B 779,961
84th Congress)
JOINT COMMITTEE PRINT
2d Session j
JOINT COMMITTEE ON ATOMIC ENERGY
!
REPORT OF THE COMPTROLLER GENERAL
OF THE UNITED STATES
ON
ATOMIC ENERGY COMMISSION CONTRACTS
FOR ELECTRIC POWER
PARTS II AND III
ELECTRIC ENERGY, INC., AND OHIO VALLEY
ELECTRIC CORPORATION
Phoenix
HD
9698
.052
A512
1955
82318
AUGUST 9, 1956
Printed for the use of the Joint Committee on Atomic Energy
UNITED STATES
GOVERNMENT PRINTING OFFICE

WASHINGTON : 1956
UNIVERSITY OF MICHIGAN LIBRARIES
Phoenix
JOINT COMMITTEE ON ATOMIC ENERGY
CLINTON P. ANDERSON, New Mexico, Chairman
CARL T. DURHAM, North Carolina, Vice Chairman
RICHARD B. RUSSELL, Georgia
JOHN O. PASTORE, Rhode Island
ALBERT GORE, Tennessee
HENRY M. JACKSON, Washington
BOURKE B. HICKENLOOPER, Iowa
EUGENE D. MILLIKIN, Colorado
WILLIAM F. KNOWLAND, California
JOHN W. BRICKER, Ohio
CHET HOLIFIELD, California
MELVIN PRICE, Illinois
PAUL J. KILDAY, Texas
JOHN J. DEMPSEY, New Mexico
STERLING COLE, New York
CARL HINSHAW, California
JAMES E. VAN ZANDT, Pennsylvania
JAMES T. PATTERSON, Connecticut
JAMES T. RAMEY, Executive Director
I
Phoenix
Foreword...
Part II:
Introduction_.
Summary..
CONTENTS
Comments on contract provisions.
Nature of the contract_
Basic data___
EEI's relationship with its sponsoring companies.
Cost of power..
Financing costs.
Cost of cancellation___.
Lack of ceiling on cost of power.
Reserve and supplemental capacity
Interim power costs__
Profit limitation__.
021
Contract provisions pertaining to EEI's earnings.
Sponsoring companies' potential profits.
Debt amortization period..
Miscellaneous comments.
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Delivery date of power.
المية
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1955
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Contract demand..
Guaranty of performance-
Comparison of EEI base contract with EEI expansion contract_
Cost of the 500,000 kilowatts of power-
Cost of the 235,000 kilowatts of power.
AEC administration of contract.
General
Construction phase-
Technical review.
Audit review..
Metering facilities and billing procedures.
Review of construction costs as of September 30, 1955-
Part III:
Introduction__
Summary_
Comments on contract provisions.
Nature of the contract_
Basic: data-
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OVEC's relationship with its sponsoring companies.
Cost of power_-
Cost of cancellation_
Lack of ceiling on cost of power-
Reserve and supplemental capacity
Interim power costs..
Profit limitation_ _ _ _
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Contract provisions pertaining to OVEC's earnings.
Sponsoring companies' potential profits.
Debt amortization period..
Miscellaneous comments.
Delivery date of power-
Contract demand.
Guaranty of performance.
Location of OVEČ powerplants_
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IV
CONTENTS
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Part III-Continued
AEC administration of contract_
General
Construction phase-
Technical review.
Audit review__
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Review of construction costs and power billings
Construction costs as of September 30, 1955.
Power billings as of June 30, 1955-
Exhibit A.-Diagram of power facilities..
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Exhibit B.-Letter to Hon. Clinton P. Anderson_
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FOREWORD
The Joint Committee on Atomic Energy in carrying out its statu-
tory responsibility to consider long-term utility contracts of the
Atomic Energy Commission has been deeply interested in the per-
formance of Ebasco Services, Inc., as construction contractor of the
steam electric generating plant of the Electric Energy, Inc., at Joppa,
Ill. The committee's interest was accentuated by the proposal made
by the Mississippi Valley Generating Co., that Ebasco Services, Inc.,
build the steam generating plant at West Memphis, Ark.
At the time of the waiver hearings in November 1954 (see Joint
Committee Print on Exercise of Statutory Requirements of sec. 164,
Atomic Energy Act of 1954 Utility Contract Between Atomic
Energy Commission and Mississippi Valley Generating Co.-of
November 4 through 13, 1954), the Joint Committee received assur-
ances from the General Manager of the Atomic Energy Commission
that, based on the then known overrun of costs of the Joppa plant,
Ebasco Services, Inc., would not be acceptable to the Commission as
the construction contractor for the West Memphis plant.
In order to determine specifically how much more the Joppa plant
cost the United States Government than originally estimated, the
Comptroller General of the United States, after consultation with the
Joint Committee, initiated a complete audit of the contract between
the Commission and Electric Energy, Inc. As the first phase of this
comprehensive undertaking, the Comptroller General made a com-
plete audit of the financial records of Ebasco during the time when it
was the construction contractor for the Joppa plant.
On February 3, 1955, Chairman Clinton P. Anderson, of the Joint
Committee on Atomic Energy, wrote the Comptroller General of the
United States as follows:
Hon. JOSEPH CAMPBELL,
Comptroller General of the United States,
General Accounting Office.
FEBRUARY 3, 1955.
DEAR MR. CAMPBELL: I am advised that the General Accounting Office has
recently completed an audit of the utility contracts between the Atomic Energy
Commission and the Ohio Valley Electric Corp. and the Electric Energy, Inc.
The Joint Committee would very much appreciate receiving a copy of the
report on this audit as soon as it is prepared.
Very sincerely,
CLINTON P. ANDERSON, Chairman.
The Comptroller General replied on February 9, 1955, as follows:
COMPTROLLER GENERAL OF THE UNITED STATES,
Washington, February 9, 1955.
HON. CLINTON P. ANDERSON,
Chairman, Joint Committee on Atomic Energy.
DEAR MR. CHAIRMAN: By letter dated February 3, 1955, you requested a copy
of the report on the General Accounting Office audit of the utility contracts
V
VI
FOREWORD
between the Atomic Energy Commission and the Ohio Valley Electric Corp. and
the Electric Energy, Inc.
As explained to the staff of your committee, the audit of these utility contracts
is currently in progress and will probably continue for several weeks. The report
will be issued in several parts, each covering a significant and separate phase of
the work. As each part is issued, a copy will be furnished the Joint Committee.
Sincerely yours,
JOSEPH CAMPBELL,
Comptroller General of the United States.
On March 31, 1955, the Comptroller General of the United States
forwarded part I of the audit report with the following cover letter:
COMPTROLLER GENERAL OF THE UNITED STATES,
Washington, D. C., March 31, 1955.
HON. CLINTON P. ANDERSON,
Chairman, Joint Committee on Atomic Energy,
Congress of the United States.
DEAR MR. CHAIRMAN: Herewith for the use of your committee is a copy of
part I of our report on review of Atomic Energy Commission contracts for electric
power. This review was made by our Division of Audits, and the report will be
issued in three parts.
Sincerely yours,
JOSEPH CAMPBELL,
Comptroller General of the United States.
The complete text of part I of the Comptroller General's report re-
ferred to above was published by the Joint Committee on Atomic
Energy on March 31, 1955.
The Comptroller General's letter of transmittal and parts II and
III follow.
LETTER OF TRANSMITTAL
GENERAL ACCOUNTING OFFICE,
COMPTROLLER GENERAL OF THE UNITED STATES,
Hon. CLINTON P. ANDERSON,
Washington, August 9, 1956.
Chairman, Joint Committee on Atomic Energy,
Congress of the United States.
DEAR MR. CHAIRMAN: Herewith for the use of your committee is
one copy each of parts II and III of our report on review of Atomic
Energy Commission contracts for electric power.
Sincerely yours,
JOSEPH CAMPBELL,
Comptroller General of the United States.
VII
REPORT ON REVIEW OF ATOMIC ENERGY COMMIS-
SION CONTRACTS FOR ELECTRIC POWER
PART II
ELECTRIC ENERGY, INC.
INTRODUCTION
As part of our review of the Atomic Energy Commission (AEC)
contracts for electric power, we reviewed the provisions of the AEC
contract with Electric Energy, Inc. (EEI), and AEC's administra-
tion of the contract. AEC initially entered into a contract with EEI
in May 1951 for 500,000 kilowatts of power from a 4-unit plant, and
later in October 1952 AEC entered into an interim agreement with
EEI to increase the contract amount to 735,000 kilowatts of power
and to add 2 units to the plant. We also reviewed AEC's audit con-
trols over the EEI operations and made additional tests to the extent
we deemed necessary to express an opinion as to the fairness of the
recorded construction costs as of September 30, 1955, for the EEI
electric power station at Joppa, Ill. Our comments are presented un-
der the following captions:
Introduction.
Summary_
Comments on contract provisions.
AEC administration of contract_
Review of construction costs as of Sept. 30, 1955.
Page
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30
36
These comments are based on a study of the contract between AEC
and EEI; on a study of the intercompany contract between EEI and
its five sponsoring companies; on a review of negotiation files, reports,
correspondence, cost estimates, procurement and administrative files,
audit reports and supporting working papers, subcontracts, purchase
orders, basic accounting records, power bills, and other related data
made available to us at the Paducah, Oak Ridge, and Washington
AEC offices, the Joppa EEI office, the Joppa Bechtel Corp. office, and
the New York Ebasco Services, Inc., office; and on discussions with
officials of AEC, EEI, Bechtel, and Ebasco. In addition, we have used
pertinent data issued by the Federal Power Commission and the Se-
curities and Exchange Commission to assist us in analyzing the AEC
power contract with EEI.
Our review work for this report, except for the review of construc-
tion costs (see p. 36), was completed in August 1955; however, the
report contains comments on some of the important actions occurring
after that date.
Our conclusions and opinions with respect to the EEI contract and
the operations conducted under the contract are as follows:
1. The probable cost to the Government for permanent power
under the EEI contract is reasonable in comparison with the aver-
age cost of producing power throughout the country.
82318-56-pts. 2 and 3 -2
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AEC CONTRACTS FOR ELECTRIC POWER
2. The use of an open-end cost-type contract for the purchase of
electric power is not fully protective to the interests of the Govern-
ment.
3. The cost to the Government for interim power that was gen-
erated at the EEI powerplant during the 6-month period from
September 1954 through February 1955 was excessive. However,
effective March 1, 1955, the rate for such power was substantially
reduced.
4. The EEI contract provides, in effect, that the contractor's
annual earnings after income taxes shall be limited to approxi-
mately 8 percent on its equity. This rate of profit is reasonable
in comparison with the average earnings on equity of private elec-
tric utilities in the United States.
5. It would have been fair for the Government to have insisted
on a larger share of the benefits that will result if the EEI power-
plant generates more power than contemplated by the contact,
which benefits under the contract would accrue primarily to the
sponsoring companies. However, when AEC wanted more power
than it contracted for under the EEI contract, the sponsoring
companies were willing to make power available from their en-
titlement in the EEI plant. AEC has obtained such power
through short-term contracts with EEI and at a cost intended
to cover generally the cost of the power to the sponsoring
companies.
6. We are unable to state an opinion as to the reasonableness of
the sponsoring companies' potential profits from the sale of power
generated at the EEI powerplant, since we do not know the price
that the sponsoring companies could get for such power, nor are
we in
position to know the amount of all of the costs that will be
incurred.
7. We noted certain aspects of AEC's administration of activ-
ities under the EEI contract that were not adequate; however,
AEC has made improvements in its administration of these
activities.
8. Based on our review, we are of the opinion that the recorded
construction costs of $181,717,024 as of September 30, 1955, for
the EEI powerplant represent fairly the costs incurred as of that
date, subject to the recording of the Ebasco settlement. Our
comments regarding the reasonableness of the construction costs
are contained in part I of this report.
All of our findings were communicated to AEC during the course of
our review, and, as noted in the report, AEC has adopted several of
our suggestions-primarily those in the area of contract admin-
istration.
We feel that it is also important to include the AEC statement fur-
nished us of the objectives underlying its arrangements for electric
power from both EEI and OVEC (Ohio Valley Electric Corp.-our
review of the OVEC contract is the subject of pt. III of this report).
(a) AEC's primary interest was to secure a very dependable supply of power
at low rates. This had to be provided on an extremely fast schedule with interim
power being supplied before availability of power from new stations and there
had to be provision for cancellation of contracts on reasonable notice at low cost.
These objectives are being satisfied.
(b) The 8-percent return on equity capital is a reasonable return compared to
the profit experiences of the power companies in their own business. More im-
AEC CONTRACTS FOR ELECTRIC POWER
3
portant since the equity financing is limited to 5 percent of total plant cost and
interest on the balance of the financing averages less than 4 percent, the total
cost of financing is much more favorable to AEC than under normal utility prac-
tice. Also, since the equity amount is so low, the companies gain relatively little
profit for the management effort required to provide AEC's supply as compared
with the return from the same management effort in their own business.
(c) Another prime consideration in the negotiations was to reduce the cost to
the Government of the contingency or other risk factors that would have been
added to power costs if the contractors were required to assume a greater measure
of risks than was provided. While this approach served to severely limit the
guaranties and risks of the companies, nevertheless, risks were assumed ***
particularly in respect to the cancellation provisions.
SUMMARY
Our major comments are summarized below. Where appropriate,
a page reference is given for a more complete discussion of a subject.
COMMENTS ON CONTRACT PROVISIONS
1. Nature of the contract
The EEI contract is a long-term prime contract with a newly created
private utility company for the supply of electric power to the AEC
atomic energy plant at Paducah, Ky. Five established private utility
companies (herein called sponsoring companies) combined to organize
EEÎ and subscribe to all of EEI's capital stock. The contract is an
open-end cost-type contract. (See p. 8.)
In order to understand the nature of the contract, it is essential to
consider the relationship of EEI with its sponsoring companies as
well as with AEC. (See p. 9.)
AEC's estimated annual cost of permanent power under this con-
tract is approximately $24,700,000, or almost $570 million over the
23-year period that it will receive permanent power from the full-scale
operation of the Joppa powerplant. (See p. 10.)
The contract does not identify which elements of EEI's financing
costs are reimbursed by AEC in its fixed payment for "financing costs.
After considering our preliminary conclusion on this subject, AEC ad-
vised us that it had changed its position with respect to its payment
for "financing costs" to one which, in our opinion, better protects the
interests of the Government. (See p. 10.)
2. Lack of ceiling on cost of power
In our opinion, the lack of a ceiling on the cost of power to AEC
is a major weakness in this contract from the point of view of the Gov-
ernment. Also, in addition to being an open-end cost-type contract,
the contract does not give AEC any direct control over the construc-
tion cost of the Joppa powerplant, which cost is a major component of
AEC's cost of power. It is recognized, however, that there are incen-
tives for EEI to construct and operate the Joppa plant in an eco-
nomical manner. (See p. 13.)
There has been a large increase in the estimated construction cost
of the Joppa plant with the result that AEC's estimated annual power
cost has increased $2,200,000, or about $50 million over the 23-year
period that it will receive permanent power from the full-scale opera-
tion of the Joppa plant. (See p. 13.)
4
AEC CONTRACTS FOR ELECTRIC POWER
3. Reserve and supplemental capacity
An important feature of the EEI contract is the large amount of
reserve and supplemental capacity that is provided to assure delivery
of AEC's contract demand. We are not technically qualified to make
an engineering appraisal of the reasonableness of the large amount of
reserve and supplemental capacity. (See p. 14.)
With respect to the financial aspects involved, however, an important
consideration from the point of view of the Government is that under
the EEI contract all of the reserve capacity, when not required to sup-
ply AEC's contract demand, is available to the sponsoring companies.
Also, and more significant, if the Joppa plant generates more power
than contemplated by the contract, the resultant benefits will accrue
primarily to the sponsoring companies since all of the excess power will
be available to the sponsoring companies and at reduced rates, whereas
AEC's contract demand will not be increased and AEC's reduction in
rates will not be as significant as the sponsoring companies' reduction.
(See pp. 15 and 16.)
It is a matter of record that the Joppa plant is expected to generate
more power than contemplated by the contract, even though actual
performance of the Joppa plant generally has not been at such a level
because of abnormal outages of generating equipment. (See pp. 16
and 17.)
4. Interim power costs
The contract provisions pertaining to the portion of interim power
that was generated at Joppa seem to have been very favorable to the
sponsoring companies; however, there were certain developments sub-
sequent to the negotiations of the expansion contract which if known
at the time of negotiations might have resulted in a lower original
interim power rate for such power. (See p. 17.)
During the 6-month period from September 1954 through February
1955, AEC paid 2 vastly different rates for Joppa power; namely, 3.8
mills per kilowatt-hour for Joppa power classified as permanent
power and 7.7 mills per kilowatt-hour, more than twice as much, for
Joppa power classified as interim power. (See p. 18.)
The above situation, during this 6-month period, was the result of
the EEI sponsoring companies purchasing all of the power generated
at EEI's Joppa plant that was surplus to AEC's contract demand for
$2,013,110 and, without physically handling the power, selling it back
to EEI (for delivery to AEC as interim power) for $4,013,887. We
do not have the information necessary for determining how much of
the $2,000,777 difference, which is approximately 100 percent of the
purchase price of the power, was profit to the sponsoring companies
but our report contains comments pertinent to the subject. We believe
that it is reasonable to conclude, however, that the rate that resulted in
the $2,000,777 difference was excessive. (See pp. 20 and 21.)
On May 20, 1955, AEC executed a letter agreement with EEI for
a new rate for Joppa-generated interim power effective as of March
1, 1955, and during the rest of the construction period of the Joppa
plant. The rate for interim power generated in the systems of the
sponsoring companies was not changed. Based on estimates pre-
pared when the new rate for Joppa-generated interim power was
negotiated, the new rate would result in reduced costs to AEC of
about $1 million over the remaining construction period of about
AEC CONTRACTS FOR ELECTRIC POWER
5
6 months. We estimate that if the new rate, effective March 1, 1955,
had been in effect during the prior 6 months (the period discussed in
the 2 previous paragraphs) AEC's interim power costs and the
$2,000,777 realized by the sponsoring companies would have been
reduced by more than $1 million. (See pp. 21 and 22.)
5. Profit limitation
The earnings of EEI are limited by contract. The earnings of its
sponsoring companies from the sale of power generated at the EEI
powerplant are not limited by contract; however, the sponsoring com-
panies are regulated by the public utility authorities of the various
states in which they operate or by the Federal Power Commission.
(See p. 22.)
The EEI contract provides that EEI will accumulate any earnings
in excess of the contract limitation and will return such excess to
the Government. This contract provision is meaningless, however,
unless there is a substantial reduction in present income tax rates,
because, as explained in our detailed comments, it seems that EEI
will never have any earnings in excess of the contract limitation and
that there will never be a refund to the Government. (See p. 23.)
While we are unable to express an opinion as to the reasonableness
of the potential profits to the sponsoring companies from the sale of
surplus power generated at the EEI powerplant, our detailed com-
ments contain a discussion of some of the factors that should be
considered in such an evaluation. (See pp. 23 and 24.)
During the first 7 months of preliminary full-scale operation of
the Joppa plant (August 1954 through February 1955) the EEI
sponsoring companies sold all of the Joppa surplus power back to EEI
for delivery to AEC. The surplus Joppa power represented only about
20 percent of the total generation of the Joppa plant. Although the
amount realized by the sponsoring companies from the resale of surplus
Joppa power was possibly subject to reduction for other system costs,
it was more than 10 times as large as the amount of profit that EEÍ
made on the sale of the total generation of the Joppa plant, including
the surplus power. (See p. 25.)
We do not have sufficient information to determine the amount
realized by the sponsoring companies from the resale of surplus
Joppa power after February 1955; however, a review of the informa-
tion that is available to us indicates that the amount realized by the
sponsoring companies for the period from March 1955 through April
1956 was substantially less, per month, than it had been for the period
discussed in the previous paragraph. (See p. 26.)
6. Debt amortization period
The power rates under the AEC and sponsoring companies contracts
are based, in part, on EEI's retiring its entire debt (approximately
97 percent of its total capital structure) within 25 years. Such a
basis for power rates is not consistent with what we understand to be
the expected service life of an electric powerplant-generally 35 or
40 years. AEC has advised us that the 25-year amortization period-
represents the best arrangement which could be worked out and satisfy the in-
stitutions furnishing the financing.
(See p. 26.)
6
AEC CONTRACTS FOR ELECTRIC POWER
Being based on debt amortization of 25 years, AEC's power rate
is higher than it would be if it had been based on a longer period of
time; however, if AEC takes power after 25 years from the date of
full-scale operation of the units its power rate under the contract
will be adjusted to eliminate interest and amortization on initial debt.
(See pp. 26 and 27.)
7. Miscellaneous comments
The EEI contract does not provide a firm date on which the power-
plant must be in commercial operation and ready to deliver perma-
nent power to AEC at contract rates. AEC's position is that it would
be imprudent for a utility company to assume this risk under the pro-
visions of this contract. (See p. 27.)
Although the EEI contract provides a specific contract demand,
AEC has advised us that AEC's entitlement to power is limited as
discussed in our detailed comments. In addition, nondelivery of
power for reasons beyond the control of the contractor does not relieve
AEC from payment of its demand charge. Because of the large re-
serve and supplemental capacity that has been provided, however,
such periods might be infrequent. (See p. 28.)
The sponsoring companies would not execute a guaranty of per-
formance pertaining to the EEI corporate entity. (See p. 28.)
8. Comparison of EEI base contract with EEI expansion contract
The original EEI contract was for 500,000 kilowatts of power. The
present EEI contract is for 735,000 kilowatts of power-the original
500,000 kilowatts from 4 units and 235,000 kilowatts from 2 addi-
tional units.
Our review indicates that generally the contract provisions pertain-
ing to the 500,000 kilowatts of power are the same in the current con-
tract as they were in the original contract. (See p. 29.)
Our review indicates also that the contract provisions pertaining to
the additional 235,000 kilowatts of power are less favorable to the
Government than the provisions pertaining to the 500,000 kilowatts
of power. (See pp. 29 and 30.)
1. General
AEC ADMINISTRATION OF CONTRACT
An evaluation of AEC's administration of the EEI contract must
be made in the light of the nature and provisions of the contract and
the results of the activities performed under the contract. (See p. 30.)
While we do not intend in any way to infer that the labor difficul-
ties at Joppa could have been avoided if AEC had direct jurisdiction
or authority over contract costs, our detailed comments include a dis-
cussion which indicates the effect of the contractual arrangements on
AEC's ability to administer this cost-type contract. (See pp. 31
and 32.)
2. Construction phase
We noted certain aspects of AEC's administration which in our
opinion were not adequate for a cost-type contract involving a con-
struction project of this size; however, AEC made improvements in
its administration during the construction period. (See pp. 32 and
33.)
While the lack of adequate records makes it rather difficult to ob-
tain a complete picture of the level of AEC's administration of the
AEC CONTRACTS FOR ELECTRIC POWER
7
technical aspects of the construction of the Joppa powerplant, our
review indicates that AEC kept generally informed relative to the
Joppa project, particularly in the latter stages of the construction
period; however, probably in large part because of restrictions of the
contractual arrangements, AEC did not exercise the supervisory ac-
tivity normally performed by a Government agency over a cost-type
contract. (See pp. 33 and 34.)
The AEC audit of Joppa construction costs was not started until
March 1953, at which point the Joppa plant had been under construc-
tion for over 2 years and approximately $80 million had been expended
of the then current estimated cost of $108,600,000 for the first 4 units
of the plant. (See p. 34.)
Based on our review of AEC audit activity and our tests of EEI
original records, we are of the opinion that the AEC audit work has
been adequately performed within the limitations of scope established,
except for the audit of payroll costs which did not include controlled
payoffs and field checks until January 1955. (See p. 34.)
3. Metering facilities and billing procedures
Based on our initial survey made during February 1955, AEC had
not taken proper precautions in administering this portion of the con-
tract. (See p. 35.)
Major weaknesses disclosed and reported to AEC were: (a) the
meter readings made by EEI at the Joppa plant to determine the basis
of its billings were not independently verified by AEC or its operating
contractor, (b) quarterly calibration tests made by EEI to determine
the accuracy of its meters were not witnessed by AEC or its operating
contractor, and (c) it is possible that, because of incomplete metering
on the starting transformer at the Joppa plant, minor amounts of
power (7,200,000 kilowatt-hours a month) could have flowed to the
sponsoring companies without AEC having any knowledge of the fact.
(See pp. 35 and 36.)
AEC acted promptly to correct the weaknesses noted above. (See
p. 36.)
REVIEW OF CONSTRUCTION COSTS AS OF SEPTEMBER 30, 1955
Construction costs for the Joppa powerplant incurred through Sep-
tember 30, 1955, totaled $181,717,024. (This date is about 2 months
after the Joppa plant was placed into full-scale commercial operation.)
The total estimated construction cost of the Joppa plant, as of Feb-
ruary 29, 1956, was $182,252,639. (See p. 37.)
In part I of this report, issued March 31, 1955, we concluded that
the best interests of the Government would be served by a timely settle-
ment of the disagreement between EEI and Ebasco pertaining to the
amounts of Ebasco's fee and Ebasco's billings for service. By letter
dated April 21, 1955, AEC advised us that a settlement between EEI
and Ebasco had been reached which provided for Ebasco to receive no
profit for its services on the Joppa powerplant. This settlement has
been recently completed in the amount of $2,770,499. (See p. 37.)
