Metropolitan Edison: A Utility Recharged

Posted: June 23, 1986

READING — Five years ago, Metropolitan Edison Co. was the ugly sister among Pennsylvania's electric utilities. Now, she's the belle of the ball.

Nearly bankrupted by the accident at Three Mile Island, its finances in tatters, Met Ed was both pitied and censured in the early '80s. Consumers and regulators damned its management, and other utility executives clucked sympathetically, thankful that what had happened to Met Ed hadn't happened to them.

And what had been half of the company's working assets sat quietly in the middle of the Susquehanna River, producing nothing, a billion-dollar piece of radioactive sculpture.

Today, Reading-based Met Ed, which sells electricity to 385,000 customers in eastern and south-central Pennsylvania, is sitting pretty. Its customers pay the region's lowest electric bills. Stockholders in its parent company have seen their shares quadruple in value since shortly after the Three Mile Island accident. Other utilities are lining up to do business with it, and even its biggest former opponents praise its fresh approach to the power business.

Forced by the March 1979 accident at Three Mile Island to abandon costly new power-plant construction and prodded to make changes in both the style and composition of its management, Met Ed, like the other two operating subsidiaries of General Public Utilities Corp., has apparently landed on its feet. And, assuming no more unpleasant surprises from either of Three Mile Island's two nuclear plants, Met Ed's prospects have not looked this good for years.

The man picked to preside over all this happiness, Fred D. Hafer, readily admits that much of his company's current good fortune is a function of Pennsylvania's current power glut; in short, Met Ed is a buyer in a buyer's market. Without enough of its own working power plants to meet all of its customers' needs, Met Ed must buy electricity wholesale from other companies or tap into the regional power pool, known as the PJM (for Pennsylvania, New Jersey, Maryland) grid.

While it used to be an article of faith among utilities that buying power was less desirable than making it yourself, that has changed. "Prices on the PJM are so attractive, you'd be silly not to take advantage of it," Hafer said.

The growth of conservation and the dropoff in economic activity during the early '80s left Met Ed's neighbors, such as Pennsylvania Power & Light Co. of Allentown and Philadelphia Electric Co., with new generating plants for which there is no immediate need. In the Pittsburgh area, the collapse of the steel industry has cut Duquesne Light Co.'s sales back to 1971 levels, just as the company is finishing two nuclear additions.

Add to that the prospect of cheap hydroelectric power from Canada and a completely unexpected boom in home-grown cogeneration from waste-coal and trash-to-steam plants, and you have a state where it's easy to shop around. As Hafer explains it, he doesn't even have to go looking for power to buy. The sellers come to him, as PP&L did after the state Public Utility Commission denied it the right to charge its own customers for much of the cost of building the Susquehanna 2 nuclear plant.

"PP&L could offer to sell us power from Susquehanna 2 at or below their cost, say for about six cents a kilowatt-hour," said Hafer, who took over as president of Met Ed in April. "But that's still twice the PJM rate, which is now about three cents."

BUYING CHEAP POWER

Unlike PE, PP&L and Duquesne, which have had to ask for large, unpopular rate increases to meet the high cost of building their plants, Met Ed can keep its own rates down by simply buying the cheapest surplus power around. Not that Met Ed hasn't sought its own rate increases - a request for a 9.75 percent boost was filed with the PUC on June 10 - but those have been offset by recent reductions to reflect the lower price of oil and purchased power.

By contrast, PE's current request for higher rates to pay for Limerick 1, likely to push Philadelphians' rates up more than 15 percent over three years, would likely not be offset by cheaper PJM costs, because Limerick virtually eliminated PE's need for grid power.

Even if the PJM rate, which is heavily influenced by oil prices, rises again, Met Ed officials feel that shopping around is still infinitely less risky and costly than building new plants, with all their financial, legal and safety problems.

Hafer describes the new Met Ed credo: "The first thing that we want to do is provide the best possible service to customers and continue to be able to meet the new demand. The last thing we want to do is build a generating station to accomplish that."

That strategy still leaves Hafer, who was rate manager for all of GPU before being named president of Met Ed, with a number of options.

SHIFTING PATTERNS OF USE

One, called load management, means encouraging consumers to shift patterns of use so that demand is less heavily concentrated at peak hours of the summer and winter. Because utilities have to be able to provide as much power as it takes to meet peak demand, even if that means generating plants sit unused most of the rest of the time, lowering those peaks means more efficiency and less cost per kilowatt-hour.

Load-management programs - lowering rates for steel mills that operate at night, for example, or homeowners who wash clothes during off hours - currently shave about 424 megawatts from Met Ed's peaks, the company says. That alone means one less mid-sized plant to build. And the company says that reducing its peak load by one kilowatt costs about $65, compared with the $2,000 to $3,000 per kilowatt it costs to build a new plant.

Another part of the Met Ed plan involves buying power from cogenerators and independent power developers, such as trash-to-steam plants. Federal and state laws are strongly encouraging public and private groups to build more and more such plants, which will help save landfill space at the same time they supply power to electric utilities.

Hafer says that growth in cogeneration, along with small dams, coal-waste plants and others, has taken the utility industry by surprise. "There is more and more cogeneration coming out of the woodwork," he said. "We never imagined just how big a piece it could provide."

