VIII. Combustion Engineering Issues

This issue concerns whether SCE should have filed suit against CE over the original steam generators. SCE argues that the other parties have not shown that SCE had a basis for a suit, that it would have prevailed in such a suit, or obtained a settlement, or what any resulting cost recovery would have been. TURN argues that SCE has failed to seek recovery from CE related to tube degradation through litigation or settlement, and has offered no plausible explanation of this failure.

TURN says that the root cause of steam generator tube degradation is the susceptibility to a variety of degradation mechanisms of the mill-annealed Inconel-600 (Alloy 600) steel used in the tubes.³¹ It represents that, by the early 1980s, SCE was aware that Alloy 600 was susceptible to degradation due to discoveries at other CE plants, and problems with tube degradation at Unit 1.³² TURN states that, by the mid-1980s, steam generators that used Alloy 600 had been replaced at six domestic nuclear plants, and by 1985 SCE was on notice that Alloy 600 was not recommended for steam generators by industry experts. TURN represents that, by the 1990s, stress corrosion cracking was recognized as a serious problem at other CE plants, and SONGS began experiencing noticeable degradation in 1993 and 1995. It states that by 1996, SCE's own analyses revealed that SONGS was unlikely to operate for even 30 years without exceeding NRC imposed plugging limits. For these reasons, TURN states that SCE knew or should have known that the steam generators would need replacement.

TURN states that owners of other CE plants aggressively sought compensation from CE for tube degradation. TURN also states that settlements were obtained for 9 of 13 units for which suits were filed against CE. Of the remaining four units, one was shut down in part due to steam generator degradation, and two have not decided whether to replace their steam generators. As a result, TURN states that with one exception SCE is the only owner to have failed to secure compensation in the course of replacing steam generators.

TURN states that a suit filed by Consumers Power Company (Consumers Power) in the mid-1970s was settled for $36 million in cash, goods and services, and cancellation of about $4 million in claims by CE. In addition, CE shared 50% of the cost of fabricating two replacement steam generators. TURN represents that a suit filed by Florida Power and Light Company (FP&L) in 1995 was settled, but the terms were not made public. TURN says that Arizona Public Service Company (APS) took aggressive action against CE in 1995 regarding the Palo Verde Nuclear Power Plant (Palo Verde), of which SCE is a minority owner, and received substantial compensation in 1996. TURN also states that a substantial number of utilities filed suits against Westinghouse over problems concerning the use of Alloy 600 in steam generators, of which all but three were settled. The settlement terms were not made public.

TURN argues that the FP&L and APS suits occurred long after the units began commercial operations; 19 years for FP&L, and 9 years for APS. Therefore, TURN says that it is reasonable to believe that the FP&L and APS suits took place long after the warranties in their Nuclear Steam Supply System (NSSS) contracts could have expired.³³

SONGS was originally licensed to operate until 2013. TURN notes that SCE has made the argument that, until the license lives were extended to 2022 as a result of its 1999 application to the NRC, SCE believed that the steam generators would last until the end of their license lives. TURN states that the NRC began granting 40-year operating licenses in 1982, which included recapture of time spent during construction. Therefore, TURN represents that at the time SONGS became operational, SCE knew that license recapture would be granted by the NRC that would allow a 40-year service life after the beginning of commercial operations. TURN points out that in its 1999 recapture application, SCE stated that SONGS was designed and constructed for 40 years of operation. TURN also states that the fact that SONGS was not designed for steam generator replacement, suggests that SCE relied on statements by CE regarding the 40-year design life of the steam generators.

TURN states that the terms of a 1987 settlement between SCE and CE, that guaranteed repairs of batwing tube problems through 2023, indicate that SCE assumed that it would be granted license recapture by the NRC.³⁴ TURN also points out that a 1988 report prepared for SCE on steam generator corrosion cites the assumption of a 40-year operating life for SONGS. For these reasons, TURN states that SCE assumed a 40-year operating life for SONGS, and that any claims by SCE that it believed, until the mid-1990s, that SONGS would have only a 30-year operating life are not credible.

TURN argues that SCE had the opportunity to raise claims against CE for breach of the warranty in the NSSS contract, and for fraud in inducing SCE to enter into the contract either by misrepresentation or non-disclosure, or in the post-contract period. TURN states that SCE represented that any tolling agreement extending the time for filing suit regarding the NSSS contract would have expired upon execution of the 1987 settlement.