Based on our review and testing of the work of the AEC auditors
and the EEI independent auditors, the underlying EEI and Bechtel
records, and the activities conducted in the New York offices of Ebasco,
we are of the opinion that the records state fairly the costs incurred
8
AEC CONTRACTS FOR ELECTRIC POWER
as of September 30, 1955, in the construction of the Joppa plant sub-
ject to the recording of the Ebasco settlement and except for one rela-
tively minor amount that was corrected in December 1955. Our com-
ments regarding the reasonableness of the costs are contained in part I
of this report. (See p. 37.)
Basic data
COMMENTS ON CONTRACT PROVISIONS
NATURE OF THE CONTRACT
The EEI contract is a long-term prime contract with a private utility
company for the supply of electric power to the AEC atomic energy
plant at Paducah, Ky. At the time of entering into the contract, EEI
was a new corporate entity created for the specific purpose of building
and operating an electric powerplant to supply a large block of electric
power to AEC. The contract is an open-end cost-type contract.
An indication of the magnitude of the EEI operation is gained from
AEC's estimate, dated March 30, 1956, of its annual cost of permanent
power under this contract. AEC's estimated annual cost of power is
$24,701,300, or almost $570 million over the 23-year period that it will
receive permanent power from the full-scale operation of the EEI
powerplant (the 25-year term of the expansion contract less a con-
struction period of about 2 years). The estimated construction cost,
as of February 29, 1956, for the EEI 6-generating-unit powerplant was
$182,252,639.
AEC initially entered into a contract with EEI in May 1951 for
500,000 kilowatts of power from a 4-unit plant, and later in October
1952 AEC entered into a interim agreement with EEI to increase the
contract amount to 735,000 kilowatts of power and to add 2 units to the
plant. Subsequently, in July 1953, AEC and EEI incorporated all
of the provisions pertaining to the 735,000-kilowatt power supply into
1 document as modification 6 to the base contract. The power under
this contract is expected to supply about 40 percent of the power re-
quirements of the AEC Paducah plant (AEĈ will obtain the balance
of its power requirements for this location from the Tennessee Valley
Authority). EEI's 6-unit powerplant, which was originally ex-
pected to have a net capability of 972,000 kilowatts, is located near
Joppa, Ill., approximately 10 miles from the AEC installation at
Paducah, Ky. EEI placed its sixth unit into commercial operation on
August 5, 1955, and AEC's most recent estimate of the Joppa plant's
net capability is 1,003,800 kilowatts.
Five private utility companies (herein called sponsoring companies)
combined to organize EEI and subscribed to all of EEI's capital stock
in a total amount of $6,200,000. These companies, and their percent
of ownership of EEI, are:
Union Electric Company of Missouri.
Central Illinois Public Service Co.-
Illinois Power Co_.
Kentucky Utilities Co---
Middle South Utilities, Inc..
Total___
1
1
Percent of
ownership
40
20
20
10
10
100
방
​AEC CONTRACTS FOR ELECTRIC POWER
9
To provide the large amount of additional capital required, EEI ar-
ranged for a series of long-term loans (approximately 25 years) in a
total amount of $195 million at interest rates ranging from 3 to 412
percent.
EEI's relationship with its sponsoring companies
Based on current estimates of the Joppa plant's capability, the
sponsoring companies will be entitled to about 20 percent of the Joppa
plant's generation; therefore, in order to understand the nature of
AEC's cost-type contract with EEI, it is essential to consider the re-
lationship of EEI with its sponsoring companies as well as with AEC.
Generally, this relationship is as follows:
1. All of the power generated by the EEI plant is available to AEC
and to the sponsoring companies. AEC has first call on the genera-
tion up to the amount necessary to supply its contract demand of
735,000 kilowatts, and the sponsoring companies are entitled to the
generation not taken by AEC in the ratio of their stock ownership
in EEI. In addition, the sponsoring companies are obligated to supply
interim and supplemental power for AEC from their own systems-
up to maximum amounts and at rates provided in the contract.
2. The total expenses of EEI are reimbursed by AEC and by the
sponsoring companies. AEC obtains its power under the provisions.
of its contract, and the sponsoring companies obtain their power by
paying that portion of EEI's expenses (except income taxes) that is
not paid by AEC, plus a fixed amount of $682,000 a year. Because
of the foregoing arrangement, the AFC contract may be classified
generally as a cost-sharing contract; however, it is important to point
out that AEC's power rate includes a fixed amount, subject to escala-
tion, for financing costs and that this fixed amount is a significant.
portion of AEC's cost of power. Based on current estimates, AEC
will receive its power for 3.84 mills per kilowatt-hour and the sponsor-
ing companies will receive their power for 3.58 mills per kilowatt-
hour. (Since the Joppa plant went into full-scale commercial opera-
tion in August 1955, the sponsoring companies have paid considerably
more for their share of Joppa power than the estimated 3.58 mills
per kilowatt-hour because of the reduced generation resulting from
abnormal outages of generating equipment. Most of this power, how-
ever, has been delivered to AEC under short-term contracts. The
rate to AEC for this power is 4.85 mills per kilowatt-hour and is in-
tended, generally, to cover the cost of the power to the sponsoring
companies, including the costs associated with the transmission lines
connecting the Joppa plant with the sponsoring companies' systems.)
3. The earnings of EEI are limited and, in effect, guaranteed as a
result of the provisions of the AEC contract and of the EEI inter-
company contract. The earnings of the sponsoring companies from
the sale of power generated at the EEI plant are neither limited nor
guaranteed by the provisions of the contracts. The sponsoring com-
panies, however, are regulated by the public utility authorities of the
various States in which they operate or by the Federal Power
Commission.
The above points are discussed in greater detail in this report.
82318-56-pts. 2 and 3- -3
10
AEC CONTRACTS FOR ELECTRIC POWER
Cost of power
According to AEC's estimate of March 30, 1956, AEC's annual
cost of power will be $24,701,300, as follows:
Annual cost
Mills per
kilowatt-hour
Percent of
total
Demand charge:
Financing costs.
Operating expenses (except fuel)
$9,690, 500
1.505
39.2
Insurance and taxes (except Federal income taxes)
2,020, 400
.314
8.2
974, 400
.151
3.9
Subtotal...
Energy charge (fuel)
12, 685, 300
1.970
51.3
Replacements.
Estimated annual cost of power.
11, 650, 000
1.809
47.2
366,000
.057
1.5
24, 701, 300
3.836
100.0
The demand charge is paid regardless of the amount of power
taken by AEC (subject to AEC's right, under certain conditions, to
make temporary reductions in its demand). As indicated in the table,
AEC's demand charge consists of three components: (1) Financing
costs, (2) operating expenses, and (3) insurance and State and local
taxes. AEC pays a fixed amount for financing costs. This amount
is fixed in the contract by establishing a base amount, which is com-
puted on the basis of an estimated cost of $159,700,000 for construc-
tion of the powerplant and for working capital, and by providing for
escalation at a fixed rate to give effect to any increase or decrease from
this estimate. The contract provides that the other two components
of the demand charge (operating expenses, and insurance and State
and local taxes) shall be adjusted to actual, and the portion of the
total actual expenses chargeable to AEC shall be determined on the
basis of its capacity ratio. AEC's capacity ratio is defined as being
the ratio of its contract demand to the average daily net capability
of the plant. Certain other minor adjustments that are not discussed
herein are also provided in the contract.
The energy charge is for the purpose of reimbursing EEI for its
fuel costs. Generally, the provisions of the contract result in the
actual cost of fuel being divided between AEC and the sponsoring
companies in proportion to the amount of energy taken by each from
the plant.
AEC is also obligated to pay for a portion of the cost of replace-
ments. AEC pays 77.6 percent of the annual cost of replacements
on the first 4 units to the extent the annual cost of replacements does
not exceed one-fourth of 1 percent of the cost of such units. AEC
also pays 84.5 percent of the annual cost of all replacements on units
5 and 6 providing AEC's approval is obtained for those replacements
which exceed one-fourth of 1 percent of the cost of such units. How-
ever, AEC's approval is not required if the replacements are necessary
under any indenture or other agreement pertaining to EEI's bonded
indebtedness.
Financing costs
The negotiation file for the expansion contract indicates that EEI's
financing costs consist of (1) interest and amortization on debt, (2)
Federal income tax, and (3) return on equity. As noted previously,
all of EEI's expenses are reimbursed by AEC and by the sponsoring
companies; however, the AEC contract with EEI is silent as to which
AEC CONTRACTS FOR ELECTRIC POWER
11
of the elements of EEI's financing costs are reimbursed by AEC in
its fixed payment for "financing costs."
At the time of our review, AEC took the position that its payment
for "financing costs" covered interest and amortization on debt,
Federal income tax, and return on equity. Based on our review of
the negotiation files and the EEI intercompany contract, however,
it seemed to us that the parties to the contract intended that AEC's
payment for "financing costs" would cover only interest and amorti-
zation on debt.
Under either position AEC will pay the same amount for "financing
costs" during the initial term of the contract. However, in the event
AEC extends its contract and takes power after 25 years from the
date of full-scale operation of the units, it will be essential to know
what portion of AEC's payments for "financing costs" covers inter-
est and amortization on debt because the contract provides that, after
such periods, interest and amortization on initial debt shall be excluded
from AEC's demand charge. We submitted to AEC our preliminary
conclusion that the best interests of the Government would be served
if AEC's payment for "financing costs" were considered to be entirely
for interest and amortization on debt. We so concluded because under
such interpretation and using the then current estimate of AEC's
cost of power, in the event AEC extended its contract after 25 years
from the date of full-scale operation, AEC's demand charge for power
would be reduced annually an estimated $566,200 more than it would
be if its payment for "financing costs" were considered to cover Federal
income tax and return on equity in addition to interest and amortiza-
tion on debt.
After considering our preliminary conclusion, AEC advised us by
letter dated November 29, 1955, that it now had the written assurance
of the president of EEI that the term "financing costs" in AEC's
demand charge covers only interest and amortization on debt and that
AEC no longer takes the position that its payment for "financing
costs" covers Federal income tax and return on equity in addition to
interest and amortization on debt.
Cost of cancellation
AEC may cancel its contract at any time after full-scale operation
of the powerplant begins. The contract provisions pertaining to the
cancellation of the 500,000 kilowatts of power are different than those
pertaining to the 235,000 kilowatts of power. These provisions are
discussed separately below. Provision is also made in the contract
for AEC to cancel its contract prior to completion and full-scale oper-
ation of the new powerplant, which period has now passed.
The amount that AEC is liable for in the event it cancels its con-
tract after full-scale operation depends on the conditions under which
it cancels and the length of time that the plant has been in full-scale
operation as of the date of cancellation. Generally the longer the
plant has been in full-scale operation, the smaller will be the cancel-
lation costs. A convenient source of AEC's estimates of its cancella-
tion costs under the EEI contract, based on the then current cost esti-
mates for construction and operations, is the tables included in the
appendix to the hearings before the Joint Committee on Atomic En-
ergy, 83d Congress, on House bill 4905 held April 28 and June 10,
1953. The following discussion is not intended to be a complete expla-
12
AEC CONTRACTS FOR ELECTRIC POWER
nation of the complicated cancellation provisions, but is presented pri-
marily to give some indication of the amount of the cancellation costs
that might be incurred.
With respect to cancellation of the 500,000 kilowatts of power, AEC
must give EEI a 1-year prior written notice. During the notice period
AEC is entitled to the 500,000 kilowatts of power; however, regard-
less of whether it takes the power, AEC is liable for the full demand
charge, except that the demand charge is reduced to the extent the
EEI's sponsoring companies are able to take the power on a firm
basis. In addition, after the notice period AEC is no longer entitled
to any power but is liable for a cancellation charge computed in accord-
ance with a formula provided in the contract. Under the formula the
amount for which AEC is liable reduces after each year of full-scale
operation. The tables referred to above show an estimated cost dur-
ing the 1-year notice period of about $8,500,000, in addition to an esti-
mated cancellation charge, on a diminishing schedule, from about
$39 million immediately before completion of the powerplant to about
$2,600,000 during the eighth year of full-scale operation. After the
eighth year of full-scale operation, AEC does not pay a cancellation
charge but is still liable for its demand charges during the notice
period.
With respect to cancellation of the 235,000 kilowatts of power, AEC
must give EEI a prior written notice for a period varying from 3
years to 1 year, depending on the date of cancellation. In addition
AEC is liable for a cancellation charge during almost the entire life
of the contract computed in accordance with a formula provided in the
contract. Again the amount of any cancellation payment reduces
after each year of full-scale operation. The tables referred to pre-
viously show an estimated cost during the notice period that reduces
during the life of the contract from about $13,500,000 to about $4,500,-
000 in addition to an estimated cancellation charge, on a diminishing
schedule, from about $30 million immediately before completion of
the powerplant to about $100,000 during the 23d year of full-scale
operation.
In summary, the estimated cancellation costs under the contract
range from about $69 million to about $100,000 depending on the time
and the conditions under which AEC might cancel.
The cancellation provisions pertaining to the 235,000 kilowatts of
power are relatively more severe on AEC than those pertaining to
the 500,000 kilowatts; however, AEC points out that this arrangement
reflects the fact that the problem of the company's absorbing the addi-
tional 235,000 kilowatts of power is superimposed on the problem
which the company would have in disposing of the first 500,000 kilo-
watts of power in the event of cancellation of the entire contract.
One additional point with respect to the cancellation provisions
should be made. At the request of the Joint Committee on Atomic
Energy, the Federal Power Commission reviewed the cancellation pro-
visions in AEC's power contracts with EEI, TVA, and OVEC. (Our
review of the OVEC contract is the subject of part III of this report.)
By letter dated June 23, 1953, the FPC advised the Joint Committee,
in part, as follows:
Considering all the factors involved in this matter, including the necessity
for the Government to incur at this time the full capital outlay for the power
AEC CONTRACTS FOR ELECTRIC POWER
13
facilities if agreement cannot be reached with the power companies, it is our
opinion that the cancellation charges on the whole are reasonably fair to the
Government, to the power companies, and to the public.
LACK OF CEILING ON COST OF POWER
The EEI contract provides a specific demand charge and energy
charge with adjustments based on actual costs of construction and
operations. The contract, however, does not provide a ceiling on the
cost of power to the Government.
In our opinion, the lack of a ceiling on the cost of power to AEC
is a major weakness in this contract from the point of view of the
Government. Also, in addition to being an open-end cost-type con-
tract, the contract does not give AEC any direct control over the con-
struction cost of the powerplant, which cost is a major component of
AEC's cost of power. This situation is evidenced by the provisions of
section 3.12 of the contract which follows:
SEC. 3.12. REVIEW AND RECOMMENDATIONS BY AEC. While it is recognized
that the operation and construction of the facilities referred to in section 1.01
are the responsibility of company, the costs thereof have a direct relation to
AEC's cost of power under this agreement, and accordingly AEC may from time
to time review and discuss with company its operating and construction plans,
practices, and procedures and make recommendations with respect thereto which
in AEC's judgment may provide for economies in construction or operations, and
company will adopt such recommendations of AEC as may be mutually agreed
upon.
Thus it is clear that AEC may make recommendations, but their adop-
tion by EEI is in no way mandatory. It is recognized, however, that
these provisions do allow for observation, review, and evaluation by
AEC personnel to the extent deemed necessary. (See section of this
report captioned "AEC Administration of Contract," p. 30.) In
addition, since the sponsoring companies will receive power from the
Joppa plant, and since AEC has the right to cancel its contract at any
time as discussed in the foregoing section, EEI has incentives to adopt
any of AEC's ideas which, in its judgment, would minimize construc-
tion or operating costs.
The disadvantage to the Government of the lack of any ceiling
on the cost of power to AEC is fully developed in part I of this re-
port where it was reported that a large increase in the estimated con-
struction cost of the Joppa plant resulted in a significant increase in
the estimated cost of electric power to the Government. At the time
we issued part I, the estimated increase in AEC's annual power costs
resulting directly from the construction cost increase of the Joppa
plant was $2,500,000. Since the release of part I, however, the plant
has been substantially completed and AEC has advised us that the con-
struction cost estimate has been reduced with the result that the pres-
ent estimate (March 30, 1956) of the increase in AEC's annual power
costs is $2,200,000, or about $50 million over the 23-year period that it
will receive permanent power from the full-scale operation of the
Joppa plant.
With respect to fuel costs, the other major component of AEC's
cost of power, AEC has effective control since the contract gives AEC
the unqualified right "to purchase and furnish to company the fuel to
be used in company's generating station."
14
AEC CONTRACTS FOR ELECTRIC POWER
RESERVE AND SUPPLEMENTAL CAPACITY
An important feature of the EEI contract is the large amount of
reserve and supplemental capacity that is provided to assure delivery
of AEC's contract demand. Reserve capacity is the excess capacity
in the Joppa plant above AEC's contract demand, and supplemental
capacity is capacity provided in the sponsoring companies' systems to
supply of power for AEC at such times as the Joppa plant may tempo-
rarily be unable to produce AEC's contract demand. Capacity in
excess of AEC's demand is required because it is essential that AEC's
contract demand be furnished on a firm basis.
It is our understanding that the normal practice in the electric
utility field for supplying a given power demand on a firm basis in-
volves one of the following three conditions:
1. Build a plant large enough to supply the given power de-
mand even with the largest generating unit out of service; or
2. Build a plant with a capacity equal to the given power de-
mand, and arrange for supplemental capacity from an outside
source or system reserve in an amount equal to the largest gen-
erating unit in the plant; or
3. Build a plant with a small reserve capacity and arrange for
the necessary supplemental capacity that would assure the given
power demand with the largest generating unit in the plant out of
service.
The estimated Joppa plant reserve capacity is greater than the esti-
mated capacity of its largest generating unit, and, in addition to the
power plant reserve, the contract provides for supplemental capacity
from other sources.
Since we are not technically qualified to make an engineering ap-
praisal of the reasonableness of such a large amount of reserve and
supplemental capacity, we are confining our comments to the financial
aspects involved except for the following two observations:
First, in our review of the need for such a large amount of addi-
tional capacity, AEC has emphasized the importance of the contem-
plated high load factor and the high reliability factor characteristic
of its power supply. The AEC power is to be delivered at a very
high load factor (which means AEC's average load will approximate
its peak load on a 24-hour-a-day basis). We have been advised that
no utility company in the country has operated its system at such a
high load factor and that the load factor has a definite bearing on
reserve capacity requirements. Also the large amount of additional
capacity results in a very dependable supply of power to AEC, and
this objective was one of AEC's primary interests during the negoti-
ation of the contract.
Second, it is interesting to note that in one of AEC's other power
supply contracts with a private utility company, Mississippi Valley
Generating Co.,' the powerplant reserve capacity was to have been
1 By letter dated July 16, 1955, the Director, Bureau of the Budget, conveyed the Presi-
dent's direction to the AEC to take immediately the necessary steps to bring to an end
the relationship between MVGC and the United States. AEC advised MVGC on November
23, 1955, that the contract would not be recognized by the United States. The validity
of the references made in this report to the MVGC contract, however, is not disturbed by
this action.
AEC CONTRACTS FOR ELECTRIC POWER
15
very small. The MVGC contract, which was negotiated subsequent
to the EEI contract, contemplated 600,000 kilowatts of firm power
with an estimated powerplant reserve of only 50,000 kilowatts, or
approximately 8 percent. The MVGC sponsoring companies agreed
to provide power from their systems up to approximately 200,000
kilowatts when one or more generating units were down. This amount
of power approximated the capacity of one unit. We understand
that the MVGC power was also to have been taken at a high load
factor.
With respect to the financial aspects involved, an important con-
sideration, from the point of view of the Government, is that under
the EEI contract all of the reserve capacity, when not required to
supply AEC's contract demand, is available to the sponsoring com-
panies. Also, and more significant, if the Joppa plant generates more
power than contemplated by the contract, the resultant benefits would
accrue primarily to the sponsoring companies. As discussed below,
all of the excess power would be available to the sponsoring companies
and, because their payment for financing costs would not be increased
accordingly, the cost of all of their power, per kilowatt-hour, would
be reduced; however, AEC's contract demand for power would remain
the same and the reduction in its cost of power, per kilowatt-hour,
would not be as significant as the sponsoring companies' reduction.
In the event the Joppa plant does not generate the amount of power
contemplated by the contract, a reverse situation would occur-the
sponsoring companies would be entitled to less power at a higher
unit cost, but AEC's contract demand would be the same and the in-
crease in its unit cost of power would not be as significant as the spon-
soring companies' increase.
It is a matter of record that the Joppa plant is expected to generate
more power than contemplated by the contract even though actual
performance of the Joppa plant generally has not been at such a
level because of abnormal outages of generating equipment.
The balance of this section is an amplification of the above general
comments.
The AEC contract demand is 735,000 kilowatts. To assure this
supply the contract provides, in effect, an expected powerplant reserve
of 231,000 kilowatts (the plant's net capability of 972,000 kilowatts
less the total of AEC's demand of 735,000 kilowatts and transmission
losses of 6,000 kilowatts). In addition, the sponsoring companies are
obligated to supply supplemental capacity up to 150,000 kilowatts,
and EEI is negotiating for interchange capacity of 50,000 kilowatts
from TVA on a nonfirm basis. The total of this extra available capac-
ity is 431,000 kilowatts or almost 60 percent of the AEC contract de-
mand. Also, with an emergency purchase of 60,000 kilowatts, possibly
from the large TVA Shawnee powerplant which is less than 5 miles
from the Paducah atomic plant, the extra available capacity would be
sufficient to enable EEI to supply the AEC demand with 3 of the 6
Joppa generating units out of service. (The above discussion does not
give effect to AEC's most recent estimates in which the Joppa plant's
expected net capability has been increased from the contract estimate
of 972,000 to 1,003,800 kilowatts.)
A significant portion of EEI's costs, primarily interest and amor-
tization of debt, is fixed. Therefore, assuming that other EEI costs
vary generally with generation, an increase in plant capacity with a
16
AEC CONTRACTS FOR ELECTRIC POWER
corresponding increase in the amount of power generated would result
in a decrease in the unit cost of power. Under these conditions, in the
event the Joppa plant generates more power than is contemplated by
the contract, there will be a reduction in the unit cost of power. The
resultant cost benefits, however, would accrue primarily to the spon-
soring companies because:
1. All of the excess power would be available to the sponsoring
companies since AEC's demand is a maximum of 735,000 kilo-
watts. This means AEC's 735,000-kilowatt demand would be a
smaller percent of total plant capacity.
2. The fixed element of AEC's power rate for financing costs
would not be reduced to give effect to AEC's reduced percent of
total plant capacity. This means that AEC's share of total costs
would be larger than its share of total plant capacity.
Stated another way, and still assuming that EEI's costs other than
financing costs vary generally with generation, the increased power
would result in AEC's cost of power, per kilowatt-hour, remaining
about the same but the sponsoring companies' cost of power, per kilo-
watt-hour, being reduced. In addition, because all of the excess power
would be available to the sponsoring companies, they would have
more power to sell. A further benefit to the sponsoring companies is
that with additional capacity in the Joppa plant there would be less
probability of their having to supply supplemental power from their
systems.
AEC's position is that, in the event the Joppa plant has a greater
capacity than contemplated by the contract, it will benefit by (1) a
reduction in its cost of power, per kilowatt-hour, because of the cost-
sharing provisions relating to operating costs, insurance, and taxes
and (2) an increased firmness of its power supply at lower rates.
For the following reasons, it is our opinion that the benefits of excess
generation to AEC are relatively minor when compared with the
benefits received by the sponsoring companies. The reduction in
AEC's cost of power because of the cost-sharing provisions relating
to operating costs, insurance, and taxes assumes that such costs are
generally fixed; however, the important point is that these costs repre-
sent only 12 percent of AEC's total cost of power (see p. 10) and
the resultant reduction in AEC's cost of power would be relatively
minor when compared with the total cost of such power. While the
additional capacity would increase the firmness of AEC's power
supply, it should be realized that provision had already been made for
a large amount of reserve capacity in the Joppa plant. To the extent
AEC might need the additional Joppa capacity, however, the asso-
ciated energy charge to AEC would most likely be lower than the
energy charge for supplemental power generated in the sponsoring
companies' systems.
As previously noted the expected net capability of the Joppa plant
has increased from 972,000 to 1,003,800 kilowatts. Actual performance
of the Joppa plant, however, has not generally been at this level
because of failures of major operating equipment. Substantial oper-
ating difficulties have been encountered with both the turbine-gen-
erators and the boilers, and EEI is presently conducting a major
overhauling program for units 1 through 4. This program started
in late September 1955, and is not expected to be completed until
AEC CONTRACTS FOR ELECTRIC POWER
17
November 1956. We have been informed that during most of this
period the Joppa plant will have only five units in operation.
For most of the months during the period August 1955, when the
plant went into full-scale commercial operation, through April 1956,
the EEI sponsoring companies have paid considerably more for their
share of Joppa power than the estimated cost of 3.58 mills per kilowatt-
hour. The reason for the increased cost is the reduced generation
resulting from the operating difficulties discussed above.
Since August 1955, AEC has negotiated 2 short-term contracts
with EEI for Joppa power in addition to the 735,000 kilowatts pro-
vided in the long-term contract. The quantities of additional power
provided in the most recent short-term contract are (1) between
70,000 and 120,000 kilowatts during the period January 1 through
June 30, 1956, at the option of AEC, and (2) 40,000 kilowatts during
the period July 1, 1956, through June 30, 1957, at the option of AEC.
