June 26, 2003
Stephen M. Cutler, Director of Enforcement
Division of Enforcement
Securities and Exchange Commission
450 Fifth Street NW
Washington, D.C. 20549-0213
Re: Petition for Enforcement under the Securities Acts and Rules against
FirstEnergy Corp, 76 S. Main St, Akron, OH 44308
www.firstenergycorp.com.
Dear Mr. Cutler:
Ohio Citizen Action submits this petition for enforcement under the Securities Acts against FirstEnergy Corp. (FirstEnergy) and its management. Ohio Citizen Action is a statewide environmental organization, with 100,000 dues paying members. We submit this petition for enforcement on behalf of our members and to promote the interest of all FirstEnergy shareholders in fair disclosure of issues relevant and material to their investments.
The Davis-Besse nuclear power plant, located in Oak Harbor, Ohio, closed in February 2002 to conduct a government mandated inspection and to refuel. During the inspection, the company identified serious corrosion of the reactor pressure vessel. The plant has been closed ever since.
Ohio Citizen Action alleges FirstEnergy management omitted material information from shareholders and financial analysts regarding degradation of the Davis-Besse reactor vessel head in 2000 and 2001.
In addition, Ohio Citizen Action alleges that the management repeatedly misled stockholders about Davis-Besse’s readiness for restart.
Ohio Citizen Action alleges violation of SEC rules regarding disclosure
of matters relating to the Davis-Besse nuclear power plant. Specifically—
1. Regulation S-K Item 101 requires "appropriate disclosure
also shall be made as to the material effects that compliance with Federal,
state and local provisions which have been enacted or adopted regulating
the discharge of materials into the environment, or otherwise relating
to the protection of the environment, may have upon the capital expenditures,
earnings and competitive position of the registrant and its subsidiaries."
2. Regulation S-K Item 303 requires Management Discussion and Analysis,
"where a trend, demand, commitment, event or uncertainty is both
presently known to management and reasonably likely to have material effects
on the registrant’s financial condition or results of operation."
Background
1. On March 6, 2002, Davis-Besse employees discovered a 5-by-7-inch
cavity on the reactor pressure vessel head. Boric acid had leaked through
cracks in control rod drive mechanisms (pipes) and eaten through six inches
of carbon steel, leaving only three-eighths of an inch of a stainless
steel cladding to seal the reactor. Tests show that the stainless steel
was cracked and warped from the 2,000 pounds per square inch of pressure
coming from the reactor pressure vessel.
2. The Nuclear Regulatory Commission (NRC) has since estimated
that had the cavity gone undiscovered, a rupture would have taken place
within one or two years (NRC Inspection Report 50-346/2003-16).
3. The non-profit, public interest group Union of Concerned Scientists
has compiled compelling evidence outlining the half-truths and misleading
statements made by FirstEnergy to the NRC regarding the condition of the
Davis-Besse reactor (attached).
In summary—
In the fall of 2001, the NRC issued Bulletin 2001-01, a safety notice,
asking 12 plant owners to close their plants and look for highly suspected
nozzle cracking by December 31, 2001. Ten of the plants complied with
this order. D.C. Cook, owned by Indiana Michigan Power Co., provided evidence
to regulators proving it had already completed the inspection work prior
to the NRC’s order. FirstEnergy launched a campaign to persuade the
NRC that Davis-Besse was safe to operate through March 2002.
Between September and November 2001, FirstEnergy made the case in writing
and in person to the NRC that it had thoroughly inspected the head of
the reactor and was confident that the reactor was not in jeopardy of
cracking or leakage.
Facts show that FirstEnergy employees could not and did not thoroughly
inspect the reactor head because there were significant structural impediments
to the visibility of the head making a thorough inspection impossible.
For example, during the February 2002 inspections, company workers found
900 pounds of boric acid deposits on the reactor pressure vessel head.
4. In December 2001, after FirstEnergy had convinced NRC officials
to postpone an inspection of Davis-Besse and three months prior to the
announcement of the degradation, FirstEnergy ordered a new lid for the
Davis-Besse reactor.
5. On February 16, 2002, FirstEnergy closed Davis-Besse for refueling
and the mandated inspection.
6. On March 7, 2002, FirstEnergy announced the discovery of the
cavity on the reactor pressure vessel.
7. Among many investigations subsequent to the discovery of the
corrosion, the Nuclear Regulatory Commission's Office of Investigations
is currently conducting a investigation into whether or not FirstEnergy
acted criminally when it withheld information from the NRC and operated
the plant with an unacceptable margin of safety.
8. The cost so far to shareholders is approximately $450 million
for repairs and replacement power through June 2003, with a firm restart
date not yet known.
Failure to report material information
1. In 1999, Davis-Besse workers started identifying boric acid
particles clogging the air filters in the reactor vessel containment building.
The boric acid forced workers to change the air filters every other day.
Normally, filters are changed every month.
2. In April 2000, Davis-Besse plant workers took a photograph of
the reactor showing a virtual river of white boric acid and red rust from
carbon steel corrosion flowing down the side of the troubled reactor vessel
head (attached). This photo, known as the "red photo" gained
prominence in August 2002 when the Cleveland Plain Dealer featured it
in a story about Davis-Besse.
3. In fall 2001, FirstEnergy management misled the Nuclear Regulatory
Commission and withheld vital information about the condition of the reactor
by not reporting the clogged air filters and providing a copy of the "red"
photograph.
4. By misleading and lying to the NRC in fall of 2001, FirstEnergy
gave stockholders misleading information that Davis-Besse was in safe
working condition. This misinformation put stockholders investments in
jeopardy, because an accident at Davis-Besse would be disastrous financially.
5. Since the discovery of the cavity, FirstEnergy and the NRC have
identified multiple "design" problems with the emergency cooling
system. These are flaws that have existed since the plant was built and
most assuredly guarantee that had the reactor pressure vessel burst, Davis-Besse
would have suffered a Chernobyl-like meltdown.
Failure to provide realistic "restart" time frame
1. Since March 2002, FirstEnergy and the NRC developed a lengthy
list of items that must be repaired prior to Davis-Besse being ready to
restart.
2. Despite this lengthy list and the amount of work to be completed,
FirstEnergy has thus far named 15 restart dates or time frames for restart
since March 2002 (attached).
3. This misrepresentation of the facts has given stockholders and
industry analysts unrealistic predictions for when or if this plant might
ever be ready to start producing electricity again.
Request for Enforcement
Ohio Citizen Action requests the SEC to pursue a full investigation followed by civil and criminal prosecution of FirstEnergy Corp. and its officials for each violation identified by the agency under the Securities Acts and rules and regulations.
Respectfully submitted,
Amy K. Ryder
Cleveland Director
|
The Plain Dealer, December
1, 2002
The "red photo"  |
Union
of Concerned Scientists Memorandum to U.S. Attorney for the Northern District
of Ohio
Davis-Besse
restart dates