Opinion ID: 1918402
Heading Depth: 1
Heading Rank: 2

Heading: Nuclear O & M Expenses

Text: In its second assignment of error, the Company contends that the Commission erred by disallowing $3.5 million in nuclear O & M expenses incurred to operate the Company's River Bend Nuclear Generating Station, Unit 1 (River Bend). The Commission disallowed the expenses because they were excessive, and because they were unique and nonrecurring. L.P.S.C. Order No. U-21485 at 15. In determining that the expenses were excessive, the Commission relied in part upon four comparisons made by Mr. Kollen, noting that in each instance 1994 O & M costs were higher than the comparative group. Id. According to Mr. Kollen's comparisons, 1994 River Bend nuclear O & M expenses were (1) 28.6%, or $20.896 million, higher than the 1994 O & M expenses of a peer group of nuclear generating units, (2) 130%, or $53.58 million, higher than 1994 O & M expenses of Waterford 3, Entergy's nuclear generating unit with the second highest O & M costs, (3) 22.5%, or $17.41 million, higher than its own 1994 O & M budget, and (4) 14.8%, or $12.196 million, higher than the Company's projected costs submitted to the Commission during merger proceedings, and relied upon by the Commission in conditionally approving the merger. Supp. Dir. Test. Mr. Kollen at 2, L.P.S.C. (11/6/95). The Company takes issue with Mr. Kollen's comparisons and his opinion that the excessive expenses resulted from imprudent outages and poor performance. Mr. John McGaha, Vice-President of Operations at River Bend, testified that Mr. Kollen's comparison of River Bend O & M expenses with expenses of a peer group is flawed, because the peer group omitted three plants that should have been included, which would have reduced by almost 14% the difference between River Bend and peer group O & M expenses. [7] Rebuttal Test. Mr. McGaha at 20, L.P.S.C. (11/27/95). The Company further contends that this comparison failed to account for the increased level of O & M expenses typically incurred by a plant which experiences a refueling outage during the test year. Plants such as River Bend, which had a refueling outage in 1994, will likely compare unfavorably to plants that did not have a refueling outage due to increased costs and decreased plant capacity. [8] In support of these contentions, Mr. McGaha testified that Mr. Kollen's peer group failed to include the Fermi 2, Pilgrim, and Millstone Unit 1 plants, and that Fermi 2 was down for all of 1994 for an outage to repair its turbine. Id. Mr. Kollen responded to Mr. McGaha's criticism of the selection of comparative nuclear facilities. He testified that: I utilized all domestic single boiling water reactors over 500 mW that actually operated during the test year. Fermi 2 was not included because it did not operate during 1994. Millstone 1 was not included because it is not a single unit. It shares a site with Millstone 2. However, the Pilgrim unit was unintentionally excluded. It should have been included in the comparative group. Surrebuttal Test. Mr. Kollen at 29, L.P.S.C. (12/11/95). Mr. Kollen then testified that he included the Pilgrim unit in a revised comparative analysis which indicated that River Bend's 1994 O & M expenses were $17.983 million higher than those of the peer group, and that the revised computation does not change his recommendation to disallow the nuclear O & M expenses. Id. at 30. The Company contends that the Commission also erred by relying upon Mr. Kollen's conclusion that River Bend's nuclear O & M expenses were excessive when compared to Entergy's other nuclear plants because two of those plants are pressurized water reactors, whereas River Bend is a boiling water reactor. The Company contends that Mr. Kollen failed to make adjustments in his comparison based upon these different designs, and that this failure contradicts his first comparison which used only nuclear units of a similar design. In response, Mr. Kollen testified that he simply made several comparisons on different bases to conclude and illustrate that the test year O & M expenses for River Bend were excessive. Surrebuttal Test. Mr. Kollen at 30, L.P.S.C. (12/11/95). Regarding Mr. Kollen's third conclusion, that River Bend's 1994 nuclear O & M expenses were excessive because they were 22.5% higher than the Company's 1994 O & M budget, Mr. McGaha testified that Mr. Kollen compared actual 1994 O & M spending to internal targets set for River Bend that were lower than the actual corporate budget. If Mr. Kollen had made an appropriate comparison, argues Mr. McGaha, then he would have discovered that the actual O & M expense was only $7.7 million higher than the budget. Rebuttal Test. Mr. McGaha at 23, L.P.S.C. (11/27/95). The Company contends that this variance, about 6%, is reasonable. The Company further contests Mr. Kollen's final comparison of the 1994 River Bend O & M expenses with the Company's projected costs submitted to the Commission during merger