ML20069F556
| ML20069F556 | |
| Person / Time | |
|---|---|
| Site: | South Texas  |
| Issue date: | 03/18/1983 |
| From: | Sinkin L Citizens Concerned About Nuclear Power, INC. |
| To: | NRC COMMISSION (OCM) |
| References | |
| ISSUANCES-OL, NUDOCS 8303230224 | |
| Download: ML20069F556 (59) | |
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UNITED STATE 5 OF AMERICA NUCLEAR REGULATCFY COMMISSION In the M'atter of ( 'd di "iO 31 -
) Docket Ncs. 50-498 OL HOUSTON LIGHTING AND POWER ( 50-499 OL COMPANY. ET AL. )
(Units I and 2) (
CITIZENS CONCERNED ABOUT NUCLEAR ?CWER (CCANP)
MOIIQU EQB UgW CgdIENTIQU_________
I. INTRODUCTION Two recent events raise new cuestions regarding the application of Houston Lighting and Power Company, gts al for a license to operate the South Texas Nuclear Project ('5TNP) .
In December 1982, the Public Utility Commission of Texas (PUC) issued its Final Order on HL&P's rate increase recuest. Egg Exhibit i attached hereto. This Order concludeo that HL&P had mismanaged the South Texas Nuclear Project. Based on tnis ccnclusicn, the PUC indicated that HL&P may not be allowed to recover all of its investment in STNP. Ic. at 3.
In January 1983, the City of. Austin, a partner in STNP.
filed suit against HL&P seeking a refund of all investment by Austin to date and assumption by HL&P of Austin's obligations for
" future payments (16% of the total) to STNP. Egg Exhibit 2 attached hereto.
These developments raise an issue wnich the Atomic Safety anc Licensing Board should consider in an expedited phase of the operating license hearings. The issue is wnether HL&P nas the financial capacity to Jinish and cperate STNP in a manner ccnsistent with the protection of ouclic heelth and safety.
This issue recuires a new contention, which CCANP proooses as f ollows:
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I r. lignt of the current economic climate for nuclear investment generally. the current f inanci al condicion of HL&P. the recent acticns of.the Public Utility Commission of Tex as in response to HL&P"s 1932 rate increase request, anc the potential economic consequences to HL&P resulting from the lawsuit filed by 'the City of Austin. dces HL&P lack tne financial qualifications to successf ully complete and cperate the South Texas. Nuclear Project.in a manner consistent with protection of - the public health and saf ety?
II. DISCUSSION The Nuclear Regulatory Commission (NRC) exempted electric utilities from financial qualifications review in order to reduce the effort and expense of the licensing process. It did not cuestion the fact that " matters important to safety may be affected by financial cualifications," 47 Fed. Reg. 13,750 (1982), and, as a result, still requires financial cualifications review for non-ut'ility applicants. See Icz at 13.753.
In reaching their decision to exempt electric utilities from financial inquiry, the NFC found that 'such utilities are financially stable, regulated monocalies; have a strong self interest in safety; and do not responc to 'inancial pressures by corner-cutting on safety. Igz at 13,751.
Further, the Commission found that the NRC inspection process would detect any such corner-cutting wnicn .T.i gh t take place. Idz The Commissicn concluded that financial cualifications review did not contribute to the safety of utility operated nuclear power plants and, therefore. adcpted the exemoticn rule.
The Commission. in its ccmments on the rule, however, notec that soecial circumstances might arise in individual licer. sing hearings which would warrant waiver of the exceoticn under 10 2
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t C.F.E. 3ectio9 C.753. Ist at 13. 75b. 7[.e CITnDi s si n al s O statec that it was nct waiving its " residual power uncer the Atcmic Energy Act to require additional information in i n:1 vi dual cases as may be necessary for the Commissicn to determine whether an acplicaticn should be granted or denied ...." Idz 10 C.F.R. Section 2.755 permits a licensing board to waive any rule when the application of the rule wculd not serve the purpose for which the rule was adopted. 10 C.F.f. Eection 2.765 (1722). In this proceecing. the pcor economic outlook f or the nuclear industry generally, the financial concition of HL&P. the recent hostile regulatory actions towards HLhP by the Public Utility Commission of Texas, and the cuestions raised by the City of Austin's lawsuit against HL&P cast substantial doubt ucen HL&P's financial ability to safety complete and opverate STNP.
Additionally. the poor safety record to date at STN?
indicates that the incentives and controls whicn the NRC feels are r ormally sufficient to ensure safety in the absence of linancial pressures are not sufficient to do so here. The record in this pr:ceeding demonstrates widescread failures by HLLP to
.i.T.olenent its cuality assurance prcgram in compliance with NRC regulations. These vi ol ati ons took place in the absence of the tremendous financial pressures HL&P new faces.
Therefore, the presumpticn that utilities are generally Jinancially qual ifi ed to safely construct and cperate nuclear oower clants is not warranted in HLLP's case.
Since ic79. when the Commissicn i ni ti ated the 2inancial cualiJications review rulemaking, the climate in whl.c5 nuclear utilities must raise funds has worsened substantiallv. Lcwered gb
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bcnc ratings for utilities investing neavily in nuclear plants, hi;her interest rates, declining investor con 41dencs. a.nc other costacles to raising capital for nuclear plants are now widespread in the investment community.
HL&P has just taken a major loss on a cencelled nuclear project, had its bond rating lowered twice in recent years. and faces future financial reverses based on actions of the PUC of Texas and of the City of Austin.
The PUC of Texas has found that HL&P has mismanaged STNP and has warned HL&P that it will not let ratepayers be charged for costs which are attributable to mismanagement. Exnibit i at 2, Exhibit 3 at 91.
The City of Austin has filed suit against HL&P alleging misrepresentation and mismanagement substantial enough to constitute a material failure of consideration to the
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particioation agreement. Exhibit 4 at 6.
It is likely that, as the extent of HL&P's mismanagement becomes clear in the record of this proceedi.ng, in the litigation by the partners against Brown and Root, and in the Austin lawsuit, the PUC will take steps to exclude substantial amounts of the cost of STNP from HL&P's rate base, p en al ici ng its stockholders and putting extreme financial pressure on menagement. Such a penalty was exacted for mismanagement in the cancellation of HL&P's Allens Creek nuclear project with the stockholders taking a $156 millicn Icss. Exhibit 2 at 52.
- A stcckholder group has filed a resolutien forcin; a vcte at the May 11. 19E3 steckholder meeting icn whether to shut down STNP 4cr e comolate independent review subject tc the accroval of the PUC.
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Eince the early saventies. censtr.uction costs 'o- nuclear cower plants have risen substantially, sometimes dramatically. As a result srders have stoppeds no new orders have been placed since 1979. the year of the NRC decision which led to the adooti on of the financial qualifications exemotion. Public Earvi cg C202aOv gf Ugw Hf021hiCg, 7 NRC 1 (1978). Of the 15 orders placed between 1974 and 1978, 13 have been cancelled. More than 70 orders placed prior to 1974 have also been c a.n c el l ec .
" Red Ink Stains Atomic Age," Dg11gts gOg Egagg, January 1983 at 12.
i One of the reasons for these cancellations has been the increasing difficulties experienced by utilities in raising the massive amounts of capital necessary to build a nuclear plant.
The credit rating companies have been lowering the ratings of utilities involved in nuclear project investment. Id t at 13.
.Almost one third of Merri11 Lynch & Co.'s clients ourposely avoid 4
investing in anything connected with nuclear oower. Idz As a result of these conditiens in the financial marketplace, utilities have become increasingly decencent upon l
l ratepayer s.uopl i ed capital. Companies in Pennsylvania, Mississiopi. Aricana, Michigan, and Kansas are counting on raisino. their rates between 20% and 60%. .
if their new nuclear plants come on line. Ids The cost of STNP was originally estimetec at between 5738 l million and $990 million. The most recent Bechtel estimate is l
l 55.495 billion. Unit 1 is now sin and one nsif years ceninc scnedule Unit 2 is seven years behinc schecule. PL&P testifiec at its latest rate hearing that, as a result of the :ncreasec 5
costs anc celavs. invsstors perceive HL&. as rel ati vsl y more risky than the se.Tple of stable industries usec to estselish a proper rate of return. Exnibit 2 at 17.
HLSP testified in the same hearing that its market-to-book ratio has declined to an average of 80% in the last two years, indicating that the company's financial integrity has cecome increasingly impaired. Idz-This impairment means that HL&P must oay investors higher returns and rely on PUC approved rate increases to meet its increased obligations.
However, the latest PUC acticns indicate that the necessary rate increases may not be forthcoming. The PUC found that a 16.55% return on equity would be adequate to maintain HLLP's financial integrity under efficient management conditiens. The FUC also found that HLLP had mismanaged its coerations and recuced HL&P's return to 16.35% as a penalty for this mismanagement. Exhibit 1 at 2.
The Commission cited as an examole of fiLLP's mismanagement i the handling of STNP. including the unreasonably cptimistic l
I construction schedule. the absence of pricr nuclear proj ect axoerience, and the " lack of proj ect control systems
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scohisticated enough to monitor progress and successfully anticipate current and future problems on a project of sucn size
, and complexity." Exhibit 2 at 31. .
In addition, the Commission cited HL&P's failure to test burn coal before purchasing it and the unusual h an dl i r.; cf the Allens Creek Nuclear Project, including the use of an 50%
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- acaci.cy esctor ir. feasibility studies Wnere NRC figures Encwec a 36% factor would be prudent. Enhibit I at 2.
As a further example of mismanagenent, the Commission cited HL&P's unreasonable delay in cancelling the Allens Creek proyect efter it became apparent the project was not f easible. Exhibit O at 52.
In addition to reducing HL&P's return on equity. the PUC recuired HL&P to write off s166 million of the cost of the All ens Creek Nuclear Project because the Commission f ound that tni s amount had been spent imprudently. Ids Furthermore, the Commission rejected the hearing examiner's finding that a $1.7 billion ceiling should be set on HL&P's share of STNP; the Commissioners wanted to make it clear that HL&P would have to prove that any amount scent on STie was reasonably spent before such amount would be included in the rate base.
Exhibit 1 at 3.
The Commission al so required HL&P to write of f any amcunt it might be compelled to pay Brown and Root as a result of I litigation between the partnership and Erown and Rcot.- Exhibit 2
-at 31. This ruling will become significant precedent as the City cf Austin lawsuit moves tcward judgment.
The Commission did not limit itself to financial sanctions egaint: HLLP. The Commission founc that HL&P's total system r==a-ves. including purchased power. will f&ll below the minimum i
- accectacle l evel .i n ICE 8. unless all of HL&P's current orojects ere comoleted on time. Id t at 2e. noting enet HL&P nse been 1
cverly cotimistic in previous planning predictions. tne Commission put HL&P on notice that more then normal custoTer 7
outages mi-ht esult in service area eductions. ;g.z Such a service area reduction would force HL&P to go cack to the PUC' for higher rates frcm their smaller service area or cancel generatcrs now under construction, like STNP. To avoic these consequences. HL&P will be pressured to rush STNP to completion by taking unacceptable risks.
Fi n al l y, the Commi ssi on Chairman P.ollins criticized the current direction of HL&P's management. He pointeo out that the Board of Directors is clearly dominated by inside directors.
Exhibit 3 at 92. He criticized the company for inclucing representatives of its outside ccunsel and principel mank on the Board. He questioned the competence of the Board, noting that none of its outside directors are qualified to make substantial contributions to multi-billion dollar decisions. Idz at 93.
Finally, the Chairman of the PUC. stated that. at a time when the company's principal problem is raising f unds in the finencial markets, none of its outside directors has any credibility on Wall Street. Idt As as result of these PUC actions, HL&P is in a difficult
- position. The required write-c4f of Slse million imprudently l
spent on Allens Creek will crevent HL&P from sati si ving its capital needs in the financial markets this year, setting oack-i its construction program significantly. Exhibit 2 at 40.
The reduction in the return on ecuity, wnile not an immedi ate probl em because it is only 0.5%. is a werning to H'_ bP that' the Ccmmission is not satisfied with HLhP's r.anagement te date and that investors, not retecayers, will bear the costs of mismanagement.
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Tre tnrset to re:uce the servi:q eres shoulc .LLh? not complets i ts constructicn orojects. in:; uding- STri?. on time, puts additional cressure on management.
