Arco Races Clock to Finish Power Plant by Deadline : Santa Clarita Project Stands to Suffer Stiff Losses if Permits Expire First

Arco Oil and Gas Co. is racing the clock to complete building a controversial power plant in Santa Clarita before permits for the project expire, which could imperil $102 million that the company hopes to recover from energy sales.

If the permits expire Dec. 20, 1990, the company faces the prospect of having an energy plant powerful enough to serve 40,000 homes but with no buyer for its electricity.

Arco officials say the project still faces formidable obstacles even though the Santa Clarita City Council agreed last week to explore settling its legal challenge against the plant out of court.

Should Arco miss its contractual deadline, Southern California Edison Co., an unwilling partner in the project, will do all it can to quash the deal, Edison officials said.

Santa Clarita Mayor Jan Heidt says she wants the city to continue to fight. “Personally, I think we have to pursue this as long as we can legally,” she said.

Fear Pollution

The City Council and the Placerita Canyon Property Owners Assn. fear that the plant will pollute Santa Clarita’s air and ground water. Arco officials fear losing a lucrative contract, acquired under a 1978 federal law designed to promote alternative sources of energy, that would force Edison to purchase power from Arco at rates well above regular market prices.

If the Arco plant started generating electricity today, company officials said, it would earn 5.7 cents per kilowatt hour--2.5 cents more than current market rates. “This is a very attractive contract,” said Doug Logan, an Arco lease and contract specialist.

Logan said electricity sales should produce $102 million during the plant’s 30-year life span.

The generous provisions of the contract and the overall impact on Edison by the law that produced it explain why Arco is rushing to build its plant and why Edison officials, watching from the sidelines, hope that it never produces a single kilowatt.

PURPA Requirements

The law is the Public Utility Regulatory Policies Act, known as PURPA. A Carter Administration reaction to the 1972 oil embargo, PURPA required utilities to purchase power from qualifying firms producing energy from alternative and renewable sources, said Sebastian J. Nola, manager of cogeneration and small-power development at Edison.

“The Carter Administration was very concerned about this country’s appetite for foreign oil,” Nola said.

PURPA became surprisingly popular, Nola said. Utilities nationwide, including Edison, were flooded with applications from solar, wind, geothermal and cogeneration plants. State utility commissions, empowered to set prices under PURPA, sometimes established high rates to encourage the development of such plants.

But since utilities could not refuse energy firms meeting federal guidelines, some utilities ended up buying power that they did not want and sometimes did not need, Nola said. Edison is one example. The company’s active PURPA contracts will cost California consumers about $260 million above what it would cost Edison to produce the energy, Edison officials said.

Tenneco Oil Co., which launched the Santa Clarita power plant, obtained its PURPA permits for two turbine generators Dec. 20, 1985. Tenneco, purchased by Arco last year, proposed building the $35-million cogeneration plant atop a 70-year-old oil field at Sierra Highway and Placerita Canyon Road in Newhall.

The company plans to burn gas to produce steam, which will be injected into the ground to heat and loosen oil deposits. Excess steam will turn generators to produce 42 megawatts of electricity, enough power to serve a city the size of Burbank. In addition to the electricity, Arco expects to produce 30 million barrels of oil, thanks to the steam-injection recovery system, Logan said.

Energy pricing involves complex formulas that raise or lower costs, but Arco’s permits essentially allow it to collect as much as 2.5 cents more than the average rate for each kilowatt hour, Nola said.

Arco’s PURPA permits expire Dec. 20, 1990, and Logan said the company should have just enough time to have both of the plant’s turbines operating at full capacity. “It will be tight,” he said.

So far, Edison has steered clear of Arco’s squabble with Santa Clarita and the Placerita Canyon homeowners. “We do not get involved,” Nola said. But if Arco misses the deadline next year, “we’ll take every step to terminate that contract,” he vowed.

Edison has taken a similar “tough but fair” approach toward other companies holding PURPA contracts, Nola said. Since 1985, he said, Edison has terminated about 30 PURPA projects that would have produced 1,300 megawatts annually.

If Arco loses its PURPA permits, the company will be forced to negotiate another contract with Edison at less attractive rates, Logan said. “We sell to them or nobody,” he said.

Although Arco is facing the tight deadline, the project has squeezed past close deadlines before.

The original PURPA permits were acquired four months before the California Public Utilities Commission established new energy rates less lucrative than those that Arco intends to charge Edison. The project’s conditional-use permit was obtained from Los Angeles County just days before Santa Clarita incorporated Dec. 15, 1987.

Legal Battle

The birth of the city set off a lengthy and acrimonious legal battle. At its first meeting, the Santa Clarita City Council passed a moratorium to block the plant.

But Los Angeles County, unaware of the moratorium, issued building permits for the project in May, July and August, 1988. The city, unaware that the plant was being built until August, ordered Tenneco to stop construction Sept. 1.

A Los Angeles Superior Court judge lifted the city’s stop-work order in January, saying Tenneco should not be penalized for the county’s blunder. Santa Clarita is appealing the judge’s ruling, but Logan said Arco hopes to settle the appeal out of court.

The company is also negotiating with the Placerita Canyon Property Owners Assn., which maintained in a 1988 lawsuit against the County Board of Supervisors that the county erred by not requiring an environmental impact report on the project. Superior Court Judge Miriam A. Vogel, who lifted the city’s stop-work order, also ruled against the property owners. The association is appealing.

Neither Logan nor the property owners’ attorney, Michael McEntee, would comment on the status of their negotiations.

But McEntee said that unless an accord is reached within six months, the association will file another suit to prevent Arco from renewing another set of permits--granted by the South Coast Air Quality Management District for construction of the first phase of the project. The AQMD permits expire Nov. 22.

Logan said Arco is confident that it will meet the AQMD deadline and have the first turbine in place by November. Arco will then start work on phase two, which must be completed by the deadline late next year.