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

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385011_1262%3A2

## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1984
- **Citation:** 466 U.S. 947

## 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,
v.

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

|
7
!
/

1983

Court of New
Court of New
983
of

Public Utilities
New
Petition

Board of
Jersey

6,1
from orders
,

-

es eee oe

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

7
*
i
“
%
:

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

a

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.

~ ‘

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).

e
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

a
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).

R
’

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

od

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

oo

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 “-
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7 SIU insthb sexticecasecncesccceseetnenesvcenccntes 218 1,418,314 46,420,070 7,898,703(6) 76,899,638 10.27
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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

Be

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

A-78

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

A-80

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.

After investigation and consideration © the entire record
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

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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 be
returned to rate base must also be determined. Staff suggested
that th: commercial operation of the unit would be the triggering

event. The Public Advocate pointed to the recent Petition for
Settlement in Pennsylvania wherein the return to rate base would
be guided by the following:
1. An order issued by the NRC authorizing normal oper-
ation of the plant.
2. The plant has begun to produce electric energy for the
system and achieves and maintains a capacity factor of
35% for at least 100 consecutive hours; and

3. The company has given 10 days notice of a rate change
to the Board and to all parties to the proceeding.

The Advocate would desire a similar set of circumstances before
the Board would act on a return to service of TMI-I.

The Petitioner argued as it has done since January 1980, when
the Board removed TMI-I from rate base, that the unit should not
have been removed and should immediately be returned to rate
base. We cannot find any merit in Petitioner's arguments.

We adopt the Advocate’s position and employ the restart crite-
ria developed in Pennsylvania. As we have stated before, when
the unit returns to commercial operation after the NRC issues the
necessary approvals, an expeditious hearing process will be insti-
tuted, the facility's status, i.c., rate base inclusion will be
examined, and if appropriate, will be recognized.

2. TMI-Il INVESTMENT

Petitioner, in its Stage II testimony and more recently in the
Stage III proceeding, requested an increase in annual revenue of
$35.3 million to reflect a recovery on its TMI-II investment.
Petitioner believes that the investment in TMI-II should be
included in rate base as “Plant Held for Future Use” (FERC
Account 105).

Petitioner alternatively suggested that the Board permit the
amortization of the TMI-II investment with carrying costs associ-
ated with the unamortized balance, in an amount equivalent to
the $35 million initially requested, if the Board determined that it
was inappropriate to recognize TMI-II as plant held for future

line, , s ] is , b » Pa-ae se * ri 7 ”
ig ae ee” BAe eee ee ae lle atte Bek Sa ie ah. 5 7 s

A-97

The Public Advocate argued that the investment does not fit
the definitions of plant held for future use as set out in the FERC
Uniform System of Accounts. Account 105 refers to “...definite
plans, never used and retired.” (RCT 24 p. 21). The Public
Advocate’s witness suggests that nothing is definite as to the
status of TMI-II. No decision has been made regarding restart
or reconstruction. Although technically feasible, the financial
and regulatory problems may inordinately delay or even preclude
such action. Additionally, the facility is not one which was
“never used” and is not “retired.”

As to the Petitioner’s alternate proposal, the Public Advocate
compared it to the treatment sought by Petitioner and other New
Jersey utilities for abandoned plants or projects, arguing that the
same cost recovery methods should be applied to TMI-II. That
is, Petitioner should not be afforded a return on carrying charges
on any unamortized investment. The Staff concurred in this
view.

After careful review, the Board finds no compelling reasons to
alter its policy that the financial impact associated with the TMI
accident should be shared by ratepayers and stockholders. The
Board has consistently allowed the pass-through of reasonable
replacement energy costs to maintain service for the ratepayer.
It has disallowed a 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 adjust-
ment now would, in our opinion, destroy the foundation of the
sharing concept which we have carefully fashioned for 2 years.

We will therefore adopt the recommendation of the Staff and
Rate Counsel. If, in fact, Petitioner at some future date, decides

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to abandon the TMI-II facility, the Board will at that time under-
take a full investigation into the circumstances surrounding the
accident before making any decision.