This contract, however, is subject to termination by either party on
December 31, 1956. Provision is also made for the supply of power
in excess of the foregoing amounts if requested by AEC and if agreed
to by the sponsoring companies. This power is interruptible power
in the sense that its delivery is subject to the generating capability of
the Joppa station, and the cost of such power to AEC is 4.85 mills
per kilowatt-hour adjusted for transmission losses from Joppa to
Paducah. The negotiation files indicate that generally the 4.85-mill
rate is intended to cover the cost of this power to the sponsoring
companies during the contract period, including the costs associated
with the transmission lines connecting the Joppa plant with the
sponsoring companies' systems.
INTERIM POWER COSTS
Interim power was power supplied to AEC during the construction
period of the Joppa powerplant (February 1951 to August 1955).
Until August 1954, interim power was supplied from the sponsoring
companies' systems. The 6-unit Joppa plant, however, was built in 2
sections, and, after the fourth unit went into commercial operation
(August 1, 1954), AEC started to receive permanent power up to its
preliminary contract demand of 500,000 kilowatts and started to re-
ceive interim power from a second source-the surplus generation of
the first 4 Joppa units over AEC's preliminary contract demand.
Until March 1, 1955, AEC paid the contract's regular interim power
rate for interim power regardless of its source.
The contract's regular interim power rate consists of a demand
charge of $1.20 per kilowatt a month plus an energy charge of 6 mills
per kilowatt-hour. At the time of our review the cost to AEC for
interim power under this rate, regardless of the source of such power,
had been about 7.8 mills per kilowatt-hour, whereas the cost to AEC
for permanent power generated at the Joppa plant had been only
about 3.8 mills per kilowatt-hour.
The contract provisions pertaining to interim power generated at
the Joppa plant seem to have been very favorable to the sponsoring
companies; however, there were certain developments subsequent to
the negotiations of the expansion contract which if known at the time
82318-56-pts. 2 and 3-
3——————4
18
AEC CONTRACTS FOR ELECTRIC POWER
of negotiations might have resulted in a lower original interim power
rate for such power.
About March 1, 1955, AEC initiated negotiations with EEI for a
reduction in the interim power rate for the portion of interim power
that was generated at the Joppa plant. These negotiations resulted
in a letter agreement, dated April 21, 1955, and accepted by AEC on
May 20, 1955, whereby effective March 1, 1955, and during the remain-
der of the construction period of the Joppa plant, the rate for interim
power generated at the Joppa plant was changed to a demand charge
of $1.20 per kilowatt a month plus an energy charge equivalent to the
amount payable by the sponsoring companies for the power. Based
on estimates prepared when the new rate was negotiated, the new rate
would result in reduced costs to AEC of about $1 million over the
remaining construction period of about 6 months. The rate for in-
terim power generated in the systems of the sponsoring companies
was not changed.
The following discussion explains the advantage to the sponsoring
companies of the contract provisions pertaining to interim power gen-
erated at the Joppa plant.
The fourth unit of the 6-unit Joppa plant went into commercial
operation on August 1, 1954. From that date to March 1, 1955, power
delivered to AEC, up to its preliminary contract demand of 500,000
kilowatts, was billed as permanent power and cost AEC about 3.8 mills
per kilowatt-hour. The power delivered to AEC in excess of its pre-
liminary contract demand of 500,000 kilowatts was classified as in-
terim power and cost AEC about 7.7 mills per kilowatt-hour. AEC
paid the 7.7 mills per kilowatt-hour rate regardless of whether this
interim power was generated and delivered from the sponsoring com-
panies' systems (which was the normal source of interim power) or
was generated at the Joppa plant and was actually surplus generation
over the AEC preliminary demand of 500,000 kilowatts. The effect
of this situation was that AEC was paying two vastly different rates
for power generated at the same plant (Joppa) and delivered to the
same location (Paducah)—namely, 3.8 mills per kilowatt-hour for
power classified as permanent power and 7.7 mills per kilowatt-hour,
more than twice as much, for power classified as interim power.
During the negotiations of the expansion contract, AEC questioned
the reasonableness of using the regular interim power rate (about
7.8 mills per kilowatt-hour) for power supplied from generation at
the Joppa plant that was surplus to AEC's preliminary contract de-
mand. The following excerpt from AEC's negotiation record shows
the position of both parties at that time (June 30, 1952).
In response to the Commission's questions *** with reference to the surplus
power from the first four units, it was explained that under the present contract
the sponsors are entitled to such surplus power for their own use and the pro-
vision *** carries this forward in the new contract for the period between
preliminary full-scale operation and final full-scale operation. If this were not
done, the sponsoring companies would have to generate higher cost power at
their own plants for their own use in lieu of the surplus power from the four
units. In addition, the investment of the sponsors in transmission lines, aggre-
gating some $11 million, would be practically useless during this particular
period if the surplus power were turned over to AEC at contract rates. It
was deemed equitable that to the extent that such surplus power was needed
by AEC that it be charged for at the regular interim power rate.
AEC CONTRACTS FOR ELECTRIC POWER
19
Based on our review of the negotiation record, AEC agreed to the
regular interim power rate (about 7.8 mills) without requesting EEI
to furnish supporting figures to show that the cost difference of op-
erating higher cost plants and the nonuse of the transmission lines
would result in additional costs to the sponsoring companies that
would reasonably justify a rate of 7.8 mills. Since the rate of 7.8
mills was about double the amount the sponsoring companies expected
to pay for the Joppa-generated power, we believe that it would have
been prudent for AEC to have requested additional information be-
fore agreeing to the regular interim power rate for surplus power
generated at the Joppa plant.
The quantity of interim power supplied by EEI significantly ex-
ceeded the quantity estimated at the time of these negotiations with the
result that the sponsoring companies' transmission lines were in use
to supply interim power from the sponsoring companies' systems at
the regular interim power rate. AEC has advised us that it consid-
ered that this increase in interim power requirements warranted the
renegotiation of the interim power rate applicable to power generated
at Joppa.
While we recognize that under the contract the surplus generation.
at Joppa belongs to the sponsoring companies to dispose of as they
wish, it is our opinion that the arrangement whereby AEC paid the
contract's regular interim power rate (about 7.8 mills per kilowatt-
hour) for power generated at the Joppa powerplant was an extremely
favorable one for the sponsoring companies. The full import of this
advantage to the sponsoring companies requires consideration of the
following: (1) The Joppa plant was built primarily to supply AEC
power requirements; (2) SEC approval of the extremely high percent
of debt included in EEI's capital structure, which SEC noted was
obviously at variance with normal standards of prudent finance, was
granted based on the provisions of the AEC contract as SEC release
No. 10300, dated January 15, 1951, states:
The crucial elements of that (AEC) contract are the Government guarantee,
in effect, of interest and amortization on Electric Energy's debt so long as the
contract is in operation, and the assurance that in the event of cancellation of
the contract a material improvement in the common stock equity of Electric
Energy would have been achieved or would necessarily follow.
(3) the contract rate for permanent power has been about 3.8 mills per
kilowatt-hour, and (4) the sponsoring companies never physically
handled the power, but merely purchased the power from EEI and
sold it back to EEI at about double the purchase price for delivery
to AEC. (This situation, however, no longer existed under the new
interim power rate that became effective as of March 1, 1955, for Joppa-
generated interim power.)
In order to determine the magnitude of the financial benefit real-
ized by the sponsoring companies from the sale of Joppa-generated
surplus power that was delivered to AEC at the regular interim power
rate, we reviewed AEC's power bills from the beginning of commercial
operation of the fourth unit (August 1954) through February 1955.
During August 1954 the Joppa plant did not generate enough power to
supply AEC's contract demand and there was no surplus power to
deliver to AEC as interim power. Since the sponsoring companies did
20
AEC CONTRACTS FOR ELECTRIC POWER
2
not receive any power to sell and they are obligated to pay EEI's costs
not covered by AEC payments, the sponsoring companies lost $134,222
in this first month of preliminary full-scale operation. For the fol-
lowing 6-month period, however, all of the Joppa generation in excess
of AEC's contract demand of 500,000 kilowatts was delivered to AEC
as interim power and the pertinent figures are summarized below.
The figures below do not include the interim power that the sponsor-
ing companies supplied for AEC from their own systems.
Surplus generation at Joppa sold to AEC as interim power

1954-September.
October.
November
December..
1955-January.
February
Total
Month
Delivered
to AEC
(kilowatt-
hours)
Price
charged
AEC
Cost to
sponsors
Difference
to sponsors
24,037, 726
109, 682, 225
$185, 403
$189,091
-$3,688
837,862
384, 039
453, 823
94, 931, 659
730,499
341, 669
388, 830
87,071, 818
664, 880
350, 251
314, 629
100, 687, 756
768, 751
365, 050
403, 701
105, 824, 741
826, 492
383, 010
443, 482
522, 235, 925
4, 013, 887
2, 013, 110
2,000, 777
AEC has advised us that in its opinion the $2,000,777 difference
noted above, which was realized by the sponsoring companies from the
sale of surplus Joppa power, should not be considered to be all profit
for the following reasons:
In order to transmit the power produced at Joppa to which the sponsors are
entitled by virtue of their payment of costs, and in order to transmit interim
and backup power to AEC, the sponsoring companies constructed a transmission
line at their own expense. The sponsors' plans were then based upon amortizing
the cost of this transmission line from the sale of power transmitted from Joppa
to their systems. When AEC expanded its Paducah plants and requested EEI
to provide significantly greater quantities of interim power before the addi-
tional powerplants could be completed, it is clear that both parties had in mind
the use of the capacity in the Joppa plant to which the sponsors were entitled
by virtue of their payments toward costs and in anticipation of which they had
made investments in facilities not included in costs covered by the AEC contract.
It is also clear that both parties recognized that the amortization costs of the
transmission line plus the higher cost to the sponsors of obtaining power for their
own use which they otherwise would have obtained from Joppa were legitimate
costs to the systems for furnishing this interim power to AEC.
The sponsoring companies' transmission lines (referred to in the
singular above) connect the Joppa plant with their systems, whereas
the EEI transmission lines connect the Joppa plant with the AEC
Paducah installation. The surplus Joppa power plant was trans-
mitted over the EEI transmission lines.
Because of a lack of pertinent data with respect to these two system
costs of the sponsoring companies, we are unable to express an opinion
as to whether they are costs which are properly associated with the
revenue obtained by the sponsoring companies from selling EEI sur-
plus power back to EEI without ever handling the power in their
2 EEI's total expenses during August 1954 applicaable to demand charge were $861,874.
The total demand charge billed to AEC under the terms of its contract with EEI was
$727,652, leaving a balance of $134,222 that the sponsoring companies were obligated to
pay EEI under the terms of the intercompany contract.
AEC CONTRACTS FOR ELECTRIC POWER
21
systems. We believe, however, that the following comments are
pertinent:
1. The sponsoring companies' transmission lines were not used to
transmit the power across the Ohio River from Joppa to Paducah;
they were used during this period, however, to transmit large quan-
tities of interim power from their systems to AEC. Based on the
schedule of maximum power requirements in the expansion contract,
we compute that at the time of negotiation AEC's estimated maximum
interim power requirement for this 6-month period was about 780
million kilowatt-hours. The actual amount of interim power deliv-
ered during this period from the sponsoring companies' systems alone
was over 1,000 million kilowatt-hours. (This amount is in addition
to the actual interim power delivered from surplus Joppa generation
which was 522 million kilowatt-hours.) For the above reasons, we
believe that during this 6-month period the amortization cost of the
sponsoring companies' transmission lines should be associated with the
approximately $8 million revenue received from the sale of the 1,000
million kilowatt-hours which was actually delivered over the sponsor-
ing companies' lines rather than the revenue from the sale of the
surplus Joppa power which was delivered over the EEI lines, across
the Ohio River, directly to Paducah.
2. We agree that if the sponsoring companies had planned to use
the Joppa surplus power during this 6-month period and, because
they sold it to EEI for delivery to AEC, they had to generate higher
cost power at their own plants for their own use, the sponsoring com-
panies incurred additional costs in their systems as a result of the sale
to EEI. We are unable to determine to what extent, if any, such
additional costs should be associated with the revenue from the sale
of Joppa surplus power to EEI because of the lack of such informa-
tion as to how much additional cost was actually incurred, to what
extent was the low cost Joppa power considered by regulatory bodies
in establishing the sponsoring companies' power rates, and what relief,
if any, did the sponsoring companies obtain through adjustments in
their power rates.
We asked AEC if it was able to estimate the amount of additional
system costs incurred by the sponsoring companies that AEC felt
was properly associated with the sale of surplus Joppa power deliv-
ered to AEČ. AEC advised us that it did not have the information
necessary to make such an estimate and pointed out that obtaining
such information would require access to sponsoring companies'
records not related to AEC activity.
In conclusion, it is recognized that the $2,000,777 realized by the
sponsoring companies on the resale of surplus Joppa power during
this 6-month period is before income taxes and is possibly subject to
reduction because of the points discussed above. Considering all
factors, however, we believe that it is reasonable to conclude that the
original interim power rate was excessive. We estimate that if the
new interim power rate, effective as of March 1, 1955, had been in
effect during the prior 6-month period, which is the period shown in
the table on page 39, AEC's power bill for interim power generated at
Joppa during that period would have been reduced by more than $1
22
AEC CONTRACTS FOR ELECTRIC POWER
million-this would have reduced the $2,000,777 realized by the spon-
soring companies by more than one-half.
Two other points are important.
First, the above discussion pertains to only part of the interim power
that was delivered to AEC during this 6-month period, since, in addi-
tion to the 522,235,925 kilowatt-hours of interim power that was de-
livered to AEC from surplus generation at Joppa, the sponsoring
companies supplied twice as much interim power (1,075,485,618 kilo-
watt-hours) from their own systems at approximately the same rate
as the Joppa-generated surplus power. We do not have the informa-
tion necessary for determining whether the sponsoring companies
made a profit or a loss from the sale of that large block of power.
Second, while it is recognized that additional costs will be involved
when Joppa surplus generation is sold elsewhere than Paducah, the
above information gives some indication of the potential value of
surplus generation to the sponsoring companies as a source of profits.
(See the following section for a more complete discussion of this
subject.) The following two points, which are part of the negotiation
record, are pertinent to this point.
1. The minutes of a meeting held January 31, 1951, indicate
that Mr. McAfee, president of EEI and president of the major
sponsoring company, wanted the record to show clearly that the
parties agreed with the rates that the sponsoring companies would
pay for the Joppa surplus power. The minutes also state;
after all the cost to power (sponsoring) companies is lower than other costs
of power to sponsoring companies, and he wouldn't want somebody to come
along later on and point their fingers at the low rates.
2. The minutes of a meeting held April 17, 1951, contain the
following information :
On behalf of EEI, it was stated that the cost of power (to the sponsoring
companies), including the $292,000, would be approximately 3.2 mills
delivered and that was only 10 percent less than the AEC rate and the
sponsoring companies still had the obligation of backup power. Moreover,
the sponsoring companies went into the deal to get reserve power and
expected to make some profit.
PROFIT LIMITATION
The earnings of EEI are limited by contract. Any power generated
at the EEI Joppa powerplant in excess of AEC's contract demand (as
well as any power not taken by AEC) is available to the sponsoring
companies in the ratio of their stock ownership in EEI, and the earn-
ings of the sponsoring companies from the sale of such power are not
limited by contract. The sponsoring companies, however, are regu-
lated by the public utility authorities of the various States in which
they operate or by the Federal Power Commission, and we understand
that these bodies through their ratemaking authority exercise a control
over profits.
While the AEC contract alone does not provide a guarantee of EEI's
earnings, as a practical matter, its earnings are guaranteed by the com-
bined provisions of its intercompany contract and of the AEC con-
tract. The earnings of the sponsoring companies are not guaranteed
by contract.
AEC CONTRACTS FOR ELECTRIC POWER
23
Contract provisions pertaining to EEI's earnings
The contract generally provides the following provisions with re-
spect to the profit limitation on EEI's earnings.
1. The earnings of EEI shall be limited to a net return after
taxes (including Federal income and excess-profits taxes) of
$508,000 a year, plus 8 percent a year on any required additional
equity capital, plus 8 percent a year on any earned surplus reason-
ably consistent with the needs of the company.
2. EEI shall set up in a special reserve any earnings in excess
of the limitation, and any cumulative amount remaining at the
end of the contract shall be paid to the Government.
The second provision is meaningless, unless there is a substantial
reduction in present income tax rates, since it seems that EEI will
never have an income which would provide a net return after taxes
of $508,000 a year. The reason for this conclusion requires a discus-
sion of the provisions of EEI's contracts with AEC and with its spon-
soring companies. Under the AEC contract, AEC's payment for
power does not include a component for profit or Federal income tax.
The intercompany contract provides, however, that each sponsoring
company shall be entitled to have delivered to it, or for its account,
all of the power in excess of that taken by AEC in the same propor-
tions that each company owns EEI stock. Also the intercompany
contract provides, generally, that the sponsoring companies will pay
all of EEI's expenses (except income taxes) that are not paid by AEC
or others, plus a fixed amount of $682,000 a year. It seems therefore
that EEI's income before taxes will be $682,000 a year and that, after
EEI pays income taxes on that amount, its net return will be substan-
tially less than $508,000 a year. Under such circumstances EEI will
never have earnings in excess of the limitation and there will never be
a special reserve accumulated to be returned to the Government.
The AEC contract with EEI provides also that the rates charged
the sponsoring companies for power generated at the EEI plant shall
be "just and reasonable" and generally shall not be less than (1) the
energy rate paid by AEC plus (2) a demand charge equal to that
portion of EEI's interest and amortization on debt, State and local
taxes and insurance, and operating costs (other than fuel) not included
in payments made by AEC or others. Although it is recognized that
the "just and reasonable" provision might be helpful to the interests
of the Government in preventing the sponsoring companies from get-
ting their Joppa power for an unreasonably low cost, it is recognized
also that it might be difficult to prove at what point a rate fails to be
"just and reasonable."
Sponsoring companies' potential profits
Essentially the sponsoring companies have two sources of potential
profits. First, the sponsoring companies will share to some extent
in the guaranteed earnings of EEI. Second, and possibly far more
important, they have potential profits from the use of the EEI low
cost power that is surplus to AEC's contract demand. It should be
clearly stated that we are unable to determine the amounts of any
potential profits to the sponsoring companies from the sale of surplus
power since we do not know the price that the sponsoring companies
could get for such power, nor are we in a position to know the amount
24
AEC CONTRACTS FOR ELECTRIC POWER
of all of the costs that will be incurred. There follows, however, a
discussion of some of the factors that should be considered in evaluat-
ing the sponsoring companies' potential profits from the use of sur-
plus power when it is not sold to AEC.
Based on information developed in our review and on comments
furnished us by AEC, the following risks and costs to the sponsoring
companies should be considered.
1. Profits are contingent on the sponsoring companies' ability to
market the power.
2. Since surplus power is not firm (the generation of the Joppa
plant is first dedicated to AEC's contract demand), surplus power is
classified as interruptible power and normally would either be backed
up with other sources of supply or sold at a lower price than firm
power.
3. As discussed in a prior section of the report, AEC has the right
to cancel the EEI contract, subject to a notice period, varying from
1 to 3 years, and to cancellation payments.
4. In the event the EEI powerplant fails to generate enough power
to supply AEC's contract demand, the sponsoring companies would
receive no power and would still be contractually obligated to bear
a portion of EEI's fixed and operating costs (but not fuel costs).
5. The sponsoring companies have to bear transmission and delivery
costs from the Joppa powerplant to the sales points in addition to the
generation cost paid EEI.
6. The sponsoring companies are obligated to furnish supplemental
power, up to a maximum amount of 150,000 kilowatts and at the rate
provided in the contract, in the event EEI needs power to supply
AEC's contract demand.
In evaluating the above points as to their effect on the sponsoring
companies' potential profits, we believe that the following comments
are pertinent.
With respect to the sponsoring companies' ability to market power
and to the risk associated with AEC's right to cancel its contract,
research indicates that the Nation's electric industry is in a tremen-
dous expansion program and that it is "building to meet anticipated
demands for electricity of ever-increasing magnitude." Even more
pertinent is the following excerpt from an article appearing in the
May 26, 1955, issue of Public Utilities Forthnightly, which excerpt
gives some indication of the future marketability of electric power
in the area serviced by the major sponsoring company of EEI (the
Union Electric Company of Missouri with a 40 percent ownership).
Union Electric Company of Missouri will spend $232 million on new and ex-
panded facilities over the next 5 years, Dudley Sanford, executive vice president
and general manager, told company stockholders at their recent annual meeting.
These plans are based on an anticipated increase in the number of customers
and in increased usage per customer. During the 5-year period, 1955 through
1959, the company expects to add 60,000 customers at a rate of about 2 percent
gain each year. The residential load is expected to increase at a rate of more
than 11 percent each year, largely because of air conditioning.
However, while the EEI Joppa plant is in an excellent location to serve
the AEC, being only 10 miles from the AEC Paducah atomic-energy
plant, it is probably not in the most advantageous location to serve the
systems of the sponsoring companies.
With respect to the sponsoring companies' ability to market inter-
ruptible power, the following three points are made:
AEC CONTRACTS FOR ELECTRIC POWER
25
1. It is presently estimated that the Joppa plant will have excess
capacity over that contemplated in the contract. Therefore, while
technically all capacity in the Joppa plant surplus to AEC's demand
(the originally contemplated reserve capacity and the excess capacity)
is interruptible, the excess capacity might more reasonably be con-
sidered firm. Further, such excess capacity would reduce the prob-
ability of the sponsoring companies' having to supply supplemental
power for AEC from their own systems and thereby would tend to in-
crease the firm power in such systems.
2. The disadvantage of interruptible power can be mitigated by
EEI's planning its maintenance down time, to the extent possible,
to correspond with those periods when the sponsoring companies' loads
were low (nights and weekends), thereby making the EEI power
available during periods when the sponsoring companies anticipate
their peak loads. There would still be the problem of emergency
outages; however, a review of charts showing emergency and planned
outages of a large electric utility system for 1951 disclosed that emer-
gency outages on weekdays represented less than 25 percent of total
outages and a very small percent of the total system capacity. Also,
since the EEI surplus power will be delivered to several large systems,
each with its own system reserve, it seems reasonable to assume that
effective use will be made of interruptible power.
3. A very important point is that the sponsoring companies' use of
EEI surplus power is not necessarily restricted by the lack of a market
greater than the sponsoring companies' then current generation. In
such an instance the sponsoring companies would probably close down
generation at some of its higher cost plants and use, in lieu of that
power, the cheaper EEI surplus power.
With respect to the sponsoring companies' obligations to furnish
supplemental power and to bear a portion of EEI's costs, even though
they do not receive any power because the Joppa powerplant fails to
generate AEC's contract demand, it should be realized that a large
power plant reserve capacity has been provided to assure continuity of
AEC's power supply and that periods when the power plant fails to
generate AEC's contract demand might be infrequent or of short dura-
tion. Also, as pointed out elsewhere in the report, the EEI powerplant
is now expected to generate more power than originally contem-
plated-this excess power being, in effect, additional reserve power
over that originally contemplated.
In conclusion, there follows a comparison of EEI's earnings from
the sale of power to AEC and to the sponsoring companies during the
first 7 months of preliminary full-scale operation of the Joppa plant
($170,331 before income taxes) with the potential earnings of the
sponsoring companies during the same period from the resale of just
the surplus Joppa power (which power was delivered to AEC). The
latter sale was discussed on pages 19 through 22. In the first 7 months
of preliminary full-scale operation of the Joppa plant (August 1954
through February 1955) the total generation of the Joppa plant was
about 3,065 million kilowatt-hours-2,540 million kilowatt-hours was
allocated to AEC as permanent power in accordance with AEC's con-
tract demand, and 525 million kilowatt-hours was allocated to the
sponsoring companies as surplus power in excess of AEC's contract
demand. The sponsoring companies sold the 525 million kilowatt-
82318-56-pts. 2 and 3—————5
26
AEC CONTRACTS FOR ELECTRIC POWER
hours back to EEI for delivery to AEC as interim power. The differ-
ence between the sponsoring companies' sales price to EEI and their
purchase cost from EEI for this power was $1,866,555 (the $2,000,777
difference in the table on p. 20 minus the $134,222 loss suffered by the
sponsoring companies in August 1954). Although the difference of
$1,866,555 realized by the sponsoring companies from the resale of
surplus Joppa power (525 million kilowatt-hours) is possibly subject
to reduction as discussed on pages 20 through 22, it is significant to
note that this amount is more than 10 times as large as the $170,331
profit, before income taxes, that EEI made on the sale of the total
generation of the Joppa plant, including the surplus power (3,065
million kilowatt-hours).
We do not have sufficient information to determine the difference
between the sponsoring companies' sales price and purchase cost for
Joppa surplus power resold after February 1955-one of the reasons
being that all of the surplus Joppa power was not delivered to AEC.
