Power Plant Deal Shines Bad Light on the PUC

As the Great California Energy Crisis of 2000-2001 continues to recede into the mists of time, reminders of that panicky period are dwindling down to a precious few.

All that remain are triple-digit residential electric bills, the bankruptcy case of PG&E; Corp.’s Pacific Gas & Electric -- and the lasting impression that none of the institutions or firms involved in the abortive adventure into utility deregulation deserves ever to be trusted again.

That last factor is the reason it’s so hard to decide who is right in a nasty dispute over Edison International’s purchase of an uncompleted power plant in the Inland Empire at a distress-sale price and its plan to sell the electrical output for 30 years to Southern California Edison -- in other words, to itself.

What makes this particularly interesting is that by acquiring the plant through an unregulated subsidiary -- rather than buying it via SoCal Edison, its utility arm -- the company largely removes it from the oversight of the California Public Utilities Commission. Critics say that by allowing themselves to be bypassed in this fashion, the commissioners might well be encouraging more such self- dealing between the state’s regulated utilities and their unregulated affiliates.

Under the circumstances, one would expect the unusual arrangement to have received lengthy scrutiny by the PUC. One would be wrong.

Instead, the PUC fast-tracked the proposal at Edison’s request, approving the deal in six months and granting the company a waiver from a state rule forbidding most such in-house power supply transactions. Among those left in the dust were the PUC’s own Office of Ratepayer Advocates, which argues the whole thing smells.

The Independent Energy Producers Assn., the trade group for developers of California power plants such as Calpine Corp., agrees. They say the Edison deal shuts them out of competitive bidding for a large chunk of electrical demand, and therefore could cost customers money in the long run.

The association’s executive director, Jan Smutny-Jones, contends that Edison exerted political pressure to push the purchase through the PUC. “This was politically cooked from the beginning,” he told me.

“Yeah, I know his position,” PUC President Michael R. Peevey responds. “But Edison sold this on the merits. It was too good a deal to pass up.”

The merits, as Edison presented them, involved the chance of getting a new plant at a bargain price. Because the original owners wrote down their investment before selling the facility, PUC officials say, the ultimate cost of the project could be $400 million less than if Edison started construction from scratch.

Still, consider the neutral observer’s quandary. On one side of the issue is Edison, which helped design the deregulation program and then held up the state for a bailout when it went sour; on the other are independent power producers, some of which have been accused of (or have acknowledged) manipulating the state’s electrical system or otherwise profiteering from the crisis.

At the center of the controversy is the Mountainview power plant, which stands about 15% finished on a site in Redlands. At various times, Mountainview’s developers have included AES Corp. and a joint venture of Bechtel Group Inc. and Royal Dutch/Shell Group. But because those owners could never reach a power purchase contract with the only potential customer in the market -- SoCal Edison -- they finally hung a “For Sale” sign on the front gate.

At that point, Edison resurfaced as a buyer for the whole schmear. The PUC granted its approval in December, barely six months after first being presented with the proposal. Edison is expected to close the purchase this month. Meanwhile, critics are demanding new regulatory proceedings and threatening lawsuits to overturn the deal.

Their objections fall into two main categories. First, they dispute Edison’s claim that the plant, and therefore the cost of the electricity to be generated by Mountainview, will be particularly cut-rate. Edison’s insistence on a quick decision left no time to hold the public auction among power plant developers that usually ferrets out the best price for a needed block of generating capacity.

Smutny-Jones maintains, in fact, that several companies he represents might have been able to offer Edison electricity at a lower cost than Mountainview -- but they weren’t given a chance. “There’s nothing extraordinarily cheap about this project,” he says.

The PUC counters that its approval of the Mountainview deal was a one-time-only event based on the extraordinary price -- and that California utilities shouldn’t view the case as a precedent.

The second objection concerns Edison’s insistence on owning the plant through an unregulated subsidiary. The company contends that the near-death experience of deregulation left its regulated utility so sickly that it couldn’t handle the financial strain of the purchase.

But critics say the real rationale was different: A purchase by SoCal Edison would have placed the plant under the oversight of the PUC. Instead, because Mountainview will be owned by a subsidiary outside the state’s jurisdiction, its main regulator will be the Federal Energy Regulatory Commission, customarily an even feebler watchdog than the PUC.

“There was evidence that Edison had the ability to finance this as a pure utility purchase,” contends Bob Cagen, a staff attorney for the Office of Ratepayer Advocates. “That just wasn’t their druthers.”

But the most dubious aspect of this process is its haste. In seeking the PUC’s rapid approval of the purchase, Edison presented it as a once-in-a-lifetime opportunity and warned that its option to buy the plant would expire in February. So time was of the essence.

But where’s the evidence of that? As the sole potential customer for an unfinished plant, Edison was presumably in a position to ward off competing bidders indefinitely, or at least long enough for the PUC to give its plan the proper aging period. Who’s to say the option couldn’t have been extended for many more months?

History has taught us that these “now-or-never” deals almost always end with tears. The citing of a tight deadline often conceals major shortcomings in a project and foretells unexpected results -- think of the Challenger launch decision or, nearer to hand, the invasion of Iraq. The notion that an opportunity will disappear if one doesn’t act fast is a telemarketer’s pitch, and just because it comes from a corporate executive rather than a voice over the phone doesn’t make it any more credible.

The PUC’s Peevey, for the record, doesn’t agree that the commission moved with undue speed. Quite the contrary, he says, the process was handled with laudable briskness and without sacrificing the conventional routine of hearings, analyses and discussions. “I would hope we could operate with similar dispatch on all things,” he says.

Even some of the project’s supporters remain uneasy. “There’s no question that the way this was presented left much to be desired,” says Matt Freedman, an attorney for the Utility Reform Network, a San Francisco consumer group that supported the deal, with conditions. “At first we thought, ‘Is this another jam job?’ But it seemed to us there was a risk that this deal would go away.”

Still, he acknowledges: “We’ll never know the extent that Edison was bluffing.”

Golden State appears every Monday and Thursday. You can reach Michael Hiltzik at golden.state@latimes.com.