Rift With SDG&E; Eased : Co-Generation Plants to Be Built for Navy

In a decision that partially resolved a two-year feud with San Diego Gas & Electric, the Navy said Monday that it will buy cheap steam and compressed air from three co-generation plants that a third-party contractor will build at naval bases on San Diego Bay.

The Navy expects the co-generation units to trim annual energy bills at bases in San Diego by about $10 million, according to a Navy spokesman.

Turbines in the plants also will produce a total of about 100 megawatts of electricity. However, SDG&E; has signed an agreement to buy that electricity from Energy Factors, the San Diego-based company which will own and operate the three co-generation plants.

Monday’s announcement hinted that the Navy is backing away from its March, 1986 plan to build a self-contained utility system that would meet all of the Navy’s electric, steam and compressed-air needs at half a dozen bases on San Diego Bay. A Navy spokesman was unable to comment on the Navy’s future utility plans.

However, Energy Factors has granted the Navy an option to purchase the 100 megawatts of electricity that the plants will produce when they are completed during the early 1990s.

And, spokesmen for both the Navy and SDG&E; on Monday acknowledged that negotiations on future electric rates for the Navy have yet to be concluded.

“The debate over electric rates (charged by SDG&E;) hasn’t ended,” according to a utility industry expert who is familiar with the Navy’s co-generation plans. “The Navy is still hard at work on reducing the operating costs at its bases.”

Other utility industry observers on Monday agreed that the Navy has not entirely abandoned its 1986 threat to create a self-contained electric utility that would allow the Navy to drop out of SDG&E;’s electric power grid.

That plan called for building three co-generation plants and an electric distribution network to link half a dozen Navy bases along the bay.

The long-simmering feud between the Navy and SDG&E; spilled over into the public in late 1986 after SDG&E; lambasted the Navy’s plan to produce its own electricity. SDG&E; claimed that residential rates would increase by $40 million a year if the Navy dropped out of the countywide utility grid.

The Navy countered that its 1986 SDG&E; electric bill represented 10% of total utility bills paid at all Navy shore facilities in the U.S. The Navy also hinted that it needed its own electric distribution network in order to secure bases from terrorists.

A Navy spokesman on Monday was unable to provide an estimate of what the Navy paid for electricity, steam and compressed air during 1987. However, the Navy paid an estimated $114 million for electricity during 1987.

Under recently introduced electric rates for large SDG&E; customers, the Navy will pay about $66 million for electricity during 1988, according to an SDG&E; spokesman.

Those new electric rates were developed partially in response to the Navy’s threat to leave SDG&E;’s system unless rates were restructured. The Navy, SDG&E;’s single largest electric customer, accounts for about 10% of SDG&E;’s electric sales.

The Navy and SDG&E; “are a lot closer together (on a proposed rate) than we were in 1986” according to John Laun, SDG&E;’s director of marketing. Laun, however, would not predict when negotiations would be concluded.

SDG&E; characterized the Navy’s announcement as a positive step, largely because SDG&E; needs the 100 megawatts of electricity that it will buy from Energy Factors to meet a growing demand for electricity.

The utility has “quite a bit of latitude” to negotiate a new electric rate for the Navy, according to Laun. But any rate agreement would be subject to review by the state Public Utilities Commission.

“SDG&E; is resisting any rate decrease because it would have an impact on its revenue and its (net) income,” according to one utility industry observer. “The PUC might decide that any reduction granted to the Navy should be passed on to other rate payers.”

The three plants to be operated by Energy Factors will generate steam and compressed air for use at the 32nd Street Naval Station, the North Island Naval Air Station and the Marine Corps Recruit Depot.

Energy Factors operates several existing co-generation plants on Navy property. However, electric-generation turbines at those plants are owned by SDG&E.; The utility will keep those turbines to meet its peak electric demand.

The co-generation project announced on Monday has been drastically scaled back from the proposal that surfaced in 1986.

Then, the Navy said it planned to allow a third-party contractor to build co-generation plants that would provide provide steam, electricity and compressed air for its so-called “San Diego Naval Complex.” That complex included the 32nd Street station, NAS North Island, MCRD, the downtown supply center, the submarine base and its Naval Amphibious Base.

The Navy will be required to obtain several building and air pollution control permits. However, the Navy evidently won’t need Congressional approval to build the co-generation plants, despite a 1986 law that required legislative approval of any new energy-related projects.

Legislators supposedly gave tacit approval to the project by failing to address it during a 30-day “window,” according to one source. “(Monday) was the 30th day and Congress didn’t do anything,” the source said.