3. TMI-2 DECONTAMINATION

Petitioner proposes that it be allowed to recover, through rates,
$13.8 million annually (including revenue taxes) for a five year
period covering its proportional (25%) shares of TMI-2 decon-
tamination costs as contemplated in the Bradley-Heinz cost shar-
ing bill currently pending before the U.S. Senate, under the
provisions of the Thornburgh Plan.

The Public Advocate, through its witness, did not provide a
specific recommendation for decontamination or clean-up costs.
The record indicates the Public Advocate continues to argue that
Petitioner cannot pass on to customers any TMI accident-related
costs, including decontamination costs, without a resolution by
the Board as to whether negligence or mismanagement contrib-
uted to the accident at TMI-2. The Public Advocate’s witness,
however, did testify that the dollar allowance for decontamina-
tion costs would be added to his revenue recommendation in
Phase II, should the Board allow some level of cost to be
recovered.

The Staff position, while approving and supportive of the shar-
ing concept, would not have provided for recovery of this cost
until all other participants under the plan pledged their shares.
The Board, however, finds that, as difficult as it is to impose
additional costs on these already burdened ratepayers we can no
longer ask others to share what we are unwilling to undertake.

Since the accident in March, 1979, the Board has advocated a
sharing philosophy regarding this event. It has attempted to ask
both ratepayers and stockholders to assume part of the financial
burden of the accident. Before now, however, we have never
asked the ratepayers to participate, through rates, in the clean-up
effort.

Each Commissioner has testified in Washington before Con-
gressional Committees as to our belief that the costs of the clean-

=

A-99

up must be shared: We have embraced Governor Thornburgh’s
sharing plan under which the Federal government, the residents
of both Pennsylvania and New Jersey, the nuclear industry and
the ratepayers of Jersey Central Power & Light, Metropolitan
Edison and Pennsylvania Electric would all contribute a share to
the clean-up effort. Substantial federal funds have already been
pledged.

The budget of the State of Pennsylvania includes a line item for |

its share of clean-up costs. The potential for additional funding
exists.

However, there is a clear requirement in Washington that to
ask ratepayers in other states to share part of the clean-up effort
while the New Jersey ratepayers refuse to contribute is not only
unfair but unwise. Our continued refusal clearly jeopardizes
hundreds of millions of dollars in contributions which would serve
to tremendously reduce the burden to Jersey Central Power and
Light ratepayers in the long-run. To fail to participate may well
mean the Thornburgh Plan will never be implemented and we will
have lost this opportunity to spread the costs over a broad base of
interested parties.

We recognize and appreciate the support of Governor Thomas
H. Kean in his full endorsement of the Thornburgh Plan. The
Public Advocate Joseph Rodriguez has also publically supported
the sharing concept of the Thornburgh Plan and its ramifications.
We are cognizant of the impact of that support.

We note that the average residential customer’s bill will
increase $6.00 a year with this allowance for clean up, or $.50 per
month. However the real cost will be even less. From testimony
before both State and Federal governmental officials, it is clear
that they perceive the funding of TMI-II as a major impediment
to the recovery of this utility. If the investment community feels

that the risk of JCP&L is reduced, the cost of borrowing by the

company and the ultimate cost to the ratepayer will be reduced.
We shall direct that the Petitioner set up an escrow account for

the funds collected for decontamination, this account will be
administered by the Board, the administrative details of which

A-100

shall be decided by the Board. Any other funds, from whatever
external sources which may hereafter be made available to the
utility for decontamination, shall also be placed in the account.
This will ensure that funds collected for decontamination will be
used exclusively for that purpose.

4. NUCLEAR INDUSTRY CONTRIBUTIONS

The Board notes in further consideration of the sharing concept
however, that in our opinion, the nuclear industry as a whole has
not been as supportive as we would have hoped. Therefore, at the
September Edison Electric Institute meeting, we shall request
that the industry voluntarily contribute to the sharing plan. It is
our intention to discuss with New Jersey utilities the necessity for
such an endeavor on the part of the industry. Failing a positive
response, in the future New Jersey utilities will no longer be
permitted to pass through the cost of their membership dues in
EEI or EPRI assessment to their ratepayers. These dues are
used in part for research and development.

In the opinion of the Board, the TMI situation provides an area
of research which is unparalleled in technological and economic
impact.