The recent suit by the City of Austin may compounc HLhP's pressures in three ways. First. if Austin wins. HL&P will be fsced with. a judgment of at least $437 million doll ar s , olus whatever sums are expended by the City of Austin between now and
- final judgment, plus damages for loss of use of STNF to Austin.
ar. d the higher costs of covering Austin's power needs. Exhibit 4 at 7. .
I Second, HL&P's obligations with respect to STNF payments will be increased by Austin's 16% share. Idz Third, successful litigation by Austin might well lesc the other two partners, who are in almost exactly the same legal rel ati onshi p to HL&P, to file similar suits. HL&P's potential liability from the three . suits could easily surpass $1.5 billion-and make ' HLLP completely responsible f or ' raising the money neecec to finish STNP.
i In light of the PUC's order concerning losses to. Brown and Root in the partner's lawsuit, it is doubtful that HLLP would be allowed to pass on litigation losses to ratepayers.
i The findinas~
of the courts in both the Brown and Root anc l
l Austin lawsuits as to the extent of HL&P's mismanagement will no doubt influence the PUC in its decision on whether or not te include the costs of STNP in HL&P's rate bese. Should the ccurts l
! Jind that Brown and Root's countersuit s.llegatiens oc gross i
inc:ncetence and mismanagement by HL6? or Austia's allegations of nisrepresentation and mismenagement by HLLF are true. or even l
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ikely :s include.the full c:s: :-a tnese kinds.of extreme f i.9 sn ci al; tilities generally .from financial 1 7 Atomic Safety and Licensing Esart:
scrsa. impact on HL&P's financial!
Dation of a deteriorating-finsncia_;
a financially weakened .HL&P. es
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g litigation against HL&P.
course, speculative. But licensinc Jictive in nature.
o of the financial cualificationss . . , .
Itdtive, but such soeculation dic:
gring the likelihood of actions.bse.
ly-Commission in the Pyblic Servicrs in that case that the "orospect or2 ere speculative than numerous cther-festretes, which should be taker-E0EE0% Ei Egg Ha021biCg. 7 NFC 1. .
l noted above will intensify th ee imanagement either directly, ass isions on olant construction. c r- -
Suate the risks of purchasing HLLF:
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MDortant-to rememoer that HLh?- hass hafety.recordt it is likely that I
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a i' increesec financial oressures will r'einjcrce that cattern.
7he f inanci al pressures that HL&? faces are tsyonc the normal pressures encountered.by tne average utility. They are er trer.e cressures. the result of long-standing matterns of i mismenagement. As such, they weigh heavily in e.l l impcrtant menagement decisions.
Generally, the primary danger of such pressure is not tnat a firm will reduce costs by purposefully cutting corners on ss.fety but rather that in its real to return to efficient management, a ccmpany will discount safety consideratiens ,in the cecision making process. Such discounting may take a form not easily detectable. such as picking the low bid of a marginally competent subcontractor, purchasing marginally acequate materials. coing less testing. and reducing commitment tc vigorous cuality
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e.ssurance.
) In HL&P's case, this danger is particularly acute since HubP
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has alreedy established a cattern of ciscounting safety censidere.tions in less exigent circumstances. Aoparently. HL&P coes not take its self interest in safety as seriously,as the NFC espected an electric utility would. 47 Fed. Reg. 10.750-1 (1C92).
i Given HL&P's record to date. HL&P must conservatively be credicted to be more likely to commit safetv violations as a I result of financial pressure and more prone to such violations than another firm in a similar f inanci al situation.
. In the comment accompanying the ule chenge, the Commission said that enisting NEC insoectic, crocedures crevice suf2 cient assursnce of safetv. Id t As noted above, newever, tne resconses to financial cressure might well be a systemati: lowerinc of
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s.enderds not reacily detectable b 7 the secrecic NRC inscettien crocess.
In addition, the histery of this plant indicates a lack of-vigorcus inscection by Region IV cf the NPC. Many safety violetiens went undetected by the regiona'. of2 ice for years. The allegations of inspector intimidation and shoedv ccnstructicn were brought to the regional office in 1978. The.t office f ailed to confirm those allegations. Subsecuently, a team primarily from-outside the region did confirm the allegations leading to the Order to Show Cause in April 1950.
A second major f ailure by Region IV emerged when the Guadrex Report revealed a chaotic design and engineering.orocess at STNP that Regicn IV apparently knew nothing about.
Finally, there is the performance of this regional office in ressect to the Comanche Peak. nuclear project. a performance.that appears so fl awed that the ASLB in the Comanche Peak licensing pecceeding intends to incuire into the nature. scoce. and ccmoetence of NRC investigations.
The.NRC inspection process, at least in the case of STNP. is not a comoensation for possible safety violations resulting from increased financial pressure.
The Commission also said that the historical responsa ?. o financial problems has been postponement or cancellatien of construction plans. Ids However. HL&P faces severse s*1C action.
if it delays 5TNF. HL&P consicers cancellation a " c u T.c idea" even in the fece of multiple adverse ccnciticns, any one of wnicn could eli.minate STNP as a visble investment. Ege Exhibit 5.
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'cre ;mcortantly fer tne cecisi:n.o- an cesrst:n; i:cerse.
eJ:ar a plant begins ocerating. the costs of a srut cown exceec
, :Be- cc:Its of construction cel ays. Tne imTediate danger od net snutting a plant down when safety censiderations indicate that a shut down is necessary exceeds the dangers of construction flaws.
Normally, utilities are not terribly pressured by financial considerations in these situations, since the cost of the olent has been included in their rate bases. However. it is quite likely tnat the full cost of 5TNP will not be included in HLhP's rate base, and that, as a result, HL&P will experience financial cressure well into the project's coerating perioc.
The danger here is that HL&P will be tempted not to shut dcwn 5TNP when it should be shut down. For examole, HL&P mignt act be able to cover its power needs from other sources in case of a shut down. As already mentioned. HL&P's pcwer reserves are low. Should it have to shut down STNP. HLLP night not be able to efJord encensive purchases of power from outside sources, even if these sources were availeble. The resulting pcwer shortage could force black outs or brown outs detrinental'to public . safety anc health.
This kind of 'inancial oressure also potentially compromises NRC enforcement efforts. The NRC should be able to shut down a plant whenever necessary. It shculd not have to balance tne risks c4 continued operation against the risks of power shortages.
The NRC should not grant an coerating license unless it is sure chet the applicant can meet the f'oreseeeble costs c; shut deurs, r=ceirs, and modi ei c at i ons . Snruld H &P not ce mole to resr nese costs. the NFC might have to chcose between allcaing 1~
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. r t-s! 4e coer eti on or causing a4 1 n an ci al :hain eact;cn wr.icn A
cculd cestroy FLLF. The N;C rhoulc never ce ple:ed in su:h a s ,
situation. The time to prevsnt such a situation from develeging it during the license aoplication incuiry and decisicn. The AL5B
. s in this proceeding is fortunate in being able to address this
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question far earlier in the licensing proceeding tnen normal;.
In conclusion, this Board shduld review HL&P's ability to ,
o sefely construct and operate the South Texas Project. The extraordinary situation created b9 the deterioration of the general f inanci al climate for nuclear-related investnent, the w ct;rrent financial condition of HL&P, the actions of the FUC _of Tex a s , and tne litigation involv ng HL&P.and STUP takes this case beycnd the purpose of the NRC's generic e::emption of utilities from financial qualifications revi ew. The purpose 1 of tne e::emption was to avoid the costs of unnecessarv inquiry. In this '
proceeding, such inquiry is both necessery and imoortent.. The new centention of f ered by CCANP is, therefore, properiv before this Board as a contention meriting inqufry and meriting an 1 exceorion pursuant to 10 C.F.R. Section 2.758.
III. JUSTIFICATICN FOR LATE FILIN3
- 4. There is good cause for lateness in filing an ad,1 icnal '
contention.
CCAMP recognizes that the time f o,r filing content:ans -
e :oi red in 1G79. Eut CCANP centencs that the deteriorating investment climate f or nuclear projects. the dec1:ne in HL !G ' s 41n enci al condition, the ?UC actions noted in this moticn. enc i .1 i
tre sitigstion nent i cr.ec cnsn;s: -L(F's Jinenc171 rcs:ects cersibereoly over tne time since ellir.g contentions was Ji.et s , .
a;cr:ariete. There is. therefore, good ceuse for filing an edditicnai contention at this time.
B. 'Assur.ing good cause for lateness is established, the balencing of the five factors in 10 C.F.R. Section 2.714(a)(1-v?
determines whether the contentions are acnitted.
, According to previous rulings of the Commi s si on , a late fil?c contention is first examined to see if there is gocd reason for lateness and then a balancing test is concocted of tne Jive factcrs in 10 C.F.R. Section 2. 714 (a) (1-v) to determine if the contention is admitted. Eggifig Qgs acq giggitic CE02EOy (Diaclo Canyon Nec1_ ear Power Plant, Units 1 and 2), CLI-91-5. 13 NRC 361.
364 (1962).
The five factors are:
(1) good cause, if any, f o/ failure to file on tine; C2) the availability of other means whereby petitiener's intsrests will be protected!
.. (3) the extent to which petitioner's carticipaticn mav reasonabl y be expected to assist in develo:ing a scund,recore?
(4) the extent to which the petitioner's interest will be represented by existing parties 8 and (5) the extent to which the petitionee's participaticn will broaden the issues or delay the proceedings.
- 1. The additional contention is filed on time.
Z The events creating the basis Scr the new centention elacst
-11 occurred within the last Jour mcnths. CCANF fliec the
+f di i rr al cce -ation witnin a reascrable tice cf terit:c er's re:e:pt c4 the informaticn on which the contention is resec.
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cre-icul+-ly since gathering of vericus cccuments enc researching t.,e l eg al status of such a cententien were also recuired. The first factor, therefore, favors acnission.
C. Onl y admission of the new contention can crotect Intervenor interests.
Al though HLt<P's financial cutlook is also the subjact matter l of PUC hearings, only the Atomic Saf ety and Licensing Board has tne power to impose the remedy that CCANP seeks: refusal to grant the application for an operating license. No other party in this proceeding has raised the financial cualifications issue. Cnly admission of this additional contention will protect CCANP's interest.
- 3. Absent the admission of this contentien and CCANP's perticipation in litigating the contention. the record in this proceeding will be seriously incomplete.
The financial ability of HL&P to safely construct and operate STNP has ceen suddenly called into question by r.he recent events which form the basis of this contention. To ignore these recent developments would be to ignore si gni f i c ant new information of great importance to the decision on wnether HL&P shoul d continue to be the applicant 4cr the STNF ocerating license. In view of the serious safety risks which could result, thi s issue should be addressed on the record in this croceeding in an expedited fashion.
J. The issue of CCANP's interests being recresented ty existing parties is moot.
As an admitted intervenor, CCANP is'aireacy reco;niced as ecresenting en independent viewpoint from any other partv. This e scter is uniquely acplicable to a retition squesting interventicn status.
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- 5. Ths a:nission cf the nsh cente-ticn n il tr:Ecsr tre issues in tni s croceeding but w i ".1 not cause celay.
Ad5ission of the financial cuali41catiens centention w uld
- pen a new ares of inquiry for tnis proceedin;. But the irportsnce o# this centention far cutweigns the fact th at an edciticnal area of inquiry i s new to be uncertaken. Tne finenci al pressures set forth in this motion create a serious threat to the sefe completion and operation of STNF.
Phase I of this proceeding encompassed all of the issues ori ginally designated for expedited treatment. The record on past avality assurance anc construction de4iciencies is new completed.
When the Fartial Ini ti al Decision is issuec, the mendste of the Commission will be fulfilled.
Further expedited hearings are to ce scheduled or i .n sr i l y because new matters we.rranting expedited treatment (Quadrex)
-arose subsequent to the initial decisicn to hcid sucn hearings.
'The current schedule of construction calls 2cr the Jirst unit of STNP to go on line in 1987. Adcin; tne financial qualificaticns contention to the expedited hearings, will not
, result in any delay, should the Acolicents ultimetelv receive a license.
The fif th element weighs in f avor of admissicn.
A balancing cf the four relevant factors in 10 C.F.n.
Eecticn 2. 714 (a) ( 1 -v) favces the ac ni s s,i cn 24 al :ne new crtentiens.
IV. DIECOVERY AND FORTHE? HEAFIN95 U::n 3cceptence c4 this new ccntenti n, CCaNF moves 'cr a
- e. s. , s -.a-e, yaey ~ n.
. e. .er.
