Appendix — Jersey Central Power & Light Co. v. Board of Public Utilities

Supreme Court brief1984

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Text

~ FILED |

MAR 6 1984

& STEVAS

CLERK

No.

IN THE

Supreme Court of the United States

OCTOBER TERM, 1983

JERSEY CENTRAL Power & LIGHT COMPANY,

Appellant,

BOARD OF PuBLic UTILITIES OF THE STATE

OF New JERSEY,

Appellee.

ON APPEAL FROM THE SUPREME COURT OF NEW JERSEY

SEPARATE APPENDIX TO

JURISDICTIONAL STATEMENT

JAMES B. LIBERMAN

BisHoP, LIBERMAN & COOK

26 Broadway

New York, New York 10004

Tel. (212) 248-6900

Counsel for Appellant

Of Counsel:

WILLIAM F. HyLAND

EpwarD DeHope

Morristown, New Jersey 07960-1981

1983

Court of New

983

Public Utilities

New

Petition

Board of

Jersey

6,1

from orders

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of New

tered December 6,

Order of

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Appendix A-!

Appendix B-!

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Appendix C-1

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Appendix A-1

SUPREME COURT OF NEW JERSEY

C-251 SEPTEMBER TERM 1983

21,691

ON PETITION FOR CERTIFICATION

IN THE MATTER OF THE PETITION OF JERSEY CENTRAL

POWER AND LIGHT COMPANY FOR AN INCREASE IN RATES

AND CHARGES IN THE TARIFFS FOR SUCH SERVICE (BPU

Docket No. 804-285)

(Jersey Central Power and Light—Petitioner)

To the Appellate Division, Superior Court:

A petition for certification of the judgment in A-

218/220/227/219/224-82T1 having been submitted to this

Court, and the Court having considered the same;

It is ORDERED that the petition for certification is denied

with costs and it is further

ORDERED that the appeal in the within matter is dismissed

pursuant to R. 2:12-9.

WITNESS, the Honorable Robert L. Clifford, Presiding,

Justice at Trenton, this 6th day of December, 1983.

STEPHEN TOWNSEND

Clerk wes

2) dee ia lle) ee ae

A-2

Appendix A-2

SUPREME COURT OF NEW JERSEY

C-252 SEPTEMBER TERM 1983

21,691

ON PETITION FOR CERTIFICATION

IN THE MATTER OF THE PETITION OF JERSEY CENTRAL

POWER AND LIGHT COMPANY FOR AN INCREASE IN RATES

AND CHARGES IN THE TARIFFS FOR SUCH SERVICE (BPU

Docket No. 804-285)

(Public Advocate—Cross-Petitioner )

To the Appellate Division, Superior Court:

A petition for certification of the judgment in A-

218/220/227/224-82T1 having been submitted to this Court,

and the Court having considered the same;

It is ORDERED that the petition for certification is denied.

WITNESS, the Honorable Robert L. Clifford, Presiding,

Justice at Trenton, this 6th day of December, 1983.

STEPHEN TOWNSEND

Clerk

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A-3

Appendix B-1

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

A-162-81T2

A-218-82T1

A-220-82T1

A-227-82T1

A-219-82T1

A-224-82T1

IN THE MATTER OF THE PETITION OF JERSEY CENTRAL POWER AND

LiGHT COMPANY FOR AN INCREASE IN RATES AND CHANGES IN

THE TARIFFS POR SUCH SERVICE (BPU Docket No. 804-285)

IN THE MATTER OF THE PETITION OF JERSEY CENTRAL POWER AND

LiGHT COMPANY FOR APPROVAL OF AN AMENDMENT OF ITS TARIFF

TO PROVIDE POR AN INCREASE IN RATES AND CHARGES FOR ELBC-

TRIC SERVICE AND A REVISION IN DEPRECIATION RATES (BPU

Docket Nos. 818-726, 818-736)

IN THE MATTER OF THE PETITION OF JenseY CENTRAL POWER AND

LiGut ComPANY LEVELIZED ENERGY ADJUSTMENT (BPU Docket

Nos. 821-75, 818-726)

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A-4

Argued: April 19, 1983—Decided: July 28, 1983

Before Judges Matthews, Antell and Francis.

On appeal! from Final Decisions of New Jersey Board of Public

Utilities.

William F. Hyland argued the cause for Jersey Central Power &

Light Company (Riker, Danzig, Scherer & Hyland, attorneys;

Kirstein, Friedman & Cherin, Berlack, Isracls & Liberman, of

counsel; James B. Liberman, Jack B. Kirstein, Edward K.

DeHope, on the briefs).

Linda S. Lodenkamper, Assistant Deputy Public Advocate, and

Menasha J. Tausner, Deputy Public Advocate, argued the cause

for the Public Advocate (Joseph H. Rodriguez, Public Advocate

of New Jersey, attorney; Roger L. Camacho, Director, Division

of Rate Counsel, of counsel).

Carla Vivian Bello, Deputy Attorney General, argued the cause

| for Board of Public Utilities (Irwin I. Kimmelman, Attorney

General of New Jersey, attorney; James J. Ciancia, Assistant

Attorney General, of counsel).

John C. Sahradnik the cause for County of Ocean (Berry,

Kagan, Privetera & attorneys (William E. Conklin,

Jr., on the brief).

John M. Quain, admitted pro hac vice, argued the cause for

sas Society of Utility Investors (Milton Lowenstein,

attorney).

Edward Lloyd argued the cause for Diane Fahey.

A-5

The opinion of the court was delivered by MATTHEWS,

P.J.A.D. “

These consolidated appeals involve four orders of the Board of

Public Utilities which impact upon rates charged by Jersey Cen-

tral Power and Light Company (JCP&L). Two of the orders

involved, that of April 23, 1981 which rejected the Public Advo-

cate’s demand for a Board inquiry into the causes of the Three

Mile Island nuclear accident, and July 31, 1981 which permitted

an increase in JCP&L’s annual revenues, are the subject of

appeals taken in Docket A-162-81.

During the pendency of Docket A-162-81, JCP&L filed a new

rate case with the Board. That case culminated in an order,

dated July 22, 1982, in which the re tes set in the previous July 31,

1981 order were augmented with new rates based upon the

Board’s latest analysis of JCP&L’s revenue requirements. Simi-

larly, during the pendency of proceedings in Docket A-162-81,

JCP&L petitioned the Board for an increase in its Levelized

Energy Adjustment Clause revenues (LEAC). That petition

resulted in a Board order dated September 2, 1982 permitting an

increase in JCP&L's LEAC.

On March 28, 1979, there occurred what has been termed “the

worst accident in the history of commercial nuclear power gener-

ation” in the United States. Report of the President's Commis-

sion on the Accident at Three Mile Island (October 1979). The

incident at Metropolitan Edison’s (Met Ed’s) Three Mile Island

nuclear power plant, Unit 2 (TMI-2), located near Harrisburg,

Pennsyltvania, has had nationwide implications not only in terms

of the future of nuclear generation but also with respect to the

financial viability of some of the largest public utilities in this

country.

While the immediate concerns of public officials understanda-

bly focused on the potential health hazards associated with the

nuclear accident, those involved in the areas of public utility

regulation soon were presented with unprecedented economic

issues. The most pressing problem facing those utilities previ-

ously dependent upon TMI for power has been the need to locate

‘

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and purchase alternate energy. Not only has the damaged TMI-

2 Unit remained inoperable, but its companion Unit, TMI-1,

shutdown for routine refueling at the time of the accident, has

continued in that state by order of the Nuclear Regulatory Com-

mission (NRC).

Appellant JCP&L, a public utility of this State and owner of a

25% interest in the Three Mile Island facility, was a TMI-depen-

since the event of March 28, 1979. Because of the accident,

JCP&L has been before the New Jersey Board of Public Utilities

on an almost daily basis seeking various forms of relief.

The appeal in A-162-81 arises from an April 29, 1980 filing by

JCP&L requesting an increase of $173.5 million in annual reve-

nues. That filing included a request that $60 million of the

increased revenues sought be granted on an emergent interim

basis. The interim request was heard directly by the Board,

while the remainder of JCP&L’s rate request was forwarded to

the Office of Administrative Law for hearings pursuant to.

N.JS.A. 52: 14F-1 et seq.

On May 13, 1980, after hearing testimony related to JCP&L’s

interim rate request, the Board granted the Company an emer-

gent increase in its base rates amounting to $60 million. In so

doing, the Board specifically addressed the’ Company's dire

financial circumstances, noting: (1) that JCP&L was about to

exhaust its short-term debt limit under a special revolving credit

agreement with bankers; (2) that JCP&L did not possess suffi-

cient coverages to sell long-term debt; (3) that JCP&L’s parent

company, General Public Utilities, was unable to sell common

equity at a reasonable price; (4) that JCP&L lacked sufficient

coverages to sell preferred stock, and (5) that JCP&L was una-

ble to finance construction required to ensure safe, adequate and

proper service to the public.

Following the granting of interim relief, and while the Com-

pany’s base rate case was still pending before the Office of

Administrative Law, the Public Advocate filed a motion with the

Board seeking a moratorium on all future JCP&L rate relief

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A-7

pending a Board determination as to primary responsibility for

the accident at Three Mile Island. A similar motion was filed by

Ocean County. On April 23, 1981, the Board issued a lengthy

order detailing its position as to what had come to be termed the

TMI “fault” issue. In that order, the Board concluded that the

granting of the motions for a fault investigation would be

“counter-productive to the public interest,” “procedurally

unmanageabie” and detrimental to “those positive efforts under

way to share the cost burdens of the TMI accident.” Responding

to the movants’ requests for a moratorium on all future JCP&L

rate increases the Board stated:

[T] he benefit to the customer of receiving reliable electric

service requires a utility healthy enough to provide that

service. Embarking on a fault investigation of a nuclear

accident, a most complex endeavor at best, and freezing

currently pending rate cases until such a proposed investi-

gation is completed, is not in the public interest. Such a

course could be of no real benefit to the ratepayer, since

reasonable replacement power costs must be paid for if

ongoing service is to continue.

The Board also noted that a “fault” investigation would add

little to the protection already atforded the public by previous

Board orders dealing with the rate-making status of TMI-1 and

TMI-2. For example, JCP&L’s base rates had already been

reduced by approximately $46.9 million annually as a result of

the Board’s removal of TMI-1 and TMI-2 from the Company’s

rate base. By that removal, the Board insured that JCP&L’s

ratepayers would not be bearing the double burden of providing

the Company with capital and operating expenses related to the

nongencrating TMI units while at the same time bearing the cost

of replacing energy formerly produced by such units.

The Board found that a fauit investigation was not necessary to

protect properly the public from undue TMI-related charges, and

further that such an investigation might jeopardize the very pub-

lic interest the movants and the Board sought to serve. Aware of

“

A-8

pending private litigation involving the question of TMI negli-

gence, the Board stated:

[1] nitiating a fault investigation would be counterproduc-

tive to two pending lawsuits where the negligence question

will be tried in a proper forum. General Public Utilities

commenced action on March 25, 1980 against Babcock

and Wilcox in U.S. District Court, Southern District of

New York alleging various grounds of negligence, such as

defects in design and improper control procedures. Con-

sistent with appropriate regulatory policy, we believe that

benefits flowing to the utility system from this lawsuit will

be properly allocated to benefit the New Jersey ratepayer.

Likewise, the utility system filed suit on December 8, 1980

against the Nuclear Regulatory Commission under the

Federal Tort Claims Act alleging negligent acts and omis-

sions by the Staff of the NRC. Consistent with regulatory

policy, recoveries from this lawsuit will be allocated to the

benefit of the New Jersey ratepayer. The inappropriate-

ness of using this Board as a duplicate forum to try the

negligence of the parties is evident.... It is evident that

the question of fault is not a simplistic one and will be

properly before the Federal Courts. [emphasis added]

Also bearing upon the Board’s decision not to embark upon a

unilateral fault investigation was the issue of NRC jurisdiction

over the design construction and operation of nuclear facilities:

[T]he design construction and operation, as well as the

use and control of nuclear facilities is within

the primary if not exclusive jurisdiction of the Nuclear

stated flatly in its Order dated January 10, 1980, . . . ‘The

design construction and of the nuclear reactor at

TMI-II are under the jurisdiction of the Nuclear ;

Regulatory Commission’. We prefer to conclude that the

Federal Atomic Energy Act, 42 U.S.C.A. 2011 ef seq., 4

vests exclusive jurisdiction in the NRC only over activities .

reasonably related to the protection against radiation ©

hazards; 42 U.S.C.A. 2021(k). But certainly the Atomic

ment of nuclear energy through the promulgation of

A-9

detailed regulations. Certainly this Board should defer to

the expertise of the Federal Body according to the concept

of primary jurisdiction in the interpretation of the stan-

dards it has set and whether or not the nuclear industry

has met these standards in a reasonable fashion. [empha-

sis added; footnotes omitted ]

Finally, the Board noted the futility of conducting a TMI fault

investigation if the objective of such an investigation was to exact

from JCP&L a penalty should fault on its part be found:

How can this Board meet its primary statutory obliga-

tion to see that safe, adequate and proper service is pro-

vided by a viable entity if it embarks upon the road

proposed by the movants? The proposed procedure could

cither result in a morass of conflicting claims or some

attribution of management imprudence to JCP &L which,

if effectuated in penalties, would jeopardize vital electric

service.

In summarizing its fault position, the Board concluded:

Suffice it to say that we have an out-of-state accident, an

overlay of primary federal authority, split ownership of

the TMI facilities and management control of the facili-

ties by a Pennsylvania utility. We also have the results of

two major fault inquiries [the Kemeny Commission

Report of October 1979 and the Rogovin Report of Janu-

ary 1980], which have not been able to isolate any particu-

lar cause of the accident. The ground has already been

covered with mixed results.... We do not see much point

in attempting to duplicate these efforts. Such an investi-

gation would serve no public purpose since in the end

reasonable replacement power must be paid for at current

levels until there is a substantial reduction when TMI-I

returns to service. After what we envision to be a pro-

tracted and complex proceeding we would still have to

balance the customers[’] interest in refunds or frozen

rates due to the imposition of and the need for a

utility viable enough to service.

Leave to appeal from the Board's April 23, 1981 order declining

to investigate TMI fault was not sought by cither the Advocate or

A-10

Ocean County. Both the Advocate and Ocean County, however,

have made fault the subject of their cross-appeals in the proceed-

ing arising out of the Board’s final rate order of July 31, 1981.

Having denied a moratorium on rate increases pending a

fault investigation, the Board, on July 31, 1981, after receipt of an

Initial Decision from the Office of Administrative Law, issued its

final rate order dealing with JCP&L’s request for $173.5 million

in additional annual revenues. In that order, the Board

addressed the usual issues involved in any rate case: rate base,

operating income, rate of return and rate design. At issue in this

appeal are (1) the Board’s findings with respect to the Company's -

rate base/rate of return, specifically whether the Board properly

continued the exclusion of TMI-1 from JCP&L’s rate base; and

whether the permitted rate of return should have reflected such

reduction in rate base, and (2) the Board’s findings as to operat-

ing income, specifically whether the Board properly treated

JCP&L’s investment in the abandoned Forked. River project.

On the issue of rate base treatment of TMI-1 the record

below disclosed continuing uncertainty on the part of the JCP&L

as to the eventual return to service of TMI-1. Based upon testi-

mony to that effect, the Board rejected the recommendation of

the Administrative Law judge that TMI-1 be returned to

JCP&L’s rate base:

[C]ircumstances have not changed sufficiently to warrant

TMI-1 being placed back into rate base at this time.

There have been many delays in bringing this unit back on

line and we continue to support the treatment of TMI-1 as

set forth in the Board’s Order of April 1, 1980 in Docket

No. 795-427. As it is our position that TMI-1 should not

be placed back into rate base until restart, we that

portion of the [ALJ's] Initial Decision which for its

inclusion. At the time of restart, the Board will consider

in expedited proceedings the appropriate rate base and

revenue adjustment related to the TMI-1 return to service.

As to the Forked River plant, JCP&L in its initial request to

the Board sought the inclusion of this proposed nuclear station in.

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its rate base as “construction work in progress” (CWIP).

A-11

JCP&L admitted, however, that uncertainty clouded the future

of the Forked River plant and that it was considering whether to

(1) proceed with construction of a nuclear unit at Forked River,

(2) convert the station to another fuel source, or (3) abandon the

project entirely. In November 1980, during the pendency of the

proceeding below, the Company announced that the Forked

River project was being abandoned.

After announcing the project’s abandonment, JCP&L

amended its rate request so as to provide for a write-off of its

abandonment loss. The Company proposed two rate-making

approaches: (1) amortization of its Forked River investment over

a 15-20 year period with a return on the unamortized portion or,

in the alternative, (2) amortization of its Forked River invest-

ment over a 10 year period without a return on the unamortized

balance. The Advocate proposed a 15-20 year amortization of

the Forked River loss without rate base treatment of the unamor-

tized balance. Similarly, the Board’s Staff recommended a 15

year write-off without a return on the unamortized balance.

Also at issue with respect to the rate-making treatment to be

accorded Forked River was whether the Company should be

permitted to include in its calculation of its abandonment loss an

“allowance for funds used during construction” (AFUDC), i.e.,

the carrying charges on the Company’s investment accrued after

April 4, 1979—the date the Company “temporarily suspended

construction. Both the Staff and the Public Advocate opposed

the inclusion of AFUDC accrued subsequent to the suspension of

actual construction on the project in the calculation of JCP&L’s

abandonment loss.

In its final order, the Board adopted the Administrative Law

judge’s recommendation that the Forked River investment be

amortized over a 15 year period without a return on the unamor-

tized balance. The Board rejected the Company’s inclusion of

AFUDC accrued after April 4, 1979 in the calculation of the

investment to be amortized.