A review of AEC's power bills since February 1955, however, indi-
cates that the difference realized by the sponsoring companies, from
the resale of that portion of surplus power that was delivered to AEC,
was substantially less, per month, than it had been during the period
discussed above. The two major reasons contributing to this reduc-
tion are: (1) during the remaining construction period of the plant,
March 1955 through July 1955, EEI substantially reduced its rate to
AEC for interim power as discussed on page 18 and (2) during the
period of full-scale operation for which we have power bills, August
1955 through April 1956, the sponsoring companies' cost of Joppa
surplus power increased considerably because of reduced generation
resulting from abnormal outages of generating equipment as dis-
cussed on pages 16 and 17.
DEBT AMORTIZATION PERIOD
EEI borrowed a substantial amount to finance its activities, with
the result that its debt capital is about 97 percent of its total capital.
The power rates under the AEC and sponsoring companies contracts
are based, in part, on EEI's retiring this entire debt within 25 years.
Such a basis for power rates is not consistent with what we under-
stand to be the expected service life of an electric powerplant-gen-
erally 35 or 40 years. AEC has advised us that the 25-year amortiza-
tion period-
represents the best arrangement which could be worked out and satisfy the in-
stitutions furnishing the financing.
Based on current estimates, AEC's payments for debt amortization
over a period of 23 years will be approximately 81 percent of EEI's
total principal indebtedness. Extension or cancellation of the con-
tract, of course, would increase or decrease the percentage figure.
An important consideration, from the point of view of the Govern-
ment, is that the AEC power rate, being based on debt amortization of
25 years, is higher than it would be if it had been based on debt amor-
tization for a longer period of time. This consideration is not signifi-
cant if, but only if, AEC extends its contract beyond a 25-year period
to some period that approximates the service life of the powerplant.
Under the EEI contract, AEC has the right to obtain power after the
initial contract period of the contract, up to the useful life of the plant.
7
AEC CONTRACTS FOR ELECTRIC POWER
27
Also the contract provides, generally, that, in the event of extension,
AEC's demand charge shall be adjusted (1) to eliminate interest and
amortization on initial debt after 25 years from the date of full-scale
operation of the units and (2) to add interest and amortization on debt
required to render service during such extended period.
It is interesting to note that in AEC's power contract with MVGC,
which was negotiated subsequent to the EEI contract but is not rec-
ognized as valid by the Government, AEC's power rate was predicated
on debt amortization of 30 years. During a 25-year period, under
such circumstances, AEC would have paid through its power rate only
about 75 percent of MVGC's indebtedness.
Delivery date of power
MISCELLANEOUS COMMENTS
The EEI contract does not provide a firm date on which the Joppa
powerplant must be in commercial operation and ready to deliver
permanent power to AEC at contract rates. AEC's position is:
No prudent utility—whether public or private-can accept the risk of entering
into a contract which guarantees to deliver such huge blocks of power on a
given date from facilities yet to be constructed. No company would agree to
such a guaranteed date of delivery unless the construction period was lengthened
considerably to provide for contingencies, or unless it included a significant cost
contingency factor, or, in the case of a contract in which the buyer will be
paying the larger share of construction cost, unless it was prepared to make
economy of construction a secondary consideration, in order to meet the estab-
lished date.
The contract does provide that the contractor will exert his best
efforts to have individual generating units ready for commercial op-
eration by certain dates set out in the contract. AEC has advised us
that the contract schedule dates were reasonably established.
There was a considerable delay in completing each of the first 4
units of the Joppa powerplant; however, the last 2 units were com-
pleted approximately on schedule. There follows a tabulation fur-
nished us by AEC of pertinent dates showing the delay for each unit:

Unit
Date stated Date of com-
in contract
mercial
operation
Delay (in
months)
12345 C
Oct.
2
6
1, 1952
Dec. 1, 1952
Feb. 1, 1953
Apr. 1, 1953
May 1, 1955
July 1, 1955
June 27, 1953
9
Aug. 1, 1953
8
Apr. 18, 1954
14
Aug. 1, 1954
June
Aug.
16
4, 1955
5, 1955
1
1
The delays in completing the units by the contract schedule dates
resulted in extra power costs to AEC because AEC was forced to take
a greater amount of higher cost "interim power" than it would have
had to take if the units had been completed on schedule. Generally,
"interim power" was power supplied to AEC by the sponsoring com-
panies during the construction period of the powerplant. Also, under
the contract, "interim power" cost AEC about 7.8 mills per kilowatt-
hour whereas permanent power delivered under the contract terms is
estimated to cost AEC about 3.8 mills per kilowatt-hour.
28
AEC CONTRACTS FOR ELECTRIC POWER
I
1
Contract demand
AEC's contract demand is 735,000 kilowatts. AEC's entitlement, up
to the amount of its demand, is limited to—.
1. The entire available capacity of the Joppa generating sta-
tion, plus
2. 200,000 kilowatts from other sources (150,000 kilowatts from
the sponsoring companies and 50,000 kilowatts on a nonfirm
basis from the interchange agreement being negotiated with
TVA).
In addition, nondelivery of power for reasons beyond the control
of the contractor does not relieve AEC from its obligation to pay its
demand charge to the contractor. However, because of the large sta-
tion reserve and the sponsoring companies' obligations to provide sup-
plemental power, the contractor's inability to deliver the amount of
power specified in the contract would be limited to periods when a
substantial number of generating units (three or more) would be out
of service.
The contract also contains broad force majeure provisions under
which the contractor is relieved of liability for any loss or damage
resulting from nongeneration or nondelivery of power because of any
reason beyond the control of the contractor.
Guaranty of performance
The sponsoring companies of EEI do not guarantee the perforance
of the contractor. The negotiation files for the EEI contract show
that AEC repeatedly tried to obtain a guaranty of performance from
the sponsoring companies, but for numerous reasons the sponsoring
companies did not feel that they were able to execute one. Some of
the stated reasons are: (1) The sponsoring companies are not a party
to the contract, (2) there would be difficulties in arranging financing
with the insurance companies, (3) the sponsoring companies are re-
sponsible companies and could not afford to let the project fail, and
(4) as a practical matter AEC had little risk.
COMPARISON OF EEI BASE CONTRACT WITH EEI EXPANSION CONTRACT
AEC entered into the EEI contract (referred to herein as the base
contract) in May 1951 for 500,000 kilowatts of power and entered into
an interim agreement in October 1952 to increase the contract amount
to 735,000 kilowatts of power. In July 1953 AEC and EEI executed
modification 6 to the base contract (referred to herein as the expansion
contract) which is a complete document in itself and incorporates all
of the provisions pertaining to the 735,000-kilowatt power supply.
The base contract provides for a four-generating unit plant, and the
expansion contract provides for two additional generating units.
We have reviewed the terms of the base contract, the interim agree-
ment, and the expansion contract in order to determine (1) whether
AEC pays the same amount for its original supply of 500,000 kilowatts
of power under the terms of the expansion contract, which is now in
effect, as it would have paid under the base contract; and (2) whether
AEC pays the same rate for the additional 235,000 kilowatts of power
as it pays for the 500,000 kilowatts of power.
The results of our review indicate that generally the contract pro-
visions pertaining to the 500,000 kilowatts of power are the same in the
AEC CONTRACTS FOR ELECTRIC POWER
29
expansion contract as they were in the base contract. With regard to
the cost of the additional 235,000 kilowatts of power, we find that the
contract provisions are less favorable to the Government than the
provisions for the 500,000 kilowatts of power.
Each of these findings is discussed below.
Cost of the 500,000 kilowatts of power
The expansion contract sets out the provisions pertaining to the
500,000 kilowatts of power separate from the provisions pertaining to
the additional 235,000 kilowatts of power, and generally the provisions
pertaining to the 500,000 kilowatts of power are the same in the expan-
sion contract as they were in the base contract. Technically there is
one important exception since the provisions of section 3.07 of the con-
tract stipulate that, after the sixth unit of the powerplant goes into
commercial operation, AEC's payment for changes in cost of facilities
and working capital will escalate at a higher rate than the rate in use
before that time.
It should be stated, however, that, while this provision will result in
an increase in the cost of power to AEC, such increase should be identi-
fied primarily with the cost of the 235,000 kilowatts of power rather
than the 500,000 kilowatts of power. The escalation rate under the
base contract, contemplates that AEC would pay only 77.8 percent of
any construction cost increase of the first 4 units; however, during
negotiation of the expansion contract AEC agreed to an escalation rate
which provides that it would pay 84.5 percent of any construction cost
increase of units 5 and 6. In addition, instead of using such escalation
rates separately, the parties agreed to use a combined rate which con-
templates AEC's paying 79.4 percent of the construction cost increase
of all 6 units. The combined rate (79.4 percent) will result in the same
cost to AEC as the separate rates (77.8 percent and 84.5 percent) pro-
viding the construction costs of the first 4 units and the construction
costs of units 5 and 6 increased in the same ratio from the then
current separate cost estimates. (The preceding discussion is in-
tended to cover changes in working capital as well as cost of facilities.)
Cost of the 235,000 kilowatts of power
Under the expansion contract AEC will pay a higher power rate for
the 235,000 kilowatts of power generated from units 5 and 6 than it
will pay for the 500,000 kilowatts of power generated from the first
4 units. In addition, certain other provisions of the expansion contract
that are related to the 235,000 kilowatts of power, but are not directly
associated with its cost, are also less favorable to the Government than
the provisions that are related to the 500,000 kilowatts of power.
In order to explain one of the major reasons why AEC will pay a
higher power rate for the 235,000 kilowatts than the 500,000 kilo-
watts, it is necessary to consider the nature of the contract. As noted
before, the contract is essentially a cost-sharing contract, except that
AEC pays a fixed amount for its share of the financing costs. Based
on estimates available at the time of our review, it is partly because of
the combination of the following 2 factors that AEC's cost, per
kilowatt-hour, for power from units 5 and 6 (235,000 kilowatts) will
be more than its cost, per kilowatt-hour, for power from the first 4
units (500,000 kilowatts).
1. ÁEC's share (a fixed amount) of the total financing costs
associated with the 235,000 kilowatts is a larger percent than its
30
AEC CONTRACTS FOR ELECTRIC POWER
share (again a fixed amount) of the total financing costs associated
with the 500,000 kilowatts, but
2. AEC's share of the total generation from units 5 and 6 is
a smaller percent than its share of the total generation from the
first 4 units, assuming all units generate at expected capabilities
or better.
If there had not been an overrun in the construction costs of the Joppa
plant, AEC's share of the financing costs associated with both the
235,000 kilowatts and the 500,000 kilowatts would have been approxi-
mately the same percent; however, AEC's cost, per kilowatt-hour, for
the energy associated with the 235,000 kilowatts would still have been
more than its cost, per kilowatt-hour, for the energy associated with
the 500,000 kilowatts. Another contributing factor to AEC's higher
power rate for the 235,000 kilowatts is that EEI's financing arrange-
ments for the construction of units 5 and 6 involve a higher interest
rate for long-term loans than its financing arrangements for the con-
struction of the first 4 units.
In addition, AEC's payments for cost of replacements related to
units 5 and 6 will be at a higher rate than its payments for cost of
replacements related to the first 4 units. AEC pays 77.6 percent of
the annual cost of replacements on the first 4 units to the extent that
the annual cost of replacements does not exceed one-fourth of 1 percent
of the cost of such units. However, AEC pays 84.5 percent of the
annual cost of all replacements on units 5 and 6 with no provision for
a limit similar to the one-fourth of 1 percent. The contract does pro-
vide that the annual cost of replacements in excess of one-fourth of
1 percent of the cost of units 5 and 6 will require AEC's approval,
but this approval is not required if the replacements are necessary
under any indenture or other agreement pertaining to EEI's bonded
indebtedness.
Two other contract provisions, pertaining to the 235,000 kilowatts,
that are less favorable to the Government are noted briefly. First,
in addition to the fact that AEC obtains a smaller percentage of the
expected capability of units 5 and 6 than it obtains of the expected
capability of the first 4 units, the expansion contract does not increase
the sponsoring companies' obligation to supply supplemental power
over its obligation of 150,000 kilowatts provided in the base contract.
Second, the provisions pertaining to AEC's rights and liabilities of
cancellation of the 235,000 kilowatts are considerably less favorable
to the Government than those pertaining to cancellation of the 500,000
kilowatts. (See the discussion of this point on pp. 11–13.)
AEC ADMINISTRATION OF CONTACT
GENERAL
An evaluation of AEC's administration of the EEI contract must
be made in the light of the nature and provisions of the contract and
the results of the activities performed under the contract. (AEC's
actual procedures for the administration of the contract are discussed
in the following two sections of this report-Construction Phase, and
Metering Facilities and Billing Procedures.)
The contract with EEI is an open-end cost-type contract under
which AEC agrees to purchase a definite amount of electric power
AEC CONTRACTS FOR ELECTRIC POWER
31
generated at the Joppa powerplant. The cost of power to AEC is
predicated, in part, on the cost of construction of the Joppa power-
plant; however, as discussed more fully under the section of this report
captioned "Lack of Ceiling on Cost of Power," the contract does not
give AEC any direct jurisdiction or authority to control such costs so
long as the costs are properly chargeable to the construction of the
plant.
The primary activities performed under the contract are the con-
struction and the operation of the Joppa powerplant. As reported,
in detail, in part I of this report there was a substantial increase in
the estimated construction cost of the Joppa power-plant, with the
result that the estimated annual cost of power to AEC was increased
$2,500,000.³ While a substantial portion of the increase in the esti-
mated cost of construction was the result of an adverse labor situation,
it is our opinion that there were 2 other important contributing fac-
tors-(1) the original estimate was based on inadequate information
and (2) the management activities at the site were not adequately
performed.
Construction of the Joppa plant started in February 1951. The
construction cost estimated increased gradually for 2 years until May
1953 when a nearly $20 million increase occurred. Before the large
increase in May 1953, the AEC Paducah area office, by letter dated
July 11, 1952, made recommendations to the Oak Ridge Operations
Office with the view of interceding in the labor situation, and in turn
the manager of the Oak Ridge Operations Office made recommenda-
tions to the Director of Production, AEC, Washington, by letter dated
July 29, 1952. The July 29, 1952, letter, in part, is quoted:
Even if it were granted that management had not always handled its labor
problems in the best manner possible, it is an inescapable conclusion that AFL
members who strike because a decision of the Joint Jurisdictional Board gives
work to other AFL members are disregarding their obligations to such an extent
that even the best management would be severely handicapped.
Two approaches are seen open for pursuit by the Commission. The first would
be direct contact, at top levels, with the AFL, to make clear our urgent need for
establishment of continuing labor peace at Joppa. The second would be to call
on our Atomic Energy Labor Relations Panel to enter the Joppa picture, some-
what as it did at Paducah.
Because of the significant effect of the adverse labor situation on
construction costs, we asked AEC what steps were taken by AEC,
Washington, as a result of the above recommendations. The AEC
answer, in pertinent part, is quoted as follows:
You are aware, of course, that the Joppa plant was a privately financed plant
over which AEC had no direct relationship with Ebasco in connection with its
construction. In these circumstances, AEC had no authority to intercede on
its own motion between Ebasco and the labor unions, and it was not requested
to assume Ebasco's collective-bargaining responsibilities. Further, the charter
of the Atomic Energy labor relations panel, which was established by the Presi-
dent to assist in the settlement of disputes arising at Government-owned privately
operated AEC facilities, did not contemplate that it would assume jurisdiction
of disputes arising in private plants or in privately financed construction.
As the intended consumer of a major portion of the power output of the plant,
AEC was, of course, greatly concerned over the interruptions to the work, and
made this fact known to both management and labor. Our Director of Organiza-
9 As noted on p. 26, since the release of pt. I, the plant has been substantially completed
and AEC has advised us that the construction cost estimate has been reduced with the
result that the present estimate (March 30, 1956) of the increase in AEC's annual power
costs is $2,200,000.
32
AEC CONTRACTS FOR ELECTRIC POWER
tion and Personnel, Mr. Oscar S. Smith, was in close touch with labor-relations
officials of Ebasco and provided such assistance and advice to them as was
appropriate in the circumstances. Further, he made representations to top labor-
union officials, including a discussion of the problem with the executive council
of the American Federation of Labor at its 1951 meeting.
Pursuant to the specific suggestions received from Oak Ridge in its memo-
randum of July 29, 1952, Mr. Smith met with Mr. J. C. Garvin of Ebasco in
August of 1952 to discuss the suggested courses of action. (You will recall that
Mr. Sapirie suggested this course of action be followed.) Mr. Garvin indicated
that the labor situation was relatively peaceful at that time and he did not
think it would be timely for AEC to take the problem up with the top AFL
leadership or to ask the Atomic Energy relations panel to intervene. In view
of this reaction and AEC's own reservations as to these alternatives, the matter
was dropped.
We also asked AEC what other steps were taken by AEC, Wash-
ington, in an effort to solve the Joppa labor problem and what was
accomplished as a result of these efforts. AEC's answer, in pertinent
part, is quoted:
Over the period of construction of units 1 and 2, AEC Washington had many
contacts with key labor officials regarding the labor situation in the entire
Paducah area. Some of these contacts involved specific problems at the gaseous
diffusion construction site, some of them involved specific problems at the Joppa
site and many of them-probably a majority-involved the general labor situa-
tion in the area which affected labor conditions at both sites. A vast majority
of the contacts were of an informal nature, either telephone calls or meetings,
since AEC's role in the labor relations matters affecting a local union and a par-
ticular employer is not one which lends itself easily to formal treatment. Through
these discussions, a number of individual specific problems were alleviated and
the cooperation of the national labor organizations was generally obtained in an
effort to clear up the unfavorable situation which existed in and around Paducah.
It would be a virtually impossible task, however, to document at this date all of
the actions which took place over a period of more than 2 years from the start
of construction of the Joppa plant until the labor situation at that location be-
came more satisfactory. If you wish to inquire about other specific instances,
such as the one contained in your first question, it is probable that we could
furnish information on such specific cases.
While we do not intend in any way to infer that the labor difficulties
at Joppa could have been avoided if AEC had direct jurisdiction or
authority over contract costs, the above discussion does indicate the
effect of the contractual arrangements on AEC's ability to administer
this open-end cost-type contract.
Technical review
CONSTRUCTION PHASE
AEC's procedure for administration of the technical aspects of the
construction of the Joppa powerplant seems to have been to main-
tain a generally informed position relative to the Joppa project by (1)
periodic visits to the construction site and to other locations where
design and procurement were accomplished, (2) receiving and review-
ing periodic reports from EEI, and (3) holding meetings with top-
level personnel of EEI. AEC's reports on its administration of this
contract have included several examples of its participation in de-
cisions with respect to EEI's construction plans.
We noted certain aspects of AEC's administration which in our
opinion were not adequate for a cost-type contract involving a con-
struction project of this size; however, AEC made improvements in
its administration during the construction period, particularly after
it became apparent that there was going to be a substantial overrun
in the construction cost estimate. These improvements resulted in
AEC CONTRACTS FOR ELECTRIC POWER
33
AEC's being kept in a more currently informed position relative to
the construction activity of the Joppa plant.
Some of the aspects of AEC's administration which we believe were
not adequate for a project of this magnitude as well as those which
were either instituted or improved during the construction period
are discussed. In order to better understand the timing involved,
it should be repeated that construction of the Joppa plant started in
February 1951.
1. The administration of activities under the EEI contract is per-
formed primarily by the AEC Paducah area office, which is under
the Oak Ridge operations office. Although the AEC relationship
with EEI involved a special situation, we were advised that the
Paducah area office was not provided with written instructions out-
lining its responsibilities and expected level of review activity until
April 14, 1954. We have reviewed this assignment of responsibility
for administration, and in our opinion it is a well-defined statement
which lists the various provisions of the EEI contract and assigns
responsibility for each provision to either the Oak Ridge operations
office or the Paducah area office and further assigns responsibility for
each provision to operating personnel, audit personnel, or legal per-
sonnel. In our opinion, such an assignment of responsibilities should
have been made in 1951.
2. In October 1953, after EEI had replaced its construction con-
tractor “in order to permit a reorganization of the construction project
so that the station can be completed on a more efficient and economical
basis," AEC increased its reporting requirements from EEI so as to
be able to more closely follow the progress of the Joppa project. AEC
has reported that its original reporting requirements, established in
February 1951, provided for AEC's receiving 4 different reports per-
taining to construction and that its October 1953 reporting require-
ments provided for AEC's receiving cost and estimate reports monthly
instead of quarterly in addition to receiving 11 different reports per-
taining to construction and 7 different reports pertaining to
operations.
3. AEC has never had a technical representative assigned to the
Joppa project site. It has conducted its technical administration on
an itinerant basis from the Paducah area which is located 40 road
miles from the project. In our opinion, the size of the project and
the ultimate effect of the construction cost on AEC's cost of power
would have justified continuous on-site representation.
4. The AEC Paducah area office did not maintain adequate records
pertaining to its day-to-day EEI contract administration activity.
We would expect that records such as a log of visits to the project
site, and memoranda for the files pertaining to observations made
at the project site, discussions with EEI personnel, recommendations
made to EEI, and verbal instructions received from higher AEC
levels would have been maintained. In our opinion, proper adminis-
tration of such a large project requires establishment and retention of
such files. The need for these files became more apparent because of
the changes in key personnel of the Paducah area office that occurred
during the construction period.
In conclusion, while the lack of adequate records makes it rather
difficult to obtain a complete picture of the level of AEC's adminis-
82318-56-pts. 2 and 3——6
34
AEC CONTRACTS FOR ELECTRIC POWER
tration of the technical aspects of the construction of the Joppa power-
plant, our review indicates that AEC kept generally informed rela-
tive to the Joppa project, particularly in the later stages of the con-
struction period; however, probably in large part because of restric-
tions of the contractual arrangements, AEC did not exercise the su-
pervisory activity normally performed by a Government agency over
a cost-type contract.
Audit review
Although some preliminary audit work was performed during
November 1952, the AEC audit of Joppa construction cost was not
actually started until March 1953. At that date the Joppa plant
had been under construction for over 2 years and approximately
$80 million had been expended of the then current estimated cost of
$108,600,000 for the first 4 units. This late starting date for the audit
also meant that some of the large cost-type subcontracts had been
completed or were nearly complete and, therefore, field checks and
controlled payoffs could no longer be applied to verify the extensive
payroll costs related to these contracts.
The AEC audit has been primarily directed toward a determina-
tion that costs shown in the construction accounts were bona fide ex-
penditures. The AEC audit, however, did not include a review and
evaluation of the procurement activities of Ebasco Services Inc., EEI's
construction contractor, until January 1955. We found also that the
AEC auditors did not review and evaluate the controls exercised by
Ebasco over its subcontractors' material and labor costs submitted for
reimbursement under cost-type contracts. In our opinion, a review
should have been made of each such subcontract and additional exami-
nation made if Ebasco coverage was not sufficient.
In the performance of the audit of payroll costs, AEC auditors
failed to perform field checks or controlled payoffs until January 1955.
We previously had questioned the lack of field checks and controlled
payoffs during our initial audit work on this contract in May 1954.
Based upon our review of AEC audit activity and our tests of EEI
original records, we are of the opinion that the AEC audit work has
been adequately performed within the limitations of scope established
except for the audit of payroll costs which did not include controlled
payoffs and field checks until January 1955.
METERING FACILITIES AND BILLING PROCEDURES
Power furnished by EEI to AEC has included (1) permanent power
generated at Joppa, (2) interim power received from the sponsoring
companies or generated at Joppa, and (3) supplemental power re-
ceived from the sponsoring companies. Proper administration of
this portion of the contract requires independent verification of the
quantity of each of these three classes of power billed to AEC since
the unit price of each class of power varies substantially. Based on
EEI records through September 1954, which were subject to adjust-
ment, the average cost for permanent power was 3.36 mills per kilo-
watt-hour, for interim power was 7.79 mills per kilowatt-hour, and
for supplemental power was 2.82 mills per kilowatt-hour.
The methods for determining the amounts of power billed AEC is
complicated and technical, and it is sufficient for purposes of this dis-
cussion to state that such amounts are based on meter readings at
AEC CONTRACTS FOR ELECTRIC POWER
35
the Paducah area of AEC (under the control of AEC's operating
contractor) and meter readings at the Joppa plant site of EEI (under
the control of EEI).
During February 1955 we made a survey at the AEC Paducah
area and at the EEI Joppa plant site to determine whether metering
facilities and billing procedures were adequate and whether controls
exercised by AEC were appropriate to protect the Government's in-
terest for payments made to EEI for electric power.
The total cost of electric power billed AEC by EEI during the 12-
month period ended September 30, 1954, was over $27 million.
Our survey disclosed that AEC´had not taken proper precautions
in administering this portion of the contract. Although adequate
controls were established by AEC and its operating contractor to
determine that the total amount of power billed to AEC by EEI had
been received, there were significant weaknesses in controls to ascer-
tain whether the proportions of permanent, interim, and supplemental
power included in the monthly bills prepared by EEI were correct.
The major weaknesses disclosed by our survey are set forth below.
1. The meter readings made by EEI at the Joppa plant site were
not independently verified by AEC or its operating contractor. These
meter readings are the basis for determining the amounts of perma-
nent, interim, and supplemental power included in the total power
billed AEC by EEI. Because of the 4 to 5 mills difference in rates
for the 3 types of power, effective administration of the contract
would require a test verification of meter readings at the Joppa plant
site.
2. Neither AEC nor its operating contractor had been represented
at the quarterly calibration tests made by EEI of its meters at the
Joppa plant site. These tests are made to determine the accuracy
of the meters which are the basis of billing data, and, if any inaccura-
cies exceed the limit of 1 percent specified in the contract, the pre-
vious month's power bill to AEC is corrected. According to internal
AEC correspondence:
EEI has failed to notify the Commission of such testing as required under
sections 5.01 and 7.11 of the power contract.