~CANF Jur ber moves tre no heerings ce s:necu.ec :n -mese
~: until all discovery, including discove-v :9 this new
- entention, is completec, so that the cemancs of :ns nearing crccess will not overlap witn tne denancs of dis:overv.
After the discovery ps-icd is co.plete. the nearings w ui t continue.
Resrectfullv su:mi ec Lanny Sinkin Counsel for Interven:r Citi: ens C ncernec About IJuclesr Pcwer. Inc.
2207 D Nueces Austin. To::as 73705
(,a ,)
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- v Deted: Meren 18, 198~
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I UNITED-STATES De,AMIRICA --
In-NUCLEAR REGULATORi COM, MISSION BEFORE THE ATOMIC SAFETY AND LICENEING BOARD
.n os '. M 21 . 3 6)~
1 CERTIFICATE OF SERVICE I here!y certify that copies of CITIZEN 5 CONCERNED AB3UT NUCLEAR POWEh (CCANP) MOTION FOR NEW CONTENTION was served my deposit in the United States Mail. first class pgstage paid tc the following individuals and entities on the ___j$___ of ne cn 1983.
Charles Bechhoefer, Esq. William S. Jordan, Esq.
Chief Administrative Judge Harmon and Weiss Atomic Safety and Licensing 1725 I Street, NW Board Panel Suite 506 U. S. Nuclear Regulatory Commission Washington, D.C. 20006 Washington, D.C. 20555 Jack R. Newman, Esq.
Dr. James C. Lamb, III Lowenstein, Newman, Reis &
Administrative Judge Axelrad 313 Woodhaven Road 1025 Connecticut Avenue, NW Chapel Hill, NC 27514 Washington, D.C. 20036 Ernest E. Hill Robert G. Perlis Administrative Judge office of the Executive Lawrence Livermore Laboratory Legal Director University of California U.S. Nuclear Regulatory Commission P. O. Box 808, L-123 Washington, D.C. 20555 Livermore, CA 94550 Mrs. Peggy Buchorn Atomic Safety and Licensing Board Executive Director U. S. Nuclear Regulatory Comm.
Citizens for Equitable Washington, D.C. 10555 Utilities Route 1, Box 1684 Atomic Safety and Licensing Brazoria, Texas 77411 Appeal Board U. S. Nuclear Regulatory Comm.
Brian Berwick, Esq. Washington, D.C. 20555 Assistant Attorney General for the State of Texas Docketing and Service Section Environmental Protection Office of the Secretary Division U. S., Nuclear Regul atory Comm.
P.O. Box 12548, Capitol Station Washington, D.C.
20555 Austin, Texas 78711 '
Tom Hudson, Esquire %
Baker and Botts Lanny'Sinkin
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One Shell Plaza Houston, Texas 77002
EXHI2IT 1 DOCKET NO. 4540 APPLICATION OF HOUSTON LIGHTING PUBLIC UTILITY COMMISSION AND POWEit CDPFANY FOR A RATE INCREASE OF TEIAS FINAL ORDER In public meeting at its offices in Austin, Texas, the Public Utility Commission of Texas finds that after statutory notice was provided to the public and to interested parties, a hearing in the above styled cause was conducted by an examiner who issued a Report containing Findings of Fact and Conclusions of Law, which Report is adopted in part and modified in part, as follows:
The application of Houston Lighting and Power Company (HL&P) is hereby GRANTED in part and DENIED in part, as set out in the Examiner's Report, as amended on November 16, 1982, subject to the following modifications:
- 1. Revenue Related Modifications A. The invested capital of HL&P shall be reduced by $2.8 million. HL&P had accrued this amount for a Liquid Metal Breeder Reactor Project which has
' since been terminated. This is cost free capital and should be deducted from invested capital.
B. The cost of equity shall be reduced by .5% to 16.35%. This is a. penalty for poor management, and shall remain in effect until NC&P's next rate case, and is not subject to recovery at some future time.
C. The following Findings of Fact & Conclusions of Law shalT be changed, as a result of the above modifications, as follows:
Page 68, - Finding of Fact No. 6,. should be changed to read:
- 6. NL&P's invested capital is valued at $3,951,544,000, as shown below:
(In Thousands of Dollars)
Plant in Service 53,962,797 Accumulated Depreciation 797.665 Net Plant 53,165,132 Construction Work In Progress .947,699 Property Held For Future Use 3,180 Nuclear Fuel 60,769 Working Cash Allowance 44,531 Materials and Supplies 42,257 Prepayments 3.267 Fuel Inventory 76,706 Less Deferred Taxes 330,228 Pre 1971 Investment Tax Credits 8,279 Customer Deposits 20,695 Property Insurance Reserve 8,120 Other Cost Free Capital 24,675 Total Invested Capital 53,951,544
- . l Docket No. 4540 Page 2
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Page 68, - Findino of Fact No. 7. Should read:
- 7. The rate base adjustments recommended by the examiner, including the additional adjustment of an increase to cost free capital of $2.8 million, which reduces invested capital by this same amount, and used in deriving Finding of Fact No. 6, are reasonable for the reasons stated in this Report.
Page 68 - Finding of Fact No. 9 -should read:
- 9. A balance of 34.625 percent net current cost and. 65.375 percent net original cost is reasonable for the purpose of calculating the adjusted value of HL&P's invested capital. Using these , percentages, the adjusted value of HL&P's invested capital is $4,938,387,000. See also, attached revised Exhibits I and II.
Page 69, Finding of Fact No.11, should read:
- 11. For reasons set out in this Report,16.85 percent return on common equity capital is reasonable for HL&P. An annual return of $499,435,000, which constitutes a 12.63 percent return on HL&P's invested capital, and a 10.11 percent return on the adjusted value of HL&P's invested capital, is fair and reasonable, is adequate under efficient management to allow HL&P to maintain its current credit rating and to attract the capital necessary for the proper discharge of its duties as a public utility, and is sufficient,to insure confidence in the financial integrity of the company.
However, the return on equity set forth above is reasonable only under circumstances of efficient management. Because the, evidence in this case establishes that HL&P has been imprudent in its management on many occassions in the past, such as its handling of STP, its purchase of coal without first test-burning it. Its unusual handling of ACNP in this docket, its use of an 80% capacity factor in its studies on ACNP when NRC data showed a 56% capacity factor to be prudent , as well as other instances which are supported by the examiner and the record in this proceeding, HL&P should be penalized by lowering its return on common equity by .5% to 16.35%. Thus, a return of $489,991,000 in this docket is proper and reasonable. This penal'ty shall remain in effect until the company's next rate case, and is 'not subject to being recovered at some future time.
Page 70, Findino of Fact No. 24, should read:
- 24. HL&P's adjusted test period revenue deficiency is found to be $182.5 million, rather than the $336 million as stated by the company in its rate-filing schedules.
6 Docke8 No. 4540 Page 3 Pape 71 - Conclusion of Law No. 3, should read:
- 3. HL&P proved that it is entitled to additional annual revenues of $182.6 million.
!!. Modifications - South Texas Nuclear Project A. The $1.7 billion ceiling placed on HL&P's share of the South Texas Nuclear Project shall be deleted, so as to avoid any implication that the Comission might be approving expenditures for STP to this level, or the implication that HL&P need not eventually prove that all dollars expended on STP over the years must be proved reasonable to the satisfaction of the Commission.
B. The following Findings of Fact and Conclusions of Law shall be changed, as a result of the modifications set forth directly above, as follows:
Page 69 Finding of Fact No. 16 should' read:
The record evidence establishes that HL&P has mismanaged STP. It is clear that HL&P is responsible for the delays at STP and for not responding to prot,lems at STP in a more timely f ashion. HL&P has shown mismanagement, not only 'in its handling of STP, but in its purchase of coal without first test-burning it, its unusual handling of ACNP, and its use of an 80%
capacity factor in it; studies on AC'4P when NRC data showed a 56% factor to be prudent, and various other instances which are supported by the Examiner's Report and the record herein.
Page 69, Finding of Fact No. 17 should read:
- 17. Protective measures having to do with the Court suit between HL&P and B&R should be adopted.
III. Modifications - Rate Design i
l A. The ratchet provision for Texas New Mexico Power Company shall be lowered to 75%.
B. The General Counsel's office shall institute an inquiry into the relationship between the firm rate for Dow relative to the firm rate for LOS-B customers. This inquiry shall be limited to the rates charged only to these customer classes, and shall be consolidated with the docket which j
will result from HL&P's filing of a tariff for interruptible power in conformance with the examiner's recocnendations,
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C. Findings of Fact should b'e changed, as a result of the modifications set forth directly above, as follows:
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Docket No. 4540 Page 4 Page 70 - Findinc of Fact No. 27 should read:
- 27. The record supports a change in TNP's ratchet to 75%; however, the record does not support TNP's theory that certain costs should not be allocated to TNP.
Page 70 - Finding of Fact No. 29 should read:
- 29. The record is inconclusive on whether Dow rates are discriminatory relative to LOS-B rates, and therefore an inquiry should be instituted to investigate the issue more fully. In the meantime, the rate design stipulated to in this case for Dow and LOS-B should be approved.
IV. Additional languaoe and Findings of Fact - Rate Design A. The Examiner's Report shall be amended at page 55, to include the entire stipulation on rate design, as follows:
Page 55 - after Number 2, add:
"As to revenue assignment, the stipulation provided that:
- 3. The methodology for assignment of revenue from the customer classes provided by staff witness Kent Saathoff is also appropriate. Each rate class should be assigned revenue to move it one-half the way toward a relative rate of return of unity where possible. However, no class should receive more than approximatstly one and one-half or less than one-half times the system wide percentage increase in total revenue. The only exception should be the Public Utility class which should be assigned its cost based revenue."
- 8. Finding of Fact No. 26 shall be changed to read:
- 26. Staff's allocation methodology and methodology for assignment of revenue from the customer classes is appropriate in this docket for the reasons stated in this Report."
C. Finding of Fact No. 34 shall be added, as follows 34 HL&P's rate design for the residential class is reasonable.
V. Affiliated Fuel Costs - Modification The examiner's recorrendations shall be modified so that HL&P shall file a tariff and associated costs by December 20, 1982 for costs to be set for the period April 1, 1983, through June 30, 1983. The formula for UFI fuel V - - .-
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Docket No. 4540 Page 5 costs set forth in the Examiner's Report, and as modified by the examiner, shall remain in effect only until April 1, 1083.
VI. Treatment of Taxes Associated with Allen's Creek Nuclesr Project For purposes of clarification, the Comission hereby adopts the examiner's treatment of the tax benefits associated with the $166 million of expenditures disallowed for the Allen's Creek Nuclear Project (ACNP).
This $166 million unrecoverable portion of ACNP expenditures will be written off for tax purposes and will result in tax savinos to HL&P.
These savings should properly inure to the benefit of the ratepayer as a credit to tax expense. The tax benefit should be spread over the ten-year amortization period adopted herein for ratemaking purposes. The examiner's tax calculation, which calls for HL&P to bear the burden of the
$166 million disallowance, after taxes, is explicitly approved herein.
IT IS FURTHER ORDERED that:
- 1. HL&P shall report to this Commission within twelve months before the filing of a rate case in which it intends to include South Texas Nuclear Project in rate base.
- 2. HL&P shall report to the Commission within six months before implementation of any substantial changes associated with the STP project.
- 3. HL&P shall pass through to ratepayers any amounts the courts may award HL&P in its lawsuit against Brown and Root in HL&P's next rate case following such award.
4 Any amounts assessed against HL&P in its court suit, including expenses for the suit it has filed against Brown & Root, shall net be recovered in any manner from HL&P ratepayers.
- 5. HL&P is hereby advised that if, in the future, it incurs abnormal customer outages, this Comission will give serious consideration to ordering neighboring utilities to serve existing or new customers within HL&P's certificated service area. .
- 6. HL&P shall pass through to ratepayers, in its annual rate filings, all recoveries associated with the Allen's Creek Nucicar Project, including all amounts for equipment sold, and costs avoided through negotiation of existing contracts, or other arrangements. These recoveries are to be used to reduce the unamortized balance of approximately $105 million.
Thus, it is to be made clear that recoveries from salvage shall inure to
Decket No. 4540 Page 6 the benefit of customers and the balance yet to be amortized of $195 million shall be reduced by any such recoveries. However, any recoveries associated with equipment acquired, contracts made, or any other arrangements, which can be clearly shown to be related to the period January 1,1980 to August 26, 1982, shall not be used to reduce the i
unamortized balance of $195 million. The method of allocation by which the amounts associated with ACNP and STP shall be refunded to each customer class shall be litigated in HL&P's next rate cast.
