Diablo Demise

In the next six months, a nexus of economic forces will surface and, this time -- really -- Diablo Canyon will be shut down if economics finally have anything to do with it. This is not dreaming. Despite decades of Pacific Gas & Electric's ability to side-step economic reality, that reality is finally coming to roost in its corporate accountants' ledgers. And, it all has to do with hydroelectric dams. "We remain committed to make sure the plant will be competitive and safely operated for the long term," maintains PG&E spokesperson Jeff Lewis. But, he added -- and here's the catch: "Diablo is going to have to stand on its own two feet."A bit of history: Bonnie Raitt used to have more problems than successes. But, no matter how tough her life has been, she's always had a soft spot for encouraging anti-nuclear attitudes. Two decades ago, she serenaded thousands on the beach adjacent to the Diablo Canyon nuclear plant as human fodder demonstrated their way into a well-orchestrated cat-and-mouse game with the cops.As Raitt's bluesy guitar wafted up toward the still-unfinished plant, the demonstrators that were caught were handcuffed and put on buses and sent the hell out of San Luis Obispo. The handcuffs lasted about two minutes and as the buses of perpetrators left Pacific Gas & Electric property, everyone waived to the musicians.Diablo was not only installing half of its reactor backwards due to a little blueprint oversight, it promised 30 years of accumulated plutonium waste. Any fool could see that the safety problems alone should keep it from being fired up. At least, that's what all the demonstrations were about.Those were righteous days when public safety was supposed to get respect on its own merits. It was before junk bonds, stock options and day trading. "Economics" meant keeping your VW running and having enough cash for stash. Now, most teenagers know more about corporate financing than most anti-nuke adults did in 1980. Not going anywhere but jail, nuclear foes changed their tactics. After cramming to learn about finance, they thought that for sure it would be economics that would shut down the Diablo. The plant was way way over budget and debt kept piling on for safety and decommissioning costs. Alas, Diablo went on line anyway.Fast forward to 1996 when California became the first state to deregulate the electric industry. Environmentalists thought excess cost was sure -- this time, again -- to sink the plants. While most consumer advocates hate deregulation because they believe it leaves residential customers holding the bag for big business deals, they did celebrate a small victory -- Diablo Canyon would finally have to make economic sense. In other words, Wall Street would demand Diablo and San Onofre Nuclear Generating Station (near San Diego) shut down. There would be no economic justification to keep the nukes running. It appeared to be sweet victory for environmentalists.One glitch: As deregulation legislation was being worked out, PG&E, and Southern California Edison, with its San Onofre Nuclear Generating Station nuke, were able to keep nuclear subsidies for four or more years during a transition to the free electric market. Much of the deals made on deregulation legislation were made in the wee hours of the morning in the state Capitol at the behest of the state Senate Energy, Utilities & Communications Committee. The only interests who managed to stay up that late fed on coffee and M&Ms at were the ones getting real salaries -- not activist's pay -- and bonuses. Environmental and small-consumer advocates were whipped by the sheer staying power of utilities and other big-business groups.With environmental and residential consumer interests out for the count, PG&E was able to craft a few deals, including the one on Diablo subsidies.The deal made was that subsidies were supposed to last until 2002 instead of throwing Diablo on the market immediately. PG&E expected to use that breathing room to lower the cost of running Diablo. And, indeed it has, just not enough to make it competitive at the moment. The utility also hoped the market price of power would remain high enough after four years to cover whatever Diablo requires to keep in the business.Thus, even after the focus turned to economics and the plant clearly did not meet anybody's idea of an efficient power producer, nuclear foes still lost. In legislation, called AB 1890, PG&E was able to lobby for continued subsidies from electric customers to keep the plant going. For those taking notes, the subsidy is called ICIP -- Incremental Cost Incentive Price. Prior to deregulation, ratepayers had already been paying the ICIP, but in order for PG&E to trade favors at the Legislature to keep the subsidies when all other power -- both fossil and renewables -- had to be turned over to market rates, the utility agreed to trade the forever subsidies in return for the four-year sunset clause.PG&E did not count on that four years being up quite so soon.For Diablo Canyon, the ICIP subsidy is pegged at $0.0337 per KWh this year and up to $0.0349/KWh in 2001 while the market price of energy through the Power Exchange averages $0.026/KWh. Basically, then, Diablo power costs one-third more than the average power from every other source including windmills, solar, geothermal and natural gas-fired plants.To environmentalists' economic rescue: PG&E's dams. PG&E has 68 hydroelectric facilities including 174 dams and water control devices, as well as 138,000 acres of lovely forested watershed land adjoining those facilities. With electric industry deregulation, PG&E wants to get out of the electric generation business. It has already sold off all, except two, of its fossil-fueled power plants. The two left are Humboldt Units 1 and 2, located right next to the long-closed Humboldt Bay nuclear plant. PG&E didn't