3. It is possible that because of incomplete metering on the starting
transformer at the Joppa plant minor amounts of power could have
flowed to the sponsoring companies without AEC having any knowl-
edge of the fact. We have been informed that the maximum amount
of power that could be lost over this line is 10,000 kilowatts or 7,200,000
kilowatt hours a month. EEI maintains that, if called upon, it can
prove this loss to be "at least a very low figure."
The results of our survey were discussed with AEC Paducah per-
sonnel on March 2, 1955, and confirmed by letter dated March 3, 1955.
By letter dated March 29, 1955, the manager of the Paducah area
office advised us that AEC had reviewed our comments and had de-
cided on the following three actions to strengthen AEC's procedures
in respect to the weaknesses pointed out in our letter of March 3, 1955.
(1) We have instructed the operating personnel to visit the Joppa steam elec-
tric station for the purpose of independently verifying the meter readings against
the log sheet entries made by EEI personnel.
(2) Witnessing of the calibration checks of the meters used for billing pur-
poses at the Joppa station will be done by the operating contractor personnel.
On March 14, 1955, the first such calibration tests were witnessed by Mr. L. W.
36
AEC CONTRACTS FOR ELECTRIC POWER
Jenkins, of Carbide & Carbon Chemicals Co. A copy of the test report has been
received by the AEC which shows the meters to be calibrated within the accuracy
specified by the contract.
(3) Investigate the cost of installing an additional meter on the starting trans-
former at the Joppa station whose function would be to indicate any power flow
out of the station to the starting transformer bank. If the cost of such installa-
tion proves to be reasonable, we will request EEI to make the installation. We
believe this would be the most adequate method of providing a positive control
to indicate that no power flow occurs from the Joppa station to the EEI system
through the starting transformer bank.
This prompt action by AEC to strengthen its controls over EEI's
metering and billing is commendable.
With respect to AEC's audit of power bills, the AEC auditors had
made little or no verification of the quantities or type of power shown
on the power bills. During the course of our survey we were informed
by the responsible AEC auditors that their audit work on the power
bills consisted of a mechanical verification of the dollar amounts on
the bills by applying the contract rates for power to the types and
amounts of power as shown on the bills. The AEC auditors, however,
have been active and, within the limitation of their scope of work,
have been effective.
During a subsequent review, completed in December 1955, we deter-
mined that additional meters were installed on the starting transformer
at the Joppa station and were placed in operation in October 1955.
Also a review of the AEC auditors' reports and workpapers disclosed
that they have extended their scope of work to include tests of the
quantities of power billed to AEC.
REVIEW OF CONSTRUCTION COSTS AS OF SEPTEMBER 30, 1955
Construction costs for the Joppa powerplant incurred through Sep-
tember 30, 1955, totaled $181,717,024. Following is a breakdown of
the costs by major category.

Direct cost.
Indirect cost.
Overhead..
Total..
Units 1 to 4
Units 5 and 6
Total
$97,777, 972
16, 253, 078
12, 414, 217
126, 445, 267
$42, 852, 297
6, 906, 599
5, 512, 861
55, 271, 757
$140, 630, 269
23, 159, 677
17, 927, 078
181, 717, 024
Construction costs through the point of Ebasco's termination were
$118,146,002 (excluding receivables in the amount of $96,566), of
which $115,288,355 or 97.6 percent was applicable to the first 4 units.
The Bechtel Corp. replaced Ebasco as the construction contractor in
August 1953.
Based on estimates dated June 30, 1955, forecasted costs to complete
the project as of September 30, 1955, were $191,679 for the first 4 units
and $3,728,243 for units 5 and 6, which costs if incurred would result
in final costs of $126,636,946 for the first 4 units and $59 million for
units 5 and 6. These figures indicate a total cost for the Joppa power-
plant of $185,636,946. At September 30, 1955, the first 4 units were
estimated to be 99.9 percent complete, and units 5 and 6 were estimated
AEC CONTRACTS FOR ELECTRIC POWER
37
to be 99.5 percent complete. As noted previously, the Joppa plant
went into full-scale commercial operation in August 1955.
Since September 30, 1955, the total estimated construction cost of
the Joppa powerplant has been reduced, and as of February 29, 1956,
the estimated cost was $182,252,639, consisting of $125,188,303 for the
first 4 units and $57,064,336 for units 5 and 6. (This last estimate
includes a reduction to reflect the EEI claim against Ebasco that was
pending at that time-this claim is discussed immediately below.)
In part I of this report, issued March 31, 1955, we concluded that
the best interests of the Government would be served by a timely settle-
ment of the disagreement between EEI and Ebasco pertaining to the
amounts of Ebasco's fee and Ebasco's billings for service. By letter
dated April 21, 1955, the General Manager of the Atomic Energy Com-
mission advised the Comptroller General of the United States that a
settlement between EEI and Ebasco had been reached which provided
for Ebasco to receive no profit for its services on the Joppa power-
plant. Ebasco's estimated profit at that time was $2,882,000, subject
to a final audit to be made. There followed a lengthy period of nego-
tiation and arbitration with respect to the amount of EEI's claim
against Ebasco. EEI advised AEC, by letter dated May 10, 1956,
that there had been a recovery in the amount of $2,770,499.43.
We visited the AEC Paducah area office and the Joppa power site;
we discussed matters with responsible AEC administrative and audit
personnel and EEI, Ebasco, and Bechtel Corp. personnel; and re-
viewed AEC administrative files and audit reports and supporting
workpapers and other pertinent data. We made limited tests of the
AEC audit work and of underlying EEI and Bechtel records to the
extent deemed necessary under the circumstances. We also reviewed
the audit reports and workpapers of EEI's independent public ac-
countants. In addition, we visited the New York offices of Ebasco.
during February 1955 to review the Ebasco home office charges and
the Ebasco procurement procedures and transactions.
Based on our review and testing of the work of the AEC auditors
and the EEI independent auditors, the underlying EEI and Bechtel
records, and the activities conducted in the New York offices of
Ebasco, we are of the opinion that the records state fairly the costs
incurred as of September 30, 1955, in the construction of the Joppa
plant subject to the recording of the Ebasco settlement and except for
one relatively minor amount that was corrected in December 1955.
Our comments regarding the reasonableness of the costs are contained
in part I of our report.
!
REPORT ON REVIEW OF ATOMIC ENERGY COMMIS-
SION CONTRACTS FOR ELECTRIC POWER
PART III
OHIO VALLEY ELECTRIC CORP.
INTRODUCTION
As part of our review of the Atomic Energy Commission (AEC)
contracts for electric power, we reviewed the provisions of the AEC
contract with the Ohio Valley Electric Corp. (OVEC) and AEC's
administration of the contract. AEC entered into the OVEC contract
in October 1952 for 1,800,000 kilowatts of electric power to be sup-
plied from 2 powerplants that OVEC was to construct. The ma-
jor design and engineering work for the OVEC powerplants was done
by the American Gas & Electric Service Corp. and by Sargent &
Lundy. OVEC placed its powerplants into full-scale commercial op-
eration on March 13, 1956. In addition, we reviewed AEC's audit
controls over the OVEC operations and made additional tests to the
extent we deemed necessary to express an opinion as to the fairness of
the recorded construction costs of the power facilities as of Septem-
ber 30, 1955, and as to the propriety of the power billings as of June
30, 1955. Our comments are presented under the following captions:
Introduction_
Summary
Comments on contract provisions..
AEC administration of contract_
Review of construction costs and power billings..
Page
39
41
45
66
69
888888
These comments are based on a study of the contract between AEC
and OVEC; on a study of the intercompany contract between OVEC
and its 15 sponsoring companies; on a review of negotiation files, re-
ports, correspondence, cost estimates, procurement and administrative
files, audit reports and supporting working papers, subcontracts, pur-
chase orders, basic accounting records, power bills, and other related
data made available to us at the Portsmouth, Oak Ridge, and Wash-
ington AEC offices, the Chillicothe, Clifty Creek, and Kyger Creek
OVEC offices, the New York office of American Gas & Electric Serv-
ice Corp., and the Chicago office of Sargent & Lundy; and on discus-
sions with officials of the above organizations at the various locations.
In addition, we have used pertinent data issued by the Federal Power
Commission and the Securities and Exchange Commission to assist
us in analyzing the AEC power contract with OVEC.
Our review work for this report, except for the review of construc-
tion costs and power billings, was completed in August 1955; however,
the report contains comments on some of the important actions oc-
curring after that date.
39
40
AEC CONTRACTS FOR ELECTRIC POWER
Our conclusions and opinions with respect to the OVEC contract
and the operations conducted under the contract are as follows:
1. The probable cost to the Government for permanent power
under the OVEC contract is reasonable in comparison with the
average cost of producing power throughout the country.
2. The use of an open-end cost-type contract for the purchase
of electric power is not fully protective to the interests of the
Government. However, the current estimate of the cost of OVEC
power to AEC compares favorably with the original estimate for
such power.
3. The OVEC contract provides that it is the intent of the
parties that OVEC's earnings after all income taxes shall be equal
to and limited to an 8 percent annual return on its outstanding
capital stock. This rate of profit is reasonable in comparison with
the average earnings on equity of private electric utilities in the
United States.
4. It has been determined that the OVEC powerplants will gen-
erate substantially more power than contemplated by the con-
tract. Both AEC and the OVEC sponsoring companies benefit
to the extent of their respective share of OVEC power from the re-
sultant lower unit cost of power; however, the sponsoring com-
panies are entitled to all of the additional power whereas AEC's
contract demand remains the same. The OVEC sponsoring com-
panies, however, have consented to short-term arrangements un-
der which they have relinquished their entitlement to all of the
OVEC power to which they are entitled for the purpose of mak-
ing such power available to AEC.
5. We are unable to state an opinion as to the reasonableness
of the sponsoring companies' potential profits from the sale of
power generated at the OVEC powerplants, since we do not know
the price that the sponsoring companies could get for such power,
nor are we in a position to know the amount of all of the costs
that will be incurred.
6. Although AEC has not exercised the supervisory activity
normally performed by a Government agency over a cost-type con-
tract, our review indicates that, as a result of the AEC review and
control procedures and the contractor's cooperation, the AEC ad-
ministration of activities under the OVEC contract has been ade-
quate to protect the Government's interest.
7. The contractor has performed competently under the con-
tract, and, as a result, substantial financial benefits have accrued
to the Government, either under the provisions of the contract or
through subsequent negotiations.
8. Based on our review, we are of the opinion that the recorded
construction costs of $317,378,294 as of September 30, 1955, for
the OVEC power facilities represent fairly the costs incurred as
of that date. Also, it is our opinion that the charges for interim
power which was received by AEC as of June 30, 1955
($15,673,797), are in accordance with the contract terms.
All of our findings were communicated to AEC during the course
of our review, and, as noted in the report, AEC has adopted several
of our suggestions-primarily those in the area of contract admin-
istration.
AEC CONTRACTS FOR ELECTRIC POWER
41
We feel that it is also important to include the AEC statement fur-
nished us of the objectives underlying its arrangements for electric
power from both OVEC and EEI (Electric Eergy, Inc.-our review
of the EEI contract is the subject of part II of this report).
(a) AEC's primary interest was to secure a very dependable supply of power at
low rates. This had to be provided on an extremely fast schedule with interim
power being supplied before availabality of power from new stations and there
had to be provision for cancellation of contracts on reasonable notice at low cost.
These objectives are being satisfied.
(b) The 8 percent return on equity capital is a reasonable return compared
to the profit experiences of the power companies in their own business. More
important since the equity financing is limited to 5 percent of total plant cost
and interest on the balance of the financing averages less than 4 percent, the total
cost of financing is much more favorable to AEC than under normal utility prac-
tice. Also, since the equity amount is so low, the companies gain relatively little
profit for the management effort required to provide AEC's supply as compared
with the return from the same management effort in their own business.
(c) Another prime consideration in the negotiations was to reduce the cost
to the Government of the contingency or other risk factors that would have been
added to power costs if the contractors were required to assume a greater meas-
ure of risks than was provided. While this approach served to severely limit the
guaranties and risks of the companies, nevertheless, risks were assumed * *
particularly in respect to the cancellation provisions.
SUMMARY
Our comments are summarized below. Where appropriate, a page
reference is given for a more complete discussion of a subject.
COMMENTS ON CONTRACT PROVISIONS
1. Nature of the contract
The OVEC contract is a long-term prime contract with a newly
created private utility company for the supply of electric power to
the AEC atomic-energy installation at Portsmouth, Ohio. Fifteen
established private utility companies (herein called sponsoring com-
panies) combined to organize OVEC. The contract is an open-end
cost-type contract. (See p. 45.)
In order to understand the nature of the contract, it is essential to
consider the relationship of OVEC with its sponsoring companies as
well as with AEC. (See p. 46.)
AEC's estimated annual cost of power under this contract is about
$60 million, or almost $1,300 million over the period of 21½ years that
it will receive permanent power from the full-scale operation of the
OVEC powerplants. (See p. 47.)
While the AEC contract with OVEC may be classified primarily
as a cost-sharing contract, a significant portion of AEC's demand
charge is an allowance for "reserve generating capacity," and this
portion is not adjusted if the actual reserve generating capacity needed
to supply AEC's contract demand is smaller or larger than was antic-
ipated when the contract was negotiated. (See p. 47.)
2. Lack of ceiling on cost of power
In our opinion, the lack of a ceiling on the cost of power to AEC is
a major contractual weakness from the point of view of the
Government. Also, in addition to being an open-end cost-type con-
tract, the contract does not give AEC any direct control over the con-
42
AEC CONTRACTS FOR ELECTRIC POWER
struction cost of the OVEC powerplants, which cost is a major com-
ponent of AEC's cost of power. It is recognized, however, that there
are incentives for OVEC to construct and operate their plants in an
economical manner. (See p. 51.)
There has been an increase in the construction cost estimate for the
OVEC plants; however, the effect of the increase on AEC's cost of
power has been offset by a substantial increase in the estimated net
capabilities of the OVEC plants. (See pp. 51-52.)
3. Reserve and supplemental capacity
An important feature of the OVEC contract is the large amount of
reserve and supplemental capacity that is provided to assure delivery
of AEC's contract demand. We are not technically qualified to make
an engineering appraisal of the reasonableness of the large amount of
reserve and supplemental capacity. (See p. 52.)
With respect to the financial aspects involved, an important con-
sideration, from the point of view of the Government, is that under
the OVEC contract all of the reserve capacity, when not required to
supply AEC's contract demand, is available to the sponsoring com-
panies. Also, and more significant, if the OVEC plants generate more
power than contemplated by the contract, there will be two major
benefits-a lower unit cost for all power generated and additional
power. Both AEC and the sponsoring companies would benefit to
the extent of their respective share of OVEC power from the lower
unit cost of power; however, all of the additional power would be
available to the sponsoring companies whereas AEC's contract demand
for power would remain the same. (See p. 54.)
The OVEC plants are expected to generate substantially more power
than contemplated by the contract. The OVEC sponsoring compa-
nies, however, have consented to short-term arrangements whereby
they have relinquished their entitlement to all of the OVEC power to
which they are entitled in order to make such power available to AEC.
(See p. 54.)
4. Interim power costs
Interim power was power supplied to AEC from the systems of the
sponsoring companies during the construction period of the OVEC
powerplants. The contract provisions pertaining to interim power
seem to have been favorable to the sponsoring companies; however,
there were certain developments subsequent to the original negotia-
tions which, if known at the time of negotiations, might have resulted
in a lower original interim power rate. (See p. 57.)
On May 10, 1955, AEC executed a letter agreement with OVEC
that provided for a substantial reduction in AEC's energy charge for
interim power effective May 1, 1955, and during the rest of the con-
struction period of the OVEC plants. The new rate resulted in
reduced interim power costs to AEC of slightly more than $5,500,000.
(See p. 58.)
5. Profit limitation
The earnings of OVEC are limited by contract. The earnings of
its sponsoring companies from the sale of power generated at the
OVEC powerplants are not limited by contract; however, the spon-
soring companies are regulated by the public-utility authorities of the
AEC CONTRACTS FOR ELECTRIC POWER
43
various States in which they operate or by the Federal Power Com-
mission. (See p. 59.)
While we are unable to express an opinion as to the reasonableness
of the potential profits to the sponsoring companies from the sale of
surplus power generated at the OVEC powerplants, our detailed com-
ments contain a discussion of some of the factors that should be consid-
ered in such an evaluation. (See pp. 59-61.)
6. Debt amortization period
The power rates under the AEC and sponsoring companies' contracts
are based in part on OVEC's retiring its entire debt (approximately
97 percent of its total capital structure) within 25 years. Such a basis
for power rates is not consistent with what we understand to be the
expected service life of an electric powerplant generally 35 or 40
years. AEC has advised us that the 25-year amortization period
"represents the best arrangement which could be worked out and
satisfy the institutions furnishing the financing." (See p. 61.)
Being based on debt amortization of 25 years, AEC's power rate is
higher than it would be if it had been based on a longer period of time;
however, if AEC takes power after 25 years, its power rate under the
contract will be adjusted to eliminate interest and amortization on the
original debt. (See pp. 61-62.)
7. Miscellaneous comments
The OVEC contract does not provide a firm date on which the power-
plants must be in commercial operation and ready to deliver permanent
power to AEC at contract rates; however, generally OVEC brought
the individual generating units into commercial operation ahead of
the target schedule provided in the contract. This resulted in savings
to AEC through the earlier use of permanent OVEC power instead
of the more expensive interim power. (See p. 62.)
Although the OVEC contract provides a specific contract demand,
AEC has advised us that OVEC's obligation to deliver the contract
demand is limited as discussed in our detailed comments. In addi-
tion, nondelivery of power for reasons beyond the control of the con-
tractor does not relieve AEC from payment of its demand charge;
however, because of the large reserve and supplemental capacity that
has been provided, such periods might be infrequent. (See p. 63.)
The sponsoring companies of OVEC do not guarantee the perform-
ance of the contractor. (See p. 63.)
8. Location of OVEC powerplants
The cost estimate, as of March 31, 1956, shows that the estimated
cost of OVEC transmission facilities is $37,198,000. The reason these
costs are so large is that the two OVEC powerplants are located some
distance from the AEC atomic energy plant and OVEC is building 2
switching stations adjacent to 2 of the sponsoring companies' power-
plants. (See pp. 63 and 65.)
While the location of the powerplants and OVEC's construction
of the two switching stations result in some advantages that are
shared by the sponsoring companies and by the Government, there are
other advantages that seem to accrue only to the sponsoring compa-
nies, both during and after the contract term. AEC's position is that
these advantages permitted provisions for cancellation more advan-
tageous to the Government. (See p. 65.)
44
AEC CONTRACTS FOR ELECTRIC POWER
AEC ADMINISTRATION OF CONTRACT
1. General
An evaluation of AEC administration of the OVEC contract must
be made in the light of the nature and provisions of the contract and
the results of the activities performed under the contract. (See p. 66.)
In our review we saw evidence that knowledge gained by AEC
from activities under an earlier but similar power agreement with
another contractor (EEI) has been used to good advantage in the
administration of the OVEC contract. (See p. 67.)
2. Construction phase
Although AEC has not exercised the supervisory activity normally
performed by a Government agency over a cost-type contract, our
review indicates that, as a result of the AEC administration pro-
cedures (discussed in our detailed comments) and the contractor's
cooperation, the AEC administration of the technical aspects of the
construction phase has been adequate. (See pp. 67 and 68.)
The AEC audit work was not started until June 1954, which was
20 months after the date of the contract and at a point where approxi-
mately $78 million had been expended on the then current estimated
cost of $371,184,000. (See p. 68.)
Our review and tests of AEC audit work indicates that it was ade-
quately performed within the limitations of the scope established.
(See p. 68.)
REVIEW OF CONSTRUCTION COSTS AND POWER BILLINGS
1. Construction costs as of September 30, 1955
Construction costs for the OVEC power facilities incurred as of
September 30, 1955, totaled $317,378,294. The total estimated con-
struction cost for the OVEC facilities, as of March 31, 1956, was $370
million. (See p. 69.)
Based on our review and testing of underlying OVEC records,
OVEC's internal controls, and the audit work performed by AEC,
OVEC, and OVEC's independent public accountants, it is our opinion
that the records through September 30, 1955, state fairly the costs
incurred in the construction of the two OVEC powerplants and as-
sociated facilities. (See p. 70.)
Power billings as of June 30, 1955
During the period covered by our review, the primary type of
power furnished AEC was interim power. Based on our tests and
verification of interim power billings, it is our opinion that charges as
of June 30, 1955 ($15,673,797), are in accordance with the contract
terms. Also, it is our opinion that the controls exercised by AEC and
its operating contractor, during the period of our review, were ade-
quate to protect the Government's interest with respect to OVEC's
billings for power. (See pp. 70-71.)
AEC CONTRACTS FOR ELECTRIC POWER
45
Basic data
COMMENTS ON CONTRACT PROVISIONS
NATURE OF THE CONTRACT
The OVEC contract is a long-term prime contract with a private
utility company for the supply of electric power to the AEC atomic
energy plant at Portsmouth, Ohio. At the time of entering into the
contract, OVEC was a new corporate entity created for the specific
purpose of building and operating electric power facilities to supply a
large block of electric power to AEC. The contract is an open-end
cost-type contract.
An indication of the magnitude of the OVEC operation is gained
from AEC's estimate, dated March 31, 1956, of its annual cost of
permanent power under this contract. AEC's estimated annual cost
of power is $60,057,000, or almost $1,300 million over the period of
2112 years that it will receive permanent power from the full-scale
operation of the OVEC powerplants (the 25-year term of the contract
less a construction period of about 31½ years). We understand that
the huge block of power that OVEC will supply AEC is greater than
that used by New York City. As of March 31, 1956, the total estimated
capital requirements of OVEC were $384,700,000 of which $370
million represented the construction cost estimate for the OVEC
power facilities.
1
AEC entered into the OVEC contract in October 1952 for 1,800,000
kilowatts of power. The power under this contract was expected to
supply the entire power requirements of AEC's Portsmouth atomic
energy plant. OVEC has constructed two powerplants-one with an
initial expected net capability of 1 million kilowatts located at Gal-
lipolis, Ohio, which is approximately 50 miles from the Portsmouth
plant, and the other with an initial expected net capability of 1,200,000
kilowatts located at Madison, Ind., which is approximately 140 miles
from the Portsmouth plant. OVEC placed the last unit of its Ohio.
plant into commercial operation on December 22, 1955, and the last
unit of its Indiana plant into commercial operation on March 13,
1956. Based on information now available, AEC estimates that the
total net capability of the 2 plants will exceed the contract estimate
of 2,200,000 kilowatts by approximately 165,000 kilowatts.
OVEC is sponsored by 15 private utility companies. The respective
rights and obligations of the sponsoring companies have been estab-
lished by contract in the ratios tabulated below:
Appalachian Electric Power Co.
Ohio Power Co_____
Indiana & Michigan Electric Co.
Ohio Edison Co__
The Cincinnati Gas & Electric Co-_-
Louisville Gas & Electric Co____
Percent
15.2
15.0
7.6
14.5
9.0
7.0
1 AEC has advised us by letter dated August 1, 1956, that the current estimate of capital
requirements is $377 million and that this reduction in effect will reduce the AEC power-
rate from the 3.81 mills per kilowatt-hour reported on p. 47 to approximately 3.78 mills
per kilowatt-hour.
46
AEC CONTRACTS FOR ELECTRIC POWER
West Penn Power Co_
The Dayton Power & Light Co--.
Columbus & Southern Ohio Electric Co----
The Toledo Edison Co.--
Monongahela Power Co.
Kentucky Utilities Co-
Pennsylvania Power Co.
The Potomac Edison Co-
Southern Indiana Gas & Electric Co-_-.
Total_.
Percent
7.0
4.9
4. 3
4.0
3.5
2.5
2.0
2.0
1.5
100.0
Information filed with the Federal Power Commission indicates that
Southern Indiana Gas & Electric Co. is not currently a sponsoring
company.
2
Since some of the companies listed on the previous page are sub-
sidiaries of the same company, only 10 companies have actually
subscribed to OVEC stock. The largest stockholder is the American
Gas & Electric Co. which owns 37.8 percent of the stock (the total
of the first 3 companies listed on the previous page, each company
being a subsidiary of A. G. & E.). The contract states that the OVEČ
equity capital is estimated not to exceed $20 million. Recent esti-
mates, however, provide that OVEC will obtain short-term bank
loans of $10 million at an anticipated interest rate of 3 percent and
will defer the sponsoring companies' investment of a like amount in
OVEC. This will reduce the cost of power to AEC since OVEC is
allowed an 8-percent return in its power rate on the amount invested
by the sponsoring companies.
To provide the large amount of additional capital required, OVEC
initially arranged to borrow $360 million by issuing long-term bonds
(approximately 25 years) at 334 percent interest and $60 million by
issuing 10-year notes at 4 percent interest. As of January 1, 1955, the
interest rate on the 10-year notes was reduced to 35% percent. Effec-
tive February 1, 1955, OVEC reduced its financial commitments by
$36 million for bonds and by $6 million for notes.