- 7. Beginning with February 1983, billings, HL&P shall not list individual cost of service items, such as fuel, separately on customer bills.
- 8. HL&P shall file a tariff, and details of costs associated with its affiliated fuel costs, by December 20, 1082, for the purpose of setting fuel costs for affiliated interests for the period April 1, 1983 through June 30, 1983. The procedure shall repeat itself on a quarterly basis.
The next tariff filing should then be filed on or before April 1,1983 for the quarter beginning July 1, 1983. No affiliated costs shall be passed through automatically to HL&P ratepayers after April 1, 1983.
- 9. HL&P shall file a proposed interruptible tariff, as recommended in the Examiner's Report, within ninety (90) days of this Order. General Counsel shall_ file an inquiry into the relationship between the firm rate for Dow relative to the firm rate for LOS-8 customers. This inquiry shall be limited to the rates changed only to these customer classes, and shall be consolidated with the docket which will result from the filing of a proposed interruptible tariff by HL&P.
- 10. HL&P shall file a revised tariff in accordance with the Opinion, Findings
' of F5ct, and Conclusions of Law herein sufficient to generate revenues not greater than those prescribed in this Order. HL&P shall file a copy of its revised tariff on all parties of record at the same time that it is filed with the Commission. The parties shall have ten (10) days from the date of such filing to present their written objections to the revised f
I tariff, if any, to the Comission staff for its review and consideration.
The Comission staff shall have twenty (20) days from the date of such filing of the revised tariff to review it for approval or rejection. The tariff shall be deemed to be approved and shall become effective upon the expiration of twenty (20) days after filing, or sooner upon notification by the Comission Secretary. In the event of rejection, HL&P shall be notified a'nd a copy sent to the intervening parties herein by the examiner, and HL&P shall have fifteen (19) additional days to file an I
amended tariff and the same procedure shall be repeated herein. The revised and approved rates shall be charged by HL&P for electricity consumed after the tariff approval date. This Order is deemed to be final
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Docket No. 4540 Page 7 on the date of rendition. Approval of the tariff, for all purposes, shall be deemed to be final on the date of its effectiveness either by operation of this Order or by notification by the examiner, whichever occurs first.
If the date of approval of tariff falls within HL&P's normal customer billing cycle, HL&P is authorized to prorate customer bills to charge customers for consumption each day of the month under the appropriate tariff in effect on that day of the month.
- 11. All motions, requests, applications, and requests for Findings of Fact and Conclusions of Law not expressly granted herein are denied for want of merit.
$1GNED AT AUSTIN, TEXAS, on this [N day of December, 1982.
PUBLIC UTILITY COMMISSION OF TEXAS
$1GNED: -
Y. MCAK ROLLIN5 /
SIGNED:
pRGE3M.COWDfN SIGNEDI /. 6 -
T. G. SMITH ATTEST:
l AMiit$3,O . &
R DA C7)BERT RYAh A NG SECRETARY OF THE COMMISSION tab 1
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Exhibit l N
HOUSTON LIGHTING & POWER COMPANY--4540 REVENUE REQUIREMENT (000's)
Test Year Company Company Staff Staff
- City City Examiner Examiner Description Per Books Adjustments Test Year Adjustments Test Year Adjustments Test Year Adjustments Test Year Fuel $1,673,251 $129,325 $ 1,802,576 $ 110,803 $ 1,913,379 1 30,732 $ 1,033,308 $ 110,803 $ 1,013,379 Purchased Power 130,764 95.139 225.903 9,667 235,570 0 225,903 9,667 235,570 Operations and Maintenance 330,850 55,871 386,721 (84,540) 378,868 (7,260) 379,461 (83,590) 379,818 Extraordinary Amortization 3,044 91,112 94.156 (38,329) 55,827 (91,112) 3,044 (71,600) 22,556 Depreciation !!7,316 16,257 133,633 0 133,634 [4,933) 128,700 0 133,634 Other Taxes 95,012 22,495 117,507 74,663 192.170 L2,409) 115,098 72,593 190.100 Franchise fees 60,166 16,521 76,687 - - L2,621) 74,066 -
Interest on Customers Deposits 0 1,225 1,225 0 1,225 0 1,225 0 1.225 Federal Income Taxes 178,222 118,223 296,445 fl9,132) 277,313 30,673) 265,772 [43,263) 253,182 R1 turn 354u694 165 305 519.999 fl9a552) 500,447 16 655) 503.344 f30 008) *489,991 Revenue Requirement T2 9 0 ,379 T7 43 $ 3,654,857 7 33,581 $ 3,688,434 IN 931) $ 3,529,921 f(15,397) $ 3,619,456
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Less Other Revenue $ 74,218 $ 17,560 $ 91,778 1 (1.J55)$ 90,423 $ (2,621) $ 89,157 $ (2,850) $ 88,928 Fuel Revenues 1,779,830 204,175 1,984 005 120 470 2 104 475 30,732 2 014 737 $ 120 470 $ 2 104 475 Base Rate Revenue 31,08'J ,331 T4 W,735 F T3, 7i,,D69 TTH5,,5_14) , 91,3 6 5(153,042) d 7K*D27 D51*dl7) D ,,47&*D5]
Less Test Period Base Rate Revenue Adjusted 1 (1,243,371) 1 (1,243,371) $ (1,095) $ (1,244,466) $(1,243,371)
Base Rate Revenue Def. lency 335,698 250,165 $(154,137) $ 182,682
.$... ....... $... ....... $....181.,561
. .. ... ***een.....
- Based on Staff Ex. No.17, revised downward af ter hearing T
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EXHIBIT 2 00CXtT NO. 4540 APPLICATION CF HCUSTON LIGHTING PUBLIC UTILITY CClHIS$!CN AND POWER COMPANY FOR A RATE INCREASE OF TEXAS Examiner's Report I. Procedural History On June 16, 1982, Houston Lignting and Power Company (HLLP), filed an application to change rates in the unincorporated areas it serves, effective July 22, 1982. The
, pr'oposed changes are expected to result in a system-wide annual base revenue increase of $336 million, or approximately 10.0 percent of the adjusted total operating revenues for the test year ending March 31, 1982. All classes of customers are affected by the proposed rate change.
A prehearing conference was held on Friday, July 2,1982, at which time the tariff changes were suspended for the 120 day statutory suspension period, and intervenor status was granted to the following parties:
Texas Industrial Energy Consumers (TIEC)
Texas-New Mexico Power Company (TNP)
Greater Houston Hospital Council (GHHC)
Dow Chemical Canaany (DOW)
St. Regis Paper comoany (St. Regis)
City of Houston (Cities)
Dickinson Independent School District (District)
Ccatittee for Consumer Rate Relief (CCRR)
City.of Baytown (Cities)
Diamond Shamrock (DS)
United States Steel Corporation (USS)
Houston Retail Merchant's Association (HRMA)
City of Pasadena (Cities)
City of Lake Jackson (Cities)
Coalition of Cities (Cities)
City of Freeport (Cities)
Department of Energy (DOE)
Mockingoird Alliance Dr. Jonn Doherty A procedural schedule was agreed upon and a hearing date set for August 30, 1962.
A prehearing conference was held on August 26, 1982. As a result of this conference, several issues in this case were resolved throt;gh stipulations. These stipulations will be explained in this Report where appropriate. The hearing was rescheduled to begin Septemoer 2,1982, to give parties time to revise their testimony after MLAP formally announced cancellation of its Allen's Creek Plant Unit No. 1, at the August 26 1982, prehearing conference. The hearing continued until September 16, 1982; initial briefs were filed October 1; and' reply briefs were filed October 8,1982.
On August 30, 1982, a hearing was held for the purpose of hearing protestant's coments in this case. Numerous protestants appeared. The major comolaint concerned bills for electricity which the customers felt sere beyond their ability to pay; e
Docke9 No. 4540 Page 17
- 07 She-win notes Gat the financial integrity test relates to allowing utilities levels of earnings that permit the achievement of appropriate market-to-book ratios, so
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that the sale of new equity does not impair the previously comitted cacital. He stated that if the market price of a utility stock remains. below book value for 4 long period of time, it constitutes prima facie evidence of the inadequacy of earnings and the impairment of cacital. Dr. She-win felt that an appropriate target market-to-book ratio is that achieved by industrials of similar risk to utilities, which have averaged 100-120 percent in the three- and five-year periods ending 1981. According to Dr. Sherwin, HII has not been able to maintain its financial integrity since 1977 because the market price of its stock has been below book value in every quarter, with one exception, for more than four years. He felt that the canpany's integrity had not only been impairad, but the degree of impaiment had increased recently, as indicated by the decline in the market-to-book ratio to an average of 80 percent in the last two years.
Dr. She win also undertook an analysis of the relation between returns and market-to-book ratics, comparing HI! and selected sangles of industrials. This analysis showed that investors perceive HI! as relatively more risky than the selected sample of industrials. Dr. Sherwin blamed the perception of more risk on the delay in the completion of South Texas Nuclear Project HMP's declining reserve margin, and the hign level of construction expenditures which would be necessary in the future to meet HO P's needs. Because of this higher perception of risk, Dr. Sherwin testified that it follows that the required return to acheive a similar market-to-book ratio lies above the 15.75-16.75 percent returns suggested by the comparable earnings test. According to him, the relatively higher risks call for an upward adjustment of approximately 1.0 percent to the results of the canpar'able earnings test.
The discount cash flow technique seeks to infer investor cacitalization rates from stock market data by reference to dividend y'ield and prospective growth in dividends and is generally represented by the following formula:
k = 0, + g
'o For price, Dr. Sherwin used the highest price in the fifty-two weeks ended May 20, 1982, or 521.75. The dividend was calculated at $2.16, the current dividend rate.
Dr. Sherwin projected the 1982-83 yield for HII in the range of 10.0-11.0 percent.
To estimate the growth rate, Dr. Sherwin reviewed annual growth rates in HII's earnings, dividends and took values, which showed wide fluctuations from one year to the next; he concluded these rates ;ermitted no reasonable inference as to investor expec*ations. Comocund ten-year dividend growth rates, computed on the basis of least souares for successive periods, snow a distinc* upward trend, from 7.1 to 8.9 percent.
The growth rates in book value show a declining trend frem 8.2 to 6.9 percent.
Dr. She* win concluded that a longer-tem growth rate for HII's total operations is in the range of 7 7.5 percent, but that the growth rate for utility operations is sopr:ximately 6.5 percent.
Docke? No. 4540 Page 29 margin ,in 1988 is due to the expiration of the existing firm purchased power-contracts. (See Exhibit IV, attached, which depicts these reserve margins.)
Historically, the minimum acceptable reserve margin throughout the regicn assignated as the Electric Reliability Council of Texas (DCOT), of wnich HL&P is a memoer, has been 15 percent. As already noted, HL&P's expected reserves will fall below the stated minimum reserve level in 1988. Implicit in even this low reserve level are the assumptions that HL&P will keep its construction program on schedule, be successful in its load managment program and conservation efforts, and attract new interruptible loads and co-generation participation.
Dr. Guy also testified that purchased power is an inmortant part of the corporate plan in the 1980's. Exhibit IV and Exhibit V, attached, show the impact of purchased power on system reserves. For example, in 1985, purchased power will make up over 68 percent of the total reserve capacity of 16.2 percent.
Even with the timely empletion of HL&P's construction schedule, and the success of other progens previously mentioned, this utility will still have reserve margins
=nich remain close to the minimum set by B COT.
The examiner salieves that while HL&P's service is adequate st the present time, the quality of service and reliability could diminish to unacceptacle levels in the near future if even one of HL&P's plans falls behind schedule. It is certainly possible that this may happen. For exmple, HL&P expects to shave its peak by 1200 MW in less that ten years; yet currently, only g MW, or approximately .07 percent of load, has been shaved. As is set forth in more detail in the examiner's discussions on the Allen's Creek and South Texas Nuclear Projects, the record in this docket indicates that HL&P may have been overly optimistic in previous future planning predictions. The examiner does not consider this a sign of mismanagement E 3, but ooes believe that based on " the record developed in this case concerning the history of STP, the coal-burning problem at Parish 8, the Allen's Creek cancellation, and the f act that HL&P has lost both its interruptible custeers, this Consnission should exercise caution l in accepting at f ace value the company's predictions.