A-12

As to the issue of rate of return, JCP&L’s rate of return

witness, a security analyst and corporate financial advisor, testi-

fied in support of an overall rate of return of 12.5% to 12.75%,

based upon a cost of equity ranging from 18.75% to 20%. His

recommendation reflected his evaluation of the investors’ percep-

tion of risk associated with regulatory actions taken in the wake of

the Three Mile Island accident, particularly the Board’s removal

of TMI-1 from rate base. In opposition to that witness, the

Public Advocate presented an economic consultant, who calcu-

lated a cost of equity in the range of 13.5% to 14.35%, yielding an

overall rate of return of 10.28% to 10.46%. In contrast to the

positions taken by both the Company and the Public Advocate,

the Staff recommended an overall rate of return of 11.03% based

upon a cost of equity of 16%.

After reviewing the various positions presented on rate of

return, the Administrative Law judge calculated an overall rate

of return of 11.21%, based upon a 16.5% cost of equity. That

return, in his opinion, approximated the recommendations set

forth by the Board’s Staff.

In its final order the Board modified the Administrative Law

judge’s recommended rate of return on equity downward by .5%,

thus allowing the Company a 16% return on equity with an

overall rate of return of 10.68%. The Board believed that that

rate, “the highest ever granted a New Jersey utility,” adequately

reflected risks facing the Company. The Board also noted that in

addition to granting this unprecedented rate of return, it had

taken numerous steps in the last few years to assist the Company

in dealing with the financial impact associated with Three Mile

Island. These steps included, among others: (1) approval of a

Revolving Credit Agreement to provide the Company with short-

term funds; (2) the allowance of accelerated amortization of a

deferred energy balance; (3) Board intervention in federal

administrative proceedings involving the pricing of energy sold to

JCP&L; (4) Board support for early NRC approval of a TMI-1

restart; (5) Board endorsement of a federal contribution to

TMI-2 clean up costs. In light of such continuing supportive

Se ey. OS ee

A-13

regulatory efforts, an overall rate of return of 10.68% was deemed

sufficient. The Board pledged itself “to monitor this level” care-

fully in subsequent rate filings.

The various adjustments made by the Board in its final order

resulted in an increase in appellant’s annual revenues of

$110,713,000 as contrasted with the $173.5 million requested.

JCP&L filed a notice of appeal from the Board’s order. Notices

of cross appeal from the order of the Board on the issue of TMI

fault were filed by the Public Advocate and the County of Ocean.

A notice of cross appeal was also filed, pro se, by Diane Fahey,

one of the customers serviced by JCP&L.

As we have noted, the Board, on June 18, 1979, permitted

JCP&L to recover replacement energy costs through its

Levelized Energy Adjustment Clause (LEAC).'

At the same time, the Board reduced JCP&L’s base revenues

by 29 million to reflect the exclusion from the rate base* of the

investment and operating costs associated with the idle TMI-2

unit. This was ordered by the Board so as to avoid inflicting the

ratepayer with the double burden of carrying replacement energy

costs as well as providing investors with a return upon the non-

generating TMI-2 plant. Similarly, when it became apparent

that the companion TMI-1 unit, although undamaged in the

accident, would remain out of service indefinitely by order of the

NRC, the Board by order dated January 21, 1980, removed

another $17.9 miilion from JCP&L’s rate base, representing the

Company’s TMI-1 investment. The Board’s action in so balanc-

ing the impact of TMI upon investors and ratepayers was

reviewed and affirmed by the Supreme Court in Jn Re Jersey

Central Power & Light Co. Petition, 85 N.J. 520 (1981).

1. LEAC is a regulatory process used to adjust consumer rates as a

result of fluctuations in fuel costs. A constant LEAC charge is based

2. Rate base refers to i plant, facilities and other

assets upon which a utility is to carn a return.

A-14

Since the Supréme Court’s decision in Jn Re Jersey Central

Power & Light Co. Petition, the Board has issued four more

TMI-related rate orders, as we have noted.

The orders dated July 22, 1982 dealing with a Board ordered

increase in JCP&L’s base rates, and that dated September 2,

1982 permitting an increase in JCP&L’s LEAC revenues, are the

subject of the appeals filed by JCP&L, the Public Advocate and

others in Docket Nos. A-218,82T1 and A-219-82T1.

On August 11, 1981, JCP&L filed a petition with the Board

seeking an increase in annual base rate revenues in the amount of

$238.5 million. The matter was referred by the Board to the

Office of Administrative Law for hearing as a contested case. At

a prehearing conference held before the Administrative Law

judge, the Public Advocate and ratepayer intervenor Diane Fahey

sought to have the scope of the rate proceeding expanded to

include an inquiry into the cause of the accident at the TMI

nuclear facility. In response to that attempt to broaden the scope

of the proceeding before the OAL, the Board set forth its position

as to the relevancy of the TMI fault issue in thrée letters sent to

the Administrative Law judge and all parties in the proceeding.

In a November 6, 1981 letter, counsel for the Board stated:

[I]t is the position of the Commissioners of the Board of

Public Utilities . . . that (1) the Board’s “Order on

Motion,” dated April 23, 1981, in JCP&L’s previous rate

case sets forth at length the Board’s decision not to reach

an independent conclusion as to TMI-fault while that

issue is being actively litigated before various federal

agencies and judicial bodies, (2) that the Board’s April

23, 1981 Order is, therefore, dispositive of the TMI-fault

question in the (present) docket; and (3) the Board's

certification of the fault issue in the previous docket and its

expression of its position re the fault question in the April

23, 1981 Order, constitute a continuing reservation by the

Board of this issue, i.c., the Board has retained jurisdiction

over TMI-fault issues.

Again, in a letter to the Administrative Law judge and all

parties dated November 13, 1981, the Board responded to a

A-15

request by the Administrative Law judge for further argument on

the fault issue in connection with the possible recovery of TMI

clean up costs:

The Board relies upon its letter to you of November 6,

1981. The position of the Board is clear and will not be

restated in detail here. Suffice it to say that, pursuant to

N.J.S.A. 52:14F-8(b), the Board has specifically reserved

all policy questions relating to TMI fault issues unto itself

and has set forth its policy determinations in its April 23rd

Order in Docket No. 804-285. The issue of clean-up costs

is inherent in this continuing reservation. However, in

order to further clarify the situation, kindly be advised

that the Board specifically reserves unto itself and certifies

to itself, for notice and hearing as appropriate, that part of

the [present] petition which requests increases in rates

due to TMI clean-up costs, and all associated

arguments, including the Public Advocate’s “fault” posi-

tion and all associated proposed proofs and revenue

impacts.

The parties are, therefore, directed to file all further

arguments, pleadings or proofs directly to the Board on

this issue, for further evaluation by the Board. The Board

will consider and evaluate whether a fault inquiry is in the

public interest with respect to TMI clean-up costs.

N.J.S.A. 52:14F-8(b) vests the agency head with the

clear power to conduct its own hearings with respect to

On December |, 1981 the Board again wrote to the Administra-

tive Law judge with respect to its reservation of TMI fault issues:

[P] lease be advised that the Board has certified all argu-

ments and testimony related to the Board’s policy on the

fault issue. Inasmuch as the Public Advocate has indi-

cated that it intends to make fault-related arguments in

connection with the company’s proposal to include TMI-2

in rate base, the Board’s reservation of the fault issue

extends to the TMI-2 rate base issuc as well.

A-16

In a letter dated November 6, 1981, the Public Advocate urged

the Administrative Law judge to ignore the Board’s reservation of

the TMI fault issues.

Characterizing the Board’s declaration of a continuing reserva-

tion of the TMI fault issue as “a motion to return the issue of

‘fault’” to the Board, the Administrative Law judge, in what he

captioned a Procedural Order Decision on Motion, stated:

As to the Board’s assertion that it can take back issues

once transmitted, I feel that to state this proposition is the

functional equivalent of deciding that the Board can

respond to an administrative law judge’s procedural order

by making the subject matter of that order disappear.

This is inconsistent with the view expressed in the “Uni-

form Administrative Procedure Rules of Practice” [ foot-

note omitted] promulgated by the Chief Administrative

Law Judge under a clear grant of statutory authority. . . .

Therefore, the Board is powerless to recall a single issue

from a transmitted contested case.’

He then proceeded to exercise what he believed to be his

discretionary authority to determine whether or not the Board

could hear the TMI fault issue directly:

I ORDER, under the exercise of my discretion, that this

issue be sent back to the Board, and | characterize the

Order as procedural, under N.J.A.C. 1:1-9.7(e), and,

hence, appealable only to the Superior Court Appellate

The Board prepared to conduct its own hearings with respect to

(1) JCP&L’s request for restoration of TMI-1 and 2 to rate base

with associated operating and maintenance expenses, and (2) :

JCP&L’s request for recovery of decontamination costs associ-

ated with the damaged TMI-2 unit. Ina prehearing order, dated

April 30, 1982, the Public Advocate’s claim that a determination

as to TMI culpability was necessary prior to the passing on to

ratepayers of any accident-related costs was addressed by the

3. The rule of referred to by the Administration Law

was to be invalid by the Supreme Court of New

Jersey in In re Adm'v Procedure Rules, 9) N.J. 85 (1982).

Tee tne 2 ae

A-17

Board. Referring to an earlier order issued by it with respect to

recovery of TMI replacement energy costs, the Board stated:

We have fully dealt with the “fault” issue at length in a

previous decision. In re Jersey Central Power and Light

Company, Decision on Motion, Docket Nos. 95-427, 804-

285 and 811-25 (April 23, 1981). We reiterate that deci-

sion in which we concluded that the NRC has primary

jurisdiction to determine compliance with standards with

regard to the design, construction, operation and use of

nuclear facilities.

In the April 23, 1981 “fault” decision relied upon by the Board,

problems associated with initiating a TMI fault inquiry were

analyzed in detail.‘ With respect to overriding NRC jurisdic-

tion, the Board has stated:

[T]he design construction and operation, as well as the

development, use and control of nuclear facilities is within

the primary if not exclusive jurisdiction of the Nuclear

Regulatory Commission. ... Certainly this Board should

defer to the expertise of the Federal Body according to the

concept of primary jurisdiction in the interpretation of the

standands & bas ast ead whether oc tae ae aaains tae

try has met these standards in a reasonable fashion.

Referring to two investigative reports claimed by the Advocate to

simplify the quantification of TMI-fault, the Board stated:

We . . . have the results of two major fault iries [the

Kemeny Commission Report of October, 1 and the

Rogovin Report of January, 1980], which have not been

able to isolate any particular cause of the accident. The

Ee ee 1980, utilizing a staff of 100

passa ay TI scientists, attributed the accident to

a complex of intertwining factors including inadequately

designed pees inadequate training of personnel,

4. The April 23, 1981 ‘fault’ order referred to by the Board is the

ee ene eee Oy ee ee Docket A-162-

A-18

inadequate emergency room procedures, inadequate con-

trol room design and a system of divided responsibilities

between the manufacturer, the Pennsylvania operator, the

Nuclear Regulatory Commission, and the New York hold-

. ing company. We do not see much point in attempting to

duplicate these efforts.

The Board in its April 1981 order had acknowledged that even

if it were to succeed in precisely establishing the degree of culpa-

bility, if any, attributable to JCP&L the imposition of any resul-

tant penalty or disallowance would necessarily have to be

balanced against the public’s interest in continued utility service:

Such an investigation would serve no public purpose since

in the end reasonable replacement power must be paid for

at current levels until there is a substantial reduction when

TMI-1! returns to service.

Even after a fault inquiry, therefore, the Board would:

[S]till have to balance the customers(’] interest in

refunds or frozen rates due to the imposition of penalties

and the need for a utility viable enough to provide service.

The Board in its April 23, 1981 “fault” decision also expressed

its concern for the impact the initiation of a fault inquiry might

have upon an already wary banking community upon which

JCP&L was exclusively dependent for credit, and also upon pos-

sible recovery by ratepayers in related civil litigation involving

alleged negligence by Babcox and Wilcox, manufacturers of the

TMI reactor.

In addition to the relevancy of TMI-fault, numerous other

ratemaking issues were explored at the hearings below. Of those

issues, the following are relevant to the present consolidated

appeal: (1) the regulatory treatment to be accorded TMI-1 and

TMI-2 in the computation of JCP&L’s rate base; (2) ratepayer

funding of TMI-2 decontamination costs; (3) the appropriate

level of rate of return and (4) the appropriate leve! of the Com-

pany’s cash working capital allowance. |

A-19

During the course of the hearings before the Board, JCP&L

argued for the return of TMI-1 to its rate base. TMI-1, although

undamaged in the March 28, 1979 accident, has remained shut-

down by order of the NRC. JCP&L’s witness testified that the

NRC shutdown order was unlikely to be lifted prior to the resolu-

tion of three major issues. Those issues involved (1) the inquiry

by the Atomic Safety and Licensing Board as to an incident

involving cheating by TMI operators on NRC operator licensing

exams; (2) a recent ruling by the U.S. Circuit Court of Appeals

requiring an evaluation of psychological distress before a restart

of TMI-1,' and (3) the discovery of leaks in TMI-1 steam genera-

tor tubes.

After evaluating the testimony, the Board reaffirmed its exclu-

sion of TMI-1 from rate base and stated with regard to the

criteria to be employed in determining when TMI-1 could appro-

priately be returned to rate base:

We adopt the Advocate’s position and employ the

restart criteria developed in Pennsylvania. As we have

stated before, when the unit returns to commercial opera-

tion after the NCR issues the necessary approvals, an

expeditious hearing process will be instituted, the facility’s

status, i.¢., rate base inclusion will be examined, and if

appropriate, will be recognized.

JCP&L also argued before the Board that TMI-2, out-of-

service since the accident, should be included in rate base as

“Plant Held for Future Use,” or, as an alternative, the Company's

investment in TMI-2 be amortized. In rejecting this proposal the

Board concluded in its July 22, 1982 order:

After careful review, the Board finds no compelling

reasons to alter its policy that the financial impact associ-

ated with the TMI accident should be shared er.

ers and stockholders. The Board has

the of reasonable replacement

to maintain service for the ratepayer. replacement snr Ss

5. That decision reversed by the Supreme Court in

M Co re hon

Edison Co. v. Energy, ___ U.S.

—— 75 L.Ed.2d $34 (1983).

’

A-20

return on Petitioner’s investment in the TMI facilities

sitting idle since March 28, 1979, in recognition of what

we believe is the equitable sharing of the cost of the

accident.

Given the uncertainty of the future of this facility, it

would be unfair to ask the ratepayer, who is the innocent

* victim of this dilemma, to fund both the replacement

power and the investment costs. The investor has borne a

share of the consequences from the accident as has the

ratepayer. We feel that a balance must be maintained in

assessing this loss. To make a mid-course adjustment now

would, in our opinion, destroy the foundation of the shar-

ing concept which we have carefully fashioned for 2%

years.

JCP&L proposed during the hearings before the Board that it

be permitted to recover through rates, 13.8 million annually for

five years towards TMI-2 decontamination costs. This amount

claimed represented its proportional share of TMI-2 clean-up

costs as set forth in the Bradley-Heinz cost-sharing bill pending

before the United States Senate. That cost-sharing reflected the

recommendations made by Governor Thornburgh of Penn-

sylvania that TMI-2 clean-up costs should be spread over a

broader base and include contributions from not only New

Jersey and Pennsylvania ratepayers, but from the federal govern-

ment and nuclear industry as a whole.

In its July 22, 1982 order, the Board permitted the requested

ratepayer contribution towards decontamination costs. The

Board also expressed its belief that an indication of its willingness

to recognize decontamination costs in rates would encourage fur-

ther remedial action on the federal level. Finally, the Board

noted the “full endorsement of the Thornburgh Plan” by Gover-

nor Kean, as well as the public support for the Thornburgh propo-

sal expressed by the Public Advocate.

JCP&L’s rate of return witness testified that an appropriate

level for a return on equity for JCP&L would be 23% given the

increased risk to the common stockholder demonstrated “by the

events of 1979, 1980 and 1981.” The Public Advocate’s rate of

A-21

return witness recommended a return on equity of between 14.84

to 15.69%. After reviewing the competing testimony, the Board

determined that a return on equity of 17% was appropriate. In

reaching that determination, the Board noted that recent long-

term “BBB” rated utility bonds were yielding near 18% and

“AAA” utility bonds 16%. That data indicated to the Board that

the Public Advocate’s recommended return on equity of between

14.84% to 15.69% was too low. The Board also took into consid-

eration the fact that JCP&L had very limited access to tradi-

tional money and capital markets. While recognizing the need to

mitigate the company’s long-term capital costs, the Board

acknowledged that restoring JCP &L’s standing in financial mar-

kets “cannot be accomplished in one Board Order covering say

the next year or two.” Rather, the Company’s financial problems

would have to be “systematically” dealt with by the Board “in a

consistent and realistic way.” Referring to its recent decision

granting Public Service Electric and Gas a return on equity of

16%, the Board described its award of a 17% return on equity as

reflective of JCP&L’s higher risk. The Board also suggested

ways in which JCP&L’s risk factor could be lessened, such as the

company’s optimum operation of its Oyster Creek nuclear facility

and an expeditious restart of TMI-1.

At the hearing below disagreement arose between JCP&L and

the Public Advocate concerning the proper methodology to be

employed in the computation of the Company’s cash working

capital allowance. JCP&L, using the approach taken in its pre-

vious rate cases and approved by the Board, used the “ method.”

