PUC Staff Wants PG&E; to Pay for 80% of Diablo : Public Arm of Agency Says Utility Should Have Known of Fault Near Site

Claiming that Pacific Gas & Electric should have known that there was an earthquake fault near the site of its Diablo Canyon nuclear plant, a regulatory group recommended Thursday that PG&E; be forced to swallow nearly 80% of the $5.5-billion construction cost of the project without hiking its electricity rates.

The utility immediately attacked as “absurd” the recommendation of the public staff division of the California Public Utilities Commission, which was even tougher than utility watchdog groups had hoped for.

But the recommendation is not binding, and recent history suggests that the five-member PUC will scale back sharply the position urged by its staff. No final decision is expected until late 1988 at the earliest.

If the recommendation were ultimately upheld, analysts said PG&E--which; earned $1.1 billion last year on revenue of $7.8 billion--would be significantly weakened. The PUC staff report, however, said it wouldn’t be so severe as to jeopardize the company’s ability to supply gas and electricity. PG&E; is the state’s largest utility and is the principal supplier of natural gas and electricity in Northern California.

Was Built Three Times

“It’s a stunning figure, there’s no way around it,” said John Curti, analyst at Birr, Wilson & Co. of San Francisco. “As big as they are, it would still put them in a bind. But I just can’t believe it’s going to happen.”

One of the most controversial nuclear plants in the country during its construction, Diablo Canyon essentially had to be built three times before it was permitted to begin full operation in 1986, on the California coast 12 miles south of San Luis Obispo. It took 14 years to complete, longer than any nuclear plant in the United States, according to the PUC.

Most of the delay resulted from the disclosure in 1971 by Shell Oil geologists of the so-called Hosgri fault three to five miles offshore, after construction had been under way for three years. The PUC staff concluded that PG&E; unreasonably failed to conduct offshore seismic surveys before starting construction.

Then, according to summaries of the 17,000-page, $7-million report, PG&E; “repeatedly ignored or minimized evidence that the Hosgri fault was a major fault, which could be capable of a very large earthquake.”

Work continued, and the project was nearly complete in 1976 when the Nuclear Regulatory Commission ordered the company to redesign and rebuild the plant to better withstand an earthquake.

Subsequent delays came in the wake of the 1979 Three Mile Island nuclear plant accident, when all nuclear projects were stalled, and in alleged design errors made during the redesign ordered by the NRC. That included a “mirror-image” snafu, in which sketches were misread and the strength requirements of certain structures were calculated wrong.

Pattern of Errors

“Inspectors soon learned that this mistake was part of a pervasive pattern of errors which occurred or were not detected during the seismic redesign after 1976,” the study said. The NRC subsequently suspended Diablo’s operating license until it was rebuilt again.

The first unit at Diablo entered operation in 1985 and the second in 1986. Today it is generating about 25% of the utility’s electricity, according to general counsel Howard V. Golub.

Now that it is in operation, Diablo Canyon has performed well above average for nuclear plants in terms of efficiency and cost per kilowatt hour--a key part of PG&E;’s case in seeking full recovery of the construction cost from customers.

The staff report calculated that PG&E; might have to cut its dividend by more than half and that its borrowing costs might climb by 1.5% because of lower debt ratings if its recommendation stands.

PG&E; is currently charging customers about 40% of the cost of Diablo Canyon, subject to possible refund if ordered by the PUC. William Ahern, head of the public staff division, said adoption of Thursday’s recommendation might cut rates 2%, while letting PG&E; recover the entire construction cost might raise rates 20%.

Wants Customers to Pay

San Francisco-based PG&E; is seeking to recover the full cost of building the two units at Diablo in the form of rates charged to customers. Any portion of the cost deemed unreasonable by the PUC would have to be borne by shareholders in the form of lower profits.

After a three-year study by a special team of 15 PUC staff members and about 30 consulting firms, the public staff division concluded that only about $1.15 billion of the $5.52-billion cost was “reasonable.” The rest, or $4.37 billion, would have to be absorbed by the utility.

That would be the stiffest such penalty ever assessed.

On Wall Street, where the price of PG&E; stock fell 75 cents to $19.75 a share Thursday, the best guess had been that the recommendation would be to deny the utility $2 billion to $3 billion of the cost, compared to the $4.4-billion figure announced by the staff.

The final number was even a pleasant surprise to the utility consumer group, Toward Utility Rate Normalization.

“It’s delicious,” said Sylvia Siegel, TURN’s executive director. “I think it’s gorgeous.”