Therefore, the examiner recersnends adoption of staff's proposal that HL&P be put on notice that if more than normal cust mer outages are experienced, serious consideration will be given to ordering neighboring utilities to serve existing or new customers within HL&P's certificated service ' area, and decertificating HLLP to those areas.
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Dockea No. 4540 Page 31 importantly, Ms. 81 eenthal testified that these reports reveal that. HL&P took no action to cor*ect the proclems which were foi.nd.
A delay of nine months from Decameer 1,1981 to August 31, 1982 also occur *ed.
The cause of such delay was HL&P's removal of B&R as architect / engineer (A/E) and S&R's withdrawal as constructor. According to Mr. Goldberg, HL&P had to relieve S&R of its position as A/E because B&R could not " bring together talent fast enough to make this joe (STP) move at a rate that we felt we could afford." While Ms. Blaenthal did not challenge the decision to relieve S&R, she testified that the B&R termination could have been avoided (1) if HL&P had exercised better judpent in 1973, or, (2) if HL&P had exercised better judpent between 1975 and 1980. According to her, HL&P should have realized in 1973 that the c:rneination of its inexperience and B&R's inexperience as an A/E would lead to the problems which it encountered fra 1975 to 1982.
Furthermore, between 1975 and 1980, HL&P should have rea'lized that it needed to exe-t more control over B&R, which according to her, it failed to do.
Based upon this evidence of alleged mismanagement and the recognition that current ratepayers are paying for such mismanagement by inclusion of CWIP in rate base, Ms. 51umenthal urged that STP warranted special treatment in this case; therefore, a cenalty/ reward syste for HL&P's management at STP was suggested. Details of these recomendations have been set out above.
C. CCRR CCRR contended that all of the problems at STP were caused by a simple f act
. situation, as follows: a utility c:ppany with an inexperienced and undermanned nuclear engineering staff hired an inexperienced architect-engineer to construct a large, complex nuclear generating station in record time. In order to obtain expeaience by building STP, the contractor (B&R) made representations regarding duration and cost of plant construction which it could not realistically fulfill, and which the project manager (HL&P) was too ill-informed to recognize as unreasonable until four years into construction and the expenditure of 52 billion.
CCRR also alleged that HL&P did not make substantial efforts to control and manage the project until 1978, when the South Texas Project Task Force was for ned. The efforts of this task force culminated in the 1979 Baseline Study which was a comprehensive project status review and systematic effort to reforecast project cost and construction duration. However, CCRR foun'd f ault with the f act that this study did not begin until after two years of what *it characterized as virtually unmonitored const*uction activity. Further, CCRR alleges that this fact accounts for MLLP's ignorthce of the situation until 1978, at which time they discovered that actually less than 10 percent of th'e recuired design work had been c:noleted prior to construction, instead of the 50 percent recorted by the contractor. A comprehensive engineering assessment Dy the Company did not take place until the Quacrex Reoort was comissioned in 1980 by Dr. Goldberg, five years after initiation of construction.
- Dock t No. 4540
- Page 37 The record which the company must develop to present to this Conrtission in the event of any future Cost overruns should cause it to pay much closer attention to pro 0lses of any nature at the project. HL&P's managment capanility at STP will be directly tied to its ability to include in rate base in the late 1980's all the costs it incurs in Constructing $IP.
Furthermore, placing the burden on HL&P to come forth with the proof on issues of cost overruns and delays means that staff and intervenors will not have to unde *.ake what this examiner considers to be an almost impossible task at present, or six years fr p now, of sorting out all the problems with this project for the years 1975-198g.
Another benefit of this scheme is that staff and intervenors will be able to concentrate on allegations of mismanagement for the years 19754 when the plant goes on line. As already mentioned, the lawsuit on this matter may have resolved the issue of blue by that time. At the very least, it will provide a great deal of information not available at this juncture.
The examiner also suggests that HL&P infor-n the Connission, and all interested parties, twelve months in advance of its intention to recuest rate base treatment for the first and second units at STP.
It is suggested, as well, that the ecmpany inform the Connission and all interested parties o.f any major changes conteplated in this project, at least six months in advance of any planned impleentation date. For example, the Bechtel forecast showed that deferral of Unit 2 at STP for five years would cost $1.284 billion. Cancelling STP Unit 2 in September 1982 would cost $368 million.
HL&P should also be ordered to pass through to its ratepayers any mount the courts may award HL&P in its lawsuit against B&R. In this regard, HL&P should present separate schedules in its annual rate case filings showing the costs associated with l
this lawsuit and any recoveries.
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Also, the Connission should not allow any amounts the courts may recuire HL&P to pay B&R to be recovered from HL&P's ratepayers either through inclusion in the cost of service or through inclusion in Account 107 as a cost of the project.
i The record indicates that HL&P's ratepayers have paid approximately $111.8 million l
in return alone due to the inclusion of some or all of STP in CVIP over the years.
This figure does not include any amounts whicti may have been paid price to the time this Connission took jurisdiction over HL&F's rates. The examiner agrees with the Cities that in light of murdgeoning cost to ratepayert, there should be some assurance that these units will ultimately bec:sne used and useful in providing service at the le=est cost possible.
HL&P continually refers to the challenge of the future faced by the comoany, this connission, and presumably, its ratepayers. The examiner agrees that this challenge
Docke2 No. 4540 Page 40 As a result c# its studies on ACNP, HL&P decided to accelerate the inservice dates for Limestone and Malakoff units by one year because without the acceleration of the construction of these units, and under the asspotion that the in-service dates for the South Texas Nuclear Project would be delayed to 1987 and 1989, HL&P generating reserves would f all to accroximately 10 percent for 1986 and 1988. If the decision was made to cancel the Allens Creet Nuclear Project, the company could allocate its financing capacility to accelerate the in-service dates of the Limestone and Malaxoff units and to maximize capability during the 1980's.
Mr. R. S. Letbetter testified concerning the effect of temination of ACNP without appropriate rate relief. According to him, if HL&P were to teminate ACNP without being granted rate relief to recover its investment in the project, its investment would have to be written off against income. This would result in an after-tax charge against incane in excess of $200 million. Mr. Letbet'ter stated that these actions would prohibit HL&P frers obtaining capital from the sale of mortgage bonds or preferred stoc for a period.cf up to twelve months because the provisions of the Mortgage and Charter could not be met. This would effectively shut cown HL&P's construction program and lead to significantly greater costs of the units under construction.
Mr. Letbetter also explained that there were practical limitations to the amounts of external funds which can be raised. Casnon stock of $200 million and preferred stock of $100 million are the maximum enounts that HL&P could expect to sell annually over the next several years. Internally generated funds and sales of dent would have to account for .the reainder of the funds needed. The following chart depicts the capital requireents of the construction progran including and excluding ACNP for the period 1983 - 1987, the time frame most critical in terms of capital requirements.
Construction Program Construction Program incl. Allens Creet excl. Allens Creet
($ millions) (3 millions) 1983 $1,320 $1,136 198a 1,514 1,300 1985 1,551 1,316 1986 1,740 1.496 1987 1,593 1,471 l Total $7,718 $6,719 I
! By reeving ACNP from the construction program, approximately 31 billion of cacital requirments would be eliminated. The financing plan for the construction program without ACNP still entails consideraole difficulty, but. Mr. Letbetter felt, is One which may be achievable if adecuate rate relief is granted to maintain HL&P's financial integrity.
The following table depicts the additional funds necessary tc finance the Construction program witn ACNP versus one excluding the project. The amount of funds I from internal sources is assumed to be ao percent of the total additional recuireents.
I I - - - _
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Docket No. 4540 Page 52 Also, while a different fixed cost factor may not be necessary for nuclear plants, it is d,1fficult to understand why HL&P did not include costs in its studies such as, insurance expense and interim capital replacment, which are costs which are cbviously highea for nuclear plants than for coal.
Also, operating experience through 1976 indicated that HL&P did overstate C&M costs for nuclear plants to some degree. While one might quibble with Mr. $sith-Johannsen over the actual underestimation of nuclear costs by HL&P associated with ACNP, all of the factors he mentioned, taken together, indicate that HL&P ignored historical data available at the time these studies were done and ignored same of the more obvious risks associated with nuclear plants in its studies. The result: the studies were, skewed in favor of the ACNP option.
However, these studies are not the only evidence of HL&P's imorudency associated with ACNP. When one takes into account the fact that fran 1976 to 1979 capital costs for nuclear plants continued to escalate more rapidly than those for coal, the safety regulations pronulgated by the NRC increased substantially as a result of the Three Mile Island incident, and ACMP bec ue stalled at the NRC in 1979 because of intervention at the construction permit hearing, the delay in cancellation can be characterized as clearly imprudent.w Finally, HL&P's difficulties with STP should have been factored into its studies on ACNP. ,
Staff witness Lee, who has followed this project over the years, also testified on ACMP. He indicated he was not surprised that ACNP had been cancelled and had in the past doubted whether the project would ever be a reality when HL&P began having problems at the NRC.
The examiner will not second-guess HL&P on its reactivation of ACNP in 1976, but agrees with CCRR that, based on all the circumstances mentioned above, the plant should have been cancelled sometime during late 1979-early 1980. Therefore, expenses incurred from approximately January 1,1980 to August 26, 1982, of approximately $160 million, should be reoved from the total amount to be mortized of $361.1 million. The 1361.1 million is staff's total to be amortized after a minor adjustment to HL&P's total of $362 million. Thus, a total of approximately $200 million should be amortized on a straight-line basis over ten years. The ten year straignt-line method more fairly assesses the burden cf this plant on HL&P ratecayers. HL&P's method is based on a method of accelerated depreciation which has been consistently rejected by this Canaission. Furthermore, it is designed to produce cash flows to achieve financial integrity measures which the examiner believe's to be beyond those needed to maintain HL&P's bond rating.
- 4assive interventions occurred in 1979 at the NRC. The examiner agrees witn HL&P that it need not have cancelled ML&P solely because of this. However, a serious evaluation of wnether the project would ever get off the ground was called for in 1979 before l another $160 million was poured into the project.
, i I
I l _
EXHkBIT3 1 don't know where all this will* be in 1988. I hope some 2 of us will still be involved in this business.
3 Open the envelope in 1988, look back. And 4 to the extent you might have been wrong on any one of 5 those estimates, look back and say: Were you imprudent 6 or were you simply relying on the best judgment you 7 ,
could make at the time on the best expert opinion you i- i 8 ! could bring to bear on the problem? And that, U
9 hgentlemen, is the difference between what I think HL&P l il 10 ijhas done and what the Examiner has concluded that they i
11 I do.
i, 12 'l CHAIRMAN ROLLINS: Thank you.
13 Mr. Cowden, do you have other questions of l l 14 :l any of these parties?
15 COMMISSIONER COWDEN: No, sir.
16 CHAIRMAN ROLLINS: Commissioner Smith?
17 COMMISSIONER SMITH: No, sir.
. 18 CHAIRMAN ROLLINS: Mr. Cowden, do you 19 wish to make your remarks and recommendations?
20 COMMISSIONER COWDEN: Mr. Chairman, I 21 want to join those who have commended the Examiner for 22 the job she did on this case. I think she did very, 23 very well in a very, very difficult case. And I i
24 commend her for the job that she did.
25 I also want to commend the lawyers who have r4 h HICKMAN KENNEDY REPORTING SERVICEINC, 7800 SHOAL CREEK BOULEVARD, SUITE 346 WEST AUSTIN TEXAS 78757 (512)458 3297
nn 1 argued here this morning. And I think Mr. Webb is 2 truly able and eloquent, and I think he represents his 3 client very, very well.
4 I think it is important for those who are 5 not lawyers who are here who are interested to 6
l recognize that the job of the lawyer is to represent 7 his client's position and to argue those points which 8 are most in-his or her client's favor. And I j 9
lunderstandthat. I recognize it. And I think i
10 g generally speaking that we have pretty good I 11 ! representation before this commission.
i 12 j Mr. Chairman, I am going to recommend the 13 adoption of the Examiner's Report with several changes. I 14 ' I told Ms. Williams this morning that my changes should 15 not be considered by her to,be personal. And certainly 16 I.think that she accepts that, that it is our 17 responsibility ultimately to make a determination, that O
18 our Staff makes recommendations and the Commission
! 19 makes the final judgment, exercises final judgment.
20 I do not think that the Commission is in a 21 position at this time to make a proper -- to make a 22 determination on a proper amount for a ceiling to be 23 placed on the expenditures of the South Texas Project.