This method assumes that a utility on a monthly billing cycle

experiences an average lag of 45 days (% of a year) in receipt of

payment for services rendered. The level of cash working capital

necessary to bridge this gap and permit the company to meet its

day-to-day operating expenses and financial obligations while

awaiting payment for services rendered is then calculated. The

Public Advocate through its witness, recommended that the

Company's cash working capital be computed based upon a

“lead-lag” study he had conducted in an effort to compute the

A-22

actual interval between the date the Company renders a service

and the date it receives payment for such services. He testified

that in conducting his lead-lag study he had used as a data base

the Company’s 1980 calendar year operations.

Although he utilized 1980 calendar year data for the computa-

tion of lead-lags generally, with respect to lead-lags in the area of

the Company’s gross receipts and franchise tax collections, the

witness recommended that such lead-lags be computed from mid-

1979.

The Board in its final order disagreed with this recommended

departure from the 1980 date base and calculated all lead-lags

upon the Company’s 1980 calendar year operations. The overall

rate revenue impact of this adjustment amounted to $4 million

out of total revenues of $1.2 billion.

Following issuance of its July 22, 1982 base rate order, the

Board, on September 2, 1982, issued its determination with

respect to JCP&L’s pending petition for an adjustment in its

Levelized Energy Adjustment Clause. Docket A-219-82-T1

involves no challenge to the actual calculation of the company’s

LEAC but is limited to the question raised by the Public Advo-

cate and other appellants as to the necessity of a TMI-fault

determination prior to the passing on of replacement energy costs

to ratepayers. Also raised in connection with the LEAC proceed-

ing by the Advocate is the issue of the Board’s ability to exclude

certain issues from a case transmitted to OAL. Although the

Advocate seeks no remedy from the court with respect to any

issue excluded by the Board in the LEAC proceeding, other than

that related to TMI-fault, it is necessary for a complete under-

standing of the LEAC portion of this appeal to note the following

facts.

During the pendency of JCP&L’s main rate case, the Com-

pany, on January 29, 1982, filed for an increase in its levelized

energy adjustment clause. The matter was referred by the Board

to the OAL for hearing. In its January 29, 1982 letter of trans-

mittal, the Board specifically reserved to itself “any and all TMI -

fault-related issues which any party may raise.” On May 24,

poe

A-23

1982, the assigned ALJ issued an Initial Decision with respect to

the issues before her. In that initial decision, the ALJ addressed

certain issues which the Public Advocate had attempted to intro-

duce into the proceeding. One issue related to a proposed inter-

est charge on over-recoveries under the LEAC, the other related

to the Advocate’s recommendation that the Board adopt a policy

encouraging conversion of electrically heated homes within

JCP&L’s service territory to gas or oil heat. With regard to

these two issues the ALJ stated:

Procedural fairness dictates that Rate Counsel’s recom-

mendations be rejected out-of4rand in this proceeding. A

prehearing conference was held on February 2, 1982. I

issued a prehearing order on February 16, 1982, which

order included stipulations and a preliminary definition of

issues. The order did not include within the statement of

issues questions relating to the reasonableness of peti-

tioner’s current credit on over-recoveries nor policies con-

cerning clectricially heated homes. At no time

subsequent to issuance of the prehearing order did Rate

Counsel give notice of these issues. Rate Counsel did not

raise any questions regarding electrically heated homes

and interest on over-recoveries until it filed its initial brief.

In view of the fact that the parties had not been afforded the

opportunity to address the issues belatedly raised by the Advo-

cate, the Administrative Law judge rejected the Advocate’s rec-

ommendations. The ALJ further noted that, by their very

nature, such proposals would more appropriately be addressed in

a generic proceeding rather than JCP&L's LEAC hearing, since

they would affect not only JCP&L, but conceivably all electric

utilities. Similarly, issues belatedly raised by Ocean County in

the LEAC proceeding dealing with outages at JCP&L’s Oyster

Creek nuclear plant were rejected by the ALJ as being more

appropriate to a base rate case than a LEAC proceeding.

After receipt of the ALJ's Initial Decision, it was determined

by the Board that more current data was necessary prior to

reaching a final LEAC revenue figure. For that reason, the

Board, on July 1, 1982, sent the case back to the OAL for the

A-24

limited purpose of updating relevant data. In its letter of trans-

mittal, the Board specifically excluded from consideration in the

reopened proceeding those issues already rejected by the ALJ as

inappropriate to a LEAC proceeding and continued its reserva-

tion of TMI-fault.

After completion of the data update the Board, on September

2, 1982, issued its LEAC determination. In that order, the Board

addressed the Advocate’s “exceptions” to the Board’s reservation

of issues in its July 2, 1982 letter sending the case back to the

OAL. The Board stated:

As to the Advocate’s . . . exception regarding the issues

reserved by the Board in its letter of transmittal of July 1,

1982 to the Office of Administrative Law, we have

reviewed the Advocate’s positions and find that in the

main, they relate to issues which are not the subject of a

LEAC review, but which are subject to either a generic

review or a review within the context of a base rate case.

The Board’s sole rationale for reserving these issues was to

insure that the parties, most especially /sic] the Public

Advocate, did not embark on a time consuming investiga-

tion of unrelated issues.

Appeals from the Board’s July 22, 1982 base rate order were

filed by the Public Advocate, Ocean County and ratepayer Diane

Fahey. Jersey Central filed a cross-appeal.

Appeals from the Board’s September 2, 1982 LEAC order were

filed by the Public Advocate and Ocean County.

Finally, we were informed at oral argument that a new rate

increase application has been filed by JCP&L and is presently

pending before the Board.

We affirm the four orders here under review generally for the

reasons expressed by the Board of Public Utility Commissioners,

: with the following observations.

At the outset we recognize the difficulty of the task given to the

Board in the regulation of this utility. Jersey Central Power and

Light has been virtually devastated by the events at Three Mile

Island. Since the date of that accident, the Board has had to

\ vera Ye Dabo le’? Orig eile tak ae eae

A-25

entertain numerous applications from JCP&L for relief in vari-

ous forms including rate and LEAC applications such as here

under review. As the Board stated in its April 23, 1981 order:

Unquestionably this Board and its Staff have been

required to devote more time, effort and resources to the

problems occasioned by Three Mile Island than has ever

been true during the approximately 70 years since the

agency was created. It is not an exaggeration to say that

we probably have a more intimate knowledge of the regu-

latory and financial problems associated with this utility

than in any other matters subjected to our jurisdiction.

This has not been a matter of choice. It has been a matter

of sheer necessity.

It has been this type of intensive regulatory monitoring of

JCP&L that has gained the Board’s primary goal: the mainte-

nance of safe, adequate and proper service for the public. To

date, JCP &L’s ratepayers have experienced no major disruptions

in essential utility services.

Throughout all of the post Three Mile Island proceedings

brought by JCP&L, the Advocate has strongly and relentlessly

sought to have a fault determination made by the Board. The

Advocate’s position, briefly stated, has been that JCP&L’s rates,

in order to be deemed reasonable, must reflect the degree of TMI

culpability, if any, attributable to the Company. While the

Advocate’s position may have a prima facie appeal, especially to

ratepayers facing yet another increase in utility bills, the fact

remains as the Board points out, that the Advocate’s seemingly

pro-ratepayer argument fails to give proper emphasis to the

Board’s primary ratepayer responsibility. That responsibility is

to insure continued utility service for the more than two million

residents of the territory serviced by JCP&L. In the absence of a

currently available alternative to JCP&L’s continued existence,

the Company must be kept financially able to continue providing

such service. As the Board has pointed out:

This u system has not a dividend in two years. It

is not, cannot access [sic] financial markets to cover

capital costs. It is paying expenses from a revolving line

A-26

of short-term bank credit. This sole source of capital is

based upon the bank’s continuing evaluation of the util-

ity’s system revenue flow which the movant seeks to

restrict. If we were to stay even consideration of an

appropriate level of purchase power costs and base rates in

matters currently pending, this could easily be interpreted

by the banks as an “adverse change” permitting the banks

to restrict their line of credit. Such a consequence would

go to the very heart of the financial viability of this utility

and its ability to serve its customers.

It must be apparent that a fault inquiry would have placed the

Board, the utility and the ratepayer in a “catch 22” situation.

It is apparent that, contrary to the assertions of the Advocate,

the Board has not been unmindful of the rate consequences to

ratepayers flowing from the Three Mile Island accident and has

exerted every effort to protect the ratepayers from undue charges.

As the Board states, “For the Advocate and other cross-appel-

lants to now argue that, absent a TMI-fault investigation, rate-

payers are being exposed to unreasonable rates is both

irresponsible and untrue.” Any analysis of whether the Board

acted properly in declining to embark upon the proposed fault

investigation must begin with a clear understanding of the scope

of the Board's discretion in this area. It is certainly true, as the

Advocate and other cross-appellants argue, that the Board has

the authority to disallow expenses that it finds to be the result of a

utility’s negligence, imprudence or mismanagement. It does not

necessarily follow, however, that the Board must embark on every

proposed investigation into alleged utility negligence, imprudence

or mismanagement, no matter how futile or detrimental to the

public interest such an investigation may be. Nor does it follow

that the Board may not, under any circumstances, defer in the

exercise of its authority to those other agencies possessing either

primary or exclusive jurisdiction over the matters involved.

The Public Advocate has attempted to introduce into the ongo-

ing Three Mile Island fault debate a new “procedural” argument

based upon his interpretation of the “single controversy” doctrine.

This argument, raised for the first time in his brief challenging the

A-27

Board’s July 1982 and September 1982 rate orders, appears to be

twofold. First, the Advocate argues that the Board has violated

the single controversy doctrine by “ignoring” the Three Mile

Island fault issue in connection with the setting of JCP&L rates.

Inasmuch as an assessment of Three Mile Island’s culpability is

viewed by the Advocate as a prerequisite to the setting of reason-

able rates, nothing short of an actual allocation of fault will

indicate that “all” the issues in the case have been resolved.

The Advocate also argues that the “single controversy” doc-

trine vests in the Office of Administrative Law the independent

adjudicatory authority to embark upon an investigation into the

causes of the Three Mile Island accident in connection with any

Three Mile Island related rate application transmitted to it by the

Board. The Advocate regards this authority so paramount that

the Board itself may not reserve the Three Mile Island fault issue

and thus frustrate the Office of Administrative Law in the exer-

cise of its adjudicatory responsibility to hear it. We disagree.

The simple answer to all of these arguments is that the author-

ity to determine that fault is relevant to any rate proceeding is

vested in the Board. In recalling that issue from the Administra-

tive Law judge the Board, in light of its knowledge of the precari-

ous existence of JCP &L and its efforts to balance the needs of the

utility and the interests of the ratepayers, simply determined that

fault was not relevant to this case before it. As we understand

the law as it existed at the time the Board made this decision, the

Board acted correctly.

During the pendency of these appeals, the Legislature enacted

and the Governor signed L. 1982, c.94 dealing with the determina-

tion of fault after a power generating accident. That statute

which ostensibly seeks to change the power of the Board which we

have just mentioned is clearly not applicable here and we see no

reason therefore to apply it. There is currently a rate proceeding

now before the Board in which JCP&L is the applicant. That

proceeding will call L.1982, c.94 into consideration.

The issue of fault has also been raised in connection with the

LEAC increases. In the proceeding which resulted in the last of

A-28

the five LEAC increases before the base rate order of July 31,

1981, the Advocate made a motion requesting that no increase in

the LEAC be granted until the Board decided the issue of fault.

The Adminstrative Law judge in the course of his initial decision,

granted an increase acknowledging “that increases pursuant to an

adjustment clause must at some point be determined to be just

and reasonable in order to be allowed on a permanent basis” and

“that an issue which is fundamental to the determination of rea-

sonableness, i.e., the issue of fault, is not being considered in this

proceeding.” The ALJ denied the Advocate’s motion because,

the Advocate claims, it was clearly based on the assumption that

the increase in the LEAC was interim in nature and that the

Board would decide the issue of fault in the base rate case. The

Board’s failure to decide that issue, it is argued, violates the

holding of the Supreme Court in Jn re Board's Investigation of

the Tele. Cos., 66 N.J. 476, 492 (1975).

The Advocate also argues that the Board apparently believes

that it is enough for it to determine.that JCP&L actually spent

additional money on replacement power or to determine that

JCP&L could not have purchased that power more cheaply else-

where. The Advocate argues that that is not enough. He claims

that the Board must determine the reasonableness of the utility's

actions at Three Mile Island, and whether the utility’s negligence

caused the increased replacement power costs or at least contrib-

uted to their magnitude. Citing Public Service Coordinated

Transport v. State, 5 N.J. 196 (1950), he claims that the Court

held that the Board and reviewing courts cannot “accept the

books of account of a public utility at face value in a rate case in

which reasonableness is always the primary issue.” /d. at 218.

The Advocate apparently argues that not only was the pass-

through of Three Mile Island replacement energy costs improper

for failure on the part of the Board to examine the fault issue, but

also because of an alleged failure by the Board to “validate” prior

pass-throughs of Three Mile Island replacement energy costs in

its final July 1981 base rate order. If the Advocate is contending

that every final base rate order must contain specific reference to

A-29

prior LEAC proceedings, we regard such as frivolous. For exam-

ple, In re Revision of Rates by Redi-Flo Corporation, 76 N.J. 21

(1978), requires only that there be a nexus between a LEAC

proceeding and a base rate case in which a utility's overall

financial status is evaluated. The Board’s July 1981 base rate

order approved rates based upon JCP&L’s cost items, one of

which was the fuel expense examined in the prior LEAC. By its

acceptance of such base rates, therefore, the prior LEAC was

authorized “in the context of a pending rate proceeding,” as

required by Redi-Flo. 76 N.J. at 41, n.13. Thus the requisite

nexus between a LEAC proceeding and a base rate case in which

a company’s complete finances are examined existed here. We

find that no more explicit validation is required.

In her main and reply briefs, Diane Fahey contends that the

assessment of decontamination costs of Three Mile Island 2 to the

ratepayers is beyond the authority granted to the Board by the

Legislature. We disagree.

Ratemaking is a legislative, not a judicial function, and the

Legislature has delegated its ratemaking authority to the Board

of Public Utilities. Public Service Coordinated Transport v.

State, 5 N.J. at 214. The Board is vested with broad discretion

limited by the statutory standard prescribing the ratemaking

powers of the Board: it must fix just and reasonable rates. Id. at

214-215; N.J.S.A. 48:2-21(b)(1). It is fundamental that a

court which reviews a decision of the Board has to weigh for itself

whether the rate is just and reasonable. A legislative body, such

as the Board, prescribing a rule for future conduct is not the same

as a judicial or quasi-judicial tribunal. Thus, if there is any

presumption in favor of the order of the commissioners it depends

upon the strength of the reasoning by which it is supported.

Public Service Co. v. Public Utility Bd., 84 N.J.L. 463-467 (Sup.

Ct. 1913), rev'd in part 37 N.J.L. 581 (E. & A. 1914), aff'd on

rehearing 87 N.J.L. 597 (E. & A. 1915), app. dism. 242 US. 666

(1917).

The justness and reasonableness of a rate “can only be deter-

mined after an examination of a company’s property valuation

A-30

which constitutes its rate base; its expenses, including income

taxes and an allowance for depreciation; and the rate of return

developed by relating its income to the rate base.” 5 N.J. at 216.

Here it is contended that clean up costs constitute the Company’s

expenses and that because Three Mile Island 2 is not in the rate

base, expenses related to it cannot be taken into account in setting

a rate.

We know of no authority for that assertion nor is any cited to

us. The “used and useful” test prevents inclusion in rate base of

any facility which is not contributing to the production of energy.

That, however, says nothing at all about anything other than a

rate base decision. Specficially, it does not say whether expenses

of property which is not used and useful can be passed along in

some other manner. It does not say that expenses which are

incurred in order to have property restored to the used and useful

tus canhot be passed along to the ratepayer.

n fact, as the Board’s brief points out, there are expenses

which are not directly linked to base rate items that are routinely

passed on. The best example is expenses of amortization of a

utility’s investments in projects abandoned before they can be

included in the rate base. Obviously such projects are not used

and useful but the ratepayer is sometimes required to pay a share

of the costs.

Reliance is placed on the case of Office of Consumers Counsel

v. PUC, 67 Ohio Stat.2d 153, 423 N.E.2d 820 (Sup. Ct. 1981),

app. dism. 455 U.S. 914, 71 L.Ed.2d 455 (1982), aff'd 1 Ohio

St.3d 22 (Sup. Ct. 1982). That case involved nuclear power

plants which, like Forked River, had been abandoned before they

were completed. The Public Utility Commission permitted

amortization of investment in the four cancelled plants. It

believed that “if the expenditures are prudent, amortization

should be permitted.” It decided that they had been prudent

because at the time the decision was made to construct the plants,

it was a reasonable decision. Similarly, the decision to terminate

construction was reasonable. 423 N.E.2d at 825-826.

A-31

The Ohio Supreme Court decided that the decision based on

prudence applied by the commission was not the correct test.

Instead the Ohio statute required that when the Public Utility

Commission fixed just and reasonable rates, it had first to deter-

mine “ ‘the cost to the utility of rendering the public utility service

for the test period... .”” 423 N.E.2d at 826. The cancelled

planned expenditures, the court said, did not represent the cost to

the utility of rendering public utility service for the test period.

The cost also did not come within another provision of the statute

allowing adjustment for certain other factors. /d., 827-828.

Thus the Ohio court was not simply deciding whether it

believed the record showed that the approved rates were just and

reasonable. It was restricted instead by a statutory definition of

what was just and reasonable and found that allowance of amorti-

zation costs did not fit within that definition. Moreover, it dealt

with amortization costs not with clean up costs as we do here.

Our Board of Public Utility Commissioners has broad power to

set rates. Obviously someone has to pay for the clean up costs.