5. CESSATION OF DEPRECIATION ON TMI-I

As part of Docket No. 818-736, Petitioner, the Public Advo-
cate and Staff have agreed as part of the stipulation in Stage I on
the treatment of cessation of depreciation on the TMI plants.
After review, we adopt this position.

6. OLp DEFERRED ENERGY

The Advocate recommended that $18,162,000 of old deferred
energy expense be removed form Petitioner’s operating expenses
and the balance transferred to the currently pending LEAC pro-
ceeding, Docket No. 821-75. Staff and the Petitioner agree with
this recommendation.

A-101

Therefore, the Board directs Petitioner to include the balance
in that account in its calculation of the pending LEAC, Docket
No. 821-75, decision on which can be anticipated by September 1,
1982.

7. Oyster CREEK REPAIRS

During the pendency of this matter, it became apparent that
extensive repairs would have to be undertaken on the Oyster
Creek nuclear plant during its next two scheduled refueling
outages. The extent of those repairs is of such concern to the
Board, that we will direct the Petitioner to inform us before
undertaking any repairs of their nature and anticipated cost. An
overview reporting system will be set up by the Division of Elec-
tric and Petitioner to insure timely reporting of the ongoing status
of these repairs.

8. TARIFF DESIGN

The tariff design stipulation (Att. 1) signed by the parties on
March 5, 1982 is a reasonable resolution of the issues. First, it
sets equitable standards for the allocation of revenue increases to
each customer class. Second, it continues the further cost defini-
tion in the design of individual tariffs. This includes a further
flattening of the General Service Secondary tariff, demand-
energy charge allocation for General Service Primary and Trans-
mission tariffs, and an increased inversion of the summer residen-
tial tariff. The latter is a step in setting a price signal to the high
summer user which reflects the increased cost of on-peak service.

Finally, this stipulation includes additional loan management
initiatives. Mandatory time-of-day rates for newly constructed
electric heat or hot water residences and the capacity offset mech-
anism to encourage storage water heating are both significant
efforts to manage load to off-peak and thus avoid the cost of
additional capacity.

The Board will adopt this stipulated tariff design submitted by
the parties.

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Vv. SUMMARY

Based upon the full record in this proceeding, Stages I, II, and
III, a review of the ALJ's Report and Recommendation and the
exceptions filed by the parties, the Board HEREBY FINDS:

1.

2.

3.

The fair value rate base for the purposes of this pro-
ceeding excluding the TMI units is $1,324,714,000.
The fair rate of return applicable to the rate base
found herein is 11.32%

A rate of return of 11.32% applied to a rate base
of $1,324,714,000 allows operating income of
$149,958,000 or an increase of $68,822,000 in annual

A-103 :

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.

4 The HEREBY DIRECTS that the fuel costs of the
existing LEAC be rolled into base rates in the amount of 5.676
mills per kwh.

DATED: July 22, 1982 BOARD OF PUBLIC UTILITIES
(SEAL) BY: (SIGNED)

BARBARA A. CURRAN
PRESIDENT

GEORGE H. BARBOUR

COMMISSIONER
ATTESTED: EDWARD H. HYNES
(SIGNED) COMMISSIONER

TERESA M. SELLMEYER
ACTING SECRETARY

A-104

Revenue Requirement Summary
(000’s)

a —

esi basaveseecesee $1,324,714 —

Rate of Return ......... 11.32% ~
Income Requirement $ 149,958 a
Pro-Forma Income .. $ 117,165 _
Income Deficiency ... $ 32,793 $ 6,601
Revenue Factor ........ 2.0987 2.0987

Require-

pubdpensbebibstnnnecee $ 68,822 $13,854

JERSEY CENTRAL POWER AND LIGHT COMPANY

Total

$1,324,714
11.32%
$ 149,958
$ 110,564
$ 39,394
2.0987

$ 82,676

A-105
Appendix D
DECISION ON MOTION

STATE OF NEW JERSEY
DEPARTMENT OF ENERGY
BOARD OF PUBLIC UTILITIES
1100 Raymond Bivd.
Newark, New Jersey 07102

BPU Docket Nos. 795-427
BPU Docket Nos. 804-285
BPU Docket Nos. 811-25

IN THE MATTER OF THE PETITIONS OF JERSEY CENTRAL

PowEeR & LIGHT COMPANY FOR INCREASES IN ITS

LEVELIZED ENERGY ADJUSTMENT CHARGE AND ITS BASE
RATES.