24 It does have some appeal. But I ,think that the 25 $1.7 million ceiling placed on HL&P's share of the South h HICKM AN-KENNEDY REPORTING SERVICE INC.
7800 SH0AL CREEK BOULEVARD. SUITE 346-WEST AUSTIN. TEXAS 78757 (512)458-3297
81 1 Texas Project should be remove,d from the case.
2 My concern is that, by implication, EL&P 3 m'ight believe that the Commission is approving 4 expenditures for that level and would, in turn, only 5 need to prove up any expenditures in excess of that 6 amount. When EL&P is prepared to put South Texas into 7 ,
service -- and I truly believe and hope that that will l
8 come about -- and comes before the Commission for 9 ,; inclusion -- for its inclusion in the rate base, the il 10 jjCompany, I think, would then have the bur' den of proof 11 on the entire amount expended. And I think they 12 recognize that and accept it. And it would be 13 inappropriate for us at this time, Mr. Chairman, and 14 Mr. Smith, to impliedly approve an amount at this time.
15 The Examiner provides for a change in the 16 Company's method of determining fuel cost for fuel 17 which comes through.UFI. She requires the Company to 18 prepare and file a tariff no later than March 30, 1983, l'
19 for the quarter which begins July 1, '83, through
'20 September 30.
21 I recommend that these dates be moved l
22 forward about three months and that the first date, 1
23 March the 30th, '83, be moved to December the 20th, 24 1982, and that this change in calculation of fuel 25 through DFI being effective April the 1st, '83 -- for 1
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h HICKMAN KENNEDY REPORTING SERVICEINC.
7800 SHOAL CREEK BOULEVARD. SUITE 346-WEST AUSTIN. TEXAS 78757 (512)458 3297 l
82
)
I the quarter beginning April the 1st., '83, through June j!
2 30th, '83.
3 F~or clarification, Paragraph 8 of the Order 4 itself should be changed to read:
5 "HL&P shall file a tariff and details 6 of costs associated with its affiliated fuel 7 cost, no later than 20 days after rendition of 8 the Final Order in this docket, for the 9 j purpose of setting full cost for affiliated 10 interest for the period April 1, '83, through 11 June 30, 1983.
12 "The procedure shall repeat itself. The 13 next tariff filing should be filed on or before 14 April 1, '83, f or the quarter beginning July 1, '83.
15 "No affiliated costs shall be passed 16 through automatically to HL&P ratepayers after 17 April 1, 1983." ,
4
- 18 As to the handling of Allen's Creek, I 19 recommend the Examiner's result, which requires 20 S166 million be removed from the amount to be amortized, 21 the remaining approximate 195 million to be amortized 22 straight line over ten years.
23 I think the Report is clear, but if not, I 24 want to make it clear that any amounts received from 25 salvage or in negotiation of termination of outstanding r
\a-h HICXMAN KENNEDY REPORTING SERVICEINC.
7800 SHOAL CREEK BOULEVARD, SUITE 346 WEST AUSTIN. TEXAS 78757 (512) 458-3297
. I
R1 1 , contracts or other arrangement; would be used to reduce 2 ,
the outstanding unamortized portion of the approximate 3 l S195 million. And when I say " unamortized," I mean the 4 balance which remains to be amortized which has not yet 5 been amortized at the time of any receipt from any 6 funds from salvage or negotiation of contracts.
7 I suggest the Order be changed to make clear i
8 j the benefits of such salvage shall inure to the benefit 9 llofthecustomersandthat the balance to be amortized 10 d' should.be reduced.
i 11 CHAIRMAN ROLLINS: Mr. Cowden, with 12 l regard to that recommendation --
13 COMMISSIONER COWDEN: Yes, sir.
14 ! CHAIRMAN ROLLINS: -- part of the 15 exceptions noted that there was to be no recovery of 16 funds expended af ter January 1980. Would the 17 implication follow that any recovery of funds from 18 equipment ordered or payments made af ter January 1, 19 1980, be excluded from this application to the
'20 amortized funds?
21 COMMISSIONER COWDEN: I didn't follow 22 your question, Mr. Chairman. If you'll give it to me 23 one more time.
24 CHAIRMAN ROLLINS: .All right, sir.
25 You're suggesting that any recovery of equipment r w h HICKMAN KENNEDY REPORTING SERVICEINC.
7800 SH0AL CREEK BOULEVARD. SUITE 346-WEST AUSTIN. TE"AS 78757 (512)458 3297
Rt I
1 l ordered -- from equipment ordered and subsequently 2 salvaged or any settlements of contracts --
3 COMMISSIONER COWDEN: Yes, sir.
4 CHAIRMAN ROLLINS: -- be utilized to 5 reduce the S195 million.
6 -
COMMISSIONER COWDEN: That's correct.
7 CHAIRMAN ROLLINS: $195 million relates I
8 [ to those funds expended prior to January of 1980.
n 9 il COMMISSIONER COWDEN: That's correct.
10 jj CHAIRMAN ROLLINS: And those funds 11 expended after January of 1980, 166 million, are not to 12 be recovered. It seems to me that any salvage related l
13 to commitments made af ter January 1, 1980, should not 14 I be applied to the amortization. -
I 15 COMMISSIONER COWDEN: I agree with that, 16 and I'm sorry I didn't understand your question. But 17 that is correct. That's correct.
r 18 CHAIRMAN ROLLINS: All right.
4' 19 COMMISSIONER COWDEN: I think that's 20 implicit in the recommendation I have tried to make.
21 CHAIRMAN ROLLINS: All right. Thank 22 you.
23 COMMISSIONER COWDEN: The Examiner 24 requires the tariff be filed rela.tive to an 25 interruptible rate and considered in a separate docket ,
l L i h HICXMAN KENNEDY REPORTING SERVICEINC.
7800 SHOAL CREEK BOULEVARD SUITE 346-WEST AUSTIN TEXAS 78757 (512)458 3297 .,
I
95 1 lwithreferencetoDow. .
2 My recommendation is to expand that ir.q u i ry ,
3 and I would instruct, if my recommendation is adopted, 4 to instruct the Staff tc file an inquiry relative to 5 the firm rate for Dow and the relationship between it 6 and LOSB rate, both matters to be considered in a 7 separate single docket, that the consideration in that 8 ,
docket be limited to Dow and the LOSB and then proceed ;
9 ! to a final resolution of the questions raised in this i
10 docket, some of which the Examiner states cannot be 11 evaluated to determine -- and I quote - " difference or 12 similarities between Dow and LOSB so as to justify an 13 equal and relative rate of return or equal base rate 14 revenue requirement for the two cases."
15 It may be that because of the multitude of 16 issues considered' otherwise, the relationships between 17 Dow and HL&P and Dow and LOSB have not been developed 18 to the extent that it should have been or that it could l* 19 have been or that it might have been.
l The inquiry, if 20 the recommendation is adopted, will pursue both of 21 these relationships, Dow and its interruptible rate and
- 22 Dow as to LOSB, and try for one time, finally, to 23 settle the issue.
24 And let's dedicate the time, manpower
(
,- 25 necessary -- man and woman power; excuse me, ladies --
1
+-
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,f h HICKM AN-KENNEDY REPORTING SERVICE INC.
7800 SHOAL CREEK BOULEVARD. SUITE 346 WEST AUSTIN. TEXAS 78757 (512)458-3297 f
I
Of li 1 'l to try to get the issue settled.
l 2 , j CHAIRMAN ROLLINS: Do .I understand that 3 your instruction to the Staff is to open th'at inquiry 4 to both interruptible rates and firm" rates?
5 COMMISSIONER COWDEN: Yes, sir.
6 CHAIRMAN ROLLINS: For both the Dow 7 contract and for LOSB class?
8 -
COMMISSIONER COWDEN: That is correct.
9 j'! CHAIRMAN ROLLINS: All right.
10 l' COMMISSIONER COWDEN: I recommend that I
11 the company be directed that individual cost of service 12 ; items such as fuel shall not be listed separate 1'y on 13 the customers' bills, beginning with the February 14 billings.
15 The City of Houston and Coalition of: Cities' 16 Exception No. 2 is, I believe, good. Invested capital l
17 of HL&P should be reduced by 2.8 million in ac'co.rdance 18 with that exception.
~
19 Liquid metal breeder reacter project was i 20 terminated some years ago. The Company has accrued.
21 2.8 million, wh!;h is, I believe, cost-free' capital. It 22 is my underrcet/f' that the expense of this annual amount i
! 23 was a stipulaced item that would no.t be allowed. And I 24 think that it's appropriate that,'in accordance with 25 that exception filed, that that cap be reduced by $2.8 l L h HICKMAN KENNEDY REPORTING SERVICEINC.
7800 SHOAL CREEK BOULEVARD. SulTE 346-WEST AUSTIN. TEXAS 78757 (512)458-3297 i
97
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h I ,S2.8 million. .
2 lf j In response to the cities, the City of 3 h, Houston and the Coalition of Cities' Exception No. 6, I h
4 !! think we need to do some cleaning up at a point or two.
li 5 l At Page 55, following Paragraph No. 2, I 6 would add the following language:
7 "As to revenue assignment, the i
8 ,
stipulation provided that, 9 "(3) The methodology.for assignment of
'ii 10 '; revenue from the customer classes provided by
- 11 Staff witness Kent Saathoff is also 12 appropriate. Each rate class should be assigned 13 revenue to move it one-half the way toward 14 rela'tive rat, sf return of unity, where 15 possible. How ev e r , no class should receive 16 more than approximately one and one-half or less 17 than one-half times the sytemwide percentage 18 increase in total revenue. The only exception 19 should be the public utility class, which
! 20 should be assigned its cost based revenue."
21 And then we need to change, I think, Finding 22 of Fact No. 26 to read -- and this would strike 26 and 23 put this language in its place.
l
! 24 " Staff's allocation methodology and 1
25 methodology for assignment of revenue from l
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' 7800 SHOAL CREEK BOULEVARD, SUITE 346 WEST AUSTIN. TEXAS 78757 (512)458-3297
88 1 .
the customer classes is appropriate in i
2 j this docket for the reasons stated in this 5:
3 p report." !
4 And then we need to add probably, and I 5 recommend addition of Finding of Fact No. 34, which 6 would read:
7 "34. BL&P rate design for the 8 d Residential class is reasonable."
9 0 Mr. Chairman, based on the argument that we 10 ,have heard this morning, I am going to recommend that 11 the request by Texas-New Mexico be granted and that the 12 ratchet be reduced from the 85 percent to 75 percent.
13 CHAIRMAN ROLLINS: If that 14 l recommendation is adopted, there would also need to be 15 a change in Finding'of. Fact 27.
16 COMMISSIONER COWDEN: Well, all of these 17 changes, Ms. Williams, that I am suggesting, there will 18 be numerous changes. I think 'it will flow through and 4
19 it will have to be redone. And I have not tried to 20 track all of those through, but we'll need to change 21 numerous Findings of Fact and certainly the Order and 22 Conclusions of Law.
23 This report includes several statements 24 relative to mismanagement on the part of the Company.
25 The Examiner concludes there is no mismanagement or s
h HICKMAN-KENNEDY REPORTING SERVICE INC.
7800 SHOAL CREEK BOULEVARD. SUITE 346-WEST AUSTIN. TEXAS 78757 (512) 458-3297 i
89 1 insufficient evidence for her to conclude that there is 2 ; mismanagement.
l' 3 I disagree and am persuaded the conclusion 4 is inconsistent with the very language of the Report 5 itself. Her conclusion deals primarily with South 6 Texas Nuclear Project: The matter of purchase of coal 7 without first test-burning it, repeated delays in 8 L problems in the South Texas Project, the unusual and ,
h !
9 h almost strange handling of Allen's Creek, consideration j 10 [ of an 80 percent capacity factor for Alle'n's Creek when.
l 11 lthe industry, according to the NRC, was experiencing a i
12 {
50 percent factor of the same type of equipment to be i
13 used at Allen's Creek.
l 14 I The Examiner discusses, and she said -- I l 15 quote -- a peculiar paranoia on the part of management, 16 that its major de' cision will be criticized in the 17 regulatory forums.
18 And she concludes by saying -- and this is a 19 quote - "This is not an indication of vigorous 20 i management. It is both imprudent and improper."
21 Without attempting to restate the many
(
l 22 references to less than distinguished management l
l 23 decisions and judgments, suffice it to say the record 24 ,
carries with it and the Examiner's Report references 25 many instances of what certainly must be considered as
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7800 SHOAL CREEK BOULEVARD, SUITE 346-WEST AUSTIN. TEXAS 78757 (512)458 3297 1
d on 1 matters of mismanagement.