The Board's decision estimated that it would cost each ratepayer

approximately fifty cents per month for his share of these costs.

The Board also believed that it was important that New Jerscy’s

ratepayers share in the clean up costs so as not to jeopardize plans

for federal money to clean up Three Mile Island 2. The sooner

the plant gets back on line the sooner it can produce energy which

will be to the benefit of the ratepayers.

It is apparent that the Board took into account the numerous

factors involved in allocating clean up costs. It concluded by

putting a relatively minimal cost on the ratepayers in order to

insure receipt of clean up funds from other sources and introduce

some measure of stability into the utility's financial situation.

All these considerations, we believe, were reasonable and the

result, we think, is that that inclusion of clean up costs in the

adjusted rate cannot be found so unjust or unreasonable as to

require reversal. We find that the allowance of clean up costs are

within the power delegated to the Board of Public Utilities by the

Legislature.

A-32

In its appeal in the 1981 base rate case JCP&L argues that the

rates set by the Board are not just and reasonable because: (1)

when the Board removed TMI-1 from the rate base it failed to

recognize the interdependence between the rate base and the rate

of return; if TMI-1 was not going to be in the rate base, a higher

rate of return should have been permitted; (2) the record does not

support a finding that 10.68% is an adequate overall rate of return

and that 16.5% is an adequate return on equity; (3) the Board

failed to refer to the standards established in Federal Power

Commission v. Hope Nat. Gas Co., 320 U.S. 591 (1944), and

therefore had no way of determining whether it was setting just

and reasonable rates. We find that none of these factors show

that the rate was unjust or unreasonable.

The Board is not required to use any particular formula in

setting just and reasonable rates and because it must consider the

public interest as well as the investors’ interest, the failure to

allow a higher rate of return because of the removal from the rate

base of TMI-1 was not error. Certainly the Board did not ignore

the interrelationship between the rate base and rate of return. In

the rate of return portion of the opinion, the Board recognized

that “[c]apital and credit markets reflect the consensus judgment

of investors who direct resources to their highest marginal

returns. Capital flow in response to risk/reward relationships

and failure to compete effectively for funds leads invariably to

capital shortages.” The Board also said that its ultimate goal

was to insure safe, adequate and proper service for the utility

customers. It recognized that the Company contended that it

that have been disallowed but are still an obligation of the Com-

pany.” This would include the previous elimination from the rate

base of TMI-1 and the removal of AFUDC accruals on Forked

River subsequent to April 4, 1979, ordered by the Board. These

actions are consistent with past Board policy. Hence, the Beard

recognized its obligation to investor and consumer interests and .

understood that the Company wanted the Board in considering

- da a . . i he 7 - ee“ 1 is

a ee, ee oe ee se

A-33

the rate of return, to take into account that TMI-1 had been

removed from the rate base.

While it is true that the Board’s decision does not closely

analyze the relationship between rate of return and the removal of

TMI-1 from the rate base, it is also apparent that the Board

considered that relationship and apparently decided that the

removal of the unit from the rate base did not justify a higher rate

of return.

Once TMI-1 was taken out of the rate base, it would not have

made sense to raise the rate of return because the utility was not

entitled to a rate of return on property which was not part of the

base. If the rate on the remaining property could be increased to

make up for the loss of TMI-1, the effect would be the same as

leaving TMI-1 in the rate base. Such would create a rate based

upon property not part of the rate base and could produce an

unreasonable rate of return. Accordingly, we conclude that the

failure to increase the rate of return merely because TMI-1 was

taken out of the rate base did not render the rate of return unjust

or unreasonable.

Finally, as to this point, the failure of the Board to refer to the

Hope standards does not indicate that the decision of the Board

violated the Public Utility law. If we can find, as we do, that the

rates are just and reasonable and adequately balance consumer

and investor interests, the mere failure to refer to Hope or specifi-

cally to set out the three Hope standards as referred to by JCP&L

does not render the ultimate decision unjust or unreasonable.

With respect to its appeal and cross-appeal on the 1981 and

1982 base rate orders, JCP&L argues that the Board failed to

establish rates which comported with the requirements of the

federal and state Constitutions under the standards set forth in

Federal Power Commission v. Hope Nat. Gas Co., 320 U.S. 591

(1944). Hope basically held that an investor had three interests:

that the company have sufficient revenue for operating and capi-

tal costs, that the return on equity be commensurate with returns

on similar enterprises, and that the company be able to maintain

credit and attract capital.

A-34

We note at the outset that the three factors which JCP&L cites

are not identical to those which we have just mentioned. JCP&L

contends that the Board should have made a finding on what its

real earnings would have been as a result of the Board’s order.

We do not read Hope to require that. Hope does say that the

investor does have the right to be concerned with the financial

integrity of the company. It does not say, however, that specific

findings must be made op. the impact of the order on the com-

pany’s financial integrity.

Any federal constitutional argument must be based on the

principle set forth in Permian Basin Area Rate Cases, 390 U.S.

747, 20 L.Ed.2d 312 (1968), reh. den. 392 U.S. 917 (1968):

It is, however, plain that the “power to regulate is not a

power to destroy,” [citations omitted]; and that maxi-

mum rates must be calculated for a regulated class in

conformity with the pertinent constitutional limitations.

Price control is “unconstitutional . . . if arbitrary, discrimi-

natory, or demonstrably irrelevant to the policy the legis-

lature is free to adopt. ...” Nebbia v. New York, 291 U.S.

502, 539, 78 L.Ed. 940, 958, 54 S.Ct. 505, 89 A.L.R.

1469. [Id. at 769-770]

As the Permian Basin case noted, “the just and reasonable

standard of the Natural Gas Act ‘coincides’ with the applicatle

constitutional standards . . . and any rate selected by the Commis-

sion from the broad zone of reasonableness permitted by the Act

cannot properly be attacked as confiscatory.” 390 U.S. at 770.

Federal Power Com. v. Nat. Gas Pipeline Co., 315 U.S. 575,

586 (1942), held that a commission was not bound to use any

single formula in determining rates. The question for the courts

is whether the order, viewed in its entirety, meets the require-

ments of the act that the rates be just and reasonable; the method

employed is not controlling.

Hope held that the only question is whether the rates were just

and reasonable, and that “involves a balance of the investor and

the consumer interests.” 320 U.S. at 603. Discussing investor

A-35

interests, the Court said there must be enough revenue for operat-

ing expenses and capital costs of the business. The return to the

equity owner must be commensurate with returns on investments

in other enterprises having corresponding risks. The return must

be sufficient to assure confidence in the financial integrity of the

enterprise so that it can maintain credit and attract capital. 320

U.S. at 603.

We have carefully examined all of the briefs filed by JCP&L,

and when we read them together, we believe that the utility’s only

constitutional argument is that the Constitution was violated

because the Board failed to make specific findings pursuant to

Hope's requirements.

We do not find any constitutional infirmity in the orders of the

Board. It appears to us that JCP&L is seeking to ignore the

difficult task which the Board has taken on in an attempt to keep

that organization vital and still servicing the ratepayers. We

believe that if it were not for the activities of this Board, JCP&L

and its investors might well be nothing more than history. It does

not serve the public well for the utility to take the attitude that it

is entitled to everything when in fact it has gotten itself into a

position where it must rely on the public to save it.

If we presume that JCP&L could argue that various portions of

the order violated the federal Constitution, we find that no such

violation occurred. In reaching this conclusion we have consid-

ered whether Hope sets constitutional requirements for a state

court. We think it does but we believe that the three investor-

interest criteria cited by JCP&L are not of constitutional dimen-

sion, and are not the only criteria which a court must consider in

deciding whether a rate set by a utility commission is so high that

it exploits consumers or so low that it is confiscatory. It is appar-

ent that the Permian Basin Area Rate Cases cited above, 390

U.S. at 790-792, shows that those Hope standards are not exciu-

sive. Never the less, insofar as the three investor-interest criteria

do apply, we find that they were not violated by the substance of

the 1981 order.

; aS iy at ina” BS “- <s

‘ E ‘ pa eeee tar. fos 5 S Sig a a eee Fee

Se ieee ee SESS Oo ae ete: he Meg ee! |” Spt Qe Mae

‘e

A-36

The Permian Basin Area Rate Cases involved the setting of

maximum rates in interstate commerce for the sale of natural gas.

The case reviewed an order of the Federal Power Commission

which had permitted one maximum price for natural gas pro-

duced after January 1, 1961 and a lower price for all other natural

gas produced in the Permian Basin. The Court first held that it

had no power to set aside a reasonable rate. 390 U.S. at 767.

There were, however, some constitutional limitations. The Court

said that the commission had the power to set maximum prices

and to set different rates for different classes. Nevertheless, the

rates had to be calculated so that they would not be arbitrary,

discriminatory or demonstrably irrelevant to the legislative

policy. 390 U.S. at 769-770. The Court said that “the just and

reasonable standard of the Natural Gas Act ‘coincides’ with the

applicable constitutional standards.” Jd. at 770.

We think it to be significant that the Permian Basin decision is

divided into several portions. The portion which discusses the

constitutional requirements (which would therefore be applicable

to a state court’s interpretation of a state statute) does not say

that the three specific Hope standards to which Jersey Central

refers in this case (the investor-interest standards) are of consti-

tutional dimension. It does say that the more general require-

ments of Hope are constitutionally required.

First, the Court, in discussing the propriety of maximum rates,

said:

A-37

So far the Court had not said that the three specific ways of

measuring investor interest must always be examined in a rate

proceeding. Rather, a general balancing might well be sufficient

to satisfy the Constitution.

It was only after the Court had decided many aspects of

whether the commission had violated pertinent constitutional

limitations and whether it had abused its statutory authority, that

it turned to deciding whether the rate structure the commission

had devised should be upheld. The Court then asked what crite-

ria should be used to assess the commission’s rate structure.

Here it referred to Hope again, saying that the Hope court had

“found appropriate criteria by inquiring whether ‘the return to

the equity owner [is] commensurate with returns on investments

in other enterprises having corresponding risks,’ and whether the

return was ‘sufficient to assure confidence in the financial integ-

rity of the enterprise, so as to maintain its credit and attract

capital.’ Jd., at 603, 88 L.Ed. at 345.” Permian Basin Area Rate

Cases, 390 U.S. at 790-791. The Court then made the following

statement which we find significant: “These criteria, suitably

modified to reflect the special circumstances of area regulation,

remain pertinent, but they scarcely exhaust the relevant consider-

ations.” Jd. at 791.

Thus, the Permian Basin case not only stands for the proposi-

tion that the questions of return on investments, assurance of

confidence and financial integrity, and the ability to maintain

credit and attract capital, are not criteria of constitutional dimen-

sion, it also makes clear that those criteria are not exclusive.

Specifically:

A-38

credit ...and... attract capital.” [390 U.S. at 791;

footnote omitted ]

The Court then looked into three areas, only one of which had

to“Wo with the rights of investors. First, it asked whether the

commission had abused its authority. Second, it had to decide

whether the order was supported by substantial evidence. Third,

it had to decide whether the order could reasonably be expected to

maintain the financial integrity of the utility, attract capital and

compensate investors, “and yet provide appropriate protection for

the relevant public interest, both existing and foreseeable.” 390

U.S. at 791-792. Hence, the Hope criteria to which JCP&L

refers in this appeal were considered only in tandem with the

public’s interest. They would not be sufficient criteria on their

own. Consequently, we hold (1) the Hope criteria regarding

financial integrity, attraction of capital and compensation for

investors are not of constitutional dimension; (2) the Hope crite-

ria requiring just and reasonable rates and the balancing of inves-

tor and consumer interests are of constitutional dimension; (3)

even when the specific criteria are used they are not exclusive;

rather they should be used together with consideration of the

public’s interest.

We find that none of the purported errors in the decision which

JCP&L apparently asserts in its second reply brief violate those

portions of the Hope decision which bind us. None of those

factors render the rate unjust or unreasonable and none of them

show that the commission has failed to balance the interest of the

investor and the consumer.

We find no merit to JCP&L's argument that the 1981 and 1982

base rate orders violated NJ. Const. (1947), Art. 1, 1 20, which

provides that private property may not be taken for public use

without just compensation. In view of what we have stated here-

tofore in this opinion, we will not give the argument dignity by

more than referring

A-39

first found that Forked River had been abandoned on April 4,

1979 and it refused to allow AFUDC treatment after that date.

Secondly, although the decision is not entirely clear, the Board

apparently refused to allow base rate treatment for Forked River;

the parties agree that that occurred and JCP&L does not claim

that that waserror. Third, it adopted its Staff's recommendation

of a 15-year amortization period.

JCP&L argues that it began to build the Forked River plant in

response to a general policy established by the Board to increase

generating capacity. It notes that throughout the construction

period the Board approved and encouraged construction. In this

rate application, JCP&L wanted to recover over 20 years the

$395 million net investment it had made in the abandoned pro-

ject. Alternatively, it suggested a 15-year amortization period

assuming a lower overall cost of capital during that time. Under

the first plan, the Board would have to allow an increase in annual

revenues of $61.5 million and*under the second plan, it would

have to allow increased revenues of $52.2 million.

When the Board excluded carrying charges after April 4, 1979,

JCP&L claims that that reduced the annual income by $26.9

million. By refusing to allow carrying charges during the period

of amortization, the Board required JCP&L shareholders to pay

the carrying charges for 15 years out of the rate of return allowed

on property in the rate base. We understand JCP&L’s argument

as not actually contesting the refusal to put Forked River in the

rate base, or the 15-year amortization period, but as contending

that carrying charges should be allowed during the 15-year

period.

JCP&L says that investors should not have to bear any part of

the cost of the abandoned project; the consumers should take the

risk of a project which would have benefited them.

The choice of how to treat these carrying costs was a decision to

be made by the administrative agency, not by a reviewing court.

The decision to disallow carrying costs is part of the overall

scheme imposed by the Board and should not be disturbed. In

A-40

any event, we do not regard the decision as unfair. The ratepay-

ers have already paid over $53 million in constructing the project

in the form of Construction Work in Progress included in rate

bases. Ratepayers will never benefit from the abandoned project.

The project is one which investors hoped would provide a profit

for them. If that hope is not realized because the investment does

not pay off, the investors, not the ratepayers, should be asked to

bear the risk.

The orders under appeal are affirmed.

I hereby certify that the foregoing is a true copy of the original

on file in my office.

ELIZABETH MCLAUGHLIN

Clerk

A-41

Appendix B-2

CIVIL ACTION

NOTICE OF APPEAL

RikeR, DANZIG, SCHERER & HYLAND

Headquarters Plaza 1l—West Tower

Speedwell Avenue

Morristown, New Jersey 07960

(201) 538-0800

Attorneys for Appellant-Petitioner

Jersey Central Power & Light Company

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

Docket Nos.

A-162-81T2

A-218-82T1

A-220-82T1

A-227-82T1

A-219-82T1

A-224-82T1

(Consolidated )

IN THE MATTER OF THE PETITION OF JERSEY CENTRAL POWER AND a

LIGHT COMPANY FOR AN INCREASE IN RATES AND CHANGES IN

THE TARIFFS FOR SUCH SERVICE (BPU Docket No. 804-285)

IN THE MATTER OF THE PETITION OF JERSEY CENTRAL POWER AND

LIGHT COMPANY FOR APPROVAL OF AN AMENDMENT OF ITS TARIFF

TO PROVIDE FOR AN INCREASE IN RATES AND CHARGES FOR ELEC-

TRIC SERVICE AND A REVISION IN DEPRECIATION RATES (BPU

Docket Nos. 818-726, 818-736)

IN THE MATTER OF THE PETITION OF JERSEY CENTRAL POWER AND a

Licut Company L&veLizep ENERGY ADJUSTMENT (BPU Docket (a

Nos. 821-75, 818-726)

A-42

TO: Stephen W. Townsend, Clerk

Supreme Court of New

Hughes Justice Complex, CN-970

Trenton, New Jersey 08625

Elizabeth McLaughlin, Clerk

A-43

New J Pchlie Interest

Attorney for Diane Fahey

264 West State Street

Trenton, New Jersey 08608

Carla V. Bello,

1100 Raynened ccate 5 Ne sane I

Newark, New Now Jersey OTIC 07102

Oscar B. Brumback, Esq.

1340 Towerlawn Drive

Monroeville, Pa. 15146

Milton Lowenstein, Esq.

17 Academy Street

Newark, New Jersey 07102

A-44

NOTICE is hereby given that, pursuant to N.J. Const. (1947),

Art. VI, § V, 11 and R. 2:2-1(a), appellant Jersey Central Power &

Light Company (“Jersey Central”) appeals to the Supreme Court of

New Jersey as of right with respect to substantial questions arising

under the United States Constitution and the Constitution of the

State of New Jersey determined by the Appellate Division of the

Superior Court by judgment entered on July 28, 1983 in favor of

respondent New Jersey Board of Public Utilities. The appeal is

from the holding of the Appellate Division that the specific standards

set forth in Federal Power Commission v. Hope Natural Gas Com-

pany, 320 U.S. 591, 603, 610, 88 L.Ed 333, 345, 349 (1944) for

determining whether the rates allowed a utility are “just and reason-

able”, and therefore are sufficient to avoid the constitutional prohibi-

tion of taking private property for public use without just

compensation, do not rise to constitutional dimension. Jersey Cen-

tral contends the Hope Standards are of constitutional dimension

and that-the decision of the Appellate Division departs from well

settled federal law and contravenes the Fifth Amendment. to the

United States Constitution, as applied to the states by the Four-

teenth Amendment, and V.J. Const. (1947) Art. I, 120.

This matter is entitled to a hearing preference pursuant to R.

1:2-5(1) since a state agency is a party.