OVEC's relationship with its sponsoring companies
Based on current estimates of the capabilities of the OVEC power-
plants, the sponsoring companies are entitled to about 15 percent of
the 2 plants' generation. Therefore, in order to understand the na-
ture of AEC's cost-type contract with OVEC, it is necessary to con-
sider the relationship of OVEC with its sponsoring companies as
well as with AEC. Generally this relationship is as follows:
1. All of the power generated by the OVEC plants is available to
AEC and to the sponsoring companies. AEC has first call on the
generation up to the amount necessary to supply its contract demand
of 1,800,000 kilowatts, and the sponsoring companies are entitled to
the generation not taken by AEC in accordance with their power
participation ratios. (See tabulation on pp. 45-46.) In addition, the
sponsoring companies are obligated to supply interim and supplemen-
tal power for AEC from their own systems-up to maximum amounts
and at rates provided in the contract.
For
2 These 10 companies are designated as "participating companies" in the contract.
convenience in the report, both sponsoring companies and participating companies are
referred to as "sponsoring companies. Making allowance for the parent-subsidiary
relationship of some of the companies, the equity participation ratios are the same as the
power participation ratios shown starting on the previous page.
AEC CONTRACTS FOR ELECTRIC POWER
47
2. The total expenses of OVEC are reimbursed by AEC and by
the sponsoring companies. AEC obtains its power under the pro-
visions of its contract, and the sponsoring companies obtain their
power by paying that portion of OVEC's expenses, taxes, and 8 per-
cent annual return on outstanding capital stock not paid by AEC.
Because of the foregoing arrangement, the AEC contract with OVEC
may be classified primarily as a cost-sharing contract. A significant
portion of AEC's demand charge, however, is an allowance for "re-
Serve generating capacity," and this portion is not adjusted if the
actual reserve generating capacity needed to supply AEC's contract
demand is smaller or larger than was anticipated when the contract
was negotiated. Based on current estimates, both AEC and the
sponsoring companies will receive OVEC power for about 3.8 mills
per kilowatt-hour.
3. The earnings of OVEC are limited and, in effect, guaranteed as
a result of the provisions of the AEC contract and of the OVEC
intercompany contract. The earnings of the sponsoring companies
from the sale of power generated at the OVEC plants are neither
limited nor guaranteed by the provisions of the contracts. The spon-
soring companies, however, are regulated by the public utility au-
thorities of the various states in which they operate or by the Federal
Power Commission.
The above points are discussed in greater detail in this report.
Cost of power
According to AEC's estimate of March 31, 1956, AEC's annual
cost of power will be $60,057,000, as follows:

Annual cost
Mills per
kilowatt-
Percent
of
hour
total
Demand charge:
Interest and amortization of debt
$20, 178, 000
1.29
33.6
Taxes and insurance_-
2,825,000
.18
4.7
Operating costs (except fuel)
6, 169, 000
.39
10.3
Subtotal.
Return on equity...
Energy charge (fuel)
Replacements.
714,000
.04
1.2
29, 886,000
1.90
49.8
29, 449, 000
1.87
49.0
826, 000
.05
1.4
Total..
Credit for use of AEC capacity.
Estimated annual cost of power.
60, 161, 000
-101, 000
60, 057, 000
3.82
-.01
100. 2
2
•
3. 81
100.0
The demand charge is paid regardless of the amount of power taken
by AEC and consists of four components: (1) Amortization of debt
and interest costs, (2) Federal, State, and local taxes, and insurance,
(3) operating costs (other than fuel), and (4) an 8-percent annual
return on outstanding capital stock. In order to determine the amount
paid by AEC, the total actual amount of these costs is divided between
AEC and the sponsoring companies on the basis of a "capacity ratio"
which is set forth in the contract. Certain other minor adjustments,
that are not discussed herein, are also provided in the contract. AEC's
"capacity ratio" is defined as the ratio of 115 percent of the sum of
AEC's contract demand plus transmission losses thereon to the estab-
lished capability of the 2 powerplants, provided, however, that AEC's
48
AEC CONTRACTS FOR ELECTRIC POWER
capacity ratio cannot exceed unity. The extra 15 percent, for which
AEC is paying, is an allowance for "reserve generating capacity."
The 15 percent is fixed and is not adjusted if the actual reserve capac-
ity needed to supply AEC's contract demand is smaller or larger than
15 percent. Based on current AEC estimates, AEC's capacity ratio
will be approximately 90 percent, which means AEC will pay approxi-
mately 90 percent of all of OVEC's expenses (except fuel, which is
included in the energy charge).
Since all expenses (except fuel) and return on equity are divided
between AEC and the sponsoring companies in a "capacity ratio"
which provides that AEC will pay for a 15-percent reserve above its
contract demand, the reasonableness of the 15 percent is important in
determining the fairness of the cost of power to the Government. We
therefore asked AEC how the 15-percent reserve factor was deter-
mined. AEC's answer is quoted below (the term "load factor," re-
ferred to in the quote, is defined as the ratio of the average load over
a designated period to the peak load occurring in that period).
Included in the original proposal dated May 12, 1952, was a provision requir-
ing AEC to pay demand charges on a reserve capacity equal to 15 percent of
the sum of (1) the AEC contract demand of 1,800 million watts metered at the
Portsmouth delivery point and (2) the losses thereon from the 330 kilovolt bus
at the generating plants. This provision was discussed at negotiating meetings.
held on June 4, 5, and 6, July 22 and 23, and August 15 and 16, 1952.
At the earliest of these meetings AEC representatives questioned the need for
a reserve of such magnitude, pointing out that the 15 percent amount was some-
what higher than the average reserve being maintained at that time by the large-
power supply systems. OVEC stated that no utility in the country had experience
operating at a system load factor of 95 percent. (Current computations are on
the basis of 98 percent load factor.) They informed AEC that the American
Gas & Electric Co. system had an annual load factor of about 68 percent, which
was probably exceeded by only one other system in the country, and made the
point that the load factor has a definite bearing on reserve capacity requirements.
They stated that on a typical electric utility system it is normal practice to
schedule maintenance for at least a year ahead, taking into account all factors
that can be made use of to minimize the amount of reserve capacity required
for this purpose. For example, on many systems there is some seasonal variation
in load, systems having hydro can use the period of high water to carry out
maintenance and, in general, maintenance can be so planned as to have a mini-
mum amount of capacity out of service for scheduled overhaul during the peak
load period of the year. Normally, on utility systems it also is possible to do
a great deal of maintenance during off-peak periods; that is, at night and over
weekends.
During subsequent discussions of this subject, OVEC stated that it was not
able to find any basis for questioning the previously reached conclusion that 15
percent reserve is fair and equitable for the kind of load undertaken to be served
at the extremely high load factor required by AEC facilities and with the guar-
anty of a very high degree of reliability of the service and the further guaranty
of additional reserve from the sponsor's systems when needed. The question
of consistency with current utility practice, they pointed out, was not applicable
since there was no utility system of the size contemplated here being operated at
that time from steam electric plants and loaded to the high degree of load factor
to which the two OVEC steam plants would be loaded to supply AEC require-
ments. Since no operating company had any experience operating at such high
load factors, there was considerable question as to the effect that it would have
on the boilers, particularly, as well as on the turbines and auxiliaries.
OVEC presented for consideration curves showing scheduled and actual main-
tenance on the American Gas & Electric Co. system for the year 1951. At that
time the total generating capacity of the American Gas & Electric Co. system was
approximately 2,600,000 kilowatts. These curves showed that the company had
scheduled maintenance of its large units so that not more than 250,000 to 300,000
kilowatts of generating capacity would be out of service at any one time for
scheduled maintenance, but that weekend maintenance due to emergencies and
other causes had run this figure above 700,000 kilowatts and that it went above.
AEC CONTRACTS FOR ELECTRIC POWER
49
་
500,000 kilowatts on 25 occasions, mostly weekends during the year. OVEC
pointed out that leeway for scheduling maintenance and for doing weekend and
off-peak maintenance would not be available in case of very high load factor
loads such as that of the AEC Portsmouth project. They said while the curves
shown were representative of a high load factor system, they could not be con-
sidered as representative of a system having as high load factor and requiring as
high a degree of reliability as would be involved in the supply of power to AEC
Portsmouth. OVEC pointed out that the proposal provided for about 30 percent
reserve. Of this AEC would buy 15 percent from the plants to be built by OVEC,
the remainder to come either from capacity in those plants paid for by OVEC
or from the sponsor's systems. OVEC agreed to give AEC credit of 0.2 mill per
kilowatt-hour for each kilowatt-hour drawn by the sponsors from any AEC
capacity, firm or reserve.
In connection with this problem, AEC also took into consideration the fact
that, in the event AEC were to construct its own generating capacity to supply
this load, it would be necessary to either (1) install additional units to provide
greater than 15 percent of reserve or (2) enter into contracts with adjacent
power systems to provide power upon demand for which a demand charge would
most certainly have to be paid whether the capacity were used or not.
Since we are not technically qualified to make an engineering ap-
praisal of the reasonableness of the size of the AEC-financed 15 per-
cent reserve, we can only point out that if such a large reserve is not
needed to supply AEC's demand, the sponsoring companies will be in
a favorable position because, to the extent the reserve is not needed.
AEC will pay almost the full demand charge on capacity which will
be available to the sponsoring companies to dispose of for their own
account.
During the negotiations of a contract recently executed with OVEC
for additional power, AEC again expressed reservations as to whether
a reserve of 15 percent was actually necessary under the 1,800,000-
kilowatt contract. However, the minutes of this negotiation meeting,
held July 29, 1955, contain the following information:
Representatives of OVEC did state, however, that, if after a sufficient period
of time had elapsed to establish with a reasonable degree of certainty the re-
serve necessary for the extremely high-load factor demand of AEC, it appeared
that the reserves involved were either too high or too low, OVEC would be pre-
pared to review the reserve situation with a view to the establishment of a reserve
in an amount which seemed appropriate on the basis of actual operating ex-
perience. Representatives of AEC agreed that such a review should be made.
The energy charge shown in the table on page 47 is for the purpose
of reimbursing OVEC for its fuel costs. Generally, the provisions
of the contract result in the actual cost of fuel being divided between
AEC and the sponsoring companies in proportion to the amount of
energy taken by each from the plants.
AEC is obligated also to pay for a portion of the cost of replace-
ments. Generally, AEC's payment is based on its capacity ratio, to
the extent the annual cost of replacements does not exceed one-fourth
of 1 percent of the cost of the facilities. Based on current estimates,
AEC will pay approximately 90 percent of the cost of replacements
up to the limit noted above.
The last item in AEC's estimate of its annual cost of power is a
credit that AEC would receive from OVEC if OVEC used AEC re-
serve capacity. The contract provides that OVEC will credit AEC
with an amount equal to 0.2-mill per kilowatt-hour for all energy taken
by OVEC through the use of any AEC capacity, firm or reserve. The
AEC estimate does not contemplate that OVEC will use any AEC firm
capacity.
I
50
AEC CONTRACTS FOR ELECTRIC POWER
Cost of cancellation
In the event that power is no longer required for AEC's Portsmouth
atomic energy plant after full-scale operation of the OVEC power-
plants, AEC has the right to cancel its contract upon 2 years' notice.
This right includes the right of partial cancellation of AEC's con-
tract demand to the extent that power is no longer required at the
Portsmouth plant. Provision is also made in the contract for AEC
to cancel its contracts before completion and full-scale operation of
the powerplants, which period has now passed.
The amount that AEC is liable for in the event it cancels its con-
tract after full-scale operation depends on the conditions under which
it cancels and the length of time that the plants have been in full-
scale operation as of the date of cancellation. Generally the longer
the plants have been in full-scale operation, the smaller will be the
cancellation costs. The contract provisions with respect to cancella-
tion are complicated, and the following discussion is not intended to
be a complete explanation of the provisions but is presented primarily
to give some indication of the amount of the cancellation costs that
might be incurred.
A convenient source of AEC's estimates of its cancellation costs
under the OVEC contract, based on the then current cost estimated
for construction and operations, is the tables included in the appendix
to the hearings before the Joint Committee on Atomic Energy, 83d
Congress, on House bill 4905 held April 28 and June 10, 1953.
With respect to cancellation after full-scale operation, AEC must
give OVEC a 2-year prior written notice. During the 2-year notice
period AEC may continue to receive power at the rates provided in the
contract, or AEC may relinquish its right to power during the unex-
pired portion of the notice period and pay a "modified demand
charge" the normal demand charge reduced by one-half of the operat-
ing costs included in the normal demand charge. The tables referred
to above show an estimated "modified demand charge" during the 2-
year notice period of about $57 million. In addition, after the notice
period AEC is no longer entitled to any power but is liable for a can-
cellation charge computed in accordance with a table which is set
forth in the contract. The amount for which AEC is liable reduces
after each year of full-scale operation. The tables referred to above
show an estimated cancellation charge, on a diminishing schedule,
from about $66 million in the 1st year of full-scale operation to about
$12 million in the 10th year of full-scale operation. After the 10th
year of full-scale operation, AEC is not liable for a cancellation
charge after the notice period. In addition to the above two payments,
AEC must reimburse OVEC for any costs of cancellation in respect of
long-term arrangements for fuel (coal) supply to the extent that the
elimination of the power requirements of AEC requires OVEC to pay
compensation under such long-term arrangements.
In summary, the total estimated cancellation costs under the OVEC
contract, as presented in the tables referred to above, range from about
$140 million to about $200,000 depending on the time and the condi-
tions under which AEC might cancel.
One additional point with respect to the cancellation provisions.
should be made. At the request of the Joint Committee on Atomic
Energy, the Federal Power Commission reviewed the cancellation pro-
visions in AEC's power contracts with OVEC, TVA, and EEI. (Our
AEC CONTRACTS FOR ELECTRIC POWER
51
review of the EEI contract is the subject of pt. II of this report.) By
letter dated June 23, 1953, the FPC advised the Joint Committee, in
part, as follows:
Considering all the factors involved in this matter, including the necessity
for the Government to incur at this time the full capital outlay for the power
facilities if agreement cannot be reached with the power companies, it is our
opinion that the cancellation charges on the whole are reasonably fair to the
Government, to the power companies, and to the public.
LACK OF CEILING ON COST OF POWER
The OVEC contract provides a specific demand charge and energy
charge with adjustments based on actual costs of construction and
operations. The contract, however, does not provide a ceiling on the
cost of power to the Government.
In our opinion, the lack of a ceiling on the cost of power to AEC is
a major contractual weakness from the point of view of the Govern-
ment. Also, in addition to being an open-end cost-type contract, the
contract does not give AEC any direct control over the construction
cost of the powerplants, which cost is a major component of AEC's
cost of power. This situation is evidenced by the provisions of section
3.10 of the contract, which follows:
SECTION 3.10. REVIEW AND RECOMMENDATIONS BY AEC. While it is recognized
that the construction and operation of the facilities referred to in sections 1.01,
1.02 and 3.06 are the responsibility of corporation, the costs thereof have a direct
relation to AEC's cost of power under this agreement, and accordingly AEC may
from time to time review and discuss with corporation its operating and con-
struction plans, practices, and procedures, and make recommendations with re-
spect thereto which in AEC's judgment may provide for economies in construc-
tion or operation, and corporation will adopt such recommendations of AEC as
may be mutually agreed upon.
Thus it is clear that AEC may make recommendations, but their
adoption by OVEC is in no way mandatory. It is recognized, how-
ever, that these provisions do allow for observation, review, and evalu-
ation by AEC personnel to the extent deemed necessary. (See section
of this report captioned "AEC Administration of Contract.") In ad-
dition, since the sponsoring companies will receive power from the
OVEČ plants and since AEC has the right to cancel its contract at
any time, as discussed in the foregoing section, OVEC has incentives
to adopt any of AEC's ideas which, in its judgment, would minimize
construction or operating costs.
An example of the disadvantage to the Government of an open-end
cost-type contract for the purchase of electric power is fully developed
in part I of this report. The contract discussed in part I is AEC's
contract with Electric Energy, Inc. (EEI), which is identical with
the OVEC contract in this particular respect, and it was reported
that a large increase in the estimated construction cost of the EEI
Joppa plant resulted in a significant increase in the estimated cost of
electric power to the Government. (The increase in AEC's annual
cost of power from EEI, currently estimated to have resulted directly
from the construction cost increase of the Joppa plant, is $2,200,000,
or about $50 million over the 23-year period that it will receive per-
manent power from the full-scale operation of the Joppa plant.)
Although to a lesser degree than the EEI Joppa plant increase,
the construction cost estimate for the two OVEC plants has also in-
creased. Generally, however, the increase in AEC's cost of power
52
AEC CONTRACTS FOR ELECTRIC POWER
resulting from the increased construction cost has been offset by the
reduction in AEC's cost of power resulting from the OVEC plants'
net capability being substantially larger than originally anticipated.
AEC does not have effective control of fuel costs, the other signifi-
cant component of AEC's cost of power. The contract gives AEC
the general right to review and make recommendations pertaining
to coal contracts but specifically states-
that it is the intent of the parties that the acquirement of an adequate, depend-
able, and economical coal supply shall be the responsibility of corporation.
AEC has advised us that, since the coal requirements for OVEC are
so large (7,600,000 tons annually), assurance of an adequate coal sup-
ply in the OVEC area necessitated long-term contracts and long-term
commitments which precluded OVEC from giving AEC the right
to furnish fuel at its election. In the event AEC cancels the con-
tract it is liable to OVEC for any resultant costs of cancellation in
respect of long-term arrangements for fuel supply; however, AEC has
the prior right to approve the cancellation provisions of any of
OVEC's fuel contracts having a term exceeding 1 year.
RESERVE AND SUPPLEMENTAL CAPACITY
An important feature of the OVEC contract is the large amount of
reserve and supplemental capacity that is provided to assure delivery
of AEC's contract demand. Reserve capacity is the excess capacity
in the OVEC plants above AEC's contract demand, and supplemental
capacity is capacity provided in the sponsoring companies' systems to
supply power for AEC at such times as the OVEC plants may be
unable temporarily to produce AEC's contract demand. Capacity
in excess of AEC's demand is required because it is essential that AEC's
contract demand be furnished on a firm basis.
It is our understanding that the normal practice in the electric utility
field for supplying a given power demand on a firm basis involves one
of the following three conditions:
1. Build a plant large enough to supply the given power demand
even with the largest generating unit out of service; or
2. Build a plant with a capacity equal to the given power de-
mand, and arrange for supplemental capacity from an outside
source or system reserve in an amount equal to the largest generat-
ing unit in the plant; or
3. Build a plant with a small reserve capacity and arrange for
the necessary supplemental capacity that would assure the given
power demand with the largest generating unit in the plant out of
service.
The estimated reserve capacity in the OVEC plants is greater than
the estimated capacity of the largest generating unit, and, in addition
to the reserve capacity in the OVEC powerplants, the contract provides
for supplemental capacity from other sources.
As noted on page 48, the negotiation files indicate that OVEC felt a
larger reserve than normal was necessary because of AEC's high load
factor (which means AEC's average load will approximate its peak
load on a 24-hour-a-day basis) and because such a high load factor
was unique in the electric utility field. The negotiation files also show,
however, that one of AEC's consultants did not agree with the above
AEC CONTRACTS FOR ELECTRIC POWER
53
conclusion. In a letter to AEC, dated July 7, 1952, the consultant
stated:
There are a few things which I would like particularly to comment upon. The
first is the capacity of the plants which are proposed for supplying the load of
1,800,000 kilowatts for the project. In my opinion the company is being some-
what conservative in installing eleven 200,000 kilowatt units which is more
than ample to supply the requirements with one unit out of service at all times.
One of the reasons for locating the project in a large system is to take advantage
of reserve capacity in times of emergency, whereas this proposal would appear
as though it were designed to stand on its own feet. I do not know exactly the
extent of the losses but I would suspect that they are not so great but what they
could be easily supplied from the system in the event that the capability of the
special plants was reduced to 1,800,000 kilowatts when units were taken out of
service. In other words, I believe that the installed capacity could be reduced
to 2 million kilowatts without serious detriment to the project.
Another AEC consultant supported OVEC's conclusion. In a letter
to AEC, dated July 25, 1952, this consultant stated:
Since one machine will be out of service for normal maintenance the major
portion of the time, and it is necessary to provide reserve for a possible break-
down of a second machine to assure continuous power for process requirements,
the decision to install 11 units is justified.
Since we are not technically qualified to make an engineering
appraisal of the reasonableness of such a large amount of reserve
and supplemental capacity, we are confining our comments to the
financial aspects involved except for the following three observations.
First, in our review of the need for such a large amount of additional
capacity, AEC has emphasized the importance of the contemplated
high load factor and the high reliability factor characteristic of its
power supply. As mentioned previously the AEC power is to be
delivered at a very high load factor, and we have been advised that no
utility company in the country has operated its system at such a high
load factor and that the load factor has a definite bearing on reserve
capacity requirements. Also the large amount of additional capacity
results in a very dependable supply of power to AEC, and this objec-
tive was one of AEC's primary interests during the negotiation of the
contract.
Second, the files pertaining to recent negotiations between AEC and
OVEC indicate that, if appropriate, subsequent study and adjustment
will be made of the reserve situation.
Third, it is interesting to note that in one of AEC's other power
supply contracts with a private utility company, Mississippi Valley
Generating Co.,3 the powerplant reserve capacity was to have been
very small. The MVGC contract, which was negotiated subsequent
to the OVEC contract, contemplated 600,000 kilowatts of firm power
with an estimated powerplant reserve of only 50,000 kilowatts, or
approximately 8 percent. The MVGC sponsoring companies agreed
to provide power from their systems up to approximately 200,000
kilowatts when one or more generating units were down. This amount
of power approximated the capacity of one unit. We understand that
the MVGC power was also to have been taken at a high load factor.
3 By letter dated July 16. 1955. the Director, Bureau of the Budget, conveyed the
President's direction to the AEC to take immediately the necessary steps to bring to an
end the relationship between MVGC and the Uniteed States. AEC advised MVGC on
November 23, 1955, that the contract would not be recognized by the United States
The validity of the references made in this report to the MVGC contract, however, is not
disturbed by this action.
54
AEC CONTRACTS FOR ELECTRIC POWER
With respect to the financial aspects involved, an important con-
sideration, from the point of view of the Government, is that under
the OVEC contract all of the reserve capacity, when not required
to supply AEC's contract demand, is available to the sponsoring com-
panies. Also, and more significant, if the OVEC plants generate
more power than contemplated by the contract, there would be two
major benefits a lower unit cost for all power generated and ad-
ditional power. Both AEC and the sponsoring companies would
benefit to the extent of their respective share of OVEC power from
the lower unit cost of power; however, all of the additional power
would be available to the sponsoring companies whereas AEC's con-
tract demand for power would remain the same. In the event the
OVEC plants do not generate the amount of power contemplated by
the contract, a reverse situation would occur. Both AEC and the
sponsoring companies would pay more for power; however, the spon-
soring companies would receive less power whereas AEC's contract
demand would remain the same.
It is a matter of record that the OVEC plants are expected to gen-
erate substantially more power than contemplated by the contract.
The OVEC sponsoring companies, however, have consented to short-
term arrangements whereby they have relinquished their entitlement
to all of the OVEC power to which they are entitled for the purpose of
making such power available to AEC. AEC has entered into short-
term contracts for such power with OVEC and with the Ohio Power
Co., one of the sponsoring companies.
The remainder of this section is an amplification of the above
general comments.
The OVEC contract demand is 1,800,000 kilowatts. To assure this
supply the contract contemplates reserve capacity plus sponsoring
companies' supplemental capacity in the aggregate of 548,000 kilo-
watts, or about 30 percent of the AEC's contract demand. Generally,
AEC finances half of this capacity and the sponsoring companies
finance half.
A significant portion of OVEC's costs are fixed; therefore, as-
suming that other OVEC costs vary generally with generation, an
increase in the amount of power generated would result in a lower
unit cost of power. Because of the cost-sharing features of the con-
tract, the lower unit cost of power would accrue to both the sponsor-
ing companies and to AEC. Also, to the extent AEC might need
backup power, such power from the OVEC plants would probably
be cheaper than from the sponsoring companies' systems. Some of
the other advantages of such excess power, however, would go only
to the sponsoring companies because (1) all of the excess power would
be available to the sponsoring companies since AEC's demand is a
maximum of 1,800,000 kilowatts and (2) the sponsoring companies'
obligation to supply supplemental power would be reduced.
A review of the minutes of meetings of the OVEC board of directors
and of correspondence between OVEC and AEC indicates that OVEC
has determined that the net capability of the 2 OVEC plants may ex-
ceed the contract estimate of 2,200,000 kilowatts by as much as 165,000
kilowatts. Under the terms of OVEC's contracts with AEC and the
sponsoring companies, such increased capability has the following
effects: (1) AEC's right to power remains the same, (2) the power
available to the sponsoring companies increases from 84,000 kilowatts
AEC CONTRACTS FOR ELECTRIC POWER
55
to 253,000 kilowatts, and (3) the amount of supplemental power that
the sponsoring companies are obligated to supply from their systems
is reduced from 190,000 kilowatts to 21,000 kilowatts. The preceding
statement can be presented in tabular form. The following table sum-
marizes information obtained from AEC studies dated October 27,
1954, and March 31, 1956.
[Kilowatts]

AEC studies dated—
Oct. 27, 1954 | Mar. 31, 1956
Total expected net capability of both plants...
Distribution of total expected net capability:
AEC contract demand.
AEC reserves in plants.