(Appearance List Attached)

By THE BOARD:

The Public Advocate by Motion of March 2, 1981 joined the
County of Ocean in moving before the Board for the following
relief: (1) That the Board undertake a formal proceeding to
determine the culpability or “fault” that can be attributed to
petitioner relating to the nuclear accident at Three Mile Island,
Pennsylvania, which, to this date, has kept both TMI Units I and
II out of service; (2) That the Board in effect, “freeze” peti-
tioner’s rates by deferring consideration of the current energy
adjustment docket and base rate docket until completion of the
requested “fault” proceeding.

The Advocate, in a series of moving papers, has urged that the
Board is precluded as a matter of law from fashioning rate relief
in the current energy adjustment proceeding and base rate pro-
ceeding even if otherwise justified, unless and until it makes a

A-106

finding as to the degree of culpability, if any, that should be
attributed to petitioner, related to the TMI-2 accident.

The thrust of the movant’s position is that the Board is legally

: required to determine the question of management prudence and,
therefore, must initiate the requested proceeding. The argument
runs that if the Board finds fault on the basis of the requested
proceeding, the Board would then be required to attribute a sub-
stantial portion of the replacement purchase power costs already
reflected in rates, and pending for Board consideration,’ to the
utility itself, with a consequent reduction in ratepayer costs.

The Advocate has also moved for denial of the proposed base
rate increase in toto, on the grounds that it includes in rate base,
TMI-1 capital costs, contrary to the Board’s Order of April 1,
1980 in Docket No. 795-427, which removed these capital costs
from rate base. This portion of the Advocate motion is
DENIED, since the Board will evaluate this issue, as well as other
substantive issues, in the context of its final determination in the
base rate docket.

The board has concluded, for the legal and policy reasons set
forth below, that it would be counterproductive to the public
interest, procedurally unmanageable and undermine those posi-
tive efforts under way to share the cost burdens of the TMI
accident, to grant these motions. These motions are conse-
quently DENIED in full, based upon our current evaluation.

We will set forth our reasons which led us to conclude that these
motions should be denied.

A-107

the ratepayer, since reasonable replacement power costs must be
paid for if ongoing service is to continue. We have outlined below
those initiatives that can be of help to the hard-pressed customer,
such as returning TMI-I to service, the success of pending law
suits, the benefits of which will flow through to the ratepayer, and
federal initiatives to share the burdens of the TMI accident.

Balancing the interest of customers in refunds anticipated from
a penalty action against the need for an ongoing utility to provide
ongoing service, leads us to deny these motions.

The Supreme Court on April 8, 1981 has held action similar to
that we take today to be reasonable and proper and as well within
the bounds of Board discretion." The Supreme Court held in this
matter that removal of TMI-I from rate base, coupled with the
accelerated amortization of JCP&L’s deferred energy balance,
was a reasonable resolution of a unique policy question, well
within the Board’s discretion, which properly balanced the level
of rates placed upon JCP&L rate payers against the need to
maintain the utility to provide safe, adequate and proper service
to the public.

We believe our action today, which is a continuation of our
determination to carefully balance these interests, is also well
within the Board’s discretion. As the Court stated on Page 7, of
its Opini

A-108

What has been placed at issue here is the appropriateness of
permitting the recovery of replacement purchase power costs for
TMI-I after we have removed the capital costs of TMI-I from
rate base. This was the very issue before the Supreme Court,
supra, in which it affirmed the Board’s discretionary powers to
act.

In Daaleman v. The Elizabethtown Gas Company, 77 N.J. 267
(1978), the New Jersey Supreme Court stated at page 569:

Punitive assessments against it are counterproductive
because, in the long run, it is the public users of the utility
service on whom the punitive award will fall. No matter
how such award is molded to avoid a “pass through” of the
punitive damages, the financial structure of the utility will

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385011_1262%3A2. Public record. Not legal advice.