even put them on the market because their proximity to the nuclear facility with its spent fuel still on-site and next to three earthquake faults would cause any offering to be snubbed by investors.After PG&E's fossil fuel plants and geothermal plants in Northern California were out of the picture, next on its "for sale" list is dams. But, when deregulation was enacted by the Legislature and the four-year subsidy continued, no one ever thought that the sold-off plants would be worth so much on the market. If Pacific Gas & Electric's dams get sold at anywhere near the $6 billion they're thought to be worth at the moment -- State Senator Steve Peace (D-San Diego) opines that they are worth up to $7 billion -- the California Public Utilities Commission intends to cut off Diablo's subsidies immediately and the utility will have to act like any other electricity entrepreneur. PG&E will still have a monopoly on the poles and wires to your house, but it will have to compete with other providers like Commonwealth Energy and Edison Source for your actual electric commodity -- the juice only -- needs.With the unexpected $6 billion windfall, most observers think that PG&E's dams will be valued or sold by mid-2000, a couple years ahead of schedule. And when that happens, Diablo becomes a big liability.PG&E spokesperson Lewis says that the costs to run the plant are below the subsidized price, but is extremely uncomfortable discussing the matter (think hemorrhoid commercials) and steadfastly refuses to say how much below the subsidized price Diablo can run, or whether Diablo can even begin to meet the average retail price of electricity from other sources. Assuming the hydroelectric plants have price tag attached to them by next summer, PG&E shareholders will be facing a big decision. That one penny difference in market price for electricity versus what it costs for Diablo to operate translates into about $160 million per year in lost revenues, according to California Public Utilities Commission Office of Ratepayer Advocates analyst Bob Kinosian. Shareholders will have to determine whether to keep pouring $160 million a year into the plant in the hope that it will turn around a make a profit one day. Or, shareholders can cut their losses.If the plant's operating costs are that high and PG&E continues to run the plant, "Then they flunk the IQ test," said Frank Wolak, Stanford economics professor and member of a state committee that watches the deregulated electric industry for any wrongful activities. A bevy of electric industry analysts were apparently caught off-guard by this new risk. Electric industry analysts for the usual suspects: Standard & Poor's, Moody's, Fitch, Merrill Lynch and Goldman Sachs refused to comment on the possibility of Diablo's early shut down due to shareholder risk. Still, PG&E has one small chance to wiggle out of its dilemma and keep the subsidies for another couple years.After lengthy hearings, the California Public Utilities Commission is about to vote on a proposal by one of its judges that would seal the subsidy cut-off date, making it simultaneous with the end of the rate freeze. After months of gathering data in hearings, it appears to be a solid decision with plenty of legal back up. This decision is needed because no one thought the end of the rate freeze would occur before 2002, and while the law in AB 1890 appears clear, there is some small margin of doubt.Needless to say, PG&E is rather unhappy about this prospect. "[It's] volatile and by definition unworkable," noted PG&E attorney Chris Warner last week ((editors, Sept. 21)). He also called the idea of ending nuclear subsidies "tortured and unlawful."PG&E can, and will, lobby the hell out of commissioners to get its way between now and when the commission is supposed to rule on the matter -- scheduled for early October, but probably not until next month. In the last decade, utilities have almost always gotten their way at the commissioners' desks, but this is the first time in ages that two commissioners have been appointed by a Democratic governor. So, betting on the old patterns is like betting that Diablo can make it without subsidies in a deregulated market.J.A. Savage is associate editor of the independent weekly trade publication, California Energy MarketsSIDEBAR Just Like Alimony, Stranded Assets are a Long-Term Commitment -- Until the New MarriageJust so you know, California's rate freeze kept electric bills at June, 1996 rates -- about 10 percent higher than what a PG&E would be charging now. That excess price is being spent to buy off investments in "stranded assets." Think of stranded assets like you would if you made a bad decision. A bad haircut -- you waste $10 to $40; a lemon of a car -- that can be in the multi-thousands of bucks; a failed marriage with alimony and child support -- well, you get the idea. You make a poor decision and your bank account suffers. That extra 10 percent for stranded assets is supposed to cover Pacific Gas & Electric's management decisions, and a few of the California Public Utilities Commission's requirements. Stranded asset pay-off is a little like a "get out of jail free" card in the Monopoly deck. PG&E was able to rack up the investments, have ratepayers pay off a return on those investments to shareholders over the years, and still get paid more in the stranded asset deal. Unlike your bank account, PG&E's isn't really suffering from its own mistakes.But, as soon as PG&E's hydroelectric plants have a price tag attached, it's almost certain all the stranded assets will be paid off. It's back to a roll of the dice for shareholders and their belief in management's ability to make good decisions. If that particular Monopoly board has a stop for a utility with Diablo Canyon sitting on it, landing there would cost a bunch of paper money, indeed.--J.A. S