TURN states that the SONGS NSSS contract specified a design life of 40 years, and that all NSSS components not easily replaced or repaired would be capable of performing their intended functions throughout the 40-year design life without more than routine maintenance. TURN argues that since the FP&L and APS claims stated that CE made representations of a 40-year operating life, it would be reasonable to assume that CE made similar claims to SCE. TURN says that the FP&L and APS claims asserted that the 40-year design life constituted an express warranty of future performance, that was not negated by other provisions of the NSSS contract, and that since the steam generators could not satisfy the design life, they were not suitable for their intended purpose. TURN asserts that SCE could have made similar claims, but failed to do so.

TURN states that in 1985, SCE decided to seek compensation from CE regarding batwing and tube annealing problems. The matter was resolved in a settlement in 1987 (1987 settlement). TURN states that in settling these claims, SCE failed to seek legal or financial protections from CE related to the foreseeable consequences of other tube degradation mechanisms that were known at the time to affect steam generators with Alloy 600 tubes. For this reason, TURN represents that the 1987 settlement was unreasonable.

TURN says SCE should have known at the time of the 1987 settlement that the steam generators might not achieve the 40-year design life. TURN states that minutes of the SONGS Board of Review meeting at that time cite compensable damages of $5 million for additional inspection and repair costs, although the settlement included only $750,000 in cash. Additionally, the SONGS Board of Review was told that SCE intended to be protected from future cost exposure by negotiating a limited warranty extension for the steam generators, although no such warranty extension was included in the settlement. TURN states that SCE did not pursue the issue of the suitability of Alloy 600 for steam generator tubes after the 1987 settlement, and did not obtain a tolling agreement that would have permitted an extension of statutory or contractual warranty periods. Therefore, TURN asserts that either the 1987 settlement jeopardized the viability of future claims, or SCE was negligent in its management of its relationship with CE.

In 1993, SCE reached a settlement (1993 settlement) with CE over deficiencies in the steam generator feedrings that were initially identified in 1981, and that led to their failure in 1990.³⁵ The settlement provided $4 million in cash, and discounts on the prices of certain goods and services. Since this settlement was not related to Alloy 600 tube problems, and was related to a pre-existing dispute dating back to 1981, TURN represents that it does not provide a basis for reaching a conclusion on the reasonableness of the 1987 settlement.

As a result of damage to four reactor coolant pump heat exchangers (heat exchangers) in 1993, SCE and SDG&E filed suit in 1996 (1996 suit) against CE alleging that it provided improper testing procedures. CE raised a counterclaim asserting a breach of the NSSS contract by SCE and SDG&E due to failure to maintain property insurance. SCE and SDG&E jointly argued that since the NSSS contract had been completely performed in 1983/84, they had no continuing obligations to CE. Based on these arguments, the court dismissed the ongoing applicability of the NSSS contract and related theories of negligence and negligent misrepresentation. As a result, TURN states that future warranty claims are likely estopped, including those related to Alloy 600. TURN also argues that the court ruling did not prohibit SCE from raising claims of fraud.

For all of the above reasons, TURN argues that the Commission should impose a disallowance for SCE's failure to pursue litigation against CE regardless of whether the SGRP is approved, because ratepayers will be harmed due to the shortened lives of the original steam generators, and compensation could have been obtained from CE. TURN states that the amount of the disallowance should be the average of the amounts received by Consumers Power and APS, in 2004 dollars. It recommends that the disallowance be imposed as a reduction in project costs if the SGRP is approved, or as a reduction to recoverable SONGS related expenses if it is not approved.

Aglet and ORA support TURN's positions regarding SCE's dealings with CE. Aglet agrees with TURN that SCE's imprudent actions will lead to unreasonable costs whether the SGRP is performed or not.

SONGS began commercial operation in 1983 and 1984, respectively. During the steam generator warranty period specified in the NSSS contract, SCE identified two steam generator problems. The first problem involved improper annealing of 86 tubes in the steam generators. The second problem involved tube wear caused by vibration of the batwings. In 1985, SCE notified CE that it considered CE to be responsible for fixing the annealing and batwing problems. In addition, SCE deducted amounts from CE invoices for work pursuant to the warranty provisions.

Subsequently, the owners of SONGS entered into the 1987 settlement. As a result of the 1987 settlement, CE inspected all steam generator tubes, reviewed relevant documentation and plugged the affected tubes. In addition, CE provided SCE with a $750,000 credit to cover the cost of plugging additional tubes that may experience batwing wear during future operation. CE also agreed that CE would perform, at its own expense, any plugging of tubes that became necessary as a result of improper annealing or batwing wear prior to the end of operations or 2023, whichever comes first.

