Diablo Canyon Pact Calls for PG&E; to Pay Full Cost

In a radical departure from tradition, Pacific Gas & Electric Co. and state officials agreed Monday that the utility would assume the entire financial risk of operating its $5.5-billion Diablo Canyon nuclear power plant, potentially saving consumers billions of dollars.

The proposed settlement of the 4-year-old Diablo rate case could serve as a model for determining who picks up the tab for cost overruns at several nuclear plants across the country. Under the plan, consumers would pay only for the electricity that the plant produces.

The effect of the proposed settlement would be an initial rate increase of 5% for PG & E’s 3.7 million electricity customers in Northern and Central California and further rate hikes in the future. Meanwhile, PG & E’s 400,000 shareholders will forgo $196 million in dividends as a result of a 27% dividend reduction.

In addition, PG & E would take a pretax write-off of $971 million, effectively wiping out its entire anticipated 1988 profit.

Under the proposed settlement, “Consumers pay for the power--not for the power plant,” said California Atty. Gen. John K. Van de Kamp at a news conference announcing the terms. The utility would initially collect 7.8 cents for every kilowatt hour produced by the plant.

The proposed settlement includes the creation of an independent safety committee to ensure that the utility does not skimp on maintenance or other safety-related expenses as it attempts to make the plant profitable by pushing production higher.

Assuming that the plant operates at average efficiency over its planned 30-year life, Van de Kamp said, the settlement effectively would prevent PG & E from recovering about $2 billion of Diablo’s $5.5-billion cost. The utility, however, noted that the plant has had an above-average operating record and predicted that the disallowance would be less.

Bill Ahern, director of the state Public Utilities Commission’s division of ratepayer advocacy, said he was overjoyed that the plant’s financial risks would be shifted to PG & E’s shareholders from its customers.

“These nuclear power plants are money pits,” he said in an interview. “They scare me to death financially.

“This is a 30-year deal,” he added. “I am sure that this plant will be down years at a time during this period.”

Called a Sellout

But despite Ahern’s obvious relief at the settlement, ratepayer advocate Sylvia Siegel, head of Toward Utility Rate Normalization, called the deal “a sellout.” Van de Kamp’s one-word response at the news conference: “Baloney.”

The ratepayers division had proposed that $4.4 billion, or 80%, of the plant’s cost be disallowed because of mismanagement, design errors and construction flaws.

“Assuming the price established for the power is acceptable, I’d argue that the consumer should view this in a positive way,” said David Hatcher, a Seattle energy consultant.

The plant--originally budgeted at $320 million--was built 3 miles from an earthquake fault and had to undergo substantial seismic modifications. Many other problems plagued construction.

Despite the immediate effect on the company’s earnings, the plan was generally welcomed in the investment community as favorable to PG & E because it would remove a cloud that has hung over the company ever since the May, 1987, recommendation by the PUC ratepayer division that $4.4 billion in Diablo costs be disallowed.

“It gets this horrible uncertainty off our back,” agreed Richard A. Clarke, chairman and chief executive of PG & E, in an interview.

After early morning briefings conducted by PG & E for analysts in New York and San Francisco, the news that it would slash its dividend and probably forgo all earnings this year had little effect on its stock price. PG & E closed off .375 cents at $15.75, apparently because the market has long expected a financial penalty from the Diablo Canyon issue.

“It’s good for everybody,” said John Curti, utilities analyst for Birr, Wilson in San Francisco. Noting that the case might otherwise have dragged on until late 1989, Curti said, “The only losers are the lawyers and accountants and expert witnesses.”

But in removing one element of uncertainty, the proposed settlement would also introduce an element of risk that historically hasn’t existed for utilities. Linking revenues to the quality of PG & E’s performance at the plant makes at least some analysts nervous, and could affect the utility’s credit rating.

Riskier Situation Seen

“It is a riskier situation, and we are going to have to look at how this should be reflected in our ratings,” said Albert Papp, senior analyst at Moody’s Investment Services in New York. “Offsetting that is the fact that if they do well, the company should be much better off.”

But Clarke said Monday, “We’d rather have the operations uncertainty than the litigation uncertainty”--especially given the highly charged, political nature of the Diablo rate case.

“We’re confident we have good people, good training and a good facility,” he said, noting that Diablo, in its first three years of operation, was ranked by the Institute of Nuclear Power Operations as one of the six best nuclear plants in the United States.

Analysts also questioned Van de Kamp’s use of a $2-billion figure for cost disallowance. “Two billion dollars could be their ultimate liability, but if they perform well, they can eventually recoup that $2 billion,” said Gary F. Hovis, director of utility research at Argus Research in New York.

The plan is in step with other deregulatory developments in the electric utility industry, but is radical in that it removes Diablo Canyon from the complex rate structure in place for the utility’s other power generating plants. As such, it will have no authorized rate of return.

“They’re almost turning Diablo Canyon into an independent power producer,” Curti said. “It’s another step toward deregulation of the utility industry.”

Pending Decisions

It could have implications for other utilities. Though most such nuclear cases have been settled--including one involving Southern California Edison’s San Onofre plant--perhaps half a dozen major plant decisions are pending.

As with Diablo, the decisions center on whether customers or shareholders should pay for the huge cost overruns incurred by dozens of nuclear plants built during the 1970s. Utilities have had to absorb billions of dollars in what were deemed excess construction costs.

“I think this could be a very good precedent,” Hovis said. “California is at the forefront of the utility commissions in the industry. They do break new ground.”

He said the California model, which still requires the approval of the state’s Public Utilities Commission, could be applied to such pending cases as the Braidwood and Byron nuclear plants of Commonwealth Edison in Chicago, the Clinton plant of Illinois Power, the Commanche Peak plant of Texas Utilities, and the South Texas Nuclear Project of Houston Industries.

But consultant Hatcher said this approach need not be limited to nuclear plants. “What they’re doing with Diablo Canyon, they could do with any investment that a utility proposes to make.”