RIKER, DANZIG, SCHERER & HYLAND

Attorneys for Appellant

Jersey CENTRAL Power & Licut Co.

By: WILLIAM F. HYLAND

cocee

A Member of the Firm

James B. Liberman

(of the New York Bar)

Debevoise & Liberman

Jack B. Kirsten

Kirsten, Friedman & Cheria

OF COUNSEL

Dated: August 17, 1983

A-45

CIVIL ACTION

NOTICE OF PETITION

FOR CERTIFICATION

Riker, DANZIG, SCHERER & HYLAND

Headquarters Plaza [l1—West Tower

Speedwell Avenue

Morristown, New Jersey 07960

(201) 538-0800

Attorneys for Appellant-Petitioner

Jersey Central Power & Light Company

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NOS.

A-162-81T2

A-218-82T1

A-220-82T1

A-227-82T1

A-219-82T1

A-224-82T1

(Consolidated )

IN THE MATT®® OF THE PETITION OF JERSEY CENTRAL POWER AND

LiGHT COMPANY POR AN INCREASE IN RATES AND CHANGES IN

THE TARIFFS FOR SUCH SERVICE (BPU Docket No. 804-285)

IN THE MATTER OF THE PETITION OF JenseY CENTRAL POWER AND

Lint COMPANY FOR APPROVAL OF AN AMENDMENT OF ITS TARIFF

TO PROVIDE FOR AN INCREASE IN RATES AND CHARGES FOR ELBC-

TRIC SERVICE AND A REVISION IN DEPRECIATION RaTes (BPU

Docket Nos. 818-726, 818-736)

To:

“ee

A-46

Stephen W. Townsend, Clerk

Supreme Court of New Jersey

Hughes Justice Complex, CN-970

Trenton, New Jersey 08625

Elizabeth McLaughlin, Clerk

Superior Court of New Jersey

Appellate Division

Hughes Justice Complex, CN-006

Trenton, New Jersey 08625

Hon. Robert A. Matthews

Presiding Judge for Administration

Appellate Division

444 Hughes Justice Complex, CN-976

Trenton, New Jersey 08625

Hon. Melvin P. Antell

Appellate Division

P.O. Box 191-M

175 South Street

Morristown, New Jersey 07960

Hon. George B. Francis

Appellate Divisi

50 Court House

1201 Bacharach Boulevard

Atlantic City, New Jersey 08401

Hon. Irwin I. Kimmelman

Attorney General

Richard J. Hughes Justice Complex

Trenton, New Jersey 08625 “

Blossom Peretz, Esq., Secretary i

New Jersey Board of Public Utilities — §

1100 Raymond Boulevard a

Newark, New Jersey 07102

A-47

Roger L. Camacho, Esq., Director

Linda S. Lodenkamper, Esq.

Menasha J. Tausner, Esq.

Department of the Public Advocate

Division of Rate Counsel

744 Broad Street

Newark, New Jersey 07102

John C. Sahradnik, Esq.

Assistant County Counsel,

County of Ocean

34 Washington Street

Toms River, New Jersey 08723

Ms. Diane Fahey

286 Boeing Drive

Bricktown, New Jersey 08723

Edward Lloyd, Esq.

New Jersey Public Interest

A-48

NOTICE is hereby given that pursuant to R. 2:2-1(b) and R.

2:12 appellant Jersey Central will petition the Supreme Court of

New Jersey for certification to the Appellate Division to review

the final judgment of that Court entered on July 28, 1983 in favor

of respondent New Jersey Board of Public Utilities.

Riker, DANZIG, SCHERER & HYLAND

Attorneys for Petitioner

JERSEY CENTRAL Power & LiGuT Co.

By: WILLIAM F. HYLAND

PPP PP PPP

James B. Liberman

(of the New York Bar)

Debevoise & Liberman

Jack B. Kirsten

Kirsten, Friedman & Cherin

OF COUNSEL

Dated: August 17, 1983

i the

ules was anneted eee ees

filed in its stool int No. Nebety As

Jersey Central Power & Light Company

Typical Bill Comparisons:

Jersey Central and Neighboring Utilities

Residential No Water Heating 500 KWH/Month

o 60 = $58.94

‘ .

$51.9913) — ¢45.3313) 49.7

Y $42.9513) iy ay 7

Z $39.23(1 $40.84!3)

Rates in Effect April 1980 .

(1) Reflecting rate increase granted 4/14/80.

(2) Reflecting rate increase granted 4/10/80.

@) Hf pending base rate increase is granted in full.

‘

‘3

4 |

“aa

es!

I a

a +

A-50

* The following graphs and schedules were annexed to Jersey Cen-

tral’s petition for a rate increase filed on 11, 1981 were

and

in the filed ;

Docket No. A-218-40T1 by Jersey Central in its appeal in

Typical Bill Comparisons

Jersey Central and Neighboring Utilities

Residential No Water Heating 500 KWH/Month

sol tt

r «63.59 63.17

60} §9.93°59.11 .

Total Monthly BM - $

(mi wa yen aoe {TL ISS).

Ei Rates in effect as of August 1, 1981

[] pending rate increase were granted in full

¢/Kwh:

EJ 16.0 12.7 11.0 101 100 93 8.6

O . «+ 4126 12.0 11.8 10.6 104

* Stages 1 and 2. plus estimated March 1982 LEAC tre-

flecting 12 months of TMI-1 generation) and expire-

tien of deferred energy cost surcharge 3/7/81

A-51

New Jersey Utilities

Average Rate per KWH of Electric Sales

1870-1880

7UROCK. ELEC. ©

er /

7 JCP&L

: 6+ Ef ATL. ELEC.

Source: FERC Statistics of Privately Owned 4

Electric Utilities in the United States #

A-52

NEW JERSEY UTILITIES

Average Rate per Kwh of Electric Sales*

1970-1980

A-53

Appendix C-1

INTERIM ORDER

STATE OF NEW JERSEY

DEPARTMENT OF ENERGY

BOARD OF PUBLIC UTILITIES

1100 Raymond Bivd.

Newark, New Jersey 07102

BPU Docker No. 804-285

BPU Docket No. 803-172

THIRD AMENDMENT TO PETITION

BPU Docket No. 795-S08A

IN THE MATTER OF THE PETITION OF JERSEY CENTRAL

POWER AND LIGHT COMPANY FOR APPROVAL OF AN

INCREASE IN RATES AND CHARGES FOR ELECTRIC SERVICE.

IN THE MATTER OF THE PETITION OF JERSEY CENTRAL

POWER AND LIGHT COMPANY FOR APPROVAL OF THE TRANS-

FER OF ITS INTEREST IN CERTAIN PROPERTY ACQUIRED IN

CONNECTION WITH THE CONSTRUCTION OF UNIT No. 7 OF

THE SEWARD GENERATING STATION.

IN THE MATTER OF THE PETITION OF JERSEY CENTRAL

POWER AND LIGHT COMPANY: PETITION FOR AUTHORITY TO

ISSUE, SELL AND REVIEW UP TO $189,000,000 OF PROMISSORY

NOTES TO BE OUTSTANDING FOR MORE THAN ONE YEAR: TO

DELIVER A SUPPLEMENTAL INDENTURE DATED AS OF JUNE

15, 1979; TO ISSUE THEREUNDER AND SELL OR PLEDGE UP TO

$100,000,000 AGGREGATE PRINCIPAL AMOUNT OF THE FIRST

MORTGAGE BONDS DUE ON OR BEFORE JuLy 1, 1986.

APPEARANCES ATTACHED

APPEARANCE LIST

Jack B. Kirsten, Esq Robert O. Brokaw, Esq

Kirsten, Friedman & Cherin General Counsel

17 Academy Street Jersey Central Power & Light

Newark, New Jersey 07102 Company

Dolores Delabar, Madison Avenue at Punch Bowl Road

Kirsten, Friedman & Cherin penta tent dntitans

17 Academy Street eve

William Holzapfel, Esq.

Newark, New Jersey 07102 Holzapfel, Perkins and Kelly

Carla V. Bello, Esq 108 North Union Avenue

Deputy Attorney General Cranford, New Jersey 07016

Office of the Attorney General

1100 Raymond Boulevard

Bartholomew T. Zanelli, Esq.

Stryker, Tams and Dill

33 Washington Street

Newark, New Jersey 07102

Francis P. Piscal, Esq.

Berry, Summerill, Piscal, Kagan

and Privetera

34 Washington Street

Toms River, New Jersey 08753

Robert H. Stoloff, Esq.

Deputy Attorney General

1035 Parkway Avenue

Trenton, New Jersey 08625

Capt. Ernest C. Pearson, Esq.

tory Law Office

A-55

By THE BOARD

Docket No. 804-285

This Order addresses the Motion of Jersey Central Power &

Light Company, filed April 29, 1980 for interim or emergent rate

relief in the amount of $60 million dollars annually, pursuant to

N.J.S.A. 48:2-21.1. Petitioner also has pending its main rate

application to increase rates in the amount of $173.5 million

dollars, which amount includes the interim request pursuant to

N.J.S.A. 48:2-21. The main rate request proposed to be effective

June 1, 1980 is hereby suspended pending further hearings and

full investigation.

After required notice, because of the emergent nature of the

Petitioner’s request, the Board held immediate hearings which

commenced on Monday, May 5, 1980, and continued on May 7, 9

and 12, 1980. In addition thereto the Board held public hearings

to permit members of the publi : in the Petitioner’s service terri-

tory to be heard. Four such public hearings were held in

Hackettstown, Morristown, Freehold and Toms River on the eve-

nings of May 6, 7 and 8, 1980.

At the evidentiary hearings, there was submitted by JCP&L

the testimony of Dennis Baldassari, Treasurer of JCPAL, Fred

D. Hafer, Vice-President-Rate Case Management of GPU Ser-

vice Corporation (“GPUSC”). Paul H. Preis, Controller of

JCP&L, Eugene F. Carter, Assistant Vico-President-Rates,

GPUSC, and numerous exhibits. There was also submitted by

the Board's staff the testimony of Anthony J. Zarillo, Executive

Officer of the Board, and Dr. Fred Grygiel, Chief Economist of

the Board. In addition, Mr. Edward Perrault presented a state

ment of objection in respect to the rate design issuc on behalf of

Air Products Company.

Active participants in the current proceedings included the

Board’s Staff, the Department of the Public Advocate, Division of

Rate Counsel, the New Jersey Department of Energy, the County

of Ocean, the U.S. Army, Office of Regulatory Law, on behalf ef

A-56

the U.S. Government executive agencies, the American Associa-

tion of Water Companies, (New Jersey Chapter) and Air Prod-

ucts Company. There was extensive cross-examination of

substantially all the witnesses presented.

The Board is properly authorized pursuant to N.J.S.A. 48:2-

21, 48:2-21.1, to grant interim emergent relief after notice and

hearing. In Re Revision of the Rates by Redi-Flo Corporation,

76 N.J. 21 (1978), in Re Board's Investigation by Telephone

Companies, 66 N.J. 476 (1975).

Indeed, since Hope’ and pursuant to the legal standards we

have enunciated,’ this Board is duty bound to provide necessary

funds to a utility on an emergent basis, subject to refund in the

event of a financial and service crises. We have defined emer-

gency in rather stringent terms to protect the consumer. . There

has to be a showing that but for an immediate infusion of rate

payer funds Petitioner would not be able to continue to provide

safe adequate and proper service or reasonably access the market

for needed construction or expense. This may take the form of a

coverage crisis, an inability to access the financial markets for

needed construction and/or or a cash-flow crisis. Mere attrition

in earnings is not sufficient unless it impacts financing, construc-

tion, or service. It is our inescapable conclusion, after review of

this record, that JCP&L is in an emergent financial crisis

impacting its ability to serve customers this day and in the months

to come and that a rate increase of $60 million in base rates is

absolutely necessary for continued service. Without such relief

Petitioner and its customers will surely suffer irreparable harm

unprecedented in electric utility regulatory experience.

With respect to the current motion for interim relief, the Board

has given substantial weight to Staff's testimony on the financial

condition of the Company.

a sie seacentcoe , 64 S.Ct. 281, 88

ee ate ie

owt. 2 Nis £0, Gas

A-57

The Board finds that:

1. JCP&L will exhaust its short-debt limit under the

RCA before the end of May.

2. Under current rates, JCP&L does not have sufficient

coverages to sell long-term debt.

3. GPU, in its present financial condition, cannot sell

common equity at a reasonable price.

4. Under current rates, JCP&L does not have sufficient

coverages to sell preferred stock.

5. Overall, under existing rates, JCP&L will not be able

to finance construction required to insure safe, ade-

quate, and proper service.

Based on these observations, we conclude that JCP &L is eligible

for interim relief.

Since the accident at Three Mile Island on March 28, 1979, the

Board has committed significant resources to protecting the long-

run interests of the ratepayers in JCP&L’s service territory.

Most recently, the Board has appealed directly to the Federal

Energy Regulatory Commission for relief from the burdensome

split-savings formula utilized in the pricing vf PJM interchange

sales. This formula has resulted in the imposition of 30 to 40%

markups on cost for purchase power. These costs are ultimately

placed on JCP&L’s ratepayers.

In addition, the Board has drawn up an action agenda for

soliciting Federal assistance. Most importantly, it is the Board's

position that the costs of TMI-2 should be spread over a much

broader base than just New Jersey and Pennsylvania ratepayers.

The Kemeny and Rogovin investigations clearly establish that the

cause of the accident at TMI was not solely limited to operator

error but, in fact, was in part related to the structure of nuclear

regulation in general.

The Board in Docket 795-427 (Phase I) directed JCPA&L to

seck out all possible purchase power agreements that would

reduce the costs ultimately imposed on ratepayers. To date, the

savings from these purchased power agreements have amounted

to $26 million.

A-58

Further, the Board is vigorously directing JCP&L to success-

fully negotiate a contract for low cost power from Ontario Hydro.

The Board will personally intercede on behalf of JCP&L ratepay-

ers in these negotiations.

Finally, the Board is conducting two major investigations

related to the TMI accident. First, the Board has initiated its

inquiry into the question of JCP&L’s potential fault in the acci-

dent. It is our intention to fully explore the underlying causes of

the accident and the role played by the respective companies.

Second, the Board has commissioned the Strategic Options Study

which will determine what is the least cost option of supplying

safe, adequate, and reliable service to JCP&L ratepayers.

Since the accident, the Board has taken action on numerous

petitions relating principally to adjustments in the LEAC and the

financing requirements of the company. Our objective in each of

these cases has been a simple one: minimize the cost to ratepayers

and keep JCP&L viable. Under present conditions, alternatives

to JCP&L would prove extremely costly and potentially disrup-

tive to reliable service.

It should be noted that of the some $234 million granted in rate

relief since June, 1979, only 34% are directly related to the TMI

accident. The remaining % of the increases are directly related

to forces (principally OPEC oil increases) which are outside the

control of this Board, JCP&L, and rate-payers. Unfortunately,

all of us are subject to the whims of the powerful OPEC cartel.

This Board will do all it can to break this dependence.

The record in this and other proceedings has clearly indicated

the serious financia! condition of the Company. The tremendous

cash requirements imposed upon the Company by the need to

purchase substantial replacement power occasioned by the out-

ages of TMI-1, TMI-2 and Oyster Creek have placed the Com-

pany in a precarious financial position. In our Order of April 1,

1980, in Docket No. 795-427, was noted that Jersey Central had

limited access to funds with which to maintain safe, adequate and

proper service as required by N.J.S_A. 48:2-23. Since that time,

the Company's ability to obtain credit and access capital markets

A-59

has further deteriorated. Most recently, the Banks involved in

the Revolving Credit Agreement (RCA) have declined to

increase the Company's $1 39,000,000 loan limit and have further

refused to extend credit beyond the $1 10,000,000 now outstand-

ing unless the Company agrees to pledge its accounts receivable

as security for additional borrowings.

Furthermore, the Company has also requested the Board’s

approval to realize approximately $5 million from the sale of its

interest in the 625MW Seward Generating Station now under

construction. It is apparent that unless the Board approves these

requests or provides some other form of relief, the Company may

be unable to maintain the present level of safe, adequate and

proper service.

Level of Interim Relief

In approaching the question of the appropriate level of interim,

the Board has again used the objective of minimizing the cost to

ratepayers and keeping JCP&L viable. It is our conviction that

the cost to ratepayers can be minimized by providing the Com-

pany a vehicle to begin the process of reducing the costly short-

nal rates are estimated to be in excess of 20 percent. Secondly,

the Board is convinced that the company’s ability to consummate

the Ontario Hydro purchase can be positively impacted and can

ultimately reduce the cost to Jersey Central ratepayers. We also

believe that any relief be sufficient to guarantee continued reliable

service.

The Board has reviewed Staff testimony and the Company's

case. Based on the review, the Board is convinced that the public

interest will be served by granting an increase in base rates of $60

million. We disagree with Staff on the issue of the $15 million

attributable to acceleration of old deferred energy balances. We

are convinced that by allowing the $15 million in terms of carn-

ings available, the Board will maximize the benefits to ratepayers

from the increase.

A-60

Let us now turn to the specific evidence that led us to conclude

that $60 million in additional base revenues is the appropriate

level of interim relief.

1. We accept the Staff position on the relevant test year,

i.c., March 31, 1980

2. We adopt, as a reasonable estimate, a 13.75 rate of

return on equity.

3. We adopt the capital structure without short-term

debt included, and the respective costs of capital

shown on attachment B.

