Edison’s Plans for New Plant Draw Heat
Southern California Edison says its plan to build a major power plant in San Bernardino County would be good for customers. But a strange-bedfellows collection of consumer watchdogs and rival electricity generators isn’t so sure.
Their qualm: an unusual structure proposed by Edison that would keep the power plant out of ratepayers’ hands and the electricity sales away from state regulatory control for 30 years.
In addition, all of the costs associated with the recently announced project are being held confidential for now, making it difficult for outsiders to judge what the price of the electricity might be and whether it would mean lower bills for customers.
The plant, called Mountainview, would be financed by Southern California Edison but built and owned by a utility subsidiary that would contract to sell electricity to Edison for three decades. Such wholesale power deals fall under the authority of the Federal Energy Regulatory Commission, which critics say is often ineffective when it comes to protecting California consumers.
“The notion of some 30-year deal, signed-off on by FERC, is totally insufficient,” said Doug Heller of the Santa Monica-based Foundation for Taxpayer and Consumer Rights. “We would encourage the development of publicly owned or at least publicly regulated power plants in California to combat the failed deregulation experiment. But we don’t like this structure, and we will be watching this.”
Jan Smutny-Jones, executive director of a generator trade group that seldom agrees with the consumer advocacy group, was even more blunt: “I don’t think it’s a good deal for ratepayers.”
But executives with Edison, in filings last week with the California Public Utilities Commission and in interviews, describe the project as an unexpected opportunity to save money for customers and provide a stable return for shareholders.
“This is an important project for us. It’s important for our customers, too,” said Robert G. Foster, president of Southern California Edison, a subsidiary of Rosemead-based Edison International. “If we are able to meet this schedule and get this plant on line, it will help rebuild confidence in California.”
Edison’s plan for Mountainview was announced on July 17 when the company said it had acquired an option to complete the construction of the 1,054-megawatt plant in Redlands, which was abandoned by a Virginia firm last year because of financial problems. The facility is projected to serve nearly 800,000 homes when completed in 2006.
According to Edison, the proposed deal’s unique structure is intended to compensate for the utility’s poor credit rating, which tumbled into junk-bond territory during the energy crisis of 2000-01. Edison plans to sell bonds to finance the deal, and says Wall Street skittishness over Edison’s credit and the California energy business could squelch sales.
By establishing a firm 30-year contract, approved by the state but overseen by federal regulators, Edison believes investor concerns would be eliminated. But for this to happen the contract would have to be administered by a subsidiary, because Edison by law is regulated by the California PUC. Both the PUC and FERC must approve Edison’s plans for Mountainview.
It has been decades since one of California’s big investor-owned utilities built a major power plant fueled by natural gas, partly because state regulators preferred smaller, more environmentally friendly projects.
Then the landmark deregulation law of 1996 gave independent electricity generators and power retailers the right, two years later, to take on the monopolies enjoyed by Edison, PG&E; Corp.’s Pacific Gas & Electric Co. and Sempra Energy’s San Diego Gas & Electric. Edison and the two other utilities sold their gas plants in California, although they kept other power plants -- in Edison’s case, nuclear, hydroelectric and out-of-state gas and coal plants that, along with long-term power contracts, provide more than enough electricity for the 4.5 million households and businesses the utility serves.
Since Southern California Edison last built a large gas plant in 1978, there have been huge advances in technology that are incorporated into the design of Mountainview. The plant is projected to be able to produce electricity more cheaply, and with less pollution, than the electricity generated by most of the rest of the state’s aging fleet of gas-fired plants.
AES Corp. began construction of the Mountainview plant in 2001 at a projected cost of $800 million. But the Virginia company halted work last year and sold the project to InterGen of Bethesda, Md., a joint venture between Royal Dutch/Shell Group and Bechtel Group Inc.
Edison hasn’t disclosed how much it paid for the option to take over the Mountainview project. The option must be exercised by Feb. 29, 2004, although Edison wants regulatory approval by the end of November.
Under its proposal, Edison would finance construction with debt securities that already have been authorized by the PUC. After the plant is built, an Edison subsidiary would sell the power under a contract to the utility, with the price tied to the cost of producing the electricity plus a return on investment for Edison.
As a result, Mountainview would not become part of the collection of utility assets known as Edison’s “rate base,” which means that state regulators, after an initial review and approval of contract terms, would not be able to change the price of electricity paid by Edison customers or the rate of return for Edison shareholders.
That setup bothers consumer groups and competitors, who suggest Edison might be getting too good a deal.
“The structure that has worked in which the utility builds the plant and it goes into rate base is a structure that is the most secure for the company and, more importantly, most controlled on behalf of the consumer,” said Heller of the Santa Monica consumer group.
“When you create these schemes that are in the dark and set up in advance, it misses the basic goal of regulation, which is to constantly oversee the appropriateness of rates,” he said.
Smutny-Jones, executive director of the Independent Energy Producers Assn., said independent generators have proved that they can build plants more cheaply than regulated utilities.
What’s more, he said, a 30-year contract such as the one that Edison is proposing for its subsidiary would allow any developer to complete the numerous power plants that have been put on hold since 2001.
“It seems to me that every step of the way it’s the ratepayer that is bearing the risk” of building and operating Mountainview, Smutny-Jones said.
Edison’s Foster said the Mountainview structure is not a blueprint for the way the utility would build other plants. Edison, in its PUC filings, said performance and other benchmarks in the contract would protect its customers.
“This is a one-time proposal, not a model for future power plant construction,” Foster said.
The Utility Reform Network, a San Francisco-based consumer watchdog group, will scrutinize the deal but recognizes that the unusual structure may reflect the new realities of financing power plants, senior attorney Mike Florio said.
“We’re really paying for the sins of deregulation here,” Florio said.
