Jersey Central Power and Light Company

Jersey Central Power and Light Company d/b/a GPU Energy
Proposed Sale of Oyster Creek Nuclear Generating Station
BPU Dkt. No. EM99120917

March 28, 2000

PRELIMINARY STATEMENT OF BLOSSOM A. PERETZ, RATEPAYER ADVOCATE

Presented by Gregory Eisenstark, Deputy Ratepayer Advocate

Good morning. I’d like to thank the Board for giving the Ratepayer Advocate the opportunity to comment on this matter here today. I will be making comments on the status of the Ratepayer Advocate’s review of GPU Energy’s proposed sale of the Oyster Creek nuclear generating station. GPU Energy has entered an agreement to sell its ownership interests in the Oyster Creek plant to AmerGen, the same company to whom it sold the TMI-1 nuclear generating station. GPU Energy has also entered an agreement to buy the energy and capacity from the Oyster Creek plant until March 31, 2003.

At the outset, while we are pleased to be able to appear and comment today, we note our objection to the fact that the Board has apparently determined not to conduct any evidentiary hearings in this case, particularly since the issues concerning the particular agreement to sell Oyster Creek were not, and indeed could not have been, addressed in the evidentiary hearings in the GPU Energy stranded costs and rate unbundling cases.

Instead, the Board has chosen to pursue today’s "legislative-type" public hearing format. We believe that given the magnitude of the dollars involved in the sale of this plant, as well as the long-term impact that the Board’s decisions here will have on the stranded costs that GPU Energy’s customers will have to pay through rates, evidentiary hearings should be conducted. Only through the submission of comprehensive written testimony, exhibits, and cross-examination of other parties’ witnesses can a comprehensive evidentiary record be developed in complex matters such as this. Moreover, because this proceeding will likely have a direct impact on customers’ stranded cost payments under the Electric Discount and Energy Competition Act, we believe evidentiary hearings are required by law.

We also note that the Board has not yet issued its Final Order in the GPU stranded cost and unbundling dockets. Given that GPU’s request for relief in the instant case is predicated upon what the Board will likely conclude in its Final Order, we believe it is procedurally and substantively inappropriate for the Board to issue a ruling here prior to issuing its Final Order in the overall GPU restructuring case.

I will now turn to some of the issues in this case. I must emphasize that these comments are intended to be a preliminary summary of the issues the Ratepayer Advocate has concerns about. The Ratepayer Advocate will file more detailed written comments by the April 11, 2000 deadline the Board has established.

Some of the issues the Ratepayer Advocate is reviewing in this case are:

1. Market Value:

The extent to which the sales price of $10 million reflects a true market value for the assets being sold;

2. GPU’s Calculation of Net Customer Benefits Under its Sale Proposal

Decommissioning Costs:

GPU Energy has agreed to pay AmerGen up to $430 million for the costs of decommissioning Oyster Creek. To do so, GPU will transfer the existing decommissioning trust fund balance to AmerGen and proposes to pay an additional $123 million towards decommissioning at the time of closing. In this proceeding, it appears that AmerGen is happy to have, at closing, $430 million in the decommissioning fund that it receives from GPU. Appendix 12 to the filing shows that the revenue requirements for decommissioning in the sale scenario total $191 million, but is $335 million for the shutdown settlement. That is a difference in revenue requirement of $144 million, and that difference accounts for most of the claimed economic benefit from the sale. The Board should be asking itself, why is it that AmerGen appears to need so much less for decommissioning than GPU? In fact, if AmerGen can decommission the plant for less, then so could GPU and, as a result, a lot of the claimed benefit from the sale just doesn't exist, except on paper.

This proposal also raises the issue of removing all Oyster Creek nuclear decommissioning costs from the utility’s Societal Benefits Charge recovery and thereby lowering the SBC rate to customers, since GPU Energy’s full responsibility for the Oyster Creek decommissioning costs would be completed at the closing. However, GPU Energy has also proposed to securitize the decommissioning cost prepayment. If ratepayers are in the future required to pay for the decommissioning prepayment through a transition bond charge, that would create a double recovery of these costs since they are now also included in the company’s SBC;

GPU’s retention of future environmental liabilities:

The proposal for GPU Energy to retain certain environmental cleanup responsibilities even after the plant is transferred to AmerGen is a significant concern. First, this aspect of the transaction appears to be contrary to the Board’s auction standard number 7. That standard requires that all on-site environmental liabilities be assumed by the buyer, unless otherwise required by applicable local, State and federal laws, or absent a showing by GPU Energy that retaining the liability "provides a substantial risk-adjusted benefit to ratepayers. . . ." The proposed sale agreement requires GPU Energy to remain financially responsible for certain known environmental liabilities and a certain level of future, unknown environmental liabilities (as well as those related to possible breaches of representations and warranties by GPU Energy).