Sponsors semifirm capacity
Sponsors reserves in plants.
Transmission and other losses.
Total..
Sponsoring companies' obligation to supply supplemental capacity-
2,200,000
2, 365, 000
1,800,000
1,800,000
274,000
274,000
73,000
220,000
11.000
33,000
42,000
38,000
2,200,000
190,000
2, 365, 000
21,000
With respect to the effect on the cost of power that results from
the increased capability, the two AEC studies show (1) there is a
lower unit cost for all power generated and (2) the lower unit cost
of power accrues to both AEC and the sponsoring companies to the
extent of their respective share of OVEC power.
As discussed above, the OVEC sponsoring companies are entitled,
by contract, to all of the OVEC power that is surplus to the amount
required to supply AEC's 1,800,000 kilowatts of power. The sponsor-
ing companies, however, have relinquished their entitlement to such
surplus power for specific periods of time in order to make the power
available to AEC. To obtain this surplus power AEC has recently
negotiated two short-term contracts. During any period of time that
these 2 contracts and AEC's long-term contract are in effect, AEC is
entitled to the entire net generation of the 2 OVEC plants for use
at the Portsmouth atomic-energy plant. In addition to the OVEC
power, the sponsoring companies have agreed to supply to AEC, un-
der certain conditions, power from their own systems. There follows
a brief discussion of each of these two short-term contracts.
The first short-term contract negotiated, known as the additional
power agreement, makes 150,000 kilowatts of firm power available
to AEC for a 3-year period beginning with the effective date of the
contract, March 30, 1956. Under this agreement, AEC is entitled
to an "additional contract demand" of 150,000 kilowatts from OVEC
generation not required to meet the 1,800,000 kilowatts demand un-
der the long-term contract. The OVEC sponsoring companies are
obligated to back up the entire 150,000 kilowatts of power with sup-
plemental power from their own systems, this obligation being in addi-
tion to their supplemental power obligation under the long-term
contract.
The cost to AEC for this additional power consists of a monthly
demand charge of $1.361 per kilowatt and a monthly energy charge
equal to (1) a prorata share of OVEC's fuel costs for power obtained
from the OVEC plants and (2) the sponsoring companies' "out-of-
pocket" costs for supplemental power obtained from the systems of
56
AEC CONTRACTS FOR ELECTRIC POWER
the sponsoring companies. Based on AEC's estimate of March 31,
1956, this additional power will cost AEC 3.95 mills per kilowatt-hour.
This estimate contemplates that power supplied from the OVEC
plants will cost AEC 3.75 mills per kilowatt-hour and that OVEC
will have to obtain about 12 percent of AEC's power requirements
from the sponsoring companies, a more expensive source of power.
AEC can extend this 3-year contract for additional 1-year periods
subject to a 27-month notice period and the negotiation of terms mu-
tually satisfactory to the parties.
The second short-term contract makes available to AEC the entire
capacity of the OVEC powerplants not required to meet the contract
demands being demanded by AEC under (1) the long-term contract
(1,800,000 kilowatts) and (2) the additional power agreement (150,-
000 kilowatts). The term of this contract is the period from March
13, 1956, the date of full-scale commercial operation of the OVEC
plants, through June 30, 1956 (subsequently extended to December
31, 1956). As noted previously the additional power agreement did
not become effective until March 30, 1956; however, during the period
from March 13, 1956, through March 29, 1956, AEC's power require-
ments in excess of the 1,800,000 kilowatts were met under this second
short-term contract. AEC's power under this contract is interruptible
power in the sense that its delivery is subject to the capability of
OVEC's powerplants. The contract does not provide for supplemen-
tal power to be furnished by the sponsoring companies; however, these
companies have agreed to supply additional power from their sys-
tems on a "when available" basis.
AEC negotiated this contract with the Ohio Power Co., one of
OVEC's sponsoring companies, rather than with OVEC. For the
contract period, the other sponsoring companies have released their
entitlement to OVEC power to the extent that such power is required
to be made available by the Ohio Power Co. to AEC. Eleven of the
sponsoring companies, however, have retained their rights and obliga-
tions to the profit or loss that might be made on the sale of power
to AEC under the contract. With respect to the other 4 sponsoring
companies, 1 of the companies does not currently qualify as a spon-
soring company and the other 3 companies are intrastate companies
and do not participate under this contract. However, based on infor-
mation filed with the Federal Power Commission, these companies
have released their entitlement to OVEC power in favor of the Ohio
Power Co.
The power delivered under this contract is generated either at the
OVEC plants or the sponsoring companies' systems. The cost to AEC
of the power generated at the OVEC plants is the same as the cost
of the OVEC power AEC obtains under the additional power con-
tract—at the rate of $1.361 per kilowatt a month plus a pro rata share
of OVEC's fuel costs. The cost of the additional power generated in
the sponsoring companies' systems is the same as the cost of the in-
terim power AEC obtained under its long-term contract-at the rate
of $1.30 per kilowatt a month plus 4 25 mills per kilowatt-hour.
One additional point should be made with respect to these two short-
term contracts. Generally, this is the only place in the report that
these contracts are discussed, and since they are short-term contracts,
no attempt has been made in the report to evaluate the effect of these
AEC CONTRACTS FOR ELECTRIC POWER
57
contracts as related to AEC's long-term contract with OVEC for
1,800,000 kilowatts of power.
INTERIM POWER COSTS
Interim power was power supplied to AEC from the systems of the
sponsoring companies during the construction period of the OVEC
plants.
The contract rate for interim power consists of a demand charge
of $1.30 per kilowatt a month plus an energy charge of 6 mills per
kilowatt-hour. Based on information developed during our review,
the contract provisions pertaining to interim power seem to have been
favorable to the sponsoring companies; however, there were certain de-
velopments subsequent to the original negotiations which, if known at
the time of negotiations, might have resulted in a lower original in-
terim power rate. On May 10, 1955, AEC executed a letter agree-
ment with OVEC that provided a substantial reduction in the energy
charge for interim power from 6 mills to 4.25 mills effective on and
after May 1, 1955.
The remainder of this section is a more detailed discussion of the
above general comments.
The contract interim power rate, $1.30 plus 6 mills, is higher than
the interim power rate AEC was able to obtain under a similar power
supply contract with EEI. When AEC pointed out during negotia-
tions that the OVEC proposed rate was higher than the EEI rate,
OVEC indicated that the $1.30 plus 6 mills rate was at least as favor-
able to the Government as the rate used by the sponsoring companies
in exchanging capacity among themselves and also as the rates then
being charged by the sponsoring companies for energy being supplied
to AEC through TVA.
The notes of an early negotiation meeting held January 23, 1952,
contain the following information:
*** remarked that it had incidentally been learned that that part of the Ohio
Valley in which we (AEC) are interested is one of the very few regions in the
country that might show in 1953 and 1954 even a slight excess of power supply
over demand. This indicates we might expect to secure interim power a little
easier there than elsewhere.
While the information above does not support granting OVEC a
higher rate for interim power than was granted EEI, AEC has ad-
vised us that the somewhat higher OVEC rate reflected the increased
quantity of interim power required and the greater likelihood of re-
quiring marginal sources of production or greater distance in trans-
mission. In addition, AEC has advised us that the Federal Power
Commission has gone on record in its letter to Congressman Sidney
R. Yates, dated April 14, 1953, that the OVEC rate was reasonable
at the time negotiated:
Although the staff has not been able to compute the cost of supplying interim
power from the sponsor's systems to AEC, it appears from recent studies made
by the staff of power costs in the area that the rate is reasonable.
The contract provides that the demand portion of the interim power
rate is $1.30 per kilowatt a month of "measured maximum kilowatt
demand." The contract provides also that maximum demand shall
be the highest average simultaneous load in kilowatts delivered dur-
ing any 60-minute period in the billing period. Therefore, the con-
58
AEC CONTRACTS FOR ELECTRIC POWER
tract gives OVEC the right to charge AEC, for the demand portion
of interim power, $1.30 times the highest 60-minute kilowatt load
delivered during the month. By letter dated August 10, 1954, OVEC
advised AEC that, during the months when the AEC power require-
ments at its Portsmouth atomic energy plant were undergoing a grad-
ual step-by-step growth, the maximum demand would be computed by
averaging the various loads delivered during the month to obtain the
maximum demand rather than by taking the highest load delivered
during the month. This provision reduced the cost of interim power
to AEC below the rate provided in the contract for the periods when
its power requirements were undergoing a step-by-step increase. AEC
has reported to the Joint Committee on Atomic Energy that the actual
savings to AEC through March 31, 1955, using this method of com-
puting demand charges, amounted to more than $900,000. (See ex-
hibit B, p. 72.)
Late in 1954, AEC and OVEC opened discussions pertaining to re-
ducing the contract interim power rate. During the ensuing period
and as part of our review of the OVEC contract, we made a limited
test of the prices that the sponsoring companies quoted OVEC for in-
terim power. This test indicated that such prices were substantially
lower than the rate charged AEC for interim power under the OVEC
contract. By letter dated April 1, 1955, we advised the manager of
the AEC Portsmouth area of the findings of our review of the ÖVEC
operation. The pertinent part of our letter pertaining to one of the
findings is quoted as follows:
The contract specifies that charges for interim power will be $1.30 for demand
and 6 mills for energy. We understand it is an established policy for a utility
company to acquire power available from other utilities at out-of-pocket costs.
A brief review of prices quoted by sponsoring companies indicates that the out-
of-pocket costs for interim power available to OVEC for use by AEC are con-
siderable lower than the contract price. For the periods we reviewed, the
AG&E system which provides a substantial amount of the interim power, quoted
out-of-pocket costs ranging from 2.3 to 4.4 mills. We noted that OVEC, after
giving consideration to transmission losses, generally allocates its interim power
requirements on the basis of the lowest out-of-pocket costs quoted by the various
sponsoring companies. Thus, the costs for the interim power are substantially
lower than the contract rates.
We understand that new generation units within the sponsors' systems in the
last 2 years have resulted in considerable additions to available sources for
interim power. The possibility exists therefore that costs of interim power now
are materially different than contemplated at the time the contract terms were
negotiated, in which case a reduction in the contract price based on actual con-
ditions would be appropriate. You stated that this matter might be discussed
with OVEC officials in the near future.
By letter dated May 11, 1955, the manager of the Portsmouth area
commented on our suggestion that the interim power rate be reex-
amined in view of reduced costs. A portion of his letter is quoted
below.
*** I am now pleased to advise you that OVEC has proposed a reduction
in the (energy) rate from 6 mills to 4.25 mills. This rate will become effective
as of May 1, 1955, provided approval by regulatory bodies can be obtained in
May. If that is not possible, then the rate is to become effective on the first of
the month in which approval is obtained from those bodies.
In conclusion, may I say that this is a splendid example of the sincerity sur-
rounding OVEC's efforts to supply our power and energy needs as economically
as possible.
AEC estimated that this significant reduction in the interim power
rate would result in savings of approximately $5,200,000 based on its
AEC CONTRACTS FOR ELECTRIC POWER
59
then current schedules of requirements for interim power. (See ex-
hibit B, p. 72.) Actual savings during the remaining construction
period, May 1, 1955, through March 12, 1956, were slightly more than
$5,500,000.
PROFIT LIMITATION
The earnings of OVEC are limited by contract. Any power gen-
erated at the ÖVEC powerplants in excess of AEC's contract demand
(as well as any power not taken by AEC) is available to the sponsoring
companies in accordance with their power participation ratios, and the
earnings of the sponsoring companies from the sale of such power are
not limited by contract. The sponsoring companies, however, are reg-
ulated by the public utility authorities of the various States in which
they operate or by the Federal Power Commission, and we understand
that these bodies through their ratemaking authority exercise a con-
trol over profits.
The OVEC contract indicates that it is the intent of the parties
that OVEC's return will be guaranteed as well as limited. The earn-
ings of the sponsoring companies are not guaranteed by contract.
Contract provisions pertaining to OȚEC's earnings
The contract provides that it is the intent of the parties that OVEC's
earnings after all income taxes will be equal to (guaranteed) and lim-
ited to an 8 percent annual return on its outstanding capital stock.
AEC's contribution to this 8 percent return, as well as to the taxes
necessary to guarantee the return, is determined by its "capacity ratio"
and is included in its demand charge. Based on current estimates,
AEC will pay about 90 percent of the total amount and the sponsoring
companies will pay about 10 percent.
Sponsoring companies' potential profits
Essentially the sponsoring companies have two sources of potential
profits. First, the sponsoring companies will share to some extent in
the guaranteed earnings of OVEC. Second, and possibly far more
important, they have potential profits from the use of the OVEC low
cost power that is surplus to AEC's contract demand. It should be
clearly stated that we are unable to determine the amounts of any
potential profits to the sponsoring companies from the sale of surplus
power since we do not know the price that the sponsoring companies
could get for such power, nor are we in a position to know the amount
of all of the costs that will be incurred. There follows, however, a dis-
cussion of some of the factors that should be considered in evaluating
the sponsoring companies' potential profits from the use of surplus
power when it is not sold to AEC.
Based on information developed in our review and on comments
furnished us by AEC, the following risks and costs to the sponsoring
companies should be considered.
1. Profits are contingent on the sponsoring companies' ability to
market the power.
2. Since surplus power is not firm (the generation of the OVEC
plants is first dedicated to AEC's contract demand), surplus power is
classified as interruptible power and normally would either be backed
up with other sources of supply or sold at a lower price than firm
power.
60
AEC CONTRACTS FOR ELECTRIC POWER
3. As discussed in a prior section of the report, AEC has the right
to cancel the OVEC contract, subject to a 2-year notice period and to
cancellation payments.
4. The sponsoring companies have to bear transmission and delivery
costs from the OVEC powerplants to the sales points in addition to
the generation cost paid OVEČ.
5. The sponsoring companies are obligated to furnish supplemental
power, up to a maximum amount and at the rate provided in the
contract, in the event OVEC needs power to supply AEC's contract
demand.
In evaluating the above points as to their effect on the sponsoring
companies' potential profits, we believe that the following comments
are pertinent.
With respect to the sponsoring companies' ability to market power
and to the risk associated with AEC's right to cancel its contract,
research indicates that the Nation's electric industry is in a tremendous
expansion program and that it is "building to meet anticipated de-
mands for electricity of ever-increasing magnitude." Even more per-
tinent is the following excerpt from an article appearing in the April
14, 1955, issune of Public Utilities Fortnightly, which excerpt gives
some indication of the future marketability of electric power in the
area serviced by the major sponsoring company of OVEĈ (the Amer-
ican Gas & Electric Co. with a 37.8 percent ownership).
In the 2-year period 1953-54, American Gas & Electric Co. added 1,075,000
kilowatts of generating capacity, including 430,000 kilowatts in 1954. This is
the largest block of capacity added by a private utility system in a similar in-
terval in history, according to Philip Sporn, president.
A prediction by Mr. Sporn that the AGE system will experience a peak demand
of 3,550,000 kilowatts in 1955, 4 times that of the 1939 peak, was coupled with
the further projection that the demand likely will quadruple again within the
relatively short period of 20 years. He said that the 1975 projection was based
on the "background of growth experience up to the present and with an appreci-
ation of the fundamental developments in the Nation's economy and in the
economy of the area served by the system from every basic viewpoint."
In addition, the section of this report captioned "Location of OVEC
Powerplants" points out that the decision to build 2 OVEC power-
plants located some 200 miles apart was made, in part, to reduce the
problem of absorption of capacity by the sponsoring companies in
the event AEC canceled its contract.
With respect to the sponsoring companies' ability to market inter-
ruptible power, the following three points are made.
1. It is presently estimated that the OVEC plants will have substan-
tial excess capacity over that contemplated in the contract. Therefore,
while technically all capacity in the OVEC plants surplus to AEC's
demand (the originally contemplated reserve capacity and the excess
capacity) is interruptible, the excess capacity might more reasonably
be considered firm. In any respect, such excess capacity reduces the
contractual obligation of the sponsoring companies to supply supple-
mental power for AEC from their own systems and thereby releases
a like amount of power in their systems for their own use on a firm
basis.
2. The disadvantage of interruptible power can be mitigated by
OVEC's planning its maintenance down time, to the extent possible,
to correspond with those periods when the sponsoring companies'
loads are low (nights and weekends), thereby making the OVEC
AEC CONTRACTS FOR ELECTRIC POWER
61
power available during periods when the sponsoring companies an-
ticipate their peak loads. There would still be the problem of emer-
gency outages; however, a review of charts showing emergency and
planned outages of the American Gas & Electric system for 1951 dis-
closed that emergency outages on weekdays represented less than 25
percent of total outages and a very small percent of the total system
capacity. Also, since the OVEC surplus power will be delivered to
several large systems, each with its own system reserve, it seems rea-
sonable to assume that effective use will be made of interruptible
power.
3. A very important point is that the sponsoring companies' use
of OVEC surplus power is not necessarily restricted by the lack of a
market greater than the sponsoring companies' then current genera-
tion. In such an instance the sponsoring companies would probably
close down generation at some of its higher cost plants and use, in
lieu of that power, the cheaper OVEC surplus power.
In conclusion, all of the power generated by the OVEC plants in
excess of that taken by AEC, up to its contract demand, is available
to the sponsoring companies. Because of the lack of pertinent infor-
mation we are unable to estimate the amounts of any potential profits
to the sponsoring companies from the sale of surplus power. In this
connection, however, the following two comments (some parts of which
have been made before in this report) are pertinent.
1. If it develops that the extra 15 percent that AEC pays in its
demand charge as an allowance for "reserve generating capacity" is
for a reserve that is larger than necessary, the sponsoring companies
will be in a favorable profit position since AEC will pay all of the
costs (except fuel and a minor adjustment of 0.2 mill per kilowatt-
hour) on power that will be available to the sponsoring companies to
dispose of for their own account.
2. If the plants generate substantially more power than is contem-
plated in the contract, the sponsoring companies' profit potentiality
will be significantly enhanced because there will be more power avail-
able to them and at a lower rate. As noted on page 55, however, the
sponsoring companies have consented to short-term arrangements
under which they have relinquished their entitlement to all of the
OVEC power to which they are entitled for the purposes of making
such power available to AEC.
DEBT AMORTIZATION PERIOD
OVEC borrowed a substantial amount to finance its activities, with
the result that its debt capital is about 97 percent of its total capital.
The power rates under the AEC and sponsoring companies contracts
are based, in part, on OVEC's retiring this entire debt within 25
years. Such a basis for power rates is not consistent with what we
understand to be the expected service life of an electric powerplant-
generally 35 or 40 years. AEC has advised us that the 25-year amor-
tization period "represents the best arrangement which could be
worked out and satisfy the institutions furnishing the financing."
Based on current estimates, AEC's payments for debt amortiza-
tion over a period of 211 years will be approximately 72 percent of
OVEC's total original indebtedness. Extension or cancellation of the
contract, of course, would increase or decrease the percentage figure.
62
AEC CONTRACTS FOR ELECTRIC POWER
An important consideration, from the point of view of the Govern-
ment, is that the AEC power rate, being based on debt amortization
of 25 years, is higher than it would be if it had been based on debt
amortization for a longer period of time. This consideration is not
significant if, but only if, AEC extends its contract beyond a 25-year
period to some period that approximates the service life of the power-
plants. Under the OVEC contract, AEC has the right to obtain power
for 10 years after the initial period of the contract. Also, the contract
provides, generally, that in the event of extension, AEC's power rate
shall be adjusted (1) to give full credit for the reduction or elimina-
tion of interest and amortization requirements and (2) to add interest
and amortization on any other debt necessary to render service during
such extended periods.
It is interesting to note that in AEC's power contract with MVGC,
which was negotiated subsequent to the OVEC contract but is not
recognized as valid by the Government, AEC's power rate was pre-
dicated on debt amortization of 30 years. During a 25-year period,
under such circumstances, AEC would have paid through its power
rate about 75 percent of MVGC's indebtedness.
Delivery date of power
MISCELLANEOUS COMMENTS
The OVEC contract does not provide a firm date on which the OVEC
powerplants must be in commercial operation and ready to deliver per-
manent power to AEC at contract rates. AEC's position is that a
prudent utility company could not agree to a guaranteed date of de-
livery under the provisions of this contract. The contract does provide
that the contractor will exert his best efforts to have individual gen-
erating units ready for commercial operation by certain dates set out
in the contract. AEC has advised us that the contract schedule dates
were reasonably established.
OVEC completed the 11 units in its 2 powerplants with an advance
of about 8 unit months in the contract schedule. There follows a
tabulation furnished us by AEC of pertinent dates for the two plants.

Kyger Creek..
Clifty Creek.
Unit
Date stated
in contract
Date of
commercial
operation
Advance
(delay)
(in months)
1
Mar. 1, 1955
Feb. 15, 1955
1/2
2
June 1, 1955
June 24, 1955
(1)
3
Sept. 15, 1955
Sept. 1, 1955
4 Jan.
1. 1956
5
Apr. 1, 1956
Nov. 15, 1955
Dec. 22, 1955
11/2
32
1
Jan.
1. 1955
Feb. 15, 1955
(112)
2
Apr. 15, 1955
May 1, 1955
(2)
3
Aug. 1, 1955
July 11, 1955
1/2
4 Nov. 1, 1955
Oct. 24, 1955
5
Feb. 15, 1956
6 June 1, 1956
Nov. 30, 1955
212
Mar. 13, 1956
21/2
One important result of OVEC's bringing the individual units into
commercial operation in advance of the contract schedule was that
AEC was able to operate with permanent OVEC power and discon-
tinue more expensive interim power sooner than anticipated. Gener-
ally, interim power cost AEC about 7.8 mills per kilowatt-hour under
AEC CONTRACTS FOR ELECTRIC POWER
63
the contract, whereas permanent power delivered under the contract
terms is estimated to cost AEC about 3.8 mills per kilowatt-hour.
Contract demand
AEC's contract demand is 1,800,000 kilowatts. AEC's entitlement,
up to the amount of its demand, is limited to—
1. The entire available capacity of the generating stations, plus
2. Supplemental power from the sponsoring companies' sys-
tems in an amount which when added to the capacity in the gen-
erating stations for which AEC pays no demand charge equals
15 percent of the AEC contract demand plus transmission losses
thereon. (In view of the increase in the expected generation of
the OVEC plants, the current estimate of the sponsoring com-
panies' obligation to supply supplemental power is only 21,000
kilowatts.)
In addition, nondelivery of power for reasons beyond the control
of the contractor does not relieve AEC from its obligation to pay its
demand charge to the contractor. However, because of the large
station reserve and the sponsoring companies' obligations to provide
supplemental power, the contractor's inability to deliver the amount
of power specified in the contract would be restricted to periods when
a substantial number of generating units (three or more) would be
out of service.
The contract also contains broad force majeure provisions under
which the contractor is relieved of liability for any loss or damage re-
sulting from nongeneration or nondelivery of power because of any
reason beyond the control of the contractor.
Guaranty of performance
The sponsoring companies of OVEC do not guarantee the perform-
ance of the contractor. Although our review of the OVEC negotia-
tion files did not disclose that AEC tried to get such a guaranty from
the OVEC sponsoring companies, the negotiation files of an earlier
AEC power contract (the EEI contract) show that AEC repeatedly
tried to obtain a guaranty of EEI's performance from EEI's sponsor-
ing companies, but for numerous reasons the EEI sponsoring com-
panies did not feel that they were able to execute one.
LOCATION OF OVEC POWERPLANTS
Attached as exhibit A to this report is a copy of the diagram of
the OVEC power system that is included as part of the OVĚC con-
tract. Basically this diagram shows the relative locations of the two
OVEC powerplants and switching stations and the OVEC-owned
Dearborn and Pierce switching stations to the AEC Portsmouth proj-
ect. The relative location of these facilities to the closest sponsoring
company's power facility is not shown but is discussed below.
1. The Kyger Creek powerplant is near Gallipolis, Ohio. The
plant is about 50 miles from the AEC project and about 13 miles
from the Philip Sporn generating station which is owned jointly
by the Ohio Power Co. and the Appalachian Electric Power Co.,
both sponsoring companies.
2. The Clifty Creek powerplant is near Madison, Ind. The
plant is about 140 miles from the AEC project and about 3 miles
64
AEC CONTRACTS FOR ELECTRIC POWER
from where the sponsoring companies connect with the existing
Paddy's Run-Miami Fort circuit. The Paddy's Run station
is owned by the Louisville Gas & Electric Co., a sponsoring com-
pany, and the Miami Fort station is owned by the Cincinnati Gas
& Electric Co., also a sponsoring company.
3. The Dearborn switching station is contiguous with the Tan-
ners Creek generating station of the Indiana & Michigan Electric
Co., a sponsoring company.
4. The Pierce switching station is 0.3 of a mile from the Walter
C. Beckjord generating station of the Cincinnati Gas & Electric
Co.
The diagram shows also that the location of the Clifty Creek power-
plant and the Dearborn switching station requires four river crossings.
The OVEC transmission system is 330,000 volts, which is the highest
transmission voltage in the United States. The ultrahigh voltage
facilities in the OVEC transmission system include a switching station
at each powerplant, the Dearborn and Pierce switching stations, and
approximately 400 miles of double circuit transmission lines. In
addition, AEC provides two 330-kilovolt switching stations at its
Portsmouth project.
