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Devil in a New Dress

power plant
Robert Scheer

Smoke on the Water:The PG&E plant at Moss Landing fuels the Santa Cruz area, but ratepayers here still pay for the Diablo Canyon fiasco.

After costs spun out of control, PG&E's Diablo Canyon nuclear power plant became a poster child for corporate welfare--and you may have already donated several hundred dollars to the cause

By Christopher Weir

In what would seem to be a major boon to ratepayers, the California Public Utilities Commission has pledged to phase competition into the electricity market in 1998. But in a contrary decree, CPUC also has declared that ratepayers will cover the costs of the Diablo Canyon nuclear power plant to the bitter end.

Whereas PG&E's "recovery" on the ill-fated $5.6 billion plant has been factored for years into electricity rates, it is now poised to accost ratepayers in the form of "competition transition charges," which will most likely appear as a separate line item. In addition, electricity produced by Diablo Canyon will continue to be subsidized at profits beyond market prices, ensuring that real competition will remain a concept rather than a reality for years.

"The status quo," CPUC senior analyst Robert Kinosian says, "is that PG&E will still get to charge ratepayers the full cost of Diablo." In which case PG&E would be guaranteed "full recovery of its investment, plus a level of profits."

The advent of deregulation and a renewed competition within the power industry provided an opportunity to reconsider this "status quo" of expensive nuclear subsidies. Instead, the status quo was reinforced, which puts a new spin on a largely ignored question: Why should ratepayers shoulder the full burden of a power plant whose dreadful debt is the product of corporate misadventure?

Developmentally Challenged

PG&E PLANTED its first full-scale atomic flag on Bodega Head, an arching coastal monolith in Sonoma County. But after a few years of site excavation and proto-activist wrangling, the project was doomed by the ominous presence of the San Andreas Fault, which angles stealthily beneath the shallow, mud-swollen Bodega shoreline.

By 1967, PG&E had targeted San Luis Obispo County's desolate Diablo Canyon for the siting of twin 1,100-megawatt reactors. Despite repeated warnings from a local university geologist in 1970 that a pattern of local earthquakes indicated the presence of a large offshore fault, PG&E did not perform adequate offshore seismic analyses (according to a CPUC report, such analyses would have cost a mere $65,000).

In fact, two Shell Oil geologists had pinpointed in 1969 what was to be christened the Hosgri Fault, located less than three miles from the site. By the time the United States Geological Survey called the Hosgri to PG&E's attention in 1973, the power plant's construction had reached an irreversible--and some would say convenient--momentum. "We must face the fact," concluded activist David Pesonen, "that either PG&E is unable to find an 80-mile-long earthquake fault at the doorstep of its Diablo Canyon, or it has deliberately covered up its discoveries."

Contrary to general anti-nuke alarmism, there was never the threat that the Hosgri Fault would disgorge Diablo Canyon and expose its reactor cores to the heavens. But the proximity of a fault capable of delivering a seven-plus magnitude quake near the site did complicate engineering factors and further raise the specter--however remote--of a catastrophic loss-of-coolant accident. What ensued was a maelstrom of costly retrofits, regulatory ratcheting and frenzied protest.

In 1981, as Diablo Canyon was finally poised for startup, an enraged Nuclear Regulatory Commission revoked the plant's low-power testing license after discovering systemic design and modeling errors, including a reversal of unit blueprints during implementation of seismic support braces.
(A Los Angeles Times science writer labeled the blueprint snafu "one of the more embarrassing goofs in the annals of American industry.")

Again, PG&E was forced to go back to the multimillion-dollar drawing board. It wasn't until 1984, 15 years after groundbreaking, that Unit 1 generated its first kilowatt.

Certainly, some of Diablo's delays and debts were incurred in the name of doomsday rhetoric, regulatory indecision and disruptive litigation. But PG&E's claim that these were more significant than the company's own mistakes was misleading.

A 1987 CPUC Division of Ratepayer Advocates report recommended that PG&E be held responsible for $4.4 billion of the plant's cost.

Noting PG&E's "deficient" engineering and quality assurance procedures, as well as the fact that the plant "had to be designed and completed three times," the report concluded that ratepayers should not have to pay for the "unnecessary costs of designing and completing Diablo Canyon."

But in the wake of past and recent CPUC rulings, the reality is just the opposite.

Dollars and Sense

When it first announced plans in 1994 to deregulate California's electricity market, the CPUC endeavored to redefine, in its own words, a "fragmented, outdated, arcane and unjustifiably complex set of regulatory policies." Last December's commission ruling, and April's proposal by state utilities, established a framework for the stagger toward an open energy market. The primary motivation for deregulation remains a soaring rate pattern that exceeds the national average by 50 percent.

"That's been the driving force," says Rich Ferguson, research director for Sacramento's nonprofit Center for Energy Efficiency and Renewable Technologies. "This protection has jacked up the prices so high that now the big customers are pissed off, and they're going to the Legislature and saying they're going to have to move to Arizona or Nevada or someplace else to get cheaper power."

Diablo Canyon accounts for about 20 percent of PG&E's electricity generation in a territory that extends north toward the Oregon border, east to the Sierra and south to Santa Barbara County. According to CPUC statistics, if Diablo's electricity were replaced with new resources at current market prices, PG&E's rates would be 15 percent lower.

This figure is more significant when considering that only about 60 percent of the company's rates result from electricity generation, with the remainder paying for non-generating infrastructure costs.

Contributing to high rates are required experiments with alternative power sources, as well as state-mandated contracts with Qualifying Facilities (QFs), which are providers of renewable power and surplus electricity generated by non-utility industries during manufacturing.