proceedings. It is this comparison on which Mr. Kollen, and ultimately the Commission, relied to disallow the $3.5 million, which reflects the excessive actual costs over the level presented by the Company and relied upon by the Commission in the merger proceeding. See Supp. Dir. Test. Mr. Kollen at 5, L.P.S.C. (11/6/95). Mr. McGaha testified that it is arbitrary and unfair to hold the Company liable for amounts that exceed this early estimate which was based on limited information, mainly publicly available information on Gulf States. The Company urges that these old projections are not properly relied upon now for ratemaking purposes, simply because the Commission chose to rely upon them earlier. In addition to inferring from these comparisons that the O & M expenses were excessive, the Commission reasoned that the O & M expenses were excessive due in part to remedial measures taken by the Company to correct the plant's poor performance. The Commission stated that: GSU's self assessment was that management had not established high standards and expectations and effectively communicated them throughout the plant, there were human performance weaknesses, and procedure, maintainability, and backlogs. It does appear that 1994 River Bend O & M was so high at least partly because of the necessity to correct existing problems. L.P.S.C. Order No. U-21485 at 15 (citations omitted). In fact, Mr. McGaha attested to a variety of internal management and operational problems that existed in 1993 and 1994, [9] which resulted in a higher number of corrective actions taken during 1994 to address problem areas. Cross Exam. Mr. McGaha at 269, L.P.S.C. (12/19/95). Mr. McGaha characterized 1994 as a tumultuous time and an unusual transition year, Id. at 270, and stated that O & M expenses for 1994 were higher than those in 1995 due to the amount of work and improvement activities the Company planned for the year, Id. at 233. The Company contends, however, that the record reveals no evidence that any particular O & M activity or project undertaken at River Bend during the test year was imprudent. Rather, all O & M expenses incurred to improve performance were reasonable, necessary, and prudent, and that River Bend's post-test year performance has improved as a consequence of these expenses. By disallowing the expenses, the Company argues that the Commission is effectively penalizing the Company for implementing programs designed to attain excellence. On the other hand, the Commission reasons that the declining post-test year O & M expenses is but another factor suggesting that the 1994 O & M expenses were excessive. Furthermore, the Commission agrees with Mr. Kollen's testimony that: The ratepayers should not be required to pay for excessive costs or poor performance. The fact that [the Company] has to engage in remedial and improvement work to bring the unit to acceptable performance is not the responsibility of ratepayers but, rather, the Company itself. Due to the unit's poor performance, the Company can't even reasonably argue that the unit has generated fuel savings sufficient to justify the excessive [nonfuel] O & M expenses. Supp. Dir. Test. Mr. Kollen at 4, L.P.S.C. (11/6/95). Utilities have an obligation to manage their facilities efficiently. The utility must make reasonable attempts to minimize costs through prudent decision making, since ratepayers depend on only one monopolistic supplier. Gulf States Utils. Co. v. Louisiana Pub. Serv. Comm'n, No. 96-2046 (La.2/25/97), 689 So.2d 1337, 1346 & n. 9. Therefore, the proper standard for determining whether a utility was imprudent is whether objectively that utility acted reasonably under the circumstances, because only the utility, and not the ratepayer, is in a position to minimize imprudence and maximize efficiency. A finding of unreasonableness, and therefore imprudence, by the Commission, will be upheld unless it is based on an error of law or is one which the Commission could not have found reasonably from the evidence. CTS Enterprises,Inc. 540 So.2d 275. Id. Here, the Company's own witness, Mr. McGaha, does not dispute that poor management decisions resulted in increased 1994 O & M expenses. His testimony is replete with examples of inefficiencies at River Bend. During the merger proceedings, the Company submitted its projected 1994 River Bend O & M expenses, which the Commission relied upon then to conditionally approve the merger. We do not find that the Commission's reliance on that figure now, given Mr. Kollen's other comparative analyses and the overwhelming evidence that River Bend's poor performance and management resulted in excessive remedial O & M expenses, is arbitrary or capricious, an abuse of discretion, or not based on the record. Because the finding that the 1994 O & M costs were excessive is sufficient support for the disallowance, we pretermit discussion of whether the Commission could properly disallow the expenses as abnormal and nonrecurring.