4. We accept the Staff's rate base recommendation

except that we recognize an additional $75,238,000 of

construction work in progress. Therefore, for rate

making purposes, we will use a net investment rate

base of $1,222,631 ,000 for the purposes of testing, on

SE ee en ee ee

5. The resulting rate of return (10.12 percent) agelied toe

net investment rate base of $1,222,631,000 yields an

operating income of $123,730,000 less $94,935,000 of

pro-forma operating income that results in a deficiency

in operating income of $28,795,000 when multiplied by

the tax factor (2.1086) results in additional revenue

requirements of $60,717,000 (say $60 million).

Based on the above analysis, we are satisfied thet an interim

increase of $60 million in base revenues is required.

Ill. Docket Ne. 795-S08A (Pledge of Accounts Receivable)

The Board has heard extensive testimony by the petitioner as

well as representatives of the agent banks on the necessity of

JCP&L pledging its accounts receivable for the $60 million in

draw-downs under the RCA. from that testimony that

the Banks are very concerned ongoing risk associated

with the regulatory envirownent-in Jersey, Pennsyivania,

and the Nuclear Regulatory Commission in Washington. Given

these uncertainities, the Banks argue that the pledge is required

to justify their increased exposure of $60 million.

A-61

It is our opinion that, at the time of the filing of the petition for

as support for the request to pledge the accounts receivable.

1. Deterioration of JCP&L’s earnings as a result of the

Board's decision to remove TMI-1 from base rates.

The Board is convinced that the decision to remove TMI-1

from base rates was justified and totally consistent with its

sharing concept enunciated in Docket No. 795-427. The

present interim rate relief granted above should totally

remove the Banks’ concern for JCP&L earning capacity

and ultimately coverages. It is clear from our analysis

that the interim order should allow JCP&L to sell long-

A-62

The Board takes note that the Pennsylvania Commission

has recently awarded Met-ED/Penelec substantial reve-

nue relief, in fact, in excess of what the companies

requested.. Further, the Pennsylvania Commission has

also ruled that the Met-Ed franchise should not be

revoked. Clearly, these are extremely positive develop-

ments in Pennsylvania.

Overall, we believe that the foundation for the pledge of the

accounts receivable has been substantially eroded. Therefore, we’

are confident that the need for the pledge no longer exists.

However, it is important to note well that the Board continues

to share everyone’s concern for the expeditious return to service of

the Oyster Creek unit. Adverse developments, remote as they

may be, still require Board recognition. Therefore, if Oyster

Creek suffers a substantial setback in its return date, the Board

will review the merits of reinstating the request for the pledge of

accounts receivable. In addition, the Board will expeditiously

address the impact of such development on the Company's

deferred energy balances and possible resolution vis-a-vis a

LEAC proceeding. We, therefore, conclude that it is in the pub-

lic interest to deny the petition for the pledge of accounts receiva-

ble without prejudice.

IV. Docket 803-172 (Transfer of Seward 7)

The petitioner requested authorization to sell its interest in

Seward 7 for some $5 million. The proceeds of the sale were to

be used to shore up an emergency dumand for cash. It is recog-

nized by all parties that the foundation for the sale was the

pressing need for cash. However, all parties also agree that were

the cash position improved, the need to sell Seward 7 would be

eliminated. Based on the testimony of Mr. Baldassari, we are

A-63

denies JCP&L’s petition to sell its interest in Seward 7 without

prejudice.

Rate Design

The petitioner initially proposed that all of the interim increase

be allocated to general service customers. Subsequently, peti-

tioner witness Carter developed some alternative approaches to

recover any interim increase. After evaluating that testimony

and considering fundamental! equities, we have concluded that the

interim increase should be allocated in the following manner:

Overall &

~ Rate Group Increase Increase

Residential ...........:..--sc+0 $ 7,369,568 1.89

General Service ................ 50,934,530 11.05

Lighting 1,695,902 13.83

Total Retail ............... $60,000,000 6.95

The residential increase will be cffectuated through a $1.00 per

month increase in the customer charge. This will produce some

$7.6 million of the $60 million in interim relief. The remaining

$53 million will be recovered from the General Service and Light-

ing customers. On balance, we feel assured that the relevant

competing equities have been appropriately addressed.

The Board recognizes that the rate design we hereby adopt is

provisional in nature subject to modification in the main proceed-

ings, just as the amount of rate relief provided is provisional, and

subject to refund. In re Sand Rates, 66 NJ. 12. Considering

the present record and cognizant that the parties will address

appropriate rate design factors in the main proceedings, such as a

detailed identification and allocation of appropriate costs to

demand end energy, the Booed conctedes that its ellecation

above, is reasonable on an interim basis.

The latest cost of in the Jersey Central proceed-

JC-202) supports this level

; = pol nb ph nan

A-64

dated cost of service and other relevant rate design testimony in

the main proceedings. We emphasize that the impact of the

above approach is to increase residential bills by 1.9%.

The remainder of the provisional rate increase (approximately

$52.4 million dollars) will be allocated to GS customers on a

provisional across-the-board basis between energy and demand

charges. Again, we recognize that additional testimony will be

required, ¢.g. comparing cost factors related to peak usage or

demand and comparing unitized rates of return, before this rate

design may be embodied in a final Order. The effect of this

allocation will be to increase GS rates by approximately 11%.,

We have therefore cushioned the impact of this increase to the

residential customer to the extent that we believe is legally per-

missible. To go further would fly in the face of N.J.S.A. 48:3-1

and 4 which prohibits undue preferences in rate making or dis-

crimination in rates between classes. We believe that the above

rate design is within the substantial discretion that this Board is

permitted to design rates since they are reasonably related to

proper purposes such as consistency of treatment, cost of service

and conservation. In re Essex County Welfare Board, 126 N.J.

Super 417.

Special credits were found reasonable to induce all electric

consumption, Rossi v. Carton, 88 N.J. Super 233. Special con-

cessions to builders for all electric service were found not to be

discriminatory. Watkins v. Atlantic City Electric Company, 67

PUR 3rd 483. We do not read the post hearing memorandum of

the Public Advocate nor the precedents cited therein, including Jn

re St. Paul Chamber of Commerce, (251 Northwest Reporter

Second Series) 350, as legally requiring another position.

Indeed, in that matter the Minnesota Supreme Court found an

allocation rates placing a substantial portion of the increase on

the commercial and industrial customer to be reasonably related

rate-making considerations, such as cost of service and

ot Me ee ie le —

;

+ ee

A-65

The details of the tariff design, are specified in Exhibit A

attached hereto and made a part hereof, are substantially accu-

rate subject to technical review by the parties. We recognize that

our regulation, N.J.A.C. 14:1-6.16, provides for a review period

after Board Order, before rates are implemented. But due to the

compelling emergent nature of this matter, we waive the technical

requirements of our regulation. We stand ready, however, on

motion to the Board or in the context of the main proceeding to

ee eee

this Order.

It is therefore crystal clear to us that unless responsible action

is taken by utility management, the financial community, this

Board and the appropriate federal agencies, this utility cannot

remain viable and provide service to its customers. If the

financial community or specific creditors perceive that manage-

ment is not acting responsibly, by not really perceiving the nature

of the financial crisis at hand, insolvency may result. It is in this

context that we view management’s recent step of awarding sub-

stantial raises to its officers as most unfortunate. It is not only

the amount of the funds involved, at a time when regular employ-

ces are being laid off, that is at issue. Objective consequences

and risks flow from management’s action. The cash flow from

lenders and customers—the life’s blood of the utility—could be

impaired by their perceptions of that action.

ADDITION: Paragraph 2 under ORDERS add (with this Order

and subject to evidence produced in the main

proceedings. )’

In addition, the Board is proceeding at the Federal level to

obtain relief from the on<cous split savings method at the Federal

Energy Regulatory Commission. Any relief depends upon a

pera «sarang ager of e the PJM Power Grid. Aay

A-66

Under normal circumstances we would have no difficulty with

the rationale that key management should be rewarded and moti-

vated. Nor would we attempt as a general rule to intrude our-

selves into matters which have been usually considered

management’s prerogative. But management actions including

salaries are subject to scrutiny." Where management actions

impact on the actions of others which could bring this company to

its knees, this Board must act pursuant to a general authority to

secure safe, adequate and proper service to New Jersey residents.’

We find this management action to be unreasonable and con-

clude under present circumstances that to merely disallow such

increase for rate making purposes’ would be an insufficient rem-

edy. There is authority under circumstances of financial jeop-

ardy to prohibit dividends, service fees and the like where such

actions could deteriorate utility property or impair service to the

public.‘ We will therefore Direct and Order that the recent

increases to the officers of JCP&L be rescinded forthwith.

Based upon the record in these proceedings, and the findings we

have made herein, the Board ORDERS as follows:

1. Petitioner is authorized on an interim provisional

basis to increase base rates in the amount of $60

million dollars according to the rate design we have

specified herein.

2. The tariff the company has submitted in compliance

with this Order is HEREBY ACCEPTED for service

rendered on and after May 15, 1980, on an interim

provisional basis subject to refund, subject to review

as to whether it fully comports with this Order and

aireetnn aia Ne Bind To

A-67

subject to evidence produced in the main

proceedings.”

3. The Petition to sell the Seward #7 coal-fired facility is

DISMISSED without prejudice.

4. The petition for Board approval of a pledge of accounts

receivable as security under RCA is DISMISS

without prejudice.

5. Petitioner shall not pay to GPU any dividends during

the remainder of 1980.

6. Petitioner shall advise this Board 30 days in advance

of any proposed dividends during 1981 so the Board

can evaluate the financial condition of petitioner.

DATED: May 13, 1980 BOARD OF PuBLic UTILITIES

By (SIGNED)

(SEAL)

Georce H. BARBOUR

PRESIDENT

EDWARD H. Hynes

COMMISSIONER

Attachment A

JERSEY CENTRAL POWER & LIGHT COMPANY

ALTERNATIVE METHOD OF ALLOCATING INTERIM INCREASE REQUEST OF $60,000,000

(RESIDENTIAL INCREASE TO CUSTOMER CHARGE ONLY/ NON-RES

INCREASE ACROSS BOARD ON BASE )

Norms il red Neer tome id nad Total

Nerm(1) a Mase Allocated Newnes 8 ned Onerel

Lune Rate Gn _— }_._.U] | —__] Sovenneoté) |

(1) (2) (3) (4) (5) (6) (7) =(5)#(6)

Residential

| STEIN ish schschctehbadipachtlesinesnasdnmneadlionsbn 474,137 2,868,573 174,650,445 §$ 5,489,969(5) $238,243,840 2.30%

2 TID ‘ncisnihsn etn ctedhdcnssctiotnaapiilliiiinn 41,157 468,516 23,568,256 480,063(5) 33,954,787 141

3 EE ha aS ae ee = 79,189 1,342,932 59,352,529 904,841(5) 89,123,989 102

4 SEES cdoisdeiissbietdvoseenehstdeindiobocsdaias 42,275 403,180 19,918,110 494,695(5) 28,856,207 1.71 >

5 - ee AE Sey ae 636,767 5,083,201 277,489,340 $ 7,369,568 $390,178,823 1.89 g

General Service

6 Secondary 70,282 4,275,108 198,209,230 $34,006,211(6) $292,984,099 19.61%

7 SIU insthb sexticecasecncesccceseetnenesvcenccntes 218 1,418,314 46,420,070 7,898,703(6) 76,899,638 10.27

8 III - <sncsassticosockcetbessocosisotpecton 80 1,832,964 $2,708,350 9,029,616(6) 91,011,799 9.92

9 RII ibsttelblnteccedbegnitigitntnetinbieeteds 70,580 7.526.386 297,337,650 $50,934,530 $460,895,536 11.05%

Lighting

10 OL 80,884° 11,629 1,298,060 $ 196,434(6) $ 1,555,863 12.43%

il SL 861 87,350 8,769,509 1,449,468 (6) 10,705,971 14.01

12 Total Lighting 861 98,980 10,067,569 $ 1,695,902 $ 12,261,834 13.83%

13 Total Retail 708,208 12,708,566 594,953,072 $60,000,000 $863,336,193 6.95%

ee ee eee eS ke ee ee i, Pe lL, ae

A-69

COST OF CAPITAL ANALYSIS

(3000's)

13.25% Return on Equity, No Short-Term Debt

Rate of

E___} ££ oo B=

Long-Term Debt .........-000 $893,682 49.48 8.27% 4.09%

Preferred Stock ..........00000 205,000 11.35 9.17 1.05

Common Equity ................ 654,605 36.24 13.25 4.80

Cost Free Capital .............. $2,815 2.93 — —

9.93%

13.75% Return on Equity, Short-Term Debt Included

Rate of

__] &$ =

Long-Term Debt ............... $893,682 47.65 8.27% 3.94%

2 Preferred Stock ...........0000+ 205,000 10.93 9.17 1.00

Bs Common Equity ................ 654,605 3491 13.75 481

2 Short-Term Debt ............... 69,027 3.68 15.04 55

Cost Free Capital .............. 52,818 2.83 _— =

A-70

APPENDIX C-2 r-]

Decision and Order

STATE OF NEW JERSEY

DEPARTMENT OF ENERGY

BOARD OF PUBLIC UTILITIES

1100 Raymond Bivd.

Newark, New Jersey 07102

DOCKET NO. 804-285

OAL DOCKET NO. PUC 3518-80

IN THE MATTER OF THE PETITION OF JERSEY CENTRAL

POWER AND LIGHT COMPANY FOR AN INCREASE IN RATES

AND CHANGES IN THE TARIFFS FOR SUCH SERVICE

SERVICE LIST ATTACHED

By THE BoarD

On April 29, 1980, Jersey Central Power & Light Company

(Petitioner, Company), a public utility of the State of New

Jersey subject to the jurisdiction of the Board of Public Utilities

(Board), filed a petition requesting an increase in its rates in the

amount of $173.5 million. At the time of filing, Petitioner

requested interim relief in the form of an immediate increase of

$60 million which was granted by the Board, after hearing, by

Order dated May 13, 1980.

Subsequent to its ruling on Petitioner's motion for interim

relief, the Board transmitted this matter to the Office of Adminis-

A-71

At the conclusion of the base rate case, at the suggestion of the

parties, the briefing of issues was divided into two sections, reve-

nue requirements and rate design. Administrative Law Judge

Stephen Marshall submitted his Initial Decision on revenue

requirements on May 11, 1981. His Initial Decision on rate

design was submitted on March 11, 1941.

REVENUE REQUIREMENT

RATE BASE

Petitioner, in its filing, showed its rate base at test year end to be

$1,364,031,000 which was adjusted for certain known and antici-

pated changes and which included the elimination of

TMI-2. The rate base calculation of the Board's Staff of

$1,268,946,000 and Rate Counsel's calculation of $1,225,166,000

essentially accepted Petitioner's test year end rate base as adjusted

except for figures related to TMI-1, construction work in progress

and working capital.

The Administrative Law Judge has adopted the position of the

Company, placing TMI-1 back into rate base. Staff and Rate

Counsel had argued that Petitioner’s portion of ownership of

TMI-1, of approximately $97.8 million, continue to be excluded

from rate base.

The events stemming from the March 28, 1979 accident at

Three Mile Island are adequately set forth by the Administrative

Law Judge in his Initial Decision. On June 18, 1979, in Docket

No. 795-427, this Board determined that as a result of the severe

damage to TMI-2 that Unit was unlikely to return to service for

two to four years and, was, therefore, no longer used and useful

for rate-making purposes. The basis for the action of the Board

in removing TM!-2 from rate base was that ratepayers should not

be required to pay both the replacement energy costs related to

Se et ae ee

On April 1, 1980, the Board,

eT ee

A-72

TMI-I warranted its removal from rate base as its continued

inclusion would violate the basic ratemaking premise which is not

used and useful in rendering utility services for a considerable

time. The Beard further held that to include TMI-1 in rate base

would be inconsistent with the equitable sharing principles previ-

ously established for TMI-2. The removal of TMI-1 from Peti-

tioner’s rate base was subsequently upheld by the New Jersey

Supreme Court in a decision rendered on April 8, 1981. 85 NJ.

520 (1981).

Based upon a review of the record in the pending matter and

the Initial Decision, the Board is of the opinion that circum-

stances bave not changed sufficiently to warrant TMI-1 being

placed back into rate base at this time. There have been many

delays in bringing this unit back on line and we continue to

support the treatment of TMI-1 as set forth in the Board’s order

of April 1, 1980 in Docket No. 795-427. As it is our position that

TMI-1 should not be placed back into rate base until restart, we

reject that portion of the Initial Decision which calls for its inclu-

sion. At the time of restart, the Board will consider, in expedited

proceedings, the appropriate rate base and revenue adjustment

related to the TMI-1 return to service.

With regard to CWIP, the Petitioner proposed the inclusion

into rate base of $61,211,000 while Rate Counsel recommended a

figure of $5,943,000. The Administrative Law Judge adopted

Staff's recommendation of $49,719,000 which represents Peti-

tioner’s test year end CWIP balance. It should be noted that the

Board in recent years has allowed some level of CWIP in rate

base due principally to the nature and amount of investment by

electric utilities. Indeed, CWIP in the amount of $54,576,000

was included in rate base in Petitioner's last base rate proceeding

in Docket No. 7619-1021. As properly noted by Staff, CWIP

without an offset has been accepted by this Board as a necessary

mechanism by which the utilities of this State may realize ade-

quate earnings to meet thase service demands created by their

ere a

A-73

Based upon our review of the record, we agree with Staff that

the figure of $49,719,000 may understate the level of construction

that Petitioner may be expected to undertake in the next few

years. Accordingly, the Board is of the opinion that a figure of

$55 million is justified by the record and that it is not unreasona-

ble to conclude that the company will maintain this level of

construction. We therefore accept the inclusion of $55 million of

CWIP into rate base as a representative figure over the short

term.

We further adopt the working capital figure of $136,107,000

recommended by Staff and Rate Counsel and accepted by the

Administrative Law Judge.

