 4
23. made on an assessment by those utilities and the state commissions
24. that regulate them of what is in the best interests of their i 25. ratepsyers in the long term. If their assessment is correct, the
26. ratepayers will be benefitted.

If it is not correct and Seabrook Unit

27. No.1 is completed and the power turns out to be needed in Maine

i

. e3 l l - ( )

\

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i

1. and Vermont, it is hardly surprising that the ratepayers in Maine i
2. and Ve2mont will suffer some detriment. t l
3. Q. In respect to a possible sale back of Seabrook, pcwor to Maine and '

i

4. Vermont, how does EUA Power's proposal differ from the previous
5. proposal of NuMaineCo Corporation?
6. A. The NuMaineCo proposal sought approval for inclusion in
7. NuMaineCo's rate base of the Maine utilities' full investment in
3. Seabrook Unit No.1, even though NuMaineCo proposed to acquire
9. the Maine utilities' share at a value less than the Sellers' investment.
10. Under the NuMaineCo proposal, in the event of a sale back, the
11. Llaine ratepayers would have supported the recovery of the same 12, investment twice -- once to the Maine utilities through write off of
13. the loss on the sale in retail and wholesale rates and once to
14. NuMaineC9: through depreciation charges in its rates for Seabrook
15. power. This cannot occur under EUA Power's proposal. Any
16. additional charges to Maine and Vermont ratepayers are attributable
17. to differences in rate of return redecting differences in* risks.
18. Q. Mr. Pardus, what would be the effect of the sale of the Seabrook
19. shares to EUA Power on'ratepayers in New England outside of Maine 4
20. and Vermont under the cost-based rate proposal?
21. A. In the case of such ratepayers the effect would be unreservedly

, 22. beneScial. ' First, let us consider the case of an upside market, in

} 23. which power is scarce and its market value is high. Under the

24. cost-based rate proposal, EUA Power's maximum rate for Seabrook l

., 25. No.1 power will be lower than the cost-based rates that the Sellers

+:

26. would have charged if they had completed the project. Again, this i
27. is because, while EUA Power would earn a higher rate of return i

i s  % h I

1. than the Sellers would have earned, the high rate of return would
2. be applied to a vastly reduced rate base.
3. Second, let us consider the case of a downside market, in  !
4. which power is relatively plentiful and the market value is relatively
5. Iow. In such a situation. EUA Power is more likely than the Seders 3
6. would have been to offer the Seabrook power to the market at less
7. than compensatory prices. This is because EUA Power, lacking a ,
s. committed customer base, will be under extreme compulsion in a

{

9. downside market to sell aR the Seabrook power that it can, even at
10. cut-rate prices, to help cover its fixed operating and debt costs.
11. By contrast, the Sellers would be under less compulsion to offer the
12. power to the market at cut-rate prices, since they might an'ticipate
13. that comadtted customers would bear the costs of unused capacity through their regular rates.

14.

15. Q. Would the proposed acquisition have any effect on the customers of

! 16. Montaup Electric Company ("Montaup")?

17. A. EUA Power would only sell power to Montaup if it had the power i
13. available and the power were the most economical source available to l
19. Montaup. The price would be the rate under the cost-based t
20. pmposal advanced here. The acquisition could thus be advantageous j 21. to Montaup's customers and their ratepayers.

! 22. A second possible effect arises outside the area of power

23. supply. Under this Commission's current practice, the overall cost
24. of capital is based on the overall cost of espital of the entire EUA
25. system. The introduction of the high-cost debt issued by EUA i
26. Power would, without adjustment, increase the rate of return
27. component in the rates paid by Montaup's customers, even if

22 -

1. Montaup purchased no power from EUA Power. This effect could be
2. elindnated, by removing EUA Power's high cost debt from the EUA
3. system capitalization in determining the rate of return for Montaup.
4. Montaup will propose such elimination in its rate filings.
5. Q. Mr. Pardus, does that complete your testimony?
6. A. Yes, it does.

o O

AFFIDAVIT CDtOWEALTH OF MASSACHUSETTS Donald G. Pardus, being duly sworn, deposes and says: that he has read the foregoing questions and answers labeled as his testimony, and if asked the questions therein his answers in response would be as shown:

that the facts contained in said answers are true to the best of his knowledge, information and belief.

& }L h:__A_-

Donald G. Pardus Subscribed and sworn before me thisj_tt.th day of A;_ .3 1985.

/

[ William F.'d'Connor Notary Public My Commission Expires: May 23, 1991.

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