The 1987 settlement addressed known problems at SONGS with annealing and batwings. SONGS had not experienced stress corrosion cracking or other unanticipated corrosion at that time. The fact that the 1987 settlement did not address problems that had not occurred at SONGS at that time does not make it unreasonable. In addition, the record shows that the 1987 settlement did not provide a broad release of potential steam generator corrosion claims against CE. We also note that SDG&E was a party to the settlement. SDG&E's participation in the 1987 settlement indicates that it too thought the settlement to be reasonable. For the above reasons, we find that SCE acted reasonably with respect to the 1987 settlement.

The 1993 settlement regarding steam generator feedrings provided SCE with $4 million in discounts on certain goods and services to be purchased from CE in future years. In the settlement discussions, CE proposed that the settlement include a release of claims related in any way to the steam generators that SCE either knew, suspected, or could have come to know about in the exercise of due care. The 1993 settlement did not include such a release. This indicates that CE recognized that SCE had not previously provided such a broad release.

In 1993, SCE conducted tests of the heat exchangers for Unit 2. SCE determined that they were damaged as a result of the testing. SCE subsequently determined that CE had improperly prepared the drawings and specifications the test procedure was based on. As a result, SCE and SDG&E filed the 1996 suit against CE seeking compensation for the damage. CE raised a counterclaim asserting a breach of the NSSS contract by SCE and SDG&E due to failure to maintain property insurance. SCE and SDG&E jointly argued that since the NSSS contract had been completely performed in 1983/84, they had no continuing obligations to CE. The court found, among other things, that the NSSS contract had been performed, and dismissed the suit.

In connection with the 1996 suit, it was SDG&E's position, as well as SCE's, that the NSSS contract warranty had expired. Therefore, SDG&E agreed with SCE's position at that time. In addition, the court's decision indicates that the NSSS contract had expired before that time. Therefore, we find that SCE acted reasonably in making that assertion.

The above history demonstrates that on a number of occasions, beginning shortly after the commencement of commercial operations, SCE pursued claims against CE, some of which were related to the steam generators. Therefore, we find that SCE would have pursued claims against CE regarding the steam generators if it reasonably believed it had a valid claim.

SONGS is owned by SCE, SDG&E, Anaheim, and Riverside. As such, although SCE is the operating agent, it is reasonable to assume that SCE's actions regarding CE were taken with the knowledge of the other owners. SDG&E is answerable to its shareholders, and Anaheim and Riverside are answerable to their citizens for actions taken by them or on their behalf by SCE. The record shows that, for example, the 1987 settlement was discussed by the SONGS Board of Review which consists of members representing each of the owners. Therefore, the other owners could and should have been aware of SCE's actions regarding CE. We have no reason to believe that the other owners have or had any incentive not to sue CE concerning the steam generators if they reasonably believed there was a basis for such a suit with a reasonable chance for a favorable outcome. There is nothing in the record that indicates that the other owners disagreed with SCE's actions regarding CE.³⁶ In addition, the record in this proceeding indicates that SDG&E is more than willing to make it known when it disagrees with SCE regarding matters related to SONGS. Thus, it appears that the other owners agreed with SCE's actions regarding CE. This in turn supports the reasonableness of SCE's actions regarding CE. As a result, we find that SCE acted reasonably with regards to CE, including the 1987 settlement, the 1993 settlement, and the 1996 suit.

Not withstanding the above, if we were to assume that SCE should have sued CE, we would have to assume that the result, if any, would have been a settlement, because the record does not indicate that any of the suits against CE were resolved other than by a settlement. Of the settlements, the record only indicates the results of two: Consumers Power and APS. The Consumers Power suit concerned damage as a result of the use of phosphate in the water treatment. This damage mechanism was not present at SONGS. The APS suit concerned a design defect in the steam generators that was unrelated to Alloy 600, and is not present at SONGS. Therefore, the results of these settlements provide no basis for determining the value of a settlement had one been reached. The results of all other settlements are confidential. As a result, there is no basis in the record for determining what the value of a settlement would have been if SCE had sued CE and reached a settlement. For all of the above reasons, we will not adopt TURN's recommendation.

³¹ Alloy 600 is a nickel-based steel alloy. The tubes were annealed at the steel mill after they were formed. Annealing is a heating and cooling treatment used to remove the internal stresses caused by forming, and alter the physical properties of the steel.

³² Unit 1 had steam generators constructed by Westinghouse Electric Corporation (Westinghouse) of Alloy 600.

³³ The NSSS includes the steam generators. Therefore, the NSSS contract includes the design and manufacture of the steam generators.

³⁴ Batwings are tube support structures within the steam generators.

³⁵ The steam generator feedring is component of the steam generator that circulates feedwater within the steam generator. Feedwater is the water that is converted into steam to turn the turbines.

³⁶ SDG&E and Anaheim are parties to this proceeding.