Based on the foregoing, the Petitioner’s rate base is set at a

level of $1,274,223,000.

OPERATING INCOME

Petitioner showed its net utility operating income for the twelve

months ended December 31, 1980, to be $111,440,000. After

making adjustments thereto, Petitioner calculated its adjusted

pro-forma utility income at $94,586,000 while Staff and Rate

Counsel recommended income levels of $112,237,000 and

$117,813,000, respectively. The differences stem from differing

positions on certain proposed adjustments to operating expenses:

tree trimming; reclassification of charitable contributions; TMI

reserve capacity adjustment and Forked River adjustment.

The position of the Staff and Rate Counsel with regard to these

expenses were, for the most part, similar and were accepted by the

Administrative Law Judge with the exception of a tree trimming

adjustment.

After full consideration, the Board is of the opinion that the

record adequately supports the level of tree trimming expense

proposed by the Petitioner and accepted by the Administrative

Law Judge and we adopt it as reasonable and proper. The Com-

pany is HEREBY ORDERED wo expend the full amount for the

Purpose indicated.

~ s\n ude

ite

o "Sy y

_ - >

Yi supeite theo sail

A-74

With regard to the treatment of the charitable contributions as

a below the line expense, we find that the testimony presented by

Rate Counsel and supported by the Staff is reasonable and there-

fore adopt it. This results in a downward adjustment in this

expense of $37,000.

We also adopt the downward adjustment to the TMI Reserve

capacity adjustment of $4,839,000 with regard to TMI-1 and

$3,205,000 with regard to TMI-2 as recommended by Staff and

Rate Counsel. It should be noted that these expenditures have

not been incurred or booked. The record also indicates that the

effect of the forecasted obligation to PJM cannot be accurately

measured until }983. While we find that the inclusion of this

expenditure is inappropriate at this time, we will not foreclose the

possibility of its allowance at a future date.

The procedural history of the Forked River Project, culminat-

ing in its abandonment, has been adequately set out in the ALJ's

Initial Decision and the filings of the parties.

The total loss of this project booked by Petitioner as of Novem-

ber 30, 1980, was $413,700,000. Petitioner has recommended

that this investment be amortized over a period of 15 to 20 years

and that a return on the unamortized portion of the investment be

allowed until the investment has been fully written off. Alterna-

tively, the Company suggests that the amortization take place

over a 10 year period without the unamortized investment being

included in rate base.

Rate Counsel and Staff recommend that there be a sharing of

the loss between the Company's stockholders and ratepayers.

Staff has adopted Rate Counsel's adjustments to the total loss

booked as of November 30, 1980 of $413,700,000.

These adjustments arc:

(1) $1 million received from sale of a cranc;

(2) $2.7 million profit on sale of uranium since Novem-

ber 30, 1980;

yo oo he eeimaremness seen at acetal

= ‘millon.

(4) Net deferred income tax of $147.6 million; and

A-75

(5) AFUDC accruals subsequent to April 4, 1979 of

$26.9 million.

It should be noted that inherent in Petitioner’s calculation of its

Forked River abandonment loss is AFUDC booked on the project

subsequent to the decision to suspend construction activities on

April 4, 1979. Rate Counsel, supported by Staff, has argued that

no rate treatment be permitted for this AFUDC where a project

has been suspended indefinitely or abandoned. The Board is of

the opinion that the record contains sufficient evidence to support

the positi t the project was indefinitely suspended as of April

4, 1979 and ‘we adopt the treatment of AFUDC booked subse-

quent to that date as proposed by Rate Counsel and Staff.

Rate Counsel has recommended that the loss be amortized over

a 15 to 20 year period while Staff has suggested a 15 year period.

Both parties recommend that the unamortized balance receive no

rate base treatment. As there is sufficient support in the record,

we adopt the adjustments recommended by Rate Counsel and

Staff and the amortization treatment suggested by Staff as both

reasonable and consistent with past Board policy regarding

abandonments.

Related to the aforementioned adjustment, the Petitioner has

made some effort regarding the issue of salvage. The adjust-

ments for salvage recommended by Rate Counsel and Staff

occurred during the test year. We add to this the sale of struc-

tural steel in the amount of $862,000 that was approved by the

Board on May 7, 1981, in Docket No. 814-416/and hold that all

other salvage transactions completed subsequent to the test year

be considered in future base rate filings.

The above, inciading the sale of steal, results is 0 act sbendon-

peor cnn: Ct Tt ate

$31,684,000.

A-76

this recommendation must be rejected in light of the planned shut

down of the Oyster Creek nuclear generating facility for refueling

for a period of at least 6 months during the life of these rates.

As it is apparent that Petitioner will incur costs far in excess of

the amount aforementioned, we will not reduce its operating and

maintenance expenses as recommended by Rate Counsel.

Rate of Return

The resolution of issues related to rate of return, in particular

that portion dealing with return on equity, is, at best, a complex

and controversial undertaking. Capital and credit markets

reflect the consensus judgment of investors who direct resources

to their highest marginal returns. Capital flow in response to

risk/reward relationships and failure to compete effectively for

funds leads invariably to capital shortages.

The ultimate purpose of the Board is to insure that the 700,000

customers of the Company continue to receive safe, adequate and

proper service. The Board is well aware that the realization of

this goal is dependent on the Petitioner's continued viability, both

We are of the opinion that the rate of return methodology

utilized by Rate Counsel does not fully take into consideration the

accurately reflect capital market realities.

The Company has taken the position that it requires additional

revenues in order to maintain its viability despite the regulatory

treatment that has been applied to its assets. To support this.

view, the Company asserts that its truc cost to serve its customers

includes costs and carrying charges that have been disallowed but

are still an obligation of the Company. This would include the

previous elimination from rate base of TMI-1 and the removal of

AFUDC accruals on Forked River subsequent to April 4, 1979

ordered by the Board herein. These actions are consistent with

past Board policy.

The extraordinary events associated with Three Mile Island

and their financial impact on the Company further complicates

A-77

the measurement of an appropriate rate of return. The Board

has been well aware of the extraordinary nature of the TMI

accident and the attendant regulatory problems and uncertainties

facing the petitioner.

In identifying and dealing with these problems, the Board has

taken many unique actions. These include, among others, the

approval of an unprecedented Revolving Credit Agreement, the

allowance for accelerated amortization of deferred energy bal-

ance, intervention in the Federal Energy Regulatory Commission

“split savings” proceedings on behalf of Jersey Central rate-pay-

ers, support for the early return to service of TMI-1 consistent

with public health and safety, financial inducement to the Com-

pany to pursue purchases outside the PJM system, and support of

Federal sharing of the TMI-2 clean up costs.

Based upon our review of the testimony related to these issues

and the risks involved, we are of the opinion that the record

adequately supports as reasonable an overall rate of return of

10.68%. This figure is based upon a finding of the cost of equity

of 15% which is the highest level allowed a New Jersey utility by

the Board as of this time. The Board will continue to monitor

this level carefully in subsequent rate filings.

This allowed rate of return applied to the net investment rate

base of $1,274,223,000 results in an operating income require-

ment of $136,087,000, less Petitioner’s pro forma operating

income of $112,037,000 resulting in an operating income defi-

ciency of $24,050,000.

Giving effect to the revenue tax factor of 2,1086, Petitioner

would be entitled to additional annual revenues of $50,712,000

over the interim rate relief of $60,000,000 authorized by the

Board in its Order of May 13, 1980 in this docket. ?

In an era of high electric rates, the question of who pays in what

Proportion becomes a question of great significance. Rate design

has become as essential as the determination of the revenue

requirement. When there is no disagreement that the utility is

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entitled to a certain amount of money, as is the case here, the

division of that amount among the various inter-and intra-class

ratepayers is of as great importance as the actual dollar figure.

The Board’s decision in this case should be a signal to the industry

that the matter of rate design is viewed with great importance by

this Board.

Inter-Class Rate Design

The Board is of the opinion that cost of service is the best

method for determining which pricing methodology will be used

in rate design. However, it must be pointed out that cost of

service is subjective in many ways and a cost of service study, for

this reason, should be used as a pathfinder or guideline in deter-

mining actual tariff designs rather than as s precise mathematical

formula. Therefore, the Board agrees with the Administrative

Law Judge's acceptance of Petitioner’s data base for the Cost of

Service study. As the Judge pointed out, there are inherent

problems in any cost of service study caused by the necessary

estimations and imprecisions in the data. To reject a study, on

this basis, would, in the opinion of the Board, serve no valid

purpose at this time.

Historically, allocation of demand has been done by use of a

Coincident Peak/Non-Coincident Peak formula. However,

today we are seeing new base load plants constructed to replace

more expensive plants, not just for expansion of the market for

electricity. This phenomenon supports an Average and Excess

formula for generation and bulk transmission plant. Average

and excess allocates plant on the basis of both class energy use

and class coincident peak demand.’ Both are important in sys-

tem planning and both are particularly recognizable in generation

and bulk transmission plant. This dual dimension in system

planning is not as identifiable in other types of plant. Because of

this factor, along with the Board’s commitment to continuity in

PAS me and excess factor is d. primo gy ehens. yo erred

ta weighing laut cmsdet oak hav (| acer) he

;

A-79

—

rates, subtransmission and distribution plant will be allocated on

a non-coincident peak formula. By adopting this new formula

the Board is recognizing that capacity is not determined solely by

system peak requirements but also by total energy use over the

entire year.

Another area of inter-class rate design to be addressed is func-

tionalization of accounts in a proper manner. Based upon the

rationale above, that new base load plants are energy-related

functions, the Board is of the opinion that the Forked River

Abandonment should be allocated on an energy basis for bulk

transmission and generation plant. Those who use the most elec-

tricity should pay the most for Forked River. The amortization

period for this abandonment will be fifteen (15) years.

Transmission maintenance expenses will be functionalized as

energy-related since they do not vary with demand. Fuel stock

will also be allocated on an energy basis. Distribution system

costs will be functionalized according to Jersey Central's “zero

size system” approach.

The Board believes that the allocation of fuel costs among

customer classes should be on an equalized cents per kwh basis

rather than the variable price differential, based on on-peak/off-

peak usage, recommended by the Administrative Law Judge.

INTRA-CLASS RATE DESIGN

Residential Service:

The Board adopts the reasoning of the Administrative Law

increased customer charges and increased summer-winter differ-

ential. Additionally, the Board feeis that the water heating sub-

sidy should be reduced by 50%, a possible first step toward total

elimination in the next rate case. This subsidy has been in effect

since 1976 and has resulted in the utility's other customers subsi-

dizing $4,000,000 cach year of this class. The revenues collected

through the elimination of this rate should be spread across the

initial blocks of both the summer and winter residential service

tariff. Another area where one ratepayer subsidizes another is in

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the all-electric block of the residential tariff. Fairness requires a

shift to reduce this subsidy. Therefore, the Board hereby estab-

lishes as Board policy the discontinuation of this subsidy for new

all-electric homes by January |, 1984. The Company is

requested to make every effort to put customers and potential

customers on notice of this termination. Moreover, as an effort

to gradually remove the subsidy which exists for present all-

electric homeowners, the tail block of the RS tariff should be

increased by 10%

General Service:

The Board is of the opinion that the third block of the GS-S

tariff should be eliminated as a step towards the termination of

The Board agrees with the Administrative Law Judge that

mandatory time-of-day rates should be implemented in both the

GS-P and GS-T classes. In accordance with the average and

excess method adopted today, the GS-P a GS-T energy and

demand portions should be reallocated with a larger share in the

energy portion.

The General Service minimum customer charge ratchet

ingly should be modified to 50% of the present charge. The

Board also agrees with the Administrative Law Judge that the

leve! of curtailable credit should be raised to $2.50 per kwh.

STANDARD TERMS AND CONDITIONS:

The Board will allow charges for uncollectible checks in the

amount of $8. This is intended to include any charges that the

Company is assessed by its bank.

A late payment charge will be allowed at the Company's over-

all rate of return. A grace period of 45 days should be allowed,

60 days for governmental entities.

The reconnection charge requested by petitioner is denied but

the Company may resubmit it during its next rate case.

A-81

The Board also is of the opinion that non-TMI-related

Levelized Energy Adjustment Clause rates should be rolled into

the base rates adopted in this case. This results in an energy

adjustment of 6.265 mills/kwh prior to voltage adjustments.

The Board, in taking a more active role in rate design, wishes to

signal to the industry that innovative rate making is an idea whose

time has come.

The development of reasonable co-generation projects, and the

acceleration of conservative methods or alternative sources of

energy, (for instance lowhead hydro projects) are also of major

concern to this Board.

herein, the Board HEREBY FINDS that:

1. The petitioner is entitled to revenues in the amount

of $110,712,000 including $60,000,000 of interim relief.

2. The petitioner’s overall rate of return should be

10.68% and its rate of return on equity should be 15%.

Therefore, based upon the foregoing, the Board HEREBY

AUTHORIZES an increase in rates as specified in this Decision

and Order and, HEREBY ACCEPTS the tariffs submitted in

accordance with the rate design herein, for service rendered on

and after the date of this Order.

On Thursday, July 23, 1981, the Board issued an oral decision

in this matter. This decision set forth the revenue requirement

and the outline for tariff design that the Board wished to be

followed in this case. On July 24, 1981 the company submitted

proposed tariffs which have been the subject of ongoing discus-

sions among Staff, the Public Advocate, the company and the

Intervenors.

The Board is of the opinion that these discussions satisfy the

requirements of N. J. A. C. 14:1-6.16 (a) (5) (i), regarding

parties opportunity to be heard on proposed tariffs. Based upon

the authority found in N. J. A. C. 14:1-1.1 and 14:1-1.2, the Board

HEREBY WAIVES the five (5) day period for written comments

on the proposed tariffs. This waiver is based upon the damage

A-82

longer and the fact that all parties have had an opportunity to be

heard in this matter.

F’ BOARD OF PusLic UTILI-

- DATED: July 31, 1981 TIES

(SEAL) By (SIGNED)

EDWARD A. HYNes

COMMISSIONER

BARBARA A. CURRAN

COMMISSIONER

ATTEST:

(SIGNED)

GERALD A. CALABRESE

SECRETARY

A-83

APPENDIX C-3

DECISION AND ORDER

STATE OF NEW JERSEY

DEPARTMENT OF ENERGY

BOARD OF PUBLIC UTILITIES

1100 Raymond Bivd.

Newark, New Jersey 07102

BPU-Dockert No. 818-726

BPU-Docker No. 818-736

OAL Dxt. No. PUC 6152-81

IN THE MATTER OF THE PETITION OF JERSEY CENTRAL POWER

AND LIGHT COMPANY FOR APPROVAL OF AN AMENDMENT OF ITS

TARIFF TO PROVIDE FOR AN INCREASE IN RATES AND CHARGES

FOR ELECTRIC SERVICE AND A REVISION IN DEPRECIATION RATES

Jack B. Kirsten, Esq., and Dolores M. Delabar, Esq., for the

petitioner, Jersey Central Power and Light Company,

William F. Hyland, Esq., and James Liberman, Esq., of

the New York Bar, of Counsel (Kirsten, Friedman &

Cherin, Attorneys)

Alfred Nardelli, Director, Division of Rate Counsel, Public

Advocate, Raymond E. Makul, Deputy Public Advocate,

William Roughton, Assistant Deputy Public Advocate,

Linda Lodenkamper, Assistant Deputy Public Advocate,

for the Division of Rate Counsci, Intervenor

I. Paul Slevin and Lucie Hirmina, for the Staff of the Board

of Public Utilities

Diane Fahey, Intervenor, pro se

Robert Westreich, Esq., Assistant Essex County Counsel, for

the Counties of Essex, Sussex, Warren, Mercer and Mon-

mouth, and the New Jersey Association of Counties,

Intervenors (David Ben Asher, Essex County Counsel,

Attorney) :

John C. Sahradnik, Esq., Assistant Ocean County Counsel,

for the County of Ocean, Intervenor (Berry, Summerill,

A-84

Piscal, Kagan & Privetera, Esqs., Ocean County Counsel,

Attorneys)

Cornelius Turner, Esq., for the Federal Executive Agencies,

Intervenor

Richard B. McGlynn, Esq., for Air Products Company,

Intervenor (Stryker, Tams & Dill, Attorneys)

William R. Watkins, Esq., for Industrial Energy Users,

Intervenor (Lindaberry, McCormick & Estabrook,

Attorneys)

Ann S. Babineau, Esq., for the Middlesex County Utilities

Authority, Intervenor (Wilentz, Goldman & Spitzer,

Attorneys)

John Quain, Esq., of the Pennsylvania Bar, for the American

Society of Utility Investors, Participant

By THE BOARD:

I. INTRODUCTION

On August 11, 1981, Jersey Central Power and Light Com-

pany (JCP&L or Petitioner) filed a petition with the Board of

Public Utilities (Board), pursuant to N.J.S.A. 48:2-21 and 48:2-

21.1, seeking an increase in its charges to retail electric customers

of approximately $238.5 million annually to become effective for

service rendered on and after September 15, 1981. This

requested amount was later reduced to $215.4 million. Peti-

tioner also filed a motion for interim relief (Stage I) requesting

$42.5 million on an annual basis to become effective October 1,

1981. This reflected the revenue impact associated with the

anticipated return to service of TMI Unit No. 1.

On September 4, 1981, the Board informed all parties to the

proceeding that it would retain the Stage I issues including the

request for cessation of depreciation on TMI-I (Docket No. 818-

736), and indicated that a record would be developed on the

remaining issues (Stage II) by the Office of Administrative Law. __

On January 8, 1982, the Petitioner filed a stipulation to Stage I,

which resolved most of the cost issues involved and left unresolved =|

A-85

the timing of the implementation of the interim relief. This issue

was ultimately heard in Stage III.

