Utilities Must Absorb $344-Million Overrun : In Consumers’ Victory, PUC Says Imprudent Management Inflated Costs at San Onofre Plant

The California Public Utilities Commission ruled Wednesday that imprudent management inflated the $4.5-billion cost of constructing the San Onofre nuclear plant by $344.6 million, and that the sum must be absorbed by the utilities that built it--not Southland electricity consumers.

The decision, on a 3-2 vote, represents the stiffest penalty against a California utility for alleged excessive spending on a power plant. It also is a victory for consumers and a financial blow to Southern California Edison Co., owner of 75% of the plant near San Clemente, and San Diego Gas & Electric Co., which owns 20%. (The other 5% is owned by municipal utilities in Anaheim and Riverside that the PUC does not regulate.)

May Lower Rates

The decision may mean slightly lower electric rates for Edison’s 3.5 million customers while slashing the utility’s earnings by as much as $338 million and putting the company in the red for the fourth quarter.

Edison Chairman Howard P. Allen assailed the ruling as “political” and “indefensible,” and said the utility will appeal.

However, utility critics were also dissatisfied. “The decision is timid and weak-kneed; the ratepayers should be very disappointed,” said Michael Shames, executive director of Utility Consumers Action Network in San Diego. Shames’ group and other consumer activists had sought the disallowance of $1.2 billion of San Onofre costs.

Four-Year Review

The decision, after four years of review, means that Edison can recover about 92% of its cost of building San Onofre’s second and third reactor units from customers in the form of higher rates, which are already in effect. The rest will be borne by its shareholders in the form of reduced profits.

By previous agreement, terms of the San Onofre decision will be applied to Edison’s 15.8% interest in the Palo Verde nuclear plant in Arizona. That would effectively bar Edison from passing on about $52 million in costs for that plant, said Michael Peevey, Edison executive vice president.

The slim majority of the commission upheld several findings of a PUC staff investigation that blamed Edison and Bechtel Power Corp., the prime contractor on the 14-year-long project, for 358 days of delay.

The report said Bechtel had spread itself too thin by taking on numerous nuclear projects during the 1970s, leaving itself unable to adequately staff the San Onofre project or finish it on schedule. The criticisms in the 1985 report ranged from poor design of parts to overbooked manufacturing plants that could not deliver components on time.

Edison was criticized for, among other things, failing to ride herd on Bechtel and doing such a poor job of training key workers that 16 of 18 failed an examination--delaying by 95 days the start-up of Unit 2 in 1983.

Examples of Problems

In one case, a worker dropped a ruler into a reactor vessel, delaying the project by two days at a cost of $1 million. In another, a worker used a spray lubricant on a bearing, washing away grease and giving rise to later problems.

Though the decision represents the biggest penalty against a California utility for alleged unreasonable spending on a capital project, there have been bigger cases elsewhere as regulators seek to tighten up on huge cost overruns that have plagued the nuclear industry.

Attention will now shift to a so-called “reasonableness review” of the Diablo Canyon nuclear plant owned by Pacific Gas & Electric of San Francisco, on which a PUC staff recommendation is due in February.

San Onofre cost 10 times its original budget and took 14 years to complete instead of the predicted seven years. Today, it generates about 20% of Edison’s electric power.

Effect on Rates

The cost of the San Onofre project was already being charged to customers pending the PUC decision, and the plant now accounts for 15% of Edison’s average residential bill of $40.25, the utility said. Depending on amortization terms yet to be set by the PUC, Peevey said rates will be unchanged or slightly lowered by the decision.

The effect will be more dramatic on Edison’s bottom line, although some analysts were relieved that it was not worse for investors.

Edison confirmed that it has told analysts that every $100 million it cannot charge to customers will reduce earnings by 15 cents to 60 cents per share this year. That would be as much as $338 million, not counting the penalty on Palo Verde, which analysts said would cause a fourth-quarter loss.

“It’s basically a write-off on their investment, but it’s not really that bad,” said John Curti, who follows Edison for the Birr, Wilson investment firm in San Francisco. “I’m not that concerned about a loss being reported.”

‘Terribly Disappointed’

San Diego Gas & Electric officials said they are “terribly disappointed” by the PUC decision and are “obligated to appeal” the ruling, said Jack Thomas, SDG&E; executive vice president and chief operating officer.

The effect on the company’s earnings will depend on the number of years over which the PUC allocates the disallowance, Thomas said.

SDG&E; officials confirmed analysts’ estimates that the disallowance would mean a write-down of about 42 cents per share on the utility’s 55.8 million shares.

Despite the delays and cost overruns, the San Onofre plant is not considered costly or inefficient by nuclear industry standards. It produces electricity more cheaply and was built faster than most comparable nuclear plants.

It was largely for that reason that an administrative law judge at the PUC recommended last week, after hearing three months of testimony, that the plant’s owners be allowed to recover the entire $4.5 billion in construction costs.

Differs Radically

However, that differed radically from a recommendation by the public advocacy arm of the PUC, that $1.1 billion of the cost be disallowed for purposes of setting electric rates.

Wednesday’s decision is a compromise written by outgoing commissioner Priscilla Grew and supported by PUC President Donald Vial and commissioner Victor Calvo. It was opposed by commissioners Frederick R. Duda and Stanley W. Hulett, both of whom said the amount was too high.

The Grew proposal left out about $700 million in overruns that had been laid to factors beyond the control of Edison, notably the higher costs resulting from the tougher regulatory demands that came in the wake of the Three Mile Island nuclear accident.

In unusually strong language, Edison officials criticized the decision as “political” and said they would ask for a rehearing by the the PUC and, if necessary, appeal to the state Supreme Court.

The three commissioners who voted to disallow the $344.6 million were appointees of former Democratic Gov. Edmund G. Brown Jr. The two who opposed it are appointees of Republican Gov. George Deukmejian.

‘Political Decision’

“It appears to be a political decision, not a regulatory decision based on the facts of the case,” Edison’s Allen said. “ . . . This appears to be the most indefensible majority decision handed down by the PUC in my memory.”

William Ahern, head of the PUC’s public staff division, which had recommended a much stiffer penalty for Edison, said Edison has “been taken off the hook” for hundreds of millions of dollars in cost overruns.

However, the compromise did not reflect Edison’s contention that its performance on San Onofre should be compared with that of other utilities, rather than being singled out for specific errors during the project.

Normally, power plant construction costs have been routinely passed through to utility customers in the form of higher rates. But the huge nuclear miscalculations have prompted an increasing number of “prudency reviews.”

Consumer activist Shames claimed that the decision was “tainted” by revelations earlier this week that a PUC attorney who worked on the San Onofre allocation issue will become a lobbyist for SDG&E; in January.

Halted Involvement

But Alvin Pak--the PUC staff attorney to Calvo, who was the swing vote in Wednesday’s decision--has insisted that he halted his involvement in SDG&E; matters pending before the commission soon after the utility approached him about a job.

Pak has acknowledged, however, that he recently participated in two PUC staff meetings in connection with the San Onofre construction cost allocation, but that he did so to explain legal memoranda that he had previously drafted.

Times staff writer Bill Ritter in San Diego contributed to this story.