The Ratepayer Advocate opposes GPU Energy’s request for BPU preapproval of deferred accounting for these liabilities. This deferred accounting proposal would allow GPU Energy to charge ratepayers for these costs through the MTC. The costs may erode a significant portion of the ratepayer benefits that GPU alleges customers will receive from the proposed sale of Oyster Creek. In this regard, paragraph 41 of the petition would cap this deferred recovery of environmental liabilities, but only at the total amount of net ratepayer benefits. While certain discovery responses indicate that GPU may contemplate another limit on such liability, it has not amended its petition to clarify this issue. Finally, we note that GPU’s economic analysis of the ratepayer benefits does not include either the known or unknown environmental liabilities is has retained under its contract with AmerGen. Thus, it is clear that GPU’s proposal regarding future known and unknown environmental liabilities, as set forth in its Petition, does not comply with the Board’s auction standards order and should not be approved. Instead of providing a risk-adjusted benefit, the current proposal could erode a significant portion of the Company’s claimed customer benefits.

Benefit Computation

The Company anticipates a curtailment gain of $42 million and amortized this gain, along with a variety of other costs, in the benefit analysis in Appendix 12 of the filing. It is not clear what this curtailment gain relates to, or why the Company apparently amortized it without any rate of return. In addition, for about half the items in the Company's computation of benefit, the amounts reflected are based on annuity computations with rate of return, albeit rate of return applied at different rates of term. For the other half of items, it appears that the computation reflects a straight amortization. This, too, is an issue that could be straightened out if there were evidentiary hearings.

Refueling Outage:

GPU Energy proposes to pay for the next refueling outage up to $88.9 million, even if the outage occurs after the closing. AmerGen would then reimburse GPU Energy over a nine-year payment period with no interest or return on the balance. The Ratepayer Advocate has severe concerns over this interest-free loan to AmerGen at ratepayer expense. Moreover, if GPU subsequently receives approval to securitize this "interest free" loan to AmerGen, its customers will have to pay interest on the associated transition bonds over a 15 year period. GPU Energy has not provided sufficient justification for this interest-free loan, especially if the refueling is done after GPU Energy no longer owns the plant.

Inclusion of Design Basis Documentation (DBD) and Probabilistic Risk Assessment (PRA) Regulatory Assets in the Sale of Plant Revenue Requirements Calculation

In Appendix 12 to its petition, GPU proposes to include two Oyster Creek-related regulatory assets in its rates charged to customers. While the total amount is proportionally small ($7.7 million), relative to the entire transaction, no explanation for inclusion of these additional regulatory assets is provided in the petition. GPU received approval to recover all BPU-approved regulatory assets as part of its distribution rate in the Board’s summary order in the restructuring proceeding. Therefore, GPU’s request to include these additional Oyster Creek related regulatory assets in its sale proceeds calculation is inappropriate.

3. GPU Energy - AmerGen Power Purchase Agreement:

The power purchase agreement between GPU Energy and AmerGen for the Oyster Creek output also raises some concerns. Among the concerns is whether AmerGen will be able to operate Oyster Creek at a sufficient availability factor to supply all the energy and capacity that GPU Energy expects under the agreement. If not, GPU would be required to obtain the energy and capacity elsewhere at presumably higher prices.

4. Tax Issues:

The Ratepayer Advocate is also concerned about the status of the IRS rulings on tax issues that are necessary before the closing could take place. GPU Energy should provide an update on this status to the Board and the Ratepayer Advocate before any final decision in this matter.

5. Market Power:

Market power to be vested in AmerGen after it acquires Oyster Creek is also an important issue. GPU Energy claims that market power is not a problem here. However, the Company’s market power analysis submitted as part if its filing shows that if transmission constraints should divide PJM into three smaller geographic areas, there would be some market power concerns in the PJM-Central and PJM-East markets. Given this analysis, this market concentration is sufficient to warrant continued monitoring of the situation by the BPU. Furthermore, the GPU market power analysis assumed that customer choice in the electric market is in an advanced stage. While customer choice has commenced, it is clearly not in an advanced stage. An important question would be the extent to which the study would have been done differently if the author had not been convinced of the advanced stage of customer choice. In any event, the results of the study as done indicate that the BPU should continue to monitor market power issues prospectively.

6. Exempt Wholesale Generator Status:

The negotiated requirement that Oyster Creek must be an eligible facility under the Public Utility Holding Company Act and obtain Exempt Wholesale Generator status should also be more fully supported by GPU Energy before the Board can act. Even though the utility claims that this proposal would increase competition in the generation market, GPU Energy has provided very little factual support for this request.

In closing, I want to emphasize that the Board must ensure that the sale of Oyster Creek provides benefits for GPU’s customers as well as its shareholders, and that New Jersey customers pay the lowest stranded costs possible and are not forced to pay higher rates due to this proposed sale.

Thank you.

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