After notice, four public hearings on the Stage II request were

held throughout the Petitioner’s service territory on November 2,

4, 5 and December 8, 1981. Evidentiary hearings were held on

twenty days from November 16, 1981 through March 5, 1982

before Administrative Law Judges Walter F. Sullivan and Ronald

I. Parker. Active parties to the base rate proceedings included

the Board’s Staff, the Department of the Public Advocate, Divi-

sion of Rate Counsel, the U.S. Army, the County of Essex and

Joint Counties Association, Air Products, Ocean County Board

of Chosen Freeholders, Industrial Electric Energy Users Associa-

tion, and the American Society of Utility Investors.

The Public Advocate and County of Ocean once again put

forth their motion regarding the “Fault” issue. This has been a

continuing motion in all of Petitioner’s proceedings since the

March 28, 1979 incident at Three Mile Island, seeking no rate

increases until the Board determines Petitioner’s responsibility in

the incident. When it became evident that these parties viewed

certain TMI-II issues in Stage II as related to the issue of

“Fault”, the Board requested that all TMI issues be returned to

the Board for determination. braces a aa

Board’s oft repeated position on the “Fault” issue.

The record in Stage II was completed before Administrative

Law Judge Ronald Parker on March 5, 1982. Petitioner at that

time argued that a revenue requirement determination by Judge

Parker would be extremely difficult due to the fact that the case

has been divided into three segments. With the consent of all the

parties, Judge Parker issued an order in which he indicated that

he would determine only the factual issues raised in the record

before him, and return the record to the Board without an ulti-

mate revenue requirement recommendation. Those issues tobe -

decided included (1) the appropriate level of cash working capi-

tal allowance; (2) Oyster Creek depreciation rate; (3) the appro-

ee ee ee ere

the rate of return.

A-86

In addition to the aforementioned TMI-I stipulation, the par-

ties reached an agreement on the tariff design issues on March 5,

1982.

Evidentiary hearings on Stage III, the TMI issues retained by

the Board, were held on May 10, 14 and 26, 1982, at which time

testimony was elicited from Company and Public Advocate wit-

nesses regarding:

1. The regulatory treatment of the TMI-I and the issue

of TMI-I depreciation in Docket No. 818-736.

2. The regulatory treatment of the investment in TMI-II.

3. The TMI-II decontamination costs.

The complexity of this case and its division into three discrete

segments for hearing purposes results in the need to examine each

stage separately. The ensuing discussion will be on a stage basis.

Il. STAGE I (TMI-I)

The parties in Stage I stipulated to a non-contested rate base of

$96,284,000. During the Stage III proceedings, Petitioner pre-

sented testimony in support of TMI-I related costs that were not

included in the stipulation submitted to the Board on January 8,

1982. These included certain plant additions and projected

investments since September 30, 1981 through June 30, 1982

totalling $6,581,000; completed nuclear fuel assemblies in the

amount of $11,474,000; depreciation adjustment related to the

proposed change in the depreciation rate; and, certain health and

safety—operating and maintenance expenses incurred at TMI-I

from May, 1980 to December, 1981 in the amount of $7,630,000.

1. PLANT ADDITIONS

A review of the record in Stage II and Stage III leads the Board

to find that the $6,581,000 of plant additions placed into service

as of June 30, 1982, should be included in the calculation of

Petitioner’s TMI-I rate base. Testimony of Petitioner's witnesses

indicates that these additions represent costs associated with

A-87

TMI-II “lessons learned” required by NRC applicable to all

nuclear facilities and also unique to TMI-I.

2. HEALTH AND SAFETY OPERATION AND MAINTENANCE

EXPENSE

Petitioner is seeking to recover certain operating and mainte-

nance (O&M) costs related to the public health and safety of the

unit and costs incurred for restart, from May, 1980 to December,

1981. It proposes that these costs be capitalized and amortized

over 21 months, which is the length of the period during which

Petitioner incurred these costs. The treatment, sought by Peti-

tioner is purportedly due to the extraordinary levels of expense

and to the nature of the items.

The Public Advocate argued that the Board was explicit in its

Decision and Order of April 1, 1980, in Docket No. 795-427,

when it ordered that the TMI-I investment and associated O&M

be removed from base rates, and therefore, the health and safety

O&M should be disallowed. It did, however, suggest that an

amortization period, of 5 to 8 years, without rate base treatment

would be appropriate if the Board chose to recognize these costs.

Staff was in basic agreement with the Public Advocate’s amor-

tization position. It agreed with the Public Advocate’s interpre-

tation of the Board’s April 1, 1980 Decision and Order, in that the

ratepayers were not to bear any costs related to the TMI-I invest-

ment or O&M until such time as the unit resumes operation and

is returned to rate base. The record shows that the O&M costs

expenditures required prior to restart. Therefore, the Board will

recognize the health and safety O&M as legitimate costs to be

. recovered throught the base rates when TMI-I is returned to rate

base.

We reject Petitioner’s reqnest to capitalize the unamortized

. balance and the 21-month period of recovery. As the Public

Advocate pointed out — , “The expenses which are amortized to

future periods for ratemaking purposes . . . are recognized i rates

throug an amortization process which does not involve a return

A-88

on an unrecovered balance.” (RCT-2A, Page 16) This has

been the Board’s position relative to these types of amortizations.

Likewise, the period for recovery in those instances as noted in the

record, has been 3 to 5 years. However, we are persuaded by the

Public Advocate’s and Staff's argument hereto and feel that the

upper bound suggested (8 years) is not an unreasonable recovery

period and reflects the Board’s sharing philosophy which we have

employed since the TMI accident in 1979.

3. DEPRECIATION ON TMI

The Petitioner proposed a change in the calculation of its

depreciation rates to 3.33% to reflect its level of investment

through 1984. This issue was also litigated in Stage II before the

' Administrative law Judge regarding Oyster Creek investment

through 1984. In both instances, Petitioner’s argument would

result in the recovery of its total investment over the remaining

life of the plants.

Staff and the Public Advocate argue that only end of test year

investment (as of June, 1982) be recognized in the calculations

resulting in a 3.29% rate. After review and consideration of the

recommendation and reasoning of the Administrative Law Judge

in his discussion of the issue in Stage II, the Board adopts the

position of Staff and the Public Advocate. To go beyond the test

year levels of investment would be too speculative and contrary to

accepted regulatory policy. :

4. NUCLEAR FUEL

Petitioner in its Stage I request, includes in its rate base calcu-

lation $24,763,000 for nuclear fuel. In the stipulation submitted

to the Board on January 8, 1982, the uncontested nuclear fuel was

reflected as $13,287,000. The balance of $11,474,000 that Peti-

tioner seeks to carn a return on represents 103 completed fucl

assemblies presently being stored off-site. This represents two

refuelings (% of the core). Petitioner testified that because the |

assemblies are complete, it must cease booking AFDC and

A-89

requests rate base treatment as if it were plant or nuclear fuel in

service.

The Pubiic Advocate noted that Petitioner normally had 25 to

30 spare assemblies on site after a refueling. (TMI-I had just

been refueled at the time of the accident). The Public Advocate

further argued that the fuel will not be used until 1984 or 1985 at

the earliest because the unit has a full core and will not be

refueled until 10 months after restart, at which time one-third of

the core will be replaced. Therefore, it argues that to permit

Petitioner to earn a return on this investment would be improper

in chat the fuel is not currently used and useful.

The Staff agreed with the position of the Public Advocate but

would allow % of the core or $5,737,000 in the calculation of

TMI-I related rate base.

After review, the Board finds that Staff's position on this issue

is meritorious and will adopt it. Assuming a restart of TMI-I

during the first quarter of 1983 as now appears likely, this portion

of the fuel assemblies would be installed in the facility during its

first post restart fueling. This would occur during the first quar-

ter of 1984 or within the foreseeable future.

Therefore, based upon the foregoing, the Board finds that the

total net investment of TMI-I Unit I based upon additions

through the test year ended June 30, 1982 to be utilized in adjust-

ing the Petitioner’s rate base when Unit I returns to service is

$108,602,000, and that the income requirement based on the

foregoing adjustments and the rate of return discussed following

is $12,293,000.

lll. STAGE Il

Those issues remaining in controversy are:

1... CONSTRUCTION Work IN Procress (CWIP)

Petitioner, in Exhibit JC-201 showed Construction Work in

Progress (CWIP) to be $89,124,000. This figure was subse-

quently reduced to $80,300,000 which includes the following:

PUN Diatasatlinineiatetevnapbenstidsensetanithsined $ 57,000

Projects under $5,000 (No AFDC ac-

| i A, A 25,812,000

Projects waiting and/or in service—not

SES TS EERE eve 9,216,000

Accumulated AFDC .0.........cccccseseees fe. 9,281,000

Investment in Nuclear Fuel Raw

EEIEED .iphicicphtuacitiesdinniticcssetssibtindagins 35,934,000

$80,300,000

Petitioner does not book AFDC on small projects of short

duration. Traditionally, these have been projects that cost

$5,000 or less. The record shows that Petitioner’s CWIP in

which carrying charges (AFDC) are not now being booked is

$25,812,000 at test year ended June 30, 1982. The Public Advo-

éate excluded the $25,812,000 from its CWIP calculation. It

contends that there is no accounting practice or procedural

impediment for Petitioner to accrue AFDC on these projects.

While this may be the case, Petitioner does not now book AFDC

on smal] projects of short duration, and has not sought to change

this policy. The issue was also raised by the Public Advocate in

Petitioner’s last base rate case. The Board, in that matter,

decided to continue treating those costs in the manner set forth by

Petitioner in this pending case. After review, we see no reason to

deviate from our prior position and therefore adopt the Staff and

the company’s position.

Petitioner’s inactive work orders total $3,886,000 and its “work

orders in-service-not completed” amount to $5,330,000. The

former represent projects which have been suspended with no

work performed for more than three months. The record does

not indicate when activity will resume on these work orders. The

Advocate and Staff, therefore, eliminate the $3,886,000 from its

recommended level of CWIP. As to the remaining $5,330,000,

this represents projects which should properly be considered

plant-in-service, however, the Petitioner's bookkeeping practices

prevent such designations. The Advocate and Staff have

included this amount in their rate base calculations.

A-91

Petitioner also includes in its CWIP calculation accumulated

AFDC of $9,281,000. In effect, Petitioner is seeking a return on

previously booked AFDC applicable to construction projects not

yet completed. The computation to book AFDC on the accumu-

lated AFDC, is made twice a year in accordance with Petitioner’s

present policy. The Public Advocate’s witness recommended

that the Board permit Petitioner to compound AFDC monthly

and, therefore, recommended elimination of the above amount

from CWIP. The Staff rejected this position, arguing that the

Board has not permitted the compounding of AFDC on a monthly

basis. We agree with Staff and adopt this position.

The last element included in Petitioner’s CWIP is nuclear fuel

in process, which equates to $35,934,000. This represents invest-

ment in nuclear fuel and raw materials for TMI-I and Oyster

Creek. The Public Advocate recommended that this nuclear fuel

in process should not be included in CWIP calculations. It con-

tended that current customers should not have to pay for this

additional investment at this time in view of the uncertainty

surrounding the restart of TMI-I, and the questionable status and

reliability of Oyster Creek. Staff concurred in this view.

After review, we find the Staff's and Advocate’s position on

nuclear fuel to be persuasive. Petitioner expects that, during the

next 36 months, Oyster Creek nuclear station will be out of

service for approximately 20 months. Further, TMI-I restart has

been delayed due to legal and technical problems. To require the

present ratepayers to absorb the cost of this investment at this

time would be unjustifiable.

The question of nuclear fuel assemblies currently in storage

and nuclear fuel in process is troubling to the Board. Consider-

ing the questionable status of the Petitioner’s nuclear program

(restart of TMI-I and II and the forecast extended outages at the

Oyster Creek facility), the Board would direct the Petitioner to

investigate the possibility of selling all or part of the inventory

currently on hand. Such a sale would give an immediate positive

cash flow advantage to the Petitioner and serve to reduce the level

A-92

of short term borowings. The Petitioner is to report to the Board

within 90 days on potential buyers contacted.

2. WORKING CAPITAL

Petitioner’s filing initially reflected a level of Working Capital

in the amount of $149,093,000 which was modified to

$150,756,000. Both analyses include an appropriate amount for

materials and supplies, and cash working capital based upon the

FPC \% of operating and maintenance expenses method of

$96,153,000. Howeve:, the Petitioner, in response to the Public

Advocate’s request X-79, provided the various leads and lags

associated with Petitioner’s revenue and expense accounts for the

calendar year 1980. Based on the above mentioned lead-lag

study, the Public Advocate argued that the cash working capital

allowance should be $44,495,000. The Public Advocate calcu-

lated the lag period for 1980, from the midpoint of 1979 to each

payment date, concluding that the weighted tax lag period is

187.4 days.

In view of the fact that the lead-lag study (X-79) represents

Petitioner’s calendar year 1980 operations, Staff argued that it is

more appropriate to begin the calculation of the lag period at the

end of 1979 or from the beginning of 1980.

The Administrative Law Judge adopted the Public Advocate’s

reasoning regarding the use of a Lead-Lag study but recom-

mended a further adjustment reflective of the Petitioner’s asser-

tion that funds accrued for the payment of debt interest and

preferred stock dividends should not be included in the cash work-

ing capital analysis. Staff and the Advocate argued that these

and as such should be included. f

We concur with the position of Staff and find that the lag period

for all taxes is 114.9 days. We further adopt the position of Rate _

Council and Staff as regards the treatment of funds for debt and

preferred stock payments.

A-93

Based upon the foregoing, the cash working capital required by

Petitioner equals $66,740,000 and the total working capital

allowance is $120,731,000.

3. The Depreciation Rate on Oyster Creek

As stated by the Board in its discussion of the treatment of

TMI depreciation, we adopt the position of Rate Counsel and

Staff regarding the use of test year end investments in the calcula-

tion of depreciation rates. Therefore, we adopt the ALJ's recom-

mendation and find a 3.75% rate to be reasonable.

4. Rate of Return

The parties in this proceeding faced the continuing difficulties

of estimating a market oriented cost of capital for a company that

Further complicating the issue are the apparent differences of

opinion regarding the present stage of the recovery of JCP&L

and, in fact, the ultimate desirability of accomplishing that recov-

ery. The Board has reviewed the record on these issues and

determined that the costs of capital and capital structure set forth

below adequately meet the legz! and regulatory standards associ-

ated with the issues:

(emt

Caplel Serectare (000) ‘ge (8)

Long-Term $ 893,000 47.40 8.41 3.99

Short- Term Debt 20,000 1.06 17.00 0.18

Preferred Stock 200,000 10.62 9.08 0.96

Common Stock 685,944 36.42 17.00 6.19

Cost Free Capital __ $4,690. 450 — _—

i336 ioe

In reaching its determination on the appropriate return on

equity for JCP&L, the Board considered the following factors:

1) Current and prospective bond ratings of JCP&L

) Mooly'n Baoan SAP BD).

A-94

Recent long-term “BBB” rated utility bonds are yield-

ing near 18 percent. Even utility bonds rated “AAA” are

priced to yield in excess of 16 percent. It, therefore,

appears obvious that the Public Advocate’s return on

equity assessment of between 14.84 to 15.69 (recom-

mended 15.69) was insufficient when filed (Staff Position:

April 7, 1982, p. 10), and capital markets have not pro-

duced interest rates to support that assessment. Reestab-

lishment of investment grade debt ratings will benefit

ratepayers in lower costs of capital.

(2) Very limited access to traditional money and capital

markets.

It is clearly the intent of the Board to mitigate the long-

term costs of capital to the Petitioner. However, this

cannot be accomplished in one Board Order covering say

the next year or two. Therefore, the Board must system-

atically deal with the Petitioner’s financial problems in a

consistent and realistic way. Our rate of return determi-

nation is totally reflective of that position. Ratepayers

will benefit from this strategy.

(3) Current and prospective high market interest rates.

franchise responsibilities. This is clearly a fact facing the

Petitioner. Although at times unpopular, the Board must

exercise its authority to asess these market-determined

A-95

aimed at mitigating these risks and passing on the benefits

to JCP&L’s ratepayers.

(5) Continuing need to assure safe, adequate, and proper

service via substantial long-term purchased power

agreements.

The Board has continually insisted that the Petitioner

pursue all purchased power agreements that will result in

lower cost power and energy. In order to successfully

execute this responsibility, the Petitioner must negotiate

contracts for five and ten years into the future. Ratepayer

benefits should not be foregone because the company is

viewed as incapable of meeting these contractual

agreements.

The overwhelming evidence in the record supports our

determination that a return on equity of 17% and an over-

all return of 11.32% are reasonable approximations of the

Petitioner's costs of capital. As noted previously, the dif-

ferential risks faced by JCP&L are greater than most

electric utilities. The Board’s recent action in Docket

812-76 indicated its assessment of the record evidence

concerning the cost of equity to PSE&G, namely 16.0%

(Decision and Order, February 11, 1982, p. 8). Our

underlying assessment of the record evidence in this pro-

ceeding clearly indicates the unrebuttable higher risk

faced by JCP&L.

IV. STAGE III (TMI-RELATED ISSUES)

The issues before the Board in Stage III are:

1. The regulatory treatment of TMI-I and the issue of

the cessation of depreciation in Docket No. 818-736.

2. The regulatory treatment of TMI-II.

3. TMI-II decontamination costs.

1. RETURN OF TMI-I TO RATE BASE

The discussion in the Stage I section set forth those isues that

were not stipulated by Staff, the Public Advocate and Petitioner.

The question of the timing, that is, when the TMI-I unit will

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