$3.3B Fair or Foul?
Union Tribune (2014-04-20) Morgan Lee
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At issue is whether utility customers — instead of corporate investors — should pay big San Onofre charges in settlement proposal
By Morgan Lee
12:01 a.m.April 20, 2014
A nuclear-plant settlement would saddle Southern California utility customers with $3.3 billion in charges over the objections of several consumer groups who were left out of negotiations.
In the wake of the breakdown and early retirement of the San Onofre Nuclear Generating Station, the proposed settlement was initially promoted as a chance for utility customers to save $1.4 billion.
The complex deal is under the microscope as utilities, state regulators and a prominent consumer advocacy group push for a quick resolution that might shortcut years of litigation.
At issue is whether it is fair to charge customers for both replacement power and plant operation expenses over the months that operator Southern California Edison struggled to repair and restart the facility.
Customers also are being asked to pay off the remaining investment in the moribund plant, although at a lower rate of return for investors.
“Ratepayers are shouldering about $3.3 billion, while investors are largely made whole,” said Ray Lutz, representing the Coalition to Decommission San Onofre that includes San Clemente Green.
The settlement proposal is built upon one crucial concession by utility investors. Edison and minority plant owner San Diego Gas & Electric would forgo about 80 percent of the $768.5 million they had expected to charge customers for a failed steam generator replacement project, by returning any funds collected after the plant’s initial breakdown.
Crippled by the rapid degradation of its steam generators, San Onofre stopped producing power on Jan. 31, 2012. Edison chose to retire San Onofre for good in June of last year, leaving the California Public Utilities Commission to decide who should pay — utility customers or corporate stockholders — for an assortment of leftover costs, from unused nuclear fuel to severance packages for laid-off plant workers.
After at least five months of secretive negotiations, a settlement proposal was announced in March by the plant’s owners and consumer advocates at the utilities commission and The Utility Reform Network, both based in San Francisco.
At least three consumer groups, which were excluded from negotiations with Edison and minority plant owner San Diego Gas & Electric, are urging California regulators to reject that deal.
They argue it would make customers responsible for the bulk of the economic consequences of the plant’s breakdown before any public deliberations about whether the utilities acted prudently.
“It evades the examination of the reasonableness of the conduct of the Southern California Edison executives when they deployed a defective steam generator after they had red-flag notices that there were problems with the design and they circumvented the review process,” said attorney Michael Aguirre
, working as an advocate for San Diego-area utility customers.
Edison was cited by nuclear safety regulators in December for failing to properly check the design of the faulty steam generators that disabled San Onofre, without sanctions. Edison says generator manufacturer Mitsubishi Heavy Industries of Japan alone is to blame.
The Nuclear Regulatory Commission continues to investigate whether Edison supplied complete and accurate information to the agency regarding the steam generator project.
Lutz says a fair deal would deny Edison recovery of its remaining plant assets, leaving the company to pursue insurance and warranty claims on its own.
Initial plant investments from the 1970s and ’80s were paid off long ago, he argues, and more-recent repairs and upgrades were made with the expectation that new steam generators would endure for several decades.
That bargaining stance cannot be supported by legal and regulatory precedent, according to Matthew Freedman, the attorney for The Utility Reform Network who helped broker the current settlement proposal.
“If it was possible to convince the utilities in a settlement to eat all of the plant costs, we would have gotten that,” he said. “There’s just no way to get that outcome. There is no way the commission would order that. And you might say that’s completely unfair. My response would be, that’s utility regulation.”
Freedman draws his conclusions from the text of California utility commission decisions on other power plants that were abandoned because of mechanical and safety failures or environmental violations, including the coal-fired Mohave Generating Station in Laughlin, Nev., and the Humboldt Bay nuclear plant in Eureka.
The so-called “regulatory compact” between the state of California and monopoly investor-owned utilities it regulates places limits on profits in return for a “reasonable opportunity” to recover their costs, Freedman explained.
In practice, that means customers seldom if ever escape paying for underlying power plant investments, he said. In rare instances, investors are denied profits on those investments.
Customers historically have been protected from paying for both replacement power and to operate a plant that is not producing power when the operator is at fault, according to Freedman.
The utilities “can’t get the full operating cost of the plant as if it were operating perfectly, you can’t get those costs and the replacement costs at the same time.”
On this account, too, the settlement proposal fails to protect customers, Lutz said.
“Either you pay for the plant or you pay for power,” he said. “If you pay for both, it’s like you’re double dipping.”
Customers would pay for all replacement power — an estimated $517 million — for the period when Edison was attempting to repair and restart San Onofre.
Costs for the plant operations, maintenance and repairs worth $940 million also would be borne by ratepayers, while utility investors cover about $100 million in cost overruns during 2012.
The settlement proposes to save ratepayers money by reducing the profits due to investors by $353 million for the mothballed plant. That consumer tab would still total about $1.36 billion.
Utility customers also would pay for nearly $500 million in unused nuclear fuel purchased by Edison, but receive the majority of proceeds as that fuel is sold off at a discount along with assorted plant equipment.
Customers stand to receive some money back from nuclear outage insurance claims and damages sought by Edison and SDG&E from generator manufacturer Mitsubishi through binding arbitration.
The plant owners would share in those proceeds, as an incentive to aggressively pursue claims.
Edison said the settlement would result in a $730 million write-off. SDG&E expects to cut its losses with a $187 million impairment charge.
(Customers already have paid for the dismantling of San Onofre by setting aside billions of dollars in a decommissioning trust fund.)
Aguirre of San Diego said the settlement strays far from the core mission of the utilities commission: to protect customers from unreasonable rates.
Defending the settlement, Freedman said, “We’re not pushovers, we’re trying to get the best deal possible.”
The current proposal has satisfied some specialty interest groups.
The Coalition of California Utility Employees, representing several unions, has said yes to the settlement that explicitly bills customers for severance packages to laid-off plant employees.
The deal has been embraced by the U.S. chapter of the international environmental group Friends of the Earth, which has strived to shut down California’s nuclear reactors out of safety concerns.
The San Luis Obispo-based Alliance for Nuclear Responsibility, meanwhile, will oppose the settlement. Several other consumer and special interest groups have yet to respond.
The utilities commission plans to hold evidentiary hearings on the settlement in San Francisco in mid-May. Parties to the settlement are expected to make their case for a settlement to the public at a meeting near San Onofre in June.