As a result, plans for a coal-fired plant to be built in the mid-1990s are being pushed back, possibly until after the turn of the century.

REMEMBERS REPUTATION

Not worrying about construction means that Hafer and his colleagues can devote themselves to repairing all the pieces of Met Ed that were damaged or neglected as a result of the TMI accident. Those include not only transmission lines, transformers and the like, but also the company's reputation in its community.

Hafer, a West Reading native who joined Met Ed as a 22-year-old Drexel University graduate in 1962, recalls that the company once enjoyed a sterling reputation among its customers and employees. "When I was growing up, Met Ed was one of the absolute gems of the community."

But like many U.S. utilities, Met Ed's high standing began to slip in the early '70s, when rising fuel prices, rising capital costs, rising operating costs and falling growth rates prompted the first serious rate increases in the company's history.

Before that, "everything was going great," Hafer said. "This was an industry that had a declining cost. The more you added, the cheaper the

average price was because the new ones were so much more efficient and less expensive than the old ones. Rates and rate-making tended to be a part-time job - it wasn't that big a deal."

But as rates climbed, they became a much bigger deal. The state regulatory process, which had meant little of substance for most of its history, suddenly became a combative arena, with a new state agency, the Office of the Consumer Advocate, challenging utilities' figures and questioning their management's prudence.

Hafer, who worked his way up through GPU's ranks as treasurer and rate manager, frankly admits, "We weren't prepared to deal with it.

UNFAMILIAR TERRITORY

"The company never had a rate case, so how would we have anyone here who knew how to deal with it? And by the way, the utility commissions were in precisely the same situation."

The groping that resulted was seldom friendly. The consumer advocate's office often felt bypassed or ignored by the company, and PUC members, most of whom had little or no experience with utilities, were often confused by the arcane complexities of the business, according to some who were active in those years.

But if rate increases tarnished Met Ed's reputation, TMI shattered it. Threats of a meltdown or serious radiation leak were followed by months of disclosures involving substandard management, deceptive practices and cheating among plant personnel. Meanwhile, with its largest and most expensive power plant off line, Met Ed was quickly going broke.

Aside from the emergency costs of containing the accident and dealing with a frightened populace, the utility was spending $25 million a month for replacement power, Hafer recalls. And the plant itself, crippled just days after it first went into full-scale operation, hadn't been paid for. Financial doomsday scenarios began to dominate executives' discussions.

"We had some very tough meetings in those early days," Hafer said. "Is bankruptcy inevitable? Is bankruptcy possible? Is bankruptcy desirable? What happens after that? The fact is, nobody knows."

'FIRMLY ANCHORED'

State regulators, instead of being simply headaches for the company, now held the power of life or death over it. Because there was no legal precedent for charging customers for a lifeless nuclear plant, any rate increases had to be negotiated, mainly on the basis of what the company needed to survive.

"We agreed to give them cash flow but no earnings," recalled David Barasch, then an assistant consumer advocate and now head of the state agency. ''The regulatory process kept them firmly anchored - but with the water up to their necks."

Eventually, however, the water began to subside. An agreement was reached dividing the costs of cleaning up TMI-2 among customers, stockholders, the federal government and other electric utilities. The GPU companies trimmed costs, cut out non-essential activities and workers, and eliminated shareholders' dividends - a situation that continues today.

They also abandoned work on a nuclear plant at Forked River, N.J., a move that GPU executives now say turned out to be a life-saver, given the increased costs of nuclear power. "Thank God we canceled Forked River," GPU chairman William G. Kuhns recently told stock analysts. "With the price of oil and gas where it is, nuclear doesn't enjoy an advantage anywhere in the country."

Hafer sees his job largely as one of repairing the trust broken between Met Ed and its community.

'WE DIDN'T KNOW'

"The biggest problem following the accident was that the people felt betrayed. They felt, 'You never told me this was possible.' And it was absolutely true we did not ever tell them, because we didn't know," he said.

According to those who have worked with and against him, Hafer brings to his job an ability to both win friends and influence people. "A solid, steady performer who's very good at talking on his feet," said one colleague, who noted that Hafer's polished social skills served him well as one of GPU's representatives on Wall Street. "There is a social element, let's face it, to the financial side of the business," the colleague said.

Barasch, who argued across the negotiating table from Hafer for days on end during the depth of Met Ed's crisis, calls him a "very pragmatic, down-to- earth, do-what-has-to-be-done sort of guy."

"He's not what I would call a true believer, in that he's not wedded to any particular way of making money," Barasch said. He called Hafer's ascension to the presidency of Met Ed "a positive development for the company. Fred's more capable of being a new-wave manager."

Others inside the company also see his move to Met Ed as a possible signal of bigger things. With GPU chairman Kuhns expected to retire not long after reaching 65 next April, there is likely to be at least one top-level opening at the company's Parsippany, N.J., headquarters. And Hafer, one insider notes, is among those "perceived to have done a good job in the post-accident period."

Hafer doesn't deny that his current job could be a "step on the ladder," but he says he's concentrating on his current job. And that, he says, is "to make sure that when we have a problem in the future - and we will, of some kind - that the public doesn't look at us in amazement and feel betrayed."

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