The files show that at the time of negotiation the use of 330-kilovolt
transmission was in the development stage, and that the American Gas
& Electric Co. planned to put its first 330-kilovolt line into service in
July 1953. Information published by A. G. & E., dated October 1954,
shows that A. G. & E. had under construction a sort of horseshoe-
shaped network of 330-kilovolt transmission lines connecting most of
its large modern powerplants. This network is approximately 450
miles long.
The major subjects discussed during the preliminary negotiations
between AEC and the OVEC sponsoring companies were the general
location of the AEC site and the number and location of the OVEC
generating plants. The negotiation files indicate that the decision to
build 2 plants located about 200 miles apart was based primarily on
the following major considerations: (1) The availability of coal and
labor, (2) the interim power requirements during the construction
period, and (3) the problem of absorption of capacity by the sponsor-
ing companies in the event of cancellation. The studies prepared by
OVEC engineers in support of this decision were reviewed by AEC
engineers and by AEC's engineering consultants, Sargent & Lundy,
and all groups were in agreement that the decision reached was the
most economical engineering solution to the problem.
The location of the 2 plants allows OVEC to obtain coal from 2
different major coal areas and to obtain construction labor from 2
different labor areas. The distance between the plants was considered
desirable in order to increase the geographical area from which it
would be economically feasible to obtain interim power in large quan-
tities. Interim power, however, in large quantities was estimated to
be needed for only about 1 year. The large geographical area was
also considered advantageous in the event AEC canceled its contract,
since the transmission distances required to absorb the power would
be kept to a minimum. This last point was of primary concern to
the sponsoring companies.
In our review of the AEC negotiation file, we found no explanation
as to why OVEC should build the Dearborn and Pierce switching sta-
AEC CONTRACTS FOR ELECTRIC POWER
65
·
tions which are in addition to the switching stations located at the two
powerplants and at the AEC project. Without commenting as to
who benefits primarily from the Dearborn and Pierce switching sta-
tions, it seems that they are needed in order that the sponsoring com-
panies will be able (1) to furnish interim power to AEC for an esti-
mated period of about 1 year, (2) to supply supplemental power to
AEC at any time during the contract period that the OVEC plants
are not able to supply AEC's demand of 1,800,000 kilowatts, and (3)
to receive power generated from the 2 OVEC powerplants in excess
of AEC's demand throughout the contract period. The contract ad-
ministration files show that the need for the Pierce switching station
was questioned in late 1952 and that OVEC's representatives stated
that, without it, two additional circuits would be required between the
Clifty Creek plant and the AEC installation. The cost of such cir-
cuits would have been considerably more than the cost of the switch-
ing station.
The construction cost estimate, as of March 31, 1956, shows that the
estimated cost of transmission facilities is $37,198,000, as follows:
330-kilovolt Pierce switching station__.
330-kilovolt Dearborn switching station_
330-kilovolt transmission lines_
Total____
$5, 178, 000
2, 176, 000
29, 844, 000
37, 198, 000
Since we do not have the technical engineering qualifications which
would warrant our expressing an opinion as to the location of the
powerplants, we can only state that the justification contained in
AEC's negotiation file seems reasonable from the point of view of
the Government. However, the location of the 2 powerplants and
the construction of the 2 switching stations require an expensive net-
work of transmission lines because of their distance from the AEC
project and result in certain advantages that seem to accrue to the
sponsoring companies only. These advantages include-
1. The sponsoring companies had to make only a relatively
small investment in transmission lines in order to tie into the
OVEC system at numerous points. These connections are nec-
essary so that the sponsoring companies will be able to receive
the OVEC system's generation in excess of AEC's contract de-
mand for the 25-year period of the contract and the total genera-
tion of that system for its remaining economic life after the AEC
contract term. (See point 3 below.) The first supplementary
transmission agreement between OVEC and its 15 sponsoring
companies provides for 9 connecting transmission lines, with no
single line being longer than 14 miles.
2. The OVEČ 330-kilovolt transmission network completes the
bottom of the large A. G. & E. horseshoe-shaped 330-kilovolt
transmission circuit which connects most of A. G. & E.'s major
plants. It is important to state that we have been unable to estab-
Îish what benefits, if any, A. G. & E. might gain from this con-
nection during the contract period.
3. In the contract AEC grants to OVEC and the sponsoring
companies easements for a term of 50 years to enter upon and
use such Government-owned land on the AEC project property
as may be necessary for the construction, operation, and main-
tenance of OVEC's or any sponsoring company's transmission
66
AEC CONTRACTS FOR ELECTRIC POWER
facilities and for interconnection with other systems. During
negotiations AEC requested that the life of the easement be
limited to the contract term plus 10 years. This request was not
satisfactory to OVEC or the sponsoring companies because the
expected life of the transmission facilities was greater than AEC's
proposed term of the easement. To the extent that the transmis-
sion facilities have an expected life beyond AEC's contract term,
we consider the advantage accrues to the sponsoring companies
only.
4. The negotiation files contain the following information:
Several [of the sponsoring] companies both in Ohio and in Indiana have
an intrastate status and the locating of a plant in each State should
minimize regulatory problems.
AEC's position is that—
*** these advantages to the sponsors alleviate the situation which would
be faced in the event of cancellation and permit provisions for cancellation more
advantageous to the Government.
In conclusion, OVEC's construction of the Pierce and Dearborn
switching stations and the location of the powerplants resulted in a
greater cost to OVEC for the transmission facilities than would have
resulted if the sponsoring companies had constructed the Pierce and
Dearborn switching stations at their own expense and if the Clifty
Creek plant had been located in Ohio at some point along the north
side of the Ohio River. While the location of the powerplants and
OVEC's construction of the Pierce and Dearborn switching stations
result in some advantages that are shared by the sponsoring companies
and the Government, there are other advantages that seem to accure
to the sponsoring companies only, both during and after the contract
term. AEC's position is that these advantages permitted provisions
for cancellation more advantageous to the Government.
AEC ADMINISTRATION OF CONTRACT
GENERAL
An evaluation of AEC's administration of the OVEC contract must
be made in the light of the nature and provisions of the contract and
the results of the activities performed under the contract.
The contract with OVEC is an open-end cost-type contract under
which AEC agrees to purchase a definite amount of electric power
generated at the two OVEC powerplants. The cost of power to AEC
is predicated, in part, on the cost of construction of the OVEC power-
plants; however, as discussed more fully under the section of this
report captioned "Lack of Ceiling on Cost of Power," AEC does not
have any direct jurisdiction or authority to control such costs so long
as the costs are properly chargeable to the construction of the plants.
The primary activities performed under this contract are the con-
struction and the operation of the two OVEC powerplants. The
OVEC plants went into full-scale commercial operation on March 13,
1956.
OVEC's original cost estimate was submitted August 26, 1952, and
totaled $338,938,000. This estimate was periodically increased, and the
estimate as of March 31, 1956, was $370 million. These increases were
stated to result primarily from more realistic labor costs, design
AEC CONTRACTS FOR ELECTRIC POWER
67
changes, and material and labor escalations. Estimated working capi-
tal requirements as of March 31, 1956, were $14,700,000 which results in
OVEC's total estimated capital requirements being $384,700,000 as
of that date. The effect on AEC's cost of power, resulting from the in-
crease in the cost estimate of the powerplants, has been offset by a sub-
stantial increase in the estimated net capabilities of the two plants.
Also, many other factors have affected the estimated cost of OVEC
power to AEC since it was originally estimated in 1952; however,
the current estimated cost is 3.81 mills per kilowatt-hour which com-
pares favorably with the original estimated cost of 3.86 mills per
kilowatt-hour.
In addition, OVEC completed construction of the 11 units of the 2
powerplants with an advance of about 8 unit months in the schedule
provided in the contract. This situation resulted in savings to AEC
through the earlier use of permanent OVEC power instead of more
expensive interim power.
Two other points with respect to AEC's administration of this con-
tract should be made. First, although the action that may be taken
by AEC is limited by the provisions of the contract, our review indi-
cates that AEC officials have shown considerable interest in and have
followed closely the construction activity and that excellent relations
and cooperation exist between AEC and OVEC. Second, in our re-
view we saw evidence that knowledge gained by AEC from activities
under an earlier but similar power agreement with another contractor,
EEI, has been used to good advantage in the administration of the
OVEC contract.
Technical review
CONSTRUCTION PHASE
AEC's procedure for administration of the technical aspects of the
construction of the OVEC powerplants seems to have been to maintain
an informed position relative to the OVEC project by (1) periodic
visits to the construction site and to other locations where design and
procurement were accomplished, (2) receiving and reviewing periodic
reports from OVEC, and (3) holding meetings with top-level person-
nel of OVEC. In addition, significant recommendations and negotia-
tions have resulted in savings in both construction costs and current
power charges.
Some of the more important features of AEC's administration un-
der the contract are summarized below.
1. Since inception of the work, numerous meetings have been held
between top-level personnel of AEC and OVEC to discuss the prog-
ress of the work, pertinent plans and schedules, and various problems
of mutual interest. These meetings included studies made at the offices
of the American Gas & Electric Service Corp. to establish the accuracy
of OVEC estimates for amounts needed to complete the construction
work.
2. AEC has maintained a continuous record of the progress of the
construction work and of matters involved in either discussions or cor-
respondence with OVEC personnel, in order to acquaint the respon-
sible parties in AEC with the pertinent points of concern. This has
also been of value to new AEC employees who were assigned to this
work.
68
AEC CONTRACTS FOR ELECTRIC POWER
3. Weekly progress reports issued by OVEC supervising engineers
at the two plant sites, as well as similar reports relative to the trans-
mission lines, have been obtained by AEC to determine the current
status of the various phases of the construction work and any unusual
problems encountered.
4. AEC employees have made visits to each of the plant sites on
alternate weeks and have issued liaison reports showing the progress
of the work and the matters discussed with OVEC personnel. In our
opinion, however, the size of the powerplants, their distance from the
AEC Portsmouth area, and the ultimate effect of construction cost
on AEC's cost of power would have justified continuous onsite repre-
sentation.
5. Prior to the use of significant quantities of power, AEC assigned
its operating contractor for the AEC Portsmouth installation desig-
nated areas of responsibilities in connection with requirements, sched-
uling, metering, recording, and billing of power.
6. AEC made cost studies to determine the economic feasibility of
continuing the use of premium time to complete the powerplants at
an earlier date. On the basis of these studies, AEC felt that the ad-
vantages of earlier operation of the powerplants would not compensate
for the costs of premium time being incurred and suggested that
OVEC consider the curtailment of overtime. It is believed that this
suggestion influenced OVEC to decrease the work-week hours at the
plant sites shortly thereafter.
7. AEC has been able to negotiate with OVEC recently for several
substantial financial benefits to the Government. See exhibit B for
AEC's letter dated June 16, 1955, to the chairman of the Joint Com-
mittee on Atomic Energy wherein AEC has summarized these bene-
fits.
In conclusion, although AEC has not exercised the supervisory
activity normally performed by a Government agency over a cost-
type contract, our review indicates that, as a result of the AEC ad-
ministration procedures and the contractor's cooperation, the AEC
administration of the technical aspects of the construction phase has
been adequate.
Audit review
The AEC audit work started in June 1954, which was 20 months
after the date of the contract and at a point where approximately
$78 million had been expended of the then estimated cost of $371,-
184,000.
A review of AEC audit papers disclosed that a thorough and de-
tailed analysis of construction costs was made. Although the audit
was primarily directed toward determining that the contractor's repre-
sentations as to cost were bona fide expenditures, some functional
studies were performed. As a result of these studies, AEC made
recommendations for strengthening OVEC's internal controls. Also,
the AEC auditors made tests of OVEC controls over both cost-plus
and unit-price work performed by its contractors and was satisfied
with the reliability of these controls.
Our review and tests of the AEC audit work indicate that it was
adequately performed within the limitations of the scope established.
Also, our review and tests of OVEC's procedures indicate that OVEC
AEC CONTRACTS FOR ELECTRIC POWER
69
has established adequate controls over contractors' billings of both
cost-plus and unit-price work.
REVIEW OF CONSTRUCTION COSTS AND POWER BILLINGS
Construction costs as of September 30, 1955
Construction costs incurred as of September 30, 1955, totaled $317,-
378,294. The following breakdown by plant sites shows the relation
of these costs to total estimated cost of the project at that date.

Kyger Creek
plant
Clifty Creek
plant
Total project
Costs incurred…….
Outstanding commitments.
Estimated cost to complete..
Total estimated cost…-
$165, 594, 918
14, 549, 451
6, 307, 315
$151, 783, 376
23, 439, 086
9,766, 966
$317, 378, 294
37, 988, 537
16, 074, 281
186, 451, 684
184, 989, 428
371, 441, 112
Since September 30, 1955, the estimated cost to complete has been
reduced, and as of March 31, 1956, the total estimated cost of the
power facilities was $370 million.
In our verification of the construction costs as of September 30,
1955, we utilized the available reports and working papers of the AEC
audit staff, the OVEC internal auditors, and the OVEC independent
public accountants. We also gave consideration to the certificates per-
taining to construction costs, which were issued by the OVEC inde-
pendent engineers as required by the mortgage and deed of trust.
We traced reported costs to plant ledgers and tested accounts and de-
tailed billings to the extent deemed necessary to establish the fairness
of the costs. We visited the New York office of the American Gas
& Electric Service Corp. and the Chicago office of Sargent & Lundy
and reviewed the costs related to the cost-plus-fixed-fee contracts for
engineering service and procurement activities. We verified charges
under extra work orders and tested controls maintained for segregat-
ing cost-plus activities from unit-price and lump-sum work. In addi-
tion, we made surveys to determine the adequacy of controls pertain-
ing to timekeeping and warehousing.
Some of the points that came to our attention and which were re-
ported to AEC during our review are summarized below. Also sum-
marized are the pertinent AEC comments.
1. We were informed that OVEC's general construction contractor
at the Clifty Creek plant had made a refund of "several hundred
thousand dollars" at the completion of a recent job for the American
Gas & Electric Co. where profits were excessive. Since A. G. & E.
is the major sponsoring company of OVEC, we questioned whether
the A. G. & E. policy of renegotiating prices with its contractors at
the end of the project work will apply also to OVEC, particularly
if excessive profits are made.
AEC advised us that it has confirmed that the same policy will ap-
ply to OVEC and that it will attempt to ascertain, when the time
comes, whether OVEC has applied this policy and whether OVEC
has made a reasonable effort to recoup any excessive profits.
2. We learned that it is also a policy of A. G. & E. to dispose of
surplus items on construction to affiliate companies, usually at a sub-
70
AEC CONTRACTS FOR ELECTRIC POWER
stantial portion of the cost. We thought that it would be to the in-
terest of the Government if a similar policy was established between
OVEC and its sponsoring companies since it could possibly result in
considerable savings in the construction costs of a project of this size.
AEC's answer noted that OVEC, by letter dated April 27, 1955, had
advised AEC that it would dispose of surplus construction items not
only to the sponsoring companies but to the highest bidder for such
items and that detailed written procedures for disposing of surplus
construction items were being prepared.
3. We noted that one of OVEC's major contracts provides for "cap-
ture" of individual pieces of equipment if rental payments exceed
a certain percentage of its established cost. Our review disclosed,
however, that OVEC's records of payments were by type of equipment
instead of by individual pieces and that it might be difficult to in-
voke the "capture" provision because the records did not show rental
payments properly.
AEC's answer noted that OVEC has changed its records and method
of accounting so as to account for rental payments by specific piece
of equipment. AEC also advised us that its auditors have determined
that nothing had been lost because of this situation as of the time
of the change in OVEC's accounting method.
4. We found that, beginning in January 1955, material issue tickets
at the Clifty Creek plant were no longer being approved by OVEC's
engineering department. Since basically these tickets are requests
for material by contractor foremen, review and approval are essential
to control and insure back charging where appropriate.
AEC advised us that the approval of material issue tickets had been
inadvertently discontinued. In addition, AEC advised us that the
OVEC engineering department has changed its procedure to again
require the necessary review and approval and that it has also reviewed
and approved the material issue tickets that had previously been
missed.
Based on our review and testing of underlying OVEC records,
OVEC's internal controls, and the audit work performed by AEC,
OVEC, and OVEC's independent public accountants, it is our opinion
that the records through September 30, 1955, state fairly the costs
incurred in the construction of the two ÓVEC powerplants and asso-
ciated facilities.
Power billings as of June 30, 1955
We reviewed the metering and billing procedures and the related
records of AEC's operating contractor and OVEC. This review in-
cluded our observation of employees' reading and recording results
shown on AEC billing meters and our detailed testing of pertinent
records. We made a special analysis of sponsoring companies' out-
of-pocket costs applicable to interim power. In addition, we made
an audit of operating expenses including costs in connection with the
procurement, barging, and handling of fuel.
INDIANA
To Tanners Creek Stotion
of Indiang & Michigan
Elec Co
Sponsors'
Ownership
To Miami Fort
(The Cincinnati
Gas & Elec Co.)
138/330 kv
2-125 mva
2-125m
To Walter C. Bockjord Station
of The Cincinnatı Gas & Elec. Co
138/330 kv
2-125 myg
DEARBORN
Sponsors'
Ownership
330 kv
-
41.5 mi i double-cire, line
To Poddys Run
(Louisville Gos
& Elec. Ca)
6-18/330 kv
240 mva banks
60060
1200 me
JULY, 1953
33.5 mi 1 double-circ. line
IK.E.C.
OVEC
70.3 mi. I double-circ. line
330 kv
CLIFTY CREEK
Ohio River
EXHIBIT A

To Columbus and Southern
Chio Elsa Co.
O.V.E.C.
Sponsers
Ownership
72.1 mi. I double-circuit line
fotoped
مصر
71.8 mil double-circ, line
330 kv
PIERCE
Ohio River
138/330
150, mva
380 kv
X-533
To The
Ohio Power Co.
A.E.C
SUBSTATIONS
A.E.C. Ownership
X-930
онго
KENTUCKY
PORTSMOUTH AREA
A.E.C. PROJECT
49.3 mi I double-circ. line
50.4 mi. I double-circ. line
330 kv
5-18/330 kv
240 mve banks
MMMM
Portsmouth
1000 mm
尼
​KYGER CREEK
Ohio River
Sponsors' Ownership
To Philip Sporn Station
of Appalachian Elac. Power Ca
and The Ohio Power Ca
WEST
VIRGINIA
ONE-LINE DIAGRAM OF POWER SYSTEM FACILITIES
TO SERVE THE PORTSMOUTH AREA A.E.C. PROJECT
82318-56 (Face p. 71)
AEC CONTRACTS FOR ELECTRIC POWER
71
As of June 30, 1955, various types of power, as defined in the con-
tract, had been delivered and billed to AEC. The types of power,
periods of delivery, and amounts of billings are as follows:

Up to January 1955.
January 1955.
February 1955.
March 1955----
April 1955...
May 1955.
June 1955...
Period
Test power Permanent
power
Interim
power
$92, 316
123, 400
$492, 406
1,035, 500
$3,589, 468
1,901, 002
1, 199, 470
1,312, 904
Total bill-
ings
$3,589, 468
1, 993, 318
1,815, 276
2,348, 404
61, 675
1, 116, 533
2,439, 788
3, 617, 996
1, 443, 395
2, 603, 096
4, 046, 491
114, 011
391, 402
1,553, 988
5,641, 822
2,628, 069
4, 296, 068
15, 673, 797
Total..
21, 707, 021
Test power is power generated prior to placing a generating unit
into commercial operation. Although a rate for test power was not
established in the contract, AEC and OVEC negotiated a single
energy rate of 2.37 mills per kilowatt-hour. The amounts billed to
AEC for such power are credited to the construction cost of the pow-
erplant which generates the power. We believe that the agreed rate
is reasonable and that the credit to construction cost constitutes sound
accounting treatment in the cost records.
AEC started receiving permanent power under the contract on
February 15, 1955, the date that the first unit of each of the power-
plants went into commercial operation. As of June 30, 1955, only 4
of the 11 OVEC units were in commercial operation. During the
period covered by our review the billings for permanent power were
tentative and subject to adjustments, possibly in significant amounts.
One of the primary reasons that the billings were tentative is that
an arbitrary value had to be placed on the "plant in service" until
all construction is complete and actual costs are fully determinable.
Because of the tentative nature of the billings for permanent power,
we are not expressing an opinion on such billings at this time.
With respect to interim power, as previously discussed in detail
on page 58, our review indicated the possibility that recent additions
of generating facilities by some of the sponsoring companies might
have provided sources of lower cost interim power than had been
anticipated at the time the contract rate was established. AEC has
since been able to negotiate a substantial reduction in its rate for in-
terim power.
Based on our tests and verification of interim power billings, it is
our opinion that charges as of June 30, 1955, are in accordance with
the contract terms.
Also, it is our opinion that the controls exercised by AEC and its
operating contractor, during the period of our review, were adequate
to protect the Government's interest with respect to OVEC's billings
for power.
72
AEC CONTRACTS FOR ELECTRIC POWER
Hon. CLINTON P. ANDERSON,
EXHIBIT B
UNITED STATES ATOMIC ENERGY COMMISSION,
Washington, D. C., June 16, 1955.
Chairman, Joint Committee on Atomic Energy,
Congress of the United States.
DEAR SENATOR ANDERSON: Arrangements have been completed with our power
suppliers which will result in significant reductions in the cost of power to the
Commission at the Portsmouth and Paducah installations. These economies as
they affect each of these installations are presented below.
OHIO VALLEY ELECTRIC CORP. CONTRACT
As a result of negotiations with OVEC which began in the fall of 1954, the
energy component of the charges for interim power has been reduced from 6 mills
per kilowatt-hour to 4.25 mills per kilowatt-hour, effective as of May 1, 1955.
Based on our present schedules of requirements for interim power, it is estimated
that this rate reduction will result in savings to the Commission of approximately
$5,200,000.
Power supplied to AEC under the interim rate is purchased by OVEC from 15
sponsoring companies. The revised rate covering these deliveries to OVEC was
filed with the Federal Power Commission and was approved by that Commis-
sion on May 25, 1955, to become effective as of May 1, 1955.
In addition to this savings in interim power costs, OVEC has based its billings
for demand charges on the basis of averaging the maximum daily demands for
the month instead of using the maximum demand of the month. Resultant actual
savings to AEC through March 31, 1955, through this method of computing de-
mand charges, have amounted to more than $900,000.
OVEC has also affected economies in its financing cost which will reduce the
rate for permanent power to AEC delivered from the generating plants now
under construction. These are:
(a) Reduction in commitment fee: As a result of efforts made during the past
year to determine as early and as accurately as possible the definitive final
cost of the project, OVEC has reduced its present commitments for notes and
bonds by $42 million. The resulting reduction in commitment fees will reduce
the cost of facilities by an estimated $315,000.
(b) Reduction in interest rate from 4 percent to 35% percent on bank notes
and sponsors' notes: By order issued December 21, 1954, the Securities and Ex-
change Commission approved the application of OVEC in connection with the
reduction in interest rates on notes issued under the bank-credit agreement. As
approved, the interest rate is: (1) 4 percent prior to January 1, 1955; (2) 4 per-
cent on and after the AEC power-agreement termination date; and (3) 3% per-
cent on and after January 1, 1955, and prior to the AEC termination date, except
that in certain circumstances the rate may be increased not to exceed 4 percent
in the event AEC reduces its contract demand or OVEC releases AEC from the
liability for charges for specified quantities of power and energy under the power
agreement.
The effect of this refinancing will result in savings to the AEC in permanent
power costs estimated at $66,000 per year.
(c) Revision of equity financing: The Securities and Exchange Commission
on May 25, 1955, approved the request of OVEC for a revision in the plan of
corporate financing wherein additional bank loans would be secured not exceed-
ing $10 million at the prime commercial loan interest rate per 90-day maturities
(presently 3 percent per annum). Without relieving the participating companies
of their obligation to provide the additional $10 million equity capital now
pledged, the equity contribution will be deferred so long as this amount will
have been loaned to OVEC as interim debt. The 12 banking institutions, a part
of the 14 underwriters of the existing unsecured notes, have agreed to provide
up' to this sum, from time to time, evidenced by 90-day notes and the pledging
by OVEC of stock subscriptions of the participating companies. It is estimated
that under this new plan AEC will save approximately $1,200,000 per year in its
permanent power cost so long as this interim debt is available at the above
interest rate.
AEC CONTRACTS FOR ELECTRIC POWER
73
Based on the latest estimate of capital requirements of the project (cost of
facilities plus working and other capital) of $388,419,000, and taking into ac-
count the savings in permanent power costs noted above, the estimated increase
in net capability of the stations and fuel as presently estimated at 19.39 cents
per million B. t. u., the present estimated cost to AEC for permanent power at
98 percent load factor is 3.79 mills per kilowatt-hour. This compares with the
initial estimated cost of 3.83 mills per kilowatt-hour or an annual difference
estimated at $640,000.
ELECTRIC ENERGY, INC., CONTRACT
The energy component of the interim power rate for power supplied from
Joppa units Nos. 1 to 4, inclusive, during the period prior to operation of unit
No. 6, has been reduced effective March 1, 1955, from 6 mills per kilowatt-hour
to a charge equivalent to the costs per kilowatt-hour payable by the sponsoring
companies for such power. This reduction in rate will result in savings in in-
terim power costs to AEC estimated at $1,100,000.
Sincerely yours,
K. E. FIELDS, General Manager.
R. W. Cook, Deputy.
с
UNIVERSITY OF MICHIGAN
3 9015 00131 0161
L..
162
+962
DATE DUE