2 Counsel for the Company argues in exceptions 3 and, in fact, here today he has argued that at the time 4 , the decisions were made, they were reasonable and that 5 it is unreasonable to look back now and second-guess 6 management.
7 I submit the only test for good or poor 8 !imanagement is by retrospective look. Surely management U
9 ! would have done differently had they had the foresight i
10 to anticipate what would result from some of the 11 decisions which have been made. Repeatedly through the 12 years, management has blamed someone else.
13 By what standard should management of a 14 public utility be judged, Mr. Chairman? Were this 15 company in a purely competitive, non-monopolistic, 16 n'on-regulatory business, I dare say that many of its 17 decisions might have by this time put it out of 18 business.
19 In private discussions with management, I am 20 aware that Dr. Rollins has and I personally, we both 21 urge the broadening of the board of directors of this 22 company in hopes of bringing some fresh approaches to 23 the Company management. These suggestions have been 24 met with very limited response. '
25 Because of the reasons which I have L
h HICKMAN-KENNEDY REPORTING SERVICE INC.
7800 SHOAL CREEK BOULEVARD. SulTE 346-WEST AUSTIN. TEXAS 78757 (512)458 3297 1
o9 il 1 !i discussed and which I believe' demonstrate poor 2 m,anagement -- because I think the record and the 3 Examiner's Report support it -- I am going to recommend 4 !that the return on equity be lowered from 16.85 to 5 h16.35 percent, with this half percent reduction as a '
6 , penalty for poor management, and shall remain in effect I
7 1until the Company's next rate case.
il 8 g! And I would like to at this point state that 0
9 l when I say until the next rate case, it's not a matter 10 of being able at some future date to go back and 11 attempt to recover it, from my standpoint.
12 It is my intention, if the recommendation is 13 adopted, that this be a signal, a signal to management, 14 1 to its board of directors, and to its shareholders that 15 this commission will not and cannot continue to condone 16 the type of management that has gone on over the last 17 several years in Houston Lighting & Power.
18 As indicated earlier, Mr. Chairman, I 19 suggested several changes. And with the changes that I l
20 have suggested, I recommend the adoption of the l 21 Examiner's Report.
l 22 CHAIRMAN ROLLINS: Mr. Smith, do you 23 have comments to make?
l 24 COMMISSIONER SMITH': No, other than to 25 say that I support the recommendation.
V h HICKMAN KENNEDY REPORTING SERVICEINC.
7800 SHOAL CREEK BOULEVARD. SUITE 346-WEST AUSTIN. TEXAS 78757 l
(512)458 3297
49 1 CHAIRMAN ROLLINS: I would like to add t;
2 l'l my comments to the recommendation. First of all, let I'
3 j! me say that . I will support in its entirety the j i
4 ,
reco.tmendation of Mr. Cowden. l 5 I am very much concerned about the issue of 6 management, and in particular about the input of 7 ; management or input and control of management by the
- i. I 8 j board of directors of this company. The board-of 9 hdirectorsofthiscompanyareclearlydominatedby ,
t! !
10 inside directors. Included as a nominal outside l 11 director is a representative of the firm that acts as 12 , counsel to this utility.
13 When you find a senior member of the outside h
14 icounsel on the board of directors of a firm, that 15 outside counsel has stepped beyond being an advisor to 16 t'he corporation, and it has become a manager of that 17 corporation. And I would urge that this company 18 consider removing from its board of directors the 19 representative of its outside counsel.
20 The same recommendation relates to the 21 position of another nominal outside director, a senior 22 officer of this company's principal commercial bank 23 affiliate. The board of directors cannot be 24 independent in its decisions with' regard to financing; 25 it cannot be independent with regard to its decisions L
h HICXMAN KENNEDY REPORTING SERVICE INC.
7800 SH0AL CREEK BOULEVARD. SUITE 346-WEST AUSTIN, TEXAS 78757 (512)458 3297 t
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1 ! concerning legal matters when dominant members of its
- j. !
2 i board of directors are its outside counsel and its l
3 ,iprincipal banker.
4 The remaining outside members of the board i
5 of directors do not have sufficient experience in their 6 own personal business to make substantial contributions 7 to decisions related to multi-billion dollar operating 8 ., budgets and multi-billion dollar construction programs.
9 j This company by its very nature has a very i'
10 substantial impact upon the future commun'ity life of 11 the City of Houston. And within the City of Houston 12 there reside the headquarters of numerous major 13 corporations which do operate multi-billion dollar l
~
14 entities. This company needs to have some of that kind 15 of community representation on its, board of directors, 16 f rom major corporations who operate multi-billion 17 dollar construction. budgets and who operate 18 multi-billion dollar operating budgets. .
It does not 19 now have any of that kind of outside input on its board
'20 t of directors.
21 It does not have on its board of directors 22 any outside director who has in its own name and in his 23 own right and in his own corporate experience any 24 credibility in Wall Street. And yet, this Company's 25 principal problem for the next 10 or 20 years is going L
h HICKMAN KENNEDY REPORTING SERVICE INC.
7800 SH0AL CREEK BOULEVARD. SUITE 346-WEST AUSTIN. TEXAS 78757-(512)458 3297
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1 l to be the raising of funds in the public markets. And.
I 2 !j it does not get from its outside directors the kind of lI
- 8 3 input which it needs with regard to those resources. l 4
'l; This company needs a major change in its 5 management direction. And I would urge its present 6 management, I would urge its present board of 7 directors, and I would particularly urge its 8 stockholders to take those actions which are necessary 9 li to make those changes, j il 1 10 !! There being no dissent to Mr. Cowden's I 11 l recommendation, the Examiner's Report will be adopted 12 with those corrections which have been noted, those 13 modifications which have been noted.
14 We'll take a brief break and come back. And 15 the next matter which we' re going to hear will be 16 D'ocket 4223.
17 (Brief recess) 18 19 CHAIRMAN ROLLINS: Let's resume our
' 20 hearing.
21 The next item is Docket 4223, the appeal of 22 Arbor Oaks, Incorporated, a water utility, from the 23 ratemaking ordinances of the City of Houston. Once l
24 again, this case has been assigned to Mr. Cowden.
25 L
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7800 SH0AL CREEK BOULEVARD. SUITE 346-WEST AUSTIN. TEXAS 78757 (512)458 3297 6
I
,**. ,; (
EXHIBIT 4"
, NO. Nb k[O CITY OF AUSTIN, I IN THE DISTRICT COURT OF
. I
- v. I I TRAVIS COUNTY, TEXAS HOUSTON LIGHTING AND POWER I COMPANY, AND HOUSTON I INDUSTRIES, INC. I f[ JUDICIAL DISTRICT PLAINTIFF'S ORIGINAL PETITION TO THE HONORABLE DISTRICT COURT:
NOW COMES the CITY OF AUSTIN, TEXAS, Plaintiff, complaining of HOUSTON LIGHTING AND POWER COMPANY and HOUSTON INDUSTRIES, INC., Defendants and seeks reformation of the South Texas Project Participation Agreement and other relief as set forth herein.
I.
Plaintiff, the City of Austin, Texas (" Austin"), is a municipal corporation incorporated under ths. laws of the State of Texas and its Home Rule Charter and located in Travis County.
Austin is engaged in the business of producing and distributing electrical power in the Austin area. Austin is the owner of a 16% undivided interest in the South Texas Project ("STP") , a nuclear pcwer plant under construction' in Matagorda County, Texas, consisting of two proposed 1250-megawatt units.
Defendant, Houston Lighting and Power Company ("HLP"), is a corporation incorporated and existing under the laws of the State of Texas, having a place of business at 611 Walker Avenue, Houston, Texas where service of process can be made upon its Chairman and Chief Executive Officer, Don D. Jordan. HLP is engaged in the business of producing and distributing electric power within the State of Texas. HLP is the owner of a 30.8%
undivided interest in STP. ,
Defendant, Houston Industries, Inc. ("Housten Industries") ,
is a corporation incorporated and existing under the laws of the ,
State of Texas, having a place of business at 611 Walker Avenue, i ilLEQ Houston, Texas where, service can be made upon its Chairman and .! '
d.*:I n Chief Executive Officer;, Don lI en'D '.~ Jordan. Houston Industries owns i I
.) ., ,
falltheputstandingsharesofstockofHLP. l bi '4j t Te M C t t" .' 3, ' .._,
l E 3 i i H p. /D 4. l
l \
i 1
II.
]
In December, 1973, in the City of Austin, Travis County, Texas, Austin entered incc a written agreement (" Participation Agreement") with HLP, Central Power and Light Company (" CPL") and The City of San Antonio, Texas, acting by and through the City Public Service Board ("CPSB" ) , to participate in the construc-tion, ownership and operation of STP. Each entity has an undi-vided ownership interest in STP in proportion to its ownership interest. The Participation Agreement is attached as Exhibit A.
Under the Participation Agreement, HLP is designated Project Manager on behalf of the participants. With certain exceptions, BLP, as Project Manager, is to provide for and is responsible for the planning, construction and operation of STP in accordance with the Participation Agreement and project agreements.
III.
As part of RLP's duties as Project Manager, HLP entered into a written contract (" Brown & Root Contract") dated December 31, 1972, with Brown & Root whereby Brown & Root was to act as architect, engineer, constructor and construction manager for STP.
Under the Brown & Root Contract (ast=ched as Exhibit B),
Brown & Root was required, among other things, (a) M perform all engineering and design work necessary for STP including all technical services necessary to ensure design and completion of STP in accordance with applicable codes, and state, local and federal government regulations; (b) to formulate, establish and
. administer a quality assurance and quality control program to l
meet the requirements of 10 CFR 50, Appendix B and (c) to perform construction and construction management services as requested by HLP as set forth in Exhibit B and the project documents.
i l
l IV.
When Austin entered into the Participation Agreement for STP i
in December, 1973, Brown & Root had been selected by HLP, as ',
1 I t
b 2
(.
Project Manager, as the' architect, engineer, constructor and construction manager for STP and had commenced work thereon.
In December, 1973, HLP and Brown & Root represented and Austin in good faith believed that Brown & Root possessed or could obtain the requisite nuclear engineering, construction, construction management, quality assurance and quality control expertise, or had the ability to obtain same, sufficient to design, engineer and construct STP in accordance with the Par-ticipation Agreement and project agreements, the Brown & Root Contract, the Act, the rules, regulations and requirements thereunder, and to have STP licensed for operation with the Nuclear Regulatory Commission ("NRC" ) . In December, 1973, HLP represented and Austin in good faith believed that HLP could and would properly perform and discharge its duties as Project Manager. Further, Austin believed that the other participants in good faith believed that Brown & Root possessed or could obtain the expertise described above and that HLP could and would so properly perform as Project Manager.
STP was not designed, engineered or constructed in accor-dance with the Participation Agreement and project agreements, the Brown & Root contract, the Act, the rules, regulations and requirements thereunder because Brown & Root did not have the above-described expertise and because HLP did not properly
- perform and discharge its duties as Project
- Manager.
Austin's belief as to the expertise of Brown & Root and the ability of HLP to properly perform and discharge its duties as Project Manager relate to material facts essential to its enter-ing into the Participation Agreement and remaining as a party.to the Participation Agreement, that is, the identity and ability of the party which would design,. engineer, construct and provide construction management, quality assurance and quality control services for STP and the ability of HLP to properly perform and discharge its duties as Project Manager.
Brown & Root did not in 1973 or thereafter have the exper-tise described above and Brown & Root did not have any reasonable ,
. t i prospects of obtaining that expertise. HLP did not in 1973 or '
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thereaf ter properly perform and discharge its duties as Project Manager.
Accordingly, STP was not designed, engineered or constructed in accordance with the Participation Agreement and project agreements, the Brown & Root contract, the Act, and the rules, regulations and requirements thereunder.
As a result of the mistaken beliefs of the parties relating to the capabilities of Brown & Root and because of ELP's failure to properly perform and discharge its duties as Project Manager, as set forth above, Austin is entitled to reform the Participa-tion Agreement.
V.
From 1973 through approximately 1981, ELP represented to Austin that Brown & Root had or could obtain the expertise described above and that Brown & Root would and could design,
- engineer and construct STP in accordance with the Participation Agreement and project agreements, the Brown & Root contract, the Act, the ' rule s , regulations and requirements thereunder, and be licensed for operation with the NRC and that HLP could and would properly perform and discharge its duties as Project Manager.