Traditionally, QF contracts have served as the whipping boy for utility angst, as well as a smokescreen for nuclear gluttony.

"They complain about these required purchases while downplaying the significance of the nuclear plants," says one source who declines to be named. "They make tons of money on these things because of the subsidies. So they don't want to rock the boat. They're sitting there fat and happy with these plants, and the less said about them the better."

Nevertheless--and despite the damning report from its own Division of Ratepayer Advocates--the CPUC has navigated PG&E's rates toward absolution for any sort of nuclear accountability.

"Part of the subsidy is a very large profit," Kinosian confirms. "So the utilities [PG&E and Southern California Edison] have these very expensive, very non­cost-effective plants, and they also happen to be their biggest profit makers."

And this is what's turning up the volume in the mosh pit of deregulation. "Even with the supposed competitive pressure," Ferguson says, "these mistakes are still not going to cost these companies one cent."

Rate-a-tat-tat

The argument for transition charges is fairly simple. To compensate utilities and their shareholders for "competition shock," the CPUC is obligated to ensure recovery for noncompetitive investments that were introduced in a heavily regulated environment on behalf not only of shareholders, after all, but also ratepayers.

It is, in the words of assenting commissioners, a promise to "honor past commitments."

To a degree, this is both fair and necessary. For so many decades, utilities have been obligated to serve their territories, and consequently have built a generating arsenal to meet ratepayer demand. And for any investor-owned utility to thrive within such a rigid framework, there must a reasonable assurance of recovery and return on investment. Since the rules of the game now have been changed, some compensation is required to help utilities disentangle themselves from expensive QF contracts, non-competitive assets and mandated divestment activities.

The hitch with Diablo Canyon (which will account for a majority of the charges) is that the utility appears to regard it with a "zero risk" regulatory mentality, one that holds ratepayers responsible for even the most audacious utility misstep, and then reconfigures it into a shareholder jackpot.

"The intention of regulation," Ferguson says, "was to keep the ratepayers from being ripped off, not to make the businesses risk-free. This whole idea has been distorted."

Counters PG&E spokesperson Tony Ledwell, "What profit we have goes to our shareholders to pay for their investments. They're entitled to a return on their investments, and the commission has said just this much."

According to Kinosian, while wholesale electricity from the competitive "power pool" will go for about 2 cents per kilowatt hour, PG&E has been guaranteed 4 cents per kwh on its Diablo electricity through 2002. This arrangement is, in essence, a continuation of current nuclear electricity subsidies. And when the company quickens its "recovery" pace via a newly accelerated plant depreciation schedule, Diablo's consumer-end rates will rise from 10 cents per kwh to 13 cents in order to pay off the $3.8 billion that remains on Diablo's books.

The plant will operate on a "must run" basis, with its non-competitive costs allocated across the board to both remaining PG&E customers and those who seek another provider. The transition charges employed toward this end will be phased out in 2005.

But how can Diablo's rates rise when PG&E has announced overall rate freezes for the coming years? Because the freeze reflects drops in QF "overpayments" and natural gas costs.

"So normally," Kinosian says, "you would see rate decreases in the order of 15 percent instead of a rate freeze over the next five years. ... The extra money is going to be used to basically pay off Diablo Canyon sooner."

Diablo Canyon remains in some ways a testament to the operational expertise and technical prowess for which PG&E has frequently garnered acclaim: The plant is a Ferrari amid the nuclear industry's Pintos. That's not to say it runs better than promised, just that it outshines a dismal industry average.

And within the tenuous logic of state electricity regulation, this is sufficient cause to bedevil ratepayers with Diablo's sins.

PG&E was, indeed, held officially accountable for about $2 billion of the plant's cost. But the CPUC's concurrent 1987 establishment of a unique performance-based standard--which rewards Diablo Canyon for efficient operation--has allowed PG&E to offset early write-offs on the plant.

A 1994 rates settlement modified this standard after the Division of Ratepayer Advocates successfully argued that the incentives were a little too generous.

Nevertheless, a 1995 earnings report shows that while Diablo Canyon generated 19 percent of PG&E's operating revenues, it accounted for 39 percent of the company's earnings per share.

Devil's Contract

The deregulation debate, ultimately, is framed by two hard-line and polarized interpretations. One holds that Diablo Canyon was built with consent from ratepayers via the CPUC, and that consequently there exists an implied and binding contract that makes no distinction between Diablo and other utility assets. Recovery is guaranteed on all.

At the other end of the spectrum, the debate's most radical voice contends that deregulation is a sort of utility bankruptcy proceeding, and that ratepayers are not obligated to pay a damned thing toward easing the transition.

Neither of these interpretations, however, discerns Diablo's egregious role amid a cast of more reasonable generating investments. Even so, is there a "regulatory compact" that makes ratepayers ultimately responsible for PG&E's nuclear ambitions?

"The commission didn't guide them into nuclear plants, the commission didn't urge them into nuclear plants, and certainly the public didn't want it," says Dr. Eugene P. Coyle, an energy analyst for Toward Utility Rate Normalization, a ratepayer advocacy organization.

Coyle and others maintain that continued ratepayer largesse toward Diablo Canyon not only whitewashes the plant's history, but also flouts the supposed balance of interest between PG&E and its customers.

"I don't think this whole thing of subsidized nuclear prices is going to last," Ferguson says. "I don't think there is any legal basis for it. There are so many people who are mad. It's going to get challenged."

Ferguson pauses. "It's such an obvious mistake," he says.

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From the July 11-17, 1996 issue of Metro Santa Cruz

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