In reliance thereon, the City of Austin
- entered into and l remained in the Participation Agreement, participated and con-tinued to participate in the ownership and funding of STP, and forebore from taking action with respect to STP, HLP or Brown & j Root.
The representations made by HLP to Austin relate to material s
- facts essential to Austin's involvement in STP, that is, the l
identity and ability of the party which would design, engineer, construct and provide construction management and quality assur-ance and quality control services for STP and the ability of HLP to properly perform and discharge its duties as Project Manager.
The representations made by HLP to Austin were not true in that Brown & Root in 1973 or thereafter did not have the exper-tise described above and did not have any reasonable prospects of i .
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! obtaining that expertise and HLP did not properly perform and ll t
- discharge its duties as Project Manager.
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p I k I As a result of such action or forebearance by Austin, Austin has suffered the damages set forth below, for which there is no adequate remedy at law.
After 1977 Houston Industries controlled HLP and induced, incited, abetted or participated in the actions described abcve.
VI.
Austin entered into the Participation Agreement based upon the good faith belief that Brown & Root had or could obtain the expertise described above and that HLP could and would properly perform and discharge its duties as Project Manager.
Brown & Root, in fact, did not have and had no reasonable prospects of obtaining such expertise and HLP did not properly perform and discharge its duties as Project Manager Austin's belief s relate to material facts essential to its entering into and remaining in the Participation Agreement, that is, the identity and ability of the party which would de sign, engineer, construct and provide construction management, quality
' assurance and quality control services for STP and the ability of HLP to properly perform and discharge its duties as Project Manager.
Austin maintained the preceding good faith beliefs in December, 1973, and thereafter, despite the exercise of ordinary care on its part.
The facts that Brown & Root was to be. the architect, engi-neer, constructor and construction manager on the project and that HLP would properly perform and discharge its duties as Project Manager are of such great consequence to the Partici-pation Agreement tha,t to enforce the Participation Agreemen,t, despite Austin's mistaken beliefs, would be unconscionable so that Austin is entitled to reform the Participation Agreement.
Reformation of the Participation Agreement will not preju-dice the rights of HLP.
VII.
Under the Participation Agreement, HLP is to provide for and ,
is responsible for the planning, construction ind operation of STP in accordance with the Participation Agreement and the 5
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project agreements. These duties relate to a material' aspect of the Participation Agreement, that is, the overall coordination i i
and responsibility for the design and building of STP.
Austin's obligation to pay for STP was and is, in part, dependent upon the performance of the above-described duties by HLP.
ELP breached the preceding duties by, among other things:
(a) Selecting Brown & Root to provide the services described abover (b) Contracting with Brown & Roots (c) Failing to terminate Brown & Root prior to 1981; (d) Failing to discern that Brown & Root could not and was not performing as required; (e) Failing to promptly inform Austin that Brown & Root could not and was not performing as required; and (f) Failing to properly perform and discharge its duties as Project Manager.
As a result of such acts or omissions by HLP, Austin has suffered the damages set forth below, for which there is nc adequate remedy at law.
Houston Industries induced, incited, abetted and partici-pated in the preceding actions of HLP.
VIII.
As a result of HLP's breaches of its contractual obliga-tions, the mistaken beliefs of the parties at the time of enter-ing into the Participation Agreement, Austin's forebearance from
- taking action with respect to STP, ELP and Brown & Root, and the !
(misplaced reliance on ELP, as set forth above, there has been a j 4
material failure of consideration to Austin with respect to the lParticipationAgreementsothatAustinisentitledtoreformation f
o f the Participation Agreement as set forth below and have all
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!! sums which it has paid pursuant to the Participation Agreement returned to it by HLP.
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, IX.
As a result of the matters described above, Austin has been
- damaged in an amount in excess of the jurisdictional amount of this court by virtue of its increased capital and interest expenditures for STP, its loss of use of STP, the necessity to purchase or generate replacement power at higher costs, and its inability to plan and provide for the future power needs of Austin, plus expenditures for attorneys' fees and expenses.
PRAYER WHEREFORE, Plaintiff respectfully requests this Court tos (a) Reform the Participation Agreement, such that (1)
Austin conveys to HLP its right, title and interest in and to STP; and (2) HLP refunds to Austin the approximately Four Hundred and Thirty-Seven Million Dc?lars ($437,000,000) expended by Austin to date with respect to STP and all future sums expended by Austin with respect to STP (b) Relieve Austin of each obligation, whether past, current or future, to provide money, property or materials with respect to STP, (c) Enter judgment in favor of Austin and against HLP and Houston Industries, jointly and severally, in the amount of damages to which Austin is entitled, together with interest, costs and attorneys' fees.
(d) Award such other relief, genera. *nd special, legal and equitable, as the Court deems appropriate under the circum-stance.
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i THE STATE OF TEXAS I ,
I COUNTY OF TRAVIS I Albert DeLaRosa, being first duly sworn, deposes and says that he is the City Attorney for the City of Austin, Texas, a municipal corporation, incorporated under the laws of the State of Texas and its Home Rule Charter and located in Travis County, ,
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Texas and that the allegations contained in Paragraph VIII of Plaintiff's Original Petition are true and correct.
Albert DeLaRosa City Attorney City of Austin, Texas iU JUBSCRIBED AND SWORN TO before me on this the b - day of AA < a . y , 1983.
I O 9
- daus No M Public in and fcr Travis County, Texas M Co:=ission Expires:
m,- Ie st. b) l . l h.
9 OFFICE OF THE CITY ATTORNEY, CITY OF AUSTIN, TEXAS RuML Albert DeLaRosa City Attorney Texas Bar No. 05648500 Business Address:
Suite 304, Brown Building 708 Colorado Street Austin, Texas 78701 (512) 477-6511, Ext. 2270 FULBRIGHT & JAWORSKI Blake Tartt Texas Bar No. 19654000 William W. Vernon 800 Bank of the Southwest Building Houston, Texas 77002 (713) 651-5131 VARNUM, RIDDERING, WIERENGO &
CHRISTENSON Thomas J. Heiden 800 Mutual Home Building l Grand Rapids, Michigan 49503 (616) 459-4186
- lt 6 ATTORNEYS FOR PLAINTIFF, -
THE CITY OF AUSTIN, TEXAS h:
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OA /Ihe Houston Fons/wed, mr. 16,1983
- CD Fty/ State justin group wants HL&P to kill South Texas Project Ey hlAltoth hCARI1"I'T cf encray at roughly onefourth the cobt cancellados tsaue etU be raised at the Stakta Said STCC began distributlag Austle's 14 percent share of the project. themselves to be unregable, dangerous Past F.streament abriter of STNP." 'meetlag. the tulefing papers la stages about als "The consensus of lawyers I've talked and astmaamicany engenshe."
V Dut a spokesman for flouston l_tghting As order of Roman Catholic suns, the weeks age and has sent copies to Austle te is that IGAP stu aNer let that faae Sinkin Bald STOC hopes to meet utth
'A6 Austin and nurirar grwp is trying & Power Co, the project's nianaging $1sters of the SorTonful Mother, recently and San Antonle city councumes. Doth go to trial- they can't afford to," Sinkla It!JP offletals before the May 11 share-se tersuade the South Texas Nuclear partner, called the canreUntion proposal succeeded la getung a aterktadJer vote ettles* uttEdes are partacts la the nucle. Bald. "They'll go late reorganization and bekter swetlag te discusa the canmUp Pro)cct's partners to wrap the geolect **a dumb tdea, imptactical and at the Stay Il meedng on halting au work at pro)cct, along with Central Power & pay eft a few centa as the donar " tjon idea.
sad malie off the 82 bullon already aprat unr callatic." en the nuclear project for se ladrpendent IJgnt Ca. of Corpus Christi. 'the twiefing paler contends that othw 'Tm convinced frera hearing testimon en it, claim 6pg ttus mill avert even hea-Apper,,gy ,, ,,n,garrega, g, ggy,, review et its poblema. Briefing papers la a week er two wtB megatives in li1JP's coatinuing the pt> ay and private discussions that if you
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- I '"8 the fact that we need the energy that out Sinkin Bald the STCC's campaign pt,. start going to the llouston City Councu, ject laciude a dearth of nuclear invest. could get the It1AP direttors off on a The Souta Tenas Cansenation Cam- come out of this plant, er that we would dated the nuns' action and was not con- which has been hostlie to recent luJP awat money, desige Gaws la the Westing- retreat someebere and they let their hair paigi contends com 4ction of the 2.304 just walk away from this huge tavest. sected wlth is, rate ta, and ta lG.AP officials, Ste- house reactor vessels and^ steam down, they would reany t he to tw out mcgiss.tt auricar plant near !!ay City ment," apokesman Craham Painter said. Sinkin, a University of Texas law stu-kle Sa semators of me tyne being used at the trorn under it (the Suum Tesas Pro-313 te "a high rtak investment in a de- lie said Austia has been the most re- South Texas Project, a potential stock. jectl," Sankta said.
fecitwe puJurf." *0r that when carried to compledon, the sleet, has representcJ a San Antonie eePtive etty toward canceuation, soting holder revolt and a reconstituted and to- Palater of HIJP, however, said the plant can provide banels ofthe ud energy a year." equivalent group,CittreesCommrned About Nuclear that the city's Electrie Utility Coranils- creastagly hostile Public Utillty ut!!!ty is having to serve 80.0u As argunwnts against cornpletion, the of 25 mtulos Pomer. la a Nuclear itegulatory Commis-STCC listed financ6ng difficultws, recur-a on at a htonday alght toeeting ordered Comndatoit torners a year and must have the pos'er Painter pointal out that cancellados slam hearing on an operaung ucense for 188 8t*II 88 ** *
- 8hkI F *I P '88bl' M8' tir.g tweakdowns and condy repairs la of the Suude Teams Project would estau the South Teams Project. Stace three Stile Island, the paper from the South Texas Project.
Euclear plants generany, repeated dis- about sta times the $3t4 mluton taas that Jerome Coldberg, ID AP's vim geest- na 88 83819 m lear"" tF Pr')"t8 Se8 lie said it1AP ta act planntng to but1J cnerles of new defects la plants, con- lGJP incurred when it rmatly canceled dent for nuclear construedon, was stwa Stakta said Inany Austia city couartl 88 C t8- new plants to ante au Hs am but ts structices delays and soaring costs, and the AHens Creek auclear plant, 88 e purchasing pown fnus oma soums a copy of the canceuation brieflag paper candidates la na April 2 electica, la re- 8 I,E" g-putale safety anil health risks. As STCC leader, tanny Sinkin, coa. by Sinkin and was unimpensed- and is already practicing conseryssaan sponding to as SICC aguentionsstre, aald It predwted the ultimate cost of the reded that putting over the canreustion *It la pretty murb a rehash of leues they elmer favored cancenation er were canMed .b , h pa M d ,u h SM M manapnwat as suggM h projects at a total las of D 4 M pro)cc att be li taluon to 58 biulos rath- Idea la "a big Joh." But Slakia said he that Ianny has teen raising a long wnung to study 11 further.
er tha2 the 55.5 bullon now pojected. beneves "It can be done before 1983 le ttme," aald Coldberg, a veteran nuclear Austle la a Jea. 6 lawsult agalast bullen. Including 5540 miluon spent by *We are trytag to shave I aduloa kilo-1he STCC argued that the $3141 tion to out." engineer."Ihis paper is basicaUy a very IEJP accused the utuity of adsmanag. Wginia Electric I own Ca en its Neth . waits by 1990 through conservatten and M bullon aaved by cancenation coulJ te Sinkta said the STT stu send a E personal statement. It represents one Ing the South Texas Project. The suit Anna No. 3 suclear plant. load management," Painter said. "Due sgent os conservation, energy etnciency pase "triefing paper" on cancenadon to man's view of the world - a world with. Seeks rehabursement by IEJP of the "The harsh reality." the STCC paper despite au this, we must face the fact aad renemat4e energy amares. It maki It1JP disectors twfore a May Il stinit. out nuclear power, regardhme of the 507 miluca Austia has spent on the pro- argued. *ts that over the past two dec- that South Texas is growing ragdilly anJ the~e at ge woulJ ** provide a megawatt hollers nuting. lie said he hopes the cest." ject, and the assumption by IRAP et ades, nuclear power plants have pioven eur new customers snust be acrved."
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x B :lentists discuss :
- Sea,e o1.e jus-ta4e,.
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DM HleTeORTLes . fi* i Climkr honins to avoid laH
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